管理層發言
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's First Fiscal Second Quarter 2026 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 line for questions. At this time, I would now like to turn the call over to Saratoga Investment Corp. Chief Financial and Chief Compliance Officer, Mr. Henri J. Steenkamp. Please go ahead.
Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal second quarter 2026 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 2026 shareholder presentation in the Events and Presentations section of our Investor website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year-end is February 28. So any reference to results reflects our August end period. A replay of this conference call will also be available. 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. Saratoga Investment Corp highlights this quarter include continued NAV growth from the previous quarter and year and NAV per share growth from the previous quarter. A strong return on equity beating the industry net originations of $22.4 million and importantly, continued solid performance from the core BDC portfolio in a volatile macro environment, including the return of our Xolage to accrual status, thereby reducing our nonaccrual investments to just one representing only 0.2% of portfolio fair value.
Continuing our historical strong dividend distribution history, we announced a base dividend of $0.25 per share per month or $0.75 per share in aggregate for 2026. Our annualized third-quarter dividend of $0.75 per share represents a 12.3% yield based on the stock price of $24.41 as of October 6, 2025, offering a strong current income from an investment value standpoint. Our Q2 adjusted NII of $0.58 per share continues to reflect the impact of the past twelve-month trend of decreasing levels of short-term interest rates and spreads on Saratoga investments largely floating rate assets and the continued effect of the recent repayments. Which has contributed to the buildup of $201 million of cash as of quarter-end available to be deployed accretively in investments or to repay existing debt. During the quarter, we continue to see very competitive market dynamics. These macro factors, our portfolio again saw multiple debt repayments in Q2 in addition to solid new originations. We originated $52.2 million including three follow-ons and new investments in multiple double B and triple B CLO debt securities. Our strong reputation and differentiated market positioning combined with our ongoing development of sponsor relationships continues to create attractive investment opportunities for high-quality sponsors. Which continued post quarter-end with three new portfolio company that are closed or in closing in Q3 so far. We continue to remain prudent and discerning in terms of the new commitments and the current volatile environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. At the foundation of our strong operating performance is the high-quality nature and resilience of our $995.3 million portfolio in the current environment. With all four historically challenged portfolio company situations resolved. One of these restructurings, Zollage, is seeing improved financial performance and has been returned to accrual status this quarter. Our current core nonportfolio non-CLO portfolio was marked up by $3.9 million this quarter, and the CLO and JV were marked down by $300,000. We also had $200,000 of net appreciation in our new double B and triple B CLO debt investments and a further net realized gains of $100,000 from an escrow payment on our modern campus investment, resulting in fair value of the portfolio increasing by $3.8 million during the quarter. As of quarter-end, our total portfolio fair value was 1.7% below cost, while our core non-CLO portfolio 2.1% above cost. The overall financial performance and solid earnings power of our current portfolio reflects strong underwriting in our growing portfolio companies and sponsors in well-selected industry segments. During the second quarter, our net interest margin decreased from $15.1 million last quarter to $13.1 million driven by a $2.1 million decrease in non-CLO interest income. This decrease was due first, average assets decreased $11 million or 1.1% to $954 million. Second, the timing of originations and repayment closings during the current and previous quarter with repayments more fully reflected in earnings and the full impact of new originations still having to flow through. And third, the absolute yields on the non-CLO portfolio decreasing from 11.5% to 11.3% as a result of SOFR rates resetting from earlier reductions combined with the impact of lower-yielding new originations during the quarter. In addition, the full period impact of the 200,000 shares issued to the ATM program in Q1 and the partial impact of the additional 400,000 shares issued in Q2 resulted in a $0.02 per share dilution to NII per share. Our overall credit quality for this quarter remains steady 99.7% of credits rated in our highest category, with now just one investment remaining on nonaccrual status. Pepper Palace, which has been successfully restructured representing only 0.2% of fair value and cost, respectively. With 84.3% of our investments at quarter-end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and company leverage is well structured for future economic conditions and uncertainty.
As we continue to navigate the challenges posed by the current geopolitical tensions and the volatility seen in the broader underwriting and macro environment, we remain confident in our experienced management team, robust pipeline, strong leverage structure, and disciplined underwriting standards to continue to steadily increase the size, quality, and investment performance of our portfolio the long term and deliver attractive risk-adjusted returns to shareholders. As always, and particularly in the current uncertain environment, balance sheet strength liquidity, and NAV preservation remain paramount for us. At a quarter-end, we maintained a substantial $407 million of investment capacity to support our portfolio companies. With a $136 million available to our existing SBIC three license $70 million from our two revolving credit facilities, and $201 million in cash. This level of cash improves our current regulatory leverage a 166.6% to a 186.5% net leverage. Netting available cash against outstanding debt. Moving on to Saratoga Investment's fiscal 2026 second quarter. Key performance indicators as compared to the quarters ended 08/31/2024, and 05/31/2025, are our quarter-end NAV was $410.5 million up 10.3% from $372.1 million last year, and up 3.6% from $396.4 million last quarter. Our NAV per share was $25.61 down from $27.07 last year and up from $25.52 last quarter. Our adjusted NII was $9.1 million this quarter, down 50.1% from last year and down 10.5% from last quarter. Our adjusted NII per share was $0.58 this quarter, down 56.4% from last year and down 12.1% from last quarter. Adjusted NII yield was 9% this quarter down from 19.7% last year and 10.3% last quarter. And latest twelve months return on equity was 9.1%, up from 5.8% last year and down slightly from 9.3% last quarter and above the industry average of 7.3%. While last year saw markdowns due to a small number of credits in our core BDC, Slide three illustrates how our recent results have delivered an ROE of 9.1% for the last twelve months. Above the industry average of 7.3%. Additionally, our long-term average return on equity over the past eleven years of 10.1% is well above the BDC industry average of 7%. Our long-term return on equity has remained strong over the past decade plus, beating the industry eight of the past eleven years and consistently positive every year. As you can see on slide four, our assets under management have steadily and consistently risen since we took over the BDC fifteen years ago despite a slight pullback recently, reflecting significant repayments. This quarter saw originations again outpacing repayments, resulting in an increase in AUM as compared to the previous quarter. The recent AUM decline over the past year does not detract from our expectation of long-term AUM growth. The quality of our credits remains strong, And with just one recently restructured investment remaining on nonaccrual, Pepper Palace, Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline. While at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I would like to now turn the call over to Henri to review our financial results as well as the composition and performance of our portfolio.
Thank you, Chris. Slide five highlights our key performance metrics for the fiscal second quarter, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q2 was 15.8 million, increasing from 15.3 million and 13.7 million shares for last quarter and last year's second quarter, respectively. Adjusted NII was $9.1 million this quarter, down 50.1% from last year and 10.5% from last quarter. This quarter's decrease in adjusted NII as compared to the prior quarter and prior year were both due to lower AUM and base interest rates. The decrease from the previous year's second quarter was also largely due to the non-recurrence of the $7.9 million Noland investment interest recognized last year that was previously on nonaccrual. The weighted average interest rate on the core BDC portfolio of 11.3% this quarter compares to 12.6% as of last year, 11.5% as of last quarter. The yield reduction from last year primarily reflects the SOFA base rate decreases over the past year. Total expenses this quarter, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes, increased $300,000 to $2.5 million as compared to $2.2 million last year and decreased $300,000 from $2.8 million last quarter. This represented 0.8% of average total assets on an annualized basis, unchanged from last quarter and up from 0.7% last year. Also, we have again added the KPI slides, 26 through 30 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past two years. Slide 30 is a new slide we added last quarter, comparing our nonaccruals to the BDC industry. You will see that our nonaccrual rate of 0.3% of cost is significantly lower than the industry average of 3.4%. This decreased from 0.6% last quarter due to our Xolage investment returning to accrual status. This highlights the current strength in credit quality of our core BDC portfolio. Moving on to Slide six. NAV was $410.5 million as of fiscal quarter-end. A $14.1 million increase from last quarter and a $38.4 million increase from the same quarter last year. During this quarter, $11.4 million of new equity was raised at or above net asset value respectively through our ATM program. This chart also includes our historical NAV per share. Which highlights how this important metric has increased 23 of the past thirty-two quarters, including by $0.9 this quarter. Over the long term, our net asset value has increased since 2011 and grown by $3.64 per share or 16.6% over the past eight years. On slide seven, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was down $0.8 in Q2, primarily due to, first, the decrease in non-CLO net interest income during the quarter up $0.10 due to recent decreasing AUM and base rates, And second, dilution from the increased DRIP and ATM program share count of $0.2. This was partially offset by both the decrease in operating expense of $0.2 and increases in the CLO and BB debt investments interest income of $0.2.
Thank you, Henri. Today, I will give an update on the market since we last spoke in July. And then comment on our current portfolio performance and investment strategy. Year to date, deal volumes in our market have been down significantly as compared to 2024 and are down further still as compared to 2021 through 2023. We believe that M and A activity will invariably revert to historical levels. But that pickup in deal volume appears to be postponed for the time being. Although the commencement of decreasing rates might help with that. The combination of historically low M and A volume in the lower middle market and an abundant supply of capital is causing spreads to tighten and leverage to remain full as lenders compete to win deals. Especially premium ones. Market dynamics are at their most competitive level since the pandemic. We've also experienced repayment activity some of our lower leverage loans being refinanced on more favorable terms. The historically low deal volumes we're experiencing have made it more difficult to find quality new platform investments than in prior periods. And with some viable concerns about the longevity of the current issuer-friendly environment, due to both market-driven and macroeconomic factors. We remain vigilant in our underwriting. As we noted on last quarter's call, this may naturally prompt the question of what is our approach to operating in this difficult deployment environment? In summary, first, stay disciplined on asset selection. Second, invest in and greatly expand our business development efforts in a market that is still largely underpenetrated by us. And third, continue to support our existing healthy portfolio companies as they pursue growth. The relationships and overall presence we've built in the marketplace combined with our ramped-up business development initiatives give us confidence in our ability to achieve healthy portfolio growth in a manner that we expect to be accretive to our shareholders in the long run.
Before leaving this topic, I'd like to reiterate that we continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we're able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documents are considerably stronger and our ability to actively manage our portfolio through ongoing with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects this. Additionally, during this past quarter, we continued to invest in multiple different CLO BB and BBB securities across eight different CLO managers for a total notional amount of $26.3 million. These investments have performed well through numerous economic cycles in the past, experiencing very low long-term default rates. While also providing enhanced yields relative to comparably rated corporate debt securities.
We anticipate third-party managed CLO BBs, and to a lesser extent, CLO junior BBBs will play an increased role in our investment portfolio going forward and will also allow us to take advantage of dislocations in the liquid loan and high-yield credit markets. Now our underwriting bar remains high as usual. In a very tough market. Yet we continue to find opportunities to deploy capital As seen on Slide 14, our more recent performance has been characterized by continued asset deployment to existing portfolio companies as demonstrated with 13 follow-ons in calendar year 2025 thus far, and we have invested in three new platform investments this calendar year as well. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term despite ever-changing and increasingly competitive market dynamics is a strength of ours. Portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams. During the quarter, our Xalage investment returned to accrual status, reflecting its improved financial performance leaving just Pepper Palace on nonaccrual, although we are still actively managing both, as discussed in previous quarters. This is a significantly positive development as now only 0.2% of the portfolio at fair value and cost, respectively, are on nonaccrual status. In general, our portfolio companies are healthy, and the fair value of our core portfolio, is 2.1% above cost. 84% 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.
Looking at average leverage on this slide, you can see that industry debt multiples move closer to six x with unitranche in the mid-fives. Total leverage for our overall portfolio is 5.34 times. Excluding Pepper Palace. Now Slide 15 provides more data on our deal flow. As you can see, the top of our deal pipeline is significantly up from the end of the calendar year 2024 despite the current M and A activity in the lower middle market remaining low. This recent increase of deal sourced is as a result of our recent business development initiatives with 20 of our of the 51 term sheets issued over the last twelve months being from deals that came from new relationships. Overall, the significant progress we've made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments.
Our originations this quarter totaled $52.2 million consisting of three follow-on investments totaling $25.9 million and double B and triple B CLO debt investments of $26.3 million. Subsequent to quarter-end, we closed or currently have in closing in our core BDC portfolio approximately $42.7 million of new originations in three new portfolio companies and two follow-ons. Including delayed draws. Two of the three new portfolio companies are with new relationships. As you can see on slide 16, our overall portfolio credit quality remains solid. As demonstrated by the actions taken and outcomes achieved on the nonaccrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models where we are confident that under all reasonable scenarios, the enterprise value of the businesses will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious. At the same time. Since our management team began working together fifteen years ago, we've invested $2.34 billion in 122 portfolio companies, and have had just three realized economic losses on these investments.
分析師問答
Hi, guys. Following up from some of Casey's questions. I mean, the the the comment I think that Mike made was you expect these these CLO debt tranches to be a more significant part of the investment strategy going forward. I mean, how much of the overall portfolio should we contemplate that strategy reaching over the next, you know, twelve months, give or take?
Well, I think that, you know, again, we're very cautious about predicting, you know, in calls like this. I think when Mike said that, I think he was referring to the fact we find it a very attractive investment category. And so we're so you know, we're open to deploying significantly more. We're not projecting doing doing more than that. I think right now, Henri, we're like, around 5%. You know? And we would be comfortable being, you know, larger know, maybe twice that much. I we don't know. But, I mean, we haven't we haven't made those determinations. We as as everything, we we kind of make our investments, you know, you know, individual credits at a time.