UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission File Number:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Securities registered pursuant to Section 12(b) of the Act:
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As of May 15, 2023, the Issuer had a total of
SACHEM CAPITAL CORP.
TABLE OF CONTENTS
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “anticipate,” “estimate,” “expect,” “project,” “plan,” “seek,” “intend,” “believe,” “may,” “might,” “will,” “should,” “could,” “likely,” “continue,” “design,” and the negative of such terms and other words and terms of similar expressions are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to numerous risks, uncertainties and assumptions, some of which are described in our 2022 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this report to confirm these statements in relationship to actual results or revised expectations.
All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this report. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.
Unless the context otherwise requires, all references in this quarterly report on Form 10-Q to “Sachem Capital,” “we,” “us” and “our” refer to Sachem Capital Corp., a New York corporation.
ii
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SACHEM CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(unaudited)
| March 31, 2023 |
| December 31, 2022 | |||
Assets |
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Cash and cash equivalents | $ | | $ | | ||
Investment securities | | | ||||
Mortgages receivable, net |
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Interest and fees receivable, net |
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Due from borrowers, net |
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Real estate owned |
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Investments in partnerships | | | ||||
Property and equipment, net | | | ||||
Other assets | | | ||||
Total assets | $ | | $ | | ||
Liabilities and Shareholders’ Equity |
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Liabilities: |
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Notes payable (net of deferred financing costs of $ | $ | | $ | | ||
Repurchase facility | | | ||||
Mortgage payable |
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Line of credit | | | ||||
Accrued dividends payable | — | | ||||
Accounts payable and accrued liabilities | | | ||||
Advances from borrowers | | | ||||
Deferred revenue | | | ||||
Total liabilities | | | ||||
Commitments and Contingencies |
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Shareholders’ Equity: |
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Preferred shares - $ |
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Common shares - $ |
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Paid-in capital |
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Accumulated other comprehensive loss | ( | ( | ||||
Accumulated deficit |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity | $ | | $ | | ||
The accompanying notes are an integral part of these financial statements.
1
SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Revenue: |
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Interest income from loans | $ | | $ | | ||
Investment gain, net | | | ||||
Income from partnership investments | | | ||||
Origination and modification fees, net |
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Fee and other income |
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Unrealized gain (loss) on investment securities | | ( | ||||
Total revenue |
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Operating costs and expenses: |
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Interest and amortization of deferred financing costs |
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Compensation, fees and taxes |
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General and administrative expenses | | | ||||
Other expenses |
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(Gain) Loss on sale of real estate | ( | | ||||
Allowance for credit losses | | | ||||
Impairment loss | | | ||||
Total operating costs and expenses | | | ||||
Net income |
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Series A Preferred Stock dividend | ( | ( | ||||
Net income attributable to common shareholders | | | ||||
Other comprehensive loss | ||||||
Unrealized gain on investment securities | | | ||||
Comprehensive income | $ | | $ | | ||
Basic and diluted net income per common share outstanding: |
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Basic | $ | | $ | | ||
Diluted | $ | | $ | | ||
Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these financial statements.
2
SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2023 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Comprehensive | Accumulated | ||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| Totals | |||||||||
Balance, January 1, 2023 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Cumulative effect of change in | — | — | — | — | — | — | ( | ( | ||||||||||||||||
Issuance of Series A Preferred Stock, net of expenses |
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| — | — | | — | — | | ||||||||||||||
Issuance of common shares, net of expenses | — | — | | | | — | — | | ||||||||||||||||
Stock based compensation | — | — | | | | — | — | | ||||||||||||||||
Unrealized gain on investments | — | — | — | — | — | | — | | ||||||||||||||||
Dividends paid on Series A Preferred Stock | — | — | — | — | — | — | ( | ( | ||||||||||||||||
Net income for the period ended March 31, 2023 | — | — | — | — | — | — | | | ||||||||||||||||
Balance, March 31, 2023 |
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| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
FOR THE THREE MONTHS ENDED MARCH 31, 2022 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Preferred Stock | Common Stock | Paid in | Comprehensive | Accumulated | ||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| Totals | |||||||||
Balance, January 1, 2022 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
Issuance of common shares, net of expenses |
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Exercise of warrants | — | — | | | ( | — | — | — | ||||||||||||||||
Stock based compensation | — | — | | | | — | — | | ||||||||||||||||
Unrealized gain on marketable securities | — | — | — | — | — | | — | | ||||||||||||||||
Dividends paid on Series A Preferred Stock | — | — | — | — | — | — | ( | ( | ||||||||||||||||
Net income for the period ended March 31, 2022 | — | — | — | — | — | — | | | ||||||||||||||||
Balance, March 31, 2022 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | ||||||||
The accompanying notes are an integral part of these financial statements.
3
SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Amortization of deferred financing costs and bond discount |
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Depreciation expense |
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Stock based compensation |
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Allowance for credit losses |
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Impairment loss | — | | ||||
(Gain) loss on sale of real estate | ( | | ||||
Unrealized(gain) loss on investment securities | ( | | ||||
(Gain) loss on sale of investment securities |
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Changes in operating assets and liabilities: |
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(Increase) decrease in: |
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Interest and fees receivable |
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Other assets - miscellaneous |
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Due from borrowers |
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Other assets - prepaid expenses |
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(Decrease) increase in: |
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Accounts payable and accrued liabilities - accrued interest | | | ||||
Accounts payable and accrued liabilities - accounts payable and accrued expenses |
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Deferred revenue |
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Advances from borrowers |
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Total adjustments |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of investment securities | ( | ( | ||||
Proceeds from the sale of investment securities | | | ||||
Purchase of interests in investment partnerships, net | ( | ( | ||||
Proceeds from sale of real estate owned | | | ||||
Acquisitions of and improvements to real estate owned, net |
| ( |
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Purchase of property and equipment |
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Principal disbursements for mortgages receivable |
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Principal collections on mortgages receivable |
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Other assets – pre-offering costs | | ( | ||||
NET CASH USED FOR INVESTING ACTIVITIES |
| ( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Net proceeds from (repayment of) line of credit |
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Net proceeds from repurchase facility |
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Proceeds from mortgage | | — | ||||
Accounts payable and accrued liabilities - principal payments on other notes | ( | ( | ||||
Dividends paid on Common Stock |
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Dividends paid on Series A Preferred Stock |
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Proceeds from issuance of common shares, net of expenses | | | ||||
Proceeds from issuance of Series A Preferred Stock, net of expenses | | — | ||||
Gross proceeds from issuance of fixed rate notes | — | | ||||
Financings costs incurred in connection with fixed rate notes | — | ( | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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CASH AND CASH EQUIVALENTS- BEGINNING OF YEAR |
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CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | | $ | | ||
The accompanying notes are an integral part of these financial statements.
4
SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
(unaudited)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION |
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Interest paid | $ | | $ | | ||
Real estate acquired in connection with the foreclosure of certain mortgages, inclusive of interest and other fees receivable, during the three months ended March 31, 2023 amounted to $
The accompanying notes are an integral part of these financial statements.
5
1. The Company
Sachem Capital Corp. (the “Company”), a New York corporation, specializes in originating, underwriting, funding, servicing and managing a portfolio of first mortgage loans. The Company offers short term (i.e., to
2. Significant Accounting Policies
Unaudited Financial Statements
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2022 and the notes thereto included in the Company’s Annual Report on Form 10-K. Results of operations for the three months ended March 31, 2023, are not necessarily indicative of the operating results to be attained in the entire fiscal year, or for any subsequent period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on (a) various assumptions that are based on experience, (b) projections regarding future operations and (c) general financial market and local and general economic conditions. Actual amounts could materially differ from those estimates.
Cash and Cash Equivalents
The Company considers all demand deposits, cashier’s checks, money market accounts and certificates of deposit with an original maturity of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents at financial institutions. The combined account balances typically exceed the Federal Deposit Insurance Corporation insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit. The Company does not believe that the risk is significant.
Investment Securities
The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values.
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. If qualitative factors indicate an available for sale debt security may be credit impaired the loss is measured as the excess of carrying value over the present value of expected cash flows, limited to the excess of carrying value over fair value. To determine credit losses, the Company may employ a systematic
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methodology that considers available quantitative and qualitative evidence. In addition, the Company considers specific adverse conditions related to the financial health of, and business outlook for, the investee. If the Company has plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in net income and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future impairments.
Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). The Company performs a qualitative assessment on a periodic basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in net income.
Current Expected Credit Losses Allowance
The Company adopted the current expected credit loss (“CECL”) standard effective January 1, 2023 in accordance with ASU No. 2016-13. The initial CECL allowance adjustment of $
The Company records an allowance for credit losses in accordance with the CECL standard on the Company’s loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics. This methodology replaces the probable incurred loss impairment methodology. In addition, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are also analyzed for credit losses in accordance with the CECL standard, as they represent a financial asset that is subject to credit risk. As allowed under the CECL standard the Company uses, as a practical expedient, the fair value of the collateral at the reporting date when recording the net carrying amount of the loan and determining the allowance for credit losses for loans in pending/pre-foreclosure status, as defined. Fair value of collateral is reduced by estimated cost to sell if the collateral is expected to be sold. The amount of loans in pending/pre-foreclosure as of March 31, 2023 and December 31, 2022 was approximately $
The CECL standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. The Company utilizes a loss-rate method for estimating current expected credit losses. The loss rate method involves applying a loss rate to a pool of loans with similar risk characteristics to estimate the expected credit losses on that pool of loans. In determining the CECL allowance, the Company considers various factors including (1) historical loss experience in its portfolio, (2) loan specific losses for loans deemed collateral dependent based on excess amortized cost over the fair value of the underlying collateral, and (3) its current and future view of the macroeconomic environment. The Company utilizes a reasonable and supportable forecast period equal to the contractual term of the loan plus any applicable short-term extensions that are reasonably expected for construction loans.
Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loans based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. The CECL allowance related to the principal outstanding is presented within “Mortgages receivable, net” and for unfunded commitments is within accounts payable and accrued liabilities in the Company’s consolidated balance sheets. The CECL allowance related to the late payment fees are presented in “Interest and fees receivable” and “Due from borrowers” in the Company’s consolidated balance sheets.
As of March 31, 2023 and January 1, 2023, the CECL allowance for mortgages receivable was approximately $
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As of March 31, 2023 and January 1, 2023, the CECL allowance for interest and fees receivable was approximately $
As of March 31, 2023 and January 1, 2023, the CECL allowance for due from borrower was approximately $
As of March 31, 2023 and January 1, 2023, the CECL allowance for unfunded commitments was $
Fair Value Measurements
The framework for measuring fair value provides a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 are described as follows:
Level 1Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company can access.
Level 2Inputs to the valuation methodology include:
| ● | quoted prices for similar assets or liabilities in active markets; |
| ● | quoted prices for identical or similar assets or liabilities in inactive markets; |
| ● | inputs other than quoted prices that are observable for the asset or liability; and |
| ● | inputs that are derived principally from or corroborated by observable market data by correlation to other means. |
If the asset or liability has a specified (i.e., contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Property and Equipment
Land and building acquired in December 2016 to serve as the Company’s office facilities is stated at cost. The building is being depreciated using the straight-line method over its estimated useful life of
Land and building acquired in 2021 to serve as the Company’s future corporate headquarters is stated at cost. Renovation of the building was completed in the first quarter of 2023 and the Company relocated its operations to the new building in March 2023. The building is being depreciated using the straight-line method over its estimated useful life of
Real Estate Owned
Real estate owned by the Company is stated at cost and is tested for impairment quarterly.
8
Consolidations
The consolidated financial statements of the Company include the accounts of all subsidiaries in which the Company has control over significant operating, financial and investing decisions of the entity. All intercompany accounts and transactions have been eliminated.
Impairment of Long-Lived Assets
The Company monitors events or changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the undiscounted cash flows are less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair market value of the assets.
Goodwill
Goodwill is not amortized, but rather tested for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. Goodwill at March 31, 2023 represents the excess of the consideration paid over the fair value of net assets acquired from Urbane New Haven, LLC in October 2022.
In testing goodwill for impairment, the Company follows FASB ASC 350, “Intangibles—Goodwill and Other”, which permits a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, or the Company chooses not to perform the qualitative assessment, then the Company compares the fair value of that reporting unit with its carrying value, including goodwill.
Deferred Financing Costs
Costs incurred in connection with the Company’s revolving credit facilities, described in Note 7-Line of Credit, Mortgage Payable, Churchill Facility, and Needham Facility are, amortized over the term of the applicable facility using the straight-line method.
Costs incurred by the Company in connection with the public offering of its unsecured, unsubordinated notes, described in Note 9 - Notes Payable, are being amortized over the term of the respective Notes.
Revenue Recognition
Interest income from the Company’s loan portfolio is earned over the loan period and is calculated using the simple interest method on principal amounts outstanding. Generally, the Company’s loans provide for interest to be paid monthly in arrears. The Company, generally, does not accrue interest income on mortgages receivable that are more than 90 days past due or interest charged at default rates. However, interest income not accrued at March 31, 2023 but collected prior to the issuance of this report is included in income for the period ended March 31, 2023.
Origination and modification fee revenue, generally
Income Taxes
The Company believes it qualifies as a real estate investment trust (“REIT”) for federal income tax purposes and operates accordingly. It made the election to be taxed as a REIT on its 2017 Federal income tax return. The Company’s qualification as a REIT
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depends on its ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”), relating to, among other things, the sources of its income, the composition and values of its assets, its compliance with the distribution requirements applicable to REITs and the diversity of ownership of its outstanding capital stock. So long as it qualifies as a REIT, the Company, generally, will not be subject to U.S. federal income tax on its taxable income distributed to its shareholders. However, if it fails to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal income tax at regular corporate rates and may also be subject to various penalties and may be precluded from re-electing REIT status for the four taxable years following the year during in which it lost its REIT qualification.
The Company has elected, and may elect in the future, to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets that the Company cannot hold directly and generally may engage in any real estate or non-real estate related business. The TRSs generate income, resulting in federal and state income tax liability for these entities. The Company does not expect to incur any corporate federal income tax liability outside of the TRSs, as it believes it has maintained its qualification as a REIT. During the three months ended March 31, 2023 and 2022, the Company’s TRSs recognized
The income tax provision for the Company differs from the amount computed from applying the statutory federal income tax rate to income before income taxes due to non-taxable REIT income and other permanent differences including the non-deductibility of acquisition costs of business combinations for federal income tax reporting.
FASB ASC Topic 740-10 “Accounting for Uncertainty in Income Taxes” prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and disclosure required. Under this standard, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in interest expense. The Company has determined that there are
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with ASC 260 — “Earnings Per Share.” Under ASC 260, basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the potential dilution from the exercise of stock options and warrants for common shares using the treasury stock method. The numerator in calculating both basic and diluted earnings per common share for each period is the reported net income.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments”, (ASU 2016-13), which changes accounting requirements for the measurement and recognition of expected credit losses from an incurred or probable methodology to a current expected credit loss methodology. Mortgages receivable, unfunded loan commitments, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are the only items currently held by the Company that are within the scope of ASU 2016-13. The Company adopted this ASU effective January 1, 2023 and applied a modified retrospective approach through a cumulative-effect adjustment to retained earnings upon adoption. At transition on January 1, 2023, the cumulative effect of adopting this ASU resulted in a decrease in retained earnings of $
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In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses” (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for troubled debt restructurings (“TDR”) for creditors that have adopted the CECL standard and requires enhanced disclosures for loan modifications made to borrowers experiencing financial difficulty in the form of interest rate reductions, principal forgiveness, other-than-insignificant payment delays, or term extensions. In addition, the new guidance requires presentation in the vintage disclosures of current-period gross write-offs by year of origination. The amendments in this update became effective for fiscal years beginning after December 15, 2022. This update did not have a material effect on the Company’s financial statements.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 was issued to (1) to clarify the guidance in FASB ASC Topic 820, “Fair Value Measurement”, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with FASB ASC Topic 820. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company does not anticipate that this update will have a material impact on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.
Reclassifications
Certain amounts included in the March 31, 2022 and December 31, 2022 consolidated financial statements have been reclassified to conform to the March 31, 2023 presentation.
3. Fair Value Measurement
The fair value measurement level within the fair value hierarchy of an asset or liability is based on the lowest level of any input that is significant to the fair market value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The following table sets forth by Level, within the fair value hierarchy, the Company’s assets at fair value as of March 31, 2023:
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Stocks and ETFs | $ | — | $ | | $ | — | $ | | ||||
Mutual funds | | — | — | | ||||||||
Debt securities | |
| |
| — | | ||||||
Total liquid investments | $ | | $ | | $ | — | $ | | ||||
Real estate owned | $ | | $ | | $ | | $ | | ||||
The following table sets forth by Level, within the fair value hierarchy, the Company’s assets at fair value as of December 31, 2022:
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Stocks and ETF’s | $ | | $ | |
| — | $ | | ||||
Mutual funds |
| |
| — |
| — |
| | ||||
Debt securities |
| |
| |
| — |
| | ||||
Total liquid investments | $ | | $ | |
| — | $ | | ||||
Real estate owned |
| — |
| — | $ | | $ | | ||||
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Following is a description of the methodologies used for assets measured at fair value:
Stocks and ETFs (level 1 and 2): Valued at the closing price reported in the active market in which the individual securities are traded.
Mutual funds (level 1 and 2): Valued at the daily closing price reported by the fund. Mutual funds held by the Company are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset values and to transact at that price. The mutual funds held by the Company are deemed to be actively traded.
Debt securities: Valued at the closing price reported in the active market in which the individual securities are traded.
Real estate owned: The Company estimates fair values of real estate owned using market information such as recent sales contracts, appraisals, recent sales, assessed values or discounted cash value models.
See Note 5 for the roll forward of real estate owned – Level 3 assets.
Impact of Fair Value of AFS Securities on OCI
The carrying value of the Company’s financial instruments approximates fair value generally due to the relative short-term nature of such instruments. Other financial assets and financial liabilities have fair value that approximate their carrying value.
Pursuant to ASC 326-30-50-4 and 50-5 the Company is required to disclose investment securities that have been in a continuous unrealized loss position for 12 months or more as of the balance sheet date. As of March 31, 2023 and December 31, 2022, the Company had a continuous unrealized losses over 12 months in Available-For-Sale debt securities of approximately $
The following table presents the impact of the Company’s Available-For-Sale (AFS) securities - debt securities on its Other Comprehensive Income (OCI) for the three months ended March 31, 2023:
Three months Ended | ||||||
March 31, | ||||||
2023 | 2022 | |||||
OCI from AFS securities: |
|
|
|
| ||
Unrealized (loss) on AFS-debt securities at beginning of period | $ | ( | $ | ( | ||
Unrealized gain on securities available-for-sale – debt securities |
| |
| | ||
Change in OCI from AFS securities – debt securities |
| |
| | ||
Balance at end of period | $ | ( | $ | ( | ||
4. Mortgages Receivable
The Company offers secured, non-bank loans to real estate owners and investors (also known as “hard money” loans) to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the Northeastern United States and Florida. The Company’s lending standards typically require that the original principal amount of all mortgage receivable notes be secured by first mortgage liens on one or more properties owned by the borrower or related parties and that the maximum LTV be no greater than 70% of the appraised value of the underlying collateral, as determined by an independent appraiser at the time of the loan origination. The Company considers the maximum LTV as an indicator for the credit quality of a mortgage note receivable. In the case of properties undergoing renovation, the loan-to-value ratio is calculated based on the estimated fair market value of the property after the renovations have been completed. However, the Company makes exceptions to this guideline if the facts and circumstances support the incremental risk. These factors include the additional collateral provided by the borrower, the
12
credit profile of the borrower, the Company’s previous relationship, if any, with the borrower, the nature of the property, the geographic market in which the property is located and any other information the Company deems appropriate.
The loans are generally for a term of to
Allowance for credit losses are charged to income in amounts sufficient to maintain an allowance for credit losses inherent in the loans which are established systematically by management as of the reporting date. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. The Company uses static pool modeling techniques to determine the allowance for loan losses expected over the remaining life of the loans, which is supplemented by management judgment. Expected losses are estimated for groups of accounts aggregated by geographical location.
The Company’s estimate of expected credit losses includes a reasonable and supportable forecast period equal to the contractual term of the loan plus any applicable short-term extensions that are reasonably expected for construction loans. The Company reviews charge-off experience factors, contractual delinquency, historical collection rates, the value of underlying collateral and other information to make the necessary judgments as to credit losses expected in the portfolio as of the reporting date. While management utilizes the best information available to make its evaluations, changes in macroeconomic conditions, interest rate environments, or both, may significantly impact the assumptions and inputs used in determining the allowance for credit losses. The Company’s charge-off policy is based on a loan by loan review of delinquent loans. The Company has an accounting policy to not place loans on nonaccrual status unless they are greater than 90 days delinquent. Accrual of interest income is generally resumed when delinquent contractual principal and interest is paid or when a portion of the delinquent contractualy payments are made and the ongoing required contractual payments have been made for an appropriate period.
As of March 31, 2023 and December 31, 2022, the Company had an outstanding principal balance of $
For the three months ended March 31, 2023 and 2022, the aggregate amounts of loans funded by the Company were $
As of March 31, 2023, the Company’s mortgage loan portfolio includes loans ranging in size up to $
At March 31, 2023, and December 31, 2022, no single borrower or group of related borrowers had loans outstanding representing more than
The Company may agree to extend the term of a loan if, at the time of the extension, the loan and the borrower meet all the Company’s then underwriting requirements. The Company treats a loan extension as a new loan. If an interest reserve is established at the time a loan is funded, accrued interest is paid out of the interest reserve and recognized as interest income at the end of each month. If no reserve is established, the borrower is required to pay the interest monthly from its own funds. The deferred origination, loan servicing and amendment fee income represents amounts that will be recognized over the contractual life of the underlying mortgage notes receivable.
Allowance for Credit Loss
In assessing the Allowance for Credit Losses (“CECL Allowance”), the Company considers historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. The Company derived an annual historical loss rate based on its historical loss experience in its portfolio, adjusted to incorporate the risks of construction lending and to reflect the Company’s expectations of the macroeconomic environment.
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The following table summarizes the activity in the CECL Allowance from adoption on January 1, 2023:
CECL Allowance | Provision for | CECL | |||||||||||||
as of December | Adoption of ASU | CECL | Allowance as of | ||||||||||||
(dollars in thousands) |
| 31, 2022(1) |
| 2016-13 (2) |
| Charge-offs |
| Allowance |
| March 31, 2023 | |||||
Geographical Location | |||||||||||||||
New England | $ | | $ | | $ | — | $ | | $ | | |||||
West |
| — |
| |
| — |
| — |
| | |||||
South |
| — |
| |
| — |
| |
| | |||||
Mid-Atlantic |
| — |
| |
| — |
| ( |
| | |||||
Total | $ | | $ | | $ | — | $ | | $ | | |||||
(1) As of December 31, 2022, amounts represent probable loan loss provisions recorded before the adoption of the ASU 2016-13.
(2) As a component of the adoption of ASU 2016-13, $
Presented below is the Company’s loan portfolio by geographical location:
| March 31, 2023 |
| December 31, 2022 |
| |||||||
(dollars in thousands) |
| Carrying Value |
| % of Portfolio |
| Carrying Value |
| % of Portfolio | |||
Geographical Location | |||||||||||
New England | $ | |
| | % | $ | |
| | % | |
West |
| |
| | % |
| |
| | % | |
South |
| |
| | % |
| |
| | % | |
Mid-Atlantic |
| |
| | % |
| |
| | % | |
Total | |
| | % | |
| | % | |||
Less, CECL Allowance |
| |
| | |||||||
Carrying value, net | $ | |
| $ | | ||||||
Presented below are the carrying values by Property Type:
| March 31, 2023 |
| December 31, 2022 |
| |||||||
Outstanding | Outstanding | ||||||||||
(dollars in thousands) |
| Principal |
| % of Portfolio |
| Principal |
| % of Portfolio |
| ||
Property Type |
| ||||||||||
Residential | $ | |
| | % | $ | |
| | % | |
Commercial |
| |
| | % |
| |
| | % | |
Land |
| |
| | % |
| |
| | % | |
Mixed use |
| |
| | % |
| |
| | % | |
Total | |
| | % | |
| | % | |||
Less, CECL Allowance |
| |
|
| |
|
| ||||
Carrying value, net | $ | | $ | |
|
| |||||
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The following tables allocate the carrying value of the Company’s loan portfolio based on internal credit quality indicators in assessing estimated credit losses and vintage of origination at the dates indicated:
March 31, 2023 | Year Originated(1) | |||||||||||||||||||
Carrying | % of | |||||||||||||||||||
FICO Score (2) (dollars in thousands) |
| Value |
| Portfolio |
| 2023 |
| 2022 |
| 2021 |
| 2020 |
| Prior | ||||||
| ||||||||||||||||||||
Under 500 |
| $ | |
| | % | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | |
501-550 |
| |
| | % | — |
| — |
| |
| |
| | ||||||
551-600 |
| |
| | % | — |
| |
| |
| |
| | ||||||
601-650 |
| |
| | % | |
| |
| |
| |
| | ||||||
651-700 |
| |
| | % | |
| |
| |
| |
| | ||||||
701-750 |
| |
| | % | |
| |
| |
| |
| | ||||||
751-800 |
| |
| | % | |
| |
| |
| |
| | ||||||
801-850 |
| |
| | % | — |
| |
| — |
| |
| | ||||||
Total |
| |
| | % | $ | |
| $ | |
| $ |
| $ | |
| $ | | ||
Less, CECL Allowance |
| | ||||||||||||||||||
Carrying value, net |
| $ | | |||||||||||||||||
(1) | Represents the year of origination or amendment where the loan was subject to a full re-underwriting. |
(2) | The FICO Scores are calculated at the inception of the loan and are updated if the loan is modified or on an as needed basis. |
December 31, 2022 | Year Originated(1) | |||||||||||||||||||
Carrying | % of | |||||||||||||||||||
FICO Score (2) (dollars in thousands) |
| Value |
| Portfolio |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| Prior | ||||||
| ||||||||||||||||||||
Under 500 |
| $ | |
| | % | $ | — |
| $ | — |
| $ | |
| $ | |
| $ | |
501-550 |
| |
| | % | — |
| |
| |
| |
| | ||||||
551-600 |
| |
| | % | |
| |
| |
| |
| | ||||||
601-650 |
| |
| | % | |
| |
| |
| |
| | ||||||
651-700 |
| |
| | % | |
| |
| |
| |
| | ||||||
701-750 |
| |
| | % | |
| |
| |
| |
| | ||||||
751-800 |
| |
| | % | |
| |
| |
| |
| | ||||||
801-850 |
| |
| | % | |
| — |
| |
| — |
| | ||||||
Total |
| |
| | % | $ | |
| $ | |
| $ | |
| $ | |
| $ | | |
Less, CECL Allowance |
| | ||||||||||||||||||
Carrying value, net |
| $ | | |||||||||||||||||
(1) | Represents the year of origination or amendment where the loan was subject to a full re-underwriting. |
(2) | The FICO Scores are calculated at the inception of a loan and are updated if the loan is modified or on an as needed basis. |
15
The following table sets forth the maturities of mortgages receivable as of March 31, 2023 and December 31, 2022:
| As of March 31, 2023 |
| As of December 31, 2022 | |||
2023 and prior | $ | | $ | | ||
2024 |
| |
| | ||
2025 |
| |
| | ||
2026 |
| — |
| — | ||
2027 | — | — | ||||
Thereafter | | | ||||
Total | | | ||||
Less, CECL Allowance | | | ||||
Total | $ | | $ | | ||
At March 31, 2023, of the
At March 31, 2023, of the
At December 31, 2022, of the
At December 31, 2022, of the
5. Real Estate Owned
Property purchased for rental or acquired through foreclosure are included on the balance sheet as real estate owned.
As of March 31, 2023 and March 31, 2022, real estate owned totaled $
As of March 31, 2023, real estate owned included $
Properties Held for Sale
During the three months ended March 31, 2023, the Company sold two properties held for sale and recognized an aggregate gain of $
16
Properties Held for Rental
As of March 31, 2023,
Rental payments due from real estate held for rental are as follows:
Year ending December 31, 2023 |
| $ | |
Year ending December 31, 2024 |
| | |
Year ending December 31, 2025 |
| | |
Year ending December 31, 2026 | | ||
Total | $ | |
6. Other Assets
As of March 31, 2023 and December 31, 2022, other assets consists of the following:
| March 31, 2023 |
| December 31, 2022 | |||
Prepaid expenses | $ | | $ | | ||
Other receivables |
| |
| | ||
Other assets |
| |
| | ||
Goodwill | | | ||||
Intangible asset – trade name | | | ||||
Deferred financing costs, net |
| |
| | ||
Total | $ | | $ | | ||
17
7. Line of Credit, Mortgage Payable, Churchill Facility, Credit Facility
Wells Fargo Margin Line of Credit
During the year ended December 31, 2020, the Company established a margin loan account at Wells Fargo Advisors that is secured by the Company’s portfolio of short-term securities. The credit line bears interest at a rate equal to
Mortgage Payable
In 2021, the Company obtained a $
On February 28, 2023, the Company refinanced the NHB Mortgage with a new $
Churchill MRA Funding I LLC Repurchase Financing Facility
On July 21, 2021, the Company consummated a $
The Facility is subject to other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements. Under one such covenant, the Company (A) is prohibited from (i) paying any dividends or making distributions in excess of 90% of its taxable income, (ii) incurring any indebtedness or (iii) purchasing any of its capital stock, unless, it has an asset coverage ratio of at least
18
The Company uses the proceeds from the Facility to finance the continued expansion of its lending business and for general corporate purposes. At March 31, 2023, the total amount outstanding under the Facility was $
Each of the New NHB Mortgage and the Churchill Facility contain cross-default provisions.
Needham Bank Credit Facility
On March 2, 2023, the Company entered into a Credit and Security Agreement (the “Credit Agreement”), with Needham Bank, a Massachusetts co-operative bank, as the administrative agent (the “Administrative Agent”) for the lenders party thereto (the “Lenders”) with respect to a $
The Credit Facility is subject to other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements, including a covenant that requires the Company to maintain: (A) a ratio of Adjusted EBITDA (as defined in the Credit Agreement) to Debt Service (as defined in the Credit Agreement) of less than
19
8. Notes Payable
At March 31, 2023, the Company had an aggregate of $
| (i) | Notes having an aggregate principal amount of $ |
| (ii) | Notes having an aggregate principal amount of $ |
| (iii) | Notes having an aggregate principal amount of $ |
| (iv) | Notes having an aggregate principal amount of $ |
| (v) | Notes having an aggregate principal amount of $ |
| (vi) | Notes having an aggregate principal amount of $ |
| (vii) | Notes having an aggregate principal amount of $ |
The Notes were sold in underwritten public offerings, were issued in denomination of $
20
The following are the future principal payments on the notes payable as of March 31, 2023:
Year ending December 31, |
| Amount | |
Remainder of 2023 | $ | — | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Total principal payments |
| | |
Deferred financing costs |
| ( | |
Total notes payable, net of deferred financing costs | $ | | |
The estimated amortization of the deferred financing costs as of March 31, 2023 is as follows:
Year ending December 31, |
| Amount | |
Remainder of 2023 | $ | | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Total deferred costs | $ | | |
9. Accounts Payable and Accrued Liabilities
As of March 31, 2023 and December 31, 2022, accounts payable and accrued liabilities include the following:
| March 31, 2023 |
| December 31, 2022 | |||
Accounts payable and accrued expenses |
| $ | |
| $ | |
CECL - allowance for unfunded contractual obligation credit losses | | — | ||||
Other notes |
| |
| | ||
Accrued interest |
| |
| | ||
Total | $ | | $ | | ||
10. Fee and Other Income
For the three month periods ended March 31, 2023 and 2022, fee and other income consists of the following:
Three Months | ||||||
ended March 31, | ||||||
| 2023 |
| 2022 | |||
Late and other fees | $ | | $ | | ||
Processing fees |
| |
| | ||
Rental income, net |
| |
| | ||
Extension fees |
| |
| | ||
Other fees | | | ||||
Legal fees | | | ||||
Other income | | | ||||
Total | $ | | $ | | ||
21
11. Commitments and Contingencies
Origination and Modification Fees
Loan origination and modification fees generally range from
Year ending December 31, 2023 |
| $ | |
Year ending December 31, 2024 | | ||
Year ending December 31, 2025 | | ||
Total | $ | |
In instances in which mortgages are repaid before their maturity date, the balance of any unamortized deferred revenue is recognized in full at the time of repayment.
Employment Agreements
In February 2017, the Company entered into an employment agreement with John Villano, the material terms of which are as follows:
In July 2022, the Company entered into an employment agreement with John E. Warch, the material terms of which are as follows: (i) the employment term commenced on August 1, 2022 and will continue until terminated by either party; (ii) a base salary of $
Unfunded Commitments
At March 31, 2023, the Company had future funding obligations totaling $
22
Other
In the normal course of its business, the Company is named as a party-defendant in connection with tax foreclosure proceedings against properties on which it holds a first mortgage lien. The Company actively monitors these actions and, in all cases, believes there remains sufficient value in the subject property to assure that no loan impairment exists. At March 31, 2023, there were
In accordance with the asset purchase agreement with Urbane New Haven, LLC in October 2022 under certain circumstances the Company will be required to pay the seller
12. Related Party Transactions
In the ordinary course of business, the Company may originate, fund, manage and service loans to shareholders. The underwriting process on these loans adheres to prevailing Company policy. The terms of such loans, including the interest rate, income, origination fees and other closing costs are the same as those applicable to loans made to unrelated third parties in the portfolio. As of March 31, 2023, and 2022, loans to known shareholders totaled $
The wife of the Company’s chief executive officer was employed by the Company as its director of finance until the third quarter of 2022 when she retired. For the three month periods ended March 31, 2023 and 2022, she was paid $
13. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments in securities, investments in partnerships, and mortgage loans.
The Company maintains its cash and cash equivalents with various financial institutions. Accounts at the financial institution are insured by the Federal Deposit Insurance Corporation up to $
The Company is potentially subject to concentration of credit risk in its investment securities. Currently, all of its investment securities, which include common stocks, preferred stock, corporate bonds and mutual funds, are held at Wells Fargo Advisors. Wells Fargo Advisors is a member of the Securities Investor Protection Corporation (SIPC).
The Company makes loans that are secured by first mortgage liens on real property located primarily in Connecticut (approximately
Credit risks associated with the Company’s mortgage loan portfolio and related interest receivable are described in Note 4 - Mortgages Receivable.
23
14. Outstanding Warrants
In connection with a public offering that was consummated in October 2017, the Company issued to the underwriters warrants to purchase an aggregate of
15. Stock-Based Compensation and Employee Benefits
Stock-Based Compensation
On October 27, 2016, the Company adopted the 2016 Equity Compensation Plan (the “Plan”), the purpose of which is to align the interests of the Company’s officers, other employees, advisors and consultants or any subsidiary, if any, with those of the Company’s shareholders and to afford an incentive to such officers, employees, consultants and advisors to continue as such, to increase their efforts on the Company’s behalf and to promote the success of the Company’s business. The Plan is administered by the Compensation Committee. The maximum number of common shares reserved for the grant of awards under the Plan is
During the three months ended March 31, 2023 and 2022, the Company granted an aggregate of
With respect to the restricted common shares granted during the three months ended March 31, 2023, (i) an aggregate of
Stock based compensation for the three months ended March 31, 2023 and 2022 was $
Employee Benefits
On April 16, 2018, the Company’s Board of Directors approved the adoption of the Sachem Capital Corp. 401(k) Profit Sharing Plan (the “401(k) Plan”). All employees, who meet the participation criteria, are eligible to participate in the 401(k) Plan. Under the terms of the 401(k) Plan, the Company is obligated to contribute
16. Equity Offerings
On August 24, 2022, the Company filed a prospectus supplement to its Form S-3 Registration Statement covering the sale of up to $
17. Partnership Investments
As of March 31, 2023, the Company had invested an aggregate of approximately $
24
companies ranges up to
The Company’s partnership investments can be categorized into two fund structures, fund investments and direct loan investments. The fund investments primarily include investments in two funds that invest in mortgage loans to borrowers. The direct loan investments are through two partnerships whereby the Company directly invests in the participation of individual loans to borrowers. Both the fund and direct loan structure primarily invest in mortgage loans to borrowers with a majority of the deals being leveraged by a bank. These loans are primarily two to three year collateralized mortgage loans, often with contractual extension options for the borrowers of an additional year. The Company receives quarterly dividends from the partnerships that are composed of a preferred return, return of capital and promote depending on each loans waterfall calculation, as defined by the loan agreements. The Company cannot redeem its fund investment at any time, its investment will be repaid as the underlying loans are repaid. The Company expects to be repaid on its current investments by December 31, 2026.
For the three months ended March 31, 2023 and 2022, the partnerships generated $
At March 31, 2023, the Company had unfunded partnership commitments totaling approximately $
18. Special Purpose Acquisition Corporation
On March 24, 2021, the Company loaned $
On July 14, 2021, Sachem Acquisition Corp. filed a registration statement on Form S-1 registering the sale of
19. Series A Preferred Stock
The Company has designated
25
consideration as described in the Series A Designation Certificate. Except under limited circumstances, holders of the Series A Preferred Stock generally do not have any voting rights. The Company has reserved
20. Subsequent Events
From April 1, 2023 through May 12, 2023, the Company sold an aggregate of
On April 4, 2023, the Company’s Board of Directors declared a dividend of $
Management has evaluated subsequent events through May 12, 2023 the date on which the financial statements were available to be issued. Based on the evaluation, no adjustments were required in the accompanying financial statements.
26
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this report. Certain statements in this discussion and elsewhere in this report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. The actual results may differ materially from those anticipated in these forward-looking statements.
Company Overview
We are a Connecticut-based real estate finance company that specializes in originating, underwriting, funding, servicing and managing a portfolio of short-term (i.e., three years or less) loans secured by first mortgage liens on real property. From our inception in December 2010, through our initial public offering, in February 2017, we operated as a limited liability company. On February 9, 2017, we completed our initial public offering (the “IPO”), the primary purpose of which was to raise equity capital to fund mortgage loans, expand our mortgage loan portfolio and diversify our ownership so that we could qualify, for federal income tax purposes, as a real estate investment trust, or REIT. We believe that, since consummation of the IPO, we meet all the requirements to qualify as a REIT for federal income tax purposes and elected to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are entitled to claim deductions for distributions of taxable income to our shareholders thereby eliminating any corporate tax on such taxable income. Any taxable income not distributed to shareholders is subject to tax at the regular corporate tax rates and may also be subject to a 4% excise tax to the extent it exceeds 10% of our total taxable income. To maintain our qualification as a REIT, we are required to distribute each year at least 90% of our taxable income. As a REIT, we may also be subject to federal excise taxes and state taxes.
Review of the First Quarter and Outlook for Balance of Year
Compared to the first quarter of 2022, revenue increased 42.8%, net income attributable to common shareholders increased 22.3%, and earnings per share remained unchanged at $0.10 per share. The revenue increase was directly related to the growth in our lending activities, reflected in our interest income which had an increase of 29.0% and our income from partnership investments that had an increase of 101.7%. We also recorded an unrealized gain of approximately $716,000 on investment securities in the first quarter of 2023 compared to a loss of $1.1 million in the first quarter of 2022, reflecting a $1.8 million increase in the value of those securities. The increase in revenue was partly offset by a 61.1% increase in operating costs and expenses. The increase in operating expenses is mainly attributable to a 76.3% increase in interest and amortization of deferred financing costs and an 79.0% increase in compensation and related expenses. The increase in compensation expense is mainly attributable to the addition of a Chief Financial Officer in August 2022 as well as additional staff positions that are part of our long-term growth strategy. Mortgages receivable increased by 34.7% compared to the same prior year period, while cash and cash equivalents decreased 64.9%. The increase in mortgages receivable was primarily due to increase in lending.
Our primary business objective for 2023 remains to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term principally through dividends. We intend to achieve this objective by accelerating profitable growth and driving operational excellence. To accelerate profitable growth, we will continue to focus on selectively originating, managing, and servicing a portfolio of first mortgage real estate loans designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We are also targeting larger-value commercial loans with strong, experienced sponsors. To drive additional operational excellence, we continuously review, assess, and upgrade our existing operational processes, from workflows and employee roles/responsibilities to decision trees and data collection forms. Additionally, we continue to focus on developing relationships with larger scale wholesale brokers, furthering our efforts to attract larger borrowers with better credit quality. We believe that our ability to react quickly to the needs of borrowers, our flexibility in terms of structuring loans to meet the needs of borrowers, our knowledge of the primary real estate markets we lend in, our expertise in “hard money” lending and our focus on newly originated first mortgage loans, should enable us to achieve our primary objective. Nevertheless, we remain flexible to take advantage of other real estate opportunities that may arise from time to time, whether they relate to the mortgage market or to direct or indirect investments in real estate.
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Our overall business strategy is as follows:
| ● | capitalize on opportunities created by the long-term structural changes in the real estate lending market and the continuing lack of liquidity in the commercial and investment real estate markets; |
| ● | take advantage of the prevailing economic environment and current economic, political and social trends that may impact real estate lending, as well as the outlook for real estate in general and particular asset classes; |
| ● | remain flexible to capitalize on changing sets of investment opportunities that may be present in the various points of an economic cycle; |
| ● | continue to improve operational efficiencies and reduce general and administrative expenses as a percentage of revenue; |
| ● | maintain our status as a publicly-held company, subject to the reporting requirements of the Exchange Act, which gives us immediate access to the public markets for much-needed capital; and |
| ● | continue to operate to qualify as a REIT and continue to qualify for an exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. |
We expect 2023 to be a challenging year due to the following factors:
Interest rate compression. For the three months ended March 2023 and 2022, the yield on our mortgage loan portfolio, inclusive of default interest, was 11.69% and 11.30%, respectively. (For this purpose, yield only takes into account the stated interest rate on the mortgage note adjusted to the default rate, if applicable.) We believe the interest rate compression will continue to be a factor in 2023, particularly as the Federal Reserve Board continues to increase interest rates, thereby increasing our cost of capital. The rates on our existing credit facilities, including the Churchill Facility, the Wells Fargo Loan and the NHB Mortgage (refinanced in February 2023) (as defined below), have all increased. In addition, the interest rate on the September 2027 Notes, our last note offering in 2022, was 8%, the highest its ever been. Overall, our weighted average cost of capital as of March 31, 2023 was 7.23% compared to 6.08% as of March 31, 2022.
Geopolitical concerns. Various geopolitical concerns have led to market volatility, spikes in commodity prices, supply chain interruptions, heightened cybersecurity concerns and general concerns that it might lead to unconventional warfare. These concerns include the ongoing war between Russia and Ukraine, heightened tensions between the United States and China, Iran’s pursuit of nuclear weapons and North Korea’s ongoing belligerence. The true ramifications of this conflict and their impact on the markets and our business are not fully known at this time. Our business is purely domestic, but we are impacted by market volatility and cybersecurity is a concern for all businesses.
Increased competition. In the past, our primary competitors were other non-bank real estate finance companies (like Sachem Capital Corp.) and banks and other financial institutions. More recently, we are encountering competition from private equity funds, hedge funds and other specialty finance entities funded by investment banks, asset managers, private equity funds and hedge funds. Clearly, the primary driver for these new market participants is the need to generate yield. They are well-funded and aggressive in terms of pricing. In addition, competition is becoming more of a factor as we implement our strategy to focus on larger loans and more sophisticated borrowers. Given recent developments regarding mid-size regional banks, we believe competition from traditional banks will abate in 2023 rather than increase. However, as traditional banks exit the lending market, non-traditional lenders, such as non-bank real estate companies, hedge funds, private equity funds and insurance companies, are likely to step into the void. Our principal competitive advantages include our experience, our reputation, our size and our ability to address the needs of borrowers in terms of timing and structuring loan transactions.
Borrower expectations. The new competitive landscape is shifting the negotiating leverage in favor of borrowers. As borrowers have more choices, they are demanding better terms. This is particularly true as we focus more on larger loans and borrowers with better credit histories.
Property value fluctuations. We remain aware of property value market cycles and utilize a dashboard of indicators to track property value trends. Our response to this development would be to adhere to our underwriting guidelines and aggressively enforce our rights when loans go into default. By judiciously relying on our dashboard of leading indicators and continuing to make decisions
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in a sound and proper manner, we see no reason to expect any negative outcome regarding our business operations and growth. Some of our indicators within our dashboard are interest rate changes impacting mortgage rates, days-on-market, pending sales, NAHB’s Housing Market Index and the Senior Loan Officer Opinion Survey.
Increased operating expenses. Our operating expenses for the three months ended March 31, 2023 are significantly higher than they were in 2022 due to our higher debt load. In addition, we expect that our aggregate dividend payments will be higher in 2023 than in 2022 due to an increase in the number of our common shares (“Common Shares”) outstanding as well as the full year effect of our Series A Preferred Stock (“Series A Preferred Stock”), which carries a 7.75% annual dividend rate. Finally, our compensation expense has increased as we hired new personnel and increased salaries of existing employees to administer a larger loan portfolio and more complex loan transactions.
Unfunded commitments. Most of our loans are funded in full at closing. However, where all or a portion of the loan proceeds are to be used to fund the costs of renovating or constructing improvements on the property, only a portion of the loan may be funded at closing. At March 31, 2023, our mortgage loan portfolio included 171 loans with future funding obligations, in the aggregate principal amount of $114.9 million, compared to 204 loans in the aggregate principal amount of $115.4 million at March 31, 2022. Advances under construction loans are funded against requests supported by all required documentation (including lien waivers) as and when needed to pay contractors and other costs of construction. In order to deal with these obligations, we are compelled to maintain higher cash balances, which could adversely impact our financial performance.
Despite these challenges we continue to believe in the viability of our business model. We believe that there continues to be a significant market opportunity for a well-capitalized “hard money” lender to originate attractively priced loans to small- and mid-scale real estate developers with good collateral, particularly in markets where, traditionally, real estate values are stable and substandard properties are improved, rehabilitated, and renovated as well as under-developed markets that are experiencing rapid growth due to population shifts. We also believe developers will prefer to borrow from us rather than other lending sources because of flexibility in structuring loans to suit their needs, our lending criteria, which places greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, and our ability to close quickly. Our goal is, and has always been, to continue to grow our mortgage loan portfolio and increase our loan profitability, while at the same time maintain or improve our existing underwriting and loan criteria.
Financing Strategy Overview
To continue to grow our business, we must increase the size of our loan portfolio, which requires that we use our existing working capital to fund new loans and raise additional capital either by selling shares of our capital stock or by incurring additional indebtedness and we are mindful of the need to repay it at the appropriate time. Although we have no pre-set guidelines in terms of leverage ratio, the amount of leverage we will deploy will depend on our assessment of a variety of factors, which may include the liquidity of the real estate market in which most of our collateral is located, employment rates, general economic conditions, the cost of funds relative to the yield curve, the potential for losses and extension risk in our portfolio, the gap between the duration of our assets and liabilities, our opinion regarding the creditworthiness of our borrowers, the value of the collateral underlying our portfolio, and our outlook for interest rates and property values. At March 31, 2023, debt represented approximately 59.9% of our total capital compared to 55.5% at March 31, 2022. To prudently grow the business and satisfy the tax requirement to distribute 90% of our taxable income, we expect to maintain our current level of debt and look to reduce our cost of capital. We intend to continue to leverage our portfolio for the sole purpose of financing our portfolio and not for speculating on changes in interest rates.
As of March 31, 2023, we had seven series of unsecured unsubordinated notes outstanding, having an aggregate outstanding principal balance of $288.4 million (collectively, the “Notes”) all of which rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness and are effectively subordinated in right of payment to all existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant a security interest) and structurally subordinated to all existing and future indebtedness of our subsidiaries. Interest on each series of notes is payable quarterly in arrears on each March 30, June 30, September 30 and December 30 of each year they are outstanding and, except as noted below, each series can be prepaid beginning on the second anniversary of its date of issuance. The net proceeds, net of the deferred financing costs, was approximately $276.4 million.
| ● | $40,250,000 aggregate original principal amount, issued August 23, 2022, bearing interest at the rate of 8.00% per annum and maturing on September 30, 2027 (the “September 2027 Notes”) and which trade on the NYSE American under the symbol SCCG; |
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| ● | $30,000,000 aggregate original principal amount, issued May 11, 2022, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2027 (the “June 2027 Notes”) and which trade on the NYSE American under the symbol SCCF; |
| ● | $51,875,000 aggregate original principal amount, issued March 9, 2022, bearing interest at the rate of 6.00% per annum and maturing on March 30, 2027 (the “March 2027 Notes”) and which trade on the NYSE American under the symbol SCCE; |
| ● | $51,750,000 million original principal amount, issued December 20, 2021, bearing interest at the rate of 6.00% per annum and maturing on December 30, 2026 (the “2026 Notes”) and which trade on the NYSE American under the symbol SCCD; |
| ● | $56,363,750 million aggregate original principal amount, of which approximately $14.4 million was issued September 4, 2020, $14.0 million was issued October 23, 2020 and $28.0 million was issued December 22, 2020, bearing interest at the rate of 7.75% per annum and maturing on September 30, 2025 (the “2025 Notes”) and which trade on the NYSE American under the symbol SCCC; |
| ● | $34,500,000 million original principal amount, issued November 7, 2019, bearing interest at the rate of 6.875% per annum and maturing on December 30, 2024 (the “December 2024 Notes”) and which trade on the NYSE American under the symbol SACC; and |
| ● | $23,663,000 million original principal amount, issued June 25, 2019, bearing interest at the rate of 7.125% per annum and maturing on June 30, 2024 (the “June 2024 Notes”) and which trade on the NYSE American under the symbol SCCB. |
Each series of Notes was issued pursuant to the Indenture, dated June 21, 2019, and a supplement thereto, which provides for the form and terms, including default provisions and cures, applicable to each series. All the Notes are subject to (i) “Defeasance,” which means that, by depositing with a trustee an amount of cash and/or government securities sufficient to pay all principal and interest, if any, on such notes when due and satisfying any additional conditions required under the Indenture, we will be deemed to have been discharged from our obligations under such notes and (ii) an “Asset Coverage Ratio” requirement pursuant to which we may not (x) pay any dividends or make distributions in excess of 90% of our taxable income, (y) incur any indebtedness or (z) purchase any shares of our capital stock unless we have an “Asset Coverage Ratio” of at least 150% after giving effect to the payment of such dividend, the making of such distribution or the incurrence of such indebtedness. “Asset Coverage Ratio” means the ratio (expressed as a percentage) of the value of our total assets relative to the aggregate amount of its indebtedness.
Under the terms of the Indenture, we may, at our option, at any time and from time to time, on or after two years from the date of issuance redeem the Notes. Accordingly, notes in the aggregate principal amount of approximately $114.5 million are currently redeemable. Notes in the aggregate principal amount of $51.75 million will become redeemable on December 20, 2023 and Notes in the aggregate principal amount of $122.13 million will become redeemable at various dates in 2024. In all cases, the redemption price equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest to, but excluding, the date fixed for redemption. On and after any redemption date, interest will cease to accrue on the redeemed notes.
Our secured indebtedness includes the Churchill Facility, the Wells Fargo Loan, the New NHB Mortgage and the Needham Credit Facility (each as described below).
On July 21, 2021, we consummated a $200 million facility (the “Churchill Facility”) with Churchill MRA Funding I LLC (“Churchill”). Under the terms of the Churchill Facility, we have the right, but not the obligation, to sell mortgage loans to Churchill, and Churchill has the right, but not the obligation, to purchase those loans. In addition, we have the right and, in some instances the obligation, to repurchase those loans from Churchill. The amount that Churchill will pay for each mortgage loan it purchases will vary based on the attributes of the loan and various other circumstances but generally will not exceed 70% of the unpaid principal balance purchased. The repurchase price is calculated by applying an interest factor, as defined, to the purchase price of the mortgage loan. We also granted Churchill a first priority security interest on the mortgage loans sold to Churchill to secure our repurchase obligation. The cost of capital under the Churchill Facility is equal to the sum of (a) the greater of (i) 0.25% and (ii) the 90-day SOFR plus (b) 3% - 4%, depending on the aggregate principal amount of the mortgage loans held by Churchill at that time. Our obligations under the Churchill Facility are secured by a lien on the mortgage loans sold to Churchill. The Churchill Facility is also subject to various terms
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and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements, including a covenant that (A) prohibits us from (i) paying any dividend or make any distribution in excess of 90% of our taxable income, (ii) incurring any indebtedness or (iii) purchasing any shares of our capital stock, unless, in any case, we have an asset coverage ratio of at least 150%; and (B) requires us to maintain unencumbered cash and cash equivalents in an amount equal to or greater than 2.50% of the amount of our repurchase obligations. Churchill has the right to terminate the Churchill Facility at any time upon 180 days prior notice to us. At such time, we have an additional 180 days after termination to repurchase all the mortgage loans held by Churchill. We believe the Churchill Facility gives us the ability to raise capital as needed at a relatively low rate. It also gives us the flexibility to seek other sources of funding. At March 31, 2023, the amount outstanding under the Churchill Facility was approximately $54.1 million, which amount was accruing interest of an effective rate of 9.09% per annum.
In 2020, we established a margin loan account with Wells Fargo that allows us to borrow against our investment securities portfolio (the “Wells Fargo Loan”). The Wells Fargo Loan is secured by our portfolio of short-term securities, had a balance of approximately $13.7 million at March 31, 2023. The outstanding balance on this loan bears interest at a rate equal to 1.75% below the prime rate. At March 31, 2023 the prime rate was 8.0% and the interest rate on the Wells Fargo Loan was, thus, 6.25%.
In 2021, we obtained a $1.4 million adjustable-rate mortgage loan from New Haven Bank (the “NHB Mortgage”) of which $750,000 was funded at closing and remained outstanding as of December 31, 2022. The purpose of the NHB Mortgage was to fund the cost of our acquisition and renovation of the property located at 568 East Main Street, Branford, Connecticut, as our new corporate headquarters. The balance of the NHB Mortgage was to be funded when those renovations were completed. Prior to its refinancing in February 2023, as described below, the NHB Mortgage accrued interest at an initial rate of 3.75% per annum for the first 72 months and was to be due and payable in full on December 1, 2037. During the first 12 months, from December 1, 2021 to November 30, 2022, only interest was due and payable. Beginning December 1, 2022 and through December 1, 2037, principal and interest was to be due and payable monthly, based on a 20-year amortization schedule.
On February 28, 2023, we refinanced the NHB Mortgage with a new $1.66 million adjustable-rate mortgage loan from New Haven Bank (the “New NHB Mortgage”). The new loan accrues interest at an initial rate of 5.75% per annum for the first 60 months. The interest rate will be adjusted on each of March 1, 2028 and March 1, 2033 to the then published 5-year Federal Home Loan Bank of Boston Classic Advance Rate, plus 1.75%. Beginning on April 1, 2023 and through March 1, 2038, principal and interest will be due and payable monthly, based on a 20-year amortization schedule. The unpaid principal amount of the loan and all accrued and unpaid interest are due and payable in full on March 1, 2038. The new loan is a non-recourse obligation, secured primarily by a first mortgage lien on the properties located 698 Main Street, Branford, Connecticut and 568 East Main Street, Branford, Connecticut.
On March 2, 2023, we entered into a Credit and Security Agreement (the “Credit Agreement”), with Needham Bank, a Massachusetts co-operative bank, as the administrative agent (the “Administrative Agent”) for the lenders party thereto (the “Lenders”) with respect to a $45 million revolving credit facility (the “Needham Credit Facility”). Under the Credit Agreement, we have the right to request an increase in the size of the Needham Credit Facility up to $75 million, subject to certain conditions, including the approval of the Lenders. Loans under the Needham Credit Facility accrue interest at the greater of (i) the annual rate of interest equal to the “prime rate,” as published in the “Money Rates” column of The Wall Street Journal minus one-quarter of one percent (0.25%), and (ii) four and one-half percent (4.50%). All amounts borrowed under the Needham Credit Facility are secured by a first priority lien on virtually all our assets. Assets excluded from the lien include real estate owned by us (other than real estate acquired pursuant to foreclosure) and mortgages sold under the Churchill Facility. The Needham Credit Facility expires March 2, 2026 subject to our right to extend the term for one year upon the consent of the Administrative Agent and the Lenders, which consent cannot be unreasonably withheld, and so long as we are not in default and satisfy certain other conditions. All outstanding revolving loans and accrued but unpaid interest are due and payable on the expiration date. We have the right to terminate the Needham Credit Facility at any time without premium or penalty by delivering written notice to the Administrative Agent at least ten (10) days prior to the proposed date of termination. The Needham Credit Facility is subject to other terms and conditions, including representations and warranties, covenants and agreements typically found in these types of financing arrangements, including a covenant that requires us to maintain: (A) a ratio of Adjusted EBITDA (as defined in the Credit Agreement) to Debt Service (as defined in the Credit Agreement) of less than 1.40 to 1.0, tested on a trailing-twelve-month basis at the end of each fiscal quarter, commencing with the quarter ending June 30, 2023; (B) a sum of cash, cash equivalents and availability under the facility equal to or greater than $10 million; and (C) an asset coverage ratio of at least 150%. As of March 31, 2023, we have not yet drawn on the Needham Credit Facility.
Finally, from time-to-time we raise capital by selling our Common Shares in various at-the market offerings. During the three months ended March 31, 2023, under our at-the-market offering facility (see Note 16 to the consolidated financial statements), we sold
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an aggregate of 2,479,798 Common Shares, realizing gross proceeds of approximately $9.4 million and we sold shares of Series A Preferred Stock having an aggregate liquidation preference of $154,675, realizing gross proceeds of $139,500 representing a discount of approximately 10% from the liquidation preference. As of the date of this Report, we have approximately $61.4 million of availability remaining for sale through one of these offerings.
REIT Qualification
We believe that we have qualified as a REIT since the consummation of the IPO and that it is in the best interests of our shareholders that we operate as a REIT. We made the election to be taxed as a REIT beginning with our 2017 tax year. As a REIT, we are required to distribute at least 90% of our taxable income to our shareholders on an annual basis. We cannot assure you that we will be able to maintain REIT status.
Our qualification as a REIT depends on our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended, relating to, among other things, the sources of our gross income, the composition and values of our assets, our compliance with the distribution requirements applicable to REITs and the diversity of ownership of our outstanding Common Shares. We cannot assure you that we will be able to maintain our qualification as a REIT.
So long as we qualify as a REIT, we, generally, will not be subject to U.S. federal income tax on our taxable income that we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate income tax rates and may be precluded from electing to be treated as a REIT for four taxable years following the year during which we lose our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income.
Critical Accounting Policies and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management will base the use of estimates on (a) various assumptions that consider prior reporting results, (b) projections regarding future operations and (c) general financial market and local and general economic conditions. Actual amounts could differ materially from those estimates.
Interest income from commercial loans is recognized, as earned, over the loan period, whereas origination and modification fee revenue on commercial loans are amortized over the term of the respective notes.
Results of Operations
Three months ended March 31, 2023 compared to three months ended March 31, 2022
Total revenue
Total revenue for the three months ended March 31, 2023 was approximately $14.7 million compared to approximately $10.3 million for the three months ended March 31, 2022, an increase of approximately $4.4 million, or 42.8%. The increase in revenue is primarily attributable to an increase in our lending operations. For the 2023 period, interest income was approximately $11.0 million compared to approximately $8.5 million for the 2022 period, an increase of approximately $2.5 million or 29.0%. Income from partnership investments was approximately $550,000 for the 2023 period compared to approximately $272,000 for the 2022 period, an increase of approximately $277,000 or 101.7%. Other income was approximately $708,000 for the 2023 period compared to approximately $609,000 for the 2022 period, an increase of approximately $99,000 or 16.3%. In addition, unrealized gains on investment securities for the 2023 period were approximately $716,000 compared to an unrealized loss of approximately $1.1 million on investment securities in the 2022 period. The increases were partially offset by a decrease in origination and modification fees of approximately $368,000, or 20% in the 2023 period, from approximately $1.8 million in the 2022 period to approximately $1.5 million in the 2023 period.
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Operating costs and expenses
Total operating costs and expenses for three months ended March 31, 2023 were approximately $9.6 million compared to approximately $5.9 million for the three months ended March 31, 2022, an increase of approximately $3.6 million or 61.1%. The increase in operating costs and expenses is primarily attributable to the increase in our unsecured bond debt while growing our lending operations. In the 2023 period, interest and amortization of deferred financing costs were approximately $6.9 million compared to approximately $3.9 million in the same 2022 period, an increase of approximately $3.0 million or 76.3%. The remaining fluctuations in operating expenses were primarily attributable to (i) compensation, fees and taxes which increased approximately $785,000, and (ii) general and administrative expenses which increased approximately $266,000, partially offset by an increase in gain on sale of real estate of approximately $214,000 and a decrease in impairment loss of approximately $156,000.
Comprehensive income
For the quarter ended March 31, 2023, we reported an unrealized gain on investment securities of approximately $92,000 reflecting the decrease in prior unrealized losses since December 31, 2022. For the quarter ended March 31, 2022, we reported an unrealized gain on investment securities of approximately $243,000 reflecting the decrease in prior unrealized losses since December 31, 2021.
Net income
Net income attributable to common shareholders for the three months ended March 31, 2023 was approximately $4.2 million, or $0.10 per share, compared to approximately $3.4 million, or $0.10 per share for the three months ended March 31, 2022.
Non-GAAP Metrics – Adjusted Earnings
We invest our excess cash in marketable securities. Under GAAP, those securities are required to be “marked to market” at the end of each reporting period. Accordingly, if the value of certain of those securities increases, the increase is reported as revenue, as has been the case in the first quarter of 2023 and the increase in the other securities is reported as a change in accumulated other comprehensive income. On the other hand, if the value decreases, the decrease in value of certain of the securities reduces our revenues. For income tax purposes, we do not report the gain or loss on those securities until they are sold. This creates a discrepancy between our GAAP net income and our taxable income. To maintain our status as a REIT, we are required to distribute, on an annual basis, at least 90% of our taxable income. Thus, to give our shareholders a better perspective of our taxable income, we use a metric called Adjusted Earnings.
Adjusted Earnings is calculated as net income attributable to common shareholders, prior to the effect unrealized gains (losses) on securities available-for-sale. Adjusted Earnings should be examined in conjunction with net income (loss) as shown in our statements of comprehensive income. Adjusted Earnings should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), or to cash flows from operating activities (determined in accordance with GAAP), as a measure of our liquidity. Similarly, Adjusted Earnings is not indicative of funds available to fund our cash needs or available for distribution to shareholders. Rather, Adjusted Earnings is an additional measure we use to analyze our business performance because it excludes the effects of certain non-cash charges that we believe are not necessarily indicative of our operating performance. It should be noted that our manner of calculating Adjusted Earnings may differ from the calculations of similarly-titled measures by other companies. In addition, there may be other differences between GAAP and tax accounting that would impact Adjusted Earnings, which are not reflected in the table below.
For the Period Ended March 31, | ||||||
| 2023 |
| 2022 | |||
Adjusted earnings: |
|
| ||||
Net income attributable to common shareholders | $ | 4,195,460 | $ | 3,429,700 | ||
Add: Unrealized (gains) losses on investment securities |
| (716,389) |
| 1,052,230 | ||
Adjusted earnings attributable to common shareholders | $ | 3,479,071 | $ | 4,481,930 | ||
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For the three months ended March 31, 2023 and 2022, Adjusted Earnings per share was $0.08 and $0.13, respectively.
Liquidity and Capital Resources
Total assets at March 31, 2023 were approximately $597.0 million compared to approximately $565.7 million at December 31, 2022, an increase of approximately $31.3 million, or 5.5%. The increase was due primarily to the increase of our mortgage loan portfolio of approximately $15.8 million, an increase in investments in partnerships of approximately $4.5 million and an increase in investment securities of approximately $11.3 million, offset in part by a decrease in cash and cash equivalents of approximately $3.4 million.
Total liabilities at March 31, 2023 were approximately $368.0 million compared to approximately $348.0 million at December 31, 2022, an increase of approximately $20.0 million, or 5.8%. This increase is principally due to increases in the repurchase facility of approximately $11.5 million and the line of credit of approximately $10.1 million, offset primarily by a decrease in accrued dividends payable of approximately $5.3 million.
Total shareholders’ equity at March 31, 2023 was approximately $229.0 million compared to approximately $217.7 million at December 31, 2022, an increase of approximately $11.3 million, or 5.2%. This increase was due primarily to net proceeds of $9.2 million from the sale of Common Shares and our net income of approximately $5.1 million, offset by dividends paid on our Series A Preferred Stock of approximately $0.9 million and a cumulative credit loss adjustment resulting from the adoption of ASU 2016-13 on January 1, 2023 of approximately $2.5 million.
Net cash provided by operating activities for the three months ended March 31, 2023 was approximately $5.0 million compared to approximately $7.6 million for the comparable 2022 period. For the 2023 period net cash provided by operating activities consisted primarily of net income of approximately $5.1 million, amortization of deferred financing costs and bond discount of approximately $600,000 and increases in deferred revenue of approximately $321,000 and advances from borrowers of approximately $1.4 million, offset by gain on the sale of real estate of approximately $148,000, unrealized gain on investment securities of approximately $716,000, gain on the sale of investment securities of approximately $276,000 and increases in due from borrowers of approximately $783,000, other assets of approximately $500,000, and interest and fees receivable of approximately $366,000. For the 2022 period net cash provided by operating activities consisted primarily of net income of approximately $4.4 million, amortization of deferred financing costs and bond discount of approximately $469,000, an impairment loss of approximately $261,000, a loss on the sale of marketable securities of approximately $154,000, unrealized loss on investment securities of approximately $1.1 million, and increases in advances from borrowers of approximately $1.6 million, deferred revenue of $233,000 and accrued interest of $122,000, offset by increases in interest and fees receivable of approximately $396,000, other receivables of approximately $211,000 and due from borrowers of approximately $292,000.
Net cash used for investing activities for the three months ended March 31, 2023 was approximately $34.0 million compared to approximately $48.4 million for the comparable 2022 period. For the 2023 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $14.0 million, net purchases of interests in investment partnerships of approximately $4.5 million, purchase of property and equipment of approximately $711,000 and principal disbursements for mortgages receivable of approximately $58.9 million, offset by principal collections on mortgages receivable of approximately $39.9 million, proceeds from sale of real estate owned of approximately $515,000 and by proceeds from the sale of investment securities of approximately $3.8 million. For the 2022 period, net cash used for investing activities consisted primarily of purchases of investment securities of approximately $27.5 million, purchases of interests in investment partnerships of approximately $11.4 million and principal disbursements for mortgages receivable of approximately $88.7 million, offset by principal collections on mortgages receivable of approximately $27.1 million, proceeds from the sale of investment securities of approximately $51.7 million and proceeds from the sale of real estate owned of $623,000.
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Net cash provided by financing activities for the three months ended March 31, 2023 was approximately $25.6 million compared to approximately $56.8 million for the comparable 2022 period. Net cash provided by financing activities for the 2023 period consists principally of net proceeds from the issuance of Common Shares of approximately $9.2 million, net proceeds from line of credit of approximately $10.1 million, net proceeds from repurchase facility of approximately $11.5 million and proceeds from mortgage of $910,000, offset primarily by dividends paid on common stock of approximately $5.3 million and preferred stock of approximately $925,000. Net cash provided by financing activities for the 2022 period consists principally of net proceeds from the issuance of fixed rate notes of $48.2 million, net proceeds from the issuance of Common Shares of approximately $15.5 million and net proceeds from repurchase facility of approximately $7.9 million, offset by repayment of line of credit of approximately $9.9 million, dividends paid on Common Shares of approximately $3.9 million and dividends paid on preferred stock of approximately $922,000.
We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs. Our short-term cash requirements primarily include funding of loans and construction draws and payments for usual and customary operating and administrative expenses, such as interest payments on notes payable, employee compensation, sales, marketing expenses and dividends. Based on this analysis, we believe that our current cash balances, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.
Our long-term cash needs will include principal payments on outstanding indebtedness and funding of new mortgage loans. Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows and proceeds from sales of real estate owned.
From and after the effective date of our REIT election, we intend to pay regular quarterly distributions to holders of our Common Shares in an amount not less than 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gains).
Subsequent Events
Management has evaluated subsequent events through May 12, 2023 the date on which the financial statements were available to be issued. Based on the evaluation, no adjustments were required in the accompanying financial statements.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources.
Contractual Obligations
As of March 31, 2023, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans as well as contractual obligations consisting of operating leases for equipment, software licenses and investment in partnerships.
Less than | 1 – 3 | 3 – 5 | More than | ||||||||||||
| Total |
| 1 year |
| years |
| years |
| 5 years | ||||||
Investment in partnerships | $ | 572,518 | $ | 572,518 | $ | — | $ | — | $ | — | |||||
Unfunded loan commitments |
| 114,851,913 |
| 114,851,913 |
| — |
| — |
| — | |||||
Total contractual obligations | $ | 115,424,431 | $ | 115,424,431 | $ | — | $ | — | $ | — | |||||
Critical Accounting Policies and Recent Accounting Pronouncements
See “Note 2 — Significant Accounting Policies” to the financial statements for explanation of recent accounting pronouncements impacting us included elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. CONTROLS AND PROCEDURES
(a) | Evaluation and Disclosure Controls and Procedures |
Management, specifically our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2023 (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) are accumulated and communicated to management, specifically our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) | Changes in Internal Control Over Financial Reporting |
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS
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10.8** | ||
10.9** | ||
10.10** | ||
10.11** | ||
10.12** | ||
10.13** | Employment Agreement, dated July 26, 2022, by and between John E. Warch and Sachem Capital Corp.(18) | |
10.14 | ||
10.15** | ||
10.16** | ||
10.17** | ||
31.1 | Chief Executive Officer Certification as required under section 302 of the Sarbanes Oxley Act * | |
31.2 | Chief Financial Officer Certification as required under section 302 of the Sarbanes Oxley Act * | |
32.1 | ||
99.1 | ||
99.2 | ||
99.3 | Loan Agreement between Sachem Capital Corp. and New Haven Bank, dated as of February 28, 2023 (22) | |
99.4 | Mortgage Release releasing Sachem Capital Corp. from the $1.4 million mortgage loan (22) | |
101.INS | XBRL Instance Document * | |
101.SCH | XBRL Taxonomy Extension Schema Document * | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document * | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document * | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document * | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document * | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
* | Filed herewith. |
** | Compensation plan or arrangement for current or former executive officers and directors. |
*** | Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K. |
| (1) | Previously filed as an exhibit to the Registration Statement on Form S-11, as amended (SEC File No.: 333-214323) and incorporated herein by reference. |
| (2) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended September 30, 2019 and incorporated herein by reference. |
| (3) | Previously filed as an exhibit to the Current Report on Form 8-K on November 27, 2019 and incorporated herein by reference. |
| (4) | Previously filed as an exhibit to the Current Report on Form 8-K on June 25, 2019 and incorporated herein by reference. |
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| (5) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 2018 and incorporated herein by reference. |
| (6) | Previously filed as an exhibit to the Current Report on Form 8-K on November 6, 2019 and incorporated herein by reference. |
| (7) | Previously filed as an exhibit to the Current Report on Form 8-K on September 9, 2020 and incorporated herein by reference. |
| (8) | Intentionally omitted. |
| (9) | Previously filed as an exhibit to the Current Report on Form 8-K on June 29, 2021 and incorporated herein by reference. |
| (10) | Previously filed as an exhibit to the Current Report on Form 8-K on December 20, 2021 and incorporated herein by reference. |
| (11) | Previously filed as an exhibit to the Current Report on Form 8-K on April 13, 2021 and incorporated herein by reference. |
| (12) | Previously filed as an exhibit to the Current Report on Form 8-K on July 27, 2021 and incorporated herein by reference. |
| (13) | Intentionally omitted. |
| (14) | Previously filed as an exhibit to the Current Report on Form 8-K on March 9, 2022 and incorporated herein by reference. |
| (15) | Previously filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 2021 and incorporated herein by reference. |
| (16) | Previously filed as an exhibit to the Current Report on Form 8-K on May 12, 2022 and incorporated herein by reference. |
| (17) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended March 31, 2022 and incorporated herein by reference. |
| (18) | (Previously filed as an exhibit to the Current Report on Form 8-K on July 27, 2022 and incorporated herein by reference. |
| (19) | Previously filed as an exhibit to the Quarterly Report on Form 10-Q for the period ended June 30, 2022 and incorporated herein by reference. |
| (20) | Previously filed as an exhibit to the Current Report on Form 8-K on August 24, 2022 and incorporated herein by reference. |
| (21) | Previously filed as an exhibit to the Current Report on Form 8-K on August 23, 2022 and incorporated herein by reference. |
| (22) | Previously filed as an exhibit to the Current Report on Form 8-K on March 3, 2023 and incorporated herein by reference. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SACHEM CAPITAL CORP. | ||
Date: May 15, 2023 | By: | /s/ John L. Villano |
|
| John L. Villano, CPA |
President, Chief Executive Officer and Interim Chief Financial Officer | ||
(Principal Executive, Accounting and Financial Officer) | ||
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