Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Saratoga Investment Corp.'s Fiscal Year-End and Fourth Quarter 2026 Financial Results Conference Call. Please note that today's call is being recorded. During today's presentation, all parties will be in listen-only mode. Following management's prepared remarks, we will open the line for questions. At this time, I would like to turn the call over to Saratoga Investment Corp Chief Financial and Chief Compliance Officer, Mr. Henri Steenkamp. Please go ahead.
Thank you. I would like to welcome everyone to Saratoga Investment Corp.'s Fiscal Year-End and Fourth Quarter 2026 earnings conference call. Today's conference call includes forward-looking statements and projections. We ask you to refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required to do so by law. Today, we will be referencing a presentation during our call. You can find our fiscal year-end and fourth quarter 2026 shareholder presentation in the Events and Presentation section of our Investor Relations website. A link to our IR page is in the earnings press release distributed last night.
For everyone new to our story, please note that our fiscal year-end is February 28th, so any reference to Q4 results reflects our February 28th quarter and year-end period. A replay of this conference call will also be available. Please refer to our earnings press release for details. I would now like to turn the call over to our Chairman and Chief Executive Officer, Christian Oberbeck, who will be making a few introductory remarks.
Thank you, Henri, welcome everyone. Saratoga Investment Corp highlights this quarter include net positive originations generated from our strong pipeline, including five new portfolio companies originated in the quarter, sustained long-term AUM growth, a strong 9.1% latest 12 months return on equity, beating our prior year and more than double the industry, and importantly, continued solid performance from the core BDC portfolio in a challenging and volatile macro environment. Continuing our historical strong dividend distribution history, we announced a monthly base dividend of $0.25 per share or $0.75 per share in aggregate for the 1st quarter of fiscal 2027, which when annualized, represents a 12.6% yield based on the stock price of $23.89 as of May 4, 2026, offering strong current income from an investment value standpoint.
Originations and AUM growth were strong during the quarter, contributing to adjusted NII of $0.53 per share, including the impact of a $1.7 million excise tax expense. Adjusted for this excise tax, NII was $0.61 per share, consistent with the prior quarter. Overall, our adjusted NII continues to reflect the impact of declining short-term interest rates and tightening spreads on our largely floating rate asset base. During the quarter, we saw a meaningful increase in deal activity, reflecting our own business development activities despite persistent sector headwinds and the cautious sentiment that has taken hold across the broader private credit sector. Market dynamics continued to be very competitive.
While our portfolio saw multiple debt repayments in Q4, our strong origination activity more than offset those exits, resulting in net originations of $101.1 million for the quarter from $135.1 million in new originations across five new investments and 15 follow-ons. Our strong reputation, differentiated market positioning, and the ongoing development of sponsor relationships continue to create attractive investment opportunities from high-quality sponsors. Investment activity continues post-quarter end, with one new portfolio company investment and multiple follow-ons already closed. We remain prudent and discerning in our underwriting approach, particularly in light of the current volatile and uncertain environment. We believe Saratoga continues to be favorably situated for potential future economic opportunities as well as challenges.
Our total $1.109 billion portfolio was marked down 1% or $9.6 million during the quarter, including net depreciation of $3.1 million in the non-CLO core portfolio and unrealized depreciation of $5.5 million in the CLO and JV. Our investment in Zollege that previously had been restructured and written off continues to perform strongly with $3.3 million of unrealized appreciation recognized in this quarter. As of quarter end, our core non-CLO portfolio remains 1.6% above cost, with our total portfolio valuation 2.4% below cost. These results reflect the quality of our direct lending underwriting, the strength of our portfolio companies and their sponsors, and our focus on well-selected industry segments with favorable risk-adjusted returns.
During the fourth quarter, our core BDC net interest margin decreased by 4% from $13.5 million last quarter to $13 million. This was driven primarily by the average SOFR rate used in the portfolio decreasing by 12 basis points from last quarter, accelerated OID of $0.9 million on the sale of the JV CLO's E-note from last quarter, not repeating. Spreads on originations this quarter being almost 200 basis points lower than on the repayments they replaced, and the timing of originations and repayments in Q4, partially offset by the 5.6% increase in average core assets. Our overall credit quality for this quarter decreased slightly to 96.8% of credits rated in our highest category.
We have just 2 investments on non-accrual status, Pepper Palace, which has been restructured, and our CLO's F-note that has been put on non-accrual for the first time this quarter, representing 0.2% of fair value and 1.2% of cost, well below the industry average of 3.3%. With 82.1% of our investments at quarter end in first lien debt and generally supported by strong enterprise values and balance sheets in industries that have historically performed well in stress situations, we believe our portfolio composition and leverage profile are well structured for future economic conditions and uncertainty. As always, and particularly in the current uncertain environment, balance sheet strength, liquidity, and NAV preservation remain paramount for us.
At quarter end, we maintained a substantial $211 million investment capacity to support our portfolio companies with $99 million available to our existing SBIC III license, $90 million from our two revolving credit facilities, and $21.8 million in cash. Our quarter-end cash position decreased meaningfully from $169.6 million last quarter to a large part to strong origination activity and the refinancing of the $175 million institutional note. The refinancing of this debt included the issuance of $150 million of new bonds, and our regulatory leverage remained unchanged at 168.4% quarter-over-quarter. As we kick off our fiscal year 2027, the macro environment remains complex, shaped by geopolitical tensions, evolving U.S. tariff policies, and concerns about AI and software.
All these aspects combined with an uncertain interest rate environment combine to create elevated volatility and continued uncertainty on credit spreads across the private credit sector. While negative press and sentiment weighs on the public BDC market, at this time, it appears that these very negative perceptions are not commensurate with the current market performance in the broader private credit market. As we continue to focus on underwriting strong credit and long-term growth, we continue to grow our team, having added three new associates and two new Managing Director hires this year, including most recently David DeSantis, who joined Saratoga as Chief Operating Officer and Senior Managing Director. David brings a wealth of private credit experience in organizational leadership, significantly expanding our C-suite resources to further enhance Saratoga's performance and growth opportunities. David will be making his debut presentation today addressing the market and Saratoga's portfolio.
Moving on to Saratoga Investment's fiscal 2026 fourth quarter key performance indicators as compared to the quarters ended February 28, 2025 and November 30th, 2025. Our quarter end NAV was $396.2 million, up 0.9% from $392.7 million last year and down 4.1% from $413.2 million last quarter. Our NAV per share was $24.42, down from $25.86 last year and $25.59 last quarter. Year-over-year NAV per share is down $1.44, with total NII of $2.32 versus total dividend distributions of $3.74. The $1.42 of distributions in excess of NII approximates the entire $1.44 of 12-month reduction in NAV per share.
This excess distribution represents previously undistributed NII profits from prior years. Our adjusted NII was $8.5 million this quarter, up 6.2% from last year and down 12.8% from last quarter. Our adjusted NII per share was $0.53 this quarter, down 5.4% from last year and 13.1% from last quarter. Excluding the excise tax, adjusted NII for Q4 was $0.61, unchanged from last quarter. Adjusted NII yield was 8.4% this quarter, unchanged from 8.4% last year and down from 9.5% last quarter. Latest 12 months return on equity was 9.1%, up from 7.5% last year, down from 9.7% last quarter, and above the industry average of 4.3%.
This past year saw a $5 million overall net realized and unrealized gain for the year. Slide 3 illustrates how these combined portfolio and financial results have delivered a return on equity of 9.1% for the last 12 months, above the industry average of 4.3%. Additionally, our long-term average return on equity over the past 12 years of 10.1% is well above the BDC industry average of 6.7%. Our long-term return on equity has remained strong over the past decade plus, beating the industry nine of the past 12 years and consistently positive every year. As you can see on Slide four, our assets under management have steadily and consistently risen since we took over the BDC 15 years ago, despite a slight pullback in fiscal 2025, reflecting significant repayments.
This quarter saw significant originations again outpacing repayments, resulting in a meaningful increase in AUM as compared to the previous quarter. The quality of our credits remains solid with just two investments on non-accrual, Pepper Palace, which has been restructured, and our CLO's F-note that has been put on non-accrual for the first time this quarter. Our management team is working diligently to continue this positive long-term trend as we deploy our significant levels of available capital into our pipeline, while at the same time being appropriately cautious in this evolving and volatile credit and economic environment. With that, I'd like to turn the call over to Henri to review our financial results, as well as the composition and performance of our portfolio.
Thank you, Chris. Slide five highlights our key performance metrics for Q4, and slide six highlights our key performance metrics for the year, most of which Chris already highlighted. Of note, the weighted average common shares outstanding in Q4 was 16.2 million, increasing from 16.1 million and 14.5 million shares for last quarter and last year's fourth quarter, respectively. Adjusted NII was $8.5 million this quarter, up 6.2% from last year and down 12.8% from last quarter. For the year, adjusted NII was $37.5 million, down 29.2% from full year 2025.
This quarter's decrease in adjusted NII as compared to the prior quarter was largely due to the impact of the $1.7 million excise tax paid during this quarter, while the increase from last year primarily relates to higher other income, such as structuring and advisory fees, reflecting the increased origination activity this year. The weighted average interest rate on the core BDC portfolio of 10.4% this quarter compares to 11.5% as of last year and 10.6% as of last quarter. The yield reduction from last year primarily reflects the SOFR base rate decreases over the past year, but is also indicative of recent tighter spreads experienced on new originations versus historically higher spreads on repaid assets.
Total expenses for the year, excluding interest and debt financing expenses, base management fees and incentive fees, and income and excise taxes, increased by $1.7 million to $11.0 million, as compared to $9.3 million in fiscal year 2025. These same expenses for Q4 increased by $1.0 million to $2.4 million, as compared to $1.4 million last year, and decreased by $0.9 million from $3.3 million last quarter. These all represented 0.8% of average total assets on an annualized basis, unchanged from both last quarter and last year. Also, for investors interested in digging deeper into the income statement and balance sheet metrics for the past two years, we have again added the KPI slides 28 through 31 in the appendix at the end of the presentation.
Slide 32 compares our non-accruals to the BDC industry. You will see that our non-accrual rate of 1.2% of cost, updated for the CLO F-note that is now on non-accrual, is still almost three times lower than the industry average of 3.3%. This highlights the current strength in credit quality of our core BDC portfolio. Moving on to slide seven, NAV was $396.2 million as of fiscal quarter end, an increase of $3.5 million from last year and a decrease of $17.0 million from last quarter. During this year, $19.3 million of new equity was raised at or above net asset value through our ATM program.
This chart also includes our historical NAV per share, which highlights how this important metric has increased 23 of the past 34 quarters. Over the long term, this metric has increased since 2011 and grown by $2.45 per share, or 11.1% over the past nine years, when not many BDCs have grown NAV per share long term. We'll cover the changes since last quarter on the next slide. On slide eight, you will see a simple reconciliation of the major changes in adjusted NII and NAV per share on a sequential quarterly basis. Starting at the top, adjusted NII per share was down $0.08 in Q4, primarily due to the impact of annual excise tax expense of $0.09. Excluding this, adjusted NII per share would be $0.61 per share, consistent with last quarter.
On the lower half of the slide, NAV per share decreased by $1.17, primarily due to the $0.75 monthly and $0.25 special dividend exceeding the $0.48 GAAP NII, plus the $0.60 unrealized appreciation recognized in Q4, with almost two-thirds of that being from the JV equity position. Now, slide nine shows the same reconciliations for the year and starting at the top again, adjusted NII per share was down $1.44 per share for the year, largely due to a decrease of $1.15 in non-CLO net interest income, reflecting lower base rates and tighter spreads, and $0.46 per share due to dilution from the DRIP and ATM program's additional shares.
On the lower half of the slide, NAV per share is down $1.44 per share, with total NII of $2.32 and a total dividend distribution of $3.74. The $1.42 of distributions in excess of NII approximates the entire 12-month reduction in NAV per share. This excess distribution represents previously undistributed NII profits from prior years. Slide 10 outlines the dry powder available to us as of quarter end, which totaled $210.8 million. This was spread between our available cash, undrawn SBA debentures, and undrawn secured credit facilities.
This quarter-end level of available liquidity allows us to grow our assets by an additional 19% without the need for external financing, with $21.8 million of quarter-end cash available, and thus fully accretive to NII when deployed, and $99 million of available SBA debentures with its low cost pricing, also very accretive. In addition, $269 million of our baby bonds, with two-thirds being 8%+, are callable now, providing us the option to refinance them and creating a natural protection against potential continuing future decreasing interest rates, which should allow us to protect our net interest margin if needed. These calls are also available to be used prospectively to reduce current debt.
You will also see that this quarter we did repay our $175 million, 4.375% 2026 notes that matured at the end of February and issued $150 million of new notes at around 7.5% with maturities between four and five years. Subsequent to quarter end, we also issued a $25 million, 7.25% private note. 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 and that most of our debt is long-term in nature. Our debt is structured in such a way that we have no BDC covenants that can be stressed during volatile times, especially important in the current economic environment.
Now I would like to move on to slides 11 through 14 and review the composition and yield of our investment portfolio. Slide 11 highlights that we have $1.109 billion of AUM at fair value, and that is invested in 49 portfolio companies, one CLO fund, one joint venture, and numerous new BB and BBB CLO debt investments. Our first lien percentage is 82.1% of our total investments, of which 33.1% of that is in first lien last-out positions. On slide 12, you can see how the yield on our core BDC assets, excluding our CLO investments, has changed over time, including this past year, reflecting the recent decreases to base interest rates and tightening spreads.
This quarter, our core BDC yield decreased to 10.4% from last quarter's 10.6%, with most of the decrease reflecting further core base rate reductions and the rest due to recent tight spreads experienced on new originations versus historically higher spreads on repaid assets. The CLO yield increased to 11.6% from 10.0% last quarter due to a lower fair value. Slide 13 shows how our investments are diversified through primarily the U.S. On slide 14, 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, JV, and BB and BBB CLO debt securities, which are all included as structured finance securities. We do have software-as-a-service assets that Dave will touch on shortly.
Moving on to slide 15, 7.6% of our investment portfolio consists of equity interests, which remain an important part of our overall investment strategy. This slide shows that for the past 14 fiscal years, we had a combined $45.4 million of net realized gains from the sale of equity interests or sale or early redemption of other investments. This year alone, we have generated $5.7 million in net realized gains. This long-term 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. Our Chief Operating Officer and Senior Managing Director, David DeSantis, will now provide an overview of the investment market.
Thank you, Henri. Good to meet all of you for the first time. Today I'll give an update on the market since Saratoga's last call in January, and then comment on our current portfolio performance and investment strategy. Generally, we are not seeing a pickup in M&A activity in the specific market we participate in, but our deal flow has increased due to the success we're having with our own business development efforts, as seen by the fact that six of the 10 new platform companies we have closed this past year with new relationships. The combination of historically low M&A volume in the lower middle market for an extended period of time and an abundant supply of capital has kept spreads tight and leverage full that lenders compete to win new deals, especially on high-quality transactions.
Market dynamics remain at their most competitive level since the pandemic, although we are seeing some signs of spread widening. We've also experienced repayment activity for some of our lower loan-to-value loans being refinanced on more favorable terms. The Saratoga management team has successfully navigated through numerous credit cycles and capital markets dislocations. Through it all, we've learned to stay laser-focused on the things that we can control. In summary, these are, number one, stay disciplined on asset selection. Two, invest in and greatly expand our business development efforts, especially given that we feel the market is still largely under-penetrated by us. Thirdly, continue to support our existing healthy portfolio companies as they pursue growth.
The relationships and overall presence we've built in the marketplace, combined with our ramped-up business development initiatives, gives us confidence in our ability to achieve healthy and disciplined portfolio growth in a manner that we expect to be accretive to our shareholders. Excuse me. Now, I'd like to switch to a discussion of Software as a Service or SaaS companies, which have been getting a lot of press lately. Specific to SaaS companies and our SaaS portfolio, Saratoga does not view software generally as being a single industry. The companies in Saratoga's portfolio that deliver their solutions through software platforms are highly diversified across a wide variety of industries and end markets, and thus do not follow a common pattern of industry or sector concentration.
Based on Saratoga's more than 13 years of investing in software-related businesses, Saratoga has found that the performance of each of these businesses is more affected by its position in the industry and specific end market within which it operates. Key considerations for any business rather than by the fact that it's a service offering and it's delivered through a software solution. While the SaaS market has been in the headlines this past quarter, it is important to avoid generalizations and to look through to individual investments and their specific attributes. Much of the market turmoil, and not just related to software companies, has been driven by the accelerating emergence of AI as a potential disruptive force.
To add some perspective on the software underwriting approach we've taken over the years, as with all deals in all industries, we've always taken into account potential disruptive forces, whether they be stronger players within a market, an entrant from an adjacent market, or a material change in product or feature expectations. Because our underwriting bar is so high, especially for software, we've turned down far more software deals than we've done over the years. The advent of AI has increased the chances for disruption, a fact we're accustomed to underwriting, and therefore, our underwriting bar has become higher still. In recent times, we always evaluate not only how we believe AI can impact our existing and prospective portfolio companies, but more importantly, how these companies are actually integrating AI into their products and their offerings.
The software businesses that Saratoga chooses to provide capital to must have several of the following positive attributes. Enterprise software companies deeply ingrained in mission-critical aspects of company workflows and therefore exceedingly valuable and difficult to replace. Vertical software with a highly specialized and complex solution set that incorporates deep knowledge of a specific industry end market. Systems of record that help administer highly proprietary, confidential, or compliance-driven data that should not be exposed to broad AI applications where its confidentiality could be at risk. Predominantly recurring revenue with strong gross and net dollar retention as a marker of stability. Healthy historical revenue growth in expanding and durable end markets. High gross margins, often 70% plus, that bolster profit potential and signify high value add. Leading competitive position in an industry vertical, and an ability to be run for cash versus growth.
Regular and frequent human user activity and/or decision-making is required in the workflow. Because we're not tourists in the space and have been disciplined in the application of these underwriting guidelines, we've achieved successful realizations on 35 software-related businesses, producing a gross unlevered IRR of 14.4% with zero economic losses over the last 13 years. This past fiscal year produced consistent outcomes, with seven software company realizations producing a gross unlevered IRR of 14.2%. Our existing SaaS portfolio has strong credit metrics with loan to value, or LTV, of 31%. 93% of the software portfolio is first lien, with an additional 6% in equity positions, which provides meaningful upside to our shareholders. Overall portfolio fair value exceeds cost by 2.5% within our software portfolio.
As to future investments, we do believe that there will remain select opportunities for Saratoga to invest in exceptional software businesses where we have confidence that our capital is well protected by the sustainable enterprise values and unique value propositions of the underlying businesses. However, I would like to emphasize that Saratoga is seeing significantly fewer software-related investments that meet our strict underwriting requirements than in previous years. As such, we do expect to see a substantial shift away from software in our deal flow and ultimately within our portfolio. By way of example, we've closed one new platform since the quarter end and have two more in closing, none of which are software-related businesses. Now I'd like to shift to highlight key elements of the lower middle market where we operate.
We continue to believe that the lower middle market is the best place to be in terms of capital deployment. As compared to the larger end of the middle market, the due diligence we are able to perform when evaluating an investment is much more robust. The capital structures are generally more conservative with less leverage and more equity. The legal protections and covenant features in our documents are considerably stronger, and our ability to actively manage our portfolio through ongoing interaction with management and ownership is greater. As a result, we continue to believe that the lower middle market offers the best risk-adjusted returns, and our track record of realized returns reflects just that.
Our underwriting bar remains high as usual in a very tough market, yet we continue to find opportunities to deploy capital thoughtfully. As seen on slide 16, although providing additional capital to existing portfolio companies continues to be an asset deployment means for us with 13 follow-ons in the first calendar quarter of 2026 alone, we have also invested in five new platforms over the same period. We're reversing the decline we experienced in the prior calendar year. Overall, our deal flow is increasing as our business development efforts continue to ramp up. Our consistent ability to generate new investments over the long term, despite ever-changing and increasingly competitive market dynamics, is a strength of ours. Portfolio management is critically important, and we remain actively engaged with our portfolio companies and in close contact with our management teams.
We ended the quarter with just one core BDC investment on non-accrual status, Pepper Palace, as Chris mentioned previously, and added our CLOs F-note, which has been put on non-accrual for the first time. Together, these two investments only represent 0.2% of the portfolio at fair value and 1.2% at cost. In general, our portfolio companies are healthy and the fair value of our core BDC portfolio is 1.6% above its cost. Two core BDC investments that had notable write-downs this quarter are Exago and Madison Logic. We recognize unrealized depreciation of $2.8 million on our debt and equity investments at Exago as it is experiencing headwinds due to a challenging end market.
The company's customers are direct selling businesses relying on consumer purchasing, which is softening due to competitive and economic pressures. The lending group is actively working with management as a sponsor to explore options to stabilize and to improve performance. Our Madison Logic debt investment was written down by $1.2 million, reflecting continued performance decline in different and difficult macroeconomic conditions. We are working with the lending group and sponsor to allow the company to execute on growth initiatives while increasing visibility into day-to-day performance. Both of these investments remain on accrual with healthy cash balances to service debt. Offsetting these markdowns, our Zollege investment continues to perform exceptionally well post-restructuring, and we marked this up another $3.3 million this quarter.
Finally, the remaining markdowns in Q4 are primarily the $5.4 million write-down of our JV investments, reflecting both the individual CLO asset performance as well as general market conditions. As a reminder, 82.1% 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. Additionally, the majority of our portfolio is comprised of businesses that produce a high degree of recurring revenue and have historically demonstrated strong revenue retention. Looking at leverage on the same slide, you can see that industry debt multiples were around 5.4x, and total leverage for our overall portfolio was at 5.3x, excluding Pepper Palace. Moving on to slide 17, this provides more data on our deal flow.
As you can see, the top of our deal pipeline is significantly up from the end of the calendar year, 2024, and in line with last year. This recent increase of deals sourced as a result of our recent business development initiatives, with 22 of the 108 term sheets issued over the last 12 months being for deals that came from new relationships formed this year. Overall, 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 upon the best investments available to us.
Our originations this fiscal quarter totaled $135.1 million, consisting of five new investments totaling $78.4 million, with 15 follow-ons totaling $55.2 million, and BBB and BBB CLO debt investments of $1.5 million. For the fiscal year, originations totaled $309.5 million, consisting of nine new investments totaling $137.3 million, 32 follow-ons totaling $125.5 million, and BB and BBB CLO debt investments of $46.7 million. As you can see on slide 18, our overall portfolio credit quality and returns remain solid.
As demonstrated by the actions taken and outcomes achieved on the non-accrual and watch list credits we had over the past year, our team remains focused on deploying capital and strong business models, where we are confident that under all reasonable scenarios, the enterprise value of the business will sustainably exceed the last dollar of our investment. Our approach and underwriting strategy has always been focused on being thorough and cautious. Since our management team began working together almost 16 years ago, we've invested $2.53 billion in 130 portfolio companies and have had just three realized economic losses on these investments. Over that same time frame, we've successfully exited 87 of those investments, achieving gross unlevered realized returns of 14.9% on $1.37 billion of realizations.
The weighted average return on our exits this quarter was 15.8%, higher than our overall track record. Taking into account last year's write-downs of a few discrete credits, our combined unlevered realized and unrealized returns on all capital invested equals 13.4%. Total realized gains for fiscal year 2026 are $5.8 million. We think this performance profile is particularly attractive for a portfolio predominantly constructed with first lien senior debt. 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 second SBIC license is fully deployed and funded, and we are currently ramping up our new SBIC III license with $99 million of lower cost undrawn debentures available, allowing us to continue to support U.S. small businesses, both new and existing. This concludes my review of the market, and I'd like to turn the call back over to our CEO. Chris?
Thank you, Dave. As outlined on slide 20, our latest dividend of $0.75 per share in aggregate for the quarter ended February 28, 2026, was paid in three monthly increments of $0.25. Recently, we declared that same level of $0.75 for the quarter ended May 31, 2026, marking the fifth quarter of our new dividend payment structure. 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 and macro environment's impact on our earnings. Moving to slide 21, our total return for the last 12 months, which includes both capital appreciation and dividends, has generated total returns of 14%, vastly beating out the BDC index's negative 1%. This places us in the top seven of all BDCs for latest 12 months, April 2026.
Our longer-term performance is outlined on the next slide 22, which shows that our one-year, three-year, and five-year total returns all place us well above the BDC index. Additionally, since Saratoga took over management of the BDC in 2010, our total return of 838% has been more than 3 times the industry's 247%. On slide 23, you can further see our last 12 months' performance placed in the context of the broader industry and specific to certain key performance metrics. We continue to focus on our long-term metrics such as return on equity, NAV per share, NII yield, and dividend growth and coverage, all of which reflect the value our shareholders are receiving. As mentioned earlier, the reduction in our NAV per share this year is almost completely accounted for by the payment of previously undistributed profits.
The NII yield and dividend coverage metrics reflect the long-term impact of reduced rates and undeployed levels of cash. In this volatile macro environment, we will continue to deploy our available capital into strong credit opportunities that meet our high underwriting standards. Our focus remains long term. We also continue to be one of the few BDCs to have grown NAV accretively over the long term and have a consistent healthy return on equity, significantly beating the industry with our long-term return on equity at roughly 1.5 times the industry average, and latest 12 months return on equity more than double the average. 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 11%, ensuring we are strongly aligned with our shareholders. Looking ahead on slide 25, while the geopolitical tensions and macroeconomic uncertainty remain ongoing factors, we began seeing renewed momentum in M&A activity across the market, which resulted in a meaningful increase in deal activity. We continue to focus on expanding deal sourcing relationships. At the same time, our portfolio continues to perform. We remain encouraged by the resilience and strength of our pipeline.
While broader sentiment towards the private credit market has become increasingly cautious due to headwinds in the software sector and increasing caution across the market, we believe these issues are not indicative of broader credit market fundamentals. Supported by our experienced management team, disciplined underwriting, and strong balance sheet, we believe we are well-positioned to responsibly grow the size and quality of our portfolio, generate consistent investment performance, and deliver compelling risk-adjusted returns for our shareholders over the 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.
Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Erik Zwick with Lucid Capital Markets. Please go ahead.
Thanks. Good afternoon, everyone. Wanted to start with a question, maybe for Henri. Just as I think about, you know, the outlook for the portfolio yield and NII going forward, you know, if I look at the Fed funds future curve, it seems like there's no rate cuts priced into the market anymore, so hopefully SOFR base rates.
Stay level so that that pressure is gone. Just looking at, you know, what was added for new investments in the quarter coming on, you know, 200 basis points lower than, I guess, kinda the repayments. It seems like there's still potentially some pressure there. I guess is that right as we look at the next quarter or so, likely still some pressure on yields? Is it, you know, kinda going to, if I look at your number one objective, expanding that at the asset base in a prudent manner, is that a way to potentially, you know, offset some of that pressure as I think about NII going forward?
Yeah. Hey, hey, Erik. Nice to hear from you. Yeah, absolutely. I think firstly, you know, it's obviously nice to see from an earnings perspective that the SOFR rate has definitely stabilized, and that if anything, we might see a drop of spread widening taking place. But sort of as we look ahead and look at our Q1 projections, Q2 definitely seeing a stabilization of base rates. Then the other variable, as you mentioned is, you know, recycling of assets. It's obviously always hard to predict to predict repayments. You know, I would say that the assets that were repaid this past quarter that resulted in the 200 basis points was some of our higher yielding assets.
I don't think one would expect that large a difference between the assets being repaid and new assets coming on. I think there definitely is still potential, you know, when you have repayments to have a little bit of squeeze happening there. To offset that, though, as the prepared remarks said, we're seeing some of the, you know, highest level of business development, pipeline-type activities happening, reflecting everything that's been done over the last year or so. And so that's helping us, you know, grow our asset base, which obviously does help offset some of that squeeze that we're seeing as assets repay.
Great. That's helpful. Maybe just a bit of a follow-up there with, you know, kind of the success of the business development efforts. Has that changed, is that kinda gradually changing the mix of the pipeline in terms of new versus, follow-on, activity?
Well, you know, generally, that's not something we can control, as you guys know. You know, we obviously cover our portfolio companies, and our portfolio has been a good source of repayments. Yeah, we have a very active and very, you know, productive calling effort. I think as Dave mentioned earlier, you know, we're looking at relatively fewer software and relatively more other types of secular growing businesses, education, healthcare, those type of things.
Got it. Last one. Apologies if I missed it in the prepared comments. What transpired during the quarter that led to the CLO F-note being placed on non-accrual?
As you know, we have different tranches in our CLO, Erik, we obviously have the equity that leads to distributions of the equity. Following the equity distribution, the F-note is sort of the next tranche up. Out of the cash that comes from distributions, the F-note has to be paid, the interest has to be paid. There was just insufficient cash at the last CLO distribution to pay the F-note interest for half of the quarter. This is a test that gets done every quarter, right?
Yeah
You know, it'll obviously be reassessed at next quarter. Based on what we know now and seeing as half of the interest couldn't be paid, we put that on non-accrual. Obviously, if next quarter, you know, distributions are sufficient to cover that, we might reassess that. As of this past quarter, half of it was unpaid and therefore put on non-accrual.
Okay. maybe one quick follow-up there. Is it, you know, a grouping of assets that, you know, weren't paying as high distributions as they've been previously? what led to that shortfall?
It's really a function of sort of the remaining assets in the CLO, that there is a group of assets that's been underperforming, and they just continued to underperform. As you had seen over the last couple of quarters, the F-note had continuously been written down over the past couple of quarters. There was a big write-down in Q3. There was still about $120 on the books, and then we fully wrote it down now in Q4. It's just a function of sort of those underperforming assets not generating sufficient cash flows anymore to cover the interest.
Understood. Thanks for taking my questions.
One moment for our next question. The next question comes from the line of Robert Dodd with Raymond James.
Hi, guys. I've got several, but why don't I start with the F-note since that was on that point, it has been written down, and it's now carried at zero. I mean, you know, if we looked at a normal portfolio company for you guys, you know, if something was on non-accrual, been marked down, you'd be talking about, you know, the lender group getting together and the sponsor, et cetera which obviously is not the situation here 'cause you control the F-note effectively. Is there a path to recovery in value of the F-note? I mean, obviously there's, you know. Is it cost recovery or anything? I mean, it's been written down to zero, but, I mean, is there a perspective where that can appreciate again?
I mean, it has It's not like it's been a one-off this quarter to write it down, right? It has gradually attrited. Is that just the consequence of the structure, or is there a way you could get value back out of that note, to, you know, to accrete to NAV?
Yeah. That's a great question, Robert, and obviously it's a much, it's a much larger assessment because it's a, you know, a tranche of debt within a structured finance product, right? You know, if you look at our existing CLO, it's a asset that the BDC has had for 15 years, or 15, I guess 18 years, since the start, has done exceptionally well and has generated, I think it's around $120 million of distributions, plus all the management fees that it receives because the BDC is the manager of the CLO as well.
It's something that's done really, really well. But it's no longer in its reinvestment period at the moment. The question is to answer on the F-note is the way you would get that value back is if you take a step back and you potentially refinance the CLO, which is something we're continuously assessing. The assets of the CLO, which was $650, has been, you know, obviously repaying, 'cause the way it works, the CLO is when you're out of the reinvestment period, you use all the proceeds from repayments to start repaying the debt. It's down to about $350 million of assets, to a much smaller size, which also makes it easier to refinance.
We're continuously sort of looking at the performance of the assets that remain in the CLO and also, you know, where market conditions are, where refinancing rates are, et cetera, to determine whether we want to refinance a CLO. If you refinance a CLO, that'll be sort of the first step to then recovering the value of the F note because you then start reinvesting cash into new assets that will be generating new cash flows that will help the value of the F note. It's, it's a little bit of a larger process and a little bit of a larger consideration than, as you said, individual portfolio companies, but it's tied to the refinancing of the CLO that we're sort of assessing on a, on a continuous basis.
Got it. Thank you. What, what different topic now. On the outreach to your point, I mean, you've kind of outperformed certainly in the last couple quarters. You've been onboarding new portfolio companies, doing follow-ons, et cetera, despite broadly a pretty muted environment for a lot of your competitors. You know, your outreach and establishing new relationships on the sponsor side has been paying off. How, back over to you , how much further can you push that?
How much further can we push our originations?
Yeah, adding originations, the pipeline, adding more sponsors, et cetera. Like, you know, how much I know you're under-penetrated, relatively speaking, where you'd like to be, but I mean, by how much? I mean, how much could your pipeline, capital being a different issue, right? Whether you could take advantage of it. How much could the pipeline increase?
Well, I think that's a, you know, it's a very interesting question. I think, you know, the nature of what we do and then the smaller middle market, you know, if there's a pyramid structure, right? Then the biggest deals, the multi-billion dollar deals are at the top of the pyramid, and then the much smaller deals are at the bottom, it's a much wider base. So, you know, we don't I mean, we didn't even talk about what our market share is 'cause it's really infinitesimal compared to the opportunity set out there.
A lot of the, a lot of the transactions as you recall, a lot of the things we do, sometimes there's the first institutional capital in a deal, and sometimes it's a founder either selling or looking a partnership to do something. It's not really driven by the exact same factors that drive the larger, you know, the middle market or the larger market that are really determined on, on M&A volumes and, and things like that. This is, you know, there's a much broader mix of sourcing, you know, non-sponsor sourcing for the transactions. Obviously, there's a lot of sponsors going into those transactions. Really, there's no ceiling, you know, on how much more business we could generate. It's obviously, it's time and relationship building, right? That's really our constraint.
We don't think the opportunity set is the constraint, but, you know, how, you know, how many people we have applied to it, how efficient we are in addressing these, how fortunate we are for if people, you know, win the auctions. We are noticing there are a fair amount of competition, and sometimes we may be, you know, backing several in a given process. You know, some of those are harder to win. The final, you know, sourcing and the closing of the deal is, you know, sort of not necessarily something we control so much. Generating that, those, a new relationships, there's, it's, is, there's really no there's no limit.
It's really the limit is really ourselves, like how much time and effort can we apply.
Yeah. Robert, there's, you know, in addition to our quarterly presentation that's on the website, we also have an investor presentation, which is a separate presentation. I'll point you there to there's a slide 27 and a slide 31 that. That section of the presentation gives a bit more color on our business development process and relationships and how we find deals, et cetera. We talk there about how there's probably about 450 companies or firms or sponsors that we have on what's called a focus list of ours. Then we tier them. There's probably a couple of 100 that we would view as sort of our more top-tier relationships that we're more actively pursuing.
When you think of the deals we do, it's probably a handful of sponsor relationships that we have most of our deals in. The population of sponsors and relationships out there is extremely broad. Obviously, you keep finding more quality deals from a small handful of sponsors, but really the opportunity is really large as you spend more time on business development, which we really have been doing, the team over the last six months and one year or so.
Yeah. Got it. Thanks, guys.
Robert, I'd also add that we've spent a lot of time cultivating these different relationships over time, right? This is a oftentimes multi-year effort, right? The sponsor universe is quite broad. Depending on any metric, I don't know, it could, I've read a lot of different sources, but it's somewhere between 1,500 and 4,000 sponsors. As we cultivate relationships with these guys and engender ourselves to them through the work that we do on deals, particularly those that don't close, this is a multi-year effort that we're trying to become more successful and more ingrained and more credible and trusted by these sponsors. We're starting to reap the fruits of that labor to date.
Got it. Thank you.
One moment as we bring up the next question. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. Our next question comes from Christopher Nolan with Ladenburg Thalmann. Go ahead, your line is open.
Hi. Thanks for the detail on the F-notes. Were there any particular industries that drove the non-accrual?
You know, I don't know exactly off the top of my head, but it's really like a handful of assets. I don't think it's there in one industry, but it's probably about five assets or so that drove most of the decline.
The F-note.
I think it's fair to say.
Yeah.
I think it's fair to say that it's less about a given asset group and kinda more about the structure. 'Cause in the structure we're in now, a lot of the cash flows are going to pay down the more senior debt. The cost structure of the liabilities is, you know, moving. You know, that's why we're very focused on finding a refinancing point for it that, in essence, we're paying down a lot more of the senior debt. Some of it is also the cost structure of our liabilities, which again, in a refinancing, as Henri mentioned earlier, that's the opportunity to reset. You know, we've got dialogues, you know, going at all, you know, at all times here.
Hopefully, we'll find an opportunity to reset it. At that point in time, we can reprice our liabilities, which are, you know, not perfectly priced to what we could get in the market if we refinance right now.
Yeah. Chris, we also have significant disclosure on the CLO in our 10-K that we just filed. You'll be able to see in the MD&A, you'll be able to see the split by industries and then also the weighting by our credit risk categories as well.
Is it fair to say that we should expect CLOs to run off as a percentage of your investment assets?
I'm sorry.
Could you repeat that, Chris? Sorry, you just broke up.
Yeah. Should we expect CLOs to decrease as a % of the investment portfolio?
Well, I think they, you know, they have decreased a fair amount, you know, to at this point in time. I think, you know, I think, I think, you know, the whole CLO business, as Henri mentioned earlier, you know, we had tremendous success with CLOs for a long time. I think the last, you know, four to five years, the CLO industry has had a lot of, you know, a lot of, you know, negative developments, if you will. There have been, you know, some weakening of the covenants, these, LMEs, you know, the liability management, programs. You've had a change in interest rate structure and all that.
There's a, there's a big sort of digestion cycle for a lot of, you know, I don't, I don't know if I'd call them excesses, but a lot of the way the market operated several years ago is causing a lot of problems today. As we move forward, there's fewer LMEs. I think the documentation's getting a little better. I think the, you know, the companies are getting financed more appropriately for the current, you know, the interest rate environment, you know, is more stable than it was over the last several years. I think, you know, the underlying, you know, dynamic, you know, is stabilizing. I think the whole industry does suffer from the slowdown in M&A.
A lot of what's going on, you know, in private, you know, equity and private credit is a lot of refinancings of existing companies. Those are generally come at, you know, much tighter, you know, tighter spreads. They're much more shopped, that type of thing. Where, you know, as the M&A environment comes back, you know, those type of deals are generally have wider spreads to them and for a whole host of reasons. You know, we, we think, you know, there's sort of been a, you know, sort of a cyclical, maybe slightly secular, degradation in the quality of the market in CLOs. We think there's a number of initiatives going on that's, at a minimum, stabilizing that, and then we think it's possible to even improve from here.
Okay. Thank you.
Thanks, Chris.
I'm showing no further questions at this time, so I would now like to turn it back to Christian Oberbeck for closing remarks.
Well, again, we thank all of our shareholders and analysts for following us and participating on this call. We look forward to speaking with you next quarter. Thank you.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.