Sachem Capital Corp. (SACH-PA)

Sachem Capital is a real-estate lender. It gives short-term loans to people who are building houses or flipping property — loans that get paid back when the project sells or when the borrower gets permanent financing. The company itself is small and has traded on the over-the-counter (OTC) markets, which means it does not list on a major exchange like Nasdaq or the New York Stock Exchange.

What Sachem does

Sachem lends money for real-estate projects that need short-term capital — think of someone who buys a house to renovate and flip it, or a small developer who is building a small residential project. These borrowers typically cannot get a traditional bank loan because they are early in a project, or they move too fast for a big bank’s timeline. Sachem fills that gap.

The loans come with a senior lien (first claim) on the property, so Sachem has collateral. The typical loan lasts one to three years, and the interest rate is much higher than a traditional mortgage — often 12 percent or more, sometimes reaching 15 percent or higher. That high rate is the company’s way of being paid for the risk. These loans can go bad if a project runs out of money or if the real-estate market turns and the property drops in value.

Sachem also invests in real-estate investment trust (REIT) preferred shares and other real-estate debt securities, which gives the company a second income stream but also adds complexity to the portfolio.

How it makes money — and why margins are tight

Sachem’s revenue comes from interest on the loans it makes and from fees (origination fees, prepayment fees, other loan-related charges). The cost side includes the cost of the money Sachem borrows to lend out, servicing and overhead, and loan losses when a project goes bad.

In a normal environment, Sachem might earn 4 to 6 percentage points between what it charges borrowers and what it costs the company to fund itself — so if Sachem borrows at 5 percent and lends at 14 percent, it pockets 9 points before expenses. But after paying salaries, office space, loan servicing, and loan losses, the net margin can shrink to single digits or even turn negative in a bad year.

This is a crowded business. Banks, savings and loans, alternative lenders, and shadow-bank funds all compete for the same deals. The competition means Sachem cannot always demand high rates, and the market sets a ceiling on what a borrower will pay. When real estate is booming and capital is cheap, borrowers have choices and drive rates down. When the market tightens, the loans that got made look worse.

Where the risks lie

Sachem is highly sensitive to the real-estate cycle. When new construction is strong and property values are rising, projects are more likely to finish on budget and on time, borrowers can refinance or sell at a profit, and losses stay low. When property values drop or construction slows, the opposite happens. A recession that stalls homebuilding or flattens property prices can lead to a wave of loan defaults, eroding capital.

Interest-rate risk is another factor. If Sachem borrows short-term at low rates and then rates rise sharply before it repays, its funding costs shoot up while loan yields might stay fixed — squeezing the spread.

Like many small lenders, Sachem also depends on the availability of capital. If it cannot borrow money cheaply, or at all, it cannot make new loans. During the 2020 pandemic and again during recent credit market stress, access to funding tightened for lenders like Sachem.

Sachem is also tiny relative to the broader real-estate lending market. It has no brand moat, no cost advantage, no special expertise that a bigger, better-capitalized lender cannot replicate. It survives by knowing its local market and being flexible, but that is not a durable competitive advantage.

The preferred shares

Sachem has issued preferred shares (traded as SACH-PA) — a hybrid between debt and equity. Preferred holders get a fixed dividend (paid before common shareholders see anything) but rank behind bondholders if the company goes into distress. Preferred shares appeal to income-focused investors who tolerate some risk for a steady payout, but they are lower-priority claims than senior debt and come with no voting power.

What to watch

Anyone considering Sachem should monitor the loan portfolio closely. The company’s quarterly 10-Q filing shows the loan count, average loan size, and yield, and also discloses problem loans and charge-offs. Watch how the delinquency rate (loans behind on payments) moves with the real-estate cycle — rising delinquencies often precede losses.

The availability of funding is critical. If Sachem is borrowing at reasonable rates and accessing new capital regularly, it is in reasonable shape. If funding dries up or costs spike, growth stops and profitability suffers fast.

Finally, the interest-rate environment matters. In a rising-rate regime, Sachem’s borrowing costs climb, which compresses the yield spread unless the company can pass rates on to borrowers — which it often cannot if loans are locked in at a fixed rate.