Earnings Call Transcript - SACH Q1 2022

Operator, Operator

Good day, everyone, and welcome to the Sachem Capital First Quarter 2022 Conference Call. It is now my pleasure to hand it over to your host, David Waldman, from Investor Relations. The floor is yours.

David Waldman, Investor Relations

Good morning, and thank you for joining Sachem Capital Corp.'s First Quarter 2022 Conference Call. On the call with us today is John Villano, CPA, Chief Executive Officer and Chief Financial Officer of Sachem Capital. On March 31, the company announced its operating results for the first quarter ended, I'm sorry, yesterday, the company announced its operating results for the first quarter ended March 31, 2022, and its financial condition as of that date. The press release is posted on the company's website. In addition, the company filed its quarter-end Form 10-Q with the U.S. Securities and Exchange Commission, yesterday, May 3, 2022, which can also be accessed from the company's website as well as the SEC's website at www.sec.gov. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at (212) 671-1021. Before Mr. Villano reviews the company's operating results for the first quarter of 2022 and the company's financial condition at March 31, 2022, we would like to remind everyone that this conference call may contain forward-looking statements. All statements other than statements of historical fact 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, seek, intend, believe, may, might, will, should, could, likely, continue, design and the negative such terms and other words in terms of 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 condition, 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 10-K filed with the Securities and Exchange Commission on March 31, 2022. Because of these risks, uncertainties and assumptions, the forward-looking statements, event, 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 that 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 other 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 these cautionary statements as well as others 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 Villano.

John Villano, CEO & CFO

Thank you for joining us today. I'm pleased to announce that our company achieved record revenue of $10.3 million, an increase of over 80%, and a net income attributable to common shareholders of $3.4 million or $0.10 per share for the first quarter of 2022. It's important to mention that we recorded an unrealized or noncash loss on securities available for sale. I will discuss this accounting adjustment shortly, but excluding this noncash charge, adjusted earnings would have been $4.5 million or about $0.13 per share. These results demonstrate our ongoing execution and strong demand for our loan products. As we've noted before, we are diversifying our loan portfolio, both geographically and across new asset classes. We are seeing the outcomes of these initiatives while maintaining disciplined underwriting and a conservative loan-to-value ratio. During the quarter, we funded around $88.7 million in mortgage loans, including loan modifications and construction draws. We have expanded our lending operations across the U.S. and currently operate in 14 states, with a solid focus along the Eastern seaboard. We will continue to grow our presence in high-growth, pro-business, and taxpayer-friendly markets. In the first quarter, we completed another public offering of unsecured notes to support our growing loan pipeline. The gross proceeds of $50 million will give us additional non-dilutive capital to speed up our lending efforts without sacrificing our objective of providing shareholders with attractive risk-adjusted returns. Looking ahead, our loan pipeline is growing and robust. We are also well capitalized with a strong balance sheet to seize market opportunities, now enhanced by software upgrades to support our underwriting, loan analysis, and review processes. We anticipate continued growth in loan fundings and overall portfolio growth. Despite the current market volatility and the Federal Reserve's interest rate increases, we remain optimistic about our business outlook. There are significant market opportunities for a well-capitalized hard money lender to originate competitively priced loans for small and mid-scale real estate developers with good collateral and solid operating histories. Speed and timely closings remain a priority for our borrowers. We aim to mitigate potential risks from rising rates by limiting new loan terms to one year. As of March 31, 2022, more than half of our loans have a term of one year or less. Additionally, rising interest rates have removed the rate compression previously discussed. At the end of a loan term, if a loan is non-defaulting and meets our other criteria, we will consider extensions or renewals at current rates, generating additional lending fees and ongoing interest income. Now, I'd like to highlight some key financials and then discuss our strategy moving forward. If you need further details, please refer to our recently filed 10-Q and press release. For the three months ending March 31, 2022, total revenue was approximately $10.3 million compared to about $5.7 million for the same period last year, an increase of about $4.6 million or 80.3%. This revenue growth primarily came from an increase in our mortgage portfolio and expanded lending operations. For the first quarter, interest income was around $8.5 million versus approximately $4.5 million in the same period the previous year, representing around a $4 million increase or 87.8%. Origination fees totaled approximately $1.6 million compared to approximately $517,000 last year, marking an increase of about $1.1 million or 216.5%. Other income from fees, including late and processing fees, was roughly $805,000 for the first quarter of 2022, up from approximately $529,000 the previous year, an increase of about $276,000 or 52.2%. Income not related to lending operations, including investment income, was about $554,000 compared to $264,000 for the same period in 2021. Conversely, losses on investment securities and unrealized losses for the '22 period amounted to approximately $1.2 million, which I will discuss in detail shortly. In 2021, the loss on investment securities was about $129,000, and we reported no unrealized losses or gains. Total operating costs and expenses for the three months ending March 31, 2022, were around $5.9 million compared to approximately $3.5 million for the same period last year, a rise of about 68.6%. This increase was primarily due to higher unsecured indebtedness, particularly our unsubordinated 5-year notes, which helped finance the growth of our loan portfolio. Interest and amortization of deferred financing costs for the quarter were around $3.9 million, compared to about $2.5 million last year, an increase of $1.4 million or 58.2%. The rise in operating expenses was also attributed to an increase in impairment losses, compensation fees, and general administrative expenses. For the quarter, we reported an unrealized gain on investment securities of about $243,000, a change from the unrealized loss of approximately $7,500 from the same period last year. Net income attributable to common shareholders for the three months ending March 31, 2022, was about $3.4 million or $0.10 per share, compared to around $2.2 million or $0.10 per share for the same period last year. I now want to explain the unrealized losses on securities available for sale of about $1.1 million in the first quarter of 2022. These unrealized losses reflect a 1.4% decline in the market value of our short-term investments. In comparison, the Barclays Aggregate Bond Index was down 5.4% during the same period. Rising interest rates have lowered the values of our note and bond portfolio, as investors seek greater yields. While most of our portfolio is structured to mature with term debt securities and ETFs linked to finite maturities, we used ASU 2016 for the valuation of these investments, essentially marking them to market in case we decide to liquidate some or all before maturity. If we hold these investments to maturity, we will recognize their full value and reverse the charge back into income. Given the valuation of our securities available for sale and the associated noncash charge, we deemed it prudent to provide investors with an adjusted earnings figure this quarter. I encourage investors to review the reconciliation to GAAP and the details included in our earnings press release. After adjusting for this unrealized loss, earnings for the three months ending March 31, 2022, were about $4.5 million or $0.13 per share, up from approximately $2.2 million or $0.10 per share for the same period last year, representing a 30% increase in earnings per share. We believe our adjusted earnings present a more accurate reflection of our core earnings and operational performance. Simply put, excluding the unrealized loss, our company achieved record revenues and earnings for the quarter ended March 31, 2022. We are confident that our strong financial performance further demonstrates our competitive positioning in the market as well as the scalability of our business model. While we have a positive outlook for next year, we acknowledge the ongoing market risks. We can swiftly adapt our strategy as market conditions evolve. As of March 31, 2022, our total assets were approximately $482 million, up from around $418 million at December 31, 2021, reflecting an increase of about $63.8 million or 15.3%. This growth was primarily driven by an increase in our mortgage loan portfolio of roughly $61.3 million and an increase in partnerships of about $11.4 million, partially offset by a decrease in cash and investment securities of about $9.2 million. Total liabilities at March 31, 2022, amounted to approximately $282.4 million compared to about $237.9 million at December 31, 2021, a rise of about $44.5 million or 18.7%. This was mainly due to an increase in the Churchill repurchase facility of around $7.9 million and notes payable of about $48.5 million, balanced by reductions in accrued dividends payable of approximately $3.9 million and a decrease in our margin line of credit of around $9.9 million. Shareholder equity as of March 31, 2022, was approximately $199.4 million compared to about $180.1 million at December 31, 2021, marking an increase of around $19.3 million. This was primarily due to net proceeds of about $15.5 million from common share sales and a net income of about $3.5 million. For clarity, all stock sales through our ATM during the first quarter of 2022 exceeded book value. As you can see, our balance sheet is strong, with over $481.8 million in assets supporting $209.1 million in note principal. Compared to our peers, our debt levels as a mortgage REIT are exceptionally low, providing stability during challenging times. As of March 31, 2022, out of 520 mortgage loans in our portfolio, only 20, or about 3.8%, were in foreclosure or being actively managed with the intent to recover our invested capital promptly. For every one of these loans, we believe the collateral's value exceeds the total amount owed. Moreover, distressed loans rarely lose 100% of their value, and often, when considering interest income, origination, and other fees throughout the loan term, they prove to be profitable for the company. Real estate owned fell to $6.3 million from $8.6 million compared to the same time last year, including $800,000 of real estate held for rental and $5.5 million of real estate held for sale. This favorable reduction is partly due to initiatives aimed at liquidating assets, which will continue to lower real estate carrying costs. Net cash from operating activities for the three months ending March 31, 2022, was about $7.8 million, increasing from approximately $2.8 million in the same period last year. In the first quarter, we distributed roughly $3.9 million in dividends on our common shares and about $922,000 for our Series A Preferred Stock dividends. Additionally, on April 1, 2022, the Board declared a dividend of $0.12 per common share, payable on April 18 to shareholders of record on April 11, 2022. As a REIT, we are obligated to distribute at least 90% of our taxable income as dividends. We plan to fulfill this requirement for the current year. Now let's discuss liquidity and capital resources. As of March 31, 2022, we had about $93.4 million in cash and short-term marketable securities. Our liquidity is complemented by a margin line of credit from Wells Fargo amounting to $23.2 million as of March 31 and our master repurchase financing facility from an affiliate of Churchill Real Estate, which had $26.9 million outstanding. These facilities offer us additional flexibility at favorable rates. It's also crucial to note that we are cautious about our borrowing and will not overleverage our portfolio. We will keep monitoring the changing economic landscape. Given the current environment, we believe we are well positioned as the go-to nonbank real estate lender as local banks struggle to understand borrower needs and timing, while small hard money lenders face capital constraints. Furthermore, rising interest rates will enhance our lending platform and drive significant growth since local banks may not qualify borrowers due to debt coverage ratios and cash flow requirements. Despite the ongoing effects of COVID-19 and the Federal Reserve's interest rate hikes, demand for our products and services remains strong. I am proud of our first-quarter operating results, having achieved record revenue of $10.3 million, an 80.3% increase from the same period last year. Additionally, we reported $3.4 million in net income attributable to common shareholders and $4.5 million in non-GAAP adjusted earnings. We maintain a cautious approach to the market and aim to deploy our capital as we enter new markets and identify appealing lending prospects. To conclude, we believe our lending platform is robust and sustainable due to our rigorous underwriting standards and thorough due diligence. Therefore, we look forward to maintaining our strong historical performance in 2022. Thank you all for participating in our call today. We will now open the floor for questions.

Operator, Operator

Your first question for today is coming from Tyler Batory. Please announce your affiliation and then ask your question.

Tyler Batory, Analyst

Tyler Batory here from Oppenheimer. Just a couple of questions for me, first on the loan growth side of things, another quarter of very strong growth there. Can you help us think a little bit more about what loan growth might look like the next few quarters? At what point you might be hitting a little bit of a ceiling in terms of your headcounts? And also if you could talk a little bit about the loan pipeline and where things stand right now, that would be helpful as well.

John Villano, CEO & CFO

Yes, our loan growth during the first quarter was outstanding. We continue to see good funding opportunities. They are in different parts of the country, which gives us the ability to pick and choose where we would like to deploy our capital. Our current work in process, loans in-house is quite unbelievable. We quite possibly could have well over $100 million of loan opportunities in the office today. So we talked about our loan pipeline being robust and growing. It's here. Yes, we are seeing some pressure on personnel. We are trying to hire some underwriters to assist with the growth. We're trying not to expand our headcount too rapidly. And I touched on it briefly during the call. We — on May 1, we have just initiated an online loan application servicing software, where borrowers can supply documents and on our end, if the underwriters, it's easier to facilitate the deals to look for open items to manage LTVs, to manage missing documents. What we're doing now is they're not sure the exact completion stage of a file. This will eliminate all of that. So our underwriters will now be able to tackle more and more loan opportunities. And I see our loan growth continuing to grow, again, subject to available efficient capital. The second quarter is shaping up to be just as nice as this first.

Tyler Batory, Analyst

And just a follow-up on the loan portfolio. Can you talk a little bit more about the strategy to expand into the commercial space? How is that progressing? And what does the loan split look like today, roughly commercial versus residential?

John Villano, CEO & CFO

Okay. First and foremost, we are seeing better lending opportunities in the commercial area. This sector has been overlooked for the past 5 to 7 years as the residential fix-and-flip market has become quite heated. So our borrowers are not able to find deals where they're able to provide enough gain for themselves to undertake. And then secondly, to really further the company initiatives, these commercial deals are a little bit larger. The developers are more experienced, they have more wherewithal. They bring a stronger personal balance sheet into the equation. So we're doing a lot more commercial type stuff now. Our portfolio is still 60% residential, residential fix-and-flip. And we're going to probably look to some kind of parity here 50-50 at some point.

Tyler Batory, Analyst

And just the last question for me. I'm interested in your perspective on perhaps growing the dividend this year? How do you think about maybe doing that? Is that a priority? Is that something you think that could make sense as we progress through 2022?

John Villano, CEO & CFO

Yes. To state right upfront growing our dividend and rewarding shareholders is prime importance here. Some of our — some of the people on this call have been around as we've grown this company. We've had to backfill quite a bit with quality people, with technology, with more office space, things like that. And those things have chopped into earnings. We are coming over that hump now. And in the fourth quarter, we saw — we're seeing it here. Our company is moving in the right direction where we can reward our shareholders and not overleverage our balance sheet, which is key. And there's a fine line between leveraging yourself to the point of failure to pay a bigger dividend. If you look at our balance sheet, it's rock solid, right. We're not borrowing every nickel we can get. We're very prudent about the debt we take on. So we're managing the balance sheet risk. And at the same time, our goal is really to reward our shareholders.

Operator, Operator

Your next question for today is coming from Chris Nolan.

Christopher Nolan, Analyst

Ladenburg Thalmann. John, given the challenges in the supply chain, how has that affected the fix-and-flip investor that you typically lend to?

John Villano, CEO & CFO

Well, that's a good question. Here is my take on it. Supply chain issues have curtailed real estate supply. And therefore, I see that keeping prices high. There's a significant demand. There are a lot of unfinished buildings. And needless to say, with material costs being expensive, well, obviously, labor costs and the lack of supply, I see real estate prices staying reasonably high and, let's call it, stable high for the near future. However, there are things that are beyond our control, and that's the liquidity, right. Interest rates can change this. The stock market, there's a lot of liquidity coming from the stock market into real estate. We're still seeing strong demand and selling prices above ask. Locally here, there's an unbelievable demand for real estate. Secondly, there's also an unbelievable demand for apartment units, where people can't find apartments. So the supply chain, the biggest issue on our end, these projects will move on a little longer than anticipated, and it puts pressure on our developer builder to really support the interest cost. And we've been in contact with our builders. We try to stay ahead of it. We try to factor it in when we look at the loans. So it has not been crippling to our business yet, but we are on the lookout for a complete shutdown of this. But I do think it's getting better.

Christopher Nolan, Analyst

And as a follow-up question, given the rise in short-term interest rates, has that changed the utilization of the line of credit and the repurchase facility in the coming quarters?

John Villano, CEO & CFO

So first, the rate compression that we've talked about, that has kind of stopped. Our borrowers are not demanding rate concessions. So that's a good thing. You'll start to see our portfolio weighted average lending rates start to rise again. It has been declining for the past 3 or 4 quarters. That should stabilize and rise. Our margins are still quite significant with Churchill Finance, we're at 4%. With our margin line at Wells, we're at 1.5. The interest rates did catch our bond portfolio, I mean, I can't hide behind that. When you have $100 million in cash because you did 2 note offerings, 1 in December and 1 in March, those things happen, right? And we welcome the rising rates here. Our borrowers are accustomed to paying for money for their projects. They factor it in, they factored into their selling or buying prices. I also think it will slow this market down, which I welcome. So I'm kind of okay here. With just 2 quarters ago, the real estate market was in a car race. It was just wild. A little bit of a slowdown here could be a good thing for everybody. So I actually welcome a little bit of a rise in rates. Our margins will still be — we're still working on the same rate. Our overall cost of capital all in is under 8%. And our margins are good. We're still lending at 11 or 12. We have our 2 for origination. We are now earning construction management fees on larger projects. Our spread is still very good.

Operator, Operator

Your next question is coming from Eddie Riley.

Edward Reily, Analyst

This is Eddie Riley with EF Hutton. I was wondering if you could give us some more color on bank lending standards given the rise in interest rates?

John Villano, CEO & CFO

I think this is important to note. Banks tend to be slow to adapt, especially as they try to remain competitive while facing oversight from the FDIC and the Federal Reserve. With interest rates increasing, I believe banks will be slower to respond. Borrowers may find it more challenging to meet the bank's lending criteria, particularly as rising rates affect cash flow metrics and increase project costs, potentially impacting loan-to-value ratios. One significant advantage we offer is our willingness to accept multiple forms of collateral, which many banks are reluctant to do. In cases where borrowers struggle with local banks, they can turn to us, and we can create a deal that incorporates additional cash, partners, or real estate collateral to make it feasible. While banks might see a slight increase in earnings as rates rise, their lending volume, particularly in the development sector, will likely face challenges.

Edward Reily, Analyst

And how are you guys thinking about the exit strategies for your borrowers with regards to refinancing versus an outright sale, given the current environment?

John Villano, CEO & CFO

Currently, they are able to sell everything they can complete. This is an ideal situation for real estate speculation. The challenge will come when the market slows down and buyers start looking for slightly lower prices; it will be quality real estate that sells first. Our focus is on being in the right location. Anyone can develop, but it's crucial to be in the right spot. Therefore, we are shifting from smaller, less vibrant towns to areas where people are moving, which have significant tax implications. Those properties will be the ones that sell.

Edward Reily, Analyst

And then turning to capital deployment for the rest of the year. You mentioned that the second quarter will be just as nice as the first one. Should we expect the third and the fourth quarter to be maybe just as nice as the first and second quarters? Or how should we think about that going forward?

John Villano, CEO & CFO

I could see what's in here now for the second quarter. Our results for the second quarter is highly dependent upon available capital. We have worked through our cash that we've had at March 31. We're deploying our money. In our business, our success is based on efficient capital. And we're at that crossroads now. But I can say the first one-third of this quarter has been off the charts.

Edward Reily, Analyst

And then I was wondering what the ultimate goal was with the investment portfolio. I noticed some sales there. And then assuming that you do hold the short-term securities to maturity, do you happen to know which quarter the unrealized loss reversal might occur?

John Villano, CEO & CFO

I don't have that. I'm sorry, I don't. I'd have to dig down and look into the specific items within the account, and we are monitoring that. And I can get that for you if you need it.

Edward Reily, Analyst

And then just the ultimate goal of the investment securities balance, should we maybe expect that to be the same so that you guys could continue utilizing the line of credit?

John Villano, CEO & CFO

A significant portion of that money was in treasury security. If we conduct a note sale and receive $50 million, our options for investing that capital are limited. We need to be cautious, as we encountered some issues previously. To be completely honest, we want to avoid leaving funds in local banks, so we are currently looking for better ways to protect our capital when these situations arise.

Operator, Operator

There appear to be no further questions in queue. I would like to turn the floor back over to John for any closing comments.

John Villano, CEO & CFO

Thank you all for participating in our conference call. I look forward to updating you all next quarter. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.