November 9, 2015

Capitala Finance Corp. Reports Third Quarter 2015 Results

CHARLOTTE, N.C.--(BUSINESS WIRE)-- Capitala Finance Corp. (Nasdaq:CPTA) ("Capitala" or the "Company") today announced its financial results for third quarter ended September 30, 2015.

Third Quarter Highlights

  • Net investment income of $7.8 million, or $0.48 per common share
  • Net asset value per share increased to $18.04 from $17.95 the previous quarter
  • Net increase in net assets resulting from operations of $8.0 million, or $0.49 per common share
  • Originated $55.6 million of gross investments during the quarter with a weighted average yield on debt investments of 12.6%
  • Repurchased 399,448 shares of common stock, representing approximately 2.5% of the shares outstanding at quarter end
  • Paid $0.62 of distributions per share during the quarter for an approximate annualized distribution rate of 13.75%, based on September 30, 2015 net asset value per share of $18.04 per share
  • Increased commitments under our revolving credit facility (the "Credit Facility") to $120.0 million from $80.0 million

Management Commentary

In describing the Company's third quarter activities, Joseph B. Alala, III, Chairman and Chief Executive Officer, stated, "Management is pleased to report positive results related to net investment income and net asset value per share for the third quarter of 2015. Net investment income per share of $0.48 for the period covered our normal distributions of $0.47 per share. In addition, net asset value per share increased to $18.04 as of quarter end. These results can be attributed to the completion of our equity rotation strategy, coupled with new debt investments funded by our April 2015 equity offering and advances from our Credit Facility. Our direct origination platform continues to deliver quality investment opportunities at attractive risk adjusted returns."

Third Quarter 2015 Financial Results

Total investment income was $18.3 million for the third quarter of 2015, compared to $11.2 million for the same period in 2014, an increase of $7.1 million, or approximately 63.9%. Interest and fee income for the third quarter of 2015 increased $5.6 million from the comparable period in 2014, while payment-in-kind ("PIK") income and dividend income collectively increased by $1.5 million.

Total expenses for the third quarter of 2015 were $10.5 million, compared to $7.6 million for the comparable period in 2014. The increase is primarily attributable to (1) an increase in incentive fees of $1.9 million as incentive fees were not earned during the third quarter of 2014, (2) an increase in interest and financing expenses of $0.5 million, and (3) an increase of $0.2 million in management fees, net of the waiver.

Net investment income for the third quarter of 2015 was $7.8 million, or $0.48 per share, compared to $3.5 million, or $0.27 per share, for the same period in 2014.

Net realized losses totaled $16.0 million, or $1.00 per share, for the third quarter of 2015, compared to net realized losses of $3.1 million for the same period in 2014. Unrealized appreciation for the third quarter of 2015 was $16.2 million, or $1.02 per common share, compared to depreciation of $0.2 million for the same period in 2014.

The chart below provides additional details regarding gains and losses, changes in unrealized appreciation, and the corresponding impact to net asset value, for the third quarter of 2015 (dollars in thousands):

         

Net Gain/Loss for the three months ended 9/30/15

Portfolio Company

 

Cost Basis

at 6/30/15

Unrealized

Appreciation/

(Depreciation)

at 6/30/15

Fair Value

at 6/30/15

Proceeds

received

 

 

Net Asset

Value Impact

for the 3

months ended

9/30/15

 

Realized

Gain/(Loss)

for the 3

months ended

9/30/15

 

Unrealized

Appreciation/

(Depreciation)

for the 3

months ended

9/30/15

Source Capital SSCR, LLC* $ 25,513 $ (9,513 ) $ 16,000 $ 14,256 $ (1,744 ) $ (11,257 ) $ 9,513
Market E's, LLC* 5,065 (3,315 ) 1,750 - (1,750 ) (5,065 ) 3,315
Source Recycling, LLC (equity only)* 1,590 (1,590 ) - - - (1,590 ) 1,590
Worklife America, Inc.* - 2,197 2,197 1,590 (607 ) 1,590 (2,197 )
Stoddard Hill Media Holdings, LLC* - 96 - 15 (81 ) 15 (96 )
Realized gains on partial exits - - - 270 270 270 -
Remaining Portfolio Companies   514,466   30,805     545,367   -   4,083     -     4,083  
$ 546,634 $ 18,680   $ 565,314 $ 16,131 $ 171   $ (16,037 ) $ 16,208  
 

*These investments were exited during the three months ended September 30, 2015

 

The net increase in net assets resulting from operations was $8.0 million for the third quarter of 2015, or $0.49 per common share, compared to a net increase of $0.3 million, or $0.02 per common share, for the same period in 2014.

Third Quarter 2015 Investment Activity

During the third quarter of 2015, the Company originated approximately $55.6 million of investments, and received approximately $34.7 million of repayments. $40.0 million was invested in three new portfolio companies, while $10.8 million was invested in six existing portfolio companies. In addition, the Company invested $4.8 million in Capitala Senior Liquid Loan Fund I, LLC ("CSLLF"). Debt investments for the period totaled $47.8 million, with a weighted average yield of 12.6%.

Investment Portfolio

As of September 30, 2015, the Company's portfolio consisted of investments in 58 companies with a fair market value of $588.2 million and a cost basis of $553.3 million. Senior secured debt investments represented 36.7% of the portfolio, subordinated debt investments represented 44.2% of the portfolio, equity/warrant investments represented 15.8% of the portfolio, and the investment in the CSLLF represented 3.3% of the portfolio, based on fair values at September 30, 2015.

The fair value of the Company's five energy investments totaled $65.3 million at September 30, 2015, approximately 11.1% of the portfolio. During the third quarter of 2015, the Company recorded unrealized depreciation of $3.2 million on its energy investments. Over the past four quarters, the Company has recorded $13.2 million of unrealized depreciation on its energy investments, approximately 16.8% of the cost basis at September 30, 2015.

The Company had three debt investments on cash non-accrual status as of September 30, 2015, with a fair value and cost basis of $10.9 million and $13.6 million, respectively. At December 31, 2014, the Company had one cash non-accrual investment with a fair value and cost basis of $0 and $3.4 million, respectively.

The Company had two debt investments on PIK non-accrual as of September 30, 2015, with a fair value of $9.7 million and a cost basis of $13.5 million. The Company had debt investments in one portfolio company on PIK non-accrual at December 31, 2014, with a fair value of $10.6 million and a cost basis of $13.1 million.

Liquidity and Capital Resources

At September 30, 2015, the Company had $37.5 million in cash and cash equivalents. In addition, the Company had SBA debentures outstanding totaling $184.2 million with an annual weighted average interest rate of 3.45%, and approximately $113.4 million of fixed rate notes bearing an interest rate of 7.125%. At September 30, 2015, the Company had $69.0 million of borrowing capacity available under its Credit Facility, which is priced at LIBOR plus 3.0% and matures on October 17, 2018. During the quarter, the Company repurchased 399,448 shares of common stock, or approximately 2.5% of the outstanding shares at September 30, 2015.

At September 30, 2015, the Company's balance sheet and future earnings will not be materially impacted by an increase in short term interest rates.

Subsequent Events

On October 22, 2015, the Company sold $13.0 million of its Western Window Systems, LLC senior secured term debt investment as part of a post-closing syndication.

Third Quarter 2015 Financial Results Conference Call

Management will host a conference call to discuss the operating and financial results at 8:30 a.m. on Tuesday November 10, 2015. To participate in the conference call, please dial 1-877-312-5507 approximately 10 minutes prior to the call. A live webcast of the conference will be available at http://investor.CapitalaGroup.com.

About Capitala Finance Corp.

Capitala Finance Corp. is a business development company that invests primarily in traditional mezzanine, senior subordinated and unitranche debt, as well as senior and second-lien loans and, to lesser extent, equity securities issued by lower and traditional middle-market companies. The Company is managed by Capitala Investment Advisors, LLC. For more information about the Company, please visit www.CapitalaGroup.com.

Forward-Looking Statements

This press release contains certain forward-looking statements. Words such as "believes," "intends," "expects," "projects," "anticipates," and "future" or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, condition or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in the Company's filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.

Capitala Finance Corp.
Consolidated Statements of Assets and Liabilities
(in thousands, except share and per share data)
       
As of

September 30,

2015

December 31,

2014

(unaudited)
ASSETS
 
Investments at fair value
Non-control/non-affiliate investments (amortized cost of $359,557 and $219,163, respectively) $ 379,329 $ 236,804
Affiliate investments (amortized cost of $114,922 and $154,552, respectively) 134,317 171,471
Control investments (amortized cost of $78,850 and $67,440, respectively)   74,571   72,062
Total investments at fair value (amortized cost of $553,328 and $441,155, respectively) 588,217 480,337
Cash and cash equivalents 37,535 55,107
Interest and dividend receivable 5,923 3,113
Due from related parties 256 518
Deferred financing fees (net of accumulated amortization of $4,722 and $3,288, respectively) 9,227 10,002
Prepaid expenses 637 515
Other assets   522   274
Total assets $ 642,317 $ 549,866
 
LIABILITIES
SBA debentures $ 184,200 $ 192,200
Notes 113,438 113,438
Revolving Credit Facility 51,000 -
Distribution payable 2,384 -
Due to related parties 4 8
Management and incentive fee payable 3,246 159
Interest and financing fees payable 1,152 2,902
Accounts payable and accrued expenses   80   322
Total liabilities $ 355,504 $ 309,029
 
Commitments and contingencies
 
NET ASSETS
Common stock, par value $.01, 100,000,000 common shares authorized, 15,895,580 and 12,974,420 common shares
issued and outstanding, respectively 159 130
Additional paid in capital 240,808 188,408
Accumulated undistributed net investment income 8,902 12,314
Accumulated undistributed net realized gain from investments 2,055 803
Net unrealized appreciation on investments   34,889   39,182
Total net assets   286,813   240,837
   
Total liabilities and net assets $ 642,317 $ 549,866
 
Net asset value per share $ 18.04 $ 18.56

Capitala Finance Corp.
Consolidated Statements of Operations
(in thousands, except share and per share data)
           
For the Three Months Ended September 30 For the Nine Months Ended September 30
  2015     2014     2015     2014  
(unaudited) (unaudited) (unaudited) (unaudited)
INVESTMENT INCOME
Interest and fee income:
Non-control/Non-affiliate investments $ 11,948 $ 4,104 $ 29,139 $ 10,170
Affiliate investments 2,675 4,790 9,347 12,415
Control investments   1,285     1,422     4,010     4,259  
Total interest and fee income   15,908     10,316     42,496     26,844  

Payment-in-kind income:

Non-control/Non-affiliate investments 758 202 1,447 626
Affiliate investments 612 334 1,263 956
Control investments   227     192     848     479  

Total payment-in-kind interest income

  1,597     728     3,558     2,061  
Dividend income:
Non-control/Non-affiliate investments 154 152 462 1,666
Affiliate investments 29 29 86 745
Control investments   615     (61 )   823     4,734  
Total dividend income   798     120     1,371     7,145  
Interest income from cash and cash equivalents   1     3     4     17  
Total investment income   18,304     11,167     47,429     36,067  
 
EXPENSES
Interest and financing expenses 4,809 4,268 14,126 8,870
Base management fee 2,781 2,536 7,778 6,830
Incentive fees 1,946 - 4,457 2,838
General and administrative expenses   981     857     3,148     2,870  
Expenses before management fee waiver 10,517 7,661 29,509 21,408
Management fee waiver   -     (38 )   -     (238 )
Total expenses net of management fee waiver   10,517     7,623     29,509     21,170  
 
NET INVESTMENT INCOME   7,787     3,544     17,920     14,897  
 
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from investments:
Non-control/Non-affiliate investments 1,605 - 9,304 1,158
Affiliate investments (12,847 ) (3,055 ) (5,750 ) (2,704 )
Control investments   (4,795 )   -     5,586     173  
Total realized gain (loss) from investments (16,037 ) (3,055 ) 9,140 (1,373 )
Net unrealized appreciation/(depreciation) on investments   16,208     (178 )   (4,293 )   (5,784 )
Net gain (loss) on investments   171     (3,233 )   4,847     (7,157 )
 
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,958   $ 311   $ 22,767   $ 7,740  
 
NET INCREASE IN NET ASSETS PER SHARE RESULTING FROM
OPERATIONS-BASIC AND DILUTED $ 0.49 $ 0.02 $ 1.52 $ 0.60
 
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING - BASIC AND DILUTED 16,088,979 12,974,420 15,018,537 12,974,420
 
DISTRIBUTIONS PAID PER SHARE $ 0.62 $ 0.47 $ 1.76 $ 0.47
 
DISTRIBUTIONS PAYABLE PER SHARE $ 0.15 $ - $ 0.15 $ -

Capitala Finance Corp.
Stephen Arnall, Chief Financial Officer
704-376-5502
sarnall@capitalagroup.com

Source: Capitala Finance Corp.

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