Yahoo Finance Fidus Investment Corporation (NASDAQ:FDUS) Q1 2024 Earnings Call Transcript
Fidus Investment Corporation (NASDAQ:FDUS) Q1 2024 Earnings Call Transcript May 3, 2024
Fidus Investment Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Fidus First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Jody Burfening. Please go ahead, ma'am.
Jody Burfening: Thank you, Chuck, and good morning, everyone, and thank you for joining us for Fidus Investment Corporation's first quarter 2024 earnings conference call. With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer; and Shelby Sherard, Chief Financial Officer. Fidus Investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results. A copy of the press release is available on the Investor Relations page of the company's website at fdus.com. I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results and cash flows of Fidus Investment Corporation.
Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, May 3, 2024, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus undertakes no obligation to update or revise any of these forward-looking statements. With that, I would now like to turn the call over to Ed. Good morning, Ed.
Ed Ross: Good morning, Jody, and good morning, everyone. Welcome to our first quarter 2024 earnings conference call. On today's call, I'll start with a review of our first quarter performance in our portfolio at quarter end and then share with you our outlook for the remainder of 2024. Shelby will cover the first quarter financial results and our liquidity position. After we have completed our prepared remarks, we'll be happy to take your questions. As expected, the first quarter shaped up to be a very active from a new investment perspective. While repayments were on the lighter side, we put a fair amount of capital to work, redeploying proceeds from the fourth quarter with net originations totaling $85.7 million, the total portfolio on a fair value basis grew to over $1 billion.
To put our investment activity for the quarter in perspective, originations of $145.9 million nearly equal the total amount invested in the first half of 2023. Consistent with our established practice, we grew the portfolio with a focus on capital preservation and the generation of attractive risk-adjusted returns. We continue to invest in industries in the lower middle market, we know well, leveraging our relationships with deal sponsors, and carefully selecting businesses with defensive characteristics and sustainable business models and positive long-term outlooks that generate cash to both service debt and support growth. Our debt portfolio generated adjusted net investment income of $18.1 million, an increase of 21.8% and compared to $14.9 million last year, primarily reflecting higher interest income and fee income for the quarter.
Taking into account the higher average share count resulting from the equity raises over the past 12 months, adjusted net investment income on a per share basis was $0.59 per share compared to $0.60 per share for the same period last year. In Q1, we paid a base dividend of $0.43 per share, plus a $0.22 per share supplemental dividend for a total distribution to shareholders of $0.65 per share. For the second quarter of 2024, the Board of Directors declared dividends totaling $0.59 per share, consisting of a base dividend of $0.43 per share and a supplemental dividend of $0.16 per share, equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter, which will be payable on June 26, 2024, to stockholders of record as of June 19, 2024.
Net asset value grew 3.2% to $608.3 million compared to $589.5 million. On a per share basis, net asset value was $19.36 at quarter end compared to $19.37 as of December 31, 2023. As I mentioned earlier, originations totaled $145.9 million for the first quarter. We stay focused on investing in first lien investments, on structuring investments with a high percentage of equity cushion and on co-investment in the equity of portfolio companies. Debt investments totaled $137.5 million, of which first lien amounted to $96.1 million or 70%. Equity investments totaled $8.4 million. Of the $145.9 million total in originations, $94.6 million was invested in 7 new portfolio companies, which were added to the portfolio primarily through M&A transactions.
Proceeds from repayments and realizations totaled $60.2 million for the first quarter, consisting of debt repayments of $57 million and proceeds from the sale of equity investments of $3.2 million, resulting in net realized gains of $1.7 million primarily from the exit of Applied Data Corporation. Our portfolio of debt investments on a fair value basis was $916.4 million or 87% of the total portfolio at quarter end. First lien investments are still the largest portion of the debt portfolio at 69%, including the fair value of our equity portfolio of $131.7 million. The fair value of the total portfolio at quarter end stood at $1.05 billion, equal to 102.2% of cost and we ended the first quarter with 87 active portfolio companies. Our portfolio remains well structured, but is positioned to produce high levels of recurring income and the potential for enhanced returns from the sale of equity securities.
Overall, our portfolio from a credit perspective, remain solid with no change in the companies we have on nonaccrual from the fourth quarter. While the performance of the 2 operating companies on nonaccrual continue to improve, each of them remain higher risk situations. As a percentage of the total portfolio on a fair value basis, non-accruals represented under 1% for the first quarter. The health of our portfolio is attributable to our strict underwriting discipline focused on carefully investing in businesses with strong and sustainable cash flow generating business models and positive long-term growth prospects. With capital preservation in mind, we remain very deliberate in our investment selection process. As we look ahead to the remainder of 2024, we are positioned to continue to grow the portfolio.
Deal flow and M&A activity is at reasonable levels, and slowly improving relative to 2023. That said, quality is spotty at the present time. As a result, originations for the second quarter are expected to be meaningfully lighter than the first quarter. Nevertheless, our portfolio is healthy and positioned to continue to generate adjusted NII well in excess of our base dividend to generate attractive risk-adjusted returns and grow net asset value over the long term. Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?
Shelby Sherard: Thank you, Ed, and good morning, everyone. I'll review our first quarter results in more detail and close with comments on our liquidity position. Please note, I will be providing comparative commentary versus the prior quarter Q4 2023. Total investment income was $34.7 million for the 3 months ended March 31, a $1.7 million decrease from Q4, primarily due to a $1.3 million decrease in interest income, including PIK, a $1.2 million decrease in fee income given higher prepayment fees in Q4. The decrease in interest and fee income was offset by a $0.1 million increase in dividend income and a $0.7 million increase in interest income on excess cash, which was due to the new investments in Q1 being back-end loaded as approximately 72% of invested capital in Q1 closed in March.
Total expenses, including income tax provision, were $17 million for the first quarter, $2.3 million lower than Q4, driven primarily by a $1.4 million decrease in the capital gains fee accrual and a $1 million decrease in income taxes related to the annual excise tax accrual in Q4. We ended the quarter with $463.1 million of debt outstanding, comprised of $175 million of SBA debentures, $250 million of unsecured notes, $22.5 million outstanding on the line of credit and $15.6 million of secured borrowings. Our debt-to-equity ratio as of March 31 was 0.8x or 0.5x statutory leverage, excluding exempt SBA debentures. The weighted average interest rate on our outstanding debt was 4.6% as of March 31, 2024. Net investment income, or NII, for the 3 months ended March 31 was $0.57 per share versus $0.58 per share in Q4.
Adjusted NII, which excludes any capital gains, incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investment was $0.59 per share in Q1 versus $0.65 in Q4, which includes an increase in the weighted average shares outstanding and a decrease in the capital gains fee accrual in Q1. For the 3 months ended March 31, we recognized approximately $1.7 million of net realized gains, primarily related to the sale of our equity investments in Applied Data Corporation. Turning now to portfolio statistics. As of March 31, our total investment portfolio had a fair value of over $1 billion. Our average portfolio company on a cost basis was $11.8 million, which excludes investments in 4 portfolio companies that sold their operations are in the process of winding down.
We have equity investments in approximately 81.3% of our portfolio companies with average fully diluted equity ownership of 3.5%. Weighted average effective yield on debt investments was 14% as of March versus 14.2% at year-end 2023. The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on nonaccrual, if any. Now I'd like to briefly discuss our available liquidity. In Q1, we repaid the remaining $35 million of outstanding SBA debentures in our second SBIC Fund, completing the wind down of this fund. As of March 31, our liquidity and capital resources included cash of $27.1 million and $77.5 million of availability on our line of credit resulting in total liquidity of approximately $104.6 million.
Now I will turn the call back to Ed for concluding comments.
Ed Ross: Thanks, Shelby. As always, I'd like to thank our team and the Board of Directors at Fidus for their dedication and hard work and our shareholders for their continued support. I will now turn the call over to Chuck for Q&A. Chuck?
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