Sachem Capital Corp. (AMEX:SACH) Q4 2022 Earnings Call Transcript

Sachem Capital Corp. (AMEX:SACH) Q4 2022 Earnings Call Transcript March 31, 2023

Operator: Greetings, and welcome to the Sachem Capital Corp. Fourth Quarter and Full Year 2022 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. It is now my pleasure to introduce your host, Kevin Reed, ICR. Thank you, Kevin. You may begin.

Kevin Reed: Good morning, everyone, and thank you for joining Sachem Capital Corp.’s year-end 2022 conference call. On the call from Sachem Capital today is Chief Executive Officer, John Villano, CPA; and Chief Financial Officer, John Warch. This morning, the Company announced its operating results for the year ended December 31, 2022, 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 year-end report on Form 10-K with the U.S. Securities and Exchange Commission on March 31, 2023, 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.

We’d like to remind everyone that this conference call may contain forward-looking statements. All statements, other than statements of historical facts contained in this conference call, including statements regarding our future results of operations and financial position, strategy and plans and our expectations for future operations are forward-looking statements. The words anticipate, estimate, expect, project, plan, speak, intend, believe, may, might, will, should, could, likely, continue, design and the negative such terms in other words in terms of similar expressions are intended to identify forward-looking statements. These forward-looking statements are based largely on the Company’s current expectations and projections about future events and trends that it believes may affect its financial conditions, results of operations, strategy, short-term and long-term business operations and objectives and financial needs.

These forward-looking statements are subject to several risks, uncertainties and assumptions as described in the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission on March 31, 2023. Because of these risks, uncertainties and assumptions, the forward-looking events or circumstances discussed in this conference call may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although the Company believes the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, level of activity, performance or achievements.

In addition, neither the Company nor any person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The Company disclaims any duty to update any of these forward-looking statements. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements as well as others made in this conference call. You should evaluate all forward-looking statements made by the Company in the context of these risks and uncertainties. With that, I’ll 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 Sachem had another year of record revenue of $52.3 million and net income attributable to common shareholders of $17.2 million or $0.46 per share. Our 2022 revenue was an increase of almost 72% from 2021, and our net income attributable to common shareholders increased over 50%. These results achieved through disciplined underwriting in an increasingly difficult macroeconomic backdrop illustrate the success and scalability of our business model. During 2022, we funded approximately $300.3 million of mortgage loans, including loan modifications and construction draws. While we are very proud of this level of activity, it is necessary to acknowledge the shifting trends throughout the year.

As inflation increased, the Federal Reserve commenced a series of rate hikes resulting in a sharp rise in interest rates throughout the year. Equity markets felt the pain of higher interest rates as sources of liquidity became cautious and credit spreads widened, turning previously profitable investments into losses. Amid this environment, we remain prudent and disciplined, and our investment in new loans slowed. Further, uncertainty continued with a broadening banking turmoil and potential fallout. Fortunately, we have no exposure to troubled banks at this point. That said, we are cognizant and keeping a keen eye on the implications the volatility may have on property appraisals, our cost of capital and normal loan payoff activity. Let me now turn to what I believe are the key strengths that position us to perform well in the current environment and emerge stronger than ever.

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First, we have a diversified mortgage portfolio across commercial, multifamily and larger single-family fix-and-flip real estate projects. Our loan portfolio is spread across 16 states and we continue to grow in the dynamic Southeast. In addition, in October, we acquired the business assets of Urbane New Haven, a move that was both strategic and highly synergistic. Having Urbane in-house provides us with very strong construction finance expertise, which enables Sachem to take on larger and more profitable construction loans with better quality sponsors while vertically integrating our platform to be in a better position to address any loan issues that may arise. In addition, Urbane provides us a differentiated and consistent income stream as well as downside protection, should a construction loan run into difficulty.

Second, our portfolio is short term in duration. As of December 31, 2022, approximately 17.6% of the loans in our portfolio had a term of one year or less, allowing us to reprice our capital relatively quickly, better protecting margins in a rising rate environment. Third, we have a deep, experienced and cycle-testing team having underwritten more than $939 million in loans through many different investment environments. With the ongoing economic uncertainty, local banks and other competitors are fearful to extend credit and have tightened lending and credit standards, turning away good borrowers and sponsors or even withdrawing completely from the market. We believe we are well positioned to potentially gain market share in this environment with our prudent lending tactics, capital strength and flexibility.

And fourth, we have a strong balance sheet with $565.7 million in assets, including $23.7 million of cash and cash equivalents, offset with $326.9 million in total debt outstanding. Earlier this month, we further augmented our capital structure as we entered into a $45 million revolving line of credit with Needham Bank, a new relationship bank, which further validates our portfolio strength and opportunistic growth strategy. This new line of credit enhances our financial flexibility and liquidity, and gives us the capacity to further scale our business and execute on our growth strategy where appropriate. I would now like to turn over the call to John to touch on some key financial highlights, then I’ll talk more about our performance and strategy going forward.

John Warch: Thank you, John. Beginning with total revenue for the year ended December 31, 2022, we generated approximately $52.3 million, up almost 72% compared to approximately $30.4 million for the year ended December 31, 2021. The increase was due to an increase in our lending operations and overall portfolio growth as well as higher interest income, net origination fees and interest on investment securities year-over-year. Total operating costs and expenses for the year ended December 31, 2022, were approximately $31.4 million, up over 83% compared to approximately $17.1 million for the year ended 2021. The increase was driven by higher interest rates and amortization of deferred financing costs, compensation fees, taxes and G&A.

Net income attributable to common shareholders for the year ended December 31, 2022, was approximately $17.2 million, up approximately 50% compared to approximately $11.5 million for the 2021 period. Earnings per share for 2022 was $0.46 per share, up 4.5% compared to $0.44 per share for 2021. With regard to our portfolio, as of December 31, 2022, we had 444 loans with a total of principal balance of $460.6 million, with an average interest rate of 10.7%, including amortized fees. We had 40 loans with a principal balance of approximately 8.8% in default or foreclosure. 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.

Real estate owned was $5.2 million compared to $6.6 million at year-end 2021. And as of December 31, 2022, real estate owned included $800,000 of real estate held for rental and $4.4 million of real estate held for sale. This favorable reduction is partly attributable to new asset liquidation initiatives that will further support a continued reduction in REO and real estate carrying costs. Turning to our balance sheet. As of December 31, 2022, total assets were $565.7 million, up $147.7 million from year end of the prior year. Total loan balance at year-end 2022 was $460.6 million, and we had total cash and cash equivalents of $23.7 million. We had total debt of approximately $326.9 million as of that date. Additionally, as John mentioned, earlier this year, we augmented our liquidity with a new $45 million revolving line of credit with Needham Bank.

This line of credit carries an interest rate of prime minus 0.25% or 4.5%, whichever is higher and matures in 2026. We were very pleased to work with Needham Bank to expand our capital sources and available liquidity. Given that this is the last day of the quarter, while we do not provide guidance, and as John alluded to in his remarks, we did want to share that we remained prudent and disciplined in regards to originations in the first quarter given the uncertainty in the macroeconomic environment. As others have shared, our originations will be lower than the prior year. We also continue to invest in the business operations infrastructure to position us for further future growth. With that, I’ll turn the call back to John.

John Villano: Thanks, John. Our operational performance in 2022 is testament to our conservative and calculated approach given these volatile times, coupled with the sustainability of our business model built for the long term. Our company was formed in 2010 during a period of extreme financial dislocation. And since then, we have always kept our eyes on the horizon. Since our inception, we have walked before running and always kept our shareholders’ invest in dollars well protected. Moving forward, we will continue to monitor the ever-changing macroeconomic backdrop looking for opportunities to invest capital and grow our platform. Further, our loan pipeline is robust, and there continues to be significant market opportunities for a well-capitalized hard money lender to originate attractively priced loans to small and mid-scale real estate developers with good collateral and a strong operating history.

We are well capitalized with a solid balance sheet and will carefully underwrite opportunities that meet our stringent underwriting standards and that add to our portfolio diversification and strength. To conclude, we have an experienced management, running a company born out of the great financial crisis, a solid and well-diversified portfolio, a strong balance sheet with excellent liquidity and a proven business model to navigate all economic cycles and drive profitability. We intend to stay disciplined while maintaining a conservative, yet prudent approach as we continue to deploy capital accretively. We believe we are well positioned to grow cash flow, dividends and shareholder value over the long term. With that, we will open the call for questions.

Operator?

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Q&A Session

Operator: Our first question is from Matthew Erdner with JonesTrading.

Matthew Erdner: I’m on for Jason Stewart this morning. So when writing these fix-and-flip projects, what is the duration on these loans? And does that vary from house-to-house. And then also, what kind of spread are you guys seeing now compared to either year-end or the end of 3Q, given the year — the move in tenure?

John Villano: So the first part of your question, a majority of our loans are underwritten with a one-year term. As part of our construction finance business, sometimes it’s in the best interest of the borrower for us to write an 18-month period as opposed to 12 months. And that’s usually at the recommendation of our Urbane counterparts. And then secondly, with respect to spread, in the past, we have had some price competition from our competitors. All of that has now gone away. We do have the freedom to price and price aggressively. So right now, today, what used to be middle of the road a 12% and two point loan offer, is now 13% and perhaps two or three. And then in addition, if it’s a construction finance situation, we have another two percentage points for the Urbane services added.

Our cost of capital is just under 9%. Our spread is still pretty good. So overall, yes, we’ve moved with the rising rates. We have not moved as far as the rates have gone. But even though we’re raising prices, there has been no slowdown in demand for quality projects on our end.

Matthew Erdner: Got you. That’s good to know. And then what is the — I guess, what are you guys requiring people to put down on these loans that are either with 12% with the two points on top or 13% and whatever? And then following up on that, on the for-sale assets, what is the assumption that you guys kind of have going into a loan versus were you guys are able to exit or rent it out at?

John Villano: Okay. The first part, we are still working with a max 70% LTV. We are looking to do better if we can. In the past, we — our borrowers did not put up those amounts in cash. Sometimes we took additional collateral. Now we are focusing more on cash down payments. We’re really looking for the borrower or sponsor to have significant skin in the game, cash money in the game. And that’s a little bit of a change that we’ve implemented over a year ago. The second part of the question, let me think of the best way to answer it. I’m lost here, John. How do you want to — what was the second part of your deal there, your question?

Matthew Erdner: So on the assumption on the exit of the loans that you guys are originating, how have the assets that you’ve held for sale or for rent varied compared to where you guys underwrote to on the exit?

John Villano: Okay. We have done very well on troubled loan disposition, whether it would be foreclosure or just a default and REO situation. Our underwriting has been strong. You’ll see in our K, the impairments are relatively low. They’re based portfolio wide. But if you look in our P&L, the loss from the sale of real estate owned is nominal dollars. So our underwriting is strong. It’s been tight. And I’ll be right to the point here. Sometimes we let a property go at a breakeven just to get our capital back. There are times where we can hold out for more money, maybe redevelop the property a little bit. That’s not our game. We want our capital back, and we want to put it to work again.