Q2 2023 Silver Spike Investment Corp Earnings Call

Participants

Scott Gordon; Chairman of the Board & CEO; Silver Spike Investment Corp.

Umesh Mahajan; CFO; Silver Spike Investment Corp.

Michael Lavery; Analyst; Piper Sandler Companies

Presentation

Operator

Good morning and thank you for standing by. Welcome to the Silver Spike Investment Corp. second-quarter 2023 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

Thank you, Catherine. Good morning, 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 to the Silver Spike -- Silver Spike's earnings conference call and live webcast for the second quarter of 2023. Silver Spike's financial results for the quarter ended June 30, 2023, were released yesterday and can be accessed from our website at ssic.silverspikecap.com. A replay of the call will also be available on Silver Spike's website.
Before I 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 under -- 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 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, August 11, 2023. Therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay or transcript.
That said, good morning again, and thank you all for joining early in the morning today. We released our earnings yesterday, and there's also an earnings slide deck attached to the 8-K that was filed with the results. Those that have joined us on this earnings webcast should see it live. I'll refer to the slides by numbers just for your reference.
Turning to page 3 of the presentation, financial highlights for the second-quarter 2023, gross investment income of $2.9 million, up from $2.5 million in the first quarter of 2023; expenses of approximately $1 million; net investment income of $1.9 million, up from $1.4 million last quarter; net investment income per share of $0.31 versus $0.22 last quarter; net assets of $90 million; and net asset value per share is at $14.49.
The increase in the gross investment income reflects the steady ramp up in our investment portfolio. We made one new investment during this quarter. The gross investment income reflects the interest, we all know that investment, as well as the increase in the base rate for all of our floating rate loans. We'll discuss the portfolio in more detail and in subsequent slides.
Also, we are pleased to announce that our Board has approved a cash dividend of $0.63 per share, consisting of a regular quarterly dividend of $0.23 per share and a special dividend of $0.40. These dividends will be payable on September 29 to stockholders of record on September 15. The company also expects to pay another special dividend during the last quarter of this year.
We'll talk more about the dividend announcement in subsequent slides. But to expand more on the Silver Spike story and the market opportunity, I'll turn it over to Scott Gordon, our CEO. Scott?

Scott Gordon

Thank you, Umesh. Good morning, everyone. Turning to Slide 4, please, just briefly in terms of an overview of Silver Spike Capital. Silver Spike Investment Corp., the BDC is externally managed by Silver Spike Capital. Silver Spike Capital is an SEC-registered investment advisor that works with its clients to originate, underwrite, and deploy first-lien senior-secured fixed and floating rate debt to the cannabis industry's most established operators.
The investment team is seasoned with decades of experience across various market cycles and complex legal regulatory frameworks in credit special situations, equities, distressed, and emerging market debt. We have raised over $600 million in public and private capital since inception. And we are the first and only publicly traded cannabis-focused business development corp.
Just jumping on to the market opportunity slide on page 7, just an update here in terms of what we're seeing in broad market. The secular growth story in cannabis continues intact, albeit at a much more subdued pace than in previous years.
New states continue to come onstream. Generally speaking, though, the rollout has been slower than had hoped for. The state and local regulatory frameworks get through growing pains of early adoption and commercialization.
Progress at the federal level remains stalled. Expectations of the passage of the SAFE Act continue to get rolled back. We don't really have a strong view in terms of what the timetable will look like for any meaningful reform at the federal level and are not generally optimistic that we'll see much progress this year.
Capital market conditions within the sector continue to be very tight. Equity market activity for public companies with respect to IPOs, secondaries, and follow-ons is virtually nonexistent. Debt capital is also scarce but more available and has become the funding source of choice for most companies in the space.
The net result of that is a deepening of the trend toward very favorable conditions for lenders such as ourselves to command attractive terms, structure, and pricing, which drives compelling risk-adjusted returns for us.
Jumping forward to Slide 9, just briefly on sourcing and origination, and then I'll pass it back to Umesh. We continue to have a significant pipeline of potential debt investments. We've reviewed over $7.8 billion and transactions across 368 different deals. Our active pipeline today is just shy of $600 million, representing about 25 different transactions.
With that, I'll pass it back to Umesh to talk more specifics about the current activity within the portfolio. Umesh?

Umesh Mahajan

Thank you, Scott. So yes, we definitely feel very good about the opportunity set in front of us. But moving to Slide 10, a little bit more about our portfolio. This slide tries to show the risk diversification that is embedded within our existing portfolio companies. The bar chart on the left shows the number of states that each of our portfolio companies operate in.
So for the cannabis industry, this is important since each state has its own set of regulations and has its own unique competitive dynamics. Each company is thus diversified when it's operating across multiple states. And at an overall portfolio level, we are even more diversified with our portfolio companies operating across various state jurisdictions.
The pie chart on company strategy in the middle shows that we have a healthy mix of companies across --those that have brands as their primary focus were those that are focused on setting up business infrastructure across multiple states as their primary strategy.
At the same time, if you see the pie chart on the right, we like the fact that most of our portfolio companies do have a vertically integrated operation structure that somewhat protects them from any supply chain issues if they occur in their state. So we feel good overall about the diversification embedded within our portfolio.
Turning to Slide 11, it shows a snapshot of our portfolio as of June 30. Companies A and B are [Shine] and PharmaCann, which were the investments we made last summer. Company C shows Curaleaf's 8% secured bonds due 2026. This investment was made at a significant discount to its par value.
Our bottom three investments have a floating rate loan structure. And so with Prime currently at 8.5%, these investments offer a pretty attractive return. Company D is one of our large positions in Verano's first-lien term loan, a transaction that was done in fourth quarter of last year. Company E [is present in] MariMed, which was an investment done earlier this year.
And in the second quarter, we made an investment in DreamFields Brands, Inc., shown as Company F. We talked about this investment briefly in our last earnings call. The company's brand, Jeeter, is one of the most recognized cannabis brands, especially in the pre-roll category and is experiencing strong growth across all its markets.
So overall, if you look at the top of the page, we have about $58 million invested with an average yield -- with a weighted average used to maturity of a little over 18%.
And a few additional points that we would like to highlight about this portfolio that an investor may want to consider when comparing Silver Spike Investment Corp. to other listed BDCs out there, first, all of our positions are first-lien loans or secured bonds, as you can see on this page.
Second, none of our loans or bonds are in non-accrual status. Third 86% of our portfolio is in floating rate loans. And lastly, our gross portfolio yield of over 18% compares favorably to the broader listed BDC universe and their portfolios.
So we believe our portfolio is attractive, and we also strongly believe that our portfolio companies are very well positioned in the industry for the longer term. And we remain extremely busy working on a number of very interesting opportunities. Our pipeline remains robust, and we hope to have more updates as we continue to deploy our capital and build our portfolio.
Moving to Slide 12, again, on the dividend announcement a little bit more. Our Board has approved a cash dividend of $0.63, $0.23 of regular quarterly dividend, and a special dividend of $0.40 per share.
As shown in the table, for the regular dividend as well as the special dividend, the record date is September 15, and the payment date is September 25. Further, we also expect that the Board will approve another similar-sized roughly special dividend to be paid during the last quarter of this year.
With that, I'll pass it back to the operator. Catherine?

Question and Answer Session

Operator

(Operator Instructions) Michael Lavery, Piper Sandler.

Michael Lavery

Thank you. Good morning.

Umesh Mahajan

Good morning, Michael. How are you?

Michael Lavery

Yes, I just was wondering if you could unpack your thinking on the special dividend in addition to the regular dividend and what drove that structure. And any other thoughts behind that there?

Umesh Mahajan

Absolutely. So as you are aware, we are BDC, and we are required to distribute over 90% of our net investment income to shareholders in the form of dividends. We started our operations middle of last year, and we have been ramping up our portfolio. And our tax year ends in March of every year.
So all the income that -- the net investment income that you have on through March is something -- is an amount that we have to take into account for making distributions this year.
So effectively, a special dividend that we have announced -- that the Board has announced here today is for a catch up in some form for the dividends that we should abate based on the net investment income that was earned until the March quarter end. And the regular dividend is effectively the dividend that we expect to pay on a regular basis based on a net investment income trend that we see going forward.

Michael Lavery

Okay. That's helpful.

Umesh Mahajan

Yes. And so to clarify, there are again in there two special dividends that we foresee. We have split them into two just so that we can finalize the exact levels of special dividend that we need to pay out based on the tax calculations.
And so the first special dividend is $0.40. The second one would be somewhat similar, but the number is not finalized yet and approved yet. But that could be paid later in the year before the calendar year gets over.

Michael Lavery

Okay, great. And just -- as I look ahead, can you give a sense of what other investments might be in the pipeline, and how do you expect some -- how much visibility you have on timing or what might be next?

Umesh Mahajan

Yes. So I think our pipeline is really, really robust, and we do have -- we're extremely busy looking at a number of opportunities. As you can appreciate, there's a lot going on in this industry across much most states, and we have been very deliberate and focused and disciplined on going through each one of the opportunities very carefully and doing a deep dive.
And I would not say that we have deliberately slowed down our deployment but a natural corollary of having to do a much deeper dive and deeper analysis and diligence on each of these opportunities has worked -- has led to a slightly different pace of deployment than what was expected earlier.
But I would say that in terms of what we see in our pipeline, it's a very healthy mix of really well-performing companies that are looking to raise capital opportunistically to expand into new states as they see the opportunity to go into new states and potentially either through organic growth or through M&A, but also a lot of the smaller companies who have smaller operators who have shown that they have the ability to be resilient.
There are a number of companies that have reached out to us who we do not really think are credit worthy, and it's -- but we are very happy with the pipeline that we see right now. Scott, do you have anything else to add?

Scott Gordon

I would just add to that, Michael, that -- and I've said this before in previous calls. And I think the same is true today that I think it behooves us to be extremely selective and patient and disciplined in terms of our deployment here.
And as Umesh alluded to, I think the market continues to come our way in terms of pricing and structure and terms. And we're in a position fortunately where we can really sort of pick and choose among the best and the most compelling opportunities in the space.
So we like to say that we're -- we have a patient sense of urgency to deploy the capital. I think, as you can see in the presentation, and as Umesh suggested that the pipeline does remain robust. It's really on us, and we're just being very, very careful in what has been an extremely challenging and market operating environment for our borrowers to make sure that we're positioning ourselves carefully in the opportunities that really sort of rise to the top.
So we feel good about it, we think. But the flipside of the industry challenges is really our opportunity. And so we feel very good in terms of where we're positioned and having dry powder to deploy.

Michael Lavery

Okay, great. Thanks so much.

Scott Gordon

You're welcome.

Operator

Thank you. And I'm showing no further questions. I'd like to turn the call back to management for any closing remarks as well.

Umesh Mahajan

Okay. Well, thank you, Catherine. Thank you, everyone, for taking the time to join us on this call this morning. We look forward to updating you further on our next call. In the meantime, if you have any questions on our earnings or on our dividends, please do not hesitate to reach out to our Investor Relations team. Thank you so much for joining today.

Operator

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