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 call may contain forward-looking statements. It is now my pleasure to introduce your host, Kevin Reed, ICR. Thank you, Kevin. You may begin.

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. 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. 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, intend, believe, may, might, will, should, could, likely, continue, design and 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 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.

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. 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.

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 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.

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' investment 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?

Our first question is from Matthew Erdner with JonesTrading.

I'm standing in for Jason Stewart this morning. What is the duration of the loans on these fix-and-flip projects, and does it vary from property to property? Also, what kind of spread are you currently observing compared to year-end or the end of the third quarter, considering the recent changes in tenure?

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.

Got you. That's good to know. What are you requiring for people to put down on these loans that are either at 12% with two points on top or 13%? Additionally, what assumptions do you have regarding for-sale assets when going into a loan compared to what you can exit or rent them out at?

We are currently maintaining a maximum loan-to-value ratio of 70%. We aim to improve on this if possible. Previously, our borrowers did not need to provide large cash amounts, and we sometimes accepted additional collateral. Now, we are placing greater emphasis on cash down payments. It's important for the borrower or sponsor to have a significant financial stake in the deal. This is a change we made over a year ago. Regarding the second part of your question, I'm trying to figure out the best way to address it. What was the second part of your inquiry?

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?

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.

Just to add to that, I'll apologize for my voice, I've kind of lost it. We work hard on the way in to make sure we have enough collateral and we constantly look at the values if we have to take a property back. We also, during our annual audit, prove that the values we're carrying are holding and that we don't have to take any more write-downs. And you see over time, we haven't really taken anything significantly. So I think we do a really good job with underwriting and making sure that if we have to take it back, and that's not the initial intent, that we're very well covered protecting our investment.

Our next question is from Gaurav Mehta with EF Hutton.

I was hoping you could provide some more color on your loan pipeline, how much is the dollar volume and what is it comprised of?

Our pipeline is staggering. It's probably at least $100 million. While most of these deals will not be funded by us, at least in this environment. It gives us the ability to cherry pick what we think are the best deals in the best locations. Right now, we are seeing loans from all over the country. There is a lot of fear in the lending business. People are pulling back. Borrowers with commitments of being hung out to dry by their bankers or other lenders. And those deals are coming here. So our pipeline is unbelievably strong even at higher pricing points, and we are cherry picking what we feel are the best of the bunch.

Can you provide more details about your enhanced underwriting standards and the new loan terms you mentioned in the press release? What are the expected new loan terms and what kind of enhancements are being implemented?

So, over the past few years, our underwriting standards have reached a truly institutional level. I would compare our underwriting process to anyone else's. This represents a significant shift from our company's origins and growth. This change directly correlates with market trends. As the market rose over the last couple of years, we enhanced our diligence. Now that we believe the market may have peaked, we are further intensifying our diligence to identify cash sources and opportunities, integrating more professionals into the construction finance aspects, and conducting more thorough background and credit checks. We are effectively strengthening our back office as we prepare for a potentially challenging environment, aware that our borrowers and developers might also face difficulties, and we need to anticipate those issues before they arise.

Okay. And actually on the loans in foreclosure, just to clarify, did you say 8.8% of the loans are in foreclosure or active management?

That is correct. Part of our initiative involves managing some smaller loans in our portfolio. Previously, we were a small balanced commercial lender with loans as low as $50,000 or $100,000. Currently, we are not easing requirements for those borrowers. We are focused on enhancing and increasing our loan minimums. Although the market may not appreciate this approach, I must be honest that our company generates substantial revenue through the default process. While we don't take pride in defaults, our loan documentation and collateral provide strong protection. Ultimately, this situation offers significant pricing and profit advantages for our company.

Just to add, while they've done small loans going back in the past, I think the average loan in the last 12 to 15 months is roughly about $1.1 million. So we have significantly upped our game knowing that to do a $100,000 loan and the $5 million loan, it takes about the same time. We're being more efficient and really going for the loans that make the most sense for the Company.

Our next question is from Christopher Nolan with Ladenburg Thalmann.

Am I correct that there was no common dividend declared for the first quarter 2023?

Chris, we're scheduled to do it early next week.

Okay. But that will account for second quarter. Correct?

No, it's really a first quarter payout.

Yes.

You appear to be facing various challenges, including strong pricing and demand, yet there is also a noticeable decline in asset quality. What are your thoughts on managing balance sheet leverage?

So company-wide, we're really constrained by the asset coverage ratio on our unsecured notes which keeps us from getting out over our skis. It's 1.5x coverage. We're well within our limits. We try not to go to bed at night and worry about portfolio performance because we have a very strong balance sheet. Now compared to our peers, our leverage is relatively low.

Okay. And then I guess in a general question, I mean, a lot of stuff is going on in the regulatory front. And it looks like you guys are sort of benefiting from it, but has there been any sort of change in the regulatory scrutiny of the Company following all the stuff that's gone on with the banks last month?

No, absolutely not. There's no one investigating us, and there are no signs of trouble on the commercial side. We believe we're in a strong position. As banks grow increasingly cautious, companies like ours are becoming a last resort for many sponsors and developers, as they really have nowhere else to turn. We're quite comfortable and do not foresee any challenges for our business in this environment. The last time we faced a situation like this was in 2010, when hard money lenders were the only active players in the industry, enabling project completion while banks stepped back. So, banks relied on hard money while the lenders continued to operate. We're feeling secure and actually see this as a favorable environment to potentially expand our activities relating to distressed properties and other deals that banks may have sidelined.

Our next question is from Tyler Batory with Oppenheimer.

Just a follow-up on some of the commentary thus far. Can you talk a little bit more directly about the competitive environment, specifically your peers? You kind of alluded to this, but it sounds like maybe there's some opportunities or some other folks perhaps to get over their skis. Is that something that you're seeing out there? Is that an opportunity for you to take even more market share as well?

Yes. And the first thing that comes to my mind, and I'm sure yours is the financial situation that occurred with Broadmark. That was a situation where Broadmark was born from a SPAC. They had $1 billion in cash, and they lent it like drunken sailors. That's not our game, that we don't play that. We've always, always walked before we ran, sometimes being a little too conservative at times. While we desire to be a larger company, it's been slow and steady here since our inception. And we are always looking for accretive investment capital because there are significant opportunities. And our Urbane acquisition is part of the plan to take advantage of those opportunities that we think are coming and coming fast.

Okay. Great. That's helpful. In terms of the cost structure, I mean, you kind of mentioned, I think, investing in the business. Where are you in terms of headcount right now? I mean, would you anticipate that moving higher next year? I mean, might it move lower given the environment?

So part of our initiative here is to move to larger loan sizes with better sponsors. And what that does is it kind of caps our headcount. With a lot of these smaller borrowers take a lot of our time, a lot of our legal effort, a lot of our treasury people. We want to start getting away from those. So at the moment, we're looking to find a place to put them. But our move is to larger deals, which we'll keep track of headcount, keeping it in line. And to be very specific, I think we're in pretty good shape here with comp. As you may be aware, we have moved to our new office facility. We've outgrown our last building. And now with all of us here basically under one roof, we're efficient, we have a great working space, and we do have room for growth here. But at the moment, I think we have enough people to get us at least through the first half of the year without bringing on more bodies.

Just to add, I think we'll strategically add as appropriate during the year. We're not going to do it well in advance and get ahead of our skis as we said, but we'll be conscious of, hey, volumes up or whatever and add in the right place. But I don't think you'll see a lot of additions, but it will be adds that make sense with what's going on.

Just one last question, really more general in terms of the dividend. I mean, I know it's something a lot of investors are focused on in terms of this whole return. Just how are you thinking about the level of dividend payout right now? Just any broad commentary you can make in terms of how comfortable you are with where the dividend is?

I don't want to make any future predictions since it's uncertain. However, I'm quite confident in our ability to maintain dividend payments. Last year, we attempted to adjust our dividend, raising it from $0.12 to $0.14, then back down to $0.13 as we aimed for stability. You might notice small fluctuations of $0.01 up or down, which reflect the natural variations in our business. Our objective is to always increase the dividend and reward our shareholders, but we must exercise caution. We can't anticipate how each quarter will conclude until it does. Therefore, we are being conservative; we don't want to raise the dividend only to have to retract it later. In our press release, we reported non-GAAP earnings of $0.53, which is a solid figure. To clarify the difference between our reported $0.46 and $0.53 per share, we had investments in treasuries and long-term securities, and the prevailing interest rates negatively impacted our portfolio. Overall, our company performed well. Without playing it safe with our long-term investments, we would have reached $0.53.

Our next question is from Chris Muller with JMP Securities.

Congrats on a finish to a challenging year. I wanted to follow up on John's comments on the banks. I guess, starting on the financing side, how have conversations been going with your existing relationships, nice to see the Needham facility added. But are there any talks about pulling back financing at all or maybe increasing credit lines as a supplement to direct lending coming from the banks?

Right now, I think we're pretty good. We have a $45 million line. It's expandable to $75 million. John, I'm not sure how much we've taken off of it, but I don't think a whole lot.

We haven't taken much at all. So it's out there, very expandable and Needham has basically committed that they will do most of the $75 million by themselves. We don't have to go out and find other sources. We do have that availability to us. And we all know other banks that over time we may bring on board as the situation warrants, but we felt Needham and us had some great synergies and that's a good starting point for the next facility.

And Needham, the first thing that would come to mind is, 'Hey, you know what, we can put $45 million on the street tomorrow.' That's not the play. That's not what we're thinking. This is play it safe. This is protection. This is, let's wait and see what the world does over the next couple of months. So we're looking at Needham: one, as a really great lending partner with us, but also as the safety net should things get off the rails.

Got it. That's helpful. And then on the demand side, as the banks do pull back and competition kind of decreases a little bit, do you expect this $100 million pipeline to kind of be the new norm? Or is that things being pulled forward a little bit?

We've had a significant pipeline for the past year and a half. While I discuss the idea of starting slow before ramping up, it would be advantageous to have a substantial amount of funding to utilize. Our company is positioned in a way that is neither too large nor too small, which is beneficial as it allows us to receive investment capital in moderate amounts, keeping our operations cautious. I would love to manage $100 million each quarter without concerns about our next funding source. For now, we are selectively pursuing the best opportunities, and I believe this approach will continue to evolve. Currently, it seems that we are receiving calls from all over the country.

Then just to add to John, if we found accretive capital that we could use, we would certainly do more deals. But while we've had discussions and been offered some capital, if it doesn't work, it doesn't work. And I totally agree with John on Needham. While it's there, we're not going to ramp it up just because it's available. We're really going to watch how everything is going and really be good stewards of our shareholders' investment and the Company. Sometimes slow and steady is better than, 'Hey, look, there's an opportunity,' to jump in because you don't know what's going on on the other side. So I think we're positioned right with some cushions and some capital that we can continue to grow the business. And if the right deal comes up when the right capital gets offered to us, we're all ears.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to John Villano for any closing comments.

Thank you all for joining our call today. We look forward to updating you again next quarter. Thank you again.

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