Sachem Capital Stock: I prefer preferred stocks (NYSE: SACH)

stained glass

The company

I present to you another compelling “hard money” lender opportunity. You may recall that I discussed a somewhat similar mREIT a few weeks ago, namely Broadmark Reabed Capital Inc.. (BRMK). This opportunity is with Sachem Capital Corp. (NYSE: SACH). “Hard money” loans are essentially private equity loans versus cash flow loans, as they focus on collateral (what they can achieve in the event of default) versus cash flow business that you would tend to see with a chartered bank.

SACH is much more residential focused than its counterpart BRMK with 54% of its portfolio in this space, as their lending is more focused on “repairable and reverse” loans, construction or distressed foreclosed loans. They have, however, diversified into commercial loans to hedge in the residential market due to the reliability of cash flow calculations and CAP rates by borrowers and investors. SACH loans are typically for renovating/converting a property, such as a warehouse, into a multi-family unit.

Sachem Capital Corp.

Sachem Capital Corp. (Investor Presentation – August 2022)

55% of SACH’s loans are in Connecticut but have branched out to Florida, New York and other states. Although BRMK loans tend to be small and use very short maturities, SACH loans tend to be even smaller, not exceeding $1 million and their average term to maturity is only 8 months. SACH can also close a loan in as little as 5 days. SACH’s portfolio yield is about the same as BRMK’s as they charge similar interest rates and have origination fees of 1-3%. Although BRMK is quite rigorous in their underwriting process, SACH is even more so as their loans all require personal guarantees and since they are doing multiple projects for the same developer it is not uncommon for them to come with cross guarantees. This means that if the developer defaults on a loan, all collateral held by the borrower can be seized rather than just the collateral securing the defaulted loan. As a result, SACH will allow a slightly higher LTV on their projects at 70% versus 60% for BRMK. Both companies are 100% secure.

Sachem Capital Corp.

Sachem Capital Corp. (Investor Presentation – August 2022)

SACH is a little more leveraged than BRMK, but it has taken tremendous work over the past year to issue new unsecured fixed rate notes at rates of 6-7.2%, which is lower than what they would get today. Nothing matures until at least 2024. Therefore, rising interest rates should actually be more of a tailwind than a headwind, as they can continue to take out new loans at higher rates at as they go off the books within a year of underwriting, while their current interest charges will remain largely unchanged over the next four to five years.

Chart
Data by YCharts

The dividend

Like BRMK, ordinary dividend coverage has been a concern for some time. Even adding the unrealized losses of $2.5 billion year-to-date on investment securities and the impairment of $595 million, the dividend coverage is approximately 93% on the dividend. quarterly of $0.14/share, which was recently announced. That’s still much more preferable than BRMK’s 130% payout ratio, but it’s not low for a REIT.

Chart
Data by YCharts
Sachem Capital Corp.

Sachem Capital Corp. (Investor Presentation – August 2022)

Management said last year that it expected net profit to cover the ordinary dividend by 2022 YE. They made the cautious decision to issue stock in 2021 and early 2022 when the stock price traded at a premium to book value because they now have $29 million in cash. .

In June 2021, SACH sold a total of 1.70 million preferred shares with a dividend of 7.75% which are the Series A 7.75% Cumulative Redeemable Preferred Shares (NYSE:SACH.PA). SACH raised $45.5 million in new capital net of fees. SACH also sold a total of 6.10 million shares of common stock in 2021 for proceeds of $30.88 million. SACH also sold two new ticket offers. In early December 2021, Sachem raised $43.3 million net of proceeds from the sale of 6.0% notes due 2026, then in March 2022 an additional $48.2 million net of fees was raised. received from these sales and the notes do not mature until 2027. result of the issuance of new capital at favorable prices has kept the TBV intact unlike BRMK which has seen its TBV drop in recent months due to the dividend aggressive.

Chart
Data by YCharts
Chart
Data by YCharts

Housing starts in the United States began to fall to their lowest levels since 2020 as interest rates began to inflict their pain on the market. Unlike BRMK, however, we have yet to see creations and their revenue decline and their default rate remained at around 3% in the second quarter of 2022, which is in line with their YE 2021 default rate and the value of real estate held has remained consistent with YOU.

Chart
Data by YCharts
Sachem Capital Corp.

Sachem Capital Corp. (Investor Presentation – August 2022)

Sachem Capital Corp.

Sachem Capital Corp. (Investor Presentation – August 2022)

7.75% Series A Cumulative Redeemable Preferred Shares Covered About 7x Net Income When Adding Non-Cash Expenses, Loan Book Could Drop Over 50%, Preferred Dividend Could Still Be Covered . The shares are also cumulative, so payments can only be suspended if the ordinary dividend is reduced. The stock is not redeemable until June 2026 and is redeemable at the liquidation preference of $25/share. At the current price of $21.30/share, the redemption yield is about 12.4% compared to the common stock yield of about 14%. Sacrificing even 200 basis points seems like a fair price to pay for high protection from reduced dividends and capital loss. Although the shares are convertible, I have chosen not to discuss conversion rates as they are not much of a factor with the current SACH share price.

Final remarks

Although SACH has done all the right things and is well capitalized as the overall housing market has started to show some weakness, we cannot ignore the fact that this is a tough business and the management needs to adopt a much more cautious approach in assessing real estate values, which will certainly slow the growth of the loan portfolio. This will result in additional impairment charges that we are already seeing and weakened common dividend coverage that is already precarious. The company is internally managed with long-term and precise thinking about who we want to lend to for us. The company has a board of directors that reviews loans over $5 million, uses third-party domestic vendors for appraisals, and has an internal audit committee as second-tier review pre-funding. As a result, preferred stocks are expected to offer stable double-digit returns for at least the next four years.

Sallie R. Loera