This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: 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.
spk01: 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?
spk05: 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.
spk02: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Michael Lavery with Piper Sandler. You may proceed.
spk04: Thank you. Good evening.
spk01: This was
spk04: Trying to reconcile slide nine with the 13 to 20.8% yields, and I feel pretty sure it's just the discount to par you might have bought some of the bonds at, but can you just help us understand how to take the breakdown on slide nine and put it into that bracket?
spk05: Yeah, that's right, Michael. That's exactly right. The two public bonds that we bought in a secondary market. And let me just say too, we watched, those were our first forays into the public markets for SSIC, but we watched them very closely. Many of us have capital markets backgrounds. We were watching as these bonds were steadily selling off throughout the course of the year. And I won't get into exact prices because Those numbers will not be in the queue that we're just posting. They'll be in the next quarter's queue. But they were all bought in the context of the market. And for a rough guide, public bonds in this space dropped, and public loans as well, and private loans, from our observation. So I would say deals that were getting done mostly in the last two years that certain brokers trade or at least quote. On average, I don't want to say on average, but the range of drop in price was kind of like 10 to 20 points. So that is exactly how you can get, if you look at an 8% fixed rate or a 12.5% fixed rate, those bonds were trading at And still are, we're trading at decent discounts to par. And that's exactly, we're running that on a yield to maturity. And that's how we get this yield range that you see on the earlier slide. And that's how we get to the weighted yield of 15.7.
spk04: No, that's great. Thanks. That's helpful. Just one more, looking ahead, you've got just a hair shy of 60% invested now. What's your expectations for timing as far as getting to 100, and what might come next after that?
spk05: Great question. So we, you know, I think we, I believe we said in the previous quarter, you know, in our kind of range, it was, you know, we were shooting for approximately getting 70% deployed by the end of the year. So I'd say we're on track for that. We can't really comment on what we have done or may have done or are doing for this quarter. But with over a billion-dollar pipeline, there's definitely the opportunity for us to get up to 70% or more by the end of the year. It's all dependent on the market conditions and the due diligence and all. And then if we kind of think of the pace that we're growing at, that we're deploying at, that, you know, if you just, you know, move that forward, you know, you can imagine that, you know, throughout the course of next year, I mean, it's always hard, as you know, to get to 100% or 98% or even possibly 96%, but throughout the course of next year, we will be, you know, most likely, we plan to be, we intend to be, you know, fully invested at some point next year. So the typical next steps obviously are a lending facility or raising more equity. The, as you know, we haven't declared a dividend yet. So, we believe once a dividend, you know, gets declared, hopefully, you know, that, well, we don't believe, but we hope that the stock markets will take notice that the portfolio, as long as it continues to perform, which we believe it will. The markets will take notice. But to issue equity, we need to be at or above NAB, which we're not now. The whole industry of BDCs are not actually interesting. I think we're probably not too dissimilar to other BDCs, but we haven't declared a dividend yet in terms of where it's trading. The whole market has been under pressure this year, the all stock market has. But anyway, most likely a debt facility would come first. That would be traditional. We are, I believe, one of the only, if not the only BDC that doesn't have a debt facility. That's because we raised a blind pool and lenders to us, potential lenders to us, want to see a portfolio, which we now have, which we're excited about. So we hope to get a debt facility in the coming next couple quarters. We're in discussions with different folks. That may or may not happen, but we hope it does. And with a debt facility, we could deploy more funds. And then over time, if the stock reflects, you know, the opportunity of getting good dividends, et cetera, then hopefully we can issue equity and grow from there. I think that would be the sequence.
spk01: Michael, if I may add, we feel that given the amount of cash we've had through the year, it's actually been very fortuitous, right? If we would have deployed much faster after we IPO'd last February, it could have gone two ways. We would have had a portfolio with roughly the same yield and a much lower credit quality, or to get this credit quality, the yield would have been much, much lower. So I think the timing was somewhat low-key, to be perfectly honest, but we were very fortunate to be sitting on a lot of cash during the sell-off and were able to pick up much higher quality assets at probably the most attractive prices we've seen in quite some time.
spk04: That's helpful. Thank you so much. I'll pass it on.
spk02: Thank you. And as a reminder, to ask a question, you will need to press star one one on your telephone.
spk03: Our next question comes from Andrew Carter with Stiefel.
spk02: You may proceed.
spk00: Yeah, thanks. Good evening. What I wanted to ask is I guess I'm a little confused here because the thesis here is behind a BDC and behind what you're doing is making loans into smaller companies and kind of, if you will, aggregating credits at scale, things that are hard. And to date, the money has been put into Ayer, Curaleaf, Verano. Those are – investors have easier access to this. So I want to ask about this. Is this something that's temporary that gives you some scale, both in terms of the management fee to support the organization, as well as kind of the SG&A, to your point, to make it a little enamoring? You're going to trade out of this. Just kind of help us understand that a little better.
spk05: Sure. Thanks for the question, Andrew. I'll start, and then, Greg, if you want to add anything. But, yeah, as you know, the BDCs are allowed to have a certain percentage of the portfolio in public companies that have market caps of 250 or bigger. So we adhere to those guidelines, but you're exactly right. We work diligently throughout the quarter, throughout the whole year since we've raised the IPO, looking at private companies, working on private company direct loan transactions. We wanted to follow the public companies because, you know, Andrew, in an interesting way, like a lot of the pricing of the privates was driven off the public as the entire market got worse. And we saw that a lot. We heard that a lot that, well, wait a minute, why would this price at X yield if public companies are now three or 500 wider? We have the cash to deploy. We looked at all the various factors, the risk factors, the size of the company, the management team, We thought that these really offered the best value in the market, but we don't have a lot of additional capacity for public bonds. So just really by definition of the rules, we just don't have a lot of capacity to add public bonds or public loans. So I suspect that we probably, it'll be, not I suspect, sorry. The other thing I would add is, These, to Michael's previous question, the two public bonds were done at very deep discounts. Those are just public, that's public knowledge because they're just public levels and where the bonds are trading. We viewed that as an opportunistic shot at getting some really good credits with really good yield with good convexity. So if the market stabilizes, You know, we can see these trade up. If you issue a loan, you know, at 95 cents or par, somewhere in between, you know, a little bit of OID, you don't have the same convexity. So we compare that to loans that we're working on the private side. But, you know, just given the rules that we can only, you know, do a certain amount of public, I would imagine that the bulk of the additional loans, you know, moving forward in the future will be from the private. We haven't really, you know, made a determination if we'll trade out of these or not. but we, you know, reserve the right to trade out of them, whatever was going to be best for our shareholders. In particular, AYR has a December 24 maturity, so there's always a chance, you know, that that gets refinanced because, you know, prior to the maturity, which would result in even a better IRR. And the reason I'll focus on that, you know, Verano was a refinancing company And Brano, you know, some people say that really, you know, kind of repriced the market. That was at 350 million refinancing. And so when you're looking at a loan of a company of that scale that, you know, has public financials and has been, you know, kind of vetted for several years in the marketplace, pricing at a really difficult time in the market to price that risk reward looked really good compared to the private opportunities that are out there. And that's why it's in the portfolio.
spk00: Fair enough. Second thing I would ask in terms of kind of the scale in the organization, could you give us an update on how many people you have right now supporting the BDC directly and therefore kind of what your bandwidth is for diligence and deals right now?
spk01: Sure, sure.
spk05: Greg, do you want to take that?
spk01: Yeah, I can handle it. Andrew, we have 10 people right now at Silver Spike Capital, the investment advisor, four of which are dedicated to underwriting. I would say the team is well-suited for a portfolio multiple the size of our current vehicle, and we've purposely built this for scale. We believe we have some of the best underwriters on the street, some of the deepest cannabis experience in the street, and have built this thing for scale.
spk00: To that question, just to help us – okay, if you've got four people dedicated, how many deals then do you think they could – I hate to say execute because you never want to force somebody to, but maybe it's diligence. However you look about – however you would think about their bandwidth for the number of deals because from here, it's ones and twos that you have to do at this level. It won't be like that forever, but from here, right now. When you say ones and twos, I think, so we can... Yeah, I mean, like, yeah, the smaller loans, maybe I'm a little off, but the smaller, it's got to be a chunkier portfolio from here on out. That's kind of what I was saying on the private side.
spk01: Yeah, exactly. Four to five-ish is the sweet spot for size at this point. But no, we have plenty of capacity. You know, it's hard to just say number of deals. As you know, the size of a deal doesn't matter. It takes the same amount of work to underwrite a a $4 million loan as it does a 20. But I don't know, maybe, maybe Frank, you want to try to put a number on it in terms of.
spk05: Sure. I mean, one way to look at is, you know, we've, we IPO in February the markets have been, you know, fairly dislocated throughout the course of the year, but we're on track to do what we did. We've done five deals through October. So, you know, we can, we can clearly handle, you know, I mean that, that equates to about one a month, right. We could do more. We could also put a lot more money to work on some of these deals. We're limited, really, Andrew, at the moment by just our amount of capital. So many of these deals could have been much bigger. You know, Shrine that we co-led, Verano, you know, was a sizable position, could have been much bigger. The secondary, you know, is, like I said, we're not going to be doing necessarily tons of secondary. We don't even have the capacity to do a ton. So, by definition, we can't. But those could evolve in bigger. So, yeah, so it's hard to put a number on it. Every deal is different. I would emphasize, and I think this is part of the reason these loans yield where they do. It takes a tremendous amount of time to diligence these. We like to ask for 30 to 45 days, not like to, we do ask for 30 to 45 days exclusivity in our term sheets. That's kind of industry standard. And it can take longer than 45 days to diligence. And frankly, for the benefit of our shareholders, we're okay. We'll take as long as it takes. And if it means that it's going to bleed into the next month or the next quarter, that's okay because we'd rather pass on a deal. And when we do the term sheets, these are non-binding. These are effectively best efforts. We don't intend to ever walk away from a customer, a borrower, if everything checks out. But remember, we are offering to do these deals based on the information we have before the extensive due diligence is done. And so many things come up through the process, as they do in the normal direct lending space. And you never know where that's going to go. So we have capacity. We could scale this thing. much bigger. And if we get to the point where we need more resources, we will get them. You know, I came from an organization where I had a tremendous number of desk analysts working for me. We built a lending business, you know, et cetera. So we and many of the other partners have done the same in terms of working at large scale, building large scale organizations. So for the time being, we have more than enough resources for the amount of capital. We're about 60% invested. We're working on active deals now. Like I said, our goal is to get to about 70% by the end of the year. It's achievable. Whether or not it happens just depends on the market and the diligence process. And then into next year, we should be able to deploy the majority of the funds into next year. So, yeah, so that's easily handled by the folks that we have. And then we'll just see as we raise more capital over time.
spk00: The next thing I would ask is just kind of looking at your year-to-date EPS, if I have this right, I think $0.12. I know there's a little bit of flexibility around the dividend about it's a 97.5% payout. How much would you expect to pay out? Because, yeah, I think you said it well. Once you put a dividend out there, that will put a support level in the stock. So help us understand what you could be targeting.
spk01: Yeah, without going into specific targets, what we don't want to do is declare a small dividend, invest more in the portfolio, bump it up a little bit, and play that game. So we're waiting until we're nearly fully invested, and then we'll declare a dividend that we believe we can support for the long term. So why don't you give us another quarter, and with next quarter's results, it'll be a much different picture, and maybe we'll be able to give an accurate estimate of what we forecast that to be.
spk00: Fair enough. Last question on the operating costs at the BDC level. How should we think about those kind of growing forward, like from the run rate you had in the quarter, I think $470,000, does that grow with the assets from here? Does that stay the same? Just anything you can give us on that number.
spk01: Yeah, those are, for the most part, fixed. So we have tremendous amount of scalability. The operating expenses were a little bit mixed. We spent less money on legal fees this quarter, but there were slightly higher management fees because the invested portion of the portfolio was higher. But other than the management fee scaling linearly, obviously, with assets, the rest of our expenses are much closer to fixed than variable. So we expect to get, as we increase the size and raise AUM and or debt, that should give us quite a lot of operating scale.
spk00: That's all I got. I'll pass it on. Thank you.
spk03: Thanks, Andrew. Thanks a lot, Andrew.
spk02: Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Greg Gentile for any closing remarks.
spk01: Thank you, Josh. Just want to thank you all for joining. Thanks for your time. And we look forward to seeing you again next quarter and enjoy the weekend. Thank you.
spk02: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer