Sachem Capital Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Financial results before the February 8 exchange are those of predecessor Sachem Capital Partners, LLC (SCP). The IPO closed February 15, 2017, so reported per-share earnings cover only February 9–March 31, not the full quarter.
Business and financial performance
Sachem originates and manages short-term, generally one-to-three-year, first-mortgage loans to real estate investors, primarily in Connecticut. Loans are typically fixed-rate, secured by real estate and personally guaranteed. At March 31, the portfolio comprised 245 loans totaling $40.1 million, up from 188 loans and $29.2 million a year earlier.
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior balance |
|---|---|---|
| Total revenue | $1.289 million | $878,297; up 46.7% |
| Net income | $896,778 | $683,068; up about 31% |
| Net income per share | $0.06 basic and diluted, for post-IPO period only | No comparable EPS reported |
| Operating costs and expenses | $392,438 | $195,229; approximately doubled |
| Net cash from operating activities | $339,481 | $695,316 |
| Net cash used in investing activities | $6.216 million | $1.823 million |
| Net cash from financing activities | $5.670 million | $487,805 |
| Cash | $1.356 million | $1.562 million |
| Mortgages receivable | $40.073 million | $32.522 million |
| Total assets | $44.658 million | $38.369 million |
| Debt | $4.628 million: $4.150 million line of credit, $308,343 mortgage payable and $169,338 other notes payable | $8.424 million: line of credit and mortgage payable |
| Total liabilities / equity | $6.056 million / $38.602 million | $9.884 million / $28.486 million |
Interest income was $1.037 million; net origination fees were $97,461. The filing reports a 12.22% annual loan-portfolio yield and a 7.0% Bankwell credit-line rate. Net income as a share of revenue was approximately 69.6%, versus 77.8% in Q1 2016, calculated from reported figures. Loan funding was $10.092 million and principal collections were $3.939 million. The portfolio included $3.109 million of unfunded construction-loan commitments.
Changes, liquidity and capital
- Revenue growth reflected increased lending activity; total revenue rose $411,000 year over year. Net income increased about $214,000.
- Expenses rose about 100%, which management attributed principally to greater lending activity, the IPO and conversion to a public corporation. Professional fees, compensation and taxes, and general and administrative expenses increased.
- Operating cash flow fell year over year despite higher earnings. Management cited the $596,070 escrow deposit and a $630,728 decrease in amounts due to members, among other working-capital movements. Investing outflow increased with higher net mortgage funding.
- The February IPO issued 2.6 million shares at $5.00, raising $13.0 million gross and approximately $11.1 million net. The company used part of the proceeds to reduce the Bankwell line; outstanding borrowings were $4.15 million at quarter-end. The $15 million facility is secured by substantially all company assets, subject to borrowing-base limits and financial covenants.
- Management said cash, available credit and expected operating cash flow were sufficient for the next 12 months. It expects to increase leverage over time, potentially to approximately 50% of capital, from 10.7% at quarter-end, to finance portfolio growth.
Outlook, risks and unusual items
- The company intends to elect REIT tax treatment for 2017 and expects to distribute at least 90% of REIT taxable income annually. Failure to qualify could trigger corporate tax, penalties and restrictions on re-electing REIT status.
- Management expects borrowing costs to rise as interest rates increase. It had not raised loan rates to match recent funding-cost increases, prioritizing market-share growth; management warned this could pressure near-term profits and cash flow. Rising rates could also affect property values and collateral.
- Borrower defaults and collateral performance are material risks. The company reported five properties subject to post-quarter foreclosure actions; it recorded no impairment based on assessed values and broker opinions. The filing gives differing descriptions of whether these foreclosures were planned or completed.
- Other exposures include $1.242 million of loans to related party JJV, dependence on the Bankwell credit facility, $3.109 million of construction advances subject to conditions, and borrower prepayments that could increase competition. No individual borrower exceeded 10% of the portfolio at March 31.
- On April 10, the company declared a $0.05-per-share dividend totaling $555,162, payable to shareholders of record April 17. On May 9, it entered a $345,000 property joint venture providing for 12% interest and a 30% share of project profits after interest recovery.
- Management reported effective disclosure controls and no material quarter-end change in internal control over financial reporting. It cautioned that forward-looking statements are subject to risk and actual results may differ.
Most important facts for investors to verify
- Clarify the filing’s statement that the company had not filed all required reports during the preceding 12 months, despite filing this 10-Q.
- Reconcile the Bankwell facility’s stated maturity date: the notes cite March 15, 2018, while MD&A cites March 18, 2018.
- Confirm the status and valuation of the five post-quarter foreclosure properties; the notes describe decisions to foreclose, whereas MD&A says the company foreclosed.
- Track REIT election and qualification, taxable income and dividend coverage, and the resulting cash available for lending.
- Monitor loan delinquencies, collateral values, construction commitments, related-party loans, line-of-credit covenants and refinancing or extension terms.
- Interpret year-over-year results in light of the predecessor-company reporting, IPO, corporate conversion and post-IPO-only EPS period.