Sachem Capital Corp. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this 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 operating results and financial conditions 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. We operate our business as one segment. We offer short-term ( i.e ., one to three years), secured, non-bank 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 our 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. Our primary underwriting criteria is a conservative loan to value ratio. In addition, we may make opportunistic real estate purchases and investments apart from our lending activities. Critical Accounting Policies and Use of Estimates Preparing our unaudited condensed 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. We base the use of estimates on (a) various assumptions that consider prior reporting results, (b) our projections regarding future operations, and (c) general financial market and local and general economic conditions. Actual amounts could differ from those estimates. Significant estimates include the provisions for current expected credit losses, loans held for sale at fair value, and real estate owned. See Note 2 – Significant Accounting Policies — to our condensed consolidated financial statements 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. CECL Allowance We record an allowance for credit losses (“CECL”) on our loan portfolio in accordance with FASB Topic 326, Financial Instruments - Credit Losses, 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 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 our loan portfolio, (2) loan specific losses for loans deemed collateral dependent based on 29 Table of Contents excess amortized cost over the fair value of the underlying collateral, and (3) management's 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 investment securities are all presented net on our Condensed Consolidated Balance Sheets with expanded disclosures in the notes to our condensed consolidated financial statements. The change in the balances during the reporting period are recorded in our Condensed Consolidated Statements of Operations under the provision for credit losses. Our Loan Portfolio The following table highlights certain information regarding our real estate lending activities for the three and six months ended June 30, 2025: Three Months Ended June 30, 2025 Six Months Ended June 30, 2025 (in thousands, except number of loans) Loans disbursed $ 39,644 $ 80,952 Loans repaid $ 23,652 $ 71,394 Principal of loans transferred to real estate owned $ 5,888 $ 6,298 Number of loans transferred to real estate owned 1 2 As of June 30, 2025 As of December 31, 2024 (in thousands, except number of loans and weighted averages) Number of loans held for investment outstanding 135 157 Gross principal amount of loans held for investment $ 384,739 $ 376,991 Weighted average contractual interest rate (1) 12.72 % 12.53 % Weighted average term to maturity (in months) (2) 6 4 ______________________________________________________________ (1) Includes default interest. (2) Does not give effect to extensions. At June 30, 2025, our outstanding mortgage loan portfolio included loans with outstanding principal balance amount up to $38.3 million. The table below gives a breakdown of our loans held for investment by loan size as of June 30, 2025: Amount Number of Loans Percentage Aggregate Gross Principal Amount Percentage (in thousands) $1,000,000 or less 64 47.4 % $ 25,973 6.8 % $1,000,001 to $5,000,000 52 38.5 % 122,229 31.8 % $5,000,001 to $10,000,000 8 5.9 % 50,674 13.2 % $10,000,001 or more 11 8.1 % 185,863 48.3 % Total 135 100.0 % $ 384,739 100.0 % 30 Table of Contents As of June 30, 2025, the primary markets in which we were exposed were Connecticut, Florida, Massachusetts and New York. The table below gives a breakdown of our loans held for investment by state as of June 30, 2025: State Number of Loans Percentage Gross Amount Outstanding Percentage (in thousands) Connecticut 65 48.1 % 113,107 29.4 % Florida 17 12.6 % 110,822 28.8 % Georgia 1 0.7 % 3,840 1.0 % Maine 3 2.2 % 2,508 0.7 % Maryland 4 3.0 % 3,231 0.8 % Massachusetts 10 7.4 % 56,213 14.6 % New Jersey 2 1.5 % 6,455 1.7 % New York 17 12.6 % 30,519 7.9 % North Carolina 5 3.7 % 23,323 6.1 % Pennsylvania 2 1.5 % 4,857 1.3 % Rhode Island 3 2.2 % 1,927 0.5 % South Carolina 4 3.0 % 13,816 3.6 % Tennessee 1 0.7 % 12,895 3.4 % Washington D.C. 1 0.7 % 1,226 0.3 % Total 135 100.0 % $ 384,739 100.0 % The following table details our loans held for investment as of June 30, 2025 by year of origination: Year of Origination Number of Loans Percentage Aggregate Gross Principal Amount Percentage (in thousands) 2025 12 8.9 % 50,040 13.0 % 2024 29 21.5 % 42,614 11.1 % 2023 26 19.3 % 88,157 22.9 % 2022 25 18.5 % 59,745 15.5 % 2021 28 20.7 % 133,399 34.7 % 2020 4 3.0 % 6,311 1.6 % 2019 and prior 11 8.1 % 4,473 1.2 % Total 135 100.0 % 384,739 100.0 % The following tables set forth information regarding the types of properties securing loans held for investment as of June 30, 2025 and December 31, 2024: June 30, 2025 December 31, 2024 (in thousands) Aggregate Gross Principal Amount Percentage Aggregate Gross Principal Amount Percentage Residential $ 196,319 51.0 % $ 211,939 56.2 % Commercial 111,395 29.0 % 95,509 25.3 % Pre-Development Land 15,506 4.0 % 23,466 6.2 % Mixed Use 61,519 16.0 % 46,077 12.2 % Total $ 384,739 100.0 % $ 376,991 100.0 % 31 Table of Contents Allowance for Credit Losses Our allowance for credit losses is influenced by historical loss experience, current exposure by geographical region, current expected credit losses on loans in foreclosure based on fair value less cost to sell, non-performing status, and other supportable forecasts of economic conditions. A loan is considered non-performing once it has been delinquent on its monthly payments more than 90 days. The following table presents the allowance for credit losses against unpaid principal balance of loans held for investment as of June 30, 2025 and December 31, 2024: June 30, 2025 December 31, 2024 (in thousands) Aggregate Gross Principal Amount Allowance Percentage of Respective Principal Aggregate Gross Principal Amount Allowance Percentage of Respective Principal Performing – General reserve $ 265,141 $ (5,058) 1.9 % $ 289,910 $ (5,051) 1.7 % Non-performing – General reserve 39,744 (659) 1.7 % 5,396 (96) 1.8 % Non-performing – Direct reserves 55,818 (3,598) 6.4 % 57,808 (7,265) 12.6 % Non-performing in Foreclosure – Direct reserves 24,036 (8,330) 34.7 % 23,877 (6,058) 25.4 % Non-performing subtotal $ 119,598 $ (12,587) 10.5 % $ 87,081 $ (13,419) 15.4 % Total $ 384,739 $ (17,645) 4.6 % $ 376,991 $ (18,470) 4.9 % For further information, see Note 4 – Loans and Allowance for Credit Losses — to our condensed consolidated financial statements. Real Estate Owned As of June 30, 2025, we owned nineteen properties, each of which previously served as collateral for first mortgage loans. One and four properties were acquired during the three and six months ended June 30, 2025, respectively, in connection with foreclosure actions. Three and four properties were sold during the three and six months ended June 30, 2025, respectively. 32 Table of Contents The following table details the carrying value of each of our real estate owned properties reflected on our Condensed Consolidated Balance Sheets as o f June 30, 2025: Property Type Location Month of Acquisition Carrying Value (in thousands) Commercial - Restaurant Bristol, CT March 2019 $ 750 Land Bristol, CT December 2019 1,406 Land Sturbridge, MA November 2022 110 Residential - Single Family Bellingham, MA December 2023 293 Land Stamford, CT May 2024 115 Land Stamford, CT May 2024 115 Land Cape Coral, FL October 2024 900 Land Cape Coral, FL October 2024 350 Land Cape Coral, FL October 2024 350 Residential - Multi Family Flagler Beach, FL October 2024 3,382 Residential - Single Family Gainsville, FL November 2024 435 Mixed Use New London, CT November 2024 1,750 Commerical - Office Windsor, CT December 2024 1,600 Commerical - Office Windsor, CT December 2024 2,250 Land New London, CT November 2024 2,500 Land Marathon, FL January 2025 410 Residential - Single Family Old Lyme, CT May 2025 1,310 Residential - Single Family Old Lyme, CT May 2025 285 Residential - Single Family Old Lyme, CT May 2025 315 Total $ 18,626 For further information, see Note 6 – Real Estate Owned (REO) — to our condensed consolidated financial statements. Results of Operations Three months ended June 30, 2025 compared to three months ended June 30, 2024 Total revenue Total revenue for the three months ended June 30, 2025 was $10.8 million compared to $15.1 million for the three months ended June 30, 2024, a decrease of $4.3 million, or 28.9%. 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. As of June 30, 2025, net loans held for investment totaled $364.5 million, compared to $485.7 million as of June 30, 2024, representing a decline of $121.2 million in the net principal balance. On the other hand, other income increased by $0.5 million. This was driven by the recognition of rental income from one project in 2025, which contributed $0.5 million during the quarter. No such rental income was recorded in the prior year. Operating costs and expenses Total operating expenses for three months ended June 30, 2025 were $9.7 million compared to $18.3 million for the three months ended June 30, 2024, a decrease of $8.6 million or 46.8%. The primary contributor to this decrease 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. Additionally, the change was due to reductions in interest and amortization expense of $0.8 million and change in valuation allowance related to loans held for sale of $1.1 million. Such reductions were partially offset by an increase in compensation and employee benefits of $0.5 million and other expenses totaling $0.3 million. 33 Table of Contents Net income (loss) attributable to common shareholders and net income (loss) attributable to common shareholders per share Net income attributable to common shareholders for the three months ended June 30, 2025 was $0.8 million, or $0.02 per common share, compared to net loss attributable to common shareholders of $4.1 million, or $0.09 per common share, for the three months ended June 30, 2024. 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): June 30, 2025 March 31, 2025 Total shareholders’ equity $ 177,907 $ 179,339 Series A Preferred Stock ($25 liquidation preference per share) (57,669) (57,669) Total shareholders’ equity, net of preferred stock $ 120,238 $ 121,670 Number of common shares outstanding at period end 47,310,139 47,310,139 Book value per common share $ 2.54 $ 2.57 Book value per common share as of June 30, 2025, was $2.54, a decrease of $0.03 from our book value per common share as of March 31, 2025 of $2.57. Such decrease is primarily due to cash dividends declared and paid for the three months ended June 30, 2025 on issued and outstanding common shares and shares of Series A Preferred Stock totaling $3.5 million, or $0.07 per common share, partially offset by net income for the three months ended June 30, 2025 of $0.8 million, or $0.02 per common share. Six months ended June 30, 2025 compared to six months ended June 30, 2024 Total revenue Total revenue for the six month s ended June 30, 2025 was $22.2 million compared to $32.0 million for the six months ended June 30, 2024, a decrease of $9.8 million, or 30.7%. 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. As of June 30, 2025, net loans held for investment totaled $364.5 million, compared to $485.7 million as of June 30, 2024, representing a decline of $121.2 million in the net principal balance. On the other hand, income from our preferred membership limited liability company investments increased by $0.6 million or 25.6% from the prior year. Operating costs and expenses Total operating e xpenses for six months ended June 30, 2025 were $20.1 million compared to $30.8 million for the six months ended June 30, 2024, a decrease of $10.7 million or 34.7% . The largest contributors to this decrease was the decrease of $2.2 million in interest and amortization of deferred financing fees as a result of the repayment of $58.2 million of aggregate principal amount of our unsecured, unsubordinated notes in 2024, and a decrease in provision for credit losses related to loans held for investment of $7.9 million, as noted above. Net income (loss) attributable to common shareholders and net income (loss) attributable to common shareholders per share Net income attributable to common shareholders for the six months ended June 30, 2025 was $0.6 million, or $0.01 per common share, compared to net loss attributable to common shareholders of $0.5 million, or $0.01 per common share, for the six months ended June 30, 2024. 34 Table of Contents 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): June 30, 2025 December 31, 2024 Total shareholders’ equity $ 177,907 $ 181,651 Series A Preferred Stock ($25 liquidation preference per share) (57,669) (57,669) Total shareholders’ equity, net of preferred stock $ 120,238 $ 123,982 Number of common shares outstanding at period end 47,310,139 46,965,306 Book value per common share $ 2.54 $ 2.64 Book value per common share as of June 30, 2025, was $2.54, a decrease of $0.10 from our book value per common share as of December 31, 2024 of $2.64 . Such decrease is primarily due to cash dividends declared and paid for the six months ended June 30, 2025 on issued and outstanding common shares and Series A Preferred Stock totaling $7.0 million, or $0.15 per common share, partially offset by net income for the six months ended June 30, 2025 of $2.8 million, or $0.06 per common share. Liquidity and Capital Resources Total assets at June 30, 2025 were $501.8 million compared to $492.0 million at December 31, 2024, an increase of $9.8 million, or 2.0%. The net increase was due primarily to increase in cash and cash equivalents and loans held for investment from net proceeds available from our June 2025 private placement of senior secured notes that was not utilized in effective refinancing of existing debt on our balance sheet. . Total liabilities at June 30, 2025 were $323.9 million compared to $310.3 million at December 31, 2024, an increase of $13.5 million, or 4.4%. This increase is primarily due to a $46.4 million increase in senior secured notes payable net of deferred financing costs of $3.6 million, offset by repayments of repurchase agreements of $19.2 million and lines of credit of $13.7 million. Total shareholders’ equity at June 30, 2025 was $177.9 million compared to $181.7 million at December 31, 2024, a decrease of $3.7 million, or 2.1%. This decrease was due primarily to an aggregate of $7.0 million of dividends paid to holders of Series A Preferred Stock and common shares, which was partially offset by $2.8 million of cumulative net earnings for the six month period and $0.4 million increase in additional paid-in capital related to stock-based compensation. 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. 35 Table of Contents These sources and uses of cash are reflected in our Condensed Consolidated Statements of Cash Flows as summarized below: Six Months Ended One Year-Change Amount 2025 2024 Amount Percentage (in thousands) (in thousands) Cash and cash equivalents, January 1 $ 18,066 $ 12,598 $ 5,468 43.4 % Net cash provided by operating activities 692 11,179 (10,487) (93.8) % Net cash (used in) provided by investing activities (2,658) 27,534 (30,192) (109.7) % Net cash provided by (used in) financing activities 6,374 (40,734) 47,108 (115.6) % Cash and cash equivalents, June 30 $ 22,474 $ 10,577 $ 11,897 112.5 % For a detailed breakdown of our cash flows during the six months ended June 30, 2025 and 2024, see our Condensed Consolidated Statement of Cash Flows. 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 unsecured notes payable 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 entered into a new Credit Agreement with Needham Bank, replacing the prior Needham Credit Facility, which was fully repaid and terminated on the same date. The new facility matures on March 2, 2026, and includes an option to extend the term by one year upon satisfaction of certain conditions. Under the new agreement, SN Holdings LLC (“SN Holdings”), our wholly owned subsidiary, serves as the borrower, and we serve as guarantor of all SN Holdings' obligations under the new Credit Agreement. The Needham Credit Facility is secured by a first priority lien on all the assets of SN Holdings, and includes a requirement that SN Holdings maintain assets equal to at least two times the outstanding principal balance under the facility. In addition, SN Holdings is required to collaterally assign to Needham a portfolio of mortgage loans with an outstanding principal balance of no less than the greater of $30 million or the full drawn balance on the facility. We, as guarantor, have also granted Needham a lien on substantially all of our assets, with the ability to request lien releases to facilitate other financings. The Needham Credit Facility, at the subsidiary borrower level, is subject to other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements, including a covenant that requires SN Holdings to maintain: (A) a ratio of Adjusted EBITDA (as defined in the Credit Agreement) to Debt Service (as defined in the Credit Agreement) of not less than 1.40 to 1.0, tested on a trailing-twelve-month basis at the end of each fiscal quarter; (B) a sum of cash, cash equivalents (at the consolidated guarantor level) and availability under the facility equal to or greater than $10 million; and (C) an Asset Coverage Ratio (as defined) of at least 150%. As of June 30, 2025, SN Holdings had borrowed $26.2 million under the new facility and was in compliance with all covenants under the Credit Agreement. On June 11, 2025, Sachem Capital Corporation Holdings, LLC ("Holdings"), our indirect, wholly-owned subsidiary, consummated a private placement of $100.0 million aggregate principal amount of Senior Secured Notes due June 11, 2030 (the "Senior Secured Notes") to various institutional investors under a Note Purchase and Guaranty Agreement (the "Agreement"). An initial draw of $50.0 million was made at closing, and the remaining $50.0 million may be drawn at any time on or prior to May 15, 2026. 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. The Senior Secured Notes bear interest at a fixed rate of 9.875% per annum, with interest only 36 Table of Contents payable quarterly on the 1st day of March, June, September and December, and include a commitment fee of 1.0% on the undrawn portion of the Senior Secured Notes. 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. Contractual Obligations As of June 30, 2025, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans and limited liability company investments. Total Less than 1 year 1 – 3 years 3 – 5 years More than 5 years (In thousands) Unfunded portions of outstanding construction loans $ 54,564 $ 11,288 $ 43,276 $ — $ — Unfunded commitments to investments in LLC's 2,420 2,420 — — — Total contractual obligations $ 56,984 $ 13,708 $ 43,276 $ — $ — Recent Accounting Pronouncements See Note 2 — Significant Accounting Policies — to our condensed consolidated financial statements for explanation of recent accounting pronouncements impacting us. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this Item.