Mark Roberson - IR, Dennard Lascar Associates Vince Foster - Chairman and CEO Dwayne Hyzak - President and COO Brent Smith - CFO Nick Meserve - Managing Director.

Bryce Rowe - Robert W. Baird Robert Dodd - Raymond James.

Greetings, and welcome to the Main Street Capital Corporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mark Roberson, Dennard Lascar. Thank you, Mr. Roberson. You may begin..

Thank you, Brock, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's second quarter 2017 earnings conference call. Joining me on the call today are Chairman and CEO, Vince Foster; President and Chief Operating Officer, Dwayne Hyzak; and Chief Financial Officer, Brent Smith.

Main Street issued a press release yesterday afternoon that details the Company's second quarter financial and operating results. This document is available on the Investor Relations section on the Company's website at mainstreetcapital.com.

A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until August 11. Information on how to access the replay was included in yesterday's release.

We also advise you that this conference call is being broadcast live through the Internet and can be accessed on the Company's homepage.

Please note that information reported on this call speaks only as of today, August 4, 2017, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call will contain forward-looking statements.

Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may or similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call and there are no guarantees of future performance.

Actual results may differ materially from the results expressed or implied in these statements 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, which can be found on the Company's website or at sec.gov.

Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures.

Certain information discussed on this call including information related to portfolio of companies was derived from third-party sources and has not been independently verified. And now, I'll turn the call over to Vince..

Thanks, Mark, and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recent dividend increase and a few other recent developments and conclude by commenting on our investment pipeline.

Following my comments, Dwayne Hyzak, our President, and Brent Smith, our CFO, will comment on our second quarter financial results, recent originations and exits, recent announcements, our current liquidity position and certain key portfolio statistics and our operating expense ratio, after which we will take your questions.

We were pleased with our second quarter operating results. Our lower middle market portfolio, our primary area of focus, appreciated by $5 million on a net basis during the quarter, with 20 of our investments appreciating during the quarter and 17 depreciating.

Our middle market loans, private loans and our other assets collectively appreciated roughly $7 million during the quarter. We finished the quarter with a net asset value per share of $22.62, a sequential increase of $0.18 a share over the first quarter.

Our lower middle market companies continue - collectively continue to exhibit very conservative leverage ratios on a relative basis, which Dwayne will cover in greater detail.

Earlier this week, our Board declared our fourth quarter 2017 regular monthly dividends at $0.19 a share in each of October, November and December of 2017, increasing our monthly payout rate by $0.05 a share. The ex-dates for these dividends are September 20, October 19 and November 20, respectively.

This dividend increase represents the seventh consecutive year we have increased our regular monthly dividend to shareholders. Our Board is nearing completion of a multiyear succession planning initiative with a particular focus on diversity.

In on our next Board Meeting in late October, we currently expect to announce the appointment of two independent directors, who are both highly qualified and each bring unique areas of expertise and experience to our already highly experienced director group.

On the Main Street personnel front, we've significantly expanded our investment teams, having recently added six new investment team members including two experienced senior analyst, an internal transfer from our accounting group and three full-time analysts. In addition, we recently on-boarded six new additions to our internship program.

Dwayne will comment on our recruitment and new hire efforts in more detail. We have originated new lower middle market and private loan investments of roughly $330 million so far this year for investment portfolio. We are more or less on budget for the year at this pace.

As of today, I would characterize our lower middle market investment pipeline is average to above average.

We continue to seek and receive significant equity participation in our lower middle market investments, and as of quarter end, we owned an average of a 37% fully diluted equity ownership position in the 99% of these investments in which we currently have equity exposure.

We are pleased to report that our I-45 joint venture with Capital Southwest has continued to mature. They recently amended their credit facility to lower its cost and increase its advance rate. This will allow the joint-venture to grow its portfolio above its $210 million current size.

In addition, the HMS joint-venture with ORIX has grown to $135 million and should be fully ramped by year-end. Our officer director group has continued to be regular purchasers of our shares, investing approximately $1.4 million during the second quarter. With that, I would like to turn the call over to Dwayne to cover our performance in more detail..

Thanks, Vince, and good morning, everyone. We are pleased to report another quarter, during which we grew both our total investment income and distributable net investment income, and again generated distributable net investment income in excess of our monthly dividends.

In addition, we also generated $11 million of net realized gains from our investment portfolio. Our second quarter operating results represent a GAAP return on equity of 13.9% for the trailing 12-month period, and 13.6% on an annualized basis for the second quarter.

Returns are in line with our stated long-term goal of producing a return on equity percentage in the low-to-mid teens. These returns also significantly exceed the dividend yield paid to our shareholders and illustrates the significant value that we are generating for our shareholders in excess of our dividend payments.

We believe that these results also continue to illustrate the significant benefits of our investment strategy of investing both debt and equity in the lower middle markets, which combined with our efficient operating structure continue to provide a value proposition that differentiates Main Street from other yield-oriented investment options and generates a premium total returns realized by our shareholders as a result of the historical growth in our dividends per share, our net asset value per share and our stock price.

As we discussed in prior quarters, we believe the primary driver of our long-term success has been and continues to be our focus on the underserved lower middle market, and specifically, our investment strategy of investing in both debt and equity in the lower middle market and acting as a sponsor and a partner to the management teams of our lower middle market portfolio companies and not just the financing source.

Without this primary focus on the lower middle market, it will be very difficult to produce these returns for our shareholders.

Despite of many industry participants have stated significant headwinds and competition in the broader middle market, which we have also experienced in our middle market business, we have not seen the same negative trends in the lower middle market.

As a result, we believe there is additional value associated with our investment focused on the lower middle market as our experience over the past two decades has shown us that the lower middle market is less correlated to the significant market fluctuations that can exist in the broader middle market.

As a result, despite the negative market commentary, we have continued to see attractive opportunities in the lower middle market in the second and third quarters.

As a result of these continued attractive lower middle market opportunities, coupled with what we believe are growing attractive opportunities in our private loan investment strategy, we have continued to focus on growing our team of investment professionals.

Since the beginning of this year, we have added four new members to our lower middle market investment team, two of which were participants in our internship program in 2016. And in the second quarter, we also added two experienced members to our middle market and private loan investment team.

And consistent with past several years, we currently have six interns working with us this summer across the firm and are excited about having this existing pipeline of new additions to the team for future years. Now turning back to our most recent operating results.

Consistent with prior quarters, the contributions from our lower middle market portfolio continue to be well-diversified, with 43 of our 75 lower middle market companies with equity investments having an appreciation at quarter-end and with 26 of these companies that are flow-through entities for tax purposes, or 50% of our total investments in these types of entities, contributing to our dividend income over the last 12 months.

In addition, we also have several equity investments and non-flow-through entities, which have contributed to our dividend income.

We believe that the diversity of our lower middle market portfolio is very important when analyzing the benefits from our lower middle market strategy, and we believe that this diversity provides visibility to the recurring nature of these benefits in the future.

We are pleased to report that our investment activity in the second quarter and our overall investment performance remains strong.

Our investment activity in the second quarter included total investments in our lower middle market portfolio of approximately $56 million, including investments in three new portfolio companies, which after aggregate repayments on debt investments and return of invested equity capital, resulted in a net increase in our lower middle market portfolio of approximately $42 million.

We had a net decrease in our middle market portfolio of approximately $55 million and a net decrease in our private loan portfolio of approximately $5 million.

As a result, at June 30, we had investments in 192 portfolio companies that are more than 50 different industries across the lower middle market, middle market and private loan components of our investment portfolio.

The largest portfolio company represents 3% of our total investment income for the last 12 months and approximately 3% of our total portfolio of fair value, with the majority of our portfolio investments representing less than 1% of our income and our assets.

Additional details on our investment portfolio at quarter-end are included in the press release that we issued yesterday but I will touch on a few highlights. Our lower middle market portfolio included investments in 75 companies, representing approximately $932 million of fair value, which is approximately 14% above our cost basis.

At the lower middle market portfolio level, the portfolio's median net senior debt to EBITDA ratio was a conservative 3.1 to 1, or 3.2 to 1 including portfolio company debt, which is junior in priority to our debt position.

As a complement to our lower middle market portfolio and our middle market portfolio, we had investments in 68 companies, representing approximately $624 million of fair value. In our private loan portfolio, we had investments in 49 companies, representing approximately $380 million in fair value.

The total investment portfolio fair value at June 30 was approximately 105% of the related cost basis and we had five investments on non-accrual status, which comprised approximately 0.2% of the total investment portfolio at fair value and 2.6% at cost.

In summary, Main Street's investment portfolio continues to perform at a high level and continues to deliver on our long-term goals. With that, I will turn the call over to Brent to cover our financial results, capital structure and liquidity position..

Thanks Dwayne. We are pleased to report that our total investment income increased by 17% for the second quarter over the same period in 2016 to a total of $50.3 million, primarily driven by an increase in interest income of approximately $5.6 million, an increase in fee income of $1.4 million and an increase in dividend income of $0.4 million.

We estimate that the amount of income that is either less consistent on a recurring basis or non-recurring, was approximately $1 million or $0.02 per share. Second quarter 2017 operating expenses, excluding non-cash share-based compensation expense, increased by $1.8 million over the second quarter of the prior year to a total of $14.8 million.

The increase is primarily related to a $0.6 million increase in compensation expense, a $0.9 million increase in general and administrative costs, which was in part due to non-recurring professional fees and other expenses related to certain potential new portfolio investment opportunities, which were terminated during the due-diligence processes, and a $0.5 million increase in interest expense.

These increases were partially offset by an increase of $0.3 million in cost reallocated to the external investment manager for services provided to it.

The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets, which we believe is a key metric in evaluating our operating efficiency, was 1.7% on annualized basis for the second quarter and 1.6% on a trailing 12 -month basis.

Excluding the non-recurring professional fees and other expenses previously mentioned, our operating expense ratio for the second quarter was 1.6% on an annualized basis and 1.5% on a trailing 12-month basis.

Our increased total investment income and the continued leverage of our efficient operating structure, resulted in a 19% increase in distributable and net investment income for the second quarter of 2017 to a total of $35.5 million, or $0.63 per share, which exceeded our recurring monthly dividends paid for the quarter, by approximately 14%.

Our external investment manager's relationship with the HMS Income Fund benefited our net investment income by approximately $2.4 million in the second quarter of 2017, through a $1.6 million reduction of our operating expenses for cost we allocated to the external investment manager for services we provided to it and $0.7 million of dividend income from the external investment manager.

We recorded a net realized gain of $11 million during the second quarter, primarily relating to a net realized gain on the exit of one lower middle market investment, a partial exit of a lower middle market investment and realized gains from the other portfolio.

And as Vince discussed, we recorded net unrealized appreciation on the investment portfolio of $11.9 million in the second quarter, primarily relating to $5 million of net appreciation on our lower middle portfolio, $4.6 million of net appreciation on our other portfolio, $3.6 million of appreciation on our external investment manager and $0.4 million of net appreciation on our private loan portfolio.

This net unrealized appreciation was partially offset by a $1.7 million of net unrealized depreciation on our middle market portfolio. Additional details for the change in our net unrealized appreciation can be found in our earnings release.

Our operating results for the second quarter of 2017 resulted in a net increase in net assets of $42.8 million, or $0.76 per share. On the capital resources front, our liquidity and overall capitalization remains strong.

At the end of the second quarter, we had $21.8 million of cash, $252 million of unused capacity under our credit facility and $88.8 million of incremental SBIC debenture capacity. Today, we have approximately $19 million of cash, $230 million of unused capacity on our credit facility and $75 million of incremental SBIC debenture capacity.

We also continue to be pleased with the execution of our ATM equity issuance program. During the second quarter, we raised nearly $41 million in net proceeds with an average share price of $38.56 per share.

As we look forward to the third quarter of 2017, we currently expect that we would generate distributable net investment income of $0.60 to $0.62 per share during the quarter.

This estimate is $0.045 to $0.065 per share, or 8% to 12% above our previously announced monthly dividends for the third quarter of $0.555 per share, or 5% to 9% above our recently announced increase in monthly dividends to $0.57 per share for the fourth quarter of 2017.

As previously mentioned in our last quarterly earnings conference call, expected per share difference between our distributable net investment income and net investment income due to our non-cash restricted stock expense will return to approximately $0.04 per share for the third quarter as the restricted stock expense will be approximately $0.3 million lower in the second quarter due to the last remaining impact from a four year vesting grant that was fully expensed by the end of second quarter.

With that, I will now turn the call back over to the operator so we can take any questions..

Thank you. We would now be conducting a question-and-answer session. [Operator Instructions]. Our first question today comes from Bryce Rowe of Baird. Please go ahead..

Hi. Thanks. Good morning..

Good morning, Bryce..

Maybe a couple topics here. First one is to expand a little modeling input from Brent. You guys mentioned some prepayment activity that helped drive fee income. I think it was fee income in the quarter.

Just wanted to be clear that that prepayment income was in fee income and not in interest income?.

The accelerated activity was both interest and fee income. So during the third quarter, we call kind of accelerated income, if you will. But I think we had around $3 million during the quarter total, and probably two-thirds of that or $1.9 million of that was interest and the rest was fee income.

So it's usually a combination of both fee and interest income..

Okay. That's helpful. Thanks. And then maybe Vince and Dwayne, perhaps you could touch on the growth in the middle market portfolio and the increase in the weighted average yield there.

Just curious what kind of opportunities you're seeing in that book and what kind of yields you're seeing? Have yields started to kind of creep back up and give you better opportunities in that middle market? Thanks..

Yes, I'll start off on the first part of the question. Then Nick Meserve that runs that portfolio will talk about what he is seeing in that market.

But in terms of its growth during the second quarter, that's more of a function of - as we receive exit proceeds from a lower middle market exit, generally what will - unless we coincidentally get lucky and there is a corresponding reasonably large lower middle market closing, generally Nick will take those - suppose just paying down the credit facility, earning 2% or whatever.

Nick will take those proceeds and deploy them in the middle market. And so that's why you see it spike up once in a while generally correlating to exit proceeds.

Would you characterize any differently, Dwayne?.

No, I agree..

And Nick, why don't you tell us the state of the market in terms of opportunities out there?.

Yes. The overall market, it's been fairly stable in the last six to 12 months. I think it's got a little bit more competitive, so pricing has come down a little bit. Our overall yields has ticked up, mainly driven by repayments of some lower yielding stuff we've had on books for two or three years.

As we think about fee income and also recycle that money from a lower coupon name and slightly higher coupon name that pushed up the overall average. But overall, I'd say it's a fairly stable market right now. The prepayment cycle has pushed a little bit slower than it was you saw in the first quarter.

And so we're not having as much pressure on a repricing basis. I think will pick up through the rest of the year as well..

But most likely, Nick is going to be reinvesting prepayment proceeds and probably not - unless we have an unforeseen spike in liquidity because of an exit, probably not looking to really grow the portfolio but just kind of be more opportunistic..

Exactly. I think there was also some weird timing of - we had some deals close late - start early second quarter as opposed to close late first quarter, so it kind of - it goes onto first and second quarter base. It's a little more smooth on a growth basis..

Got it. Okay. Thanks guys. Appreciate it..

Thanks..

The next question is from Robert Dodd of Raymond James. Please go ahead..

Hi guys. Obviously it was a really good quarter, significantly exceeded the guidance you gave but all the indications you gave at the end of that when you reported the first. Obviously some of that was this - you talk about the non-recurring, maybe that was $0.02 about half of it.

What else was it that kind of caught you by surprise in the second quarter and generated that excess earnings versus where you thought you were couple of months back?.

Yes, Robert, I would say that it is primarily the additional activities from a repayment standpoint. Every quarter when we're doing this call, one quarter into the quarter, so depending upon what happens in the second and third months of the quarter, you can see significant movement.

I'd say that the biggest movement or surprises we have, we just see the additional activity in those second and third months of the quarter versus what we were expecting when we had our last conference call.

Brent, I don't know if you'd add anything else?.

No, I would say - I mean, Vince spent some time in his comment but on the private loan front I'd say we're probably a little bit ahead of where we thought we would be, so that also contributes to more investment income as well..

The private loans are really little bit higher to predict because generally, Nick will receive an inbound call. Someone is maybe underwritten a deal and looking for one or two partners and he will have maybe a week to look at it or something like that, and so that's - those are kind of hard to predict..

Yes, everything about is lumpy. I appreciate that. And then secondly, if I can. Vince. I mean, obviously at the Analyst Day you talked a lot about tax. I have no idea honestly and you might give us the same response now what's going to happen with tax.

It seems even more up in the air than it was even a few months back, like whether any thing is going to happen at all? So, A, just can you give us your thoughts on that? And then B, is that uncertainty - it certainly doesn't seem to be having any effect on your originations for the lower middle market etcetera but you're hearing anything in that market segment whether it's actually going to have any effect of people just push it aside and not worry about it?.

Yes, I think the prospect of comprehensive tax reform and most people's view is debt on arrival for the rest of the year and maybe you'll have something - it's not tax reform but some type of tax build that lowers the corporate rate and makes some other changes around that. Just maybe does something with repatriation of offshore funds.

But none of that really is going to impact us or our constituents to great. We see people changing their behavior. I think as an industry, Robert - and I don't want to answer a question you didn't ask.

But as an industry, we've been much more focused on our legislative agenda with respect to BDC modernization, getting an SBIC bill passed in the House and Appropriations Bill has some really good language in it.

The House Appropriations Bill the cleared the committee, real good in it language on the AFFE issue, which could reinstate us back into the indices. So we've had a lot of favorable activity in the last 90 days and tax has really been on the backburner.

The only thing I'd add about taxes, there seems to be a consensus now listen to the remarks of Congressman Brady and others that there would be a carve-out for any interest expense non-deductibility for small businesses in addition to the language in his blueprint that talks about a carve-out for financial institution.

So that kind of issue or fear has seem to have abated quite a bit..

Okay. Got it. Thank you. Really helps..

[Operator Instructions]. We have a follow-up question from Bryce Rowe of Baird. Please go ahead..

Hi guys, just wanted to ask one more. Appreciate all the commentary about the new hires and growth of the employee base.

Maybe Vince and Dwayne, could you remind us what the structure looks like right now of the kind of the lower middle market investing team, and how you plan to grow that whether it be by team or just within the individual teams as a part of that lower middle market group? Thanks..

I'll let Dwayne take a shot at it. Then I'll likely correct him. Go ahead..

So Bryce, I'd say there hasn't been a lot of significant changes there.

We've got a good core group of very experienced individuals that lead each of our lower middle market teams, so our efforts for the last couple of years had been and continue to be just supplementing those teams so that they can continue to do the better job of covering the lower middle market broadly across the company and across the country, and I think we're doing a better job today than we were two years ago and we're successful and continuing to add resources like we talked about in my comments.

We're excited about being able to do a better job two years from now than what we do today.

So it's really just continue to focus on doing the same types of things from a transaction, deal structure and type of company standpoint, but just doing it with better coverage of the overall marketplace and doing it with a greater frequency than what we did in the past..

The only thing I would add is that we are - at least in my view, we are hiring more resources than we can currently deploy because we want to train them and prepare them for the growth that we expect to have in the near term. So we're trying to avoid a situation where we wait till we need someone and see who is available. We're going ahead.

And so our expense ratio has ticked up maybe 10 basis points as a result of that, but we think it's a good investment. So there is a lot of people running around, a lot of young people and there is lot of training going on. And I think that all bodes well for '18 and '19..

And I can complement that, Bryce, we talked about the private loan strategy and portfolio probably for the last a year, if not longer, but that's another area bodes through our lower middle market team and through Nick's team on the middle market side that we're really focusing on significantly and seeing significant activity.

And we think you'll continue to see that for the balance of this year and into 2018 as we look at our investment strategy going forward..

Okay. And you guys have like four or five lower middle market teams right now.

And Vince and Dwayne, where you kind of see that maybe in a couple of years from now?.

Well, what we're kind of experimenting with is larger kind of super teams, where you don't have maybe near-term visibility in a new managing director that would carve people off and have independent origination capability. So on Dwayne's team, you'd probably have the largest team.

I would characterize that as kind of a super team, whereas we have - if you are a newer managing director, you'll spin off and kind of have your own team that might be smaller. So we're still trying to - we're letting the skill set of the people we have dictate the forum rather than vice versa. So we're still sticking with our four teams right now.

Nick's team has grown significantly. And the interesting dynamic that we have is with respect to private loans. It's more of a jump ball [ph] where if Dwayne sees one and has the bandwidth, he will typically be leading it. He might not be leading it. His team will go ahead and execute it. Nick will be doing the same thing.

So we're still - we're still little bit influx as do we have a third division that just does private loans. Hines would probably prefer that we go in that direction versus now Nick is doing middle market and private loans. Dwayne and his teams are doing lower middle market and private loans..

Got it. Okay. Thanks guys..

Thanks Bryce..

There are no further questions at this time. I would like to turn the floor back over to management for closing comments..

Great. Well, thanks for everyone's participation. And we look forward to speaking to you again in November..

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day..