Main Street Capital (MAIN) Q4 2022 Earnings Call Transcript

Motley Fool Transcribing

February 24, 2023, 3:00PM

Prices as of February 24, 2023 at 3:09 p.m. ET

Source: The Motley Fool.

Welcome to the Main Street Capital Corporation fourth quarter earnings conference call. [Operator instructions] This conference is being recorded, just to remind you. It is my pleasure to present your host, Zach Vaughan from Dennard Lascar Investor Relations. Thank you, sir.

Operator, thank you. Good morning to everyone. We are grateful that you joined us for Main Street Capital Corporation's fourth quarter 2022 earnings conference call. Nick Meserve (managing director and head for the private credit investment group) will also be participating in the Q&A section of the call. Yesterday afternoon, Main Street released a press release that detailed the company's fourth quarter and full-year financial results and operating results. The investor relations section on Main Street Capital's website, mainstcapital.com, has the document. It can be worth listening to a stock tip. The market has been tripled by. *

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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, February 24th, 2023, and therefore, you were advised the 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 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 CEO, Dwayne Hyzak. 
Dwayne Hyzak

Chief Executive Officer

Thank you, 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 while also providing a few updates on our performance for the full year. I'll also provide updates on our asset management activities, our recent declarations of another supplemental dividend payable in March and our regular monthly dividends for the second quarter of 2023, 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 first quarter of 2023, after which we will be happy to take your questions. We're very pleased with our fourth-quarter results, which closed a record year for Main Street across several key performance indicators with significant positive momentum for 2023.

Our results include new quarterly records for net investment income, or NII, per share and distributable net investment income, or DNII, per share, significantly exceeding our records achieved in the third quarter and representing the sixth consecutive quarter in which we set our matched or NII per share record. This consistent, strong performance demonstrates the continued and sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies, and the underlying quality of our portfolio companies. We're also pleased that the positive results included strong contributions from both our lower middle market and private loan investment strategies and our asset management business, providing us confidence about the recurring nature of these positive results in the future. As a result of our strong performance, our quarterly DNII per share exceeded $1 per share for the first time, and we generated an annualized net income return on equity of over 20%.

We're also pleased with the strong results for the full year, which also included record NII per share and DNII per share, and allowed us to end the year at a record net asset value per share. After these record-breaking results and some meaningful capital markets activities, we entered the new year with a strong liquidity position and a conservative leverage profile. We remain very 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 over the long-term future. These positive results and our favorable outlook for the first quarter resulted in our recommendation to our board of directors for our most recent dividend announcements, which I will discuss in more detail later.

Our net asset value per share increased in the quarter due to the impact of the fair value increases and several components of our investment portfolio and the positive impact of our equity issuances in the quarter. Our lower middle market portfolio companies continued their strong performance overall, which resulted in another quarter of meaningful fair value appreciation in the equity investments in this portfolio. We are excited about the new and follow-on investments we made in our lower middle market portfolio companies during the quarter. We expect that these follow-on investments will drive additional fair value appreciation in these portfolio companies in future quarters.

We also benefited from meaningful fair value appreciation in our private loan portfolio and in the value of our wholly owned registered investment advisor through a combination of portfolio of company-specific and broader market-based drivers. We also continue to have favorable investment activities in the fourth quarter. Our lower middle market investments of $152 million in the quarter resulted in a net increase in lower middle market investments after repayments of $127 million. This capped off another strong year of activity with total lower middle market investments of $373 million for the year, resulting in a net increase of $264 million.

Our private loan investment activities in the quarter include new investments of $86 million, which, after aggregate repayments, resulted in a net decrease in our private loan investments of $26 million. For the year, we completed $713 million of new investments, resulting in a net increase in our private loan portfolio of $335 million. Given our favorable liquidity position after our recent capital markets activities, which Jesse will address in his comments, which we achieved despite a very challenging capital markets environment, we are 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 advise through our external investment manager, including MSC Income Fund, a non-traded BDC, and MS Private Loan Fund I, a private credit fund, continued to experience favorable performance in the fourth quarter. This positive performance resulted in significant incentive fee income for our asset management business. And as a result, we received significantly higher dividends from our asset management business. We remain excited about our plans for these funds as we execute on 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 are also 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. And we look forward to sharing additional details as we execute our plans for this business in 2023 and work to create additional value for the next few years. Based upon our results for the fourth quarter, combined with our favorable outlook in each segment of our business and the benefits of our efficient operating structure, earlier this week, our board declared a supplemental dividend of $0.175 per share payable in March, representing our largest and sixth consecutive quarterly supplemental dividend.

Our board also declared regular monthly dividends for the second quarter of 2023 at $0.225 per share, payable in each of April, May, and June, representing a 4.7% increase from the second quarter of 2022. The increased supplemental dividend for March is a result of our strong performance in the fourth quarter, which resulted in DNII per share that was $0.37, or 56%, greater than our monthly dividends paid during the quarter. The March 2023 supplemental dividend will result in total supplemental dividends paid during the trailing 12-month period of $0.45 per share, representing an additional 17% paid to our shareholders in excess of our regular monthly dividends. Including the supplemental dividends, our DNII per share for the fourth quarter exceeded our total dividends paid by $0.20 per share.

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 2023 and to further enhance the growth of our NAV per share. As we've previously mentioned, we currently expect to recommend that our board declare future supplemental dividends to the extent DNII significantly exceed our regular monthly dividends paid in future quarters and we maintain a stable to positive net asset value. Based upon our expectations for continued favorable performance in the first quarter, we currently anticipate proposing an additional supplemental dividend payable in June 2023. Now turning to our current investment pipeline.

As of today, and after our robust activity for the fourth quarter, I would characterize our lower middle market investment pipeline as below average. While the near-term pipeline is currently below average, we remain highly confident in our ability to generate significant new lower middle market investment opportunities in 2023. 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 characterize our private loan investment pipeline as average.

With that, I will turn the call over to David.
David Magdol

President and Chief Investment Officer

Thanks, Dwayne. And good morning, everyone. [Inaudible] provides a good opportunity to look back at our history and highlight the benefits of our unique and diversified investment strategy and discuss how this is enabled us to deliver attractive returns to our shareholders over an extended period of time. We believe, looking back at our history, also supports our intent to continue to execute our unique and highly differentiated strategy in the future.

Since our IPO in 2007, we have increased our monthly dividends per share by 105%, and we have declared cumulative total dividends to our shareholders of $36.65 per share, or over 2.4 times our IPO price of $15 per share. Our total return to shareholders since our IPO calculated using our stock price as of yesterday's close and assuming reinvestment of all dividends received since our IPO was 8.6 times money invested. This compares very favorably to 2.5 times money invested for the S&P 500 over the same period of time and is significantly higher when compared to our BDC peers. As we've previously discussed, we believe that the primary drivers of our long-term success have been and will continue to be our focus on making both debt and equity investments in the underserved lower middle market, supporting our private credit activities for the benefit of our balance sheet and for the clients of our asset management business, which clearly benefits our shareholders and our industry-leading cost structure, which provides for a strong alignment of interests between our management team and shareholders through our team's meaningful stock ownership and incentive compensation plan, which is tied to our ability to achieve superior financial results for our shareholders.

Most notably and uniquely, our lower middle market strategy provides attractive leverage points and yields on our first-lien debt investments while also creating a true partnership with the management teams of our portfolio companies through our flexible equity ownership structures. This approach provides significant downside protection through our first-lien debt investments while still providing the benefits of alignment and significant upside potential with our equity investments made alongside our portfolio company management team partners. Our long-term historical track record of investing in a lower middle market, coupled with our view that this market continues to be underserved, gives us confidence that we will be able to continue to find attractive new investment opportunities in this important cornerstone of our business in the future. In 2022, Main Street invested $373 million in our lower middle market strategy.

$137 million of this capital was deployed in five new lower middle market platfo