Q4 2019 Earnings Call
For standing by welcome to the Harvest Capital Credit Corporation, Q4, 2019 earnings Conference call.
Fine all participants for either listen only mode I forget speakers presentation verbal would be a question remains first question to ask a question. During the session you will need to press star one on your telephone. Please be advised the could these conference is being recorded if you require any further or.
Since we first bars zero I would've liked we had a conference over to your host Mr. William Alvarez Chief Financial officers. Thank you. Please go head. Okay. Thank you operator, good morning, everyone and thank you for participating in this conference call to discuss our financial results.
Fiscal year in quarter ended December 31st 2019.
I'm joined today by our Chairman and Chief Executive Officer Girls, who gilson and by Richard Buckanavage, Our President before we start I'll provide a disclaimer regarding any forward looking statements that we make during this presentation.
This presentation contains forward looking statements, which relate to future events or harbor skeptic credits future performance or financial condition.
These statements are not guarantees of future performance condition results and involve a number of risks and uncertainties actual results may differ materially from those in a forward looking statements as a result of a number of factors, including those described from time to time in our filings with the Securities Exchange Commission.
Harvest capital credit undertakes no duty to update any forward looking statements made herein now I'll turn the call over to Joe.
Thanks, Bill we continue to make progress towards achieving or 2020 goals of leveraging our existing capital to grow to roughly a 150 million dollar investment portfolio as well as returning 10.2 million of non accrual loans to interest earning status.
We currently have nearly 15 million of mandates that we expect could close in the next few months.
We also continue to work hard on resolving these problem assets and they have shown underlying improvements in the past few quarters I'll have build go through some of the financial results from the quarter in fiscal year, and then ritual give some color on the current lending environment before I'd make some concluding remarks, Bill hey, Thanks Joel.
Net investment income for the quarter was 1.2 million or 19 cents per share compared to 1.6 million or 25 cents per share in the fourth quarter of 2018.
Net investment income decreased by <unk> point 4 million in 2019 as compared to 2018 as result of a decrease in investment income <unk> point Sevenmillion as a result of a lower income between periods.
I said by a decrease of point Threemillion expenses into 2019 period as compared to 2018.
Net loss for the quarter was point threemillion or five cents per share compared to net income of 1.5 million or 24 cents per share in the fourth quarter of 2018.
The decrease in net income principally resulted from the company recording lower investment income as a result to be lower weighted average effective yield lower prepayment and other nonrecurring fees. In addition of CP Holdings company to nonaccrual status during 2019, and an increase in realized losses offset by an increase in unrealized.
Appreciation and lower operating expenses.
Reflecting on the year ended December 31st 2019.
Net investment income was 3.8 million or 63 cents per share compared to 6 million or 93 cents per share for the year ended December 31st 2018.
The $2.2 million decrease in the 2019 fiscal year as compared to 2018, primarily related to the company recording $3.5 million of lower investment income as a result of a lower income earning portfolio throughout the year compared to 2018 and lower effective yield offset by lower operating expense.
As a 1.4 million for the year ended December 31st 2019.
Net loss for the year ended December 30, Onest 2019 was 1.2 million or 20 cents per share compared to net income of 5.1 million were 79 cents per share.
The year ended December 31st 2018.
$6.3 million decrease was primarily attributable to a $3.5 million decrease in investment income a $1.9 million increase in realized losses, and a $2.3 million increase in the change in unrealized depreciation partially offset by a decrease in expenses net of reimbursements of $1.4 million.
We recognize fee amortization income up 148003 months ended December 31st 2019 compared to $305000 in the comparable 2018 quarter.
The higher fee amortization in 2018, resulting from the company exiting $18.6 million of debt investments in the fourth quarter of 2018.
Our fees our deferred until they are either earned amortized into income over the life of the investment using effective yield method or fully recognize when investment pay off occurs.
As a result.
Our fees and other income will fluctuate quarter to quarter, depending on portfolio activity.
As of December 31st 2019, the fair value of our portfolio was was 116.8 million for the cost bases 123.4 million, reflecting $6.6 million of net unrealized depreciation in the portfolio at the end of the year.
As of December 31st 2019, we had a debt balance of 72.5 mean, consisting of $43.7 million of bank debt and $28.8 million in 2022 notes for debt to equity ratio of approximately on an 8% compared to approximately 58% at December 30, Onest 2018.
At year end, we had $21.8 million of cash in a practice approximately $1.2 million of Undrawn capacity on our 55 million dollar credit facility.
As of yearend, our net asset value was 11023 cents per share down a dollar and seven cents per share from December 31st 2018, principally as a result of paying 98 cents for Sharon distributions for the year ended December 31st 2019.
Realizing a 20 cent decrease in net assets from our 2019 operations offset by 11 cents of accretion due to shares repurchased during 2019.
I want to <unk> during the call over to reach for some further discussion on the investment environment.
Thanks Bill.
The current state of the market, which we can be continues to be competitive. Although this is not the sole factor in our lower than anticipated deployment in Q4 or year to date 2020.
Deal flow remains robust and the quality of the opportunities. We're currently evaluating as hot much of the factors contributing to the slower than expected deployment activity relate to unusually high number of delays and transaction closing timetables and a few cases deals being terminated and diligence.
All of which are outside our control what prudent responses to diligence issues.
As was the case and the most recent quarters, our ability to utilize a higher level leverage that's but harvest in a position to pursue a broader array of transactions, most notably our ability to be competitive on unitranche financings, which continue to represent a greater percentage of our current mandates and the pipeline in general.
The upside to pursuing Unitranche financings. In addition to the collateral priority benefits, we enjoy from Unitranche financings is that the average hold size tends to be larger as compared to standalone mezzanine investments, enabling us to achieve our overall deployment objectives with a fewer number of closed transactions.
We continued to be encouraged by our ability to identify attractive new investment opportunities, although our deployment activity in Q4 was largely portfolio related.
In the aggregate, we closed approximately $4.5 million and debt commitments across five portfolio companies, bringing our portfolio to 20 bought investments.
Subsequent to quarter ends we increased our senior term loan Slappey communications by approximately 1.1 million in order to finance an add on acquisition for this portfolio company.
As well as it they make a small equity investment totaling $200000, representing our pro rata share of an equity raise associated with an add on acquisition for King engineering.
As we look forward to the remainder of Q1 2020 in early Q2, we remain optimistic regarding our current pipeline currently have threed NAND data transactions totaling approximately 14.8 million and investment commitments, approximately 14.1 million and fundings that close.
All of these transactions represent new investments, which will bring our total portfolio to 28.
And all three are unitranche investments with yields similar to yields were previously closed unitranche investments.
Many of these financings are expected to close by quarter end, but because of the late in the quarter. These mandates are not likely to contribute meaningfully to this quarter's income, but we'll provide solid earnings momentum for Q2 and beyond.
With that I'd like to turn the call back over to Joe for some final thoughts.
Thanks, Rich we continue to believe that if we execute on our current plan to increase our investment portfolio to roughly 1.3 to one leverage ratio.
Net investment income will cover our current dividend level with potential upside from the redeployment of 22 million of non interest, earning assets, which includes 12 million of equity investments at fair value.
Back into interest, earning investments over time.
I also believe that are stock as a compelling value with current price levels and we would anticipate a favorable reaction if were successful in the next few quarters that achieving or plan.
Our advisor and its employees are well aligned with shareholders given its ownership of roughly one third of the shares outstanding.
In closing I wanted to also congratulate Richard Buckanavage, who was elected president of the company recently and there's let our investment efforts since inception I also want to thank our employees and board members for the continued efforts to make harvest capital credit a success and our shareholders for their continued support with that operator.
We take any questions if anyone has a thank you.
Just a reminder, participants if he would like to ask the question. Please press Star then the number one on your telephone keypad again, if he would like to ask a question. Please press Star then the number one on your telephone.
That your first question comes from the line ever Ryan Lynch, but can you be W. Let me ask your question.
Hey, good morning, Thanks for taking my questions.
First just a quick one housekeeping one on on the income statement.
During during the last time during 2019, you guys had professional fees or expenses of about a $1.1 million, but over the last couple of quarters. The third quarter on a fourth quarter, there like 200000 and in the fourth quarter there around 100000.
I'm just curious you have any guidance on why do we should expect from from a full year 2020 from our professional fees standpoint.
Yes, Brian Thanks for the question.
You know, we basically have reduced our professional fees.
Substantially over a 2019, we changed our orders.
Aligned line ourselves with a firm that's a little more sensitive to our needs and best aligned to talk to our business. So so going forward you know the the level of fees.
2020 should should kind of match that what we've incurred in 2019.
Okay.
Right and the other thing just to remember is there some seasonality to those fees based on the annual audit and all that we can accrue that evenly through the years. So the first quarter every year, there's a lot higher.
Fees, then maybe by the time to get to the second half of the year, just just or remind you.
Gotcha Okay.
And then.
You know as you were talking about in your prepared comments and I think in a press release, you talked about wanting to get to around 150 million dollar investment portfolio.
In 2020 can you just speak about that that's sort of goal of growing to portfolio pretty substantially how does that play out in an economic environment, you know where economic activity seems to be grinding to a hard you think it is still prudent to be you know meaningfully deploying capital on growing your portfolio.
Ill.
In this uncertain environment.
I'm sure Rich asked some comments on that but.
That's why just we'd that's what we do.
Typically two or three months of due diligence on all these investments and a lot of them haven't come through based on due diligence is.
But.
Yeah, we think that if you just go back to.
The environment.
I don't know now, it's I guess 810 years ago.
In hindsight, the best time to put capital out in our part of the market was you know and fear and uncertainty caused a lot of these overly aggressive or <unk> providers of.
Okay.
Interest.
Paying investments to sleep and so I would expect that over that if the markets discounting a recession or downturn or slow down whatever it is.
We will have opportunities to potentially put out our capital at higher levels in terms of returns than we've had in recent history, but rich wondering why don't you maybe add some color to that.
Sure No. It's good question and.
Prior to all of what we're experiencing currently we've already begun to do.
More scrutinized potential new investments and I think as I alluded to in my prepared remarks, we have intact, we've walked away from several transactions.
In Q4 in early 2020, where no issues came up and diligence. So we're not jeopardizing underwriting standards to grow the balance sheets back if anything we're probably going to grow a less quickly than we otherwise would have given given the current environment, but we've already been adjusting our our internal models with rubber.
<unk> economic growth.
A couple of quarters ago, and so we've already been and we'll continue to factor. These current.
Yeah. This current situation into our underwriting process as well and that might mean that we are we walk away from other transactions, but we're keenly focused on investments that do not exhibit a.
A strong correlation to the overall economy or no. Our counter cyclical those are the types investments that we are a that we're pursuing today and in this environment and likely for the foreseeable future.
I mean to as we kind of working through this agent in real time.
You know with with.
Talking about deal flow and potential deals that are getting done today I mean, how are you guys.
As you guys evaluate new deals how are you guys ensuring that the deals that you guys are putting on today or week from an hour or months from now.
Oh are going to be well positioned if we do go into just some sort of economic downturn. A recession are you guys changing the businesses that you guys focus on the sectors that you focus on are you guys not change Annapolis, but also.
The ensuring that the leverage is much lower on these businesses, the covenants or or better yields are higher you know how are you guys evaluating new deal opportunities.
In today's environment.
Versus how you were six months ago, given the environment is dramatically changes and also as you run your internal.
Models into your due diligence.
What's sort of base case are you using for the economic environment you guys. Assuming your that did at the U.S. economy goes into recession, you know over the next year is that's where the base gets you guys are using or something more favorable.
You're right I mean, all all these above.
Clearly we are not investing in sectors today that we might have invested in prior periods.
Automotive automotive would be a perfect example, we've been shying away from that that that sector for quite some time, knowing that the you'll likely was at the peak and of course, we are we already know that no unit volumes are down in the automotive sector. So we adjust our.
Underwriting.
Criteria based on factors in the marketplace and so yes, we're we're altering industries that we that we will invest in versus.
Sectors that we will invest and looking at as you said lower leverage.
And of course, adjusting our internal models I mean at this point, we had not factored into recession, but of course all of this is quite new and likely that we do.
In terms models do reflect some sort of recession, which I think as you know is pretty widely expected at this point as short term as it might be a so our our underwriting criteria is always evolving based on the current environment that we're facing and certainly we're going to be working on.
Further adjustments.
And I would have been also that we we may delay some closings.
By several weeks just just to get they for her look into what you know what some of the Uh huh.
Yes, some of these companies and so we're doing everything we can to ensure that we're making prudent investments given some of the uncertainty in the marketplace.
Okay and then one last one from me you know.
When I look at your guys stock price today I mean, you guys are trained less than 50 cents on the dollar 50%.
Less than 50% of book value today.
You guys at the end of the year had a 14% portfolio yield. So you know when you guys are evaluating it does the are you guys are allocators of capital. So when you guys are looking to allocate capital to different investment decisions, whether it was added new companies are there is or the other decision just to repurchase shares.
When you guys are trading at less than 50% of book value and have a portfolio yield a 14% that you can get.
Less than 50%.
No of book value.
How how can you find any deals in the market.
With.
I'll close to 3% expected.
Which which was what you can basically by your portfolio at today by repurchasing shares.
Well.
Yeah. We are we agree with you our stock is undervalued and unlike.
Like I know you follow abroad sector, we've actually been active.
Repurchasers of our stock in the open market over time I think last.
The last year, we probably bought back or close to 10% of the shares. So we don't disagree with you. The stock is a compelling value here we have certain.
Blackout periods, and and you know timing for other things, but to the extent that this is a new reality you where are these kind of stocks, including ours are going to be trading at.
You can be assured we'll be taking a hard look at that and not just announcing a buyback like some companies, but actually doing a buyback.
<unk>.
You worry just just on that point in this.
My last question just on that point.
Yeah.
Do you way at all with the share repurchases.
Very compelling opportunities to buy your current portfolio for less than 50% of its value today via the share repurchase.
Versus your market cap of being you know 20 or 30 million today.
Your your equity base of you know $67 million today do you ever worry that the share repurchases. You know just further pressing your you know kind of the the relevance.
You have your BDC across a broader base and not being able to really operate on a sufficiently sized bdcs or how do you weigh that a compelling opportunity for share repurchase, but also just shrinking your balance sheet and your equity base in your market cap for what's already on an incredibly small BDC.
Those are all factors.
But I mean, I think ultimately we are well aligned with shareholders and I think we'll continue to hopefully do the right thing that's in the best interest of or shareholders, but yeah. We went public and we had a.
Market cap of under 100 million. If you recall so we've never been a large company. So it's it's not as if we've ever according to some people's expectations of what kind of asset size yet to be we've we've we've we've never been close or above that.
Threshold that seems to get applied, but I think that the I mean, our issue when considering the buyback stock has more to do with a de leveraging.
On our current fixed costs for the public company than anything else.
And so it sounds a little bit more complicated kind of analysis than what you just said buying the portfolio with a big discount just because we.
On the marginal shrinking the ability to grow assets squeezes Ah.
The existing earnings a lot more given the fixed cost of being public.
Yeah that makes sense, but the fixed cost okay.
Those are all my questions I appreciate that thank you today.
No problem. Thank you very much.
Once again, if he would like to ask a question seems like press Star then the number one on your telephone keypad again, if he would like to ask the question.
Please press Star then the number one on year sounds sounds keep Pat.
Again to ask the question. Please press Star then the number one on your style that sounds bad.
Copper it doesn't seem like there or any other questions. So why don't we conclude the call and.
Bill Rich and I are obviously available.
If you want to cost directly with other questions and otherwise, we'll look forward to updating everyone.
On our progress <unk> after the first quarter in early May Thank you.
Thank you and that concludes today's conference. Thank you all for joining.
Disconnect.
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