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Item 5. Market for Registrant’s Common Equity

2024-03-15 compared with 2023-03-13 · 197 added, 191 removed, 287 unchanged (57% of the section changed)

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The information contained in this section should be read in conjunction with our audited consolidated financial statements and related notes thereto and other financial information included elsewhere in this annual report on Form 10-K.

We are a real estate credit focused company that originates, structures, funds and manages commercial real estate credit investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments throughout the United States, which we collectively refer to as our targeted assets.

Our loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States.

We focus on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties primarily in primary and secondary markets.

We believe loans in this size range are subject to less competition, offer higher risk adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification.

Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily through regular distributions.

We are a real estate investment trust that originates, invests in and manages a diverse portfolio of real estate and real estate-related assets.

We focus primarily on commercial real estate credit investments, including first mortgage loans, subordinated loans (including B-notes, mezzanine and preferred equity) and credit facilities throughout the United States, which we collectively refer to as our targeted assets.

Our loans finance the acquisition, development or recapitalization of high-quality commercial real estate in the United States.

We focus on middle market loans in the approximately $10 million to $50 million range, which we believe are subject to less competition, offer higher risk-adjusted returns than larger loans with similar risk metrics and facilitate portfolio diversification.

Our investment objective is to provide attractive risk-adjusted returns to our stockholders, primarily by earning high current income that allows for regular distributions, and, in certain instances, benefiting from potential capital appreciation.

There can be no assurances that we will be successful in meeting our investment objective.

As of December 31, 2022, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 31 loans in 10 states with an aggregate net principal balance of $633.2 million, a weighted average coupon rate of 11.5%, a weighted average loan-to-value ratio of 70.1% and a weighted average remaining term to maturity of 1.1 years.

We may also make strategic real estate equity and non-real estate-related investments that align with our investment objectives and criteria.

As of December 31, 2023, we held a net loan portfolio (gross loans less obligations under participation agreements and secured borrowing) comprised of 21 loans in nine states with an aggregate net principal balance of $509.5 million, a weighted average coupon rate of 12.9% and a weighted average remaining term to maturity of 0.8 years.

Each of our loans was originated by Terra Capital Partners or its affiliates.

Our portfolio is diversified based on location of the underlying properties, loan structure and property type.

As of December 31, 2022, our portfolio included underlying properties located in 31 markets, across 10 states and includes property types such as multifamily housing, student housing, commercial offices, medical offices, mixed-use and industrial properties.

As of December 31, 2023, our portfolio included underlying properties located in 21 markets, across nine states and includes property types such as multifamily housing, student housing, commercial offices, medical offices, mixed-use, industrial and infrastructure properties.

The profile of these properties ranges from stabilized and value-added properties to pre-development and construction.

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On March 2, 2020, we engaged in a series of transactions pursuant to which we issued an aggregate of 4,574,470.35 shares of common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by us, cash of $25.5 million and other working capital.

Following the consummation of the BDC Merger and as of December 31, 2022, former Terra BDC stockholders owned approximately 19.9% of our common equity, Terra JV held 70.0% of the issued and outstanding shares of our common stock with the remainder of 10.1% held by Terra Offshore REIT;

and Terra Fund 5 and Terra Fund 7 owned an 87.6% and 12.4% interest, respectively, in Terra JV.

As of December 31, 2023, Terra Fund 7 and Terra Offshore REIT held approximately 8.7% and 10.1%, respectively, of our issued and outstanding Class B Common Stock.

We have elected to be taxed as a REIT for U.S.

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Recent Developments

Merger Agreements

On October 1, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of May 2, 2022, Terra BDC merged with and into Terra LLC, our wholly owned subsidiary, with Terra LLC continuing as the surviving entity of the merger and as our wholly owned subsidiary.

The Certificate of Merger and Articles of Merger with respect to the BDC Merger were filed with the Secretary of State of the State of Delaware and SDAT, respectively, at the Effective Time.

At the Effective Time, except for any shares of Terra BDC Common Stock held by us or any of our wholly owned subsidiaries or Terra BDC, which shares were automatically retired and ceased to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock was automatically cancelled and retired and converted into the right to receive (i) 0.595 shares of our newly designated Class B Common Stock, and (ii) cash, without interest, in lieu of any fractional shares of Class B Common Stock otherwise issuable in an amount, rounded to the nearest whole cent, determined by

multiplying (x) the fraction of a share of Class B Common Stock to which such holder would otherwise be entitled by (y) $14.38.

Pursuant to the terms of the transactions described in the Merger Agreement, approximately 4,847,910 shares of Class B Common Stock were issued to former Terra BDC stockholders in connection with the BDC Merger, based on the number of outstanding shares of Terra BDC Common Stock as of the Closing Date.

Following the consummation of the BDC Merger, former Terra BDC stockholders owned approximately 19.9% of our common equity.

On the Closing Date, we filed with the SDAT the Charter Amendment.

Pursuant to the Charter Amendment, (i) the authorized shares of our stock which we have authority to issue were increased from 500,000,000 to 950,000,000, consisting of 450,000,000 shares of Class A Common Stock, 450,000,000 shares of Class B Common Stock, and 50,000,000 shares of Preferred Stock, and (ii) each share of our common stock issued and outstanding immediately prior to the Effective Time was automatically changed into one issued and outstanding share of Class B Common Stock.

The Class B Common Stock rank equally with and have identical preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption as each other share of our common stock, except as set forth below with respect to conversion.

On the First Conversion Date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date as approved by our Board, one-third of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.

On the Second Conversion Date, one-half of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.

On the Third Conversion Date, all of the issued and outstanding shares of Class B Common Stock will automatically and without any action on the part of the holder thereof convert into an equal number of shares of Class A Common Stock.

As of the Effective Time and in accordance with the Merger Agreement, the size of our Board was increased by three members and each of Spencer Goldenberg, Adrienne Everett and Gaurav Misra (each a “Terra BDC Designee) was elected to our Board to fill the vacancies created by such increase, with each Terra BDC Designee to serve until our next annual meeting of stockholders and until his or her successor is duly elected and qualifies.

Each of the other members of our Board immediately prior to the Effective Time continued as members following the Effective Time.

On June 28, 2023, we announced we entered into an Agreement and Plan of Merger, dated as of June 27, 2023 (the “WMC Merger Agreement”), with Western Asset Mortgage Capital Corporation, a Delaware corporation (“WMC”).

On August 8, 2023, WMC terminated the WMC Merger Agreement pursuant to its terms (the “Termination”), and we were paid a termination fee of $3.0 million.

Distribution of Class B Common Stock by Terra Fund 5

Prior to undertaking the REIT Formation Transaction, the Terra Funds distributed a consent solicitation memorandum disclosing the details of the proposed transactions and received the requisite consent of investors in each of the Terra Funds to engage in the REIT Formation Transaction.

The consent solicitation memorandum disclosed that Terra Fund 5 could in the future make a distribution-in-kind to its members of shares of our company, rather than a cash distribution.

The limited liability company agreement of Terra Fund 5 provides that the term of Terra Fund 5 expires on December 31, 2023.

On December 20, 2023, Terra Fund 5 announced that effective December 29, 2023, Terra Fund 5 would distribute all its shares of Class B Common Stock to its members as part of the winding up of Terra Fund 5.

On the Distribution Date, each member of Terra Fund 5 received 2,252.02 shares of Class B Common Stock for each unit of membership interest in Terra Fund 5 held by such member.

Because Terra Fund 5 previously owned its interests in the shares of Class B Common Stock indirectly through its ownership of interests in Terra JV, prior to the Distribution Date, Terra JV first distributed the shares of Class B Common Stock to Terra Fund 5, and Terra Fund 5 then distributed those shares to its members on the Distribution Date.

On February 8, 2024, each of Terra Fund 5 and Terra JV were dissolved.

Portfolio Summary

Net Loan Portfolio

The following tables provide a summary of our net loan portfolio as of:

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Principal balance $ 53,998,648 $ 455,462,178 $ 509,460,826 $ — $ 509,460,826

Amortized cost 92,274,998 534,215,769 626,490,767 12,680,594 613,810,173

Carrying value 54,095,173 402,377,085 456,472,258 — 456,472,258

Fair value 53,435,742 403,904,207 457,339,949 — 457,339,949

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Rate (1)(2)(3)

Total Gross Loans Obligations under Participation Agreements and Secured Borrowing Total Net Loans

Total Gross Loans Obligations under Participation Agreements Total Net Loans

Number of loans 8 23 31 1 31

Principal balance $ 90,990,183 $ 554,805,276 $ 645,795,459 $ 12,584,958 $ 633,210,501

Amortized cost 75,520,212 394,153,102 469,673,314 76,818,156 392,855,158

Carrying value 92,274,998 534,215,769 626,490,767 12,680,594 613,810,173

Fair value 90,729,098 532,416,656 623,145,754 12,680,595 610,465,159

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_______________

(1) These loans pay a coupon rate of LIBOR or SOFR plus a fixed spread.

Coupon rate shown was determined using LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 2022, and LIBOR of 0.10% as of December 31, 2021.

(1) These loans pay a coupon rate of London Interbank Offered Rate (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), or forward-looking term rate SOFR (“Term SOFR”) plus a fixed spread.

Coupon rates shown were determined using LIBOR of 5.47%, average SOFR of 5.34% and Term SOFR of 5.35% as of December 31, 2023, and LIBOR of 4.39%, average SOFR of 4.06% and Term SOFR of 4.36% as of December 31, 2022.

(2) As of December 31, 2023 and 2022, amount included $342.9 million and $413.1 million of senior mortgages used as collateral for $204.9 million and $261.0 million of borrowings under credit facilities, respectively.

(3) As of December 31, 2022 and 2021, twenty-one and thirteen of these loans, respectively, are subject to a LIBOR or SOFR floor, as applicable.

In addition to our net loan portfolio, as of December 31, 2022, we owned a multi-tenant office building acquired pursuant to a foreclosure and as of December 31, 2021, we owned 4.9 acres of land acquired pursuant to a deed in lieu of foreclosure and the aforementioned multi-tenant office building.

The parcel of land was sold in the second quarter of 2022.

The real estate and related lease intangible assets and liabilities had a net carrying value of $40.6 million and $56.1 million as of December 31, 2022 and 2021, respectively.

The mortgage loan payable encumbering the multi-tenant office building had an outstanding principal amount of $29.3 million and $32.0 million as of December 31, 2022 and 2021, respectively.

(3) As of December 31, 2023 and 2022, 14 and 21 loans, respectively, are subject to a LIBOR, SOFR, or Term SOFR floor, as applicable.

Real Estate Ownership

In addition to our net loan portfolio, as of December 31, 2023, through two investments, we owned eight industrial buildings acquired in 2023;

and as of December 31, 2022, we owned a multi-tenant office building acquired pursuant to a foreclosure.

As of December 31, 2023 and 2022, the real estate and related lease intangible assets and liabilities had a net carrying value of $129.8 million and $40.6 million, respectively, and the mortgage loans payable encumbering the real estate properties had an outstanding principal amount of $73.5 million and $29.3 million, respectively.

Equity Investments

Additionally, as of December 31, 2023 and 2022, we owned 14.9% and 27.9%, respectively, of equity interest in a limited partnership that invests primarily in performing and non-performing mortgages, loans, mezzanines and other credit instruments supported by underlying commercial real estate assets.

W e also beneficially owned equity interests in three joint ventures that invest in real estate properties.

In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower.

In 2022, in connection with a $10.0 million mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower.

We accounted for this arrangement as an equity investment.

In May 2023, we purchased the underlying assets and the $10.0 million mezzanine loan was settled in connection with the purchase.

In November 2023, in connection with a loan restructuring, we contributed $5.0 million to another joint venture that owns a real estate property.

We account for our equity interest in the joint ventures as equity method investments because we do not have a

controlling financial interest in the entities.

As of December 31, 2023 and 2022, these equity investments had total carrying value of $37.2 million and $62.5 million, respectively.

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We calculate our book value per share by dividing our net equity by the number of outstanding shares of our common stock, unless otherwise determined by our Board.

Our book value per share of Class B Stock Common Stock as of December 31, 2022 was $13.23.

Our book value per share of Class B Stock Common Stock as of December 31, 2023 and 2022 was $9.93 and $13.23, respectively.

Portfolio Investment Activity

Net Loan Portfolio

For the years ended December 31, 2023 and 2022, we invested $19.2 million and $126.9 million in new and add-on investments and had $10.3 million and $33.3 million of repayments, resulting in net investments of $8.9 million and $93.6 million, respectively.

Amounts are net of obligations under participation agreements, secured borrowing, borrowings under the master repurchase agreement, the term loan, the repurchase agreements and the revolving line of credit.

Amounts are net of obligations under participation agreements and secured financing.

Real Estate Ownership

For the year ended December 31, 2023, we made two investments for eight industrial buildings for a total capital cost of $132.1 million.

In connection with these acquisitions, we obtained mortgage financing totaling $72.6 million.

Net Loan Portfolio Information

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Preferred equity investments 126,550,969 127,105,312 27.8 % 121,231,434 122,132,177 19.9 %

Credit facility 28,802,833 29,080,183 4.7 % 11,762,500 11,859,876 3.0 %

Mezzanine loans 17,444,357 17,424,081 3.8 % 26,767,345 26,770,521 4.4 %

Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) %

Credit facility — — — % 28,802,833 29,080,183 4.7 %

Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) %

Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 %

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Office $ 144,812,619 $ 144,853,769 31.7 % $ 171,611,750 $ 172,042,063 27.9 %

Industrial 147,796,164 148,891,742 24.3 % 18,762,500 18,859,876 4.8 %

Multifamily 85,660,082 86,210,868 18.9 % 104,589,464 105,570,432 17.2 %

Industrial 67,579,869 67,612,621 14.8 % 147,796,164 148,891,742 24.3 %

Mixed-use 63,096,365 63,531,806 13.9 % 64,880,450 65,838,965 10.7 %

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Infrastructure 21,250,000 21,443,421 4.7 % 21,250,000 21,840,359 3.6 %

Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) %

Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) %

Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 %

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New York 90,483,672 90,483,672 19.8 % 91,845,479 91,877,084 14.9 %

Georgia 72,401,718 73,101,964 11.9 % 53,289,288 53,536,884 13.6 %

Texas 67,625,000 68,142,046 11.1 % 13,625,000 13,725,690 3.5 %

New Jersey 82,419,378 83,489,049 18.3 % 62,228,622 62,958,482 10.3 %

Washington 56,671,267 57,027,639 9.3 % 3,523,401 3,382,683 0.9 %

Georgia 74,335,828 74,602,328 16.3 % 72,401,718 73,101,964 11.9 %

Utah 49,250,000 50,329,949 11.0 % 49,250,000 50,698,251 8.3 %

North Carolina 43,520,028 44,041,162 7.2 % 44,492,971 44,704,699 11.4 %

Washington 34,052,223 34,020,449 7.5 % 56,671,267 57,027,639 9.3 %

Arizona 31,000,000 31,296,235 6.9 % 31,000,000 31,276,468 5.1 %

North Carolina 21,826,479 21,929,657 4.8 % 43,520,028 44,041,162 7.2 %

Massachusetts 7,000,000 7,000,000 1.5 % 7,000,000 7,000,000 1.1 %

South Carolina — — — % 3,000,000 3,145,614 0.8 %

Allowance for loan losses — (25,471,890) (4.1) % — (13,658,481) (3.5) %

Texas — — — % 67,625,000 68,142,046 11.1 %

Allowance for credit losses — (56,976,025) (12.5) % — (25,471,890) (4.1) %

Total $ 509,460,826 $ 456,472,258 100.0 % $ 633,210,501 $ 613,810,173 100.0 %

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Our operating results may also be impacted by conditions in the financial markets and unanticipated credit events experienced by borrowers under our loan assets.

Credit risk represents the potential loss that we would incur if our borrowers failed to perform pursuant to the terms of their obligations to us.

With respect to our loan portfolio, we seek to manage credit risk by limiting exposure to any one individual borrower and any one asset class.

Additionally, our Manager employs an asset management approach and monitors the portfolio of investments through, at a minimum, quarterly financial review of property performance including net operating income, loan-to-value, debt service coverage ratio and the debt yield.

Our Manager also requires certain borrowers to establish an interest reserve, as a form of additional collateral, for the purpose of providing for future interest or property-related operating payments.

The performance and value of our loans depends upon the sponsors’ ability to operate or manage the development of the respective properties that serve as collateral so that each property’s value ultimately supports the repayment of the loan balance.

Mezzanine loans and preferred equity investments are subordinate to senior mortgage loans and, therefore, involve a higher degree of risk.

In the event of a default, mezzanine loans and preferred equity investments will be satisfied only after the senior lender’s investment is fully recovered.

As a result, in the event of a default, we may not recover all of our investments.

Our loans and investments are subject to credit risk.

The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us.

To monitor this risk, our asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

In addition, we are exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control.

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Concentration Risk

We hold real estate-related loans.

Thus, our loan portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans.

The result of such concentration in real estate assets is that a loss in such loans could materially reduce our capital.

We hold real estate and real estate-related loans.

Thus, our investment portfolio may be subject to a more rapid change in value than would be the case if it were required to maintain a wide diversification among industries, companies and types of loans.

The result of such concentration in real estate assets is that a loss in such investments could materially reduce our capital.

Interest Rate Risk

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(i) the interest expense associated with variable rate borrowings to increase;

(ii) the value of real estate-related loans to decline;

(ii) the value of real estate and real estate-related loans to decline;

(iii) coupons on variable rate loans to reset, although on a delayed basis, to higher interest rates;

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(i) the interest expense associated with variable rate borrowings to decrease;

(ii) the value of real estate-related loans to increase;

(ii) the value of real estate and real estate-related loans to increase;

(iii) coupons on variable rate real estate-related loans to reset, although on a delayed basis, to lower interest rates;

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Asset servicing fee 1,857,765 1,560,044 297,721

Provision for loan losses 11,813,409 10,904,163 909,246

Provision for credit losses 45,548,803 11,813,409 33,735,394

Real estate operating expenses 4,586,245 5,005,551 (419,306)

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92,398,284 45,785,225 46,613,059

Operating income 10,829,221 7,770,854 3,058,367

Operating (loss) income (24,484,250) 10,829,221 (35,313,471)

Other income and expenses

Interest expense from obligations under participation agreements (3,180,771) (10,596,545) 7,415,774

Interest expense on repurchase agreement payable (7,913,942) (142,495) (7,771,447)

Interest expense on mortgage loan payable (2,173,114) (2,449,239) 276,125

Interest expense on revolving line of credit (2,674,568) (911,811) (1,762,757)

Interest expense on term loan payable (524,344) (6,835,877) 6,311,533

Interest expense on secured financing (28,113,245) (14,793,540) (13,319,705)

Interest expense on unsecured notes payable (9,643,974) (6,682,937) (2,961,037)

Interest expense on secured borrowing (1,507,572) (1,576,502) 68,930

Net unrealized (losses) gains on marketable securities (122,299) 22,500 (144,799)

Loss on sale of real estate (51,984) — (51,984)

Income from equity investment in unconsolidated investments 2,731,477 5,925,802 (3,194,325)

Interest expense on obligations under participation agreements (1,353,006) (3,180,771) 1,827,765

Gain on extinguishment of participation liability 14,079,379 3,435,902 10,643,477

Unrealized losses on investments, net (316,573) (122,299) (194,274)

(Loss) income from equity investment in unconsolidated investments (2,383,938) 2,731,477 (5,115,415)

Gain on sale of interests in unconsolidated investments — 799,827 (799,827)

Realized loss on loan repayments — (517,989) 517,989

Gain on extinguishment of obligations under participation

agreements 3,435,902 — 3,435,902

Realized gains on marketable securities 83,411 129,248 (45,837)

Loss on disposal of real estate (4,211,153) (51,984) (4,159,169)

Realized (losses) gains on investments, net (459,279) 83,411 (542,690)

(32,401,789) (17,780,914) (14,620,875)

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Net Loan Portfolio

In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements, term loan payable, revolving credit facility and repurchase agreement payable.

In assessing the performance of our loans, we believe it is appropriate to evaluate the loans on an economic basis, that is, gross loans net of obligations under participation agreements, notes payable, term loan payable, revolving credit facility and repurchase agreements payable.

The following table presents a reconciliation of our loan portfolio on a weighted average basis from gross to net :

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and secured borrowing (9,987,566) 17.4 % (59,931,021) 12.1 %

Repurchase agreement payable (167,507,961) 6.2 % (6,349,642) 2.6 %

Promissory notes payable (13,002,573) 10.7 % — — %

Repurchase agreements payable (134,030,835) 8.3 % (167,507,961) 6.2 %

Term loan payable — — % (10,303,678) 5.3 %

Revolving line of credit (47,383,467) 7.6 % (16,721,744) 4.0 %

Revolving line of credit payable (87,114,331) 8.7 % (47,383,467) 7.6 %

Net loans (3)

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and secured borrowing (9,987,566) 17.4 % (24,800,580) 8.1 %

Repurchase agreement payable (167,507,961) 6.2 % (6,349,642) 2.6 %

Promissory notes payable (13,002,573) 10.7 % — — %

Repurchase agreements payable (134,030,835) 8.3 % (167,507,962) 6.2 %

Term loan payable — — % (10,303,678) 5.3 %

Revolving line of credit (47,383,467) 7.6 % (16,721,744) 4.0 %

Revolving line of credit payable (87,114,331) 8.7 % (47,383,467) 7.6 %

Net loans (3)

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Interest Income

For the year ended December 31, 2022 as compared to the same period in 2021, interest income increased by $5.8 million, primarily due to an increase in contractual interest income as a result of an increase in the weighted average principal balance of gross loans due to new loans we originated in 2022 and loans we acquired in connection with the BDC Merger, as well as an increase in the weighted average coupon rate due to increases in the underlying index rates.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest income increased by $13.5 million, primarily due to an increase in contractual interest income as a result of an increase in the weighted average principal balance of gross loans due to loans originated in 2022 and loans we acquired in connection with the BDC Merger, as well as an increase in the weighted average coupon rate due to increases in the underlying index rates.

Real Estate Operating Revenue

For the year ended December 31, 2022 as compared to the same period in 2021, real estate operating revenue increased by $2.6 million, as a result of lease termination income recognized in 2022 in connection with a termination notice received in November 2021.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, real estate operating revenue decreased by $0.4 million, primarily due to lease termination income recognized in 2022 (there was no such lease termination income recognized in 2023), partially offset by rental income contributed by the industrial buildings acquired in 2023.

Prepayment Fee Income

Prepayment fee income represents prepayment fees charged to borrowers for the early repayment of loans.

For the year ended December 31, 2022 as compared to the same period in 2021, prepayment fee income increased by $1.8 million, as a result of an increase in loans with minimum yield provisions repaid before maturity.

For the year ended December 31, 2023, there was no early repayment of loans and we did not recognize any prepayment fee income.

For the year ended December 31, 2022, we recognized prepayment fee income of $2.0 million on loans with minimum yield provisions repaid before maturity.

Other Operating Income

For the year ended December 31, 2022 as compared to the same period in 2021, other operating income decreased by $0.3 million, as a result of a decrease in dividend income earned on the marketable securities resulting from a decrease in the weighted average balance of the marketable securities.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, other operating income increased by $0.1 million, primarily due to an increase in dividend income recognized on marketable securities, partially offset by a decrease in application fees income on deals under application.

Operating Expenses Reimbursed to Manager

Under the terms of the Management Agreement with our Manager, we reimburse our Manager for operating expenses incurred in connection with services provided to us, including our allowable share of our Manager’s overhead, such as rent, employee costs, utilities and technology costs.

For the year ended December 31, 2022 as compared to the same period in 2021, operating expenses reimbursed to our Manager increased by $1.2 million, as a result of an increase in the allocation ratio resulting from an increase in total assets under management due to new loans we originated as well as loans acquired in connection with the BDC Merger.

Under the terms of a management agreement (the “Management Agreement”) with our Manager, we reimburse our Manager for operating expenses incurred in connection with services provided to us, including our allowable share of our Manager’s overhead, such as rent, employee costs, utilities and technology costs.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, operating expenses reimbursed to our Manager increased by $1.2 million, primarily due to an increase in the allocation ratio resulting from an increase in total assets under management primarily due to loans acquired in connection with the BDC Merger.

Asset Management Fee

Under the terms of the Management Agreement with our Manager, we paid our Manager a monthly asset management fee at an annual rate of 1% of the aggregate funds under management, which included the aggregate gross acquisition price, net of participation interest sold to affiliates, for each real estate-related investment and cash held by us.

For the year ended December 31, 2022 as compared to the same period in 2021, asset management fees increased by $1.4 million, primarily due to an increase in total assets under management resulting from new loans we originated as well as loans acquired in connection with the BDC Merger.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, asset management fees increased by $1.3 million, primarily due to an increase in total assets under management primarily resulting from loans acquired in connection with the BDC Merger.

Asset Servicing Fee

Under the terms of the Management Agreement with our Manager, we paid our Manager a monthly servicing fee at an annual rate of 0.25% of the aggregate gross origination price or acquisition price for each real estate-related loan held by us.

For each of the year ended December 31, 2022 as compared to the same period in 2021, asset servicing fees increased by $0.4 million, primarily due to an increase in total assets under management resulting from new loans we originated as well as loans acquired in connection with the BDC Merger.

Provision for Loan Losses

Our Manager performs a quarterly evaluation for possible impairment of our portfolio of loans.

We record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) impaired loan reserves, if any.

As of December 31, 2022, we did not have any loans with a loan risk rating of “4” or “5”, and did not record any general allowance for loan losses for the year ended December 31, 2022.

As of December 31, 2022, we had four loans deemed impaired and recorded specific allowance for loan losses of $11.8 million for the year ended December 31, 2022.

As of December 31, 2021, we had one loan with a loan risk rating of “4” and no loans with a loan risk rating of “5”, and recorded general allowance for loan losses of $0.6 million for the year ended December 31, 2021.

Additionally, as of December 31, 2021, we had three loans deemed impaired and recorded specific allowance for loan losses of $10.3 million for the year ended December 31, 2021.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, asset servicing fees increased by $0.3 million, primarily due to an increase in total assets under management resulting from loans acquired in connection with the BDC Merger.

Provision for Credit Losses

On January 1, 2023, we adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses.

Prior to the adoption of ASU 2016-13, we recorded an allowance for credit losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4”, plus (ii) 5% of the aggregate carrying amount of loans rated as a “5”, plus (iii) past due loan reserves, if any.

For the year ended December 31, 2023, provision for credit losses increased by $33.7 million, primarily related to the decline in fair value of collateral underlying three loans in the investment portfolio due to a decline in the macroeconomic outlook for commercial real estate.

Real Estate Operating Expenses

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, real estate operating expenses increased by $0.4 million, primarily due to expenses incurred on the industrial buildings that we acquired in 2023, partially offset by a reduction in expenses due to the disposal of the office building in October 2023 and a real estate tax refund related to the overpayment of real estate tax in the prior year.

Depreciation and Amortization

For the year ended December 31, 2022 as compared to the same period in 2021, depreciation and amortization increased by $2.5 million, primarily due to a lease termination notice received in November 2021, at which time we accelerated the amortization of lease intangibles.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, depreciation and amortization increased by $0.4 million, primarily due to the industrial buildings that we acquired in 2023, partially offset by a reduction in depreciation and amortization due to the disposal of the office building in October 2023.

Impairment Charge

For the years ended December 31, 2022 and 2021, we recorded an impairment charge of $1.6 million and $3.4 million, respectively, on 4.9 acres of the development land located in Pennsylvania in order to reduce the carrying value of the land to

its estimated fair value, which is the estimated selling price less the cost of sale.

For the year ended December 31, 2023, we recognized an impairment charge of $11.8 million on the multi-tenant office building located in California in order to reduce the carrying value of the building to its estimated fair value.

In October 2023, we conveyed our interest in the office building to the lender by deed-in-lieu of foreclosure and accordingly, we no longer own the office building.

For the year ended December 31, 2022, we recognized an impairment charge of $1.6 million, on 4.9 acres of the development land located in Pennsylvania in order to reduce the carrying value of the land to its estimated fair value, which is the estimated selling price less the cost of sale.

The development land was sold in the second quarter of 2022.

Professional Fees

For the year ended December 31, 2022 as compared to the same period in 2021, professional fees increased by $1.9 million, primarily due to legal fees incurred in connection with litigation related to the ground rent described above as well as a loan refinancing in 2022 which we accounted for as a loan modification.

For the year ended December 31, 2022 as compared to the same period in 2021, other expense increased by $0.3 million, as a result of a fee paid to a third-party in connection with the sale of a parcel of land.

Interest Expense from Obligations under Participation Agreements

For the year ended December 31, 2022 as compared to the same period in 2021, interest expense from obligations under participation agreements decreased by $7.4 million, as a result of a decrease in the weighted average principal amount outstanding on obligations under participation agreements, partly due to the release of obligations under participation agreements with Terra BDC in connection with the BDC Merger.

Interest Expense on Repurchase Agreement Payable

On November 8, 2021, we entered into a master repurchase agreement that provides for advances of up to $195 million which we expect to use to finance certain secured performing commercial real estate loans, including senior mortgage loans.

Additionally, on February 18, 2022, we entered into another master repurchase agreement that provides for advances of up to $200 million, which we expect to use to finance the originations of certain secured performing commercial real estate loans and the acquisitions of certain secured non-performing commercial real estate loans.

For the year ended December 31, 2022, interest expense on repurchase agreement payable increased by $7.8 million, as a result of an increase in the weighted average principal amount outstanding on repurchase agreement payable.

Interest Expense on Mortgage Loan Payable

For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on mortgage loan payable decreased by $0.3 million, as a result of a decrease in the weighted average principal amount outstanding on mortgage loan payable.

Interest Expense on Revolving Line of Credit

On March 12, 2021, we entered into a Business Loan and Security Agreement (the “revolving line of credit”) to provide for advances up to the lesser of $75.0 million or the amount determined by the borrowing base, which is based on the eligible assets pledged to the lender.

On January 4, 2022, we amended the revolving line of credit to increase the maximum amount available to $125.0 million.

For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on revolving line of credit increased by $1.8 million, due to an increase in weighted average principal amount outstanding on the revolving line of credit.

Interest Expense on Term Loan Payable

On September 3, 2020, we entered into an indenture and credit agreement that provided for a floating rate loan of $103.0 million, $3.6 million of additional future advances, and up to $11.6 million of additional future discretionary advances, in connection with certain outstanding funding commitments under the mortgage assets owned by us and financed under the indenture and credit agreement.

The loan bore interest at LIBOR plus 4.25% with a LIBOR floor of 1.0%.

On February 18, 2022, we refinanced this loan with a new repurchase agreement.

In connection with the BDC Merger, we assumed a delayed

draw term loan of $25.0 million.

The delayed draw term loan bears interest at an annual rate of 5.625% and matures on July 1, 2023.

For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on term loan payable decreased by $6.3 million, as a result of a decrease in the weighted average principal amount outstanding on term loan payable.

Additionally, in connection with the refinancing, we reversed the previously accrued step-up interest of $0.4 million during the first quarter of 2022.

Interest Expense on Secured Borrowing

In March 2020, we entered into a financing transaction where a third-party purchased an A-note position.

However, the sale of the A-note position did not qualify for sale accounting treatment and therefore, the gross amount of the loan remains in the consolidated balance sheets.

The portion that was sold is reflected as secured borrowing in the consolidated balance sheet, and the associated interest is reflected as interest expense on secured borrowing in the consolidated statements of operations.

The secured borrowing was repaid in August 2022.

For the year ended December 31, 2022 as compared to the same period in 2021, interest expense on secured borrowing decreased by $0.1 million as a result of a decrease in the weighted average principal amount outstanding.

Directors’ Fees

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, directors’ fees increased by $0.2 million, as a result of an increase in the size of our Board due to the BDC Merger.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, other expenses decreased by $0.2 million, primarily as a result of a fee paid in 2022 to a third-party in connection with the sale of a parcel of land in June 2022.

Interest Expense on Secured Financing

Our secured financing consists of repurchase agreements, revolving line of credit, term loan, promissory notes and property mortgages.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest expense on secured financing increased by $13.3 million as a result of an increase in the weighted average principal amount outstanding as well as an increase in the index rate on secured financing agreements.

Interest Expense on Unsecured Notes Payable

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In connection with the BDC Merger, we assumed $38.4 million in aggregate principal amount of 7.00% notes due in 2026.

For the year ended December 31, 2022 as compared to the same periods in 2021, interest expense on unsecured notes payable increased by $3.5 million, as a result of an increase in the weighted average principal amount outstanding.

Income from Equity Investment in Unconsolidated Investments

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest expense on unsecured notes payable increased by $3.0 million, as a result of an increase in the weighted average principal amount outstanding due to the assumption of unsecured notes payable in connection with the BDC Merger.

Interest from Obligations under Participation Agreements

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, interest expense from obligations under participation agreements decreased by $1.8 million, as a result of a decrease in the weighted average principal amount outstanding, primarily due to the release of obligations under participation agreements with Terra BDC in connection with the BDC Merger, partially offset by an increase in the index rate on the outstanding obligations under participation agreements.

Gain on Extinguishment of Participation Liability

In September 2023, the counterparty to a participation agreement conveyed its interest in the obligation under participation agreement to us and we recognized a gain on extinguishment of participation liability of $10.6 million for the year ended December 31, 2023.

In connection with the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were effectively extinguished and we recognized a net gain of $3.4 million for the year ended December 31, 2022, representing the difference between the carrying value of the Company’s obligations under participation agreements and the fair value of Terra BDC’s investments acquired through participation agreements.

Unrealized Losses on Investments, Net

For the year ended December 31, 2023, as compared to the year ended December 31, 2022, unrealized losses on investments, net increased by $0.2 million, primarily due to a decrease in the fair value of our marketable securities at period end.

(Loss) Income from Equity Investment in Unconsolidated Investments

In August 2020, we entered into a subscription agreement with RESOF, an affiliate managed by our Manager, whereby we committed to fund up to $50.0 million to purchase partnership interest in RESOF.

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As of December 31, 2023 and 2022, we owned 14.9% and 27.9% of the equity interest in RESOF, respectively.

W e also owned beneficial equity interests in three joint ventures that invest in real estate properties.

W e also own beneficial equity interests in three joint ventures that invest in real estate properties.

In 2022, in connection with a mezzanine loan we originated, we entered into a residual profit sharing arrangement with the borrower.

We accounted for this arrangement as an equity investment.

For the year ended December 31, 2022, we recognized income from equity investment in unconsolidated investments of $2.7 million, which consisted of equity income from RESOF of $5.2 million and equity loss from the joint ventures of $2.5 million.

For the year ended December 31, 2021, we recognized income from equity investment in unconsolidated investments of $5.9 million, which consisted of equity income from RESOF of $6.2 million, partially offset by equity loss from two joint ventures of $0.2 million.

We account for this arrangement as an equity investment.

In May 2023, the mezzanine loan that was accounted for as an equity investment and five senior loans that were held for investment were settled and exchanged for five industrial buildings.

In November 2023, we contributed $5.0 million to a joint venture that owns a real estate property.

We account for our equity interest in the joint ventures as equity method investments because we do not have a controlling financial interest in the entities.

For the year ended December 31, 2023, we recognized loss from equity investment in unconsolidated investments of $2.4 million, which consisted of net equity loss from the joint ventures and the mezzanine loan of $3.5 million, partially offset by equity income from RESOF of $1.1 million.

The equity loss from the joint ventures was the result of depreciation and amortization and interest expense recognized by the joint ventures.

The equity income from RESOF included adjustments made due to the dilution of our ownership interest in RESOF as new investors were admitted in 2022 and 2023.

For the year ended December 31, 2022, we recognized income from equity investment in unconsolidated investments of $2.7 million, which consisted of equity income from RESOF of $5.2 million, partially offset by equity loss from the joint ventures of $2.5 million.

Gain on Sale of Interests in Unconsolidated Investments

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There was no such gain for the year ended December 31, 2023.

Realized Loss on Repayment of Loans

For the year ended December 31, 2022, we did not recognize any gain or loss on repayment of loans.

For the year ended December 31, 2021, two previously defaulted loans were repaid at a discount and we recognized a net loss on loan repayment of $0.5 million, excluding previously accrued allowance for loan losses of $1.0 million.

Gain on Extinguishment of Obligations Under Participation Agreements

The was no such gain for the year ended December 31, 2021.

For the year ended December 31, 2022 as compared to the same period in 2021, net loss decreased by $5.4 million.

Loss on Disposal of Real Estate

In October 2023, we conveyed our interest in an office building to the lender by deed in lieu of foreclosure and recognized a net loss on disposal of real estate of $4.2 million for the year ended December 31, 2023.

In June 2022, we sold 4.9 acres of adjacent land located in Pennsylvania for net proceeds of $8.6 million, and recognized a net loss on sale of $0.1 million for the year ended December 31, 2022.

Realized (Losses) Gains On Investments, Net

For the year ended December 31, 2023, we sold a portion of our investments in common stock and recognized a net loss on sale of $0.5 million.

For year ended December 31, 2022, we sold our investments in common and preferred stocks and recognized a net gain on sale of $0.1 million.

For the year ended December 31, 2023 as compared to the year ended December 31, 2022, the resulting net loss increased by $49.9 million.

Financial Condition, Liquidity and Capital Resources

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We expect to fund approximately $22.4 million of the unfunded commitments to borrowers during the next twelve months.

We expect to maintain sufficient cash on hand to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on our credit facilities.

Additionally, we had $29.3 million of borrowings outstanding under a mortgage loan payable that bear interest at an annual rate of LIBOR plus 3.85% with a LIBOR floor of 2.23%, that is collateralized by an office building.

The mortgage loan payable matures on May 31, 2023.

We expect to refinance the mortgage loan payable before it matures.

In connection with the BDC Merger, we assumed a $25.0 million delayed draw term loan.

This term loan bears interest at an annual rate of 5.625% and matures on July 1, 2023.

We expect to either maintain sufficient cash on hand to repay the facility or refinance the facility.

We expect to maintain sufficient liquidity to fund such commitments through matching these commitments with principal repayments on outstanding loans or draw downs on our credit facilities.

In connection with the BDC Merger, we assumed a $25.0 million term loan.

The term loan currently bears interest at an annual rate of SOFR plus 7.375% with a SOFR floor of 5.0% and matures on March 31, 2024.

We expect to either maintain sufficient liquidity to repay the facility or refinance the facility.

Our revolving line of credit with outstanding principal balance of $47.5 million was to come due on March 12, 2024 and our Goldman Sachs Bank repurchase agreement with outstanding principal balance of $75.5 million was to come due on February 18, 2024 (see “ Summary of Financing” below).

On March 7, 2024, the facility term of our revolving line of credit was extended to September 12, 2024 with an option to extend the facility term for an additional 12-month period and the facility term of the Goldman Sachs Bank facility was extended to February 18, 2025.

Summary of Financing

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Type of Financing Maximum Amount Available Outstanding Balance Amount Remaining Available Interest Rate Maturity Date

Senior unsecured notes N/A $ 85,125,000 N/A 6.00% 6/30/2026

Senior unsecured notes N/A 38,375,000 N/A 7.00% 3/31/2026

Delayed draw term loan $ 25,000,000 25,000,000 — 5.625% 7/1/2023

Unsecured notes payable N/A $ 85,125,000 N/A 6.00% June 2026

Unsecured notes payable N/A 38,375,000 N/A 7.00% March 2026

Property mortgages N/A 40,250,000 N/A 6.25% June 2028

$ 163,750,000

Variable Rate:

Mortgage loan payable N/A $ 29,252,308 N/A LIBOR plus 3.85% with a LIBOR floor of 2.23%

Line of credit $ 125,000,000 90,135,865 $ 34,864,135 LIBOR plus 3.25% with a combined floor of 4.00%

UBS repurchase agreement 195,000,000 51,050,000 143,950,000 LIBOR or Term SOFR depending on repurchased asset index plus a spread ranging from 1.60% to 2.25%

GS repurchase agreement 200,000,000 119,826,606 80,173,394 Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 1.75% to 3.00%)

Property mortgages N/A $ 33,256,885 N/A Term SOFR +3.5% (Term SOFR

Floor of 3.75%) April 2027

Term loan N/A 15,000,000 N/A SOFR + 7.375% (SOFR floor of 5.0%) March 2024

Promissory notes payable N/A 63,509,518 N/A Term SOFR plus a spread ranging from 4.75% to 5.6% with a combined floor rate ranging from 9.0% to 10.9%.

March 2025 - March 2026

Revolving line of

$ 125,000,000 47,461,730 $ 77,538,270 Term SOFR + 3.35% (combined floor rate of 6.0%) March 2024

UBS AG repurchase

agreement (2)

195,000,000 18,480,000 176,520,000 Term SOFR + 1.965% November 2024

Goldman Sachs Bank

repurchase agreement (3)

200,000,000 75,455,624 124,544,376 Term SOFR (subject to underlying loan floors on a case-by-case basis) plus a spread ranging from 2.0% to 5.00%)

February 2024

$ 520,000,000 $ 253,163,757 $ 378,602,646

_______________

(1) On March 7, 2024, we amended the facility agreement to waive the quarterly minimum net worth covenant for the purposes of the December 31, 2023 measurement date, decrease the minimum net worth covenant for future quarterly measurement dates, reduce the credit line, increase the coupon rate, revise the minimum profitability covenant and extend the facility term to September 12, 2024 with an option to extend the facility term for an additional 12-month period.

(2) In February 2024, the outstanding balance was repaid.

On March 7, 2024, we amended the side letter to the UBS AG facility agreement to reduce the maximum amount available under the facility to zero.

In connection with this amendment, UBS AG waived the payment of any fees and the meeting of any representations, warranties or covenants for the period commencing on December 31, 2023 until such time as there are amounts outstanding under the UBS AG facility agreement.

(3) On March 7, 2024, we amended the Goldman Sachs Bank facility agreement to extend the maturity date to February 18, 2025 and to reduce the minimum interest coverage ratio covenant.

Cash Flows Provided by Operating Activities

For the year ended December 31, 2022 as compared to the same period in 2021, cash flows provided by operating activities decreased by $3.7 million, primarily due to payment for a deposit for a potential investment partially offset by an increase in net contractual interest income.

For the year ended December 31, 2023, as compared to the year ended December 31, 2022, cash flows provided by operating activities increased by $8.2 million, primarily due to an increase in net contractual interest income.

Cash Flows Used in Investing Activities

For the year ended December 31, 2023, cash flows used in investing activities were $10.0 million, primarily related to origination and purchase of loans of $78.9 million, purchase of real estate properties of $52.5 million, purchase of held-to-maturity securities of $20.0 million, purchase of marketable securities of $7.9 million, purchase of equity interests in unconsolidated investments of $7.3 million, and funding for promissory note receivable of $3.8 million, partially offset by proceeds from repayments of loans of $126.1 million, proceeds from redemption of held-to-maturity securities of $20.0 million, return of capital on unconsolidated investments of $11.3 million, and proceeds from sale of marketable equity securities of $2.4 million.

For the year ended December 31, 2022, cash flows used in investing activities were $49.1 million, primarily related to origination and purchase of loans of $290.0 million and purchase of equity interests in unconsolidated investments of $25.5 million, partially offset by proceeds from repayments of loans of $197.5 million, proceeds from sale of interests in joint ventures of $33.7 million, cash and restricted cash acquired in connection with the BDC Merger of $24.6 million, proceeds from sale of real estate of $8.6 million and proceeds from sale of marketable securities of $1.3 million.

For the year ended December 31, 2021, cash flows used in investing activities were $87.7 million, primarily related to origination and purchase of loans of $252.4 million, purchase of partnership interest in a limited partnership of $32.2 million and purchase of marketable securities of $6.5 million, partially offset by proceeds from repayments of loans of $196.8 million and proceeds from sale of marketable securities of $6.6 million.

Cash Flows Provided by Financing Activities

For the year ended December 31, 2022, cash flows provided by financing activities were $34.1 million, primarily due to proceeds from borrowings under the repurchase agreements of $151.9 million, proceeds from borrowings under the revolving line of credit of $130.5 million, and proceeds from obligations under participation agreements of $29.6 million, partially offset by repayments of borrowings under the term loan of $93.8 million, repayments on borrowings under the revolving line of credit of $79.0 million, repayment of secured borrowing of $38.7 million, repayments of borrowings under repurchase agreements of $25.6 million, repayments of obligations under participation agreements of $22.2 million and distributions paid of $16.1 million.

For the year ended December 31, 2021, cash flows provided by financing activities were $101.8 million, primarily due to proceeds from issuance of unsecured notes payable, net of discount, of $82.5 million, proceeds from obligations under participation agreements and secured borrowing of $87.9 million and proceeds from borrowings under the term loan, revolving line of credit and repurchase agreement of $85.9 million.

These cash inflows were partially offset by repayments on obligations under participation agreements of $101.7 million, distributions paid of $17.1 million, payment of mortgage principal of $12.1 million, repayment on borrowings under the term loan of $16.6 million, a decrease in interest reserve and other deposits hold on

investments of $4.7 million and payment for deferred financing costs of $2.3 million.

Cash Flows (Used in) Provided by Financing Activities

For the year ended December 31, 2023, cash flows used in financing activities were $15.5 million, primarily related to principal repayments on secured financing of $205.3 million, distributions paid of $18.6 million and payment for financing costs of $3.3 million, partially offset by proceeds from secured financing of $211.0 million.

For the year ended December 31, 2022, cash flows provided by financing activities were $34.1 million, primarily due to proceeds from secured financing of $286.6 million and proceeds from obligations under participation agreements of $29.6 million, partially offset by principal repayments on secured financing of $239.7 million, repayments of obligations under participation agreements of $22.2 million and distributions paid of $16.1 million.

Distribution Reinvestment Plan

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Our consolidated financial statements are prepared in conformity with United States generally accepted accounting principles, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods.

change in subsequent periods.

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

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As we execute our expected operating plans, we will describe additional critical accounting policies in the notes to our future consolidated financial statements in addition to those discussed below.

Allowance for Loan Losses

Our loans are typically collateralized by either the sponsors’ equity interest in the real estate properties or the underlying real estate properties.

As a result, we regularly evaluate the extent and impact of any credit migration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan-by-loan basis.

Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations and/or reserve balances are sufficient to cover the debt service requirements currently and into the future;

(ii) the ability of the borrower to refinance the loan;

and/or (iii) the property’s liquidation value.

We also evaluate the financial wherewithal of the sponsor as well as its competency in managing and operating the real estate property.

In addition, we consider the overall economic environment, real estate sector, and geographic submarket in which the borrower operates.

Such analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, the capitalization and discount rates;

(ii) site inspections;

and (iii) current credit spreads and discussions with market participants.

Our Manager performs a quarterly evaluation for possible impairment of our portfolio of loans.

A loan is impaired if it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan.

Impairment is measured based on the present value of expected future cash flows or the fair value of the collateral if the loan is collateral dependent.

Upon measurement of impairment, we record an allowance to reduce the carrying value of the loan with a corresponding charge to net income.

In conjunction with the quarterly evaluation of loans not considered impaired, our Manager assesses the risk factors of each loan and assigns each loan a risk rating between 1 (very low risk) and 5 (highest risk), which is an average of the numerical ratings in the following categories:

(i) sponsor capability and financial conditions;

(ii) loan and collateral performance relative to underwriting;

(iii) quality and stability of collateral cash flows and/or reserve balances;

and (iv) loan to value.

We record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4,” (Higher risk), plus (ii) 5% of the aggregate carrying amount of loans rated as a “5,” (Highest risk) plus (iii) impaired loan reserves, if any.

There may be circumstances where we modify a loan by granting the borrower a concession that we might not otherwise consider when a borrower is experiencing financial difficulty or is expected to experience financial difficulty in the foreseeable future.

Such concessionary modifications are classified as troubled debt restructurings (“TDRs”), unless the modification solely results in a delay in a payment that is insignificant.

Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

Allowance for Credit Losses

On January 1, 2023, we adopted the provisions of ASU 2016-13, which requires entities to recognize credit losses on financial instruments based on an estimate of current expected credit losses.

The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to estimating credit losses upon the occurrence of an actual loss event under the previous “incurred loss” methodology.

We use a model based approach for estimating the allowance for credit losses on performing loans on a collective basis, including future funding commitments for which we do not have the unconditional right to cancel, as these loans share similar risk characteristics.

We utilize information obtained from internal and external sources relating to past events, current economic conditions and reasonable and supportable forecasts about the future to determine the expected credit losses for our loan portfolio.

We utilize a commercial mortgage based, third-party loan loss model and because we do not have a meaningful history of realized credit losses on our loan portfolio, we subscribe to a database service to provide historical proxy loan loss information.

We employ logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998.

We have chosen to incorporate a weighted average macroeconomic forecast that encompasses baseline, optimistic and pessimistic scenarios, into our allowance for credit losses on performing loans estimate during the reasonable and supportable forecast period which is currently eight quarters.

We select certain economics variables from a group of independent variables such as Commercial Real Estate Price Index, unemployment and interest rate which are included in the model as part of macroeconomic forecast and updated regularly based on current economic trends.

The specific loan level information input into the model includes loan-to-value and debt service coverage ratio metrics, as well as principal balances, property type, location, coupon rate, coupon rate type, original or remaining term, expected repayment dates and contractual future funding commitments.

Based on the inputs, the loan loss model determines a loan loss rate through the generation of a probability of default (PD) and loss given default (LGD) for each loan.

The allowance for credit losses on performing loans is then calculated by applying the loan loss rate to the total outstanding loan balance of each loan.

These results require a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses.

Changes in such estimates can significantly affect the expected credit losses.

Management Agreement with Terra REIT Advisors

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A disposition fee in the amount of 1.0% of the gross sale price received by our company from the disposition of each loan, but not upon the maturity, prepayment, workout, modification or extension of a loan unless there is a corresponding fee paid by the borrower, in which case the disposition fee will be the lesser of (i) 1.0% of the principal amount of the loan and (ii) the amount of the fee paid by the borrower in connection with such transaction.

If we take ownership of a property as a result of a workout or foreclosure of a loan, we will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.

If we take ownership of a

property as a result of a workout or foreclosure of a loan, we will pay a disposition fee upon the sale of such property equal to 1.0% of the sales price.

Transaction Breakup Fee .

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Any excess is deferred and amortized to interest income over the term of the loan.

(2) Amounts for the years ended December 31, 2022 and 2021, excluded $0.2 million and $0.3 million, respectively, of origination fees paid to our Manager in connection with our equity investment in an unconsolidated investment.

These origination fees were capitalized to the carrying value of the unconsolidated investment as a transaction cost.

(2) Disposition fee is generally offset with exit fee income and included in interest income on the consolidated statements of operations.

Management Agreement Amendment

On March 11, 2024, we and our Manager entered into an amendment to the Management Agreement, effective as of January 1, 2024 (the “Amendment”), in order to extend the term of the Management Agreement and modify the terms upon which the Management Agreement may be terminated.

Except as discussed below, the terms of the Management Agreement remain unchanged by the Amendment.

Except where the context requires otherwise, all references herein to the “Management Agreement” are to the Management Agreement as modified by the Amendment.

The term of the Management Agreement will expire on December 31, 2027 (the “Initial Term”) and will automatically renew for an unlimited number of additional one-year terms upon each anniversary date of the last day of the Initial Term (each, a “Renewal Term”), unless terminated by us or the Manager during the Initial Term or a Renewal Term in accordance with the terms of the Management Agreement (as described below).

The Management Agreement may be terminated by us during the Initial Term or any Renewal Term upon a finding by either (i) at least two-thirds of the independent directors on our Board or (ii) the holders of a majority of the outstanding shares of our common stock (other than those shares held by members of the our senior management team or affiliates of our Manager) that either (a) there has been unsatisfactory performance by our Manager that is materially detrimental to us, or (b) the compensation payable to our Manager pursuant to the Management Agreement is unfair;

provided, however, that we will not have the right to terminate the Management Agreement on the basis of unfair compensation to our Manager if our Manager agrees to continue to provide its services under the Management Agreement in exchange for reduced fees that at least two-thirds of the independent directors on our Board determine to be fair pursuant to the procedures set forth in the Management Agreement.

We must deliver prior written notice of any such termination to our Manager at least 180 days prior to the last calendar day of the Initial Term or the then-current Renewal Term, as applicable, and the Management Agreement will terminate effective as of the last calendar day of the Initial Term or the then-current Renewal Term, as applicable.

Upon any termination of the Management Agreement by us as discussed above, we will pay our Manager, on the date on which such termination is effective, a termination fee in an amount equal to three times the average annual fees of all types and expense reimbursements received by or owed to our Manager pursuant to the Management Agreement during the 24-month

period immediately preceding such termination (the “Termination Fee”), calculated as of the end of the most recently completed monthly prior to the date of such termination.

We may also terminate the Management Agreement, effective upon 30 calendar days’ prior written notice from our Board to our Manager, without payment of any Termination Fees or other penalties, upon (i) the material breach of the Management Agreement by our Manager or its affiliates that continues for 30 days after written notice thereof to our Manager (or 45 days after delivery of written notice thereof if our Manager takes diligent steps to cure such breach within 30 days of delivery of the written notice), (ii) any fraud or other criminal conduct, gross negligence or breach of fiduciary duty by our Manager or its affiliates in connection with the Management Agreement, as determined by a final, non-appealable judgment of a court of competent jurisdiction, (iii) our Manager’s bankruptcy, insolvency or dissolution, or (iv) an Internalization Event (as defined in the Management Agreement).

No Termination Fee or other penalty is payable upon such a termination by us.

Our Manager may terminate the Management Agreement, effective upon 60 days’ prior written from our Manager to us, if we breach the Management Agreement and such breach continues for 30 days after written notice thereof.

We will pay our Manager the Termination Fee upon such termination by our Manager.

Cost Sharing and Reimbursement Agreement with Terra LLC

We have entered into a cost sharing and reimbursement agreement with Terra LLC, effective October 1, 2022 pursuant to which Terra LLC will be responsible for its allocable share of our expenses, including fees paid by us to our Manager based on

relative assets under management.

These fees are eliminated in consolidation and therefore have no impact on our consolidated financial statements.

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In connection with the BDC Merger, the obligations under participation agreements with Terra BDC totaling $37.0 million were effectively extinguished.

As of December 31, 2022, the principal balance of our participation obligation was $12.6 million, which was a participation obligation to a third party.

As of December 31, 2023, there was no participation obligation.

The loans that are subject to participation agreements are held in our name, but each of the participant’s rights and obligations, including with respect to interest income and other income (e.g., exit fee, prepayment income) and related fees/expenses (e.g., disposition fees, asset management and asset servicing fees), are based upon their respective pro rata participation interest in such participated investments, as specified in the respective participation agreements.

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Similarly, interest earned on the entire loan balance is recorded within “Interest income” and the interest related to the participation interest is recorded within “Interest expense from obligations under participation agreements” in the consolidated statements of operations.

For the year ended December 31, 2022, the weighted average outstanding principal balance on obligations under participation agreements and secured borrowing was approximately $59.9 million, and the weighted average interest rate was approximately 12.1%, compared to weighted average outstanding principal balance of approximately $114.4 million, and weighted average interest rate of approximately 11.0% for the year ended December 31, 2021.

For the year ended December 31, 2023, the weighted average outstanding principal balance on obligations under participation agreements was approximately $10.0 million and the weighted average interest rate was approximately 17.4%, compared to the weighted average outstanding principal balance on obligations under participation agreements and secured borrowing of approximately $59.9 million and the weighted average interest rate was approximately 12.1% for the year ended December 31, 2022.

The secured borrowing was repaid in August 2022.

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity