Arthur Penn: Yes. It’s — I think the word mixed is what we’ve been using. The consumer is mixed. On one hand, they’re going on trips and they’re going on cruises and hotels and airlines. So the consumer is willing to pay for experiences and our exit on PRA Events is one end of the spectrum, and that’s corporate events kind of rocketed back as companies in that case and individuals are happy to travel for experiences. On the other hand, for goods, it’s certainly been stickier. Walker Edison is another example on the other side of it where that’s furniture, where consumers during COVID were buying a lot of furniture, and now it’s much less so. So consumer is where there’s some interesting action going on, both on the negative and the positive. So you really need to be attuned to what’s going on and the movements within consumer demand. But clearly, people are paying for experiences, and they’re paying a lot less for goods at this point.
Operator: We’ll take our next question from Kevin Fultz from JMP Securities.
Kevin Fultz: My first question relates to your outlook on portfolio yield. I’m assuming the Fed is nearing the end of its rate hiking cycle, do you see kind of nearing the peak in terms of portfolio yield? Or do you see incremental opportunity to pick up wider spreads that could drive portfolio yield higher longer term?
Richard Allorto: Yes. So trying to bet on what the Fed is going to do is just like being a weather man, you don’t know. What we can tell from our portfolio though is inflation is not so easily stamped out. It’s — we had another read yesterday — the economy had a read yesterday of 5% inflation. So this is not — our PennantPark view is that this higher interest rate environment is going to last for a while. That said, we do get LIBOR floors or in this case, SOFR floors. I have to go change my nomenclature. We get SOFR floors on all of our deals. And then we have two main — we have two main mechanisms for growing NII and potentially the dividend here, PFLT. One is leverage. We’re a little less optimized on leverage. We’re 1.17x.
Our target leverage is 1.4 to 1.6x. And then, of course, our JV, we just did that securitization financing and that JV is poised to grow to $950 million to $1 billion over the course of time, which should generate some healthy ROE for PFLT. Today, the JV is $770 million. So we’ve got two levers, we think, to grow NII. Even if you take a stance that risk-free rates are coming down, SOFR is going to come down, we don’t think so. But even if it is, we still feel very good about our income generation capacity, which helped drive our decision about the dividend increase.
Kevin Fultz: Okay. I appreciate the insight there. And then just one more, I guess, in regards to portfolio positioning, are there any pockets or industries that you find particularly attractive right now? I’m just curious where you’re seeing the rest of these return opportunities.
Arthur Penn: Yes. So look, our 5 key sectors remain where we’re focused. Health care, which is always needed, you got to be careful about reimbursement and cost, but health care, we’ve had a very good track record on. Government services and defense has always been a key sector for us in a world of geopolitical risk and uncertainty, that is a good sector, and the other sectors as well. Consumer, you got to be in the right area of consumer. Business services is a general catch-all, and software and tech remains good. We don’t do ARR loans. We’re classic EBITDA cash flow lenders. So those are the sectors, and those remaining sectors where we see the most opportunity.
Operator: And our next question comes from Mickey Schleien from Ladenburg.
