Good day, and welcome to the Sachem Capital Corp. First Quarter 2024 Earnings Conference Call. Please note, this event is being recorded.

Good morning, everyone, and thank you for joining Sachem Capital Corp.'s First Quarter 2024 Earnings Conference Call. On the call from Sachem Capital today is Chief Executive Officer and Interim Chief Financial Officer, John Villano, CPA; and Vice President of Finance and Operations, Nick Marcello. This morning, the company announced its operating results for the quarter ended March 31, 2024, and its financial condition as of that date. The press release is posted on the company's website at www.sachemcapitalcorp.com. As a reminder, remarks made on today's 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.

Thank you, and thanks to everyone for joining us today. Sachem and the overall real estate industry continue to face a challenging and evolving macro backdrop, marked by uncertainty regarding inflation and the Federal Reserve's future rate policy. To these points, real estate transactions remain constrained as many banks remain on the sidelines. In this environment, we are highly focused on prudently managing our balance sheet to ensure we have ample liquidity and are underwriting the highest quality loans with financially strong borrowers. During the quarter, we worked through loan modifications and extensions as well as defaults in cases where projects have been largely completed, but our borrowers are searching for longer-term takeout financing. Loan modifications and extensions added approximately $1.5 million in revenue, as loans were extended, restructured, or put back on track. As we have noted before, loans that are extended or modified are re-underwritten to ensure the collateral and projects are still viable and well capitalized. Our experience through many cycles has provided us with the necessary tools to navigate this environment appropriately. Importantly, it has been our experience that troubled loans often prove profitable over their term when interest income, origination, and other fees are considered. Furthermore, we believe our low REO balances, compared to our loans in foreclosure, tell the story of how often our loan workouts result in a favorable outcome. Let's now discuss our first quarter 2024 financials in more detail. For the first quarter 2024, Sachem grew revenue approximately 17% to $17.2 million compared to $14.7 million in the same quarter of the prior year. Despite this revenue growth in the first quarter, we saw a sharp reduction in loan originations. To emphasize, this was not due to a lack of loan opportunities, but rather from our steadfast resolve to manage liquidity going forward. We continue to monitor a deep pipeline, with very strong borrowers and the potential to establish long-term relationships. With that said, we remain disciplined. And while long-term capital remains scarce and mostly unavailable to our borrowers, we are focused on maintaining strong liquidity as we continue to effectively navigate the ongoing lending marketplace, notably for our upcoming baby bonds that are due and payable in June 2024. Our current lending approach, which encompasses protection of liquidity and strict loan selection, will continue to impact earnings until we find efficient capital and the tight funding environment begins to ease. Further, without new loan originations, our origination fee income will be negatively affected. We're always proactively pursuing ways to add reasonably priced capital, which would allow us to pivot to be more offensive and invest in attractive opportunities. Obviously, we will continue our balanced approach, but protecting liquidity comes at a cost and future earnings may be impacted. Total operating costs and expenses for the first quarter of 2024 were approximately $12.5 million compared to approximately $9.6 million in the prior year quarter. The change was due to several factors. Specifically, we recorded interest and amortization of deferred financing costs of approximately $7.5 million in the first quarter as compared to approximately $6.9 million in the first quarter of 2023. G&A was up approximately $340,000 compared to the prior year quarter 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. Compensation expenses were relatively stagnant, and other expenses were up over the same period due to increases in depreciation and taxes. Lastly, we also had a $1.3 million provision for loan losses, the majority of which related to an office asset. Looking ahead, there is a possibility of incremental noncash provisions and impairments, but our seasoned team remains committed to maximizing value through our focused asset management initiatives. As a result, net income attributable to common shareholders for the first quarter of 2024 was approximately $3.6 million compared to approximately $4.2 million in the same quarter last year, and earnings per share were $0.08 as compared to $0.10 per share. As discussed in prior quarters, 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. As I mentioned earlier and similar to what other participants in our industry are facing, loan originations are very challenging in the current environment, but our demand for loans continues to rise as banks remain on standby, mid-sized financial institutions struggle with nonperforming loans and many hard money lenders are low on capital and cannot support their borrowers. We believe the struggle in our industry creates opportunities for us. And as we look ahead, our origination efforts are focused primarily on single-family and multifamily residential, where prices and demand have remained relatively stable due to a lack of housing supply in many of our targeted markets. For the quarter, we had net fundings of approximately $42.7 million from mortgage loans, including loan modifications and construction draws that were offset by approximately $51.4 million of principal paydowns. During the first quarter, the company modified or extended a total of 49 loans. These modifications resulted in gross fee income of approximately $1.2 million. Looking at our whole portfolio. As of March 31, 2024, we had 273 loans, with a total principal balance of approximately $490.7 million, with a weighted average interest rate of 12.7%, noninclusive of fees earned. Our loan portfolio is geographically diverse, spanning across 15 states, with a focus on Southeastern growth markets. Loan originations continue to encompass a variety of property types, including multifamily, single-family, and other commercial real estate assets. Further, within our portfolio, only 12.4% of our investments are in office. At quarter end, we had loans with a principal balance of approximately $85.7 million in nonaccrual status, which includes 60 loans in pending foreclosure by the company, representing approximately $72.9 million of outstanding principal balance, including the accrued but unpaid interest and borrower charges. Real estate owned was approximately $3.7 million as of March 31, 2024, including approximately $800,000 held for rental and approximately $2.9 million held for sale. Let's now discuss our balance sheet and financial position, where we continued to maintain strong liquidity as a primary focus of the company. As of March 31, 2024, we had total assets of $626.5 million, including approximately $18.4 million of cash, cash equivalents and approximately $38.4 million in investment securities, offset by $377.6 million in total debt outstanding. Additionally, at quarter end, we had available liquidity of $30 million on our credit facility. In closing, we continue to maintain our disciplined approach to managing our business. Our diversified portfolio and strong financial foundation, together, give us confidence as we look ahead to unrestricted lending markets. As we continue to prudently protect our capital, we believe the time is getting closer where we can more intently pivot back to growing our business. We firmly believe our strategic shift to a balance of lending and liquidity in this market will ultimately lead to long-term value for our shareholders. I want to thank the entire Sachem team for their hard work and contributions to our performance. We will now open the call for questions.

The first question today comes from Christopher Nolan with Ladenburg Thalmann.

On the topic of balancing, lending and liquidity, should we read into that, that you're going to be lowering the leverage on the balance sheet?

Chris, unfortunately, we are in a leverage business. I would like to say, yes, we are, but in truth, no. We're really limited by our debt covenant ratio, and our debt covenants on our unsecured notes allow for a 1.5x debt coverage. So it's kind of a governor on how fast we can grow our business. And the coverage ratio, while limiting at times, does allow us to sleep easy at night. So it's not a very aggressive covenant. What we're doing is we're basically lending what we collect. And this goes back to the early days of COVID, where there was so much uncertainty. Needless to say, demand was strong then. It's strong now. But the uncertainty going forward is very concerning. And we're really just playing close to the vest. And as I mentioned in our script, in our discussion, being cautious affects profits. We just want to be clear; we're being very conservative going forward. We don't want to be caught on the wrong side. Until we see clarity, we're just going to play it very close to the vest.

Understood. With the higher yields you achieved on your investments this quarter, should we expect another increase in yields next quarter as more loans reprice? What kind of trend do you anticipate developing in that regard?

Over the past year, many of our loans from the COVID era and the low interest rate period are now being repriced. Our basic rates going forward are set at 12% interest and 2% for origination fees. If there's a construction component, we have a 1% or 2% construction service fee. These rates will remain stable. We do not have much capacity to increase them significantly, as higher rates may negatively impact the projects. Therefore, I believe that 12% and 2% are solid benchmarks for us moving forward. Additionally, we are not pursuing lower yielding opportunities.

The next question comes from Gaurav Mehta with Alliance Global Partners.

I wanted to ask you on the one provision that you talked about on an office asset this quarter. Hoping to get some more color on that loan.

Yes, and I could help a little bit. I may ask Nick Marcello to provide more clarity, but here's my take. We did an asset up in Maine, and the project failed. Our borrower could not perform. We have a friendly buyer who has shown up and purchased the asset. And we feel that a change of structure and change of use can be a great outcome for us. Unfortunately, Gaurav, these things take so much time. And as much as I would like to say it's all going to show up roses at the end, it's down the road a bit. So the change of use is very positive. We have funds available to do the work. We have contractors to finish the project. And in the next year or so, we'll be reporting back on how that all worked out.

Okay. The second question on the net funding. I think you said $42.7 million of net funding this quarter. And so I just want to clarify, all of that was loan modifications and construction draws? There were no new loan originations in that number?

No, there were new loan originations. It was not tremendously significant. Nick, do you have the exact new loan originations for the quarter?

Yes. We did $23 million of gross loan originations for the quarter, and net fundings on that number were really only about $12 million, though. So very light.

I would like to revisit your comments about having a strong pipeline of borrowers while also being cautious. Can you provide more details about the quality of these borrowers? Are you observing the same level of quality in the pipeline, or have there been any changes?

We feel that the quality of this pipeline is tremendous. It's a whole lot better than what we've had in the past. And it's really a result of good quality borrowers and good quality projects looking for a home. A lot of our industry is locked up at the moment. Banks are uncertain. Liquidity is scarce with respect to regular lending on projects. Good borrowers are searching, right? It truly is their livelihood. They are accustomed to having great service and available capital to continue to work. So we are getting a lot of great opportunities, some larger than what we're accustomed. Certainly now it's not the time to dig too deep into bigger projects.

Your next question comes from Matthew Erdner with JonesTrading.

I believe you said $85 million in nonaccruals and $64 million in foreclosure. If I'm wrong there, please correct me. But could you talk a little bit about what's going on with this? Whether if it's a borrower issue, money-wise, or if it's a construction plan? Could you just expand on those a little bit?

Yes. The total is $85 million. We just broke the number into two pieces for you. What we've been doing over the past few quarters is really going through a cleansing of our portfolio. We do have loans that are too small for us. Those are not being extended or renewed in some cases. We have loans that require time to complete, where labor and material shortages have caused delays. We have projects where labor and material pricing has kind of blown out construction budgets, and those require the assistance of our Urbane unit to get back on track and redirect. But what we're doing is an ongoing plan to continue cleansing the portfolio. And unfortunately, as I mentioned earlier, these things take time. In the past week, we've had two properties that came back through foreclosure. They were under contract and sold within the week, with great results for us. It's just a question of getting our hands on the asset. Our biggest problem to date is that the courts move very slowly in some cases. A borrower that fears a failed project can sometimes be slow to pick up the phone. Once they realize we're in this game to help them work this out and get square again, we can usually get things back on track. But it's been a process. I think you'll see elsewhere in our industry that a lot of our competition, which is significantly larger than us, is running into the same type of issues. It's not always the project; it's not the borrower; it's a combination of a lot of things. I could sit here all day and say, 'Hey, look, it's planning and zoning. It's material costs.' Real estate is a tough game. If you can't get the project sold or refinanced, it turns into a problem. It becomes a problem quickly because we're very expensive. Not having a counterparty to refinance our borrowers is really putting a lot of loans in jeopardy, to be quite honest. We do think a cutting of the rates, when that happens, will be great for us. It will get us back on track. We'll get our stride back. But not having a counterparty keeps these borrowers tied to us a little bit. So we continue to work with them, and we continue to protect our assets going forward.

Right. That's helpful. And then can you talk a little bit about the investment securities portfolio? And from a modeling perspective, should we expect some of that to decrease in the upcoming quarters for the baby bonds?

That whole portfolio has been liquidated and closed, and that happened early April.

The next question comes from Chris Muller with JMP.

So I guess, how far do you think we are into this current stress cycle? And looking at your own portfolio, do you feel like you've been able to identify where most of those problems are going to be? Or do you think this will be more of an ongoing process for the bulk of 2024?

I feel that it's going to be ongoing. It's very interesting to me that properties in distress get cleaned up. Properties that we think are super run into problems. I think it's going to be ongoing. It requires us to have a hands-on approach. We are very thankful we are not buyers of loans in bulk. That is a huge problem. We know our borrowers. We're in contact with them consistently. We actively manage the portfolio, and that gives us the ability to clean this stuff up. There's a little saying here that we kind of joke about: all loans are good until they're not. Sometimes, we just get surprised with maybe a bad response from a borrower or bad news, but sometimes the bad stuff turns out pretty good for us.

Got it. That's helpful. And then I guess that leads into my second question here. Can you just talk about what a typical modification looks like? Do you guys typically require borrowers to put fresh equity in? Just what does a typical modification look like, I guess?

A typical modification for us starts this way. We start contacting our borrowers 90 days prior to the end of their loan, just letting them know that we're watching, and they should be aware that their loan is going to term out here at some point. The discussion then goes something like this: we have a refinance, a sale, or we have a problem. At least we start the action early. When the loan is terming out, we ensure we have a plan. We've started working on this before the loan terms. You're going to figure out if this project needs new capital, if it's a construction budget issue, or if it could be partners in the borrower partnership. But at least we're hands-on before the loan terms. Once that loan terms, it becomes a defaulted loan. So what we're seeing now is under COVID, we were doing 100 loans a quarter, and those modifications are coming due; that's why these numbers are a little elevated. So we're working off huge volumes of loan closings that are all maturing now. I also want to mention that our loan count used to have in excess of 500 loans in our portfolio; we're down to the 270 range. It's really our push to deal with quality borrowers and quality projects, so that we don't have the small guy who is not bankable. We're trying to get away from that.

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.