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.