Q1 2020 Earnings Call

Want to start by saying that all of us at Main Street hope that you and your loved ones are safe and healthy. We recognize that the last few months have been a very challenging time for everyone and that the near-term future continues to include significant and certain age. We send our thoughts and best wishes those individuals that have been most negatively impacted by the covid-19 pandemic and our most sincere gratitude to those individuals who have sacrificed and risk their personal safety for the benefit of others and whose efforts are allowing us to collectively work through this difficult time.

As we previously communicated in our press releases and March and April since the beginning of the covid-19 impacts. We have placed significant focus on in attention to the health and safety of our employees.

Our employees at Main Street are critical to our historical and future success in our ability to consistently generate our best and Industry returns for our shareholders. We have been extremely fortunate mainstream their employees have been safe and healthy throughout the last few months.

We implemented our remote working Arrangements in mid-march and have successfully maintained our full operating capacities throughout the pandemic. We are greatly appreciative of the efforts of our employees and the strength of our team gives us significant confidence as we look forward to the future.

Those of you that have been long-term investors in in followers of Main Street each quarter. You have her discuss our primary focus on our lower Middle Market strategy and its related benefits are believe that this strategy is very much in comparison to other investment firms and our conviction that this strategy is the biggest driver to our ability to create value for our shareholders.

One of the tenets of our little bit of marketing strategy is the strength and quality of the management teams of these portfolio companies and are strong alignment of interests with these individuals as our partners in our investor running processes. We focus more attention on evaluating these individuals as our future long-term Partners than any other aspects of our underwriting our due diligence processes.

We've also maintained a very consistent.

An approach of aligning our interest directly with these individuals through our typical investment structure and we believe this alignment is a significant strength and source of value for us and our shareholders.

Throughout the last few months as our Main Street investment teams have been extremely active and working with our portfolio companies the strength of these portfolio company management teams has never been more evident or more valuable to us. We are extremely appreciative of a diligent efforts and proactive actions taken by our portfolio companies that we are more confident than ever in our core philosophies of both selecting the right individuals to partner with ensuring a strong alignment of interests with these individuals.

Now turning specifically to our results for the first quarter the unprecedented effects of the covid-19 pandemic on our economy have proved to be very challenging.

Our first quarter results reflect the negative impact of the adverse economic effects of the pandemic on market conditions and the overall economy most specifically in the amount of unrealized appreciation. We experienced in our Investment Portfolio.

Fortunately are intentional strategy of maintaining a conservative capital structure and significant liquidity position has allowed us to manage through the challenges to date support our existing portfolio companies should continue to execute on new investment opportunities on a highly selective basis.

In addition we continue to believe that are highly Diversified and mature Investment Portfolio were proved to be very beneficial as we work through the current environment.

David and Brent will provide details on each of these points and their comments despite are challenging first quarter as a result of our Diversified Investment Portfolio together with the advantages of our differentiating a strategy the alignment of our interests with our little bit of Market portfolio company management teams are efficient operating structure and alignment of interests with our shareholders combined with our conservative capital structure in a position. We believe that we are well-positioned to whether the current market conditions and provide a favorable outcome for all of our stakeholders and we remain committed to maintaining a stable dividend payment level going off.

To that end earlier this week our board declare our third quarter of 2020 regular monthly dividends of 20 and 1/2 cents per share payable in each of July August and September and amount that is unchanged from our monthly dividends for the second quarter as discussed in our mid-april, press release due to the challenges and uncertainty created by covid-19 and our desire to maintain a conservative approach to our dividends and to preserve quiddity to support an active and opportunistic approach to new Investments based upon our recommendations. Our board agreed to spend our semi-annual supplemented dividend indefinitely.

We believe the suspension is prudent and in the best interests of all of our stakeholders and is supportive of our commitment to maintain a stable dividend payment level going forward through our recurring monthly dividends.

Now turning to our investment activities in the first quarter and our current investment pipeline. We completed lower Middle Market Investments of $66 in the quarter including investments into new companies. And as of today mainly due to the impact of covid-19, I would characterize our lower middle-market investment pipeline is below average.

Might be impact of covid-19. We continue to be very active in our lower Middle Market strategy as evidenced by a recent announcement of our $49 investment in Pearl Meyer in late April.

We also have several new investment opportunities in the pipeline and and expect to continue to execute on new investments in the near-term.

More importantly based upon our historical experiences over the last two decades as the industry-leading partner for lower middle-market companies and their management teams. We expect that are very unique debt and Equity investment offering them combined with our ability to be a long-term to permanent partner to these companies will result in a significant increase in our little bit of Market opportunities as the economy begins to recover.

Even the current environment we continue to focus on maintaining a disciplined and selective approach to new investment opportunities and we remain confident in our ability to originate new Investments consistent with our historical invest profile.

During the first quarter we continue to successful focus of our non lower middle-market Investment Portfolio growth on our private loan portfolio resulting in this portfolio growing modestly on a net basis in the quarter off. Well, our middle-market portfolio decreased by over thirty million dollars.

As of today or characterize our private loan investment pipeline is slightly below average, but growing given the reduction and the number of competitors with the liquidity and access to Capital necessary to continue to be active in the current market.

Well, they can get the performance of our investment Investment Portfolio during the quarter and specifically are lower Middle Market portfolio. We are pleased that the vast majority of these companies were either deemed essential or critical we're able to log in full operation capacity on a remote work Arrangement basis as a result. These companies have been able to maintain a significant level of operations despite the various stay at home and shelter-in-place mandates helping them at this difficult time.

And in closing as a testament to the positive use our officer and director group continues to have regarding the strength of the Main Street platform. This group has continued to be regular purchases of our shares investing in projects. One point 1 million dollars during the first quarter.

Specifically including significant purchased by purchases by the executive and Senior Management team and are bored during March when our stock price experienced the most significant negative impacts from covid-19.

On a collective basis our director and offers to group owns Main Street shares valued at approximately $68 at quarter-end or over $80 today with that. I will now turn the call over to David.

Thanks, Dwayne and good morning. Everyone is Dwayne highlighted in his remarks. This is a challenging quarter for Main Street as we and our portfolio company Partners prepared for and responded to the page and unexpected never negative impact created by covid-19.

Despite this negative impact are intentional and purposeful divorce Diversified investment strategy has served as well during this time. It has been the Cornerstone of our philosophy over nearly thirteen years is a public company and a benefit of our permanent capital structure. We believe our diversification by issuer industry and Market vintage and wage provides our shareholders attractive structural benefits some of these benefits come from our ability to be a long-term to permanent Capital provider as evidenced by the fact that 22000 of our lower middle-market companies have been in our portfolio for longer than eight years including twelve relationships lasting longer than a decade.

our long-term

Holding. Results in a very conservative capitalization for the vast majority of our lower middle-market companies and we benefit from strong relationships with the management teams of our portfolio companies were often times. We are minority Equity investors.

As of March 31st our Investment Portfolio had investments in $193 portfolio companies spanning across more than 40 Industries our largest portfolio company represented approximately 3% of total Investment Portfolio fair value of quarter-end and 4.4% of our total investment income for the last 12 months. Most notably the majority of our portfolio Investments represented less than 1% of our assets and our income.

Main streets over all conservative capitalization allowed us to focus on our portfolio company needs instead of having to specifically turn our attention to our own capital structure during this time of Market 2007.

Since early March we've been working very closely with our lower Middle Market portfolio companies and assessing and responding to the rapidly challenging market conditions resulting from covid-19 or strong a bit of Interest by being significant Equity investors, alongside our lower Middle Market portfolio company Executives proof powerful as we and our portfolio company Park Partners work tirelessly to support portfolio company interests. We've been extremely impressed with the proactive and responsive nature of our portfolio company Executives and are grateful for their partnership. We are highly confident that their actions are the direct result of our portfolio company managers being material Equity owners of their respective companies as opposed to just being salaried employees.

In many instances the management teams voluntarily reduced their compensation made tough operating decisions, including furloughing long-term employees and several of our portfolio company manufactures offered to put in their own Equity Capital to support their businesses these actions give us an extremely high level of respect for these Executives and significant comforter that their decisions own best interests of their companies.

Over ninety percent of our lower Middle Market Investments were either deemed as essential businesses or able to continue to operate on a full or limited basis during these uncertain times, which we expect will mitigate some of the detriment these businesses would have otherwise incurred.

During the first quarter the contributions from our lower Middle Market portfolio continued to be well Diversified with 98% of our debt investments in this segment of our business representing first-lien depositions month and forty of our 70 lower middle-market companies with Equity Investments, maintaining unrealized appreciation at quarter-end 62% of our companies that are pass-through entities for tax purposes contributed to our dividend income in the last 12 months.

We believe that our investment philosophy investing in both the first lien debt Investments as well as the equity Securities of our lower Middle Market portfolio companies provides an attractive financing option for our partner and provides a very desirable investment structure for us when compared to other models or strategies available in the market.

during the first quarter we continue to

Take advantage of our liquidity and capital structure to make it attractive strategic Investments focus on our lower middle-market and private loan portfolios our investment activity in the first quarter included total investment banker lower Middle Market portfolio of approximately $66 including Investments, totaling $56 into new lower Middle Market portfolio companies, which asked after aggregate down payment on debt Investments and return of invest in equity Capital resulted in a net decrease in our lower Middle Market portfolio of approximately 9.4 million dollars total investments in our private loan port phone number approximately 66 million dollars including forty 1 million dollars of new and twenty five million dollars of follow-on Investments, which after aggregate repayments results in the net increase our private loan portfolio of four point four million dollars, and we had a net decrease in our Middle Market portfolio of approximately thirty two million dollars.

Lower Middle Market portfolio included investments in seventy companies representing approximately 1.2 billion dollars of fair value, which is over 18% above our cost basis the fair wage for a lower Middle Market portfolio company Equity Investments was approximately 162% of the cost of such Equity Investments with the with most of these Investments capitalized with conservative leverage ratios in our private loan portfolio. We had investments in sixty-three companies representing approximately $629 of fair value and in our Middle Market portfolio, we had investments in 48 companies representing approximately 418 million dollars in fair value.

Our total Investment Portfolio at fair value of quarter-end was approximately 99% of the related cost basis and we had ten Investments on non-accrual status which comprise approximately 1.5% of the total Investment Portfolio at fair value in 5.3% it cost.

Turning to the outlook for the remainder of twenty-twenty. We intend to focus our efforts on continuing to support our existing Investments while thoughtfully investing Capital primarily in new lower Middle Market opportunities.

As a matter of historical context some of our most successful lower Middle Market Investments were initiated in the wake of the 2002 to 2004 recession and the 2008 and 2009 financial crisis during these uncertain times main streets unique and differentiated lower Middle Market strategy provides a particularly attractive value proposition to our perspective portfolio company Partners off.

Our ability to provide flexible debt and long-term Equity Solutions are always a key differentiator for us, but the current environment is a particularly good time for us to put new money to work in our core Market comprised predominantly a privately owned closely held businesses that have a specific reason to transact.

As other lenders struggle with capital availability and private-equity investors act overly opportunistic in this environment. They tend to be unresponsive to the marketplace this Dynamic can provide an environment for our type of solution to particularly Thrive is an attractive alternative. Our investment committee is worked together for nearly twenty years and more prolific times. And in times of Market dislocation, and we are excited for the the opportunity to create significant shareholder value and twenty twenty and twenty 21% to that end. We continue to see attractive new lower middle-market investment opportunities when we are cautiously optimistic, we will be able to prudently deploy Capital with attractive risk-adjusted return profiles during the remainder of twenty-twenty as I've mentioned in the past. We continue to de-emphasize new investment activity log in our Middle Market segment of our Investment Portfolio in favor of private loan opportunities, but we intend to opportunistically put Capital to work in a select number of attractive private loan and middle-market name.

As opportunity to present them.

And other debt investors are forced by the lenders to seek liquidity from their portfolios and sell existing Investments at attractive discounts to par.

Since the first quarter we have selectively closed Investments that fit that criteria these Investments when purchased at attractive prices should provide above-average investment returns in Palm quarters as they approached maturity finally during these times of Market volatility. We are also grateful for the Deep relationships that we have built over time with so many referral sources over the past twenty years, which I believe will serve as particularly well in finding attractive risk-adjusted return opportunities as the year progresses with that. I'll turn the call over to Brent to cover our financial results capital structure and liquidity. Thanks David our total investment income in the first quarter decreased over the same period in 2019 to a total of 56.2 million primarily driven by a decrease in dividend income and interesting as both areas were negatively impacted by covid-19. The change in total investment income is after an increase of two point four million related to

The higher levels of accelerated income for certain debt Investments when compared to the first quarter of last year our operating expenses, excluding non-cash share-based compensation expense decreased by 2.8 million over the same period of the prior year to a total of 16.8 million primarily related to a decrease in cash incentive compensation levels and adam22 her compensation expense due to the decline in the fair value of our Deferred Compensation Plan assets the ratio of our total operating expenses, excluding interest expense as a percentage of our average total assets was 1.1% for the first quarter on an annualized basis this low-cost percentage highlights are unique internally managed structure in a life with our stakeholders our ability to leverage our efficient operating structure during this challenging environment offset a significant portion of anticline and investment income and resulted in distributing.

That investment income a 39.4 million or 61 cents per share the activities of our external investment manager benefited our net investment income by approximately 2.5 million through the allocation of one point six million of operating expenses for services. We provided to it and point seven million of dividend income. We recorded a net realized loss twenty two point four million four million during the first quarter primarily relating to the realized losses from the exit of a lower middle-market investment and the partial exit of two other lower Middle Market Investments.

We recorded a net unrealized depreciation on the Investment Portfolio of 211.6 million primarily resulting from the impact of covid-19. The net unrealized appreciation includes 72.2 million of net depreciation relating to our middle-market portfolio, 68.4 million of net depreciation on our private loan portfolio about forty five point six million of net depreciation on our lower Middle Market portfolio, 12.9 million of depreciation relating to our external investment manager and 11.3 million of net depreciation on our other portfolio our operating results for the first quarter resulted in a net decrease in net assets of 171.4 million or $2.66 per share.

Call capitalization and current liquidity remains strong. As our total liquidity is approximately 500 million early during the quarter and prior to the impacts from covid-19. We raised approximately fifty million in net proceeds on ratm Equity issuance program, moving forward. We expect to be active under the program that conservative levels as we continue to believe that funding our new lower middle-market Equity Investments with permanent capital is appropriate and we believe our ability to continue to raise Equity is another important differentiating factor for Main Street. Overall. We feel that our conservative or average continued access to Capital and strong liquidity has as well positioned to not only continue to successfully navigate the Des challenging. But to also be opportunistic in terms of investment opportunities in the market.

As we look forward to the second quarter do the ongoing impact of covid-19 a significant amount of uncertainty exists in relation to the overall economy and the operating results of our portfolio companies it as a result. There's an increased level of uncertainty related to our expected operating results. Therefore we are not providing our typical guidance for Distributing net investment income for the second quarter month. However, it has we we previously mentioned in our press release in mid-april. We do expect that are Distributing net investment income will be will be below our monthly dividends for the second quarter. Specifically we expected a client in a dividend income from our Equity Investments as a cash flows of some of our portfolio companies have been negatively impacted to varying degrees and in general our portfolio, as are appropriately taking a conservative approach in managing their overall liquidity during this period of uncertainty

In addition. We expect a decrease in our interest income primarily due to the additional Decline and Libor rates that occur during the first quarter and a decrease in our fee income due to our church every generation activity during the during the pandemic as we continue to manage our capital and liquidity in a very conservative manner with that. I will now turn the call back over to the operator so we can take any questions. Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad a confirmation to get your lines in the question queue. You may press star to if you would like to remove your question from the Q4 participants using speaker equipment may be necessary to pick up your handset before pressing the star keys off. One moment, please while we pull for questions.

Our first question is from Jaden with Raymond James.

Hi everyone. Good morning, and hope all is well. First question. I guess kind of in Broad Strokes. Were there any Industries in the quarter or post quarter-end that were more mature hit by covid-19 the pandemic effects. Um, then was expected Beyond kind of the The Usual Suspects like Leisure retail restaurants and so forth.

Yes.

Thanks for the question. I would say that you know, no huge surprises outside of the industries that you referenced that you know, you would expect they would have been significantly impacted. I'd say the if you look for outliers may have been more Geographic where you had stronger, you'll shelter-in-place or stay-at-home mandates that require companies to have to shut down either, you know, totally or to a greater extent. So I'd say that would have been you know, the dog outside of that I would say it would you know, it would be the industry that you expected to be it to be impacted.

Okay, what about in terms of can you give any scale as to whether or not there were any Amendment relief requests in the quarter or post quarter-end and whether or not that is acceleration through the the first month of the quarter.

Yeah, I would say there's there's been some activity there and I would say most of the activity has been around, you know referrals on a temporary basis for you know for either interest or you know, some type of principal repayments. I would say our approach which is your consistent with what what I think it would have always been is that if there's a request there we're looking for the for the company and is equity investors off to do something, you know in tandem with this or you know, as part of that request. They've got to do something whether that's you know, you know cost-cutting internally at the company if they're you know, if their owners of the business and and they're also excellent or if it's a private Equity Group in our you know, private loaner Middle Market portfolio is making some other concession to to go along with that request.

Matt was there anything else?

My apologies last question just briefly on the lmm portfolio. Could you give any scale as to whether or not companies have been applying for the paycheck Protection Program? And if so how many of applied and and kind of what the the receivable rate has been on such thank you. Thank you. What I was saying on the the Triple-T Loan program. I think you know given our primary focus on the lower minimum wage in the the profiles of these companies which you know would be a profile, you know, given the size and scale of the companies both from a a revenue standpoint in from an employee standpoint. It's safe to assume that significant number of our companies would be eligible for the trouble. Peelo program. I would also say right also remind people that we are typically the minority Equity investor in most of our lower middle-market companies and in these situations, it's not another Institutional Investor another private Equity Group. That's the the majority owner is typically going to be individuals and most commonly you'll be individuals that are on the management team.

a super these companies, you know when you look at their application for the Triple P loans, ultimately ultimately it's not solely our decision on whether they decide to access the loans and I would also say that you know in these companies cases wage clearly, they've been impacted by your by covid-19 and I think in in situations where the companies have been more significantly impacted,

You know these triple P loans or a very positive source of liquidity used to help those companies through the the issues associated with the pandemic. The other thing that I think we point out is that you know, triple P loans are just part of the job stimulus opportunities that are out there and I would say that the vast majority of our companies not just in the lower Middle Market, but also in the private loan and middle-market portfolios, you know, we believe that they should be and we believe that they are actively evaluating all these programs including, you know, some of the programs under the payroll tax some areas we can either you'll see credits or or look for deferrals. There's also a number of state and local opportunities that our companies are exploring and then you also have you know, a reinstatement of the tax, you know, net operating loss carry-back that can provide significant benefits to our country. So, you know, we we expect they are you kind of acting on all these opportunities and you know, when we can we're we're helping them evaluate the opportunities.

It's great. I appreciate the color. Thanks guys. Thank you.

Ladies and gentlemen, as a reminder to ask a question, please, press star one on your telephone keypad. Our next question is from Kenneth Ali with RBC Capital markets.

All right. Good morning. Thanks for taking my question. Just one on the evaluation process presumably most of the the net I realized losses in the quarter. We're we're driven by wine and credit spreads, but just wondering what if you could just frame out for us how much of any of the idiosyncratic you know, covid-19 related adjustments were were factored into the valuation. Thank you.

Yeah, cuz I would say, you know as part of our evaluation process. We we definitely would have been looking at the impacts of across the portfolio both in the lower Middle Market and our private loan no middle-market portfolios. And I think that you know, as you would probably expect the impact of of covid-19 was you know, very significant, you know in in, you know that's reflected in the in the marks Thursday. We have you know in our you know earnings release in our 10-q. You'll be able to see the, you know, the details by portfolio. I think the you know, the impact of of credit spreads, you know was most impactful wage on the Middle Market and private loan portfolios and specifically in the private loan portfolio. You know, we think you know, there's a a significant portion of that unrealized appreciation that you know as spreads recover and we've seen some recovery here and the in the first part of the second quarter, you know, we should see some of that depreciation come back to us in terms of of the flipping back into unreal unrealised appreciation.

Gotcha, very helpful and then one one followed by if I may just just given the uncertainties the economic uncertainty wondering if you could just give us any kind of thought on potential trends for dividend income that you could be receiving from your lmm portfolio with in the near-term. Thanks. Thanks. Again. Yeah, I would say you're probably not a surprise to anybody, you know given the the impacts of covid-19, you know, all companies including the companies that are lower Market portfolio. Are you taking a very hard look at liquid and they're you know, making sure that they've got a you know capital structure and liquidity position that is conservative enough to withstand or or kind of work through the you know, the challenges associated with covid-19. Would you look at our lower middle-market companies? And I think if you if you look at our first quarter results, you would have seen that impact coming through in the dividend income that we received from our portfolio companies and I think we we expect that. Yep.

you need to see that you know for the you know, the second and third quarters and

You know the long-term, you know kind of results will be your really dictated by how long this covid-19 pandemic last and how long you know, a lot of these you'll shelter-in-place and stay-at-home mandates last.

Gotcha, very helpful. Thanks again, and hope everyone stays safe. I used to have the same to you.

Our next question is from Michael Ramirez SunTrust.

Morning, guys. Thanks for taking our questions this morning.

I apologize if I missed this or it was discussed earlier. I'm just curious how much your interest income collected during the quarter was classifies tick and how does that compare to last quarter? Yeah, I pick interest was around 2% this this quarter and it increased by about 90% during the quarter as we agree to work with them, you know several of our companies to let them switch to pick for a certain amount of certain period of time as we kind of work through this page.

Okay, so that I believe last quarter is about 2% So relatively flat I believe I guess. Yeah, I think it was it was around. He was like, oh, I believe last quarter. I believe it's like it might be closer to and half percent this quarter. So it wasn't it wasn't a huge don't overall percentage. Okay.

No, that's fair. Thanks for that. If I may so it's quite understandable that you're not going to provide your usual guidance. But thanks for the the color office regarding around the dividends interesting, and fees. Just curious maybe more of a high level with the uncertainty of you know, per month to prospects inability to pay interest income and dividend in the fees. You could collect on your reservation. What are your thoughts about sort of temporarily possibly moving towards a variable dividend policy.

I think if you if you look at our you know actions over the last month or so, you know, we we've taken steps to to not recommend are aboard that we continue to pay this in my angles supplemental and I think with with that action and are your current position across the portfolio and are you current spillover income position? I think at least for the next couple of quarters, we feel really good about our ability to maintain a stable monthly dividend. That's our our planet our intent, you know, I think again if the covid-19 pandemic, you know issues last longer we'll obviously have to re-home reevaluate that over the next couple of quarters, but I think you have and everything that we're looking at today kind of across across all factors, you know, we we feel pretty good about that monthly dividend and that's what we were trying to communicate with our previous comments.

Okay.

That that's helpful, and I think that's all for me today. Thank you guys. Thanks a lot, Michael.

Thank you. This concludes the question-and-answer session. I will turn the floor back to management for closing remarks. We thank everyone for joining us again for our conference call will look forward to your talking again in a few months here, and we hope everyone remains is safe and healthy as possible. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines. Have a great day.