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, Chairman of the Board of Sachem Capital Corp. Mr. Villano, the floor is yours.

Good morning, ladies and gentlemen. I am John Villano, President and Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Sachem Capital Corp. I welcome you to our 2021 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 consideration of the ongoing COVID-19 considerations, 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 documents tab on the right side of the meeting center screen. Once you click the documents tab, you will find a tab entitled Rules Of Conduct. You should quickly review the rules of contact -- conduct set forth for this meeting. If you need a copy of the annual report or the proxy statement, you can access them by clicking on the documents tab on the right side of the meeting center screen and choosing Proxy Materials. Also present is Joel Goldschmidt from the law firm of Kurzman Eisenberg Corbin & Lever, 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 Q&A. Mr. Goldschmidt has been appointed Secretary and Ms. Stanley has been appointed the Inspector of Elections for this meeting. 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 Valentine, an employee of the transfer agent to the effect that notice of this meeting was mailed on September 13, 2021, to all shareholders of record of Sachem Capital Corp. as of August 30, 2021, the record date for this meeting. Unless specifically requested, we will dispense with the reading of such notice. A certified list of 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 30, 2021, there were 28,315,930 eligible votes. I direct 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 the 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 John Villano, Leslie Bernhard, Arthur Goldberg and Brian Prinz to the company's Board to serve until the 2022 Annual Meeting of Shareholders or until their respective successors have been elected and qualified. The Board recommends a vote for each candidate. This motion has already been moved and seconded. [Operator Instructions]

We'll now pause for a moment to see if there are any questions. It does not appear there are any questions at this time. John, please go ahead.

Thank you, David. We will skip the second item of business for now and move on to the third and fourth items. The third 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, 2021. The Board recommends a vote for the proposal. This motion has already been moved and seconded. [Operator Instructions]

We'll now pause again for a moment to see if there are any questions. And it seems like there are no questions at this time. John, please go ahead.

Thank you. The fourth item of business is the approval of a nonbinding advisory resolution relating to executive compensation. The Board recommends a vote for the proposal. This motion has already been moved and seconded. [Operator Instructions]

We'll now pause again for a moment to see if there are any questions. And it seems like there are no questions at this time. John, please go ahead.

Thank you. The fourth item of business is the approval of a nonbinding advisory resolution relating to executive compensation. The Board recommends a vote for the proposal. This motion has already been moved and seconded. [Operator Instructions]

We'll now pause again for a moment to see if there are any questions. And it appears there are no questions at this time. John, please go ahead.

Thank you. With respect to the second item of business, to approve a charter amendment to increase the number of authorized common and preferred shares of the company, approval requires the affirmative votes of more than 50% of the common shares eligible to vote at the meeting or 14,157,966 common shares. The company would like more time to solicit shareholders who have not yet voted on this proposal. Therefore, I hereby make a motion to adjourn the vote on this proposal to November 3, 2021, at 10:00 a.m.

I second the motion.

I will now call for a vote on the first, third and fourth items. 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, they need to take any further action. We will now pause for a few minutes to give shareholders an opportunity to vote. [Voting]

The voting is now closed on the first, third and fourth items. I ask the inspector commensurate tally of the votes and announce the voting results. Following announcement of the voting results, 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 has been duly reelected as Director of Sachem Capital Corporation. The advisory approval of the appointment of Hoberman & Lesser LLP as the company's independent auditors for the fiscal year ending December 31, 2021, has been approved. And the nonbinding advisory resolution relating to executive compensation has been approved. The motion to adjourn the vote on proposal 2 to amend the company's charter to increase its authorized capital passed.

Thank you, Ms. Stanley. I congratulate my fellow directors on their reelection. A motion to adjourn the meeting as to the first, third and fourth agenda items has already been moved and seconded. The meeting will now be adjourned as to those items. We will now turn to management's presentation, after which I will entertain questions from shareholders.

[Operator Instructions] We'll now pause for a moment to see if there are any questions. It does not appear there are any questions at this time. Please go ahead, John.

Thank you, David. Please take a moment to review the forward-looking statement included in our presentation. You should fully understand the risks of reliance on these statements and should evaluate all statements contained herein completely. Finally, any statement, conclusion or assumption made by Sachem is not a predication of future events. As you review this slide, let me give you some background on our company and the commitment of management. 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; 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 remains stout and robust in difficult times. During the period from December 2010 to the date of our IPO in 2017, Sachem sourced 175 partners, raised $28 million in equity capital 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 and continued investment in the company. Our initial 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. 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. We are really a seller of our mortgage notes. Since our inception and through December of 2020, Sachem has made approximately 1,500 mortgage loans with an approximate principal balance of $381 million. Our historical loss percentage on these loans is approximately 1%. I would like to touch on a few points. First, Sachem is internally managed with a full-service business model that is highly scalable. Second, we are a disciplined underwriter based on a conservative property valuation; third, we maintain a conservative approach to portfolio diversification and finally, our ability to now access capital markets for low-cost debt, fueling loan and revenue growth. 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. Here are some factors for you to consider as you contemplate an investment in Sachem. First, management owns greater than 7% of the company and are not sellers of stock. We are working owners with a focus on bottom line performance; second, our loans are high-yield assets, not directly tied to interest rate fluctuations; third, our leverage is low compared to our peers; fourth, the management team can protect invested assets and provide stability of growth and profits; fifth, Sachem is a benefactor of an aging housing stock, resulting in an unrelenting demand for our loan products. Our loan backlog is approximately $60 million; sixth, we have a history of significant profits and a track record of managing troubled assets with minimal losses; and finally, our business model is robust, scalable and highly profitable as evidenced by our recent filings. As a nonbank finance company, Sachem is an obvious choice for developers as they look to finance their current opportunity. We have found that ease of finance carry significant weight to the developer finance equation. Why then is Sachem part of the developer value equation? First, Sachem will lend on most all property types. Sachem will allow real estate collateral as well as borrower earnest money deposits. Further, a credit blemish will not deter financing. Again, time from application to close is short compared to banks. Sachem is bridge financing, so a higher cost of interest and fees is not significant in the overall project economics. Construction draw financing is quick when compared to banks. And finally, Sachem Canon will extend a note to accommodate a borrower if delays have occurred. 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 and access to opportunities. Further, long-term trends in existing housing and single-family housing starts show long periods of under capacity and a shortfall of new housing. Some important points from this slide. First, lack of housing, COVID and a limited number of new housing starts have created shortages giving rise to higher prices, thus protecting invested loan principle; second, the age of the housing stock in the U.S. will give rise to renovation opportunities and subsequent fix-and-flip business. If investors and developers can earn reasonable returns on invested capital, the fix-and-flip business will remain strong and quite robust. Shortages in housing inventory have given rise to rising prices of home resales as developers search for qualifying property to renovate. Quality renovation property is scarce due to moratorium on foreclosures as well as evictions. Government mandates have slowed the overall pace of foreclosures limiting the supply of distressed fix-and-flip property. At this point, the courts are jammed with cases creating a backlog with significant time delays to unlock capital. Connecticut, our primary market, has enjoyed significant real estate benefits due to the COVID pandemic. First and foremost, rising real estate prices exist throughout New England, as people leave densely populated urban areas for more living space, better schools, remote work and an overall better quality of life. Lower interest rates have made homes more affordable and thus help push real estate prices higher. Many of our borrowers will now fit the local banks lending box. As a result, most of these A- or B+ loan opportunities find their way to nonbank lenders like Sachem. Our borrowers require quick closings and for this service, most often negotiate lower purchase prices on the real estate they are buying. They also look for flexibility and credit determination, loan structuring and construction funding. Most banks are unable to accommodate these borrowers due to regulatory restrictions. Quite simply, the banks are fighting a battle with a 600-pound gorilla on their back and cannot effectively compete with nonbank finance. Sachem is now looking for larger loans with more financially stable and seasoned developers. While these loans are often priced more attractively for the borrower, our loan funds are invested for longer periods and often with prepayment fees and success fees upon completion. The rapid payoff of mortgage notes prior to maturity often occurs in smaller loans, thus reducing returns, while the funds remain idle as new opportunities are located. Our business model is based on just a few key factors: first, disciplined underwriting and unwavering due diligence; second, extensive collateral and analysis; third, the 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. As stated previously, 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. Bottom line results are almost automatic with a properly underwritten loan package. 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 the 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 and 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. Important takeaways from this slide, ongoing underwriting diligence with appraisals, site visits and background checks, our ability to conclude diligence quickly and fund timely. And finally, ongoing borrower interaction through servicing personnel and asset management, such as ongoing property inspections. Sachem has been predominantly a Connecticut-based lender with as much as 90% of our loan originations sourced within 70 miles of our office. Since the end of 2019, the company has diversified our loan portfolio to include operations in Florida, Texas and 9 other states. Our moves beyond the Connecticut border are opportunistic in nature as we search for low-risk, high-yield opportunities with attractive valuations. We are continually searching for lending partners and originators to assist in providing us deal flow and boots-on-the-ground service. We expect our expansion to continue throughout 2021 and into 2022. This slide reflects factual information on our loan products for the quarter ended June 30, 2021. Let me clarify a few items. We have 2 loan products, a 1-year and a 3-year loan. Origination fees range from 2% to 5% of the loan principal with credits for prompt payoff. Both loans are interest-only with principal payable at maturity. Approximately 90% of our loans have a note rate more than 12%, and approximately 85% of our notes are 1-year paper. In a difficult situation, the interest rate on the note will go to 18%, our default rate and remain until the default is cured by the borrower. In recent quarters, our gross loan origination income has increased significantly due to our transition to larger loan sizes and increased lending volume. Our maximum loan-to-value is 70%, and no borrower has commitments to Sachem for more than 10% of the portfolio. Finally, the company is offering interest rates as low as 6.9% plus origination fees to well-qualified and collateralized borrowers, projects that fit specific guidelines for inclusion in our Churchill credit facility. Our portfolio is designed so no single loan or borrower will cripple our ability to pay dividends to our shareholders. Historically, the residential fix-and-flip portion of our portfolio has averaged between 65% and 70% of total loan balances and is now 60.7%, reflecting our transition away from resi fix-and-flip to better loan-to-value propositions for our capital. 52% of our loans are 500,000 or more, reflecting our move to larger loans and better sponsors. For clarification, when we mentioned residential mortgages, we are talking about 1 to 4 family buildings held for investment or rental. We are not a residential lender to homeowners for their residents and thus are not subject to the lending requirements imposed on banks. Consistent loan growth and minimal loss reserves confirms our lending process. As you look at our operating performance since our IPO in February of 2017, please take note of the following occurrences within the 18 quarter period. First, in June of 2019, the repayment of our Webster Bank line of credit. This loan was paid prior to maturity, incurring approximately $800,000 in onetime costs to terminate the facility; second, in November of 2019, the beginning of restructuring our balance sheet moving to unsecured bonds to finance our loan growth; and finally, the occurrence of the COVID pandemic beginning in February 2020. During this 18-quarter period, our average quarterly earnings per share was approximately $0.10 and total assets have grown approximately 5x to approximately $300 million as of June 30, 2021. Further, we have invested heavily in personnel, technology and workspace during this period. These reinvestments in our company reduced earnings per share but reinforced the long trend -- the long-term trend in earnings and dividends. Prior to our IPO, Sachem grew its balance sheet based on capital contributions from new and existing partners. Simply, this is a crawl-before-you-run strategy, ultra-conservative and low overhead. It is also the most difficult way to grow a business. While our current business model has changed somewhat over the years, there are important threads we need to review here. First, virtually all our assets are encumbered. While our unsecured bonds are more costly than bank finance, the bonds allow us to take advantage of lending opportunities should they arise, contain only one covenant be repaid without penalty and allow for additional financing in a timely manner; second, our average loan principal has grown significantly during the past 2 years as we move to better sponsors and collateral; third, we are seeking lending partners that have a business mindset similar to ours. This is an attempt to diversify our asset concentration, search for better lending opportunities and get boots-on-the-ground coverage. And finally, we are not big on overleveraging our portfolio. As with all our competitors, Sachem benefits greatly from debt and the use of leverage. Industry-wide, leverage will boost revenue and ultimately, EPS, making management look like superstars. Overleverage is like playing with a sharp knife, a slight misstep, and pain sets in. The key is balance. During June of 2021, Sachem raised approximately $45 million of preferred stock to bolster our balance sheet. And as you all know, we utilized our ATM to raise equity capital with sales above our book value. This is not a money grab but an ongoing plan to manage our assets and our downside risk. As you are aware, our financing plan worked perfectly during COVID as the world instantly look for capital. We took advantage of lending opportunities. Having the right mix of capitals lets our executive sleep well at night, and as our investors, you should too. Our strategy is to upsize our historical lending model from small balance residential fix-and-flip to larger multifamily, high-quality fix-and-flip and commercial loans, where quality of sponsorship and project protect our invested capital. As we review this slide, there are important takeaways to note. Loan origination volume is expanding as well as origination fees. Remember, remember our review of Line 16, where fee income is an ever-increasing part of gross revenues; second, loan length is decreasing, reflecting a robust real estate market and proper underwriting. One important topic not contained in this slide is the complete restructuring of our balance sheet as we moved from all our assets being secured to unsecured lending with significant equity to weather any market downturn. Our focus is protecting our assets and providing safe, reasonable returns. At Sachem, we like to lend often and early in the process. Lending early minimizes risk and allows for attractive loan pricing. Lending early also provides room for the refinance lender to return our capital. Significant refinance activity provides multiples of fees like legal, processing, inspection, appraisal and background. Please take note of the following metrics. Our weighted average interest rate holds up nicely as other lenders fight rate compression. Our average outstanding loan balance is up 84% from 2018. Our average loan term has decreased from 11 to 8 months reducing interest rate risk. Our growth in total assets has increased approximately 244%. And lastly, foreclosures, despite COVID are in check. All information contained in this slide is readily available on the SEC website. As we continue to improve our balance sheet, notice the reduction in our debt-to-equity ratio and the increase in our asset coverage. We will continue to bombproof our balance sheet as this real estate market ages. All information contained in this slide is also readily available on the SEC website. As you all know, we have accessed our ATM during 2020, raising significant amounts of capital with sales of stock well in excess of both book value. During the first half of 2021, we sold approximately 4.5 million shares, realizing net proceeds before offering costs of approximately $27.6 million. As we grow our shares outstanding, we have maintained our EPS while strengthening our balance sheet. This slide concludes our presentation. If you desire or ask any questions, please feel free to do so.

We'll pause once again to see if there are any questions at this time. And it appears we do not have any questions at this time. I'll turn it back to you, John.

Thank you, David. Thank you all for your attendance at the meeting. We look forward to your attendance on November 3, 2021, at 10:00 a.m. to vote on our charter amendment. I hope everyone stays safe.

This concludes the meeting. You may now disconnect.