Sachem Capital Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Sachem is a real estate finance company focused on short-term, first-mortgage loans, primarily to real estate owners and investors in Connecticut, New York, and Florida. The filing is unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $16.46 million | $12.55 million | $31.17 million | $22.85 million |
| Net income | $5.70 million | $5.23 million | $10.82 million | $9.58 million |
| Net income attributable to common shareholders | $4.77 million | $4.31 million | $8.97 million | $7.74 million |
| Basic and diluted EPS | $0.11 | $0.12 | $0.21 | $0.22 |
| Operating costs and expenses | $10.76 million | $7.32 million | $20.35 million | $13.27 million |
| Operating cash flow | — | $12.09 million | $7.33 million |
For the first half, revenue rose 36.4%, while operating costs increased 53.3%. Interest income from loans grew 20.8%, partnership investment income increased 164.0%, and net unrealized investment-security results improved by $3.1 million year over year. Higher borrowing costs and expanded compensation and administrative costs offset part of these gains. Despite higher net income, EPS declined, reflecting a larger share count. Adjusted earnings, a company-defined non-GAAP measure, were $8.37 million, or $0.19 per share, versus $10.27 million, or $0.29 per share, in the first half of 2022; this measure excludes unrealized investment-security gains or losses.
Financial position, liquidity, and debt
- At June 30, 2023, total assets were $624.0 million, including $506.7 million of net mortgages receivable, $37.2 million of investment securities, and $15.1 million of cash and cash equivalents. Total assets increased 10.3% from December 31, 2022; net mortgages rose about $46.0 million and cash declined about $8.6 million.
- Total liabilities were $395.0 million and shareholders’ equity was $229.0 million. Debt represented approximately 61.3% of total capital, versus 59.3% at June 30, 2022. The company reported a 7.25% weighted-average cost of capital, excluding financing-cost amortization, versus 6.22% a year earlier.
- Unsecured notes had $288.4 million principal outstanding ($281.2 million net of deferred financing costs), with $58.2 million maturing in 2024 and $56.4 million in 2025. Additional borrowings included $50.5 million under the Churchill repurchase facility, $35.9 million on lines of credit, $6.2 million of secured notes, and $1.6 million of mortgage debt.
- Six-month investing cash outflow was $65.2 million, primarily reflecting $114.5 million of mortgage originations, partly offset by $66.4 million of principal collections. Financing cash inflow was $44.5 million; cash decreased by $8.6 million over the period.
- Management said current cash balances and anticipated operating cash flows should fund operations for the next 12 months. The company also reported $110.3 million of unfunded loan commitments, largely due within one year, and $2.1 million of unfunded partnership commitments.
Material changes and developments
- The mortgage portfolio’s outstanding principal increased to $508.9 million from $460.7 million at year-end 2022. The portfolio was concentrated in New England (48.2%), the South (32.0%), and the Mid-Atlantic (19.2%).
- The company adopted CECL accounting on January 1, 2023, recording a $2.49 million cumulative adjustment to accumulated deficit. The mortgage allowance was approximately $2.2 million at June 30, versus $105,000 before adoption.
- The company entered a $45 million Needham revolving credit facility in March, with an option to request an increase to $75 million subject to lender approval; $10.0 million was drawn at June 30. In May, it obtained a $7.0 million commercial loan, of which $6.224 million was outstanding at period-end.
- During the first half, the company issued 2.62 million common shares for approximately $9.7 million net proceeds and preferred shares for approximately $0.5 million net proceeds; it also repurchased 71,000 common shares for approximately $226,000. Common shares outstanding increased to 43.82 million from 41.09 million at year-end.
Outlook, risks, and unusual items
- Management aims to grow the loan portfolio while preserving capital and pursuing risk-adjusted returns, including targeting larger commercial loans and improving operating processes. It did not provide specific earnings or loan-growth guidance.
- Management described 2023 as challenging, citing rising borrowing rates and margin compression, increased competition, borrower demands for better terms, possible property-value fluctuations, and higher operating and dividend costs. The stated mortgage portfolio yield was 12.17% for the first half, including default interest, versus a 7.25% weighted-average cost of capital; management cautioned that the spread may remain pressured.
- At June 30, 126 loans with approximately $97.1 million of principal had matured without repayment or extension; 51 loans, with approximately $47.2 million of principal, were in foreclosure. Nonaccrual loans totaled approximately $96.4 million, compared with $55.7 million at year-end 2022. Management said it believed collateral value exceeded outstanding balances on loans in foreclosure. These exposures warrant attention alongside the company’s loan-loss assumptions.
- The company recorded $412,500 of impairment expense in the second quarter, including $200,000 related to its former headquarters property, which was under contract for sale. It also reported a $21,239 loss on sales of real estate in Q2.
- Subsequent to quarter-end, the board declared a $0.13 common-share dividend payable August 11, 2023. Through August 11, the company sold an additional 1.52 million common shares for about $5.76 million gross and 28,531 preferred shares for about $586,000 gross.
- Key structural risks include floating-rate funding costs, debt maturities, borrowing-facility covenants, collateral and geographic concentration, and maintaining REIT qualification. The Needham facility includes minimum liquidity and asset-coverage requirements and a debt-service covenant. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Delinquent, matured, nonaccrual, and foreclosure loan balances; subsequent collections, extensions, foreclosures, and collateral recoveries.
- Compliance with debt covenants and liquidity requirements, available borrowing capacity, and the company’s ability to refinance or repay notes maturing in 2024 and 2025.
- Whether loan yields can keep pace with funding costs, and how growth in interest expense and operating costs affects common-share earnings and dividends.
- Funding needs and timing for the $110.3 million of unfunded loan commitments, including the impact on cash and borrowing capacity.
- CECL allowance adequacy, investment-security valuations, and the carrying value and sale outcome of real estate assets, including the former headquarters.