Silver Spike Investment Corp.

Hello, thank you for standing by and welcome to the Silver Spike Investment Corp. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Greg Gentile, President of Silver Spike Capital. Please go ahead.

Thank you, Josh. This is Greg. Welcome to Silver Spike's earnings conference call, a live webcast for the second quarter of fiscal year 2023. Silver Spike's second quarter fiscal 2023 financial results were released to be accessed from Silver Spike's website at ssic.silverspikecap.com. A replay of the call will also be available on Silver Spike's website. Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements under federal securities laws. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. We encourage you to refer to our most recent SEC filings for more information on some of these risk factors. Silver Spike assumes no obligation or responsibility to update any forward-looking statements. Please note that the information reported on this call speaks only as of today, November 10, 2022. Therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay or transcript reading. Thank you all for joining. As you know, we just released our results. There is a management presentation deck attached to the materials. Those of you on the webcast should see it live. Otherwise, please find the link to the deck in the 8K that was filed approximately 15 minutes ago. We may refer to some slides by numbers just for reference and for your convenience. Second quarter 2023 highlights, which you can find on page 3 of the management presentation, included gross investment income of $1.2 million versus $0.8 million last quarter. Expenses of approximately $0.6 million, roughly equal to last quarter. Net investment income of $0.6 million versus $0.2 million last quarter. net investment income per share of $0.09 this quarter versus $0.04 last quarter, and net assets of $85.3 million versus $84.8 million last quarter. Our net asset value per share is $13.73 versus $13.64. The increase in gross investment income is due to the fact that we had our first two investments, which were made last quarter, on the books for the entirety of the quarter ending September 30th. As you may recall, we made those investments late in the previous quarter and did not get a full quarter of interest accrual. Although we have no new investments to report for the quarter, we've been very busy and have invested in three new assets in October of this year, which Frank will elaborate on further. So it's very important to note that we put over $26 million in to work just in the past month, more than doubling the size of the invested portion of the portfolio as of the reporting date, September 30th, 2022. Just to back up, I'd like to discuss a little bit of our story in general. As you know, we are a business development corporation. We're registered under the Investment Company Act of 1940, and we're currently still the first and only BDC that's publicly traded, focused on direct lending in the cannabis sector. And we spent a lot of time discussing which structure is best for the market opportunity. And given what we're seeing now, I think we're in a fantastic position to take advantage what you'll hear Frank talk about in just a few minutes. As a reminder, we did look closely at the REIT structure. REITs, as you may know, are required to have 75% of their portfolio invested in real estate or mortgage assets. That's not the case for Silver Spike. At the BDC, our only material restrictions are that we must invest 70% of the portfolio in U.S. private companies or U.S. public companies with market caps of less than $250 million. We can lend against cash flows. We can lend against virtually any type of collateral, including real estate, equipment, cash receivables, inventory, equities and subsidiaries, which often own cannabis licenses. And cash flow lending is just a much larger, much larger cam than real estate lending. So as you see companies evolve, I think Silver Spike is positioned to really build a portfolio of high-quality, multi-collateral, multi-security package-type instruments, which our competitors can not necessarily offer. With that, we'll expand on the market opportunity. I'll turn it over to Frank Cotsen, our head of credit. We'll discuss the portfolio in detail and elaborate further on the investments made subsequent to September 30th. Frank?

Thank you, Greg. My name is Frank Cotsen. I'm the head of credit, as Greg mentioned, at Silver Spike Capital. And thanks to everyone for joining us today. So just for a quick guidepost, I will loosely follow the next four or five slides. For those of you who have the slides up, for those who don't, I'll try to be as self-explanatory as possible. I'll go through the market opportunity. I'll just briefly touch on our investment process. I'll talk about sourcing and origination. And then most importantly, probably I'll talk about the portfolio summary of where we are as of the end of October. So we'll include the end of previous quarter and then also just talk a little bit, just expand on what Greg talked a little bit about what we did in the month of October. So as you see on slide six, you know, there's really four key points about the market opportunity. Many people ask, why now? Why is the right time now? And, you know, first of all, cannabis is an emerging market secular growth and it's a very attractive lending opportunity. This growth story, as you see on the bar chart on the right, shows the US legal cannabis retail sales to grow from an estimated $33 billion this year to up to $72 billion by 2030. So more than doubling over the next eight years. The second point is really lending in this space really presents compelling opportunities to profit from this supply, demand, and balance. We talk about this all the time. The debt servicing capacity of these companies goes far beyond the available supply of institutional debt capital. And Greg mentioned there are some cannabis REITs, a few that are publicly traded. There's some private money in this space. The amount of demand that we see far dwarfs you know, the supply of institutional capital that we see for this space. And that's why we're seeing the types of yields we are. And in fact, if you look at the chart on the lower right-hand corner, cannabis lending really offers a significant premium to traditional other forms of leveraged finance. The chart shows U.S. leverage loan index, and there are various footnotes of the dates and the um, sources for these. Um, and obviously the markets have been very volatile. So take this, you know, for what it is, the market, these numbers change every day, particularly on a day like today, um, where the markets were up quite a bit and I'm sure spreads were quite a bit tighter. But, um, some of the sources that we use that other folks use show us leveraged loan, um, index yielding about six and a half percent, the direct lending index yielding about 8.3%, the US high yield index yielding 8.9%. Now, those numbers are as of the end of a certain quarter. They actually went probably wider intra-quarter, and then they were much tighter today. So just take those numbers. Let's just say the range for leveraged lending is kind of like 7% to 9% plus or minus to the past couple months. And our current SSIC loan yields range from 13.1% to 20.8%. We'll talk about the average of our portfolio yield later, but, you know, suffice to say we're close to double our portfolio is yielding close to double what traditional leverage lending indices are. And we are lending on a first lien senior secured basis. So it's important to note that. So we think, in addition, look at the last bullet point. Lenders can demand various structural protections. and has significant pricing power. So not only do we believe that you're getting, we know that you're getting yield that's close to double what we see in other kind of traditional, not other, but traditional kind of lending and levered lending products. We also think in many cases we're able to demand and borrowers are willing to give us, given the scarcity of debt capital in this space, better structural protections. And then the Sorry, it's a little out of sequence, but the third bullet point of the four points is that we believe, we strongly believe this opportunity is gonna exist for many years. People ask all the time, is safe banking gonna change this? Is safe banking going to bring in banks to compete against you and have spreads go two to 400 basis points tighter, for instance? And no, that's not the case. We do not believe that that is the case, that banks will come into this. When federal legalization happens, which is probably not going to be part of safe banking, then banks over many years will start to look at the space. But I think that the key point is the private credit market today is $1.3 trillion of lending that is done primarily away from the banks, and that's in other industries, right? In general, banks, because of regulatory capital rules that have happened post-Dodd-Frank-Volcker, after the financial crisis, banks do not do a lot of direct lending for the most part in the U.S., and most of the direct lending comes from alternative asset managers. And so whether it happens or not, this opportunity is going to exist for many years in our belief. If we go to the next slide, I'm not going to dwell on this, but for your reference, slide seven talks about our investment and underwriting process. I spent almost 25 years at a major U.S. bank. Many of our colleagues have worked in capital markets for 20, 25, 35 years. We spent a lot of time developing what we think is kind of best-in-class investment and underwriting process, so you can read that at your leisure. If you go to the following slide, slide eight, we talk about sourcing and origination. You know, I came from a bank background where we spent a tremendous amount of time looking for opportunities, looking for deals, very structured, knowing what the landscape is, knowing who the borrowers are, making connections with the borrowers. In addition to kind of having that kind of DNA many of us have from our past lives, We also benefit from Silver Spike's network in this space. So Silver Spike is founded by some folks who have invested early investors in the cannabis space. So they have a tremendous network. And I think some of the big deals that we either structured, like the Shrine deal in our first full quarter or other deals that we participated in, and just our market presence prior to raising SSIC as an IPO, which we raised in February. This kind of market presence, our reputation, the connectivity that we have in the industry really is an important, important competitive advantage to source and originate because we focus on direct deal sourcing, and that's through our network. We've looked at As the slide shows, we've reviewed over 6 billion, 6.5 billion of deals, close to 300 debt transactions that we've reviewed. And we have an active pipeline of over a billion across 31 different transactions. That changes regularly because deals come and go and new information comes up all the time. We're diligencing multiple deals at any given point in time. But that pipeline has ranged from about a billion to a billion and a half. I'd say for most, if not all, of this year. And the point on the right is that management's experience in deep relationships really do create a differentiated sourcing ability. So we talk to management teams all the time who are interested in working with us, which is exciting. And then if you just jump ahead to page nine, as Greg mentioned, this is – slide nine has our SSIC portfolio summary. And Greg mentioned – and this is through October of this year – And Greg mentioned that we did no new loans in the quarter, but we were quite busy in the quarter and we were diligencing many different loans. As you know, the quarter was pretty volatile in the financial markets and we're pretty picky. We turned down the vast majority of our deals. So we ended up participating in investing in three deals in October. The bulk of the, and the reason we're talking about them today is the bulk of the work was done on these three names in September and, you know, in the fall previous quarter. We bought – we did – also, I'll point out, we did two secondary transactions. We bought public bonds of AYR Wellness, which have a fixed rate at 12.5%. We also bought fixed rate 8% bonds of Curleaf Holdings. The first was a 1.8 million approximate investment value of the AYR. The current leave was approximately a 3.9 million investment value. And lastly, we participated in Verano Holdings, which was the bulk of the work of that was done throughout the quarter. It priced at the end of October. Remember, the markets were pretty volatile in September and October. That loan is priced at prime plus 6.5% with a 6.25% prime floor. And that was our second large position of 20.37 million. So where does that leave us? That leaves us as of the end of October with a total invested portfolio of, and this is coming from the slide nine, of 50.73 million, which means that 59.45% of our portfolio, our funds have been invested. And I think it's important to note that the weighted average yield of the loans is 15.7%. So that's the weighted average gross yield of our portfolio. And then I just want to emphasize, we spend, we're very excited to participate in these loans and to work on these transactions and the transactions that are in our pipeline currently. And what's really interesting to us versus when we contemplated this concept a couple years back, is that we really are lending to some of the biggest, some of the biggest by revenue, by brand, by dispensary count, by stake, many different metrics. These are some of the biggest and we believe some of the highest credit qualities of cannabis companies in the industry. And there is a tremendous opportunity to lend to smaller companies as well. But I would say, given the dislocation in the markets, we've been very excited to lend to some of the biggest and what we think some of the best credit quality companies are in the industry at yields that are, I would say, on average, as a rough guide, 400 to 600 basis points wider or greater yield than they would have been at approximately a year ago. So mid-teens yields in higher for this quality of company and the size and scale of company we think is a very exciting opportunity for our investors. So that's all I had with the slides. At this point, unless Greg has anything else to add, I'm going to pass it over to Josh, who is going to open it up for questions.