Operator
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, Stephen Swift, with Investor Relations.
Stephen Swift
Thank you, sir. You may begin. Good morning, everyone, and thank you for joining Sachem Capital Corp's second quarter 2024 earnings conference call. On the call from Sachem Capital today is Chief Executive Officer John Villano, CPA, and Chief Financial Officer Nick Marcello. This morning, the company announced its operating results for the quarter ended June 30th, 2024, and its financial condition as of that date. The press release is posted on the company's website, 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 filing. With that, I'll now turn the call over to John.
John
Thank you, and thanks to everyone for joining us today. During the second quarter of 2024, we maintained our prudent approach towards balance sheet management and our lending activities. With the market anticipating a potential rate cut from the Fed the latter half of the year and optimistic prospects for a soft landing, it appears that we could be trending back in the right direction. That said, we will continue our disciplined approach until markets have stabilized, capital availability has improved, and opportunities for a creative investment are available. This quarter, we generated approximately $15.1 million in revenue. As mentioned last quarter, origination fees make up a significant portion of our revenue, and until we feel more comfortable in the capital environment, we are prepared to postpone earnings growth in the near term to protect our capital, which includes avoiding borrowing at rates that could be potentially dilutive for Satan. We believe remaining patient better positions us for long-term earnings growth. As we have said before, we are willing to work with our borrowers to modify or extend loans, provided they meet our stringent re-underwriting process and possess the necessary capital reserves. During the quarter, we produced revenue of $2.1 million in fee income from loans, a notable change from the comparable period in 2023 from reduced origination volume. The first half of 2024, we added only $1.6 million in REO, reflecting our ability to efficiently manage non-performing loans. Our hands-on approach, coupled with firsthand knowledge of our borrower, can usually move a loan from non-performing to performing. Additionally, we generated a net gain of approximately $264,000 from REO sales during this period, demonstrating that foreclosing on a property does not always result in loss. Our seasoned asset management team continues to take an asset-by-asset approach, meticulously reviewing and inspecting all loans in our portfolio on a regular basis. Similar to many companies in our sector and more broadly across the financial services industry, we added an additional CECL provision for credit losses related to loans of approximately $8.5 million. While this is a non-cash item, it further underlies the impact to real estate valuations and liquidity uncertainty that persists within the market, particularly with commercial real estate assets. As we look forward, I am confident that our cycle tested experience provides us with the tools needed to navigate this environment effectively. Nick Marcello, recently appointed as Chief Financial Officer, brings impressive financial acumen that has and will continue to greatly aid in this process. With that, I would like to hand the call over to Nick to discuss our second quarter financials.
Nick
Nick? Thank you, John. For the second quarter of 2024, Satrum recorded revenue of $15.1 million compared to $16.3 million in the same quarter of the prior year. As John previously mentioned, we are still experiencing the impact of reduced loan originations, and until we are able to source accretive capital, the company believes it is prudent to hold cash on hand as loans continue to pay off. Opportunities within our sector remain, but our diligent approach and steadfast commitment to managing liquidity continues to guide our strategy. Total operating costs and expenses for the second quarter of 2024 were approximately $18.5 million compared to approximately $10.3 million in the prior year quarter. For the second quarter of 2024, we had additional provisions for credit losses of $8.5 million to account for the ongoing challenges in the commercial real estate market. As noted on our last earnings call, we anticipated an increase in provisions due to the prevailing uncertainty in the macroeconomic environment. This puts our current allowance for credit losses for mortgages receivable at $14.4 million, or approximately 3% of unpaid principal balance. Most of these reserves are held against commercial real estate assets as our residential mortgage portfolio continues to hold its value on a relative basis. The increase in CECL provisions was partially offset by interest in amortization of deferred financing costs of approximately $7 million, costs related to compensation and employee benefits of approximately $1.4 million, and G&A of approximately $1.3 million, which all exhibited decreases compared to the prior year quarter, a testament to the company's ability to control costs as originations have been challenged. As a result, net loss attributable to common shareholders for the second quarter of 2024 was approximately $4.1 million compared to net income attributable to common shareholders for approximately $4.8 million in the comparing prior year period, or a $0.09 loss and $0.11 gain per diluted share, respectively. 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. On July 19th, the board declared a quarterly dividend of $0.08 per share for shareholders of record as of July 29th, 2024. Turning to portfolio activities. Like past quarters, our loan originations were down, but the demand for capital within the industry remains strong. With banks staying on the sidelines and financing challenges persisting, we believe our pipeline will continue to be robust, even as we remain very selective given the current capital markets environment. Our core focus remains on single-family and multi-family residential assets in growing markets where the metrics remain favorable. For the quarter, We had net fundings of approximately $41.7 million from mortgage loans, including loan modifications and construction draws that were offset by approximately $32.3 million of principal paydowns. During the second quarter, the company modified or extended a total of 26 loans. These modifications resulted in gross fee income of approximately $1 million. As of June 30th, our portfolio comprised 262 loans with total unpaid principal balance of approximately $500.1 million and a weighted average interest rate of 12.8% excluding fees. Our loan portfolio is geographically diverse, covering 16 states, with a focus on growth markets in the southeast, balanced with more stable markets in the northeast. Additionally, only 12.3% of our investments are in office properties. At quarter end, we had loans with a principal balance of approximately $106.9 million and non-accrual status, which includes 50 loans and foreclosure by the company, representing approximately $73.1 million of outstanding principal balance, including the accrued but unpaid interest and borrower charges. Real estate owned was $3.9 million as of June 30, 2024, including $800,000 held for rental and $3.1 million held for sale. let's now discuss our balance sheet and financial position where maintaining strong liquidity remains a primary focus for the company. As of June 30th, 2024, we had total assets of $586.3 million, including $10.6 million of cash, cash equivalents, and $1.8 million in investment securities, offset by $343.8 million of total debt outstanding. Additionally, at quarter end, we had available liquidity of $10 million on our Needham credit facility. We will continue to utilize drawdowns from our existing credit facilities, current cash on hand, and principal repayments from our mortgage loans to manage upcoming debt maturities, notably the $34.5 million principal amount of unsecured, unsubordinated notes due on December 30, 2024. I will now turn the call back to John for closing remarks.
John
Thanks, Nick. Since our inception as a public company in 2017, we have built a reliable and robust lending platform, paid an excellent stream of dividends, and most importantly, increased book value during some volatile market periods. At quarter end, book value stood at approximately $3.76 per share. We have also returned to shareholders approximately $2.25 per share in dividends since our first quarter as a public company. In closing, we will continue to uphold our prudent approach of managing liquidity and being highly selective in underwriting until markets improve. Our diversified portfolio and strong financial foundation support our confidence in the future as we work to get back to growing our business in 2025. I would like to express my gratitude to the entire Sachem team for their ongoing hard work, dedication, and undeniable contributions to our performance. We will now 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 2 if you would 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. Our first question comes from Gaurav Mehta with Alliance Global Partners. Please proceed with your question.
Gaurav Mehta
Thank you. Good morning. I wanted to ask you, I wanted to follow up on the balance sheet, the $34.5 million loan that's due in December. I wanted to get some more color on your plans on refinancing that loan and how much capacity do you have currently on the balance sheet to to address that loan maturity?
John
That's a great question, Gaurav. So if you look at our June 30 balance sheet, we did have $10.5 million in cash. Currently, we have almost $30 million of cash on hand, not including liquidity from our credit facilities or repurchase agreements to handle the December maturity. So we're in really good shape.
Gaurav Mehta
So $30 million... cash on hand after 2Q?
Gaurav
That's correct.
Gaurav Mehta
Okay. As a follow-up, I was wondering if you could provide some more color on where the interest rates are if you were to issue new debt.
John
Can you repeat that again? I didn't catch it. I'm sorry.
Gaurav Mehta
Just as a follow-up, I wanted to get some more color on where the rates are for your company in case you need to issue new debt.
John
Okay. So as I'm sure you're all aware, Sachem, we closed down an offering about a month and a half ago where we were trying to do an institutional note offering. The rates on the debt were just not accretive to our business model. And, you know, as such, we've kind of backed away from raising, we call it inefficient debt. It's best for us to perhaps shrink our balance sheet, and wait for better opportunities in the debt markets when a deal doesn't fit the box. It's expensive in terms of rate. It has other provisions in terms of no call, meaning you can't pay it off early if rates should improve. Those kind of things are detrimental to our business, and eventually they do come and hurt our shareholders. So those are the things that we're trying to stay away from. and it'd be easier for us to manage our book as we have it, marshal cash, continue to lend money, of course, but not to take a reach and certainly not to try to grow in this market where interest rates are still quite aggressive.
Gaurav Mehta
Okay, and then lastly, on the credit loss reserves that you had in the quarter, can you provide some color on those credit loss reserves?
John
What I'll do is I'll ask Nick Marcello to contribute to this. He's more in tune with the accounting treatment and the actual occurrence of the provisions. Go ahead, Nick.
Nick
Yeah. Hey, Gaurav. So, yeah, so the company increased its reserve. I think we kind of saw this across the sector. We took the position that market conditions haven't improved all that much. We had And the company considers non-accrual loans on an asset-by-asset approach. The rest of the performing bucket has sort of a historical provision applied to it based on losses that we've incurred since inception. So what you're really seeing in that $8.5 million is about $5 to $5.5 or so of direct reserve balance against individual loans that are non-performing. The additional $3 million roughly was applied across the general reserve bucket, both of which were just as a result of, again, asset valuation declines for the underlying collateral for loans that are non-performing, as well as just the company taking the approach that market conditions are still fairly punitive for our borrowers as they really don't have an opportunity right now in a lot of cases to refinance, you know, as was probably in their business plan initially. Just, you know, as banks haven't been able to offer takeout financing, you know, our guys can only sort of withstand our, you know, our 12% for so long. And as a result, you're kind of seeing an uptick in our, how we're looking about our CECL reserves.
Gaurav
Okay, thank you. That's all I had.
Nick
Our next question comes from Tyler Pattering with Oppenheimer.
Operator
Please proceed with your question.
Tyler
Good morning. Thank you. And congratulations to Nick on the new responsibilities here. First question, just to follow up on one of the prior comments. John, I think you said $30 million of cash that you have right now. Is that just that increase from the $10 million you had at the end of the quarter, that extra $20 million, I'm assuming that's just some extra principal repayments that have come through, correct?
John
That is correct. And let me be perfectly clear, Tyler, and I think you're coming here. Marshaling cash, right, being somewhat defensive, it does have the effect of hurting bottom line performance. So, yes, you're absolutely right. We do have approximately $30 million in cash. Currently, we're deciding whether we should pay the December notes off early to save the interest rate on those or not. So that's a board decision that's coming down the pike.
Tyler
Okay. And then some of the numbers you provided, I think you said $106 million in non-accrual, $73 million in change in foreclosure. I think a little bit of a tick-up versus the prior quarter. Um, so just talk a little bit more about, you know, what, what, what's going on there. And, um, you know, there's potential that those numbers could go even higher the next, uh, the next couple of quarters, or maybe you think you're in a, you're in a, you're in a good spot, um, kind of given the, given what you have, um, right now.
John
Yeah. Um, so first of all, you know, I'd love to say I'm in a good spot, but, you know, clarity, right, is, is a big issue right now. Um, we are still, um, not believers that a half point interest cut when it comes and if it comes is going to solve the problems in the industry. Um, we're still fighting through some COVID excesses, um, you know, not only material and labor costs, but rapidly increasing prices and now decreasing prices that kind of throw business plans out of whack. Um, We have an election coming, and certainly not wanting to get political, but there's uncertainty. There's wars out there. We're taking this month by month, and kind of in tune with where Gaurav was going with his questions. A lot of our competition, say, or fellow mortgage REITs, they have the ability to lever through a period of defaults. We don't. We can't. We're not going to chase ridiculous money. So we can't earn through these things. We feel that that's – you're just really walking yourself off the plank, and we don't want to do that. So we like to think that 2025 is a better time for us to get back on the growth wagon. We're playing defense. Hey, just yesterday we received $2.25 million on a loan, an industrial property that didn't pay in nine months, full pay. Those things happen. So the portfolio is still moving, and as you noted, we did raise $20 million in the last month and a half. So we're quite happy with how the portfolio is turning, but we're still at risk with respect to appraisals. And borrowers that, as Nick mentioned, they're just jammed up. There's nowhere for them to go. And the real issue that we run into is once the distress vibe gets out there, getting 100% is very difficult. So we're running into a little bit of that where a borrower in distress can say, hey, you know, what if I give you 85%? What if I give you 90%? So we're fighting some of those off at the same time. It's just going to take a little time for us to get clarity, uh, moving forward.
Tyler
Okay. Okay. Great. Appreciate that. Um, and then last question for me, you know, there's a lot of people that reach out, ask about, um, you know, the dividend, the dividend policy, how to think about the dividend going forward, given kind of where we are in, in the industry. So if you could address that for, for shareholders, please, that would be, that would be helpful. Thank you.
John
Well, um, you know, we've kind of worked our dividend down here a bit. Um, when we don't have a liquidity to grow our book, um, there's no way for us to maintain our, um, let's call it a 12 cent dividend. Um, the yield on our common was much greater. Um, what, what we've done here is we're actually paying out gap earnings, um, instead of tax earnings like we used to. So we're just trying to scale it down a little bit. We're conserving cash. Um, Again, we have a couple more quarters of this. We hope to be back on the strong dividend train in the near future. But once again, we still feel that cash and liquidity is king. So, I mean, I think we're going to have a reduced dividend here for the next quarter or two.
Nick
Yeah, just to add to that, we're paying taxable, not GAAP right now. So taxable is more – you could think about like net distributable earnings as some of our peer kind of disclose and think about that. And diesel reserves don't reduce taxable income. So those sort of, if you look at those as an add back, you get closer to that 8 cent number that we distributed for the quarter.
Gaurav
Okay. All right. Thank you very much for the detail. Appreciate it. Yep. Thanks, Nick.
Nick
Our next question comes from Chris Muller with Citizenship MP.
Operator
Please proceed with your question.
spk08
Hey, guys. Thanks for taking the questions, and congrats, Nick, on the new role. So I guess I wanted to touch on the specific reserves of $5.5 million that you guys talked about. I guess given the short-term nature of your loans, what changed so quickly with the assets from the last quarter, and did they not qualify for modifications there? Is that what kind of drove the reserve, the specific reserves?
John
When we go through our modification, it's basically a re-underwrite of the loan. What we're finding is our borrower is not in the same kind of shape going forward. We may also find that a property, for example, didn't lease up, things like that. So we're not being more aggressive with respect to the write-down. We're trying to be realistic with respect to where the portfolio sits. And it's a bunch of different occurrences. Just trying to get a feel for what net realizable value may be.
spk08
Got it. And then I guess on the other side of the coin with REO, we really haven't seen a big jump in that REO bucket. Should we expect to see that increase over the next couple quarters as you work through some of these loans? Or do you think you'll be more successful on the modification side and things won't have to go REO?
John
Chris, there's a very interesting phenomena in our business. Once we get a property back, for good or bad, we're able to move it. Our biggest issue is getting control of the properties. The best thing in the world now is an attorney fighting a foreclosure. They make tons of money. The stall process is, in our opinion, quite frivolous. And it keeps us from really moving forward with respect to a sale or a renovation to complete the property. So the issue is these things are hung up in the foreclosure process. In most cases, when we get the property back, it is sold within a few weeks after getting it. So the REO doesn't stick around for long, and we're quite happy about that. It is a testament to the underwriting. It's just getting them back into our hands where we can do some good with the property.