Sachem Capital Corp. Common Shares

Greetings and welcome to the CHM Capital Court Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kevin Reed, ICR. Thank you, Kevin. You may begin.

Good morning, everyone, and thank you for joining Sachem Capital Corp's year-end 2022 conference call. On the call from Sachem Capital today is Chief Executive Officer John Villano, CPA, and Chief Financial Officer John Walsh. This morning, the company announces operating results for the year-ended December 31, 2022, and its financial condition as of that date. The press release is posted on the company's website. www.satriumcapitalcorp.com. In addition, the company will file its year-end report on Form 10-K with the U.S. Securities and Exchange Commission on March 31, 2023, which can be accessed on the company's website as well as the SEC's website at www.sec.gov. If you have any questions after the call or would like any additional information about the company, please visit our website. We'd like to remind everyone that this conference call may contain forward-looking statements. All statements other than statements of historical facts contained in this conference call, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations are forward-looking statements. The words anticipate, estimate, expect, project, plan, speak, intend, believe, may, might, will, should, could, likely, continue, design, and the negative such terms, in other words, in terms of similar expressions, are intended to identify forward-looking statements. These forward-looking statements are based largely on the company's current expectations and projections about future events and trends that it believes may affect its financial conditions, results of operations, strategy, short-term and long-term business operations, and objectives and financial needs. These forward-looking statements are subject to several risks, uncertainties, and assumptions as described in the company's Form 10-K filed with the U.S. Securities and Exchange Commission on March 31, 2023. Because of these risks, uncertainties, and assumptions, the forward-looking events or circumstances discussed in this conference call may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. you should not rely upon forward-looking statements as predictions of future events. Although the company believes the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, level of activity, performance, or achievements. In addition, neither the company nor any person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The company disclaims any duty to update any of these forward-looking statements. All forward-looking statements attributable to the company are expressly qualified in their entirety by the cautionary statements, as well as others made in this conference call. You should evaluate all forward-looking statements made by the company in the context of these risks and uncertainties. With that, I'll now turn the call over to John.

Thank you, and thanks to everyone for joining us today. I am very pleased to report Satrum had another year of record revenue of $52.3 million and net income attributable to common shareholders of $17.2 million, or 46 cents per share. Our 2022 revenue was an increase of almost 72% from 2021, and our net income attributable to common shareholders increased over 50%. These results, achieved through disciplined underwriting in an increasingly difficult macroeconomic backdrop, illustrate the success and scalability of our business model. During 2022, we funded approximately $300.3 million of mortgage loans, including loan modifications and construction draws. While we are very proud of this level of activity, it is necessary to acknowledge the shifting trends throughout the year. As inflation increased, the Federal Reserve commenced a series of rate hikes, resulting in a sharp rise in interest rates throughout the year. Equity markets felt the pain of higher interest rates as sources of liquidity became cautious and credit spreads widened, turning previously profitable investments into losses. Amid this environment, we remained prudent and disciplined, and our investment in new loans slowed. Uncertainty continued with a broadening banking turmoil and potential fallout. Fortunately, we have no exposure to troubled banks at this point. That said, we are cognizant and keeping a keen eye on the implications the volatility may have on property appraisals, our cost of capital, and normal loan payoff activity. Let me now turn to what I believe are the key strengths that position us to perform well in the current environment and emerge stronger than ever. First, we have a diversified mortgage portfolio across commercial, multifamily, and larger single-family fix-and-flip real estate projects. Our loan portfolio is spread across 16 states, and we continue to grow in the dynamic Southeast. In addition, in October, we acquired the business assets of Urbane New Haven, a move that was both strategic and highly synergistic. Having Urbane in-house provides us with very strong construction finance expertise, which enables Sachem to take on larger and more profitable construction loans with better quality sponsors while vertically integrating our platform to be in a better position to address any loan issues that may arise. In addition, Urbane provides us a differentiated and consistent income stream as well as downside protection should a construction loan run into difficulty. Second, our portfolio is short-term in duration. As of December 31st, 2022, approximately 17.6% of the loans in our portfolio had a term of one year or less, allowing us to reprice our capital relatively quickly, better protecting margins in a rising rate environment. Third, we have a deep experienced and cycle tested team having underwritten more than 939 million in loans through many different investment environments. With the ongoing economic uncertainty, local banks and other competitors are fearful to extend credit and have tightened lending and credit standards, turning away good borrowers and sponsors, or even withdrawing completely from the market. We believe we are well positioned to potentially gain market share in this environment with our prudent lending tactics, capital strength, and flexibility. And fourth, We have a strong balance sheet with $565.7 million in assets, including $23.7 million of cash and cash equivalents, offset with $326.9 million in total debt outstanding. Earlier this month, we further augmented our capital structure as we entered into a $45 million revolving line of credit with Needham Bank, a new relationship bank with further validates our portfolio strength and opportunistic growth strategy. This new line of credit enhances our financial flexibility and liquidity and gives us the capacity to further scale our business and execute on our growth strategy where appropriate. I would now like to turn over the call to John to touch on some key financial highlights. Then I'll talk more about our performance and strategy going forward.

Thank you, John. Beginning with total revenue for the year ended December 31st, 2022, we generated approximately $52.3 million. up almost 72 percent compared to approximately 30.4 million for the year ended December 31st, 2021. The increase was due to an increase in our lending operations and overall portfolio growth as well as higher interest income, net origination fees, and interest on investment securities year over year. Total operating costs and expenses for the year ended December 31st, 2022, were approximately $31.4 million, up over 83% compared to approximately $17.1 million for the year ended 2021. The increase was driven by higher interest rates and amortization of deferred financing costs, compensation fees, taxes, and G&A. Net income attributable to common shareholders for the year ended December 31, 2022, was approximately $17.2 million, up approximately 50% compared to approximately $11.5 million for the 2021 period. Earnings per share for 2022 was $0.46 per share, up 4.5% compared to $0.44 per share for 2021. With regard to our portfolio, as of December 31st, 2022, we had 444 loans with a total principal balance of $460.6 million with an average interest rate of 10.7%, including amortized fees. We had 40 loans with principal balance of approximately 8.8 in default or foreclosure. In the case of each of these loans, we believe the value of the collateral exceeds the total amount due. And as we have discussed in the past, a troubled or distressed loan rarely loses 100% of its value, and usually over the term of the loan, when interest income, origination, and other fees are considered, the overall transaction is profitable. Real estate owned was, what, $5.2 million compared to $6.6 million at year-end 2021. And as of December 31st, 2022, real estate owned included $800,000 of real estate held for rental and $4.4 million of real estate held for sale. This favorable reduction is partly attributable to new asset liquidation initiatives that will further support a continued reduction in REO and real estate carrying costs. Turning to our balance sheet, as of December 31st, 2022, total assets were $565.7 million, up $147.7 million from year end of the prior year. Total loan balance at year end 2022 was $460.6 million, and we had total cash and cash equivalents of $23.7 million. We had total debt of approximately $326.9 million as of that date. Additionally, as John mentioned, earlier this year, we augmented our liquidity with a new $45 million revolving line of credit with Needham Bank. This line of credit carries an interest rate of prime minus a quarter or 4.5%, whichever is higher, and matures in 2026. We were very pleased to work with Needham Bank to expand our capital sources and available liquidity. Given that this is the last day of the quarter, while we do not provide guidance, and as John alluded to in his remarks, we did want to share that we remained prudent and disciplined in regards to originations in the first quarter given the uncertainty in the macroeconomic environment. As others have shared, our originations will be lower than the prior year. We also continue to invest in the business operations infrastructure to position us for further future growth. With that, I'll turn the call back to John.

Thanks, John. Our operational performance in 2022 is testament to our conservative and calculated approach given these volatile times, coupled with the sustainability of our business model built for the long term. Our company was formed in 2010 during a period of extreme financial dislocation, and since then, we have always kept our eyes on the horizon. Since our inception, we have walked before running and always kept our shareholders' invested dollars well-protected. Moving forward, we will continue to monitor the ever-changing macroeconomic backdrop, looking for opportunities to invest capital and grow our platform. Further, our loan pipeline is robust, and there continues to be significant market opportunities for a well-capitalized hard money lender to originate attractively priced loans to small and mid-scale real estate developers with good collateral and a strong operating history. We are well capitalized with a solid balance sheet and will carefully underwrite opportunities that meet our stringent underwriting standards and that add to our portfolio diversification and strength. To conclude, we have an experienced management running a company born out of the great financial crisis, a solid and well-diversified portfolio, a strong balance sheet with excellent liquidity, and a proven business model to navigate all economic cycles and drive profitability. We intend to stay disciplined while maintaining a conservative yet prudent approach as we continue to deploy capital accretively. We believe we are well positioned to grow cash flow, dividends, and shareholder value over the long term. With that, we will open the call for questions. Operator.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

One moment, please, while we poll for questions. Thank you. Our first question is for Matthew Erbner with Jones Trading. Please proceed with your question.

Hey, guys. Thanks for taking the question. I'm on for Jason Stewart this morning. So when writing these fix and flip projects, what is the duration on these loans and does that vary from house to house? And then also what kind of spread are you guys seeing now compared to either year end or the end of 3Q given the year, the move in tenure?

So the first part of your question, a majority of our loans are underwritten with a one year term. As part of our construction finance business, Sometimes it's in the best interest of the borrower for us to write an 18-month period as opposed to 12, and that's usually at the recommendation of our Urbane counterparts. And then secondly, with respect to spread, in the past we have had some price competition from our competitors. All of that has now gone away. we do have the freedom to price and price aggressively. So right now today, what used to be middle of the road, a 12% and two point loan offer is now 13 and perhaps two or three. And then in addition, if it's a construction finance situation, we have another two percentage points for the Urbane services added. Our cost of capital is just under 9%. Our spread is still pretty good. You know, so overall, yes, we've moved with the rising rates. We have not moved as far as the rates have gone. But even though, you know, we're raising prices, there has been no slowdown in demand for quality projects on our end.

Gotcha. That's good to know. And then what is the, I guess, what are you guys requiring people to put down on these loans that are either 12 with the two points on top or 13 and whatever? And then following up on that, on the for sale assets, what is the assumption that you guys kind of have going into a loan versus where you guys are able to exit or rent it out at? Thanks.

Okay. The first part, we are still working with a max 70% LTV. We are looking to do better if we can. In the past, our borrowers did not put up those amounts in cash. Sometimes we took additional collateral. Now we are focusing more on cash down payments. We're really looking for the borrower or sponsor to have significant skin in the game, cash money in the game. And that's a little bit of a change that we've implemented over a year ago.

The second part of the question, let me think of the best way to answer this. I'm lost here, John.

How do you want to, what was that, what was the second part of your deal there, your question? So on the assumption on the exit of the loans that you guys are originating, how have the assets that you've held for sale or for rent varied compared to where you guys underwrote to on the exit?

Oh, okay. We have done very well on troubled loan disposition, whether it be foreclosure or just a default and REO situation. Our underwriting has been strong. You'll see in our K, the impairments are relatively low. They're based portfolio wide. But if you look in our P&L, the loss from the sale of real estate owned is nominal dollars. So our underwriting is strong. It's been tight. And, you know, I'll be right to the point here. Sometimes we let a property go at a break even just to get our capital back. There are times where we can hold out for more money, maybe redevelop the property a little bit. That's not our game. We want our capital back, and we want to put it to work again.

Just to add to that, I'll apologize for my voice. I kind of lost it. We work hard on the way in to make sure we have enough collateral, and we constantly look at the values if we have to take property back. We also, during our annual audit, you know, prove that the values we're carrying are holding and that we don't have to take any more write-downs. And you see over time, we haven't really taken anything significantly. So I think we do a really good job with underwriting and making sure that if we have to take it back and that's not the initial intent, that we're very well covered protecting our investment.

Awesome. Thank you, guys. That's helpful. Thank you. Our next question is from Gaurav Mehta with EF HUD.

Please proceed with your question.

Thank you. Good morning. I was hoping if you could provide some more color on your loan pipeline, how much is the dollar volume and what is it comprised of?

Our pipeline is staggering. You know, it's probably at least $100 million. While most of these deals will not be funded by us, at least in this environment, it gives us the ability to cherry pick what we think are the best deals in the best locations. Right now, we are seeing loans from all over the country. There is a lot of fear in the lending business. People are pulling back. Borrowers with commitments are being hung out to dry by their bankers or other lenders. And those deals are coming here. So our pipeline is unbelievably strong, even at higher pricing points. And we are cherry-picking what we feel are the best of the bunch.

Okay.

In the press release, you also talked about your focus on enhancing your underwriting standards and limiting the terms on the new loans. Can you provide some more color on that? on that, like, you know, what's the, what's expected new term on the loan and what kind of enhancements you guys are doing?

So what we've, from many, from a few years back, our underwriting standards at the moment are truly institutional quality. I'll put up our underwriting process against anyone. And this is a big change from, where this company has started and where it's come from and part of it is in uh direct relation to what the market has been doing so as the market was scaling higher over the past couple of years we increased our diligence and now that we feel that the market may have peaked we are we are we are further increasing our diligence um looking for sources of cash in deals, pulling some professionals into the construction finance components, doing significant more in the form of background and credit. We're basically beefing up our back office, knowing that we could be heading into a troubled environment, and we also know that our borrowers and developers can also be running into trouble, and we need to see that before they tell us.

Okay. And lastly, on the loans and foreclosure, just to clarify, did you say 8.8% of the loans are in foreclosure or active management?

That is correct. So part of that is an initiative on our end to clean some of the smaller loans from our portfolio. If you remember, in the past, we were a truly small balance commercial lender. We had loans as small as $50,000 or $100,000. We are not cutting those borrowers any slack at the moment. We're trying to enhance and upgrade our minimums with respect to the loans that we do. And again, you know, these are, you know, the street doesn't like to see this, but I've got to be perfectly honest when I say this, every quarter, Sachem makes a whole lot of money in a default process. You know, we're not proud that they happen, but we are well protected in the form of our loan documentation. We're well protected in our collateral. And in the end, there are significant pricing advantages and profit advantages for us as a company.

Just to add, while they've done small loans going back in the past, I think the average loan in the last 12 to 15 months is roughly about $1.1 million. So we have significantly upped our game, knowing that to do a $100,000 loan and a $5 million loan, it takes about the same time. We're being more efficient and really going for the loans that make the most sense for the company.

Okay. Thank you. That's all I had. Thank you. Thank you.

Our next question is from Christopher Nolan with Bladenburg Felden. Please proceed with your question.

Hey, guys. Am I correct that there was no common dividend declared for the first quarter 2023?

Chris, we're scheduled to do it early next week.

Okay. But that will account for its second quarter.

No, it's really a first quarter payout.

Okay. And then given, I mean, you seem to have a lot of cross currents going on in terms of strong pricing, strong demand, but also, you know, asset quality seems to be deteriorating. Where is the thoughts in terms of taking balance sheet leverage?

So company-wide, we're really constrained by the asset coverage ratio on our unsecured notes, which it keeps us from getting out over our skis. It's one and a half times coverage. We're well within our limits. You know, we try not to, you know, go to bed at night and worry about portfolio performance because we have a very strong balance sheet. You know, compared to our peers, our leverage is relatively low.

Okay. And then I guess in a general question, I mean, a lot of stuff is going on the regulatory front and it looks like you guys are sort of benefiting from it, but has there been any sort of change in the regulatory scrutiny of the company following all the stuff that's gone on with the banks last month?

No, absolutely not. You know, we have no, no one's poking around here. There are no hints of any trouble. on the commercial side, we feel like we're in a pretty good place. And with the banks becoming very fearful, companies like us are a last resort for a lot of sponsors and developers. There's really nowhere else for them to go. So we're actually very comfortable. We don't see any storm clouds on the horizon with respect to our business in this environment. You know, the last time that we had a situation like this back in 2010, hard money lenders were the only players in the industry. And that's how projects were completed. You know, banks kind of ran from the carnage. So, you know, banks took the TARP money and the hard money guys didn't. So we're kind of comfortable here, and this is actually a pretty good environment for us to – really maybe increase our stride with respect to distressed properties and other deals that may have been closed down by the bankers.

Thank you, John. Thank you. Our next question is from Tyler Batter with Oppenheimer.

Please proceed with your question.

Hey, good morning. Thanks for taking my question. Just to follow up on... some of the commentary thus far. Can you talk a little bit more directly about the competitive environment, specifically your peers? You kind of alluded to this, but it sounds like maybe there's some opportunities where some other folks perhaps did get over their skis. Is that something that you're seeing out there? I mean, is that an opportunity for you to take even more market share as well?

Yes. And, you know, the first thing that comes to my mind and I'm sure yours is the financial situation that occurred with Broadmark. That was a situation where Broadmark was born from a SPAC. They had a billion dollars in cash and they lent it like drunken sailors. That's not our game, that we don't play that. We've always, always walked before we ran. sometimes being a little too conservative at times. While we desire to be a larger company, it's been slow and steady here since our inception. And we are always looking for a creative investment capital because there are significant opportunities.

And

you know, our urbane acquisition is part of the plan to take advantage of those opportunities that we think are coming and coming fast.

Okay, okay, great. That's helpful. In terms of the cost structure, I mean, you kind of mentioned, I think, investing in the business. I mean, where are you in terms of, you know, headcount right now? I mean, would you anticipate that moving higher next year? I mean, might it move lower given the environment?

So part of our initiative here is to move to larger loan sizes with better sponsors. And what that does is it kind of caps our head count. A lot of these smaller borrowers take a lot of our time. A lot of our legal effort, a lot of our treasury people, we want to start getting away from those. So at the moment, we're looking to find a place to put them. But our move is to larger deals, which will keep track of headcount, keep it in line. And to be very specific, I think we're in pretty good shape here with comp. As you may be aware, we have moved to our new office facility. We've outgrown our last building. And, you know, now with all of us here basically under one roof, We're efficient. We have a great working space. And we do have room for growth here. But at the moment, you know, I think we have enough people to get us at least through the first half of the year without bringing on more bodies.

Just to add, I think we'll strategically add as appropriate during the year. We're not going to do it well in advance and get ahead of our skis, as we said. But, you know, we'll be conscious of, hey, you know, volume's up or whatever. and add in the right place. But I don't think you'll see, you know, a lot of ads, but it'll be ads that make sense with what's going on.

Okay. Just the last question, you know, really more general in terms of the dividend. I mean, I know it's something a lot of investors are focused on, you know, in terms of this whole return. Just how are you thinking about, you know, the level of Dividend payout right now, just any broad commentary you can make in terms of kind of how comfortable you are with where the dividend is?

Again, I don't want to project the future because we don't know, but as I sit here today, I'm pretty confident on our ability to continue to pay dividends. And, you know, last year we tried to move our dividend up You know, we moved it from 12 to 14 back to 13. We're trying to find a stable ground. So you may see it move a penny back and forth, but it's really just us, you know, the ebb and flow of our business. You know, our goal here is to always increase the dividend and reward our shareholders. But you can't, you never know. how the quarter will end until it ends so we're trying to be a little conservative we don't want to we don't want to jack the dividend and then pull it back um and to that end if you saw in our press release um you know our non-gap earnings were 53 cents that's a pretty good number and you know to spend a minute and explain the difference between our 46 and 53 uh cents per share we had safe money parked in treasuries and long-term securities. And the interest rates, you know, took the bat to our portfolio. Overall, our company performed outrageously well. We would have been at 53 cents if we didn't play safe with our, you know, our long-term portfolio.

Makes sense. Okay. Very good detail. Thank you. Thank you. Our next question is from Chris Muller with JMP Securities.

Please proceed with your question.

Hey, guys. Thanks for taking the question, and congrats on a nice finish to a challenging year. I wanted to follow up on John's comments on the bank. I guess starting on the financing side, how have conversations been going with your existing relationships? Nice to see the Needham facility added, but are there any talks about pulling back financing at all or maybe increasing credit lines as a supplement to direct lending coming from the banks? Thanks.

You know, right now, I think we're pretty good. We have a $45 million line. It's expandable to 75. John, I'm not sure how much we've taken off of it, but I don't think a whole lot.

We haven't taken much at all. So, it's out there, very expandable, and Needham has basically committed that, you know, they will do most of the 75 by themselves. We don't have to go out and find other sources. You know, we do have that availability to us. And we all know other banks that over time, you know, we may bring on board as the situation warrants and or permits. But we felt Needham and us had some great synergies. And that's, you know, a good starting point for the next facility.

And Needham, you know, the first thing that will come to mind is, hey, you know what, we can put $45 million on the street tomorrow. That's not the play. That's not what we're thinking. This is played safe. This is protection. This is let's wait and see what the world does over the next couple of months. So we're looking at Needham, you know, one as a really great lending partner with us, but also as a safety net should things get off the rails.

Got it. That's helpful. And then on the demand side, as the banks do pull back and competition kind of decreases a little bit, Do you expect this $100 million pipeline to kind of be the new norm or is that things being pulled forward a little bit?

We've had a large pipeline for the past year and a half. And, you know, as I sit here, you know, I talk about walking before running. It would be nice to have a huge chunk of money to go to work. We just, you know, our company is, is not too big and yet not too small. And we're kind of stuck in the middle. And that's kind of a good thing because we, we get, we get investment capital in, in moderate sized chunks and it keeps us playing, you know, close to the best. I would love to be able to handle a hundred million, a quarter and not worry about our next dollar. But, you know, for right now we're cherry picking the best. I think that will continue to grow and, and, You know, we'll see where it goes. But for right now, everybody in the country seems to be calling us.

Yeah, just to add to John's, if we found the creative capital that we could use, we would certainly do, you know, more deals. But while we've had discussions and, you know, been offered some capital, if it doesn't work, it doesn't work. And I totally agree with John on that. While it's there, we're not going to ramp it up just because it's there. We're going to really watch how everything's going and really be good stewards of our shareholders' investment and the company. So sometimes slow and steady is better than, hey, look, there's an opportunity, jump in, because you don't know what's going on on the other side. So I think we're positioned right with some cushions and some capital that we can continue to grow the business. And if the right deal comes up or the right capital gets offered to us, we're all ears.

Okay, well, it's a good position to be in, especially in this environment. So thanks for taking the questions.

You're welcome.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to John Vallotta for any closing comments.

Thank you all for joining our call today. We look forward to updating you again next quarter. Thank you again.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.