TSLX & TPVG Q3 2023 Updates By Scott Kennedy
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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.
This 12th earnings assessment article reviews TSLX’s and TPVG’s NAV and adjusted NII/NII performance during Q3 2023. This article is mainly for subscribers who do not utilize chat.
TSLX’s NAV was nearly an exact match-very minor outperformance while its adjusted NII was a modest outperformance. TPVG’s NAV was a minor underperformance while its NII was a minor outperformance.
No change in TSLX’s and TPVG’s percentage recommendation ranges or risk rating. TSLX and TPVG are currently deemed appropriately valued (HOLD).
Another good/strong quarter from TSLX. One of the main reasons why TSLX has recommendation ranges priced at a premium to most sector peers.
TPVG reported an average quarter. TPVG's NAV decline will, once again, underperform peers this quarter. Furthermore, TPVG's credit risk remains above average/heightened. However, TPVG's earnings remain strong.
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.
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1) TSLX’s NAV and Adjusted NII Q3 2023 Performance (Projected Versus Actual Results):
On 11/2/2023, Sixth Street Specialty Lending Inc. (TSLX) reported the company’s earnings results for the third quarter of 2023. Table 1 below provides TSLX’s NAV and earnings summary.
Table 1 – TSLX Q3 2023 NAV and Earnings Summary
Source: Taken Directly from the REIT Forum’s © Analytical Spreadsheets/Data
Hi subscribers. I was able to review TSLX’s Q3 2023 earnings results. TSLX's Q3 2023 adjusted NII of $0.603 per share (when including an excise tax accrual) was a modest outperformance versus my projection of $0.570 per share. TSLX’s adjusted NII was $0.588 per share for the second quarter of 2023. As such, I projected an adjusted NII decrease of ($0.018) per share. In actuality, TSLX reported an increase of $0.015 per share during the third quarter of 2023. My preference is to use adjusted NII as this indicates TSLX’s “truer” operational performance during the quarter. The institutional analysts’ consensus average is based on TSLX’s NII which is a slightly different metric (includes a capital gains incentive fee accrual (reversal)). TSLX’s capital gains incentive fee accrual (reversal) is not currently payable in cash and may never be; dependent upon future performance of the portfolio. Still, the institutional analysts’ consensus average was NII of $0.573 per share for the third quarter of 2023.
TSLX typically has some notable adjusted NII/NII fluctuations from quarter-to-quarter due to some extraordinary/one-time items/events occurring within the company’s income statement. This type of activity picked up a bit during the third quarter of 2023 (more than I anticipated). For example, TSLX had accelerated original issue discount (“OID”) accretion of $0.7 million while having loan prepayment/repayment/exit fees of only $0.3 million during the second quarter of 2023. In comparison, TSLX had accelerated OID accretion of $1.6 million while having loan prepayment/repayment/exit fees of $0.9 million during the third quarter of 2023. Basically, only inside management (and a few other parties) knows exactly which portfolio companies prepaid their loans during any specific quarter and which ones specifically had prepayment clauses. The only other parties to know all this information is the portfolio companies themselves, deal underwriters, and TSLX’s external auditors (if/when tested). This is why both the institutional analysts and I have particular trouble “pinpointing” TSLX’s NII/adjusted NII during some quarters (when compared to most other BDC peers). When combined, these 2 income sources directly led to $2.5 million in additional revenues/income for TSLX during the third quarter of 2023. This compared to only $1.0 million during the second quarter of 2023. In comparison, due to my anticipation of a continued subdued prepayment environment, I projected total OID accretion and prepayment/repayment/exit fees of only $1.0 million. When calculated, this $1.5 million variance directly led to an adjusted NII outperformance of $0.017 per share when compared to my expectations.
Moving on, the severity of TSLX’s investment portfolio decrease during the third quarter of 2023, prior to any fair market value (“FMV”) fluctuations, slightly outperformed my expectations. TSLX had quarterly loan originations funded at close and add-on investments of $152 million during the third quarter of 2023. TSLX had loan prepayments/repayments/restructurings of ($159) million during the third quarter of 2023. When calculated, excluding scheduled principal payments, amortization, and fair market value (“FMV”) fluctuations, TSLX decreased the company’s investment portfolio size by ($7) million during the third quarter of 2023. In comparison, I projected TSLX would decrease the company’s investment portfolio size by a mean of ($25) million. When factoring in partially offsetting very slightly higher management fees, non-capital gains incentive fees, and interest expense, TSLX’s slightly larger investment portfolio size directly led to additional adjusted NII of approximately $0.6 million or $0.007 per share when compared to my expectations.
Regarding all remaining expense accounts not stated above, TSLX reported an adjusted NII outperformance of $0.009 per share when compared to my expectations. This minor variance was scattered amongst several remaining expense accounts; including a slightly lower excise tax accrual.
When the 3 variances noted above are combined, this fully reconciles back to TSLX’s adjusted NII outperformance of $0.033 per share during the third quarter of 2023 when compared to my expectations.
Moving on, TSLX reported a NAV as of 9/30/2023 of $16.97 per share (1.4% increase) versus my projection of $16.85 per share (0.7% increase). I classify this as nearly an exact match (at or within a 1.0% variance) and was well within my $16.40 - $17.30 per share range. Upon a quick review of TSLX’s underlying investments, no surprises “jumped out” amongst the 131 portfolio companies as of 9/30/2023. Simply put, the vast majority of debt and equity investments performed as expected (and the underlying valuation fluctuations reflected this notion). A good portion of TSLX’s investment portfolio is within the upper middle market (“UMM”). Larger capitalized companies generally have had an easier time in the fairly recent environment (versus the lower middle market (“LMM”)). However, with looming credit/recessionary risk, even UMM credit spreads were not immune to very slight widening late last year. However, spreads have tightened a bit during 2023 as the odds of an economic “soft landing” have recently ticked higher.
TSLX’s investment portfolio, when considering both realized and unrealized valuation fluctuations, recorded $15 million of net appreciation (when including currency translations, hedging, and an income tax provision). In comparison, I projected net realized and unrealized appreciation of $8 million (technically $7.5 million). The largest variance this quarter, similar to the prior quarter, was actually within TSLX’s foreign exchange valuation fluctuations (something I will readily admit I do not fully model due to immateriality). When calculated, this $8 million variance directly led to a NAV outperformance of $0.09 per share when compared to my expectations.
When the variance note above is combined with the adjusted NII outperformance of $0.033 per share discussed earlier and a matching of very minor NAV accretion regarding TSLX’s “at the market” (“ATM”) equity issuance during the quarter, this fully reconciles to TSLX’s $0.12 per share of NAV outperformance when compared to my expectations.
Regarding credit risk, TSLX had only 1 portfolio company on non-accrual status as of 9/30/2023. TSLX did not add any new portfolio companies to its non-accrual list during the quarter while no portfolio companies were taken off non-accrual status as well. This was something I correctly anticipated. I consider no new portfolio companies on non-accrual status a positive catalyst/trend when compared to the broader market volatility over the past 6 quarters. As such, TSLX’s non-accrual percentages remained extremely low (0.9% based on amortized cost basis and 0.7% based on FMV). That said, this will be something I continually monitor. As noted last quarter, TSLX’s debt investments in Bed, Bath, and Beyond Inc. (Bed + Bath) remain sound (no notable credit risk). Again, these are a special asset-backed loan (“ABL”) and debtor-in-possession (“DIP”) loans which I discussed in chat earlier this year. So, do not worry about the bankruptcy news for that portfolio company earlier this year (strong/direct collateral support).
TSLX continued to have a minor collateralized loan obligation (“CLO”) debt position during the third quarter of 2023. As stated 5 quarters ago, management likely wanted to take advantage of some fairly recent price dislocations in that specific asset class/market which has continued to “juice” yields a bit. I do not mind this strategy; putting some unused capital to work. I would have been a bit more hesitant if these were CLO equity positions (riskier on the credit hierarchy).
So, all-in-all, a modest outperformance on TSLX’s adjusted NII (variance of $0.033 per share) and nearly an exact match – very minor outperformance on the company’s NAV (variance of only 0.7%). So, I believe another good quarter for TSLX. A consistent, recent theme for this BDC.
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