Sachem Capital Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Sachem originates and services short-term, first-mortgage loans to real estate owners and investors, primarily in Connecticut, and has elected REIT tax treatment.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $5.71 million | $4.31 million; up 32.5% |
| Net income | $2.18 million | $2.24 million; down 2.5% |
| Basic and diluted EPS | $0.10 | $0.10 |
| Operating costs and expenses | $3.53 million | $2.07 million; up 70.2% |
| Operating margin (net income/revenue) | 38.2% | 51.9% |
| Net cash from operating activities | $2.79 million | $1.73 million |
| Cash and cash equivalents | $18.35 million | $19.41 million at Dec. 31, 2020 |
| Cash plus investment securities | $54.65 million | $56.70 million at Dec. 31, 2020 |
| Mortgages receivable | $156.77 million | $155.62 million at Dec. 31, 2020 |
| Total assets / shareholders’ equity | $228.43 million / $84.64 million | $226.67 million / $80.92 million at Dec. 31, 2020 |
- Loan interest income increased 56.2% to $4.53 million. Investment income and realized securities results together fell to about $113,000 from about $544,000, while other income rose 60.7% to $457,000.
- Interest and amortization expense increased 114.3% to $2.46 million, largely reflecting higher debt. The mortgage portfolio yield declined to 11.73% from 12.16%.
- Cash used in investing activities was $2.07 million, compared with $16.22 million in Q1 2020; cash used in financing was $1.78 million. Cash declined $1.06 million during the quarter.
- Gross notes principal was about $114.5 million, with a $28.16 million Wells Fargo margin-line balance; management described total indebtedness as approximately $142.7 million. The margin line was secured by short-term securities and carried a 1.5% rate at quarter-end. Notes had stated coupons of 6.875%–7.75%.
- Unfunded loan commitments totaled $23.49 million. The filing reports $2.65 million of dividends paid during the quarter.
Material changes and management commentary
- Loan originations were $31.66 million and principal collections were $30.51 million, both described as the highest quarterly levels since the IPO. The mortgage portfolio consequently grew only about $1.2 million from year-end; management said rapid repayments and reinvestment made it difficult to deploy working capital efficiently.
- Management’s main near-term challenge was deploying available capital into loans and reducing the burden of interest expense. It intended to grow selectively, including targeting larger commercial loans and expanding beyond Connecticut, particularly into Florida and Texas.
- Management anticipated continued loan-rate compression and higher 2021 operating costs, especially interest and compensation expense. It cited increased competition from well-funded lenders and borrower demands for better terms. It reported no significant increase in defaults and said collateral values had stabilized, while noting these conditions could change.
- COVID-19 forbearance and the moratorium on new lending had ended by the beginning of Q3 2020, and the company had resumed lending under its normal underwriting criteria. Management nevertheless warned that renewed disruption could delay originations, construction, repayments, servicing and foreclosure actions.
- Twelve of 479 loans were reported in foreclosure proceedings, with approximately $2.6 million due, in the mortgages note. The MD&A separately reported five loans in enforcement or collection proceedings totaling approximately $496,000; management said collateral value exceeded amounts due. These disclosures may describe different categories and warrant reconciliation.
- The company reported that it expected current cash and anticipated operating cash flows to fund operations for the next 12 months. It must generally distribute at least 90% of REIT taxable income and is subject to a 150% asset-coverage covenant on its notes.
Subsequent events and other notable items
- From April 1 through May 4, 2021, the company sold 2,045,336 common shares through ATM offerings for approximately $10.54 million in net proceeds. The filing gives different maximum offering amounts in different sections: $43.64 million and $46.64 million.
- April executive compensation approvals included a $500,000 CEO base salary, a $250,000 target annual bonus, a $500,000 restricted-share award and a $250,000 one-time cash bonus; the COO received a $25,000 cash bonus and $25,000 restricted-share award. These were approved after quarter-end.
- The company committed $3 million to a commercial real estate finance partnership and had invested approximately $1.84 million at March 31, 2021; withdrawal requires the manager’s approval.
- Management reported effective disclosure controls as of March 31, 2021 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the foreclosure and enforcement disclosures: 12 loans and approximately $2.6 million in the note versus five loans and approximately $496,000 in the MD&A.
- Confirm the authorized ATM offering size, which is stated as both approximately $43.64 million and $46.64 million, and assess dilution from subsequent share sales.
- Review debt balances, note maturities and the 150% asset-coverage covenant; the filing’s descriptions of the 7.75% notes’ maturity are not consistent across sections.
- Assess the capacity to fund $23.49 million of commitments while deploying cash, meeting debt service and sustaining REIT distributions, especially if loan payoffs remain rapid or yields compress.
- Monitor collateral values, borrower performance, geographic concentration, rising-rate exposure and any renewed COVID-19 disruption; management’s collateral-value assessments are not guarantees of recovery.