Sachem Capital Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Sachem originates and services short-term, generally first-lien loans to real estate investors, primarily in Connecticut. The unaudited statements were prepared under U.S. GAAP. Comparisons with Q1 2017 have limitations: Sachem acquired its predecessor’s business on February 8, 2017, and 2017 per-share results exclude the period before the IPO.
Financial results and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $2.72 million | $1.29 million in Q1 2017; up 111% |
| Net income | $1.97 million; $0.13 per basic and diluted share | $896,778; $0.06 per share in Q1 2017 |
| Net margin | About 72.6% | About 69.6% in Q1 2017 |
| Operating costs and expenses | $744,000 | $392,438 in Q1 2017; up about 90% |
| Operating cash flow | $1.30 million | $339,481 in Q1 2017 |
| Investing cash flow | $(4.32) million | $(6.22) million in Q1 2017 |
| Financing cash flow | $2.63 million | $5.67 million in Q1 2017 |
| Cash | $562,508 | $954,223 at December 31, 2017 |
| Total assets | $73.43 million | $67.49 million at December 31, 2017 |
| Total liabilities | $18.51 million | $12.93 million at December 31, 2017 |
| Shareholders’ equity | $54.92 million | $54.57 million at December 31, 2017 |
Interest income from loans was $1.96 million; net origination fees were $348,548, and other income was $294,747. Interest and deferred-financing-cost expense was $222,956. The loan portfolio totaled approximately $69.6 million across 366 loans, compared with approximately $40.1 million and 245 loans at March 31, 2017. Portfolio yield was 12.19%; stated loan rates were 9.5%–12%, with an 18% default rate.
At March 31, 2018, the Bankwell revolving credit line balance was $14.15 million, with a $20 million facility and a 6.19% interest rate. The company also reported a $298,569 mortgage payable and a $2.0 million mortgage funding payable. Management described debt as about 20% of total capital. The filing does not provide a conventional current ratio or a clear standalone measure of available borrowing capacity under the Bankwell facility.
Material changes and operating developments
- Revenue more than doubled, reflecting growth in lending activity; net income also more than doubled. Operating expenses rose, driven in part by higher compensation, public-company costs, and interest expense.
- Mortgage principal disbursements were $10.35 million, versus $6.03 million of principal collections. The loan portfolio grew from $63.27 million at year-end 2017 to $69.58 million at March 31, 2018.
- Thirteen loans were classified as non-performing, with approximately $3.5 million of principal and accrued unpaid interest. The company said all were referred to counsel for foreclosure or settlement and that collateral value exceeded outstanding balances; these are management assessments.
- Unfunded construction-loan commitments were $3.81 million. The company recorded a $2.0 million payable for two loans it agreed to purchase; funding remained subject to approvals and receipt of original loan files.
- Shareholders’ equity reflects $1.62 million of dividends paid during the quarter. On April 2, the company declared a further $0.105-per-share dividend, also totaling $1.62 million, paid April 19.
Outlook, risks, and contingencies
Management said cash, anticipated operating cash flows, and capacity under the new facility were expected to fund operations for the next 12 months. It expects to grow the loan portfolio and may increase leverage; it stated a longer-term objective of debt at approximately 50% of total capital. The company intended to distribute at least 90% of REIT taxable income, subject to maintaining REIT qualification.
On May 11, 2018, after quarter-end, Sachem entered a $35 million revolving credit facility with Webster Business Credit Corporation, Bankwell Bank, and Berkshire Bank, replacing and repaying the Bankwell facility. The new facility matures May 11, 2022, bears interest at 30-day LIBOR plus 4.00%, and is secured by substantially all company assets. Borrowing is subject to eligibility and borrowing-base limits; eligible mortgage loans were approximately $47.7 million at closing. Covenants include minimum tangible net worth of $52 million, fixed-charge coverage of at least 1.25:1, and senior funded debt to tangible net worth no greater than 2:1. Additional fees apply.
Management warned that rising rates could increase funding costs and compress loan spreads; it had not raised loan rates to match recent borrowing-cost increases and favored market-share growth over short-term profits. It also noted that sharply rising rates could affect real estate values and collateral. Other risks include borrower defaults, foreclosure outcomes, concentration in real estate lending, reliance on financing and eligible collateral, and possible loss of REIT status. The company said it failed to distribute 85% of 2017 taxable income and recorded $19,000 of excise tax. It reported $3.81 million in construction-loan commitments and no material off-balance-sheet arrangements. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Performance and asset-quality trends, particularly the status, collateral values, and recoveries on the 13 non-performing loans.
- Availability and cost of borrowing under the new $35 million facility, including eligible-loan calculations, covenants, fees, and compliance.
- Whether loan yields can keep pace with funding costs as rates change, and the effect on net interest spread and cash generation.
- Related-party exposure: loans to former partners/shareholders totaled $4.88 million, including $969,457 classified as mortgages receivable from an affiliate; confirm terms, monitoring, and repayment.
- REIT qualification and distribution requirements, including the reported excise tax and the sustainability of dividends relative to taxable income and liquidity.