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Edited Transcript of GSVC earnings conference call or presentation 7-Aug-19 9:00pm GMT

Q2 2019 Sutter Rock Capital Corp Earnings Call

WOODSIDE Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Sutter Rock Capital Corp earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allison Green

Sutter Rock Capital Corp. - CFO, Treasurer, Controller & Secretary

* Jackson Stone

* Mark David Klein

Sutter Rock Capital Corp. - President & CEO

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Conference Call Participants

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* Jon Robert Hickman

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Sutter Rock Capital's Second Quarter 2019 Earnings Conference Call. (Operators Instructions) This call is being recorded today, Wednesday, August 7, 2019.

I will now turn the conference over to Jackson Stone. Please go ahead, sir.

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Jackson Stone, [2]

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Thank you for joining us on today's call. I'm joined today by the Chief Executive Officer of Sutter Rock Capital, Mark Klein; and Chief Financial Officer, Allison Green.

Please note that a slide presentation that corresponds to today's prepared remarks by management is available on our website at www.sutterrock.com under Investor Relations Presentations.

Today's call is being recorded and broadcast live on our website, www.sutterrock com. Replay information is included in our press release issued earlier today. This call is the property of Sutter Rock Capital, any unauthorized reproduction of this call in any form is strictly prohibited.

I would also like to call your attention to customary disclosures in today's earnings press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance or future financial condition or results and involve a number of risks, estimates and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including, but not limited to, those described from time to time in the company's filings with the SEC.

Management does not undertake to update such forward-looking statements unless required to do so by law. To obtain copies of Sutter Rock Capital's latest SEC filing, please visit our website at sutterrock.com or the SEC's website at sec.gov.

Now I would like to turn the call over to Mark Klein.

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [3]

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Thank you, Jackson. We are pleased to share the results of Sutter Rock's second quarter 2019. First, I will review the recent quarter, which reflects the previously discussed expense reductions as a result of the internalization. Then I will provide an update on key developments in the portfolio. To conclude, I will hand the call over to Allison Green for a brief financial overview, and then we will open up the call for questions.

As announced last week, we have changed our name from GSV Capital to Sutter Rock Capital and our ticker from GSVC to SSSS, reflective of the internalization of the asset manager. As an internally managed BDC, with significant investable capital, we look forward to the ongoing management and construction of our portfolio to drive net asset value by executing on the strategy of making investments in leading institutionally-backed private companies with a clear path to liquidity.

Additionally, our Board of Directors has approved an additional $5 million for our share repurchase program. We believe that our portfolio is significantly undervalued and as such, have increased the share repurchase program to $25 million.

Let's start with Slide 3. At the end of the first quarter, net asset value was $10.75 per share, unchanged from $10.75 per share in the first quarter. Net asset value totaled approximately $211 million compared to $213 million in the first quarter. As our existing and new investments are continuing to perform, we expect to see meaningful growth in our net asset value.

As announced during our call on March 14, we transitioned to an internally-managed fund structure. We are excited about this initiative and believe this will continue to create tangible near-term and long-term value for shareholders as we just completed our first full quarter as an internally-managed BDC. The cost savings from operations are now reflected in our income statement. Later in the call, Allison Green will discuss other developments outside of the portfolio and explain the steps we are taking to increase overall shareholder return.

Please turn to slides 5 and 6. Our key area of focus continues to be selectively adding new companies to our investment portfolio. Accordingly, our team has expanded our sourcing network, which has allowed us to evaluate a wider range of deals in the marketplace. Throughout the quarter, we have visited with a number of disruptive industry-leading technologies. A few of industries of focus include financial technology, blockchain, consumer retail, e-commerce, health and wellness and logistics. In addition to expanding our investment opportunity set, we have also enhanced our diligence process. We have developed an extensive investment funnel and performed in-depth analysis at each stage of our process. Presently, of the opportunities we've analyzed, we are pleased to announce that we've committed to one new investment.

After the second quarter ended, we committed to invest $7.5 million in GreenAcreage Real Estate Corp., a real estate investment trust, which holds industrial and retail cannabis-related facilities, currently operated by Acreage Holdings. Cannabis operators have a significant need for capital as they grow, and commercial banks and traditional lenders will not lend to the cannabis industry. We believe these unique dynamics paired with the tremendous tailwinds and institutional capital behind the cannabis industry provide a unique opportunity for Sutter Rock to enter.

As a real estate operator that does not touch the plant, GreenAcreage is well positioned to take advantage of this opportunity. The organization is led by Gordon DuGan, who has significant experience running real estate investment trust. Gordon most recently served as the CEO of Gramercy Property Trust from 2012 until 2018, where he grew the company from approximately $300 million in total assets and ultimately sold it to Blackstone in 2018 for $7.6 billion.

A sophisticated institutioner -- institution that was recently an investor in innovative Industrial Properties will be GreenAcreage's largest investor. Innovative Industrial Properties is the first and only cannabis REIT to list on the New York Stock Exchange and has returned over 400% to investors since going public in December of 2016.

GreenAcreage has an exclusive partnership with Acreage, one of the largest vertically integrated multistate cannabis operators. Acreage has operating licenses for MSAs with license holders to assist in operations in 20 states, serving a population of approximately 180 million Americans and in an estimated addressable market in 2022 of $17 billion in legal Cannabis sales. Acreage has also entered an agreement to be acquired by Canopy Growth, a well-established Canadian cannabis operator that is listed on the New York and Toronto Stock Exchanges, with a market capitalization of almost $15 billion. They are viewed as the platinum standard for cannabis companies after receiving a $4 billion investment from Fortune 500 company, Constellation Brands.

In relationship with Acreage -- its relationship with Acreage provides GreenAcreage with an extensive pipeline of assets from a credit-worthy tenant. This will allow GreenAcreage to gain scale quickly, which should provide investors with an opportunity for liquidity in the near term. In addition to the industry opportunity, the management team and partnerships, Sutter Rock is entering at a significant discount to where innovative industrial property is currently traded, based on a multiple of funds from operations.

We are extremely excited to be entering this growing space and to be investing alongside the GreenAcreage team. Presently, our target is to invest $15 million cannabis real estate investment trust, with $7.5 million in GreenAcreage and an additional $7.5 million to be invested in an identified different company, which we expect to announce at a later date.

We are also excited to announce an additional follow-on investment into Aspiration Partners through a convertible note. Aspiration is an online bank whose objective is to offer socially-conscious and sustainable banking services and investment products. Aspiration has attracted over 1 million customers and continues to add 100,000 new clients each month. Its product has demonstrated success by appealing to a market that typically has been underbanked. More than half of Aspiration's customers are under 35 and only 6% of its customers within the New York City, Los Angeles and San Francisco Bay Area combined.

Since we initially invested, Aspiration has raised more than $100 million at escalating valuations from leading investors like Social Impact Finance, Allen and Company, Alpha Edison as well as celebrities such as Orlando Bloom, Leonardo DiCaprio, Doc Rivers and Jeff Skoll.

Beyond our new investments in GreenAcreage and Aspiration, we are utilizing our enhanced investment process to systematically source and evaluate investment opportunities in top VC/institutionally-backed companies that we believe will be leaders in their respective industries.

As stated on our previous earnings call, it is now our intention to hold public securities through a lock-up period and ensuing stabilization period. Accordingly, we sold our entire position in Spotify in the beginning of the second quarter for a sizable gain and have exited approximately 60% of our position in Dropbox. We will continue to monitor our Dropbox position and expect to monetize the remainder of our position in the near term.

Beyond Dropbox and Spotify, we are pleased to report noteworthy developments from Nextdoor and Enjoy. In May, Nextdoor raised $123 million Series C -- Series F round led by Riverwood Capital, with participation from existing investment -- investors Benchmark, Tiger and Kleiner Perkins. This round was at a valuation of approximately $2.1 billion, up from the $1.5 billion valuation we invested in -- less than a year ago. As reported by TechCrunch, Nextdoor's revenues doubled again in 2019, and Nextdoor is planning to use the new capital towards growing internationally, having just launched in Sweden and Denmark. Nextdoor plans to grow 3x faster across Europe in 2019 than it did last year. We are excited in all that Sarah Friar has accomplished since she's become the CEO and are confident in her ability to continue to execute on our stated growth plan.

Another position we'd like to highlight is Enjoy, which is now one of the top 10 positions in our portfolio. Enjoy is focused on reinventing the mobile retail store by sending an expert delivery person into customers' homes to deliver and seamlessly set up technology products. As was disclosed in public filings, Enjoy raised $75 million in funding in May. We are -- we initially invested in Enjoy in 2014, when CEO, Ron Johnson, the ex-Macy's CEO and ex-Head of Retail at Apple was raising Enjoy's Series A round. Since we invested, Enjoy has formed partnerships with companies like Google, AT&T and Sonos and is on its way to creating a nationally recognizable brand.

Please turn to Slide 7 and 8 for a review of notable developments in our investment portfolio in the first quarter and subsequent to quarter's end. Sutter Rock's top 5 positions as of June 30 were Palantir, Coursera, Lyft, Course Hero and Nextdoor. These positions accounted for approximately 60% of the investment portfolio at fair value. As of June 30, our top 10 positions accounted for approximately 86% of the portfolio. To put the evolution of our investment portfolio into perspective, the combined fair value of our top 5 positions as of June 30 was $110 million, or approximately 88% of Sutter Rock's $126 million total market capitalization at quarter's end. We believe this dynamic emphasizes a significant risk-reward opportunity for investment -- investors.

Segmented by 6 general investment themes, the top allocation of our investment portfolio is Education Technology, representing approximately 38% of the investment portfolio at fair value. Marketplaces was the second largest category, representing approximately 25% of the portfolio. Additionally, we are now breaking out financial technology as an investment theme as it accounted for approximately 8% of our portfolio at fair value. As we evaluate new investments, we are focused on investing in the themes we have historically had success in and on identifying new trends, we believe, represent compelling long-term opportunities.

Looking ahead, we believe that Sutter Rock is well positioned to deliver long-term shareholder value. We are executing against a disciplined growth investment strategy with strong tailwinds. We believe the fundamentals of our portfolio are strong, and the IPO environment continues to show signs of strength, which has historically been a catalyst for our stock.

Thank you for your attention. And with that, I will hand it over to Allison.

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Allison Green, Sutter Rock Capital Corp. - CFO, Treasurer, Controller & Secretary [4]

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Thank you, Mark. I would like to follow Mark's update with a more detailed review of our financial results as of June 30, 2019, and updates regarding our transition to an internally-managed BDC, our expense reduction initiatives, the share repurchase program and our current liquidity position.

We ended the second quarter with an NAV per share of $10.75. This is unchanged from Q1. A breakdown of NAV for the second quarter is shown on Slide 9 and is consistent with our financial reporting. In sum, the unchanged NAV during the second quarter was largely the result of a $0.69 per share increase related to net realized gain on investments during the quarter and a $0.05 per share increase due to adjusted tax positions, offset by a $0.63 per share decrease due to net unrealized depreciation of our portfolio investment and a $0.14 per share decrease from net investment loss.

The $0.69 per share increase due to net realized gain on investments in the second quarter was attributable to the gains realized on the sale of our remaining Spotify shares as well as the sale of nearly 60% of our publicly traded Dropbox shares during the quarter.

Please refer to Slide 10 for an update on our share repurchase program. During the second quarter, we began to see the cost savings effects from the internalization of our management of Sutter Rock. As discussed last quarter, as an internally managed BDC, we expect to have a significantly reduced cost structure. Upon termination of the investment advisory agreement on March 12, 2019, we no longer pay management fees each month as management is now employed directly by the BDC, and we no longer accrue an incentive fee.

Total operating expenses decreased by approximately 50% from the same quarter last year to a total of $3.3 million in the second quarter of 2019. The decrease was primarily due to the elimination of management fees, incentive fees and costs under the prior administration agreement.

From an operational perspective, in addition to the name change, Sutter Rock has also moved to a new permanent office in downtown San Francisco. The new office space lease provides direct savings compared to a portion of the expenses captured under the prior administration agreement.

Together, we believe our ongoing efforts to reduce the operating expenses and the meaningful cost savings we have already begun to realize as an internally managed BDC left continued positive impacts on NAV. We remain diligent about managing our expense base moving forward.

Now on Slide 10. During the second quarter, we repurchased 115,801 shares of Sutter Rock Capital common stock for approximately $700,000. To echo Mark's earlier comments, we are pleased to announce that our Board of Directors has authorized a $5 million expansion of the current share repurchase program to an aggregate of $25 million, which means approximately $9.1 million total repurchases under the program. Since commencement of the share repurchase program in August 2017, Sutter Rock has repurchased over 11% of its then-outstanding shares.

Finally, I would like to review Sutter Rock's current liquidity. We ended the second quarter with approximately $84.4 million of liquid assets, including $54.4 million of cash and $30 million of marketable securities, $19 million of which is restricted due to lockup provisions. Our cash balance increased during the quarter to $54.4 million as of June 30, 2019, primarily due to proceeds generated by the monetization of our Spotify and Dropbox position. The $30 million in marketable securities represents our remaining unrestricted holdings in Dropbox of $11 million at June 30 and our currently restricted $19 million position in Merck, subject to certain lockup agreements.

Subsequent to quarter end, we sold an additional 55,000 shares of Dropbox for $1.4 million in total proceeds, realizing an additional gain of approximately $500,000.

That concludes my comments. We would like to thank you for your interest and support of Sutter Rock Capital.

Now I will turn the call over to the operator to start the Q&A session. Operator?

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Questions and Answers

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Operator [1]

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[Operators Instructions) We'll take our first question from Jon Hickman of Ladenburg.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [2]

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Mark, could you tell me what your -- what percentage of the portfolio is in the education now and liquidity position?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [3]

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It's 38.6%.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [4]

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38.6%. And then I'm sorry, I was trying to catch up with everything you were saying about this cannabis company. Can you walk through who owns who again?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [5]

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Sure. The company that we're investing in is GreenAcreage. GreenAcreage is -- has a relationship with Acreage, who -- it's an exclusive partnership with them, so the right of first refusal of their properties. Acreage is into an agreement to be bought by Canopy Growth, which has a $4 billion investment of Constellation Brands.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [6]

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So Canopy is going to buy Acreage, but the -- that shouldn't change the relationship between GreenAcreage and (inaudible)?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [7]

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No. No. That's all connected.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [8]

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Connected, so it will be its subsidiary now. Okay.

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [9]

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But GreenAcreage makes up the company.

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Jon Robert Hickman, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Special Situations Analyst [10]

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Yes. But Acreage...

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [11]

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(inaudible)

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Operator [12]

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[Operators Instructions) We'll take our next question from [Ted Helen], Private Investor.

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Unidentified Participant, [13]

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Just a question on your -- what's your due diligence process as compared to the previous management?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [14]

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So it's -- I would say the following: We spend an awful lot of time with the management of our portfolio of companies or prospective portfolio companies on sites and channel checks, et cetera. So we do what you would expect us to do as very in-depth, typical due diligence.

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Unidentified Participant, [15]

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But didn't they do that as well?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [16]

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I believe that the team -- the way we -- we continue to spend a great deal and time and effort in our diligence process.

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Unidentified Participant, [17]

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Okay. Can I get another one in?

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [18]

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I think we have others waiting, but thanks a lot, Ted. I really appreciate it.

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Operator [19]

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[Operators Instructions) At this time, there are no further questions in the queue. I would like to turn the call back over to Mark Klein for closing remarks.

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Mark David Klein, Sutter Rock Capital Corp. - President & CEO [20]

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Thank you all very much for attending our conference call. We greatly appreciate your support, and feel free to contact us directly with any further questions. Thanks again.

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Operator [21]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.