Sachem Capital Corp. Common Shares

Good day, and welcome to the Sachem Capital Court First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Sweat, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining Sachem Capital Corp.' 's first quarter 2024 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. This morning, the company announced its operating results for the quarter ended March 31st, 2024, and its financial condition as of that date. The press release is posted on the company's website at www.sachemcapitalcorp.com. 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 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 filings. With that, I'll turn the call over to John.

Thank you, and thanks to everyone for joining us today. Sachem and the overall real estate industry continue to face a challenging and evolving macro backdrop marked by uncertainty regarding inflation and the Federal Reserve's future rate policy. To these points, real estate transactions remain constrained as many banks remain on the sidelines. In this environment, we are highly focused on prudently managing our balance sheet to ensure we have ample liquidity and are underwriting the highest quality loans with financially strong borrowers. During the quarter, we worked through loan modifications and extensions, as well as defaults in cases where projects have been largely completed, but our borrowers are searching for longer-term takeout financing. Loan modifications and extensions added approximately $1.5 million in revenue as loans were extended, restructured, or put back on track. As we have noted before, loans that are extended or modified are re-underwritten to ensure the collateral and projects are still viable and well capitalized. Our experience through many cycles has provided us with the necessary tools to navigate this environment appropriately. Importantly, it has been our experience that troubled loans often prove profitable over their term when interest income, origination, and other fees are considered. Furthermore, 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. Let's now discuss our first quarter 2024 financials in more detail. For the first quarter 2024, Satrum grew revenue approximately 17% to $17.2 million, compared to $14.7 million in the same quarter of the prior year. Despite this revenue growth in the first quarter, we saw a sharp reduction in loan originations. To emphasize, this was not due to a lack of loan opportunities, but rather from our steadfast resolve to manage liquidity going forward. We continue to monitor a deep pipeline with very strong borrowers and the potential to establish long-term relationships. With that said, we remain disciplined, and while long-term capital remains scarce, and mostly unavailable to our borrowers, we are focused on maintaining strong liquidity as we continue to effectively navigate the ongoing lending marketplace, notably for our upcoming baby bonds that are due and payable in June 2024. Our current lending approach, which encompasses protection of liquidity and strict loan selection, will continue to impact earnings until we find efficient capital and the tight funding environment begins to ease. Further, without new loan originations, our origination fee income will be negatively affected. We are always proactively pursuing ways to add reasonably priced capital, which would allow us to pivot to be more offensive and invest in attractive opportunities. Obviously, we will continue our balanced approach, but protecting liquidity comes at a cost, and future earnings may be impacted. Total operating costs and expenses for the first quarter of 2024 were approximately $12.5 million compared to approximately $9.6 million in the prior year quarter. The change was due to several factors. Specifically, we recorded interest and amortization of deferred financing costs of approximately $7.5 million in the first quarter as compared to approximately $6.9 million in the first quarter of 2023. G&A was up approximately $340,000 compared to the prior year quarter 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. Compensation expenses were relatively stagnant and other expenses were up over the same period due to increases in depreciation and taxes. Lastly, We also had a 1.3 million provision for loan losses, the majority of which related to an office asset. Looking ahead, there is a possibility of incremental non-cash provisions and impairments, but our seasoned team remains committed to maximizing value through our focused asset management initiatives. As a result, net income attributable to common shareholders for the first quarter of 2024 was approximately 3.6 million. compared to approximately 4.2 million in the same quarter last year. And earnings per share were 8 cents as compared to 10 cents per share. As discussed in prior quarters, 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. Turning to portfolio activities. As I mentioned earlier, and similar to what other participants in our industry are facing, loan originations are very challenging in the current environment. But our demand for loans continues to rise as banks remain on standby, mid-sized financial institutions struggle with non-performing loans, and many hard money lenders are low on capital and cannot support their borrowers. We believe the struggle in our industry creates opportunities for us, and as we look ahead, our origination efforts are focused primarily on single-family and multi-family residential, where prices and demand have remained relatively stable due to a lack of housing supply in many of our targeted markets. For the quarter, we had net fundings of approximately $42.7 million from mortgage loans including loan modifications and construction draws that were offset by approximately $51.4 million of principal paydowns. During the first quarter, the company modified or extended a total of 49 loans. These modifications resulted in gross fee income of approximately $1.2 million. Looking at our whole portfolio, as of March 31, 2024, we had 273 loans with a total principal balance of approximately $490.7 million, with a weighted average interest rate of 12.7%, non-inclusive of fees earned. Our loan portfolio is geographically diverse, spanning across 15 states, with a focus on southeastern growth markets. Loan originations continue to encompass a variety of property types, including multifamily, single-family, and other commercial real estate assets. Further, within our portfolio, only 12.4% of our investments are in office. At quarter end, we had loans with a principal balance of approximately $85.7 million in non-accrual status, which includes 60 loans in pending foreclosure by the company, representing approximately $72.9 million of outstanding principal balance, including the accrued but unpaid interest in borrower charges. Real estate owned was approximately $3.7 million as of March 31, 2024, including approximately $800,000 held for rental and approximately $2.9 million held for sale. Let's now discuss our balance sheet and financial position, where we continue to maintain strong liquidity as a primary focus of the company. As of March 31, 2024, we had total assets of $626.5 million. including approximately $18.4 million of cash, cash equivalents, and approximately $38.4 million in investment securities, offset by $377.6 million in total debt outstanding. Additionally, at quarter end, we had available liquidity of $30 million on our credit facility. In closing, we continue to maintain our disciplined approach to managing our business. Our diversified portfolio and strong financial foundations together give us confidence as we look ahead to unrestricted lending markets. As we continue to prudently protect our capital, we believe that time is getting closer where we can more intently pivot back to growing our business. We firmly believe our strategic shift to a balance of lending and liquidity in this market will ultimately lead to long-term value for our shareholders. I want to thank the entire Sachem team for their hard work and contributions to our performance. We will now open the call for questions.