Saratoga Investment Corp. (NYSE:SAR) Q3 2024 Earnings Call Transcript

Saratoga Investment Corp. (NYSE:SAR) Q3 2024 Earnings Call Transcript January 10, 2024

Saratoga Investment Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp’s 2024 Fiscal Third Quarter Financial Results Conference Call. Please note that today’s call is being recorded. During today’s presentation, all parties will be in a listen-only mode. Following management’s prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp’s Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Sir, please go ahead.

Henri Steenkamp: Thank you. I would like to welcome everyone to Saratoga Investment Corp’s 2024 fiscal third quarter earnings conference call. Today’s conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today, we will be referencing a presentation during our call. You can find our fiscal third quarter 2024 shareholder presentation in the Events and Presentations section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night.

A replay of this conference call will also be available. 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: Thank you, Henri, and welcome everyone. Saratoga’s adjusted net investment income per share increased 31% as compared to last year, yet decreased slightly as compared to last quarter. The sequential quarterly per share decrease equates to the $0.07 dilution from the increased weighted average shares outstanding from our recent ATM equity issuances, with much of that cash yet to be deployed. This quarterly performance significantly exceeded our recently increased dividend by 40%. The level of interest rates stabilized in the recent quarter, resulting in elevated margins on our growing portfolio relative to the past year. In addition, the continued general contraction of available credit for smaller middle market businesses and our ongoing development of sponsor relationships has created an abundant flow of attractive investment opportunities from high-quality sponsors at attractive pricing terms and absolute rates.

We believe Saratoga continues to be well positioned for potential future economic opportunities and challenges. Saratoga’s credit structure with largely interest-only, covenant-free, long-duration debt incorporating maturities primarily two to 10 years out has positioned us well with the increase in interest rates delivering increased margins. Most importantly, at the foundation of our performance is the high-quality nature, resilience and balance of our approximately $1.11 billion portfolio, which has been marked down 3% overall versus cost in this challenging environment. Our core BDC portfolio, excluding our CLO and JV, is down less than 1% versus cost, including markdowns in four specific credits, partially offset by $4.3 million of net realized appreciation in the rest of the core BDC portfolio.

This overall portfolio performance reflects the strength of our underwriting and our solid growing portfolio of companies and sponsors in well selected industry segments. Our portfolio strength is further manifested in our many key performance indicators this past quarter outlined on Slide 2, including, first, quarterly adjusted NII increased by 44% and NII per share increased by $0.24 or 31% over the past year; second, current assets under management grew to approximately $1.11 billion, a record level; and third, our dividends increased to $0.72 per share, up 6% from $0.68 per share in Q3 last year and over-earned by 40% as compared to this quarter’s $1.01 per share adjusted NII. We continue to approach the market with prudence and discernment in terms of new commitments in the current environment.

Our originations this quarter demonstrate that despite an overall robust pipeline, there are periods like the current one where many of the investments we review do not meet our high quality credit standards. We originated no new portfolio investments in this fiscal quarter, but had 14 smaller follow-on investments in existing portfolio companies we know well with strong business models and balance sheets. Originations this quarter totaled $36 million, with $2 million of repayments and amortization. Our credit quality for this quarter remained high at 97.1% of credits rated in our highest credit category, despite adding our Zollege investment this quarter as our third investment on non-accrual. With 86% of our investments in quarter-end — at quarter-end in first lien debt and our overall portfolio generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio and leverage is well structured for challenging economic conditions and uncertainty.

Saratoga’s annualized third quarter dividend of $0.72 per share and adjusted net investment income of $1.01 per share implied an 11% dividend yield and a 15.4% earnings yield based on its recent stock price of $26.16 per share on January 8, 2024. The over-earning of the dividend by $0.29 this quarter or $1.16 annualized per share increases NAV, supports the increasing dividend level and growth, and provides a cushion against adverse events. In volatile economic conditions, such as we are currently experiencing, balance sheet strength, liquidity and NAV preservation remain paramount for us. First, we raised $48 million of equity since the end of Q1, increasing our NAV from $338 million as of May 31, 2023, to approximately $373 million on a pro forma basis, including the equity raise at the beginning of December using our November 30, 2023 NAV as a basis.

This equity provides additional balance sheet strength, reduces our regulatory leverage and supports our strong originations. And second, at quarter-end, we had a substantial $222 million of investment capacity available to support our portfolio companies with $145 million available through our newly approved SBIC III fund, $30 million from our expanded revolving credit facility and $47 million in cash. Saratoga Investment’s third quarter demonstrated solid performance within our key performance indicators as compared to the quarters ended November 30, 2022 and August 31, 2023. Our adjusted NII is $13.1 million this quarter, up 44% from last year and down 1% from last quarter. Our adjusted NII per share is $1.01 this quarter, up 31% from $0.77 last year and down 6% from $1.08 last quarter.

Latest 12-month return on equity is 6.6%, up from 4% last year and down from 9.6% last quarter. Our NAV per share is $27.42, down 2.9% from $28.25 last year and down 3.6% from $28.44 last quarter. And our quarter-end NAV is up to $360 million from $336 million last year, but down slightly from $362 million last quarter. Henri will provide more detail later. As you can see on Slide 3, our assets under management have steadily and consistently risen since we took over the BDC 13 years ago and the quality of our credits remains high with only three credits on non-accrual. Our management team is working diligently to continue this positive trend as we deploy our available capital into our growing pipeline, while at the same time being appropriately cautious in this volatile and evolving credit environment.

While this past quarter and fiscal year have seen some markdowns to a handful of credits in our core BDC portfolio as well as our CLO and JV investments in the broadly syndicated loan market, Slide 4 demonstrates how our long-term average return on equity over the past 10 years is well above the BDC industry average and has remained consistently strong over the past decade. With that, I would like to now turn the call back over to Henri to review our financial results as well as the composition and performance of our portfolio.

Henri Steenkamp: Thank you, Chris. Slide 5 highlights our key performance metrics for the fiscal third quarter ended November 30, 2023, most of which Chris already highlighted. Of note, the weighted average common shares outstanding of 13.1 million shares in Q3 increased from 11.9 million last year and 12.2 million last quarter. Adjusted NII increased this quarter, up 43.8% from last year but down 1% from last quarter primarily from, first, the impact of higher interest rates, both base rates and spreads with a weighted average current coupon on non-CLO BDC investments increasing from 11.7% to 12.5% year-over-year and relatively unchanged from last year — from last quarter; second, average non-CLO BDC assets increasing by 15.7% year-over-year and by 1.6% since last quarter; and third, other income including a $1.3 million dividend received from the Saratoga Investment joint venture.

Adjusted NII yield was 14.6%. This yield is up from 10.8% last year but slightly down from 15.0% last quarter. Total expenses for this quarter, excluding interest and debt financing expenses, base management fees and incentive fees and income and excise taxes increased from $2.1 million both last quarter and last year to $2.3 million this quarter. This represented 0.8% of average total assets on an annualized basis unchanged from both Q3 last year and last quarter. Also, we have again added the KPI slides 28 through 31 in the appendix at the end of the presentation that shows our income statement and balance sheet metrics for the past nine quarters and the upward trends we have maintained, including a 57% increase in net interest margin over the past year.

Moving on to Slide 6, NAV was $359.6 million as of this quarter-end, a $2.5 million decrease from last quarter and a $23.8 million increase from the same quarter last year. This quarter, the main drivers of the decrease was the $10 million of equity issued under the ATM program and the $14.2 million of net investment income that was more than offset by $18.2 million of net realized and unrealized losses and $8.4 million of dividends declared net of stock dividend distributions through the company’s DRIP plan. No shares were repurchased during this quarter. This same chart also includes our historical NAV per share, which highlights how this important metric has increased 20 of the past 27 quarters with — sorry, with Q3 down $1.02 per share, primarily reflecting the markdowns discussed.

Over the long term, our net asset value has steadily increased since 2011, and this growth has generally been accretive as demonstrated by the consistent increase in NAV per share over the long term. We continue to benefit from our history of consistent realized and unrealized gains. On Slide 7, 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 $0.07, primarily due to the net dilution from the additional 1.2 million shares issued in the recent ATM equity offering, with all the other changes offsetting each other. On the lower half of the slide, NAV per share decreased by $1.02, primarily due to the $1.36 in unrealized depreciation and the $0.71 dividend recognized in the quarter exceeding the $1.09 in GAAP NII.

Slide 8 outlines the dry powder available to us as of quarter-end, which totaled $222 million. This was spread between our available cash, undrawn SBA debentures and undrawn secured credit facility. This quarter-end level of available liquidity allows us to grow our assets by an additional 20% without the need for external financing, with $47 million of quarter-end cash available and thus fully accretive to NII when deployed and $145 million of available SBA debentures with its low cost pricing, also very accretive. This quarter, we also added a column showing any call options of our debt. This shows that our $321 million of baby bonds, effectively all our 6% plus debt, is callable within the next year, creating a natural protection against potential future decreasing interest rates, which will protect our net interest margin in a declining rate environment, if needed.

We remain pleased with our available liquidity and leverage position, including our access to diverse sources of both public and private liquidity and especially taking into account the overall conservative nature of our balance sheet, the fact that almost all our debt is long term in nature and with almost no non-SBIC debt maturing within the next two years. Also, our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times. Now, I’d like to move on to Slides 9 through 13 and review the composition and yield of our investment portfolio. Slide 9 highlights we now have $1.1 billion of AUM at fair value, and this is invested in 55 portfolio companies, one CLO fund and one joint venture. Our first lien percentage is 86% of our total investments, of which [32%] (ph) is in first lien last out positions.

On Slide 10, you can see how the yield on our core BDC assets, excluding our CLO, has changed over time, especially this past year. This quarter, our core BDC yield was down slightly 10 bps to 12.5%, primarily due to our Zollege investment going on non-accrual with base rates relatively unchanged. The CLO yield increased to 8.0% from 6.0% last quarter, reflecting the decrease in value from weaker performance. The CLO is performing and current. Slide 11 shows how rates have stabilized the past three months. The average three-month SOFR is now basically the same as the average rate used in our portfolio and the closing quarter-end rate. We will continue to benefit from these levels while rates remain elevated and until rates reset. Slide 12 shows our investments are diversified through the U.S. And on Slide 13, you can see the industry breadth and diversity that our portfolio represents, spread over 43 distinct industries in addition to our investments in the CLO and joint venture, which are included as structured finance securities.

Of our total investment portfolio, 8.3% currently consists of equity interest, which remain an important part of our overall investment strategy. Slide 14 shows that for the past 11 fiscal years, we had a combined $81.6 million of net realized gains primarily from the sale of equity interests. This consistent realized gain performance highlights our portfolio credit quality has helped grow our NAV and is reflected in our healthy long-term ROE. That concludes my financial and portfolio review. I’ll now turn the call over to Michael Grisius, our Chief Investment Officer, for an overview of the investment market.

Michael Grisius: Thank you, Henri. I’ll take a few minutes to describe our perspective on the current state of the market and then comment on our current portfolio performance and investment strategy. The overall deal market has remained relatively unchanged since our last update, as it seems to be in a bit of a holding pattern to see what happens in the broader macro environment. While liquidity among private equity firms remains abundant, an opaque economic outlook, high financing costs and elevated levels of inflation continue to constrain the private equity deal market, which drives much of the demand for new credits. Lenders, especially banks, remain more risk sensitive, backing off historically volatile sectors and taking a harder stance on the use of capital, which creates a lending vacuum for borrowers.

Overall, lenders are requiring greater equity capitalizations regardless of the enterprise multiples and, in some cases, have reduced their pace of deployment as well as their hold positions. All of these factors are positive for us and support the confidence we have in our ability to carefully deploy capital in a manner that is accretive to our shareholders. Leverage levels appear to be increasing and remain full for strong credits. The growth in absolute yields appears to have abated and with fears of an economic slowdown dampening among some market participants, we have seen some lenders offer tighter spreads to win mandates. The Saratoga management team has successfully managed through a number of credit cycles and that experience has made us particularly aware of the importance of: first, being disciplined when making investment decisions; and second, being proactive in managing our portfolio.

We’re keeping a very watchful eye on how continued inflationary pressures and labor costs, high rates and a potential economic slowdown could affect both prospective and existing portfolio companies. A natural focus currently remains on supporting our existing portfolio companies through follow-ons. Our underwriting bar remains high as usual, yet we continue to find opportunities to deploy capital. Follow-on investments in existing borrowers with strong business models and balance sheets continue to be a healthy avenue of capital deployment as demonstrated with the 69 follow-ons this calendar year, including delayed draws. In addition, we invested in nine new platform investments this calendar year. The portfolio management continues to be critically important and we remain actively engaged with our portfolio companies and in close contact with our management teams, especially in this uncertain market environment.

There are a couple of credits specifically that are experiencing varying levels of stress that we have marked down this quarter that I’ll touch on shortly. But in general, our portfolio companies are healthy and 83% of our portfolio is generating financial results at or above the prior quarter. This quarter, we added our Zollege investment to non-accrual as they missed their October and November interest payments. This means we have three investments on non-accrual, including Knowland and Pepper Palace. After recognizing the net unrealized depreciation on our overall portfolio this quarter, Saratoga’s core BDC portfolio is 0.9% below cost. Despite the write-down of a handful of specific assets this quarter, the remaining portfolio generated $4.3 million of unrealized appreciation, reflecting certain attributes of our portfolio that bolster its overall durability.

86% of our portfolio is in first lien debt and generally supported by strong enterprise values in industries that have historically performed well in stress situations. We have no direct energy or commodities exposure. In addition, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. Our approach has always been to stay focused on the quality of our underwriting. And as you can see on Slide 15, this approach has resulted in our portfolio performance being at the top of the BDC space with respect to net realized gains as a percentage of portfolio at cost. We are only one of 13 BDCs that have had a positive number over the last three years, currently fifth overall.

Even taking into account the challenges and corresponding write-downs in a few of portfolio companies, under Saratoga management, the sum total of realized gains and unrealized appreciation have far outstripped realized losses and unrealized depreciation in our core non-CLO portfolio over time. Our internal credit quality rating reflects the impact of current market volatility and shows 97.1% of our portfolio at our highest credit rating as of quarter-end. A part of our investment strategy is to selectively co-invest in the equity of our portfolio companies when we’re given that opportunity and when we believe in the equity upside potential. This equity co-investment strategy has not only served as yield protection for our portfolio, but also meaningfully augmented our overall portfolio returns as demonstrated on the slide and a previous one, and we intend to continue this strategy.

Now looking at leverage on Slide 16, you can see that industry debt multiples have come down this year from their historically high levels. Total leverage for our overall portfolio was 4.3 times, excluding Knowland and Pepper Palace and Zollege, while the industry is now again at above 5 times leverage. In addition, this slide illustrates the strength of our deal flow and our consistent ability to generate new investments over the long term despite ever changing and increasing competitive market dynamics. During the fourth calendar quarter, we added no new portfolio companies and made 15 follow-on investments. Despite the success we’re having investing in highly attractive businesses and growing our portfolio and the healthy deal flow we are seeing, it is important to emphasize that, as always, we’re not aiming to grow simply for growth’s sake, especially in the face of uncertain macroeconomic environments.

Our capital deployment bar is always high and is conditioned upon healthy confidence that each incremental investment is in a durable business and will be accretive to our shareholders. Slide 17 provides more data on our deal flow previously discussed, demonstrating how our team’s skill set, experience and relationships continue to mature and our significant focus on business development has led to multiple new strategic relationships that have become sources for new deals. Five of the nine new portfolio companies over the past 12 months are from newly formed relationships, reflecting notable progress as we expand our business development efforts. The significant progress we’ve made in building broader and deeper relationships in the marketplace is noteworthy because it strengthens the dependability of our deal flow and reinforces our ability to remain highly selective as we rigorously screen opportunities to execute on the best investments.

As you can see on Slide 18, our overall portfolio credit quality remains solid. As you can see on the chart on the left, the gross unleveraged IRR unrealized investments made by the Saratoga Investment management team is 15.7% on $917 million of realizations. On the chart on the right, you can see the total gross unlevered IRR on our $1.2 billion of combined weighted SBIC and BDC unrealized investments is 10.9%, including the markdowns of this quarter. Notably, the unleveraged IRR on the combined realized and unrealized $2.1 billion of capital invested by the Saratoga management team is 13.8%. We now have three investments on non-accrual, with Pepper Palace classified as red and Knowland and Zollege as yellow. Knowland has been yellow for a while and no significant change to the Q2 mark occurred.

Pepper Palace continued to suffer from poor performance and liquidity issues, reflecting the $4.1 million markdown this quarter. We are working with a sponsor and a financial advisor to assess future options and evaluate the ongoing viability and profitability potential of the business in the current consumer retail environment. The remaining fair value of this investment is $5 million. Zollege started facing liquidity issues this quarter, resulting in its inability to pay its October and November interest on time, which has led us to move this to non-accrual. Despite recent challenges, we believe that the core Zollege business model and value proposition remains solid, as evidenced by the company’s reasonably stable student enrollment trends.

In addition to these non-accrual investments, we also want to highlight two other investments that we marked down this quarter. We marked our Netreo investment down by $8.3 million, of which $6.1 million was the reversal of appreciation previously recognized in our common equity. This markdown reflects a combination of factors, including recent weaker financial performance and a significantly lower market multiple due to changing market conditions. We continue to believe that all of our debt is covered by the enterprise value of the business and that the ultimate equity realization will be determined by market factors and company performance. We also marked down our ETU investment by $1.8 million, primarily related to our equity position. This reflects weaker financial performance driven by lower revenue growth than expected amid a weaker macro selling environment for corporate learning and development.

The company has a blue chip customer base and we continue to believe that the business offers market-leading technology and a unique value proposition within this space. In addition, the CLO and JV have — had a $6.5 million of unrealized depreciation, primarily driven by the performance of certain individual credits in the broadly syndicated loan portfolio. Of note is that the rest of the core BDC portfolio has continued to perform well, resulting in $4.3 million of net unrealized appreciation across our remaining 50 portfolio companies. 82% of our portfolio is generating financial results at or above the prior quarter. Our overall investment approach has yielded exceptional realized returns and recovery of our invested capital and our long-term performance remains strong as seen by our track record on this slide.

Moving on to Slide 19, you can see our first and second SBIC licenses are fully funded and deployed with our first license recently surrendered. We are currently ramping up our new SBIC III license with $145 million of lower cost undrawn debentures available, allowing us to continue to support U.S. small businesses. This concludes my review of the market, and I’d like to turn the call back over to our CEO. Chris?

Christian Oberbeck: Thank you, Mike. As outlined on Slide 20, our latest dividend of $0.72 per share for the quarter ended November 30, 2023 was paid on December 28, 2023. This is the largest quarterly dividend in our history and reflects a 6% and 36% increase over the past one and two years, respectively. The Board of Directors will continue to evaluate the dividend level on at least a quarterly basis considering both company and general economic factors, including the current interest rate environment’s impact on our earnings. Recognizing the divergence of opinions on when interest rate cuts will commence and at what pace, the expected overall economic performance, Saratoga’s Q3 over-earning of its dividend by 40% or $1.01 per share versus $0.72 per share this quarter provides a substantial cushion should economic conditions deteriorate or base rates decline.

Moving to Slide 21, our total return over the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 14%, uncharacteristically underperforming the BDC index of 30% for the same period. Our longer-term performance is outlined on our next Slide 22. Our three- and five-year returns place us in the top quartile of all BDCs for both time horizons. Over the past three years, our 66% return exceeded the average index return of 45%. Over the past five years, our 100% return exceeded the index’s average of only 64%. Since Saratoga took over management of the BDC in 2010, our total return has been 712% versus the industry’s 241%. On Slide 23, you can further see our performance placed in the context of the broader industry and specific to certain key performance metrics.

We continue to focus our long-term metrics such as return on equity, NAV per share, NII yield and dividend growth and coverage, all of which reflects the growing value our shareholders are receiving. While NAV per share is down 2.9% this past year, we continue to be one of the few BDCs to have grown NAV over the long term and we have done it accretively. Moving on to Slide 24, all of our initiatives discussed on this call are designed to make Saratoga Investment a leading BDC that is attractive to the capital markets community. We believe that our differentiated performance characteristics outlined on this slide will help drive the size and quality of our investor base, including adding more institutions. These differentiating characteristics, many previously discussed, include maintaining one of the highest levels of management ownership in the industry at 13%, ensuring we are aligned with our shareholders.

Looking ahead on Slide 25, we remain confident that our reputation, experienced management team, historically strong underwriting standards, and time and market-tested investment strategy will serve us well in navigating through the challenges and uncovering the opportunities in the current and future environment, and that our balance sheet, capital structure and liquidity will benefit Saratoga’s shareholders in the near and long term. In closing, I would again like to thank all of our shareholders for their ongoing support. And I would like to now open the call for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Erik Zwick with Hovde Group. Your line is now open.

Erik Zwick: Good morning, everyone.

Christian Oberbeck: Good morning.

Erik Zwick: I’m wondering if you start first with that question — on the pipeline, I wonder if you could kind of break out how you characterize the opportunities that are likely to enter the portfolio in terms of new investments versus existing. It sounds like at this point based on what transpired in the last quarter, there’s certainly more attractive opportunities to extend to existing investments. I’m curious if you’re kind of near-term outlook for the next quarter or two is similar or if you’re seeing some more attractive opportunities for new investments?

Michael Grisius: It’s a good question. We are continuing to see good opportunities to deploy capital. We didn’t find anything in this past quarter, and that was mostly reflective of the fact that the deals that we saw in terms of the leverage that they were looking for relative to the strength of the business model, we just couldn’t get comfortable and didn’t pass our underwriting bar. I think, I wouldn’t say that that’s characteristic of our pipeline in general, but that certainly was characteristic of what we ended — where we ended up this past quarter. The pace of investment that we’re experiencing is certainly being influenced to some degree by lower deal activity just in general in the middle market. We’re still seeing a disconnection between what value sellers think that they ought to fetch and what buyers are willing to pay in this market.

So, there’s not — we’re not seeing as much deal volume as we’ve seen historically, but we still are seeing healthy activity and have confidence that we’ll find opportunities to deploy capital.

Erik Zwick: That’s helpful. Thank you. And then, you mentioned in the comment in one of the slides that you’ve got quite a bit of liquidity on hand right now and the ability to potentially grow AUM as much as 20% without harnessing or kind of tapping external financing. Just curious, is that — goal is to actually get that full 20%? And if so, over what time horizon would you expect to put that to work?

Michael Grisius: It’s interesting, we — go ahead, Chris.

Christian Oberbeck: Sorry, Mike. Just at a very high level, we’ve tried to run our business with ample liquidity to take advantage of opportunities. And so, we have the dry powder available. We have a large group of portfolio companies that continue to grow. As you saw this past quarter, there’s a lot of follow-on opportunities. We’re financing a number of buildups. And so, we want to make sure that we’re there for and available to be there for our portfolio companies when they need the capital for whatever reason, mostly positive reasons. But so we want to have that available for that. And then, we also want to be available for new opportunities for our existing relationships and for building new ones. And so, that’s a stance we’ve kind of maintained for the whole time, the last 13 years.

That’s what we continue to maintain. As to the pace of deployment and our expectations for that, I mean that’s sort of not in our control. I mean, I think as Mike said just earlier, we had a lot of opportunities. We could have put out a whole lot more money this past quarter, but we refrained from doing so. So, we’re going to pick our spots, we’re going to support our portfolio companies when merited, and we’re going to be selective going forward. So unfortunately, we can’t give you a hard forecast for when and how we would deploy that, and it’s really going to be subject to the opportunity set both from our existing portfolio and from new opportunities.

Michael Grisius: The only thing I’d add to that, too, just to augment that is that, you had asked if we had a goal to deploy that additional capital, we tend not to think about our business that way as Chris was explaining. We just really set ourselves up for the best opportunities we can to deploy capital in a way that we feel very comfortable to be accretive to our shareholders, and let the rest take care of itself. But definitely don’t set goals around kind of where we want to move the balance sheet. It’s really more of function of what opportunities we see. And if we see those, we certainly want to avail ourselves and let the — of those opportunities and let the shareholders benefit from it.

Erik Zwick: Got it. And one last one and I’ll step aside. Just in terms of the Zollege investment, I think I didn’t get the exact quote, but I think you mentioned the core business and operating trends remain solid, but they did miss the two interest — monthly interest payment. So, just curious, it’s kind of balancing those two, what led to their decision to skip those payments and any timeframe expectations for when they might return to accrual?

Michael Grisius: The company is experiencing some execution and cost challenges that have constrained their liquidity, and we’re working with the sponsor and management on some initiatives to improve performance. But the decision certainly was made as a result of those liquidity challenges to suspend interest payments. We are — as we look at the core business though, a lot of the fundamentals that we originally liked in the business remain intact. And so, we’re seeing a lot of stability in terms of student starts and enrollment and things that you point to fundamentally to feel comfortable that the business model has a compelling value proposition for its customers, but work to do on the execution side. Can’t really put a date or time around kind of a timeframe for improved performance, but that’s what we’re focused on for sure.