Sachem Capital Corp. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Sachem originates and services short-term, generally one-to-three-year, first-mortgage loans to real estate owners and investors, primarily in Connecticut. The filing is unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $6.71 million | $4.31 million | $12.43 million | $8.62 million |
| Net income | $2.53 million | $2.27 million | $4.71 million | $4.51 million |
| Net income per common share | $0.10 | $0.10 | $0.20 | $0.20 |
| Operating expenses | $4.18 million | $2.04 million | $7.71 million | $4.12 million |
| Comprehensive income | $2.43 million | $2.49 million | $4.60 million | $4.59 million |
- For the quarter, revenue rose 56.0% and net income rose 11.7%; for the first half, revenue rose 44.2% and net income rose 4.6%. Interest income from loans increased 43.4% in Q2 and 49.4% year to date, reflecting growth in lending.
- Operating expenses increased 105.1% in Q2 and 87.4% for the first half. The largest driver was interest expense and financing-cost amortization, which rose 118.2% in Q2 and 116.0% year to date as debt increased. Added executives and staff also raised compensation costs.
- Q2 included $257,845 of debt-forgiveness income. First-half investment-security sales produced a $43,968 loss, versus a $437,159 gain in the prior-year period. Impairment losses on real estate owned were $319,000 for the first half, down from $495,000.
Balance sheet, liquidity and cash flow
- At June 30, total assets were $296.3 million, including $172.8 million of mortgages receivable, $62.2 million of cash and equivalents, and $44.5 million of investment securities. Cash plus securities totaled approximately $106.7 million.
- Total liabilities were $150.0 million and shareholders’ equity was $146.3 million. Notes payable, net of financing costs, were $110.1 million; the Wells Fargo margin line balance was $34.3 million. Management described total indebtedness as approximately $148.8 million and debt as 50.6% of capital. The notes bear rates of 6.875%–7.75%; the margin line rate was 1.5% at quarter-end.
- First-half operating cash flow was $6.1 million, investing cash flow was negative $26.7 million, and financing cash flow was positive $63.4 million. Cash increased by $42.8 million to $62.2 million.
- Management said existing cash, investments and expected operating cash flows should fund operations for the next 12 months. This assessment includes substantial near-term loan-funding obligations: $31.8 million of unfunded commitments across 130 loans.
Material changes and capital actions
- Mortgages receivable rose from $155.6 million at year-end 2020 to $172.8 million at June 30, 2021. The company funded $75.2 million of loans and collected $58.0 million of principal during the first half.
- The company raised $22.9 million net through common-share sales and $40.6 million net from issuing 1.7 million Series A preferred shares during the first half. The preferred stock pays cumulative dividends at 7.75% annually on a $25 liquidation preference. An additional 203,000 shares were sold after quarter-end, bringing reported aggregate net offering proceeds to approximately $45.4 million.
- On July 21, 2021, the company entered into a $200 million master repurchase facility. It is optional for both parties, secured by mortgage loans sold under it, and priced at 30-day LIBOR (subject to a 0.25% floor) plus 3%–4%. The company said it intended to use the facility to support lending growth and general corporate purposes.
- From July 1 through August 9, the company also raised $8.0 million net from additional at-the-market common-share sales.
Outlook, risks and notable disclosures
- Management intends to grow the loan portfolio, pursue larger commercial loans and expand beyond New England, including in Florida and Texas. It expects continued loan-yield compression amid increased competition and borrower bargaining power; portfolio yield was 11.72% for the first half, down from 12.38% a year earlier.
- Key risks include property-value declines, rising funding costs, borrower defaults, COVID-19 disruption, construction delays and reduced loan prepayments. Management reported no significant increase in defaults and stated it believes collateral values exceed amounts due on loans in foreclosure or enforcement proceedings.
- The filing reports $31.8 million of unfunded loan commitments, which management says require higher cash balances and could weigh on financial performance. A 150% asset-coverage covenant applies to the notes for specified distributions, additional indebtedness and share repurchases.
- The company operates as a REIT and must meet complex ongoing qualification and distribution requirements, including distributing at least 90% of taxable income. Failure to qualify could result in corporate-level taxes and other consequences.
- Management identified no material change in internal control over financial reporting and concluded disclosure controls were effective at June 30, 2021.
Most important facts for investors to verify
- Reconcile the filing’s differing loan-enforcement disclosures: the notes report 12 foreclosure proceedings totaling approximately $2.63 million, while MD&A reports seven enforcement or collection proceedings totaling approximately $895,000.
- Review the $31.8 million unfunded commitment schedule, anticipated draw timing and available liquidity, including the conditions under which the optional Churchill facility can be used.
- Assess the effects of rising debt-service costs and loan-yield compression on profitability and dividend coverage; first-half interest and financing-cost expense more than doubled year over year.
- Confirm the post-quarter capital raised, common-share dilution, preferred dividend burden and actual use and pricing of the new financing facility.
- Monitor foreclosure outcomes, real estate impairments and Connecticut/property-market concentration, as well as compliance with note covenants and REIT requirements.