Sachem Capital Corp. (SCCG): Navigating a Challenging Lending Environment with Disciplined Growth

Published on September 24, 2024 | Ticker: SCCG

Sachem Capital Corp. (SCCG), a leading real estate finance company, has demonstrated its resilience in the face of a turbulent macroeconomic landscape. Despite the ongoing challenges posed by rising interest rates and a volatile real estate market, the company has continued to deliver solid financial performance, showcasing its ability to adapt and capitalize on emerging opportunities.

Financials

For the fiscal year ended December 31, 2023, Sachem Capital 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. These impressive figures underscore the company's strong operational execution and its commitment to prudent financial management.

In the first quarter of 2024, Sachem Capital continued to navigate the evolving market conditions with agility. The company reported revenue of $17,200,956, a 17.0% increase compared to the same period in the prior year. This growth was primarily driven by a rise in interest rates, which enabled the company to charge higher yields on its loan portfolio. Additionally, the company's income from partnership investments increased by 117.4% year-over-year, further bolstering its top-line performance.

However, the challenging lending environment did have an impact on Sachem Capital's profitability. Net income attributable to common shareholders for the first quarter of 2024 was $3,648,699, or $0.08 per share, compared to $4,195,460, or $0.10 per share, in the same period of 2023. This decrease was largely due to a 30.7% rise in operating costs and expenses, which included a significant increase in the provision for credit losses related to loans.

Portfolio Diversification

Geographically, Sachem Capital's loan portfolio remains well-diversified, with a focus on the Southeastern and Northeastern regions of the United States. As of March 31, 2024, the company's loan portfolio was distributed across 15 states, with 47.1% of the loans located in New England, 33.6% in the South, and 18.5% in the Mid-Atlantic region.

In terms of property types, Sachem Capital's loan portfolio is balanced, with 49.7% in residential properties, 36.5% in commercial real estate, 7.6% in pre-development land, and 6.2% in mixed-use properties. This diversification helps mitigate the company's exposure to any single market or asset class, enhancing the overall stability of its portfolio.

Liquidity

Despite the challenges, Sachem Capital remains committed to its strategic shift towards a balance of lending and liquidity. The company's disciplined approach to underwriting and risk management has allowed it to maintain a strong financial position, with total assets of $626.5 million and total debt of $377.6 million as of March 31, 2024.

Sachem Capital's liquidity position is further bolstered by its access to various financing sources, including a $200 million master repurchase facility with Churchill MRA Funding I LLC, a $65 million revolving credit facility with Needham Bank, and an ongoing at-the-market equity offering program. These diverse funding options provide the company with the flexibility to navigate the current market environment and capitalize on future growth opportunities.

Outlook

Looking ahead, Sachem Capital remains cautiously optimistic about the lending landscape. The company's management team 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 in the residential and multifamily sectors, where prices and demand have remained relatively stable.

To this end, Sachem Capital is focused on selectively originating, managing, and servicing a portfolio of first mortgage real estate loans that generate attractive risk-adjusted returns. The company's experienced management team, strong underwriting standards, and deep industry knowledge position it well to navigate the current challenges and capitalize on emerging opportunities.

Risks and Challenges

While the company acknowledges the potential for incremental non-cash provisions and impairments, its seasoned team remains committed to maximizing value through focused asset management initiatives. Sachem Capital's Board of Directors also continues to evaluate the company's dividend distribution policy, balancing operational performance, federal tax requirements, and the importance of maintaining long-term financial flexibility.

Conclusion

In conclusion, Sachem Capital Corp. has demonstrated its resilience and adaptability in the face of a challenging lending environment. The company's diversified portfolio, disciplined growth strategy, and strong financial position provide a solid foundation for navigating the current market conditions and positioning the business for long-term success. As Sachem Capital continues to prudently protect its capital and selectively deploy it into attractive opportunities, investors can expect the company to emerge from this period as an even stronger and more resilient real estate finance provider.

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