Creative Media & Community Trust Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are intended to be covered by the safe harbors created thereby. 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 continuing 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 in “Item 1A—Risk Factors” of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 29, 2024 (the “2023 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 our 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 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. 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 June 30, 2024 and results of operations for the three and six months ended June 30, 2024 and 2023 should be read in conjunction with the 2023 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 2023 Form 10-K and in Part II, Item 1A of this Quarterly Report. Capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to those terms in “Part I — Financial Information” of this Quarterly Report on Form 10-Q, including the notes to the consolidated financial statements contained therein. The terms “we,” “us,” “our” and the “Company” refer to Creative Media & Community Trust Corporation and its subsidiaries. Definitions We use certain defined terms throughout this Quarterly Report on Form 10-Q that have the following meanings: The phrase “ADR” represents average daily rate. It is calculated as trailing six-month room revenue divided by the number of rooms occupied. For sold properties, ADR is presented for the Company’s period of ownership only. The phrase “annualized rent” represents gross monthly base rent, or gross monthly contractual rent under parking and retail leases, 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. The phrase “net annualized rent” represents gross monthly base rent, or gross monthly contractual rent under parking and retail leases, net of total rent abatements granted in the applicable month, multiplied by 12. Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent. The phrase “RevPAR” represents revenue per available room. It is calculated as trailing six-month room revenue divided by the number of available rooms. For sold properties, RevPAR is presented for the Company’s period of ownership only. 42 Table of Contents Executive Summary Business Overview 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. 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. 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. 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. 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 and in South Korea to support its platform. Properties As of June 30, 2024, 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. Our Unconsolidated Joint Ventures contain two office properties (one of which is being partially converted into multifamily units), one multifamily site currently under development, one multifamily property and one commercial development site. As of June 30, 2024, our 13 office properties, totaling approximately 1.3 million rentable square feet, were 82.5% occupied, and our one hotel with an ancillary parking garage, which has a total of 503 rooms, had RevPAR of $167.57 for the six months ended June 30, 2024, and our three multifamily properties were 92.5% occupied. Additionally, as of June 30, 2024, we had nine development sites (three of which were being used as parking lots). Strategy We are a Maryland corporation and REIT. 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. 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. 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. 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. 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 co-invest 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). Further, as a matter of prudent management, we regularly evaluate each asset within our portfolio as well as our strategy. 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. 43 Table of Contents CIM Group Operations CIM Group believes that a vast majority of the risks associated with acquiring real estate are mitigated by accumulating local market knowledge of the community where the asset is located. As a result, CIM Group typically spends significant resources over a period of between six months and five years evaluating communities prior to making any acquisitions. The distinct districts that CIM Group identifies through this process as targets for acquisitions are referred to as “Qualified Communities.” Qualified Communities typically have dedicated resources to become, or are currently, vibrant communities where people can live, work, shop and be entertained, all within walking distance or close proximity to public transportation. These areas, which include traditional downtown areas and suburban main streets, generally have high barriers to entry, high population density, positive population trends, a propensity for growth and support for investment. CIM Group believes that the critical mass of redevelopment in such Qualified Communities creates positive externalities, which enhance the value of real estate assets in the area. CIM Group targets acquisitions of diverse types of real estate assets, including retail, residential, office, parking, hotel, signage and mixed-use through CIM Group’s extensive network and its current opportunistic activities. CIM Group seeks to maximize the value of its holdings through active onsite property management and leasing. CIM Group has extensive in-house research, acquisition, credit analysis, development, finance, leasing and onsite property management capabilities, which leverage its deep understanding of metropolitan communities to position properties for multiple uses and to maximize operating income. As a vertically-integrated owner and operator, CIM Group has in-house onsite property management and leasing capabilities. Property managers prepare annual capital and operating budgets and monthly operating reports, monitor results and oversee vendor services, maintenance and capital improvement schedules. 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 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. CIM Group’s Investments and Development teams are separate groups that work very closely together on transactions requiring development or redevelopment. While the Investments team is ultimately responsible for acquisition analysis, both the Investments and Development teams perform due diligence, evaluate and determine underwriting assumptions and participate in the development management and ongoing asset management of CIM Group’s assets under development. The Development team is also responsible for the oversight and/or execution of securing entitlements and the development/repositioning process. In instances where CIM Group is not the lead developer, CIM Group’s in-house Development team continues to provide development and construction oversight to co-sponsors through a shadow team that oversees the progress of the development from beginning to end to ensure adherence to the budgets, schedules, quality and scope of the project in order to maintain CIM Group’s vision for the final product. Both the Investments and Development teams interact as a cohesive team when sourcing, underwriting, acquiring, executing and managing the business plan of an opportunistic acquisition. Financing Strategy We may finance our future activities through one or more of the following methods: (i) offerings of shares of our common stock, par value $0.001 per share (“Common Stock”), preferred stock or other equity and/or debt securities of the Company; (ii) issuances 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, including the securitization of portions of our loan portfolio; (v) the sale of existing assets; (vi) partnering with co-investors; and/or (vii) cash flows from operations. 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 properties partially owned through Unconsolidated Joint Ventures): As of June 30, 2024 2023 Occupancy (1) 82.5 % 83.0 % Annualized rent per occupied square foot (1)(2) $ 58.85 $ 56.71 ______________________ 44 Table of Contents (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) Represents gross monthly base rent under leases commenced as of the specified periods, 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. Annualized rent for certain office properties includes rent attributable to retail. Total abatements, representing lease incentives in the form of free rent, for the twelve months ended June 30, 2024 and 2023 were approximately $2.2 million and $2.8 million, respectively. Giving effect to abatements, net annualized rent per occupied square foot was $58.34 and $54.56 as of June 30, 2024 and 2023, respectively (See Definitions for more detail). 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 September 30, 2024 December 31, 2024 March 31, 2025 June 30, 2025 Expiring Cash Rents: Expiring square feet (1) 148,871 19,357 217,098 30,485 Expiring rent per square foot (2) $ 50.82 $ 52.33 $ 52.86 $ 72.86 ______________________ (1) Month-to-month tenants occupying a total of 6,670 square feet are included in the expiring leases in the first quarter listed. (2) Represents gross monthly base rent, as of June 30, 2024, under leases expiring during the periods above, multiplied by 12. This amount reflects total cash rent before abatements. Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent. During the three and six months ended June 30, 2024, we executed leases with terms longer than 12 months totaling 52,346 and 89,307 square feet, respectively. The table below sets forth information on certain of our executed leases during the three and six months ended June 30, 2024, 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: Number of Leases (1) Rentable Square Feet New Cash Rents per Square Foot (2) Expiring Cash Rents per Square Foot (2) Three months ended June 30, 2024 9 47,130 $ 48.53 $ 58.71 Six months ended June 30, 2024 18 82,872 $ 50.01 $ 55.86 ______________________ (1) Based on the number of tenants that signed leases. (2) Cash rents represent gross monthly base rent, multiplied by twelve. This amount reflects total cash rent before abatements. Where applicable, annualized rent has been grossed up by adding annualized expense reimbursements to base rent. Fluctuations in submarkets, buildings and terms of leases cause large variations in these numbers and make predicting the changes in rent in any specific period difficult. Our rental and occupancy rates are impacted by general economic conditions, including the pace of regional and economic growth, and access to capital. Therefore, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates. 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. 45 Table of Contents 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 June 30, 2024 2023 Occupancy 92.5 % 83.9 % Monthly rent per occupied unit (1) $ 2,647 $ 2,914 ______________________ (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. Net of rent concessions granted in the specified period, monthly rent per occupied unit was $2,469 and $2,336 as of June 30, 2024 and 2023, respectively. Hotel Statistics: The following table sets forth the occupancy, ADR and RevPAR for our hotel in Sacramento, California for the specified periods: For the Six Months Ended June 30, 2024 2023 Occupancy 79.5 % 80.9 % ADR $ 210.80 $ 201.59 RevPAR $ 167.57 $ 163.18 Seasonality Our revenues and expenses for our hotel property are subject to seasonality during the year. Generally, our hotel revenues are greater in the first and second quarters than the third and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in revenues, segment net operating income, net income and cash provided by operating activities. In addition, the hotel industry is cyclical and demand generally follows, on a lagged basis, key macroeconomic factors. Lending Segment Through our loans originated under the SBA 7(a) Program, we are a national lender that primarily originates loans to small businesses. We identify loan origination opportunities through personal contacts, internet referrals, attendance at trade shows and meetings, direct mailings, advertisements in trade publications and other marketing methods. We also generate loans through referrals from real estate and loan brokers, franchise representatives, existing borrowers, lawyers and accountants. 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 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. 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. 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. Property Concentration Kaiser Foundation Health Plan, Incorporated, which occupied space in one of our Oakland, California properties, accounted for 29.5% of our annualized office rental income for the three months ended June 30, 2024. 46 Table of Contents 2024 Results of Operations Comparison of the Three Months Ended June 30, 2024 to the Three Months Ended June 30, 2023 Net Loss and FFO Three Months Ended June 30, Change 2024 2023 $ % (dollars in thousands) Total revenues $ 34,439 $ 32,760 $ 1,679 5.1 % Total expenses $ 36,126 $ 50,058 $ (13,932) (27.8) % Net loss $ (852) $ (18,361) $ 17,509 (95.4) % Net loss was $852,000 for the three months ended June 30, 2024 compared to a net loss of $18.4 million for the three months ended June 30, 2023, a decrease of $17.5 million. The decrease in net loss was primarily due to a decrease in depreciation and amortization expense of $14.0 million and an increase of $4.2 million in segment net operating income (discussed in more detail in the following Summary Segment Results) . Funds from Operations 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. 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. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (the “NAREIT”). Like any metric, FFO should not be used as the only measure of our performance because it excludes depreciation and amortization and captures neither the changes in the value of our real estate properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our operating results. Other REITs may not calculate FFO in accordance with the standards established by the NAREIT; accordingly, our FFO may not be comparable to the FFOs of other REITs. Therefore, FFO should be considered only as a supplement to net income (loss) as a measure of our performance and should not be used as a supplement to or substitute measure for cash flows from operating activities computed in accordance with GAAP. 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 loss attributable to common stockholders to FFO attributable to common stockholders (in thousands): Three Months Ended June 30, 2024 2023 Net loss attributable to common stockholders (1) $ (9,667) $ (23,815) Depreciation and amortization 6,456 20,472 Non-controlling interests’ proportionate share of depreciation and amortization (68) (883) FFO attributable to common stockholders (1) $ (3,279) $ (4,226) ______________________ (1) During the three months ended June 30, 2024 and 2023, we recognized $567,000 and $315,000, respectively, of redeemable preferred stock redemptions. 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, which is a non-GAAP measure, was $(3.3) million for the three months ended June 30, 2024, an increase of approximately $0.9 million compared to $(4.2) million for the three months ended June 30, 2023. The increase in FFO was primarily due to an increase of $4.2 million in segment net operating income (discussed in more 47 Table of Contents detail in the following Summary Segment Results). This was partially offset by an increase in interest expense not allocated to our operating segments of $952,000, an increase in redeemable preferred stock dividends of $1.7 million, and an increase in redeemable preferred stock redemptions of $252,000. Summary Segment Results During the three months ended June 30, 2024 and June 30, 2023, 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 (dollar amounts in thousands). Three Months Ended June 30, Change 2024 2023 $ % Revenues: Office $ 14,101 $ 13,975 $ 126 0.9 % Hotel $ 12,155 $ 11,668 $ 487 4.2 % Multifamily $ 5,449 $ 4,078 $ 1,371 33.6 % Lending $ 2,564 $ 2,963 $ (399) (13.5) % Expenses: Office $ 6,397 $ 6,426 $ (29) (0.5) % Hotel $ 7,835 $ 7,555 $ 280 3.7 % Multifamily $ 3,116 $ 3,362 $ (246) (7.3) % Lending $ 1,821 $ 2,439 $ (618) (25.3) % Income (Loss) From Unconsolidated Entities: Office $ 1,204 $ (710) $ 1,914 NM* Multifamily $ (81) $ (194) $ 113 (58.2) % Non-Segment Revenue and Expenses: Interest and other income $ 170 $ 76 $ 94 NM* Asset management and other fees to related parties $ (425) $ (627) $ 202 (32.2) % Expense reimbursements to related parties - corporate $ (612) $ (677) $ 65 (9.6) % Interest expense $ (8,346) $ (7,394) $ (952) 12.9 % General and administrative $ (983) $ (1,106) $ 123 (11.1) % Transaction-related costs $ (135) $ — $ (135) N/A Depreciation and amortization $ (6,456) $ (20,472) $ 14,016 (68.5) % Provision for income taxes $ (288) $ (159) $ (129) 81.1 % ______________________ (*) Percentage changes in excess of 100% are deemed to be not meaningful (“NM”) Revenues Office Revenue: Office revenue includes rental revenue, expense reimbursements and lease termination income from office properties. Office revenue was $14.1 million for the three months ended June 30, 2024, consistent with $14.0 million for the three months ended June 30, 2023. Hotel Revenue: Hotel revenue increased to $12.2 million for the three months ended June 30, 2024, compared to $11.7 million for the three months ended June 30, 2023. The increase was due to an increase in average daily rate and revenue per available room during the three months ended June 30, 2024. Multifamily Revenue: Multifamily revenue was $5.4 million for the three months ended June 30, 2024, compared to $4.1 million for the three months ended June 30, 2023. The increase was primarily attributed to higher rental revenues at our 48 Table of Contents multifamily properties in Oakland, California due to increased occupancy and increased monthly rent per occupied unit, net of rent concessions, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Lending Revenue: Lending revenue represents revenue from our lending subsidiaries, including interest income on loans and other loan related fee income. Lending revenue was $2.6 million for the three months ended June 30, 2024, compared to $3.0 million for the three months ended June 30, 2023. The decrease was primarily due to a decrease in premium income as a result of lower loan sale volume and decreased interest income due to higher loan payoff volume during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Income (loss) From Unconsolidated Office Entities: The income from our Unconsolidated Joint Ventures included in office segment net operating income increased to $1.2 million for the three months ended June 30, 2024, compared to a loss of $710,000 for the three months ended June 30, 2023. The increase was primarily due to an unrealized gain on the value of real estate at one of the unconsolidated office entities recognized during the three months ended June 30, 2024. Loss From Unconsolidated Multifamily Entity: The loss from our Unconsolidated Joint Venture included in the multifamily segment net operating income was $81,000 for the three months ended June 30, 2024, compared to a loss of $194,000 for the three months ended June 30, 2023. The decrease was primarily due to a decrease in the unrealized loss on the value of real estate at the Unconsolidated Joint Venture included in our multifamily segment during the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Interest and Other Income: Interest and other income, which has not been allocated to our operating segments, increased to $170,000 for the three months ended June 30, 2024, compared to $76,000 for the three months ended June 30, 2023. The increase was primarily related to interest earned on money market accounts during the three months ended June 30, 2024. Expenses Office Expenses: Office expenses were $6.4 million for the three months ended June 30, 2024, the same as for the three months ended June 30, 2023. Hotel Expenses: Hotel expenses increased to $7.8 million for the three months ended June 30, 2024, compared to $7.6 million for the three months ended June 30, 2023. The increase was primarily due to increased wage expenses during the three months ended June 30, 2024. Multifamily Expenses: Multifamily expenses decreased to $3.1 million for the three months ended June 30, 2024 compared to $3.4 million for the three months ended June 30, 2023. The decrease was primarily attributable to lower property-level general and administrative expenses at multifamily properties in Oakland, California for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Lending Expenses: Lending expenses represent expenses from our lending subsidiaries, including interest expense, general and administrative expenses and fees to related parties. Lending expenses decreased to $1.8 million, for the three months ended June 30, 2024, compared to $2.4 million for the three months ended June 30, 2023. The decrease was primarily due to a decrease in interest expense resulting from the amount of principal repayments on our SBA 7(a) loan-backed notes as well as a decrease in allocated payroll expenses, primarily as a result of lower loan origination volume. 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 $425,000 for the three months ended June 30, 2024 compared to $627,000 for the three months ended June 30, 2023. The decrease was 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 2023. Expense Reimbursements to Related Parties — Corporate: The Administrator receives compensation and/or reimbursement for performing certain services for the Company and its subsidiaries. Expense reimbursements to related parties-corporate were $612,000 for the three months ended June 30, 2024, generally consistent with expenses of $677,000 for the three months ended June 30, 2023. Interest Expense: Interest expense, which has not been allocated to our operating segments, increased to $8.3 million for the three months ended June 30, 2024, compared to $7.4 million for the three months ended June 30, 2023. The increase was attributable a higher average outstanding principal balances on our 2022 Credit Facility Revolver for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 and an increase in the SOFR components of interest rates on our variable-rate debt for the three months ended June 30, 2024, as compared to the three months ended June 30, 2023. 49 Table of Contents General and Administrative Expenses: General and administrative expenses, which have not been allocated to our operating segments, were $1.0 million for the three months ended June 30, 2024, generally consistent with $1.1 million for the three months ended June 30, 2023. Transaction-Related Costs: Transaction costs, which related to potential real estate transactions, were $135,000 for the three months ended June 30, 2024, compared with no such costs for the three months ended June 30, 2023. Depreciation and Amortization Expense: Depreciation and amortization expense decreased to $6.5 million for the three months ended June 30, 2024, compared to $20.5 million for the three months ended June 30, 2023. The decrease was primarily due to a decrease 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, partially offset by incremental increases to fixed asset depreciation expense related to the acquired properties. Provision for Income Taxes: Provision for income taxes was $288,000 for the three months ended June 30, 2024, compared to $159,000 for the three months ended June 30, 2023. The increase is due to higher taxable income at our taxable REIT subsidiaries compared to the prior year period. 2024 Results of Operations Comparison of the Six Months Ended June 30, 2024 to the Six Months Ended June 30, 2023 Net Loss and FFO Six Months Ended June 30, Change 2024 2023 $ % (dollars in thousands) Total revenues $ 68,437 $ 61,672 $ 6,765 11.0 % Total expenses $ 73,433 $ 88,162 $ (14,729) (16.7) % Net loss $ (4,757) $ (25,937) $ 21,180 (81.7) % Net loss was $4.8 million for the six months ended June 30, 2024 compared to a net loss of $25.9 million for the six months ended June 30, 2023, a decrease of $21.2 million. The decrease in net loss was primarily due to a decrease in depreciation and amortization expense of $17.0 million , a $2.5 million decrease in transaction-related costs, and an increase of $4.9 million in segment net operating income (discussed in more detail in the following Summary Segment Results) . These were partially offset by a $3.0 million increase in interest expense not allocated to our operating segments . Funds from Operations 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. 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. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (the “NAREIT”). Like any metric, FFO should not be used as the only measure of our performance because it excludes depreciation and amortization and captures neither the changes in the value of our real estate properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our operating results. Other REITs may not calculate FFO in accordance with the standards established by the NAREIT; accordingly, our FFO may not be comparable to the FFOs of other REITs. Therefore, FFO should be considered only as a supplement to net income (loss) as a measure of our performance and should not be used as a supplement to or substitute measure for cash flows from operating activities computed in accordance with GAAP. 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. 50 Table of Contents The following table sets forth a historical reconciliation of net loss attributable to common stockholders to FFO attributable to common stockholders (in thousands): Six Months Ended June 30, 2024 2023 Net loss attributable to common stockholders (1) $ (21,962) $ (36,530) Depreciation and amortization 12,934 29,974 Non-controlling interests’ proportionate share of depreciation and amortization (172) (1,360) Gain on sale of real estate — (1,104) FFO attributable to common stockholders (1) $ (9,200) $ (9,020) ______________________ (1) During the six months ended June 30, 2024 and 2023, we recognized $1.4 million and $688,000, respectively, of redeemable preferred stock redemptions. 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, which is a non-GAAP measure, was $(9.2) million for the six months ended June 30, 2024, a decrease of $180,000 compared to $(9.0) million for the six months ended June 30, 2023. The decrease in FFO was primarily due to a $3.0 million increase in interest expense not allocated to our operating segments and a $4.1 million and $685,000 increase in redeemable preferred stock dividends and redemptions, respectively. These were partially offset by an increase of $4.9 million in segment net operating income (discussed in more detail in the following Summary Segment Results) as well as a $2.5 million decrease in transaction-related costs. 51 Table of Contents Summary Segment Results During the six months ended June 30, 2024 and June 30, 2023, 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 (dollar amounts in thousands). Six Months Ended June 30, Change 2024 2023 $ % Revenues: Office $ 28,712 $ 27,462 $ 1,250 4.6 % Hotel $ 24,009 $ 23,160 $ 849 3.7 % Multifamily $ 10,198 $ 5,301 $ 4,897 92.4 % Lending $ 5,204 $ 5,673 $ (469) (8.3) % Expenses: Office $ 13,260 $ 13,049 $ 211 1.6 % Hotel $ 15,627 $ 14,902 $ 725 4.9 % Multifamily $ 6,505 $ 4,742 $ 1,763 37.2 % Lending $ 3,672 $ 3,791 $ (119) (3.1) % Income (Loss) From Unconsolidated Entities Office $ 1,321 $ (774) $ 2,095 NM* Multifamily $ (524) $ 638 $ (1,162) NM* Non-Segment Revenue and Expenses: Interest and other income $ 314 $ 76 $ 238 NM* Asset management and other fees to related parties $ (819) $ (1,347) $ 528 (39.2) % Expense reimbursements to related parties - corporate $ (1,217) $ (1,205) $ (12) 1.0 % Interest expense $ (16,403) $ (13,385) $ (3,018) 22.5 % General and administrative $ (2,171) $ (2,407) $ 236 (9.8) % Transaction-related costs $ (825) $ (3,360) $ 2,535 (75.4) % Depreciation and amortization $ (12,934) $ (29,974) $ 17,040 (56.8) % Gain on sale of real estate $ — $ 1,104 $ (1,104) N/A Provision for income taxes $ (558) $ (415) $ (143) 34.5 % ______________________ (*) Percentage changes in excess of 100% are deemed to be not meaningful (“NM”) Revenues Office Revenue: Office revenue includes rental revenue, expense reimbursements and lease termination income from office properties. Office revenue increased to $28.7 million for the six months ended June 30, 2024, compared to $27.5 million for the six months ended June 30, 2023. The increase was primarily due to higher rental revenues at an office property in Beverly Hills, California due to increased occupancy. Hotel Revenue: Hotel revenue increased to $24.0 million for the six months ended June 30, 2024, compared to $23.2 million for the six months ended June 30, 2023. The increase was due to an increase in average daily rate and revenue per available room during the six months ended June 30, 2024. Multifamily Revenue: Multifamily revenue was $10.2 million for the six months ended June 30, 2024, compared to $5.3 million for the six months ended June 30, 2023. The increase was primarily attributable to the six months ended June 30, 2024 benefiting from two full quarters of income from properties acquired during the three months ended March 31, 2023. 52 Table of Contents Lending Revenue: Lending revenue represents revenue from our lending subsidiaries, including interest income on loans and other loan related fee income. Lending revenue was $5.2 million for the six months ended June 30, 2024, compared to $5.7 million for the six months ended June 30, 2023. The decrease was primarily due to a decrease in premium income and a decrease in interest income as a result of lower loan originations and loan sale volume during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Income (loss) From Unconsolidated Office Entities: The income from our Unconsolidated Joint Ventures included in office segment net operating income increased to $1.3 million for the six months ended June 30, 2024, compared to a loss of $774,000 for the six months ended June 30, 2023. The increase was primarily due to an unrealized gain on the value of real estate at one of the unconsolidated office entities recognized during the six months ended June 30, 2024. (Loss) income From Unconsolidated Multifamily Entity: The loss from our Unconsolidated Joint Venture included in the multifamily segment net operating loss was $524,000 for the six months ended June 30, 2024, compared to income of $638,000 for the six months ended June 30, 2023. The decrease was primarily due to an unrealized loss on the value of real estate at the Unconsolidated Joint Venture included in our multifamily segment during the six months ended June 30, 2024. Interest and Other Income: Interest and other income, which has not been allocated to our operating segments, increased to $314,000 for the six months ended June 30, 2024, compared to $76,000 for the six months ended June 30, 2023. The increase was primarily related to interest earned on money market accounts during the six months ended June 30, 2024. Expenses Office Expenses: Office expenses increased to $13.3 million for the six months ended June 30, 2024, compared to $13.0 million for the six months ended June 30, 2023. The increase was primarily due to higher operating expenses at our office properties in Beverly Hills, California, and Los Angeles, California as a result of increased occupancy, and our office property in Oakland, California from increased utilities and repairs and maintenance expense. These were partially offset by lower real estate tax expense at our office property in Austin, Texas. Hotel Expenses: Hotel expenses increased by 4.9% to $15.6 million for the six months ended June 30, 2024, compared to $14.9 million for the six months ended June 30, 2023. The increase was primarily due to increased wage expenses during the six months ended June 30, 2024. Multifamily Expenses: Multifamily expenses increased to $6.5 million for the six months ended June 30, 2024 compared to $4.7 million for the six months ended June 30, 2023. The increase was primarily attributable to the six months ended June 30, 2024 including two full quarters of expense from properties acquired during the six months ended June 30, 2023. Lending Expenses: Lending expenses represent expenses from our lending subsidiaries, including interest expense, general and administrative expenses and fees to related parties. Lending expenses were $3.7 million, for the six months ended June 30, 2024, largely consistent with expenses of $3.8 million for the six months ended June 30, 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 $819,000 for the six months ended June 30, 2024 compared to $1.3 million for the six months ended June 30, 2023. The decrease was 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 2023. Expense Reimbursements to Related Parties — Corporate: The Administrator receives compensation and/or reimbursement for performing certain services for the Company and its subsidiaries. Expense reimbursements to related parties-corporate were $1.2 million for the six months ended June 30, 2024, the same as for the six months ended June 30, 2023. Interest Expense: Interest expense, which has not been allocated to our operating segments, increased to $16.4 million for the six months ended June 30, 2024, compared to $13.4 million for the six months ended June 30, 2023. The increase was attributable to mortgages assumed in connection with our multifamily acquisitions during the first quarter of 2023, higher average outstanding principal balances on our 2022 Credit Facility Revolver for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 and an increase in the SOFR components of interest rates on our variable-rate debt for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. General and Administrative Expenses: General and administrative expenses, which have not been allocated to our operating segments, were $2.2 million for the six months ended June 30, 2024, generally consistent with $2.4 million for the six months ended June 30, 2023. 53 Table of Contents Transaction-Related Costs: Transaction costs were $825,000 for the six months ended June 30, 2024, compared with $3.4 million for the six months ended June 30, 2023. The decrease was related to costs incurred in connection with the acquisition of two multifamily properties in Oakland, California in the first quarter of 2023, which increased these costs in the prior year period. Depreciation and Amortization Expense: Depreciation and amortization expense decreased to $12.9 million for the six months ended June 30, 2024, compared to $30.0 million for the six months ended June 30, 2023. The decrease was primarily due to a decrease 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, partially offset by incremental increases to fixed asset depreciation expense related to the acquired properties. Gain on Sale of Real Estate: Gain on sale of real estate of $1.1 million for the six months ended June 30, 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 six months ended June 30, 2024. Provision for Income Taxes: Provision for income taxes was $558,000 for the six months ended June 30, 2024, consistent with $415,000 for the six months ended June 30, 2023. Cash Flow Analysis Our cash flows from operating activities are primarily dependent upon the real estate assets owned, occupancy level of our real estate assets, the rental rates achieved through our leases, the occupancy and ADR of our hotel, the collectability of rent and recoveries from our tenants, and loan related activity. 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 decreased by $3.9 million for the six months ended June 30, 2024, as compared to the same period in 2023. The decrease was primarily due to a $7.2 million decrease resulting from a higher level of net working capital used compared to the prior period and a decrease in net proceeds from the sale of loans of $1.8 million, partially offset by a reduction in net loss adjusted for depreciation and amortization expense and other non-cash items of $5.2 million. 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 decreased by $76.3 million for the six months ended June 30, 2024, as compared to the same period in 2023. The decrease in cash used in investing activities was primarily due to an decrease in acquisitions of real estate of $96.7 million and a decrease in cash outlays of $6.2 million related to our investments in Unconsolidated Joint Ventures during the six months ended June 30, 2024, compared to the same period in 2023. Partially offsetting the decrease in net cash used in investing activities are $29.5 million in proceeds from the sale of a property to the 4750 Wilshire JV during the six months ended June 30, 2023. Our cash flows from financing activities are generally impacted by borrowings and capital activities. Net cash provided by financing activities decreased by $56.7 million for the six months ended June 30, 2024, as compared to the same period in 2023, primarily as a result of net proceeds from our 2022 Credit Facility and mortgages of $13.6 million during the six months ended June 30, 2024 compared to $71.3 million during the six months ended June 30, 2023, the issuance of unguaranteed SBA 7(a) loan-backed notes of approximately $54.1 million during the six months ended June 30, 2023, and a $23.2 million decrease in net proceeds from the issuance of preferred stock. The aforementioned amounts decreasing net cash provided by financing activities were partially offset by a decrease in redemption of preferred stock of $75.3 million and a decrease in the payment of deferred debt origination costs of $3.0 million during the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Liquidity and Capital Resources General 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. We may finance our future activities through one or more of the following methods: (i) offerings of shares of our common stock, par value $0.001 per share (“Common Stock”), preferred stock or other equity and/or debt securities of the Company; (ii) issuances 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, including the securitization of portions of our loan portfolio; (v) the sale of 54 Table of Contents 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 the 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 for a total cost of $83.8 million. The payment for the Series L Redemption was made on January 25, 2023 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. 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 $19.6 million as of June 30, 2024, 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. 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. An Unconsolidated Joint Venture (the “4750 Wilshire JV”), in which we have a 20% ownership interest, is in the process of converting two of the three floors of an office building in Los Angeles, California from office-use into 68 for-lease multifamily units (the “4750 Wilshire Project”), with the first floor of the building continuing to function as 30,335 square feet of office space. The total cost of the 4750 Wilshire Project is expected to be approximately $31.0 million (our share of which will be $6.2 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 JV, we received cash sales proceeds from the joint venture partners, enhancing our liquidity. 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. As of June 30, 2024, total costs of $23.6 million had been incurred by the 4750 Wilshire JV in connection with the 4750 Wilshire Project. The 4750 Wilshire Project is expected to be completed by the third quarter of 2024. In addition to the 4750 Wilshire Project, our long-term liquidity needs include our plan to renovate the Sheraton Grand Hotel in Sacramento, California (the “Hotel Renovation”), which primarily entails renovating the hotel’s guest rooms and corridors and is expected to cost approximately $20.9 million. As of June 30, 2024, $2.0 million of pre-construction costs had been incurred with respect to the Hotel Renovation, which the Company has started construction as of July 2024, with anticipated completion by the end of of 2024. Additionally, an Unconsolidated Joint Venture (the “1910 Sunset JV”), in which we have approximately a 44% ownership interest, has begun construction to develop a multifamily apartment building with 36 multifamily units at 1915 Park Avenue in Los Angeles, California (the “1915 Park Project), which development is expected to be completed by the third quarter of 2025 and with an estimated cost of approximately $19.3 million (our share of which will be $8.5 million). The 1910 Sunset JV plans to finance the project through a combination of cash from operations at its office property, additional equity contributions from existing investors, and proceeds from a mortgage loan from a third-party lender (which is in-place but currently has no outstanding borrowings and is subject to additional equity contribution requirements which have not yet been met). As of June 30, 2024, the 1910 Sunset JV had incurred total costs of $3.9 million in connection with the 1915 Park 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 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. 55 Table of Contents Sources and Uses of Funds Mortgages We have mortgage loan agreements with an outstanding balances of $250.7 million as of June 30, 2024. Our mortgage loans mature on various dates from June 7, 2025 through July 1, 2026, with the two mortgage loans with maturity dates in 2025, each including a 1-year extension option, one of them at the Company’s discretion and one subject to certain conditions being met. The Company has been in discussions with the lender under the variable rate mortgage to restructure the terms of the mortgage, as rent payments from the property will likely be insufficient to meet debt service payments under the mortgage. There can be no assurance that such restructuring will occur. If the Company and the lender under the variable rate mortgage cannot agree on a modification of the mortgage and the Company fails to make a required monthly debt service payment, such failure will constitute an event of default under the mortgage and the lender may, among other remedies, declare principal and interest under the mortgage loan to be immediately due and payable. The mortgage relates to Channel House, a multifamily property in Oakland, California. 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: eight office properties and one hotel property. 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 June 30, 2024, the variable interest rate was 7.93%. 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 August 1, 2024, June 30, 2024, and December 31, 2023, $173.2 million, $173.2 million, and $153.2 million, respectively, was outstanding under the 2022 Credit Facility and approximately $0.0, $0.0 and $53.0 million, respectively, was available for future borrowings. As of each of March 31, 2024 and June 30, 2024, the Company was not in compliance with a financial covenant under the 2022 credit facility. Such non-compliance constituted an event of default under the 2022 credit facility. On May 14, 2024, lenders under the 2022 credit facility and the Company entered into an agreement (the “First Modification Agreement”) pursuant to which the lenders waived such event of default with respect to the test period ending March 31, 2024. On August 7, 2024, lenders under the 2022 credit facility and the Company entered into an agreement (the “Second Modification Agreement”) pursuant to which the lenders waived such event of default with respect to the test period ending June 30, 2024. Pursuant to the Second Modification Agreement, the Company will not be able to borrow under the 2022 credit facility without the consent of the lenders until certain conditions are satisfied, including delivery of a revised business plan acceptable to the lenders and re-establishing compliance with the financial covenant. There can be no assurance as to when or if such conditions will be satisfied. The Company believes that it could rely on other sources for its liquidity needs, including, among other things, (i) obtaining new or modifying existing credit facilities and term loans; (ii) offerings of shares of Common Stock, preferred stock or other equity and or debt securities of the Company; (iii) the addition of senior recourse or non-recourse debt using existing assets as collateral; (iv) the sale of existing assets; (v) partnering with co-investors; and or (vi) cash flows from operations. Among other restrictions, the Second Modification Agreement also prohibits subsidiaries of the Company that own properties that secured the 2022 credit facility from making any distributions to its parent entities. The Second Modification Agreement did not waive compliance with the financial covenant for the test period ending September 30, 2024 or any future period. Simultaneously with the execution of the Second Modification Agreement, the Company made a $4.0 million repayment under the 2022 credit facility. While the Company has been in discussions with the administrative agent of the 2022 credit facility to come to a satisfactory solution to the Company’s non-compliance with a financial covenant, there can be no assurance that such resolution will be achieved. If the Company is unsuccessful in coming to a resolution with the administrative agent of the 2022 credit facility, and is not able to re-establish compliance with the financial covenant for the test period ending September 30, 2024 or any future period, lenders thereunder may, among other remedies, declare their commitment thereunder to be terminated and/or 56 Table of Contents declare the unpaid principal amount of all outstanding loans, all interest accrued and unpaid thereon, to be immediately due and payable, and foreclose on or take other secured creditor remedies with respect to the properties that secure the 2022 credit facility. Other Financing Activity 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. 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 June 30, 2024, 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 SOFR plus 3.51%, with quarterly interest‑only payments. The junior subordinated balance is due at maturity on March 30, 2035. The junior subordinated notes may be redeemed at par at our option. The aggregate principal balance of the junior subordinated notes was $27.1 million as of June 30, 2024. Securities Offerings 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 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 June 30, 2024, there were 988,794 Series A Preferred Warrants to purchase 250,777 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. Since June 2022, the Company has been conducting a public offering with respect to shares of its Series A1 Preferred Stock. We intend to use the net proceeds from the offerings for general corporate purposes, acquisitions of shares of our Common Stock and Preferred Stock, whether through one or more tender offers, share repurchases or otherwise, and acquisitions consistent with our acquisition and asset management strategies. As of June 30, 2024, we had issued 11,492,002 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 $446.9 million after commissions, fees and allocated costs. Dividends on and Redemptions of Preferred Stock 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 57 Table of Contents 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. Consequently, the dividend rate on a quarterly basis does not necessarily correlate directly to any individual factor. From the date of issuance until the fifth anniversary of the date of issuance, holders of Series A Preferred Stock and Series D Preferred Stock may require us to redeem such shares at a discount to the Series A1 Preferred Stock, Series A Preferred Stated Value and Series D Preferred Stated Value, respectively. From and after the fifth anniversary of the date of original issuance of any share of our Preferred Stock, we generally (subject to certain conditions) have the right (but not the obligation) to redeem, and the holder of such share may require us to redeem, such share at a redemption price equal to 100% of the stated value of such share, plus any accrued but unpaid dividends in respect of such share as of the effective date of the redemption. 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. As of June 30, 2024, we redeemed 2,065,479 shares of Series A Preferred Stock, 151,074 shares of Series A1 Preferred Stock, and 8,410 shares of Series D Preferred Stock. Off-Balance Sheet Arrangements As of June 30, 2024, 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.