10-Q: Sachem Capital Corp. Reports Net Loss in Q3 2024 Amidst Increased Credit Loss Provisions

Sachem Capital Corp. reported a net loss attributable to common shareholders of $6.6 million for the nine months ended September 30, 2024, primarily due to a significant increase in provisions for credit losses.

Summary

• Sachem Capital Corp. reported a net loss of $6.6 million attributable to common shareholders for the nine months ended September 30, 2024, a significant downturn compared to a net income of $14.2 million for the same period in 2023.
• The company's revenue decreased by 3.3% year-over-year, primarily due to a decline in loan originations and an increase in non-accrual loans.
• A major factor contributing to the net loss was an $18.0 million provision for credit losses, a substantial increase from $65,000 in the prior year, reflecting concerns about the value of assets securing the company's mortgage loans.
• Loan originations decreased by 32.1%, impacting both interest and fee income, while general and administrative expenses rose by 35.5% due to increased legal and advisory fees.
• The company's total outstanding indebtedness was $324.7 million as of September 30, 2024, with a debt-to-equity ratio of 58.5% to 41.5%.
• The company is currently not in compliance with a debt service coverage ratio covenant related to its Needham Credit Facility, and is seeking a waiver.
• Sachem is planning to sell a pool of mortgage loans with an aggregate principal amount of approximately $78.8 million to improve liquidity and reduce its exposure to non-performing assets.
• The company's mortgage loan portfolio includes loans ranging in size up to $42.0 million with stated interest rates ranging from 5.0% to 15.0%.

Sentiment

Score: 3

Explanation: The document indicates a significant downturn in financial performance, with a net loss, decreased revenue, and a substantial increase in credit loss provisions. The company is also facing challenges with debt covenants and market conditions, leading to a negative outlook.

Positives

• Income from partnership investments increased by 67.1% year-over-year.
• Interest expense and amortization of deferred financing costs decreased by 1.9% following the repayment of unsubordinated notes in June 2024.
• The company has access to capital through its existing credit facilities and at-the-market offering facility.
• The company has a strong balance sheet with $220.6 million of shareholders equity.

Negatives

• The company reported a net loss of $6.6 million attributable to common shareholders for the nine months ended September 30, 2024.
• Revenue decreased by 3.3% year-over-year.
• There was a significant $18.0 million provision for credit losses in 2024.
• Loan originations decreased by 32.1%.
• General and administrative expenses increased by 35.5%.
• The company is not in compliance with a debt service coverage ratio covenant related to its Needham Credit Facility.
• The company has $34.5 million of unsecured notes due on December 30, 2024.

Risks

• The company faces challenges from a high interest rate environment, which increases the cost of its existing credit facilities.
• Capital markets illiquidity makes it difficult for the company to raise growth capital.
• Global and domestic political concerns create market volatility and uncertainty.
• Increased competition from private lenders puts pressure on pricing.
• Property value fluctuations and declines could adversely impact the company's operations and financial condition.
• Unfunded commitments require the company to maintain higher cash balances.
• The company is not in compliance with a debt service coverage ratio covenant related to its Needham Credit Facility, which could lead to a default.
• The company has $34.5 million of unsecured notes due on December 30, 2024.

Future Outlook

The company anticipates further write-downs related to loans and continued declines in interest and fee income due to ongoing challenges in the real estate and capital markets. However, general administrative expenses are expected to return to more typical levels, and other expenses should stabilize. The company also expects to meet its repayment obligations using cash flow from operations, additional borrowings, and proceeds from the sale of a portion of its loan portfolio.

Management Comments

• Management believes the ability to utilize the company's existing $200 million Churchill Facility, cash and cash equivalents of $5.9 million, investment securities at fair value of $1.6 million, continued cash flows from operations, sales of Series A Preferred Stock through the company's at-the-market offering facility, and proceeds from the potential sale of mortgage loans in the secondary market would alleviate the uncertainty.
• Management believes that there continues to be a significant market opportunity for a well-capitalized hard money lender to originate attractively priced loans to smalland mid-scale real estate developers with good collateral.
• Management intends to repay the December 2024 Notes with a combination of cash flow from operations, proceeds from existing credit facilities, and proceeds from the sale of loans.

Industry Context

The company is operating in a challenging environment with high interest rates, capital market illiquidity, and increased competition from private lenders. The commercial real estate market has experienced a significant decline in value, leading to increased loan defaults and foreclosures. These factors are impacting the company's financial performance and require strategic actions to improve liquidity and reduce exposure to non-performing assets.

Comparison to Industry Standards

• The company's debt-to-equity ratio of 58.5% to 41.5% is lower than many of its mortgage REIT peers.
• The company's stated yield on its mortgage loan portfolio, inclusive of default interest, was 13.1% for the nine months ended September 30, 2024, which is relatively high compared to traditional lending institutions.
• The company's reliance on short-term, secured, non-bank loans is a common strategy in the hard money lending sector, but the current market conditions are creating challenges for all participants.
• The company's decision to sell a pool of non-performing loans is a common strategy for REITs facing increased credit losses and liquidity concerns, similar to actions taken by other REITs in the current market environment.

Management Changes

Legal Proceedings

• The company is named as a party-defendant in connection with tax foreclosure proceedings against properties on which it holds a first mortgage lien.

Related Party Transactions

• The company originates, funds, manages, and services loans to shareholders, with loans to known shareholders totaling $15.7 million as of September 30, 2024.
• The company hired the daughter of the company's chief executive officer to perform certain credit and compliance services.

Stakeholder Impact

• Shareholders are negatively impacted by the net loss and decreased revenue.
• Employees may be affected by potential cost-cutting measures.
• Borrowers may face increased scrutiny and stricter lending terms.
• Creditors may be concerned about the company's ability to meet its debt obligations.

Next Steps

• The company plans to sell a pool of mortgage loans with an aggregate principal amount of approximately $78.8 million.
• The company intends to repay the December 2024 Notes with a combination of cash flow from operations, proceeds from existing credit facilities, and proceeds from the sale of loans.
• The company will continue to monitor market conditions and adjust its strategies as needed.

Key Dates

Keywords

mortgage loans, real estate finance, credit losses, loan origination, REIT, non-accrual loans, debt financing, capital markets, interest rates, property values