Sachem Capital(SACH) - 2024 Q3 - Quarterly Report

Part I: Financial Information Item 1. Financial Statements (unaudited) The unaudited consolidated financial statements for September 30, 2024, show a net loss and declining assets, driven by increased credit loss provisions and rising non-accrual loans Consolidated Balance Sheets As of September 30, 2024, total assets decreased to $555.5 million and liabilities to $334.9 million, while the allowance for credit losses more than doubled to $20.2 million Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2024 (unaudited) | Dec 31, 2023 (audited) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $5,881 | $12,598 | | Mortgages receivable, net | $456,883 | $491,712 | | Allowance for credit losses | ($20,212) | ($7,523) | | Total assets | $555,457 | $625,539 | | Liabilities & Equity | | | | Notes payable, net | $260,464 | $282,353 | | Lines of credit | $35,500 | $61,792 | | Total liabilities | $334,850 | $395,463 | | Total shareholders' equity | $220,607 | $230,076 | Consolidated Statements of Operations The company reported a net loss of $6.6 million for the nine months ended September 30, 2024, primarily driven by an $18.0 million provision for credit losses and declining revenues Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2024 | Q3 2023 | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $14,785 | $17,775 | $46,735 | $48,341 | | Provision for credit losses | $8,096 | ($131) | $17,964 | $65 | | Net income (loss) | ($5,051) | $6,190 | ($3,436) | $17,008 | | Net income (loss) to common shareholders | ($6,146) | $5,223 | ($6,623) | $14,192 | | Diluted EPS | ($0.13) | $0.12 | ($0.14) | $0.32 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2024, operating cash flow decreased, investing activities provided $44.3 million (reversal from prior year), and financing activities used $64.5 million, resulting in a $6.7 million net decrease in cash Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $13,510 | $18,938 | | Net Cash Provided by (Used in) Investing Activities | $44,262 | ($67,579) | | Net Cash (Used in) Provided by Financing Activities | ($64,489) | $50,740 | | Net (Decrease) Increase in Cash | ($6,717) | $2,099 | | Cash at End of Period | $5,881 | $25,812 | Notes to Unaudited Consolidated Financial Statements Notes highlight the impact of the CECL standard on credit loss allowances, a significant increase in non-accrual loans to $147.0 million, a debt covenant breach, and a planned $78.8 million non-performing loan sale for liquidity - The company adopted the Current Expected Credit Loss (CECL) standard on January 1, 2023, which requires estimating credit losses over the life of its loans, leading to a significant increase in the allowance for credit losses[41] Allowance for Credit Losses by Financial Statement Line Item (in thousands) | Line Item | Balance as of Dec 31, 2023 | Provision for credit losses YTD | Balance as of Sep 30, 2024 | | :--- | :--- | :--- | :--- | | Mortgages receivable | $7,523 | $12,689 | $20,212 | | Interest and fees receivable | $902 | $2,710 | $3,612 | | Due from borrower | $352 | $1,798 | $2,150 | | Unfunded commitments | $509 | $713 | $1,222 | | Total Allowance | $9,286 | $17,910 | $27,196 | - Loans on nonaccrual status increased significantly to $147.0 million as of September 30, 2024, from $84.6 million at December 31, 2023[83] - As of September 30, 2024, the company was not in compliance with the debt service coverage ratio covenant on its Needham Credit Facility, with the lender considering a waiver[116] - The company has $34.5 million of unsecured notes maturing on December 30, 2024[125] - Subsequent to the quarter end, the company initiated a sale of a pool of mortgage loans with an aggregate principal of approximately $78.8 million, a majority of which are non-accrual, to improve liquidity, with the sale expected to close before December 31, 2024[166] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the net loss to increased credit loss provisions from declining collateral values, reduced loan originations, and rising expenses, exacerbated by market illiquidity and high foreclosure rates - The primary factor for the swing from net income in 2023 to a net loss in 2024 was an $18.0 million provision for credit losses, compared to just $65,000 in the prior year, mainly due to declines in the value of assets securing the loans[171] - At September 30, 2024, 23.9% of the loans in the portfolio were in foreclosure proceedings, an increase from 18.0% at December 31, 2023, reflecting the decline in commercial real estate values[181] - The company is not in compliance with the debt service coverage ratio covenant in its Needham Credit Facility due to the large non-cash provision for credit losses impacting EBITDA calculation, with the lender considering a waiver[204] - In October 2024, the company initiated the sale of a pool of mortgage loans with an aggregate principal of approximately $78.8 million, a majority of which are non-accrual, as a strategic move to improve liquidity and manage underperforming assets[192] Nine-Month Performance Comparison (in thousands) | Metric | Nine Months 2024 | Nine Months 2023 | | :--- | :--- | :--- | | Total Revenue | $46,735 | $48,341 | | Provision for credit losses | $17,964 | $65 | | Total Operating Expenses | $50,400 | $31,694 | | Net Loss Attributable to Common Shareholders | ($6,623) | $14,192 | Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Sachem Capital Corp. is not required to provide the information for this item - The company is not required to provide quantitative and qualitative disclosures about market risk because it qualifies as a smaller reporting company[232] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2024 - The CEO and CFO concluded that as of September 30, 2024, the company's disclosure controls and procedures are effective[231][234] - No changes occurred during the fiscal quarter ended September 30, 2024, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[235] Part II: Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered equity sales, repurchasing 535,369 common shares for $1.4 million during the nine months ended September 30, 2024, with $5.9 million remaining for future repurchases - The company made no unregistered sales of equity securities during the period[237] Issuer Purchases of Equity Securities (Q3 2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2024 | 114,796 | $2.7537 | | August 2024 | 172,744 | $2.3633 | | September 2024 | 247,829 | $2.5338 | | Total Q3 | 535,369 | | Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, indentures for various note series, credit agreements, employment agreements, and certifications by the CEO and CFO