PFLT Q3 2023 Updates By Scott Kennedy

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Related to the stocks in this article:

CWMF is long: RITM-D, GPMT-A, DX-C, EFC-A, MFA-C, RITM-C, EFC-B, PMT-C, PMT-B, CIM-B, AGNCP, CIM-D, RITM, SLRC, MFA, GPMT, RC.

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The rest of this post is from Scott Kennedy.

Summary

• This 23rd earnings assessment article reviews PFLT’s NAV and NII performance during Q3 2023.

• This article also discusses how PFLT’s quarterly change in NAV and NII “matched up” to expectations. Earnings remain a key driver to stock performance.

• PFLT’s NAV was a minor outperformance while its NII was a minor underperformance.

• No change in PFLT’s percentage recommendation ranges or risk rating. PFLT is currently deemed overvalued (SELL).

• Overall, PFLT reported an "average" quarter.  PFLT's quarterly NII dropping below $0.35 per share equates to no recommendation range upgrade.  PFLT remains modestly overvalued.

Introduction:

Hi subscribers. For new members, my name is Scott Kennedy and currently I fully cover 20 mortgage real estate investment trust (mREIT) and 15 business development company (“BDC”) common stocks within this Investing Group regarding research/data, subscriber questions, weekly projected book values/net asset values (BV/NAV), and common stock recommendation ranges. Colorado (“CO”) Wealth Management handles the mREIT preferred stocks and he and his team handles all other applicable REIT sectors outside the mREIT sector. CO also provides some mREIT common stock and BDC articles from time-to-time which are more of an “overview/introduction” discussion; typically based either on my or our combined research/data. This also includes some macroeconomic trends and data. My name is always attached to all Investing Group articles I personally wrote so there is no confusion for subscribers.

This REIT Forum article is part of a series of articles over a span of 6-7 weeks which will analyze my previously projected BV/NAV and core earnings (or core earnings equivalent)/net investment income (“NII”) figures and compare these metrics to each mREIT’s and BDC’s actual reported results, respectively. For readers who are familiar with my public mREIT and/or BDC articles, these types of articles are beneficial to readers who desire to pursue a more active investing strategy and/or want more “real time” thoughts/analysis.

I hope my services/contributions ultimately help enhance a subscriber’s total investment returns or minimize their total investment losses within the mREIT and BDC sectors. At the very least, I hope subscribers will gain more insight into the mREIT and BDC sectors by reading my/our exclusive REIT Forum articles.

1) PFLT’s NAV and NII Calendar Q3 2023 Performance (Projected Versus Actual Results):

On 11/15/2023, PennantPark Floating Rate Capital Ltd. (PFLT) reported the company’s earnings results for the calendar third quarter of 2023 (fiscal fourth quarter of 2023). Table 1 below provides PFLT’s NAV and earnings summary.

Table 1 – PFLT Calendar Q3 2023 NAV and Earnings Summary

Source: Taken Directly from the REIT Forum’s © Analytical Spreadsheets/Data

Hi subscribers. I was able to review PFLT’s calendar Q3 2023 (fiscal Q4 2023) earnings results. PFLT's calendar Q3 2023 net investment income (“NII”) of $0.324 per share was a minor underperformance versus my projection of $0.335 per share (range $0.310 - $0.360 per share). PFLT’s NII for the calendar second quarter of 2023 was $0.364 per share. As such, I projected a NII decrease of ($0.029) per share. In actuality, PFLT reported a NII decrease of ($0.040) per share during the calendar third quarter of 2023. The institutional analysts’ consensus average was NII of $0.314 per share. Let us discuss how PFLT slightly underperformed my quarterly NII expectations.

First, regarding quarterly investment activity, I was a bit disappointed. Even with continued at-the-market” (“ATM”) equity share issuance, PFLT recorded loan originations funded at close and add-on investments of only $94 million during the calendar third quarter of 2023. Simply put, continued subdued loan originations, especially during PFLT’s fiscal year-end quarter. In comparison, I projected quarterly loan originations funded at close and add-on investments of $125 - $175 million (mean of $150 million). In addition, PFLT recorded loan prepayments/repayments/restructurings of ($141) million during the calendar third quarter of 2023. In comparison, I projected quarterly prepayments/repayments/restructurings of ($125) – ($175) million (mean of ($150) million). When calculated, excluding fair market value (“FMV”) fluctuations, PFLT decreased the company’s investment portfolio size by ($48) million during the calendar third quarter of 2023. In comparison, I projected PFLT would report a mean unchanged investment portfolio size. So, a slightly - modestly smaller investment portfolio size when compared to my expectations. When quantified, including the incentive fee offset from lower total pre-incentive fee income, this ultimately resulted in a NII underperformance of ($0.019) per share when compared to my expectations.

Second, PFLT continued to experience a rise in the company’s weighted average annualized yield during the calendar third quarter of 2023 when compared to the prior quarter. Simply put, this was due to the continued increase in LIBOR/SOFR/PRIME. PFLT reported a weighted average annualized yield of 11.80%, 12.40%, and 12.60% for the calendar first, second, and third quarter of 2023, respectively. When calculated, this was a quarterly increase of 0.60% and 0.20%, respectively. It should be noted PFLT’s percentage increase during the calendar second quarter of 2023 included a one-time dividend income “boost” from Dominion Holdings, LLC (Dominion). This was discussed during the prior quarter. This past quarter, this exactly matched my expectations. This metric should begin to plateau towards the end of 2023. In addition, it should be noted the higher LIBOR/SOFR/PRIME rises, the more underlying credit risk (non-accruals) needs to be respected (and monitored). This will have heightened importance as we head through 2023 and into 2024. When quantified, including the incentive fee offset from similar total pre-incentive fee income (not applicable in this specific case), this directly led to no/a de minimis NII variance when compared to my expectations.

When the 2 variances noted above are combined, along with a remaining NII outperformance of $0.008 per share mainly scattered amongst PFLT’s expense accounts (mainly lower base management fees and interest expense on a smaller investment portfolio size), this fully reconciles to the company’s quarterly NII underperformance of ($0.011) per share during the calendar third quarter of 2023 when compared to my expectations.

Moving on, PFLT reported a NAV as of 9/30/2023 of $11.13 per share (1.5% increase) versus my projection of $10.90 per share (0.5% decrease). I consider this a minor (at or greater than a 1.0% but less than a 2.5%) outperformance and was within my $10.55 - $11.25 per share range (towards the top end). As such, a bit encouraging regarding PFLT’s NAV fluctuation this quarter but nothing overly exciting.

Unfortunately, at the time I wrote this earnings chat note, PFLT had yet to provide the company’s 10-K report (and likely will not provide until tomorrow). As such, I currently cannot take a “deep dive” into PFLT’s investment portfolio which contained 131 portfolio companies as of 9/30/2023. As such, I cannot provide specific, underlying portfolio company valuation reconciliations at this time. Therefore, for this quarter, a “top-line” reconciliation will have to justify. Regarding PFLT’s entire investment portfolio, the company reported a combined net realized loss and net unrealized appreciation of $7 million during the calendar third quarter of 2023. In comparison, I projected PFLT would report a combined net realized loss and net unrealized depreciation of ($5) million. When calculated, this $12 million variance directly led to a NAV outperformance of $0.21 per share when compared to my expectations.

When this variance is combined with the aforementioned NII underperformance of ($0.011) per share discussed earlier and a NAV outperformance of $0.03 per share regarding the quarterly FMV fluctuations of the company’s outstanding borrowings (liabilities; deemed immaterial for discussion), this directly reconciles back to PFLT’s NAV outperformance of $0.23 per share when compared to my expectations.

Regarding credit risk, PFLT likely put 0 new portfolio companies on non-accrual status during the calendar third quarter of 2023. In addition, 0 portfolio companies were likely taken off non-accrual status. This was previously highlighted in our weekly mREIT and BDC articles series (credit section; 1 upgrade and 1 downgrade were within PFLT’s joint venture [JV] which is separately reviewed/analyzed). Looking ahead, API Holdings III Corp. (“API”), Efficient Collaborative Retail Marketing Company LLC (Retail), Research Now Group, Inc. and Dynata, LLC (Research Now), and a recently restructured Walker Edison Furniture LLC (Walker Edison) will continue to need heightened monitoring. Research Now could be placed on non-accrual status as early as the calendar fourth quarter of 2023.

So, all-in-all, a minor underperformance on PFLT’s NII (variance of $0.011 per share) and a minor outperformance on the company’s NAV (variance of 2.0%). I believe PFLT reported an “average” quarter regarding NII and NAV fluctuations (not “horrific”, not great).

When taking PFLT’s recent and projected performance into consideration, along with macroeconomic trends/events (mainly Fed monetary policy, the general projected movement of rates/yields, and projected economic performance over the foreseeable future), no change to my/our PFLT percentage recommendation ranges (relative to CURRENT NAV) or risk rating (remains at a 4). PFLT remains an “average” BDC in my/our opinion. If PFLT could have generated NII at or above $0.35 per share in consecutive quarters (which did NOT occur), kept non-accruals in check (which occurred), AND kept NAV relatively unchanged or reported an increase (which occurred), I would have performed a percentage recommendation range (relative to CURRENT NAV) upgrade. If this upgrade had occurred, this would have also resulted in a risk rating upgrade from 4 to 3.5. However, the NII “target/goal” was not met. As such, I do not believe PFLT’s performance this quarter justifies an upgrade YET. This is something to point out to subscribers. An upgrade could occur as early as next quarter if PFLT puts the company’s newly raised capital to work in investments with low credit risk and attractive risk-adjusted returns (thus resulting in a modest increase in quarterly NII past $0.35 per share solely with recurring income).

At a closing price as of 11/15/2023 of $10.84 per share, PFLT is deemed to be modestly OVERVALUED/a SELL recommendation (price target of $10.25 per share). As such, I/we currently deem PFLT is not attractively valued. Therefore, subscribers should not currently initiate or add to one’s existing position. In my opinion, a modest - notable pullback would first need to occur.

Conclusions Drawn + BUY, SELL, or HOLD Recommendation: