SACH - Sachem Capital Corporation

[DTEJD1997]

Hey all:

 

Anybody else looking at SACH?  This is a "hard money" mREIT based in CT.  They do most of their lending in CT, but do have some loans in TX, CO, SC.

 

They reworked their capital structure in the last part of 2019.  Made it much simpler & safer.  They are also sitting on a TON of cash for a company of their size and the industry they are in.

 

The common is selling at pretty big discount to book value.  They have deferred a decision on the dividend, but should pay something out towards the end of the year.

 

As interesting as the common is, I think their bonds are also pretty compelling.

 

"Ragnar is a Pirate" did a pretty good write up on this stock & bonds.

 

I didn't get in at the low, but reasonably close.  Got a nice little gain, but I think there is a good chance it will go substantially higher once things start getting back to normal.

 

Any thoughts?

 

[matts]

Interesting. Thanks to both of you for the idea. On the call Jeff asked about LTV caluclated at purchase price or after repair estimation and the CEO said:

 

"That’s always been the great issue with us. If it is a construction loan, we’re looking at an after repair value. So, it has to take into account the construction financing, the appreciation that the developer puts into the project, the purchase price of the property to begin with. That’s the tougher of the calculation so it’s 50% of value. And, if it’s a non-construction loan, it has to be 50% of the purchase price. Believe me, in today’s day and age, a 50% LTV is going to be pretty tough to get. That’s self-imposed. We understand that. There are very few techniques we can use to prop up a transaction and it all comes down to the value at the end."

 

Note: the 50% he is referring to is their new policy because of COVID, their prior loans were generally made at 70% LTV

 

Do we know what is a construction loan according to their definition? I'm guessing it's when the contractor actually requires architectural drawings and approval from the city and non-construction is when it's just a kitchen reno etc. Does that sound right?

 

Just trying to figure out how to haircut their assets. Obviously, if most of "Developer – Residential Mortgages" on their books is based on after repair estimation and the borrowers abandon their flips, the haircut should be more severe. Has anyone figured out how much of their res book is construction vs non-construction (LTV on purchase cost, vs LTV on after repair est)?

 

I think that's a critical part of determining the downside risk.

 

 

[writser]

I agree with Matt. Haven't been able to figure that out so far. The September 2019 presentation gives some details about their portfolio at the time: a split of ~7% land, ~24% commercial,  ~67% residential. ~75% of the loans portfolio by value is <$500k. And about the residential loans: they are "primarily homes that are fixed and flipped". One of the key questions seems to be whether LTV for that part of the portfolio is primarily based on cost or after-repair value. That's something I haven't been able to figure out. If you have a bunch of crap that is financed at 70% of estimated after-repair value things can go downhill fast, or so I presume.

 

That said, the bonds seem reasonably well covered even if you assume heavy losses. The equity is a bit too risky for my tastes at first glance.

 

Bond/note prices have bounced back to $~20. Obviously I'm a bit late to the party here but they seem attractive. I still have to pore over the note prospectus but at first glance the covenants seem a bit loose. The notes are unsecured, in the words of the company: " they are effectively subordinated to all of our existing and future secured indebtedness" and they do not have to be redeemed when a change of control occurs. On the other hand a default event can be triggered when they miss a single interest payment.

 

In any case an interesting idea, thanks for sharing. Have to think about it a bit more. The CEO sounded sensible on the conference call.

 

Also, it's kind of crazy that one founding brother left the company and the other one effectively says: "I'm not sure why, he never sent a letter" in the conference call. Probably some kind of family feud.

[matts]

Can someone help me understand how LOAN was trading a 2x book? I just don't get it. A company like this owns a bunch of mortgages and some debt to finance them. Yes, they charge fairly high interest for their loans but the loans are also riskier than normal mortgages. The mortgage values on the BS should reflect the value of the higher interest rate, correct? LOAN ROE has only been above 10% last few years, and often negative before that. why on earth should one of these pseudo banks trade much above book? I'm perplexed.

 

 

[Hielko]

Can someone help me understand how LOAN was trading a 2x book? I just don't get it. A company like this owns a bunch of mortgages and some debt to finance them. Yes, they charge fairly high interest for their loans but the loans are also riskier than normal mortgages. The mortgage values on the BS should reflect the value of the higher interest rate, correct? LOAN ROE has only been above 10% last few years, and often negative before that. why on earth should one of these pseudo banks trade much above book? I'm perplexed.

I assume people just buy it for the dividend yield...

 

About the bonds, they seem pretty safe right now. But I think just looking at the current balance sheet isn't the proper way to analyze risk.

 

Lets say you have company X with $50 in random assets. It issues a $100 bond and you buy it, giving the company $100 cash while still having $50 in additional assets. Would you now characterize this bond as super super safe? Should it be AAA rated? After all, if you look at the balance sheet there is $100 in cash so the whole bond is covered by the cash on the balance sheet. A simple analysis would say that they could repay the bond at any moment without problem.

 

But no, the company isn't going to liquidate right now and isn't going to keep the cash on the balance sheet. It's going to be spend, the company is going to take risks with it and at the end of the day if it works out you get your money back plus interest as a bond investor. If it doesn't work out you get whatever is left at that point in time. But you don't share in the upside of taking the risks.

 

The bonds of Sachem have almost no covenants, only meaningful one is a 150% asset coverage ratio I believe. A lot can happen between today end 2024 when they should be redeemed. Not saying that 80% of par is the right price, but also not so sure that is significantly undervalued.

[DTEJD1997]

Can someone help me understand how LOAN was trading a 2x book? I just don't get it. A company like this owns a bunch of mortgages and some debt to finance them. Yes, they charge fairly high interest for their loans but the loans are also riskier than normal mortgages. The mortgage values on the BS should reflect the value of the higher interest rate, correct? LOAN ROE has only been above 10% last few years, and often negative before that. why on earth should one of these pseudo banks trade much above book? I'm perplexed.

I assume people just buy it for the dividend yield...

 

About the bonds, they seem pretty safe right now. But I think just looking at the current balance sheet isn't the proper way to analyze risk.

 

Lets say you have company X with $50 in random assets. It issues a $100 bond and you buy it, giving the company $100 cash while still having $50 in additional assets. Would you now characterize this bond as super super safe? Should it be AAA rated? After all, if you look at the balance sheet there is $100 in cash so the whole bond is covered by the cash on the balance sheet. A simple analysis would say that they could repay the bond at any moment without problem.

 

But no, the company isn't going to liquidate right now and isn't going to keep the cash on the balance sheet. It's going to be spend, the company is going to take risks with it and at the end of the day if it works out you get your money back plus interest as a bond investor. If it doesn't work out you get whatever is left at that point in time. But you don't share in the upside of taking the risks.

 

The bonds of Sachem have almost no covenants, only meaningful one is a 150% asset coverage ratio I believe. A lot can happen between today end 2024 when they should be redeemed. Not saying that 80% of par is the right price, but also not so sure that is significantly undervalued.

 

if you listen to the latest conference call, management is very clear about how the cash on the BS will be used.  New loans have tighter underwriting standards AND will be limited to incoming cash flows (payoffs & interest).  Thus, SACH will be approximately keeping their $21mm in liquidity until the current crisis passes.

 

As for the bonds, yes, the upside is limited.  I am happy to double my money in 4 years AND receive interest payments.  That rate of return well exceeds my yearly return target.  I just wish I was piling into the bonds at 8.

 

Finally, a potential investor is not limited to EITHER equity OR bonds.  They can buy both!

[matts]

DTE, I THINK everyone so far agrees that the bonds are most likely money good. I was mostly interested in the common now.

 

Would you mind addressing my questions? a bit of your thought process in addition to what Jeff wrote would really help the discussion.

 

What's your understanding of the LTV on cost vs LTV on after repair estimates for their residential book? They never defined what is a "construction loan". LTV of 70% on the cost of a shitty house, plus  a major renovation planned by the borrow would introduce quite a bit of risk to collateral coverage.

 

and also, with respect to the upside for the common, why should a company like this trade at 2x book? I don't understand why investors used to value LOAN so highly.

 

Thanks again for the idea. Bonds were certainly a great buy a few weeks ago, hence my interest in the common.

 

 

[5xEBITDA]

What is book value of tangible equity as a % of total debt and how much can tangible equity decline before it is below 100% of total debt?

[hillfronter83]

Is anyone concerned about their expansion in geographies other than Connecticut while all their employees are in CT?

 

Here is from their 10K (emphasis mine):

We further believe that there will be many opportunities for us to expand our business into new markets. In the fourth quarter of 2019 and the first quarter of 2020, we have funded loans secured by properties in Phoenix, Arizona, Austin, Texas, Charleston, South Carolina and Littleton, Colorado. We also believe these developers will prefer to borrow from us rather than other lending sources because of our flexibility in structuring loans to suit their needs, our lending criteria, which places greater emphasis on the value of the collateral rather than the property cash flow or credit of the borrower, and our ability to close quickly.

 

We rely on readily available market data, including appraisals when available or timely, tax assessment rolls, recent sales transactions and brokers to evaluate the value of the collateral.

 

 

 

[johnny]

Seems like a bit of a no-brainer, unless there is fraud or egregious mismanagement. So shouldn't that basically be the substantive discussion?

 

1. One day, in the midst of a bunch of successful capital raises and business growth, Co-CEO and head of marketing just disappear. Company then "incurred significant costs” to harden their systems against intrusion? Sounds like these two already personally knew most of the business contacts, so it wasn't borrower lists they were protecting, right?

 

2. The surviving brother is Chairman-CEO-CFO-Treasurer. Note that 75% of the board is current/former CFOs, including a former partner in a CFO staffing company. So one might imagine they should have an easier go of networking/recruiting to take some of the load off of our Key Man's shoulders?

 

3. Loans under foreclosure went from 9% in 2018 to 2% in 2019, pretty damn good. Especially helpful since they had four separate capital raises that year, so there would be a strong incentive to make sure all loans were on their best behavior. Also, hopefully totally unrelated, we ended 2019 with $11.8m in loans that had been extended past their original maturity, which we are assured is very normal regular stuff.

 

I don't know anything about this business, but here's the single data point that keeps pushing its way into my forehead as I think about this company:

 

Maybe a year ago a contractor-type guy wanted to pitch me on providing capital for projects that seem to roughly fit the profile given here (based on stated loan median of $140k). I remember, in my virgin innocence, being totally shocked at the massive percentage of the total capital he proposed was going to improvements (ie, we're buying this house for $60k, and we're going to put $60K into the kitchen bathrooms floor and windows). He explained how these 60k properties, after 60 more ks and some elbow grease were going to sell for 150, easily.

 

Well, if your underwriting takes that at face value and slaps 70%LTV on it, I can actually see .5x book being the correct number in times like these, where the average homebuyer's propensity to pay for section 8 housing with subzero fridges may be significantly diminished.

[matts]

Seems like a bit of a no-brainer, unless there is fraud or egregious mismanagement. So shouldn't that basically be the substantive discussion?

 

1. One day, in the midst of a bunch of successful capital raises and business growth, Co-CEO and head of marketing just disappear. Company then "incurred significant costs” to harden their systems against intrusion? Sounds like these two already personally knew most of the business contacts, so it wasn't borrower lists they were protecting, right?

 

2. The surviving brother is Chairman-CEO-CFO-Treasurer. Note that 75% of the board is current/former CFOs, including a former partner in a CFO staffing company. So one might imagine they should have an easier go of networking/recruiting to take some of the load off of our Key Man's shoulders?

 

3. Loans under foreclosure went from 9% in 2018 to 2% in 2019, pretty damn good. Especially helpful since they had four separate capital raises that year, so there would be a strong incentive to make sure all loans were on their best behavior. Also, hopefully totally unrelated, we ended 2019 with $11.8m in loans that had been extended past their original maturity, which we are assured is very normal regular stuff.

 

I don't know anything about this business, but here's the single data point that keeps pushing its way into my forehead as I think about this company:

 

Maybe a year ago a contractor-type guy wanted to pitch me on providing capital for projects that seem to roughly fit the profile given here (based on stated loan median of $140k). I remember, in my virgin innocence, being totally shocked at the massive percentage of the total capital he proposed was going to improvements (ie, we're buying this house for $60k, and we're going to put $60K into the kitchen bathrooms floor and windows). He explained how these 60k properties, after 60 more ks and some elbow grease were going to sell for 150, easily.

 

Well, if your underwriting takes that at face value and slaps 70%LTV on it, I can actually see .5x book being the correct number in times like these, where the average homebuyer's propensity to pay for section 8 housing with subzero fridges may be significantly diminished.

 

Agreed. But if what you say is true, then the CEO has incentives to keep the scheme going and keep paying himself so I still see the bonds as money good. at around 14.5% YTM i think it's a fairly solid investment so I picked some up. I have not been able to get comfortable with the equity.

[johnny]

(edit: Please don't take this post too seriously: I don't have any strong opinions here, just haven't slept in about 30 hours and need to burn off my last coffee)

 

Here's my serious question for people who knows this stuff better than me: given how clear the crux of the issue for the company is (collateral: good or not?), wouldn't it be a very simple solution for the company to just publish a list of all the properties they have lent against? Then a few market participants could spot-check the list, make sure its not all Connecticut swampland, and everything would be fine. More likely, nobody would do the work because they'd be comfortable with the strength of the signal and everything would be fine.

 

Luckily I have google. So I'll just cross my fingers and hope they lend using subsidiaries with the word "Sachem" in them. Most their lending is in Connecticut, so I'll go hunting there: https://www.uslandrecords.com/ctlr/

 

I have to choose a township, and I know nothing about Connecticut. Luckily, I have google and it tells me that BRIDGEPORT is the most populous "township", so we'll choose that and see what pops up.

 

The most recent filing, just last month, is a UCC-1 and it is by Sachem Capital Corp and the subject property is:

 

https://www.coldwellbankerhomes.com/ct/bridgeport/2335-east-main-street-east/pid_930586/

 

Okay: Coldwell says transaction for $170,000--that seems to be about the right size for their portfolio. Only weird thing here is that this transaction happened five years ago, with the UCC-1 filed just last month. Let's put a pin in that.

 

I originally had no intention of trying to investigate the developer/contractor, but I couldn't help but notice the name:

 

L'Eglise De Dieu La Grande Commission

 

It's been a while since I took French 1, but luckily, Google. Here's the Facebook page for L.E.D.D.L.G.C.

 

https://www.facebook.com/Grandecommission/

 

It is a very small community church for some specific type of immigrant following some specific type of Christianity. Being from LA, this sort of thing is quite familiar to me--immigrants starting up small churches in vacant commercial spaces. But at the risk of wildly generalizing, usually this is not going on in areas that scream "dependable collateral".

 

Okay, so what the hell is going on? Why is there a March 2020 UCC filing, with an immigrant church as the counterparty, on a property that was last transacted on five years ago? I'd like to be able to tell you it took me only 5 seconds to answer the question, but I had to wade through about 5 or 6 more hits on Le Grande Commission (tax liens and stuff) before I finally got to March 2015. And what did I find there? Another UCC-1. Filed by Sachem. So a company that presents itself as making mostly one year loans on predominantly fix-and-flip residential properties seems to be six years into a loan made to a 30-person Haitian evangelical church that find itself intermittently unable to pay property taxes on the collateral. What are Sachem's loss reserves at, again?

 

Here is what is clear: Sachem's representations about what its portfolio is made up of do not seem consistent with this psuedo-random draw from the pool. Maybe just bad luck; maybe if I had picked a different town or a different day to check, or maybe if I had ordered the list alphabetically instead of by date...maybemaybemaybe.

 

Perhaps there is a perfectly reasonable explanation. I think somebody wanting to go long the equity here would be well advised to reach out and ask for some clarity on this asset. Since it's so old, it probably makes sense to ask to talk to the employee that actually signed for the original deal in 2015. That appears to be somebody by the name of *squints at monitor* Jeff-rey Villllllano. Anybody know if he is still with the firm?

 

So there you have it. n = 1.

[matts]

That's some damn good research for someone just burning off their last cup of coffee. I'll be taking a look. Thanks!

[matts]

I looked at some of the mortgages properties below your N1 and it looks like maybe it was just unfortunate the sketchy church happened to be at the top of the list. Now, I haven't been able to work through the whole timeline of the documents of when/how/to who Sachem lend the money, but here are some examples of the properties securing sachem loans. Not cherry-picking, just getting the next 4 mortgages after the church:

 

1. https://www.realtytrac.com/property/ct/bridgeport/06605/613-615-laurel-ave/196772553/

 

loan: 146k, this one isn't listed as sold anywhere (private sale) but realtor estimated value of 134k

 

2. https://www.realtytrac.com/property/ct/bridgeport/06604/41-43-columbia-st/52692416/

 

loan: 107,  sold for 50k on 02/03/2020, current realtor estimate of 140k.  after repair estimate based on 70% LTV: 152k, looks like a bit renovation/construction

 

3. https://www.zillow.com/homedetails/264-Soundview-Ave-Bridgeport-CT-06606/58774590_zpid/

 

loan: 109k zillow: sold 12/17/19 for 105k, current zillow estimate 105k,  after repair estimate based on 70% LTV: 155k

 

4. https://www.zillow.com/homedetails/123-Exeter-St-Bridgeport-CT-06606/57253571_zpid/

 

loan: 191 zillow: sold 12/12/19 for 188k, current zillow estimate 233k, after repair estimate based on 70% LTV: 273k

 

looks to me like they are definitely lending 70% of after repair value. On the flip side, none of the loans seem overly risky. not lending too much above zillow estimate for renovation.

 

 

[zuokk]

I'm also in the process of spot checking the other townships and so far, the collateral look decent.

 

 

[Nelg]

Has anyone researched the backgrounds of the executives and directors? If you're looking for a quick yes/no, I think it might be easier to just research the people vs properties, notwithstanding the very interesting points johnny brought up.

 

One of the directors has been involved with (either as a director or CFO) of a ton of companies, many of which have gone to zero. Granted, some of the companies filed for Ch11 a couple years after his departure and not while he was actively involved.

 

The investment thesis does seem pretty compelling and I have to admit I was impressed with the CEO after reading the call transcript. But this director's background throws me off a bit. I am a bit weary of a lot of financial institutions at the best of times, and think I'll let someone else make money on this one.

 

[Packer16]

The LTV vs LTC (loan to cost) is an issue in some of these fix & flip lenders.  It would be interesting to see what LTC ratio is as LTV is based upon an estimate of value after the repair.

 

Packer

 

[matts]

I'm also in the process of spot checking the other townships and so far, the collateral look decent.

 

Thanks for contributing.

what townships? so we don't overlap efforts...

[zuokk]

Started from the bottom and now I'm ...in the middle

[ragnarisapirate]

Started from the bottom and now I'm ...in the middle

 

Meaning?

 

I think the thing that a lot are missing, is the the REOs they have, aren’t necessarily reos that they lent on. A lot are reos that they bought, knowing that the loans weren’t working.

[matts]

Started from the bottom and now I'm ...in the middle

 

Meaning?

 

I think the thing that a lot are missing, is the the REOs they have, aren’t necessarily reos that they lent on. A lot are reos that they bought, knowing that the loans weren’t working.

 

Not sure what you mean by that Jeff. a lot of their REO is homes they bought where other lenders lent the money to the flippers and SACH bought the property at a discount from the flipper?

 

Also, as a bondholder, for me the main focus is on the margin with the LTV. I'm looking in the county records to see how much they lent on a "project" vs how much the property is worth today, assuming the flipper just bails. It looks like they were lending 70% LTV based on after-reno estimated value, which doesn't leave much margin of safety depending on what the reno budget was as a % of RE cost.

 

 

[ragnarisapirate]

Listen to their last conference call, and check out the section where they talk about the REOs. It towards the end. That will give you a lot of info about the REOs. You can also email the CEO. He is really good about getting back with people.

 

For the LTV, there are different ways to structure a 70% ltv loan so that the lender is good if the house does not get fixed up and the person gets away with the money. There is more to this type of product than just looking at numbers.

 

Would absolutely love to hear what a convo with the CEO would sound like, for you, because these are good questions, that I’d love to hear more on. :)

 

 

[DTEJD1997]

Hey all:

 

Anybody else see that SACH's earnings came out this AM?

 

Earnings of about $.10/share vs. $.13/share in the year ago period.  Lower earnings this quarter was due in part to a larger number of shares outstanding.

 

Revenue was up about 29% YOY.

 

Stock is up $.25/share, to about $2.54/share.

 

Maybe people are reacting negatively as EPS are down?  I am surprised that the bonds aren't trading near par.

 

Going to be interesting to see what the dividend is for the year.  Might be $.35 to $.40?

[matts]

Hey all:

 

Anybody else see that SACH's earnings came out this AM?

 

Earnings of about $.10/share vs. $.13/share in the year ago period.  Lower earnings this quarter was due in part to a larger number of shares outstanding.

 

Revenue was up about 29% YOY.

 

Stock is up $.25/share, to about $2.54/share.

 

Maybe people are reacting negatively as EPS are down?  I am surprised that the bonds aren't trading near par.

 

Going to be interesting to see what the dividend is for the year.  Might be $.35 to $.40?

 

I believe the bonds aren't moving because they blew their entire cash balance on new loans in Q1. You don't think that's a major issue?

[DTEJD1997]

Hey all:

 

Anybody else see that SACH's earnings came out this AM?

 

Earnings of about $.10/share vs. $.13/share in the year ago period.  Lower earnings this quarter was due in part to a larger number of shares outstanding.

 

Revenue was up about 29% YOY.

 

Stock is up $.25/share, to about $2.54/share.

 

Maybe people are reacting negatively as EPS are down?  I am surprised that the bonds aren't trading near par.

 

Going to be interesting to see what the dividend is for the year.  Might be $.35 to $.40?

 

I believe the bonds aren't moving because they blew their entire cash balance on new loans in Q1. You don't think that's a major issue?

 

No, I don't think they have substantially burned off cash & short term since the last conference call.  It is down, but only about $3mm?

 

That might be due to commitments that they had, but had not yet funded/paid for?

 

So I don't think your assertion is correct.  Will find out in the Tuesday conference call.