Greetings, and welcome to the Sachem Capital Corp. Second Quarter 2024 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 is being recorded. It is now my pleasure to introduce your host, Stephen Swett with Investor Relations. Thank you, sir. You may begin.

Good morning, everyone, and thank you for joining Sachem Capital Corp.'s second quarter 2024 earnings conference call. On the call from Sachem Capital today is Chief Executive Officer, John Villano, CPA, and Chief Financial Officer, Nick Marcello. This morning, the company announced its operating results for the quarter ended June 30, 2024 and its financial condition as of that date. The press release is posted on the company's website. 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 now turn the call over to John.

Thank you, and thanks to everyone for joining us today. During the second quarter of 2024, we maintained our prudent approach towards balance sheet management and our lending activities. With the market anticipating a potential rate cut from the Fed in the latter half of the year and optimistic prospects for a soft landing, it appears that we could be trending back in the right direction. That said, we will continue our disciplined approach until markets have stabilized, capital availability has improved, and opportunities for accretive investment are available. This quarter, we generated approximately $15.1 million in revenue. As mentioned last quarter, origination fees make up a significant portion of our revenue, and until we feel more comfortable in the capital environment, we are prepared to postpone earnings growth in the near term to protect our capital, which includes avoiding borrowing at rates that could be potentially dilutive for Sachem. We believe remaining patient better positions us for long-term earnings growth. As we have said before, we are willing to work with our borrowers to modify or extend loans provided they meet our stringent re-underwriting process and possess the necessary capital reserves. During the quarter, we produced revenue of $2.1 million in fee income from loans, a notable change from the comparable period in 2023 from reduced origination volume. In the first half of 2024, we added only $1.6 million in REO, reflecting our ability to efficiently manage non-performing loans. Our hands-on approach coupled with firsthand knowledge of our borrower can usually move a loan from non-performing to performing. Additionally, we generated a net gain of approximately $264,000 from REO sales during this period, demonstrating that foreclosing on a property does not always result in loss. Our seasoned asset management team continues to take an asset-by-asset approach, meticulously reviewing and inspecting all loans in our portfolio regularly. Similar to many companies in our sector and more broadly across the financial services industry, we added an additional CECL provision for credit losses related to loans of approximately $8.5 million. While this is a non-cash item, it further underlies the impact to real estate valuations and liquidity uncertainty that persists within the market, particularly with commercial real estate assets. As we look forward, I am confident that our cycle-tested experience provides us with the tools needed to navigate this environment effectively. Nick Marcello, recently appointed as Chief Financial Officer, brings impressive financial acumen that has and will continue to greatly aid in this process. With that, I would like to hand the call over to Nick to discuss our second quarter financials.

Thank you, John. For the second quarter of 2024, Sachem recorded revenue of $15.1 million compared to $16.3 million in the same quarter of the prior year. As John previously mentioned, we are still experiencing the impact of reduced loan originations, and until we are able to source accretive capital, the company believes it is prudent to hold cash on hand as loans continue to pay off. Opportunities within our sector remain, but our diligent approach and steadfast commitment to managing liquidity continue to guide our strategy. Total operating costs and expenses for the second quarter of 2024 were approximately $18.5 million compared to approximately $10.3 million in the prior-year quarter. For the second quarter of 2024, we had additional provisions for credit losses of $8.5 million to account for the ongoing challenges in the commercial real estate market. As noted on our last earnings call, we anticipated an increase in provisions due to the prevailing uncertainty in the macroeconomic environment. This puts our current allowance for credit losses for mortgages receivable at $14.4 million or approximately 3% of unpaid principal balance. Most of these reserves are held against commercial real estate assets as our residential mortgage portfolio continues to hold its value on a relative basis. The increase in CECL provisions was partially offset by interest and amortization of deferred financing costs of approximately $7 million, costs related to compensation and employee benefits of approximately $1.4 million, and G&A of approximately $1.3 million, which all exhibited decreases compared to the prior-year quarter, a testament to the company's ability to control costs as originations have been challenged. As a result, net loss attributable to common shareholders for the second quarter of 2024 was approximately $4.1 million compared to net income attributable to common shareholders of approximately $4.8 million in the comparing prior-year period or a $0.09 loss and $0.11 gain per diluted share, respectively. 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. On July 19, the Board declared a quarterly dividend of $0.08 per share for shareholders of record as of July 29, 2024. Turning to portfolio activities, like past quarters, our loan originations were down, but the demand for capital within the industry remains strong. With banks staying on the sidelines and financing challenges persisting, we believe our pipeline will continue to be robust even as we remain very selective given the current capital markets environment. Our core focus remains on single-family and multifamily residential assets in growing markets where the metrics remain favorable. For the quarter, we had net fundings of approximately $41.7 million from mortgage loans, including loan modifications and construction draws that were offset by approximately $32.3 million of principal paydowns. During the second quarter, the company modified or extended a total of 26 loans. These modifications resulted in gross fee income of approximately $1 million. As of June 30, our portfolio comprised 262 loans with a total unpaid principal balance of approximately $500.1 million and a weighted average interest rate of 12.8% excluding fees. Our loan portfolio is geographically diverse, covering 16 states, with a focus on growth markets in the Southeast balanced with more stable markets in the Northeast. Additionally, only 12.3% of our investments are in office properties. At quarter-end, we had loans with a principal balance of approximately $106.9 million in non-accrual status, which includes 50 loans in foreclosure by the company, representing approximately $73.1 million of outstanding principal balance, including the accrued but unpaid interest and borrower charges. Real estate owned was $3.9 million as of June 30, 2024, including $800,000 held for rental and $3.1 million held for sale. Let's now discuss our balance sheet and financial position, where maintaining strong liquidity remains a primary focus for the company. As of June 30, 2024, we had total assets of $586.3 million, including $10.6 million of cash, cash equivalents, and $1.8 million in investment securities, offset by $343.8 million of total debt outstanding. Additionally, at quarter-end, we had available liquidity of $10 million on our Needham credit facility. We will continue to utilize drawdowns from our existing credit facilities, current cash on hand, and principal repayments from our mortgage loans to manage upcoming debt maturities, notably the $34.5 million principal amount of unsecured, unsubordinated notes due on December 30, 2024. I will now turn the call back to John for closing remarks.

Thanks, Nick. Since our inception as a public company in 2017, we have built a reliable and robust lending platform, paid an excellent stream of dividends, and, most importantly, increased book value during some volatile market periods. At quarter-end, book value stood at approximately $3.76 per share. We have also returned to shareholders approximately $2.25 per share in dividends since our first quarter as a public company. In closing, we will continue to uphold our prudent approach of managing liquidity and being highly selective in underwriting until markets improve. Our diversified portfolio and strong financial foundation support our confidence in the future as we work to get back to growing our business in 2025. I would like to express my gratitude to the entire Sachem team for their ongoing hard work, dedication, and undeniable contributions to our performance. We will now open the call for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Gaurav Mehta with Alliance Global Partners. Please proceed with your question.

Thank you. Good morning. I wanted to ask you...

Good morning.

I wanted to follow-up on the balance sheet, the $34.5 million loan that's due in December. I wanted to get some more color on your plans on refinancing that loan and how much capacity do you have currently on the balance sheet to address that loan maturity?

That's a great question, Gaurav. So, if you look at our June 30 balance sheet, we did have $10.5 million in cash. Currently, we have almost $30 million of cash on hand, not including liquidity from our credit facilities or repurchase agreements to handle the December maturity. So, we're in really good shape.

So, $30 million cash on hand after 2Q?

That's correct.

Okay. As a follow-up, I was wondering if you could provide some more information on the current interest rates, if you have that available.

Can you repeat that again? I didn't catch it. I'm sorry.

Just as a follow-up, I wanted to get some more color on where the rates are for your company in case you need to issue new debt?

Okay. So, as I'm sure you're all aware, Sachem, we closed down an offering about a month and a half ago, where we were trying to do an institutional note offering. The rates on the debt were just not accretive to our business model. And as such, we've kind of backed away from raising what we call inefficient debt. It's best for us to perhaps shrink our balance sheet and wait for better opportunities in the debt markets when a deal doesn't fit the box, right? It's expensive in terms of rate. It has other provisions in terms of no-call, meaning you can't pay it off early if rates should improve. Those kinds of things are detrimental to our business and eventually they do come and hurt our shareholders. So, those are the things that we're trying to stay away from. And it'd be easier for us to manage our book as we have it, marshal cash, and continue to lend money, of course, but not to take a reach and certainly not to try to grow in this market where interest rates are still quite aggressive.

Okay. And then lastly, on the credit loss reserves that you had in the quarter, can you provide some color on those credit loss reserves?

What I'll do is I'll ask Nick Marcello to contribute to this. He's more in tune with the accounting treatment and the actual occurrence of the provisions. Go ahead, Nick.

Yes, the company increased its reserve, which seems to reflect a trend across the sector. Market conditions haven't improved significantly. The company evaluates loans on a case-by-case basis for non-accrual status. The performing loans portion has a historical provision based on losses we've experienced since we started. In the $8.5 million you mentioned, about $5 million to $5.5 million is set aside as a direct reserve for specific non-performing loans. The additional roughly $3 million is allocated to the general reserve, both of which are due to declines in asset valuation related to the collateral for non-performing loans. Additionally, the company recognizes that market conditions remain tough for borrowers, limiting their opportunities for refinancing as they initially planned. Since banks have faced challenges in providing takeout financing, our borrowers are struggling to manage the current 12% rate for too long, which is reflected in the increase in our CECL reserve assessment.

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

Our next question comes from Tyler Batory with Oppenheimer. Please proceed with your question.

Good morning. Thank you. And congratulations to Nick on the new responsibilities here. First question, just a follow-up on one of the prior comments. John, I think you said $30 million in cash that you have right now. Is that just that increase from the $10 million you had at the end of the quarter? That extra $20 million, I'm assuming that's just some extra principal repayments that have come through, correct?

That is correct. And let me be perfectly clear, Tyler, and I think you're coming here. Marshaling cash, right, being somewhat defensive, it does have the effect of hurting bottom-line performance. So, yes, you're absolutely right. We do have approximately $30 million in cash. Currently, we're deciding whether we should pay the December notes off early to save the interest rate on those or not. So that's a Board decision that's coming down the pike.

Okay. You mentioned $106 million in non-accrual and just over $73 million in foreclosure, which seems to have increased slightly compared to the previous quarter. Can you elaborate on what's happening with those figures? Do you foresee the numbers potentially rising in the next couple of quarters, or do you believe the situation is stable based on your current status?

First of all, I'm in a good position, but clarity is a significant concern at the moment. We don't believe that a 0.5 point interest rate cut, if it happens, will resolve the industry's problems. We are still dealing with COVID-related excesses, not just in material and labor costs, but also with rapidly rising and now falling prices that disrupt our business plans. Additionally, with an upcoming election and ongoing geopolitical uncertainties, we’re taking things month by month. In line with Gaurav's questions, many of our competitors, such as other mortgage REITs, can leverage through periods of defaults, but we cannot afford to do that. We're not going to pursue high-risk money. We feel that trying to earn through this situation would be reckless. We hope that 2025 will be a better opportunity for growth. Currently, we are playing it safe. For instance, just yesterday, we collected $2.25 million on a loan for an industrial property that hadn't been paid in nine months. These situations occur. Our portfolio is still active, and as noted, we've raised $20 million in the past month and a half, which we're pleased about. However, we still face risks concerning appraisals and borrowers, as Nick pointed out, are in tough situations with limited options. The real challenge we encounter is that once the distressed atmosphere sets in, recovering full amounts becomes very difficult. We're experiencing some of that now, as distressed borrowers may propose lower payment offers. So, we're navigating these challenges, and it will take time for us to gain clarity moving forward.

Okay, great. Appreciate that. And then, last question for me, there's a lot of people that reach out ask about the dividend, the dividend policy, how to think about the dividend going forward given kind of where we are in the industry. So, if you could address that for shareholders, please, that would be helpful. Thank you.

Well, we've kind of worked our dividend down here a bit. When we don't have liquidity to grow our book, there's no way for us to maintain our, let's call it, a $0.12 dividend. The yield on our common was much greater. What we've done here is we're actually paying out GAAP earnings, instead of tax earnings like we used to. So, we're just trying to scale it down a little bit. We're conserving cash. Again, we have a couple more quarters of this. We hope to be back on the strong dividend train in the near future. But once again, we still feel that cash and liquidity is king. So, I mean, I think we're going to have a reduced dividend here for the next quarter or two.

Okay...

Yeah, just to add to that, we're paying taxable, not GAAP right now. So, taxable is more...

Oh, I'm sorry.

You could consider net distributable earnings similar to what some of our peers disclose, and keep in mind that CECL reserves do not affect taxable income. If you view those as an add back, you will get closer to the $0.08 amount that we distributed for the quarter.

Okay. All right. Thank you very much for the detail. Appreciate it.

Yeah. Thanks, Nick.

Our next question comes from Chris Muller with Citizens JMP. Please proceed with your question.

Hey, guys. Thanks for taking the questions. And congrats Nick on the new role. So, I guess I wanted to touch on the specific reserves of $5.5 million that you guys talked about. I guess, given the short-term nature of your loans, what changed so quickly with the assets from the last quarter? And did they not qualify for modifications there? Is that what kind of drove the reserve, the specific reserves?

When we go through our modification, it's basically a re-underwrite of the loan. What we're finding is our borrower is not in the same kind of shape going forward. We may also find that a property, for example, didn't lease up, things like that. So, we're not being more aggressive with respect to the write down. We're trying to be realistic with respect to where the portfolio sits, and it's a bunch of different occurrences. Just trying to get a feel for what net realizable value may be.

Got it. And then, I guess, on the other side of the coin with REO, we really haven't seen a big jump in that REO bucket. Should we expect to see that increase over the next couple of quarters as you work through some of these loans? Or do you think you'll be more successful on the modification side and things won't have to go REO?

Chris, there's a very interesting phenomenon in our business. Once we get a property back for good or bad, we're able to move it, okay. Our biggest issue is getting control of the properties. The best thing in the world now is an attorney fighting a foreclosure. They make tons of money, the stall process is, in our opinion, quite frivolous, and it keeps us from really moving forward with respect to a sale or a renovation to complete the property. So, the issue is these things are hung up in the foreclosure process. In most cases, when we get the property back, it is sold within a few weeks after getting it. So, the REO doesn't stick around for long and we're quite happy about that. It is a testament to the underwriting. It's just getting them back into our hands where we can do some good with the property.

Got it. That's helpful. Thanks for taking the questions.

Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.

Hey, guys. Nick, congratulations on the step. Hey, John, the allowance for reserves, is that a function of lower cash flows on the property or lower LTVs or a combination?

It's a mixed situation, Chris. In some instances, it's related to loan-to-value. We have addressed the risks associated with appraisals publicly and continue to encounter these challenges. There are also issues with cash flows. We have faced scenarios where a property, despite being fully rented at excellent rental rates, does not gain trust from banks during refinancing due to the perception that the rent roll is too ideal. As a result, they adjust the rent estimates downwards, leading to lower refinancing offers. We are experiencing a mix of issues with developers, the availability of developer capital, banks' readiness to finance a loan or project, and the impact of distressed loans on property appraisals. Overall, it’s a complex situation for us. We try to approach each case individually, but fortunately, we have some additional time to address these matters.

Okay. So, assuming that it is a good chunk of it is LTV related, a rate cut may be giving you a little relief on the CECL provisioning. Is that a reasonable read into that?

I would say, yes. I don't think one rate cut will solve not only our issues, but our industry's issues. I think once the real estate buyer, the investor sees a steady policy coming from the Federal Reserve, it would be a great time for them to come in and not only buy distress but also just start doing their own projects and refilling our pipeline with deals. One cut is just what's wet our whistle and hope for the best, but if we start putting two or three of these together, I think we do have a change to get things fixed.

Final question is on capital structure. Following the withdrawal of the notes offering, it sounds like you guys are really starting to think about how to approach your capital structure a little bit different. And I'm sort of getting the sense that you're now considering a more deleveraged balance sheet going forward. And if that's the case, should we also expect improved pricing because it sounds like you got more deal flow that you know what to do with, and so why not raise prices as well?

We have a healthy number of deals coming in, and there is a strong demand for our type of projects. We believe that reducing our leverage is the right strategy at this moment. I cannot pay off our December notes, which are around 7% to 8%, and replace them with rates of 10% or 11% or worse. Our shareholders wouldn't support that decision. Therefore, we're not aiming to jeopardize our stability for the sake of expanding our business. We think that by being cautious regarding growth, we will be well positioned when opportunities arise again. Our pricing remains steady at approximately 12.2%, and we have our construction service fee; it's just that we are not closing many deals right now, which has significantly decreased our origination fee income.

Okay. Thank you.

Okay, Chris.

Our next question comes from Matthew Erdner with JonesTrading. Please proceed with your question.

Hey, guys. Thanks for taking the question. I just want to repeat this back, make sure I got the right numbers first off. Net fundings of $41.7 million and then offset by $32.3 million in paydown, so I'm getting about net portfolio growth of like $9.4 million.

That's about right.

That's correct, yeah.

Okay. And then, what is your expectation for payoffs for the remainder of the year? Should we expect it to continue kind of at that $30 million pace?

We used to project payoffs much more accurately two years ago. Payoffs remain strong, and we have many good loans being refinanced. We anticipate raising some cash by the end of the year. If I had to make a projection, I would estimate around $20 million in portfolio growth, with fundings exceeding repayments. We're not as active in our deals as we used to be when we completed $100 million a quarter, so a net growth of approximately $20 million would be my best estimate.

Got you. And then, as you guys continue to defend the balance sheet and kind of have the defensive posture, how do you weigh lending out new money versus keeping it on hand and just keeping that cash on the balance sheet to kind of take care of the current capital structure?

There's a situation in our office regarding investment decisions. Honestly, the best investment we can make right now is to buy our own shares. As a lender, we prefer not to deplete our cash by purchasing shares at this time. Cash is very important currently, and we might consider buying some shares if prices are favorable, which could happen shortly after this call. We have the funds available for these actions as well as for lending, and I feel comfortable knowing that we have cash on hand, much like we did during the COVID crisis. It's beneficial to have that liquidity. We need to be cautious about trying to exceed our challenges because the future is still uncertain. We’re going to manage our cash carefully and ask for a couple of quarters to determine how things unfold. I believe we will gain more clarity after the elections and concerning the situation in the Middle East, but we anticipate improvements ahead.

Right. That's helpful. And then, turning to the credit facility, I think you mentioned you had $10 million left there. Have you guys had any discussions about possibly increasing the size? And what's the demand on the bank side for something like a new credit facility or a repurchase agreement to kind of throw the ones onto?

We have a great relationship with Needham Bank. We have discussed an upsize. Most likely, if they don't see us using the line, sitting with a ton of cash, it's probably not a thing that they want to do. But again, they've been a great partner for us. I think they do want to give us more capital to grow our business. They too appreciate the play-safe posture that we're taking. Hey, look, we're always looking for accretive cash and hopefully it comes from Needham. We do have a Churchill facility with a lot of room, and right now, there's no real push for additional liquidity unless it comes at a great price.

Got you. That's helpful. Thank you.

We have reached the end of our question-and-answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.