Fifth Street Senior Floating Rate's Upcoming Fiscal Q3 2014 Net Asset Value Projection

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Summary

I am projecting FSFR will report a total increase (decrease) in net assets of $0.1 million for the fiscal nine-months ended 6/30/2014.

I am projecting FSFR will report a net asset value (‘NAV’) of $15.14 per share as of 6/30/2014 (net asset value range is stated within the article).

I am projecting FSFR will report an increase (decrease) in NAV of 0.07% and generate an economic return of 1.85% for the fiscal third quarter of 2014.

FSFR is in the process of forming a strategic joint venture (‘JV’) partnership with GF Funding 2014 to expand the company’s investment portfolio but needs additional financing/capital.

On 7/10/2014, FSFR held a special meeting of stockholders where a proposal was approved allowing the company to sell shares of its common stock at a price below current NAV.

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 share as of 6/30/2014. Prior to results being provided to the public on 8/14/2014 (via the company's quarterly press release), I would like to analyze FSFR's NAV as of 6/30/2014 and provide readers a general direction on how I believe this recent quarter has panned out.

In some quarters, I anticipate providing readers a projection article for FSFR in regards to the company's consolidated statement of operations. 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 third 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 current BUY, SELL, or HOLD recommendation for FSFR will be in the "Conclusions Drawn" section of this article.

Side Note: Predicting certain accounting figures within the business development company ('BDC') sector is usually more difficult when compared to other sectors due to the fair market value ('FMV') adjustments that occur on a company's investment portfolio each quarter. Specifically, the following two FSFR accounts are typically more difficult to project in any given quarter: 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 or anticipated. 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 Projected NAV as of 6/30/2014:

Due to the fact that several figures needed to project/calculate FSFR's NAV as of 6/30/2014 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 nine-months ended timeframe. Using Table 1 below as a reference, one must add certain account figures from the fiscal first, second, and third quarters of 2014 for purposes of projecting a suitable NAV as of 6/30/2014.

Table 1 - FSFR Fiscal Nine-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 "Fiscal Nine-Months Ended (ESTIMATE)" column), we can now begin to calculate FSFR's projected NAV as of 6/30/2014. This projection will be calculated using Table 2 below.

Table 2 - FSFR Nine-Months Ended NAV Projection (NAV as of 6/30/2014)

(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 6/30/2014. Unless otherwise noted, all figures below are for the "nine-months ended" timeframe. Let us look at the following figures (in corresponding order to the "Ref." column shown in Table 2 next to the June 30, 2014 column):

A) Operations

B) Stockholder Transactions

C) Capital Share Transactions

A) Operations:

- Net Increase (Decrease) in Net Assets From Operations Estimate of $4.8 Million; Range ($5.2) - $14.8 Million

- Confidence Within Range = Moderate to High

- See Red Reference "A" in Table 2 Above Next to the June 30, 2014 Column

This "net increase (decrease) in net assets from operations" figure consists of the following three amounts 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 (due to time constraints), I will summarize what I believe will occur within these three amounts during the fiscal third quarter of 2014. Let us first discuss FSFR's NII account.

1) Net Investment Income:

- Estimate of $5.2 Million; Range $3.7 - $6.7Million

- Confidence Within Range = High

- See Blue Reference "A" in Tables 1 and 2 Above Next to the June 30, 2014 Column

FSFR reported NII of $1.5 and $1.8 million for the fiscal first and second quarters of 2014, respectively. I am projecting FSFR will report NII of $1.9 million for the fiscal third quarter of 2014. Using Tables 1 and 2 above as a reference, when combined this is a projected NII of $5.2 million for the nine-months ended 6/30/2014. Per FSFR's monthly newsletter for June 2014, the company rotated out of certain assets to "optimize" the investment portfolio. FSFR, through sales/repayments in nine portfolio companies, reinvested all proceeds/funds into thirteen new investments. This rotation of investments occurred because FSFR used up most of the company's available borrowings (the $100 million Natixis Revolving Credit Facility) in the prior quarter. It should also be noted FSFR had no new equity offerings (discussed later in the article), debt arrangements, or finalized joint venture ('JV') partnerships during the fiscal third quarter of 2014.

As such, I am projecting FSFR had gross loan originations of $55 million during the fiscal third quarter of 2014. I am also projecting FSFR had portfolio sales/repayments of ($45) million during the fiscal third quarter of 2014. When combining the company's quarterly gross loan originations less portfolio sales/repayments, I am projecting FSFR's total investment portfolio increased (decreased) $10 million for the fiscal third quarter of 2014 (prior to all quarterly FMV fluctuations). For FSFR, this would be the first quarter where the company's investment portfolio had not materially grown. Now let us discuss FSFR's net unrealized appreciation (depreciation) on investments account.

2) Net Unrealized Appreciation (Depreciation) on Investments:

- Estimate of ($0.8) Million; Range ($5.3) - $3.7 Million

- Confidence Within Range = Moderate

- See Blue Reference "B" in Tables 1 and 2 Above Next to the June 30, 2014 Column

FSFR reported a net unrealized appreciation (depreciation) on investments of ($0.3) and ($0.3) million for the fiscal first and second quarters of 2014, respectively. I am projecting FSFR will report a net unrealized appreciation (depreciation) on investments of ($0.2) million for the fiscal third 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 ($0.8) million for the nine-months ended 6/30/2014.

In the prior quarter, the following notable transactions occurred within this account: 1) unrealized appreciation (depreciation) of ($0.2) million on New Trident Holdcorp, Inc.; and 2) unrealized appreciation (depreciation) of ($0.1) million on Blackhawk Specialty Tools, LLC. The remaining net change to this account consisted of numerous minor unrealized appreciation (depreciation) FMV fluctuations on the rest of FSFR's investment portfolio.

Regarding the fiscal third quarter of 2014, I am partially basing my projection of this account on the fact that all of FSFR's investments are still relatively new (under 1 year). Based on this notion (and several other analytical factors), I am projecting the net change to this account consisted of numerous minor to modest unrealized appreciation (depreciation) FMV fluctuations on FSFR's investment portfolio. Now let us discuss FSFR's net realized gain (loss) on investments account.

3) Net Realized Gain (Loss) on Investments:

- Estimate of $0.5 Million; Range ($0.5) - $1.5 Million

- Confidence Within Range = Moderate

- See Blue Reference "C" in Tables 1 and 2 Above Next to the June 30, 2014 Column

FSFR reported a net realized gain (loss) on investments of $22,625 and $0.3 million for the fiscal first and second quarters of 2014, respectively. I am projecting FSFR will report a net realized gain (loss) on investments of $0.2 million for the fiscal third 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 $0.5 million for the nine-months ended 6/30/2014. This projection assumes a portion of the 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 to modest net realized gains associated with these types of sales to market participants.

Let us now combine the three amounts described above to come up with a proper net increase (decrease) in net assets from operations figure for the nine-months ended 6/30/2014. When combining NII of $5.2 million, a net unrealized appreciation (depreciation) on investments of ($0.8) million, and a net realized gain (loss) on investments of $0.5 million, I am projecting FSFR had an increase (decrease) in net assets from operations of $4.8 million (rounded) for the nine-months ended 6/30/2014 (see red reference "A" in Table 2 above).

B) Stockholder Transactions:

- Net Increase (Decrease) in Net Assets From Stockholder Transactions Estimate of ($4.7) Million; Range ($4.9) - ($4.5) Million

- Confidence Within Range = High

- See Red Reference "B" and Blue Reference "D" in Table 2 Above Next to the June 30, 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 net investment company taxable income ('ICTI')" figure. Since this is the only amount within this specific classification, both figures will be the same.

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

Table 3 - FSFR Nine-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 6/26/2014 is projected to be 6.7 million. This figure is unchanged from FSFR's outstanding shares of common stock as of 3/31/2014. I am projecting no shares of common stock were issued as part of FSFR's dividend reinvestment plan for the fiscal third quarter of 2014. On 7/10/2014, FSFR held a special meeting of stockholders where a proposal was approved allowing the company to sell shares of its common stock at a price below CURRENT NAV. However, prior to the approval of this "special vote", FSFR would 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 third quarter of 2014, FSFR's stock price remained below NAV as of 3/31/2014.

The common stock dividend declared for the fiscal third quarter of 2014 was $0.27 per share. When calculated, I am projecting a dividend distribution of ($1.8) million. When this dividend distribution is combined with the six-months ended dividend distributions of ($2.9) million, I am projecting FSFR had an increase (decrease) in net assets from stockholder transactions of ($4.7) million for the nine-months ended 6/30/2014 (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 June 30, 2014 Column

This "net increase (decrease) in net assets from capital share transactions" figure consists of the following three amounts: 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 June 30, 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 third quarter of 2014, this figure should remain at $0 for the nine-months ended 6/30/2014 (see blue reference "E" in Table 2 above and Table 4 below).

Table 4 - FSFR Nine-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])

2) Issuance of Common Stock Under Dividend Reinvestment Plan:

- Estimate of $0; Range $0 - $0.1 Million

- Confidence Within Range = High

- See Blue Reference "F" in Table 2 Above Next to the June 30, 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, second, and third quarters of 2014.

Table 5 - FSFR Nine-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 assuming management will repurchase outstanding shares of common stock in the open market for the fiscal third quarter of 2014. This is due to the fact FSFR's stock price, at the time of the dividend distribution for the quarter, was below the company's NAV of $15.13 per share as of 3/31/2014. FSFR's "big brother" Fifth Street Finance Corp. (FSC) repurchases 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 is implemented when FSC's stock price, at the time of distribution, is priced at a discount to NAV. During the fiscal second quarter of 2014, FSFR had implemented a similar strategy. As such, I am not projecting any additional capital raised from the issuance of new shares of common stock under FSFR's dividend reinvestment plan for the fiscal third quarter of 2014.

Therefore, I am projecting FSFR will report an issuance of common stock under the company's dividend reinvestment plan figure of $0 for the nine-months ended 6/30/2014 (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 = High

- See Table 2 Above Next to the June 30, 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 throughout the quarter FSFR's stock price continued to trade below the company's NAV of $15.13 per share as of 3/31/2014, I am assuming management did not initiate any share buybacks during the fiscal third quarter of 2014. FSFR's stock price was never at a material discount to NAV (over 10%) throughout the quarter and I believe management wanted to put any unused capital towards quarterly loan originations. Therefore, I am projecting FSFR will report a repurchases of common stock figure of $0 for the nine-months ended 6/30/2014 (see Table 2 above).

When combining net equity raised in common stock issuances of $0, net 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 had an increase (decrease) in net assets from capital share transactions of $0 for the nine-months ended 6/30/2014 (see red reference "C" in Table 2 above).

Remainder of NAV Calculation:

After combining the three referenced figures discussed earlier (see red references "A, B, C" in Table 2 above), I am projecting FSFR had a "total increase (decrease) in net assets" of $0.1 million for the nine-months ended 6/30/2014 (see red reference "(A + B + C) = D" in Table 2 above).

Having this figure established, let us now calculate FSFR's projected NAV per share as of 6/30/2014 (see red references "D, E, F, G" in Table 2 above):

Total Increase (Decrease) in Net Assets: $0.1 million

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

(=) Net Assets at End of Period: $100.9 million

(/) Outstanding Shares of Common Stock as of 6/30/2014: 6.7 million

(=) NAV Per Share as of 6/30/2014: $15.14 per share

Conclusions Drawn:

To sum up all the information discussed above, I am projecting FSFR will report the following NAV per share as of 6/30/2014:

FSFR's Projected NAV as of 6/30/2014 = $15.14 Per Share

FSFR's Projected NAV Range as of 6/30/2014 = $15.04 - $15.24 Per Share

This projection is an increase (decrease) of $0.01 per share from FSFR's NAV as of 3/31/2014. This minor increase in NAV can be attributed to the following quarterly 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's net increase (decrease) in net assets resulting from operations (also known as EPS) will be $0.28 per share for the fiscal third quarter of 2014 (rounded to the nearest cent). In comparison, I am projecting FSFR had dividend distributions of ($0.27) per share for the fiscal third quarter of 2014 (also rounded to the nearest cent). After adding these two amounts together, an increase (decrease) of $0.01 per share for the fiscal third quarter of 2014 is obtained.

My 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 factors for FSFR. First, FSFR currently trades at a modest discount to my projected NAV as of 6/30/2014. As of 7/28/2014, FSFR's stock price was $14.09 per share. This calculates to a premium (discount) of ($1.05) per share for a price to NAV ratio of 0.931 (a 6.94% discount).

Second, FSFR's Board of Directors ('BoD') recently announced an increase in the amount of dividend distributions from $0.27 per share for the fiscal third quarter of 2014 to $0.30 per share for the fiscal fourth quarter of 2014. This is the fourth consecutive quarter where FSFR's BoD declared a dividend increase. These consecutive quarterly dividend increases should be seen as a positive sign.

Third, FSFR continues to be in the process of forming a strategic JV partnership with GF Funding 2014 to expand the company's investment portfolio. FSC recently completed a similar JV partnership with a subsidiary of the Kemper Corporation (NYSE:KMPR) called "Senior Loan Fund JV 1". When FSC's Senior Loan Fund JV 1 is fully funded, management believes investments within this specific portfolio will increase NII and generate higher rates of returns when compared to the rest of investment portfolio. Similar advantages should occur within FSFR's future JV partnerships.

Now let us discuss a few negative factors for FSFR. First, FSFR had an annualized weighted average yield on debt investments of only 6.64% as of 12/31/2013. This annualized weighted average yield on debt investments slightly increased to 6.74% as of 3/31/2014. Since FSFR did not have any collateralized loan obligations ('CLO') or equity investments to potentially help boost yield, this is still a very low percentage and one of the lowest within the BDC sector. FSFR needs to increase the company's annualized weighted average yield on debt investments 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 on debt investments and did so in the fiscal second quarter of 2014. However, readers should also understand this goal will take some time as general market interest rates remain relatively suppressed.

Second, as part of the JV partnership agreement with GF Funding 2014, FSFR needs to obtain an additional source of financing/capital to fund the company's portion of the investment portfolio. FSFR has basically used up all of the equity proceeds in relation to the company's IPO in July 2013 and borrowings through its $100 million Natixis Revolving Credit Facility created in November 2013. As stated last quarter, I believed FSFR needed to establish additional sources of financing/capital in the debt/equity markets. However, it remains "non advantageous" for FSFR to perform an additional equity raise due to the fact the stock price is currently trading at a modest discount to my projected NAV of $15.14 per share as of 6/30/2014.

This dilemma gets back to the special meeting that recently occurred. On 7/10/2014, FSFR held a special meeting of stockholders where a proposal was approved allowing the company to sell shares of its common stock at a price up to (25%) below CURRENT NAV. In my opinion, this particular "restriction" has a very large "threshold" and is one of the main reasons why FSFR's stock price continues to trade at a modest discount to CURRENT NAV. Potential investors know an equity raise, most likely below CURRENT NAV, is basically a certainty in the near future. I believe this should be seen as a fairly important negative sign. This would cause a dilution to existing shareholders and have negative impacts on FSFR's future NAV.

From the positive and negative factors listed above, I currently rate FSFR as a WEAK HOLD for existing shareholders with a "wait-and-see" attitude for all new potential investors. Before I consider an initial investment in FSFR, I am waiting until at least one future additional equity raise occurs. My recommendation regarding FSFR may change in the future depending on the size and dilutive effect of the first additional equity raise. This decision is even after considering FSFR is currently trading at a modest discount to CURRENT NAV. I believe FSFR is (and will continue to be) "hindered" by the notion of an additional equity raise which will have a dilutive effect to existing shareholders while causing the company's future NAV to decrease.

Final Note: I will continue to monitor FSFR'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.

Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation may not fit each investor's current investing strategy.

Disclosure: The author is long FSC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in FSFR, KMPR.