Sachem Capital Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Sachem is a Connecticut-based real estate finance company specializing in short-term loans secured by first mortgage liens, primarily on Connecticut properties. It operates as a REIT.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $4.31 million | $3.07 million | $8.62 million | $6.41 million |
| Net income | $2.27 million | $1.14 million | $4.51 million | $3.20 million |
| Basic and diluted EPS | $0.10 | $0.06 | $0.20 | $0.19 |
| Operating cash flow | Not separately provided for the quarter | $3.98 million | $3.73 million |
Q2 revenue increased about 41% year over year and net income roughly doubled; six-month revenue rose 34% and net income 41%. Net income as a share of revenue was about 52.6% in Q2 2020 versus 37.3% in Q2 2019, and 52.3% for the first half versus 49.9%. These are simple net-income-to-revenue ratios, not a separately reported operating margin. Q2 growth reflected higher loan interest and origination fees. For the first half, revenue also included a $437,000 gain on investment securities. Six-month EPS growth was more modest than net-income growth as weighted-average shares increased to 22.1 million from 17.1 million.
Balance sheet, debt, and liquidity
- At June 30, total assets were $143.4 million, total liabilities $59.0 million, and shareholders’ equity $84.4 million.
- Mortgages receivable increased to $111.4 million from $94.3 million at year-end 2019. The portfolio had 477 loans; stated rates were 5% to 13%, with an 18% default rate.
- Cash and investments totaled about $20.6 million, down from $34.8 million at year-end; cash alone was $4.65 million. Management attributed the reduction primarily to deploying funds into mortgage loans.
- Notes payable were $55.7 million net of deferred financing costs. The notes’ aggregate original principal was about $58.2 million, with fixed rates of 7.125% and 6.875% and maturities in 2024. Total indebtedness was reported at approximately $59.0 million. Management described capitalization as 58.9% equity and 41.1% debt.
- First-half investing cash outflow was $15.7 million and financing cash outflow was $2.5 million; cash declined $14.2 million. Dividends paid in the first half were $2.65 million.
- Unfunded construction-loan commitments were $8.18 million. Management stated that cash balances and anticipated operating cash flow should fund operations for the next 12 months.
Material changes and management outlook
- Interest and deferred-financing-cost expense rose substantially year over year, reflecting higher indebtedness after the 2019 note offerings. The prior-year comparison also included about $780,000 of line-of-credit termination expense, which did not recur in 2020.
- The company recorded $495,000 of real-estate impairment in the first half, including $245,000 in Q2; no comparable impairment was recorded in first-half 2019. Real estate owned declined to $7.0 million from $8.3 million at year-end.
- COVID-19 led the company to restrict new lending beginning in March. From April 1, new-loan limits included a 50% maximum loan-to-value ratio, lending limited to cash generated by payoffs, and additional approval and interest-reserve requirements for certain loans. The company said it restored its general 70% loan-to-value policy effective July 1, while retaining a cautious approach.
- Twenty-three loans, representing $6.5 million of principal, were in COVID-related forbearance, with approximately $200,000 of interest deferred. Sachem said eligible borrowers had to be current on obligations and could receive a 90-day interest deferral.
- Management cited expected rate compression and competitive pressure, while pursuing geographic expansion into Florida and Texas and seeking larger, higher-quality transactions. Average portfolio yield was 12.38%, compared with 12.83% for the comparable 2019 period; management expected further compression in 2020.
- Credit and operating risks include borrower payment or refinancing difficulties, reduced property values, delays in construction and loan documentation, and restricted access to Connecticut courts for foreclosures and evictions. Thirteen loans, totaling approximately $3.6 million due, were in foreclosure or collection proceedings; management believed collateral value exceeded amounts due.
- After quarter-end, the board declared a $0.12-per-share dividend, totaling about $2.65 million, payable August 7, 2020. A new COO began July 1 under an employment agreement with a $250,000 annual base salary and potential severance.
Key facts for investors to verify
- Whether the COVID forbearance loans remain current or require further deferrals, and how deferred interest is collected.
- Loan performance, collateral valuations, foreclosure outcomes, and the assumptions supporting the $495,000 impairment charge.
- Whether cash and operating inflows can cover the $8.18 million construction commitments, dividends, and debt service amid reduced lending activity.
- The sustainability of reported earnings given higher fixed borrowing costs, investment-sale gains, and expected yield compression.
- Compliance with REIT distribution requirements and the notes’ 150% asset-coverage covenant, which restricts certain distributions, borrowing, and share repurchases.