Saratoga Investment Corp (SAR) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Saratoga Investment Corp's year-end and fiscal fourth-quarter 2016 financial results conference call. Please note that today's call is being recorded.

(Operator Instructions)

At this time, I would like to turn the call over to the 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 year-end and fourth-quarter 2016 earnings conference call.

Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to up date 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 2016 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.

A replay of this conference call will also be available from 1 PM today through May 25. Please refer to our earnings press release for details.

I would now like to turn the call to our Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.

Thank you, Henri, and welcome, everyone. As we reflect on our 2016 year end following a successful 2015, we would like to highlight some of the continued progress and achievements during this productive year and 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 a 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 returns for our shareholders. FY16 and the fiscal fourth quarter continued our trend of outperformance. As highlighted on slide 2, during the past year and quarter, many of our metrics and milestones underscore our achievements and continued momentum.

To briefly recap, first, we continued on our path of strengthening our financial foundation by increasing our net asset value to $125.1 million, a 2.1 % increase from $122.6 million as of end of the year last year; maintaining our investment quality and credit, with 98.3% of our loan investments now having our highest rating and no investments on nonaccrual; and third, generating a return on equity of 9.4% of the last 12 months, greatly outperforming the industry average of approximately 1.1%.

Secondly, we expanded our assets under management to $284 million, an 18% increase from $240 million at the end of both our third quarter and FY15. For the year, this increase of $44 million is net of $68.2 million of redemptions experienced over the last 12 months and reflects strong originations of $109.2 million for the year and $51.8 million for the quarter. This growth is also a 199% increase from $95 million at the end of FY12. Our significant investment activity in the fourth quarter is consistent with our continued long-term upward trajectory in asset growth, while recognizing that growth can be lumpy when viewed on a quarterly basis.

Third, the continued strengthening of our financial foundation has enabled us to increase our quarterly dividend for the sixth consecutive quarter. This dividend of $0.41 for the fourth quarter 2016 was paid on April 27 this year.

The individual size of our dividends has increased by 128% since the launch of our program, and all these dividend payment increases are exceeded by our net investment income for the same periods. As result, we are comfortably earning our dividend, which distinguishes us from many other BDCs. In addition, our dividend reinvestment plan, started in 2015, remains in effect.

Fourth, our base of liquidity remained strong and promises to improve. Effective May 29, 2015, we entered into a debt distribution agreement with Ladenburg Thalmann, through which we may offer for sale from time to time up to $20 million in aggregate principal amount of our existing baby bonds issuance through an aftermarket offering. As of February 29, 2016, we sold bonds this year with a principal of $13.5 million at an average price of $25.31 for aggregate net proceeds of $13.4 million and we continue to have significant dry powder to meet future potential opportunities in a changing credit and pricing environment. Our existing available year- and quarter-end liquidity allows us to grow our current assets under management by 35% without any new or external financing.

And finally, we continue to have in place our share repurchase program that allows us to repurchase up to 400,000 shares of our common stock. As of May 16, 2016, we repurchased 61,257 shares at a weighted average price of $14.89 per share. And we will continue to assess this as a way of deploying our capital and improving shareholder returns.

This year also saw an increase in performance within our key performance indicators as compared to last year. Our adjusted NII is up 7%, to $10.6 million, and our adjusted NII per share is up $0.05, to $1.90. Our adjusted NII yield is up 10 basis points, to 8.6%, and our return on equity is up 10 basis points, to 9.4%, comfortably beating the industry average of approximately 1.1%.

Comparing this fourth quarter to the third quarter, our adjusted NII is up 7%, to $2.5 million, and our adjusted NII per share is up $0.03, to $0.45, reflecting the increased net originations we had during the quarter. Our adjusted NII yield is up 60 basis points, to 8%, and our return on equity is negative 1.3%, versus 10.8% last quarter. The quarter's return on equity was impacted by the realized and unrealized losses on our legacy Targus and Elyria investments of $2.4 million, or a negative 6.1% impact on return on equity.

Both Targus and Elyria are legacy investments that predate Saratoga's management of the Company. Our other investments are generally performing very well, as reflected in our strong credit quality rating. Overall, we are very excited about these accomplishments, and we'll go into greater detail on each one on today's call.

As I've 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 has continued, with $284 million in assets under management in our BDC as of February 29, 2016. We have seen an 18% increase in assets year to date, with 98.3% of our loan investments holding the highest internal rating that we award.

We also have no investments on nonaccrual. Thus, our overall loan quality continues to increase, while we continue to grow assets in a measured way.

With that, I would like to now turn the call back over to Henri to review in greater detail our full financial results as well as the composition and performance of our portfolio.

Thank you, Chris. Looking at our quarterly key performance metrics on slide 4, we see that for the quarter ended February 29, 2016, our net investment income was $3.1 million, or $0.54 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 $2.5 million, or $0.45 per share. This represented a decrease of $0.1 million compared to the same period last year and an increase of $0.2 million compared to the quarter ended November 30, 2015.

This quarter benefited from higher growth investment income as compared to the quarters ended November 30, 2015, and February 28, 2015. Investment income increased 12.4% to $7.8 million for this year's fourth quarter, as compared to $6.9 million for the third quarter, and increased 4.6%, from $7.5 million for the same quarterly period last year. This increased investment income was generated from an investment base that has grown by 18.1% since both Q3 and last year.

The investment income increase was offset by increased debt and financing expenses from higher outstanding notes payable in SBA debentures this year, reflective of the growing investment and asset base, the sum of it not yet fully deployed; increased base and incentive management fees generated from the management of this larger pool of investments; and increased total expenses, excluding interest and debt financing expenses, base management fees, and incentive fees. These increased expenses reflect higher professional fees related to the issuance of notes this year as well as increased administrator and deal research fees. In addition, we also accrued an excise tax of $237,000 during this quarter.

In the fourth quarter of FY16, we experienced a net loss on investments of $3.5 million, or $0.62 on a weighted average per share basis, resulting in a total decrease in net assets from operations of $0.4 million, or $0.07 per share. The $3.5-million net loss on investments was largely comprised of $4 million of net realized loss from investments, offset by $0.5 million of net unrealized appreciation. The realized loss of $4 million includes a $4.2-million realized loss in our legacy investments in Targus Holdings following a restructuring of the company that occurred during the quarter, resulting in the elimination of our former unsecured note and common equity accompanied by a conversion of our prior first lien term loan into new equity.

Net investment income yield as a percentage of average net asset value was 9.8% for the quarter ended February 29, 2016. Adjusted for the incentive fee accrual related to net unrealized capital gains, the net investment income yield was 8%, down from 8.8% last year, and up from 7.4% last quarter.

Much focus is always placed on net investment income, but we have highlighted in the past the importance we place on return on equity as an important financial indicator, which includes both the realized and unrealized gains. Return on equity was negative 1.3% for this quarter, but was primarily due to the impact of the realized and unrealized losses on our legacy Targus and Elyria investments totaling $2.4 million, which had a negative 6.1% impact on ROE.

Moving onto a key performance metrics for the fiscal year on slide 5, where we would also focus on our balance sheet metrics, we see that for the year ended February 29, 2016, our net investment income was $10.7 million, or $1.91 on a weighted average per share basis. Adjusted for the incentive fee accrual and the second incentive fee calculation, our net investment income was $10.6 million, or $1.90 per share. This represented an increase of $0.7 million, or $0.05 per share, as compared to last year.

In FY16, we experienced a net gain on investments of $1 million, or $0.17 on a weighted average per share basis, resulting in a total increase in net assets from operations of $11.6 million, or $2.09 per share. The net gain on investments was comprised largely of $0.2 million net realized gains and $0.7 million in net unrealized appreciation. The slight realized gain for the year is net of the $4.2 million legacy Targus loss discussed earlier.

Net investment income yield was 8.6% for the year ended February 29, 2016. Adjusted for the incentive fee accrual, the NII yield was also 8.6%, up from 8.5% last year. Our NII yield has continue to grow each year.

Return on equity was 9.4% for the year, up from 9.3% last year and 7.7% in FY14, and significantly beating the current market average of approximately 1.1%. We believe our ROE growth has been very consistent and an important indicator of our success in pursuing our strategy of growing the asset base, building scale, and generating competitive yields, while continuing to focus on the quality of our portfolio.

As ROE and our other metrics continue to improve, it 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. This quarter, SBIC assets increased to 71% of total assets. 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.

Our total investment income was $50.1 million for the fiscal year, an increase $2.7 million, or 9.8%, compared to last fiscal year. Our total investment income for the year was comprised primarily of $26.9 million of interest income, $1.5 million of management fee income on the CLO, and $1.7 million of other income. For the quarter, total investment income was comprised primarily of $6.9 million of interest income, $0.4 million of management income on the CLO, and $0.5 million of other income. Other income includes dividends received from portfolio companies, as well as origination, structuring, and advisory fees.

Our total operating expenses were $19.4 million for the FY16 year and consisted of $8.5 million in interest and debt financing expenses, $6.8 million in base and incentive management fees, $2.5 million in professional fees and administrator expenses, and $1.6 million in insurance expenses, directors fees, and general administrative excise tax and other expenses. Our total operating expenses were $4.7 million for the fiscal fourth quarter and consisted of $2.2 million in interest and debt financing expenses, $1.2 million in base and incentive management fees, $0.6 million in professional fees and administrator expenses, and $0.6 million in insurance expenses, directors fees, and general and administrative excise tax and other expenses.

For this fiscal year, FY16, total operating expenses increased by $1.7 million as compared to last year, while for Q4 alone, total operating expenses increased by only $0.1 million as compared to the same period last year. This increase in total operating expenses was primarily attributable to a higher interest and credit facility financing expenses as well as increased management and incentive fees as our asset base continues to grow and outperform.

Total expenses, excluding interest and debt financing expenses, base management fees, and incentive management fees, increased from $3.6 million for the year ended February 28, 2015, to $4.2 million this year, but held constant at 1.6% of average assets under management for the year, the same percentage as last year. For the quarter on its own, the increase was only $0.1 million, from $1.1 million to $1.2 million. We expect to further benefit from scale as our assets continue to increase while our cost structure remains relatively constant.

Net asset value was $125.1 million as of February 29, 2016, a $2.6 million increase from an NAV of $122.6 million as of the end of last year. NAV per share was $22.06, compared to $22.70 as of the same time last year.

During these 12 months, NAV per share decreased by $0.64 per share, primarily reflecting the $2.6 million, or $0.45 per share increase in net assets, net of the $2.36 dividend paid during FY16 and offset by the dilutive impact of the 295,745 shares issued pursuant to our dividend reinvestment plan. The dilutive share impact was reduced by 25,417 shares repurchased during the year up to February 29, 2016.

Slide 6 outlines the dry powder available to us as of this year end. As of the end of the year, 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 $60.2 million, respectively.

With the $45 million available on the credit facility, $46.3 million additional borrowing capacity at our SBIC subsidiary, and $7 million in cash and cash equivalents, we had a total of $98.3 million of available liquidity at our disposal as of year end. This available liquidity equates to approximately 55% of the value of our year-end investments, meaning we can grow our current assets under management by a further 35% 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. As we had previously discussed, last year we entered into a debt distribution agreement with Ladenburg Thalmann & Company through which the Company may offer for sale from time to time up to $20 million in aggregate principal amount of the notes through an at-the-market offering. This is a benefit of having our N-2 shelf registration statement, allowing us to capitalize on market opportunities.

As of February 29, 2016, the Company sold 539,725 bonds, with a principal of $13.5 million, at an average price of $25.31 for aggregate net proceeds of $13.4 million. This enables us to further enhance our liquidity and plan ahead for future capital needs, such as the remainder of our first SBIC license and the funding of a second SBIC license.

These new issuances are under the exact same terms as the original baby bond offering into 2013. We remain pleased with our liquidity position, especially taking into account the conservative composition our balance sheet, and the ability we continue to have to substantially grow our assets without the need for external financing.

Now we'd like to move on to slides 7 through 9 and review the composition of performance of our investment portfolio. Slide 7 highlights the portfolio composition and yield at the end of the quarter.

As of year end, the fair value of the Company's investment portfolio was $284 million, principally invested in 54 portfolio companies and one CLO fund. Our portfolio is composed of 50.9% of first-lien term loans, 31.1% of second-lien term loans, 4.2% of syndicated loans, 4.5% of subordinated notes of the Saratoga CLO, and 9.3% of common equity. As of year end, the weighted average current yield was 11.1%, which was comprised of a weighted average current yield of 10.7% on first-lien term loans, 11.5% on second-lien term loans, 7.6% on syndicated loans, and 16.4% 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, has remained consistently around 11% throughout this year, and actually increased as compared to the prior two quarters. While the CLO's yield decreased this quarter, syndicated yields continued to move steadily upwards. Most of the volatility in the overall yield was reflective of a change in the CLO yield as calculated.

Moving on to slide 9, during that fiscal fourth quarter 2016, we invested $51.8 million in new and existing portfolio companies and had $5.5 million in exits and repayments, resulting in net investments of $46.3 million for the quarter. During the full year, we invested $109.2 million in new and existing portfolio companies and had $68.2 million in exits and repayments, resulting in net investments of $41 million for the year.

As you can see on 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, as well as software as a service, 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 this past fiscal year.

Of our total investment portfolio 9.3% consists of equity interests. Equity investments are and will continue to be an important part of our overall investment strategy. Slide 10 demonstrates how realized gains from the sale of equity investments combined with other investments has helped enhance shareholders' capital.

For the past four years, we have had a combined $5.3 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 FY16, we were able to show a net realized gain of $0.2 million, despite the $4.2-million realized loss associated with our legacy investment in Targus mentioned earlier, reflecting our success in investments we have originated.

That completes my financial and portfolio review. I will now turn the call over to Michael Grisius, our President and Chief Investment Officer, for an overview of the investment market.

Thanks, Henri. I would like to start by taking couple minutes to update everyone on the current market as we see it. The market's extremely competitive conditions persist, and for the first quarter of 2016, market volatility has not helped.

As you can see on slide 11, at first glance, it appears that Q1 2016 may have been a turning point for leverage. For a number of years, middle-market leverage has been steadily climbing, a trend that appears to have reached a turning point based on the reduction in Q1 2016 on this slide. Valuation multiples for US buyouts drop for the first time since 2012, and 2015 exceeded 2014, which already had the highest multiples since even pre-crisis levels. Debt multiples also fell for the first time since 2009.

But have valuation and debt multiples really stabilized? It seems likely to us that declining deal volumes, persistently low interest rates, and a relatively benign credit environment will collude to bolster leverage levels in our market. It's difficult to gauge were valuations and leverage will ultimately end up, but we think we'll continue to experience a competitive market, where strong businesses coming to market will garner outsized valuation multiples and aggressive leverage.

Against this backdrop, pricing remains under pressure as lenders compete for mandates. Several data sources in our own experience indicate that gross investment yields have remained tight. Despite the NII pressure facing many BDCs we have not seen a widening of yields in the non-syndicated market.

Slide 12 further demonstrates how fewer deals are being done. The number of transactions for deal sizes in the US below $25 million in 2015 was down 23% from calendar year 2014.

Calendar year 2016 is off to a slow start as well. Only 353 debt deals in that size range closed as of March 31, 2016, compared to last year's first quarter. That's a year-to-date reduction of 33%. At this pace, calendar year 2016 is likely to be a slower year than 2015.

In the face of these difficult market trends, we feel good about this overall strength of our portfolio and the returns we have generated through our origination activity. We also remain optimistic of our own pipeline and originations.

Our overall portfolio quality is strong, and even stronger when evaluated taking into account only the assets originated by Saratoga since we took over management of the BDC. As you can see on slide 13, the gross unleveraged IRR on realized investments made by the Saratoga Management Team is 19.4% on approximately $90 million of realizations in our SBIC, and 14.9% on approximately $47 million of realizations in the rest of our BDC. Similarly, realizations from this past fiscal year alone, excluding syndicated loans, generated gross unleveraged returns of 21.1%.

While redemptions present a challenge because they naturally curtail our asset growth, we 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 are refinanced with cheaper debt capital.

On the chart on the right, you can see that gross unlevered IRR on our unrealized investments, the total gross unlevered IRR on all of our $200 million-plus of SBIC unrealized investments is 15.9%. In addition, our gross returns in the SBIC have remained consistently strong across vintage years. The total gross unlevered IRR on the rest of our BDC unrealized investments since Saratoga took over management is 9.7% on approximately $46 million of investments. This is reflective of some mark-to-market valuation activities.

Our investment activity since quarter end has illustrated the strength of our growing and reliable origination platform. As Chris and Henri mentioned earlier, our fiscal fourth quarter had new originations of $51.8 million, significant as compared to historical quarters and more than offsetting our lumpy third-quarter redemptions. Our expanding presence in the lower end of the middle market has provided us increased origination volume over time, as well as given us the confidence in our ability to deploy capital at a healthy pace despite market trends to the contrary.

As we have dedicated more resources to our business development effort, we have generated an increasing number of investment opportunities. Our reputation for being fair-minded and supportive investors has increased our pace of referrals from small business owners and management teams.

In addition, we continue to increase our private equity sponsor and intermediary relationships. Using our own internal rating system, we had grown our tier 1 yield sourcing relationships from 8 in 2012 to 85 currently. We believe this will allow us to further accelerate our pace of investment while we remain diligent and careful in our investment approach.

As we mentioned last quarter, we also believe our origination activity is a function of our own presence in the small business marketplace. Moreover, we have significant room to expand our deal sourcing relationships, as we are still not known by many participants in the market. We have continued to make significant strides in expanding our relationships and are confident these relationships will create higher origination activity in the future.

We believe that our production in fiscal Q4 is a good indicator of the growing strength of our origination platform. During this timeframe, we closed eight transactions with a healthy mix of partners.

Ideally, we hope to build our portfolio three ways. First, from new relationships. Second, from new business with existing relationships. And third, from follow-on investments in existing portfolio companies.

This quarter, we benefited from all three means of growth. Our fourth-quarter transactions include two deals that were with new relationships with private equity funds, two new platform investments with relationships we have worked with before, and various follow-on investments to support the growth of existing portfolio companies. We also continue to believe that the lower middle market is the most attractive market segment to deploy capital, and the fundamentals here remain strong, leading to the best risk-adjusted returns in our view.

Powerful, long-term secular trends bode well for the BDC industry. Slide 14 demonstrates how competition from small bank letters has continued to abate, largely through consolidation of the small business banking industry and regulatory changes that have made lending increasingly onerous for banks that remain in the market.

In addition, Saratoga Investment's target market is rich with potential opportunities. Small businesses with revenues between $10 million and $150 million in revenues represent nearly 90% of the market. Against this, less than 8% of private capital is focused on small businesses, creating a target-rich environment that we are well positioned to benefit from.

As you can see in the chart on slide 15, we don't compete directly with the more traditional lenders. Our target investment size and the businesses we serve are too small for most non-bank finance companies, larger BDCs, larger mezz funds, and insurance companies, but at a higher risk point than where traditional banks, CLOs, non-bank finance companies, and lower middle-market stretch senior lenders are comfortable operating. This provides a space where we can be competitive and operate effectively.

We remain focused on this lower end of the middle market as the place to be on a relative basis with the best risk-adjusted returns. Additionally, by virtue of the sheer quantity of businesses at that end of the market, it is less efficient and less competitive.

In the chart on slide 16, you can see that multiples in the industry in December seem to come off a high in the second calendar quarter last year. According to the KeyBanc metrics, only 44% of all middle-market deals last quarter were leveraged over 4.1 times, as compared to as much as 92% only nine months ago.

As we discussed earlier, there are doubts if this downward trend will continue. However, irrespective of where market leverage has historically been, we have been able to invest in deals with relatively low multiples. This quarter, our total leverages actually reduced from 3.9 times last quarter to 3.8 times today. Therefore, the majority of our closed deals remain beneath 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 profiles. We will, of course, make selective higher-leverage loans, provided that through our own underwriting, we concluded that the credit characteristics of each business can support a higher debt profile. Of important to us when doing deals with higher leverage is to ensure that are dollars are invested in companies with exceptionally strong business models where we are confident that the enterprise value of the businesses will sustainably exceed the last dollar of our investment.

In addition, this slide demonstrates the growth we have had in the number of executed investments. With a strong execution track record the past couple of quarters, as well as year-over-year growth, our executed investments increased to 16 in FY15. In the first quarter of calendar 2016, we saw three deals close, a number on pace with previous quarters and within a tough environment.

We achieved this growth in an extremely competitive market while managing to reduce our average leverage at the same time. This speaks to the risk profile of our investment portfolio and the investment philosophy of the firm.

I'd like to go into a little more detail regarding our pipeline on slide 17. Our deal flow remains robust. More than half of our FY16 deals were closed in the last half of the year. Moreover, since 2014, the number of deals that we've sourced and looked at has increased materially, 60% of these coming from companies without institutional ownership, and the remainder from private equity sponsors.

In calendar year 2015, we looked at 613 deals and executed on 16. Including calendar first quarter, we remain relatively on pace from the last 12 months' perspective. Over the past couple of years, the number of deals we've sourced has continued to increase, and we believe it shows the significant impact our efforts had a growing our origination platform. We have also made great strides in expanding our relationships and are confident that these relationships will create higher origination activity in the future.

Since taking over management of the BDC, we have understood the importance of getting the assets right. As a consequence, our highest priority was to build one of the premier execution teams in the business. We believe that we have accomplished that. We have now been dedicating additional resources to our origination effort since last year, which we believe will allow us to accelerate our growth, while maintaining our disciplined investment approach.

And we view our professional staff as best in class. Since taking over the BDC in 2010, Saratoga has continued investing 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.

With respect to our SBIC, our objective remains to maximize our risk-adjusted returns in a manner that utilizes the low cost of capital and the 2-to-1 leverage advantage we possess through our SBIC license. By focusing on the smaller, less competitive end of the market, we are able to reduce the risk profile of our portfolio while delivering highly accretive returns to our investors.

As you can see on slide 18, as of February 29, 2016, over 51% of our SBIC investments are in senior debt securities, which is slightly down from last quarter due to recent redemptions and increased first lien/last out and second-lien investments. The leverage profile of these investments remains very low at 3.6 times, especially when compared to market leverage.

Because of the leverage and lower cost of capital advantages inherent in the SBIC program, we can achieve strong returns for our shareholders without moving far out on the risk spectrum. Therefore, and as demonstrated this past year, we intend to grow our net investment income by continuing to dedicate the majority of our of effort and resources to growing that portion of our portfolio.

Moving on to slide 19, you can see our SBIC assets increased to $200.6 million as of February 29, 2016, from $135.8 million last year. As a percentage of our total portfolio, SBIC assets have grown from 0% of our total portfolio at fiscal year end 2012, to 56% last year, and now to 71% this year. This growth in SBIC assets is an important part of our continued increase in net investment income, as the lower financing costs help grow our NII yield at a healthy pace.

Also, it is important to note that as of fiscal year ended February 29, 2016, we had $50.9 million total available SBIC investment capacity, including cash, of which $46.3 million is leverage capacity within our SBIC license. If we were to obtain a second license, 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.

In our view, our origination platform is among the very best at our end of 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, and I'd like to turn the call back over to our CEO. Chris.

Thank you, Mike. From the start of our quarterly dividend payment program 18 months ago, our expectation has been that this dividend would continue to increase, which it has by 128% since the program launched. As outlined on slide 20, during our FY16, Saratoga has declared and paid dividends of $2.36 per share, composed of $0.27 for the quarter ended February 28, 2014; $0.33 per share for the quarter ended May 31, 2015; $0.36 per share for the quarter ended August 31, 2015; and $0.40 per share for the quarter ended November 30, 2015; and a special dividend of $1 per share in June, 2015.

On March 31, 2016, we also announced a dividend of $0.41 per share for the fiscal quarter ended February 29, 2016, paid on April 27, 2016, to all shareholders of record at the close of business on April 15, 2016. Shareholders continue to have the option to receive payment of the dividend in cash or receive shares of common stock, pursuant to the Company's dividend reinvestment plan, or DRIP plan, which Saratoga adopted in conjunction with the new dividend policy and provides the reinvestment of dividends on behalf of its stockholders. For more information, see Stock Information section of the Company's investor relations website.

Slide 20 also shows how we are currently still significantly over earning our dividend. This past Q4 dividend of $0.41 per share compares to our average adjusted NII per share of $0.48 for the year, which means we are currently over earning our dividend by 17% for the year. This gives us one of the highest dividend coverages in the BDC industry.

We also further exercised our share repurchase plan during the quarter ended February 29, 2016. During FY15, we announced the approval of an open-market share repurchase plan that allows 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. In October, this share repurchase plan was extended for another year and increased to 400,000 shares through October 2016.

As of May 16, 2016, we repurchased 61,257 shares at a weighted average price of $14.89 per share under this plan. All of these initiatives are important corporate tools being employed by us in realizing the Company's goals, and combined with our results for the year, we feel extremely positive about the Company's development and continued evolution.

We are also pleased to see our relative standing in the industry consistently improve over time. As you can see on slide 21, and reflecting our strong key performance indicators as we have discussed earlier, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns at the top of our industry as compared to other BDCs.

Not only is our performance solidly positive with a total return over 12% during the past 12 months, but much of the rest of the industry finds itself currently in negative territory, with the BDC index at negative 2%. Our three- and five-year performances are very similar. And despite putting up these strong historical total returns, our price to NAV remains at a 25% discount, reflecting the potential incremental returns that could still be achieved in the future.

In addition to looking at our historical returns, slide 22 demonstrates how we have climbed to the top of the rankings in a number of important other core categories. Many of the important performance metrics that we've been focused on in our prepared remarks -- return on equity, NAV growth, total capacity, and year-over-year dividend growth -- are reflected in the standings, with Saratoga being a market leader of the past year or more. And in all these cases, we are also significantly meeting the BDC average in these important categories.

Moving on to slide 23, you will see a scatter chart illustrating our comparative outperformance in a different way, plotting our return on equity against our value as reflected by price to NAV. As you can see, we've outperformed the BDC market from a return-on-equity perspective on the right side of the graph, while our price to NAV has not yet reflected this performance.

We believe that no competitor currently generates a higher return with a better credit profile and a better value than we do. We feel that these and the other metrics that we've discussed today have underscored the strength of the investment strategy we have pursued since taking over the management of Saratoga in 2010, and we hope that as we continue to outperform from a return-on-equity perspective, that our position will be moving up on this chart.

All of our initiatives we have discussed on this call are designed to make Saratoga Investment a highly competitive BDC that is attractive to the capital markets community. We hope that our differentiated characteristics as outlined on slide 24 will help drive the size and quality of our investor base while continuing to add institutions to the roster.

These characteristics are strong and growing dividend, industry-leading return on equity, ample low-cost available liquidity, solid earnings per share, and NII yield with potential to grow, and expansion of assets under management. In addition, we have had only limited exposure to the oil and gas industry. We believe that Saratoga Investment is solidly on the path to being a premier BDC in the marketplace as demonstrated by our superior shareholder returns.

Moving on to slide 25, our final slide, we've accomplished a lot in the past year and are proud of our financial results. Our objectives remain simple and consistent -- continue to execute our long-term strategy to expand our asset base without sacrificing credit quality, while benefiting from scale. We also continue to increase our capacity to source, analyze, close, and manage our investments by adding to our 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'd like to again thank all of our shareholders for their ongoing support. We are excited for the growth and profitability that lies ahead for Saratoga Investment Corp., and I would like to now open the call for questions.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Yes. Good morning, everyone. My first question is perhaps for Chris. Saratoga has a relatively small balance sheet, so I imagine it's a challenge to write larger checks without causing investment concentration. Can you tell us what strategies you're employing to confront that challenge? For example, other BDCs co-invest with private funds to be able to provide more capital.

Okay. Well, thank you, Mickey, for that question. First of all, I'd like to say that our focus has primarily been on the smaller end of the smaller middle market, so we've been investing in the $3 million to -- as high as $25 million, but largely in the $3 million to $12 million to $15 million EBITDA range. And at that size level, many of our investments are -- many of the type of credit that is appropriate for a BDC as opposed to a bank or the like, is maybe in the $7 million to $20 million range, which is a very comfortable range for us to be able to lead the origination of those transactions.

And so you can see a number of our transactions were invested at somewhere in the -- our largest is $17 million and our smallest might be in the $5-million range, but in a lot of those investments, we are the sole lender. So a big part of what we are focused on, we can finance with hold positions in the mid teens and be the lead investor.

We do come across, as you point out, opportunities where the hold size might be substantially larger. It might be $25 million, $50 million, and the like, and I think as you can see from some of our portfolio holdings, we have a long history in the industry. The BDC industry itself has a long history of partnering.

And so we have very close partners that we have worked on a number of transactions with that are name investors in the BDC industry, and we have a like-minded approach to these investments. And so when we find a deal that requires a larger hold position than ours, we have had really very little difficulty in finding partners that have enabled us to maintain our leadership as the lead syndicating agent of those deals to execute.

So the short answer to your question is we have not found that our size has limited us from closing on the transactions that we originate, and we have used partners when appropriate, but many of our investments, we are able to complete with a hold position of our own.

And Mickey, this is Mike. I'll chime in a little bit on that. The other thing I'd point out is that our experience is that at the lower end of the middle market, as Chris defined it, we have an opportunity to position ourselves in a better spot in the balance sheet and get better returns, so we think it's a better place to play. And so we're going to continue to focus on that end of the market and feel like we can comfortably grow our balance sheet with deals in that size range.

Now, having said that, as we continue to grow up as a firm, we also are expanding our relationships with other debt providers. And as Chris mentioned, we have co-invested in a number of deals with other like-minded folks like ourselves. We're also continuing to expand our relationships with potential groups like you mentioned that will allow us over time to look at some of those larger deals.

There will be a point in the marketplace where some of those larger deals will offer better returns than they do today, but right now we feel like that's not the better place to be investing capital. We feel like our space is the better one to focus on, and we're happy to be where we are.

Mike, if I could delve just a little bit further then, can you give us a sense of what proportion of your deal flow are club deals? What is the average EBITDA of your deals? And what percentage has a PE sponsor behind you?

I don't have those metrics in front of me. I would say that, right now, just generally, the majority of deals that we're doing are PE sponsored deals, but it's certainly not all of them. Our portfolio consists of a healthy mix.

And I think we do have some stats on how many deals we see that are nonsponsored deals. We feel like those ones require some more work, but we have opportunities to get even better returns on nonsponsored activity. I don't have the stats either on club deals. We have more than a handful in our portfolio for sure.

We've really focused our effort on trying to build relationships with the sponsor community as it relates to those -- that side of our portfolio, the sponsor community where their size fits us well. And we tend to define that as sponsors with roughly $300 million funds and below. That doesn't mean that we don't serve some of the larger ones and certainly building relationships there, but if you are looking at funds in that size range, we typically don't need to bring a partner in to get a deal done, particularly when we are looking at a junior capital position.

You will note that for most of our unitranche deals where we are speaking for all of the capital, those tend to be in businesses that are at the smaller end of the size range just in terms of EBITDA. And that actually works out well because it's our view that with some of these smaller companies, you like to be dollar one in the capital structure and be in a first-lien position.

As we start to see some of the larger companies with a bit more EBITDA, it's more frequently the case that those end up being bifurcated structures where there's a first-lien lender that's a third party, and we're coming into provide some junior capital, second-lien capital. Sometimes we do that, where the sponsor puts us together with another senior lender that they have a relationship with. And more often, or more frequently, I should say, we're building relationships with senior lenders with whom we are partnering with our providing a combined term sheet to the sponsor community to support a transaction.

And, Mickey, you can see on slide 17 on the right-hand side there, we, just on the private equity sponsor side, we do show for our deals sourced as well as our term sheets there, the breakout between what is private equity sponsored and --

Right. I see that. A couple questions on the CLO. I saw that the estimated yield fell pretty significantly quarter to quarter. Was that driven by the squeeze on cash flow from the Fed's rate increase or problems with the collateral or a little bit of both?

I would say it was probably neither, Mickey. I think it reflects really probably a couple of things. I think it reflects, a, some of the volatility that was experienced in the CLO market at the end of February. And then it also obviously reflects the fact that the CLO continues to move down its maturity aging, and another quarter of cash flow came off of it.

And then you probably saw in the 10-K that our discount rate on the CLO also went up this quarter, reflecting that volatility at year end, which, by the way, as you know, has changed quite a lot since then and has improved quite a lot since then. But the factor of all of these has resulted in, when you do the evaluation, the effective interest moving down slightly.

Henri, what's the cash yield, then, on the CLO as opposed to the estimated yield?

We don't think of cash yield as a percentage, but I think as we've shared in the past, our cash distribution that we get every quarter, approximately half of it, which therefore represents the 17% that you've seen, is interest, and then the rest of it, really half of the $1.5 million we do a quarter, is a return of capital, and therefore, what you're concluding in your cash yield number.

Okay. And my last question, you alluded to a rebound in CLO equity valuations. Can you give us a sense of the scope of that rebound since your fiscal year end?

It's hard to do because we haven't done a full valuation yet, Mickey, but as I've said, we have seen, definitely, the prices of all of our positions improve greatly. So I'd say February was probably, if you think of the last four, five months, was a evaluation down at the low end of the pricing there. We're expecting our valuation to reflect these increased prices when we run it now again at May 31.

Right. I would understand. Couple of balance sheet questions. What's the outlook for monetizing the Take 5 common shares? I don't remember if you're in control of that situation or someone else. But obviously, I'm sure you would like to put that into a yield investment.

We have exited that equity position very successfully. I think the equity on that investment had a 10 times return on the initial equity investment.

So that was exited since February.

Yes.

Yes. That's correct. The transaction was unrealized at quarter end, Mickey, or at year end, but we marked it up because it was close to being finalized at year end to within $200,000 of the final value.

That's good. Okay. Very good. And what is your target for total leverage including SBA debentures?

Our leverage including SBA debentures I believe is currently about [$1.1 million] -- [$1.15 million] I believe.

That's [$1.3 million]?

Yes. And then we still have -- our target is obviously to continue growing our debentures for the rest of the first license.

So you'd be willing to run the balance sheet at above [$1.3 million]?

Yes, we would. And that's why we are -- the composition of our asset base is reflective of that as well. We're investing in lower-leverage transactions and have a good mix of first-lien, senior secured deals in our portfolio, so we think that's a healthy mix.

Okay. And you had a large quarter for originations. Were they skewed either toward the beginning or the end of the quarter?

Pretty -- I'd say they're pretty even, actually. There were definitely some of the beginning, right after our Q3, and then there were a couple at the end and a couple in the middle. I think we said there were eight, and they really were split pretty evenly.

Okay.

It's funny. We tend not to think about things in terms of when they close relative to the quarter. We never ever want quarterly production to invade our credit process and our thinking.

No. I understand. It's just from a modeling perspective such a big quarter that it can really skew the metrics if you don't take that into account.

Well, Mickey, as you can appreciate as from a modeling standpoint, I think there was three deals that closed within three days of quarter end.

Right.

But it was an anomalous quarter because the redemptions came early and then originations that have been in the pipeline didn't actually close officially, so you really probably should look at those two quarters on an average of the two quarters rather than as separate quarters to make more sense of all that.

Absolutely. Mickey, we've highlighted the past couple of quarters on our calls as well, just that clearly, redemptions are lumpy, and even originations. It's tough to look at it in a quarter. And obviously, very happy with this past quarter, but quarters are not really reflective of production and redemptions. We look at it more from an annual perspective, an annual growth.

So we think -- our balance sheet in terms of from the top down, building the right relationships so that we're seeing the deals that our investors want us to invest in. And at any given time, we're looking at, gosh, could be 50, 60 potential transactions in a given week, and we're going through our pipeline constantly as a result.

It just -- the production ends up being very lumpy. I would even say that if you saw -- I'd go further and say if you see a BDC who is producing assets on a very consistent, steady-Eddie basis, that would concern me because that's just not the business.

Fair enough. My last question -- I appreciate all the time you are giving me. Your year happened to end at a low point in the recent cycle in the market, and so there's some names that are marked at levels that look concerning, but that may be technical. And I was just wondering if you could comment on whether any of these are really experiencing operational issues as opposed to just technical marks? So these would be BMC --

Yes. Is a good question. Mickey, we -- I'm sorry.

The names I was looking at were BMC, Dispensing Dynamics, Prime Security, [Rossco], Smile Brands, and TM Restaurants.

So -- and of course, these are private companies, so we can't get into -- each deal has its own story. But general response I'd give you that some of those deals are ones where there is a mark, and so there are valued based on the mark because it's -- they're securities that are traded. And certainly, in looking at those, by and large, there's been an uptick, if you were to get an indication from folks in the marketplace, preliminary indication from folks in the marketplace, that you'd see a rebound generally in those credits.

And then the other ones are also reflective of mark to mark, but it's a combination of things. I think you mentioned TM as one that has had some softness, so I think in that business, it's reflecting the fact that the leverage is a little higher than what it would be on a new origination activity, but we still, in all those credits, other than the two that we've talked about, the two legacy credits, Elyria and Targus, we feel very good about our principal investment in all of those credits.

Okay. I understand. I appreciate all your time. Those are all my questions for today. Thank you.

Thank you, Mickey.

Doug [Premise], RBP.

Hey, guys. Thanks for taking my call, and thanks for what you guys have been doing. You have been doing a nice job.

The question really that we continue to have and just the area of concern is just this dilution. And I can understand the qualitative reasons, but quantitatively, if I look, the NAV would probably be over $1 higher today versus where it is today if there wasn't this continuous dilution via the additional shares. And can you walk me through the quantitative thought process on why you guys feel that this dilution is okay?

Well, a couple thoughts here. Number one, we have been, over time, producing very strong returns on equity in Saratoga Investment Corp. And part of what we're able to do is to access SBIC leverage and baby bond leverage and the others. And so it's important for us to build our equity base in the Company.

And we recognize the Company is trading at a discount to NAV, yet the incremental return on the equity that's retained is extraordinarily high. It's higher than our average return on equity, especially if viewed as invested in the SBIC. We think the return on equity in the SBIC is really like off the charts in terms of way north of 20% if you look at the last year or so.

So we view that the dividend retention is an extraordinarily high-return investment for the Company by retaining that capital and by the investors that participate. We would like to point out that that dividend reinvestment plan is available to every single shareholder.

Right.

If every single shareholder were to participate, they would not have any dilution. Dilution occurs because some people are taking cash and some people are reinvesting. The rate of actual dilution is a 5% discount for those that do that to the 10 days prior market price, so it's not that different than investors buying -- it's close to what investors would get from just buying into the Company at the market. However, it's primary capital that we can use to grow and support the high return on equity activities that we are doing.

And so in an environment where much of the industry is trading below NAV, yet our performance is way in excess of the industry, we think it's important to keep growing and investing in the Company. So that dollar of share that you're talking about, that would be less equity capital, less of a equity base to support our operations. And because it is available to every single shareholder, that dilution is a voluntary event, right? It's voluntary to pick the stock or to take the cash, so if you are diluted, it's because you chose to take the cash and you chose to be diluted, but you choose to reinvest, you're in the same position as you would have been.

Right. But the fact is that it's trading at a 25% discount on the market saying it doesn't -- it really doesn't like it. You guys are doing a very nice job. The assets are performing, and the Company has done well.

But you want to be in the entities that trade at 95% of book value or close to par, those other guys that are able to issue more equity through secondaries. And it's been mired in this 65% to 75% of book value range for a while, so the market continues to be skeptical. And I understand your thought process with respect to if you take the dividends, you eliminate the dilution, but the market continues to assign a pretty big discount.

Doug, of note also this quarter, as you probably heard, we note the discount ourselves as well, and so we do have a share repurchase program that we have -- executing on quite a lot over the last couple of months -- I think we're up to over 60,000 shares already -- but at the same time, trying to balance of this need to grow equity and also grow our float as well, which is for us very -- I think is important in thinking about share price appreciation as well.

Okay. I guess we're not going to agree on it. But thank you.

Thanks, Doug.

Ben Rubenstein, Robotti.

Hi, guys. Quick question on the energy exposure. I understand that you have almost -- you basically have no direct exposure today, but is that something that you'd look to increase moving forward?

Well, let me -- this is Mike -- give you a perspective on why we don't have energy exposure. The challenge with most energy deals -- so it's not 100% the case. There certainly are business models that can be pretty steady and have characteristics that we like. But by and large, most energy deals, just companies have a lot of volatility, and it's natural that they would because their fortunes are tied to a commodity whose price changes quite a bit depending on where you are the cycle and depending on what's going on in the world and so forth.

And so the reason we don't have a lot of energy exposure isn't so much that we forecasted that there would be a decline in energy prices and so we timed it and were smart in that respect. Instead, we just said, let's stay away from businesses that are in end markets that are very volatile. And so when we look at a lot of the -- and we could have done countless energy deals two, three years ago.

But we'd sit around our own credit committee and say, okay, what does this business look like if oil is at $50? And almost every time it was like this business may not even be around or it's going to be really struggling, but certainly our debt is going to be in trouble. And if we come to that answer when we ask that question, then it's not a deal for us.

So it's not likely that we are going to increase our energy exposure. It's not to say that we wouldn't find a deal or two where we feel like it's not tied to rig counts or things of that nature. It may be serving the energy market in some way where we feel like it's got more steady characteristics that we seek in the companies that we like to put in our portfolio.

And if I could maybe make a comment further, that the energy -- everybody is learning a lot about energy. It's written in the headlines of papers every day. I think one of the biggest problems that we have with energy -- we are very much niche oriented.

We like to focus on businesses that have like a leading market position, have something proprietary about their business so that they control largely what happens to them, and management can make adjustments that can -- to things that happen. So you have a good quality management team and a good quality niche, you can manage that. And most of our portfolio -- almost all our portfolio is in that type of business.

The problem with energy characteristically is every single energy firm has underperformed dramatically. Even the best managed energy firms have been hammered by this downturn. So this -- the forces that drive energy are beyond the control of a good management and a good niche. Companies like Schlumberger, for example, which maybe has one of the best business niches in the world in terms of their incredibly dominant share of the energy industry, they are having a terrible time stock market wise, and their market position is probably getting better because their competitors are going out of business, et cetera.

So we would be more interested if we were equity investors in energy now than we would be necessarily as debt investors, but as debt investors, we're looking for security of our principal. And we just find in a market as volatile as energy, it's a pretty -- history has shown it to be a very dangerous place to be a debt investor. And the people that have made the most money have really the equity investors, not the debt investors, and so that's why we stay away from that particular sector.

That's very -- and then just quickly, I know you talked about a little bit about this, but in terms of the repurchase plan, can you be a little more specific in terms of how high of a price to book or price to NAV that you'd be willing to pay versus -- like (inaudible) at 90% of book, are you buying back stock, or are you trying to find more loans at the SBIC?

Well, as you can appreciate, any time a company is buying back its own stock, there's a lot of regulation around that SEC reporting. We have blackout periods and the like, and so what we do is we have a plan with some parameters, but they are not publicly disclosed parameters, and they're not supposed to be publicly disclosed, but that we use on a quarterly basis to decide how we would be purchasing the stock going forward.

So each quarter, we make a decision as to how -- what the formula is for that. But then once that's determined, we don't weigh in. In other words, that is delegated to a third-party brokerage firm to execute. So again, that's a subject that's -- it's a highly regulated subject and not something that's fully publicly disclosable.

Thanks. I appreciate it. And thanks for taking my questions.

Thanks, Ben.

That concludes the Q&A session. I will now turn the call back over to Christian Oberbeck for closing remarks.

Well, again we want to thank everyone for joining us today, and we look forward to speaking with you next quarter.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.