Main Street Capital Corporation

Greetings, and welcome to the Main Street Capital 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. Should anyone 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 Vaughan. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's third 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 Ryan Nelson, Chief Financial Officer. Also participating in 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 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 15th. 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 8, 2024, and therefore, your revised and 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 impairment 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. 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 CEO, Dwayne Ejok.

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 update 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 recent investment activities and current investment pipeline, and several other noteworthy updates. Following my comments, David and Ryan 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're pleased with our performance in the third quarter, which resulted in an annualized return on equity of 18.8%, DNII per share that continued to exceed the dividends paid to our shareholders, and a new record for NAV per share for the ninth 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 further enhanced our strong capital structure and liquidity position during the quarter, which Ryan will discuss in more detail. And we continue to maintain very strong liquidity and a conservative leverage profile, which we believe is important in the current economic environment. We maintain attractive investment pipelines in both our lower middle market and private loan investment strategies, and we remain excited about the opportunities in our lower middle market and private loan investment portfolios and in our asset management business, each of which has us well positioned for the future and provide us a continued favorable outlook for the fourth quarter. We remain confident that these strategies, together with our cost-efficient operating structure, will allow us to continue to deliver superior results for our shareholders in the future. Our positive results for the third quarter, combined with 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 more detail later. Our NAB per share increase in the quarter, primarily due to the impact of net fair value increases in our investment portfolio and our asset management business, and the accretive impact of our equity issuances, which Ryan will discuss in more detail. The continued favorable performance of the majority of our lower-minimum market portfolio companies resulted in another quarter of strong dividend income contributions and significant net fair value appreciation in the equity investments in our lower-minimum market portfolio. We are also excited to have several portfolio companies in the advanced stages of completing strategic acquisitions, which, if successful, will provide the opportunity for additional future fair value appreciation in addition to providing us highly attractive incremental debt investments in these high-performing portfolio companies. We also continue to see increased interest from potential buyers in several of our lower middle market portfolio companies that could lead to favorable realizations over the next few quarters, and which we believe further highlights the strength and quality of our portfolio companies. Our lower middle market investment activity in the third quarter included total investments of $52 million, which after repayments and other investment activity, resulted in a net increase in lower middle market investments of $2 million. Although this investment activity was lower than our expectations for the quarter, we're pleased to have completed two new lower middle market platform company investments shortly after quarter end, which David will cover in more detail. And we expect to have additional lower middle market investment activity before year end. We're very pleased with our private loan investment activity in the quarter. This activity included total private loan investments of $309 million, which after repayments and other investment activity resulted in a net increase in our private loan investments of $163 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 third quarter, resulting in significant incentive fee income for our asset management business for the eighth consecutive quarter, and together with our recurring base management fees, a significant contribution to our net investment income. We also benefited from significant fair value appreciation from the value of our external investment manager due to a combination of the continued increased fee income, growth in assets under management, and broader market-based drivers. We remain excited about our plans for the external funds that we manage as we execute our investment strategies and other strategic initiatives. We are optimistic about the future performance of the funds and the attractive returns we are providing to the investors of each fund and about our strategy of growing our asset management business within our internally managed structure. As part of these efforts, we are very pleased with our progress in exploring a potential listing of the shares of MSC Income Fund. a non-listed BDC advised by our external investment manager. As detailed in MSC Income Fund's recent definitive proxy statement, upon the approval of the fund's shareholders and effective upon a listing of the fund's shares, the fund would transition its investment strategy to be solely focused on its private loan investment strategy, accompanied by an amendment to its investment advisory agreement to, among other things, align its fee structure with the go-forward investment strategy. The fund plans to hold a special meeting of its shareholders in early December to consider and vote on the proposals set forth in the fund's definitive proxy statement, each of which is intended to position the fund to listed shares. We are very excited about these potential activities and changes, which we believe represent significant catalysts to the future growth of the fund and the opportunity for significant future benefits to both the fund's shareholders and our asset management business. 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 $0.30 per share payable in December, representing our 13th consecutive quarterly supplemental dividend and an increase to our regular monthly dividends for the fourth quarter of 2025 to $0.25 per share. The first quarter regular monthly dividends are payable in each of January, February, and March, and represent a 4% increase from the regular monthly dividends paid in the first quarter of 2024. The supplemental dividend for December is a result of our strong performance in the third quarter and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share, representing an additional 41% paid to our shareholders in excess of our regular monthly dividends and total dividends for the trailing 12 months of over $4 per share and the current total yield we are providing to our shareholders of approximately 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 NAB. Based upon our expectations for continued favorable performance in the fourth quarter, we currently anticipate proposing an additional supplemental dividend table in March 2025. Now, turning to our current investment pipeline, as of today, I would characterize our lower-minimum market investment pipeline as above average. We believe that the unique and flexible financial solutions that we can provide to lower-minimum 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-minimum market companies and we are confident in our expectations for favorable 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 would characterize our private loan investment pipeline as average. With that, I will turn the call over to David.