Q4 2022 Silver Spike Investment Corp Earnings Call

Speaker 1: all for a day you

Speaker 2: Good day, and welcome to the Silver Spike Investment Corp. Fiscal Year-End 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

Speaker 2: Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Imesh Mahajan, CFO. You may begin.

Speaker 3: Good morning. Hello everyone. This is Umesh Mahajan, CFO of Silver Spike Investment Corp. With me here today is Scott Gordon, CEO of Silver Spike Investment Corp.

Speaker 3: Welcome everyone to the SilverSpikes earnings conference call and live webcast for the fiscal year 2022. SilverSpikes' fourth-quarter fiscal 2022 financial results were released yesterday and can be accessed from our website at ssic.silverspikescap.com.

Speaker 3: A replay of the call will also be available on our website.

Speaker 3: Before we begin, I would like to remind everyone that certain statements not based on historical facts made during this call, including any statements related to financial guidance, may be deemed as forward-looking statements under the 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 during the call.

Speaker 3: Today, March 31, 2023. Therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay or transfer feeling.

Speaker 3: So, good morning again and thank you all for joining. We released our results yesterday and filed an 8-K this morning, with a presentation deck attached to it. Those of you who have joined us on this webcast should have the presentation.

Speaker 3: Else, please find the link to the deck in the 8K that was filed. We may refer to the slides by numbers for your reference as we go through it.

Speaker 3: So, turning to page 3 of the presentation.

Speaker 3: Financial Highlights for the Quarter Ended December 31, 2022.

Speaker 3: Gross investment income of $2 million versus $1.2 million the previous quarter. Expenses of approximately $0.6 million, the same as last quarter. Investment income of $1.4 million versus $0.6 million last quarter.

Speaker 3: Net investment income per share of 23 cents this quarter versus 9 cents last quarter. Net assets of 86.5 million versus 85.3 million and net asset value per share of $13.91 versus $13.73 last quarter. The increase in gross investment income that you see here reflects the steady ramp-up in our economy.

Speaker 3: Income is for the partial period that we held this investment for.

Speaker 4: Turning to page 4.

Speaker 3: Financial highlights for the fiscal year ended December 31, 2022. Now, our board of directors approved a change in our fiscal year from March 31 to December 31. So, the financials on the slide, and also in our 10-K that you'll see today.

Speaker 3: For the period from April 1 to December 31, over nine months, our gross investment income was $4 million, with expenses of approximately $1.8 million. We had a net investment income of $2.2 million and a net investment income per share of $0.35.

Speaker 3: Net assets of 86.5 million and net asset value per share of $13.91.

Speaker 3: To elaborate further on the Silver Spike story and market opportunity, I will now turn it over to Scott Gordon, our CEO. Thanks, Umesh. I will briefly touch upon our story, our investment process and philosophy, and the outlook for our business. Please turn to slide six.

Speaker 5: You can see that we are a Business Development Corp registered under the 1940 Act. We are the first and the only BDC publicly traded that is focused on direct lending in the cannabis industry. We believe that our structure is ideally suited for the evolving landscape and the capital needs in the sector.

Speaker 5: Other lenders, such as REITs, are required to put up a substantial portion of their portfolio as real estate collateral, 75% in the case of REITs. On the other hand, we are cash flow lenders and can lend against every type of collateral that is available. We believe this offers a more flexible source of capital for operators in the industry and expands the opportunity set for us.

Speaker 5: We believe that this will expand even further as the industry continues to grow and mature. Our team, we believe, has the appropriate mix of background experience and track record both within the cannabis industry and the capital markets and credit businesses to execute on this plan.

Speaker 5: Turning to slide seven, just briefly, you know, in terms of the market opportunity, I think everybody knows that the cannabis market for public equities has been under continued pressure, you know, for close to two years now. But we think it's important to revisit why lending to the cannabis market is a big issue.

Speaker 5: and grow. At the same time, the sources of capital, due to all the complexities and regulatory limitations and constraints in the industry, are quite limited. Competition in the cannabis lending space is also limited. We believe we are among a handful of dedicated lenders to the space, REITs or otherwise, that have dry powder and capital currently offering loan capital.

Speaker 5: In this place, to operators, we believe that the demand and supply imbalance of capital needed and capital available, as depicted in the chart at the bottom right, is intriguing compared to traditional markets like leveraged loans, direct lending, or even high yield. We're potentially obtaining higher yields than comparable risks at currentcountrys.com.

Speaker 5: Changes, whether it's the SAFE Act or other things, are going to compel traditional sources of banks or other types of lenders to step into the space. And so, we think we have substantial runway to continue executing on our plan.

Speaker 5: I am not going to talk too much about slide eight, but I just want to highlight here that we have a very robust underwriting process and a very deliberate approach to our investments. We also have an elaborate process for sourcing, originating, structuring, and underwriting, as well as monitoring.

Speaker 5: On slide nine, we show some metrics here with respect to our sourcing and origination. I think it's important to note before I hand this back over to Umesh that our extensive industry network has been built through our operating experience in the space. My partners and I have substantial connections and experience across the sector.

Speaker 5: We believe that this ability is evident in our transactions, where we think we're punching above our weight in terms of lending to some of the largest marquee names in the sector based on that network and those relationships across the industry. At this point, I'll hand it back to Amesh.

Speaker 3: Thanks, Scott. So, yes, we're definitely very pleased with the pipeline of opportunities that we have. In fact, since our inception, as you see on the slide, since our inception, we have seen over $6.8 billion in transactions. And as of December 31, we have an active pipeline of over $840 million, where we are actively engaged with these potential borrowers. So, thank you.

Speaker 3: During the fiscal year, we made three new investments in this quarter. Company C shows AYR's 12.5% secured bonds due December 2024, and Company D shows Q Relief's 8% secured bonds due December 2026. As we discussed in our previous earnings call, we have a lot of money to spend.

Speaker 3: These two were made at a significant discount to their par values.

Speaker 3: And Company E is one of our large investments in Verano's four-tranche term loan, a transaction that was completed in late October. As you can see, for that loan, with the prime rate currently at 8% and a spread of 6.5% on this loan.

Speaker 3: We believe this loan offers a very attractive return, considering the credit metrics for one of the top cannabis operators in the country.

Speaker 3: Subsequent to the end of the quarter, after 12-31, we made another investment in Marriment, shown as Company F. It's a three-year, first-lien, secured term loan with prime plus 5.75% cash and 1.4% PIK.

Speaker 3: Combined that coupon with the upfront fees, we believe this loan also offers a very attractive yield to maturity. So overall, if you look at the top of the page, the banner at the top, we have approximately 54.5 million invested.

Speaker 3: With an average yield to maturity of over seven and a quarter percent, and 17 and a quarter percent, we believe our portfolio has companies that are very well positioned in the industry for the longer term and, at the same time, offer an attractive yield to maturity.

Speaker 3: This combination of credit quality and attractive return profile has been made possible for a couple of reasons in our view. First, we have benefited from a timing perspective. We began our deployment in the latter part of 2022. As we all know, the sector has undergone many changes.

Speaker 3: Despite some of the challenges many operators have faced in the sector, we have also benefited from the fact that almost 89% of the portfolio is floating rate, as you can see here on this chart. As the Fed funds rate and other benchmark rates moved up rapidly late last year, so have the coupons on our loans, and that has improved our portfolio.

Operator: Good day, and welcome to the Silver Spike Investment Corp. Fiscal Year-End 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Imesh Mahajan, CFO . You may begin.

Speaker 3: We haven't closed any additional investments in the month of March.

Speaker 3: But we've been very busy working on a number of very interesting transactions.

Speaker 3: So overall, we are really excited about the pipeline we are currently working on, and we hope to have more updates for you as we continue to deploy our capital and build a high-quality portfolio.

Speaker 3: With that, I'll pass it back to the operator, Michelle.

Umesh Mahajan (CFO): Good morning. Hello everyone. This is Umesh Mahajan, CFO of Silver Spike Investment Corp. With me here today is Scott Gordon, CEO of Silver Spike Investment Corp. Welcome everyone to the SilverSpikes earnings conference call and live webcast for the fiscal year 2022.

Speaker 2: Thank you. If you'd like to ask a question, please press star 1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1 again.

Speaker 2: Our first question comes from Andrew Carter with Stifel. Your line is open.

Speaker 6: Hello, can you hear me? Hi, Andrew. How are you? Hey, how are you doing? Good morning. So, the first question I have is, you talked about the credit metrics on your portfolio. Can you give us any sense of what the cash flow coverage is on your private loans? And when I say cash flow, I mean including taxes as well. Right?

Umesh Mahajan (CFO): SilverSpikes' fourth-quarter fiscal 2022 financial results were released yesterday and can be accessed from our website at ssic.silverspikescap.com. A replay of the call will also be available on our website. Before we begin, I would like to remind everyone that certain statements not based on historical facts made during this call, including any statements related to financial guidance, may be deemed as forward-looking statements under the federal securities laws.

Speaker 3: Yes, sure. I don't have the exact statistics for each of the portfolio companies in front of me, but there are a couple of things to consider here. First, all of these loans are secured. All of these debt positions are secured debts. And if you think about the leverage, I believe the average across the portfolio is around two times in the form of leverage.

Umesh Mahajan (CFO): 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 during the call. Today, March 31, 2023. Therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay or transfer feeling.

Umesh Mahajan (CFO): So, good morning again and thank you all for joining. We released our results yesterday and filed an 8-K this morning, with a presentation deck attached to it. Those of you who have joined us on this webcast should have the presentation. Else, please find the link to the deck in the 8K that was filed. We may refer to the slides by numbers for your reference as we go through it.

Speaker 3: issues, but also the working capital and the CAPEX program, especially the maintenance CAPEX that the company has to take care of.

Speaker 3: I don't have the cash flow coverage, but our fundamental underwriting premise is based on the cash flow profile of these companies.

Speaker 3: And we feel pretty comfortable with that coverage profile.

Speaker 6: Okay, I guess just to step back on that, are our shrine and pharma generating cash? Yes, they are.

Speaker 6: Okay, this question I'd ask is looking at the fee, looking at the income, how much of the income this quarter was interest income from the investments and how much was the kind of yield on cash, and then a follow-on question to that. In your calculation of incentive fees, do you include interest earned on your cash account?

Umesh Mahajan (CFO): So, turning to page 3 of the presentation. Financial Highlights for the Quarter Ended December 31, 2022. Gross investment income of $2 million versus $1.2 million the previous quarter. Expenses of approximately $0.6 million, the same as last quarter. Investment income of $1.4 million versus $0.6 million last quarter. Net investment income per share of 23 cents this quarter versus 9 cents last quarter. Net assets of 86.5 million versus 85.3 million and net asset value per share of $13.91 versus $13.73 last quarter. The increase in gross investment income that you see here reflects the steady ramp-up in our economy. Income is for the partial period that we held this investment for.

Speaker 3: Yeah, I drew, I think if you look at the previous quarter, I think the cash on the interest income, as you know, the interest rates really started going up only towards the fourth quarter. So the interest income part of the income is really small. I don't even know the percentage, but it's.

Speaker 3: It is really, really small. It may be more meaningful going forward, but as of the fourth quarter, it was definitely very small.

Speaker 3: Is that counted in our calculations? I think interest income is counted as any other income. So, I believe it will be included in the gross investment income line.

Speaker 3: That counted in our calculations. I think interest income is counted as any other income. And so I believe it will get counted in the gross investment income line. Okay, I'll pass it on.

Umesh Mahajan (CFO): Turning to page 4. Financial highlights for the fiscal year ended December 31, 2022. Now, our board of directors approved a change in our fiscal year from March 31 to December 31. So, the financials on the slide, and also in our 10-K that you'll see today. For the period from April 1 to December 31, over nine months, our gross investment income was $4 million, with expenses of approximately $1.8 million. We had a net investment income of $2.2 million and a net investment income per share of $0.35. Net assets of 86.5 million and net asset value per share of $13.91.

Speaker 2: Our next question comes from Michael Lavery with Piper Sandler. Your line is open.

Speaker 2: Thank you. Our next question comes from Michael Lavery with Piper Sandler. Your line is open. Good morning. Thank you.

Speaker 7: I just wanted to come back to some of the credit metrics. You mentioned in your prepared remarks how the yields are more attractive, but the credit metrics are also better. Can you point to some of the ones you look at when you have that in mind, and maybe what benchmarks and how it compares? Let's unpack that.

Speaker 7: that comparison just a little bit for us.

Speaker 3: Absolutely, Michael. If you look at the portfolio that we have here and examine the company, the first thing that jumps out is that most of these companies are established with a very good operating profile in the industry, which can be resilient.

Scott Gordon (CEO): To elaborate further on the Silver Spike story and market opportunity, I will now turn it over to Scott Gordon, our CEO .

Scott Gordon (CEO): Thanks, Umesh. I will briefly touch upon our story, our investment process and philosophy, and the outlook for our business. Please turn to slide six. You can see that we are a Business Development Corp registered under the 1940 Act. We are the first and the only BDC publicly traded that is focused on direct lending in the cannabis industry. We believe that our structure is ideally suited for the evolving landscape and the capital needs in the sector.

Speaker 3: in the backdrop that we are seeing for the industry. It's important to note. And then when it comes to specific cash metrics, I think leverage is an important one to consider. The other one is secured leverage and not just total leverage. So we pay close attention to

Speaker 3: Many of these operators, and as you know very well, many of the MSOs have large liabilities outside of their debt, and we pay close attention. So the secured debt leverage across most of these names is far lower than the total leverage that I just talked about.

Scott Gordon (CEO): Other lenders, such as REITs, are required to put up a substantial portion of their portfolio as real estate collateral, 75% in the case of REITs. On the other hand, we are cash flow lenders and can lend against every type of collateral that is available. We believe this offers a more flexible source of capital for operators in the industry and expands the opportunity set for us. We believe that this will expand even further as the industry continues to grow and mature. Our team, we believe, has the appropriate mix of background experience and track record both within the cannabis industry and the capital markets and credit businesses to execute on this plan.

Speaker 3: And in terms of cash flow metrics, it is important to make a distinction between growth capex, maintenance capex, and we try to ensure that the cash flow is available before debt service to take care of our debt. And I think overall, stepping back, I think...

Speaker 3: If you look at what Scott discussed in his chart on page seven, where there is a comparison with other fixed income indices or fixed income markets across leveraged loans, direct lending, high yield, etc., there is a reason why cannabis gets a premium. I think it is because of the supply-demand imbalance for capital, but also I think it's because of the supply-demand imbalance for capital.

Speaker 3: The metrics are better in the sense of the leverage, in the sense of the cash flow coverage, in terms of the loan-to-value; again, the...

Scott Gordon (CEO): Turning to slide seven, just briefly, you know, in terms of the market opportunity, I think everybody knows that the cannabis market for public equities has been under continued pressure, you know, for close to two years now. But we think it's important to revisit why lending to the cannabis market is a big issue. and grow. At the same time, the sources of capital, due to all the complexities and regulatory limitations and constraints in the industry, are quite limited.

Speaker 3: I cannot specifically talk about the enterprise valuations that we have for this company, but the low-to-earth value we believe is far more attractive than what you would get in a U.S. high-yield index, for example, where there are unsecured bonds and the coverage is not as extensive. So, is that helpful, Michael? Yes, that's great insight. Thanks.

Speaker 2: Thank you. There are no further questions at this time. I'd like to turn the call back over to Umesh for any closing remarks.

Scott Gordon (CEO): Competition in the cannabis lending space is also limited. We believe we are among a handful of dedicated lenders to the space, REITs or otherwise, that have dry powder and capital currently offering loan capital. In this place, to operators, we believe that the demand and supply imbalance of capital needed and capital available, as depicted in the chart at the bottom right, is intriguing compared to traditional markets like leveraged loans, direct lending, or even high yield. We're potentially obtaining higher yields than comparable risks at currentcountrys.com. Changes, whether it's the SAFE Act or other things, are going to compel traditional sources of banks or other types of lenders to step into the space. And so, we think we have substantial runway to continue executing on our plan.

Speaker 3: Sure. Thank you, Michelle. Thank you, everyone, for joining in. To end, I would like to say that we are very excited with where we are today with our portfolio and outlook, as well as the set of opportunities we are seeing right now. We look forward to getting on a call again with you.

Scott Gordon (CEO): I am not going to talk too much about slide eight, but I just want to highlight here that we have a very robust underwriting process and a very deliberate approach to our investments. We also have an elaborate process for sourcing, originating, structuring, and underwriting, as well as monitoring. On slide nine, we show some metrics here with respect to our sourcing and origination. I think it's important to note before I hand this back over to Umesh that our extensive industry network has been built through our operating experience in the space.

Scott Gordon (CEO): My partners and I have substantial connections and experience across the sector. We believe that this ability is evident in our transactions, where we think we're punching above our weight in terms of lending to some of the largest marquee names in the sector based on that network and those relationships across the industry. At this point, I'll hand it back to Amesh.

Scott Gordon (CEO): Thanks, Scott. So, yes, we're definitely very pleased with the pipeline of opportunities that we have. In fact, since our inception, as you see on the slide, since our inception, we have seen over $6.8 billion in transactions. And as of December 31, we have an active pipeline of over $840 million, where we are actively engaged with these potential borrowers.

Umesh Mahajan (CFO): During the fiscal year, we made three new investments in this quarter. Company C shows AYR's 12.5% secured bonds due December 2024, and Company D shows Q Relief's 8% secured bonds due December 2026. As we discussed in our previous earnings call, we have a lot of money to spend. These two were made at a significant discount to their par values.

Umesh Mahajan (CFO): And Company E is one of our large investments in Verano's four-tranche term loan, a transaction that was completed in late October . As you can see, for that loan, with the prime rate currently at 8% and a spread of 6.5% on this loan. We believe this loan offers a very attractive return, considering the credit metrics for one of the top cannabis operators in the country.

Umesh Mahajan (CFO): Subsequent to the end of the quarter, after 12-31, we made another investment in Marriment, shown as Company F. It's a three-year, first-lien, secured term loan with prime plus 5.75% cash and 1.4% PIK. Combined that coupon with the upfront fees, we believe this loan also offers a very attractive yield to maturity.

Umesh Mahajan (CFO): So overall, if you look at the top of the page, the banner at the top, we have approximately 54.5 million invested. With an average yield to maturity of over seven and a quarter percent, and 17 and a quarter percent, we believe our portfolio has companies that are very well positioned in the industry for the longer term and, at the same time, offer an attractive yield to maturity.

Umesh Mahajan (CFO): This combination of credit quality and attractive return profile has been made possible for a couple of reasons in our view. First, we have benefited from a timing perspective. We began our deployment in the latter part of 2022. As we all know, the sector has undergone many changes. Despite some of the challenges many operators have faced in the sector, we have also benefited from the fact that almost 89% of the portfolio is floating rate, as you can see here on this chart. As the Fed funds rate and other benchmark rates moved up rapidly late last year, so have the coupons on our loans, and that has improved our portfolio.

Umesh Mahajan (CFO): We haven't closed any additional investments in the month of March. But we've been very busy working on a number of very interesting transactions. So overall, we are really excited about the pipeline we are currently working on, and we hope to have more updates for you as we continue to deploy our capital and build a high-quality portfolio.

Umesh Mahajan (CFO): With that, I'll pass it back to the operator, Michelle. Thank you. If you'd like to ask a question, please press star 1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1 again. Our first question comes from Andrew Carter with Stifel. Your line is open.

Operator: Hello, can you hear me? Hi, Andrew. How are you? Hey, how are you doing? Good morning. So, the first question I have is, you talked about the credit metrics on your portfolio. Can you give us any sense of what the cash flow coverage is on your private loans? And when I say cash flow, I mean including taxes as well.

Umesh Mahajan (CFO): Right? Yes, sure. I don't have the exact statistics for each of the portfolio companies in front of me, but there are a couple of things to consider here. First, all of these loans are secured. All of these debt positions are secured debts. And if you think about the leverage, I believe the average across the portfolio is around two times in the form of leverage.

Umesh Mahajan (CFO): issues, but also the working capital and the CAPEX program, especially the maintenance CAPEX that the company has to take care of. I don't have the cash flow coverage, but our fundamental underwriting premise is based on the cash flow profile of these companies. And we feel pretty comfortable with that coverage profile.

Scott Gordon (CEO): Okay, I guess just to step back on that, are our shrine and pharma generating cash? Yes, they are.

Umesh Mahajan (CFO): Okay, this question I'd ask is looking at the fee, looking at the income, how much of the income this quarter was interest income from the investments and how much was the kind of yield on cash, and then a follow-on question to that. In your calculation of incentive fees, do you include interest earned on your cash account? Yeah, I drew, I think if you look at the previous quarter, I think the cash on the interest income, as you know, the interest rates really started going up only towards the fourth quarter. So the interest income part of the income is really small. I don't even know the percentage, but it's. It is really, really small. It may be more meaningful going forward, but as of the fourth quarter, it was definitely very small. Is that counted in our calculations? I think interest income is counted as any other income. So, I believe it will be included in the gross investment income line. That counted in our calculations. I think interest income is counted as any other income. And so I believe it will get counted in the gross investment income line. Okay, I'll pass it on.

Operator: Our next question comes from Michael Lavery with Piper Sandler. Your line is open. Thank you. Our next question comes from Michael Lavery with Piper Sandler. Your line is open. Good morning. Thank you. I just wanted to come back to some of the credit metrics. You mentioned in your prepared remarks how the yields are more attractive, but the credit metrics are also better. Can you point to some of the ones you look at when you have that in mind, and maybe what benchmarks and how it compares? Let's unpack that. that comparison just a little bit for us.

Michael Lavery (Analyst): Absolutely, Michael. If you look at the portfolio that we have here and examine the company, the first thing that jumps out is that most of these companies are established with a very good operating profile in the industry, which can be resilient. in the backdrop that we are seeing for the industry. It's important to note. And then when it comes to specific cash metrics, I think leverage is an important one to consider.

Umesh Mahajan (CFO): The other one is secured leverage and not just total leverage. So we pay close attention to Many of these operators, and as you know very well, many of the MSOs have large liabilities outside of their debt, and we pay close attention. So the secured debt leverage across most of these names is far lower than the total leverage that I just talked about.

Umesh Mahajan (CFO): And in terms of cash flow metrics, it is important to make a distinction between growth capex, maintenance capex, and we try to ensure that the cash flow is available before debt service to take care of our debt. And I think overall, stepping back, I think... If you look at what Scott discussed in his chart on page seven, where there is a comparison with other fixed income indices or fixed income markets across leveraged loans, direct lending, high yield, etc., there is a reason why cannabis gets a premium. I think it is because of the supply-demand imbalance for capital, but also I think it's because of the supply-demand imbalance for capital.

Umesh Mahajan (CFO): The metrics are better in the sense of the leverage, in the sense of the cash flow coverage, in terms of the loan-to-value; again, the... I cannot specifically talk about the enterprise valuations that we have for this company, but the low-to-earth value we believe is far more attractive than what you would get in a U.S. high-yield index, for example, where there are unsecured bonds and the coverage is not as extensive. So, is that helpful, Michael?

Michael Lavery (Analyst): Yes, that's great insight. Thanks.

Operator: Thank you. There are no further questions at this time. I'd like to turn the call back over to Umesh for any closing remarks. Sure. Thank you, Michelle. Thank you, everyone, for joining in. To end, I would like to say that we are very excited with where we are today with our portfolio and outlook, as well as the set of opportunities we are seeing right now. We look forward to getting on a call again with you.