Sachem Capital Corp. Common Shares

Greetings and welcome to the Sachem Capital Corp fourth quarter and full year 2023 earnings call. At this time, all participants are in a listen-only mode. A 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. I would now like to turn the conference over to your host, Mr. Steve Sweat, Investor Relations for Sachem Capital Corp. Thank you. You may begin.

Good morning, everyone, and thank you for joining Sachem Capital Corporation's full year 2023 earnings conference call. On the call from Sachem Capital today is Chief Executive Officer and Interim Chief Financial Officer, John Villano, CPA, and Vice President of Finance and Operations, Nick Marcello. Yesterday, the company announced its operating results for the year ended December 31st, 2023, and its financial condition as of that date. The press release is posted on the company's website at www.SachemCapitalCorp.com. In addition, the company filed its year-end Form 10-K with the SEC on April 1st, 2024, 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. As a reminder, remarks made today on the conference call may include forwarding statements, Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements 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, the company 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 filing. With that, I'll turn the call over to John.

Thank you, and thanks to everyone for joining us today. For 2023, Sachem grew revenue approximately 25.5% to $65.6 million, compared to $52.3 million in 2022. While revenue increased, Sachem overcame a challenging year in the mortgage-reach space, where the macroeconomic environment was marked by bank failures, large loan losses, uncertainty related to inflation, and lastly, interest rates that rose at a near-unprecedented rate. In addition, shifting expectations related to the Federal Reserve's policy direction further pressured the economic outlook, as capital remained expensive. In this environment, we have remained highly focused on originating only what we perceive as the highest quality loans to ensure that we are measured and disciplined as it relates to the investment of capital. During the year, we work through loan extensions, modifications, and defaults as needed while our borrower search for efficient capital. Loan modifications and extensions added approximately 4.1 million in revenue as loans were extended or restructured and put back on track. Loans that are extended or modified are re-underwritten to ensure the collateral and projects are still viable and well-capitalized. During the year, we incurred approximately $6.4 million in non-cash impairments, 70% of which was related to two office loans. I also want to note that the recognized non-cash impairments are in part related to originations during and immediately after the pandemic when interest rates were at near-historic lows masking rapid run-ups in material and labor costs, as well as significant delays due to overall shortages of labor and material. As rates rose dramatically, project refinancing became a significant challenge for some borrowers, reducing or eliminating their equity and motivation to remain involved in certain instances. While we expect to face a challenging environment and may incur additional impairments in the future, we will continue to work and preserve value through loan modification and asset management efforts, while continuing to strive to outperform peers. Our efforts have proven successful in the past, and this year we wrote off only $91,000 in real estate owned. It is our experience that a troubled or distressed loan rarely loses all 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. Further, we believe our low REO balance as compared to our loans in foreclosure tells the story of how often our loan workouts result in a favorable outcome. Historically, losses resulting from impaired loans have been minimal and pay tribute to the Sachem team's expertise in working out difficult situations. As an example, A $510,000 loan in foreclosure during the fourth quarter of 2023 was repaid in January 24 at par plus all accrued interest and borrower charges totaling approximately $92,000. Total earnings on this troubled loan since initial funding was approximately $172,000. Let's now discuss our 2023 financials in more detail. While originations during 2023 were only approximately $205 million due to our refined approach and restrained capital needs, revenue, as I mentioned, grew over 25% for the full year 2023. Total operating costs and expenses for 2023 were approximately $49.7 million compared to approximately $31.4 million in the prior year. The increase was due to several factors. but the primary change was due to higher interest expense resulting from higher interest rates. Specifically, we recorded interest in amortization of deferred financing costs of approximately $29.2 million in 2023 as compared to approximately $21.5 million in the prior year. Also, G&A went up approximately $2.2 million due to our efforts to strengthen the team as we added necessary resources to ensure strong internal controls and to support the full integration of our Urbane New Haven acquisition, which closed at the end of 2022. Compensation expenses increased approximately $2.2 million, which resulted from having Urbane Capital integrated for a full year and the addition of a new Sachem employee. Other expenses also increased year over year due to increases in depreciation of Sachem's office building, fees, taxes, and other expenses, and an approximate $6.4 million provision for loan losses. As a result, net income attributable to common shareholders for 2023 was approximately $12.1 million compared to approximately $17.2 million in 2022. Earnings per share for 2023 was $0.27 compared to $0.46 per share for 2022. Recently, the Sachem Board approved a first quarter 2024 dividend. Additional details can be found in our recently filed dividend press release. Our board regularly evaluates our dividend distribution policy on an ongoing basis, balancing our operational performance, federal tax requirements, and the importance of maintaining long-term financial flexibility. We are proud of how consistent our dividend has remained over the years, and we will strive to maintain an attractive dividend going forward. subject to our board's oversight.