Sachem Capital Corp. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated 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 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: ● 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; 33 Table of Contents ● 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 for the remainder of 2024: High interest rate environment. 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 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. 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 . Our last underwritten public offering was in August 2022. 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. 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, 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. 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 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. 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 and declines. 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 Co-Star reports. Additionally, we primarily utilize third-party valuations including, but not limited to, appraisals, broker price opinions, automated valuation models, and internal valuations to assist in both our underwriting and monitoring of our portfolio assets. Nevertheless, property value market cycles could have an adverse impact on our operations and financial condition. 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 34 Table of Contents 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 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 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. 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 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. 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 political 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 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 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 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. ● 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 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. ● 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 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 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 35 Table of Contents 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 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. Loan Sale 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. Debt 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 36 Table of Contents 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; ● $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; ● $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; ● $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; ● $56.4 million aggregate original principal amount, of which $14.4 million was issued September 4, 2020, $14.0 million was issued October 23, 2020 and $28.0 million was issued December 22, 2020, bearing interest at the rate of 7.75% per annum and maturing on September 30, 2025 (the “2025 Notes”), which trades on the NYSE American under the symbol SCCC. The 2025 Notes are prepayable beginning on September 4, 2022; and ● $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. 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. 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 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. 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 37 Table of Contents 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 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%. 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 ( “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. 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 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: (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 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 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. 38 Table of Contents 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. 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 allowances for credit losses in accordance with ASU No. 2016-13, known as CECL (i.e., current expected credit losses) 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) our 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 of the allowance. The accrued allowance for unfunded construction commitments is included in accounts payable and accrued liabilities on the consolidated balance sheets included in the accompanying unaudited consolidated financial statements. The change in the balances during the reporting period are recorded in the consolidated statements of operations under the provision for credit losses related to loans. 39 Table of Contents Results of Operations Three months ended September 30, 2024 compared to three months ended September 30, 2023 Total revenue 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 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 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. 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 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) 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 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. 40 Table of Contents Nine months ended September 30, 2024 compared to nine months ended September 30, 2023 Total revenue 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 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. 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) 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 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 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 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, 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. 41 Table of Contents 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 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. 42 Table of Contents 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). 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. Inc. 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 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 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than ​ 1 – 3 ​ 3 – 5 ​ More than ​ Total 1 year years years 5 years ​ ​ (In thousands) Unfunded portions of outstanding construction loans ​ $ 71,865 ​ $ 52,801 ​ $ 19,064 ​ $ — ​ $ — Unfunded partnership commitments ​ 4,499 ​ ​ 4,499 ​ ​ — ​ ​ — ​ ​ — Total contractual obligations ​ $ 76,364 ​ $ 57,300 ​ $ 19,064 ​ $ — ​ $ — ​ 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. ​ 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. ​