Sunrise Realty Trust, Inc. (SUNS) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the First Quarter 2015 Solar Senior Capital Ltd. Earnings Conference Call. My name is Steve, and I'll be the operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to the Chairman and Chief Executive Officer Michael Gross. Please proceed.

Thank you very much and good morning. Welcome to Solar Senior Capital Ltd. earnings call for the quarter and year ended March 31, 2015. I'm joined here today by our Chief Operating Officer Bruce Spohler, and Chief Financial Officer Richard Peteka. Rich, would you please please start off by covering the webcast and forward-looking statements.

Of course, thank you Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Senior Capital Ltd. and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast on our Web site at www.solarseniorcap.com. Audio replay of this call will be made available later today as disclosed in our press release. I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. Solar Senior Capital Ltd. undertakes no duty to update any forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our Web site or call us at (212) 993-1670. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. We are pleased with our results for the first quarter 2015, both in terms of financial performance and our strategic sourcing initiatives. We continue to believe that Solar Senior with its predominantly first lien senior secured floating rate portfolio is not only a critical component of our Solar platform but is also an important allocation in investor's portfolio as the Fed inevitably raises interest rates. In fact, we at Solar Senior is so confident that the credit quality of our portfolio and our ability to grow net investment income per share that the Solar Capital Partner investment team has increased its collective ownership in outstanding common stock to close a 7%. At the time of our earnings call this past February the credit markets were still reacting to the turmoil caused by the massive drop in oil prices. The spread widening that occurred around year end did benefit pricing into the new interest market however, the first quarter 2015 experienced a significant drop-off in new and short activity in both the liquid leveraged loan market as well as the private middle market. US syndicate lending fell to a two and a half year low in the first quarter, as the pickup in M&A related financing could not offset the slowdown in refinancing activity. This resulted in a $0.40 drop in US loan issuance in the first quarter compared to the prior quarter. In the middle market, specifically, new issue volume reached a three year low. Against this challenging backdrop we continued to positive momentum of our strong fourth. In Q1 we earned $0.34 of net investment income per share approximating our earnings in Q4 2014 and we maintained our net asset value per share of $17.65. Additionally on March 31 our diversified portfolio comprised predominantly of senior secured floating rate loans continue to be 100% performing. We continue to have no direct exposure to the energy sector. Equally important, or progress in the quarter on the First Lien Loan Program, are joined by [indiscernible] creates a runway for net investment income growth through the remainder of 2015. Bruce will provide additional details on the FLLP. On the top of the growth or strategic portfolio company, Gemino Healthcare Finance paid us the first quarter dividend of $852,000 which represents a 5.1% increase from the fourth quarter 2014. We believe this investment has additional potential earnings upside. We are optimistic about our ability to growth both SUNS and the FLLP portfolios in 2015 generally the first quarter invest activity is seasonally low. This year's dropoff was magnified by the energy sector induced credit market turmoil. This quarter and that trend has reversed itself. We have recently seen a pickup and activity in the middle market overall as well specifically for Solar Senior. For our growing FLLP portfolio Gemino continues strong performance with its growth potential and our 5% foreign core senior secured loan portfolio, we believe we can increase the net investment income per share over the coming quarters. On March 31, 2015, SUNS had approximately $34 million of unused credit capacity subject to borrowing base limits. In addition to quarter and the $75 million the FLLP credit facility was undrawn. When considering the anticipated two to one debt-to-equity leverage on our four 50 million commitment to the FLLP, we believe our total repo capital today is approximately $120 million subject to borrowing base limitations. Lastly, our Board of Directors declared a monthly distribution for May 2015 of $11.75 per share payable on June 2, 2015 to stockholders of record on May 21, 2015. At this time, I would like to turn the call back over to our chief financial officer Rich Peteka

Thank you, Michael. Solar Senior Capital Limited net asset value at March 31 was $203.5 million or $17.65 per share consistent with the net asset value of year-end. Our balance sheet on March 31 had an investment portfolio with a fair market value of 345.4 million in 46 portfolio companies operating in 26 industries compared to 340.5 million in 43 portfolio companies operating in 25 industries as of December 31. In March 31, 2015, the weighted average yields on our income producing portfolios decreased slightly to 6.9% measured at fair value versus 7.0% at December 31 and 100% percent of our portfolio of investments are performing. SUNS also have 140.9 million of borrowings outstanding on its 175 million credit facility on March 31 resulting in a net debt-to-equity ratio of .67 times. This compares to 143.2 million in a net debt-to-equity ratio of .67 times as December 31. Gross investment income for the three months ended March 31st totaled 6.1 million versus 5.83 million for the three months ended December 31. Expenses for the three months ended March 31 were 2.3 million, compared to 1.9 million for the three months ended December 31. Accordingly, net investment income for the quarter ended March 31, 2015 was 3.9 million or $0.34 per average share, versus 4.0 million or $0.35 per average share for the quarter ended December 31, 2014. Below the line, net realized and unrealized gain for the quarter ended March 31st totaled 210,000 versus a loss of 2,000 for Q4 2014. Ultimately, the company had a net increase in net assets resulting from operations of 4.1 million or $0.35 per average share for the three months ended March 31, 2015. This compared to a net increase of 4.0 million or $0.35 per average share for the three months ended December 31st. At this time, I’d like to turn the floor over to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich. Let me begin by providing a portfolio update. Overall credit fundamentals and financial performance of our portfolio companies remained strong. As Michael mentioned, we continue to have no direct exposure to the energy sector. At March 31st, our portfolio was a 100% performing and we feel confident about our portfolio company’s ability to continue to deleverage and de-risk. At March 31, the weighted average yield of our portfolio was 6.9% measured at fair value. Our internal risk assessments on a weighted average of our total portfolio remained at approximately 2 at March 31 based on our 1 to 4 risk rating scale with 1 representing the least amount of risk. Including our ownership portion of the loan now held at the FLLP joint venture, SUNS’ portfolio ended the first quarter with investment in 45 issuers across 25 industries and our average issuer exposure is approximately $7.7 million. Portfolio was invested approximately 88% in senior secured loans which includes our ownership portion of the FLLPs firstly in senior secured loans, roughly 10% in Gemino senior secured healthcare whose portfolio consists [indiscernible] of senior secured first lien loans, 1% in unsecured notes and less than 1% in common equity excluding Gemino and our FLLP membership interest. Including our investment in Gemino and the FLLP partnership at a 100% floating rate, approximately 94% of our income producing portfolio is at floating rate. During the quarter, our muted new issue activity across the credit markets excluding our first lien senior secured loan transfers into the joint venture, we invested approximately $24 million across five portfolio companies and had sales and repayments of approximately $20 million resulting in net portfolio growth just over $4 million. Before I give an overview of Q1 activity, let me provide an update on our new strategic first lien program with Voya Investment Management as well as our investment in Gemino. During the quarter, we established $75 million initial credit facility for the FLLP which has the final maturity at 2020 and bears interest at a rate of LIBOR plus 225 BIPs to 250 BIPs. We transferred $32 million first lien senior secured loans from our balance sheet into the SPV and exchanged for roughly $30 million of equity interest and $2.5 million of cash which equals an 87.5% ownership of the JV. These transferred assets provide the equity necessary to now fund additional first lien investments through borrowings under the FLLP credit facility. As we grow that portfolio, we anticipate upsides in the credit facility with an expected debt to equity ratio of approximately 2 times once ramped. We’ve recently begun drawing under that credit facility to fund new investments for the FLLP joint venture. Now let me turn to Gemino. At quarter end, Gemino had just over $119 million of funded senior secured revolving or term loans across 36% discreet issuers with an average loan balance of approximately 3.3 million. All of the loan commitments from Gemino are floating rate, asset based, senior secured, cash pay consistent with 12/31/14 portfolio. For Q1 2015, Gemino paid distributions of $862,000 to SUNS equating to a 10.5% annual distribution yield on our costs which is an increase of 5% from the distribution paid in Q4. In addition, Gemino had $90 outstanding under its $110 million credit facility at quarter end. Now let me highlight a couple of our Q1 investments. We made a $10 million investment in the first lien loan to support Ontario Teachers acquisition of Pet Vet Care Centers, a leading consolidator of general practice and specialty veterinary hospitals. Net leverage to our first lien loan is just over 4 times and the investment carries an all-in yield of approximately 6%. Next, after being repaid at par on our $10 million investment in IPC systems first lien term loan, we funded a $5 million investment in a new first lien term loan concurrent with the purchase of the company by Centerbridge Partners. As a reminder, the company’s leading provider of network services and trading communication technology to the financial markets. The IRR since inception on our investment is just over 7.8%. The first lien – a new first lien loan has the net leverage of 3.9 times in an all-in yield of just over 7%. Additionally, we increased our investment in TFS Minor by $2 million via an add-on term loan. The company used the proceeds to make an accretive acquisition. The company currently has net leverage of 4.2 times and our total exposure just over $11.5 million carrying an all-in yield approximately 6%. Now I’ll touch on the couple of our repayments in Q1. We repaid a par on our $6.5 million position in epic health services first lien term loan. The repayment was pursuant to a wholesale refinancing of the company in connection with the sale of the company to a strategic pediatric private duty nursing company. The combination creates a larger and more diversified business. We were given the opportunity to invest $3 million into the new first lien term loan which carries an all-in yield of approximately 6%. Finally, second quarter to-date we’re experiencing net portfolio growth and are optimistic about our ability to continue to drive growth in net investment income through both the ramp of our FLLP joint venture as well as continued growth at Gemino. Now I’d like to turn the call back to Michael.

Thank you, Bruce. In conclusion, we believe we are well positioned to deliver growth in net investment income over the course of 2015. We expect our core portfolio of 100% performing senior secured loans to continue to provide a steady earnings stream and for the FLLP and Gemino to drive growth in the near term. As large shareholder ourselves, our investment decisions are guided by the objective that investors in the senior secured loan asset class expect the preservation of capital. Concurrently, we are focused on growing our net investment income without incurring undue risk and we believe this can be accomplished by continuing to grow Gemino’s dividend and through the FLLP with its first lien mandate and reasonable leverage target. We continue to believe the senior secured middle-market loan asset class remains attractive on both the relative and absolute basis. SUNS currently has a well-diversified portfolio of senior secured folding rate loans. The weighted average yield of the portfolio based on fair value was 6.9% at March 31, 2015. In comparison, the S&P LSTA U.S. leverage loan 100 which tracks the 100 largest loans in the broader index had a yield to maturity of just 4.7% at March 31st. At last light’s closing price of 50.90 per share, SUNS trade at 0.9 times book value yield approximately 8.9% and has ample capital to make additional investments. The risk in value proposition of an investment in Solar Senior Capital is compelling when compared to syndicated high yield and bank loan markets. SUNS yield of approximately 8.9% also compares quite favorably to the 5.9% yield of the Barclays high yield corporate index and to a 6.3% weighted average yield on representative sample of 14 closed end bank loan funds. Thank you for your time this morning. We look forward to speaking you next quarter. Operator, please open the line up for questions at this time.

Thank you. [Operator Instructions] And stand-by for your first question which come from the line of Andrew Careye from BBC Income Fund. Please go ahead.

Just wanted little bit of clarity. So obviously with the strength and the liquid loan markets coming here in Q1, just wondered it looks like on your book with NAV being flat, why that wasn’t – why we didn’t see more of a markup during the period?

I don’t think there was much movement from the technical perspective as we looked across our credit. That was directionally a little bit up a little bit down, but generally speaking I don’t think the market moved that materially in Q1 to justify material technical mark. I mean these are first liens without any real call protection, they’re all callable apart.

Right. Sure. No, fair enough. And then just, I guess maybe any more additional color I appreciate kind of what you gave in your prepared remarks, but obviously with the liquid markets and even within private credit things remain competitive. Just your outlook on being able to deploy capital in this market and your ability to I guess find new deals that make sense from a risk reward standpoint?

Well I think honestly the driver if you look back at Q1 is relatively flat portfolio position was really the result not so much of the competitive nature of the market price, but more because of the lack of the issuance. We feel that when there are deals we get our fair share of looks. If you go back to Q4 as you may recall, we originated over $90 million of new transactions for SUNS. It’s just the Q1 there was not a lot of activity to be had mid-market loan issuance was down over 60% in that quarter, but we feel extremely well positioned I think from a competitive perspective as you know there are very few BBCs and other institutions targeted exclusively on first lien club mid-market loans.

Right.

And I think the dislocation that inevitably will result as GE finds a home for their sponsor business just creates more opportunity from a competitive dynamic.

Sure. No, thank you. Certainly makes sense and I appreciate you guys taking a conservative look to the book unlike some others who have been more aggressive and we're seeing the consequence of that now given than they can't raise new capital. So, certainly appreciate you guys taking the more conservative look.

[Operator Instructions] And your next question come from the line of Joe Maselli from Wells Fargo Securities. Please go ahead. Joe, your line is open, you may be on mute.

So the broadly syndicated market has rebounded considerably since the fourth quarter and secondary levels are up new issue pricing has tightened significantly amid a frothy technical environment. I think we’ve seen even some of the loans that are marked in the portfolio as of the end of the first quarter, they’ve since been re-priced or they’re in market with re-price I think Pro Mach is currently in market with the re-price and IPC Systems has since been re-priced downwards by about a 100 basis points. I’m curious as to what this strategy is in relation to redeployments in this environment especially considering kind of the more conservative stance early last year and before the more aggressive deployment amidst the volatility in the fourth quarter?

Yes I think we believe that a lot of the driver of the re-pricings that you just referenced is the lack of new issue activity and so the supply side has been extremely dry and that’s what’s creating the dynamic. I think if you move into middle market, obviously there are fewer participants that can take mid-market loan risk. Obviously CLOs have certain amount of baskets, but again echoing my earlier comments I think the potential dislocation with GE exiting the business and until that finds a new home creates a good opportunity for us at Solar Senior on the mid-market first lien loan as oppose to the broadly syndicated. As you know, when we find good risk in the broadly syndicated like a Pro Mach we will participate, but we agree, that’s an asset that if the price is too tight obviously we would let go and cycle into more middle-market loans where we think there's a better issue and demand and competitive dynamics.

Okay great and just one last thing. Some of the second liens that are in the portfolio are considerably seasoned about a year old in the event that some of those assets are repaid, is that part of the strategy to reinvest the proceeds in more second lien loans.

Now, it's not. I'm glad you raised that. I think our strategy is [indiscernible] that capital itself is going to redeploy into our FLLP. We'd like to risk more on that in the second lien. We don’t have that much second lien left but as it gets repaid you are not going to see us re-up into. And also potentially deploy more capital into Gemino as they continue to grow their book.

[Operator Instructions] There are no further questions. I would now like to turn the call back over to Michael for closing remarks.

Thank you very much and thank you for your time this morning. We look forward to talking to you in next quarter.