What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-09 · 182 added, 145 removed, 305 unchanged (52% of the section changed)

14 unchanged sentences

CMCT does not undertake to update them to reflect changes that occur after the date they are made.

The following discussion of our financial condition as of June 30, 2022 and results of operations for the three and six months ended June 30, 2022 and 2021 should be read in conjunction with the 2021 Form 10-K.

The following discussion of our financial condition as of September 30, 2022 and results of operations for the three and nine months ended September 30, 2022 and 2021 should be read in conjunction with the 2021 Form 10-K.

For a more detailed description of the risks affecting our financial condition and results of operations, see “Risk Factors” in Part I, Item 1A of the 2021 Form 10-K and in Part II, Item 1A of this Quarterly Report.

3 unchanged sentences

The phrase “ADR” represents average daily rate.

It is calculated as trailing 3-month room revenue divided by the number of rooms occupied.

It is calculated as trailing nine-month room revenue divided by the number of rooms occupied.

For sold properties, ADR is presented for the Company’s period of ownership only.

3 unchanged sentences

The phrase “RevPAR” represents revenue per available room.

It is calculated as trailing 3-month room revenue divided by the number of available rooms.

It is calculated as trailing nine-month room revenue divided by the number of available rooms.

For sold properties, RevPAR is presented for the Company’s period of ownership only.

21 unchanged sentences

We cannot predict the significance, extent or duration of any adverse impact of COVID-19 on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on its Common Stock or Preferred Stock.

However, our business, financial condition, results of operations, and liquidity have been adversely affected and may continue to be adversely affected during 2022.

As of June 30, 2022, our real estate portfolio consisted of 17 assets, all of which were fee-simple properties, including one office property which we own through our investment in an unconsolidated joint venture (the “Unconsolidated Joint Venture”).

As of June 30, 2022, our 12 office properties, totaling approximately 1.4 million rentable square feet, were 78.1% occupied and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $127.98 for the six months ended June 30, 2022.

Additionally, as of June 30, 2022, we had three development sites (one being used as a parking lot).

As of September 30, 2022, our real estate portfolio consisted of 19 assets, all of which were fee-simple properties, including one office property which we own through our investment in an unconsolidated joint venture (the “Unconsolidated Joint Venture”).

As of September 30, 2022, our 13 office properties, totaling approximately 1.3 million rentable square feet, were 83.2% occupied and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $125.64 for the nine months ended September 30, 2022.

Additionally, as of September 30, 2022, we had four development sites (with one being used as a parking lot).

We are a Maryland corporation and REIT.

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We seek to apply the expertise of CIM Group to the acquisition, development and operation of top-tier multifamily properties situated in dynamic markets with similar business and employment characteristics to its creative office investments.

All of our multifamily and creative office assets are and will generally be located in communities qualified by CIM Group as described

further below.

These communities are located in areas that include traditional downtown areas and suburban main streets, which have high barriers to entry, high population density, positive population trends and a propensity for growth.

All of our multifamily and creative office assets are and will generally be located in communities qualified by CIM Group as described further below.

These communities are located in areas that include traditional downtown areas and suburban main streets, which

have high barriers to entry, high population density, positive population trends and a propensity for growth.

We believe that the critical mass of redevelopment in such areas creates positive externalities, which enhance the value of real estate assets in the area.

29 unchanged sentences

(ii) credit facilities and term loans;

(iii) the addition of senior recourse or non-recourse debt using target acquisitions as well as existing assets as collateral;

(iii) the addition of senior recourse or non-recourse debt using target acquisitions as well as existing assets as collateral, including the securitization of portions of our loan portfolio;

(iv) the sale of existing assets;

and or (v) cash flows from operations.

(v) partnering with co-investors;

and or (vi) cash flows from operations.

Rental Rate Trends

1 unchanged sentence

The following table sets forth occupancy rates and annualized rent per occupied square foot across our office portfolio as of the specified periods (includes property partially owned through the Unconsolidated Joint Venture):

As of June 30,

As of September 30,

Occupancy (1)(2) 83.2 % 77.7 %

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(1) The information presented in this table represents historical information as of the date indicated without giving effect to any property sales occurring thereafter.

(2) In connection with the 4750 Wilshire Project (as defined later), the Company is no longer classifying approximately 110,000 square feet of vacant space at its property at 4750 Wilshire Boulevard in Los Angeles, California as rentable office square footage as of September 30, 2022.

(3) Represents gross monthly base rent under leases commenced as of the specified periods, multiplied by 12.

This amount reflects total cash rent before abatements.

Total abatements, representing lease incentives in the form of free rent, for the twelve months ended June 30, 2022 and 2021 were approximately $2.2 million and $1.3 million, respectively.

Total abatements, representing lease incentives in the form of free rent, for the twelve months ended September 30, 2022 and 2021 were approximately $2.3 million and $1.3 million, respectively.

Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent.

2 unchanged sentences

For the Three Months Ended

September 30, 2022 December 31, 2022 March 31, 2023 June 30, 2023

December 31, 2022 March 31, 2023 June 30, 2023 September 30, 2023

Expiring Cash Rents:

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(1) Month-to-month tenants occupying a total of 16,662 square feet are included in the expiring leases in the first quarter listed.

(2) Represents gross monthly base rent, as of June 30, 2022, under leases expiring during the periods above, multiplied by 12.

(2) Represents gross monthly base rent, as of September 30, 2022, under leases expiring during the periods above, multiplied by 12.

This amount reflects total cash rent before abatements.

Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent.

During the three and six months ended June 30, 2022, we executed leases with terms longer than 12 months totaling 39,392 and 60,870 square feet, respectively.

The table below sets forth information on certain of our executed leases during the three and six months ended June 30, 2022, excluding space that was vacant for more than one year, month-to-month leases, leases with an original term of less than 12 months, related party leases, and space where the previous tenant was a related party:

During the three and nine months ended September 30, 2022, we executed leases with terms longer than 12 months totaling 58,666 and 119,536 square feet, respectively.

The table below sets forth information on certain of our executed leases during the three and nine months ended September 30, 2022, excluding space that was vacant for more than one year, month-to-month leases, leases with an original term of less than 12 months, related party leases, and space where the previous tenant was a related party:

Leases (1) Rentable

1 unchanged sentence

Foot (2) Expiring

Three months ended June 30, 2022 7 26,766 $ 35.11 $ 33.18

Six months ended June 30, 2022 14 41,737 $ 44.60 $ 43.57

Three months ended September 30, 2022 8 33,343 $ 46.95 $ 49.45

Nine months ended September 30, 2022 22 75,080 $ 45.64 $ 46.18

______________________

9 unchanged sentences

The following table sets forth the occupancy, ADR and RevPAR for our hotel in Sacramento, California for the specified periods:

For the Six Months

Ended June 30,

For the Nine Months

Ended September 30,

Occupancy 73.5 % 48.2 %

9 unchanged sentences

We also generate loans through referrals from real estate and loan brokers, franchise representatives, existing borrowers, lawyers and accountants.

In addition, as an SBA 7(a) licensee, we originated loans as an authorized lender under the Paycheck Protection Program (“PPP”), which was enacted during the year ended December 31, 2020 and completed during 2021.

Originations under the PPP have ended and we had a remaining outstanding balance of $205,000 in PPP loans outstanding as of June 30, 2022.

In addition, as an SBA 7(a) licensee, we originated loans as an authorized lender under the Paycheck Protection Program (“PPP”).

Originations under the PPP have ended and we had no remaining PPP loans outstanding as of September 30, 2022.

The SBA 7(a) Loan Program is the SBA’s most common loan program and is considered to be the best SBA assisted loan option when real estate is part of a business purchase.

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We assist in the identification of which type of loan is best suited for a potential borrower’s needs.

Our SBA 7(a) term loans have monthly repayment terms of principal and interest and are originated with variable interest rates based on the prime rate.

Our SBA 7(a) term

loans have monthly repayment terms of principal and interest and are originated with variable interest rates based on the prime rate.

Most of our SBA 7(a) loans have maturities of approximately 25 years.

The PPP provided lenders who originated loans under the program with a 100% guaranty of repayment (provided certain conditions are met) and provided small businesses with uncollateralized and unguaranteed loans at an interest rate of 1.00%.

We obtained all funds to originate loans under the PPP from the Federal Reserve on a basis that correlated to the outstanding principal balance due from our borrowers pursuant to the PPP on a dollar-for-dollar basis with a cost of funds of 0.35%.

As of June 30, 2022, substantially all loans originated under the PPP have been repaid (with a concomitant reduction in our obligations to the Federal Reserve).

While we have focused on originating real estate loans almost exclusively to the limited service and mid-scale hospitality industry, we intend to increase our efforts to originate other real estate collateralized loans.

1 unchanged sentence

Property Concentration

Kaiser Foundation Health Plan, Incorporated (“Kaiser”), which occupied space in one of our Oakland, California properties, accounted for 29.2% of our annualized rental income for the three months ended June 30, 2022.

Kaiser Foundation Health Plan, Incorporated (“Kaiser”), which occupied space in one of our Oakland, California properties, accounted for 29.5% of our annualized rental income for the three months ended September 30, 2022.

2022 Results of Operations

Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021

Net Income and FFO

Three Months Ended June 30, Change

Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021

Net (Loss) Income and FFO

Three Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

Total expenses $ 24,694 $ 21,679 $ 3,015 13.9 %

Net income $ 2,931 $ 527 $ 2,404 456.2 %

Net income increased to $2.9 million, or by $2.4 million, for the three months ended June 30, 2022, compared to net income of $527,000 for the three months ended June 30, 2021.

The increase was primarily due to an increase in office segment net operating income of $314,000 , an increase in hotel segment net operating income of $3.2 million, a decrease in asset management fees of $1.3 million and a decrease in provision for income taxes of $675,000, partially offset by a decrease in lending segment net operating income of $3.4 million.

Net (loss) income $ (232) $ 1,624 $ (1,856) (114.3) %

Net (loss) income was $(232,000) for the three months ended September 30, 2022 compared to net income of $1.6 million for the three months ended September 30, 2021, a decrease of $1.9 million.

The decrease was primarily due to a decrease in lending segment net operating income of $3.7 million, a decrease in office segment net operating income of $994,000 and an increase in general and administrative expenses of $600,000 .

The aforementioned amounts were partially offset by an increase in hotel segment net operating income of $1.5 million, a decrease in asset management fees of $1.3 million and a decrease in provision for income taxes of $759,000.

Funds from Operations

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The following table sets forth a historical reconciliation of net loss attributable to common stockholders to FFO attributable to common stockholders (in thousands):

Three Months Ended June 30,

Three Months Ended September 30,

Net loss attributable to common stockholders (1)

4 unchanged sentences

______________________

(1) During the three months ended June 30, 2022 and 2021, we recognized $106,000 and $13,000, respectively, of redeemable preferred stock redemptions and $4,000 and $106,000, respectively, of redeemable preferred stock deemed dividends.

Such amounts are included in, and have the effect of reducing, net loss attributable to common stockholders and FFO attributable to common stockholders, because redeemable preferred stock redemptions are not an adjustment prescribed by NAREIT.

FFO attributable to common stockholders was $2.6 million for the three months ended June 30, 2022, an increase of $1.8 million compared to $859,000 for the three months ended June 30, 2021.

The increase in FFO is primarily attributable to an increase in office segment net operating income of $314,000 , an increase in hotel segment net operating income of $3.2 million, a decrease in asset management fees of $1.3 million and a decrease in provision for income taxes of $675,000, partially offset by a decrease in lending segment net operating income of $3.4 million as well as an increase in redeemable preferred stock dividends declared or accumulated of $540,000 .

(1) During the three months ended September 30, 2022 and 2021, we recognized $4.9 million and $27,000, respectively, of redeemable preferred stock redemptions and $0 and $90,000, respectively, of redeemable preferred stock deemed dividends.

Of the $4.9 million of redeemable preferred stock redemptions recognized during the three months ended September 30, 2022, $4.8 million resulted from amounts recognized in connection with the Series L Repurchase (defined below).

Such amounts are included in, and have the effect of increasing, net loss attributable to common stockholders and FFO attributable to common stockholders, because redeemable preferred stock redemptions are not an adjustment prescribed by NAREIT.

FFO attributable to common stockholders was $(6.6) million for the three months ended September 30, 2022, a decrease of $8.4 million compared to $1.8 million for the three months ended September 30, 2021.

The decrease in FFO was primarily due to an increase in redeemable preferred stock redemptions of $4.8 million (resulting from amounts recognized in connection with the Series L Repurchase during the three months ended September 30, 2022 ), a decrease in lending segment net operating income of $3.7 million, an increase in redeemable preferred stock dividends declared or accumulated of $1.9 million, a decrease in office segment net operating income of $994,000 and an increase in general and administrative expenses of $600,000 .

Summary Segment Results

During the three months ended June 30, 2022 and 2021, we operated in three segments:

During the three months ended September 30, 2022 and 2021, we operated in three segments:

office and hotel properties and lending.

Set forth and described below are summary segment results for our operating segments (dollar amounts in thousands).

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2022 2021 $ %

5 unchanged sentences

Lending $ 1,162 $ 904 $ 258 28.5 %

Income From Unconsolidated Entity

Loss From Unconsolidated Entity

Office $ (204) $ — $ (204) 100.0 %

5 unchanged sentences

General and administrative $ (1,353) $ (753) $ (600) 79.7 %

Transaction costs $ (201) $ — $ (201) 100.0 %

Depreciation and amortization $ (5,093) $ (5,061) $ (32) 0.6 %

2 unchanged sentences

Office revenue includes rental revenue, expense reimbursements and lease termination income from office properties.

Office revenue increased to $14.1 million, or by 5.4%, for the three months ended June 30, 2022 compared to $13.4 million for the three months ended June 30, 2021.

The increase is primarily due to increased rental revenue at an office property in Austin, Texas as a result of higher occupancy for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Office revenue increased to $14.0 million, or by 8.0%, for the three months ended September 30, 2022 compared to $13.0 million for the three months ended September 30, 2021.

The increase is primarily due to increased rental revenue at an office property in Austin, Texas as a result of higher rental rates and higher occupancy and an increase in rental revenues at an office property in Los Angeles, California and an office property in Beverly Hills, California, both as a result of increased occupancy.

Hotel Revenue:

Hotel revenue increased to $9.6 million, or by 175.4%, for the three months ended June 30, 2022, compared to $3.5 million for the three months ended June 30, 2021, primarily due to an increase in occupancy and average daily rate during the second quarter of 2022 as compared to the second quarter of 2021 as a result of the hospitality industry recovering from the impact of COVID-19.

Hotel revenue increased to $8.5 million, or by 54.4%, for the three months ended September 30, 2022, compared to $5.5 million for the three months ended September 30, 2021, primarily due to an increase in occupancy and average daily rate during the third quarter of 2022 as compared to the third quarter of 2021 as a result of the hospitality industry recovering from the impact of COVID-19.

Lending Revenue:

Lending revenue represents revenue from our lending subsidiaries, including interest income on loans and other loan related fee income.

Lending revenue decreased to $2.8 million, or by 52.9%, for the three months ended June 30, 2022, compared to $5.8 million for the three months ended June 30, 2021.

The decrease is primarily due to lower premium income as a result of lower loan sale volume and a reduction in the market premium achieved during the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

We expect lending revenue to be lower materially for the second half of 2022, when compared to the second half of 2021 because of lower loan origination volume compared to 2021, a year when the SBA temporarily increased guaranteed percentages for SBA 7(a) loan originations, decreased demand for variable rate loans in the current inflationary economic environment, which we believe tends to lead borrowers to seek fixed rate loan products, and lower revenue from servicing assets retained for servicing the government guaranteed portion of our loans due to expected increases in prepayment.

These factors were partially offset by acceleration of income-recognition from any principal discounts recorded on our loans due to increased prepayment.

Lending revenue decreased to $2.4 million, or by 59.2%, for the three months ended September 30, 2022, compared to $5.8 million for the three months ended September 30, 2021.

The decrease is primarily due to lower premium income as a result of lower loan sale volume and a reduction in the market premium achieved during the three months ended September 30, 2022, compared to the three months ended September 30, 2021.

The lower loan origination volume was primarily the result of the SBA temporarily increasing the guaranteed percentages of SBA 7(a) loan originations during the comparable period in 2021, while these factors were partially offset by acceleration of income-recognition from any principal discounts recorded on our loans due to increased prepayment.

We expect lending revenue to be lower materially for

the fourth quarter of 2022, when compared to the fourth quarter of 2021, because of lower loan origination volume compared to 2021, a year when the SBA temporarily increased guaranteed percentages for SBA 7(a) loan originations, decreased demand for variable rate loans in the current inflationary economic environment, which we believe tends to lead borrowers to seek fixed rate loan products, and lower revenue from servicing assets retained for servicing the government guaranteed portion of our loans due to expected increases in prepayment.

Office Expenses:

Office expenses increased to $6.4 million, or by 11.6%, for the three months ended June 30, 2022, compared to $5.8 million for the three months ended June 30, 2021.

The increase is primarily due to an increase in operating expenses at an office property in Austin, Texas, primarily as a result of increased real estate tax expense, as well as at an office property in Beverly Hills, California and an office property in Oakland, California, primarily as a result of higher maintenance expenses.

Office expenses increased to $7.3 million, or by 33.5%, for the three months ended September 30, 2022, compared to $5.5 million for the three months ended September 30, 2021.

The increase is primarily due to an increase in operating expenses at our office property in Oakland, California, primarily as a result of repairs and higher maintenance expenses and utilities expenses, and an increase in operating expenses at an office property in Austin, Texas, primarily as a result of increased real estate tax expense.

In addition, office expenses for the three months ended September 30, 2021 had been reduced by tax refunds related to prior tax years and adjustments to payroll allocation reimbursements related to certain properties.

Hotel Expenses:

Hotel expenses increased to $6.3 million, or by 81.9%, for the three months ended June 30, 2022, compared to $3.5 million for the three months ended June 30, 2021, primarily as a result of increased occupancy at the hotel as compared to the first quarter of 2021 as a result of the hospitality industry recovering from the impact of COVID-19.

Hotel expenses increased to $6.1 million, or by 32.1%, for the three months ended September 30, 2022, compared to $4.6 million for the three months ended September 30, 2021, primarily as a result of increased occupancy at the hotel as compared to the third quarter of 2021 as a result of the hospitality industry recovering from the impact of COVID-19.

Lending Expenses:

Lending expenses represent expenses from our lending subsidiaries, including interest expense, general and administrative expenses and fees to related parties.

Lending expenses increased to $1.1 million, or by 34.0%, for the three months ended June 30, 2022, compared to $792,000 for the three months ended June 30, 2021.

The increase was primarily due to an increase in salary expenses (largely due to a reduction in costs being capitalized as a result of lower loan origination volume) as well as an increase in general and administrative expenses.

Income From Unconsolidated Entity:

Income from our unconsolidated entity included in office segment net operating income was $260,000 for the three months ended June 30, 2022.

As our investment in the unconsolidated entity was made in February 2022, there was no comparable income for the three months ended June 30, 2021.

Lending expenses increased to $1.2 million, or by 28.5%, for the three months ended September 30, 2022, compared to $904,000 for the three months ended September 30, 2021.

The increase was primarily due to an increase in salary expenses (largely due to a reduction in costs being capitalized as a result of lower loan origination volume, partially being offset by a reduction in loan origination commissions), an increase in interest expense and an increase in provision for loan losses, partially offset by a decrease in general and administrative expenses.

(Loss) Income From Unconsolidated Entity:

The loss from our unconsolidated entity included in office segment net operating income was $204,000 for the three months ended September 30, 2022.

As our investment in the Unconsolidated Joint Venture was made in February 2022, there was no comparable income for the three months ended September 30, 2021.

The loss from our unconsolidated entity included in office segment net operating income of $204,000 for the three months ended September 30, 2022 was primarily due to the expenses related to the Unconsolidated Joint Venture’s mortgage debt origination as well as increases in administrative expenses.

Asset Management and Other Fees to Related Parties:

Asset management fees and other fees to related parties, which have not been allocated to our operating segments, were $920,000 for the three months ended June 30, 2022, a decrease of 59.3%, compared to $2.3 million for the three months ended June 30, 2021.

The decrease was a result of the Fee Waiver which became effective January 1, 2022 and resulted in the new Base Fee calculated at an annual rate of 1% (or 0.25% per quarter) of the average net asset value attributable to common stockholders at the beginning and end of the period.

Asset management fees and other fees to related parties, which have not been allocated to our operating segments, were $916,000 for the three months ended September 30, 2022, a decrease of 59.5%, compared to $2.3 million for the three months ended September 30, 2021.

The decrease was primarily a result of the Fee Waiver which became effective January 1, 2022 and resulted in the new Base Fee calculated at an annual rate of 1% (or 0.25% per quarter) of the average net asset value attributable to common stockholders at the beginning and end of the period.

Expense Reimbursements to Related Parties — Corporate:

The Administrator receives compensation and or reimbursement for performing certain services for the Company and its subsidiaries that are not covered by the Incentive Fee.

Expense reimbursements to related parties-corporate were $526,000 for the three months ended June 30, 2022, an increase of 15.9%, compared to $454,000 for the three months ended June 30, 2021 due to increases in allocated payroll.

Expense reimbursements to related parties-corporate were $511,000 for the three months ended September 30, 2022, consistent with $533,000 for the three months ended September 30, 2021.

Interest Expense:

Interest expense, which has not been allocated to our operating segments, was $2.3 million for the three months ended June 30, 2022, a decrease of 8.3% compared to $2.5 million for the three months ended June 30, 2021.

The decrease is primarily due to a lower average outstanding principal balance on our 2018 Revolving Credit Facility compared to

the three months ended June 30, 2021, partially offset by increases in the LIBOR component of interest rates on our variable-rate debt for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Interest expense, which has not been allocated to our operating segments, was $2.1 million for the three months ended September 30, 2022, consistent with $2.1 million for the three months ended September 30, 2021.

For the three months ended September 30, 2022, we saw increases in the LIBOR component of interest rates on our variable-rate debt compared to the three months ended September 30, 2021.

Such increases were offset by a lower average outstanding principal balance on our 2018 Revolving Credit Facility for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

General and Administrative Expenses:

General and administrative expenses, which have not been allocated to our operating segments, were $880,000 for the three months ended June 30, 2022, consistent with $835,000 for the three months ended June 30, 2021.

General and administrative expenses, which have not been allocated to our operating segments, were $1.4 million for the three months ended September 30, 2022 as compared to $753,000 for the three months ended September 30, 2021.

The increase was primarily due to increases in legal and other professional fees.

Transaction Costs:

Transaction costs, related to abandoned project costs in connection with potential real estate transactions, were $201,000 for the three months ended September 30, 2022.

There were no transaction costs incurred during the three months ended September 30, 2021.

Depreciation and Amortization Expense:

Depreciation and amortization expense was consistent at $5.0 million for both the three months ended June 30, 2022 and 2021.

Depreciation and amortization expense was consistent at $5.1 million for both the three months ended September 30, 2022 and 2021.

Provision for Income Taxes:

Provision for income taxes was $321,000 for the three months ended June 30, 2022 as compared to $996,000 for the three months ended June 30, 2021.

The decrease in provision for income taxes is due to a decrease in taxable income at our taxable REIT subsidiaries, largely due to the operations of the lending division during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Provision for income taxes was $187,000 for the three months ended September 30, 2022 as compared to $946,000 for the three months ended September 30, 2021.

The decrease in provision for income taxes is due to a decrease in taxable income at our taxable REIT subsidiaries as a result of the operations of the lending division during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

2022 Results of Operations

Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021

Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021

Net Income (Loss) and FFO

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

2 unchanged sentences

Net income (loss) $ 5,001 $ (1,520) $ 6,521 (429.0) %

Net income increased to $5.2 million, or by $8.4 million, for the six months ended June 30, 2022, compared to net loss of $3.1 million for the six months ended June 30, 2021.

The increase is primarily attributable to an increase of $541,000 in office segment net operating income, an increase of $6.5 million in hotel segment net operating income, a decrease of $2.7 million in asset management fees, a decrease of $859,000 in general and administrative expenses, a decrease of $585,000 in interest expense and a decrease of $742,000 in provision for income taxes, partially offset by a decrease of $3.7 million in lending segment net operating income.

Net income increased to $5.0 million, or by $6.5 million, for the nine months ended September 30, 2022, compared to net loss of $1.5 million for the nine months ended September 30, 2021.

The increase is primarily attributable to an increase of $8.0 million in hotel segment net operating income, a decrease of $4.0 million in asset management and other fees to related parties, a decrease of $1.5 million in provision for income taxes, a decrease in interest expense of $606,000 and a decrease of $259,000 in general and administrative expenses partially offset by a decrease of $7.4 million in lending segment net operating income and a decrease of $453,000 in office segment net operating income.

Funds from Operations

The following table sets forth a historical reconciliation of net loss attributable to common stockholders to FFO attributable to common stockholders (in thousands):

Six Months Ended June 30,

Nine Months Ended September 30,

Net loss attributable to common stockholders (1)

$ (16,844) $ (15,632)

Depreciation and amortization 15,071 15,167

1 unchanged sentence

$ (1,773) $ (465)

(1) During the six months ended June 30, 2022 and 2021, we recognized $181,000 and $26,000, respectively, of redeemable preferred stock redemptions and $19,000 and $163,000, respectively, of redeemable preferred stock deemed dividends.

______________________

(1) During the nine months ended September 30, 2022 and 2021, we recognized $5.0 million and $53,000, respectively, of redeemable preferred stock redemptions and $19,000 and $253,000, respectively, of redeemable preferred stock deemed dividends.

FFO attributable to common stockholders was $4.8 million for the six months ended June 30, 2022, an increase of $7.1 million compared to $(2.3) million for the six months ended June 30, 2021.

The increase in FFO is primarily attributable to an increase of $541,000 in office segment net operating income, an increase of $6.5 million in hotel segment net operating income, a decrease of $2.7 million in asset management and other fees to related parties, a decrease of $859,000 in general and administrative expenses, a decrease of $585,000 in interest expense and a decrease of $742,000 in provision for income taxes, partially offset by a decrease of $3.7 million in lending segment net operating income and by an increase in redeemable preferred dividends declared or accumulated of $1.1 million.

Of the $5.0 million of redeemable preferred stock redemptions recognized during the nine months ended September 30, 2022, $4.8 million resulted from amounts recognized in connection with the Series L Repurchase.

FFO attributable to common stockholders was $(1.8) million for the nine months ended September 30, 2022, a decrease of $1.3 million compared to $(465,000) for the nine months ended September 30, 2021.

The decrease in FFO is primarily attributable to a decrease of $7.4 million in lending segment net operating income, an increase in redeemable preferred stock redemptions of $5.0 million (resulting from $4.8 million recognized in connection with the Series L Repurchase during the nine months ended September 30, 2022), an increase in redeemable preferred dividends declared or accumulated of $3.0 million and a decrease of $453,000 in office segment net operating income, partially offset by an increase of $8.0 million in hotel segment net operating income, a decrease of $4.0 million in asset management and other fees to related parties and a decrease of $1.5 million in provision for income taxes, a decrease in interest expense of $606,000 and a decrease of $259,000 in general and administrative expenses.

Summary Segment Results

During the six months ended June 30, 2022 and 2021, we operated in three segments:

During the nine months ended September 30, 2022 and 2021, we operated in three segments:

office and hotel properties and lending.

Set forth and described below are summary segment results for our operating segments (dollar amounts in thousands).

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2022 2021 $ %

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General and administrative $ (3,370) $ (3,629) $ 259 (7.1) %

Transaction costs $ (201) $ — $ (201) 100.0 %

Depreciation and amortization $ (15,071) $ (15,167) $ 96 (0.6) %

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Office revenue includes rental revenue, expense reimbursements and lease termination income from office properties.

Office revenue increased to $28.2 million, or by 4.8%, for the six months ended June 30, 2022 compared to $26.9 million for the six months ended June 30, 2021.

The increase is primarily due to increased rental revenue at an office property in Austin, Texas as a result of higher occupancy as compared to the six months ended June 30, 2021.

Office revenue increased to $42.2 million, or by 5.9%, for the nine months ended September 30, 2022 compared to $39.9 million for the nine months ended September 30, 2021.

The increase is primarily due to increased rental revenue at an office property in Austin, Texas and an office property in Los Angeles, California as a result of higher occupancy, partially offset by lower rental revenues at an office property in San Francisco, California as a result of lower occupancy when compared to the nine months ended September 30, 2021.

Hotel Revenue:

Hotel revenue increased to $17.4 million, or by 224.4%, for the six months ended June 30, 2022, compared to $5.4 million for the six months ended June 30, 2021, primarily due to an increase in occupancy and average daily rate during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 as a result of the hospitality industry recovering from the impact of COVID-19.

Hotel revenue increased to $25.8 million, or by 138.4%, for the nine months ended September 30, 2022, compared to $10.8 million for the nine months ended September 30, 2021, primarily due to an increase in occupancy and

average daily rate during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 as a result of the hospitality industry recovering from the impact of COVID-19.

Lending Revenue:

Lending revenue represents revenue from our lending subsidiaries, including interest income on loans and other loan related fee income.

Lending revenue decreased to $5.6 million, or by 39.5%, for the six months ended June 30, 2022, compared to $9.3 million for the six months ended June 30, 2021.

The decrease is primarily due to lower premium income as a result of lower loan sale volume and a reduction in the market premium achieved during the six months ended June

30, 2022, compared to the six months ended June 30, 2021.

These factors were partially offset by acceleration of income-recognition from any principal discounts recorded on our loans due to increased prepayment.

Lending revenue decreased to $8.0 million, or by 47.1%, for the nine months ended September 30, 2022, compared to $15.1 million for the nine months ended September 30, 2021.

The decrease is primarily due to lower premium income as a result of lower loan sale volume and a reduction in the market premium achieved during the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021.

We expect lending revenue to be lower materially for the fourth quarter of 2022, when compared to the fourth quarter of 2021, because of lower loan origination volume compared to 2021, a year when the SBA temporarily increased guaranteed percentages for SBA 7(a) loan originations, decreased demand for variable rate loans in the current inflationary economic environment, which we believe tends to lead borrowers to seek fixed rate loan products, and lower revenue from servicing assets retained for servicing the government guaranteed portion of our loans due to expected increases in prepayment.

Office Expenses:

Office expenses increased to $12.6 million, or by 9.9%, for the six months ended June 30, 2022, compared to $11.5 million for the six months ended June 30, 2021.

The increase is primarily due to an increase in operating expenses at an office property in Austin, Texas, primarily as a result of increased real estate tax expense, and an office property in Oakland, California, primarily as a result of higher maintenance expenses.

and an office property in Oakland, California as compared to the six months ended June 30, 2021.

Office expenses increased to $20.0 million, or by 17.5%, for the nine months ended September 30, 2022, compared to $17.0 million for the nine months ended September 30, 2021.

In addition, office expenses for the nine months ended September 30, 2021 had been reduced by tax refunds related to prior tax years and adjustments to payroll allocation reimbursements related to certain properties.

Hotel Expenses:

Hotel expenses increased to $11.7 million, or by 90.3%, for the six months ended June 30, 2022, compared to $6.2 million for the six months ended June 30, 2021, primarily as a result of increased occupancy at the hotel during as a result of the hospitality industry recovering from the impact of COVID-19.

Hotel expenses increased to $17.8 million, or by 65.4%, for the nine months ended September 30, 2022, compared to $10.8 million for the nine months ended September 30, 2021, primarily as a result of increased occupancy at the hotel during as a result of the hospitality industry recovering from the impact of COVID-19.

Lending Expenses:

Lending expenses represent expenses from our lending subsidiaries, including interest expense, general and administrative expenses and fees to related party.

Lending expenses were $2.2 million, for both the six months ended June 30, 2022 and 2021.

Lending expenses increased to $3.4 million, or by 9.6% for the nine months ended September 30, 2022, compared to $3.1 million for the nine months ended September 30, 2021.

Income From Unconsolidated Entity:

Income from our unconsolidated entity included in office segment net operating income was $176,000 for the nine months ended September 30, 2022.

As our investment in the Unconsolidated Joint Venture was made in February 2022, there was no comparable income for the nine months ended September 30, 2021.

Asset Management and Other Fees to Related Parties:

Asset management fees and other fees to related parties, which have not been allocated to our operating segments, were $1.8 million for the six months ended June 30, 2022, a decrease of 59.3%, compared to $4.5 million for the six months ended June 30, 2021.

Asset management fees and other fees to related parties, which have not been allocated to our operating segments, were $2.8 million for the nine months ended September 30, 2022, a decrease of 59.3%, compared to $6.8 million for the nine months ended September 30, 2021.

Expense Reimbursements to Related Parties — Corporate:

The Administrator receives compensation and or reimbursement for performing certain services for the Company and its subsidiaries that are not covered by the Incentive Fee.

Expense reimbursements to related parties-corporate were $948,000 for the six months ended June 30, 2022, a decrease of 10.5%, compared to $1.1 million for the six months ended June 30, 2021.

Expense reimbursements to related parties-corporate were $1.5 million for the nine months ended September 30, 2022, a decrease of 8.4%, compared to $1.6 million for the nine months ended September 30, 2021.

The decrease was primarily due to reductions in allocated payroll.

Interest Expense:

Interest expense, which has not been allocated to our operating segments, was $4.3 million for the six months ended June 30, 2022, a decrease of 11.9% compared to $4.9 million for the six months ended June 30, 2021.

The decrease is primarily due to a lower average outstanding principal balance on our 2018 revolving credit facility during the six months ended June 30, 2022 compared to the six months ended June 30, 2021, partially offset by increases in the LIBOR component of interest rates on our variable-rate debt for the six months ended June 30, 2022 as compared to six months ended June 30, 2021.

Interest expense, which has not been allocated to our operating segments, was $6.4 million for the nine months ended September 30, 2022, a decrease of 8.6% compared to $7.0 million for the nine months ended September 30, 2021.

The decrease is primarily due to a lower average outstanding principal balance on our 2018 revolving credit facility during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, partially offset by increases in the LIBOR component of interest rates on our variable-rate debt for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

General and Administrative Expenses:

General and administrative expenses, which have not been allocated to our operating segments, were $2.0 million for the six months ended June 30, 2022, a decrease of 29.9% compared to $2.9 million for the six months ended June 30, 2021.

The decrease is primarily due to a decrease in legal fees as compared to the six months ended June 30, 2021.

General and administrative expenses, which have not been allocated to our operating segments, were $3.4 million for the nine months ended September 30, 2022, a decrease of 7.1% compared to $3.6 million for the nine months ended September 30, 2021.

The decrease is primarily due to a decrease in legal fees as compared to the nine months ended September 30, 2021.

Transaction Costs:

Transaction costs, related to abandoned project costs in connection with potential real estate transactions, were $201,000 for the nine months ended September 30, 2022.

There were no transaction costs incurred during the nine months ended September 30, 2021.

Depreciation and Amortization Expense:

Depreciation and amortization expense was $10.0 million for the six months ended June 30, 2022, consistent with $10.1 million for the six months ended June 30, 2021.

Depreciation and amortization expense was $15.1 million for the nine months ended September 30, 2022, consistent with $15.2 million for the nine months ended September 30, 2021.

Provision for Income Taxes:

Provision for income taxes was $628,000 for the six months ended June 30, 2022, a decrease of 54.2% compared to $1.4 million for the six months ended June 30, 2021.

The decrease in provision for income taxes is due to a decrease in taxable income at our taxable REIT subsidiaries, largely due to the operations of the lending division during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Provision for income taxes was $815,000 for the nine months ended September 30, 2022, a decrease of 64.8% compared to $2.3 million for the six months ended September 30, 2021.

The decrease in provision for income taxes is due to a decrease in taxable income at our taxable REIT subsidiaries, as a result of operations of the lending division during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Cash Flow Analysis

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Our cash flows from operating activities are also impacted by fluctuations in operating expenses and other general and administrative costs.

Net cash provided by operating activities

increased by $7.4 million for the six months ended June 30, 2022, as compared to the same period in 2021.The increase was primarily due to an increase in net income adjusted for depreciation and amortization expense, write-offs of uncollectible receivables and income from our unconsolidated entity of $6.9 million, primarily as a result of increases in segment net operating income and a decrease in asset management fees, partially offset by a $1.5 million decrease in net proceeds from sale of guaranteed loans net of loan fundings, held for sale.

Net cash provided by operating activities increased by $14.4 million for the nine months ended September 30, 2022, as compared to the same period in 2021.The increase was primarily due to an increase in net income adjusted for depreciation and amortization expense, write-offs of uncollectible receivables and income from our unconsolidated entity of $6.6 million, a $13.1 million increase in net proceeds from sale of guaranteed loans net of loan fundings, held for sale, partially offset by a $5.8 million decrease resulting from a higher level of net working capital used compared to the prior period.

Our cash flows from investing activities are primarily related to property acquisitions and dispositions, expenditures for the development or repositioning of properties, capital expenditures and cash flows associated with loans originated at our lending segment.

Net cash used in investing activities increased by $30.9 million for the six months ended June 30, 2022, as compared to the same period in 2021.

The increase in cash used in investing activities was primarily due to an increase of $3.8 million in capital expenditures, primarily as a result of increased office leasing activity resulting in more tenant improvements, and acquisitions of real estate of $8.1 million, compared to no purchases during the same period in 2021, and a cash outlay of $22.4 million related to our investment in the Unconsolidated Joint Venture during the six months ended June 30, 2022.

Additionally, as a result of the ending of the PPP loan originations in 2021, there was a decrease in net cash used in investing activities related to net loan fundings of $3.4 million.

Net cash used in investing activities increased by $17.9 million for the nine months ended September 30, 2022, as compared to the same period in 2021.

The increase in cash used in investing activities was primarily due to an increase of $4.6 million in capital expenditures and an increase in acquisitions of real estate of $7.8 million, compared to the same period in 2021, and a cash outlay of $22.4 million related to our investment in the Unconsolidated Joint Venture during the nine months ended September 30, 2022.

Partially offsetting net cash used in investing activities are the ending of the PPP loan originations in 2021, creating a decrease in net cash used in investing activities related to net loan fundings of $6.7 million, and $10.3 million of cash provided by our Unconsolidated Joint Venture during the nine months ended September 30, 2022 as a result of distributions in connection with the closing of the financing of the property owned by the Unconsolidated Joint Venture.

Our cash flows from financing activities are generally impacted by borrowings and capital activities.

Net cash provided by financing activities was $4.5 million during the six months ended June 30, 2022, compared to net cash provided by financing activities of $12.9 million in the same period in 2021.

The decrease in net cash provided by financing activities of $8.4 million was primarily as a result of net proceeds from issuance of Common Stock during the six months ended June 30, 2021 of $78.5 million related to our rights offering completed in June 2021 as compared to the six months ended June 30, 2022 in which the Company repurchased $303,000 worth of its Common Stock and had no proceeds from Common Stock issuances.

Partially offsetting the aforementioned decrease in net cash provided by financing activities, the Company had net proceeds from debt of $6.5 million during the six months ended June 30, 2022 compared to net debt paydowns of $64.0 million during the six months ended June 30, 2021.

Net cash used in financing activities was $11.5 million during the nine months ended September 30, 2022, compared to net cash used in financing activities of $25.7 million in the same period in 2021.

The decrease in net cash used in financing activities of $14.2 million was primarily as a result of net proceeds from debt of $5.1 million during the nine months ended September 30, 2022 compared to net debt paydowns of $102.4 million during the nine months ended September 30, 2021, and an increase of $56.7 million in proceeds from the issuance of Preferred Stock, net of redemptions, during the nine months ended September 30, 2022.

The aforementioned amounts decreasing net cash used in financing activities were partially offset by net proceeds from issuance of Common Stock during the nine months ended September 30, 2021 of $78.3 million related to our rights offering completed in June 2021 as compared to the nine months ended September 30, 2022 in which the Company repurchased $4.7 million worth of its Common Stock and had no proceeds from Common Stock issuances.

Additionally, there was $67.4 million in repurchases of Series L Preferred Stock during the nine months ended September 30, 2022.

Liquidity and Capital Resources

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(ii) credit facilities and term loans;

(iii) the addition of senior recourse or non-recourse debt using target acquisitions as well as existing assets as collateral;

(iii) the addition of senior recourse or non-recourse debt using target acquisitions

as well as existing assets as collateral;

(iv) the sale of existing assets;

and or (v) cash flows from operations.

With respect to the $50.0 million outstanding under the 2018 Revolving Credit Facility as of August 3, 2022 that is scheduled to mature in October 2022, we are working with a bank to refinance such indebtedness prior to its maturity date.

(v) partnering with co-investors;

and or (vi) cash flows from operations.

With respect to the $85.0 million outstanding under the 2018 Revolving Credit Facility as of September 30, 2022 , we are working with a bank to refinance such indebtedness prior to its maturity date.

There can, however, be no assurance that such refinancing will occur.

In the interim, in order to preserve flexibility with respect to our liquidity, we submitted an extension notice in July 2022 to extend the maturity of the 2018 Revolving Credit Facility to October 2023.

The extension is subject to the satisfaction of certain conditions that we expect to be able to satisfy (if the refinancing does not occur).

In the interim, the Company has executed a one-year extension of the 2018 Revolving Credit Facility to extend its maturity to October 2023.

In November 2022, holders of the Series L Preferred Stock will have the right to require us to redeem all or any of the shares of Series L Preferred Stock held by such holders.

At the same time, we will also have the right to redeem any or all shares of our Series L Preferred Stock.

The redemption price, whether the redemption is at the request of a holder or by us, will be equal to 100% of the stated value of the Series L Preferred Stock plus any accumulated and unpaid dividends.

The redemption price, whether the redemption is at the request of a holder or by us, will be equal to 100% of the stated value of the Series L Preferred Stock (for a total of $83.7 million in aggregate as of September 30, 2022) plus any accumulated and unpaid dividends.

We can pay the redemption price, at our option and in our sole discretion, either in cash or in equal value through the issuance of shares of our Common Stock.

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We have been actively evaluating our options with respect to whether we will exercise our redemption right with respect to any or all shares of Series L Preferred Stock as well as other alternatives.

We believe that we will have sufficient liquidity to redeem any shares of Series L Preferred Stock in cash (to the extent we decide to pay any redemption price in cash).

Our long-term liquidity needs will consist primarily of funds necessary for acquisitions of assets, development or repositioning of properties, or re-leasing of space in existing properties, capital expenditures, refinancing of indebtedness, SBA 7(a) loan originations, paying distributions on our Preferred Stock or any other preferred stock we may issue, any future repurchase of Common Stock and or redemption of our Preferred Stock (if we choose, or are required, to pay the redemption price in cash instead of in shares of our Common Stock) and distributions on our Common Stock.

Additionally, our outstanding commitments to fund loans were $7.1 million as of June 30, 2022, substantially all of which reflect prime-based loans to be originated by our subsidiary engaged in SBA 7(a) Small Business Loan Program lending.

The majority of these commitments have government guarantees of 75% (as the government guarantee has now reverted to 75% from 90%) and we believe that we will be able to sell the guaranteed portion of these loans in a liquid secondary market upon fully funding these loans.

some commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements.

Additionally, our outstanding commitments to fund loans were $11.5 million as of September 30, 2022, substantially all of which reflect prime-based loans to be originated by our subsidiary engaged in SBA 7(a) Small Business Loan Program lending.

All of these commitments have government guarantees of 75% (as the government guarantee has now reverted to 75% from 90%) and we believe that we will be able to sell the guaranteed portion of these loans in a liquid secondary market upon fully funding these loans.

Since some commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements.

The Company intends to convert two out of the three floors of an office building that it owns at 4750 Wilshire Boulevard in Los Angeles into for-lease multifamily units (the “4750 Wilshire Project”).

As part of its asset-light investment approach, the Company intends to finance the 4750 Wilshire Project by inviting co-investors to acquire a stake in the property, with the Company retaining a minority equity interest.

The total cost of the 4750 Wilshire Project is expected to be approximately $32.8 million, which will be financed by a combination of equity contributions from co-investors and the Company as well as a reposition loan from a third-party lender.

At the initial closing of the co-investment, the Company expects to receive proceeds from co-investors, which proceeds will enhance the liquidity of the Company.

Further, the Company is expected to earn management fees from co-investors in connection with their co-investment in the 4750 Wilshire Project.

We may not have sufficient funds on hand or may not be able to obtain additional financing to cover all of our long-term cash requirements.

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Sources and Uses of Funds

We have one mortgage loan agreement with an outstanding balance of $97.1 million as of June 30, 2022.

We have one mortgage loan agreement with an outstanding balance of $97.1 million as of September 30, 2022.

Revolving Credit Facilities

In October 2018, we entered into the 2018 Revolving Credit Facility that, as amended, allows us to borrow up to $209.5 million, subject to a borrowing base calculation.

As of June 30, 2022 and December 31, 2021, the variable interest rate was 3.72% and 2.15%, respectively.

The 2018 revolving credit facility matures in October 2022 and provides for one one-year extension option under certain conditions, including providing notice of the election and paying an extension fee of 0.15% of each lender’s commitment being extended on the effective date of such extension.

We expect to extend its maturity to October 2023, subject to satisfying certain conditions, and/or refinance such indebtedness.

Based on our projected performance and current capital market conditions, we expect that we will be able to implement either or both options.

As of August 3, 2022, June 30, 2022, and December 31, 2021, $50.0 million, $75.0 million and $60.0 million, respectively, was outstanding under the 2018 revolving credit facility and approximately $150.9 million, $125.9 million, and $117.6 million, respectively, was available for future borrowings.

In June 2020, we commenced borrowing funds from the Federal Reserve through the PPPLF.

Advances under the PPPLF carry an interest rate of 0.35%, are made on a dollar-for-dollar basis based on the amount of loans originated under the PPP and are secured by loans made by us under the PPP.

The PPPLF contains customary covenants but is not subject to any financial covenants.

The maturity date of PPPLF borrowings is the same as the maturity date of the loans pledged to secure the extension of credit, generally two years.

At maturity, both principal and accrued interest are due.

The maturity date of a PPPLF borrowing will be accelerated if, among other things, we have been reimbursed by the SBA for a loan forgiveness (to the extent of the forgiveness), we have received payment from the SBA representing exercise of the loan guarantee or we have received payment from the underlying borrower (to the extent of the payment received).

We borrowed money under the PPPLF to finance all the loans we originated under the PPP.

As of June 30, 2022, $205,000 was outstanding under the PPPLF.

The 2018 revolving credit facility is secured by properties in the Company’s real estate portfolio:

eight office properties and one hotel property.

As of September 30, 2022 and December 31, 2021, the variable interest rate was 4.33% and 2.15%, respectively.

The Company is working with a bank to refinance the 2018 revolving credit facility which management believes is probable based on its projected performance and current capital market conditions.

There can, however, be no assurance that such refinancing will occur.

In the interim, the Company has executed a

one-year extension of the 2018 Revolving Credit Facility to extend its maturity to October 2023.

In connection with the extension, the Company paid 25% of the extension fee specified in the 2018 Revolving Credit Facility (i.e., 25% of 0.15% of each lender’s commitment being extended) on October 30, 2022, with the remaining 75% of the extension fee specified in the 2018 Revolving Credit Facility (i.e., 75% of 0.15% of each lender’s commitment being extended) being due and payable on the date that is 90 days after October 30, 2022.

The Company believes cash on hand, proceeds from the sale of our Series A1 Preferred Stock, net cash provided by operations and the entry into new financing arrangements will be sufficient to meet its obligations as they become due in the ordinary course of business for at least 12 months following the date these financial statements are issued, November 14, 2022.

As of November 9, 2022, September 30, 2022, and December 31, 2021, $55.0 million, $85.0 million and $60.0 million, respectively, was outstanding under the 2018 revolving credit facility and approximately $154.5 million, $119.9 million, and $117.6 million, respectively, was available for future borrowings.

Other Financing Activity

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The SBA 7(a) loan-backed notes bear interest at the lower of the one-month LIBOR plus 1.40% or the prime rate less 1.08%.

The outstanding balance of SBA 7(a) loan-backed notes on August 3, 2022, June 30, 2022, and December 31, 2021, was $3.8 million, $4.0 million and $7.7 million, respectively.

The outstanding balance of SBA 7(a) loan-backed notes on November 9, 2022, September 30, 2022, and December 31, 2021, was $2.2 million, $2.7 million and $7.7 million, respectively.

We have junior subordinated notes with a variable interest rate that resets quarterly based on the three-month LIBOR plus 3.25%, with quarterly interest‑only payments.

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The junior subordinated notes may be redeemed at par at our option.

The aggregate principal balance of the junior subordinated notes was $27.1 million as of June 30, 2022.

As an SBA 7(a) licensee, we are an authorized lender under the PPP and originated loans under the program.

As of June 30, 2022, we had $205,000 outstanding in PPP loans.

We expect that all of the outstanding PPP loans will be forgiven, either in part or in full, by the SBA or be repaid by the borrower, including both principal and accrued interest.

The aggregate principal balance of the junior subordinated notes was $27.1 million as of September 30, 2022.

Securities Offerings

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However, in accordance with the terms of the Series A Preferred Warrants, the exercise price of each Series A Preferred Warrant issued prior to the Reverse Stock Split was automatically adjusted to reflect the effect of the Reverse Stock Split and, in the discretion of our Board of Directors, the exercise price and the number of shares issuable upon exercise of each Series A Preferred Warrant issued prior to the Special Dividend was adjusted to reflect the effect of the Special Dividend.

As of June 30, 2022, there were 4,294,512 Series A Preferred Warrants to purchase 1,113,569 shares of Common Stock outstanding.

As of September 30, 2022, there were 4,034,366 Series A Preferred Warrants to purchase 1,045,671 shares of Common Stock outstanding.

From February 2020 through June 2022, we conducted a continuous public offering of our Series A Preferred Stock and Series D Preferred Stock.

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We intend to use the net proceeds from the offerings for general corporate purposes, acquisitions of shares of our Common Stock and Preferred Stock, whether through one or more tender offers, share repurchases or otherwise, and acquisitions consistent with our acquisition and asset management strategies.

As of June 30, 2022, we had issued 192,440 shares of Series A1 Preferred Stock, 8,251,657 shares of Series A Preferred Stock and 56,857 shares of Series D Preferred Stock and received aggregate net proceeds of $192.2 million after commissions, fees and allocated costs.

As of September 30, 2022, we had issued 2,859,441 shares of Series A1 Preferred Stock, 8,251,657 shares of Series A Preferred Stock and 56,857 shares of Series D Preferred Stock and received aggregate net proceeds of $253.0 million after commissions, fees and allocated costs.

On March 16, 2020, we established an “at the market” (“ATM”) program through which we may, from time to time in our discretion, offer and sell shares of Common Stock having an aggregate offering price of up to $25.0 million through an investment banking firm acting as the sales agent.

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We intend to use the net proceeds from shares sold under the ATM program, if any, for general corporate purposes, acquisitions of shares of our Preferred Stock, whether through one or more tender offers, share repurchases or otherwise, and acquisitions consistent with our acquisition and asset management strategies.

As of August 3, 2022, no sales of Common Stock have been made under the ATM program.

As of November 9, 2022, no sales of Common Stock have been made under the ATM program.

Dividends on and Redemptions of Preferred Stock

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Prior to the payment of any distributions on Series L Preferred Stock in respect of a given year, we must first declare and pay dividends on the Common Stock in respect of such year in an aggregate amount equal to the Initial Dividend announced by our Board of Directors at the end of the prior fiscal year.

On December 29, 2021, we announced an Initial Dividend on shares of our Common Stock for fiscal year 2022 in the aggregate amount of $7,010,799, of which $3,972,000 had been paid as of June 30, 2022.

On December 29, 2021, we announced an Initial Dividend on shares of our Common Stock for fiscal year 2022 in the aggregate amount of $7,010,799, of which $3,972,000 had been paid as of September 30, 2022.

We expect to pay dividends on the Series A1 Preferred Stock, Series A Preferred Stock and Series D Preferred Stock in arrears on a monthly basis, and on the Series L Preferred Stock in arrears on a yearly basis, unless our results of operations, our general financing conditions, general economic conditions, applicable requirements of the MGCL or other factors make it imprudent to do so.

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Holders of our Common Stock are entitled to receive dividends, if, as and when authorized by the Board of Directors and declared by us out of legally available funds.

In determining our dividend policy, the Board of Directors considers many

factors including the amount of cash resources available for dividend distributions, capital spending plans, cash flow, our financial position, applicable requirements of the MGCL, any applicable contractual restrictions, and future growth in NAV and cash flow per share prospects.

In determining our dividend policy, the Board of Directors considers many factors including the amount of cash resources available for dividend distributions, capital spending plans, cash flow, our financial position, applicable requirements of the MGCL, any applicable contractual restrictions, and future growth in NAV and cash flow per share prospects.

Consequently, the dividend rate on a quarterly basis does not necessarily correlate directly to any individual factor.

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The redemption price in respect of any share of Preferred Stock, whether redeemed at our option or at the option of a holder, may be paid in cash or in shares of Common Stock in our sole discretion.

During the three months ended June 30, 2022, we redeemed 88,225 shares of Series A Preferred Stock and no shares of Series A1 Preferred Stock, Series D Preferred Stock or Series L Preferred Stock.

During the three months ended September 30, 2022, we redeemed 59,942 shares of Series A Preferred Stock and no shares of Series A1 Preferred Stock, Series D Preferred Stock or Series L Preferred Stock.

On September 15, 2022, the Company repurchased 2,435,284 shares of its Series L Preferred Stock in a privately negotiated transaction (the “Series L Repurchase”).

The shares were repurchased at a purchase price of $27.40 per share (a 3.4% discount to the stated value of $28.37) plus $1.12 per share of accrued and unpaid dividends (or $2.7 million of accrued and unpaid dividends in the aggregate).

The total cost to complete the Series L Repurchase, including of transactions costs of $700,000, was $70.1 million.

In connection with the Series L Repurchase, the Company recognized redeemable preferred stock redemptions of $4.8 million on its consolidated statement of operations for the three and nine months ended September 30, 2022.

Off-Balance Sheet Arrangements

As of June 30, 2022, we did not have any off-balance sheet arrangements.

As of September 30, 2022, we did not have any off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

Our recently issued accounting pronouncements are described in Note 2 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Quantitative and Qualitative Disclosures About Market Risk

The fair value of our mortgage payable is sensitive to fluctuations in interest rates.

Discounted cash flow analysis is generally used to estimate the fair value of our mortgage payable, using a rate of 6.28% and 3.22% as of September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, our mortgage payable had a book value of $97.1 million, and a fair value of $90.0 million and $100.8 million, respectively.

Our future income, cash flow and fair values relevant to financial instruments are dependent upon prevalent market interest rates.

Market risk refers to the risk of loss from adverse changes in market prices and interest rates.

We are exposed to market risk in the form of changes in interest rates and the potential impact such changes may have on the cash flows from our floating rate debt or the fair values of our fixed rate debt.

As of September 30, 2022 and December 31, 2021 (excluding premiums, discounts, and deferred loan costs), $97.1 million (or 44.5%) and $102.1 million (or 50.2%) of our debt, respectively, was fixed rate borrowings, and $120.9 million (or 55.5%) and $101.4 million (or 49.8%), respectively, was floating rate borrowings.

Based on the level of floating rate debt outstanding as of September 30, 2022 and December 31, 2021, a 50 basis point change in LIBOR would result in an annual impact to our earnings of approximately $604,000 and $507,000, respectively.

We calculate interest rate sensitivity by multiplying the amount of floating rate debt by the respective change in rate.

The sensitivity analysis does not take into consideration possible changes in the balances or fair value of our floating rate debt.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis