Sunrise Realty Trust: Is it just me or is this company undervalued?

I recently ran a stock screen for companies with market caps less than $1B and little to no debt.

When browsing through the results, one company caught me by surprise:

Sunrise Realty Trust (ticker: SUNS) (corporate website) (SEC filings).

I was surprised

The company:

1. Has zero debt

2. Is currently valued below the value of its assets

Specifically:

1. The market cap is currently ~$77.5M

2. The company has ~$115M in assets

   1. ~$46M of that is loans it gets interest from

   2. ~$68M of that is cash 

So, the $77.5M valuation is just a little above its $68M in cash. So, it seems like the loan assets are being heavily discounted.

I'd never seen any thing like this (limited experience 🤷).

So, what's the story?

The story is that the company was spun off from a REIT (real estate investment trust) called AFC Gamma (ticker: AFCG. AFC Gamma focuses on loans to the cannabis industry.

SUNS was spun off to take advantage of non-cannabis-related commercial real estate opportunities AFCG was seeing.

Side note: I didn't know the difference between a spin-off and spin-out. So, I had to look it up. Basically, a spin-off is when part of a company is separated out into it's own company. Then, shareholders in the original company get shares of the new company. A spin-out is when some intellectual property (IP) of a company is used to create a separate company. In this case, shareholders of the original company don't get any shares of the new company.

Side note: I also recently learned that commercial real estate (CRE) lending includes lending for construction of multi-family housing. So, it's not just office space.

SUNS's first day of trading was July 7, 2024.

The spin-off

The company filed to issue new stock with the Securities and Exchange Commission (SEC): SEC filing.

From the filing, the AFCG is funding SUNS with $115M via:

1. A transfer of assets (i.e. interest-bearing loans)

2. Enough cash to bring the total value up to $115M

SUNS also released an investor presentation.

To quickly summarize, the company currently holds 3 secured subordinated debt loans for $28.22M, $28.19M and $14.1M. I'm far from an expert on debt, but reading through the presented info (and doing lots of google searches), it seems like they have reasonable risk profiles.

The interest rates on the loans are about 20.64%, 13.00%, and 9.55%, respectively. There're a lot of factors that'll affect the actual yields from the loans. But I think these should be reasonable approximations for now, so let's stick with them for simplicity.

Using these numbers, the loans will produce annual interest of about $10.8M.

The stock issuance filing reports Q1 income of $3.1M, which annualizes to $12.4M. So, I feel comfortable with the $10.8M as a conservative estimate of current annual income.

Some quick calculations

Normally when thinking about company's value, I'd be interested in its price per earnings (PE ratio).

But, Investopedia says it's better to value REITs on price per funds from operations (P/FFO).

From the stock issuance filing, Q1 expenses were $0.77M. So, that annualizes to ~$3.1M.

So, subtracting the expenses from the income, we can estimate funds from operations (FFO) as $7.7M.

With the current market cap of $77.5M, the P/FFO is about 10.

From this report on REITs, the P/FFO across all listed REITs is currently about 15:

So, this seems to compare pretty well!

Insiders are buying

SUNS directors and officers made a large number of purchases of the new company's shares during the first couple days of public trading:

• 2024-07-10, 1,000 shares, Alexander Frank, Director, SEC filing

• 2024-07-10, 5,000 shares, Jim Fagan, Director, SEC filing

• 2024-07-10, 137,044 shares, Leonard Tannenbaum, Director, SEC filing

• 2024-07-11, 16,500 shares, Jodi Hanson, Director, SEC filing

• 2024-07-11, 4,000 shares, Robyn Tannenbaum, President, SEC filing

• 2024-07-12, 56,584 shares, Leonard Tannenbaum, Director, SEC filing

This is a positive signal. They most likely wouldn't do this unless they think they're going to profit.

Who's running SUNS?

The CEO of SUNS is Bryan Sedrish.

I would've liked to have seen some interviews with him, but didn't find much. The closest thing was a panel he was on in 2022. I didn't get a lot of signal from that. But, he seems knowledgeable and I didn't get any red flags.

From his LinkedIn profile, he has an impressive background. He was previously at a company called Related, which appears to have a good reputation.

He remains CEO of another company called Southern Realty Trust. But, it overlaps with the role at SUNS. The relationship is laid out in the new stock issuance filing.

No strong signal, but no major concerns. 🤷

One weird thing

The Chairman of the Board is Leonard Tannenbaum. He's also the largest shareholder of SUNS.

From doing a bit of search, he seems to be a bit quirky. Nothing particularly noteworthy, though.

I did find this Forbes article, which raises some concern. To summarize, he may have made some decisions prioritizing his personal net worth and social status over management of risk. And, there's some odd stuff about past relationships.

So, I'm not entirely sure what to make of this.

But, I'm not too worried since Sedrish is running the company. Tannenbaum has enough control to fire Sedrish. But, the probability of that seems low. Especially, if Sedrish is delivering returns to shareholders (Tannenbaum being the biggest shareholder).

Conclusion

So, I've come to the conclusion that SUNS might be undervalued. I think there's limited downside risk at the current valuation.

My guess is that this is because:

1. It's new and there's no operating history

2. It's a tiny company, so no one's paying attention

I think the biggest risks are:

1. Limited liquidity

2. Lack of operating history

3. Uncertainty about how the market will value the company

4. Limited info about management

5. The web of connections between AFGC, SUNS, and SRT

Is it 10x?

Mmm... I don't think so.

Even with the low price on assets and price per FFO, it'd take a lot to 10x the valuation. Or, it'd take a lot to produce enough dividend yield to net 10x in returns.

Definitely, the company would need to take on a lot of debt to expand like that.

Maybe the company will do it. But, I'd need to see some operating history before being able to get confident in that as a possibility.

I'm going to experiment anyways

As part of the learning process, I need real experience.

So, even though I don't see 10x here, my analysis suggests this security is undervalued with reasonable downside risk.

I've made a $1,000 purchase (which I'm okay with losing, if that's the ultimate outcome). I'll post updates as any learnings unfold.

Let's see what happens!

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