Sachem Capital Corp. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 13, 2023. Sachem originates and services short-term, generally first-lien real estate loans, primarily in Connecticut, New York and Florida, and operates as a REIT.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $17.5 million | $13.5 million | $48.7 million | $36.4 million |
| Net income | $6.2 million | $5.1 million | $17.0 million | $14.6 million |
| Net income attributable to common shareholders | $5.2 million | $4.1 million | $14.2 million | $11.9 million |
| Basic and diluted EPS | $0.12 | $0.11 | $0.32 | $0.32 |
| Operating costs and expenses | $11.3 million | $8.5 million | $31.7 million | $21.8 million |
- Revenue drivers: Interest income was $14.3 million in Q3 and $37.2 million for the nine months. Nine-month partnership income was $2.3 million, versus $1.1 million in 2022. Unrealized investment-security results improved to a $0.4 million gain for the nine months, from a $3.6 million loss.
- Expense and earnings trend: Nine-month expenses rose 45.7%, led by interest and deferred financing-cost expense, up 43.8% to $21.7 million. Despite higher GAAP common income, management’s non-GAAP adjusted earnings attributable to common shareholders fell to $13.8 million from $15.5 million; adjusted EPS was $0.32 versus $0.42.
- Balance sheet at September 30: Total assets were $637.8 million, including net mortgage receivables of $495.9 million; total liabilities were $402.3 million and shareholders’ equity was $235.5 million. Cash and equivalents were $25.8 million, compared with $23.7 million at December 31, 2022.
- Debt: Unsecured notes had $288.4 million of principal outstanding ($281.8 million net of financing costs). Other reported borrowings included a $47.9 million repurchase facility, a $51.3 million line of credit and a $1.1 million mortgage payable. The Needham facility had a $65 million commitment and $25 million drawn; the Churchill facility balance was $47.9 million. Management reported debt at approximately 61.0% of total capital, versus 59.8% a year earlier.
- Cash flow, nine months: Operating activities provided $18.9 million; investing activities used $67.6 million; financing activities provided $50.7 million. Cash increased $2.1 million from year-end 2022.
Changes, outlook and material risks
- Compared with the first nine months of 2022, revenue rose 33.8% and common-shareholder net income rose 19.6%, while reported EPS remained $0.32. Loan growth and higher borrower rates supported revenue; increased debt and funding costs, compensation and general and administrative expenses weighed on results.
- The portfolio grew: net mortgages receivable increased from $460.6 million at December 31, 2022 to $495.9 million at September 30, 2023. The company also acquired a Westport, Connecticut commercial building for approximately $10.7 million, with a ten-year tenant lease expected to commence in 2024 after improvements.
- Credit and maturity exposure: At September 30, 95 loans totaling approximately $84.8 million had matured without repayment or extension; 64 were in foreclosure, with approximately $63.5 million in principal. Loans on nonaccrual status totaled approximately $82.9 million. Management said it believed foreclosure collateral values exceeded loan balances. Unfunded loan commitments were approximately $107.7 million.
- Refinancing: Notes with $58.2 million principal mature in 2024. The company said it was actively pursuing refinancing, extensions or repayment. Debt covenants include a minimum 150% asset-coverage ratio; the Needham facility also requires specified debt-service coverage and minimum cash plus availability.
- Management outlook: The stated objective is to grow the loan portfolio while protecting capital and pursuing attractive risk-adjusted returns. Management expects cash balances and operating cash flows to fund operations for the next 12 months, while noting long-term needs include debt principal and new lending. No specific earnings or revenue guidance was provided.
- Risks highlighted: Rising interest rates and funding costs, potential loan-spread compression, competition, borrower bargaining power, property-value declines, geopolitical and market volatility, and the liquidity demands of construction-loan commitments. Management reported a 7.3% weighted-average debt cost, excluding financing-cost amortization, versus 6.7% a year earlier; portfolio yield, including default interest, was 12.2% versus 11.3%.
- Other notable items: Adoption of CECL on January 1, 2023 reduced opening retained earnings by $2.49 million; the mortgage allowance was approximately $2.1 million at quarter-end. The company recorded a $477,047 loss on its Sachem Acquisition Corp. investment. It declared a $0.11 common dividend payable November 7, 2023. Management stated disclosure controls were effective and there was no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track resolution and recoveries for matured, nonaccrual and foreclosure loans, and assess whether collateral values support management’s estimates.
- Verify the plan and funding sources for the $58.2 million of 2024 note maturities, including covenant headroom and refinancing cost.
- Assess liquidity against $107.7 million of unfunded loan commitments, dividends, operating needs and debt service.
- Compare loan yields with borrowing costs and monitor whether rising expenses and competition continue to compress spreads.
- Review adjusted earnings alongside GAAP results and taxable income; the company cautions that adjusted earnings is not a measure of liquidity or funds available for distribution.
- Monitor common-share issuance and dilution: 4.14 million common shares were sold through the at-the-market program during the first nine months of 2023.