Sachem Capital Corp. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparative figures are for FY2019. This is an annual filing, not a standalone fourth-quarter report. Sachem is a real estate finance company that originates short-term, generally interest-only loans secured by first mortgages, primarily on investment properties. It elected REIT tax treatment beginning in 2017.
Financial performance and position
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Total revenue | $18.6 million | $12.7 million |
| Net income | $9.0 million | $6.2 million |
| Diluted earnings per share | $0.41 | $0.32 |
| Net cash from operating activities | $9.6 million | $8.1 million |
| Total assets | $226.7 million | $141.2 million |
| Mortgage loans receivable | $155.6 million | $94.3 million |
| Cash and short-term marketable securities | $56.7 million | $34.8 million |
| Total shareholders’ equity | $80.9 million | $82.6 million |
- Revenue increased 46.5% and net income increased 45% year over year. Interest income from loans was $13.8 million, versus $9.8 million. Revenue also included $0.9 million in gains on sales of marketable securities.
- Operating costs and expenses rose 47.7% to $9.6 million. Interest and deferred financing cost amortization increased to $5.5 million from $2.9 million, reflecting greater borrowing.
- Loan originations were $117.2 million versus $64.7 million; repayments were $55.0 million versus $43.3 million. The portfolio grew to 495 loans from 438.
- Portfolio weighted-average contractual yield fell to 11.79% from 12.42%. Connecticut represented 77% of year-end loan principal, down from approximately 89% in 2019; Florida rose to 9.64%.
- Cash flow from investing was negative $82.8 million, mainly reflecting loan funding and investment purchases; financing provided $73.8 million. Year-end cash alone was $19.4 million; short-term marketable securities were $37.3 million.
- Debt was approximately $138.7 million net of financing costs on the balance sheet; management also describes total outstanding indebtedness of approximately $143.6 million, including face-value notes. Year-end debt included about $114.5 million of unsecured notes and a $28.1 million margin line secured by short-term securities. Debt represented 64.3% of total capital, versus 35.7% in 2019.
- The company reported a $795,000 impairment loss, compared with $417,000 in 2019. Year-end real estate owned was $8.9 million.
Material changes, outlook and risks
- COVID-19 response: From April 2020, the company temporarily limited new lending to cash generated by payoffs, reduced new-loan LTV limits to 50%, required independent-director approval for loans above $1 million, and required interest reserves for certain loans. It restored the general 70% LTV limit effective July 2020. A forbearance program deferred approximately $200,000 of interest on 23 loans totaling $6.5 million; by year-end, all had exited forbearance and were current on interest.
- Management outlook: Sachem said it intended to grow its portfolio while maintaining underwriting discipline, expand beyond Connecticut—especially in Florida and Texas—and pursue larger loans with experienced sponsors and higher-quality collateral. It expected further rate compression in 2021 amid stronger competition and borrower demands for better terms. Management said current cash and anticipated operating cash flow were expected to fund operations for the next 12 months, and reported $20.2 million of new loans funded from January through March 12, 2021. No quantified earnings or dividend guidance was provided.
- Key risks: COVID-19 disruption, weaker borrower payment or refinancing capacity, falling collateral values, maturity extensions and delayed foreclosures; geographic concentration in Connecticut; rising funding costs and narrowing loan spreads; high leverage and dependence on external capital; and REIT qualification and distribution requirements. Management also cited declining or flattening property values and aggressive new competitors.
- Loan performance items to distinguish: 16 loans were in foreclosure at year-end, with approximately $3.1 million of principal, accrued interest and charges; management believed collateral value exceeded amounts due and recorded no related reserve. Separately, MD&A reports five loans in enforcement or collection proceedings with approximately $307,000 due. The filing does not clearly reconcile these differently described populations. It also reports 93 matured loans not yet repaid or extended, being processed for modification.
- Capital returns and subsequent events: The company declared a $0.12-per-share dividend for year-end 2020, paid January 8, 2021, totaling approximately $2.65 million. It repaid its headquarters mortgage in February 2021 and sold 234,051 shares through an at-the-market offering in March 2021 for approximately $1.2 million gross.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an ICFR attestation.
Important facts for investors to verify
- Reconcile reported debt amounts, including the distinction between balance-sheet carrying value and face-value indebtedness, and review the 150% asset-coverage covenant and margin-line terms.
- Track the 93 matured, unresolved loans, foreclosure and collection status, subsequent recoveries, collateral valuations, and the adequacy of impairment reserves.
- Assess whether declining portfolio yield and higher borrowing costs pressure net interest spreads, earnings, and the ability to sustain dividends.
- Monitor Connecticut concentration, the pace and underwriting quality of expansion into other states, and the effect of competition on loan pricing.
- Review the $37.3 million short-term securities portfolio, its use as collateral for the margin line, and liquidity available after unfunded loan commitments of $19.6 million.
- Confirm continued REIT qualification, compliance with debt covenants, and actual dividend coverage from recurring operating cash flow rather than investment-sale gains or new financing.