美國
證券和交易委員會
華盛頓特區 20549
表格
（標記一）
截至季度結束日期的財務報告
或
過渡期從 至
委託文件編號：001-39866
(根據其章程規定的註冊人準確名稱)
| ||
（設立或組織的其他管轄區域） | （納稅人識別號碼） |
(主要行政辦公室地址)
(
(註冊人電話號碼，包括區號)
（如自上次報告以來發生更改，則包括更名、更改地址及更改財政年度）
請通過複選標記表明：（1）在過去12個月內已提交1934年證券交易法第13或15（d）條規定需要提交的所有報告，或者在註冊者被要求提交該等報告的較短期間內已提交該等報告，並且（2）在過去90天內已受到此類報告要求。☒
請通過複選標記表明：註冊者是否已在過去12個月內提交所有互動數據文件，或者在註冊者被要求提交此類文件的較短期間內已通過電子方式提交了根據S-t法規第405條規定（本章第232.405條）需要提交的每個互動數據文件。☒
通過√符號表示註冊人是否屬於大幅放緩的申報者、加速的申報者、非加速的申報者、較小的報告公司或新興成長公司。請參閱《交易所法》第120億2條中「大幅放緩的申報者」、「加速的申報者」、「非加速的申報者」、「較小的報告公司」和「新興成長公司」的定義。
大型加速文件者 | ☐ | 如果是新興增長公司，請勾選是否註冊人選擇不使用執行交易所第13（a）條規定所提供的任何新的或修訂的財務會計準則的推遲過渡期。 ☐ | ☐ |
☒ | 小型報表公司 | ||
新興成長公司 |
如果是新興成長公司，請打勾，表示註冊人選擇不使用根據《交易所法》第13（a）條提供的任何新的或修訂後的財務會計準則的延長過渡期。☐
請在以下方框內打勾：是否屬於殼公司（根據證券交易法規則12b-2所定義）
根據證券法第12(b)條註冊的證券：
每一類的名稱 |
| 股票代碼 |
| 在其上註冊的交易所的名稱 |
|
| |||
截至2024年11月13日，發行人總共擁有
有關前瞻性聲明的警告聲明
本季度報告(Form 10-Q)涵蓋了截至2024年9月30日的三個和九個月的情況，包括前瞻性陳述。本報告中除歷史事實陳述外的所有陳述，包括關於我們未來經營業績、財務狀況、戰略和計劃，以及對未來經營的期望，均屬前瞻性陳述。「預計」、「估計」、「期待」、「規劃」、「尋求」、「打算」、「相信」、「可能」、「或許」、「將會」、「應該」、「可能」、「繼續」、「設計」以及類似表達意思的負面詞語和其他類似表達意思的詞語，均旨在識別前瞻性陳述。
我們主要基於目前對可能影響我們財務狀況、經營業績、戰略、短期和長期業務運營和目標以及財務需求的未來事件和趨勢的期望和預測，作出這些前瞻性陳述。這些前瞻性陳述將受到衆多風險、不確定性和假設的影響，其中一些在我們的2023年度報告(Form 10-K)和截至2024年6月30日的季度報告(Form 10-Q)中有所描述，這兩份報告均已提交給美國證券交易委員會(SEC)。鑑於這些風險、不確定性和假設，本報告中討論的前瞻性事件和情況可能不會發生，實際結果可能與前瞻性陳述中預期或暗示的情況存在重大和不利的差異。
您不應將前瞻性陳述視爲未來事件的預測。儘管我們認爲前瞻性陳述所反映的期望是合理的，但我們無法保證未來的結果、活動水平、表現或成就。此外，我們和其他任何人均不對這些前瞻性陳述中任何一項的準確性和完整性承擔責任。我們聲明，在本報告日期後更新這些前瞻性陳述以確認這些陳述與實際結果或修正後的期望的關係的任何義務。
所有前瞻性聲明均在其整體上由這些警示性聲明以及本報告中做出的其他聲明明確限定。您應在這些風險和不確定性的背景下評估我們所做的所有前瞻性聲明。
除非情況另有要求，本報告中所有對Sachem Capital，我們，我們和我們的引用均指的是Sachem Capital Corp.，一家紐約公司。
ii
第一部分. 基本報表
項目1. 基本報表
sachem capital corp.
合併資產負債表
(千美元，除股份數據外)
| 2024年9月30日 |
| 2023年12月31日 | |||
(未經審計) | (經審計) | |||||
資產 |
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現金及現金等價物 | $ | | $ | | ||
投資證券（按公允價值計） | | | ||||
應收抵押貸款 | | | ||||
信貸損失準備金 | ( | ( | ||||
抵押貸款應收款，扣除信用損失準備 | | | ||||
應收利息和費用，淨額 |
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應收款項，淨額 |
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房地產業擁有的財產 |
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對合夥企業的投資 | | | ||||
淨出租房地產業投資 |
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物業和設備，淨額 | | | ||||
其他資產 | | | ||||
總資產 | $ | | $ | | ||
負債和股東權益 |
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負債： |
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應付票據（扣除融資成本$後的淨額） | $ | | $ | | ||
回購設施 | | | ||||
應付 mortgage |
| |
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信用額度 | | | ||||
應計的分紅派息應付款 | — | | ||||
應付賬款和應計負債 | | | ||||
借款人預付款 | | | ||||
低於市場租賃無形資產 | | | ||||
遞延收入 | | | ||||
總負債 | | | ||||
承諾和事項： |
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股東權益： |
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優先股 - $ | | | ||||
普通股-美元 |
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其他資本公積 |
| |
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累計其他綜合收益 | — | | ||||
累積赤字 |
| ( |
| ( | ||
股東權益合計 |
| |
| | ||
負債和股東權益總計 | $ | | $ | | ||
附註是這些合併財務報表的一部分。
1
sachem capital corp.
綜合利潤表（未經審計）
(除股份和每股數據外單位爲千元美元)
截至三個月 | 截至九個月 | |||||||||||
2023年9月30日 | 九月30日， | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
營收 |
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|
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| ||||||
貸款利息收入 | $ | | $ | | $ | | $ | | ||||
貸款產生的手續費收入 | | | | | ||||||||
來自合夥投資的收入 | | | | | ||||||||
其他投資收入 |
| |
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其他收入 |
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總收入 |
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運營費用 |
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利息及遞延融資費用的攤銷 |
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薪酬和員工福利 |
| |
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| |
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管理費用 | | | | | ||||||||
與貸款相關的信貸損失準備（回收） | | ( | | | ||||||||
房地產資產減值損失 | | | | | ||||||||
房地產和設備的出售損失（收益），淨額 | ( | | ( | | ||||||||
其他費用 |
| |
| |
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總營業費用 | | | | | ||||||||
其他收入（損失）之前的營業收入（損失） |
| ( |
| |
| ( |
| | ||||
其他收入（損失） | ||||||||||||
股票的淨利潤（損失） | ( | ( | | | ||||||||
其他收益（損失），淨額 | ( | ( | | | ||||||||
淨利潤（虧損） | ( | | ( | | ||||||||
優先股分紅 | ( | ( | ( | ( | ||||||||
淨利潤歸屬於普通股股東 | $ | ( | $ | | $ | ( | $ | | ||||
每股普通股基本盈利（虧損） | $ | ( | $ | | $ | ( | $ | | ||||
每股普通股攤薄盈利（虧損） | $ | ( | $ | | $ | ( | $ | | ||||
基本加權平均每股普通股股數 |
| |
| |
| |
| | ||||
稀釋後加權平均每股普通股股數 |
| |
| |
| |
| | ||||
附註是這些合併財務報表的一部分。
2
sachem capital corp.
合併綜合收益（損失）表（未審計）
(除股份和每股數據外單位爲千元美元)
截至三個月 | 截至九個月 | |||||||||||
九月30日， | 九月30日， | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
淨利潤（虧損） | $ | ( |
| $ | | $ | ( |
| $ | | ||
其他全面收益（損失）： |
|
| ||||||||||
| — | ( | ( | | ||||||||
將債務證券上的損失從未實現轉換爲實現 | — | — | ( | — | ||||||||
全面收入（損失） | ( | | ( | | ||||||||
優先股分紅 | ( | ( | ( | ( | ||||||||
歸屬於普通股東的總綜合收益（損失） | $ | ( | $ | | $ | ( | $ | | ||||
附註是這些合併財務報表的一部分。
3
sachem capital corp.
股東權益變動表（未經審計）
(千美元，除股份數據外)
2024年9月30日結束的三個月 | ||||||||||||||||||||||
累計 | ||||||||||||||||||||||
額外的 | 其他 | |||||||||||||||||||||
優先股 | 普通股 | 實繳 | 綜合 | 累計 | ||||||||||||||||||
| 分享 |
| 金額 |
| 分享 |
| 金額 |
| 資本 |
| 收入（損失） |
| 虧損 |
| 總計 | |||||||
2024年7月1日餘額 |
| | $ | |
| | $ | | $ | | $ | — | $ | ( | $ | | ||||||
發行A類優先股，減去費用 |
| | — |
| — | — | | — | — | | ||||||||||||
股票回購 | — | — | ( | ( | ( | — | — | ( | ||||||||||||||
以股票爲基礎的補償，扣除被放棄的股份 | — | — | ( | — | | — | — | | ||||||||||||||
分紅派息股票A系列 | — | — | — | — | — | — | ( | ( | ||||||||||||||
普通股股息支付 | — | — | — | — | — | — | ( | ( | ||||||||||||||
淨虧損 |
| — | — | — | — | — | — | ( | ( | |||||||||||||
2024年9月30日餘額 | | $ | |
| | $ | | $ | | $ | — | $ | ( | $ | | |||||||
2023年9月30日結束的三個月 | ||||||||||||||||||||||
累計 | ||||||||||||||||||||||
附加 | 其他 | |||||||||||||||||||||
優先股 | 普通股 | 實繳 | 綜合 | 累計 | ||||||||||||||||||
| 分享 |
| 金額 |
| 分享 |
| Amount |
| 資本 |
| 損失 |
| 虧損 |
| 總計 | |||||||
2023年7月1日餘額 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
發行A類優先股淨額扣除費用 | | — | — | — | | — | — | | ||||||||||||||
發行普通股，扣除費用 | — | — | | | | — | — | | ||||||||||||||
基於股票的報酬，減去被放棄的股份 | — | — | ( | — | | — | — | | ||||||||||||||
債券投資未實現損失 | — | — | — | — | — | ( | — | ( | ||||||||||||||
分紅派息股票A系列 | — | — | — | — | — | — | ( | ( | ||||||||||||||
普通股股息派發 | — | — | — | — | — | — | ( | ( | ||||||||||||||
淨利潤 |
| — | — | — | — | — | — | | | |||||||||||||
2023年9月30日餘額 | | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
附註是這些合併財務報表的一部分。
4
sachem capital corp.
股東權益變動綜合報表（續）（未經審計）
(千美元，除股份數據外)
| 截至2024年9月30日的九個月 | |||||||||||||||||||||
累積 | ||||||||||||||||||||||
其他 | 其他 | |||||||||||||||||||||
優先股 | 普通股 | 實收資本 | 綜合 | 累計 | ||||||||||||||||||
| 股票 |
| 金額 |
| 股份 |
| 數量 |
| 資本 |
| 收入（損失） |
| 虧損 |
| 總計 | |||||||
2024年1月1日餘額 |
| | $ | | | $ | | $ | | $ | | $ | ( | $ | | |||||||
發行A類優先股，減去費用 | | — | — | — | | — | — | | ||||||||||||||
發行普通股，扣除費用 |
| — |
| — | |
| |
| | — | — |
| | |||||||||
股票回購 | — | — | ( | ( | ( | — | — | ( | ||||||||||||||
以股票爲基礎的補償，扣除被放棄的股份 | — | — | | — | | — | — | | ||||||||||||||
債券投資未實現損失 | — | — | — | — | — | ( | — | ( | ||||||||||||||
未實現的損失轉爲已實現的損失 | — | — | — | — | — | ( | — | ( | ||||||||||||||
分紅派息股票A系列 | — | — | — | — |
| — | — | ( |
| ( | ||||||||||||
普通股股息支付 | — | — | — | — | — | — |
| ( |
| ( | ||||||||||||
淨虧損 | — | — | — | — | — | — |
| ( |
| ( | ||||||||||||
2024年9月30日餘額 |
| | | | | | — | ( | $ | | ||||||||||||
| 2023年9月30日結束的九個月 | |||||||||||||||||||||
累積 | ||||||||||||||||||||||
其他 | 其他 | |||||||||||||||||||||
| 優先股 |
| 普通股 |
| 實收資本 |
| 綜合 |
| 累積 | |||||||||||||
| 股票 |
| 金額 |
| 分享 |
| 金額 |
| 資本 |
| 損失 |
| 虧損 |
| 總計 | |||||||
2023年1月1日的餘額 | | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
採用新會計準則的累積效應（ASU 2016-13） | — | — | — | — | — | — | ( | ( | ||||||||||||||
發行A類優先股，減去費用 | | — | — | — | | — | — | | ||||||||||||||
發行普通股，扣除費用 | — | — | | | | — | — | | ||||||||||||||
股票回購 | — |
| — | ( |
| — | ( | — | — | ( | ||||||||||||
以股票爲基礎的補償，扣除被放棄的股份 | — | — | | — | |
| — | — | | |||||||||||||
未實現債務證券收益 | — | — | — | — | — | | — | | ||||||||||||||
分紅派息股票A系列 | — | — | — | — | — | — | ( | ( | ||||||||||||||
普通股股息支付 | — | — | — | — | — | — | ( | ( | ||||||||||||||
淨收入 | — | — | — | — | — | — |
| | | |||||||||||||
Balance, September 31, 2023 |
| | $ | | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
附註是這些合併財務報表的一部分。
5
sachem capital corp.
合併現金流量表（未經審計）
(以千美元計)
九個月結束 | ||||||
9月30日， | ||||||
| 2024 |
| 2023 | |||
經營活動產生的現金流量 |
|
|
| |||
淨利潤（虧損） | $ | ( | $ | | ||
調整淨利潤(虧損)和經營活動提供的現金: | ||||||
遞延融資費用和債券折扣的攤銷 |
| |
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折舊費用 |
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其他資產的註銷 - 發行前費用 | — | | ||||
基於股票的補償 |
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與貸款相關的信貸損失準備 |
| |
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減值損失 | | | ||||
(收益) 房地產及設備的銷售損失，淨額 | ( | | ||||
(收益) 股票證券 | ( | ( | ||||
運營資產和負債的變化： |
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|
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應收利息和費用，淨額 |
| ( |
| ( | ||
其他資產 |
| |
| ( | ||
應收款項，淨額 |
| ( |
| ( | ||
應付賬款和應計負債 | | | ||||
遞延收入 |
| ( |
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借款人預付款 |
| ( |
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總調整 |
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營業活動產生的現金流量淨額 |
| |
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投資活動產生的現金流量 |
|
|
|
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購買投資證券 | ( | ( | ||||
出售投資證券的收入 | | | ||||
購買投資合夥企業的權益，淨額 | ( | ( | ||||
出售擁有的房地產所得款 | | | ||||
擁有的不動產改善，淨值 |
| — |
| ( | ||
購買物業和設備 | | | ||||
對租賃房地產業投資的改善 |
| ( |
| ( | ||
抵押貸款應收款的主要支出 |
| ( |
| ( | ||
抵押貸款應收款的本金回收 |
| |
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投資活動提供的（使用的）淨現金 |
| |
| ( | ||
籌資活動產生的現金流量 |
|
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|
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信用額度的淨收益（償還） |
| ( |
| | ||
回購融資的淨收益（償還） |
| ( |
| | ||
應付抵押貸款的收入（償還） | ( | | ||||
普通股股息支付 |
| ( |
| ( | ||
分紅派息股票A系列 |
| ( |
| ( | ||
發行普通股的收益，扣除費用後 | | | ||||
回購普通股 | ( | ( | ||||
發行A系列優先股的收入，扣除費用後 | | | ||||
應付票據的總收益（償還） | ( | — | ||||
融資活動產生的淨現金流量（流出） |
| ( |
| | ||
現金及現金等價物的（減少）增加 |
| ( |
| | ||
現金及現金等價物 – 期初餘額 |
| |
| | ||
現金及現金等價物-期末 68,294 | $ | | $ | | ||
附註是這些合併財務報表的一部分。
6
7
1. 公司
sachem capital corp.（以下簡稱「公司」）是一家紐約公司，專注於發起、承銷、融資、服務及管理一組第一抵押貸款組合。公司將其業務運營爲
2. 重要會計政策摘要
未經審計的合併財務報表
公司的未經審計的合併基本報表已按照美國公認會計原則（「GAAP」）編制，這些原則適用於中期財務信息。因此，這些報表不包括GAAP要求的所有信息和腳註，以滿足完整的基本報表。然而，管理層認爲，所有的調整（包括正常的經常性應計項目）都被認爲是公平呈現所必需的，已被納入。應與公司的2023年12月31日結束的經審計的合併基本報表及其附錄一起閱讀。2023年12月31日的資產負債表信息來源於經過審計的基本報表，但不包括GAAP要求的所有披露。截止到2024年9月30日的三個月和九個月的運營結果，並不一定預示着在整個財政年度或任何後續期間將獲得的經營結果。
呈報依據及合併原則
編制附帶的未經審計的合併基本報表符合GAAP要求管理層做出估計和假設，這些估計和假設會影響基本報表中資產和負債的報告金額，以及在該基本報表日期和報告期間的收入和費用的披露。管理層基於以下方面使用估計：(a) 考慮以往報告結果的各種假設，(b) 關於未來運營的預測，以及 (c) 一般金融市場和地方及總體經濟條件。實際金額可能會與這些估計有實質性差異。
公司的附帶未經審計的合併基本報表包括公司對所有子公司的控制，這些子公司在實體的重大運營、財務和投資決策上具有控制權。所有重大內部帳戶和交易在合併時已被消除。
現金及現金等價物
公司將所有活期存款、銀行本票、貨幣市場帳戶和原始到期時間爲三個月或更短的存款證明視爲現金等價物。
投資證券
債務投資被分類爲可供出售，並且實現的收益和損失採用特定識別法記錄。公允價值的變動（不包括信用損失和減值）在其他綜合收益中記錄。公允價值是基於公開可用市場信息或管理層確定的其他估計來計算的。如果投資的成本超過其公允價值，管理層會評估其他因素，包括一般市場條件、債務工具發行人的信用質量以及公允價值低於成本的程度。爲了判斷信用損失，管理層可能會採用一個
8
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
systematic methodology that considers available quantitative and qualitative evidence. In addition, management may consider specific adverse conditions related to the financial health of, and business outlook for, the issuer of the debt security. If the Company plans to sell the security or it is more likely than not that it will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in net income and a new cost basis in the investment is established. If market, industry, and/or business and/or financial conditions relating to the issuer deteriorate, the Company may incur future losses and/or impairments.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). Management performs a qualitative assessment on a periodic basis and recognizes an impairment if there are sufficient indicators that the fair value of the investment is less than the carrying value. Changes in value are recorded in net income (loss).
Non-accrual loans
A loan is generally placed on non-accrual status when it is probable that principal and interest will not be collected under the original contractual terms. At that time, interest income is no longer accrued. Non-accrual loans consist of loans for which principal or interest has been delinquent for 90 days or more. Interest income is subsequently recognized only to the extent it is received in cash or until the loan qualifies for return to accrual status. Loans are restored to accrual status when contractually current and the collection of future payments is reasonably assured. In certain instances, the Company may make exceptions to placing a loan on non-accrual status if the loan is in the process of modification.
Loan modifications made to borrowers experiencing financial difficulty.
In situations where economic or legal circumstances may cause a borrower to experience significant financial difficulties, the Company may grant concessions for a period of time to the borrower that it would not otherwise consider. These modified terms may include interest rate reductions, principal forgiveness, term extensions, and other-than-insignificant payment delays intended to minimize the Company’s economic loss and to avoid foreclosure or repossession of collateral. The Company monitors the performance of all loans, including loans modified to borrowers experiencing financial difficulty, and considers loans that are 90 days past due to be in payment default.
Allowance for Credit Losses
The Company adopted the current expected credit loss (“CECL”) standard effective January 1, 2023 in accordance with ASU 2016-13, “Financial Instruments – Credit Losses”. The initial CECL adjustment of $
The Company records an “Allowance for credit losses” on the consolidated balance sheets with respect to its loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics. This methodology, known as the “static pool 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 ASU 2016-13, as they represent a financial asset that is subject to credit risk. As allowed under the CECL standard used by the Company, 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 aggregate outstanding principal balance and the accrued but unpaid interest and borrower charges of loans in pending/pre-foreclosure as of September 30, 2024 and December 31, 2023 was $
9
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
The CECL standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. The Company utilizes 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, the Company considers 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. The Company utilizes a forecast of three years which approximates its longer-term loans, which are often the construction loans.
Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The “Allowance for credit losses” is maintained at a level sufficient to provide for expected credit losses over the life of the loans based on evaluating historical credit loss experience and to make adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. The “Allowance for credit losses” related to the principal outstanding is presented within “Mortgages receivable, net” and for unfunded commitments is within accounts payable and accrued liabilities in the Company’s consolidated balance sheets. The “Allowance for credit losses” related to the late payment fees are presented in “Interest and fees receivable, net”, and “Due from borrowers, net” in the Company’s consolidated balance sheets. Lastly, the allowance related to unfunded commitments for construction loans is presented in “Accounts payable and accrued liabilities” on the Company’s consolidated balance sheets.
The below table represents the financial statement line items that are impacted by the Allowance for credit losses:
Provision for credit | |||||||||
| Balance as of December 31, 2023 |
| losses related to loans |
| Balance as of September 30, 2024 | ||||
(in thousands) | |||||||||
Mortgages receivable | $ | | $ | | (1) | $ | | ||
Interest and fees receivable |
| |
| |
| | |||
Due from borrower |
| |
| |
| | |||
Unfunded commitments |
| |
| |
| | |||
Total Allowance for credit losses | $ | | $ | | $ | | |||
(1) | For the nine months ended September 30, 2024, the Company recorded an $ |
As of September 30, 2024 and December 31, 2023 the Company recorded an “Allowance for credit losses” on debt securities of $
Fair Value Measurements
The framework for measuring fair value provides a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurement” are described as follows:
Level 1Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company can access.
10
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Level 2Inputs to the valuation methodology include:
| ● | quoted prices for similar assets or liabilities in active markets; |
| ● | quoted prices for identical or similar assets or liabilities in inactive markets; |
| ● | inputs other than quoted prices that are observable for the asset or liability; and |
| ● | inputs that are derived principally from or corroborated by observable market data by correlation to other means. |
If the asset or liability has a specified (i.e., contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Property and Equipment
Land and building acquired in 2021 to serve as the Company’s corporate headquarters is stated at cost. Renovation of the building was completed in the first quarter of 2023 and the Company relocated its operations to the building in March 2023. The building is being depreciated using the straight – line method over its estimated useful life of
The following tables represent the Company’s property and equipment, net as of September 30, 2024 and December 31, 2023:
September 30, 2024 |
| Cost |
| Accumulated Depreciation |
| Property and Equipment, Net | |||
(in thousands) | |||||||||
Building | $ | | $ | ( | $ | | |||
Land |
| |
| — |
| | |||
Furniture and fixtures |
| |
| ( |
| | |||
Computer hardware and software |
| |
| ( |
| | |||
Vehicles |
| |
| ( |
| | |||
Total property and equipment, net | $ | | $ | ( | $ | | |||
December 31, 2023 |
| Cost |
| Accumulated Depreciation |
| Property and Equipment, Net | |||
(in thousands) | |||||||||
Building | $ | | $ | ( | $ | | |||
Land |
| |
| — |
| | |||
Furniture and fixtures |
| |
| ( |
| | |||
Computer hardware and software |
| |
| ( |
| | |||
Vehicles |
| |
| ( |
| | |||
Total property and equipment, net | $ | | $ | ( | $ | | |||
Investment in Rental Real Estate
Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the improvement and leasing of real estate are capitalized. Maintenance and repairs are expensed as incurred. For redevelopment of existing operating properties, the net book value of the existing property under redevelopment plus the cost for the construction and improvements incurred in connection with the redevelopment, including interest and debt expense, are capitalized to the extent the capitalized costs of the property do not exceed the estimated fair value of the redeveloped property when complete. If the cost of the redeveloped property, including the net book value of the existing property, exceeds the estimated fair value of the redeveloped property, the excess is charged to expense. Depreciation is recognized on a straight-line basis over the estimated useful
11
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
lives of these assets which range from
Upon the acquisition of real estate, the Company assesses whether the transaction should be accounted for as an asset acquisition or as a business combination. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. Acquisitions of real estate generally will not meet the definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related identified intangible assets).
The Company allocates the purchase price of real estate to land and building (inclusive of site and tenant improvements) and, if determined to be material, intangibles, such as the value of above- and below-market leases and origination costs associated with the in-place leases.
The allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed involves subjectivity as the allocations are based on an analysis of the respective fair values. In determining the fair value of the real estate acquired, the Company utilized a third-party valuation which primarily utilizes cash flow projections that apply, among other things, estimated revenue and expense growth rates, discount rates and capitalization rates, as well as sales comparison approach, which utilizes comparable sales, listings and sales contracts. The Company assesses the fair value of the acquired leases based on estimated cash flow projections that utilize appropriate discount rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. The determined and allocated fair values to the real estate acquired will affect the amount of depreciation and amortization we record over the respective estimated useful lives or term of the lease.
On June 23, 2023, the Company entered into a purchase and sale contract (the “Westport Purchase Agreement”) to acquire a commercial office building in Westport, CT (the “Westport Asset”) for $
See Note 6 – Investment in Rental Real Estate, net for further details surrounding the above acquisition as of September 30, 2024.
Real Estate Owned (“REO”)
REO acquired through foreclosure is initially measured at fair value and is thereafter subject to an ongoing impairment analysis. After an REO acquisition, events or circumstances may occur that result in a material and sustained decrease in the cash flows generated from the property or other market indicators including listing data may signal a decline in the liquidation value. REO is evaluated for recoverability when impairment indicators are identified. Any impairment losses are included in the consolidated statements of operations.
Impairment of Long-Lived Assets
The Company continually monitors events or changes in circumstances that could indicate the carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the undiscounted cash flow is less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.
12
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Goodwill
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. Goodwill at September 30, 2024 represents the excess of the consideration paid over the fair value of net assets acquired from Urbane New Haven, LLC in October 2022.
In testing goodwill for impairment, the Company adheres to ASC Topic 350, “Intangibles—Goodwill and Other,” which permits a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, or the Company chooses not to perform the qualitative assessment, then it compares the fair value of that reporting unit with its carrying value, including goodwill.
As of September 30, 2024 and December 31, 2023, goodwill was $
Deferred Financing Costs
Costs incurred in connection with the Company’s revolving credit facilities, described in Note 8 – Lines of Credit, Mortgage Payable Churchill Facility – are amortized over the term of the applicable facility using the straight-line method.
Costs incurred by the Company in connection with the issuance of unsecured, unsubordinated notes, described in Note 9 – Unsecured Notes Payable – are being amortized over the term of the respective unsecured, unsubordinated notes.
Revenue Recognition
Interest income from the Company’s loan portfolio is earned over the loan period and is calculated using the simple interest method on principal amounts outstanding. Generally, the Company’s loans provide for interest to be paid monthly in arrears. The Company, generally, does not accrue interest income on loans that are more than 90 days past due or interest charged at default rates. However, interest income not accrued at September 30, 2024 but collected prior to the issuance of this Report is included in income for the three and nine month periods ended September 30, 2024.
Origination and modification fee revenue, generally
Income Taxes
The Company believes it qualifies as a real estate investment trust (“REIT”) for federal income tax purposes and operates accordingly. It made the election to be taxed as a REIT on its 2017 Federal income tax return. The Company’s qualification as a REIT depends on its ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”), relating to, among other things, the sources of its income, the composition and values of its assets, its compliance with the distribution requirements applicable to REITs and the diversity of ownership of its outstanding capital stock. So long as it qualifies as a REIT, the Company, generally, will not be subject to U.S. federal income tax on its taxable income distributed to its shareholders. However, if it fails to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal income tax at regular corporate rates and may also be subject to various penalties and may be precluded from re-electing REIT status for the four taxable years following the year during in which it lost its REIT qualification. Other than taxes incurred by TRSs (see below), the Company does not expect to incur any corporate federal income tax liability outside of the TRSs, as it believes it has maintained its qualification as a REIT.
13
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
The Company has elected, and may elect in the future, to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets that the Company cannot hold directly and generally may engage in any real estate or non-real estate related business. The TRSs generate income, resulting in federal and state income tax liability for these entities. During the three and nine months ended September 30, 2024, the Company’s TRSs recognized provisions for federal and state income tax of $
The income tax provision for the Company differs from the amount computed from applying the statutory federal income tax rate to income before income taxes due to non-taxable REIT income and other permanent differences including the non-deductibility of acquisition costs of business combinations for federal income tax reporting.
ASC Sub-Topic 740-10 “Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and disclosure required. Under this standard, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense. The Company has determined that there are
Earnings (Losses) Per Share
Basic and diluted earnings (losses) per share are calculated in accordance with ASC Topic 260 — “Earnings Per Share.” Under ASC Topic 260, basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. The computation of diluted earnings (losses) per share is similar to basic earnings (losses) per share, except that the denominator is increased to include the potential dilution from the exercise of stock options and warrants for common shares using the treasury stock method. The numerator in calculating both basic and diluted earnings (losses) per common share for each period is the reported net income (loss).
For the three and nine months ended September 30, 2024, the Company had basic and diluted weighted shares of
Recent Accounting Pronouncements
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2023-03”). ASU 2022-03 was issued to (1) to clarify the guidance in ASC Topic 820, “Fair Value Measurement”, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with ASC Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. This update did not have a material effect on the accompanying unaudited consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (ASC Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 intends to improve reportable segment disclosure requirements, enhance interim disclosure requirements and provides new segment disclosure requirements for entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024. ASU 2023-07 applies retrospectively to all prior periods presented. This update is not expected to have a material effect on the accompanying consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted, would have a material effect on the Company’s unaudited consolidated financial statements.
14
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Reclassifications
Certain amounts included in the Company’s December 31, 2023 and September 30, 2023 consolidated financial statements have been reclassified to conform to the presentation in the accompanying unaudited consolidated financial statements.
3. Fair Value Measurement
The fair value measurement level within the fair value hierarchy of an asset or liability is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The following table sets forth by Level, within the fair value hierarchy, the Company’s assets at fair value as of September 30, 2024:
| Level 1 |
| Level 2 |
| Total | ||||
(in thousands) | |||||||||
Stocks and ETFs | $ | — | $ | | $ | | |||
Total investment securities, at fair value | $ | — | $ | | $ | | |||
The following table sets forth by Level, within the fair value hierarchy, the Company’s assets at fair value as of December 31, 2023:
| Level 1 |
| Level 2 |
| Total | ||||
(in thousands) | |||||||||
Stocks and ETF’s | $ | — | $ | | $ | | |||
Mutual funds |
| |
| — |
| | |||
Debt securities |
| |
| |
| | |||
Total investment securities, at fair value | $ | | $ | | $ | | |||
Following is a description of the methodologies used for assets measured at fair value:
Stocks and ETFs (Levels 1 and 2): Valued at the closing price reported in the active market in which the individual securities are traded.
Mutual funds (Levels 1 and 2): Valued at the daily closing price reported by the fund. Mutual funds held by the Company are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset values and to transact at that price. The mutual funds held by the Company are deemed to be actively traded.
Debt securities: Valued at the closing price reported in the active market in which the individual securities are traded.
Impact of Fair Value of Available-for-sale Securities on Other Comprehensive Income
The carrying value of the Company’s financial instruments approximates fair value generally due to the relative short-term nature of such instruments. Other financial assets and financial liabilities have fair value that approximate their carrying value.
Pursuant to ASC Topic 326-30-50-4 and 50-5 the Company is required to disclose investment securities that have been in a continuous unrealized loss position for 12 months or more as of the balance sheet date. As of September 30, 2024 and December 31, 2023, the Company had a continuous unrealized losses over 12 months in Available-For-Sale (“AFS”) debt securities of $
15
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
related provision of credit losses for the three and nine month periods ended September 30, 2024 and 2023. During the nine months ended September 30, 2024, the Company sold all of the remaining AFS debt securities.
The following table presents the impact of the Company’s AFS securities - debt securities on its Other Comprehensive Income (“OCI”) for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended | Nine months Ended | |||||||||||
September 30, | September 30, | |||||||||||
2024 | 2023 | 2024 | 2023 | |||||||||
(in thousands) | ||||||||||||
OCI from AFS securities – debt securities: |
|
|
|
|
|
|
|
| ||||
Unrealized (losses) on debt securities at beginning of period | $ | — | $ | ( | $ | | $ | ( | ||||
Reversal of losses from unrealized to realized | — | — | ( | — | ||||||||
Unrealized (loss) gain |
| — |
| ( |
| ( |
| | ||||
Change in OCI from AFS debt securities | — | ( | ( | | ||||||||
Balance at end of period | $ | — | $ | ( | $ | — | $ | ( | ||||
As of September 30, 2024 and 2023, the investment securities cost basis was $
4. Mortgages receivable
The Company offers secured, non-bank loans to real estate owners and investors (also known as “hard money” loans) to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the Northeastern and Southeastern United States. The Company’s lending standards typically require that the original principal amount of all mortgage receivable notes be secured by first mortgage liens on one or more properties owned by the borrower or related parties and that the principal amount of the loan be no greater than 70% of the appraised value of the underlying collateral, as determined by an independent appraiser at the time of the loan origination. In the case of properties undergoing renovation, the LTV ratio is calculated based on the estimated fair market value of the property after the renovations have been completed. Generally, the Company considers a maximum loan-to-value ratio of 70% as an indicator for the credit quality of a mortgage note receivable. However, the Company makes exceptions to this guideline if the facts and circumstances support the incremental risk. These factors include the additional collateral provided by the borrower, the credit profile of the borrower, the Company’s previous relationship, if any, with the borrower, the nature of the property, the geographic market in which the property is located and any other information the Company deems appropriate.
The loans are generally for a term of to
As of September 30, 2024 and December 31, 2023, loans on nonaccrual status had an outstanding principal balance of $
For the nine months ended September 30, 2024 and 2023, the aggregate amounts of loans funded by the Company were $
As of September 30, 2024, the Company’s mortgage loan portfolio includes loans ranging in size up to $
16
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
As of September 30, 2024, and December 31, 2023, the Company had
The Company may agree to extend the term of a loan if, at the time of the extension, the loan and the borrower meet all the Company’s then underwriting requirements. The Company treats a loan extension as a new loan. If an interest reserve is established at the time a loan is funded, accrued interest is paid out of the interest reserve and recognized as interest income at the end of each month. If no reserve is established, the borrower is required to pay the interest monthly from its own funds. The deferred origination, loan servicing and amendment fee income represents amounts that will be recognized over the contractual life of the underlying mortgage notes receivable.
Allowance for Credit Losses
Allowance for credit losses are charged to income in amounts sufficient to maintain an allowance for credit losses inherent in the loans that are established systematically by management as of the reporting date. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. The Company uses static pool modeling techniques to determine the allowance for loan losses expected over the remaining life of the loans, which is supplemented by management’s judgment. Expected credit losses are estimated for groups of accounts aggregated by geographical location.
The Company’s estimate of expected credit losses includes 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. The Company reviews charge-off experience factors, contractual delinquency, historical collection rates, the value of underlying collateral and other information to make the necessary judgments as to allowance for credit losses expected in the portfolio as of the reporting date. While management utilizes the best information available to make its evaluations, changes in macroeconomic conditions, interest rate environments, or both, may significantly impact the assumptions and inputs used in determining the allowance for credit losses. The Company’s charge-off policy is determined by a review of each delinquent loan. The Company has an accounting policy to not place loans on nonaccrual status unless they are more than 90 days delinquent. Accrual of interest income is generally resumed when the delinquent contractual principal and interest is paid in full or when a portion of the delinquent contractually payments are made, and the ongoing required contractual payments have been made for an appropriate period.
In assessing the allowance for credit losses, the Company considers historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The Company derived an annual historical loss rate based on its historical loss experience in its portfolio, adjusted to incorporate the risks of construction lending, other specific circumstances, and to reflect the Company’s expectations of the macroeconomic environment.
The following table summarizes the activity in the mortgages receivable allowance for credit losses from December 31, 2023 through September 30, 2024:
Allowance for credit losses | |||||||||
Allowance for credit losses as of | Provision for credit losses | as of September 30, | |||||||
| December 31, 2023 |
| related to loans |
| 2024 | ||||
(in thousands) | |||||||||
Geographical Location | |||||||||
New England | $ | | $ | | $ | | |||
Mid-Atlantic |
| |
| |
| | |||
South |
| |
| |
| | |||
West |
| — |
| |
| | |||
Total | $ | | $ | | $ | | |||
17
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Presented below is the Company’s loan portfolio by geographical location:
| September 30, 2024 |
| December 31, 2023 |
| |||||||
| Carrying Value |
| % of Portfolio |
| Carrying Value |
| % of Portfolio | ||||
(in thousands) | |||||||||||
Geographical Location | |||||||||||
New England | $ | |
| | % | $ | |
| | % | |
Mid-Atlantic |
| |
| | % |
| |
| | % | |
South |
| |
| | % |
| |
| | % | |
West |
| |
| | % |
| |
| | % | |
Total | |
| | % | |
| | % | |||
Less: Allowance for credit losses | ( |
| ( | ||||||||
Carrying value, net | $ | |
| $ | | ||||||
Presented below are the carrying values by property type:
| September 30, 2024 |
| December 31, 2023 |
| |||||||
Outstanding | Outstanding | ||||||||||
| Principal |
| % of Portfolio |
| Principal |
| % of Portfolio |
| |||
(in thousands) | |||||||||||
Property Type |
| ||||||||||
Residential | $ | |
| | % | $ | |
| | % | |
Commercial |
| |
| | % |
| |
| | % | |
Pre-development land |
| |
| | % |
| |
| | % | |
Mixed use |
| |
| | % |
| |
| | % | |
Total | |
| | % | |
| | % | |||
Less: Allowance for credit losses |
| ( |
|
| ( |
|
| ||||
Carrying value, net | $ | | $ | |
|
| |||||
The following tables allocate the carrying value of the Company’s loan portfolio based on internal credit quality indicators in assessing estimated credit losses and vintage of origination at the dates indicated:
September 30, 2024 | Year Originated(1) | |||||||||||||||||||
Carrying | % of | |||||||||||||||||||
FICO Score (2) |
| Value |
| Portfolio |
| 2024 |
| 2023 |
| 2022 |
| 2021 |
| Prior | ||||||
(in thousands) | ||||||||||||||||||||
Under 500 |
| $ | |
| | % | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | |
501-550 |
| |
| | % | — |
| — |
| — |
| |
| | ||||||
551-600 |
| |
| | % | |
| |
| |
| |
| | ||||||
601-650 |
| |
| | % | |
| |
| |
| |
| | ||||||
651-700 |
| |
| | % | |
| |
| |
| |
| | ||||||
701-750 |
| |
| | % | |
| |
| |
| |
| | ||||||
751-800 |
| |
| | % | |
| |
| |
| |
| | ||||||
801-850 |
| |
| | % | — |
| |
| |
| — |
| — | ||||||
Total |
| |
| | % | $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
Less: Allowance for credit losses |
| ( | ||||||||||||||||||
Carrying value, net |
| $ | |
| ||||||||||||||||
(1) | Represents the year of origination or amendment where the loan was subject to a full re-underwriting. |
(2) | The FICO scores are calculated at the inception of the loan and are updated if the loan is modified or on an as needed basis. |
18
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
December 31, 2023 | Year Originated(1) | |||||||||||||||||||
Carrying | % of | |||||||||||||||||||
FICO Score (2) |
| Value |
| Portfolio |
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| Prior | ||||||
(in thousands) | ||||||||||||||||||||
Under 500 |
| $ | |
| | % | $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | |
501-550 |
| |
| | % | |
| |
| |
| — |
| | ||||||
551-600 |
| |
| | % | |
| |
| |
| |
| | ||||||
601-650 |
| |
| | % | |
| |
| |
| |
| | ||||||
651-700 |
| |
| | % | |
| |
| |
| |
| | ||||||
701-750 |
| |
| | % | |
| |
| |
| |
| | ||||||
751-800 |
| |
| | % | |
| |
| |
| |
| | ||||||
801-850 |
| |
| | % | |
| |
| — |
| — |
| | ||||||
Total | |
| | % | $ | |
| $ | |
| $ | |
| $ | |
| $ | | ||
Less: Allowance for credit losses | ( | |||||||||||||||||||
Carrying value, net |
| $ | | |||||||||||||||||
(1) | Represents the year of origination or amendment where the loan was subject to a full re-underwriting. |
(2) | The FICO scores are calculated at the inception of the loan and are updated if the loan is modified or on an as needed basis. |
The following table sets forth the maturities of mortgages receivable as of September 30, 2024:
| For the years ended December 31, | ||
(in thousands) | |||
2024 (9 months) and prior | $ | | |
2025 |
| | |
2026 |
| | |
Thereafter | | ||
Total | | ||
Less: Allowance for credit losses | ( | ||
Total | $ | | |
At September 30, 2024, of the
At December 31, 2023, of the
Loan modifications made to borrowers experiencing financial difficulty
In certain situations, the Company may provide loan modifications to borrowers experiencing financial difficulty. These modifications may include term extensions, and adding unpaid interest, charges and taxes to the principal balance intended to minimize the Company’s economic loss and to avoid foreclosure or repossession of collateral. The Company generally receives additional collateral as part of extending the terms of the loan for loans experiencing financial difficulty.
The Company monitors the performance of loans modified to borrowers experiencing financial difficulty. The Company considers loans that are 90 days past due to be in payment default. For the three months ended September 30, 2024 and 2023, $
19
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
As of September 30, 2024, the Company was committed to lend additional amounts totaling $
5. Investment in Rental Real Estate
As of September 30, 2024 and December 31, 2023, investment in rental real estate, net consist of the following:
Nine months ended September 30, 2024 |
| Cost |
| Accumulated Depreciation |
| Investment in Rental Real Estate, Net | |||
(in thousands) | |||||||||
Land | $ | | $ | — | $ | | |||
Building |
| |
| ( |
| | |||
Site improvements |
| |
| ( |
| | |||
Tenant improvements |
| |
| — |
| | |||
Construction in progress |
| |
| — |
| | |||
Total | $ | | $ | ( | $ | | |||
Year ended December 31, 2023 |
| Cost |
| Accumulated Depreciation |
| Investment in Rental Real Estate, Net | |||
(in thousands) | |||||||||
Land | $ | | $ | — | $ | | |||
Building |
| |
| ( | | ||||
Site improvements |
| |
| ( | | ||||
Tenant improvements |
| |
| — | | ||||
Construction in progress | | — | | ||||||
Total | $ | | $ | ( | $ | | |||
Building and site improvements are being depreciated using the straight-line method over its estimated useful life of
Additionally, the Company leases space to a tenant under an operating lease. The lease provides for the payment of fixed base rent payable monthly in advance and periodic step-ups in rent over the term of the lease and a pass through to tenants of their share of increases in real estate taxes and operating expenses over a base year. The lease also provides for free rent and a tenant improvement allowance of $
As of September 30, 2024, future minimum rents under non-cancelable operating leases were as follows:
Years Ending December 31, |
| Amount | |
(in thousands) | |||
2024 (3 months) | $ | — | |
2025 |
| — | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
Total | $ | | |
20
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Estimated annual amortization of acquired below-market lease intangible is as follows:
Years Ending December 31, |
| Amount | |
(in thousands) | |||
2024 (3 months) | $ | — | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
Total | $ | | |
Estimated annual amortization of acquired in-place lease intangible is as follows:
Years Ending December 31, |
| Amount | |
(in thousands) | |||
2024 (3 months) | $ | — | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
Total | $ | | |
Estimated annual amortization of deferred leasing costs is as follows:
Years Ending December 31, |
| Amount | |
(in thousands) | |||
2024 (3 months) | $ | — | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
Total | $ | | |
In addition, the Westport Purchase Agreement contains a provision requiring the payment of an Additional Purchase Price, as defined, upon the earlier to occur of:
| ● | The Company closing on any construction financing on the Project, as defined, or |
| ● | Twelve months following receipt of all zoning and other State and municipal permits and approvals necessary to construct certain residential units, as defined. |
These payments represent contingent consideration in connection with this acquisition, requiring accrual when the payments are deemed probable and reasonably estimable. In January 2024, the Company submitted a proposal to the town of Westport for
21
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
6. Real Estate Owned (REO)
Property acquired through foreclosure are included on the Company’s consolidated balance sheets as real estate owned and further categorized as held for sale or held for rental, described in detail below.
As of September 30, 2024 and December 31, 2023, REO totaled $
The following table presents the Company’s REO as of September 30, 2024 and December 31, 2023:
| September 30, 2024 |
| December 31, 2023 | |||
(in thousands) | ||||||
Real estate owned at the beginning of period | $ | | $ | | ||
Principal basis transferred to real estate owned |
| |
| | ||
Charges and building improvements |
| — |
| | ||
Proceeds from sale of real estate owned |
| ( |
| ( | ||
Impairment loss |
| ( |
| ( | ||
Gain on sale of real estate owned |
| |
| | ||
Balance at end of period | $ | | $ | | ||
As of September 30, 2024, REO included $
Properties Held for Sale
During the three months ended September 30, 2024, the Company sold
Properties Held for Rental
As of September 30, 2024,
As of September 30, 2024, future minimum rents under this lease were as follows:
Years Ending December 31, |
| Amount | |
(in thousands) | |||
2024 (3 months) | $ | | |
2025 |
| | |
2026 |
| | |
Total | $ | | |
22
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
7. Other Assets
As of September 30, 2024 and December 31, 2023, other assets consist of the following:
| September 30, 2024 |
| December 31, 2023 | |||
(in thousands) | ||||||
Prepaid expenses | $ | | $ | | ||
Other receivables |
| |
| | ||
Other assets |
| |
| | ||
Notes receivable | | | ||||
Deferred financing costs, net | | | ||||
Deferred leasing cost | | | ||||
Leases in place intangible | | | ||||
Goodwill | | | ||||
Intangible asset – trade name |
| |
| | ||
Total | $ | | $ | | ||
8. Lines of Credit, Mortgage Payable and Churchill Facility
Line of Credit – Wells Fargo
During the year ended December 31, 2020, the Company established a margin loan account at Wells Fargo Advisors that is secured by the Company’s portfolio of short-term securities. The credit line bears interest at a rate equal to
Line of Credit – Needham Bank
On March 2, 2023, the Company entered into a Credit and Security Agreement (the “Credit Agreement”), with Needham Bank, a Massachusetts co-operative bank, as the administrative agent (“Needham”) for the lenders party thereto (the “Lenders”) with respect to a $
Loans under the Needham Credit Facility accrue interest at the greater of (i) the annual rate of interest equal to the “prime rate,” as published in the “Money Rates” column of The Wall Street Journal minus one-quarter of one percent (
As of September 30, 2024, the Company was not in compliance with the debt service coverage ratio covenant described above. The Company’s inability to comply with this covenant is directly related to the provision for credit losses, which is a non-cash
23
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
charge that adversely impacts earnings. Unlike other non-cash charges against earnings, such as depreciation and amortization, provision for credit losses is not added back to earnings under the definition of EBITDA. Needham is aware of the situation and has informed the Company that it is considering granting a waiver on the debt service covenant ratio. Per the Credit Agreement, the breach of a covenant can result in a default which, if left uncured for more than
The Company uses the proceeds from the Needham Credit Facility to finance the continued expansion of its lending business and for general corporate purposes.
As of September 30, 2024 and December 31, 2023, the total outstanding principal balance on the Needham Credit Facility was $
Mortgage Payable
In 2021, the Company obtained a $
On February 28, 2023, the Company refinanced the NHB Mortgage with a new adjustable-rate mortgage loan from New Haven Bank (the “New NHB Mortgage”) in the original principal amount of $
As of September 30, 2024 and December 31, 2023, the total outstanding principal balance on the New NHB Mortgage was $
Churchill MRA Funding I LLC Repurchase Financing Facility
On July 21, 2021, the Company consummated a $
The Churchill Facility is subject to other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements. Under one such covenant, the Company (A) is prohibited from (i) paying any dividends or making distributions in excess of 90% of its taxable income, (ii) incurring any indebtedness or (iii) purchasing any of its capital stock, unless, it has an asset coverage ratio of at least
24
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
terminate the Churchill Facility at any time upon
The Company uses the proceeds from the Churchill Facility to finance the continued expansion of its lending business and for general corporate purposes. At September 30, 2024, the total amount outstanding under the Churchill Facility was $
The New NHB Mortgage and the Churchill Facility contain cross-default provisions.
9. Unsecured Notes Payable
At September 30, 2024, the Company had an aggregate of $
| (i) | Notes having an aggregate principal amount of $ |
| (ii) | Notes having an aggregate principal amount of $ |
| (iii) | Notes having an aggregate principal amount of $ |
| (iv) | Notes having an aggregate principal amount of $ |
| (v) | Notes having an aggregate principal amount of $ |
| (vi) | Notes having an aggregate principal amount of $ |
The Notes were sold in underwritten public offerings, were issued in denomination of $
25
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
The following are the future principal payments on the notes payable as of September 30, 2024:
Years ending December 31, |
| Amount | |
(in thousands) | |||
Remainder of 2024 | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Total principal payments |
| | |
Deferred financing costs |
| ( | |
Total notes payable, net of deferred financing costs | $ | | |
The estimated amortization of the deferred financing costs as of September 30, 2024 is as follows:
Years ending December 31, |
| Amount | |
(in thousands) | |||
Remainder of 2024 | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Total deferred costs | $ | | |
10. Accounts Payable and Accrued Liabilities
As of September 30, 2024 and December 31, 2023, accounts payable and accrued liabilities include the following:
| September 30, 2024 |
| December 31, 2023 | |||
(in thousands) | ||||||
Accounts payable and accrued expenses |
| $ | |
| $ | |
Allowance for credit losses on unfunded commitments | | | ||||
Accrued interest |
| |
| | ||
Total | $ | | $ | | ||
11. Fee income from loans
For the three and nine month periods ended September 30, 2024 and 2023, fee income from loans consists of the following:
Three Months | Nine Months | |||||||||||
ended September 30, | ended September 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
(in thousands) | ||||||||||||
Origination and Modification fees | $ | | $ | | $ | | $ | | ||||
Extension fees | |
| |
| |
| | |||||
Late and other fees | ( |
| |
| |
| | |||||
Processing fees |
| |
| |
| |
| | ||||
Construction servicing fees | | | | — | ||||||||
Legal fees | | | | | ||||||||
Other fees | | | | | ||||||||
Total | $ | | $ | | $ | | $ | | ||||
26
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
12. Commitments and Contingencies
Origination, Modification, and Construction Servicing Fees
Loan origination and modification fees generally range from
Years ending December 31, |
| Amount | |
(in thousands) | |||
Remainder of 2024 | $ | | |
2025 | | ||
2026 |
| | |
2027 |
| | |
Total | $ | | |
In instances in which mortgages are repaid before their maturity date, the balance of any unamortized deferred revenue is recognized in full at the time of repayment.
Employment Agreements and Arrangements
In February 2017, the Company entered into an employment agreement with John Villano, the material terms of which are as follows: (i) the employment term is
Effective as of September 1, 2024, the Company entered into a new employment arrangement with Nicholas M. Marcello, the Company’s Chief Financial Officer, the material terms of which are as follows: (i) an annual base salary of $
Unfunded Commitments
At September 30, 2024, the Company had future funding obligations totaling $
27
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Liquidity
The Company incurred a net loss attributable to common shareholders of $
Management believes the ability to utilize the Company’s existing $
Other
In the normal course of its business, the Company is named as a party-defendant in connection with tax foreclosure proceedings against properties on which it holds a first mortgage lien. The Company actively monitors these actions and, in all cases, believes there remains sufficient value in the subject property to assure that no loan impairment exists. At September 30, 2024, there were
In accordance with the asset purchase agreement with Urbane New Haven, LLC (“Urbane”) in October 2022, under certain circumstances the Company will be required to pay Urbane
13. Related Party Transactions
In the ordinary course of business, the Company may originate, fund, manage and service loans to shareholders. The underwriting process on these loans adheres to prevailing Company policy. The terms of such loans, including the interest rate, income, origination fees and other closing costs are the same as those applicable to loans made to unrelated third parties in the portfolio. As of September 30, 2024, and December 31, 2023, loans to known shareholders totaled $
In December 2021, the Company hired the daughter of the Company’s chief executive officer to perform certain credit and compliance services. For the three-month periods ended September 30, 2024 and 2023, she received compensation of $
14. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments in securities, investments in partnerships, and mortgage loans.
The Company maintains its cash and cash equivalents with various financial institutions. Accounts at the financial institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $
28
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
As of September 30, 2024,
Credit risks associated with the Company’s mortgage loan portfolio and related interest receivable are described in Note 4 – Mortgages receivable, net.
15. Stock-Based Compensation and Employee Benefits
Stock-Based Compensation
On October 27, 2016, the Company adopted the 2016 Equity Compensation Plan (the “Plan”), the purpose of which is to align the interests of the Company’s officers, other employees, advisors and consultants or any subsidiary, if any, with those of the Company’s shareholders and to afford an incentive to such officers, employees, consultants and advisors to continue as such, to increase their efforts on the Company’s behalf and to promote the success of the Company’s business. The Plan is administered by the Compensation Committee. The maximum number of common shares reserved for the grant of awards under the Plan is
During the nine months ended September 30, 2024 and 2023, the Company granted an aggregate of
With respect to the restricted common shares granted during the nine months ended September 30, 2024, (i)
Stock-based compensation for the three months ended September 30, 2024 and 2023 was $
Employee Benefits
On April 16, 2018, the Company’s Board of Directors approved the adoption of the Sachem Capital Corp. 401(k) Profit Sharing Plan (the “401(k) Plan”). All employees who meet the participation criteria, are eligible to participate in the 401(k) Plan. Under the terms of the 401(k) Plan, the Company is obligated to contribute
16. Equity
On August 24, 2022, the Company filed a prospectus supplement to its Form S-3 Registration Statement covering the sale of up to $
29
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
Company filed a new prospectus supplement (the “New Prospectus Supplement”) which modified the ATM Offering by reducing the amount of common shares the Company may offer and sell to up to an aggregate of $
During the nine months ended September 30, 2024, under this offering, the Company sold
In October 2022, the Board adopted a stock repurchase plan (the “Original Repurchase Plan”), pursuant to which the Company may repurchase up to an aggregate of $
During the nine months ended September 30, 2024 and 2023, under this program, the Company repurchased
17. Partnership Investments
Shem Creek
As of September 30, 2024, the Company had invested an aggregate of $
The Company accounts for these investments at cost because the Company does not manage the entities in which it holds an interest and thus has no control or have significant influence over the investments. Shem is a commercial real estate finance company that provides debt capital solutions to local and regional commercial real estate owners in the Northeastern United States. The Company’s withdrawal from each limited liability company may only be granted by Shem.
The Company’s investments can be categorized into three fund structures: fund investments, direct loan investments (co-invest vehicles) and the manager investment. The fund investments primarily include investments in two entities that invest in mortgage loans. The direct loan investments are through three entities whereby the Company directly invests in the participation of individual loans. Both the fund and direct loan structure primarily invest in mortgage loans to borrowers with a majority of the deals being leveraged by a bank. These loans are primarily two- to three- year collateralized mortgage loans, often with contractual extension options for the borrowers of an additional year. The Company receives quarterly distributions from the entities that are comprised of a preferred return, return of capital, and the incentive fee depending on each loan’s waterfall calculation, as defined by the loan agreements. The Company’s interests in the entities are not redeemable at any time, as its investment will be repaid as the underlying loans are repaid. The Company expects to be repaid on its current investments by December 31, 2027. Shem’s compensation includes senior financing fees, incentive fees, and management fees that are charged to each entity that it manages, including the seven entities in which the Company has an investment. The Company expects to receive quarterly distributions from the respective entities operating cash flows.
For the three months ended September 30, 2024 and 2023, the Shem investments generated, in the aggregate, $
30
SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
At September 30, 2024, the Company had unfunded partnership commitments totaling $
Cordo CLT Investors LLC
In September 2024, the Company, through its wholly owned subsidiary Urbane Capital, LLC, acquired a
18. Series A Preferred Stock
The Company has designated
19. Subsequent Events
On
Between October 1, 2024 and November 13, 2024, the Company transferred approximately $
Between October 1, 2024 and November 13, 2024, through the Company’s at-the-market offering facility, the Company sold
Effective on October 10, 2024, the Company’s Board of Directors adopted a new stock repurchase plan (the “New Repurchase Plan”) to replace the Original Repurchase Plan, pursuant to which the Company may repurchase up to an aggregate of $
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SACHEM CAPITAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024
common shares under the plan or termination with its terms. Ladenburg Thalmann & Co. Inc. and Janney Montgomery Scott LLC will act as the Company’s exclusive purchasing agents under the New Repurchase Plan.
On October 5, 2024, the Company retained the services of Mission Capital (“Mission”), a subsidiary of Marcus and Millichap, which is a real estate capital markets firm, to act as its sole and exclusive advisor in connection with the proposed sale by the Company of a pool of mortgage loans having an aggregate principal amount of approximately $
Between October 1, 2024 and November 13, 2024, the Company repurchased
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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 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
We are a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term (i.e., three years or less) loans secured by first mortgage liens on real property. From our inception in December 2010, through our initial public offering, in February 2017, we operated as a limited liability company. On February 9, 2017, we completed our initial public offering (the “IPO”), the primary purpose of which was to raise equity capital to fund mortgage loans and expand our mortgage loan portfolio and to diversify our ownership so that we could qualify, for federal income tax purposes, as a real estate investment trust, or REIT. We believe that, since consummation of the IPO, we meet all the requirements to qualify as a REIT for federal income tax purposes and elected to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are entitled to claim deductions for distributions of taxable income to our shareholders thereby eliminating any corporate tax on such taxable income. Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% excise tax to the extent it exceeds 10% of our total taxable income. To maintain our qualification as a REIT, we are required to distribute each year at least 90% of our taxable income. As a REIT, we may also be subject to federal excise taxes and state taxes.
Review of the First Nine Months of 2024 and Outlook for Balance of Year
For the nine months ended September 30, 2024, revenue declined by 3.3% compared to the comparable 2023 period. In addition, for the 2024 period we reported a net loss attributable to common shareholders of $6.6 million compared to net income attributable to common shareholders of $14.2 million for the comparable 2023 period. The decrease in revenue and the swing from net income to net loss were driven by several factors. The primary factor was a $18.0 million provision for credit losses in 2024, compared to $65,000 in 2023. This increase was mainly due to declines in the value of assets securing the mortgage loans in our portfolio. Provisions for credit losses, including impairment losses, are non-cash charges and do not affect taxable income and distributable earnings as a result. The second factor was a 32.1% decrease in loan originations, which negatively impacted both interest and fee income from loans. This decline was primarily due to our inability to raise growth capital amid challenging macroeconomic conditions. The third factor was a 35.5% rise in general and administrative expenses, mainly from increased legal and advisory fees related to shareholder activism. The fourth factor was a 90.1% increase in other expenses, primarily driven by higher tax expenses from our taxable REIT subsidiary. On a positive note, income from partnership investments rose 67.1%, and interest expense, along with amortization of deferred financing costs, decreased by 1.9%, following the repayment of our unsubordinated notes in June 2024.
Looking ahead to the remainder of 2024, further write-downs related to loans are possible, along with continued declines in interest and fee income due to ongoing challenges in the real estate and capital markets. However, we anticipate general administrative expenses will return to more typical levels, and other expenses should stabilize. Additionally, a tranche of our unsecured subordinated five-year notes, totaling $34.5 million, is due on December 30, 2024. While the repayment of these notes will not impact interest expense or amortization for the remainder of this year, it will reduce these costs in 2025. We expect to meet the repayment obligation using cash flow from operations, additional borrowings under existing credit facilities, and proceeds from the sale of a portion of our loan portfolio (details to be discussed further below).
Our overall business strategy is as follows:
| ● | capitalize on opportunities created by the long-term structural changes in the real estate lending market and the continuing lack of liquidity in the commercial and investment real estate markets; |
| ● | take advantage of the prevailing economic environment and current economic, political and social trends that may impact real estate lending, as well as the outlook for real estate in general and particular asset classes; |
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| ● | remain flexible to capitalize on changing sets of investment opportunities that may be present in the various points of an economic cycle; |
| ● | continue to improve operational efficiencies and reduce general and administrative expenses as a percentage of revenue; |
| ● | maintain our status as a publicly-held company, subject to the reporting requirements of the Exchange Act, which gives us immediate access to the public markets for much-needed capital; and |
| ● | operate to qualify as a REIT and for an exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. |
We believe that the following factors are the major challenges confronting us for the remainder of 2024:
High interest rate environment. The rates on our existing credit facilities, including the Churchill Facility and the New NHB Mortgage (as defined below), have all increased. The effective rate of Needham Bank Credit Facility was 7.75%, and Churchill Facility was 8.95% as of September 30, 2024. In addition, the interest rate on the September 2027 Notes, our last note offering in 2022, was 8.0%, the highest it has ever been. Although interest rates have started to come down recently, we expect interest rates to remain elevated for the remainder of 2024 and into 2025.
Capital markets illiquidity. Our last underwritten public offering was in August 2022. Since then, our sole source of working capital has been interest and principal payments on our existing loan portfolio, our existing credit facilities (Churchill and Needham) and intermittent sales under our at-the-market offering facility. Rates have began to ease but the current U.S. 10 Year Treasury Yield would indicate rates are expected to stay elevated for longer than anticipated.
Global and domestic political concerns. 2023 and early 2024 was marked with various geopolitical concerns, including the ongoing conflict between Ukraine and Russia, and Israel, Hamas, Hezbollah and other Iranian proxies, heightened tensions between the U.S. and China regarding Taiwan and global trade, Iran’s and North Korea’s continued pursuit of nuclear weapons and Iran’s ongoing attempts to destabilize the Middle East. These conflicts have led to market volatility, spikes in commodity prices, supply chain interruptions, heightened cybersecurity concerns and general concerns that it might lead to unconventional warfare. The true ramifications of these conflicts and their impact on the markets and our business operations, specifically our borrowers and real estate prices, are not fully known at this time. Our business is purely domestic, but our Company and our borrowers are impacted by the uncertainty created by world events and unexpected market volatility. Additionally, in the fourth quarter of this year, the United States had a presidential election pursuant to which a new president was elected. The new president and his administration is expected to take office in January 2025 and his policies and priorities remain to be seen.
Increased competition from private lenders. In the past, our primary competitors were other non-bank real estate finance companies and banks and other financial institutions. More recently, we are encountering competition from private equity funds, hedge funds and other specialty finance entities funded by investment banks, asset managers, private equity funds and hedge funds. The primary driver for these new market participants, we believe, is their need to find higher yielding investments. Given that residential transition loan gross yields are in the 12-15% range, many institutions are deploying capital into credit products where the returns are nearing equity investments. These entities, in general, are well-funded, have relatively easy access to capital and are aggressive in terms of pricing. In addition, competition is becoming more of a factor as we implement our strategy to focus on larger loans and more sophisticated borrowers. Given recent developments regarding mid-size regional banks, we believe competition from traditional banks will continue to abate in 2024 rather than increase. However, as traditional banks exit the lending market, non-traditional lenders, such as non-bank real estate companies, hedge funds, private equity funds and insurance companies, are likely to step into the void. Our principal competitive advantages include our experience, our reputation, our size and our ability to address the needs of borrowers in terms of timing and structuring loan transactions.
Property value fluctuations and declines. 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 Co-Star reports. Additionally, we primarily utilize third-party valuations including, but not limited to, appraisals, broker price opinions, automated valuation models, and internal valuations to assist in both our underwriting and monitoring of our portfolio assets. Nevertheless, property value market cycles could have an adverse impact on our operations and financial condition. Over the past two years, the commercial real estate market throughout most of the United States has experienced a significant decline in value, 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
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allowances for credit losses and write-downs of real estate assets. Although many of our loans are secured by residential properties, 28.0% 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 mortgage loans as of September 30, 2024 was $27.2 million. Our total provisions for credit losses related to loans for the three and nine month periods ended September 30, 2024 were $8.1 million and $18.0 million, respectively. Similarly, the decline in commercial real estate values has led to an increase in our foreclosure rates. At September 30, 2024, 23.9% of the loans in our portfolio were in foreclosure proceedings compared to 18.0% at December 31, 2023. We expect these trends to continue through the remainder of 2024.
Unfunded commitments. Most of our loans are funded in full at closing. However, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing. At September 30, 2024, our mortgage loan portfolio included 80 loans with future funding obligations, in the aggregate principal amount of $71.9 million, compared 123 loans with future funding obligations, in the aggregate principal amount of $99.8 million at September 30, 2023. Advances under construction loans are funded against requests supported by all required documentation (including lien waivers) as and when needed to pay contractors and other costs of construction. To deal with these obligations, we are compelled to maintain higher cash balances, which could adversely impact our financial performance.
Despite these challenges, the changing dynamics of the real estate finance marketplace, the debt and equity markets, shocks to the financial system and challenging political developments, we continue to believe in the viability of our business model. We believe that there continues to be a significant market opportunity for a well-capitalized “hard money” lender to originate attractively priced loans to small- and mid-scale real estate developers with good collateral, particularly in markets where, traditionally, real estate values are stable and substandard properties are improved, rehabilitated, and renovated as well as under-developed markets that are experiencing rapid growth due to population shifts. We also believe developers will prefer to borrow from us rather than other lending sources because of flexibility in structuring loans to suit their needs, our lending criteria, which places greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, and our ability to close and service loans quickly. Our goal is, and has always been, to continue to grow our mortgage loan portfolio and increase our loan profitability, while at the same time maintaining or improving our existing underwriting and loan criteria. Specifically, we believe that the following factors will impact our performance in 2024.
| ● | Strong balance sheet. At September 30, 2024, we had $220.6 million of shareholders’ equity and total indebtedness for borrowed money of $324.7 million (including deferred financing costs). Thus, our capital structure was 58.5% debt and 41.5% equity compared to 61.0% debt and 39.0% equity at September 30, 2023 which is significantly lower than our mortgage REIT peers. Our equity includes 2,279,824 shares of Series A Preferred Stock (as defined in Note 18), which carries a dividend rate of 7.75% per annum. |
| ● | Pricing power. For the nine months ended September 30, 2024, and 2023, the stated yield on our mortgage loan portfolio, inclusive of default interest, was 13.1% and 12.2%, respectively. (For this purpose, the yield only takes into account the stated interest rate on the mortgage note adjusted to the default rate, if applicable.) The pullback from the banking sector continues to provide demand for products and as such we have the ability to maintain attractive pricing. |
| ● | Access to capital. As a public company subject to the reporting requirements of the Exchange Act, we are able to access the public markets for capital. Since the IPO through September 30, 2024, we raised $513.4 million of gross proceeds through public offerings of our equity and debt securities. We have used the net proceeds from these offerings to grow our business. |
| ● | Liquidity. In addition, to our capital raises through the public markets, we have other sources of liquidity: (i) a $200 million master repurchase financing facility (the “Churchill Facility”) with Churchill MRA Funding I LLC (“Churchill”), a subsidiary of Churchill Real Estate, a vertically integrated real estate finance company based in New York, New York and (ii) a $65 million revolving credit facility with Needham Bank, a Massachusetts co-operative bank, which can be increased up to $75 million (the “Needham Credit Facility”). As of September 30, 2024, we had cash and cash equivalents of $5.9 million. |
| ● | Management. Our senior executive officers include John Villano, president and chief executive officer, and Nicholas Marcello, chief financial officer. Other key personnel include a senior vice president – asset management and a vice |
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| president – asset management. In addition, we have added personnel in operations, accounting and administration to accommodate the growth of our business. Although these new hires have resulted in increased compensation, they were and will continue to be necessary to accommodate our growth and to maintain our ability to continue to service our borrowers and manage our business without sacrificing quality. |
Financing Strategy Overview
To continue to grow our business, we must increase the size of our loan portfolio, which requires that we use our existing working capital to fund new loans and raise additional capital either by selling shares of our capital stock or by incurring additional indebtedness. We do not have a policy limiting the amount of indebtedness that we may incur. Thus, our operating income in the future will depend on how much debt we incur and the spread between our cost of funds and the yield on our loan portfolio. Rising interest rates have an adverse impact on our business unless we can increase the rates on our loans to offset the increase in our cost of funds and to satisfy investor demand for yield. In addition, rapidly rising interest rates could have an unsettling effect on real estate values, which could compromise some of our collateral.
We do not have any formal policy limiting the amount of indebtedness we may incur, but we are limited to a 150% asset coverage ratio from our debt covenants. Depending on various factors we may, in the future, decide to take on additional debt to expand our mortgage loan origination activities to increase the potential returns to our shareholders. Although we have no pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion regarding the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values. At September 30, 2024, debt represented 58.5% of our total capital compared to 61.0% at September 30, 2023. To prudently grow the business and satisfy the tax requirement to distribute 90% of our taxable income, we expect to maintain our current level of debt and look to reduce our cost of capital. We intend to maintain a modest amount of leverage for the sole purpose of financing our portfolio and not for speculating on changes in interest rates.
Loan Sale
In October 2024 we retained Mission Capital (“Mission”), a subsidiary of Marcus and Millichap, which is a real estate capital markets firm, as our sole and exclusive advisor for the proposed sale of a pool of mortgage loans with an aggregate principal value of approximately $78.8 million. A majority of these loans are classified as “non-accrual,” meaning payments of interest owed are more than 90 days overdue. In the current market environment, selling these non-performing loans offers a strategic opportunity to improve liquidity and mitigate the opportunity cost associated with holding underperforming assets. Non-performing loans not only tie up valuable capital but also increase our cost of capital by raising risk perceptions among lenders and investors, making it more expensive for us to access financing. Current bids project recoverability of approximately 70% of unpaid principal balance indicating a loss on these loans of approximately $26.9 million which is inclusive of loss on unpaid principal balance, along with unpaid interest, fees, and charges. We are anticipating closing the transaction prior to December 31, 2024.
The net proceeds from the sale will be used for working capital and general corporate purposes, with a portion potentially allocated to repaying the December 2024 Notes. By reducing our exposure to non-performing loans, this transaction will allow us to optimize capital allocation, lower our cost of capital, and position the Company for stronger financial flexibility moving forward.
Debt
Our total outstanding indebtedness at September 30, 2024 was $324.7 million, which included $23.5 million outstanding under the Churchill Facility, $1.0 million outstanding under the New NHB Mortgage, $35.5 million outstanding under the Needham Credit Facility and $264.7 million aggregate outstanding principal amount of five-year, unsecured unsubordinated notes, (the “Notes”) as set forth below. During the nine months ended September 30, 2024, the Company redeemed its 7.125% unsecured, unsubordinated
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Notes due June 30, 2024 in the aggregate principal amount of $23.7 million plus the accrued interest thereon. At September 30, 2024, the Company has six series of Notes outstanding:
| ● | $40.3 million aggregate original principal amount, issued August 23, 2022, bearing interest at the rate of 8.00% per annum and maturing on September 30, 2027 (the “September 2027 Notes”), which trades on the NYSE American under the symbol SCCG; |
| ● | $30.0 million aggregate original principal amount, issued May 11, 2022, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2027 (the “June 2027 Notes”), which trades on the NYSE American under the symbol SCCF; |
| ● | $51.9 million aggregate original principal amount, issued March 9, 2022, bearing interest at the rate of 6.00% per annum and maturing on March 30, 2027 (the “March 2027 Notes”), which trades on the NYSE American under the symbol SCCE; |
| ● | $51.8 million aggregate original principal amount, issued December 20, 2021, bearing interest at the rate of 6.00% per annum and maturing on December 30, 2026 (the “2026 Notes”), which trades on the NYSE American under the symbol SCCD; |
| ● | $56.4 million aggregate original principal amount, of which $14.4 million was issued September 4, 2020, $14.0 million was issued October 23, 2020 and $28.0 million was issued December 22, 2020, bearing interest at the rate of 7.75% per annum and maturing on September 30, 2025 (the “2025 Notes”), which trades on the NYSE American under the symbol SCCC. The 2025 Notes are prepayable beginning on September 4, 2022; and |
| ● | $34.5 million aggregate original principal amount, issued November 7, 2019, bearing interest at the rate of 6.875% per annum and maturing on December 30, 2024 (the “December 2024 Notes”), which trades on the NYSE American under the symbol SACC. |
Each series of Notes was issued pursuant to the Indenture, dated June 21, 2019, and a supplement thereto, which provides for the form and terms, including default provisions and cures, applicable to each series. All seven series of Notes are subject to (i) “Defeasance,” which means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on such notes when due and satisfying any additional conditions required under the Indenture, we will be deemed to have been discharged from our obligations under such notes and (ii) an “Asset Coverage Ratio” requirement pursuant to which we may not (x) pay any dividends or make distributions in excess of 90% of our taxable income, (y) incur any indebtedness or (z) purchase any shares of our capital stock unless we have an “Asset Coverage Ratio” of at least 150% after giving effect to the payment of such dividend, the making of such distribution or the incurrence of such indebtedness. “Asset Coverage Ratio” means the ratio (expressed as a percentage) of the value of our total assets relative to the aggregate amount of its indebtedness.
Under the terms of the Indenture, we may, at our option, at any time and from time to time, redeem Notes two years after the date of their original issuance. The Notes are all currently redeemable at our option. In each case the redemption price is equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest to, but excluding, the date fixed for redemption. On and after any redemption date, interest will cease to accrue on the redeemed notes.
Our secured indebtedness as of September 30, 2024 includes the Churchill Facility, the New NHB Mortgage and the Needham Credit Facility (each as described below).
Under the terms of the Churchill Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans. In addition, we have the right and, in some instances the obligation, to repurchase those loans from Churchill. The amount that Churchill will pay for each mortgage loan it purchases will vary based on the attributes of the loan and various other circumstances but generally will not exceed 70% of the unpaid principal balance purchased. The repurchase price is calculated by applying an interest factor, as defined, to the purchase price of the mortgage loan. We also granted Churchill a first priority security interest on the mortgage loans sold to Churchill to secure our repurchase obligation. The cost of capital under the Churchill Facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 90-day SOFR plus (b) 3% - 4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time. Our obligations under the Churchill Facility are secured by a lien on the mortgage loans sold to Churchill. The Churchill Facility is also subject to various terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing
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arrangements, including a covenant that (A) prohibits us from (i) paying any dividend or make any distribution in excess of 90% of our taxable income, (ii) incurring any indebtedness or (iii) purchasing any shares of our capital stock, unless, in any case, we have an asset coverage ratio of at least 150%; and (B) requires us to maintain unencumbered cash and cash equivalents in an amount equal to or greater than 2.50% of the amount of our repurchase obligations. Churchill has the right to terminate the Churchill Facility at any time upon 180 days prior notice to us. At such time, we have an additional 180 days after termination to repurchase all the mortgage loans held by Churchill. We believe the Churchill Facility gives us the ability to raise capital as needed at a relatively low rate. It also gives us the flexibility to seek other sources of funding. At September 30, 2024, the amount outstanding under the Churchill Facility was $23.5 million, which amount was accruing interest of an effective rate of 8.95% per annum.
On February 28, 2023, we refinanced the $1.4 million adjustable-rate mortgage loan from New Haven Bank which we originally obtained in 2021, with a new $1.66 million adjustable-rate mortgage loan from New Haven Bank (the “New NHB Mortgage”). The new loan accrues interest at an initial rate of 5.75% per annum for the first 60 months. The interest rate will be adjusted on each of March 1, 2028 and March 1, 2033 to the then published 5-year Federal Home Loan Bank of Boston Classic Advance Rate, plus 1.75%. From April 1, 2023 through March 1, 2038, principal and interest is due and payable on a monthly basis. All payments under the new loan are amortized based on a 20-year amortization schedule. The unpaid principal amount of the loan and all accrued and unpaid interest are due and payable in full on March 1, 2038. The new loan is a non-recourse obligation, secured primarily by a first mortgage lien on the property located at 568 East Main Street, Branford, Connecticut.
On March 2, 2023, we entered into a Credit and Security Agreement (the “Credit Agreement”), with Needham Bank, a Massachusetts co-operative bank, as the administrative agent ( “Needham”) for the lenders party thereto (the “Lenders”) with respect to a $45 million revolving credit facility (the “Needham Credit Facility”). Under the Credit Agreement, we have the right to request an increase in the size of the Needham Credit Facility up to $75 million, subject to certain conditions, including the approval of the Lenders. As of September 8, 2023, the Needham Credit Facility was increased to $65 million. Loans under the Needham Credit Facility accrue interest at the greater of (i) the annual rate of interest equal to the “prime rate,” as published in the “Money Rates” column of The Wall Street Journal minus one-quarter of one percent (0.25%), and (ii) four and one-half percent (4.50%). All amounts borrowed under the Needham Credit Facility are secured by a first priority lien on virtually all our assets. Assets excluded from the lien include real estate owned by us (other than real estate acquired pursuant to foreclosure), and mortgages sold under the Churchill Facility. The Needham Credit Facility expires March 2, 2026 subject to our right to extend the term for one year upon the consent of the Needham and the Lenders, which consent cannot be unreasonably withheld, and so long as we are not in default and satisfy certain other conditions. All outstanding revolving loans and accrued but unpaid interest is due and payable on the expiration date. We have the right to terminate the Needham Credit Facility at any time without premium or penalty by delivering written notice to Needham at least ten (10) days prior to the proposed date of termination. The Needham Credit Facility 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 us to maintain: (A) a ratio of Adjusted EBITDA (as defined in the Credit Agreement) to Debt Service (as defined in the Credit Agreement) of less than 1.40 to 1.0, tested on a trailing-twelve-month basis at the end of each fiscal quarter, commencing with the quarter ended June 30, 2023; (B) a sum of cash, cash equivalents and availability under the facility equal to or greater than $10 million; and (C) an asset coverage ratio of at least 150%. At September 30, 2024, the amount outstanding under the Needham Credit Facility was $35.5 million, which was accruing interest of an effective rate of 7.75% per annum.
Currently, we are not in compliance with the debt service coverage ratio covenant in the Credit Agreement relating to the Needham Credit Facility described in the previous paragraph. Our inability to comply with this covenant is directly related to the provision for credit losses, which, as discussed elsewhere in this Report, is a non-cash charge that adversely impacts our earnings. Unlike other non-cash charges against earnings, such as depreciation and amortization, provision for credit losses related to mortgage loans is not added back to earnings under the definition of EBITDA. Needham is aware of the situation and has informed us that they are considering granting us a waiver on the debt service covenant ratio. Per the Credit Agreement, the breach of a covenant can result in a default which, if left uncured for more than 30 days, allows Needham to terminate the facility.
Finally, from time-to-time we raise capital by selling our common shares and shares of our Series A Preferred Stock through our at-the market offering facility. During the nine months ended September 30, 2024, under our at-the-market offering facility, we sold an aggregate of 568,711 common shares, realizing gross proceeds of $2.1 million and 256,703 shares of our Series A Preferred Stock having an aggregate liquidation preference of approximately $6.4 million, realizing gross proceeds of $5.4 million (representing a discount of 15.7% from the liquidation preference.) At September 30, 2024, $48.3 million of common shares and shares of our Series A Preferred Stock having a liquidation preference of approximately $66.8 million were available for future sale under the ongoing at-the-market offering.
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REIT Qualification
We believe that we have qualified as a REIT since the consummation of the IPO and that it is in the best interests of our shareholders that we operate as a REIT. We made the election to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders on an annual basis. We cannot assure you that we will be able to maintain REIT status.
Our qualification as a REIT depends on our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code, relating to, among other things, the sources of our gross income, the composition and values of our assets, our compliance with the distribution requirements applicable to REITs and the diversity of ownership of our outstanding common shares. We cannot assure you that we will be able to maintain our qualification as a REIT.
So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our taxable income that we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate income tax rates and may be precluded from electing to be treated as a REIT for four taxable years following the year during which we lose our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income.
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.
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.
We record allowances for credit losses in accordance with ASU No. 2016-13, known as CECL (i.e., current expected credit losses) 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 made changes to the accounting for available-for-sale debt securities. One such change is to require 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. Also, 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) our 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. The allowance for the mortgages receivable is presented in the consolidated balance sheets while the allowances on the interest receivable, due from borrowers, and (available-for-sale debt) investment securities are presented net of the allowance. The accrued allowance for unfunded construction commitments is included in accounts payable and accrued liabilities on the consolidated balance sheets included in the accompanying unaudited 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 related to loans.
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Results of Operations
Three months ended September 30, 2024 compared to three months ended September 30, 2023
Total revenue
Total revenue for the three months ended September 30, 2024 was $14.8 million compared to $17.8 million for the three months ended September 30, 2023, a decrease of $3.0 million, or 16.8%. The decrease in revenue is primarily attributable to a decrease in our lending operations in comparison to the same 2023 period, which have been adversely impacted by current conditions in the capital markets, making it extremely difficult for us to raise the capital on terms that we deem to be acceptable. For the three months ended September 30, 2024, interest income was $11.4 million compared to $14.3 million for the same 2023 period, a decrease of $2.9 million or 20.0%. The decrease is in-line with the decline of our mortgage loan portfolio, as well as comes as a direct result of the increase of loans in nonaccrual. Fee income from loans decreased to $1.8 million compared to $2.4 million for the same 2023 period, a decrease of $0.6 million, or 23.9%. This decrease in fees was primarily attributable to a decrease in originations. For the three months ended September 30, 2024, we funded 12 new loans having an aggregate original principal amount of $6.7 million, compared to 18 loans in the amount of $28.0 million for the three months ended September 30, 2023. As a result, origination fee income decreased approximately 16.4%, from $0.6 million for the three months September 30, 2023 to $0.1 million for the three months September 30, 2024. Loan originations, modifications, and extensions for the three months ended September 30, 2024 were $14.4 million compared to $52.2 million for the same 2023 period. During the three months ended September 30, 2024, we were predominantly focused on modifying existing loans. Income from partnership investments was $1.5 million for the 2024 period compared to $0.8 million for the 2023 period, an increase of $0.8 million or 91.2%. In addition, other investment income for the three months ended September 30, 2024 was $0.03 million compared to $0.3 million for the same 2023 period, a decrease of $0.3 million or 98.9%. Other income remained relatively stagnant period over period.
Operating expenses
Total operating expenses for three months ended September 30, 2024 were $19.6 million compared to $11.3 million for the three months ended September 30, 2023, an increase of $8.3 million or 72.8%. The increase in operating expenses is primarily attributable to our provision for credit losses related to loans. For the 2024 period, provision for credit losses related to loans were $8.1 million compared to a $0.1 million recovery of credit losses related to loans for the comparable 2023 period. This increase is primarily due to a period-over-period increase of loans in pending and pre-foreclosure status of $13.5 million, as a result of $81.8 million of unpaid principal, interest, and charges as of September 30, 2024 compared to $68.3 million as of September 30, 2023. Such balances consist of primarily commercial assets, of which have experienced a decline in fair value throughout 2024. See Note 2 to the accompanying unaudited consolidated financial statements included elsewhere in this Report for further details on our methodology on determining allowance for credit losses and provisions for credit losses related to loans under such category. The remaining fluctuations in operating expenses were primarily attributable to (i) general and administrative expenses increased $1.0 million as a result of additional legal and advisory fees incurred in dealing with an activist shareholder, (ii) interest and amortization of deferred financing costs decreased $0.8 million as result of repayment of the June 2024 note, (iii) impairment loss on real estate owned increased $0.1 million, (iv) a $0.2 million decrease in net loss on sale of real estate owned, and property and equipment and (v) other expenses which increased $0.09 million.
Other income (loss)
For both of the three-month periods ended September 30, 2024 and 2023, we reported a $0.2 million loss on equity securities.
Net income (loss)
Net loss attributable to common shareholders for the three months ended September 30, 2024 was $6.1 million, or $0.13 per share, compared to net income to common shareholders $5.2 million, or $0.12 per share, for the three months ended September 30, 2023.
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Nine months ended September 30, 2024 compared to nine months ended September 30, 2023
Total revenue
Total revenue for the nine months ended September 30, 2024 was $46.7 million compared to $48.3 million for the nine months ended September 30, 2023, a decrease of $1.6 million, or 3.3%. The decrease in revenue is primarily attributable to the decline in our mortgage loan portfolio, which decreased 4.4% period-to-period. For the 2024 period, interest income was $35.8 million compared to $37.2 million for the same 2023 period, representing a decrease of $1.4 million, a 3.6% decrease. The decrease is in-line with the decline of our mortgage loan portfolio, as well as comes as a direct result of increases of loans in nonaccrual. Fee income from loans decreased to $6.5 million compared to $7.9 million for the same 2023 period, a decrease of $1.4 million, or 17.3%. This decrease in fees was primarily attributable to a decrease in originations. For the first nine months of 2024, we funded 38 new loans having an aggregate original principal amount of $60.2 million, compared to 56 loans in the amount of $100.1 million for the first nine months of 2023. Similarly, origination fee income decreased approximately 13.6%, from $2.2 million for the nine months of 2023 to $1.9 million for the first nine months of 2024. Also, other investment income was $0.4 million for the nine months ended September 30, 2024 compared to $0.9 million for the same 2023 period, a decrease of $0.5 million or 55.4%. These decreases were offset, in part, by increases in partnership investment income and other income. Income from partnership investments was $3.9 million for the 2024 period compared to $2.3 million for the 2023 period, an increase of $1.6 million or 67.1%.
Operating expenses
Total operating costs and expenses for nine months ended September 30, 2024 were $50.4 million compared to $31.7 million for the nine months ended September 30, 2023, an increase of $18.7 million, or 59.0%. The increase in operating expenses is primarily attributable to our provision for credit losses related to loans. For the 2024 period, provision for credit losses related to loans were $18.0 million compared to $0.07 million for the same 2023 period, an increase of $17.9 million. The increase in provision for credit losses related to loans relates to the aforementioned increase in loans in pending and pre-foreclosure as well as the decline in fair value of such assets, along with the expectation of future decreases in such fair values. Further, general and administrative expenses increased $1.3 million, or 35.5% as a result of factors mentioned above, and other expenses increased $0.6 million or 90.1%. Such increases were partially offset by a decrease in interest and amortization of deferred financing costs. For the 2024 period, interest and amortization of deferred financing costs was $21.3 million compared to $21.7 million for the same 2023 period, a decrease of $0.4 million, or 1.9%.
Other income (loss)
For the nine-month period ended September 30, 2024, we reported $0.2 million gain on equity securities compared to a $0.4 million gain on equity securities for the nine months ended September 30, 2023.
Net Income (loss)
Net loss attributable to common shareholders for the nine months ended September 30, 2024 was $6.7 million, or $0.14 per share, compared to net income of $14.2 million, or $0.32 per share for the nine months ended September 30, 2023. The $0.46 per share swing is due primarily to the increase in provisions for credit losses related to loans, as stated above.
Liquidity and Capital Resources
Total assets at September 30, 2024 were $555.5 million compared to $625.5 million at December 31, 2023, a decrease of $70.0 million, or 11.2%. The decrease was due primarily to the decrease of our cash and cash equivalents of $6.7 million, a decrease in investments securities of $36.2 million, a decrease in net mortgages receivable of $34.8 million, and a decrease in interest and fee receivable of $3.5 million, offset by increases in investment in rental real estate of $2.4 million and investment in partnership of $11.1 million.
Total liabilities at September 30, 2024 were $334.9 million compared to $395.5 million at December 31, 2023, a decrease of $60.6 million, or 15.3%. This decrease is primarily due to principal repayments of; notes payable of $21.9 million, repurchase facility of $3.0 million, and the line of credit of $26.3 million. Additionally, decreases in the accrued dividends payable of $5.1 million, deferred revenue of $1.3 million, and advances from borrowers of $3.9 million, offset by increases accounts payable and accrued liabilities of $1.0 million.
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Total shareholders’ equity at September 30, 2024 was $220.6 million compared to $230.1 million at December 31, 2023, a decrease of $9.5 million. This decrease was due primarily to dividends paid on common shares and Series A Preferred Stock of $9.0 million and $3.2 million, respectively, along with net loss of $3.4 million and repurchases of our common shares of $1.4 million, which was partially offset by the proceeds of the sale of Series A Preferred Stock of $5.2 million, issuance of common shares of $2.1 million, and stock-based compensation of $0.7 million.
Net cash provided by operating activities for the nine months ended September 30, 2024 was $13.5 million compared to $18.9 million for the comparable 2023 period. For the 2024 period net cash provided by operating activities consisted primarily of amortization of deferred financing costs and bond discount of $1.9 million, depreciation expense of $0.3 million, stock based compensation of $0.7 million, provision for credit losses related to loans of $18.0 million, and a decrease in other assets of $3.5 million, offset by an increase in net interest and fees receivable of $0.6 million, a gain on equity securities of $0.2 million, decrease in advances from borrowers of $3.9 million, an increase due from borrowers, net of $1.7 million, and a net gain on sale of real estate and property and equipment of $0.3 million. For the 2023 period net cash provided by operating activities consisted primarily of net income of approximately $17.0 million, amortization of deferred financing costs and bond discount of approximately $1.8 million, stock-based compensation of approximately $0.6 million, impairment loss of approximately $0.6 million, increases in advances from borrowers of approximately $2.6 million and deferred revenue of approximately $0.6 million, offset by unrealized gain on investment securities of approximately $0.4 million, increase in due from borrowers of approximately $2.2 million, increase in other assets in aggregate of approximately $1.0 million, and an increase in interest and fees receivable of approximately $1.6 million.
Net cash provided by (used in) investing activities for the nine months ended September 30, 2024 was $44.3 million compared to net cash used for investing activities of $67.6 million for the comparable 2023 period. For the 2024 period, net cash provided by investing activities consisted primarily of proceeds from the sale of investment securities of $44.0 million, proceeds from sales of real estate owned of $2.0 million, and principal collections on mortgages receivable of $135.3 million, offset by purchases of investment securities of $7.8 million, purchases of interests in investment partnerships, net of $11.1 million, improvements in investment in rental real estate of $2.5 million, and principal disbursements for mortgages receivable of $115.7 million. For the 2023 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $21.1 million, net purchases of interests in investment partnerships of approximately $9.1 million, investment in rental real estate of approximately $10.7 million and principal disbursements for mortgage loans of approximately $159.7 million, offset by principal collections on mortgage loans of approximately $123.5 million, proceeds from sale of real estate owned of approximately $0.1 million, proceeds from sale of property and equipment of approximately $0.5 million, and by proceeds from the sale of investment securities of approximately $9.1 million.
Net cash provided by (used in) financing activities for the nine months ended September 30, 2024 was $(64.5) million compared to net cash provided by financing activities of $50.7 million for the comparable 2023 period. Net cash used in financing activities for the 2024 period consists principally of repayment of lines of credit of $26.3 million, repayment of repurchase facility of $3.0 million, dividends paid on common shares and Series A Preferred Stock of $14.2 million and $3.2 million, respectively, and repayment of the unsecured notes payable that came due in September 2024 of $23.6 million, offset by proceeds from the issuance of common shares, net of expenses and Series A Preferred Stock, net of expenses of $2.1 million and $5.2 million, respectively. Net cash provided by financing activities for the 2023 period consists principally of net proceeds from the issuance of common shares of approximately $15.3 million, net proceeds from the issuance of Series A Preferred Stock of approximately $1.9 million, net proceeds from line of credit of approximately $47.8 million, net proceeds from repurchase facility of approximately $5.4 million, and proceeds from mortgage of $0.4 million, offset primarily by dividends paid on common shares of approximately $16.9 million and Series A Preferred Stock of approximately $2.8 million.
Our long-term cash needs will include principal payments on outstanding indebtedness and funding of new mortgage loans. 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 and construction draws and payments for usual and customary operating and administrative expenses, such as interest payments on notes payable, employee compensation, sales, marketing expenses and dividends. Additionally, the December 2024 Notes are due and payable on December 30, 2024. We intend to repay the December 2024 Notes with a combination of cash flow from operations, proceeds from our existing credit facilities (i.e., Churchill and Needham), and proceeds from the sale of loans (as described in Note 19 – Subsequent Events). Accordingly, we believe that our current cash balances, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.
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From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our common shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains).
Between October 1, 2024 and November 13, 2024, through our at-the-market offering facility, we sold no common shares, 6,802 shares of Series A Preferred Stock having an aggregate liquidation preference of $0.2 million, realizing gross proceeds of $0.1 million (representing a discount of 14.3% from the liquidation preference.)
Effective on October 10, 2024, our Board adopted a new stock repurchase plan (the “New Repurchase Plan”) to replace our existing stock repurchase plan (the “Original Repurchase Plan”), pursuant to which we may repurchase up to an aggregate of $5,802,959 of common shares. Under the New Repurchase Plan, share repurchases will be made from time to time on the open market at prevailing market prices in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act. The New Repurchase Plan is expected to continue until the earlier of the repurchase of all the common shares under the plan or termination in accordance with its terms. Ladenburg Thalmann & Co. Inc. and Janney Montgomery Scott LLC will act as the Company’s exclusive purchasing agents under the New Repurchase Plan.
Between October 1, 2024 and November 13, 2024, we repurchased 46,043 common shares through the Original Repurchase Plan.
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 September 30, 2024, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment, software licenses and investment in partnerships.
Less than | 1 – 3 | 3 – 5 | More than | ||||||||||||
| Total |
| 1 year |
| years |
| years |
| 5 years | ||||||
(In thousands) | |||||||||||||||
Unfunded portions of outstanding construction loans | $ | 71,865 | $ | 52,801 | $ | 19,064 | $ | — | $ | — | |||||
Unfunded partnership commitments |
| 4,499 |
| 4,499 |
| — |
| — |
| — | |||||
Total contractual obligations | $ | 76,364 | $ | 57,300 | $ | 19,064 | $ | — | $ | — | |||||
Critical Accounting Policies and Recent Accounting Pronouncements
See “Note 2 — Significant Accounting Policies” to the financial statements for explanation of recent accounting pronouncements impacting us included elsewhere in this Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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.
Item 4. CONTROLS AND PROCEDURES
(a) | Evaluation and Disclosure Controls and Procedures |
Management, specifically our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2024 (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported, within the time periods
43
specified in the SEC’s rules and forms and (ii) are accumulated and communicated to management, specifically our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) | Changes in Internal Control Over Financial Reporting |
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal quarter ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Company Purchases of its Equity Securities
The purchases set forth in the table below were made pursuant to the Original Repurchase Plan adopted by the Board in October 2022 pursuant to which we may repurchase up to an aggregate of $7,500,000 of our common shares. Under the Original Repurchase Plan, share repurchases were made from time to time on the open market at prevailing market prices or in negotiated transactions off the market in accordance with applicable federal securities laws, including Rule 10b-18 and 10b5-1 of the Exchange Act. Ladenburg Thalmann & Co. Inc. acted as our exclusive purchasing agent under the Original Repurchase Plan.
During the nine month period ended September 30, 2024, we repurchased 535,369 common shares under the Original Repurchase Plan at a total cost of approximately $1.4 million. As set forth below, approximately $5.9 million was available under the Original Repurchase Plan as of September 30, 2024.
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
| (d) | |||||
Maximum | ||||||||||
Number | ||||||||||
(or | ||||||||||
Approximate | ||||||||||
(c) | Dollar Value) of | |||||||||
Total Number | Shares (or | |||||||||
of Shares (or | Units) | |||||||||
|
| Units) | that May Yet | |||||||
|
| (b) |
| Purchased as | Be | |||||
| (a) |
| Average |
| Part of Publicly |
| Purchased | |||
| Total Number of |
| Price Paid |
| Announced |
| Under | |||
| Shares (or units) |
| per Share |
| Plans or |
| the Plans or | |||
Period |
| Purchased |
| (or Unit) |
| Programs |
| Programs | ||
Month #1 (July 1-31, 2024) |
| 114,796 | $ | 2.7537 |
| — | $ | 6,953,579 | ||
Month # 2 (August 1-31, 2024) |
| 172,744 | $ | 2.3633 |
| — | $ | 6,547,141 | ||
Month #3 (September 1-30, 2024) |
| 247,829 | $ | 2.5338 |
| — | $ | 5,916,845 | ||
Total |
| 535,369 |
|
| — |
|
| |||
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Item 6. EXHIBITS
46
10.14** | ||
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 | ||
32.2 | ||
97.1 | Policy Relating to Recovery of Erroneously Awarded Compensation (25) | |
99.1 | ||
99.2 | ||
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. |
| (11) | Previously filed as an exhibit to the Current Report on Form 8-K on April 13, 2021 and incorporated herein by reference. |
47
| (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. |
| (26) | Previously filed as an exhibit to the Current Report on Form 8-K on August 26, 2024 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: November 14, 2024 | By: | /s/ John L. Villano |
|
| John L. Villano, CPA |
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: November 14, 2024 | By: | /s/ Nicholas M. Marcello |
|
| Nicholas M. Marcello |
Chief Financial Officer | ||
(Principal Accounting and Financial Officer) |
49