Q2 2020 SuRo Capital Corp Earnings Call
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Good day, ladies and gentlemen, thank you were standing by welcome to solar Capital's second quarter 2020 earnings call. During todays presentation, all parties would be in listen only mode.
Isn't taking the conference at the open for questions. It's called being recorded today Wednesday August <unk> 2020, I'll now turn that I could turn conference or declare council of several capital. Please go ahead.
Thank you for joining us on today's call I'm joined today by the Chief Executive Officer, Absurd capital, Mark Klein and Chief Financial Officer, Allison Greene. Please note that a slide presentation correspond to todays prepared remarks by management is available on our website at www Dot sure Okapi dotcom under.
Investor Relations events and presentations today's call is being recorded and broadcast live on our website Www Dot Cerro top dot Com replay information is included in our press release issued today. This call is a property answer a capital when the unauthorized reproduction of this call in any form is strictly prohibited.
I would also like to call your attention to customary disclosures in todays earnings press release regarding forward looking information statements made in today's conference call and webcast may constitute forward looking statement, which relate to future events for our future performance or financial condition. These statements are not guarantees for our future performance or.
Your financial condition or results and involve a number risks estimates and uncertainties, including the impact of because they've 19 pandemic and any market volatility that may be detrimental to our business our portfolio companies, our industry and the global economy that could cause actual results could differ materially from the plans intentions.
And expectations for selective and or suggested by the forward looking statements actual results may differ materially from those and look forward looking statements as a result of the numbers doctors, including but not limited to those described from time to time in the company's filings with the FCC.
Management does not undertake to update such forward looking statements unless required to do so by law to obtain copies of service capitals latest SEC filings. Please visit our website at www Dot <unk> dot com or the as he sees web site at FCC Dot Gov.
Now I would like to turn the call over to Mark Klein.
Thank you color.
Losing share the results for sure capitals second quarter 2020.
These are obviously one unprecedented problems we are living through societies facing tremendous jobs.
Answer OCO would like to do anything from a foreign workers responders, who put themselves service throughout the colder 19 pending.
We are fortunate account worked or employees and their families remain healthy continues to function remotely like other firms.
I will now discuss how portfolios fared during the ongoing holding on to kinda back at Holly Hello, fewer larger positions you didn't experience degrees of business acceleration during the kind of.
To conclude I will hand, the call over to also green for Reed financial overview.
At the conclusion of her remarks, we will open the call for questions.
Let's start with slide 12 wells flowing through.
This quarter certain capital reported its highest dividend adjusted net asset value for sure in five years.
At June Thirtyth 2014, sometimes $11 in 84 cents for sure and increased from $10 in 22 cents for sure at March 30, Onest 2020.
No so value proximally, approximately $193 million at quarter end compared to $173 million first quarter.
Please turn to slide four or five and six for a review of notable developments no investment portfolio and the second quarter and subsequent to quarter in.
We continue to take initiatives to drive shareholder value.
July 29, Sirona Capitals board of directors declared a 15 cents per share dividends to stockholders Alison will provide additional details on the dividend later on the call.
This dividend in conjunction with a combined 32 cents of dividends previously declared in 2019 yields an aggregate of 47 cents per share of dividends distributed related to investment activity in 2019.
So capitals top five positions as of June 30th were Coursera course hero Pelletier, Ozzie media and next door.
These positions are accounted for approximately 68% what the investment portfolio at fair value.
As of June Thirtyth, our top 10 to positions accounted for approximately 87% of the portfolio.
Now I would like to discuss notable developments in a few of our largest positions.
First I want to highlight our investment in politics here or third largest position.
On July six Palin tiered announces confidentially submitted a draft registration statement when its form S. One with the FCC.
This filing maybe a precursor to an initial public offering in the near term.
As of June Thirtyth, Sirona capitals net asset value does not include any change in the value of our apart passenger destination.
The value, we ascribe to it in Q1.
We continue to hold or pallets, your investment and an implied equity value of approximately $12 billion.
Next I would like to note that our investments in online learning through our physicians in Coursera and course zero represent over one third or of our invested portfolio.
From recent media reports as well as earnings reports from public online learning companies. It is evidence that covenant I did covert 19 pandemic has continued to spark surges in demand for online education.
We believe the effects of the pandemic have accelerated a long term structural change and how education is being and will be consumed with a clear transition towards online education.
On July 17, Coursera, our largest position announced it is raised $130 million in a series F financing.
The round was led by anyway, and we participated with a $2.8 million pro rata follow on investments.
Round also included existing investors Kleiner Perkins.
See group learn capital and others that brought the company's cash balance to more than $300 million.
According to the company's announcement.
The information and online publication reported the round values coursera at approximately $2.5 billion.
As previously announced Coursera had raised last raised $103 million in April 2019 at a $1.5 billion to $6 billion pretty money valuation. This is according to critical.
Coursera has continued to take initiatives to support students in universities during the cold in 19 pandemic.
In June 2020, Coursera announcing it was extended college and University students free access to over 3800 courses.
There is 50 guided projects 400, specializations and 11 professional certificates on course service platform.
Through September Thirtyth students can enroll at no cost in the program, which includes online instruction from the world's top universities and professional certificates from leading industry educators like Google and I'd be yeah.
With nearly 70% of the world students impacted by campus closures. This program allows students to continue learning outside of the classroom.
As announced last February course, euro or second largest position raises series b financing round.
Surge reported in February that course here or raise a $10 billion series B around led by new view capital at a 1.1 billion dollar valuation.
New view capital also contributed $30 million to the company's employee tender program.
This financing round more of course heroes first financings answerable capital that its series Hey round in 2014.
Due to the impact of the covert 19 pandemic and related parties in school closures with less any person student access to teachers are study groups students have increasingly turn to online learning supplements for their studies, including of course heroes online document library.
Chegg a key competitor core to course hero noted in his earnings call earlier. This week that its research indicates a majority of students now feel online learning can be as legitimate affected and rigorous as in person instruction.
Half of the students surveyed who had no prior online learning experience now want the option of hybrid or fully online education and 72%. So the students had already had online experience expect the same.
Soon it's turned to check in record numbers during the quarter with expectations for this trend to continue into the fall regardless of workout College campuses will look like.
We believe course see course hero is similarly positioned to capitalize on this long term trend towards online learning.
In response to the Coburn 19 pandemic course heroes offered educators free access to its document Vivek library of more than 40 million teaching and learning resources last month horse here or announced the launch of an educator exchange. We're college faculty can earn income by uploading and churn teaching.
Learning and study materials with peers and students.
This exchange further expands course heroes efforts to partner with faculty by providing a platform with the value of luxury nodes practice tags and teaching materials can be recognized and shared.
Next store our fifth largest position has gained notable traction during the coven 19 pandemic.
During our March 2020, CNBC interview next door Ceos, Sarah Fryer indicated that next door experienced an 80% month over month increase in daily active users in the month of March. Additionally, next door launch next door groups and next door help map to provide healthy into.
Vigils, an opportunity to support neighbors in need.
Next store is an outstanding platform that serves over 210000 neighborhoods across 11 countries. We believe next store has tremendous upside both as an ability to expand internationally and with an opportunity to further monetize its hyper localized user base.
Segmented by six general investment themes, the top allocation of our investment portfolio is to education technology, representing approximately 48% of the investment portfolio at fair value Big data in cloud was the second largest representing approximately 90% of the portfolio.
Our financial technologies and services category accounted for approximately 13% of our portfolio and fair value or social mobile category accounted for approximately 11% of our portfolio and marketplaces accounted for approximately 9% number investment portfolio at fair value.
In addition to our previous announcement they were that we are expanding our strategy to include private credit investments through our appointment of carried family as a senior managing director and senior member of the investment Committee. Our team has continued to expand or sourcing network in order to evaluate a wide range.
The equity investment opportunities in top VC and institutionally backed companies that demonstrates strong operating fundamentals.
I would like to highlight the due to the ongoing mark to market dislocation, we're seeing tremendous investment opportunities in high quality companies. This dislocation is presenting attractive opportunities in both equity and private credit.
Our assets that credit investments are targeted targeting capital intensive high growth technology businesses, particularly in the financial technology insurance technology and property technology industries.
Asset backed loans in this space command attractive interest rates in the mid to high teens, often coupled with the ability to participate in equity upside to warrants assigned to the lender upon funding.
We believe this strategy represents a compelling opportunity to drive shareholder value as it will generate recurring investment interest income and overtime could drive a regular dividend stream for our shareholders.
Our equity investments are targeting businesses that had been shown to provide scaled valuation growth before potential IPO for strategic exit.
A few industries of focus include ecommerce in retail financial technology, food technology, and transportation and logistics.
Please turn to slide seven.
Among these equity investment opportunities are type investments via special purpose acquisition companies also known as facts, which we view as similar to pre IPO securities.
Specs for companies formed to raise capital and then initial public offering whose proceeds or use solely to fund in acquisition of or merger with a private company, thereby taking the private company public.
In advance of sign even after an acquisition agreements fact, often arrange committed debt or equity financing in the form of a pipe commitment.
Our unique access to these pipe financings or opportunities for serve catheter capital to invest in late stage venture capital private equity or institutionally back companies within an attractive investment time horizons, we feel we are uniquely positioned to lever.
Our proprietary axis the pipe investments.
And to capitalize on a growing number of these opportunities as a as companies increasingly turn.
Two specs as viable liquidity solutions.
In 2020, there have been 9 billion dollars' worth of pipe commitment and announced and completed spec merger deals 65% of all spec merger announcements in 2020 have an associated pipe commitment of which 3.4 billion had been associated with completed.
That mergers.
Year to date 55 stocks have been issued for over $22 billion and at least 30 additional specs have lied S. One registration statements.
As of now there are approximately 100 spec outstanding that are actively pursuing merger opportunities.
During the second quarter as announced on July 2nd we invested $5 million in rent the runway.
Extend to the 6.9 million dollar collateralized loan with equity upside potential to pound tier lending SPV and invested or Proto pro rata of $500000 in a junior preferred convertible notes to lie.
Please turn to slide eight.
Rental runway is a subscription fashion service lot women Tourette unlimited designer solves for work events in every day were.
Founded in 2009 in headquartered in New York City Renter runway offers hundreds of thousands of apparel and accessories, but 700 plus designers on its best in class platform.
We believe that the company's exclusive designer relationships and its unparalleled engineering analysis logistics infrastructure provider with us strong competitive mode and position us well for for future growth.
Rental runrate way raise $125 million in March of 2019 at a 1 billion dollar valuation.
Led by Bain capital ventures, with participation from Franklin Templeton and T. Rowe price.
We invested in preferred stock during the second quarter as we believe the company has the financing to bridge itself to future profitability and take advantage of the challenging retail environment.
As rest the runway is a well capitalized highly innovative market leader. We believe this investment prevent presents a compelling opportunity to participate in the eventual rebound or the fashion and the subscription rental industry. After the Cobiz 19 outbreak subsides.
Not only does rent the wrong way have the financial backing to stand the impact of covert 19, but we also believe that rent the wrong way is unique subscription model in viral word of mouth marketing uniquely position to capitalize on the outside market growth that they manage that may arise following a covered 90 rebound as traditional.
Tom models will continue to remain challenged.
Please turn to slide nine.
Hi Volunteer lending Trust is zero capital's first debt investment since announcing our new strategy in partnership with carefully in the first quarter. This debt instrument is a 6.9 million dollar non recourse clout collateralized loan to Pelletier lending Trust a trust owned by former senior.
To your employee proceeds from this loan were used to finance the exercise and taxes associated with 2.26 million.
I asked the common shares a pound tier as well as prepaid interest a compelling feature this investment is that the low not only provides server capital with a regular interplay with regular interest payments accruing at 15% annually, but allows us to participate in the appreciation of the Pelletier shares.
Above $5.29 per share.
Please turn to slide 10.
Additionally, as previously announced over close to 170 million dollar financing round in line and existing serve capital portfolio company during the second quarter.
As part of the transaction Liberal Google will transfer jump Hoover's Bacon scooter business to line.
We invested our pro rata amounted to this financing now which represents an approximate 500000 dollar follow on investments.
Given the attractive valuation, which serve capitals, making this fall investment we're comfortable that at a modest improvement and lines business, we will generate a profit on our total investment.
With the support of who Hoover, we believe Lyme is financially and strategically position to further establish a leadership position in the micro mobility industry, particularly after social distancing requirements are lifted a remote.
As the global ride sharing leader over as a natural fit for lines business. We believe that this partnership can accelerate the success line was experienced prior to the onset of Coburn 19.
We've already begun to see positive momentum in lines business as Tech Crunch reported in July that line was among three scooter providers to win a permit to operate shared electric scooters in Paris. Following a seven month tender process that included as many of 16 competing companies.
Please turn to slide 11.
As discussed earlier in the call we've executed a $2.8 million pro rata investment in core service series F financing round. This investment was made alongside any aid Kleiner Perkins learn capital and others. We we're excited by the tremendous Melissa momentum behind core service business and look forward to supporting Chris.
There as it continues to lead a fundamental shift in consumer behavior toward high quality learning outside the classroom.
Looking back and we believe that serve capital is well positioned to deliver long term shareholder value. We are executing against a disciplined growth investment strategy with strong tailwinds and we believe that the fundamentals of our core portfolio our strong.
Thank you for your attention and with that I'll hand, it over to house.
Thank you Mike.
Mark update with a more detailed review of our financial results ended June Thirtyth 20, pointing.
Recently declared dividends or share repurchase program for continued expense reduction initiative and our current liquidity position.
We're pleased to report we ended the second quarter within maybe per share of $11, an 84 cents a.
They break down in any of the per share in the quarter in is shown on slide 12, and it's consistent with our financial reporting.
And on the increase in TV per share during the second quarter was largely driven by $1.62 cents per share a net unrealized appreciation of our portfolio investment did not 17 cents per share increase attributable to the exhibit a common stock repurchase during the quarter during the share repurchase program.
Increases the NPV per share, where I'm not mine that 17 cents per share decreased and not in that line.
Subsequent to quarter one on July 29, 2020, our board of directors declared a dividend 15 cents per share payable on August 20 to 2020 shareholders of record on August 11 2000.
This dividend that was related to investment activity in 2019 in bringing the total dividends declared related to 20, making and recognize the need to 47 cents per share.
These dividends has been categorize it not me like capital gains for tax purposes.
Please refer to slide 13, everybody the current data at the share repurchase program.
During the second quarter, the company repurchased 594637 shares for approximately $3.6 million since inception of the share repurchase program in 2017 to date, we have repurchased 4 million 452049 shares of our common stock for approximately 27.3 million.
In dollars, excluding the modified Dutch auction tender offer effectuated in the fourth quarter of 20 maintain.
The total funds allocated by our board of directors to the share repurchase program to date is $30 million considering share repurchases. During the second quarter. This leaves approximately $2.7 million for future repurchases under the program I.
As of today between the share repurchase program into Q4, 2019 modified Dutch auction tender offer no capital has repurchased 5 million 91324 shares of common stock for approximately $37.3 million since inception of the share repurchase program in August 20, but again this represents nearly 27.
First on the shares outstanding at that time.
During the second quarter, we continued to see the coffee aside from the internalization and the management of Taro capital.
Previously discussed, but internally managed BDC, we have a significantly reduce cost structure upon termination of the Matthew Brightree agreement on March 12, 2018, we no longer be management each month administer it sounds like directly by the BDC and we no longer accruing anticipate.
Total adjusted operating expenses for the second quarter were approximately $2.99 million adjusted pretty impact of accounting Nitin theraplas acceleration of the recognition unrecognized compensation costs related to stock based compensation, India. They are the cancellation such stock based compensation without a repurchase exchange earthquake.
They decelerated concert conditioned upon cancellation of approximately $2 million, it's off the in equity section of the balance sheet.
Adjusted operating expenses of $2.9 million for the second quarter 2020 represents a decrease of approximately 10% in operating expenses from $3.3 million during the second quarter 2018 <unk>.
When you compared to our last second quarter isn't externally managed it became the second quarter 2020, adjusted total operating expense a $2.9 million represents nearly 54% decrease from total operating expenses before labor day of $6.3 million in the second quarter 2018.
Similarly, the adjusted total operating expense for the first topic 2020 was $6.2 million compared with $7.6 million in the first time between 19 adjusted for the reversal. These tend to be a cool and $11.7 million total operating expenses before waivers for the first half of 20 team.
Last year, we were fully externally managed.
You can can you decrease in operating expenses is primarily due to the elimination of management he intends to be concoct under the prior administration agreement.
Further supported by ongoing expense reduction initiatives separate the inherent saving the internally managed that structure, we anticipate operating expenses to pretty decreasing 2020, it will be fully internalized spin entire year cost related to the internalization have generally been absorbed in 2018.
Together, we believe our ongoing meticulous efforts to reduce operating expenses and the meaningful cost savings. We are revising it internally managed BDC. What gives you positive impact on anything remain diligent about managing our expenses moving forward.
Finally, I would like did you throw capital its current liquidity, we ended the quarter with approximately $23.3 million the cash unrestricted cash we did not want a public securities at quarter right.
Our cash balance at $23.3 million. It. The June 30, 2020 consisted primarily of credit each generated by the monetization varied portfolio position from the quarter fleet that came through the first quarter 2020 remaining proceed through the issuance of $40 million, a 4.75% convertible senior notes due in 2023 issued during.
In the first quarter 2018.
That concludes my comment would like to thank you for your interest in support of startup.
Now I will turn the call over to the operator to start documenting session operator.
Thank you if you'd like to ask a question for you signaled by pressing star one on your telephone keypad, if anything a speaker phone case mix. Your mute function is turned off to a lot of some of the three try equipment.
Lets you limit yourself to one question again I start went to ask the question well pause for just a moment trial ever done an opportunity to pick up for questions.
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Well take our first question, Dave from Mark Palmer with B T G.
Yes. Thank you good afternoon.
Earlier in your commentary you talked about the potential to take advantage of dislocations stemming from the pandemic. If you could talk a little bit about what you're seeing in the environment, where the verticals that you're pursuing particularly with regard to valuations yeah, we see the.
Equity markets than a very robust of late what are you seeing on the private side.
The market.
Thanks, Mark and thanks for your ongoing support to Us [noise].
And if you and I've talked about this I in the earlier part of the depending cycle. There was clearly a bit of fear driven selling and fear driven capital raising and at that point in time similar to what what's going on in the public markets, we were seeing significant on.
Discounts to prior rounds.
Various different investments.
And including ER and some names that we know obviously in the case of line. They did a significant down around and we were fortunate to participate on a pro rata basis is very attractive terms. We did take advantage of some of the dislocation everything in the case of rent the runway, where we're able to purchase stock.
At a discount to the around that we noted in her in her comments earlier I I think that I think on a case by case basis. There continues to be some of that I think if it's not.
Obviously with the NASDAQ, making record highs, there's a lot less fear in the secondary marketing selling and there is starting to be some robust robustness in the prior in the primary rounds. So we looked at we've looked at discounted rounds, we looked at primary around obviously, we know what he'd say coursera.
The significant up around too much we participated as well so I would say on the equity side. The secondary side selectively as people are trying to realign their portfolios. We are seeing certain secondary names come out and discounts to prior Allen's we did earlier C.
Some say some primary rounds common use discounted levels and candidly right now I think a lot of the primary rounds that we've seen them that are picked up in the press are clearly comedy and premiums two rounds. They raised before on the debt side, it's it's a little bit it's a case.
By case basis, we are seeing opportunities for companies like.
Like of which we.
Outlined in or commentary that you need a capital to deploy against their strategy that we'd rather borrow against assets rather than raise equity capital city, and perhaps a discounted rate than what do we might so to more of a mixed bag there was earlier.
In March and April even until earlier there.
Next we'll hear from Alex Paris with Barrington Research.
Hi, Mark and Alex.
Hi, Elephant I'm, sorry, he said a few questions for do you.
Oh.
Let's start the not necessarily in any order up you mentioned Merck in your prepared comments.
Equity investment focus yeah, you calm in the retail Fintech Foodtech transportation logistics is that the the pipe side, the private credit side or just in general and the reason I ask is given your investment themes you know how do they fit within those.
Sure.
Very fair question and Alex. Thank you again for your ongoing support to the just are we greatly appreciate it.
I think certainly on the VC side in the institutional back secondaries and other primaries that we've been doing.
Those are areas that we are seeing interesting opportunities and and continue to do that we were not pigeonholed into those industries. We just wanted to highlight those bad.
On the on the debt side, you know, we made a pretty clear fintech insurance type product tankers, where we're spending much more or the time on the the pipe side on the business you know perspectives as common combination again, we're going to stick to our meeting we're not going to whenever you're not going to see us participate.
In the sort of bridge pipes into industrially oriented companies or life science type of companies will very much day into the ones that are a technology base financial technology consumer base.
Hi Tech base.
George is consumer in general.
Hi, Alex Love.
[noise] [noise] that will conclude today's question, yes recession I'll now turn the conference over to my clients transitional costs.
His remarks.
Thank you all very much for taking the time out this afternoon to listen to our conference call and for your support shareholders.
Analysts and friends of the team we greatly appreciate it.
We hope you and your family's stay safe and is a difficult environment. Thank you all very much.
I will conclude todays conference. Thank you for your participation you may now disconnect.
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