Sachem Capital Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Sachem is a real estate finance company and REIT focused on short-term loans secured by first mortgages, primarily in the Northeastern U.S. and Florida.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $12.5 million | $6.7 million | $22.8 million | $12.4 million |
| Net income | $5.2 million | $2.5 million | $9.6 million | $4.7 million |
| Net income attributable to common shareholders | $4.3 million | $2.5 million | $7.7 million | $4.7 million |
| Basic and diluted EPS | $0.12 | $0.10 | $0.22 | $0.20 |
| Operating costs and expenses | $7.3 million | $4.2 million | $13.3 million | $7.7 million |
Revenue grew 86.9% in Q2 and 83.9% in the first half, mainly from loan portfolio expansion: first-half loan interest income rose 105.6% and origination fees rose 173.0%. GAAP net margin, calculated as net income divided by revenue, was approximately 41.7% in Q2 and 41.9% for the first half, versus 37.7% and 37.9%, respectively, in 2021. Common-shareholder earnings were affected by preferred dividends of $1.84 million in the first half. First-half adjusted earnings, excluding unrealized investment-security losses, were $10.3 million, or $0.29 per share; this is a company-defined non-GAAP measure.
Balance sheet, debt and cash flow
- At June 30, total assets were $525.4 million, including $422.4 million of mortgages receivable, up from $292.3 million at December 31, 2021. Shareholders’ equity was $205.0 million.
- Cash and cash equivalents were $29.1 million; cash plus investment securities totaled approximately $63.5 million, down from $102.6 million at year-end as funds were deployed into loans.
- Reported debt balances included $240.2 million of notes payable net of financing costs, $39.4 million outstanding on the Churchill repurchase facility, a $23.4 million Wells Fargo line, and a $0.75 million mortgage. Management stated debt was approximately 59.3% of total capital, compared with 50.6% at June 30, 2021.
- First-half operating cash flow was $7.3 million; investing cash use was $120.6 million, principally reflecting mortgage originations; financing cash inflow was $100.4 million, including note and common-share issuance. Cash declined by $12.8 million over the six months.
Material changes, outlook and risks
- Mortgage originations funded in the first half were $192.0 million, compared with $75.2 million in the prior-year period. The company raised about $100 million net from note and common-share offerings, principally to finance lending and general purposes.
- Management expects the second half of 2022 to be challenging, citing higher rates and inflation, slower economic growth, possible declines in borrower demand or property values, competition and pressure on borrower terms. Variable-rate borrowing costs had already increased; further effects were uncertain.
- Management’s stated objective is to grow the loan portfolio while preserving capital and seeking risk-adjusted returns. It reported launching a web-based underwriting platform and pursuing larger commercial loans and wholesale-broker relationships. It said current cash balances and anticipated operating cash flows should fund operations for the next 12 months; no earnings or revenue guidance was provided.
- Unfunded borrower loan commitments totaled $119.1 million across 191 loans, compared with $31.8 million across 130 loans a year earlier. The company warns it may not have sufficient working capital to meet all draw requests, and no reserve was recorded for these commitments.
- Approximately $46.2 million of mortgages were past maturity and in foreclosure or extension processes. Twenty-eight of 503 loans were in foreclosure proceedings, with approximately $9.1 million of principal, accrued interest and borrower charges; management believes collateral values exceed balances and charges.
- Investment securities incurred $2.5 million of unrealized losses recognized in first-half revenue. The company also recorded $595,500 of impairment expense in the first half, including $490,500 related to real estate owned.
- Other risks include exposure to real-estate values and regional conditions, borrower credit and repayment, rising funding costs, and REIT qualification and distribution requirements. The company reported no material change in internal control over financial reporting and said disclosure controls were effective.
Subsequent events
From July 1 through August 8, the company sold 2.27 million common shares through its at-the-market program for approximately $10.8 million gross. The board declared a $0.14-per-share common dividend payable July 28. The company increased authorized common shares to 200 million and hired John E. Warch as CFO effective August 1; John L. Villano remained CEO and president.
Important facts for investors to verify
- Capacity and liquidity to fund the $119.1 million of borrower commitments, including construction draws and the timing of those requests.
- Repayment, extension and collateral outcomes for matured and foreclosure loans, and the adequacy of impairment assessments.
- Exposure to higher interest rates: variable-rate borrowing costs, loan yields, funding availability and any asset-coverage or liquidity covenant headroom.
- Loan portfolio growth quality, geographic and borrower concentration, and the sustainability of origination-fee income and earnings.
- Future common-share issuance and dilution, dividend coverage, debt maturities and the company’s ability to maintain REIT status.