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Focus of Article:

The focus of this article is to provide a detailed analysis of Fifth Street Finance Corp.'s (FSC) net asset value ('NAV') per common share as of 6/30/2013. Prior to results being provided to the public early next month (via its quarterly press release), I would like to analyze FSC's NAV as of 6/30/2013 and provide readers a general direction on how this recent quarter has panned out.

A previous two-part article I wrote laid the ground works for this NAV prediction. In that article, I projected/analyzed FSC's income statement for the fiscal third quarter of 2013. The following are links to that two-part income statement projection article:

PART 1 - Fifth Street Finance Corp.'s Upcoming Fiscal Q3 2013 Income Statement Projection

PART 2 - Fifth Street Finance Corp.'s Upcoming Fiscal Q3 2013 Income Statement Projection

My buy, sell, or hold recommendation will be in the conclusion paragraph of this article.

Author's Note: Predicting FSC's NAV can be difficult at times in regards to a few specific accounts on the income statement. These accounts include the following: 1) fee income; 2) unrealized appreciation (depreciation) on investments; and 3) realized gain (loss) on investments. Numerous assumptions and variables are used when projecting results within these specific accounts. Furthermore, there are general assumptions used when performing an overall analysis on FSC's quarterly income statement which leads to its NAV calculation. Actual values may differ materially from the following estimated values within this article due to unforeseen circumstances. This includes a deviation from the typical business strategies by management in a specific quarter. Readers should be aware as such. These projections are my personal estimates and all figures detailed below should not solely be used for any investor's buying or selling decisions. All actual reported figures that are above my ranges within this article will be deemed a positive sign in my judgment. All actual reported figures that are below my ranges within this article will be deemed a negative sign in my judgment.

Due to the fact that several figures needed to predict/calculate FSC's NAV as of 6/30/2013 come directly from its income statement, I provide Table 1 below. This table is different than three similar tables within my income statement article due to the fact Table 1 shows FSC's income statement from both a three (quarterly) and nine-month perspective. The tables in my income statement article (linked above) only show FSC's income statement from a quarterly perspective. For purposes of estimating a suitable net asset value as of 6/30/2013, one must culminate the figures from the fiscal first and second quarter of 2013 (ACTUAL) column and the fiscal third quarter of 2013 (ESTIMATE) column within Table 1.

Table 1 - FSC Three and Nine-Month Ended Income Statement


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Having provided Table 1 above [in particular FSC's "9 Months Ended (ESTIMATE)" column], we can now begin to calculate FSC's projected NAV as of 6/30/2013. This projection will be calculated using Table 2 below.

Side Note: In regards to Table 2, FSC provides a similar table that matches the data I have prepared below. FSC's table is called "Consolidated Statements in Changes in Net Assets". I recalculate FSC's NAV calculation to ensure all my income statement figures (including data from various other spreadsheets) match exactly to what FSC provides/discloses. As such, I ensure no variances arise between FSC's actual figures reported (via its quarterly SEC submissions; 10-Q or 10-K where applicable) and my spreadsheet's past (ACTUAL) columns.

Table 2 - FSC Three, Six, and Nine-Months Ended Net Asset Value Calculation/Projection (NAV as of 6/30/2013)


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With Table 2 above as a reference, let us take a look at the calculation for FSC's projected NAV as of 6/30/2013. Unless otherwise noted, all figures below are for the nine-month ended time frame. Let us look at the following figures (in corresponding order to the red references shown in Table 2 above):

A) Operations

B) Stockholder Transactions

C) Capital Share Transactions

A) Operations:

- Net Increase in Net Assets From Operations Estimate of $78.9 Million; Range $73.9 - $83.9 Million

- Confidence Within Range = Moderate

- See Red Reference "A" in Table 2 Above Next to the June 30, 2013 Column

This operations figure consists of the following accounts that come directly from the income statement (see Tables 1 and 2 above): 1) net investment income; 2) net unrealized appreciation (depreciation) on investments; and 3) net realized gain (loss) on investments.

Due to the fact I talked about these accounts in my previous FSC income statement article (links at the top of this article), I will not delve into the details on how I obtained these figures. One can look at my previous article to see how I came up with these figures. Also, note the net increase (decrease) in net assets from operations figure in Table 2 is the same figure shown within FSC's income statement in Table 1 (see red reference "C" under the "9 Months Ended (ESTIMATE)" column).

B) Stockholder Transactions:

- Net (Decrease) in Net Assets From Stockholder Transactions Estimate of ($91.4) Million; Range ($90.4 - $92.4) Million

- Confidence Within Range = High

- See Red Reference "B" in Table 2 Above and Blue Reference "D" in Table 2 Above and Table 3 Below Next to the June 30, 2013 Column

This is a fairly simple calculation. This is the dividend paid by FSC on its common shares outstanding for the fiscal first, second, and third quarters of 2013. Since Table 2 already provides us with FSC's "net (decrease) in net assets from stockholder transactions" figure of ($56.2) million as of 3/31/2013, my projection will only highlight the activity within the fiscal third quarter of 2013.

Side Note: As shown in Table 2 above, FSC's net (decrease) in net assets from stockholder transactions figure is the equivalent to FSC's "distributions to stockholders from net investment income" account. Since this is the only account within this specific classification, both accounts have the same figure.

Table 3 - FSC Quarterly Stockholder Transactions Calculation/Projection


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With Table 3 above as a reference, the number of common shares outstanding as of 4/12/2013 was 106,209,125. This is unchanged from FSC's 3/31/2013 common shares outstanding. The monthly common stock dividend declared and paid in the fiscal third quarter of 2013 was $0.0958 per share. This has been the twenty-first consecutive month (seventh consecutive quarter) where FSC has declared a monthly dividend of $0.0958 per share. Therefore, I am projecting an April 2013 dividend distribution of ($10.2) million.

I am estimating a monthly common stock dividend reinvestment of 100,000 shares to be issued during the fiscal third quarter of 2013 (300,000 shares for the quarter). These additional shares are issued as part of FSC's dividend reinvestment plan and are added to the number of common shares outstanding for May and June's monthly dividend distribution (as shown in Table 3 above). In the past, FSC has repurchased common shares outstanding in the open market to distribute as part of the dividend reinvestment plan (net effect of 0 additional common shares outstanding). However, FSC has not performed this open market repurchase since the fiscal third quarter of 2012. As such, I am assuming FSC will not do this for the fiscal third quarter of 2013 as well.

As indicated in my income statement projection article (see links above), FSC completed an additional equity raise on 4/12/2013. Through this equity raise of 14,435,215 shares (including the underwriters' partial exercise of its over-allotment option of 935,215 shares), FSC increased its total number of common shares outstanding to 120,644,378. Including the projected 100,000 common shares added from FSC's dividend reinvestment plan regarding April's dividend, the number of common shares outstanding as of 5/13/2013 is projected to be 120,744,378. Therefore, I am projecting a May 2013 dividend distribution of ($11.6) million.

Including the projected 100,000 common shares added from FSC's dividend reinvestment plan regarding May's dividend, the number of common shares outstanding as of 6/12/2013 is projected to be 120,844,378. Therefore, I am projecting a June 2013 dividend distribution of ($11.6) million.

Therefore, I am projecting total dividend distributions from net investment income of ($33.3) million for the fiscal third quarter of 2013. For the nine-months ended 6/30/2013, I am projecting total distributions of ($91.4) million (see blue reference "D" in Tables 2 and 3 above).

C) Capital Share Transactions:

- Net Increase in Net Assets From Capital Share Transactions Estimate of $310.5 Million; Range $307.5 - $313.5 Million

- Confidence Within Range = High

- See Red Reference "C" in Table 2 Above Next to the June 30, 2013 Column

This capital share transactions figure consists of the following accounts (see Table 2 above): 1) issuance of common stock, net; 2) issuance of common stock under dividend reinvestment plan; and 3) repurchases of common stock.

1) Issuance of Common Stock, Net:

- Estimate of $302.8 Million; Range $299.8 - $305.8 Million

- Confidence Within Range = High

- See Boxed Blue Reference "E" in Table 2 Above and Table 4 Below Next to the June 30, 2013 Column for Reference

Since Table 2 already provides us with FSC's "issuance of common stock, net" figure of $151.3 million as of 3/31/2013, my projection will only highlight the activity within the fiscal third quarter of 2013.

Table 4 - FSC Quarterly Issuance of Common Stock, Net Calculation/Projection


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As mentioned earlier, FSC completed an additional equity raise on 4/12/2013. With Table 4 above as a reference, an initial 13.5 million shares of common stock were issued from FSC's 4/13/2013 equity raise. The gross issuance price was $10.85 per share. Therefore, gross proceeds of $146.5 million were raised in conjunction with the issuance of 13.5 million shares of common stock. The underwriters' partially exercised its over-allotment option of 935,215 shares at a gross issuance price of $10.85 per share. Gross proceeds of this partial exercise were $10.1 million.

Next, one must subtract the underwriters' commissions of $4.7 million and offering costs in conjunction with this equity raise of $0.3 million. After subtracting out these costs, FSC's net proceeds raised from its 4/13/2013 equity raise of 14.4 million common shares were $151.5 million. This calculation is valid because the net equity proceeds of $151.5 million directly ties to FSC's filed Form 8-K.

When adding FSC's net equity proceeds of $151.5 million for the fiscal third quarter of 2013 to its balance of $151.3 million as of 3/31/2013, FSC's issuance of common stock through equity raises for the nine-months ended 6/30/2013 is projected to be $302.8 million (see blue reference "E" in Tables 2 and 4 above).

2) Issuance of Common Stock Under Dividend Reinvestment Plan:

- Estimate of $7.7 Million; Range $7.5 - $7.9 Million

- Confidence Within Range = High

- See Boxed Blue Reference "F" in Table 2 Above and Table 5 Below Next to the June 30, 2013 Column for Reference

Since Table 2 already provides us with FSC's "issuance of common stock under dividend reinvestment plan" figure of $4.5 million as of 3/31/2013, my projection will only highlight the activity within the fiscal third quarter of 2013.

Table 5 - FSC Quarterly Issuance of Common Stock Under Dividend Reinvestment Plan Calculation/Projection


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With Table 5 above as a reference, I am estimating 100,000 common shares will be issued each month as part of FSC's dividend reinvestment plan (as mentioned earlier). This equates to 300,000 common shares for the fiscal third quarter of 2013. Using April's issuance price of $11.03 per share, I am projecting FSC's April capital raised under its dividend reinvestment plan will be $1.1 million. Using May's issuance price of $10.56 per share, I am projecting FSC's May capital raised under its dividend reinvestment plan will be $1.1 million. Using June's issuance price of $10.45 per share, I am projecting FSC's June capital raised under its dividend reinvestment plan will be $1.0 million. Any variances that arise regarding the number of shares actually issued under FSC's dividend reinvestment plan each month have been taken into consideration within my ranges for this specific account.

3) Repurchases of Common Stock:

- Estimate of $0; No Range

- Confidence Within Range = High

- See Table 2 Above Next to the June 30, 2013 Column for Reference

FSC may intend to repurchase outstanding shares of its common stock. However, this will only occur when FSC's common stock repurchase price would be materially accretive to its NAV. Since FSC's stock price basically stayed above its NAV of $9.90 per share throughout the quarter, FSC most likely did not initiate any share buybacks during the fiscal third quarter of 2013. Therefore, FSC's repurchases of common stock for the nine-months ended 6/30/2013 is projected to remain unchanged at $0.

After adding both the issuance of common stock, net and issuance of common stock under dividend reinvestment plan accounts together, I am projecting a net increase in net assets from capital share transactions of $310.5 million for the nine-months ended 6/30/2013 (see red reference "C" in Table 2 above).

Remainder of NAV Calculation:

After adding up the three referenced figures within Table 2 above (red references "A" through "C"), the total increase in net assets as of 6/30/2013 is projected to be $298 million (red reference "D" in Table 2 above).

We can now calculate FSC's projected NAV per share as of 6/30/2013 (see red references "D" through "G" in Table 2 above):

Net Assets at Beginning of Period (9/30/2012): $903,570,000

(+) Total Increase (Decrease) in Net Assets: $298,022,734

(=) Net Assets at End of Period: $1,201,592,734

(/) Common Shares Outstanding at 6/30/2013: 120,944,378

(=) NAV Per Common Share as of 6/30/2013: $9.94 per share

Conclusions Drawn:

To sum up all the information I have discussed above, I am estimating FSC will report the following figure:

NAV of $9.94 per share as of 6/30/2013

This is a $0.04 per share increase from FSC's 3/31/2013 NAV and a $0.06 per share increase from FSC's 12/31/2012 NAV. My range for FSC's 6/30/2013 NAV is $9.89 - $9.99 per share. FSC's fiscal third quarter of 2013 $0.04 per share NAV increase can be attributed to the following:

Table 6 - FSC Quarterly NAV Change (Per Share Basis)


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With Table 6 above as a reference, I am projecting FSC's earnings per common share to be $0.25 for the fiscal third quarter of 2013 (rounded to the nearest cent). Referring to Table 1 above, FSC's net increase in net assets resulting from operations is projected to be $29.2 million for the fiscal third quarter of 2013. In comparison, FSC paid out a fiscal third quarter of 2013 dividend of $0.29 per share. Referring to Table 3 above, FSC's dividend distributions are projected to be ($33.3) million for the fiscal third quarter of 2013. After adding these two figures together, a negative differential of ($0.04) per share or ($4.1) million for the current quarter is obtained.

However, this negative differential is overshadowed by FSC's $0.08 per share accretion to NAV via its April 2013 14.4 million common share equity raise. This equity raise of 14.4 million shares had a net issuance price of $10.52 per share. This was a $0.62 per share accretion to FSC's NAV of $9.90 per share as of 3/31/2013. Per my prior quarter's FSC NAV article, I correctly stated this equity raise would be accretive to FSC's NAV for the fiscal third quarter of 2013.

The equity raised from my estimated 300,000 shares issued under FSC's dividend reinvestment plan would also provide an extremely slight accretion to FSC's NAV as of 6/30/2013 (under $0.01 per share). This is due to the fact these shares were issued at average price of $10.68 per share. This was a $0.78 per share accretion to FSC's NAV of $9.90 per share as of 3/31/2013.

My projected overall NAV increase of $0.04 per share shown in Table 2 is now completely reconciled and properly examined with Table 6 as a reference.

Final Note Regarding My Personal BUY, SELL, or HOLD Recommendation:

I feel FSC should continue to trade at a slight to modest premium to NAV. One main reason is the yield obtained through ownership of this stock. The current annual yield by owning FSC is approximately 10.5%. This is one reason why investors are attracted to this stock and to the business development company ('BDC') sector in general. More and more investors are looking for a steady stream of dividend income in this low interest rate environment. I feel FSC could be an enticing proposition for most investors looking for a steady stream of income. However, the recent price of FSC may be a little steep for some investors looking for a valuation play.

FSC recently closed at $10.90 per share as of 7/26/2013. This is a $0.96 per share premium to my estimated NAV of $9.94 per share as of 6/30/2013. This is roughly a 1.1x price to NAV ratio. At this current price (if I currently owned the stock), I would hold the stock and receive the monthly dividends. In my personal opinion, FSC's current stock price is too high to initiate a position. However, if FSC's stock price modestly declines closer to my estimated NAV of $9.94 as of 6/30/2013, I would once again begin to "eye" this stock. I would begin to seriously consider initiating a position in FSC around the $10.25 - $10.30 per share level.

Therefore, I currently rate FSC as a solid HOLD.

Source: Fifth Street Finance Corp.'s Upcoming Fiscal Q3 2013 Net Asset Value Projection (As Of June 30, 2013)