Q4 2023 Sachem Capital Corp Earnings Call

Participants

John Villano; Chairman, CEO, President & Interim CFO; Sachem Capital Corp

Gaurav Mehta; Analyst; Alliance Global Partners

Christopher Nolan; Analyst; Landenburg Thalmann

Matthew Erdner; Analyst; JonesTrading

Chris Muller; Analyst; Citizens JMP

Presentation

Operator

Geetings and welcome to the Sachem Capital Corp. Fourth Quarter and Full Year 2023 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. [Steve Swet], Investor Relations for Sachem Capital Corp. Thank you. You may begin.

Good morning, everyone, and thank you for joining Sachem Capital Corporation's full year 2023 earnings conference call. On the call for Sachem Capital today is Chief Executive Officer and Interim Chief Financial Officer, John Villano; CPA and Vice President of Finance and Operations. Nick Marcello.
Yesterday, the Company announced its operating results for the year ended December 31st, 2023, and financial condition as of that date press release posted on the Company's website at www.SachemCapital Corp.com. In addition, the company filed its year end Form 10 K with the SEC on April first, 2020 fourth, which can be accessed on the Company's website as well as the SEC's website at www.SEC.gov. You have any questions after the call, I would like any additional information about the Company. Please visit our website.
As a reminder, remarks made today on the conference call may include forward-looking statements are 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 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 keep us 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.

John Villano

Thank you, and thanks to everyone for joining us today. For 2023, Sachem grew revenue approximately 25.5% to $65.6 million compared to $52.3 million in 2022. While revenue increased Sachem overcame a challenging year in the mortgage reach space where the macro economic environment was marked, my bank failures, large loan losses, uncertainty related to inflation, and lastly, interest rates that rose at a near unprecedented rate.
In addition, shifting expectations related to the Federal Reserve's policy direction further pressured the economic outlook as capital remained expensive in this environment. We remain highly focused on originating only what we perceive as the highest quality loans to ensure that we are measured and disciplined as it relates to the investment of capital.
During the year, we work to loan extensions, modifications and defaults as needed. While our borrowers search for efficient care capital loan modifications and extensions added approximately $4.1 million in revenue as loans were extended or restructured and put back on track loans that are extended, our modified our re underwritten to ensure the collateral and projects are still viable and well-capitalized. During the year, we incurred approximately $6.4 million in non-cash impairments, 70% of which was related to two office loans.
I also want to note that the recognized non-cash impairments are in part related to originations during and immediately after the pandemic when interest rates were at near historic lows, masking rapid run-up in material and labor costs as well as significant delays due to overall shortages of labor and material as rates rose dramatically, project refinancing became a significant challenge for some borrowers, reducing or eliminating their equity and motivation to remain involved in certain factories, a challenging environment and may incur additional impairments in the future.
We will continue to work and preserve value through loan modification, asset management efforts while continuing to strive to outperform peers. Our efforts have proven successful in the past and this year, we wrote off only $91,000 in real estate owned. It is our experience that a troubled or distressed loan rarely lose is all of its value. And usually over the term of the loan when interest, income, origination and other fees are considered the overall transaction and is profitable Further, we believe our low REO balance as compared to our loans in foreclosure tells the story of how often are loan workouts result in a favorable outcome.
Historically, losses resulting from impaired loans have been minimal and pay tribute to the CGM team's expertise in working out difficult situations. As an example, a $510,000 loan in foreclosure during the fourth quarter of 2023 was repaid in January 24 at par plus all accrued interest and borrower charges totaling approximately $92,000. Total earnings on this troubled loan since initial funding was approximately $172,000.
Let's now discuss our 2023 financials in more detail. While originations during 2023 were only approximately $205 million due to our refined approach and restrained capital needs. Revenue, as I mentioned, grew over 25% for the full year 2023.
Total operating costs and expenses for 2023 were approximately $49.7 million compared to approximately $31.4 million in the prior year. The increase was due to several factors, but the primary change was due to higher interest expense resulting from we require interest and amortization of deferred financing costs of approximately $29.2 million in 2023 as compared to approximately $21.5 million in the prior year.
Also, G&A went up approximately $2.2 million 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 Burbank in payment acquisition, which closed at the end of 2022, compensation expenses increased approximately $2.2 million, which resulted from having or bank capital integrated for a full year and the addition of a new station employee.
Other expenses also increased year over year due to increases in depreciation of Sagent's office, building fees, taxes and other expenses, and an approximate $6.4 million provision for loan losses. As a result, net income attributable to common shareholders for 2023 was approximately $12.1 million compared to approximately $17.2 million in 2022. Earnings per share for 2023 was $0.27 compared to $0.46 per share for 2022.
Recently, the Sachem Board approved the first quarter 2020 for dividends. Additional details can be found on our recently filed dividend press release. 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, similar to other participants in our industry. Loan originations for 2023 nation NeoMed decelerated throughout the year as we remain disciplined and continue to tighten lending standards.
As we discussed on our last call, demand for loans continues to rise as banks remain on standby and other hard money lenders are low on capital. I cannot support their borrowers further. Loan demand pressure continues to mount as midsize financial institutions as well as nonbank lenders struggle with nonperforming loans as NPLs continue to rise quarter over quarter, our competitors lending box continues to shrink, creating opportunities for a well-capitalized lender.
As we look ahead, our origination efforts are focused on lending to borrowers with strong credit profiles and a history of timely repayments. Additionally, our focus remains primarily on single-family residential and multifamily were due to a lack of housing supply in many of our targeted markets. Price and demand have remained relatively stable.
As a reminder, we structure our loans to be short term, and we ended the year with 86.5% of the loans in our portfolio having a term of one year or less. This loan structure allows us to reprice capital efficiently to better maintain and enhance margins, which served us well in the rising interest rate environment.
Now with the market sentiment shifting to one-off costs, we believe we can potentially capture the incremental margin as we move through the upcoming year. If you remember, when interest rates were very low, Sachem did not chase borrowers into low cost financing deciding not to compete with abnormally low interest rates has proven to be a good decision for causing significant losses to other lenders when rates changed rapidly a year ago.
For the year, we had net fundings of approximately $204.9 million of mortgage loans, including loan modifications and construction draws that were offset by approximately $167 million of principal paydowns. A significant portion of our paydowns resulted from the successful completion of one-off Sagent's largest projects to date, $22 million construction loan Sarasota, Florida.
During the fourth quarter, the Company modified or extend it a total of 47 loans. These modifications from $705,000 supplementing our reduced origination fee income. For the full year, these fees were approximately $4.1 million.
With regard to our portfolio, as of December 31st, 2023, we had 311 loans with a total principal balance of approximately $499.2 million with a weighted average interest rate of 11.4%. Not inclusive of fees, are a notable increase over 2022 and a testament to our short term pricing strategy. Additionally, one of the key strengths that gives us confidence going forward is the diversity of our loan portfolio.
Our mortgage portfolio was spread across 15 states with a focus on Southeastern growth markets and includes a variety of property types, including multifamily, single-family and other commercial real estate assets within our portfolio, only 12.1% of our investments are in office. We have loans with the principal balance of approximately $84.6 million in non-accrual status, which includes 56 loans in pending foreclosure by the Company, representing approximately $68.5 million of outstanding principal balance, including the accrued but unpaid interest and borrower charges.
I would note that our portfolio, excluding two loans has generated an above-average risk-adjusted returns with more than $1 billion of loans underwritten over the years. Our experienced cycle-tested team and disciplined approach has proven effective in enabling us to maintain good credit quality from our borrowers and well secured assets.
At year end, real estate owned was approximately $3.5 million compared to $5.2 million at year end 2022. And as of December 31st, 2023, real estate owned included approximately $800,000 held for rental and approximately $2.7 million held for sale.
Let's now discuss our balance sheet and financial position. As due to our disciplined stance and uncertainty. On the macro front, we have maintained strong liquidity. We have a balance sheet marked by $625.5 million in assets, up 10.6% year over year. This included $50.4 million of cash, cash equivalents and investment securities offset with $377.7 million in total debt outstanding.
In addition, we have available liquidity of approximately $36.1 million in our credit facility. This liquidity affords us significant flexibility to prudently allocate capital in a select different manner. Having liquidity on hand, provides market strength and positions us to select the best alternatives for our invested capital, even while maintaining prudent and disciplined.
During this period, we increased our investments in partnerships by $12.2 million year-over-year. Notable growth stemmed primarily from our significant involvement in the multifamily and workforce housing sector through the sham Creek partnership in 2023. This partnership yield at $3.5 million in income compared to $1.8 million in 2022.
In closing, we continue to navigate an evolving macro environment and our disciplined approach to operating our businesses and managing our portfolio continues to serve us well. Our diversified portfolio and strong financial foundation gives us confidence. As we look ahead, we continue to focus on protecting our capital and growing long term value for our shareholders. I want to thank the entire sales team for their hard work and contributions to our performance.
With that, we will open the call for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Gaurav Mehta, Alliance Global Partners.

Gaurav Mehta

Hoping to get some more color on on your loan pipeline, what do you guys seeing in the market and maybe some more color on the loan impairments that you had in 4Q?

John Villano

Sure. First and foremost on our pipeline is unbelievably robust. We are not taking or funding every deal that we see Palm. We're probably the funding 10% of our pipeline. There is still, you know, the resulting demand is from the banks and ability to act lack of capital in our competitors. And just lenders being shy about the overall lending market on the upcoming elections may have something to do with this valuation may have something to do with this on. But in any case, our pipeline is robust and we have curtailed our lending year over year. We're doing a third less than we did in 2022, trying to be as protective of our capital as we can and picking the best loans that we can for our portfolio.
With respect to on our impairments, hey, look, things happen. We're not happy. But in the case of our significant impairment this quarter and this year, um, we were hit with office assets that have been on our books for some time. And sadly, when leases don't materialize on valuations drop and there's not broken out reinvent the property. And needless to say that the pain is here. So I'm not a lot to be said about that.
What I would like to mention, though, is our continue. I'll work through ongoing modifications, extensions on as you as you most certainly remember from our third quarter call, Bob, a lot of our borrowers have nowhere to go. Most borrowers have nowhere to go. And what we're trying to do is to get them back on track to make sure they're on their asset is performing assets as expected and as intended. And if it is not on becomes a default for us.
So we do work with our borrowers will pay significant attention to not only our assets with as well as their assets. And our goal is to get them back on track. And sometimes it doesn't happen. And there's a bunch of reasons why things go into default. So let me just start labor and material cost timing delays on tenants. I touched upon this a lot of different things that can slow down a performing asset and we run into all of the market is one and call them as well.
So we do expect more of a continued push in the workout area on historically, these will work out pretty good. There's never been a sharp, no smack on the risk here with our workouts. The office properties different right at the world has changed with respect to office and home lumps hurt, but we're not the only ones taking these lumps, but that will continue to build from. We will see.

Gaurav Mehta

Okay, thank you. one more quarter from on the balance sheet. I saw that your balance from repurchase facility was lower than third quarter. Did you provide some more color on your plans for that facility?

John Villano

Yes. On our repurchase facility, the rates have gotten a little bit expensive. So we've kind of been shying away a little bit in using our Needham facility that really nothing more than that.

Gaurav Mehta

Okay. Thank you for taking my questions.

Operator

Christopher Nolan, Ladenburg Thalmann.

Christopher Nolan

Hey, John, um, because our asset quality by geography, is there a pattern there? Are you seeing higher on impairments so forth in the Northeast as opposed to the Southeast for growth?

John Villano

That's a great question. Virtually all of our impairments, Connecticut, New York and New Jersey. Let me let me just expand on that. And there's a reason for that on the margin when property is being developed rented, whatever the margins aren't as large here as you are in the Southeast or in Florida. So it's a very fine line between success and failure from, for example, a build they're building a house on here in Connecticut. It stands to earn a much smaller dollar than if at the same house was conducted in built in Florida, so if somebody were to assume can slide off track real quick with respect to valuation group.

Christopher Nolan

And also given your comments about higher demand in that you couldn't be more selective in your loans home. Are you charging a lender or your borrowers, higher fees are higher yield? Are you able to get higher yields from your incremental new loans than before?

John Villano

Back last summer, we were testing 13% and 3 and that went into the on the third quarter. We found pushback at 13% and 3, 13% interest, three points. We are back down at 12% and 2 points, which has been our historical go to and there is significant demand at that level.

Christopher Nolan

Great. And then finally on or you should we expect the level of loans to increase? And if so, what percentage of loans do you think it could go to?

John Villano

I wish I knew to be perfectly honest on. You've heard me talk about appraisal risk and, you know, we think that is a big dumb hindrance to us moving forward. I do a distressed borrowers who sells a property can affect all the properties around it. So we're cautious about that. It's devastating. Now there's real value.
However, impairment can be hiding real value. And but GAAP is GAAP or auditors. one appraisals, there could be more. I don't want to sugarcoat any of this on loan impairments can continue here. We don't think they're critical having great history of working them out. And if you look at our REO, the balance continues to work its way down when, Tom, I hope that helps. But again, looking forward, it's still very cloudy for all of us.

Christopher Nolan

Thank you.

Operator

Matthew Erdner, JonesTrading.

Matthew Erdner

Following up on the last question with the 12 into 13 and 3, and where do you guys originate at in the fourth quarter? Was it at that 12 into number? And then also, can you talk about comfort level when you have to take these loans back? We cannot take on some REO.

John Villano

Thanks. Sure, um, yes, we were lending a 12 into on in the fourth quarter on the lending volume wasn't there that were not were down a full 3rd year over year, but our first quarter last year was significantly larger than the fourth quarter of this year. So we've been cutting back. We're continuing to keep it small. I'm trying to maintain liquidity on.
So a couple a couple of things like to note, we're maintaining liquidity. We don't have origination fees, even though we're getting 2% on all our deals, we don't have that strong funding volume that can kind of backstop from a lesser volume expense you're just doing. It would be somewhere between seven and $0.1 a share. So it's been a very tough industry for us, lenders on one with valuation and delays to get construction done. And that's our margins have been they've been cramped a little bit for CGM last year, $7.6 million more interest than the year before. So on, we expect that to stop. But again, it hasn't yet. Right?
And then following up on the if you have to take properties it and how comfortable are you guys are operating for the time being are stabilizing and the disposal on our. So we get calls every day from people that want to buy distress and we don't have a ton of it. We really don't one of the significant REOs that we have is a home, a building site here in Connecticut. And we have one builder taking down a couple of lots at a time. So that's working its way off the books. There's been no real additions to that the REO portfolio. But I will say this, Tom, once we have control of the property, good things happen, right? We can make a full assessment. We can fix it. We can improve that. We could do things.
Our issue is no way the law works. Foreclosures are terribly slow and you know, I wish I could use different language, but it's a horrendous on the most horrendous part of our businesses getting Titusville to our assets back. So we have we haven't attorneys in house working on this. In many cases, our loans are purchased during the foreclosure buy distressed buyers and down. We collect most of our money. And as you can see by the Ontario and gains and losses on our real estate and the P & L, there's no, there's no real problems there, right. Yes, that's good to note.
And then just in terms of overall pipeline, given the banks are on the sidelines because you guys noticed more demand for your product in the past couple of quarters? Demand is crazy. We have a couple of ways to monitor the demand. And we have the Board of the stuff we like is always around the $100 million. It's been that way. We tried to keep it to $100 million. We are funding nowhere near that. I'm thinking somewhere else moving forward. We used to do $100 million a quarter. So demand is there. We're trying to pick the best the best sponsors on. We are seeing much better sponsors coming our way, which lends credibility to they have nowhere to go where they're running into problems elsewhere.
So we enjoy picking up a good sponsor and perhaps looking at a new project. But again, until liquidity comes back to our space, we refused to borrow at ridiculous interest rates. So we're trying to stick to our knitting here. We're trying to be frugal with our capital, but we're not we're not chasing expensive money.

Matthew Erdner

That's helpful. Thank you.

Operator

Chris Muller, Citizens JMP.

Chris Muller

And so on the decrease in modification fees, should we read into that that credit is largely holding stable aside from a couple of those office loans? Or have you guys tightened the criteria for what would result in a modification?

John Villano

This is a good one, and I'll have tried to be at some point here. So first of all, our lending criteria has gotten stricter and stricter and very, very few loans can pass the credibility test, which is part of the reason we're moving loans into default because those loans don't qualify and pass our credibility requirement. So we're cleaning house the second part of that, and there's no need to panic over to the cleaning house.
Some of these loans are tight. So we're not doing $200,000 loans anymore, and we've got a bunch of them and we're showing, you know, less support for those smaller loans, and we'd like to move them along. That's not something that we want to handle anymore. They don't move the ship and in many cases are more problems.

Chris Muller

Got it. That's helpful. And then I guess with rate cuts likely coming at some point in the back half of the year, do you expect that to further increase the demand for your product? And I guess the real question is, are your borrowers rate sensitive or are they going to be borrowing no matter what the interest rate environment's looking like?

John Villano

Yes, they're going to borrow on what happens to them is they get squeezed on the back end. Our business has been a high cost of capital to these types of developers. Now smaller projects that don't fit a bank's box, so to speak. It may not be exactly what a bank is looking for and into their from, let's call it the lending box. These guys have used to paying the higher rates. I mean they were paying north of 10% when interest rates were to just the way that they roll on.
And further our new our borrowers are not always the best bankable prop prospects. We've been moving into that segment now for over a year, better quality sponsors, sponsors, bigger downpayments, better quality properties, which, of course, brings you into bigger sized loans. The smaller loans are more on they move quickly. They're less structured from, for example, we're very tight on construction construction draw requests, some small borrowers. They don't even know what we're talking about. So M&A just don't fit any longer. You'll see our loan count go down over the upcoming quarters, and it's just the natural evolution of our business.

Chris Muller

Got it. Appreciate taking the questions.

Operator

Ladies and gentlemen, we've come to the end of our question and answer session. I'll turn the floor back to Mr. Villano for any final comments.

John Villano

See you again next quarter. Feel free to give us the quality of our ICRIC., our Investor Relations and Rating. If you like to ask any further questions. Thank you again. Thank you.

Operator

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.