Sachem Capital Corp (SACH) 2024 Q3 法說會逐字稿

(Technical difficulty) Higher professional fees stemming from shareholder activism which has now been resolved, interest and amortization of deferred financing costs have decreased by approximately 11% since September 30, 2023, primarily due to the repayment of our unsecured notes payable that came due in June of 2024.

As a result, net loss attributable to common shareholders for the third quarter of 2024 was $6.1 million or negative $0.13 per diluted share compared to $5.2 million or $0.12 per diluted share in the comparing prior year period. As discussed in prior quarters. 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.

On November 7, the board declared a quarterly dividend of $0.5 per share for shareholders of record as of November 18, 2024.

Going forward. It is anticipated that the company will disclose future dividend declarations with respect to its first three fiscal quarters, concurrently with the release of its quarterly earnings with respect to the 4th quarter, either at the end of the year and or concurrently with the release of yearend financial information, this timing will better align with our results.

Turning to portfolio activities as with previous quarters in 2024 loan originations remained challenged. However, with banks remaining on the sidelines and financing challenges persisting, we expect our pipeline to remain robust even as we stay highly selective due to the current capital markets environment. Our primary focus continues to be on single family and small multifamily residential assets and growing markets where the metrics remain favorable.

For the quarter we had net fundings of approximately $31.3 million for mortgage loans including loan modifications and construction draws that were offset by approximately $55.6 million of principal pay downs.

During the third quarter the company modified or extended a total of 24 loans. These modifications resulted in gross fee income of $0.9 million as of September 30, 2024. Our portfolio was comprised of 226 loans with a total unpaid principal balance of approximately $477.1 million the weighted average interest rate of 13.1% inclusive of default rates but excluding fees.

Our loan portfolio is geographically diverse covering 16 states with a focus on growth markets in the Southeast, balanced with more stable markets in the northeast. Additionally, only 13.3% of our investments are in office properties.

At quarter end, we had loans with a principal balance of approximately $147 million in non-accrual status, which includes 54 loans in foreclosure by the company representing approximately $81.8 million of outstanding principal balance including the accrued but unpaid interest and borrower charges. Real estate owned was $4.3 million as of September 30, 2024, including $0.8 million held for rental and $3.5 million held for sale.

Now let's move on to our balance sheet and financial position where maintaining liquidity is a priority to stay prepared during a time when valuable opportunities are emerging, the capital remains extensive. As of September 30, 2024, we had total assets of $555.5 million including$ 5.9 million of cash and cash equivalents and $1.6 million in investment securities offset by $324.7 million of total debt outstanding.

We will continue to utilize drawdowns from our existing credit facilities, current cash on hand principal repayments from our mortgage loans, proceeds from the sale of preferred stock under our ATM program and proceeds from the potential sale of mortgage loans to manage the upcoming debt maturities. Notably the $34.5 million principal amount of unsecured unsubordinated notes due on September 30, 2024.

Finally, as John mentioned, we are targeting to close on the sale of 41 loans of approximately $78.8 million of unpaid principal balance of these loans, $41.5 million are considered non-accrual loans are loans that are over 90 days past due on payment.

Currently, we are anticipating recovery of approximately 70% of unpaid principal balance from the sale of the loan pool. Selling these loans provide several advantages to Sachem. First, we eliminate the risk of significant costs related to the foreclosure and bankruptcy process including professional fees, providing capital to finish projects and other expenses relating to the REO.

Second, the process to reclaim our assets is often lengthy which constrains capital and limits resources that could be directed towards other areas of the business. The opportunity cost of our capital is significant, particularly when foreclosures regularly take over two years to complete and many judicial states that we lend in.

Lastly, these loans provide liquidity in a time where capital remains expensive, selling these loans gives us the best chance to avoid onboarding dilutive capital and eliminates a significant drag on earnings. As such. We believe the sale is the most direct path to regain our step and start to regrow our dividends.

I will now turn the call back to John for closing remarks.

Thanks Nick.

We are excited to reposition Sachem as a market leader in small balance real estate finance, we look forward to refilling our loan pipeline and funding a creative projects.

Our goal is to derisk our balance sheet, restore our dividend and reward our shareholders. We are grateful for the continued shareholder support through challenging industry specific and macroeconomic conditions. Our transition is currently underway, and we are excited to enhance our lending operations, increase our dividend while protecting book value.

I want to extend my heartfelt gratitude to the entire Sachem team for their continuous hard work, dedication and invaluable contributions to our performance. And now we will turn the call over to the operator for questions. Thank you.

(Operator Instructions)

Gaurav Mehta, Alliance Global Partners.

Thank you. Good morning.

I wanted to ask you on your non-accrual loans and the mortgage loan that you're planning to sell. So, I think in the prepared remarks, you said $147 million of non-accrual. It seems to be higher than the number for non-accrual in the last quarter. So, hoping to get some good color on non-accrual and then the sale of mortgage loans. So, want to get some more color on that pool of mortgage loans that you're selling and, the expected timing of the sale.

Yes. I can take that one off. So, the non-accrual, I think that the particular spike in the non-accrual was related to a loan that we're actively working on. It's a sizable loan, down in Naples, Florida. There's been some litigation with one of the second mortgage holder in the deal that has flowed the project. But we're actively working through that and hope to have an outcome in that over the coming months.

The assets are near completion and with sales scheduled here's some issues with the second mortgage holder that's been slowing that and that's what made up a sizable portion of that spike between Q2 and Q3.

Relating to the note sale, as you mentioned, a little more than $41 million of the pool is non-accrual, which is in that $140 plus million-dollar number. Majority of the pool the other sort of portion is probably has another non-performing aspect, I suppose the entire pool being sold because there's either like a sponsorship issue, perhaps another underlying asset issue, but loans that we want to clear ourselves up to redeploy into better credit products as is the general theme of the sale.

So, we're excited to get that process executed and get the capital back into performing assets. We take that process off after quarter, close and anticipate a full closing on the sale prior to December 30, 2024.

I would just add to that, I suppose if you go into the asset base, the majority of these loans were not this, they're sort of the commercial projects. I would say generally speaking, there are some small residential projects that we're selling, but a majority of it is commercial assets.

Thank you, Nick.

I'd like to add one other thing to that. Which kind of ties in the last few quarters of our performance. As we've all known, our dividend has kind of tracked downward here to where it is today. These loans have been a drag on earnings non-accrual certainly doesn't help us in an effort to restore our dividend to what it was. And then some, we need to close these loans out.

And quite honestly, we do a very nice job of clearing these up, but the drag of non-accruals is just hurting the dividend and internally we feel that it's best to eliminate these. Even though if we were to fight these to the end, we would probably get back most of our money, but we would have a reduced dividend for a prolonged period of time.

Okay. Just as a follow up, so $41 million are non-accrual in that pool and that $41 million is included in the $147million total number. And, and so I guess as you think about the remaining non-actual pool, should we expect like similar outcome for what would remain in the non-actual after the sale of the mortgage loan portfolio.

At this point there is no secondary loan sale with respect to the additional non-accrual.

Okay. And last year on the balance sheet, I think you talked about a few different sources of capital that you may use to address the $34 million debt maturity in December and so out of those sources. Is there any source that you prefer over another as you look to address the debt maturity.

Gaurav, what we're expecting from the culmination of the loan sale will have options. Our loans that are due in December are $34.5 million. Most likely it will be a full paydown of those notes, of course, a reduction of our credit facility with Needham Bank. And at that point we can start to build our business again and putting loans on the books.

Okay, thank you. That's all I had.

Matthew Erdner, JonesTrading.

Hi, good morning, guys. Thanks for taking the question. So, with the $78 million in loan sales, that kind of gets me to around $400 million for the current portfolio size. Do you know what percentage would be office, after this loan sale closes, what remainder of that $400 million would be commercial outside of office, and then I think you mentioned $41 million in non-accrual. So, that kind of brings it back down towards, $100 million give or take. Can you just let me know if I'm reading through this correctly.

Okay. So, the non-accruals, I just let the Nick take this with respect to the office percentage, but the significant portion of non-accruals are residential conduct. So, we don't see much devaluation as we see with the loan sale.

Regarding the office $10 plus million of the 78 going to the sale our office properties. So, certainly like there's a sizable portion of that our office assets that we're going to be selling to continue to lower that exposure.

Got it. That's helpful. Yes. And then turning to another question, with regard to capital allocation, it looks like you guys repurchased almost a half a million shares during the quarter. Made the investment in the Shem Creek capital, where do you guys view the best return on your capital at this point.

First of all, Matt, we think we think our shares are depressed even in light of all of this, we feel that the shares again it's only my opinion, we feel that the shares are cheap with respect to book value. We think in the near future our dividend will be restored.

Look, we're lending at 12 and two still. Right now, we're still through the end of the year. We're not going to lend, we're not going to do anything, we're still managing our business, performing through the loan sale. Next year will be a, starting in January, we're going to take stock of what we have. We're going to look for new capital and begin moving again. So, to answer your question, we think our stock is a great buy here. We still like residential lending. It's just, we're not seeing as many great projects and so, we're just sitting tight for now and until we can find a creative capital. it's going to be a slow play.

Got it. That's helpful. Thank you guys.

Tyler Batory, Oppenheimer.

Good morning. This is Jonathan on for Tyler. Thanks for taking my questions first one for me, John, somewhat of a follow up, but now that we move past the election and the September rate cut, I'm curious if you can maybe update us on your latest thinking on how next year plays out and you highlighted the strong deal flow. So, pairing that kind of what do you need to see to step back on the pedal next year.

Okay. All right. So, our loan sale is coming through. We've talked about that. We've cut our dividend. I wanted just, I'm not happy. Right. Let's be very clear. I'm not happy. I don't expect our shareholders to be happy.

There could quite possibly be. And this is again a board of director decision but there could be another $0.5 event, and I just don't want to mince words. It's quite possible. It's not a dividend in despair. It's just again we're starting to see the light at the end of the tunnel. We're excited about moving forward. We're really looking to the second quarter, and I think at that point, we're going Sachem to start looking like the company we used to be.

Okay. That's great. I appreciate the color. And then you guys invested in the Shem Creek partnership in the quarter. And in the past, you've talked about satellite offices with local hard money lenders. I'm curious if those conversations have become more active or changed at all in light of the environment and the moves we've seen in the interest rates over the past few months.

The it is a great opportunity for us. However, without capital, we have to kind of mind our business and we, we're a lender at heart that's what we do. We're starting to step out a little bit more in the real estate development business through our TRS and our urbane unit we're very excited for what they can do and what they can bring to our bottom line.

So, what is very interesting in our business model at this point is we have the opportunity for capital gains which, we've kind of stepped a little bit away from being your normal vanilla white mortgage lender. We now have the ability to spin off capital gains and those will be tremendous benefits to our shareholders. They will come once we fill this pipeline, they will come consistently and it's a new view, but let it be said here we are a mortgage lender. We're not straying too far from the path we feel that Shem Creek adds great credibility in the workforce housing for us. We don't have the ability to attract that kind of investment with our rates the way they are.

So, we're very excited to have them as part of our team and we think that could be a huge part of our business going forward.

That's excellent. I appreciate all the color today. That's all for me.

Chris Muller, Citizens JMP.

Hi John and Nick, thanks for taking the questions. So, I guess on the lower fees from modifications, how are you guys feeling about where you're at modification wise. Is, are you through the bulk of what you expect to come through or is there another, I guess steady flow of small modifications coming over the coming quarters.

Chris, we continued, I mean, a modification are at one point we had 500 loans and we're now down to approximately 225. Just by the sheer number, we get a bunch of these every single month. And what we have done through the last quarter is, we have changed a significant portion of our underwriting process.

It is greatly improved a lot of these modifications don't fit the guidelines any longer and those guys are going off to mission, we're foreclosing if they don't want, there's nowhere for them to go quite honestly. And, which leads us to, selling the notes or foreclosing. So, we're, this is part of a cleansing of our balance sheet, and they continue to come, we do our very best to protect our borrowers and we've been known to go to the ninth inning for many, but if we can't get them to fit our guidelines, they kind of have to go.

Guys. So should we expect to see a pickup in REO over the next couple orders.

I don't really see it a good portion of our loans and foreclosure resolve themselves, it's either through a short sale, another interested party, a refinance. Our REO has not grown tremendously o over this whole period, this whole last two-year struggle that we've been in. So, I don't expect it to be an REO, but I will add this little caveat.

If we have the ability to perform a cash for keys transaction, we will do it artificially inflating the REO it gives us control, but it's a quick sale I mean, this is not stuff we're keeping again, it's just trying to get control and in some of the States it's just hard to get, especially New York and New Jersey, it's hard to get control.

I'll actually, I'll clarify that. I think what John is saying too is that we are trying to take back some REO before it goes to mission for sale, you just get better execution in the secondary market if you can convert it to REO alleviates the risk.

So, what we're trying to do is be proactive with the loan pool to get in front of our borrowers to say, here's a chance to hand us the keys. So, you'll see a subsequent disclosure that discusses like the amount that we're taking into REO but that's going to the mission sale. But again, that was done strategically to facilitate the sale that wasn't just us taking a bunch of REO through like say foreclosure.

Got it. That's very helpful. And then I guess my second question for you, Nick with the CRE reserve in the quarter, I think you said that most of that reserve was related to the Naples asset. I want to make sure I got that correct first. And then can you just break out for me. The general and specific reserves that are in that $20.2 million total number. Is any of those specific reserves, I guess is the question.

I would say the general split is roughly you've got about $14 million in direct reserve, which is against assets that are in the non performing, but all of which is against assets in the nonperforming bucket. The remainder is sort of general reserve that relates to the rest of the performing pool. Is that helpful.

Very helpful. Thank you. That was all I had. I look forward to seeing you guys shift back off into at some point in 2025.

Thank you.

Christopher Nolan, Ladenburg Thalmann.

Hi, guys, for the $78 million loan sale. Is that going to just be a realized loss in the fourth quarter or is going to be part reserve recovery. How's that going to work Accounting wise.

Yes, you'll see a reserve recovery CRE for loans that were reserved against in the pool and then you'll, it'll be offset by to your point, a realized loss of where it's executed at. There's some mass that is in the, our filing that's coming out shortly, that goes into sort of a pro forma effect of what the loan sale looks like.

Okay. And then, I guess if I heard you correctly on the cash for the maturing December Note. Do you have that cash on hand now or is it still in process.

Chris. So, what we have is we've kept our availability at Needham relatively low. We do have some cash. We don't have all of it, but we have the ability to draw from Needham if need be. And then we also have the anticipated proceeds from the sale of the notes.

Okay. So, your facility, credit facility will cover it if need be.

Yes.

And the final question is on the Sachem capital investment was did that flow through the income statement at all or was that just sort of a CapEx type of balance sheet investment.

That did not flow through the income statement yet. We did that transaction early in September, we have P&L effects are still it was too short lived during the quarter or for the year, let's say.

But that was not manager investment to---

Yes, that was on It's a third-party manager, the third-party manager investment that oversees the funds that we've been investing in as majority of which is our capital is in a co-invest vehicle with outsized economics to the rest of the limited partners in the fund.

So, does that expense be amortized over a period of time. Is that the way to look at that investment.

No, it's an equity investment.

That's it for me. Thank you very much.

Thanks Chris.

Thank you, a reminder, to all the participants that you may press star and one to ask a question. Ladies and gentlemen, we have reached the end of question-and-answer session.

I would now like to turn the floor over to John Villano for closing comments.

Thank you, everyone for joining us today. We look forward to updating you with the filing of our K.

Thanks again.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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