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Item 7. Management’s Discussion and Analysis

2024-03-29 compared with 2023-03-31 · 142 added, 112 removed, 229 unchanged (53% of the section changed)

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You should read the following discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

For a discussion of the year ended December 31, 2021, see “Item

7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s

Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 16, 2022.

Executive Summary

Business Overview

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

Creative Media & Community Trust Corporation is a Maryland corporation and REIT.

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.

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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 December 31, 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 December 31, 2022, our 13 office properties, totaling approximately 1.3 million rentable square feet, were 81.7% occupied and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $126.19 for the year ended December 31, 2022.

Additionally, as of December 31, 2022, we had four development sites (with one being used as a parking lot).

CIM also maintains additional offices across the United States and in South Korea to support its platform.

As of December 31, 2023, our real estate portfolio consisted of 27 assets, all of which were fee-simple properties and five of which we own through investments in Unconsolidated Joint Ventures.

As of December 31, 2023, our 13 office properties, totaling approximately 1.3 million rentable square feet, were 83.8% occupied and our one 503-room hotel with an ancillary parking garage, had RevPAR of $145.80 for the year ended December 31, 2023 and our three multifamily properties were 79.3% occupied.

Additionally, as of December 31, 2023, we had nine development sites (three of which were being used as parking lots).

Rental Rate Trends

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 100% of our property partially owned through the Unconsolidated Joint Venture):

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 December 31,

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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 December 31, 2022.

(2) In connection with the 4750 Wilshire Project (as defined later), the Company no longer classified 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 December 31, 2022.

We sold 80% of our interest in 4750 Wilshire Boulevard to the JV Partners in February 2023 with our remaining 20% interest now invested in a newly-formed joint venture with the JV Partners.

We are in the process of converting two out of the building’s three floors into for-lease multifamily units.

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

This amount reflects total cash rent before abatements.

Total abatements, representing lease incentives in the form of free rent, for the years ended December 31, 2022 and 2021 were $2.8 million and $1.5 million, respectively.

Total abatements, representing lease incentives in the form of free

rent, for the years ended December 31, 2023 and 2022 were $3.0 million and $2.8 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 100% of our 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

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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):

As of December 31,

Occupancy 79.3 % N/A

Monthly rent per occupied unit (1) $ 2,805 N/A

______________________

(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:

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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 December 31, 2022.

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

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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.

We work with potential borrowers to identify 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.

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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.

These loans are anticipated to be concentrated in industries in which we previously had positive experience, including convenience store, RV park and single purpose building owner-occupied restaurant operations and may include owner-occupied industrial operations/warehouse buildings.

These loans are anticipated to be primarily concentrated in industries in which we previously had positive experience, including convenience store, RV park and single purpose building owner-occupied restaurant operations and may include owner-occupied industrial operations/warehouse buildings.

2023 Results of Operations

Net Income (Loss) and FFO

Net (Loss) Income and FFO

December 31, Change

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Total expenses $ 170,163 $ 94,994 $ 75,169 79.1 %

Net income (loss) $ 5,945 $ (851) $ 6,796 —

Net income increased to $5.9 million, or by $6.8 million, for the year ended December 31, 2022, compared to a net loss of $851,000 for the year ended December 31, 2021.

The increase was primarily due to an increase of $9.2 million in hotel segment net operating income, a decrease of $5.5 million in asset management and other fees to related parties and a decrease of $1.9 million in provision for income taxes, partially offset by a decrease in lending segment net operating income of $9.3 million.

We believe that funds from operations (“FFO”), a non-GAAP measure, is a widely recognized and appropriate measure of the performance of a REIT and that it is frequently used by securities analysts, investors and other interested parties

in the evaluation of REITs, many of which present FFO when reporting their results.

Net (loss) income

$ (51,456) $ 5,945 $ (57,401) N/A

The Company had a net loss of $51.5 million for the year ended December 31, 2023, representing a decrease of $57.4 million compared to net income of $5.9 million for the year ended December 31, 2022.

The decrease was primarily due to an increase of $32.1 million in depreciation and amortization expense (primarily due to an increase in acquired in-place lease intangible assets amortization at multifamily properties located in Oakland, California acquired during the first quarter of 2023 and which were fully amortized as of December 31, 2023) and an increase in interest expense not allocated to our operating segments of $22.4 million.

Funds from Operations

FFO represents net income (loss) attributable to common stockholders, computed in accordance with GAAP, which reflects the deduction of redeemable preferred stock dividends accumulated, excluding gains (or losses) from sales of real estate, impairment of real estate, and real estate depreciation and amortization.

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FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends.

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

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

Year Ended December 31,

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Depreciation and amortization 52,484 20,348

Noncontrolling interests’ proportionate share of depreciation and amortization

Gain on sale of real estate

FFO attributable to common stockholders (1)

$ (26,437) $ (5,437)

(1) During the years ended December 31, 2022 and 2021, we recognized $13.1 million and $113,000, respectively, of redeemable preferred stock redemptions on our consolidated statements of operations and $19,000 and $253,000 respectively, of redeemable preferred stock deemed dividends on our consolidated statements of operations.

(1) During the years ended December 31, 2023 and 2022, we recognized $1.5 million and $13.1 million, respectively, of redeemable preferred stock redemptions on our consolidated statements of operations and $0 and $19,000 respectively, of redeemable preferred stock deemed dividends on our consolidated statements of operations.

Of the $13.1 million of redeemable preferred stock redemptions recognized during the year ended December 31, 2022, $12.7 million resulted from amounts recognized in connection with the Series L Repurchase and Series L Redemption (defined below).

Such amounts are included in, and have the effect of increasing the 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 $(5.4) million for the year ended December 31, 2022, a decrease of $5.6 million compared to $133,000 for the year ended December 31, 2021.

The decrease in FFO was primarily attributable to an increase in redeemable preferred stock redemptions of $13.0 million (primarily resulting from $12.7 million recognized in connection with the Series L Repurchase and Series L Redemption during the year ended December 31, 2022) and a decrease in lending segment net operating income of $9.3 million, partially offset by an increase of $9.2 million in hotel segment net operating income, a decrease of $5.5 million in asset management and other fees to related parties and a decrease of $1.9 million in provision for income taxes.

FFO attributable to common stockholders was $(26.4) million for the year ended December 31, 2023, a decrease of $21.0 million compared to $(5.4) million for the year ended December 31, 2022.

The decrease in FFO was primarily attributable to an increase in interest expense not allocated to our operating segments of $22.4 million and an increase in redeemable preferred stock dividends of $7.2 million.

These were partially offset by a decrease in the consolidated statement of operations impact of redeemable preferred stock redemptions of $11.6 million (primarily resulting from $12.7 million recognized in connection with the Series L Repurchase and Series L Redemption during the year ended December 31, 2022).

Summary Segment Results

During the years ended December 31, 2022 and 2021, we operated in three segments:

office and hotel properties and lending.

During the years ended December 31, 2023 and 2022, we operated in four segments:

office, hotel and multifamily properties and lending.

Set forth and described below are summary segment results for our operating segments.

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Hotel $ 41,096 $ 35,213 $ 5,883 16.7 %

$ 11,224 $ — $ 11,224 N/A

Lending $ 11,458 $ 10,765 $ 693 6.4 %

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Hotel $ 27,992 $ 24,099 $ 3,893 16.2 %

$ 9,464 $ — $ 9,464 N/A

Lending $ 7,899 $ 4,385 $ 3,514 80.1 %

Income From Unconsolidated Entity

Office $ 164 $ — $ 164 —

(Loss) Income From Unconsolidated Entities

Office $ (582) $ 164 $ (746) N/A

$ 155 $ — $ 155 N/A

Non-Segment Revenue and Expenses:

Interest and other income $ — $ 1 $ (1) —

Interest and other income $ 447 $ — $ 447 N/A

Asset management and other fees to related parties $ (2,627) $ (3,570) $ 943 (26.4) %

Expense reimbursements to related parties—corporate $ (2,342) $ (1,925) $ (417) 21.7 %

Interest expense $ (9,052) $ (9,005) $ (47) 0.5 %

Interest expense $ (31,406) $ (9,052) $ (22,354) NM*

General and administrative $ (5,453) $ (4,630) $ (823) 17.8 %

Transaction costs $ (223) $ (143) $ (80) 55.9 %

Depreciation and amortization $ (20,348) $ (20,112) $ (236) 1.2 %

Transaction costs $ (4,421) $ (223) $ (4,198) NM*

Depreciation and amortization $ (52,484) $ (20,348) $ (32,136) NM*

Gain on sale of real estate $ 1,104 $ — $ 1,104 N/A

Provision for income taxes $ (1,228) $ (1,131) $ (97) 8.6 %

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(*) Percentage changes in excess of 100% are deemed to be not meaningful (“NM”)

Office Revenue:

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

Office revenue increased by 5.0% to $55.9 million for the year ended December 31, 2022 compared to $53.3 million for the year ended December 31, 2021.

The increase is primarily due to increased rental revenues at two office properties in Los Angeles, California, an office property in Beverly Hills, California, and an office property in Austin, Texas, due to higher aggregate rental rates, as well as higher occupancy at the aforementioned Beverly Hills, California property, as compared to the prior year.

Additionally, there was an increase in expense reimbursement revenues related to higher operating expenses at an office property in Oakland, California.

The aforementioned increases in office revenues were partially offset by a decrease in rental revenues at an office property in San Francisco, California, as a result of lower occupancy at the property.

Office revenue decreased by 1.6% to $55.0 million for the year ended December 31, 2023 compared to $55.9 million for the year ended December 31, 2022.

The decrease is primarily due to the disposition of an 80% interest in an office property in Los Angeles, California in February 2023.

This was partially offset by higher rental revenues at an office property in Beverly Hills, California due to higher occupancy.

Hotel Revenue:

Hotel revenue increased by 16.7% to $41.1 million for the year ended December 31, 2023, compared to $35.2 million for the year ended December 31, 2022.

The increase is due to increase in occupancy and average daily rate during 2022 as compared to the prior year as a result of the hospitality industry continuing to recover from the impact of COVID-19.

The increase is due to an increase in occupancy and average daily rate during 2023 as compared to the prior year.

Multifamily Revenue:

Multifamily revenue was $11.2 million for the year ended December 31, 2023.

As our multifamily properties were acquired during the year ended December 31, 2023, there was no comparable revenue for the year ended December 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 by 45.6% to $10.8 million for the year ended December 31, 2022 compared to $19.8 million for the year ended December 31, 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 year ended December 31, 2022, compared to the year ended December 31, 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 the aforementioned trend to continue into 2023 because of lower loan origination volume from 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.

Income From Unconsolidated Entity:

Income from our unconsolidated entity included in office segment net operating income was $164,000 for the year ended December 31, 2022.

As our investment in the Unconsolidated Joint Venture was made in February 2022, there was no comparable income for the year ended December 31, 2021.

Lending revenue increased by 6.4% to $11.5 million for the year ended December 31, 2023 compared to $10.8 million for the year ended December 31, 2022.

The increase is due to increased interest income from higher interest rates, partially offset by decreased premium income as a result of lower loan sale volume during the year ended December 31, 2023, compared to the year ended December 31, 2022.

Also partially offsetting the increase was a decrease in loan servicing income as a result of lower loan origination volume and higher loan payoff volume.

Income (Loss) From Unconsolidated Office Entities:

Income from our office Unconsolidated Joint Ventures included in office segment net operating income decreased to a loss of $582,000 for the year ended December 31, 2023 compared to income of $164,000 for the year ended December 31, 2022.

The decrease was primarily due to an unrealized loss on the value of real estate at one of our office Unconsolidated Joint Ventures recognized during the year ended December 31, 2023 and an increase in mortgage interest expense at both of our office Unconsolidated Joint Ventures during the year ended December 31, 2023.

These were partially offset by an unrealized gain on the value of real estate related to another one of our office Unconsolidated Joint Ventures recognized during the year ended December 31, 2023.

Income From Unconsolidated Multifamily Entity:

The income from our Unconsolidated Joint Venture included in multifamily segment net operating income was $155,000 for the year ended December 31, 2023.

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

Office Expenses:

Office expenses increased by 12.5% to $26.8 million for the year ended December 31, 2022 compared to $23.8 million for the year ended December 31, 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 and utilities expenses (due to increases in usage and rates), as well as an increase in repairs and maintenance, cleaning and utilities expenses at an office property in Austin, Texas.

A portion of the aforementioned operating expenses were offset by increases in tenant reimbursement revenues.

In addition, office expenses for the year ended December 31, 2021 had been reduced by tax refunds related to prior tax years and adjustments to payroll allocation reimbursements related to certain properties.

Office expenses decreased by 2.6% to $26.1 million for the year ended December 31, 2023 compared to $26.8 million for the year ended December 31, 2022.

The decrease is primarily a result of the disposition of an 80% interest in an office property in Los Angeles, California in February 2023.

Additionally contributing to the decrease is a decrease in operating expenses at an office property in Austin, Texas, as a result of lower real estate tax expenses.

Hotel Expenses:

Hotel expenses increased by 50.9% to $24.1 million for the year ended December 31, 2022 compared to $16.0 million for the year ended December 31, 2021, primarily as a result of increased occupancy at the hotel due to the hospitality industry continuing to recover from the impact of COVID-19.

Hotel expenses increased by 16.2% to $28.0 million for the year ended December 31, 2023 compared to $24.1 million for the year ended December 31, 2022, as a result of increased occupancy at the hotel.

Multifamily Expenses:

Multifamily expenses were $9.5 million for the year ended December 31, 2023.

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

Lending Expenses:

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Lending expenses increased by 80.1% to $7.9 million for the year ended December 31, 2023 compared to $4.4 million for the year ended December 31, 2022.

The increase was primarily due to an increase interest expense as a result of an increase in interest rates, an increase in provision for loan losses, and an increase in general and administrative expenses, partially offset by a decrease in salaries expenses (due to lower loan origination volume).

The increase was primarily due to 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 decreased by 26.4% to $2.6 million for the year ended December 31, 2023 compared to $3.6 million for the year ended December 31, 2022.

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.

The lower fees also reflect a decrease in the adjusted fair value of the Company’s assets in the year ended December 31, 2022 as compared to the year ended December 31, 2021 due to a decrease in the aggregate fair value of the Company’s investments in real estate resulting from valuation changes at the end of 2021 and 2022.

The lower fees reflect a decrease in the adjusted fair value of the Company’s assets in the year ended December 31, 2023 as compared to the year ended December 31, 2022 due to a decrease in the aggregate fair value of the Company’s investments in real estate resulting from valuation changes at the end of 2022 and 2023.

Expense Reimbursements to Related Parties—Corporate :

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

Expense reimbursements to related parties—corporate decreased by 6.1% to $1.9 million for the year ended December 31, 2022 compared to $2.1 million for the year ended December 31, 2021, primarily due to reductions in allocated payroll.

Expense reimbursements to related parties—corporate increased by 21.7% to $2.3 million for the year ended December 31, 2023 compared to $1.9 million for the year ended December 31, 2022, primarily due to increases in allocated payroll from transactions that occurred during the year ended December 31, 2023.

Interest Expense:

Interest expense, which has not been allocated to our operating segments, remained consistent at $9.1 million for the year ended December 31, 2022 compared to $9.0 million for the year ended December 31, 2021.

This is due to lower average outstanding principal balances on our 2018 and 2022 revolving credit facilities during the year ended December 31, 2022 compared to the year ended December 31, 2021, offset by increases in the LIBOR and SOFR components of interest rates on our variable-rate debt for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Interest expense, which has not been allocated to our operating segments, increased to $31.4 million for the year ended December 31, 2023 compared to $9.1 million for the year ended December 31, 2022.

The increase was attributable to two variable-rate mortgages assumed in connection with our multifamily acquisitions during the first quarter of 2023, higher outstanding principal balances on our 2022 Credit Facility Revolver (as defined below) for the year ended December 31, 2023 compared to our 2018 revolving line of credit facility for the year ended December 31, 2022, and increases in the SOFR components of interest rates on our variable-rate debt for the year ended December 31, 2023 compared to the year ended December 31, 2022.

General and Administrative Expenses:

General and administrative expenses, which have not been allocated to our operating segments, were $4.6 million for the year ended December 31, 2022, consistent with $4.6 million for the year ended December 31, 2021.

General and administrative expenses, which have not been allocated to our operating segments, were $5.5 million for the year ended December 31, 2023, compared to $4.6 million for the year ended

December 31, 2022, an increase of 17.8%.

The increase was primarily due to an increase in state and local tax expenses, legal fees, and certain nonrecurring consulting services.

Transaction Costs:

Transaction costs were $223,000 for the year ended December 31, 2022 compared to $143,000 for the year ended December 31, 2021.

The increase is due to an increase in abandoned project costs incurred related to potential real estate transactions in 2022 as compared to the prior period.

Transaction costs were $4.4 million for the year ended December 31, 2023 compared to $223,000 for the year ended December 31, 2022.

The increase is primarily due to related transfer tax expenses in connection with the acquisition of two multifamily properties in Oakland, California in the first quarter of 2023 as well as incremental non-recurring expenses related to potential real estate acquisitions.

Depreciation and Amortization Expense:

Depreciation and amortization expense remained consistent at $20.3 million for the year ended December 31, 2022 compared to $20.1 million for the year ended December 31, 2021.

Depreciation and amortization expense increased to $52.5 million for the year ended December 31, 2023 compared to $20.3 million for the year ended December 31, 2022.

The increase is due to an increase in acquired in-place lease intangible assets amortization at multifamily properties located in Oakland, California acquired during the first quarter of 2023 (which were fully amortized as of December 31, 2023), as well as incremental increases to fixed asset depreciation expense related to such acquired properties.

Gain on Sale of Real Estate:

Gain on sale of real estate of $1.1 million for the year ended December 31, 2023 was related to the sale of 80% of our interest in an office property in Los Angeles, California.

There were no dispositions during the year ended December 31, 2022.

Provision for Income Taxes:

Provision for income taxes decreased by 62.2% to $1.1 million for the year ended December 31, 2022 compared to $3.0 million for the year ended December 31, 2021.

The decrease is primarily due to a decrease in taxable income at our taxable REIT subsidiaries, as a result of operations of the lending division during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Provision for income taxes increased by 8.6% to $1.2 million for the year ended December 31, 2023 compared to $1.1 million for the year ended December 31, 2022.

The increase is primarily due to higher taxable income at our taxable REIT subsidiaries during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Cash Flow Analysis

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Net cash provided by operating activities decreased by $20.4 million for the year ended December 31, 2023, as compared to the same period in 2022.

The decrease was primarily due to a $10.8 million decrease in net proceeds from sale of guaranteed loans net of loan fundings, held for sale, and a $9.3 million decrease resulting from a higher level of net working capital used compared to the prior period.

These were partially offset by an increase in net income of $6.8 million for the year ended December 31, 2022, as compared to the same period in 2021.

The decrease was primarily due to a decrease in net income adjusted for depreciation and amortization expense and other non-cash items of $25.7 million and a $2.0 million increase resulting from a lower level of net working capital used, partially offset by a $1.5 million increase in net proceeds from the sale of loans, and a $1.2 million increase in return on investment from Unconsolidated Joint Ventures compared to the same period in 2022.

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 $66.4 million to $88.7 million for the year ended December 31, 2023 compared to $22.3 million for the year ended December 31, 2022.

The increase in cash used in investing activities was primarily due to our $12.4 million investment in the Unconsolidated Joint Venture, net of distributions, an increase in capital expenditures of $4.8 million and an increase in real estate acquisitions of $7.9 million.

Partially offsetting the aforementioned increases in net cash used in investing activities was a $15.4 million decrease in cash used in investing activities related to net loan fundings during the year ended December 31, 2022 as compared to 2021, a year when the SBA temporarily increased guaranteed percentages for SBA 7(a) loan originations and where we were actively lending under the Paycheck Protection Program.

The increase in cash used in investing activities was primarily due to a $85.9 million increase in acquisitions of real estate, a $10.3 million decrease in distributions from Unconsolidated Joint Ventures, a $5.7 million decrease in principal collected on loans, and a $4.5 million increase in capital expenditures compared to the same period in 2022.

Partially offsetting net cash used in investing activities are $33.3 million in proceeds from the sale of 80% of our interest in 4750 Wilshire to an Unconsolidated Joint Venture during the year ended December 31, 2023 and a decrease in cash outlays of $8.4 million related to our investments in the Unconsolidated Joint Ventures compared to the same period in 2022.

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

Net cash provided by financing activities for the year ended December 31, 2022 was $13.7 million compared to cash used in financing activities of $43.6 million for the year ended December 31, 2021.

The $57.3 million change was due to a $112.4 million increase in proceeds from issuance of preferred stock, net of redemptions, and a $106.0 million increase in net proceeds from debt during the year ended December 31, 2022 compared to the same period in 2021.

The aforementioned amounts increasing net cash provided by financing activities were partially offset by a decrease in net proceeds of $76.9 million from issuance of Common Stock related to our rights offering completed in June 2021 as compared to the year ended December 31, 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 year ended December 31, 2022 and an increase in the payment of preferred stock dividends of $6.3 million.

Net cash provided by financing activities for the year ended December 31, 2023 was $63.4 million compared to cash provided by financing activities of $13.7 million for the year ended December 31, 2022.

The increase of $49.8 million was primarily due to $56.5 million of net proceeds from our 2022 Credit Facility and mortgages during the year ended December 31, 2023 compared to $16.5 million of net paydowns during the year ended December 31, 2022, the issuance of unguaranteed SBA 7(a) loan-backed notes of approximately $54.1 million, and a $72.1 million decrease of cash used in the repurchase of Series L Preferred Stock and Common Stock during the year ended December 31, 2023 compared to the same period in 2022.

The aforementioned amounts of increasing net cash provided by financing activities were partially offset by an increase in $97.6 million of redemption of preferred stock during the year ended December 31, 2023, a $44.8 million decrease in net proceeds from issuance of Preferred Stock, as well as a $5.2 million increase in preferred dividend payments.

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, 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.

On a short-term basis, our principal demands for funds will be for the acquisition of assets, development or repositioning of properties (as further described below) (including pre-construction costs such as obtaining entitlements and

permits and architectural work), 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 (of which $49.8 million could be redeemed without any redemption fee as of December 31, 2023 in cash and/or in shares of Common Stock in our sole discretion).

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

(i) offerings of shares of Common Stock, preferred stock or other equity and/or debt securities of the Company;

(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;

(iv) the sale of existing assets;

(v) partnering with co-investors;

and or (vi) cash flows from operations.

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”).

(ii) issuance of interests in our operating partnership in exchange for properties;

(iii) credit facilities and term loans;

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

(v) the sale of existing assets;

(vi) partnering with co-investors;

and/or (vii) cash flows from operations.

In December 2022, we completed a refinancing of our 2018 credit facility, which was set to mature in October 2023, replacing it with 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 of $93,000 (or $0.03 per share), was $83.8 million.

The payment for the Series L Redemption was made on January 25, 2023 as well as 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 will be 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.

In January 2023, the Company completed the previously-announced redemption of all outstanding shares of its Series L Preferred Stock in cash at its stated value of $28.37 (plus accrued and unpaid dividend of $1.56 per share, or $4.6 million in the aggregate).

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

The redemption 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.

Our long-term liquidity needs will consist primarily of funds necessary for acquisitions of assets, development or repositioning (pre-construction costs) of properties (as further described below), 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 $12.6 million as of December 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.

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.

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.

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 intend to convert two out of the three floors of an office building that we own at 4750 Wilshire Boulevard in Los Angeles into for-lease multifamily units (the “4750 Wilshire Project”).

As part of our asset-light investment approach, we have secured co-investors who have taken an 80% stake in the property, with us retaining a minority equity interest (the “Co-Investment”), effective February 17, 2023.

Further, we are evaluating development of our development sites.

To the extent we decide to proceed with development work on any of our development sites (in addition to those discussed below), we will have increased liquidity needs.

We own a 20% interest in an Unconsolidated Joint Venture (the “4750 Wilshire JV”) 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 Co-Investment, we have commitments to receive cash proceeds from co-investors, enhancing our liquidity.

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

In connection with the 4750 Wilshire JV, we received cash sales proceeds from our joint venture partners.

Further, we have earned and will continue to earn management fees from co-investors in connection with their co-investment in the 4750 Wilshire Project.

In addition to the 4750 Wilshire Project, our long-term liquidity needs include our plan to renovate the Sheraton Grand Hotel in Sacramento, California, which renovation is expected to cost approximately $20.9 million, as well as the plan of one of the Unconsolidated Joint Ventures, in which we have a 50% ownership interest, to develop a multifamily apartment building at 1915 Park Avenue in Los Angeles, California, which development is expected to cost approximately $19.3 million (our share of which will be $9.7 million).

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 risks detailed in “Risk Factors” in “Item 1A—Risk Factors” of this Annual Report on 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 “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 December 31, 2022.

We have mortgage loan agreements with outstanding balances of $250.7 million as of December 31, 2023 in the aggregate.

Our mortgage loans mature on various dates from June 7, 2024 through July 1, 2026.

We expect to exercise the extension option or refinance our fixed rate mortgage loan maturing on June 7, 2024 prior to maturity.

Revolving Credit Facilities

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:

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

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

eight office properties and one hotel property.

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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 March 22, 2023 and December 31,

2022 , $113.2 million and $56.2 million, respectively, was outstanding under the 2022 Credit Facility and approximately $93.0 million and $150.0 million, respectively, was available for future borrowings.

As of March 21, 2024, December 31, 2023, and December 31, 2022, $158.2 million, $153.2 million, and $56.2 million, respectively, was outstanding under the 2022 Credit Facility and approximately $48.0 million and $53.0 million, and $150.0 million, respectively, was available for future borrowings.

Other Financing Activity

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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%.

The annual interest rate for the first interest payment date shall be 7.40%.

As of December 31, 2023, the variable interest rate was 8.15%.

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.

We have junior subordinated notes with a variable interest rate that resets quarterly based on the three-month SOFR plus 3.51%, with quarterly interest‑only payments.

The junior subordinated balance is due at maturity on March 30, 2035.

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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 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.

issued prior to the special dividend in 2019 was adjusted to reflect the effect of the Special Dividend.

As of December 31, 2023, there were 1,749,732 Series A Preferred Warrants to purchase 449,382 shares of Common Stock outstanding.

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In June 2022, we concluded the offering of our Series A Preferred Stock and Series D Preferred Stock and have since conducted a continuous public offering of our Series A1 Preferred Stock of up to approximately $692.3 million.

We intend to use the net proceeds from the offerings for general corporate purposes as described under “—Liquidity and Capital Resources—General.” As of December 31, 2022, we had issued 5,766,077 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 $318.2 million after commissions, fees and allocated costs.

During the twelve months ended December 31, 2021, we conducted the Rights Offering pursuant to which we issued an aggregate of 8,521,589 shares of Common Stock at a subscription price of $9.25 per share for aggregate gross proceeds of $78.8 million before issuance costs of $1.9 million.

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 December 31, 2023, we had issued 10,273,369 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 $420.0 million after commissions, fees and allocated costs.

Dividends on and Redemptions of Preferred Stock

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(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.

Additionally, holders of our Series L Preferred Stock were entitled to receive cumulative cash dividends on each share of 5.50% of the Series L Preferred Stock Stated Value (i.e., the equivalent of $1.56035 per share per year).

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.

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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 year ended December 31, 2022, we redeemed 561,248 shares of Series A Preferred Stock, 9,930 shares of Series A1 Preferred Stock, and 8,000 of Series D Preferred Stock.

As of December 31, 2023, we redeemed 1,388,499 shares of Series A Preferred Stock, 95,026 shares of Series A1 Preferred Stock, and 8,410 of Series D 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”).

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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 year ended December 31, 2022.

As announced on December 23, 2022, the 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 of $93,000 (or $0.03 per share), 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 (including $0.03 per share of transaction costs) 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 will be owed on the redeemed shares of Series L Preferred Stock subsequent to December 31, 2022.

In December 2022, we announced the redemption of all outstanding shares of our Series L Preferred Stock.

In January 2023, we completed such previously-announced redemption of all outstanding shares of our Series L Preferred Stock in cash at its stated value of $28.37 per share (plus accrued and unpaid dividend of $1.56 per share, or $4.6 million in the aggregate) (the “Series L Redemption”).

The total cost to complete the Series L Redemption, including transaction costs of $93,000, was $83.8 million.

Off Balance Sheet Arrangements

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As a result, in no event would a holder of Series A Preferred Stock, Series A1 Preferred Stock or Series D Preferred Stock, as the case may be, be entitled to receive an amount greater than the Maximum Value upon the redemption of such shares or our liquidation.

Accordingly, although the estimated value of the Series A Preferred Stock, Series A1 Preferred Stock and Series D Preferred Stock, calculated based on the Calculated Assets and Liabilities as described above, exceeded the Maximum Value, we determined that the estimated value of each of the Series A Preferred Stock, the Series A1 Preferred Stock and Series D Preferred Stock, as of December 31, 2022, was equal to $25.00 per share, plus accrued and unpaid dividends.

exceeded the Maximum Value, we determined that the estimated value of each of the Series A Preferred Stock, the Series A1 Preferred Stock and Series D Preferred Stock, as of December 31, 2023, was equal to $25.00 per share, plus accrued and unpaid dividends.

As of December 31, 2023, there were 10,473,369 and 10,378,343 shares of Series A1 Preferred Stock issued and outstanding, respectively, 8,820,338 and 7,431,839 shares of Series A Preferred Stock issued and outstanding, respectively, 56,857 and 48,447 shares of Series D Preferred Stock issued and outstanding, respectively, and 22,786,741 shares of Common Stock issued and outstanding.

Additionally as of December 31, 2021, there were 5,387,160 shares of Series L Preferred Stock outstanding, all of which had been either repurchased during 2022 or reclassified to a liability on our consolidated balance sheet as of December 31, 2022 in connection with the Series L Redemption.

Additionally as of December 31, 2023, there were no shares of Series L Preferred Stock outstanding, all of which had been either repurchased during 2022 or reclassified to a liability on our consolidated balance sheet as of December 31, 2023 in connection with the Series L Redemption.

Holders of 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 as follows:

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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.

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

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

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

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

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

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-K

Item 7. Management’s Discussion and Analysis