Sachem Capital Corp. (SCCC), a leading real estate finance company, has navigated a challenging and evolving macroeconomic backdrop marked by uncertainty around inflation and the Federal Reserve's future rate policy. Despite these headwinds, the company has demonstrated resilience, reporting solid financial results for the first quarter of 2024.
For the full year 2023, Sachem Capital Corp. reported annual net income of $15,899,153, annual revenue of $64,773,320, annual operating cash flow of $21,855,510, and annual free cash flow of $21,625,923. In the first quarter of 2024, the company generated revenue of approximately $17.2 million, up 17.0% from the same period in 2023. This increase was primarily driven by higher interest rates charged to borrowers, as well as a 117.4% increase in income from partnership investments.
However, the company's net income attributable to common shareholders for the first quarter of 2024 was approximately $3.6 million, or $0.08 per share, compared to approximately $4.2 million, or $0.10 per share, in the same period of 2023. This decrease was largely due to a 30.7% increase in operating costs and expenses, including a significant increase in provisions for credit losses related to loans.
Business Overview
Sachem Capital Corp. is a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing, and managing a portfolio of short-term (i.e., three years or less) loans secured by first mortgage liens on real property. The company's lending activities are primarily focused on the northeastern and southeastern regions of the United States, with a particular emphasis on growth markets.The company's business model is centered on providing flexible, "hard money" loans to small- and mid-scale real estate developers and investors. Sachem's lending criteria place greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, allowing the company to serve a niche market that is often underserved by traditional lenders.
Navigating a Challenging Lending Environment
The current macroeconomic environment has presented significant challenges for Sachem Capital Corp. and the broader real estate finance industry. The company has faced headwinds from rising interest rates, which have impacted its cost of capital and the ability of its borrowers to secure long-term financing. Additionally, the ongoing dislocation and turmoil in the credit markets and the banking sector have created uncertainty and disruption in the lending landscape.In response to these challenges, Sachem has adopted a disciplined approach focused on prudent liquidity management. During the first quarter of 2024, the company'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 balance sheet.
Sachem's Chief Executive Officer, John Villano, emphasized the importance of this approach, stating, "The company is highly focused on prudently managing the balance sheet to ensure ample liquidity and are underwriting the highest quality loans with financially strong borrowers." This strategy, while impacting short-term earnings, is intended to position the company for long-term success and enable it to capitalize on opportunities that may arise as the lending environment evolves.
Loan Portfolio and Asset Quality
As of March 31, 2024, Sachem Capital Corp. had a total loan portfolio of $490.7 million, with a weighted average interest rate of 12.7%. The company's loan portfolio is geographically diverse, spanning across 15 states, with a focus on Southeastern growth markets.The company's loan portfolio includes a variety of property types, including multifamily, single-family, and other commercial real estate assets. At the end of the first quarter, 12.4% of the company's investments were in the office sector, which has been particularly challenged in the current environment.
Sachem's asset quality metrics have been a point of focus, with the company reporting $85.7 million in loans on nonaccrual status as of March 31, 2024, including $72.9 million in loans in pending foreclosure. The company has been proactive in addressing these problem loans, working closely with borrowers to find solutions and protect the value of its collateral.
John Villano commented on the company's approach, stating, "The company continues to work with borrowers, and continues to protect assets going forward. It's an ongoing plan to continue cleansing the portfolio."
Liquidity and Capital Resources
Sachem Capital Corp. 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 been a key priority, as it navigates the challenging lending environment and prepares for the upcoming maturity of its unsecured notes. Villano emphasized, "Being cautious affects profits. And the company just wants to be clear, it's being very conservative going forward. The company doesn't want to be caught on the wrong side."
Sachem's disciplined approach to capital allocation and liquidity management has been crucial in maintaining the company's financial flexibility and positioning it to capitalize on future opportunities as the lending landscape evolves.
Outlook and Growth Strategies
Despite the current challenges, Sachem Capital Corp. remains optimistic about the long-term prospects for its business. The company believes that the ongoing dislocation and turmoil in the credit markets and the banking sector will continue to fuel significant demand for its mortgage products, particularly as traditional lenders remain on the sidelines.Sachem's growth strategies are focused on selectively originating, managing, and servicing a portfolio of first mortgage real estate loans designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. The company is particularly targeting the single-family and multifamily residential sectors, where prices and demand have remained relatively stable due to a lack of housing supply in many of its targeted markets.
Villano commented on the company's strategic shift, stating, "The company firmly believes the strategic shift to a balance of lending and liquidity in this market will ultimately lead to long-term value for shareholders."
Risks and Challenges
While Sachem Capital Corp. has demonstrated resilience in the face of the current challenges, the company continues to navigate a complex and evolving landscape. Risks and challenges include:- Interest rate environment: The company's cost of capital has increased due to rising interest rates, which could continue to impact its profitability.
- Competition from non-traditional lenders: Sachem is facing increased competition from private equity funds, hedge funds, and other specialty finance entities, which may have easier access to capital and be more aggressive in terms of pricing.
- Property value fluctuations: Declines in real estate valuations, particularly in the commercial real estate sector, could compromise the company's collateral and lead to increased credit losses.
- Regulatory changes: As a REIT, Sachem is subject to various regulatory requirements, and any changes in the regulatory landscape could impact the company's operations and financial performance.
Conclusion
Sachem Capital Corp. has navigated a challenging lending environment with a disciplined focus on liquidity management and prudent underwriting. While the company's short-term earnings have been impacted by its cautious approach, Sachem's long-term strategy of balancing lending and liquidity is intended to position the company for success as the market environment evolves.The company's diversified loan portfolio, strong financial foundation, and experienced management team provide a solid foundation for weathering the current challenges and capitalizing on future opportunities. As Sachem continues to execute its strategic plan, investors will be closely watching the company's ability to maintain its competitive edge and deliver sustainable value to its shareholders.