Sachem Capital Corp. — Q3 2022 Form 10-Q
Business context and reporting period. Sachem is a REIT-focused real estate finance company that originates short-term, generally one-to-three-year, first-mortgage loans, primarily to real estate owners and investors. This unaudited report covers the quarter and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021 unless otherwise noted.
Financial performance and condition
- Revenue and earnings: Q3 revenue was $13.5 million, up 58.9% from $8.5 million; net income was $5.1 million versus $4.3 million, and income attributable to common shareholders was $4.1 million, or $0.11 per share, versus $3.4 million, or $0.12 per share. For the first nine months, revenue rose 73.7% to $36.4 million, net income rose to $14.6 million from $9.0 million, and common-shareholder income was $11.9 million, or $0.32 per share, unchanged per share year over year.
- Revenue drivers and expenses: Nine-month loan interest income nearly doubled to $30.5 million, and origination and modification fees increased to $5.8 million from $2.8 million. Operating expenses rose 82.6% to $21.8 million, including interest and deferred-financing-cost expense of $15.1 million versus $7.5 million. The company recorded $3.6 million of unrealized investment-security losses in nine-month revenue; management’s non-GAAP adjusted earnings, excluding those losses, were $15.5 million, or $0.42 per share.
- Loan portfolio: Mortgages receivable grew to $448.5 million from $292.3 million at year-end. The portfolio included 477 loans, with stated rates of 5.0%–14.2%. The company funded $252.4 million of mortgage principal and collected $95.2 million during the nine-month period.
- Cash flow: Nine-month operating cash flow was $12.4 million, compared with $17.4 million in 2021. Investing activities used $151.2 million, principally for mortgage originations; financing activities provided $132.3 million. Cash and cash equivalents declined by $6.5 million to $35.5 million.
- Liquidity and capital: Cash plus investment securities totaled approximately $69.8 million at September 30, down from $102.6 million at year-end. Total assets were $561.8 million and shareholders’ equity was $219.3 million. Notes payable were $279.6 million net of financing costs (approximately $288.4 million principal); other borrowings included $43.1 million under the Churchill repurchase facility, $3.5 million on the Wells Fargo line, and a $0.75 million mortgage. Management reported debt at approximately 59.8% of total capital, versus 49.3% at September 30, 2021.
Material changes, outlook, and risks
- Growth was funded in part by new debt and equity: the company issued three note series in 2022, raising $122.1 million gross, and sold 7.18 million common shares through an at-the-market offering for $36.7 million net. The larger loan book contributed to higher interest and fee income, while increased borrowing costs, staffing, and operating expenses weighed on results. Common shares outstanding rose to 40.1 million from 32.7 million at year-end.
- At September 30, the company had $118.1 million of conditional future loan-funding commitments, up from approximately $61.7 million a year earlier, and $3.6 million of unfunded partnership commitments. Management said it expected cash and operating cash flows to fund operations for the next 12 months, but noted these funding obligations could require higher cash balances.
- Credit matters warrant attention: 92 loans with approximately $45.0 million unpaid principal were past maturity and in foreclosure or extension processes. Forty-four loans were in foreclosure proceedings, with approximately $21.4 million of principal, accrued interest, and borrower charges. Management believed collateral values exceeded amounts owed. The filing also reports $105,000 of mortgage impairment and $685,500 of real-estate-owned impairment for the nine months.
- Management described higher rates and inflation as increasing funding costs and potentially reducing borrower demand, property values, repayment capacity, and access to public capital. Other identified risks include competition, borrower bargaining power, geographic concentration, and economic disruption. The company said these factors had not yet materially reduced business volume, but their future effect was uncertain. It expects compensation expense to continue rising.
- Debt and repurchase-facility covenants generally require at least 150% asset coverage for specified dividends, additional debt, or share repurchases; the Churchill facility also requires unencumbered cash equal to at least 2.5% of repurchase obligations. The Churchill facility was $43.1 million outstanding, with approximately $2.1 million additional availability reported.
- Subsequent events included the October acquisition of substantially all assets of Urbane New Haven for 300,000 common shares (valued at approximately $1.1 million); the company said purchase-price allocation and any contingent liability were still being assessed. A repurchase plan authorized up to $7.5 million of common shares through September 30, 2023. The board declared a $0.13-per-share dividend payable November 14, 2022. Management provided no numerical earnings or revenue guidance.
- The company stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. It also noted REIT qualification depends on continuing compliance, including annual distributions of at least 90% of taxable income.
Key facts for investors to verify
- Whether the $118.1 million of loan-funding commitments can be met under stressed liquidity or capital-market conditions, and how much is ultimately drawn.
- Performance and collateral coverage of past-maturity and foreclosure loans, including extensions, recoveries, and any additional impairments.
- Borrowing costs, debt maturities, covenant headroom, and availability under the Churchill facility as rates and funding markets change.
- Whether loan growth and fee income continue to outpace interest expense and other operating-cost increases, and how investment-security losses affect GAAP results versus adjusted earnings.
- Final accounting and any contingent liabilities arising from the Urbane acquisition, and the actual use of the authorized share-repurchase plan and subsequent ATM issuance.