Sachem Capital Corp. (SCCE)

Sachem Capital’s Series D preferred shares (ticker SCCE) are a form of hybrid security issued by a small real-estate lending company in Connecticut. Preferred shares sit between debt and common equity in the company’s capital structure—they offer a fixed dividend (currently around 8 percent annually, though this can change), paid quarterly or semi-annually, and they give holders a claim on assets that comes before common shareholders but after the company’s debt. For income-seeking investors willing to accept some risk, preferred shares can provide steady payouts from a profitable lending operation, but they also lock holders into the cyclical, concentrated risks of the real-estate market.

The company, Sachem Capital Corp., was founded in 2007 and has spent the past decade and a half making bridge loans and construction financing available to residential developers. Bridge loans are short-term debt instruments that fill the gap between when a project starts and when it either sells or qualifies for permanent mortgage financing. Because these loans are short-duration and backed by real property, they carry higher interest rates than traditional mortgages—typically in the 12 to 15 percent range. This high yield is Sachem’s primary source of revenue, and it is what funds the dividend paid to preferred shareholders.

The business model seems simple enough: originate loans at 14 percent, fund the company at 4 or 5 percent, pocket the spread, and use some of the profit to pay preferred holders a steady 8 percent return. The reality is more complex. Sachem must continuously source new loans (origination), manage the portfolio through changing market conditions (servicing), absorb periodic defaults and losses (loan loss provisions), and maintain adequate capital and liquidity to keep the lending engine running. All of this happens against the backdrop of the real-estate cycle—a powerful force that moves in multi-year waves and can turn a profitable lender into a money-losing one in a matter of months.

The margin available to Sachem—the difference between what it earns on loans and what it pays for capital—is tighter than it first appears. Before loan losses, the company might enjoy a 6 to 8 percentage-point spread. But overhead (salaries, compliance, legal, systems) eats 2 to 3 points. Loan losses in a normal year consume another 1 to 2 points. That leaves 1 to 3 points of pre-tax profit—which, after taxes, funds the preferred dividend and retains some capital for growth. In a year when delinquencies spike or a large loan defaults, the math flips negative fast.

Sachem’s loan portfolio is concentrated in residential real estate in the Northeast, though the company has gradually expanded into other geographies and property types. The concentration creates vulnerability. A localized real-estate downturn—or a national recession that suppresses residential construction and property values—hits Sachem hard. Unlike a major bank with loans spread across geographies and borrower types, Sachem has a high proportion of its capital bet on one asset class and one region. When that asset class stumbles, the company stumbles with it.

Funding risk is a second major concern. Sachem does not have a retail-deposit base like a traditional bank, so it must tap wholesale capital markets, credit lines, and other financing arrangements to fund its loans. Access to that capital is not guaranteed, especially during periods of credit stress. The 2008 financial crisis and the 2020 pandemic both demonstrated how quickly wholesale funding can dry up for lenders like Sachem. If Sachem cannot fund new loans, growth stops. If existing funding becomes expensive, profitability compresses. The preferred dividend is typically covered by earnings, but in a severe downturn, the company might have to cut it to preserve capital.

Interest-rate risk compounds the structural challenges. Sachem often borrows at floating rates (adjusting regularly as Fed policy or market conditions change) while lending at fixed rates, at least for portions of the portfolio. When the Federal Reserve raises rates, Sachem’s cost of capital climbs while loan yields remain locked in, shrinking the spread. New loan originations eventually reflect higher rate environments, but there is a lag—months or quarters during which the portfolio reprices. A steep, unexpected rate rise can hit earnings immediately.

The preferred share structure itself places SCCE holders in a peculiar position relative to common shareholders. Preferred holders get a fixed, priority claim on dividends (the 8 percent is paid before common shareholders see anything) but have no voting power and no claim to growth. If Sachem has a banner year and originations surge and losses stay low, common shareholders capture the upside through a rising stock price or special dividends. Preferred holders continue to receive their 8 percent, no more. Conversely, if the company hits severe stress, preferred holders rank ahead of common but behind senior creditors. In an insolvency scenario, the preferred dividend might be suspended to preserve capital for debt repayment, or the preferred shares might be written down entirely.

For an investor evaluating SCCE, the relevant metrics are straightforward: the company’s return on assets (how much profit it generates relative to its loan portfolio), the delinquency rate and charge-off history (early indicators of loan quality), the available spread (what it earns on loans minus what it costs to fund), and access to capital (credit lines, debt markets). A few years of strong real-estate markets, low delinquencies, and stable funding can make the preferred dividend feel safe and reliable. A sudden shift—tightening credit, rising defaults, a property-market downturn—can quickly threaten that comfort.

The lack of a competitive moat is also relevant. Sachem competes with banks, other non-bank lenders, private equity-backed funds, and a long tail of other small operators in the same space. There is nothing proprietary about the underwriting process, the loan structure, or the customer relationships. A larger, better-capitalized competitor with a lower cost of capital can always undercut Sachem’s pricing or grab market share. Sachem’s durability depends on its ability to be nimble and to know its local markets better than outsiders—advantages that are real but not durable. The preferred shares yield a fixed income stream from a company that profits from real-estate lending during good times and suffers during bad times, with no special protection against commoditization or competitive pressure.