Sunrise Realty Trust, Inc.
Q4 2014 Earnings Call Transcript

Published: 27 Feb 2015

[Operator:]

Good day, ladies and gentlemen. And welcome to the Solar Senior Capital Ltd. Earnings Conference Call for the Quarter and Year Ended December 31, 2014. My name is Ben, and I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Michael Gross, Chairman and Chief Executive Officer. Please proceed, sir.

[Michael Gross:]

Thank you and good morning. Welcome to Solar Senior Capital Ltd. earnings call for the quarter and year ended December 31, 2014. I'm joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka, our Chief Financial Officer. Rich, please start off by covering the webcast and forward-looking statements.

[Richard Peteka:]

Certainly. Thank you, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Senior Capital Ltd. and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast on our website at www.solarseniorcap.com. Audio replay of this call will be made available later today as disclosed in our press release. I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's 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. 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. Solar Senior Capital Ltd. 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 website or call us at [phone]. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

[Michael Gross:]

Thank you, Rich. 2014 was a very productive year for Solar Senior Capital on a number of important fronts. In addition, we've established good momentum heading into 2015. The credit fundamentals and financial performance of our portfolio companies remained very healthy. As of December 31st, our portfolio comprised predominantly of senior secured floating rate loans is 100% performing. In addition, we have no direct exposure to the energy sector. Despite being selective in the face of continued frothy credit markets and elevated repayment over the course of the year, we experienced a 27% growth in our portfolio with the substantial volume of the increase coming in the fourth quarter, as we took of each advantage of higher middle-market M&A transaction volume and a more attractive underwriting environment. In the fourth quarter, portfolio activity resulted in new investments of approximately $90 million across 10 portfolio companies. We more fully utilize our available credit capacity to drive portfolio growth and to diversify our holding. The $28 million of sales repayment in the fourth quarter were lighter that we experienced in recent quarters, resulting net portfolio growth of $62 million. In September last year, we announced an important growth initiative in forming a strategic partnership with Voya Investment Management to create a First Lien Loan Program or FLLP. The FLLP provides incremental long-term capital from a like-minded credit investor that expansion origination capacity and allows us to scale the Solar Senior balance sheet more efficiently. We are off to a solid start and have already seen how this joint venture and the additional scale enhances our value to the sponsor community. As a reminder, Solar Senior and Voya committed equity of $50 million and $7.25 million, respectively to the joint venture. We started underwriting investments in late Q4 and in the first quarter of this year we begin to fund the joint venture. In addition, we recently closed a credit facility for the joint venture that should enable FLLP to achieve a debt-to-equity ratio of up to two times once the portfolio is fully ramped. Our investment in General Healthcare also continue to demonstrate strategic value to its recurring cash income, diversified portfolio of senior secured assets and differentiated origination platform. Gemino Healthcare expertise and asset based lending platform creates a risk return profile that is a low correlation to SUNS’ traditional underwriting of senior secured cash flow loans. Bruce will provide additional information on Gemino and our fourth quarter activity. With traction on our recent growth initiatives and solid portfolio growth, we were able to drive overall leverage to 0.67 times debt-to-equity and utilize our balance sheet more effectively. Ultimately, Solar Senior reported net investment income of $0.35 per share in the fourth quarter, up from $0.31 per share in the prior quarter. In addition, our book value of $17.65 at 12/31 was consistent with book value reported at the end of the third quarter. We believe we have built the portfolio to a size that should be able to sustain net investment income in the rage that going forward substantially cover our quarterly distribution plus or minus a couple of pennies per share. We have no plans at present time to cut our dividend. Moreover, we believe that we can drive further growth to NII over 2015 as we build out the FLLP and use available credit capacity to fund new investments. At December 31st, the company had $143.2 million in borrowings on its $175 million credit facility and $31.8 million of unused capacity. When considering the combined $57 million equity commitments plus expected available credits, we believe our investable capital for the FLLP joint venture, together with Solar Senior Capital approaches $150 million subject to borrowing base limitations. Lastly, our Board of Directors declared a monthly distribution for March 2015 a $0.1175 per share, payable on April 2, 2015 to stockholder of record on March 19, 2015. At this time, I will turn the call back over to our Chief Financial Officer, Richard Peteka.

[Richard Peteka:]

Thank you, Michael. Solar Senior Capital Limited net asset value at year-end was $203.5 million or $17.65 per share. This compared to a net asset value of $203.6 million or $17.65 per share at September, 30th, NAV per share unchanged. Our investment portfolios at December 31st had a fair market value of $340.5 million across 43 portfolio companies operating in 25 industries. This compares to a fair market value of $278 million in 39 portfolio companies operating in 21 industries at September 30, 2014. At December 31st, the weighted average yields on our income producing portfolios decreased slightly to 7.0% measured at fair value versus 7.2% at September 30th and the 100% percent of our portfolio of investments are performing. Gross investment income for the three months ended December 31st reflected the increase in our portfolio and totaled $5.9 million versus $5.3 million for the three months ended September 30th. Expenses for the three months December 31st were $1.9 million, compared to $1.8 million for the three months ended September 30th. Accordingly, net investment income for the quarter ended December 31st was $4.0 million or $0.35 per average share, versus $3.5 million or $0.31 per average share for the quarter ended September 30th. Below the line, realized and unrealized losses for the fourth fiscal quarter was de minimis, a net to a profit $1,000 versus losses of $1.8 million for Q3. Ultimately, the company had a net increase in net assets, resulting from operations of $4.0 million or $0.35 per average share for the three months ended December 31st. This compares $1.7 million or $0.15 per average share for the three months ended September 30, 2014. At December 31st, SUNS had a $143.2 million in borrowings outstanding on its $175 million credit facility, resulting in a net debt to equity ratio of 0.67 times. At this time like, I’d like to turn the floor over to our Chief Operating Officer, Bruce Spohler.

[Bruce Spohler:]

Thank you, Rich. Let me begin by providing a portfolio update. Overall credit fundamentals and financial portfolio performance of our portfolio companies remained strong. While the portfolio is broadly diversified across multiple issuers and industries, we continue to favor issuers operating in more defensive non-cyclical sectors. And as Michael mentioned, we have no direct exposure to the energy sector. At December 31st, our portfolios are 100% performing and we feel confident about the prospects of our company’s operating performance. For Q4, the weighted average yield of our portfolio was 7% measured at fair value. Our internal risk assessments on a weighted averaged basis remained at approximately 2, measured at fair market value at 12/31 based on our 1 to 4 risk rating scale, with one representing the least amount of risk. SUNS’ portfolio ended Q4 with investments in 43 issuers across 25 corporate industries. The average issuer exposure is approximately $7.9 million. Our portfolio was invested 88% in senior secured loans, 10% in Gemino senior secured healthcare whose portfolio consists entirely of senior secured loans, 1% in unsecured loans and 0.3% in common equity excluding Gemino. Including our investments in Gemino at a 100% floating rate, over 94% of our portfolio carry floating rate and just over 5% carry a fixed rate, when measured at fair value. As Michael mentioned, we had a very active quarter with new investments of approximately $90 million across 10 portfolio companies, in addition to sales and repayments of approximately $28 million. This resulted in net portfolio growth in excess of $60 million. Before I give the overview of our fourth quarter activity, let me provide an update on our investment in Gemino. At year end, Gemino had in excess of $122 million of funded senior secured revolving return loans across 38 issuers with an average loan balance of just over $3 million. All of the commitments at Gemino are floating rate senior secured cash paid loans. For Q4, Gemino paid distributions to Solar Senior of $820,000, equating to a 10% annualized distribution yield on our cost, which is consistent with the overall yield for all of 2014. Now let me highlight a couple of our fourth quarter investments. We funded a $12 million investment in the first lien term loan of Highgate Hotels, which supported Trilantic Partners acquisition of the company. Highgate is a hotel management company, which operates urban hotel properties predominantly in New York City. The net first lien leverage is 2.4 times and our yield is approximately 5.8%. We also funded a $13 million investment in the first lien term loan of Capstone Logistics, a leading freight handling and logistics provider, which was recently acquired by The Jordan Company. Net first lien leverage is just over 4 times and our yield of this investment is approximately 5.75%. Additionally, Solar Senior funded a $15 million investment in the $100 million first lien term loan for Metalogix, which supported Permira’s buyout of this leading provider of Idera’s software tools. Net first lien leverage is approximately 4.7 times and our investment yield is just over 7%. Additionally, we made $7.5 million investment in the first lien loan of ABS, which is a leading provider of outsourced janitorial services to U.S. retail sector. Net first lien leverage is 4 times and the yield is just over 6%. Lastly, we founded a $7 million investment into the new $85 million first lien term loan for Richelieu Foods, which is a leading provider of private label frozen pizza. Our sister company, Solar Capital, had originally invested in mezzanine loan back in 2010 to support the acquisition of the company by Centerview Partners. Given our extensive knowledge of this company, we elected to participate in this refinancing this past quarter. Net first lien leverage is in the mid 3 times and our yield is just over 6.2%. Now let me highlight couple of our fourth quarter repayments. We were repaid on our $9.8 million investment in Attachmate Corporations’ first lien term loan as a result of the company’s sale. We originally invested in Attachmate back in May 2012 and have realized an IRR in excess of 8.5% on this investment. Additionally, we were repaid on our $2.5 million second lien investment in HealthPort Technologies. Our IRR in this investment was just under 13%. Given our experience of the company, we elected to fund a new $5 million investment in the company’s first lien term loan, which was supporting the purchase of the company. Net first lien leverage is just under 5 times and our yield is just over 6%. We also sold our $5 million position in Electronic Funds Source. We had originally invested in the company as part of this acquisition by Warburg Pincus back in the middle of last year and we took advantage of market condition to sell our position at a premium to par. Our IRR in this investment was just under 9%. As Michael mentioned, our joint venture with Voya is off to a solid start and we are pleased to partner with the likeminded and disciplined credit investor. We are actively underwriting attractive first lien senior secured floating rate loans for this joint venture. Subsequent to year end, joint venture closed on the credit facility with the third party lender and we had begun to invest in assets. The credit facility there is a coupon in the range of LIBOR plus 2.25 to 2.5 and there is no LIBOR floor. Finally, year to date visibility on repayment levels is very low consistent with the insurance that we had in Q4. Now I would like to turn the call back over to Michael.

[Michael Gross:]

Thank you, Bruce. In conclusion, we are quite pleased with our fourth quarter performance and the traction we are seeing on our recent strategic growth initiatives. Importantly, portfolio growth and greater utilization of our credit facility has enabled SUNS to be in position where sustainable net investment income can more adequately cover our dividend. Over the course of 2015, we expect additional portfolio growth as we prudently deploy our available capital. As significant shareholder of this business our primary focus remains on preservation of capital to the careful selection of senior secured investments, with risk characteristics that meet our strict underwriting standards. In the fourth quarter, we were able to take advantage of higher transaction volume and improvements in terms that resulted from market volatility. We continue to believe that the senior secured middle market loan asset class remains attractive both on a relative and absolute basis. We currently have a well diversified portfolio of senior secured floating rate loans. The weighted average yield of the portfolio based on fair value was 7% at the end of the year. In comparison, the S&P/LSTA U.S. Leveraged Loan 100, which tracks the 100 largest loans in the broader index, held a yield to maturity of just 5.15% at December 31st. At our closing quite last night of $15.40 -- $15.47, we trade at just 0.88 times book value with a yield of over 9% and we have capital to make additional investments. The risk and value proposition of an investment in Solar Senior Capital is very compelling when compared to the syndicated high yield and bank loan markets. Our yield of approximately 9% offer compares quite favorably to the 5.97% yield of the Barclays high yield corporate index and to a 6.4% weighted average yield on a representative sample of ’14 closed end bank loan funds. Thank you for your time this morning. We look forward to speaking to you next quarter. Operator, please open this line up for questions.

[Operator:]

Thank you very much, Michael. [Operator Instructions] The first question comes from the line of Mickey Schleien from Ladenburg. Please proceed.

[Mickey Schleien:]

Yes. Good morning, Michael and Bruce.

[Michael Gross:]

Good morning.

[Mickey Schleien:]

Quick question, has the investment manager agreed to waive any fees for 2015 the way they -- the way you did in 2014?

[Michael Gross:]

No. We have not.

[Mickey Schleien:]

Okay. Thank you.

[Michael Gross:]

Thank you.

[Operator:]

Thank you very much for your question, Mickey. The next question comes from the line of Doug Crimmins from RVP. Please proceed.

[Doug Crimmins:]

Yeah. Hi. Thanks for taking my call. Two quick questions. Can you give a breakdown on the portfolio between first and second lien loans? And then secondly, is there like a pie chart that gives a breakdown, an industry breakdown?

[Michael Gross:]

Yeah. I’ll take the first part of that question. When you look through the Gemino on a consolidated basis, as well as the Voya's joint venture in excess of 90% of the portfolio is first lien loans.

[Richard Peteka:]

And regarding the industry, there is an exhibit in the 10-K that goes through the industry breakdown.

[Doug Crimmins:]

Okay. Thank you.

[Richard Peteka:]

Our pleasure.

[Operator:]

Thank you very much, Doug. [Operator Instructions] We do have a further question. It comes from the line of Jonathan Bach from Wells Fargo Securities. Please proceed, sir.

[Jonathan Bach:]

Hey. Good afternoon and thank you for taking my question. Michael and Bruce, when we think about the first lien market, particularly I think you referred to as the clubish market where it's kind of between sole direct origination and what you could pick up on a BSL basis. It is our understanding that there is a significant amount of middle market capital that has been raised recently particularly, even now via SMA or other and BDCs as well over the past, particularly private BDCs. Can you give us a sense as to whether or not the category that you focus on today in that club market, whether there is kind of an element of direct origination or kind of not, whether the pricing and the risk adjusted returns that you've seen relative to past years are super attractive, average or slightly below average now today in light of spread widening in what we've seen?

[Michael Gross:]

Yeah. I’ll take a shot at this, Jonathan. Just top of mind here, as I whip through sort of investments we went into in Q4, I think clubby is a good way to describe it. I’m seeing a $180 million first lien tranche that we clubbed into. I’m seeing a $100 million first lien tranche that we took $12 million of. I’m seeing $158 million, Metalogix was $100 million, Quorum was $125 million, Richelieu was $85 million, so you get my point. These are $100 million to $150 million facilities typically, in terms of where we deploying our capital and we’re investing anyway from $5 million to $15 million. It’s direct in that. All of us are allowed the opportunity to go and do direct due diligence. Club leaders are people like Ares, Golub, Fifth Street. So we are all in there doing direct due diligence. These are not by and large led by other banks, although there is an occasional BNP or RBC mid-market bank in there. But for the most part, we are all allowed to do direct due diligence, Jonathan. I think that the terms really, as you know consistently, you get conveyance at this end of the market which gives us considerable comfort. I think leverage ratios have been rather consistent between the 3.5 to 4 times depending on the sector that you are lending into. And pricing today on a first lien basis, a year ago was probably pushing 4.25, 4.50 over LIBOR. Today, it’s more in the 475, sometimes at 500 over depending on the sector. But be mindful that because of the new capital that’s coming to the sector, everybody’s got to diversify diversification acquirements. So most people that have raised capital are also taking 5s and 10s and 15s, these are clubs. It’s different from unitranche asset class where people are taking down the entire tranche.

[Jonathan Bach:]

Okay, guys. Very helpful. And then in the current market today, as we have kind of heard that spreads obviously widened, but now have particularly and more liquid collateral tightened a bit. Are you experiencing kind of the same phenomena in your core or are you still seeing spreads closer to where they were at the end of December?

[Michael Gross:]

I would say it’s a range where they were in Q3 from where they were in Q4, but we are helped by virtue of the fact that the leaders of these clubs are somewhat levered and are trying to bring in some friendly club members and don’t feel the need to necessarily push down pricing by an extra 25 basis point. So it tends to be in that 6 - 5.75 to 6.25 all-in yield.

[Jonathan Bach:]

Got it. Okay. Great, guys. Thank you so much.

[Michael Gross:]

Thanks, Jonathan.

[Operator:]

Thank you for your question, Jonathan. The next question comes from the line of Jonathan Finger for Finger Interests. Please proceed.

[Jonathan Finger:]

Hi, Bruce. Hey, Michael.

[Michael Gross:]

Hey, Jonathan.

[Jonathan Finger:]

Michael, you talked about the dividend earlier. In terms of thinking about dividend coverage, how should we think about that? Should we look at sort of net investment income, or when you look at the tax characteristics of dividends, some portion is return of capital, how should we think about that?

[Richard Peteka:]

I think that one of the things over the course of the year -- this is Rich -- that you want to consider and we have to consider is directly we have to pay on 90% of our gross income. And when we do get upfront fees on these deals, as we do, in a period of growth, we are taking upfront fees that are taxable and require to be distributed. So we have to consider that in our dividends to shareholders. Yes, for GAAP, we are amortizing that fees. So in those cases of where we are seeing that kind of growth, you generally have more taxable income, therefore a dividend requirement versus the GAAP amortization of that income over the period to maturity.

[Jonathan Finger:]

Okay. Thank you.

[Operator:]

Thank you very much for your question, Jonathan. We have no further questions in the queue. I would now like to turn the cal back over to Mr. Michael Gross for closing remarks.

[Michael Gross:]

We appreciate your time this morning. We look forward to talking to you in early May about Q2 and we’ll share with you our continued growth. Thank you.

[Operator:]

Thank you very much. Thank you for your participation in today’s conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Have a great day.