Item 1A. Risk Factors
Item 1A. Risk Factors
We employ leverage, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.
Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in us. We borrow from and issue senior debt securities to banks and other lenders that are secured by liens on our assets. Holders of these senior securities have fixed dollar claims on our assets that are superior to the claims of the holders of our other securities. Leverage is generally considered a speculative investment technique. Any increase in our income in excess of interest payable on our outstanding indebtedness would cause our net income to increase more than it would have had we not incurred leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not incurred leverage. Such a decline could negatively affect our ability to pay dividends to the holders of our equity securities or scheduled debt payments. There can be no assurance that our leveraging strategy will be successful.
Our outstanding indebtedness imposes, and additional debt we may incur in the future will likely impose, financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a REIT. A failure to add new debt facilities or issue additional debt securities or incur other indebtedness in lieu of or in addition to existing indebtedness could have a material adverse effect on our business, financial condition or results of operations.
Our total outstanding indebtedness at June 30, 2024 was $343.8 million, which included $23.0 million outstanding under the Churchill Facility, $1.0 million outstanding under the New NHB Mortgage, $55.0 million outstanding under the Needham Credit Facility and $264.7 million aggregate outstanding principal amount of Notes. We may incur additional indebtedness in the future, including, but not limited to, borrowings under the Churchill Credit Facility and Needham Credit Facility or the issuance of additional debt securities in one or more public or private offerings, although there can be no assurance that we will be successful in doing so. Our ability to service our debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of leverage that we employ depends on the assessment of management and the board of directors of market and other factors at the time of any proposed borrowing.
Under the Notes, we are generally required to meet an asset coverage ratio at least equal to 150%, respectively, of total assets to total borrowings and other senior securities, which include all our borrowings and any redeemable preferred stock we may issue in the future. If this ratio declines below 150%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions to our shareholders. Our asset coverage ratio as of June 30, 2024 was 171.6%.
Provisions for credit losses and impairments remain a risk to our business.
We monitor a variety of indicators to track property value trends, including the Federal Funds Rate, U.S Treasury data, days-on-market, pending sales, NAHB’s Housing Market Index and the Senior Loan Officer Opinion Survey. Additionally, we almost always utilize a third-party valuation including, but not limited to, appraisals, broker price opinions, and automated valuation models, to assist in both our underwriting and monitoring of our portfolio assets. Property value market cycles could have an adverse impact on our operations and financial condition. Over the past three years, the commercial real estate market throughout most of the United States has experienced a significant decline in value, notably commercial office assets, which has led to a corresponding increase in the rate of loan defaults and foreclosures. As a result, many REITs have been forced to record additional allowances for credit losses and write-downs of real estate assets. Although most of our loans are secured by residential properties, 29.3% of our portfolio is secured by commercial real estate and, hence, we are not immune from this trend. On a quarterly basis, we evaluate the allowance for credit losses by analyzing several market indicators indicated above and adjust accordingly. Our total allowance for credit losses related to loans as of June 30, 2024 was $19.1 million. Our total provisions for credit losses related to loans for the three and six month periods ended June 30, 2024 were $8.5 million and $9.9 million, respectively. Under GAAP, allowances for credit losses and impairment charges reduce net income and, therefore, could have a material adverse impact on the value of our securities, which could make it more difficult for us to raise capital or increase the cost of capital. Unless we see a reversal of the decline in commercial property valuations, interest raise easing from the federal reserve, and an increase in lending activity for commercial real estate, we believe further allowances for credit losses, provisions for credit losses and impairments remain a risk to our business.
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A high level of defaults, particularly among larger mortgage loans, could have a material adverse impact on our business, operations and financial condition.
Historically, our mortgage loans were relatively small, and a small number of foreclosures did not have a material adverse impact on our business. However, our business strategy has changed, and we are now making larger loans with increasing frequency, changing the risk profile of our mortgage loan portfolio. When combined with the decline in commercial real estate values and restrictive credit conditions, the rate of foreclosures that we are experiencing is increasing. At June 30, 2024 we had 262 loans, 44.3% of the loans in our portfolio, with an outstanding principal balance exceeding $1 million. Of the 262 mortgage loans in our portfolio, 50, or 19.1%, were in the process of foreclosure. These foreclosure loans had an aggregate outstanding balance, principal, accrued but unpaid interest and other borrower charges, of $72.9 million. At December 31, 2023, we had 113 loans, 36.3% of the loans in our portfolio, with an outstanding principal balance exceeding $1 million. Of the 311 mortgage loans in our portfolio, 56, or 18.0%, were in the process of foreclosure. These loans had an aggregate outstanding balance, principal, accrued but unpaid interest and other borrower charges, of $68.1 million. At December 31, 2022, we had 98 loans, 22.1% of the loans in our portfolio, with an outstanding principal balance exceeding $1 million. Of the 444 mortgage loans in our portfolio, 40, or 9.0%, were in the process of foreclosure. These loans had an aggregate outstanding balance, principal, accrued but unpaid interest and other borrower charges, of $24.0 million. If this trend continues, it could have a material adverse impact on our business, operations and financial condition.
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Item 6. EXHIBITS
Exhibit No.
Description
2.1
Form of Amended and Restated Exchange Agreement (1)
3.1
Certificate of Incorporation (1)
3.1(a)
Certificate of Amendment to Certificate of Incorporation (1)
3.1(b)
Certificate of Amendment to Certificate of Incorporation filed on October 7, 2019 (2)
3.1(c)
Certificate of Amendment to Certificate of Incorporation filed on June 25, 2021 (9)
3.1(d)
Certificate of Amendment to Certificate of Incorporation filed on July 19, 2022 (19)
3.1(e)
Certificate of Amendment to Certificate of Incorporation filed on August 23, 2022 (20)
3.2
Amended and Restated Bylaws, effective as of November 25, 2019 (3)
4.1
Indenture, dated as of June 21, 2019, between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (4)
4.2
First Supplemental Indenture, dated as of June 25, 2019, between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (4)
4.3
Form of 7.125% Notes due 2024 (4)
4.4
Second Supplemental Indenture between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (2)
4.5
Form of 6.875% Notes due 2024 (6)
4.6
Third Supplemental Indenture between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (7)
4.7
Form of 7.75% Notes due 2025 (included as Exhibit A to Exhibit 4.6 above)
4.8
Specimen 7.75% Series A Cumulative Redeemable Preferred Stock Certificate. (9)
4.9
Fourth Supplemental Indenture between Sachem Capital Corp. and U.S. Bank National Association, as Trustee (10)
4.10
Form of 6.00% Note due 2026 (attached as Exhibit A to Exhibit 4.9 above).
4.11
Fifth Supplemental Indenture between Sachem Capital Corp. and U.S. Bank Trust Company, National Association, as Trustee (14)
4.12
Form of 6.00% Note due 2027 (attached as Exhibit A to Exhibit 4.11 above)
4.13
Sixth Supplemental Indenture between Sachem Capital Corp. and U.S. Bank Trust Company, National Association, as Trustee (16)
4.14
Form of 7.125% Note due 2027 (attached as Exhibit A to Exhibit 4.13 above)
4.15
Seventh Supplemental Indenture between Sachem Capital Corp. and U.S. Bank Trust Company, National Association, as Trustee (21)
4.16
Form of 8.00% Note due 2027 (attached as Exhibit A to Exhibit 4.15 above)
4.17
Revolving Credit Note, dated March 2, 2023, in the principal amount of $45 million in favor of Needham Bank, as lender (22)
10.1**
Employment Agreement by and between John L. Villano and Sachem Capital Corp. (1)
10.2
Sachem Capital Corp. 2016 Equity Compensation Plan (1)
10.3**
Final Form of the Restrictive Stock Grant Agreement dated April 2021 under the Sachem Capital Corp. 2016 Equity Compensation Plan between Sachem Capital Corp. and John L. Villano (11)
10.4
Master Repurchase Agreement and Securities Contract, dated as of July 21, 2021, between Sachem Capital Corp. and Churchill MRA Funding I LLC (12)
10.5
Custodial Agreement, dated as of July 21, 2021, among Sachem Capital Corp., Churchill MRA Funding I LLC. and U.S. Bank National Association (12)
10.6**
Agreement and General Release, dated as of January 14, 2022, between Sachem Capital Corp. and Peter J. Cuozzo (15)
10.7**
Final Form of the Restrictive Stock Grant Agreement dated April 2022 under the Sachem Capital Corp. 2016 Equity Compensation Plan between Sachem Capital Corp. and John L. Villano (17)
10.8**
Final Form of the Restrictive Stock Grant Agreement dated October 13, 2021 under the Sachem Capital Corp. 2016 Equity Compensation Plan between Sachem Capital Corp. and each of Leslie Bernhard, Arthur Goldberg and Brian Prinz (19)
10.9**
Final Form of the Restrictive Stock Grant Agreement dated July 19, 2022 under the Sachem Capital Corp. 2016 Equity Compensation Plan between Sachem Capital Corp. and each of Leslie Bernhard, Arthur Goldberg and Brian Prinz (19)
10.10
Credit and Security Agreement, dated as of March 2, 2023, among Sachem Capital Corp., the lenders party thereto and Needham Bank, as administrative agent (22)
10.11 (a)
First Amendment to the Credit and Security Agreement, dated as of September 8, 2023, among Sachem Capital Corp., the lenders party thereto and Needham Bank, as administrative agent (24)
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10.12
Final Form of the Restrictive Stock Grant Agreement dated February 17, 2023 under the Sachem Capital Corp. 2016 Equity Compensation Plan between the Company and John L. Villano (23)
10.13
Final Form of the Restricted Stock Grant Agreement dated March 19, 2024 under the Sachem Capital Corp. 2016 Equity Compensation Plan between the Company and John L. Villano (25)
31.1
Chief Executive Officer Certification as required under section 302 of the Sarbanes Oxley Act *
31.2
Chief Financial Officer Certification as required under section 302 of the Sarbanes Oxley Act *
32.1
Chief Executive Officer Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes Oxley Act ***
32.2
Chief Financial Officer Certification pursuant to 18 U.S.C. section 1350 as adopted pursuant to section 906 of the Sarbanes Oxley Act ***
97.1
Policy Relating to Recovery of Erroneously Awarded Compensation (25)
99.1
Open-End Construction Mortgage, Security Agreement and Assignment of Leases and Rents, dated February 28, 2023, by Sachem Capital Corp., in connection with the New Haven Bank Mortgage refinancing (22)
99.2
Commercial Term Note made by Sachem Capital Corp to New Haven Bank, dated February 28, 2023, in the principal amount of $1,660,000 (attached as Exhibit B to Exhibit 99.1 above)
99.3
Loan Agreement between Sachem Capital Corp. and New Haven Bank, dated as of February 28, 2023 (22)
99.4
Mortgage Release releasing Sachem Capital Corp. from the $1.4 million NHB Mortgage (22)
101.INS
XBRL Instance Document *
101.SCH
XBRL Taxonomy Extension Schema Document *
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB
XBRL Taxonomy Extension Label Linkbase Document *
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document *
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)*
*
Filed herewith.
**
Compensation plan or arrangement for current or former executive officers and directors.
***
Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.
(1) Previously filed as an exhibit to the Registration Statement on Form S-11, as amended (SEC File No.: 333-214323) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 2019 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Current Report on Form 8-K on November 27, 2019 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Current Report on Form 8-K on June 25, 2019 and incorporated herein by reference.
(5) Intentionally omitted.
(6) Previously filed as an exhibit to the Current Report on Form 8-K on November 6, 2019 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Current Report on Form 8-K on September 9, 2020 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2016 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Current Report on Form 8-K on June 29, 2021 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Current Report on Form 8-K on December 20, 2021 and incorporated herein by reference.
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(11) Previously filed as an exhibit to the Current Report on Form 8-K on April 13, 2021 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Current Report on Form 8-K on July 27, 2021 and incorporated herein by reference.
(13) None.
(14) Previously filed as an exhibit to the Current Report on Form 8-K on March 9, 2022 and incorporated herein by reference.
(15) Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2021 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Current Report on Form 8-K on May 12, 2022 and incorporated herein by reference.
(17) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended March 31, 2022 and incorporated herein by reference.
(18) Intentionally omitted.
(19) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 2022 and incorporated herein by reference.
(20) Previously filed as an exhibit to the Current Report on Form 8-K on August 24, 2022 and incorporated herein by reference.
(21) Previously filed as an exhibit to the Current Report on Form 8-K on August 23, 2022 and incorporated herein by reference.
(22) Previously filed as an exhibit to the Current Report on Form 8-K on March 3, 2023 and incorporated herein by reference.
(23) Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended March 31, 2023 and incorporated herein by reference.
(24) Previously filed as an exhibit to the Quarterly Report on Form 10 - Q for the period ended September 30, 2023 and incorporated herein by reference.
(25) Previously filed as an exhibit to the Annual Report on Form 10 - K for the year ended December 31, 2023 and incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
SACHEM CAPITAL CORP.
Date: August 14, 2024
By:
/s/ John L. Villano
John L. Villano, CPA
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2024
By:
/s/ Nicholas M. Marcello
Nicholas M. Marcello
Chief Financial Officer
(Principal Accounting and Financial Officer)
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