What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-13 compared with 2023-08-14 · 100 added, 102 removed, 182 unchanged (53% of the section changed)

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

Review of the First Half of 2023 and Outlook for Balance of Year

Compared to the first half of 2022, revenue increased 36.4%, net income attributable to common shareholders increased 15.9%, while earnings per share decreased $0.01 per share or 4.6%.

The revenue increase was directly related to the growth in our lending activities, reflected in our interest income which had an increase of 20.8%, which resulted from a more favorable rate environment in comparison to the first half of 2022, and our income from partnership investments that had an increase of 164.0%.

We also recorded an unrealized gain of approximately $0.6 million on investment securities in the first half of 2023 compared to a loss of $2.5 million in the first half of 2022, reflecting a $3.1 million increase in the value of those securities.

Review of the First Nine Months of 2023 and Outlook for Balance of Year

Compared to the nine months of 2022, revenue increased 33.8%, net income attributable to common shareholders increased 19.6%, while earnings per share remained consistent with September 30, 2022.

The revenue increase was directly related to the growth in our lending activities as well as to the increase in the interest rates that we are able to charge borrowers, which is reflected in our interest income which had an increase of 21.9%, and our income from partnership investments that had an increase of 110.1%.

We also recorded an unrealized gain of approximately $0.4 million on investment securities for the nine months of 2023 compared to a loss of $3.6 million for the nine months of 2022, reflecting a $4.0 million increase in the value of those securities.

The increase in revenue was partially offset by a 45.7% increase in operating costs and expenses.

The increase in operating expenses is mainly attributable to a 43.8% increase in interest and amortization of deferred financing costs and an 37.5% increase in compensation and related expenses.

The increase in compensation expense is mainly attributable to the hiring of our former Chief Financial Officer in August of 2022 (see Note 12 in the accompanying consolidated financial statements), and to the hiring of additional employees from our acquisition of Urbane Capital LLC in October of 2022.

The increase in compensation expense is mainly attributable to the hiring of our former Chief Financial Officer in August of 2022 (see Note 12 in the accompanying consolidated financial statements), and to the hiring of additional employees in connection with our acquisition of the assets of Urbane New Haven, LLC in October of 2022.

Mortgages receivable increased by approximately $47.4 million compared to the same prior year period, while cash and cash equivalents decreased by 27.3%.

The increase in mortgages receivable was primarily due to an increase in lending.

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.

Our primary business objective for the balance of 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.

We are also targeting larger-value commercial loans with strong, better capitalized and 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.

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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;

● capitalize on opportunities created by the long-term structural changes in the real estate finance 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 finance, 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;

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● 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;

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

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

To date, 2023 has been a challenging year and we expect it to continue to be one due to the following factors:

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

Overall, our weighted average cost of capital, excluding amortization of deferred financing costs, as of June 30, 2023 was 7.25% compared to 6.22% as of June 30, 2022.

On the other hand, the yield on our portfolio has not matched the growth in our cost of capital.

For the six months ended June 30, 2023, and 2022, the yield on our mortgage loan portfolio, inclusive of default interest, was 12.17% and 11.30%, 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.

Overall, our weighted average cost of debt capital, excluding amortization of deferred financing costs, as of September 30, 2023 was 7.3% compared to 6.7% as of September 30, 2022.

For the nine months ended September 30, 2023, and 2022, the yield on our mortgage loan portfolio, inclusive of default interest, was 12.2% and 11.3%, respectively.

(For this purpose, yield only takes into account the stated interest rate on the mortgage note adjusted to the default rate, if applicable.) Nevertheless, we believe the interest rate compression will continue to be a factor during the remainder of 2023.

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.

Various geopolitical concerns, including the ongoing conflict between Ukraine and Russia and Israel and Hamas, have heightened tensions between the U.S.

and China regarding Taiwan and global trade, Iran’s continued pursuit of nuclear weapons and its ongoing attempts to destabilize the Middle East and North Korea’s belligerence, 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.

The true ramifications of these conflicts and their impact on the markets and our business operations, specifically our borrowers and real estate prices 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.

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The primary driver for these new market participants, we believe, is their need to find higher yielding investments.

Given that residential transition loan gross yields are in the 12-15% range, many institutions are deploying capital into credit products where the returns are nearing equity investments.

These entities, in general, are well-funded, have relatively easy access to capital and are 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.

Given recent developments regarding mid-size regional banks, we believe competition from traditional banks will continue to abate in 2023 and into 2024 rather than increase.

However, as traditional banks exit 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.

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Borrower expectations.

The new competitive landscape is shifting the negotiating leverage in favor of borrowers.

As borrowers have more choices, they are demanding better terms.

As stated above the increased yield environment has resulted in an inflow of private capital into the transitional lending sector.

As a result, some of the negotiating leverage has shifted in favor of borrowers who have multiple term sheets.

As borrowers have more choices they are demanding better terms, relative to the current interest rate enviorment.

able to pass along most of the increased cost of capital to the borrowers, increased competition has the potential to hinder spreads.

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.

Property value market cycles could have an adverse impact on our operations and finacial condition.

We monitor a variety of indicators to track property value trends, including the Federal Funds Rate, U.S Treasury data, days-on-market, pending sales, NAHB’s Housing Market Index and the Senior Loan Officer Opinion Survey.

Additionally, we almost always utilize a third party valuation including, but not limited to, appraisals, Broker Price Opinions (“BPOs”), and Automated Valuation Models (“AVMs”), to assist in both our underwriting and monitoring of our portfolio assets.

By judiciously relying on our indicators and continuing to make sound underwriting decisions, we are poised to respond quickly if asset valuations begin to decline.

Increased operating expenses.

Our operating expenses for the three and six months ended June 30, 2023 are significantly higher than they were in 2022 due to our higher debt load, as well as higher borrowing rates.

In addition, we expect that our aggregate dividend payments will be higher in 2023 than in 2022 due to an increase in the number of our common shares (“Common Shares”) outstanding as well as the full year effect of our Series A Preferred Stock (“Series A Preferred Stock”), which carries a 7.75% annual dividend rate.

Our operating expenses for the three and nine months ended September 30, 2023 are significantly higher than they were in 2022 due to our higher debt load, as well as higher borrowing rates.

In addition, we expect that our aggregate dividend payments will be higher in 2023 than in 2022 due to an increase in the outstanding number of our common shares (“Common Shares”), and our Series A Preferred Stock (“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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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 June 30, 2023, our mortgage loan portfolio included 160 loans with future funding obligations, in the aggregate principal amount of $110.3 million, compared 191 loans with future funding obligations, in the aggregate principal amount of approximately $119.1 million at June 30, 2022.

At September 30, 2023, our mortgage loan portfolio included 144 loans with future funding obligations, in the aggregate principal amount of $107.7 million, compared 185 loans with future funding obligations, in the aggregate principal amount of approximately $118.0 million at September 30, 2022.

Advances under construction 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.

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Although we have no pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion regarding the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values.

At June 30, 2023, debt represented approximately 61.3% of our total capital compared to 59.3% at June 30, 2022.

At September 30, 2023, debt represented approximately 61.0% of our total capital compared to 59.8% at September 30, 2022.

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 June 30, 2023, 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.

As of September 30, 2023, 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 aggregate net proceeds, net of the deferred financing costs, from the sale of the notes 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;

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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.

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 but generally will not exceed 70% of the unpaid principal balance purchased.

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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 (A) prohibits us from (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%;

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 (A) prohibits us from (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) requires us to maintain unencumbered cash and cash equivalents in an amount equal to or greater than 2.50% of the amount of our repurchase obligations.

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

At June 30, 2023, the amount outstanding under the Churchill Facility was approximately $50.5 million, which amount was accruing interest at the rate of 9.31% per annum.

At September 30, 2023, the amount outstanding under the Churchill Facility was approximately $47.9 million, which amount was accruing interest at the rate of 9.47% per annum.

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

The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $25.9 million at June 30, 2023.

The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $26.3 million at September 30, 2023.

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

At June 30, 2023 the prime rate was 8.25% and the interest rate on the Wells Fargo Loan was, thus, 6.50%.

As of July 27, 2023, the prime rate is 8.5% and the rate on the Wells Fargo Loan is 6.75%.

At September 30, 2023 the prime rate was 8.50% and the interest rate on the Wells Fargo Loan was, thus, 6.75%.

As of the date of this report, there has not been a change in the interest rates stated as of September 30, 2023.

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.

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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.

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

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 “Needham Credit Facility”).

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

As of September 8, 2023, the Needham Credit Facility was increased to $65 million.

Loans under the Needham 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%).

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We have the right to terminate the Needham 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.

The Needham Credit Facility is subject to other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements, including a covenant that requires us to maintain:

The Needham Credit Facility is subject to other terms and conditions, including representations and warranties, covenants and agreements typically

found in these types of financing arrangements, including a covenant that requires us to maintain:

(A) a ratio of Adjusted EBITDA (as defined in the Credit Agreement) to Debt Service (as defined in the Credit Agreement) of less than 1.40 to 1.0, tested on a trailing-twelve-month basis at the end of each fiscal quarter, commencing with the quarter ending June 30, 2023;

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and (C) an asset coverage ratio of at least 150%.

As of June 30, 2023, the interest rate on the Needham Credit Facility was 8.0% and as of July 27, 2023, interest is accruing at the rate of 8.25% per annum.

On May 30, 2023, in connection with our investment in Shem Creek Sachem 100 LLC (see Note 9 to the accompanying consolidated financial statements), we obtained a commercial loan from PeoplesBank of $7,000,000.

At closing we had an outstanding principal balance of $6,224,000 with the ability to draw an additional $776,000 so long as there are no existing events of default under the loan agreement.

The loan accrues interest at an annual fixed rate of 6.50%.

The loan has an original maturity date of June 20, 2026 and a one year extension option that defers the maturity date until June 20, 2027.

During the first 36 payment periods, only interest is due and payable, after which principal must be repaid for the remainder of the loan term under a thirty (30) year amortization schedule.

The PeoplesBank loan is non-recourse, secured by a first lien on the Shem Creek Middlesex mortgage receivable.

As of September 30, 2023 and November 10, 2023, the interest rate on the Needham Credit Facility was 8.25% per annum.

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

During the six months ended June 30, 2023, under our at-the-market offering facility (see Note 17 to the accompanying consolidated financial statements), we sold an aggregate of 2,616,124 Common Shares, realizing gross proceeds of approximately $9.9 million and we sold shares of Series A Preferred Stock having an aggregate liquidation preference of $615,075, realizing gross proceeds of $527,600 representing a discount of approximately 16.6% from the liquidation preference.

At June 30, 2023, approximately $61.4 million of Common Shares and $24.5 million of Series A Preferred Stock were available for future sale under the ongoing at-the-market offering.

During the nine months ended September 30, 2023, under our at-the-market offering facility (see Note 17 to the accompanying consolidated financial statements), we sold an aggregate of 4,140,503 Common Shares, realizing gross proceeds of approximately $15.6 million and we sold shares of Series A Preferred Stock having an aggregate liquidation preference of $2,321,975, realizing gross proceeds of approximately $1.9 million representing a discount of approximately 16.7% from the liquidation preference.

At September 30, 2023, approximately $55.7 million of Common Shares and $23.1 million of Series A Preferred Stock were available for future sale under the ongoing at-the-market offering.

REIT Qualification

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Results of Operations

Three months ended June 30, 2023 compared to three months ended June 30, 2022

Three months ended September 30, 2023 compared to three months ended September 30, 2022

Total revenue

Total revenue for the three months ended June 30, 2023 was approximately $16.5 million compared to approximately $12.5 million for the three months ended June 30, 2022, an increase of approximately $4.0 million, or 31.2%.

The increase in revenue is primarily attributable to an increase in our lending operations as well as to the increase in the interest rates that we are able to charge borrowers in comparison to the three months ended June 30, 2022.

For the 2023 period, interest income was approximately $11.9 million compared to approximately $10.4 million for the 2022 period, an increase of approximately $1.5 million or 14.0%.

Income from partnership investments was approximately $1.0 million for the 2023 period compared to approximately $0.3 million for the 2022 period, an increase of approximately $0.7 million or 217.5%.

Fee and other income was approximately $1.6 million for the 2023 period compared to approximately $0.8 million for the 2022 period, an increase of approximately $0.8 million or 96.7%.

In addition, unrealized loss on investment securities for the 2023 period was approximately $0.1 million compared to approximately $1.5 million for the 2022 period.

The increase in revenue was partially offset by a decrease in origination and modification fees of approximately $0.4 million, or 21.5% in the 2023 period, from approximately $2.2 million in the 2022 period to approximately $1.8 million in the 2023 period.

Total revenue for the three months ended September 30, 2023 was approximately $17.5 million compared to approximately $13.5 million for the three months ended September 30, 2022, an increase of approximately $4.0 million, or 29.5%.

The increase in revenue is primarily attributable to an increase in our lending operations as well as to the increase in the interest rates that we are able

to charge borrowers in comparison to the three months ended September 30, 2022.

For the 2023 period, interest income was approximately $14.3 million compared to approximately $11.5 million for the 2022 period, representing an increase of approximately $2.8 million or 23.6%.

Origination and modification fees were approximately $1.2 million compared to approximately $1.7 million for the 2022 period, representing a decrease of approximately $0.5 million or 28.4%.

For the three months ended September 30, 2023, revenue was partially offset by approximately $0.2 million of unrealized losses on investment securities million compared to approximately $1.1 million for the 2022 period, representing an increase of approximately $0.8 million or 77.7%.

Operating costs and expenses

Total operating costs and expenses for three months ended June 30, 2023 were approximately $10.8 million compared to approximately $7.3 million for the three months ended June 30, 2022, an increase of approximately $3.5 million or 47.0%.

The increase in operating costs and expenses is primarily attributable to the increase in our borrowing costs that were utilized to grow our lending operations.

In the 2023 period, interest and amortization of deferred financing costs were approximately $7.1 million compared to approximately $5.2 million in the same 2022 period, an increase of approximately $1.9 million or 37.0%.

The remaining fluctuations in operating expenses were primarily attributable to (i) compensation, fees and taxes which increased approximately $0.4 million, and (ii) general and administrative expenses which increased approximately $0.7 million.

Total operating costs and expenses for three months ended September 30, 2023 were approximately $11.3 million compared to approximately $8.5 million for the three months ended September 30, 2022, an increase of approximately $2.8 million, or 33.7%.

The increase in operating costs and expenses is primarily attributable to the increase in our indebtedness, which was the fuel for our revenue growth, along with increases in the cost of funds.

In the 2023 period, interest and amortization of deferred financing costs was approximately $7.7 million compared to approximately $6.0 million in the same 2022 period, an increase of approximately $1.7 million or 28.6%.

The balance of the increase in operating expenses was primarily attributable to (i) compensation, fees and taxes which increased approximately $0.2 million, a 15.0% increase over the comparable 2022 amount, and (ii) general and administrative expenses, which increased approximately $0.6 million, a 84.6% increase over the comparable 2022 amount.

Comprehensive income

For the quarter ended June 30, 2023, we reported an unrealized gain on investment securities of approximately $0.1 million reflecting the decrease in prior unrealized losses since March 31, 2023.

For the quarter ended June 30, 2022, we reported an unrealized loss on investment securities of approximately $0.2 million reflecting the decrease in the market value of certain securities since March 31, 2022.

Net income attributable to common shareholders for the three months ended June 30, 2023 was approximately $4.8 million, or $0.11 per share, compared to approximately $4.3 million, or $0.12 per share for the three months ended June 30, 2022.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

For the quarter ended September 30, 2023, we reported an unrealized loss on investment securities of approximately $83,600 reflecting the decrease in the market value of certain securities since June 30, 2023.

For the quarter ended September 30, 2022, we reported an unrealized loss on investment securities of approximately $132,000 reflecting a decrease in the market value of certain securities since June 30, 2022.

Net income attributable to common shareholders for the three months ended September 30, 2023 was approximately $5.2 million, or $0.12 per share, compared to approximately $4.1 million, or $0.11 per share for the three months ended September 30, 2022.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2023

Total revenue

Total revenue for the six months ended June 30, 2023 was approximately $31.2 million compared to approximately $22.8 million for the six months ended June 30, 2022, an increase of approximately $8.4 million, or 36.4%.

The increase in revenue is primarily attributable to the growth in our lending operations, as well as to the increase in the interest rates that we are able to charge borrowers compared to the six months ended June 30, 2022.

Total revenue for the nine months ended September 30, 2023 was approximately $48.7 million compared to approximately $36.4 million for the nine months ended September 30, 2022, an increase of approximately $12.3 million, or 33.8%.

The increase in revenue is primarily attributable to the growth in our lending operations as well as to the increase in the interest rates that we are able to charge borrowers in comparison to the nine months ended September 30, 2022.

For the 2023 period, interest income was approximately $37.2 million compared to approximately $30.5 million for the 2022 period, representing an increase of approximately $6.7 million or 21.9%.

Origination and modification fees decreased to approximately $3.2 million for the 2023 period compared to approximately $4.1 million for the 2022 period, a decrease of approximately $0.9 million, or 20.8%.

Income from partnership investments increased to approximately $1.6 for the 2023 period compared to approximately $0.6 million for the 2022 period, an increase of approximately $1.0 million or 164.0%.

Fee and other income was approximately $2.3 million for the 2023 period compared to approximately $1.4 million for the 2022 period, an increase of approximately $0.9 million or 61.9%.

For the six months ended June 30, 2023, unrealized

gain on investment securities was $0.6 million, an increase of $3.1 million compared to revenue being offset by an unrealized loss of approximately $2.5 million for the six months ended June 30, 2022.

Income from partnership investments increased to approximately $2.3 million for the 2023 period compared to approximately $1.1 million for the 2022 period, an increase of approximately $1.2 million.

Fee and other income was approximately $3.5 million for the 2023 period compared to approximately $2.0 million for the 2022 period, an increase of approximately $1.5 million.

For the nine months ended September 30, 2023, unrealized gain on investment securities was approximately $0.4 million, an increase of approximately $4.0 million compared to revenue being partially offset by an unrealized loss of approximately $3.6 million for the nine months ended September 30, 2022.

Operating costs and expenses

Total operating costs and expenses for six months ended June 30, 2023 were approximately $20.3 million compared to approximately $13.3 million for the six months ended June 30, 2022, an increase of approximately $7.0 million, or 53.3%.

The increase in operating costs and expenses is primarily attributable to the increase in our unsecured bond debt while growing our lending operations and for the reasons discussed herein.

Total operating costs and expenses for nine months ended September 30, 2023 were approximately $31.7 million compared to approximately $21.8 million for the nine months ended September 30, 2022, an increase of approximately $9.9 million, or 45.7%.

The increase in operating costs and expenses is primarily attributable to the increase in our overall indebtedness along with increases in our cost of funds.

In the 2023 period, interest and amortization of deferred financing costs was approximately $21.7 million compared to approximately $15.1 million in the same 2022 period, an increase of $6.6 million, or 43.8%.

The balance of the increase in operating expenses was attributable to (i) compensation, fees and taxes which increased approximately $1.2 million, or 53.2%, (ii) general and administrative expenses which increased approximately $0.9 million, or 73.4%, (iii) provision for credit losses which increased approximately $0.1 million or 87.1% and (iv) partially offset by impairment loss which decreased approximately $0.1 million, or 15.9%.

The balance of the increase in operating expenses was attributable to (i) compensation, fees and taxes which increased approximately $1.4 million, or 37.5%, (ii)

general and administrative expenses which increased approximately $1.5 million, or 77.4%, and (iii) partially offset by an impairment loss which decreased approximately $0.2 million, or 22.5%.

Comprehensive income

For the six months ended June 30, 2023, we reported an unrealized gain on investment securities of approximately $0.2 million reflecting the increase in the market value of such securities since December 31, 2022.

For the six months ended June 30, 2022, we reported an unrealized gain on investment securities of approximately $0.1 million reflecting the increase in the market value of such securities since December 31, 2021.

Net income attributable to common shareholders for the six months ended June 30, 2023 was approximately $9.0 million, or $0.21 per share, compared to $7.7 million, or $0.22 per share for the six months ended June 30, 2022.

For the nine months ended September 30, 2023, we reported an unrealized gain on investment securities of approximately $0.1 million reflecting the increase in the market value of such securities since December 31, 2022.

For the nine months ended September 30, 2022, we reported an unrealized loss on investment securities of approximately $81,500 reflecting the decrease in the market value of such securities since December 31, 2021.

Net income attributable to common shareholders for the nine months ended September 30, 2023 was approximately $14.2 million, or $0.32 per share, compared to $11.9 million, or $0.32 per share for the nine months ended September 30, 2022.

Non-GAAP Metrics – Adjusted Earnings

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For the Three Month

For the Six Month

Period Ended June 30,

For the Nine Month

Period Ended September 30,

Adjusted Earnings:

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Adjusted earnings attributable to common shareholders

For the three months ended June 30, 2023 and 2022 adjusted earnings per share was $0.11 and $0.16, respectively.

For the six months ended June 30, 2023 and 2022 adjusted earnings per share was $0.19 and $0.29, respectively.

For the three months ended September 30, 2023 and 2022 adjusted earnings per share was $0.12 and $0.13, respectively.

For the nine months ended September 30, 2023 and 2022 adjusted earnings per share was $0.32 and $0.42, respectively.

Liquidity and Capital Resources

Total assets at June 30, 2023 were approximately $624.0 million compared to approximately $565.7 million at December 31, 2022, an increase of approximately $58.3 million, or 10.3%.

The increase was due primarily to the increase of our mortgage loan portfolio of approximately $46.0 million, an increase in investments in partnerships of approximately $4.6 million and an increase in investment securities of approximately $12.6 million, partially offset by a decrease in cash and cash equivalents of approximately $8.6 million.

Total liabilities at June 30, 2023 were approximately $395.0 million compared to approximately $348.0 million at December 31, 2022, an increase of approximately $47.0 million, or 13.5%.

Total assets at September 30, 2023 were approximately $637.8 million compared to approximately $565.7 million at December 31, 2022, an increase of approximately $72.2 million, or 12.8%.

The increase was due primarily to the increase of our mortgage loan portfolio of approximately $35.3 million, an increase in investments in partnerships of approximately $9.1 million, an increase in net investments in rental real estate of approximately $10.4 million, and an increase in investment securities of approximately $12.5 million, partially offset by a decrease in real estate owned of approximately $1.7 million.

Total liabilities at September 30, 2023 were approximately $402.3 million compared to approximately $348.0 million at December 31, 2022, an increase of approximately $54.4 million, or 15.6%.

This increase is principally due to increases in the repurchase facility of approximately $5.4 million and the line of credit of approximately $47.8 million, offset primarily by a decrease in accrued dividends payable of approximately $5.3 million.

Total shareholders’ equity at June 30, 2023 was approximately $229.0 million compared to approximately $217.7 million at December 31, 2022, an increase of approximately $11.3 million, or 5.2%.

This increase was due primarily to net proceeds of $9.7 million from the sale of Common Shares and our net income of approximately $10.8 million, offset by dividends paid on our Series A Preferred Stock and Common Shares of approximately $1.8 million and $5.7 million, respectively, and a cumulative credit loss adjustment resulting from the adoption of ASU 2016-13 on January 1, 2023 of approximately $2.5 million.

Net cash provided by operating activities for the six months ended June 30, 2023 was approximately $12.1 million compared to approximately $7.3 million for the comparable 2022 period.

For the 2023 period net cash provided by operating activities consisted primarily of net income of approximately $10.8 million, amortization of deferred financing costs and bond discount of approximately $1.2 million, stock based compensation of approximately $0.4 million, impairment loss of approximately $0.4 million, increases in deferred revenue of approximately $0.5 million and advances from borrowers of approximately $2.7 million, offset by unrealized gain on investment securities of approximately $0.6 million, increase in due from borrowers of approximately $1.5 million, increase in other assets in aggregate of approximately $0.7 million, and an increase interest and fees receivable of approximately $1.5 million.

For the 2022 period net cash provided by operating activities for the six months ended June 30, 2022 was approximately $7.3 million, which consisted primarily of net income of approximately $9.6 million, amortization of deferred financing costs and bond discount of $1.1 million and unrealized loss on investment securities of approximately $2.5 million offset by increases in interest and fees receivable of $1.6 million, due from borrowers of $1.1 million and decreases in advances from borrowers of approximately $3.7 million

Net cash used for investing activities for the six months ended June 30, 2023 was approximately $65.2 million compared to approximately $120.6 million for the comparable 2022 period.

For the 2023 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $18.3 million, net purchases of interests in investment partnerships of approximately $4.6 million, purchase of property and equipment of approximately $0.7 million and principal disbursements for mortgages receivable of approximately $114.5 million, offset by principal collections on mortgages receivable of approximately $66.4 million, proceeds from sale of real estate owned of approximately $0.2 million and by proceeds from the sale of investment securities of approximately $6.5 million.

For the 2022 period, net cash used for investing activities for the six months ended June 30, 2022 was approximately $120.6.

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

Net cash provided by financing activities for the six months ended June 30, 2023 was approximately $44.5 million compared to approximately $100.4 million for the comparable 2022 period.

Net cash provided by financing activities for the 2023 period consists principally of net proceeds from the issuance of Common Shares of approximately $9.7 million, net proceeds from the issuance of Preferred Shares of approximately $0.5 million, net proceeds from line of credit of approximately $32.3 million, net proceeds from repurchase facility of approximately $8.0 million, proceeds from mortgage of $0.9 million and proceeds from issuance of secured note of $6.2 million, offset primarily by dividends paid on common stock of approximately $11.0 million and preferred stock of approximately $1.8 million.

Net cash provided by financing activities for the 2022 period consists principally of net proceeds from the issuance of fixed rate notes of $78.8 million, net proceeds from the issuance of common shares of approximately $21.2 million and net proceeds from repurchase facility of approximately $20.3 million, offset primarily by repayment of the line of credit of approximately $9.8 million, dividends paid on common shares of approximately $8.3 million and dividends paid on preferred stock of approximately $1.8 million.

Total shareholders’ equity at September 30, 2023 was approximately $235.5 million compared to approximately $217.7 million at December 31, 2022, an increase of approximately $17.8 million, or 8.2%.

This increase was due primarily to net proceeds of approximately $15.4 million from the sale of Common Shares, net proceeds of approximately $1.9 million from the sale of Series A Preferred Stock, and our net income of approximately $17.0 million, offset by dividends paid on our Series A Preferred Stock and Common Shares of approximately $2.8 million and $11.6 million, respectively, and a cumulative credit loss adjustment resulting from the adoption of ASU 2016-13 on January 1, 2023 of approximately $2.5 million.

Net cash provided by operating activities for the nine months ended September 30, 2023 was approximately $18.9 million compared to approximately $12.4 million for the comparable 2022 period.

For the 2023 period net cash provided by operating activities consisted primarily of net income of approximately $17.0 million, amortization of deferred financing costs and bond discount of approximately $1.8 million, stock-based compensation of approximately $0.6 million, impairment loss of approximately $0.6 million, increases in advances from borrowers of approximately $2.6 million and deferred revenue of approximately $0.6 million, offset by unrealized gain on investment securities of approximately $0.4 million, increase in due from borrowers of approximately $2.2 million, increase in other assets in aggregate of approximately $1.2 million, and an increase in interest and fees receivable of approximately $1.6 million.

For the 2022 period net cash provided by operating activities was approximately $12.4 million.

For the 2022 period net cash provided by operating activities consisted primarily of net income of approximately $14.6 million, amortization of deferred financing costs and bond discount of $1.7 million and unrealized loss on investment securities of approximately $3.6 million, offset by increases in interest and fees receivable of $2.2 million, due from borrowers of $1.5 million and decreases in advances from borrowers of approximately $5.1 million.

Net cash used for investing activities for the nine months ended September 30, 2023 was approximately $67.6 million compared to approximately $151.2 million for the comparable 2022 period.

For the 2023 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $21.1 million, net purchases of interests in investment partnerships of approximately $9.1 million, investment in rental real estate of approximately $10.7 million and principal disbursements for mortgages receivable of approximately $159.7 million, offset by principal collections on mortgages receivable of approximately $123.5 million, proceeds from sale of real estate owned of approximately $0.1 million, proceeds from sale of property and equipment of approximately $0.5 million, and by proceeds from the sale of investment securities of approximately $9.1 million.

For the 2022 period, net cash used for investing activities for the nine months ended September 30, 2022 was approximately $151.2 million.

For the 2022 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $39.7 million, net purchases of interests in investment partnerships of approximately $16.5 million and principal disbursements for mortgages receivable of approximately $252.4 million, offset by proceeds from the sale of investment securities of approximately $62.2 million, proceeds from the sale of real estate owned of approximately $1.6 million, and by principal collections on mortgages receivable of approximately $95.2 million.

Net cash provided by financing activities for the nine months ended September 30, 2023 was approximately $50.7 million compared to approximately $132.3 million for the comparable 2022 period.

Net cash provided by financing activities for the 2023 period consists principally of net proceeds from the issuance of Common Shares of approximately $15.3 million, net proceeds from the issuance of Series A Preferred Stock of approximately $1.9 million, net proceeds from line of credit of approximately $47.8 million, net proceeds from repurchase facility of approximately $5.4 million, and proceeds from mortgage of $0.4 million, offset primarily by dividends paid on Common Shares of approximately $16.9 million and Series A Preferred Stock of approximately $2.8 million.

Net cash provided by financing activities for the 2022 period consists principally of net proceeds from the issuance of fixed rate notes of approximately $122.1 million, net proceeds from the issuance of Common Shares of approximately $36.7 million and net proceeds from repurchase facility of approximately $24.0 million, offset primarily by repayment of line of credit of approximately $29.6 million, dividends paid on Common Shares of approximately $13.5 million, dividends paid on Series A Preferred Stock of approximately $2.8 million, and financing costs incurred in connection with fixed rate notes of approximately $4.5 million.

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

Our short-term cash requirements primarily include funding of loans and construction draws and payments for usual and customary operating and administrative expenses, such as interest payments on notes payable, employee compensation, sales, marketing expenses and dividends.

compensation, sales, marketing expenses and dividends.

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.

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Subsequent Events

Management has evaluated subsequent events through August 11, 2023 the date on which the financial statements were available to be issued.

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

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

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Contractual Obligations

As of June 30, 2023, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment, software licenses and investment in partnerships.

As of September 30, 2023, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment, software licenses and investment in partnerships.

Investment in partnerships

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis