What changed in this filing

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Item 1. Business

2024-04-01 compared with 2023-03-31 · 224 added, 240 removed, 322 unchanged (59% of the section changed)

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Business 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 located primarily in the Northeastern and Southeastern United States and may also be secured with additional collateral, such as other real estate owned by the borrower or its principals, a pledge of the ownership interests in the borrower by the principals thereof, and/or personal guarantees by the principals of the borrower.

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., typically three years or less) loans secured by first mortgage liens on real property located primarily in the northeastern and southeastern sections of the United States.

In addition, our loans are usually further secured with additional collateral, such as other real estate owned by the borrower or its principals, a pledge of the ownership interests in the borrower by the principals thereof, and/or personal guarantees by the principals of the borrower.

Our typical borrower is a real estate investor or developer who uses the proceeds of the loan to fund its acquisition, renovation, rehabilitation, development and/or improvement of residential or commercial properties and that are held for investment or sale.

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However, over the last few years, we have extended our geographic footprint significantly.

While most of our loans, by number and amount, are still made in Connecticut, the percentages are declining.

At December 31, 2022, our mortgage loan portfolio was spread across 16 states.

While most of our loans, by number and amount, are still made in Connecticut, the percentages have declined.

At December 31, 2023, our mortgage loan portfolio was spread across fifteen states.

Connecticut loans represented approximately 59.2% of our portfolio measured by number of loans, but only approximately 39.8% measured by the loan balances.

Similarly, historically our primary focus has been on small loans – less than $500,000.

Similarly, historically our primary focus has been on small loans – less than $1 million.

Over the last few years our strategy shifted, and we began to actively pursue larger loans.

At December 31, 2022, loans having an outstanding principal balance of $500,000 or less still represented approximately 64.9% of the number of our loans in our portfolio but these loans only accounted for approximately 13.8% of the amount of our loan portfolio.

Our loans typically have a maximum initial term of one to three years and bear interest at a fixed rate of 5.0% to 14.2% per year and a default rate of up to 18% per year.

We believe larger loans often have better collateral in addition to better sponsors with stronger personal balance sheets.

At December 31, 2023, loans having an outstanding principal balance of $1 million or less represented approximately 63.7% of the number of our loans in our portfolio, but these loans only account for approximately 14.4% of the amount of our loan portfolio.

Our loans typically have a maximum initial term of one to three years and typically bear interest at a fixed rate of 10.0% to 13.0% per year and a default rate of up to 24% per year.

We usually receive origination fees, or “points,” generally ranging from 1% to 3% of the original principal amount of the loan as well as other fees relating to underwriting, funding and managing the loan.

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Interest is always payable monthly in arrears.

Recently, as loan sizes have increased, we have required most of our borrowers to set up interest reserves that are funded with a minimum of one year’s interest payments.

Generally, we limit the amount of a loan to 70% of the value of the property securing the loan.

However, we will consider loans with a higher loan to value ratio if there are other factors that we believe mitigate the risk.

Recently, as loan sizes have increased, we have required most of our borrowers to establish an interest reserve funded with a minimum of one year’s interest payments, from which we draw monthly.

Generally, we limit the amount of a loan to 70% of the value of the property securing the loan and 85% of the total cost of the project.

However, we will consider loans with a higher loan to value ratio or higher loan to cost if there are other factors that we believe mitigate the risk.

Those other factors could be additional collateral, the credit profile of the borrower, any prior history that we have with the borrower, the quality of the property or the nature of the local real estate market in which the property is located.

Also, in the case of construction loans, the loan-to-value ratio is based on the post-construction value of the property.

We rely on readily available market data, including appraisals when available or timely, automated valuation models (AVMs), recent sales transactions and brokers to evaluate the value of the collateral.

We also adopted a policy that limits the maximum amount of any loan we fund to a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of our loan portfolio after accounting for the loan

under consideration.

Finally, any loan with an original principal amount exceeding $5 million must be approved by the Board of Directors (the “Board”).

We rely on readily available market data, including appraisals, automated valuation models (AVMs), recent sales transactions and brokers to evaluate the value of the collateral.

We have also adopted a policy that limits the maximum amount of our exposure to a single borrower or a group of affiliated

borrowers to 10% of the aggregate amount of our loan portfolio, unless otherwise approved by the Board of Directors (the “Board”).

Finally, any loan with an original principal amount exceeding $5 million must be approved by the Board.

Our primary objective is 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 through dividends.

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The Market Opportunity

In general, we believe that there is 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.

In general, we believe that there is 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, where, historically, substandard properties are improved, rehabilitated, and renovated and under-developed markets that are experiencing rapid growth due to population shifts.

Notwithstanding the foregoing, our business is not without its challenges.

Although concerns about the COVID-19 virus abated significantly, 2022 proved to be a challenging year and we expect many of these challenges will carryover to 2023.

First, in response to a sharp increase in the rate of inflation beginning in 2022 the Federal Reserve Board has been aggressively raising interest rates.

After the latest increase on March 22, 2023, the Fed Funds target rate established by the Federal Open Market Committee, as of March 22, 2023, is 4.75% to 5.00% and the prime rate, as reported by The Wall Street Journal on March 29, 2023, is 8.00%.

At the end of 2021, the corresponding rates were 0.08% and 3.25%, respectively.

These rate increases have, to date, had only a marginal impact on the inflation rate and, thus, many economists and other financial experts expect rates to continue to increase in 2023.

The increase in rates impacts our business in a number of ways.

First, it has made it more difficult for us to raise funds for working capital purposes and, even when we do raise funds, it is more costly.

This has had an adverse impact on our margins as we have not been able to raise the rates on our loans to the same extent.

Second, the increase in rates has had an adverse impact on property values.

We are addressing this development by taking a more aggressive approach to property values during the underwriting process.

Third, as rates increase and property values decrease, inevitably, default rates on our mortgage loan portfolio are likely to increase.

We are addressing this risk by focusing more on the credit-worthiness of our borrowers and monitoring our loan portfolio more carefully.

The second major challenge for our business is relatively new.

In March 2023, the Federal Deposit Insurance Corporation (“FDIC”) assumed control over two mid-sized banks – Silicon Valley Bank in San Francisco and Signature Bank in New York.

Since then, other banks have been mentioned as possible take-over candidates for the FDIC.

In addition, Credit Suisse-First Boston, a major investment bank, is also believed to be in a difficult financial situation.

It is not yet clear, whether these institutions represent unique situations or whether they represent the vanguard of a larger trend in the financial services industry.

If the latter, it could have severe repercussions for capital markets and the global economy.

The final challenge for 2023 are the ongoing geopolitical tensions including the Russian-Ukrainian war, the state of relations between the United States and China, Iran’s continued pursuit of nuclear weapons and continuing hostile acts and statements by North Korea.

Any or all of the foregoing could adversely impact financial markets and economic growth, all of which could have an adverse impact on our business.

The last few years, including 2023 have been particularly challenging and we expect a continuation of this trend throughout 2024 due to the following factors:

Uncertain interest rate environment.

Over the past four years, our cost of capital has increased significantly as the U.S.

Federal Reserve Bank (the “Fed”) raised rates as a countermeasure to stem the rapid rise in inflation.

As a result, as of December 31, 2023, overall, our weighted average cost of debt capital, excluding amortization of deferred financing costs, was 7.22% compared to 7.07% as of December 31, 2022.

As a result, we were forced to increase the rates we charge on our mortgage loans in order to maintain our margins.

Normally, one would have expected that higher borrowing costs would have disincentivized potential borrowers from our products.

However, because traditional banks significantly reduced their lending operations and non-traditional lenders were adversely impacted by the high cost of capital, whether equity or debt, assuming capital was even available (our last debt offering was consummated in August 2022), our business remained robust.

In 2023, the Fed ceased raising rates due to a significant decrease in the rate of inflation.

However, the Fed has yet to reduce interest rates, although many analysts believe that will occur at some point in 2024 but opinions vary as to when the Fed will begin and how quickly those reductions will be implemented.

Accordingly, accretive capital remains scarce, and the cost of available capital remains high.

Uncertain capital markets.

Our growth and profitability depend on our ability to raise additional capital through the sale of equity and debt securities.

In 2022, we raised approximately $161.4 million from the sale of equity and debt securities through various public offerings.

In 2023, the aggregate amount raised from the sale of equity and debt securities through public offerings was only $23.0 million.

As mentioned above, our last public debt offering was in August 2022.

The decrease from 2023 to 2022 was due solely to the fact that capital markets were all but inaccessible in 2023.

We compensated for this decline in capital origination by drawing upon our existing credit facilities and opening a new credit facility with Needham Bank.

As a result, our indebtedness under our three credit facilities ( i.e., Churchill, Needham and Wells Fargo, all as described below), increased by $42.1 million.

This increased our total indebtedness from $335.3 million as of December 31, 2022 to $377.7 million as of December 31, 2023.

While we still have significant availability under the Churchill and Needham credit facilities, the Wells Fargo Loan only has approximately $1.0 million of availability as of December 31, 2023.

In addition, in 2024, approximately $58.2 million of principal of our unsecured unsubordinated notes are maturing.

If we are unable to refinance these obligations, we will have to repay them from operating cash flow and/or by further draws on our existing credit facilities, which could have an adverse impact on our ability to grow our mortgage loan portfolio.

Property value fluctuations.

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.

Nevertheless, property value market cycles could have an adverse impact on our operations and financial condition.

Over the past three years, the commercial real estate market throughout most of the United States has experienced a significant decline in value, notably commercial office assets, which has led to a corresponding increase in the rate of loan defaults and foreclosures.

As a result, many REITs have been forced to record additional allowances for credit losses and write-downs of real estate assets.

Although most of our loans are secured by residential properties, approximately 37.4% of our portfolio is secured by commercial real estate and, hence, we are not immune from this trend.

On a quarterly basis, we evaluate the allowance for credit losses by analyzing a number of market indicators indicated above and adjust accordingly.

Our total mortgages receivable allowance for credit losses for 2023 were approximately $7.5 million, compared to $105,000 in 2022 after implementation of ASU 2016 - 13 (“CECL”).

Our total provisions for credit losses related to loans for 2023 were approximately $5.6 million, compared to $105,000 in 2022.

Unless we see a reversal of the decline in commercial property valuations and an increase in lending activity for commercial real estate, we believe further allowances for credit losses, provisions for credit losses, and asset write-downs in 2024 are a possibility.

Geopolitical concerns.

The Ukrainian-Russian conflict has just entered its third year.

In October 2023, Hamas, an Islamic group that controls the Gaza Strip, invaded Israel, killing 1,200 Israelis and taking another 240 persons back to Gaza as hostages.

They also destroyed approximately 20 farming communities surrounding the Gaza strip.

In retaliation, Israel invaded Gaza and that conflict has entered its sixth month.

Related thereto, the Houthi, another Islamic group based in Yemen, in solidarity with Hamas, has been attacking ships traversing the Red Sea.

As a result, many cargo ships have been rerouted around the southern tip of Africa, which adds significant costs and delays for goods, further stressing supply lines.

In addition, China continues to threaten Taiwan and, recently, Venezuela has laid claims to the oil rich regions of Guyana.

These conflicts 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.

Increased operating expenses and capital outlay.

Our operating expenses for the year ended December 31, 2023, were significantly higher than they were in 2022 and we expect our operating expenses will continue to increase in 2024 to facilitate our growth.

The primary drivers of the increases are compensation expenses and interest expense, due to our higher debt load and higher interest rates.

In addition, we expect that our aggregate dividend payments will be higher in 2024 than in 2023 due to an increase in the outstanding number of our Common Shares, and our Series A Preferred Stock, which carries a 7.75% annual dividend rate.

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.

Finally, we have two series of unsecured notes that are due and payable in 2024 in the amount of approximately $58.2 million.

Replacing these two series of unsecured notes with new debt would almost certainly be more expensive in 2024 given the current rate environment.

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, 2023, our mortgage loan portfolio included 112 loans with future funding obligations, in the aggregate principal amount of $97.9 million, compared 177 loans with future funding obligations, in the aggregate principal amount of approximately $114.6 million at December 31, 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.

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

Increased competition.

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

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

Gross yields on non-bank loans are currently in the 12%-15% range, so 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 continue to abate in 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.

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.

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 environment.

While we are 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.

Despite these challenges, the changing dynamics of the real estate finance marketplace, the debt and equity markets, shocks to the financial system and challenging geopolitical developments, 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.

Specifically, we believe that the following factors will impact our performance in 2024.

● Strong balance sheet.

At December 31, 2023, we had approximately $230.1 million of shareholders’ equity and total indebtedness for borrowed money of approximately $377.7 million (including deferred financing costs).

Thus, our capital structure was approximately 60.4% debt and 39.6% equity compared to approximately 59.3% debt and 40.7% equity at December 31, 2022.

Our equity includes 2,029,923 shares of Series A Preferred Stock, which carries a dividend rate of 7.75% per annum.

We believe our low debt ratio, as compared with our peers, is a competitive advantage for us.

● Access to capital .

Once the capital markets open up, we should be in a good position to raise capital quickly and efficiently.

As a public company subject to the reporting requirements of the Exchange Act, we are able to access the public markets for capital.

Through December 31, 2023, we raised approximately $505.9 million of gross proceeds through public offerings of our equity and debt securities.

We did not undertake new any public offerings in 2023 other than sales under our existing at-the-market offering facility.

We have used the net proceeds from these sales to grow our business.

● Liquidity .

In addition, to our capital raises through the public markets, we have other sources of liquidity:

(i) a $200 million master repurchase financing facility (the “Churchill Facility”) with Churchill MRA Funding I LLC (“Churchill”), a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York;

(ii) a margin loan account with Wells Fargo that allows us to borrow against our investment securities portfolio (the “Wells Fargo Loan”), the net value of which at December 31, 2023 was approximately $36.3 million;

and (iii) a $65 million revolving credit facility with Needham Bank, a Massachusetts co-operative bank, which can be increased up to $75 million under certain circumstances (the “Needham Credit Facility”).

As of December 31, 2023, we had cash and cash equivalents and net investment securities of approximately $50.4 million.

● Management .

Our senior executive officers include John Villano, chief executive officer, president and interim chief financial officer.

Other key personnel include a vice president – finance and operations, a senior vice president – asset management and a vice president – asset management.

In addition, we have added personnel in operations, accounting and administration to accommodate the growth of our business.

Although these new hires have resulted in increased compensation, they were and will continue to be necessary to accommodate our growth and to maintain our ability to continue to service our borrowers and manage our business without sacrificing quality.

Our Business and Growth Strategies

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To accelerate profitable growth, we will continue to focus on selectively originating, managing, and servicing a portfolio of first mortgage real estate loans designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles.

We are also targeting larger-value commercial loans with strong, experienced sponsors.

To drive operational excellence, we have embarked on a broad change management initiative to review, assess, and upgrade — or transform if necessary — our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms.

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

We also target larger-value commercial loans with strong, experienced sponsors.

To drive operational excellence, we review, assess, and upgrade — or transform if necessary — our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms.

To that end, in 2023 we further automated our underwriting process.

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

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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.

Lastly, we are looking to partner with other small hard money lenders that are undercapitalized in an effort to participate in their loans or to provide them with enterprise capital growing their business, with Sachem having upside economics in the Manager entity.

Lastly, we are looking to partner with other small well run, opportunistic hard money lenders in growing Metropolitan Statistical Area’s that are looking for growth capital.

Our effort will include a participation in their loans or enterprise capital to grow their business, with Sachem having upside economics in the Manager entity.

Our strategy to achieve our objective also includes the following:

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● We continue to strengthen our geographic footprint beyond Connecticut.

At December 31, 2022, we had loans in 15 other states – California, Florida, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee and Texas.

At December 31, 2023, we had loans in 14 other states – California, Florida, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee and Texas, and Washington, D.C..

We continue to expand our presence in these states as well as seek opportunities in other markets that meet our underwriting and loan criteria.

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In addition, we believe the migration to these types of loans will offset any rate compression and help us maintain a low foreclosure rate.

● To leverage our expertise in real estate finance and our capital resources, on the one hand, and to capitalize on lending opportunities in specific markets, on the other, we plan to partner and invest with local “hard money” real estate lenders creating satellite offices under the “Sachem” influence.

● We plan to partner and invest with local “hard money” real estate lenders creating satellite offices under the “Sachem” influence.

An advantage of this model is that these local lenders subscribe to a “Sachem” model using their own personal assets and those of other investor partners to fund loan opportunities and operations which increases their capital commitment to the opportunity.

Under these arrangements, we would provide loan funding capital as well as our underwriting and servicing expertise and our local partners would provide us with “boots on the ground” lending opportunities.

We have had preliminary discussions with local lenders in other markets, including Orlando, Florida, Greenwich, Connecticut, Charlotte, North Carolina and Atlanta, Georgia.

We plan to continue these discussions and scout other locations as well.

However, we have not yet entered into any definitive agreements and we cannot assure you that we will be able to consummate any such partnerships or joint ventures on terms that will be acceptable to all parties.

We believe that the primary challenges for us in 2023 will be the following:

Recent developments in the banking sector, particularly the FDIC assuming control of Silicon Valley Bank and Signature Bank, the forced sale of Credit Suisse to USB and the attempt to engineer a sale of First Republic Bank, suggest that the economy may be entering a period of illiquidity.

This could adversely impact our business in several ways.

First, it may make it more difficult for us to raise working capital to grow our business.

Our growth to date has been fueled by our ability to raise capital through the sale of debt and equity securities.

We have not been able to access the capital markets since August of 2022.

Although we recently obtained a $45 million revolving credit facility from Needham Bank, we will need to raise additional working capital to sustain our historical growth rates.

Second, it may make it more difficult for our borrowers to refinance their loans with us as those loans become due.

We have already seen an increase in the number of loans that are past their due date but remain unpaid.

Similarly, our ability to raise equity capital has been hampered by the decline in the value of our common shares, consistent with the general decline in the major stock indices and decreases in the market value of REIT stocks.

Our common shares are now trading well below book value.

Interest rate compression.

Since the beginning of 2022 through the date of this report, the Federal Reserve Board (the “Fed”) has raised interest rates nine times for an aggregate increase of 4.75%.

As a result, the Fed Funds rate has increase from 0.08%, at January 3, 2022, to 4.83% 1 , as of March 29, 2023.

Similarly, the prime rate, which was 3.25%, on January 3, 2022, is 8.00%, as of March 29, 2023.

As a result, our cost of capital has increased.

Our last note offering, consummated in August 2022, was priced at 8.00%, the highest rate we ever paid.

Similarly, the rates on our adjustable rate facilities, have increased significantly.

On the other hand, we have not been able to offset the higher cost of capital with commensurate increases in the rates we charge our borrowers.

Geopolitical concerns.

As our business is strictly domestic, in general, geopolitical events do not impact us directly.

Nevertheless, adverse geopolitical developments could indirectly impact us to the extent they lead to market volatility, spikes in commodity prices, supply chain interruptions, heightened cybersecurity concerns and general concerns that it might lead to unconventional warfare.

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

Increased competition.

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 finance companies, hedge funds, private equity funds and insurance companies, are likely to step into the void.

Clearly, the primary driver for these new market participants is the need to generate yield.

They are well-funded and aggressive in terms of pricing, making it more difficult for us to raise our borrowing rates.

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

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.

https://www.newyorkfed.org/markets/reference-rates/effr

Property value fluctuations.

While the higher interest rates have had only a minimal impact on the rate of inflation, they have lowered overall economic output;

GDP growth is slowing.

This has had an adverse impact on property values, which makes it more difficult for our borrowers to sell their properties and pay-off our loans.

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 significant 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.

Labor shortages.

As our business has grown, we have had to hire more people.

In 2022 our employee headcount increased by 12, or 55%, including nine people that we hired in October 2022 when we acquired the assets of Urbane New Haven, LLC.

Many of these new hires filled our need in asset management, underwriting, accounting and legal departments.

Knowledgeable and qualified personnel are in high demand.

According to the U.S.

Bureau of Labor Statistics, the January 2023 unemployment rate for New Haven (the most recent month for which such data is available), which is where we are based, was 3.9%, which while higher than the national average is still quite low.

If we cannot hire high-quality, talented people our ability to sustain our growth will be impaired.

Increased operating expenses.

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

In addition, our compensation expense has increased as we hired new personnel and increased salaries of existing employees to administer a larger loan portfolio and more complex loan transactions.

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 approximately $114.6 million, compared to 177 loans in the aggregate principal amount of approximately $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.

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

Specifically, we believe that the following factors will impact our performance in 2023.

● Strong balance sheet.

At December 31, 2022, we had approximately $217.7 million of shareholders’ equity and total indebtedness for borrowed money of approximately $335.3 million (including deferred financing costs).

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

Our equity includes 1,903,000 shares of Series A Preferred Stock, which carries a dividend rate of 7.75% per annum.

● Access to capital .

As a public company subject to the reporting requirements of the Exchange Act, we are able to access the public markets for capital.

Through December 31, 2022, we raised approximately $482.5 million (gross proceeds) through public offerings of our equity and debt securities.

We have used the net proceeds from these offerings to increase our business.

● Liquidity .

In addition, to our capital raises through the public markets, we have three other sources of liquidity:

(ii) a margin loan account with Wells Fargo that allows us to borrow against our investment securities portfolio (the “Wells Fargo Loan”);

and (iii) a $1.4 million mortgage loan with New Haven Bank (the “NHB Mortgage”) that we used to finance the purchase and renovation of what will be our new corporate headquarters.

As of December 31, 2022, we had cash and cash equivalents of approximately $23.7 million and investment securities, net of the Wells Fargo Loan, of approximately $21.0 million.

In the first quarter of 2023, we refinanced the NHB Mortgage increasing the amount of the loan to $1.66 million and opened a new $45 million revolving credit facility with Needham Bank.

● Management .

Our senior executive officers include John Villano, chief executive officer and president, and John Warch, chief financial officer.

Other key personnel include a vice president – finance and operations, a senior vice president – asset management and a vice president – asset management.

In January 2023 our chief investment officer and director of investor relations resigned.

Instead of replacing him, we reassigned his tasks to existing employees.

In addition, we have added personnel in operations, accounting and administration to accommodate the growth of our business.

We have not yet entered into any definitive agreements, and we cannot assure you that we will be able to consummate any such partnerships or joint ventures on terms that will be acceptable to all parties.

Our Competitive Strengths

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We commenced operations as a limited liability company in December 2010 with three investors and limited equity capital.

Since our inception through December 31, 2022, we have funded approximately 1,900 mortgage loans having an aggregate principal amount of approximately $939.7 million.

Since our inception through December 31, 2023, we have funded approximately 1,950 mortgage loans having an aggregate gross principal amount of approximately $1.1 billion.

Immediately prior to the IPO, we had approximately 155 investors and approximately $27.0 million of members’ equity.

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Similarly, since the IPO, our mortgage loan portfolio has grown from $33.8 million to $499.2 million at December 31, 2023.

In addition, at December 31, 2022, we had approximately $23.7 million of cash and cash equivalents and approximately $24.6 million of investment securities.

We have reported net profits in every quarter since our IPO.

In addition, at December 31, 2023, we had approximately $50.4 million of cash and cash equivalents and net investment securities.

● Long-standing relationships.

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As long as these borrowers remain active real estate investors, they provide us with an advantage in securing new business and help us maintain a pipeline to attractive new opportunities that may not be available to many of our competitors or to the general market.

● Skilled workforce.

● Skilled and loyal workforce.

Our employees are multi-skilled professionals who have a strong “team” orientation, a “continuous process improvement” mentality, and an authentic desire to learn all aspects of our business and contribute wherever and however they are needed.

Other than the retirement of three employees, we have had zero employee turnover in over 24 months.

Other than the retirement of three employees, we have had only one employee leave the Company in the last 24 months.

● Knowledge of the market.

We have an intimate knowledge of the Connecticut real estate market, which enhances our ability to identify attractive opportunities and helps distinguish us from many of our competitors.

We have also established relationships with locals in other markets, such as Naples, Florida and Austin, Texas, to provide us with visibility, lending opportunities and local expertise.

We have also established relationships with locals in other markets, such as Naples, Florida and Orlando, Florida, to provide us with visibility, lending opportunities and local expertise.

● Disciplined lending.

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We also believe that our procedures and experience allow us to execute opportunities quickly and efficiently.

Lastly, our newly formed subsidiary, Urbane Capital, LLC, further bolsters our portfolio management by giving us the in-house expertise to resolve troubled loans and to complete construction projects to maximize shareholder value.

Lastly, Urbane Capital, LLC, our subsidiary, further bolsters our portfolio management by giving us the in-house expertise to resolve troubled loans and to complete construction projects to maximize shareholder value.

● Structuring flexibility.

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Our ability to customize financing structures to meet borrowers’ needs is one of our key business strengths.

● No legacy issues.

We are not burdened by distressed legacy real estate assets.

Our Real Estate Lending Activities

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At December 31, 2023, our outstanding mortgage loan portfolio included loans ranging in size from approximately $12,000 to $37.4 million.

At December 31, 2022, approximately 77.9% our loans, accounting for approximately 23.1% of our loan portfolio, had an outstanding principal balance of $1 million or less.

That means, approximately 22.1% of our loans, accounting for approximately 76.9% of our loan portfolio, had an outstanding principal balance of more than $1 million.

In comparison, at December 31, 2021, approximately 88.5% of our loans, accounting for approximately 38.3% of our loan portfolio, had a an outstanding principal balance of $1 million or less.

That means, approximately 11.5% of our loans, accounting for approximately 61.7% of our loan portfolio, had an outstanding principal balance of more than $1 million.

At December 31, 2023, approximately 63.7% of our loans, accounting for approximately 14.4% of our loan portfolio, had an outstanding principal balance of $1 million or less.

Thus, approximately 36.3% of our loans, accounting for approximately 85.6% of our loan portfolio, had an outstanding principal balance of more than $1 million.

In comparison, at December 31, 2022, approximately 77.9% of our loans, accounting for approximately 23.1% of our loan portfolio, had an outstanding principal balance of $1 million or less.

Thus, approximately 22.1% of our loans, accounting for approximately 76.9% of our loan portfolio, had an outstanding principal balance of more than $1 million.

The table below gives a breakdown of our mortgage loan portfolio by loan size as of December 31, 2023:

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In comparison, at the end of 2022, approximately 61.3% of the loans in our portfolio (representing approximately 43.5% of the aggregate outstanding principal balance of our loan portfolio) were secured by properties located in Connecticut.

Most of the properties we finance are

residential investment or commercial.

Most of the properties we finance are residential investment or commercial and have a construction component.

However, in all instances the properties are held only for investment by the borrowers and may or may not generate cash flow.

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South Carolina

Washington D.C.

The typical terms of our loans to date are as follows:

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At December 31, 2023 our average loan size was approximately $1.6 million and the median loan size was approximately $577,000.

In comparison, at December 31, 2021, our average loan size was approximately $562,000 and the median loan size was approximately $202,000.

We have a policy that limits the amount of all loans to a single borrower or a group of related borrowers to no more than 10% of our total loan portfolio (after accounting for the loan in question), unless otherwise approved by the Board.

In addition, we have another policy that requires the Board to approve all loans that have an original principal amount of $5 million or more.

In comparison, at December 31, 2022 our average loan size was approximately $1.0 million and the median loan size was approximately $332,000.

We have a policy that limits the maximum amount of our exposure to a single borrower or a group of affiliated borrowers to 10% of the aggregate amount of our loan portfolio, unless otherwise approved by the Board.

Finally, any loan with an original principal amount exceeding $5 million must be approved by the Board.

Loan-to-Value Ratio.

Our underwriting guidelines provide that the original principal amount of a loan should not exceed 70% of the fair market value of the property securing the loan.

In the case of properties undergoing renovation, the loan-to-value ratio is calculated based on the estimated fair market value of the property after the renovations have been completed.

In the case of properties undergoing renovation, the estimated fair market value of the property after the renovations have been completed.

However, we do make exceptions to this guideline if the facts and circumstances support the incremental risk.

The factors we will consider include the additional collateral provided by the borrower, the credit profile of the borrower, our previous relationship, if any, with the borrower, the nature of the property, the geographic market in which the property is located and any other information we deem appropriate.

Loan-to-Cost Ratio.

Our underwriting guidelines provide that the original principal amount of a loan should not exceed 85% of the total cost of the project.

Interest rate.

Currently, a fixed rate between 5.0% to 14.2% per annum with a default rate of up to 18% per annum.

Currently, a fixed rate typically between 10.0% to 13.0% per annum with a default rate of up to 24% per annum.

Origination fees.

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Generally, none required.

Depending on the circumstances, we may require the borrower to establish reserves for interest, taxes and/or insurance.

Depending on the particular cash flow of a property, we may require the borrower to establish reserves for interest, taxes and/or insurance.

This has been particularly true with respect to larger loans.

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Borrowers pay an application fee, an inspection fee, wire fee, bounced check fee and, in the case of construction loans, check requisition fee for each draw from the loan.

In 2022, we added a construction management fee of 1% to 2% of the construction budget for construction loans.

Starting in 2022, we added a construction servicing fee of 1% to 2% of the construction budget for construction loans.

Finally, as is typical in real estate finance transactions, the borrower pays all expenses relating to obtaining the loan including the cost of a property appraisal, the cost of an environmental assessment report, if any, the cost of a credit report and all title, recording fees and legal fees.

Operating Data

Our lending activities increased each year since we commenced operations and we have reported net profits in every quarter since our IPO.

Our lending activities have increased each year since we commenced operations.

Our Loan Portfolio

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Historically, many of our loans are paid prior to their maturity dates.

For example, of the loans that were repaid in full during 2022, approximately 30.7% were repaid prior to maturity.

In 2023, of the loans that were repaid in full during the year, approximately 56.6% were repaid prior to maturity.

For 2022, approximately 30.7% of the loans repaid during that year were paid prior to maturity.

The Company believes the decline in repayments prior to maturity in 2023 as compared to 2022 is primarily due to the rising interest rate environment in 2023 that also put pressure on the U.S.

banking system.

Of the 311 mortgage loans that made up our loan portfolio at December 31, 2023, 89, or approximately 28.6%, had matured in 2023 but have not been repaid in full or extended.

These loans are in the process of modification and will be extended if the borrower can satisfy our underwriting criteria, including the proper loan-to-value ratio, at the time of renewal.

If the loan does not meet our underwriting criteria, we will treat the loan as in default and take the necessary steps to collect the balance due.

We treat renewals and extensions of existing loans as new loans.

We monitor our loans on a day-to-day basis.

We generate daily reports from our loan tracking software that provides us with detailed information on each loan in our portfolio including the maturity date of the loan, the date the last payment was received, the date the next payment is due, the amount, if any, in arrears, whether we have received any notice from the insurance carrier that a claim has been made or that coverage has been discontinued and whether we have received any notice from the taxing authority of a lien for non- payment of taxes.

We generate reports from our loan tracking software that provides us with detailed information on each loan in our portfolio including the maturity date of the loan, the date the last payment was received, the date the next payment is due, the amount, if any, in arrears, whether we have received any notice from the insurance carrier that a claim has been made or that coverage has been discontinued and whether we have received any notice from the taxing authority of a lien for non- payment of taxes.

If there is a default, we immediately contact the borrower to determine the reasons underlying the default and what action the borrower plans to take to cure the default.

Once we become aware of the default, we continue to monitor the loan closely until we are satisfied that the situation has been resolved.

Generally, we do not make periodic inspections of the properties securing our loans or obtain new appraisals during the term of the loan even if there is a default.

However, if the borrower desires to extend the term of the loan, since we treat that as a new loan, we undertake all our underwriting procedures, including, if necessary, a new appraisal.

As a real estate finance company, we deal with a variety of default situations, including breaches of covenants, such as the obligation of the borrower to maintain adequate liability insurance on the mortgaged property, to pay the taxes on the property and to make timely payments to us.

Generally, we do not make periodic inspections of the properties securing our loans.

However, if the borrower desires to extend the term of the loan, since we treat that as a new loan, we undertake all our underwriting procedures, including a new appraisal.

As a real estate finance company, we deal with a variety of default situations, including breaches of covenants, such as the obligation of the borrower to maintain adequate liability and property insurance on the mortgaged property, to pay the taxes on the property and to make timely payments to us.

As such, we may not be aware that a default occurred.

At December 31, 2022, of the 444 mortgage loans in our portfolio, 40, or approximately 8.8%, were in the process of foreclosure.

At December 31, 2023, of the 311 mortgage loans in our portfolio, 56 were in the process of foreclosure.

The aggregate outstanding principal balance and the accrued but unpaid interest and borrower charges on these loans as of December 31, 2023 was approximately $68.1 million, or approximately 13.6% of our mortgage loan portfolio.

In the case of each of these loans, we believe the value of the collateral exceeds the outstanding balance on the loan and, accordingly, we have not reserved for any losses.

In comparison, at December 31, 2021, of the 520 mortgage loans in our portfolio, 16, or approximately 3.1%, were in the process of foreclosure.

We have taken reserves against 18 of the loans subject to foreclosure of approximately $6.2 million as of December 31, 2023.

In comparison, at December 31, 2022, of the 444 mortgage loans in our portfolio, 40 were in the process of foreclosure.

The aggregate outstanding principal balance and the accrued but unpaid interest and borrower charges on these loans as of December 31, 2022 was approximately $24.0 million, or approximately 5.2% of our mortgage loan portfolio.

In the case of each of these loans, we believe the value of the collateral exceeds the outstanding balance on the loan and, accordingly, we have not reserved for any losses.

As of December 31, 2022, in the case of each of these loans, we believed the value of the collateral exceeded the outstanding balance on the loan and, accordingly, we did not reserve for any losses.

As our business and mortgage loan portfolio has grown, we realize that late payments could adversely impact our performance and could adversely impact our ability to comply with loan covenants under a credit facility.

As a result, over the last few years we have been more aggressive in asserting our right to collect late payment fees.

As a result, over the last few

years we have been more aggressive in asserting our right to collect late payment fees.

As a result, revenue from late payment fees increased initially.

Notwithstanding our aggressive stance, we realized that certain borrowers may have difficulty staying current on

their obligations.

Notwithstanding our aggressive stance, we realized that certain borrowers may have difficulty staying current on their obligations.

Thus, if a borrower can demonstrate true “hardship”, we will not enforce our rights immediately and give the borrower an opportunity to cure its default.

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Some of the factors we will consider include the nature of the default ( i.e ., whether nonpayment of amounts due or breach of a covenant or agreement), the reason or reasons for the default, our cash flow requirements, the nature and length of our relationship with the borrower, whether or not the borrower has a history of non-payment and the loan-to-value ratio at the time of the default.

At December 31, 2023, six affiliated borrowers accounted for 5.1% of our loan portfolio.

At December 31, 2022, five affiliated borrowers accounted for 5.1% of our loan portfolio.

At December 31, 2021, eight affiliated borrowers accounted for 5.7% of our loan portfolio.

We had one borrower represent 10.1%, or approximately $50.4 million outstanding principal balance of our mortgage portfolio as of December 31, 2023.

The following tables set forth information regarding the types of properties securing our mortgage loans outstanding at December 31, 2023 and 2022 and the interest earned in each category:

At December 31,

Developer–Residential Mortgages

Developer–Commercial Mortgages

Land Mortgages

Pre-Development Land

Total Mortgages Receivable

For the Years Ended December 31,

Interest Earned

Land Mortgages

At December 31, 2023:

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11 loans, which accounted for approximately 3.4% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in New Jersey;

six loans, which accounted for approximately 2.33% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in North Carolina:

four loans, which accounted for approximately 3.4% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in North Carolina:

and eight loans, which accounted for approximately 1.6% of our loan portfolio, were secured by properties located in Maryland.

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20 loans, which accounted for approximately 4.5% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in Massachusetts;

and five loans, which accounted for approximately 2.3% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in New Jersey.

No other state accounted for more than four loans or 2.0% of our loan portfolio.

21 loans, which accounted for approximately 4.89% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in New Jersey;

six loans, which accounted for approximately 2.3% of the aggregate outstanding principal balance of our loan portfolio, were secured by properties located in North Carolina:

and eight loans, which accounted for approximately 1.7% of our loan portfolio, were secured by properties located in Maryland.

No other state accounted for more than five loans or 2.0% of our loan portfolio.

Our Origination Process and Underwriting Criteria

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Our chief executive officer, John L.

Villano, spends a significant portion of his time on business development as well as on

underwriting, structuring and servicing each loan in our portfolio.

Villano, spends a significant portion of his time on business development as well as on underwriting, structuring and servicing each loan in our portfolio.

A principal source of new transactions has been repeat business from existing and former customers and their referral of new business.

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Finally, we analyze and assess selected financial and operational data provided by the borrower relating to its operation and maintenance of the property.

In terms of the borrower and its principals, we obtain third party credit reports from one of the major credit reporting services as well as selected personal financial information provided by the borrower and its principals.

In terms of the borrower and its principals, we obtain third party credit reports from one of the major credit reporting services, background checks from LexisNexis, and personal financial statements provided by the borrower and its principals.

Additionally, we test personal financial statements by requesting supporting documents such as bank and brokerage statements and mortgage documents for other property they own, if applicable.

We analyze all this information carefully prior to making a final determination.

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Before a loan commitment is issued, the loan must be reviewed and approved by our management team.

If there is an exception to our standard guidelines, an exception report must be signed by our chief executive officer.

Our loan commitments are generally issued subject to receipt by us of title documentation and title report, in a form satisfactory to us, for the underlying property.

Additionally, any loan with an original principal amount exceeding $5 million must be approved by the Board.

Financing Strategy Overview

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We intend to maintain a modest amount of leverage for the sole purpose of financing our portfolio and not for speculating on changes in interest rates.

Our total outstanding indebtedness at December 31, 2022 was approximately $335.3 million, which included the Wells Fargo Loan balance of $3.6 million, $42.5 million outstanding under the Churchill Facility, $750,000 outstanding under the NHB Mortgage

and approximately $288.4 million aggregate outstanding principal amount of five-year, unsecured unsubordinated notes, including deferred financing costs (the “Notes”) as follows:

Our total outstanding indebtedness at December 31, 2023 was approximately $377.7 million, which included the Wells Fargo Loan balance of $26.8 million, $26.5 million outstanding under the Churchill Facility, $1.08 million outstanding under the NHB Mortgage, $35.0 million outstanding under the Needham Credit Facility and approximately $288.4 million aggregate outstanding principal amount of five-year, unsecured unsubordinated notes, including deferred financing costs (the “Notes”) as follows:

● $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”), which trades on the NYSE American under the symbol SCCG.

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● $56,363,750 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”), which trades on the NYSE American under the symbol SCCC.

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

● $34,500,000 aggregate 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”), which trades on the NYSE American under the symbol SACC.

The December 2024 Notes are due and payable in full on December 30, 2024.

● $23,663,000 aggregate 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”), which trades on the NYSE American under the symbol SCCB.

The June 2024 Notes are due and payable in full on June 30, 2024.

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.

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Under the terms of the Indenture, we may, at our option, at any time and from time to time, redeem Notes two years after the date of their original issuance.

As such, the June 2024 Notes, the December 2024 Notes and the 2025 Notes are all currently redeemable at our option.

The 2026 Notes will be redeemable as of December 20, 2023, and the March 2027 Notes, the June 2027 Notes and the September 27 Notes, will not be redeemable until 2024.

As such, the June 2024 Notes, the December 2024 Notes, the 2025 Notes, the 2026 Notes and the March 2027 are all currently redeemable at our option.

The June 2027 Notes will be redeemable in May 2024, and the September 27 Notes, will be redeemable in August 2024.

In each case the redemption price is 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 as of December 31, 2022 includes the Churchill Facility, the Wells Fargo Loan and the NHB Mortgage (each as described below).

On July 21, 2021, we consummated a $200 million facility (the “Churchill Facility”) with Churchill MRA Funding I LLC (“Churchill”).

Our secured indebtedness as of December 31, 2023 includes the Churchill Facility, the Wells Fargo Loan, the NHB Mortgage and the Needham Credit Facility (each as described below).

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.

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We also granted Churchill a first priority security interest on the mortgage loans sold to Churchill to secure our repurchase obligation.

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.

The cost of capital under the Churchill Facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 90-day SOFR plus (b) 3% - 4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time.

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

( On November 18, 2022, the Churchill Facility was amended to replace the 90-day LIBOR with the 90-day SOFR as the new benchmark rate.) 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.

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.

Churchill has the right to terminate the Churchill Facility at any time upon 180 days prior notice to us.

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At December 31, 2023, the amount outstanding under the Churchill Facility was approximately $26.5 million, which amount was accruing interest of an effective 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 $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 5.75%.

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

In 2021, we obtained a $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 at December 31, 2022.

The initial proceeds of the NHB Mortgage were used to offset some of the costs we incurred to acquire the property located at 568 East Main Street, Branford, Connecticut.

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

The NHB Mortgage accrued interest at an initial rate of 3.75% per annum for the first 72 months and was 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 on December 1, 2022 principal and interest was due and payable on a monthly basis, based on a 20-year amortization schedule.

The Wells Fargo Loan is secured by our portfolio of short-term securities, which had a value of approximately $36.3 million at December 31, 2023.

The outstanding balance on the Wells Fargo Loan of approximately $26.8 million bears interest at a rate equal to 1.75% below the prime rate.

At December 31, 2023, the prime rate was 8.5% and the interest rate on the Wells Fargo Loan was 6.77% after certain minor adjustments.

As of December 31, 2023 the Wells Fargo Loan had approximately $1.0 million of availability.

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, a portion of which was used towards the costs incurred to acquire the property located at 568 East Main Street, Branford, Connecticut.

The balance of the NHB Mortgage was funded when the renovations of that property were completed.

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

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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.

In 2022, we sold an aggregate of 7,879,907 Common Shares and realized net proceeds of approximately $39.3 million.

The shares were sold to the public pursuant to at-the-market offerings.

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

The outstanding mortgage balance as of December 31, 2023 is approximately $1.1 million.

On March 2, 2023, we entered into a Credit and Security Agreement (the “Credit Agreement”), with Needham Bank, a Massachusetts co-operative bank, 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%).

All amounts borrowed under the Needham 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 Needham Credit Facility expires March 2, 2026 subject to our right to extend the term for one year upon the consent of the Administrative Agent and the Lenders, which consent cannot be unreasonably withheld, and so long as we are not in default and satisfy certain other conditions.

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

We have the right to terminate the 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:

(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;

(B) a sum of cash, cash equivalents and availability under the facility equal to or greater than $10 million;

and (C) an asset coverage ratio of at least

As of December 31, 2023, the interest rate on the Needham Credit Facility was 8.25% per annum.

The outstanding balance on the Needham Credit Facility as of December 31, 2023 was $35.0 million.

In 2023, we sold an aggregate of 5,546,891 Common Shares, realizing gross proceeds of approximately $20.9 million, and sold an aggregate of 126,923 shares of its Series A Preferred Stock having an aggregate liquidation preference of $3,173,075, realizing gross proceeds of approximately $2.6 million representing a discount of approximately 17.6% to the liquidation preference.

The shares were sold to the public pursuant to our at-the-market offering.

At December 31, 2023, approximately $45.4 million of Common Shares and shares of Series A Preferred Stock having a liquidation preference of $22.4 million were available for future sale under the ongoing at-the-market offering facility.

In 2022, we sold an aggregate of 7,879,907 Common Shares and realized net proceeds of approximately $39.3 million.

The shares were sold to the public pursuant to at-the-market offerings.

In 2021, we raised aggregate net proceeds of approximately $45.5 million (after deducting underwriting discounts and commissions and offering expenses) from the sale of 1,903,000 shares of our 7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock”) in a firm commitment underwritten public offering at a public offering price of $25.00 per share, equal to the liquidation preference.

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

The shares were sold to the public pursuant to our at-the-market offering facility.

The following table shows our sources of capital, including our financing arrangements, and our loan portfolio as of December 31, 2023:

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Repurchase facility

Line of credit

Lines of credit

Mortgage payable

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Total sources of capital

Cash and short-term investment securities

Mortgages receivable

Cash and investment securities, net

Mortgages receivable, net

Investments in Partnerships

Commencing with our IPO, our founders, Jeffrey C.

Villano and John L.

Villano, served as co-chief executive officers.

In addition, Jeffrey C.

Villano served as our president and treasurer and John L.

Villano served as our chairman, chief financial officer and secretary.

On November 20, 2019, Jeffrey C.

Villano resigned from his positions as our co-chief executive officer, president and treasurer.

On December 10, 2019, he also resigned as a member of the Board.

Upon his resignation, the Board confirmed John L.

Villano as our sole chief executive and appointed him as president and treasurer as well.

Villano then resigned as secretary and Peter Giannotti, our in-house counsel, was appointed as secretary in his place.

In July 2022, Mr.

Villano relinquished his position as treasurer and the Board appointed Mr.

Giannotti as secretary and treasurer.

In August 2022, Mr.

Villano relinquished his position as chief financial officer and the Board appointed John E.

Warch as chief financial officer.

Villano is our chairman, chief executive officer and, since May 2023, interim chief financial officer.

Pursuant to his employment agreement with us, John L.

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In January 2022, we promoted Nicholas M.

Marcello to the position of vice president, finance and operations, in connection with the January 14, 2022 retirement of Peter Cuozzo from his positions as our executive vice president and chief operating officer.

Marcello joined us in September 2020 as director of finance and as vice president, finance and operations he has assumed a leadership role in business operations and will continue to have oversight of our financial reporting, capital markets activities, tax compliance, and investments.

In July 2022, we hired John E.

Warch as our executive vice president and chief financial officer, replacing John L.

Villano as the company’s chief financial officer.

Warch is a seasoned industry executive, with over 40 years of corporate finance and accounting experience.

Marcello to the position of vice president, finance and operations.

Marcello joined us in September 2020 as an accounting manager, and was subsequently promoted to vice president, finance and operations, has assumed a leadership role in business operations and will continue to have oversight of our financial reporting, capital markets activities, tax compliance, and investments.

In October 2022, in connection with our acquisition of the assets of Urbane New Haven, LLC and formation of Urbane Capital, LLC, we hired Eric O’Brien as our senior vice president – asset management and Ralph Sylvester as our vice president – asset management.

O’Brien and Mr.

Sylvester are seasoned asset management professionals.

Sylvester are seasoned development and asset management professionals.

The real estate finance markets in Connecticut and other geographic areas in which we operate are highly competitive.

Our competitors include traditional lending institutions such as regional and local banks, savings and loan institutions, credit unions and other financial institutions as well as other market participants such as specialty finance companies, REITs, investment banks,

insurance companies, hedge funds, private equity funds, family offices and high net worth individuals.

In addition, there are numerous “hard money” lenders of significant size serving the markets in which we currently operate and those in which we plan to operate in the future.

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Notwithstanding intense competition and some of our competitive disadvantages, we believe we have carved a niche for ourselves among small and mid-size real estate developers, owners and contractors in the markets in which we operate because we are well-capitalized, we have demonstrated flexibility to structure loans to suit the needs of the individual borrower and we can act quickly.

In addition, through our marketing efforts we are beginning to develop a brand identity in some of the other markets in which we operate, particularly those along the eastern seaboard as well as Texas.

In addition, through our marketing efforts we are beginning to develop a brand identity in some of the other markets in which we operate, particularly those along the eastern seaboard.

We believe we have developed a reputation among these borrowers for offering reasonable terms and providing outstanding customer service.

1 unchanged sentence

Sales and Marketing

We do not engage any third parties for sales and marketing services other than Google advertising.

We do not engage any third parties for sales and marketing services other than Google advertising and the Scotsman Guide.

Rather, we rely on our senior executive officers and our new marketing department to generate lending opportunities as well as referrals from existing or former borrowers, brokers, bankers and web-based advertising.

12 unchanged sentences

Our operations are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions.

In addition, we may rely on exemptions from various requirements of the Securities Act of 1933, as amended (the “Securities Act”), the Exchange Act, the Investment Company Act and ERISA.

In addition, we may rely on exemptions from various requirements of the Securities Act of 1933, as amended (the “Securities Act”), the

Exchange Act, the Investment Company Act and ERISA.

These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties who we do not control.

24 unchanged sentences

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

What changed 10-K

Item 1. Business