Sunrise Realty Trust, Inc. 10-Q

Item 1. Financial Statements SUNRISE REALTY TRUST, INC. BALANCE SHEETS As of June 30, 2024 December 31, 2023 (unaudited) Assets Loans held for investment at carrying value, net $ 37,593,224 $ — Current expected credit loss reserve ( 37,421 ) — Loans held for investment at carrying value, net of current expected credit loss reserve 37,555,803 — Cash and cash equivalents 11,285,046 31,244,622 Interest receivable 585,227 — Prepaid expenses and other assets 55,000 — Total assets $ 49,481,076 $ 31,244,622 Liabilities Due to affiliate $ 2,274 $ — Current expected credit loss reserve 34,433 — Accounts payable and other liabilities 533,659 10,000 Total liabilities 570,366 10,000 Commitments and contingencies (Note 5) Shareholder’s equity Member's Equity — 31,234,622 Preferred stock, par value $ 0.01 per share, 10,000 and 0 shares authorized at June 30, 2024 and December 31, 2023, respectively, and 0 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively — — Common stock, par value $ 0.01 per share, 50,000,000 and 0 shares authorized at June 30, 2024 and December 31, 2023, respectively, and 100 and 0 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively 1 — Additional paid-in capital 45,399,999 — Accumulated earnings (deficit) 3,510,710 — Total shareholder’s equity 48,910,710 31,234,622 Total liabilities and shareholder’s equity $ 49,481,076 $ 31,244,622 See accompanying notes to the financial statements 1 Index SUNRISE REALTY TRUST, INC. STATEMENTS OF OPERATIONS (unaudited) Three months ended June 30, 2024 Six months ended June 30, 2024 Revenue Interest income $ 1,979,576 $ 4,005,882 Total revenue 1,979,576 4,005,882 Expenses General and administrative expenses 21,025 21,568 Professional fees 372,954 636,372 Total expenses 393,979 657,940 (Increase) decrease in provision for current expected credit losses ( 71,854 ) ( 71,854 ) Net income $ 1,513,743 $ 3,276,088 Earnings per common share: Basic and diluted earnings per common share (in dollars per share) $ 0.22 $ 0.48 Weighted average number of common shares outstanding: Basic and diluted weighted average shares of common stock outstanding (in shares) 6,889,032 6,889,032 See accompanying notes to the financial statements 2 Index SUNRISE REALTY TRUST, INC. STATEMENTS OF SHAREHOLDER’S EQUITY (unaudited) Three months ended June 30, 2024 Member's Equity Preferred Stock Common Stock Additional Paid-In Capital Accumulated Earnings (Deficit) Total Shareholder's Equity Shares Amount Balance as of March 31, 2024 $ — $ — 100 $ 1 $ 45,399,999 $ 1,996,967 $ 47,396,967 Net income — — — — — 1,513,743 1,513,743 Balance as of June 30, 2024 $ — $ — 100 $ 1 $ 45,399,999 $ 3,510,710 $ 48,910,710 Six months ended June 30, 2024 Member's Equity Preferred Stock Common Stock Additional Paid-In Capital Accumulated Earnings (Deficit) Total Shareholder's Equity Shares Amount Balance as of December 31, 2023 $ 31,234,622 $ — — $ — $ — $ — $ 31,234,622 Capital Contributions — — — — 17,000,000 — 17,000,000 Distributions — — — — ( 2,600,000 ) — ( 2,600,000 ) Effect of corporate conversion on member's equity ( 31,234,622 ) — 100 1 30,999,999 234,622 — Net income — — — — — 3,276,088 3,276,088 Balance as of June 30, 2024 $ — $ — 100 $ 1 $ 45,399,999 $ 3,510,710 $ 48,910,710 See accompanying notes to the financial statements 3 Index SUNRISE REALTY TRUST, INC. STATEMENT OF CASH FLOWS (unaudited) Six months ended June 30, 2024 Operating activities: Net income $ 3,276,088 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Increase (decrease) in provision for current expected credit losses 71,854 Accretion of deferred loan original issue discount and other discounts ( 35,236 ) Changes in operating assets and liabilities Interest receivable ( 585,227 ) Prepaid expenses and other assets ( 55,000 ) Accounts payable and other liabilities 525,933 Net cash provided by (used in) operating activities 3,198,412 Cash flows from investing activities: Issuance of and fundings on loans ( 50,822,722 ) Principal repayment of loans 13,264,734 Net cash provided by (used in) investing activities ( 37,557,988 ) Cash flows from financing activities: Proceeds from capital contributions 17,000,000 Distributions ( 2,600,000 ) Net cash provided by (used in) financing activities 14,400,000 Net (decrease) increase in cash and cash equivalents ( 19,959,576 ) Cash and cash equivalents, beginning of period 31,244,622 Cash and cash equivalents, end of period $ 11,285,046 Supplemental disclosure of non-cash activity: OID withheld from funding of loans $ 281,888 Supplemental information: Interest paid during the period $ — Income taxes paid during the period $ — See accompanying notes to the financial statements 4 Index SUNRISE REALTY TRUST, INC. NOTES TO THE FINANCIAL STATEMENTS As of June 30, 2024 (unaudited) 1. ORGANIZATION Sunrise Realty Trust, Inc. (the “Company” or “SUNS”) (f/k/a CRE South LLC) was formed on August 28, 2023, and converted from a Delaware limited liability company to a Maryland corporation in February 2024. As of June 30, 2024 , SUNS was a wholly-owned subsidiary of AFC Gamma, Inc. (“AFC Gamma”) and an institutional lender to the commercial real estate sector. SUNS is externally managed and advised by Sunrise Manager LLC (“SUNS Manager” or the “Manager”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), to provide debt capital solutions to commercial real estate markets in the Southern United States. SUNS focuses on originating, underwriting and managing commercial real estate (“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, commercial mortgage-backed securities (“CMBS”) and debt-like preferred equity securities across CRE asset classes. SUNS intends for its investment mix to include high quality residential, including multi-family, condominiums and single-family communities, retail, office, hospitality, industrial, mixed use and specialty-use real estate. Spin-Off On February 22, 2024, AFC Gamma announced that its Board unanimously approved a plan to spin-off AFC Gamma’s CRE portfolio into an independent, publicly traded company, SUNS (the “Spin-Off”). SUNS intends to elect to be taxed as a real estate investment trust (“REIT”) for United States federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the taxable year ending December 31, 2024. The Spin-Off was effected by the transfer of AFC Gamma’s CRE portfolio from AFC Gamma to SUNS and the distribution of all of the outstanding shares of SUNS’ common stock, par value $ 0.01 per share (the “Common Stock”) to all of AFC Gamma’s shareholders of record as of the close of business on July 8, 2024 (the “Record Date”). AFC Gamma’s shareholders of record as of the Record Date received one share of SUNS Common Stock for every three shares of AFC Gamma common stock held as of the Record Date. The Spin-Off was completed July 9, 2024 (the “Distribution Date”). On the Distribution Date, SUNS became an independent, publicly traded company, trading on the Nasdaq Capital Market under the symbol “SUNS”. AFC Gamma retained no ownership interest in the Company following the Spin-Off. SUNS has historically operated as a part of AFC Gamma; consequently, stand-alone financial statements have not historically been prepared. In connection with the Spin-Off, the Company entered into several agreements with AFC Gamma that govern the relationship between the Company and AFC Gamma following the Spin-Off, including the Separation and Distribution Agreement and the Tax Matters Agreement. These agreements provide for the allocation between AFC Gamma and SUNS of the assets, liabilities and obligations (including, among others, investments, property and tax-related assets and liabilities) of AFC Gamma and its subsidiaries attributable to periods prior to, at and after the Spin-Off. Moreover, in preparation for the Spin-Off, the management of SUNS entered into a new management agreement with SUNS Manager, which became effective concurrently with the completion of the Spin-Off. The Manager also entered into an Administrative Services Agreement (the “Administrative Services Agreement”) with TCG Services LLC, an affiliate of the Manager and Leonard Tannenbaum, the Company’s Executive Chairman, and Robyn Tannenbaum, the Company’s President. The Company operates in one operating segment and is primarily focused 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. The Company 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. The Company intends for its investment mix to include high quality residential, including multi-family, condominiums and single-family communities, retail, office, hospitality, industrial, mixed use and specialty-use real estate. 5 Index The Company intends to elect to be taxed as a REIT for United States federal income tax purposes under the Code, commencing with the taxable year ending December 31, 2024. The Company generally will not be subject to United States federal income taxes on its REIT taxable income as long as it annually distributes all of its REIT taxable income prior to the deduction for dividends paid to shareholders and complies with various other requirements as a REIT. 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited interim financial statements should be read in conjunction with the audited financial statements and the related management’s disclosure and analysis of financial condition and results of operations included in the Company’s final Information Statement included as Exhibit 99.1 to the Company’s Registration Statement on Form 10, initially filed on February 22, 2024, as amended, and declared effective July 2, 2024 (File No. 001-41971) by the U.S. Securities and Exchange Commission (the “SEC”), the final version of which was included as Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC on July 3, 2024 (the “Information Statement”). Refer to Note 2 to the Company’s financial statements in the Information Statement for a description of the Company’s significant accounting policies. The Company has included disclosures below regarding basis of presentation and other accounting policies that (i) are required to be disclosed quarterly, (ii) have material changes or (iii) the Company views as critical as of the date of this report. Basis of Presentation The historical financial statements of SUNS are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In accordance with GAAP, certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and liabilities or contingent liabilities at the date of the financial statements. They also may affect the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates upon subsequent resolution of identified matters. The historical financial statements of SUNS are prepared from AFC Gamma’s historical accounting records and are presented on a standalone basis as if SUNS operations have been conducted independently from AFC Gamma. Intracompany transactions have been eliminated. Transactions between the Company and AFC Gamma have been included in these financial statements. For those transactions between the Company and AFC Gamma that have been historically settled in cash, the Company has reflected such balances in the Balance Sheets as Due from Affiliates or Due to Affiliates. The aggregate net effect of transactions between the Company and related parties that have been historically settled other than in cash are reflected in the Balance Sheets as Member’s Equity and Shareholder’s Equity and in the Statements of Cash Flows as Proceeds from Capital Contributions and Distributions. For additional information, see Note 10, “Related Party Transactions,” and Note 6, “Shareholder’s Equity.” Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Significant estimates include the current expected credit losses (“CECL”). Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023 - 07— Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, early adoption is permitted. The amendments should be applied retrospectively to all prior period s presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently evaluating the impact of the update on the Company’s future financial statements. 6 Index In December 2023, the FASB issued ASU 2023-09—Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 improves the transparency of income tax disclosures related to rate reconciliation and income taxes. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied prospectively, however retrospective application is permitted. The Company does not currently anticipate that adoption of ASU 2023-09 will have a material impact on the financial statements. 3. LOANS HELD FOR INVESTMENT AT CARRYING VALUE As of June 30, 2024 and December 31, 2023, t he Company’s portfolio included two and zero loans held at carrying value, respectively. The aggregate originated commitment under these loans was approximately $ 57.7 million and zero , resp ectively, and outstanding principal was approximately $ 37.8 million and zero , respectively, as of June 30, 2024 and December 31, 2023. During the six months ended June 30, 2024, the Company funded approximately $ 51.1 million of new loans and additional principal and had approximately $ 13.3 million of principal repayments of loans held at carrying value. As of June 30, 2024 and December 31, 2023, approximately 43 % and zero , respectively, of the Company’s loans held at carrying value had floating interest rates. As of June 30, 2024, t hese floating benchmark rates included one-month Secured Overnight Financing Rate (“SOFR”) subject to a floor of 4.0 % and quoted at 5.3 %. The following table summarizes the Company’s loans held at carrying value as of June 30, 2024: As of June 30, 2024 Outstanding Principal (1) Original Issue Discount Carrying Value (1) Weighted Average Remaining Life (Years) (2) Senior mortgage loans (3) $ 16,209,825 $ — $ 16,209,825 0.4 Subordinate debt 21,630,051 ( 246,652 ) 21,383,399 2.9 Total loans held at carrying value $ 37,839,876 $ ( 246,652 ) $ 37,593,224 1.8 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted OID and loan origination costs. (2) Weighted average remaining life is calculated based on the carrying value of each respective group of loans as of June 30, 2024. (3) Senior mortgage loans include senior loans that also have a contiguous subordinate loan because as a whole, the expected credit quality of the subordinate loan is more similar to that of a senior loan. The following table presents changes in loans held at carrying value as of and for the six months ended June 30, 2024: Principal Original Issue Discount Carrying Value Total loans held at carrying value at December 31, 2023 $ — $ — $ — New fundings 51,104,610 ( 281,888 ) 50,822,722 Accretion of original issue discount — 35,236 35,236 Loan repayments ( 13,264,734 ) — ( 13,264,734 ) Total loans held at carrying value at June 30, 2024 $ 37,839,876 $ ( 246,652 ) $ 37,593,224 7 Index A more detailed listing of the Company’s loans held at carrying value portfolio based on information available as of June 30, 2024 is as follows: Description Outstanding Principal (1) Original Issue Discount Carrying Value (1) Interest Rate Maturity Date (2) Payment Terms (3) Mixed-use senior mortgage loan (Houston, TX) $ 16,209,825 $ — $ 16,209,825 20.0 % (4) 11/30/2024 I/O Residential subordinate debt (Sarasota, FL) 21,630,051 ( 246,652 ) 21,383,399 13.0 % (5) 5/12/2027 I/O Total loans held at carrying value $ 37,839,876 $ ( 246,652 ) $ 37,593,224 (1) The difference between the Carrying Value and the Outstanding Principal amount of the loans consists of unaccreted OID and loan origination costs. (2) Certain loans are subject to contractual extension options and may be subject to performance based or other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications. (3) I/O = interest-only, P/I = principal and interest. P/I loans may include interest-only periods for a portion of the loan term. (4) Base weighted average interest rate of 14.7 % plus SOFR (SOFR floor of 4.0 %). Cash interest rate represents a blended rate of differing cash interest rates applicable to each of the senior and subordinate loans to which the Company is a lender under the credit agreements. The subordinate loan component bears interest at a base interest rate of 15.31 % plus SOFR (SOFR floor of 4.0 %) and the senior loan component bears interest at a base interest rate of 3.48 % plus SOFR (SOFR floor of 4.0 %). (5) Base interest rate of 13.0 % . 4. CURRENT EXPECTED CREDIT LOSSES The Company estimates its current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broader range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform the “CECL Reserve” using a model that considers multiple datapoints and methodologies that may include discounted cash flows (“DCF”) and other inputs, which may include the risk rating of the loan, how recently the loan was originated compared to the measurement date and expected prepayment, if applicable. Calculation of the CECL Reserve requires loan specific data, which may include the fixed charge coverage ratio, loan-to-value ratio, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including but not limited to the expected timing of loan repayments and the Company’s current and future view of the macroeconomic environment. The Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve, which may include (i) whether cash from the borrower’s operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and (iii) the liquidation value of collateral. For loans where the Company has deemed the borrower/sponsor to be experiencing financial difficulty, the Company may elect to apply a practical expedient in which the fair value of the underlying collateral is compared to the amortized cost of the loan in determining a specific CECL allowance. As of June 30, 2024 and December 31, 2023, the Company’s CECL Reserve for its loans held at carrying value is approximately $ 71.9 thousand and zero , respectively, or 0.19 % and zero , respectively, of the Company’s total loans held at carrying value of approximately $ 37.6 million and zero , respectively, and is bifurcated between the current expected credit loss reserve (contra-asset) related to outstanding balances on loans held at carrying value of approximately $ 37.4 thousand and zero , respectively, and a liability for unfunded commitments of approximately $ 34.4 thousand and zero , respectively. The liability was based on the unfunded portion of the loan commitment over the full contractual period over which the Company is exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. 8 Index Activity related to the CECL Reserve for outstanding balances and unfunded commitments on the Company’s loans held at carrying value as of and for the three and six months ended June 30, 2024 was as follows: Outstanding (1) Unfunded (2) Total Balance at March 31, 2024 $ — $ — $ — Increase (decrease) in provision for current expected credit losses 37,421 34,433 71,854 Write-offs — — — Recoveries — — — Balance at June 30, 2024 $ 37,421 $ 34,433 $ 71,854 Outstanding (1) Unfunded (2) Total Balance at December 31, 2023 $ — $ — $ — Increase (decrease) in provision for current expected credit losses 37,421 34,433 71,854 Write-offs — — — Recoveries — — — Balance at June 30, 2024 $ 37,421 $ 34,433 $ 71,854 (1) As of June 30, 2024, the CECL Reserve related to outstanding balances on loans held at carrying value is recorded within current expected credit loss reserve in the Company’s balance sheets. (2) As of June 30, 2024, the CECL Reserve related to unfunded commitments on loans held at carrying value is recorded within current expected credit loss reserve as a liability in the Company’s balance sheets. The Company continuously evaluates the credit quality of each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, projected cash flow, loan structure and exit plan, loan-to-value ratio, fixed charge coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows: Rating Definition 1 Very Low Risk — Investment exceeds performance expectations. Trends and risk factors since time of investment are favorable. 2 Low Risk — Investment performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable. 3 Medium Risk — Performing investments requiring closer monitoring. Trends and risk factors show some deterioration. 4 High Risk/ Potential for Loss — Investment underperforming with the potential of some interest loss. Trends and risk factors are negative. 5 Impaired/ Loss Likely — Investment underperforming with expected loss of interest and full recovery of principal is unlikely. The risk ratings are primarily based on historical data as well as taking into account future economic conditions. As of June 30, 2024, the carrying value, excluding the CECL Reserve, of the Company’s loans held at carrying value within each risk rating by year of origination is as follows: Risk Rating: 2024 Total 1 $ 16,209,825 $ 16,209,825 2 21,383,399 21,383,399 3 — — 4 — — 5 — — Total $ 37,593,224 $ 37,593,224 9 Index 5. COMMITMENTS AND CONTINGENCIES As of June 30, 2024 and December 31, 2023, the Company had the following commitments to fund various investments: As of June 30, 2024 As of December 31, 2023 Total original loan commitments $ 57,663,334 $ — Less: drawn commitments ( 51,104,610 ) — Total undrawn commitments $ 6,558,724 $ — The Company from time to time may be a party to litigation in the normal course of business. The Company investigates these claims as they arise. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. As of June 30, 2024, the Company is not aware of any legal claims that could materially impact its business, financial condition or results of operations. 6. SHAREHOLDER’S EQUITY Conversion On February 20, 2024, the Company completed a corporate conversion, converting from a Delaware limited liability company to a Maryland corporation. Pursuant to the certificate of incorporation effected in connection with the corporate conversion, the Company’s authorized capital stock consists of 50,000,000 shares of voting Common Stock and 10,000 shares of Preferred Stock (defined below), par value $ 0.01 per share. Preferred Stock As of June 30, 2024 and December 31, 2023, the Company authorized 10,000 and zero shares of preferred stock, par value $ 0.01 per share (the “Preferred Stock”), respectively, of which none have been issued. The Company’s Board of Directors has the authority, without action by our shareholders, to issue up to 10,000 shares of Preferred Stock in one or more series or classes and to designate the rights, preferences and privileges of each series or class, which may be greater than the rights of SUNS’ Common Stock. There were no shares of Preferred Stock designated or outstanding as of June 30, 2024 and December 31, 2023, respectively. Common Stock As of June 30, 2024 and December 31, 2023, the Company authorized 50,000,000 and zero shares of Common Stock, respectively, and issued 100 and zero of Common Stock, respectively. Spin-Off On July 1, 2024, the SUNS Board approved a forward stock split of shares of the Company’s Common Stock, at a ratio of 68,890.32 -for-one (to be effected in the form of a stock dividend for purposes of the Maryland General Corporation Law), pursuant to which 68,890.32 additional shares of SUNS Common Stock shall be issued for each outstanding share of SUNS Common Stock (the “Forward Stock Split”), payable prior to the consummation of the Spin-Off. The Forward Stock Split took effect immediately prior to the distribution of the shares of common stock of SUNS to the shareholders of AFC Gamma common stock. As a result of the Forward Stock Split, the number of outstanding shares of SUNS Common Stock increased to 6,889,032 shares outstanding as of July 8, 2024. The Spin-Off was effected by the transfer of AFC Gamma’s CRE portfolio from AFC Gamma to SUNS and the distribution of all of the outstanding shares of SUNS Common Stock to all of AFC Gamma’s shareholders of record as of the close of business on July 8, 2024. AFC Gamma’s shareholders of record as of the Record Date received one share of SUNS Common Stock for every three shares of AFC Gamma common stock held as of the close of business July 8, 2024, the Record Date for the distribution, as well as a cash payment in lieu of any fractional shares. The Spin-Off was completed July 9, 2024. Immediately after the Spin-Off, the Company was no longer a wholly owned subsidiary of AFC Gamma. 10 Index 7. EARNINGS PER SHARE On July 8, 2024, the date of the Spin-Off, all of the outstanding shares of SUNS Common Stock were distributed to AFC Gamma’s shareholders of record as of the close of business on July 8, 2024 and AFC Gamma’s shareholders received one share of SUNS Common Stock for every three shares of AFC Gamma common stock held. As a result, the number of outstanding shares of SUNS Common Stock increased to 6,889,032 shares outstanding as of July 8, 2024. This share amount is utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Spin-Off. For the three and six months ended June 30, 2024, these shares are treated as issued and outstanding for purposes of calculating historical earnings per share. For periods prior to the Spin-Off, it is assumed that there are no dilutive equity instruments, as there were no equity awards of SUNS outstanding prior to the Spin-Off. The following information sets forth the computations of basic and diluted weighted average earnings per common share for the three and six months ended June 30, 2024: Three months ended June 30, 2024 Six months ended June 30, 2024 Net income attributable to common shareholders $ 1,513,743 $ 3,276,088 Divided by: Basic and diluted weighted average shares of common stock outstanding 6,889,032 6,889,032 Basic and diluted weighted average earnings per common share $ 0.22 $ 0.48 8. INCOME TAX Historically, the Company was a wholly-owned subsidiary of AFC Gamma, and was a disregarded entity for tax purposes. As such, the Company did not file a tax return. The Company’s entire share of taxable income or loss was previously included in the tax return of AFC Gamma. The Company was formed on August 28, 2023 and converted from a Delaware limited liability company to a Maryland corporation in February 2024. The Company intends to elect to be taxed as a REIT for U.S. federal income tax purposes, commencing with the taxable year ending December 31, 2024. The Company believes that, commencing with such taxable year, the Company is organized and operated in such manner as to qualify for taxation as a REIT under the U.S. federal income tax laws, and the Company intends to continue to operate in such a manner. However, no assurances can be given that our beliefs or expectations will be fulfilled, since qualification as a REIT depends on our continuing to satisfy numerous asset, income, and distribution tests, which in turn depends, in part, on our operating results. The Company will elect to be taxed as a REIT only if the Company believes that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws, and that our method of operation will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws for such taxable year and thereafter. So long as the Company qualifies for taxation as a REIT, the Company generally will not be subject to U.S. federal income tax on the portion of our taxable income or capital gain that is distributed to stockholders annually. The income tax provision for the Company was zero for the three and six months ended June 30, 2024 . For the three and six months ended June 30, 2024 , the Company incurred no expense for U.S. federal excise tax. Excise tax represents a 4 % tax on the sum of a portion of the Company’s ordinary income and net capital gains not distributed during the period. If it is determined that an excise tax liability exists for the current period, the Company will accrue excise tax on estimated excess taxable income as such taxable income is earned. The expense is calculated in accordance with applicable tax regulations. The Company does not have any unrecognized tax benefits and the Company does not expect that to change in the next 12 months. 9. FAIR VALUE Fair Value of Financial Instruments GAAP requires disclosure of fair value information about financial instruments, whether or not recognized at fair value in the balance sheets, for which it is practicable to estimate that value. 11 Index The following table details the book value and fair value of the Company’s financial instruments not recognized at fair value in the unaudited interim balance sheets as of June 30, 2024 : As of June 30, 2024 Carrying Value Fair Value Financial assets: Cash and cash equivalents $ 11,285,046 $ 11,285,046 Loans held for investment at carrying value $ 37,593,224 $ 37,612,761 Estimates of fair value for cash and cash equivalents are measured using observable, quoted market prices, or Level 1 inputs. The Company’s loans held for investment are measured using unobservable inputs, or Level 3 inputs. 10. RELATED PARTY TRANSACTIONS As of June 30, 2024 , SUNS was a wholly-owned subsidiary of AFC Gamma and was externally managed and advised by AFC Management, LLC, (“AFCG’s Manager”), a registered investment adviser under the Advisers Act, and an affiliate of Leonard Tannenbaum, SUNS’ Executive Chairman, and Robyn Tannenbaum, SUNS’ President. Each of the Company’s officers was employed by AFCG’s Manager and certain of the Company’s officers are members of AFCG’s Investment Committee. Concurrent with the completion of the Spin-Off, SUNS is externally managed by SUNS Manager, an investment adviser with overlapping ownership to AFCG’s Manager and an affiliate of Mr. Tannenbaum and Mrs. Tannenbaum. Until the completion of the Spin-Off, there was no management fee or incentive fee incurred by the Company. Management Agreement On February 22, 2024, SUNS and its external manager, SUNS Manager, entered into a management agreement (the “Management Agreement”), effective upon the listing of SUNS Common Stock. Following the completion of the Spin-Off, the Company is managed by its Board of Directors and the Company’s executive officers and by SUNS Manager, as provided for under our Management Agreement. Pursuant to the Management Agreement, the Manager manages the loans and day-to-day operations of the Company, subject at all times to the further terms and conditions set forth in the Management Agreement and such further limitations or parameters as may be imposed from time to time by the Company’s Board. The Manager receives base management fees (the “Base Management Fees”) that are calculated and payable quarterly in arrears, in an amount equal to 0.375 % of the Company’s Equity (as defined in the Management Agreement), subject to certain adjustments, less 50 % of the aggregate amount of any other fees (“Outside Fees”), including any agency fees relating to the Company’s loans, but excluding the Incentive Compensation (as defined below) and any diligence fees paid to and earned by the Manager and paid by third parties in connection with the Manager’s due diligence of potential loans. In addition to the Base Management Fees, the Manager is entitled to receive incentive compensation (the “Incentive Compensation” or “Incentive Fees”) with respect to each fiscal quarter (or portion thereof that the Management Agreement is in effect) based upon the Company’s achievement of targeted levels of Core Earnings. “Core Earnings” is defined in the Management Agreement as, for a given period, the net income (loss) for such period, computed in accordance with GAAP, excluding (i) non-cash equity compensation expense, (ii) Incentive Compensation, (iii) depreciation and amortization, (iv) any unrealized gains or losses or other non-cash items that are included in net income for the applicable reporting period, regardless of whether such items are included in other comprehensive income or loss, or in net income and (v) one-time events pursuant to changes in GAAP and certain non-cash charges, in each case after discussions between the Manager and the Company’s independent directors and approved by a majority of the independent directors. 12 Index Administrative Services Agreement On July 8, 2024, SUNS Manager entered into the Administrative Services Agreement with TCG Services LLC, an affiliate of SUNS Manager, Mr. Tannenbaum and Mrs. Tannenbaum. The Administrative Services Agreement sets forth the terms on which TCG Services LLC will provide SUNS certain administrative services, including providing personnel, office facilities, information technology and other equipment and legal, accounting, human resources, clerical, bookkeeping and record keeping services at such facilities as well as other services. The Company shall pay all of its allocable costs and expenses or shall reimburse the Manager or its affiliates for such expenses paid or incurred on behalf of the Company by the Manager or its affiliates, excepting only those expenses that are specifically the responsibility of the Manager pursuant to the Management Agreement. Due to Affiliate Amounts due to an affiliate of the Company as of June 30, 2024 and December 31, 2023 were approximately $ 2.3 thousand and zero , respectively. Investments in Loans From time to time, the Company may co-invest with other investment vehicles managed by the SUNS Manager or its affiliates, including by means of splitting loans, participating in loans or other means of syndicating loans. The Company is not obligated to provide, nor has it provided, any financial support to the other managed investment vehicles. As such, the Company’s risk is limited to the carrying value of its investment in any such loan. Additionally, SUNS Manager or its affiliates, may from time to time serve as administrative and collateral agents to the lenders under our co-investments. As of June 30, 2024, there were two co-invested loans held by the Company and affiliates of the Company. 11. SUBSEQUENT EVENTS The Company has evaluated subsequent events through the date the financial statements were available to be issued. There were no material subsequent events, other than those described below, that required disclosure in these unaudited interim financial statements. In July 2024, SUNS and an affiliate of SUNS entered into a senior secured credit facility for a total aggregate commitment amount of approximately $ 35.2 million for the refinance of an active adult multi-family residential rental development in southwest Austin, Texas. SUNS committed a total of approximately $ 14.1 million and the affiliate committed the remaining approximately $ 21.1 million. The senior loan was issued at a discount of 1.0 % and matures in three years . At closing, the Company funded approximately $ 11.4 million and the affiliate funded approximately $ 17.0 million. The loan bears interest at a rate of SOFR plus 4.25 %, with a rate index floor of 4.75 %. The credit facility is secured by a deed of trust on the property and any deposit and reserve accounts established by the terms of the credit facility. The proceeds of the loan will be used to, among other things, fund the completion of construction and other reserves and refinance existing debt. In July 2024, SUNS and an affiliate of SUNS entered into a senior secured credit facility for a total aggregate commitment amount of $ 42.0 million for the refinance of a luxury hotel component of a 20 -story mixed-use project in San Antonio, Texas. SUNS committed a total of approximately $ 27.3 million , and the affiliate committed the remaining $ 14.7 million . The senior loan was issued at a discount of 1.0 % and matures in three years . At closing, the Company funded approximately $ 25.0 million and the affiliate funded approximately $ 13.5 million . The loan bears interest at a rate of SOFR plus 6.35 % , with a rate index floor of 4.50 % . The is secured by a first-priority mortgage on the property and a security interest in all of the equity interests held by the borrower. The proceeds of the credit facility will be used to, among other things, fund the completion of reserves and refinance existing debt. 13 Index In August 2024, SUNS and affiliates entered into a $ 75.0 million senior secured revolving credit facility and a $ 85.0 million senior secured term credit facility for a total aggregate commitment amount of $ 160.0 million for the construction of a master-planned single-family residential home community and property development in Palm Beach Gardens, Florida. SUNS committed a total of approximately $ 18.8 million and $ 21.3 million to the revolving loan and term loan, respectively, and funded $ 8.8 million and $ 18.8 million towards each respective loan at close. Affiliates committed the remaining $ 56.3 million and $ 63.8 million towards the revolving loan and term loan, funding $ 26.3 million and $ 56.3 million , respectively, at close. The term loan and secured revolver were each issued at a discount of 1.25 %. The revolving loan bears interest at a rate of SOFR plus 6.25 % , with a rate index floor of 4.0 % , and unused fee of 2.0 %. The proceeds of the revolving loan will be used to, among other things, fund the completion of reserves, fund home construction costs and refinance existing debt. The term loan bears an interest rate of SOFR plus 8.25 % , with a rate index floor of 4.0 % . The proceeds of the senior loan will be used to, among other things, fund the completion of construction and other reserves and refinance existing debt. The term loan and the secured revolver each mature in three years . The loans are each secured by senior first mortgage lien on the property and a security interest in all of the equity interests held by the borrower. Brian Sedrish was appointed as Chief Executive Officer (“CEO”), effective July 1, 2024. In connection with his recent appointment as CEO, the Company granted Mr. Sedrish 36,363 shares of restricted stock, which vest over a three-year period with approximately 33 % vesting on each of the first, second and third anniversaries of July 9, 2024. In August 2024, the Company’s Board of Directors declared a partial quarter cash dividend of $ 0.21 per common share for the quarter ending September 30, 2024, which will be paid on October 15, 2024 to shareholders of record as of September 30, 2024, and a regular cash dividend of $ 0.42 per common share for the quarter ending December 31, 2024, which will be paid on January 15, 2025 to shareholders of record as of December 31, 2024. Spin-Off On July 9, 2024, Sunrise Realty Trust, Inc. became an independent, publicly traded company, trading on the Nasdaq Capital Market under the symbol “SUNS”. The Spin-Off was effected by the transfer of AFC Gamma’s CRE portfolio, from AFC Gamma to SUNS and the distribution of all of the outstanding shares of SUNS Common Stock to all of AFC Gamma’s shareholders of record as of the close of business on July 8, 2024. AFC Gamma’s shareholders of record as of the Record Date received one share of SUNS Common Stock for every three shares of AFC Gamma common stock held as of the Record Date. AFC Gamma retained no ownership interest in the Company following the Spin-Off. Prior to the Spin-Off, AFC Gamma contributed approximately $ 115 million to the Company in connection with the Spin-Off, comprised of SUNS’ loan portfolio and cash. In connection with the Spin-Off, the Company entered into several agreements with AFC Gamma that govern the relationship between the Company and AFC Gamma following the Spin-Off, including the Separation and Distribution Agreement and the Tax Matters Agreement. These agreements provide for the allocation between AFC Gamma and SUNS of the assets, liabilities and obligations (including, among others, investments, property and tax-related assets and liabilities) of AFC Gamma and its subsidiaries attributable to periods prior to, at and after the Spin-Off. Moreover, in connection with the Spin-Off, the management of SUNS will be assigned to Sunrise Manager LLC and SUNS entered into a new management agreement with SUNS Manager, which became effective concurrently with the completion of the Spin-Off on July 9, 2024. SUNS Manager also entered into the Administrative Services Agreement with TCG Services LLC, an affiliate of SUNS Manager and Mr. Tannenbaum and Mrs. Tannenbaum. 14 Index CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this “Quarterly Report”), filed by Sunrise Realty Trust, Inc. (the “Company,” “SUNS,” “we,” “us,” and “our”), and the information incorporated by reference in it, or made in other reports and filings with the SEC contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend such statements to be covered by the safe harbor provisions contained therein. Some of the statements contained in this Quarterly Report, other than statements of current or historical facts, are forward-looking statements and are based on our current intent, belief, expectations and views of future events. The forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results or performance, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “project,” “could,” “would,” “will,” “can,” “continuing,” “may,” “aim,” “intend,” “ongoing,” “plan,” “predict,” “potential,” “should,” “seeks,” “likely to” or words or phrases of similar meaning. Specifically, this report includes forward-looking statements regarding (i) our portfolio and strategies for the growth of our commercial real estate lending business; (ii) our working capital, liquidity and capital requirements; (iii) potential state and federal legislative and regulatory matters; (iv) our expectations and estimates regarding certain tax, legal and accounting matters, including the impact on our financial statements and/or those of our borrowers; (v) our expectations regarding our portfolio companies and their businesses, including demand, sales volume, profitability, and future growth; (vi) the amount, collectability and timing of cash flows, if any, from our loans; (vii) our expected ranges of originations and repayments; (viii) estimates relating to our ability to make distributions to our shareholders in the future; and (ix) our investment strategy. These forward-looking statements reflect management’s current views about future events, and are subject to risks, uncertainties and assumptions. Our actual results may differ materially from the future results and events expressed or implied by the forward-looking statements. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following: • we have no recent history of operating as an independent company, and our historical and pro forma 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; • following the Spin-Off, our financial profile will change, and we will be a smaller, less diversified company than AFC Gamma prior to the Spin-Off; • the ability of our Manager to locate suitable loan opportunities for us and to monitor and actively manage our portfolio and implement our investment strategy; • our ability to identify a successful business and investment strategy and execute on our strategy; • the ability of our Manager to locate suitable loan opportunities for us and to monitor and actively manage our portfolio and implement our investment strategy; • our expected ranges of originations and repayments; • the allocation of loan opportunities to us by our Manager; • our projected operating results; • changes in general economic conditions, in our industry and in the commercial finance and real estate markets; • the state of the U.S. economy generally or in specific geographic regions; • the impact of a protracted decline in the liquidity of credit markets on our business; • the amount, collectability and timing of our cash flows, if any, from our loans; • our ability to obtain and maintain financing arrangements; • our expected leverage; • changes in the value of our loans; • losses that may arise due to the concentration of our portfolio in a limited number of loans and borrowers; • our expected investment and underwriting process; • the rates of default or recovery rates on our loans; 15 Index • the degree to which our hedging strategies may or may not protect us from interest rate volatility; • the availability of investment opportunities in mortgage-related and real estate-related instruments and other securities; • changes in interest rates and impacts of such changes on our results of operations, cash flows and the market value of our loans; • interest rate mismatches between our loans and our borrowings used to fund such loans; • the departure of any of the executive officers or key personnel supporting and assisting us from our Manager or its affiliates; • impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; • our ability to maintain our exemption from registration under the Investment Company Act (as defined below); • our ability to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes; • estimates relating to our ability to make distributions to our shareholders in the future; • our understanding of our competition; • market trends in our industry, interest rates, real estate values, the securities markets or the general economy; • we may not achieve some or all of the expected benefits of the Spin-Off; • that the Distribution will not qualify for tax-free treatment; • we may have indemnification liabilities to AFC Gamma under the Separation and Distribution Agreement; • we cannot be certain that an active trading market for SUNS Common Stock will develop or be sustained after the Distribution and, following the Distribution, our stock price may fluctuate significantly; • we may issue shares of preferred or common stock in the future, which could dilute your percentage ownership of SUNS; and • shareholder litigation in connection with the Spin-Off, may result in significant costs of defense, indemnification and liability The above list of factors is not exhaustive or necessarily in order of importance. Please see the section entitled “ Risk Factors ” located in our final Information Statement on Form 10, the final version of which was included as Exhibit 99.1 on our Form 8-K filed with the SEC on July 3, 2024, for a further discussion of these and other risks and uncertainties which could affect our future results. These forward-looking statements apply only as of the date of this report and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by applicable law.