Sachem Capital(SACH) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Sachem Capital Corp.'s unaudited consolidated financial statements and management's discussion and analysis for Q1 2023 Item 1. FINANCIAL STATEMENTS (unaudited) This section presents Sachem Capital Corp.'s unaudited consolidated financial statements, including the balance sheets, statements of comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes explaining accounting policies, financial instruments, and operational specifics for the periods ended March 31, 2023, and December 31, 2022 Consolidated Balance Sheets The consolidated balance sheets show the company's financial position, with total assets increasing by 5.5% and total liabilities by 5.8% from December 31, 2022, to March 31, 2023, primarily driven by growth in mortgages receivable and financing activities Consolidated Balance Sheet Highlights | Metric | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Total Assets | $596,997,042 | $565,661,862 | | Mortgages receivable, net | $476,469,464 | $460,633,268 | | Total Liabilities | $368,000,987 | $347,954,508 | | Total Shareholders' Equity | $228,996,055 | $217,707,354 | | Cash and cash equivalents | $20,332,516 | $23,713,097 | - Total assets increased by approximately $31.3 million, or 5.5%, from December 31, 2022, to March 31, 2023[14] - Total liabilities increased by approximately $20.0 million, or 5.8%, from December 31, 2022, to March 31, 2023[14] Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income show a 42.8% increase in total revenue for Q1 2023 compared to Q1 2022, driven by higher interest income from loans and partnership investments, despite a 61.1% rise in operating costs and expenses Consolidated Statements of Comprehensive Income Highlights | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | | Total Revenue | $14,707,759 | $10,301,375 | 42.8% | | Interest income from loans | $10,983,326 | $8,511,375 | 29.0% | | Income from partnership investments | $549,723 | $272,488 | 101.7% | | Unrealized gain (loss) on investment securities | $716,389 | $(1,052,230) | N/A | | Total operating costs and expenses | $9,587,537 | $5,949,909 | 61.1% | | Net income attributable to common shareholders | $4,195,460 | $3,429,700 | 22.3% | | Basic and diluted net income per common share | $0.10 | $0.10 | 0.0% | - Unrealized gain on investment securities was $716,389 in Q1 2023, a significant improvement from an unrealized loss of $1,052,230 in Q1 2022[15] Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased from $217.7 million at January 1, 2023, to $229.0 million at March 31, 2023, influenced by net income and common share issuances, partially offset by the cumulative effect of adopting the CECL accounting standard and preferred stock dividends Shareholders' Equity Changes (Q1 2023) | Item | Amount | | :---------------------------------------------------- | :------------- | | Balance, January 1, 2023 | $217,707,354 | | Cumulative effect of change in accounting principle - Adoption of ASU 2016-13 | $(2,489,574) | | Issuance of common shares, net of expenses | $9,181,158 | | Net income for the period ended March 31, 2023 | $5,120,222 | | Dividends paid on Series A Preferred Stock | $(924,762) | | Balance, March 31, 2023 | $228,996,055 | - The adoption of ASU 2016-13 resulted in a cumulative-effect adjustment of $(2,489,574) to accumulated deficit[17] Consolidated Statements of Cash Flows Cash flows from operating activities decreased by 33.7% in Q1 2023 compared to Q1 2022, while net cash used for investing activities decreased by 29.9%. Net cash provided by financing activities also saw a significant decrease of 55.0%, leading to an overall net decrease in cash and cash equivalents Consolidated Statements of Cash Flows Highlights | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | | Net cash provided by operating activities | $5,009,391 | $7,555,123 | -33.7% | | Net cash used for investing activities | $(33,955,040) | $(48,442,632) | -29.9% | | Net cash provided by financing activities | $25,565,068 | $56,812,081 | -55.0% | | Net increase (decrease) in cash and cash equivalents | $(3,380,581) | $15,924,572 | N/A | | Cash and cash equivalents - End of Period | $20,332,516 | $57,863,469 | -64.9% | - Principal disbursements for mortgages receivable were $58,883,818 in Q1 2023, offset by principal collections of $39,884,300[19] - Net proceeds from line of credit increased to $10,086,036 in Q1 2023, compared to a repayment of $(9,898,667) in Q1 2022[19] Notes to Consolidated Financial Statements These notes provide comprehensive details on Sachem Capital Corp.'s business operations, accounting policies, financial instruments, and significant transactions, offering crucial context for the unaudited financial statements - The Company adopted the Current Expected Credit Loss (CECL) standard effective January 1, 2023, recording an initial allowance adjustment of $2,489,574 as a direct charge to accumulated deficit[35][64] - The CECL allowance for mortgages receivable increased by approximately $55,000 from January 1, 2023 ($1.9 million), to March 31, 2023 ($2.0 million)[39] - The Company believes it qualifies as a Real Estate Investment Trust (REIT) for federal income tax purposes, generally exempting it from U.S. federal income tax on distributed taxable income[56][59] Note 1. The Company Sachem Capital Corp. specializes in originating and managing short-term, secured, non-bank first mortgage loans for real estate owners and investors, primarily in the Northeastern U.S. and Florida, with a focus on conservative loan-to-value ratios - The Company offers short-term (one to three years), secured, non-bank loans to real estate owners and investors for property acquisition, renovation, development, rehabilitation, or improvement[25] - Loans are secured by a first mortgage lien on real estate, often with additional collateral and personal guarantees, and the primary underwriting criterion is a conservative loan to value ratio[25] Note 2. Significant Accounting Policies This note outlines the key accounting principles and estimates used in preparing the financial statements, including the adoption of the CECL standard, fair value measurements, revenue recognition, and REIT tax treatment Unaudited Financial Statements The unaudited consolidated financial statements are prepared in accordance with GAAP for interim information, including all necessary adjustments, but do not contain all footnotes required for complete annual statements - Interim financial statements are prepared in accordance with GAAP for interim financial information and do not include all information and footnotes required for complete financial statements[26] Use of Estimates Management relies on various assumptions, projections, and economic conditions to make estimates for financial reporting, acknowledging that actual results may differ materially - Preparation of financial statements requires management to make estimates and assumptions based on experience, future operations, and economic conditions, with actual amounts potentially differing materially[27] Cash and Cash Equivalents The company classifies demand deposits, cashier's checks, money market accounts, and certificates of deposit with original maturities of three months or less as cash equivalents, noting a concentration of credit risk due to balances exceeding FDIC insurance - All demand deposits, cashier's checks, money market accounts, and certificates of deposit with original maturities of three months or less are considered cash equivalents[28] - Combined account balances typically exceed FDIC insurance coverage, leading to a concentration of credit risk, though the Company does not believe the risk is significant[28] Investment Securities Debt investments are classified as available-for-sale, with fair value changes recorded in other comprehensive income, while equity investments are measured at fair value or cost with impairment adjustments - Debt investments are classified as available-for-sale, with changes in fair value (excluding credit losses) recorded in other comprehensive income[30] - Equity investments with readily determinable fair values are measured at fair value; those without are measured using the equity method or cost with adjustments for observable changes or impairments[34] Current Expected Credit Losses Allowance The company adopted the CECL standard on January 1, 2023, establishing an allowance for credit losses on its loan portfolio and related receivables, using a loss-rate method that considers historical experience, current conditions, and future economic forecasts - The CECL standard was adopted effective January 1, 2023, replacing the probable incurred loss impairment methodology[35] - The CECL allowance for mortgages receivable was approximately $2.0 million as of March 31, 2023, an increase of approximately $55,000 from January 1, 2023[39] - The CECL allowance for unfunded commitments was $562,000 as of March 31, 2023, an increase of approximately $40,000 from January 1, 2023[42] Fair Value Measurements The fair value hierarchy categorizes inputs into Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable and significant inputs) to measure fair value - The fair value hierarchy prioritizes inputs to valuation techniques, with Level 1 being unadjusted quoted prices in active markets, Level 2 including observable inputs other than quoted prices, and Level 3 using unobservable inputs[43][44][45] Property and Equipment Land and buildings acquired for office facilities are stated at cost and depreciated using the straight-line method over 40 years, with the new corporate headquarters placed in service in Q1 2023 - The new corporate headquarters building, acquired in 2021, was completed and placed in service in March 2023, depreciated over 40 years[47] Real Estate Owned Real estate owned by the company is recorded at cost and is subject to quarterly impairment testing - Real estate owned is stated at cost and tested for impairment quarterly[48] Consolidations The consolidated financial statements include all subsidiaries where the company has control over significant operating, financial, and investing decisions, with all intercompany accounts and transactions eliminated - Consolidated financial statements include all controlled subsidiaries, with intercompany accounts and transactions eliminated[49] Impairment of Long-Lived Assets The company monitors for events indicating potential impairment of long-lived assets, recognizing a loss if undiscounted expected future cash flows are less than the carrying amount - Impairment losses on long-lived assets are recognized when undiscounted expected future cash flows are less than the carrying amount[50] Goodwill Goodwill is not amortized but tested for impairment annually or more frequently if indicators arise, using a qualitative assessment or comparing fair value to carrying value - Goodwill is tested for impairment annually or more frequently if circumstances indicate potential impairment, using a qualitative assessment or comparing fair value to carrying value[51][52] Deferred Financing Costs Costs associated with revolving credit facilities and public offerings of unsecured notes are amortized over the term of the respective facilities or notes using the straight-line method - Deferred financing costs for credit facilities and public note offerings are amortized using the straight-line method over their respective terms[53] Revenue Recognition Interest income from loans is recognized over the loan period using the simple interest method, while origination and modification fees are recognized ratably over the contractual life of the loan - Interest income from the loan portfolio is earned over the loan period using the simple interest method on principal amounts outstanding[54] - Origination and modification fee revenue, typically 1%-3% of the loan balance, is recognized ratably over the contractual life of the loan[55] Income Taxes The company operates as a REIT, generally avoiding federal income tax on distributed taxable income, and has elected to treat certain subsidiaries as taxable REIT subsidiaries (TRSs) which incur income tax liability - The Company believes it qualifies as a REIT, generally not subject to U.S. federal income tax on taxable income distributed to shareholders[56][59] - Taxable REIT subsidiaries (TRSs) may hold assets and engage in business, generating federal and state income tax liability for these entities[60] Earnings Per Share Basic and diluted earnings per share are calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding, with diluted EPS including potential dilution from stock options and warrants - Basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding[63] - Diluted EPS includes potential dilution from stock options and warrants using the treasury stock method[63] Recent Accounting Pronouncements The company adopted ASU 2016-13 (CECL) effective January 1, 2023, and ASU 2022-02 (TDR and Vintage Disclosures) which had no material effect, and does not anticipate a material impact from ASU 2022-03 (Fair Value Measurement of Equity Securities) - ASU No. 2016-13, 'Measurement of Credit Losses on Financial Instruments' (CECL), was adopted effective January 1, 2023, with a cumulative-effect adjustment to retained earnings[64] - ASU 2022-02, 'Troubled Debt Restructurings and Vintage Disclosures,' became effective for fiscal years beginning after December 15, 2022, and did not have a material effect on the Company's financial statements[66] - ASU 2022-03, 'Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,' effective for fiscal years beginning after December 15, 2023, is not anticipated to have a material impact[67] Reclassifications Certain amounts in the March 31, 2022, and December 31, 2022, consolidated financial statements were reclassified to align with the March 31, 2023, presentation - Certain amounts in prior period financial statements were reclassified to conform to the March 31, 2023 presentation[69] Note 3. Fair Value Measurement The company's assets measured at fair value, including liquid investments and real estate owned, are categorized by Level 1, 2, or 3 inputs, with total liquid investments increasing to $35.8 million as of March 31, 2023 Assets at Fair Value | Asset Category | March 31, 2023 (Total) | December 31, 2022 (Total) | | :-------------------- | :--------------------- | :---------------------- | | Stocks and ETFs | $1,403,680 | $4,728,724 | | Mutual funds | $15,193,680 | $14,850,839 | | Debt securities | $19,239,842 | $4,996,899 | | Total liquid investments | $35,837,202 | $24,576,462 | | Real estate owned | $6,138,912 | $5,216,149 | - As of March 31, 2023, the Company had continuous unrealized losses over 12 months in Available-For-Sale debt securities of approximately $517,000, but no allowance for credit losses was deemed necessary[76] Note 4. Mortgages Receivable This note details the company's mortgage loan portfolio, including lending standards, nonaccrual loans, funding and repayment activities, and the CECL allowance, noting a significant increase in nonaccrual loans and loans in foreclosure proceedings - The Company's lending standards typically require first mortgage liens and a maximum Loan-to-Value (LTV) of no greater than 70% of appraised value, with exceptions based on additional collateral and borrower profile[78] - Outstanding principal balance of loans on nonaccrual status increased to $97,106,984 as of March 31, 2023, from $55,691,857 as of December 31, 2022[85] - As of March 31, 2023, 128 mortgage loans (approximately 31.5% of the portfolio by count) representing approximately $81.4 million had matured but were not repaid or extended[101] - 52 mortgage loans, with an aggregate outstanding principal balance of approximately $40.6 million, were subject to foreclosure proceedings as of March 31, 2023[102] CECL Allowance Activity (Q1 2023) | Geographical Location | CECL Allowance as of Dec 31, 2022 | Adoption of ASU 2016-13 | Provision for CECL Allowance | CECL Allowance as of March 31, 2023 | | :-------------------- | :-------------------------------- | :---------------------- | :--------------------------- | :-------------------------------- | | New England | $105 | $1,302 | $3 | $1,410 | | West | $0 | $7 | $0 | $7 | | South | $0 | $402 | $56 | $458 | | Mid-Atlantic | $0 | $210 | $(3) | $207 | | Total | $105 | $1,921 | $56 | $2,082 | Loan Portfolio by Geographical Location (Carrying Value in thousands) | Geographical Location | March 31, 2023 | % of Portfolio | December 31, 2022 | % of Portfolio | | :-------------------- | :------------- | :------------- | :---------------- | :------------- | | New England | $226,026 | 47.23% | $225,603 | 48.97% | | South | $154,662 | 32.32% | $135,857 | 29.49% | | Mid-Atlantic | $94,713 | 19.79% | $96,128 | 20.86% | | West | $3,150 | 0.66% | $3,150 | 0.68% | | Total | $478,551 | 100.00% | $460,738 | 100.00% | | Less, CECL Allowance | $2,082 | | $105 | | | Carrying value, net | $476,469 | | $460,633 | | Loan Portfolio by Property Type (Outstanding Principal in thousands) | Property Type | March 31, 2023 | % of Portfolio | December 31, 2022 | % of Portfolio | | :------------ | :------------- | :------------- | :---------------- | :------------- | | Residential | $217,734 | 45.50% | $229,944 | 49.91% | | Commercial | $167,814 | 35.07% | $154,929 | 33.63% | | Land | $63,515 | 13.27% | $46,499 | 10.09% | | Mixed use | $29,488 | 6.16% | $29,366 | 6.37% | | Total | $478,551 | 100.00% | $460,738 | 100.00% | | Less, CECL Allowance | $2,082 | | $105 | | | Carrying value, net | $476,469 | | $460,633 | | Note 5. Real Estate Owned Real estate owned totaled $6.1 million as of March 31, 2023, comprising properties held for rental and sale. The company recognized a gain of $148,100 from property sales in Q1 2023, a reversal from a loss in Q1 2022 - Real estate owned totaled $6,138,912 as of March 31, 2023, with no valuation allowance[105] - As of March 31, 2023, real estate owned included $813,090 held for rental and $5,325,822 held for sale[106] - The Company recognized an aggregate gain of $148,100 from the sale of two properties held for sale during the three months ended March 31, 2023, compared to a loss of $65,838 in the prior year period[107] Note 6. Other Assets Other assets increased to $5.4 million as of March 31, 2023, from $4.9 million at December 31, 2022, including prepaid expenses, other receivables, goodwill, and deferred financing costs Other Assets Breakdown | Item | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Prepaid expenses | $400,418 | $410,373 | | Other receivables | $3,741,984 | $3,519,804 | | Other assets | $459,291 | $477,048 | | Goodwill | $391,000 | $391,000 | | Intangible asset – trade name | $130,400 | $130,400 | | Deferred financing costs, net | $297,274 | $54,548 | | Total | $5,420,367 | $4,983,173 | Note 7. Line of Credit, Mortgage Payable, Churchill Facility, Credit Facility The company manages various financing facilities, including a Wells Fargo margin loan, a refinanced New Haven Bank mortgage, a Churchill repurchase facility, and a new Needham Bank revolving credit facility, to support its lending operations and corporate purposes - The Wells Fargo margin loan had an outstanding balance of $13,673,930 as of March 31, 2023, with an interest rate of 6.25%[113] - The New Haven Bank Mortgage was refinanced on February 28, 2023, with a new $1.66 million adjustable-rate mortgage at an initial rate of 5.75% per annum[115] - The Churchill MRA Funding I LLC Repurchase Financing Facility had $54,055,815 outstanding as of March 31, 2023, with an effective interest rate of 9.09%[120] - A new $45 million revolving credit facility was entered into with Needham Bank on March 2, 2023, with an option to increase to $75 million, secured by virtually all company assets[122] Note 8. Notes Payable The company has $280.6 million in unsecured, unsubordinated notes payable outstanding across seven series, with various interest rates and maturity dates, and future principal payments scheduled through 2027 - As of March 31, 2023, the Company had an aggregate of $280,608,110 of unsecured, unsubordinated notes payable outstanding, net of deferred financing costs[126] Future Principal Payments on Notes Payable (as of March 31, 2023) | Year ending December 31, | Amount | | :----------------------- | :------------- | | Remainder of 2023 | $0 | | 2024 | $58,163,000 | | 2025 | $56,363,750 | | 2026 | $51,750,000 | | 2027 | $122,125,000 | | Total principal payments | $288,401,750 | - The Notes are subject to an 'Asset Coverage Ratio' requirement of at least 150% for certain actions like dividend payments or incurring additional indebtedness[126] Note 9. Accounts Payable and Accrued Liabilities Total accounts payable and accrued liabilities increased to $2.0 million as of March 31, 2023, from $1.4 million at December 31, 2022, primarily due to the inclusion of a $562,000 CECL allowance for unfunded contractual obligations Accounts Payable and Accrued Liabilities | Item | March 31, 2023 | December 31, 2022 | | :-------------------------------------------------- | :------------- | :---------------- | | Accounts payable and accrued expenses | $1,025,051 | $1,109,789 | | CECL - allowance for unfunded contractual obligation credit losses | $562,000 | $0 | | Other notes | $1,762 | $6,014 | | Accrued interest | $418,637 | $323,416 | | Total | $2,007,450 | $1,439,219 | Note 10. Fee and Other Income Total fee and other income increased by 16.3% to $707,605 for the three months ended March 31, 2023, compared to the same period in 2022, with notable increases in extension fees and other fees Fee and Other Income (Three Months Ended March 31) | Item | 2023 | 2022 | | :---------------- | :--------- | :--------- | | Late and other fees | $113,131 | $128,864 | | Processing fees | $32,070 | $65,855 | | Rental income, net | $13,300 | $10,042 | | Extension fees | $180,410 | $101,834 | | Other fees | $203,029 | $50,562 | | Legal fees | $96,500 | $62,100 | | Other income | $69,165 | $189,307 | | Total | $707,605 | $608,564 | Note 11. Commitments and Contingencies The company has significant unfunded future funding obligations totaling $114.9 million as of March 31, 2023, and details employment agreements with key executives, including stock-based compensation and termination provisions - Unfunded future funding obligations totaled $114,851,913 as of March 31, 2023, which will be funded from loan payoffs and additional drawdowns under credit facilities and equity/debt sales[135] - As of March 31, 2023, 226,483 restricted common shares remain unvested for John Villano, the CEO[133] - John E. Warch's employment was terminated effective May 4, 2023, with 5,333 restricted common shares remaining unvested as of March 31, 2023[134] Note 12. Related Party Transactions Loans to known shareholders increased to $25.4 million as of March 31, 2023, from $15.6 million in the prior year, with interest income from these loans also rising. The company also discloses compensation paid to family members of the CEO - Loans to known shareholders totaled $25,436,352 as of March 31, 2023, compared to $15,594,572 as of March 31, 2022[138] - Interest income earned on related party loans increased to $506,093 for Q1 2023, up from $347,638 for Q1 2022[138] - The CEO's daughter received $43,000 in compensation for internal audit and compliance services in Q1 2023, up from $27,500 in Q1 2022[139] Note 13. Concentration of Credit Risk The company's credit risk is concentrated in its mortgage loan portfolio, primarily in Connecticut (41.13%), Florida (26.79%), and New York (12.55%), making it susceptible to regional economic conditions - Mortgage loans are primarily concentrated in Connecticut (approximately 41.13%), Florida (approximately 26.79%), and New York (approximately 12.55%)[142] - The Company maintains cash and cash equivalents with various financial institutions, with balances often exceeding FDIC insurance coverage[140] Note 14. Outstanding Warrants All remaining unexercised warrants to purchase common shares, issued in connection with a 2017 public offering, expired on October 24, 2022 - All remaining unexercised warrants, originally issued in October 2017, expired on October 24, 2022[144] Note 15. Stock-Based Compensation and Employee Benefits The company granted 183,390 restricted common shares in Q1 2023, resulting in stock-based compensation expense of $173,132, and contributed $44,696 to its 401(k) Plan - The Company granted 183,390 restricted common shares under the Plan during Q1 2023, with a fair value of $709,719[146] - Stock-based compensation expense for Q1 2023 was $173,132, up from $106,879 in Q1 2022[148] - The 401(k) Plan expense for Q1 2023 was $44,696, an increase from $19,993 in Q1 2022[149] Note 16. Equity Offerings During Q1 2023, the company sold 2,479,798 common shares for approximately $9.4 million and Series A Preferred Stock for $139,500 under its at-the-market offering facility - During Q1 2023, the Company sold 2,479,798 common shares, realizing gross proceeds of approximately $9.4 million[150] - The Company also sold Series A Preferred Stock with an aggregate liquidation preference of $154,675, realizing gross proceeds of $139,500[150] Note 17. Partnership Investments The company has invested approximately $35.3 million in four limited liability companies focused on commercial real estate finance, generating $549,723 in income for Q1 2023, and has unfunded partnership commitments of $573,000 - As of March 31, 2023, the Company had invested approximately $35.3 million in four limited liability companies[151] - Income from partnership investments increased to $549,723 for Q1 2023, up from $272,488 for Q1 2022[156] - The Company had unfunded partnership commitments totaling approximately $573,000 as of March 31, 2023[157] Note 18. Special Purpose Acquisition Corporation The company's wholly-owned subsidiary, Sachem Sponsor LLC, invested in Sachem Acquisition Corp., a blank check company formed for business combinations, incurring approximately $452,000 in related costs - Sachem Sponsor LLC, a wholly-owned subsidiary, purchased 1,437,500 shares of Class B common stock of Sachem Acquisition Corp. for $25,000[158] - The Company incurred approximately $452,000 in costs related to the SPAC's registration statement, including legal, accounting, and filing fees[158] Note 19. Series A Preferred Stock The Series A Preferred Stock pays quarterly cumulative dividends at 7.75% of its $25.00 per share liquidation preference, is generally not redeemable before June 29, 2026, and has limited voting rights - The Series A Preferred Stock pays quarterly cumulative dividends at 7.75% of the $25.00 per share liquidation preference per annum[160] - The Series A Preferred Stock is not redeemable before June 29, 2026, except upon a Change of Control, and holders generally do not have voting rights[160][163] Note 20. Subsequent Events From April 1, 2023, to May 12, 2023, the company sold 136,356 common shares for approximately $510,000 and declared a dividend of $0.13 per share payable on April 24, 2023 - From April 1, 2023, through May 12, 2023, the Company sold 136,356 common shares, realizing gross proceeds of approximately $510,000[164] - On April 4, 2023, the Board of Directors declared a dividend of $0.13 per share, payable on April 24, 2023[164] Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the company's financial performance for Q1 2023, highlighting significant revenue growth driven by lending activities, but also noting increased operating expenses and a challenging market outlook due to rising interest rates and competition. The section also covers financing strategies, REIT qualification, and liquidity Company Overview Sachem Capital Corp. is a Connecticut-based real estate finance company specializing in short-term, first mortgage loans, operating as a REIT since 2017 to fund its mortgage loan portfolio and diversify ownership - Sachem Capital Corp. is a Connecticut-based real estate finance company specializing in originating, underwriting, funding, servicing, and managing a portfolio of short-term (three years or less) loans secured by first mortgage liens on real property[168] - The Company qualified as a REIT for federal income tax purposes beginning with its 2017 tax year, allowing deductions for distributions of taxable income to shareholders[168] Review of the First Quarter and Outlook for Balance of Year Q1 2023 saw a 42.8% revenue increase and 22.3% net income growth, with EPS remaining at $0.10. The company aims to grow its loan portfolio and enhance operational excellence in 2023, despite challenges from rising operating costs - Compared to Q1 2022, Q1 2023 revenue increased 42.8%, net income attributable to common shareholders increased 22.3%, and earnings per share remained unchanged at $0.10[169] - The revenue increase was primarily due to a 29.0% increase in interest income and a 101.7% increase in income from partnership investments[169] - Operating costs and expenses increased by 61.1%, mainly due to a 76.3% increase in interest and amortization of deferred financing costs and a 79.0% increase in compensation[169] - The primary business objective for 2023 is to grow the loan portfolio while protecting capital and providing attractive risk-adjusted returns, focusing on larger-value commercial loans[170] Overall Business Strategy and Challenges The company's strategy focuses on capitalizing on real estate lending opportunities and improving operational efficiencies, but faces challenges including interest rate compression (weighted average cost of capital rose to 7.23%), geopolitical concerns, increased competition from non-traditional lenders, shifting borrower expectations, property value fluctuations, and higher operating expenses - The weighted average cost of capital increased to 7.23% as of March 31, 2023, from 6.08% as of March 31, 2022, due to rising interest rates[171] - Challenges include interest rate compression, geopolitical concerns, increased competition from private equity funds, hedge funds, and other specialty finance entities, shifting borrower expectations, and property value fluctuations[171][172][173][174] - Unfunded commitments totaled $114.9 million at March 31, 2023, requiring the company to maintain higher cash balances[179] Financing Strategy Overview The company's financing strategy involves leveraging its portfolio, with debt representing 59.9% of total capital as of March 31, 2023. It utilizes seven series of unsecured notes, secured facilities (Churchill, Wells Fargo, New NHB Mortgage, Needham Credit Facility), and at-the-market equity offerings to fund growth and manage capital costs - Debt represented approximately 59.9% of total capital at March 31, 2023, compared to 55.5% at March 31, 2022[181] - The Company has seven series of unsecured unsubordinated notes outstanding, with an aggregate principal balance of $288.4 million[182] - Secured indebtedness includes the Churchill Facility ($54.1 million outstanding at 9.09% effective rate), the Wells Fargo Loan ($13.7 million outstanding at 6.25%), the New NHB Mortgage ($1.66 million at 5.75%), and a new $45 million Needham Credit Facility (undrawn as of March 31, 2023)[191][192][194][195] - During Q1 2023, the Company sold 2,479,798 Common Shares for approximately $9.4 million and Series A Preferred Stock for $139,500 through at-the-market offerings[197] REIT Qualification The company believes it has qualified as a REIT since its IPO in 2017, requiring it to distribute at least 90% of its taxable income annually to shareholders to avoid federal income tax - The Company believes it has qualified as a REIT since its IPO in 2017 and elected to be taxed as a REIT beginning with its 2017 tax year[198] - As a REIT, the Company is required to distribute at least 90% of its taxable income to shareholders annually to generally avoid U.S. federal income tax[198][200] Critical Accounting Policies and Use of Estimates The preparation of financial statements in accordance with GAAP necessitates management to make estimates and assumptions based on prior results, future operations, and economic conditions, which may differ materially from actual outcomes - The preparation of consolidated financial statements requires management to make estimates and assumptions that affect reported amounts, based on prior results, future operations, and economic conditions[201] Results of Operations For Q1 2023, total revenue increased by 42.8% to $14.7 million, driven by a 29.0% rise in interest income and a 101.7% increase in partnership investment income. However, total operating costs and expenses also surged by 61.1% to $9.6 million, primarily due to higher interest and amortization costs, resulting in net income attributable to common shareholders of $4.2 million ($0.10 per share) Total revenue Total revenue for Q1 2023 increased by $4.4 million, or 42.8%, to $14.7 million, primarily due to a 29.0% increase in interest income from loans and a 101.7% increase in income from partnership investments - Total revenue for Q1 2023 was approximately $14.7 million, an increase of approximately $4.4 million (42.8%) from Q1 2022[203] - Interest income from loans increased by approximately $2.5 million (29.0%) to $11.0 million in Q1 2023[203] - Income from partnership investments increased by approximately $277,000 (101.7%) to $550,000 in Q1 2023[203] Operating costs and expenses Total operating costs and expenses increased by $3.6 million, or 61.1%, to $9.6 million in Q1 2023, mainly driven by a 76.3% increase in interest and amortization of deferred financing costs - Total operating costs and expenses for Q1 2023 were approximately $9.6 million, an increase of approximately $3.6 million (61.1%) from Q1 2022[204] - Interest and amortization of deferred financing costs increased by approximately $3.0 million (76.3%) to $6.9 million in Q1 2023[204] - Compensation, fees, and taxes increased by approximately $785,000, and general and administrative expenses increased by approximately $266,000[204] Comprehensive income For Q1 2023, the company reported an unrealized gain on investment securities of approximately $92,000, reflecting a decrease in prior unrealized losses - The Company reported an unrealized gain on investment securities of approximately $92,000 for Q1 2023, reflecting a decrease in prior unrealized losses since December 31, 2022[205] Net income Net income attributable to common shareholders for Q1 2023 was approximately $4.2 million, or $0.10 per share, an increase from $3.4 million ($0.10 per share) in Q1 2022 - Net income attributable to common shareholders for Q1 2023 was approximately $4.2 million, or $0.10 per share, compared to approximately $3.4 million, or $0.10 per share, for Q1 2022[206] 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. Adjusted Earnings attributable to common shareholders decreased to $3.5 million ($0.08 per share) in Q1 2023 from $4.5 million ($0.13 per share) in Q1 2022 - Adjusted Earnings is calculated as net income attributable to common shareholders, prior to the effect of unrealized gains (losses) on securities available-for-sale, to better reflect taxable income for REIT distribution requirements[208] Adjusted Earnings Attributable to Common Shareholders | Metric | For the Period Ended March 31, 2023 | For the Period Ended March 31, 2022 | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | 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 | | Adjusted Earnings per share | $0.08 | $0.13 | Liquidity and Capital Resources Total assets increased by 5.5% to $597.0 million, and total shareholders' equity increased by 5.2% to $229.0 million as of March 31, 2023. Net cash provided by operating activities decreased, while net cash used for investing activities decreased, and net cash provided by financing activities also decreased significantly. The company believes current cash and anticipated operating cash flows will be sufficient for short-term needs - Total assets increased by approximately $31.3 million (5.5%) to $597.0 million at March 31, 2023, primarily due to increases in the mortgage loan portfolio, partnership investments, and investment securities[211] - Total shareholders' equity increased by approximately $11.3 million (5.2%) to $229.0 million, driven by net proceeds from common share sales and net income, offset by preferred stock dividends and a CECL adjustment[213] - Net cash provided by operating activities decreased to $5.0 million in Q1 2023 from $7.6 million in Q1 2022[214] - Net cash used for investing activities decreased to $34.0 million in Q1 2023 from $48.4 million in Q1 2022[215] - Net cash provided by financing activities decreased to $25.6 million in Q1 2023 from $56.8 million in Q1 2022[216] Subsequent Events Management evaluated subsequent events through May 12, 2023, and determined that no adjustments were required in the accompanying financial statements - No adjustments were required in the financial statements based on the evaluation of subsequent events through May 12, 2023[220] Off-Balance Sheet Arrangements The company is not a party to any off-balance sheet transactions, arrangements, or relationships with unconsolidated entities that would significantly affect liquidity or capital resources - The Company is not a party to any off-balance sheet transactions, arrangements, or relationships with unconsolidated entities[221] Contractual Obligations As of March 31, 2023, the company's total contractual obligations, primarily unfunded loan commitments and investment in partnerships, amounted to $115.4 million, all due within one year Contractual Obligations (as of March 31, 2023) | Item | Total | Less than 1 year | | :------------------------ | :------------ | :--------------- | | 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 This section refers to Note 2 for details on critical accounting policies and recent accounting pronouncements impacting the company - Refer to Note 2 – Significant Accounting Policies for explanations of recent accounting pronouncements[224] Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Sachem Capital Corp. is not required to provide detailed quantitative and qualitative disclosures about market risk - As a smaller reporting company, Sachem Capital Corp. is not required to provide quantitative and qualitative disclosures about market risk[226] Item 4. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, and reported no material changes in internal control over financial reporting during the quarter Evaluation and Disclosure Controls and Procedures The chief executive officer and chief financial officer evaluated the effectiveness of disclosure controls and procedures as of March 31, 2023, concluding they were effective - Management concluded that the disclosure controls and procedures were effective as of March 31, 2023[227] Changes in Internal Control Over Financial Reporting There were no material changes in the company's internal control over financial reporting during the fiscal quarter ended March 31, 2023 - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2023[228] PART II. OTHER INFORMATION This section details exhibits filed with the Form 10-Q, providing supporting documentation for the financial report Item 6. EXHIBITS This section provides a comprehensive list of exhibits filed with the Form 10-Q, including organizational documents, indentures, stock agreements, and financing agreements, with references to their previous filings - The exhibits include various corporate documents such as the Certificate of Incorporation, Bylaws, Indentures for notes, and agreements related to financing facilities and stock grants[231] SIGNATURES The Form 10-Q is officially signed on behalf of Sachem Capital Corp. by John L. Villano, President, Chief Executive Officer, and Interim Chief Financial Officer, on May 15, 2023 - The report was signed by John L. Villano, President, Chief Executive Officer, and Interim Chief Financial Officer, on May 15, 2023[238]