Earnings Call Transcript - SACH Q2 2025

Operator, Operator

Good day, and welcome to the Sachem Capital Corp. Second Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would like now to turn the conference over to Stephen Swett, Investor Relations. Please go ahead.

Stephen C. Swett, Investor Relations

Good morning, and thank you for joining Sachem Capital Corp.'s Second Quarter 2025 Earnings Conference Call. On the call from Sachem Capital today is Chief Executive Officer, John Villano, CPA, and Interim Chief Financial Officer, Jeff Walraven. This morning, the company announced its operating and financial results for the quarter ended June 30, 2025. The press release is posted on the company's website. In addition, the company filed its Form 10-Q today, which can be accessed on the company's website as well as the SEC'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. These include the risks detailed in our annual Form 10-K and this Form 10-Q, such as those related to nonperforming loans, credit losses, and market conditions. 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.

John L. Villano, CEO

Thank you, and thanks to everyone for joining us today. We will begin by reviewing our operating and financial results for the second quarter and provide an update on our strategic progress. During the quarter, we continued working towards growing our lending platform and taking decisive steps to strengthen our financial position. The efforts we made in late 2024 and early this year to protect our balance sheet from non-accretive financing positioned us well for continued stabilization in the second quarter. Building on the momentum from the first quarter, we remained focused on sourcing accretive capital to support our growth. We are pleased with the closing of our new $100 million senior secured notes due June 2030. This new financing provides significant financial flexibility for Sachem, allowing us to repay existing obligations and accelerate the origination of new accretive loans resulting in asset growth for the first time in 5 quarters. Moving forward, we will continue to evaluate additional capital sources to further strengthen our liquidity position and grow our earning asset base. During the first half of the year, our portfolio continued to perform in line with expectations. While we still have approximately $119.6 million gross unpaid principal balance of nonperforming loans, loans held for investment were $107 million net compared to $107.6 million gross and $94.3 million net as of March 31, 2025. We continue to make meaningful progress working through these legacy assets, which we believe is critical to unlocking value and supporting future dividend growth. As of June 30, 2025, our book value was $2.54 per share, representing just a 1.2% decrease from March 31, 2025. Additionally, I'd like to provide a brief update on our significant exposure to a single borrower in the South Florida region. Specifically, 2 cross-collateralized loans in Naples totaling approximately $50.4 million as of June 30, 2025, representing 13.1% of our mortgage loan portfolio and 42.1% of our NPL balance down from $55 million at year-end 2024, primarily due to proceeds from the sale of 1 of 4 completed condominium units earlier this year. There were no further unit sales in the second quarter which aligns with the typically slow summer season for property transactions in the Naples area due to seasonal factors like heat and reduced buyer activity. As discussed in our prior calls, this legacy 2021 investment has faced ongoing challenges, including permitting delays, hurricane impacts from 2 separate weather events, contractor and borrower performance issues, legal disputes with the city of Naples, and further legal disputes with former capital partners that have led to bankruptcy proceedings to protect against junior liens. A judge or mediation event with a former capital partner lender holding a second mortgage position, which has been set aside multiple times by the bankruptcy court but sustained through repetitive appeals, is scheduled for this week. A positive outcome, we believe, would clear the path forward for resolution, enabling the sale of the remaining completed units, completion of an additional 4 condo building on 1 site and development or sale of the other site. We remain in non-accrual status on this loan. Currently, on an opportunity cost basis impacting monthly earnings by about $450,000. But we firmly believe that consolidated cross-collateralized value remains in excess of outstanding net book unpaid principal balance recorded on our balance sheet as of June 30. And we are optimistic about recovering capital as these resolutions progress. Last quarter, we mentioned the current development projects that our partner, Urbane New Haven, is helping us work through. To provide an update on this progress, our 4 Urbane real estate developments, 1 office with a residential component, and 3 high-end single-family homes have made strong progress and are progressing on schedule. Our Westport office assets are 50% leased with GAAP rental income of approximately $1.3 million annually. A portion of the Westport office asset was partitioned and is now approved for 10 residential homes, of which 2 are deemed affordable. The Westport residential component is approved and in the development planning stage. Our 3 high-end homes in Coconut Grove, Florida are in various stages of construction with sales planned for late 2025 and the first half of 2026. We will continue to provide updates as these projects move towards completion. Additionally, at quarter end, we had invested an aggregate of $41.2 million in projects managed by Shem Creek Capital through 6 investment funds. As a reminder, Shem Creek Capital is a commercial real estate finance platform that provides debt capital solutions to multifamily properties and allows us to participate in multifamily finance with strong borrower sponsorship. During the 6 months ended June 30, 2025, these investments generated approximately $3 million in revenue, of which $1 million was for the current quarter ending June 30 representing an attractive low-risk double-digit yield. Turning to the macro environment. Our industry continues to navigate a challenging landscape of both obstacles and opportunities. The Federal Reserve has maintained a steady stance with rates remaining elevated. In the single-family housing market, mortgage rates continued to dampen demand while existing home sales remained well below historical averages. Single-family construction loan rates are at the highest levels in years, with interest rates more than 10%. Existing homeowners in many instances are tied to their current home as COVID-era interest rates make it unaffordable to move to larger or new homes. The demand for new construction is significant, but with higher construction costs, burdensome permitting regulations, coupled with higher interest rate charges, make a new home purchase unattainable for many. Fix and flip residential faces similar challenges as property value has increased, reducing developer margins. While these challenges create headwinds for the broader market, they also present meaningful opportunities for selective and experienced lenders like Sachem who can provide capital solutions where traditional financing remains constrained. As noted in our 10-Q, this environment has contributed to our revenue decline due to lower net originations and elevated nonperforming loans and real estate owned, but we are positioned to capitalize on it. Due to the ongoing constraints for many traditional lenders like banks, our pipeline of new origination opportunities continues to exceed our current capacity. We remain committed to our disciplined approach in evaluating new loans and maintaining our focus on single-family and multifamily residential assets in markets with strong underlying fundamentals. Our underwriting standards continue to emphasize highly experienced and creditworthy sponsors. Our post-COVID era loan originations continued to perform exceptionally well. As we move into the second half of 2025, we remain confident in our strategic direction and our ability to capitalize on the opportunities ahead. With the addition of our new $100 million financing facility, we have strengthened our balance sheet and enhanced our capacity to support growth initiatives. We will continue to focus on working through our legacy nonperforming loan assets and pursuing accretive growth opportunities that align with our risk management principles. We are very excited about the opportunity ahead, and I will now turn the call over to Jeff.

Jeffery C. Walraven, CFO

Thank you, John. I'll walk through Sachem Capital's financial highlights for the second quarter ended June 30, 2025. Let's get started with revenues. Total revenue was $10.8 million compared to $15.1 million in the second quarter of 2024. The change in revenue was primarily due to the cumulative effect on interest income from loans from materially lower net new loan origination over the last 12 months which resulted in a year-over-year reduction in the unpaid principal balance of loans held for investment of $121.2 million, in addition to a currently elevated amount of nonperforming loans, loans held for sale, and real estate owned. As a result, interest income from loans was $7.5 million, down from $11.8 million, partially offset by fee income of $1.8 million and LLC income of $1 million. On the other hand, other income increased significantly, increasing by $0.5 million. This was driven by the recognition of rental income from 1 project in 2025 which contributed the $0.5 million during this quarter. No such rental income was recorded in the prior quarter or year. Turning to operating expenses. Total operating costs and expenses for the second quarter of 2025 were $9.7 million compared to $18.3 million in the same quarter last year. The primary contributor to this decrease was the reduction in the provision for credit losses related to loans held for investment, which declined by $7.6 million or 89.1%. This change was driven by a decrease in direct allowances related to foreclosures and nonperforming loans. Additionally, the change was due to reductions in interest and amortization expense of $0.8 million, compensation and employee benefits, provision for credit losses related to loans held for sale, and other expenses totaling $1 million. Overall, this reflects our progress in managing risks and reducing financing costs through debt repayments. So net results. This resulted in a GAAP net income of $1.9 million, and after payment of the Series A preferred stock dividends of $1.1 million, net income attributable to common shareholders was $0.8 million or $0.02 per share compared to net loss attributable to common shareholders of $4.1 million or $0.09 per share for the second quarter of 2024. Looking at our balance sheet position. Total assets increased to $501.8 million from $492 million at December 31, 2024. Specific to our loan portfolio as of June 30, we held 135 first mortgage loans on residential and commercial real estate, primarily for investment with an unpaid principal balance of $382.1 million, net of $2.6 million in deferred loan fees. After an allowance for credit losses of $17.6 million, the net carrying value was $364.5 million up from $356.6 million at year-end 2024, but down $121.2 million from $485.7 million a year ago due to lower net originations, elevated nonperforming assets, and cumulative aggregate corporate debt reductions due to maturities. We also had $8.8 million in loans held for sale, net of a $0.5 million valuation allowance. This quarter, I wanted to add to this balance sheet discussion further financial context on our investments in Shem Creek funds. While our investment is carried at cost on our balance sheet in accordance with U.S. GAAP, our $41.2 million members' equity invested supports over $600 million in gross loans held for investments by those funds. On a pro-rata pro forma basis, our approximate 39% of the total funds members' equity participation represents approximately $234 million of deployed levered capital. Total liabilities increased to $323.9 million, primarily due to the initial draw at closing of the private placement of 5-year senior secured notes due June 11, 2030. Our aggregate outstanding debt at June 30, 2025, was $315.5 million. Resulting total asset to total liability coverage is 1.55x. Shareholders' equity stands at $177.9 million, resulting in a debt-to-equity ratio of 1.8x or 64.6% debt and 35.4% equity. Looking at book value. As John mentioned earlier, our book value was stable this quarter and as expected. Book value per common share at June 30, 2025, was $2.54 compared to $2.64 at year-end 2024 and $2.57 at March 31, 2025. The year-to-date decrease of $0.10 is solely driven by the $4.2 million net aggregate preferred and common dividends paid in excess of $2.8 million in booked net earnings. As the market continues to evolve and impact the entire industry, we do remain confident that the major issues are behind us as we look to return to growth. On liquidity and capital resources, cash and cash equivalents increased to $22.5 million from $18.1 million at the start of the year. For the first half of 2025, we have dispersed $81 million in principal for draws on existing loans and new loans while collecting $71.4 million in repayments leading to a net outflow of about $9.6 million in loan-related investing activities. This reflects our disciplined approach to originations in the challenging environment with collections helping maintain liquidity. Additionally, during the second quarter, we completed a $100 million private placement of 5-year senior secured notes that mature on June 11 of 2030, and we drew an initial $50 million at closing and can tap the remaining $50 million at any time before May 15, 2026. We continue to maintain solid liquidity with a focus on prudent management of debt maturities and funding requirements. Regarding our $56.3 million notes maturing this quarter at the end of September, we expect to be able to fully repay the notes from drawdowns on our existing credit facilities, primarily the recent senior secured notes facility and retained cash from principal repayments on our mortgage loan that would fully provide proceeds to repay and replace the maturing bond principal without requiring additional balance sheet and loan portfolio compression. As detailed in our 10-Q, our liquidity is supported by principal interest payments on loans, sales of real property, and our credit facilities. On dividends, 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 continue to monitor this closely amid our focus on NPL resolution and growth. As a reminder, going forward, the company has aligned its intended timing of its common dividend and Series A preferred dividend declaration and payment thereof to occur in the month of March, June, September, and December. I will now turn the call back to John for closing comments.

John L. Villano, CEO

Thanks, Jeff. We believe Sachem is positioned to be a leader in small balance real estate finance. We look forward to resolving our remaining nonperforming loans to unlock capital for growth and accessing new sources of accretive capital to refill our loan pipeline. While our recovery is well underway, more time is needed to be fully back on track. We will continue to manage our business, grow book value, and our dividend with the goal of producing value for our shareholders. Thank you, and we'll now open the call to questions from our analysts.

Operator, Operator

The first question is from Chris Muller with Citizens Capital Markets.

Christopher Muller, Analyst

And congrats on getting the notes offering done. It's nice to have that behind you guys. So I want to talk about some of the LLC investments. It looks like there was a dip in income there quarter-over-quarter. So I guess the question is, what caused that dip? And what's the outlook for Urbane and Shem Creek in the back half of the year?

John L. Villano, CEO

Okay, Chris. So Urbane, as we've talked about in our just recent script read, we've got projects going on, 1 in Connecticut, 3 in Florida that are in various stages of progress. Our building in Westport, Connecticut, which is a significant office building, is 50% leased. We've talked about a $1.3 million GAAP rental income for the year, which does provide a rate of return to Sachem. And then further, the efforts of Urbane capital have. They split off a section of the property to really build a residential community as part of the parcel. And that has significant upside to us. We are moving through the planning stages, and we expect that to occur in the next 6 to 9 months. Unfortunately, these things take time. There are also some preliminary discussions of further leasing of the main office building from our significant tenant. Those discussions are ongoing. With respect to the properties in Florida, we have recently inspected those properties and they are moving along well. We expect a sales perhaps in the fourth quarter of 2025 with further sales in the first half of '26 for the remaining 2 units. The buildings are of excellent quality. They are in Coconut Grove, Florida, and we have a local, well-established builder handling the process with us. With respect to Shem Creek, with our Shem Creek investments, and you do know that we have a 20% ownership interest in the manager. Our cash flows are subject to certain waterfalls with respect to the loans that we participate in. In many cases, we don't know exactly how those are going to flow to us. But overall, we do maintain a double-digit yield on our investments with Shem. They are excellent in terms of underwriting multifamily and workforce loan opportunities. It's something that we can't handle here at Sachem because our cost of capital is just a bit too high to be effective in that lending space. So it's a way for us to get portfolio diversification with great sponsors, great underwriters, and we look forward to building our relationship with Shem over the coming years.

Christopher Muller, Analyst

Got it. That's helpful. And sorry, go ahead.

Jeffery C. Walraven, CFO

I would like to add to John's commentary by providing some numbers. We have received about a $7 million return of capital from the Shem Creek investments, which have seen ongoing turnover. From year-end to June 30, this return specifically relates to the funds invested in Shem Creek, excluding the manager. Additionally, as John mentioned, there was a timing discrepancy between the first and second quarters regarding the waterfalls. Therefore, I wouldn't recommend simply annualizing the results for the three months ending June 30, as there was a slight variation. Instead, I suggest focusing on the total investments in Shem Creek, which amount to approximately $41.2 million, with current earnings reflecting a low double digit return, between 10% to 12% on those invested funds.

Christopher Muller, Analyst

Got it. It's very helpful. And then I guess on Urbane more specifically, what does the pipeline look for new projects there? Are they kind of at capacity with the existing book?

John L. Villano, CEO

Chris, you're going to get me in a lot of trouble here. We are looking to build the Urbane pipeline. You may have heard me speak about this in prior calls, not so recently, but we want to have Urbane projects rolling off our books every quarter. And that's going to require us to invest further dollars with them going forward. We've had a bump in the road over the past year or so; '24 was difficult for us. So we've slowed down the pursuit of opportunities with Urbane. However, it is a topic of discussion every day, and we're looking to get back on that horse and begin building our portfolio with them again.

Christopher Muller, Analyst

Got it. That's very helpful. And just one other one, if I could throw it out there. It looks like the REO was pretty stable in the quarter. Can you just give us some insight into that bucket? Were there sales and new additions? Or was REO activity pretty muted in the quarter?

John L. Villano, CEO

We are making significant progress working through the nonperforming loans and the real estate owned. Unfortunately, the process takes a lot of time and effort. Jeff, if you would like to share some of the improvements we've made during the quarter and expected improvements in the third quarter, that would be a good time to talk about that.

Jeffery C. Walraven, CFO

Regarding REO, there is a detailed breakdown in the MD&A section that shows the asset-by-asset details and when they were added to the portfolio. Year-to-date, while the REO amount of approximately $18 million appears stable, we have made additions of $2.3 million and have removed some as well. There's also a section where we address the changes in REO that I will locate for you shortly. Looking at NPLs, loans held for investment, loans held for sale, and REO as a whole, since June 30, we have seen continued progress in resolutions, which we believe peaked at that date. Since then, we've had resolutions in that area totaling about $5 million. By the end of the third quarter, we anticipate an additional resolution of $12.5 million in NPLs, loans held for sale, and REO. We expect the pace of resolutions to increase in the latter half of the year due to our focused efforts.

Operator, Operator

The next question is from the line of Christopher Nolan with Ladenburg Thalmann.