Business Overview and History

Sachem Capital Corp. is a real estate investment trust (REIT) that specializes in originating, underwriting, funding, servicing, and managing a portfolio of loans secured by first mortgages on real property. The company's journey has been marked by strategic pivots and a commitment to adapting to industry challenges, positioning it for continued success.

Sachem Capital was founded in December 2010 and initially operated as a limited liability company before completing its initial public offering (IPO) in February 2017. The primary purpose of the IPO was to raise equity capital to fund mortgage loans and expand the company's portfolio, as well as to diversify its ownership structure to qualify as a REIT for federal income tax purposes.

After the IPO, Sachem Capital believes it has met all the requirements to qualify as a REIT and elected to be taxed as a REIT beginning with its 2017 tax year. As a REIT, the company is entitled to claim deductions for distributions of taxable income to its shareholders, thereby eliminating any corporate tax on such taxable income. Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% excise tax to the extent it exceeds 10% of the company's total taxable income. To maintain its qualification as a REIT, Sachem Capital is required to distribute each year at least 90% of its taxable income.

The company specializes in originating, underwriting, funding, servicing, and managing a portfolio of first mortgage loans secured by real property, primarily in the northeastern and southeastern United States. In the years following its IPO, Sachem Capital has faced various challenges, including navigating changes in the real estate finance marketplace, the debt and equity markets, shocks to the financial system, and political developments. Despite these challenges, the company has continued to grow its business and mortgage loan portfolio while maintaining its focus on prudent underwriting and risk management.

As of September 30, 2024, Sachem Capital's mortgage loan portfolio consisted of 226 loans with a total unpaid principal balance of $477.1 million. The portfolio is geographically diverse, covering 16 states with a focus on growth markets in the Southeast balanced with more stable markets in the Northeast. The weighted average interest rate on the loan portfolio, inclusive of default rates but excluding fees, stood at 13.1%.

Navigating Challenges and Diversifying the Business Model

Throughout the past two years, Sachem Capital has faced a series of headwinds, including rising interest rates, supply chain issues, and macroeconomic uncertainties. In response, the company has taken strategic actions to navigate these challenges and position itself for long-term growth.

One key initiative was the company's investment in Shem Creek Capital, a commercial real estate finance company with a focus on providing debt capital solutions to local and regional commercial real estate owners in the Northeastern United States. In September 2024, Sachem Capital acquired a 20% membership interest in Shem Creek for $5 million, with the option to increase its stake to 30% by early 2027.

This investment represents a significant step in Sachem Capital's efforts to diversify its business model and generate additional revenue streams. By partnering with an experienced third-party manager, the company aims to leverage Shem Creek's expertise in the commercial real estate finance sector and gain exposure to a new asset class.

Addressing Non-Performing Loans and Strengthening the Balance Sheet

Another strategic move by Sachem Capital was the decision to sell a pool of approximately $78.8 million in non-performing loans. This proactive step will allow the company to reduce its exposure to underperforming assets, improve the overall quality of its loan portfolio, and free up capital to be redeployed into more profitable opportunities.

The anticipated recovery rate on the sold loans is around 70% of the unpaid principal balance. While this transaction will result in a realized loss, the company believes it is the best course of action to enhance its financial position and position itself for future growth.

Additionally, the proceeds from the loan sale will be used to pay down the $34.5 million in unsecured, unsubordinated notes due in December 2024, further strengthening Sachem Capital's balance sheet and reducing its cost of capital.

Financials

Sachem Capital's financial performance has been impacted by challenging market conditions in recent years. For the fiscal year 2023, the company reported annual revenue of $32 million and net income of $15.9 million. The annual operating cash flow and free cash flow for 2023 both stood at $21.86 million.

However, the most recent quarter (Q3 2024) showed a significant decline in financial performance. Revenue for Q3 2024 was $14.8 million, down 16.8% compared to Q3 2023. The company reported a net loss of $5.1 million for Q3 2024, compared to a profit of $6.2 million in Q3 2023. This decrease in revenue and net income was primarily attributable to a decline in loan originations as the company remained prudent with short-term debt coming due, as well as an increase in the provision for credit losses.

The company's mortgage loan portfolio had a total carrying value of $477.1 million as of September 30, 2024, down from $499.2 million as of December 31, 2023, a 4.4% decrease. This decline was primarily due to a slowdown in new loan originations, which decreased from $100.1 million in the first nine months of 2023 to $60.2 million in the first nine months of 2024, a 40% drop.

Sachem Capital's allowance for credit losses increased significantly, rising from $7.5 million as of December 31, 2023, to $20.2 million as of September 30, 2024. This increase was primarily due to declines in the value of the assets securing the mortgage loans in the company's portfolio, leading to an $18 million provision for credit losses in the first nine months of 2024, compared to only $65,000 in the same period of 2023.

Liquidity

As of September 30, 2024, Sachem Capital's liquidity position showed some signs of strain. The company reported cash and cash equivalents of $5.9 million. The debt-to-equity ratio stood at 1.349, indicating a relatively high level of leverage. The current ratio and quick ratio were both 0.538, suggesting potential short-term liquidity challenges.

Sachem Capital has access to two credit facilities to support its operations. The company has a $65 million revolving credit facility with Needham Bank, of which $35.5 million was outstanding as of September 30, 2024. Additionally, there is a $200 million master repurchase financing facility with Churchill MRA Funding I LLC, with $23.5 million outstanding as of the same date.

Outlook and Future Prospects

Despite the challenges faced in recent years, Sachem Capital remains optimistic about its future prospects. The company's strategic shift towards diversification, coupled with its disciplined approach to loan origination, positions it well to capitalize on the evolving real estate finance landscape.

Looking ahead, Sachem Capital expects to see robust deal flow, particularly as traditional banks continue to remain on the sidelines. The company's focus on single-family and small multifamily residential assets in growing markets, where metrics remain favorable, is expected to drive future growth.

Furthermore, the company's investment in Shem Creek Capital provides a new avenue for revenue generation and diversification, allowing Sachem Capital to tap into the commercial real estate finance market while leveraging the expertise of an experienced third-party manager. As of September 30, 2024, the company had invested a total of $51.6 million in seven entities managed by Shem Creek Capital, LLC, up from $43 million as of December 31, 2023. These investments generated $3.9 million in income for Sachem Capital in the first nine months of 2024, compared to $2.3 million in the same period of 2023, a 67.1% increase.

In addition to its mortgage loan portfolio, Sachem Capital has also made investments in rental real estate. As of September 30, 2024, the company had $13 million invested in rental real estate properties, up from $10.6 million as of December 31, 2023. This increase was primarily due to the acquisition of a commercial office building in Westport, Connecticut for $10.7 million in August 2023.

As Sachem Capital navigates the current market environment, it remains committed to enhancing shareholder value through prudent capital allocation, strategic investments, and a focus on accretive growth opportunities. The company's strong balance sheet and diversified business model position it well to deliver long-term sustainable growth for its investors.

Conclusion

Sachem Capital's journey has been marked by adaptability and strategic decision-making in the face of industry challenges. By diversifying its business model, addressing non-performing loans, and strengthening its balance sheet, the company is poised to capitalize on emerging opportunities and deliver long-term value for its shareholders.

The company operates primarily in the Northeastern and Southeastern United States, with 34% of the properties securing its mortgage loans located in Connecticut, 29.6% in Florida, and 13.5% in New York as of September 30, 2024. This geographic diversification helps to mitigate regional economic risks.

Despite the recent financial challenges, including the decrease in loan originations and increase in non-performing loans, Sachem Capital's Board has declared a quarterly dividend of $0.05 per share for Q3 2024, demonstrating confidence in the company's long-term prospects.

As Sachem Capital continues to evolve, its commitment to disciplined lending, strategic partnerships, and a diversified revenue stream positions it as a key player in the real estate finance sector, ready to weather market volatility and drive sustainable growth. The company's focus on addressing its non-performing loan portfolio and its continued investment in partnership opportunities suggest a proactive approach to overcoming current market challenges and positioning itself for future success.