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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Ladies and gentlemen, thank you for standing by. Welcome to the American Capital first quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Amanda Cuthbertson. Please go ahead.
AMANDA CUTHBERTSON, IR, AMERICAN CAPITAL STRATEGIES: Thanks, Roxanne and thank you for joining American Capital's first quarter 2008 earnings call. Before we begin, I would like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent that are not recitations of historical facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the Safe Harbor protection, provided by the Reform Act.
Actual outcomes and results could differ materially from those forecast, due to the impact of many factors beyond the control of American Capital. We do not undertake to update our forward-looking statements unless required by law. An archive of this presentation will be available on our website and the telephone recording can be accessed through May 21st, by dialing 800-475-6701. The replay code for the replay is 918891. To view the Q1 slide presentation please go to our website, Americancapital.com and click on Q1 2008 shareholder presentation link in the upper right-hand corner.
You can select conference call option to view the streaming slide presentation, or the Webcast option for both slides and audio. If you have any trouble with the Webcast during the presentation please hit F5 to refresh. As a quick reminder, we just wanted to point out that we will be hosting our American Capital Equity Investor Conference on May 19th, and formal comments will begin at 9:30 eastern time, registration has closed but the Webcast will be available and can be accessed on our website. And with that, I will turn the call over to Malon Wilkus, Chairman and CEO of American Capital.
MALON WILKUS, CHAIRMAN, CEO, AMERICAN CAPITAL STRATEGIES: Amanda, thank you so much, and I appreciate everyone joining us today. With me today is John Erickson, our CFO; Ira Wagner, our COO, and we're going to try to get through this quickly, so that we can take questions.
I do want to say that I know I think most of our analysts are probably tired of hearing it but I think our shareholders are loving it, that it's a great time to be leveraged less than one to one, debt to equity, and as you see, all the troubles in the financial institutions today, I think people and our shareholders are realizing more and more, it's to those firms that are properly capitalized that the opportunities are available. So going to slide four, the key take-aways for this quarter is that we've had, this is an outstanding investment environment, and that's why we love being leveraged one to one, because we can take advantage of it. And our investment portfolio is performing quite well. Commercial credit remains excellent, the faults remain low, and the credit crunch has improved pricing, which should be, over the next several years, be accretive to future (inaudible) realized earnings and dividends.
We had $1 billion in the first quarter of unrealized depreciation, and so I want to make sure that what you take away from this is that $127 million is due to the performance on our private finance portfolio, and the balance is due to declining public trading prices, widening spreads, and the implementation and induction of FAS 127. But we believe a lot of that declining public trading prices, widening spreads, those will eventually work back through the system and we'll talk a lot more about that in a couple minutes.
This is a great time to have a seasoned portfolio. So over -- so we're experiencing great liquidity and that's because we have substantial control over a large portion of our portfolio and it's generating significant levels of liquidity, 931 million in the first quarter. Just want to review our dividends. Again, we reiterated our 419 -- $4.19 in dividends for 2008, 13% increase over '07, almost half of that dividend we're forecasting to be paid from income that we earned in 2007 that we rolled over into 2008. That means the income we're earning in 2008 we will be able to over a very large amount of that into '09. We also want to make clear, we are forecasting that our 2008 realized earnings will exceed our 2008 dividends. So we expect to perform this year for our shareholders.
The second quarter forecast is for $0.68 to $0.75 in NOI per diluted share. We also expect our realized earnings will exceed $1.10 per diluted share. And that would not only then cover our second quarter dividend, but the slight amount that we didn't cover in the first quarter with realized earnings. And then we wanted to reiterate our forecast that over $500 million of 2008 taxable income will be rolled over into 2009 to cover the 2009 dividends. And that's versus the 360 million that we rolled over from last year to this year. So again, we expect to be performing in an outstanding way this year. Moving to slide seven, we paid $1.01 in the first quarter, a 13% growth. Our realized earnings per share was 93% of that Q1 dividend, so virtually covered by our realized earnings. And the forecast is that our -- to our first quarter dividend will be paid from ordinary income for tax purposes and rolled over, taxed income that was rolled over from '07.
Now, for the second quarter dividend, which we declare now at $1.03, $0.70 of that will be paid from net long-term capital gains, rolled over from 2007. And that will be taxed by the way at a 15% capital gains rate and John wanted me to remind everyone that if you have your shares lent out and that they're on borrow, and that's quite possibly the case if you have it in a margin account, then the income that you will get to replace that dividend will generally be taxed at ordinary rates. So if you want that capital gains tax rate, you might want to take it off borrow. And then you can see our forecast for the rest of the year adding up to the 419 in dividends and on slide eight you can see a wonderful growth rate in our dividend. You can see how well we performed growing our dividends in the last recession, and we see no reason why we won't continue to perform well in this recession, if indeed we're in one, and if we move into one, we expect to perform.
So, let's move on to slide ten, to our financial highlights. We had good realized earnings, $0.77 NOI per diluted share, that's a 5% increase. It came on the high end of our $0.73 to $0.78 guidance, and it represents 11% trailing 12 months return on equity. We had $0.94 in realized earnings, 16% increase over Q1, a 15% LTM return on equity, in part driven by $33 million in net realized gains. And so for both NOI and realized earnings, we had a very nice growth rate over prior year's performance. Now we did have a $4.16 loss on the bottom line, due to $964 million of net gains and net depreciation. And so we had a very large amount of depreciation for the first quarter, and I'm going to talk more about that in the next couple of slides. That brings us down to $28.16 NAV. That's a $4.72 decrease in our NAV over the fourth quarter of '07, but only a 7% decline from Q1, 2007. So in a sense, we went up a little bit in 2007 in terms of appreciation, and it has come back down to the levels not too dissimilar from Q1 of '07.
Going to slide 11, let's - - you can see at your leader here, you can look at the gains, but let's talk about the depreciation and appreciation, so the unrealized portion of this total. So we had a total negative amount of appreciation/depreciation gains and losses of $964 million, but the part I want to focus in on is the 997 million of unrealized depreciation. And, you can see this broken down on slide 12. So starting with our private finance portfolio, this is where we fund our own buyout, and we provide one-stop buyouts, and then we also do one-stop financing for other private equity firms doing buyouts. Here we had 327 million of net depreciation, in context, it's on a 8.4 billion of assets. The depreciation of 180 million was from changes in the accounting policies when we implemented FAS 157. And then in addition, there were declines in cash flows of certain portfolio companies, and declines in trading multiples, comparable public company trading multiples of certain of our portfolio companies. So setting aside the FAS 157, we think our portfolio actually performed quite, well considering the environment, but there are some specific companies that have under-performed.
Turning to the European Capital Limited, we had 123 million of depreciation there, due to decline in its quoted market price. We valued that, based on the quoted market price, plus control premium, and in the first quarter consulted with the SEC staff on the use of the control premium. There was - - in this depreciation at European Capital would have no impact on American Capital's revenues, NOI, or realized earnings.
As you all know, we have a portfolio company called American Capital, LLC, which is the alternative asset fund manager, which handles all the asset management business that American Capital is involved in. There, we had 140 million of depreciation, and that's due to declines in trading multiples of comparable public companies that will expect substantial declines in this last quarter, and it was also due to some decline in projected management fees. One of the - - I guess the largest sector where we had declines was our structured products business, where we are invested in CLOs, CDOs and CMBS, there we had 360 million of depreciation, and that's due primarily to widening investment spreads, and I'm going to give an example of that in a minute. We will actually look at those spreads. The assets are performing as under-written, and we exceed no impact on our revenues in (inaudible) or realized earnings of this depreciation. And then we had interest rate derivatives, where we had 73 million of depreciation, a large portion of those derivatives are required result of our securitizations, on balance sheet term securitizations, and some of our other bank loans.
Let's go to slide 13. American Capital, as you know, invests primarily in the illiquid assets, and they have no trading market, and under FAS 157, those are considered level 3 assets. American Capital generally holds, or we intend to hold those assets to settlement or maturity, and that has been the case for ten years, that we have been in business as a public company. Well in March of this year, the SEC staff published a letter on MD&A disclosure, for the 10Qs and 10Ks, the management discussion that you typically put in the K and Q. And what the SEC has asked is for …