Fifth Street Senior Floating Rate Corporation (FSFR) Q3 2016 Earnings Conference Call August 10, 2016 10:00 AM ET
Todd Owens - President
Steve Noreika - Chief Financial Officer
Robyn Friedman - Investor Relations
Good morning, ladies and gentlemen and welcome to the Fifth Street Senior Floating Rate Corporation Third Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the call over to your host for today’s conference, Ms. Robyn Friedman, Head of Investor Relations. Ma’am, you may begin.
Thank you, Bridget. Good morning and welcome to Fifth Street Senior Floating Rate Corp’s third quarter 2016 earnings call. I am joined this morning by 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 August 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 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 rise 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. Todd 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 President, Todd Owens.
Thank you, Robyn. Good morning everybody. For the quarter ended June 30, 2016, FSFR generated $0.21 of net investment income per share, below our quarterly dividend of $0.225 per share. During the June quarter, we incurred higher than normal professional expenses, a trend that continued from the March quarter and was primarily related to preparation for our annual meeting. After this quarter, we expect more typical levels of professional fees.
The June quarter was characterized by an increase in deal flow from the low levels of the March quarter as we closed $112 million of investments across nine new and three existing portfolio companies. The overall credit quality of the portfolio remains stable, while the decline in the net asset value quarter-over-quarter attributable to a few concentrated investments, which we will highlight later in the call. Our leverage levels were slightly elevated this quarter, with debt to equity of 0.91 times at the end of the quarter, above our targeted leverage range of 0.8 to 0.9 times.
Turning to the middle market environment, the June quarter was marked by an increase in leverage loan volumes and lower spreads relative to the sluggish start to the calendar year. Despite this rally, loan volumes remain light relative to the previous year, with a lack of M&A deals executed by middle market private equity firms, coupled by global growth concerns highlighted by Brexit, which tempered activity. Despite a slower middle market environment and broader market volatility, Fifth Street's scale and origination platform generated compelling investment opportunities brought to us by our private equity sponsors. Going forward, we remain focused on investing in quality deals higher in the capital structure.
In an environment such as this with large amounts of capital chasing fewer deals, we believe it is important to remain disciplined and employ a high degree of selectivity. We continue to be focused on investing in companies with strong underlying fundamentals, including businesses that operate in high cash flow sectors and those with strong recurring revenue models while shying away from cyclical industries.
Turning to our portfolio, FSFR continues to maintain a diverse portfolio of senior secured floating rate loans. As of June 30, 2016, our portfolio consisted of senior secured floating rate loans spread across 64 companies in 28 industries, with our largest non-controlled investment accounting for 4.7% of total assets. Approximately 88% of the portfolio consists of senior secured floating rate debt investments and approximately 11% of the portfolio consists of investments in the subordinated notes and LLC equity interests of the FSFR-Glick JV. As a reminder, the Glick joint venture invests in senior secured floating rate loans and approximately 100% of the underlying debt portfolio consists of floating rate loans.
The overall credit quality of our portfolio remains stable, with one investment on non-accrual, representing only 0.2% of total investments at fair value. We are pleased that our energy exposure remains minimal at only 0.5% of total investments at fair value in just one portfolio company. Additionally, our portfolio does not have any CLO equity or debt investments. As I stated earlier, we feel good about the overall credit quality of our loans, despite experiencing further credit deterioration in a small number of portfolio companies.
During the June quarter, we removed Ameritox from non-accrual but continued to suffer markdowns of the investment. In April, our portfolio management team worked closely with the company and its sponsor owners to restructure the investment, and we exchanged our debt investment for debt and equity securities on the restructured entity. As equity holders in Ameritox, we may experience more volatility around the mark-to-market of this investment.
Another investment that has seen challenges over the course of the year is Answers.com. Recent financial results have continued to weaken, which has caused further price declines in the trading prices of both the first and second lien loans, leading to mark-to-market write-downs. The Company remains current on its cash interest payments, but given the mark on the Answers.com second lien position, it remains a non-accrual in respect of its OID.
We remain excited about our joint venture with the Glick family and its ability to drive returns for FSFR shareholders. The yield on FSFR’s investment in the joint venture has been instrumental in driving an increased yield on FSFR’s overall portfolio. As of June 30, 2016, the joint venture has $220 million in assets, including senior secured loans across 36 portfolio companies. The joint venture generated $2.1 million of income for FSFR during the quarter, representing an 11.7% weighted average annualized return on our investment. We have one of the lowest fees structures in the industry, but we think it always makes sense to strive for improvement. Therefore, we've decided to take a fresh look at ways to enhance the alignment of interest between our external advisor and our shareholders, including potential changes to our fee structure. We’ll have more to say about this topic on our next earnings call.
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, Todd. We ended the third quarter of 2016 with total assets of $639.8 million, down from $697.7 million at our fiscal year end.
Portfolio investments totaled $598.3 million at fair value and were spread across 64 companies at June 30, 2016.
At the end of the June quarter, we had $23 million of cash and cash equivalents on our balance sheet. Net asset value per share was $10.99 as compared to $11.18 at the end of the March quarter, driven mainly by credit related losses in select portfolio companies, which were slightly offset by market driven write-ups.
For the three months ended June 30, 2016, we generated total investment income of $13.1 million, which was relatively flat compared to the prior quarter and net investment income of $6.2 million or $0.21 per share.
During the quarter ended June 30, 2016, we closed $112.2 million of investments in nine new and three existing portfolio companies and funded $107.1 million across new and existing portfolio companies. We also received $34.1 million in connection with full repayments of two of our debt investments, both of which were exited at par and an additional $45.2 million in connection with other pay-downs, syndications and sales of debt investments.
As of June 30, 2016, 88% of the portfolio consisted of senior secured floating rate loans and 10.6% 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 June 30, 2016, the average size of our portfolio debt investments was $9.1 million and average portfolio company EBITDA was $58.9 million.
Credit quality was strong once again, with only one portfolio company on non-accrual status, representing 0.2% of total investments at fair value. The weighted average yield on our debt investments, including the return on the JV, was 8.6% as of June 30, 2016 and included a cash component of 8.4%, up from 8.4% and 8.3% respectively during the March quarter.
As Todd mentioned, during the June quarter, we operated at the upper end of our target leverage range, ending the quarter slightly above the range at 0.91 times debt to equity. As of June 30, we had $108 million of notes payable outstanding related to our securitization and $115.8 million drawn on our Citibank and East West Bank credit facilities.
Last week, our Board of Directors declared monthly dividends of $0.075 per share for September, October, and November. We expect our Board of Directors to continue declaring monthly dividends on a quarterly basis, subject to various factors, including company performance, capital availability, as well as general economic and market conditions.
I will now turn it back over to Robyn.
Thank you for joining us on today’s call. Bridget, please open the lines for questions.
Thanks everybody for your attention this morning.
Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.
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