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. 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.

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. In addition, the company will file its quarter-end Form 10-Q with the U.S. Securities and Exchange Commission later today. 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.

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 impact on 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 will 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 and prudent in how we lend. 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. 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 obligations. 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, fix-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 have 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 that carries an interest rate of prime 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 costs 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 general and administrative expenses. 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 of 2023 was $0.10 in line with the first quarter of 2022. With regard to our portfolio, as of March 31, 2023, we had 406 loans with a total principal balance of $476.5 million and an average interest rate of 11.69%, not inclusive 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, which aligns with 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. 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 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 headwinds. In summary, with a well-diversified portfolio comprised of shorter duration loans and experienced and cycle-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.

Thank you. And your first question will be from Gaurav Mehta at EF Hutton. Please go ahead.

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

Our originations in comparison to the first quarter of 2022 are down almost 25% from 88 million to 60 million. The 60 million of this quarter includes construction loan finance, which encompasses modifications and extensions. So, 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 not stalled. 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.

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 the fourth quarter; can you provide some color on the non-accrual loans?

Yes, for sure. Our business is basically, you know, as they say, fix and flip. Our borrowers come to us to be efficient, to move quickly, and to receive seed capital to get a project started and completed in a timely manner. Our problem in the first quarter, Gaurav, was quite simple. The banks have stepped away from financing the refinance of our borrowers. We’re normally taken out within 11 months to 13 months in the local banks. They’ve kind of gone into their shelter. 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 and reconsidered by the company, basically re-underwritten. If the original terms and conditions are still in place we will extend these loans for another year.

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

Thank you.

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

Hey, thank you. Good morning. So, a follow-up just in terms of your approach to originations and whatnot. 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 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 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?

Okay. Yeah. For sure. Our pipeline is huge. I always say it's at least 100 million. We are seeing loans from brokers, competitors, banks. Everybody's looking for a home for the deal. Our underwriting team and underwriters are trying to determine the best low-risk position that Sachem can take in one of these deals because we aim to hit our $40 million quota. So, right out of the gate, we're looking for certain MSAs, significant cash in the deal, and experience. Once we can start checking off some of these items, we then try to see what type of property it is. We're still looking primarily at residential and multi-family as our top two focuses, commercial being third, and ground-up construction last. We’re working through a framework to pick and choose what we see as an abundance of opportunity. Some of this opportunity is absolutely horrendous, but we're trying to pick the best that we can.

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

In our little world of New England and Branford, Connecticut, we really have no pricing barriers at the moment. The demand for cash shifts what we have to lend. Our current pricing is 13 and 3. 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%. We still have a great spread that really hasn't compressed as rates have moved. We're able to price into it for now.

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

Thank you.

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

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 foreclosures?

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

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

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 we’re kind of in a holding pattern. We’re lending what we collect to an extent and again, it's just marshaling cash and picking the best out of the bunch.

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

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

That's it for me. Thank you.

Okay. Thanks.

Thank you. And your next question will be from Matthew Erdner, JonesTrading. Please go ahead.

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 are? And then as a follow-up to that, could you talk about the dividend just a little bit and explain what your thoughts are there? Thank you.

Oh, sure. Our construction projects vary greatly. It could be a two-family remodel, a 10-unit building, a 50-unit building, or even some ground-up projects with significant sponsors. Most of our construction is with very experienced sponsors who are well-capitalized, and the kind of projects that should take us through this little period of uncertainty in the market. We have significant projects in Charlotte, Connecticut, and Florida—all of which are moving according to plan. As of right now, we believe these projects will come through this little hiccup we’re experiencing. Regarding the dividend, as I touched upon during our call, there could be some pressure on our dividends. Let’s not sugarcoat that. As we build cash here, cash that remains unutilized is not earning, and may lead to some pressure. I don't know how bad it will be. We’re very proud of what we've done with our dividend; we will defend it as long as we can. However, as we build cash for protection, we can see a potential slip in the dividend.

Thank you. That's helpful.

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

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

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