2023-04-03 04:23:02 ET
Summary
- Sachem is now trading for 70 cents on the dollar with its commons down 27% over the 12 months.
- The hard money lender offers a double-digit 14% yield but this is not fully covered by GAAP EPS.
- Tangible book value per share has been in decline on the back of a rise in Sachem's outstanding shares.
Sachem Capital ( SACH ) last declared a quarterly cash dividend of $0.13 per share , in line with its prior payout for a 14% forward yield. The hard money lender has proved resilient, up 18% in 2023, against what has been a wholesale destruction of value across the mortgage REIT industry. Indeed, peer company Broadmark ( BRMK ) was bought by Ready Capital ( RC ) after its stock price and payouts were essentially cut in half. Tangible book values ("TBV") have been under sustained pressure due to rising Fed Funds rates and mREITs more broadly have recently brought in dividend cuts with the outlook for 2023 being marked by continued uncertainty.
Sachem has kept its dividend stable throughout this period of disruption with the dividend temporarily spiking to $0.14 per share. Hence, whilst Sachem's baby bonds ( SCCE ) still offer value and are currently trading at a 20% discount to par, the commons are likely to see the strongest price movements through 2023. Whether this is a positive or negative price movement will depend on the direction of TBV and FFO payout ratios.
Tangible Book Value And Discount To Book
Sachem's fiscal 2022 fourth quarter earnings saw revenue come in at $9.4 million , a 36% increase over the year-ago quarter. Full-year revenue came in at $52.28 million , a 72% year-over-year increase and a beat by $2.58 million on consensus estimates. The lender funded roughly $300.3 million of mortgage loans spread across 16 states with a focus on the Southeast. Critically, 17.6% of Sachem's loans had a term of one year or less which provides management with the flexibility to reprice their capital base in response to the rising rate environment. Put simply, and due to the marked rise in interest rates, longer-duration loans at lower rates are less attractive than shorter-duration loans during a still-rising rate backdrop. Sachem is able to better protect its interest spread with the bulk majority of its construction finance loans made at a 70% LTV and at terms not longer than 18 months.
Sachem also flagged what was an enhanced deal pipeline of at least $100 million. The failure and subsequent buyout of Silicon Valley Bank have sparked angst almost some lenders and Sachem noted less price competition from competitors post-period end. Deal flow from otherwise high-quality borrowers with commitments who have had their loans pulled has moved towards Sachem and management expects to fully capitalize on this. This has meant being more aggressive with their loan pricing with Sachem also tapping on Needham Bank for a new $45 million revolving line of credit. This can be increased to $75 million to provide Sachem with the capacity to hover up business from developers affected by the fallout from Silicon Valley Bank.
Sachem's TBV as of the end of its fourth quarter was $217.7 million, around $5.30 per share and down sequentially from $5.47 per share in the third quarter. It also fell 3.6% from $5.50 in the year-ago comp. The REIT held 444 loans with a total principal balance of $460.6 million. Roughly 8.8% of this, around 40 loans, was in default or foreclosure with the remainder at an average interest rate of 10.7%. Sachem was upbeat on the value of the collateral of loans in defaults being insufficient to cover the loans.
Earnings, Payout And The 2023 Outlook
Net income attributable to common shareholders was $17.2 million with earnings per share of $0.46 per share a $0.02 growth over the year-ago quarter. Whilst EPS was a beat by $0.01 on consensus estimates, it failed to fully cover total dividends for the year. Sachem paid $0.52 in dividends over the last four quarters, around $0.06 more than 2022 GAAP EPS. However, adjusted non-GAAP earnings was $20.2 million, around $0.53 per share. This would have seen its payout ratio improve to 98.1%.
The risk here is defaults tick up on the back of a recession to cause short-term disruption to earnings even with management highlighting that their distressed loans have rarely lost 100% of their value. Further, the current 30% discount to book is justified as TBV per share is under a sustained decline on the back of a material rise in Sachem's outstanding share count.
Hence, this discount will be less of an opportunity in future quarters if TBV per share continues to decline. Sachem ended the fourth quarter with $565.7 million in assets, $23.7 million of cash and cash equivalents, and $326.9 million in total debt outstanding. Whilst a dividend cut would not be the worst-case scenario with a still double-digit yield likely, I don't think the commons are a good buy at this time with the huge rush for new loans countered by falling TBV per share and uncertainty around the dividend coverage.
For further details see:
Sachem: 30% Discount To Book And A 14% Yield