Since we are approaching the SLRC x-dividend date I thought it might be time for a follow-up to my Oct. 18th post. At that time I suggested SLRC might be one of the most attractive BDC's for the months ahead. In my judgment, that continues to be the case.
In the recent Q3, SLRC reported NOI of $.60 per share which was the best since Q1 of 2010 when they had 32.5 million F/D shares outstanding versus 37 million at end of the latest quarter. That $.60 NOI covered the Q3 dividend and the Company said the Q4 NOI will also cover the Q4 dividend. The street NOI consensus quarterly estimates for the next five quarters are all at $.60 or higher.
NAV advanced over both the previous quarter and the year ago quarter. Realized Gains and Unrealized Gains were both positive. Despite record portfolio growth in Q2 ($186 million net growth), Q3 saw negative portfolio growth as prepayments and exits exceeded originations as loan markets tightened. There is nothing too disturbing here as we know the origination of new loans can be lumpy and the schedule of loan closures can be difficult to predict. Also, tightening markets require more discipline when evaluating new loans. The portfolio credit quality remains strong. Over 98% of income producing assets are performing, and the two remaining loans on non-accrual status are expected to come off of non-accrual in this current quarter. The pipeline is healthy and SLRC has plenty of dry powder to fund whatever opportunities that pipeline presents.
Here are a few SLRC numbers with comparisons to the BDC peer group. Using a recent close of $22.87 per share, the current dividend yield is 10.5% versus the BDC peer group median of 9.4%. The price to NAV is 101% versus the peer group median of 107%. The potential total return (dividend yield plus capital gain to the analysts' consensus target price) is 20.78%.
In my last post I talked about the catalyst to drive the SLRC price higher in time. On this post, I will re-visit that concept but with a slightly different approach. At the end of Q3, SLRC had some $322 million available for new investment against a portfolio value of $1171 million. So there is lots of portfolio growth coming which will eventually result in earnings/dividend increases. Their debt was running at a low .28 of equity versus an industry average of .55 debt to equity. One of the industry analysts calculated the quarterly earnings potential if SLRC ran its' portfolio at a .65x debt to equity ratio, which is the SLRC stated target. That earnings potential calculated out to upwards of $.70 per share, per quarter. That is a nice advance from the current quarterly NOI.
It is sometimes helpful to get from the analyst community a valuation of SLRC management. The analyst community I refer to are the major brokerage firms and not the letter writers or the amateur analysts who populate the internet. Since the last SLRC earnings release I have seen reports or excerpts from four analysts. Their general comments below may give us some reassurance that as investors, we have a competent partner in SLRC management.
a) "SLRC is managed by a quality team"
b) "We continue to like SLRC and view management team as strong"
c) " We expect that as the company adds additional leverage SLRC should be able to expand its NII and grow the dividend"
d) "Solar Continues to Shine: We continue to view SLRC as one of the most appealing mezzanine strategies in the BDC space given our outlook for opportunistic portfolio growth over time, along with book value upside."
So what we have in SLRC is an experienced management team committed to investing in recession resilient, stable companies that can generate cash flow and reduce leverage throughout an economic cycle. We also have a Company generating an exceptional current dividend yield, selling at a price to book well below its' peers **, and positioned to deliver a high total return when coupling the dividend yield to the potential stock price movement. But most importantly, SLRC, with its' large amount of available investment capital and low leverage profile, is poised to ramp up the quarterly NOI and dividend amount thus giving us some forward looking comfort. This forward visibility coupled with the historical stable performance, makes SLRC an attractive BDC. It's the kind of stuff we look for as investors.
** Peer group consists of those BDC's with a market capitalization of $500 million or more.
Note 1 : For those of you who may wish to capture the coming $.60 dividend, the x-date is 12-18-12 which is just around the corner. An investor must buy/own the stock prior to that date. Buying the stock on 12-18-12 will not get that dividend on those new shares.
Note 2 : Should SLRC, in time, pay a $.70 quarterly dividend, the dividend yield based on the current price and a $.70 dividend run rate would be 12.36% and there currently is just one other BDC (a small BDC well out of the peer group) that returns that level of dividend yield.
Note 3 : If the SLRC stock price advanced to match its' current 10.5% dividend yield while paying $.70 quarterly, the stock price would go to $26.67 per share which is 16.6% higher than the current price. That may be why two analysts have the SLRC target price at $27 per share and a third analyst has a target of $26.50. The report I saw from one of those analysts has NOI quarterly estimates as follows: 2012 Q4 $.60; 2013 $.60, $.62, $.62, $.64; and 2014 $.65, $.66, $.68, $.71.
Note 4 : We haven't talked about institutional ownership of BDC stocks but I am aware of one firm that does track this metric and SLRC ranks 6th highest of 33 BDC's monitored for institutional ownership.
Note 5 : All of this is just my opinion but I do get the help from "The Shadow" and he knows everything.
"Who knows what evil lurks in the hearts of men? The Shadow knows!"
Good Hunting to you all and happy holidays.
Jan
AI
