Main Street Capital Corp (MAIN) (Q1 2024) Earnings Call Transcript Highlights: Record-High ...

• Return on Equity (ROE): Annualized at 17.2% for the quarter, with a trailing 12-month ROE of 19.3%.

• Net Asset Value (NAV) per Share: Increased, setting a new record for the quarter.

• Net Investment Income (NII) per Share: Exceeded dividends paid, contributing to strong dividend coverage.

• Distributable Net Investment Income (DNI) per Share: Exceeded monthly dividends by 54% and total dividends by 9%.

• Total Investment Portfolio: Grew by approximately 6% on a cost basis.

• Dividend Declarations: Increased total dividends paid by 20% compared to the same period last year; supplemental dividend of $0.30 per share declared for June.

• Investment Activity: Lower middle market investments totaled $92 million, private loan investments totaled $155 million.

• Total Investment Income: $131.6 million, up 9.4% year-over-year.

• Operating Expenses: Increased by $2.5 million from the previous year.

• Liquidity and Capital Structure: Strong liquidity with over $900 million available; conservative leverage profile maintained.

• Warning! GuruFocus has detected 7 Warning Sign with MAIN.

Release Date: May 10, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Main Street Capital Corp reported a strong first quarter with an annualized return on equity of 17.2% and a 19.3% return on equity for the trailing 12 months.

• Net investment income (NII), distributable net investment income (DNI), and net asset value (NAV) per share all reached new record highs, significantly exceeding dividends paid to shareholders.

• The company declared a 20% increase in total dividends paid to shareholders compared to the same period last year, demonstrating strong dividend coverage and financial health.

• Main Street Capital Corp experienced growth in both lower middle market and private loan investment portfolios, with total investment portfolio growing by approximately 6% on a cost basis.

• The asset management business continued to perform well, contributing significantly to net investment income through incentive fee income and base management fees.

Negative Points

• There was a slight decrease in dividend income from portfolio companies compared to previous quarters, potentially indicating some variability in portfolio company performance.

• The private loan portfolio experienced some net fair value depreciation, driven by specific portfolio company underperformance.

• Main Street Capital Corp recognized net realized losses in the private loan, middle market, and other portfolios totaling $12.8 million for the quarter.

• Investments on nonaccrual status, although a small percentage of the total portfolio, still pose a risk of potential losses.

• The company noted an increase in operating expenses, primarily driven by higher interest and compensation-related expenses.

Q & A Highlights

Q: Can you discuss the use of more debt to fund growth in 2024 and how it relates to your regulatory leverage targets? A: (Dwayne Hyzak - CEO) We've maintained leverage well below our targets, partly due to uncertainty in the markets. We plan to move towards our long-term targets of 0.8 to 0.9 times leverage over the next 12 to 24 months. We aim to be conservative, focusing on strong investment strategies rather than excessive leverage.

Q: What is driving the nonrecurring or less recurring income, particularly on the fee side? A: (Dwayne Hyzak - CEO) The nonrecurring income in Q1 was primarily from two repayments that had benefits upon prepayment, contributing to additional fee income. This fluctuates based on investment repayment activities across our broad portfolio.

Q: Could you provide an update on the second private loan fund's activity and targets? A: (Dwayne Hyzak - CEO) The fund has about $80 million in LP commitments, targeting around $150 million, potentially up to $300 million. The fundraising period is set for 18 months, starting from September last year.

Q: Are there any industry sectors that are currently underperforming or that you are avoiding? A: (Dwayne Hyzak - CEO) We continue to avoid companies focused on the lower end of the consumer market, as they have been underperforming. Our portfolio generally sees more companies overperforming, especially those in industrial or B2B sectors.

Q: What are the yield dynamics within the three portfolios mentioned in the press release? A: (Dwayne Hyzak - CEO and Nicholas Meserve - Managing Director) In the lower middle market, any yield reduction is due to existing portfolio companies performing well and moving down interest rate pricing grids. In private credit, spreads are back to 2021-2022 levels after widening last year, with a focus on competitive spreads rather than increased leverage or deal terms.

Q: Can you comment on the current level of nonaccruals and spillover income? A: (Dwayne Hyzak - CEO and Jesse Morris - CFO) Nonaccruals decreased slightly due to one company moving off nonaccrual after a realized loss and a small new addition. Spillover income is just under $80 million, approximately $1 per share.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.