Sachem Capital Corp. (SCCG) is a real estate finance company that specializes in originating, underwriting, funding, servicing, and managing a portfolio of short-term, secured, non-bank loans, often referred to as "hard money loans." The company primarily serves small- to mid-scale real estate developers and investors in the Northeastern and Southeastern United States.
Sachem Capital's Established Roots and Resilient Business Model
Sachem Capital was founded in December 2010 as a limited liability company, with the primary focus of providing short-term, secured loans to fund the acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the northeastern and southeastern United States. In February 2017, the company completed its initial public offering (IPO), which was instrumental in raising equity capital to fund mortgage loans and expand its portfolio. Additionally, the IPO helped diversify Sachem Capital's ownership structure, allowing it to qualify as a real estate investment trust (REIT) for federal income tax purposes.
Since its IPO, Sachem Capital has elected to be taxed as a REIT, which entitles the company to claim deductions for distributions of taxable income to its shareholders, effectively eliminating corporate tax on such taxable income. This tax-advantaged status has allowed Sachem to focus on growing its business and loan portfolio. Over the years, the company has successfully raised additional capital through various public offerings of both equity and debt securities, using these funds to continue expanding its lending activities.
One of Sachem Capital's key strengths is its flexible and adaptable business model. The company is able to pivot its lending focus to capitalize on changing market conditions and new opportunities. For example, when traditional bank lending tightened during the COVID-19 pandemic, Sachem was able to step in and meet the increased demand for alternative financing solutions from real estate investors and developers.
Navigating Challenging Conditions with Prudent Risk Management
The past few years have presented significant headwinds for Sachem Capital, including rising interest rates, volatility in the capital markets, and a softening in commercial real estate values. However, the company has weathered these storms through its disciplined underwriting and risk management practices.
Sachem's conservative loan-to-value ratios, typically capping loans at 70% of the underlying collateral's value, have helped to mitigate the impact of declining property values. Additionally, the company's diversified portfolio, which includes a mix of residential and commercial real estate loans, has allowed it to weather downturns in specific sectors.
Challenges and Adaptations in 2024
In 2024, Sachem Capital faced several significant challenges. The company reported a net loss of $6.7 million for the first nine months of the year, primarily due to a substantial $18.0 million provision for credit losses related to its loan portfolio. This non-cash charge was driven by a decline in the value of assets securing the company's mortgage loans, particularly in the commercial real estate market.
To address this issue, Sachem has taken proactive steps, including retaining Mission Capital, a real estate capital markets firm, to advise on the sale of a pool of non-performing loans with a principal value of approximately $78.8 million. This strategic move is expected to improve the company's liquidity, reduce its cost of capital, and optimize capital allocation, positioning Sachem for stronger financial flexibility moving forward.
Additionally, the company has faced challenges in raising growth capital, with its last underwritten public offering taking place in August 2022. Sachem has relied on its existing credit facilities, loan repayments, and intermittent sales under its at-the-market offering facility to fund its operations and loan originations.
Despite these headwinds, Sachem Capital remains committed to its core business model and is working to enhance its financial and operational resilience. The company's strong balance sheet, with a debt-to-equity ratio of 58.5% as of September 30, 2024, provides a solid foundation for weathering the current market conditions.
Diversifying the Loan Portfolio and Expanding Partnerships
In recent years, Sachem Capital has taken steps to diversify its loan portfolio beyond its traditional focus on residential real estate. The company has increased its exposure to commercial real estate, pre-development land, and mixed-use properties, which now account for 28.0%, 6.1%, and 6.6% of the loan portfolio, respectively.
Moreover, Sachem has expanded its investment platform by forming partnerships with entities like Shem Creek Capital, a commercial real estate finance company. These partnerships have allowed Sachem to access a broader range of lending opportunities and diversify its income streams. For the nine months ended September 30, 2024, income from partnership investments totaled $3.9 million, representing a 67.1% increase compared to the same period in 2023.
Navigating the Regulatory Landscape and Maintaining REIT Status
As a real estate investment trust (REIT), Sachem Capital must adhere to strict regulatory requirements to maintain its tax-advantaged status. The company's ability to continue qualifying as a REIT is crucial, as it allows Sachem to avoid corporate-level taxation and distribute at least 90% of its taxable income to shareholders.
Sachem has demonstrated its commitment to maintaining its REIT status, evidenced by its conservative leverage ratios and adherence to the relevant tax rules and regulations. As of September 30, 2024, the company's debt-to-equity ratio stood at 58.5%, well within the industry's recommended guidelines for REITs.
Looking Ahead: Cautious Optimism and Strategic Positioning
While Sachem Capital has faced its share of challenges in recent years, the company's long-term fundamentals remain strong. The growing demand for alternative financing solutions, Sachem's disciplined underwriting, and its strategic partnerships position the company well to navigate the current market environment.
As the company works to optimize its loan portfolio, reduce its cost of capital, and enhance its financial flexibility, Sachem Capital is cautiously optimistic about its future prospects. With a focus on prudent risk management, diversification, and operational efficiency, Sachem is committed to weathering the storm and emerging as a stronger, more resilient player in the real estate finance industry.
Financials
Revenue and Net Income
For the first nine months of 2024, Sachem Capital reported total revenue of $46.7 million, a decrease of 3.3% compared to $37.8 million for the same period in 2023. The decline was primarily driven by a 3.6% decrease in interest income from loans to $35.8 million and a 17.3% decrease in fee income from loans to $6.5 million. The decrease in fee income was largely attributable to a 40% decline in loan originations compared to the prior year period.
The company recorded a net loss of $6.7 million for the first nine months of 2024, compared to net income of $14.2 million in the prior year period. This swing to a net loss was largely due to a significant increase in the 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 same period of 2024.
For the most recent quarter ended September 30, 2024, Sachem Capital reported revenue of $14,785,000 and a net loss of $6,146,000. The company's operating cash flow (OCF) for the quarter was $2,331,000, while free cash flow (FCF) stood at $2,383,000. These figures represent a decline compared to the prior year quarter, primarily driven by decreases in loan originations and increases in provisions for credit losses related to the mortgage loan portfolio.
Loan Portfolio
As of September 30, 2024, Sachem Capital's loan portfolio consisted of 516 mortgage loans with an aggregate principal balance of $454.3 million. The average outstanding loan balance was approximately $880,000, with a weighted average contractual interest rate of 11.91% and a weighted average term to maturity of 14 months.
Diversification Efforts
In addition to its core mortgage lending business, Sachem Capital has invested in rental real estate, with a portfolio valued at $12.96 million as of September 30, 2024, up from $10.55 million at the end of 2023. This investment in rental properties helps diversify the company's revenue streams and provides an additional source of income.
Liquidity
Cash and Credit Facilities
As of September 30, 2024, Sachem Capital had cash and cash equivalents of $5,880,000. The company maintains several credit facilities to support its operations and lending activities, including:
1. A $65 million revolving credit facility with Needham Bank, of which $35.5 million was outstanding as of September 30, 2024. 2. A $200 million master repurchase financing facility with Churchill MRA Funding I LLC, of which $23.5 million was outstanding.
These credit facilities provide Sachem Capital with additional liquidity to fund its lending operations and manage its working capital needs.
Debt Profile
Sachem Capital's total debt as of September 30, 2024, stood at $294.6 million, consisting primarily of unsecured unsubordinated notes. The company's debt-to-equity ratio of 58.5% reflects its conservative approach to leverage and commitment to maintaining a strong balance sheet.
Liquidity Ratios
The company's current ratio and quick ratio both stood at 139.31 as of September 30, 2024, indicating a strong ability to meet its short-term obligations. These healthy liquidity ratios provide Sachem Capital with financial flexibility and a buffer against potential market disruptions.
Industry Trends and Competitive Landscape
Sachem Capital operates in a dynamic real estate finance market, characterized by several key trends:
1. High interest rates: The current high interest rate environment has impacted borrowing costs and real estate valuations. 2. Capital markets illiquidity: Tightening conditions in capital markets have made it more challenging for companies like Sachem to raise new funds. 3. Increased competition from private lenders: The alternative lending space has seen an influx of private lenders, intensifying competition for quality loan opportunities. 4. Property value fluctuations: Volatility in real estate markets, particularly in the commercial sector, has affected the value of collateral securing Sachem's loans.
In response to these trends, Sachem Capital is focused on managing its credit risk, maintaining a strong balance sheet, and exploring alternative capital sources to fund growth. The company's experience in navigating market cycles and its disciplined approach to lending position it well to adapt to changing market conditions.
As Sachem Capital continues to navigate these challenges, its ability to maintain underwriting discipline, manage its loan portfolio effectively, and capitalize on emerging opportunities will be crucial in driving long-term shareholder value and maintaining its position as a leading player in the alternative real estate finance market.