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Monroe Capital Corporation Reports Good Q2/16

|Includes: Monroe Capital (MRCC)

What most retail investors see when they look at MRCC - "the yield is too dang low." What I see when I look at MRCC - "you can get a dividend that is THAT strongly covered in NII at still get a yield of 9%???"

Q2-16 had a NII beat, a TII beat and a NAV gain. This was a 'full glass' quarter (as opposed to the 'glass is half full' quarter being generated by most).

Monroe Capital Corporation Reports NII of $0.4427 compared to a dividend of $0.35/share
What They Earned Monroe Capital Corporation reported for Q2-16 Total Investment Income of $11.118 million ($0.8547/share). Net Investment Income was $5.759 million ($0.4427/share). The Net Increase in Net Assets Resulting from Operations was $5.277 million ($0.4057/share). NAV was $14.50 compared to $14.45 last quarter.

The consensus analyst numbers from Yahoo Finance:

  Current Qtr. Next Qtr. Current Year Next Year
No. of Analysts 10 10 7 9
Avg. Estimate 0.4 0.40 1.7 1.61
Low Estimate 0.36 0.36 1.63 1.45
High Estimate 0.44 0.43 1.79 1.74
Year Ago EPS 0.43 0.36 1.6 1.7
Revenue Estimate Current Qtr. Next Qtr. Current Year Next Year
No. of Analysts 7 7 8 7
Avg. Estimate 10.55M 10.94M 44.22M 48.51M
Low Estimate 10M 10.49M 43.01M 41.24M
High Estimate 10.9M 11.38M 45.84M 58.4M
Year Ago Sales 9.52M 9.17M 36.9M 44.22M
Sales Growth (year/est) 10.80% 19.30% 19.80% 9.70%

My spreadsheets:

  Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13 Q3-13 Q2-13 Q1-13
Realized & Unrealized Gains -0.482 2.157 -793 242 -7 -291 -419 -437 -848 538 -672 -447 438 1797
Realized & Unrealized Gains/share -0.0371 0.1658 -0.0617 0.0193 -0.0006 -0.0304 -0.0440 -0.0459 -0.0885 0.0551 -0.06724 -0.0501 0.0761 0.3125

In April of 2015 MRCC did a public offering of 2,450,000 shares of its common stock at a public offering price of $14.85/share while the March ending NAV was $14.18. That event should have increased NAV - but MRCC does not disclose the specific amount of NAV increase per share for this event.
In July of 2013 MRCC did a public offering of 4,000,000 shares of its common stock at a public offering price of $14.05 per share while the June ending NAV was $14.01.

  Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14
Interest income 8,930 8,604 9,046 8,588 8,178 7,049 7.405 6,889 6,544 5,929
Fee income 516 331 98 177 559 567 713 387 208 197
Prepayment gain (loss) 232 337 301 159 503 267 356 223 144 229
Accretion of discounts and amortization of premium 389 365 320 308 279 198 209 169 150 161
The above are the components of total interest income. Dividend income needs to be added to arrive at total investment income.
Total investment income 11,118 11,539 10,126 9,172 9,519 8,081 8,683 7,668 7,046 6,516
Percent of TII from Fee + Prepayment + Accretion 10.23% 8.95% 7.10% 7.02% 14.09% 12.77% 14.72% 10.16% 7.12% 9.01%
  Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13 Q3-13 Q2-13 Q1-13
Total investment income 11.118 11.539 10.126 9.172 9.519 8.081 8.683 7.668 7.046 6.516 6.395 4.347 3.752 3.719
Net investment income 5.759 5.787 5.005 4.498 5.071 4.167 4.621 3.810 3.501 3.130 3.184 2.413 1.550 1.503
Adjusted NII before incentives             4.560 3.727 3.345 3.238 3.074 2.450 1.702 1.672
Investments @ fair value 0.343 0.343 0.341 0.330 0.283 0.253 0.234 0.235 0.238 0.225 0.208 0.169 0.144 0.134
Wt Av Share Count 13.008 13.008 12.861 12.545 11.718 9.562 9.518 9.527 9.582 9.761 10.000 8.922 5.765 5.751
TII/share $0.8547 $0.8871 $0.7873 $0.7311 $0.8123 $0.8451 $0.9123 $0.8049 $0.7353 $0.6676 $0.6935 $0.4872 $0.6508 $0.6467
Adjusted NII/share - my calculation             $0.4791 $0.3912 $0.3491 $0.3317 $0.3074 $0.2746 $0.2952 $0.2907
Adjusted NII/share - their calculation $0.43 $0.47 $0.40 $0.36 $0.43 $0.44 $0.49 $0.40 $0.37 $0.32 $0.32 $0.27 $0.27 $0.26
Dividend/share $0.35 $0.35 $0.35 $0.35 $0.35 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34 $0.34
NII/share - my calculation $0.4427 $0.4449 $0.3892 $0.3585 $0.4328 $0.4358 $0.4855 $0.3999 $0.3654 $0.3207 $0.3184 $0.2704 $0.2689 $0.2613
NAV/share $14.50 $14.45 $14.19 $14.21 $14.18 $14.11 $14.05 $13.95 $13.93 $13.99 $13.92 $14.01 $14.78 $14.54
Wt Av Yield 9.8% 9.9% 10.3% 10.5% 10.8% 11.1% 11.0% 10.8% 10.5% 10.2% 9.9% 9.5% 9.6% 9.8%
NII/TII Ratio 51.80% 50.15% 49.43% 49.04% 53.27% 51.57% 53.22% 49.69% 49.69% 48.03% 49.79% 55.51% 41.31% 40.41%

Prepayment and amendment fees along with paydown gains added $0.05/share more than usual in Q4-14
Typically - 'adjustments' produce more real numbers. MRCC adjustments did the opposite. That stoped in Q1-15

What They Own: The Company had debt and equity investments in 55 portfolio companies (which is less diversification than I like), with a total fair value of $342.8 million, as of June 30, 2016 as compared to debt and equity investments in 53 portfolio companies, with a total fair value of $343.5 million, as of March 31, 2016. The Company's portfolio consists primarily of first lien loans, representing 74.3% of the portfolio as of June 30, 2016 and 75.1% of the portfolio as of March 31, 2016. As of June 30, 2016, the weighted average contractual yield on the Company's investments was 9.8% and the effective yield was 9.8%.

The almost bad news: At $15.66, the yield (140/1566) of 8.94% is too low below the PWAY. But if run rate NII is close to the current $0.44/share - the dividend should grow to as much as $0.40/share (and that is still being very conservative). At that dividend, the yield would be (160/1566) 10.21%. When viewed through that 'what if' metric prism, MRCC is still under valued. And that is after having a very good year to date in 2016.

The bad news: Let's test driving one of my favorite metrics. Just how safe if the MRCC dividend? You can the dividend coverage by NII - and the dividend looks very safe. But there is another metric that calculates dividend safety - and that is by comparing the dividend/NAV ratio to the PWAY - where the PWAY needs to be 150 bps above the div/NAV (or lower for low fee BDCs). With a new NAV of $14.50, the MRCC div/NAV ratio is (140/1450) 9.66%. That is below the PWAY - but not by enough. I am tempted to give MRCC an exception for the low PWAY, but the very average NII/TII ratio prohibits me from giving it an exception.

At a 'what if' dividend of $0.40/share, the MRCC div/NAV ratio would be (160/1450) 11.03%. That is well above the PWAY - and that would be a very bad thing.

The comparison of NII to the dividend promotes a high expectation of dividend growth. The "div/NAV to PWAY" comparison does not. I need to keep that second comparison in mind - or the result could be some irrational exuberance for MRCC.

Disclosure: I am/we are long MRCC.