Saratoga Investment Corp. (SAR) Q3 2016 Earnings Report, Transcript and Summary

Welcome to Saratoga Investment Corp's Fiscal Third Quarter 2016 Financial Results Conference Call. [Operator Instructions]. At this time I would like to turn the call over to Saratoga Investment Corp's Chief Financial Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal third quarter 2016 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 2016 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 from 1 PM today through January 21. Please refer to our earnings press release for details. I would now like to turn the call over to our Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Henri, and welcome everyone. Since becoming Manager of Saratoga Investment, we have been guided by a singular focus on increasing the quality and size of our asset base with the ultimate purpose of building Saratoga Investment Corp. into a best-in-class BDC, generating meaningful returns for our shareholders. The 2016 fiscal third quarter has continued our trend of outperformance. As highlighted on slide two during this past quarter, many of our metrics illustrate the steadfast commitment and underscore our continued momentum. To briefly recap, first, we continued on our path of strengthening our financial foundation by expanding our net asset value to $127.03 million, a 1.6% increase from $125.3 million at the end of last quarter; maintaining our strong levels of investment quality and credit with over 97% of our loan investments now having our highest rating; and generating a return on equity of 10.8% for Q3 and 12.9% year to date, greatly outperforming the industry average of approximately 4.3%. Second, while we remain ever focused on building scale, we have endeavored to maintain a robust high-quality asset base with a strong yield and return on equity. Although this quarter saw new originations of $15.3 million, our assets under management contracted slightly this quarter due to an unusual concentration of $27.9 million of redemptions particularly in our SBIC. The timing of redemptions and the new rate originations during this quarter were unusual with most redemptions occurring during the quarter while many new originations occurring following quarter end. This is demonstrated by new investments of $31.2 million subsequent to quarter end and as of January 12, 2016, versus $3 million of redemptions. While we're continuously exposed to further redemptions, we wanted to highlight the unusual timing this quarter of the redemptions and the subsequent originations. Our significant investment activity since quarter end is consistent with our continued long term upward trajectory and asset growth while recognizing that growth can be lumpy when viewed on a quarterly basis. In addition, positive returns from these redemptions have increased our return on equity and net asset value as noted above. Third, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the fifth consecutive quarter. We will pay a quarterly dividend of $0.40 per share for the third fiscal quarter 2016 payable on February 29, 206 for all stockholders of record on February 1, 2016. Our quarterly dividends have increased by 122% at the start of our dividend program and these dividend payment increases are exceeded by our net investment income per share for the same period. As a result, we're comfortably earning our dividend which distinguishes us from many other BDCs. Fourth, our base of liquidity remains strong and promises to improve. Effective May 29, 2015, we entered into a debt distribution agreement with Ladenburg Thalmann through which we may offer for sale from time to time up to $20 million of aggregate principal amount of our existing Baby Bonds issuance through an at the market offering. As of November 30, 2015, we sold bonds this year with a principal of $13.1 million at an average price of $25.31 for aggregate net proceeds of $13 million. And the increased available liquidity as a result of redemptions this quarter gives us more dry powder to meet future potential opportunities in a changing credit and pricing environment. Our quarter end liquidity allows us to grow our existing assets under management by more than 60% without any new external financing. Finally, we continue to have in place our share repurchase program that allows us to repurchase up to 400,000 shares of our common stock. No shares were repurchased under this plan during this quarter. However, we continue to assess this as a way of deploying our capital and improving shareholder returns. We also remain encouraged by the continued expansion and diversification of our shareholder base and the positive discussions we have had with both new and existing shareholders. Most of our key performance indicators for fiscal third quarter 2016 as compared to last year's third quarter were slightly down primarily due to two factors. Firstly, last year's third quarter had outsized dividend income of approximately $400,000. It was highlighted at the time as once off. Secondly, this quarter saw a reduced interest income from significant redemptions in the quarter while generating very positive returns on these investments resulted in cash awaiting deployment especially in our SBIC which was redeployed shortly after quarter end. In summary, our adjusted net investment income decreased by 18% to $2.3 million, adjusted net investment income on a net asset value decreased to 7.4% down 210 basis points from 9.5% and adjusted NII per share of $0.42 was down 21% from $0.53. On a year-to-date basis comparing the nine months ended November 30, 2015 to last year's comparable period, our adjusted net investment income increased by 11% to $8.1 million. Adjusted net investment income on net asset value increased to 8.6%, up 30 basis points from 8.3%, adjusted NII per share of $1.46, up 7% from $1.36. However as we mentioned earlier, despite these redemptions, our return on equity, a metric that factors in not only the net investment income performance of the portfolio but also the overall realized and unrealized return, was 10.8% for Q3 and 12.9% year to date. Even in a quarter where we saw numerous closings roll into the following quarter we comfortably beat the industry average of approximately 4.3%. As you can see on slide three, the quality and quantity of assets has remained largely stable quarter on quarter. We saw an unusually concentrated number of redemptions this quarter with $15.3 million of originations offset by $27.9 million of redemptions resulting in a 4% reduction in assets under management to $241 million as of November 30, 2015. From another perspective, our assets under management at quarter end reflect 153% increase in AUM since fiscal year 2012 with over 97% of our current loan investments holding the highest internal rating of the award. With that, I would like to turn the call back over to Henri to review in greater detail our full financial results as well as the composition and performance of our portfolio.

Thank you, Chris, and happy New Year to everyone. Looking at our quarterly key performance metrics on slide four, we see that for the quarter ended November 30, 2015, our net investment income was $2.2 million or $0.38 on a weighted average per share basis. Adjusted for the incentive fee accrual related to net unrealized capital gains, our net investment income was $2.3 million or $0.42 per share. This represented a decrease of $0.5 million as compared to both the same period last year as well as last quarter. This decrease is primarily due to two factors. Firstly, last year's third quarter had outsized dividend income that was highlighted at the time as once off. And secondly, this quarter saw reduced interest income from significant redemptions in the quarter reducing our asset base resulting in cash awaiting asset deployment which was only deployed shortly after quarter end. This delay in deploying assets reduced interest income while still incurring interest expense on outstanding SBA debentures with much of the redemptions being in our SBIC. In situation such as those we faced this quarter, when the redemptions occur early in the quarter and the cash is only redeployed a few days after quarter end, we choose to absorb the negative interest spread during the interim so as not to limit our overall available liquidity long term. Importantly and what we're very pleased about is that these redemptions have generated positive returns that are accretive to both net asset value and return on equity as seen in the growth of both metrics. In the third quarter of fiscal 2016, we experienced a net gain on investments of $1.3 million or $0.23 on a weighted average per share basis resulting in a total increase in net assets from operations of $3.4 million or $0.61 per share. The $1.3 million net gain on investments was comprised largely of $0.8 million in net unrealized gains and $0.4 million in net realized gains. This realized gain this quarter increases our net realized gains for the nine months this year to $4.2 million or $0.81 per -share reflecting the credit strength of our portfolio. Net investment income yield as a percentage of average net asset value was 6.8% for the quarter ended November 30, 2015. Adjusted for the incentive fee accrual, the net investment income yield was 7.4%, down from 9.5% last year and 9.3% last quarter. The decrease reflects the factors I discussed earlier. For the nine months this year, the net investment income yield was 8.1% or 8.6% on an adjusted basis. Much focus and attention is always placed on net investment income. However, we also view return on equity which includes both realized and unrealized gains as an important financial indicator, as the reflection of the overall performance of the portfolio. Our return on equity was 10.8% for this quarter and 12.9% for the nine months ended November 30, 2015 easily beating the market average which is just over 4%. These all remain performance metrics that we feel are important indicators of our success in pursuing our strategy of growing the asset base, building scale and generating competitive yields while continuing to prioritize the quality of our portfolio. These metrics are expected to continue to improve as we put further capital to work and SBIC assets continue to grow as compared to our overall assets under management. The greater net investment income on these investments financed through lower cost SBA debentures contributes more to our bottom-line. SBIC assets increased again this quarter to 63% of our total investments. Our total investment income was $6.9 million for the fiscal third quarter 2016. Total investment income decreased $0.4 million or 5.1% compared to the third fiscal quarter last year. Our total investment income for this quarter was comprised primarily of $6.2 million of interest income, $0.4 million of management fee income associated with our CLO and $0.3 million of other income. Other income includes dividends received from portfolio companies as well as origination, structure and advisory fees. Our total operating expenses were $4.8 million for the fiscal third quarter and consisted of $2.1 million in interest and debt financing expenses, $1.5 million in base and incentive management fees, $0.7 million in professional fees and administrator expenses and $0.5 million in insurance expenses, directors fees and general, administrative and other expenses. For this fiscal third quarter, total operating expenses increased by $0.1 million as compared to the same period last year. Total expenses excluding interest and debt financing expenses, base management fees and incentive management fees increased from $0.8 million for the third quarter last year to $1.2 million for this quarter. This increase is primarily due to higher professional fees related to the issuance of the notes this quarter that are required to be expensed as well as increased administrator expenses and deal research fees. As you might have noted, our prior period numbers for November 30, 2014 have been revised to reflect adjustments outlined in our notes to the financial statements included in our Form 10-Q including the early adoption of a new accounting standard. Despite heavy redemptions, a slight reduction in our assets and our growing dividend our net asset value continues to grow furthering the consistent growth delivered over the past five years. As you can see on slide five, our NAV has grown from $86 million as of February 28, 2011 to $127.3 million as of November 30, 2015, an increase of 48%. This $127.3 million current NAV also represents a $2 million increase from $125.3 million as of last quarter and a $4.1 million increase from $123.5 million as of February 28, 2015. For the nine months ended November 30, 2015, $10.8 million of dividends were declared, $7.6 million of net investment income and $4.2 million of net realized gains were earned and $3.8 million of stock dividend distributions were made. NAV per share was $22.59 as of this quarter compared to $22.42 as of last quarter and $22.70 as of February 28, 2015. During the nine months since the start of fiscal year 2016, NAV per share decreased by $0.11 per share primarily reflecting $4.7 million or a $0.83 per share increase in net assets offset by the dilutive impact of the 234,716 shares issued pursuant to the dividend, reinvestment plan during this period. The $0.83 per share increase in net assets is net of the $1.96 dividend paid during fiscal year 2016. Moving on, slide six outlines the dry powder available to us as of November 30, 2015. As of the end of the fiscal third quarter, we had no outstanding borrowings under our revolving credit facility with Madison Capital and $79 million in outstanding SBA debentures. Our baby bonds had a carrying amount and fair value of $61.4 million and $61.5 million, respectively. With the $45 million available on the credit facility, $71 million additional borrowing capacity at our SBIC subsidiary and $27.2 million in cash and cash equivalents, we had a total of $143.2 million of available liquidity at our disposal as of quarter end. This available liquidity equates to approximately 60% of the value of our investments meaning we can grow our quarter end assets under management by a further 60% without any additional new external financing. We remain pleased with our liquidity position especially taking into account the conservative composition of our balance sheet and the ability we have to substantially grow our assets without the need for external financing. We also continue to assess all our various capital and liquidity sources and will manage our sources and uses on a real-time basis to ensure optimization. As we had previously discussed effective May 29, 2015, we launched and at the market offering of our existing baby bonds issuance through which we may offer to for sale from time to time up to $20 million in aggregate principal amounts. This is the benefit of having our N-2 shelf registration statement allowing us to capitalize on market opportunities. As of November 30, 2015, we had sold 522,981 bonds this year with a principal of $13.1 million at an average price of $25.31 for aggregate net proceeds of $13 million enabling us to further enhance our liquidity and plan ahead for future capital needs such as the remainder of our first SBIC license in the future funding of a second SBIC license. These new issuances are under the exact same terms as the original baby bond offering in 2013. Now we would like to move on to slides seven through nine and review the composition and performance of our investment portfolio. Slide seven highlights the portfolio composition and yield at the end of the quarter. As of quarter end, fair value of the company's investment portfolio was $241 million principally invested in 31 portfolio companies and one CLO fund. Our portfolio was composed of 60.4% of first lien term loans, 18.1% of second lien term loans, 6.6% of syndicated loans, 6.6% of subordinated notes of the Saratoga CLO and 8.9% of common equity. The weighted average current yield on the portfolio as of November 30, 2015 was 11.2% which was comprised of a weighted average current yield of 10.9% on first lien term loans, 10.6% on second lien term loans, 7.2% on syndicated loans and 18.9% on our CLO subordinated notes. Despite downward pressure on yields due to continued competition, our yields have remained strong. To further illustrate this point, slide eight demonstrates how the yield on our core BDC assets excluding our CLO and syndicated loans has remained consistently around 11% over the past four years. While the CLO yields decreased this quarter, syndicated yields continue to move steadily upwards. Most of the volatility in the overall yield was reflective of the change in the CLO yield as calculated. Moving on to slide nine, during the fiscal third quarter 2016, we invested $15.3 million in new and existing portfolio companies and had $27.9 million in exits and repayments resulting in net redemptions of $12.6 million for the quarter. As you can see on this slide, our investments continue to be highly diversified by type as well as in terms of geography and industry, a large focus on business, consumer and healthcare services as well as software as a service while spread over 12 distinct industries. It is worth noting that we have no significant direct exposure to the oil and gas industry. Of our total investment portfolio, 8.9% consists of equity interest. Equity investments are and will continue to be an important part of our overall investment strategy. Slide 10 demonstrates how realized gains from the sale of equity investments combined with other investments has helped enhance shareholders capital. For the past three years, we have had a combined $9.3 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This quarter we again had $0.5 million. This consistent performance continues to be a good indicator of our portfolio credit quality. That concludes my financial and portfolio review. I will now turn the call over to Michael Grisius, our President and Chief Investment Officer, for an overview of the investment market.

Thanks, Henri. I would like to take a couple of minutes to update everyone on the current market as we see it, then I will discuss our portfolio strategy and performance as we operate in this environment. Over the past couple of quarters, we have found ourselves reviewing a larger number of deals yet it is proving more difficult to find high quality transactions in the pipeline of opportunities that exist. Slide 11 shows the results of a quarterly survey of junior debt participants for calendar Q3. Not much has changed from last quarter. It demonstrates how although junior debt providers reviewed a slightly lower number of opportunities this past quarter, very large 88% of respondents still reviewed more than 25 deals and 100% of respondents submitted at least one letter of intent during the first quarter. With our increased business development activities that I will highlight later, our specific experience has actually been that we're continuing to review more and more deals. Closed transaction activity continues to be down significantly with closings down another 36% this quarter as the majority of respondents closed either zero or just one transaction during the quarter. In addition, several data sources and our own experience indicate that gross investment yields have remained tight. Despite the NII pressure facing many BDCs, we have not seen a widening of yields in the non-syndicated markets. Our experience is that high-quality deals remain in high demand. Most quality investment opportunities being pursued by multiple parties processes. Slide 12 further demonstrates how fewer deals are being done. The number of transactions for deal sizes in the U.S. below $25 million year-to-date in 2015 is down 47% from calendar year 2014. In the first 11 months of calendar year 2015, there were only 924 private equity deals -- deal closings in the smaller deal market compared to 1904 for the full year last year. The decline has continued to accelerate from a 44% year-over-year reduction when we last reported this. In the face of these difficult market trends, we feel good about the overall strength of our portfolio and the returns we have generated through our origination activity. We also remain optimistic of our own pipeline and originations. Our overall portfolio quality is strong and is even stronger when evaluated taking into account only the assets originated by Saratoga since we took over the management of the BDC. The gross unleveraged IRR on realized investments made by the Saratoga management team since 2010 are 14.5%. Similarly, redemptions from this past quarter alone excluding syndicated loans generated gross unleveraged returns of 20.3% with the IRR for the past nine months being 17.3%. While redemptions can present a challenge because they naturally curtail our asset growth, we believe they are also a strong indicator of the strength of our investment team and our investment selection process. Realizations mostly occur when companies are performing well and they either enter into a change of control transaction or a refinance with cheaper capital. Our investment activity since quarter end has illustrated the strength of our growing and reliable origination platform. As Chris mentioned earlier since our fiscal third quarter end, we have had new originations of $31.2 million, significant as compared to historical quarters and more than offsetting our lumpy third quarter redemptions. Our expanding presence in the lower end of the middle-market has provided us increased origination volume over time as well as given us confidence in our ability to deploy capital at a healthy pace despite market trends to the contrary. As we have dedicated more resources to our business development effort, we have generated an increased number of investment opportunities. Our reputation for being fair-minded and supportive investors has increased our pace of referrals from small business owners and management teams. In addition, we continue to increase our private equity sponsor relationships. We believe this will allow us to further accelerate our pace of investment while we remain diligent and careful in our investment approach. As we mentioned last quarter, we also believe our origination activity is a function of our presence in the small business marketplace. The origination activity of many of our competitor BDCs is highly dependent on private equity activity of a relatively smaller group of firms at the larger end of the market. In contrast, given the sheer quantity of smaller businesses that occupied the lower end of the middle-market where we operate, we're confident that we can increase our pace of investment by continuing to grow our qualified deal pipeline. Moreover, we have significant room to expand our deal sourcing relationships as we're still not known by many participants in the market. We have continued to make significant strides in expanding our relationships and are confident that these relationships will create higher origination activity in the future. We believe our production in fiscal Q3 and so far in Q4 is a good indicator of the growing strength of our origination platform. During this timeframe, we closed seven transactions with a healthy mix of partners. These transactions include two deals that were with new relationships with private equity funds, a couple of new deals with relationships we have worked with before and various follow-on investments to support the growth of existing portfolio companies. We also continue to believe that the lower middle market is the most attractive market segment to deploy capital and the fundamentals here remain strong leading to the best risk-adjusted returns in our view. In the chart on slide 13, you can see that multiples in the industry seem to have come down off a high in the second calendar quarter 2015. 62% of the market debt to EBITDA multiples were 4.1 times or higher this past period ending November 30, 2015, a significant decrease from 92% in calendar Q2. Historically the majority of our closed deals are beneath that level. The average SAR leverage for all of our deals at 3.9 times. In addition, the majority of our investments are in first lien assets. We're very careful to exercise extraordinary investment discipline and invest only in credits with attractive risk return profiles. Of importance to us when doing deals with higher leverage is to ensure that our dollars are invested in companies with exceptionally strong business models where we're confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investment. As we have noted before, deals are not necessarily low risk when they have low leverage and high risk when they have high leverage. Decline plenty of low leverage loans to weak credits and frequently pursue higher leverage loans to strong companies. The most important thing for us is that we remain thorough and disciplined in assessing the risk profile of each underlying business and that we craft the capital structure to match the relative strength of each portfolio company. Slide 13 also demonstrates the steady long term growth that we have had in the number of executed investments. With a strong execution track record for the past couple of quarters as well as year-over-year growth, our executed investments doubled from seven in 2013 to 14 in calendar year 2014. In calendar 2015, we executed 16 investments, four in December post quarter end despite the current pressure in the marketplace that we discussed earlier. Our growth over the past couple of years has been in an extremely competitive market which speaks to our strengthening origination efforts and as overall portfolio quality has improved to the risk profile of our investment portfolio and the investment philosophy of the firm. The tougher environment that currently exists in closing deals highlights the importance of having a robust pipeline and as you can see on slide 14, we have made great strides in expanding our relationships and are confident these relationships have created higher origination activity. In calendar 2015, we sourced 609 deals, up 27% from last year while issuing 67 term sheets of 56% over the same period. Not only are we seeing more deals but we're engaging further through the term sheet process more often. Currently we're closing approximately 2.6% of deals reviewed. With additional origination and due diligence resources that we have added to the team recently, we believe that we will be able to continue to evaluate and close more deals going forward despite increasingly adverse market conditions and all of this while maintaining our investment quality. We view this as an achievement but expect to improve upon this performance. With respect to our SBIC, our objective remains to maximize our risk-adjusted returns in a manner that utilizes the low cost of capital and the 2 to 1 leverage advantage we possess through our SBIC license. By focusing on the smaller less competitive end of the market, we're able to reduce the risk profile of our portfolio while delivering highly accretive returns to our investors. As you can see on slide 15 as of November 30, 2015, approximately 63% of our SBIC investments are on senior debt securities. With the typical exception of small working capital facilities, these are the most senior debt in the capital structure and exclude first lien and last out debt because of the leverage and lower cost of capital advantages inherent in the SBIC program, we can achieve strong returns for our shareholders without moving far out on the risk spectrum. Therefore, we tend to grow our net investment income by continuing to dedicate the majority of our effort and resources to growing that portion of our portfolio. With that in mind moving on to slide 16, you can see that our SBIC assets remained relatively flat quarter over quarter at $151 million as of November 30, 2015. However our SBIC assets are up 11% from $136 million at fiscal year-end 2015. As a percentage of our total portfolio, SBIC assets have grown from 0% of our total portfolio at fiscal year-end 2012 to 63% this quarter. This growth in SBIC assets is an important part of our continued increase in net investment income as the lower financing costs help grow our NII yield at a healthy pace. Also it is important to note that as of this quarter ended November 30, 2015, that $86.3 million total available SBIC investment capacity of which $71 million is leveraged capacity within our SBIC license. If we were to obtain a second license in the future, the leveraged capacity would increase by at least $75 million with the ability to increase assets by an additional $112.5 million. This leverage capacity could potentially increase the recent progress of the Family of Funds Bill. Fundamentally our strategy in this market is to focus on our core strengths, our origination platform, our experienced and disciplined underwriting and our SBIC funding capacity. So in summary, our view remains that our origination platform is among the very best at our end of the market and we're dedicating more resources toward it. Likewise, the strength of our investment team and our underwriting process is evidenced by the overall health of our portfolio, strong investment returns we have generated since becoming managers of the BDC. Redemptions are tough to predict and as we have seen this quarter, asset growth can be lumpy on a quarterly basis because of that. But through our origination platform and our growing list of business relationships, we're seeing a steady flow of SBIC eligible and other BDC investments. We're optimistic about our ability to grow our portfolio and earnings at a healthy rate while remaining extremely diligent in our underwriting and due diligence procedure. This concludes my review of the market. I would like to turn the call over to our CEO.

Thank you, Mike. Since assuming the management of Saratoga Investment Corp., paying regular quarterly cash dividends was an important goal for us. Since reaching that goal, our quarterly dividend has increased consistently. After today's further increase, we have now increased our dividend 122% since the commencement of the new quarterly dividend program. As outlined on slide 17, over the past six quarters, Saratoga has paid quarterly dividends of $0.18 per share for the quarter ended August 31, 2014; $0.22 per share for the quarter ended November 30, 2014 [Technical Difficulty], payable on February 29, 2016, to all stockholders of record at the close of business on February 1, 2016. Consistent with our new policy, shareholders will have the option to receive payment of the dividend in cash or receive shares of common stock pursuant to the company's dividend reinvestment plan or DRIP plan which Saratoga adopted in conjunction with the new dividend policy. The DRIP plan provides for the automatic reinvestment of dividends on behalf of stockholders. Our goal with this policy remains to allow stockholders who want cash to receive their dividend in cash. However, it also provides the opportunity for many stockholders we have spoken to who are interested in reinvesting their dividends to receive additional shares of common stock. Experience has shown that those stockholders who hold their shares with a broker must affirmatively instruct their brokers prior to the record date if they prefer to receive this dividend and future dividends in common stock. The number of shares of common stock to be delivered shall be determined by dividing the total dollar amount by 95% of the average of the market prices per share at the close of trading on the 100 days immediately preceding and including the payment date. For more information, stock information section of the company's investor relations website. Slide 17 also shows how we're currently significantly over earning our dividend. This new Q3 dividend of $0.40 per share compares to our average NII per share of $0.46 for the year which means we're currently over earning our dividend by 15% for the year. This gives us one of the highest dividend coverages in the BDC industry. On slide 18, you can see how far we have come in terms of dividend yield, continuously reducing the gap between us and other BDCs, placing us now close to in line with the industry average. Based on our recent share price, this dividend represents a dividend yield of 10.7% while at the same time we're still significantly over earning our dividend. We continue to have in place our existing share repurchase plan that allows us to repurchase 400,000 shares of common stock at prices below NAV and has been extended through October 2016. No shares were repurchased under this plan during this quarter but we're continuously assessing how to best utilize this plan. In addition to being very proud of the growth in our NAV while maintaining the high quality of our assets, we're also pleased to see our industry-leading total return figures. As you can see on slide 19, our total return which includes both capital appreciation and dividend has put Saratoga Investment at the top of its industry as compared to other BDCs since we took over the management of the BDC. The slide shows the performance since we took over management in 2010 that our one-, three- and five-year total return performances are similar. On slide 20, we illustrate the comparative performance in a different way comparing our total return performance of the BDC Index for the last 12 months. As you can see, we outperformed the BDC Index quite considerably over the last 12 months with a total return of 15% versus the Index's negative 5%. This continues our strong performance since we took over the management of the BDC in 2010 with our total return since then being 121% as compared to the industry's 61%. Moving on to slide 21, all of our initiatives are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We hope to drive the size and quality of our investor base while continuing to add institutions to the roster. We have spoken today about many of the components of our competitiveness that are highlighted on slide 21. Dividend yield of 10.7% and growing, year-to-date return on equity of 12.9%, year-to-date net investment income yield of almost 9% and growing, ample low cost liquidity, strong earnings per share and expansion of assets under management. In addition, we have had only limited exposure to the oil and gas industry and had no realized write-downs as many other BDCs have experienced. We believe that Saratoga Investment is solidly on the path to being a premier BDC in the marketplace as demonstrated by our superior shareholder returns. Moving on to slide 22, our objectives are simple and consistent, to continue to execute our long term strategy to expand our asset base without sacrificing credit quality while benefiting from scale. We also continue to increase our capacity to source, analyze, close and manage our investments by adding to our management team and capabilities. We're focused on building our asset base both at the BDC and the SBIC levels with particular focus on maximizing potential high-teen returns on the equity investment in our SBIC utilizing the 2 to 1 leverage that it provides. This is the optimal means to increase our assets under management and net investment income yield enabling us to increase returns to shareholders and achieve growth in our net asset and stock values. We're greatly encouraged by the recent increase in the Family of Funds limitation for SBICs from $225 million to $350 million which provides us a pathway for additional SBIC growth once we have more fully invested our current SBIC fund and subject to SBA final approval of an additional license. In closing, I would like to thank all of our shareholders for their ongoing support. We're excited for the growth and profitability that lies ahead for Saratoga investment Corp. We would now like to open the call for questions.

[Operator Instructions]. Our first question comes from the line of David Chiaverini with Cantor Fitzgerald. Your line is open. Your question please.

First question is on the CLO yield, looking on slide eight, I see in the most recent quarter it was 18.9% which is at the lower end of what it has been over the past few years. Could you just comment on what drove it to come down and if we should expect that to come down further going forward?

Sure, David, it is Henri here. Yes, the yield is sort of a function of our overall cost and I would say what you saw this quarter is probably more reflective of the yield in the high teens that we will see going forward based on our current costs and it is really sort of driven as the future cash flows are reducing as we near the end of our reinvestment period.

Okay, that makes sense, and looking at the overall portfolio yield, how it has kind of ticked down a little bit over the past few quarters, should we likewise expect that to come down somewhat over the next few quarters?

I think on the overall yield if you take out the CLO which we attempt to do on one of our slides, you will see that it is actually sort of what we call the BDC and SBIC has remained relatively consistent and it has sort of been between I think 10.8% and 11.2% probably for the last six quarters and I think based on what we have seen in the last two or three months in the new originations we have done, that is still a range which has been consistent with [the past] [ph].

Yes, this is Mike Grisius. We're keeping our fingers crossed that we start seeing an upward trend toward rates being higher especially given the fact that many of the BDCs and the participants in the financial community are facing some pressure and return on their portfolio. We haven't seen it yet as we mentioned in the prepared remarks. But are hopeful that we will see some upward trends in that direction, but in terms of thinking about the future and certainly what we're experiencing now, we haven't seen downward pressure either. So the deals that we're doing now are consistent with the types of returns that we have achieved in the past.

And a follow-up to that. As you noted, you are not seeing spread widening in the non-syndicated market but given the current environment and just over the past week to week and a half, it seems as if spreads just continue to widen out. How long do you think that would take to impact and show up in the markets you serve?

Yes, I wish I had a crystal ball and could tell you. I think logic would dictate that at some point it will. The point of reference I would give you is that when spreads were -- if you went back a few years ago, a couple of years ago in a different credit market when spreads were tightening significantly, the spreads at the lower end of the middle-market were wider. And I tell you that because I think our perspective is that the lower end of the middle-market tends to lag the broader more liquid market so while you see the larger deals in the more liquid market having expanded yield profiles, it hasn't shown up yet, but logic would dictate that at some point it should. We're not underwriting or thinking about investing our capital that way. We really look at each deal individually and make sure that the return that we're generating relative to our cost of capital is strong as compared to the risk profile of the business that we're investing in.

My last question is on credit quality. It seems investors are very focused on credit quality these days particularly given the oil and gas backdrop and it is great to see the exposure that Saratoga has is minimal, it is really only showing up in the CLO. But for the portfolio overall, how is the credit trends and the performance of the underlying companies? I noticed in the most recent quarter you added the senior loans of targets to nonaccrual but outside of that, what are you seeing in the rest of the portfolio?

Well, I would make a few remarks. Generally the performance of middle-market companies just as we participate in the marketplace is good but not great. So you don't see the kind of growth in middle-market businesses that you see in other times of the cycle if you will and our portfolio is holding up very well. I think we've talked about this in the past. If you look at the portfolio relative to what a lot of the companies want to achieve with their budget, many of them are below where they want to perform but the vast majority are outperforming their performance in the past. So generally our portfolio is holding up very well and I think as we have indicated most of our assets are in senior loans so we feel very good about the credit quality that we have. Another point that I would make is that the couple of deals that we tend to focus on and are having some difficult performance are legacy assets. I would say that the credit profile of the deals that we're originating and focused on are different than the credit profile of those that we inherited and so we're working those and those deals are still facing some challenges. But overall, I think the message you should have is that we feel very good about the quality of our credit portfolio. So some of the legacy deals that are facing challenges are really Elyria and Targus.

And I would just add on Targus that you mentioned, David, when we think about credit quality and our highest credit quality rating, we talk about the 97% although you mentioned that it was already in that 3% last quarter and not within the highest credit quality bucket of ours last quarter already.

I will add this, one of the challenges you see and we talked about this a little bit in the prepared remarks, one of the biggest things that drives redemptions is strong portfolio performance. So if you capitalize a deal in a certain fashion and then the company performs real well, you are exposed to that one being refinanced or perhaps sold and that is unfortunate because it makes it difficult to grow your net assets. We have expressed that we have got lots of confidence that we can continue to do that and will do that but certainly if you are making good investment selections you are exposed to higher redemptions and we have experienced that.

That is a great point and one follow-up if I may. You said that some of the companies aren't necessarily meeting their budget or where they would hope to have been. Are you able to comment on which industries you are seeing a little bit of that underperformance so to speak?

Yes, it is really hard to attribute it to any industry. I think I should probably clarify my comment. What I was trying to convey was that certainly our experience has been in certain markets you have certain robust economic markets where you see lots of companies that are just performing super well and really for the last few years that is not what we have seen across the industry and in our specific portfolio, it has performed well. But you don't see companies that are consistently outperforming their budget. They are doing well and we're selecting the right types of companies but they are not knocking the cover off of the ball if you will. It is hard for us to attribute to any industry per se. I think we have got a very diverse set of portfolio companies and each one is unique and we're proud of all the investments that we make and they typically have unique characteristics that make us feel very comfortable that they are going to sustain their enterprise value over time. [End]

I think it is also and not too much focus on the legacy investments but I think for example in Olearia, that is exposed -- again it is a legacy inherited investment we have but that has got exposure to some of the mining and some of the energy related industry so that is a source of weakness there. And then Targus has had some issues. It is not really related to general -- it has to do with its own marketplace. But in terms of our originated portfolio, I think as Mike said, we're investing lots of different niche companies and service businesses in the United States and it is highly diversified, it is not really correlated to the economy per se. It is each business has got its own kind of focus and that is why as Mike said earlier, we feel that the lower middle market is a very attractive place to be invested today since you are not necessarily subject to the big swings in the economy as much as the niche markets and their relative market position.

Our next question comes from the line of Casey Alexander with Ladenburg Thalmann. Your line is open. Your question please?

Mike, just as a general industry question, do you think that the heavy repayments that Saratoga saw is kind of consistent across the BDC industry? Did you sense out in the marketplace that there was a trend of that type?

That is a very good question. I need to caveat that I haven't studied it to that level, I haven't gone through the other BDC's balance sheet and look at their redemptions and so forth. But certainly the fact that our assets lean toward more first lien securities and our leverage profile is lower than the industry average and of course the performance of our portfolio has been exceptional I think. Those factors expose us to redemptions that may be a bit higher than what other BDCs may experience given where they are investing in the capital structure of deals and the types of deals that they are doing.

Did you get the sense, Mike, that your portfolio companies were repaying and/or refinancing because they sensed that the Fed interest-rate increases were on the way and that this might be their last window to do so and therefore perhaps it is likely to trail off or did you get any kind of feedback like that?

No. That is a good question but that is not what we have experienced. Really in our experience where we get exposed especially on a refinance is that we may underwrite a business at a certain size and a certain credit profile where we can come in with not a whole lot of risk and get an outsized return just because the market is not terribly competitive. And then the company performs very well. We come in as an institutional investor and give it a little bit of a stamp of approval and then over time, that accesses that business to cheaper capital. It may be a traditional finance institution like a bank or another institution that offers more favorable pricing and just is in a different market than we're in.

I think just to follow along with that, I think it is fair to say that each of the company's refinancings are really their own story and their own progress and their own development. There is really not a macro theme running across it.

I should add this too, Casey, just so I make sure that you don't misinterpret my comments. I think if you went back say two, three years ago, the credit environment especially at the lower end of the middle-market was different. I think there was even less competition in that market so for a while we were exposed to new entrants into that market offering cheaper terms and more aggressive terms, etc. While the market remains very, very competitive, we have sort of already experienced that in our portfolio and facing that pressure we feel like that is mostly behind us.

Would you share with us of the $31 million that you have originated subsequent to the end of the quarter? Can you share with us how much of that has been directed to the SBA subsidiary?

Yes, it is probably between 80% and 90% of it, Casey. It is almost all of it.

So you have successfully pretty much soaked up most of the cash that was left over in the SBA subsidiary?

We would prefer to say invested, Casey.

My fault, I'm sorry. What is Henri, I think you might have this, the total fixed rate to floating rate exposure in the portfolio?

I believe it is around 53%, 55% floating rate at the moment.

53%, 55% floating. Okay.

It is in that range.

And a couple of years ago when the company was sort of in a similar position with a previous CLO, rather than run it out to the finish line they chose to restructure or rebuild it into a new fully formed CLO and I think investors benefited from that pretty solidly. Is there some thought or a trigger point in time where you might consider doing that again?

Casey, as you correctly point out, each CLO has an investment period. Our current CLO's investment period runs through October 2016. So generally when your reinvestment period ends, that is generally about the time to look towards a refinancing. So certainly that is something we're beginning to think about but there is a question of market dynamics and the optimal time to take advantage of that.

Thank you. Our final question comes from the line of Tony Polak with Aegis. Your line is open. Your question please.

Can you explain the rationale of not buying back stock at 65% of book value?

Sure. This is an ongoing discussion we have had on a number of our calls and looking at the marketplace and looking at deployment of capital. I think on the one hand buying back stock is -- at $0.65 is something that we're actively considering doing but I think we'd still look at that in the context of our short and long term investment goals and I think if we look at buying back for example stock at the current market price versus investing further in our SBIC, that in a short period of time like a 12 to 15 month period of time, the buying back the stock looks like -- is probably a better use of capital but over a longer period of time, investing the SBIC is going to return substantially more. So because of the high rate of return, because of the leverage, the ongoing nature of it and in addition, it gives us more scale and scale is very important to us given our size and it also gives us more market presence and in a larger and more diversified portfolio. So we're kind of weighing those two analyses sort of at all times and so we haven't fully concluded not to buy back stock but we're actively considering the buyback of stock in the context of the growth of the portfolio and the returns available through our investments.

I would like to now turn the call over to Christian Oberbeck for any additional remarks.

I would like to thank everyone for joining us today and we look forward to speaking with you next quarter. Thank you.