Scott Kennedy’s BDC Series: Ares Capital’s NAV, Valuation, And Dividend Versus 13 BDC Peers – Part 1 (Post Q1 2024 Earnings)
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 13 BDC peers.
Part 1 also performs a comparative analysis between each company’s investment portfolio as of 12/31/2023 and 3/31/2024. 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 “chat notes”/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 0.00%↑ recent results and compare a handful of the company’s metrics to 13 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 13 BDC peers. Table 1 will also provide a premium (discount) to estimated CURRENT NAV analysis using stock prices as of 5/27/2024. Table 2 will compare ARCC’s investment portfolio (including several additional metrics) as of 12/31/2023 and 3/31/2024 to the 13 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 0.00%↑ , FS KKR Capital Corp. FSK 0.00%↑ , Gladstone Investment Corp. GAIN 0.00%↑ , Golub Capital BDC Inc. GBDC 0.00%↑ , Main Street Capital Corp. MAIN 0.00%↑ , MidCap Financial Investment Corp. MFIC 0.00%↑ , Oaktree Specialty Lending Corp. OCSL 0.00%↑ , Blue Owl Capital Corp. OBDC 0.00%↑ , PennantPark Floating Rate Capital Ltd. PFLT 0.00%↑ , SLR Investment Corp. SLRC 0.00%↑ , Blackrock BLK 0.00%↑ TCP Capital Corp. TCPC 0.00%↑ , TriplePoint Venture Growth BDC Corp. TPVG 0.00%↑ , and Sixth Street Specialty Lending Corp. TSLX 0.00%↑ .
I have decided to drop coverage of Prospect Capital Corp. PSEC 0.00%↑ due to continued operational underperformance versus a majority of sector peers (amongst other factors). I am planning to pick up coverage of a new BDC stock starting on 7/1/2024 (subscribers will help decide which stock to add).
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 13 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 “Q1 2024” 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 1 – 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 1 above provides the following information on ARCC and the 13 BDC peers (see each corresponding column): 1) NAV per share at the end of calendar Q4 2023; 2) NAV per share at the end of calendar Q1 2024; 3) NAV per share change during calendar Q1 2024 (percentage); 4) economic return (loss) (change in NAV and accrued dividend) during calendar Q1 2024 (percentage); 5) economic return (loss) during the trailing 12-months (percentage); 6) my estimated CURRENT NAV per share (NAV as of 5/27/2024); 7) stock price as of 5/27/2024; 8) 5/27/2024 premium (discount) to my estimated CURRENT NAV (percentage); 9) NII per share during calendar Q1 2024; 10) NII per share change versus the prior quarter; 11) NII per share change versus calendar Q1 2023; 12) 5/27/2024 stock price to annualized NII ratio; and 13) percentage of total investment income attributable to capitalized PIK (deferred) income during calendar Q1 2024 (percentage).
Now that an overview has been provided, let us start the comparative analysis.
Analysis of ARCC:
Using Table 1 above as a reference, ARCC had a NAV of $19.24 per share at the end of calendar Q4 2023. ARCC had a NAV of $19.53 per share at the end of calendar Q1 2024. This calculates to a quarterly NAV increase of $0.29 per share or 1.51%. When including ARCC’s quarterly dividend of $0.48 per share and no special periodic dividend, the company had an economic return (change in NAV and accrued dividend) of $0.77 per share or 4.00% for calendar Q1 2024. It should also be noted ARCC had a trailing 12- and 24-month economic return of 16.29% and 22.70%, respectively. Both percentages were above the covered peer average.
ARCC’s performance during the past four quarters was mainly attributable to the following three factors: 1) modest net underpayment of dividends when compared to the company’s NII/core earnings; 2) minor - modest net realized losses within a handful of exited portfolio companies; and 3) minor - notable net unrealized appreciation within a majority of the company’s active investment portfolio. This is a good transition to the next topic of discussion, an analysis of ARCC’s investment portfolio (including several additional metrics) as of 12/31/2023 and 3/31/2024. To begin this analysis, Table 2 is provided below.
Tables 2a + 2b – Investment Portfolio Composition Analysis (Including Several Additional Metrics; 3/31/2024 Versus 12/31/2023)