Sachem Capital Corp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Sachem originates and services short-term, generally first-lien real estate loans, primarily to property owners and developers. It operates as a REIT and is required to distribute at least 90% of taxable income to shareholders.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $8.52 million | $4.27 million | $20.95 million | $12.89 million |
| Net income | $4.30 million | $2.14 million | $9.03 million | $6.64 million |
| Net income attributable to common shareholders | $3.39 million | $2.14 million | $8.10 million | $6.64 million |
| Basic and diluted EPS | $0.12 | $0.10 | $0.32 | $0.30 |
| Operating costs and expenses | $4.22 million | $2.13 million | $11.92 million | $6.25 million |
| Net cash from operating activities | Not presented quarterly | Not presented quarterly | $17.37 million | $7.39 million |
- Q3 revenue rose 99.5% year over year; nine-month revenue rose 62.5%. Growth was led by loan interest income, which increased 75.5% in Q3 and 58.8% year to date.
- Nine-month operating costs increased 90.6%, including a 111.6% rise in interest expense and financing-cost amortization and a 76.5% increase in compensation-related costs. Management attributed the increases to higher borrowing and staffing needs accompanying growth.
- Loan portfolio yield was 11.92% for the nine months, down from 12.28% in the prior-year period. Management cited market-driven rate compression and expects it to continue.
- Q3 comprehensive income was $2.89 million, including a $500,000 unrealized loss on investment securities. Nine-month comprehensive income was $7.49 million, including a $612,000 unrealized loss.
Financial position and liquidity
- At September 30, 2021, total assets were $313.35 million, compared with $226.67 million at December 31, 2020. Mortgages receivable were $219.96 million, up from $155.62 million; cash and cash equivalents were $19.24 million.
- Investment securities were $56.08 million. Cash plus investment securities totaled approximately $75.3 million, compared with $56.7 million at year-end 2020.
- Total liabilities were $154.59 million and shareholders’ equity was $158.76 million. Management reported capital structure of approximately 49.3% debt and 50.7% equity, compared with 63% debt at March 31, 2021; the shift resulted from equity issuance, not debt reduction.
- Indebtedness was approximately $144.6 million: approximately $114.5 million of unsecured notes, with a weighted-average stated rate of 7.36%, and $30.1 million outstanding on a securities-backed Wells Fargo margin line bearing 1.5% at quarter-end. Notes mature in 2024 and 2025.
- Nine-month investing cash outflow was $84.94 million, principally reflecting net mortgage loan funding and purchases of securities. Financing cash inflow was $67.40 million, mainly from common and preferred share offerings. Cash declined by $0.17 million to $19.24 million.
Changes, outlook, and material matters
- Compared with September 30, 2020, mortgages receivable increased 77.2%, according to management. The company funded approximately $154.8 million of mortgage loans during the first nine months and collected approximately $90.5 million in principal repayments.
- Equity offerings generated approximately $30.9 million net from common shares and $45.5 million net from 1.903 million Series A preferred shares. The preferred stock carries a 7.75% cumulative dividend, has no stated maturity, and generally is not redeemable before June 2026.
- In July 2021, Sachem entered into a $200 million master repurchase facility with Churchill. It had not pledged loans under the facility as of September 30. The facility carries collateral, asset-coverage, and liquidity requirements and may be terminated by Churchill on 180 days’ notice.
- There were 157 loans with $61.7 million of unfunded future funding obligations, which management expected to fund over the following 12 months. Sachem said it expected available cash, securities, and operating cash flows to cover operating needs for the next 12 months; it also identified the unfunded commitments as a significant liquidity exposure.
- The filing reports one borrower with $22.3 million outstanding, or 10.2% of the loan portfolio. A second borrower had $10.0 million outstanding and approximately $23.4 million in total funding obligations; fully funded, exposure would be approximately 10% of the portfolio.
- The notes describe 17 loans in foreclosure proceedings with approximately $6.2 million due, while MD&A separately reports eight loans in enforcement or collection proceedings with approximately $892,000 due. Management said collateral values exceeded amounts due in the cases discussed.
- Management cited competition and borrower demands for better terms, COVID-19 uncertainty, labor shortages and construction-material supply disruptions, property-value changes, rising expenses, and potential rate compression. It reported no significant increase in defaults attributable to COVID-19 to date. No specific earnings or dividend guidance was provided.
- Subsequent events: from October 1 through November 1, the company raised approximately $5.4 million net from additional common shares. The board declared a $0.12-per-common-share dividend payable October 29, 2021.
Important facts for investors to verify
- Reconcile the filing’s different foreclosure and enforcement figures, and assess collateral values, loan status, and potential losses.
- Evaluate the $61.7 million of unfunded loan commitments against available liquidity, facility availability, and actual borrower draw timing.
- Review borrower concentration and fully funded exposure to the second large borrower, alongside the reported first-borrower exposure above the stated 10% policy threshold.
- Assess the effect of lower loan yields, higher funding and compensation costs, and preferred dividends on earnings available to common shareholders.
- Check compliance with the notes’ 150% asset-coverage covenant and the Churchill facility’s covenants, including its minimum unencumbered-cash requirement.
- Monitor REIT qualification, COVID-19 and construction-market effects, and the terms and performance of the Churchill facility and planned business expansion.