Blue Owl Capital Q4: One of the Best 9% Yields Your Money Can Buy Right Now (NYSE: OBDC) | Private Equity Weekly

introduce

Some investors may prefer to invest in other industries, such as technology or consumer staples, because these stocks tend to provide capital appreciation.But there is one industry that offers investors some capital appreciation The past few years have been the BDC sector (us).

BDCs and REITs have long been a staple in my portfolio as I continue to build and grow my dividend portfolio to stay afloat over the next 5 to 10 years. This is one of the reasons I typically cover stocks in these sectors on Seeking Alpha.

Since the banking crisis that occurred about a year ago, I think BDCs will only continue to benefit investors in the long term. I hold a number of BDCs that I consider to be top tier in the sector, such as Ares Capital (ARCC), southwest of the capital (CSWC) and Blackstone Guaranteed Loans (BXSL). The one that I think lags behind these three in terms of quality is Blue Owl Capital (NYSE: OBDC), in this article I will discuss why OBDC is one of the best BDCs that money can buy right now.

Previous rating

I last covered Blue Owl Capital about 6 months ago in October with the title: When market uncertainty gives you lemons, make dividend lemonade. With interest rates deterring many investors from turning to safer fixed-rate investments like bonds, certificates of deposit, and money markets, I think OBDCs are the perfect investment to park cash for a decent yield.

In addition, they provide loans to U.S. middle market companies with weighted average EBITDA of $200 million across 29 industries. They are currently the second largest BDC by market capitalization at $5.96 billion.

I like BDC because of its strong dividend coverage and conservative balance sheet. I rated the stock a Buy because it was trading at a double-digit discount to NAV at the time, and if you had bought at that time, you would have gained nearly 15% on the stock price while also earning a decent dividend yield. Since then, BDC has reported two additional quarters to close out 2023. Let’s discuss the company’s financials and see why they are one of the top BDCs looking for income.

Strong financial position

Since my last buy rating, OBDC has reported third- and fourth-quarter earnings of the year. I have to say I’m impressed. In its fourth-quarter financial report released on February 22, BDC’s net investment and total investment income exceeded analysts’ expectations and increased quarterly.

Nll was $0.51, beating expectations by $0.03, while Tll was $411.23 million, beating expectations by $13.48 million. In a challenging economic backdrop that not only makes it more difficult to make attractive investments but also puts downward pressure on borrowers due to higher long-term interest rates, I am impressed by OBDC’s performance on both fronts. deep impression.

In the chart, you can see that OBDC’s Nll continues to trend upward. Given the macro environment plaguing some business development companies, it’s also about their management teams and credit quality.

Net investment income also grew year over year, up more than 24% from $0.41 in the fourth quarter of 2022. Total investment income also showed good growth, up from US$399 million in the third quarter and US$377.62 million in the first quarter. In addition, the net interest margin also increased from 11.5% to 12.4% compared with the same period last year. From this point of view, Blue Owl Capital seems to be going all out.

However, the fair value of the portfolio fell to $12.7 billion from $12.9 billion at the end of the quarter. Additionally, BDC continued to make additional investments, growing its portfolio to 193 companies at the end of the fourth quarter. This number is up from 187 companies in the third quarter and 184 companies at the end of 2022.

Although their first lien investments have declined, they still have a significant percentage invested in first lien loans, at 68%. That’s lower than peers Capital Southwest and Blackstone Secured Lending, which have first-lien/senior secured loan ratios of 97.4% and 86.5%, respectively. But OBDC is still higher than ARCC’s 65.1%.

For those unfamiliar with first lien loans, the lender has priority in payment compared to those who invest in a second lien loan. Therefore, these are considered safer and what investors look for when considering investing in this industry. This also makes them more financially stable and less vulnerable to economic downturns.

Growing NAV and Dividends

Blue Owl Capital’s net asset value growth also grew steadily this year. This is something investors looking to buy into this sector should be aware of. This not only shows that its portfolio is growing, but that the company continues to easily earn more than its dividends.

Net asset value increased from $14.99 to $15.45 annually. This is also up from $15.40 in the third quarter. Since some BDCs pay out additional income in the form of special and supplementary dividends, this can sometimes reduce NAV if coverage is less than 100%.

But even with an additional $0.08 and the dividend increased to $0.37, the Nll of $0.51 still covers more than 100%. OBDC ended the year with $0.30 in spillover income and paid a $1.59 dividend while earning $1.93 in net investment income.

This represents a year-on-year increase of 37%. Additionally, regular dividend coverage is expected to remain strong at 138%. The benefit of BDC paying additional revenue is that if coverage becomes too tight, management can choose to reduce or eliminate the special or supplemental revenue entirely.

OBDC also increased its dividend by 6.1% to $0.35 in November, rewarding shareholders with a dividend increase on top of the supplemental dividend they will pay in 2023. So while OBDC’s revenue growth is good because interest rates are higher, and since it’s predominantly floating with a portfolio interest rate of 97%, dividend growth is also coming along with it. This is up from $0.33 at the start of 2022, and judging by their growing Nll, I expect to see this increase for the foreseeable future.

Improve balance sheet

What I’m probably most impressed with is that OBDC has managed to improve its balance sheet. BDC successfully deleveraged, raising its debt-to-equity ratio to 1.09x, within management’s target range of 0.90x to 1.25x. This is also down from 1.19x at the end of 2022. For comparison purposes, this is slightly higher than ARCC’s end-2023 multiple of 1.02x.

While they do have some $400 million of debt coming due this month, the company has enough available liquidity to cover $2.1 billion of debt. This was also up from $1.8 billion in the second quarter.

Next year, BDC’s maturities will more than double to $940 million, but the company raised $600 million in equity from unsecured notes, with some of the proceeds available to pay down maturing debt. But again, judging by BDC’s capital and investment grade credit ratings from Fitch and S&P, this is entirely manageable.

Dissertation Risks

While Blue Owl Capital keeps these sizes to a minimum, it did have four companies in non-accrual status at the end of the fourth quarter, with one added this quarter. On a cost and fair value basis, they accounted for 1.3% and 1.1% respectively. By comparison, popular peers CSWC and ARCC have non-accrual charges of 2.2% and 1.3%, respectively.

However, that’s well below peer FSK KKR Capital (FSK), whose non-accrual charges of 5.1% at cost and 2.6% at fair value are surprisingly high and more than I’d like to see in this industry s level. This number could rise in the coming months if the economy experiences a sudden downturn such as a recession.

OBDC took over one of the four companies on a non-accrual basis because they had been underperforming for a significant period of time. As for the latest on the other two companies, the management team said they had no updates in their latest financial reports. While the current list of NPLs is manageable, OBDC investors should pay close attention in the coming quarters.

Small discount on net asset value

Despite the share price gains over the past few months, OBDC still trades at a slight discount to its NAV price of $15.45, with the price at the time of writing sitting at $15.28.However, the current discount is lower than that of BDC 3-year average -8.34% , but considering their growth of over 24% and strong growth over the past year, getting BDC at a deep discount seems unlikely.

Important points for investors

Blue Owl Capital showed strong earnings amid economic uncertainty and outperformed in its latest quarter. Additionally, their income continues to exceed regular and supplemental dividends, resulting in impressive NAV growth throughout the year.

They have also increased leverage levels and added liquidity, putting themselves in a good position to take advantage of potentially attractive investments in anticipation of lower interest rates sometime this year. They also increased their regular dividend while managing $0.30 in spillover income.

While they did move one company to non-accrual status in the fourth quarter, the lower percentage is a testament not only to their management team, but also to the credit quality of the portfolio. While I expect the supplemental dividend to disappear as interest rates fall, OBDC’s strong financials continue to show investors why they are one of the best in the industry for income-focused investors.