UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40496

Terra Property Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland	81-0963486
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

205 West 28th Street, 12th Floor

New York, New York 10001

(Address of principal executive offices)

(212) 753-5100

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Securities Exchange Act of 1934:

Title of each class	Trading Symbol(s)	Name of exchange on which registered
6.00% Notes due 2026	TPTA	New York Stock Exchange

Securities registered pursuant to section 12(g) of the Securities Exchange Act of 1934:

Common Stock $0.01 par value per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	þ	Smaller reporting company	☑
		Emerging growth company	☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of August 12, 2022, the registrant had 19,487,460 shares of common stock, $0.01 par value, outstanding. No market value has been computed based upon the fact that no active trading market had been established as of the date of this document.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements:
	Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021	2
	Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited)	3
	Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2022 and 2021 (unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4.	Controls and Procedures	60
PART II	OTHER INFORMATION	60
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	61
Signatures		63

1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Terra Property Trust, Inc.

Consolidated Balance Sheets

	June 30, 2022		December 31, 2021
	(unaudited)
Assets
Cash and cash equivalents	$	28,978,788	$	35,783,956
Restricted cash	7,421,852		7,411,811
Cash held in escrow by lender	4,352,755		7,902,880
Marketable securities	—		1,310,000
Loans held for investment, net	520,520,022		457,329,582
Loans held for investment acquired through participation, net	13,322,380		12,343,732
Equity investment in unconsolidated investments	91,896,673		69,713,793
Real estate owned, net (Note 5)
Land, building and building improvements, net	47,492,647		58,325,068
Lease intangible assets, net	4,838,667		7,451,771
Operating lease right-of-use asset	27,387,013		27,394,936
Interest receivable	3,173,496		2,463,037
Due from related party	—		2,605,639
Other assets	3,927,963		3,505,953
Total assets	$	753,312,256	$	693,542,158
Liabilities and Equity
Liabilities:
Term loan payable, net of deferred financing fees	$	—	$	91,940,062
Unsecured notes payable, net of debt issuance cost	82,166,108		81,856,799
Repurchase agreements payable, net of deferred financing fees	190,130,617		43,974,608
Obligations under participation agreements (Note 7 )	43,774,875		42,232,027
Mortgage loan payable, net of deferred financing fees and other	31,790,254		32,134,295
Revolving line of credit payable, net of deferred financing fees	48,355,899		38,186,472
Secured borrowing	38,312,920		34,586,129
Interest reserve and other deposits held on investments	7,421,852		7,411,811
Operating lease liability	27,387,013		27,394,936
Lease intangible liabilities, net (Note 5)	9,143,006		9,709,710
Due to Manager (Note 7)	3,084,198		2,388,317
Interest payable	1,370,199		1,879,626
Accounts payable and accrued expenses	1,247,857		1,264,131
Unearned income	365,003		449,690
Other liabilities	2,066,305		4,289,967
Total liabilities	486,616,106		419,698,580
Commitments and contingencies (Note 9)
Equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued	—		—
12.5% Series A Cumulative Non-Voting Preferred Stock at liquidation preference,    125 shares authorized and 125 shares issued and outstanding at June 30, 2022    December 31, 2021	125,000		125,000
Common stock, $0.01 par value, 450,000,000 shares authorized and 19,487,460    shares issued and outstanding at June 30, 2022 and December 31, 2021	194,875		194,875
Additional paid-in capital	373,443,672		373,443,672
Accumulated deficit	(107,067,397)		(99,919,969)
Total equity	266,696,150		273,843,578
Total liabilities and equity	$	753,312,256	$	693,542,158

See notes to unaudited consolidated financial statements.

2

Terra Property Trust, Inc.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Revenues
Interest income	$	10,274,051	$	8,750,466	$	19,156,202	$	16,871,415
Real estate operating revenue	2,991,321		2,265,700		5,970,775		4,277,341
Prepayment fee income	1,174,760		—		1,174,760		—
Other operating income	247,981		240,131		498,646		396,793
	14,688,113		11,256,297		26,800,383		21,545,549
Operating expenses
Operating expenses reimbursed to Manager	2,140,635		2,007,069		4,069,198		3,349,827
Asset management fee	1,640,628		1,156,696		3,128,723		2,313,239
Asset servicing fee	395,718		276,990		745,047		550,197
Provision for loan losses	25,633		573,061		75,929		849,081
Real estate operating expenses	1,247,328		1,516,105		2,465,291		2,487,420
Depreciation and amortization	1,718,373		931,723		3,436,745		1,863,448
Impairment charge	—		—		1,604,989		—
Professional fees	1,011,354		469,932		1,753,872		990,351
Directors fees	36,247		36,249		72,499		72,499
Other	374,203		132,697		457,624		204,185
	8,590,119		7,100,522		17,809,917		12,680,247
Operating income	6,097,994		4,155,775		8,990,466		8,865,302
Other income and expenses
Interest expense from obligations under    participation agreements	(1,238,655)		(2,772,801)		(2,313,764)		(4,652,882)
Interest expense on repurchase agreement    payable	(1,665,283)		—		(2,421,109)		—
Interest expense on mortgage loan payable	(520,829)		(656,859)		(1,039,446)		(1,343,009)
Interest expense on revolving line of credit	(700,737)		(162,651)		(1,225,031)		(180,497)
Interest expense on term loan payable	—		(1,646,182)		(164,969)		(3,318,950)
Interest expense on unsecured notes payable	(1,432,877)		(336,861)		(2,863,060)		(336,861)
Interest expense on secured borrowing	(556,855)		(334,905)		(1,109,640)		(634,710)
Net unrealized (losses) gains on marketable    securities	(34,950)		248,874		(133,994)		234,266
Loss on sale of real estate	(51,984)		—		(51,984)		—
Income from equity investment in    unconsolidated investments	1,364,332		1,400,839		2,783,667		2,738,666
Realized gains on marketable securities	32,278		—		83,411		—
	(4,805,560)		(4,260,546)		(8,455,919)		(7,493,977)
Net income (loss)	$	1,292,434	$	(104,771)	$	534,547	$	1,371,325
Series A preferred stock dividend declared	(3,906)		(3,906)		(7,812)		(7,812)
Net income (loss) allocable to common stock	$	1,288,528	$	(108,677)	$	526,735	$	1,363,513
Earnings (loss) per share — basic and diluted	$	0.07	$	(0.01)	$	0.03	$	0.07
Weighted-average shares — basic and diluted	19,487,460		19,487,460		19,487,460		19,487,460
Distributions declared per common share	$	0.19	$	0.23	$	0.39	$	0.43

See notes to unaudited consolidated financial statements.

3

Terra Property Trust, Inc.

Consolidated Statements of Changes in Equity

(Unaudited)

	Preferred Stock		12.5% Series A Cumulative Non-Voting Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit
						$0.01 Par Value
			Shares	Amount		Shares	Amount						Total equity
Balance at January 1, 2022	$	—	125	$	125,000	19,487,460	$	194,875	$	373,443,672	$	(99,919,969)	$	273,843,578
Distributions declared on common shares    ($0.20 per share)	—		—	—		—	—		—		(3,893,595)		(3,893,595)
Distributions declared on preferred shares	—		—	—		—	—		—		(3,906)		(3,906)
Net loss	—		—	—		—	—		—		(757,887)		(757,887)
Balance at March 31, 2022	$	—	125	$	125,000	19,487,460	$	194,875	$	373,443,672	$	(104,575,357)	$	269,188,190
Distributions declared on common shares    ($0.19 per share)	—		—	—		—	—		—		(3,780,568)		(3,780,568)
Distributions declared on preferred shares	—		—	—		—	—		—		(3,906)		(3,906)
Net income	—		—	—		—	—		—		1,292,434		1,292,434
Balance at June 30, 2022	$	—	125	$	125,000	19,487,460	$	194,875	$	373,443,672	$	(107,067,397)	$	266,696,150

	Preferred Stock		12.5% Series A Cumulative Non-Voting Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit
						$0.01 Par Value
			Shares	Amount		Shares	Amount						Total equity
Balance at January 1, 2021	$	—	125	$	125,000	19,487,460	$	194,875	$	373,443,672	$	(70,438,482)	$	303,325,065
Distributions declared on common shares    ($0.20 per share)	—		—	—		—	—		—		(3,893,595)		(3,893,595)
Distributions declared on preferred shares	—		—	—		—	—		—		(3,906)		(3,906)
Net income	—		—	—		—	—		—		1,476,096		1,476,096
Balance at March 31, 2021	$	—	125	$	125,000	19,487,460	$	194,875	$	373,443,672	$	(72,859,887)	$	300,903,660
Distributions declared on common shares    ($0.23 per share)	—		—	—		—	—		—		(4,429,352)		(4,429,352)
Distributions declared on preferred shares	—		—	—		—	—		—		(3,906)		(3,906)
Net loss	—		—	—		—	—		—		(104,771)		(104,771)
Balance at June 30, 2021	$	—	125	$	125,000	19,487,460	$	194,875	$	373,443,672	$	(77,397,916)	$	296,365,631

See notes to unaudited consolidated financial statements.

4

Terra Property Trust, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	534,547	$	1,371,325
Adjustments to reconcile net income to net cash provided by operating    activities:
Paid-in-kind interest income, net	—		(383,089)
Depreciation and amortization	3,436,745		1,863,448
Provision for loan losses	75,929		849,081
Impairment charge	1,604,989		—
Amortization of net purchase premiums on loans	122,783		30,696
Straight-line rent adjustments	719,036		(23,118)
Amortization of deferred financing costs	1,135,225		428,411
Amortization of discount on unsecured notes payable	228,281		31,035
Amortization of above- and below-market rent intangibles	(492,749)		(169,110)
Amortization and accretion of investment-related fees, net	(467,910)		(20,521)
Amortization of above-market rent ground lease	(65,175)		(65,175)
Realized gains on marketable securities	(83,411)		—
Net unrealized losses on marketable securities	133,994		(234,266)
Loss on sale of real estate	51,984		—
Income from equity investment in excess of distributions received	(1,765,734)		(2,738,666)
Changes in operating assets and liabilities:
Interest receivable	(710,459)		(438,582)
Due from related party	2,605,639		—
Other assets	(1,383,519)		584,392
Due to Manager	281,058		93,227
Unearned income	160,042		(166,223)
Interest payable	(509,427)		1,056,504
Accounts payable and accrued expenses	(16,274)		(2,488,423)
Other liabilities	(2,223,662)		546,318
Net cash provided by operating activities	3,371,932		127,264
Cash flows from investing activities:
Origination and purchase of loans	(120,420,961)		(82,136,763)
Proceeds from repayments of loans	56,610,198		46,381,804
Purchase of equity interests in unconsolidated investments	(20,915,067)		(14,065,197)
Proceeds from sale of real estate	8,585,500		—
Distributions in excess of net income	497,920		—
Purchase of marketable securities	—		(6,479,148)
Proceeds from sale of marketable securities	1,259,417		—
Net cash used in investing activities	(74,382,993)		(56,299,304)

5

Terra Property Trust, Inc.

Consolidated Statements of Cash Flows (Continued)

(Unaudited)

	Six Months Ended June 30,
	2022		2021
Cash flows from financing activities:
Repayments of obligations under participation agreements	(15,000,000)		(12,442,509)
Proceeds from obligations under participation agreements	16,522,472		54,550,858
Proceeds from borrowings under repurchase agreements	148,089,549		—
Proceeds from borrowings under revolving line of credit	41,169,295		9,213,759
Repayments of borrowings under revolving line of credit	(30,920,124)		—
Distributions paid	(7,681,975)		(8,330,759)
Repayment of borrowings under the term loan	(93,763,471)		(2,600,000)
Proceeds from secured borrowing	3,629,034		7,569,135
Proceeds from issuance of unsecured notes payable, net of discount	—		82,464,844
Repayment of mortgage principal	(413,065)		(3,619,098)
Proceeds from borrowings under the term loan	—		2,031,572
Change in interest reserve and other deposits held on investments	10,041		680,529
Payment of financing costs	(975,947)		(1,529,600)
Net cash provided by financing activities	60,665,809		127,988,731
Net (decrease) increase in cash, cash equivalents and restricted cash	(10,345,252)		71,816,691
Cash, cash equivalents and restricted cash at beginning of period	51,098,647		32,920,323
Cash, cash equivalents and restricted cash at end of period (Note 2)	$	40,753,395	$	104,737,014

	Six Months Ended June 30,
	2022		2021
Supplemental Disclosure of Cash Flows Information:
Cash paid for interest	$	10,482,040	$	7,995,878

See notes to unaudited consolidated financial statements.

6

Terra Property Trust, Inc.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2022

Note 1. Business

    Terra Property Trust, Inc. (and, together with its consolidated subsidiaries, the “Company” or “Terra Property Trust”) was incorporated under the Maryland General Corporation Law on December 31, 2015. Terra Property Trust is a real estate credit focused company that originates, structures, funds and manages commercial real estate investments, including mezzanine loans, first mortgage loans, subordinated mortgage loans and preferred equity investments. The Company’s loans finance the acquisition, construction, development or redevelopment of quality commercial real estate in the United States. The Company focuses on the origination of middle market loans in the approximately $10 million to $50 million range, to finance properties in primary and secondary markets.

    On January 1, 2016, Terra Secured Income Fund 5, LLC (“Terra Fund 5”), the Company’s then parent, contributed its consolidated portfolio of net assets to the Company pursuant to a contribution agreement in exchange for shares of the Company’s common stock. Upon receipt of the contribution of the consolidated portfolio of net assets from Terra Fund 5, the Company commenced its operations on January 1, 2016. On March 2, 2020, the Company engaged in a series of transactions pursuant to which the Company issued an aggregate of 4,574,470.35 shares of its common stock in exchange for the settlement of an aggregate of $49.8 million of participation interests in loans held by the Company, cash of $25.5 million and other working capital. As of June 30, 2022, Terra JV, LLC (“Terra JV”) held 87.4% of the issued and outstanding shares of the Company’s common stock with the remainder held by Terra Offshore Funds REIT, LLC (“Terra Offshore REIT”).

    The Company has elected to be taxed, and to qualify annually thereafter, as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), commencing with the taxable year ended December 31, 2016. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. The Company also operates its business in a manner that permits it to maintain its exemption from registration as an “investment company” under the Investment Company Act of 1940, as amended.

    The Company’s investment activities are externally managed by Terra REIT Advisors, LLC (“Terra REIT Advisors” or the “Manager”), a subsidiary of the Company’s sponsor, Terra Capital Partners, LLC (“Terra Capital Partners”), pursuant to a management agreement (the “Management Agreement”), under the oversight of the Company’s board of directors (the “Board”) (Note 7). The Company does not currently have any employees and does not expect to have any employees. Services necessary for the Company’s business are provided by individuals who are employees of the Manager or by individuals who were contracted by the Company or by the Manager to work on behalf of the Company pursuant to the terms of the Management Agreement. On April 1, 2021, Mavik Capital Management, LP (“Mavik”), an entity controlled by Vikram S. Uppal, the Chief Executive Officer of the Company, completed a series of related transactions that resulted in all of the outstanding interests in Terra Capital Partners, being acquired by Mavik for a combination of cash and interests in Mavik (the “Recapitalization”). No amendments or other modifications were made to the Management Agreement in connection with the Recapitalization, and the Manager and its personnel continue to serve as the external manager of the Company pursuant to the terms of the Management Agreement.

On May 2, 2022, the Company, Terra Income Fund 6, Inc. (“Terra BDC”), Terra Merger Sub, LLC, a wholly owned subsidiary of the Company (“Merger Sub”), Terra Income Advisors, LLC and the Manager, entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, subject to the terms and conditions therein, Terra BDC will be merged with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of the Company (such surviving company, the “Surviving Company” and such transaction, the “Merger”).

Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), except for any shares of common stock, par value $0.001 per share, of Terra BDC (“Terra BDC Common Stock”) held by the Company or any wholly owned subsidiary of the Company or Terra BDC, which will be automatically retired and cease to exist with no consideration paid therefor, each issued and outstanding share of Terra BDC Common Stock will be automatically cancelled and retired and converted into the right to receive (i) 0.595 shares (as such number may be adjusted in accordance with the Merger Agreement, the “Exchange Ratio”) of the newly designated Class B Common Stock, par value $0.01 per share, of the Company (“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 to which such holder would otherwise be entitled by (y) $14.38.

7

Notes to Unaudited Consolidated Financial Statements

Prior to the Effective Time, the Company will file with the State Department of Assessments and Taxation of Maryland Articles of Amendment to the Articles of Amendment and Restatement of the Company (the “Charter Amendment”). Pursuant to the Charter Amendment, (i) the authorized shares of stock which the Company has authority to issue will be increased from 500,000,000 to 950,000,000, consisting of 450,000,000 shares of Class A Common Stock, $0.01 par value per share (“Class A Common Stock”), 450,000,000 shares of Class B Common Stock, and 50,000,000 shares of Preferred Stock, $0.01 par value per share, and (ii) each share of the Company’s common stock issued and outstanding immediately prior to the Effective Time will be automatically changed into one issued and outstanding share of Class B Common Stock.

Except with respect to conversion, each share of Class B Common Stock will 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 the Company’s common stock. On the date that is 180 calendar days (or, if such date is not a business day, the next business day) after the 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 the Board (the “First Conversion Date”), 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 date that is 365 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date following the First Conversion Date as approved by the Board (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 date that is 545 calendar days (or, if such date is not a business day, the next business day) after the date of initial listing of shares of Class A Common Stock for trading on a national securities exchange or such earlier date following the Second Conversion Date as approved by the Board, 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.

Pursuant to the Merger Agreement, the Company has agreed to take all necessary corporate action so that upon and after the Effective Time, the size of the Board is increased from three to six, and three individuals designated by Terra BDC (the “Terra BDC Designees”) are elected to the Board. If a Terra BDC Designee is not able or willing to serve on the Board as of the Effective Time, Terra BDC will select a replacement within a reasonable period of time prior to the Effective Time, and the Board will elect such replacement as a member of the Board as of the Effective Time.

On June 24, 2022, the Company filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 containing a proxy statement/prospectus related to the Merger. On July 18, 2022, the SEC declared the registration statement effective. The Merger is expected to close in September 2022, subject to the required approvals by Terra BDC’s stockholders and other customary closing conditions. There can be no assurances that the Merger will close.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

    The consolidated financial statements include all of the Company’s accounts and those of its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation.

The Company consolidates entities in which it has a controlling financial interest based on either the variable interest entity (“VIE”) or voting interest model. The Company is required to first apply the VIE model to determine whether it holds a variable interest in an entity, and if so, whether the entity is a VIE. If the Company determines it does not hold a variable interest in a VIE, it then applies the voting interest model. Under the voting interest model, the Company consolidates an entity when it holds a majority voting interest in an entity.

The Company accounts for investments in which it has significant influence but not a controlling financial interest using the equity method of accounting (see Note 4).

VIE Model

An entity is considered to be a VIE if any of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk, as a group, lack either the direct or indirect ability through voting rights or similar rights to make decisions that have a significant effect on the success of the entity or the obligation to absorb the entity’s expected losses or

8

Notes to Unaudited Consolidated Financial Statements

right to receive the entity’s expected residual returns, or (c) the voting rights of some equity investors are disproportionate to their obligation to absorb losses of the entity, their rights to receive returns from an entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately few voting rights.

Under the VIE model, limited partnerships are considered a VIE unless the limited partners hold substantive kick-out or participating rights over the general partner. The Company consolidates entities that are VIEs when the Company determines it is the primary beneficiary. Generally, the primary beneficiary of a VIE is a reporting entity that has (a) the power to direct the activities that most significantly affect the VIE’s economic performance, and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

Loans Held for Investment

    The Company originates, acquires, and structures real estate-related loans generally to be held to maturity. Loans held for investment are carried at the principal amount outstanding, adjusted for the accretion of discounts on investments and exit fees, and the amortization of premiums on investments and origination fees. The Company’s preferred equity investments, which are economically similar to mezzanine loans and subordinate to any loans but senior to common equity, are accounted for as loans held for investment. Loans are carried at cost less allowance for loan losses.

Allowance for Loan Losses

    The Company’s loans are typically collateralized by either the sponsors’ equity interest in the real estate properties or the underlying real estate properties. As a result, the Company regularly evaluates 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. The Company also evaluates the financial wherewithal of the sponsor as well as its competency in managing and operating the real estate property. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market 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.

    The Manager performs a quarterly evaluation for possible impairment of the Company’s portfolio of loans. A loan is impaired if it is deemed probable that the Company 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, the Company records 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, the Manager assesses the risk factors of each loan and assigns each loan a risk rating between 1 and 5, which is an average of the numerical ratings in the following categories: (i) sponsor capability and financial condition; (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. Based on a 5-point scale, the Company’s loans are rated “1” through “5”, from less risk to greater risk, as follows:

Risk Rating	Description
1	Very low risk
2	Low risk
3	Moderate/average risk
4	Higher risk
5	Highest risk

    The Company records 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.

    There may be circumstances where the Company modifies a loan by granting the borrower a concession that it 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

9

Notes to Unaudited Consolidated Financial Statements

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.

Equity Investment in Unconsolidated Investments

The Company accounts for its equity interests in unconsolidated investments under the equity method of accounting, i.e., at cost, increased or decreased by its share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting.

The Company evaluates its equity investment unconsolidated investments on a periodic basis to determine if there are any indicators that the value of its equity investments may be impaired and whether or not that impairment is other-than-temporary. To the extent an impairment has occurred and is determined to be other-than-temporary, the Company measures the charge as the excess of the carrying value of its investment over its estimated fair value, which is determined by calculating its share of the estimated fair market value of the underlying net assets based on the terms of the applicable partnership or joint venture agreements.

Marketable Securities

    The Company from time to time invests in short term debt and equity securities. These securities are classified as available-for-sale and are carried at fair value. Changes in the fair value of equity securities are recognized in earnings. Changes in the fair value of debt securities are reported in other comprehensive income until a gain or loss on the securities is realized.

Real Estate Owned, Net

    Real estate acquired is recorded at its estimated fair value at acquisition and is shown net of accumulated depreciation and impairment charges.

    Acquisition of properties generally are accounted for as asset acquisitions. Under asset acquisition accounting, the costs to acquire real estate, including transaction costs, are accumulated and then allocated to individual assets and liabilities acquired based upon their relative fair value. The Company allocates the purchase price of its real estate acquisitions to land, building, tenant improvements, acquired in-place leases, intangibles for the value of any above or below market leases at fair value and to any other identified intangible assets or liabilities. The Company amortizes the value allocated to in-place leases over the remaining lease term, which is reported in depreciation and amortization expense on its consolidated statements of operations. The value allocated to above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

    Real estate assets are depreciated using the straight-line method over their estimated useful lives: buildings and improvements - not to exceed 40 years, and tenant improvements - shorter of the lease term or life of the asset. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their estimated useful life.

    Management reviews the Company’s real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The review of recoverability is based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate assets. If impaired, the real estate asset will be written down to its estimated fair value.

Leases

    The Company determines if an arrangement is a lease at inception. Operating leases in which the Company is the lessee are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. 

    ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s lease typically does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made in advance and excludes lease incentives

10

Notes to Unaudited Consolidated Financial Statements

if there were any. The Company’s lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Revenue Recognition

    Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

    Interest Income: Interest income is accrued based upon the outstanding principal amount and contractual terms of the loans and preferred equity investments that the Company expects to collect and it is accrued and recorded on a daily basis. Discounts and premiums on investments purchased are accreted or amortized over the expected life of the respective loan using the effective yield method, and are included in interest income in the consolidated statements of operations. Loan origination fees and exit fees, net of portions attributable to obligations under participation agreements, are capitalized and amortized or accreted to interest income over the life of the investment using the effective yield method. Income accrual is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of the Manager, recovery of income and principal becomes doubtful. Outstanding interest receivable is assessed for recoverability. Interest is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability.

    The Company holds loans in its portfolio that contain paid-in-kind (“PIK”) interest provisions. The PIK interest, which represents contractually deferred interest that is added to the principal balance that is due at maturity, is recorded on the accrual basis.

    Real Estate Operating Revenues: Real estate operating revenue is derived from leasing of space to various types of tenants. The leases are for fixed terms of varying length and generally provide for annual rent increases and expense reimbursements to be paid in monthly installments. Lease revenue, or rental income from leases, is recognized on a straight-line basis over the term of the respective leases. Additionally, the Company recorded above- and below-market lease intangibles, which are included in real estate owned, net, in connection with the acquisition of the real estate properties. These intangible assets and liabilities are amortized to lease revenue over the remaining contractual lease term.

    Other Revenues: Prepayment fee income is recognized as prepayments occur. All other income is recognized when earned.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments, with original maturities of ninety days or less when purchased, as cash equivalents. Cash and cash equivalents are exposed to concentrations of credit risk. The Company maintains all of its cash at financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation.

    Restricted cash represents cash held as additional collateral by the Company on behalf of the borrowers related to the investments in loans or preferred equity instruments for the purpose of such borrowers making interest and property-related operating payments. Restricted cash is not available for general corporate purposes. The related liability is recorded in “Interest reserve and other deposits held on investments” on the consolidated balance sheets.

    Cash held in escrow by lender represents amounts funded to an escrow account for debt services and tenant improvements.

    The following table provides a reconciliation of cash, cash equivalents and restricted cash in the Company’s consolidated balance sheets to the total amount shown in its consolidated statements of cash flows:

	June 30,
	2022		2021
Cash and cash equivalents	$	28,978,788	$	88,293,082
Restricted cash	7,421,852		12,826,145
Cash held in escrow by lender	4,352,755		3,617,787
Total cash, cash equivalents and restricted cash shown in the consolidated    statements of cash flows	$	40,753,395	$	104,737,014

11

Notes to Unaudited Consolidated Financial Statements

 Participation Interests

Loan participations from the Company which do not qualify for sale treatment remain on the Company’s consolidated balance sheets and the proceeds are recorded as obligations under participation agreements. For the investments for which participation has been granted, the 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. Interest expense from obligations under participation agreement is reversed when recovery of interest income on the related loan becomes doubtful. See “Obligations under Participation Agreements” in Note 8 for additional information.

Term Loan

    The Company previously financed certain of its senior loans through borrowings under an indenture and credit agreement. The Company accounted for the borrowings as a term loan, which was carried at the contractual amount (cost), net of unamortized deferred financing fees. On February 18, 2022, the Company refinanced the Term Loan (as defined below) with a new repurchase agreement. See “Term Loan” in Note 8 for additional information.

Repurchase Agreements

The Company finances certain of its senior loans held for investment through repurchase transactions under master repurchase agreements. The Company accounts for the repurchase transactions as secured borrowing transactions, which are carried at their contractual amounts (cost), net of unamortized deferred financing fees. See “Repurchase Agreements” in Note 8 for additional information.

Fair Value Measurements

    United States generally accepted accounting principles (“U.S. GAAP”) establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The Company has not elected the fair value option for its financial instruments, including loans held for investment, loans held for investment acquired through participation, obligations under participation agreements, secured borrowing, unsecured notes, mortgage loan payable, term loan payable, repurchase agreement payment and revolving line of credit. Such financial instruments are carried at cost, less impairment, where applicable. Marketable securities are financial instruments that are reported at fair value.

Deferred Financing Costs

    Deferred financing costs represent fees and expenses incurred in connection with obtaining financing for investments. These costs are presented in the consolidated balance sheets as a direct deduction of the debt liability to which the costs pertain. These costs are amortized using the effective interest method and are included in interest expense on the applicable borrowings in the consolidated statements of operations over the life of the borrowings.

Income Taxes

    The Company has elected to be taxed as a REIT under the Internal Revenue Code commencing with the taxable year ended December 31, 2016. In order to qualify as a REIT, the Company is required, among other things, to distribute at least 90% of its REIT net taxable income to the stockholders and meet certain tests regarding the nature of its income and assets. As a REIT, the Company is not subject to federal income taxes on income and gains distributed to the stockholders as long as certain requirements are satisfied, principally relating to the nature of income and the level of distributions, as well as other factors. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax for taxable years before 2018) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. Any gains from the sale of foreclosed properties within two years are subject to U.S. federal and state income taxes at regular corporate rates. As of June 30, 2022, the Company has satisfied all the requirements for a REIT.

The Company did not have any uncertain tax positions that met the recognition or measurement criteria of Accounting Standards Codification (“ASC”) 740-10-25, Income Taxes, nor did the Company have any unrecognized tax benefits as of the periods presented herein. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as

12

Notes to Unaudited Consolidated Financial Statements

income tax expense in its consolidated statements of operations. For the three and six months ended June 30, 2022 and 2021, the Company did not incur any interest or penalties. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The Company’s 2018-2020 federal tax returns remain subject to examination by the Internal Revenue Service.

Earnings Per Share

    The Company has a simple equity capital structure with only common stock and preferred stock outstanding. As a result, earnings per share, as presented, represent both basic and dilutive per-share amounts for the periods presented in the consolidated financial statements. Income per basic share of common stock is calculated by dividing net income allocable to common stock by the weighted-average number of shares of common stock issued and outstanding during such period.

Use of Estimates

    The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates, and those differences could be material.

The coronavirus (“COVID-19”) pandemic has had a significant impact on local, national and global economies and has resulted in a world-wide economic slowdown. As the COVID-19 pandemic evolved from its emergence in early 2020, so has its global impact. During the course of the pandemic, many countries have re-instituted, or strongly encouraged, varying levels of quarantines and restrictions on travel and in some cases have at times limited operations of certain businesses and taken other restrictive measures designed to help slow the spread of COVID-19 and its variants. Governments and businesses have also instituted vaccine mandates and testing requirements for employees. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries, including the collateral underlying certain of the Company’ loans. Moreover, with the potential for new strains of COVID-19 or outbreaks of other infectious diseases, governments and businesses may re-impose aggressive measures to help slow the spread of infectious diseases in the future. For this reason, among others, as the COVID-19 pandemic continues, the potential global impacts are uncertain and difficult to assess. The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of June 30, 2022, however uncertainty over the ultimate impact of COVID-19, rising inflation and increases in interest rates on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of June 30, 2022 inherently less certain than they would be absent the current and potential impacts of COVID-19, macroeconomic changes, and geopolitical events.

Segment Information

    The Company’s primary business is originating, acquiring and structuring real estate-related loans related to high quality commercial real estate. From time to time, the Company may acquire real estate encumbering the senior loans through foreclosure. However, management treats the operations of the real estate acquired through foreclosure as the continuation of the original senior loans. The Company operates in a single segment focused on mezzanine loans, other loans and preferred equity investments, and to a lesser extent, owning and managing real estate.

Recent Accounting Pronouncements

    In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. In April 2019, the FASB issued additional amendments to clarify the scope of ASU 2016-13 and address issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. In May 2019, the FASB issued ASU 2019-05 — Targeted Transition Relief, which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. In October 2019, the FASB decided that for smaller reporting companies, ASU 2016-13 and related amendments will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company meets the definition of a smaller reporting company under the regulation of the Securities and Exchange Commission. As such, the Company will adopt this ASU and related amendments on January 1, 2023. Management is currently evaluating the impact this change will have on the Company’s consolidated financial statements and disclosures.

13

Notes to Unaudited Consolidated Financial Statements

    London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. In July 2017, the U.K. Financial Conduct Authority, which regulates the LIBOR administrator, ICE Benchmark Administration Limited (“IBA”), announced that it would cease to compel banks to participate in setting LIBOR as a benchmark by the end of 2021, which has subsequently been delay to June 30, 2023. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition (“ASU 2021-01”). ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. In the event LIBOR is unavailable, the Company’s investment documents provide for a substitute index, on a basis generally consistent with market practice, intended to put the Company in substantially the same economic position as LIBOR. As a result, the Company does not expect the reference rate reform and the adoption of ASU 2020-04 and ASU 2021-01 to have a material impact on its consolidated financial statements and disclosures.

Note 3. Loans Held for Investment

Portfolio Summary

The following table provides a summary of the Company’s loan portfolio as of June 30, 2022 and December 31, 2021:

	June 30, 2022									December 31, 2021
	Fixed Rate			Floating Rate (1)(2)(3)			Total			Fixed Rate			Floating Rate (1)(2)(3)			Total
Number of loans	4			18			22			6			15			21
Principal balance	$	57,466,258		$	486,495,659		$	543,961,917		$	74,880,728		$	405,270,423		$	480,151,151
Carrying value	$	57,896,378		$	475,946,024		$	533,842,402		$	75,520,212		$	394,153,102		$	469,673,314
Fair value	$	57,406,064		$	472,179,809		$	529,585,873		$	75,449,410		$	391,752,209		$	467,201,619
Weighted-average coupon rate	13.35		%	7.79		%	8.38		%	12.39		%	7.01		%	7.85		%
Weighted-average remaining  term (years)	1.60			1.08			1.13			1.93			1.45			1.53

_______________

(1)These loans pay a coupon rate of LIBOR or Secured Overnight Financing Rate (“SOFR”), as applicable, plus a fixed spread. Coupon rate shown was determined using LIBOR of 1.79%, average SOFR of 1.09% and forward-looking term rate based on SOFR (“Term SOFR”) of 1.69% as of June 30, 2022 and LIBOR of 0.10% as of December 31, 2021.

(2)As of June 30, 2022 and December 31, 2021, amount included $348.6 million and $290.6 million of senior mortgages used as collateral for $241.5 million and $176.9 million of borrowings under credit facilities, respectively (Note 8).

(3)As of June 30, 2022 and December 31, 2021, sixteen and thirteen of these loans, respectively, are subject to a LIBOR or SOFR floor, as applicable.

14

Notes to Unaudited Consolidated Financial Statements

Lending Activities

The following table presents the activities of the Company’s loan portfolio for the six months ended June 30, 2022 and 2021:

	Loans Held for Investment		Loans Held for Investment through Participation Interests		Total
Balance, January 1, 2022	$	457,329,582	$	12,343,732	$	469,673,314
New loans made	119,461,668		959,293		120,420,961
Principal repayments received	(56,610,198)		—		(56,610,198)
Net amortization of premiums on loans	(122,783)		—		(122,783)
Accrual, payment and accretion of investment-related fees and other,    net	537,682		19,355		557,037
Provision for loan losses	(75,929)		—		(75,929)
Balance, June 30, 2022	$	520,520,022