10-K: Sachem Capital Corp. Reports Net Loss for 2024, Faces Covenant Compliance Challenges

Sentiment:

Annual Results 31 March 2025 4:59 PM

Sachem Capital Corp. reports a net loss for 2024 due to various factors, including realized losses on loan sales and increased provisions for credit losses, while also addressing covenant compliance issues and strategic shifts.

Worse than expectedThe company reported a net loss compared to a net income in the previous year.Revenue decreased due to limited capital availability.The company was not in compliance with a debt service coverage ratio covenant.

Summary

Sachem Capital Corp. reported a net loss of $43.9 million for 2024, a significant downturn compared to the $12.1 million net income in 2023.
The loss was attributed to a $22.0 million realized loss on the sale of loans, a $4.9 million valuation allowance for loans held for sale, a $26.9 million provision for credit losses, and a $0.5 million impairment charge on real estate owned.
Revenue declined by 11.2% due to limited capital availability, impacting loan origination and portfolio growth.
Two tranches of outstanding Notes, totaling $58.2 million, were repaid in 2024 from cash flow and credit facilities.
The company was not in compliance with a debt service coverage ratio covenant under its previous Needham Bank credit facility, but this issue was resolved by replacing the facility with a new $50 million credit facility.
There is a risk of default under the new Needham credit facility if a compliance certificate cannot be delivered by May 15, 2025.
Notes totaling $56.4 million are due on September 30, 2025, and the company plans to repay them through a combination of cash flow and credit facility borrowings.
The company is subject to baby shelf rules, limiting the amount of securities it can sell due to its public float being less than $75 million.
The illiquidity of the loan portfolio could impede the company's ability to respond to adverse economic changes.
The company experienced a significant increase in non-performing loans, with an aggregate outstanding balance of $87.0 million as of December 31, 2024.
The company sold 32 mortgage loans in December 2024 for $36.1 million, representing 64.7% of their unpaid principal balances.
At December 31, 2024, debt represented 62.0% of total capital, compared to 60.4% at December 31, 2023.
The company is focusing on larger loans and more stable borrowers to mitigate future problem loans.
The company is enhancing underwriting guidelines to strengthen documentation and collateral positions.
The company is implementing a cyber risk management program to address cybersecurity threats.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to the reported net loss, covenant compliance issues, and declining revenue. While the company is taking steps to address these challenges, the overall sentiment is pessimistic.

Positives

The company replaced its previous Needham Bank credit facility with a new $50 million credit facility, resolving a covenant compliance issue.
The company plans to repay Notes totaling $56.4 million due on September 30, 2025, through a combination of cash flow and credit facility borrowings.
The company is focusing on larger loans and more stable borrowers to mitigate future problem loans.
The company is enhancing underwriting guidelines to strengthen documentation and collateral positions.
The company is implementing a cyber risk management program to address cybersecurity threats.

Negatives

Sachem Capital Corp. reported a net loss of $43.9 million for 2024, a significant decrease from the $12.1 million net income in 2023.
Revenue declined by 11.2% due to limited capital availability, impacting loan origination and portfolio growth.
The company was not in compliance with a debt service coverage ratio covenant under its previous Needham Bank credit facility.
The company sold 32 mortgage loans in December 2024 for $36.1 million, representing 64.7% of their unpaid principal balances.
The company is subject to baby shelf rules, limiting the amount of securities it can sell due to its public float being less than $75 million.
The illiquidity of the loan portfolio could impede the company's ability to respond to adverse economic changes.
The company experienced a significant increase in non-performing loans, with an aggregate outstanding balance of $87.0 million as of December 31, 2024.

Risks

There is a risk of default under the new Needham credit facility if a compliance certificate cannot be delivered by May 15, 2025.
The company's inability to raise capital when needed will harm its business, financial condition and results of operations, and will likely cause the company's stock value to decline further.
Difficult conditions in the mortgage and real estate markets, the financial markets and the economy generally have caused and may cause the company to experience losses in the future.
Increases in interest rates could adversely affect the company's ability to generate income and pay dividends.
Adverse geopolitical developments could have a material adverse impact on the company's business.
Prepayment rates can change, adversely affecting the performance of the company's assets.
Many of the properties securing the company's mortgage loans are not income producing, thus increasing the risks of delinquency and foreclosure.
The company may be adversely affected by the economies and other conditions of the markets in which it operates, particularly in Connecticut, Florida and New York, where it has a high concentration of its loans.
Competition could have a material adverse effect on the company's business, financial condition and results of operations.
The company may adopt new or change its existing underwriting financing, or other strategies and asset allocation and operational and management policies without shareholder consent, which may result in the purchase of riskier assets, the use of greater leverage or commercially unsound actions.
The occurrence of cyber incidents, or a deficiency in the company's cybersecurity or in those of any of its third-party service providers, could negatively impact the company's business.

Future Outlook

The company expects to maintain its current level of debt and is always looking to attempt to reduce its cost of capital. The company believes that its current cash balances, availability on its debt facilities, and its anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.

Industry Context

The real estate finance markets in which Sachem Capital operates are highly competitive, with increasing competition from non-traditional lenders such as non-bank real estate companies, hedge funds, private equity funds, and insurance companies.

Comparison to Industry Standards

The document does not provide enough information to make a detailed comparison to industry standards.
Comparable companies in the mortgage REIT sector include Arbor Realty Trust, Broadmark Realty Capital, and Granite Point Mortgage Trust.
These companies typically operate with leverage and are subject to similar risks related to interest rates, credit quality, and economic conditions.
Without specific benchmarks for loan origination volume, non-performing loan ratios, and cost of capital, it is difficult to assess Sachem Capital's performance relative to its peers.

Management Changes

Role	Previous Person	New Person	Effective Date	Reason
Chief Financial Officer	Nicholas Marcello	Jeffery C. Walraven (Interim)	December 2024	Resignation

Corporate Governance

Change Type	Description	Effective Date	Impact Assessment
Bylaws Amendment	The Board adopted and approved the Amended and Restated Bylaws of the Company, effective as of March 25, 2025, including advance notice requirements for shareholder proposals and director nominations.	2025-03-25	The Amended and Restated Bylaws, among other things: Adopt advance notice requirements for shareholders submitting a director nomination or shareholder proposal pursuant to the Amended and Restated Bylaws, including requiring certain information about such nomination or proposal and the nominating or proposing shareholder; Require shareholders seeking to take action by written consent in lieu of a shareholder meeting to request that the Board fix a record date for the purpose of determining the shareholders entitled to take such action; Specify the powers of the chair of a shareholder meeting to regulate conduct at such meeting and to adjourn the meeting; Require director candidates to make themselves available for interviews with members of the Board; Provide that special meetings of the Board may be held with less than 24 hours notice, if necessary or appropriate under the circumstances; Conform certain provisions of the Amended and Restated Bylaws to terms of the New York Business Corporation Law, including as related to quorum requirements, notices of shareholder meetings, and the maintenance of shareholder lists; and Make various other updates, including ministerial and conforming changes and the elimination of obsolete provisions.

Legal Proceedings

The company is subject to various pending and threatened legal proceedings or other matters arising out of the normal conduct of business in which claims for monetary damages are asserted.

Related Party Transactions

The company may originate, fund, manage and service loans to shareholders in the ordinary course of business.
As of December 31, 2024, loans to known shareholders totaled $17.2 million.
In December 2021, the company hired the daughter of the company's Chief Executive Officer to perform certain internal audit and compliance services.

Stakeholder Impact

Shareholders have experienced a decline in the trading price of the company's securities and a reduction in dividend payments.
Employees may be affected by potential cost-cutting measures or changes in business strategy.
Borrowers may face stricter lending terms or increased scrutiny due to the company's financial challenges.
Creditors may be concerned about the company's ability to meet its debt obligations.

Next Steps

The company is required to provide Needham with a certificate no later than May 15, 2025 that it was in compliance with the debt service coverage ratio covenant at March 31, 2025.
The company will need to repay Notes having an aggregate outstanding principal amount of $56.4 million on September 30, 2025.
The company will need to refinance or repay Notes having an aggregate principal amount of $51.8 million on December 30, 2026.
The company will need to refinance or repay Notes having an aggregate principal amount of $51.9 million on March 30, 2027.
The company will need to refinance or repay Notes having an aggregate principal amount of $30.0 million on June 30, 2027.
The company will need to refinance or repay Notes having an aggregate principal amount of $40.3 million on September 30, 2027.

Key Dates

Date	Description
2016-01	Sachem Capital Corp. was organized as a New York corporation.
2016-10-27	Date of the 2016 Equity Compensation Plan.
2016-12-15	HML Capital Corp. changed its name to Sachem Capital Corp.
2017-02-08	Date prior to which Sachem Capital Partners, LLC (SCP) operated.
2017-02-09	Sachem Capital Corp. completed its initial public offering (IPO).
2017	Sachem Capital Corp. elected to be taxed as a REIT beginning with its 2017 tax year.
2018-04-16	Date of the adoption of the Sachem Capital Corp. 401(k) Profit Sharing Plan.
2019-06-21	Date of the Indenture between Sachem Capital Corp. and U.S. Bank National Association, as Trustee.
2021-07-21	Date of the Master Repurchase Agreement and Securities Contract between Sachem Capital Corp. and Churchill MRA Funding I LLC.
2022-02-25	Effective date of the S-3 Registration Statement.
2023-03-02	Date of the Credit and Security Agreement with Needham Bank.
2023-06-23	Date the Company entered into a purchase and sale contract to acquire a commercial office building in Westport, CT.
2023-08-31	Date the Company completed the acquisition of a commercial office building in Westport, CT.
2024-09	The Company acquired the seventh ownership interest, a 20% membership interest in Shem Creek Capital, LLC.
2024-10-10	Effective date of the New Repurchase Plan.
2024-11-18	Effective date of the dismissal of Hoberman & Lesser CPAs, LLP and engagement of Baker Tilly US, LLP.
2024-12	Jeffery C. Walraven was appointed to serve as Interim Chief Financial Officer.
2024-12	The Company consummated the sale of 32 mortgage loans.
2025-02-24	The Board authorized and the Company declared a dividend of $0.484375 per share on the Companys 7.75% Series A Preferred Stock.
2025-03-05	The Board authorized and declared a quarterly dividend of $0.05 per Common Share.
2025-03-10	The Compensation Committee authorized a grant of 420,168 restricted Common Shares to John L. Villano and a one-time bonus grant of 20,000 restricted Common Shares to each of the non-employee directors.
2025-03-20	The Company terminated its existing Needham Credit Facility and replaced it with a new Needham Credit Facility.
2025-03-25	The Board adopted and approved the Amended and Restated Bylaws of the Company.
2025-03-28	The registrant had 47,310,139 common shares outstanding.
2025-03-31	Dividend of $0.484375 per share on the Companys 7.75% Series A Preferred Stock payable.
2025-03-31	Quarterly dividend of $0.05 per Common Share payable.
2025-05-15	Deadline to provide Needham with a certificate of compliance with the debt service coverage ratio covenant.
2025-09-30	Notes having an aggregate outstanding principal amount of $56.4 million are due and payable in full.
2026-03-02	Maturity date of the new Needham Credit Facility.
2026-06-29	Date on or after which the Company may redeem any or all of the shares of the Series A Preferred Stock.
2026-12-30	Notes having an aggregate principal amount of $51.8 million bearing interest at 6.0% per annum and maturing.
2027-03-30	Notes having an aggregate principal amount of $51.9 million bearing interest at 6.0% per annum and maturing.
2027-06-30	Notes having an aggregate principal amount of $30.0 million bearing interest at 7.125% per annum and maturing.
2027-09-30	Notes having an aggregate principal amount of $40.3 million bearing interest at 8.00% per annum and maturing.

Keywords

Sachem Capital Corp, Net Loss, Credit Losses, Loan Portfolio, REIT, Mortgage Loans, Financial Results, Debt, Covenant Compliance, Real Estate

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