Q3 2021 SLR Investment Corp Earnings Call
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Good day and thank you for standing by welcome to the Q3 2021 S. M Investment Corp earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask the question during the session you'll need to press star one on your telephone.
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I would not like to have the conference over to your speaker today, Mr. Michael <unk>, Chairman and go see Oh. Thank you and please go ahead.
Take your operator, and good morning, everybody welcome to Escolar investment Corp's earnings call. The third fiscal quarter ended September 30th 2021.
I'm joined here today by Bruce bowler, our co Chief Executive Officer, and Richard <unk> are cheaper that to officer rich before we begin would you. Please start off by cover the webcast and forward looking statements.
Thanks, Michael.
I would like to remind everyone that today.
Cast are being recorded.
Nope that they are the property is F or invest in court and that any unauthorized broadcast in any form is strictly prohibited.
This conference call is being webcast from the investors tab on our website at Www Dot echelon investment corked Dot com.
Audio replays of this call will be made available later today.
Closed in our earnings press release.
I would also like to call your attention to the customary disclosures in our press release regarding forward looking information.
Statements made in today's conference call and webcast may constitute forward looking statements, which relate to future events or a future performance or financial condition.
These statements are not guarantees about future performance financial condition or results and involve a number of risks and uncertainties, including impacts from COVID-19.
Past performance is not indicative of future results actual results may differ materially as a result of the number of factors, including those from time to time, it or filings with the SEC.
So our investment Corp undertakes no duty to update any forward looking statements unless required to do so by law to obtain copies of our latest SEC filings. Please visit our website or call us at 212.
9931.
1670.
At this time I'd like to turn the call back to our chairman and co CEO Michael gross.
Rich and again, good morning, and thank you for joining us.
The third quarter and the fourth quarter, thus far have been an active period origination teams, including though that SORC, especially plaids subsidiaries. In particular are sponsored finance business has had a very strong quarter.
Against the backdrop of the continued economic rebound and record levels of private equity and leveraged connect activity or pipeline has been extremely robust during the quarter, we directly and indirectly originated $358 million of investments our largest total excluding plot from acquisitions in the past several years we.
Have been able to remain highly selective while generating portfolio growth.
Net asset value per share for the quarter ended September 30th with $20.20.
For the third quarter of 2021 or net investment income with 36 cents per share.
As September 30th over 99% of a comprehensive investment portfolio was invested in senior secured loans and 77% of the portfolio fair value with allocated to our specialty fats investments.
Our most recent commercial finance acquisition Kingsbridge is performing well above expectations.
Our other specialty finance subsidiaries continue to rebuild their portfolios following their trough utilization levels, resulting from government stimulus and other COVID-19 induced challenges.
Src leverage that September 30th was 0.79 times net debt to equity.
Elevated levels of invest activity have continued into the fourth quarter based primarily on a few investments funding post quarter and are.
Net leverage at November 1st would be 0.9 times.
We believe that as existing loan commitments are funded an additional investments currently being underwritten or close over the next couple of months.
<unk> will approach the midpoint of a target range of 0.9 time to 1.25 times net debt to equity.
During the third quarter, we issued $50 million, a five year private unsecured notes at $2, 95% as a result, now 69% of our funded that is unsecured we are actually looking to term out additional funding.
Looking forward, we expect to deploy much of our low cost available capital towards new investments across a lending strategies and.
And our cash flow lending business, we're seeing an increase in the size of the companies seeking direct financings, rather accessing the syndicated loan market, which we attribute to financial sponsored desire for speed uncertainty of execution.
The scale of SLR sees investment adviser and its ability to hold up to $200 million of a given investment enabled us to participate in these upper middle market financings, which we continue to believe are better position to protect capital in the event of future economic disruptions.
Our specialty finance teams are poised for growth. They're also seeing increased deal flow as more companies look to pledge collateral to obtain working capital to fund growth initiatives.
The breath of our investment strategies means that we only need to see modest growth in Culver vertical to drive meaningful portfolio growth in earnings growth.
In addition, we have an active pipeline of bolt on a new specialty finance acquisition opportunities.
At this time I'll turn the call over to her coasts are CFO rich fatigue.
Take you to the third quarter financial highlights.
Thank you Michael.
Escolar investment corpse net asset value of September 30th 2021.
853, $5 million or $20.20 per share.
<unk> $857.4 million or $20.29 per share at June 30th 2021.
At September 30th 2021 as far as he is on balance sheet investment portfolio had a fair market value of 1.62 billion in 106 portfolio companies across 33 industries.
As compared to a fair market value of $150 billion and 101 portfolio companies across 27 industries at June 30th 2021.
At September 30th the company had $718 million of debt outstanding.
Leverage of 0.79 times net debt to equity.
When considering available capital from the company's credit facilities together with available capital of from the non recourse credit facilities at four credit solutions as for equivalent finance and Kingsbridge.
As for investment Corp had significant available capital to fund future portfolio growth.
Moving to the P&L for the three months ended September 30th 2021, gross investment income totaled $32 2 million.
Versus 35 $6 million for the three months ended June 30th.
Expenses totaled $17 2 million for the three months ended September 30th 2021 and.
And this compared to $21 million for the three months ended June 30th 2021.
Accordingly, the company's net investment income for the three months ended September 30th 2021 totaled $15.0 million with 36 cents per average share compared to $15.5 million with 37 cents per average share for the three months ended June 30th.
Below the line the company had net realized an unrealized losses for the third fiscal quarter totaling 1.6 million versus net realized an unrealized gains of $3.0 million for the second quarter of 2021.
Ultimately the company had a net increase in net assets, resulting from operations of $13 4 million or 32 cents per average share for the three months ended September 30th 2021.
This compares to a net increase of $18 $6 million.44 per average share for the three months ended June 30th 2021.
Finally, our board of directors declared a Q4 2021 distribution of 41 cents per share payable on January 5th 2022 is.
The shelves of record on December 16th 2021.
And with that I'll turn the call over to our co CEO.
Bruce Fuller.
You're rich.
Sorc's strong portfolio performance supports our underwriting thesis investing at the top of the capital structure and first lien cash flow loans to upper middle market borrowers and non cyclical industries as well as allocating a significant portion of our exposure to collateralized loans to.
Especially finance verticals.
A quarter and soldiers comprehensive portfolio was just over 2 billion and remained highly diversified encompassing over 600 issuers across 75 industries.
Our largest industry exposures, where healthcare provider's diversified financials life Sciences and software.
At 930 over 99% of our total portfolio consisted of senior secured loans.
Of those loans.
A 95, 5% were first lien and only three 8% were secondly up.
Three 8% secondly loans to 3% were cash flow and one 5% or asset base loans benefiting from borrowing basis.
At quarter end are weighted average asset level yield was 9.9% up slightly from the prior quarter.
By focusing on our niche commercial finance verticals, we've been able to maintain asset level yields close to 10%. Despite a decrease in LIBOR and spread compression.
Notably we've been able to maintain these yields while actively reducing our exposure to higher yielding second lien cash flow investments.
A quarter and the weighted average investment risk rating soldiers portfolio excuse me Slr's portfolio was under two based on our one to four risk rating scale with one representing the least amount of risk.
Total originations for the third quarter with $358 million in repayments were $260 million.
In addition, we had approximately $150 million of unfunded investment commitments outstanding at quarter end, which we expect to fund over the next couple of months.
Now, let me provide an update on each of our investment vehicles.
SLR sponsor finance, our cash flow vertical.
At September 30th or sponsor cash flow book was $456 million or approximately 23% of our total portfolio.
And it's invested across 24 borrowers with an average position size of just under 20 million.
The average EBITDA of these borrowers was approximately 90 million consistent with our focus on larger upper mid market borrowers.
During the third quarter, a compelling opportunity set of cash flow investments across healthcare software and financial services drove over $120 million a portfolio growth.
Additionally, origination volume in the fourth quarter should contribute to further growth.
Before year end.
And the third quarter, we made $185 million of new cash flow commitments and funded $140 million, we experienced repayments of only 18 million.
As Michael mentioned, we've been able to take advantage of the broader scale of the SLR platform to underwrite larger investment positions and first lien cash flow loans give.
Given the sponsor communities preference for partnering with just a few lenders each with large investment sizes.
Darcy would not be able to participate in these investments without the capacity of the broader SLR platform.
Recent commitments have grown to over $65 million demonstrating the benefit of our platform scale.
We have increased our delay draw term loans, which are issued by borrowers to fund future acquisitions. These.
These investments offer a prudent opportunity for SORC to grow its investment and establish credit with existing financial covenants.
At quarter end, SORC had close to $90 million of unfunded cash flow commitments, which we expect to contribute to additional portfolio growth.
At quarter end, the weighted average yield and our cash flow investment portfolio was just under 8%.
Now, let me turn to asset base lending SLR credit solutions.
At quarter end, our senior secured asset based portfolio was just over $400 million, representing 20% of our total portfolio.
Was invested across 28 borrowers with an average investment of just under 15 million.
The weighted average asset level yield of this portfolio was just over 12% compared to 10% at the end of the second quarter.
During the third quarter, we funded approximately $93 million of new asset based investments and had repayments of $76 million.
Credit solutions as seen a significant increase in its pipeline, which we expect to translate into portfolio growth in the coming quarters.
For the quarter credit solutions paid SLR C. A cash dividend a five $5 million.
Okay, Let me turn to corporate leasing Kingsbridge, we are a year into the investment in Kingsbridge and are very pleased with the results the credit quality of the portfolio remains strong and rich nations have been steady.
At quarter end Kingsbridge highly diversified portfolio of leases.
Totaled approximately $578 million with an average funded exposure of approximately $1.3 million per obligor. The portfolio was 100% performing with the majority of Kingsbridge portfolio invested in assets that are least by investment grade borrowers for.
For the third quarter Kingsbridge paid a dividend of three and $5 million to SLR consistent with the prior quarter, which equates to just over 10% annualized yield on cost.
Including the interest on our $80 million loan into Kingsbridge gross income generated by Kingsbridge for the third quarter was $5.2 million.
We expect to see Kingsbridge portfolio continue to expand in the coming quarters.
Now, let me turn to equipment finance.
As a reminder included in our equipment finance business are financings health both directly on our balance sheet as well as those held an SLR equipment finance.
Which is a subsidiary that for tax efficiency purposes hold certain investments.
During the third quarter equipment, finance invested $48 million and had repayments of $42 million.
The portfolio totaled $322 million.
It's invested across 100 different borrowers with an average exposure of three and a quarter million dollars.
The equipment finance asset class represents approximately 16% of our total portfolio.
100% of their investments are first lane.
And a quarter and the weighted average asset level yield was 9.7%.
During the third quarter.
Investment income from the equipment finance business, including the assets held on the balance sheet total for $3 million.
The rebound and activity economic activity that started.
About a year ago has continued through the third quarter and has been supportive of the performance of this equipment finance portfolio, we're seeing valuations returned to their pre COVID-19 levels.
Underlying equipment and the credit quality of our borrowers improved.
The team expects to grow this portfolio as we head into next year.
Finally, let me provide an update on our life science lending business.
A quarter and this portfolio totaled $235 million consisted.
Consisted of 13 bars with an average investment of approximately 18 million.
Life Science loans represented 12% of our total portfolio and contributed 27% of our gross investment income during the quarter.
Repayments, an amortization totaled $54 million.
During the pandemic, our life science portfolio experienced lighter churn than is typical as repayments start to occur at a more normal cadence.
The realisation fees and other income associated with these loans will become more consistent.
A quarter and solar head over $44 million of unfunded life signs commitments outstanding which are available to borrowers upon reaching certain milestones.
We expect that these may be drawn to fund continued growth in our life signs portfolio depending quarters.
Additionally, the life Science Finance team currently has a robust pipeline of new opportunities.
The weighted average yield on this portfolio was 9.6%, which excludes success fees and warrants.
In conclusion.
<unk> portfolio activity for the third quarter represents a continuation of the investment themes that have been driving our portfolio over the last few years.
Focusing new origination activity on firstly in cash flow loans and defensive sectors, increasing our investments and specialty finance assets, where we generally get tighter structures and more attractive risk adjusted returns.
And growing our investments alongside our portfolio companies by committing to delay draw acquisition financings.
Across all asset classes, including cash flow lending, we're seeing a large number of quality investment opportunities. This.
This increase is reflective of the solid economic rebound and increased middle market sponsor activity.
The current environment is attractive and provides a great opportunity for Src to grow its portfolio over the coming quarters now, let me turn the call back to Michael.
Thank you Bruce.
In closing the third quarter on the heels of a strong first half represented a robust origination period for SORC.
With several of these investments funding in the fourth quarter in particular are sponsor finance team capitalize on a strong opportunity set in our core industries. We are optimistic about our earnings growth potential and the opportunity to.
Across each of our investment verticals, we've got.
With the economic recovery in full swing in our portfolio on solid footing, we're focused on deploying are available capital into attractive investment opportunities.
Across her investment strategies, which which spanned cash flow ABL life sciences, an additional equipment financing a corporate leasing we're seeing robust origination activity, which would translate into continued portfolio growth in the coming quarters.
We believe we are still in the early early innings with substantial runway as financial sponsors deploy record amounts of dry powder and more of the larger businesses, we prefer to lend to choose direct financings over syndicated debt markets. These.
These industry Tailwinds combined with the scale of our investment adviser should benefit SORC investors through greater access to upper middle market casual investment opportunities, which <unk>.
Last year's proven are better positioned to protect capital than most smaller companies.
<unk>, we are reaping the benefits of our scale advantage and our cash flow life science and ABL verticals.
We have access to ample low cost capital with which to deploy with which to fund portfolio growth.
Does it continue to grow the portfolio, we believe NII will return to covering the dividend.
At 11 o'clock. This morning, we will be hosting and earnings call for the Q3 2021 result of SLR Senior investment Corp, or sons, our ability to provide traditional middle market senior secured financing through this vehicle continues to enhance origination team's ability to meet our clients capital needs and we continue to see benefits of its value proposition.
And our Dealflo. We thank you for your time operated could you. Please open the line for questions.
As a reminder to ask a question you will need to branch Taiwan on your telephone again it started in the number one on your telephone to ask the question can we draw. Your question. Please press the pound key.
Nissan biological by the Q&A lasting.
Our first question comes from the line as men Nathan with dialogue J D y.
Getting your line is now open.
Good morning.
Okay.
Wanted to clarify.
You mentioned $150.
Hopefully this committee that over the next couple of months.
And taking that is by year end is that appear assumption.
That's probably a little faster than we would anticipate Melissa.
I think it's more likely over the next.
Three or four quarters, it's a little bit unpredictable only because these are generally.
Acquisition lines that we don't get a lot of four warning at the time of draw. It's usually only a couple of weeks in advance, but it's important to note that that's just what's been committed to an an unfunded basis that will be drawn down. We also have additional fundings during the fourth quarter that we do expect to get funded so it's a combination.
Mission of these unfunded lines and new funded investments that will be coming on this quarter. So you'll probably get to the same result, but it won't be just from the usage of those unfunded lines this quarter.
Okay.
As a follow up.
Want to think about.
Increase in leverage currently in your portfolio.
I'm trying to find the impact on.
I think you just fine.
On the back of the envelope masquerade it seems like maybe someone does.
Sunday, an announcer seemed a little bit more towards the lower yielding categories the cash flow alone.
Also in others.
My understanding about that directly.
So so that is a great question.
I would say that the it's a mixture.
It is skewed there, but it is also inclusive of ABL as well as life Science, which is you know our higher yielding so we generally think it'll blend out to the portfolio yield that we carry today.
When you look across the mix and to put a perspective virtually all of our net originations this quarter or in cash flow and our portfolio yield one from nine 7% to 9.6%, So 10 basis points move not significant.
Okay.
Thank you.
We have a question from Matt Jayden is Raymond James Your line is now open.
Hey, guys morning, and I. Appreciate you taking my questions first one for me on the interest income line, so down quarter over quarter, even with portfolio growth and sounds like yields were kind of flat.
Any any noise in that line item, we should be aware of this quarter or is that purely just a function of of origination and repayment timing.
Sure.
I think first of all Q2, we did have more repayment income some of the life science investments in particular as you know as those repay generate a lot of fees at repayment be it.
I would like.
Prepayment fees, it warrants et cetera.
But also in Q3 as we've discussed most of the activity funded late in the quarter and in fairness in October and the beginning Q4, so there's definitely a timing element as well.
Got it that's helpful.
To me on on the cash flow segments. So a couple of theme over the last couple of quarters expectations kind of maybe for 2022 and the cash flow statement you sitting here today do you expect continued growth in this segment in 2022, we're kind of a a flattening after growth.
Quarter in the next.
Well look at today, it's about 23% of the portfolio to melissa's questions. There is continued cash flow.
Portfolio growth that will just come from drawing down the acquisition line commitments that we've already made.
So we do see some additional growth there, but again in the context of the overall business. We are seeing volumes pick up across each of our vertical. So I don't think the mix will shift much we expect growth in cash flow, but it would not call it disproportionate to the broader portfolio, maybe get to 25, 26%.
But not a significant change in the mix just overall growth across the segments.
Got it and last one for me just maybe on on pipeline and target leverage.
Based on funding quarter to date is it is it your expectation to achieve the midpoint of the target range, maybe in queue for or is that something maybe more so in early 2022.
So.
I would say that the following we have expected to achieve the 0.9 at September we ended up achieving October.
So whether it's going to be late Q for early Q1, it's hard for us to say, but I would say just because as you know the deal business things get shifted a month here or there.
It's a little bit of a dynamic process, but I would say over the next few months, we do expect to get to that midpoint.
Got it that's it for me I appreciate the time.
Thank you. Thank you very much.
Again to remind everyone to ask a question. Please.
And the number one on your telephone keypad.
If you have no.
Further questions. We thank you for your time this morning and for those of you who will be on our call for soldiers SLR senior.
In 20 minutes.
Thank you.
This concludes today's conference call. Thank you for participating you may know.
Okay.
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