Main Street Capital Corporation

Greetings, and welcome to the Main Street Capital Corporation Second Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone to 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, at the North Baxter Investor Relations. Thank you, sir. You may begin.

Thank you, Operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's second quarter 2023 earnings conference call. Joining me today with prepared comments are Duane Hijak, Chief Executive Officer, David Magdahl, President and Chief Investment Officer, and Jesse Morris, Chief Financial Officer and Chief Operating Officer. Also participating for the Q&A portion of the call is Nick Mazur, Managing Director and Head of Main Street's Private Credit Investment Group. Main Street issued a press release yesterday afternoon that details the company's second 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 August 11th. 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, August 4th, 2023, and therefore, you are advised that 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. Many 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 and as of the date of this call, and there are no guarantees of future performance. Actual results may differ materially from the 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, or DNII. DNII is Net Investment Income, or NII, as determined in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, excluding the impact of non-cash compensation expenses. Management believes that presenting DNII and the related per share amount are useful and appropriate supplemental disclosures for analyzing Main Street's financial performance since non-cash compensation expenses do not result in net cash impact to Main Street upon settlement. Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are net asset value, or NAV, and return on equity, or ROE. NAV is defined as total assets minus total liabilities and is reported on a per share basis. Main Street defines ROE as the net increase in net assets resulting from operations divided by the average quarterly total net assets. Please note that 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. Dwayne.

Thanks, Zach. Good morning everyone and thank you for joining us today. We appreciate your participation on this morning's call and we hope that everyone's doing well. On today's call, I will provide my usual updates regarding our performance in the quarter while also providing updates on our asset management activities, our recent dividend declarations, our expectations for dividends going forward, our current investment pipeline, and several other noteworthy updates. Following my comments, David and Jesse will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure and leverage, and our expectations for the third quarter, after which we'll be happy to take your questions. We are very pleased with our performance in the second quarter, which was highlighted by a return on equity of 19.2% and includes new quarterly records for NII per share, DNII per share, and NAV per share for the fourth consecutive quarter. Our strong performance included continued positive results from our lower middle market and private loan investment strategies and significant contributions from our asset management business. These results demonstrate the continued and sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, the unique contributions of our asset management business, and the underlying strength and quality of our portfolio companies. We are also pleased that we continue to maintain an attractive investment pipeline in both our lower middle market and private loan investment strategies. And this attractive investment pipeline, together with our conservative liquidity position and capital structure, provides us a continued favorable outlook for the third quarter. Our DNII in the second quarter exceeded the monthly dividends paid to our shareholders by 66% and the total dividends paid to our shareholders by 24%. This strong performance allowed us to deliver significant value to our shareholders while still conservatively retaining a meaningful portion of our income and growing our NAV per share. These positive results and our favorable outlook for the third quarter resulted in our recommendations to our board of directors for our most recent dividend announcements, which I'll discuss in more detail later. Our NAV per share increased in the quarter due to several factors. including our retention of the excess NII per share above our total dividends paid in the quarter, the impact of fair value increases in our investment portfolio, and the accretive impact of our equity issuances in the quarter. Our lower middle market portfolio companies continued their overall favorable performance, which resulted in another quarter of net fair value appreciation and strong dividend income contributions from our equity investments in this portfolio. As we look forward to the next few quarters, We remain excited about the benefits we expect certain of our low-emitting market portfolio companies to realize from the acquisitions they have completed over the last 12 months, largely funded by follow-on debt investments we made in those portfolio companies, and we expect to see additional fair value appreciation in these portfolio companies in the future. We've also seen an increase in potential exit activities in our low-emitting market portfolio that could lead to favorable realizations over the next few quarters. We were pleased with our investment activity in the second quarter, which included total lower middle market investments of $131 million and investments in three new portfolio companies. These investments were offset by increased repayments we received on several debt investments and the full exit of our investments in two lower middle market portfolio companies. This investment activity resulted in a net decrease in the cost basis of our lower middle market investments of $7 million. We were also pleased with our private loan investment activities in the quarter, which included total investments of $168 million. We also received increased repayments and realized a loss on a private loan investment during the quarter, resulting in a net decrease in the cost basis of our private loan investments of $11 million. We've also continued to produce attractive returns on our asset management business. The funds we managed through our external investment manager continue to experience favorable performance in the second quarter. This positive performance resulted in significant incentive fee income for our asset management business for the third consecutive quarter, and as a result, we received a significantly higher contribution to our net investment income from our asset management business. We remain excited about our plans for these external funds that we manage as we execute our investment strategies and other strategic initiatives, and we are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund. We also remain optimistic about our strategy for growing our asset management business within our internally managed structure and increasing the contributions from this unique benefit to our Main Street stakeholders. As part of this growth strategy, we're happy to update that we've made meaningful progress on our next private loan fund, and we are planning to have our first closing for the fund before the end of the third quarter. We look forward to sharing additional details and updates on the new fund on our next conference call. Based upon our results for the second quarter, combined with our favorable outlook in each of our primary investment strategies and for our asset management business, earlier this week our Board declared a supplemental dividend of 27.5 cents per share, payable in September, representing our largest and eighth consecutive quarterly supplemental dividend. Our Board also declared an increase in our regular monthly dividends for the fourth quarter of 2023 to 23.5 cents per share, payable in each of October, November, and December, representing a 6.8% increase from the fourth quarter of 2022. The increased supplemental dividend for September is a result of our strong performance in the second quarter, which resulted in DNII per share, which exceeded our regular monthly dividends paid during the quarter by 44.5 cents, or 66%. The September 2023 supplemental dividend will result in total supplemental dividends paid during the trailing 12-month period of 77.5 cents per share, representing a 22% increase over the June 2023 supplemental dividend and an additional 29% paid to our shareholders in excess of our regular monthly dividends and significantly increasing the current yield we are paying to our shareholders. Our DNII per share for the second quarter exceeded our total dividends paid by 22 cents per share, or 24%. We are pleased to be able to deliver this significant additional value to our shareholders while also maintaining a significant portion of our excess earnings to support our capital structure and investment portfolio against risks from the current economic uncertainties that may be realized in the future and to further enhance the growth of our NAV per share. We currently expect to recommend that our Board continue to declare future supplemental dividends to the extent DNII significantly exceeds the regular monthly dividends paid in future quarters and we maintain a stable to positive NAV. Based upon our expectations for continued favorable performance in the third quarter, we currently anticipate proposing an additional supplemental dividend payable in the fourth quarter of 2023. Now, turning to our current investment pipeline, as of today, I would characterize our lower middle market investment pipeline as average. Despite the current broad economic uncertainty, we continue to expect to be active in our lower middle market strategy. Consistent with our experience in prior periods of broad economic uncertainty, we believe the unique and flexible financing solutions we can provide to lower middle market companies and their owners and management teams in our differentiated long-term to permanent holding periods should be an even more attractive solution in the current environment and should result in very attractive investment opportunities for us. We are excited about these new investment opportunities. and we expect our current pipeline will be helpful as we work to maintain our positive momentum from the last several quarters. We also continue to be very pleased with the performance of our private credit team and the significant growth they have provided for our private loan portfolio and our asset management business. And as of today, I would also characterize our private loan investment pipeline as average. With that, I will turn the call over to David.