Sunrise Realty Trust, Inc. (SUNS) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020 Solar Senior Capital Ltd. Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Michael Gross, Chairman and Co-CEO. Thank you. Please go ahead.

Thank you and good morning. Welcome to Solar Senior Capital Ltd.'s earnings call for the fiscal year ended December 31, 2020. As we will discuss on this call, last night we announced the rebranding of the Solar platform to SLR. Effective today with SUNS changes name to SLR Senior Investment Corp. and SUNS Advisor changes name to SLR Capital Partners. The company's ticker will remain SUNS. I'm joined here today by Bruce Spohler, our Co-Chief Executive Officer; and Rich Peteka, our Chief Financial Officer. Rich, would you please start off by covering the webcast and forward-looking statements?

Sure. Of course, Michael. Thank you. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of SLR Senior Investment Corp. and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast from the Investors tab on our website at www.slrseniorinvestmentcorp.com. Audio replays of this call will be made available later today as disclosed in our press release. I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference 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, including the impact of COVID-19 and related changes in base interest rates and significant market volatility on our business, our portfolio companies, and the global economy. Additionally, past performance is not indicative of future results. 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. SLR Senior Investment Corp. 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 new website or call us at 212-993-1670. At this time, I'd like to turn the call back to our Co-Chief Executive Officer, Michael Gross.

Thank you, Rich. I'm pleased to report that SLR Senior Investment Corp.'s portfolio remained 100% performing throughout the entire year. The strong performance supports our investment thesis that asset-based loans in niche markets and first lien cash flow loans to upper middle market companies provide meaningful downside protection during challenging economic periods. Our portfolio company's resilient business models, strong management teams and financial sponsors have enabled them to successfully weather the crisis. We attribute our healthy portfolio to our disciplined underwriting, the deep experience of our investment teams and SUNS' diversified platform across cash flow, asset-based lending, and life science verticals. We are pleased with SUNS' performance during 2020 and are extremely grateful to our employees, clients, lenders, and service providers for their tireless efforts despite the stress and personal hardship this pandemic has caused. At year-end, our net asset value per share was $15.91, up from $15.79 at the prior quarter. Credit market valuations continued to improve in the fourth quarter as our portfolio companies benefited from the government stimulus and the proactive steps taken by our management teams and sponsors to margin liquidity and reduce expenses throughout the downturn. At December 31, our net asset value represents an approximately 76% recovery of the unrealized depreciation recorded at March 31. Importantly, we currently anticipate that our existing investments will ultimately result in the expected returns at the time of our initial underwriting. 100% of our repayments during the quarter were made at or above par. At December 31, over 99% of our comprehensive investment portfolio at fair value was invested in first lien loans and approximately 53% of the total fair value consisted of loans in our specialty finance verticals. These businesses have historically exhibited low default and loss rates throughout business cycles. Notably, the ABL and life science teams have each managed through multiple cycles over career spending 20 to 30-plus years. In the fourth quarter, SLR Investment Corp. produced $0.30 per share of net investment income post fee waivers fully covering our distributions. At December 31, SUNS remains significantly under-levered at 0.34x net debt to equity relative to our target range of 1.25x to 1.5x. Our portfolio contraction in 2020 is a result of robust repayment activity from our cash flow borrowers due to strong fundamental performance of these companies despite broad economic challenges. Additionally, the decline in our asset-based loan portfolio balances resulted from the strong liquidity positions of those borrowers. A significant amount of the borrowers at our ABL businesses received government stimulus funding and many of those use the liquidity to temporarily pay down our credit lines with them. As the economic conditions normalize, we expect these customers to redraw on our credit lines. The strong repayment activity throughout the year is a testament to our underwriting discipline as well as the resilience of our portfolio. We expect portfolio growth in the coming quarters from the increased pipeline of both first lien cash flow as well as asset-based loan investment opportunities. Given the improving economic climate and stabilization of markets, our investment pipeline is growing. Our diversified investment platform encompassing cash flow lending, multiple ABL strategies, and life science venture lending positions SUNS as a solution provider to borrowers. Importantly, we are in a unique position to allocate capital across our strategy to the most attractive risk-adjusted return investments. We also have over $440 million of available capital to support the expansion of our comprehensive portfolio and over $7.5 billion of investable capital across the SLR platform. SUNS has the opportunity to take part in larger transactions alongside SLR's other investment vehicles, providing us with a significant advantage versus lenders that do not have the capital base to underwrite entire middle-market financings. Finally, I'll touch on the rationale and benefits of our platform rebranding, which we announced last night. Since our first acquisition for our sister BDC, SLRC in 2012, we have remained focused on building a diversified commercial finance platform with multiple sourcing verticals that can provide our investors exposure to niche private debt sub-asset classes that carry attractive pricing in terms of strong protections in the form of covenants and collateral coverage. This initiative has included SUNS' acquisition of Gemino and North Mill and Summit Financial by North Mill. We continue to seek opportunities to expand our suite of lending strategies. As a result of our success, we have become a house of brands rather than a branded house. To reflect our unified platform and holistic approach to providing our borrower clients with financing solutions and our investors with attractive investment returns, we have rebranded Solar as SLR with each of our entities change its name to an extension of the SLR brand. While our origination team has always been focused on cross-selling, our financing capabilities, we look forward to leveraging a common brand as our originators go to market under one name. For our clients, the entrepreneurial style of high-touch service will always remain the same, supported by the resources of an asset manager with over $7.5 billion of investable capital. At this time, I'll turn over the call over to our CFO, Rich Peteka, to take you through the Q4 financial highlights.

Thank you, Michael. SUNS' net asset value at December 31 was $255.4 million or $15.91 per share. This compares to a net asset value of $253.4 million or $15.79 per share at September 30, 2020. SUNS' balance sheet investment portfolio at December 31, 2020, at a fair market value of $340.8 million in 44 portfolio companies operating in 19 industries compared to a fair market value of $389.5 million in 44 portfolio companies operating in 19 industries at September 30, 2020. Turning to our funding profile and leverage. SUNS continues to have a very strong balance sheet, which we believe is serving us well in the current downturn. At December 31, 2020, SUNS had $90.4 million of debt outstanding and net leverage of only 0.34x debt-to-equity, down from 0.52x in the prior quarter. SUNS also had no near-term debt maturities, having already termed out both its primary $225 million credit facility and the secondary $75 million credit facility to 2023 and 2024 respectively. In addition, SUNS has $85 million of unsecured notes with the maturity of March 31, 2025. And SUNS has over $440 million available to fund comprehensive portfolio growth, subject to borrowing base limits. As a reminder, SUNS' target leverage is 1.25x to 1.5x debt-to-equity under the reduced asset coverage requirement. As of December 31, 2020, the company only had unfunded -- the company had unfunded revolver commitments of only $5.2 million that could be fully drawn by its borrowers. Now from a P&L perspective, gross investment income for the 3 months ended December 31, 2020, totaled $7.3 million compared to $7.9 million for the 3 months ended September 30. Net expenses for the 3 months ended December 31 were $2.5 million compared to $3.1 million for the 3 months ended September 30, 2020. Therefore, net investment income for the quarter ended December 31, 2020, was $4.8 million or $0.30 per average share as compared to $4.8 million or $0.30 per average share for the 3 months ended September 30. For the quarter ended December 31, 2020, the investment adviser voluntarily waived manager fees of just over $1 million compared to $722,000 of fees waived for the quarter ended September 30. Going below the line, SUNS had net realized and unrealized gains for the fourth fiscal quarter totaling $2.0 million compared to net realized and unrealized gains of $3.8 million for the third fiscal quarter ended September 30. Accordingly, SUNS had a net increase in net assets resulting from operations of $6.9 million or $0.43 per average share for the 3 months ended December 31, 2020. This compares to a net increase in net assets resulting from operations of $8.6 million or $0.54 per average share for the 3 months ended September 30, 2020. Lastly, our Board of Directors declared a monthly distribution for March 2021 of $0.10 per share payable on April 2, 2021, to stockholders of record on March 18, 2021. And at this time, I'd like to turn the call over to our Co-Chief Executive Officer, Bruce Spohler.

Thank you, Rich. First and foremost, SUNS' portfolio has remained 100% performing throughout the current economic slowdown and the early stages of the recovery. Our performance is a testament to the financial sponsors, management teams, and portfolio companies that we've invested in. In addition, SUNS' performance supports our underwriting thesis of minimizing the risk of loss by investing at the top of the capital structure in first lien cash flow loans to noncyclical industries and allocating a significant portion of our portfolio to collateralize loans through our specialty finance lending verticals. At year-end, the weighted average investment risk rating remained constant at 1.9 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. As further indication of the resiliency of our portfolio, 100% of the portfolio was performing. Our watch list was down to 2.4% at year-end, down from the peak of 7.6% back in the second quarter. SUNS' total portfolio was $460 million at year-end and was highly diversified, encompassing 205 borrowers across over 120 different industries. Approximately 53% of the portfolio was invested in asset-based and life science lending strategies with the remaining 47% in first lien cash flow loans. Our largest industry exposures were insurance, healthcare providers and services, and software. The average investment per borrower was just over $2 million or less than 0.5% of the portfolio. At year-end, approximately 100% of the portfolio was invested in senior secured loans with 99.9% of that being in first lien loans and a de minimis amount of equity. Approximately 85% of our loans have LIBOR floors and at year-end, all of our borrowers made their interest payments as expected. We believe that our efforts to position the portfolio to first lien loans, which carry less risk than second lien and subordinated loans, will result in greater capital preservation during the ongoing economic recovery. At year-end, our weighted average asset level yield was 9.6%. By focusing on our commercial finance verticals, we have been able to maintain asset level yields that approach 10%, despite the sharp drop in LIBOR resulting from the Federal Reserve's efforts. Including activity across our 4 business lines, originations in the fourth quarter totaled $35 million and repayments were just under $100 million. For the full year, originations totaled just over $165 million and repayments were $370 million. Now let me provide an update on our investment verticals. I'll start with cash flow. We believe our cash flow portfolio is well positioned to perform during either a continued economic recovery or a mild downturn given our lack of direct exposure to cyclical industries such as energy, commodities, travel, leisure, heavy manufacturing, or consumer discretionary sectors. Substantially all of our cash flow investments outperformed their COVID budgets as a rebound in revenues as well as cost cuts have had a positive impact on their financial performance. We view the majority of our portfolio companies as providing essential services in noncyclical sectors. In particular, our healthcare loans have been performing extremely well. We attribute this both to the recession resilient and essential service nature of this industry as well as our underwriting edge, stemming from our experienced healthcare cash flow team and access to proprietary industry insights through both our life science teams and our Gemino Healthcare ABL team. At year-end, our cash flow portfolio was just about $220 million or roughly 47% of the total portfolio and was invested across 30 borrowers with an average investment of $7 million. Of note, our one remaining second lien investment was repaid at par in the fourth quarter, resulting now in a 100% first lien cash flow loan portfolio. The weighted average EBITDA for this portfolio was over $100 million and the weighted average yield on this portfolio was 6.7% at year-end. During the fourth quarter, we originated approximately $20 million of new cash flow loans and experienced repayments of approximately $70 million. In addition, during the fourth quarter, we committed to unfunded acquisition lines that we expect will provide a boost to fundings during 2021. The weighted average IRR unrealized cash flow deals during the fourth quarter was 7.3%. For the full year, we originated just over $60 million of cash flow loans and experienced repayments of over $180 million. Our cash flow portfolio's contraction during last year was driven by repayment activity at or above par, where performance from the borrower remains strong despite the challenging market and COVID conditions. While this dynamic creates a short-term need to re-grow our portfolio, we view it as a testament to the strong underwriting skills of our team and success at preserving our investors' capital. We are seeing a pickup in sponsor activity during the first quarter with higher volumes of M&A and add-on acquisitions compared to the prior quarters. We expect this sponsor-led momentum to carry forward through 2021. Now let me touch on our asset-based businesses. The collaboration across our healthcare business and business credit, together with the acquisition of Summit Financial factoring business a year ago, has broadened and deepened the coverage across all regions and enhanced the pipeline of investment opportunities. We view this new unified rebranding as a means of enhancing their marketing efforts as well as an appropriate symbolism of their collaborative approach to the market. Let me now provide an update on each of them. I'll start with SLR Business Credit. Our Business Credit portfolio was approximately $150 million at year-end, representing 32% of the total portfolio. It consisted of over 120 borrowers with an average investment of $1.2 million. 99% of its borrowers were deemed essential businesses and the government stimulus has been highly beneficial to the portfolio companies. This portfolio is defensively positioned with its largest exposures being in food distribution, IT staffing, and manufacturing. Business Credit has not had a single payment default during the pandemic and is 100% performing at year-end. We are very pleased with the credit quality of the portfolio as well as the yield carrying over 12.5%. During the fourth quarter, we funded $8 million of new loans and had repayments of $15 million. For the full year, Business Credit funded over $70 million of new loans and had repayments of $94 million. The reduction in their portfolio resulted from our borrowers receiving government stimulus payments, which they used to pay down temporarily our lines of credit. We expect many of these customers to redraw on these lines during 2021. SLR Business Credit also continues to monitor the opportunity for additional add-on acquisitions to expand their business. During the fourth quarter, they paid a cash dividend of $1.3 million, consistent with the prior quarter and in line with North Mill's earnings power. Now let me turn to SLR Healthcare ABL. The Healthcare ABL portfolio was $65 million at year-end, representing 14% of our total portfolio. Total number of borrowers has remained consistent over time and is comprised of loans to 37 borrowers with an average funded loan size of just under $2 million. The portfolio remains 100% performing with not a single payment default since the start of COVID. The impairment risk remains very low, given healthcare ABL's disciplined underwriting and focus on financing healthcare service providers who have government and high-quality insurance company accounts receivable collateral, which support our working capital facilities. Cash collections typically go directly into lockboxes and interest payments are debited automatically by our team. The weighted average yield on this portfolio was approximately 12.4% at year-end. During the fourth quarter, they funded $8 million of new loans and had repayments of $14 million. For the full year, they had originations of $25 million and had repayments of just over $90 million. Similar to Business Credit, Healthcare ABL's portfolio contracted in 2020, largely as a result of the borrowers choosing to pay down their credit facilities with proceeds from various government stimulus programs. We have begun to see an increase in our borrowers' use of their credit lines as their capital needs extend beyond the government stimulus received. In addition, Healthcare ABL's pipeline of new borrowers remains robust heading into this year. During the fourth quarter, they paid a cash dividend of $900,000, consistent with the prior quarter and in line with their current earnings power. As we look into 2021, we are confident in the portfolio quality of Healthcare ABL and believe the company is well positioned to capture additional portfolio growth as the market settles and funded balances return to more normal levels. Now finally, let me provide an update on our life science segment. Overall, the life science portfolio is largely insulated from short-term market and economic dislocations. 100% of life science loans are performing and we continue to expect to incur no losses in this segment. Currently, 100% of the portfolio has cash runway greater than 12 months. At year-end, this portfolio totaled $28 million across 8 borrowers with an average investment of $3.5 million. There were negligible originations and repayments during the quarter. The weighted average yield was approximately 9.3%, but this excludes any success fees or warrants that typically accompany these loans. Overall, we believe SUNS' portfolio is well positioned to weather an improving, but still challenging period as the economy recovers. We remain in close contact with our management teams, their sponsors, and work closely with our extensive network of relationships to source new investment opportunities. Our commercial finance platform and significant dry powder enables us to provide structured solutions, including cash flow and asset-based loans. SLR Investment Corp. -- Senior Investment Corp. will be able to participate in these financings while maintaining significant diversification. Now let me turn the call back over to Michael.

Thank you, Bruce. At this time, let me offer a few concluding remarks. From inception, we have endeavored to make the right decisions to preserve and enhance long-term shareholder value. Our priority has always been to create and maintain a portfolio that can generate steady income for our shareholders and protect our capital. Throughout 2020, we remain disciplined in the face of significant spread compression, higher leverage and loose structures, all of which have elevated the risk of principal loss in middle-market leveraged loans. We believe by building a defensive portfolio across cash flow and specialty finance first lien senior secured loans as well as operating well under our target fund leverage and preserving liquidity, we took the appropriate steps to navigate successfully through a difficult 2020. Throughout, we have maintained alignment through our ownership of SUNS stock alongside our fellow shareholders. With over $440 million of available capital and a strong foundation given our defensive comprehensive portfolio and relatively low leverage, we believe the company is positioned to originate attractive new investments. Our patience and willingness to be underinvested, provides us with a foundation to be opportunistic. With over $7.5 billion of investable capital across the platform, SLR's scale will enable SUNS to participate in high volume of larger transactions throughout 2021, accelerating the growth of its portfolio. Given the magnitude of the economic disruption and expected uneven recovery, we believe that the improved investment opportunity set will persist for a number of quarters as companies require financing solutions for liquidity, working capital and growth initiatives. Sponsor activity is definitely on the upswing and the PE industry is armed with significant dry powder. We believe SUNS is in a great position to capitalize on this opportunity. Additionally, we look forward to continuing to execute our commercial finance strategy now under one unified brand, SLR. We hope and wish that all of you are in good health and would like to thank you for your time today and your support of your company. Operator, if there's any questions, please open up the line.

So, operator, looks like we have no questions. So in conclusion, I'd just like to thank everybody for their attention this morning. And of course, if people do have questions, please feel free to reach out to us directly. Take care, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.