Sachem Capital Corp. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. The actual results may differ materially from those anticipated in these forward-looking statements. Company Overview We are a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term ( i.e., three years or less) loans secured by first mortgage liens on real property. From our inception, in December 2010, through our initial public offering, in February 2017, we operated as a limited liability company. On February 9, 2017, we completed our initial public offering (the “IPO”), the primary purpose of which was to raise equity capital to fund mortgage loans and expand our mortgage loan portfolio and to diversify our ownership so that we could qualify, for federal income tax purposes, as a real estate investment trust, or REIT. We believe that, since consummation of the IPO, we met all the requirements to qualify as a REIT for federal income tax purposes and elected to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are entitled to claim deductions for distributions of taxable income to our shareholders thereby eliminating any corporate tax on such taxable income. Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% excise tax to the extent it exceeds 10% of our total taxable income. To maintain our qualification as a REIT, we are required to distribute each year at least 90% of our taxable income. As a REIT, we may also be subject to federal excise taxes and state taxes. Market Opportunity Notwithstanding the spread of the novel corona virus known as COVID-19, which had a severe adverse impact on certain segments of the U.S. and global economy, its impact on our business was negligible. Even now, as concerns mount over the impact that the Delta variant of the virus will have on the global economic recovery, we believe that there will continue to be a significant market opportunity for a well-capitalized “hard money” lender to originate attractively priced loans to small-scale real estate developers with strong equity positions ( i.e., good collateral), particularly in Connecticut where, traditionally, real estate values in many neighborhoods have been stable and substandard properties are improved, rehabilitated and renovated. We further believe that there are many opportunities for us to expand our business into new markets. We also believe developers will prefer to borrow from us rather than other lending sources because of our flexibility in structuring loans to suit their needs, our lending criteria, which places greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, and our ability to close quickly. Review of the first Nine Months of 2021 and Outlook for Balance of Year Compared to the first nine months of 2020, revenue increased 62.5%, net income to common shareholders increased 21.9%, and earnings per share increased $0.02 per share. The revenue increase was directly related to an increase in interest income of 58.8%, which reflects growth in our lending activities. The increase in revenue was offset by an 90.6% increase in total operating costs and expenses. The increase in operating expenses is mainly attributable to a 111.6% increase in interest expense and amortization of deferred financing costs and a 76.5% increase in compensation and related expenses. The increase in compensation expense is mainly attributable to the addition of a Chief Operating Officer in July 2020 and a Chief Investment Officer in April 2021, positions that are part of our long-term growth strategy. In addition, we added support staff in our operations and finance teams to assist in the servicing of our loan portfolio. The increase in net income to common shareholders was generally related to the growth in our loan portfolio and significant origination fee income. Mortgages receivable increased by 77.2% or $95.8 million compared to September 30, 2020, while cash and cash equivalents and investment securities increased 127.7% or $42.3 million. The increase in cash and cash equivalents and investment securities was due primarily to $30.9 million of net proceeds from the sale of common shares, and $45.5 million of net proceeds from the sale of our 7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”). 17 Table of Contents Our primary business objective remains to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends. We intend to achieve this objective by accelerating profitable growth and driving operational excellence. To accelerate profitable growth, we will continue to focus on selectively originating, managing, and servicing a portfolio of first mortgage real estate loans designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We are also targeting larger-value commercial loans with strong, experienced sponsors. To drive operational excellence, we have embarked on a broad change management initiative to review, assess, and upgrade – or transform if necessary – our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms. To that end, in the third quarter of 2021 we rolled out a new underwriting model that autmotated the production of our loan documentation – term sheets, proof of funds, etc. The automation allows for more accurate and timely processing of loans, thus increasing loan production while keeping our employee headcount down. In addition, we have focused on developing relationships with larger scale wholesale brokers, furthering our efforts to attract larger borrowers with better credit quality. We believe that our ability to react quickly to the needs of borrowers, our flexibility in terms of structuring loans to meet the needs of borrowers, our knowledge of the primary real estate markets we lend in, our expertise in “hard money” lending and our focus on newly originated first mortgage loans, should enable us to achieve our primary objective. Nevertheless, we remain flexible to take advantage of other real estate opportunities that may arise from time to time, whether they relate to the mortgage market or to direct or indirect investments in real estate. Our strategy to achieve this objective also includes the following: ● capitalize on opportunities created by the long-term structural changes in the real estate lending market and the continuing lack of liquidity in the commercial and investment real estate markets; ● take advantage of the prevailing economic environment and current economic, political and social trends that may impact real estate lending, as well as the outlook for real estate in general and particular asset classes; ● remain flexible to capitalize on changing sets of investment opportunities that may be present in the various points of an economic cycle; and ● operate to qualify as a REIT and for an exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. In terms of our outlook for the remainder of 2021, the biggest challenge remains the unknown impact of COVID-19 and future actions that may be taken to contain the spread of COVID-19. Keeping our workforce healthy and safe is our number one priority and we are following the updated guidelines and recommendations issued by the State of Connecticut and Centers for Disease Control. We continue to encourage employees to stay home when sick and encourage working from home when possible. In the event of a positive COVID-19 test result, Sachem employees inform management and follow state testing and contact tracing protocols. We have not been immune to the virus striking our employees and their family members. Fortunately, none of these occurrences has been life-threatening. However, to mitigate the risk of office closure and to ensure business continuity, our employees are equipped so they can seamlessly work remotely. This remote work set-up has proven to be effective since, at times during the pandemic, employees had to self-isolate based on their own health condition or that of an immediate family member. While loan processing and funding may have been marginally delayed, there was no material adverse impact to the service levels we provided our borrowers. In the event we are forced to close our physical office, we think it likely that there would be some adverse impact. For example, the underwriting process would continue to function but would take longer to complete without immediate access to background and credit profiles. Loan committee meetings would continue to be held virtually (as they are under normal conditions) but the loan approval process may incur delay or not be as thorough and efficient as in the past. In addition, we may not be able to meet with borrowers or potential borrowers, including physical property inspections, which could adversely impact our ability to service our loans, monitor compliance and originate new loans. Finally, the filing of loan documents with the various recording offices may be delayed. In summary, the consequences may include one or more of the following: ● increase the amount of time necessary to review loan applications, structure loans and fund loans; ● adversely impact the ability of borrowers to remain current on their obligations; 18 Table of Contents ● reduce the rate of prepayments; ● delay the completion of renovation projects in-process; ● inhibit the ability of borrowers to sell their properties to repay their obligation to us; and ● delay foreclosure or other judicial proceedings necessary to enforce our rights. Other factors that we believe will impact our business for the remainder of 2021 include the following: Increased competition. In the past, our primary competitors were other non-bank real estate finance companies (similar to Sachem Capital Corp.) and banks and other financial institutions. Our principal competitive advantages included our size and our ability to address the needs of borrowers in terms of timing and structuring loan transactions. More recently, we are encountering competition from private equity funds, hedge funds and other specialty finance entities funded by investment banks, asset managers, private equity funds and hedge funds. Clearly, the primary driver for these new market participants is the need to generate yield. They are well-funded and aggressive in terms of pricing. Borrower expectations. The new competitive landscape is shifting the negotiating leverage in favor of borrowers.As borrowers have more choices, they are demanding better terms. As of September 30, 2021, the yield on our portfolio was 11.92% compared to 12.28% for the same period in 2020. We expect rate compression will continue for the balance of 2021. Property value fluctuations. We remain aware of property value market cycles and utilize a dashboard of indicators to track property value trends. Our response to this development would be to adhere to our strict loan-to-value ratio and other underwriting guidelines and aggressively enforce our rights when loans go into default. By judiciously relying on our dashboard of leading indicators and continuing to make decisions in a sound and proper manner, we see no reason to expect any negative outcome regarding our business operations and growth. Some of our indicators within our dashboard are interest rate changes impacting mortgage rates, days-on-market, pending sales, NAHB’s Housing Market Index, and the Senior Loan Officer Opinion Survey, among others. Increased operating expenses. Our operating expenses for 2021 are significantly higher than they were in 2020 due to our higher debt load. In addition, our dividend payments will be higher in 2021 than in 2020 due to an increase in the number of common shares outstanding as well as the issuance of of our Series A Preferred Stock, which carries a 7.75% annual dividend rate. Finally, our compensation expense has increased as we hired new personnel and increased salaries of existing employees to administer a larger loan portfolio and more complex loan transactions. Unfunded commitments. Most of our loans are funded in full at closing. However, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing. At September 30, 2021, our mortgage loan portfolio included 157 loans with future funding obligations, in the aggregate principal amount of $61,707,185, compared to 105 loans in the aggregate principal amount of $13,342,248 at September 30, 2020. The increase is due to an increase in construction loan originations, a large portion of which is in the Florida market. Advances under these loans are funded against requests supported by all required documentation (including lien waivers) as and when needed to pay contractors and other costs of construction. In order to deal with these obligations, we are compelled to maintain higher cash balances, which could adversely impact our financial performance. 19 Table of Contents Despite the challenges we faced in 2020, the changing dynamics of the real estate finance marketplace and the impact of COVID-19, we continue to believe in the viability of our business model. Our goal is, and has always been, to continue to grow our mortgage loan portfolio and increase our loan profitability, while at the same time maintain or improve on our existing underwriting and loan criteria. Specifically, we believe that the following factors will, in fact, help us deal with the uncertainties expected in the remainder of 2021: ● From January through September 30, 2021, we funded approximately $154.8 million of mortgage loans including loan modifications and construction draws. The sources for these loans and draws included cash and cash equivalents at December 31, 2020 (approximately $19.4 million), short term marketable securities at December 31, 2020 (approximately $37.3 million), net proceeds from the sale of our Series A Preferred stock (approximately $45.5 million), net proceeds from the sale of common shares (approximately $30.9 million) and loan repayments (approximately $90.5 million). As of September 30, 2021, we had cash and cash equivalents and investment securities of approximately $75.3 million. We plan to use these funds during the remainder of 2021 to increase our mortgage loan portfolio. As of October 22, 2021 we had issued term sheets for new loans in the aggregate principal amount of approximately $75.6 million. Some of these loans may never get funded for a variety of reasons. In addition, as of October 22, 2021, we had applications in-house for loans totaling approximately $123.0 million. None of these loans have been approved and none may ever be approved. ● Beginning in the second quarter of 2021, we significantly reduced our leverage, thereby mitigating the risks should economic conditions deteriorate. At September 30, 2021, our capital structure was 49.3% debt and 50.7% equity compared to 63% debt and 37% equity at March 31, 2021. The change was accomplished by selling equity – common shares and preferred shares – rather than by reducing our indebtedness. Our total indebtedness at September 30, 2021 was approximately $144.6 million, including deferred financing costs. Of this amount, approximately $30.1 million is the outstanding balance on our credit facility with Wells Fargo, which is currently accruing interest at the relatively modest rate of 1.5%. The remaining indebtedness, approximately $114.5 million, is the aggregate outstanding principal balance on our unsubordinated unsecured notes, which have a weighted average interest rate of 7.36% per annum. On the other hand, the notes provide us with operational flexibility. Other than interest, they do not have any significant costs and expenses, such as legal fees, collateral maintenance fees, unused facility fees, processing fees and the additional personnel costs relating to reporting and compliance. Second, they only have one financial covenant – an asset coverage ratio of 150%. There are no limitations in terms of the size of the mortgage loans we choose to fund, the markets in which we choose to operate and the nature of the collateral. Finally, the notes are unsecured. ● On July 21, 2021, we consummated a $200 million master repurchase financing facility (“Facility”) with Churchill MRA Funding I LLC (“Churchill”), a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York. Under the terms of the Master Repurchase Agreement entered into in connection with the Facility (the “MRA”), we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans. In addition, we have the right and, in some instances the obligation, to repurchase those loans from Churchill. The amount that Churchill will pay for each mortgage loan it purchases will vary based on the attributes of the loan and various other circumstances. The repurchase price is calculated by applying an interest factor to the purchase price of the mortgage loan. We have also granted Churchill a first priority security interest on the mortgage loans sold to Churchill to secure its repurchase obligation. The cost of capital under the Facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 30-day LIBOR plus (b) 3%-4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time. The MRA contains other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements. In addition, the Company has agreed that it will not (A) (i) pay any dividends or make distributions in excess of 90% of its taxable income, (ii) incur any indebtedness or (iii) purchase any of its capital stock, unless, in any case, it has an asset coverage ratio of at least 150%; and (B) has unencumbered cash and cash equivalents in an amount equal to or greater than 2.50% of the amount of its repurchase obligations. Churchill has the right to terminate the Facility at any time upon 180 days prior notice to the Company. The Company then has an additional 180 days after termination to repurchase all the mortgage loans held by Churchill. (See Note 6 to the attached financial statements.) ● We have made the necessary adjustments to our operations to replace our former co-chief executive officer by hiring new employees and re-assigning existing employees to new tasks. We now have a robust executive team that includes our chief executive and chief financial officer, a chief operating officer and a chief investment officer. In addition, we have added junior executives as well in accounting and administration. Although these new hires will result in increased compensation, they were and will continue to be necessary to accommodate our growth and to maintain our ability to continue to service our borrowers and manage our business without sacrificing quality. 20 Table of Contents ● We have adjusted and refined our business strategy to address changes in the marketplace and our growth to-date. Specifically, we continue to strengthen our geographic footprint beyond Connecticut and the rest of New England with particular emphasis on Florida and Texas. In addition to the aforementioned states, our current mortgage loan portfolio includes loans secured by properties in New York, Arizona, South Carolina and California. We continue to look for opportunities in new markets that meet our underwriting and loan criteria. ● We are funding larger loans than we have in the past that are secured by what we believe are higher-quality properties that are being developed by borrowers that we deem to be more stable and successful. In addition, we believe the migration to these types of loans will offset any rate compression and help us maintain a low foreclosure rate. ● To leverage our expertise in real estate finance and our capital resources, on the one hand, and to capitalize on lending opportunities in specific markets, on the other, we plan to partner and invest with local “hard money” real estate lenders creating satellite offices under the “Sachem” influence. An advantage of this model is that these local lenders subscribe to a “Sachem” model using their own personal assets and those of other investor partners to fund loan opportunities and operations which increases their capital commitment to the opportunity. Under these arrangements, we would provide loan funding capital as well as our underwriting and servicing expertise and our local partners would provide us with “boots on the ground” lending opportunities. We recently leased office space in Austin, Texas, which is manned by one of our shareholders who lives in the area as well as a sales and marketing campaign, primarily via Google advertising, in the hopes of building a robust pipeline to supplement our operator and to develop the Sachem brand in Texas. We also have had preliminary discussion with local lenders in other markets, including Orlando, Florida, Greenwich, Connecticut, Charlotte, North Carolina and Atlanta, Georgia. We plan to continue these discussions and scout other locations as well. However, we have not yet entered into any definitive agreements and we cannot assure you that we will be able to consummate any such partnerships or joint ventures on terms that will be acceptable to all parties. ● On March 24, 2021, we loaned $25,000 to our wholly-owned subsidiaiary, Sachem Sponsor LLC. Sachem Sponsor used those funds to purchase 1,437,500 shares of Class B common stock of Sachem Acquisition Corp., a newly organized blank check company formed under the laws of Maryland in February 2021 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. Sachem Acquisition Corp.’s registration statement on Form S-1 is currently under SEC review. Operational and Financial Overview Our loans typically have a maximum initial term of one to three years and bear interest at a fixed rate of 5% to 14.2% per year and a default rate of 18% per year. We usually receive origination fees, or “points,” ranging from 2% to 5% of the original principal amount of the loan as well as other fees relating to underwriting, funding and managing the loan, such as inspection fees. Since we treat an extension or renewal of an existing loan as a new loan, we also receive additional “points” and other loan-related fees in connection with those transactions. Interest is always payable monthly in arrears. As a matter of policy, we do not make any loans if the loan-to value ratio exceeds 70%. In the case of construction loans, the loan-to-value ratio is based on the post-construction value of the property. We rely on readily available market data, including appraisals when available or timely, tax assessment rolls, recent sales transactions and brokers to evaluate the value of the collateral. Finally, we have adopted a policy that limits the maximum amount of any loan we fund to a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of our loan portfolio, taking into consideration the loan under consideration, unless otherwise approved by our board of directors. At September 30, 2021, we had one borrower whose outstanding loans, in the aggregate principal amount of $22.3 million, represented 10.2% of our mortgage loan portfolio. In addition, we had a second borrower with loans having an aggregate outstanding principal amount of $10.0 million, which represented approximately 4.6% of our mortgage loan portfolio. However, our total funding obligations to this borrower are approximately $23.4 million. On a fully funded basis, the total amount outstanding to this borrower would have represented approximately 10.0% of our mortgage loan portfolio as of September 30, 2021. Our revenue consists primarily of interest earned on our loan portfolio. As of March 31, 2021, our capital structure was weighted towards more debt versus equity and debt service has become a significant factor in determining our net income. As of September 30, 2021 our capital structure shifted and is more balanced -- approximately 49.3% debt and 50.7% equity. Most of our debt, approximately $114.5 million, is unsecured unsubordinated 5-year notes. The weighted average interest rate on these notes is 7.36%. In addition, we had a balance of approximately $30.1 million at September 30, 2021 under our margin loan account with Wells Fargo. The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate. The interest rate on this loan as of September 30, 2021 was 1.5%. 21 Table of Contents In addition, our net income for the three and nine months ended September 30, 2021 has been adversely impacted by a reduction in the yield on our mortgage loan portfolio as well as $90.4 million of loan payoffs during the nine month period compared to $55 million for all of 2020. In the first nine months of 2021, we realized faster payoff of investment “fix and flip” loans with these projects coming to fruition quicker due to a stronger real estate market and, we believe, our sound underwriting and analysis of each project. The velocity with which our loans are paid off reflects the health of our portfolio. Despite these payoffs, we were able to redeploy the capital into new loans, boosting the yield to our shareholders by recognizing origination fees over shorter durations than originally underwritten. Our strategy continues to be to adhere to our current underwriting guidelines, which we believe will allow us to continue to grow our loan portfolio while protecting and preserving capital in a manner that provides attracted risk-adjusted returns to our shareholders. For the nine months ended September 30, 2021 and 2020, the yield on our mortgage loan portfolio was 11.92% and 12.28%, respectively. For this purpose, yield only takes into account the stated interest rate on the mortgage note adjusted to the default rate, if applicable. We believe the interest rate compression will continue to be a factor for the remainder of 2021 as we implement our new strategy focusing on larger loans, secured by higher quality properties being developed by more seasoned developers with a history of successful development projects. On the other hand, since the interest rate on our outstanding indebtedness is fixed, we have reduced the risk on interest rate compression if and when interest rates begin to increase. That will enable us to continue to focus on growth and building market share rather than short-term profits and cash flow. We seek to mitigate some of the risk associated with rising rates by limiting the term of new loans to one year. At September 30, 2021, approximately 87.6% of the mortgage loans in our portfolio had a term of one year or less. If, at the end of the term, the loan is not in default and meets our other underwriting criteria, we will consider an extension or renewal of the loan at our then prevailing interest rate. If interest rates have decreased and we renew a loan at a lower rate, the “spread” between our borrowing costs and the yield on our portfolio will be squeezed and would adversely impact our net income. We cannot assure you that we will be able to increase our rates at any time in the future and we cannot assure you that we can continue to increase our market share. As a real estate finance company, we deal with a variety of default situations, including breaches of covenants, such as the obligation of the borrower to maintain adequate liability insurance on the mortgaged property, to pay the taxes on the property and to make timely payments to us. As such, we may not be aware that a default occurred. At September 30, 2021, eight of our mortgage loans were the subject of enforcement or collection proceedings. The aggregate amount due on these loans, including principal, unpaid accrued interest and borrower charges, was approximately $892,000, representing approximately 0.4% of our aggregate mortgage loan portfolio. In the case of each of these loans, we have determined the value of the collateral exceeds the aggregate amount due. To date, the aggregate amount of realized losses on our loan portfolio have been de minimis. Financing Strategy Overview To continue to grow our business, we must increase the size of our loan portfolio, which requires that we use our existing working capital to fund new loans and raise additional capital either by selling shares of our capital stock or by incurring additional indebtedness. We do not have a policy limiting the amount of indebtedness that we may incur. Thus, our operating income in the future will depend on how much debt we incur and the spread between our cost of funds and the yield on our loan portfolio. Rising interest rates could have an adverse impact on our business if we cannot increase the rates on our loans to offset the increase in our cost of funds and to satisfy investor demand for yield. In addition, rapidly rising interest rates could have an unsettling effect on real estate values, which could compromise some of our collateral. In June 2021 and July 2021, we raised aggregate net proceeds of approximately $45.5 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of 1,903,000 shares of our Series A Preferred Stock in the Series A Offering (defined below) as described in Liquidity and Capital Resources below and Notes 11 and 14 to the accompanying financial statements. The Series A Preferred Stock is listed on the NYSE American and began trading under the symbol “SACHPRA” on July 6, 2021. 22 Table of Contents We do not have any formal policy limiting the amount of indebtedness we may incur. Depending on various factors we may, in the future, decide to take on additional debt to expand our mortgage loan origination activities to increase the potential returns to our shareholders. Although we have no pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion regarding the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values. At September 30, 2021, debt represented approximately 49.3% of our total capital. To grow the business and satisfy the requirement to pay out 90% of net profits, starting in June 2019 we gradually raised our debt level from 41.7% to as much as 63.0% of our total capital in the second quarter of 2021. We intend to maintain a modest amount of leverage for the sole purpose of financing our portfolio and not for speculating on changes in interest rates. Our total outstanding indebtedness at September 30, 2021 was approximately $144.6 million, which included a credit line loan of approximately $30.1 million and three series of unsecured, unsubordinated five-year notes having an aggregate original principal amount of approximately $114.5 million (collectively, the “Notes”), including deferred financing costs. The Notes include notes having an aggregate principal amount of approximately $23.7 million bearing interest at the rate of 7.125% per annum and have a maturity date of June 30, 2024 (the “June 2024 Notes”); notes having an aggregate principal amount of $34.5 million bearing interest at the rate of 6.875% per annum and have a maturity date of December 30, 2024 (the “December 2024 Notes”); and notes having an aggregate original principal amount of approximately $56.4 million, bearing interest at the rate of 7.75% per annum and have a maturity date of September 30, 2025 (the “2025 Notes”). All three series of Notes are unsecured, unsubordinated obligations and rank equally in right of payment with all our existing and future senior unsecured and unsubordinated indebtedness but are effectively subordinated in right of payment to all our existing and future secured indebtedness (including indebtedness that is initially unsecured but to which we subsequently grant a security interest). Interest on all three series of Notes is payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year the Notes are outstanding. Each series of Notes was issued pursuant to the Indenture, dated June 21, 2019, and a supplement thereto, which provides for the form and terms, including default provisions and cures, applicable to each series. All three series of Notes are subject to (i) “Defeasance,” which means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on such notes when due and satisfying any additional conditions required under the Indenture, we will be deemed to have been discharged from our obligations under such notes and (ii) an “Asset Coverage Ratio” requirement pursuant to which we may not pay any dividends or make distributions in excess of 90% of our taxable income, incur any indebtedness or purchase any shares of our capital stock unless we have an “Asset Coverage Ratio” of at least 150% after giving effect to the payment of such dividend, the making of such distribution or the incurrence of such indebtedness. “Asset Coverage Ratio” means the ratio (expressed as a percentage) of the value of our total assets relative to the aggregate amount of its indebtedness. We may, at our option, at any time and from time to time, on or after June 30, 2021, in the case of the June 2024 Notes, November 7, 2021, in the case of the December 2024 Notes, and September 4, 2022, in the case of the 2025 Notes, redeem such notes, in whole or in part, at a redemption price equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest to, but excluding, the date fixed for redemption. On and after any redemption date, interest will cease to accrue on the redeemed notes. All three series of Notes trade on the NYSE American. The June 2024 Notes trade under the symbol “SCCB”, the December 2024 Notes trade under the symbol “SACC” and the 2025 Notes trade under the symbol “SCCC”. We have a margin loan account with Wells Fargo, which is secured by our portfolio of short-term securities and has a balance of approximately $30.1 million at September 30, 2021. The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate. The interest rate at September 30, 2021 is 1.5%. On July 21, 2021, we consummated a $200 million Facility with Churchill, a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York. Under the terms of the Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans. The cost of capital under the Facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 30-dayLIBOR plus (b) 3%-4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time. Our obligations under the Facility are secured by a lien on the mortgage loans sold to Churchill. The Facility gives us the ability to raise capital as needed at a relatively low rate. It also gives us the flexibility to seek other sources of funding. (See above and Note 6 to the attached financial statements.) 23 Table of Contents REIT Qualification We believe that we have qualified as a REIT since the consummation of the IPO and that it is in the best interests of our shareholders that we operate as a REIT. We made the election to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders on an annual basis. We cannot assure you that we will be able to maintain REIT status. Our qualification as a REIT depends on our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended, relating to, among other things, the sources of our gross income, the composition and values of our assets, our compliance with the distributions requirements applicable to REITs and the diversity of ownership of our outstanding common shares. We cannot assure you that we will be able to maintain our qualification as a REIT. So long as we qualify as a REIT, we, generally, will not be subject to U.S. federal income tax on our taxable income that we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate income tax rates and may be precluded from electing to be treated as a REIT for four taxable years following the year during which we lose our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income. Emerging Growth Company Status We are an “emerging growth company”, as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements not applicable to other public companies but applicable to emerging growth companies, including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As an emerging growth company, we can also delay adopting new or revised accounting standards until those standards apply to private companies. We intend to avail ourselves of these options. Once adopted, we must continue to report on that basis until we no longer qualify as an emerging growth company. We will cease to be an emerging growth company upon the earliest of: (i) the end of the 2022 fiscal year; (ii) the first fiscal year after our annual gross revenue are $1.07 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common shares held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our common shares less attractive if we choose to rely on these exemptions. If, as a result of our decision to reduce future disclosure, investors find our common shares less attractive, there may be a less active trading market for our common shares and the price of our common shares may be more volatile. As an “emerging growth company,” we intend to avail ourselves of the reduced disclosure requirements and extended transition periods for adopting new or revised accounting standards that would otherwise apply to us as a public reporting company. Once adopted, we must continue to report on that basis until we no longer qualify as an emerging growth company. As a result, our financial statements may not be comparable to those of other public reporting companies that either are not emerging growth companies or that are emerging growth companies but have opted not to avail themselves of the reduced disclosure requirements for emerging growth companies and investors may deem our securities a less attractive investment relative to those other companies, which could adversely affect our stock price. 24 Table of Contents Results of Operations Three months ended September 30, 2021 compared to three months ended September 30, 2020 Total revenue Total revenue for the three months ended September 30, 2021 was approximately $8.5 million compared to approximately $4.3 million for the three months ended September 30, 2020, an increase of approximately $4.3 million, or 99.5%. The increase in revenue is primarily attributable to the growth in our lending operations as a direct result of our receipt of approximately $45.5 million from the sale of the the Series A Preferred Stock as well as the velocity at which existing loans are repaid and our ability to quickly recycle those proceeds into new loans and generate new origination fees. For the 2021 period, interest income was approximately $6.1 million compared to approximately $3.5 million for the 2020 period, representing an increase of approximately $2.6 million or 75.5%. Origination fees increased to approximately $999,300 for the 2021 period compared to approximately $393,100 for the 2020 period. Investment income for the 2021 period was approximately $275,700 compared to approximately $32,500 for the 2020 period. This increase reflects reflects both a larger investment portfolio and more favorable market conditions during 2021. In the 2021 period we had approximately $256,400 of gains from the sale of investment securities compared to a loss of approximately $22,000 for the 2020 period. Other income was approximately $579,700 for the 2021 period compared to approximately $337,000 for the 2020 period, an increase of approximately $242,900, or 72.1%. Operating costs and expenses Total operating costs and expenses for three months ended September 30, 2021 were approximately $4.2 million compared to approximately $2.1 million for the three months ended September 30, 2020, an increase of approximately $2.1 million or 97.9%. The increase in operating costs and expenses is primarily attributable to the increase in interest expense and amortization of deferred financing costs, which, in turn, is a direct result of an increase in our overall indebtedness, particularly our unsubordinated unsecured notes. At September 30, 2021, total indebtedness was approximately $144.6 million and the aggregate outstanding principal amount of our notes was approximately $114.5 million (including deferred financing costs). In comparison, at September 30, 2020, the corresponding amounts were approximately $84.6 million and $72.5 million, respectively. In the 2021 period, interest and amortization of deferred financing costs was approximately $2.6 million compared to approximately $1.3 million in the same 2020 period, an increase of approximately $1.3 million, or 105.2%. The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $25,300, or 16.0%, (ii) compensation, fees and taxes which increased approximately $271,200, or 54.2%, (iii) general and administrative expenses which increased approximately $149,700, or 103.1%, an impairment loss of approximately $150,000 and an increase in the loss on sale of real estate of approximately $91,600. In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the three months ended September 30, 2020. Since July 2020, we hired a chief operating officer, chief investment officer and junior executives in accounting and administration, which resulted in increased compensation for the three and nine month periods ended September 30, 2021. Comprehensive income For the quarter ended September 30, 2021, we reported an unrealized loss on investment securities of approximately $500,000 reflecting the decrease in the market value of such securities since June 30, 2021. For the quarter ended September 30, 2020, we reported an unrealized loss on investment securities of approximately $73,000 reflecting the decrease in the market value of such securities since June 30, 2020. Net Income Net income attributable to common shareholders for the three months ended September 30, 2021 was approximately $3.4 million, or $0.12 per share, compared to approximately $2.1 million, or $0.10 per share for the three months ended September 30, 2020. 25 Table of Contents Nine months ended September 30, 2021 compared to nine months ended September 30, 2020 Total revenue Total revenue for the nine months ended September 30, 2021 was approximately $20.9 million compared to approximately $12.9 million for the nine months ended September 30, 2020, an increase of approximately $8.1 million, or 62.5%. The increase in revenue is primarily attributable to the growth in our lending operations. For the 2021 period, interest income was approximately $15.3 million compared to approximately $9.6 million for the 2020 period, representing an increase of approximately $5.7 million or 58.8%. Origination fees increased to approximately $2.3 million for the 2021 period compared to approximately $1.6 million for the 2020 period. Investment income increased to approximately $699,000 for the 2021 period compared to approximately $163,000 for the 2020 period due to our larger investment portfolio and more favorable market conditions during 2021. Net gain on the sale of investment securities was approximately $212,000 for the 2021 period compared to net gains of approximately $415,000 for the 2020 period. Other income was approximately $1.6 million for the 2021 period compared to approximately $904,000 for the 2020 period, an increase of approximately $676,000, or 74.8%. Finally, in the 2021 period we recognized gain on the forgiveness of debt of approximately $257,800. Operating costs and expenses Total operating costs and expenses for the nine months ended September 30, 2021 were approximately $11.9 million compared to approximately $6.3 million for the nine months ended September 30, 2020, an increase of approximately 90.6%. The increase in operating costs and expenses is primarily attributable to the increase in our unsecured bond debt while growing our lending operations and for the reasons discussed herein. In the 2021 period, interest and amortization of deferred financing costs was approximately $7.5 million compared to approximately $3.6 million in the same 2020 period, an increase of approximately $4.0 million, or 111.6%. The balance of the increase in operating expenses was attributable to (i) professional fees, which increased approximately $266,000, or 66.2%, (ii) compensation, fees and taxes which increased approximately $943,000, or 76.5%, (iii) general and administrative expenses which increased approximately $290,000, or 70.3% and (iv) an increase in the loss on sale of real estate of approximately $104,000. In November 2019 one of our co-chief executive officers and our director of marketing resigned, which reduced our compensation expense in the nine months ended September 30, 2020. Since July of 2020, we hired a chief operating officer, chief investment officer and junior executives in accounting and administration, which resulted in increased compensation for the nine month periods ended September 30, 2021. Comprehensive income For the nine months ended September 30, 2021, we reported an unrealized loss on investment securities of approximately $612,000 reflecting the decrease in the market value of such securities since December 31, 2020. For the nine months ended September 30, 2020, we reported an unrealized gain on investment securities of approximately $13,282 reflecting the increase in the market value of such securities since December 31, 2019. Net Income Net income attributable to common shareholders for the nine months ended September 30, 2021 was approximately $8.1 million, or $0.32 per share, compared to $6.6 million, or $0.30 per share for the nine months ended September 30, 2020. Liquidity and Capital Resources At September 30, 2021, cash and cash equivalents and investment securities totaled approximately $75.3 million compared to approximately $56.7 million at December 31, 2020. This increase is attributable to approximately $45.5 million of net proceeds from our Series A Offering (defined below) as well as common stock issuances. Total assets at September 30, 2021 were approximately $313.4 million compared to approximately $226.7 million at December 31, 2020, an increase of approximately $86.7 million, or 38.2%. The increase was due primarily to an increase in cash and cash equivalents and investment securities of approximately $18.6 million, our mortgage loan portfolio of approximately $64.3 million, investment in partnership of approximately $1.8 million, a net increase in property and equipment of approximately $756,000, and increases in due from borrowers of approximately $1.4 million and interest and fees receivable of approximately $885,000, offset by a decrease in real estate owned of approximately $2.1 million.The increase in property and equipment is due to the purchase of an office building in Branford, Connecticut that we expect to become our new corporate headquarters in 2022. 26 Table of Contents Total liabilities at September 30, 2021 were approximately $154.6 million compared to approximately $145.8 million at December 31, 2020, an increase of approximately $8.8 million, or approximately 6.1%. This increase is principally due to an increase in our line of credit of approximately $2.0 million, advances from borrowers of approximately $8.2 million (of which a majority represented prepaid interest), and deferred revenue of approximately $1.8 million, offset by decrease in dividends payable of approximately $2.7 million, mortgage payable of approximately $768,000, other loans of approximately $258,000, and accounts payable and accrued expenses of approximately $180,000. Total shareholders’ equity at September 30, 2021 was approximately $158.8 million compared to approximately $80.9 million at December 31, 2020, an increase of approximately $77.8 million. This increase was due primarily to our closing of the Series A Offering on June 29, 2021 and the partial exercise of the overallotment option to purchase an additional 203,000 shares of Series A Preferred Stock with aggregate net proceeds of approximately $45.5 million, net proceeds of approximately $30.9 million from the sale of stock and our net income to common shareholders of approximately $8.1 million. Net cash provided by operating activities for the nine months ended September 30, 2021 was approximately $17.3 million compared to approximately $7.4 million for same 2020 period. For the 2021 period net cash provided by operating activities consisted primarily of net income of approximately $9.0 million, amortization of deferred financing costs and bond discount of approximately $839,400, an impairment loss of approximately $469,000, increase in deferred revenue of approximately $1.8 million, and an increase in advances from borrowers of approximately $8.2 million, offset by a gain on sale of marketable securities of approximately $212,400 and a gain on forgiveness of debt of approximately $257,800, and an increase in interest and fees receivable of approximately $885,400, other receivables of approximately $361,000 and due from borrowers of approximately $1.4 million. For the 2020 period net cash from operations consisted primarily of net income of approximately $6.6 million, an impairment loss of $495,000, depreciation and amortization of deferred financing cost of approximately $357,500, an increase in advances from borrowers of approximately $565,700, and accounts payable and accrued expenses of approximately $272,600, offset by a realized gain on investments of approximately $415,300, increases in interest and fees receivable of approximately $180,300, amounts due from borrowers of approximately $273,200, and prepaid expenses of approximately $82,100, and a decrease in deferred revenue of approximately $91,000. Net cash used for investing activities for the nine months ended September 30, 2021 was approximately $85.0 million compared to approximately $41.4 million for the comparable 2020 period. For the 2021 period, net cash used for investing activities consisted primarily of net principal disbursements for mortgages receivable of approximately $64.3 million, purchase of an interest in investment partnership of approximately $1.8 million, net purchases of investment securities of approximately $19.2 million, acquisitions of and improvements to real estate owned of approximately $333,400, purchase of property and equipment of approximately $817,800 and costs in connections with investment activities of approximately $281,000, offset by proceeds from the sale of real estate owned of approximately $1.8 million. For the 2020 period, net cash used for investing activities consisted primarily of net principal disbursements for mortgages receivable of approximately $30.2 million, net purchases of investment securities of approximately $11.3 million and the purchase of property and equipment of approximately $118,000, and improvements to real estate owned of approximately $1.6 million, offset by proceeds from the sale of real estate owned of $1.8 million. Net cash provided by financing activities for the nine months ended September 30, 2021 was approximately $67.5 million compared to approximately $20.5 million for the comparable 2020 period. Net cash provided by financing activities for the 2021 period consists principally of the net proceeds from issuance of common shares of approximately $30.9 million, net proceeds from the issuance of preferred stock of approximately $45.5 million and proceeds from our line of credit of approximately $2.0 million, which increases were offset by dividends paid on common stock of approximately $8.8 million, dividends paid on preferred stock of approximately $932,000, repayment of mortgage payable of approximately $768,000 and financing costs incurred of approximately $451,000. Net cash provided by financing activities for the 2020 period consists principally of the net proceeds from the issuance of fixed rate notes of approximately $14.4 million, proceeds from our line of credit of approximately $12.1 million and proceeds from other loans of approximately $258,000, which were offset by dividends paid of approximately $5.3 million and the payment of financing costs of approximately $852,000. In June 2021 and July 2021, we raised aggregate net proceeds of approximately $45.5 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of an aggregate of 1,903,000 shares of our Series A Preferred Stock in a firm commitment underwritten public offering at a public offering price of $25.00 per share, equal to the liquidation preference (the “Series A Offering”) as described in Notes 11 and 14 to the accompanying financial statements. 27 Table of Contents On July 21, 2021, we consummated a $200 million Facility with Churchill, a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York. Under the terms of the Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans. We intend to use the proceeds from the Facility to finance the continued expansion of our lending business and for general corporate purposes. (See above and Note 6 to the attached financial statements.) We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs. Our short-term cash requirements primarily include funding of loans and payments for usual and customary operating and administrative expenses, such as interest payments on notes payable, employee compensation, sales, marketing expenses and dividends. Based on this analysis, we believe that our current cash balances and investment securities, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months. Our long-term cash needs will include principal payments on outstanding indebtedness, preferred dividends and funding of new mortgage loans. Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows and proceeds from sales of real estate owned. From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our common shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains). Subsequent Events From October 1, 2021 through November 1, 2021, we sold 968,779 common shares in an at-the-market offering (see Note 11) which raised $5,411,273 in net proceeds. On October 13, 2021, the board of directors declared a dividend of $0.12 per common share payable on October 29, 2021 to shareholders of record as of October 25, 2021. Off-Balance Sheet Arrangements We are not a party to any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources. Contractual Obligations As of September 30, 2021, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment and software licenses. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than ​ 1 – 3 ​ 3 – 5 ​ More than ​ Total 1 year years years 5 years Operating lease obligation $ 6,044 $ 4,393 $ 1,651 $ — $ — Unfunded loan commitments ​ 61,707,185 ​ 61,707,185 ​ — ​ — ​ — Total contractual obligations ​ $ 61,713,229 ​ $ 61,711,578 ​ $ 1,651 ​ $ — ​ $ — ​ Critical Accounting Policies and Recent Accounting Pronouncements See “Note 2 — Significant Accounting Policies” to the financial statements for explanation of recent accounting pronouncements impacting us included elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. ​ Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this Item. ​ 28 Table of Contents