Good day and welcome to the Sachem Capital Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the call over to Mr. Kevin Reed. Investor Relations, please go ahead.

Good morning, everyone, and thank you for joining Sachem Capital Corp's third quarter 2023 conference call. On the call from Sachem Capital today is Chief Executive Officer and Interim Chief Financial Officer, John Villano, CPA, and Vice President of Finance and Operations, Nick Marcello. Yesterday, the company announced its operating results for the quarter ended September 30th, 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 US Securities and Exchange Commission, which 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 material 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, the company will be discussing certain non-GAAP financial measures. More information about these non-GAAP financial measures and reconciliation 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.

Thank you, Kevin, and thanks to everyone for joining us today. I am pleased to report Sachem produced solid results in the third quarter despite a persistently difficult macroeconomic backdrop. Stubbornly high inflation coupled with the market's uncertainty as to the direction of the Federal Reserve's policy has kept us measured and prudent in our approach with shareholders' capital. With this discipline as our guide, Sachem achieved revenue growth of approximately 30% to $17.5 million compared to the same quarter in 2022, and net income attributable to common shareholders of $5.2 million, or $0.12 per share. Our revenue growth is a direct result of our deliberate underwriting, a solid balance sheet, and in-house liquidity. Further, our experience in navigating difficult lending cycles has allowed us to build a resilient portfolio structured to reduce steady, above average, risk-adjusted returns. Having underwritten over $1 billion of loans through a multitude of cycles, we have a forward-looking perspective that is grounded in knowledge learned from past experiences with an ongoing watchful eye on credit quality and the protection of our assets. It is no longer news that loan originations in the commercial and residential real estate sector have slowed to a trickle, if not stopped completely in some areas due to the dramatic rise in interest rates over the past two years. Furthermore, in recent weeks, many mid-sized financial institutions, as well as non-bank lenders like Sachem, have reported an increase in non-performing loans in the third quarter. While we view this situation as an opportunistic way to grow market share, we are also mindful of our portfolio management and capital resources. Specifically, we made some significant progress regarding non-performing loans in the quarter, reducing them by approximately 12% quarter-over-quarter. Lastly, loan impairments are down slightly compared to the year-ago, nine-month period. The…

Thank you. I'll begin the question-and-answer session. [Operator Instructions] First question will be from Christopher Nolan, Ladenburg Thalmann. Please go ahead.

Hey, John. How would you characterize the average term of a loan in the third quarter versus earlier in the year? Is it long or just more borrowers are asking to extend and so forth?

Good question, Chris. So every one of our loans are a one-year term. There're rare circumstances where we may go to 18 months or even 24 months. Those are rare. What we're seeing now is our borrower is coming to the end of term. In normal circumstances, there would be [Technical Difficulty] taking a long time. And so what we're doing is we're giving them additional time. And this is always if the loan is performing as we've agreed and in accordance with the loan docs. So what we're finding now is the loans are going a little bit longer as we modify to give them time to refi or time to even to complete a project. So we're probably moving from 12 to 18 months. Overall, the average term is still less than 12 portfolio-wide, but we are extending to give our borrowers a reasonable chance to work out of their contract with us.

Got it. And then I noticed that your unrestricted cash holdings have increased in the quarter. And given that you have a bond due in June 2024, is the idea to just build up cash and use that to pay down the maturing bond?

As a last resort, yes. So we are building a war chest, not only for the upcoming bond in June, there’s also one coming due later in the year in December. So we want to be liquid first, and when we consider the macroeconomic environment that we're operating in, I think cash is valuable. So we're blending now the cash need for our bonds, the cash need for opportunity and then the cash for safety. So there's a little bit of a tug of war going on here, trying to be prudent with our shareholders' capital. We have a clear eye on what's coming due in June. We will be ready for it. Hopefully, the markets loosen up a bit and we can refinance. I believe that first series of bonds are at 6.875%. it's kind of a far cry from where we are today. So it may be non-accretive if we have to go to the markets to get it, but, in any case, cash in our bank is earning 12 plus two. So we're still trying to figure that out.

Great. Thank you. And final question. I estimate your investment spreads widened over the quarter. Is the -- and given that you also did a reserve allowance release, is the thought that maybe given you can run with a little less leverage than before? Is the idea to dial back the leverage or just to keep the leverage at similar levels?

What we do is we manage the portfolio based on our bond covenants. We can lend every single penny we have, which wouldn't be prudent nor wise in this world that we're in. So remaining a lot of space between the top end of our bond covenants. Yes, our margins have widened a bit. We are now, in this quarter, seeing some pressure at the [13 and 3] (ph) level, where deals and projects are not workable at those rates. So that is looking to be the top end for us at the moment. And we're falling back to our customary 12% and two origination points, and those deals are still getting funded.

Great. That's it for me. Thank you for taking my questions.

Thank you. Next question will be from Tyler Batory, Oppenheimer & Co. Please go ahead.

Thank you. Good morning. John, can you talk about your approach to originations here? What does the pipeline look like? You think this Q3 number is a good run rate to be thinking about the next couple of quarters?

So yes, we're planning on doing somewhere in the vicinity of $50 million in originations through the third quarter. We do have some expected large loan payoffs coming due which may increase that number. But we're kind of figuring on $50 million. We have a bunch going this week. But I wouldn't be -- I wouldn't push further than that. I think that will be a very consistent number for us to work with.

Okay. Great. And then in terms of the competitive environment, some of your peers, some that may be less well capitalized, some that have a different approach to the business, just kind of talk about how they're doing. And I'm really interested if that can be a potential opportunity for you?

Yes, it's -- first of all, certainly, it is an opportunity. Just last week, we assisted a refinance of a loan in Central Florida with a smaller lender, a small public lender. So we will step up and do certain deals if they meet our guidelines. But let truth be told, a lot of the lenders that are not distressed funds, they're struggling. They have the same capital constraints that we have, not as well capitalized. The balance sheet is not as strong. They may have partners as opposed to shareholders that demand cash and extract cash from the ongoing operations when there was a little bit of a panic. So there's a lot of, first of all, competition from distress, but on the -- the regular business lenders are struggling, and I'll throw banks into that mix. The local bank is struggling. They don't know what to do. They can't get deals done. We are seeing great deals come through here that these borrowers should be at a bank. They should be SBA, they should be at a bank, and they should be getting much better rates that we can offer. It's just not there. So you have tightness at the marginal borrower level. You have tightness with the better borrower that expects great rates from the banks and great service, they're not getting it. So we're getting a look at all of this, and our guidelines, they're pretty stiff right now. We're asking a lot of questions, and I'd have a pretty good resume to get a loan here at the moment. So we love -- we kind of like this. We wish we had an extra $100 million to go to work with. But competition is fierce from distressed funds. They think everything is distressed, not really the case yet, not. There are people looking to fund and complete projects, and they're having trouble getting the capital that they need.

Okay, that's great to hear. That's all from me. Thank you.

Thank you. Next question will be from Matthew Erdner of Jones Trading. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. I saw a new line item on the balance sheet, investments in rental real estate. Could you kind of expand on that and tell me what that is?

Yes. So during the quarter, we purchased a piece of commercial real estate. It is an office project. It is one-third leased. It is the former Bridgewater estate, Bridgewater, the PE firm owned by Ray Dalio. We bought their corporate offices. Part of our play there is to develop a portion of the property into residential housing, which we're working on at the moment. A successful completion of the residential portion of the project will reduce our basis in the property to 50%. So we think it's a good long-term hold. Sachem will take a piece of that business. We've had very good leasing interest from some very large players. The building is 50,000 square feet approximately. We think it's a great project, and it's a way for us to reduce our exposure in a commercial office product. And if you didn't know, the project, Matt, is in Westport, Connecticut.

Got it. Thank you. And then should we expect things like this going forward? Or is this just a onetime opportunity that you guys felt like you could capitalize on and provide some value add there?

No, this is a good question. So bear with me on this answer. It is a onetime project. It is a project brought to us by our Urbane group. We bought them a year ago. They go out and they'll look for projects that are accretive to us, and they search this out, they're involved. We're wrapping up a project with them now in Westport, which is the sale of a 12-unit condo building on the river right downtown. So they've identified this property. The same team is going to develop the building, also do the permitting for the residential.

Got it. Thank you.

Thank you. [Operator Instructions] Next question will be from Chris Muller of JMP Securities. Please go ahead.

Yeah. Thanks for taking the question and congrats on a nice quarter. So John, you talked about in the past doing larger loans given the lower levels of competition out there. So I guess are new loans continuing to trend larger? And what is your outlook for that into 2024 as more of the regular way competition returns to the market?

Well, the smaller loans don't have the margins in terms of profits to the developer that they used to. Properties are fairly priced. And when you factor in, whether it be permitting cost, renovation or even our debt service, the smaller project just can't get done here anymore. So we're focusing on larger deals where, should the developer slip a bit, he has room to succeed. So we're looking for deals that have better margins, which most often will take you to a little bit of a larger deal, better quality sponsor, better capital light sponsor. And we've had better success with that. Very few of these projects go off without a hitch.

Got it. That's helpful. And then I guess on the CECL recovery, is that driven more from the macro picture changing from the last quarter? Or is it more behind like the NPL reduction and asset-specific improvements?

For this question, Chris, Nick Marcello, is on the call here. He is our Vice President of Finance and Accounting. Nick, would you mind helping me with this one?

Yeah, absolutely. Hey, Chris. So that CECL -- the recovery of CECL is a result of the mortgage portfolio shrinking a bit during the quarter. Our CECL reserve is down on a portfolio basis. So you'll see quarter-over-quarter, you saw a little bit of shrinkage in the mortgage balance as a whole as a result of that large payoff that John referenced on the call.

Got it. Very helpful. Thanks for taking questions.

Thank you. That concludes our question-and-answer session. Now I'd like to turn the call back over to Mr. John Villano for closing remarks.

Thank you, everyone, for joining us today. We look forward to updating you again next quarter. Thank you.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.