Sachem Capital Corp. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. Actual operating results and financial conditions may differ materially from those anticipated in these forward-looking statements. Company Overview We are a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term (i.e., three years or less) loans secured by first mortgage liens on real property. From our inception in December 2010, through our initial public offering, in February 2017, we operated as a limited liability company. On February 9, 2017, we completed our initial public offering (the “IPO”), the primary purpose of which was to raise equity capital to fund mortgage loans and expand our mortgage loan portfolio and to diversify our ownership so that we could qualify, for federal income tax purposes, as a real estate investment trust, or REIT. We believe that, since consummation of the IPO, we meet all the requirements to qualify as a REIT for federal income tax purposes and elected to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are entitled to claim deductions for distributions of taxable income to our shareholders thereby eliminating any corporate tax on such taxable income. Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% excise tax to the extent it exceeds 10% of our total taxable income. To maintain our qualification as a REIT, we are 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. Review of the First Quarter and Outlook for Balance of Year Compared to the first quarter of 2023, revenue in the first quarter of 2024 increased 17.0%, net income attributable to common shareholders decreased 13.0%, and earnings per share decreased $0.02 per share. The increase in revenue is primarily due to an increase in interest rates that we are able to charge borrowers, reflected in our interest income which had an increase of 15.1%. In addition, income from partnership investments increased 117.4%, and, as of March 31, 2024 the underlying investments within those partnerships had zero defaults. On the other hand, unrealized gain on equity securities decreased approximately $0.5 million quarter-over-quarter. The increase in revenue was offset by an overall 30.7% increase in operating costs and expenses. The increase in operating expenses is mainly attributable to a 8.7% increase in interest expense and amortization of deferred financing costs. The increase in interest expense is attributable to the higher interest rate environment. We expect interest expense to increase over the remainder of 2024 as we seek to refinance over $50 million aggregate principal amount of our unsecured unsubordinated notes maturing in 2024. We experienced a 37.9% increase in general and administrative expenses, driven primarily from consulting and professional fees, a 564.9% increase in other expenses driven primarily by tax expenses relating to the TRS, and a 1,192.4% increase in provision for credit losses related to loans. The additional provision for credit losses related to loans was principally caused by value declines in mortgages secured by commercial real estate. Despite a difficult commercial real estate and capital markets environment, 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. This optimism stems from our perception that the ongoing dislocation and turmoil in the credit markets and the banking sector will continue to fuel significant demand for our mortgage products. We intend to achieve this objective by continuing to focus on selectively originating, managing, and servicing a portfolio of first mortgage real estate loans designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that our strategy targeting larger-value commercial loans with strong, experienced sponsors and on developing relationships with larger scale brokers, furthering our efforts to attract larger borrowers with better credit quality has been critical to our ability to continue to operate profitably in this difficult lending environment. In addition, to drive additional operational excellence, we are committed to continuously review, assess, and upgrade our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms. 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 objective. Nevertheless, we remain flexible to take advantage of other real estate opportunities that may arise from time to time, whether they relate to the mortgage market or to direct or indirect investments in real estate. 30 Table of Contents ​ Our overall business strategy is as follows: ● capitalize on opportunities created by the long-term structural changes in the real estate lending market and the continuing lack of liquidity in the commercial and investment real estate markets; ● take advantage of the prevailing economic environment and current economic, political and social trends that may impact real estate lending, as well as the outlook for real estate in general and particular asset classes; ● remain flexible to capitalize on changing sets of investment opportunities that may be present in the various points of an economic cycle; ● continue to improve operational efficiencies and reduce general and administrative expenses as a percentage of revenue; ● maintain our status as a publicly-held company, subject to the reporting requirements of the Exchange Act, which gives us immediate access to the public markets for much-needed capital; and ● operate to qualify as a REIT and for an exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. We believe that the following factors are the major challenges confronting us in 2024: High interest rate environment. 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 31, 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. We expect interest rates to remain elevated for the remainder of 2024. Geopolitical concerns. 2023 and early 2024 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 from private lenders. In the past, our primary competitors were other non-bank real estate finance companies and banks and other financial institutions. More recently, we are encountering competition from private equity funds, hedge funds and other specialty finance entities funded by investment banks, asset managers, private equity funds and hedge funds. The primary driver for these new market participants, we believe, is their need to find higher yielding investments. 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 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. Property value fluctuations. 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 CoStar reports. 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. We continue to see declines in real estate 31 Table of Contents valuations, particularly with larger commercial real estate assets (notably office). 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 and capital outlay. Our operating expenses for the three months ended March 31, 2024 are higher than they were in 2023 due to our higher debt load, as well as higher borrowing rates. In addition, we have two tranches of unsecured Notes coming due in 2024. The refinance of these Notes will likely carry a higher interest rate, ultimately increasing interest expenses even further. Finally, our other expenses increased primarily from federal tax liabilities and general and administrative increased from short payoffs on defaulted loans. Unfunded commitments. Most of our loans are funded in full at closing. However, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing. At March 31, 2024, our mortgage loan portfolio included 93 loans with future funding obligations, in the aggregate principal amount of $95.5 million, compared 171 loans with future funding obligations, in the aggregate principal amount of approximately $114.9 million at March 31, 2023. 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. We also believe developers will prefer to borrow from us rather than other lending sources because of flexibility in structuring loans to suit their needs, our lending criteria, which places greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, and our ability to close and service loans quickly. Our goal is, and has always been, to continue to grow our mortgage loan portfolio and increase our loan profitability, while at the same time maintain or improve our existing underwriting and loan criteria. Specifically, we believe that the following factors will impact our performance in 2024. ● Strong balance sheet. At March 31, 2024, we had approximately $237.4 million of shareholders’ equity and total indebtedness for borrowed money of approximately $377.6 million (including deferred financing costs). Thus, our capital structure was approximately 60.3% debt and 39.7% equity compared to approximately 59.9% debt and 40.1% equity at March 31, 2023 which is significantly lower than our mortgage REIT peers. Our equity includes 2,108,957 shares of Series A Preferred Stock, which carries a dividend rate of 7.75% per annum. ● Pricing power. For the three months ended March 31, 2024, and 2023, the yield on our mortgage loan portfolio, inclusive of default interest, was 12.7% and 11.69%, 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.) The pullback from the banking sector continues to provide demand for products and as such we have the ability to maintain attractive pricing. ● 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. Since the IPO through March 31, 2024, we raised approximately $509.6 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 March 31, 2024, we had cash and cash equivalents of approximately $18.4 million. 32 Table of Contents ● 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. 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 have an adverse impact on our business unless we can 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 March 31, 2024, debt represented approximately 60.3% of our total capital compared to 59.9% at March 31, 2023. 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. Debt Our total outstanding indebtedness at March 31, 2024 was approximately $377.6 million, which included the Wells Fargo Loan balance of $27.3 million, $25.9 million outstanding under the Churchill Facility, approximately $1.1 million outstanding under the NHB Mortgage, $35.0 million outstanding under the Needham Credit Facility and approximately $288.4 million aggregate outstanding principal amount of five-year, unsecured unsubordinated notes, (the “Notes”) as follows: ● Approximately $40.3 million 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; ● $30.0 million 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; ● Approximately $51.9 million 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; ● Approximately $51.8 million 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; ● Approximately $56.4 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, 33 Table of Contents 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; ● $34.5 million 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; and ● Approximately $23.7 million 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 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, 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 as of March 31, 2024 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 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 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 (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. At such time, we have an additional 180 days after termination to repurchase all the mortgage loans held by Churchill. We believe the Churchill Facility gives us the ability to raise capital as needed at a relatively low rate. It also gives us the flexibility to seek other sources of funding. At March 31, 2024, the amount outstanding under the Churchill Facility was approximately $25.9 million, which amount was accruing interest of an effective rate of 9.4% per annum. The Wells Fargo Loan is secured by our portfolio of investment securities, which had a value of approximately $36.6 million at March 31, 2024. The outstanding balance on the Wells Fargo Loan of approximately $27.3 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. 34 Table of Contents 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%. From April 1, 2023 through March 1, 2038, principal and interest is 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 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 ended 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 March 31, 2024, 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 three months ended March 31, 2024, under 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.) At March 31, 2024, approximately $48.6 million of Common Shares and $20.8 million of Series A Preferred Stock were available for future sale under the ongoing at-the-market offering. REIT Qualification We believe that we have qualified as a REIT since the consummation of the IPO and that it is in the best interests of our shareholders that we operate as a REIT. We made the election to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders on an annual basis. We cannot assure you that we will be able to maintain REIT status. Our qualification as a REIT depends on our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code, relating to, among other things, the sources of our gross income, the composition and values of our assets, our compliance with the distribution requirements applicable to REITs and the diversity of ownership of our outstanding Common Shares. We cannot assure you that we will be able to maintain our qualification as a REIT. So long as we qualify as a REIT, we, generally, will not be subject to U.S. federal income tax on our taxable income that we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate income tax rates and may be precluded from electing to be treated as a REIT for four taxable years following the year during which we lose our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income. 35 Table of Contents Critical Accounting Policies and Use of Estimates The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management will base the use of estimates on (a) various assumptions that consider prior reporting results, (b) projections regarding future operations and (c) general financial market and local and general economic conditions. Actual amounts could differ from those estimates. Interest income from commercial loans is recognized, as earned, over the loan period, whereas origination and modification fee revenue on commercial loans are amortized over the term of the respective notes. 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. Also, 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 mortgages receivable is presented in 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 accrued allowance for unfunded construction commitments is included in accounts payable and accrued liabilities on the accompanying consolidated balance sheets. The change in the balances during the reporting period are recorded in the Consolidated Statements of Comprehensive Income under the Provision for credit losses related to loans. Results of Operations Three months ended March 31, 2024 compared to three months ended March 31, 2023 Total revenue Total revenue for the three months ended March 31, 2024 was approximately $17.2 million compared to approximately $14.7 million for the three months ended March 31, 2023, an increase of approximately $2.5 million, or 17.0%. The increase in revenue is primarily due to an increase in interest rates that we are able to charge borrowers in comparison to the 2023 period. For the 2024 period, interest income was approximately $12.6 million compared to approximately $11.0 million for the 2023 period, an increase of approximately $1.6 million or 15.1%. Income from partnership investments was approximately $1.2 million for the 2024 period compared to approximately $0.5 million for the 2023 period, an increase of approximately $0.7 million or 117.4%. Other income was approximately $1.2 million for the 2024 period compared to approximately $0.7 million for the 2023 period, an increase of approximately $0.5 million or 68.1%. The increases were offset by a decrease in unrealized gain on investment securities of approximately $0.5 million, or 74.2% in the 2024 period, from approximately $0.7 million in the 2023 period to approximately $0.2 million in the 2024 period. 36 Table of Contents Operating costs and expenses Total operating costs and expenses for three months ended March 31, 2024 were approximately $12.5 million compared to approximately $9.6 million for the three months ended March 31, 2023, an increase of approximately $2.9 million or 30.7%. The largest contributor to this increase was provisions for credit losses related to loans, which were approximately $1.3 million in the 2024 period compared to approximately $0.1 million in the 2023 period. In the 2024 period, interest and amortization of deferred financing costs were approximately $7.5 million compared to approximately $6.9 million in the same 2023 period, an increase of approximately $0.6 million or 8.7%. The remaining fluctuations in operating expenses were primarily attributable to (i) compensation, fees and taxes which increased approximately $0.2 million, (ii) general and administrative expenses which increased approximately $0.3 million, and (iii) other expenses, which increased approximately $0.5 million. Comprehensive income For the quarter ended March 31, 2024, we reported an unrealized loss on available-for-sale debt securities of approximately $0.1 million reflecting the net reclass of unrealized gains over realized gains since December 31, 2023. For the quarter ended March 31, 2023, we reported an unrealized gain on investment securities of approximately $0.1 million reflecting the decrease in prior unrealized losses since December 31, 2022. Net income Net income attributable to common shareholders for the three months ended March 31, 2024 was approximately $3.6 million, or $0.08 per share, compared to approximately $4.2 million, or $0.10 per share for the three months ended March 31, 2023. Non-GAAP Metrics – Adjusted Earnings We invest our excess cash in marketable securities. Under GAAP, those securities are required to be “marked to market” at the end of each reporting period. Accordingly, if the value of certain of those securities increases, the increase is reported within net income, whereas the remaining increase is reported as a change in accumulated other comprehensive income. On the other hand, if the value decreases, the decrease in value of certain of the securities reduces our net income. For income tax purposes, we do not report the unrealized gain or loss on those securities until they are sold or mature. This creates a discrepancy between our GAAP net income and our taxable income. To maintain our status as a REIT, we are required to distribute, on an annual basis, at least 90% of our taxable income. Thus, to give our shareholders a better perspective of our taxable income, we use a metric called Adjusted Earnings. Adjusted Earnings is calculated as net income attributable to common shareholders, prior to the effect of unrealized gains (losses) on equity investments. Adjusted Earnings should be examined in conjunction with net income (loss) as shown in our statements of comprehensive income. Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity, nor is Adjusted Earnings indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted Earnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance. It should be noted that our manner of calculating Adjusted Earnings may differ from the calculations of similarly-titled measures by other companies. In addition, there may be other differences between GAAP and tax accounting that would impact Adjusted Earnings, which are not reflected in the table below. ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Month Period Ended March 31, ​ 2024 2023 Adjusted earnings: ​ ​ ​ ​ Net income attributable to common shareholders ​ $ 3,648,699 ​ $ 4,195,460 (Subtract)/Add: Unrealized gain on equity securities ​ (185,181) ​ (716,389) Adjusted earnings attributable to common shareholders ​ $ 3,463,518 ​ $ 3,479,071 ​ For the three months ended March 31, 2024 and 2023, Adjusted Earnings per share was $0.07 and $0.08, respectively. 37 Table of Contents Liquidity and Capital Resources Total assets at March 31, 2024 were approximately $626.5 million compared to approximately $625.5 million at December 31, 2023, an increase of approximately $1.0 million, or 0.2%. The increase was due primarily to the increase of our cash and cash equivalents of approximately $5.8 million, an increase in investments in partnership of approximately $3.2 million, an increase in investment securities of approximately $0.7 million, and an increase in net investments in rental real estate of approximately $0.7 million, offset by decreases in net mortgages receivable of approximately $9.0 million and net interest and fees receivable of approximately $0.4 million. Total liabilities at March 31, 2024 were approximately $389.1 million compared to approximately $395.5 million at December 31, 2023, a decrease of approximately $6.4 million, or 1.6%. This decrease is principally due to decreases in the accrued dividends payable of approximately $5.1 million and advances from borrowers of approximately $1.8 million, offset primarily by an increase in accounts payable and accrued expenses of approximately $0.4 million and increase in the line of credit of approximately $0.5 million. Total shareholders’ equity at March 31, 2024 was approximately $237.4 million compared to approximately $230.1 million at December 31, 2023, an increase of approximately $7.3 million, or 3.2%. This increase was due primarily to net proceeds of $3.6 million from the sale of Common Shares and Preferred shares and our net income of approximately $3.5 million. Net cash provided by operating activities for the three months ended March 31, 2024 was approximately $4.2 million compared to approximately $5.0 million for the comparable 2023 period. For the 2024 period net cash provided by operating activities consisted primarily of net income of approximately $4.7 million, amortization of deferred financing costs and bond discount of approximately $0.6 million, provisions for credit losses related to loans of approximately $1.3 million, stock based compensation of approximately $0.2 million, a decrease in net interest and fees receivable of approximately $0.4 million, and an increase in accounts payable and accrued liabilities of approximately $0.4 million, offset unrealized gains on investment securities of approximately $0.2 million, decreases in advances from borrowers of approximately $1.8 million and deferred revenue of approximately $0.3 million, as well as increases in other assets of approximately $0.3 million, and net due from borrowers of approximately $1.0 million. For the 2023 period net cash provided by operating activities consisted primarily of net income of approximately $5.1 million, amortization of deferred financing costs and bond discount of approximately $0.6 million and increases in deferred revenue of approximately $0.3 million and advances from borrowers of approximately $1.4 million, offset by gain on the sale of real estate of approximately $0.1 million, unrealized gain on investment securities of approximately $0.7 million, gain on the sale of investment securities of approximately $0.3 million and increases in due from borrowers of approximately $0.8 million, other assets of approximately $0.5 million, and interest and fees receivable of approximately $0.4 million. Net cash provided for investing activities for the three months ended March 31, 2024 was approximately $4.3 million compared to net cash used of approximately $34.0 million for the comparable 2023 period. For the 2024 period, net cash provided for investing activities consisted primarily of proceeds from the sale of investment securities of approximately $7.1 million, principal collections on mortgages receivable of approximately $51.4 million, and proceeds from the sale of real estate owned of approximately $0.1 million, offset by purchases of investment securities of approximately $7.7 million, principal disbursements for mortgages receivable of approximately $42.7 million, purchases of net interests in investment partnerships of approximately $3.2 million, and purchases of rental real estate of approximately $0.7 million. For the 2023 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $14.0 million, net purchases of interests in investment partnerships of approximately $4.5 million, purchase of property and equipment of approximately $711,000 and principal disbursements for mortgages receivable of approximately $58.9 million, offset by principal collections on mortgages receivable of approximately $39.9 million, proceeds from sale of real estate owned of approximately $515,000 and by proceeds from the sale of investment securities of approximately $3.8 million. Net cash used in financing activities for the three months ended March 31, 2024 was approximately $2.7 million compared to net cash provided by financing activities of approximately $25.6 million for the comparable 2023 period. Net cash used for financing activities for the 2024 period consists principally of dividends paid on common shares of approximately $5.1 million, dividends paid on Series A Preferred Stock of approximately $1.0 million, and repayment of repurchase facilities of approximately $0.6 million, offset primarily by net proceeds from issuance of common shares of approximately $2.1 million, net proceeds from issuance of Series A Preferred Stock of approximately $1.6 million, and net proceeds from lines of credit of approximately $0.5 million. Net cash provided by financing activities for the 2023 period consists principally of net proceeds from the issuance of common shares of approximately $9.2 million, net proceeds from line of credit of approximately $10.1 million, net proceeds from repurchase facility of 38 Table of Contents approximately $11.5 million and proceeds from mortgage of $910,000, offset primarily by dividends paid on common stock of approximately $5.3 million and preferred stock of approximately $925,000. We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs. Our short-term cash requirements primarily include funding of loans and construction draws and payments for usual and customary operating and administrative expenses, such as interest payments on notes payable, employee compensation, sales, marketing expenses and dividends. Additionally, Notes having an aggregate outstanding principal balance of approximately $23.7 million are maturing on June 30, 2024 and Notes having an aggregate outstanding principal balance of $34.5 million are maturing on December 30, 2024. We intend to repay the Notes either by refinancing them or with a combination drawdowns from of our existing credit facilities, current cash on hand, and principal repayments of our mortgage loans. 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 and funding of new mortgage loans. Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows and proceeds from sales of real estate owned. From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our Common Shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains). On April 1, 2024, the Company declared a dividend of $0.11 per share, or $5,219,066 in the aggregate, to shareholders of record as of April 9, 2024, which was paid on April 16, 2024. Between April 1, 2024 and May 9, 2024, through our at-the-market offering facility, we sold no Common Shares, and 69,431 shares of its Series A Preferred Stock having an aggregate liquidation preference of $1,735,775, realizing gross proceeds of $1,519,944 (representing a discount of approximately 12% from the liquidation preference.) Off-Balance Sheet Arrangements We are not a party to any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources. Contractual Obligations As of March 31, 2024, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment, software licenses and investment in partnerships. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than ​ 1 – 3 ​ 3 – 5 ​ More than ​ Total 1 year years years 5 years Unfunded portions of outstanding construction loans ​ $ 95,457,791 ​ $ 61,231,076 ​ $ 34,226,715 ​ $ — ​ $ — Unfunded partnership commitments ​ 2,449,967 ​ 2,449,967 ​ — ​ — ​ — Total contractual obligations ​ $ 97,907,758 ​ $ 63,681,043 ​ $ 34,226,715 ​ $ — ​ $ — ​ Critical Accounting Policies and Recent Accounting Pronouncements See “Note 2 — Significant Accounting Policies” to the financial statements for explanation of recent accounting pronouncements impacting us included elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. ​ 39 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this Item. ​