SuRo Capital Corp.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to SuRo Capital’s Fourth Quarter and Fiscal Year 2020 Earnings Call. During today’s presentation Wednesday, March 10, 2021 all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. This call is being recorded today. I will now turn the conference over to today’s speaker, 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. Today’s call is being recorded and broadcast live on our website, www.surocap.com. Replay information is included in our press release issued today. This call is the property of SuRo Capital and the unauthorized reproduction of this call in any form is strictly prohibited.

[Mark Klein:]

Thank you, Claire. We are pleased to share the results of SuRo Capital’s fourth quarter of 2020. These are obviously unprecedented times we’re living through and society is facing tremendous challenges. We at SuRo Capital continue to thank the frontline workers and responders, who have put themselves at risk throughout the COVID-19 pandemic. As the country is continuing to get vaccinated, we are hopeful that we are nearing the end of the pandemic. I would like to begin by discussing how our portfolio is fair during the COVID-19 pandemic and highlight how a few of our larger positions have even experienced degrees of business acceleration during these uncertain times. To conclude, I’ll 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 dividend adjusted net asset value per share since September of 2015. At December 31, 2020 net asset value was $15.14 per share, inclusive of dividends paid during the quarter of $0.47. This is an increase from $12.46 per share at September 30, 2020, and an increase from $11.38 per share at December 31, 2019. Net asset value totaled $302 million at quarters’ end compared to $253 million in the third quarter.

[Allison Green:]

Thank you, Mark. I would like to follow Mark’s update with a more detailed review of our fourth quarter activity and financial results as of December 31. Q1 2021 investment activity recently declared dividends. We recently announced redemption of our 4.75% convertible senior notes due March 2023 and our current liquidity position. First, I will review our investment activity. New investments during the fourth quarter included a $10 million investment in a Series A and Series B preferred shares of Blink Health and the $4.5 million investment in Second Avenue comprised of $1.5 million in the Series A preferred shares and $3 million in a secured term loan to Second Avenue. During the fourth quarter, we also completed follow on investments of $500,000 and a convertible note to current portfolio company Enjoy Technology and a total of $1 million in additional investment in the common stock of Green Acreage Real Estate Corp. Subsequent to year end, we invested $7 million in the Series B-1 and Series B-2 preferred shares of Shogun Enterprises. $200,000 in share units and warrant units of Churchill Sponsor VI LLC, the sponsor vehicle for Churchill Capital VI and $300,000 in share units and warrants units of Churchill Sponsor VII LLC, the sponsor vehicle for Churchill Capital VII. During Q1, we also invested in an additional $500,000, an additional investment in the common stock of Green Acreage Real Estate Corp. Please turn to Slide 10. During the fourth quarter, we continued to sell our unrestricted publicly traded Class A common shares with Palantir. On September 30, 2020. Palantir Technologies Inc. completed its IPO on the New York Stock Exchange under the ticker PLTR. Upon IPO, 80% of our shares remain restricted until the lockup period expired on February 18, 2021. On the date of IPO, we sold 400,000 shares or approximately 7% of our Palantir holdings going into IPO for a net realized gain of approximately $3 million. During the fourth quarter, we sold the remaining 754,738 shares of our then unrestricted shares for a net realized gain of approximately $5.4 million. Subsequent to year end and once the remaining 80% of our shares became unrestricted on February 18, 2021, we sold 4,618,952 or all remaining shares as of March 4, 2021 for a net realized gain of $110.5 million. In total, we have realized approximately $118.9 million in net gain from our Palantir investment, not including sales made in prior years. During the fourth quarter, we also received proceeds related to our June 2020 investment in Palantir Lending Trust SPV. As of year-end, $8.7 million has been received from Palantir Lending Trust SPV of the proceeds received prior to year end, $6.9 million we paid the total outstanding principal of the note, $800,000 was attributed to the guaranteed interest and $1 million was generated by the equity participation and underlying collateral. As of December 31, 2020, the balance of the loan and all guaranteed interest has been fully repaid. Subsequent to year end, we received an additional $1.4 million from Palantir Lending Trust SPV. These additional proceeds are attributed directly to the equity participation in the underlying collateral. As of March 10, 2020, $10.1 million has been received from the Palantir Lending Trust SPV and 812,290 shares of underlying collateral to which we retain in equity interest remains to be sold. We are pleased to report we ended the fourth quarter and fiscal year 2020 with an NAV per share of $15.14. A breakdown of NAV per share as of year-end is shown on Slide 11 and it’s consistent with our financial reporting. In sum, the increase in NAV per share during the fourth quarter was largely driven by approximately $2.92 per share of net unrealized appreciation of our investment portfolio, approximately $0.36 per share attributable to net realized gain on the sale of portfolio investment and approximately $0.08 per share attributable to the repurchase of our common stock. These increases to NAV per share were partially offset by $0.47 per share in dividends declared during the quarter and $0.21 per share decrease attributable to net investment loss. During the fourth quarter, SuRo Capital declared two dividends for a total of $0.47 per share in dividends. On October 28, 2020, our Board of Directors declared a $0.25 per share dividend paid on November 30, 2020 to shareholders of record on November 10, 2020. And on December 16, 2020, our Board of Directors declared a $0.22 per share dividend paid on January 15, 2021 to shareholders of record on December 30, 2020. The dividend declared has been categorized as net long-term capital gains for tax purposes. The related realized gains are attributable to the monetization upon sale or exit of the investments in our portfolio. Subsequent to year end, on January 26, our Board of Directors declared a dividend of $0.25 per share paid on February 19 to shareholders of record on February 5. And as Mark announced, on March 8, our Board of Directors declared a dividend of $0.25 per share payable on April 15 to shareholders of record on March 30. These 2021 dividends are expected to be categorized as net long-term capital gain for tax purposes. The related realized gains are attributable to the monetization upon sale of asset of the investments in our portfolio. On February 19, 2021, we caused notices of redemption to be issued to the holders of our 4.75% convertible senior notes due 2023, regarding exercise of our option to redeem in whole the issued and outstanding 4.75% convertible senior notes due 2023, pursuant to the Indenture, dated as of March 28, 2018, between us and U.S. Bank, as trustee, and the First Supplemental Indenture, dated as of March 28, 2018, between the us and U.S. Bank, as trustee. We will redeem up to $38,215,000 in aggregate principal amount of the issued and outstanding 4.75% convertible senior notes due 2023 on March 29, 2021 the Redemption Date. The 4.75% convertible senior notes due 2023 will be redeemed at 100% of their principal amount $1,000 per note, plus the accrued and unpaid interest thereon from September 30, 2020, through, but excluding, the Redemption Date. Holders of the 4.75% convertible senior notes due 2023 may surrender such notes for conversion into shares of SuRo Capital common stock in lieu of receiving cash at any time prior to the close of business on the business day immediately preceding the Redemption Date. The current conversion rate for the 4.75% convertible senior notes due 2023 is 108.0505 shares of SuRo Capital common stock for each $1,000 principal amount of such notes, which represents a current conversion price of approximately $9.25 per share. A copy of the notice of redemption was included as an exhibit to the current report on Form 8-K filed with the SEC on February 19, 2021. Please refer to that current report on Form 8-K for additional information. Finally, I would like to review SuRo Capital’s current liquidity. We ended the quarter with approximately $140.4 million of liquid assets, including $45.8 million of cash and $94.6 million of public security subject to lockup restrictions at that time. Our cash balance of $45.8 million as of December 31, 2020 consisted primarily of proceeds generated during the third quarter 2020 via the ACM offering and the monetization of various portfolio positions throughout the year. The $94.6 million of public security subject to lockup restrictions held as of December 31 represent our shares in Palantir Technologies valued at the December 31, 2020 closing price of $23.55 plus a discount for lack of marketability related to the then current lockup provision. As noted earlier, beginning with the expiration of the lockup on February 18, 2021, and through March 4, 2021, we sold all of our remaining previously restricted shares for approximately $123.4 million in net proceeds realizing approximately $110.5 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 to start the Q&A session. Operator?

[Operator:]

Thank you. And our first question will come from Kevin Fultz with JMP Securities.

[Kevin Fultz:]

Good evening, and thank you for taking my questions. Firstly, the private credit strategy was launched just over a year ago and in that timeframe you’ve made a few investments. I know it’s still – you’re still early on growing that part of the business, but can you give us a sense of how you view the long-term opportunity of the private credit strategy in relation to the total portfolio?

[Mark Klein:]

Sure. And thank you for your question. As we discussed, I guess when we first launched it our intent was to allocate up to 20% of our portfolio to this strategy and to review the strategy. The strategy is basically an asset based lending strategy to emerging venture backed companies that would carry any significant coupon and have equity participation. We have – as you said, we’ve done a couple of those investments. We are actively in discussions with several of other of them. We believe that the opportunity set is big now as when we initially launched it and we continued to do our diligence on the multiple opportunities that we have. And I expect that over the next period of time, we’ll be able to communicate that we’ve made other investments in that capacity.

[Operator:]

Our next question comes from Jon Hickman with Ladenburg and Thalmann.

[Jon Hickman:]

Hi Mark. Thanks for taking my questions. I’m not that familiar with the founder side of this back world. But the investments that you made in those two backs seem relatively small compared to what you usually do. Can you elaborate on that?

[Mark Klein:]

Sure. And without devolving into a very long conversation about SPAC inspect founder equity. SPAC sponsors are required to put up probably about 3% or 4% of the capital that are raised for their SPACs. And for that they’re given what amounts to a 20% fully diluted of the capital that’s raised plus warrants in those securities. So the basic relationship is for every dollar that a sponsor puts up, there’s a multiple of value that’s created in the inspect sponsor shares and warrants and that multiple can range anywhere from seven or eight times, not only they put up to something in excess of 10 times. So probably that, there’s a reason why there’s 500 SPACs out there looking for transactions because the economics are very exciting to the sponsors. And we believe that we have the ability with not just Churchill, with others to help, to participate in the posting of that founders capital for sponsors, and then to be able to get requisite economics that are significant multiples of our initial capital. Those two investments are obviously relatively small given the size of our capital base, but as you can imagine, these economics broadly are quite dear to sponsors. And so each opportunity that we have will be different in size, scope, who the sponsor is, and what the potential upside opportunity are – is with them.

[Operator:]

And our next question comes from Lance Gard with One Senior Island Capital

[Unidentified Analyst:]

Yes. My question is about the dilute of effect of the convertible debentures. I would assume that it’s not in the $15.14 NAV as of 12/31/20, but it will be taken into account during the March 31 quarter. Am I correct?

[Mark Klein:]

Yes, you’re correct. And Allison will give you a brief overview of the potential dilution that to support. And so we’re level set. We said, we issued this convert in 2018 at what was a 20% premium to the stock price and it a premium to our NAV. And our ability to borrow money at 4% and 3.25% and deploy that against the investments that we’ve had and to be able to generate that significant rate of return against that money, we think is a more than a very strong offset. And the fact that our converts are so deep in the money is because we’ve been so fortunate in that our portfolio companies have performed the way they have. But Allison can try to give you a better idea of what the potential dilution would be upon the conversion.

[Allison Green:]

Right. Thank you, Mark. So essentially, when we issued the redemption notice, we had currently $38.2 million of principal that was currently outstanding. Since we issued that redemption, we did have one conversion of a 1,000 notes or approximately $1 million as principal that did convert at the previous conversion rate. So right now, we have about $37.2 million of principal outstanding. That could be redeemed for cash, if not converted prior to which we anticipate will happen. Should be – should that entire $37.2 million will be requested to be converted prior to the redemption that was in just over 4 million additional shares.

[Operator:]

And our next question comes from Alex Paris with Barrington Research.

[Alex Paris:]

Hey guys, thanks for taking my questions. Congratulations on a strong finish to the year. It sounds like we’ve got some things to look forward to in 2021. I have a couple of questions and I’ll try to roll it up into one long question on SPACs. Mark, you mentioned your existing SPAC portfolio. I was wondering if you could just kind of go over that with segment you have QCX 15.7 in there. What else is in there?

[Mark Klein:]

I’m sorry. Let’s go ahead. And I think do your comment on question. I apologize. No, go head. All right.

[Alex Paris:]

And then, and then also I think this surge in SPAC IPO’s could lead to opportunities like you described with Rover, opportunities for liquidity events through SuRo and to that end would your methodology for holding public equity in Rover’s be the same. Would you sell it as soon as lock-ups expire? And then lastly, follow-on questions at the founders equity, in a typical SPAC IPO, if the money is not invested in two years, you get your money back. Is it the same thing with founders? That’s it.

[Mark Klein:]

Super. So let me do – I think I got all the questions. I tried to write it down. So thank you. Obviously, when the fact that there’s 490 some odd SPACs looking for deals is it’s sort of a phenomenal number. I think broadly and not specifically to our portfolio, pretty much any company in that either held in a venture capital portfolio or in a private equity portfolio has been approached that as a value of greater than $500 million, $600 million has been approached by multiple SPACs at this point in time. I think there is – there are not – it’s not that they’re being just reached into by these facts. There are every investment bank right now are effectively running sell-side processes that they now call SPAC offs in which they invite five, six, 10 SPACs to compete for an asset. So given where – given that backdrop, obviously our portfolio is going to be attractive, at least some of the names in our portfolio will be highly attractive to the SPAC community, which is great for our shareholders. So that’s number one. Secondly, our view is not going to change. We’re not in the public securities holding business. If people want to buy and sell public equities, we think that they can do it on their own. They don’t need us to do that. So in the case of Rover, once that’s SPAC is consummated – that deal is consummated and whatever the lock up period associated with that we would treat that as if it was a traditional IPO. I think that answers the broader questions. Specifically to founder economics, the good news and the bad news for founders, the good news is they post some amount of money and if they effectuate a business combination that there’s a multiple of that amount of money that is rewarded that they end up with. In the event after two years, that they are unable to source a business combination, then their founder’s equity is worth nothing. So it is it’s not a riskless trade for anybody for founders or in our case, if we decide to participate with founders, that’s why you do – as we go about this process, we will clearly evaluate not just the economic opportunity that may be presented to us, but who is presenting it to us and what we feel the likelihood that they had the ability to identify source and complete a business combination with a company that can and should be public.

[Operator:]

Next will be Lee Alper with Hammock Investors.

[Lee Alper:]

Hi. I think you answered the question, but just let me make it a little clearer. So if a company goes public, you will just sell as soon as you can, as opposed to strategically selling.

[Mark Klein:]

What we’ve said Lee, over the last probably 18 months or so is we don’t believe that our investors are paying us to hold public securities. With that said, so we’re not long-term holders of our private companies that go public, once they go public. We’ve also said that we will not just randomly or indiscriminately sell the shares, especially in and around lock up periods, there’s usually a fair amount of volatility associated with those shares. So we will try to be intelligent and judicious about our monetization and do it over a period of time unless the opportunity provides us to accelerate that. So we’re not long-term holders after something goes public typically, but we try to be somewhat judicious about how we execute our exit.

[Operator:]

And our next question will come from

[Unidentified Analyst:]

Hi, Mark and Alison, thanks for taking my quick call. Quick question in regards to – I think you’ve already covered it Mark, but $1.40 from the Palantir proceeds that is in addition to the year-end NAV, correct, the $15.16 at year-end.

[Mark Klein:]

Yes. That’s correct.

[Unidentified Analyst:]

Okay. Great. And secondly…

[Mark Klein:]

That’ll be included in our Q1 report.

[Unidentified Analyst:]

Exactly. Okay. And secondly, with the upcoming dilution, possibly with the converts has there been any ongoing chat of increasing buybacks with the stock trading below NAV as opposed to continuously increasing the dividends quarter-to-quarter?

[Mark Klein:]

Well, a couple of things. As you probably know, we have been active in group retiring or shares when there’s a significant discount to NAV. Up until, actually pretty recently before we pre-released our numbers, our stock had been trading at a premium to NAV, the stock has come down a little, the volatility of the market and the volatility and uncertainty of what we did with our Palantir shares. This is sort of the first time that the market – we’ve communicated to the market, what we’ve done with our Palantir shares. So the market will have an opportunity to digest that whatever way it sees fit. Additionally, the Coursera going public announcement was Monday, I think or last Friday. So again, I don’t know if that’s fully understood by the public. So we are – those who have been investing with us for a while, know that we’ve been active in repurchasing, purchasing is the appropriate tool to enhance shareholder value. We’ve also been – we tried to communicate dividends to our investors in returned capital that way. As a rep, we are required to distribute gains. So we will continue to do that as well.

[Operator:]

As a reminder, if you – we’ll go ahead and turn the conference back over to you. And that does conclude the question-and-answer session.

[Mark Klein:]

Thank you. Thank you for taking the time to participate in the call. In our minds, we are very fortunate that our portfolio has been very much appreciated by the marketplace. The monetization and the gain in Palantir was a tremendous return for our investors. We are excited about the filing of Coursera and where that may take that position, which is now our largest position in our portfolio. We also are excited about some of the names that we mentioned and some of the names that we didn’t have the time to mention. We do firmly believe that the democratization of access to SPACs is something that we can provide that is different than the ETFs that are out there or individuals simply purchasing the SPEC shares or SPEC warrants, and not having the ability to participate in the sponsor economics to participate in pipes, to participate in other elements. And we’re really excited about that opportunity for our investors. We believe that is untapped in the marketplace and that we can drive returns, if we move against that strategy in a thoughtful manner. So we truly appreciate all the time and your support and thank you very much, and I hope everybody stays healthy. Thank you very much. Bye.

[Operator:]

Thank you. That does conclude today’s conference. We do thank you for your participation. Have an excellent day.