Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this annual report. Certain statements in this discussion and elsewhere in this Report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements.
Company Overview
Sachem Capital Corp., a New York corporation, established in 2010 and completing an initial public offering in 2017 is a self-managed REIT that specializes in originating, underwriting, funding, servicing and managing a portfolio of first mortgage loans. The Company operates its business as one segment. The Company offers short-term ( i.e ., one to three years), secured, non-bank loans (sometimes referred to as “hard money” loans) to real estate owners and investors to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the northeastern and southeastern sections of the United States. The properties securing the Company’s loans are generally classified as residential or commercial real estate and, typically, are held for resale or investment. Each loan is secured by a first mortgage lien on real estate and may also be secured with additional collateral, such as other real estate owned by the borrower or its principals, a pledge of the ownership interests in the borrower by the principals thereof, and/or personal guarantees by the principals of the borrower. The Company does not lend to owner occupants of residential real estate. The Company’s primary underwriting criteria is a conservative loan to value ratio. In addition, the Company may make opportunistic real estate purchases apart from its lending activities.
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2024 Year in Review
Total revenue decreased 11.2%; net (loss) income attributable to common shareholders decreased 462.5%; and earnings per common share decreased $1.20 per share.
● Notwithstanding the decrease in net revenue and the net loss attributable to common shareholders, we reported net positive cash flow from operations of $12.4 million for the year.
● Total dividends declared and paid to common shareholders in 2024 was $11.4 million.
● We raised an aggregate of $7.8 million of additional capital from the sale of Common Shares and Series A Preferred Stock through our at-the-market offering facility.
● We funded $134.3 million of mortgage loans including loan originations, modifications, and construction draws, net of construction holdback.
● We maintained our leverage ratio, thereby mitigating the risks should economic conditions deteriorate. At December 31, 2024, our capital structure was 62.0% debt and 38.0% equity compared to 60.4% debt and 39.6% equity at December 31, 2023.
● We maintained our strategy to fund larger loans than we have in the past that are secured by what we believe are higher-quality properties that are being developed by borrowers that we deem to be more stable and successful. We believe migration to larger borrowers and better capitalized sponsors will decrease future problem loans.
● We continued the enhancement of our underwriting guidelines to strengthen our documentation and collateral position on our loans.
● We sold 32 loans, having an aggregate unpaid principal balance of principal balance of $55.8 million, which generated approximately $36.1 million of net proceeds. Most of the loans sold were categorized as “non-performing”.
Critical Accounting Policies and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management will base the use of estimates on (a) various assumptions that consider prior reporting results, (b) projections regarding future operations and (c) general financial market and local and general economic conditions. Actual amounts could differ from those estimates. See Note 2 – Significant Accounting Policies for further details.
Revenue Recognition
Interest income from commercial loans is recognized, as earned, over the loan period, whereas origination and modification fee revenue on commercial loans are amortized over the term of the respective notes.
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CECL Allowance
We record an allowance for credit losses (“CECL”) in accordance with the CECL standard on our loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics. This methodology replaces the probable incurred loss impairment methodology. In addition, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are also analyzed for credit losses in accordance with the CECL standard, as they represent a financial asset that is subject to credit risk. Further, CECL requires credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. As allowed under the CECL standard that we have adopted, as a practical expedient, the fair value of the collateral at the reporting date is compared to the net carrying amount of the loan when determining the allowance for credit losses for loans in pending/pre-foreclosure status, as defined. Fair value of collateral is reduced by estimated cost to sell if the collateral is expected to be sold. The CECL standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. We utilize a loss-rate method for estimating current expected credit losses. The loss rate method involves applying a loss rate to a pool of loans with similar risk characteristics to estimate the expected credit losses on that pool of loans. In determining the CECL allowance, we consider various factors including (1) historical loss experience in its portfolio, (2) loan specific losses for loans deemed collateral dependent based on excess amortized cost over the fair value of the underlying collateral, and (3) its current and future view of the macroeconomic environment. We also utilize a reasonable and supportable forecast period equal to the contractual term of the loan plus any applicable short-term extensions that are reasonably expected for construction loans. Loans, interest receivable, due from borrowers, unfunded commitments, and (available-for-sale debt) investment securities are all presented net on the Consolidated Balance Sheets with expanded disclosures in the notes to the consolidated financial statements. The change in the balances during the reporting period are recorded in the Consolidated Statements of Operations under the provision for credit losses.
Results of Operations
Years ended December 31, 2024 and 2023
Total revenue
Total revenue for the year ended December 31, 2024, was $57.5 million compared to $64.7 million for the year ended December 31, 2023, a decrease of $7.2 million, or 11.2%. The decrease in revenue was primarily due to a reduction in the number of loan originations and a decline in net loans held for investment over the year. For 2024, interest income was $43.2 million compared to $49.3 million for 2023, representing a decrease of $6.1 million or 12.4%. Fee income from loans decreased to $8.6 million for 2024 compared to $10.7 million for 2023, a decrease of $2.1 million, or 19.7% due to lower origination volume as compared to 2023. Income from limited liability company investments increased to $5.2 million for 2024 compared to $3.5 million for 2023, an increase of $1.7 million, or 48.8%. Other investment income was $0.4 million for 2024 compared to $1.2 million for 2023, a decrease of $0.8 million, or 67.7%.
Operating costs and expenses
Total operating costs and expenses for the year ended December 31, 2024, were $75.3 million compared to $49.7 million for 2023, an increase of $25.6 million, or 51.5%. This net increase was attributable to (i) a $21.3 million increase in provision for credit losses related to loans and (ii) a $1.9 million increase in general and administrative expenses as a result of increased legal and professional fees during the second and third quarters of the year related to matters outside of our ordinary course of business; all of which was offset by a $1.4 million decrease in interest and amortization expense.
Other (loss) income
Total other loss for the year ended December 31, 2024 was $21.8 million compared to other income of $0.9 million the year ended December 31, 2023, a decrease of $22.7 million. This decrease was driven by the $22.0 million loss on the sale of loans, and a decrease in gain on equity securities of $0.7 million.
Net (loss) income attributable to common shareholders and net (loss) income attributable to common shareholders per share
Net loss attributable to common shareholders for the year ended December 31, 2024 was $43.9 million compared to net income attributable to common shareholders of $12.1 million for the year ended December 31, 2023. Accordingly, net loss per weighted average Common Share outstanding for the year ended December 31, 2024 was $0.93 compared to net income per weighted average Common Share outstanding for the year ended December 31, 2023 of $0.27.
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Comprehensive (loss) income
For the year ended December 31, 2024, we reported a reclass of realized losses on certain equity securities of $0.3 million reflecting the recognition of unrealized losses on securities sold, as well as a reversal of losses on debt securities from unrealized to realized following the sale of such securities. For the year ended December 31, 2023, we reported a reclassification of unrealized losses to provision for credit losses of $0.8 million reflecting the recognition of unrealized losses on securities held for over one year, which were not considered temporary losses, as well as an unrealized gain on investment securities of $0.1 million.
Book value per common share
The following table sets forth the calculation of our book value per common share (in thousands, except share and per share data):
At December 31,
2024
2023
Total shareholders’ equity
$
181,651
$
230,076
Series A Preferred Stock ($25 aggregate liquidation preference)
(57,669)
(50,748)
Total shareholders’ equity, net of preferred stock
123,982
179,328
Number of Common Shares outstanding at period end
46,965,306
46,765,483
Book value per common share
$
2.64
$
3.83
Book value per common share as of December 31, 2024, was $2.64, a decrease of $1.19 from our book value per common share as of December 31, 2023 of $3.83. Such decrease is primarily due to the net effect of the sum of the following:
● Non-cash allowances and losses of (i) provision for credit losses related to loans totaling $26.9 million; (ii) valuation allowance related to loans held for sale totaling $4.9 million; (iii) loss on sale of loans totaling $22.0 million during the year ended December 31, 2024, all of which total $53.8 million, or $1.15 per share decrease in book value;
● Net loss available to common shareholders for the year ended December 31, 2024 adjusted for excluding the non-cash allowances and losses above of $9.8 million, or $0.20 per share increase in book value: and
● Cash dividends declared and paid for year ended December 31, 2024 on Common Shares totaling $11.4 million, or $0.24 per share decrease in book value.
Liquidity and Capital Resources
Total assets at December 31, 2024 were $492.0 million compared to $620.9 million at December 31, 2023, a decrease of $128.9 million, or 20.8%. The decrease was due primarily to note sale that closed during December 2024, lower originations during the year as a result of utilizing principal repayments and cash received for the redemption of the unsubordinated unsecured note payable that was due in December 2024, and sale of $36.2 million of investments in securities.
Total liabilities at December 31, 2024 were $310.3 million compared to $390.8 million at December 31, 2023, a decrease of $80.5 million, or 20.6%. This decrease was principally due to repaying in full two tranches of our unsecured unsubordinated five-year notes that matured in June and December of 2024. The total amount repaid was $58.2 million. In addition, we closed our Wells Fargo line of credit, which had an outstanding balance of $27.3 million. Finally, there was a decrease in advances from borrowers of $7.0 million. These decreases were partaially offset by our outstanding balance on the Churchill Credit Facility which increased by $7.2 million.
Total shareholders’ equity at December 31, 2024 was $181.7 million compared to $230.1 million at December 31, 2023, a decrease of $48.4 million, or 21.0%. This decrease was attributable to the $22.0 million loss on the sale of loans that occurred in December 2024, the $26.9 million provisions related to loans mandated by CECL, and the $4.9 million valuation allowance on loans held for sale, all of which contributed to the result of a $39.6 million net loss for the year ended December 31, 2024.
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Sources and Uses of Funds
Our primary sources of cash include principal and interest payments on mortgage loans and various fees associated with such loans, proceeds from the sales of real property, net proceeds from offerings of equity securities and borrowings from our credit facilities. Our primary uses of cash include debt service payments (both principal and interest), new originations of loans held for investment, new investments in real estate, dividend distributions to our shareholders, and operating expenses.
These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below:
Year Ended
One Year Change
Amount
2024
2023
Amount
Percentage
(in thousands)
Cash and cash equivalents, January 1
$
12,598
$
23,713
$
(11,115)
(88.2)
%
Net cash provided by operating activities
12,890
21,851
(8,961)
(69.5)
%
Net cash provided by (used in) investing activities
79,910
(72,488)
152,398
190.7
%
Net cash (used in) provided by financing activities
(87,332)
39,522
(126,854)
(145.3)
%
Cash and cash equivalents, December 31
$
18,066
$
12,598
$
5,468
30.3
%
For a detailed breakdown of our cash flows during the years ended December 31, 2024 and 2023, see the statement of cash flows included in our audited financial statements.
We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs. Our short-term cash requirements primarily include funding of loans, dividend payments, interest and principal payments on our indebtedness, including repayment/refinancing of the Notes maturing in September 2025, and payments for usual and customary operating and administrative expenses, such as employee compensation and sales and marketing expenses. Based on this analysis, 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.
Our long-term cash needs will include principal and interest payments on outstanding indebtedness maturing late in 2026 and early 2027, preferred stock dividends and funding of new mortgage loans. Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows, refinancing existing debt, and proceeds from sales of real estate owned.
On March 20, 2025, we terminated our existing Needham Credit Facility and replaced it with a new Needham Credit Facility. Except as described below, the new Needham Credit Facility is identical to the old Needham Credit Facility in all material respects:
● First, the borrower under the new Needham Credit Facility is SN Holdings LLC, a Connecticut limited liability company formed and wholly owned by Sachem for the sole purpose of acting as the borrower under the new agreement. Sachem is the guarantor of all SN Holdings’ obligations under the new Needham Credit Facility.
● Second, SN Holdings, in its capacity as borrower, granted Needham a lien on all its assets. SN Holdings is required to maintain assets equal to two times the outstanding balance on the new Needham Credit Facility. In addition, SN Holdings is required to collaterally assign to Needham mortgage loans having an outstanding principal balance in an amount no less than the greater of (i) $30 million and (ii) the aggregate principal outstanding principal balance on the new Needham Credit Facility.
● Third, Sachem, in its capacity as guarantor, agreed to grant Needham a blanket lien on all its assets. However, Needham is required to release its lien at Sachem’s request to facilitate other financing by Sachem and subsidiaries level.
● Fourth, the new Needham Credit Facility is a committed facility of up $50 million, subject to borrowing base limitations and facility covenant compliance.
● Fifth, the new Needham Credit Facility retained the same maturity of March 2, 2026 as original term with the option to extend one year provided we are in compliance with all the covenants and other terms and conditions of the new Needham Credit Facility.
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Simultaneously with the execution and delivery of the Credit, Security and Guaranty Agreement, dated as of March 20, 2025, among SN Holdings, Sachem and Needham, which governs the new Needham Credit Facility, Sachem repaid the entire outstanding balance on the old credit facility, $39.6 million, and SN Holdings drew $36.1 million on the new credit facility, reducing our outstanding indebtedness by $3.5 million. As of March 20, 2025, the Company was no longer in violation of any Needham Credit Facility covenants. On April 1, 2025, SN Holdings is required to make a principal payment of $9.9 million, further reducing the outstanding indebtedness to $26.2 million.
A copy of the Credit, Security and Guaranty Agreement, dated as of March 20, 2025, among SN Holdings, Sachem and Needham, is filed as Exhibit 10.8 to this Report.
Subsequent Events
On February 24, 2025, the Board authorized and the Company declared a dividend of $0.484375 per share on the Company’s 7.75% Series A Preferred Stock payable on March 31, 2025 to Series A Preferred Stock shareholders of record on March 15, 2025. The payment represents the full amount of the dividend accruing from December 30, 2024 through and including March 29, 2025.
On March, 5, 2025, the Board authorized and declared a quarterly dividend of $0.05 per Common Share to be paid to shareholders of record as of the close of trading on the NYSE American on March 17, 2025. The dividend is payable on March 31, 2025.
On March 10, 2025, our Compensation Committee authorized (i) a grant of 420,168 restricted Common Shares to John L. Villano, which shares had a fair market value on the date of grant of approximately $500,000; and (ii) a one-time bonus grant of 20,000 restricted Common Shares to each of our non-employee directors, Arthur Goldberg, Brian Prinz, Leslie Bernhard and Jeffery Walraven. Each of our non-employee directors, with the exception of Mr. Walraven, also had the option, at his or her election, to receive the fair market value equivalent of his or her grant in a lump sum cash payment of $23,800. An aggregate of 60,000 restricted Common Shares were granted to our non-employee directors, which shares had an aggregate fair market value on the date of grant of approximately $71,400. Ms. Bernhard elected to receive the lump sum cash payment.
We identified subsequent to the above March 10, 2025 action of the Company’s Compensation Committee regarding authorization of issuance of 420,168 of restricted Common Shares to John L. Villano under the effective 2016 Equity Compensation Plan that it had over authorized on the total issuance by 320,168 shares. The over issuance is a result of a specified limitation in the Plan that no more than 100,000 Common Shares may be made subject to awards to a single individual in a single plan year, subject to adjustments as provided. No identified adjustment provisions were deemed applicable. As a result of this identification, it was also determined that in calendar 2023 and 2024 there were additional similar over issuances of 30,890 and 11,857, respectively. In total, there were 362,915 restricted Common Shares which have been issued in excess of Plan limitations, all of which still remain unvested and restricted. No other plan years have identified any additional over issuances. In an immediate remediation of this matter, on March 24, 2025, John L. Villano voluntarily forfeited the 420,168 Common Shares that were granted on March 10, 2025.
See Needham Credit Facility subsequent event as disclosed above in the “Liquidity” section.
Management has evaluated subsequent events through March 31, 2025, the date on which the consolidated financial statements were available to be issued. Based on the evaluation, no adjustments were required in the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources.
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Contractual Obligations
As of December 31, 2024, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans and limited liability company investments.
Less than
1 – 3
3 – 5
More than
(in thousands)
Total
1 year
years
years
5 years
Unfunded portions of outstanding construction loans
$
49,874
$
36,223
$
13,651
$
—
$
—
Unfunded commitments
4,374
4,374
—
—
—
Total contractual obligations
$
54,248
$
40,597
$
13,651
$
—
$
—
Recent Accounting Pronouncements
See ‘‘Note 2 — Significant Accounting Policies’’ to the financial statements for explanation of recent accounting pronouncements impacting us.