Sachem Capital Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 15, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Sachem Capital Corp. 2nd 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. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Kevin Reed, Investor Relations. Thank you, sir. You may begin.

Speaker 1

Good morning, everyone, and thank you for joining Sachem Capital Corp's Q2 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 30, 2023, in The press release is posted on the company's website, www.sachimcapitalcorp.com. In addition, the company filed its quarter end Form 10 Q with the U. S.

Speaker 1

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 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.

Speaker 1

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 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?

Speaker 2

Thank you, Kevin, and thanks to everyone for joining us today. Station 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 Q2 results were quite strong. We achieved record revenue growth of more than 31% to $16,500,000 Compared to the same quarter of 2022 and net income attributable to common shareholders of $4,800,000 or $0.11 per share.

Speaker 2

These results highlight the deliberate and prudent approach we apply to 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 Sachem 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 historical levels.

Speaker 2

In the Q2, we funded approximately 55 point 6,000,000 of mortgage loans, including loan modifications and construction draws. While our originations have leveled off similar to the rest of the 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.

Speaker 2

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. 1st, Hagee Capital was born out of the great financial crisis and has a deep experience and battle tested management team. We have underwritten over $1,000,000,000 of loans through many different lending cycles, and we'll use that experience as a guide to navigate our path forward. 2nd, we have a diversified mortgage portfolio across multifamily, single family, fix and flip loans and commercial real estate projects.

Speaker 2

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% of the loans in our portfolio had a term of 1 year or less, allowing us to reprice capital quickly to better protect our margins. Importantly, We have a strong balance sheet with $624,000,000 in assets, including $52,300,000 in cash, cash equivalents and investment securities, offset with $382,700,000 in total debt outstanding.

Speaker 2

In addition, We have available liquidity of approximately $37,900,000 in our credit facilities. This liquidity and availability 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 $10,800,000 compared to approximately $7,300,000 for the Q2 of 2022. The change was due to higher interest and amortization of deferred financing costs, G and A and compensation fees and taxes. Interest and amortization of deferred financing costs increased from approximately 5 $200,000 in the Q2 of 2022 to approximately $7,100,000 this quarter, a change of approximately 1,900,000 or 37%.

Speaker 2

Net income attributable to common shareholders for the quarter was approximately $4,800,000 compared to approximately $4,300,000 for the Q2 of 2022. Earnings per share for the Q2 of 2023 were 0 point 1 $1 versus $0.12 in the Q2 of 2022. With regard to our portfolio, as of June 30, 20 23, we had 360 loans with a total principal balance of 506,700,000 With a weighted average interest rate of 12.17%, not inclusive of fees earned. We had loans with a principal balance of approximately $96,400,000 in non accrual status, and there are 51 loans in pending foreclosure by the company, representing approximately $47,200,000 of unpaid principal. During the quarter, the company modified or extended a total of 62 loans.

Speaker 2

These modifications resulted in gross fee income of approximately $2,000,000 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, Importantly, we have the expertise to work through these issues given our successful track record through prior cycles. For the 6 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.

Speaker 2

Turning to our balance As of June 30, 2023, real estate owned was approximately $5,000,000 compared to $5,200,000 at year end 2022. Specifically, real estate owned included approximately $818,000 held for rental and approximately $4,200,000 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 to 2nd quarter net income of $0.11 per share. The difference was primarily related to our timing of certain revenues and originations.

Speaker 2

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 discipline 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.

Speaker 2

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. Operator?

Operator

And answer session. 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 is from Tyler Batory with Oppenheimer and Co. Please proceed with your question.

Speaker 3

Hey, good morning. Thank you. So first question for me is just interested what you're seeing loan pipeline, Keeping your cautious stance, should we expect origination activity to remain pretty consistent With where you were in the first half of the year for the rest of this year?

Speaker 2

Good morning, Tyler. First, our pipeline is still very, very robust. Its creation and sustainability is really based on Banks and our competitors inability or fear to fund our types of business purpose loans. We expect our pipeline to remain unbelievably large really through the end of this year. And with that, We are unbelievably selective in picking what we think are the best opportunities of the bunch.

Speaker 2

And these loans in our pipeline are from all over the country. And as we've discussed in the past, We are doing our very best to stay on the Eastern seaboard. We're still very strong in New England And Southeast part of the U. S. Opportunities exist for us everywhere.

Speaker 2

The bank's failure to respond to borrowers' needs have turned over a lot of their better paying customers to us, And we try to take advantage of them in terms of providing the services that they so desperately need to either start or finish projects. Hopefully, in the long run, we acquire a customer, but for right now, there is a steady stream of good quality borrowers Great projects. With respect to origination volume, as we talked in our release here, We have seen on our end a reduction in funding and it's kind of by design. We have limited amounts of liquidity as does everyone in our space. We have sufficient working capital.

Speaker 2

We are doing our very best not to spend every penny. So we're playing cautious. I'd like to just Drop a couple of numbers in here that I think you may find useful. For the 1st 6 months of this year, 2023, We funded $114,000 about $114,500,000 in loans And we received $66,000,000 in payoffs. And if we were to compare that to the year ago period, To the year ago period where we funded $192,000,000 of loans $61,000,000 of payoffs.

Speaker 2

It'll give you the feel of how we're condensing our workload That we're picking better and better deals and doing our very best to conserve our capital until Liquidity improves in our industry.

Speaker 3

Okay. Very helpful Commentary there. My follow-up question just in terms of loans and foreclosure, loan modifications, potential Just talk about kind of what's machine with those two items? I mean is that something that maybe trends lower the next couple of quarters given you're being a little bit more selective in terms of the capital that you're deploying?

Speaker 2

That's a good question and of course a very important topic. We have a bunch of foreclosures and we have a bunch of modifications and extensions as I discussed on our call. These numbers will start to wind down. These are loans that were originated during a very robust real estate cycle. There was a time where we're doing, given a given quarter, 125 loans.

Speaker 2

And those loans are looking for a home, which is our biggest problem. The term of our loan runs its course. We have a choice. I can either foreclose, send a demand letter and foreclose or we can extend and modify. And Our team is really good at figuring out, is our borrower doing what they should, what they agreed to do?

Speaker 2

Have they maintained the property? Is the construction on process? If in fact the borrower has done as agreed, We can extend and modify his loan for

Speaker 3

another year.

Speaker 2

We are seeing an awful lot of this. And it's really a result of Our people not having a place to go, where they have completed projects and no bank financing To assist them really with lower payments and long term debt capital. So to be very specific, we see this, I don't want to say coming to an end, that would not be fair. We do see the amount of modifications and extensions slowing down tremendously towards the end of the year. Remember, our loans are 1 year.

Speaker 2

We were very busy last September December, and we started to slow down in March. So, we have another few months of this, but I just want to give you I just want to reiterate what was said in the call We modified 62 loans this quarter and the modifications resulted in a gross $2,000,000 of additional fee income to Sachem. And this income is really supporting our lower level of originations. That's all for me. Okay.

Speaker 2

Thank you.

Speaker 3

Sorry, go ahead. Okay. All right. Thank you, John.

Speaker 2

Okay, Tyler. Thank you.

Operator

Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.

Speaker 4

John, what sort of leverage level are you targeting? And given the inverted yield curve, do you see any sort of Refinance opportunities at a lower rate potentially.

Speaker 2

Okay. So let's talk about leverage. Overall, our leverage level, really not able to increase our leverage Dramatically at this point, and there's really two reasons for that. One is finding affordable debt capital is very difficult And finding an amount that would be beneficial to us. 2nd is the covenants on our short term notes.

Speaker 2

So we are limited to a 1.5 times asset coverage ratio, which it's a good thing and a bad thing. It allows us to walk at a good pace. It doesn't allow us to sprint and get ahead of ourselves. We did increase a little bit of debt in the quarter. We are always looking to raise equity.

Speaker 2

In fact, we have utilized our ATM during the first 1st month is on a very sparing level, raising about $10,000,000 during the 1st 6 months. So we continue to balance debt and equity, and it's all about having a real fortress of a balance sheet. With respect to yields, 1st and foremost, we don't have any pricing pressure at the moment. We still have a great spread on our loan products compared to our weighted cost of capital. We have the ability to put a lot of money to work with really great spreads still, Not as good as they were 2 years ago, but still very, very good.

Speaker 2

While we would hope The rise in interest rates would kind of slow down here. I think if it goes too far, I mean, we could have a crack. But as of right now, margins are good. We are always looking for affordable debt capital. I feel like we're a few months away from finding that.

Speaker 5

Okay. Thank you.

Operator

Our next question comes from Matthew with Jones Trading. Please proceed with your question.

Speaker 6

Hey, good morning. Thanks for taking the question. So you mentioned that you're seeing good spreads Still, what are those spreads looking like? And then can you also describe what a typical modification looks like for you guys? You mentioned that your extension, But are you requiring more equity capital to be put in?

Speaker 6

Just what are the requirements there? Thanks.

Speaker 2

Sure. So, in terms of loan spreads, our cost of capital is between 8.5% 9%. You're currently company wide lending at a minimum of 13% and 2%, Pushing higher, mostly 13% and 3%. The 3% is the origination. So our margins are very good.

Speaker 2

These are 1 year loans. This is not so we were 12% and 2% when rates were much lower. We're borrowing at 6% with our unsecured notes. So, our margins have been compressed, but it has not been devastating, Okay. Now our typical modification.

Speaker 2

So there's 2 kinds. Around here, it's Does the mod need new capital from us or is it just a time mod, meaning, projects done, projects cash flowing And our borrower needs another year or 6 months to find suitable refinancing or sale. The easy ones are the time slots. We have a completed project. It's a timing issue.

Speaker 2

I talked about the banks and our competitors' failure to lend. Their fear is causing us a little bit of a heartache and a heartache for our borrowers as well who have to incur additional costs. Our heartache is that I have to explain this stuff every quarter. The other mods where our project may have run over budget Due to material labor, whatever, lack of labor, Those require a little more effort on our part. And our team will go in and really underwrite the loan again, Not as full, but mostly, mostly complete.

Speaker 2

And in that regard, we determine if the loan is a keeper, Meaning our borrower has done as agreed within his loan docs or is our borrower so far off track we need to Put an end to it. So, if the deal requires more capital and we see light at the end of the tunnel, We will provide capital, complete the project, maybe provide some liquidity to the borrower so we We can get 3 or 4 months down the road to complete a sale. All right. Those are the differences. Like I said, we cleaned up 62 of those During the quarter, I expect there to be another $62,000,000 And last quarter, we earned $2,000,000 in gross fees.

Speaker 6

Yes, that's helpful. And then as a follow-up, of the ones that you're not able to clean up and you take on as real estate owned, what is the Time line there of how long it's going to be on the balance sheet and what have you guys been seeing in terms of sales and how quickly you can get out of these properties?

Speaker 2

Unfortunately, in New England, the foreclosure process is absolutely horrendous. Most of our foreclosures are resolved before we have to take back a property. Okay. So it's unbelievably hard to believe, but as you can see, our REO balance From quarter to quarter, it's relatively stable. It's $5,200,000 a year ago.

Speaker 2

It's $5,000,000 now. I don't want to say that I'm happy having $5,000,000 of REO. It's just the ebb and flow of the product. Trying to add more color there. They resolve themselves basically, Matt.

Speaker 2

And Mostly, if it comes back to us, we have a stable of almost 500 developers that we circulate Product B, REO2. So we have built in buyers. And as you could check, As you can see in our historic filings, most of our impairments are relatively small When you consider the amount of loans in our portfolio. So these problems kind of resolve themselves. Not to say that I'm not going to get a punch in the nose somewhere along the way here, but historically, our loss provisions have been relatively low.

Speaker 2

I'll even say unbelievably low compared to our peers. We expect that to continue. So all I can really say, these things kind of work themselves out. If our underwriters do what they're supposed to do, It's more a disclosure item than a fire sale.

Speaker 6

That's helpful information. Thank you.

Operator

Okay. Our next question comes from Chris Mueller with JMP Securities. Please proceed with your question.

Speaker 5

Hey, John. Thanks for taking the question. So to your comment on the pullback from the banks, does this represent a short term While they're out of the market or do you think you guys can win some longer term business here?

Speaker 2

Don't The banks always guess wrong, right? They're pulling back. This is an opportunity for us to Maybe Garner some of their better borrowers, some of their better projects, Clearly be able to price aggressively. I think the banks here will come around at some point, But they did this during COVID. And we were just a couple months into COVID and we saw That there was an opportunity for us to build our business and we did.

Speaker 2

This is looking and feeling the same way. And what I'm seeing here, Chris, is that the banks are afraid. They're afraid of interest rates. And we have a very interesting situation with respect to the rise in interest rates And the failure of real estate prices to fall. And that just leads me down a path of, Hey, there is real value.

Speaker 2

The value is created, in my opinion, with new construction. New construction and new building codes, labor, materials, these things are so expensive that it's raising Value across the board for all real estate, maybe except for office. The idea here is that Older properties in need of repair are being bid up because the cost to build new is so expensive. And I think the banks are missing the boat on that. So again, it's my opinion.

Speaker 2

We'll see what the market shows me a couple of months From now, but we like to zig when they zag a little bit.

Speaker 5

Yes, that's helpful. And then the follow-up So I see some subsequent ATM issuance in the 10 Q. Is that just to support the increased pipeline?

Speaker 2

Well, yes, yes, yes, it is. It's part of the balancing between debt and equity. We do that dance all the time. We don't want to put pressure on our covenants. We want to have capital, Free capital should we need it or we see an opportunity.

Speaker 2

But when we have certain periods during the quarter where we can We will go and do that. Now let me be very clear, I'm not happy raising capital at $3.75 Right. So I just want that to ring loud and clear. Sometimes we have to. And it's not Because things are on a fire sale, it's because we're doing that very delicate balance, The dance between debt and equity.

Speaker 5

Got it. Appreciate your comments.

Speaker 2

Okay.

Operator

There are no further questions at this time. I would now like to turn the floor back over to John Villano for closing comments. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Sachem reported record revenue growth of over 31% to $16.5 million and net income of $4.8 million ($0.11 per share) in Q2 2023, highlighting the resilience of its disciplined underwriting amid rising rates and inflation pressures.
  • Q2 originations totaled $55.6 million—below historical levels by design—while the company’s loan pipeline exceeded $114 million year-to-date, as Sachem seizes market share opportunities from larger banks pulling back.
  • The firm maintains a strong balance sheet and liquidity position with $52.3 million in cash and securities, $37.9 million available under credit facilities, and 88.3% of loans maturing within one year to enable rapid repricing.
  • As of June 30, 2023, the 360-loan portfolio carried a weighted average interest rate of 12.17%, preserving healthy spreads over its 8.5–9% cost of capital, and modifications in Q2 generated approximately $2 million in fee income.
  • Management reinforces a cautious, cycle-tested approach, focusing on diversified residential and multifamily lending, balancing dividend distributions with preserving financial flexibility to capitalize on market dislocations.
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Earnings Conference Call
Sachem Capital Q2 2023
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