What changed in this filing

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Item 1A. Risk Factors

2024-04-01 compared with 2023-03-31 · 88 added, 72 removed, 558 unchanged (22% of the section changed)

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budget debates, geopolitical issues, international trade issues, public health issues, and the availability and cost of credit have contributed to increased volatility and uncertainty for the economy and the financial and credit markets.

For example, COVID-19 has contributed significantly to the supply chain issues in the real estate sector that have affected our borrowers, ultimately slowing construction and driving up cost.

For example, COVID-19 contributed significantly to the supply chain issues in the real estate sector that have affected our borrowers, ultimately slowing construction and driving up costs.

In addition, we cannot assure that similar or a completely different set of adverse conditions will not arise in the future.

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Currently, there are several geopolitical concerns that could, indirectly, have an adverse impact on our business.

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 continued belligerence.

The conditions, and the responses thereto, such as sanctions imposed by the United States and other western democracies, and any expansion thereof is likely to have unpredictable and wide-ranging effects on the domestic and global economy and financial markets, which could have an adverse effect on our business and results of operations.

These concerns include the ongoing war between Russia and Ukraine and Israel and Hamas, heightened tensions between the United States and China over trade, intelligence gathering and Taiwan, Iran’s pursuit of nuclear weapons and its ongoing attempts to destabilize the Middle East and North Korea’s continued belligerence.

The conditions, and the responses thereto, such as sanctions imposed by the United States and other western democracies, and any expansion thereof is likely to have unpredictable and wide-ranging effects on the domestic and global financial markets, which could have an adverse effect on our business and results of operations.

Already, these conditions have led to market volatility, a sharp increase in certain commodity prices, such as wheat and oil, and an increasing number and frequency of cybersecurity threats.

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We will continue to monitor the situation carefully and, if necessary, take action to protect our business, operations, and financial condition.

An increase in interest rates could adversely affect our ability to generate income and pay dividends.

Further increases in interest rates could adversely affect our ability to generate income and pay dividends.

Although the Fed has not increased since July 2023, and most analysts expect interest rates to decrease in 2024, there is still the possibility of interest rate increases in the future, especially if there is a recurrence of inflation.

Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing.

In addition, rising interest rates may also cause loans that we originated prior to an interest rate increase to provide yields that are below prevailing market interest rates.

Moreover, if we must refinance our existing indebtedness at higher rates, the spread between our cost of funds and the yield on our mortgage loan portfolio will decrease.

Moreover, if we must refinance our existing indebtedness at higher rates, the spread between our cost of funds and the yield on our mortgage loan portfolio

will decrease.

As interest rates increase, the aforementioned factors could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our shareholders .

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Many of our loans are not funded with interest reserves and our borrowers may be unable to pay the interest accruing on the loans when due, which could have a material adverse impact on our financial condition.

Our loans are not always funded with an interest reserve.

Many of our loans do not have an interest reserve.

Thus, we generally rely on the borrowers to make interest payments as and when due from other sources of cash.

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In the event of any default under a mortgage loan held by us, we will bear a risk of loss to the extent of any deficiency between the value of the collateral and the outstanding principal and accrued interest of the mortgage loan, and any such losses could have a material adverse effect on our cash flow from operations and our ability to make distributions to our shareholders.

In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

the lien is unenforceable under state law.

Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.

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Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower and the priority and enforceability of the lien will significantly impact the value of such mortgage.

In the event of a foreclosure, we may assume direct ownership of the underlying real estate.

In the event of foreclosure, we may assume direct ownership of the underlying real estate.

The liquidation proceeds upon sale of such real estate may be less than the outstanding balance of the loan (including principal, accrued but unpaid interest and other fees and charges).

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The occurrence of any of the foregoing or similar events may reduce our return from an affected property or asset and, consequently, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our shareholders.

We may be adversely affected by the economies and other conditions of the markets in which we operate, particularly in Connecticut, where we have a high concentration of our loans.

We may be adversely affected by the economies and other conditions of the markets in which we operate, particularly in Connecticut, Florida and New York, where we have a high concentration of our loans.

The geographic distribution of our loan portfolio exposes us to risks associated with the real estate and commercial lending industry in general within the states and regions in which we operate.

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● changes in interest rates.

At December 31, 2022, approximately 61.3% of our mortgage loans (representing approximately 43.5% of the aggregate outstanding principal balance of our loan portfolio) were secured by property located in the state of Connecticut.

As a result, we are subject to the general economic and market conditions in Connecticut as well as those of New England and the northeastern United States.

At December 31, 2023, approximately 59.2% of our mortgage loans (representing approximately 39.8% of the aggregate outstanding principal balance of our loan portfolio) were secured by property located in Connecticut;

12.5% (representing approximately 13.8% of the aggregate outstanding principal balance of our loan portfolio) were secured by property located in New York State;

and 10.9% (representing approximately 25.4% of the aggregate outstanding principal balance of our loan portfolio) were secured by property located in Florida.

As a result, we are subject to the general economic and market conditions in those markets as well as in other markets where we lend.

For example, other geographic markets in neighboring states could become more attractive for developers, investors and owners based on favorable costs and other conditions to construct or improve or renovate real estate properties.

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Any adverse economic or real estate developments or any adverse changes in the local business climate in any geographic market in which we have a concentration of properties, could have a material adverse effect on us.

To the extent any of the foregoing risks arise in Connecticut, New England and the northeastern United states, our business, financial condition and results of operations and ability to make distributions to shareholders could be materially adversely affected.

To the extent any of the foregoing risks arise in Connecticut, New York and Florida, our business, financial condition and results of operations and ability to make distributions to shareholders could be materially adversely affected.

The illiquidity of our loan portfolio could significantly impede our ability to respond to adverse changes in economic, financial, investment and other conditions.

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Therefore, we may not be able to vary our portfolio in response to economic, financial, investment or other conditions promptly or on favorable terms, which could have a material adverse effect on us.

Declining real estate valuations could result in impairment charges, the determination of which involves a significant amount of judgment on our part.

Any impairment charge could have a material adverse effect on us.

We review our loan portfolio for impairment on a quarterly basis and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Indicators of impairment include, but are not limited to, a sustained significant decrease in the value of the collateral securing the loan, including the value of the real estate and other assets pledged to secure the loan as well as personal guarantees by the principals of the borrower, or a borrower’s inability to stay current with respect to its obligations under the terms of the loan.

A significant amount of judgment is involved in determining the presence of an indicator of impairment.

Declining real estate valuations could result in impairment charges or provisions for credit losses, the determination of which involves a significant amount of judgment on our part.

Any impairment or provision could have a material adverse effect on us.

We review our loan portfolio for impairments and provisions for credit losses on a quarterly basis and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Indicators of loss include, but are not limited to, a sustained significant decrease in the value of the collateral securing the loan, including the value of the real estate and other assets pledged to secure the loan as well as personal guarantees by the principals of the borrower, or a borrower’s inability to stay current with respect to its obligations under the terms of the loan.

A significant amount of judgment is involved in determining the presence of

an indicator of impairment or credit loss.

If we determine that the value of the collateral is less than the amount outstanding on the loan or the amount that may become due upon the maturity of the loan, a loss must be recognized for the difference between the fair value of the property and the carrying value of the loan.

The evaluation of the market value of the underlying collateral requires a significant amount of judgment on our part.

Any impairment charge could have a material adverse effect on our financial condition.

A high level of defaults, particularly among larger loans, could have a material adverse impact on our business, operations and financial condition.

At December 31, 2022, approximately 8.8% of our loans, representing approximately 4.9% of the total amount of our loan portfolio, were in foreclosure.

Because, historically, our loans have been relatively small, this has not had a material adverse impact on our business.

For the year ended December 31, 2023, we recorded impairment charges of approximately $0.8 million compared to $0.8 million in 2022.

For the years ended December 31, 2023 and 2022, we recorded provisions for credit losses related to loans of approximately $5.6 million and $105,000, respectively.

Any impairment or credit losses could have a material adverse effect on our financial condition.

A high level of defaults, particularly among larger mortgage loans, could have a material adverse impact on our business, operations and financial condition.

Historically, our mortgage loans were relatively small, and a small number of foreclosures did not have a material adverse impact on our business.

However, our business strategy has changed, and we are now making larger loans with increasing frequency.

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This alters the risk profile of our portfolio.

If 8.8% of our loans were in foreclosure and all of those had an outstanding principal balance in excess of $1 million, they would represent a much greater portion of our loan portfolio, which could have a material adverse impact on our business, operations and financial condition.

At December 31, 2023, of the 311 mortgage loans in our portfolio, 56 were in the process of foreclosure, with an aggregate outstanding principal balance and the accrued but unpaid interest and borrower charges on these loans of approximately $68.1 million.

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 was approximately $24.0 million.

If this trend continues, it could have a material adverse impact on our business, operations and financial condition.

Competition could have a material adverse effect on our business, financial condition and results of operations.

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Even within these policies, management has broad discretion.

We may adopt new strategies, policies and/or procedures or change any of our existing strategies, policies and /or procedures regarding financing, hedging, asset allocation, lending, operations and management at any time without the consent of shareholders, which could result in us originating and funding mortgage loans or entering into financing or hedging transactions with which we have no or limited experience or that are different from, and possibly riskier than our existing strategies and policies.

We may adopt new strategies, policies and/or procedures or change any

of our existing strategies, policies and /or procedures regarding financing, hedging, asset allocation, lending, operations and management at any time without the consent of shareholders, which could result in us originating and funding mortgage loans or entering into financing or hedging transactions with which we have no or limited experience or that are different from, and possibly riskier than our existing strategies and policies.

The adoption of new strategies, policies and procedures or any changes, modifications or revisions to existing strategies, policies and procedures, may increase our exposure to fluctuations in real estate values, interest rates, prepayment rates, credit risk and other factors and there can be no assurance that we will be able to effectively identify, manage, monitor or mitigate these risks.

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fiscal and debt policies may materially adversely affect our business, liquidity, financial condition and results of operations.

In response to the COVID-19 pandemic, the U.S.

Congress has passed multiple relief bills that have significantly increased the gross federal debt and the budget deficit.

Concerns regarding the gross federal debt and the budget deficit have increased the possibility of credit-rating downgrades or economic slowdowns in the U.S.

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Inflation and rising interest rates could adversely impact our business, operations and financial condition.

Since January 1, 2022, through the date of this Report, the Federal Reserve Board (the “Fed”) has raised interest rates nine times for an aggregate of 4.75%.

These are the first interest increases since December 2018.

As a result, Fed Funds rate has increase from 0.08%, at January 3, 2022, to 4.83%, as of March 29, 2023, and the prime rate has increased from 3.25% to 8.00%, as of March 29, 2023.

The Fed’s rate increases are in response to a sharp increase in the annual rate of inflation in the United States, which was reported to be 6.5% for the 12 months ended December 31, 2022.

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

economy has slowed.

Until now, these economic factors have not had an adverse impact on the volume or velocity of our business.

Inflation and rising interest rates could adversely impact our business, operations and financial condition.

In 2023, the Fed raised interest rates four times for an aggregate of 1%.

As a result, the Fed Funds rate increased from 4.50%, at January 1, 2023, to 5.50%, as of December 31, 2023 and the prime rate increased from 7.5% to 8.50%.

The Fed’s rate increases are in response to a sharp increase in the annual rate of inflation in the United States over the last several years, which was reported to be 3.4% and 6.5% for the 12 months ended December 31, 2023 and 2022, respectively.

The Fed increases appear to have suppressed inflation growth, but as a result has slowed growth in the commercial real estate sector.

These economic factors have not had an adverse impact on the volume or velocity of our business, likely because of the slowdown in the regional banking system.

However, they have led to an increase in our borrowing costs.

In addition, the increase in interest rates and inflation and the decrease in the rate of growth of the U.S.

economy has caused a severe decrease in the major stock indices and a general decrease in the valuations of many public companies, including Sachem Capital.

As a consequence, our ability to access the public markets to raise capital has been adversely impacted.

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

Our ability to access the public markets to raise reasonably priced capital has been adversely impacted.

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

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

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Furthermore, such disruptions may result in legal liability.

Accordingly, our failure or inability to

provide products and services to our customers in a timely and efficient manner may result in significant liability, a loss of customers and damage to our reputation, which could have a material adverse effect on us.

Accordingly, our failure or inability to provide products and services to our customers in a timely and efficient manner may result in significant liability, a loss of customers and damage to our reputation, which could have a material adverse effect on us.

The occurrence of cyber-incidents, or a deficiency in our cybersecurity or in those of any of our third-party service providers, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information or damage to our business relationships or reputation, all of which could negatively impact our business and results of operations.

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We cannot assure you that our business and results of operations will not be negatively impacted by a cyber incident.

We face risks from cybersecurity threats that could have a material adverse effect on our business, financial condition, results of operations, cash flows or reputation.

We acknowledge that the risk of a cyber incident is prevalent in the current threat landscape and that a future cyber incident may occur in the normal course of our business.

However, cyber incidents have not been identified to date, therefore having no material adverse effect on our business, financial condition, results of operations, or cash flows.

We understand potential vulnerabilities to known or unknown threats remain and have implemented our cyber risk management program described in Item 1.C.

below to stay up-to-date on attacks against IT assets, data, and services, and to prevent their occurrence and recurrence where practicable.

We cannot assure you that our program will be effective in preventing a cyber incident in the future.

If it’s not effective it could have a material adverse effect on our business, financial condition, results of operations, or cash flows.

The loss of key personnel, such as one of our executive officers, could have a material adverse effect on us.

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Our inability to recruit or retain qualified personnel or maintain access to key third-party service providers and software developers, could have a material adverse effect on us.

In 2022, we added 14 employees, nine of which we hired when we acquired the assets of Urbane New Haven, LLC in October 2022, reflecting the increase in the size and volume of operations.

Over the last two years we added 14 employees, nine of which we hired when we acquired the assets of Urbane New Haven, LLC in October 2022, reflecting the increase in the size and volume of operations.

Each of these new employees had to be trained to follow our policies and procedures.

Training new employees is a difficult, time consuming and expensive task but is key to our growth and success.

We must continue to identify, hire, train, and retain qualified professionals, operations employees, and sales and senior management personnel who maintain relationships with our customers and who can provide the technical, strategic and marketing skills that will help us grow.

We must continue to identify, hire, train, and retain qualified professionals, operations employees, and sales and senior

management personnel who maintain relationships with our customers and who can provide the technical, strategic and marketing skills that will help us grow.

Currently, the U.S.

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Villano, are both exempt from this provision.

(Jeffrey Villano is no longer affiliated with us

and, as far as we know, no longer owns any of our Common Shares.) The ownership limits contained in our charter could delay or prevent a transaction or a change in control of our company under circumstances that otherwise could provide our shareholders with the opportunity to realize a premium over the then current market price for our Common Shares or would otherwise be in the best interests of our shareholders.

(Jeffrey Villano is no longer affiliated with us and, as far as we know, no longer owns any of our Common Shares.) The ownership limits contained in our charter could delay or prevent a transaction or a change in control of our company under circumstances that otherwise could provide our shareholders with the opportunity to realize a premium over the then current market price for our Common Shares or would otherwise be in the best interests of our shareholders.

If we sell or transfer mortgage loans to a third party, including a securitization entity, we may be required to repurchase such loans or indemnify such third party if we breach representations and warranties.

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We do not record these unfunded commitments as liabilities on our balance sheets as the unfunded portion of the loans are not included in the outstanding mortgage loan balances.

We also have not created a reserve for these unfunded commitments.

We try to maintain a reasonable amount of working capital at all times, although not in amounts sufficient to cover all our deferred funding obligations.

In addition, we can also borrow funds against our portfolio of marketable securities, although the value of these securities in our account fluctuate regularly based on our liquidity and demand for our loans.

We also can raise capital through the Churchill Facility.

Nevertheless, there is a possibility that demands for funding under existing loans could exceed our available working capital and if we fail to meet our funding obligations, we may be subject to legal claims by the borrowers.

In addition, we can also borrow funds against our portfolio of marketable securities, although the value of these securities in our account fluctuate, which can reduce our liquidity.

As of December 31, 2023, we had approximately $1.0 million of availability remaining under our Wells Fargo Loan and we may also be able to raise additional capital through one of our other credit facilities ( i.e., Churchill and Needham, which have significant availability).

Nevertheless, there is a risk that borrower demand for funding under existing loans could exceed our available working capital and if we fail to meet our funding obligations, we may be subject to legal claims by the borrowers.

This could have a material and adverse impact on our business reputation, our operations as well as our financial condition.

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If we cannot access external sources of capital on favorable terms or at all, our ability to execute our business and growth strategies will be impaired .

In addition to our normal operating expenses, we have significant cash requirements, notably dividend payments and loan repayments.

To qualify and maintain our qualification as a REIT, we are required under the Code to distribute at least 90% of our “REIT taxable income” (determined before the deduction for dividends paid and excluding net capital gains) annually.

In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our “REIT taxable income,” including any net capital gains.

In addition, we are subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our “REIT taxable income,” including any net capital gains.

In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

Because of these distribution requirements, we may not be able to fund future capital needs, specifically, capital for funding mortgage loans, from operating cash flow.

In addition, approximately $58.2 million principal of our unsecured, unsubordinated notes will become due in 2024 and another $56.4 million will become due in 2025.

Because of these distribution and repayment requirements, we may not be able to fund future capital needs, specifically, capital for funding mortgage loans, from operating cash flow.

Consequently, we rely on third-party sources of capital to fund a substantial amount of our working capital needs.

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Our outstanding indebtedness as of December 31, 2023 was approximately $377.7 million, which exposes us to the risk of default thereunder, among other risks.

At December 31, 2022, our total outstanding indebtedness was approximately $335.3 million, including approximately $58.2 million original principal amount of unsecured unsubordinated fixed rate term notes that mature in 2024, approximately $56.4 million original principal amount of unsecured unsubordinated fixed rate term notes that mature in 2025, approximately $51.8 million original principal amount of unsecured unsubordinated fixed rate term notes that mature in 2026, approximately $122.1 million original principal amount of unsecured unsubordinated fixed rate term notes that mature in 2027, a line of credit secured by our investment portfolio of approximately $3.6 million, approximately $42.5 million under the Churchill Facility that is secured by a first priority security interest on the mortgage loans pledged as collateral, and $750,000 mortgage loan secured by our corporate office buildings.

At December 31, 2023, our total outstanding indebtedness was approximately $377.7 million, including approximately $58.2 million original principal amount of unsecured unsubordinated fixed rate term notes that mature in 2024, approximately $56.4 million original principal amount of unsecured unsubordinated fixed rate term notes that mature in 2025, approximately $51.8 million original principal amount of unsecured unsubordinated fixed rate term notes that mature in 2026, approximately $122.1 million original principal amount of unsecured unsubordinated fixed rate term notes that mature in 2027, a line of credit secured by our investment portfolio of approximately $26.8 million, approximately $26.5 million under the Churchill Facility that is secured by a first priority security interest on the mortgage loans pledged as collateral, approximately $1.1 million mortgage loan secured by our corporate office buildings and approximately $35 million under the Needham Credit Facility.

Our organizational documents contain no limitations regarding the maximum level of indebtedness, whether as a percentage of our market capitalization or otherwise, that we may incur.

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Our outstanding fixed rate term notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have incurred or may incur in the future.

As of December 31, 2022, we have approximately $288.4 million aggregate principal amount of fixed rate term notes (the “Notes”) outstanding, taking into account the deferred financing costs.

As of December 31, 2023, we had approximately $288.4 million aggregate principal amount of fixed rate term notes (the “Notes”) outstanding.

The Notes are unsecured.

As a result, they are effectively subordinated to all our existing and future secured indebtedness, such as the Wells Fargo Loan, approximately $3.6 million at December 31, 2022, the approximately $42.5 million of outstanding borrowings as of December 31, 2022 and any future borrowing under the Churchill Facility, the $750,000 outstanding under the NHB Mortgage at December 31, 2022, as well as any secured indebtedness that we may incur in the future, or any indebtedness that is initially unsecured to which we subsequently grant a security interest, to the extent of the value of the assets securing such indebtedness.

As a result, they are effectively subordinated to all our existing and future secured indebtedness, such as the Wells Fargo Loan, approximately $26.8 million at December 31, 2023, the Churchill Facility, approximately $26.5 million as of December 31, 2023, the Needham Facility, $35.0 million as of December 31, 2023, and the NHB Mortgage, approximately $1.1 million at December 31, 2023, as well as any secured indebtedness that we may incur in the future, or any indebtedness that is initially unsecured to which we subsequently grant a security interest, to the extent of the value of the assets securing such indebtedness.

In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes.

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the Wells Fargo Loan is collateralized by our portfolio of short-term securities held at Wells Fargo;

and the NHB Mortgage is secured by a first mortgage lien on properties located at 698 Main Street and 568 East Main Street, Branford, Connecticut.

the NHB Mortgage is secured by a first mortgage lien on the property located at 568 East Main Street, Branford, Connecticut;

and all amounts borrowed under the Needham Credit Facility are secured by a first priority lien on virtually all our assets, not including real estate owned by us (other than real estate acquired pursuant to foreclosure) and mortgages sold under the Churchill Facility.

The Notes are subordinated to the indebtedness and other liabilities of our subsidiaries.

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Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such entities.

Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims.

Even if we are recognized as a creditor of one or more of these entities, our

claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims.

Consequently, the Notes will be structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries.

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Notes having an aggregate principal amount of approximately $218.2 million are currently redeemable.

Notes having an aggregate principal amount of approximately $51.8 million will be redeemable on or after December 20, 2023, Notes having an aggregate principal amount of

approximately $51.9 million will be redeemable on or after March 9, 2024, Notes having an aggregate principal amount of $30.0 million will be redeemable on or after May 11, 2024 and Notes having an aggregate principal amount of approximately $40.3 million are redeemable on or after August 23, 2024.

Notes having an aggregate principal amount of $30.0 million will first become redeemable on May 11, 2024 and Notes having an aggregate principal amount of approximately $40.3 million will first become redeemable on August 23, 2024.

We may choose to redeem the Notes when prevailing interest rates are lower than the rate borne by the Notes.

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There can be no assurance that our credit rating will remain for any given period of time or that such credit rating will not be lowered or withdrawn entirely by the rating agency if in their judgment future circumstances relating to the basis of the credit rating so warrant.

If we default on our obligations under the Churchill Facility, the Wells Fargo Loan or NHB Mortgage, we may suffer adverse consequences and may not be able to make payments on the Notes.

If we default on our obligations under the Churchill Facility, the Wells Fargo Loan, NHB Mortgage or Needham Credit Facility, we may suffer adverse consequences and may not be able to make payments on the Notes.

To secure our obligations under the Churchill Facility, Churchill has a first priority security interest on the mortgage loans pledged as collateral under the Churchill Facility.

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A decline in the value of the securities below the margin call limit may require us to provide additional funds or securities to Wells Fargo to avoid a forced sale of such securities.

The occurrence of either or both of the foregoing events could have a material adverse effect on our business, financial condition and results of operations, cash flows, our ability to make distributions to shareholders and make the interest payment on the Notes.

Any default under the agreements governing our existing indebtedness, including a default under the Churchill Facility or the Wells Fargo Loan or the NHB Mortgage or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal and interest on the Notes and substantially decrease the market value of the Notes.

All amounts borrowed under the Needham Credit Facility are secured by a first priority lien on virtually all our assets excluding real estate owned by us (other than real estate acquired pursuant to foreclosure) and mortgages sold under the Churchill Facility.

The occurrence of any of the foregoing events could have a material adverse effect on our business, financial condition and results of operations, cash flows, our ability to make distributions to shareholders and make the interest payment on the Notes.

Any default under the agreements governing our existing indebtedness, including a default under the Churchill Facility, the Wells Fargo Loan, the NHB Mortgage or Needham Credit Facility or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal and interest on the Notes and substantially decrease the market value of the Notes.

If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness, including the Notes.

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If our operating performance declines, we may in the future need to seek to obtain waivers from our existing lenders at the time to avoid being in default.

If we breach any loan covenants, we may not be able to obtain such a waiver from the lenders in which case we would be in default under the credit arrangement and the lender could exercise its rights as described above, and we may be forced into bankruptcy or liquidation.

If we are unable to repay indebtedness, lenders having secured obligations could proceed against the collateral securing the debt.

Because the Churchill Facility and the NHB Mortgage have, and any future credit facilities will likely have, customary cross-default provisions, if repayment of any outstanding indebtedness, such as the Notes, the Churchill Facility, the Wells Fargo Loan, the NHB Mortgage or any future credit facility, is accelerated, we may be unable to repay or finance the amounts due.

Because the Churchill Facility and the NHB Mortgage have, and any future credit facilities will likely have, customary cross-default provisions, if repayment of any outstanding indebtedness, such as the Notes, the Churchill Facility, the Wells Fargo Loan, the NHB Mortgage, the Needham Credit Facility or any future credit facility, is accelerated, we may be unable to repay or finance the amounts due.

Risks Related to Regulatory Matters

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Our continued qualification as a REIT will depend on our ability to meet, on an ongoing basis, various complex requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources of our income, and the amount of our distributions to our shareholders.

To satisfy these requirements, we might have to forego investments

we might otherwise make.

To satisfy these requirements, we might have to forego investments we might otherwise make.

Thus, compliance with the REIT requirements may hinder our operational performance.

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Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% tax.

In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business.

In general, prohibited transactions are sales or other dispositions of property held primarily for sale to

customers in the ordinary course of business.

The determination as to whether a sale is a prohibited transaction depends on the facts and circumstances related to that sale.

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To qualify as a REIT, we generally must distribute to our shareholders at least 90% of our “REIT taxable income” (determined without regard to the dividends paid deduction and excluding net capital gain) each year, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our “REIT taxable income” each year.

In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

In order to maintain our REIT status and avoid the payment of income and excise taxes, we may be forced to seek third-party capital to meet the distribution requirements even if the then- prevailing market conditions are not favorable.

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shareholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in Common Shares.

In addition, such a taxable share dividend could be viewed as equivalent to a reduction in our cash distributions, and that factor, as well as the possibility that a significant number of our shareholders could determine to sell Common Shares to pay taxes owed on dividends, may put downward pressure on the market price of Common Shares.

In addition, such a taxable share dividend could be viewed as equivalent to a reduction in our cash distributions, and that factor, as well as the possibility that a

significant number of our shareholders could determine to sell Common Shares to pay taxes owed on dividends, may put downward pressure on the market price of Common Shares.

Complying with REIT requirements may cause us to liquidate or forgo otherwise attractive investment opportunities.

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Sales of substantial amounts of our Common Shares in the public market may have an adverse effect on the market price of our Common Shares.

Sales of substantial amounts of our Common Shares, including by any selling shareholders, adoption and

utilization of an at the market issuance program, or the availability of such Common Shares for sale, whether or not actually sold, could adversely affect the prevailing market prices for our Common Shares.

Sales of substantial amounts of our Common Shares, including by any selling shareholders, adoption and utilization of an at the market issuance program, or the availability of such Common Shares for sale, whether or not actually sold, could adversely affect the prevailing market prices for our Common Shares.

If this occurs and continues it could impair our ability to raise additional capital through the sale of securities.

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In the event of our bankruptcy, liquidation, dissolution or winding up of our affairs, our assets will be available to pay obligations on the Series A Preferred Stock only after all of our indebtedness and other liabilities have been paid.

At December 31, 2022, our total outstanding indebtedness, including the aggregate outstanding principal amount of unsecured, unsubordinated notes (net of deferred financing costs), amounts due under the Churchill Facility, the Wells Fargo Loan and the NHB Mortgage, totaled $326.9 million, and total liabilities were $348.0 million.

At December 31, 2023, our total outstanding indebtedness, including the aggregate outstanding principal amount of unsecured, unsubordinated notes (net of deferred financing costs), amounts due under the Churchill Facility, the Wells Fargo Loan, the NHB Mortgage and the Needham Credit Facility, totaled $371.7 million, and total liabilities were $395.5 million.

The rights of holders of the Series A Preferred Stock to participate in the distribution of our assets will rank junior to the prior claims of our current and future creditors and any future series or class of preferred stock we may issue that ranks senior to the Series A Preferred Stock.

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If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all of the Series A Preferred Stock then outstanding.

We and our subsidiaries have incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the Series A Preferred Stock.

We and our subsidiaries have

incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the Series A Preferred Stock.

Certain of our existing or future debt instruments may restrict the authorization, payment or setting apart of dividends on the Series A Preferred Stock.

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Under applicable New York law, a New York corporation may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business, or, except in limited circumstances, the corporation’s total assets would be less than the sum of its total liabilities plus, unless our certificate of incorporation, as amended, provides otherwise, the amount that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

Accordingly, we may not make a distribution on the Series A Preferred Stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or, except in limited circumstances, our total assets would be less than the sum of our total liabilities plus, unless the charter provides otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred shares then outstanding, if any, with preferences senior to those of the Series A Preferred Stock.

total liabilities plus, unless the charter provides otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred shares then outstanding, if any, with preferences senior to those of the Series A Preferred Stock.

The change of control conversion rights may not adequately compensate the holders of Series A Preferred Stock in the event we undergo a change of control.

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Voting rights for holders of shares of Series A Preferred Stock exist primarily with respect to the ability to elect, voting together as a single class with the holders of any other class or series of our preferred shares having similar voting rights, two additional directors to the Board, in the event that six quarterly dividends (whether or not consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to our charter, including the certificate of amendment creating the Series A Preferred Stock, that materially and adversely affect the rights of the holders of shares of Series A Preferred Stock or authorize, increase or create additional classes or series of our stock that are senior to the Series A Preferred Stock.

Other than the limited circumstances described in our certificate of incorporaton, as amended, holders of shares of Series A Preferred Stock will not have any voting rights.

Other than the limited circumstances described in our certificate of incorporation, as amended, holders of shares of Series A Preferred Stock will not have any voting rights.

If the Series A Preferred Stock or our Common Shares are delisted, your ability to transfer or sell your shares of the Series A Preferred Stock may be limited and the market value of the Series A Preferred Stock will likely be materially adversely affected.

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If it is, the liquidity or market value of the Series A Preferred Stock could be adversely affected.

Unresolved Staff Comments

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 1A. Risk Factors