Q1 2024 Silver Spike Investment Corp Earnings Call

Participants

Umesh Mahajan; Chief Financial Officer; Silver Spike Investment Corp

Scott Gordon; Chairman of the Board, Chief Executive Officer; Silver Spike Investment Corp

Michael Lavery; Analyst; Piper Sandler Companies

Pablo Zuanic; Analyst; Zuanic & Associates LLC

Presentation

Operator

Good day and thank you for standing by. Welcome to Silver Spike Investment Corporation first quarter 2024 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Umesh Mahajan, Chief Financial Officer. Please go ahead.

Umesh Mahajan

Good morning. This is Umesh Mahajan, CFO of Silver Spike Investment Corp. With me here today is Scott Gordon, CEO of Silver Spike Investment Corp. Welcome to Silver Spike's earnings conference call and live webcast for the first quarter ended March 31, 2024. Silver Spike's financial results for the fourth quarter ended March 31, 2024, were released yesterday and can be accessed from our website at ssic.silverspikecap.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 that are not based on historical facts made during this call, including any statements related 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 that 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 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, May 10, 2024. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay or transcript reading.
So good morning again and thank you all for joining. We released our results yesterday along with our 10-Q. And there is a management presentation deck attached to the 8-K that was filed and made available this morning. Those who have joined us on this earnings webcast should also see a link to the slides that we will use for our discussion today. We may refer to the slides by numbers for your reference. I'll cover the presentation slides, and then turn it over to Scott Gordon for his thoughts and remarks.
Before we get to the financial highlights for the quarter ended March 31, 2024, a quick recap about the loan portfolio acquisition that we announced in this quarter. on February 20, 2024, the company announced that it entered into a definitive agreement to purchase from Chicago Atlantic Loan Portfolio LLC, a portfolio of loans in exchange for newly issued shares of the company's common stock subject to certain customary closing conditions.
On April 15, 2024, the company filed a registration statement on Form N-14. In connection with this loan portfolio acquisition with the Securities and Exchange Commission, SEC, we are currently anticipating this transaction to close in mid-2024.
With that, turning to page 3 of the presentation for financial highlights for the fourth quarter of 2024. The gross investment income for this quarter was $2.8 million compared to $2.5 million in the fourth quarter last year. Expenses of approximately $0.8 million, excluding the expenses related specifically to the loan portfolio acquisition. Results in investment income, excluding transaction expenses of $2 million compared to $1.4 million last year. We have incurred transaction-related expenses of $2.1 million in the quarter as the definitive agreements were signed in this quarter.
Net investment income was negative $0.1 million. Net assets of $84.5 million down from last year due to the payment of dividends and the transaction expenses. On a per-share basis the investment income, excluding the transaction expenses, was $0.33 per share compared to $0.22 per share last year. The net investment income was negative $0.01 per share and net asset value at the end of the period as of March 31, 2024, was $13.6.
Also, the Board declared a regular quarterly cash dividend of $0.25 per share. The dividend will be payable on June 28 to stockholders of record on June 20. We will not really go through the subsequent few slides in the slide deck in detail as we have covered them in the past, and most investors are already familiar with our story.
But turning to page 9, to talk about our origination efforts. Our deal pipeline remains strong. In general, since last quarter of 2023, many of the potential borrowers in the industry have not rushed into borrowing money as they were watching the interest rate movements in the markets, as well as the developments on the rescheduling of cannabis to Schedule III.
We've used that time period towards due diligence and underwriting of our 25 borrowers as a part of our loan portfolio acquisition that we announced. And at this point, as the industry continues to grow, good operators in the industry have started revisiting their growth and expansion plans and have started thinking about raising more capital to support their plans. We have an active dialogue with many of the best operators in the industry and have an active pipeline of over $425 million.
On page 11, we show our portfolio summary as of March 31. [They were only the] investments in this quarter. As you can see at the top of the page, we have over $54 million, almost $55 million invested with an average yield to maturity of about 18%.
A few points we like to reiterate about this portfolio plus all of our positions are first lien loans are secured bonds. None of these loans or bonds are in non-accrual status. Over 90% of our invested portfolio is in floating rate loans. And our gross portfolio yield of 18% compares favorably to the broader listed BDC universe. With that, let me pass it on to Scott Gordon for a few remarks.

Scott Gordon

Thanks, Umesh. Just wanted to take a minute and talk about the big industry news of late which has been the apparent approval by the DEA of the HHS's recommendation to reschedule cannabis. This has been a widely anticipated move since the HHS announcement last year. The process timeline, however, is uncertain and could take up to several years to complete. It's met with challenges seeking judicial review and or administrative hearings. The change, however, would have a major impact on company cash flows through the elimination of the 280E tax effect.
While we view the move as positive, like all legislative initiatives in the cannabis realm, the devil remains in the detail around both timing and implementation. Given the myriad of ambiguities with respect to that, we believe that the current dynamic of capital constraints in the industry will be largely unchanged, nor do we extrapolate anything further on the regulatory front because of the rescheduling process. Say for act, in other pending pieces of reform will muddle as usual and continue to be subject to all of the same vagaries and obstacles have been present for some time. As such, we take a mildly optimistic view of the news and maintain some hope that perhaps this time is different. On balance, it's clearly a step in the right direction.
With that, I'll pass back to Umesh.

Umesh Mahajan

Thank you, Scott. That's all we had in terms of prepared remarks. We can take questions. Is there any, [Gigi]

Question and Answer Session

Operator

(Operator Instructions)
Michael Lavery, Piper Sandler.

Michael Lavery

Thank you, good morning.

Umesh Mahajan

Good morning, Michael.

Michael Lavery

Regarding the transaction, can you just touch on how it's progressing? And maybe if there's any regulatory review updates or just your sense of what we should expect as far as that moves along?

Umesh Mahajan

Yeah, sure. So we have submitted a N-14 statement to the SEC for the review on April 15. That N-14 is a document that would be used as a proxy as well as providing information on the transaction. We are expecting that process to take another month or two. It is difficult to estimate the exact time it will take for the completion of this review. But following that review, we will be taking the shareholder vote.
So everything is -- in terms of the ongoing process for approval, everything is going as we had anticipated. We think we should get comments from the SEC on the document in short order. It's difficult to know exactly when. And we don't think that we should be expecting a close on this transaction sometime at this summer.

Michael Lavery

Okay, great. That's helpful. And just as far as rescheduling has been, sort of in the spotlight in the industry in recent days. Can you give a sense of what the implications would be, expected to be for you guys in particular? And just how the ramifications of that might look for you?

Umesh Mahajan

Yes. I mean, as Scott mentioned in his remarks, there is clearly the implication of the 280E on the cannabis operators, and it's a extremely positive one. So the first impact really, from our perspective is that our portfolio companies, both the companies that we have in our portfolio right now, as well as the companies that are -- for the borrowers that are in the anticipated [portfolio] acquisition, are going to have much better cash flows and the credit metrics are going to look different [end tier] So that's a positive.
In terms of overall dynamic, the competitive dynamic for the lending industry, which we operate in. We do not think that, just the announcement, and even the ultimate passing of 280E is really going to change the dynamic from a supply and demand for capital for the cannabis operators. We do not expect the floodgates for capital to open up with this announcement or even with the passing of 280E. And as a result, at least over the next couple of years, we do not anticipate a significant change in either the yields or the overall competitive dynamic.
And we do think that the news has led most of the cannabis operators to rethink their growth plans. The industry continues to grow pretty nicely, and the operators, the good Operators are definitely thinking revisiting their plans and then they will need the capital, and we will be there to support them.
So from our perspective, we think it's a positive for our credit metrics of our borrower companies. We think the dynamics, the competitive dynamic doesn't change for us in the near term or definitely over the next year or two. And it's positive in the sense that the operators are getting better and are going to start talking about their growth plans and much more earners.

Michael Lavery

Okay, great. Thank you so much.

Operator

Pablo Zuanic, Zuanic & Associates.

Umesh Mahajan

Hey, Pablo. Good morning.

Pablo Zuanic

Good morning. Thank you. Look, two quick questions. One, a follow-up to the prior question. Of course, the 280E news and rescheduling, it's all positive, right? But does that mean that a lot of operators maybe go on a wait and hold pattern for now and don't engage until there's more clarity on when that's implemented under 280E benefits?
I realize that in some states right [that may go wreck] they may need to expand, although some of them may already have capacity there. So I'm just wondering whether we have a period of maybe almost one year where the demand side, you know it's weaken temporarily. I don't know if you want to comment on that and then and then the second -- well, let's start with that first, thanks.

Scott Gordon

Yeah, I'll take that Pablo. Look, I think we've already seen that dynamic, you know, since the initial announcement by HHS of the recommendation to switch to -- to rescheduled to Schedule III. And so this has definitely been the backdrop of the market since that announcement, whatever it was four or five months ago. And look, I think there's obviously some degree of hope and an expectation among the operators and our borrowers that this news will sort of drive down borrowing costs and kind of open the floodgate of capital through the market. =
You know, as Umesh has alluded to, we just don't see that. I think there are many impediments of the capital constraints in the marketplace, and you know, 280E wasn't released among the major factors, the federal illegality and just the nature of the complexity of the industry I think are the barriers of keeping capital from coming in and that's unchanged.
So I think, yeah, you're right that there might be some level of companies out there that might opt to take a more sort of patient wait-and-see approach with the belief that, better terms are sort of coming if they do that. But I also think, a lot of the companies that we speak to sort of accept the silver reality of what has been the history of disappointment on many of the legislative things that have happened in the industry.
And I think if capital is available to them, they'll take it. So a mixed bag. But yeah, I could see on the margin where this might take another sort of three to six months of needing to play out for some folks who might want to stay on the sidelines. But we think ultimately, you can't wait forever, and many of the operators have already been waiting for a fairly long time. So those that have real kind of expansion plans and need that growth capital, I think don't have a choice.

Pablo Zuanic

Understood. And then just on a separate subject. In terms of the transaction structure, maybe just to clarify, obviously, Chicago Atlantic is a Group, right? And your transaction is a Group, the holding company. It has nothing to do with the REIT that's a public listed vehicle. But I'm just trying to understand in terms of what's public information is the idea that that becomes a bit of a sister company for you, that you work together, you coordinate and I'm referring to I REIT? Or that's just a top of a separate organization, and your transaction is really with a holding company?

Umesh Mahajan

The two are completely separate Pablo. You're right, they're completely separate and yeah, they're separate. The REIT is a completely independent entity from BDC.

Pablo Zuanic

All right. Okay, that's all I have. Thank you.

Operator

(Operator Instructions)
At this time, I'm showing no further questions. I would now like to turn the conference back over to Umash Mahajan for closing remarks.

Umesh Mahajan

Well, thank you, everyone, for joining us for this call. We look forward to keep giving you updates on the transaction and look forward to speaking with you again in the next earnings call. Thank you very much.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.