Summary and Analysis

Company Overview

• The company is a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term loans secured by first mortgage liens on real property.
• The company completed its initial public offering (IPO) in February 2017 to raise equity capital and qualify as a real estate investment trust (REIT) for federal income tax purposes.
• As a REIT, the company is entitled to claim deductions for distributions of taxable income to shareholders, eliminating corporate tax on such income.

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

• Revenue declined 3.3% compared to the same period in 2023, driven by:
  • $18 million provision for credit losses, up from $65,000 in 2023, due to declines in asset values
  • 32.1% decrease in loan originations, reducing interest and fee income
  • 35.5% rise in general and administrative expenses, mainly from increased legal and advisory fees
  • 90.1% increase in other expenses, primarily from higher tax expenses
• The company expects further write-downs and declines in interest/fee income for the remainder of 2024, but anticipates general administrative expenses and other expenses will stabilize.
• Key challenges include a high interest rate environment, capital markets illiquidity, global/domestic political concerns, increased competition from private lenders, and property value fluctuations.
• However, the company believes there is still significant market opportunity as a well-capitalized “hard money” lender, citing its strong balance sheet, pricing power, access to capital, and experienced management team.

Financing Strategy Overview

• The company does not have a formal policy limiting debt, but is limited to a 150% asset coverage ratio.
• Debt represented 58.5% of total capital as of September 30, 2024, down from 61.0% a year earlier.
• The company plans to maintain its current debt level and focus on reducing its cost of capital.
• In October 2024, the company plans to sell a pool of non-performing loans to improve liquidity and mitigate the cost of holding underperforming assets.

Debt

• Total outstanding indebtedness was $324.7 million as of September 30, 2024.
• This includes $264.7 million in unsecured notes across six series, as well as borrowings under the Churchill Facility, New NHB Mortgage, and Needham Credit Facility.
• The company is currently not in compliance with the debt service coverage ratio covenant in the Needham Credit Facility, but is seeking a waiver from the lender.

REIT Qualification

• The company believes it has qualified as a REIT since its IPO and that operating as a REIT is in the best interests of shareholders.
• As a REIT, the company is required to distribute at least 90% of its taxable income to shareholders annually.

Critical Accounting Policies and Use of Estimates

• The company records allowances for credit losses on its loan portfolio and other financial assets in accordance with the CECL accounting standard.
• The company utilizes a loss-rate method for estimating expected credit losses, considering historical experience, current conditions, and reasonable forecasts.

Results of Operations

• Revenue declined 16.8% in Q3 2024 and 3.3% in the first 9 months of 2024 compared to the prior year periods, primarily due to decreases in interest income and fee income.
• Operating expenses increased 72.8% in Q3 2024 and 59.0% in the first 9 months of 2024, driven by a significant increase in provisions for credit losses.
• Net loss attributable to common shareholders was $6.1 million in Q3 2024 and $6.7 million in the first 9 months of 2024, compared to net income of $5.2 million and $14.2 million, respectively, in the prior year periods.

Liquidity and Capital Resources

• Total assets decreased 11.2% from December 31, 2023 to September 30, 2024, primarily due to decreases in cash, investments, and mortgage receivables.
• Total liabilities decreased 15.3% over the same period, mainly from repayments of debt.
• Shareholders’ equity decreased 4.1%, due to dividends, share repurchases, and the net loss.
• The company believes its current cash balances and anticipated cash flows will be sufficient to fund operations for the next 12 months, including repayment of the December 2024 Notes.

Overall, the company has faced significant challenges in 2024 due to the high interest rate environment, capital markets illiquidity, and declines in asset values. While the company believes there are still opportunities in the real estate lending market, it will need to navigate these headwinds and optimize its capital structure and operations to return to profitability.