Sachem Capital Corp. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2019, compared with Q1 2018; balance-sheet figures are compared with December 31, 2018. Sachem originates and services short-term, first-lien real estate loans, primarily in Connecticut, and has elected REIT tax treatment. Its portfolio comprised 413 loans totaling approximately $81.7 million at quarter-end.
Key financial results
- Revenue: $3.35 million, up 23.2% from $2.72 million. Loan interest income was $2.75 million versus $1.96 million; net origination fees were $365,000 versus $349,000.
- Profit: Net income was $2.06 million, up 4.2% from $1.97 million. Basic and diluted EPS were $0.13 in both periods.
- Expenses and margins: Operating expenses rose 73.5% to $1.29 million from $744,000, including higher funding costs and compensation. Calculated net margin was approximately 61.4%, versus 72.6% in Q1 2018.
- Cash flow: Operating cash flow was $1.17 million, compared with $1.30 million. Investing activities used $4.73 million, mainly reflecting mortgage originations; financing activities provided $4.47 million. Cash and restricted cash ended at $1.07 million, all reported as restricted cash on the balance sheet.
- Assets and lending: Total assets were $92.32 million, up from $86.01 million at year-end. Mortgage receivables were $80.88 million on the balance sheet; the loan portfolio table reports $81.75 million outstanding. Real estate owned rose to $4.91 million from $2.94 million.
- Debt and capital: The Webster revolving facility balance was $30.38 million, accruing interest at 6.49%; its stated maturity is May 2022. A $795,000 mortgage loan was refinanced at 5.06%, maturing in 2029. Management reported debt at 35.3% of total capital and equity at approximately 65%.
- Equity and distributions: The ATM offering generated approximately $2.23 million net from 511,635 shares sold during the quarter. Shareholders’ equity was $57.09 million. A $0.12-per-share dividend totaling $2.05 million was paid in April.
Material changes and operating developments
- Revenue growth reflected expanded lending, while higher interest and financing-cost amortization, personnel costs, and general and administrative expenses drove faster expense growth; net income increased only modestly and EPS was unchanged.
- Mortgage loans funded during Q1 totaled $12.83 million, compared with $10.35 million in Q1 2018. The filing reports principal repayments of $9.66 million in Q1 2019 and $6.03 million in Q1 2018.
- Eleven of 413 loans were classified as non-performing, with approximately $4.1 million of principal and accrued unpaid interest, about 5% of the portfolio. Management stated collateral value exceeded balances; the loans were referred to counsel for foreclosure or settlement.
- The company reacquired two notes previously sold to a shareholder, resulting in $2.217 million due to that shareholder at March 31, 2019. The filing also describes loans to former partners/shareholders and other related-party arrangements.
- After quarter-end, Sachem sold 2,970,280 additional ATM shares through May 7, raising approximately $13.4 million net.
Outlook, risks, and contingencies
- Management said cash, available Webster facility capacity, and expected operating cash flows should fund operations for the next 12 months. It was exploring alternative financing but had no definitive agreement reported.
- Management expects to increase leverage over time, potentially to approximately 50% of total capital, to fund portfolio growth and REIT distributions. The Webster facility generally restricts additional borrowing without lender consent, subject to exceptions.
- Management noted borrowing costs could continue rising and that it had not raised loan rates to match recent increases. The stated strategy was to prioritize market share, which could pressure near-term profits and cash flow if the spread narrows.
- The filing describes stagnant or declining Connecticut property values and longer sale periods observed since the second half of 2018, while demand for the company’s loans remained robust. Rapid rate increases could also affect real estate values and collateral.
- The company was not in compliance with the Webster facility’s tangible-net-worth covenant at December 31, 2018; lenders waived compliance on March 29, 2019. Sachem reported compliance with all financial covenants at March 31, 2019, but warned that future noncompliance could permit acceleration of the facility.
- Unfunded construction-loan commitments were $5.63 million. REIT status depends on continued compliance with complex tax requirements; loss of status could result in corporate-level taxes and other consequences.
- Management reported disclosure controls and procedures were effective at March 31, 2019 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the $80.88 million balance-sheet mortgage receivable figure with the $81.75 million portfolio amount reported in the credit-risk disclosure.
- Review non-performing loan trends, collateral valuations, foreclosure outcomes, and the rise in real estate owned.
- Track the loan yield versus floating-rate funding costs, facility availability, covenant headroom, and refinancing or alternative-funding plans.
- Assess the impact of the post-quarter ATM issuance, including dilution, net proceeds, and the company’s remaining offering capacity.
- Confirm the sustainability of dividends alongside REIT distribution requirements, loan-funding commitments, and liquidity needs.
- Review related-party lending and shareholder note transactions, as well as continued REIT qualification and compliance with lender covenants.