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Edited Transcript of SACH.A earnings conference call or presentation 16-Aug-19 12:00pm GMT

Q2 2019 Sachem Capital Corp Earnings Call

BRANFORD Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Sachem Capital Corp earnings conference call or presentation Friday, August 16, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John L. Villano

Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary

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Conference Call Participants

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* Benjamin Ira Zucker

Aegis Capital Corporation, Research Division - Analyst

* Mark Delott;Delott & Associates International, Inc.;President

* Paul Drees

Market Edge LLC - President

* Richard J. Belz

R.F. Lafferty & Co., Inc. - New York Broker

* David K. Waldman

Crescendo Communications, LLC - President & CEO

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you all for joining us for the Sachem Capital First Quarter (sic) [Second Quarter] 2019 Business Update Call. (Operator Instructions)

And now to get us started with opening remarks and introductions, I'm pleased to turn the floor to Sachem Investor Relations, David Waldman. Welcome, David.

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David K. Waldman, Crescendo Communications, LLC - President & CEO [2]

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Good morning, and thank you for joining Sachem Capital Corp.'s Second Quarter 2019 Conference Call. On the call with us today is John Villano, CPA, Co-Chief Executive Officer and Chief Financial Officer of Sachem.

On Wednesday, August 14, the company announced its operating results for the 3- and 6-month period ended June 30, 2019, and its financial condition as of that date. The press release is posted on the company's website, www.sachemcapitalcorp.com.

In addition, the company filed its quarterly report on Form 10-Q with the U.S. Securities and Exchange Commission on August 14, which can also be addressed on 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 second quarter of 2019 and the company's financial condition at June 30, 2019, we would like to remind everyone that this conference call may contain forward-looking statements. All statements other than statements of historical facts contained in this conference call, including statements regarding our future results of operations and financial positions, 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 of such terms and other words and 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 Form 10-Q for the second quarter of 2019 filed with the U.S. Securities and Exchange Commission on August 14, 2019, as well as the company's Form 10-K filed on March 29, 2019. Because of these risks, uncertainties and assumptions, the forward-looking events and 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 prediction 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 achievement.

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. Please go ahead, John.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [3]

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Thank you, David, and thanks to everyone for joining us today. The first half of 2019 was a transitional period for Sachem. During the period, the company achieved the following milestones: first, we obtained a BBB+ bond rating to enable further leveraged portfolio growth and expansion beyond Connecticut; second, we raised $39 million in fresh capital, $23 million in debt and $16 million in equity; third, we terminated our existing high-cost, asset-restrictive, high-maintenance credit facility; and finally, we established the groundwork to lend responsibly the asset classes with compelling risk-reward scenarios. As we all know, a restructuring of this type can and most often will affect results of operations.

Although our revenue growth and profitability was lower than prior quarters, our balance sheet was strengthened, providing us with a powerful base to further grow our business.

Our new capital structure provides a number of operational benefits. First, with the exception of a mortgage on our corporate headquarters, we own all of our assets free and clear. Second, we have substantially reduced, if not eliminated, a significant administrative and compliance cost associated with our prior credit facility. Third, we have lowered, if not eliminated, many of the bars and hurdles to undertake additional financing transactions. And finally, we now have greater flexibility to capitalize on changes and perhaps opportunities in the marketplace.

All in all, we believe we now have a solid foundation for sustained growth and improved profitability in the second half of 2019 and beyond.

With that as background, I would like -- I would now like to discuss the financing transactions occurring in the quarter. First, we sold $23 million aggregate principal amount of our 7.125% unsecured, unsubordinated notes due June 30, 2024. Soon thereafter and as part of an overallotment, another $663,000 of notes were sold in early July. The aggregate net proceeds from the offering was approximately $22.3 million.

Secondly, we sold approximately $14.6 million of common shares through our at-the-market or ATM facility. The net proceeds to us were approximately $14.1 million. We used these net proceeds from these offerings to repay the entire outstanding balance on our $35 million revolving credit facility with Webster Bank, including principal, accrued but unpaid interest and other fees. We then terminated the lot.

By replacing our secured, variable rate, revolving credit facility with unsecured, fixed rate notes, we believe we now have greater flexibility to incur additional indebtedness on more favorable terms. In addition, we have eliminated the significant charges related to servicing and maintaining the credit facility. And more importantly, we reduced our credit exposure to a single asset class, the residential fix-and-flip market. This market is highly fluid with high loan turnover and arguably overpriced compared to other opportunities. We now have the flexibility to lend capital where we believe we have the most compelling loan-to-value prospects.

In total, we made $30.6 million of principal payments on the credit facility during the second quarter of 2019. These funds normally would be used to fund new loans. As a result, the growth of our mortgage portfolio in quarter 2 was significantly lower than it had been in previous quarters. This had a direct impact on our revenue growth.

In addition, we incurred substantial nonrecurring costs associated with the termination of our prior credit facility, the majority of which was a noncash expense. Total termination charges were approximately $780,000 or $0.04 per common share based on weighted shares outstanding at June 30, 2019. Included in this amount was the write-off of deferred financing cost of approximately $439,000. This amount was a current quarter noncash expense as these costs were incurred in prior quarters.

Finally, as a result of the equity capital raise, the number of our common shares outstanding increased by about 3.5 million since the year-end 2018. This also adversely impacted our earnings per share. Quite simply, equity proceeds were directly applied to our credit facility and not used to fund new loans.

On a more positive note, net cash provided by operations in the first half of 2019 will increase approximately 27.6% to $3.7 million compared to the first 6 months of 2018.

Our restructuring efforts continued into the third quarter, where we raised another $15 million of equity capital to further strengthen our balance sheet. We used a portion of the net proceeds to reduce other existing liabilities, and the balance of funds will be used to increase our mortgage loan portfolio. In addition to strengthening our balance sheet, these proceeds should also enhance our operational performance.

We also have the ability to raise additional working capital if needed by selling equity under our at-the-market facility. As a result of these transactions, we believe we now have the ability and foundation to raise additional capital through note offerings and bank debt. As of June 30, 2019, our equity-to-debt ratio was approximately 3:1. This ratio is unbelievably low when compared to our peers and once again opens the door for debt financings to grow our business.

We view note sales, similar to the one we completed in June, as an attractive option to raise flexible, nondilutive capital on favorable terms. Note sales will enable us to further scale the business and take advantage of market conditions without the constraints imposed on us by our former lender. We may supplement these note offerings with a revolving credit facility, smaller in size, more efficient and less costly.

In light of all this, we are extremely encouraged by the outlook for the second half of the year and the long-term prospects for the business. We believe the key factors to our success continue to be: disciplined underwriting and extensive due diligence; a flexible approach to structuring loans; and finally, diligent monitoring of our loan portfolio and constant borrower contact.

In terms of our operating results for the second quarter of 2019, total revenues were approximately $3.07 million compared to approximately $3.0 million for the corresponding period of 2018. This was an increase of approximately 1%.

During the second quarter of 2018, the company benefited from increased liquidity from the new-at-the-time Webster credit facility. This liquidity was not available in the second quarter of 2019. The increase in revenue reflects $94,000 of fee income and $13,000 in rental income. Interest income from our mortgage loans was lower by about $60,000 and other income by approximately $25,000.

Total operating costs and expenses for the 3 months ended June 30, 2019, were approximately $1.9 million compared to approximately $832,000 for the 3 months ended June 30, 2018. Key components of the increase are as follows: $780,000 of a onetime expense incurred in connection with the termination of the revolving credit facility. Of this amount, $439,000 represents the write-off of unamortized deferred financing cost, a noncash item. Second, compensation expense, including stock-based compensation, increased by $170,000. This increase includes the compensation cost relating to our new Controller, in-house legal counsel, a repair crew for our REO and executive salary increases from July of 2018, none of which were applicable in the 2018 period. These additional hires are directly related to the growth in our operations over the past 2 years. And finally, interest and amortization of deferred financing costs increased approximately $70,000, reflecting the increase in the mortgage loan portfolio during the period prior to payoff.

Net income for the 3 months ended June 30, 2019, was $1.1 million compared to $2.2 million for the same period last year. Basic and diluted net income per weighted average common share was $0.06 for the second quarter of 2019 compared to $0.14 per share for the second quarter of 2018. Line-of-credit termination charges were approximately $780,000 or $0.04 per share based on weighted shares outstanding at June 30. Increases in personnel costs represent approximately $0.01 per weighted share.

Total revenues for the 6 months ended June 30, 2019, were approximately $6.4 million compared to approximately $5.8 million for the corresponding period of 2018, an increase of approximately 11.3%. The increase in revenue represents an increase in our lending operations.

Interest income for the 6 months ended June 30, 2019, was approximately $5.1 million in comparison to approximately $4.3 million for the corresponding period of 2018. Net origination fees were approximately $705,000 for the 6 months ended June 30, '19, compared to approximately $689,000 for the 6 months ended June 30, 2018. Finally, fee income increased by approximately $109,000. These increases were offset in part by a reduction in other income of $203,000.

Total operating costs and expenses for the 6 months ended June 30, 2019, were approximately $3.2 million compared to approximately $1.6 million for the 6 months ended June 30, 2018. Key components of the increase are as follows: once again, $780,000 of expense incurred in connection with the termination of our credit facility, which, as I mentioned earlier, $490,000 was due to the write-off of unamortized deferred financing costs. These are noncash items. Second, interest and amortization of deferred financing cost increased approximately $469,000, reflecting the increase in our mortgage loan portfolio and an increase in the interest rate on the Webster facility. Third, compensation expense, including stock-based compensation, increased by $312,000. And finally, general and administrative expenses increased $107,000.

Net income for the 6 months ended June 30, 2019, was approximately $3.2 million compared to $4.2 million for the 6 months ended June 30, 2018. Basic and diluted net income per weighted average common share outstanding was $0.19 for the 6 months ended June 30 compared to $0.27 per share for the 6 months ended June 30, 2018.

Turning now to our balance sheet. As of June 30, total assets were approximately $95.9 million compared to approximately $86 million as of December 31, 2018. Our loan portfolio was approximately $83.5 million compared to approximately $78.9 million as of December 31, 2018. Interest and fees receivable from borrowers were approximately $1.5 million compared to approximately $1.4 million at December 31, 2018.

Real estate owned increased to $4.9 million from $2.9 million at December 31, 2018. However, there was no increase in real estate owned since March 31, 2019. Of the $4.9 million of real estate owned, approximately $948,000 is classified as real estate held for rental and $39 million -- sorry, and $30.9 million as real estate held for sale. All 8 properties held for sale at June 30, 2019, are being actively marketed.

Total liabilities were approximately $26.5 million compared to total liabilities of approximately $33.2 million as of December 31, 2018. Liabilities at June 30 included $23 million aggregate principal amount of notes, net of approximately $1.4 million of deferred financing costs or $21.7 million; a $795,000 mortgage on our corporate headquarters; and $2.2 million due to a shareholder relating to the previous assignment of commercial mortgage loans. The $2.2 million has since been repaid, saving the company approximately $200,000 in interest costs annually.

Finally, shareholders' equity was approximately $69.4 million compared to approximately $52.8 million as of December 31, 2018. The increase of approximately $16.6 million reflects a $1.1 million increase in retained earnings and a $15.5 million increase in paid-in capital. Paid-in capital increased by the aggregate net proceeds of approximately $15.5 million from the selling of 3.5 million common shares and an at-the-market offering. As previously noted, these equity proceeds were used to pay down the balance on the Webster facility.

Also, in July of 2019, we paid a dividend of $0.12 per share. The total amount of the dividend payment was approximately $2.35 million. This dividend payout reflects not only our financial performance but also our confidence in the outlook for 2019 as well as our commitment to providing investors attractive risk-adjusted returns.

To wrap up, net income and earnings per share were less than our normal expectation at Sachem. Working capital flowing to the paydown of our credit facility did limit loan growth, and of course, the sale of common shares to repay the balance due on the Webster credit facility had an adverse impact on earnings per share.

Nevertheless, as a result of our financing transactions, we are more encouraged than ever by the outlook for our business and remain fully committed to our goal of providing investors attractive returns. We believe our lending platform is solid and sustainable, given our strict underwriting criteria and extensive due diligence.

The demand for our loan products and services remain strong as traditional lenders are unable to satisfy demand. We are encouraged by our ability to compete effectively with larger market participants, and we'll continue to build a larger, more efficient platform to conduct our business operations. We remain fully committed to conservative lending.

I would like to thank you all for joining the call today. At this point, we would like to open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Ben Zucker with Aegis Capital.

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [2]

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Congratulations on the day-to-day progress and fortifying the balance sheet. Can we start from a high level? And could you just, I mean, talk about the market backdrop and then maybe get into competition and pricing for your loans in the market?

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [3]

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Currently, in Connecticut, our loan pipeline is quite full. What concerns us -- it's enjoyable to be busy. It's enjoyable to have a backlog. We are cautiously optimistic. We are seeing borrowers that are coming, as they say, late to the party. Our underwriting staff are performing the necessary diligence to weed out these new participants. We are looking for more seasoned investors in an effort to not be the first try for these new fix-and-flip builders.

We do feel that the Connecticut real estate market is slowing somewhat. We keep track of the MLS. We have individuals in-house that -- they are realtors. They have their finger on the pulse of the market. Connecticut is not a -- as robust as you may find in New York or Boston. We do have a little bit of softness in prices, and we prefer that. We would rather not lend up the ladder, as they say. We don't want to chase prices. We don't want to chase deals. We prefer a slower market. We prefer less buyer, as they say.

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [4]

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Okay. No, no, that's definitely helpful, and it's funny since everyone's worrying about rates right now that the overall rates are still making home purchases more attractive, and we are seeing that (inaudible) mortgages right now. And you -- and I guess you touched on the pipeline already. So when I look over to the Q, I noticed the expected repayment schedule. It looks like there is a maybe $32 million to the second half of 2019, which seemed like a good amount. I'm just wondering internally, when you guys look at these loans, what do you think from a high level the likelihood some of those repay versus you guys extend those and keep them on the book and maybe eke out a little bit more fee incomes on it as well.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [5]

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That -- this is a great question, Ben, and we touched on it very briefly at the beginning of our call. The residential fix-and-flip market is -- has become very fluid. As much as we like to lend for longer terms, we really like the quality of our notepaper. We want to loan on the books. We're seeing that these properties are moving quickly. So in effect, what we're doing is we have a great loan. The capital gets repaid sooner than later, and now we have to search to find a -- an equally great loan to replace it. And it's disruptive, and it costs money. We have to really staff up to handle the flow of money and the repayments and then the redos of the new loans. So we are looking to spread our risk, which we now have the ability to do with the closure of the Webster facility. So where we -- in the past, we were 2/3, maybe 70% residential fix-and-flip. We're looking to bring that down a little bit. We're looking to balance our portfolio with -- when I say longer-term paper, I'm not talking 30 years. I'm talking maybe from a 1-year paper to a 3-year paper. And it'll give our portfolio some stability of earnings, right? So we're trying to build that income machine as opposed to -- we're not reselling our notes looking for gain.

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [6]

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Yes. I definitely appreciate that fact. It's kind of a financial business model, you're a little bit on the hamster wheel. So it sounds like what you're talking about maybe diversifying or (inaudible) a little bit more into is maybe like a little bit of still hard money but more like commercial bridge lending where some borrower has a little value-add business prem if you'd like to bring that over a little bit longer term to other commercial parties like you already have in your portfolio. Is that right?

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [7]

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Yes. Most of our commercial projects are owner-occupied commercial. And so we're big fans of the owner being on premises and, obviously, guarantor of the debt. We -- the residential fix-and-flip is how we built our business. And we're just a little cautious on pricing here. Values have gotten a little crazy. There aren't as many great deals in the marketplace, so our borrowers are paying more. And we're just being a little more selective in that area. And let truth be told, we do want to put money to work, and we're looking for the best loan-to-value proposition we can get.

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [8]

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Understood. And then maybe just lastly from me. I think I heard as you were closing your remarks, you mentioned building a more efficient platform. So what -- we're trying to think about efficiencies. Obviously, the kind of the equity capital base has grown a little bit year-to-date. And I'm just wondering from a back-office and staffing standpoint, how much bigger of a loan portfolio do you think the current team could handle without Sachem needing to hire more people? I'm just maybe trying to get an idea of where some operating leverage might lie in the business, if any.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [9]

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Well, in our second quarter numbers, we basically had to devote one person to handle the Webster facility. Really, it was just very cumbersome. It was not efficient. There was a lot of paper flow back and forth, an awful lot of communications between executives and Webster. That is now gone, and now we can put this person back on underwriting. We actually free up our Corporate Counsel. But to be more specific, there's no reason why we can't take our $83 million loan portfolio and take it to $100 million without adding another person here. (inaudible).

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [10]

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Great. That's great to hear.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [11]

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Just one thing. I think you had mentioned, Ben, and I didn't -- I don't think I answered it fully. Yes, we -- in the last couple of weeks, we had a little bit of a drop in interest rates. This -- the dropping of interest rates does not affect our customer. Our customer is using these funds for very short periods of time. It's a question of speed and what it does do for us. We're not competing with the 3% and 4% mortgage rates. What's happening now is our borrowers are coming to us. Our base rate is at 12%, 2.5 points for 1-year paper. They're using this money quickly and efficiently. And then what happens is their customer, their buyer is going and obtaining these lower interest rates, which are -- it's actually stabilizing our portfolio because the lesser rates make our borrowers' property more valuable and protects us with a greater LTV. So we're all for this. We're not competing with [quickened] loans, but our borrowers move quickly, and they really share in the benefit of a lesser -- the lesser interest rate.

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Benjamin Ira Zucker, Aegis Capital Corporation, Research Division - Analyst [12]

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Totally agree. It almost incentivizes them to keep the project moving along as quickly as possible so that they can capitalize on the favorable market.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [13]

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That's right.

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Operator [14]

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We'll take our next question from the line of Mark Delott with Delott & Associates International.

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Mark Delott;Delott & Associates International, Inc.;President, [15]

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John, yes, the last caller pretty much asked all the questions, and you answered all the questions to my satisfaction. The only thing I would like to ask is if we go into a recession, which, obviously, the inverted interest curve is possibly indicating, how is that going to affect you if it's a little more than a moderate recession?

And as far as debt levels go, now that you've paid off the Webster loan, it seems like there's very little debt in the company other than some incidental debt. So if you could comment on that, I'd appreciate it.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [16]

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Sachem kind of -- we formed our company, and we started actually in 2010, but as executives of the company, we were lending money before that. We will enjoy and reap great benefits in a recession. Difficulty in the real estate market is a really good thing for us. What we're seeing now is the residential fix-and-flip market is actually suffering because there's not good-quality, low-priced fix-and-flip homes available. Where we used to be able to -- our borrowers used to be able to get these properties at $50,000 or $60,000 per unit, they're now paying $100,000. We would love to see a little pressure on real estate prices to take some of the frosting off this cake.

Remember, we like to lend in stable environments. This here is -- we're cautious here with respect to resi fix-and-flip, and our termination of the Webster facility was directly related to that. We couldn't get money or availability from Webster unless we lent money in a residential fix-and-flip environment. So in effect, we were walking up the ladder, and you just don't know where that last rung is. And we were not comfortable doing that. So yes, we would love to see a little bit of stress in the real estate market. It creates opportunity for us and opportunity for our borrowers.

With respect to debt levels, we -- I mentioned in the call that our equity-to-debt is 3:1. And competitively, in our industry, something like 7:1 debt-to-equity is more normal or 5:1. While we understand the benefits of what debt will do to our earnings per share, we get all that. At this stage of the world, we want to be responsible with debt. Our next move will be in the debt marketplace, and we're looking to put some more on the books here. And we just want to -- we want to do it with knowledge of where we are in the marketplace. The debt has to be efficient, and it has to be at a reasonable cost. And that's really what we're trying to do here. And it really was the cause of some of the pain in the second quarter.

We were not comfortable having every single asset that we owned secured by a bank, knowing that if something should ever happen, in the lifeboat, it would only be Webster Bank. And we weren't going to put ourselves in that position, and we weren't going to put our money and our shareholder money in a position where a market turmoil, market uprising in the real estate area will put us in a position where we can't fund loans and run our business. So that's really what we've done here.

We think the notes are going to be a great, nondilutive way to grow our business in the future. And you know what? They're not that much more expensive. And you know what? They may even be cheaper when you really start scratching the pad with a pencil. There were an awful lot of incidental costs to have bank debt, and all those incidental costs add up to the point where even though the interest rate is so much less, a point less than the bonds, when push comes to shove, they're more similar than you think. And having unsecured paper means a whole lot at the moment.

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Mark Delott;Delott & Associates International, Inc.;President, [17]

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I agree 100%. What would you say, time-wise, per year, how many issuances of new bonds would you like to do? In other words, you just completed this one. Do you think every 6 months, every 9 months or as needed? Obviously, you had a very good reception for the bonds, and I was very lucky to get some on the offering. And I'm wondering what your feelings are about issuances of new baby bonds basically or even preferred stock.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [18]

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Everyone raises the preferred stock question. I think the bonds have kind of pushed their way in front of the preferred. And let truth be told, this question will be great for our underwriting team. And if they could continue to present management with viable, fundable deals, then that's going to dictate how fast we can go back to the markets and raise more notes.

So the idea -- the beauty of this, to get the Webster credit line, it took us 8 months to get. We could, if needed, get back into the bond market. We can go every month if we need to. If there's a marketplace, we can present our claim. So the idea here is we can do it with speed. We have no lending conditions with the bonds. The cost of the bonds are similar to banks, and we have the ability to layer them, which is kind of nice. And you can't beat the fact that it's unsecured.

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Mark Delott;Delott & Associates International, Inc.;President, [19]

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Great. And again, congratulations on a great year. And I don't look at any downward trends in the earnings and revenues this last 3 or 4 months as a big issue. I think cleaning things up, like you did, was great. So congratulations, and that's all I have to say at this time.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [20]

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Thank you, Mark.

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Operator [21]

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And next we'll take a question from the line of Richard Belz with R.F. Lafferty.

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Richard J. Belz, R.F. Lafferty & Co., Inc. - New York Broker [22]

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I've been involved with the company since your secondary in October of 2017. I do believe that your leverage now is probably less than it's ever been. And if you look at your net income for this last quarter and if you add back the termination fee, you still didn't cover the dividend, and I believe this might have been the first quarter that you didn't cover the dividend. How comfortable are you are -- are you going forward that the $0.12 dividend is safe?

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [23]

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We are comfortable. And I tried to highlight the effects of the Webster paydown in the second quarter. And Richard, you're right on target. We feel we missed by about $0.01 or $0.02, and we're not comfortable with that. And we're doing everything we can now. We're kind of set. We're ready to go. Our underwriters are hustling. We're hoping we put together a great third quarter. And in truth, I want to put that $0.48 or $0.50 on the table again. We have some ground to make up, and we're committed to doing that. And we just -- we tried to get it all wrapped up into 1 quarter, so it'll limit the quarterly damage, and I think we've done that. But it's all -- it really comes down to finding the good-quality loans that we could put our stake in the ground.

But Richard, our commitment to the dividend goes all the way back to when we were a partnership. And our guys put money in, and they were getting an 11% to 12% return on their capital. Now granted, we're not a partnership. We don't have the overhead structure like we used to, but we do have a commitment to these guys. And our goal is really to have earnings per share, pay the dividend as we did in 2018. We're going to try to pay 100% of what we make and as a thank you for being with us. And we're fighting to keep that dividend firm, and we paid the $0.12. We knew we were going to miss. And it's really our commitment and the way management can draw a line in the sand to say, "You know what? We're not messing around, and $0.12 is it."

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Richard J. Belz, R.F. Lafferty & Co., Inc. - New York Broker [24]

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Following up on that. It seems like you're maybe $0.01, $0.0125 less by adding termination fee to what you actually paid out. What other expenses that you have -- that you had with Webster that will now be eliminated? Does that cover the $0.0125? Or is it still off a little?

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [25]

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I could give you a couple, and I'm not here to throw rocks at these guys. But they had quarterly audits of our portfolio. Their accounting firm cost more than our SEC auditors when they came here, which is ridiculous. The Webster finance had a 0.5% agency fee. And when you have a $30 million line of credit, that's $150,000. That was money they kept themselves. They didn't even share it with the syndicate. It doesn't include bank charges. We were still paying their attorney a year after the deal. Their attorney kept going in and reviewing our loan files. I don't know why.

So in any case, we're happy to be away from them. We now have -- we have now freed up a body to work on underwriting, and we've given our in-house counsel a little bit of breathing room. They were expensive. And lastly, we've been away from them for a month, and we got a $675 bank charge yesterday on 4 accounts that had no money in them. They just play a little differently than we do.

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Operator [26]

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(Operator Instructions) We'll move next to Paul Drees with Market Edge.

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Paul Drees, Market Edge LLC - President [27]

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With the favorable changes to the balance sheet and debt-to-equity ratios, can you comment on your current cost of capital compared to previously?

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [28]

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Well, our Webster facility all-in was about 7%. So when they say LIBOR plus 4, it's the incidentals you have to talk about. So for an extra 0.125%, we're able to get unsecured debt with the notes. So as the idea now is equity is, I hate to say it, it's the most expensive capital we have, all right? It's nonreturnable. We love it. The use of our ATM has been wonderful for the stock price. And the idea now is to put more of the 7.125% or less debt on the books here. Our 1-year paper, Paul, is about 14.5% all-in. And that gives us a real nice margin if we can price the next note offering at something less than 7%. This is kind of something that -- this is perfect for us. So we have a few dollars hanging around now. It won't be here for long once we get back to the debt markets, and we should have a 7% spread on our debt.

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Paul Drees, Market Edge LLC - President [29]

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Okay. And one operational kind of follow-up. On your shorter-term, less than 1-year fix-and-flip loans, do they have any early payment or early termination fees on them typically?

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [30]

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No, they do not. And we -- this is a great question, and I think I'm going to answer this so that it differentiates us from the Wall Street crowd. We do not have penalties for prepayments on any of our paper nor do we have minimum interest provisions. So for example, if we do a 1-year note and it pays off in 3 years, there's not an automatic 6-month interest payment. And this is the kind of stuff that allows us to compete with Wall Street money that comes into our area, they want to buy paper. And you know what? Our borrowers don't like that stuff. They feel like they're getting taken advantage of. We have discussed it in-house. We're not comfortable with it. What we will do is if we don't have proper communication with the borrower at the end of that first year, we will put them in a default mode until we get a communication, and we can work it out. But it's not that, hey, you pay us early, there's a 1% fee. We don't do that kind of stuff.

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Paul Drees, Market Edge LLC - President [31]

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Yes. No. I'm sure a lot of people must be asking, but I really like the differentiation that is part of the brand, that's part of the offer, separating you from all the other sources that people may have. So okay.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [32]

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Okay. Thank you.

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Operator [33]

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And Mr. Villano, we have no further questions from the group. I'll turn it back to you, sir, for any additional or closing remarks.

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John L. Villano, Sachem Capital Corp. - Chairman, Co-CEO, CFO & Secretary [34]

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Well, thank you all for joining our call. Thank you for the interest -- your interest in our company. Let's wait and see, and let's see how this third quarter works out. We're hoping for the best. We expect more than what we showed you this time. Let's stay tuned. Thank you all.

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Operator [35]

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Ladies and gentlemen, that does conclude today's telephone conference. We thank you all for your participation, and you may now disconnect your lines. We hope that you enjoy your weekend.