Sachem Capital Corp. — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; comparative figures are for 2020. Sachem is a Connecticut-based real estate finance company and REIT that originates short-term, generally interest-only loans secured by first mortgages on investment and development properties. The audited financial statements received an unqualified opinion.
Financial and operating performance
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $30.4 million | $18.6 million |
| Net income | $13.3 million | $9.0 million |
| Net income attributable to common shareholders | $11.5 million | $9.0 million |
| Basic and diluted EPS | $0.44 | $0.41 |
| Net cash provided by operating activities | $28.1 million | $9.6 million |
| Net cash used for investing activities | $166.3 million | $82.8 million |
| Net cash provided by financing activities | $160.7 million | $73.8 million |
| Interest and deferred financing cost expense | $10.4 million | $5.5 million |
- Revenue rose 63.5%; net income attributable to common shareholders rose 27.5%. Operating costs increased 78.0%, with higher financing costs, staffing, and operating expenses.
- Loan interest income was $22.3 million; loan origination fees were $3.4 million. The weighted contractual portfolio yield declined to 11.57% from 11.79%.
- Mortgage loans outstanding grew to $292.3 million across 520 loans, from $155.6 million across 495 loans. Originations, including modifications and construction draws, were $251.8 million; repayments were $115.1 million.
- At year-end, total assets were $418.0 million, total liabilities $237.9 million, and shareholders’ equity $180.1 million. Cash and cash equivalents were $41.9 million and investment securities were $60.6 million.
- Debt was approximately $219.3 million on a gross principal basis, including unsecured notes and secured borrowings; reported debt carrying value, net of deferred financing costs, was $213.5 million. Debt was 56.9% of total capital, down from 64.3% in 2020. Debt agreements generally require at least 150% asset coverage for specified actions.
- Common shareholders received four quarterly dividends of $0.12 per share during 2021. The company issued $45.5 million net proceeds of 7.75% Series A preferred stock, which carries a cumulative 7.75% annual dividend.
Material changes and portfolio profile
- The company raised capital through common-share at-the-market sales ($56.0 million net), preferred shares ($45.5 million net), and $51.8 million of 6.00% notes due 2026. It also established a $200 million master repurchase facility with Churchill; $19.1 million was outstanding at year-end.
- Strategy shifted toward larger loans, larger commercial transactions, and geographic expansion. Connecticut’s share of loan balances declined to 55.1% from approximately 77% in 2020; Florida represented 18.2% and New York 13.1%.
- Loans over $1 million represented 61.7% of portfolio balances, compared with 40.5% in 2020. The average loan size increased to approximately $562,000 from $314,000.
- Sixteen loans, with approximately $4.4 million of principal and accrued amounts, were in foreclosure at year-end; the company said collateral value exceeded balances and recorded no loan-loss reserve for them. Separately, 107 loans that matured during 2021 remained unpaid in full or unextended and were being evaluated for modification or extension.
- Future funding obligations on construction loans were approximately $89.2 million at year-end, versus $19.1 million in 2020. The filing says these obligations require the company to maintain higher cash balances.
Outlook, risks, and subsequent events
- Management’s stated 2022 objective is profitable portfolio growth while preserving capital, with continued operational upgrades, larger commercial loans, and expansion beyond Connecticut. The filing provides no numerical earnings or revenue guidance.
- Management identified COVID-19 disruption, rising rates and yield compression, competition and borrower demands for better terms, real-estate value fluctuations, geopolitical uncertainty, and higher operating costs as challenges. The company noted that most assets and many funding costs are fixed-rate, but its Churchill, Wells Fargo, and New Haven Bank borrowings are adjustable-rate products.
- Credit risks include short loan terms, balloon payments, reliance on refinancing or property sales for repayment, loans secured by properties that may not generate cash flow, foreclosure delays, and increasing exposure to larger individual loans. Property-value declines could also cause impairment or collateral shortfalls.
- At year-end, cash plus investment securities totaled $102.6 million; securities net of the Wells Fargo margin loan were approximately $27.5 million. Management stated that cash balances and expected operating cash flows should cover the next 12 months. This should be assessed alongside the $89.2 million in unfunded construction-loan obligations.
- After year-end, Sachem sold 2.73 million common shares for approximately $16.0 million gross and issued $50.0 million of 6.00% notes due 2027 for approximately $48.2 million net; a partial $1.875 million over-allotment was subsequently announced. It also paid a $0.12-per-share common dividend on January 10, 2022.
- The company reported effective disclosure controls and management-assessed internal control over financial reporting as effective; the auditor did not provide an internal-control attestation. Management’s forward-looking statements are subject to risks and are not guaranteed results.
Important facts for investors to verify
- Reconcile gross debt of approximately $219.3 million with the $213.5 million debt carrying value, and review maturities, secured collateral, variable-rate exposure, and asset-coverage covenants.
- Track the status and ultimate recoveries of the 107 matured loans and 16 foreclosure cases, and test management’s collateral-value assumptions and no-reserve conclusion.
- Assess the $89.2 million construction-loan funding commitment against available liquidity, cash needs, and the terms and availability of financing facilities.
- Evaluate the risk implications of larger loans and concentration in Connecticut, Florida, and New York, alongside the company’s expansion and underwriting performance.
- Review the effects of continued share issuance, preferred dividends, debt costs, and REIT distribution requirements on common-share earnings, liquidity, and dividend capacity.
- Consider the related-party disclosures: the CEO’s wife received $120,000 for services in 2021, and his daughter received $10,962 for internal audit and compliance services.