Saratoga Investment Corp (NYSE:SAR)
Q2 2017 Earnings Conference Call
October 13, 2016, 10:00 AM ET
Henri Steenkamp - Chief Financial Officer
Christian Oberbeck - Chairman and Chief Executive Officer
Michael Grisius - President and Chief Investment Officer
Mickey Schleien - Ladenburg Thalmann & Co
Casey Alexander - Compass Point Research & Trading
Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Saratoga Investment Corp's Fiscal Second Quarter 2017 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 Officer, Mr. Henri Steenkamp. Sir, please go ahead.
Thank you. I would like to welcome everyone to Saratoga Investment Corp's fiscal second quarter 2017 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 2017 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 October 20. 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. Before we go into greater detail on our fiscal second quarter 2017 results, we would like to highlight some of the continued progress and achievements during th0is quarter for Saratoga. Some of these are outlined on Slide 2.
Since becoming the manager of Saratoga Investment Corp, we have been singularly focused on the long-term objective of 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 return for our shareholders.
We are very pleased to say that our fiscal second quarter 2017 continued our trend of outperformance and steady growth. As highlighted on Slide 2, during the past quarter, many of our metrics illustrate our achievements and continued momentum. To briefly recap, first, we continued to strengthen our financial foundation by increasing our net asset value to $128.6 million, a 1.1% increase from $127.1 million as of last quarter, increasing our net asset value per share from $22.11 last quarter to $22.39 as of this quarter, maintaining our investment quality and credit with 99.9% of our loan investments now having our highest rating, our highest percentage ever, and as importantly no investments on non-accrual, and generating an annualized return on equity or 16.5% for the quarter and 9.1% on a trailing twelve month basis, greatly outperforming the last twelve months BDC industry average of approximately negative 1.1%.
Second, we expanded our assets under management to $273 million, an 8% increase from the $252 million as of August 31, 2015, and a sequential increase of 3% from $264 million as of May 31, 2016.
The year-to-date assets under management are slightly down from $284 million. From a longer-term perspective, this quarter also reflects 186% increase from $95 million at the end of fiscal year 2012. This quarter is illustrative of the success of our growing origination platform. We originated our highest level of investments in Q2 totaling $55.7 million, which more than offset the significant redemptions of $50.3 million as we experienced at the same time.
Our growth in AUM over the last few years is evidence of our continued long-term upward trajectory in asset growth recognizing that originations and redemptions could be lumpy when viewed on a quarter-to-date.
Third, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the eighth consecutive quarter. We will pay a quarterly dividend of $0.44 per share for the second fiscal quarter 2017 payable on November 9, 2016 to all stockholders on record on October 31, 2016. This is an increase of $0.01 over last quarter’s dividend of $0.43 per share.
Since the quarter end, we also paid a special dividend of $0.20 per share on September 5, 2016. All of our dividend payments have been exceeded by our adjusted debt investment income for the same period. As a result, we are comfortably overearning our dividend which distinguishes us from many other BDCs.
Fourth, our base of liquidity remains strong and promises to improve. To our debt distribution agreement with Ladenburg Thalmann, our existing baby bonds issuance provides opportunity to raise capital through an aftermarket offering and remains a reliable source of liquidity as needs arise.
We continue to have significant drypowder to meet future potential opportunities, the changing credit and pricing environment. Our existing available quarter end liquidity, excluding any new baby bond issuances allows us to grow our current assets under management by 42% without any new external financing. This financing headroom places us in a leading position, vis-à-vis our competitors whose existing capacity average of 8.8%.
Finally, on October 5, 2016, we extended our existing share repurchase program for another year, and increased it to 600,000 shares through October 15, 2017. As of October 11, 2016, we have repurchased 199,797 shares at a weighted average price of $16.73 per share under this plan and we will continue to assess this as a way of deploying our capital and improving shareholder returns.
This quarter also saw increasing performance within our key performance indicators as compared to the previous quarter ended May 31, 2016. Our adjusted NII is up 17% to $3 million and our adjusted NII per share is up $0.07 to $0.53. Our adjusted NII yield is up 120 basis points to 9.5%, and our annualized return on equity is up 610 basis points to 16.5% as compared to our first quarter return on equity of 10.4%, comfortably beating the industry average of approximately negative 1.1%.
Overall, we remain extremely pleased with these accomplishments and we will go into greater detail on each one on today’s call.
As I have mentioned, we remain committed to further advancing the overall size and quality of our asset base. As you can see on Slide 3, our upward trend of quality and quantity of assets remains stable with $273 million in assets under management in our BDC as of August 31, 2016. We have seen an 8% increase in assets as compared with last year and a 3% quarter-on-quarter increase. This increase reflects our record level of originations of $55.7 million during the quarter, more than offsetting the $50.3 million of significant redemptions.
As we have shared in the past, we expect that redemptions and originations will remain lumpy in the short-term and this quarter we saw a high level of both. In terms of portfolio quality, 99.9% of our loan investments hold the highest internal rating that we award, and importantly, we have no investments as non-accrual. Thus our overall loan quality continues to increase while we continue to pursue measured asset growth.
With that, I would now like to turn the call back over to Henri to review in greater detail on our full financial results as well as the composition and performance of our portfolio.
Thank you, Chris. Looking at our quarterly key performance metrics on Slide 4, we see that for the quarter ended August 31, 2016, our net investment income was $2.6 million or $0.45 on a weighted average per share basis.
Adjusted for the incentive fee accrual related to net unrealized capital gains in the second incentive fee calculation, our net investment income was $3.0 million or $0.53 per share. This represented an increase of $0.1 million compared to the same period last year and an increase of $0.4 million compared to the quarter ended May 31, 2016.
For this year’s second quarter, total investment income increased 6.8% to $8.4 million as compared to $7.9 million for this year’s first quarter, and increased 8.9% from $7.8 million for the same quarterly period last year.
This increased investment income was generated from an investment base that is growing by 8% from the second quarter last year and by 3% on a sequential quarterly basis. In addition, total investments income benefited from an increase of $0.2 million in other income this quarter compared to last year as the high levels of originations and redemptions this quarter led to increased advisory fees and prepayment penalties received.
The investment income increase was offset by first, increased debt and financing expenses from higher outstanding notes payable and SBA debentures this year reflective of the growing average investment and asset base.
Second, slightly increased base and incentive management fees generated from the management of this larger pool of investment and third, increased total expenses excluding interest and debt financing expenses, base management fees and incentive fees reflecting primarily higher administrator and general and administrative expenses.
In the second quarter of fiscal 2017, we experienced a net gain on investment of $2.7 million or $0.46 on a weighted average per share basis resulting in a total increase in net assets from operations of $5.3 million or $0.92 per share. The $2.7 million net gain on investment was largely comprised of $5.9 million of net realized gains offset by $3.3 million of net unrealized depreciation.
The net realized gain includes seven realizations this quarter that all had realized gains but primarily relate the realization of our investment in Legacy Cabinets Inc. of $3.4 million. The net unrealized depreciation for the quarter is primarily due to the reversal of this Legacy gain from unrealized to realized.
Our legacy layer [ph] investment has been further written down $0.3 million with the remaining value now at $0.3 million.
Net investment income yield as a percentage of average net asset value was 8.1% for the quarter ended August 31, 2016. Adjusted for the incentive fee accrual related to net unrealized capital gains, the net investment income yield was 9.5%, up from 9.3% for the same period last year and up from 8.3% for the first quarter this year.
So, much focus is always placed on net investment income, but we have highlighted in the past, our emphasis on return on equity is an important financial indicator which includes both realized and unrealized gains. Annualized return on equity was 16.5% for this quarter, up from 10.4% last quarter and 4.0% for the same period last year. Our last twelve month ROE is 9.1% and also significantly beats the current BDC industry average of negative 1.1%.
We believe that ROE growth has been very consistent and an important indicator of our success and pursuing our strategy of growing the asset base, building scale and generating competitive yields while continuing to focus on the quality of our portfolio.
Our total operating expenses were $5.8 million for the second quarter 2017 and consisted of $2.4 million in interest and debt financing expenses, $2.4 million in base and incentive management fees, $0.6 million in professional fees and administrator expenses and $0.4 million in insurance expenses, directors’ fees and general, administrative and other expenses.
For the second quarter 2017, total operating expenses increased by $1.7 million as compared to the same period last year. This increase was primarily due to higher incentive management fees and higher interest and credit facility financing expenses reflecting our growing asset base. The higher incentive management fees are almost solely due to higher second incentive fees as this quarter had a net gain on investments of $2.7 million as compared to a net loss of $2.4 million last year.
GAAP requires a 20% accrual to be booked against this every quarter. Total expenses excluding interest and debt financing expenses, base management fees and incentive management fees increased from $0.8 million for the quarter ended August 31, 2015 to $1.1 million for the quarter ended August 31, 2016 primarily due to higher administrator expenses this year as well as $0.1 million excise tax credit last year that is non-recurring.
Total expenses remained unchanged at 1.4% of average total assets for both quarters when adjusting last quarter’s expenses for the excise tax credit. We expect a further benefit from scale as our assets continue to increase while our cost structure remains relatively consistent.
As ROE and our other metrics continue to improve, it further demonstrates two important points about the value of our asset growth. First, as our 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 are currently 76% of total assets with $46 million of debentures yet to be drawn on our first license that we have already fully funded. The next $46 million of asset growth therefore will have a greater contribution to our bottom-line. And second, we see the benefit of scale becoming more visible as our operating expenses stabilize and reduce as a percentage of our total assets.
As you can see on Slide 5, net asset value has steadily increased over the past 6.5 years continuing to benefit from the history of consistent realized gains we will discuss later. NAV this quarter was $128.6 million as of August 31, 2016, a $1.5 million increase from an NAV of $127.1 million for the quarter ended May 31, 2016.
NAV per share was $22.39 as of quarter end compared to $22.11 as of May 31, 2016 and $22.06 as of February 29, 2016. During the past six month period, NAV per share increased by $0.53 per share primarily reflecting the $3.4 million or $0.60 per share increase in net assets and this is net of the $1.04 per share dividend paid during the six months period.
This was offset by the dilutive impact of the net 68,583 shares issued during the six months period representing 1.2% of the shares outstanding. These shares consisted about 181,660 shares issued pursuant to the dividend reinvestment plan representing two quarters’ dividend payments and a special dividend offset by a 113,077 shares that were repurchased.
Slide 6, outlines the drypowder available to us as of August 31, 2016. As of this date, we had zero outstanding in borrowings under our revolving credit facility with Madison Capital and $103.7 million in outstanding SBA debentures.
Our baby bonds had a carrying amount and fair value of $61.8 million and $63.3 million respectively. With the $45 million available on the credit facility, $46.3 million additional borrowing capacity at our SBIC subsidiary and $22.9 million in cash and cash equivalents, we had a total of $114.2 million of available liquidity at our disposal as of the end of our second quarter 2017.
This available liquidity equates to approximately 42% of the value of our year end investment meaning we can grow our current assets under management by a further 42% without any additional external financing. We also continue to assess all our various capital and liquidity sources and we’ll manage our sources and uses on a real-time basis to ensure optimization.
We also continue to have the ability to issue baby bonds under an at the market offering while our shelf registration statement is current. This enables us to further enhance our liquidity and plan ahead for future capital needs such as the funding of the second SBIC lines.
These new issuances are under the exact same term as the original baby bond offering in 2013. We remain pleased with our liquidity position, especially taking into consideration the conservative composition of our balance sheet and the ability we continue to have to substantially grow our assets without the need for external financing.
Now I would like to move on Slide 7 through 9 and review the composition and yields of our investments portfolio. Slide 7 highlights the portfolio composition and yields the end of the quarter.
As of August 31, 2016, the fair value of the company's investment portfolio was $273 million, principally invested in 29 portfolio companies and one CLO fund. So our total investment portfolio was composed of 56.2% of first lien term loans, 31.9% of second lien term loans, 4.4% of subordinated notes in the CLO, 3.5% of syndicated loans and 4.1% of common equity.
The weighted average current yield was 11.0% which was comprised of a weighted average current yield of 10.5% on first lien term loans, 11.5% on second lien term loans, 5.3% on syndicated loans and 19.4% on our CLO subordinated notes. Despite downward pressure on yields due to continued competition, our yields have remained strong as compared to the previous fiscal quarters.
To further illustrate this point, slide 8 demonstrates how the yield on our core BDC assets excluding our CLO and syndicated loans, as well as our total asset yields have remained consistently around 11% for the past several years.
Following the nine originations and seven redemptions during this quarter, the core BDC assets yield reduced slightly. The syndicated yields also decreased in this quarter but was offset by the increase in the CLO’s yields. All these changes have the total yield at a 11%.
Moving on to slide 9, during the second quarter 2017, we made investments of $55.7 million in nine new or existing portfolio companies and had $50.3 million in seven exit and repayments resulting in a net increase in investments of $5.4 million for the quarter at our BDC. As you can see on this slide 9, our investments continue to be highly diversified by type, as well as in terms of geography and industry with a large focus on business, consumer and healthcare services while spread over 12 distinct industries.
It is worth noting that we have no direct exposure to the oil and gas industry a fact that has served us extremely well during the past fiscal year. Of our total investment portfolio, 4.1% consists of equity interest. Equity investments are and will continue to be an important part of our overall investment strategy.
As we discussed earlier, we have had consistent realized gains over the past years that has helped grow our NAV. Slide 10 demonstrates how realized gains from the sale of equity investment combines with other investments that help enhance the shareholder capital.
For the past 4.5 fiscal years, we have had a combined $17.4 million of net realized gains from the sale of equity interest or sale or early redemption of other investments. This consistent performance continues to be a good indicator of our portfolio credit quality.
In the second quarter 2017, we continued to strength and we are able to show a net realized gain of $5.9 million reflecting our success in investments we have originated. Year-to-date fiscal 2017 total net realized gains were $12.0 million.
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.
Thank you, Henri. I would like to start by taking a couple minutes to update everyone on the current on market as we see it. The market is at extremely competitive conditions that we’ve seen during the last couple of quarters continued through Q2 2017.
Slide 11 indicates how many fewer deals are being done in the market. The number of transactions per deal sizes in the US below $25 million in 2015 was down 23% from calendar year 2014 and calendar year 2016 is even slower continuing that trend.
There is a year-over-year reduction in deal volume of 35% at this stage. At this pace, we anticipate calendar year 2016 to be a slower year than 2015. As a result, pricing remains under pressure as lenders compete for mandates, there is evidence suggesting that yields across the broader middle market for most credit types have tightened slightly over the last quarter but these decreases were modest generally no more than 25 basis points.
This was most likely due to an increase in inflows or demand coupled with limited new issuances or supply. Generally, we have seen no widening of spreads in the lower middle market where we operate. Our experience has been that strong credits are aggressively sought after.
In the broader market where there is an abundance of capital and relatively soft deal volume, we continue to believe that the lower middle market is the most attractive market segment to deploy capital and the fundamentals here remains strong leading to the best risk-adjusted returns.
In our case, we have created a primary origination portfolio of healthy low leverage assets with a robust average yield of around 11%. In addition, powerful long-term secular trends bode well for the BDC industry as a whole. Banks continue to shift toward large borrowers due in part to the regulatory hurdles facing smaller banks serving the middle market.
In addition, Saratoga Investments target market that’s rich with potential opportunity. Small businesses with revenues between $10 million and $150 million represent nearly 90% of the opportunity set.
In this chart on Slide 12, you can see that multiples in the industry seem to have dropped slightly. According to KeyBanc metrics, 58% of all middle-market deals as of June 30, 2016 were leveraged over 4.1 times as compared to 75% in March 2016. Now this appears to be temporary and 0.5% of other trends as we see leverage currently being very aggressive for high quality credits.
However, irrespective of the fluctuations of market leverage levels historically, we have been able to invest in deals with relatively low multiples. This quarter our total leverage was 4.1 times, up slightly from 3.9 times during the previous quarter. Nevertheless, the majority of our closed deals remains beneath overall market levels.
As they have been consistently in the past, we are very careful to exercise extraordinary investment discipline and invest only in credits with attractive risk return profile. We will of course make selective higher leverage loans provided that through our own underwriting, we conclude that the credit characteristics of each business can support a higher debt profile.
Of importance to us when doing deals with higher leverage, let’s ensure that our dollars are invested in companies with exceptionally strong business models where we are confident that the enterprise value of the businesses – of the businesses will exceed the last dollar of our investment.
In addition, this slide demonstrates the overall upward trend we have experienced in our number of executed investments reflecting our increased investment in business development and our growing base of relationships in the market.
As you can see in the slide, our investment volume has increased consistently over the past several years growing from seven in fiscal 2013 to 18 in the last LTM period, the highest level in our history. That said, we also had significant redemptions this quarter with seven investments paying off.
Although payoffs present challenges because they curtail our natural growth, we have generated healthy unlevered IRRs from our redemptions that we are very happy about and we will discuss shortly in more detail.
Having invested capital through multiple economic cycles, we know that originations tend to be lumpy and we understand the importance of never allowing our desire to grow assets to interfere with our credit judgment.
I’d like to go into a little bit more detail regarding our pipeline on Slide 13. Our deal flow remains robust. Moreover, since 2013 the number of deals that we have sourced and looked at has increased materially. 60% of these come from companies without institutional ownership, the rest come from private equity sponsors.
In calendar year 2015, we looked at 613 deals and executed on 16 of them. In the twelve months ended August 31, 2016, the number of deals that we’ve looked at has increased slightly in comparison to this 2015 number, but the number of term sheets issued has declined. A confluence of factors are producing this results.
The more robust origination platform that we’ve invested in over the past couple of years, the difficult market conditions and the lack of quality deals and the prudence that comes with disciplined investment judgment.
In short, we are seeing more deals, but we are turning more down. Unfortunately for us, we’ve been able to grow through the current soft market for quality deals in three main ways. First, by deploying capital in support of existing portfolio of companies that are healthy and growing, second, by gaining repeat business from existing relationships, and third, by building targeted new relationships with top quality investors and deal sources.
In this most recent quarter, our transaction volume reflected a healthy mix of all three of these avenues for growth. We believe the strength of our deal flow will allow us to continuing to grow our portfolio at a pace consistent with the past. This will be lumpy and not linear as we have always said and the last couple of quarters that demonstrated this, but we feel confident we will be able to consistently grow over time.
Our reputation for being fair-minded and support of investors has increased our pace of referrals from small business owners and management fees. In addition, we continue to increase our private equity sponsor and intermediary relationships using our own internal valuation system, we have grown our tier-1 deal sourcing relationships from eight in 2012 to over 100 today. We believe this will allow us to further accelerate our pace and investment while we remain diligent and careful in our investment approach.
Since taking over management of the BDC, we have understood the importance of getting the assets’ rights. As a consequence, our highest priority was to build one of the premier execution teams in the business. We believe we have accomplished that and we view our professional staff as best-in-class. Saratoga has continued to invest in talent combining experience with expertise.
We remain focused on continuously adding to our talent as we have over the last five years and feel that we are well positioned to continue to benefit from the momentum we have built. Our overall portfolio quality is strong and it’s even stronger when taking into account only the assets originated by us since taking over the BDC management in 2010.
As you can see on Slide 14, the gross unleveraged IRR on realized investments made by the Saratoga management team is 17.7% on approximately $112 million of investments in our SBIC and 14.9% on approximately $48 million of investments in the rest of our BDC.
Similarly, the first nine months of calendar 2016, we have seen ten realizations which generated a gross unlevered IRR of 22.1% while payoffs naturally curtail our asset growth, we do believe they are a strong indicator of the strength of our investment team and our investment selection process.
Realizations, mostly occur when companies have performed well and they either enter into a change of control transaction or a refinance with cheaper capital. On the chart on the right, you can also see the gross unlevered IRR on our unrealized investments. The total gross unlevered IRR on our $224 million of SBIC unrealized investments is 13.9%.
In addition, our gross returns in the SBIC have remained consistently strong across 22 years. The total gross unlevered IRR on the rest of our BDC unrealized investments since Saratoga took over management is 10% on approximately $39 million of investments. This includes some mark-to-market valuation activities.
Combined, our total SBIC and BDC unrealized investments of $263 million are producing a gross unlevered IRR of 13.3%. With respect to our SBIC, our objective remains to maximize our risk-adjusted returns in a manner that utilizes the low cost of capital in two to one of leverage advantage we possess through our SBIC licensing.
By focusing on the smaller less competitive end of the market, we are able to reduce the risk profile of our portfolio, while delivering highly accretive returns to our investors. As you can see on Slide 15, the mix of securities in our portfolio is conservative and the leverage profile of these investments remains low at 3.9 times especially when compared to overall market leverage.
Because of the leverage and lower cost of capital advantage inherent in the SBIC program, we can achieve strong returns for our shareholders without moving far out under this spectrum. Therefore, and as demonstrated this past year, we intend to grow our net investment income by continuing to dedicate the majority of our effort and resources to growing that portion of our portfolio.
Moving on to Slide 16, you can see our SBIC assets increase slightly to $206 million as of August 31, 2016 from $182.7 million last quarter and $200.6 million as of yearend. As a percentage of our total portfolio, SBIC assets have grown from 0% at fiscal yearend 2012 to 71% at the end of the last fiscal year and to 76% this quarter.
Also it is important to note that as of the quarter ended August 31, 2016, we had $51 million total available SBIC investment capacity including cash, of which $47 million is leverage capacity within our current SBIC licenses. If we were to obtain a second license in the future, our leverage capacity would increase by another $75 million or more based on the new regulations with the ability to increase assets by at least $112.5 million.
And in our view, our origination platform is among the very best that are into the market and we continue to dedicate more resources toward it. We are seeing a steady flow of SBIC eligible investments and are optimistic about our ability to grow that portfolio at a healthy rate while remaining extremely diligent in our overall underwriting and due diligence procedures.
This concludes my review of the market. I’d like to turn the call back to our CEO, Chris.
Thank you, Mike. From the start of our quarterly dividend payment program two years ago, our expectation was this dividend would increase substantially that it has growing by a 144% since the program launched. As outlined on Slide 17, during the fiscal year 2016, we declared and paid dividends of $2.36 per share, gradually raising the dividend for the year from $0.27 for the quarter ended February 28, 2015 to $0.40 per share for the quarter ended November 30, 2015.
Last year also included a special dividend of $1 per share. In addition, during the fiscal year 2017, so far, we paid a dividend of $0.41 per share for the fiscal quarter ended February 29, 2016, a dividend of $0.043 per share for the fiscal quarter ended May 31, 2016 and a special dividend of $0.20 per share paid on September 5, 2016.
On October 5, 2016, our Board of Directors declared a dividend of $0.44 for the quarter ended August 31, 2016 to be paid on November 9, 2016 to all shareholders of record at the close of business on October 31, 2016.
This is a further increase of $0.01 to our quarterly dividend. Therefore, in total, we’ve already declared dividends of $1.48 per share during the first two quarters of fiscal 2017. Shareholders continue to have the option to receive payment of the dividend in cash or receive shares of common stock pursuant to our dividend reinvestment plan or DRIP plan which we adopted in conjunction with the new dividend policy and provides with a reinvestment of dividend on behalf of our stockholders.
For more information, see the Stock Information section of our investor relations section on our website. Slide 17 also shows how we are currently still overearning our dividend. This quarter’s dividend of $0.44 per share compares to our adjusted average NII per share of $0.49 for fiscal 2017, which means we are currently overearning our dividend by 12.5%.
This gives us one of the higher dividend coverages in the BDC industry. We also further exercised our share repurchase plan during the quarter ended August 31, 2016. During fiscal year 2015, we announced the approval of an open market share repurchase plan that allowed us to repurchase up to 200,000 shares of our common stock at prices below our NAV.
As reported, in our then most recently published financial statements, this plan was doubled in size last year ended October 2016, the share repurchase plan was extended for another year and increased the 600,000 shares through October 2017. As of October 11, 2016, we have repurchased 199,797 shares at a weighted average price of $16.73 per share under this plan.
We are also pleased to see a relative standing in the industry consistently improve over time. As you can see on Slide 18 and reflecting our strong key performance indicators we have discussed earlier, our total return for the last twelve months which includes both capital appreciation and dividend has generated total returns of 20.5% beating the BDC index at 13.2% even after the rally in the industry over the last couple of months.
When viewed over a longer time horizon, such as six years, which is when we took over the management of the BDC, we have outperformed with distinction relative to the rest of the industry. Our six year total return is 203.9% which places us third in the industry overall compared to other BDCs. Our three year total return is also very strong at 41.7% placing us fourth overall.
And despite putting up these strong historical total returns, our price to NAV still remains at a rather 20% discount reflecting the opportunity for potential future incremental returns.
Moving on to Slide 20, you will see our outperformance placed in the context of the broader industry. We continue to achieve high marks across a diversity of categories including interest yield on a portfolio, latest twelve months return on equity, dividend coverage, dividend growth and investment capacity.
We’d like to particularly point out our outperformance on return on equity over the past twelve months as this reflects overall financial performance including portfolio credit quality. During the last twelve months, our return on equity is 9.1% as compared to the BDC industry average of negative 1.1%. We are very pleased with all these outcomes, particularly since the market has only gotten more competitive and outperformance more difficult to achieve over the last couple of quarters.
Moving on to Slide 21, you will see a scattered chart illustrating our comparative outperformance in a different way, starting on return on equity against our value as a reflection by price to NAV. As you can see, we have outperformed the BDC market from a return on equity perspective on the right side of the graph, while our price to NAV have not yet reflected this performance. We believe that no competitor currently generates the higher return with a better credit profile and at a better value than we do.
We feel that these and the other metrics that we discuss today underscores the strength of the investment strategy we have pursued since taking over the management of Saratoga in 2010 and we believe that as we continue to outperform from return on equity perspective, that our position will be moving up on this chart.
Before we summarize our outstanding performance characteristics on the following page, we want to update you on the status of our current SBIC’s second license and our CLO as reaching the end of our reinvestment period. On April 2, 2015, the SBA issued a green light inviting Saratoga to continue the application process to obtain a license to form and operate in second SBIC subsidiary.
On September 27, 2016, the SBA informed us that as part of their continued review of our application for a second license in order to ensure that were reviewing the most current information available, we would need to update all previously submitted materials and invited us to reapply.
As a result of this request, the existing green light letter to the SBA issued to us has expired. If approved in the future, a second SBIC license would provide us an incremental source of long-term capital by permitting us to issue up to $150 million additional SBA guaranteed debentures in addition to the $150 million already approved under the first license.
With regards to our CLO, the reinvestment period for our CLO ends on October 20, 2016. We are in the process of exploring potential refinancing strategies for our CLOs which will provide a new reinvestment period into the broadly syndicated first lien market. We are seeking to refinance the CLO under the most attractive financing terms available to us.
Moving on to Slide 22, all of our initiatives we have discussed in this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We believe that our differentiated characteristics outlined in this slide will help drive the size and quality of our investor base including the addition of more institutions.
These characteristics include a strong and growing dividend, industry-leading return on equity, ample low cost available liquidity which will enable us grow our current asset base, solid earnings per share, NAI yield with substantial growth potential, steady high quality expansion of assets under management and an attractive risk profile.
The high credit quality of our portfolio is buttressed by our minimal exposure to the oil and gas industry and no investments on non-accrual. This speaks to the attractive risk profile that we have built into the portfolio. With this performance, Saratoga Investment is solidly on a path of being a premier BDC in the marketplace.
Moving on to Slide 23, our final slide, we’ve accomplished a lot in this quarter and are proud of our financial results. There is no change to our simple and consistent objectives, continue to execute on 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 investment management team and capabilities. Continuing to execute on these objectives should result in our continued industry leadership and shareholder return performance.
In closing, I would again like to thank all of our shareholders for the ongoing support. We are excited for the growth and profitability that lies ahead for Saratoga Investment Corp. I would now like to open the call for questions.
[Operator Instructions] And our first question comes from the line of Mickey Schleien from Ladenburg. Your line is open.
Yes, good morning everyone. Thanks for taking my questions. I'd like to start by asking, to what do you attribute the high level of repayments this quarter?
That’s a good question, Mickey. The one part of our business that we don’t have much control over is payoffs. So if we were to look at the loans that did payoff, it’s a combination of factors. In some cases, the companies were sold; in other cases, the companies perform so well that they were refinanced with sort of more traditional capital and that’s kind of the natural development of our portfolio. If the deals perform very well, they are going to recycle a little bit faster and you’d certainly experience that.
Mike, that's a good segue to my next question, a couple of your repayments had relatively high coupons like National Truck and Bristol. Did you offer to reprice those deals given the recent amount of spread compression we've seen in the middle market?
We certainly were engaged with ownership and new ownership in both cases and had dialogue around that but chose not to proceed with the new financing.
Okay. And I haven't done the math, but could you give me a sense of the yields on your new investments versus your exits?
I think we have that. Give us one second.
If you want to give it to me offline that will be fine.
It’s in the deck, but it’s going to be in the mid tens on new investments on a blended basis and then I think on the redemptions it averages to a little over 11 like a 11.1 on the interest rate.
So a slight decline, but one of the things, it seem perfect sort of when you look at that because some of that depends on the mix of securities as well.
And of course the thing that we are encouraged by and we look at is the vast majority of the new investments were all SBIC qualified investments. So, at a rate that we achieved on those new investments is kind of in the mid tens. It’s very accretive, a two to one leverage, very accretive to shareholders we think especially on a risk-adjusted basis.
I understand. Mike, the assumptions at least that you disclosed in the Q for the valuation of CLO didn't change quarter-to-quarter, but some of that is due to a broad range that's described in the filings. But I did notice that you assumed a higher estimated yield on this CLO. Can you talk a little bit about what changed?
By yield, you mean the discount, right, Mickey?
Yes, the effective yield - estimated yield that you are using.
We actually, it actually was a slight increase, so…
That's my point, yes
Yes, yes, we had a – we basically went from 19% to 8% and it’s really a combination. As we do the valuation of the CLO, we look at input from recent trades that we see and then there is also conversations that I had with trading desks regarding the current CLO equity and what they are seeing in the market and it was sort of based on a combination of all of that that we decreased the discount rate from 19% to 18%, and that had a very minor impact, a slight $0.2 million increase in the actual valuation from Q1. But it wasn’t a major change, 19% to 18% is not that significant in the context of the CLO.
Right. Mike, I noticed that the portfolio's average leverage has been creeping up, not significantly, but it's gone up for the last few quarters. Does that reflect a benign outlook that you have on the economy and your willingness to take on more risk or something else?
No, it’s a good question. It’s really just reflective of the deal opportunities that we are seeing in the marketplace. Certainly over time, if you were to look at the mix of our portfolio back two three years ago, there were fewer sponsored transactions. So we had more deals that we are investing in. We were backing a management team, maybe backing ownership that wasn’t in a funded sponsorship structure, and those deals were generally going to be a little bit lower leverage. The mix of our deals that we’re closing now consists of a higher percentage of sponsor-backed transactions. Those deals have the benefit of very sophisticated sponsors that we’ve gotten to know very well and have repeat business from. They are usually writing significant equity checks to support the debt in the transaction, but typically the leverage profile of those deals is a bit higher as well. So they sort of trade offs. The size of those companies tends to be higher as well. So it’s sort of a – there’s a lot of factors that are influencing that, but we are not – we are certainly not taking approach where we say, we think the economy is in a really good place and therefore lets reflect that in our comfort level on leverage. We instead look at each deal individually, look at it on its merits and every single deal that we evaluate. We run it through the gauntlet. We really look at what it – how much would that industry cycle if it cycles like that again, will the balance sheet hold up, all those factors weigh into our comfort level in the leverage profile. And so, if we do something as I indicated in our prepared remarks that has a higher leverage profile, it’s because we indeed believe that the enterprise value will sustainably support that higher leverage profile.
I understand. Just a couple more questions, I don't think I've seen an SBA green light letter expire, at least in the times that I've been looking at the sector. So that seems to imply that there was some sort of issue with the initial application and can you give us any more color on what caused them to ask you to reapply and what caused the delay?
Sure Mickey. Basically, we don’t know exactly how they make their decisions at the SBA and so we don’t want to get too involved and try to say exactly what it is. But I think part of the consideration had to do with where we are in our first license and the utilization of our first license. And at this point in time, we still have, as Henri had said earlier, like $44 million left of investment capacity in our first license and I think that was part of the consideration was where we were in terms of our first license before engaging in a second license. I think it’s notable that they invited us to reapply and so, we can’t project exactly what they are thinking, but we view that as encouraging that we are still in that process. I think, in Mike’s presentation, I think, if you look at the performance of our SBIC investments with very high double-digit returns in the 20% sort of returns, our return profile is among the very best for credit-oriented SBIC investments vehicles there. So, we are positive and optimistic and we still have a significant amount of investments to go with our remaining first license.
I understand and just a couple of housekeeping questions with respect to liquidity, how much of your cash is in the SBIC? And lastly, could you remind us, what - at least within a range the amount of private funds that are managed by other Saratoga entities? That's it for me.
I’ll take the first one just on the cash. So, I think in the past, Mickey, we’ve seen more of the cash actually being in our SBIC, which we’ve always noted. For this quarter actually it was more of a equal split between SBIC and then in our holding company, because some of the realizations that we did had this quarter was actually outside of our SBIC and that’s the cash that we still have to deploy.
So on your balance sheet, the line that reads reserve accounts, that's not necessarily the SBIC cash, correct?
Correct. It’s a combination of SBIC as well as one of our subsidiaries over which the asset-backed by Madison’s ability is. So that one is a combination, the other line is solely non-SBIC.
Okay and the other question was related to the private funds.
Sure, Mickey. I think, that’s – that they are private funds and it’s generally not a public matter. So we generally don’t speak to the exact amount of that. It’s substantial, but it’s not something that we specifically disclose.
Okay, that's it for me. Thank you for your time.
Thank you. And our next question comes from the line of Casey Alexander from Compass Point Research Trading. Your line is open.
Hi, good morning guys.
You have gotten to a lot of my questions, but I have got a few more. Just for clarification sake, is there any acceleration of the SBIC process, given that you have had an application in there for 18 months or is it literally back to square one? I mean, are we now working towards getting a new green light letter?
Yes, technically we are a new green light letter, but it’s a new green light letter for a second license and we…
Have been part of the program since 2012. So, we’ve had multiple audits. For example, we just completed our recent audit in August. Our portfolio is pretty well seasoned. They know us well. We have a very – we are well known down there, we’ve been down there many times. So, all those are important consideration in their process for evaluating making these investments. So, to our understanding, a green light or a second license process is in and of itself generally a more accelerated process than a de novo green light. But again, we want to be very careful not to project too much of their decision-making process. It’s into our discussion as I said, we are responsible for is our inputs and our inputs are very strong performance and our continued investment performance and as we said earlier, the green light has expired, but we were invited to be applied. So, we view that as a positive indication.
Okay, thank you. Mike, my next questions are for you, because they relate more to the portfolio. If I've checked this right there is actually only three new companies in the portfolio and the vast majority of the originations were to existing companies. Can you - why should I be comfortable that we are not getting too concentrated in the same companies?
Well, there is, I think it’s interesting. The thing that we like about building a portfolio at seasons is, having an opportunity to invest more capital in a well-performing company where you know the management team, you know the ownership et cetera. Those are the best calls that you can get. We feel like our portfolio is well balanced. The businesses that we supported this quarter, we were delighted to support, because they are all performing very well and I think we are going to deliver terrific returns for our shareholders. Some of those deals, as I look at sort of the ones that we closed this past quarter were on the small side for us and we actually made those investments with the hope that we have an opportunity to expand the dollars invested in those companies. So we are delighted to have the opportunity to invest in those portfolio of companies. I think as I said, earlier, as I think the about the portfolio and growth in the portfolio, there is three avenues, all of them are important and they are especially important in this market, one is just repeat business from sponsors and intermediaries that you’ve done business with and if you were to start to look over the last three years, we’ve done a terrific job of getting repeat business as we’ve established relationships in the market. That’s why we spend so much time trying to build more relationships as we know that had that kind of recurring deal flow effects. Another is from – as you pointed out is from, expanding our investment in good well-performing portfolio of companies that we love to have that opportunity when it arises, especially for investing in the equity in those deals. It tends to be – kind of typically things are going well and it’s very accretive all the way around. And then the last thing is just new relationships and that’s where we spend the majority of our time is trying to build those new relationships which will then expand those other two categories. And in this last quarter, we were successful with all three, repeat business from existing sponsors, new portfolio of companies, new sponsor relationships that we hadn’t had prior to this and then we are delighted to support existing portfolio of companies with additional capital.
Well, okay, I get your answer, but then - if they are well-performing companies, when you expand the relationship, particularly in the case of Noland and Mercury, the Noland investment went from $5 million to $17 million and Mercury went from $9 million to $21 million, but in both cases there was a pretty significant increase in the interest being charged them, which is not typical of what you would see from a well-performing investment. And yet, these have now become significantly - a significant double-digit percentage of net assets of the company. So I would – again, say on - particularly on those two, how do I get comfortable that we have increased the size of the commitment but their rate went up so much?
Yes, I think, whenever we look at a transaction, particularly supporting companies’ growth, we always reevaluate what the balance sheet looks like and where we are in accounting structure and so I think in both cases, we had an opportunity to upsize or increase the interest rate based on the new leverage profile that we are evaluating and it’s not uncommon for us, Casey, as we structure deals to have sort of flexible pricing in that respect, where we say, okay, initially your rate of interest is going to be in this range, but if you perform really well, you’ll have an opportunity to take advantage of a little bit lower pricing. Obviously, there is a floor on that given the return profile that we are seeking. And so that kind of goes both ways, as a company is deleveraging it’s not uncommon, there is number of deals in our portfolio where we’ve lowered interest to keep this deal in our portfolio as it’s performed very well and in these cases, we supported them with more dollars, their leverage profile went up a bit and as a consequence we had the opportunity to raise the interest rate. In Mercury’s case, we did subsequent to quarter end, we did sell down part of our position there just from an exposure standpoint.
Okay, all right.
But those are both companies that we are delighted to be supporting and very happy with and we are excited to be advancing additional dollars to.
Okay. All right, thanks for taking my questions.
Thank you. At this time, I am showing no further questions in the queue. I’d like to turn the call back over to Christian Oberbeck for closing remarks.
Sure, well, if there are no more questions, we thank you all for participating in this call and we appreciate your support and interest and look forward to speaking with you next quarter. Thank you very much.
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.
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