Sachem Capital Corp. Common Shares

Greetings and welcome to the Sachem Capital Corp second quarter 2023 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, Investor Relations. Thank you, sir. You may begin.

Good morning, everyone, and thank you for joining Sachem Capital Corp's second quarter 2023 conference call. On the call from Sachem Capital today is Chief Executive Officer and Interim Chief Financial Officer, John Bellano, CPA, as well as Vice President of Finance and Operations, Nick Marcello. Yesterday, the company announced its operating results for the quarter ended June 30th, 2023, and its financial condition as of that date. The press release is posted on the company's website. www.sachemcapitalcorp.com. In addition, the company filed its quarter-end Form 10-Q with the U.S. Securities and Exchange Commission and 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. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ material from those discussed today. We do not undertake any obligation to update our forward-looking statement in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will be discussing certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our SEC filings. With that, I'll now turn the call over to John. John?

Thank you, Kevin, and thanks to everyone for joining us today. Sachem produced another solid quarter of revenue and earnings growth while continuing to invest in our business. We accomplished this in a difficult operating environment marked by ongoing Federal Reserve rate hikes, banking sector pressures, and lingering inflation. Importantly, Sachem has remained disciplined in our approach and our second quarter results were quite strong. We achieved record revenue growth of more than 31% to $16.5 million. compared to the same quarter of 2022, and net income attributable to common shareholders of 4.8 million, or 11 cents per share. These results highlight the deliberate and prudent approach we applied through our underwriting, which coupled with the resiliency of our loan portfolio has allowed our performance to remain steady amid these ever-evolving economic conditions. As recent headlines confirm, new loan originations in the commercial and residential real estate sector have slowed dramatically in the wake of a rapid rise in interest rates over the past 18 months. As larger banks pull back, we view this as an opportunity to grow market share and continue to expand the Saton platform. As we discussed last quarter, While these factors provide opportunity, we will not veer from our proven and disciplined approach to our sourcing and underwriting of loan opportunities. Given our ongoing cautionary outlook, our originations remain conservative and below recent historical levels. In the second quarter, we funded approximately $55.6 million of mortgage loans, including loan modifications and construction draws. While our originations have leveled off similar to the rest of the industry, we are seeing a strong pipeline of new requests for modifications and construction loans. As noted over the past several quarters, it has been our practice to lend to borrowers with strong credit profiles and a proven track record of performance so we can be opportunistic and put capital to work when ideal situations arise. Our proactive approach during financial market dislocations will create opportunities to grow our already robust pipeline of potential funding opportunities. Due to our disciplined stance, we have maintained strong liquidity and are positioned to selectively capitalize on situations where banks and other smaller, less capitalized competitors are unwilling or unable to perform. Our focus remains primarily on residential and multifamily loans where housing prices and demand have remained relatively stable. I would like to remind everyone of our strategic strengths that position us well in the current environment. First, HM Capital was born out of the great financial crisis and has a deep experience in battle-tested management team. We have underwritten over $1 billion of loans through many different lending cycles, and we'll use that experience as a guide to navigate our path forward. Second, we have a diversified mortgage portfolio across multifamily, single-family, fix-and-flip loans, and commercial real estate projects. Our loan portfolio is spread across 15 states, and as we have stated in the past, it is our intent to grow responsibly in the Southeast. Our loans are generally short-term in nature. As of quarter end, approximately 88.3 percent of the loans in our portfolio had a term of one year or less. allowing us to reprice capital quickly to better protect our margins. Importantly, we have a strong balance sheet with $624 million in assets, including $52.3 million in cash, cash equivalents and investment securities, offset with $382.7 million in total debt outstanding. In addition, we have available liquidity of approximately $37.9 million in our credit facilities. This liquidity and availability provide us the financial capacity to capture market share in an opportunistic and selective manner. Let me touch on a few key financial metrics beyond the strong revenue growth that I mentioned earlier. Total operating costs and expenses for the quarter were approximately 10.8 million compared to approximately 7.3 million for the second quarter of 2022. The change was due to higher interest in amortization of deferred financing costs, G&A, and compensation fees and taxes. Interest in amortization of deferred financing costs increased from approximately $5.2 million in the second quarter of 2022 to approximately $7.1 million this quarter, a change of approximately $1.9 million, or 37%. Net income attributable to common shareholders for the quarter was approximately $4.8 million compared to approximately $4.3 million for the second quarter of 2022. Earnings per share for the second quarter of 2023 were $0.11 versus $0.12 in the second quarter of 2022. With regard to our portfolio, as of June 30, 2023, we had 360 loans with a total principal balance of $506.7 million with a weighted average interest rate of 12.17%, not inclusive of fees earned. We had loans with a principal balance of approximately $96.4 million in non-accrual status, and there are 51 loans in pending foreclosure by the company, representing approximately $47.2 million of unpaid principal. During the quarter, the company modified or extended a total of 62 loans, These modifications resulted in gross fee income of approximately $2 million, supplementing our reduced origination fee income. In the case of each of these loans, we believe the value of the collateral exceeds the total amount due. 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. Importantly, we have the expertise to work through these issues given our successful track record through prior cycles. For the six months ended June 30, 2023, the company impaired or wrote down approximately $413,000 of loans and had a gain on the sales of real estate owned of $126,000. In addition, we recorded a provision for future credit losses in accordance with CECL guidelines of $196,000. Turning to our balance sheet, as of June 30, 2023, real estate owned was approximately $5 million compared to $5.2 million at year-end 2022. Specifically, real estate owned included approximately $818,000 held for rental and approximately $4.2 million held for sale. With regard to our dividend, we paid a $0.13 per share dividend paid on August 11, 2023 to shareholders of record as of August 7, 2023. This compares the second quarter net income of $0.11 per share. The difference was primarily related to our timing of certain revenues and originations. As a REIT, we are required to pay out 90% of taxable income per year to our shareholders. And in this environment, the board will continue to evaluate the distribution policy on a regular basis, balancing our performance with the importance of maintaining financial flexibility. In closing, we will maintain our disciplined and cautionary approach to managing the business, and we'll continue to invest in Sachem for the future. We foresee the possibility of large cash balances and limited lending operations, potentially providing a near-term drag on earnings. While we do not provide forward-looking financial guidance, we believe maintaining our cautious stance is the best strategy to create long-term sustained value for shareholders as the economic environment evolves. Our management team has invested through many different economic cycles with a clear eye on asset protection and shareholder value. With experience gained through each cycle, we have built a resilient, well-diversified portfolio. and a fortified balance sheet to navigate the current volatility and set us up to drive long-term value for our shareholders. With that, we will open the call for questions.