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 2022 earnings conference call. Joining me today with prepared comments are Dwayne Hijak, Chief Executive Officer, David Magdahl, President and Chief Investment Officer, Jesse Morris, Chief Financial Officer and Chief Operating Officer. Also participating for the Q&A portion of the call is Nick Meserve, 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 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 10th. 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 3, 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. 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 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 a 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 also 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. Now I'll turn the call over to MainStreet's CEO, Dwayne Eshock. Thanks, Zach.

Good morning, everyone, and thank you for joining us today. We appreciate your participation on this morning's call. We hope that everyone's doing well. On today's call, I'll provide my usual updates regarding our performance in the quarter. We're 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 fourth quarter, after which we'll be happy to take your questions. We are pleased with our performance in the third quarter. which was highlighted by an annualized return on equity of 17.9% for the quarter, which increased our return on equity for the trailing 12-month period to 18.2%. Our performance included continued strength in the underlying performance of the majority of our lower middle market and private loan portfolio companies and significant contributions from our asset management business. We believe these results demonstrate the continued and sustainable strength of our overall platform the strong current investment income generating capabilities of our existing investment portfolio, and the unique benefits provided by the equity investments in our lower middle market investment portfolio and by our asset management business, both of which also contributed meaningful fair value appreciation in the quarter. We are also pleased that our investment pipeline and our lower middle market investment strategy has improved, and we expect higher levels of new lower middle market investment activity over the next few months. This improved investment pipeline together with our conservative liquidity position and capital structure, which we significantly enhanced during the quarter, provide us a continued favorable outlook for the fourth quarter. Our DNII in the third quarter exceeded the monthly dividends paid to our shareholders by 51% and the total dividends paid to our shareholders by 8%, allowing us to continue to deliver the benefits of our strong results to our shareholders. These positive results and our favorable outlook for the fourth quarter resulted in our recommendations to our Board of Directors for our most recent dividend announcements, which I'll discuss in detail later. Our NAV per share increased in the quarter due to several factors, including the impact of the fair value increases in our investment portfolio, the accretive impact of our equity issuances in the quarter, and our retention of the excess NII per share above our total dividends paid in the quarter. The continued favorable performance of the majority of our lower middle market portfolio companies 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 our expectations for our lower middle market portfolio companies, and we expect to see additional fair value appreciation in this portfolio in the future. We are also excited to have several portfolio companies in the advanced stages of strategic acquisitions, which if successful, would provide the opportunity for additional fair value appreciation in addition to providing us highly attractive incremental investments in these high performing companies. We've also seen continued progress with the increased potential exit activities for several of our lower middle market portfolio companies that we noted last quarter. And we believe that these activities could lead to favorable realizations over the next few quarters. Our lower middle market investment activity in the third quarter was well below our expectations and goals and was limited to total investments of $20 million in existing portfolio companies. These investments, after repayments we received on several debt investments and return of invested equity capital, resulted in a net decrease in the cost basis of our lower middle market investments of $5 million. As I previously noted, we expect to have investment activity in our lower middle market strategy over the next few months that is more in line with our normal activities and expectations. We were pleased with our private loan investment activities in the quarter, which included total investments of $135 million and investments in two new portfolio companies. After debt repayments, sales of certain investments, and a realized loss on a private loan investment during the quarter, our investment activity resulted in a net increase in the cost basis of our private loan investments of $54 million. We've also continued to produce attractive results in our asset management business. The funds we advise through our external investment manager continue to experience favorable performance in the third quarter, resulting in significant incentive fee income for our asset management business for the fourth consecutive quarter and a significant contribution to our net investment income. 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 for 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 significant progress on our second private loan fund and had our initial closing of equity commitments in September. We look forward to the continued growth of this new fund over the next few quarters. Based upon our results for the third 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 December, representing our ninth consecutive quarterly supplemental dividend. Our board also declared another increase to our regular monthly dividends for the first quarter of 2024 to 24 cents per share payable in each of January, February, and March. representing a 6.7% increase from the first quarter of 2023 and representing our fifth increase to our monthly dividends in the last six quarters. The supplemental dividend for December is a result of our strong performance in the third quarter, which resulted in DNII per share, which exceeded our regular monthly dividends paid during the quarter by 35 cents, or 51%. The December supplemental dividend will result in total supplemental dividends paid during the 12-month period of $0.95 per share, representing an additional 35% paid to our shareholders in excess of our regular monthly dividends and resulting in a current yield we are providing to our shareholders of approximately 10%. After the multiple recent increases to our monthly dividend and the significant supplemental dividend, our DNII per share for the third quarter still exceeded our total dividends paid by $0.75 per share, or 8%. We are pleased to be able to deliver this significant additional value to our shareholders while still conservatively maintaining a portion of our excess earnings to support our capital structure and investment portfolio against the risks that exist from the current economic uncertainties 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 fourth quarter, we currently anticipate proposing an additional supplemental dividend payable in the first quarter of 2024. 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 expect to continue 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 and 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. 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 recent quarters in the future. 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.