Business Context and Reporting Period
HMS Income Fund, Inc. (the "Company") is an externally managed, non-diversified closed-end management investment company organized as a Business Development Company (BDC) under the Investment Company Act of 1940. The Company's primary objective is to generate current income through debt and equity investments in lower middle market and middle market companies. This report covers the quarterly period ended March 31, 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Investment Income | $29.2 million | $24.0 million |
| Net Investment Income | $13.9 million | $12.2 million |
| Net Realized Gain (Loss) | ($7.1 million) | ($7.2 million) |
| Net Change in Unrealized Appreciation | $12.1 million | $10.6 million |
| Net Increase in Net Assets from Operations | $18.8 million | $15.6 million |
| Earnings Per Share (Basic & Diluted) | $0.24 | $0.19 |
| Net Asset Value (NAV) per Share | $8.03 | $8.17 |
| Total Portfolio Investments (Fair Value) | $1,110.1 million | $1,067.6 million |
| Weighted Average Effective Yield | 9.6% | 8.9% |
| Cash and Cash Equivalents | $18.3 million | $24.5 million |
| Total Borrowings Outstanding | $500.0 million | $444.0 million (Avg) |
| Asset Coverage Ratio | 226% | 223% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by approximately $5.2 million (21.7%) compared to Q1 2018, driven primarily by a $4.0 million increase in interest income and a $1.1 million increase in dividend income. The weighted average effective yield on the portfolio rose from 8.9% to 9.6%.
- Expense Increase: Total expenses, net of waivers, increased by $3.5 million to $15.3 million. This was primarily due to a $2.0 million increase in interest expense (driven by higher average borrowings and rates) and a $1.4 million increase in incentive fees.
- Portfolio Activity: The Company funded new investments of approximately $34.2 million and received $39.0 million in proceeds from sales and repayments. The portfolio size decreased slightly on a cost basis by 0.7%.
- Realized Losses: The Company recognized a net realized loss of $7.1 million, largely attributed to a $5.5 million loss on affiliate investments, partially offset by unrealized appreciation of $12.1 million.
Guidance, Outlook, and Risks
- Distributions: The Company declared a distribution of $0.17 per share for the quarter. Distributions for the period April 1, 2019, through June 30, 2019, were declared at a rate of $0.00191781 per share per day. The Company notes that distributions may exceed earnings and could include a return of capital.
- Liquidity: As of March 31, 2019, the Company had $18.3 million in cash and $70.0 million in available capacity under its credit facilities. The Company maintains sufficient liquidity to fund approximately $45.1 million in outstanding unfunded commitments.
- Subsequent Events: On May 8, 2019, the Company's investment in HMS-ORIX SLF LLC was merged into Mariner CLO 7, Ltd. The Company used proceeds from this transaction to purchase approximately $25.9 million of subordinated notes issued by Mariner CLO.
- Risks: The Company is subject to interest rate risk, as approximately 88.7% of its debt portfolio contains floating rates. While floors on these rates mitigate downside risk, rising rates increase borrowing costs. Additionally, the Company holds investments on non-accrual status representing 0.1% of the portfolio at fair value.
Key Facts for Investor Verification
- Fee Waivers: The Advisers waived internal administrative services expenses of approximately $758,000 for the quarter. No base management or incentive fees were waived, though a $1.4 million subordinated incentive fee was earned.
- Share Repurchases: The Company repurchased 820,174 shares for approximately $6.6 million during the quarter at an average price of $7.99 per share.
- Non-Qualifying Assets: Approximately 12.9% of the Company's total assets were considered non-qualifying under the 1940 Act as of March 31, 2019.
- Debt Structure: The Company has two primary credit facilities: a $120 million TIAA facility (fully utilized) and a $450 million Deutsche Bank facility (with $70 million available).