Main Street Capital Corporation

Greetings and welcome to the Main Street Capital Corporation's third quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughn, with Denard Laskar Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's third quarter 2020 earnings conference call. Main Street issued a press release yesterday afternoon that details the company's third quarter financial and operating results. This document is available on the investor relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until November 13th. Information on how to access the replay was included in yesterday's release. We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the company's homepage. Please note that information reported on this call speaks only as of today, November 6, 2020, and therefore you are advised that any time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call will contain forward-looking statements. Any of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, or similar expressions. These statements are based on management's estimates, assumptions, and projections as of the date of this call, and there are no guarantees of future performance. Actual results may differ materially. Results expressed or implied in these statements As a result of risks, uncertainties, and other factors, including but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And now I'll turn the call over to Main Street's CEO, Dwayne Hijak.

Thanks, Zach. Good morning, everyone, and thank you for joining us today. Joining me for a call today with prepared comments are David Magdahl, our president and chief investment officer, and Brent Smith, our CFO. Also joining us for the Q&A portion of our call are Vince Foster, our executive chairman, and Nick Masserve, our managing director and head of our middle market investment group. I wanted to start by saying that we hope everyone is staying safe and healthy during these very unusual times. Given the ongoing impact of the COVID-19 pandemic, Similar to our calls for the last two quarters, I will start today's call with some comments regarding the impact of the pandemic. I will then comment on our overall performance in the third quarter, some developments within our asset management business, our investment activities and current investment pipeline, our outlook for the next few quarters, our recent dividend announcement, and several other updates. Following my comments, David and Brent will provide additional comments on our investment strategy, investment portfolio, financial results, and future expectations, after which we'll be happy to take your questions. Since our last conference call, we've continued to prioritize the health and well-being of the employees and management teams and employees of our portfolio companies, while proactively working through the ongoing impacts of the pandemic on our investment portfolio. We greatly appreciate the ongoing efforts of these individuals, and we continue to be very pleased with their efforts and actions throughout the pandemic. While the economic environment since our last call has continued to be very challenging, we are pleased that the performance across the vast majority of our portfolio companies has stabilized and started to improve, allowing us to recover a meaningful portion of the unrealized depreciation we experienced earlier this year, with net appreciation of $48 million across our investments and a 3% increase in net asset value per share in the third quarter. We continue to feel good about the overall quality of our investment portfolio, and the leadership provided by the management teams of these companies, and we currently expect to see continued fair value improvement and recovery in future quarters. In addition, we are pleased that despite the impacts of the pandemic, we have continued to have success executing on new investments in both our lower middle market and private loan strategies, and we remain confident that our conservative capital structure and strong liquidity position will allow us to continue to manage through the current challenges and to successfully execute on the opportunities that exist with our portfolio companies and in our pipeline of attractive lower middle market and private loan investment opportunities. We're also very pleased with our recent closing of an agreement through which we became the sole investment advisor to HMS Income Fund, which has been renamed as MSC Income Fund. We are excited about our plans for positioning this fund for the future while also executing our overall strategy to grow our asset management business within our internally managed structure and continue to provide this unique benefit to our Main Street stakeholders. We are also pleased to report that we continue to make good progress on our internal initiatives to organically grow our asset management business, and we look forward to sharing additional details in the near future. Based upon the positive developments we have seen in our existing portfolio companies, coupled with the future benefits of the growth in our asset management business and the attractive new investment opportunities we are seeing in our lower middle market and private loan strategies, we are confident that the third quarter represented the low point for our Distributable Net Investment Income, or DNII, and we expect to see increases in our DNII in the fourth quarter and future quarters, which Brent will cover in more detail. Now, turning back to our results for the third quarter, these results reflect the continued negative impact of the pandemic on the overall economy, most specifically in the significant decrease in the amount of dividend income we realized from our equity investments and an increase in the number of investments on non-accrual status at quarter end. We remain confident that the decrease in dividend income is a temporary issue, partly due to the conservative approaches many of our portfolio companies are taking in managing their capital and liquidity in response to the pandemic. And we believe this dividend income will recover as the impacts of the pandemic subside. Our team also continues to maintain significant focus on working through those underperforming investments to realize the best possible outcome for our stakeholders. Despite the negative impact of these items and the resulting level of DNII in the quarter, as a result of our diversified investment portfolio, together with the advantages of our differentiated investment strategy, the increasing benefits from our asset management business, our strong investment pipeline, our efficient operating structure, and alignment of interest with our shareholders, combined with our conservative capital structure and strong liquidity position, we remain comfortable with our commitment to maintaining a stable monthly dividend payment level going forward. To that end, earlier this week our Board declared our first quarter 2021 regular monthly dividends of 20.5 cents per share, payable in each of January, February, and March, an amount that is unchanged from our monthly dividends for the fourth quarter. Now turning to our investment activities in the third quarter and our current investment pipeline, we completed lower middle market investments of $46 million in the quarter, including an investment in one new company, and financing for acquisitions by two of our existing portfolio companies. And as of today, I would characterize our lower middle market investment pipeline as above average. We continue to be very active in our lower middle market strategy, and we have several new investment opportunities in the pipeline that we expect to close in the fourth quarter. Also included in this investment pipeline are several additional follow-on investments in existing portfolio companies, as our companies are increasingly more comfortable with their current business conditions and are actively looking to execute on various attractive growth opportunities. We also believe that the last few months have caused many entrepreneur owners to refocus their financial and estate planning priorities and consistent with our historical experiences over the last two decades as the industry leading partner for lower middle market companies and their management teams, we believe that our unique combined debt and equity investment offering and our ability to be a long-term to permanent partner for the companies we invest in positions us as the favorite investment partner for these business owners in the current environment. During the third quarter, we continued the successful focus of our non-lower middle market investment growth on our private loan portfolio, resulting in this portfolio growing by $69 million on a net basis in the quarter, while our middle market portfolio decreased by $2.5 million, consistent with our previously stated objectives. As of today, I would characterize our private loan investment pipeline as average. And in closing, our officer and director group has continued to be regular purchasers of our shares, investing approximately $400,000 during the quarter. On a collective basis, our director and officer group owns Main Street Shares value at approximately $98 million at quarter end. With that, I will turn the call over to David.