Sunrise Realty Trust: Still looking good

Back on July 24, 2024, I published an analysis of Sunrise Realty Trust (ticker: SUNS).

This is an update.

Summary: Things are looking good so far.

First quarterly report (10-Q)

The company filed its first quarterly report with the SEC yesterday (August 14, 2024).

The quarter covered by the report is April 1 - June 30, 2024. The company officially completed being spun off on July 9, 2024. So, the financial info in the report doesn't provide much info beyond what we already knew from the investor presentation from the spin-off.

The good thing is that there weren't any surprises.

It was boring. In the best of ways.

The 10-Q did include a couple notes on the current quarter (July 1 - September 30):

• They issued a senior secured loan for $14.1M

• They issued a senior secured loan for $27.3M

• They issued a senior secured loan for $40.1M

• They declared a partial-quarter dividend of $0.21 for the current quarter (paid in October)

• They declared a regular dividend of $0.42 for the next quarter (paid in January)

More details on the loans made can be found in a separate publication: SUNS Q2 2024 Investor Presentation.

There're a couple things I like about these loans:

1. They're senior secured debt

2. They each have loan-to-cost (LTC) under 61%.

3. They're recent, so were evaluated with consideration for the current state of the economy

Basically, this sums up to these looking like high-quality loans.

Here're a couple reasons why (skip if you find this boring):

1. Senior debt is paid out first if anything goes wrong

2. Secured debt means there's an asset with material value that can be used to support pay out if anything goes wrong (versus depending on availability of cash)

3. The lower the loan-to-cost, the lower the competition for recompensation if things go wrong

4. Current elevated interest rates were taken into consideration when evaluating borrowers' abilities to repay these loans

First earnings call

Also yesterday, SUNS had their first earnings call.

An earnings call is a public conference call where the company's management:

1. Updates investors and analysts on how the business has been doing

2. Answers questions from analysts

Companies usually do earnings calls once per quarter.

Like with the 10-Q, there wasn't a lot to cover on the earnings call.

The management team mostly used it to introduce themselves and the business to investors and analysts.

When I did my initial analysis of the company, I didn't find much info on the CEO, Brian Sedrish. So, I was looking forward to hearing him speak on this call.

Unfortunately, the call was primarily driven by Leonard Tennenbaum.

It seems clear that Tennenbaum is the primary person in control.

This makes sense since he's the biggest shareholder, as well as chairman of the board.

But, Sedrish is the person most responsible for business operations. So, I'm hoping to hear more from him in the future.

On the call, the team summarized their business thesis as:

1. The US South is growing

2. They're deeply familiar with the region

3. They have extensive business relationships in the region

4. The current financial environment offers substantial opportunity to non-bank lenders

And, here're a few notable points from the discussion:

• They've committed to issuing $119.6M worth of loans so far

• They have a pipeline of $1B worth of deals they're evaluating

• They're targeting 1:1 leverage (i.e. funding their business with $1 of debt for each $1 of shareholder equity)

• They've set up a line of debt to borrow up to $100M

• Full utilization of the line of debt is likely to be happen over 1-2 quarters

• They believe the $0.42 dividend will be sustainable over time

• They dividend may increase once all capital is deployed (including the $100M line of debt)

Only one analyst asked questions on the call.

But, his participation is another good sign.

It means analysts are starting to evaluate the company.

Analysts reporting on the company makes it likely that more people will begin trading the stock.

More people trading the stock means more liquidity. That is, there'll be more people to buy from and sell to.

Side note: More pain ahead in commercial real estate?

Just a side note here.

During the call, an analyst asked about the deals the company's seeing.

Sedrish responded that they're primarily seeing refinancings.

He said that refis are the main thing the market needs right now. He commented that declining interest rates won't solve all the problem in commercial real estate (CRE).

Reading between the lines of other comments, it sounds like there aren't too many distressed sales... yet.

Investment update

So, I continue to feel good about this investment.

As I write this, I found that the market price actually jumped by a fair amount:

Being honest, my two initial reactions were:

1. Nice, it went up! Maybe I should sell?

2. I wish I'd bought more.

These are big no-no's.

They're emotional reactions.

Here's the rational view:

1. I think the stock's still undervalued. It's not time to sell.

2. I'm still learning. I bought the right amount because I shouldn't be investing more than I'm comfortable losing until I'm confident I fully understand the risk. The market price could have gone, and may go, the other direction.

Emotions managed: Check ✅

As a fun side note, I recognized the analyst who asked questions during the earnings call (Stephen Laws from Raymond James).

I've heard him on the earnings calls of other REITs.

In fact, I even made note of a question he asked in my Arbor Realty Trust analysis.

That made me feel good because I feel like I'm building familiarity.

Happy hunting!

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