Fifth Street Senior Floating Rate's Upcoming Fiscal Q2 2014 Net Asset Value Projection

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Summary

I am projecting Fifth Street Senior Floating Rate ('FSFR') will report a total increase (decrease) in net assets of ($0.2) million for the fiscal six-months ended 3/31/2014.

I am projecting FSFR will report a net asset value (‘NAV’) of $15.10 per common share as of 3/31/2014 (net asset value range is stated within article).

I am projecting FSFR will report an increase (decrease) in NAV of 0% but generate an economic return of 1.52% for the fiscal second quarter of 2014.

FSFR is in the process of forming a strategic partnership with GF Funding 2014 to obtain additional capital needed to expand the company’s investment portfolio.

I currently believe FSFR can sustain the company’s newly declared quarterly dividend of $0.27 per share for the next several quarters.

Focus of Article:

The focus of this article is to provide a detailed projection of Fifth Street Senior Floating Rate Corp.'s (FSFR) net asset value ('NAV') per common share as of 3/31/2014. Prior to results being provided to the public on 2/15/2014 (via the company's quarterly press release), I would like to analyze FSFR's NAV as of 3/31/2014 and provide readers a general direction on how I believe this recent quarter has panned out.

In some quarters, I anticipate providing readers an income statement projection article for FSFR. However, due to time constraints regarding research on other companies, I felt it would be best to just provide this NAV article for the fiscal second quarter of 2014. As such, I will also include my quarterly "net investment income" ('NII') and "net increase (decrease) in net assets resulting from operations" (also known as "earnings per share" ('EPS')) projections in this article. My buy, sell, or hold recommendation for FSFR will be in the conclusion paragraph of this article.

Author's Note: Predicting certain accounting figures within the business development company ('BDC') sector is usually more difficult when compared to other sectors due to the valuation adjustments that occur on a company's investment portfolio each quarter. Specifically, the following two FSFR accounts are typically more difficult to project: 1) unrealized appreciation (depreciation) on investments and 2) realized gain (loss) on investments. As such, there are several assumptions used when performing such an analysis. FSFR's actual reported values may differ materially from my projected values within this article due to unforeseen circumstances. This could occur because management deviates from a company's prior business strategy and pursues a new strategy that was not previously disclosed. This could also occur when the company has a "one-time" extraordinary event which was previously unforeseen. Readers should be aware as such. All projections within this article are my personal estimates and 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.

Overview of FSFR's NAV as of 3/31/2014:

Due to the fact that several figures needed to project/calculate FSFR's NAV as of 3/31/2014 come directly from the company's consolidated statement of operations, I provide Table 1 below. Table 1 shows FSFR's consolidated statement of operations from a six-months ended perspective. Using Table 1 below as a reference, one must add certain account figures from the fiscal first and second quarters of 2014 for purposes of projecting a suitable NAV as of 3/31/2014.

Table 1 - FSFR Six-Months Ended Consolidated Statement of Operations

(Source: Table created entirely by myself, partially using FSFR data obtained from the SEC's EDGAR Database)

Having provided Table 1 above (in particular FSFR's "Six-Months Ended (ESTIMATE)" column), we can now begin to calculate FSFR's projected NAV as of 3/31/2014. This projection will be calculated using Table 2 below.

Table 2 - FSFR Three and Six-Months Ended NAV Calculation/Projection (NAV as of 3/31/2014)

(Source: Table created entirely by myself, partially using FSFR data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 2 above as a reference, let us take a look at the calculation for FSFR's projected NAV as of 3/31/2014. Unless otherwise noted, all figures below are for the "six-months ended" timeframe. Let us look at the following figures (in corresponding order to the "Ref." column shown in Table 2 next to the March 31, 2014 column):

A) Operations

B) Stockholder Transactions

C) Capital Share Transactions

A) Operations:

- Net Increase (Decrease) in Net Assets From Operations Estimate of $2.8 Million; Range ($4.2) - $9.8 Million

- Confidence Within Range = Moderate to High

- See Red Reference "A" in Table 2 Above Next to the March 31, 2014 Column

This "net increase (decrease) in net assets from operations" figure consists of the following three accounts that come directly from FSFR's consolidated statement of operations: 1) net investment income (see blue reference "A" in Tables 1 and 2 above); 2) net unrealized appreciation (depreciation) on investments (see blue reference "B" in Tables 1 and 2 above); and 3) net realized gain (loss) on investments (see blue reference "C" in Tables 1 and 2 above). Since I have refrained from writing a quarterly consolidated statement of operations projection article for FSFR, I will summarize what I believe will occur within these three accounts during the fiscal second quarter of 2014. Let us first discuss FSFR's NII account.

1) Net Investment Income:

- Estimate of $3.4 Million; Range $1.9 - $4.9 Million

- Confidence Within Range = Moderate to High

- See Blue Reference "A" in Tables 1 and 2 Above Next to the March 31, 2014 Column

FSFR reported NII of $1.5 million for the fiscal first quarter of 2014. I am projecting FSFR will report NII of $1.9 million for the fiscal second quarter of 2014. Using Tables 1 and 2 above as a reference, when combined this is a projected NII of $3.4 million for the six-months ended 3/31/2014. Per FSFR's recent monthly newsletter for April 2014, management stated the company had gross loan originations of $96 million during the fiscal second quarter of 2014. Through the strong quarterly gross loan originations, management was able to utilize the newly established $100 million Natixis Credit Facility during the fiscal second quarter of 2014. Management further mentioned FSFR had seen portfolio sales and repayments of ($47) million during the fiscal second quarter of 2014. When combining the company's quarterly gross loan originations less portfolio sales/repayments, FSFR's total investment portfolio should increase by approximately $50 million for the fiscal second quarter of 2014 (prior to all quarterly fair market value ('FMV') fluctuations). For FSFR, this is a continued increase in the company's investment portfolio and should help spur the increase to quarterly NII. Now let us discuss FSFR's net unrealized appreciation (depreciation) on investments account.

2) Net Unrealized Appreciation (Depreciation) on Investments:

- Estimate of ($0.7) Million; Range ($5.2) - $3.8 Million

- Confidence Within Range = Moderate

- See Blue Reference "B" in Tables 1 and 2 Above Next to the March 31, 2014 Column

FSFR reported a net unrealized appreciation (depreciation) on investments of ($0.3) million for the fiscal first quarter of 2014. I am projecting FSFR will report a net unrealized appreciation (depreciation) on investments of ($0.4) million for the fiscal second quarter of 2014. Once again using Tables 1 and 2 above as a reference, when combined this is a projected net unrealized appreciation (depreciation) on investments of ($0.7) million for the six-months ended 3/31/2014.

In the prior quarter, FSFR reported an unrealized appreciation (depreciation) of ($0.3) million regarding the company's investment in Triple Point Group Holdings, Incorporated. Since this debt investment was only couple of months old, the minor unrealized valuation loss was a bit surprising. The remaining net change to this account consisted of numerous minor unrealized appreciation (depreciation) fluctuations on the rest of FSFR's investment portfolio.

With that being said, all investments are still relatively new and should not have any material FMV fluctuations. I anticipate various investments had some minor to modest unrealized appreciation (depreciation) during the fiscal second quarter of 2014. Now let us discuss FSFR's net realized gain (loss) on investments account.

3) Net Realized Gain (Loss) on Investments:

- Estimate of $0.1 Million; Range ($0.9) - $1.1 Million

- Confidence Within Range = Moderate to High

- See Blue Reference "C" in Tables 1 and 2 Above Next to the March 31, 2014 Column

FSFR reported a net realized gain (loss) on investments of $22,625 for the fiscal first quarter of 2014. I am projecting FSFR will report a net realized gain (loss) on investments of $0.1 million for the fiscal second quarter of 2014. Still using Tables 1 and 2 above as a reference, when combined this is a projected net realized gain (loss) on investments of $0.1 million for the six-months ended 3/31/2014. This projection includes the fact a portion of the ($47) million of portfolio exits during the quarter were debt investments sold in the open market which slightly appreciated in value. As such, I'm anticipating several minor net realized gains associated with these types of sales to market participants.

Let us now combine the three accounts described above to come up with a proper net increase (decrease) in net assets from operations figure for the six-months ended 3/31/2014. When combining NII of $3.4 million, a net unrealized appreciation (depreciation) on investments of ($0.7) million, and a net realized gain (loss) on investments of $0.1 million, I am projecting FSFR has an increase (decrease) in net assets from operations of $2.8 million for the six-months ended 3/31/2014 (see red reference "A" in Table 2 above).

B) Stockholder Transactions:

- Net Increase (Decrease) in Net Assets From Stockholder Transactions Estimate of ($2.9) Million; Range ($2.7) - ($3.1) Million

- Confidence Within Range = High

- See Red Reference "B" and Blue Reference "D" in Table 2 Above Next to the March 31, 2014 Column

- See Blue Reference "D" in Table 3 Below

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

This is a fairly simple calculation. This is FSFR's dividend distributions for the fiscal first and second quarters of 2014.

Table 3 - FSFR Six-Months Ended Distributions to Common Stockholders Projection

(Source: Table created entirely by myself, partially using FSFR data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 3 above as a reference, the number of outstanding shares of common stock as of 3/27/2014 is projected to be 6.7 million. This figure is unchanged from FSFR's outstanding shares of common stock as of 12/31/2013. I am projecting no shares of common stock were issued as part of FSFR's dividend reinvestment plan for the fiscal second quarter of 2014. FSFR will only issue additional shares of common stock, either through an equity raise or through the company's dividend reinvestment plan, when the issuance would be accretive to NAV. During the entire fiscal second quarter of 2014, FSFR's stock price remained below NAV as of 12/31/2013.

FSFR is currently in the process of forming a strategic partnership with GF Funding 2014 to obtain additional capital needed to expand the company's investment portfolio. This may eventually include additional shares of common stock being issued to GF Funding 2014 in exchange for capital. However, I am anticipating this deal had yet to be finalized during the fiscal second quarter of 2014. The common stock dividend declared for the fiscal second quarter of 2014 was $0.23 per share. When calculated, I am projecting a dividend distribution of ($1.5) million.

When this dividend distribution is combined with the prior quarter's dividend distribution of ($1.4) million, I am projecting FSFR has an increase (decrease) in net assets from stockholder transactions of ($2.9) million for the six-months ended 3/31/2014 (see red reference "B" in Table 2 above and blue reference "D" in Tables 2 and 3 above).

C) Capital Share Transactions:

- Net Increase (Decrease) in Net Assets From Capital Share Transactions Estimate of $0; Range ($1.5) - $1.5 Million

- Confidence Within Range = High

- See Red Reference "C" in Table 2 Above Next to the March 31, 2014 Column

This "net increase (decrease) in net assets from capital share transactions" figure consists of the following three accounts: 1) issuance of common stock, net (see blue reference "E" in Table 2 above and Table 4 below); 2) issuance of common stock under dividend reinvestment plan, net (see blue reference "F" in Table 2 above and Table 5 below); and 3) repurchases of common stock.

1) Issuance of Common Stock, Net:

- Estimate of $0; No Range

- Confidence Within Range = High

- See Blue Reference "E" in Table 2 Above Next to the March 31, 2014 Column

- See Blue Reference "E" in Table 4 Below

Since FSFR did not have any equity raises (which would result in the issuance of common stock) during the fiscal second quarter of 2014, this figure should remain at $0 for the six-months ended 3/31/2014.

Table 4 - FSFR Six-Months Ended Issuance of Common Stock, Net Projection

(Source: Table created entirely by myself, partially using FSFR data obtained from the SEC's EDGAR Database [link provided below Table 1])

Therefore, I am projecting FSFR reports a six-months ended issuance of common stock, net figure of $0 (see blue reference "E" in Tables 2 and 4 above).

2) Issuance of Common Stock Under Dividend Reinvestment Plan:

- Estimate of $0; No Range

- Confidence Within Range = High

- See Blue Reference "F" in Table 2 Above Next to the March 31, 2014 Column

- See Blue Reference "F" in Table 5 Below

This is a simple calculation. This is FSFR's issuance of common stock under the company's dividend reinvestment plan for the fiscal first and second quarters of 2014.

Table 5 - FSFR Six-Months Ended Issuance of Common Stock Under Dividend Reinvestment Plan Projection

(Source: Table created entirely by myself, partially using FSFR data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 5 above as a reference, I am projecting no shares of common stock were issued as part of FSFR's dividend reinvestment plan for the fiscal second quarter of 2014. In the past, FSFR's "big brother" Fifth Street Finance Corp. (FSC) has at times repurchased outstanding shares of common stock in the open market to distribute as part of the company's dividend reinvestment plan (net effect of 0 additional outstanding shares of common stock issued). This strategy has only been implemented when FSC's stock price, at the time of distribution, is priced at a discount to NAV.

FSFR's stock price continued to trade at a discount to NAV throughout the entire fiscal second quarter of 2014. As such, I am projecting the company will continue to either distribute the company's dividends via cash or repurchase outstanding shares of common stock in the open market. Either way, the net effect is no additional outstanding shares of common stock being issued or additional capital being raised under the dividend reinvestment plan.

Therefore, I am projecting FSFR reports a six-months ended issuance of common stock under the company's dividend reinvestment plan figure of $0 (see blue reference "F" in Tables 2 and 5 above).

3) Repurchases of Common Stock:

- Estimate of $0; Range ($5.0) Million - $0

- Confidence Within Range = Moderate to High

- See Table 2 Above Next to the March 31, 2014 Column for Reference

Management may intend to repurchase outstanding shares of common stock when FSFR's stock price is at a material discount to the company's NAV. Even though FSFR's stock price continued to be below the company's NAV of $15.10 per share as of 12/31/2013, I am assuming management did not initiate any share buybacks during the fiscal second quarter of 2014. Even though FSFR's stock price continued to trade at a discount to NAV throughout the quarter, I believe management wanted to use all available credit/capital towards quarterly loan originations to increase the company's investment portfolio. Therefore, I am projecting FSFR reports a six-months ended repurchases of common stock figure of $0 (see Table 2 above).

When combining net equity raised in common stock issuances of $0, equity raised in relation to the company's dividend reinvestment plan of $0, and equity in relation to repurchases of common stock of $0, I am projecting FSFR has an increase (decrease) in net assets from capital share transactions of $0 for the six-months ended 3/31/2014 (see red reference "C" in Table 2 above).

Remainder of NAV Calculation:

After adding up the three referenced figures discussed earlier (see red references "A, B, C" in Table 2 above), I am projecting FSFR has a "total increase (decrease) in net assets" of ($0.2) million for the six-months ended 3/31/2014 (see red reference "(A + B + C) = D" in Table 2 above).

Having this figure established, let us now calculate FSFR's projected NAV per common share as of 3/31/2014 (see red references "D, E, F, G" in Table 2 above):

Total Increase (Decrease) in Net Assets: ($0.2) million

(+) Net Assets at Beginning of Period: $100.8 million

(=) Net Assets at End of Period: $100.7 million (rounded)

(/) Outstanding Shares of Common Stock as of 3/31/2014: 6.7 million

(=) NAV Per Common Share as of 3/31/2014: $15.10 per share

Conclusions Drawn:

To sum up all the information discussed above, I am projecting FSFR will report the following NAV per common share as of 3/31/2014:

FSFR's Projected NAV as of 3/31/2014 = $15.10 Per Common Share

FSFR's Projected NAV Range as of 3/31/2014 = $15.00 - $15.20 Per Common Share

This projection is no change from FSFR's NAV as of 12/31/2013. This unchanged NAV can be attributed to the following per share changes:

Table 6 - FSFR Quarterly NAV Per Share Changes

(Source: Table created entirely by myself, including all calculated figures and projected valuations)

Using Table 6 above as a reference, I am projecting FSFR reports quarterly NII of $0.28 per share. When compared to FSC's management fee which is based on 2% of the company's ending gross assets for the current quarter, FSFR's management fee is based only on 1% of the company's average ending gross assets for the current and prior quarter. Each company's ending gross assets figure excludes the cash and cash equivalents account. Since FSFR's management fee is based on the average ending gross assets for the current and prior quarter (which had a lower balance), I am projecting the increase in accrued management fees lagged behind the increase in interest income for the fiscal second quarter of 2014. This assumption is mainly due to the net increase (decrease) of approximately $50 million regarding FSFR's investment portfolio. This should directly benefit NII by a few cents in the current quarter.

When combining the projected quarterly NII of $0.28 per share, the projected quarterly unrealized appreciation (depreciation) of ($0.06) per share, and the projected quarterly realized gain (loss) of $0.01 per share, I am projecting FSFR's net increase (decrease) in net assets resulting from operations (also known as EPS) will be $0.23 per share for the fiscal second quarter of 2014. In comparison, I am projecting FSFR had dividend distributions of ($0.23) per share for the fiscal second quarter of 2014. After adding these two amounts together, an unchanged NAV per share figure for the fiscal second quarter of 2014 is obtained.

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

I continue to believe there are several positive and negative aspects to FSFR right now. Let us first discuss a few positive trends for FSFR. First, FSFR currently trades at a modest discount to NAV as of 12/31/2013. As of 5/7/2014, FSFR's stock price was $14.12 per share. This calculates to a premium (discount) of ($0.98) per share for a price to NAV ratio of 0.935 (6.50% discount).

Second, FSFR's Board of Directors ('BoD') recently announced an increase in the amount of quarterly dividend distributions from $0.23 per share for the fiscal second quarter of 2014 to $0.27 per share for the fiscal third quarter of 2014. This quarterly increase should be seen as an encouraging sign.

Now let us discuss a few negative trends for FSFR. First, FSFR had an annualized weighted average yield on debt investments of only 6.81% as of 9/30/2013. This annualized weighted average yield on debt investments slightly dropped to only 6.64% as of 12/31/2013. Since FSFR did not have any collateralized loan obligations ('CLO') or equity investments to potentially help boost yield, this is a very low percentage and one of the lowest within the BDC sector. FSFR needs to increase the company's annualized weighted average yield in the upcoming quarters to help grow NII per share as expenses begin to escalate as the portfolio grows. FSFR has stated the company is confident management can gradually increase this very low annualized weighted average yield. However, readers should be aware this most likely will take some time as market rates in general remain suppressed.

Second, FSFR will need to generate additional capital in the near future. As stated earlier, FSFR has basically used all of the equity proceeds in relation to the company's IPO in July 2013 and financing through its $100 million Natixis Credit Facility created in November 2013. As stated last quarter, I projected FSFR will need to establish additional sources of financing/capital in the debt/equity markets. FSFR is currently in the process of forming a strategic partnership with GF Funding 2014 to obtain additional capital needed to expand the company's investment portfolio. This may eventually include additional shares of common stock being issued to GF Funding 2014 in exchange for capital. However, it currently is not advantageous for FSFR to perform an additional equity raise due to the fact the stock price is currently trading at a modest discount to projected NAV of $15.10 per share as of 3/31/2014. If FSFR's stock price does not increase to NAV over the next several months, management may issue new shares of common stock at a minor to modest discount to NAV or be forced into financing terms at higher interest rates than previously desired. This would cause either dilution to existing shareholders or have negative impacts on NII/NAV.

Therefore, I currently rate FSFR as a HOLD for existing shareholders with a "wait-and-see" attitude for all new potential investors. If FSFR were to trade at a material discount to NAV (10% or above discount), I would rate the stock a BUY.

Personally, I will continue to monitor the company's quarterly results. In particular, I will continue to analyze the following FSFR quarterly figures: 1) NII/net ICTI; 2) NAV; and 3) annualized weighted average yield on debt investments. I will also evaluate all newly created sources of financing/capital.

Disclosure: I am long FSC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in FSFR.