Ares Capital: Q1 Earnings

| About: Ares Capital (ARCC)

Ares Capital (NASDAQ:ARCC) reported first quarter 2010 earnings today, and maintained its dividend at $0.35 for the second quarter. The BDC Reporter had a quick look before the Conference Call:

The Company gave multiple earnings metrics for the period. The most important was Net Investment Income Per Share at $0.25, burdened by professional fees associated with the Allied Capital acquisition and higher than expected portfolio repayments. Net of these costs the number was $0.28. In absolute terms, Investment income, and Net Investment Income were up over the prior period, but the per share results were brought down by the new equity issued in the quarter. Total share count is up by 22% since year end. Akin to many other Business Development Companies ("BDCs") , Ares took Realized Losses of ($4.9mn) in quarter, but Unrealized Gains were up $50mn, causing Net Asset Value to increase to $11.78 from $11.44 three months ago.

The Allied Capital acquisition will impact the balance sheet and earnings from next quarter. A portion of Allied's debt has been repaid and management suggests a number of investments will pay off in the second quarter. Still, it's hard to determine what ARCC's balance sheet and earnings will look like once all the dust settles because Ares is furiously adding new loans and repaying debt while portfolio repayments are coming in faster than expected. We're encouraged by the higher yields registered on the portfolio, increasing management fees from its growing asset management business, non-accruing loans under control and plenty of borrowing capacity thanks to expanded credit lines and loan repayments. Less impressed by the high operating expenses of the Company, where only 50% of revenues (even after adjusting for the Allied professional fees) drops to the Net Investment Income line.

Where stabilized earnings will end up, though, is anyone's guess. We will have a much clearer view next quarter, and be able to determine if earnings can sustain the dividend. Given that Ares is aiming to replace repaid Allied assets with higher yielding investments (less equity investments and more subordinated debt investments), and new investments in general are still paying higher rates than investment pay-offs , we should see yields and Net Investment Income increase sharply. In the short term, the balance sheet is very strong due to the new equity and debt refinancings, with substantial dry powder for the rest of 2010. We'll close by noting that Ares is now the largest Businesss Development Company ("BDC") by market capitalization, which is a notable achievement and makes the company a bellwether in this industry.

Disclosure: Long ARCC