Q1 2022 Arrowmark Financial Corp Earnings Call

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Welcome to the Aramark Financial Corp, Q1, 2022 Investor Conference call. At this time, all participants are in a listen only mode. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would.

Now I'd like to turn the call over to Julie Morocco, Investor Relations for Aramark Financial Corp, formerly known as Stone Castle Financial Corp.

Before we begin this conference call I'd like to remind everyone that certain statements made during the call maybe considered forward looking statements based on current management expectations that involve substantial risks and uncertainties actual results may differ materially from the results stated in or implied by these forward looking statements Aramark financial has basically.

Forward looking statements included in this presentation on information available to US as of March 31, 2022, unless otherwise noted the company undertakes no duty to update any forward looking statements made herein.

In todays call the management of Aramark financial will be providing prepared remarks investors will have the opportunity to address their questions directly to management by calling investor relations at 2124685441 or E mailing J, Morocco at Aramark partners Dot com.

Now I will turn the call over to Sanjay Bosley.

Thank you Julie.

Good afternoon, and welcome to our Mark the National's first quarter Investor call for 2022.

Along with Julien here with me today is Carl I'll CFO .

And the next few minutes I'll briefly comment on the market environment.

Factors affecting the credit markets.

Commenting on the company.

Then I will provide financials.

Quarterly results and portfolio review.

And Pat will provide you with greater detail on our financial results.

So to start off.

The market today are experiencing volatility.

The reversal of nearly 15 years of near zero interest rate.

Which began during the great financial crisis come to ahead.

This monetary policy.

In part driven by the combination of current macro factors right.

Weighing on the market.

Including Ukraine crisis.

And disrupt the supply chain.

And pardon driving higher inflation.

With long term view in mind I want to put the macro factors.

Affecting the market into perspective.

When it comes to Aramark Natural Corp.

And our underlying investment.

Yes.

We believe that our investment portfolio, which is made up of security primarily issued.

Money Center Bank.

And U S community banks.

Well it would stand the macro factor affecting our current economy.

In fact, we.

We believe that our defensive approach.

Based on capital preservation.

Generation.

And Ernie total.

Recurring.

Combined with approximately 70% floating rate assets.

Allows for our investment portfolio to offer a strong inflation hedge.

Our beliefs are based on the following.

Baird.

Our investments are structured in a way that mitigates risk.

As previously mentioned.

All regulatory capital relief and less than a primarily issued by money Center banks.

And are well capitalized.

And are also investment grade rating.

We also deployed capital and well capitalized banks.

We invest in combo.

Trust preferred.

<unk> Securities issued by the bank.

Second.

In regards to our portfolio of regulatory capital and community Bank investment.

These investments are diversified.

Across the money center banks and community banks.

Third.

Referred to mitigate risks to our portfolio management process.

Although our investment team is in frequent contact with the issuers.

And clearly it's correct.

The portfolio.

Again, where economic scenarios.

And finally <unk>.

He has experience managing through multiple economic cycles and market conditions.

These experiences are exactly why we remain intently focused on credit quality when underwriting the portfolio.

Now I'd like to say a few words on the credit market.

Positive impact it can have on our earnings.

The U S tenure hit 30%.

First time since 2018.

The market that factor in at minimum 50 basis points increase announced last week.

While the credit and equity markets are expected to be volatile.

This period of rising interest rates.

We believe a rise in base rates should be beneficial to our portfolio.

What may not be falling down to our investors.

Is that approximately 70% of the company's total investment are in floating rate assets.

Notably the regulatory capital Securities.

The base rate.

LIBOR or software.

On regulatory capital in medicine.

Adjusted higher.

Richard Karn, one pathway into higher effective coupons it'd be the lesser.

All things being equal.

Anticipated increases in rates will provide air amongst the national.

The ability to increase the company's earnings.

We estimate.

That every 25 basis points increase in the fed funds rate.

Then translate into an additional.

Two one penny per share per quarter and net income.

All things being equal.

Okay.

Ill cover our origination pipeline.

And the community banking space, the primary and secondary market.

To be aggressively price and the forward for 5% coupon range.

But often low coupon rates that we saw in 2020 and 2021.

While our strategy continues to look across the entire banking sector.

There are regulatory capital lease securities today continue to be more attractive.

Adjusted basis.

Recently community banks.

However can.

The bank sub debt yields in the secondary market are increasing at some fixed rate low coupon from any bank securities are trading at a discount.

Jeff to a rising rate environment.

As such.

Community Bank issued securities in the secondhand market worldwide.

This should allow us to opportunistically invest in these instruments.

Now onto our multinational its results for the first quarter.

We are pleased to report that net investment income for the first quarter of 2022.

Approximately $3 million.

Or <unk> 42 per share.

Two 5% from the prior quarter.

I wanted to take a moment to reflect.

Since the second quarter of 2020.

When Aramark asset management took over management contract for the company.

Net investment income has consistently been reported in the <unk> 40 per share range or higher.

As some of you may recall during the first quarter of this year.

We announced an increase to our quarterly dividend by <unk> <unk> per share.

Our two 6% increase.

This is the first time the company increased its quarterly dividend rate in five years.

With regard to our net asset value at the end of the quarter.

Companies that maybe was $21 44.

<unk> 26 per share from the prior quarter.

This week, we released our unaudited estimated April .

Which was at $21 36 per share.

Even during volatile times can.

Can be relatively stable.

Provide some stability to our stock.

Now, let me turn to the portfolio.

During the first quarter the company invested a total of $6 million.

One regulatory capital transaction.

The security was purchased in the secondary market for an effective coupon opened at a lower percent.

I want to point out.

But the yields of the regulatory capital relief security will continue to benefit from the rise in interest rate.

Putting REIT structure.

The addition of the $6 million investment during Q1.

It was offset with $13 2 million in proceeds for call it investment and $4 million of partial paydown.

Subsequent to the end of the first quarter.

The company invested $23 8 million.

For transaction and received $6 4 million partial paydown.

Year to date portfolio activity in terms of new investments.

Repayments and partial pay down as a net positive impact.

Net investments, increasing $6 2 million.

The company's estimated yield on the portfolio investments.

As of March 31 was 95, 3% up five basis points over last quarter.

At quarter end I am pleased to report that total assets of the portfolio reported a $211 million.

Up 15, 6% from the prior year.

The investment portfolio was reported at $200 million.

One 4% from the prior year.

In closing my remarks, I want to highlight that for the first quarter.

Our financial reported an increase in net investment income.

An increase in the dividend.

In an attractive dividend yield of over 8%.

We firmly believe that during this volatile time.

The company is benefiting from the strategic mix.

Our regulatory capital investment and community Bank investment.

<unk> financial is the only public investment company.

<unk> is unique investment opportunity for investors.

Now I'd like to turn the call over to Pat.

Thank you Sanjay.

As I do each quarter I will present, the financial results by going through the components of the company's quarterly results in detail.

The net asset value on March 31 was $21 44 per share down <unk> 26 from the prior quarter.

The decline in NAV in part reflects the volatility of the credit market.

Now onto the breakdown of the components.

NAV is comprised of four components net investment income realized capital gains and losses the change in value of the portfolio with investments and lastly distributions paid during the period.

Let's review these components.

Gross income for the quarter was approximately $4 7 million or <unk> 66 per share.

Total expenses for the quarter were $1 7 million for <unk> 24 per share, resulting in net investment income for the quarter of 3 million or <unk> 42 per share.

As is the case every quarter the timing of calls and Paydowns impacts the income generation of the company.

Realized capital gains and losses in the quarter is the second component affecting the change in NAV.

Net realized capital gains from investment activities were approximately $2 3 million or <unk> 32 per share.

The third component changes in unrealized appreciation or depreciation of the portfolio.

It relates to how the value of the entire investment portfolio has changed from the previous quarter end to the current quarter end.

So the quarter the change in net unrealized depreciation on investments and foreign currency transactions was approximately $4 3 million or <unk> 61 per share.

I want to point out the gains and losses from foreign currency hedging activities do not impact our net income.

Fourth component affecting the change in net asset value is distributions.

The regular cash distribution for the quarter was 39 per share.

Sanjay mentioned the quarterly cash distribution was up one penny per share from the prior quarter, reflecting the company's confidence in its ability to meet and exceed this new dividend rate.

The distribution of <unk> 38 cents was paid on March 29.

In summary, we began the quarter with a net asset value of $21 70 per share.

During the quarter, we generated net income of $3 million.

Realized capital gains of approximately $2 $3 million and the unrealized value of the portfolio and foreign currency transactions decreased by $4 3 million.

Some of these components reduced by distribution of <unk> 39 per share resulted in a net asset value of $21 44 per share on March 31.

This was down 26 from the prior quarter.

Turning to the valuations for our portfolio holdings I want to particularly stress at this time and in these markets that the vast majority of the portfolio continues to be independently marked meaning we do not mark our own portfolio.

For the quarter, approximately 80% of the portfolio of prices remarks reflect a minimum of two quotations or actual closing exchange prices.

These quotations represent an independent third party assessment of the current value of the portfolio.

This should provide a greater degree of confidence in the companys underlying value versus other publicly traded closed end funds and bdcs portfolios are comprised of assets that do not have readily available market flotation and therefore self mark many of the assets in their portfolios.

At quarter end the company had total assets of 211 million consisting of total investments of $200 million and cash interest and dividends receivable and prepaid assets totaling approximately $11 million.

Of note year over year total assets increased $28 5 million or up 15, 6% as Sanjay mentioned earlier.

This asset growth was due in part to the Companys $10 $8 million registered direct offering in July of 2021, along with optimizing the use of our credit line.

At quarter end, our dividend yield was approximately seven 3%.

As of today, the dividend yield is over 8%.

Now let me update you on the balance of our credit facility on March 31, 2022, the company had $57 million drawn from the facility or 27% of total assets based on regulated investment company rules, we may only borrow up to 33, 3% of our total assets.

Now I want to turn the call back over to Sanjay for closing remarks.

Thank you Pat.

I'd like to thank everyone on the call for listening in today.

We appreciate your continued support and hope to visit with you in your office soon.

Good night ladies.

Ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Okay.

Yes.

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