Sachem Capital Corp. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017. Sachem originates short-term, generally one-to-three-year, first-mortgage loans to real estate investors, primarily in Connecticut. The filing’s 2016 comparative results largely reflect its predecessor, Sachem Capital Partners, LLC (SCP); Sachem became a public company following the February 2017 exchange transaction and IPO.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1.94 million | $1.02 million | $4.75 million | $2.99 million |
| Net income | $1.32 million | $675,000 | $3.17 million | $2.23 million |
| Net income per share | $0.12 | Not reported | $0.26 since IPO effective date | Not reported |
| Net cash from operating activities | — | — | $2.77 million | $2.42 million |
- Q3 revenue increased 90.8% year over year; nine-month revenue increased 59%. Management attributed growth primarily to expanded lending. Nine-month operating expenses rose 106% to $1.57 million, reflecting increased lending, public-company and REIT costs, and financing expense.
- At September 30, total assets were $56.9 million, including $52.7 million of mortgages receivable, versus $38.4 million and $32.5 million, respectively, at year-end 2016. The portfolio comprised 311 loans; no borrower exceeded 10% of the outstanding portfolio.
- Cash was $1.02 million. Nine-month investing cash outflow was $19.0 million, mainly reflecting $33.8 million of mortgage advances, partly offset by $14.8 million of principal collections. Financing cash inflow was $15.7 million, including $13.0 million of gross IPO proceeds.
- Debt included $15.92 million outstanding on a $20 million revolving credit line and $304,000 of mortgage payable. The credit-line rate was 5.83%; management reported a 12.13% annual loan-portfolio yield. Debt represented about 29% of total capitalization. Total liabilities were $17.72 million and equity was $39.16 million.
- Unfunded construction-loan commitments were $3.10 million. Management said cash, available credit and expected operating cash flows should be sufficient for the next 12 months.
Outlook, risks and significant items
- Management intends to elect REIT tax treatment for 2017 and expects to distribute at least 90% of REIT taxable income. It reported distributing $0.26 per share since the IPO through September 30, representing 100% of net income over that period. A $0.105-per-share dividend was declared after quarter-end.
- Management expects borrowing costs to rise with interest rates and had not raised loan rates to match recent increases. It prioritized market-share growth, which could pressure near-term profits and cash flow. Rising rates may also affect collateral values; increased prepayments and competition from traditional lenders were identified as concerns.
- The Bankwell facility is secured by substantially all company assets, subject to borrowing-base limits and financial covenants, and matures June 30, 2019. Additional indebtedness above $100,000 generally requires Bankwell consent. The facility includes restrictions on certain dividends and other actions.
- After quarter-end, the company began foreclosure proceedings on two loans with $238,000 aggregate principal and reported no impairment based on property assessments and broker opinions. It also reported a settlement providing additional collateral on another loan.
- From October 27 to November 3, 2017, the company completed a follow-on offering of 4,312,500 shares at $4.00 per share, raising approximately $15.8 million net, primarily for loan growth and general corporate purposes.
- The company disclosed related-party arrangements, including office rent paid to an entity partly owned by a co-CEO and historical loans to JJV, LLC; the September 30 principal balance of loans to JJV was $1.10 million. It reported $3.10 million of unfunded construction commitments and routine litigation related to properties in foreclosure, with no impairment identified for those matters.
- Management concluded disclosure controls were effective at September 30, 2017 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Loan-level credit quality, collateral valuations, borrower extensions, and the status and recovery outcomes of foreclosure or settlement cases.
- Availability under the Bankwell borrowing base, covenant compliance, refinancing plans before the 2019 maturity, and the impact of higher rates on funding costs and loan yields.
- REIT qualification, taxable income and dividend coverage; accounting net income is not necessarily the same as REIT taxable income.
- Use of follow-on offering proceeds, dilution, and whether portfolio growth can sustain earnings while operating costs increase.
- Comparability of reported year-over-year results, given the February 2017 exchange, IPO, predecessor operations, and change in corporate structure.