Sachem Capital Corp. (AMEX:SACH) Q4 2023 Earnings Call Transcript

Sachem Capital Corp. (AMEX:SACH) Q4 2023 Earnings Call Transcript April 1, 2024

Sachem Capital Corp. misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $0.1. Sachem Capital Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings! And welcome to the Sachem Capital Corp. Fourth Quarter and Full Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Steve Swett, Investor Relations for Sachem Capital Corp. Thank you. You may begin.

Steve Swett: 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 its financial condition as of that date. The press release is posted on the company's website at www.sachemcapitalcorp.com. In addition, the company filed its year-end Form 10-K with the SEC on April 1st, 2024, 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 today on the 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 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 REIT space where the macroeconomic environment was marked by 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 have remained 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 worked through loan extensions, modifications, and defaults as needed while our borrowers searched for efficient 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 or modified are 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-ups 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 instances. While we expect to face a challenging environment and may incur additional impairments in the future, we will continue to work and preserve value through loan modification and 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 loses all 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.

Further, we believe our low REO balance as compared to our loans in foreclosure tells the story of how often our loan workouts result in a favorable outcome. Historically, losses resulting from impaired loans have been minimal and paid tribute to the Sachem 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 higher interest rates. Specifically, we recorded 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 Urbane New Haven acquisition, which closed at the end of 2022. Compensation expenses increased approximately $2.2 million, which resulted from having Urbane Capital integrated for a full year and the addition of a new Sachem employee.

Other expenses also increased year-over-year due to increases in depreciation of Sachem'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 a first quarter 2024 dividend. Additional details can be found in 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 were met with many challenges. Origination volumes decelerated throughout the year as we remained disciplined and continued 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 and cannot support their borrowers. Further, loan demand pressure continues to mount as mid-sized financial institutions, as well as non-bank lenders, struggle with non-performing 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, where due to a lack of housing supply in many of our targeted markets, prices 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 of cuts, 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 while 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 of Sachem's largest projects to date, a $22 million construction loan in Sarasota, Florida.

During the fourth quarter, the company modified or extended a total of 47 loans. These modifications resulted in gross fee income of approximately $775,000, 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 31, 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 earned, 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 had loans with a 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 above average risk-adjusted returns. With more than $1 billion of loans underwritten over the years, our experienced, cycle-tested team and disciplined approach have 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 31, 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 of December 31, 2023. 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 facilities. This liquidity affords us significant flexibility to prudently allocate capital in a selective manner. Having liquidity on hand provides market strength and positions us to select the best alternatives for our invested capital.

Even while maintaining prudence and discipline during this period, we increased our investments in partnerships by $12.2 million year-over-year. This notable growth stem primarily from our significant involvement in the multifamily and workforce housing sector through the Shem Creek partnership. In 2023, this partnership yielded $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 Sachem team for their hard work and contributions to our performance. With that, we will open the call for questions. Operator.

See also 20 Fastest Developing Countries in 2024 and 15 Countries with the Largest Budget Deficit as a Percent of GDP.

To continue reading the Q&A session, please click here.