Sachem Capital Corp (SACH) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sachem Capital Fourth Quarter and Full Year 2021 Conference Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, David Waldman with Investor Relations. Sir, the floor is yours.

Good morning, everyone, and thank you for joining Sachem's -- Sachem Capital Corp.'s Year-end 2021 Conference Call. On the call with us today is John Villano, CPA, Chief Executive Officer and Chief Financial Officer of Sachem Capital.

Yesterday, March 31, the company announced its operating results for the year ended December 31, 2021, 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 year-end report on Form 10-K with the U.S. Securities and Exchange Commission on March 31, 2022, which can also 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 contact Crescendo Communications at (212) 671-1021.

Before Mr. Villano reviews the company's operating results for 2021, the company's financial condition as at December 31, 2021, we'd 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 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 of 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 Form 10-K filed with the Securities and Exchange Commission on March 31, 2022. Because of these risks, uncertainties and assumptions, forward-looking events or circumstances discussed in 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, predictions of future events. Although the company believes the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, level of activity, performance or achievements.

In addition, either the company nor any 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.

Thank you, and thanks to everyone for joining us today. I am very pleased to report your company reported record revenue of $30.4 million and net income attributable to common shareholders of $11.5 million or $0.44 per share for the year ended December 31, 2021.

In the fourth quarter alone, revenue increased 66% to $9.5 million, and we achieved net income attributable to common shareholders of $3.4 million. We believe these results illustrate the success and scalability of our business model. We obtained these strong results with disciplined underwriting and a conservative loan-to-value ratio.

During the year, we funded approximately $251.8 million of mortgage loans, including loan modifications and construction draws. We also expanded our senior management team and personnel to support the next phase of our business operations.

There were several important drivers that impacted our growth during the period. First, we have been pursuing opportunistic expansion and diversifying our mortgage portfolio across commercial, multifamily and larger single-family fix-and-flip real estate projects.

To give a few examples. First, we closed a $19.5 million loan for the purchase and conversion of a warehouse in Brighton, Massachusetts into a 28-union condominium complex within an up-and-coming residential community. Sachem was selected based on our ability to cross-collateralize the loan based on other properties owned by the borrower.

Second, we closed on a $11.6 million loan with an experienced developer to acquire and renovate a 466,000 square foot multi-tenant office complex in Milford, Connecticut. The project comprised of 5 3-story buildings, including the corporate headquarters for a national apparel retailer. For this project, we were selected based on our ability to close the loan in a much shorter time frame than other traditional lenders.

Lastly, we also closed a $9 million loan to an experienced developer converting a hotel property in Fairfield County to luxury apartments. Sachem was selected due to its flexibility in lending to meet the unique needs of the borrower.

We believe these transactions are a good illustration of not only the traction we're gaining in diversifying our portfolio into new asset classes, but also our ability to structure the loan to meet the needs of the borrower. This flexibility provides us a distinct competitive advantage.

In addition to diversifying into new asset classes, we're expanding our lending operations across the U.S. and now have a presence in 14 states with a strong core focus on the Eastern Seaboard. We will continue to expand our geographic footprint to include high-growth, pro-business and taxpayer-friendly MSAs.

We are committed to Austin, Texas, and we'll continue to grow our loan portfolio in this market. In particular, we see significant opportunities in Texas, Florida and the Carolinas. To support our growing loan pipeline, in December of 2021 and March 2022, we announced 2 registered public offerings of unsecured notes with gross proceeds of $101.8 million. These transactions provide us additional non-dilutive capital to accelerate our lending activities without compromising our main goal, which is to provide our shareholders with attractive risk-adjusted returns.

In July, we closed on a $200 million credit facility with Churchill MRA Funding. We believe this facility gives us even greater flexibility to raise debt capital at a relatively low rate.

And finally, during the year, we utilized our ATM and realized approximately $56 million of net proceeds from the sale of our common stock at prices well in excess of book value.

Looking ahead, I am pleased to report our loan pipeline is robust and expanding. Further, we are well capitalized with a solid balance sheet to take advantage of opportunities in the market.

Despite the current market volatility and the fact that the Federal Reserve Board has started to raise interest rates, we remain encouraged by the outlook for our business. There continues to be significant market opportunities for a well-capitalized hard money lender to originate attractively priced loans to small- and mid-scale real estate developers with good collateral and a strong operating history.

We seek to mitigate some of the potential risks associated with rising rates by limiting the term of new loans to 1 year. As of December 31, 2021, approximately 51% of the loans in our portfolio had a term of 1 year or less. If at the end of the loan term a loan is not in default and meets our other underwriting criteria, we will consider an extension or renewal at our prevailing rates, thereby generating additional lending fees and continued interest income.

To leverage our experience in real estate finance as well as capitalize on lending opportunities in targeted markets, we have also implemented a strategy to partner and invest with local hard money real estate lenders, creating satellite offices with a Sachem influence.

And finally, we launched our new underwriting platform. Specifically, in the third quarter of 2021, we rolled out a new underwriting model that automates the production of our loan documentation, such as term sheets, closing conditions, proof of funds, to name a few. The automation allows more accurate and timely processing of loans, thus increasing loan production while keeping our employee headcount down. In addition, we have begun to focus on developing relationships with larger-scale wholesale brokers, furthering our efforts to attract more experienced borrowers with better credit quality.

I would now like to touch on some key financial highlights then talk more about our strategy going forward. If you need any additional insight into the financial details, please review our recently filed 10-K and press release.

First, total revenue for the year ended December 31, 2021, was approximately $30.4 million compared to approximately $18.6 million for the year ended December 31, 2020. This represents an increase of approximately $11.8 million or 63.5%. The increase in revenue is due primarily to an increase in our lending operations and overall portfolio growth. Interest income, net origination fees and interest on investment securities all increased during the period. More specifically, interest income increased approximately 61.4% to $22.3 million. Origination fee income increased approximately 79% to $3.4 million. And other income increased by 100% to $2.5 million. Gross origination fees were approximately $5.9 million for the 2021 period compared to $2.8 million for the prior year period.

Total operating costs and expenses for the year ended December 31, 2021, were approximately $17.1 million compared to approximately $9.6 million for the year ended 2020. Year-over-year, this represents an increase of approximately $7.5 million or 78%.

The company's largest expense, representing approximately 61% of total operating expenses, was interest and amortization of deferred financing costs. In comparison, for 2020, interest and amortization of deferred financing costs represented approximately 58% of total operating expenses.

Interest and amortization of deferred financing costs were $10.4 million in 2021 compared to $5.5 million in 2020. This represents an increase of 87.9%. The increase is directly related to interest paid on our outstanding, unsecured, unsubordinated 5-year notes as we borrow funds to grow our loan portfolio.

The balance of the increase in operating expenses was attributable to an increase in compensation fees and taxes, which increased by approximately $1.3 million; professional fees, which increased by approximately $513,000; general and administrative fees, which increased by approximately $538,000; and other expenses, which increased by approximately $142,000. These increases are attributable to our increased level of operations and the implementation of our growth strategies.

Net income attributable to common shareholders for 2021 was approximately $11.5 million compared to approximately $9 million for the 2020 period, representing an increase of approximately $2.5 million or 27.5%. Earnings per share for 2021 was $0.44 compared to $0.41 for 2020, representing an increase of 7.3%.

Overall, we believe our financial results are evidence of our strong competitive position in the market and the sustainability of our business model over time. Even though our outlook for next year remains positive, we recognize there are still ongoing market risks to consider. As you have seen, we can quickly adapt our strategy as market conditions change.

In terms of Sachem's financial condition as of December 31, 2021, compared to December 31, 2020, total assets increased by $191.3 million to $418 million. The increase was due primarily to the growth in our mortgage loan portfolio, which increased by approximately $137 million to an aggregate outstanding principal balance of $292.3 million.

We also had an increase of approximately $45.9 million in cash and short-term marketable securities during the period. This cash increase was due in part to our sale of approximately $52 million in unsubordinated unsecured notes late in December 2021.

Total liabilities increased approximately $92.1 million to $237.9 million. The increase reflects the increase in overall indebtedness, which at December 31, 2021, was approximately $213.5 million compared to approximately $138.7 million at December 31, 2020. The increase in overall indebtedness of $80.6 million was primarily due to the issuance of $51.75 million in aggregate original principal amount of 5-year unsecured subordinated notes, a $5 million increase in the Wells Fargo margin line and a $19.1 million draw on the Churchill credit facility; finally, a $1.4 million mortgage with New Haven Bank, of which $750,000 is outstanding.

It's important to note that in 2021, we significantly reduced our leverage, thereby mitigating risk should economic conditions deteriorate. At December 31, 2021, our capital structure was 56.9% debt and 43.1% equity compared to 64.3% debt and 35.7% equity at December 31, 2020. We will continue to monitor debt levels to reduce the excess of risk associated with overleveraging our balance sheet.

Total shareholders' equity at December 31, 2021, was $180.1 million compared to $81 million at December 31, 2020. This increase was due primarily to our net income before preferred dividends of approximately $13.3 million, net proceeds from the sale of our common shares through our ATM of $56 million, net proceeds from the issuance of preferred stock of approximately $45.5 million and the aggregate of dividends paid and dividends declared of $13.6 million.

Our balance sheet remains solid with over $418 million of assets, backing $160.5 million in note principal. As a mortgage REIT, our debt levels are extraordinarily low versus our peers, thereby providing stability during difficult times.

As of December 31, 2021, of the 520 mortgage loans in our portfolio, just 16 or approximately 3.1% were in the process of foreclosure or actively managed with the goal of unlocking our invested capital in a timely manner. In the case of each of these loans, we believe the value of the collateral exceeds the total amount due. Further, a troubled or distressed loan rarely loses 100% 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.

Real estate owned decreased to $6.6 million compared to $8.9 million at year-end. As of December 31, 2021, real estate owned included $786,000 of real estate held for rental and $5.8 million of real estate held for sale. This favorable reduction is partly attributable to new asset liquidation initiatives that will further support a continued reduction in REO in real estate carrying costs.

Net cash provided by operating activities in 2021 was $27.8 million compared to $9.6 million in 2020. In 2021, the company paid a total of $12.3 million in dividends on our common shares, of which approximately $2.7 million was attributable to 2020 and approximately $1.9 million of dividends paid with respect to our Series A preferred stock. In addition, in late December 2021, the company declared. And in January 2022, the company paid a dividend of $0.12 per common share or $3.9 million, which was attributable to 2021.

As you are aware, Sachem Capital operates as a REIT and is required to distribute a minimum of 90% of the company's taxable income to shareholders as dividends. We intend to comply with this requirement for the current year.

Let me take a moment now to discuss liquidity and capital resources. We had cash and short-term marketable securities of approximately $102.6 million as of December 31, 2021. Supplementing our liquidity is our margin line of credit with Wells Fargo with a balance of $33.2 million at December 31 and our master repurchase financing facility with an affiliate of Churchill real estate, which had only $19.1 million outstanding, providing us additional flexibility at very attractive rates. It's also important to reiterate that we are very careful about the debt we take on and will not overlever our portfolio to garner higher leveraged returns.

Moving forward, we will continue to monitor the ever-changing economic conditions. Given the current market, we believe we are well positioned as the go-to nonbank real estate lender as local banks fail to understand the needs and timing of their borrowers, and small hard money lenders struggle with a lack of lending capital and the need to fit loans into a predetermined box.

Despite the lingering effects of COVID-19 and the fact that the Federal Reserve Board has started to raise interest rates, the demand for our products and services remain strong. I am pleased with our 2021 operating results, having achieved record revenue of $30.4 million and record net income of $11.5 million. Armed with enhanced underwriting procedures, we are still maintaining a cautionary approach to the market and look forward to further deploying our capital as we open new markets and identify attractive opportunities. Heading into 2022, we have maintained our momentum with a robust loan pipeline.

One final note. We reported this morning that the Board of Directors authorized and declared a quarterly dividend of $0.12 per share to be paid to shareholders of record as of the close of trading on April 11, 2022. This dividend reflects our strong financial results for 2021 as well as our favorable outlook heading into 2022.

So to wrap up, we have built a highly scalable business model to drive increased revenue and cash flow, which we strongly believe will continue to grow profitability and dividends in the years ahead. We believe our lending platform is solid and sustainable given our strict underwriting criteria and extensive due diligence. As a result, we look forward to building upon our strong historical performance.

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

(Operator Instructions) Your first question for today is coming from Chris Nolan.

Christopher Nolan, Ladenburg Thalmann. John, congratulations on a good quarter and a good year. On the capital front, I noticed that your 7.75% unsecured notes are prepayable beginning in September. What are the thoughts around prepaying those early?

We have had significant discussions, Chris, but our -- first of all, we -- the interest we can save based on our last raise is significant, and it's a very important topic for us right now. Our issue today and as I discussed, we borrowed $50 million of notes in December. And just recently, $50 million again. We're using that to fund the growth of our portfolio. I would very much like to raise additional note principal so that we're able to do those things. So it is on our mind. We're trying to grow the portfolio first, but the repayment of our more expensive notes, it's prime importance for 2022.

And you seem to be pacing it pretty well in terms of doing incremental equity raises and debt raises. Is that the strategy for 2022 to sort of pace those together?

It is. We're trying to obtain a certain level of balance between debt and equity. And I touched on that a little bit during the call. We've been able to reduce our overall debt levels a little bit in relation to our equity. And it just gives us a nice balance. Hey, we can throw out a better dividend and earn more money if we really increase the leverage. And we like to play a little close to the vest. We don't want to be debt gamblers. So we are balancing debt and equity, and we're trying to do it in such a way where we can utilize our ATM and not have a shock to our stock price with an equity raise.

(Operator Instructions) Your next question is coming from Brian Hollenden.

It's Brian Hollenden from Aegis Capital. Maybe we'll stick with that last question for a second, John. Can you just maybe elaborate a little bit more on -- given the capital that you kind of currently have, what sort of return on equity can investors sort of anticipate for 2022?

As I sit here today, I very much would like to have 4 quarters of $0.12 as a dividend. Our share price, I think, is just a bit above $5 today. That's a very reasonable return. We are always looking to increase our dividend. We do manage our business quite judiciously with respect to operating costs.

But over the past couple of years, Brian, we've had to really -- we had to bring on some people, which, obviously, it does affect the bottom line. And we're staffing up. We're bringing in better quality individuals, better coverage. And the truth is in the growth of the business, right? We have the right people. Our goal moving forward, we'd love to pay $0.48 for 2022, giving us just under a 10% dividend yield for the year.

Maybe switching up a little bit on demand side. Can you talk about developer demand? Has it changed at all since the last conference call? Do you expect rising inflation or interest rates to diminish developer activity at all?

So right now, there's very -- the very interesting phenomenon in the real estate world, to be very specific, developer demand is crazy. We have more loans in-house than we can handle. Our underwriters are jammed with work. And what's happening now is the lack of inventory is pushing prices higher, which is making some of these larger projects that may have been shovel-ready for years, it now makes them viable. So we're looking into this.

What's nice about developer demand is that our money stays on the books for a longer period of time. So in comparison, if someone wants to renovate and sell a 2-family house, that project can take just a few months. We give them the money, we get it back quickly, and then we have to go find the next deal.

What we have now is our money is now invested longer, which is kind of nice. So our goal now is to focus on the best qualified developer that we can get. Invest with him and let our money sit there and earn for our shareholders over a longer period of time.

And to further explain, the smaller fix-and-flip market has become unbelievably overheated, where individuals cannot find the inventory. So needless to say, everybody is looking into bigger and bigger deals, which is part of our issue, right? We can't get viable appraisals to support the smaller projects. So we're doing some larger deals. The amount of origination fees and the interest income is really working in our favor. You could really see the benefits of it in our bottom line.

I touched on the growth of our origination fees year-over-year. Those origination fees really provide a cushion for those deals that do on occasion go sideways. So we do have a very large construction component. We have some initiatives in process where we're utilizing a high-end design/build companies to review the construction process, to interview the borrower and developer. And if something -- again, if that deal were to go sideways, we have someone who can complete projects for us and get us our capital back.

Maybe just a quick follow-up there. Just could you give us an approximation in terms of like what percent of that portfolio overall maybe is that fix-and-flip capital where they just kind of need it for the 2 to 3 months versus the longer-term developer capital?

So our developer capital is somewhere around 40% of our portfolio. So the fix-and-flip shorter term is about 60%, and the 60% -- we're trying to reduce the 60%.

(Operator Instructions) We do have a follow-up question coming from Chris Nolan.

John, could you discuss your interest sensitivity for a moment? I mean, I know the loans are generally fixed, and your borrowings are generally fixed as well. But assuming interest rates do go up, do you see any sort of secondary effects in terms of declining asset quality or things like that given that all the supply chain issues going around? Any sort of color you can provide would be helpful.

Sure. First, our cost of capital when you factor in our dividend yield is just north of 8%. Our weighted portfolio yield as of December 31, I think off the top of my head was 11.2 -- I'm sorry, 11.7%. That does not include origination fees. So we still have a good, good margin to really flow revenue to the bottom line.

As we go forward, if the cost of our notes starts to rise, yes, that could have an adverse impact on how we finance our business. What we would do is back off on our unsecured notes and delve a little deeper into our Churchill facility, which currently now is at 4%. So we have weapons to protect our interest rate spread.

And let me be clear here. Over the past year or two, our portfolio yield was just north of 12, and it has come down. But the amount of interest rate compression has not been terrible. We still have pricing flexibility across the board in all markets where we do business. And yes, some of our better, more sophisticated borrowers are looking for price concessions. But it's not a run on the bank. It's not across the board.

So for right now, I think we're in a pretty good place with respect to rising interest rates. And Chris, to be quite honest, as the interest rates go higher, a lot of our borrowers will not have the bank option, the local bank. These people may not qualify. The banks may get skittish. All of that business will come to us. And it's -- I would rather be lending in a flat or down market than a crazy rising real estate market like we have. So we're actually looking forward to a little bit of a slowdown here. We don't want to climb the ladder and be at the last rank.

So we're looking forward to a little slowdown. I think the interest rates will slow some of the speculation in the market. And then further, to touch on supply chain, our borrowers are working through this. They're basically very creative. And because most of our projects are on a smaller scale, they have to come up with maybe 5 or 10 sets of roof trusses, let's say, as opposed to a large national builder that may need 150. So yes, our borrowers are -- they have a little bit of pain, but it's not terrible. And yes, we hear some complaints, but again, it's not running through our portfolio.

Your next question is coming from [Robert Deke].

The stock price recently took a sharp drop. Was there anything that you can attribute that to?

To be honest, I have no idea. Our stock should be steady as a rock, right? We consistently provide the earnings, the dividends. Yes, they're -- people can get skittish on interest rates. They can get skittish on world events. As I say, sometimes we get -- the baby gets thrown out with the bathwater. Our stock moves up and down, I try not to put too much weight. When it gets down to $4.50, I'd like to think it's a buying opportunity. Am I happy that it's there? No, not really. We -- I have a lot of long-term holders that they've been with us a long time, and I understand the pain that they go through.

So no, there is no answer. To be very specific, I have not sold any shares. I don't intend to. One of our executives here is buying small amounts, I believe, on a monthly basis. We're firm believers in the stock and where it's going to go from here. So I try not to focus too much over the short term. And like I said, we're very bullish on Sachem shares.

Okay. Just wondered if there was something in the background that we were missing. I appreciate the response.

Okay.

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

Thank you, everyone. Stay tuned. We look forward to updating you again next quarter. Thank you again.

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