Ares Capital (ARCC) is a component in my latest 'Lower Risk Total Return' BDC portfolio as well as my 'Risk Averse', 'General', and 'Value' portfolios and is currently considered a 'Buy'. This article will discuss the most recently reported financial information, following up on my previous EPS projections from my "ARCC: December 2013 Report" and discuss dividend coverage.
Follow Up on Previous Earnings Projections
The following projections are from my last report on ARCC in December where I estimated Q4 EPS of $0.424 which was close to actual as shown below.
When projecting net investment income ("NII") I do not include incentive fees or income taxes related to realized or unrealized capital gains. ARCC uses a similar measure called 'Core EPS' and state "Core EPS provides useful information to investors regarding financial performance because it is one method Ares Capital uses to measure its financial condition and results of operations."
The largest variance was the portfolio growth and associated interest income. I had higher amounts of both but was using a conservative 'other income' assumption that almost balanced out the total amount of income. My expense assumptions were close as well and the major variance was lower incentive fees related to income due to the lower portfolio growth and interest income. The actual NII per share of $0.417 was slightly lower than my projections but still covered regular dividends of $0.38.
There was a special dividend of $0.05 paid during the quarter but this is covered through capital gains as are the related incentive fees.
Other Highlights and Considerations
I have not completed my full analysis or revised projections but wanted to point some things to be aware of. During the quarter, ARCC realized $34.5 million in net realized gains which is about $0.12 per share and could be used for additional special dividends. This last quarter was strong for originations with gross commitments totaling $1.2 billion compared to $1.1 billion in Q3 2013. However ARCC exited commitments of $833 million in Q4, resulting in net commitments for the quarter of $414 million. The March quarter looks like it is off to a slow start with only $233 million in new commitments compared to $409 million in exits. This is not necessarily bad news and could imply that management is being selective and it also means there is less of a need for another equity offering in the near future which will allow the price to rise. The other good news is that 93% of the new investments were at floating rates with a yield of 10.0% compared to the exited investments at an average yield of 8.9%. In addition, ARCC had an investment backlog and pipeline of approximately $635 million and $145 million.
There were two investments placed on non-accrual including Allied Capital. I will check into these and include in my next report. There was a slight uptick in the portfolio credit quality (despite increased non-accruals) with lower portfolio leverage and better interest coverage as show in the chart below:
There was a slight increase in its Senior Secured Loan Program with GE and this is another area I will be looking into for risk considerations.
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