Sachem Capital Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Sachem originates and manages short-term, first-mortgage loans to real estate owners and investors, primarily in the northeastern and southeastern United States. It operates as a REIT.
Financial performance and position
- Revenue: $17.2 million, up 17.0% from $14.7 million in Q1 2023. Loan interest income rose 15.1% to $12.6 million; partnership income increased to $1.2 million from $0.5 million.
- Earnings: Net income was $4.7 million versus $5.1 million. Net income attributable to common shareholders was $3.65 million, down 13.0%; diluted EPS was $0.08 versus $0.10. Adjusted earnings, a company-defined non-GAAP measure, were $3.46 million, or $0.07 per share, versus $3.48 million, or $0.08 per share.
- Costs and credit provision: Operating costs and expenses increased 30.7% to $12.5 million. Interest and financing-cost expense rose 8.7% to $7.47 million; provision for loan credit losses increased to $1.31 million from $0.10 million.
- Cash flow: Operating activities provided $4.22 million, versus $5.01 million. Investing activities provided $4.32 million, compared with $34.0 million used in Q1 2023. Financing activities used $2.72 million, versus $25.6 million provided. Cash and equivalents ended the quarter at $18.4 million, up from $12.6 million at year-end.
- Assets and equity: Total assets were $626.5 million; shareholders’ equity was $237.4 million. Net mortgage receivables were $482.7 million, against a gross balance of $490.7 million and an $8.1 million loan allowance.
- Debt and liquidity: Management reported approximately $377.6 million of total indebtedness for borrowed money. Major balances included $288.4 million principal on unsecured notes, $35.0 million on the Needham facility, $27.3 million on the Wells Fargo loan, $25.9 million on the Churchill facility and $1.1 million on the mortgage. The Needham facility is $65 million, with $35 million drawn. The filing reports an 8.25% Needham rate and 9.40% effective Churchill rate at quarter-end. Debt was 60.3% of capital, compared with 59.9% at March 31, 2023.
Material changes and credit indicators
- Revenue growth was more than offset by faster expense growth; common-shareholder earnings and EPS declined year over year. Management attributed higher loan interest income to rates charged to borrowers, while elevated rates also increased funding costs.
- Loans on nonaccrual status were approximately $85.7 million, including loans pending foreclosure, versus $84.6 million at year-end. About $72.9 million of loans were pending/pre-foreclosure; reserves against those loans were approximately $7.3 million.
- At March 31, 72 of 273 loans, with approximately $140.7 million in principal, had matured without repayment or extension. The company said these loans were being modified and would be extended if they met underwriting requirements.
- Q1 loan originations were approximately $42.7 million, below $58.9 million a year earlier; principal collections were $51.4 million, above $39.9 million. The loan portfolio’s gross carrying value declined from $499.2 million at year-end to $490.7 million.
- One borrower represented 10.8% of the outstanding loan portfolio, approximately $53.2 million. Loan collateral was concentrated in Connecticut (39.8%), Florida (26.2%) and New York (13.3%); commercial real estate made up 36.5% of the portfolio.
Outlook, risks and notable items
- Management’s 2024 objective is to grow the loan portfolio while preserving capital and pursuing risk-adjusted returns. It expects elevated interest rates for the rest of 2024 and said interest expense may increase as it refinances more than $50 million of notes maturing in 2024.
- The company intends to address the June 2024 notes ($23.7 million) and December 2024 notes ($34.5 million) through refinancing, credit-facility borrowings, cash and loan repayments. Management said cash balances and anticipated operating cash flows should fund operations for the next 12 months.
- Key risks include commercial-property value declines, higher funding costs, competition from private lenders, market and geopolitical volatility, and the liquidity demands of construction-loan commitments. The company had $95.5 million of unfunded loan commitments and $2.45 million of unfunded partnership commitments.
- At Westport, zoning approval for residential units became final after the appeal period in April. The company accrued $600,000 of additional purchase price as of March 31, 2024. A separate $2.3 million Miami property purchase closed in April.
- On April 1, the company declared a common dividend of $0.11 per share, totaling approximately $5.2 million, paid April 16. Q1 common dividends paid were $5.14 million; preferred dividends were $1.02 million. Preferred shares carry a 7.75% dividend rate.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing cautions that REIT qualification depends on continued compliance with complex requirements.
Important facts for investors to verify
- Progress and terms for refinancing the $58.2 million of notes due in 2024, including the effect on interest expense and liquidity.
- Collections, extensions and foreclosure outcomes for matured, nonaccrual and pending/pre-foreclosure loans; adequacy of credit-loss reserves, which rose materially in Q1.
- Trends in commercial-property collateral values, borrower concentrations and the performance of the loan portfolio’s largest exposures.
- Capacity to fund the $95.5 million of loan commitments while maintaining liquidity and meeting facility covenants, including the $10 million cash-and-availability requirement under Needham.
- Whether earnings and cash generation can sustain common and preferred distributions while meeting REIT distribution requirements and debt restrictions.