Saratoga Investment Corp

Corp's 2025 Fiscal Third Quarter 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 like to turn the call over to Saratoga Investment Corp's Chief Financial and Chief Compliance Officer, Mr. Henry Steenkamp. Please go ahead, sir. Thank you.

I would like to welcome everyone to Saratoga Investment Corp's 2025 Fiscal Third 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 third quarter 2025 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. 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, Henry, and welcome, everyone. Saratoga Investment Corp. highlights this quarter includes sequential quarterly increase of adjusted NII, excluding the effect of one-time null and interest reserve reversal, improved latest 12 months return on equity of 9.2%, reflecting the solid, high-quality nature of our existing portfolio, Another increase in total NAV and steady NAV per share. Healthy originations in both new and existing portfolio companies, while also experiencing outsized redemptions of successful investments. And continued over-earning of our dividends. The substantial over-earning of the dividend this quarter continues to support the current level of dividends, increases NAV, supports increased portfolio growth, and provides a cushion against adverse events. This quarter's earnings reflects the impact of the past six-month trend of decreasing levels of interest rates and spreads on Saratoga Investments' largely floating rate assets, while not yet recognizing the full-time impact of the recent outsized repayments seen this quarter. The cost of most long-term balance sheet liabilities are largely fixed, though callable either now or in the near future, in the context of the significant level of available cash currently creating a negative arbitrage Management is evaluating the use of such calls prospectively to reduce current debt. From an overall investment value and current yield perspective, our annualized third quarter dividend of 74 cents per share implies a 12.2% dividend yield based on the stock price of 24.21 per share on January 7, 2025, or 90% of our third quarter's NAV. During the quarter, we began to see the early stages of a potential increase in M&A in the lower middle market, reflecting in multiple repayments during the quarter, in addition to significant new originations. As was the case in previous quarters, our strong reputation and differentiated market positioning, combined with our ongoing development of sponsor relationships, continues to create attractive investment opportunities from high-quality sponsors, despite lower overall mergers and acquisitions volumes, and elevated interest rate levels. 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, resilience, and balance of our $960 million portfolio in the current environment. Where we have encountered significant challenges in four of our portfolio companies over the past year, we've completed decisive action and resolved all four of these companies' challenges through two sales and two restructurings. Our current core non-CLO portfolio was marked down slightly by $1.4 million this quarter, and the CLO and JV were marked down by $4 million. This was offset by net realized gains of $1.2 million this quarter on various repayments, most notably the INVITA investment, and the $7.7 million of escrow realized gains, mainly from the former NETRIO investment, resulting in $3.5 million of total net reduction in portfolio value during the quarter. Our total portfolio fair value is now 0.7% below cost, while our core non-CLO portfolio is 3% above cost. Our originations this quarter were elevated as we began to see the effect of declining interest rates and increased M&A activity in the market. Deployments during the quarter included $85 million in two new portfolio company investments and eight follow-on investments in existing portfolio companies that we know well, all with sound business models and strong balance sheets. Our quarter-end cash position grew to $250 million, largely due to an outsized $160 million of repayments of successful investments in five portfolio companies and amortizations. exceeding the substantial $85 million of originations. The repayments include the recognition of a $4.8 million realized gain, along with $67 million of debt repayments from our successful five-year INVITA investment. This increase in our cash position improved our effective leverage from 160.1% regulatory leverage to 183.2% net leverage, netting available cash against outstanding debt. Our overall credit quality for this quarter remains steady, with 99.7% of credits rated in our highest category, with the two investments currently still on non-accrual status being Zollage and Pepper Palace, both of which have been successfully restructured, each representing only 0.3% of both fair value and cost. With 86.8% 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 stressed situations, we believe our portfolio and leverage are well-structured for challenging economic conditions and further changes in interest rates in either direction. As always, and particularly in the current uncertain environment, balance sheet strength, liquidity, and NAV preservation remain paramount for us. At quarter end, we maintained a substantial $474 million of investment capacity to support our portfolio companies, with $136 million available through our existing SBIC III license, $87.5 million from our two revolving credit facilities, and $250 million in cash. Saratoga Investments' third quarter of fiscal 2025 demonstrated a solid level of performance with our key performance indicators as compared to the quarters ended November 30th, 2023 and August 31st, 2024. Our adjusted NII is $12.4 million this quarter, down 5.3 percent from last year, and 31.7 percent from last quarter. And our adjusted NII per share is 90 cents this quarter, down 10.9 percent from 1.01 last year, and down 32.3 percent from $1.33 last quarter. When excluding the $7.6 million, which is equivalent to 44 cents per share, that impact of the non-recurring NOLAND investment interest reserve released in the previous and current quarter from its successful sale, adjusted NII increased one cent per share from 89 cents to 90 cents as compared to the previous quarter. Adjusted NII yield is 13.3% this quarter, down from 14.6% last year and from 19.7% last quarter. Latest 12 months return on equity is 9.2%, up from 6.6% last year and up from 5.8% last quarter, and beating the industry average of 8.5%. Our NAV per share is $26.95, down 1.7% from $27.42 last year, and down 0.4% from $27.07 last quarter. And our quarter end NAV was $374.9 million, up from $359.6 million last year, and up from $372.1 million last quarter. The $2.8 million increase in NAV sequentially resulted primarily from at-the-market sales of 108,000 shares at NAV. In addition, a further 356,000 shares were sold to the market at NAV for $9.6 million subsequent to quarter end, resulting in total sales of $12.6 million. While the past 12 months have seen markdowns to a small number of credits in our core BDC portfolio, slide 3 illustrates how our recent strong results have delivered a return on equity of 9.2% for the last 12 months, above the industry average of 8.5%. Additionally, our long-term average return on equity over the last 10 years of 10.4% remains well above the BDC industry average of 6.9%, 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. Outsized repayments offset strong originations this quarter, resulting in our AUM declining, yet this does not impact our expectation of long-term AUM growth. The quality of our credits remains solid, with only the two recently restructured Pepper Palace and Zollich credits on non-accrual, consistent with last quarter. Our management team is working diligently to continue this positive trend as we deploy our significant levels of available capital into our 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 Henry to review our financial results, as well as the composition and performance of our portfolio.