Scott Kennedy’s mREIT + BDC Earnings Series: Assessing Blackrock TCP Capital’s And New York Mortgage’s Performance For Q1 2024
Summary
This earnings assessment article reviews TCPC’s and NYMT’s NAV/BV and adjusted NII/core earnings equivalent performance during Q1 2024 and compares results to expectations. Earnings remain a driver to stock performance.
TCPC’s NAV slightly outperformed my/our expectations (within range; still a large quarterly decrease) while its adjusted NII was a minor–modest outperformance (top end of range).
Non-Accruals slightly decreased (factors in the BKCC merger) while PIK income slightly increased. No change in TCPC’s percentage recommendation ranges or risk/performance rating. TCPC is currently deemed appropriately valued (HOLD).
NYMT’s BV notably underperformed my/our expectations. NYMT’s notable BV decline was even more severe when compared to my bearish assumptions. NYMT’s net spread income was nearly an exact match.
No change in NYMT’s percentage recommendation ranges or risk/performance rating. While NYMT has some value, it is considered a very “speculative” play. It will take time to “right the ship”.
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) TCPC:
Commentary
Quarterly NAV Fluctuation: Minor Outperformance (1.2% Variance).
Adjusted NII: Minor - Modest Outperformance ($0.027 Per Share Variance).
A largely “as expected” quarter regarding Blackrock TCP Capital’s TCPC 0.00%↑ NAV in my opinion. TCPC reported a notable quarterly NAV decrease which was correctly anticipated. If anything, a minor outperformance (a slightly less severe NAV decrease). As such, TCPC’s underlying portfolio company valuations (both realized and unrealized) largely matched expectations. TCPC reported a combined net realized loss and unrealized depreciation (including interest rate swap FMV fluctuations) of ($23) million during calendar Q1 2024. This even included $21 million in unrealized appreciation from the BlackRock Capital Investment Corporation (“BKCC”) merger (purchase discount). In comparison, I projected a combined net realized loss and unrealized depreciation (including interest rate swap FMV fluctuations) of ($30) million. The majority of TCPC’s valuation decline was due to a handful of previously highlighted underperforming portfolio companies. This includes, but is not limited to, TVG-Edmentum Holdings, LLC (Edmentum; mentioned the prior 2 quarters), Razor Group GmbH (Razor; mentioned the prior several quarters), Aventiv Technologies, Inc. (Aventiv; mentioned the prior several quarters), Astra Acquisition Corp. (Astra; mentioned the prior several quarters), and 36th Street Capital Partners Holdings, LLC (36th Street; mentioned the prior 2 quarters). This was the 2nd straight quarter TCPC has reported a notable NAV decline (which was correctly anticipated).
A slightly – modestly outperforming quarter regarding TCPC’s adjusted NII in my opinion. Due to the fact TCPC now accrues for GAAP discount accretion in relation to the BKCC merger, I believe the company’s adjusted NII is the best metric to track regarding operational performance (not NII; more indicative of net ICTI). Let us briefly discuss this minor - modest outperformance.
First, when excluding FMV fluctuations, TCPC increased the company’s investment portfolio size by $583 million during Q1 2024. The overwhelming majority of this increase was directly due to the BKCC merger. In comparison, I projected TCPC would increase the company’s investment portfolio size by $550 million. As such, a slightly larger investment portfolio size.
Second, TCPC reported a weighted average annualized yield of 14.10% during Q4 2023 and Q1 2024 (unchanged). This past quarter, this was a 0.1% outperformance when compared to my expectations. This was mainly the result of TCPC acquiring BKCC investments that had slightly higher effective interest rates/yields when compared to my expectations. That said, as stated 2 quarters ago, I continue to believe this metric began to plateau towards the end of 2023. I continue to project a gradual decrease over time which is already factored in my/our modeling and percentage recommendation ranges. In addition, it should be noted the higher LIBOR/SOFR/PRIME rose (over 500 basis points [bps] in 1.5 years), the more underlying credit risk (non-accruals) needs to be respected (and monitored). This will have heightened importance as we head through 2024.
Third, even though TCPC continued to notably write-down the FMV of the company’s 2nd lien debt investment in Astra, management did not place this loan on non-accrual status during Q1 2024. This was in direct contradiction to TSLX’s decision to place this same exact loan on non-accrual status (and my expectation to do so as well). This led to a very minor adjusted NII outperformance.
TCPC reported a “troubling” quarter regarding NAV and a bit more of an optimistic quarter regarding adjusted NII (hence the market’s positive reaction immediately after earnings). That said, TCPC still has work to do regarding managing heightened credit risk of a handful of underperforming portfolio companies. A risk/performance rating of 3.5 for TCPC remains appropriate in the current environment/over the foreseeable future.
Change or Maintain
NAV Adjustment: Our projection for current NAV per share was adjusted: Up $0.10 (To Account for the Actual 3/31/2024 NAV Vs. Prior Projection). Price targets have already been adjusted to reflect the change in NAV. The update is included in the card below and the subscriber spreadsheets.
Percentage Recommendation Range (Relative to CURRENT NAV): No Change.
Risk/Performance Rating: No Change. Remains at 3.5.