Main Street Capital Corporation

Greetings, and welcome to the Main Street Capital second quarter earnings conference call. At this time, all participants are in a listen-only mode. A 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. Thank you, Zach. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's second quarter 2024 earnings conference call. Joining me today with prepared comments are Dwayne 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 in 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 16th. 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 9, 2024, 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 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 the 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 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. MainStreet 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 MainStreet CEO, Dwayne Heshock. Thanks, Zach.

Good morning, everyone, and thank you for joining us. 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 recent investment activities and 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 of 2024, after which we'll be happy to take your questions. We are pleased with our second quarter results, which were highlighted by an annualized return on equity of 16.1%, DNII per share that continued to exceed the dividends paid to our shareholders, and a new record for NAV per share for the eighth consecutive quarter. We believe that these continued strong results demonstrate the 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 continued underlying strength and quality of our portfolio companies. We are also pleased that we generated significant growth in both our role in the market and private loan investment portfolios and ended the quarter with attractive investment pipelines in both investment strategies, which we expect will be beneficial in the future. We remain encouraged by the continued favorable performance of our diversified lower middle market and private loan investment strategies and remain confident that these strategies, together with the benefits of our asset management business and our cost efficient operating structure, will allow us to continue to deliver superior results for our shareholders in the future. Additionally, with the continued support of our long-term lender relationships, as evidenced by our recent extension and expansion of our corporate facility, and the benefits of our second investment-grade debt offering of the year in June, we continue to maintain strong liquidity and a conservative leverage profile, which we believe is important in the current economic environment, and we remain excited about the current opportunities in both our low-limit market and private loan investment strategies. These positive results for the second quarter, combined with 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 primarily due to the impact of net fair value increases in our investment portfolio and the accretive impact of our equity issuances, which Jesse will discuss in more detail. The continued favorable performance of the majority of our lower middle market portfolio companies resulted in strong dividend income contributions and another quarter of significant net fair value appreciation in the equity investments in the lower middle market portfolio. We are also excited about the follow-on investments we made to finance strategic acquisitions by two of our high-performing lower middle market portfolio companies, each of which were funded by follow-on debt investments by Main Street for a total of over $36 million of incremental debt investments in these portfolio companies. We expect that these follow-on investments will help drive additional fair value appreciation in these portfolio companies in future quarters, in addition to the highly attractive interest income provided by these incremental debt investments. In the second quarter, we were also pleased to have recognized a meaningful realized gain upon the combination of one of our lower-minimum market portfolio companies with a strategic acquirer, which resulted in the full exit of our debt investments and a partial exit of our equity investment in the company, while retaining an equity investment in the combined company and the related future upside from the strategic combination. We are excited that we continue to see increased interest from potential buyers in several of our lower-minimum market portfolio companies, that could lead to favorable realizations over the next few quarters, and which we believe highlights the strength and quality of our portfolio companies. We were very pleased with our investment activity in the second quarter. This activity included total low-eminent market investments of $155 million, including new investments totaling $88 million, resulting in a net increase in our low-eminent market investments of $69 million after repayments and other investment activity. Our private loan investment activities in the quarter included new investments of $324 million, which after repayments and other investment activity resulted in a net increase in our private loan investments of $225 million. Given our conservative capital structure and strong liquidity position, we remain very well positioned to continue the growth of our investment portfolio over the next few quarters. We've also continued to produce positive results in our asset management business, The funds we advised through our external investment manager continue to experience favorable performance in the second quarter, resulting in significant incentive fee income for our asset management business for the seventh consecutive quarter, and together with our recurring base management fees, a significant contribution to our net investment income. We remain excited about our plans for the 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 remain optimistic about our strategy for growing our asset management business within our internally managed structure and are actively working to increase the contributions from this unique benefit to our Main Street stakeholders. As a result of these continued efforts, a few weeks ago, MSC Income Fund, a non-listed BDC that is advised by our external investment manager, filed a preliminary proxy statement that contains certain proposals intended to position the fund to listed shares on a national securities exchange. The preliminary proxy statement also details additional activities and changes at MSC Income Fund, including a transition of the fund's investment strategy to be solely focused on its private loan investment strategy and a potential amendment to the investment advisory agreement between the external investment advisor and the fund, both of which would become effective upon a listing of the fund's shares. We're very excited about these potential changes at MSC Income Fund, which we believe represents significant catalyst to the future growth of the fund and the opportunity for significant future benefits to both the MSC Income Fund shareholders and our asset management business. 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 30 cents per share, payable in September, representing our 12th consecutive quarterly supplemental dividend to go with the eight increases to our regular monthly dividends since the fourth quarter of 2021. Our board also declared regular monthly dividends for the fourth quarter of 2024 of 24.5 cents per share payable in each of October, November, and December, representing a 4% increase from the regular monthly dividends paid in the fourth quarter of 2023. The supplemental dividend for September is a result of our strong performance in the second quarter and will result in total supplemental dividends paid during the trailing 12-month period of $1.175 per share, representing an additional 41% paid to our shareholders in excess of our regular monthly dividends and total dividends for the trailing 12-month period of over $4 per share and a current total yield we are providing to our shareholders of over 8%. We currently expect to recommend that our board continue to declare future supplemental dividends to the extent DNII significantly exceeds our regular monthly dividends paid in future quarters, and we maintain a stable to positive NAV. Based upon our expectations for the continued favorable performance in the third quarter, we currently anticipate proposing an additional supplemental dividend payable in December 2024. Now turning to our current investment pipeline, As of today, I characterize our lower-middle-market investment pipeline as well above average. We believe that the unique and flexible financing solutions that we can provide to lower-middle-market companies and their owners and management teams in our differentiated long-term to permanent holding periods represent an attractive solution to the needs of many lower-middle-market companies, and we are confident in our expectations for strong new lower-middle-market investment activity over the next few months. We also continue to be very pleased with the performance of our private credit team and the significant growth that they have provided for our private loan portfolio and our asset management business. And as of today, I'd characterize our private loan investment pipeline as average. My last update relates to our activities to expand and improve our finance, accounting, and treasury functions to match the growth and best in class performance of our investment teams, investment portfolio, and asset management business. As part of these activities, Yesterday, we announced several promotions and changes in these areas, including a change in Main Street's CFO position. We are excited about these changes and what they mean for our company and for these specific individuals in the future. In conjunction with these changes, personally and on behalf of our executive management team and our board of directors, I want to thank Jesse for his significant contributions over the last few years as our CFO while also serving as our chief operating officer and managing a lower middle market investment portfolio. We are very excited to have his focus back solely on our investment and operations activities, where we know that he will continue to add significant value to our firm, and we appreciate his significant contributions over the last few years as our CFO. With that, I will turn the call over to David.