Saratoga Investment Corp. (SAR) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Saratoga Investment Corporation Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to hand the conference over to Mr. Rich Petrocelli, Chief Financial Officer. Sir, you may begin.

Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s Fiscal Fourth Quarter and Year-End 2013 Earnings Conference Call. Before we begin, I need to remind everyone that this conference call contains statements that to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual outcomes and results could differ materially from those forecasted due to many factors, which are described in the company's filings with the U.S. Securities and Exchange Commission. We do not undertake to update our forward-looking statements unless required to do so by law. A replay of this conference call will be available from 8:00 p.m. today through June 6. Please refer to our earnings press release for details. I would now like to introduce our Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Rich, and welcome, everyone. In fiscal year 2013, we continued to build upon the financial strength and positive momentum established in 2012. We increased significantly both the size and quality of our portfolio in 2013, investing almost twice the amount this year as compared to the year prior, with a commensurate increase in the percentage of higher quality credits in the portfolio. In addition, 2013 allowed us to develop plans to extend our capital resources, which came to fruition with our fixed-rate note issuance earlier this month. This additional liquidity will enable us to further grow our portfolio of investments in middle-market businesses. We continue to have a positive view of the demand for financing in the markets we address. I will return shortly with a review of our portfolio but I would now like to turn the call back over to Rich to review our financial results.

Thanks, Chris. Saratoga Investment Corp.'s net investment income for the fourth quarter ended February 28, 2013 was $2 million or $0.42 on a weighted average per share basis. Net gain on investments was $3.8 million or $0.81 on a weighted average per share basis, resulting in a net increase in net assets from operations of $5.8 million or $1.23 on a weighted average per share basis. Net asset value was $108.7 million as of February 28, 2013, an $11.3 million increase from NAV of $97.4 million a year before. NAV per share was $22.98 as of February 28, 2013 compared to $25.12 as of February 29, 2012. This decrease of reported NAV per share was due to the issuance of 853,455 shares of common stock and a payment of $3.3 million in cash in connection with the company's $16.5 million cash and stock dividend declared on November 9, 2012. For fiscal year 2013, ended February 28, 2013, our net investment income was $7 million or $1.71 on a weighted average per share basis. And our net gain on investments was $7.6 million or $1.84 on a weighted average per share basis, resulting in net increase in net assets from operations of $14.6 million or $3.55 on a weighted average per share basis. Our total investment income for fiscal year 2013 was $17 million, an increase of approximately $3.5 million or 25.9% compared to fiscal year 2012. Our investment income was comprised primarily of $14.4 million of interest income and $2 million of management fee income associated with the investment in the CLO. Our total operating expenses were $10 million and consisted of $2.5 million in interest and credit facility expenses; $2.1 million in base management fees; $1.2 million in professional fees; $2 million in incentive management fees; $516,000 in insurance expenses; $1 million in administrator expenses; and $580,000 in directors' fees and general, administrative and other expenses. For the fiscal year 2013, total operating expenses increased approximately $2.2 million or about 27.8% compared to the fiscal year ended February 29, 2012. This increase in total operating expenses was primarily attributable to higher interest and credit facility financing expenses, base management fees and incentive management fees. On February 28, 2013, we had $24.3 million of borrowings under our revolving credit facility with Madison Capital Funding and a cash balance of nearly $12.2 million. In addition, there was $36 million outstanding of SBA debentures. With the $45 million credit facility and the up to $150 million borrowing capacity at the SBIC subsidiary, Saratoga has a total of $195 million of borrowing capacity. On May 10, 2013, Saratoga Investment closed an underwritten public offering of $42 million in aggregate principal amount of 7.5% fixed-rate notes due 2020. On May 17, 2013, the underwriters exercised their overall allotment provision, bringing the total amount of fixed-rate notes raised to $48.3 million. The company intends to use the net proceeds from the offering to repay a portion of the outstanding indebtedness under its senior secured revolving credit facility and to fund new investment opportunities. That concludes my financial review. I will now turn the call back over to Chris.

Thanks, Rich. Before we open for questions, I would like to review the composition and performance of our investment portfolio. At the close of the fiscal year, the fair value of the company's investment portfolio was $155.1 million, principally invested in 28 portfolio companies and 1 CLO fund with $412 million of assets under management. Saratoga Investment's portfolio was composed of 54% first lien term loans, 6.2% second lien term loans, 15% senior secured notes, 3.1% unsecured notes and 5.2% of equity interests and 16.5% subordinated notes of a CLO. During the fiscal year 2013, Saratoga Investment Corp. invested $71.6 million in new and existing portfolio companies and had $21.5 million in aggregate amount of exits and repayments, resulting in net investments of $50.1 million for the year at the BDC. At the CLO, Saratoga invested $41.7 million in new or existing portfolio companies and had $51.7 million of exits and repayments. Some of our underperforming legacy investments were exited or otherwise liquidated during the fiscal year. We had $600,000 of realized gains due to exits from Energy Alloys and Grant U.S. Holdings. In closing, I would again like to thank all of our shareholders for their ongoing support. We are excited for the growth and profitability that lies ahead for Saratoga Investment Corp. And I would now like to open the call for questions.

[Operator Instructions] We do have a question from Allan Young from Raging Capital Management.

You have consistently shown the ability to raise capital, to put capital to work. That recent note raise was really very impressive, and the investments have been, so far, very successful. Given the importance of the cash dividend to the stock price, can you update us on your thinking about when you might want to start paying a cash dividend on the stock?

Thank you, Allan. And as you know, from our prior calls in this format, it is our desire to become a regular way BDC and pay a regular cash dividend. And so that's our ultimate desire. We have been managing our cash in a way where we continue to not pay a full cash dividend. We continue to pay the allowed 80-20, as you all know very well. It served us well so far with a net asset value of $108 million today. That's up from $74 million about 3 years ago.

2.5 years ago.

2.5 years ago. And so as of the year end, right. So in a 2.5-year period of time, we've increased more than $30 million our NAV, and that's a very important component for us because that helps define sort of the magnitude of individual investments we can make as we watch our NAV and our investment relative to NAV for asset allocation. And so what we need to do is, we need to build that NAV. And one of the ways to do it is to -- retaining the earnings, and the other way to do it is to do an equity offering. At this point in time, we have sufficient capital to grow our assets more than double than what they are right now and without raising additional equity capital. And retaining the dividend has helped us with our capital availability. So we right now do not -- we have -- we don't have a shortage of capital to deploy to build our assets, which is good news. And so our objective is to grow our assets substantially from here. And it's a combination of the magnitude of the asset growth and then the net investment income off of those assets. When it gets us into a position where we feel we can comfortably pay the dividend, that's when we will start paying the dividend. It is our objective to do that, but at this point in time, we are still a ways away in terms of absolute asset growth and earnings on those assets from being able to do that.

As you do the math, can you give a sense of what that size of investment portfolio would be?

Again, we're reluctant to make a statement that's an absolute statement, as you can appreciate, but directionally, we would think that as we move into the high $200 millions under management, we would be approaching the zone where we could entertain doing that. The one caveat to that would be, it'd be important to have a sufficient yield on those investments. So the net investment income is at a certain scale, but directionally, we think that's the place where we would begin to be able to seriously look at doing that.

And can you just comment on the pipeline of investment opportunities right now? And what -- any color on the rate of investment?

Well, I think we had a very high rate of investment at year end and in the beginning of the year, which has been reported with our filings and our press release. Our investment rate continues well. We don't see a falloff, if you will. It's not like the pipeline is -- there's no dramatic falloff. There was definitely a bit of a surge around year end because of tax change things going on. And so we did 5 deals in December, for example. So we don't anticipate having months like that. But since that time, we've closed a number of deals. And so we're on pace to grow our assets in -- right rich [ph] consistently with last year and more.

Last year, we added -- we invested $72 million and had approximately $20 million of prepayments. This year-to-date, we've invested approximately $24 million to $25 million. So I think we're at or a little better than last year's pace to date. I think the prepayments, given the market, may be -- may come in a little higher than last year, but we don't, at this point, see that being entirely different than last year.

I'm showing no further questions at this time.

Well, if there's no further questions, thank you, everyone, for joining us today. We look forward to speaking with you next quarter. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may now disconnect, and have a wonderful day.