Innovative Food Holdings IVFH (1 of 2)

DTEJD1997 here: 

I am guilty of being disorganized, doing too many things at once, and not fully completing what I start.  That happened with IVFH. Fortunately, I've known Jeff for a long time.  He is MUCH more organized  than I am.  He wound up helping me with this research and idea, doing actual field work, and picking up where I have left off. I did the initial work and analysis, but Jeff carried on and did a lot of the work and some very detailed analysis. Thus, this is a two part analysis. I started it, and Jeff finishes it off. 

The opportunity in (IVFH) kind of fell into my lap. IVFH has been on my extensive watch list for a few years. It has been near the bottom for a lot of that time. IVFH has had some difficulties of late, a lot of shareholder frustration, and perhaps most importantly, shareholder selling and a declining share price. The price has recently been as low as $.15/share in the recent panic. It has since climbed up to just above $.30/share. 

A couple of years ago, IVFH has made some excellent money, good returns on equity and capital. IVFH also has a lot of assets, cash, inventory, intellectual property and some interesting real estate. They then made some acquisitions that they had a LOT of expenses with, margins narrowed, earnings & cashflow went down, investors got frustrated and fatigued, and the stock price collapsed....so down near the bottom of the watch list it went... 

So here is how I became much more aware of the current opportunity in IVFH: 

I sell items on Ebay, and have for over 20 years. Late one night, something unusual popped up on my Ebay feed. That oddball item was “All Natural Pure Bee Honeycomb by Ziyad “ This is a “honeycomb” with honey in it. Yum Yum! I found it to be kind of unusual. This is not something that I would be thinking about purchasing online. The instant I saw it though, it registered with me. I've actually seen this item for sale in a great grocery store (Al-Haramain) that I frequent in Hamtramck MI. Hamtramck is a very dynamic small city, with lots of recent immigrants and a vibrant business community. There are many tremendous grocers there, with Al-Haramain being my "go-to" favorite.  As I am familiar with the Ziyad brand, I clicked on the Ebay link to find out more. Turns out, it is being sold by a seller with the name of “igourmet”.  Igourmet? I've heard of that name before...they are subsidiary company of IVFH!  What a small world!  I found it interesting that this item was being sold for $13.99 on Ebay, there is also a delivery fee of $5.99. I've seen that item for sale for less in Hamtramck....They are almost certainly making good margins (percentage wise) on that item. Perhaps most importantly of all, they have sold well over 100 of these honeycombs! That is pretty darn good for Ebay! 

So I did some more investigating....igourmet's feedback rating has been increasing quite substantially lately. Further, it seems to be accelerating in the last 60 days or so. Undoubtedly, a chunk of that is due to the Corona-virus pandemic as people are more likely to want to have food delivered to them. 

Igourmet also has a substantial offering of food items on Ebay, about 2,400 items. 
Igourmet also has a very high feedback rating, well over 99% As a seller on Ebay, I can say that is quite an accomplishment. It is somewhat easy to get a 98% or 99% feedback rating over 100 transactions....try doing that over SEVERAL THOUSAND. Try doing that feedback over the course of a a year.  That is NOT going to be easy, you are most assuredly going to have be doing something right in order to accomplish that.  Whoever is running igourmet's Ebay store is capable and doing a good job. 
As much feedback as igourmet has gotten on Ebay, not every transaction gets them feedback from the buyer. In my experience, I get about a 40% conversion ratio (buyer's who leave feedback). The items that I sell are usually very expensive technical items, usually bought by sophisticated, professional buyers. So I probably get a very high conversion ratio. I strongly suspected that igourmet is NOT getting a 40% conversion ratio. What if they are getting 25% or so? In order to get 1,000 feedback in a month, they would have to being at least 4,000 transactions monthly.

What is the average dollar value of that transaction? $10? $20? $40? more? Is the average buyer, buying more than 1 item at a time? I am going to guess that there is a fairly high percentage of buyers who buy MORE than 1 item. Could their average transaction be about $30? Take 4,000 transactions at $30, and that comes out to about $120,000 a month in sales on Ebay. On a yearly basis, that is well over $1,000,000. Now part of this is an upswing due to the CV-19 pandemic...but igourmet has been selling actively on Ebay for a while.  Igourmet's sales were decent BEFORE the Covid epidemic.  During the Covid epidemic, sales have exploded.  and they are building the business on Ebay as time progresses. I think in time, even after the CV-19 passes, igourmet will still be selling a LOT of things on Ebay. 

What if I am off in my assumptions? Could it be that they are actually doing 4-5 thousand transactions a month on Ebay? What if the average transaction is MORE than $30? Could it be $40? Maybe? That is not some crazy “pie in the sky” interweb type of thing. Maybe $200k a month in sales? If so, that could EASILY be $2mm a year in Ebay sales alone. 

Now here is where it really gets interesting... 

If you go back through IVFH's quarterly and annual reports, e-commerce is discussed. In the regulatory filings, Ebay sales are NOT mentioned. In 2019, IVFH did about $10mm in e-commerce sales, without mention of Ebay.  If Ebay's sales are exploding higher, what about their selling on Amazon.com? Wal-Mart.com ?, their own in house websites? I'm going to guess that they are all going to be SUBSTANTIALLY higher than last year, as what is going on in Ebay. 

So with these admittedly “rough assumptions” I bought a bunch of shares just below $.25/share. At $.25/share, the market cap of IVFH is about $8.6mm. I think that is pretty interesting for a company that was doing over $10mm a year in “e-commerce” and had not even discussed that they were selling on Ebay. That indicates to me that Ebay is a relatively small component of their e-commerce sales. However, $1,000,000 in Ebay sales is not insignificant for a company with a market cap of $8.6mm. 
I suspected that investor pessimism had gone too far, and perhaps everybody is/was fatigued, and no investor was paying much attention? Could it possibly be an inefficient market for IVFH, something not being properly priced?  This is exactly the type of situation where I think I can get some interesting results? 
Of course, there are lots of moving parts, and IVFH has some real estate and other interesting things. 

So I took my initial research and passed it on to Jeff.  Jeff evaluated my initial work, and he thought to do some things that I didn't do or even consider, and here are his thoughts/insights....

-DTEJD1997

Disclosure: I am long IVFH. Assume everything that I wrote here is wrong.

Sachem Capital (93.5% Upside) and Sachem Baby Bonds (~18.5% YTM) (SACH | SCCB | SACC)

Sachem Capital (common: SACH) and Sachem Baby Bonds (SCCB | SACC)

For the TL;DR crowd:

The baby bonds (SCCB | SACC) trade for a hair more than 2/3 face (~$18 of $25), and have very little risk. Yield To Maturity is about 18.42% and 18.75%, between price appreciation to face at maturity, and their interest rate. They are about as safe and cheap an investment as I can imagine.

The common stock (SACH) trades for ~63% of book value (market cap of $52mm vs book value of ~$83mm), and seems really cheap as well. If Sachem Capital traded like the recently beaten down Manhattan Bridge Capital (LOAN) a REIT/hard money lender, very similar to them financially and geographically, SACH stock would trade for ~$4.40, providing for an upside of ~93.5% (compared to LOAN with a p/b of 1.17) . The two company's financials are pretty similar, as debt (the thing that creates the most risk here) makes up ~40% of LOAN's assets, and ~42% of SACH's

As such, even with potential write downs of assets (I don't think this is a huge risk), the equity should have significant upside, with minimal risk of capital impairment. The bonds (SCCB and SACC) have a VERY high probability of trading at face, and I don't see any real risk of capital impairment with them.

If everything gets back to normal, the common stock could trade for $7.30/share, given the valuation that LOAN had JUST 2 MONTHS AGO! Their market cap of $62.6mm represented a p/b of ~1.95.

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For some more detail:

A lot of investments I make are based on the ideas of other people. This one is no exception. I love talking ideas with others, and a lot of time, bouncing ideas off one another is much better than doing so individually. You can come up with some really good stuff, and have a sanity check, to make sure that no one is doing anything stupid.

The common stock was found by DTEJD1997, an attorney/investor from Detroit that I've known for years. After I bought the common, another person suggested a look at the baby bonds (I just didn't think to buy them... facepalm), when they saw I was buying the common. DTEJD1997 and I both worked on the thesis, which was really fun. :)

Sachem Capital is a hard money lender.  Sachem capital is set up a Real Estate Investment Trust (REIT).  Sachem is a subset of REITS known as a "mortgage REIT/mREIT", as such, SACH's primary assets are 1st lien mortgages on real estate.  SACH does own and lease out a few properties, but the vast majority of it's assets are mortgages.

If someone wants to buy a piece of real estate, they can get more leverage (and less headache) by going through a sort of short term financing (1 year or less), with a hard money lender, rather than a traditional bank. Everyone always bitches about the rates that hard money lenders charge, but, to get a good deal done, it’s more than worth it. A lot of deals need to close quickly, and property sellers are willing to take less money for a quick closing. Banks can not close a loan in a week, whereas hard money lenders can. After the buyer of the property fixes up and “seasons” the property, where it has been rented for some period of time, a traditional bank will refinance the loan, at a lower rate. If everything is done right, a borrower can get into a house for a lot less than the 20% down that a bank would require. This is on top of the deal actually being able to close for them! Just getting across the finish line is a big deal!

Having used hard money loans in the past, and present, I am very familiar with the process. For me, I generally borrow enough to buy the house, and renovate it. This very week, I will be using a hard money loan to buy a house across the street from the home that I reside. It is a win win for both me, and the seller (a story for another time, maybe).

For those of you that know Manhattan Bridge Capital (LOAN), Sachem is in the same line of business.  Manhattan Bridge Capital has been in business for a longer time and also has track record which has been good.  Manhattan Bridge Capital is known quantity to investors, and trades for a premium. Sachem Capital is not as well known, and trades for discount.  Will this always be the case? I doubt it.

With that being said, there are some big differences.  Manhattan Bridge Capital has its loans in the New York City metro area. In comparison, Sachem has more geographic coverage primarily CT, but also small amounts in Texas, South Carolina, and Colorado.  Sachem Capital has substantial cash on hand ($20mm),  whereas LOAN has a paltry $118K... this is 9.8% of their SG&A of $1.2mm for last year; granted, they have some room on their line of credit, but that isn't a great situation to be in- those lines of credit can be yanked away from you... compare that to the $20mm of cash that SACH has on hand (per their conference call), being 1,000% of their annual Compensation, Fees, Taxes, G&A (to be extra conservative).....

Who's gonna have the money to keep the lights on? Sachem.

Sachem seems to be more conservative than my personal lenders: SACH lends a max of 70% LTV, and have recently adjusted that down to 50% LTV, in light of the crisis.

Looking at their balance sheet, after this barn burner of a quarter...

This is a critical part of the analysis.  A great deal of mREIT's have complicated capital structures.  Complicated capital structures are NOT what you want in a time of crisis.  Sachem Capital went through a few moves restructuring their capital structure in late 2019.  Management was very lucky to have done this at the time.  Those moves included:

A). SACH sold 2.3mm common stock in late summer of 2019 at a price of about $5/share, raising a little over $11mm.

B). SACH floated two series of bonds, SCCB & SACC.

C). SACH used the proceeds of these capital raises to repay and retire their bank debt.  The result was a greatly simplified capital structure, and increased flexibility, as well as just not having to rely on banks.

The end result is that at April 2020, SACH's capital structure consists of common stock, "baby bonds", and retained earnings.  SACH has no bank loans, no credit default swaps, no perpetual preferred stock, no interest rate option spreads, no swaps, and so on.  Very simple, very basic capital structure is to SACH's advantage.  This is so incredibly important because most mREITs that get into trouble have over extended themselves into crazy complicated capital structures.  Another INCREDIBLY IMPORTANT POINT is that SACH is not securitizing their loan portfolio.  This is one of the primary reasons of the Great Financial Crisis .  It is NOT in SACH's interest to have inflated appraisals being done- not just because of the balance sheet risk, but, insiders own almost 8% of the company (most of that being owned by the CEO.  There is much less of a conflict of interest as compared to the large banks in the GFC, who really just want loan originations.

So, as of the last 10K we have assets of $141.2mm and liabilities of $58.6mm for a B/V of $82.6mm (20mm in cash) and a P/B of ~.46... Their historic P/E is 8.39, and the past dividend yield is 11.2%... not too shabby for a company that seems to be in pretty good shape.

They are a REIT, and HAVE to pay out 90% of earnings to maintain this status. As long as they make income, which I am pretty confident they will... you get these payments. SACH's management does have a bit a leeway though.  They do NOT have pay those earnings out quarterly, they can issue one large dividend at the end of the year.  If/when there are net earnings in 2020 for SACH, this is what management is going to do, since they are differing this quarters payment. Generally, when REITs and MLPs get these large yields, there is more risk. I generally feel that there is LESS risk with this company, now, than there was 3 months ago, simply because of the reduction in price.

On the most recent conference call, several interesting tidbits came out. *THIS IS A GOOD CONFERENCE CALL TO LISTEN TO ALL OF* (if you don’t want to listen, you can read it)

*The board is aware of the price of the stock, and bonds, and has discussed buying them back.

*The CEO didn’t want to comment on if he would be buying stock personally. He mentioned that there were restrictions and blackouts...

*They have limited new loans to just the money amounts that come back in, through repayments and interest earned

*They temporarily deferred their common stock dividend, but are adamant to pay it out (end of 2020), necessary to maintain their REIT status

*Putting geographic expansion on hold

*Numerous competitors have stopped lending

*Sachem has gotten more conservative in their loans

*Sachem is committed to maintaining their REIT status going forward.

Presently, the baby bonds trade for ~$18, against a face value of $25.  At the height of the recent panic, these bonds trades as low as $8!!!  There are $55.4mm outstanding, meaning that of the company’s $58.6mm in liabilities, 94.5% are the bonds. Though, these bonds are presently worth ~$40mm. So, if the company were to totally cease operations, they could pay off ~1/2 of the present value of the bonds with the $20mm cash they have in the bank (per the conference call), and cough up the remaining $20mm from liquidating their loans and other assets (some REOs)... all they need is $0.20 cents on the dollar to cover the bonds at present prices and ~$0.33 cents on the dollar to cover in full.  REMEMBER, that is for an asset that was originally loaned at 70% LTV. 

As such, the actual appraised value of the asset, would have to drop by even more-  less than $0.15 cents on the dollar, for the bonds to not get paid out at current prices!!!

This is a scenario that I do not think will occur. As SACH has the most senior position against the houses. If they were a mREIT that owned the property, had it financed, and was relying on the remaining equity, I would TOTALLY understand this valuation.... however, this is NOT the case.

For the common stock to get hurt at its present price of $2.37, the loans/assets on their books would have to liquidate for ~$0.44 cents on the dollar, of what they are carried on their books for. Again, a scenario that I don't think is very likely, given that these loans were made at 70% LTV...

Now, I know if it gets bad enough for liquidations, there are costs with this, and the courts are shut down. However, there are personal guarantees on these, so that helps. That guarantee may not be worth a lot in the coming months, but it is worth something. Also, with the underwriting standards of the company, I think their borrowers are relatively strong, as are the properties they lend against, relative to the loan balances.

Could it be that some of the appraisals are "optimistic"?  It could be...BUT since the GFC, appraisers have had to tighten up.  It is also NOT in SACH's interest to have "optimistic appraisals" being done.  SACH holds the paper!  They aren't reselling it!  

Sure, some loans are in default, but, some of those, were intentionally bought by the company, from other lenders. They outlined their thesis, and how this works, in the most recent conference call. Again, check that out for more info. *THIS IS A GOOD CONFERENCE CALL TO LISTEN TO ALL OF* (if you don’t want to listen, you can read it)

Additionally, while there are some loans outside of maturity, I do not think that is a problem, as that is pretty common with this type of loan. Say that a loan is for a year: it may take 6 months to renovate the house, another 2 to rent, and then 3 to refinance. That takes you right up to maturity.... so, it’s easy to see how this could stretch out, past whatever date was set. If a loan goes past the maturity date, the interest rate goes UP, and the collateral is SAFER, as it has already likely been fixed up, making the 70% LTV a more concrete number.

Yes, the brother of the CEO recently left, and it seems weird that they have not talked... but, families can be weird, and I don't think this is a huge deal. Sure, a discount may be reasonable to apply here, but 50%?! nah... more like 5%... Plus, if you look at the covenants of their old bank loans, both brothers had to be employed by the company- that's one of the reasons why it would seem they got the bonds issued- to reduce covenants. So, this shouldn't be a TOTAL surprise.

Yes, it’s a REIT, and REITs are getting killed, especially mREITs. But, this one is different than all the rest, because of the simple capital structure, debt to asset ratio, and the value of the equity. Not only that, but, it isn't a REIT in a traditional sense. They have 1st mortgages on the properties, and are the most senior lien holders... Most REITs just get what is left, AFTER notes like these are paid off. If the company was more heavily levered? I would get the huge discount to book. But, there just isn’t that much leverage with SACH. AND IT ISN'T BANK DEBT... So, they aren't going to have to worry about covenant breaches like others, and modifications, where the banks get them for fees and such. This is just a fantastic setup! 

SACH's common equity still too risky?  One can mitigate their equity risk by buying the bonds (I am long both)

Bottom line, is that I can think of no safer investments, with as much upside, as Sachem Baby Bonds. The equity ain't bad either.

Disclosure: I am long both SACH and SACC. Assume everything that I wrote here is wrong.