SACH - Sachem: Can The 15.5% Dividend Yield Survive?

2023-08-16 21:14:18 ET

Summary

• Sachem is currently paying out a 15.5% dividend yield to its common shareholders.
• Fiscal 2023 second quarter EPS of $0.11 per share meant the mREIT was unable to cover its $0.13 per share dividend payment.
• A further rise in loans on non-accrual status, which stood at 19% as of the end of the second quarter, could derail the current payout.

Sachem Capital's ( SACH ) year has been decent with the mortgage REIT up nearly 14% on a total return basis, moving ahead of 52-week lows set in May. The quarterly dividend has proved resilient, defying bearish calls for a cut on the back of earnings attributable to common shareholders that have been coming in quite tight on its coverage of the quarterly dividend. The mREIT last declared a quarterly cash dividend of $0.13 per share , in line with its prior payment and for a 15.5% annualized forward yield. Critically, Sachem's fiscal 2023 second-quarter earnings saw earnings of $0.11 per share for a 118% payout ratio.

Management stated during the second quarter earnings call that the difference was due to the timing of certain revenues and originations. However, the mREIT is clearly feeling the pressure of a Fed Funds rate that was hiked ten consecutive times, paused, then hiked again by 25 basis points to a 22-year high at 5.25% to 5.50%. Loans on non-accrual status jumped to $96.4 million from $55.7 million as of the end of the fourth quarter of 2022. This was a $40.7 million, or 73% jump, in six months and was set against a portfolio that consisted of 360 loans with a total principal balance of $506.7 million and a weighted average interest rate of 12.17%. Hence, around 19% of Sachem's portfolio is on non-accrual status.

A Further Jump In Loans On Non-Accrual Status Could See The Dividend Cut

Sachem is not currently covering its dividend with EPS and has nearly 20% of its loans no longer collecting interest. The mREIT has a $1.4 million average loan size with 88% of its loans having a term size of less than 1 year. As of the end of the second quarter residential loans formed the majority of Sachem's portfolio at 44.85% with commercial loans coming in at 33.2% and land at 16.17%. Critically, the carrying value of the portfolio realized a $46 million increase over 2022's fourth quarter with the mREIT originating $55.6 million of mortgage loans, including loan modifications and construction draws, during the second quarter. Sachem is targeting a 15% all-in yield on new originations.

The worry here for common shareholders is that there is a further jump in loans on non-accrual status in the third quarter. Bulls would be right to flag that this barely jumped sequentially from the first quarter when the mREIT recorded $90.1 million in loans on non-accrual. However, Sachem also had 51 loans pending foreclosure, representing around $47.2 million in unpaid capital. The company takes collateral for its loans which are also typically underwritten at 70% loan to value or 85% loan to cost ratios.

Sachem has repeatedly stated that their troubled or distressed loans rarely lose 100% of their value especially when interest income, origination, and other fees are considered. Revenue for the second quarter came in at $16.5 million , up 31.2% over its year-ago comp and a beat by $2.4 million on consensus estimates with growth being driven by the rise in interest rates pushing the rates on its short-term loans higher. Sachem's loan products include fix-and-flip loans, foreclosure loans, bridge loans, new construction loans, and commercial real estate development.

US Economy Looks Set To Avoid A Recession As Short-Term Loans Allow For Quicker Loan Repricing

Sachem flagged that they're seeing a strong pipeline of new demand for modifications and construction loans. The mREIT intends to maintain originations at its current level and at a similar pace with its industry where lenders have become a lot more conservative in response to the uncertain macroeconomic backdrop. However, expectations for a recession have been dialed back in recent weeks and on the back of the July CPI print which saw the headline rate come in below market expectation at 3.2%. J.P. Morgan has ruled out a recession in 2023 with Goldman placing the chances of a recession next year at a 1 in 5 chance from an earlier 1 in 4 probability. This is important as it mitigates the overall specter of a larger-scale jump in loans on non-accrual status.

It's important to note that Sachem's peer Broadmark Realty ( RC ) which was acquired by Ready Capital faced rising nonperforming loans that forced a 50% dividend cut. Whilst Sachem has stated it rarely loses money on its loans, the lead time on its foreclosure process combined with further pressure from a rise in loans on non-accrual could force a near-term dividend cut. The mREIT held cash and equivalents, including investment securities of $52.3 million as of the end of the second quarter, so there is some fiscal headroom to support the $5.7 million quarterly common share dividend payout. However, management emphasized that their board is continually evaluating the distribution policy against the lack of dividend coverage. If this lack of coverage remains a feature for the next few quarters, then it's hard to justify making up a shortfall from cash reserves. The Series A preferreds ( SACH.PA ) continue to offer a safer option for stability, albeit with a 9.45% yield on cost that is around 600 basis points lower than the commons. Both tickers are a hold.

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