Sunrise Realty Trust, Inc.(SUNS) - 2024 Q4 - Annual Report

Loan Origination and Investment Strategy - As of March 1, 2025, the company has a loan origination pipeline of approximately $1.4 billion in commercial real estate deal commitments under review[41] - The company plans to capitalize on a$ 2.0 trillion looming commercial real estate maturity by 2026, taking advantage of market dislocations and declining liquidity[45] - The company is focusing on the Southern U.S. due to positive demographic trends and a shortage in residential and commercial real estate supply[44] - The company has sourced a pool of approximately $40.7 billion in commercial real estate deals, indicating a strong market presence[41] - The company intends to build a diversified portfolio combining higher-yielding investments with stable senior mortgage loans to maximize risk-adjusted returns[49] - The company is currently negotiating definitive loan documents for potential investments, which remain subject to satisfactory completion of underwriting and due diligence[42] Market Position and Regulatory Environment - The company believes non-bank lenders can generate higher returns with lower leverage levels due to recent shifts in the credit market[43] - The company is not burdened by the same regulatory hurdles as traditional lenders, allowing for more flexible structuring of credit positions[43] - The company is subject to various regulations under U.S. federal and state laws, including the Dodd-Frank Act, which may impact its operations[112] - The company relies on the Section 3(c)(5) Exemption under the Investment Company Act, requiring at least 55% of its portfolio to consist of qualifying assets[115] Management and Compensation Structure - The Management Agreement has an initial term until February 22, 2027, with automatic annual renewals unless terminated with 180 days' notice[61] - The termination fee for unsatisfactory performance by the Manager is three times the average annual Base Management Fee and average annual Incentive Compensation earned during the previous 12 months[61] - An Internalization Transaction can occur when equity reaches or exceeds$ 1,000,000,000, with the initial offer price determined by a special committee of independent directors[65] - The Internalization Price is calculated as five times the sum of the annual Base Management Fee, annual Incentive Compensation, and aggregate Outside Fees earned during the previous 12 months[66] - The Investment Guidelines prohibit loans that would cause the company to fail as a REIT or be regulated as an investment company under the Investment Company Act[69] - The Investment Committee is responsible for reviewing loan opportunities and ensuring compliance with Investment Guidelines on at least a quarterly basis[71] - The allocation policy aims to distribute loan opportunities fairly among various investment vehicles managed by the Manager, considering factors like available capital and investment objectives[76] - The Manager has adopted a Conflicts of Interest Policy to guide compliance with legal standards and avoid conflicts in investment advisory activities[80] - The Manager has agreed to waive an additional $1.0 million in fees and the inclusion of net proceeds from the January 2025 Offering in the Company's Equity for management fee calculations until December 31, 2025, or until the proceeds are utilized[85] - Base Management Fees amount to 0.375% of the Company's Equity, payable quarterly in cash, and will not be less than zero regardless of portfolio performance[91] - Incentive Compensation is contingent upon achieving Core Earnings exceeding a Hurdle Amount, defined as 2% of Adjusted Capital from the previous quarter[94] - The calculation of Incentive Compensation includes a Catch-Up Amount and an Excess Earnings Amount based on Core Earnings exceeding specified thresholds[94] - The Manager's compensation includes reimbursement for expenses incurred on behalf of the Company, with specific allocations for personnel based on time spent on Company affairs[88] - The termination fee is equal to three times the sum of the annual Base Management Fee and annual Incentive Compensation earned during the previous 12 months[88] - The Company maintains a conflict of interest policy to manage potential conflicts arising from Covered Persons' personal and professional relationships[84] - The Manager is responsible for ensuring compliance with the conflict of interest policy and may delegate certain responsibilities to other Covered Persons[83] - The Company may grant equity-based awards under the 2024 Stock Incentive Plan to the Manager and other eligible awardees[90] - The definition of Equity for management fee calculations includes net proceeds from equity securities and retained earnings, adjusted for specific non-cash items[92] Financial Performance and Risk Management - The company has an Adjusted Capital of$ 100.0 million as of the last day of the immediately preceding fiscal quarter[102] - Core Earnings for the specified quarter represent a quarterly yield of 15.0% on Adjusted Capital, amounting to $3.75 million[102] - The Hurdle Amount is calculated at$ 2.0 million, based on a hurdle rate of 2.0% quarterly[103] - The hypothetical quarterly Incentive Compensation payable to the Manager would be $0.75 million, derived from the Catch-Up Amount and Excess Earnings Amount[103] - The Catch-Up Amount is approximately$ 666,667, calculated based on Core Earnings exceeding the Hurdle Amount[103] - The Excess Earnings Amount is approximately $83,333, calculated from Core Earnings exceeding 166-2/3% of the Hurdle Amount[103] - The company expects to continue to diversify its loan portfolio as loans in the pipeline are evaluated and originated through the deployment of capital[498] - The company is subject to interest rate risk, which could lead to a decline in net interest spread and net interest margin during periods of rising interest rates[488] - Credit risk is managed through a comprehensive review and selection process, with ongoing monitoring of loans for variance from expected performance[496] - The company’s loans are typically valued using a yield analysis, which may be affected by changes in market yields and recovery rates[489] - The company’s investment decisions will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic, and credit environments[497] Loan Portfolio Composition - As of December 31, 2024, the loan portfolio was concentrated with the top three borrowers representing approximately 49.0% of the aggregate outstanding principal balances and approximately 53.4% of the total loan commitments[498] - The company had six floating-rate loans as of December 31, 2024, representing approximately 79% of the portfolio based on aggregate outstanding principal balances[489] - A hypothetical 100 basis points increase in the floating benchmark rate would result in an increase in annual interest income of approximately$ 1.0 million[489] - The company evaluates its loans on a quarterly basis, with fair value determined by the Board through its independent Audit and Valuation Committee[484] - The company’s investment mix includes high-quality residential, retail, office, hospitality, industrial, and specialty-use real estate[481]