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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 196 added, 157 removed, 140 unchanged (72% of the section changed)

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On February 9, 2017, we completed our initial public offering (the “IPO”), the primary purpose of which was to raise equity capital to fund mortgage loans and expand our mortgage loan portfolio and to diversify our ownership so that we could qualify, for federal income tax purposes, as a real estate investment trust, or REIT.

We believe that, since consummation of the IPO, we meet all the requirements to qualify as a REIT for federal income tax purposes and elected to be taxed as a REIT beginning with our 2017 tax year.

We believe that, since consummation of the IPO, we meet all the requirements to

qualify as a REIT for federal income tax purposes and elected to be taxed as a REIT beginning with our 2017 tax year.

As a REIT, we are entitled to claim deductions for distributions of taxable income to our shareholders thereby eliminating any corporate tax on such taxable income.

Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% excise tax to the extent it exceeds 10% of our total taxable income.

To maintain our qualification as a REIT, we are

required to distribute each year at least 90% of our taxable income.

To maintain our qualification as a REIT, we are required to distribute each year at least 90% of our taxable income.

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

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● Total revenue increased 25.5%;

net income attributable to common shareholders increased 50.2%;

and earnings per common share increase $0.02 per share.

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

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

net income attributable to common shareholders decreased 29.7%;

and earnings per common share decreased approximately $0.18 per share.

● We raised an aggregate of approximately $23.0 million of additional capital from the sale of Common Shares and Series A Preferred Stock through our at-the-market offering facility.

● We funded approximately $204.9 million of mortgage loans including loan modifications and construction draws.

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

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

At December 31, 2023, our capital structure was 60.4% debt and 39.6% equity compared to 59.3% debt and 40.7% equity at December 31, 2022.

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

● We adjusted and refined our business strategy to address changes in the marketplace and our growth to-date.

Specifically, we continue to strengthen our geographic footprint beyond Connecticut and the rest of New England with particular emphasis on Florida and New York.

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

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

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

● We continued implementing our strategy to fund larger loans than we have in the past that are secured by what we believe are higher-quality properties that are being developed by borrowers that we deem to be more stable and successful.

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

We believe migration to larger borrowers and better capitalized sponsors will decrease future problem loans.

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

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

● On June 23, 2023, the Company entered into a purchase and sale contract (the “Westport Purchase Agreement”) for $10,600,000 to acquire a commercial office building in Westport, CT (the “Westport Asset”).

The transaction was completed on August 31, 2023.

In connection with this transaction, which was accounted for as an asset acquisition, the Company allocated the purchase price and acquisition - related costs to the tangible and intangible assets acquired based on the fair market value of the individual components.

In addition, the Company recorded a lease liability stemming from below - market rental rates.

Total consideration, including capitalized acquisition - related costs, was $10,725,237.

Our primary business objective for 2024 remains to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends.

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

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

To drive additional operational excellence, we continuously review, assess, and

upgrade our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms.

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

We believe that our ability to react quickly to the needs of borrowers, our flexibility in terms of structuring loans to meet the needs of borrowers, our knowledge of the primary real estate markets we lend in, our expertise in “hard money” lending and our focus on newly originated first mortgage loans, should enable us to achieve our primary

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.

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We expect 2024 to be a challenging year due to the following factors:

Interest rate compression.

Our net income for 2022 has been adversely impacted by a reduction in the yield on our mortgage loan portfolio.

For the years ended December 31, 2022 and 2021, the yield on our mortgage loan portfolio was 11.50% and 11.57%, respectively.

(For this purpose, yield only takes into account the stated interest rate on the mortgage note adjusted to the default rate, if applicable.) We believe the interest rate compression will continue to be a factor in 2023, particularly as the Federal Reserve Board has continued to increase interest rates, thereby increasing our cost of capital.

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

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

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

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

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

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

The interest rates we charge on our loans are subject to a variety of factors including competition (see below) and consumer reluctance due to inflation and general economic conditions.

If we cannot increase the rates on our loans, the spread between our cost of capital and what we earn on that capital will be squeezed, which would adversely impact our income.

On the other hand, since the interest rate on a portion of our outstanding indebtedness is fixed, we have reduced the risk on interest rate compression when interest rates increase.

That will enable us to continue to focus on growth and building market share rather than short-term profits and cash flow.

Rising interest rates and interest rate compression.

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

The effective rate of Needham Bank Credit Facility was 8.25%, and Churchill Facility was 9.40% as of March 28, 2024.

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

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

For the year ended December 31, 2023, and 2022, the yield on our mortgage loan portfolio, inclusive of default interest, was 12.6% and 11.5%, respectively.

(For this purpose, the yield only takes into account the stated interest rate on the mortgage note adjusted to the default rate, if applicable.) Nevertheless, we believe the interest rate compression will continue to be a factor during the first half of 2024 until the Fed begins to cut interest rates.

Geopolitical concerns.

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

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

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

2023 was marked with various geopolitical concerns, including the ongoing conflict between Ukraine and Russia and Israel and Hamas, heightened tensions between the U.S.

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

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 competition.

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

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.

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.

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

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

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

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

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

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

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.

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

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

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

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

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

Property value fluctuations.

We remain aware of property value market cycles and utilize a dashboard of indicators to track property value trends.

Our response to this development would be to adhere to our underwriting guidelines and aggressively enforce our rights when loans go into default.

By judiciously relying on our dashboard of leading indicators and continuing to make decisions in a sound and proper manner, we see no reason to expect any negative outcome regarding our business operations and growth.

Some of our indicators within our dashboard are interest rate changes impacting mortgage rates, days-on-market, pending sales, NAHB’s Housing Market Index and the Senior Loan Officer Opinion Survey.

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

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

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

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

Increased operating expenses.

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

In addition, our aggregate dividend payments have been higher in 2022 than in 2021 due to an increase in the number of Common Shares outstanding as well as the full year effect of our Series A Preferred Stock, which carries a 7.75% annual dividend rate.

Our operating expenses for the year ended December 31, 2023 are significantly higher than they were in 2022 due to our higher debt load, as well as higher borrowing rates.

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

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

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However, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing.

At December 31, 2022, our mortgage loan portfolio included 177 loans with future funding obligations, in the aggregate principal amount of $114.6 million, compared to 177 loans in the aggregate principal amount of $89.2 million at December 31, 2021.

The increase is due to an increase in construction loan originations, a large portion of which is in the Florida market.

Advances under these loans are funded against requests supported by all required documentation (including lien waivers) as and when needed to pay contractors and other costs of construction.

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

Despite the challenges we faced in 2021 and 2022, the changing dynamics of the real estate finance marketplace, supply chain disruptions, we continue to believe in the viability of our business model.

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.

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.

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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.

● 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, 2023, we raised approximately $505.9 million of gross proceeds

through public offerings of our equity and debt securities.

We used the net proceeds from these offerings 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”);

and (iii) a $65 million revolving credit facility with Needham Bank, a Massachusetts co-operative bank, which can be increased up to $75 million (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.

Financing Strategy Overview

To continue to grow our business, we must increase the size of our loan portfolio, which requires that we use our existing working capital to fund new loans and raise additional capital either by selling shares of our capital stock or by incurring additional indebtedness and we are mindful of the need to repay it at the appropriate time.

On January 10, 2024, we paid a dividend of $0.11 per share, or $5,144,203 in the aggregate

We do not have a policy limiting the amount of indebtedness that we may incur.

Thus, our operating income in the future will depend on how much debt we incur and the spread between our cost of funds and the yield on our loan portfolio.

Rising interest rates could have an adverse impact on our business if we cannot increase the rates on our loans to offset the increase in our cost of funds and to satisfy investor demand for yield.

In addition, rapidly rising interest rates could have an unsettling effect on real estate values, which could compromise some of our collateral.

We do not have any formal policy limiting the amount of indebtedness we may incur, but we are limited to a 150% asset coverage ratio from our debt covenants.

Depending on various factors we may, in the future, decide to take on additional debt to expand our mortgage loan origination activities to increase the potential returns to our shareholders.

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

At December 31, 2023, debt represented approximately 60.4% of our total capital compared to 59.3% at December 31, 2022.

To prudently grow the business and satisfy the tax requirement to distribute 90% of

our taxable income, we expect to maintain our current level of debt and look to reduce our cost of capital.

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

As of December 31, 2022, we had seven series of unsecured unsubordinated notes outstanding, having an aggregate outstanding principal balance of $288.4 million (collectively, the “Notes”) all of which rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness and are effectively subordinated in right of payment to all existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant a security interest) and structurally subordinated to all existing and future indebtedness of our subsidiaries.

Interest on each series of notes is payable quarterly in arrears on each March 30, June 30, September 30 and December 30 of each year they are outstanding and, except as noted below, each series can be prepaid beginning on the second anniversary of its date of issuance.

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

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

● $30,000,000 aggregate original principal amount, issued May 11, 2022, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2027 (the “June 2027 Notes”) and which trade on the NYSE American under the symbol SCCF;

● $51,875,000 aggregate original principal amount, issued March 9, 2022, bearing interest at the rate of 6.00% per annum and maturing on March 30, 2027 (the “March 2027 Notes”) and which trade on the NYSE American under the symbol SCCE;

● $51,750,000 million original principal amount, issued December 20, 2021, bearing interest at the rate of 6.00% per annum and maturing on December 30, 2026 (the “2026 Notes”) and which trade on the NYSE American under the symbol SCCD;

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

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

● $23,663,000 million original principal amount, issued June 25, 2019, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2024 (the “June 2024 Notes”) and which trade on the NYSE American under the symbol SCCB.

To prudently grow the business and satisfy the tax requirement to distribute 90% of our taxable income, we expect to maintain our current level of debt and look to reduce our cost of capital.

We intend to 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, 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, approximately $1.1 million outstanding under the NHB Mortgage, $35 million outstanding under the Needham Credit Facility and approximately $288.4 million aggregate outstanding principal amount of five-year, unsecured unsubordinated notes, (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;

● $30,000,000 aggregate original principal amount, issued May 11, 2022, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2027 (the “June 2027 Notes”), which trades on the NYSE American under the symbol SCCF;

● $51,875,000 aggregate original principal amount, issued March 9, 2022, bearing interest at the rate of 6.00% per annum and maturing on March 30, 2027 (the “March 2027 Notes”), which trades on the NYSE American under the symbol SCCE;

● $51,750,000 aggregate original principal amount, issued December 20, 2021, bearing interest at the rate of 6.00% per annum and maturing on December 30, 2026 (the “2026 Notes”), which trades on the NYSE American under the symbol SCCD;

● $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;

● $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.

Each series of Notes was issued pursuant to the Indenture, dated June 21, 2019, and a supplement thereto, which provides for the form and terms, including default provisions and cures, applicable to each series.

All the Notes are subject to (i) “Defeasance,” which means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on such notes when due and satisfying any additional conditions required under the Indenture, we will be deemed to have been discharged from our obligations under such notes and (ii) an “Asset Coverage Ratio” requirement pursuant to which we may not (x) pay any dividends or make distributions in excess of 90% of our taxable income, (y) incur any indebtedness or (z) purchase any shares of our capital stock unless we have an “Asset Coverage Ratio” of at least 150% after giving effect to the payment of such dividend, the making of such distribution or the incurrence of such indebtedness.

All seven series of Notes are subject to (i) “Defeasance,” which means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on such notes when due and satisfying any additional conditions required under the Indenture, we will be deemed to have been discharged from our obligations under such notes and (ii) an “Asset Coverage Ratio” requirement pursuant to which we may not (x) pay any dividends or make distributions in excess of 90% of our taxable income, (y) incur any indebtedness or (z) purchase any shares of our capital stock unless we have an “Asset Coverage Ratio” of at least 150% after giving effect to the payment of such dividend, the making of such distribution or the incurrence of such indebtedness.

“Asset Coverage Ratio” means the ratio (expressed as a percentage) of the value of our total assets relative to the aggregate amount of its indebtedness.

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

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

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

In all cases, the

redemption price equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest to, but excluding, the date fixed for redemption.

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

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 includes the Churchill Facility, the Wells Fargo Loan and the NHB Mortgage.

On July 21, 2021, we consummated a $200 million facility with 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.

In addition, we have the right and, in some instances the obligation, to repurchase those loans from Churchill.

The amount that Churchill will pay for each mortgage loan it purchases will vary based on the attributes of the loan and various other circumstances.

The repurchase price is calculated by applying an interest factor to the purchase price of the mortgage loan.

The amount that Churchill will pay for each mortgage loan it purchases will vary based on the attributes of the loan and various other circumstances but generally will not exceed 70% of the unpaid principal balance purchased.

The repurchase price is calculated by applying an interest factor, as defined, to the purchase price of the mortgage loan.

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

The cost of capital under the Churchill Facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 30-day LIBOR plus (b) 3% – 4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time.

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

This change had minimal impact on the interest rate.

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.

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.

The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $3.6 million at December 31, 2022.

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

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

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

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

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

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

The Wells Fargo Loan is secured by our portfolio of investment 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.

Other than increasing our borrowing costs under the Wells Fargo Loan, it is difficult to forecast what impact the elevated interest rate environment will have on our investment securities portfolio.

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

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

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

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

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

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

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

Beginning on April 1, 2023 and through March 1, 2038, principal and interest will be due and payable on a monthly basis.

All payments under the new loan are amortized based on a 20-year amortization schedule.

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

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

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

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

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

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.

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

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

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

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

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 150%.

At December 31, 2023, the amount outstanding under the Needham Credit Facility was approximately $35.0 million, which was accruing interest of an effective rate of 8.25% per annum.

Finally, from time-to-time we raise capital by selling our Common Shares and shares of our Series A Preferred Stock through our at-the market offering facility.

During the year ended December 31, 2023, under our at-the-market offering facility, we sold an aggregate of 5,475,891 Common Shares, realizing gross proceeds of approximately $20.9 million and we sold shares of Series A Preferred Stock having an aggregate liquidation preference of $126,923, realizing gross proceeds of approximately $2.6 million representing a discount of approximately 17.6% from the liquidation preference.

At December 31, 2023, approximately $45.4 million

of Common Shares and $22.4 million of Series A Preferred Stock were available for future sale under the ongoing at-the-market offering.

REIT Qualification

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We made the election to be taxed as a REIT beginning with our 2017 tax year.

As a REIT, we

are required to distribute at least 90% of our taxable income to our shareholders on an annual basis.

As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders on an annual basis.

We cannot assure you that we will be able to maintain REIT status.

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federal, state and local taxes on our income.

Emerging Growth Company Status

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

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

Critical Accounting Policies and Use of Estimates

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

We record an allowance for credit losses (“CECL”) in accordance with the CECL standard on our loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics.

This methodology replaces the probable incurred loss impairment methodology.

In addition, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are also analyzed for credit losses in accordance with the CECL standard, as they represent a financial asset that is subject to credit risk.

Further, CECL made changes to the accounting for available-for-sale debt securities.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

As allowed under the CECL standard that we have adopted, as a practical expedient, the fair value of the collateral at the reporting date is compared to the net carrying amount of the loan when determining the allowance for credit losses for loans in pending/pre-foreclosure status, as defined.

Fair value of collateral is reduced by estimated cost to sell if the collateral is expected to be sold.

The CECL standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment.

We utilize a loss-rate method for estimating current expected credit losses.

The loss rate method involves applying a loss rate to a pool of loans with similar risk characteristics to estimate the expected credit losses on that pool of loans.

In determining the CECL allowance, we consider various factors including (1) historical loss experience in its portfolio, (2) loan specific losses for loans deemed collateral dependent based on excess amortized cost over the fair value of the underlying collateral, and (3) its current and future view of the macroeconomic environment.

We also utilize a reasonable and supportable forecast period equal to the contractual term of the loan plus any applicable short-term extensions that are reasonably expected for construction loans.

The allowance for the mortgage receivable is presented on the Consolidated Balance Sheets while the allowances on the interest receivable, due from borrowers, and (available-for-sale debt) investment securities are presented net.

The change in the balances during the reporting period are recorded in the Consolidated Statements of Comprehensive Income under the Provision for credit losses.

Results of Operations

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Total revenue for the year ended December 31, 2023, was approximately $65.6 million compared to approximately $52.3 million for the year ended December 31, 2022, an increase of approximately $13.3 million, or 25.5%.

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

The increase in revenue was primarily due to an increase in interest rates that we are able to charge borrowers in comparison to the 2022 period.

For 2023, interest income was approximately $49.3 million compared to approximately $42.6 million for 2022, representing an increase of approximately $6.7 million or 15.6%.

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

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

Origination and modification fees decreased to approximately $5.9 million for 2023 compared to approximately $7.3 million for 2022, a decrease of approximately $1.4 million, or 18.9% due to lower origination volume as compared to 2022.

Income from partnership investments increased to approximately $3.5 million for 2023 compared to approximately $1.8 million for 2022, an increase of approximately $1.7 million, or 94.6%.

Fee and other income was approximately $4.8 million for 2023 compared to approximately $3.0 million for 2022, an increase of approximately $1.8 million, or 62.1%.

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

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

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

For 2023, revenue was increased by approximately $0.8 million of unrealized gain on investment securities, while revenue was offset by approximately $3.0 million of unrealized losses on equity securities in 2022.

Operating costs and expenses

Total operating costs and expenses for the year ended December 31, 2023, were approximately $49.7 million compared to approximately $31.4 million for 2022, an increase of approximately $18.3 million, or 58.5%.

The largest contributor to this increase was interest and amortization of deferred financing costs, which were $21.5 million in 2022 compared to $10.4 million in 2021, an increase of approximately 106.8%.

The increase is directly related to interest payments on the Notes.

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

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

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

The largest contributor to this increase was interest and amortization of deferred financing costs, which were approximately $29.2 million in 2023 compared to approximately $21.5 million in 2022, an increase of approximately $7.7 million, or 35.5%.

The increase is directly related to the increase in rates charged and the increase in net borrowings on the Wells Fargo Loan, Churchill Facility, and Needham Credit Facility.

The balance of the increase in operating expenses was attributable to (i) provision for credit losses related to loans totaling approximately $5.6 million;

(ii) provision for credit losses related to available-for-sale debt securities totaling approximately $0.8 million;

(iii) compensation (including stock-based compensation), fees and taxes, which increased approximately $1.6 million;

(iv) general and administrative expenses, which increased approximately $2.2 million;

and (v) write-off of failed deal expenses relating to the Company’s special purpose acquisition corporation of approximately $0.5 million.

The operating costs and expenses increases are primarily attributable to the adoption of ASU 2016-13, our increased level of operations, hiring of additional staff and the implementation of certain of our growth strategies.

Net income and net income per share

Net income for 2022 attributable to common shareholders was approximately $17.2 million compared to approximately $11.5 million for 2021, an increase of approximately $5.8 million or 50.2%.

Net income for 2023 attributable to common shareholders was approximately $12.1 million compared to approximately $17.2 million for 2022, a decrease of approximately $5.1 million or 29.7%.

Our net income per weighted average Common Share outstanding for 2023 was $0.27 compared to $0.46 for 2022.

Comprehensive Income

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

For the year ended December 31, 2023, we reported a reclass of unrealized losses on certain equity securities of approximately $877,000 reflecting the recognition of unrealized losses on securities held for over one year, which were not considered temporary losses.

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Net income attributable to common shareholders

Unrealized losses on investment securities – debt investments

(Subtract)/Add:

Unrealized (gain)/losses on investment securities – debt investments

Adjusted earnings attributable to common shareholders

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

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

For the years ended December 31, 2023 and 2022 adjusted earnings per share was $0.25 and $0.54, respectively.

Liquidity and Capital Resources

Total assets at December 31, 2023 were approximately $625.5 million compared to approximately $565.7 million at December 31, 2022, an increase of approximately $59.8 million, or 10.6%.

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

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

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

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

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

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

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

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

The increase was due primarily to the growth in our mortgages receivable, which increased approximately $38.5 million, an approximately $2.2 million increase in interest and fees receivables, an approximately $13.2 million increase in investment securities, an approximately $12.2 million increase in investment in partnerships, an approximately $4.0 million increase in other assets, and the increase relating to the 2023 addition of net investments of rental real estate of approximately $10.6 million.

These increases were offset by an approximately $11.1 million decrease in cash and cash equivalents, an increase in allowance for credit losses (for mortgages receivable, interest receivable, due from borrower, and available-for-sale debt securities) of approximately $8.9 million, a decrease in property and equipment of approximately $0.7 million and by an approximately $1.8 million decrease in real estate owned.

Total liabilities at December 31, 2023 were approximately $395.5 million compared to approximately $348.0 million at December 31, 2022, an increase of approximately $47.5 million, or 13.7%.

This increase was principally due to an overall increase in our total indebtedness, which at December 31, 2023, was approximately $371.7 million (net of deferred financing costs).

Specifically, the increase was attributable to an increase of $58.2 million primarily due to the increase in line of credit borrowings from the Wells Fargo Loan as well as Needham Credit Facility, and an increase of approximately $0.3 million due to the refinancing of the NHB Mortgage.

Such increases in our total indebtedness was partially offset by a decrease of approximately $16.1 million in our repurchase facility as a result of principal paydowns of the Churchill Facility.

The balance of the increase was attributable to increases in accounts payable and accrued liabilities of approximately $0.9 million, increase in notes payable of approximately $2.3 million (from the amortization of deferred financing costs), advances from borrowers of approximately $1.1 million, deferred revenue of approximately $0.3 million, and the addition of below market lease intangibles of approximately $0.7 million.

The increases were partially offset by a decrease in accrued dividends payable of approximately $0.2 million.

Total shareholders’ equity at December 31, 2023 was approximately $230.1 million compared to approximately $217.7 million at December 31, 2022, an increase of approximately $12.4 million, or 5.7%.

This increase was attributable to (i) 2023 net income of approximately $15.9 million, (ii) net proceeds from the sale of Common Shares of $20.5 million and (iii) net proceeds from the sale of Series A Preferred Stock of approximately $2.6 million, offset by (iv) approximately $21.7 million of dividends paid and dividends declared with respect to 2023 operating income to holders of our Common Shares (v) approximately $3.8 million paid of dividends paid to holders of our Series A Preferred Stock, and (vi) approximately $2.5 million from the cumulative effect for the change in accounting principle as a result of the adoption of ASU 2016-13 (CECL).

Net cash provided by operating activities in 2023 was approximately $21.9 million compared to approximately $13.1 million in 2022.

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

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

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

For 2023, net cash from operating activities was primarily the result of net income of approximately $15.9 million, amortization of deferred financing costs of approximately $2.4 million, provision for credit losses related to loans of approximately

$5.6 million, provision for credit losses related to available-for-sale debt securities of approximately $0.8 million, impairment loss of approximately $0.8 million, stock based compensation of approximately $0.8 million, and an increase in advances from borrowers of approximately $1.1 million, offset by increases in interest and fees receivable of approximately $2.3 million, other assets of approximately $3.5 million, due from borrower of approximately $0.3 million, and an unrealized gain on investment securities of approximately $0.8 million.

For 2022, net cash from operating activities was primarily the result of net income of approximately $20.9 million, amortization of deferred financing costs of approximately $2.1 million, unrealized losses on investment securities of approximately $3.0 million, an impairment loss of $0.9 million, stock based compensation of $0.5 million and an increase in accounts payable and accrued liabilities of approximately $0.8 million, offset by increases in interest and fees receivable of approximately $2.6 million, other assets of approximately $3.6 million, due from borrowers of approximately $1.6 million, accrued dividends payable of approximately $1.4 million, and decreases in deferred revenue of approximately $0.3 million and advances from borrowers of approximately $5.2 million.

Net cash used for investing activities for 2023 year was approximately $72.5 million compared to approximately $159.5 million in net cash used in 2022.

For 2023, the major contributors to net cash used for investing activities were the purchase of investments securities of approximately $30.4 million, net purchases of interests in investment partnerships of approximately $12.2 million, net purchases of investment in rental real estate of approximately $10.8 million, and principal disbursements on mortgages receivable of approximately $204.9 million.

These amounts were offset by proceeds from the sale of investment securities of approximately $18.1 million, proceeds from the sale of real estate owned of approximately $0.5 million, net proceeds from the sale of property and equipment of approximately $0.5 million, and principal collections on mortgages receivable of approximately $167.0 million.

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

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

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

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

Net cash provided by financing activities for 2023 year was approximately $39.5 million compared to approximately $128.2 million for 2022.

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

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

Net cash provided by financing activities for the 2023 consisted primarily of net proceeds from our lines of credit with Wells Fargo and Needham Bank of approximately $58.2 million, proceeds from the issuance of Series A Preferred Stock of approximately $2.6 million, and proceeds from the issuance of Common Shares of approximately $20.5 million, offset by repayment of the Churchill Facility of approximately $16.1 million, dividends paid on Common Shares of approximately $21.9 million, and dividends paid on Series A Preferred Stock of approximately $3.8 million.

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

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

Our short-term cash requirements primarily include funding of loans, dividend payments, interest payments on our indebtedness and payments for usual and customary operating and administrative expenses, such as employee compensation and sales and marketing expenses.

Based on this analysis, we believe that our current cash balances, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.

Our long-term cash needs will include principal payments on outstanding indebtedness, preferred stock dividends and funding of new mortgage loans.

Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows and proceeds from sales of real estate owned.

Our short-term cash requirements primarily include funding of loans, dividend payments, interest and principal payments on our indebtedness, including repayment/refinancing of our notes payable maturing in 2024, and payments for usual and customary operating and administrative expenses, such as employee compensation and sales and marketing expenses.

Based on this analysis, we believe that our current cash balances, availability on our debt facilities, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.

Our long-term cash needs will include principal and interest payments on outstanding indebtedness, preferred stock dividends and funding of new mortgage loans.

Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows, refinancing existing debt, and proceeds from sales of real estate owned.

From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our Common Shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains).

Subsequent Events

We evaluated subsequent events from January 1, 2024 until the financial statements were issued.

On January 10, 2024, we paid a dividend of $0.11 per share, or $5,144,203 in the aggregate, to shareholders of record as of December 29, 2023.

On January 10, 2023, William C.

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

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

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

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

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

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

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

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

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

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

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

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

default and satisfy certain other conditions.

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

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

Between January 2, 2024 and January 24, 2024, through our at-the-market offering facility, we sold an aggregate of 568,711 Common Shares, realizing gross proceeds of approximately $2.1 million and 79,034 shares of its Series A Preferred Stock having an aggregate liquidation preference of $1,975,850, realizing gross proceeds of $1,587,954 (representing a discount of approximately 20% from the liquidation preference.) There were no sales of capital stock through our at – the – market offering facility subsequent to January 24, 2024.

On January 12, 2024, our tenant in the Westport Asset exercised their option to upsize the lease from approximately 33% to approximately 50% occupancy of the leasable square footage, pursuant to the terms outlined in the original lease agreement.

We submitted a proposal to the town of Westport for 8 market rate residential units and 2 affordable rate units.

Those units were approved in March of 2024, subject to a 30 day appeal period, which extends into April 2024.

On March 19, 2024, our Board of Directors authorized a one time bonus of a restricted grant of 111,857 Common shares to John L.

The fair market value on the date of grant was approximately $500,000.

On March 28, 2024, our Board of Directors approved a dividend of $0.11 per share, payable on April 16, 2024 to common shareholders of record as of the close of the NYSE American on April 9, 2024.

Management has evaluated subsequent events through March 28, 2024 the date on which the consolidated financial statements were available to be issued.

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

Off-Balance Sheet Arrangements

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Contractual Obligations

As of December 31, 2022, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment and software licenses.

Operating lease obligations

As of December 31, 2023, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans and partnership investments.

Unfunded portions of outstanding construction loans

Unfunded commitments

Unfunded partnership commitments

Total contractual obligations

1 unchanged sentence

See ‘‘Note 2 — Significant Accounting Policies’’ to the financial statements for explanation of recent accounting pronouncements impacting us.

Quantitative and Qualitative Disclosures about Market Risk

We are a “smaller reporting company” as defined by Regulation S-K and, as such, are not required to provide the information required by this item.

Financial Statements and Supplementary Data

The financial statements required by this Item are set forth beginning on page F-1.

Change in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 7. Management’s Discussion and Analysis