Sachem Capital Corp. (SACH), a mortgage real estate investment trust (REIT) specializing in short-term, secured, non-bank loans, has navigated a challenging macroeconomic environment with a focus on prudent balance sheet management and disciplined lending practices. Despite the headwinds, the company has delivered solid financial results, showcasing the resilience of its business model.

For the full year 2023, Sachem Capital reported annual net income of $15.9 million, annual revenue of $64.8 million, annual operating cash flow of $21.9 million, and annual free cash flow of $21.6 million. In the first quarter of 2024, the company generated revenue of $17.2 million, a 17.0% increase compared to the same period in 2023. This top-line growth was primarily driven by an increase in interest rates charged to borrowers, as well as higher income from partnership investments and other fee-based revenue streams.

However, the challenging market conditions have also impacted Sachem Capital's profitability. Net income attributable to common shareholders for the first quarter of 2024 was $3.6 million, or $0.08 per share, compared to $4.2 million, or $0.10 per share, in the same period of 2023. The decrease in net income was largely due to a significant increase in operating expenses, including a $1.3 million provision for credit losses related to loans, primarily on an office asset.

Business Overview

Sachem Capital is a mortgage REIT that specializes in originating, underwriting, funding, servicing, and managing a portfolio of short-term, secured, non-bank loans to real estate investors. The company's primary focus is on providing financing for the acquisition, renovation, development, rehabilitation, or improvement of residential and commercial properties, typically held for resale or investment.

The company's lending strategy is centered on a conservative loan-to-value (LTV) ratio, with a focus on first mortgage liens on real estate and personal guarantees from the borrowers. Sachem Capital's loan portfolio is geographically diverse, spanning 15 states, with a concentration in the Southeastern growth markets. The portfolio is also diversified by property type, including multifamily, single-family, and other commercial real estate assets.

Navigating a Challenging Market

The current macroeconomic environment, marked by high inflation, rising interest rates, and uncertainty surrounding the Federal Reserve's future policy actions, has presented significant challenges for Sachem Capital and the broader real estate industry. In this environment, the company has adopted a cautious and disciplined approach to managing its balance sheet and loan origination activities.

During the first quarter of 2024, Sachem Capital's loan originations were significantly lower compared to the prior year period, not due to a lack of demand, but rather a conscious effort to maintain strong liquidity and protect the company's capital. The company's management team recognizes the importance of preserving financial flexibility in the face of ongoing market volatility and uncertainty.

To this end, Sachem Capital has focused on loan modifications and extensions, working closely with its borrowers to restructure and put loans back on track. These efforts have resulted in additional revenue, as the company has been able to generate fees from these loan modifications. However, the company has also had to contend with an increase in nonaccrual loans, including those in the pending foreclosure process, which have required additional provisions for credit losses.

Liquidity

Sachem Capital has maintained a strong financial position, with total assets of $626.5 million as of March 31, 2024, including $18.4 million in cash and cash equivalents and $38.4 million in investment securities. The company's total debt outstanding was $377.6 million, with available liquidity of $30 million on its credit facility.

The company's focus on liquidity management has come at a cost, as it has limited its loan origination activities and, consequently, its origination fee income. However, Sachem Capital's management team believes that this approach is prudent in the current environment, as it allows the company to navigate the market uncertainties and be well-positioned to capitalize on opportunities when the lending environment becomes more favorable.

Outlook

Sachem Capital's management team remains cautiously optimistic about the company's long-term prospects, despite the near-term challenges. The company continues to see strong demand for its lending products, as banks and other traditional lenders remain on the sidelines, creating opportunities for non-bank lenders like Sachem Capital.

However, the company also faces several risks, including the potential for further declines in real estate valuations, continued uncertainty in the macroeconomic environment, and increased competition from other non-bank lenders. Additionally, the company's upcoming debt maturities, including $23.7 million in June 2024 and $34.5 million in December 2024, will require careful management and potential refinancing.

Sachem Capital's management team has demonstrated its ability to navigate challenging market conditions, and the company's diversified portfolio, strong financial foundation, and disciplined approach to lending and liquidity management position it well for the future. As the company continues to prudently protect its capital, it believes the time is approaching when it can more aggressively pivot back to growing its business and delivering long-term value to its shareholders.

Conclusion

Sachem Capital Corp. has navigated a challenging market environment with a focus on disciplined lending and liquidity management. While the company has faced headwinds that have impacted its profitability in the short term, its diversified portfolio, strong financial position, and experienced management team position it well to capitalize on future opportunities as the lending environment becomes more favorable. Investors should closely monitor Sachem Capital's progress as it continues to execute on its strategic priorities and navigate the evolving real estate finance landscape.