Sachem Capital Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021 unless otherwise stated. Sachem is a REIT-focused real estate lender originating short-term, generally first-lien loans, primarily in the Northeastern U.S. and Florida. Financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Total revenue | $10.30 million | Up 80.3% from $5.71 million in Q1 2021 |
| Net income | $4.35 million | Up from $2.18 million |
| Net income attributable to common shareholders | $3.43 million; $0.10 per share | Up from $2.18 million; $0.10 per share |
| Adjusted earnings attributable to common shareholders | $4.48 million; $0.13 per share | Excludes $1.05 million unrealized investment-security losses |
| Operating costs and expenses | $5.95 million | Up 68.6% from $3.53 million |
| Operating cash flow | $7.56 million | Up from $2.79 million |
| Investing cash flow | $(48.44) million | Compared with $(2.07) million |
| Financing cash flow | $56.81 million | Compared with $(1.78) million |
| Cash and cash equivalents | $57.86 million | Up from $41.94 million at year-end |
| Investment securities | $35.51 million | Down from $60.63 million |
| Mortgages receivable | $353.63 million | Up $61.33 million from year-end; up 125.6% from March 31, 2021 |
| Total assets / shareholders’ equity | $481.76 million / $199.41 million | Up from $417.96 million / $180.08 million |
| Interest expense and financing-cost amortization | $3.90 million | Up 58.2% year over year |
Revenue growth reflected higher loan interest income ($8.51 million, up 87.8%) and origination fees ($1.64 million, up 216.5%). Expenses rose with increased borrowing, staffing and lending activity. The quarter included $1.05 million of unrealized investment-security losses in net income, partly offset in comprehensive income by a $243,000 unrealized gain on securities classified through other comprehensive income. The filing reports a loan portfolio yield of 11.30%, versus 11.73% a year earlier.
Debt and liquidity: Notes payable were $209.05 million net of financing costs, with $216.28 million aggregate principal outstanding. Additional borrowings included $26.95 million under the Churchill repurchase facility, $23.28 million on the Wells Fargo line and $750,000 of mortgage debt. The balance-sheet carrying amounts of these obligations total approximately $260.0 million. Management reported debt at approximately 55.5% of total capital, versus 63.0% at March 31, 2021. Cash plus investment securities totaled approximately $93.4 million. The company stated that cash balances and anticipated operating cash flows should fund operations for the next 12 months.
Material changes and lending portfolio
- Gross mortgage originations were $88.74 million in Q1 2022, versus $31.66 million in Q1 2021; principal collections were approximately $27.3 million.
- The company issued $50 million of 6.00% notes due 2027 and sold 2.73 million common shares through its at-the-market program for net proceeds of $15.55 million. Proceeds primarily supported lending and general corporate needs.
- Partnership investments increased to $17.41 million from $6.06 million at year-end; Q1 partnership income was approximately $272,000. Unfunded partnership commitments were approximately $3.7 million.
- Unfunded loan commitments totaled $115.44 million across 204 loans, versus approximately $23.5 million across 129 loans a year earlier. Management said the increase was driven by construction lending, including in Florida.
- Twenty of 520 mortgage loans were in foreclosure proceedings, with approximately $6.3 million of principal, accrued interest and borrower charges. Management stated it believed collateral value exceeded the balances. Approximately $27.2 million of mortgages were past maturity and in the process of being extended.
- Portfolio concentration included Connecticut (47.3%), Florida (20.6%) and New York (13.4%). Stated loan rates ranged from 5.0% to 14.2%.
Outlook, risks and unusual items
Management’s 2022 objective is to grow the loan portfolio while preserving capital and pursuing attractive risk-adjusted returns. It is targeting larger commercial loans and borrowers with established sponsors, and described operational upgrades including automated underwriting documentation. No specific earnings or revenue guidance was provided.
- Management identified rate compression and rising funding costs as risks, particularly for adjustable-rate borrowings and competition-constrained loan pricing. It also cited intensified competition, borrower demands for better terms, property-value fluctuations, increased operating expenses and continuing COVID-19 disruption; it noted uncertainty from the Russia-Ukraine war and related market volatility.
- Large construction-loan draw commitments require liquidity and could weigh on financial performance. The Churchill facility had $26.95 million outstanding and approximately $6.3 million of additional availability; its covenants include a 150% asset-coverage test for specified actions and a minimum unencumbered-cash requirement.
- As a REIT, Sachem must meet continuing tax and distribution requirements, including distributing at least 90% of taxable income. Failure to qualify could result in corporate tax and other consequences. Its debt covenants also restrict certain distributions, additional borrowing and share repurchases unless asset coverage is at least 150%.
- Q1 included a $260,500 impairment loss, a $65,838 loss on sale of real estate and a $154,135 loss on sale of investment securities. Real estate owned was $6.31 million; the company recorded $155,500 of property impairment during the quarter.
- Subsequent events: Sachem sold an additional $1.875 million principal amount of 2027 notes in April; declared a $0.12 common dividend payable April 18; sold 663,765 additional shares through its ATM program for approximately $3.4 million gross through May 3; and received a term sheet for a possible note offering of up to $75 million. The CEO’s annual salary was increased to $750,000 in April, and restricted shares were also granted to executives.
Important facts for investors to verify
- Whether the $115.44 million of unfunded loan commitments can be funded on schedule and how draws affect cash, borrowing needs and returns.
- Performance and collateral outcomes for the 20 loans in foreclosure and the approximately $27.2 million past maturity and being extended.
- Actual borrowing costs and compliance with asset-coverage, liquidity and dividend covenants as rates and funding mix change.
- Whether management’s 12-month liquidity assessment remains supported by operating cash generation and available facilities.
- Reconcile cash-flow figures: the financial statements report Q1 net income of $4.35 million and operating cash flow of $7.56 million; parts of the MD&A describe net income as approximately $5.4 million and investing cash use as approximately $48.7 million. The filing text does not explain these apparent differences.
- Progress toward REIT qualification, the impact of equity and debt issuance on per-share results, and the eventual economics of the planned growth in larger and construction loans.