Tuesday, November 2, 2010

ACAS Accretes NAV, Earnings; Diminishes Debt

The call won't be on until tomorrow morning, but the news is out: ACAS enjoyed $59M in NOI (+84% q/q), $149M in "net earnings" (+$72m over q309), over $300m in cash proceeds from realizations, and $407m in debt repayment. NAV increased $0.44 over the quarter to stand at $9.59 per share, more than $2 higher than the after-hours share price printing at the time of writing. Net unrealized appreciation on portfolio investments swelled with the improving economy, and the realization of losses on investment exits, combined to drive the quarter's unrealized portfolio appreciation to $158m.

ACAS' investment in ECAS, about which readers have heard here before, is now valued at $0.5B while its own NAV stands at $0.8B, implying hundreds of millions in discounted valuation that would not exist if ACAS were to dissolve the corporate fiction of ECAS and hold the company's portfolio investments directly. The $300M discount baked into ECAS is thus an artifact of FAS 157, and the likelihood that selling the whole portfolio in a corporate wrapper would involve a NAV discount similar to ACAS' own NAV discount. While this makes perfect sense from the standpoint of FAS 157, of course, it boggles the mind: if a dollar bill is worth $1, but is worth only $0.63 hidden in a wallet, it's worth $0.44 if the wallet is first tucked into a purse. Got that? Good. You are getting the theory of how ACAS is valued under FAS 157 in light of the NAV discount.

So, how many of those purses you want?

ACAS' balance sheet should strengthen with any broader economic recovery, as its portfolio is diverse and capable of catching updraft from any direction. Improvements at portfolio companies flow to ACAS' bottom line. They also improve valuation metrics (earnings being an input into valuation formulas) which boost ACAS' NAV.

ACAS is currently $107m away from lowering the interest rate on its outstanding debt. Part of the $407m in debt repayment was on secured debt due in 2013, intended to make sure that ACAS doesn't have another liquidity crisis inspired by another default scare. ACAS is looking out more than a quarter ahead, which I like to see in management. Avoiding liquidity crises and improving the cost of debt are both solid strategic moves. The Jaded Consumer approves.

One thing worth noting is the improvement in the loan portfolio on non-accrual. Last quarter, non-accrual loans stood at $308 of "fair value" (8.5% of all loans at "fair value"), but this quarter the number has slid to $265m of fair value and a less upsetting $7.8% of all loans at fair value. As portfolio companies get their footing and resume payments, ACAS' NOI and the valuation of the loan portfolio should both improve.

I wasn't particularly happy to read that the $305m in cash proceeds involved sales at an average of 2.9% below last quarter's FAS-157-compliant "fair value" -- after all, the portfolio was going up, right? -- but I'd rather have the cash out of dogs. New investments of $63m are good news: ACAS is cherry-picking the best deals available across a broad range of sectors, and I want as many of those good deals in my shopping cart as we head toward the register.

I also like to see 5% per quarter in NAV increase. ACAS doesn't make a return on its share price, it makes a return on its investment portfolio. Watching that portfolio swell is better long-term news to me than a share price uptick. The portfolio and the NOI it generates is real.

I'm interested to get more color on the company's outlook from tomorrow's call, but it may be a few days until I get a chance to hear it. In the meantime, I like what I see.

6 comments:

Imperator said...

The increase in NAV is the primary metric I was looking for, along with the debt payments.

But I have to wonder, why doesn't the market believe in the $9.59 NAV? Why is it continuing to trade at this substantial discount?

I plan on holding ACAS, great price action so far, hopefully it will get to the nine dollar range soon.

Anonymous said...

Jaded,

What were your thoughts on the conference call?

Anonymous said...

Jaded - pretty good that UBS added to analyst coverage with a buy rating on 12/2! Have any idea how many analysts were covering ACAS when it was in the S&P? 3 months ago we had 9, then 10 1 month ago and this is now 11. Despite my personal (positive) feelings on the investment this is usually a pretty good sign is it not?

Anonymous said...

I wonder if AGNCs continued issuance of more shares increases ACAS's management fees by the same percentage? No one seems to be talking about this. Id love your insights.

clb said...

always appreciate your commentary (esp on ACAS for me). Haven't seen any updates recently, you still around?

Jaded Consumer said...

I'm definitely still here, but I've been busy as a one-armed paper hanger. I'm changing my work, having less unstructured time during the day, and shopping for a replacement for a Mercedes that is about to go out of warranty. The reliability of the Mercedes diesel of this century is nothing like the reliability of the Mercedes diesel of last century. Last century's model didn't need a alternator to keep running, and this century's won't start because both batteries unaccountably died without giving the user any electronic notifications despite the car's logs silently filling with warnings. Thanks, Mercedes, for sticking me without wheels like that.

With respect to AGNC: ACAS' management fee is based on assets under management, so ACAS increases management fees with each AGNC issuance in proportion to the increase in funds under management. Above-NAV issuance of AGNC yields a fee increase slightly disproportionate to the share percent increase. AGNC is definitely one of ACAS' winners: it's liquid, it throws off good dividends, and it is growing. The management fee is paid monthly based on assets under management. Issuance at AGNC is an immediate raise for ACAS.

The increase in covering analysts doesn't say much about the stock in terms of performance, but it potentially impacts the company's ability to get good news noticed as it makes announcements that are correctly interpreted by the media robots, which is doubtful. One not-counted analyst is Cramer, who continues to publish that the stock is to be hated. At least one must admire his consistency.

ACAS' discount is likely related to the fact that ACAS is still operating with no dividend. The reason people invest in BDCs is the reason they invest in REITs: dividends. They do not generally invest based on a value proposition or a thesis of systematic undervaluing. I expect a NAV discount to persist until the dividend is restored in the next year or so. I predict a dividend to be restored in the next next year or so on the assumption that loss carry-forwards will be eclipsed by profits. As this occurs, analyst misreads of the company's earnings releases will propel the stock up: since NAV increases result from changes in unrealized gains, and unrealized gains must be reported as income under FAS 157, the less thoughtful observers will declare that ACAS' dividend is not close to earnings and thus "more sustainable" or "has room to grow" despite that the dividend will be exactly what the IRS requires a BDC to issue to maintain its tax status (i.e., 90%+ of realized and thus taxable net income).