Sachem Capital Corp. quarterly report, Q3 FY2020

Sachem Capital Corp. — Q3 2020 Form 10-Q

Business context and reporting period. Sachem Capital is a REIT-focused real estate finance company that originates short-term, first-mortgage loans, primarily in Connecticut. This unaudited filing covers the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods.

Financial performance and position

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Total revenue	$4.27 million	$3.38 million	$12.89 million	$9.79 million
Net income	$2.14 million*	$2.06 million*	$6.64 million	$5.25 million
Net income per share, basic and diluted	$0.10*	$0.10*	$0.30	$0.30
Net cash from operating activities	Not provided quarterly	Not provided quarterly	$7.39 million	$7.31 million

*The financial statements report Q3 2020 net income of $2.139 million and Q3 2019 of $2.055 million. The MD&A narrative reverses these amounts, while retaining $0.10 per share for both periods; investors should verify the discrepancy.

Margins and lending yield: The filing does not state an operating or net margin. Average portfolio yield was 12.28% at September 30, 2020, down from 12.66% a year earlier.
Loan portfolio and assets: Mortgages receivable were $124.1 million, up from $94.3 million at December 31, 2019. Total assets were $169.6 million, compared with $141.2 million at year-end. The company reported 480 loans; 78.1% had a term of one year or less.
Cash and liquidity: Cash and cash equivalents were $5.38 million; investments were $27.69 million, for combined cash and investments of approximately $33.1 million. Operating cash flow was $7.39 million. Investing activities used $41.36 million and financing activities provided $20.51 million, resulting in a $13.46 million decrease in cash during the nine months.
Debt: Total liabilities were $85.77 million, versus $58.65 million at December 31, 2019. The company reported approximately $85.6 million total indebtedness: $72.53 million principal across three unsecured note series, a $12.1 million Wells Fargo line secured by investments, and approximately $0.8 million mortgage debt. Debt represented 50.4% of capital. The notes carry rates of 6.875%–7.75% and mature in 2024–2025.
Other items: A $495,000 impairment charge on real estate owned was recorded in the first nine months. Investment sales generated a $415,000 gain in that period. Shareholders’ equity was $83.86 million; dividends paid during the nine months totaled $5.31 million.

Material changes versus prior comparable periods

Nine-month revenue increased 32% and net income increased about 26% year over year, primarily reflecting growth in lending operations and the mortgage portfolio.
Nine-month operating expenses rose 40%, principally because interest expense and deferred financing-cost amortization increased approximately $1.95 million as indebtedness expanded. The prior-year period included approximately $780,000 in line-of-credit termination expense, while 2020 included the $495,000 real-estate impairment.
Mortgage originations funded were $68.0 million in the first nine months, up from $42.2 million; principal collections were $37.9 million, versus $27.9 million.
The company issued $14.36 million of 7.75% notes due 2025 in September. In October, after quarter-end, it issued an additional $14 million of those notes, with an underwriters’ option for up to another $2.1 million.
The loan portfolio expanded into Florida: management reported approximately $9.7 million of Florida loans at September 30, up from less than $1 million at June 30.

Outlook, commentary, and risks

Management described its outlook for the rest of 2020 as optimistic, citing robust third-quarter demand, a favorable competitive landscape, and strength in Connecticut residential real estate. It also acknowledged uncertainty and provided no quantified earnings or revenue guidance.
COVID-19 prompted tighter underwriting from April 1, including limiting new lending to cash generated by payoffs and reducing maximum loan-to-value to 50%. The company restored its general 70% limit in July, while retaining a cautious approach. Loans over $1 million required approval by an independent director, and certain loans required an interest reserve.
At September 30, 18 loans remained under a COVID-related forbearance program, with $5.1 million aggregate principal and $146,000 deferred interest. Fourteen loans were in foreclosure proceedings, with approximately $4.0 million due; management believed collateral value exceeded amounts due.
Key risks include renewed pandemic restrictions, borrower payment or refinancing difficulties, delays in foreclosure proceedings, declining collateral values, interest-rate and funding-cost pressures, and competition that may compress loan yields. Approximately 90% of loans were secured by Connecticut properties, creating geographic concentration risk.
Management said current cash and investments plus expected operating cash flows should fund operations for the next 12 months. The company had $13.34 million in unfunded construction-loan commitments. It warned that renewed COVID-19 disruption could lead to expense reductions and lower dividends.
After quarter-end, the company paid a $0.12-per-share dividend on November 4, totaling approximately $2.65 million. Its notes restrict certain distributions, additional borrowing, and share repurchases unless the asset coverage ratio is at least 150%; REIT status also generally requires distribution of at least 90% of taxable income.

Important facts for investors to verify

Reconcile the conflicting Q3 net-income and per-share figures in the financial statements versus the MD&A narrative.
Review subsequent note issuance, total borrowing capacity and costs, and compliance with the notes’ 150% asset-coverage requirement.
Track performance and collateral coverage of the 18 forborne loans, 14 foreclosure loans, and $13.34 million of unfunded construction commitments.
Assess how Florida expansion, Connecticut property concentration, pandemic-related conditions, and yield compression affect portfolio quality and returns.
Confirm the sustainability of dividends against cash generation, debt covenants, REIT distribution requirements, and management’s stated liquidity expectations.