Sachem Capital Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. Sachem is a Connecticut-based real estate finance company and REIT focused on short-term loans secured by first mortgages, primarily in Connecticut.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $4.31 million | $3.35 million |
| Net income | $2.24 million | $2.06 million |
| Net income per share, diluted | $0.10 | $0.13 |
| Net cash from operating activities | $1.73 million | $1.17 million |
| Net cash used in investing activities | $16.22 million | $4.73 million |
| Net cash from/(used in) financing activities | $(2.72) million | $4.47 million |
- Revenue increased 28.8%, primarily reflecting growth in lending activity. The 2020 period also included $97,516 of investment interest and a $446,083 gain on investment securities; neither item was recorded in Q1 2019.
- Operating expenses rose 60.6% to $2.07 million, including higher financing costs and a $250,000 impairment charge on real estate owned. Net income rose about 8.9%, but diluted EPS fell because weighted-average shares increased to 22.12 million from 15.58 million. Calculated net margin was approximately 51.9%, versus 61.4% in Q1 2019.
- Mortgage portfolio yield, including specified borrower fees, was 12.16%, compared with 12.42%. Loan interest rates ranged from 5% to 13%; the stated default rate was 18%.
Financial position and liquidity
- Total assets were $141.18 million, essentially unchanged from year-end 2019. Mortgages receivable rose to $111.79 million from $94.35 million; total equity was $81.96 million.
- Cash and cash equivalents were $1.63 million, down from $18.84 million. Investments were $16.25 million, making cash plus investments about $17.87 million, versus approximately $34.79 million at year-end. Management attributed the shift largely to increased mortgage lending.
- Reported notes payable, net of financing costs, were $55.59 million, with a further $0.78 million mortgage payable and $0.07 million other notes payable. Management described total indebtedness as approximately $59.0 million. The two unsecured note series carry coupons of 7.125% and 6.875% and mature in 2024.
- Operating cash flow was positive at $1.73 million. Investing cash use principally reflected $28.68 million of mortgage disbursements, offset by $11.76 million of principal collections and investment-security transactions. Dividends paid were $2.65 million, exceeding quarterly net income.
- Unfunded construction-loan commitments totaled $9.37 million. Management said current cash and expected operating cash flows would be sufficient for operations over the next 12 months.
Changes, outlook, and risks
- In response to COVID-19, Sachem reported 42 forbearance requests across its 480 mortgages, representing $9.2 million of loans and approximately $283,000 of deferred interest. Valid requests generally received a 90-day interest-payment deferral.
- Management identified risks from borrower payment difficulties, delayed loan processing and court proceedings, slower prepayments, delayed renovations and property sales, and declining collateral values. It cautioned that COVID-19 could materially affect revenue, income, cash flow, and operations.
- Effective April 1, 2020, new-loan policies were tightened: lending limited to cash generated by loan payoffs, maximum LTV reduced to 50%, independent-director approval required for loans over $1 million, and an interest reserve contemplated for certain larger loans. The company also described temporarily curtailed operations and reduced customer contact.
- Management expected continued rate compression in 2020 and cited competition and changing borrower bargaining power. It also discussed longer-term plans to expand geographically and pursue larger or higher-quality transactions, while noting these plans and outcomes are uncertain.
- Subsequent events: Sachem sold a defaulted $140,000-principal note for $170,000 on April 27, reporting approximately $18,000 of interest income and no gain or loss; it received $247,845 in Paycheck Protection Program proceeds on April 29.
- The notes restrict dividends above 90% of taxable income, additional borrowing, and share repurchases unless the company satisfies a 150% asset coverage ratio. REIT status depends on meeting ongoing qualification and distribution requirements.
Important facts for investors to verify
- How the 42 COVID-19 forbearance requests developed, including deferred interest, subsequent delinquencies, and loan recoveries.
- Collateral values and loss exposure for the 13 loans in foreclosure proceedings, with approximately $3.1 million due; management stated collateral values exceeded amounts due.
- Whether the reduced cash balance, $9.37 million of unfunded construction commitments, and dividend payments remain manageable under slower collections or weaker lending conditions.
- Investment-security valuation and the sustainability of reported earnings, which included a $446,083 realized gain and a $135,382 unrealized loss.
- Compliance with note covenants, the 150% asset coverage requirement, and REIT qualification and distribution obligations.