SCCF - Sachem Capital Corp. (SACH) Q1 2023 Earnings Call Transcript

2023-05-15 10:17:04 ET

Sachem Capital Corp. (SACH)

Q1 2023 Earnings Conference Call

May 15, 2023 8:00 A.M. ET

Company Participants

Kevin Reed - ICR

John Villano - Chief Executive Officer and Interim Chief Financial Officer

Nick Marcello - Vice President, Finance and Operations

Conference Call Participants

Gaurav Mehta - EF Hutton

Tyler Batory - Oppenheimer

Christopher Nolan - Ladenburg Thalmann

Matthew Erdner - JonesTrading

Presentation

Operator

Good morning ladies and gentlemen, and welcome to the Sachem Capital Corp. First Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Note that this call is being recorded on May 15, 2023.

And I would like to turn the conference over to Kevin Reed, ICR. Please go ahead, sir.

Kevin Reed

Good morning, everyone, and thank you for joining Sachem Capital Corp.'s first quarter 2023 conference call. On the call from Sachem Capital today is Chief Executive Officer and Interim Chief Financial Officer, John Villano, CPA; and Vice President, Finance and Operations, Nick Marcello. This morning, the company announced its operating results for the quarter ended March 31, 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 will file its quarter-end Form 10-Q with the U.S. Securities and Exchange Commission later today, 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 on today’s conference call may contain 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, 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 earnings release and SEC filings.

With that, I will now turn the call over to John.

John Villano

Thank you, and thanks to everyone for joining us today. I am very pleased to report that Sachem had a solid start to 2023, despite an increasingly uncertain economy. This quarter, we achieved revenues of 14.7 million, an increase of more than 42% over the first quarter of 2022 and net income attributable to common shareholders of 4.2 million or $0.10 per share for the quarter. These results underscore the strength of our business, the resiliency of our loan portfolio and our disciplined underwriting, even amid the evolving economic conditions and turmoil in the banking sector.

As we know, the capital markets continue to signal concerns about further bank troubles in the future. Furthermore, since some potential bank failures have hard money lending businesses or provide capital to hard money lenders, it will likely have significant implications for our lending industry for years to come. Given the uncertainty and quickly evolving economic backdrop, we continue to execute a cautious approach to our lending practices and we'll most likely maintain that stance for at least the next few quarters.

Given these market dynamics, we will maintain a vigilant eye on the implications these factors may have on property appraisals, our cost of capital and normal loan payoff activity That said, during the first quarter, we funded approximately 58.9 million of mortgage loans, including loan modifications, and construction draws. As we said last quarter, we anticipated our originations would be lower this year than last, but that we would be opportunistic, get prudent in how we [lend] [ph].

During the quarter, our originations were focused on borrowers with strong credit and proven results. Importantly, most originations in the first quarter carried gross returns of over 15% so we have been able to maintain spreads as our cost of capital increased. Even as we have tightened underwriting standards and partnered with better credit borrowers. And given our disciplined stance, we have maintained strong liquidity. The one constant is that there was no shortage of opportunities in our pipeline.

We will look to opportunistically capitalize on situations when they arise where banks and other smaller less capitalized competitors cannot fulfill obligation. Importantly, our four key strengths that position us to perform well in the current environment include a diversified mortgage portfolio across multi-family, single-family, fixed and flip loans, and commercial real estate projects.

Our loan portfolio is spread across 15 states and we continue to strategically grow in the southeast. Second, our loans are generally short-term in nature. As of quarter-end, approximately 16.3% of the loans in our portfolio at a term of one-year or less, allowing us to reprice our capital quickly to better protect our margins. Third, we have a deep experienced and cycle tested management team. We have underwritten approximately $1 billion in loans through many different investment environments.

Sachem Capital was born of the great financial crisis and we will continue to use our experience as a guide to navigate the current environment. Fourth, we have a strong balance sheet with 597 million in assets, including 20.3 million of cash and cash equivalents offset with 339.3 million in total debt outstanding. In the quarter, we further augmented our capital structure entering into a $45 million revolving line of credit, expandable to [75 million] [ph] that carries an interest rate of [prime] [ph] minus one quarter or 4.5%, whichever is higher and matures in 2026.

We are excited to have expanded our bank to include Needham Bank as we successfully boosted our available liquidity and enhanced our financial flexibility. As of March 31, 2023, we had approximately 63.3 million of available liquidity within our debt facilities to supplement our cash and cash equivalents on-hand. We believe having that dry powder will allow us to capture market share in what we believe will be a prolonged economic downturn.

Turning to our financial highlights of the quarter. We generated total revenue of approximately 14.7 million, up over 42%, compared to approximately 10.3 million for the prior year's first quarter. This change was due to an increase in our lending operations and overall portfolio growth and is reflected in our interest income and our income from partnership investments, which rose approximately 29% and 90%, respectively.

Total operating cost and expenses for the quarter were approximately 9.6 million, compared to approximately 5.9 million for the first quarter of 2022. The change was due to higher interest and amortization of deferred financing costs, compensation fees and taxes, and G&A. Interest and amortization of deferred financing costs increased from approximately 3.9 million in the first quarter of 2022 to approximately 6.9 million this quarter, an increase of almost $3 million or 77%.

Net income attributable to common shareholders for the quarter was approximately 4.2 million, compared to approximately 3.4 million for the first quarter of 2022. Earnings per share for the first quarter 2023 was $0.10 in-line with the first quarter 2022. With regard to our portfolio, as of March 31, 2023, we had 406 loans [with a] [ph] total principal balance of $476.5 million and an average interest rate of 11.69%, [not inclusive] [ph] of fees earned.

We had loans with a principal balance of approximately 90.1 million on non-accrual status. Of that 90.1 million, there were 52 loans in pending foreclosure by the company, representing approximately $40.6 million of unpaid principal, interest, and charges. 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.

At the start of 2023, we adopted CECL. First went to ASC 2016-13. In accordance with the framework, we established an opening reserve balance of approximately 2.5 million. The details of which are discussed in our footnotes. The impact to net income quarter-over-quarter for credit losses was approximately $102,000.

Turning to our balance sheet. As of March 31, 2023, real estate owned was 6.1 million at March 31, 2023, compared to 5.2 million at year-end 2022. Specifically, real estate owned included approximately 813,000 held for rental and 5.3 million held for sale. Currently, Sachem is negotiating the sale of two REO properties totaling approximately 2.1 million. The company intends to recover all invested costs on the eventual sales of these two properties. We ended the quarter with assets of approximately 597 million, up 31.3 million from year-end 2022.

Total loan balance at quarter-end was approximately 476.5 million. Current partnership investments of approximately 35.3 million and we had total cash and cash equivalents of approximately 20.3 million along with total debt of approximately 339.3 million. We believe our low leverage, compared with our peers underpins the strength of our balance sheet as a whole.

Our performance and results in the first quarter underscore the strength of our platform, the resiliency of our loan portfolio and our prudence in capital deployment. While we expect additional challenges will emerge, we believe maintaining a prudent approach to lending in the coming quarters focused only on the best and highest quality credit will be the right approach for the foreseeable future.

Before we conclude our prepared remarks, I wanted to point out that while we do not provide financial guidance on future expectations, we do want to provide additional perspective. Specifically, given this unique and very uncertain economic and financial market landscape, as we communicated earlier, we will prudently continue to strengthen our balance sheet by building our cash and overall liquidity. This is certainly the right approach to set us up for the future, but it does come with a near-term cost, meaning it will create a drag on earnings.

Additionally, as part of the balance sheet effort, we will continue to exercise a disciplined approach to our originations, focused on fewer opportunities that we will believe will drive fee income, revenue, and earnings. Moving forward, while our results may be impacted on a relative basis, we believe these steps are the proper approach to maintain profitability as we navigate the headwind.

In summary, with a well-diversified portfolio comprised of shorter duration loans and experienced and cycled tested management team along with a strong balance sheet, we are well-positioned to navigate the short-term volatility and to grow long-term shareholder value.

With that, we will open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you sir. [Operator Instructions] And your first question will be from Gaurav Mehta at EF Hutton. Please go ahead.

Gaurav Mehta

Thank you. Good morning. I wanted to ask you on your loan repayment. I think you said gross originations for the quarter was 58.9 million, can you provide some color on what was the net origination for the quarter?

John Villano

So, our originations in comparison to the first quarter of 2022 are down almost 25% from [88 million to 60 million] [ph]. The 60 million of this quarter includes construction loan finance, which is modifications and extensions. So, you know, our originations are down throughout. Mostly, what we're doing now is fulfilling construction requirements with prior closed loans.

So, our basic origination platform is, listen, it's not on a stall. It's being very selective. We look to originate around 40 million a quarter for the first quarter, which we did and 40 million for the second quarter, which we are going to do. And we're just playing very close to the best in managing our cash.

Gaurav Mehta

Okay. Second question on the non-accruals. I think in your prepared remarks, you mentioned $91 million of loans were in non-accruals, which would imply around 19% of the principal value in non-accruals. It seems like it's higher than what the non-accruals were in 1Q, I'm sorry in 4Q, can you provide some color on the non-accrual loans?

John Villano

Yes, for sure. Our business is basically, you know, as they say, fix and flip. You know, our borrowers, they come to us, they come to us to be efficient, to move quickly, and to give them the seed capital to get a project started and completed in a timely manner. Our problem in the first quarter, Gaurav, was really quite simple.

The banks have stepped away from the finance, the refinance of our borrowers. You know, we're normally taken out within, you know, somewhere between 11 months and 13 months in the local banks. And they’ve kind of, they're gone into their [shelter] [ph]. As they have stepped back, our loans have now moved past due, so to speak.

What we will do, and even though that's a large number, a significant portion of these non-accrual loans will be re-modified, re-considered by the company, basically, re-underwritten. And if the original terms and conditions are still in place we will extend these loans for another year.

Gaurav Mehta

Okay. Thank you. That's all I had.

John Villano

Thank you.

Operator

Thank you. Next question will be from Tyler Batory at Oppenheimer. Please go ahead.

Tyler Batory

Hey, thank you. Good morning. So, the follow-up just in terms of your approach to originations and whatnot, I mean given this commentary, trying to be more disciplined, and I think in the previous answer, you mentioned maybe 40 million is a good run rate to be using going forward. Multiple part question here for you. I guess talk a little bit more about, kind of the pipeline and the opportunities for that 40 million? And maybe what sort of things are you looking at to perhaps ramp things up a little bit more? I imagine you want to see the overall environment improve, but just, kind of curious if there's a scenario where you get back to where you were perhaps mid last year, you know in terms of the amount of loans that you're funding?

John Villano

Okay. Yeah. For sure. Our pipeline is huge. I always say a [100 million, it's at least that] [ph]. We are seeing loans from brokers, competitors, banks. Everybody's looking for a home, you know, for the deal. Right? Everybody's looking for money. What we are doing, and our underwriting team, and our underwriting officers? They're trying to determine the best low-risk position that Sachem can take in one of these deals because we tried to hit our $40 million quota.

So, you know, right from the [indiscernible] we'll look – right off the [bat] [ph], we're looking for certain MSAs. We're looking for significant cash in the deal. We're looking for experience. And at that point, you know, once we could start ticking and time-off some of these items, we then try to see what type of property it is. We're still looking at resi and multi-family as being, you know, number 1 and 2 on the list.

Commercial being third. And ground up construction being, kind of last on our list. So, you know, we're trying to work through a little bit of a framework to pick and choose what we see is an abundance of opportunity. And, truly, some of this opportunity is absolutely horrendous. It's coming through here, looking for a home, but we're trying to pick the best that we can.

Tyler Batory

Okay.

John Villano

We expect this pipeline to increase as money becomes a little more scarce, Tyler, but we're not, you know, hey, we only have so much money that we can lend. And our cost of capital if we went into the markets to raise money is quite significant at the time whether it be preferred or equity or even another debt offering. So, we're marshaling cash and using our cash to manage the pipeline.

Tyler Batory

Okay. Appreciate that. Can you talk about spreads right now, so you just, kind of remind us how the competitive environments is impacting that as well?

John Villano

Yeah. So, you know, in our little world of, you know, New England and Branford, Connecticut we really have no pricing barriers at the moment. The demand for cash for us shifts what we have to lend. Our current pricing is [13 and 3] [ph]. And if there's some construction finance involved, there's another 2% on top of that. Our cost of capital is somewhere between 8% and 9%.

Nick, do you have an exact number on our cost of capital?

Nick Marcello

Yeah. We're just over 8% right now on our debt costs with equity, obviously, being quite a bit higher right now.

John Villano

So, you know, we still have a great spread that really hasn't – our spread has not been compressed as rates have moved. We're able to price into it for now.

Tyler Batory

Okay. I think that's all from me. Appreciate the detail. I'll pass it on.

John Villano

Thank you.

Operator

Thank you. Next question will be from Christopher Nolan at Ladenburg Thalmann. Please go ahead.

Christopher Nolan

John, I estimate that your interest income declined quarter-over-quarter since the fourth quarter. If so, was that related to the increase in the properties and foreclosure?

John Villano

It was. And once loans are 90 days old, we put them on non-accrual. And, you know, we had 1 or 2 large loans fall into this non-accrual status only because refinance and packages fell through at the last minute. We expect those to be corrected. And I think next quarter, you'll probably see a better result with respect for these outstanding non-accruals.

Christopher Nolan

Great. And then in your comments in terms of slowing down growth, keeping more cash liquidity, how should we look at the leverage ratio?

John Villano

So, right now, we have a significant amount of cushion with respect to our bond covenant, which is an asset coverage ratio of 1.5x. We are being very, very careful with that, of course. We don't feel that we can take on significant amounts of future debt without raising either equity or preferred. Equity at this level is just not the right idea. And preferred right now is too costly, so, you know, we're kind of in a holding pattern. We're lending what we collect to an extent and you know, again, it's just marshaling cash and picking the best out of the bunch.

Christopher Nolan

Final question, was the change in the ending share count related to ATM issuances?

John Villano

Yes. I think we accessed the ATM once or twice during the quarter. So, we weren't, you know, obviously, with our share price down here, it was not really prudent to get too crazy, but we did use the ATM once or twice during the quarter.

Christopher Nolan

That's it for me. Thank you.

John Villano

Okay. Thanks.

Operator

Thank you. [Operator Instructions] And your next question will be from Jason Stewart, JonesTrading. Please go ahead.

Matthew Erdner

Hey guys, this is Matthew on for Jason this morning. Thanks for taking the question. So, could you just describe the average length of these construction loans and what kind of projects they're on? And then as follow-up to that, could you talk about the dividend just a little bit and explain what your thoughts are there? Thank you.

John Villano

Oh, sure. Our construction projects were varied. It could be a two family remodel. It could be a 10 unit building. It could be a 50 unit building. It could be some ground up with a significant sponsor. Most of our construction is with, you know, very experienced sponsors, well-capitalized and the kind of projects that should take us through this little period of uncertainty in the market, let's say. Our construction, I mean, there's significant projects in Charlotte.

We have projects in Connecticut. We have some in Florida. All of which are moving according to plan. And, you know, as of right now, we think these things will come outside of this little hiccup we're having. With respect to the dividend, as I touched during our call, we, you know, there could be some pressure on our dividends. Right? Let's not sugar coat them. As we as we build cash here, cash that hangs around is not earning, and there might be some pressure.

I don't know how bad it would be. We're very proud of what done with our dividend, we will defend it, as long as we can. So, I know as we build cash to be protective, we can see a little bit of a slip in the dividend.

Matthew Erdner

Thank you. That's helpful.

Operator

Thank you. At this time, I would like to turn the call back over to our presenters for closing remarks.

John Villano

Thank you all for joining us today. We look forward to updating you once again next quarter. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.

For further details see: