Capitala Finance Corp (CPTA) CEO Joe Alala on Q1 2021 Results - Earnings Call Transcript

Capitala Finance Corp (CPTA) Q1 2021 Earnings Conference Call May 4, 2021 8:30 AM ET

Company Participants

Joe Alala - Chairman & Chief Executive Officer

Steve Arnall - Chief Financial Officer & Chief Operating Officer

Conference Call Participants

Operator

At this time, I would like to welcome everyone to Capitala Finance Corporation’s Conference Call for the Quarter Ended March 31, 2021. All participants are in a listen-only mode. Today's call is being recorded, and a replay will be available approximately three hours after the conclusion of the call on the company's website at www.capitalagroup.com under the Investor Relations section.

The host for today's call are Capitala Finance Corp.'s Chairman and Chief Executive Officer, Joe Alala and Chief Financial Officer and Chief Operating Officer, Steve Arnall. Capitala Finance Corporation issued a press release on May 3, 2021, with details of the company's quarterly financial and operating results. A copy of the press release is available on the company's website.

Please note that this call contains forward-looking statements that provide information other than historical information, including statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in the forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the section titled Risk Factors and Forward-looking Statements in the company's quarterly report on Form 10-Q. Capitala undertakes no obligation to update or revise any forward-looking statements.

At this time, I would like to turn the meeting over to Joe Alala.

Joe Alala

Thank you operator. Good morning and thank you everyone for joining us today. Steve and I have some prepared remarks and will be around the balance of the day to address any questions you may have. We have decided to not have a Q&A session for this call, but again encourage you to reach out to us as we will address your questions and we are around all day.

We are pleased to report an 11% increase in NAV during the first quarter of 2021 at $44.74 per share. This is our fourth consecutive quarter of NAV improvement. This is the result of improved performance of our portfolio of investments coupled with recent realized exits, examples, Burgaflex, CIS and Xirgo. Moreover, we expect the portfolio to continue to rotate out of both current debt and equity positions over the next several reporting periods.

Our total debt-to-equity at quarter end was 1.6 to 1 down significantly from year-end at almost 2 to 1. Regulatory debt-to-equity was 1 to 1 at quarter end. During the first quarter, we repaid $20 million of SBA debentures, $6 million of which matured on March 1 2021 and $14 million of which was scheduled to mature on March 1, 2022. Since June 30 2020, we have repaid $79 million of SBA guaranteed debentures and $2.2 million of 6% notes, all from cash generated from investment portfolio activity and realizations. Note at June 2020, the total debt-to-equity was almost 2.7 to 1.

Furthermore, we forecast to repay all SBA debt as part of this transaction. On April 2021, the company announced that the Board of Directors has selected Mount Logan Management LLC, an affiliate of BC Partners Advisors L.P. to serve as the new investment adviser to the company. We are committed to a smooth transition. We plan to hold a special shareholder meeting in late May seeking the approval of the new investment advisory agreement. We think this is the right time for the company to attach to a larger credit platform as Capitala Group continues to focus on the management of its various private funds focused on equity returns with yields.

As I mentioned on the investor call we co-hosted on April 22nd with BC Partners, we believe that the affiliation with Mount Logan will provide the best path to resumption of distributions and ultimately a stock price closer to NAV. We hope you will support this decision and vote in favor of the new advisory agreement proxy to be distributed this week.

At this point, I would like to ask Steve to provide some more color on our financial results.

Steve Arnall

Thanks Joe. Good morning, everyone. Total investment income was $4.9 million for the first quarter of 2021, compared to $7.1 million for the first quarter of 2020. Interest and fee income declined by $1 million – $1.9 million for the comparable periods, resulting from a decrease in debt investments outstanding while payment in kind income declined by $0.3 million.

Total expenses for the first quarter of 2021 were $5.7 million, a decrease of $1.4 million from the first quarter of 2020. Interest and financing expenses declined by $0.8 million, resulting from the repayment of SDA debentures in 2020 and 2021. Base management fees declined by $0.4 million, due to a decline in total assets.

Net realized losses totaled $14 million or $5.17 per share for the first quarter of 2021, compared to net realized gains of $1.0 million for the same period in 2020. During the first quarter of 2021, the company realized a $14.2 million loss on its investment in currency capital LLC. However, the loss did not have an impact on net asset value as the realized amount was in line with our previous valuation.

Net unrealized appreciation totaled $27.2 million for the first quarter 2021 compared to net unrealized depreciation of $43.4 million for the first quarter of 2020. The net increase in net assets resulting from operations totaled $12.4 million or $4.56 per share for the fourth quarter of 2021, compared to a net decrease of $42.4 million for the comparable period in 2020.

Net assets at March 31, 2021 were $121.3 million or $44.74 per share, compared to $108.9 million or $40.19 per share at December 31, 2020. At March 31, 2021, we had $59.7 million in cash and cash equivalents. In addition, we had zero drawn and $25 million available on our senior secured credit facility with KeyBank N.A.

Also, the company has SBA debentures outstanding, totaling $71.0 million with a weighted average annual interest rate of 2.62%, $72.8 million of fixed rate notes bearing interest rate of 6% and $52.1 million of convertible notes bearing an interest rate of 5.75%. The company's total debt-to-equity ratio at March 31, 2021 was 1.6:1 compared to 1.98:1 at the prior year-end.

On March 31, 2021, our investment portfolio includes 35 investments with a fair value of $258.2 million and a cost basis of $234 million. First lien debt investments on a fair value basis at March 31, 2021, comprised 53.5% of the portfolio; second lien investments represent 15.2% and equity/warrant investments represent 31.3%. At quarter end, March 31, 2021, we had three investments on non-accrual status with a cost basis and fair market value of $21.3 million and $16.6 million respectively.

At this point, I'll turn the call back over to Joe for some closing comments.

Joe Alala

Thanks, Steve. So we are not having a Q&A today, but Steve and I are around all day. We will get proxies distributed this week for the shareholder meeting proposed on May 27. Most of the shareholders we have talked to strongly support the transition of the BDC to management – Mount Logan and BC partners. We as management strongly supported and the Board of Directors unanimously approved it. We're around all day. Thank you for your participation in this call and we look forward to hearing from you. Everyone have a great day.

Operator

This concludes today's conference call. Thank you all for participating and you may now disconnect. Have a great day.

Question-And-Answer Session

End of Q&A

Comments

[hammannja]

$CPTA Additional analysis regarding the upcoming Capitala Shareholder Vote: noticepapers.com/...

[hammannja]

For those who haven't given up on the value of shareholder voting, please check out noticepapers.com/...

[Flex68]

A stock that has been struggling for years.

I have long appreciated the premise, but have only ever 'watched' for years....

Not a bad short-termer since end of August 2020, but absolutely terrible since the IPO.

Consistent and continual misses, this one is far from 'investor friendly' , lol

[21009961]

Stockholders------Why would you think Mount Logan Capital, stock symbol: PYCFF can do a good job of management with their wholly-owned subsidiary, Mount Logan Management LLC ("ML Management") ?????? when it looks like they can not even manage what they are doing now profitably for their shareholders?

It was obvious that Capitala Investment Advisors, LLC was not managing for shareholder's benefit and it looks like Capitala is turning over the reins to the same type of management ability.

IMHO the management fee that ML Management will get paid should be based on a tiered advisory fee based on stockholder portfolio performance. This would include stock value plus dividends issued to shareholders, in other words, the shareholder portfolio’s size. This way when the shareholders do well then the advisory management company does well. Pray that BENEFITS to shareholders are restored.

[BDHPlayer]

@21009961 They are involved with the management of Portman Financial which has been rolling up other small BDC's. My guess is because of the large discount to NAV they couldn't roll up this one but could do so in the future.

I'm happy with what they have done with PTMN and anything could be better than the value destruction by current management.

[21009961]

@BDHPlayer Thanks for the insight. I agree. They can not do worse than the advisory that CPTA has. However: I think the fees for management need to be changed to become in line with shareholder benefits and not a percentage of assets under management and performance-based fees. These advisors can easily obtain "assets under management", but what if they do not perform profitably, and the shareholders see share prices drop and dividends cut? Such is the case with CPTA.
Fees to outside firms should be transparent and leadership not the same folks.