Fifth Street Senior Floating Rate Corp (NASDAQ:FSFR)
Q1 2016 Earnings Conference Call
February 10, 2016, 10:00 ET
Robyn Friedman - VP, IR
Ivelin Dimitrov - CEO
Steven Noreika - CFO
Welcome to the Fifth Street Senior Floating Rate Corp. Q1 2016 Earnings Conference Call. [Operator Instructions]. I would now like to give the conference call to Miss Robyn Friedman. You may begin, ma'am.
Thank you Kevin. Good morning and welcome to Fifth Street Senior Floating Rate Corp's first-quarter 2016 earnings call. I am joined this morning by Ivelin Dimitrov, Chief Executive Officer; Todd Owens, President; and Steve Noreika, Chief Financial Officer. Before we begin, I would like to note that this call is being recorded.
Replay information is included in our February 9, 2016 press release and is posted on the Investor Relations section of Fifth Street Senior Floating Rate Corp's website which can be found at www.FSFR.fifthstreetfinance.com. Please note that this call is the property of Fifth Street Senior Floating Rate Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited.
Today's conference call may include forward-looking statements and projections that reflect the Company's current views with respect to, among other things, future events and financial performance. Forward-looking statements may include statements as to the future operating results, dividends and business prospects of Fifth Street Senior Floating Rate Corp.
Words such as believe, expect, seeks, plans, should, will, estimate, projects, anticipates, intend and future or similar expressions are intended to identify forward-looking statements. Although not all forward-looking statements include these words. These forward-looking statements are subject to the inherent risks and uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected or implied in these forward-looking statements.
New risks and uncertainties arise over time and it is not possible for the Company to predict those events or how they may affect it. Therefore, you should not place undue reliance on these forward-looking statements. We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 203-681-3720. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.
The format for today's call is as follows. Ivelin will provide introductory remarks, an overview of our results and a market update and Steve will summarize the financial results. Then we will open the line for Q&A. I will now turn the call over to our CEO, Ivelin Dimitrov.
Thank you, Robyn. For the quarter ended December 31, 2015, FSFR generated $0.24 of net investment income per share, covering a run rate quarterly dividend of $0.225 per share for the second consecutive quarter. During the quarter, FSFR closed $129 million of investments across 23 new and 2 existing portfolio companies. We operated within our target leverage range of 0.8 to 0.9 times debt to equity, closed on a $25 million credit facility with East West Bank and continued to make progress ramping the FSFR Glick joint venture.
Overall in 2015 the middle market experienced its weakest year for sponsored loan volumes since 2009. The December quarter has historically been the most active for new originations, but mirroring broader middle-market M&A trends the Fifth Street platform saw a muted calendar year end.
There were several factors contributing to a soft December quarter for the market, including weakness in the energy and commodity sectors, combined with spread widening. Looking ahead, we anticipate the March quarter will follow the traditional seasonal pattern of lighter volume, with activity picking up later in 2016 as the market adjusts due to higher borrowing costs.
As of December 31, 2015 we had a strong and diversified portfolio of senior-secured floating-rate loans spread across 68 companies in 30 industries, with our largest non-control investment accounting for 4.7% of total assets. Overall, the credit quality of the portfolio remains healthy with approximately 91% of our portfolio consisting of senior-secured floating-rate debt investments.
FSFR continues to employ rigorous underwriting standards and has always taken a conservative approach when selecting positions, specifically shying away from cyclical sectors such as energy. We're pleased that our energy exposure remains minimal at only 0.7% of total investments at fair value, in just one portfolio company. Additionally, our portfolio does not have any CLO investments, debt or equity.
Despite the broader market volatility that persisted during the December quarter, we're pleased with the overall performance and stability of our portfolio. However, during the quarter we experienced credit deterioration in a few portfolio companies and one investment was moved to non-accrual status. As of December 31, 2015, the two investments on non-accrual status comprised 2.6% of our debt portfolio at fair value. Our net asset value declined in the quarter due to this credit deterioration and broader market volatility, including spreads widening.
Over half of the NAV decline was related to market fluctuations. Ameritox, one of our larger investments has continued to under-perform over the last two quarters and was marked down to 64% of par and moved to cash non-accrual status. Ameritox' under-performance is primarily due to a significant reduction in Medicare reimbursement rates, as well as lower [indiscernible] volumes. Our portfolio management team is working closely with the Company's management and sponsor owners to improve its underlying operating performance and restructure the investment.
FSFR's joint venture with the Glick family continued to ramp over the quarter towards its anticipated size of $300 million. As of December 31, 2015, the joint venture had $199 million in assets, including senior-secured loans across 29 portfolio companies. The joint venture generated $1.6 million of income for FSFR during the first quarter, representing a 10.5% weighted-average annualized return on our investment. We believe that Fifth Street's direct origination platform has and will continue to be instrumental in driving funding of the joint venture.
As always, our management team has been focused on generating consistent results to deliver value to stockholders. We're pleased that our earnings have exceeded our quarterly run rate given in for two consecutive quarters, setting the dividend at a level that should be consistently colored has enhanced our operating flexibility. Before turning the call over to Steve to go over our financial results in more detail, I would also like to take a brief, brief moment to address the recent developments regarding our Company.
As you likely saw during the quarter, one of our stockholders Ironside's Partners disclosed its intent to nominate two director candidates for election to the FSFR Board and seek additional strategic changes, including replacing our investment advisor. The FSFR Board and its management team are dedicated to maintaining an open dialogue with our stockholders and value their input towards our goal of creating stockholder value.
As we have shared with you in the past, the FSFR Board conducts a robust annual review of the investment advisory arrangements with Fifth Street management. Following its most recent review in 2015 the Board unanimously approved the continuation of the agreement with Fifth Street management and continues to believe that it is the right investment advisor for the Company. Specifics regarding the board's evaluation and conclusions will be detailed in FSFR's definitive proxy statement. With that, I would now like to turn the call over to our Chief Financial Officer, Steve Noreika, to discuss our financials in more detail.
Thank you, Ivelin. We ended the first quarter of 2016 with total assets of $644.5 million, down from $697.7 million at the end of the September quarter. Portfolio investments totaled $604 million at fair value and were spread across 68 portfolio companies at December 31.
At the end of the December quarter we had $20.5 million of cash and cash equivalents on our balance sheet, net asset value per share was $11.36 as compared to $12.11 at the end of the September quarter. For the three months ended December 31, 2015, we generated total investment income of $13.9 million which was relatively flat compared to the prior quarter and net investment income of $7 million or $0.24 per share.
During the quarter ended December 31, 2015, we closed $128.5 million of investments in 23 new and 2 existing portfolio companies and funded $132.4 million across new and existing portfolio companies. We also received $47.5 million in connection with full repayments of four of our debt investments, all of which were exited at par and an additional $76.9 million in connection with syndications and sales of debt investments.
As of December 31, 2015, 90.7% of the portfolio consisted of senior-secured floating-rate loans and 9.1% of the portfolio consisted of investments in the subordinated notes and equity interests in FSFR Glick JV. We continue to build a well-diversified portfolio and have our largest exposures in the software and healthcare industries. At December 31, 2015, the average size of our portfolio debt investments was $8.8 million and average portfolio company EBITDA was $63.4 million.
Credit quality was strong once again, with over 95% of the portfolio on accrual status. The weighted-average yield on our debt investments, including the return on the JV, was 8% as of December 31, 2015 and included a cash component of 7.8% which were in line with the previous quarter.
Turning to our capital structure, subsequent to quarter end, FSFR announced the closing of a $25 million senior-secured revolving credit facility with East West Bank. The facility matures in January 2021 and will accrue interest at LIBOR plus a variable margin. As Ivelin mentioned, during the December quarter we operated within our target leverage range, ending the quarter at 0.87 times debt to equity. As of December 31, we had $182.3 million of notes payable, outstanding related to our securitization and $109.2 million drawn on our Citibank credit facility.
Earlier this week our Board of Directors declared monthly dividends of $0.075 per share for March, April and May. We expect the Board to continue to declare monthly dividends on a quarterly basis. I will now turn it back over to Robyn.
Thank you for joining us on today's call. Kevin, please open the lines for questions.
Thanks to everyone for joining the call today.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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