Q1 2024 Sachem Capital Corp Earnings Call
Operator: Good day, and welcome to the Sachem Capital Corp. first quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Sweat, Investor Relations. Please go ahead.
Good day and welcome to the <unk> Capital Corp, first quarter 2024 earnings Conference call.
All participants will be in a listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on a touchtone phone.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Steven Swett Investor Relations. Please go ahead.
Stephen Sweat: Good morning, everyone, and thank you for joining Sachem Capital Corp's first quarter 2024 earnings conference. On the call from Safem Capital today is Chief Executive Officer and Interim Chief Financial Officer John Volano, CPA, and Vice President of Finance and Operations, Nick Marcello.
Steven Swett: Good morning, everyone and thank you for joining sage them capital Corp's first quarter 2024 earnings conference call on the call from say from capital Today is Chief Executive Officer, and interim Chief Financial Officer, John Pullano, CPA, and Vice President of Finance and operations Nick Marcello.
Stephen Sweat: This morning, the company announced its operating results for the quarter ended March 31, 2024, and its financial condition as of that date. The press release is posted on the company's website at www.sachemcapitalcorp.com. As a reminder, remarks made on today's conference call may include forward-looking statements. Such 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 or a more detailed discussion of the factors that may affect the company's results.
Steven Swett: This morning, the company announced its operating results for the quarter ended March 31, 2024, and its financial condition as of that date. The press release is posted on the company's website at Www Dot save some capital Corp Dot com.
Steven Swett: 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.
Steven Swett: 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 companys results. Please refer to our earnings release for this quarter and to our most recent SEC filings.
Stephen Sweat: Please refer to our earnings release for this quarter and to our most recent SEC filing. 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 is contained in our SEC filing. With that, I'll turn the call over to John.
Steven Swett: 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 our SEC filings with that I'll turn the call over to John.
John Volano: Thank you, and thanks to everyone for joining us today. The industry continues to face a challenging and evolving macro backdrop, marked by uncertainty regarding inflation and the Federal Reserve's future rate policy. On these points, real estate transactions remain constrained as many banks remain on the sidelines.
John Pullano: Thank you and thanks to everyone for joining us today.
John Pullano: Hey, Jim and the overall real estate industry continue to face a challenging and evolving macro backdrop marked by uncertainty regarding inflation and the federal reserve's future rate policy.
John Pullano: To these points real estate transactions remained constrained as many banks remain on the sidelines.
John Volano: In this environment, we are highly focused on prudently managing our balance sheet to ensure we have ample liquidity and are underwriting the highest quality loans with financially strong borrowers. During the quarter, we worked through loan modifications and extensions, as well as defaults, in cases where projects have been largely completed, but our borrowers are searching for longer-term take-out financing. Loan modifications and extensions added approximately $1.5 million in revenue as loans were extended, restructured, or put back on track.
John Pullano: In this environment, we are highly focused on prudently managing our balance sheet to ensure we have ample liquidity and our underwriting the highest quality loans with financially strong borrowers.
During the quarter, we worked through loan modifications and extensions as well as defaults in cases, where projects have been largely completed what our borrowers are searching for longer term takeout financing.
John Pullano: Loan modifications and extensions of added approximately $1 5 million in revenue as loans were extended restructure are put back on track.
John Volano: As we have noted before, loans that are extended or modified are re-underwritten to ensure the collateral and projects are still viable and well capitalized. Our experience through many cycles has provided us with the necessary tools to navigate this environment appropriately.
John Pullano: As we have noted before loans that are extended or modified our re underwritten to ensure the collateral and projects are still viable and well capitalized.
John Pullano: Our experience through many cycles has provided us with the necessary tools to navigate this environment appropriately.
John Volano: Importantly, it has been our experience that troubled loans often prove profitable over their term when interest income, origination, and other fees are considered. Furthermore, we believe our low REO balance as compared to our loans in foreclosure tells the story of how often our loan workouts result in a favorable outcome. Let's now discuss our first quarter 2020 financials in more detail. For the first quarter 2024, Sachem grew revenue approximately 17% to $17.2 million, compared to $14.7 million in the same quarter of the prior year.
John Pullano: Importantly, it has been our experience that troubled loans often proved profitable over their term when interest income origination and other fees are considered.
John Pullano: Furthermore, we believe our low Oreo balance as compared to our loans and foreclosure tells the story of how often our loan workouts result in a favorable outcome.
John Pullano: Let's now discuss our first quarter 2024, our financials in more detail.
John Pullano: For the first quarter 2024, <unk> revenue of approximately 17% to $17 2 million compared to $14 $7 million in the same quarter of the prior year.
John Volano: Despite this revenue growth in the first quarter, we saw a sharp reduction in loan origination. To emphasize, this is not due to a lack of loan opportunities but rather from our steadfast resolve to manage liquidity going forward. We continue to monitor a deep pipeline with very strong borrowers and the potential to establish long-term relationships. With that said, we remain disciplined, and while long-term capital remains scarce and mostly unavailable to our borrowers, we are focused on maintaining strong liquidity as we continue to effectively navigate the ongoing lending market, notably for our upcoming baby bonds that are due and payable in June 2024.
John Pullano: Despite this revenue growth in the first quarter, we saw a sharp reduction in loan originations.
John Pullano: To emphasize this is not due to a lack of loan opportunities, but rather from our steadfast resolve to manage liquidity going forward.
John Pullano: We continue to monitor a deep pipeline with very strong borrowers and the potential to establish long term relationships.
With that said, we remain disciplined and while long term capital remains scarce and mostly unavailable to our borrowers we are focused on maintaining strong liquidity as we continue to effectively navigate the ongoing lending marketplace.
John Pullano: Notably for our upcoming baby bonds that are due and payable in June 2024.
John Volano: Our current lending approach, which encompasses protection of liquidity and strict loan selection, will continue to impact earnings until we find efficient capital and the tight funding environment begins to ease. Further, without new loan originations, our origination fee income will be negatively affected.
John Pullano: Our current lending approach, which encompasses protection of liquidity and strict loan selection will continue to impact earnings until we find efficient capital and the tight funding environment begins to ease.
Further without new loan originations, our origination fee income will be negatively affected.
John Volano: We are always proactively pursuing ways to add reasonably priced capital, which would allow us to pivot to be more offensive and invest in attractive opportunities. Obviously, we will continue our balanced approach, but protecting liquidity comes at a cost, and future earnings may be impacted. Total operating costs and expenses for the first quarter of 2024 were approximately $12.5 million compared to approximately $9.6 million in the prior year quarter. The change was due to several factors.
We're always proactively pursuing ways to add reasonably priced capital, which would allow us to pivot to be more offensive and invest in attractive opportunities.
John Pullano: Obviously, we will continue our balanced approach, but protecting liquidity comes at a cost and future earnings may be impacted.
Total operating costs and expenses for the first quarter of 2024 were approximately $12 5 million compared to approximately $9 6 million in the prior year quarter.
John Pullano: The change was due to several factors.
John Volano: Specifically, we recorded interest and amortization of deferred financing costs of approximately $7.5 million in the first quarter as compared to approximately $6.9 million in the first quarter of 2023. G&A was up approximately $340,000 compared to the prior year quarter due to our efforts to strengthen the team as we added the necessary resources to ensure strong internal controls and to support the full integration of our Urbane New Haven acquisition. Compensation expenses were relatively stagnant, and other expenses were up over the same period due to increases in depreciation and taxes.
John Pullano: Specifically, we recorded interest and amortization of deferred financing costs of approximately $7 5 million the first quarter as compared to approximately $6 9 million in the first quarter of 2023.
John Pullano: G&A was up approximately 340000 compared to the prior year quarter due to our efforts to strengthen the team as we added necessary resources to ensure strong internal controls and to support the full integration of our Urbana New Haven acquisition.
John Pullano: Compensation expenses were relatively stagnant and other expenses were up over the same period due to increases in depreciation and taxes.
John Volano: Lastly, we also had a $1.3 million provision for loan losses, the majority of which related to an office asset. Looking ahead, there is a possibility of additional non-cash provisions and impairments, but our seasoned team remains committed to maximizing value through our focused asset management initiative. As a result, net income attributable to common shareholders for the first quarter of 2024 was approximately $3.6 million, compared to approximately $4.2 million in the same quarter last year, and earnings per share were $0.08, as compared to $0.10.
Lastly, we also had a $1 3 million provision for loan losses, the majority of which related to an office asset.
John Pullano: Looking ahead, there is a possibility of incremental noncash provisions and impairments.
John Pullano: Our seasoned team remains committed to maximizing value through our focused asset management initiatives.
John Pullano: As a result net income attributable to common shareholders for the first quarter of 2024 was approximately $3 6 million compared to approximately $4 2 million the same quarter last year and earnings per share were <unk> <unk> as compared to <unk> 10 per share.
John Volano: As discussed in prior quarters, our board regularly evaluates our dividend distribution Policy on an ongoing basis, balancing our operational performance, federal tax requirements, and the importance of maintaining long-term financial flexibility. We are proud of how consistent our dividend has remained over the years, and we will strive to maintain an attractive dividend going forward, subject to our board's oversight. Turning to Portfolio Activity. As I mentioned earlier, and similar to what other participants in our industry are facing, loan originations are very challenging in the current environment.
John Pullano: As discussed in prior quarters, our board regularly evaluates our dividend distribution policy on an ongoing basis balancing our operational performance federal tax requirements and the importance of maintaining long term financial flexibility we.
John Pullano: We are proud of how consistent our dividend has remained over the years and we will strive to maintain an attractive dividend going forward subject to our board's oversight.
John Pullano: Turning to portfolio activities.
John Pullano: As I mentioned earlier and similar to what other participants in our industry are facing loan originations are very challenging in the current environment, but.
John Volano: But our demand for loans continues to rise as banks remain on standby, mid-sized financial institutions struggle with non-performing loans, and many hard money lenders are low on capital and cannot support their borrowers. We believe the struggle in our industry creates opportunities for us.
John Pullano: But our demand for loans continues to rise as banks remain on standby midsized financial institutions struggle with nonperforming loans.
John Pullano: And many hard money lenders are low on capital and that support their borrowers.
John Pullano: We believe the struggle on our industry creates opportunities for us.
John Volano: As we look ahead, our origination efforts are focused primarily on single-family and multi-family residential, where prices and demand have remained relatively stable due to a lack of housing supply in many of our targeted markets. For the quarter, we had net funding of approximately $42.7 million from mortgage loans, including loan modifications and construction draws, that were offset by approximately $51.4 million of principal paydown. During the first quarter, the company modified or extended a total of 49 loans. These modifications resulted in gross fee income of approximately $1.2 million.
John Pullano: As we look ahead, our origination efforts are focused primarily on single family and multifamily residential where prices and demand have remained relatively stable between lack of housing supply in many of our targeted markets.
John Pullano: For the quarter, we had net fundings of approximately $42 7 million from mortgage loans, including loan modifications and construction draws that were offset by approximately $51 4 million of principal paydowns.
During the first quarter the company modified or extended a total of 49 loans.
John Pullano: These modifications resulted in gross fee income of approximately $1 2 million.
John Volano: Looking at our whole portfolio, as of March 31, 2024, we had 273 loans with a total principal balance of approximately $490.7 million, with a weighted average interest rate of 12.7%, non-inclusive of fees earned. Our loan portfolio is geographically diverse, spanning across 15 states, with a focus on southeastern growth markets. Loan originations continue to encompass a variety of property types, including multifamily, single-family, and other commercial real estate assets.
John Pullano: Looking at our whole portfolio as of March 31, 2024, we had 273 loans with a total principal balance of approximately $497 million with a weighted average interest rate of 12, 7% non inclusive of fees earned.
John Pullano: Our loan portfolio is geographically diverse spanning across 15 states with a focus on southeastern growth markets.
Loan originations continued to encompass a variety of property types, including multifamily single family and other commercial real estate assets.
John Volano: Furthermore, within our portfolio, only 12.4% of our investments are in offices. At quarter end, we had loans with a principal balance of approximately $85.7 million in non-accrual status, which includes 60 loans in pending foreclosure by the company, representing approximately $72.9 million of outstanding principal balance, including accrued but unpaid interest and borrower charges. Real estate owned was approximately $3.7 million as of March 31, 2024, including approximately $800,000 held for rental and approximately $2.9 million held for sale.
Further within our portfolio only 12, 4% of our investments are in office.
John Pullano: At quarter end, we had loans with a principal balance of approximately $85 7 million in non accrual status, which includes 60 loans in pending foreclosure by the company, representing approximately $72 9 million of outstanding principal balance, including the accrued but unpaid interest in power charges.
John Pullano: Real estate owned was approximately $3 7 million as of March 31, 2024, including approximately $800000 held for rental and approximately $2 9 million held for sale.
John Volano: Let's now discuss our balance sheet and financial position, where we continue to maintain strong liquidity as a primary focus of the company. As of March 31, 2024, we had total assets of $626.5 million, including approximately $18.4 million of cash and cash equivalents and approximately $38.4 million in investment securities, offset by $377.6 million in total debt outstanding. Additionally, at quarter end, we had available liquidity of $30 million on our credit facility. In closing, we continue to maintain our disciplined approach to managing our business.
John Pullano: Let's now discuss our balance sheet and financial position, where we continued to maintain strong liquidity as a primary focus of the company.
As of March 31, 2024, we had total assets of $626 5 million <unk>.
John Pullano: Including approximately $18 4 million of cash cash equivalents and approximately $38 4 million in investment securities offset by $377 6 million and total debt outstanding.
John Pullano: Additionally at quarter end, we had available liquidity of $30 million on our credit facility.
John Pullano: In closing, we continue to maintain our disciplined approach to managing our business, our diversified portfolio and strong financial foundation together give us confidence as we look ahead to unrestricted lending markets as we continue to prudently protect our capital. We believe the time is getting closer where we can more intently.
John Volano: Our diversified portfolio and strong financial foundation together give us confidence as we look ahead to unrestricted lending markets. As we continue to prudently protect our capital, we believe that the time is getting closer when we can more intently pivot back to growing our business. We firmly believe our strategic shift to a balance of lending and liquidity in this market will ultimately lead to long-term value for our shareholders. I want to thank the entire Sachem team for their hard work and contributions to our performance. We will now open the call for questions.
John Pullano: Pivot back to growing our business.
John Pullano: We firmly believe our strategic shift to a balance of lending and liquidity in this market will ultimately lead to long term value for our shareholders.
Speaker Change: Want to thank the entire <unk> team for their hard work and contributions to our performance. We will now open the call for questions.
Speaker Change: Operator.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Christopher Nolan with Ladenburg-Dalman. Please go ahead.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question today comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Christopher Nolan: Hey, John, thank you for the comments. Financial Strategy
Christopher Nolan: Hey, John Thank you for the comments.
Christopher Nolan:
Christopher Nolan: The financial strategy going forward.
Christopher Nolan: On the topic of balancing lending and liquidity should we read into that that youre going to be lowering the leverage on the balance sheet.
John Volano: Chris, unfortunately, you know we are in a leveraged business. I would like to say yes, we are, but in truth, no. We're really limited by our debt covenant ratio, our debt covenants on our unsecured notes, one and a half times debt coverage. So it's kind of a governor on how fast we can grow our business. And the coverage ratio, while limiting at times, does allow us to sleep easy at night. So it's not a very aggressive covenant.
Speaker Change: Chris Unfortunately, we are in a leveraged business.
Chris: I would like to say, yes, we are but in truth no.
Chris: We were really limited by our debt covenant ratio our debt covenants on our unsecured notes one five times debt coverage. So it's kind of a governor on how fast we can grow our business.
Chris: And the coverage ratio, while limiting at times does allow us to sleep at night, So it's not a very aggressive covenant.
John Volano: What we're doing is basically lending what we collect. And this goes back to the early days of COVID, where there was so much uncertainty. Needless to say, demand was strong then, and it's strong now.
Chris: What we're doing is we're basically lending what we collect.
Chris: And this goes back to the early days of Covid.
Chris: Where there was so much uncertainty.
Chris: Needless to say demand was strong than it is strong now, but the uncertainty going forward is very concerning.
John Volano: But the uncertainty going forward is very concerning, and we're really just playing close to the vest. And as I mentioned... in our script, in our discussion, is that being cautious affects. And we just want to be clear, we're being very conservative going forward. We don't want to be caught on the wrong side. And until we see clarity, we're just going to play it very close to the back.
Chris: And it really just playing close to the best and as I mentioned.
Chris: In the in our script in our discussion has it.
Chris: Being cautious effects province.
Chris: And we just want to be clear we're being.
Chris:
Chris: Very conservative going forward, we don't want to be caught on the wrong side.
Chris: And until we see clarity, we're just going to play it very close to the vest.
John Volano: I understand. And then the wider, the higher your yields that you got on your investments in this quarter. Should we see in the next quarter another step up in yields as more loans are repriced, or what sort of trend do you see developing?
Chris: Understood.
Chris: Then the water the higher yields that you've got on your investments in this quarter.
Speaker Change: Should we see it in the next quarter or another step up in yields as more loans reprice or what sort of trend do you see developing there.
John Volano: Over the past year or so, a lot of our, I'll say, COVID era, low interest rate era loans are now coming back through and getting repriced. Once again, our basic rates going forward are 12% interest, 2% for origination fees, and if there's a construction component, we have 1 or 2% as a construction service fee. Those are staying, you know; they're steadfast. We don't have the ability to really raise those, as much as we would like to. I mean, the rates at some point become damaging to the project at hand. So I think the 12 and two going forward is a really good benchmark for us, and also we're not chasing lower yielding opportunities, to be clear.
Over the past year.
Speaker Change: A year or so a lot of our.
Speaker Change: I will say Covid era, low interest rate loans are now coming back through and getting repriced.
Speaker Change: Once again, our basic rates going forward, 12% interest, 2% for origination fees and if theres a construction component, we have one or 2% as a construction service fee.
Speaker Change: <unk> are staying steadfast.
Speaker Change: We're not we don't have the ability to really.
Speaker Change: Raise those.
Speaker Change: <unk>.
Speaker Change: As much as we would like to I mean, the rates at some point become damaging to the project at hand, So I think the 12 month two going forward is a really good benchmark for us.
Speaker Change: And also we're not chasing.
Speaker Change: Lower yielding opportunities to be clear.
Speaker Change: Great. Thank you.
Operator: The next question comes from Gaurav Mehta with Alliance Global Partners. Please go ahead.
The next question comes from Gaurav Mehta with Alliance Global Partners. Please go ahead.
Gaurav Mehta: Thank you good morning.
Gaurav Mehta: I wanted to ask you about the one provision that you talked about in relation to office assets this quarter. I'm hoping to get some more color on that loan.
Gaurav Mehta: I wanted to ask you on the one.
Gaurav Mehta: One provision that you talked about on our office asset this quarter, we're going to get some more color on that loan.
John Volano: Yes, and I can help a little bit. I may ask Nick Marcello to provide more clarity, but here's my take. Um, we did an asset deal up in Maine, and the project failed. Our borrower could not perform.
Gaurav Mehta: Yes.
Speaker Change: I can help a little bit.
Speaker Change: Oh.
Speaker Change: You may ask Nick Marcello to provide more clarity, but here's my take.
We did an asset.
Speaker Change: Up in Maine, and the project failed.
Speaker Change: Our borrower could not perform.
Speaker Change: We have a friendly buyer.
John Volano: We have a friendly buyer who has shown up and purchased the asset, and we feel that a change of... structure of the project and change of... Unfortunately, Gaurav, these things take so much time, and as much as I would like to say it's all going to come rosy at the end, it's down the road a bit. So the change of use is very positive. We have funds available to do the work, and we have contractors to finish the project. And, you know, in the next year or so, we'll be reporting back as to how that all goes.
Speaker Change: As shown up in and purchased the asset and.
Speaker Change: We feel that a change of.
Speaker Change: Structure of the project and change of use.
Speaker Change: Can be a great outcome for us. Unfortunately garage these things take so much time.
Speaker Change: <unk>.
Speaker Change: As much as I would like to say, it's all going to show up rose as at the end.
Speaker Change: It's down the road a bit so.
Speaker Change: The change of use is very positive.
Speaker Change: We have funds available to do the work we have contractors to finish the project and in the next year or so we will be reporting back as to how that all worked out.
Speaker Change: Okay.
Speaker Change: The second question on the on the net funding, but I think you said $40 million to $107 million on net funding this quarter and so I just I just wanted to clarify all of that bodes loan modifications and construction draws there were no new loan originations in that number.
John Volano: Second question on net funding, I think you said $42.7 million of net funding this quarter, and so I just want to clarify, all of that was loan modifications and construction draws. There were no new loan originations in that number? No, there were new loan originations, but it was not tremendously significant. Nick, do you have the exact new loan originations for the quarter? Yeah, we did. We did $23 million of gross loan originations for the quarter, but in net fundings on that number, it was really only about $12 million. So it is so very light.
Speaker Change: No there were new loan originations.
Speaker Change: It was not tremendously significant.
Speaker Change: Nick do you have the exact.
Speaker Change: New loan originations for the quarter.
Yes, we did we did $23 million of.
Nick Marcello: Gross loan originations for the quarter.
Nick Marcello: And net fundings on that number was really only about $12 million.
John Volano: Okay, maybe lastly, I think you mentioned in your prepared remarks that you see you have a pipeline of strong borrowers, but you're being cautious, and I just wanted to get some more color maybe on the quality of borrowers. Are you seeing the same quality of borrowers in the pipeline, or is there any change in the quality?
Speaker Change: So very right.
Speaker Change: Okay.
Speaker Change: <unk>.
Speaker Change: Asked me I think.
Speaker Change: In your prepared remarks.
Speaker Change: <unk> mentioned that you are seeing.
Speaker Change: Have a pipeline of strong borrowers, but European car share then and you know I just wanted to get some more color maybe on the quality of our borrowers.
Speaker Change: Are you seeing theme quality all borrowers in the pipeline or is there any change in the quality.
John Volano: We feel that the quality of this pipeline is tremendous. It's a whole lot better than what we've had in the past, and it's really a result of good quality borrowers and good quality projects looking for a home. A lot of our industry is locked up at the moment, and banks are uncertain, liquidity is scarce with respect to regular lending on projects, and good borrowers are searching, right? It truly is their livelihood.
Speaker Change: We feel that the quality of this pipeline is tremendous.
Speaker Change: It's a whole lot better than what we've had in the past.
Speaker Change: And it's really a result of.
Speaker Change: Good quality borrowers and good quality projects looking for a home.
Speaker Change: And.
Speaker Change: A lot of our industry is locked up at the moment.
Speaker Change: Thanks, Ron certain liquidity is scarce with respect to <unk>.
Speaker Change: Regular lending on projects and.
Speaker Change: Good borrowers are searching right it truly is their livelihood.
John Volano: They're accustomed to having great service and available capital to continue to work. So we are getting a lot of great opportunities, some larger than we're used to, and certainly now is not the time to dig too deep into bigger projects.
Speaker Change: There are accustomed to having great service and available capital to continue to work.
Ron: So we are getting a lot of great opportunities.
Ron: Some larger than what were accustomed.
Ron: And certainly now is not the time to to dig too deep into bigger projects.
Gaurav Mehta: Okay, thank you for taking my questions.
Speaker Change: Okay. Thank you for taking my questions.
Speaker Change: Thank you.
Speaker Change: Your next question comes from Matthew <unk> with Jones trading. Please go ahead.
Operator: The next question comes from Matthew Erdner with Jones Trading. Please go ahead. Thank you.
Matthew Erdner: Hey, good morning, guys. Thanks for taking the time to answer the question. I believe you said $85 million in non-accruals and $64 million in foreclosure. If I'm wrong there, please correct me, but could you talk a little bit about what's going on with this? You know, whether it's a borrower issue money-wise or if it's a construction plan, could you just expand on those a little bit? Thanks.
Matthew: Hey, good morning, guys. Thanks for taking the question I believe you said $85 million in non accruals and 64 in foreclosure.
If I'm wrong. There. Please please correct me, but could you talk a little bit about what's going on with this.
Matthew: Whether if it's a borrower issue.
Matthew: Money wise or if it's a construction plan.
Matthew: Could you just expand on those a little bit thanks.
Matthew: Yeah.
John Volano: The total is $85,000. We just broke the number into two pieces for you.
Matthew: The total was 85.
Matthew: The number is we just broke the number into two pieces for you.
Matthew: What we've been doing over the past few quarters.
John Volano: What we've been doing over the past few quarters is really going through a cleansing of our portfolio. We do have loans that are too small for us. Those are not being extended or renewed in some cases. We do have loans that require time to complete where labor and material shortages have caused delays. We have projects where labor and material pricing has kind of blown out construction budgets, and those require the assistance of our Urbane unit to get back on track and redirect.
Matthew: Is really going through a cleansing of our portfolio.
Matthew: We do have.
Matthew: Loans that are too small for us.
Matthew: Those are not being extended or renewed in some cases.
Matthew: We do have loans that require time to complete where labor and material shortages have caused delays.
Matthew: We have we have projects, where labor and material pricing has kind of blown out construction budgets.
Matthew: And in those require the assistance of our urbane unit to get back on track and redirect.
John Volano: But what we're doing, it's an ongoing plan to continue cleansing the portfolio, and, you know, unfortunately, as I mentioned earlier, these things take time. And, you know, in the past week, we've had two properties that came back through foreclosure. They were under contract and sold within the week, with great results for us, and it's just a question of getting our hands on the asset. It's our biggest problem to date. The courts move very slowly in some cases, and honestly, a borrower that fears a failed project, they're sometimes slow to pick up the phone, and once they realize we're in this game to help them work this out and get back on their feet again, we're usually able to get things back on track.
Matthew: But what we're doing it's an ongoing plan to continue.
Matthew: Continue cleansing the portfolio.
Matthew: And.
Matthew: Unfortunately, as I mentioned earlier.
Matthew: These things take time.
Matthew: And in the past week, we've had two properties.
That came back through foreclosure they were under contract and sold within the week.
Matthew: With great results.
Matthew: For us.
Matthew: And it's just it's just a question of getting our hands on the asset and it's our biggest problem to date.
Matthew: Let's move very slowly in some cases.
Matthew: And honestly a borrower that.
Matthew: Fears.
Matthew: A failed project there are sometimes slow to pick up the phone and once they realized we're in this game to help them work this out and gets gets square again.
Matthew: We are usually able to get things back on track.
John Volano: But it's been a process, and I think you'll see elsewhere in our industry that, you know, a lot of our competition, which, you know, they're significantly larger than us, they're running into the same type of problems. It's not always the project, it's not the bar, it's a combination of a lot of things. And, you know, I could sit here all day and say, hey, look, it's planning and zoning, it's material costs.
Matthew: But it's been a process.
Matthew: And I think youll see elsewhere in our industry that.
Matthew: A lot of our competition, which they are significantly larger than us.
Matthew: We're running into the same type of.
Matthew: Issues.
Matthew: It's not always the project is not the borrower, it's a combination of a lot of things and.
Matthew: I could sit here all day, and say, Hey, look it's planning and zoning is material costs.
John Volano: Real estate is a tough game, and you know if you can't get the project sold or refinanced, it turns into a problem, and it turns into a problem quick because we're very expensive. So not having a counterparty to refinance our borrowers is really putting a lot of loans in jeopardy, to be quite honest. We do think a cutting of the rates, when that happens, will be great for us. It'll get us back on track. We'll get our stride back, but not having a counterparty, you know, keeps these borrowers tied to us a little bit. So we continue to work with them, and we continue to protect our assets going forward.
Matthew: Real estate is a tough game and if you can't get the projects sold or refinanced.
Matthew: It turns into a problem and it turns into a problem quick because were very expensive.
Matthew: So not having a counterparty to refinance our borrowers is really putting a lot of loans in jeopardy to be quite honest.
Matthew: We do think of cutting over the rates when that happens.
Matthew: Will be great for us it'll it'll get us back on track, we'll get our stride back.
Matthew: But not having a counterparty keeps these borrowers tied to us a little bit. So we continue to work with them and we continue to protect our assets going forward.
John Volano: Right, that's helpful. And then, can you talk a little bit about the investment securities portfolio? And, you know, from a modeling perspective, should we expect some of that to decrease in the upcoming quarters for the baby bonds? Um, that whole portfolio has been.
Speaker Change: Alright, that's helpful.
Speaker Change: And then could you talk a little bit about the investment securities portfolio and from a modeling perspective should we expect some of Thats a decrease in the upcoming quarters for the baby bonds.
John Volano: That whole portfolio has been liquidated and closed, and that happened in early April.
Speaker Change: That whole portfolio has been liquidated and closed.
And that happened early April.
Speaker Change: Awesome. Thank you.
Operator: The next question comes from Chris Moeller with JMP. Please go ahead.
Speaker Change: The next question comes from Chris Moore with JMP. Please go ahead.
Chris Moore: Hey, John Thanks for taking the questions.
Chris Moeller: John, thanks for taking the questions. So, I guess, how far do you think we are into this current stress cycle? And looking at your own portfolio, do you feel like you've been able to identify where most of those problems are going to be? Or do you think this will be more of an ongoing process for the bulk of 2024?
Chris Moore: So I guess, how far do you think we are into this current stress cycle and looking at your own portfolio do you feel like you've been able to identify where most of those problems are going to be or do you think this will be more of an ongoing process for the bulk of 2024.
Chris Moore:
John Volano: You know, I feel that it's going to be ongoing. You know, it's very interesting to me that, you know, properties in distress get cleaned up, and properties that we think are super, run into a problem.
Speaker Change: You know I feel that it is going to be ongoing.
Speaker Change: It's very interesting to me that.
Speaker Change: No.
Speaker Change: Properties in distress get cleaned up properties that we think are super run into a problem.
John Volano: It requires us to have a hands-on approach. We are very thankful. We are not buyers of loans in bulk. That is a huge problem.
Speaker Change: It is going to be ongoing it requires us to have a hands on approach.
Speaker Change: We are very thankful, we are not buyers of loans in bulk.
That is a huge problem.
John Volano: You know, we know our borrowers, we're in contact with them consistently, we actively manage the portfolio, and that gives us the ability to clean this stuff up. So, you know, there's a little saying here that we kind of joke about, that all loans are good until they're not. You know, sometimes we just get surprised with, you know, maybe a bad response from a borrower or bad news, but sometimes the bad stuff turns out pretty good for us.
Speaker Change: We know our borrowers were in contact with them consistently we actively manage the portfolio and that gives us the ability to clean this stuff up so there.
John Volano: Yeah, that's helpful. And then I guess that leads into my second question here. Can you just talk about what a typical modification looks like? Do you guys typically require borrowers to put fresh equity in? Just what does a typical modification look like, I guess?
Speaker Change: Theres, a little saying here that we kind of joke about is that.
Speaker Change: All loans are good until theyre not in.
Speaker Change: Sometimes we just get surprised with.
Maybe.
Speaker Change: Bad response from a borrower or bad news, but.
Speaker Change: Sometimes the bad stuff turns out pretty good for us.
Speaker Change: Got it that's helpful. And then I guess that leads into my second question. Here can you just talk about what a typical modification looks like are you guys typically require borrowers to put fresh equity.
Speaker Change: Just what are the typical modification looked like I guess.
Speaker Change:
John Volano: You know, a typical mod for us starts this way, you know, we start contacting our borrowers 90 days prior to the end of their loan, just letting them know that, you know, we're watching, and they should be aware that their loan is going to term out here at some point. And, you know, the discussion then goes something like this. We have a refinance, we have a sale. What do you have?
Speaker Change: A typical model for us.
Speaker Change: Starts this way.
Speaker Change: We start contacting our borrowers 90 days prior to the end of their loan just letting them know that we're watching and they should be aware that their loan is going to term out here at some point in the discussion then goes something like this.
Speaker Change: We have a refinance we have a sale.
John Volano: We have a problem, but at least we can start the action early. When the loan is terming out, we have a plan. So we've started working on this before the loan terms. We were going to figure out if this project needs new capital, if it's a construction budget issue, or, my God, it could be partners in the borrower partner. But at least we're hands-on before the long term. And then technically, once that loan term ends, it becomes a defaulted loan.
Speaker Change: What have you we have a problem.
Speaker Change: At least we start the action early.
Speaker Change: When the loan is terming out we have a plan. So we started working on this before the loan terms.
Speaker Change: To figure out if this project needs new capital if its construction budget issue if it's.
Speaker Change: Got it could be partners in the borrower partnership.
Speaker Change: But at least we're hands on before the loan terms and then technically once that loan terms it becomes a defaulted loan.
John Volano: So what we're seeing now is that back during, towards the end of COVID, we were doing 100 loans a quarter, and those modifications are coming due, and that's kind of why these numbers are a little bit elevated. So, you know, we're working off, you know, huge volumes of loan closings that are all maturing now. And I also want to mention that, you know, look at our loan cap. We used to have in excess of 500 loans in our portfolio.
Speaker Change: So.
Speaker Change: What we're seeing now is.
Speaker Change: Back during the towards the end of Covid, we're doing 100 loans a quarter and those modifications are coming due and that's kind of why these numbers are a little bit elevated.
Speaker Change: So we're working off.
Speaker Change: Huge volumes.
Speaker Change: Of loan closings that are all maturing now.
Speaker Change: And I also want to mention that.
Speaker Change: Look at our lone Cam we used to have in excess of 500 loans in our portfolio.
John Volano: We're down to the 270. And it's really our push to deal with quality borrowers and quality projects so that we don't have... I hate to say it, the small guy who is not bankable. We're trying to get away from that.
Speaker Change: We're down to the end of the $2 70 range.
Speaker Change: It's our it's really our push to deal with quality borrowers and quality projects. So that we don't have.
Speaker Change: I hate to say the small guy who is not bankable, where we're trying to get away from that.
Chris Moeller: That's helpful. Thanks for your comments, John.
Speaker Change: Got it that's helpful. Thanks for your comments John.
Operator: This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.
Operator: ?? ?? ?? ?? ?? ??
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Okay.
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