Sachem Capital Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 15, 2023. Sachem originates short-term, generally first-lien real estate loans, primarily in the Northeast and Florida, and operates as a REIT.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable / prior period |
|---|---|---|
| Total revenue | $14.7 million | $10.3 million in Q1 2022; +42.8% |
| Net income | $5.1 million | $4.4 million in Q1 2022 |
| Net income attributable to common shareholders | $4.2 million; $0.10 per share | $3.4 million; $0.10 per share in Q1 2022 |
| Operating expenses | $9.6 million | $5.9 million in Q1 2022; +61.1% |
| Net cash from operating activities | $5.0 million | $7.6 million in Q1 2022 |
| Cash and cash equivalents | $20.3 million | $23.7 million at December 31, 2022 |
| Total assets / shareholders’ equity | $597.0 million / $229.0 million | $565.7 million / $217.7 million at December 31, 2022 |
| Mortgage receivables, net | $476.5 million | $460.6 million at December 31, 2022 |
Revenue growth primarily reflected higher loan interest income ($11.0 million, up 29%) and partnership investment income ($550,000, up 101.7%), alongside a $716,000 unrealized investment-securities gain versus a $1.1 million loss in Q1 2022. Origination and modification fees declined 20% to $1.5 million. Interest and financing-cost expense rose 76.3% to $6.9 million, and compensation, fees and taxes increased 79% to $1.8 million. Adjusted earnings, a company-defined non-GAAP measure excluding unrealized securities gains and losses, were $3.5 million, or $0.08 per share, versus $4.5 million, or $0.13 per share.
Cash used in investing was $34.0 million, principally reflecting $58.9 million of mortgage disbursements, partly offset by $39.9 million of principal collections. Financing provided $25.6 million, including $9.2 million net proceeds from common-share issuance and $11.5 million net proceeds from the repurchase facility; common and preferred dividends paid totaled approximately $6.3 million. Cash declined $3.4 million during the quarter.
Debt, liquidity and portfolio risks
- Outstanding notes had $288.4 million aggregate principal ($280.6 million net of deferred financing costs), with maturities concentrated in 2024–2027. Other borrowings included $54.1 million under the Churchill repurchase facility, $13.7 million on the Wells Fargo margin line and a $1.66 million mortgage. The new $45 million Needham revolving facility was undrawn at quarter-end.
- Management reported weighted-average cost of capital of 7.23%, compared with 6.08% a year earlier; debt was approximately 59.9% of total capital versus 55.5% a year earlier. Churchill’s effective rate was 9.09% at March 31.
- The Needham facility includes covenants requiring at least $10 million of cash, cash equivalents and availability, an asset coverage ratio of at least 150%, and a specified debt-service covenant beginning with the quarter ending June 30, 2023. Other debt agreements also impose asset-coverage and distribution restrictions.
- Loans on nonaccrual status totaled $97.1 million at March 31, up from $55.7 million at December 31, 2022. Of 406 loans, 128 loans totaling about $81.4 million had matured without full repayment or extension; 52 loans, with about $40.6 million of principal and accrued charges, were in foreclosure proceedings. Management stated it believed collateral value exceeded balances on the foreclosure loans.
- Unfunded loan commitments were $114.9 million across 171 loans. The filing says these obligations may require higher cash balances and are expected to be funded through loan repayments, credit facilities and securities proceeds.
Outlook, changes and notable items
- Management aims to grow the loan portfolio while protecting capital and pursuing risk-adjusted returns, with increased focus on larger commercial loans and experienced sponsors. It described 2023 as challenging due to rising funding costs, competition, borrower negotiating leverage, property-value uncertainty, higher operating expenses and geopolitical and market volatility. No quantitative earnings or portfolio-growth guidance is provided.
- Management stated that cash balances and anticipated operating cash flows should be sufficient for operations over the next 12 months. This assessment should be considered alongside the large unfunded lending commitments and debt maturities.
- The company adopted CECL on January 1, 2023, recording a $2.49 million cumulative reduction to accumulated deficit. The mortgage-loan credit-loss allowance was $2.08 million at March 31, versus $105,000 at year-end, reflecting the accounting transition and subsequent provision.
- On March 2, the company entered into the $45 million Needham facility; on February 28, it refinanced its New Haven Bank mortgage with a $1.66 million loan at an initial 5.75% rate. The company also issued 2.48 million common shares through its at-the-market offering for about $9.4 million gross proceeds.
- The board declared a $0.13-per-share dividend on April 4, paid April 24. Subsequent to quarter-end, 136,356 additional common shares were sold through the ATM for about $510,000 gross proceeds through May 12. The filing reports the chief financial officer’s employment ended May 4, 2023.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The company identified REIT qualification, credit and collateral performance, interest rates, funding access and market conditions as important uncertainties.
Investor verification priorities
- Track nonaccrual loans, matured loans, foreclosure outcomes, extensions and collateral recoveries, and compare them with the company’s credit-loss allowance.
- Assess funding capacity for the $114.9 million of unfunded loan commitments, cash needs and upcoming note maturities; review facility availability and covenant compliance.
- Monitor the effect of higher borrowing costs on net interest economics, margins and dividends, including the company’s reported decline in adjusted earnings per share.
- Review ATM share issuance and resulting dilution, dividend coverage, and the company’s ability to meet REIT distribution requirements while honoring debt covenants.
- Verify management’s stated 12-month liquidity outlook against subsequent financial results and changes in loan performance, property values and financing markets.