10-Q 1 sach-20240331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                        

Commission File Number: 001-37997

SACHEM CAPITAL CORP.

(Exact name of registrant as specified in its charter)

New York

    

81-3467779

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

568 East Main Street, Branford, CT 06405

(Address of principal executive offices)

(203) 433-4736

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes     No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).        Yes         No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes         No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Ticker symbol(s)

    

Name of each exchange on which registered

Common Shares, par value $.001 per share

 

SACH

 

NYSE American LLC

7.125% Notes due 2024

SCCB

NYSE American LLC

6.875% Notes due 2024

SACC

NYSE American LLC

7.75% Notes due 2025

SCCC

NYSE American LLC

6.00% Notes due 2026

SCCD

NYSE American LLC

6.00% Notes due 2027

SCCE

NYSE American LLC

7.125% Notes due 2027

SCCF

NYSE American LLC

8.00% Notes due 2027

SCCG

NYSE American LLC

7.75% Series A Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share

SACHPRA

NYSE American LLC

As of May 9, 2024, the Issuer had a total of 47,446,051 common shares, $0.001 par value per share, outstanding.

SACHEM CAPITAL CORP.

TABLE OF CONTENTS

Part I

FINANCIAL INFORMATION

    

Page Number

Item 1.

Financial Statements (unaudited)

Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023

1

Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 2024 and 2023 (unaudited)

2

Consolidated Statements of Changes in Shareholders’ Equity for the Three-Month Periods Ended March 31, 2024 and 2023 (unaudited)

3

Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2024 and 2023 (unaudited)

4

Notes to Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4.

Controls and Procedures

40

Part II

OTHER INFORMATION

Item 6.

Exhibits

41

SIGNATURES

44

EXHIBITS

i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “anticipate,” “estimate,” “expect,” “project,” “plan,” “seek,” “intend,” “believe,” “may,” “might,” “will,” “should,” “could,” “likely,” “continue,” “design,” and the negative of such terms and other words and terms of similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to numerous risks, uncertainties and assumptions, some of which are described in our 2023 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this report to confirm these statements in relationship to actual results or revised expectations.

All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this report. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

Unless the context otherwise requires, all references in this quarterly report on Form 10-Q to “Sachem Capital,” “we,” “us” and “our” refer to Sachem Capital Corp., a New York corporation.

ii

PART I.        FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

SACHEM CAPITAL CORP.

CONSOLIDATED BALANCE SHEETS

(unaudited)

    

March 31, 2024

    

December 31, 2023

Assets

 

  

 

  

Cash and cash equivalents

$

18,413,401

$

12,598,256

Investment securities (at fair value)

38,432,752

37,776,032

Mortgages receivable

490,743,670

499,235,371

Less: Allowance for credit losses

(8,053,252)

(7,523,160)

Mortgages receivable, net of allowance for credit losses

 

482,690,418

 

491,712,211

Investments in rental real estate, net

 

11,266,309

 

10,554,461

Interest and fees receivable, net

 

8,083,432

 

8,474,820

Due from borrowers, net

 

5,241,976

 

5,596,883

Real estate owned

 

3,703,519

 

3,461,519

Investments in partnerships

46,221,719

43,035,895

Property and equipment, net

3,330,653

3,373,485

Other assets

9,143,300

8,955,250

Total assets

$

626,527,479

$

625,538,812

Liabilities and Shareholders’ Equity

 

  

 

  

Liabilities:

 

  

 

  

Notes payable (net of deferred financing costs of $5,443,237 and $6,048,490, respectively)

$

282,958,513

$

282,353,260

Repurchase facility

25,860,601

26,461,098

Mortgage payable

 

1,061,720

 

1,081,303

Lines of credit

62,251,343

61,792,330

Accrued dividends payable

5,144,203

Accounts payable and accrued liabilities

2,754,348

2,321,535

Advances from borrowers

9,176,571

10,998,351

Below market lease intangible

664,737

664,737

Deferred revenue

4,356,605

4,647,302

Total liabilities

$

389,084,438

$

395,464,119

Commitments and Contingencies

 

  

 

  

Shareholders’ equity:

 

  

 

  

Preferred shares - $0.001 par value; 5,000,000 shares authorized; 2,903,000 shares designated as Series A Preferred Stock; 2,108,957 and 2,029,923 shares of Series A Preferred Stock issued and outstanding at March 31, 2024 and December 31, 2023, respectively

$

2,109

$

2,030

Common shares - $0.001 par value; 200,000,000 shares authorized; 47,446,051 and 46,765,483 issued and outstanding at March 31, 2024 and December 31, 2023

 

47,446

 

46,765

Paid-in capital

 

253,669,954

 

249,825,780

Accumulated other comprehensive income

190,329

315,614

Accumulated deficit

 

(16,466,797)

 

(20,115,496)

Total shareholders’ equity

 

237,443,041

 

230,074,693

Total liabilities and shareholders’ equity

$

626,527,479

$

625,538,812

The accompanying notes are an integral part of these consolidated financial statements.

1

SACHEM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

Three Months Ended

March 31, 

    

2024

    

2023

Revenue:

  

 

  

Interest income from loans

$

12,641,444

$

10,983,326

Investment gain, net

527,824

274,796

Income from partnership investments

1,195,300

549,723

Origination and modification fees, net

 

1,461,966

 

1,475,920

Fee and other income

 

1,189,241

 

707,605

Unrealized gain on equity securities

185,181

716,389

Total revenue

 

17,200,956

 

14,707,759

Operating costs and expenses:

 

  

 

  

Interest and amortization of deferred financing costs

 

7,469,442

 

6,872,967

Compensation, fees and taxes

 

1,943,197

 

1,779,318

General and administrative expenses

1,238,574

898,115

Other expenses

 

556,640

 

83,722

(Gain) Loss on sale of real estate and property and equipment, net

10,854

(148,100)

Provision for credit losses related to loans

1,312,024

101,515

Total operating costs and expenses

12,530,731

9,587,537

Net income

 

4,670,225

 

5,120,222

Preferred stock dividend

(1,021,526)

(924,762)

Net income attributable to common shareholders

3,648,699

4,195,460

Other comprehensive income (loss)

Unrealized (loss) gain on debt securities

(125,285)

91,637

Total comprehensive income

$

3,523,414

$

4,287,097

Basic and diluted net income per common share outstanding:

 

  

 

  

Basic

$

0.08

$

0.10

Diluted

$

0.08

$

0.10

Weighted average number of common shares outstanding:

 

  

 

  

Basic

 

47,326,384

 

42,792,509

Diluted

 

47,326,384

 

42,792,509

The accompanying notes are an integral part of these consolidated financial statements.

2

SACHEM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2024

Accumulated

Additional 

Other

Preferred Stock

Common Shares

Paid in

Comprehensive

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Totals

Balance, January 1, 2024

 

2,029,923

$

2,030

 

46,765,483

$

46,765

$

249,825,780

$

315,614

$

(20,115,496)

$

230,074,693

Issuance of Series A Preferred Stock, net of expenses

 

79,034

79

 

1,556,103

1,556,182

Issuance of Common Shares, net of expenses

568,711

569

2,049,471

2,050,040

Stock-based compensation

111,857

112

238,600

238,712

Unrealized loss on debt securities

(125,285)

(125,285)

Dividends paid on Series A Preferred Stock

 

 

(1,021,526)

(1,021,526)

Net income

 

4,670,225

4,670,225

Balance, March 31, 2024

2,108,957

$

2,109

 

47,446,051

$

47,446

$

253,669,954

$

190,329

$

(16,466,797)

$

237,443,041

    

FOR THE THREE MONTHS ENDED MARCH 31, 2023

Accumulated

Additional

Other

 

Preferred Stock

 

Common Shares

 

Paid in

 

Comprehensive

 

Accumulated

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Loss

    

Deficit

    

Totals

Balance, January 1, 2023

1,903,000

$

1,903

41,093,536

$

41,094

$

226,220,990

$

(561,490)

$

(7,995,143)

$

217,707,354

Cumulative effect of adoption of new accounting principle (ASU 2016-13)

(2,489,574)

(2,489,574)

Issuance of Series A Preferred Stock, net of expenses

6,187

6

136,699

136,705

Issuance of Common Shares, net of expenses

2,479,798

2,480

9,178,678

9,181,158

Stock-based compensation

183,390

183

173,132

 

 

173,315

Unrealized gain on debt securities

91,637

91,637

Dividends paid on Series A Preferred Stock

(924,762)

(924,762)

Net income

 

5,120,222

 

5,120,222

Balance, March 31, 2023

 

1,909,187

$

1,909

43,756,724

$

43,757

$

235,709,499

$

(469,853)

$

(6,289,257)

$

228,996,055

The accompanying notes are an integral part of these consolidated financial statements.

3

SACHEM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOW

Three Months Ended

March 31, 

    

2024

    

2023

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

  

Net income

$

4,670,225

$

5,120,222

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of deferred financing costs and bond discount

 

623,788

 

600,215

Depreciation expense

 

94,174

 

40,132

Stock-based compensation

 

238,712

 

173,315

Provision for credit losses related to loans

 

1,312,024

 

101,515

Loss (Gain) on sale of real estate and equipment, net

10,854

(148,100)

Unrealized gain on equity securities

(185,181)

(716,389)

Gain on sale of investment securities

 

 

(275,879)

Changes in operating assets and liabilities:

 

 

  

Interest and fees receivable, net

 

391,388

 

(366,191)

Other assets

 

(221,845)

 

(489,696)

Due from borrowers, net

 

(1,037,945)

 

(783,302)

Accounts payable and accrued liabilities

432,813

10,483

Deferred revenue

 

(290,697)

 

320,608

Advances from borrowers

 

(1,821,780)

 

1,422,458

Total adjustments

 

(453,695)

 

(110,831)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

4,216,530

 

5,009,391

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Purchase of investment securities

(7,725,283)

(13,971,218)

Proceeds from the sale of investment securities

7,128,459

3,780,522

Purchase of interests in investment partnerships, net

(3,185,824)

(4,491,054)

Proceeds from sale of real estate owned

121,146

515,136

Acquisitions of and improvements to real estate owned, net

 

 

(103,136)

Purchases of property and equipment

(14,505)

(710,883)

Purchases of rental real estate

 

(748,685)

 

Principal disbursements for mortgages receivable

 

(42,654,300)

 

(58,883,824)

Principal collections on mortgages receivable

 

51,398,181

 

39,884,300

Other assets – pre-offering costs

25,111

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

4,319,189

 

(33,955,046)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Net proceeds from lines of credit

 

459,013

 

10,086,036

Net proceeds from (repayment of) repurchase facility

 

(600,497)

 

11,522,349

Proceeds from (repayment of) mortgage

(19,583)

910,000

Accounts payable and accrued liabilities – principal payments on other notes

(4,252)

Dividends paid on common shares

 

(5,144,203)

 

(5,342,160)

Dividends paid on Series A Preferred Stock

 

(1,021,526)

 

(924,762)

Proceeds from issuance of common shares, net of expenses

2,050,040

9,181,158

Proceeds from issuance of Series A Preferred Stock, net of expenses

1,556,182

136,705

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

(2,720,574)

 

25,565,074

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

5,815,145

 

(3,380,581)

CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD

 

12,598,256

 

23,713,097

CASH AND CASH EQUIVALENTS – END OF PERIOD

$

18,413,401

$

20,332,516

The accompanying notes are an integral part of these consolidated financial statements.

4

SACHEM CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)

(unaudited)

Three Months Ended

March 31, 

    

2024

    

2023

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION

  

 

  

Cash paid during the period for interest

$

6,851,147

$

6,191,398

SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING ACTIVITIES:

Real estate acquired in connection with the foreclosure of certain mortgages during the three months ended March 31, 2024 and 2023 was $374,000 and $1,186,663, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

1.    The Company

Sachem Capital Corp. (the “Company”), a New York corporation, specializes in originating, underwriting, funding, servicing and managing a portfolio of first mortgage loans. The Company operates its business as one segment. The Company offers short-term (i.e., one to three years), secured, non-bank loans (sometimes referred to as “hard money” loans) to real estate owners and investors to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the northeastern and southeastern sections of the United States. The properties securing the Company’s loans are generally classified as residential or commercial real estate and, typically, are held for resale or investment. Each loan is secured by a first mortgage lien on real estate and may also be secured with additional collateral, such as other real estate owned by the borrower or its principals, a pledge of the ownership interests in the borrower by the principals thereof, and/or personal guarantees by the principals of the borrower. The Company does not lend to owner occupants of residential real estate. The Company’s primary underwriting criteria is a conservative loan-to-value (“LTV”) ratio. In addition, the Company may make opportunistic real estate purchases apart from its lending activities.

2.    Significant Accounting Policies

Unaudited Consolidated Financial Statements

The accompanying unaudited consolidated financial statements (“the consolidated financial statements”) of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2023 and the notes thereto included in the Company’s Annual Report on Form 10-K. Results of operations for the three months ended March 31, 2024, are not necessarily indicative of the operating results to be attained in the entire fiscal year, or for any subsequent period.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with 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 bases 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.

The consolidated financial statements of the Company include the accounts of all subsidiaries in which the Company has control over significant operating, financial and investing decisions of the entity. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all demand deposits, cashier’s checks, money market accounts and certificates of deposit with an original maturity of three months or less to be cash equivalents.

Investment Securities

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, management may employ a 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

6

Table of Contents

SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

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 carrying value. Changes in value are recorded in net income.

Allowance for Current Expected Credit Losses

The Company adopted the current expected credit loss (“CECL”) standard effective January 1, 2023 in accordance with ASU No. 2016-13. The initial CECL allowance (”Allowance for credit losses”) adjustment of $2,489,574 was recorded effective January 1, 2023 as a cumulative-effect of change in accounting principle through a direct charge to accumulated deficit on the consolidated statements of shareholders’ equity; however, subsequent changes to the CECL allowance will be recognized in the consolidated statements of comprehensive income in “Provision for credit losses related to loans”.

The Company records an allowance for credit losses in accordance with the CECL standard on the Company’s 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 the CECL standard, 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 amount of loans in pending/pre-foreclosure as of March 31, 2024 and December 31, 2023 was approximately $72.9 million and $68.1 million, respectively. As of March 31, 2024 and December 31, 2023, the Company has taken reserves against loans subject to foreclosure of approximately $7.3 million and $6.2 million, respectively, which is included in “Allowance for credit losses” on the accompanying balance sheets.

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” in the Company’s consolidated balance sheets.

7

Table of Contents

SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

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 March 31, 2024

Mortgages receivable

$

7,523,160

$

530,092

$

8,053,252

Interest receivable

 

901,957

 

207,846

 

1,109,803

Due from borrower

 

352,459

 

542,345

 

894,804

Unfunded commitments

 

508,600

 

31,741

 

540,341

Total Allowance for credit losses

$

9,286,176

$

1,312,024

$

10,598,200

As of March 31, 2024 and December 31, 2023 the Company had an allowance for credit losses on debt securities of approximately $0.8 million for each year, which is presented in “Investment securities (at fair value)” on the Company’s consolidated balance sheets. As of March 31, 2024 and 2023, fair market value of these securities was $821,052 and $1,130,518, respectively. The cost basis of these securities were $1,647,841.

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 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.

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 new building in March 2023. The building is being depreciated using the straight – line method over its estimated useful life of 40 years. The new building was placed in service during the three months ended March of 2023.

8

Table of Contents

SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

The following tables represent the Company’s Property and Equipment, Net as of March 31, 2024 and December 31, 2023:

March 31, 2024

    

Cost

    

Accumulated Depreciation

    

Property and Equipment, Net

Building

$

2,541,214

$

(62,756)

$

2,478,458

Land

 

255,013

 

 

255,013

Furniture and fixtures

 

280,889

 

(80,051)

 

200,838

Computer hardware and software

 

284,578

 

(211,029)

 

73,549

Vehicles

 

435,180

 

(112,385)

 

322,795

Total property and equipment, net

$

3,796,874

$

(466,221)

$

3,330,653

December 31, 2023 (Audited)

    

Cost

    

Accumulated Depreciation

    

Property and Equipment, Net 

Building

$

2,541,214

$

(50,694)

$

2,490,520

Land

 

262,631

 

 

262,613

Furniture and fixtures

 

319,898

 

(68,891)

 

251,098

Computer hardware and software

 

352,573

 

(227,687)

 

124,886

Vehicles

 

305,980

 

(61,612)

 

244,368

Total property and equipment, net

$

3,782,369

$

(408,884)

$

3,373,485

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 lives of these assets which range from 7 to 40 years. Tenant allowances are amortized on a straight-line basis over the shorter of the lives of the related leases, or the useful lives of the assets.

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 $10,600,000. The transaction was completed on August 31,

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SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

2023. In connection with this transaction, which was accounted for as an asset acquisition, the Company allocated the purchase price and acquisition-related costs to the tangible and intangible assets acquired based on fair value. In addition, the Company recorded a lease liability stemming from below-market rental rates. Total consideration, including capitalized acquisition-related costs, was $10,725,237.

See Note 5 – Investment in Rental Real Estate, net for further details surrounding the above acquisition as of March 31, 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 comprehensive income.

Impairment of Long-Lived Assets

The Company continually monitors events or changes in circumstances that could indicate 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 flows 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.

Goodwill

Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. Goodwill at March 31, 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 March 31, 2024 and 2023, goodwill was approximately $0.4 million, which is presented in other assets on the Company’s consolidated balance sheets. There was no impairment to goodwill during the three months ended March 31, 2024 and 2023.

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.

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SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

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 mortgages receivable that are more than 90 days past due or interest charged at default rates. However, interest income not accrued at March 31, 2024 but collected prior to the issuance of this report is included in income for the three-month period ended March 31, 2024.

Origination and modification fee revenue, generally 1% – 3% of either the original loan principal or the modified loan balance, is collected at loan funding and is recognized ratably over the contractual life of the loan in accordance with ASC Topic 310.

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.

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 months ended March 31, 2024, the Company’s TRSs recognized provisions for federal and state income tax of $190,025, which is represented in other expenses on the Company’s consolidated statements of comprehensive income. During the three months ended March 31, 2023, there were no recognized provisions for federal income tax nor state tax.

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 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 no uncertain tax positions requiring accrual or disclosure in the accompanying consolidated financial statements as of March 31, 2024 and 2023.

Earnings Per Share

Basic and diluted earnings 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 per share is similar to basic earnings 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 per common share for each period is the reported net income.

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SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

As of March 31, 2024, the Company had basic and diluted weighted average shares of 47,326,384 outstanding, resulting in basic and diluted earnings per share of $0.08, respectively. As of March 31, 2023, the Company had basic weighted averages shares of 42,792,509 outstanding resulting in basic and diluted earnings per share were $0.10.

Recent Accounting Pronouncements

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued to (1) to clarify the guidance in FASB 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 FASB 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 Company’s financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (FASB 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. This standard is effective for the Company beginning with its 2024 annual reporting. ASU 2023-07 is to be adopted retrospectively to all prior periods presented. The Company does not anticipate that this update will have a material impact on its 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 consolidated financial statements.

Reclassifications

Certain amounts included in the March 31, 2024 and December 31, 2023 consolidated financial statements have been reclassified to conform to the March 31, 2024 presentation.

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 market 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 March 31, 2024:

    

Level 1

    

Level 2

    

Total

Stocks and ETFs

$

$

1,942,897

$

1,942,897

Mutual funds

16,461,721

16,461,721

Debt securities

19,207,082

 

821,052

20,028,134

Total investment securities

$

35,668,803

$

2,763,949

$

38,432,752

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SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

The following table sets forth by Level, within the fair value hierarchy, the Company’s assets at fair value as of December 31, 2023 (Audited):

    

Level 1

    

Level 2

    

Total

Stocks and ETF’s

$

$

1,755,219

$

1,755,219

Mutual funds

 

16,236,445

 

 

16,236,445

Debt securities

 

18,945,087

 

839,281

 

19,784,368

Total investment securities

$

35,181,532

$

2,594,500

$

37,776,032

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 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 March 31, 2024 and December 31, 2023, the Company had a continuous unrealized losses over 12 months in Available-For-Sale (“AFS”) debt securities of approximately $826,789 and approximately $808,561, respectively. The Company reviewed a number of factors to assess the credit quality of the debt instruments including, but not limited to, current cash position, operating cash flow, and corporate earnings and the impending maturity date of said securities, as of the most recently filed financial statements. As such, at March 31, 2024 and December 31, 2023, the Company has an allowance for credit losses regarding AFS debt securities totaling approximately $0.8 million, of which is included in investment securities (at fair value) on the accompanying consolidated balance sheets. There was no such related provision of credit losses for the three-month periods ended March 31, 2024 and 2023. The remaining AFS debt securities with a fair value of $19.2 million had an unrealized gain of $190,328 at March 31, 2024.

The following table presents the impact of the Company’s AFS securities - debt securities on its Other Comprehensive Income (“OCI”) for the three months ended March 31, 2024:

Three Months Ended

March 31, 

2024

2023

OCI from AFS securities – debt securities:

    

  

    

  

Unrealized (losses) on debt securities at beginning of period

$

315,614

$

(561,490)

Reversal of losses from unrealized to realized

212,097

Unrealized (losses) gain on debt securities

 

(337,382)

 

91,637

Change in OCI from AFS debt securities

(125,285)

91,637

Balance at end of period

$

190,329

$

(469,853)

As of March 31, 2024 and 2023, the investment securities cost basis were approximately $41.1 million and $38.6 million, respectively.

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SACHEM CAPITAL CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2024

4.    Mortgages Receivable, net

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 United States and Florida. 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 maximum LTV 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. The Company considers the maximum LTV as an indicator for the credit quality of a mortgage note receivable. 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. 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 one to three years. The loans are initially recorded and carried thereafter, in the financial statements, at cost. Most of the loans provide for monthly payments of interest only (in arrears) during the term of the loan and a “balloon” payment of the principal on the maturity date.

As of March 31, 2024 and December 31, 2023, loans on nonaccrual status had an outstanding principal balance of approximately $85.7 million and approximately $84.6 million, respectively. The nonaccrual loans are inclusive of loans pending foreclosure. For the three months ended March 31, 2024 and 2023, approximately $0.3 million and approximately $0.6 million of interest income was recorded on nonaccrual loans due to payments received, respectively.

For the three months ended March 31, 2024 and 2023, the aggregate amounts of loans funded by the Company were approximately $42.7 million and approximately $58.9 million, respectively, offset by principal repayments of approximately $51.4 million and approximately $39.9 million, respectively.

As of March 31, 2024, the Company’s mortgage loan portfolio includes loans ranging in size up to approximately $38.1 million with stated interest rates ranging from 5.0% to 15.0%, compared to loans ranging in size of up to approximately $29.9 million with stated interest rates ranging from 5.0% to 14.2% for the period ended March 31, 2023. The default interest rate is generally 18%, but could be more or less depending on state usury laws and other considerations deemed relevant by the Company.

As of March 31, 2024, and December 31, 2023, the Company had one borrower representing 10.8% and 10.1% of the outstanding mortgage loan portfolio, or approximately $53.2 million and approximately $50.4 million, respectively.