Sachem Capital Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2016)
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2016, for Sachem Capital Corp. (formerly HML Capital Corp.). The company operates as a Connecticut-based real estate finance firm specializing in short-term "hard money" loans secured by first mortgage liens on residential and commercial properties, primarily in Connecticut. The reporting period reflects the operations of its predecessor, Sachem Capital Partners, LLC ("SCP"), prior to a corporate reorganization. On February 8, 2017, SCP transferred all assets and liabilities to Sachem Capital Corp. in exchange for common shares. Subsequently, on February 9, 2017, the company completed an Initial Public Offering (IPO) and began trading on the NYSE MKT. The company intends to elect Real Estate Investment Trust (REIT) status for the 2017 tax year.
Key Financial Metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total Revenue | $4,133,495 | $2,786,724 |
| Net Income | $3,050,627 | $2,306,903 |
| Operating Expenses | $1,082,868 | $479,821 |
| Net Cash from Operating Activities | $3,697,185 | $2,376,197 |
| Loan Portfolio (Principal) | $33,750,610 | $27,532,867 |
| Total Debt | $8,423,943 | $6,000,000 |
| Members' Equity | $28,485,615 | $24,229,517 |
| Weighted Avg. Interest Rate | 12.23% | 11.76% |
| Cash on Hand | $1,561,863 | $1,834,082 |
Debt Structure: The company utilizes a $15.0 million revolving line of credit with Bankwell Bank. As of December 31, 2016, $8.1 million was outstanding. The interest rate is variable (Prime + 3.0%, minimum 6.25%), which was 6.75% at year-end. The facility matures on March 15, 2018.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 46% to $4.1 million, driven by a 47% increase in interest income ($3.65 million vs. $2.48 million) and higher origination fees.
- Expense Increase: Operating expenses rose 129% to $1.1 million. This was primarily due to higher interest expense ($505k vs. $222k) resulting from increased debt utilization and higher compensation to the manager ($350k vs. $210k).
- Portfolio Expansion: The loan portfolio grew by $6.2 million (22.6%) to $33.8 million, with 217 loans outstanding compared to 180 in 2015.
- Real Estate Owned (REO): The company acquired five properties in August 2016 due to borrower defaults. Three were sold in October 2016, resulting in a net loss of approximately $99,000 recorded in 2016. Two properties remain held for sale or rental.
- Corporate Structure: The company transitioned from a private LLC to a public C-Corporation (Sachem Capital Corp.) in early 2017, raising an estimated $11.2 million in net proceeds from its IPO.
Guidance, Outlook, and Risks
Outlook and Strategy: Management intends to grow the loan portfolio while maintaining a conservative loan-to-value (LTV) ratio of 65% or less. The company plans to increase leverage over time, targeting debt at approximately 50% of total capital to enhance returns, up from roughly 23% at year-end 2016. The company expects to pay regular quarterly distributions to shareholders, aiming to distribute at least 90% of REIT taxable income.
Management Commentary: Management noted that while late payment fees increased in 2016 due to stricter enforcement, this does not indicate a rise in default rates. However, the company has not yet raised lending rates to match recent increases in its cost of funds (borrowing rate increased to 7.0% in March 2017), prioritizing market share growth over short-term profit margins.
Key Risks:
- Interest Rate Risk: The company funds fixed-rate loans with variable-rate debt. Rising interest rates compress the net interest margin unless lending rates are adjusted.
- Geographic Concentration: Approximately 93% of the loan portfolio is secured by properties in Connecticut, exposing the company to local economic downturns.
- REIT Qualification: Failure to meet complex REIT requirements (asset tests, income tests, distribution requirements) could result in significant corporate income taxes.
- Financing Covenants: The Bankwell Credit Line contains strict covenants, including a minimum fixed charge coverage ratio of 1.35:1.00 and tangible net worth requirements. A breach could accelerate debt repayment.
- Key Person Risk: Operations rely heavily on the co-CEOs, John and Jeffrey Villano, who manage underwriting and business development.
Investor Verification Checklist
- REIT Election Status: Verify the company has successfully filed its 2017 tax return electing REIT status to avoid corporate income tax.
- Interest Rate Spread: Monitor the spread between the company's variable borrowing costs (currently ~7.0%) and the fixed rates on its loan portfolio (9-12%) to assess margin compression.
- Credit Line Compliance: Confirm the company remains in compliance with Bankwell Bank covenants, specifically the fixed charge coverage ratio and tangible net worth thresholds.
- Related Party Transactions: Review the terms of loans made to JJV, LLC (an affiliate of the CEOs), which totaled $1.23 million at year-end, to ensure they are on arm's-length terms.
- Loan Loss Reserves: Note that the company currently carries no loan loss reserves; verify if future economic conditions necessitate the establishment of such reserves.
- Post-IPO Liquidity: Assess the trading volume and liquidity of the common shares on the NYSE MKT following the February 2017 listing.