Saratoga Investment (NYSE:SAR) released fourth-quarter financial results and hosted an earnings call on Wednesday. Read the complete transcript below.
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Summary
Saratoga Investment reported a strong fiscal year end with net positive originations and a 9.1% return on equity, significantly outperforming the industry average.
The company announced a monthly base dividend of $0.25 per share, representing a 12.6% yield, and maintained a robust investment pipeline despite challenging market conditions.
Future growth is supported by strong business development initiatives, a diversified portfolio, and substantial liquidity with $211 million in investment capacity.
The company’s portfolio remains predominantly in first lien debt with a focus on solid credit quality, although some assets such as the CLO F note were placed on non-accrual.
Management highlighted ongoing strategic hires, including a new COO, to enhance performance and growth opportunities, and expressed confidence in navigating macroeconomic uncertainties.
Full Transcript
OPERATOR
Good morning ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp’s fiscal year end and fourth quarter 2026 financial results conference call. Please note that today’s call is being recorded. During today’s presentation, all parties will be in 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. Chief Financial and Chief Compliance Officer Mr. Henry Steenkamp. Please go ahead.
Henry Steenkamp (Chief Financial and Chief Compliance Officer)
Thank you. I would like to welcome everyone to Saratoga Investment Corp’s fiscal year end and fourth quarter 2026 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 year end and fourth quarter 2026 shareholder presentation in the Events and Presentation section of our investor Relations website. A link to our IR page is in the earnings press release distributed last night. For everyone new to our story, please note that our fiscal year end is February 28, so any reference to Q4 results reflects our February 28 quarter and year end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer Christian Oberbeck who will be making a few introductory remarks.
Christian Oberbeck (Chairman and Chief Executive Officer)
Thank you Henry and welcome everyone. Saratoga Investment Corp. Highlights this quarter include net positive originations generated from our strong pipeline, including five new portfolio companies originated in the quarter, sustained long term AUM growth, a strong 9.1%, latest 12 month return on equity beating our prior year and more than double the industry and importantly, continued solid performance from the core BDC portfolio in a challenging and volatile macro environment. Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 share in aggregate for the first quarter of fiscal 2027, which when annualized represents a 12.6% yield based on the stock price of 2389 as of May 4, 2026, offering strong current income from an investment value standpoint. Originations and AUM growth were strong during the quarter, contributing to adjusted NII of $0.53 per share including the impact of a $1.7 million excise tax expense adjusted for this excise tax NII was $0.61 per share consistent with the prior quarter. Overall, our adjusted NII continues to reflect the impact of declining short term interest rates and tightening spreads on our largely floating rate asset base. During the quarter we saw a meaningful increase in deal activity reflecting our own business development activities. Despite persistent sector headwinds and the cautious sentiment that has taken hold across the broader private credit sector, market dynamics continue to be very competitive. While our portfolio saw multiple debt repayments in Q4, our strong origination activity more than offset those exits resulting in net originations of $101.1 million for the quarter from $135.1 million in new originations across 5 new investments and 15 follow ons. Our strong reputation, differentiated market positioning and the ongoing development of sponsor relationships continue to create attractive investment opportunities from high quality sponsors. Investment activity continues post quarter end with one new portfolio company investment and multiple follow ons already closed. We remain prudent and discerning in our underwriting approach, particularly in light of the current volatile and uncertain environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges. Our total 1.109 billion portfolio was marked down 1% or $9.6 million during the quarter including net depreciation of $3.1 million in the non CLO core portfolio and unrealized depreciation of $5.5 million in the CLO and JV. Our investment in solidge that previously had been restructured and written off continues to perform strongly with $3.3 million of unrealized appreciation recognized in this quarter. As of quarter end, our core non CLO portfolio remains 1.6% above cost with our total portfolio valuation 2.4% below cost. These results reflect the quality of our direct lending underwriting, the strength of our portfolio companies and their sponsors, and our focus on well selected industry segments with favorable risk adjusted returns. During the fourth quarter, our core BDC net interest margin decreased by 4% from $13.5 million last quarter to 13 million. This was driven primarily by the average SOFR rate used in the portfolio decreasing by 12 basis points from last quarter. Accelerated OID of $0.9 million on the sale of the JVCLO’s E Note from last quarter not repeating spreads on originations this quarter being almost 200 basis points lower than on the repayments they replaced and the timing of originations and repayments in Q4 partially offset by the 5.6% increase in average core assets. Our overall credit quality for this quarter decreased slightly to 96.8% of credits rated in our highest category. We have just two investments on non accrual status, Pepper palace, which has been restructured and our CLOS F note that has been put on nonaccrual for the first time this quarter, representing 0.2% of fair value and and 1.2% of cost, well below the industry average of 3.3%. With 82.1% of our investments at quarter end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio composition and leverage profile are well structured for future economic conditions and uncertainty. As always and particularly in the current uncertain environment, balance sheet strength, liquidity and nav preservation remain paramount for us. At quarter end we maintained a substantial $211 million investment capacity to support our portfolio companies with $99 million available through our existing SBIC 3 license, $90 million from our two revolving credit facilities and $21.8 million in Canadian cash. Our quarter end cash position decreased meaningfully from $169.6 million last quarter due in large part to strong origination activity and the refinancing of the $175 million institutional note. The refinancing of this debt included the issuance of $150 million of new bonds and our regulatory leverage remained unchanged at 168.4% quarter over quarter as we kick off our fiscal year 2027, the macro environment remains complex, shaped by geopolitical tensions, evolving U.S. tariff policies and concerns about AI and software. All of these aspects, combined with an uncertain interest rate environment combine to create elevated volatility and continued uncertainty on credit spreads across the private credit sector. While negative press and sentiment weighs on the public BDC market at this time, it appears that these very negative perceptions are not commensurate with the current market performance in the broader private credit market. As we continue to focus on underwriting, strong credit and long term growth, we continue to grow our team having added three new associates and two new Managing director hires this year, including Most recently David DeSantis, who joined Saratoga as Chief Operating Officer and Senior Managing Director. David brings a wealth of private credit experience and organizational leadership, significantly expanding our C suite resources to further enhance Saratoga’s performance and growth opportunities. David will be making his debut presentation today addressing the market and Saratoga’s portfolio, moving on to Saratoga Investments Fiscal 2026 Fourth Quarter Key Performance Indicators as compared to the quarters ended February 28, 2025 and November 30, 2025. Our quarter end NAV was $396.2 million, up 0.9% from $392.7 million last year and down 4.1% from $413.2 million last quarter. Our NAV per share was $24.42 down from $25.86 last year and 2,559 last quarter. Year over year, NAV per share is down $1.44 with total NII of $2.32 versus total dividend distributions of $3.74. The $1.42 of distributions in excess of NII approximates the entire $1.44 of 12 month reduction in NAV per share. This excess distribution represents previously undistributed NII profits from prior years. Our Adjusted NII was $8.5 million this quarter, up 6.2% from last year and down 12.8% from last quarter. Our adjusted NII per share was 53 cents this quarter, down 5.4% from last year and 13.1% from last quarter. Excluding the excise tax, Adjusted NII for Q4 was $0.61 unchanged from last quarter. Adjusted NII yield was 8.4% this quarter, unchanged from 8.4% last year and down from 9.5% last quarter and latest 12 months. Return on equity was 9.1% up from 7.5% last year, down from 9.7% last quarter and above the industry average of 4.3%. This past year saw a $5 million overall net realized and unrealized gain for the year year and slide three illustrates how these combined portfolio and financial results have delivered a return on equity of 9.1% for the last 12 months above the industry average of 4.3%. Additionally, our long term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.7%. Our long term return on equity has remained strong over the past decade plus beating the industry 9 of the past 12 years and consistently positive every year. As you can see on slide 4, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago despite a slight pullback in fiscal 2025 reflecting significant repayments. This quarter saw significant originations, again outpacing repayments resulting in a meaningful increase in AUM as to compared compared to the previous quarter. The quality of our credits remains solid with just two investments on nonaccrual Pepper palace which has been restructured and our CLO’s F note that has been put on nonaccrual for the first time this quarter. Our management team is working diligently to continue this positive long term trend as we deploy our significant levels of available capital into our pipeline while at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I’d like to turn the call over to Henry to review our financial results as well as the composition and performance of our portfolio.
Henry Steenkamp (Chief Financial and Chief Compliance Officer)
Thank you Chris. Slide 5 highlights our key performance metrics for Q4 and Slide 6 highlights our key performance metrics for the year, most of which Chris already highlighted. Of note, the weighted average common Shares outstanding in Q4 was 16.2 million, increasing from 16.1 million and 14.5 million shares for last quarter and last year’s fourth quarter respectively. Adjusted NII was $8.5 million this quarter, up 6.2% from last year and down 12.8% from last quarter. For the year, adjusted NII was $37.5 million, down 29.2% from full year 2025. This quarter’s decrease in adjusted NII as compared to the prior quarter was largely due to the impact of the $1.7 million excise tax paid during this quarter, while the increase from last year primarily relates to higher other income such as structuring and advisory fees. Reflecting the increased origination activity this year, the weighted average interest rate on the core BDC portfolio of 10.4% this quarter compares to 11.5% as of last year and 10.6% as of last quarter. The yield reduction from last year primarily reflects the SOFA base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets. Total expenses for the year, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes increased by $1.7 million to 11.0 million as compared to $9.3 million in fiscal year 25. These same expenses for Q4 increased by $1.0 million to $2.4 million as compared to $1.4 million last year and decreased by $0.9 million from $3.3 million last quarter. These all represented 0.8% of average total assets on an annualized basis, unchanged from both last quarter and last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past two years, we have again added the KPI slides 28 through 31 in the appendix at the end of the presentation and slide 32 compares our non accruals to the BDC industry. You will see that our non accrual rate of 1.2% of cost updated for the CLO F Note that is now on non accrual is still almost three times lower than the industry average of 3.3%. This highlights the current strength in credit quality of our core PDC portfolio. Moving on to Slide 7, NAV was $396.2 million as of fiscal quarter end, an increase of $3.5 million from last year and a decrease of $17.0 million from last quarter. During this year, $19.3 million of new equity was raised at or above net asset value through our ATM program. This chart also includes our historical NAV per share which highlights how this important metric has increased 23 of the past 34 quarters over the long term. This metric has increased since 2011 and grown by $2.45 per share or 11.1% over the past nine years when not many BDCs have grown NAV per share long term. We’ll cover the changes since the last quarter on the next slide. On slide 8 you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis starting at the top, adjusted NII per share was down $0.08 in Q4 primarily due to the impact of annual excise tax expense of $0.09. Excluding this, adjusted NII per share would be $0.61 per share share consistent with last quarter. On the lower half of the slide, NAV per share decreased by $1.17 primarily due to the $0.75 monthly and $0.25 special dividend exceeding the $0.48 GAAP NII plus the $0.60 unrealized depreciation recognized in Q4, with almost 2 thirds of that being from the JV equity position. Now slide 9 shows the same reconciliations for the year and starting at the top again, adjusted NII per share was down $1.44 per share for the year largely due to a decrease of $1.15 in non CLO net interest income reflecting lower base rates and tighter spreads and $0.46 per share due to dilution from the DRIP and ATM programs. Additional shares on the lower half of the slide NAV per share is down $1.44 per share with total NII of $2.32 and a total dividend distribution of $3.74. The $1.42 of distributions in excess of NII approximates the entire 12 month reduction in NAV per share. This excess distribution represents previously undistributed NII profits. Slide 10 outlines the dry powder available to us as of quarter end which totaled $210.8 million. This was spread between our available cash undrawn SBA debentures and undrawn secured credit facilities. This quarter end level of available liquidity allows us to grow our assets by an additional 19% without the need for external financing with $21.8 million of corporate quarter end cash available and thus fully accretive to NII when deployed and $99 million of available SBA debentures with its low cost pricing also very accretive. In addition, $269 million of our baby bonds with 2/3 being 8% are callable now, providing us the option to refinance them and creating a natural protection against potential continuing future decreasing interest rates which should allow us to protect our net interest margin if needed. These calls are also available to be used prospectively to reduce current debt. You will also see that this quarter we did repay our $175 million 4.375% …
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