Sachem Capital Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Sachem Capital originates and manages short-term, primarily first-lien real-estate loans, mainly in Connecticut. Figures are unaudited.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.38 million | $3.05 million | $9.79 million | $8.81 million |
| Net income | $2.06 million | $1.96 million | $5.25 million | $6.13 million |
| Basic and diluted EPS | $0.10 | $0.13 | $0.30 | $0.40 |
- Q3 revenue rose 10.7% year over year and net income rose 4.7%; EPS declined as weighted-average shares increased.
- Nine-month revenue increased 11.1%, while net income declined 14.3%, principally reflecting higher expenses, including the one-time Webster credit facility termination charge.
- Net interest income is the core business driver. Management reported a mortgage portfolio yield of 12.66% for Q3 and 12.58% for the nine-month period. The filing does not provide a defined operating margin measure.
- At September 30, cash was $11.0 million, versus approximately $0.16 million at year-end 2018. Nine-month operating cash flow was $7.31 million, investing cash flow was negative $14.52 million, and financing cash flow was $18.06 million.
- Total assets were $109.28 million and shareholders’ equity was $84.26 million. Mortgage receivables were $89.02 million, up from $78.89 million including affiliate loans at December 31, 2018. Real estate owned was $5.31 million, compared with $2.94 million at year-end.
- Debt was approximately $23.3 million, primarily the 7.125% unsecured notes due 2024, plus a $0.79 million mortgage payable and other small obligations. The prior revolving credit facility was repaid and terminated in June. Management characterized capitalization as approximately 78% equity and 22% debt.
Material changes and financing
- The company raised equity through at-the-market sales and a public offering, and issued $23.663 million of 7.125% unsecured notes due June 2024. Proceeds were used substantially to repay the Webster revolving facility; the equity offering also supported working capital and portfolio growth.
- Termination of the Webster facility generated $779,641 of expense, including a $439,446 noncash write-off of deferred financing costs. Management estimated the charge reduced EPS by approximately $0.04 for the nine-month period.
- Mortgage lending remained active: loans funded during the nine months totaled $42.16 million and principal collections totaled $27.92 million. The portfolio comprised 432 loans with $89.02 million outstanding at quarter-end.
- Cash dividends paid in the nine-month period were $7.03 million. The company declared a further $0.12 per-share dividend in October, paid October 22.
Outlook, risks and contingencies
- Management said available cash and anticipated operating cash flows were expected to fund operations for the next 12 months, and described the company as well-capitalized for the next 12–18 months. It planned to deploy available funds into new mortgage loans.
- After quarter-end, the company issued $30.0 million of 6.875% unsecured notes due December 2024, with approximately $28.6 million net proceeds. The filing also describes potential underwriter over-allotment notes and remaining ATM capacity. These subsequent financing proceeds were not included in September 30 cash.
- Management observed stagnant or declining Connecticut property values and longer marketing times, alongside continued demand and tighter traditional-bank credit. It said it would maintain its underwriting guidelines.
- Sixteen loans, with approximately $7.9 million of principal and accrued unpaid interest, were in foreclosure proceedings at September 30, representing approximately 8.87% of the mortgage portfolio. Management believed collateral value exceeded the relevant loan balances and related unpaid property taxes; this is management’s assessment, not assurance of recovery.
- Unfunded mortgage commitments totaled $7.33 million. Interest-rate increases could raise funding costs, pressure the lending spread, affect real-estate values and weaken collateral. The company also disclosed risks to maintaining REIT status and the potential tax consequences of losing it.
- The June 2019 notes restrict certain distributions, additional debt and share repurchases unless the company meets a 150% asset coverage ratio. The filing states no material change in internal control over financial reporting and that disclosure controls were effective.
Important facts for investors to verify
- Loan-level performance, delinquency trends, foreclosure timelines and actual collateral recovery versus management’s estimates.
- Whether the $7.33 million of unfunded commitments are drawn and how they affect liquidity and portfolio growth.
- Future loan yields relative to debt costs, especially after the subsequent 6.875% note issuance and any new borrowing.
- Compliance with note indenture asset-coverage and distribution restrictions, as well as REIT qualification and distribution requirements.
- How management deploys post-quarter financing proceeds and whether lending conditions and Connecticut property values change.