Owl Rock Capital Stock: Big return from a well-run BDC (NYSE:ORCC)
“Only a battle lost is sadder than a battle won..” – Robert Jordan, The Fires of Heaven
Today we take an in-depth look at a high yield concern. It looks like one beneficial owner is done selling a decent chunk of his stake in the company. Additionally, one director purchased just under $150,000 of stock in early November. It was the first insider buying in stocks since the spring of last year. A full analysis follows below.
Owl Rock Capital Corporation (ORCC) is a BDC or Business Development Company based in the Big Apple. The company or fund invests in senior secured or unsecured loans, subordinated loans or mezzanine loans. It also takes into account equity-related securities, including warrants and preferred stocks, as well as preferred stock investments and common stock investments. The shares currently cost just over $14.00 per share and sport a market capitalization of approximately $5.6 billion. Currently, the stock pays a quarterly dividend of 31 cents per share for an annual yield north of 8.5% at current trading levels.
The financial sector should benefit from the rising interest rates that have been a theme over the past few months as the 10-year Treasury yield has risen and is now above one and three-quarters percent. A less-followed group of financial stocks are business development companies (BDCs). These high-yielding stocks should do well as interest rates rise. Owl Rock’s portfolio is strictly focused on this segment of the market and all assets under management or AUM are domiciled in the United States. The company’s current loan portfolio sits just north of $12 billion at the end of the third quarter.
The company also largely keeps its portfolio limited to senior and junior secured loans, which can be seen above, which leaves it managed more conservatively than most of its BDC peers.
The company further reduces risk by maintaining its broadly diversified investment portfolio across all sectors. The company had outstanding loans with about 130 different companies at the end of the third quarter.
Third Quarter Highlights:
The company released its third quarter results on November 3. Owl Rock posted net investment income, or NII, of 33 cents per share, two cents above consensus. It was flat at the same time a year ago, but up from NII’s 30 cents in the second quarter. Total investment income was up about 44% year-over-year to just over $270 million, well above expectations. The company made repayments of $2 billion in the quarter, which generated healthy fee and amortization revenue. Owl Rock’s overall portfolio interest allocation remained consistent with previous quarters at around 650 basis points. The company’s annualized loss ratio was 14 basis points in the quarter, one of the lowest in the BDC space.
Gross creations of $3.3 billion were up just $957 million from the same time a year ago, when much of the country was just emerging from lockdowns across much of the country. Net asset value climbed to $14.95 per share from $14.67 per share in 3Q2020 and $14.90 per share in the prior quarter.
Analysts’ comments and results:
Over the past six months, four analyst firms, including RBC Capital and JMP Securities, have reissued buy ratings on ORCC. The price targets offered are within a very narrow range of $15.50 to $16.00 per share. Wells Fargo reiterated a holding rating during this period with a price target of $14.00 per share.
The company has premium credit ratings from all major rating agencies, which is an outlier in this market niche. On November 8, a director purchased 10,000 shares of ORCC when he effectively doubled his stake in the company. This was the first insider buying since February 2021. In between, the beneficial owner’University of California Regents‘ made frequent sales but retained almost all of its stake in Owl Rock.
The company pays a dividend in quarterly installments that now has an annual yield just south of 8.8%. The company maintained its dividend allocation during the pandemic and also aggressively repurchased shares during this sale.
A return of nearly 9% in an environment where the 10-year Treasury yield is just north of 1.75% should find its adherents, especially as Owl Rock’s portfolio is conservatively managed over several foreheads. Insider buying is always nice to see, but November buying isn’t all that remarkable given its small size, and the stock hasn’t seen any follow-on insider activity to date.
Equities have been limited for most of the past year. Given this, and the stock price is not that far below analysts’ price targets in a challenging overall market environment, I wouldn’t bet on such capital appreciation in the coming quarters.
That said, the shares are trading around 6% below the current net asset value. Barring a significant recession, one would think this should help provide a floor for the stock near current trading levels. Given this, ORCC seems to make sense as at least a small “watchdog” for income-oriented investors.
“Every man should lose a battle in his youth, so that he does not lose a war when he is old.” – George R. R. Martin
Bret Jensen is the founder and author of articles for the Biotech Forum, the Busted IPO Forum and the Insiders Forum