Q1 2022 Saratoga Investment Corp Earnings Call
[music].
Okay.
Good morning, ladies and gentlemen, thank you for standing by welcome to the Saratoga investment Corp's fiscal first quarter 2022 financial results Conference call. Please note that today's call is being recorded during today's presentation. All parties will be in a listen only mode. Following management's prepared remarks, we will open.
The lines for questions.
At this time I would like to turn the call over to Saratoga investment Corp's, Chief Financial Officer, and compliance officer, Mr. Henri Steenkamp, Sir Please go ahead.
Thank you and we'd like to welcome everyone to Saratoga investment Corp's fiscal first quarter, 2020.2 earnings conference call.
Today's conference call includes forward looking statements and projections, we ask you to refer to our most recent filings with the ACC for important factors that could cause actual results to differ materially from these forward looking statements and projections, we do not undertake to update our forward looking statements unless required to do so by low.
Today, we will be referencing a presentation during our call you can find our fiscal first quarter 2020.2 shareholder presentation in the events and presentations section of our Investor Relations website and link to our IR page and the earnings press release distributed last night.
A replay of this conference call will also be available from 1 P. M. Today through July 15th please refer to our earnings press release for details.
I would now like to turn the call over to our chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Thank you and Henry and welcome everyone.
Reflecting on this quarter versus the challenges at the same time last year. This quarter is underscored the resilience and Saratoga and our portfolio of companies. Despite.
Despite the unprecedented impact of COVID-19, which we all felt so strongly over the past year, we feel very fortunate.
And given the devastation of this tragic pandemic.
From a financial perspective to have demonstrated our ability to weather and overcome the challenges as well as to capitalize on the financial recovery opportunity and transition aggressively to the substantial ramp up and market activity.
This quarter, we grew our assets under management to $678 million with a $119 million of originations growth, reaching their highest levels.
While maintaining our credit quality and the extremely high credit bar, we set for all new originations.
The performance from our existing portfolio also grew our NAV per share by 5% this quarter to $28.70, <unk> also a record.
Our latest 12 months return on equity as of this quarter was 19, 4%.
We look forward to presenting our most recent results and reviewing our financial and portfolio performance and the solid structure of our capitalization.
To briefly recap the past quarter on slide 2.
First we continued to strengthen our financial foundation this quarter by maintaining a high level of investment credit quality with 93% of our loan investments continuing to have our highest rating at quarter end.
Generating a return on equity of 19, 4% from your trailing 12 month basis in Q1, I ended up 17, 6% BDC industry average.
As of Q1, registering a gross unlevered IRR of 13% on our total unrealized portfolio with our current fair value, 3% of our total cost from a portfolio and a gross unlevered IRR of 16, 5% on total realizations to date and 570 free.
Net.
Second our assets under management increased to $678 million this quarter and <unk>.
92% increase from $554 million as of last quarter, and a 40% increase from $483 million as at the same time last year.
We originated a record $119 million of new investments offset by $15 million of repayments this quarter.
And importantly, our new originations included 4 new portfolio company investments as well as 9 follow ons with existing portfolio companies and the current pipeline is robust.
Third.
Improving economic conditions and balance sheet strength liquidity and NAV preservation.
And Paramount from Us.
Our current capital structure at quarter end was strong with $320 million of Mark to market equity supporting $173 million of long term covenant free non spic's debt.
Our quarter and regulatory leverage of 251% substantially exceeds our 150% requirement.
And includes a $39 million drawn credit facility at quarter end.
We have $157 million and available liquidity at quarter and available to support and a portfolio of companies with $131 million of the total dedicated to new opportunities and our Spic's to fund.
Oh and cost of this new Spic's 2 debt is currently less than 2%.
Total committed undrawn lending commitments outstanding to existing portfolio companies are $15 million.
In March we issued a $50 million 4.375% 5 year unsecured bond and strengthens both our capital and liquidity position and also importantly reduces our current cost of non spic's capital by almost 200 basis points.
Finally, reflecting on our strong performance and overall portfolio and resiliency. The board of directors decided to again increase our quarterly dividend by <unk> to <unk> 44 per share for the quarter ended May 31, 2021 day.
On June 29.2021.
We will continue to evaluate our dividend payments on at least a quarterly basis as we gain better visibility on the intermediate term economy and fundamental portfolio performance.
This quarter saw a strong performance within our key performance indicators as compared to the quarters ended May 31, 2020 and February 28.2021.
Our adjusted net $6.3 million this quarter up 8% versus $5.8 million, both last year and last quarter.
Our adjusted NII per share is <unk> 56, this quarter up 5 from 51 last year and <unk> <unk> from 52 last quarter.
Latest 12 months return on equity is 19, 4% up from 9.9% last year and 5% last quarter.
Our NAV per share is $28.70 up 14% from 25, 11 last year and up 5% from 2725 last quarter significantly exceeding industry performance.
Andrew will provide more detail on these matters later.
As in the past, we remain committed to further advance and the overall long term size and quality of our asset base.
As you can see on slide 3 our assets under management and steadily and consistently risen since we took over the BDC and more than 10 years ago and the quality of our credits remains high and.
We are working diligently to continue this positive trend as we deploy our available capital and toward growing pipeline, while at the same time being appropriately cautious in this evolving credit environment.
With that I would like to now turn the call back over to Henri to review, our financial results as well as the composition and performance of our portfolio.
Thank you Chris.
Slide 4 highlights our key performance metrics for the quarter ended May 31, 2021 weighted.
When adjusting for the incentive fee accrual related to net unrealized capital gains and the second incentive fee calculation adjusted NII of $6.3 million was up 8% from $5.8 million last quarter and as compared to the same amount for last year's Q1 adjusts.
Adjusted NII per share was <unk> 56 cents up 5 cents from 51 cent per share last year and up 4 cents from 52 cents per share last quarter.
Across the 3 quarters weighted average common shares outstanding remained largely unchanged at $11.2 million shares for each quarter.
The increase and adjusted NII from last year and last quarter, primarily reflects the higher level of investments and results and higher interest and other income with AUM up 22% from last quarter and up 40% from last year, our effective yield and our core BDC portfolio has remained relatively unchanged.
At 9.5% during hold free periods and.
Adjusted NII yield was 8.0% when adjusted for the incentive fee accrual. This yield is up 10 basis points from 7.9% last year and up 30 basis points from 7.7% last quarter.
For this quarter, we experienced a net gain on investments of $18.5 million or $1.66 per weighted average share resulting in a total increase in net assets from operations up 21.0 million or $1.88 per share.
The $18.5 million net gain on investments was comprised of $16.8 million and net unrealized appreciation on investments and $1.9 million and natrium life gains offset by $2 million of net deferred tax expense on unrealized depreciation and Saratoga investment's blocker subsidy.
Heres.
The $1.9 million net realized gains was generated from the sale of our village Realty investment.
The $16.8 million net unrealized depreciation was driven by a 3.4% increase and the total value of the remaining portfolio primarily related to improvements in market spreads EBITDA multiples and or revised portfolio company performance.
This number includes a full 0.0 million dollar increase in the fair value of our CLO investment as well as a $14.6 million increase in fair value across the rest of the portfolio, excluding the village Realty realization.
We have mold and recover the net reduction and the value of the non CLO portfolio. During May 31, and 2020, our portfolio fair value is now 3.2% above the total cost.
Return on equity remains an important performance indicator for us, which includes both realized and unrealized gains.
Our return on equity was 19, 4% for the last 12 months ahead of the industry average of 17, 6%.
Total expenses, excluding interest and debt financing expenses base management fees and incentive management fees increased from $1.4 million last year Q1 to $1.9 million for this quarter, but remained unchanged at 1.1% of average total assets.
We also again included the Kpis slides starting from slides 27 through 30 and the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past 9 quarters and the upward trends we have maintained.
Moving on to slide 5.
And was $323 million as of this quarter and a $16.1 million increase from <unk> of $304.2 million at year end and a $38.7 million increase from NAV of $281.6 million as of the same quarter last year, primarily driven by really.
<unk> and unrealized gains during.
During Q1.40000 shares were repurchased at a cost of $1.0 million and an average price of $25.09 per share.
And NAV per share was $28.70 as of quarter and up 5.3% from 27.25 as of year end and up 14, 3% from $25.11 as of the same period last year.
And NAV per share has increased 13 of the past 15 quarters and.
Net asset value has steadily increased since 2011 and this growth has been accretive as demonstrated by the increase in NAV per share we continue to benefit from our history of consistent realized and unrealized gains.
On slide 6 you will see a simple reconciliation of the major changes in NII and NAV per share on a sequential quarterly basis.
Starting at the top NII per share increased from 52 per share last quarter to 56 cents per share and Q1.
Most of the increase was due to the 10 cent increase and other income and a force and decrease in operating expenses.
This was partially offset by a 7% decrease and non CLO interest income and a <unk> <unk> increase in base management fees.
Moving onto the lower half of the slide this reconciles the $1.45 and <unk>.
<unk> per share increase for the quarter, the <unk> generated by our NII and a $1.66, net realized and unrealized gains, including the deferred tax impact were offset primarily by the 43 <unk> Q4 fiscal 'twenty 1 dividend declared in Q1 of this year.
There was a 1 cent dilutive net impact of our ATM and drip programs in Q1 as well.
Slide 7 outlines the dry powder available to us as of May 31, and 2021, which totaled $157 million. This was spread between the other available cash undrawn SBA debentures and Undrawn Madison facility.
This quarter and level of available liquidity allows us to grow our assets by an additional 23% without the need for external financing with $20 million of it being cash and thus fully accretive to NII, when deployed and $131 million and SBA debentures with and all in cost of approximately 2% also very accretive.
Mike will later touch on net originations since quarter end. However, we have recently, partially repaid our outstanding credit facility with $18.5 million currently still drawn.
Included on the schedule for the first time on March 10, 2021, we closed a public offering of $50 million for 375% notes due 2026, resulting in net proceeds of approximately $48.8 million.
We remain pleased with our liquidity and leverage position, especially taking into account the overall conservative nature of our balance sheet and the fact that all our debt is long term in nature with no non <unk> debt maturing within the next 4 years and all mostly fixed rate.
Now I would like to move on to slides 8 through 11 and review the composition and yield of our investment portfolio.
Slide 8 highlights that as of quarter, and we have $678 million of AUM at fair value invested and 44 portfolio portfolio companies and 1 CLO fund.
I'll first lien percentage is 76% of our total investments of which 5% of that is and first lien last out positions.
On slide 9 you can see how the yield on our core BDC assets, excluding our CLO as well as our total assets yield has dropped over time, yet remains healthy this quarter. Our overall, our overall yield decreased to 8.6%. However, core asset yields has remained relatively unchanged at $9.5 per.
And.
The primary reason for the overall yield decrease is due to our equity positions increasing from 6.7% to 11, 9% of our overall portfolio due to a combination of new equity investments and unrealized gains on existing equity positions.
Much of the increase and new equity positions is and preferred equity that and quarterly dividends and as presented and other income.
As a reminder, 100 basis points is generally our lowest flow. So we do not expect to see further decreases in LIBOR greatly impact interest income.
CLO yield of 13, 3% is an increase from 11, 6% last quarter, reflecting CLO outperformance and our CLO is current and performing.
Turning to slide 10, our investments remain highly diversified by type as well as in terms of geography during the past quarter, we made investments of $119.2 million in 4 new portfolio companies and 9 follow ons and had $14.9 million and 1 repayments and amortization result.
And our net increase and investments of $104.3 million for the quarter.
On slide 11, you can see the industry breadth and diversity that our portfolio represents.
Our investments are spread over 31 distinct industries with a large focus on education software and services education services and healthcare software.
Total investment and the CLO is reflected as structured finance securities.
Of our total investment portfolio equity interest has increased to 11, 9% and remain an important part of our overall investment strategy.
For the past 9 fiscal years, including Q1, we had a combined $61.5 million of natrium as gains from the sale of equity interests or sale or early redemption of other investments and.
About 2 thirds of these gains were fully accretive to NAV due to the unused capital loss carryforwards debt were carried over from when Saratoga took over management of the BDC.
Following our elyria realization last quarter, we are again and accumulative capital loss carryforward tax position, which will offset future realized gains like we had this quarter.
This consistent performance highlights our portfolio credit quality has helped grow our NAV and is reflected in our healthy long term Roe.
That concludes my financial and portfolio review I will now turn the call over to Michael <unk>, Our Chief investment officer for an overview of the investment market.
Henry.
I'll take a couple of minutes to describe our perspective on the current state of the market and then comment on our current portfolio performance and investment strategy.
And it has only been 2 months since our last update and we see market conditions continue their return to where they were pre COVID-19.
Liquidity conditions remain exceptionally robust.
We are seeing increasing transaction volumes tightening credit yields.
And greater leverage multiples and and aggressive capital deployment posture overall.
With current pricing and leverage that such aggressive levels. There is increasing pressure from investors to compete and other ways such as accelerated timing to close and looser covenants restrictions.
That said.
Lenders and our market are still wary of thinly capitalized deals and for the most part are staying disciplined in terms of minimum aggregate base levels of equity.
And requiring reasonable covenants.
Deal volume and the first half of the year was quite robust and there appears to be a positive outlook. In this regard for the remainder of the calendar year 2021.
Our underwriting bar remains high as usual yes.
Yes, we are actively seeking and finding opportunities to deploy capital.
We believe a compelling risk adjusted returns can be achieved by deploying capital and support of businesses that have demonstrated strength and durability throughout this COVID-19 environment.
Follow on investments with existing borrowers with strong business models and balance sheets.
To be and important avenue of capital deployment as.
And as demonstrated with 9 follow ons this past fiscal quarter.
Most notably we have invested and 16 new platform investments since the onset of the pandemic, including 4 and this past calendar quarter.
Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies.
We have found that they are generally taken the right steps to help mitigate both the near and long term effect of COVID-19 on their businesses.
All of our loans and our portfolio are paying according to their payment terms.
Taco Mac, which has a cost basis of $2.3 million is now the only investment on non accrual with my alarm through bankruptcy restructuring and completely written off this quarter.
There have been no new non accruals prior to and through Covid.
We also recognized an additional $16.8 million and unrealized appreciation this quarter, which means that our overall portfolio has more than recovered the unrealized depreciation in Q1 of last year.
And the fair value of Saratoga has overall assets now exceeds its cost basis by 3.2%.
And we believe this strong performance reflects certain attributes of our portfolio that bolster its overall durability.
70, 776% of our portfolio is and first lien debt and generally supported by strong enterprise values and industries that have historically performed well and stress situations.
We have no direct energy or commodities exposure.
In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention.
Our approach has always been to stick to our strategy.
And focus on the quality of our underwriting and as you can see on slide 13. This approach has resulted in our portfolio performance being at the top of our BDC list that has had only 7 bdcs with a positive net realized gains as a percentage of portfolio cost over the past 3 years.
Our strong underwriting culture remains Paramount at Saratoga, we approach each investment working directly with management and ownership to thoroughly assess the long term strength of the company and its business model we.
We endeavored appear as deeply as possible and to a business in order to understand accurately its underlying strengths and characteristics.
We always have saw durable businesses and invested capital with the objective of producing the best risk adjusted accretive returns for our shareholders over the long term.
Our internal credit quality rating reflects the impact of Covid and shows 93% of our portfolio and our highest rating as of quarter and.
And part of our investment strategy is to selectively co invest and the equity of our portfolio companies when were given that opportunity.
And when we believe and the equity upside potential.
It has been our experience that there is significant overlap between those businesses that meet our strict underwriting writing requirements and those that possess attributes that make them attractive equity investments.
And this equity co investment strategy has not only served as yield protection for our portfolio, but also meaningfully augmented our overall portfolio returns.
We intend to continue this strategy.
Looking at Slide 14, total leverage for the overall portfolio from investments underwritten using EBITDA was 382 times up slightly from 363 times the previous quarter.
Reflecting an increase and leverage of certain new deals.
Now that said our leverage is below the average year to date market leverage multiples, which are all above 5 times across our industry.
Through past volatility, we have been able to maintain a relatively modest risk profile throughout and although we never consider leverage and isolation.
Rather focusing on investing and credits with attractive risk return profiles and exceptionally strong business models, where we are confident the enterprise value of the businesses will sustainably exceed the last dollar of our investment.
In addition, this slide illustrates our strengthening and ability to generate new investments over the long term.
During the first 6 months of calendar year 2021, we have added 6 new portfolio companies and made 16 follow on investments.
And this success underscores the ongoing emphasis on deepening our relationships and broadening our origination capabilities.
This strong origination pace has continued since our fiscal quarter and <unk>.
However, we are also seeing significant repayments, resulting from change of control transactions and acquisitions.
Subsequent to quarter, and we have executed approximately $85 million of new originations and 3 new portfolio companies and 3 follow ons with repayments of approximately $106 million and 4 exits and realizations for a net reduction and investments of 21 million.
Yes.
Moving on to slide 15, our team's skill set experience and relationships continue to mature.
And our significant focus on business development has led to new strategic relationships that have become sources for new deals.
Our number of deals sourced has dropped reflecting the difficult sourcing environment during much of the last 15 months. Although we are actively actively seeing healthy and increasing volume of new loan inquiries.
Most notably the 55 term sheets issued during the last 12 months is markedly up from last year's pace.
Similarly, the first half of calendar year 2021 is up as compared to the first half of calendar year 2020, showing that we are generating more shots on goal.
What is especially pleasing to us is that almost 1 fifth of our term sheets issued over the past 12 months and 4 of our 11, new portfolio company investments are from newly formed relationships.
Reflecting notable progress as we expand our business development efforts.
There are a number of factors that give us measured confidence that we can continue to grow our AUM steadily in this environment as well as over the long term.
First we continue to grow our reach into the marketplace as evidenced by several investments. We've recently made with newly formed relationships.
Second we have developed numerous deep long term relationships with active and established firms that look to us as their preferred source of financing.
Third we continue to see plenty of investment opportunities and industry segments that are experiencing long term secular growth trends and within which we have intentionally and developed expertise.
As you can see on slide 16, our overall portfolio credit quality remains solid.
The gross Unlevered IRR unrealized investments made by the Saratoga investment management team and 16, 5% on approximately $573 million of realizations.
The single village Realty repayments on Q1 had an IRR of 24% and a realized gain of approximately $1.9 million.
On the chart to the right you can also see the total gross unlevered IRR on our $621 million of combined weighted SB IC and BDC unrealized investments is 13% since Saratoga took over management.
The 2 largest unrealized depreciations remaining due to COVID-19.
And our Nolan group in situ education investments, both of which are more dependent on in person human interaction.
We do not believe the remaining unrealized depreciation changes our view of their fundamental long term performance.
Even with those current markdowns, our overall portfolio fair value is now 3% above its total cost.
Our and boost investment approach has yielded exceptional realized returns.
Moving on to Slide 17, you can see our first <unk> license is fully funded with $225 million invested as of year end.
Our second Spic's license has already been funded with $84 million of equity of which $138 million of equity and SBA debentures have been deployed.
There is still $1.1 million of cash and $124 million of debentures currently available against that equity.
We still have $3.5 million of unfunded equity, which when dropdown into the Spi C would increase our debenture availability by $7 million.
When comparing this quarter to the same time last year. The way the portfolio has proved proven itself to be well constructed and brasilia and against the impact of COVID-19 really has underscored demonstrating.
And the strength of our team platform and portfolio and our overall underwriting and due diligence procedures.
Credit quality is always our primary focus, especially at times with such high activity levels.
And while the World has changed significantly since Q1 of last year, we remain intensely focused on preserving asset value.
And remain confident and our team.
And the future for Saratoga investment.
This concludes my review of the market and our portfolio and I'd like to turn the call back over to our CEO Chris.
Thank you Mike.
And as outlined on slide 18, the board of directors declared a <unk> 44 per share dividend from the quarter ended May 31.2021.
This reflected a <unk> <unk> increase from last quarter and fourth sequential quarterly dividend increase.
Board of directors will continue to reassess this on and at least a quarterly basis, considering growth company specific and economic factors.
Moving to slide 19, our total returns and the last 12 months, which includes both capital appreciation and dividends has generated total returns of 68%, beating the BDC index and 54%.
Our longer term performance is outlined on our next slide.
Our 1.3 and 5 year returns place us at the top end of all Bdcs for both time horizons.
Over the last 3 years or 38% return exceeded the 35% return of the index over the past 5 years, our 139% return exceeded the index is 65% return.
On Slide 21, you can further see our outperformance placed and the context of the broader industry and specific to certain key performance metrics and we remain above the industry average across diverse categories, including interest yield on the portfolio latest 12 months return on equity.
<unk> debt to equity ratio latest 12 months NAV per share growth dividend coverage and year over year dividend growth.
We continue to focus on latest 12 months return on equity and NAV per share outperformance, which are both at the top of the industry and reflects the growing value from our shareholders are receiving.
Only are we 1 of the few bdcs to have grown and EV.
We've done it accretively buy also growing NAV per share.
Moving on to slide 22.
Our initiatives discussed in this call are designed to make Saratoga investment and highly competitive BDC that is attractive to the capital markets community.
We believe and our differentiated characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions.
And our differentiating characteristics include maintaining 1 of the highest levels of management ownership and the industry at 15% access to low cost and long term liquidity with which to support our portfolio and make accretive investments.
And a second <unk> license, providing sub 2% cost liquidity.
Triple B plus investment grade rating was recently upgraded and active public and private bond issuances.
Solid historic earnings per share and NII yield strong industry, leading historic and long term return on equity accompanied by growing NAV and NAV per share putting us at the top of the industry for bumps.
High quality expansion of assets under management, and an attractive risk profile.
In addition, our historically high credit quality portfolio contains minimal exposure to conventionally cyclical industries, including the oil and gas industry.
We remain confident and our experienced management team historically strong underwriting standards and tested environmental and tested investment strategy will serve us well and battling through the challenges and the current and future environment and.
And our balance sheet capital structure, and liquidity will benefit Saratoga shareholders, and the near and long term and.
In closing I'd like to again, thank all of our shareholders for their ongoing support and I would like to now from the call for questions.
To ask a question you will need to press star 1 on your telephone toward drawing a question just press the pound key.
And once again Thats star 1 for questions placed and pilots pilot and a roster.
Our first question will come from the line of Bryce Rowe from hoped may begin.
Hi, good morning.
Good morning.
Wanted to.
To ask about the composition of the portfolio really interesting to see.
And the equity piece of it go up and certainly you made some comments around that.
In your prepared remarks so.
And I guess first question around that is just can you can you talk about.
Why why that level of.
Equity investment and do you anticipate.
Future future equity investment.
Levels I guess.
And in that strong or was it more kind of opportunistic this quarter in terms of being able to make those equity investments.
So it's a good question, especially noting that debt some of the portfolio of companies that are foreign.
And particularly well and you see that evidenced in the valuations. This past quarter were ones, where we have meaningful equity investments. The thing I would say price is that it has always been part of our playbook to co invest and the equity of our portfolio companies when were given that opportunity now were very select.
And in that respect, we're not just doing that.
With.
Broad net and in doing that indiscriminately, we're very careful to underwrite the equity upside as well, but as I indicated in my prepared remarks, we have found that the number of businesses that meet our very strict debt underwriting requirements.
Tend to overlap very well with businesses that have very good equity upside. So the things that we look for strong management teams businesses that have.
Good.
Tailwind and very good industries with a differentiated business model run by <unk>.
Good management and strong ownership.
Tend to also be businesses that.
They have good equity upside potential and so that's worked out well for us. The 1 thing I would emphasize is that this has been a playbook that we've had.
Throughout our management of Saratoga. So if you look at many of our investments over the years, whether it would be easy ice or H M N or expedited or most recently village Realty and some other.
Businesses that we've invested and over the years, we've established a playbook, where we look for businesses that are at our end of the market and we can put an initial amount of debt capital in those businesses and then support their growth.
And we support their growth.
Not only with debt capital, but but equity investments and in the cases of some of the portfolio of companies that are experiencing nice appreciation and have good potential.
And as well, they're businesses that fit that playbook, which is something we've been doing but it's something that I've just highlighted most recently because you can see.
<unk> evidence of.
And.
That strategy bearing fruit.
And this quarter was really an example price are we sort of both those things came together and the same quarter as well thus.
The increase you're seeing.
Right.
And that's it was interesting to see for sure and.
I guess a follow up to that is.
Your portfolio overall portfolio yield.
K came down on a calculated basis because of the preferred because of that debt increased and.
And equity composition of the portfolio, so trying to understand kind of how to think about.
And maybe dividends coming off of those assets.
Pretty only type of investments and what we might see within that other income line.
And the income statement and.
And you look look through the schedule of investments and there's very little detail in terms of what debt what that income could be so I think that would be helpful for us to to understand.
With typically when we're making and equity invest and most of the time.
And nearly nearly all the time, we're investing equity alongside debt securities that have a current return attached to them. So certainly and we've been doing that throughout our management. So certainly that will have a near term impact on what the blended current return is on our portfolio, but we are.
And we're careful to balance that and on occasion, if we really see a terrific opportunity to make and outsized equity investment.
And with measured caution, we'll upsize that amount and that certainly can affect R. R.
Near term yield when we make those investments but over the long term, we do have confidence that that strategy will augment our overall returns on our portfolio now I think.
To answer your question hopefully a little bit more specifically if you look at our investment activity. This past quarter there were a.
A few investments that had.
Preferred equity securities attached to them to 2 we're just standalone preferred equity securities and 1 was in combination with a debt and common equity investments those 2 straight up preferred.
Equity investments somewhat unusual and opportunistic for us I wouldn't I wouldn't net youre thinking and the future I mean, not that we won't avail ourselves of that opportunity and wouldn't welcome it and the future I wouldn't say that that's going to be ordinary course as much those are investments that we made with relationships that we have that are really strong and there was an opportune.
To put some preferred capital to work.
And somewhat of a unique opportunity and so we're excited to have that but I wouldn't say that that's core to what we'll be doing I think what you see in.
Some of our other deal activity through the quarter, where were making an equity investment alongside a more sizeable debt investment would be kind of a standard operating procedure for us here and you are correct, Brian So those standalone preferred equity positions. They are they are paying dividends, but dividends of course presented not and.
Interest income or net interest margin is presented and the other income line, partly why you see that other income line growing this quarter.
And and so therefore not included in the the overall yield on the overall portfolio of the 8.6 because that doesn't include dividends right.
Right right, Okay. So I mean so.
And part of that part of the increase and and other income is tied specifically to those 2 standalone equity investments.
Correct correct. This this quarter you know other income obviously as I noted jumped quite a bit and the 2 main reasons was 1 obviously, a big origination quarter and as.
And as we've spoken in the past we put the the structuring fee the 1% fee. We generally receive we put in other income. So that's obviously 1 of the reasons and then the second reason absolutely is dividends received on those standalone preferred equity positions.
Great.
It's good input and I appreciate I appreciate you answering the questions.
Okay. Thanks, Brad.
And you.
Our next question will come from the line of Casey Alexander from Compass point May begin.
Yes, hi, good morning.
And I did want to ask I did want to ask about the structuring advisory fee income.
Because it has become a growing portion.
And and I see that you've broken it out.
You know how.
How recurring is that for instance, when I look at you said you've done $85 million in new originations I mean should I be baking in already 850000 of structuring and advisory fee income into my model because of that.
Yes, so the way I would think of it as Casey.
And generally receive between 75 bps and 100 bps of structuring and advisory fee income on debt.
And again generally that would be the right way to sort of view it somewhere between 75, and 100 bps and and.
And obviously, it's been growing as you noted because of the last couple of quarters have been almost back to back record quarters on originations for us. So, yes, it's definitely and into play and a linkage there with our originations absolutely. Okay. Alright. Thank you and looking at what Mike described is the subsequent to quarter and information, but also.
And noting that a significant amount of your originations usually comes nearer to the end of the quarter.
And expect that that net repayment of 21 million to 2 arguably probably balance itself out by the time, we get to the end of the quarter with additional new originations did generally come at the end of the quarter.
Okay.
Oh gosh, that's that's that would be that's just a tough question and answer I think as we've said Casey or our businesses.
And so lumpy and unpredictable in terms of its predictable and no long run rate you can sort of look and we feel very confident that we can continue to grow the portfolio, but the exact timing.
Of exit from pay offs versus originations, it's just really hard to gauge I havent really it's an interesting observation you make I haven't really thought about our business in terms of.
The origination pace happening closer to the end of the quarter, and especially given that our quarters don't sync up with calendar quarters like they do from most people I would say that at the end of a typical calendar year, we certainly see a lot of motivation for people to try and get something done within a calendar year and we have.
And that experience.
Answer your question directly in terms of how we see the rest of the quarter shaping up we feel good about our pipeline is reflective of a lot of the investments that we're making and business development as well as the strength of the relationships that we have and we've invested a lot of businesses that have an appetite for more capital to.
So we do feel good about our pace of.
Of investment.
And that's going to exactly shake out through the rest of the quarter, it's still undetermined.
Alright, great. Thank you.
Go ahead and jump in and then and maybe state what's fairly obvious, but I think I think Henry.
Henry and Mike are saying that it's fairly random and the way these deals land on.
1 way or the other and to the extent we have the ability to influence things you know obviously, we we try and close the deals that are coming our way as soon as we can and.
And I'm trying to delay the repayments as long as we can but.
And that's probably a matter of days or a week or something that we might be able to have some influence there.
But it's pretty much.
It's not really and our hands the timing of all this.
Okay, great, Thank you and and.
Fortunately, we're not here Mike to ask the easy questions were here to ask the hard ones and so.
Always dicey.
That's okay.
And I have 1 for you here Christian.
I'm looking at our portfolio and assets under management is the largest it's ever been by a step function larger than it's ever been.
And I'm looking at a quarterly dividend that is 12 cents below where it was in the third quarter of 2000 and 'twenty given the growth and the portfolio should we reasonably expect some acceleration and the pace of dividend increases to sort of work its way back towards the prior level.
And that's a very good question Casey and.
Something that we.
Consider at the board level.
Actively I mean as.
And as you can appreciate that.
The most recent 2 quarters and I've had a very substantial.
Origination flow like more than we've ever had before so we're really just sort of like a quarter and a half into.
Really substantial growth and our assets and then we're really sort of maybe.
2.3 quarters into what looks like a pretty solid recovery from what looked like a pretty horrible.
Outlook a year ago.
And I don't know how many years it looked like the last 12 months.
But and it's pretty amazing the differences and scenarios and have occurred and so.
As you know we took a very cautious approach to our dividend last year and we've been increasing it.
And at a pace that's.
Has not been commensurate with the increase and our earnings, but we did not necessarily.
We're unable to project exactly what our earnings we're gonna be because all of this stuff has come to us. So so yes, we're sitting on a 12 substantial.
Substantial outperform out earnings of our of our dividend I think as we've discussed in prior calls Theres. This spillover.
Situation, where ultimately.
Whenever earnings out earnings we have we're going to have to distribute right.
The tax laws are what they are and and so within the within any given periods.
Of time and there is some flexibility we have but we have some hard tax deadlines, where we have to pay out our taxable income. So so so in a sort of a multi quarter forward look we're going to have to reconcile our taxable income with our dividend payout and.
And we're looking at that very actively and then spillover and the amount of spillover you're allowed to have is also part of that equation and as you know and as we mentioned last year, we werent and zero spillover most of our peers and in.
And they're not the statistics at my fingertips, right now, but most of our peers and pretty heavy spillover levels and and our spillover level right now is quite modest relative to what it could be.
So there is not.
Normal pressure right now.
This quarter next couple of quarters.
To rebalance and so we have a little bit of time to see how and how this plays out and obviously if we continue to have robust performance like we have.
We're going to need to address that and our dividend.
Yeah.
Alright, great. Thank you for that Christian and and that's all my questions. So I'll pop back in the queue. Thank you very much.
Thanks Casey.
Our next question comes from the line of Sarkis <unk>.
Chin from B Riley you may begin.
Hey, good morning, and thank you for taking my questions here.
Good morning, sorry, good morning.
Just wanted to kind of do a little compare and and go back to Brian's question regarding the equity interest.
And going up even on an amortized cost basis right. So.
Was it predominantly driven off of the new preferred security investments, which will kind of leave you a dividend or was there some other.
Opportunistic investment there and then also part and parcel to this question would be when do you expect to let's say monetize those interests or if you can give us some historical examples to that.
I haven't I haven't Henry you could comment on the exact numbers in terms of how much of it was the preferred investments, but the approach that we're taking in equity co investments is consistent with what we've done in the past.
And I think the only thing that would drive that and an outsized way would likely be those too.
Preferred investments yeah to give you some ocala sarkis. So if you sort of think of the absolute dollars that are equity sort of increase from February to may.
2 thirds of it was because of additional equity.
<unk> or investments by us and about a third of it was just because of our existing equity positions that increased in value and were marked up.
And then if you think of the 2 thirds that is the new investments probably I would say just over half of it related to those preferred equity investments and then the remainder was sort of.
Again, the standard playbook, we always do which is just sort of bite sized small equity.
Pieces that we do as part of debt investments.
Hope that's helpful.
Yes Super helpful. Thanks for that and sales.
And so.
Great and if I could just put and just sort of interest.
And overlay and I and I'm sure.
And kind of repeating what but some of it I think Mike had said earlier.
And Theres no real strategic change and what we're doing relative to our equity.
Henry said about a third of it is just sort of regular way investing equity as we always have we don't always get equity, we kind of always want it and.
And in conjunction with our with our debt investments and that's been important for the accretion and our NAV and NAV per share.
A third of it is from appreciation in our and our.
Our underlying equity. So that's you know that's that's very positive right. So there's other third and.
And like I said earlier it was really just an opportunistic and we want to remain opportunistic.
Those are we think they are called preferreds and called equity but.
Because of the structure of what we're doing there.
Debt like in terms of guaranteed.
Agreed return, if you will and credit quality of that return and and.
And nature of duration. So so so those really during the equity bucket, but there.
They're not like them.
Pure <unk> common equity type exposure.
And you also had a question you had a question on the duration I mean typically.
We're not in the and the driver's seat in terms of and exit.
We may be you influential in that respect, but we're not and the driver's seat typically as a co investor in most of the companies that we have and our portfolio. So the pace of <unk>.
Realization is sort of consistent with what you see and in our our debt portfolio. If we're supporting a sponsor typically that sponsors investing capital at a certain pace and then theyre going to go look for realizations.
And look to exit that business and alongside that exit we would we would.
At the same time, if it's a business, where we're directly supporting and management team or maybe it's an independent sponsor different different ownership structure. Some of those are a little bit more long dated invest.
Investments I.
I think per instance, easy ice was 1 that was in that category. Some of the other ones that we're in today are also in that category and those ones tend to be a little bit more long dated but.
Generally the pace of the way you should think about the pace of realization, it's fairly consistent with the pace of realization on our debt.
Okay. Thanks for that and I guess I'm kind of coming to this and a roundabout way because if I look at your second lien and.
And unsecured loans on the book on a cost basis, it hasn't really budged much kind of even.
In recent quarters, and and obviously youre, making a more concerted push into first lien and so I just wanted to understand it.
And if the average loan duration is about let's call it 3 years with.
Single to low double digit coupon.
And this preferred investment must have been much more attractive and.
And some way shape or form for you to deploy capital. There is is that kind of a REIT summation of the thought process or is there something different that you kind of like to increase more first lien and second lien and unsecured paper out. There is just not attractive just wanted to get some more color around the other categories there.
Yes.
And it's good observation I mean, I think first to just to address the standalone preferred investments those are pretty unique circumstances, we'd love to have the opportunity to make more of those investments.
But I wouldn't I wouldn't look at our business strategy and think that you are suddenly going to see lots of that that's directionally. What we're intending to do is what we've done historically, which is co invest in and equity alongside debt investments that we make now.
By and large the approach that we've taken just on making any investments and debt securities.
It's really just trying to find out where the best risk adjusted returns present themselves, sometimes the apps and the second lien there have even been times, historically, where we've done unsecured debt.
Debt as well.
As the market has marched on and where we are presently and the market. We think that there's a much greater percentage of real solid risk adjusted return opportunities and first lien positions and that's why you see the majority of the deals that we're doing in first lien positions and few.
And we're of the junior capital positions.
Now that could change and a different marketplace sometimes win.
There is a correction and the market.
Opportunities, we'll shift as well, but by and large investing.
At the top of the capital stack and then augmenting those returns with an opportunity to invest and the equity has been a really good formula for us and Thats generally what we intend to continue to do.
And Sarkis, if I can just add 1 thing Mike and I were actually he and his office. This morning, and we were just looking at the mixed together of our portfolio for this quarter and when you look at it you obviously look at this quarter and it was a big total dollar value of $119 million, which obviously overjoyed at and you were asking about the 2 preferred equity and preferred equity investments obviously.
Which are a little different maybe than we've done and other quarters, but.
Other than that if you take a step back and you just look at the quarter as a whole 2 thirds of our originations this quarter, what follow ons and 1 third was for portfolio companies and a new investments and if you think of that sort of mix or as Mike called Elliott playbook that is exactly consistent with the way.
We've originated not just many quarters back but over the last years. So much of our growth has come from follow ons and this quarter is no different.
Okay.
Great.
Just to add to that part of that.
<unk> has worked out well for us because where we play.
In the middle market, we will do the work to get close to and underwrite very thoroughly a business that's been on the smaller side.
And make a.
Less substantial investment.
And then what maybe some of the bigger Bdcs would bother with the.
And the benefit of that though is it allows us to get close to the company to really thorough diligence have real covenants and our structure and then as those businesses growth.
They can be a source of capital deployment for us and many of our debt best deals fall right into that category, where we made a relatively small investment initially and hopefully and equity co investment and then as the companies either acquisitive or they need growth capital, we've been there to to upside.
Our investment and as we've grown our capacity to upsize our investment has also grown.
Which extends the duration of the debt, but also allows us to enjoy.
The lift and enterprise value, if we're co investing and the equity and that's that's something that we're.
And we're intending to continue to do.
And I think this quarter you can see some of the benefits of that particularly and a handful of our portfolio companies that are performing quite well.
Thank you for the added color that's all I had.
Our next question will come from the line of Matt Tjaden from Raymond James May begin.
Hey, all good morning, and I. Appreciate you taking my questions first 1 from me on the unrealized depreciation during the quarter. It looks like a bulk of it came from 3 names primarily passageways net trio and grey Heller.
Anything you can give us on whether or not those write ups were they a function of improved performance and EBITDA or expanding market multiples and any color there would be would be of interest.
Yes. Good question, so passage ways was reflective of.
And and expected exit and so that's just a write up reflecting that that valuation.
Of that exit.
And then the other 2.
Or a mix of both so there is definitely multiple expansion that has increased the value of those.
Portfolio companies, both of which we have substantial equity investments in but the reason that the.
The multiple expansion has occurred is because the portal both of those portfolio companies have performed quite well and as they've grown they've gotten to a different level of scale where.
And at that scale.
It's natural for the multiple valuation to grow as well so it's a combination of a.
Performance and some of that strong performance and growth to up to a higher size business has expanded the.
Enterprise value multiple as well.
Okay kind of a different turn from me on the second question then.
So obviously, a stronger origination quarter it looks like originations are continuing to be strong and.
Any high level commentary on what Youre seeing and originations is kind of elevated levels. There is still some pull forward from COVID-19 levels are private equity sponsors and management teams looking at potential tax changes any any anything high level you guys are seeing.
The only thing the observation I would make.
Is that.
Deal activity was down quite a bit last year as everyone knows and I think there were some deals that didn't happen because people wanted to wait and see how the.
The Covid experience would play out and so there were deals that were on the sidelines even companies that we're going to get sold some of them and our portfolio.
Now that we're getting to a better place.
In that respect Youre seeing transaction volumes come up quite a bit. So I think some of that slower pace from last year is spilling into the current environment.
And Fortunately there is there is what comes with that even though it will result in some some payoffs and our portfolio. We're also seeing a tick up in.
Potential to deploy capital and new opportunities as well and.
Youre seeing that and our origination activity.
Yeah.
Great Thats it from me I appreciate the time.
Thanks, Matt.
Sure.
And we have a follow up from Bryce Rowe from host May begin.
Thanks for thanks for taking the follow up.
Wanted to ask about the.
The structure of the debt debt capital on the balance sheet.
And how you're how you all are thinking about.
Future funding from them from a debt capital perspective, and in the context of.
Some of the some of the baby bonds being callable here next month.
And the context of market pricing being as attractive as it is right now.
And then kind of in the context of where you where you are in terms of using the.
And revolving credit facility I think you look back you havent really used debt revolving credit facility and a couple of.
A couple of years and yet.
You obviously used to here.
As Casey was talking about your portfolio has grown has grown quite a bit. So I'm just I'm wondering if it's time for some bit of evolution from a.
I guess it use of the credit facility, if youll start to use it more if you'll look for another source to add on to that to that credit facility. So you can kind of better manage the puts and takes from a origination repayment perspective. Thanks.
Sure and Thats, an excellent question and something that we are constantly evaluating and working with and.
As you can see and the last.
A couple of quarters, we've been diversifying our sources of capital and we have the most recent 4 and 3 eighths bond issuance, which was and.
A new low level.
Fixed rate financing for us.
And.
And those markets are still open to us.
We do have these call dates on baby bonds and we do have those markets are and also open to us.
We do have our revolver.
And and possible modifications to our revolver and expeditions and all those things you mentioned, so where we're looking at all and I think and obviously, we need to be careful and forward looking statements here and this call. Soon so it's very hard for us to give you specific and.
<unk> right now as to what were exactly planning, but I think it's fair to say that yes, we are an incredibly robust credit environment and we are actively considering and all those on all those fronts I would also point out that in terms of our.
The amount we have drawn on our revolving credit.
Accurately point out and that's kind of been a swing line for us and we haven't had to use it that often.
A lot of our investments have been and are Spic's fund, where we can we can draw on.
The draw and those credit facilities as needed kind of like a revolver if you will.
Recently, we've had more than a bit outside of our SP IC.
Investments that have been attractive outside of our RSP IC.
Qualifications.
What investments are required to be like to be able to be in spi.
Fund and so.
And then also the lower rates that we're able to get on some of these institutional bonds opens up a new.
A new environment for us for for lending in terms of cost of capital. So so all of those are sort of high top of mind, but I think it's also again important to realize that you look at the growth and our assets under management has been very rapid.
And the last 2 quarters I think as you know and our subsequent to quarter and I think you'll see that there was significant repayments.
The current kind of right after quarter end, but then we've also had significant reinvestment. So so we are keeping an eye on our pipeline and our net asset addition, right and that's driving.
A lot of this and.
And so sort of our revolver is a very important element because it allows us to do what we were able to do bridge over the quarter, but that snapshot is not necessarily completely reflective of some of the ongoing ebbs and flows.
How are you.
Capital needs are required so.
So overall.
Just to try and give you a better than a non answer pointed question. Upon what we exactly going to do we can't say, what where exactly going to do but we arent very specifically looking at.
All of those markets and whats available in those markets as well as our pipeline and how much of our pipeline goes into RSP IC versus non interest.
And so as you know from our presentation, we have a tremendous amount of capital $124 million Spic's debt. That's available right now so anything that qualifies for Orange <unk> and we can put in there with a 100% debt financing because we've already funded the equity there. So it's really.
The incremental capital need is really about outside the FDIC right now and how we manage that relative to capital markets availability and revolver pricing that type of thing.
That's helpful Chris.
I appreciate that.
And that was it was a good non answer but a good answer for sure.
And I think the I think the market kind of loses loses sight to a certain extent.
How how you all are positioned not only from a debt capital perspective, but from and from an opportunity to continue to reduce the cost of your.
Of your debt.
Thanks for thanks for taking the question.
Thank you Brad.
And we have another follow up from Casey Alexander from Compass point, you may begin.
Yeah, and mindless asked and answered thanks very much.
Yeah.
Thank you and I'm not showing any further questions and the queue at this moment.
Okay well.
We'd like to thank everyone for their.
Time, and attention and support of us and for joining our call today and we look forward to speaking with you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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