What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-10 compared with 2022-05-04 · 122 added, 79 removed, 176 unchanged (53% of the section changed)

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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.

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, expand our mortgage loan portfolio and 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 meet 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.

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As a REIT, we may also be subject to federal excise taxes and state taxes.

Review of the First Quarter and Outlook for Balance of Year

Compared to the first quarter of 2021, revenue increased 80.3%, net income attributable to common shareholders increased 57.1%, and earnings per share remained unchanged at $0.10 per share.

Review of the First Half of 2022 and Outlook for Balance of Year

Compared to the first half of 2021, revenue increased 83.9%, net income attributable to common shareholders increased 64.1%, and earnings per share increased $0.02 per share, or 8.2%.

The revenue increase was directly related to the growth in our lending activities, reflected in our interest income which had an increase of 105.6% and our origination fees that had an increase of 173.0%.

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The increase in compensation expense is mainly attributable to the addition of a Chief Investment Officer in April 2021 as well as additional support staff in our operations and finance teams, positions that are part of our long-term growth strategy.

Mortgages receivable increased by 125.6% compared to March 31, 2021, while cash and cash equivalents increased 215.4%.

The increase in both mortgages receivable and cash and cash equivalents were primarily due to increase in lending and two public note offerings, a preferred stock offering and our at-the-market offerings.

With the hiring of a new Chief Financial Officer in the third quarter of 2022,and additional accounting staff to support him, we expect compensation to continue to increase.

Mortgages receivable increased by 144.5% compared to June 30, 2021, while cash and cash equivalents decreased 53.2%.

The increase in both mortgages receivable and decrease in cash and cash equivalents were primarily due to an increase in lending.

Our primary business objective for 2022 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.

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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 procedures and forms.

To that end, in the third quarter of 2021 we rolled out a new underwriting model that automated the production of our loan documentation — term sheets, proof of funds, etc.

To drive operational excellence, we have embarked on a broad 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 procedures and forms.

To that end, in the second quarter of 2022 we rolled out a new web-based underwriting platform that further automates our underwriting process.

The automation allows for more accurate and timely processing of loan applications, thus increasing loan production while keeping our employee headcount down.

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● operate to qualify as a REIT and for an exemption from registration under the Investment Company Act of 1940, as amended.

We expect 2022 to be a challenging year due to the following factors:

The novel corona virus known as COVID-19 remains a concern as the risk of new variants and the attendant personal and economic disruption is still prevalent.

We expect the second half of 2022 to be challenging due to the following factors:

Interest rates and inflation.

Since the beginning of the current year, the Federal Reserve Board has raised interest rates four times:

0.25% in March;

0.75% in June and 0.75% in July.

These are the first interest increases since December 2018.

As a result, the prime rate has increase from 3.25% to 5.50%.

The Fed’s rate increases are in response to a sharp increase in the annual rate of inflation in the United States, which is currently 9.1%, the highest its been in decades.

As a result of these increases, the growth of the U.S.

economy has slowed, with a decrease in U.S.

GDP reported in both the first quarter and second quarter of 2022.

If the second quarter decrease is confirmed later this month, the United States would officially be in a recession.

Until now, these economic factors have not had an adverse impact on our business other than to increase our borrowing costs on our variable rate indebtedness ( i.e., the Wells Fargo Loan and the Churchill Facility.) However, any fixed rate indebtedness that we incur in the future is likely to be more expensive than our current fixed rate indebtedness.

In addition, if these trends continue, they could result in decreased demand for our products and a decrease in property valuations, which could have an adverse impact on the ability of our borrowers to repay their loans.

Thus, we cannot assure you that our business, operations and financial condition will not be adversely impacted.

The novel corona virus known as COVID-19 remains a concern as the risk of new variants and the related personal and economic disruption is still prevalent.

In terms of dealing with 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.

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Finally, the filing of loan documents with the various recording offices may be delayed.

Interest rate compression.

For the three months ended March 31, 2022 and 2021, the yield on our mortgage loan portfolio was 11.30% and 11.73%, 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 in 2022, particularly as the Federal Reserve Board has begun to increase interest rates, thereby increasing borrowing costs and the cost of capital.

This will have a direct impact on our future borrowing costs and on the amounts we borrow under the Churchill Facility (described below), the Wells Fargo Loan (described below) and the NHB Mortgage (described below), all of which are adjustable rate products.

We seek to mitigate some of the risk associated with rising rates by limiting the term of most new loans to one year.

The interest rates we charge on our loans are subject to a variety of factors including competition (see below) and consumer reluctance due to inflation and general economic conditions.

If we cannot increase the rates on our loans, the spread between our cost of capital and what we earn on that capital will be reduced, which would adversely impact our income.

On the other hand, since the interest rate on a portion of our outstanding indebtedness is fixed, we have reduced the risk of interest rate compression if interest rates increase.

That will enable us to continue to focus on growth and building market share rather than short-term profits and cash flow.

Geopolitical concerns.

The Russian Ukrainian war has caused market volatility, spikes in commodity prices, supply chain interruptions, heightened cybersecurity concerns and general concerns that it might lead to unconventional warfare.

ramifications of this conflict and their impact on the markets and our business are not fully known at this time.

Our business is purely domestic, but we are impacted by market volatility and cybersecurity is a concern for all businesses.

As our business is purely domestic, except for issues related to market volatility, rising interest rates and cybersecurity concerns, the war has had limited impact on our operations.

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.

In the past, our primary competitors were other non-bank real estate finance companies, 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.

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Increased operating expenses.

Our operating expenses for the three months ended March 31, 2022 are significantly higher than they were in the same period in 2021 due to our higher debt load, increased headcount, and increased loan volume.

Our operating expenses for the three and six months ended June 30, 2022 are significantly higher than they were in the same period in 2021 due to our higher debt load, increased headcount, and increased loan volume.

In addition, 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.

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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 March 31, 2022, our mortgage loan portfolio included 204 loans with future funding obligations, in the aggregate principal amount of approximately $115.4 million, compared to 129 loans in the aggregate principal amount of approximately $23.5 million at March 31, 2021.

At June 30, 2022, our mortgage loan portfolio included 191 loans with future funding obligations, in the aggregate principal amount of approximately $119.1 million, compared to 130 loans in the aggregate principal amount of approximately $31,845,533 at June 30, 2021.

The increase is due to an increase in construction loan originations, a large portion of which is in the Florida market.

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In order to deal with these obligations, we are compelled to maintain higher cash balances, which could adversely impact our financial performance.

Despite the challenges we faced in 2021, the changing dynamics of the real estate finance marketplace, supply chain disruptions, and the impact of COVID-19, we continue to believe in the viability of our business model.

Despite these challenges, the changing dynamics of the real estate finance marketplace, the debt and equity markets, supply chain disruptions, and the impact of COVID-19, we continue to believe in the viability of our business model.

We believe that there continues to be a significant market opportunity for a well-capitalized “hard money” lender to originate attractively priced loans to small- and mid-scale real estate developers with good collateral, particularly in markets where, traditionally, real estate values are stable and substandard properties are improved, rehabilitated, and renovated as well as under-developed markets that are experiencing rapid growth due to population shifts.

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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 March 31, 2022, debt represented approximately 55.5% of our total capital compared to 63.0% at March 31, 2021.

At June 30, 2022, debt represented approximately 59.3% of our total capital compared to 50.6% at June 30, 2021.

To prudently grow the business and satisfy the tax requirement to distribute 90% of our taxable income, we expect to maintain our current level of debt and look to reduce our cost of capital.

We intend to continue to leverage our portfolio for the sole purpose of financing our portfolio and not for speculating on changes in interest rates, particularly while interest rates remain low.

As of March 31, 2022, we had five series of unsecured unsubordinated notes outstanding, having an aggregate outstanding principal balance of $216.3 million (collectively, the “Notes”) all of which rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness and are effectively subordinated in right of payment to all existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant a security interest) and structurally subordinated to all existing and future indebtedness of our subsidiaries.

As of June 30, 2022, we had six series of unsecured unsubordinated notes outstanding, having an aggregate outstanding principal balance of $248.2 million (collectively, the “Notes”) all of which rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness and are effectively subordinated in right of payment to all existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant a security interest) and structurally subordinated to all existing and future indebtedness of our subsidiaries.

Interest on each series of notes is payable quarterly in arrears on each March 30, June 30, September 30 and December 30 of each year they are outstanding and, except as noted below, each series can be prepaid beginning on the second anniversary of its date of issuance.

● $50,000,000 aggregate original principal amount, issued March 9, 2022, bearing interest at the rate of 6.00% per annum and maturing on March 30, 2027 (the “2027 Notes”) and which trade on the NYSE American under the symbol SCCE;

The net proceeds, net of the deferred financing cost, is approximately $237.5 million.

● $30,000,000 aggregate original principal amount, issued May 11, 2022, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2027 (the “June 2027 Notes”) and which trade on the NYSE American under the symbol SCCF;

● $51,875,000 aggregate original principal amount, issued March 9, 2022, bearing interest at the rate of 6.00% per annum and maturing on March 30, 2027 (the “March 2027 Notes”) and which trade on the NYSE American under the symbol SCCE;

● $51,750,000 aggregate original principal amount, issued December 20, 2021, bearing interest at the rate of 6.00% per annum and maturing on December 30, 2026 (the “2026 Notes”) and which trade on the NYSE American under the symbol SCCD;

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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 five 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 (x) pay any dividends or make distributions in excess of 90% of our taxable income, (y) incur any indebtedness or (z) 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.

All six 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 (x) pay any dividends or make distributions in excess of 90% of our taxable income, (y) incur any indebtedness or (z) 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.

Under the terms of the Indenture, 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, September 4, 2022, in the case of the 2025 Notes, December 20, 2023, in the case of the 2026 Notes, and March 9, 2024, in the case of the 2027 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.

Under the terms of the Indenture, 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, September 4, 2022, in the case of the 2025 Notes, December 20, 2023, in the case of the 2026 Notes, March 9, 2024, in the case of the March 2027 Notes and May 11, 2024, in the case of the June 2027 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.

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It also gives us the flexibility to seek other sources of funding.

At March 31, 2022, the amount outstanding under the Churchill Facility was approximately $26.9 million, which amount was accruing interest of an effective rate of 4.70% per annum.

At June 30, 2022, the amount outstanding under the Churchill Facility was approximately 39.4 million, which amount was accruing interest of an effective rate of 5.44% per annum.

In 2020, we established a margin loan account with Wells Fargo that allows us to borrow against our investment securities portfolio (the “Wells Fargo Loan”).

The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $23.3 million at March 31, 2022.

The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $23.4 million at June 30, 2022.

The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate.

The interest rate at March 31, 2022 was 1.75%.

In 2021, we obtained a new adjustable-rate mortgage loan from New Haven Bank for up to a maximum principal amount of $1.4 million (the “NHB Mortgage”) of which $750,000 is outstanding as of December 31, 2021.

The purpose of the NHB Mortgage is to fund the cost of our acquisition and renovation of the property located at 568 East Main Street, Branford, Connecticut, which, once renovated, will become our new corporate headquarters.

At June 30, 2022, the prime rate was 4.75% and the interest rate on the Wells Fargo Loan was 3.00%.

However, on July 27, 2022, the Federal Reserve Board raised interest rates 0.75%, which will result in an increase in the prime rate and other interest rate benchmarks.

Other than increasing our borrowing costs under the Wells Fargo Loan, it is too early to tell what impact this latest rate increase will have on our business, operations and/or financial condition.

In 2021, we obtained a new adjustable-rate mortgage loan from New Haven Bank for up to a maximum principal amount of $1.4 million (the “NHB Mortgage”) of which $750,000 was outstanding at June 30, 2022.

The initial proceeds of the NHB Mortgage were used to offset some of the costs we incurred to acquire the property located at 568 East Main Street, Branford, Connecticut, which, once renovated, will become our new corporate headquarters.

The balance of the NHB Mortgage will be funded when those renovations are completed.

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Beginning on December 1, 2022 and through December 1, 2037 (the “Amortization Period”), principal and interest will be due and payable on a monthly basis.

All payments under the NHB Mortgage are amortized based on a 20-year amortization schedule.

Payments of principal will be based on a 20-year amortization schedule.

The interest rate will be adjusted on each fifth anniversary of the commencement of the Amortization Period to the then published 5-year Federal Home Loan Bank of Boston Classic Advance Rate, plus 2.60%.

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Finally, from time-to-time we raise capital by selling our common shares in various at-the market offerings.

During the three months ended March 31, 2022, we sold an aggregate of 2,730,725 common shares pursuant to an at-the-market offering for which we realized aggregate net proceeds of approximately $15.5 million.

During the six months ended June 30, 2022, we sold an aggregate of 3,867,157 common shares pursuant to an at-the-market offering for which we realized aggregate net proceeds of approximately $21.3 million.

REIT Qualification

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Once adopted, we must continue to report on that basis until we no longer qualify as an emerging growth company.

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.

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.

Results of Operations

Three months ended March 31, 2022 compared to three months ended March 31, 2021

Three months ended June 30, 2022 compared to three months ended June 30, 2021

Total revenue

Total revenue for the three months ended March 31, 2022 was approximately $10.3 million compared to approximately $5.7 million for the three months ended March 31, 2021, an increase of approximately $4.6 million, or 80.3%.

Total revenue for the three months ended June 30, 2022 was approximately $12.5 million compared to approximately $6.7 million for the three months ended June 30, 2021, an increase of approximately $5.8 million, or 86.9%.

The increase in revenue is primarily attributable to an increase in our lending operations.

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Origination fees were approximately $2.0 million compared to approximately $832,000 for the 2021 period, representing an increase of approximately $1.2 million or 145.9%.

Other income was approximately $610,000 for the 2022 period compared to approximately $457,000 for the 2021 period, an increase of approximately $153,000 or 33.5%, offset by unrealized losses on investment securities of approximately $1.1 million compared to $0 for the 2021 period.

For the three months ended June 30, 2022, revenue was offset by approximately $1.5 million of unrealized losses on investment securities.

There was no such offset in the comparable 2021 period.

Operating costs and expenses

Total operating costs and expenses for three months ended March 31, 2022 were approximately $5.9 million compared to approximately $3.5 million for the three months ended March 31, 2021, an increase of approximately 68.6%.

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 hereinabove.

Total operating costs and expenses for three months ended June 30, 2022 were approximately $7.3 million compared to approximately $4.2 million for the three months ended June 30, 2021, an increase of approximately $3.1 million, or 75.0%.

The increase in operating costs and expenses is primarily attributable to the increase in our unsecured indebtedness, which was the fuel for our revenue growth, and an increase in compensation expense of approximately 46.3%.

In the 2022 period, interest and amortization of deferred financing costs was approximately $5.2 million compared to approximately $2.5 million in the same 2021 period, an increase of approximately $2.7 million or 108.0%.

The balance of the increase in operating expenses was primarily attributable to (i) compensation, fees and taxes which increased approximately $376,000, and (ii) general and administrative expenses which increased approximately $169,000, offset by gain on sale of real estate, which decreased approximately $203,000.

Comprehensive income

For the quarter ended June 30, 2022, we reported an unrealized loss on investment securities of approximately $193,000 reflecting the decrease in the market value of certain securities since March 31, 2022.

For the quarter ended June 30, 2021, we reported an unrealized loss on investment securities of approximately $104,000 reflecting the decrease in the market value of certain securities since March 31, 2021.

Net income attributable to common shareholders for the three months ended June 30, 2022 was approximately $4.3 million, or $0.12 per share, compared to approximately $2.5 million, or $0.10 per share for the three months ended June 30, 2021.

Six months ended June 30, 2022 compared to six months ended June 30, 2021

Total revenue

Total revenue for the six months ended June 30, 2022 was approximately $22.8 million compared to approximately $12.4 million for the six months ended June 30, 2021, an increase of approximately $10.4 million, or 83.9%.

The increase in revenue is primarily attributable to the growth in our lending operations.

For the 2022 period, interest income was approximately $18.9 million compared to approximately $9.2 million for the 2021 period, representing an increase of approximately $9.7 million or 105.6%.

Origination fees increased to approximately $3.7 million for the 2022 period compared to approximately $1.3 million for the 2021 period, an increase of approximately $2.3 million, or 173.0%.

Income from partnership investments increased to approximately $589,000 for the 2022 period compared to approximately $54,000 for the 2021, an increase of approximately $535,000.

Other income was approximately $1.4 million for the 2022 period compared to approximately $1.3 million for the 2021 period, an increase of approximately $153,000.

For the six months ended June 30, 2022, revenue was offset by approximately $2.5 million of unrealized losses on investment securities.

There was no such offset in the comparable 2021 period.

Operating costs and expenses

Total operating costs and expenses for six months ended June 30, 2022 were approximately $13.3 million compared to approximately $7.7 million for the six months ended June 30, 2021, an increase of approximately $5.6 million, or 72.1%.

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 2022 period, interest and amortization of deferred financing costs was approximately $9.1 million compared to approximately $5.0 million in the same 2021 period, an increase of $4.1 million, or 83.3%.

The balance of the increase in operating expenses was primarily attributable to (i) impairment loss, which increased approximately $236,000, (ii) compensation, fees and taxes which increased approximately $402,000, and (iii) general and administrative expenses which increased approximately $242,000.

The balance of the increase in operating expenses was attributable to (i) compensation, fees and taxes which increased approximately $778,000, or 55.4%, (ii) general and administrative expenses which increased approximately $410,000, or 100.5%, (iii) other expenses and taxes which increased approximately $115,000 and (iv) impairment loss which increased approximately $277,000, or 86.7%.

Comprehensive income

For the quarter ended March 31, 2022, we reported an unrealized gain on investment securities of approximately $243,000 reflecting the decrease in prior unrealized losses since December 31, 2021.

For the quarter ended March 31, 2021, we reported an unrealized loss on investment securities of approximately $7,500 reflecting the decrease in the market value of such securities since December 31, 2020.

Net income attributable to common shareholders for the three months ended March 31, 2022 was approximately $3.4 million, or $0.10 per share, compared to approximately $2.2 million, or $0.10 per share for the three months ended March 31, 2021.

Adjusted Earnings

For the six months ended June 30, 2022, we reported an unrealized gain on investment securities of approximately $50,000 reflecting the increase in the market value of such securities since December 31, 2021.

For the six months ended June 30, 2021, we reported an unrealized loss on investment securities of approximately $112,000 reflecting the decrease in the market value of such securities since December 31, 2020.

Net income attributable to common shareholders for the six months ended June 30, 2022 was approximately $7.7 million, or $0.22 per share, compared to $4.7 million, or $0.20 per share for the six months ended June 30, 2021.

Non-GAAP Metrics – Adjusted Earnings

We invest our excess cash in marketable securities.

Under GAAP, those securities are required to be “marked to market” at the end of each reporting period.

Accordingly, if the value of certain of those securities increases, the increase is reported as revenue, whereas the remaining increase is reported as a change in accumulated other comprehensive income.

On the other hand, if the value decreases, as has been the case in the first two quarters of 2022, the decrease in value of certain of the securities reduces our revenues.

For income tax purposes, we do not report the gain or loss on those securities until they are actually sold.

This creates a discrepancy between our GAAP net income and our taxable income.

To maintain our status as a REIT, we are required to distribute, on an annual basis, at least 90% of our taxable income.

Thus, to give our shareholders a better perspective of our taxable income, we use a metric called Adjusted Earnings.

Adjusted Earnings is calculated as net income attributable to common shareholders, prior to the effect unrealized gains (losses) on securities available-for-sale.

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Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with generally accepted accounting principles in the United States of America (“GAAP)), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders.

Rather, Adjusted Earnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our

operating performance.

It should be noted that our manner of calculating Adjusted Earnings may differ from the calculations of similarly-titled measures by other companies.

For the Period Ended March 31,

In addition, there may be other differences between GAAP and tax accounting that would impact Adjusted Earnings, which are not reflected in the table below.

For the Three Month

For the Six Month

Period Ended June 30,

Adjusted Earnings:

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Adjusted earnings attributable to common shareholders

Adjusted earnings per share was $0.13.

For the three months ended June 30, 2022 adjusted earnings per share was $0.16.

For the six months ended June 30, 2022 adjusted earnings per share was $0.29.

There were no unrealized gains or losses on investment securities reported in net income for the six month period ended June 30, 2021.

Liquidity and Capital Resources

At March 31, 2022, cash and cash equivalents and investment securities totaled approximately $93.4 million compared to approximately $102.6 million at December 31, 2021.

This decrease was reflected by an increase in mortgages receivable.

Total assets at March 31, 2022 were approximately $481.8 million compared to approximately $418.0 million at December 31, 2021, an increase of approximately $63.8 million, or 15.3%.

At June 30, 2022, cash and cash equivalents and investment securities totaled approximately $63.5 million compared to approximately $102.6 million at December 31, 2021.

The decrease in cash and cash equivalents and investment securities is a reflection that we were drawing down those assets to fund new loans.

Some of the cash represented the proceeds from the sale of the June 2027 Notes.

Total assets at June 30, 2022 were approximately $525.4 million compared to approximately $418.0 million at December 31, 2021, an increase of approximately $107.4 million, or 25.7%.

The increase was due primarily to the increase of our mortgage loan portfolio of approximately $130.1 million, an increase in investments in partnerships of approximately $13.6 million, offset in part by a decrease in cash and cash equivalents and investment securities of approximately $39.1 million.

Total liabilities at March 31, 2022 were approximately $282.4 million compared to approximately $237.9 million at December 31, 2021, an increase of approximately $44.5 million, or approximately 18.7%.

This increase is principally due to an increase in the repurchase facility of approximately $7.9 million and the notes payable, net of deferred financing costs, of approximately $48.5 million, offset by decreases in the accrued dividends payable of approximately $3.9 million and line of credit of approximately $9.9 million.

Total shareholders’ equity at March 31, 2022 was approximately $199.4 million compared to approximately $180.1 million at December 31, 2021, an increase of approximately $19.3 million.

Total liabilities at June 30, 2022 were approximately $320.4 million compared to approximately $237.9 million at December 31, 2021, an increase of approximately $82.5 million, or 34.7%.

This increase is principally due to increases in the repurchase facility of approximately $20.3 million, or 106.3%, and the notes payable, net of deferred financing costs, of approximately $79.7 million, or 49.6%, offset primarily by decreases in the accrued dividends payable of approximately $3.9 million, line of credit of approximately $9.8 million and advances from borrowers of approximately $3.7 million.

Total shareholders’ equity at June 30, 2022 was approximately $205.0 million compared to approximately $180.1 million at December 31, 2021, an increase of approximately $24.9 million.

This increase was due primarily to net proceeds of $21.2 million from the sale of common shares and our net income attributable to common shareholders of approximately $7.7 million.

Net cash provided by operating activities for the three months ended March 31, 2022 was approximately $7.8 million compared to approximately $2.8 million for same 2021 period.

For the 2022 period net cash provided by operating activities consisted primarily of net income of approximately $5.4 million, amortization of deferred financing costs and bond discount of $469,000, an impairment loss of $261,000, a loss on the sale of marketable securities of $154,000, unrealized loss on investment securities of approximately $1.1 million, and increases in advances from borrowers of approximately $1.6 million, deferred revenue of $233,000 and accrued interest of $122,000, offset by increases in interest and fees receivable of $294,000, other receivables of $211,000 and due from borrowers of $171,000 .

For the 2021 period net cash provided by operating activities consisted primarily of net income of $2.2 million, amortization of deferred financing costs and bond discount of $244,000, a loss on the sale of investment securities of $129,000, and increases in accounts payable and accrued expenses of $164,000, deferred revenue of $85,000 and advances from borrowers of $873,000, offset by an increase in interest and fees receivable of $63,000, other receivables of $346,000, due from borrowers of $499,000 and prepaid expenses of $102,000.

Net cash used for investing activities for the three months ended March 31, 2022 was approximately $48.7 million compared to approximately $2.1 million for the comparable 2021 period.

For the 2022 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $27.5 million, purchases of interests in investment partnerships of approximately $11.4 million and principal disbursements for mortgages receivable of approximately $88.7 million, offset by principal collections on mortgages receivable of approximately $27.3 million, proceeds from the sale of investment securities and proceeds from the sale of real estate owned of $623,000.

For the 2021 period, net cash used for investing activities consisted primarily of principal disbursements for mortgages receivable of approximately $31.7 million, purchase of an interest in investment partnership of approximately $1.8 million, purchase of investment securities of approximately $22.8 million, offset by principal collections on mortgages receivable of approximately $30.5 million and proceeds from the sale of investment securities of approximately $23.6 million.

Net cash provided by financing activities for the three months ended March 31, 2022 was approximately $56.8 million compared to approximately $1.8 million of cash used for the comparable 2021 period.

Net cash provided by financing activities for the 2022 period consists principally of net proceeds from the issuance of fixed rate notes of $48.2 million, net proceeds from the issuance of common shares of approximately $15.5 million and net proceeds from repurchase facility of approximately $7.9 million, offset by repayment of line of credit of approximately $9.9 million, dividends paid on common shares of approximately $3.9 million and dividends paid on preferred stock of $922,000.

Net cash used for financing activities for the 2021 period consists principally of dividends paid of approximately $2.7 million and repayment of mortgage payable of approximately $768,000, offset by proceeds from the sale of common shares of approximately $1.5 million and proceeds from our line of credit of approximately $105,000.

Net cash provided by operating activities for the six months ended June 30, 2022 was approximately $7.3 million compared to approximately $6.1 million for same 2021 period.

For the 2022 period net cash provided by operating activities consisted primarily of net income of approximately $9.6 million, amortization of deferred financing costs and bond discount of $1.1 million and unrealized loss on investment securities of approximately $2.5 million offset by increases in interest and fees receivable of $1.6 million, due from borrowers of $1.1 million and decreases in advances from borrowers of approximately $3.7 million.

For the 2021 period net cash provided by operating activities consisted primarily of net income of $4.7 million, amortization of deferred financing costs and bond discount of $503,000, an impairment loss of $319,000, increase in deferred revenue of 131,000, and an increase in advances from borrowers of $1.2 million, offset by an increase in interest and fees receivable of $198,000, other receivables of $64,000, due from borrowers of $281,000, prepaid expenses of $82,000, and a gain on extinguishment of debt of $258,000.

Net cash used for investing activities for the six months ended June 30, 2022 was approximately $120.6 million compared to approximately $26.7 million for the comparable 2021 period.

For the 2022 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $36.1 million, purchases of interests in investment partnerships of approximately $13.6 million and principal disbursements for mortgages receivable of approximately $192.0 million, offset by principal collections on mortgages receivable of approximately $60.9 million, proceeds from the sale of investment securities $59.7 million and proceeds from the sale of real estate owned of $1.4 million.

For the 2021 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $85.5 million, principal disbursements for mortgages receivable of approximately $75.2 million and purchase of interests in investment partnerships of approximately $1.8 million, offset by principal collections on mortgages receivable of approximately $58.0 million, proceeds from the sale of investment securities $78.1 million and proceeds from the sale of real estate owned of $919,000.

Net cash provided by financing activities for the six months ended June 30, 2022 was approximately $100.4 million compared to approximately $63.4 million of cash used for the comparable 2021 period.

Net cash provided by financing activities for the 2022 period consists principally of net proceeds from the issuance of fixed rate notes of $78.8 million, net proceeds from the issuance of common shares of approximately $21.2 million and net proceeds from repurchase facility of approximately $20.3 million, offset primarily by repayment of line of credit of approximately $9.7 million, dividends paid on common shares of approximately $8.3 million and dividends paid on preferred stock of approximately $1.8 million.

Net cash provided by financing activities for the 2021 period consists principally of the net proceeds from issuance of common shares of $22.9 million, net proceeds from the issuance of preferred stock of $40.6 million and proceeds from our line of credit of $6.2 million, offset primarily by dividends paid of $5.4 million and repayment of mortgage payable of $768,000.

We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs.

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Subsequent Events

On April 4, 2022, we sold an additional $1,875,000 principal amount of the 2027 Notes pursuant to a partial exercise of the underwriters’ over-allotment option in the March 2027 Note Offering (see Note 8 — Financing Transactions) and realized net proceeds of approximately $1.8 million, after payment of underwriting discounts and commissions and estimated offering expenses.

In April 2022, we granted (i) 98,425 restricted common shares (having a market value of approximately $500,000) our chief executive officer.

One-third of such shares will vest on January 1, 2023, and an additional one-third will vest on each of January 1, 2024 and 2025 and (ii) 7,042 restricted common shares (having a market value of approximately $35,000) to our vice president of finance and operations.

One-third of such shares vested on the date of grant, and an additional one-third will vest on each of April 7, 2023 and 2024.

In addition, we increased the base salary for our chief executive officer to $750,000.

On April 1, 2022, the board of directors declared a dividend of $0.12 per common share payable on April 18, 2022 to shareholders of record as of April 11, 2022.

From April 1, 2022 through May 3, 2022, we sold an aggregate of 663,765 common shares under our at-the-market offering facility realizing gross proceeds of approximately $3.4 million.

On April 6, 2022, we received a term sheet for another note offering up to a maximum of $75 million aggregate principal amount.

We expect to make the offering in May 2022.

Management has evaluated subsequent events through May 3, 2022 the date on which the financial statements were available to be issued.

From July 1, 2022 through August 8, 2022, we sold an aggregate of 2,265,841 common shares under our at-the-market offering facility realizing gross proceeds of approximately $10.8 million.

On July 8, 2022, the board of directors declared a dividend of $0.14 per common share payable on July 28, 2022 to shareholders of record as of July 21, 2022.

On July 19, 2022, after shareholders approved an amendment to our charter at our 2022 Annual Meeting of Shareholders, we filed a Certificate of Amendment of the Certificate of Incorporation to increase the number of authorized common shares available for issuance from 100,000,000 to 200,000,000.

On July 19, 2022, we issued an aggregate of 15,000 restricted common shares to our three independent directors (i.e., 5,000 shares each), of which 3,750 shares vested immediately upon issuance and 3,750 shares will vest on each of July 19, 2023, 2024 and 2025.

On July 26, 2022, we entered into an agreement with John E.

Warch pursuant to which we will employ Mr.

Warch as our Chief Financial Officer and Executive Vice President.

Warch’s employment term commenced August 1, 2022 and will continue until terminated by either party.

His annual base compensation is $325,000.

In connection with this hire, John L.

Villano resigned as our Chief Financial Officer but will continue to serve as our Chief Executive Office and President.

Management has evaluated subsequent events through August 9, 2022 the date on which the financial statements were available to be issued.

Based on the evaluation, no adjustments were required in the accompanying financial statements.

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Contractual Obligations

As of March 31, 2022, 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, software licenses and investment in partnerships.

Operating lease obligation

As of June 30, 2022, 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, software licenses and investment in partnerships.

Investment in partnerships

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis