Sachem Capital Corp. (AMEX:SACH) Q3 2023 Earnings Call Transcript
Sachem Capital Corp. (AMEX:SACH) Q3 2023 Earnings Call Transcript November 14, 2023
Operator: Good day and welcome to the Sachem Capital Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the call over to Mr. Kevin Reed. Investor Relations, please go ahead.
Kevin Reed: Good morning, everyone, and thank you for joining Sachem Capital Corp's third quarter 2023 conference call. On the call from Sachem Capital today is Chief Executive Officer and Interim Chief Financial Officer, John Villano, CPA, and Vice President of Finance and Operations, Nick Marcello. Yesterday, the company announced its operating results for the quarter ended September 30th, 2023, 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 quarter-end Form 10-Q with the US Securities and Exchange Commission, which can be accessed 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 visit our website.
A finance executive with a satisfied smile reviewing a pile of documents in their office.
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 material from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, the company will be discussing certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliation 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 Villano: Thank you, Kevin, and thanks to everyone for joining us today. I am pleased to report Sachem produced solid results in the third quarter despite a persistently difficult macroeconomic backdrop. Stubbornly high inflation coupled with the market's uncertainty as to the direction of the Federal Reserve's policy has kept us measured and prudent in our approach with shareholders' capital. With this discipline as our guide, Sachem achieved revenue growth of approximately 30% to $17.5 million compared to the same quarter in 2022, and net income attributable to common shareholders of $5.2 million, or $0.12 per share. Our revenue growth is a direct result of our deliberate underwriting, a solid balance sheet, and in-house liquidity.
Further, our experience in navigating difficult lending cycles has allowed us to build a resilient portfolio structured to reduce steady, above average, risk-adjusted returns. Having underwritten over $1 billion of loans through a multitude of cycles, we have a forward-looking perspective that is grounded in knowledge learned from past experiences with an ongoing watchful eye on credit quality and the protection of our assets. It is no longer news that loan originations in the commercial and residential real estate sector have slowed to a trickle, if not stopped completely in some areas due to the dramatic rise in interest rates over the past two years. Furthermore, in recent weeks, many mid-sized financial institutions, as well as non-bank lenders like Sachem, have reported an increase in non-performing loans in the third quarter.
While we view this situation as an opportunistic way to grow market share, we are also mindful of our portfolio management and capital resources. Specifically, we made some significant progress regarding non-performing loans in the quarter, reducing them by approximately 12% quarter-over-quarter. Lastly, loan impairments are down slightly compared to the year-ago, nine-month period. The health of Sachem's portfolio resides in the diversity of our loans and the diligence of our underwriting. We have a diversified mortgage portfolio across a variety of asset classes, including multifamily, single-family, and other commercial real estate assets. Our loan portfolio is diversified across 15 states, and as we have said in the past, it is our intent to grow responsibly in the Southeast.
Additionally, it is our underwriting practice to lend to borrowers with strong credit profiles and a proven record of performance. Our loans are structured to be short-term in nature. As of quarter-end, 283, or 86.5% of the loans in our portfolio had a term of one year or less. As part of our process, this structure allows us to reprice capital quickly, better protect our margins in this rising interest rate environment. In keeping with our disciplined approach and our ongoing cautionary view of the lending marketplace, our originations have continued to trend below our recent historical levels. In the third quarter, we had net fundings of approximately $53 million of mortgage loans, including loan modifications and construction draws, that were offset by approximately $59.2 million of principal paydowns.
A significant portion of our paydowns resulted from the successful completion of one of the Sachem's largest projects to date, $22 million construction loan in Sarasota, Florida, highlighting the execution of our business plan. While our originations have been curtailed, similar to others in the industry, we continue to build a robust pipeline for modifications and construction loans. As our capital continues to cycle, we are poised to redeploy into higher-yielding loans with well-capitalized sponsors. We have sufficient capital and therefore can be opportunistic, yet selective, to capitalize on situations when deemed appropriate. Our focus remains primarily on residential and multifamily loans, where due to a lack of housing supply, prices and demand have remained relatively stable.
Due to our disciplined stance and uncertainty on the macro front, we have maintained strong liquidity. We have a balance sheet marked by $638 million in assets, including $62.9 million of cash, cash equivalents, and investment securities, offset with $388.7 million in total debt outstanding. In addition, we have available liquidity of approximately $40 million on our credit facilities. This liquidity affords us significant flexibility to prudently allocate capital in a selective manner. Having liquidity on hand provides market strength and positions us to select the best alternatives for our invested capital. Let me touch on some more key financial metrics in addition to the strong revenue growth and financial flexibility. Total operating costs and expenses for the quarter were approximately $11.3 million compared to approximately $8.5 million for the third quarter of 2022.
The increase was due to higher interest and amortization of deferred financing costs, D&A, compensation, fees, taxes, and other expenses. Interest and amortization of deferred financing costs increased from approximately $6 million in the third quarter of 2022 to approximately $7.7 million this quarter, a change of approximately $1.7 million or 28.3%. Net income attributable to common shareholders for the quarter was approximately $5.2 million, compared to approximately $4.1 million for the third quarter of 2022. Earnings per share for the third quarter of 2023 were $0.12 versus $0.11 in the third quarter of 2022. With regard to our portfolio, as of September 30, 2023, we had 327 loans with a total principal balance of approximately $495.7 million with a weighted average interest rate of 12.2%, not inclusive of fees earned.
We had loans with a principal balance of approximately $84.8 million in non-accrual status, which includes 64 loans in pending foreclosure by the company, representing approximately $63.5 million of unpaid principal. During the quarter, the company modified or extended a total of 47 loans. These modifications resulted in gross fee income of approximately $1.1 million, supplementing our reduced origination fee income. As we have discussed in the past, we believe the value of the collateral exceeds the total amount due. It is our experience that a troubled or distressed loan rarely loses all of its value. And usually over the term of the loan, when interest income, origination and other fees are considered, the overall transaction is profitable.
Historically, losses resulting from impaired loans are minimal and pay tribute to the expertise utilized to work out difficult situations. Sachem's record on workout resolutions is quite successful. For the nine months ended September 30, 2023, the company impaired approximately $613,000 of loans and had a loss on the sales of real estate owned of $72,000. As of September 30, 2023, real estate owned was approximately $3.9 million compared to $5.2 million at year end 2022. Specifically, real estate owned included approximately $826,000 held for rental and approximately $2.7 million held for sale. With regard to our dividend, the Board authorized an $0.11 per share dividend paid on November 7, 2023 to shareholders of record as of October 31, 2023.
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. In closing, our disciplined approach to operating our business and managing our portfolio has positioned us for ongoing profitability and continued growth in the future. We have built a resilient, well-diversified portfolio and a strong balance sheet, which gives us confidence as we navigate the current environment. We fully understand our financial flexibility means increasing cash liquidity, which in the near term may potentially result in a short-term drag on earnings. Management team believes this action to be prudent in this environment.
We will continue to have a clear eye on asset protection and continue to expand the platform to build long-term shareholder value. With that, we will now open the call for questions. Operator?
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