Sachem Capital Corp. — Q2 2017 Form 10-Q
Business context and reporting period
The unaudited report covers the three and six months ended June 30, 2017. Sachem originates short-term, generally one-to-three-year loans secured by first mortgages on real estate, primarily in Connecticut. The loans are generally made to real estate investors and are not made to owner-occupants.
Comparisons require care: Sachem acquired Sachem Capital Partners, LLC (SCP) on February 8, 2017, and completed its IPO in February. The 2016 results and pre-exchange 2017 results are SCP’s, while the reported 2017 six-month results combine predecessor and post-exchange activity. Per-share results are reported only from February 9, 2017.
Financial and operating highlights
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.560 million | $1.095 million | $2.823 million | $1.974 million |
| Net income | $957,000 | $869,000 | $1.853 million | $1.552 million |
| Net income margin | 61.3% | 79.4% | 65.7% | 78.6% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.659 million | $1.626 million |
Q2 revenue increased 42.4% year over year, while net income increased about 10%. Six-month revenue rose about 43% and net income about 19%. Higher lending activity drove revenue growth; expenses rose substantially, including public-company and corporate costs. Q2 operating expenses were $603,000 versus $226,000, and six-month expenses were $969,000 versus $421,000. Q2 basic and diluted EPS were $0.09; six-month EPS was $0.14 for the post-IPO period only.
At June 30, 2017, total assets were $52.988 million, including $47.807 million of mortgages receivable and $1.868 million of cash. Total liabilities were $13.985 million and equity was $39.003 million. The balance sheet reported a $12.161 million line of credit and $306,000 mortgage payable. The Bankwell revolving facility was increased to $20 million; its rate was 5.8% at quarter-end and it matures June 30, 2019, subject to its terms and extension option. Management reported debt at 31.2% of total capitalization and said it expects leverage may rise toward 50% over time.
Six-month investing cash use was $14.455 million, principally reflecting $23.238 million of mortgage advances, partly offset by $9.181 million of principal collections. Financing cash provided was $13.102 million, including $13 million of gross IPO proceeds. Cash increased by $306,000 during the period. Management said cash, available facility capacity and expected operating cash flows should fund operations for the next 12 months.
The loan portfolio comprised 280 loans totaling approximately $47.8 million at June 30, versus 193 loans and approximately $30.4 million a year earlier. The reported annual portfolio yield was 12.06%; recent quarter loans carried stated rates of 11%–12%, with an 18% default rate. The company’s policy caps loan-to-value at 65%. Unfunded construction-loan advances were $3.307 million.
Changes, outlook, risks and unusual items
- The February exchange and IPO changed Sachem from a non-operating corporation into a public mortgage lender. Net IPO proceeds were approximately $11.1 million; operating and compliance costs rose with the reorganization, public-company status and expanded lending.
- Management intends to elect REIT tax treatment for 2017 and expects to distribute at least 90% of REIT taxable income. Qualification depends on meeting ongoing tax-law requirements.
- Management expects borrowing costs to rise with interest rates and had not raised loan rates to match recent increases. It prioritized market-share growth over near-term profits and cash flow; this may pressure the funding spread. Rising rates could also affect collateral values. Management noted increased loan prepayments, potentially reflecting greater competition from traditional lenders.
- The Bankwell facility is secured by substantially all company assets, subject to borrowing-base limits and financial covenants, and restricts additional indebtedness and dividends in certain circumstances. Certain executives and JJV provide capped guarantees.
- Subsequent to quarter-end, Sachem reported foreclosure proceedings involving five properties securing loans with aggregate principal of about $510,000. It recorded no impairment based on assessments and broker opinions. It also entered a $345,000 property joint venture, with a 30% share of project profits after recovery of interest, and received an offer to sell a real-estate-owned property for $470,000 before repairs; management expected a small profit.
- On July 7, the company declared a $0.105-per-share dividend, approximately $1.166 million, paid July 27. A reported $42,231 Q2 loss on sale of real estate appears as a $42,231 adjustment in the cash-flow reconciliation; the filing text does not clearly explain this presentation.
- Management concluded disclosure controls were effective at June 30 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess comparability of reported growth given the SCP predecessor accounting, February exchange, IPO, and differing EPS periods.
- Review Bankwell borrowing-base availability, covenant compliance, maturity and extension terms, and the impact of variable-rate borrowing on the lending spread.
- Evaluate loan collateral values, borrower concentration, construction commitments, prepayment trends and the outcomes of the five foreclosure matters; the filing does not provide a clear quantified delinquency or nonperforming-loan total.
- Confirm REIT election and distribution requirements, and whether dividends are supported by taxable income and available liquidity.
- The cover page marks “No” for having filed all required reports during the preceding 12 months; investors should verify the explanation and applicability, given the company’s recent formation and IPO.