Future Capital Deployment From Resolved Loans And Developments Will Drive Lending Opportunities

Catalysts

About Sachem Capital

Sachem Capital provides small balance real estate finance solutions focused on residential and mixed-use assets, complemented by targeted development and fund investments.

What are the underlying business or industry changes driving this perspective?

• Progressive resolution of nonperforming loans and conversion of distressed assets into REO and development projects through Urbane should release trapped capital, support higher earning assets and improve overall net margins as workout costs subside.
• Leveraging Urbane and Shem Creek to reposition select properties into higher-value multifamily and residential developments positions Sachem to benefit from persistent rental demand and could lift fee income and earnings from higher-yielding equity-like returns.
• A sustained environment where traditional lenders remain cautious on real estate credit increases demand for flexible private capital. This should support Sachem's double-digit loan yields and drive revenue growth as originations scale on a strengthened balance sheet.
• Ongoing Federal Reserve rate cuts, combined with still constrained new housing supply, may improve borrower affordability while preserving elevated spreads for specialized lenders. This can enhance loan volume without materially compressing portfolio yields and thus support earnings.
• Disciplined capital structure management, including retiring higher-cost unsecured notes and extending term debt with covenant headroom, improves financial flexibility to fund a robust pipeline of high-return loans and supports sustainable growth in book value and future earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Sachem Capital's revenue will grow by 168.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -942.5% today to 26.4% in 3 years time.
• Analysts expect earnings to reach $19.8 million (and earnings per share of $0.33) by about December 2028, up from $-36.8 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 4.8x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the US Mortgage REITs industry at 13.0x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A large and prolonged nonperforming loan and REO burden, including the concentrated Naples exposure that represents over 13% of the portfolio, could tie up capital and increase workout, legal and property carrying costs, limiting new originations and putting pressure on revenue and net margins over time.
• If the broader real estate cycle remains weak, with elevated rates on longer maturities, subdued housing transactions and ongoing permitting and construction hurdles, demand for Sachem's loans may not fully offset higher credit losses, which would weigh on long term earnings growth and book value per share.
• Sustained reliance on relatively expensive funding structures such as the 9.875% senior secured notes and other leveraged facilities could compress the spread between loan yields and funding costs, reducing the benefit of double digit loan coupons and constraining future net interest income and net margins.
• Execution risk in Urbane and Shem Creek development and fund investments, including potential delays, cost overruns or weaker than expected sales and leasing, could turn intended equity like upside into write downs, negatively impacting revenue diversification and overall earnings.
• Persistently high levels of nonaccrual loans and the need to maintain or rebuild allowances for credit losses, particularly if resolutions take longer or recoveries disappoint, could erode the recent improvement in provisions and lead to renewed pressure on net income and book value.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $1.48 for Sachem Capital based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2.0, and the most bearish reporting a price target of just $1.2.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $75.2 million, earnings will come to $19.8 million, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $1.02, the analyst price target of $1.48 is 31.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.