Malon Wilkus - Chairman and Chief Executive Officer
Pete Deoudes - Vice President, Investor Relations
Rick Shane - JPMorgan
American Capital (ACAS) J.P. Morgan SMid Cap Conference December 11, 2013 12:45 PM ET
Rick Shane - JPMorgan
Good morning. This is Rick Shane from the J.P. Morgan specialty finance team. I welcome you all to our SMid Cap Conference. It is my pleasure to introduce the management team from American Capital. We have the CEO, Malon Wilkus; and Director of Investor Relations, Pete Deodes. It's great to see you guys.
We've covered you at American Capital for in my carrier more than a decade at this point, and exciting to see sort of the turnaround over the last few years. And we think that 2014 will be another great year of growth.
Thanks, everybody, for joining us and it's a small group. So I'm going to try to kind of give you an overview very quickly. Let's just see, just show hands, the folks that don't know us very well, and like we need to go to high-level. So let's do this a high-level.
And we were founded back in 1986. We went public in 1997. We've become one of the leading managers and investors in alternative assets. We have $20 billion of earning assets under management, and of which $6 billion is on our balance sheet and $14 billion is in externally managed funds. We have seven private funds and two public funds that we manage.
When you include levered assets, we have a $117 billion and these are managed by teams of people in eight offices. We have Dallas, Chicago, Boston, New York and Annapolis, and then our home office in Bethesda, Maryland; and then we also operate out of London and Paris.
And as you can see here, here is our earning asset under management. It's been growing very rapidly since 2010 to $20.4 billion. And you can see it's broken down between the assets that we have on our balance sheet and the assets in externally managed funds.
When you include levered assets then we are at $117 billion in assets under management. We have 37 teams managing these funds and these assets, 120 investments professionals. So for instance, we have a team of course managing our agency REITs and another team slightly different managing the American Capital Mortgage REIT.
We have different team managing our CLOs, we have multiple teams managing our private equity and multiple teams managing our Sponsor Finance. And we have similar kind of breakdown in Europe. We have a team managing our special situation assets and so on and so forth.
And we have an operations team. Allow me to start with this FACT team. We have 36 audit and valuation professionals in our FACT team to help us do due-diligence and evaluating companies who we might invest in. And then they help monitor the companies on a monthly basis and value them on a quarterly basis.
We have 19-person operations team with 10 former CEOs and Presidents. We also have a supply chain management group there to help bring lower cost to supplies and pricing to our various portfolio company, so we help get them the lowest cost FedEx and low cost phone service. And we help take them to Mexico or to Asia to get lower cost materials and supplies or manufacturing.
We have a 5-person syndications team that where we syndicate and out senior debt and managing, get the lowest cost pricing on senior debt. And we have a 24-person legal team to keep our cost low, because it's a lot more expensive to use third-party legal and 9-person human resource team.
We are broken up into five different business segments. So on the left is our operating companies, where we have $2.2 billion invested and we're investing up and down the balance sheet in these companies and in all sorts of sectors. Secondly, we have our asset management company valued at $0.9 billion in value and there we're managing these nine funds under management.
Third, we have a Sponsored Finance team that is working with other private equity firms to provide debt financing to their transactions. And fourth, we have our European capital, where we're doing both our buyout or operating company's business and our Sponsored Finance business in Europe. And then finally, we have Structured Products, where we're investing in CLO equity and in our own CLOs.
So let's go to the private finance business. You can see that over the last five years we have been diversifying the mezzanine component of our Sponsored Financed business, private finance business has been declining, as we have de-levered our balance sheet. The equity component has been rising. This gives us great upside opportunities and as the economy is improving and growing.
So we've invested overtime $21 billion at American Capital and over 375 portfolio company since our IPO. $11 billion of that has been in over a 115 American Capital One Stop Buyout, where we are controlling and operating these companies. $8 billion has been in over a 160 private equity buyouts that are sponsored by over a 150 private equity firms, and this is our Sponsored Finance business. And then $2 billion has been direct in the companies for growth, acquisitions and recapitalizations.
We have produced a 12% IRR on the $16 billion of investments that we've made in private finance, in our private finance portfolio over the last 14 years. And that's, remind you, on a blend of senior debt, about a-third senior debt, a-third mezzanine debt and a-third equity. And so 26% IRR on the exits of these investments. So we've done a tremendous amount of exits and proven out the portfolio.
You can see the volume of our activity in our buyouts. We have since 2009 been doing a much smaller volume of buyouts and focusing more on exiting our companies, managing them, expanding them, growing them and exiting them at excellent prices.
But you can see here in our buyout business, our One Stop Buyouts, we've invested $11.4 billion since we went public. We've gotten this 9% return on the senior debt that we've deployed there, a 12% return on the mezzanine debt and a 14% return on the equity. So our blend of 12% total return is there.
If you would include our asset management company in this calculation, which most private equity funds would have included that, but we've treated separately. But if you included that 14% return on equity, it would be more around 18%.
Now, we've actually proven the exit, so 90% of these investments we've already exited, and you can see that returns on our exits is 8% on senior, 12% on mezz, 27% return on equities, and therefore a blend of 15%. So we wait until it's the right time to exit the equity in these companies and we get better returns.
Lets turn to our assets management company, where we have $14 billion of earnings assets under management, $117 billion overall. And at the top you can see we're managing two different private equity funds. This is American Capital Equity I and American Capital Equity II.
Equity I was created in 2006 and it was composed of about 100 pieces of equity and a 100 different portfolio companies in our buyout business. And we sold at the prior quarter's fair value. We booked a gain when we sold these and we turned around and managed these assets on a 2 and 30 basis.
And then a year later, we sold another amount. This ACE I was originally a $1 billion fund. ACE II is originally a $760 million fund. And we have exited a lot of those assets and provided very fine returns for these vintages. And then we also have European Capital that we manage externally as well.
Secondly, we have our two public REITs, American Capital Agency, American Capital Mortgage. American Capital Agency has been the best performing REIT since we took it public in 2008, I should say. An outstanding performance, and with that performance we've been able to grow it quite dramatically. And so today we're managing $10 billion of equity there. And we have $97 billion of assets, earning 125 basis points.
And then American Capital Mortgage, it's a sister company, that's a hybrid REIT, able to do more things. And just recently it purchased a residential mortgage servicer, allowing then American Capital Mortgage and for that matter agency to participate in the servicing rights that are being sold today.
And then, finally we have our four funds, CLOs that we have created and managed. Our 2007 CLO was in the top decile of performance. It performed extremely well, producing high-teen returns for the equity. And then we've created another CLO in 2012 and then two in 2013.
And I would say that we are in a good position to continue to expand our sale of business, because of the potential or the requirements now that CLO managers have skin in the game, and of course with the size of our balance sheet that presents no problem. We're trying to expand our asset management business, trying to organically grow additional funds for us to manage, so both expand our existing funds, those that we can't expand and then also establish more funds to manage.
Quickly, let's talk about European capital. It's wholly owned by American Capital. And it was founded back in 2005. It does both One Stop Buyouts and manages operating companies there in Europe. And it also has a Sponsor Finance business participating in the highly syndicated mezzanine debt in Europe and then middle-market mezzanine.
We have offices in London and Paris, 55 employees. And it's invested $3.5 billion in over a 106 portfolio companies, $1.1 billion in nine One Stop Buyouts and $2.2 billion in 91 private equity sponsored buyouts. We have produced a 5% IRR there, and that's through two recessions coming very shortly after we started our investments in Europe.
Actually European capital has been performing very well for American Capital for the last five years contributing great deal to our earnings and producing very fine returns for us over the last five years. In part, because we have invested mostly in the U.K. and the countries north of the Mediterranean, so we have no assets in Italy and Spain or Greece today.
Our Structured Product business. We have $262 million of fair value of assets there. It's produced a 17% IRR in our CLO business. It was our CMBS business, where we booked the bulk of our losses during the Great Recession and there we have produced a negative 18% IRR.
So what's driving our growth today -- and for those folks that are following me perhaps on the internet, this chart may not be there. It's at the end of the presentation that you have. What's driving our growth is a variety of things, and it's not only what's been driving our growth in the past and since third quarter of 2009 we've produced a 29% annualized growth in our book value per share, but it's the same things that we expect to drive our growth in the future.
So number one, we have the potential to reap equity rates of return on the $1.6 billion of equity stakes that we have in our middle-market companies. And we're continuing to grow those companies through organic growth, add-on acquisitions, and continual operational improvements. And in fact, we've done four add-on acquisitions over the last year for our portfolio.
We are growing our $828 million of equity investments in American Capital asset management trying to expand our existing funds and raising new funds and we're also leveraging some of our investment teams potential. Third, is that we have the potential for appreciating our $880 million investment in European Capital. There we hold our investment in European capital at a $214 million discount to ECAS NAV.
If we were to consolidate we would pick up that discount, but we're not able to consolidate under the current arrangements. And in an addition, Europe Capital itself has on its book a $52 million discount, that's bond yield discount on performing loan assets. And we've been exiting a lot of our performing loan assets there, we've been exiting at par, and so we believe we will pickup that bond yield discount as we exit out of some of these investments.
Fourth, in terms of driving our growth per share is our stock buyback program. And we've bought $924 million cumulatively of our stock back through the third quarter, since are program began in the third quarter of 2011. And that represents, 24% of our shares outstanding and prior to that the implementation of the program. The program is both, a stock repurchase and a dividend program. So if we trade below book, we would expect to use our liquidity for stock buybacks and if we trade above book, we would expect to use our liquidity for dividends.
And then finally, we are operating to optimize our tax benefit or tax assets. Today it has $492 million dollars of net operating losses on our balance sheet, which we can use to offset taxes and $377 million of net capital losses, again, to offset losses.
Finally, let me just show you our net asset value and growth rates since we went public in or since the fourth quarter of 2009, and we've produced a 36% annualized growth since that time. And we continue to grow our book value. So in the third quarter, we're now up to $19.54. And that's up from the $17.84 that we read at the end of last year.
And so with that, let me open up to questions.
Rick Shane - JPMorgan
I'd indulge myself and take the first question if I could. And actually this slide's a great place to start. One of the things that has driven price appreciation over the last several years, and strong stock performance is exactly what you've demonstrated here, which is the NAV growth.
What's interesting to me, and one of the parts of our thesis on the stock is that, while the stock has performed well, on a multiple basis it's actually not anymore expensive than it was two years ago, because of the NAV growth. The discount has persisted. One of the questions I have is why do you think that discount has persisted? And specifically would you talk as you address that about the CML, AAI transaction and the drag that equity has had on returns over the last couple of years?
Well, equity has actually contributed a great deal to returns over the several years, because of the appreciation and gains that we've enjoyed on our equity. But what you're talking about is in NOI, net operating income as non-earnings. I think the SEC's has actually started investigation over the analyst that called earned-NOI earnings as opposed to NOI. That's a joke, by the way. In fact, our equity does contributed to our earnings, but it doesn't contribute much to our net operating income.
We're very different from the rest of the BDCs and that we don't have a lot of assets that contributed in net operating income. And particularly, as we were delivering and paying off $6 billion for the debt, we've exited a lot of our debt assets, which were indeed earning income that came into our net operating income level.
Nonetheless, we still grew our earnings. And we did that because actually equity has grown at a much faster rate than debt grows. And so we've actually had far there upside for the last five years and we've shown that in our book value per share, and frankly we've shown that in our stock price. So our stock price has also risen around 27% compounded rates of return over the last five years.
But what you were talking about is our discount to book and you can see that from this Slide 79, and you can see that prior to the liquidity crisis and the Great Recession we were trading at a premium to book. We paid our last dividend in 2009, and so we came down as a price to book, and we grew back up to 80% of book than two years ago United States got downgraded, there was a question of whether we would be able -- U.S. would payback its debts.
There was question whether Greece would dropout of the Euro and there would be a Euro crisis. Northern Africa was flame in revolution and Japan had just experienced the Tsunami. So once again, our kind of assets, which are invested predominantly in the liquid middle-market equities, not so liquid, but you'll perceive that way. And we dropdown to 0.5x book in that period of time, but we've be growing back again, and today we're at 0.8x book.
So we feel that as the world gets more comfortable with the economy that indeed we will trade better as a price to book. And that we're viewed as a portfolio of representing mainstreet equities, and truly we are, a portfolio of mainstreet equities. We're not highly levered, we're far less levered.
I used to say, we were a levered play on mainstreet equities, but that's not true anymore because we've paid down so much debt. So when we went to last recession, we probably were at around 7.5x to 8x debt-to-EBITDA on a consolidated basis. Too levered, we'll never lever to that to be again, but today we're probably around 3.5x debt-to-EBITDA on a consolidated basis, if you were to consolidate it with our portfolio companies.
Rick Shane - JPMorgan
And the reason I bring that up, that transaction up specifically is I think that one of the factors that accounts for that discount is that the current income versus your peers as a percentage of your book is lower, because the equity positions aren't generating the current income that the debt instruments are?
So the problem with that statement is that they are not our peers, right. They are finance companies. You're talking about, there are 63 BDCs out there, half of those are public and they are all finance companies and we're just simply not. Only about 15% of our assets are in loans to third-party companies that we don't control. And that's what virtually 100% of the assets of the rest of the BDCs are in, in those kind of loans.
And so we invested in the equities of the middle-market companies, virtually no other BDC has invested in that way. So those aren't really our peers, but people do perceive them as our peers, and they are paying out a sizeable dividend, a 9% or 10% dividend. And we don't pay any dividend at all.
So we are being compared in a way that's very difficult in that respect. But nonetheless, the transaction you're talking about helps address that. So in this last, actually in the fourth quarter, shortly after the turn of the quarter, one of our control companies bought another control company. And in the course of it, it refinanced, and as opposed to syndicating out the senior debt to third-party lenders, which would preclude the company from paying a dividend to us, because of the covenants that they would enter into, instead we kept the senior debt on our balance sheet.
Now, we can finance that senior debt with fairly low cost debt of our own and get some spread income and that will help our net operating income. But in addition, because we're holding the senior debt, we will allow that portfolio company or debt operating company to pay it's earnings out as a dividend to us.
And so that won't happen immediately because they have to develop E&P, and you start negative because of fees, when you buy company like that. But within the next few quarters, we'd expect to start earning dividends from that company that we will book as revenues and it will increase our net operating income. And in addition, it will provide more transparency into our control company. So our shareholders in the market will be able to see their earnings coming off of our control companies.
Now, we report that every quarter in this aggregate fashion. And today there is over about $720 million of EBITDA in our controlled companies. But you don't see that coming in as a dividend, because they're precluded to pay that to us because of third-party lenders, instead they're using that to pay down debt and to grow and so forth.
But with the CML, the acquisition of AAIPharma, it can indeed pass their earnings, their free cash flow on to us as a dividend. Now, we've been doing that with our asset management company. We've never funded that with third-party debt, and so our asset management company has been paying us great dividends, total of a $125 million run rate for the year. And the market is paying a lot of attention to that.
What peer group or sector within your industry should we compare the company to, if its not the other BDCs?
If you really look at our assets, we look most like a diversified growth company, diversified holding companies. Companies like Roper Industries, Danaher's is one that you probably all know fairly well. Danaher is much bigger than we are, but in structure and how they operate, we're very similar to Danaher. We're very similar to Roper, but we're probably more hands-on than Roper is, in terms of its subsidiaries.
We don't call them subsidiary companies, right, as an investment company, we have to call it a portfolio company, but really they're operating subsidiaries of ours. We control them. As I showed, we have an operations team with 10 former Presidents and CEOs and they're constantly working in those companies to help grow them and develop them.
And so we are very much like a diversified growth companies, whose multiples trade at sizeable much higher than our multiple. And what we're missing is the ability to go to those same investors and those same analysts that follow that industry. And show them our results because our results are shown using investment company financials, and it would just be very different for them.
Now, the transaction that we just did with AAIPharma and CML allows us to come up with numbers that are much more similar that they would see. And we're working to actually bring our control companies up to public reporting standards, so that we could actually voluntarily report, but not only on a fair value basis, but also on a regular GAAP basis. And once we'd be in that position, then we could go to those investors and diversified holding companies and diversified growth companies and basically present how we are operating in the similar fashions how they normally would see it. Any other questions?
Rick Shane - JPMorgan
I think with that we are out of time. Malon, Pete, thank you very much. It's great to see you guys.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!