Business Overview

Sachem Capital Corp. (SACH) is a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing, and managing a diverse portfolio of short-term, secured, non-bank loans primarily in the Northeastern and Southeastern United States. Founded in 2010 and going public in 2017, the company has steadily grown its mortgage loan portfolio and leveraged its expertise to capitalize on the evolving real estate lending landscape.

Sachem Capital was established in December 2010 as a limited liability company, operating as a specialized real estate finance firm. The company's primary focus has been on originating, underwriting, funding, servicing, and managing a portfolio of short-term secured, non-bank loans, commonly known as "hard money loans," to real estate owners and investors. These loans are typically secured by first mortgage liens on the underlying real estate properties.

In February 2017, Sachem Capital completed its initial public offering (IPO), with the primary goal of raising equity capital to fund mortgage loans and expand its portfolio. Additionally, the IPO allowed the company to diversify its ownership structure, enabling it to qualify as a real estate investment trust (REIT) for federal income tax purposes. Sachem believes it has met the requirements to qualify as a REIT since the IPO and elected REIT status beginning with its 2017 tax year.

Throughout its history, Sachem Capital has faced various challenges in the competitive landscape. Initially, its primary competitors were other non-bank real estate finance companies and banks. However, in recent years, the company has encountered increasing competition from private equity funds, hedge funds, and other specialty finance entities funded by investment banks, asset managers, private equity funds, and hedge funds. These new market participants have been attracted by the higher yields available in Sachem's residential transition loan business.

Furthermore, over the past two years, the commercial real estate market throughout much of the United States has experienced a significant decline in value. This trend has led to a corresponding increase in loan defaults and foreclosures, forcing Sachem to record additional allowances for credit losses and write-downs of real estate assets, particularly on its commercial real estate loans. In response, the company has had to closely monitor a variety of market indicators to track property value trends and adjust its underwriting criteria and portfolio management accordingly.

Competitive Landscape and Financing Strategy

Sachem Capital operates in a competitive marketplace, facing both traditional bank lenders and non-bank real estate finance companies. The company's key competitive advantages include its experienced management team, strong reputation, and ability to provide flexible, timely financing solutions to its borrowers. In recent years, the company has also encountered increased competition from private equity funds, hedge funds, and other specialty finance entities seeking higher-yielding investment opportunities.

To continue growing its business, Sachem Capital utilizes a balanced financing strategy, leveraging both debt and equity capital. The company has access to various sources of capital, including public offerings of equity and debt securities, a $200 million master repurchase financing facility with Churchill MRA Funding I LLC, and a $65 million revolving credit facility with Needham Bank. As of September 30, 2024, the company's capital structure was comprised of 58.5% debt and 41.5% equity, which is significantly lower than industry peers.

Financial Performance

For the nine months ended September 30, 2024, Sachem Capital reported revenue of $46.7 million, a 3.3% decrease compared to the same period in 2023. The decline in revenue was primarily attributable to a decrease in the company's mortgage loan portfolio, as well as an increase in non-accrual loans, which negatively impacted interest and fee income. During this period, the company recorded a $18.0 million provision for credit losses, a significant increase from the $65,000 provision in the prior-year period.

Net loss attributable to common shareholders for the nine months ended September 30, 2024, was $6.7 million, or $0.14 per share, compared to net income of $14.2 million, or $0.32 per share, in the same period of 2023. The decline in profitability was largely driven by the substantial increase in the provision for credit losses, as well as higher general and administrative expenses related to legal and advisory fees.

For the most recent quarter ended September 30, 2024, Sachem Capital reported revenue of $14.8 million and a net loss of $6.1 million. The company's loan portfolio included 226 loans with an aggregate outstanding principal balance of $477.1 million as of September 30, 2024. The portfolio was diversified by property type, with 59.3% secured by residential properties, 28.0% by commercial properties, 6.1% by pre-development land, and 6.6% by mixed-use properties.

Geographically, the company's loan portfolio was concentrated in three main states: 34.0% of the properties were located in Connecticut, 29.6% in Florida, and 13.5% in New York. This regional focus aligns with Sachem's strategy of operating primarily in the northeastern and southeastern United States.

The company's primary sources of revenue are interest income and fee income related to its loan portfolio. For the nine months ended September 30, 2024, interest income from loans was $35.8 million, while fee income from loans, including origination, modification, extension, and other fees, totaled $6.5 million. Additionally, Sachem earned $3.9 million in income from its investments in real estate partnerships during this period.

Liquidity

Sachem Capital maintains a strong liquidity position to support its operations and growth initiatives. The company's liquidity is primarily derived from cash on hand, cash flow from operations, and available credit facilities. As of September 30, 2024, Sachem Capital had $5.9 million in cash and cash equivalents. The company also had $65 million available under its revolving credit facility with Needham Bank, of which $35.5 million was outstanding. This facility can be increased up to $75 million, providing additional financial flexibility.

Furthermore, Sachem has a $200 million master repurchase financing facility with Churchill MRA Funding I LLC, of which $23.5 million was outstanding as of September 30, 2024. These credit facilities, combined with the company's cash position, provide Sachem with significant liquidity to support its operations and pursue growth opportunities.

The company's current ratio and quick ratio both stand at 139.31, indicating a strong ability to meet short-term obligations. While the exact debt-to-equity ratio is not provided, the company's capital structure of 58.5% debt and 41.5% equity suggests a relatively balanced approach to financing.

Outlook

Looking ahead, Sachem Capital faces several challenges, including a high-interest rate environment, capital markets illiquidity, increased competition from non-traditional lenders, and potential further declines in property values. However, the company remains focused on capitalizing on opportunities in the evolving real estate finance marketplace, maintaining a strong balance sheet, and leveraging its expertise to navigate the current landscape.

Despite these challenges, Sachem Capital believes there continues to be a significant market opportunity for a well-capitalized hard money lender like itself to originate loans to small- and mid-scale real estate developers. The company's conservative underwriting standards, which typically emphasize a loan-to-value (LTV) ratio of no greater than 70%, position it well to manage risk in the current market environment.

Risks and Considerations

While Sachem Capital's business model has demonstrated resilience through various economic cycles, the company faces several risks that investors should consider:

1. Interest Rate Environment: Rising interest rates have an adverse impact on the company's business, as it must balance its cost of funds with the yield on its loan portfolio to maintain profitability.

2. Capital Markets Volatility: The company's ability to raise capital through public offerings of equity and debt securities is crucial for its growth, and any disruptions in the capital markets could impede its ability to access funding.

3. Competition from Non-Traditional Lenders: The increasing presence of private equity funds, hedge funds, and other specialty finance entities in the real estate lending market has intensified competition and put pressure on pricing and deal structures.

4. Property Value Fluctuations: Declines in commercial and residential real estate values could lead to higher loan default rates and increased provisions for credit losses, negatively impacting the company's financial performance.

5. Regulatory Environment: As a REIT, Sachem Capital must adhere to strict guidelines and regulations, and any changes in the regulatory landscape could affect its operations and tax status.

6. Geographic Concentration: With a significant portion of its loan portfolio concentrated in Connecticut, Florida, and New York, the company is exposed to regional economic fluctuations and real estate market conditions in these areas.

7. Credit Risk: The recent increase in the provision for credit losses highlights the potential for loan defaults, particularly in a challenging economic environment.

Despite these challenges, Sachem Capital's strong balance sheet, experienced management team, and diversified loan portfolio position the company to navigate the evolving real estate finance landscape. Investors should closely monitor the company's ability to manage its risks, maintain credit quality, and capitalize on emerging opportunities in the market.

Conclusion

Sachem Capital Corp. (SACH) is a well-established real estate finance firm that has demonstrated its resilience through various economic cycles. While the company faces several headwinds, including a challenging interest rate environment, capital markets volatility, and increased competition, its conservative underwriting standards, diversified loan portfolio, and balanced financing strategy provide a solid foundation for weathering the current landscape. As Sachem Capital continues to navigate the evolving real estate finance market, investors should closely monitor the company's ability to manage its risks, maintain credit quality, and capitalize on emerging opportunities.