Sunrise Realty Trust (SUNS) risk factors, FY2024 10-K

Risks Related to Our Business and Growth Strategy

1. 01Competition for the capital investments that we make may reduce the return of these investments, which could adversely affect our operating results and financial condition
2. 02If we are unable to successfully integrate new CRE loans and manage our growth, our results of operations and financial condition may suffer
3. 03We will allocate our cash on hand and the proceeds of our financing activities without input from our shareholders
4. 04The due diligence process undertaken by our Manager in regard to our investment opportunities may not reveal all facts relevant to an investment and, as a result, we may experience losses, which could materially and adversely affect us
5. 05Our investments’ lack of liquidity may adversely affect our business
6. 06Our existing portfolio is, and our future portfolio may be, concentrated in a limited number of investments, which subjects us to an increased risk of significant loss if any asset declines in value
7. 07Our portfolio is concentrated in the Southern U.S., and we will be subject to economic and other risks of doing business in those geographic markets
8. 08The commercial mortgage loans we intend to originate and acquire are subject to the ability of the commercial property owner to generate net income from operating the property
9. 09The estimates of market opportunity and forecasts of market growth included in this registration statement may prove to be inaccurate. Even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all
10. 10In the event of borrower distress or a default, we may lack the liquidity necessary to protect our investment or avoid a corresponding default on any obligations we may have in connection with our own financing
11. 11We may need to foreclose on certain of the loans we originate or acquire, which could result in losses that materially and adversely affect us
12. 12Construction loans involve an increased risk of loss
13. 13Risks of cost overruns and non-completion of the construction or renovation of the properties underlying loans we originate or acquire could materially and adversely affect us
14. 14Investments we may make in CMBS may be subject to losses
15. 15We may not control the special servicing of the mortgage loans included in the CMBS in which we invest, and, in such cases, the special servicer may take actions that could adversely affect our interests
16. 16With respect to certain mortgage loans included in our CMBS investments, the properties that secure the mortgage loans backing the securitized pool may also secure one or more related mortgage loans that are not in the CMBS, which may conflict with our interests
17. 17The B-notes that we may acquire may be subject to additional risks related to the privately negotiated structure and terms of the transaction, which may result in losses to us
18. 18If our Manager overestimates the yields or incorrectly prices the risks of our investments, we may experience losses
19. 19Some of our investments may be recorded at fair value and, as a result, there will be uncertainty as to the value of these investments
20. 20Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments
21. 21We were recently formed and have limited operating history, and may not be able to operate our business successfully or to generate sufficient revenue to make or sustain distributions to our shareholders
22. 22We face risks associated with the deployment of our capital
23. 23Monetary policy actions by the United States Federal Reserve could adversely impact both our borrowers and our financial condition
24. 24Declines in market prices and liquidity in the capital markets can result in significant net unrealized losses of our portfolio, which in turn would reduce our book value
25. 25Provisions for loan losses are difficult to estimate
26. 26The investments and other assets we will acquire may be subject to impairment charges, and we may experience a decline in the fair value of our assets
27. 27Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions, and we cannot assure you that those ratings will not be downgraded
28. 28A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair our investments and harm our operating results
29. 29Investments in non-conforming and non-investment grade rated investments involve an increased risk of default and loss
30. 30Investments in subordinated mortgage interests, mezzanine loans and other assets that are subordinated or otherwise junior in a borrower’s capital structure may expose us to greater risk of loss
31. 31The CRE loans that we originate or acquire may be non-recourse loans, and the assets securing these loans may not be sufficient to protect us from a partial or complete loss if the borrower defaults on the loan, which could materially and adversely affect us
32. 32We may be subject to additional risks associated with CRE loan participations
33. 33If we originate or acquire CRE loans or CRE-related assets secured by liens on facilities that are subject to a ground lease and the ground lease is terminated unexpectedly, our interests in the loans or assets could be materially and adversely affected
34. 34Any distressed loans or other investments we make, or investments that later become non-performing, may subject us to losses and other risks relating to bankruptcy proceedings, which could materially and adversely affect us
35. 35There may be circumstances in which our investments could be subordinated to claims of other creditors, or we could be subject to lender liability claims
36. 36As a debt investor, we are often not in a position to exert influence on borrowers, and the shareholders and management of such borrowers may make decisions that could decrease the value of investments in such borrower
37. 37Insurance proceeds on a property may not cover all losses, which could result in the corresponding non-performance of or loss on our investment related to such property
38. 38Prepayment rates may adversely affect the yield on our loans and the value of our portfolio of assets
39. 39CRE valuation is inherently subjective and uncertain
40. 40Our investments expose us to risks associated with debt-oriented real estate investments generally
41. 41We may invest in derivative instruments, which would subject us to increased risk of loss
42. 42If the loans that we originate or acquire do not comply with applicable laws, we may be subject to penalties, which could materially and adversely affect us
43. 43We may not control the servicing of mortgage loans in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests
44. 44Liability relating to environmental matters may impact the value of our loans or of properties that we may acquire upon foreclosure of the properties underlying our investments
45. 45Climate change has the potential to impact the properties underlying our investments
46. 46Subject to the approval of our Board (which must include a majority of our independent directors), our Manager may change our investment strategies or guidelines, financing strategies or leverage policies without the consent of our shareholders
47. 47State licensing requirements may cause us to incur expenses, and our failure to be properly licensed may have a material adverse effect on us
48. 48We depend on our Manager and its affiliates to develop appropriate systems and procedures to control operational risk
49. 49We may not be able to obtain or maintain required licenses and authorizations to conduct our business and may fail to comply with various state and federal laws and regulations applicable to our business
50. 50We may be subject to claims by third parties asserting that we have caused our, our Manager’s or our Manager’s affiliates’ directors, officers, employees, consultants or advisors to breach the terms of their non-competition or non-solicitation agreement
51. 51An epidemic or pandemic (such as the outbreak and worldwide spread of COVID-19) could materially and adversely impact or cause disruption to our borrowers and their operations, and in turn our ability to continue to execute our business plan
52. 52The outcome of the 2024 presidential election could materially and adversely impact or cause disruption to our borrowers and their operations, and in turn our ability to continue to execute our business plan

Risks Related to Sources of Financing Our Business

1. 53Our growth depends on external sources of capital, which may not be available on favorable terms or at all
2. 54If general economic instability or downturn leads to an inability to borrow at attractive rates or at all, our ability to obtain capital to finance our investments could be negatively impacted
3. 55For our borrowed money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us
4. 56Global economic, political and market conditions could have a significant adverse effect on our business, financial condition, liquidity and results of operations, including a negative impact on our ability to access the debt markets on favorable terms
5. 57We may incur significant debt, which may subject us to restrictive covenants and increased risk of loss and may reduce cash available for distributions to our shareholders
6. 58Our indebtedness may affect our ability to operate our business, and may have a material adverse effect on our financial condition and results of operations
7. 59We may not be able to generate sufficient cash flow to meet our debt service obligations
8. 60Any lending facilities will impose restrictive covenants
9. 61Any bank credit facilities that we may use in the future to finance our operations may require us to provide collateral or pay down debt
10. 62Adoption of the Basel III standards and other proposed supplementary regulatory standards may negatively impact our access to financing or affect the terms of our future financing arrangements
11. 63Hedging against interest rate exposure may adversely affect our earnings, limit our gains or result in losses, which could adversely affect cash available for distribution to our shareholders
12. 64We are subject to counterparty risk associated with our hedging activities

Risks Related to the Spin-Off

1. 65We have limited history of operating as an independent company, and our historical financial information is not necessarily representative of the results that we would have achieved as a separate, publicly-traded company and may not be a reliable indicator of our future results
2. 66Following the Spin-Off, our financial profile changed, and we are a smaller, less diversified company than AFC prior to the Spin-Off
3. 67The terms we received in our agreements with AFC and its subsidiaries involve potential conflicts of interest and could be less beneficial than the terms we may have otherwise received from unaffiliated third parties
4. 68Some of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in AFC

Risks Related to Our Organization and Structure

1. 69These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management
2. 70Our authorized but unissued shares of common stock and preferred stock may prevent a change in control of our Company
3. 71The Maryland General Corporation Law prohibits certain business combinations, which may make it more difficult for us to be acquired
4. 72The Charter contains provisions that make removal of our directors difficult, which could make it difficult for our shareholders to effect changes to management
5. 73Ownership limitations contained in the Charter may restrict change of control or business combination opportunities in which our shareholders might receive a premium for their shares
6. 74Maintenance of our exemption from registration under the Investment Company Act may impose significant limits on our operations. Your investment return in our common stock may be reduced if we are required to register as an investment company under the Investment Company Act
7. 75Rapid and steep declines in the values of our commercial real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the Investment Company Act
8. 76Our rights and the rights of our shareholders to recover on claims against our directors and officers are limited, which could reduce our and our shareholders’ recovery against them if they negligently cause us to incur losses

Risks Related to Our Relationship with our Manager and its Affiliates

1. 77agreement that is ultimately entered into. This could, in turn, have a material adverse effect on our business, financial condition and results of operations, and our ability to pay dividends to our shareholders
2. 78Our growth depends on the ability of our Manager to make loans on favorable terms that satisfy our investment strategy and otherwise generate attractive risk-adjusted returns initially and consistently from time to time
3. 79There are various conflicts of interest in our relationship with our Manager that could result in decisions that are not in the best interests of our shareholders
4. 80can be no assurance that any procedural protections will be sufficient to ensure that these transactions will be made on terms that will be at least as favorable to us as those that would have been obtained in an arm’s-length transaction
5. 81The ability of our Manager and its officers and employees to engage in other business activities may reduce the time our Manager spends managing our business and may result in certain conflicts of interest
6. 82Terminating our Management Agreement for unsatisfactory performance of our Manager or electing not to renew the Management Agreement may be difficult and terminating our Management Agreement in certain circumstances requires payment of a substantial termination fee
7. 83Even if we terminate our Management Agreement for cause, we may be required to continue to retain our Manager for 30 days following the occurrence of events giving rise to a for-cause termination
8. 84The Incentive Compensation payable to our Manager under the Management Agreement may cause our Manager to select riskier loans to increase its Incentive Compensation
9. 85Our Manager manages our portfolio in accordance with very broad investment guidelines and our Board does not approve each loan and financing decision made by our Manager, which may result in us making riskier loans than those currently comprising our existing portfolio
10. 86Our Manager may change its investment process, or elect not to follow it, without the consent of our shareholders and at any time, which may adversely affect our loans
11. 87We do not have a policy that expressly prohibits our directors, managers, officers, shareholders or affiliates, as applicable, from engaging for their own account in business activities of the types conducted by us
12. 88Our Manager is subject to extensive regulation as an investment adviser, which could adversely affect its ability to manage our business
13. 89In addition to other analytical tools, our Manager may utilize financial models to evaluate loan opportunities, the accuracy and effectiveness of which cannot be guaranteed
14. 90Our Manager’s and its affiliates’ liability is limited under the Management Agreement, and we have agreed to indemnify our Manager against certain liabilities. As a result, we could experience poor performance or losses for which our Manager and its affiliates would not be liable

Risks Related to Our Taxation as a REIT

1. 91Failure to qualify as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our shareholders
2. 92Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows
3. 93REIT distribution requirements could adversely affect our ability to execute our business plan and liquidity and may force us to borrow funds during unfavorable market conditions
4. 94Complying with REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive loans
5. 95The tax on prohibited transactions will limit our ability to engage in certain loans involving the sale or other disposition of property or that would otherwise subject us to a 100% penalty tax
6. 96Legislative, regulatory or administrative tax changes related to REITs could materially and adversely affect our business
7. 97Dividends payable by REITs generally do not qualify for reduced tax rates applicable to qualified dividend income
8. 98If we were considered to have actually or constructively paid a “preferential dividend” to certain of our shareholders, our status as a REIT could be adversely affected
9. 99The ability of our Board to revoke our REIT election without shareholder approval may cause adverse consequences to our shareholders
10. 100Complying with REIT requirements may limit our ability to hedge our operational risks effectively and may cause us to incur tax liabilities
11. 101To the extent the business interest deductions of our subsidiaries, if any, are deferred or disallowed, our taxable income may exceed our cash available for distributions to shareholders
12. 102The “taxable mortgage pool” rules may increase the taxes that we or our shareholders may incur, and may limit the manner in which we effect future securitizations

Risks Related to our Common Stock

1. 103The market price for our common stock may be volatile, which could contribute to the loss of all or part of your investment
2. 104The value of our equity securities could be materially and adversely affected by our level of cash distributions
3. 105Future offerings of debt securities, which would rank senior to our common stock upon a bankruptcy liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the value of our capital stock
4. 106We may in the future pay distributions from sources other than our cash flow from operations, including borrowings, offering proceeds or the sale of assets, which means we will have less funds available for investments or less income-producing assets and your overall return may be reduced
5. 107Our failure to meet the continued listing requirements of Nasdaq could result in a delisting of our common stock
6. 108Our Board may change our policies without shareholder approval
7. 109There is a risk that shareholders may not receive distributions or that such dividends may not grow over time
8. 110As one of our significant shareholders and a significant beneficial owner of our Manager, Leonard M. Tannenbaum, our Executive Chairman, can exert significant influence over our corporate actions and important corporate matters
9. 111We are an “emerging growth company” and a “smaller reporting company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies will make shares of our common stock less attractive to investors
10. 112We incur significant costs as a result of being a public company, and such costs may increase when we cease to be an emerging growth company and/or smaller reporting company
11. 113Ineffective internal controls could impact our business and operating results
12. 114We rely on information technology in our operations, and security breaches and other disruptions in our systems could compromise our information and expose us to liability, which would cause our business and reputation to suffer
13. 115Future sales of our capital stock or other securities convertible into our capital stock could cause the value of our common stock to decline and could result in dilution of your shares of our common stock
14. 116Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud