Sachem Capital Corp. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The unaudited filing was signed August 13, 2018. Sachem originates short-term, generally first-lien mortgage loans to real estate investors, primarily in Connecticut. Results against 2017 are affected by the February 2017 exchange and IPO; the company cautions that comparisons may not be directly comparable.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $3.04 million | $1.56 million | $5.76 million | $2.82 million |
| Net income | $2.21 million | $0.96 million | $4.18 million | $1.85 million |
| Net income per share, basic and diluted | $0.14 | $0.09 | $0.27 | $0.14 |
| Operating costs and expenses | $0.83 million | $0.60 million | $1.58 million | $0.97 million |
| Operating cash flow | Not presented for quarter | $2.93 million | $1.66 million | |
| Investing cash flow | Not presented for quarter | $(10.14) million | $(14.45) million | |
| Financing cash flow | Not presented for quarter | $8.48 million | $13.10 million |
- Balance sheet at June 30: Total assets were $79.89 million, including $72.38 million of mortgage loans outstanding (including affiliate loans), $2.72 million of real estate owned and $2.22 million of cash. Total liabilities were $24.38 million and shareholders’ equity was $55.51 million.
- Debt and liquidity: The Webster revolving facility balance was approximately $22.15 million; mortgage payable was $0.30 million. The company replaced its former Bankwell credit line with a $35 million facility in May, bearing interest at 30-day LIBOR plus 4.00% and maturing May 11, 2022. The balance carried a 6.09% rate at June 30. The facility is secured by substantially all assets and borrowing capacity is subject to eligible-collateral limits and covenants.
- Portfolio and yield: The portfolio had 385 loans totaling approximately $72.4 million, with stated rates of 5.0%–12.5%; management reported a 12.30% annual portfolio yield. Eight loans, totaling approximately $2.56 million including accrued unpaid interest, were classified as non-performing, about 3.5% of the portfolio. Management said collateral values exceeded balances and the loans had been referred to counsel.
- Dividends: Cash dividends paid in the first half were $3.24 million. A further $0.11-per-share dividend, $1.70 million in aggregate, was paid July 27, 2018.
Material changes and management commentary
- Q2 revenue increased 94.9% year over year; first-half revenue increased 104.2%. Management attributed growth primarily to expanded lending. First-half interest income rose to $4.34 million from $2.26 million, and net origination fees to $0.69 million from $0.27 million.
- First-half expenses increased 62.6%, including higher interest and financing-cost expense ($0.60 million versus $0.29 million) and compensation costs ($0.55 million versus $0.27 million). The filing attributes expense growth to lending expansion and public-company/REIT operating requirements. A $19,000 excise tax was incurred because the company did not distribute 85% of 2017 taxable income in 2017.
- First-half loan fundings were approximately $30.3 million, against principal repayments of approximately $21.2 million. The company reported $6.20 million of unfunded construction-loan commitments.
- The company reported compliance with the Webster facility’s financial covenants at June 30: minimum tangible net worth of $52 million, fixed-charge coverage of at least 1.25:1, and senior funded debt to tangible net worth no greater than 2:1.
- Management believes cash, facility availability and operating cash flows will be sufficient for operations over the next 12 months. It expects to increase leverage over time toward approximately 50% of total capital from approximately 29% at June 30, while using borrowing to finance the loan portfolio.
Outlook, risks and unusual items
- Management said rising rates could increase borrowing costs and compress the spread between funding costs and loan yields. It had not raised loan rates to match recent funding-cost increases, prioritizing market-share growth, but said it may need to change that strategy. Its approach includes seeking one-year loan terms where possible.
- Key risks include borrower defaults and collateral-value declines, refinancing and liquidity needs, variable-rate debt exposure, and the possibility of credit-facility covenant breaches. A default could make debt immediately payable and expose substantially all assets to lender remedies. The company has no general corporate policy limiting leverage.
- The company intends to qualify as a REIT and says it intends to make the election beginning with tax year 2017. Maintaining REIT status depends on meeting complex income, asset, ownership and distribution requirements; failure could result in corporate-level taxes and other consequences. REITs generally must distribute at least 90% of taxable income.
- At June 30, the company had $6.20 million of unfunded construction advances. It also disclosed ordinary-course litigation involving properties in foreclosure, stating it believed collateral value was sufficient; no quantified loss contingency was provided.
- Subsequent events included a July increase in each senior executive’s annual base compensation to $360,000, retroactive to April 1, with an additional $50,000 accrued for Q2. Three agreements to sell real estate owned were entered into in July and August; management expected to recover or profit on those sales.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the reported loan yield, delinquency trends and collateral valuations remain adequate as the portfolio grows, particularly for the eight non-performing loans.
- Actual borrowing availability under the Webster facility after applying eligible-loan, advance-rate and covenant requirements, and the effect of LIBOR changes on funding costs.
- Whether operating cash generation can support loan growth, $6.20 million of construction commitments, debt service and REIT distributions.
- REIT election and ongoing qualification, including distribution requirements and the circumstances behind the $19,000 excise tax.
- Comparability of 2017 earnings and per-share data, given the February 2017 exchange and IPO, and the impact of executive compensation and other public-company costs.