Q2 2022 Saratoga Investment Corp Earnings Call
[music].
Ladies and gentlemen.
This is the operator todays conference is scheduled to begin momentarily until that time your lines have been placed on hold thank you for your patience.
[music].
Okay.
Okay.
Good morning, ladies and gentlemen.
Thank you for standing by welcome to Saratoga investment Corp's fiscal second quarter 2022 financial results Conference call.
Please note that today's call is being recorded.
During todays presentation, all parties will be in a listen only mode.
Following management's prepared remarks, we will open the line for questions.
At this time I'd like to turn the call over tea and.
So sorry.
<unk> investment Corporation ships financial and compliance officer.
Mr. Henry's tanker Sir please go ahead.
Thank you I would like to welcome everyone to Saratoga investment Corp's fiscal second quarter 2022 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 SEC 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 law.
Today, we will be referencing a presentation during our call you can find our fiscal second quarter 2022 shareholder presentation in the events and presentations section of our Investor Relations website, a link to our IR page is in the earnings press release distributed last night.
A replay of this conference call will also be available from one PM today through October 13th 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 Henri and welcome everyone as.
As we reflect on the second quarter, we continue to be pleased with the strength and resilience of our financial position and portfolio companies. Despite the.
The unprecedented global impact and continuance of COVID-19, we feel very fortunate job overcoming challenges, thus far and to be in a position, where we can leverage the upside of the ongoing recovery in substantial ramp up in market activity.
Our existing portfolio of companies continue to perform well and our current business development activities allow us to find and evaluate a healthy level of new investments our AUM contracted slightly this quarter to $666 million, we originated $116 million in new platforms were follow on investments almost matched.
Our record Q1 quarter.
This was offset by a record number of repayments with $135 million redeemed, including the recognition of the $10.0 million realized gain on our passageways equity investment.
We have often discussed how our long term growth in assets could be accompanied temporarily by lumpy substantial repayments of which this quarter was an example.
We continue to bring new platform investments into the portfolio with four added this fiscal quarter and all originations were made while maintaining extremely high credit quality bar, we have set for our investments.
The performance of our existing portfolio also grew our NAV per share by 1% this quarter to $125.0
Again, a historical record for us with this quarter increase being the 14th increase in the past 17 quarters. Our latest 12 months return on equity as of this quarter was 14, 4%.
To briefly recap the past quarter on slide two.
First we continue to strengthen our financial foundation in Q2 by maintaining a high level of investment credit quality with over 93% of our loan investments retaining our highest credit rating at quarter end.
Generating a return on equity of 14, 4% on a trailing 12 month basis and registering a gross unlevered IRR of 12, 7% our total unrealized portfolio.
With our current fair value, 4% above the total cost of our portfolio.
On a gross Unlevered IRR of 16, 1% on total realizations of $698 million.
Our assets under management decreased slightly to $666 million this quarter, a 2% decrease from $678 million as of last quarter due to the record repayments, but a 31% increase from $508 million as at the same time last year, and a 20% increase from $554 million as of year.
And.
Despite this net reduction or new originations included four new portfolio company investments as well as six follow on investments in our current pipeline remains robust.
Third despite improving economic conditions balance sheet strength liquidity and NAV preservation remain Paramount for us our current capital structure at quarter end was strong $324 million of Mark to market equity supports $238 million of long term covenant free non spic's.
Debt and $172 million of long term covenant free Spic's debentures.
Our quarter end regulatory leverage of 236% substantially exceeds our 150% requirement.
We have $221 million of liquidity at quarter end available to support our portfolio companies was $111 million of the total dedicated to new opportunities and our Spic's II fund.
The all in cost of this new Spic's two debt is currently less than 2% and the total committed undrawn lending commitments outstanding to existing portfolio companies are $16 million.
In July we issued an additional $125 million five year unsecured bonds with an effective yield of $4, 125% that strengthened both our capital and liquidity position.
In August we repaid our existing $60 million, 625% as a baby bonds, which importantly reduces our current cost of non FDIC capital by more than 200 basis points and just this week, we closed a new $50 million facility with them.
Our lender finance, reducing our existing facilities cost of capital by 100 basis points.
Finally, reflecting on our recent note issuance and improved liquidity on the overall portfolio and financial performance. The board of directors increased our quarterly dividend by 8%.
<unk> 52 per share for the quarter ended August 31, 2021 paid on September 28.2021.
We will continue to reassess the amount of our dividends on a quarterly basis as we gain better visibility on the economy and fundamental business performance.
This quarter saw a strong performance with our key performance indicators as compared to the quarters ended August 31, 2020, and May 31.2021.
Our adjusted NII of $7 million this quarter up 27, 5% versus $10.0 billion last year, and up 11, 6% versus $9.0 million last quarter our.
Our adjusted NII per share of <unk> 63, this quarter up from 49 last year and up from 56 last quarter.
Latest 12 months return on equity was 14, 4% up from 14, 3% last year, but down from 19, 4% last quarter.
And our NAV per share is $125.0 up nine.
9% from 2668 last year and up 1% from $98.0 last quarter. This is the highest NAV per share for Saratoga investments since inception of our management in 2010.
And we will provide more detail later.
As you can see on slide three our assets under management have steadily and consistently risen since we took over the BDC more than 11 years ago and the quality of our credits remain high with no non accruals currently.
We are currently working diligently to continue this positive trend as we deploy our available capital to our 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 four highlights our key performance metrics for the quarter ended August 31.2021.
When adjusting for the incentive fee accrual related to net capital gains in the second incentive fee calculation and the interest on the redeemed Saf baby bonds during the cold period.
Adjusted NII of $7.0 million was up 11, 6% from $9.0 million last quarter and up 27, 5% from $10.0 million as compared to last year's Q2.
Just at NII per share was <unk> 63 up 14 from 49 per share last year and up seven from 56 per share last quarter.
Across the three quarters weighted average common shares outstanding remained largely unchanged at $13.0 million shares for each quarter.
The increase in adjusted NII from last year, primarily reflects the higher level of investments and results in higher interest and other income with AUM up 31% from last year.
The increase from Q1 was primarily due to the full period impact of originations made during Q1 as well as the recognition of a $7.0 million interest reserve release to interest income related to our Taco Mac investment that has been removed from non accrual this quarter.
Adjusted NII yield was eight 7%. This yield is up 70 basis points from eight zero percent last year and up 110 basis points from seven 6% last quarter.
For the second quarter, we experienced and Nathan gain on investments of $4.0 million or 28 cents per weighted average share and a $7.0 million realized loss on extinguishment of our SaaS baby bonds at Spic's won debentures or 14th per weighted average share, resulting in a total increase in net assets from.
Operations of $16.0 million or <unk> 71 per share.
Sure.
The $4.0 million net gain on investments was comprised of $6.0 million in net realized gains and $7.0 million in net unrealized depreciation on investments offset by $4 million of income tax expense unrealized gains and $4.0 million net deferred tax expense on unrealized.
Depreciation and a blocker subsidiaries.
The $6.0 million natrium gain primarily comprises a $10.0 million realized gain on the sale of the Companys passageways investment.
And by the recognition of a $13.0 million realized loss on the final write down of the company's my alarm Center investment.
The $7.0 million unrealized depreciation reflect one the $11.0 million reversal of previously recognized depreciation and the $13.0 million reversal of previously recognized depreciation on the passageways realization in the myeloma center right off respectively and two <unk>.
One 1% increase in the total value of the remaining portfolio primarily related to improvements in market spreads EBITDA multiples and or revised portfolio company performance.
All of the net reduction in the value of the non CLO portfolio in the first quarter of last year has been more than reversed and the overall portfolio of fair value is now $3, 8% above cost.
Return on equity remains an important performance indicator for US, which includes both realized and unrealized gains our return on equity was 14, 4% for the last 12 months.
Total expenses, excluding interest and debt financing expenses base management fees and incentive management fees and income taxes increased from $5.0 million as of the quarter ended August 31, 2020 to $9.0 million. This quarter. This represents one 1% of average total assets unchanged over there.
Same periods.
We have also again added the kpis slides starting from slides 26 through 29 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past nine quarters and the upward trends we have maintained.
Particular note is slide 29, highlighting how our net interest margin run rate has almost quadrupled since Saratoga took over management of the BDC has increased by 8%. The past 12 months and has continued to increase in Q2.
Moving on to slide five Niv was $325.0 million as of this quarter and a $11.0 million increase from last quarter, and a $34.0 million increase from the same quarter last year, primarily driven by realized and unrealized gains.
In Q2, 9623 shares were repurchased at a cost of $2 million at an average price of $110.0 per share. While 5441 shares were sold for net proceeds of $3.0 million at an average price of $114.0
And NAV per share was 28.97 as of quarter end up from $98.0 as of last quarter and from 26.68 as of 12 months ago.
And NAV per share has increased 14 of the past 17 quarters.
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 six 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 adjusted NII per share increased from 56 per share last quarter to <unk> 63 per share this quarter of.
A <unk> <unk> increase in non CLO net interest income of one sand increasing both CLO interest income and other income and a <unk> <unk> benefit from lower operating expenses were partially offset by a <unk> <unk> decrease due to higher base management fees.
Moving onto the lower half of the slide this reconciles the 27% <unk> NAV per share increase for the quarter.
<unk> 57 of GAAP, NII and 44 <unk> of net realized gains and unrealized depreciation on investments were partially offset by 16% net expense related to income and deferred taxes on gains the 44 dividend paid in Q2, and a 14th centralized loss on extinguishment of debt.
Slide seven outlines the dry powder available to us as of quarter end, which totaled $232.0 million.
This was spread between our available cash Undrawn, SBA debentures, and Undrawn secured credit facility.
This quarter end level of available liquidity allows us to grow our assets by an additional 34% without the need for external financing with $73 million of it being cash and thats fully accretive to NII when deployed and $111 million of SBA debentures with an all in cost of less than 2% wholesale.
Very accretive.
On July 15, 2021, we reopened our existing four 375% notes due 2026 and issued an additional $125 million of notes at a premium of 1%, resulting in an effective yield of four 1% to 5% further strengthening our capital structure and reducing our cost of.
<unk> significantly at quarter end, we used some of those proceeds to redeem 60 million six 5% baby bonds effectively cutting our interest expense by more than 200 basis points on that amount.
<unk> has been delisted on IV with how stuck again trading at or above NAV per share. We also have an active ATM equity program in place.
Finally, just this week, we closed a new three year $50 million revolving credit facility within senior lender finance. This facility replaces our existing Madison facility and with a floating rate of LIBOR, plus 4% with a 75 basis points floor has reduced our credit facility cost of capital by 100 basis points.
While retaining strong structure and flexibility.
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 spic's debt maturing within the next four years and mostly fixed rate.
Now I would like to move on to slides eight through 11 and quickly review the composition and yield of our investment portfolio slide eight highlights that we now have $666 million of AUM at fair value or $642 million at cost invested in 43 portfolio companies and one CLO fund.
<unk> percentage at 74% of our total investments of which three 5% of that is in first lien last out positions.
On slide nine you can see how the yield on our core BDC assets, excluding our CLO as well as our total assets yield has dropped this year. This.
This is partly due to continued tightening of spreads in our market, but also due to a mix shift as some of our high yielding assets. We repaid this quarter. In addition, our equity position. This fiscal year has almost doubled from six 7% to 12, 1% in Q2.
Some of this equity increases in the form of preferred equity that is recurring dividend income that is now reflected in its own dividend income line in the P&L rather than an interest income.
And as a reminder, 100 basis points.
Lowest floor. So we do not expect to see further decreases in LIBOR impact interest income.
The CLO yields remained steady almost unchanged at 13, 2% quarter on quarter.
<unk> is currently performing and current.
Turning to slide 10 during the second fiscal quarter, we made investments of $116 million in four new portfolio companies and six follow on investments and had a record $135 million in.
And six repayments plus amortization, resulting in a decrease in investments of $19 million for the quarter.
On slide 11, you can see the industry breadth and diversity that our portfolio represents our investments are spread over 34 distinct industries with a large focus on health care software services.
Services, and education and health care services.
In addition to our investment in a CLO, which has included a structured finance securities.
Of our total investment portfolio 12, 1% consists of equity interest, which remain a very important part of our overall investment strategy.
For the past nine fiscal years, including Q2, we had a combined $63 million of net realized gains from the sale of equity interests or sale or early redemption of other investments.
Over two thirds of these gains were fully accretive to NAV due to the unused capital loss carryforwards that were carried over from when Saratoga took over management of the BDC.
Following our elyria realization last year and my alarm Center final write down this quarter. We are again in accumulative capital loss carryforward tax position, which will offset current and future realized gains.
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.
Thank you Henry.
I will 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.
Since our last update we see market conditions continuing to tighten.
Returning to where they were pre COVID-19, and very much a borrower's market.
Liquidity conditions remain exceptionally robust.
We are seeing increasing transaction volumes tightening credit yields and greater leverage multiples and an aggressive capital deployment posture overall.
Pricing and leverage metrics are among the most competitive levels that we've ever seen.
As a result, there is increasing pressure for investors to compete in other ways, such as accelerated timing to close and looser covenant restrictions.
Now that said lenders in 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 in the first half of the year was quite robust and there appears to be a positive outlook. In this regard for the remainder of calendar year 2021.
Calendar Q4, 2021 is on a path to be particularly active drew.
<unk> driven by unusually robust M&A activity, resulting from frenzied post pandemic trading conditions.
Tangible for future capital gains tax legislation.
And unabated fed supported the economy through low interest rates.
Our underwriting bar remains high as usual, yes, we are actively seeking and finding opportunities to deploy capital as evidenced by two record origination quarters back to back and for new platform companies added in fiscal Q2.
Follow on investments with existing borrowers with strong business models and balance sheets continue to be an important avenue of capital deployment.
As demonstrated with six follow ons this past fiscal quarter and nine in the previous.
Most notably we have invested in 19, new platform investments since the onset of the pandemic, including three in 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 position themselves to benefit from the uptick in general economic activity as the economy recovers.
All of our loans in our portfolio a portfolio are paying according to their payment terms.
Taco Mac has been placed back on accrual.
So in addition to not having any non accruals prior to and through Covid. We now have zero non accruals across the whole portfolio.
We also recognized $6.0 million net realized gains and an additional $7.0 million and unrealized appreciation this quarter, which means that our overall portfolio has more than recovered the unrealized depreciation associated with Covid last year.
And the fair value of Saratoga is overall assets now exceeds its cost basis by three 8%.
We believe this strong performance reflects certain attributes of our portfolio that bolster its overall durability.
74% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in 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 stay focused on the quality of our underwriting and as you can see on slide 13. This approach has resulted in our portfolio performance performance being at the top of the BDC space with respect to net realized gains as a percentage of portfolio at cost.
We are at the top of the list of only eight bdcs that had a positive number over the past three 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 endeavored appear as deeply as possible into our 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 30 at 93% of our portfolio at our highest grade credit rating as of quarter end.
Part of our investment strategy is to selectively co invest in the equity of our portfolio companies when were given that opportunity and.
And when we believe in the equity upside potential.
It has been our experience that there is significant overlap between those businesses that meet our strict debt underwriting requirements and those that possess attributes that make them attractive equity investments.
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.
Now looking at leverage on Slide 14, you can see the industry debt multiples increased slightly from calendar Q1 to Q2.
Total leverage for overall portfolio for our overall portfolio was three six to eight times decreasing slightly from last quarter, reflecting strength in portfolio company capitalization and new originations with lower leverage.
Through past volatility, we have been able to maintain a relatively modest leverage profile.
That said, we never consider leveraging in isolation, rather focusing on investing in 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 investment.
In addition, this slide illustrates our consistent ability to generate new investments over the long term despite ever changing market dynamics.
During the first three calendar quarters, we added nine new portfolio companies and made 22 follow on investments.
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 deal sources dropped initially due to COVID-19, but more recently, reflecting our efforts to focus on attracting a higher percentage of quality opportunities.
Our deal pipeline is robust most notably the 66 term sheets issued during the last 12 months is markedly up from last year's pace.
Similarly, the first nine months of calendar year, 2021 is up compared to the calendar year 2020.
Showing that we are generating more shots on goal.
What is especially pleasing to us is that over one third of our term sheets issued over the past 12 months and four of our 14, new portfolio company investments are from newly formed relationships.
Reflecting notable progress as we expand our business development efforts.
Sure.
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 have 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.
Within which we are intentionally developed expertise.
As you can see on slide 16, our overall portfolio credit quality remains solid.
The gross Unlevered IRR on realized investments made by the Saratoga investment management team is 16, 1%.
$698 million of realizations.
The single pass its ways repayment in Q2 had an IRR of 34%.
On the chart to the right you can see the total gross unlevered IRR on our $612 million of combined weighted Spi and BDC unrealized investments is 12, 7% since Saratoga took over management.
The two largest unrealized depreciation to remaining due to COVID-19.
Our in our Nolan group in situ education investments.
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 of fair value is now 4% above its total cost.
Our investment approach has yielded exceptional realized returns.
Moving on to Slide 17, you can see our first Spic's license is fully funded with $210 million invested as of quarter end.
Our second Spic's licenses already been fully funded with $92.0 million of equity.
All of which $172 million of equity in SBA SBA debentures have been deployed.
There is still $13.0 million of cash and $111 million of debentures currently available against that equity.
When comparing this quarter to much of last year. The way the portfolio has proven itself to be both durable and resilient against the impact of COVID-19, really underscores the strength of our team platform and portfolio.
And our overall underwriting and due diligence procedures.
Credit quality remains our primary focus.
Especially at times with such high activity levels as we are seeing now.
And while the world is in continuous blocks, we remain intensely focused on preserving asset value and remain confident in our team.
In the future for Saratoga.
This concludes my review of the market and I'd like to turn the call back over to our CEO Chris.
Thank you Mike.
As outlined on slide 18, the board of directors declared a <unk> 52 per share dividend for the quarter ended August 31, 2021 is.
This reflected an eight <unk> or 18% increase from last quarter.
Board of directors will continue to reassess this on at least a quarterly basis, considering both company and general economic factors.
Moving on to Slide 19, our total return for the last 12 months, which includes both capital appreciation and dividends has generated total returns of 77% well above the BDC index at 50%.
Our longer term performance is outlined on our next slide.
Our three and five.