Introduction

Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Baby Bond issued by Sachem Capital Corp (SACH). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B5 Filing by Sachem Capital Corp. – the prospectus.

Source: SEC.gov

For a total of 1.2M notes issued, the total gross proceeds to the company are $30M. You can find some relevant information about the new baby bond in the table below:

Source: Author’s spreadsheet

Sachem Capital Corp 6.875% Notes due 2024 (NASDAQ: SACC) pay a fixed interest at a rate of 6.875%. The new issue has no Standard & Poor’s rating but is expected to be rated “BBB+” by less authoritative Egan-Jones Ratings Company. SACC is callable as of 11/07/2021 and is maturing on 12/30/2024. The new IPO is currently trading close to its par value at the price of $24.91 and has a 7.63% Yield-to-Call and a 7.24% Yield-to-Maturity. The interest paid by this baby bond is not eligible for the preferential 15% to 20% tax rate. This results in the “qualified equivalent” YTC and YTM sitting around 6.36% and 6.03%, respectively.

Here is the product’s Yield-to-Call curve:

Source: Author’s spreadsheet

The Company

Sachem Capital Corp. incorporated on January 25, 2016, is a real estate finance company. The Company is specialized in originating, underwriting, funding, servicing and managing a portfolio of short-term loans secured by first mortgage liens on real property located primarily in Connecticut.

The Company provides its funds for acquisition, renovation, rehabilitation, development and/or improvement of residential and commercial properties. Its offered loans typically have a maximum initial term of one to three years and bear interest at a fixed rate. The Company’s primary objective is to grow its loan portfolio while preserving capital in a manner that provides for risk-adjusted returns to its shareholders over the long term principally through dividends. It intends to achieve the objective by continuing to focus on selectively originating, managing and servicing a portfolio of first mortgage real estate loans designed to generate risk-adjusted returns across a variety of market conditions and economic cycles.

Source: Reuters.com | Sachem Capital Corp

Below, you can see a price chart of the common stock, SACH:

Source: Tradingview.com

For 2018, the company has paid a $0.44 annual dividend on its common stock. With a market price of $4.24, the current yield of SACH is at 10.38%. As an absolute value, this means $8.32M yearly dividend expenses for the common.

In addition, the company’s market capitalization is around $99.5M, which makes SACH the third smallest ‘Residential REIT’ (according to Finviz.com).

Capital Structure

Below, you can see a snapshot of Sachem Capital Corp.’s capital structure as of its Quarterly Report in June 2019. You can also see how the capital structure evolved historically.

Source: Morningstar.com | Company’s Balance Sheet

As of Q1 2019, SACH had a total debt of $22.53M (representing the other outstanding baby bond issued by the company, SCCB), and with the newly issued SACC, the total debt of the company becomes $53M, that are senior to the company’s equity. This makes the Debt-to-Equity ratio at 0.53, which is good and the company has enough market capitalization coverage of its debt.

Furthermore, we also want to add one more ratio, the Earnings-to-Debt payments. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. From the income statement, we can see the company had a net income of $6.8M for the TTM with $3.7M needed for its debt payments (the yearly interest expenses on SCCB and SACH), so we have a ratio of 1.84, which is also very good coverage.

The Sachem Capital Corp Family

As I’ve already mentioned, SACH has one more recently-issued outstanding baby bond, Sachem Capital Corp 7.125% Notes due 2024 (NASDAQ: SCCB):

Source: Author’s spreadsheet

SCCB also pays a fixed interest, at a rate of 7.125%, is callable as of 06/30/2021, and is maturing on 06/30/2024. With a market price of $25.75, SCCB has a Yield-to-Call of 5.90% and Yield-to-Maturity of 6.68% compared to 7.63% YTC and 7.24% YTM of the new issue, which means the second has much better Yield-to-Worst.

In addition, in the following chart, you can see a comparison between SCCB and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). Due to the short history of the preferred stock, any meaningful conclusions can hardly be made, so this is for an informational purpose only.

Source: Tradingview.com

Sector Comparison

The following section contains all baby bonds that pay a fixed interest rate, with a par value of $25, issued by a Real Estate Investment Trust.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author’s database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author’s database

Source: Author’s database

Fixed-Rated Baby Bonds

The next charts show a more global view of all baby bonds that trade on the national exchanges, pay a fixed distribution, and have stated maturity date of less than 10 years, with a positive YTC. For a clearer view, the baby bonds, issued by MDLY (MDLQ and MDLX) are excluded from the charts.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author’s database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author’s database

Asset Coverage Covenant

We agree that for the period of time during which the Notes are outstanding, we will not pay any dividends or make distributions in excess of 90% of our taxable income, incur any indebtedness or purchase any shares of our capital stock unless we have an “Asset Coverage Ratio” of at least 150% after giving effect to the incurrence of such indebtedness and the application of the net proceeds therefrom or after taking into account the purchase price for such shares, as the case may be. “Asset Coverage Ratio” means the ratio (expressed as a percentage) of the value of our total assets bears to the aggregate amount of our indebtedness (including the aggregate of the involuntary liquidation preference of redeemable preferred stock, if any).

Source: 424B5 Filing by Sachem Capital Corp

Use of Proceeds

We intend to use the net proceeds from the sale of the Notes offered under this Prospectus Supplement for working capital and general corporate purposes, i.e., to fund new real estate loans secured by first mortgage liens. We may also use the net proceeds from the sale of the Notes to acquire other real estate finance companies or mortgage loan portfolios, although at this time no such acquisitive transactions are pending.

Source: 424B5 Filing by Sachem Capital Corp

Addition to the iShares Preferred and Income Securities ETF

With the current market capitalization of only $30M, SACC cannot be an addition to PFF, which is important to us due to its influence on the behavior of all fixed-income securities. I’ll just remind you about last year’s rally in the fixed-income borne from the redemption of the two “giants” HSEA and HSEB and the released cash of over $600 million used from PFF to buy more of the rest of its holdings.

Conclusion

As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, SACC is no exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain but in many cases, the new security happens to be better than the ones already trading on the market.

The company’s debt-to-equity and interest coverage ratios are good, moreover, there is additional protection to the newly issued notes, as SACH is obligated to maintain an “Asset Coverage Ratio” of at least 150%. Furthermore, the company’s two baby bonds are its only debt.

With the current trading at par that translates into a 7.24% Yield-to-Worst, SACC looks excellent. It looks better than its “older” relative, SCCB and despite the lack of many REIT baby bonds, the new IPO has the highest Yield-to-Worst. Also when comparing SACC to all other short-term “babies”, it gives one of the highest returns. Unfortunately, and the other notes, issued by a REIT are quite different from the newly listed. Another disadvantage is the weak performance of the common stock, SACH. Personally, I think this yield in the context of seemingly good company ratios look good but would approach cautiously.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-11-14