Sachem Capital Corp. — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022; comparisons are primarily with FY2021. Sachem is a REIT and non-bank real estate finance company originating short-term, generally interest-only loans secured by first mortgages on investment and development properties. This summary reflects the supplied filing text; the audited financial statements received an unqualified opinion.
Financial performance and position
| Metric | FY2022 / year-end | FY2021 / comparison |
|---|---|---|
| Total revenue | $52.3 million | $30.4 million; up 71.8% |
| Net income | $20.9 million | $13.3 million |
| Net income attributable to common shareholders | $17.2 million; $0.46 per diluted share | $11.5 million; $0.44 per diluted share |
| Adjusted earnings (non-GAAP) | $20.2 million; $0.54 per share | No unrealized investment gains or losses reported in net income |
| Net cash from operating activities | $13.1 million | $27.8 million |
| Cash and cash equivalents | $23.7 million | $41.9 million |
| Investment securities | $24.6 million | $60.6 million |
| Mortgage loans receivable | $460.6 million | $292.3 million |
| Total assets / shareholders’ equity | $565.7 million / $217.7 million | $418.0 million / $180.1 million |
| Total liabilities | $348.0 million | $237.9 million |
| Total debt, net of deferred financing costs | $326.9 million | $213.5 million |
| Weighted average cost of capital | 7.07% at year-end | 5.87% at year-end |
Revenue growth primarily reflected increased lending. Loan interest income rose 91.1% to $42.6 million, and origination and modification fees increased 69.3% to $7.3 million. Revenue also included $3.0 million of unrealized investment-security losses, versus $0.3 million of unrealized gains in 2021. Operating expenses increased 83.4% to $31.4 million, led by interest and deferred financing-cost expense, which more than doubled to $21.5 million. Net income attributable to common shareholders grew 50.2%; the increase in diluted EPS was smaller, from $0.44 to $0.46.
The reported net income margin was approximately 40.0% of total revenue; net income attributable to common shareholders was approximately 32.9% of revenue. These ratios reflect the filing’s reported revenue, including investment-security valuation effects.
Cash flow from operations fell to $13.1 million despite higher net income, in part reflecting growth in receivables and other assets and a decline in advances from borrowers. Investing activities used $159.5 million, including $300.3 million of mortgage-loan disbursements; financing activities provided $128.2 million. Cash plus investment securities totaled $48.3 million at year-end, down from $102.6 million a year earlier.
Portfolio, debt and liquidity
- The loan portfolio grew to 444 loans and $460.6 million outstanding from 520 loans and $292.3 million in 2021. Average loan size increased to about $1.04 million from $562,000. Loans over $1 million made up 76.9% of balances.
- Connecticut accounted for 43.5% of loan balances, down from 55.1%; Florida represented 23.5%. The portfolio covered 16 states.
- Weighted-average contractual loan rate was 10.72%, down from 10.99%; management reported portfolio yield of 11.50%, versus 11.57% in 2021. Yield is based on stated interest rates, adjusted to default rates where applicable, and excludes fees.
- Debt represented 59.3% of total capital at year-end, compared with 56.9% in 2021. The filing also reports approximately $335.3 million of indebtedness including deferred financing costs; the balance sheet reports $326.9 million of debt net of deferred financing costs.
- Unsecured notes had $288.4 million aggregate principal outstanding, with maturities from 2024 through 2027 and coupon rates from 6.00% to 8.00%. The highest-rate series, issued in August 2022, bears 8.00% interest. Debt covenants generally require at least 150% asset coverage for specified actions.
- The $200 million Churchill repurchase facility had $42.5 million drawn at an effective 8.52% rate at year-end. A $3.6 million Wells Fargo margin loan was secured by investment securities and bore 5.75% interest at year-end.
- After year-end, Sachem refinanced its headquarters mortgage and entered a $45 million Needham Bank revolving facility on March 2, 2023, with a possible increase to $75 million subject to conditions. The facility is secured by substantially all assets, subject to stated exclusions, and had not been drawn as of the filing date.
- Management stated that cash balances and anticipated operating cash flows were expected to cover operating needs for the next 12 months. However, it also said it had been unable to access capital markets since August 2022 and would need additional working capital to sustain historical growth rates.
Material changes and unusual items
- During 2022, Sachem issued $122.1 million of fixed-rate notes and raised about $39.3 million net from at-the-market common-share sales. The share issuance increased common shares outstanding and diluted existing holders.
- In October 2022, Sachem acquired substantially all assets of Urbane New Haven, LLC for 300,000 common shares valued at $996,000, adding construction and asset-management capabilities. The filing recorded $391,000 of goodwill and a $130,400 trade name.
- Foreclosure proceedings involved 40 loans, or 8.8% of loans, with approximately $24.0 million of principal, accrued interest and charges at year-end. The comparable figures were 16 loans and $4.4 million in 2021. Management believed collateral values exceeded amounts owed and recorded no allowance for loan losses; the auditor identified the allowance assessment as a critical audit matter.
- Separately, 105 loans had matured during 2022 and remained unpaid in full or unextended at year-end; management said these were being modified and would be extended only if they met underwriting criteria.
- Unfunded future advances on construction loans totaled $114.6 million across 177 loans, up from $89.2 million across the same number of loans in 2021. The filing also lists $4.0 million of other unfunded commitments. These obligations require liquidity and may affect performance.
- The company recorded $0.9 million of impairment loss, including $0.8 million related to real estate owned. Real estate owned was $5.2 million at year-end.
- Common dividends paid in 2022 totaled $18.8 million; preferred dividends totaled $3.7 million. The Series A preferred stock carries a cumulative 7.75% dividend. The board determines common dividends, and the company does not guarantee a minimum common dividend.
Outlook, commentary and risks
Management’s stated 2023 objective was to grow the loan portfolio while protecting capital and pursuing risk-adjusted returns, with emphasis on larger commercial loans and experienced sponsors, geographic diversification, underwriting discipline and operational efficiency. The filing provides no numerical earnings or revenue guidance.
Management identified rising funding costs and margin compression as key challenges: weighted average cost of capital rose to 7.07% at year-end 2022 and was reported at 7.44% as of March 1, 2023, after subsequent rate changes and the mortgage refinancing. It said it was seeking to raise loan rates and fees where possible and limit terms on new loans, but competition and borrower demands may constrain pricing.
- Higher interest rates and lower property values could make refinancing or sale of collateral harder for borrowers, increasing delinquencies, extensions and losses.
- Management noted increasing past-due loans and warned that continued market illiquidity could make capital raising and borrower refinancing more difficult.
- Non-bank lenders and other well-funded competitors may price aggressively, particularly for the larger loans Sachem is targeting.
- Concentration and credit risks remain, including exposure to Connecticut and Florida, larger loan balances, non-income-producing properties and potentially lengthy foreclosure processes.
- Funding commitments, debt maturities, interest costs and REIT distribution requirements could constrain liquidity. Debt agreements also impose asset-coverage and other covenants.
- Other disclosed risks include economic and geopolitical uncertainty, cybersecurity, hiring and retention, REIT qualification, and maintaining the Investment Company Act exemption.
Investor verification priorities
- Track delinquent and matured loans, foreclosure resolution, recoveries and collateral valuations; compare outcomes with management’s no-reserve judgment.
- Verify the company’s capacity to meet $114.6 million of construction advances and other unfunded commitments while maintaining required liquidity and covenants.
- Monitor funding availability, draws and pricing under the Needham facility, Churchill utilization, access to equity and debt markets, and the 2024–2027 note maturities.
- Assess whether loan yields and fees can keep pace with funding costs, and whether portfolio growth and larger-loan concentration change credit risk.
- Reconcile cash generation with dividends, share issuance and the filing’s different debt presentations: gross indebtedness of approximately $335.3 million versus $326.9 million net of deferred financing costs.