Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our historical financial statements, which are included elsewhere in this Form 10-K. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions, which are subject to risk, uncertainties and other factors, including, but not limited to, those described in the subsection titled “Risk Factors,” located in Part I, Item 1A, of this Form 10-K.
Overview
KDM was organized as a Florida limited liability company on July 24, 2009, under the name HCMK Consulting, LLC. We changed our name to J. W. Korth & Company, LLC, in November 2010, and then to Korth Direct Mortgage, LLC, on August 24, 2016. KDM converted into a Florida corporation, Korth Direct Mortgage Inc., on June 6, 2019. Our principal executive offices are located at 135 San Lorenzo Avenue Suite 600, Coral Gables, Florida 33146, and our telephone number is (305) 668-8485. Our website address is www.korthdirect.com. We also operate under the trade name KDM Financial, as well as via our subsidiary, J. W. Korth & Company Limited Partnership, a Michigan limited partnership.
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Korth Direct Mortgage began its formal operations in October of 2016 when we engaged our Chief Lending Officer. KDM is a licensed Mortgage Lender Servicer with the State of Florida. Our NMLS License Number is 1579547.
We were wholly owned by J. W. Korth until July 31, 2020, when we acquired all of the equity of J.W. Korth, making it a subsidiary.
We originate, fund, and service loans which are made to commercial borrowers. The loans are held by KDM as the lender. We fund our loans in a variety of ways, including selling loan participations, via a warehouse line, and directly in the capital markets through issuance of Mortgage Secured Notes (“MSNs” or “Notes”), which are sold through J.W. Korth as initial purchaser through exemptions from registration available under Rule 144A, Regulation D, and other exemptions from registration. We also own and operate commercial property acquired via foreclosure or deed in lieu of foreclosure. We may also issue second lien loans using KDM’s own assets, in which case these loans will be junior to the CM Loans where they are secured by the same property, or issue first mortgages with our own funds, which may or may not use additional financing.
KDM also operates its business through a variety of subsidiaries. KDM MFB LLC, a Delaware limited liability company was formed to issue multi-family bridge loans, and KDM Funding I LLC, a Florida limited liability company was formed to issue additional MSNs. These companies are wholly owned by KDM. Our REO portfolio is held in the name of KDM Asset Management LLC, a wholly owned subsidiary of KDM, and each property is held in a special purpose entity owned by KDM Asset Management, LLC.
Results of Operations for Year Ended December 31, 2025
The Company generated revenues of $17,235,522 for the year ended December 31, 2025, an increase of $5,167,865 or 43% compared with revenues of $12,067,657 for the year ended December 31, 2024, due to large increases in Origination and Leasing Revenue of revenues from our Asset Management segment. As of December 31, 2025, the Company owned mortgages of $285,416,050 compared with mortgages of $451,974,989 as of December 31, 2024, a decrease of 36.85%.
Similarly, gross profits increased by $4,704,605, or 55% to $13,220,244 during the year ended December 31, 2025, compared with gross profits of $8,515,639 during the year ended December 31, 2024.
Operating expenses were $10,533,839 during the year ended December 31, 2025, an increase of $1,000,724 compared with operating expenses of $9,533,115 during the year ended December 31, 2024. The increase in operating expenses was primarily the result of an increase of $745,944 in office expenses and an increase of $564,275 in depreciation related to the properties in our REO Portfolio.
The Unrealized (Loss)Gain on Mortgages caption is the net present value of our mortgage servicing rights. The balance sheet caption Mortgage Servicing Rights (“MSRs”) takes our expected future servicing revenues from our entire book of loans and discounts it to present value. Due to approximately $125 million loans being paid off in 2025, Servicing Revenue fell year over year by $914,377, or a decline of 18.10%.
For the year ended December 31, 2025, the Company recorded an income tax provision of $126,363 compared with an income tax benefit of $633,698 for the year ended December 31, 2024.
The Company pared Net Loss from $3,618,907 for the year ended December 31, 2024 to $2,344,108 net loss for the year ended December 31, 2025. Our Net Loss was 49% lower than the prior year, primarily due to a 73% increase in Origination Revenue at $2.918 million and a 94.3% increase in Leasing Revenue due to additional properties added to our REO Properties. See Segment Reporting for more information on our Asset Management segment. Our Operating Profit improved by 364% to $2,686,405 from ($1,017,406).
Although the benchmark interest rates dropped 75 bps in 2025, the commercial real estate landscape continued to present challenges. While growing additional relationships to fund lending for our primary segment of Lending and Servicing, we also made significant progress in our Asset Management division bringing one property back to performing and negotiating additional tenants and possible sale contract on another. With the MSN market stalled for 2025, KDM was unable to add significantly to its servicing portfolio which has resulted in a net decline of approximately $125 million of loans serviced. Additionally new loans closed were at traditional servicing rates, rather than at net interest margin rates, resulting in less unrealized gain added to the balance sheet. We are hopeful that the MSN market investors will return for 2026, as this is a critical piece of our business model as well as the net margin from those loans is the security interest underlying our preferred stock payments. KDM continues to explore additional avenues in its business and expects 2026 to present new opportunities for the Company and its investors.
Financial Condition for the year ended December 31, 2025
As of December 31, 2025, we had $5,354,168 in cash, $5,732,975 in portfolio loans and securities, as well as $285,416,050 of loans securitized or participated out to investors. Total KDM originations stood at $672,267,797 as of December 31, 2025. As of December 31, 2025, our property and equipment net of depreciation is valued at $69,691,129. The Company also has invested approximately $1,084,050 in KDM Capital Partners, LP, which makes bridge loans on multifamily properties.
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The fair value of our Mortgage Servicing Rights fell by 34%, falling proportionally to the MSN loans that have paid off and not been replaced. Our MSRs are the net present value of the future servicing income we receive from loans made to date. This value is highly subjective and includes such variables as constant prepayment rate (CPR), discount rate, and market pricing data. Please see the explanation of this change in value above in “Results of Operations.” The current value was provided by a third-party consulting firm and uses 15.0% for the discount rate and includes a 14.25% CPR, along with other assumptions customary to the industry.
Total assets declined by 27% to $380,854,013 at December 31, 2025 due to $166,558,939 book value of loans paying off or otherwise being disposed. This includes $50,800,000 moved out of the mortgage book and into REO at fair value upon acquisition through foreclosure or deed in lieu of foreclosure.
Capital and Liquidity Needs
W ith the decline in the MSN market, and KDM just beginning to ramp business with some new lending partners at lower net profit to the Company than the MSN program, KDM’s balance sheet and ongoing monthly revenue from servicing has declined significantly. We are optimistic that in 2026 the MSN market will recover and we will add additional assets to our MSRs and recurring revenue streams .
I n the Asset management segment of the business, KDM may need to access financing in order to improve or reposition properties it owns. Including, in particular, a development project on its LA Arts District property to convert it to multi-family .
KDM continues to work to raise capital for its nascent fund, KDM Capital Partners, LP (the “Fund”), currently targeting high net worth investors, RIAs, and family offices. The Company is actively looking to repackage some of its existing loans into an alternative structure or may otherwise access the capital markets or private credit markets as we deem necessary for our business in forms that will allow us the flexibility to grow our business again.
Status of our CM Loans
As of year-end 2025, KDM had 4 loans in payment default and outstanding, for a total of $8,156,973, of which $4,656,977 is KDM’s portfolio capital. Two of these loans are fully funded by KDM and two are partially funded by investors. We believe the outstanding balances on these loans represent an approximate 72% loan to value, and that we are reasonably secured versus stabilized value of the properties, but they will take time to resolve the foreclosure actions.
In total, KDM has had payment defaults on 11 loans out of the 118 loans we have originated on 167 properties, representing a default rate of 9.3% of loans, or 6.6% of properties lent on. Of these, 64% were office defaults, 3 of the 11 were sold at or near par, with investors experiencing only minor losses. However, one office did not have sufficient cash flow to pay its ground lease once it was acquired and investors were unwilling to put in additional capital due to the distressed capital structure, and that loan was a total loss. Of the remaining seven defaults, as of year end 2025, three are in our REO portfolio, and four are in various stages of the foreclosure process.
Of the approximately $673,567,197 in loans originated by the Company, $322,769,453 of principal has been returned to investors, representing approximately 48% of total funds invested. Additionally, the Company has paid out a total of $114,103,957 in MSN interest to investors since inception, representing a 16.9% interest return based on the total amount of loans originated. In aggregate, the Company has returned $463,874,410 to investors through its Mortgage Secured Note program.
CM Loans may from time to time be in a state of technical default. Such defaults arise out of a breach of one or more covenants or obligations of the loan, other than those for the repayment of principal or interest. KDM as the Servicer may elect to trigger default conditions where it feels that the underlying loan agreements provide for such default and that the triggering of default remedies is in the best interest of protecting the value of the underlying collateral and the repayment of the loan. Where KDM believes that a technical default would create a material risk to the CM Investors, KDM will provide notice to the CM Investors of the default and its risks.
Real Estate
In November 2022, KDM acquired a majority interest in a specialty office building in Stafford, Virginia after the borrower defaulted on its second lien mortgage. The first lien mortgage is in KDM2021-N011 and the property continues to cash flow the first lien. KDM is planning a specialty buildout of the third floor for a new tenant and may continue to operate the property or sell it to investors.
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In the beginning of 2024, KDM acquired two properties on behalf of are MSN Noteholders in Acton, MA and St. Louis, MS via foreclosure and deed in lieu of foreclosure, respectively. The properties were currently securitized in KDM2021-N015 and KDM2021-N022, respectively. Both properties had high vacancy at the point of acquisition and the Company is working to stabilize the properties prior to sale in order to maximize recovery for the MSN Noteholders.
After taking the office building in April 2024, in May 2025, KDM Cupples REO LLC defaulted on the ground lease of the property it owned in St. Louis, Missouri. After a meeting with the bondholders, where KDM informed all bondholders that capital would need to be raised to pay the taxes, insurance, and ground rent, in order to not default, with additional funds in order to stabilize the property, the bondholders chose to let the property go. The ground lessor terminated the ground lease and KDM Cupples REO LLC no longer owns the leasehold estate. On June 23, 2025, KDM removed the $9,000,000 asset from its balance sheet and canceled the related outstanding bonds. The transaction is reflected in the consolidated statements of operations as a loss on foreclosures and change in fair value of mortgage secured notes.
In March 2025 and April 2025, via deed in lieu of foreclosure, KDM acquired a mixed use property in Los Angeles, California, a majority-owned via a subsidiary named KDM Seaton Colyton Holdings, LLC and an owner-occupied building in Selma, TX.
We have future expected rents from the above properties of approximately $43,171,046, approximately $14M of which is expected before 2030, and the remaining $29.1M from 2031 and beyond.
Map of Current Loans
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Loan Information as of March 31, 2025
Number
Buildings
Ticker
Property
Property
Type
EJ Rating
Issue Date
Maturity
Date
Status
Original Balance
Original Appraisal
Original LTV
Appraisal Date
Current Balance
KDM2017-N001
Pinellas Park, FL
Multi-family
Paid-in-Full
KDM2017-N002
Miami, FL
Multi-family
Paid-in-Full
KDM2018-N001
Miami, FL
Warehouse
Paid-in-Full
KDM2018-N002
St Petersburg, FL
Multi-family
Paid-in-Full
KDM2018-N003
Perrysburg, OH
Warehouse
Paid-in-Full
KDM2018-N005
Northwood, Ohio
Warehouse
Paid-in-Full
KDM2018-N007
Vicksburg, MS
Multi-family
Paid-in-Full
KDM2019-N001
Hammonton, NJ
Office
Paid-in-Full
KDM2019-N002
Birmingham & Center Point, AL
Multi-family
Paid-in-Full
KDM2019-N003
Springs Global SC and PA
Industrial
BBB+
Paid-in-Full
KDM2019-N004
Masco Springs - OH, OK, GA
Industrial
Performing
KDM2019-N005
Capitol Heights, MD
Industrial
Paid-In-Full
KDM2019-N008
Cleveland, Ohio
Retail
Paid-in-Full
KDM2020-N001
Woodbridge, VA
Industrial
Performing
KDM2020-N002
Cleveland, OH
Office
Paid-in-Full
KDM2020-N003
Carrollton, GA
Data Center
Paid-In-Full
KDM2020-N007
Stuart, FL
Office
Paid-in-Full
KDM2020-N006
Water's Edge, Trenton, NJ
Skilled Nursing Facility
Paid-In-Full
KDM2020-N009
La Grange, IL
Industrial
Paid-in-Full
KDM2020-N008
Loves Park, IL
Industrial
Paid-in-Full
KDM2020-N010
Multifamily in AL, NY, FL
Multi-family
Performing
KDM2020-N012
Hampton, VA
Office
Performing
KDM2020-N011
Stamford, CT
Office
Performing
KDM2021-N001
Mixed-use
Performing
and 01/21
KDM2021-N002
Bellingham, WA
Office
BBB+
Performing
KDM2021-N004
Ronkonkoma, NY
Warehouse
BBB/BBB+
Performing
KDM2021-N005
Los Angeles, CA
Industrial
REO
KDM2021-N006
FL and SC
Office
Performing
KDM2021-N007
Cheyenne, WY
Industrial
Paid -In-Full
KDM2021-N008
Covina, CA & Las Cruces, NM
Retail
Paid-in-Full
KDM2021-N011
Stafford, VA
Office
REO
KDM2021-N013
East Orange, NJ
Education Center
Performing
KDM2021-N014
Mount Prospect, IL
Retail
Paid -In-Full
KDM2021-N015
Acton, MA
Office
REO
KDM2021-N018
Columbus, Toledo, Alliance & Mansfield, OH
Skilled Nursing Facility
Paid -In-Full
KDM2021-N020
Washington, PA & Goreville & Marion, IL
Funeral Homes & Office
Paid off 89.90%
KDM2021-N021
Kentucky
Office
Performing
KDM2021-N022
St. Louis, Missouri
Office
BBB+
Charge-Off
KDM2022-N001
Allentown, PA
Office
Performing
KDM2022-N002
North Carolina & Virginia
Retail
Performing
KDM2022-N003
Ohio
Skilled Nursing Facility
Paid -In-Full
KDM2022-N006
Honolulu, HI
Special Use
Performing
KDM2022-N007
California and Texas
Retail
Performing
KDM2022-N009
Benton, Washington
Office
Performing
KDM2022-N010
Washington D.C.
Office
BBB+
Performing
KDM2022-N011
Selma, Texas
Warehouse
REO
KDM2022-N014
Coral Gables, Florida
Office
Paid-in-Full
KDM2023-N001
Long Beach, CA
Retail
A/A-/BBB
Paid-in-Full
KDM2023-N002
Homewood, AL
Office
Performing
KDM2023-N003
Murray, Kentucky & Kingsport, Tennesseee
Multisecuritization
Performing
KDM2023-N006
Worcester, MA
Retail
BBB+
Performing
KDM2023-N008
Ft Myers, FL
SFR
Default
KDM2024-N001
Pembroke Pines, FL
Medical Office
Performing
KDM2024-N002
Miami, FL
Industrial
Performing
KDM2024-N003
San Diego, CA
Mixed-use
Performing
KDM2019-N005
Capitol Heights, MD
Industrial
Performing
KDM2025-N001
San Diego, CA
Multi-Family
Performing
MFB 1
KDM2024-N004
Clute, TX
Multi-family
Performing
MFB 2
KDM2024-N005
Atlanta, GA
Multi-family
Default
MFB 3
KDM2024-N007
San Diego, CA
Multi-family
Performing
* Ratings are the original and current ratings received from Egan-Jones Ratings Agency
** NR means the loan has not been rated and was either sold as a participation or an unrated bond.
*** Non-sequential loan numbers are due to some loans having been issued a file number, but the transaction was not closed, or is waiting to be closed
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Sales, Marketing and Customer Service
Our marketing efforts are designed to attract borrowers and brokers to solicit us for lending opportunities. Our origination team primarily does this through the substantial network of commercial mortgage brokers we have assembled, as well as through correspondent and wholesale relationships. We employ primarily email correspondence to mortgage brokers, banks, real estate agents, and commercial property owners to encourage them to present CM Loans to us for possible funding through the issuance of corresponding Notes. We attend trade shows, subscribe to lead generation databases, and loan and property platforms to find loans. We contact other financial institutions, directly and through brokers, that may own commercial mortgages, and may attempt to purchase mortgages for KDM.
Fraud detection
We consider fraud detection to be of utmost importance to the successful operation of our business. We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud. We use services from third-party vendors for user identification and Office of Foreign Assets Control (“OFAC”) compliance.
Notwithstanding KDM’s due diligence examination of the information provided to KDM by a borrower, there can be no assurance that the information provided to us, and on which we rely, is true, accurate, and complete.
Competition
The market for mortgage lending is competitive and rapidly evolving. We believe the following are the principal competitive factors in the lending market:
pricing and fees;
experience, including borrower full funding rates and investor returns;
branding; and
ease of use.
We face competition from major banking institutions, non-bank lenders, local banks, other private credit groups, as well as smaller private lenders.
Our success depends on further developing our network of transaction referral sources and broadening our distribution of our CM Investments.
We may also face future competition from new companies entering our market. If one or more of our competitors were to merge or partner with another of our competitors or a new market entrant, the change in competitive landscape could adversely affect our ability to compete effectively.
