Sequoia Economic Infrastructure H1 2025 Earnings Report

Sequoia Economic Infrastructure EPS Results

• Actual EPS: GBX 4.26
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Sequoia Economic Infrastructure Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Sequoia Economic Infrastructure Announcement Details

• Quarter: H1 2025
• Date: 12/5/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, December 5, 2024
• Conference Call Time: 4:00AM ET

Sequoia Economic Infrastructure (LON:SEQI)ome Fund Limited invests in a diversified portfolio of senior and subordinated economic infrastructure debt investments through its subsidiary Sequoia IDF Asset Holdings S.A. The Company operates through investment in senior and subordinated infrastructure debt instruments and related and/or similar assets segment. Its investment objective is to provide investors with regular, sustained, long-term distributions and capital appreciation from a diversified portfolio of senior and subordinated economic infrastructure debt investments. Its principal investment policy is to invest in a portfolio of loans, notes and bonds. It invests in various market sectors, such as transport, transportation equipment, utilities, power, renewable energy, telecommunications infrastructure and infrastructure accommodation. Sequoia Investment Management Company Limited is the investment advisor of the Company.

Sequoia Economic Infrastructure H1 2025 Earnings Call Transcript

Key Takeaways

• SECI's NAV rose from 93.77 to 95.03 in H1 FY25, delivering a 5.1% total NAV return (annualized 10.2%).
• Dividends of $3.4375 per share were paid, aligning with the $0.068 per share target and are 1.06× cash covered.
• The fund repurchased 49.3 million shares during the period, contributing 0.47p per share accretion via buybacks.
• Two of three non-performing loans were resolved—Clyde Street was sold and Bulb was nearly fully repaid—bolstering credit quality.
• A $500 million pipeline at ~10% yields and a stable/slightly declining rate outlook support potential 3.5p per share hold-to-par upside.

Presentation

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

Good morning, everyone. Welcome to the first half of fiscal year 2025 interims call on SEQI. This covers the period from 1 April 2024 through 30 September 2024. I'm Randall Sandstrom, and also on the call with me this morning is Steve Cook, Head of Portfolio Management, and Matt Dimond, Head of Client Capital. If we turn right to the introduction, SEQI's portfolio has had a good six-month period, and our resilient portfolio has generated substantial cash during the period, with NAV climbing from 93.77 at year-end fiscal 2024 to 95.03 for the period ending 30 September 2024. Dividends paid have been $3.4375 per share, and this is consistent with our full-year dividend target of $6.78 per share, and it's cash covered at 1.06x. We've been able to maintain credit quality of the portfolio without a reduction in targeted yields.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

58.5% of the portfolio is senior secured loans, and we have low construction exposure at 8.1% of the portfolio. We're happy to report that we've made good progress on non-performing loans during the period. We've resolved two out of the three challenging positions with the sale of Clyde Street and the near-full repayment of Bulb. The current and expected stable or gradually declining interest rate environment is also supportive of SEQI. We have 3.5p per share of expected pull-to-par upside. We have a strong pipeline of investment opportunities with a highly selective investment policy. It's approximately $500 million in size, and gross yields right now in the investment pipeline are about 10%. I think, as everybody knows, we've had a proactive and balanced approach to capital allocation. We've had a significant share buyback program where, during this six-month period, the fund has bought back 49.3 million shares.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

That's in the last six months, and SEQI has been a leader in buybacks in the listed infrastructure and credit sector since July of 2022. We have the room to potentially and modestly increase fund leverage and take advantage of the attractive pipeline of investment opportunities that we have. We've also made, lastly, sustained ESG progress with the portfolio ESG score climbing to 64.65, up from 62.77 for year-end fiscal year 2024.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

Thank you, Randy. Turning on to the next slide, we're going to have a look at the portfolio in a bit more detail, and then come on to talk about performance and some key metrics for the fund. I think the first thing to say in terms of the overall portfolio is that it's remained approximately unchanged in terms of its main characteristics over the six-month period, and this is consistent with our strategy that was set out in the annual accounts of maintaining credit quality, maintaining diversification, and obviously targeting a 9%-10% yield, which will enable us to comfortably cover the dividend and hopefully grow NAV as well. To give you a bit more detail on that, the portfolio key characteristics are set out on this slide.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

The U.K. remains relatively large by historical standards, about 29% of the portfolio, but the U.S. is, as it always has been, actually the largest single geographical area. The U.S. entirely represents all of that. There's no exposure to Canada currently in the portfolio. We're currently about 60% senior secured debt, about 59%, which is unchanged over the six-month period, about 60% fixed-rate debt, and the idea there is to lock in interest rates if and when we start to see policy rates fall, and as Randy mentioned, about 8% of the portfolio relates to assets in the construction stage, which is up very, very fractionally on where it was at the end of the previous financial year, which was 7%. In terms of geographic sectors, the portfolio, as you can see, remains very highly diversified.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

Digitalization is our largest single sector, and within that, data centers and telecoms towers are the two largest areas. But actually, the portfolio is really well spread across a very wide range of different types of infrastructure, and that clearly is a key way of managing risk within the portfolio. We spread our risks. We don't put all of our eggs into one basket. Turning on to the next slide, on page four, we have here some more KPIs. As you can see, the portfolio yield to maturity is practically unchanged. It's 9.94% compared to 10.02% at the end of the previous financial year. The portfolio size is, again, very similar. We've seen a little bit of net asset growth, which we're obviously delighted by. It's gone from 93.77 to 95.03, and we'll look at a NAV attribution on that on the next page.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

The total return on the NAV over the six-month period was 5.1%. That's not an annualized figure. Obviously, we'd annualized to 10.2%. We think that's a very solid performance. The ordinary share price, unfortunately, has ticked down a fraction from 81.1 to 80.2. That gives a share price total return for the period of 2.9% once dividends are taken into account. Earnings per share are up clearly on the back of higher interest income. Dividends have remained constant. Dividend cover, so this cash cover on the dividend, has remained constant at 1.06x, which is consistent with the long-run guidance that we've historically given of 1.05-1.1x. And the portfolio ESG score has improved quite materially, actually, from 62.77 to 64.65. Turning to the next slide, we have a NAV bridge on page five. You can see opening NAV at 93.77, as I mentioned.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

By far, the main two drivers of NAV performance are interest income at 5.4p per share over the period, offset partly by dividends of 3.44p. So you'll see that interest income, this is an accounting definition, not a cash definition, very well-covered dividends. Offsetting that a bit further is you have expenses of 0.8p, a number of small adjustments, and actually a positive adjustment of 0.47p per share relating to accretion through the share buyback, which, as Randy mentioned, has been a very significant activity for the fund over the period.

[Matt Dimond, Head of Client Capital at Sequoia Economic Infrastructure Income Fund]

Great. Thank you, Steve. Turning to SEQI's long-term performance against its benchmark since IPO. On this chart here, you'll see three lines. The blue line is SEQI's share price total return performance. The black line is SEQI's NAV total return performance, and the red line is our high-yield bond benchmark. This is a global benchmark hedged into sterling to match our own hedging into our home currency, and first, one point to make is there isn't a clear direct benchmark for infrastructure high-yield debt. The sector is coming of age, and it's really growing as an institutional asset class for allocation. You'll see clearly there's been a large gap between the SEQI NAV total return and the share price total return, and that is what we refer to as the NAV discount.

[Matt Dimond, Head of Client Capital at Sequoia Economic Infrastructure Income Fund]

This is a factor that has been impacting not just us, but a lot of the peer group and the broader listed investment company market, particularly the alternatives. It's something that's very front of mind for the team here at SIMCO. We're looking to manage the discount continuously through our ongoing share buyback program, which has been in place since the middle of 2022. In conjunction with that, we continue to refresh the portfolio through highly selective investments at today's attractive yield levels. Notwithstanding the discount, the SEQI NAV total return has outperformed the underlying high-yield bond benchmark broadly by between 3.5% and 4%. We're very sort of pleased with that continued level of outperformance reflecting not just the illiquidity premium that we can achieve through our strategy, but we believe our highly selective and focused approach to investments.

[Matt Dimond, Head of Client Capital at Sequoia Economic Infrastructure Income Fund]

In terms of when this discount, we hope, will narrow and disappear, we are relatively positive in terms of our outlook on this based on the scenario that rates have peaked and are generally expected to be reducing over the years ahead, maybe not as fast as they went up. But this is a very benign environment for our type of product of high-yield credit, as we can lock in some very good returns at these current rates. I mentioned that we are continuing to make highly selective investments, and we've got a couple of case studies here. This is one that was completed in the middle of the year. It's called Project Crystal. This is a very high-quality business in Germany providing critical medical services. Specifically, it's a leading provider of diagnostics and therapeutic services. It includes MRI and radiotherapy.

[Matt Dimond, Head of Client Capital at Sequoia Economic Infrastructure Income Fund]

It operates across 29 centers in Germany, and it works with over 150 physicians, and they have treated over 500,000 patients. This industry is underpinned by a very stable regulatory environment. It provides essential services and exhibits strong barriers to entry. Our equity partner in this is a very well-established infrastructure equity player, and they sit behind us in the capital stack. The business has grown well since its inception organically and also via acquisitions. Our loan has been provided in the form of a mix between term loan and CapEx facility. We are part of a club of lenders, and the total loan is EUR 29.5 million. It's a Holdco loan alongside other debt providers, benefiting from senior security and other robust financial covenants.

[Matt Dimond, Head of Client Capital at Sequoia Economic Infrastructure Income Fund]

The loan will be utilized to refinance existing debt and provide capital for further growth, both potentially within Germany and elsewhere in neighboring countries. This example is a great illustration of a highly thematic infrastructure theme playing into healthcare and aging societies. I'd like to pass on to Steve to cover the next case study.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

Thanks, Matt. The next case study is actually one on the recovery on our loan to Bulb, so this is following the investment through the insolvency of Bulb, and just to refresh people's memories, Bulb was one of the largest challenger energy supply companies in the U.K. What happened over the course of 2021, as you'll recall, is that gas prices increased at an unprecedented pace, and a large number of the smaller energy supply companies in the U.K. had difficulty maintaining their hedging arrangements. They just started to absorb more and more capital, and companies like Bulb found they didn't have enough capital to maintain a full hedging book over the winter months, and so Bulb went into special administration, which meant we couldn't enforce our security over the assets of Bulb, and its parent company, Simple Energy, went into just normal administration.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

It's now been about three years since all that has happened. We've been working very hard, both with Interpath, who are the administrators at Simple, and Teneo, the special administrators appointed to Bulb, and a whole range of other participants in the market. And we've now got to a point where we expect to recover or have recovered the full amount of our loan, and we also have expectations that we'll recover some or all of the interest that has accrued on the loan over the course of the administration. So it's been a very positive outcome. To achieve it, we had to be very proactive. So we've done a large number of things. We've been through a mediation process with the special administrators, which resulted in a cash settlement of GBP 25 million, which has been fully received in cash.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

We went through a restructuring of Simple Energy and the IT systems and department that Bulb had built up, which was widely considered to be best in class amongst the energy supply companies, and we spun that out into a company called Zoa, which, together with management, the fund owned the equity in. Zoa has subsequently sold its business to ENSEK, which is a subsidiary of Centrica. We still have some residual claims coming out of that. Some elements of the business weren't sold, and we still have a claim over them, but actually, overall, we received more than book value on that transaction at the point of sale, although we're not actually disclosing the precise terms of the sale.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

When you add together all of these, plus recoveries of cash at the Simple level, that gives, as I said, actually a very positive full or nearly full recovery on the transaction over the last three years.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

Thank you, Steve. If we go to the closing remarks, which are on page nine, SEQI, we feel, is well positioned to reap the rewards from our attractive, diversified investments. And I wanted to cover three points on this page: agility, performance, and opportunity. We feel the fund is very agile, and we've tried to have a thoughtful approach to capital allocation between buybacks and selected investments. Our revolving credit facility has been renewed. It's GBP 300 million in size, and that's with JPMorgan. We're diversified, and we have a resilient portfolio. And by resilient, we mean defensive, and it performs well during weaker markets. And this has been borne out by our low loss rates, which includes the period of the sovereign debt crisis back when we started out, COVID, and until recently, very high rates of inflation.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

We also have fresh monthly NAVs, which are well established by external appraisals, and our marks are done by PricewaterhouseCoopers. We've also been locking in high portfolio yields through the use of swaps, and we have just over 60% of the portfolio right now in fixed-rate exposure. On performance, we feel that we have had good portfolio performance, and this has included an attractive and consistently cash-covered dividend, finishing the period with coverage of 1.06 times unchanged from fiscal year in 2024, which was also at 1.06 times. We've continued our long-term outperformance versus the high-yield benchmark that Matt talked about, outperforming that benchmark by an average of 3.7% over the fund's life, with half as much volatility as that benchmark. We also, as you know, have a very low average life of only four years, which helps to keep the portfolio fresh and thematic.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

What this means is we get back about 25% of the portfolio every year to invest in currently attractive risk-return opportunities and to fund the share buyback. In a word on our loss rates, they've been low, and they've now gotten even lower. Our loss rate per annum for the life of the fund is now on an average of 51 basis points per annum versus 58 basis points per annum at the end of fiscal year 2024. I wanted to say underperformance, and I feel this is really important, that we realize that this performance has not been reflected in our stock price, even though it has been reflected in our NAV. This is why we have continued the share buyback program running for so long.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

It's also important to say that we continue as the IA to receive 10% of our fees and shares, and SIMCO has accumulated a lot of shares over the years, so we feel investors paying on the share price. Lastly, we feel there is a good opportunity right now, given how SEQI is positioned. There's the prospect, as we've mentioned, for lower interest rates, and we think that's good for portfolio valuation. We also think it'll help drive more M&A, which will help drive more deal flow for our pipeline. Embedded in that is also the pull-to-par effect that we've talked about, and we expect that to be 3.5p per share in upside. There's also attractive yields on reinvestment right now. And as we mentioned earlier, the yields in our pipeline currently are at about 10%. And that includes a strong thematic pipeline of about £500 million in size.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

And as Matt mentioned, as interest rates continue to drop and get lower, we feel that more and more borrowers will want to refinance to lock in those lower rates, which should help the growth in our pipeline. And then lastly, I just wanted to say that I feel our share price presents an opportunity. And I say that because in the last six months, if you look at our numbers, our NAV has performed really well. It's grown in four of the last six months, but our stock price has gone sideways. And I feel that this does not reflect the intrinsic value of the fund. Thank you, everybody. This finishes the presentation part of the results, and we'd be happy to turn it over to Q&A. Yes, we're getting a few questions in. Thank you, everybody, for sending those in.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

The first question I'll be happy to answer is, do we have any plans to increase the dividend in 2025? And on that, the dividend is something that's always reviewed by the board, but there have been no announcements to change the dividend.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

Thanks, Randall. I think the next question is asking about our use of interest rate swaps and, in particular, how large are they and are they at the portfolio level or do we swap individual loans? And maybe to answer that, they're not incredibly material. They're typically 5%-10% of NAV, so it's a relatively small proportion, and we don't do very long-dated or high-duration swaps. So we have a policy for the amount of interest rate sensitivity we want to take through derivatives. And we use them, obviously, just to target a particular fixed floating split on the portfolio. We hedge at the portfolio level, not against individual loans. And they give us a lot more control than just relying on the investment strategy.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

The reason for that, obviously, is clearly you can target making fixed-rate loans or floating-rate loans, but you don't have the same level of control over which loans are going to repay. So fixing your sort of interest rate strategy or adopting an interest rate strategy just through the investment and the loan portfolio is slightly crude. Basically, interest rate swaps give us a lot more control, a lot more precision over that part of the strategy. I think the next question may be one for me as well, which is asking about the implications of the U.S. election. We've actually just recorded a podcast on this very topic, which is on the fund's website under media. So there's a 10-minute discussion on this topic, which I won't repeat now, obviously.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

But I think the short conclusion is, overall, we don't think there are huge risks presented by Trump's policies. Clearly, it's likely to be, or they're likely to be, if anything, beneficial for things like conventional power, LNG, midstream, things that might benefit from some of his tax policies. So economic growth could be positive. On the other hand, probably some negatives for things in the renewable sector, particularly rooftop solar, where we think there's enhanced levels of risk, potentially trade. So things like ports or container shipping might be affected by tariffs. And obviously, quite a lot of his policies are inflationary, and that might lead to higher interest rates. So there's a lot of complex interdependent consequences that we talk about in the podcast.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

But the short conclusion is we feel that our portfolio is well positioned, actually, for what we expect Trump's agenda to be over the next couple of years. I can see a couple of questions here for Randy, so I'll just tag team.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

Yes, absolutely. We've got a question in on our new sectors, geographies. Do investments in new jurisdictions, Italy and Portugal, offer better returns than other areas? And it really depends. The returns on infrastructure are more dependent on the sector, the subsector, and the project itself than on the country or the jurisdiction. In all cases, we invest in investment-grade and developed markets. So you're not going to see large differences in yields or spreads due to the country. The primary determinant of returns would be on the project, the degree of financial risk and the degree of business risk. Obviously, in those two countries, they're both subject to Euro LIBOR, so we're not going to see any differences there.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

There's a few questions, which I'll probably lump together, if that's okay, relating to non-performing loans. So I'll try to answer as many of these as I can do. So the first question is, how significant a time commitment has been resolving and working through the non-performing loans? I mean, look, the answer is it's a lot of work, but I think it's a really important part of a manager's role if you're in the debt space. So inevitably, if you work in credits, there will be underperforming and non-performing parts of any loan portfolio. And you need to dedicate the resources and the right level of expertise to working through them because actually, it makes a tremendous difference. Having a sort of properly resourced, senior, experienced team directly leads to better financial outcomes. So we don't see it as being a distraction from the job.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

We think it's part of the job, actually, and a very important part of the job. Next question on a sort of related theme is on Bulb, what is recognized in the valuation? And the answer is, and what we say is we expect to get back of the currently outstanding, our base cases, we get back the principal, and we're likely to get back some of the, maybe even all of the accrued interest. So what we've done is you'd expect is we've taken the principal and accrued interest. We've haircut that for uncertainty and time value of money. So we've applied an appropriate discount rate. What we haven't done, obviously, is look forward and say, look, if that takes three months, there'll be another three months accrued interest.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

So that would all be potential upside over and above the sort of discounting that's implied by the sort of discount factors on the loan. Obviously, it goes without saying we're very pleased. Then a couple of questions on ACG. Active Care Group. This is not a distressed loan, but it's a restructuring where we've received some equity, actually a majority equity position in the business. So we're currently carrying that at nil value, which obviously is the most prudent possible assumption. We're not obviously a private equity firm. Having said that, we're not impatient capital. We're working with the company. We'll find an exit at the right time. But right now, it's about obviously building the business and looking for ways to sort of maximize the value of our position there. So there's no specific update.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

But obviously, like I said, it's marked as cautiously as is possible, given that it's marked at nil. So it's only upside from what we've got it marked at.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

We've got a question here about our fixed floating balance. Are you still comfortable with that given the Trump result, potential inflation, interest rate rises? Yes, we are comfortable. And we've never really moved that mix very much. We've tended to be sort of around 50-50 over the life of SEQI, and we've moved that just a little bit given the peak that we've seen recently in interest rates. So I think that our current positioning is fine, and it can take into consideration a variety of scenarios on rates.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

There's a question here, which is, what is the average debt service coverage ratio across the portfolio? And I'm going to answer that by saying it's not information that we disclose, but not because we feel it's remarkably sensitive, but actually because it's very dependent upon the sort of mix of assets in the portfolio. And by itself, it could be quite a misleading or confusing statistic. Now, what do I mean by that? Well, just to sort of unpick the jargon, debt service coverage ratio is the ratio of a borrower's free cash flow, so cash flow available to service debt, divided by debt service, so interest and mandatory debt repayments. So a DSCR, debt service coverage ratio of two times means that for every pound of debt service, the borrower's got two pounds of free cash flow.

[Steve Cook, Head of Portfolio Management at Sequoia Economic Infrastructure Income Fund]

The reason why it's a confusing statistic is lenders will target very, very different types of DSCRs based upon the predictability and credit quality of a transaction. So to give you an example, if you've got a deal and we've got one like this, which is a leasing transaction, so we finance the rolling stock on the Madrid Metro, where all the income comes from lease payments from the Madrid Public Transport Authority, you can finance that on a really low DSCR. If you've got something with much more operational risk, you have a really high DSCR. Taking the average of those two numbers, therefore, doesn't tell you much. It just tells you that you've got a wide range of things in the portfolio. So that's not a number that we think is useful to disclose, unfortunately.

[Randall Sandstrom, CIO at Sequoia Economic Infrastructure Income Fund]

Okay, everybody. That takes us to the end of Q&A. No further questions have come in. We'd like to thank everybody for attending our first half fiscal year 2025 results call.

Participants

Executives

• Steve Cook, Head of Portfolio Management
• Randall Sandstrom, CIO
• Matt Dimond, Head of Client Capital