Earnings Call Transcript - SUNS Q3 2024

Operator, Operator

Good morning, and welcome to Sunrise Realty Trust's Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. Please go ahead.

Gabriel Katz, Chief Legal Officer

Good morning, and thank you all for joining Sunrise Realty Trust's Earnings Call for the quarter ended September 30, 2024. I'm joined this morning by Leonard Tannenbaum, our Executive Chairman; Brian Sedrish, our Chief Executive Officer; and Brandon Hetzel, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our October 8, 2024, press release and is posted on the Investor Relations portion of our website at sunriserealtytrust.com along with our third quarter 2024 earnings release and investor presentation. Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, market developments, our investment pipeline, anticipated portfolio yield and financial performance and projections in 2024 and beyond. These statements are subject to inherent uncertainties in predicting future results. Please refer to Sunrise Realty Trust's most recent periodic filings with the SEC for certain conditions and significant factors that could cause actual results to differ materially from these forward-looking statements and projections. During today's conference call, management will refer to non-GAAP financial measures, including distributable earnings. Please see our third quarter earnings release uploaded to our website for reconciliations of the non-GAAP financial measures with the most directly comparable GAAP measures. The format for today's call is as follows, Len will provide introductory remarks, and Brian will cover our portfolio and outlook for our pipeline. Brandon will then provide an update on our financial position. After that, we'll open the lines for Q&A. With that, I will now turn the call over to Executive Chairman, Leonard Tannenbaum.

Leonard Tannenbaum, Executive Chairman

Thank you, Gabe. Good morning, and welcome to our first earnings conference call as a standalone public entity. I'm excited to share that we are continuing the strong momentum we have built since our listing as an independent public company. SUNS is an important part of the TCG real estate platform. This platform consists of a number of funds focused on sourcing, underwriting and investing in commercial real estate loans. The affiliation with this platform provides SUNS with the ability to pursue larger transactions. We continue to see opportunities in the fast-growing Southern United States and are benefiting from the favorable conditions in the commercial real estate market. The Federal Reserve's September interest rate cut of 50 basis points had a positive impact on buyer and borrower sentiment with our team observing a noticeable increase in the number of sponsors seeking debt to either acquire new assets or refinance existing loans. With many providers focused on their existing portfolios and banks pulling back from the market, alternative lenders like SUNS have the opportunity to invest in deals with strong risk-adjusted returns. We expect these tailwinds to persist as demand for commercial real estate debt continues to outpace its supply and interest rates come down gradually. Given these positive trends, our direct origination platform continues to source attractive deals, and we have maintained an active pipeline of $1.2 billion. Year-to-date, the TCG real estate platform and its syndicate partners have closed approximately $461 million in deals, of which SUNS committed $150 million. We also have 4 signed term sheets across the platform totaling $235 million in documentation. As of November 1, SUNS had 7 deals in our portfolio. To date, we have closed every transaction we have signed a term sheet for, and we look forward to announcing additional closings in the future. Currently, our target leverage ratio is 1.5 times to 1. As Executive Chairman and the largest shareholder of SUNS, I spend a considerable amount of time thinking about our capital structure. As we grow our assets, we expect to have a balance of unsecured and secured debt. I'm thrilled to announce that just yesterday, we closed a senior secured revolving credit facility with East West Bank's agent. With over $70 billion in assets under management, East West Bank has been a valued partner of mine for years. I am pleased they stepped up with an initial $50 million commitment to a credit facility that can expand up to $200 million in borrowing capacity. This facility offers favorable terms at SOFR plus 2.75% with an attractive floor, giving us the flexibility to strategically expand our portfolio across the Southern United States. I believe that this credit facility provides us with a competitive cost of capital that should allow for enhanced shareholder returns in the future. With that, I'll turn the call over to Brian.

Brian Sedrish, Chief Executive Officer

Thanks, Len, and good morning, everyone. We have had a busy and productive third quarter as we started trading as an independent publicly traded company on July 9. For the third quarter, SUNS generated distributable earnings of $0.27 per basic weighted average share of common stock. As we previously disclosed on October 15, 2024, we paid a partial dividend of $0.21 per common share for the third quarter to shareholders of record on September 30, 2024. The partial dividend reflected the fact that we were an independent public company for only part of the quarter and experienced cash drag as we invested SUNS capital. Given the additional deals we have closed and visibility into ramping the SUNS portfolio, in August 2024, the Board of Directors also declared a regular dividend of $0.42 per common share for the fourth quarter of 2024. Now turning to our portfolio. In the third quarter of 2024, SUNS successfully closed $87.4 million in deals, which include a $6 million commitment to a $12 million senior loan upsize for The Allen in Houston, Texas; a $14.1 million commitment to a $35.2 million senior loan for Jovie Belterra in Austin, Texas; a $27.3 million commitment to a $42 million senior loan for the Thompson Hotel in San Antonio, Texas; and a $40 million commitment to a $160 million senior loan for Panther National in Palm Beach Gardens, Florida. Subsequent to the end of the third quarter, in fact, just last week, we committed $30 million to a $96 million senior loan that was agented by the TCG real estate platform for the development of Sixth & Rio, a premier condominium project in Fort Lauderdale, Florida. This investment reflects our broader strategy of partnering with top-tier developers who share our vision for creating high-quality real estate in key southern U.S. markets. We continue to find attractive opportunities in the residential sector, which now comprises 75% of our portfolio. Notably, we currently have zero exposure to office properties. Our portfolio is comprised of new vintage assets with our first deal closed in January 2024. All loans are current and performing. As Len described earlier, our pipeline remains strong with approximately $1.2 billion in active deals. From inception through November 1, we, along with our affiliated funds on the TCG real estate platform and our syndicate partners have executed term sheets totaling $696 million, successfully closing $461 million with SUNS committing $150 million. Additionally, $235 million are in documentation with SUNS expected to fund a portion of this amount in line with the TCG allocation policy. We anticipate that several of the deals in documentation will close by the end of the year. To date, we have closed every transaction that we have signed a term sheet for. We credit this in part to the team's extensive preliminary due diligence and its focus on borrower selectivity. Finally, in light of recent events like Hurricane Milton in our home state of Florida, I'd like to reassure our stakeholders that our investments in the state were not materially impacted. All of our investments across the Southern United States are fully insured, and we take proactive steps to mitigate risks by tailoring insurance coverage to align with the specific risks of each investment. This ensures both the company and our borrowers remain well protected. Looking ahead, we remain focused on building a portfolio of new vintage assets, leveraging our local expertise, deep market knowledge and strong relationships across the southern U.S. These strengths allow us to identify opportunities early and act decisively in competitive markets. My team and I continue to remain optimistic that the attractive lending opportunities that we are witnessing today in the commercial lending space will continue for the foreseeable future, particularly across our target geographic markets. I believe that the unique market lending environment is one of the best that I have observed in my 25-plus year real estate career. With that, I will now turn the call over to Brandon Hetzel, our CFO.

Brandon Hetzel, Chief Financial Officer

Thank you, Brian. For the quarter ended September 30, 2024, we generated net interest income of $3.2 million and distributable earnings of $1.9 million or $0.27 per basic weighted average common share and had GAAP net income of $1.7 million or $0.26 per basic weighted average common share. We believe providing distributable earnings is helpful to shareholders in assessing the overall performance of SUNS business. Distributable earnings represents net income computed in accordance with GAAP, excluding non-cash items such as stock compensation expense, unrealized gains or losses and the provision for current expected credit losses. We ended the third quarter of 2024 with $120 million of current commitments and $98 million of principal outstanding spread across 6 loans. As of November 1, 2024, our portfolio consisted of $150 million of current commitments and $104 million of principal outstanding across 7 loans with a weighted average portfolio yield to maturity of 13%. I'd also like to note that as of September 30, 2024, our CECL reserve is $24,000 or approximately 3 basis points for our loans at carrying value. As Len mentioned earlier, I'm pleased to report that on November 6, 2024, we successfully closed a senior secured revolving credit facility with East West Bank. This facility provides an initial commitment of $50 million with the option to increase total commitments up to $200 million, subject to available collateral and lender participation. The facility matures in 2027 and allows us to borrow and repay as needed, further enhancing our financial flexibility to support portfolio growth and capitalize on future opportunities. On October 15, 2024, SUNS paid a dividend of $0.21 per share for the third quarter to shareholders of record as of September 30, 2024. The Board of Directors has also declared a regular dividend of $0.42 per common share for the fourth quarter of 2024. This dividend will be paid on January 15, 2025, to shareholders of record on December 31, 2024. As of September 30, 2024, our total shareholder equity was $112.1 million, and our book value per share was $16.19. Absent the declaration of the fourth quarter dividend, our book value would have been approximately $16.61. With that, I will now turn it back over to the operator to start the Q&A.

Operator, Operator

Our first question comes from Jasmeen Kaur with Raymond James. Your line is now open.

Stephen Laws, Analyst

This is Stephen Laws with Raymond James. I wanted to follow up on the pipeline question. I guess, first, maybe can you talk about the competitive environment? Are you seeing anybody come back in? I know a lot of lenders are still on the sidelines given legacy portfolio issues, which you guys don't have. But can you talk about the competitive environment in the Southeast markets where you guys are active?

Leonard Tannenbaum, Executive Chairman

Sure. We haven't noticed any significant increase in competition. It has remained relatively stable compared to what we've experienced over the last few months. While we're not the only players in the market, there are still very few competitors that we frequently encounter for the types of transactions we are targeting in the Southern U.S. On a positive note, we have observed more opportunities, which ties back to our excitement about the pipeline. We have definitely seen an increase in the number of sponsors and their advisors seeking to refinance in the current market, particularly with a large portion of these opportunities being on the residential side, which is very encouraging.

Stephen Laws, Analyst

Appreciate the comments there. And then as you think about the pipeline, can you provide us a little color on what you're seeing? Are you really seeing kind of new construction or new development opportunities? Is it refinance? Is it acquisition financing? And then kind of along those lines, relative value between looking at new subordinated debt investments versus senior loans? Just trying to get an idea of what's in the pipeline? And of that stuff, what do you view as the most attractive from a risk-reward standpoint?

Brian Sedrish, Chief Executive Officer

The majority of our current focus has been on refinancing. This is particularly exciting for us as we're finding borrowers with a more optimistic view, believing that interest rates have reached their peak and are starting to decline slowly. This has led to these groups being willing to invest additional equity into transactions and pursue refinancing because they are committed to the long-term value. This has created numerous refinancing opportunities. On the new transaction front, activity is gradually increasing, though it's still relatively subdued. There remains a disconnect between buyers and sellers, but it does seem like values have hit their lowest point, resulting in a slight uptick in activity. Additionally, when it comes to the balance between senior and subordinated debt, we have observed that the best risk-adjusted opportunities are on the senior side. Being compensated for engaging across the entire capital structure is very beneficial. Our recent closing of the East West facility supports this strategy, and overall, we are leaning towards the senior side.

Stephen Laws, Analyst

Great. And one more, if I may. Just as I think about the initial portfolio, do you guys still feel good ramping that, say, by the end of the first quarter? Or kind of as you look at your pipeline and the time it takes to close deals and do the due diligence, kind of how do you expect to see the portfolio ramp over the next 3 to 6 months?

Leonard Tannenbaum, Executive Chairman

We're not going to provide forward projections because things often take longer than expected, and we want to avoid misleading anyone. However, when we mention actionable deals, we have successfully closed every deal for which we have a signed term sheet and documentation. We anticipate closing all of those deals, but the exact timeline remains uncertain. If I had to estimate, I would say it could happen within the next six months.

Stephen Laws, Analyst

Well, I was hoping you can make my job easy.

Leonard Tannenbaum, Executive Chairman

Yeah. So I don't get to make your job a lot easier. The good news is there's plenty of deal flow. But just to remind you, right, this pipeline, even though it's $1 billion, took $100 billion to get there. So our selectivity is still running about 1%. So the team is going through 99 deals for every 1 deal that we actually do, 1% to 2%. So it's a really low selectivity.

Stephen Laws, Analyst

I was looking for a cheat sheet there, Len, but Q3 numbers are right on top of my investment activity. So I feel comfortable. And congratulations on your first quarter as a public entity and the solid results in this ramp period. Appreciate it.

Leonard Tannenbaum, Executive Chairman

Thanks, Steve.

Operator, Operator

Our next question comes from the line of Chris Muller with Citizens JMP. Your line is open.

Chris Muller, Analyst

Hey, guys. Thanks for taking the question. Good to be on with you for the first public call here. So I guess maybe I'll take a stab at a little bit different question from Stephen Laws. Given the current equity base and financing in place, what size portfolio can you guys support? So maybe not timing, but just kind of sizing given everything that's in place right now?

Leonard Tannenbaum, Executive Chairman

So what we think about is structuring this a lot like another firm you might know in the space, who I think is doing a really good job structuring it, where it will be ultimately in the medium-term, about one third equity, one third sub-debt and one third senior, of which the senior will be half drawn. And that's sort of how you get to that 1.5 times leverage target. So first step is to get the East West line and get a great partner with them and utilize that line. And then ultimately, we'd seek to do sub debt in the market, which I think is very attractive at this point. And we've done before in another public entity, as you know.

Chris Muller, Analyst

Got it. And then I guess on that $0.42 dividend, given that you guys declared that already, is it fair to assume that distributable EPS in the fourth quarter and going forward will be in that ballpark run rate, $0.42 area?

Leonard Tannenbaum, Executive Chairman

We can't predict future numbers with certainty. However, as we expand our portfolio and increase our investments, we expect our earnings to rise, and we have already begun that process.

Chris Muller, Analyst

Got it. That’s helpful. Appreciate you guys taking the questions today. And look forward to watching the story play out in the coming quarters.

Leonard Tannenbaum, Executive Chairman

Thanks very much. Thanks for your interest.

Operator, Operator

Thank you. And I'm showing no further questions at this time. This does conclude today's conference call. Thank you for your participation. You may now disconnect.