Sachem Capital Corp. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 26, 2020. The audited financial statements received an unqualified opinion. Sachem is a Connecticut-based real estate finance company and REIT, originating short-term, generally interest-only loans secured by first mortgages on investment properties.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $12.68 million | $11.71 million | +8.3% |
| Net income | $6.20 million | $7.77 million | -20.3% |
| Diluted earnings per share | $0.32 | $0.50 | Lower |
| Net cash from operating activities | $8.12 million | $6.22 million | Higher |
| Mortgage loan portfolio at year-end | $94.35 million | $78.89 million | +19.6% |
| Shareholders’ equity at year-end | $82.56 million | $52.80 million | +56.4% |
- Net margin was approximately 48.9% in 2019, compared with 66.4% in 2018, calculated as net income divided by reported revenue.
- Interest income from loans was $9.75 million, versus $8.96 million. The reported portfolio yield, including origination and other loan-related fees, was 12.41% (also described as 12.42% in the filing) versus 12.85%.
- Operating costs and expenses rose 64.5% to $6.48 million. Interest and deferred-financing-cost expense was $2.94 million, including a $439,446 non-cash write-off tied to terminating the revolving credit facility. The company also recorded $340,195 of separate termination-related expense and a $417,094 real-estate impairment.
- Cash and cash equivalents were $18.84 million and short-term marketable securities were $15.95 million at year-end, together approximately $34.79 million. Total assets were $141.21 million.
- Net cash used in investing was $37.82 million, principally reflecting $64.74 million of mortgage originations and $16.00 million of investment purchases, partly offset by $43.35 million of mortgage principal collections. Financing activities provided $48.38 million.
- Gross outstanding debt was approximately $59.0 million, including approximately $58.2 million of unsecured, fixed-rate notes due in 2024 and a $0.78 million mortgage payable. The balance sheet reports notes payable net of deferred financing costs; total liabilities were $58.65 million.
Portfolio, capital and material changes
- The year-end loan portfolio comprised 438 loans. Approximately 89% of outstanding principal was secured by Connecticut properties; residential loans made up approximately 76% of portfolio principal.
- Nine loans, with approximately $2.6 million of principal and accrued interest, were in foreclosure proceedings, compared with 13 loans totaling approximately $5.1 million in 2018. Management said it believed collateral values exceeded balances and recorded no loan-loss reserve. Separately, 66 loans had matured during 2019 without being repaid in full or extended and were undergoing modification.
- Real estate owned increased to $8.26 million from $2.94 million. The 2019 balance included $7.70 million held for sale and $0.56 million held for rental; the company recorded a $417,094 impairment loss.
- During 2019, Sachem raised approximately $90.3 million gross through equity and note offerings and used proceeds in part to repay its $35 million revolving credit facility, terminated June 25. The filing cites approximately $779,641 in total termination charges, including the deferred-cost write-off. Management said the replacement unsecured, fixed-rate notes reduced facility-related costs and restrictions.
- Common shares outstanding increased to 22.12 million from 15.44 million. The company paid approximately $9.68 million in dividends during 2019. It declared a $0.12-per-share dividend payable in January 2020, but made no assurance of future dividend levels.
Outlook, risks and unusual items
- COVID-19 was identified as a significant, developing risk after year-end. Connecticut’s March 20, 2020 order required non-essential businesses to close from March 23. Sachem warned of possible operating disruption, slower underwriting and loan processing, borrower payment and refinancing difficulties, delayed property sales or foreclosures, and declining collateral values.
- Management said preserving liquidity was its priority and stated that available cash, short-term securities and expected operating cash flows were expected to fund operations for the next 12 months. It was considering, but had not finalized, tighter standards for new loans from April 1: limiting activity to cash from loan payoffs, reducing maximum LTV to 50%, requiring independent-director approval for loans over $1 million, and requiring interest reserves above an amount not yet determined. Commitments through March 31 were to be honored.
- The board deferred decisions on 2020 dividends until July 2020. The company stated its intent to continue REIT qualification, which generally requires annual distributions of at least 90% of taxable income, but dividends remain subject to board discretion and liquidity.
- Management anticipated continued rate compression from competition and borrower demands, and noted that property-value declines could raise foreclosure risk. It also described plans to expand beyond New England, including loans in Arizona, Texas, South Carolina and Colorado, and to pursue larger or higher-quality projects. These plans were subject to the changed liquidity-first posture.
- Other material risks include the concentration of loans in Connecticut, dependence on borrower refinancing or property sales for repayment, balloon maturities, limited interest reserves, illiquid collateral, potential refinancing and debt-service constraints, and compliance with REIT and Investment Company Act requirements. The notes require at least 150% asset coverage for specified dividends, additional debt and share purchases.
- Jeffrey C. Villano, co-founder and co-CEO, resigned as an officer in November 2019 and as a director in December; the remaining founder, John L. Villano, became CEO, CFO, president and treasurer. Management reported that duties were reassigned and new employees hired.
Important facts for investors to verify
- Current loan delinquencies, the status of the 66 matured loans, and whether collateral values remain sufficient—especially under post-year-end economic conditions.
- Cash availability, loan collections and funding commitments, debt service and compliance with the notes’ 150% asset-coverage covenant.
- Whether planned loan underwriting restrictions were implemented, and the board’s subsequent dividend decisions.
- Real estate owned valuations, sale proceeds and carrying costs; the filing notes that impairment and collateral valuations rely on management judgment.
- The impact of 2019 share issuance and any subsequent capital raising on per-share earnings, book value and dividend capacity.