Quick Value #224 - Sunrise Realty (SUNS)
CRE spin-off coming July 9th
Today’s idea:
CRE finance spin-off
Large cash balance at $67m
Clean balance sheet with $115m assets and no debt
Positive net income and large potential earnings power
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Market Performance
Quick Value
Sunrise Realty (SUNS)
What they do…
Sunrise Realty is an upcoming spin-off from AFC Gamma (AFCG).
SpinCo is a CRE finance business starting out with 2 loans and $115m in total assets. RemainCo will continue operating their cannabis lending business. Both are externally managed by Leonard Tannenbaum’s firm, SRT.
How SUNS describes their model:
SUNS’ focus is on originating CRE debt investments and providing capital to high-quality borrowers and sponsors with transitional business plans collateralized by CRE assets with opportunities for near-term value creation, as well as recapitalization opportunities. SUNS intends to create a diversified investment portfolio, targeting investments in senior mortgage loans, mezzanine loans, whole loans, B-notes, CMBS and debt-like preferred equity securities across CRE asset classes.
Sunrise will start with 2 loans on the balance sheet at a $46m carrying value yielding ~16%. There’s an LOI out for another loan that hasn’t closed yet.
Total assets (and equity) will be $115m at the time of spin in some combination of cash and loans. Management highlighted a pipeline of $815m in lending opportunities but no framework or financial model for the company (i.e. overall targeted leverage, ideal loan portfolio, size, etc.).
Pro-forma earnings are $2.3m with the external management fee included and an assumption around yield on cash. There are another $0.9m public company costs + other G&A not included in that, so call it $1.4m run-rate net income per quarter with the existing portfolio ($5.6m annualized).
Why it’s interesting…
Small and likely overlooked
Solid balance sheet
Earnings potential
AFC Gamma is a $250m market cap and Sunrise will get a ~third of the existing equity and a quarter of the total assets in the spin. So this will be a small one. Pre-spin, AFC Gamma has book value at $310m and trades at 0.8x P/B. That same multiple would equate to a $92m market cap for Sunrise.
But Sunrise will be spun off with virtually no liabilities and a big slug of cash to deploy ($67m for now, but the final amount depends on whether they close on a loan prior to the spin). Maybe that deserves to trade closer to 1x book? At the same time it’s a highly concentrated portfolio of assets and probably will stay that way.
Based on 6.9m shares outstanding, tangible book value is $16/share.
What could potential earnings be?
Let’s say they lever up the $115m equity 2:1 and deploy $230m into CRE loans yielding a similar 16%. Call that $36m in annual interest income. With $115m financed at 8% = $9.2m interest expense. Throw in $6-7m for SG&A including the management fee and we get $20m or so annual earnings or $2.90/share on 6.9m shares outstanding. Probably need to incorporate some loan loss provisions in there too. G&A might creep higher by then, but it’s a starting point.
The external management situation is a bit squishy here. Both CRE loans at Sunrise were syndicated from the manager, SRT, who also participated in both loans. Their incentive fee has a low hurdle based on run-rate earnings, so G&A could ramp fairly quickly.
Summing it up…
This is an interesting little special situation. Maybe there’s an opportunity for a mispricing. AFCG is already trading slightly below CRE finance peers at 0.8x book and a ~16% dividend yield. But the balance sheet is in good shape (low assets/equity ratio).
Sunrise will have a great balance sheet to work with but it’s small and the track record untested…
Hmm…
Did you end up buying into this? Insiders buying aggressively last week around $11-12