Sachem Capital Corp. — Q2 2019 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2019; balance sheet compared with December 31, 2018. Sachem originates and services short-term, generally first-lien mortgage loans to real estate owners and investors, primarily in Connecticut, and operates as a REIT. Its portfolio comprised 414 loans totaling approximately $83.5 million; reported annual portfolio yield was 12.83%.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $3.07 million | $3.04 million | $6.41 million | $5.76 million |
| Net income | $1.14 million | $2.21 million | $3.20 million | $4.18 million |
| Basic and diluted EPS | $0.06 | $0.14 | $0.19 | $0.27 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $3.73 million | $2.93 million |
Revenue increased about 0.8% in Q2 and 11.3% for the first half year over year. Net income declined about 48% in Q2 and 23.5% for the first half. The filing attributes much of the earnings pressure to higher expenses, including a nonrecurring $779,641 charge for terminating the Webster revolving credit facility; $439,446 of that amount was a noncash write-off of deferred financing costs. Calculated net margin was approximately 37% in Q2 2019 versus 73% in Q2 2018, and approximately 50% versus 73% for the first half.
At June 30, total assets were $95.9 million, cash was $3.10 million, total liabilities were $26.5 million, and shareholders’ equity was $69.4 million. Gross mortgage loans outstanding were approximately $83.5 million, including affiliate loans reported separately on the balance sheet. Real estate owned was $4.94 million. First-half investing cash use was $7.66 million, principally reflecting net mortgage lending; financing activities provided $6.87 million. Cash and restricted cash increased by $2.94 million during the half.
Material changes and financing
- The company raised $16.0 million gross through an ATM common-share offering and issued $23.0 million principal amount of 7.125% unsecured notes due June 30, 2024. Net proceeds were used primarily to repay the Webster facility, which was paid off and terminated in June. The notes are reported net of approximately $1.27 million in financing costs.
- At June 30, the balance sheet included $21.73 million of notes, a $792,053 mortgage on the company’s headquarters, and $2.217 million due to a shareholder. Management described total indebtedness as approximately $22.5 million, excluding certain other liabilities.
- Common shares outstanding increased from 15.44 million at December 31, 2018 to 18.91 million at June 30, 2019, primarily due to the ATM issuance.
- Subsequent to quarter-end, Sachem sold an additional $663,000 principal amount of notes, raised approximately $11.5 million gross in a July/August common-share offering, and sold shares through a new ATM program. It repaid the $2.217 million shareholder balance, plus accrued interest, on July 26.
Outlook, risks and other notable items
Management said cash balances and anticipated operating cash flows should be sufficient for operations over the next 12 months. It expects the refinancing to reduce facility-related costs and provide greater financing flexibility, and said additional lending capital became available through post-quarter equity offerings. No specific earnings or revenue guidance was provided. The company may seek a new revolving credit facility if terms are acceptable.
- Credit quality: eight loans with approximately $2.9 million principal and accrued interest were in foreclosure proceedings; another 14 loans, approximately $5.8 million including accrued interest, were reported in default. Management believed collateral values exceeded loan balances in these cases. Unfunded loan commitments were $6.37 million.
- Market and funding risks include potentially stagnant or declining Connecticut property values, longer sale times, rising interest rates that could compress lending spreads, and dependence on access to capital to fund loan growth.
- REIT status depends on meeting complex income, asset, ownership and distribution tests. The company must generally distribute at least 90% of taxable income; management cautioned it cannot assure continued REIT qualification or dividends at the current rate.
- The company reported that it was not in compliance with a tangible-net-worth covenant at December 31, 2018; lenders waived compliance in March 2019. The Webster facility was subsequently repaid and terminated.
- In July, the company declared and paid a $0.12 per-share dividend totaling approximately $2.35 million. The notes impose an asset-coverage test for certain distributions, additional debt and share repurchases.
- Management reported disclosure controls as effective at June 30, 2019 and no material quarterly change in internal control over financial reporting. Adoption of the new credit-loss accounting standard was planned for January 1, 2020; management did not expect a material impact.
Investor verification points
- Confirm the ongoing cost and cash interest burden of the 7.125% notes relative to the terminated revolving facility and expected loan yields.
- Track the status, collateral values and resolution outcomes of the 22 loans identified as in foreclosure or default, as well as the $6.37 million in unfunded commitments.
- Assess whether proceeds from post-quarter share sales support loan growth and how further equity issuance may affect per-share earnings and dividends.
- Verify compliance with note asset-coverage restrictions, REIT distribution and qualification requirements, and the company’s ability to sustain dividends.
- Reconcile the filing’s reported indebtedness description with balance-sheet liabilities, including the shareholder balance that was repaid after quarter-end.