Business Overview and History

Sachem Capital Corp. (SCCF) is a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing, and managing a portfolio of short-term, secured, non-bank loans, commonly referred to as "hard money loans." The company was founded in 2010 and completed its initial public offering (IPO) in 2017, with the primary goal of raising equity capital to fund mortgage loans and expand its portfolio.

Sachem Capital was founded in December 2010 as a limited liability company, initially focusing on providing short-term, secured loans to real estate owners and investors, primarily in the northeastern and southeastern United States. The company's loan portfolio typically includes properties for acquisition, renovation, development, rehabilitation, or improvement.

In February 2017, Sachem Capital completed its IPO, which not only raised equity capital to fund mortgage loans and expand its portfolio but also allowed the company to diversify its ownership structure to qualify as a real estate investment trust (REIT) for federal income tax purposes. The company has maintained its REIT status since 2017, electing to be taxed as such beginning with the 2017 tax year.

Since its IPO, Sachem Capital has significantly expanded its business through continued loan origination and portfolio management. To support this growth, the company has actively raised capital through public offerings of both equity and debt securities. From its IPO through September 30, 2024, Sachem Capital has successfully raised $513.4 million in gross proceeds through these public offerings.

In October 2022, the company made a strategic move to diversify its business model by acquiring Urbane New Haven, LLC, a real estate development company. This acquisition was aimed at expanding Sachem Capital's capabilities and providing additional expertise in real estate development projects to complement its core hard money lending business.

Throughout its history, Sachem Capital has faced various challenges, including establishing its reputation in the early days and more recently navigating a difficult interest rate environment, capital markets illiquidity, and increased competition from private lenders. The company has also had to manage an increase in loan defaults and foreclosures, particularly in its commercial real estate portfolio, due to declines in property values. In response to these challenges, Sachem Capital has adjusted its underwriting criteria, increased its allowance for credit losses, and taken impairment charges on certain real estate assets.

Navigating a Challenging Market Environment

The past few years have presented significant challenges for Sachem Capital, as the company has navigated a high-interest-rate environment, capital markets illiquidity, and increased competition from private lenders. These factors have adversely impacted the company's revenue and profitability, as evidenced by its net loss of $6.7 million for the nine months ended September 30, 2024, compared to net income of $14.2 million for the same period in 2023.

The primary driver of the net loss was an increase in the company's provision for credit losses related to loans, which rose from $65,000 in the first nine months of 2023 to $18.0 million in the corresponding period of 2024. This significant increase was mainly due to declines in the value of assets securing the mortgage loans in Sachem Capital's portfolio, particularly its commercial real estate holdings, which have experienced a significant decline in value over the past two years.

In addition to the rise in credit-related expenses, Sachem Capital has also faced challenges in raising growth capital, which has negatively impacted its loan origination activities. The company's loan originations decreased by 32.1% in the first nine months of 2024 compared to the same period in 2023, leading to a 3.6% decline in interest income and a 17.3% decrease in fee income from loans.

Financials

As of September 30, 2024, Sachem Capital had total assets of $555.5 million. The company's net loss for the nine months ended September 30, 2024, was $6.7 million, compared to net income of $14.2 million for the same period in 2023. Interest income declined by 3.6%, and fee income from loans decreased by 17.3% in the first nine months of 2024 compared to the same period in 2023.

For the most recent quarter (Q3 2024), Sachem Capital reported revenue of $14.8 million, representing a 16.8% decrease compared to the same quarter in the prior year. The quarterly net loss was $6.1 million, compared to net income of $5.2 million in the prior year quarter. This significant swing was primarily driven by an $8.1 million increase in the provision for credit losses related to loans.

The company's mortgage loan portfolio, which is its primary business activity, totaled $477.1 million as of September 30, 2024, down from $499.2 million as of December 31, 2023, a decrease of 4.4%. 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.

The mortgage loan portfolio is geographically diversified, with 34% of the loans located in Connecticut, 29.6% in Florida, and 13.5% in New York. In terms of property type, the portfolio is composed of 59.3% residential, 28% commercial, 6.1% pre-development land, and 6.6% mixed-use properties.

As of September 30, 2024, Sachem Capital had established an allowance for credit losses on its mortgage loan portfolio of $20.2 million, up from $7.5 million at the end of 2023. This significant increase in the allowance reflects the company's expectations of future decreases in the fair values of the collateral underlying its mortgage loans.

In addition to its mortgage loan portfolio, Sachem Capital has invested an aggregate of $51.6 million in seven limited liability companies managed by Shem Creek Capital, LLC. These partnership investments generated $3.9 million in income for Sachem Capital in the first nine months of 2024, up from $2.3 million in the same period of 2023, an increase of 67.1%.

The company also has an investment in rental real estate, which totaled $13.0 million as of September 30, 2024, up from $10.6 million at the end of 2023. This rental real estate investment includes a commercial office building in Westport, Connecticut that the company acquired in August 2023 for $10.7 million.

Liquidity and Capital Structure

As of September 30, 2024, Sachem Capital had $5.9 million in cash and cash equivalents, $1.6 million in investment securities, and total assets of $555.5 million. The company's capital structure was 58.5% debt and 41.5% equity, with total indebtedness of $324.7 million, including $260.5 million in unsecured, unsubordinated notes and $60.0 million in secured credit facilities.

To address its upcoming debt maturities, including the $34.5 million December 2024 Notes due on December 30, 2024, Sachem Capital plans to use a combination of cash flow from operations, additional borrowings under its existing credit facilities, and proceeds from the proposed sale of a pool of mortgage loans with an aggregate principal value of approximately $78.8 million. The company's ability to successfully execute this plan will be critical to its near-term liquidity and financial flexibility.

Sachem Capital's debt-to-equity ratio stood at 0.58 as of September 30, 2024, down from 0.61 a year earlier, indicating a somewhat less leveraged capital structure. The company's current ratio and quick ratio were both 139.31, reflecting strong short-term liquidity.

The company's available credit lines include a $65 million revolving credit facility with Needham Bank, with $35.5 million outstanding as of September 30, 2024, at an interest rate of 7.75%. Additionally, Sachem Capital has a $200 million master repurchase financing facility with Churchill MRA Funding I LLC, with $23.5 million outstanding as of September 30, 2024, at an effective interest rate of 8.95%.

Outlook and Strategy

Looking ahead, Sachem Capital faces a challenging operating environment, with continued pressure on its loan portfolio, limited access to growth capital, and elevated interest expenses. The company's primary focus will be on maintaining its existing portfolio, reducing its exposure to non-performing loans, and optimizing its capital allocation to lower its cost of capital and improve its financial flexibility.

To this end, the company has retained Mission Capital, a real estate capital markets firm, to serve as its exclusive advisor for the proposed sale of a pool of non-performing mortgage loans. The net proceeds from this transaction are expected to be used for working capital and general corporate purposes, with a portion potentially allocated to repaying the December 2024 Notes.

Despite the current headwinds, Sachem Capital believes that there continues to be a significant market opportunity for a well-capitalized hard money lender, particularly in the company's core markets where real estate values have traditionally been stable. The company's management team remains committed to navigating the current challenges, optimizing its capital structure, and positioning the business for long-term success.

Risks and Challenges

Sachem Capital faces several key risks and challenges that investors should be aware of:

1. Credit risk: The company's loan portfolio is subject to the risk of borrower defaults and declines in the value of the underlying collateral, which could lead to increased provisions for credit losses and impairment charges.

2. Interest rate risk: Rising interest rates have an adverse impact on Sachem Capital's business, as the company may not be able to increase the rates on its loans quickly enough to offset the increase in its cost of funds.

3. Competition: The company faces intense competition from other non-bank real estate finance companies, as well as from private equity funds, hedge funds, and other specialty finance entities, which may be able to offer more aggressive pricing and terms.

4. Liquidity and capital access: Sachem Capital's ability to grow its business is dependent on its access to capital, either through debt or equity financing. Disruptions in the capital markets could limit the company's ability to raise the necessary funds.

5. Regulatory environment: As a REIT, Sachem Capital must comply with various regulations and requirements, including maintaining its REIT status and satisfying the 90% distribution requirement. Changes in the regulatory landscape could have a significant impact on the company's operations and financial performance.

Conclusion

Sachem Capital Corp. (SCCF) is a specialist lender that has faced significant challenges in recent years, as it has navigated a high-interest-rate environment, capital markets illiquidity, and increased competition. The company's net loss in the first nine months of 2024 was primarily driven by a substantial increase in provisions for credit losses related to its mortgage loan portfolio, particularly its commercial real estate holdings.

To address these challenges, Sachem Capital is focused on maintaining its existing portfolio, reducing its exposure to non-performing loans, and optimizing its capital structure to lower its cost of capital and improve its financial flexibility. The company's proposed sale of a pool of non-performing mortgage loans is a key part of this strategy, and its successful execution will be critical to the company's near-term liquidity and long-term prospects.

Despite the current headwinds, Sachem Capital believes that there continues to be a significant market opportunity for a well-capitalized hard money lender, and the company remains committed to navigating the present challenges and positioning the business for long-term success. Investors should closely monitor the company's progress in executing its strategic initiatives and managing its credit risks and liquidity position.