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Daily Alert - 11/19/19

This BDC is a recent IPO and has a current dividend yield of 6.81%, paid quarterly.

This BDC is a recent IPO and has a current dividend yield of 6.81%, paid quarterly.

Owl Rock Capital Corporation (ORCC)
From The Dividend Hunter

Owl Rock Capital Corporation (ORCC) is a new business development company (BDC) that launched with a July 17th IPO. That makes the stock about three months old as a publicly-traded company.

ORCC comes out the gate with a $6 billion market cap, making it the second-largest publicly traded BDC by market value. ORCC is externally managed by Owl Rock Capital Advisors LLC, an SEC-registered investment advisor that is an affiliate of Owl Rock Capital Partners. Owl
Rock Capital Partners, together with its subsidiaries, is a New York-based direct lending platform with approximately $13 billion of assets under management as of June 30, 2019.

ORCC was actually started in early 2016. A portfolio was built up over three-and-a-half years before the BDC was taken public with an IPO.

Owl Rock makes loans to middle-market corporations. It appears that loan prospects are sourced from private equity investors to provide debt funding of companies they sponsor/invest in. The ORCC portfolio companies have decent size, with average annual revenue of $444 million and EBITDA of $79 million. As of the 2019 second quarter, there were 90 portfolio companies from industries. The total portfolio value was $7.2 billion. 81% of the portfolio is first-lien loans. There have been zero portfolio losses or defaults since inception in 2016.

In the second quarter management call, it was noted that over 3,500 opportunities had been evaluated to date, with less than 5% becoming portfolio investments. As the CEO noted, the lending team is “busy saying no.” One plus is how well diversified the investment portfolio is.

Owl Rock focuses on making loans of $200 to $600 million. Loans of this size are out of reach for many smaller lenders and BDCs. Management touts the big investment the company has made in its team of 50 professionals, deep sponsor relationships, and a large flexible pool of capital.

Overall, I am impressed with what the Owl Rock Capital Partners have done to make the structure and management of Owl Rock Capital Corporation investor-friendly. While this is an externally managed BDC (a structure of which I am NOT a fan), the ORCC management fee structure is much lower than the average externally managed BDC. The base management fee is 1.5% and excludes cash. Also, the advisor is entitled to pre-incentive fees NII of 17.5% with a hurdle rate of 6% annually as well as 17.5% of cumulative realized capital gains.

Current net investment income (NII) is running at 11%, which would add 0.875% to the base management fee. That gives a current management fee level of 2.4%, compared to the externally BDC average of 3.2%. However, most of the management fee has been waived through the end of 2020. The total fee will be 0.75% through the end of next year. The other important factor in managing a BDC is the amount of leverage. BDC rules allow debt of 1.0 times equity, with the ability to vote on a waiver for up to 2.0 times debt to equity leverage. Owl Rock has a conservative leverage target of 0.75 times. Just before the IPO, the company made an equity call on its private investors, so the BDC came out of the gate with leverage of just 0.24 times equity. This means the company has a half-turn of borrowing capacity up to its leverage goal before it would need to raise equity capital out by issuing more common stock shares. Bringing the debt level up to the target points to very strong growth in net investment income per share.

A final neat piece of business structure is there is an automatic share buyback in place that will acquire ORCC shares at any time if the stock trades below the net asset value (NAV). It is not a good thing when a BDC is trading for less than NAV. The second quarter-end NAV was $15.28 per share. The stock is currently trading for $16.64. At a premium, which is what we want.

Owl Rock has an investment-grade credit rating from four rating agencies. Investment grade means lower borrowing costs and higher net investment income, out of which dividends are paid.

The Owl Rock Board of Directors has set a base quarterly dividend of $0.31 per share. The Board also has a special additional dividend that will be paid each quarter through the end of 2020. That means we know the dividends for the next five quarters. From the current share value, we will be earning a 9% yield through the end of next year.

From the IPO starting point, there is tremendous potential for Owl Rock to grow the investment portfolio and net interest income per share. I would not be surprised to see this stock trading in the low $20’s by the end of next year. You have about two months until hitting that first ex-dividend date, so you can buy shares now or pick them up with spaced out purchases.

Tim Plaehn, The Dividend Hunter,, November 2019