Sachem Capital Corp. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company is a Connecticut-based real estate finance company making short-term, first-mortgage loans, primarily to real estate investors. It completed its IPO in February 2017, acquired the predecessor business Sachem Capital Partners, LLC, and intended to elect REIT tax treatment for 2017. Comparisons with 2016 require caution because the 2017 results include the predecessor through February 8, while 2016 reflects the predecessor for the full year.
Financial and operating highlights
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $7.00 million | $4.13 million | +69.3% |
| Net income | $4.86 million | $3.05 million | +59.3% |
| Net margin | 69.5% | 73.8% | Down 4.3 percentage points |
| Net cash from operating activities | $4.84 million | $3.70 million | +31.0% |
| Cash at year-end | $0.95 million | $1.56 million | Down $0.61 million |
Revenue growth reflected higher lending activity: interest income was $5.43 million, up about 49%, and net origination fees were $0.80 million versus $0.20 million. Operating costs and expenses rose 97.3% to $2.14 million, including higher compensation, professional fees, and public-company and REIT-related costs. Interest expense and deferred financing-cost amortization totaled $0.66 million. The company reported basic and diluted earnings of $0.38 per weighted-average share for the period after its IPO; there is no comparable 2016 per-share figure.
Investing cash outflow was $28.93 million, primarily reflecting $53.47 million of loan originations against $23.95 million of principal collections. Financing cash inflow was $23.48 million, including $30.25 million of gross proceeds from two 2017 equity offerings, partly offset by offering costs, dividends, and debt activity.
Portfolio, debt, and liquidity
- At year-end, the loan portfolio comprised 337 loans with $63.27 million in principal, versus 217 loans and $33.75 million a year earlier. The weighted-average contractual interest rate was 12.08%; average loan size was about $188,000.
- About 89.5% of principal was secured by Connecticut properties. The company generally limits loan-to-value ratios to 65%; loans are typically fixed-rate, interest-only, and due in a balloon payment at maturity.
- Debt totaled $10.14 million: $9.84 million drawn on a $20 million Bankwell revolving facility and a $0.30 million property mortgage. Total liabilities were $12.93 million and equity was $54.57 million. The revolver rate was 6.19% at year-end and matures June 30, 2019, with an option to repay over 36 monthly installments subject to the facility terms.
- Management reported approximately $10.2 million of additional borrowing availability, but borrowing is subject to eligible-loan and collateral limits. Cash was $0.95 million, and construction-loan advances of $3.36 million remained unfunded. Management believed cash, facility capacity, and operating cash flows would cover operating needs for the next 12 months.
- The filing gives differing measures of debt as a share of capital: one passage says approximately 15.0%, while another says 19.9%. Investors should reconcile the definitions and figures.
Material changes, outlook, and risks
- Credit performance: 12 loans were classified as non-performing at year-end, with approximately $2.2 million of principal and accrued unpaid interest, up from five loans and $532,000 in 2016. The company referred these loans to counsel for foreclosure or settlement and said it believed collateral values exceeded balances. It reported no loan-loss reserve. Separately, 24 loans that matured during 2017 had not been repaid or extended by year-end and were being considered for modification.
- Strategy and rates: Management prioritized market-share growth over near-term profits and cash flow, generally seeking one-year terms on new loans where possible. Loan rates are fixed while revolver borrowing costs vary; management warned that rising rates could compress spreads and said it might need to raise loan rates. No quantified earnings or portfolio guidance was provided.
- Distributions and REIT obligations: REIT status requires annual distribution of at least 90% of taxable income. The company paid three 2017 dividends totaling $0.26 per share and reported $3.34 million of dividends paid during 2017; a further $0.105-per-share dividend, partly attributable to 2017, was paid in February 2018. The filing also reports $32,500 of excise tax because the company did not distribute 85% of 2017 taxable income during 2017.
- Key exposures: Geographic concentration in Connecticut, borrower defaults, collateral valuation and foreclosure timing, prepayments and reinvestment risk, rising variable funding costs, and reliance on Bankwell financing. The facility has restrictive covenants and is secured by substantially all company assets; refinancing or repayment at maturity may be challenging if not extended or replaced.
- Governance and related parties: The portfolio included loans to JJV and former partners/shareholders. The filing reports $1.10 million of loans to JJV and $3.59 million of loans to former partners who are now shareholders. Related-party transactions, including office occupancy and compensation for services, merit review.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The independent auditor gave an unqualified opinion on the financial statements but did not attest to internal control effectiveness; the company cited its emerging-growth-company exemption.
Most important facts for investors to verify
- Reconcile the filing’s differing debt-to-capital percentages and confirm actual eligible borrowing capacity under Bankwell’s borrowing-base rules.
- Review the status, collateral values, foreclosure progress, and subsequent collections for the 12 non-performing loans and the 24 matured loans still under modification consideration.
- Assess whether loan yields can keep pace with variable funding costs, and how much of earnings depends on origination fees, late fees, or continued rapid portfolio growth.
- Confirm REIT qualification, taxable income, required distributions, and the impact of excise taxes and other tax obligations on cash available for dividends.
- Evaluate related-party lending and transactions, the Bankwell facility’s June 2019 maturity and covenants, and the company’s ability to maintain liquidity while funding construction commitments.