SACH - Sachem Capital: A Fat Yield Covered. Why I'm Buying

• Sachem Capital recently raised its quarterly dividend payout.
• This has maintained the dividend yield solidly over 10% and defied fears of a cut.
• Recently reported fiscal 2022 second quarter earnings showed revenue growth outperforming consensus estimates.

When Sachem Capital ( SACH ) raised its quarterly dividend payout to $0.14 per share, a 16.7% increase over the prior dividend of $0.12, its long-term investors reacted with surprise and jubilation. The previous payout was considered by some to be somewhat at risk due to the uncertain macro environment and worries about whether it was covered. Hence, the move to increase its quarterly payout looks set to reduce these concerns whilst reflecting the long-term management objective of providing attractive risk-adjusted returns to shareholders through dividends.

Connecticut-based Sachem is a real estate finance company specializing in originating, servicing and managing a portfolio of first mortgage loans. The non-bank lender typically focuses on secured short term loans of between 12 to 36 months to real estate investors looking to fund residential or commercial development projects. Whilst it has a presence in 15 states, the company primarily focuses on Connecticut, Massachusetts, and New York.

The real estate development market is incredibly capital-intensive with developers relying heavily on borrowed capital to acquire, develop, and maintain properties. Sachem has focused on meeting this demand through relatively small loans. The company has an average loan size that is currently less than $500,000, but that has increased markedly in recent quarters.

The company's common shares currently trade at just over $5, placing Sachem's total market capitalization at $183.5 million, down from around $220 million at its peak when shares were trading at $6.40. The decline built on the broader stock market malaise caused by rising inflation, interest rates, and recessionary pressures. This of course possesses systematic risks to Sachem as it could slow down demand for their loans, cause an increase in defaults on their current loan portfolio, or reduce the value of properties used as collateral by its customers.

Sachem Navigates The Short Term Lending Market To Deliver Strong Results

Sachem last reported earnings for its fiscal 2022 second quarter which saw revenues come in at $12.5 million . This was an 87% growth over the year-ago quarter and a beat of $870,000 on consensus estimates. Management stated that the increase was primarily due to an expansion of lending operations to new geographies and larger loan sizes. Interest income at $10.4 million comprised the bulk of revenues and increased by approximately $5.8 million or 122.8% over its year-ago figure. Origination fees at $2 million also increased, rising by 145% from $832,000 in the year-ago quarter.

The company's earnings per share during the quarter stood at $0.16 on the back of non-GAAP adjusted earnings of $5.8 million. As Sachem is structured as a REIT, it is required to distribute a minimum of 90% of taxable income each year to its shareholders. This places the increased quarterly dividend payout and yield of 11% in focus at it is covered by adjusted EPS. Hence, the solid growth momentum behind Sachem's lending operations should see the company continue to deliver strong results in the quarters ahead and possibly further incremental increases in the dividend payout. This hinges on the broader macro context not deteriorating further.

That Sachem's managed to grow total assets by 25.7% year-over-year to reach $525.4 million is a commendation of its management's ability to navigate the disruption and weakening of the economy that we have seen since the start of the year. This growth was mainly driven by a $130 million expansion of their loan portfolio. However, total liabilities also grew to reach $320.4 million, an increase of 34.7% from year-ago liabilities with cash and equivalents at $29 million as of the end of the quarter.

I'm Buying Because Of The Yield

Sachem Capital offers a compelling yield against an uncertain macro environment. I'm buying because I need the income. Inflation continues to rise, hitting household budgets hard as we all stare down the prospect of double digit inflation figures on the back of Russia's unprovoked war on Ukraine. This could cause further FED fund rate increases and reduce demand for the short term loans that has supported Sachem's net income growth since it went public.

The need to build a more reliable stream of income against what look sets to be months of heightened financial difficulty for millions is a core reason I've expanded my position in Sachem. Whilst this also posses a risk of capital destruction and a potential dividend cut, the alternative to see your lifestyle eroded by inflation is too grave to ignore. I rate Sachem as a buy on the strength of its financials which has supported the recent dividend raise. Indeed, the macro environment poses risks to the very well run company, but this is broadly a systematic non-Sachem issue that should be evaluated when investing in all public companies.

For further details see: