FS KKR Capital Corp. (NYSE:FSK) Q1 2023 Earnings Call Transcript May 5, 2023
Operator: Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp's First Quarter 2023 Earnings Conference Call. Your lines will be in a listen-only mode during remarks by FSK's management. Please note that this conference is being recorded. At this time, Robert Paun, Head of Investor Relations, will proceed with the introduction. Mr. Paun, you may begin.
Robert Paun: Thank you. Good morning, and welcome to FS KKR Capital Corp's first quarter 2023 earnings conference call. Please note that FS KKR Capital Corp may be referred to as FSK, the Fund or the Company throughout the call. Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued this morning. In addition, FSK is posted on its Web site, a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended March 31, 2023. A link to today's webcast and the presentation is available on the Investor Relations section of the company's Web site under Events and Presentations.
Please note that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward-looking statements that are subject to risks and uncertainties that could affect FSK or the economy generally. We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's first quarter earnings release that was filed with the SEC this morning, May 5, 2023.
Non-GAAP information should be considered supplemental in nature and should not be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's Web site. Speaking on today's call will be Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Steven Lilly, Chief Financial Officer. Also joining us in the room are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson. I will now turn the call over to Dan.
Dan Pietrzak: Thank you, Robert, and welcome, everyone, to FS KKR Capital Corp's First Quarter 2023 Earnings Conference Call. Unfortunately, Michael Forman is not able to participate on today's call due to an unavoidable scheduling conflict. For the first quarter, our team again delivered strong operating results as FSK generated net investment income totaling $0.81 per share, and adjusted net investment income totaling $0.78 per share, as compared to our public guidance of $0.77 and $0.74 per share respectively. Our net asset value increased modestly quarter-over-quarter as the slight decline in the value of our investment portfolio was offset by out-earning our $0.70 per share distribution and accretive share repurchases. M&A activity remained (ph) during the first quarter.
As a result, our investment team originated approximately $270 million of new investments. That said, we are seeing activity level and inquiries ramp up in recent weeks. From a liquidity perspective, we ended the first quarter with approximately $3 billion of available liquidity. With regard to our share repurchase program, during March, we completed the remaining portion of our previously committed $100 million buyback program as we repurchased $32 million of shares. Based on our continued strong financial results, our Board has declared a second quarter distribution of $0.70 per share, which consists of our base distribution of $0.64 per share, and a supplemental distribution of $0.06 per share. As a reminder, based on the overall strength of the company's earnings power, we expect our quarterly supplemental distribution to total a minimum of $0.06 per share throughout 2023, and possibly beyond, equating to a minimum of $0.70 per share per quarter of quarterly distributions during 2023.
Additionally, we are pleased to announce special distributions totaling $0.15 per share, which will be paid in three equal installments between now and the end of 2023. We are pleased to be in a position to share this additional income with investors as we have worked diligently over the last several quarters to achieve our targeted level of spillback income. Our special distributions equate to an additional $0.05 per share per quarter on top of our regularly quarterly and supplemental distributions over the next three quarters. As a result of achieving our operating targets, we believe investors will be able to receive a minimum of $2.95 per share of total distributions in 2023, which equate to 11.8% yield on our March 31, 2023 net asset value, and an annualized yield of approximately 16% based on our recent share price.
We further believe that our ability to provide shareholders with such an attractive distribution is based on the significant portfolio rotation work we have accomplished over the last five years. Turning to the current market and economic environment, the volatility we experienced in the financial markets during 2022 has continued during the first quarter of 2023, especially with the challenges in the banking space. We continue to expect inflation to remain elevated, and we believe the higher interest rate environment will last longer than some market observers are expecting. Should our views prove accurate, then we believe floating rate asset structures coupled with investment strategies which contain a degree of inflation protection, such as (ph) large portfolio companies and asset-based finance investment tied to collateral pools will remain attractive.
While we do expect M&A transaction volumes to remain below average for the next few quarters, the increased volatility and economic uncertainty does create compelling investment opportunities for FS KKR and other large-scale players. We and other private debt investors are able to negotiate attractive pricing, enhanced call protection, and lower overall leverage levels for extremely high-quality companies. Spreads on new originations are approximately 100 basis points higher compared to a year ago. Additionally, large private debt platforms, like FSK, will continue to benefit from incumbency positions to support existing portfolio companies as well as protections in our loan documents, allowing us to re-price existing investments to current market rates, which we believe is quite important from a portfolio perspective.
Photo by Towfiqu barbhuiya on Unsplash
Our investment portfolio continues to perform well as our borrowers have adapted to the current operating environment, and have successfully demonstrated an ability to pass through price increases, which have helped maintain acceptable EBITDA margins. As I mentioned earlier, during the first quarter we originated $270 million of investments. These investments were focused on funding and add-ons to existing portfolio companies, resulting in approximately 87% of our originations coming from opportunities and companies previously invested in by KKR. Our new investments, combined with $264 million of net sales and repayments when factoring in sales through our joint venture, equated to a net portfolio increase of $6 million. In terms of interest coverage, at the end of the first quarter, our portfolio companies had a median interest coverage of 1.7 times.
For clarity, this was calculated using base rates as of December 31, 2022 to align with portfolio company financials. As evidenced by our lower-than-average origination activity, we remain extremely selective in our underwriting and origination process. Also, during periods of market stress, we benefit from our portfolio monitoring unit and are dedicated workout and governance teams. These dedicated internal teams are able to work seamlessly alongside our deal teams to navigate situations which potentially arise during more challenging operating environments. That being said, through the end of the first quarter, we have not experienced a significant increase in amendment requests, which we view as a positive. With that, I'll turn the call over to Brian to discuss our portfolio in more detail.
Brian Gerson: Thanks, Dan. As of March 31, 2023, our investment portfolio had a fair value of $15.3 billion, consisting of 189 portfolio companies. This compares to a fair value of $15.4 billion and 197 portfolio companies as of December 31, 2022. At the end of the first quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio. We continue to focus on senior secured investments as our portfolio consisted of 61% first lien loans and 69.4% senior secured debt as of March 31. In addition, our joint venture represented 9.1% of the fair value of the portfolio, and asset-based finance investments represented 11.7% which are comprised predominantly of first lien loans or secured asset-based finance investments.
Looking through to the investments in our joint venture, our total portfolio consisted of 77% senior secured debt as of March 31. During the first quarter, our new originations consisted of approximately 82% in first lien loans, 11% in asset-based finance investments, 3% in subordinated debt, and 4% in equity and other investments. The weighted average yield on accruing debt investments was 11.7% as of March 31, 2023, compared to 11.4% as of December 31. As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. The increase in our weighted average yield during the first quarter was primarily associated with the continued rise in base rates as well as higher yields on new originations during the past few quarters.
Including the effects of the investment activity, we experienced during the first quarter, as of March 31, 2023 approximately 86% of our total investment portfolio is now comprised of investments originated either by KKR Credit, or the FS KKR Advisor. This compares to 84% at March 31 2022. During the first quarter, excluding the impact of merger accounting, we experienced net portfolio depreciation on investments of approximately $17 million. The largest negative movers in our portfolio, which are impacted by credit performance related issues during the quarter were Wittur and Reliant Rehab. Wittur is a global leader in the Outsourced Elevator Components segment, with a focus on the production of elevator doors, and the manufacturing of adjacent components for both new equipment markets and the aftermarket.
The company has been facing persistent inflation headwinds, as well as a slowdown in construction in China, which has led to us placing our second-lien loan on nonaccrual this quarter. Reliant Rehab offers physical, occupational and speech therapy services to skilled nursing facilities. The company has been affected by macroeconomic factors across the health care services industry, including a decline in labor productivity, and increase in contract labor given a tight labor market in the U.S., and inflation driven wage increases. I'd also like to comment on another investment. Miami Beach Medical Group. Miami Beach Medical Group provides primary care, specialty care, in-house pharmacy and home visits, primarily focusing on Medicare Advantage members.
The company has recently experienced weaker performance due to lower membership growth, elevated medical expenses, and higher operating expenses related to wage inflation. In the first quarter, we provided an amendment, which included a $50 million first-lien debt paid down at par from the sponsor. During the quarter, we placed student debt investments on non-accrual with a combined fair market value of $72 million and a cost of $140 million. In addition, there are three debt investments fully removed from non-accrual status, with a combined fair market value of $7 million and a cost of $29 million. Based on the first quarter's activity, as of March 31, 2023 non-accruals totaled 5.5% of a portfolio on a cost basis and 2.7% on a fair value basis, compared to 4.9% on a cost basis, and 2.4% on a fair value basis, as of December 31, 2022.
We also thought it would be helpful to provide the market with information based on the assets originated by KKR Credit. As of the end of the quarter, non-accruals relating to the 86% of our total portfolio, which has been originated by KKR Credit and the FS KKR Advisor were 2.8% on a cost basis and 0.8% on a fair value basis. And with that, I'll turn the call over to Steven.
Steven Lilly: Thanks, Brian. As Dan mentioned earlier, we are pleased to reward shareholders with a declaration of a $0.15 per share special distribution, which will be paid in three equal installments in May, August and November of this year. Combining our quarterly base and supplemental distributions of $0.70 per share with the three $0.05 per share quarterly special distributions, our total distribution for 2023 should be a minimum of $2.95 per share. This represents an 11.8% yield on our March 31, 2023 net asset value of $24.93 per share and a 16% yield on our current stock price, both of which we view as quite attractive. Turning to our financial results for the first quarter, total investment income increased by $7 million, quarter-over-quarter, driven by increased interest income.
The components of our total investment income during the quarter were as follows. Total interest income was $369 million, an increase of $9 million, quarter-over-quarter, dividend and fee income totaled $87 million, a decrease of $2 million quarter-over-quarter. Our dividend and fee income during the first quarter is summarized as follows, $55 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $27 million. And, fee income totaling approximately $5 million. Our interest expense totaled $114 million. An increase of $5 million quarter-over-quarter due to the impact of rising base rates on our secured debt facilities. Our weighted average cost of debt was 5.1% as of March 31st.
Management fees totaled $58 million, a decrease of $1 million quarter-over-quarter. And, incentive fees totaled $46 million during the first quarter. A detailed bridge on our net asset value per share on a quarter-over-quarter basis is as follows: our ending 4Q 2022 net asset value per share of $24.89 was increased by GAAP net investment income of $0.81 per share and was decreased by $0.11 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by a $0.70 per share dividend paid during the quarter and increased by $0.04 per share due to share repurchases. A sum of these activities results in our March 31, 2023 net asset value per share of $24.93. From a forward-looking guidance perspective, we expect second quarter 2023 GAAP net investment income to approximate $0.78 per share.
And, we expect our adjusted net investment income to approximate $0.75 per share. Detailed second quarter guidance is as follows: our recurring interest income on a GAAP basis is expected to approximate $362 million as we continue to expect below average M&A activity during the quarter. We expect recurring dividend income associated with our joint venture to approximate $55 million. We expect other fee and dividend income to approximate $30 million. From an expense standpoint, we expect our management fees to approximate $58 million. We expect incentive fees to approximate $45 million. We expect our interest expense to approximate $115 million. And, we expect other G&A expenses to approximate $10 million. As a reminder, the $0.03 per share difference between our GAAP net investment income and our adjusted net investment income relates to the expected accretion of our investments during the quarter due to merger accounting.
This difference affects our recurring interest income. Other categories of our revenues and expenses are not affected. In terms of the right side of our balance sheet, our gross and net debt to equity levels were 125% and 118%, respectively at March 31, 2023. Both of which are unchanged from their fourth quarter levels. At March 31, our available liquidity was $3 billion. At the end of the first quarter, approximately 54% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt. And the overall effective average cost of debt was 5.1%. And with that, I'll turn the call back to Dan for a few closing remarks before we open the call for questions.
Dan Pietrzak: Thanks, Steven. In closing, we are pleased that our portfolio rotation and achievement of operational goals have reached the point where we can provide shareholders with such an attractive overall distribution rate for 2023 and possibly beyond. And while uncertainty in the overall economy remains, we believe FSK is well-positioned from a portfolio construction standpoint to continue to deliver strong results for our shareholders. With that, operator, we would like to open the call for questions.
See also 20 Biggest Holding Companies in USA and 20 Most Desirable Companies To Work For In USA.
To continue reading the Q&A session, please click here.
"corp" - Google News
May 08, 2023 at 12:18AM
https://ift.tt/b6Lva0C
FS KKR Capital Corp. (NYSE:FSK) Q1 2023 Earnings Call Transcript - Yahoo Finance
"corp" - Google News
https://ift.tt/RqryYlk
Shoes Man Tutorial
Pos News Update
Meme Update
Korean Entertainment News
Japan News Update
Bagikan Berita Ini
0 Response to "FS KKR Capital Corp. (NYSE:FSK) Q1 2023 Earnings Call Transcript - Yahoo Finance"
Post a Comment