Sachem Capital(SACH) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The company's unaudited statements detail its financial position, performance, and cash flows for the period Balance Sheets | Metric | Sep 30, 2022 (unaudited) | Dec 31, 2021 (audited) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $35,464,257 | $41,938,897 | | Investment securities | $34,351,374 | $60,633,661 | | Mortgages receivable | $448,524,665 | $292,301,209 | | Total assets | $561,821,384 | $417,961,751 | | Liabilities | | | | Notes payable (net) | $279,557,613 | $160,529,363 | | Repurchase facility | $43,100,146 | $19,087,189 | | Total liabilities | $342,521,410 | $237,879,190 | | Shareholders' Equity | | | | Total shareholders' equity | $219,299,974 | $180,082,561 | | Total liabilities and shareholders' equity | $561,821,384 | $417,961,751 | - Total assets increased by $143.8 million (34.4%) from December 31, 2021, to September 30, 2022, primarily driven by a $156.2 million increase in the mortgage loan portfolio and a $16.5 million increase in partnership investments, partially offset by a $32.8 million decrease in cash and investment securities[185] - Total liabilities rose by $104.6 million (44.0%) over the same period, mainly due to increases in the repurchase facility ($24.0 million, 125.8%) and notes payable ($119.0 million, 74.1%), partially offset by decreases in accounts payable, accrued dividends, line of credit, and advances from borrowers[186] - Total shareholders' equity increased by $39.2 million (21.8%), primarily from $36.7 million in net proceeds from common share sales and $11.9 million in net income attributable to common shareholders, partially offset by $2.8 million in preferred stock dividends and $9.6 million in common share dividends[187] Statements of Comprehensive Income | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Interest income from loans | $11,545,748 | $6,094,165 | $30,490,694 | $15,307,692 | | Origination and modification fees, net | $1,669,034 | $1,268,624 | $5,759,650 | $2,788,498 | | Unrealized losses on investment securities | $(1,076,836) | — | $(3,607,498) | — | | Total revenue | $13,540,987 | $8,522,376 | $36,390,493 | $20,948,451 | | Interest and amortization of deferred financing costs | $5,974,975 | $2,589,847 | $15,083,228 | $7,541,536 | | Total operating costs and expenses | $8,487,348 | $4,221,761 | $21,757,811 | $11,915,593 | | Net income | $5,053,639 | $4,300,615 | $14,632,682 | $9,032,858 | | Net income attributable to common shareholders | $4,131,873 | $3,386,824 | $11,867,385 | $8,100,769 | | Basic and diluted net income per common share | $0.11 | $0.12 | $0.32 | $0.32 | - Total revenue for the three months ended September 30, 2022, increased by 58.9% to $13.5 million, primarily due to an 89.5% increase in interest income from loans and a 31.6% increase in origination and modification fees, partially offset by $1.1 million in unrealized losses on investment securities[171] - Operating costs and expenses for the three months ended September 30, 2022, surged by 101.0% to $8.5 million, mainly driven by a 130.7% increase in interest and amortization of deferred financing costs, a 95.7% rise in compensation, fees, and taxes, and a 49.6% increase in general and administrative expenses[172] - Net income attributable to common shareholders for the three months ended September 30, 2022, was $4.1 million ($0.11 per share), compared to $3.4 million ($0.12 per share) in the prior year, with a decrease in EPS despite higher net income due to an increased weighted average number of common shares outstanding[19][175] Statements of Changes in Shareholders' Equity | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Shareholders' Equity (Beginning) | $180,082,561 | $80,919,540 | | Issuance of common shares, net | $36,654,419 | $30,883,928 | | Stock based compensation | $357,321 | $126,632 | | Unrealized loss on marketable securities | $(81,525) | $(611,998) | | Dividends paid on Series A Preferred Stock | $(2,765,297) | $(932,089) | | Dividends paid on common shares | $(9,580,187) | $(6,123,415) | | Net income for the period | $14,632,682 | $9,032,858 | | Total Shareholders' Equity (Ending) | $219,299,974 | $158,758,082 | - Shareholders' equity increased from $180.1 million at January 1, 2022, to $219.3 million at September 30, 2022, driven by $36.7 million from common share issuances and $14.6 million in net income, partially offset by $2.8 million in preferred stock dividends and $9.6 million in common share dividends[23][187] Statements of Cash Flows | Metric | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $12,405,669 | $17,374,676 | | Net cash used for investing activities | $(151,227,331) | $(84,941,629) | | Net cash provided by financing activities | $132,347,022 | $67,401,241 | | Net increase (decrease) in cash and cash equivalents | $(6,474,640) | $(165,712) | | Cash and cash equivalents - End of period | $35,464,257 | $19,242,316 | - Net cash provided by operating activities decreased to $12.4 million for the nine months ended September 30, 2022, from $17.4 million in the prior year, primarily due to changes in operating assets and liabilities, including increases in interest and fees receivable and due from borrowers, and decreases in advances from borrowers[188][190] - Net cash used for investing activities significantly increased to $151.3 million in 2022 from $84.9 million in 2021, driven by higher principal disbursements for mortgages receivable ($252.4 million vs $154.8 million) and increased purchases of investment securities and partnership interests[191] - Net cash provided by financing activities rose to $132.3 million in 2022 from $67.4 million in 2021, mainly due to $117.6 million from fixed-rate notes issuance, $36.7 million from common share issuance, and $24.0 million from the repurchase facility, partially offset by line of credit repayments and dividend payments[192] Notes to Financial Statements (unaudited) 1. The Company - Sachem Capital Corp specializes in originating, underwriting, funding, servicing, and managing a portfolio of short-term (one to three years), secured, non-bank first mortgage loans to real estate owners and investors, primarily in Connecticut, New York, and Florida[31] 2. Significant Accounting Policies - The unaudited financial statements are prepared in accordance with GAAP for interim financial information, relying on management estimates and assumptions[32][33][34][35][37][38][39] - The Company accounts for real estate owned at cost, tests for impairment quarterly, and consolidates subsidiaries where it has control[42][43][46][47] - Sachem Capital Corp elected to be taxed as a Real Estate Investment Trust (REIT) for federal income tax purposes starting in 2017, which generally exempts it from US federal income tax on distributed taxable income, provided it meets various complex requirements[49] 3. Fair Value Measurement | Asset Category | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Stocks and ETFs | $9,135,577 | — | — | $9,135,577 | | Mutual funds | $25,215,797 | — | — | $25,215,797 | | Total liquid investments | $34,351,374 | — | — | $34,351,374 | | Real estate owned | — | — | $5,615,940 | $5,615,940 | - The Company's fair value assets as of September 30, 2022, primarily consist of Level 1 liquid investments (stocks, ETFs, mutual funds) totaling $34.4 million, valued at quoted market prices[56][57][58] | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Unrealized (losses) on AFS securities at beginning of period | $(425,972) | $(137,802) | $(476,016) | $(25,992) | | Unrealized (losses) on securities available-for-sale | $(131,569) | $(500,188) | $(81,525) | $(611,998) | | Balance at end of period | $(557,541) | $(637,990) | $(557,541) | $(637,990) | 4. Mortgages Receivable - The Company's mortgage loan portfolio increased significantly, with $252.4 million in loans funded during the nine months ended September 30, 2022, compared to $154.8 million in the prior year[62] - As of September 30, 2022, the total outstanding mortgages receivable reached $448.5 million, up from $292.3 million at December 31, 2021[17][62] | Loan Type | Dec 31, 2021 | Sep 30, 2022 | | :--- | :--- | :--- | | Residential | $157,841,896 | $234,747,362 | | Commercial | $95,319,795 | $143,898,654 | | Land | $20,755,891 | $39,513,545 | | Mixed Use | $18,383,627 | $30,365,104 | | Total | $292,301,209 | $448,524,665 | - At September 30, 2022, 92 loans totaling approximately $45.0 million were past maturity and either in foreclosure or being extended[67] 5. Real Estate Owned - Real estate owned (REO) decreased from $6.8 million at September 30, 2021, to $5.6 million at September 30, 2022[69] - As of September 30, 2022, REO included $800,053 of real estate held for rental and $4,815,887 held for sale[70][71] 6. Other Assets | Category | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Prepaid expenses | $117,449 | $271,291 | | Other receivables | $512,284 | $94,108 | | Other assets | $472,800 | $306,440 | | Deferred financing costs, net | $19,809 | $264,451 | | Total | $1,122,342 | $936,290 | 7. Line of Credit, Mortgage Payable, and Churchill Facility - The Wells Fargo margin loan, secured by investment securities, had an outstanding balance of $3,542,853 at September 30, 2022, with an interest rate of 4.50%[76] - The NHB Mortgage, an adjustable-rate loan for up to $1.4 million, had $750,000 outstanding at September 30, 2022[77] - The $200 million Churchill MRA Funding I LLC Repurchase Financing Facility had $43,100,146 outstanding at September 30, 2022, with an effective interest rate of 6.99%[80][81][82] 8. Financing Transactions - During the nine months ended September 30, 2022, the Company generated approximately $159.7 million in gross proceeds from securities sales, including $122.1 million from various unsecured notes and $37.6 million from the sale of 7,177,043 common shares in an at-the-market offering[84][85] 9. Notes Payable - As of September 30, 2022, the Company had $279,557,613 in unsecured, unsubordinated notes payable (net of deferred financing costs)[87][89] - The notes are listed on the NYSE American and are callable by the Company without premium or penalty after their second anniversary of issuance[87] 10. Accounts Payable and Accrued Liabilities | Category | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Accounts payable and Accrued expenses | $555,571 | $501,753 | | Other notes | $10,760 | $30,921 | | Accrued interest | $595,839 | $164,729 | | Total | $1,162,170 | $697,403 | 11. Fee and Other Income | Category | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Late and other fees | $92,098 | $202,572 | $338,638 | $300,471 | | Processing fees | $37,480 | $50,230 | $165,950 | $129,615 | | Rental income, net | $8,867 | $28,320 | $37,067 | $23,105 | | Extension fees | $212,608 | $86,671 | $415,128 | $232,886 | | Other fees | $124,292 | $55,025 | $259,542 | $150,094 | | Legal fees | $91,115 | $69,800 | $253,055 | $181,600 | | Other income | $75,289 | $98,823 | $579,541 | $833,260 | | Total | $641,749 | $591,441 | $2,048,921 | $1,851,031 | 12. Commitments and Contingencies - Deferred revenue from loan origination and modification fees totaled $4,471,800 at September 30, 2022, with $1,583,313 expected to be recognized in 2022, $2,687,114 in 2023, and $201,373 in 2024[93] - At September 30, 2022, the Company had unfunded future funding obligations of $118,103,785, which borrowers can draw upon satisfying conditions[98][99] 13. Related Party Transactions - Loans to known shareholders totaled $20,932,994 at September 30, 2022, up from $13,200,972 in 2021, with interest income from these loans increasing to $1,248,826 for the nine months ended September 30, 2022, from $573,446 in the prior year[100] - Compensation paid to the CEO's wife (Director of Finance, retired Q3 2022) was $62,865 for the nine months ended September 30, 2022[101][103] 14. Concentration of Credit Risk - The Company's mortgage loans are concentrated primarily in Connecticut (approximately 43.0%), Florida (approximately 21.7%), and New York (approximately 14.2%), exposing it to regional economic conditions[104][105] 15. Outstanding Warrants - IPO Warrants to purchase 130,000 common shares expired unexercised on February 9, 2022[106][107] 16. Stock-Based Compensation and Employee Benefits - Under the 2016 Equity Compensation Plan, 153,967 restricted common shares were granted during the nine months ended September 30, 2022, compared to 94,681 in 2021[110][111] - The 401(k) Plan expense for the nine months ended September 30, 2022, was $71,925, up from $46,276 in the prior year, reflecting the Company's obligation to contribute 3% of a participant's compensation[112] 17. Equity Offerings - During the nine months ended September 30, 2022, the Company sold 7,177,043 common shares through an at-the-market offering, generating net proceeds of $36,654,419[113][114] 18. Partnership Investments - As of September 30, 2022, the Company had invested approximately $22.5 million in four limited liability companies, with ownership interests up to 49%[115][116] 19. Special Purpose Acquisition Corporation - The Company loaned $25,000 to its wholly-owned subsidiary, Sachem Sponsor LLC, to purchase shares in Sachem Acquisition Corp, a SPAC[119] 20. Series A Preferred Stock - The Series A Preferred Stock pays quarterly cumulative dividends at 7.75% per annum ($1.9375 per share) on a $25.00 liquidation preference[121] 21. Charter Amendments - On July 19, 2022, the Company increased its authorized common shares from 100,000,000 to 200,000,000[122][123] 22. Subsequent Events - From October 1 to November 9, 2022, the Company sold 405,037 common shares, generating approximately $1.6 million in gross proceeds[124][127] - Effective October 7, 2022, the Board adopted a stock repurchase plan for up to $7.5 million of common shares through September 30, 2023[128][129][130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial conditions and operational results, highlighting revenue growth and strategic initiatives Company Overview - Sachem Capital Corp is a Connecticut-based real estate finance company specializing in short-term first mortgage loans[133] Review of the First Nine Months of 2022 and Outlook for Balance of Year - For the first nine months of 2022, revenue increased by 73.7%, net income attributable to common shareholders rose by 46.5%, and EPS remained consistent at $0.32[134] - The Company's primary objective for 2022 is to grow its loan portfolio while preserving capital and providing attractive risk-adjusted returns, mainly through dividends[135] - Challenges for the upcoming quarters include rising interest rates and inflation (Fed raised rates 6 times for 3.75% total), increased borrowing costs, and potential adverse impacts on capital access and property valuations[137][139][140][141][142] - Despite challenges, the Company believes in its business model, focusing on well-capitalized 'hard money' lending to small- and mid-scale real estate developers in stable and growing markets[147] Financing Strategy Overview - To grow its business, the Company must increase its loan portfolio by using existing working capital and raising additional capital through equity sales or debt[148] - As of September 30, 2022, the Company had $288.4 million in seven series of unsecured unsubordinated notes outstanding, ranking equally with other senior unsecured debt but subordinated to secured debt[149][152][153] - Secured indebtedness includes the Churchill Facility ($43.1 million outstanding at 6.99% effective rate), the Wells Fargo Loan ($3.5 million outstanding at 4.5% interest), and the NHB Mortgage ($750,000 outstanding at 3.75% initial rate)[154][155][156][159] - During the nine months ended September 30, 2022, the Company raised approximately $36.7 million in net proceeds from common share sales through an at-the-market offering[160][161] REIT Qualification - The Company believes it has qualified as a REIT since its IPO in 2017 and intends to maintain this status, which requires distributing at least 90% of its taxable income annually to shareholders[162][163][164] Emerging Growth Company Status - As an 'emerging growth company' under the JOBS Act, Sachem Capital Corp has availed itself of exemptions from certain reporting requirements, including delaying the adoption of new accounting standards[165][167][170] Critical Accounting Policies and Use of Estimates - The preparation of financial statements requires management to make estimates and assumptions based on experience, future projections, and market conditions[168][169] Results of Operations Three months ended September 30, 2022 compared to three months ended September 30, 2021 - Total revenue increased by 58.9% to $13.5 million, driven by an 89.5% increase in interest income from loans and a 31.6% increase in origination and modification fees, partially offset by $1.1 million in unrealized losses on investment securities[171] - Operating costs and expenses rose by 101.0% to $8.5 million, primarily due to a 130.7% increase in interest and amortization of deferred financing costs, a 95.7% increase in compensation, fees, and taxes, and a 49.6% increase in general and administrative expenses[172] - Net income attributable to common shareholders was $4.1 million ($0.11 per share) for the three months ended September 30, 2022, compared to $3.4 million ($0.12 per share) in the prior year, with a slight decrease in EPS due to a higher weighted average number of common shares outstanding[175] Nine months ended September 30, 2022 compared to nine months ended September 30, 2021 - Total revenue increased by 73.7% to $36.4 million, primarily from a 99.2% increase in interest income ($30.5 million) and a 106.6% increase in origination and modification fees ($5.8 million)[176] - Operating costs and expenses grew by 82.6% to $21.8 million, mainly due to a 100.0% increase in interest and amortization of deferred financing costs ($15.1 million), a 69.7% increase in compensation, fees, and taxes, and a 45.6% increase in general and administrative expenses[177] - Net income attributable to common shareholders was $11.9 million ($0.32 per share) for the nine months ended September 30, 2022, compared to $8.1 million ($0.32 per share) in the prior year, with EPS remaining flat despite higher net income due to an increased weighted average number of common shares outstanding[179] Non-GAAP Metrics – Adjusted Earnings - Adjusted Earnings, a non-GAAP metric, is used to provide a better perspective of taxable income by excluding unrealized gains (losses) on available-for-sale securities, which are marked-to-market under GAAP but not recognized for tax purposes until sold[180][181][182] | Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net income attributable to common shareholders | $4,131,873 | $11,867,385 | | Add: Unrealized losses on investment securities | $1,076,836 | $3,607,498 | | Adjusted earnings attributable to common shareholders | $5,208,709 | $15,474,883 | | Adjusted Earnings per share | $0.13 | $0.42 | Liquidity and Capital Resources - Cash and cash equivalents and investment securities totaled $69.8 million at September 30, 2022, down from $102.6 million at December 31, 2021, reflecting a draw down to fund new loans[184][185] - Total liabilities increased by 44.0% to $342.5 million, mainly from increases in the repurchase facility and notes payable[186][187] - Net cash provided by operating activities decreased to $12.4 million, while net cash used for investing activities significantly increased to $151.3 million[188][191][192] - The Company projects current cash balances and anticipated operating cash flows will be sufficient for short-term operating needs (next 12 months), including loan funding, expenses, and dividends[193][194] Subsequent Events - From October 1 to November 9, 2022, the Company sold 405,037 common shares for approximately $1.6 million[196][197][198] - All remaining underwriters' warrants expired unexercised on October 24, 2022[199][200] Off-Balance Sheet Arrangements - The Company is not a party to any off-balance sheet transactions, arrangements, or relationships with unconsolidated entities or other persons that are likely to affect liquidity or capital resources[201] Contractual Obligations | Obligation | Total | Less than 1 year | | :--- | :--- | :--- | | Investment in partnerships | $3,588,984 | $3,588,984 | | Unfunded loan commitments | $118,103,785 | $118,103,785 | | Total contractual obligations | $121,692,769 | $121,692,769 | - As of September 30, 2022, total contractual obligations amounted to $121.7 million, primarily consisting of $118.1 million in unfunded loan commitments and $3.6 million in investment in partnerships, all due within one year[203] Critical Accounting Policies and Recent Accounting Pronouncements - Management does not believe that any recently issued, but not yet effective, accounting standards would have a material effect on the Company's financial statements if currently adopted[54][204] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, the company is exempt from providing detailed disclosures about market risk - As a smaller reporting company, Sachem Capital Corp is not required to provide quantitative and qualitative disclosures about market risk[206] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022 - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022, ensuring timely and accurate reporting of information required under the Exchange Act[207] - No changes in internal control over financial reporting were identified during the fiscal quarter ended September 30, 2022, that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting[208] PART II. OTHER INFORMATION Item 1A. Risk Factors Key risks include significant unfunded commitments and the adverse impact of inflation and rising interest rates - The Company has significant unfunded commitments of approximately $118.1 million under existing loans[211] - Inflation and rising interest rates (Fed raised rates 3.75% in 2022) have increased borrowing costs and adversely impacted the Company's ability to raise capital in public markets[212] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details its unregistered sales of equity securities for an acquisition - On October 6, 2022, the Company issued 300,000 restricted common shares, valued at approximately $1.1 million, to Urbane New Haven, LLC as part of an asset acquisition[213] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, agreements, and certifications - The exhibits include various corporate documents such as the Certificate of Incorporation and amendments, Amended and Restated Bylaws, Indentures and Supplemental Indentures for different series of notes, and the form of Series A Cumulative Redeemable Preferred Stock Certificate[215] - Key agreements listed are employment agreements for John L Villano and John E Warch, the 2016 Equity Compensation Plan and related restrictive stock grant agreements, and the Master Repurchase Agreement with Churchill MRA Funding I LLC[215][216] - Certifications required under the Sarbanes-Oxley Act (Sections 302 and 906) from the Chief Executive Officer and Chief Financial Officer are also included, along with XBRL Instance Document and Taxonomy Extension documents[216] SIGNATURES The report contains official signatures from the CEO and CFO certifying the submission - The report is duly signed on November 10, 2022, by John L Villano, CPA, President and Chief Executive Officer, and John E Warch, CPA, Chief Financial Officer, in accordance with the requirements of the Securities Exchange Act of 1934[222]