What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-14 · 195 added, 285 removed, 202 unchanged (70% of the section changed)

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This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), which are intended to be covered by the safe harbors created thereby.

Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “project,” “target,” “expect,” “intend,” “might,” “believe,” “anticipate,” “estimate,” “could,” “would,” “continue,” “pursue,” “potential,” “forecast,” “seek,” “plan,” or “should” or “goal” or the negative thereof or other variations or similar words or phrases.

Such forward-looking statements include, among others, statements about CMCT’s plans and objectives relating to future growth and outlook, and the trading liquidity of CMCT’s Common Stock.

Such forward-looking statements are based on particular assumptions that management of CMCT has made in light of its experience, as well as its perception of expected future developments and other factors that it believes are appropriate under the circumstances.

Forward-looking statements are necessarily estimates reflecting the judgment of CMCT’s management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.

These risks and uncertainties include those associated with (i) the scope, severity and duration of the current pandemic of COVID-19, and actions taken to contain the pandemic or mitigate its impact, (ii) the adverse effect of COVID-19 on the financial condition, results of operations, cash flows and performance of CMCT and its tenants and business partners, the real estate market and the global economy and financial markets, among others, (iii) the timing, form and operational effects of CMCT’s development activities, (iv) the ability of CMCT to raise in place rents to existing market rents and to maintain or increase occupancy levels, (v) fluctuations in market rents, including as a result of COVID-19, (vi) the effects of inflation and higher interest rates on the operations and profitability of CMCT and (vii) general economic, market and other conditions.

Additional important factors that could cause CMCT’s actual results to differ materially from CMCT’s expectations are discussed under the section “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 16, 2022 (the “2021 Form 10-K”).

These statements include the plans and objectives of management for future operations, including plans and objectives relating to future growth of our business and availability of funds.

Such forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “project,” “target,” “expect,” “intend,” “might,” “believe,” “anticipate,” “estimate,” “could,” “would” “continue,” “pursue,” “potential,” “forecast,” “seek,” “plan,” “should” or “goal” or the negative thereof or other variations or similar words or phrases.

Such forward-looking statements also include, among others, statements about our plans and objectives relating to future growth and outlook.

Such forward-looking statements are based on particular assumptions that our management has made in light of its experience, as well as its perception of expected future developments and other factors that it believes are appropriate under the circumstances.

Forward-looking statements are necessarily estimates reflecting the judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.

These risks and uncertainties include those associated with (i) the timing, form, and operational effects of our development activities, (ii) our ability to raise in place rents to existing market rents and to maintain or increase occupancy levels, (iii) fluctuations in market rents, (iv) the effects of inflation and higher interest rates on our operations and profitability and (v) general economic, market and other conditions.

Additional important factors that could cause our actual results to differ materially from our expectations are discussed under the section “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023 (the “2022 Form 10-K”).

The forward-looking statements included herein are based on current expectations and there can be no assurance that these expectations will be attained.

Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond CMCT’s control.

Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate.

In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by CMCT or any other person that CMCT’s objectives and plans will be achieved.

In light of the significant uncertainties inherent in the forward-looking statements expressed or implied herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

Readers are cautioned not to place undue reliance on forward-looking statements.

Forward-looking statements speak only as of the date they are made.

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 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.

We do not undertake to update them to reflect changes that occur after the date they are made, except as may be required by applicable securities laws.

The following discussion of our financial condition as of March 31, 2023 and results of operations for the three months ended March 31, 2023 and 2022 should be read in conjunction with the 2022 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 2022 Form 10-K and in Part II, Item 1A of this Quarterly Report.

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The phrase “ADR” represents average daily rate.

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

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

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

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The phrase “RevPAR” represents revenue per available room.

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

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

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

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Creative Media & Community Trust Corporation (formerly known as CIM Commercial Trust Corporation) is a Maryland corporation and REIT.

We primarily own and operate Class A and creative office real assets in vibrant and improving metropolitan communities throughout the United States.

We seek to acquire, operate and develop premier multifamily and creative office assets that cater to rapidly growing industries such as technology, media and entertainment in vibrant and emerging communities throughout the United States.

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.

We primarily acquire, develop, own and operate both premier multifamily properties situated in vibrant communities throughout the United States and Class A and creative office real assets in markets with similar business and employment characteristics to our multifamily investments.

We seek to apply the expertise of CIM Group to the acquisition, development and operation of premier multifamily properties and creative office assets that cater to rapidly growing industries such as technology, media and entertainment.

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

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We believe that these assets will provide greater returns than similar assets in other markets, as a result of the population growth, public commitment and significant private investment that characterize these areas.

We intend that no investment will exceed 10% of our gross asset value at the time of investment but management may ultimately determine to execute on more significant acquisitions.

We are operated by affiliates of CIM Group.

CIM is a community-focused real estate and infrastructure owner, operator, lender and developer.

CIM is headquartered in Los Angeles, CA, with offices in Atlanta, GA, Bethesda, MD, Chicago, IL, Dallas, TX, New York, NY, Orlando, FL, Phoenix, AZ, and Tokyo, Japan.

CIM also maintains additional offices across the United States, as well as in Korea, Hong Kong and the United Kingdom to support its platform.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic.

Since then, COVID-19 has spread worldwide, causing significant disruptions to the U.S.

and world economies.

Additionally, the spread of COVID-19 in the United States and the resulting restrictions on travel, meetings and social gatherings that have been implemented from time to time have impacted, and may continue to impact, the operations of our hotel in Sacramento, California.

The extent to which COVID-19 will continue to impact our operations and those of our tenants, business partners and borrowers will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of any new outbreaks involving variants of COVID-19 and actions taken to contain or mitigate such outbreaks, the distribution and acceptance of vaccines, the impacts on the U.S.

and international economies and the extent to which federal, state and local governments provide relief or assistance to those affected by COVID-19.

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.

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).

CIM is headquartered in Los Angeles, CA, with offices in Atlanta, GA, Chicago, IL, Dallas, TX, London, UK, New York, NY, Orlando, FL, Phoenix, AZ, and Tokyo, Japan.

CIM also maintains additional offices across the United States, as well as in Korea and Hong Kong to support its platform.

As of March 31, 2023, our real estate portfolio consisted of 25 assets, all of which were fee-simple properties, including two office properties (one of which is being partially converted into multifamily units) and one multifamily property, which we own through our investment in unconsolidated joint ventures (the “Unconsolidated Joint Ventures”).

As of March 31, 2023, our 13 office properties, totaling approximately 1.3 million rentable square feet, were 81.3% occupied, our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $162.85 for the three months ended March 31, 2023 and our three multifamily properties which were 80.7% occupied.

Additionally, as of March 31, 2023, we had seven development sites (with two being used as parking lots).

We are a Maryland corporation and REIT.

Our portfolio of investments currently consists of Class A and creative office real assets in vibrant and improving metropolitan communities throughout the United States.

Our portfolio of investments currently consists of premier multifamily, Class A and creative office real assets in vibrant and improving metropolitan communities throughout the United States.

We also own one hotel in northern California and a lending platform that originates loans under the Small Business Administration (“SBA”) 7(a) loan program.

We seek to apply the expertise of CIM Group to the acquisition, development and operation of premier multifamily properties situated in vibrant communities throughout the United States.

We also seek to acquire, develop and operate creative office assets that cater to rapidly growing industries such as technology, media and entertainment in markets with similar business and employment characteristics to our multifamily 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.

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.

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Our investments in multifamily and creative office assets may take different forms, including direct equity or preferred investments, real estate development activities, side-by-side investments or co-investments with vehicles managed or owned by CIM Group and/or originating loans that are secured directly or indirectly by properties primarily located in qualified communities (“Qualified Communities”) that meet our strategy.

We intend that no investment will exceed 10% of our gross asset value at the time of investment but management may ultimately determine to execute on more significant acquisitions.

Further, we leverage the investor relationships of CIM Group to execute on our investment pipeline using an asset-light approach for certain of our investments.

Under this approach, we coinvest with one or more third parties on an asset-level basis by raising capital from such third parties, maintain an economic interest in the asset and, in some cases, earn a management fee and a percentage of the profits.

We believe this is a compelling model that is expected to contribute to strong returns on invested capital while reducing risk by reducing our capital outlay.

We intend to dispose of assets that do not fit into our strategy over time and opportunistically (i.e., we do not have any specific time frame with respect to such dispositions).

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Such review may result in dispositions when, among other things, we believe the proceeds generated from the sale of an asset can be redeployed in one or more assets that will generate better returns, or the market value of such asset is equal to or exceeds our view of its intrinsic value.

If we dispose of any of these assets, we intend to reinvest the proceeds in assets that fit our strategy.

CIM Group Operations

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In addition, they ensure that revenue objectives are met, lease terms are followed, receivables are collected, preventative maintenance programs are implemented, vendors are evaluated and expenses are controlled.

In addition, CIM Group’s real assets management committee (the “Real Assets Management Committee”) reviews and approves strategic plans for each asset, including financing, leasing, marketing and property positioning, as well as hold/sell analyses and performance tracking relative to the overall business plan.

In addition, CIM Group’s real assets management committee (the “Real Assets Management Committee”) reviews and approves strategic decisions related to financing strategies and hold/ sell analyses and performance tracking relative to the overall business plan.

CIM Group’s organizational structure provides for continuity through multi-disciplinary teams responsible for an asset from the time of the original investment recommendation, through the implementation of the asset’s business plan, and any repositions or ultimate disposition activities.

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Office Statistics:

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 September 30,

The following table sets forth occupancy rates and annualized rent per occupied square foot across our office portfolio as of the specified periods (includes 100% of our properties partially owned through unconsolidated joint ventures):

As of March 31,

Occupancy (1)(2) 81.3 % 78.9 %

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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 September 30, 2022 and 2021 were approximately $2.3 million and $1.3 million, respectively.

Total abatements, representing lease incentives in the form of free rent, for the twelve months ended March 31, 2023 and 2022 were approximately $2.8 million and $1.8 million, respectively.

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

Annualized rent for certain office properties includes rent attributable to retail.

Over the next four quarters, we expect to see expiring cash rents as set forth in the table below (includes property partially owned through the Unconsolidated Joint Venture):

Over the next four quarters, we expect to see expiring cash rents as set forth in the table below (includes 100% of our properties partially owned through unconsolidated joint ventures):

For the Three Months Ended

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

June 30, 2023 September 30, 2023 December 31, 2023 March 31, 2024

Expiring Cash Rents:

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(1) Month-to-month tenants occupying a total of 9,465 square feet are included in the expiring leases in the first quarter listed.

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

(2) Represents gross monthly base rent, as of March 31, 2023, 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 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:

During the three months ended March 31, 2023, we executed leases with terms longer than 12 months totaling 43,887 square feet.

The table below sets forth information on certain of our executed leases during the three months ended March 31, 2023, 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

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Foot (2) Expiring

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

Three months ended March 31, 2023 8 32,636 $ 53.96 $ 53.54

______________________

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Additionally, decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re lease space could have a material adverse effect 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 our Common Stock or Preferred Stock.

Multifamily Statistics:

The following table sets forth occupancy rates and the monthly rent per occupied unit across our multifamily portfolio for the specified periods (includes 100% of our property partially owned through an unconsolidated joint venture):

For the Three Months

Ended March 31,

Occupancy 80.7 % N/A

Monthly rent per occupied unit (1) $ 2,852 N/A

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(1) Represents gross monthly base rent under leases commenced as of the specified period, divided by occupied units.

This amount reflects total cash rent before concessions.

Hotel Statistics:

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

For the Nine Months

Ended September 30,

For the Three Months

Ended March 31,

Occupancy 80.6 % 69.2 %

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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”).

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.

The maximum loan amount for an SBA 7(a) loan is $5.0 million.

Key eligibility factors are based on what the business does to generate its income, its credit history, and where the business operates.

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.

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

The SBA 7(a) Loan Program is the SBA’s most common loan program.

The maximum loan amount for an SBA 7(a)

loan is $5.0 million.

Key eligibility factors are based on what the business does to generate its income, its credit history, the

liquidity of the borrower, size standards and where the business operates.

We work with potential borrowers to identity the type

of loan that would be appropriate for each such 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.

Most of our SBA 7(a) loans have

maturities of approximately 25 years.

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.

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Property Concentration

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.

Kaiser Foundation Health Plan, Incorporated (“Kaiser”), which occupied space in one of our Oakland, California properties, accounted for 30.3% of our annualized office rental income for the three months ended March 31, 2023.

2023 Results of Operations

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

Comparison of the Three Months Ended March 31, 2023 to the Three Months Ended March 31, 2022

Net (Loss) Income and FFO

Three Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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Total expenses $ 38,104 $ 22,293 $ 15,811 70.9 %

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.

Net (loss) income $ (7,576) $ 2,302 $ (9,878) N/A

Net loss was $7.6 million for the three months ended March 31, 2023 compared to net income of $2.3 million for the three months ended March 31, 2022, a decrease of $9.9 million.

The decrease was primarily due to an increase in depreciation and amortization expense of $4.5 million, an increase in interest expense not allocated to our operating segments of $3.9 million and an increase in transaction-related costs of $3.4 million (primarily related to transfer tax expenses in connection with the acquisition of two multifamily properties in Oakland, California during the three months ended March 31, 2023) .

These were partially offset by a gain of $1.1 million recognized in connection with the sale of 80% of our interest in an office property, an increase of $822,000 in segment net operating income (discussed in more detail below).

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 September 30,

Three Months Ended March 31,

Net loss attributable to common stockholders (1)

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Depreciation and amortization 9,502 5,004

Noncontrolling interests’ proportionate share of depreciation and amortization (477)

Gain on sale of real estate (1,104) —

FFO attributable to common stockholders (1)

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(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).

(1) During the three months ended March 31, 2023 and 2022, we recognized $373,000 and $75,000, respectively, of redeemable preferred stock redemptions and $0 and $15,000, respectively, of redeemable preferred stock deemed dividends.

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 .

FFO attributable to common stockholders was $(4.8) million for the three months ended March 31, 2023, a decrease of $7.0 million compared to $2.2 million for the three months ended March 31, 2022.

The decrease in FFO was primarily due to an increase in interest expense not allocated to our operating segments of $3.9 million, an increase in transaction-related costs of $3.4 million (primarily related to transfer tax expenses in connection with the acquisition of two multifamily properties in Oakland, California during the three months ended March 31, 2023) and an increase in redeemable preferred stock dividends and redeemable preferred stock redemptions of $373,000 and $298,000, respectively.

These were partially offset by an increase of $822,000 in segment net operating income (discussed in more detail below) .

Summary Segment Results

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

During the three months ended March 31, 2023 we operated in four segments:

office, hotel and multifamily properties and lending.

During the three months ended March 31, 2022, 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 September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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Hotel $ 11,492 $ 7,793 $ 3,699 47.5 %

Multifamily $ 1,223 $ — $ 1,223 — %

Lending $ 2,710 $ 2,884 $ (174) (6.0) %

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Hotel $ 7,347 $ 5,399 $ 1,948 36.1 %

Multifamily $ 1,380 $ — $ 1,380 — %

Lending $ 1,352 $ 1,136 $ 216 19.0 %

Loss From Unconsolidated Entity

Office $ (204) $ — $ (204) 100.0 %

Income from unconsolidated entities

Office $ (64) $ 120 $ (184) N/A

Multifamily $ 832 $ — $ 832 — %

Non-Segment Revenue and Expenses:

Interest and other income $ 1 $ — $ 1 — %

Asset management and other fees to related parties $ (720) $ (921) $ 201 (21.8) %

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General and administrative $ (1,301) $ (1,137) $ (164) 14.4 %

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

Transaction-related costs $ (3,360) $ — $ (3,360) — %

Depreciation and amortization $ (9,502) $ (5,004) $ (4,498) 89.9 %

Gain on sale of real estate $ 1,104 $ — $ 1,104 — %

Provision for income taxes $ (256) $ (307) $ 51 (16.6) %

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

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.

Office revenue decreased to $13.5 million, or by 4.4%, for the three months ended March 31, 2023 compared to $14.1 million for the three months ended March 31, 2022.

The decrease is primarily due to decreased rental revenues at an office property in Los Angeles, California and an office property in San Francisco, California, both a result of lower occupancy, and the disposition of an 80% interest in an office property in Los Angeles, California in February 2023.

Hotel Revenue:

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.

Hotel revenue increased to $11.5 million, or by 47.5%, for the three months ended March 31, 2023, compared to $7.8 million for the three months ended March 31, 2022, due to an increase in occupancy and average daily rate during the first quarter of 2023 as compared to the first quarter of 2022 as a result of the hospitality industry continuing to recover from the impact of COVID-19.

Multifamily Revenue:

Multifamily revenue was $1.2 million for the three months ended March 31, 2023.

As our multifamily properties were acquired during the three months ended March 31, 2023, there was no comparable revenue for the three months ended March 31, 2022.

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 $2.4 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.

Lending revenue decreased to $2.7 million, or by 6.0%, for the three months ended

March 31, 2023, compared to $2.9 million for the three months ended March 31, 2022.

The decrease is primarily due to lower premium income as a result of lower loan sale volume during the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

(Loss) Income From Unconsolidated Office Entities:

The income from our unconsolidated entities included in office segment net operating income decreased to a loss of $64,000 for the three months ended March 31, 2023 compared to income of $120,000 for the three months ended March 31, 2022.

The decrease was primarily due to an increase in mortgage interest expense and an unrealized loss related to one of our unconsolidated office entities’ investment in real estate during the three months ended March 31, 2023.

Income From Unconsolidated Multifamily Entity:

The income from our unconsolidated entity included in multifamily segment net operating income was $832,000 for the three months ended March 31, 2023.

As our unconsolidated multifamily property was acquired during the three months ended March 31, 2023, there was no comparable income for the three months ended March 31, 2022.

Office 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.

Office expenses increased to $6.6 million, or by 6.6%, for the three months ended March 31, 2023, compared to $6.2 million for the three months ended March 31, 2022.

The increase is primarily due to an increase in operating expenses at our office properties in Austin, Texas and Los Angeles, California, primarily as a result of higher administrative and utilities expenses, and an increase in operating expenses at an office property in Beverly Hills, California, primarily as a result of increased administrative and utilities expenses and real estate tax expense.

Hotel Expenses:

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.

Hotel expenses increased to $7.3 million, or by 36.1%, for the three months ended March 31, 2023, compared to $5.4 million for the three months ended March 31, 2022, primarily as a result of increased occupancy at the hotel as a result of the hospitality industry continuing to recover from the impact of COVID-19.

Multifamily Expenses:

Multifamily expenses were $1.4 million for the three months ended March 31, 2023.

As our multifamily properties were acquired during the three months ended March 31, 2023, there were no comparable expenses for the three months ended March 31, 2022.

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 $1.2 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 $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 $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 $2.1 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 $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 $5.1 million for both the three months ended September 30, 2022 and 2021.

Provision for Income Taxes:

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

Net Income (Loss) and FFO

Nine Months Ended September 30, Change

2022 2021 $ %

Total revenues $ 76,038 $ 65,801 $ 10,237 15.6 %

Total expenses $ 70,398 $ 65,005 $ 5,393 8.3 %

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

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):

Nine Months Ended September 30,

Net loss attributable to common stockholders (1)

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

Depreciation and amortization 15,071 15,167

FFO attributable to common stockholders (1)

$ (1,773) $ (465)

______________________

(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.

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.

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.

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 $(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 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).

Nine Months Ended September 30, Change

2022 2021 $ %

Office $ 42,225 $ 39,881 $ 2,344 5.9 %

Hotel $ 25,825 $ 10,833 $ 14,992 138.4 %

Lending $ 7,987 $ 15,086 $ (7,099) (47.1) %

Office $ 19,968 $ 16,995 $ 2,973 17.5 %

Hotel $ 17,807 $ 10,765 $ 7,042 65.4 %

Lending $ 3,359 $ 3,064 $ 295 9.6 %

Income From Unconsolidated Entity

Office $ 176 $ — $ 176 100.0 %

Non-Segment Revenue and Expenses:

Interest and other income $ 1 $ 1 $ — — %

Asset management and other fees to related parties $ (2,757) $ (6,781) $ 4,024 (59.3) %

Expense reimbursements to related parties - corporate $ (1,459) $ (1,592) $ 133 (8.4) %

Interest expense $ (6,406) $ (7,012) $ 606 (8.6) %

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) %

Provision for income taxes $ (815) $ (2,316) $ 1,501 (64.8) %

Office Revenue:

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

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 $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 $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 $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 $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 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.

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 provision for loan losses, partially offset by a decrease in general and administrative expenses.

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.

Lending expenses increased to $1.4 million, or by 19.0%, for the three months ended March 31, 2023, compared to $1.1 million for the three months ended March 31, 2022.

The increase was primarily due to an increase in allocated salary expenses and an increase in interest expense related to the issuance of new SBA 7(a) loan-backed notes in connection with the securitization that closed in March 2023.

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 $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.

Asset management fees and other fees to related parties, which have not been allocated to our operating segments, were $720,000 for the three months ended March 31, 2023, a decrease of 21.8%, compared to $921,000 for the three months ended March 31, 2022.

The decrease was primarily a result of a reduction in asset management fees related to a decrease in our net asset value, primarily resulting from a reduction in the fair value of our investments in real estate as of the end of 2022 .

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 $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.

The Administrator receives compensation and or reimbursement for performing certain services for the Company and its subsidiaries.

Expense reimbursements to related parties-corporate increased by 25.1% to $528,000 for the three months ended March 31, 2023, compared to $422,000 for the three months ended March 31, 2022, primarily due to increases in allocated payroll primarily due to the transactions that occurred during the three months ended March 31, 2022.

Interest Expense:

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.

Interest expense, which has not been allocated to our operating segments, increased to $6.0 million for the three months ended March 31, 2023, compared to $2.1 million for the three months ended March 31, 2022.

This is due to higher outstanding principal balances on our 2022 revolving line of credit facility for the three months ended March 31, 2023 compared to our 2018 revolving line of credit facility for the three months ended March 31, 2022.

Additionally LIBOR and SOFR components of interest rates on our variable-rate debt increased for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

In addition, two variable-rate mortgages were assumed in connection with our multifamily acquisitions during the three months ended March 31, 2023.

General and Administrative Expenses:

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.

General and administrative expenses, which have not been allocated to our operating segments, were $1.3 million for the three months ended March 31, 2023 as compared to $1.1 million for the three months ended March 31, 2022.

The increase was primarily due to increases in non-recurring legal fees.

Transaction-Related Costs:

Transaction-related costs of $3.4 million for the three months ended March 31, 2023 were primarily related to transfer tax expenses in connection with the acquisition of of two multifamily properties in Oakland, California.

There were no transaction-related costs incurred during the three months ended March 31, 2022.

Depreciation and Amortization Expense:

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.

Depreciation and amortization expense increased by 89.9% to $9.5 million for the three months ended March 31, 2023, compared to $5.0 million for the three months ended March 31, 2022.

The increase is primarily due to an increase in acquired in-place lease intangible assets amortization at multifamily properties located in Oakland, California acquired during the three months ended March 31, 2023.

Gain on sale of real estate:

Gain on sale of real estate of $1.1 million was related to the sale of 80% of our interest in an office property in Los Angeles, California.

There were no dispositions during the three months ended March 31, 2022.

Provision for Income Taxes:

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.

Provision for income taxes decreased by 16.6% to $256,000 for the three months ended March 31, 2023 as compared to $307,000 for the three months ended March 31, 2022.

The decrease 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 March 31, 2023 as compared to the three months ended March 31, 2022.

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 $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.

Net cash provided by operating activities decreased by $5.9 million for the three months ended March 31, 2023, as compared to the same period in 2022.

The decrease was primarily due to a decrease in net income adjusted for depreciation and amortization expense, partially offset by a $1.9 million increase 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 $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.

Net cash used in investing activities increased by $58.0 million for the three months ended March 31, 2023, as compared to the same period in 2022.

The increase in cash used in investing activities was primarily due to an increase in acquisitions of real estate of $94.5 million, compared to the same period in 2022.

Partially offsetting net cash used in investing activities are $16.7 million in proceeds from the sale of a property to the 4750 Wilshire JV during the three months ended March 31, 2023 and a decrease in cash outlays of $15.8 million related to our investments in unconsolidated joint ventures during the three months ended March 31, 2023, compared to the same period in 2022.

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

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.

Net cash provided by financing activities increased by $56.2 million for the three months ended March 31, 2023, as compared to the same period in 2022, primarily as a result of net proceeds from debt of $103.8 million during the three months ended March 31, 2023 compared to net debt proceeds of $27.1 million during the three months ended March 31, 2022, the issuance of unguaranteed SBA 7(a) loan-backed notes for net proceeds of approximately $43.3 million, and an increase of $14.7 million in proceeds from the issuance of preferred stock during the three months ended March 31, 2023.

The aforementioned amounts increasing net cash provided by financing activities were partially offset by an increase in redemption of preferred stock of $87.7 million during the three months ended March 31, 2023.

Liquidity and Capital Resources

On a short-term basis, our principal demands for funds will be for the acquisition of assets, development or repositioning of properties, or re-leasing of space in existing properties, capital expenditures, interest and principal on current and any future debt financings, SBA 7(a) loan originations, paying distributions on our Preferred Stock and Common Stock and making redemption payments on our Preferred Stock.

On a short-term basis, our principal demands for funds will be for the acquisition of assets, development or repositioning of properties, or re-leasing of space in existing properties, capital expenditures, paying interest and principal on current and any future debt financings, SBA 7(a) loan originations, paying distributions on our Preferred Stock and Common Stock and making redemption payments on our Preferred Stock.

We may finance our future activities through one or more of the following methods:

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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;

1 unchanged sentence

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, 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 (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.

We do not know whether holders of Series L Preferred Stock will exercise their redemption rights and, if so, in what amounts.

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 $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.

In December 2022, we completed a refinancing of our 2018 credit facility, which was set to mature in October 2023, replacing it with the a new facility (the “2022 Credit Facility”).

The 2022 Credit Facility includes a $56.2 million term loan as well as a revolver allowing the Company to borrow up to $150.0 million, both of which are collectively subject to a borrowing base calculation.

The 2022 Credit Facility matures in December 2025 and provides for two one-year extension options, subject to certain conditions being satisfied.

On December 23, 2022, the Company announced it would redeem all remaining outstanding shares of its Series L Preferred Stock in cash on January 25, 2023 at its stated value of $28.37.

The total cost to complete the Series L Redemption, including transaction costs, was $83.8 million.

The payment for the Series L

Redemption was made on January 25, 2023 together with payment of the accrued and unpaid dividends on the redeemed shares of Series L Preferred Stock through December 31, 2022 of $1.56 per share (or $4.6 million accrued and unpaid dividends in the aggregate) and was funded by a combination of proceeds from the sale of our Series A1 Preferred Stock, draws on our 2022 Credit Facility, and cash on hand.

No additional dividends were owed on the redeemed shares of Series L Preferred Stock subsequent to December 31, 2022.

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, paying interest and principal on debt financings, 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 $8.0 million as of March 31, 2023, substantially all of which reflect prime-based loans to be originated by our subsidiary engaged in SBA 7(a) Small Business Loan Program lending.

A majority of these commitments have government guarantees of 75% (as the government guarantee has now reverted to 75%) 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.

Further, we are evaluating renovation of certain areas of our hotel in California and development of our development sites.

To the extent we decide to proceed with renovating our hotel, undertaking pre-development work and/or conducting development work on any of our development sites, we will have increased liquidity needs.

We own a 20% interest in an unconsolidated joint venture (the “4750 Wilshire Joint Venture”) that is in the process of converting a portion of an office building in Los Angeles, California from office space into luxury for-rent residential units (the 4750 Wilshire Project”).

The total cost of the 4750 Wilshire Project is expected to be approximately $31.0 million, which will be financed by a combination of equity contributions from us and co-investors as well as a mortgage loan from a third-party lender.

In connection with the 4750 Wilshire Joint Venture, we have commitments to receive cash proceeds from the joint venture partners, enhancing our liquidity.

Further, we expect 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.

The nature of our business, and the requirements imposed by REIT rules that we distribute a substantial majority of our REIT taxable income on an annual basis in the form of dividends, may cause us to have substantial liquidity needs over the long-term.

While we will seek to satisfy such needs through one or more of the methods described in the first paragraph of this section, our ability to take such actions is highly uncertain and cannot be predicted, and could be affected by various risks and uncertainties, including, but not limited to, the effects of COVID-19 and other risks detailed in “Risk Factors” in Part I, Item 1A of the 2021 Form 10-K.

While we will seek to satisfy such needs through one or more of the methods described in the first paragraph of this section, our ability to take such actions is highly uncertain and cannot be predicted, and could be affected by various risks and uncertainties, including, but not limited to, the risks detailed in “Risk Factors” in “Item 1A—Risk Factors” of this Annual Report on Form 10-K.

If we cannot obtain funding for our long-term liquidity needs, our assets may generate lower cash flows or decline in value, or both, which may cause us to sell assets at a time when we would not otherwise do so which could have a material adverse effect 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 our Common Stock or Preferred Stock.

Sources and Uses of Funds

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

We have mortgage loan agreements with an outstanding balances of $262.4 million as of March 31, 2023.

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.

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

In October 2018, we entered into the 2018 revolving credit facility that, as amended, allowed us to borrow up to $209.5 million, subject to a borrowing base calculation.

The 2018 revolving credit facility was 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.

In December 2022, the Company refinanced its 2018 credit facility and replaced it with a new 2022 Credit Facility, entered into with a bank syndicate, that includes a $56.2 million term loan (the “2022 Credit Facility Term Loan”) as well as a revolver allowing the Company to borrow up to $150.0 million (the “2022 Credit Facility Revolver”), both of which are collectively subject to a borrowing base calculation.

The 2022 Credit Facility is secured by properties in the Company’s real estate portfolio:

six office properties and one hotel property (as well as the hotel’s adjacent parking garage and retail property).

The 2022 Credit Facility bears interest at (A) the base rate plus 1.50% or (B) SOFR plus 2.60%.

As of March 31, 2023, the variable interest rate was 7.36%.

The 2022 Credit Facility Revolver is also subject to an unused commitment fee of 0.15% or 0.25% depending on the amount of aggregate unused commitments.

The 2022 Credit Facility is guaranteed by the Company and the Company is subject to certain financial maintenance covenants.

The 2022 Credit Facility matures in December 2025 and provides for two one-year extension options, subject to certain conditions being satisfied, 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.

As of May 1, 2023, March 31, 2023 and December 31, 2022, $158.2 million, $178.2 million, and $56.2 million, respectively, was outstanding under the 2022 Credit Facility and approximately $48.0 million, $28.0 million and $150.0 million, respectively, was available for future borrowings.

Other Financing Activity

On May 30, 2018, we completed a securitization of the unguaranteed portion of certain of our SBA 7(a) loans receivable with the issuance of $38.2 million of unguaranteed SBA 7(a) loan-backed notes.

On March 9, 2023, our lending division completed a securitization of the unguaranteed portion of certain of our SBA 7(a) loans receivable with the issuance of $54.1 million of unguaranteed SBA 7(a) loan-backed notes (with net proceeds of approximately $43.3 million, after payment of fees and expenses in connection with the securitization and the funding of a reserve account and an escrow account).

The SBA 7(a) loan-backed notes are collateralized by the right to receive payments and other recoveries attributable to the unguaranteed portions of certain of our SBA 7(a) loans receivable.

The SBA 7(a) loan backed notes mature on March 20, 2048, with monthly payments due as payments on the collateralized loans are received.

Based on the anticipated repayments of our collateralized SBA 7(a) loans, at issuance, we estimated the weighted average life of the SBA 7(a) loan-backed notes to be approximately two years.

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 November 9, 2022, September 30, 2022, and December 31, 2021, was $2.2 million, $2.7 million and $7.7 million, respectively.

The SBA 7(a) loan-backed notes bear interest at a per annum rate equal to the lesser of (i) 30-Day average compounded SOFR plus 2.90% and (ii) prime rate minus 0.35%.

As of March 31, 2023, the variable interest rate was 7.40%.

We reflect the SBA 7(a) loans receivable as assets on our consolidated balance sheet and the SBA 7(a) loan-backed notes as debt on our consolidated balance sheet.

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 September 30, 2022.

The aggregate principal balance of the junior subordinated notes was $27.1 million as of March 31, 2023.

Securities Offerings

We conducted a continuous public offering of Series A Preferred Units from October 2016 through January 2020, where each Series A Preferred Unit consisted of one share of Series A Preferred Stock and one Series A Preferred Warrant.

During the tenure of the offering, we issued 4,603,287 Series A Preferred Units and received net proceeds of $105.2 million after commissions, fees and allocated costs.

We conducted a continuous public offering of Series A Preferred Stock from October 2016 through January 2020, where one Series A Preferred Warrant was issued along with each issued share of Series A Preferred Stock.

During the tenure of the offering, we issued 4,603,287 Series A Preferred Stock and Series A Preferred Warrants and received aggregate net proceeds of $105.2 million after commissions, fees and allocated costs.

The Series A Preferred Warrants are exercisable beginning on the first anniversary of the date of their original issuance until and including the fifth anniversary of the date of such issuance.

At the time of issuance, the exercise price of each Series A Preferred Warrant was equal to a 15.0% premium to the per share estimated NAV of our Common Stock most recently published and designated as the applicable NAV by us at the time of issuance.

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

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 in 2019 (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 in 2019 was adjusted to reflect the effect of the Special Dividend.

As of March 31, 2023, there were 2,925,501 Series A Preferred Warrants to purchase 756,257 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 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.

Sales of Common Stock under the ATM program may be made directly on or through Nasdaq, among other methods.

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

As of March 31, 2023, we had issued 6,798,510 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 $341.5 million after commissions, fees and allocated costs.

Dividends on and Redemptions of Preferred Stock

Holders of Series A1 Preferred Stock, Series A Preferred Stock, Series D Preferred Stock and Series L Preferred Stock are entitled to receive, if, as and when authorized by our Board of Directors, and declared by us out of legally available funds, cumulative cash dividends on each share as follows:

(1) at the of greater of (i) an annual rate of 6.0% of the Series A1 Preferred Stock Stated Value (i.e., the equivalent of $0.3750 per share per quarter) and (ii) the Federal Funds (Effective) Rate for such quarter and plus 2.5% of the Series A1 Preferred Stock Stated Value divided by four, up to a maximum of 2.5% of the Series A1 Preferred Stock Stated Value per quarter, (2) 5.50% of the Series A Preferred Stock Stated Value (i.e., the equivalent of $0.34375 per share per quarter), (3) 5.65% of the Series D Preferred Stock Stated Value (i.e., the equivalent of $0.35313 per share per quarter), and (4) 5.50% of the Series L Preferred Stock Stated Value (i.e., the equivalent of $1.56035 per share per year), respectively.

However, if we fail to timely declare distributions or fail to timely pay any distribution on the Series L Preferred Stock, the annual dividend rate of the Series L Preferred Stock will temporarily increase by 1.00% per year, up to a maximum annual rate of 8.50% of the Series L Preferred Stock Stated Value.

Dividends on each share of Preferred Stock begin accruing on, and are cumulative from, the date of issuance.

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 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.

Holders of Series A1 Preferred Stock, Series A Preferred Stock and Series D Preferred Stock are entitled to receive, if, as and when authorized by our Board of Directors, and declared by us out of legally available funds, cumulative cash dividends on each share as follows:

(1) at the of greater of (i) an annual rate of 6.0% of the Series A1 Preferred Stock Stated Value (i.e., the equivalent of $0.3750 per share per quarter) and (ii) the Federal Funds (Effective) Rate for such quarter and plus 2.5% of the Series A1 Preferred Stock Stated Value divided by four, up to a maximum of 2.5% of the Series A1 Preferred Stock Stated Value per quarter, (2) 5.50% of the Series A Preferred Stock Stated Value (i.e., the equivalent of $0.34375 per share per quarter), and (3) 5.65% of the Series D Preferred Stock Stated Value (i.e., the equivalent of $0.35313 per share per quarter), respectively.

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, 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.

The timing and amount of dividends declared and paid on our Preferred Stock will be determined by our Board of Directors, in its sole discretion, and may vary from time to time.

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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 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).

During the three months ended March 31, 2023, we redeemed 189,753 shares of Series A Preferred Stock and 12,870 shares of Series A1 Preferred Stock.

On September 15, 2022, we repurchased 2,435,284 shares of our 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 per share) 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.

In connection with the Series L Repurchase, we recognized redeemable preferred stock redemptions of $4.8 million on our consolidated statement of operations for the three months ended March 31, 2023.

As announced on December 23, 2022, we redeemed all remaining outstanding shares of our Series L Preferred Stock in cash on January 25, 2023 at its stated value of $28.37 (the “Series L Redemption).

The total cost to complete the Series L Redemption, including transaction costs, was $83.8 million.

In connection with the Series L Redemption, we recognized redeemable preferred stock redemptions of $7.9 million on our consolidated statement of operations for the year ended December 31, 2022.

The $7.9 million of redeemable preferred stock redemptions represents the difference between the repurchase price and the carrying value of the repurchased Series L Preferred Stock (representing the stated value of $28.37 per share reduced by $2.65 per share of stock offering costs).

As of December 31, 2022, $83.8 million was recorded in accounts payable and accrued expenses on our consolidated balance sheet in connection with the Series L Redemption.

The accrued and unpaid dividends on the redeemed shares of Series L Preferred Stock through December 31, 2022 of $1.56 per share (or $4.6 million accrued and unpaid dividends in the aggregate) were also paid January 25, 2023.

No additional dividends were owed on the redeemed shares of Series L Preferred Stock subsequent to December 31, 2022.

Off-Balance Sheet Arrangements

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

As of March 31, 2023, 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