Executive Summary / Key Takeaways

• Sachem Capital Corp. (SACH), a self-managed REIT specializing in short-term, secured real estate loans, experienced a significant 31.9% year-over-year decline in total revenue in Q1 2025, primarily driven by fewer loan originations and an elevated level of nonperforming loans and real estate owned.
• Despite the revenue pressure, the company saw a 16.9% reduction in operating expenses, largely due to lower interest costs from debt repayments, contributing to a smaller net loss attributable to common shareholders compared to the revenue decline.
• Asset quality remains a critical focus, with nonaccrual loans increasing to $107.6 million as of March 31, 2025, representing a notable portion of the $367.9 million loan portfolio, impacting interest income generation.
• The company maintains diverse funding sources, including unsecured notes ($230.2 million outstanding) and credit facilities (Needham and Churchill), and believes its current liquidity is sufficient for the next 12 months, although refinancing the September 2025 notes is a near-term capital structure event to watch.
• While Sachem Capital leverages niche regional expertise and a relationship-based approach as competitive advantages, it faces vulnerabilities from operational inefficiencies and a lack of the advanced technological tools seen in larger competitors, which could impact long-term efficiency and market share capture.

Setting the Scene: Business Model, History, and Market Position

Sachem Capital Corp., established in 2010 and publicly listed in 2017, operates as a self-managed real estate investment trust (REIT). Its core business revolves around originating, underwriting, funding, servicing, and managing a portfolio of short-term, secured, non-bank first mortgage loans. These loans, typically with terms of one to three years, are provided to real estate owners and investors primarily in the northeastern and southeastern United States to finance the acquisition, renovation, development, rehabilitation, or improvement of properties. A fundamental tenet of Sachem's underwriting strategy is maintaining a conservative loan-to-value ratio, aiming to mitigate risk in its secured lending activities. Beyond its core lending, the company also engages in opportunistic real estate purchases and investments.

Operating within the specialized segment of hard money lending and short-term real estate finance, Sachem Capital competes with a range of entities, including other real estate investment trusts, private hard money lenders, and, indirectly, traditional banks and emerging fintech platforms. Larger publicly traded competitors like Arbor Realty Trust (ABR), Ladder Capital (LADR), and Blackstone Mortgage Trust (BXMT) operate on a significantly larger scale, often leveraging more sophisticated operational structures and broader geographic reach.

Sachem Capital's competitive positioning is characterized by its deep niche focus on regional markets, particularly along the Eastern Seaboard. This localized expertise and a relationship-based lending approach are key differentiators, potentially allowing the company to identify opportunities and manage risks within its specific geographic footprint more effectively than larger, less specialized players. This can translate into the ability to command higher yields on its loans compared to institutional lenders.

However, the competitive landscape highlights areas where Sachem Capital lags. While competitors like Arbor Realty Trust (ABR) and Blackstone Mortgage Trust (BXMT) invest in advanced digital underwriting tools and AI-driven risk assessment, enabling faster processing and potentially better default prediction accuracy, Sachem's operational approach appears less reliant on such technological moats. The company's investment in technology, as indicated by its property and equipment, includes standard items like computer hardware and software, but the information does not detail proprietary or significantly differentiated technological platforms that provide a distinct competitive edge in efficiency or risk management compared to more tech-forward rivals. This difference in operational leverage could impact Sachem's cost structure and scalability relative to competitors who benefit from technology-driven efficiencies.

Recent Financial Performance: Q1 2025 Results Under Pressure

Sachem Capital's financial performance in the first quarter of 2025 reflected the challenging market conditions and specific portfolio dynamics. Total revenue for the three months ended March 31, 2025, stood at $11.4 million, a notable decrease of 31.9% compared to $16.8 million in the same period of 2024. This decline was primarily attributed to the cumulative effect of fewer loan originations over the preceding fifteen months, leading to a lower outstanding principal balance in the loan portfolio. Additionally, a currently elevated amount of nonperforming loans and real estate owned properties weighed on interest income generation. Partially offsetting this decline was a significant increase in income from limited liability company investments, which rose by approximately 71.7% quarter-over-quarter.

Operating expenses saw a favorable decrease, totaling $10.4 million for the three months ended March 31, 2025, a 16.9% reduction from $12.5 million in the prior year period. The most significant contributor to this decrease was lower interest and amortization of deferred financing costs, a direct result of the repayment of $58.2 million of unsecured notes in 2024. Decreases in compensation and employee benefits, the provision for credit losses related to loans held for investment, and other expenses also contributed to the overall reduction in operating costs.

Despite the reduction in expenses, the substantial drop in revenue led to a net loss attributable to common shareholders of $0.2 million for the first quarter of 2025, a significant shift from the net income of $3.6 million reported in the first quarter of 2024. This translates to a basic and diluted loss per common share of $0.00, compared to earnings per share of $0.08 in the prior year period. The financial results underscore the impact of reduced lending activity and asset quality challenges on the company's profitability in the current environment.

Loan Portfolio Dynamics and Asset Quality Trends

As of March 31, 2025, Sachem Capital's loan portfolio held for investment had a gross principal amount of $367.9 million, a decrease from $377.0 million at December 31, 2024. The portfolio comprised 143 loans, ranging in size from $0.03 million to $37.9 million, with stated interest rates between 6.50% and 15.00%. The weighted average contractual interest rate, including default interest, was 12.88%.

A key area of focus for investors is asset quality. Loans held for investment on nonaccrual status increased to an outstanding principal balance of $107.6 million as of March 31, 2025, up from $87.0 million at December 31, 2024. This represents a significant portion of the total portfolio and directly impacts interest income. The company's allowance for credit losses related to loans held for investment stood at $18.1 million at March 31, 2025, slightly down from $18.5 million at December 31, 2024. This allowance includes both general reserves on performing and non-performing loans, as well as direct reserves on non-performing loans and those in foreclosure. The direct reserves on non-performing loans in foreclosure represented 25.6% of the outstanding principal balance in that category as of March 31, 2025, highlighting the potential for losses on these specific assets.

The company's real estate owned (REO) portfolio, properties acquired through foreclosure, also increased slightly to $18.9 million net as of March 31, 2025, from $18.6 million at December 31, 2024. One property was acquired during the quarter. The REO portfolio includes properties held for sale ($18.1 million) and one commercial property held for rental ($0.8 million). The increase in nonaccrual loans and REO reflects the pressures in the real estate market and the inherent risks in secured lending, particularly in a higher interest rate environment.

Geographically, the portfolio remains concentrated, with New England accounting for 47.8% ($175.8 million), the South 39.7% ($145.9 million), the Mid-Atlantic 11.5% ($42.1 million), and the West 1.1% ($4.1 million) as of March 31, 2025. This regional concentration is a function of the company's niche strategy but also exposes it to localized market downturns.

Capital Structure and Liquidity Management

Sachem Capital's capital structure is characterized by a mix of equity, unsecured notes, and secured credit facilities. As of March 31, 2025, total assets were $491.4 million, and total liabilities were $312.1 million, resulting in total shareholders' equity of $179.3 million. Book value per common share decreased slightly to $2.57 from $2.64 at the end of 2024, primarily due to $3.5 million in dividends paid during the quarter.

A significant component of the liability structure is the unsecured notes payable, totaling $230.2 million in aggregate principal amount outstanding as of March 31, 2025. These notes, trading under various ticker symbols including SCCD (6.00% Notes due 2026), have staggered maturities, with a notable $56.4 million tranche maturing in the remaining nine months of 2025 and a large $122.1 million maturing in 2027. All outstanding notes are currently callable by the company. These notes contain covenants, including a requirement to maintain an Asset Coverage Ratio of at least 150% for certain actions like paying distributions or incurring additional debt.

Secured financing facilities provide additional capital and flexibility. The Churchill MRA Funding I LLC repurchase facility had an outstanding balance of $41.5 million as of March 31, 2025, with an effective interest rate of 8.31%. This facility is secured by pledged mortgage loans and includes covenants related to asset coverage and maintaining unencumbered cash. The company also entered into a new $50 million revolving credit facility with Needham Bank in March 2025, replacing a prior facility. This new facility, maturing in March 2026 with an extension option, is secured by assets of a subsidiary (SN Holdings LLC) and a blanket lien on Sachem Capital's assets. It also includes financial covenants, such as maintaining a minimum Adjusted EBITDA to Debt Service ratio and a minimum level of cash and facility availability. As of March 31, 2025, the company reported compliance with all covenants under the new Needham agreement. Subsequent to the quarter end, SN Holdings made a $9.9 million principal payment on this facility, reducing the outstanding balance to $26.2 million.

Liquidity is a key consideration, particularly given the near-term debt maturity. Cash and cash equivalents increased to $24.4 million at March 31, 2025, from $18.1 million at December 31, 2024. Net cash provided by operating activities was $0.2 million in Q1 2025, a significant decrease from $4.2 million in Q1 2024, reflecting the impact of lower revenue and changes in operating assets and liabilities. The company has unfunded commitments totaling $46.4 million for loans and $4.8 million for LLC investments. Management believes its current cash balances, availability under debt facilities, and anticipated cash flows from operations will be sufficient to fund operations for the next 12 months. Long-term funding needs are expected to be met through operating cash flows, refinancing existing debt, and proceeds from asset sales.

Outlook and Key Risks

While Sachem Capital did not provide specific quantitative financial guidance for future periods, the company's outlook is implicitly tied to its ability to manage its loan portfolio, maintain access to capital, and navigate the current economic environment. The belief that current liquidity is sufficient for the next 12 months suggests confidence in meeting near-term obligations, including the September 2025 note maturity, likely through a combination of loan payoffs, facility draws, or refinancing. The anticipated completion of the Charlotte, North Carolina multifamily development project by the end of 2026 represents a potential future source of return from its LLC investments.

However, several risks and challenges could impact this outlook. The elevated level of nonaccrual loans and REO properties poses a continued risk to future revenue and could necessitate further provisions for credit losses or losses on asset sales. The concentration of the loan portfolio in specific geographic regions makes the company susceptible to regional economic downturns or real estate market corrections.

From an operational perspective, the previously identified material weakness in internal control over financial reporting related to stock-based compensation, which remained unresolved as of March 31, 2025, highlights a potential area of concern regarding financial reporting reliability and internal governance. While the company is actively implementing remediation efforts, the existence of such a weakness requires close monitoring.

Furthermore, the company's reliance on debt financing, including facilities with cross-default provisions, exposes it to interest rate risk and the risk of covenant breaches, although the company reported compliance as of the latest reporting date. The callable nature of the unsecured notes provides flexibility but also introduces uncertainty regarding the timing and terms of potential redemptions or refinancings.

Conclusion

Sachem Capital Corp. operates a focused business model within the niche of short-term, secured real estate lending, leveraging regional expertise and relationships. The first quarter of 2025 results underscore the current pressures facing the company, with reduced lending activity and asset quality challenges leading to a significant revenue decline and a net loss for the period. The increase in nonaccrual loans and REO properties warrants careful attention, as these impact profitability and require effective asset management strategies.

Despite these headwinds, Sachem Capital has taken steps to manage its capital structure, including refinancing its Needham credit facility and actively managing its debt maturities. The company's diverse funding sources and stated belief in sufficient liquidity for the near term provide a degree of stability.

For investors in SCCD, the 6.00% Notes due 2026, the analysis points to a company navigating a challenging operational environment while managing its financial obligations. The yield offered by the notes must be assessed against the backdrop of the company's asset quality trends, its ability to generate sufficient cash flow from operations (which was significantly lower in Q1 2025), and its plans for addressing upcoming debt maturities. While the company's niche strategy offers potential advantages, its operational efficiency and lack of a clear technological moat compared to larger rivals remain factors to consider in its long-term competitive standing. The successful execution of its asset recovery strategies and the effective management of its capital structure, particularly the refinancing of the September 2025 notes, will be critical determinants of future performance and the stability of its debt obligations.