Q2 2024 Sachem Capital Corp Earnings Call

Speaker Change: Greetings and welcome to the State Capital Corp second 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: Erning Conference Call. At this time, all participants are in a listen only mode.

Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Speaker Change: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephen Swift.

Stephen Swett: And thank you for joining Sachem Capital Corp.'s second quarter 2024 earnings conference call. On the call from Sachem Capital today are Chief Executive Officer John Villano, CPA, and Chief Financial Officer Nick Marcello. This morning, the company announced its operating results for the quarter ended June 30, 2024, and its financial condition as of that date. The press release is posted on the company's website, www.

Speaker Change: with Investor Relations. Thank you, sir. You may begin.

Speaker Change: Good morning, everyone, and thank you for joining SACIM Capital Corp's second quarter 2024 earnings conference call. And the call from SACIM Capital today is Chief Executive Officer John Villano, CPA, and Chief Financial Officer Nick Marcello.

Speaker Change: This morning, the company announced its operating results for the quarter ended June 30th, 2024, and its financial condition as of that date. The press release is posted on the company's website, www.sachemcapitalcorp.com.

Stephen Swett: 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.

Speaker Change: As a reminder, remarks made on today's conference call may include forward-looking statements.

Speaker Change: Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.

Speaker Change: We do not undertake any obligation to update our forward-looking statements in light of new information or future events.

Stephen Swett: 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 filing. During this call, the company will be discussing certain non-GAAP financial measures. More information about these non-GAP financial measures and reconciliations to the most directly comparable GAP financial measures contained in our SDG filing. With that, I'll now turn the call over to John. Thank you, and thanks to everyone for joining us today.

Speaker Change: 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.

Speaker Change: During this call, the company will be discussing certain non-GAAP financial measures.

Speaker Change: More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our SEC filing.

Speaker Change: With that, I'll now turn the call over to John .

John Villano: During the second quarter of 2024, we maintained our prudent approach to balance sheet management and our lending activities. With the market anticipating a potential rate cut from the Fed in the latter half of the year and optimistic prospects for a soft landing, it appears that we could be trending back in the right direction. That said, we will continue our disciplined approach until markets have stabilized, capital availability has improved, and opportunities for creative investment are available. This quarter, we generated approximately $15.1 million in revenue.

John: Thank you, and thanks to everyone for joining us today.

Speaker Change: During the second quarter of 2024, we maintained our prudent approach towards balance sheet management and our lending activities.

John: With the market anticipating a potential rate cut from the Fed the latter half of the year and optimistic prospects for a soft landing, it appears that we could be trending back in the right direction.

John: That said, we will continue our disciplined approach until markets have stabilized, capital availability has improved, and opportunities for accretive investment are available.

John Villano: As mentioned last quarter, origination fees make up a significant portion of our revenue, and until we feel more comfortable in the capital environment, we are prepared to postpone earnings growth in the near term to protect our capital, which includes avoiding borrowing at rates that could be potentially dilutive for Sachem. We believe remaining patient better positions us for long-term earnings growth. As we have said before, we are willing to work with our borrowers to modify or extend loans, provided they meet our stringent re-underwriting process and possess the necessary capital reserves.

Speaker Change: This quarter we generated approximately $15.1 million in revenue.

Speaker Change: As mentioned last quarter, origination fees make up a significant portion of our revenue.

Speaker Change: And until we feel more comfortable in the capital environment, we are prepared to postpone earnings growth in the near term to protect our capital, which includes avoiding borrowing at rates that could be potentially dilutive for Sajam.

Speaker Change: We believe remaining patient better positions us for long-term earnings growth.

Speaker Change: As we have said before, we are willing to work with our borrowers to modify or extend loans, provided they meet our stringent re-underwriting process and possess the necessary capital reserves.

John Villano: During the quarter, we produced revenue of $2.1 million in fee income from loans, a notable change from the comparable period in 2023 due to reduced origination volume. In the first half of 2024, we added only 1.6 million in REO, reflecting our ability to efficiently manage non-performing loans. Our hands-on approach, coupled with first-hand knowledge of our borrower, can usually move a loan from non-performing to performing. Additionally, we generated a net gain of approximately $264,000 from REO sales during this period, demonstrating that foreclosing on a property does not always result in loss.

Speaker Change: During the quarter, we produced revenue of $2.1 million in fee income from loans, a notable change from the comparable period in 2023 from reduced origination volume.

Speaker Change: The first half of 2024, we added only 1.6 million in REO, reflecting our ability to efficiently manage non-performing loans.

Speaker Change: Our hands-on approach coupled with first-hand knowledge of our borrower can usually move a loan from non-performing to performing.

Speaker Change: Additionally, we generated a net gain of approximately $264,000 from REO sales during this period, demonstrating that foreclosing on a property does not always result in loss.

John Villano: Our seasoned asset management team continues to take an asset-by-asset approach, meticulously reviewing and inspecting all loans in our portfolio on a regular basis. Similar to many companies in our sector and more broadly across the financial services industry, we added an additional Cecil provision for credit losses related to loans of approximately 8.5 million. While this is a non-cash item, it further underlies the impact on real estate valuations and liquidity uncertainty that persists within the market, particularly for commercial real estate assets.

Speaker Change: Our seasoned asset management team continues to take an asset-by-asset approach, meticulously reviewing and inspecting all loans in our portfolio on a regular basis.

Speaker Change: Similar to many companies in our sector and more broadly across the financial services industry, we added an additional CECL provision for credit losses related to loans of approximately 8.5 million.

Speaker Change: While this is a non-cash item, it further underlies the impact to real estate valuations and liquidity uncertainty that persists within the market, particularly with commercial real estate assets.

Speaker Change: As we look forward, I am confident that our cycle-tested experience provides us with the tools needed to navigate this environment effectively.

John Villano: Nick Marcello, recently appointed as Chief Financial Officer, brings impressive financial acumen that has and will continue to greatly aid in this process. With that, I would like to hand the call over to Nick to discuss our second quarter financials.

Nick Marcello: Nick Marcello, recently appointed as Chief Financial Officer, brings impressive financial acumen that has and will continue to greatly aid in this process. With that, I would like to hand the call over to Nick to discuss our second quarter financials. Nick?

Nick Marcello: Thank you, John. For the second quarter of 2024, Sachem recorded revenue of 15.1 million compared to 16.3 million in the same quarter of the prior year. As John previously mentioned, we are still experiencing the impact of reduced loan originations, and until we are able to source creative capital, the company believes it is prudent to hold cash on hand, as loans continue to pay off. Opportunities within our sector remain, but our diligent approach and steadfast commitment to managing liquidity continue to guide our strategy.

Nick Marcello: Thank you, John.

Nick Marcello: For the second quarter of 2024, Statrium recorded revenue of $15.1 million compared to $16.3 million in the same quarter of the prior year.

Speaker Change: As John previously mentioned, we are still experiencing the impact of reduced loan originations and until we are able to source accretive capital, the company believes it is prudent to hold cash on hand as loans continue to pay off.

John: Opportunities within our sector remain, but our diligent approach and steadfast commitment to managing liquidity continues to guide our strategy.

Nick Marcello: Total operating costs and expenses for the second quarter of 2024 were approximately 18.5 million, compared to approximately 10.3 million in the prior year quarter. For the second quarter of 2024, we had additional provisions for credit losses of $8.5 million to account for the ongoing challenges in the commercial real estate market. As noted on our last earnings call, we anticipated an increase in provisions due to the prevailing uncertainty in the macroeconomic environment. This puts our current allowance for credit losses for mortgages receivable at $14.4 million, or approximately 3% of the unpaid principal balance.

John: Total operating costs and expenses for the second quarter of 2024 were approximately $18.5 million compared to approximately $10.3 million in the prior year quarter.

John: For the second quarter of 2024, we had additional provisions for credit losses of 8.5 million to account for the ongoing challenges in the commercial real estate market.

John: As noted on our last earnings call, we anticipated an increase in provisions due to the prevailing uncertainty in the macroeconomic environment.

John: This puts our current allowance for credit losses for mortgages receivable at 14.4 million or approximately 3% of unpaid principal balance.

Nick Marcello: 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. The increase in Cecil provisions was partially offset by interest in amortizing deferred financing costs of approximately $7 million, costs related to compensation and employee benefits of approximately $1.4 million, and GNA of approximately $1.3 million, which all exhibited decreases compared to the prior year quarter, a testament to the company's ability to control costs as originations have been challenged.

John: 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.

John: The increase in CECL provisions was partially offset by interest and amortization of deferred financing costs of approximately $7 million, costs related to compensation and employee benefits of approximately $1.4 million,

John: In GNA of approximately 1.3 million, which all exhibited decreases compared to the prior year quarter, a testament to the company's ability to control costs as originations have been challenged.

Nick Marcello: As a result, net loss attributable to common shareholders for the second quarter of 2024 was approximately $4.1 million, compared to net income attributable to common shareholders for approximately $4.8 million in the corresponding prior year period, or a $0.09 loss and $0.11 gain per diluted share, respectively. 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. On July 19, the board declared a quarterly dividend of $0.08 per share for shareholders of record as of July 29, 2024.

John: As a result, net loss attributable to common shareholders for the second quarter of 2024 was approximately $4.1 million compared to net income attributable to common shareholders for approximately $4.8 million in the comparing prior year period.

John: or a $0.09 loss and $0.11 gain per diluted share, respectively.

Speaker Change: 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.

Speaker Change: On July 19th, the board declared a quarterly dividend of $0.08 per share for shareholders of record as of July 29th, 2024.

Nick Marcello: Turning to Portfolio Activities, Like past quarters, our lone originations were down, but the demand for capital within the industry remained strong. With banks staying on the sidelines and financing challenges persisting, we believe our pipeline will continue to be robust, even as we remain very selective given the current capital markets environment. Our core focus remains on single-family and multi-family residential assets and growing markets where the metrics remain favorable.

Speaker Change: Turning to Portfolio Activities.

Speaker Change: Like past quarters, our loan originations were down, but the demand for capital within the industry remains strong.

Speaker Change: With banks staying on the sidelines and financing challenges persisting, we believe our pipeline will continue to be robust even as we remain very selective given the current capital markets environment.

Speaker Change: Our core focus remains on single-family and multifamily residential assets in growing markets where the metrics remain favorable.

Nick Marcello: For the quarter, we had net funding of approximately 41.7 million from mortgage loans, including loan modifications and construction draws that were offset by approximately 32.3 million of principal paydown. During the second quarter, the company modified or extended a total of 26 loans. These modifications resulted in gross fee income of approximately 1 million. As of June 30th, our portfolio comprised 262 loans with a total unpaid principal balance of approximately $500.1 million and a weighted average interest rate of 12.8%, excluding fees. Our loan portfolio is geographically diverse, covering 16 states, with a focus on growth markets in the southeast, balanced with more stable markets in the northeast.

Speaker Change: For the quarter, we had net fundings of approximately $41.7 million for mortgage loans, including loan modifications and construction draws that were offset by approximately $32.3 million of principal paydowns.

Speaker Change: During the second quarter, the company modified or extended a total of 26 loans. These modifications resulted in gross fee income of approximately $1 million.

Nick Marcello: Additionally, only 12.3% of our investments are in office properties. At quarter end, we had loans with a principal balance of approximately $106.9 million in non-accrual status, which included 50 loans in foreclosure by the company, representing approximately $73.1 million of outstanding principal balance, including accrued but unpaid interest and borrower charges. Real estate owned was $3.9 million as of June 30th, 2024, including $800,000 held for rental and $3.1 million held for sale.

Speaker Change: As of June 30th, our portfolio comprised 262 loans with total unpaid principal balance of approximately 500.1 million and a weighted average interest rate of 12.8% excluding fees.

Speaker Change: Our loan portfolio is geographically diverse, covering 16 states, with a focus on growth markets in the southeast, balanced with more stable markets in the northeast. Additionally, only 12.3% of our investments are in office properties.

Speaker Change: At quarter end, we had loans with a principal balance of approximately $106.9 million in non-accrual status, which includes 50 loans in foreclosure by the company, representing approximately $73.1 million of outstanding principal balance.

Speaker Change: including the accrued but unpaid interest and borrower charges.

Speaker Change: Real estate owned was $3.9 million as of June 30, 2024, including $800,000 held for rental and $3.1 million held for sale.

Nick Marcello: Let's now discuss our balance sheet and financial position, where maintaining strong liquidity remains a primary focus for the company. As of June 30th, 2024, we had total assets of 586.3 million, including 10.6 million of cash and cash equivalents, and 1.8 million in investment securities, offset by 343.8 million of total debt. Additionally, at quarter end, we had available liquidity of $10 million on our Needham credit facility. We will continue to utilize drawdowns from our existing credit facilities, current cash on hand, and principal repayments from our mortgage loans to manage upcoming debt maturities, notably the $34.5 million principal amount of unsecured, unsubordinated notes due on December 30th, 2024. I will not turn the call back to John for closing remarks.

Speaker Change: Let's now discuss our balance sheet and financial position where maintaining strong liquidity remains a primary focus for the company.

Speaker Change: As of June 30th, 2024, we had total assets of 586.3 million, including 10.6 million of cash.

Speaker Change: Cash equivalents and 1.8 million in investment securities offset by 343.8 million of total debt outstanding

Speaker Change: Additionally, at quarter-end, we had available liquidity of $10 million on our Needham Credit Facility.

Speaker Change: who will continue to utilize drawdowns from our existing credit facilities.

Speaker Change: Current cash on hand and principal repayments from our mortgage loans to manage upcoming debt maturities, notably the $34.5 million principal amount of unsecured, unsubordinated notes due on December 30th, 2024.

John Villano: Thanks, Nick. Since our inception as a public company in 2017, we have built a reliable and robust lending platform, paid an excellent stream of dividends, and, most importantly, increased book value during some volatile market periods. At quarter end, Book Value stood at approximately $3.76 per share.

Speaker Change: I will now turn the call back to John for closing remarks.

Speaker Change: Thanks, Nick.

John: Since our inception as a public company in 2017, we have built a reliable and robust lending platform, paid an excellent stream of dividends, and most importantly, increased book value during some volatile market periods.

John: At quarter end, book value stood at approximately $3.76 per share.

John Villano: We've also returned to shareholders approximately $2.25 per share in dividends since our first quarter as a public company. In closing, we will continue to uphold our prudent approach of managing liquidity and being highly selective in underwriting until markets improve. Our diversified portfolio and strong financial foundation support our confidence in the future as we work to get back to growing our business in 2025. I would like to express my gratitude to the entire Sachem team for their ongoing hard work, dedication, and undeniable contributions to our performance.

John: We have also returned to shareholders approximately $2.25 per share in dividends since our first quarter as a public company.

John: In closing, we will continue to uphold our prudent approach of managing liquidity and being highly selective in underwriting until markets improve.

John: Our diversified portfolio and strong financial foundation support our confidence in the future as we work to get back to growing our business in 2025.

Speaker Change: I would like to express my gratitude to the entire Sachem team for their ongoing hard work, dedication, and undeniable contributions to our performance.

Operator: We will now open the call for questions. Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Speaker Change: We will now open the call for questions.

Operator: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we pull for questions. Our first question comes from Gaurav Mehta with Alliance Global Partners. Please proceed with your question. Thank you. Good morning.

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Speaker Change: One moment, please, while we pull for questions.

Speaker Change: Our first question comes from Gaurav Mehta with Alliance Global Partners. Please proceed with your question.

Gaurav Mehta: I want to ask you- I wanted to follow up on the balance sheet, the $34.5 million loan that's due in December. I wanted to get some more color on your plans for refinancing that loan and how much capacity you have currently on the balance sheet to address that loan maturity. That's a great question, Gaurav.

Gaurav Mehta: Thank you. Good morning.

Gaurav Mehta: I want to ask you

Gaurav Mehta: I wanted to follow up on the balance sheet, the $34.5 million loan that's due in December .

Speaker Change: I wanted to get some more color on your plans on refinancing that loan and how much capacity do you have currently on the balance sheet to address that loan maturity?

Nick Marcello: So if you look at our June 30 balance sheet, we did have $10.5 million in cash. Currently, we have almost $30 million of cash on hand, not including liquidity from our credit facilities or repurchase agreements to handle the December maturity. So we're in really good shape. So $30 million cash on hand after 2Q. Ah, that's correct. Okay, as a follow-up, I was wondering if you could provide some more color on where the interest rates are if you were to issue new debt. Can you repeat that again? I didn't catch it.

Garov: That's a great question, Gaurav. So if you look at our June 30 balance sheet, we did have $10.5 million in cash. Currently, we have almost $30 million of cash on hand.

Garov: Not including liquidity from our credit facilities or repurchase agreements to handle the December maturity. So we're in really good shape.

Speaker Change: So $30 million cash on hand after 2Q?

Speaker Change: That's correct

Speaker Change: Okay as a follow-up I was wondering if you could provide some more color on where the interest rates are if you were to issue new debt.

Gaurav Mehta: I'm sorry. Just as a follow-up, I wanted to get some more color on where the rates are for your company in case you need to issue new debt. Okay, so as I'm sure you're all aware, Sachem, we closed down an offering about a month and a half ago where we were trying to do an institutional note offering. The rates on the debt were just not attractive to our business model, and as such, we've kind of backed away from raising, what we call inefficient debt.

Speaker Change: Can you repeat that again? I didn't catch it. I'm sorry.

Speaker Change: Just as a follow-up, I wanted to get some more color on where the rates are for your company in case you need to issue new debt.

SageM: Okay, so as I'm sure you're all aware, Sachem, we closed down an offering about a month and a half ago, where we were trying to do an institutional note offering.

Speaker Change: The rates on the debt were just not accretive to our business model. And as such, we've kind of backed away from raising, we call it inefficient debt.

Gaurav Mehta: It's best for us to perhaps shrink our balance sheet and wait for better opportunities in the debt markets. Unknown Executive, Gaurav Mehta, Matthew Erdner, Christopher Muller, John Villano, Nicholas So those are the things that we're trying to stay away from.

Speaker Change: It's best for us to perhaps shrink our balance sheet and wait for better opportunities in the debt markets.

Speaker Change: You know when a deal doesn't fit the box, right? It's expensive in terms of rate It has other provisions in terms of no call meaning you can't pay it off early if rates should improve Those kind of things are detrimental to our business and eventually, you know, they do come and hurt our shareholders

Unknown Executive: And it would be easier for us to manage our book as we have it, marshal cash, continue to lend money, of course, but not to take a reach and certainly not to try to grow in this market where interest rates are still quite aggressive. Okay, and then lastly, on the credit loss reserves that you had in the quarter, can you provide some color on those credit loss reserves? What I'll do is I'll ask Nick Marcello to... Unknown Speaker He's more in tune with the accounting treatment and the actual occurrence of the provisions. Yeah Gaurav.

Speaker Change: So those are the things that we're trying to stay away from.

Marshall Cash: and it'd be easier for us to manage our book as we have it, marshal cash, continue to lend money, of course, but not to take a reach and certainly not to try to grow in this market where interest rates are still quite aggressive.

Speaker Change: Okay, and then lastly, on the credit loss reserves that you had in the quarter, can you provide some color on on those credit loss reserves?

Nick Marcello: What I'll do is I'll ask Nick Marcello to, you know, contribute to this. He's more in tune with the accounting treatment and the actual occurrence of the provisions.

Nick Marcello: Go ahead, Nick.

Nick Marcello: Yeah, so the company increased its reserve. I think we kind of saw this across the sector. You know, we took the position that, you know, market conditions haven't improved all that much. We had in the company consideration of non-accrual loans on an asset by asset approach. The rest of the performing bucket has sort of a historical provision applied to it based on losses that we've incurred since inception. So what you're really seeing in that eight and a half million is about the Reserve Balance Against Individual Loans That Are Performing.

Nick Marcello: Yeah, hey Gaurav. So, yeah, so the company increased its reserve. I think we kind of saw this across the sector.

Nick Marcello: You know that we took the position that you know market conditions haven't improved all that much we had and the company considers

Nick Marcello: loans, non accrual loans on an asset by asset approach.

Nick Marcello: The rest of the performing bucket has sort of a historical.

Nick Marcello: provision applied to it based on

Nick Marcello: losses that we've incurred since inception. So what you're really seeing in that eight and a half million is about

Nick Marcello: Five to five and a half or so of direct.

Nick Marcello: reserve balance against individual loans that are non-performing. The additional $3 million roughly was applied across the general reserve bucket, both of which were just as a result of, again,

Nick Marcello: Assert valuations, our situation declines about.

Nick Marcello: for the underlying collateral for loans that are non-performing.

Nick Marcello: The additional three million roughly was applied across the general reserve bucket, both of which were just as a result of again, asset valuation declines for the underlying collateral for loans that are non-performing, as well as just the company taking the approach that market conditions are still fairly punitive for our borrowers as they really don't have an opportunity right now in a lot of cases to refinance as was probably in their business plan initially. As banks haven't been able to offer takeout financing, our guys can only sort of withstand our, You know, our 12% for so long, and as a result, you're kind of seeing an uptick in her, how we're looking at our seasonal reserve. Okay, thank you. That's all I had.

Nick Marcello: as well as just the company taking the approach that market conditions are still.

Nick Marcello: fairly punitive for our borrowers as they really

Nick Marcello: Don't have an opportunity right now in a lot of cases to refinance, you know, as was probably in their in their business plan initially.

Nick Marcello: As banks haven't been able to offer take-out financing, our guys can only sort of withstand our 12% for so long, and as a result, you're kind of seeing an uptick in how we're looking about our CECL reserve.

Speaker Change: Okay, thank you. That's all I had.

Tyler Batory: Our next question comes from Tyler Batory with Oppenheimer. Please proceed with your question. Good morning.

Speaker Change: Our next question comes from Tyler Battering with Oppenheimer. Please proceed with your question.

John Villano: Thank you. And congratulations to Nick on his new responsibilities here. First question, just to follow up on one of the prior comments. John, I think you said 30 million dollars of cash that you have right now. Is that just that increase from the 10 million you had at the end of the quarter, that extra 20 million? I'm assuming that's just some extra principal repayments that have come through, correct. That is correct. And let me be perfectly clear, Tyler, and I think you're coming here.

Tyler Battlering: Good morning. Thank you. And congratulations to Nick on the new responsibilities here. First question, just to

Tyler Battlering: Follow up on one of the prior comments, John , I think you said $30 million of cash that you have.

Speaker Change: Right now, is that just that increase from the 10 million you had at the end of the quarter, that extra 20 million, I'm assuming that's just some extra principal repayments that have that have come through, correct?

Speaker Change: That is correct and let me be perfectly clear Tyler and I think you're coming here, marshalling cash right being somewhat defensive it does have the effect of hurting bottom line performance.

John Villano: Marshaling cash, right, being somewhat defensive, it does have the effect of hurting bottom-line performance. So, yes, you're absolutely right.

John Villano: We do have approximately $30 million in cash. Currently, we're deciding whether we should pay the December notes off early to save the interest rate on those or not. So that's a board decision that's coming down. Okay.

Speaker Change: So, yes, you're absolutely right. We do have approximately $30 million in cash. Currently, we're deciding whether we should pay the December notes off early.

Speaker Change: to save the interest rate on those or not. So that's a board decision that's coming down the pike.

John Villano: And then some of the numbers you provided, I think you said $106 million in nonaccrual, $73 million in change in foreclosure. I think that was a little bit of a tick up versus the prior quarter. So just talk a little bit more about what's going on there and if there's potential that those numbers could go even higher in the next couple of quarters, or maybe you think you're in a good spot, kind of given what you have right now. Yeah.

Tyler Battlering: Okay, and then some of the numbers you provided, I think you said 106 million.

Speaker Change: and non accrual, 73 and change.

Speaker Change: I'm in foreclosure. I think a little bit of a of a tick up versus the prior quarter So just talk a little bit more about you know, what's going on

Speaker Change: there and, you know, there's potential that those numbers could go even higher the next, the next couple of quarters or maybe you think you're in a, you're in, you're in a good spot, kind of given the given what you have right now.

John Villano: So first of all, I'd love to say I'm in a good spot, but clarity is a big issue right now. We are still not believers that a half point interest cut, when it comes and if it comes, is going to solve the problems in the We're still fighting through some COVID excess. You know, not only material and labor costs but rapidly increasing prices and now decreasing prices that kind of throw business plans out of whack. We have an election coming, and certainly not wanting to get political, but there's uncertainty. There are wars out there.

Speaker Change: Yeah, so first of all, you know, I'd love to say I'm in a good spot, but, you know, clarity, right, is a big issue right now. We are still not believers that a half point interest cut

Speaker Change: when it comes and if it comes is going to solve the problems in the industry.

Speaker Change: We're still fighting through some COVID excesses, you know, not only material and labor costs, but rapidly increasing prices and now decreasing prices that kind of throw business plans out of whack.

Speaker Change: We have an election coming, right? And certainly not wanting to get political, but there's uncertainty. There's wars out there.

John Villano: We're taking this month by month and kind of in tune with where Gaurav was going with his questions. A lot of our competition, Say, or Fellow Mortgage Reads have the ability to lever through a period of defaults. We don't, can't.

Speaker Change: We're taking this month by month and

Speaker Change: You know kind of in tune with where Gaurav was going with his questions a lot of our

Gaurav Mehta: competition say or fellow mortgage rates, they have the ability to lever through a period of defaults.

John Villano: We're not We're not going to chase ridiculous money. So we can't earn through these. We feel that that you're just really walking yourself off the plank, and we don't want to do that.

Gaurav Mehta: We don't.

Gaurav Mehta: We can't. We're not going to chase ridiculous money. So we can't earn through these things.

Gaurav Mehta: We feel that that's, you know, you're just really walking yourself off the plank and we don't want to do that.

John Villano: So we like to think that 2025 is a better time for us to get back on the growth wagon. We're playing defense, you know, hey, just yesterday, we received $2.25 million on a loan for an industrial property that didn't pay in full in nine months. Those things happen.

Gaurav Mehta: So we like to think that 2025 is a better time for us to get back on the growth wagon.

Speaker Change: Unknown Speaker We're playing defense, you know, hey, just yesterday, we received $2.25 million on a loan, an industrial property that didn't pay in nine months, full pay, those things happen.

John Villano: So the portfolio is still moving, and as you noted, we did raise $20 million in the last month and a half. So we're quite happy with how the portfolio is turning out, but we're still at risk with respect to appraisals and borrowers that, as Nick mentioned, they're just jammed off. There's nowhere for them, and the real issue that we run into is, you know, once the distress vibe gets out there, getting a hundred percent is very difficult. So we're running into a little bit of that, where a borrower in distress can say, Hey, you know, what if I give you 85%? What if I give them to you?

Speaker Change: So, the portfolio is still moving. And as you noted, we did raise $20 million in the last month and a half. So, we're quite happy with how the portfolio is turning, but we're still at risk with respect to appraisals.

Speaker Change: and borrowers that, as Nick mentioned, they're just jammed up. There's nowhere for them to go. And the real issue that we run into is, you know, once the distress vibe gets out there,

Nick Marcello: Getting a hundred percent is very difficult.

Nick Marcello: So we're running into a little bit of that where a borrower in distress can say, hey, you know, what if I give you 85%? What if I give you 90%?

John Villano: So we're fighting some of those off at the same time. It's just going to take a little time for us to get clarity moving forward. Okay, okay. I appreciate that.

Nick Marcello: So we're fighting some of those off at the same time. It's just going to take a little time for us to get clarity moving forward.

John Villano: And then last question for me, you know, there are a lot of people that reach out and ask about the dividend, the dividend policy, how to think about the dividend going forward, given kind of where we are in the industry. So if you could address that for shareholders, please, that would be helpful. Well, you know, we've kind of worked out our dividend down here. When we don't have liquidity to grow our book, there's no way for us to maintain our, let's call it, a 12 cent dividend. The yield on our comment was much greater. What we've done here is we're actually paying out gap earnings instead of tax. He used to, so we're just trying to scale it down a little bit.

Speaker Change: Okay, okay, great. Appreciate that. And then last question for me.

Speaker Change: There's a lot of people that reach out, ask about the dividend, the dividend policy, how to think about the dividend going forward, given kind of where we are in the industry. So if you could address that for shareholders, please, that would be helpful. Thank you.

Sheryl: Well, um...

Speaker Change: You know, we've kind of worked our dividend down here a bit.

Speaker Change: when we don't have liquidity to grow our book.

Speaker Change: There's no way for us to maintain our

Speaker Change: Let's call it a 12 cent dividend. The yield on our common was much greater. What we've done here is we're actually paying out gap earnings.

Speaker Change: instead of tax earnings like we used to. So we're just trying to scale it down a little bit. We're conserving cash.

John Villano: We're conserving cash. Again, we have a couple more quarters of this. We hope to be back on the strong dividend train in the near future. But once again, you know, we still feel that cash and liquidity are king. So, I mean, I think we're gonna have a reduced dividend here for the next quarter. Okay, just a little add to that. We're paying tax, not GAAP right now. So taxable is more you could think about, like net distributable earnings as some Unknown Executive, Gaurav Mehta, Matthew Erdner, Nicholas Muller, John Villano, Nicholas Marcello, don't reduce tax.

Speaker Change: Again, we have a couple more quarters of this. We hope to be back on the strong dividend train in the near future. But once again, you know, we still feel that that cash and liquidity is king.

Speaker Change: Um...

Speaker Change: So, I mean, I think we're going to have a reduced dividend here for the next quarter or two.

Speaker Change: Yeah, just to add to that, we're paying taxable, not GAAP right now. So taxable is more, you can think about like net distributable earnings as some of our peer kind of disclosed and think about that and diesel reserves don't.

Unknown Executive: So if you look at those as an ad back, you get closer to that each number that we distributed for the quarter. Okay. All right. Thank you very much for the detail.

Speaker Change: Don't reduce taxable income. So those sort of get if you look at those as an ad back you get closer to that. That 8 cent number that we distributed for the quarter.

Tyler Batory: I appreciate it. Yep. Thanks.

Speaker Change: Okay, all right. Thank you very much for the detail. Appreciate it

Chris Muller: Our next question comes from Chris Muller with Citizenship, MP. Please proceed with your question. Hey, guys, thanks for taking the questions and congratulations, Nick, on the new role.

Speaker Change: Yes. Thanks. Thanks.

Speaker Change: Our next question comes from Chris Moller with Citizen Street MP. Please proceed with your question.

Chris Muller: So I guess I wanted to touch on the specific reserves of $5.5 million that you guys talked about. I guess, given the short-term nature of your loans, what changed so quickly with the assets from the last quarter? And did they not qualify for modifications there?

Chris Moller: Hey guys, thanks for taking the questions and congrats, Nick, on the new role. So I guess I wanted to touch on the specific reserves of $5.5 million that you guys talked about. I guess, given the short-term nature of your loans, what changed so quickly with the assets from the last quarter? And did they not qualify for a...

John Villano: Is that what kind of drove the reserve, the specific reserves? When we go through our modification, it's basically a re-underwrite of the loan. What we're finding is our borrower is not in the same kind of shape going forward. We may also find that the property, for example, did.

Speaker Change: Modifications there that what kind of drove the reserve the specific reserves

Speaker Change: When we go through our modification, it's basically a re-underwrite of the loan.

Speaker Change: What we're finding is our borrower is not in the same kind of shape.

Speaker Change: Going forward we may also find that a, a property for example, didn't lease up, you know, things like that. So we're not being more aggressive with respect to the write down. We're trying to be realistic with respect to where the portfolio sits. And it's a bunch of different occurrences.

John Villano: So we're not being more aggressive with respect to the write-down; we're trying to be realistic with respect to where the portfolio sits, and there are a bunch of different occurrences. Just trying to get a feel for what the net realizable value is.

Speaker Change: Just trying to get a feel for what net realizable value may be.

Chris Muller: And then, on the other side of the coin with REO, we really haven't seen a big jump in that REO bucket. Should we expect to see that increase over the next couple of quarters as you work through some of these loans? Or do you think you'll be more successful on the modification side, and things won't have to go REO?

Speaker Change: Got it. And then I guess on the other side of the coin with REO, we really haven't seen a big jump in that REO bucket. Should we expect to see that increase over the next couple quarters as you work through some of these loans? Or do you think you'll be more successful on the modification side and things won't have to go REO?

John Villano: Chris, there's a very interesting phenomenon in our business. Once we get a property back... For good or bad, we're able to move. Okay. Our biggest issue is getting control of the property. The best thing in the world now is an attorney fighting a foreclosure. They make tons of money.

Speaker Change: Um, Chris, there's a very interesting phenomena in our business. Once we get a property back.

Chris Moller: for good or bad we're able to move it.

Chris Moller: Okay, our biggest issue is getting control of the properties.

Speaker Change: The best thing in the world now is an attorney fighting a foreclosure. They make tons of money. The stall process is, in our opinion, quite frivolous.

John Villano: The stall process is, in our opinion, quite frivolous, and it keeps us from really moving forward with respect to a sale or a renovation to complete the property. So the issue is these things are hung up, and the foreclosure process, in most cases, when we get the property back, it is sold within a few weeks after we get it back. So the REO doesn't stick around for long, and we're quite happy about that. It is a testament to underwriting, just getting them back into our hands, where we can do some good with the problem.

Speaker Change: And it keeps us from really moving forward with respect to a sale or a renovation to complete the property. So the issue is these things are hung up in the foreclosure process.

Speaker Change: In most cases when we get the property back, it is sold within

Speaker Change: You know a few weeks after getting it. So the REO doesn't stick around for long and We're quite happy about that. It is a testament to the underwriting. It's just getting them back into our hands Where we can do some good with the property

Chris Muller: That's helpful. Thanks for taking the question. Our next question comes from Christopher Nolan with Leidenberg Thelman. Please proceed with your question. Hey guys, Nick, congratulations on the step.

Speaker Change: Got it. That's helpful. Thanks for taking the questions.

Speaker Change: Our next question comes from Christopher Nolan with Leidenberg Feldman. Please proceed with your question.

Christopher Nolan: Hey, John, the allowance for reserves, is that a function of lower cash flows on the property or lower LTVs or the company? It's a mixed bag, Chris. In some cases, it's an LTV, we have talked publicly about appraisal risks, do we have, and we continue to run into that. It could also be cash flows. We have run into situations where one of our properties is fully rented with magnificent.

Christopher Nolan: Hey guys, Nick, congratulations on the step. Hey John, the allowance for reserves, is that a function of lower cash flows on the property or lower LTVs or a combination?

Speaker Change: It's a mixed bag, Chris.

Speaker Change: In some cases it's an LTV. We have talked publicly about appraisal risk.

Speaker Change: We do we have and we continue to run into that it could also be cash flows we have run into situations where a One of our properties is fully rented with magnificent rent

John Villano: I mean, premium, and Bank Refi doesn't trust the rent, meaning they're the two perfect. So they discount the rents, and the offer to refi out is less. So we're running into properties that are performing perfectly, and now all of a sudden the rents are too high, and they don't expect, So we're running into a mixed bag of developer issues, developer capital, and the bank's willingness to get into a loan or into a project.

CastingWords: Transcription by CastingWords

CastingWords: Meaning they're too, they're too perfect.

CastingWords: So they discount the rents and the offer to refi out is less.

CastingWords: So we're running into properties that are performing perfectly and now all of a sudden the rents are too perfect and they don't expect them to continue.

CastingWords: So we're running into a mixed bag of developer issues, developer capital, banks willingness to get into a loan.

John Villano: And then also, we have, you know, a distressed loan that sells on the street, and all of a sudden, it affects your property in the next appraisal. So it's kind of a mixed bag for us. We try to handle each one a little differently.

CastingWords: or into a project and then also we have you know a distressed loan that sells on the street and all of a sudden it affects your property in the next appraisal. So it's kind of a mixed bag for us. We try to handle each one a little differently but again we have a little more time to deal with this.

John Villano: But again, we have a little more time. Thank you very much. Okay, so assuming that it is, you know, a good chunk of it is LTV related, a rate catch may be giving you a little relief on these easels. Provisioning. Is that a reasonable read into that? I would say yes.

Speaker Change: Okay, so, assuming that it is, you know, a good chunk of it is LTV related, a rate cut may be giving you a little relief on the Cecil

John Villano: I don't think one rate cut will solve not only our issues but our industry's issues. I think once once The Real Estate Buyer, The Investor's Seed, a steady policy coming from the Federal Reserve. It would be a great time for them to come in and not only because of the stress but also to start doing their own projects.

Speaker Change: Provisioning. Is that a reasonable read into that?

Speaker Change: I would say yes. I don't think one rate cut will solve not only our issues, but our industry's issues. I think once once the

Speaker Change: The real estate buyer, the investor, sees a steady policy coming from the Federal Reserve. It would be a great time for them to come in and not only buy distressed, but also just start doing their own projects and refilling our pipeline with deals.

John Villano: Refilling our pipeline with deals. One cut is just, you know, let's wet our whistles and hope for the best. But if we start putting two or three of these together, I think we do have a change to get. The final question is on capital structure, following the, here with draw all the notes offering. It sounds like you guys are really starting to think about how to approach your capital structure a little bit differently, and I was working in this sense that you're now considering, you know, a more de-leveraged balance sheet going forward. And if that's the case, should we also expect, you know, improved pricing because it sounds like you've got more deal flow than you know what to do with? So why not raise prices as well?

Speaker Change: One cut is just, you know, let's wet our whistle and hope for the best. But if we start putting two or three of these together, I think we do have a change to get things fixed.

Speaker Change: Final question is on capital structure, following the

Speaker Change: to withdraw the notes offering.

Speaker Change: It sounds like you guys are really starting to think about how to approach

Speaker Change: Your capital structure a little bit different and I'm sort of getting the sense that you're now considering, you know, a more deleveraged balance sheet going forward And if that's the case Should we also expect you know improved pricing because it sounds like you got more deal flow that you know what to do with

John Villano: [inaudible] We do have significant deal flow, and the world is looking for money to do our types of deals. Lowering our leverage is, in our opinion, exactly the right thing to do. I certainly can't pay out our December notes, which I think are maybe seven and eight or something like that, and replace them with ten, eleven, or even something ugly. None of our shareholders would appreciate them.

Speaker Change: And so why not raise prices as well?

Speaker Change: We do have significant deal flow and the world is looking for money to do our types of deals.

Speaker Change: Unknown Speaker Lowering our leverage is, in our opinion, exactly the right thing to do now. I certainly can't go pay out our December notes, which I think are maybe 7 1 8 or something like that, and replace it with 10 11, or even something uglier.

John Villano: So we're not looking to sink the ship just to grow the book of business. We think playing a little defense with respect to growth is going to position us to be really strong when the lights get turned back on. We still have our pricing. We still can price. I mean, we're still 12 and 2.

Speaker Change: None of our shareholders would appreciate that move.

Speaker Change: So we're not looking to sink the ship just to grow the book of business. We think by playing a little defense with respect to growth is going to position us to be really strong when the lights get turned back on.

Speaker Change: We still have our pricing. We still can price. I mean, we're still 12 and 2. We have our construction service fee. It's just we're not doing many deals, so our origination fee income is down severely.

John Villano: We have our construction service fee. It's just we're not doing many deals, so our origination fee income is down severely. Okay, thank you.

Speaker Change: Okay, thank you.

Matthew Erdner: Okay. Our next question comes from Matthew Erdner with Jones Trading. Please proceed with your question. Hey guys, thanks for taking the question. I just want to repeat this back, make sure I got the right numbers. First off, net funding of $41.7 million, and then offset by $32.3 million in pay down. So I'm getting about a net portfolio growth of like $9.4 million. That's about right.

Chris Moller: Okay, Chris.

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

Matthew Edenner: Hey guys, thanks for taking the question. I just want to repeat this back, make sure I have the right numbers. First off, net funding is at $41.7 million and then offset by $32.3 million in pay down. So I'm getting about net portfolio growth of like $9.4 million.

Unknown Executive: That's correct. Yep. Okay. And then what is your expectation for payoffs for the remainder of the year? Should we expect it to continue kind of at that $30 million? Yeah, we used to be able to project payoffs a lot better two years ago. Payoffs are still quite robust.

Speaker Change: That's about right. That's correct, yeah.

Speaker Change: Okay and then what is your expectation for payoffs for the remainder of the year? Should we expect it to continue kind of at that 30 million dollar pace?

Speaker Change: We used to be able to project payoffs a lot better two years ago.

John Villano: There's a whole ton of good loans on the books that are getting refinanced and things like that. We still expect to raise some cash going into the end of the year, which is hard to say, Matt. I would probably, you know, if I had a work of projection, I would probably look, you know, maybe a $20 million portfolio growth. [inaudible] Funding over repayments, something like that. We're not, we're not, you know, jumping out of our shoes doing deals where we used to do 100 million a quarter, so. It's probably going to be around 20 million; net growth would be my best guess.

Speaker Change: Payoffs are still quite robust.

Speaker Change: You know there's a whole ton of good loans on the books that are getting refinanced and things like that. We still expect to raise some cash going into the end of the year. It's hard to say, Matt. I would probably, you know, if I had to work a projection, I would probably look, you know, maybe at a $20 million dollar portfolio growth.

Speaker Change: Fundings over repayments, something like that. We're not jumping out of our shoes doing deals where we used to do 100 million a quarter.

Matthew Erdner: Gotcha. And then, you know, as you guys continue to defend the balance sheet and kind of have this offensive posture, how do you weigh, you know, lending out new money versus keeping it on hand and, you know, just keeping that cash on the balance sheet to kind of take care of the current capital structure? There's a tug-of-war in the office here.

Speaker Change: It's going to be probably around 20 million neck growth would be my best guess.

Matt: Gotcha. And then, you know, as you guys continue to defend the balance sheet and kind of have the defensive posture, how do you weigh, you know, lending out new money versus keeping it on hand and, you know, just keeping that cash on the balance sheet to kind of take care of the current capital structure?

John Villano: The best investment we can make is to buy our shares right here, quite honestly. Um, we don't want to, you know, waste cash buying shares at the moment, so I think.

Speaker Change: There's a tug of war in the office here. The best investment we can make is to buy our shares right here, quite honestly. We are a lender.

Speaker Change: You know, we don't want to, you know, waste cash buying shares at the moment. So I think.

John Villano: You know, look, Cassius King at the moment. There may be some stock buying going on, a little bit here and there, depending on where the price goes, and we may see what happens right after this call. So we have cash available to do those things, we have cash available to lend, and quite honestly, I'm able to sleep easy at night knowing that... You know, very much like a COVID scenario, when COVID hit, we had cash. And it's a great place.

Speaker Change: You know, look, Cassius King at the moment.

Speaker Change: There may be some stock buying some shares a little bit here and there depending on where price goes and we may see what happens right after this call. So we have cash available to do those things. We have cash available to lend.

Speaker Change: and quite honestly, I'm able to sleep easy at night knowing that, you know, very much like a COVID scenario. When COVID hit, we had cash.

John Villano: So we don't want to out earn our, try to out earn our problem, because we just don't know where the end is. So we have cash to do. We're going to be prudent with our cash. And I just thought, you know, I asked you guys to give us a couple quarters to see where this ends. So I think we'll have some clarity probably after the elections and what's going on in the Middle East. But, you know, things should start to clear up. Right, right.

Speaker Change: And it's a great thing. So we don't want to try to out earn our problems because we just don't know where the end is. So we have cash to do things. We're going to be prudent with our cash.

Speaker Change: and we just thought, you know, I asked you guys to give us a couple quarters to see where this ends. So I think we'll have some clarity probably after the elections and what's going on in the Middle East, but, you know, things should start to clear up.

Matthew Erdner: That's helpful. And then, you know, turning to the credit facility, I think you mentioned you had $10 million left there. You know, have you guys had any discussions about possibly increasing the size? And you know, what's the demand on the bank side for something like a new credit facility or repurchase agreement to kind of throw the loans onto? We have a great relationship with Needham Bank, and we have discussed an upsize.

Speaker Change: Right, right. That's helpful. And then, you know, turning to the credit facility, I think you mentioned you had $10 million left there. You know, have you guys had any discussions about possibly increasing the size and you know, what's the demand on the bank side for

Speaker Change: you know, something like a new credit facility or repurchase agreement to kind of throw the ones on to.

Matthew Erdner: Most likely, if they don't see us using the line, sitting with a ton of cash, it's probably not a thing that they want to do. But again, they've been a great partner for us. I think they do want to give us more capital to grow our business. They, too, appreciate the play safe posture that we're taking. Hey, look, we're always looking for creative cash, and hopefully, it comes from Needham. We do have a Churchill facility with a lot. And right now, there's no real push for additional liquidity unless it comes at a, Gotcha.

Speaker Change: We have a great relationship with Needham Bank.

Speaker Change: We have discussed an upsize, most likely if they don't see us using the line.

Speaker Change: Unknown Speaker I'm going to go ahead and get started. Thank you.

Speaker Change: They too appreciate the play safe posture that we're taking. Hey, look, we're always looking for a creative cash and hopefully it comes from Needham. We do have a Churchill facility with a lot of room.

Speaker Change: and you know right now there's there's no real push for additional liquidity unless it comes at a great price

Speaker Change: Gotcha. That's helpful. Thank you.

Matthew Erdner: That's helpful. Thank you. We have reached the end of our question and answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: We have reached the end of our question and answer session. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Operator: A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephen Swett, with Investor Relations. Thank you, sir. You may begin. Good morning, everyone.

John Villano: This is a non-cash item that persists within the market and more broadly across the financial services industry. As we look forward, I am confident that our cycle-tested experience provides us with the tools needed to navigate this environment effectively.