Introduction section by Colorado Wealth Management Fund.
Article section by Scott Kennedy.
Bringing More of Scott’s Work to Our Website
The REIT Forum is a service produced by Michael Vanloon (better known as Colorado Wealth Management Fund) and Scott Kennedy. After intense consideration, I decided to launch our service through Substack. Since then, we’ve seen great success. Substack enables us to give readers real-time alerts with entire articles delivered directly to their inboxes.
You’re probably used to seeing the “from” field saying: “ColoradoWealthManagementFund from The REIT Forum”.
In some of our future e-mails, it may say:
“Scott Kennedy from The REIT Forum”.
That will simply mean we’ve updated the backend of the website for Scott Kennedy to directly post his articles.
I want to make browsing our work as simple as possible for readers. This will be another step in that direction.
For the moment, I’ll be posting Scott’s work. The following articles are a direct copy and paste from Scott. While we get the back end set up, there is a delay in getting the articles posted. Rest assured that it should be solved soon.
Finding Our Positions
I posted a subscriber-exclusive article with links to our Google Sheets. You can always access our positions there. Scott’s positions are updated each week. CWMF’s positions are usually updated on the same day as the trade.
Disclosures
Related to the stocks in this article:
CWMF is long: RITM-D, GPMT-A, DX-C, EFC-A, RITM-C, EFC-B, PMT-C, PMT-B, CIM-B, AGNCP, CIM-D, RITM-B, RITM, SLRC, GPMT, RC.
Scott Kennedy is long: RITM, RC, SLRC, GPMT, ARCC, TSLX, FSK, RITM-D, MITT-B, MITT-C, GAINL, RCB, ECCC, ECCW.
The rest of this post is from Scott Kennedy.
Summary
Part 1 of this article compares ARCC’s recent quarterly change in NAV, quarterly and trailing 12-month economic return, NII, and current valuation to 14 BDC peers.
Part 1 also performs a comparative analysis between each company’s investment portfolio as of 6/30/2023 and 9/30/2023. This includes an updated percentage of investments on non-accrual status.
I also provide a list of the other BDC stocks I currently believe are undervalued (a buy recommendation), overvalued (a sell recommendation), and appropriately valued (a hold recommendation).
Other metrics analyzed include each company’s cumulative realized gain (loss) per share, NII per share, price to annualized NII ratio, and percentage of income attributable to capitalized PIK income.
By providing these comparable sector metrics, this article sheds light on some useful quantitative data when assessing each company’s past, current, and likely future performance.
Author’s Note: This is an “early look” for the REIT Forum subscribers regarding my quarterly business development company (“BDC”) sector comparison article. PART 1 of this article covers BDC net asset value (“NAV”) fluctuations (and various other metrics), PART 2 covers dividend metrics, and both parts cover projected current valuations and recommendations. While I will be providing this article to the public in the near future, this “version” of the article per se will provide each BDC’s BUY, SELL, or HOLD percentage recommendation range. This also includes 6 separately-ranked tables for more effective sector comparative metrics. In the future, subscribers will get additional early looks regarding mortgage real estate investment trust (mREIT) and BDC articles I provide to the public, along with additional data/metrics and per share price ranges. Furthermore, this includes same day/near future mREIT and BDC earnings articles and weekly recommendation change articles that are only provided to subscribers of the REIT Forum.
Focus of Article:
The focus of PART 1 of this article is to analyze Ares Capital Corp.’s (ARCC) recent results and compare a handful of the company’s metrics to 14 BDC peers. This analysis will show past and current data with supporting documentation within two detailed tables. Table 1 will compare ARCC’s recent NAV, economic return (loss), net investment income (“NII”), stock price to annualized NII ratio, and percentage of total investment income attributable to capitalized payment-in-kind (“PIK”)/deferred income to the 14 BDC peers. Table 1 will also provide a premium (discount) to estimated CURRENT NAV analysis using stock prices as of 12/8/2023. Table 2 will compare ARCC’s investment portfolio (including several additional metrics) as of 6/30/2023 and 9/30/2023 to the 14 BDC peers.
I am writing this two-part article due to the continued requests that such an analysis be specifically performed on ARCC and some of the company’s BDC peers at periodic intervals. These BDC peers include Capital Southwest Corp. (CSWC), FS KKR Capital Corp. (FSK), Gladstone Investment Corp. (GAIN), Golub Capital BDC Inc. (GBDC), Main Street Capital Corp. (MAIN), MidCap Financial Investment Corp. (MFIC) (formerly Apollo Investment Corp.; AINV), Oaktree Specialty Lending Corp. (OCSL), Blue Owl Capital Corp. (OBDC) (formerly Owl Rock Capital Corp.; ORCC), PennantPark Floating Rate Capital Ltd. (PFLT), Prospect Capital Corp. (PSEC), SLR Investment Corp. (SLRC), Blackrock (BLK) TCP Capital Corp. (TCPC), TriplePoint Venture Growth BDC Corp. (TPVG), and Sixth Street Specialty Lending Corp. (TSLX).
Understanding the characteristics of a company’s investment portfolio and operating performance can shed some light on which companies are overvalued or undervalued strictly per a “numbers” analysis. This is not the only data that should be examined to initiate a position within a particular stock/sector. However, I believe this analysis would be a good “starting-point” to begin a discussion on the topic. My BUY, SELL, or HOLD recommendation and current price target for ARCC will be in the “Conclusions Drawn” section of the article. This includes providing a list of the BDC stocks I currently believe are undervalued (a buy recommendation), overvalued (a sell recommendation), or appropriately valued (a hold recommendation).
NAV, Economic Return (Loss), Current Premium (Discount) to NAV, and NII Analysis - Overview:
Let us start this analysis by getting accustomed to the information provided in Table 1 below. This will be beneficial when explaining how ARCC compares to the company’s 14 BDC peers regarding the metrics stated above. Due to the fact several BDC peers listed in Table 1 have a different fiscal year-end, all quarterly results are based on a calendar year-end. For instance, all metrics below are stated “Q3 2023” even though this does not correspond to every company’s fiscal year-end. Readers should be aware as such when the analysis is presented below.
Table 1a – NAV, Economic Return (Loss), Current Premium (Discount) to NAV, NII, and Capitalized PIK Analysis
(Source: Table created by me, obtaining historical stock prices from NASDAQ and each company’s NAV per share figures from the SEC’s EDGAR Database)
Table 1a above provides the following information on ARCC and the 14 BDC peers (see each corresponding column): 1) NAV per share at the end of the calendar second quarter of 2023; 2) NAV per share at the end of the calendar third quarter of 2023; 3) NAV per share change during the calendar third quarter of 2023 (percentage); 4) economic return (loss) (change in NAV and accrued dividend) during the calendar third quarter of 2023 (percentage); 5) economic return (loss) during the trailing 12-months (percentage); 6) my estimated CURRENT NAV per share (NAV as of 12/8/2023); 7) stock price as of 12/8/2023; 8) 12/8/2023 premium (discount) to my estimated CURRENT NAV (percentage); 9) NII per share during the calendar third quarter of 2023; 10) NII per share change versus the prior quarter; 11) NII per share change versus the calendar third quarter of 2022; 12) 12/8/2023 stock price to annualized NII ratio; and 13) percentage of total investment income attributable to capitalized PIK (deferred) income.
Table 1b – Past and Current BDC Recommendation Analysis