Greetings and welcome to Sachem Capital Corp. Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Stephen Swett, Investor Relations. Thank you, Mr. Swett. You may begin.

Good morning, everyone, and thank you for joining Sachem Capital Corp's third quarter 2024 earnings conference call. On the call from Sachem Capital today is Chief Executive Officer, John Villano, CPA; and Chief Financial Officer, Nick Marcello. This morning, the company announced its operating results for the quarter ended September 30, 2024 and its financial condition as of that date. The press release is posted on the company's website, www.sachemcapitalcorp.com. 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, the company 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 the SEC filings. With that, I'll turn the call over to John.

Thank you and thanks to everyone for joining us today. As we previously noted, the current macroeconomic environment has posed significant challenges for small balance lenders. Borrowers are facing substantial pressure from construction and labor costs that continue to rise, elevated interest rates and stricter credit requirements imposed by banks. These challenges amongst others have led to increased uncertainties around project completion, which ultimately have made it difficult for our borrowers to secure long-term financing. As you know, the Federal Reserve just reduced the interest rates by 25 basis points following a 50 basis point decrease in September of this year. This trend is encouraging and positive for borrowers and lenders alike and consistency of rate cuts will spur borrower optimism and open the door for many to access the financing they need. For the last two years, Sachem has reduced originations as we uphold a diligent and prudent approach to our underwriting and avoid dilutive capital raises. In this environment, we are taking the necessary measures to return to accretive growth, while continuing to navigate through this period of low origination activity. Subsequent to quarter-end, we began negotiations regarding a sale of mortgage loans of approximately $78.8 million with the anticipated recovery of approximately 70% of the unpaid principal balance. This pool of loans was generally originated during the 2021 and 2022 period when rates were lower and costs were expected to stabilize sooner. Unfortunately, our borrowers were hit with a combination of an unprecedented rapid rise in interest rates and inflated material and labor costs all at once. This combination rendered many real estate projects unviable. While not the outcome we prefer, the sale of these loans is proactive and will reduce the amount of foreclosure and nonaccrual loans, allowing us to reinvest in accretive assets. Further, we…

Thank you, John. For the third quarter 2024, Sachem recorded revenue of $14.8 million compared to $17.8 million in the same quarter of the prior year. As John previously mentioned, the reduction is mainly attributable to the impact of reduced loan originations as we remain prudent with short-term debt coming due. Interest and fee income from loans declined compared to the same period in 2023, while income from partnership investments rose due to the recent investment in Shem Creek during 2024. Over the past four years, Sachem has invested approximately $47 million in Shem, which has been delivering attractive double-digit returns with no losses to-date. We are excited to leverage the many synergies this partnership provides and appreciate the diversification it brings to our business model. Total operating costs and expenses for the third quarter of 2024 were approximately $19.6 million compared to approximately $11.3 million in the prior year quarter. The increase was driven by multiple factors, including additional CECL reserves totaling $8.1 million and approximately $2.3 million in G&A expenses. As a reminder, the provisions on the loan portfolio are non-cash charges reflecting the ongoing uncertainty within our industry and a broader economy. This puts our current allowance for credit losses for mortgage receivable at $20.2 million or approximately 4.2% of unpaid principal balance. Most of these reserves are held against commercial real estate assets as our residential mortgage portfolio continues to hold its value on a relative basis. G&A expenses increased compared to the same quarter in 2023, primarily due to 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…

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 accretive projects. Our goal is to de-risk 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.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Gaurav Mehta with Alliance Global Partners. Please go ahead.

Yes, thank you. Good morning. I wanted to ask you on your non-accrual loans and the mortgage loans 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-accruals in the last quarter. So hoping to get some more color on non-accruals. 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, Gaurav. So, the non-accrual, I think 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 partners one of the, sorry, the second mortgage holder in the deal that has, closed 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, there's just 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 million plus number. Majority of the pool the other sort of portion is probably has another nonperforming 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 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 kicked 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 the -- 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.

Okay. Thank you, Nick. Gaurav, 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 $147 million total number. And so I guess as you think about the remaining non-accrual pool, should we expect like similar outcome for what would remain in the non-accrual 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 lastly, 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, we'll have options. Our loans that are due in December are $34.5 million. Most likely it will be a full pay down 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.

Are you done with the question, Mr. Mehta?

Yes. Thank you.

Thank you. Next question comes from the line of Matthew Erdner with JonesTrading. Please go ahead.

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

Got you. Yeah, sorry, go ahead.

Regarding the office, there's yes, no problem, $10 million plus of the $78 million going to the sale of our office properties. So certainly like there's a sizable portion of that, that our office assets that we're going to be selling you have to continue to lower that exposure.

Got it. That's helpful. And then turning to another question with regard to capital allocation, it looks like you guys repurchased almost 0.5 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 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 12.2 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 accretive capital, it's going to be a slow play.

Got it. That's helpful. Thank you, guys. Sorry, go ahead.

Thank you. Next question comes from the line of Tyler Batory with Oppenheimer and Co. Please go ahead.

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've moved 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. 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 you know I'm not happy, right? Just to 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 $0.05 dividend. 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 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?

It is a great opportunity for us. However, without capital, we have to kind of mind our business. And 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 past. We feel that Shem Creek has 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.

Thank you. Next question comes from the line of Chris Muller with Citizens JMP. Please go ahead.

Hey, 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? Are you through the bulk of what you expect to come through or is there another, I guess, steady flow of small modification 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 to -- there's nowhere for them to go quite honestly and which leads us to selling the notes or foreclosing. So 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 nine inning for many. But if we can't get them to fit our guidelines, they kind of have to go.

Got it. So should we expect to see a pickup in REO over the next couple of orders?

No, I don't really see it. A good portion of our loans in foreclosure resolve themselves, right? It's either through a short sale, another interested party, a refinance. Our REO has not grown tremendously over this whole period, right, 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 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's 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, it alleviates the risk. So what we're trying to do is be proactive with the sale -- with the loan pool to get in front of our borrowers to say, hey, 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 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 CECL 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 that 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 -- 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 at some point in 2025.

Thank you.

Thanks.

Thank you. Next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Hey, guys. For the $78 million loan sale, is that going to just be a realized loss in the fourth quarter or it's going to be part reserve recovery? How's that going to work accounting wise?

You'll see a reserve. Yeah, I'll just.

No, Nick, go ahead.

You'll see a reserve recovery, Chris, 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 math that is in 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, 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 credit facility will cover if need be?

Yes. That's right.

Okay. And the final question is on the Shem Capital Investment. 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. The P&L effects are still it was too short lived during the quarter or for the year, let's say.

Okay.

But that was under the manager investment. 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.

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

Thanks, Chris.

Thank you. [Operator Instructions] 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.