SLR Investment: A Monthly 11.15% Yield, But NAV Is Being Challenged

SLR Investment (NASDAQ:SLRC) last declared a monthly cash dividend of $0.1366 per share, in line with its prior payout and for an 11.15% annualized forward yield. This is a payout that has essentially remained the same since 2018 when it was a quarterly $0.41 distribution after being hiked by 1 cent from 2017. So whilst lacking in growth, the business development company has made up for it with a type of rigid stability that's seen the payout remain near constant since 2013. The New York-based BDC invests in senior secured loans of private middle market companies and managed a portfolio worth $2.9 billion at fair value as of the end of its fiscal 2023 first quarter.

The income is of course the prize and the double-digit yield paid monthly not only forms an apt income source in a period of heightened inflation, it's helped paper over what's been lacklustre price returns from the BDC. Indeed, whilst SLR is down around 30% over the last 5 years, this inverts to a 15% positive total return with the inclusion of dividends. Critically, SLR's net asset value, as defined by tangible book value, has been on a downtrend since 2013, only partially reversed by the spring 2022 acquisition of its affiliate BDC, SLR Senior Investment Corp.

Look At The Direction Of NAV For Future Returns

SLR saw NAV come in at $984.2 million as of the end of its first quarter, down sequentially from $999.7 million in the fourth quarter. The NAV upsurge witnessed when SLR combined with its affiliate BDC is now moving down with NAV per share as of the end of the first quarter of $18.04 falling from $19.56 in the year-ago comp. If income is the prize, NAV is the anchor for shareholder value creation. While the BDC is relatively lowly geared with a net debt-to-equity of 1.12x, the NAV pressure has come from a consistently high payout ratio.

Total investment income at $53.5 million was a huge 62% growth from the year-ago comp with interest income gains driving the bulk of this growth. As of the end of the first quarter, around 98.6% of SLR's investment portfolio was comprised of first lien senior secured floating rate loans. Hence, the BDC has benefited immensely from the marked rise in the Fed funds rate to what's now a 22-year high with the 25 basis points hike at the July FOMC meeting. The BDC is externally managed with this coming with a management fee of $7.7 million during the quarter. It was aggregated with interest expenses that jumped 84% year-over-year to $15.3 million for a net investment income of $22.1 million.

This was around $0.41 per share. The 3-month aggregate of SLR's dividend is $0.4098 which means a payout ratio of around 99.9%. For some context, NII per share was $0.41 per share in the prior fourth quarter with the payout ratio staying constant quarter-over-quarter. Paying out all of NII as a dividend has formed a major headwind to NAV expansion especially when aggregated with two issuers on non-accrual as of the end of the first quarter. This included a first lien loan to AmeriMark Intermediate Holdings of $13.4 million at fair value.

Will The Dividend Be Maintained?

SLR's payout ratio leaves the BDC with little fiscal headroom if the economy turns south and its first lien loans on a non-accrual status spike up. The BDC has maintained a strong pace of investments and allocated roughly $156 million across 40 portfolio companies during the first quarter. This was more than double the $67.5 million invested in the year-ago comp. Investments repaid, prepaid, and sold during the first quarter were $144.2 million, leaving the BDC with cash and equivalents of $444.4 million. This is a substantial amount of dry powder that forms an incredible hedge for any possible regression of the macroeconomic context. Crucially, it also means that SLR should be able to maintain what is a quarterly dividend expense of $22.4 million.

A dividend cut would seem less likely against this cash position even if the payout ratio temporarily moves north of 100%. However, bears would be right to state that the current elevated interest rate environment has catalyzed wholesale dividend raises across the BDC space, and SLR is only managing to maintain a status quo from a decade ago. And whilst the BDC is pushing ahead with new investments, repayments essentially mean its net new investment for the first quarter came in at $11.8 million. Yes, this is important to reduce risk going into what could be a hard landing for the US economy, but it also means the future outlook for NII more fully outstripping the dividend is poorer. SLR is a hold against this.