SLR Senior Investment Corp. (NASDAQ:SLRC) Q1 2021 Earnings Conference Call May 6, 2021 11:00 AM ET
Michael Gross – Chairman and Co-Chief Executive Officer
Bruce Spohler – Co-Chief Executive Officer
Richard Peteka – Chief Financial Officer
Conference Call Participants
Matt Tjaden – Raymond James
Good day and thank you for standing-by. Welcome to the Q1 2021 SLR Investment Corporation Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chairman and Co-CEO, Michael Gross. Please go ahead, sir.
Thank you very much and good morning. Welcome to SLR Investment Corp.’s earnings call for the first quarter ended March 31, 2021. I’m joined today by Bruce Spohler, our Co-Chief Executive Officer and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you please start by covering the webcast and forward-looking statements?
Of course. Thank you, Michael. I would like to remind everyone that today’s call and webcast are being recorded. Please note that they are the property of SLR Investment Corp. and that any unauthorized broadcast in any form are strictly prohibited. This conference call is being webcast from the Investors tab on our website at www.slrinvestmentcorp.com. Audio replays of this call will be made available later today, as disclosed in our earnings press release.
I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today’s conference call and webcast may constitute forward-looking statements, which relate to future event or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties, including impacts from COVID-19.
Past performance is not indicative of future results. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. SLR Investment Corp. undertakes no duty to update any forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at (212) 993-1670.
At this time, I would like to return the call back to our Chairman and Co-CEO, Michael Gross.
Thank you, Rich. Good morning and thank you for joining us. The SLR team hopes to find you, your family, friends and colleagues happy, healthy, and safe. I want to start off by discussing our Q1 2021 results before turning the call back over to our CFO, Rich Peteka to discuss the financial highlights and then our Co-CEO, Bruce Spohler, who will walk you through the investment landscape.
Yesterday after the close, we reported net investment income of $0.37 per share for the first quarter. This represents a solid increase of the $0.35 we reported in Q4 of 2020. And importantly, we are now through the incentive fee catch-up, which means that each incremental dollar of income is highly accretive to shareholders. Alongside the increase in NII SLRC’s portfolio remains 100% performing as it has throughout the entire pandemic. Net asset value increased $0.10 per share compared to the prior quarter. We attribute the resiliency of our portfolio to our conserve underwriting, our focus on first lien senior secured loans to larger upper middle market companies in our cash flow segment and especially finance investment verticals, which offered greater structural protections and yields than what is currently available in the cash flow lending market.
At March 31, over 99% of our comprehensive investment portfolio was invested in senior secured loans and 83% of the portfolio is fair value was allocated to specialty finance investments. During the first quarter, the U.S. middle market reflected a more favorable economic backdrop punctuated by a resurgence in sponsor led M&A and refinancing transactions. The government’s fiscal and monetary stimulus programs combined with the vaccination program have turbocharged recovery and removed a number of uncertainties. As a result, we are seeing increased deal flow across all of our investment verticals. The cash flow transactions we’re seeing across the SLR platform are a combination of funded loans and delayed draw commitments, which fund acquisitions and further growth of these companies. Bruce will talk about this table of trend in more detail.
Earnings growth is driven by a combination of having held investments made in the fourth quarter of 2020, including our equity investment in Kingsbridge Holdings. For a full quarter and generated – fees generated from the repayment of life science investment. We are now six months into our ownership of Kingsbridge and integration has been seamless.
Looking forward, we would deploy our approximately $700 million of low cost available capital towards new investments across all of our strategies. We remain modestly leveraged at 0.82x as of March 31 and have significant capacity to capitalize on the robust opportunity set before us. In our cash flow lending business, we’re seeing an increase in the size of the company seeking direct financing, which we attribute to borrowers desire for speed and certainty of execution.
The scale of SLR’s investment advisor and its ability to hold up to $200 million of a given investment enables SRLC to invest in these upper middle market financings, which we continue to believe are better position to protect capital in the event of further economic disruption. Our specialty finance teams are also seeing increased deal flow as more companies look to pledge collateral and intellectual property to obtain liquidity. The breadth of our investment strategies means that we only need to see modest growth from each vertical to drive meaningful portfolio earnings growth across the entire business.
At this time, I’ll turn the call back over to our CFO, Rich Peteka to take you through the Q1 financial highlights.
Thank you, Michael. SLR Investment Corp.’s net asset value at March 31, 2021 was $856.2 million or $20.26 per share compared $852.0 million or $20.16 per share at December 31, 2020. At March 31, 2021, SLRC’s on balance sheet investment portfolio had a fair market value of $1.5, 7 billion in 105 portfolio companies across 20 industries compared to a fair market value of 1.57 billion in 105 portfolio companies across 25 industries compared to a fair market value of $1.53 billion in 105 portfolio companies across 25 industries at December 31, 2020.
At March 31, the company had $711.0 million of debt outstanding and leverages 0.82x net debt to equity. When considering available capacity from the company’s credit facilities combined with the available capital from the non-recourse credit facilities at SLR Credit Solutions, Equipment Financing Kingsbridge SLR Investment Corp. had approximately $683 million to fund future portfolio growth subject to borrowing base limits.
Moving to the P&L. For the three months ended March 31, 2021 gross investment income totaled $35.9 million versus $31.4 million for the three months ended December 31. Expenses totaled $20.4 million for the three months ended March 31, 2021 and this compared to $16.5 million for the three months ended December 31, 2020. Accordingly, the company’s net investment income for the three months ended March 31, 2021 totaled $15.5 million or $0.37 per average share compared to $14.9 million or $0.35 per average share for the three months ended December 31, 2020.
Below the line, the company had net realized and unrealized gains for the first fiscal quarter totaling $6.0 million versus net realized and unrealized gains of $3.4 million for the fourth quarter of 2020. Ultimately, the company had a net increase in net assets resulting from operations of $21.5 million or $0.51 per average share for the three months ended March 31, 2021. This compares to a net increase of $18.3 million or $0.43 per average share for the three months ended December 31, 2020. Finally, our Board of Directors recently declared a Q2 2021 distribution of $0.41 per share payable on July 2, 2021 to shareholders of record on June 23, 2021.
With that I’ll turn the call over to our Co-CEO, Bruce Spohler.
Thank you, Rich. First and foremost, SLRC’s portfolio is 100% performing at quarter end. Our performance supports the underwriting thesis of investing at the top of the capital structure in first lien cash flow loans to upper mid market borrowers that operate non-cyclical industries, as well as allocating a significant portion of our exposure to collateralize loans through our specialty finance verticals.
At quarter end, the weighted average investment risk rating of our portfolio was under 2 based on our 1 to 4 risk rating scale, with 1 representing the least amount of risk. The percentage of our portfolio rated 3s and 4s is down to 2.8% after peaking at 7.5% in the second quarter of last year. At March 31, SLRC’s comprehensive portfolio was just over $2 billion and was highly diversified encompassing over 600 distinct issuers across 80 industries. Our largest industry exposures are healthcare providers and services, diversified financials, life sciences and retail asset based loans.
The average investment per issuer was just over $3 million or 0.2% of the portfolio. At quarter end over 99% of our portfolio consisted of senior secured loans. Of these loans 94.4% were first lien loans and only 4.9% were second lien. Of the second lien loans 2.1% were cash flow and 2.8% were asset-based loans. At quarter end, our weighted average asset level yield was 9.8% compared to 10% the prior quarter. By focusing on our commercial finance verticals, we have been able to maintain asset level yields close to 10%, despite a decrease in LIBOR as well as spread compression.
Notably we’ve been able to maintain these yields, while actively reducing our exposure to second lien investments. Total portfolio originations for the first quarter were $215 million and repayments were $230 million, resulting in a net total portfolio of $2 billion. In addition, we had approximately $75 million of unfunded investment commitments outstanding, which we expect to fund in future quarters.
Now let me provide an update on each of our verticals. SLR sponsor finance our cash flow business. At quarter end, our cash flow loan portfolio was $325 million or approximately 16% of the comprehensive portfolio. The average EBITDA of new cash flow loans made during the first quarter was over $100 million consistent with our focus on larger upper mid-market borrowers. During the first quarter, we had cash flow commitments of approximately $60 million of which $45 million were funded. We experienced repayments of approximately $5 million resulting in net cash flow portfolio growth of $40 million. Our cash flow investments during the quarter came from a mixture of delay draws in existing credits and new investments, primarily in the healthcare and insurance sectors.
As Michael mentioned, we’ve been able to take advantage of the broader scale of the SLR platform to underwrite larger investment positions in first lien cash flow loans to upper mid-market sponsor own companies. Given the sponsor community’s preference for partnering with a few lenders in each of their investments with large hold sizes, SLRC would not be able to participate in these financings without the support of the broader SLR platform.
We are increasingly committing to delayed draw term loan facilities that are raised by companies to fund future acquisitions. These transactions offer a prudent opportunity for SLRC to grow its investment in established credits with existing financial covenants and in many instances, incremental sponsor equity contributions. By stepping into an existing loan facility with shorter duration and OID, the yield to maturity is enhanced. At 8.6% the weighted average yield of the cash flow portfolio was roughly flat with the prior quarter.
Now let me turn to our asset-based strategy, SLR Credit Solutions. As a reminder, our ABL vertical is a combination of the senior secured loans of SLR Credit Solutions, as well as loans held directly on our balance sheet. At quarter end, senior secured asset-based portfolio totaled just over $440 million, representing 22% of our comprehensive portfolio. The weighted average yield of the portfolio was 10.5% compared to 10.7% the prior quarter. During the first quarter, we funded approximately $32 million of new ABL loans and had repayments of approximately $100 million.
Portfolio contraction during the first quarter was driven by repayments of two sizeable investments, which generated an unlevered asset level IRR of 9.5%. Looking forward, the pipeline in this strategy is robust. For example, retailers, a core competency of our ABL team are continuing to explore alternative financing solutions at an increased pace, following a challenging last year. During the quarter, SLR Credit Solutions paid a cash dividend of $6 million.
Now let me turn to our Corporate Leasing business Kingsbridge. We are now six months into our ownership of Kingsbridge and the integration is proceeding smoothly. The credit quality of the portfolio remains strong and originations during the quarter were steady. At quarter end, Kingsbridge highly diversified portfolio of leases approximated $590 million with an average funded exposure of approximately $1.3 million per obligor. The lease portfolio was 100% performing and over 70% of the portfolio is invested in assets leased by investment-grade borrowers.
For the first quarter, Kingsbridge paid a dividend of $2.8 million to SLRC. When we include the interest on our $80 million senior secured loan into Kingsbridge, gross income from our investments in Kingsbridge was $4.4 million for the quarter. We expect that our combined debt and equity investment in Kingsbridge will generate approximately $20 million of gross income this year, and produce a blended cash yield of approximately 10%, consistent with other specialty finance assets across the SLR platform.
Now let me turn to SLR Equipment Finance, as reminder included in the Equipment Finance business, our equipment loans held directly on our balance sheet, as well as those held in SLR Equipment Finance, a wholly-owned portfolio company that for tax efficiency purposes hold certain of these investments. In the first quarter, Equipment Finance invested $30 million and had portfolio repayments of approximately $30 million. At quarter-end, the portfolio totaled $320 million. The portfolio is invested across 104 borrowers with an average exposure of approximately $3 million. This asset class represents approximately 16% of our comprehensive portfolio.
100% of Equipment Finance investments are first lien loans, and at quarter-end, the weighted average asset level yield was just over 10%. Comprehensive investment income from the full portfolio, including assets on the balance sheet and those held in the subsidiary totaled just over $4 million. The rebound enact economic activity that started last quarter and continued into this first quarter has been supportive of the performance of our Equipment Finance investments. We are seeing equipment valuations returned to their pre-COVID levels and credit quality improving. The team has now turned their attention towards regrowing the portfolio.
Now finally, let me touch on our life science lending business. At quarter end, our portfolio totaled just over $330 million, consisted of 16 borrowers with an average investment of just over $20 million. Life science loans represented 16% of our total portfolio and nearly 32% of our gross investment income for the quarter. During the quarter, the team committed $35 million of which $30 million was funded during the quarter. Repayments totaled $30 million leaving the portfolio flat from the prior quarter.
Our life science team was repaid on one investment during the quarter, which generated an 18% gross asset level IRR. As part of the repayment, SLRC recognized a $3.4 million fee through additional income. During the pandemic, our life science portfolio experienced very little churn, as repayments start occurring at a more normal cadence, the realization fees and other income associated with these investments becomes recurring and more consistently benefits earnings. At quarter end, SLRC had $25 million of delay draw commitments to existing borrowers that are available upon reaching certain milestones. We expect some of these to be drawn in future quarters. The weighted average yield of the life science portfolio was just over 10% at costs and this excludes success fees and warrants.
In conclusion, SLRC’s portfolio activity during the first quarter represents a continuation of the investment themes that have been driving our portfolio over the last few years. Focusing new origination activity on first lien cash flow loans in defensive sectors, increasing investments in specialty finance assets, where we get tight structures and attractive risk adjusted returns and growing alongside portfolio companies by committing to delay draw facilities, which fund over the following quarters.
Across all of our investment verticals, including cash flow, we are seeing a larger volume of quality investment opportunities than we have seen in a number of quarters. The uptake is reflective of the economic rebound and increased middle-market sponsor activity. In addition, we’re seeing a larger pipeline of opportunities from the business development efforts across the SLR platform. The current market environment is attractive and provides a great opportunity for SLRC to grow its portfolio this year.
Now let me turn the call back to Michael.
Thank you, Bruce. In closing, we believe that the first quarter of 2021 was a great start to the year in terms of our portfolio’s credit quality, earnings growth, and the opportunity set across all of our investment verticals. With the economic recovery in full swing, and SLRC’s portfolio on solid footing, we fully focused on deploying capital in attractive investment opportunities across all of our investment verticals. The breadth of investment strategies, which span cash flow, ABL, life science venture, in addition to equipment financing and leasing remain at modest activity in each vertical aggregates to meaningful overall portfolio growth.
As I mentioned earlier, now that we’re through the incentive fee catch-up every incremental dollar of income is highly accretive to shareholder returns at 0.8 times net debt-to-equity. SLRC remains under levered relative to our target of 0.9 to 1.25 times. We have access to ample low cost capital which to fund portfolio growth. As we continue to grow the portfolio, we believe NII will return to fully covering the dividend.
We also believe we’re still in the early innings with substantial runway, as financial sponsors deploy record amounts of dry powder and more of the larger businesses we prefer to lend, to choose direct financing over syndicated debt markets. These industry tailwinds combines the scale of SLRC investment advisor should benefit SLRC investors with greater access to upper middle market investment opportunities, which as last year’s proven our better position to protect capital than smaller companies are.
In conclusion, our team is confident in SLRC see defensively positioned portfolio, strong liquidity position, and the investment opportunity set. Later on this morning at 11:00, we’ll be hosting an earnings call for Q1 results of SLR Senior Investment Corp. or SUNS. Our ability to provide traditional middle-market senior secured financing through this vehicle continues to enhance our origination teams’ ability to meet our clients’ capital needs. And we continue to see benefits of its value proposition and SLRC’s deal flow.
We thank you for your time this morning. Operator, could you please open the line for questions?
[Operator Instructions] Your first question comes from Matt Tjaden from Raymond James.
Good morning and appreciate taking the time. First kind of two technical questions to start off, First on, SOAG [ph], so a good bump up in dividend income quarter-over-quarter, any color you can give surrounding that asset and kind of how we should expect dividend income to settle over the coming quarters.
Yes. Great question. So that’s the gift that keeps on giving. We’ve been invested there for several years. Just to refresh your memory portfolio of long lease aircraft. It is winding down. We don’t expect much more from that. We have, as I mentioned, been in it for a number of years and it’s been an incredibly attractive investment of return in the upper teens on an IRR basis. So a little bit more coming, but we don’t expect the same runway that we have in the past because we haven’t been investing in that vertical for a couple of years now. So it’s a bit of a runoff.
Okay. That’s helpful, I guess, as a follow-up to that, on the other income lines. So obviously, a little elevated, I think you said related to a success fee on a life science loan, when that line item kind of normalizes out. Any commentary you can give on where we would expect that to settle out?
So unfortunately, no, I guess the best way to look at that line is on average over a year’s time period. It’s generated because of life science to your point, that’s the nature of those assets. That was really depressed last year that line just because there was not much assurance. So the good news is we have longer duration than is typical in life science assets, which tend to churn within two years that is accelerating. So we expect that, it’s episodically recurring. It’s not consistently recurring. But we do expect to see more of that. But it’s hard to pick a number on a quarterly basis. It’s really more over the course of a year as you look at it in the context of that portfolio and the life science portfolio has been growing over the last couple of years.
Fair enough. And then just last one for me, kind of more high level. Based on kind of what I’d calculate there’s about $0.40 and embedded NAV per share upside based on your current book, fair value to cost. Again kind of on a high level basis, is the COVID recovery over in fair value to cost marks? Or is there still some potential for NAV per share upside?
Yes. We do think there’s some. I think a fair bit of it came back rather quickly for us just because of the resilient sectors that we’ve been invested in, together with the specialty finance verticals that have also demonstrated a fair bit of COVID resilience. So yes, there is a little bit more to go but we snapped back rather quickly.
Got it. That’s it for me. Appreciate the time.
Thanks for your questions, Matt.
[Operator Instructions] There are no further questions at this time. Presenters, please continue.
Thank you very much for your time this morning. And for those of you are involved with SLR Senior Investment Corp., we’ll talk to you half an hour.
This concludes today’s conference call. Thank you everyone for participating. You may now disconnect.