10-Q: Sachem Capital Returns to Profit Amid Revenue Dip

Sachem Capital Corp. reported a return to net income profitability in Q2 2025, driven by reduced credit loss provisions, despite a significant decline in core loan revenue and an increase in non-accrual loans.

Summary

• Net income attributable to common shareholders was $0.8 million ($0.02 per share) for the three months ended June 30, 2025, compared to a net loss of $4.1 million ($0.09 per share) for the same period in 2024.
• For the six months ended June 30, 2025, net income attributable to common shareholders was $0.6 million ($0.01 per share), a significant improvement from a $0.5 million loss ($0.01 per share) in the prior year period.
• Total revenues decreased by 28.9% to $10.8 million for Q2 2025 and by 30.7% to $22.2 million for H1 2025, primarily due to lower net new loan originations and elevated non-performing loans.
• Operating expenses decreased substantially by 46.8% to $9.7 million for Q2 2025 and by 34.7% to $20.1 million for H1 2025, largely driven by an 89.1% reduction in the provision for credit losses to $0.9 million for Q2 2025.
• Loans held for investment on non-accrual status increased to $119.6 million as of June 30, 2025, from $87.0 million as of December 31, 2024.
• Book value per common share decreased to $2.54 as of June 30, 2025, from $2.64 as of December 31, 2024.
• A new private placement of $100.0 million Senior Secured Notes due June 11, 2030, was consummated, with an initial draw of $50.0 million; the remaining $50.0 million is expected to be drawn in September 2025 to repay maturing unsecured notes.

Sentiment

Score: 4

Explanation: While the company returned to net profitability due to a significant reduction in credit loss provisions, core revenue from loans declined substantially, and non-accrual loans increased. The new secured notes provide liquidity but come at a higher fixed interest rate. The disclosed material weakness in internal controls is a notable concern.

Positives

• Achieved net income profitability for both the three and six months ended June 30, 2025, reversing losses from the prior year periods.
• Provision for credit losses related to loans held for investment significantly decreased by $7.6 million (89.1%) for Q2 2025 and $7.9 million for H1 2025, contributing to improved net income.
• Successfully completed a private placement of $100.0 million Senior Secured Notes, enhancing financing flexibility and liquidity.
• Cash and cash equivalents increased to $22.5 million as of June 30, 2025, from $18.1 million at the beginning of the year.
• Income from limited liability company investments increased by $0.6 million (25.6%) for the six months ended June 30, 2025.

Negatives

• Total revenues declined significantly by 28.9% for Q2 2025 and 30.7% for H1 2025, primarily due to lower net new loan originations.
• Net loans held for investment decreased by $121.2 million year-over-year, reflecting reduced lending activity.
• Non-accrual loans held for investment increased to $119.6 million as of June 30, 2025, from $87.0 million as of December 31, 2024, indicating a rise in problematic loans.
• Book value per common share decreased by $0.10 to $2.54 as of June 30, 2025.
• Net cash provided by operating activities significantly decreased to $0.7 million for H1 2025 from $11.2 million for H1 2024.
• A material weakness in internal control over financial reporting related to stock-based compensation was identified, leading to ineffective disclosure controls.

Risks

• **Credit Risk / Loan Quality**: An elevated amount of non-performing loans, with $119.6 million on non-accrual status as of June 30, 2025, poses a risk to future asset quality and profitability.
• **Concentration Risk**: One borrower accounts for 13.1% ($50.4 million) of the outstanding mortgage loan portfolio, creating significant exposure to a single entity.
• **Geographical Concentration**: The loan portfolio is highly concentrated in New England (45.2%) and the South (42.8%), making the company susceptible to regional economic downturns.
• **Liquidity Risk**: Reliance on loan payoffs, credit facilities, and debt/equity sales for funding, with a need to refinance $56.3 million of unsecured notes maturing in September 2025.
• **Internal Control Weakness**: A material weakness in internal control over financial reporting related to stock-based compensation indicates a deficiency in financial reporting oversight.
• **Litigation Risk**: The company is subject to various pending and threatened legal proceedings, including tax foreclosure actions, which could result in material expenses or liabilities.

Future Outlook

The company anticipates drawing the remaining $50.0 million from its Senior Secured Notes in September 2025 to repay $56.3 million of unsecured notes maturing on September 30, 2025. Management believes current cash balances, available debt facilities, and anticipated cash flows from operations will be sufficient to fund operations for the next 12 months. Long-term cash needs are expected to be met through unused financing proceeds, operating cash flows, refinancing existing debt, and proceeds from real estate sales. The construction of the Cordo CLT Investors LLC project is projected to be completed by the end of 2026, with monetization of the investment expected in the first half of 2028.

Management Comments

• The change in revenue was primarily due to the cumulative effect of materially lower net new origination over the last twelve months, resulting in a reduction in the unpaid principal balance of loans held for investment, in addition to a currently elevated amount of nonperforming loans and real estate owned.
• The primary contributor to the decrease in operating expenses was the reduction in the provision for credit losses related to loans held for investment, which declined by $7.6 million or 89.1%. This change was driven by a decrease in direct allowances related to foreclosures and non-performing loans.
• We believe that our current cash balances, availability on our debt facilities, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.
• The Company expects that it will draw the remaining $50.0 million during September 2025 immediately prior to its maturity redemption payment of $56.3 million of unsecured notes payable due September 30, 2025.

Industry Context

Sachem Capital Corp. operates as a self-managed REIT specializing in short-term, secured, non-bank mortgage loans, primarily for real estate acquisition, renovation, and development in the northeastern and southeastern U.S. The reported decline in net new loan originations and the increase in non-accrual loans suggest a challenging lending environment, possibly influenced by higher interest rates or broader economic uncertainties impacting borrower demand and repayment capabilities. The significant reduction in the provision for credit losses, while boosting net income, warrants scrutiny to ensure it reflects genuine improvements in loan quality rather than a change in assessment methodology. The successful private placement of Senior Secured Notes indicates continued access to institutional capital, which is vital for non-bank lenders in the current market to manage liquidity and refinance maturing obligations.

Comparison to Industry Standards

• The increase in non-accrual loans to $119.6 million (31.1% of the portfolio) as of June 30, 2025, from $87.0 million (23.1% of the portfolio) at December 31, 2024, suggests a deterioration in loan performance that would be concerning compared to industry peers with stable or improving asset quality.
• The significant decline in total revenues (28.9% for Q2 2025 and 30.7% for H1 2025) due to lower net new originations indicates a contraction in core business activity, which contrasts with growth trends seen in some segments of the real estate finance industry.
• The 9.875% fixed interest rate on the newly issued Senior Secured Notes, while providing stable financing, is a relatively high cost of capital, potentially reflecting the perceived risk profile of hard money lending or the company's specific credit standing compared to more traditional real estate lenders.
• The disclosed material weakness in internal control over financial reporting related to stock-based compensation is a significant governance deficiency that falls below the expected standards for publicly traded companies and could impact investor confidence, unlike well-governed comparable REITs.

Corporate Governance

Legal Proceedings

• Subject to various pending and threatened legal proceedings or other matters arising out of the normal conduct of business, where claims for monetary damages are asserted.
• Management does not anticipate that the aggregate ultimate liability arising from such matters will be material to the company's consolidated financial position.
• Named as a party-defendant in tax foreclosure proceedings against two properties on which it holds a first mortgage lien, with an unpaid principal balance of $1.9 million.

Related Party Transactions

• Loans to known shareholders totaled $19.2 million as of June 30, 2025, with $18.9 million loaned to a wholly owned entity of the Senior Vice President of Asset Management and Vice President of Asset Management; all such loans are performing.
• Interest income earned on all related party loans for the three and six months ended June 30, 2025, totaled $0.3 million and $0.8 million, respectively.
• Compensation paid to the daughter of the Chief Executive Officer for internal audit and compliance services was $60,587 for the three months and $103,857 for the six months ended June 30, 2025.

Stakeholder Impact

• **Shareholders**: Experienced a return to net income profitability, but also a decrease in book value per share and a significant decline in core revenue. The disclosed material weakness in internal controls could raise governance concerns.
• **Creditors/Noteholders**: The successful private placement of Senior Secured Notes provides additional collateralized security, while the planned repayment of maturing unsecured notes addresses near-term debt obligations. However, the increase in non-accrual loans could impact future collateral values and loan performance.
• **Employees**: Stock-based compensation is part of the benefits structure, but the identified issues with over-issuance and internal control weaknesses may affect employee perception or confidence in compensation management.
• **Borrowers**: The company continues to originate loans, but at a lower rate. The increase in non-accrual loans suggests that some borrowers are experiencing financial difficulties, potentially impacting their ability to repay loans.

Next Steps

• Draw the remaining $50.0 million from the Senior Secured Notes in September 2025.
• Repay $56.3 million of unsecured notes maturing on September 30, 2025.
• Continue active implementation of the remediation plan to address the material weakness in internal control over financial reporting, including strengthening review and approval processes for equity awards and improving oversight controls.
• Project construction for Cordo CLT Investors LLC is anticipated to be completed by the end of 2026.
• Monetization of the Cordo CLT Investors LLC investment is expected in the first half of 2028.

Key Dates

Recommendation

While Sachem Capital Corp. achieved net profitability, this was largely driven by a significant reduction in credit loss provisions, which masked a substantial decline in core revenue from loan originations. The increase in non-accrual loans and the disclosed material weakness in internal controls present notable risks. The new secured debt provides necessary liquidity for refinancing but comes at a higher cost. Investors should monitor the effectiveness of remediation efforts for internal controls, the trend in loan originations, and the performance of the non-accrual loan portfolio before considering a stronger position.

Keywords

REIT, Mortgage Loans, Real Estate Investment Trust, Hard Money Lending, SEC Filing, Financial Results, Loan Portfolio, Credit Losses, Corporate Governance, Debt Financing, Non-performing Loans, Real Estate Development