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Harvest Capitals Reported 1Q Results Show Clear Progress

Harvest Capitals Reported 1Q Results Show Clear Progress

Harvest Capital s reported first-quarter results show clear progress, and management commentary about its investment pipeline is encouraging. Core net investment income (NII) per share was $0.34, equivalent to the dividend but slightly below our $0.36 estimate. Net income, which includes unrealized gains and losses on investments, was $0.36 versus our $0.35 estimate. The core NII shortfall versus our estimate was driven primarily by lower-than-expected fee income, which is lumpy in nature, and by lower payment-in-kind (PIK) income. The upside to our net income estimate was driven primarily by unrealized gains in Harvest s equity investment portfolio, which can be lumpy, and by its royalty security.

Harvest s portfolio ended the March quarter at $82.0 million of investments at fair value, up 16% from the prior quarter and slightly above our $81.1 million estimate. Harvest s portfolio consisted of 26 different companies, up from 21 in the prior quarter and 13 at the time of the IPO in second quarter 2013. Fifty percent of the portfolio was second-lien senior secured, down from 53% in the prior quarter and 55% at the time of the IPO. The first-lien senior secured investments remained at 44% of the portfolio. Equity and royalty securities accounted for the remaining 6%, which is up from 3% in the prior quarter.

Management has put an increased focus on growth of the senior secured investments in light of heightened competition. Management indicated that its pipeline stands at $122 million across 22 transactions, which is down slightly from the $150 million across 29 investments at the start of the second quarter but up from 19 transactions totaling $100 million at the beginning of the year. Second-quarter originations and follow-on investments stood at about $11 million as of May 14. Management said that an additional six deals totaling roughly $24 million are likely to close by quarter end, but timing could delay some closes.

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The yield on investments, excluding the roughly $7 million low-yielding transitory portfolio, was 16.5%, which compares with 16.6% in the prior quarter. The yield, including the transitory portfolio, was 15.7%. Management has invested about $7 million in highly liquid, senior secured investments, which carry materially lower yields to reduce the cash drag from the IPO while it searches for core investments. Due to heightened competition over the past couple of quarters, Harvest has increased its appetite for senior secured and unitranche investments, both of which carry lower yields relative to its core investment portfolio.

Harvest has also been increasing its floating rate investments, which carry yields that are lower than most of Harvest s current portfolio of fixed-rate investments, to reduce interest rate risk. Floating rate investments stood at 46% of the portfolio versus 32% at the time of the IPO. As a consequence of the aforementioned portfolio shifts, we expect Harvest s yield to compress slightly from the current level of 16.5% to 13%-15% over time. Harvest focuses on the lower end of the middle market, with loans averaging around $3 million.

Harvest Capitals Reported 1Q Results Show Clear Progress

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