Sunrise Realty Trust, Inc. ($SUNS)

Good morning, and welcome to the Sunrise Realty Trust Fourth Quarter and Fiscal Year 2025 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Gabriel Katz, Chief Legal Officer. Please go ahead.

Good morning, and thank you all for joining Sunrise Realty Trust's Earnings Call for the quarter and fiscal year ended December 31, 2025. I'm joined this morning by Leonard Tannenbaum, our Executive Chairman; Brian Sedrish, our Chief Executive Officer; and Brandon Hetzel, our Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our February 10, 2026 press release and is posted on the Investor Relations portion of our website at sunriserealtytrust.com, along with our fourth quarter and fiscal year 2025 earnings release and investor presentation. Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, market developments, our investment pipeline, anticipated portfolio yield and financial performance and projections in 2026 and beyond. These statements are subject to inherent uncertainties in predicting future results. Please refer to Sunrise Realty Trust's most recent periodic filings with the SEC, including our annual report on Form 10-K filed earlier this morning for certain conditions and significant factors that could cause actual results to differ materially from these forward-looking statements and projections. During today's conference call, management will refer to non-GAAP financial measures, including distributable earnings. Please see our fourth quarter and fiscal year earnings release uploaded to our website for reconciliations of the non-GAAP financial measures with the most directly comparable GAAP measures. The format for today's call is as follows: Len will provide a general business and capital markets overview. Next, Brian will cover our view on the state of the commercial real estate lending markets and discuss our existing portfolio. Then Brandon will provide an update on our financial position. After that, we'll open the lines for Q&A. With that, I will now turn the call over to our Executive Chairman, Leonard Tannenbaum.

Thank you, Gabe. Good morning, and welcome to our fourth quarter and fiscal year 2025 earnings conference call. As we finished 2025 and turn to 2026, we remain focused on providing loans to sponsors of transitional real estate business plans, primarily in the Southern United States. Our portfolio construction remains similar to how we began the year with a focus on residential loans, which are mainly senior secured and floating rate. From a broader real estate market perspective, 2025 also seemed to be a transition year. We saw limited transaction volume in early '25, which gave way to improving conditions in the second half as the Federal Reserve's rate easing cycle took hold. As a reminder, SUNS -- SUNS is an important part of the TCG real estate platform. The platform consists of a number of funds focused on sourcing, underwriting and investing in commercial real estate loans. The affiliation with our platform provides SUNS with a scalable infrastructure, debt and equity capital markets expertise and the ability to pursue larger transactions than it could currently pursue on its own. During the fiscal year ended December 31, 2025, the TCG real estate platform closed on $368 million of loans, of which SUNS committed $247 million and funded $224 million. Additionally, during the 2025 fiscal year, SUNS received $52 million of repayments. As of February 27, the TCG real estate platform has closed on $91 million of loans this year, with SUNS committing $62 million of that total. For the quarter ending December 31, 2025, SUNS generated distributable earnings of $0.27 per share per basic weighted average share of common stock. Earnings were impacted by the loan to Thompson Hotel in San Antonio, which we foreclosed on less than 2 weeks ago. In line with our policies, we placed the loan on nonaccrual during the fourth quarter, which reduced distributable earnings by approximately $0.03 a share. Had this loan been on accrual, distributable earnings would have been approximately $0.30 per share. Looking ahead, the Board of Directors has declared a $0.30 dividend per share for the quarter ended March 31, 2026. We remain focused on paying a dividend that is consistent with the earnings power of the business over the medium term. I'm also pleased to announce that subsequent to the quarter end, we increased our revolving credit facility to $165 million with the addition of Customers Bank, who has committed $25 million. As a reminder, our revolving credit facility originally established in November of 2024 remains expandable to $200 million and carries an interest rate at 2.75% over SOFR with a 2.63% floor. With that, I'll turn it over to Brian to walk through our portfolio in more detail.

Thank you, Len, and good morning, everyone. Before turning to our current portfolio and pipeline, I wanted to take a minute to discuss what we are seeing generally in the commercial real estate market. Over the last year, we have observed a clear bifurcation emerge across the lending market between lenders that have largely worked through their problem loans and can remain on offense and those still constrained by legacy portfolio issues. Many lenders that are currently on offense remain focused on multifamily and industrial assets, where spreads are tight and continue to compress. In these more commoditized segments, return targets are largely achieved through leverage and capital markets arbitrage rather than fundamental credit expertise. Our approach is differentiated. We focus on originating commercial mortgage loans for sponsors executing transitional business plans, situations that demand a more structured bespoke solution. Our team's depth of experience in pre-stabilization strategies and complex deal structures allows us to identify and underwrite opportunities that many lenders choose not to pursue. We believe these core competencies position us to capture the most compelling risk-adjusted opportunities in today's market. Critically, our focus on structuring complexity and asset level expertise enables us to generate superior unleveraged returns, reducing our reliance on financial leverage to meet target yields and providing more durable foundation for performance across market cycles. Turning to our portfolio. In the fourth quarter of 2025, SUNS closed on $56 million of commitments, which include approximately $26 million in a financing package comprised of 2 senior loans for collection suites, a small bay industrial for-sale development consisting of 2 projects located in Doral and West Palm Beach, Florida; and a $30 million loan in a senior bridge for the financing of a 7-story Class A retail property in the Galleria section of Houston, Texas. From year-end through March 1, SUNS committed approximately $62 million to 2 loans originated by the TCG real estate platform. One was a $14 million commitment to a senior bridge loan for the acquisition of a premier Ranch property in Southern Colorado, which has already been repaid. And the second is a $48 million B note to refinance a 15-property portfolio of graduate by Hilton Hotels. These investments reflect our broader strategy of partnering with top-tier sponsors who share our vision for creating and investing in high-quality real estate projects. Turning to our portfolio management efforts. On March 3, we took ownership of the Thompson Hotel in San Antonio, the 20-story mixed-use hotel in condominium consists of 162 hotel rooms and was delivered and opened in 2021. The property sits in a premier location in San Antonio along the Riverwalk and is viewed as a Class A hotel situated in one of the nation's top 10 cities by population. Despite slower-than-expected hotel operations, we believe the hotel's medium- to long-term prospects are attractive. Of note, the loan carries a personal guarantee from the borrower covering certain shortfalls, which we intend to pursue. Prior to and following the foreclosure event, numerous hospitality companies have reached out to us inquiring about the prospects of acquiring the asset. Over the next week, we intend to hire a premier broker to market the asset. We believe that the SUNS portfolio is well positioned from an interest rate perspective as 97% of our current portfolio's outstanding principal is floating rate with floors of on a weighted average, 3.9%. Given these floors in place across our loan book, our credit line with an approximate floor of 2.6% presents a potential opportunity to expand SUNS' net interest margin. I remain confident in the opportunity set ahead and look forward to capitalizing on the attractive opportunities currently in front of us. With that, I will now turn the call over to Brandon Hetzel, our CFO.

Thank you, Brian. For the quarter ended December 31, 2025, we generated net interest income of $5.2 million and distributable earnings of $3.5 million or $0.27 per basic weighted average common share and had GAAP net income of $1.6 million or $0.12 per basic weighted average common share. For the full year ended December 31, 2025, we generated net interest income of $21.6 million and distributable earnings of $15.2 million or $1.19 per basic weighted average common share and had GAAP net income of $12.1 million or $0.93 per basic weighted average common share. We believe that providing distributable earnings is helpful to shareholders in assessing the overall performance of SUNS' business. Distributable earnings represents net income computed in accordance with GAAP, excluding noncash items such as stock compensation expense, unrealized gains or losses and the provision for current expected credit losses, also known as CECL. We ended the fourth quarter of 2025 with $420.7 million of current commitments and $305.5 million of principal outstanding spread across 16 loans. As of February 27, 2026, our portfolio, excluding the Thompson Hotel, consisted of $442.1 million of current commitments and $337 million of principal outstanding across 16 loans with a weighted average portfolio yield to maturity of approximately 12%. I'd also like to note that as of December 31, 2025, our CECL reserve was approximately $2.1 million or 68 basis points for our loans held at carrying value. As of December 31, 2025, we had total assets of $310.2 million, and our total shareholder equity was $182 million with a book value of $13.56 per share. As Len mentioned earlier, the Board of Directors has declared a $0.30 dividend per share for the quarter ended March 31, 2026. The dividend will be paid on April 15, 2026, to shareholders of record as of March 31, 2026. With that, I will now turn it back over to the operator to start the Q&A.

[Operator Instructions] Our first question comes from the line of Timothy D'Agostino of B. Riley Securities.

Regarding originations, the $62 million you committed was in February. And given recent market volatility, uncertainty, disruption, however you want to characterize it, could you just talk us through how the investment opportunity and the market for you all looks given we're seeing the 10-year kind of tick back up. It'd be great to just kind of understand how the market dynamics have changed throughout the course of 2026 so far.

Yes, sure. Thanks for the question. It's Brian. So yes, certainly, the volatility in the market has created some ups and downs, started the year in 2026, where what we saw, as I mentioned in some of the prepared remarks, a real dichotomy between the spreads on multifamily and industrial, in particular, existing assets continuing to tighten, I think largely led by price tightening in the senior market, CLO market, the warehouse line market. That's really not an era, as you know, that we've been focused on. And what that did is it created a bit more gap and an opportunity for us to see more of the types of transitional deals that we're focused on. And that definitely seemed to happen. You also seem to see a gap tighten between buyers and sellers. So there is more opportunity on new acquisitions. All that being said, the last couple of weeks have definitely created more uncertainty. Rates, as you mentioned, going back up, really are creating a bit of a question mark as to whether or not a deal makes sense or not. I expect that will continue. We're in the business of finding where there's opportunities for -- to take advantage of dislocation in the market. And I think that is where the opportunity will sit for the next foreseeable future. I think that sort of volatility creates opportunities for us. But it's definitely like everyone else, a bit of a wait and see to see how things settle out.

Our next question comes from the line of Gaurav Mehta of Alliance Global Partners.

I wanted to ask on the loan pipeline. I think in your deck, you showed $652 million, which is lower than [ $1.7 billion ] in the last quarter. So does that reflect your -- I guess, your comments about market volatility? And I guess, what kind of dropped off that loan pipeline in the last, I guess, couple of months?

Sure. Thanks for the question. It's Brian again. Yes, it does trail off the last question and answer. Definitely, there has been a differentiation in terms of pricing on the multifamily and industrial side. And we just have been more discerning. I mean we have a focus on going after transactions that we think have long-term durability $650 million is still in our mind, a really strong pipeline, particularly in light of the amount of capital available for us to invest. And everyone has sort of just taken the view of let's focus on very highly actionable deals and remove those that create more noise and distraction for us. And I expect, as I'm sure you've seen a lot of the companies, those things will come up and down in terms of the pipeline. But we thought we wanted to call and reflect what we felt was a more focused area for us in the next couple of months.

All right. That's helpful. Second question on the hospitality asset in San Antonio. Can you maybe provide some more color on why that asset foreclosed? Anything specific about that asset?

Yes, sure. So the Thompson in San Antonio, a really high-quality asset. Obviously, Thompson flag, which is the Hyatt flag, 162 keys. The asset -- look, San Antonio has had a bunch of deliveries recently. There's a lot of positivity in that market, but there's been a bunch of deliveries. The asset was from a pricing perspective, high, our loan interest rate. The asset has taken longer to ramp up. There's been some specific things as it relates to the management of that hotel. And ultimately, just taking longer and the sponsor's ability to continue to put dollars in became harder and harder. As we mentioned in the prepared remarks, we do have a series of personal guarantees, which we intend to pursue. But ultimately, that was just the decision where until cash flow came back to be able to support the asset's operations, which we do believe in the medium term is achievable. The sponsor just didn't have the capability to continue to service the loan. I mean just to add to that, I mean, it's a very high-quality asset. Like I said, it was built very recently in 2021. I think from everyone that stays there, everyone you speak to, it's a high-quality asset. It's just unfortunately an issue with cost of capital right now and the fact that there's been some deliveries that are currently constraining cash flows.

All right. And then maybe lastly, on the dividend, $0.30, it seems like it's higher than $0.27 earnings in 4Q. How should we expect, I guess, your target dividend coverage in respect to where the earnings are?

Look, our goal -- this is Len speaking. The goal is not to overpay our dividend. So I think the Board looking forward, felt comfortable that we would get this covered over the course of the next 6 to 12 months in aggregate.

our next question comes from the line of Tyler Batory of Oppenheimer.

Just wanted to clean up a few items and to double-click on the San Antonio asset. Just help us think about the ideal resolution there, perhaps the time line as well. And I just want to be clear, I mean, it sounds like this is a very asset-specific sort of issue and not reflective of anything that's going on broader in the portfolio. But just wanted to be sure that, that's the case in your view.

Yes. I think you saw this -- this is Len speaking. I think you saw the asset was a 3. So it was on our watch list. We sort of knew that this could happen. We were hoping it didn't. The resolution was clean, which was nice, too. It was a clean foreclosure, was no delay to it. It was necessary as there's additional value that could be gained depending on whether the flag is renewed or not. And so our intention, I think Brian said that, is to hire a premier broker as soon as we can. That sounds like about a week from now and market -- again, market the product. And we believe we're going to find a buyer for it. So this is around next quarter, we should ask a lot of questions about why.

Great. And in terms of building up the East West Bank facility, $140 million to $165 million. I know there's potential to get that to $200 million. Is that something you're expecting in the next couple of quarters? And just kind of talk us through sources of capital here as we move through 2026.

So one thing that's been frustrating to me about the nonaccrual or the property is it comes out of our borrowing base. And we proactively told our banks and when we dealt with this. So we're not able to relever the asset. And that's one reason why earnings are a bit lower and our availability is a bit lower. So as soon as we resolve what you're going to look for to sort of see re-momentum or additional momentum towards positive earnings and all that good stuff is this asset getting resolved. Because I think maybe we pointed out or maybe I skipped your last question, this really is the only asset that we're concerned about at this time. And then you could see that we'll move assets into Category 3, 4 and 5 as we find more concern over assets. So this is really only our only concerned asset. It's definitely an issue. We know we have to resolve it quickly. And that's going to do 2 things: one, put more money and do more good deals, but also two, expand our borrowing base.

Okay. And I think the last one for me, hopefully tie a lot of this commentary together. When you reflect on 2025, when you look at 2026 so far, just kind of frame for us how capital deployment is really trending versus your plans 1, 1.5 years ago when you came public. Just trying to get a reference point in terms of how things have gone in the past couple of quarters versus what you were hoping or versus what you were expecting.

Sure. And those often diverge in terms of hope and expect. Look, I think largely, I will say without question, that the view and projections that we all make is really dependent in large part on the opportunity set and the evolving opportunity set. And it was clear there was significant opportunity from a spread basis to put out really interesting deals, which is really was the whole premise of really starting the business back in 2023, 2024. There were a really good opportunity set. Then we saw spreads tighten, which was fine because our capital base, as you know, is not that significant, so we can be highly selective. Last year, really reflected the fact that the markets tightened up, the opportunity set, rates didn't drop as quickly. The opportunity set was a bit thinner than expected. We were able to get out some capital and what we thought was interesting deals. I think the most important thing is making sure we're not going after deals just to stretch. The end of '25, really things started to break a bit. There seem to be definitely a tighter gap between buyer and sellers bids, which meant more acquisitions. And certainly, as you know, that is highly correlated to the opportunity set for us is just more acquisitions. Refinancing certainly happened. There seemed to be more of a capitulation on the refinancing side in terms of incumbent lenders wanting or forcing their borrowers. And then I would say, though, that things have been a bit more tumultuous right now, just given back to an earlier question, the uncertainty in the markets, treasuries being where they are, which, as you know, cap rates are often correlated there. So I think there'll be a bunch of volatility for the time being. I mean, largely in our type of business, as I mentioned in the prepared remarks, I mean, we really are in more of the off-the-run interesting transactions. And I think those always create opportunities in times of uncertainty, and there are several we're looking at now. And so I'm hopeful, look, we're going to get through generally the macro issues, at least I hope so in the near future. And that will create more opportunities. In the meantime, as I said, this volatility does create pretty interesting opportunities for guys like us.

Let's turn back over to Brian Sedrish for closing remarks. Sir?

Well, thank you very much for all for us for joining. We look forward to talking to you on next quarterly conference call. Thank you.

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