What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-31 · 139 added, 115 removed, 158 unchanged (62% of the section changed)

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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.

Actual results may differ materially from those anticipated in these forward-looking statements.

Company Overview

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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.

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.

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and earnings per common share increase $0.02 per share.

● We sold $51.75 million aggregate principal amount of 2026 Notes.

● We sold $45.5 million shares of Series A Preferred Stock.

● We sold $56.0 million of Common Shares.

● We closed the $200 million master repurchase financing facility with Churchill.

● We closed a $1.4 million mortgage loan with New Haven Bank to finance purchase and renovation of new corporate headquarters.

● We raised an aggregate of approximately $122.1 million of additional capital from the sale of Notes.

● We raised an aggregate of approximately $39.3 million of additional capital from the sale of Common Shares from our at-the-market offerings.

● We funded approximately $300.3 million of mortgage loans including loan modifications and construction draws.

● We significantly reduced our leverage, thereby mitigating the risks should economic conditions deteriorate.

● We reduced our leverage ratio, thereby mitigating the risks should economic conditions deteriorate.

At December 31, 2022, our capital structure was 59.3% debt and 40.7% equity compared to 56.9% debt and 43.1% equity at December 31, 2021.

● We 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.

Our executive team includes a chief executive and chief financial 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.

● We hired a new senior vice president and vice president of asset management, which allows us to create a new revenue stream.

● We 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 New York.

In addition to the aforementioned states, our current mortgage loan portfolio includes loans secured by properties in California, Maine, Maryland, Massachusetts, New Jersey, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee and Texas.

In addition, our current mortgage loan portfolio includes loans secured by properties in California, Georgia, Maine, Maryland, Massachusetts, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee and Texas.

We continue to look for opportunities in new markets that meet our underwriting and loan criteria.

● We implemented our strategy to fund 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.

● We continued implementing our strategy to fund 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 have implemented our strategy to partner and invest with local “hard money” real estate lenders creating satellite offices under the “Sachem” influence.

● Launched our new underwriting platform.

● We continued the enhancement of our underwriting guidelines to strengthen our documentation and collateral position on our loans.

Our primary business objective for 2023 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 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.

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 begun to focus 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.

To drive additional operational excellence, we continuously review, assess, and upgrade our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms.

Additionally, we continue to focus on developing relationships with larger scale wholesale brokers, furthering our efforts to attract larger borrowers with better credit quality.

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:

Our overall business strategy is as follows:

● 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;

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● remain flexible to capitalize on changing sets of investment opportunities that may be present in the various points of an economic cycle;

● continue to improve operational efficiencies and reduce general and administrative expenses as a percentage of revenue;

● maintain our status as a publicly-held company, subject to the reporting requirements of the Exchange Act, which gives us immediate access to the public markets for much-needed capital;

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We expect 2023 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.

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.

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, employees are expected to inform management immediately and follow state testing and contact tracing protocols.

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, it is likely to have some adverse impact on our operations.

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.

Interest rate compression.

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For the years ended December 31, 2022 and 2021, the yield on our mortgage loan portfolio was 11.50% and 11.57%, 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, the Wells Fargo Loan and the NHB Mortgage, all of which are adjustable rate products.

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

(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 2023, particularly as the Federal Reserve Board has continued to increase interest rates, thereby increasing our cost of capital.

The rates on our existing credit facilities, including the Churchill Facility, the Wells Fargo Loan and the NHB Mortgage (refinanced in February 2023), have all increased.

In addition, the interest rate on the September 2027 Notes, our last note offering in 2022, was 8%, the highest its ever been.

Overall, our weighted average cost of capital as of December 31, 2022 was 7.07% compared to 5.87% as of December 31, 2021.

Taking into account the refinancing of the NHB Mortgage on February 28, 2023, and increases in the rates of the Churchill Facility and Wells Fargo Loan after December 31, 2022, as of March 1, 2023, our weighted average cost of capital was 7.44%.

Although we closed the Needham facility on March 2, 2023, as of the date hereof we have not made any draws on that facility.

We seek to mitigate some of the risk associated with rising rates by limiting the term of new loans to one year, raising the rates on our loans and charging additional fees, where possible.

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 squeezed, which could adversely impact our income.

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 squeezed, 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 on interest rate compression when interest rates increase.

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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.

Various geopolitical concerns have led to market volatility, spikes in commodity prices, supply chain interruptions, heightened cybersecurity concerns and general concerns that it might lead to unconventional warfare.

These concerns include the ongoing war between Russia and Ukraine, heightened tensions between the United States and China, Iran’s pursuit of nuclear weapons and North Korea’s ongoing belligerence.

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

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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.

In the past, our primary competitors were other non-bank real estate finance companies (like Sachem Capital Corp.) and banks and other financial institutions.

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.

Competition is becoming more of a factor as we implement our strategy to focus on larger loans and more sophisticated borrowers.

They are well-funded and aggressive in

terms of pricing.

In addition, competition is becoming more of a factor as we implement our strategy to focus on larger loans and more sophisticated borrowers.

Given recent developments regarding mid-size regional banks, we believe competition from traditional banks will abate in 2023 rather than increase.

However, as banks pull back from the lending market, non-traditional lenders, such as non-bank real estate companies, hedge funds, private equity funds and insurance companies, are likely to step into the void.

Our principal competitive advantages include our experience, our reputation, our size and our ability to address the needs of borrowers in terms of timing and structuring loan transactions.

Borrower expectations.

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Our operating expenses for 2022 are significantly higher than they were in 2021 due to our higher debt load.

In addition, our aggregate dividend payments have been higher in 2021 than in 2020 due to an increase in the number of Common Shares outstanding as well as the issuance of our Series A Preferred Stock, which carries a 7.75% annual dividend rate.

In addition, our aggregate dividend payments have been higher in 2022 than in 2021 due to an increase in the number of Common Shares outstanding as well as the full year effect 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.

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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 the challenges we faced in 2021 and 2022, the changing dynamics of the real estate finance marketplace, supply chain disruptions, 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.

We also believe developers will prefer to borrow from us rather than other lending sources because of 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.

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.

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 our existing underwriting and loan criteria.

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.

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 December 31, 2022, debt represented approximately 59.3% of our total capital compared to 56.9% at December 31, 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 December 31, 2021, we had four series of unsecured unsubordinated notes outstanding, having an aggregate outstanding principal balance of $166.3 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.

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.

As of December 31, 2022, we had seven series of unsecured unsubordinated notes outstanding, having an aggregate outstanding principal balance of $288.4 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.

The net proceeds, net of the deferred financing costs, was approximately $276.4 million.

● $40,250,000 aggregate original principal amount, issued August 23, 2022, bearing interest at the rate of 8.00% per annum and maturing on September 30, 2027 (the “September 2027 Notes”) and which trade on the NYSE American under the symbol SCCG;

● $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 million 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;

● $56,363,750 million aggregate original principal amount, of which approximately $14.4 million was issued September 4, 2020, $14.0 million was issued October 23, 2020 and $28.0 million was issued December 22, 2020, bearing interest at the rate of 7.75% per annum and maturing on September 30, 2025 (the “2025 Notes”) and which trade on the NYSE American under the symbol SCCC;

The 2025 Notes are prepayable beginning on September 4, 2022;

● $34,500,000 million original principal amount, issued November 7, 2019, bearing interest at the rate of 6.875% per annum and maturing on December 30, 2024 (the “December 2024 Notes”) and which trade on the NYSE American under the symbol SACC;

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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 four 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 the 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, and December 20, 2023, in the case of the 2026 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 two years from the date of issuance redeem the Notes.

Accordingly, notes in the aggregate principal amount of approximately $114.5 million are currently redeemable.

Notes in the aggregate principal amount of $51.75 million will become redeemable on December 20, 2023 and Notes in the aggregate principal amount of $122.13 million will become redeemable at various dates in 2024.

In all cases, the

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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The cost of capital under the Churchill 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.

In November 2022, the Churchill Facility was amended to change the “benchmark” rate from 90-day LIBOR to 90-day SOFR.

This change had minimal impact on the interest rate.

Our obligations under the Churchill Facility are secured by a lien on the mortgage loans sold to Churchill.

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

The interest rate at December 31, 2021 was 1.5%.

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.

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

The NHB Mortgage accrues interest at an initial rate of 3.75% per annum for the first 72 months and is due and payable in full on December 1, 2037.

During the first 12 months, from December 1, 2021 to November 30, 2022, only interest will be due and payable.

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.

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%.

The NHB Mortgage is a non-recourse loan, secured by a first mortgage lien on 698 Main Street, Branford, Connecticut, our current corporate headquarters, and 568 East Main Street, Branford, Connecticut.

Once the NHB Mortgage is fully funded, the mortgage lien on 698 Main Street will be released.

In addition to the foregoing, 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 a firm commitment underwritten public offering at a public offering price of $25.00 per share, equal to the liquidation preference.

The Series A Preferred Stock is listed on the NYSE American and began trading under the symbol “SACHPRA” on July 6, 2021.

At December 31, 2022 the prime rate was 7.5% and the interest rate on the Wells Fargo Loan was, thus, 5.75%.

In 2021, we obtained a $1.4 million adjustable-rate mortgage loan from New Haven Bank (the “NHB Mortgage”) of which $750,000 was funded at closing and remained outstanding as of December 31, 2022.

The purpose of the NHB Mortgage was to fund the cost of our acquisition and renovation of the property located at 568 East Main Street, Branford, Connecticut, as our new corporate headquarters.

The balance of the NHB Mortgage was to be funded when those renovations were completed.

Prior to its refinancing in February 2023, as described below, the NHB Mortgage accrued interest at an initial rate of 3.75% per annum for the first 72 months and was to be due and payable in full on December 1, 2037.

During the first 12 months, from December 1, 2021 to November 30, 2022, only interest was due and payable.

Beginning December 1, 2022 and through December 1, 2037, principal and interest was to be due and payable monthly, based on a 20-year amortization schedule.

On February 28, 2023, we refinanced NHB Mortgage with a new $1.66 million adjustable-rate mortgage loan from New Haven Bank.

The new loan accrues interest at an initial rate of 5.75% per annum for the first 60 months.

The interest rate will be adjusted on each of March 1, 2028 and March 1, 2033 to the then published 5-year Federal Home Loan Bank of Boston Classic Advance Rate, plus 1.75%.

Beginning on April 1, 2023 and through March 1, 2038, principal and interest will be due and payable monthly, based on a 20-year amortization schedule.

The unpaid principal amount of the loan and all accrued and unpaid interest are due and payable in full on March 1, 2038.

The new loan is a non-recourse obligation, secured primarily by a first mortgage lien on the properties located 698 Main Street, Branford, Connecticut and 568 East Main Street, Branford, Connecticut.

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

During calendar year 2021, through these facilities we sold an aggregate of 10,490,188 common shares for which we realized aggregate net proceeds of approximately $56.0 million.

During calendar year 2022, through these offerings we sold an aggregate of 7,879,907 Common Shares for which we realized aggregate net proceeds of approximately $39.3 million.

As of the date of this Report, we have approximately $71.3 million of availability remaining for sale through one of these offerings.

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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.

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.

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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 of December 31, 2022, we ceased to be an emerging growth company.

However, we will still be a smaller reporting company and will continue to be exempt from the independent auditor certification requirement under Section 404 of the Sarbanes-Oxley Act.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with U.S.

GAAP in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

We base our use of estimates on (a) a preset number of assumptions that consider past experience, (b) future projections and (c) general financial market conditions.

The accompanying consolidated financial statements have been prepared in accordance with U.S.

generally accepted accounting principles (“GAAP”).

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Management will base the use of estimates on (a) various assumptions that consider prior reporting results, (b) projections regarding future operations and (c) general financial market and local and general economic conditions.

Actual amounts could differ from those estimates.

Interest income from commercial loans is recognized, as earned, over the loan period and origination fee revenue on commercial loans is amortized over the term of the respective note.

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.

Interest income from commercial loans is recognized, as earned, over the loan period, whereas origination and modification fee revenue on commercial loans are amortized over the term of the respective notes.

Results of Operations

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The increase in revenue was due primarily to an increase in lending operations.

For 2021, interest income was approximately $22.3 million, origination fees were approximately $3.4 million, other income was approximately $2.5 million, late and other fees were approximately $519,000 and processing fees were approximately $193,000, for a total of approximately $28.9 million, an increase of $11.7 million over the same items in 2020.

Income from other sources included gain on sale of investment securities, approximately $284,000, investment income, approximately $1.2 million, and net rental income, approximately $30,000.

Other income in 2021 included income from borrower charges of approximately $477,000, lender, overfunding, modification, extension, and inspection fees of $1.7 million, and in-house legal fees of $254,000.

Increased lending activity was driven almost exclusively by $151.4 million in net proceeds of new capital raised during the year, including approximately $56.0 million raised from the sale of Common Shares, $45.5 million raised from the sale of Series A Preferred Stock and $49.9 million raised from the sale of a new series of five-year unsecured unsubordinated notes.

For 2022, interest income was approximately $42.6 million compared to approximately $22.3 million for 2021, representing an increase of approximately $20.3 million or 91.1%.

Origination and modification fees increased to approximately $7.3 million for 2022 compared to approximately $4.3 million for 2021, an increase of approximately $3.0 million, or 69.3%.

Income from partnership investments increased to approximately $1.8 million for 2022 compared to approximately $142,000 for 2021, an increase of approximately $1.7 million.

Fee and other income was approximately $3.0 million for 2022 compared to approximately $2.3 million for 2021, an increase of approximately $0.7 million, or 29.1%.

For 2022, revenue was offset by approximately $3.0 million of unrealized losses on investment securities, while revenue included approximately $285,000 of unrealized gains in 2021.

Increased lending activity was driven almost exclusively by $156.8 million in net proceeds of new capital raised during the year, including approximately $39.3 million raised from the sale of Common Shares and $117.6 million raised from the sale of three new series of five-year unsecured unsubordinated notes.

In addition, we borrowed an additional $23.4 million pursuant to the Churchill Facility.

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The balance of the increase in operating expenses was attributable to (i) compensation (including stock-based compensation), fees and taxes, which increased approximately $2.2 million;

(ii) professional fees, which increased approximately $513,000;

(iii) general and administrative expenses, which increased approximately $538,000;

and (iv) other expenses, which increased approximately $142,000.

These increases are attributable to our increased level of operations and the implementation of certain of our growth strategies.

and (ii) general and administrative expenses, which increased approximately $0.9 million.

These increases are attributable to our increased level of operations, hiring of additional staff and the implementation of certain of our growth strategies.

Net income and net income per share

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Our net income per weighted average Common Share outstanding for 2022 was $0.46 compared to $0.44 for 2021.

Comprehensive Income

For the year ended December 31, 2022, we reported an unrealized loss on certain investment securities of approximately $85,500 reflecting the decrease in the market value of such securities, which is net of a reclass (reversal of losses from unrealized to realized totaling $310,000 from the sale of certain securities during 2022) since December 31, 2021.

For the year ended December 31, 2021, we reported an unrealized loss on certain investment securities of approximately $476,000 reflecting the decrease in the market value of such securities since December 31, 2020.

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 within net income, whereas the remaining increase is reported as a change in accumulated other comprehensive income.

On the other hand, if the value decreases, the decrease in value of certain of the securities reduces our net income.

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

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 of unrealized gains (losses) on securities available-for-sale – debt investments.

Adjusted Earnings should be examined in conjunction with net income (loss) as shown in our statements of comprehensive income.

Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with 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.

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.

Ended December 31,

Adjusted Earnings:

Net income attributable to common shareholders

Unrealized losses on investment securities – debt investments

Adjusted earnings attributable to common shareholders

For the year ended December 31, 2022 adjusted earnings per share was $0.54.

There were no unrealized gains or losses on investment securities reported in net income for the year ended December 31, 2021.

Liquidity and Capital Resources

Total assets at December 31, 2022 were approximately $565.7 million compared to approximately $418.0 million at December 31, 2021, an increase of approximately $147.7 million, or 35.3%.

The increase was due primarily to the growth in our mortgage loan portfolio, which increased approximately $136.7 million, an approximately $45.9 million increase in cash and short-term marketable securities, an approximately $1.6 million increase in due from borrowers, an approximately $1.9 increase in receivables, an approximately $739,000 increase in property and equipment, an approximately $192,000 increase in deferred financing costs, an approximately $200,000 increase in prepaid expenses, an approximately $6.1 million increase in investment in partnership, and an approximately $306,000 increase in other assets.

The increase was due primarily to the growth in our mortgage loan portfolio, which increased approximately $168.3 million, an approximately $1.6 million increase in due from borrowers, an approximately $2.6 million increase in interest and fees receivables, an approximately $1.9 million increase in property and equipment, an approximately $24.8 million increase in investment in partnerships, and an approximately $4.0 million increase in other assets.

These increases were offset by an approximately $54.3 million decrease in cash and investment securities and by an approximately $1.3 million decrease in real estate owned.

Total liabilities at December 31, 2022 were approximately $348.0 million compared to approximately $237.9 million at December 31, 2021, an increase of approximately $110.1 million, or approximately 46.3%.

This increase is principally due to an overall increase in our total indebtedness, which at December 31, 2021, was approximately $213.5 million compared to approximately $138.7 million at December 31, 2020 (in each case, net of deferred financing costs), an increase of $80.6 million primarily due to issuance of $51.75 million aggregate original principal amount of five-year, unsecured unsubordinated notes, a $5 million increase in the Wells Fargo Loan and a $19.1 million draw on the Churchill Facility.

The balance of the increase was attributable to an increase in advances from borrowers of approximately $13.2 million, an increase in deferred revenue of approximately $2.5 million, an increase in accounts payable and accrued expenses of approximately $129,000 and accrued dividends payable of approximately $1.3 million which were paid in January 2022.

This increase was principally due to an overall increase in our total indebtedness, which at December 31, 2022, was approximately $326.9 million compared to approximately $213.5 million at December 31, 2021 (in each case, net of deferred financing costs), an increase of $113.4 million primarily due to the issuance of approximately $119.5 million, net of deferred financing costs, of five year unsecured unsubordinate notes payable, increase in notes payable and approximately $23.4 million draw on the Churchill Facility, partially offset by a decrease in the Wells Fargo Loan of approximately of $29.6 million.

The balance of the increase was attributable to increases in accounts payable and accrued liabilities of approximately $0.7 million and accrued dividends payable of approximately $1.4 million.

The increases were partially offset by decreases in advances from borrowers of approximately $5.2 million, and in deferred revenue of approximately $0.3 million,

Total shareholders’ equity at December 31, 2022 was approximately $217.7 million compared to approximately $180.1 million at December 31, 2021, an increase of approximately $37.6 million.

This increase was due primarily to our net income of approximately $13.3 million, net proceeds from the sale of Common Shares of $56.0 million, net proceeds from the sale of our Series A Preferred Stock of approximately $45.5 million, offset by the aggregate of dividends paid and dividends declared of $13.6 million on our Common Shares with respect to 2021 income and dividends of $1.9 million paid on our Series A Preferred Stock.

This increase was due primarily to our net income of approximately $20.9 million, net proceeds from the sale of Common Shares of $39.3 million, issuance of 300,000 Common Shares totaling approximately $1.0 million for the purchase of Urbane New Haven, LLC’s assets, offset by the aggregate of dividends paid and dividends declared of $20.2 million on our Common Shares with respect to 2022 income and dividends of $3.7 million paid on our Series A Preferred Stock.

Net cash provided by operating activities in 2022 was approximately $13.1 million compared to approximately $27.8 million in 2021.

For 2022, net cash from operating activities was primarily the result of net income of approximately $20.9 million, amortization of deferred financing costs of approximately $2.1 million, unrealized losses on investment securities of approximately $3.0 million, an impairment loss of $905,000, stock based compensation of $495,000 and an increase in accounts payable and accrued liabilities of approximately $767,000, offset by increases in interest and fees receivable of approximately $2.6 million, other assets of approximately $3.6 million, due from borrower of approximately $1.6 million, accrued dividends payable of approximately $1.4 million, and decreases in deferred revenue of approximately $283,000 and advances from borrowers of approximately $5.2 million.

For 2021, net cash from operating activities was primarily the result of net income of approximately $13.3 million, amortization of deferred financing costs of approximately $1.2 million, an impairment loss of $719,000 and increases in deferred revenue of approximately $2.5 million, advances from borrowers of approximately $13.2 million, accrued interest of approximately $161,000 and accounts payable and accrued expenses of approximately $129,000, offset by a gain on sale of marketable securities of approximately $284,000, and increases in interest and fees receivable of approximately $1.9 million, and amounts due from borrowers of approximately $1.6 million.

For 2020, net cash from operating activities was primarily the result of net income of approximately $9.0 million, amortization of deferred financing costs of approximately $602,000, an impairment loss of $795,000, decreases in other receivables of approximately $74,000 and deposits on property and equipment of approximately $72,000, increases in deferred revenue of approximately $894,000, advances from borrowers of approximately $982,000 and accounts payable and accrued expenses of approximately $122,000, offset by a gain on sale of marketable securities of approximately $903,000, and increases in interest and fees receivable of approximately $505,000, and amounts due from borrowers of approximately $1.5 million.

Net cash used for investing activities for 2021 year was approximately $166.0 million compared to approximately $82.8 million in net cash used for 2020.

For 2021, the major contributors to net cash used for investing activities were the purchase of investments of approximately $204.0 million, acquisitions of and improvements to real estate owned of approximately $1.0 million, purchases of interests in investment partnerships of approximately $6.1 million, and principal disbursements on mortgages receivable of approximately $251.8 million.

These amounts were offset by proceeds from the sales of investments of approximately $180.5 million, proceeds from the sale of real estate owned of approximately $2.4 million, and principal collections on mortgages receivable of approximately $115.1 million.

For 2020, the major contributors to net cash used for investing activities were the purchase of investments of approximately $97.6 million, acquisitions of and improvements to real estate owned of approximately $1.8 million and principal disbursements on mortgages receivable of approximately $117.2 million.

Net cash used in investing activities for 2022 year was approximately $159.5 million compared to approximately $166.0 million in net cash used in 2021.

For 2022, the major contributors to net cash used for investing activities were the purchase of investments securities of approximately $51.7 million, purchase of property and equipment of approximately $1.6 million, purchases of interests in investment partnerships, net of approximately $24.8 million, and principal disbursements on mortgages receivable of approximately $300.3 million.

These amounts were offset by proceeds from the sale of investment securities of approximately $85.1 million, proceeds from the sale of real estate owned of approximately $2.1 million, and principal collections on mortgages receivable of approximately $131.8 million.

For 2021, the major contributors to net cash used for investing activities were the purchase of investments of approximately $204.1 million, acquisitions of and improvements to real estate owned of approximately $822,000, purchases of interests in investment partnerships of approximately $6.1 million, and principal disbursements on mortgages receivable of approximately $251.8 million.

Net cash provided by financing activities for 2022 year was approximately $128.2 million compared to approximately $160.7 million for 2021.

Net cash provided by financing activities for the 2021 consisted primarily of a $5.1 million increase in the amount of the Wells Fargo Loan, gross proceeds from the sale of our fixed rate notes of approximately $51.8 million, proceeds from our Churchill facility of approximately $19.1 million, proceeds from the issuance of Common Shares of approximately $56.0 million, and proceeds from the issuance of Series A Preferred Stock of approximately $45.5 million, offset by dividends paid on Common Stock of approximately $12.3 million, dividends paid on Preferred Stock of approximately $1.9 million, financing costs incurred of approximately $1.9 million and principal payments on our notes and mortgage payable of approximately $791,000.

Net cash provided by financing activities for the 2020 consisted primarily of $30.1 million Wells Fargo Loan, gross proceeds from the sale of our fixed rate notes of approximately $56.1 million (after taking into account the original issuance discount) and proceeds from other loans of approximately $258,000 offset by dividends paid of approximately $7.96 million, the repayment of our credit line in the amount of $2.0 million, financing costs incurred of approximately $2.52 million and principal payments on our notes and mortgage payable of approximately $37,000.

Net cash provided by financing activities for the 2022 consisted primarily of a gross proceeds from the sale of our fixed rate notes of approximately $122.1 million, proceeds from the Churchill Facility of approximately $23.4 million, and proceeds from the issuance of Common Shares of approximately $39.3 million, offset by $29.6 million decrease in the amount of the Wells Fargo Loan, dividends paid on Common Stock of approximately $18.8 million, dividends paid on Preferred Stock of approximately $3.7 million, and financing costs incurred of approximately $4.5 million.

Net cash provided by financing activities for the 2021 consisted primarily of a $5.1 million increase in the amount of the Wells Fargo Loan, gross proceeds from the sale of our fixed rate notes of approximately $51.8 million, proceeds from the Churchill Facility of approximately $19.1 million, proceeds from the issuance of Common Shares of approximately $56.0 million, and proceeds from the issuance of Series A Preferred Stock of approximately $45.5 million, offset by dividends paid on Common Stock of approximately $12.3 million, dividends paid on Preferred Stock of approximately $1.9 million, financing costs incurred of approximately $1.9 million and principal payments on our notes and mortgage payable of approximately $791,000.

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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On January 10, 2023, we paid a dividend of $0.13 per share, or $5,342,160 in the aggregate, to shareholders of record as of December 30, 2022.

On March 14, 2022, we sold a property classified as real estate held for sale at December 31, 2021 and received $622,737 in net proceeds.

From January 3, 2022 through March 2, 2022, we sold an aggregate of 2,730,725 common shares under an at-the-market offering facility realizing gross proceeds of approximately $16.0 million.

On March 9, 2022, we sold $50,000,000 aggregate principal amount of 6.00% notes due March 30, 2027 (the “2027 Notes”) and realized net proceeds of approximately $48.2 million.

The 2027 Notes are unsecured, unsubordinated obligations and rank equally in right of payment with all our existing and future senior unsecured and unsubordinated indebtedness (including the Notes) 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), and trade on the NYSE American under the ticker symbol “SCCE.” The 2027 Notes bear interest at the rate of 6.00% per annum beginning on March 9, 2022, which will be payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year they are outstanding.

The first interest payment date will be June 30, 2022.

The unpaid principal balance of the 2027 Notes and all accrued but unpaid interest thereon is payable in full on March 30, 2027.

On February 9, 2022, warrants to purchase an aggregate of 130,000 common shares at an exercise price of $6.25 per common share issued to the underwriters in connection with the IPO expired without being exercised.

(See “Note 14 - Outstanding Warrants” to the financial statements.)

Effective on January 14, 2022, Peter J.

Cuozzo, our former Executive Vice President and Chief Operating Officer retired from all of his positions with the company.

On January 10, 2023, William C.

Haydon, resigned from his position as our chief investment officer, chief credit officer and director of investor relations.

From January 3, 2023 through March 30, 2023, we sold an aggregate of 2,479,798 Common Shares under our at-the-market offering facility, realizing gross proceeds of approximately $9.4 million.

Additionally, since January 3, 2023, we have sold shares of our Series A Preferred Stock having an aggregate liquidation preference of $154,675 under our at-the-market offering facility.

The gross proceeds from the sale of these shares were $139,500 representing a discount of approximately 10% from the liquidation preference.

In February 2023, we granted an aggregate of 44,500 restricted Common Shares (having a market value of approximately $141,000) to our employees.

One-third of such shares vested immediately on the grant date, and an additional one-third will vest on each of the first and second anniversaries of the grant date.

On February 28, 2023, we refinanced the NHB Mortgage with a new $1.66 million adjustable-rate mortgage loan from New Haven Bank.

On March 2, 2023, we entered into a Credit and Security Agreement (the “Credit Agreement”), with Needham Bank, a Massachusetts co-operative bank, as the administrative agent (the “Administrative Agent”) for the lenders party thereto (the “Lenders”) with respect to a $45 million revolving credit facility (the “Credit Facility”).

Under the Credit Agreement, we have the right to request an increase in the size of the Credit Facility up to $75 million, subject to certain conditions, including the approval of the Lenders.

Loans under the Credit Facility accrue interest at the greater of (i) the annual rate of interest equal to the “prime rate,” as published in the “Money Rates” column of The Wall Street Journal minus one-quarter of one percent (0.25%), and (ii) four and one-half percent (4.50%).

All amounts borrowed under the Credit Facility are secured by a first priority lien on virtually all our assets.

Assets excluded from the lien include real estate owned by us (other than real estate acquired pursuant to foreclosure) and mortgages sold under the Churchill Facility.

The Credit Facility expires March 2, 2026 subject to our right to extend the term for one year upon the consent of the Administrative Agent and the Lenders, which consent cannot be unreasonably withheld, and so long as we are not in

default and satisfy certain other conditions.

All outstanding revolving loans and accrued but unpaid interest are due and payable on the expiration date.

We have the right to terminate the Credit Facility at any time without premium or penalty by delivering written notice to the Administrative Agent at least ten (10) days prior to the proposed date of termination.

Off-Balance Sheet Arrangements

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Unfunded portions of outstanding construction loans

Unfunded loan commitments

Unfunded commitments

Total contractual obligations

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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-K

Item 7. Management’s Discussion and Analysis