Sachem Capital Corp. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Sachem originates short-term, generally first-lien real estate loans to investors, primarily in Connecticut, and has elected REIT tax treatment. Comparisons with 2017 are affected by the February 2017 exchange transaction and IPO; the filing cautions that the periods may not be fully comparable.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $3.05 million | $1.94 million | $8.81 million | $4.75 million |
| Net income | $1.96 million | $1.32 million | $6.13 million | $3.17 million |
| Diluted EPS | $0.13 | $0.12 | $0.40 | $0.26 |
| Operating costs and expenses | $1.09 million | $0.62 million | $2.68 million | $1.57 million |
- Revenue increased 57% in Q3 and 86% for the nine months, principally reflecting growth in lending. Nine-month interest income was $6.61 million, versus $3.83 million.
- Net income rose 49% in Q3 and 93% for the nine months. Approximate net margin was 64% in Q3 and 70% year to date, compared with 68% and 67%, respectively, in 2017.
- Higher funding costs and operating expenses partly offset growth. Nine-month interest and deferred financing cost expense increased 86% to $1.10 million; compensation and related costs also increased. A $19,000 excise tax was recorded because the company did not distribute 85% of 2017 taxable income.
- Nine-month operating cash flow was $3.77 million, investing cash outflow $16.08 million, and financing cash inflow $11.91 million. Cash declined $410,000 to $544,000.
Balance sheet, lending and liquidity
- At September 30, total assets were $85.03 million, up from $67.49 million at year-end 2017. Mortgage receivables were $76.84 million, plus $969,000 in loans to an affiliate; real estate owned was $3.15 million.
- Line-of-credit borrowings were $27.26 million and mortgage payable was $294,000, versus $9.84 million and $301,000, respectively, at year-end. Shareholders’ equity was $55.79 million. Management characterized capitalization as approximately 66% equity and 34% debt.
- The $35 million Webster revolving facility, entered into in May 2018, replaced the Bankwell facility. It matures May 2022, bears interest at 30-day LIBOR plus 4.00%, and had a 6.26% rate at quarter-end. Borrowing is subject to a 75% advance rate against eligible mortgage loans and other facility requirements.
- The portfolio comprised 395 loans totaling approximately $77.8 million, versus 311 loans and approximately $52.7 million a year earlier. Portfolio yield was 12.48%. Loans generally have one-to-three-year terms, fixed rates of 5.0% to 12.5%, and an 18% default rate.
- Ten loans were non-performing, with approximately $5.2 million of principal and accrued unpaid interest, or 6.7% of the portfolio. All had been referred to counsel; management stated collateral values exceeded balances. Unfunded construction-loan commitments were $6.82 million.
Outlook, risks and notable items
- Management said available cash, facility capacity and anticipated operating cash flows should fund operations for the next 12 months. It expects leverage could rise toward 50% of total capital to support growth and REIT distributions.
- Management prioritized gaining market share over raising loan rates to match rising borrowing costs. It warned that further rate increases could compress the lending spread if loan pricing does not keep pace; it cannot assure that it can raise rates or sustain portfolio growth.
- The Webster facility requires 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. The company reported compliance at quarter-end. The facility also restricts additional debt, subject to exceptions.
- REIT status requires meeting complex income, asset, ownership and distribution tests, including distributing at least 90% of taxable income. Failure to qualify could result in corporate taxation and loss of REIT eligibility for four years, absent relief.
- After quarter-end, the company paid a $0.12-per-share dividend ($1.85 million total), completed two real estate sales, and sold a mortgage note at a $28,175 gain. A shelf registration for up to $100 million of securities became effective November 9, including an ATM offering of up to $16 million of common shares; agent compensation may be up to 7%.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Non-performing-loan status, foreclosure progress, collateral valuations and realized recoveries relative to the reported $5.2 million exposure.
- Webster facility borrowing-base availability, covenant headroom, floating-rate costs and the effect of higher funding rates on net interest spread.
- Funding and timing of the $6.82 million in unfunded loan commitments, alongside planned originations and distributions.
- Ability to maintain REIT qualification and meet distribution requirements; confirm the impact of the reported excise tax and future payouts.
- Potential dilution and net proceeds if the company uses the $16 million ATM offering, including sales commissions of up to 7%.