Mark Roberson - IR, Dennard Lascar Associates Vince Foster - Chairman & CEO Dwayne Hyzak - President & COO Brent Smith - CFO.

Robert Dodd - Raymond James Doug Mewhirter - SunTrust Robinson Humphrey.

Greetings, and welcome to the Main Street Capital Third 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 with Dennard Lascar, Investor Relations. Thank you, you may begin. Mark Roberson Thank you, Jasmine, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's third 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 third 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 November 10. 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, November 3, 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 third 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 are very pleased with our third quarter operating results. Our lower middle market portfolio, our primary area of focus, appreciated by $9.1 million on a net basis during the quarter, with 19 of our investments appreciating during the quarter and 13 depreciating.

Our middle market loans, private loans and our other assets collectively depreciated roughly $0.5 million during the quarter. We finished the quarter with a net asset value per share of $23.02, a sequential increase of $0.40 a share over the second quarter.

Our lower middle market companies 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 first quarter 2018 regular monthly dividends at $0.19 a share in each of January, February and March of 2018, maintaining our fourth quarter monthly payout rate. The ex-dates for these dividends are December 20, January 18 and February 21, respectively.

In addition we are pleased to have recently announced our board's declaration of our semi-annual supplemental dividend to be paid in December of 27.5 cents a share. We expect to ask our Board to declare a similar dividend to be paid next year. Yesterday we announced the appointment of Valerie Banner to our Board.

We are very excited to have a professional with Valerie’s background to become our 8th independent director. We have originated new lower middle market and private loan investments of roughly $410 million so far this year which exceeds our budget for the full year.

As of today, I would characterize our lower middle market investment pipeline most of which is realized will likely close in the first quarter of 2018 is about average.

We continue to seek and receive significant equity participation in our lower middle market investments, and as of quarter end, we owned on an average a 38% fully diluted equity ownership position in the 99% of these investments in which we currently have equity exposure.

Our officer director group has continued to be regular purchasers of our shares, investing approximately $0.5 million during the third quarter. With that, I would like to turn the call over to Dwayne to cover our performance in more detail. I wanted to be particularly brief today to save room for potential tax reform discussion..

Thanks Vince, 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.

Our third quarter operating results represent a GAAP return on equity or ROE of 12.7% for the trailing 12-month period, and 10.7% on an annualized basis for the third quarter. Returns are in-line with our stated long-term goal of producing an ROE percentage in the low-to-mid teens.

We believe these returns illustrate the significant benefits of our investment strategy of investing in both debt and equity in the lower market which combined with our efficient operating structure and other complementary investment and asset management activities 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 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 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. Given the unique benefits of our lower middle market strategy for the past few years we have been providing comments on different aspects of this strategy.

Today, I am going to discuss how we apply our long term goal of generating a Main Street ROE percentage in the lower to mid teens when evaluating new lower middle market opportunities and in the process continue to generate net investment income in excess of our monthly dividends.

We believe that some investors in BDC have historically focused on monthly dividends only when evaluating their expected return.

But as most people know this approach could be highly misleading in situation where either the dividends are not covered by net investment income or when investment underwriting issues are causing the net asset value per share and therefore the stock price to decline overtime.

Instead of the dividend mixed approach we believe that ROE is more important when setting goals and evaluating performance.

When we evaluate new lower middle active investments, we focus on having the combined first lien debt in equity investments target a blended internal rate of return in the high teens low 20% range and a minimum current investment income contribution which allows us to first maintain and then subsequently grow our monthly dividend to our shareholders.

From an underlying standpoint we achieve these targets by maintaining a discipline mix of debt and equity investments. With the typical initial investment comprised of approximately 75% to 80% debt and 20% to 25% equity and with very modest growth assumptions for this equity investments.

We are confident that if we are successful in achieving this level of combined return and if taken into account our historical rate of performance issues and [re-add] process at a very modest utilization of debt financing under Main Street’s capital structure to fund these investments that our lower middle market business will continue to allow us to deliver an overall Main Street ROE percentage in the low to mid teens.

We also believe that our proven ability to generate this level of return coupled with the large addressable market for lower middle market investments is evident that the continued growth of our business through a combination of new equity issuance and modest debt capital issuance is in the best interest of our shareholders.

As far of our ROE focus we have also increased our focus on evaluating our existing lower middle market investments and executing on opportunities to exit investments which are positive contributors to ROE. So we can redeploy that capital into other investments.

Partially because of these efforts we have experienced moderately increased turnover activity in our lower middle market portfolio over the last several quarters and we expect this to continue in the future.

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 42 of our 70 lower middle market companies with equity investments having appreciation at quarter-end and with 27 of these companies that are flow-through entities for tax purposes are 54% 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 third quarter and our overall investment performance remains strong.

Our investment activity in the third quarter included total investments in our lower middle market portfolio of approximately $45 million, including approximately $39 million and one new lower middle market portfolio company which after aggregate repayments on debt investments and return of invested equity capital, resulted in a net decrease in our lower middle market portfolio of approximately $11 million.

We had a net decrease in our middle market portfolio of approximately $15 million and a net increase in our private loan portfolio of approximately $105 million.

As a result, at September 30, we had investments in 195 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 approximately 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 71 companies, representing approximately $938 million of fair value, which is approximately 17% above our cost basis.

At the lower middle market portfolio level, the portfolio's median net senior debt to EBITDA ratio was a conservative 3.0 to 1, or 3.3 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 $607 million of fair value. In our private loan portfolio, we had investments in 56 companies, representing approximately $486 million in fair value.

The total investment portfolio fair value at September 30 was approximately 106% of the related cost basis and we had six investments on non-accrual status, which comprised approximately 0.4% of the total investment portfolio at fair value and 2.7% 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 11% for the third quarter over the same period in 2016 to a total of $51.8 million primarily driven by an increase in interesting comp of approximately $4.2 million, an increase in fee income of $0.6 million and increase in dividend income of $0.4 million.

The total investment income for the third quarter includes $1.7 million related dividend income as considered either less consistent on a recurring basis or nonrecurring which is consistent with the amount in the third quarter of 2016 and an increase of $0.4 million related to higher accelerated activity compared to the same period in 2016.

Third quarter 2017 operating expenses excluding non-cash share based compensation expense increased by $1.4 million over the third quarter of the prior year to a total of $15.3 million.

The increased is primarily related to a $0.5 million increase in compensation expense, a $0.5 million increase in general and administrative costs, a $0.8 million increase in interest expense. These increases are partially offset by an increase of $0.4 million in cost we allocated 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 asset which we believe is the key metric in evaluating our operating efficiency was 1.5% on an annualized basis for the third quarter.

Our increased total investment income and a continued leverage of our efficient operating structure resulted in a 12% increase in distributable net investment income for the third quarter of 2017 to a total of $36.5 million or $0.64 per share which exceeded our recurring monthly dividends paid for the quarter by approximately 15%.

Our external investment manager’s relationship with the HMS Income Fund benefited our net investment income by approximately $2.4 million in the third quarter of 2017, through a $1.7 million reduction of our operating expenses for cost we allocated to that external investment manager for services we provided to it and $0.7 million of dividend income from the external investment manager.

We reported a net realized loss of $10.7 million during the third quarter, primarily relating to a net realized loss on the exit of one lower middle market investment and as Vince discussed, we reported net unrealized appreciation on the investment portfolio of $8.6 million in the third quarter, primarily relating to $9.1 million of net appreciation on our lower middle market portfolio, $1.6 million of net appreciation on our other portfolio, $2.2 million of appreciation on our external investment manager and $0.8 million of net appreciation on our private loan portfolio.

This net unrealized appreciation was partially offset by $5.1 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 third quarter of 2017 resulted in a net increase and net assets of $34.9 million, or $0.61 per share. On the capital resources front, our liquidity and overall capitalization remain strong.

At the end of the third quarter, we had $30.1 million of cash, $230 million of unused capacity under our credit facility and approximately $75 million of incremental SBIC debenture capacity. Today, we have approximately $41 million of cash, $295 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 third quarter, we raised nearly $40 million in net proceeds with an average sales price of $39.58 per share.

As we look forward to the fourth quarter of 2017, we currently expect that we would generate distributable net investment income of $0.61 to $0.63 per share during the quarter. This estimate is $0.04 to $0.06 per share, or 7% to 11% above our previously announced monthly dividends for the fourth quarter of $0.57 per share.

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] Thank you. The first question is coming from the line of Robert Dodd with Raymond James. Please proceed with your question..

Hi guys and thanks Vince for bringing it up with -- thanks for the question.

What’s your view currently, do you think on how that could, if it passes and impacts 2017, if it doesn't go to 2018 obviously at your Analyst Day you talked about it can have been different, obviously different impacts on dividend income versus NAV marks and fair value etcetera, that’s a really big question, but have you got any additional colour that you can give us given where we are right now and it sits on the hill as we speak?.

Yes.

I spent a quite a bit of time on it since it came out and I would say overall highly consistent with last summer, I would say modestly positive impact on our NAV because the way we value our lower middle market equity investments we have, we do a market approach and a DC up approach and with respect to the DC up approach you assume a C Corp buyer buys the company and then in determining what they would pay, we have been assuming a 35% tax rate, maybe plus I don't remember.

While you drop that to 20 that drives up the DCF component of your valuation because your companies are worth more to a C Corp buyer. On the other hand, your [vac] would go up somewhat because your weighted average cost to capital has a 35% benefit on the interest expense component which is no longer worth 35% it’s only worth 20%.

So net-net we were forecasting, a lower to mid single digit increase in NAV attributable to the lower middle market valuation, so again somewhat positive.

The next thing you look to Robert, is the interest limitation and we got to do a little bit more work on it but generally it is going to apply to everyone, flow-through and C Corps etcetera, it's not going to apply interestingly, it looks like to reach and so we need to figure out if we are going to join the race and just having it not applied, but even if it did apply it limits your net interest expense, well under the common understanding of net interest expense, BDCs we’ve have more interest income and interest expense so it shouldn't apply to us as a practical matter even if we are, hard out like to reach.

And it would be really surprising if somehow our interest expense was not viewed as trade or business type interest expense to offset our interest income and therefore we have to worry about it.

With respect to our portfolio companies, first of all there's an out, if you have less than $25 million in revenue and we have a lot of our companies that they're right in that range of $25 million of revenue, so we would have to do a deeper dive but could be half of our companies and it would have no application to it all.

So I assume you're in more than $25 million revenue company, your interest expense is limited to 30% of your EBITDA.

So what does that mean, well if you have a company that you bought for seven times EBITDA that has $10 million in EBITDA so you paid $70 million and you levered it four times with 8% debt that company in year one will have $3.2 million of interest expense.

The tax proposal would limit it to three million of interest expense, 30% times of EBITDA, the point two would be disallowed and carried over.

Again, it should be a fairly modest impact to most companies, obviously you get 5 to 6 times leverage and then EBITDA margins might not be as strong what have you, you can envision a situation where it could be more material.

So I think kind of a, at the end of the day, kind of a non-issue for us on the interest front and then the final issue that we spent some time on it this 25% rate for active individuals and pass-throughs rather than professional services pass-throughs, so most of our equity investments are in pass-throughs and most of our if not all of our management members own equity and it is and they're not passive and so our LLC agreements call for tax distributions equal to the highest marginal rate of any member of the LLC, which typically is going to be individuals that no longer will be the – will never be the blocker because the blocker will have 20% rate.

So we look to the individual that would have the highest rate and because the 25% rate on active pass-through income is limited to 30% of your income when the smoke clears that roughly 40% subtle rate manager of ours is only going to incur a 35% federal rate and so you could see a modest decrease in tax related dividends and it gets bit more complicated but again basically immaterial for us.

And that's the high leverage anyone wants to hear at this point. You can call me offline if you want..

Okay.

Well, I mean all of that together like obviously that last part is it income to you most of the other frankly is potentially NAV, all of them bind together to ROE but your view is this does not represent any – raise any concern about having to change your ROE goal?.

Correct. That's correct. Absent are first look at this, less than 24 hours having missed something or misconstrued something the plain meaning of it, it looks like it's to more or less out of it..

Okay. Got it and just one final, on the Q4 the NOI guidance of 61 to 63 and you have said not only changes would be particularly significant.

Is that based on current stack, tax status quo or a presumption of the new bill effects 17?.

That is based on the current tax rules..

Got it. Thank you. .

Thank you Robert..

Thank you. [Operator Instruction] Our next question is coming from the line of Doug Mewhirter with SunTrust Robinson Humphrey, please proceed with your question..

Hi, good morning. And thanks for heading off the inevitable tax question. I know that it's your favorite subject in the world than. Some non-tax related question sort of hitting a couple of different topics.

First, I may have transposed this in my brain when I read the report but it appears that your middle market investments are marked below cost in aggregate. Again I may have reversed that but that seems unusual given the fact that spreads have tightened so much.

I just wondered if either I got it wrong or if there is anything behind that?.

You got that right and I would say that the reason will be below cost, certain specific names as opposed to anything that's market driven activity..

And then you combine that with in that portfolio the names won't trigger both really, and so you are – the good performers [indiscernible] also with some under performers that will be marked below par..

Yes, your call protection where they can if they take you out you have to pay – one has to pay one101 for example. It burns off after 6 to 12 months if we have it at all.

And so it would typically be constrained by being – constrained in terms of evaluation, in terms how it trades because you would want to pay part of quarter and then get redeemed immediately and get called and you lose that quarter.

So effectively, you would expect this type of portfolio to trade below cost because all it takes is one retailer or what have you whose loans are trading at 90 or 95 where it happens to be and everything else trailing at par you would expect the portfolio to be marked under par..

Thanks. That's very helpful. Second, just any commentary on, it looks like you had a pretty sizable jump in your private loan origination.

I assume it was just a handful of deals and I assume nothing to read into that because I know it can be lumpy?.

I’d say that activity Doug is consistent with what we have been saying now probably for the last year if not longer when you look at the different portfolios we have between lower middle market, middle market and private loans as you heard us talk there for a long time.

The lower middle market has been and always will be the primary focus but if you look at the middle market versus the private loans all thing being equal we would favor more activity in the private loan area and we have been successful in doing out that part of our investment strategy and practice over the last few years and we are seeing the benefits of that.

And I say that the benefits of that private loan strategy are particularly attractive given the current activity over the last six months or so in the middle market which has gotten more aggressive from the pricing and term standpoint..

What's interesting about that market Doug is we don't have a dedicated private loan originated team, originating team. So there are a lot of other lenders and all kinds of other individuals out there that were merging kind of as a preferred partner, we have been around, we have capital.

They like the way we behave and we work as part of a group to try to be constructive and so there is a lot of demand that's coming in that’s unsolicited.

Nick would you describe it any differently?.

I consider some of the private loan portfolio would have been two or three, four years ago considered middle market and they have been led by larger bank and now they are led by non-bank lenders. And so you have seen that disintermediation of the banks and kind of moving more of our direction here on non-bank..

Okay. Thanks. That's helpful.

My last question, you still get that a nice little kicker from your relationship with Hines and HMS growth with the continued delay to the DOR rule and this I also follow LPL which is one of the largest distributors and they have talked about how the pressure, the regulatory pressure is not nearly as great as many people thought.

Do you expect sort of a restart of the growth in the HMS income fund because of the less regulatory pressure? Do you think brokers are still going to be really cautious just because they know what's around the corner?.

Nick is on the board of HMS, so Nick why don't you take that? It's your forecast..

Thanks Vince. I would say, our thought on kind of a second vehicle with HMS it's probably going to be two of 18 event on a fairly significant scale. It's probably more of a 2019 timeframe for us.

We do think, we are talking to broker dealers out there the LPL is the world, there is an appetite for more products and they do you want to place, they want more PDCs or closing bonds with yield. They are just trying to get the right structure that works for their investors and works for us as well.

And that's what the market started with right now is what is that structure and how you pay for it going forward..

And Nick, I want to clarify that HMS1 that they have stopped fund raising as of September –.

As of September 30 was the final close fund raising for HMS1 and so any new kind of fund raising there will probably happen under new vehicle..

Okay. Thanks. That's helpful and that's all my questions..

Thanks Doug..

Thank you. There are no further questions at this time. So I would like to pass the floor back over to management for any additional concluding comments..

Great. Well again, thanks for joining us today and we look forward to talking to you next year. Bye. .

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