Sachem Capital Corp. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this annual report. Certain statements in this discussion and elsewhere in this Report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements. Company Overview We are a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term ( i.e., three years or less) loans secured by first mortgage liens on real property. From our inception in December 2010, through our initial public offering, in February 2017, we operated as a limited liability company. On February 9, 2017, we completed our initial public offering (the “IPO”), the primary purpose of which was to raise equity capital to fund mortgage loans and expand our mortgage loan portfolio and to diversify our ownership so that we could qualify, for federal income tax purposes, as a real estate investment trust, or REIT. We believe that, since consummation of the IPO, we 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. As a REIT, we are entitled to claim deductions for distributions of taxable income to our shareholders thereby eliminating any corporate tax on such taxable income. Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% excise tax to the extent it exceeds 10% of our total taxable income. To maintain our qualification as a REIT, we are 46 Table of Contents 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. 2022 Year in Review; Outlook for 2023 2022 Highlights ● Total revenue increased 71.8%; net income attributable to common shareholders increased 50.2%; and earnings per common share increase $0.02 per share. ● 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 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 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, 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 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. ● We continued the enhancement of our underwriting guidelines to strengthen our documentation and collateral position on our loans. 2023 Outlook 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. We intend to achieve this objective by accelerating profitable growth and driving operational excellence. To accelerate profitable growth, we will continue to focus on selectively originating, managing, and servicing a portfolio of first mortgage real estate loans designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We are also targeting larger-value commercial loans with strong, experienced sponsors. To drive 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. 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 47 Table of Contents objective. Nevertheless, we remain flexible to take advantage of other real estate opportunities that may arise from time to time, whether they relate to the mortgage market or to direct or indirect investments in real estate. Our 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; ● take advantage of the prevailing economic environment and current economic, political and social trends that may impact real estate lending, as well as the outlook for real estate in general and particular asset classes; ● remain flexible to capitalize on changing sets of investment opportunities that may be present in the various points of an economic cycle; ● 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; and ● operate to qualify as a REIT and for an exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. We expect 2023 to be a challenging year due to the following factors: Interest rate compression. Our net income for 2022 has been adversely impacted by a reduction in the yield on our mortgage loan portfolio. 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 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 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. That will enable us to continue to focus on growth and building market share rather than short-term profits and cash flow. Geopolitical concerns. 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. Our business is purely domestic, but we are impacted by market volatility and cybersecurity is a concern for all businesses. Increased competition. 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 48 Table of Contents 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. The new competitive landscape is shifting the negotiating leverage in favor of borrowers. As borrowers have more choices, they are demanding better terms. This is particularly true as we focus more on larger loans and borrowers with better credit histories. Property value fluctuations. We remain aware of property value market cycles and utilize a dashboard of indicators to track property value trends. Our response to this development would be to adhere to our underwriting guidelines and aggressively enforce our rights when loans go into default. By judiciously relying on our dashboard of leading indicators and continuing to make decisions in a sound and proper manner, we see no reason to expect any negative outcome regarding our business operations and growth. Some of our indicators within our dashboard are interest rate changes impacting mortgage rates, days-on-market, pending sales, NAHB’s Housing Market Index and the Senior Loan Officer Opinion Survey. Increased operating expenses. 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 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. Unfunded commitments. Most of our loans are funded in full at closing. However, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing. At December 31, 2022, our mortgage loan portfolio included 177 loans with future funding obligations, in the aggregate principal amount of $114.6 million, compared to 177 loans in the aggregate principal amount of $89.2 million at December 31, 2021. The increase is due to an increase in construction loan originations, a large portion of which is in the Florida market. Advances under these loans are funded against requests supported by all required documentation (including lien waivers) as and when needed to pay contractors and other costs of construction. In order to deal with these obligations, we are compelled to maintain higher cash balances, which could adversely impact our financial performance. 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 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 and we are mindful of the need to repay it at the appropriate time. 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 49 Table of Contents 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; ● $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; and ● $23,663,000 million original principal amount, issued June 25, 2019, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2024 (the “June 2024 Notes”) and which trade on the NYSE American under the symbol SCCB. 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 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 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 50 Table of Contents 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. Our secured indebtedness includes the Churchill Facility, the Wells Fargo Loan and the NHB Mortgage. On July 21, 2021, we consummated a $200 million facility with Churchill. Under the terms of the Churchill Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans. In addition, we have the right and, in some instances the obligation, to repurchase those loans from Churchill. The amount that Churchill will pay for each mortgage loan it purchases will vary based on the attributes of the loan and various other circumstances. The repurchase price is calculated by applying an interest factor to the purchase price of the mortgage loan. We also granted Churchill a first priority security interest on the mortgage loans sold to Churchill to secure our repurchase obligation. 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. The Churchill Facility is also subject to various terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements, including a covenant that prohibits us from (A) (i) paying any dividend or make any distribution in excess of 90% of our taxable income, (ii) incurring any indebtedness or (iii) purchasing any shares of our capital stock, unless, in any case, we have an asset coverage ratio of at least 150%; and (B) have unencumbered cash and cash equivalents in an amount equal to or greater than 2.50% of the amount of our repurchase obligations. Churchill has the right to terminate the Churchill Facility at any time upon 180 days prior notice to us. At such time, we have an additional 180 days after termination to repurchase all the mortgage loans held by Churchill. We believe the Churchill Facility gives us the ability to raise capital as needed at a relatively low rate. It also gives us the flexibility to seek other sources of funding. At December 31, 2022, the amount outstanding under the Churchill Facility was approximately $42.5 million, which amount was accruing interest of an effective rate of 8.52% per annum. The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $3.6 million at December 31, 2022. The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate. 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 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. REIT Qualification We believe that we have qualified as a REIT since the consummation of the IPO and that it is in the best interests of our shareholders that we operate as a REIT. We made the election to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we 51 Table of Contents are required to distribute at least 90% of our taxable income to our shareholders on an annual basis. We cannot assure you that we will be able to maintain REIT status. Our qualification as a REIT depends on our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code, relating to, among other things, the sources of our gross income, the composition and values of our assets, our compliance with the distribution requirements applicable to REITs and the diversity of ownership of our outstanding Common Shares. We cannot assure you that we will be able to maintain our qualification as a REIT. So long as we qualify as a REIT, we, generally, will not be subject to U.S. federal income tax on our taxable income that we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate income tax rates and may be precluded from electing to be treated as a REIT for four taxable years following the year during which we lose our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income. Emerging Growth Company Status 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 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, whereas origination and modification fee revenue on commercial loans are amortized over the term of the respective notes. Results of Operations Years ended December 31, 2022 and 2021 Total revenue Total revenue for the year ended December 31, 2022 was approximately $52.3 million compared to approximately $30.4 million for the year ended December 31, 2021, an increase of approximately $21.9 million, or 71.8%. The increase in revenue was due primarily to an increase in lending operations. 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. 52 Table of Contents Operating costs and expenses Total operating costs and expenses for the year ended December 31, 2022 were approximately $31.4 million compared to approximately $17.1 million for 2021, an increase of approximately $14.3 million, or 83.4%. The largest contributor to this increase was interest and amortization of deferred financing costs, which were $21.5 million in 2022 compared to $10.4 million in 2021, an increase of approximately 106.8%. The increase is directly related to interest payments on the Notes. 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; 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 Net income for 2022 attributable to common shareholders was approximately $17.2 million compared to approximately $11.5 million for 2021, an increase of approximately $5.8 million or 50.2%. 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. ​ ​ ​ ​ ​ For the Year ​ ​ Ended December 31, ​ ​ 2022 Adjusted Earnings: ​ Net income attributable to common shareholders ​ $ 17,221,589 Add: Unrealized losses on investment securities – debt investments ​ 2,963,760 Adjusted earnings attributable to common shareholders ​ $ 20,185,349 ​ 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. 53 Table of Contents 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 $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 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 $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. 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. 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. 54 Table of Contents 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 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. Our short-term cash requirements primarily include funding of loans, dividend payments, interest payments on our indebtedness and payments for usual and customary operating and administrative expenses, such as employee compensation and sales and marketing expenses. Based on this analysis, we believe that our current cash balances, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months. Our long-term cash needs will include principal payments on outstanding indebtedness, preferred stock dividends and funding of new mortgage loans. Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows and proceeds from sales of real estate owned. From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our Common Shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains). Subsequent Events 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 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 55 Table of Contents 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 We are not a party to any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources. Contractual Obligations As of December 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 and software licenses. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than ​ 1 – 3 ​ 3 – 5 ​ More than ​ Total 1 year years years 5 years Operating lease obligations ​ $ 718 ​ $ 718 ​ $ — ​ $ — ​ $ — Unfunded portions of outstanding construction loans ​ 114,556,794 ​ 114,556,794 ​ — ​ — ​ — Unfunded commitments ​ 4,037,911 ​ 4,037,911 ​ — ​ — ​ — Total contractual obligations ​ $ 118,595,423 ​ $ 118,595,423 ​ $ — ​ $ — ​ $ — ​ Recent Accounting Pronouncements See ‘‘Note 2 — Significant Accounting Policies’’ to the financial statements for explanation of recent accounting pronouncements impacting us. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are a “smaller reporting company” as defined by Regulation S-K and, as such, are not required to provide the information required by this item. ​ Item 8. Financial Statements and Supplementary Data The financial statements required by this Item are set forth beginning on page F-1. ​ Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure None. ​