Sunrise Realty Trust, Inc. (SUNS) Earnings Call Transcript

[Operator Instructions] I would now like to turn the call over to Gabriel Okolski, Chief Legal Officer. Please go ahead.

Good morning, and thank you all for joining Sunrise Realty Trust's Earnings Call for the quarter ended September 30, 2026. I'm joined this morning by Len Tannenbaum, our Executive Chairman; Brian Sedrish, our Chief Executive Officer; and Brandon Hetzel, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our October 2026 press release and is posted on the Investor Relations portion of our website at sunriserealtytrust.com, along with our third quarter 2026 earnings release and investor presentation. Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, market developments, our investment pipeline, anticipated portfolio yield, financial performance and projections in 2026 and beyond, the anticipated benefits of our merger with Southern Realty Trust, and our share repurchase program. These statements are subject to inherent uncertainties in predicting future results. Please refer to Sunrise Realty Trust's most recent periodic filings with the SEC, including our Form 10-Q for the quarter ended September 30, 2026, for certain conditions and significant factors that could cause actual results to differ materially from these forward-looking statements and projections. During today's conference call, management will refer to non-GAAP financial measures, including Distributable Earnings. Please see our third quarter earnings release available on our website for reconciliation of the non-GAAP financial measures with our most directly comparable GAAP measures. The format for today's call is as follows. Len will discuss our recent merger with SRT and our share repurchase program. Brian will cover the commercial real estate lending market, our portfolio and investment pipeline, and Brandon will review our financial results and position. After that, we'll open the lines for Q&A. With that, I will now turn the call over to our Executive Chairman, Len Tannenbaum.

Thank you, Gabriel, and good morning. Since our last earnings call, SUNS reached an important milestone. On November 5, we completed our merger with Southern Realty Trust, or SRT, our affiliated private mortgage REIT. At SUNS' October 23 special meeting, approximately 91.6% of votes cast approved the issuance of SUNS' common stock in connection with the merger, with approximately 60% of the outstanding shares represented. At SRT's October 23 special meeting, a majority of SRT's outstanding shares approved the merger. We thank stockholders of both companies for their support, and I am pleased to welcome former SRT stockholders as SUNS stockholders. We also welcome Howard Sudnow, a former independent SRT director, to the SUNS board as an additional independent director. This merger creates a larger, more efficient public CRE lending platform. On an unaudited pro forma basis, as of September 30, 2026, as if the merger had occurred on that date, the combined portfolio would have had approximately $478.6 million of total loan commitments and $393.1 million of outstanding principal. We issued approximately 8.5 million shares at an exchange ratio of 1.45 SUNS shares per SRT share. The combined company has approximately 22 million shares outstanding, with roughly 38.5% held by former SRT stockholders. Our amended and restated management agreement is now in effect. It reduces the incentive fee from 20% to 17.5% and the annual hurdle rate from 8% to 7%. Additionally, beginning in the first quarter of 2027, base management fees will be reduced by $250,000 for each quarter of 2027, totaling $1 million for the benefit of SUNS stockholders. With the merger complete, our focus is on realizing the benefits of that scale. We believe our larger equity base can, 1, broaden financing options, potentially including unsecured debt; 2, support greater trading liquidity; and 3, reduce duplicative costs. Given our team's experience managing both portfolios with shared 100% overlap in the same loans, we do not anticipate any integration risk. We also believe opportunistic share repurchases can be an attractive use of capital. In October, our board authorized a $20 million share repurchase program through December 31, 2027. With that, I will now turn it over to Brian Sedrish, our Chief Executive Officer.

Thanks, Lenny. Good morning. I'll start with the market, then cover new investment activity and the portfolio. Higher rates and renewed volatility created additional pressure for borrowers during the quarter. The Federal Reserve raised its policy rate in September for the first time since 2023, and in early October, the 10-year Treasury yield touched its highest level since 2002 before easing. This comes against a substantial maturity backdrop. According to the Mortgage Bankers Association, approximately $875 billion of commercial and multifamily mortgages are scheduled to mature in 2027, and another $652 billion in 2027. For sponsors with loans coming due, refinancing proceeds can fall short of outstanding debt balances, creating demand for additional equity and structured capital, which increases the value of lenders that can commit and execute with certainty. That environment plays to how SUNS is built. We do not seek to compete primarily on price for stabilized assets where banks and other lenders focus. We earn our returns by underwriting transitional business plans and negotiating structure, which allows us to operate with modest corporate leverage and help limit the financing and liquidity pressures that can affect more heavily levered lenders. Subsequent to the completion of the merger, given our low leverage and expanded capital base, we have ample capacity to deploy across new transactions. We were deliberate with new commitments during a volatile third quarter, and we continued to prioritize pricing, structure, and sponsor quality over deployment volume. Since quarter end, our activity has picked up. Subsequent to quarter end, SUNS closed on an approximately $3 million senior secured loan for buildings A and B of Sommet Blanc, a luxury residential project in Park City, Utah. We were already a lender on the adjacent building, and following the merger, SUNS' commitment across all three buildings now totals approximately $17 million. The TCG Real Estate Platform is advancing transactions under signed term sheets. As discussed last quarter, one is a proposed $93 million senior construction loan for a multi-family development in Texas, comprising a $62 million A note with a third-party partner and a $31 million B note expected to be held by SUNS. We expect this transaction to close shortly. The other transactions, which have signed term sheets, total $169 million. All transactions remain subject to diligence, documentation, and customary closing conditions. Turning to our portfolio, on October 9, we completed the $41 million sale of the Thompson San Antonio throughout the year. Our joint venture consisting of $9 million in purchase or cash and $32 million of senior secured financing, now held entirely by SUNS following the merger. The transaction closed in line with our investment's carrying value before closing costs and transaction expenses. The loan bears interest at a fixed rate increasing scale from 8% to 10% rates throughout the term. The buyer intends to fund additional cash equity towards capital improvements. Separately, SUNS continues to pursue available remedies under the former sponsor's guarantee. Following the sale, SUNS no longer holds any owned real estate. All loans in our portfolio were current and performing at September 30 and remain so today. Looking ahead, we are primarily focused on deploying SUNS' capital into loans that meet our underwriting standards, opportunistically executing the share repurchase program, and continuing to fund construction commitments within our existing book. A performing loan portfolio, low leverage, and an expanded equity base support the financial flexibility to pursue these priorities selectively. I will now turn to Brandon Hetzel, our Chief Financial Officer, to review our financial results.

Thank you, Brian. For the quarter ended September 30, 2026, we generated net interest income of $5.8 million and Distributable Earnings of $3.2 million, or $0.24 per basic weighted average common share. GAAP net income was $2.9 million, or $0.21 per basic weighted average common share. These results included approximately $900,000, or $0.06 per share, of one-time merger-related costs. For the nine months ended September 30, 2026, we generated net interest income of $18.9 million and Distributable Earnings of $11.8 million, or $0.89 per basic weighted average common share, compared to $0.90 per share of dividends declared for the same period. GAAP net income for the nine months was $10.2 million, or $0.75 per basic weighted average common share. We believe that providing Distributable Earnings is helpful to stockholders in assessing the overall performance of SUNS' business. Distributable Earnings represents net income computed in accordance with GAAP, excluding non-cash items such as stock compensation expense, unrealized gains or losses, and the provision for current expected credit losses. In the third quarter, SUNS funded $17.1 million of new and existing loans and received $58.9 million of repayments, primarily reflecting the July repayment of the Panther National senior term loan and construction revolver. We ended September 30 with $313.9 million of loan commitments and $256.9 million of principal outstanding across 12 loans, all current and performing, with a weighted average estimated portfolio yield to maturity of approximately 12%. Following the Thompson San Antonio sale and the Sommet Blanc loan, as of October 30, 2026, SUNS' standalone portfolio consisted of $336.3 million of current commitments and $283.6 million of principal outstanding across 14 loans. As of September 30, 2026, our CECL reserve was approximately $900,000, or 36 basis points, of loans held at carrying value, and all 12 loans in our standalone portfolio were risk-rated 2. As of September 30, 2026, approximately 95% of our loan principal was floating rate with a weighted average SOFR floor of approximately 3.9%. We estimate that a 100-basis-point increase in benchmark rates would increase our annual interest income by approximately $1.9 million, while a 100-basis-point decrease would only reduce it by approximately $500,000, which reflecting the protective nature provided by our rate floors in each case before any change in borrowing costs. As of September 30, 2026, our debt outstanding was approximately $96.8 million, representing a debt-to-equity ratio of approximately 0.5x. On a standalone basis, as of September 30, 2026, SUNS had total assets of $285.4 million, and our total shareholder equity was $181 million, with a book value of $13.39 per share. For the quarter ended September 30, 2026, the Board of Directors declared a $0.30 common stock dividend per share outstanding, which was paid on October 15, 2026, to shareholders of record as of September 30, 2026. In connection with the merger, the Board declared a prorated stub period dividend of $0.09 per share, or approximately $1.2 million, covering the period from October 1 through November 4, 2026, which was paid on November 5 to stockholders of record as of November 2, 2026. We expect the Board to declare a dividend for the remainder of the fourth quarter covering November 5 through December 31, 2026, with the amount and record date to be announced in the ordinary course. With that, I will now turn it back over to the operator to start the Q&A. Thank you.

[Operator Instructions] One moment while we compile the Q&A roster. Our first question will be coming from the line of Gaurav Mehta of Alliance Global Partners. Please go ahead.

I wanted to ask you if you could discuss your balance sheet targets post-merger for the combined company.

Sure. So, we haven't disclosed the balance sheet numbers as we're still working on the purchase price accounting, and due to the timing of the deal closing that has not been complete, but we did put into the investor presentation what the current commitments on a combined basis as of September 30 would have been, which is about commitments of $478.6 million with principal outstanding of about $393.1 million.

The second question, I think, remarks, you talked about $169 million in signed term sheets. Are you able to provide some more color on that? Are those loans mostly residential? Any color on that would be helpful.

Hey, Gaurav. So those deals are deals we've been spending a lot of time on. They are, to answer your question, they are residential plays where in one case there is an existing very high-end luxury destination home resort where ultimately we would potentially be providing the capital to help improve and build additional facilities, additional homes for sale. So there's that one. We have another one where again a very successful residential community. We'd be helping a very similar in the capital to help continue to add value in that site. And then lastly another play, again all residential as well. These are both condos and single-family homes where, again, the sponsor needs the requisite capital to help them continue to deliver product to their clients. I think generally, broadly, what I'll say is we found a lot of interest in those types of transactions, and we think we're leaning into those, really take advantage of our expertise. So we've been spending a lot of time in those. And then the other thing I might add is there's just much less competition in that type of market, so I think we find that we can deliver pretty interesting attractive returns to our shareholders through those types of deals.

Okay, and then lastly, you have one loan maturing in December '26 in Fort Lauderdale. Are you guys expecting that loan to be repaid or do you guys expect that to be extended?

The answer to that question is if we do extend out, it would be for a relatively short period of time. That deal is a deal that we put on nearly three years ago. The sponsor has done exactly what they said they were going to do in terms of delivering on time, actually ahead of time and on budget. The pre-sold of those for sale condos, a little over 50% of those. The units look great and the inventory is there, so the logical takeout is an inventory loan. The question just is, because the loan is maturing in December, whether the sponsor needs a couple more months. They're going to have a signed term sheet shortly. So we may end up extending out for a couple months. If we do, we look at that as extremely positive. Alternatively, the sponsor may just decide to just pay us out. The question of timing as to how quickly they can bring it all together. Ideally, we'd like to have the opportunity to keep it out a little bit longer. It's been a great performing loan for us and we really like the sponsorship.

All right, thank you. That's all I have.

One moment for the next question, please. Our next question will be coming from the line of Jade Rahmani of KBW. Please go ahead.

Could you provide a book value estimate pro forma for the merger close?

We have not disclosed the pro forma book value due to not having the final purchase price accounting finished due to the timing of the recent close of the merger. But we did believe in the proxy we did have an estimate as of June 30.

Okay. Just thinking about the dividend beyond the next declaration, which would be for a partial period, what's a reasonable range to assume?

I think that we are going to pay a stub dividend. Board still hasn't determined it. The intention is to pay out close to our income for the year. So I think that's going to be the balance this year. Then we'll look at the pro forma results for next year and make a determination next year.

Is there a target ROE we could apply to what we think pro forma book value is to make an estimate?

I think the tough part of where we are today is, and I think you can see it in the numbers, is we're under-levered, and we have a lot of capacity, the good news, we have a lot of capacity to do deals. The bad news is a lot of these deals that Brian was talking about earlier, I would have expected to close already. Everything takes longer. And so what's going to drive earnings is getting us back to appropriate leverage and driving the right ROE for our stockholders. And so I think that's the main indicator that I'll be looking for over the next three to four months is as we announce deals as they close and we close them. That's going to be driving that should be driving our stock in future ROE.

What's a reasonable target for annual origination and debt-to-equity ratio?

Target debt-to-equity ratio is at least 1-to-1, right? And so we're not anywhere close to that, unfortunately. But we should, that's still very low for mortgage REITs to have a 1-to-1 debt-to-equity ratio. And we have approximately, I'm now rounding numbers, $300 million of SUNS equity and draw on, what are we, 400 something million? I mean actual draws $393 million. So, we should be $200 more million dollars outstanding drawn for us to achieve the ROE targets that we really are looking for. Not commitments, but actual targets. I don't have specific targets. I just wanted to say we are definitely too low today, given we're only $100 million of leverage on a $300 million-ish equity base. So we need another $200 million of deals, not with closed, but closed and fund, or fund existing commitments, for us to achieve a much better ROE.

Gears, when you think of turmoil that's playing out in the commercial real estate landscape, so we saw sort of phase one play out from 2022 through late 2024, driven by the Fed rate hikes, as you all well know, plus office uncertainty. Some of that has diminished and the office sector has begun a recovery. Industrial is also doing quite well as are retail and hotel, which leaves multifamily. Multifamily has been facing plenty of supply challenges across the Sunbelt, including in Florida. But we could be, you know, perhaps close to a trough there, although everyone's been thinking that for the last year. Nevertheless, at the same time, rates are going higher. So multifamily could be sort of the next wave of stress. And then you look at where commercial mortgage REITs are trading at 50% of book value. So I guess, what are your high-level thoughts on the landscape we're facing and where SUNS can really move the needle if it's going to just be on direct originations or if you see that there could be potential consolidation opportunities.