Sachem Capital Corp. (SACH) Earnings Call Transcript & Summary

Hello and welcome to the Annual Meeting of Shareholders of Sachem Capital Corp. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to John Villano, President and Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Sachem Capital Corp. Mr. Villano, the floor is yours.

Good morning, ladies and gentlemen. I am John Villano, President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Sachem Capital Corp. I welcome you to our 2020 Annual Meeting of Shareholders. With me is Peter Cuozzo, Executive Vice President and Chief Operating Officer of Sachem Capital Corp. Today's virtual-only meeting is a live audio webcast. In light of the ongoing COVID-19 pandemic, we believe that holding a virtual meeting is in the best interest of the health and safety of our shareholders and will provide the best opportunity for our shareholders to attend and participate in the meeting. I call your attention to the rules of conduct set forth for this meeting. These are made available to each shareholder in the files section in the lower left of the screen. If you need a copy of the annual report or the proxy statement, the links are provided online. Also present is Joel Goldschmidt from the law firm of Kurzman Eisenberg Corbin & Lever LLP, the company's corporate and securities counsel; Steven Lesser of the independent accounting firm of Hoberman & Lesser LLP, the company's independent auditors; Maura Stanley of Computershare, the company's transfer agent; and David Waldman of Crescendo Communications, investor relations for the company, who will help moderate the questions and answers. Mr. Goldschmidt has been appointed secretary of this meeting and Ms. Stanley has been appointed as inspector of elections and will serve as inspector. The following directors are also present: Leslie Bernhard, Arthur Goldberg and Brian Prinz. I will now address the meeting agenda and present the affidavit of William Valentin, an employee of the transfer agent, to certify that the notice of this meeting was mailed on September 15, 2020, to all shareholders of record as of August 27, 2020, the record date for this meeting. Unless specifically requested, we will dispense with the reading of such notice. A certified list of the shareholders entitled to vote at the meeting is available and may be inspected by any shareholder by clicking the link on the left side of the screen. It shows that as of the close of business on August 27, 2020, there were issued an outstanding 22,117,301 common shares, representing an equal number of eligible votes. I direct that the affidavit be filed with the minutes of this meeting. I present the oath of office subscribed by the inspector and direct that the oath also be filed with the minutes. The inspector has advised that she has tallied the number of votes present at the meeting and that in excess of 50% of eligible votes are present in person or by proxy. A quorum is therefore present and the meeting can now proceed to consider all matters coming before it. The first item of business is the reelection of me, John Villano; Leslie Bernhard; Arthur Goldberg; and Brian Prinz to the company's Board to serve until 2021 Annual Meeting of Shareholders or until their respective successors have been elected and qualified. The Board recommends a vote for each candidate. The motion has already been moved and seconded. If you have any questions or comments on the proposal, you may submit questions online by clicking in the dialogue icon in the upper-right corner of the meeting center screen. The second and final item of business is the advisory approval of the appointment of Hoberman & Lesser LLP as the company's independent auditors for the fiscal year ending December 31, 2020. The Board recommends a vote for the proposal. The motion has already been moved and seconded, if you have any questions or comments on the proposal, you may submit questions online by clicking in the dialogue icon in the upper-right corner of the meeting center screen. I will now call for a vote. If you have not voted or wish to change your vote, you may do so now by clicking on the link provided online. Any shareholder who has already voted and does not want to change their vote need not take any further action. We will now pause for a few minutes to give shareholders an opportunity to vote. [Voting]

The online voting is now closed on all matters. I ask that the inspector commence their tally of the votes and announce the voting results. Following announcement of the voting results and adjournment of the meeting, there will be a presentation by management to shareholders and an opportunity for shareholders to ask questions.

Ladies and gentlemen, I hereby announce that each of the nominees is duly reelected as a Director of Sachem Capital Corp., and the advisory approval of the appointment of Hoberman & Lesser LLP as the company's independent auditors for the fiscal year ending December 31, 2020 has been approved.

Thank you, Ms. Stanley. I congratulate my fellow directors on their reelection. A motion to adjourn the meeting has already been moved and seconded. The meeting will now adjourn. We will now turn to management's presentation, after which I will entertain questions from shareholders. David, can I ask you to read the forward-looking statement, please?

Yes. Thank you. This presentation includes forward-looking statements. All statements in this presentation other than statements of historical facts, 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, expectation and the negative of such terms and other words and terms of similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our 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 a number of risks, uncertainties and assumptions, some of which cannot be quantified and some of which are beyond our control. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this presentation may not occur, and our actual operating and financial 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 predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this presentation to confirm these statements in relationship to actual results or revised expectations. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this presentation. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

Okay. Let's move on to Page #2. Ladies and gentlemen, during this presentation, I will not read from the slides. These are here for your review during my presentation or afterwards at your convenience. Our goal here is to provide some additional color with respect to the slides, and questions and answers are welcome at the end of the presentation. Let's begin. Sachem was formed in December of 2010 as a partnership specifically to address the lack of liquidity in the banking sector. The inability of banks to understand small balance commercial real estate loans and finally, their ability to execute in a timely manner. Our immediate goal was to locate sources of capital and more importantly, develop a dependable business model that not only generates sustainable profits but remain stout and robust in difficult times. During the period from December of 2010 to the date of our IPO in 2017, Sachem sourced 175 partners, raised $28 million and obtained a $15 million credit facility. This was a time of rapid loan growth, system and control implementation and of course, fantastic profits. During this period, Sachem earned the reputation as the go-to lender in the Connecticut hard money lending space. The management of Sachem is committed to the success of the company. This commitment can be seen by our large investment in the company, our transition from external to internal management, and finally, our focus on bottom line results. As an investor in Sachem, you should look at your investment in us as we look at an investment in our borrower clientele. Does management have enough skin in the game to make the right decisions to push past difficult times and truly take an interest in the direction of the company? Next slide, please. In general, Sachem is a vertically-integrated mortgage REIT. We originate, underwrite, fund, service and manage all our first lien mortgages. Our loans are often called hard money loans because they are specifically collateralized by hard real estate assets. Since our inception and through June of 2020, Sachem has made over 1,100 mortgage loans with an approximate principal balance of $232 million. Our historical loss percentage on these loans is less than 0.2%. The data contained in these slides represent our audited financial data for 2019 and '18 and reviewed financial data as of June 30, 2020. Results for the quarter ended September 30, 2020, are not yet available. As housing ages in the U.S., Sachem is positioned to be a significant player in the growth of the nonbank lending space. Speed of execution, coupled with our stellar reputation, gives us a first look at most opportunities. The growth of our loan portfolio is only limited by available, efficient capital. Some important takeaways from this slide. Diversification of notes receivable, representing an ongoing search for low-risk transactions. Liquidity through unsecured note offerings provided resources to grow our portfolio. Profits and dividend declarations reflect the stability of our portfolio and are expected to rise. Inside ownership is approximately 8%, including directors. Next slide, please. We realize there are many investment choices to invest your hard-earned dollars. In terms of risk versus reward, we think Sachem stacks up pretty well. Co-founders own greater than 7% of the company and are not sellers of the stock. We are working owners with a focus on bottom line performance. Our loans are high-yield assets not directly tied to interest rate fluctuations. Our leverage is low compared to our peers. The management team can protect invested assets and provide stability of growth in profits. Sachem is the benefactor of an aging housing stock, resulting in an unrelenting demand for our loan products. Our loan backlog is greater than $30 million. We have a history of significant profits and a track record of managing troubled assets with minimal losses. Next slide, please. Sachem is a prime benefactor to the aging U.S. real estate. Traditional banks prefer to lend when a property is seasoned and stabilized. Significant repairs, code violations and any type of visual property damage will turn away your local bank, leaving the property owner in dire straits. Sachem is an opportunistic lender and can structure a loan with preservation of invested capital as our top priority. Our goal is to lend at a better LTV, which must be less than 70% and often with additional real estate collateral and borrower guarantees. Quite simply, the Sachem model is to lend early in the renovation process for 2 reasons. First, lending early provides great risk/reward positions; and second, being early leaves room for other lenders to lend at a higher risk profile and refinance our capital. As you can see in our next slide, the fix and flip market is booming. New home construction in the Northeast is well below historical levels. Reasons for the lack of new home construction are: one, suitable land is costly and hard to come by; second, construction materials and labor costs are high; and finally, the time from permitting to completion is lengthy. The truth is, investors and developers cannot locate reasonably priced new homes, so renovated home growth is on the rise. Due to rising construction costs, more and more of the fix and flip homes are now financed. Investors look to loan finance to stretch and protect their working capital should another opportunity arise. We expect this trend to continue. Finally, profits to be earned on fix and flip properties have caught the eye of developers and speculators. Profits are locked in with a buy low and refinance or sell high strategy. COVID-19 has ignited the Connecticut housing sector, creating opportunity for lenders like Sachem to satisfy the surge in demand for real estate as people move from New York City and Metropolitan New York. Homes are selling in days, and the inventory of homes for sale are historically low. Bidding wars are common. Next slide, please. Our business model is based on just a few key factors: first, disciplined underwriting and unwavering due diligence; second, extensive collateral analysis; third, flexibility to structure loans; fourth, timely execution and delivery; and finally, management of the borrower. We insist on steady and sensible growth in our loan portfolio. Our company started as a small balance lender, and we remain a small balance lender today. We prefer to hold our notes and most often refuse to sell our paper to others. We are comfortable with our notes, their yield and expectation of repayment. 99% of our loans are first mortgages, with 90% of our loan portfolio in Connecticut. Besides Connecticut, we currently have loans in New York, Massachusetts, Rhode Island, Arizona, Florida and Texas. In the third quarter of 2020, we initiated a growth strategy focused on Florida. Pre third quarter, we had $989,000 of Florida loans in our portfolio. By the end of the third quarter, our portfolio totaled $10.6 million of loans from Florida, a nearly tenfold increase, and we have many more dollars in our quarter 4 pipeline. Next slide, please. As a nonbank real estate finance company, we move quickly and decisively when a funding opportunity presents itself. We are not limited by real estate classification, age or location when we evaluate a loan opportunity. Our focus is on value and ultimately, the borrowers' investment and commitment to the deal. We diversify our portfolio to obtain the best value prospects for our invested dollars. We do not lend to own like some of our competitors. We understand every deal is different. On occasion, some extra effort is needed to get the desired result. We will and can assist our borrowers when necessary to work a deal into the clear. At Sachem, we nurture our borrowers and look for them to be successful as we build our relationship. Their success will lead to our sustained growth and bottom line net income. Next slide, please. This slide reflects factual information on our loan products for the quarter ended June 30, 2020. Let me clarify a few items. We have 2 loan products, a 1-year and a 3-year loan. The 1-year loan has origination fees of 2.5% and the 3-year loan has a 5% origination fee with credits for prompt repayment. Both loans are interest-only with principal payable at maturity. 95% of our loans have a note rate of 12% plus and 85% of our notes are 1-year paper. In a default situation, the interest rate on the note will go to 18% and remain until the default is cured by the borrower. Compared to prior years, our gross loan origination income has declined somewhat, reflecting our transition to more preferable short-term loans. Our maximum loan-to-value is 70%, and no borrower has commitments to Sachem for more than 5% of the portfolio. As you can see on the slide, we do have a 5% note. This note was purchased at a discount to yield approximately 12%. Next slide, please. Our portfolio is designed so no single loan will cripple our ability to pay dividends to our shareholders. Historically, the residential fix and flip portion of our portfolio has averaged somewhere between 65% and 70% of total loans. 95% of our loans are $500,000 or less, showing we are truly a small balance lender. For clarification, when we mention residential mortgages, we are talking about 1 to 4 family buildings held for investment or rental. We are not a residential lender. We don't lend to homeowners for their residence and thus are not subject to lending requirements imposed on banks. At Sachem, we'd like to lend often and early in the process. Smaller loan originations provide multiples of fees like legal, processing, inspection and appraisal and background. Consistent loan growth and minimal loss reserves confirms our lending process. Next slide, please. This slide reflects income statement data for the years ended December 31, 2018, 2019 and the first half of 2020. As you review the data contained on the slide, let me add this bit of information. 2018 and the first 6 months of 2019 were periods where Sachem struggled to grow our loan portfolio due to ongoing constraints in working capital. During the first half of 2019, Sachem has taken steps to restore liquidity and expand lending operations. Specifically, we terminated our line of credit with Webster Bank and restructured our balance sheet to grow with unsecured notes. Our gross income has continued to grow during the periods presented, even as we build the structures to support a larger lending platform. During 2019 and the first half of 2020, we have invested in accounting, legal, sales and marketing and underwriting personnel as well as investor relations. We will continue to build our platform with quality people during 2020. Return on average assets and equity are, in my opinion, industry-leading metrics considering our low level of leverage. We look forward to growing our earnings per share and expanding our interest expense coverage for the remainder of 2020. Next slide, please. As you look at our balance sheet for June 30, 2020 and December of '19, key takeaways from this analysis is our continued low leverage in relation to our peers and great asset coverage. We will continue to balance growth in our debt with the stability of additional equity to balance growth and business risk. Our balance sheet is built for difficult times should they occur. Next slide, please. As you review our portfolio performance slide, take notice of the following metrics: stable growth in assets from 2018 to the 6 months ended June 30, 2020; growth in mortgage loans of 18% during the 6 months ended June 30, 2020; stability in our weighted average interest rate; growth in the fix and flip space has increased competition, has not curtailed our loan pricing; stability in origination fee income as we move to shorter duration loans. Foreclosures are up slightly from 2019 levels but well below anticipated levels with COVID. Let's remember, most foreclosures do not go the full distance to auction or sale. Next slide, please. This slide shows the stability of our earnings. Our first quarter of 2020 dividend payable in April of '20 was placed on hold during the coronavirus pandemic and the dividend payment in January 2020 was a distribution of 2020 income. Simply, Sachem distributed dividends greater than earnings in 2019. Thanks, everyone. This will conclude our presentation. I would like to now open our meeting to questions from shareholders.

Yes. Our first question is as follows. What are your expectations of foreclosure time lines in Florida? I've had nonperforming loans take 2-plus years to foreclose there given that it's a judicial process with oftentimes court-mandated mediations, et cetera.

So first and foremost, all of our loans in Florida are performing. As in our business, foreclosures are a necessary evil, they happen. We are going to -- we look at Florida as it will with Connecticut. It sometimes takes a year to 18 months to get a property back here in Connecticut. We do expect shorter times in Florida. You have to remember that we are not a residential lender and the commercial process is a bit quicker. And then you must also realize that the borrower has many defenses, okay, and everything from multiple bankruptcies to evictions to prolong their stay in a piece of property. There are very few states that allow a quick turnover of a troubled piece of real estate. So we do expect time lines to be similar to Connecticut. What we are trying to do is to work with better sponsors of property. We are building our personnel in Florida, and we think it's going to be a great growth area. We are marketing to South Florida right now every week. And we're moving at a -- I don't want to say a snail's pace, but we're walking instead of running. And we're being quite comfortable with our borrowers and making sure they have the wherewithal to handle a difficult time.

Great. Thank you. Our next question is, when you say your max LTV is 70%, is that loan-to-cost or after repaired value?

So when we evaluate a loan opportunity, if it is a construction loan, we go to after -- we look at 70% of after repaired. If it is a straight purchase with no construction, it's a loan-to-cost. What we are doing is we are getting multiple valuation, multiple values when we perform valuations. So we're not looking for just a straight appraisal to say, "Hey, this is our number." We're looking for a blend that makes sense. We clearly realize that appraisals can be tainted and we're looking for a corroboration of the evidence where we can tie in recent sales, property listings in the area, assessor cards at the town. We're looking for things that make sense as opposed to a large deviation from market because an appraisal just happened to time right. Next question.

Great. Thank you. That actually concludes our questions. So I'll turn the floor back to you, Mr. Villano.

Okay. Since there are no other questions, I'd like to thank everyone for joining us today. Feel free if there are questions after this meeting and presentation to contact our investor contact, David Waldman at Crescendo Communications, or feel free to give us a call here in the office, and we will get a response for you. Thank you, everyone.

This concludes the meeting. You may now disconnect.