Saratoga Investment Corp

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp's 2024 Fiscal Year-End and Fourth Quarter Financial Results Conference Call. Please note that today's call is being recorded. During today's presentation, all parties will be in listen-only mode. Following management's prepared remarks, we will be opening the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp's Chief Financial, Chief Compliance Officer, Mr. Henry Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's 2024 Fiscal Year-End and Fourth Quarter 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 year end and fourth quarter 2024 shareholder presentation in the events and presentation 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. 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 Overbeck, who will be making a few introductory remarks.

Thank you, Henry, and welcome, everyone. Saratoga's adjusted net investment income per share for the year increased 44% as compared to last year, and for Q4 decreased by 2.5%, as compared to last year and 4% as compared to last quarter. The substantial year-over-year increase in NII reflects growth in AUM, strong overall portfolio performance, and margin improvement from year-over-year increased rates and spreads on Saratoga's investments, largely floating rate assets, with costs of financing liabilities remaining largely fixed. Perspectives on year-over-year quarterly performance include A $0.04 decrease from last year's Q4 includes $0.13 of dilution from the increased share count resulting from the recent equity ATM issuances this year at NAV, which have not yet been deployed in new investments. Higher quality income this quarter versus a year ago from a higher mix of recurring interest income, up 29%, and lower other income items, including structuring, advisory, and prepayment fees, which were down 44%, largely from a less robust M&A environment, and once yearly excise taxes were up $0.04 per share, or 71% over last year's fourth quarter. This quarter's earnings of $0.94, inclusive of the once annual $0.11 excise tax on undistributed taxable income noted above, significantly exceeded our recently increased dividend by 29%. The level of interest rates stabilized in the recent quarter, resulting in elevated margins on our growing portfolio relative to the past year. In addition, our ongoing development of sponsor relationships continues to create attractive investment opportunities from high-quality sponsors at attractive pricing terms and absolute rates, despite the constrained general volume of M&A over the past couple of years. We believe Saratoga continues to be well-positioned for potential future economic opportunities and challenges. Saratoga's credit structure, with largely interest-only, covenant-free, long-duration debt, incorporating maturities primarily two to ten years out, has positioned us well with the elevated level of interest rates delivering substantially increased margins and industry-leading dividend coverage. Most importantly, at the foundation of our performance, is the high-quality nature, resilience, and balance of our approximately $1.139 billion portfolio. Our core BDC portfolio, excluding our CLO and JV, is down 1.7% versus cost, including $13.8 million of markdowns this quarter in two discrete credits, Pepper Palace and Zolage, which is partially offset by $4.2 million of net unrealized appreciation in the rest of the core BDC portfolio. The remaining fair value of these two written down credits at year end is $6.3 million, and we are actively implementing management changes and capital structure improvements, which have the potential for future increases in recovery value. The overall financial performance and strong earnings power of our current portfolio reflects the strength of the underwriting in our solid, growing portfolio of companies in well-selected industry segments. We continue to approach the market with prudence and discernment in terms of new commitments in the current environment. Our originations this quarter demonstrate that, despite an overall robust pipeline, there are periods, like the current one, where many of the investments we review do not meet our high-quality credit standards. During the full year, we originated eight new portfolio company investments and had 65 smaller follow-on investments in existing portfolio companies which we know well. with strong business models and balance sheets. Originations this year totaled $246 million, with $30 million of repayments and amortization. This includes $43 million originated in 14 follow-on investments in Q4, offset by $11 million in repayments. Our credit quality for this quarter remained high at 98.1 percent of credits rated in our highest category, with three investments currently still on non-accrual, With 86% of our investments at quarter end in first lien debt and our overall portfolio generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and leverage is well-structured for challenging economic conditions and uncertainty. Saratoga's annualized fourth quarter dividend of 73 cents per share and adjusted debt investment income of 94 cents per share imply a 12.4% dividend yield and a 16% earnings yield based on its recent stock price of $23.57 per share on May 3, 2024. The over-earning of the dividend by 21 cents this quarter, or 84 cents annualized per share, increases NAV, supports the increasing dividend level and portfolio growth, as well as providing a cushion against adverse events. In volatile economic conditions such as we are currently experiencing, balance sheet strength, liquidity, and NAV preservation remain paramount for us. First, we raised $48 million of equity at NAV since the end of Q1, helping increase our NAV from $338 million as of May 31, 2023, to $370 million as of February 29, 2024. With shares trading below NAV during this period, the managers subsidized the issuance shortfall so that the BDC received the full NAV price for all shares sold. This equity provides additional balance sheet strength, reduces our overall regulatory leverage, and supports our strong originations. Second, at year end, we maintained a substantial $207 million of investment capacity to support our portfolio companies. with $136 million available through our newly approved SBIC III fund, $30 million from our expanded revolving credit facility, and $41 million in cash. And third, on March 27, 2024, we entered into a special purpose vehicle and a new three-year financing credit facility, which provides for incremental borrowings in an aggregate amount of up to $50 million. Saratoga Investment's fourth quarter demonstrated a solid level of performance with our key performance indicators as compared to the quarters ended February 29th, 2023 and November 30th, 2023. Our adjusted NII is $12.8 million this quarter, up 10 percent from last year and down 3 percent from last quarter. Our adjusted NII per share is 94 cents this quarter, down 4 cents from 98 cents last year and down 7% from 101 last quarter, inclusive of the dilution and excise tax factors noted earlier. Latest 12 months return on equity is 2.5%, down from 7.2% last year, and down from 6.6% last quarter. Our NAV per share is $27.12, down 7% from 29.18 last year, and down 1% from 27%. last quarter, and our quarter-end NAV is up $370 million from $347 million last year and $360 million last quarter. Importantly, KPIs related to full-year earnings power are adjusted NII for fiscal 2024 is $52 million, up 52% from $34 million last year, and adjusted NII per share is $4.10 per share this year, up 44% from $2.85 per share last year. While this past quarter and fiscal year have seen markdowns to a small number of credits in our core BDC portfolio, slide three illustrates how our long-term average return on equity over the past 10 years is well above the BDC industry average at 10.5% versus the industry's 6.5%. and has remained consistently strong over the past decade, beating the industry eight of the past 10 years. As you can see on slide four, our assets under management have steadily and consistently risen since we took over the BDC 14 years ago, and the quality of our credits remains solid, with only three credits on non-accrual unchanged from last quarter. Our management team is working diligently to continue this positive trend as we deploy our available capital into our pipeline while at the same time being appropriately cautious in this volatile and evolving credit environment. With that, I would like to now turn the call back over to Henry to review our financial results, as well as the composition and performance of our portfolio.