Kipp DeVeer: Yes, I think as the market is recovering to do new transactions Mark it’s just – it’s keep it simple right so probably the down the middle of the Fairway transaction has been particularly in private equity regardless of size. Let’s just structure a single unitranche with partners that we know, I think, capital structures have been less levered and less complicated perhaps than in the past. Purchase prices are coming down which is great and simple unitranche loans have probably just carried the day, over the last couple of quarters.
Mark Hughes: Understood. Then the exits were pretty low in the fourth quarter, a little more balanced, I guess, in January, but anything there and noteworthy?
Kipp DeVeer: No, not really. I mean, I think again, with lower activity on the new deal side, you would expect lower repayments and lower exits. So, my guess is as transaction activity picks up in 2024, you’ll see a more normalized rate of exits as well, but nothing particularly remarkable there.
Operator: Our next question comes from Erik Zwick with Hovde Group.
Erik Zwick: Good morning. First, I just want to echo everyone else’s congratulations to Penni, Scott. And then in terms of kind of my questions, I wanted to follow-up on a commentary Kipp, I believe you gave to one of the earlier questions about your expectation for the portfolio yield to remain relatively stable. Just looking at the activity through the first month of the year in the press release, it looks like the weighted average yield on debt and income for new fundings was 11.3% and then for exits during that same period, 12.6%, a little bit of compression there. And I know one quarter – or sorry, one month certainly doesn’t make a trend, but just curious if you could talk to kind of the if there are any factors in that first month that contributed to that compression there? And kind of what gives you kind of confidence again that the portfolio you can stay relatively stable at this point?
Kipp DeVeer: Yes. I mean, look, I think the natural trend is likely to be lower and less defaults pick up substantially, right? So I think the expectation is that base rates are likely to go down this year, so we’ll see a little bit of pressure there. And if the economy remains resilient and defaults, even if they creep up modestly, don’t spike, which is my expectation. I think you’ll see sort of a stable spread environment, with perhaps a little bit of pressure as transaction activity picks up. So I do think, the general trend is likely to see the all-in yield on new investments come down from the prior year or two where they’ve been elevated very attractive. We’ve obviously taken advantage of that. But I’ll just remind everybody, I mean, it doesn’t have a particular impact I think on us having earned $0.60 plus of core earnings against a $0.48 dividend this quarter.
We’ve sort of built in as it relates to the dividend, an assumption that over time yields are likely to come down and we’ve got plenty of earnings capacity to continue to support the current dividend, in fact, supports the dividend plus add to NAV over the next couple of quarters.
Erik Zwick: I appreciate that commentary there. And I think the last part of your answer there is the most important that dividend coverage still remains very strong, even with, if we come down from historically high rates.
Kipp DeVeer: Yes.
Erik Zwick: And just secondly…
Kipp DeVeer: We have a lot of room and obviously we’re using the current environment to obviously pay the dividend, but continue to build NAV too, which is a luxury at this point in the cycle.
Erik Zwick: Very true. And just my second question in terms of the floors, I think the majority of new floating rate commitments and fundings have floors. I’m just curious if you’ve had any, given the fact that we’re kind of in this higher for longer rate environment, have any success having those floors move up relative to, say, maybe a year or so ago?
Kipp DeVeer: Yes. We’ve tried. It hasn’t really worked, sort of annoying to be honest. But now the market convention kind of remains that 1% LIBOR floor, which doesn’t make a lot of sense to me, but it is what it is.
Operator: [Operator Instructions] Our next question comes from Casey Alexander with Compass Point.
Casey Alexander: Hi, good morning. For another seven minutes I was going to ask if you – it was your expectation that first quarter originations might be seasonally slow, but you already answered that you expected to be somewhat balanced at a higher rate across the year. So let me shift to while we were in this period of slower originations, you were able to just in time fill your capital needs through the ATM program. If you see a higher level of activity being generated across the year this year, would it be shareholders reasonable expectation that you would pepper in some syndicated offerings to go along with the ATM program?
Kipp DeVeer: Thanks, Casey. I assume you mean on the equity side.
Casey Alexander: Yes.
Kipp DeVeer: Look, I mean, not necessarily. I mean the ATM programs have been, I think, efficient source for us to continue to kind of grow the equity base and with that grow on the asset side. And the leverage levels at the end of Q4 were probably, in my mind, on the lower side of where we might like them. So we’ve got a lot of debt capacity to continue to support new investing. So I don’t see any particular reason sitting here today to think about an issuance outside of the ATM program. I’m also a little surprised, frankly, that the stock hasn’t performed a little bit better than it has relative to the growth in book value over the course of 2023. So doing an issuance at this price to me isn’t something that’s particularly attractive. So nothing in the hopper there, I think.
Casey Alexander: All right. Well, certainly agreed on your second point there. My follow-up, I’m going to tip one over here to Penni and thank you for your years of work with Ares. If your thought process is that we’re in the higher for longer camp, I mean, it’s your most recent unsecured offering was $1 billion that you then chose to swap out and float out at a couple of points higher than the stated coupon on that deal or so in that range anyway. If you’re in the higher for longer camp, why swap it out? I mean, the spread is still pretty attractive and rates would have to move pretty materially for it to balance out to the coupon on that over the course of the next five years.
Penni Roll: Yes. Thanks for the question. This is something that, this is our second issuances that we’ve swapped recently. We are still in a higher rate environment for fixed rate debt issuances. If you think about our portfolio, we have about 70% of our portfolio being in floating rate. So there is a benefit to kind of match funding the interest rate and looking at that opportunity to have that more aligned with the rate on the portfolio being floating. So over a longer period – this five-year window, if you look at where we swapped it to, which is roughly as 200, that’s well in line or below what we could get new secured financing at today. So we think that it is a good cost of capital. Yes, it does kind of make it a little more expensive on the front end.
But if you believe the curve, and you look at that on a relative basis to where we can get secured debt, it’s a good variable rate floating pricing for us and gives us that matching as we go through the five-year window. We look at this on a case-by-case basis. We may not always swap it, but in this case, we felt like, given the benefits of where the swap priced at the time that we did it, it made sense.
Operator: This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Kipp DeVeer for any closing remarks.
Kipp DeVeer: Thanks for everybody joining the call. Really happy with the quarter. Again, just to finish off another. Congratulations to Scott on his new appointment. And again, many thanks to Penni for all the contributions for her partnership, her friendship over the years, and we’re thrilled that she’ll still be obviously with us day-to-day at Ares. But thanks for everybody attending, and we’ll catch you next quarter.
Operator: Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today’s call, an archive replay of the call will be available approximately one hour after the end of the call through March 6 at 05:00 p.m. Eastern Time to domestic callers by dialing 1 (800) 753-6121, and to international callers by dialing 1 (402) 220-2676. An archive replay will be available on the webcast link located on the homepage of the Investor Resources section of Ares Capital website. Thank you and have a great day.
