Greetings, and welcome to the Sachem Capital Corp. Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kevin Reed, Investor Relations. Thank you, sir. You may begin.

Good morning, everyone, and thank you for joining Sachem Capital Corp.'s second quarter 2023 conference call. On the call from Sachem Capital today is Chief Executive Officer and Interim Chief Financial Officer, John Villano, CPA; as well as Vice President of Finance and Operations, Nick Marcello. Yesterday, the company announced its operating results for the quarter ended June 30, 2023, and its financial condition as of that date. The press release is posted on the company's website, www.sachemcapitalcorp.com. In addition, the company filed its quarter-end Form 10-Q with the U.S. Securities and Exchange Commission and can be accessed on the company's website as well as the SEC's website at www.sec.gov. If you have any questions after the call or would like any additional information about the company, please visit our website. As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will be discussing certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our SEC filings. With that, I'll now turn the call over to John. John?

Thank you, Kevin, and thanks to everyone for joining us today. Sachem produced another solid quarter of revenue and earnings growth while continuing to invest in our business. We accomplished this in a difficult operating environment, marked by ongoing federal reserve rate hikes, banking sector pressures and lingering inflation. Importantly, Sachem has remained disciplined in our approach and our second quarter results were quite strong. We achieved record revenue growth of more than 31% to $16.5 million compared to the same quarter of 2022 and net income attributable to common shareholders of $4.8 million or $0.11 per share. These results highlight the deliberate and prudent approach we apply through our underwriting, which coupled with the resiliency of our loan portfolio, has allowed our performance to remain steady amid these ever-evolving economic conditions. As recent headlines confirm, new loan originations in the commercial and residential real estate sector have slowed dramatically in the wake of a rapid rise in interest rates over the past 18 months. As larger banks pull back, we view this as an opportunity to grow market share and continue to expand the Sachem platform. As we discussed last quarter, while these factors provide opportunity, we will not bear from our proven and disciplined approach to our sourcing and underwriting of loan opportunities. Given our ongoing cautionary outlook, our originations remain conservative and below historical levels. In the second quarter, we funded approximately $55.6 million of mortgage loans, including loan modifications and construction draws. While our originations have leveled off similar to the rest of the industry, we are seeing a strong pipeline of new requests for modifications and construction loans. As noted over the past several quarters, it has been our practice to lend to borrowers with strong credit profiles and a proven track record of performance…

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Tyler Batory with Oppenheimer & Co. Please proceed with your question.

Hi, good morning. Thank you. So first question for me is just interested in what you're seeing - loan pipeline, what that looks like today compared with a few quarters ago, where you're seeing the most opportunities. And it sounds like you're still keeping your cautious stance. Should we expect origination activity to remain pretty consistent with where you were in the first half of the year for the rest of this year?

Good morning, Tyler. First, our pipeline is still very, very robust. Its creation and sustainability is really based on banks and our competitors' inability or fear to fund our types of business purpose loans. We expect our pipeline to remain unbelievably large really through the end of this year. And with that, we are unbelievably selective in picking what we think are the best opportunities of the bunch. And these loans in our pipeline are from all over the country. And as we've discussed in the past, we are doing our very best to stay on the Eastern Seaboard. We're still very strong in New England and the Southeast part of the U.S. Opportunities exist for us everywhere. The bank's failure to respond to borrowers' needs have turned over a lot of their better paying customers to us. And we try to take advantage of them in terms of providing the services that they so desperately need to either start or finish projects. Hopefully, in the long run, we acquire a customer. But for right now, there is a steady stream of good quality borrowers and great projects. With respect to origination volume, as we talked in our release here, we have seen at our end, a reduction in funding, and it's kind of by design. We have limited amounts of liquidity as does everyone in our space. We have sufficient working capital. We are doing our very best not to spend every penny, so we're playing cautious. I'd like to just drop a couple of numbers in here that I think you may find useful. For the first six months of this year, 2023, we funded 114,000 - 114,500,000 in loans, and we received $66 million in payoffs. And if we were to compare that to the year ago period where we funded $192 million of loans with $61 million of payoffs. We'll give you the feel of how we're condensing our workload that we're picking better and better deals and doing our very best to conserve our capital until liquidity improves in our industry.

Okay. Very helpful commentary there. My follow-up question, just in terms of loans and foreclosure loan modifications, potential distress out there. Just talk about kind of what you're seeing with those two items. I mean, is that something that maybe trends lower in the next couple of quarters, given you're being a little bit more selective in terms of the capital that you're deploying?

That's a good question and, of course, a very important topic. We have a bunch of foreclosures, and we have a bunch of modifications and extensions, as I discussed on our call. These numbers will start to wind down. These are loans that were originated during a very robust real estate cycle. There was a time where we were doing given a given quarter 125 loans. And those loans are looking for a home, which is our biggest problem. The term of our loan runs its course, we have a choice. I can either foreclose, send a demand letter and foreclose where we can extend and modify. And our team is really good at figuring out is our borrower doing what they should, what they agreed to do? Have they maintained the property? Is the construction on process? If in fact, the borrower has done as agreed, we can extend and modify his loan for another year. We are seeing an awful lot of this. And it's really a result of our people, not having a place to go where they have completed projects and no bank financing to assist them really with lower payments and long-term debt capital. So to be very specific, we see this, I don't want to say coming to an end, that would not be fair. We do see the amount of modifications and extensions slowing down tremendously towards the end of the year. Remember, our year - our loans are one year. We were very busy last September and December, and we started to slow down in March. So we have another few months of this, but I just want to give you - I just want to reiterate what was said in the call that we modified 62 loans this quarter, and the modifications resulted in a gross $2 million of additional fee income to Sachem. And this income is really supporting our lower level of originations.

That's all for me.

Okay. Thank you.

Thank you, John. Appreciate it.

Okay, Tyler. Thank you.

Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.

John, what sort of leverage level are you targeting? And given the inverted yield curve, do you see any sort of refinance opportunities at a lower rate potentially?

Okay. So let's talk about leverage. Overall, our leverage level really not able to increase our leverage dramatically at this point. And there's really two reasons for that. One is finding affordable debt capital is very difficult and finding it in an amount that would be beneficial to us. Second is the covenants on our short-term notes. So we are limited to a 1.5x asset coverage ratio, which - it's a good thing and a bad thing. It allows us to walk at a good pace. It doesn't allow us to sprint and get ahead of ourselves, so we did increase a little bit of debt in the quarter. We are always looking to raise equity. In fact, we have utilized our ATM during the first six months on a very sparing level, raising about $10 million during the first six months. So we continue to balance debt and equity, and it's all about having a real fortress of a balance sheet. With respect to yields, first and foremost, we don't have any pricing pressure at the moment. We still have a great spread on our loan products compared to our weighted cost of capital. We have the ability to put a lot of money to work with really great spreads still not as good as they were two years ago, but still very, very good while we would hope the rise in interest rates would kind of slow down here. I think if it goes too far, I mean we could have a crack. But as of right now, margins are good. We are always looking for affordable debt capital. I feel like we're a few months away from finding that.

Our next question comes from Matthew Erdner with Jones Trading. Please proceed with your question.

Hi, good morning. Thanks for taking the question. So you mentioned that you're seeing good spreads still. What are those spreads looking like? And then can you also describe what a typical modification looks like for you guys? You mentioned at your extension, but you are acquiring more equity capital to be put in. Just what are the requirements there? Thanks.

So in terms of loan spreads, our cost of capital is between 8.5% and 9%. We are currently company-wide lending at a minimum of 13% and 2%, pushing higher, mostly 13% and 3%. The 3% is the origination, so our margins are very good. These are 1-year loans. We - this is not - so we were 12% and 2% when rates were much lower. We were borrowing at 6% with our unsecured notes. So our margins have been compressed, but it has not been devastating, okay? Now our typical modification. So there's two kinds around here, it's - does the mod need new capital from us? Or is it just a time mod, projects done, projects cash flowing and our borrower needs another year or six months to find suitable refinancing or sale. The easy ones are the time mods. We have a completed project. It's a timing issue. I talked about the banks and our competitors' failure to when their fear is causing us a little bit of a heartache, a heartache for our borrowers as well who have to incur additional costs. Our heartache is that I have to explain this stuff every quarter. The other mod where our project may have run over budget due to material labor, whatever lack of labor. Those require a little more effort on our part. And our team will go in and really underwrite the loan again, not as full but mostly, mostly complete. And in that regard, we determine if the loan is a keeper, meaning our borrower has done as agreed within his loan docs or is our borrowers so far off track, we need to put an end to it. So if the deal requires more capital and we see light at the end of the tunnel, we will provide capital to complete the project, maybe provide some liquidity to the borrower, so we can get three or four months down the road to complete a sale, all right? Those are differences. Like I said, we cleaned up 62 of those during the quarter. I expect there to be another 62 and last quarter, we earned $2 million in gross fees.

Yes, that's helpful. And then as a follow-up, of the ones that you're not able to clean up and you take on as real estate owned? What is the time line there, how long it's going to be on the balance sheet? And what have you guys been seeing in terms of sales and how quickly you can get out of these properties?

Unfortunately, in New England, the foreclosure process is absolutely horrendous. Most of our foreclosures are resolved before we have to take back a property, okay? So it's unbelievably hard to believe, but as you can see, our REO balance from quarter-to-quarter is relatively stable. It's $5.2 million a year ago. It's $5 million now. I don't want to say that I'm happy having $5 million of REO. It's just the ebb and flow of the product. Trying to add more color there. They resolve themselves basically, Matt, and mostly if it comes back to us, we have a stable of almost 500 developers that we circulate the product, the REO 2, so we have built-in buyers. And as you could check, as you can see in our historic filings, most of our impairments are relatively small when you consider the amount of loans in our portfolio. So these problems kind of resolve themselves, not to say that I'm not going to get a punch in the nose somewhere along the way here. But historically, our loss provisions have been relatively low, I'll even say unbelievably low compared to our peers. We expect that to continue. So all I can really say, these things kind of work themselves out. If our underwriters do what they're supposed to do, it's more a disclosure item than a fire sale.

That's helpful information. Thank you.

Our next question comes from Chris Muller with JMP Securities. Please proceed with your question.

Hi, John, thanks for taking the questions. So to your comment on the pullback from the banks, does this represent a short-term opportunity while they're out of the market? Or do you think you guys can win some longer-term business here?

Don't - the banks always guess wrong, right? They're pulling back. This is an opportunity for us to maybe garner some of the better borrowers, some of their better projects, clearly be able to price aggressively. I think the banks here will come around at some point, but they did this during COVID. And we were just a couple of months into COVID, and we saw that there was an opportunity for us to build our business, and we did work. This is looking and feeling the same way. And what I'm seeing here, Chris, is that the banks are afraid, they're afraid of interest rates. And we have a very interesting situation with respect to the rise in interest rates and the failure of real estate prices to fall. And that just leads me down a path of hey, there is real value of value is created, in my opinion, with new construction, new construction and new building codes, labor, materials, these things are so expensive that it's raising value across the board for all real estate, maybe except for office. The idea here is that older properties in need of repair are being bid up because the cost to build new is so expensive. So - and I think the banks are missing the boat on that. So again, it's my opinion. We'll see what the market shows me a couple of months from now, but we like to zig when they zag a little bit.

Got it. That's helpful. And then the other follow-up I have. So I see some subsequent ATM issuance in the 10-Q. Is that just to support the increased pipeline?

It's - well, yes, yes. Yes, it is. It's part of the balancing between debt and equity - all the time. We don't want to put pressure on our covenants. We want to have capital, free capital should we need it or we see an opportunity. But when we have certain periods during the quarter where we can access the ATM, it's not a blackout and if we feel that there is a market for us to raise some capital, we will go and do that. Let me be very clear. I'm not happy raising capital at $3.75, right? So I just want that to ring loud and clear. Sometimes we have to, and it's not because things are on a fire sale. It's because we're doing that very delicate balance, the dance between debt and equity.

Got it. Appreciate your comments.

There are no further questions at this time. I would now like to turn the floor back over to John Villano for closing comments.

Thank you for the questions. Thank you all for joining us today. I look forward to updating you next quarter.

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