What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-14 compared with 2024-08-14 · 136 added, 128 removed, 192 unchanged (58% of the section changed)

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

Review of the First Half of 2024 and Outlook for Balance of Year

Compared to the first half of 2023, revenue in the first half of 2024 increased 4.4%, net income attributable to common shareholders decreased 105.3%, and earnings per share decreased $0.22 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 6.6%.

In addition, income from partnership investments increased 55.1%, and, as of June 30, 2024 the underlying mortgage loan investments within those partnerships had zero defaults.

The increase in revenue was offset by an overall 54.4% increase in operating expenses.

The increase in operating expenses is mainly attributable to an increase of $9.7 million in provisions for credit losses related to loans year-over-year, which had the most significant impact on earnings per share.

This was primarily driven by underlying asset valuation declines in our loans that are pending foreclosure.

Provisions for credit losses, including impairment losses, are a non-cash charge and have no impact on our taxable income.

Additionally, we had a 3.1% increase in interest expense and amortization of deferred financing costs.

The increase in interest expense is primarily attributable to the higher interest rate environment.

We expect interest expense to increase over the remainder of 2024 as we seek to refinance over $34.5 million aggregate principal amount of our unsecured unsubordinated notes maturing in 2024.

We experienced a 12.7% increase in general and administrative expenses, driven primarily from consulting and professional fees, a 191.6% increase in other expenses driven primarily by tax expenses relating to our taxable REIT subsidiary.

Despite a difficult commercial real estate and capital markets environment, our primary business objective for 2024 is to protect book value for our shareholders.

We believe we can do so by allocating capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term - principally through dividends.

This 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 our primary business objective by continuing to focus on selectively originating, managing, and servicing a portfolio of first mortgage real estate loans designed to generate attractive returns across a variety of market conditions and economic cycles.

We believe that our strategy targeting larger-value 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 business objective.

Nevertheless, we remain poised 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.

Review of the First Nine Months of 2024 and Outlook for Balance of Year

For the nine months ended September 30, 2024, revenue declined by 3.3% compared to the comparable 2023 period.

In addition, for the 2024 period we reported a net loss attributable to common shareholders of $6.6 million compared to net income attributable to common shareholders of $14.2 million for the comparable 2023 period.

The decrease in revenue and the swing from net income to net loss were driven by several factors.

The primary factor was a $18.0 million provision for credit losses in 2024, compared to $65,000 in 2023.

This increase was mainly due to declines in the value of assets securing the mortgage loans in our portfolio.

Provisions for credit losses, including impairment losses, are non-cash charges and do not affect taxable income and distributable earnings as a result.

The second factor was a 32.1% decrease in loan originations, which negatively impacted both interest and fee income from loans.

This decline was primarily due to our inability to raise growth capital amid challenging macroeconomic conditions.

The third factor was a 35.5% rise in general and administrative expenses, mainly from increased legal and advisory fees related to shareholder activism.

The fourth factor was a 90.1% increase in other expenses, primarily driven by higher tax expenses from our taxable REIT subsidiary.

On a positive note, income from partnership investments rose 67.1%, and interest expense, along with amortization of deferred financing costs, decreased by 1.9%, following the repayment of our unsubordinated notes in June 2024.

Looking ahead to the remainder of 2024, further write-downs related to loans are possible, along with continued declines in interest and fee income due to ongoing challenges in the real estate and capital markets.

However, we anticipate general administrative expenses will return to more typical levels, and other expenses should stabilize.

Additionally, a tranche of our unsecured subordinated five-year notes, totaling $34.5 million, is due on December 30, 2024.

While the repayment of these notes will not impact interest expense or amortization for the remainder of this year, it will reduce these costs in 2025.

We expect to meet the repayment obligation using cash flow from operations, additional borrowings under existing credit facilities, and proceeds from the sale of a portion of our loan portfolio (details to be discussed further below).

Our overall business strategy is as follows:

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The rates on our existing credit facilities, including the Churchill Facility and the New NHB Mortgage (as defined below), have all increased.

The effective rate of Needham Bank Credit Facility was 8.25%, and Churchill Facility was 9.60% as of June 30, 2024.

The effective rate of Needham Bank Credit Facility was 7.75%, and Churchill Facility was 8.95% as of September 30, 2024.

In addition, the interest rate on the September 2027 Notes, our last note offering in 2022, was 8.0%, the highest it has ever been.

We expect interest rates to remain elevated for the remainder of 2024.

Although interest rates have started to come down recently, we expect interest rates to remain elevated for the remainder of 2024 and into 2025.

Capital markets illiquidity .

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Since then, our sole source of working capital has been interest and principal payments on our existing loan portfolio, our existing credit facilities (Churchill and Needham) and intermittent sales under our at-the-market offering facility.

In the current environment, growth capital is simply too expensive and will remain so until interest rates begin to come down.

Rates have began to ease but the current U.S.

10 Year Treasury Yield would indicate rates are expected to stay elevated for longer than anticipated.

Global and domestic political concerns.

2023 and early 2024 was marked with various geopolitical concerns, including the ongoing conflict between Ukraine and Russia and Israel and Hamas and other Iranian proxies, heightened tensions between the U.S.

2023 and early 2024 was marked with various geopolitical concerns, including the ongoing conflict between Ukraine and Russia, and Israel, Hamas, Hezbollah and other Iranian proxies, heightened tensions between the U.S.

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

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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.

Additionally the United States will have a presidential election in the fourth quarter of this year.

While the effects of the election are difficult to predict, one thing is clear:

come January 2025, we will have a new administration, whose policies and priorities remain to be seen.

Our business is purely domestic, but our Company and our borrowers are impacted by the uncertainty created by world events and unexpected market volatility.

Additionally, in the fourth quarter of this year, the United States had a presidential election pursuant to which a new president was elected.

The new president and his administration is expected to take office in January 2025 and his policies and priorities remain to be seen.

Increased competition from private lenders.

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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.

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.

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

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

As a result, many REITs have been forced to record additional

allowances for credit losses and write-downs of real estate assets.

Although many of our loans are secured by residential properties, 28.0% of our portfolio is secured by commercial real estate and, hence, we are not immune from this trend.

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

Our total allowance for credit losses related to loans as of June 30, 2024 was $19.1 million.

Our total provisions for credit losses related to loans for the three and six month periods ended June 30, 2024 were $8.5 million and $9.9 million, respectively.

Our total allowance for credit losses related to mortgage loans as of September 30, 2024 was $27.2 million.

Our total provisions for credit losses related to loans for the three and nine month periods ended September 30, 2024 were $8.1 million and $18.0 million, respectively.

Similarly, the decline in commercial real estate values has led to an increase in our foreclosure rates.

At June 30, 2024, 19.1% of the loans in our portfolio were in foreclosure proceedings compared to 18.0% at December 31, 2023.

At September 30, 2024, 23.9% of the loans in our portfolio were in foreclosure proceedings compared to 18.0% at December 31, 2023.

We expect these trends to continue through the remainder of 2024.

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

At June 30, 2024, our mortgage loan portfolio included 93 loans with future funding obligations, in the aggregate principal amount of $89.0 million, compared 143 loans with future funding obligations, in the aggregate principal amount of $103.3 million at June 30, 2023.

At September 30, 2024, our mortgage loan portfolio included 80 loans with future funding obligations, in the aggregate principal amount of $71.9 million, compared 123 loans with future funding obligations, in the aggregate principal amount of $99.8 million at September 30, 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.

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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.

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 maintaining or improving our existing underwriting and loan criteria.

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

● Strong balance sheet.

At June 30, 2024, we had $230.2 million of shareholders’ equity and total indebtedness for borrowed money of $343.8 million (including deferred financing costs).

Thus, our capital structure was 58.6% debt and 41.4% equity compared to 61.3% debt and 38.7% equity at June 30, 2023 which is significantly lower than our mortgage REIT peers.

At September 30, 2024, we had $220.6 million of shareholders’ equity and total indebtedness for borrowed money of $324.7 million (including deferred financing costs).

Thus, our capital structure was 58.5% debt and 41.5% equity compared to 61.0% debt and 39.0% equity at September 30, 2023 which is significantly lower than our mortgage REIT peers.

Our equity includes 2,279,824 shares of Series A Preferred Stock (as defined in Note 18), which carries a dividend rate of 7.75% per annum.

● Pricing power.

For the six months ended June 30, 2024, and 2023, the yield on our mortgage loan portfolio, inclusive of default interest, was 12.81% and 12.17%, respectively.

For the nine months ended September 30, 2024, and 2023, the stated yield on our mortgage loan portfolio, inclusive of default interest, was 13.1% and 12.2%, 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.

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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 June 30, 2024, we raised $511.7 million of gross proceeds through public offerings of our equity and debt securities.

Since the IPO through September 30, 2024, we raised $513.4 million of gross proceeds through public offerings of our equity and debt securities.

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

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(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 and (ii) 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 June 30, 2024, we had cash and cash equivalents of $10.6 million.

As of September 30, 2024, we had cash and cash equivalents of $5.9 million.

● Management .

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

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

Other key personnel include 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.

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

At June 30, 2024, debt represented 58.6% of our total capital compared to 61.3% at June 30, 2023.

At September 30, 2024, debt represented 58.5% of our total capital compared to 61.0% at September 30, 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.

Our total outstanding indebtedness at June 30, 2024 was $343.8 million, which included $23.0 million outstanding under the Churchill Facility, $1.0 million outstanding under the New NHB Mortgage, $55.0 million outstanding under the Needham Credit Facility and $264.7 million aggregate outstanding principal amount of five-year, unsecured unsubordinated notes, (the “Notes”) as set forth below.

On June 25, 2024, we redeemed our 7.125% unsecured, unsubordinated Notes due June 30, 2024 in the aggregate principal amount of $23.7 million (“the June 2024 Notes”) plus accrued and unpaid interest.

Following the repayment of the June 2024 Notes, the following Notes remain outstanding:

In October 2024 we retained Mission Capital (“Mission”), a subsidiary of Marcus and Millichap, which is a real estate capital markets firm, as our sole and exclusive advisor for the proposed sale of a pool of mortgage loans with an aggregate principal value of approximately $78.8 million.

A majority of these loans are classified as “non-accrual,” meaning payments of interest owed are more than 90 days overdue.

In the current market environment, selling these non-performing loans offers a strategic opportunity to improve liquidity and mitigate the opportunity cost associated with holding underperforming assets.

Non-performing loans not only tie up valuable capital but also increase our cost of capital by raising risk perceptions among lenders and investors, making it more expensive for us to access financing.

Current bids project recoverability of approximately 70% of unpaid principal balance indicating a loss on these loans of approximately $26.9 million which is inclusive of loss on unpaid principal balance, along with unpaid interest, fees, and charges.

We are anticipating closing the transaction prior to December 31, 2024.

The net proceeds from the sale will be used for working capital and general corporate purposes, with a portion potentially allocated to repaying the December 2024 Notes.

By reducing our exposure to non-performing loans, this transaction will allow us to optimize capital allocation, lower our cost of capital, and position the Company for stronger financial flexibility moving forward.

Our total outstanding indebtedness at September 30, 2024 was $324.7 million, which included $23.5 million outstanding under the Churchill Facility, $1.0 million outstanding under the New NHB Mortgage, $35.5 million outstanding under the Needham Credit Facility and $264.7 million aggregate outstanding principal amount of five-year, unsecured unsubordinated notes, (the “Notes”) as set forth below.

During the nine months ended September 30, 2024, the Company redeemed its 7.125% unsecured, unsubordinated

Notes due June 30, 2024 in the aggregate principal amount of $23.7 million plus the accrued interest thereon.

At September 30, 2024, the Company has six series of Notes outstanding:

● $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;

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

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

The September 2027 Notes will be redeemable at any time on or after August 23, 2024.

The Notes are all currently redeemable at our option.

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 June 30, 2024 includes the Churchill Facility, the New NHB Mortgage and the Needham Credit Facility (each as described below).

Our secured indebtedness as of September 30, 2024 includes the Churchill Facility, the New NHB Mortgage and the Needham Credit Facility (each as described below).

Under the terms of the Churchill Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans.

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

The Churchill Facility is also subject to various terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements, including a covenant that (A) prohibits us from (i) paying any dividend or make any distribution in excess of 90% of our taxable income, (ii) incurring any indebtedness or (iii) purchasing any shares of our capital stock, unless, in any case, we have an asset coverage ratio of at least 150%;

The Churchill Facility is also subject to various terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing

arrangements, including a covenant that (A) prohibits us from (i) paying any dividend or make any distribution in excess of 90% of our taxable income, (ii) incurring any indebtedness or (iii) purchasing any shares of our capital stock, unless, in any case, we have an asset coverage ratio of at least 150%;

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

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

At June 30, 2024, the amount outstanding under the Churchill Facility was $23.0 million, which amount was accruing interest of an effective rate of 9.6% per annum.

At September 30, 2024, the amount outstanding under the Churchill Facility was $23.5 million, which amount was accruing interest of an effective rate of 8.95% per annum.

On February 28, 2023, we refinanced the $1.4 million adjustable-rate mortgage loan from New Haven Bank which we originally obtained in 2021, with a new $1.66 million adjustable-rate mortgage loan from New Haven Bank (the “New NHB Mortgage”).

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%.

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.

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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”).

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 ( “Needham”) 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.

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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 expires March 2, 2026 subject to our right to extend the term for one year upon the consent of the Needham 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 is 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 Needham 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:

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

At June 30, 2024, the amount outstanding under the Needham Credit Facility was $55.0 million, which was accruing interest of an effective rate of 8.25% per annum.

At September 30, 2024, the amount outstanding under the Needham Credit Facility was $35.5 million, which was accruing interest of an effective rate of 7.75% per annum.

Currently, we are not in compliance with the debt service coverage ratio covenant in the Credit Agreement relating to the Needham Credit Facility described in the previous paragraph.

Our inability to comply with this covenant is directly related to the provision for credit losses, which, as discussed elsewhere in this Report, is a non-cash charge that adversely impacts our earnings.

Unlike other non-cash charges against earnings, such as depreciation and amortization, provision for credit losses related to mortgage loans is not added back to earnings under the definition of EBITDA.

Needham is aware of the situation and has informed us that they are considering granting us a waiver on the debt service covenant ratio.

Per the Credit Agreement, the breach of a covenant can result in a default which, if left uncured for more than 30 days, allows Needham to terminate the facility.

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 six months ended June 30, 2024, under our at-the-market offering facility, we sold an aggregate of 568,711 common shares, realizing gross proceeds of $2.1 million and 176,205 shares of its Series A Preferred Stock having an aggregate liquidation preference of approximately $4.4 million, realizing gross proceeds of $3.7 million (representing a discount of 16.2% from the liquidation preference.) At June 30, 2024, $48.3 million of common shares and shares of Series A Preferred Stock having a liquidation preference of approximately $18.7 million were available for future sale under the ongoing at-the-market offering.

During the nine months ended September 30, 2024, under our at-the-market offering facility, we sold an aggregate of 568,711 common shares, realizing gross proceeds of $2.1 million and 256,703 shares of our Series A Preferred Stock having an aggregate liquidation preference of approximately $6.4 million, realizing gross proceeds of $5.4 million (representing a discount of 15.7% from the liquidation preference.) At September 30, 2024, $48.3 million of common shares and shares of our Series A Preferred Stock having a liquidation preference of approximately $66.8 million were available for future sale under the ongoing at-the-market offering.

REIT Qualification

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Results of Operations

Three months ended June 30, 2024 compared to three months ended June 30, 2023

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Total revenue

Total revenue for the three months ended June 30, 2024 was $15.1 million compared to $16.3 million for the three months ended June 30, 2023, a decrease of $1.2 million, or 6.9%.

The decrease in revenue is primarily attributable to a decrease in our lending operations in comparison to the three months ended June 30, 2023.

This decrease is attributable to the current conditions in the capital markets, which make it very difficult for us to raise the capital we need to grow our mortgage loan portfolio.

As a result, loan originations, modifications, and extensions for the second quarter of 2024 were $34.5 million compared to $46.4 million for the second quarter of 2023 resulting in fee income in the second quarter of 2024 amounting to $2.1 million compared to $3.3 million in the second quarter of 2023, a decrease of $1.2 million, or 37.2%.

For the 2024 period, interest income was $11.8 million compared to $11.9 million for the 2023 period, a decrease of $0.1 million or 1.2%.

Total revenue for the three months ended September 30, 2024 was $14.8 million compared to $17.8 million for the three months ended September 30, 2023, a decrease of $3.0 million, or 16.8%.

The decrease in revenue is primarily attributable to a decrease in our lending operations in comparison to the same 2023 period, which have been adversely impacted by current conditions in the capital markets, making it extremely difficult for us to raise the capital on terms that we deem to be acceptable.

For the three months ended September 30, 2024, interest income was $11.4 million compared to $14.3 million for the same 2023 period, a decrease of $2.9 million or 20.0%.

The decrease is in-line with the decline of our mortgage loan portfolio, as well as comes as a direct result of the increase of loans in nonaccrual.

Fee income from loans decreased to $1.8 million compared to $2.4 million for the same 2023 period, a decrease of $0.6 million, or 23.9%.

This decrease in fees was primarily attributable to a decrease in originations.

For the three months ended September 30, 2024, we funded 12 new loans having an aggregate original principal amount of $6.7 million, compared to 18 loans in the amount of $28.0 million for the three months ended September 30, 2023.

As a result, origination fee income decreased approximately 16.4%, from $0.6 million for the three months September 30, 2023 to $0.1 million for the three months September 30, 2024.

Loan originations, modifications, and extensions for the three months ended September 30, 2024 were $14.4 million compared to $52.2 million for the same 2023 period.

During the three months ended September 30, 2024, we were predominantly focused on modifying existing loans.

Income from partnership investments was $1.5 million for the 2024 period compared to $0.8 million for the 2023 period, an increase of $0.8 million or 91.2%.

In addition, other investment income for the 2024 period was $0.07 million compared to $0.03 million for the 2023 period, an increase of $0.04 million or 105.9%.

Other income remained stagnant period over period.

In addition, other investment income for the three months ended September 30, 2024 was $0.03 million compared to $0.3 million for the same 2023 period, a decrease of $0.3 million or 98.9%.

Other income remained relatively stagnant period over period.

Operating expenses

Total operating expenses for three months ended June 30, 2024 were $18.5 million compared to $10.3 million for the three months ended June 30, 2023, an increase of $8.2 million or 78.8%.

Total operating expenses for three months ended September 30, 2024 were $19.6 million compared to $11.3 million for the three months ended September 30, 2023, an increase of $8.3 million or 72.8%.

The increase in operating expenses is primarily attributable to our provision for credit losses related to loans.

In the 2024 period, provision for credit losses related to loans were $8.5 million compared to $0.1 million in the same 2023 period, an increase of $8.4 million.

This increase is primarily due to a period-over-period increase of loans in pending and pre-foreclosure status of $23.1 million, as a result of $73.1 million of unpaid principal, interest, and charges as of June 30, 2024 compared to $50.0 million as of June 30, 2023.

For the 2024 period, provision for credit losses related to loans were $8.1 million compared to a $0.1 million recovery of credit losses related to loans for the comparable 2023 period.

This increase is primarily due to a period-over-period increase of loans in pending and pre-foreclosure status of $13.5 million, as a result of $81.8 million of unpaid principal, interest, and charges as of September 30, 2024 compared to $68.3 million as of September 30, 2023.

Such balances consist of primarily commercial assets, of which have experienced a decline in fair value throughout 2024.

See Note 2 to the accompanying unaudited consolidated financial statements included elsewhere in this Report for further details on our methodology on determining allowance for credit losses and provisions for credit losses related to loans under such category.

The remaining fluctuations in operating expenses were primarily attributable to (i) general and administrative expenses decreased $0.1 million, (ii) interest and amortization of deferred financing costs decreased $0.2 million, and (iii) other expenses which increased $0.1 million.

The remaining fluctuations in operating expenses were primarily attributable to (i) general and administrative expenses increased $1.0 million as a result of additional legal and advisory fees incurred in dealing with an activist shareholder, (ii) interest and amortization of deferred financing costs decreased $0.8 million as result of repayment of the June 2024 note, (iii) impairment loss on real estate owned increased $0.1 million, (iv) a $0.2 million decrease in net loss on sale of real estate owned, and property and equipment and (v) other expenses which increased $0.09 million.

Other income (loss)

Total other income (loss) for the three months ended June 30, 2024, was $0.3 million compared to a ($0.3) million loss for the three months ended June 30, 2023.

For the three months ended June 30, 2024, we reported a gain on equity securities of $0.1 million as a result of market fluctuations.

The remaining balance in other income (loss) for the 2024 period relate to a gain on sale of real estate and property and equipment, net of $0.3 million and impairment loss of $0.1 million.

For the three months ended June 30, 2023, we reported gain on equity securities of $0.2 million as a result of market fluctuation.

The remaining balance in other income (loss) for the 2023 period relate to a loss on sale of real estate and property and equipment, net of $0.02 million and impairment loss of $0.4 million.

For both of the three-month periods ended September 30, 2024 and 2023, we reported a $0.2 million loss on equity securities.

Net income (loss)

Net income (loss) attributable to common shareholders for the three months ended June 30, 2024 was ($4.1) million, or ($0.09) per share, compared to $4.8 million, or $0.11 per share for the three months ended June 30, 2023.

The decrease in net income is primarily due to the period-over-period increase of $8.4 million in the provision for credit losses related to loans and the period-over-period decrease of $1.1 million in revenue.

Six months ended June 30, 2024 compared to six months ended June 30, 2023

Net loss attributable to common shareholders for the three months ended September 30, 2024 was $6.1 million, or $0.13 per share, compared to net income to common shareholders $5.2 million, or $0.12 per share, for the three months ended September 30, 2023.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Total revenue

Total revenue for the six months ended June 30, 2024 was $32.0 million compared to $30.6 million for the six months ended June 30, 2023, an increase of $1.4 million, or 4.4%.

The increase in revenue is primarily attributable to the increase in the interest rates that we are able to charge borrowers compared to the six months ended June 30, 2023.

For the 2024 period, interest income was $24.4 million compared to $22.9 million for the 2023 period, representing an increase of $1.5 million or 6.6%.

Fee income from loans decreased to $4.7 million compared to $5.5 million for the 2023 period, a decrease of $0.8 million, or 14.4%.

This decrease was attributable mainly to a decrease in originations.

The number of new loans funded in the first six months of 2024 were 24 in the amount of $50.7 million, compared to 38 loans in the amount of $72.2 million in the first six months of 2023.

Similarly, origination fee income decreased approximately 50.0%, from $1.6 million in the first six months of 2023 to $0.8 million in the first six months of 2024, which is included in fee income.

Income from partnership investments increased to $2.4 million for the 2024 period compared to $1.6 million for the 2023 period, an increase of $0.8 million or 55.1%.

Other investment income was $0.4 million for the 2024 period compared to $0.6 million for the 2023 period, a decrease of $0.2 million or 39.0%.

Other income was $0.06 million for the 2024 period compared to $0.03 million for the 2023 period, an increase of $0.03 million, or 90%.

Total revenue for the nine months ended September 30, 2024 was $46.7 million compared to $48.3 million for the nine months ended September 30, 2023, a decrease of $1.6 million, or 3.3%.

The decrease in revenue is primarily attributable to the decline in our mortgage loan portfolio, which decreased 4.4% period-to-period.

For the 2024 period, interest income was $35.8 million compared to $37.2 million for the same 2023 period, representing a decrease of $1.4 million, a 3.6% decrease.

The decrease is in-line with the decline of our mortgage loan portfolio, as well as comes as a direct result of increases of loans in nonaccrual.

Fee income from loans decreased to $6.5 million compared to $7.9 million for the same 2023 period, a decrease of $1.4 million, or 17.3%.

This decrease in fees was primarily attributable to a decrease in originations.

For the first nine months of 2024, we funded 38 new loans having an aggregate original principal amount of $60.2 million, compared to 56 loans in the amount of $100.1 million for the first nine months of 2023.

Similarly, origination fee income decreased approximately 13.6%, from $2.2 million for the nine months of 2023 to $1.9 million for the first nine months of 2024.

Also, other investment income was $0.4 million for the nine months ended September 30, 2024 compared to $0.9 million for the same 2023 period, a decrease of $0.5 million or 55.4%.

These decreases were offset, in part, by increases in partnership investment income and other income.

Income from partnership investments was $3.9 million for the 2024 period compared to $2.3 million for the 2023 period, an increase of $1.6 million or 67.1%.

Operating expenses

Total operating costs and expenses for six months ended June 30, 2024 were $31.0 million compared to $20.1 million for the six months ended June 30, 2023, an increase of $10.9 million, or 54.4%.

Total operating costs and expenses for nine months ended September 30, 2024 were $50.4 million compared to $31.7 million for the nine months ended September 30, 2023, an increase of $18.7 million, or 59.0%.

The increase in operating expenses is primarily attributable to our provision for credit losses related to loans.

In the 2024 period, provision for credit losses related to loans were $9.9 million compared to $0.2 million in the same 2023 period, an increase of $9.7 million.

The increase in provision for credit losses related to loans relates to the aforementioned increase in loans in pending and pre-foreclosure as well as the decline in fair value of such assets,

along with the expectation of future decreases in such fair values.

The remaining fluctuations relate to the increase in our floating rates for our debt.

In the 2024 period, interest and amortization of deferred financing costs was $14.4 million compared to $14.0 million in the same 2023 period, an increase of $0.4 million, or 3.1%.

Lastly, general and administrative expenses increased $0.3 million, or 12.7%, and other expenses increased $0.6 million or 191.6%.

For the 2024 period, provision for credit losses related to loans were $18.0 million compared to $0.07 million for the same 2023 period, an increase of $17.9 million.

The increase in provision for credit losses related to loans relates to the aforementioned increase in loans in pending and pre-foreclosure as well as the decline in fair value of such assets, along with the expectation of future decreases in such fair values.

Further, general and administrative expenses increased $1.3 million, or 35.5% as a result of factors mentioned above, and other expenses increased $0.6 million or 90.1%.

Such increases were partially offset by a decrease in interest and amortization of deferred financing costs.

For the 2024 period, interest and amortization of deferred financing costs was $21.3 million compared to $21.7 million for the same 2023 period, a decrease of $0.4 million, or 1.9%.

Other income (loss)

Total other income for the six months ended June 30, 2024, was $0.6 million compared to $0.3 million for the six months ended June 30, 2023, an increase of $0.3 million.

For the six months ended June 30, 2024, we reported a gain on equity securities of $0.5 million as a result of market fluctuations and liquidating the investments held at Wells Fargo.

The remaining fluctuations in other income (loss) for the 2024 period were gain on sale of real estate and property and equipment, net of $0.3 million and impairment loss of $0.1 million.

For the six months ended June 30, 2023, we reported gain on equity securities of $0.6 million as a result of market fluctuation.

The remaining balance in other income for the 2023 period relate to a gain on sale of real estate and property and equipment, net of $0.1 million and impairment loss of $0.4 million.

For the nine-month period ended September 30, 2024, we reported $0.2 million gain on equity securities compared to a $0.4 million gain on equity securities for the nine months ended September 30, 2023.

Net Income (loss)

Net income (loss) attributable to common shareholders for the six months ended June 30, 2024 was $0.5 million, or ($0.01) per share, compared to $9.0 million, or $0.21 per share for the six months ended June 30, 2023.

The decrease in net income is primarily due to the year-over-year increase in provisions for credit losses related to loans, as stated above.

Net loss attributable to common shareholders for the nine months ended September 30, 2024 was $6.7 million, or $0.14 per share, compared to net income of $14.2 million, or $0.32 per share for the nine months ended September 30, 2023.

The $0.46 per share swing is due primarily to the increase in provisions for credit losses related to loans, as stated above.

Liquidity and Capital Resources

Total assets at June 30, 2024 were $586.3 million compared to $625.5 million at December 31, 2023, a decrease of $39.2 million, or 6.3%.

Total assets at September 30, 2024 were $555.5 million compared to $625.5 million at December 31, 2023, a decrease of $70.0 million, or 11.2%.

The decrease was due primarily to the decrease of our cash and cash equivalents of $6.7 million, a decrease in investments securities of $36.2 million, a decrease in net mortgages receivable of $34.8 million, and a decrease in interest and fee receivable of $3.5 million, offset by increases in investment in rental real estate of $2.4 million and investment in partnership of $11.1 million.

Total liabilities at June 30, 2024 were $356.2 million compared to $395.5 million at December 31, 2023, a decrease of $39.3 million, or 9.9%.

Total liabilities at September 30, 2024 were $334.9 million compared to $395.5 million at December 31, 2023, a decrease of $60.6 million, or 15.3%.

This decrease is primarily due to principal repayments of;

notes payable of $21.9 million, repurchase facility of $3.0 million, and the line of credit of $26.3 million.

Additionally, decreases in the accrued dividends payable of $5.1 million and advances from borrowers of $2.1 million, offset by increases in deferred revenue of $0.2 million and accounts payable and accrued liabilities of $0.5 million.

Total shareholders’ equity at June 30, 2024 was $230.2 million compared to $230.1 million at December 31, 2023, an increase of $0.1 million.

This increase was due primarily to net proceeds of $5.7 million from the sale of common shares and shares of Series A Preferred Stock and our net income of $1.6 million, offset by dividends paid on common shares and Series A Preferred stock of $2.1 million and $5.2 million, respectively.

Net cash provided by operating activities for the six months ended June 30, 2024 was $11.2 million compared to $12.1 million for the comparable 2023 period.

For the 2024 period net cash provided by operating activities consisted primarily of net income of $1.6 million, amortization of deferred financing costs and bond discount of $1.3 million, depreciation expense of $0.2 million, stock based compensation of $0.4 million, provision for credit losses related to loans of $9.9 million, and a decrease in interest and fees receivable, net of $0.4 million, offset by gain on equity securities of $0.5 million, decrease in advances from borrowers of $2.1 million, an increase due from borrowers, net of $0.6 million, and a net gain on sale of real estate and property and equipment of $0.3 million.

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

Net cash provided by (used in) investing activities for the six months ended June 30, 2024 was $27.5 million compared to net cash used for investing activities of $65.2 million for the comparable 2023 period.

For the 2024 period, net cash provided by investing activities consisted primarily of proceeds from the sale of investment securities of $44.0 million, proceeds from sales of real

estate owned of $1.4 million, and principal collections on mortgages receivable of $79.6 million, offset by purchases of investment securities of $7.8 million, purchases of interests in investment partnerships, net of $3.9 million, improvements in investment in rental real estate of $1.4 million, and principal disbursements for mortgages receivable of $84.3 million.

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

Net cash provided by (used in) financing activities for the six months ended June 30, 2024 was $(40.7) million compared to net cash provided by financing activities of $44.5 million for the comparable 2023 period.

Net cash used in financing activities for the 2024 period consists principally of repayment of lines of credit of $6.8 million, repayment of repurchase facility of $3.5 million, dividends paid on common shares and Series A Preferred Stock of $10.4 million and $2.1 million, respectively, and repayment of the unsecured notes payable that came due in June 2024 of $23.6 million, offset by proceeds from the issuance of common shares, net of expenses and Series A Preferred Stock, net of expenses of $2.1 million and $3.6 million, respectively.

Net cash provided by financing activities for the 2023 period consists principally of net proceeds from the issuance of common shares, net of expenses of $9.7 million, net proceeds from the issuance of Series A Preferred Stock, net of expenses of $0.5 million, net proceeds from lines of credit of $32.3 million, net proceeds from repurchase facility of $8.0 million, proceeds from mortgage payable of $0.9 million and proceeds from issuance of unsecured unsubordinated notes payable of $6.2 million, offset primarily by dividends paid on Common Shares of $11.0 million and Series A Preferred Stock of $11.0 million and $1.8 million, respectively.

Additionally, decreases in the accrued dividends payable of $5.1 million, deferred revenue of $1.3 million, and advances from borrowers of $3.9 million, offset by increases accounts payable and accrued liabilities of $1.0 million.

Total shareholders’ equity at September 30, 2024 was $220.6 million compared to $230.1 million at December 31, 2023, a decrease of $9.5 million.

This decrease was due primarily to dividends paid on common shares and Series A Preferred Stock of $9.0 million and $3.2 million, respectively, along with net loss of $3.4 million and repurchases of our common shares of $1.4 million, which was partially offset by the proceeds of the sale of Series A Preferred Stock of $5.2 million, issuance of common shares of $2.1 million, and stock-based compensation of $0.7 million.

Net cash provided by operating activities for the nine months ended September 30, 2024 was $13.5 million compared to $18.9 million for the comparable 2023 period.

For the 2024 period net cash provided by operating activities consisted primarily of amortization of deferred financing costs and bond discount of $1.9 million, depreciation expense of $0.3 million, stock based compensation of $0.7 million, provision for credit losses related to loans of $18.0 million, and a decrease in other assets of $3.5 million, offset by an increase in net interest and fees receivable of $0.6 million, a gain on equity securities of $0.2 million, decrease in advances from borrowers of $3.9 million, an increase due from borrowers, net of $1.7 million, and a net gain on sale of real estate and property and equipment of $0.3 million.

For the 2023 period net cash provided by operating activities consisted primarily of net income of approximately $17.0 million, amortization of deferred financing costs and bond discount of approximately $1.8 million, stock-based compensation of approximately $0.6 million, impairment loss of approximately $0.6 million, increases in advances from borrowers of approximately $2.6 million and deferred revenue of approximately $0.6 million, offset by unrealized gain on investment securities of approximately $0.4 million, increase in due from borrowers of approximately $2.2 million, increase in other assets in aggregate of approximately $1.0 million, and an increase in interest and fees receivable of approximately $1.6 million.

Net cash provided by (used in) investing activities for the nine months ended September 30, 2024 was $44.3 million compared to net cash used for investing activities of $67.6 million for the comparable 2023 period.

For the 2024 period, net cash provided by investing activities consisted primarily of proceeds from the sale of investment securities of $44.0 million, proceeds from sales of real estate owned of $2.0 million, and principal collections on mortgages receivable of $135.3 million, offset by purchases of investment securities of $7.8 million, purchases of interests in investment partnerships, net of $11.1 million, improvements in investment in rental real estate of $2.5 million, and principal disbursements for mortgages receivable of $115.7 million.

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

Net cash provided by (used in) financing activities for the nine months ended September 30, 2024 was $(64.5) million compared to net cash provided by financing activities of $50.7 million for the comparable 2023 period.

Net cash used in financing activities for the 2024 period consists principally of repayment of lines of credit of $26.3 million, repayment of repurchase facility of $3.0 million, dividends paid on common shares and Series A Preferred Stock of $14.2 million and $3.2 million, respectively, and repayment of the unsecured notes payable that came due in September 2024 of $23.6 million, offset by proceeds from the issuance of common shares, net of expenses and Series A Preferred Stock, net of expenses of $2.1 million and $5.2 million, respectively.

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

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

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, the December 2024 Notes are maturing on December 30, 2024.

We intend to repay the December 2024 Notes either by refinancing them or with a combination of 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.

Additionally, the December 2024 Notes are due and payable on December 30, 2024.

We intend to repay the December 2024 Notes with a combination of cash flow from operations, proceeds from our existing credit facilities (i.e., Churchill and Needham), and proceeds from the sale of loans (as described in Note 19 – Subsequent Events).

Accordingly, 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.

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 July 19, 2024 we declared a dividend of $0.08 per share, or $3.8 million in the aggregate, to shareholders of record as of July 29, 2024, which was paid on August 6, 2024.

Between July 1, 2024 and August 14, 2024, through our at-the-market offering facility, we sold 7,622 shares of its Series A Preferred Stock having an aggregate liquidation preference of $0.2 million, realizing gross proceeds of $0.2 million (representing a discount of 13.3% from the liquidation preference.)

Between July 1, 2024 and August 14, 2024, we repurchased 114,796 common shares through our existing stock repurchase plan.

Between October 1, 2024 and November 13, 2024, through our at-the-market offering facility, we sold no common shares, 6,802 shares of Series A Preferred Stock having an aggregate liquidation preference of $0.2 million, realizing gross proceeds of $0.1 million (representing a discount of 14.3% from the liquidation preference.)

Effective on October 10, 2024, our Board adopted a new stock repurchase plan (the “New Repurchase Plan”) to replace our existing stock repurchase plan (the “Original Repurchase Plan”), pursuant to which we may repurchase up to an aggregate of $5,802,959 of common shares.

Under the New Repurchase Plan, share repurchases will be made from time to time on the open market at prevailing market prices in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act.

The New Repurchase Plan is expected to continue until the earlier of the repurchase of all the common shares under the plan or termination in accordance with its terms.

Ladenburg Thalmann & Co.

and Janney Montgomery Scott LLC will act as the Company’s exclusive purchasing agents under the New Repurchase Plan.

Between October 1, 2024 and November 13, 2024, we repurchased 46,043 common shares through the Original Repurchase Plan.

Off-Balance Sheet Arrangements

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Contractual Obligations

As of June 30, 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.

As of September 30, 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.

(In thousands)

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis