SuRo Capital Corp.
Q2 2020 Earnings Call Transcript

Published: 5 Aug 2020

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to SuRo Capital’s Second Quarter 2020 Earnings Call. During today’s presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. This call is being recorded today, Wednesday, August 5, 2020. I will now turn the conference over to Claire Councill of SuRo Capital. Please go ahead.

[Claire Councill:]

Thank you for joining us on today’s call. I’m joined today by the Chief Executive Officer of SuRo Capital, Mark Klein; and Chief Financial Officer, Allison Green. Please note that a slide presentation that corresponds to today’s prepared remarks by management is available on our website at www.surocap.com under Investor Relations, Events and Presentations.

[Mark Klein:]

Thank you, Claire. We are pleased to share the results of SuRo Capital second quarter of 2020. These are obviously unprecedented times we are living through and society is facing tremendous challenges. We as SuRo Capital would like to, again, thank the frontline workers and responders who have put themselves at risk throughout the COVID-19 pandemic. We are fortunate to report that our employees and their families remain healthy and continue to function remotely like other firms. I will now discuss how a portfolio is fair during the ongoing COVID-19 pandemic and highlight few of our larger positions even experienced degrees of business acceleration during the pandemic. To conclude, I will hand the call over to Allison Green for a brief financial overview. As the conclusion of our remarks, we will open the call for questions. Let’s start with Slide 3. This quarter, SuRo Capital reported at highest dividend adjusted net asset value per share in five years. At June 30, 2020, net asset value is $11.84 per share, an increase from $10.22 per share at March 31, 2020. Net asset value approximated $193 million a quarter, and compared to $173 million in the first quarter.

[Allison Green:]

Thank you, Mark. I would like to follow Mark’s update with a more detailed review of our financial results as of June 30, 2020. Our recently declared dividends, our share repurchase program, our continued expense reduction initiatives and our current liquidity position. We are pleased to report, we ended the second quarter with an NAV per share of $11.84, a breakdown of NAV per share as of quarter end is shown on Slide 12 and it’s consistent with our financial reporting. Income, the increase in NAV per share during the second quarter was largely driven by a $1.52 per share of net unrealized appreciation of our portfolio investments and a net $0.17 per share increase attributable to the accretive effects of common stock repurchase during the quarter through the share repurchase program. These increases to NAV per share were offset by a net $0.17 per share decrease in net investment loss. Subsequent to quarter end, on July 29, 2020, our board of directors declared a dividend at $0.15 per share payable on August 25, 2020 to shareholders of record on August 11, 2020. This dividend was related to investment activity in 2019 and brings the total dividends declared related to 2019 investment activity to $0.47 per share. These dividends have been categorized as net capital gains for tax purposes. Please refer to Slide 13. As I reviewed the current status of the share repurchase program. During the second quarter, the company repurchased 594,637 shares for approximately $3.6 million. Since inception of the share repurchase program in August 2017 to date, we have repurchased 4,452,049 shares of our common stock for approximately $27.3 million, excluding the modified Dutch Auction tender offer effectuated in the fourth quarter of 2019. The total funds allocated by our Board of Directors to the share repurchase program to date is $30 million, considering share repurchases through the second quarter, this leaves approximately $2.7 million for future purchases under the program. As of today, between the share repurchase program in the Q4 2019 modified Dutch Auction tender offer, SuRo Capital has repurchased 5,901,324 shares of common stock for approximately $37.3 million. Since inception of the share repurchase program in August 2017. This represents nearly 27% of the shares outstanding at that time. During the second quarter, we continued to see the cost-saving effects from the internalization of the management of SuRo Capital. As previously discussed as an internally managed BDC, we have a significantly reduced cost structure upon termination of the Investment Advisory Agreement on March 12, 2019, we no longer pay management fees each month as management is now employed directly by the BDC and we no longer accrue an incentive fee. Total adjusted operating expenses for the second quarter were approximately $2.9 million, adjusted for the impact of accounting guidance that requires acceleration of the recognition of all unrecognized compensation costs related to stock-based compensation in the event of a cancellation of such stock-based compensation without a repurchase exchange or replacement. This accelerated cost recognition upon cancellation of approximately $2 million is offset in the equity section of the balance sheet. Total adjusted operating expenses of $2.9 million for the second quarter of 2020, represent a decrease of approximately 10% in operating expenses from $3.3 million during the second quarter of 2019. We compared to our last second quarter as an externally managed entity, the second quarter 2020 adjusted total operating expense of $2.9 million represents a nearly 54% decrease from total operating expenses before waivers of $6.3 million in the second quarter of 2018. Similarly, the adjusted total operating expense for the first half of 2020 was $6.2 million compared with $7.6 million in the first half of 2019, adjusted for the reversal of the incentive fee accrual and $11.7 million in total operating expenses before waivers for the first half of 2018. The last year we were fully externally managed. We continue to decrease in operating expenses is primarily due to the elimination of management fees, incentive fees and costs under the prior administration agreement and further supported by ongoing expense reduction initiatives, separate from the inherent savings of the internalized management structure. We anticipate operating expenses to further decrease in 2020 as we will be fully internalized for the entire year and it’s cost-related fee internalization have generally been absorbed in 2019. Together, we believe our ongoing meticulous efforts to reduce operating expenses and the meaningful cost savings we are realizing as an internally managed BDC. We have continued positive impacts on NAV. We remain diligent about managing expense base moving forward. Finally, I would like to review SuRo Capital’s current liquidity. We ended the quarter with approximately $23.3 million of cash and restricted cash. We did not hold any public securities at quarter end. Our cash balance of $23.3 million as of June 30, 2020, consisted primarily of proceeds generated by the monetization of various portfolio positions from the quarter of 2017 through the first quarter of 2020 and remaining proceeds from the issuance of $40 million or 4.75% convertible senior notes due in 2023 issued during the first quarter of 2018. That concludes my comments. We’d like to thank you for your interest and support of SuRo Capital. Now I will turn the call over to the operator to start the Q&A session. Operator?

[Operator:]

Thank you. And we’ll take our first question today from Mark Palmer with BTIG.

[Mark Palmer:]

Yes, thank you. Good afternoon. Earlier in you commentary, you talked about the potential to take advantage of dislocations stemming from the pandemic. If you could talk a little bit about what you are seeing in the environment for the verticals that you are pursuing, particularly with regard to evaluations. We see the equity markets then very robust of late. What are you seeing on the private side of the market?

[Mark Klein:]

Thanks Mark. And thanks for your ongoing support to us. You and I talked about this. In the earlier part of the pandemic cycle there was clearly a bit of fear-driven selling and fear-driven capital-raising. And at that point in time, similar to what was going on in the public markets, we were seeing significant discounts to prior rounds in various different investments, including in some names that we know obviously in the case of Lyft, they did a significant down round and we were fortunate to participate on a pro rata basis in very attractive terms. We did take advantage of some of the dislocation in the case of rent the runway where we were able to purchase stock at a discount to the round that we noted in our comments earlier. I think on a case by case basis, there continues to be some of that. I think it’s not obviously with the NASDAQ making record highs. There’s a lot less fear in the secondary margin in selling. And there is starting to be some robustness in the primary rounds. So we looked at discounted rounds, we looked at primary rounds. Obviously we know that Coursera did a significant up-round in which we participated as well. So I would say on the equity side, the secondary side, selectively, as people are trying to realign the portfolios, we are seeing certain secondary names coming out at a discount to prior rounds. We did it earlier, see some, say some primary rounds coming at discounted levels and candidly right now, I think a lot of the primary rounds that we’ve seen in that are picked up in the press are clearly coming at premiums, two rounds that they raise before. On the debt side, it’s a little bit – it’s a case by case basis. We are seeing opportunities for companies that like, of which we outlined in our commentary that do need a capital to deploy against their strategy that would rather borrow against assets rather than raise equity capital at a perhaps discounted rate than what they would like to. So it’s more of a mixed bag than it was earlier in March and April, even to earlier May.

[Operator:]

Next we’ll hear from Alex Paris with Barrington Research.

[Alex Paris:]

Hey Mark, and Alex – Hi Allison, I’m sorry. I had a few questions for you. First off and not necessarily in any order, could you mentioned Mark, in your prepared comments, equity investment focus in e-com and retail, FinTech, food tech, transportation and logistics. Is that on the pipe side, the private credit side, or just in general. And the reason I ask is given your free investment themes, how do they fit within those?

[Mark Klein:]

Sure. That’s a very fair question. And Alex, thank you again for your ongoing support to serve. We greatly appreciate it. I think certainly on the VC side and the institutional back secondaries and other primaries that we’ve been doing those are areas that we are seeing interesting opportunities and continue to do that. We are not pigeonholed into those industries. We just wanted to highlight those a bit. On the debt side, we made it pretty clear FinTech insurance, tech – prop tech is where we’re spending much more of the time. On the pipe side on the business, that business combination, again, we’re going to stick to our meeting. We’re not going to – you are not going to see us participate in the sort of bridge pipes into industrial oriented companies or life science type of companies. We’re very much stay into the ones that are a technology based, financial technology consumer-based, prop tech based endures consumer in general. Probably I think Alex off.

[Operator:]

That will conclude today’s question-and-answer session. I’ll now turn the conference over to Mark Klein for any additional closing remarks.

[Mark Klein:]

Thank you all very much for taking the time out this afternoon to listen to our conference call and for your support as shareholders and analysts and friends on the team. We greatly appreciate it. We hope you and your family stay safe in this difficult environment. Thank you all very much.

[Operator:]

That will conclude today’s conference. Thank you for your participation. You may now disconnect.