SuRo Capital Corp.
Q3 2020 Earnings Call Transcript

Published: 6 Nov 2020

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to SuRo Capital’s Third Quarter 2020 Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This call is being recorded. I’d now like to turn things over to Adam Bates. Please go ahead.

[Adam Bates:]

Thank you for joining us on today’s call. I am 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 & Presentations.

[Mark Klein:]

Thank you, Adam. We are pleased to share the results of SuRo Capital’s third quarter 2020. These are obviously unprecedented times we are living through, and society is facing tremendous challenges. We at 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. I will discuss how our portfolio is fair during the ongoing COVID-19 pandemic and volatility surrounding the election and highlight how a few of our larger positions have even experienced degrees of business acceleration during these uncertain times. To conclude, I will hand the call over to Allison Green for a brief financial overview. At the conclusion of our remarks, we will open the call for questions. Let’s start with Slide 3. This quarter, SuRo Capital reported its highest dividend adjusted net asset value per share since September of 2015. At September 30, 2020, net asset value was $12.46 per share, adjusted for dividends declared during the quarter of $0.40 a share and increase from $11.84 per share at June 30, 2020. Net asset value totaled approximately $253 million at quarter’s end compared to $192 million in the second 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 September 30, 2020. Our recently declared dividends, the expansion and status of our share repurchase program, the results of our at-the-market offering, our continued expense reduction initiative and our current liquidity position. We are pleased to report we ended the third quarter with an NAV per share of $12.46 adjusted for $0.40 per share and dividends declared during the quarter. It breaks out of NAV per share as of quarter end is shown on Slide 8 and it’s consistent with our financial reporting. In sum, the increase in NAV per share during the third quarter was largely driven by $0.80 per share of net unrealized appreciation of our portfolio investment, approximately $0.24 per share attributable to our at-the-market capital raise and approximately $0.12 per share in net realized gains from the exit or sale of investments in our portfolio. These increases to NAV per share were partially offset by $0.40 per share in dividends declared during the quarter and at $0.13 per share decrease in net investment loss. And in that $0.01 per share decrease attributable to the conversion of 1,780,000 or just under 5% of our 4.75% convertible senior notes due March 2023. On July 29, our board of directors declared a dividend at $0.15 per share paid on August 25 to shareholders of record on August 11. 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. All dividends attributable to 2019 had been categorized as net realized capital gains for tax purposes. On September 25, our board of directors declared a dividend of $0.25 per share paid on October 20 to shareholders of record on October 5. This dividend is related to current year investment activity and is expected to be categorized as net realized capital gains for tax purposes. Subsequent to quarter end, on October 28, our board of directors declared a dividend of $0.25 per share payable on November 30 to shareholders of record on November 10. This dividend is also related to current year investment activity and is expected to be categorized as net realized capital gains for tax purposes. As Mark noted, we anticipate paying an additional dividend to those I noted here closer to year end. Please refer to Slide 9, as I reviewed the current status of the share repurchase program. During the third quarter, the company did not repurchase any shares as our at-the-market offering was active. As Mark mentioned earlier, we were pleased to announce that on October 28, our board of directors authorized an additional $10 million expansion of the share repurchase program. This brings the total allocation by our board of directors to the share repurchase program to $40 million. This is in addition to the $10 million, 2019 Modified Dutch Auction Tender Offer. Subsequent to quarter end, we repurchased 371,283 shares of our common stock for approximately $3.1 million, since inception of the share repurchase program in August 2017 to date. We have repurchased 4,823,332 shares of our common stock for approximately $30.4 million. Excluding the $10 million Modified Dutch Auction Tender Offer effectuated in the fourth quarter of 2019. Considering share repurchases to date and the recent additional allocation by the board of directors, this leaves approximately $9.6 million for future repurchases under the program. As of today, between the share repurchase program and the 2019 Modified Dutch Auction Tender Offer, SuRo Capital has repurchased 6,272,607 shares of common stock for approximately $40.4 million since the inception of the share repurchase program in August 2017. This represents over 28% of the shares outstanding at that time. On July 29, the company entered into an at-the-market sales agreement with BTIG, JMP Securities and Ladenburg Thalmann to issue and sell up to $50 million in aggregate amount of shares of our common stock via an at-the-market capital raise or ATM Offering. On September 23, we increased the maximum amount of shares available to be sold through the ATM Offering to $150 million from $50 million. We primarily intend to use the net proceeds from the ATM Offering to make investments in portfolio companies in accordance with our investment objective and strategy. During the third quarter, we issued in sold 3,808,979 shares under the ATM Offering at a weighted average price of $13.36 per share. For gross proceeds of $51 million and net proceeds of $49.9 million after deducting commissions to the agents on the shares sold. The last day of sales was September 28, prior to the Palantir direct listing on September 30 and no additional shares have been issued or sold since September 28. As of today, up to approximately $99.1 million in aggregate amount of the shares remain available for sale under the ATM Offering, but we have no current intention of issuing additional shares of common stock under this ATM Offering at this time. During the third 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 operating expenses for the third quarter were approximately $3 million. This represents a decrease of approximately 17% in operating expenses from $3.6 million during the third quarter of 2019, adjusted for stock based compensation expense. When compared to our last third quarter as an externally managed entity, the third quarter 2020 total operating expenses of $3 million, represent a nearly 34% decrease from total operating expenses before waivers of $4.6 million in the third quarter of 2018. The adjusted total operating expense for the first nine months of 2020 or year-to-date was $9.2 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 of stock based compensation in Q2 is offset in the equity section of the balance sheet. The adjusted total operating expenses $9.2 million for the first nine months of 2020 is compared with $12.6 million in the first nine months of 2019, adjusted for the reversal of incentive fee accrual and $16.3 million in total operating expense before waivers for the first nine months of 2018. The last year, we were fully externally managed. The continued decrease in operating expenses is primarily due to the elimination of management fees and 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 to the internalizations 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 was continued positive impacts on NAV. We remain diligent about managing our expense base moving forward. Finally, I would like to review, SuRo Capital’s current liquidity. We ended the quarter with approximately $107.3 million of liquid assets, including $60.3 million of cash, $7.2 million of unrestricted marketable public securities, and $39.5 million of public securities subject to lock up restrictions. Our cash balance is $60.3 million as of September 30, consisted primarily of proceeds generated via at the market offering and the monetization of various portfolio positions during the year. The $7.2 million of unrestricted marketable public securities and $39.5 million of public security subject to lockup restrictions held as of September 30, represent our shares in Palantir. During the third quarter, we sold a portion of our unrestricted shares in Palantir, not included in the 7.2 million held at quarter end for approximately $4.1 million in net proceeds, realizing approximately $3 million in gains. Subsequent to quarter end, we sold our remaining unrestricted shares for approximately 7.6 million in net proceeds, realizing approximately $5.4 million in gains. That concludes my comments. We would like to thank you for your interest in support of SuRo Capital. Now I will turn the call over to the operator, start the Q&A session operator.

[Operator:]

Thank you. We’ll hear first today from Jon Hickman with Ladenburg.

[Jon Hickman:]

Hello. Thanks for taking my question. Could you tell us, what you got the – I guess, the raise for Coursera and Course Hero were at $2.5 billion and then $1.1 billion respectively. Could you tell us how – what you have those positions valued at on your as of September 30?

[Mark Klein:]

Hi, Jon and thank you for your call and thanks for your ongoing support. As you know we don’t comment on the values of the company simply on our positions and what our positions are work, but not as they relate to total corporate value. With that said, our evaluation metrics, as you know, we utilize among other variables, the last round of evaluation. We overlay other items such as secondary trading and the waterfall and capitals capital structure. So I know I’m not answering your question directly, but typically, our evaluation is something slightly lower or maybe more than slightly lower, but typically lower than the last round that was raised.

[Jon Hickman:]

Yes. Don’t you put a – like a private discount on that on the last time.

[Mark Klein:]

We do a series of things in our evaluation work that I know you and I have discussed in length. But is we apply our heuristics to our evaluations, which include but don’t limited, the last round trading in the secondary markets, if those variables aren’t there, then public comps.

[Jon Hickman:]

Okay. And then, I think I read recently that Nextdoor was contemplating IPO. Was there anything you say about that that’s already public.

[Mark Klein:]

I mean, Jon, there was a Bloomberg article approximately two weeks ago by the SPAC reporter at Bloomberg, who stated that she believed that next door was in conversations with one or several specs evaluations between $4 billion and $5 billion, as a value of the company. That’s what we’ve read. That’s probably what you’ve read and that’s all we know or can comment on.

[Jon Hickman:]

Okay. And then, I’m sorry, I have one last question. The Blink business model, they make money, they deal directly with the manufacturer and then, so they take a cut between that in the consumer. Is that how they do it?

[Mark Klein:]

Yes. But their value proposition predominantly is you as the consumer, when your doctor, wants to recommend pick a drug, that when they ask for your pharmacy, you give them Blink, they then entered into the Blink system. You can then go and determine which pharmacy and you get pricing in which pharmacy you want it to be either delivered from or picked up from. And one of the real advantage is that they provide is that since they work with both the generics, as well as the name brand of equivalents. They get the same pricing, they get the appropriate pricing and the lowest pricing at a given pharmacy, as opposed to having to run around, to go to Walgreens for one thing, and perhaps your local pharmacy for something else.

[Operator:]

Question next today from Andrew Harte with BTIG.

[Andrew Harte:]

Hi, good evening. Good. How are you? Thanks. I’m wondering if you can kind of give us an update on what the pipeline might look like and future credit investments. And then as a follow-up, maybe when we can expect to see some investments in the future, in the – in any SPAC acquisitions, premerger SPAC acquisitions.

[Mark Klein:]

Well, obviously, we’ve just - we sort of disclosed, always disclosed in our prepared remarks. We are – we have evaluated in this quarter, the better part of 60 different portfolio companies with a fair amount of them credit opportunities. We the credit work is extensive to have it there it’s bespoke. So we’re creating term sheets to do that, which is a much longer process than an equity being offered at a price or a negotiation on as such. We have several credit investments in various stages of being completed. We have term sheets out on a few of them and we have further more advanced dialogues on some of them. So that said, on the SPAC pipe side, we are very active in looking at those, obviously, there’s been an immense amount of activity in the SPAC from both the underwriting, as well as the announcement of SPAC transactions. We’ve gone down the path on quite, I’d say one, several we’ve gotten very deep down the path on a couple. And we may be able to announce that we’ve completed one or two as we end calendar year.

[Operator:]

We’ll hear next from Ron Levine with Ron Levine Associates.

[Ron Levine:]

Yes. This is Ron Levine. Mark, my question pertains to the Coursera. If you have a comment on its current profitability or any thought they may have of going public.

[Mark Klein:]

Thanks. And thanks for your question, Ron. Obviously, there’s been a fair amount in the public domain about Coursera, given where they, where it is in size, where it is in its saturation. And there’s been articles written about that may or may not go public. So to the degree that we comment, we comment simply what’s in the public domain, which – what’s in the public domain, leads the investment public to believe that they will contemplate upon – they’re headed towards a public offering. The timing of that is remains uncertain.

[Ron Levine:]

Okay. Second question, do you have any feeling as to why the stock sells at such a discount to the NAV, especially in the light of the changes that the current management team has made, which I really appreciate very much and congratulate on.

[Mark Klein:]

Thanks, Ron. Well, I mean, I’d say a few things, right. We – the volatility that we’ve experienced in our share price over the last six months, if you can – if you really want to go back to the onslaught of COVID has been unprecedented for our stock. Obviously, with the – with Palantir coming public and given the publicity around Palantir and the excitement around that, there was a much broader base interest in our company as that as investors realize through various publications, articles and analysts that that was a large position in our portfolio. And our stock got bid up sharply. And I think that Palantir coming public, it was about a $22 billion valuation, which was obviously significantly higher than we had held in the highest valuation that is achieved and on an outright basis, which we viewed as very exciting. I think the investment public viewed it at somewhat disappointing. So we then had the same rush of folks that ran in and better stock up then became the sellers of our stock. So we had this bit of a pendulum approach to what had gone on and our stock got sold down fairly indiscriminately, I think and hopefully, today’s an indicator and the stock and even over the last few days, the selling is purely subsided. I think we’ve had a bit of a turnover in our shareholder base. I do believe talking to a lot of our shareholders that the shareholders that now are buy our stock or own our stock realize that this is a pretty interesting vehicle and that our net asset value makes a lot of sense. And that our portfolio was far broader than a one-trick pony in Palantir. And the fact is we still own 80% of our Palantir and have a fair amount of value that is there and will be created. But I think investors are now coming to realize the value of what we discuss even three of our top five – four of our top five positions let alone some of our other positions. So I think the discount this time as much more of a function of the volatility in the stock. I think the actions that we continue to take and we took advantage of it, right. The idea of the stock trading down to the low $8 range where their NAV at $12.46 was an excellent opportunity for our Board to extend our – and expand our buyback. So because if we can buy back stock, which is at the stock has to go up 50% to get back to our NAV is training in the 37% discount. So that was an opportunity for us to create shareholder value by trailing the share count at that level. But I don’t – I really don’t believe you’re going to continue to see significant discounts, because our portfolio continues to have companies that are now are really demonstrating how good they are. We will have monetizations within our portfolio. We are having opportunities make investments like we just did in Blink and some other things that are occurring. So I just think it is – we’re not the old GSV, if you will. And I think with that, I think you saw that for our stock trading above NAV was the first time. And certainly at a 10% and 15% premiums NAV was the first time in about eight years of that occurred. And that’s because of a lot of the things that we are doing. And I suspect that the stock will start to trade back up to in and around NAV now that the shareholder base is a little bit sad and the volatility is running out of it a bit.

[Operator:]

We’ll hear next from a Private Investor.

[Unidentified Analyst:]

Hi, thank you for taking my call. I’m just curious if the organization has ever considered creating its own spec to maybe take some of those smaller positions public, if they were interested, or if that’s something that we can be possible.

[Mark Klein:]

We’re not in the business of creating stacks for ourselves. I think there are a lot of very good sponsors out there. I think our opportunity to invest in pipes that they create for deals that they’re creating is in a very interesting pre-IPO strategy for us. I think we will have the opportunity at some point in time to participate on the – I’ve called it Founder’s equity side. If we chose to put at risk capital with specs, but it’s not in our mandate to create pipes – to create specs. We won’t do that. We will participate alongside other sponsors either two pipes or maybe at some point in time in their Founder’s equity as well.

[Operator:]

And at this time, I would like to turn things back to management for any closing remarks.

[Mark Klein:]

Thank you all for taking time, and obviously an extremely interesting time in the country between the election and the pandemic. We really appreciate the time you’re spending with us and the support that many of you have expressed directly to us and management. So thank you all very much, and please try and stay healthy. Thank you, bye.

[Operator:]

And that will conclude today’s conference. Again, we thank you all for your participation and you may now disconnect.