Blue Owl Capital Corp
NYSE:OBDC
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Blue Owl Capital Corp
Earnings Call Analysis
Q3-2023 Analysis
Blue Owl Capital Corp
Blue Owl Capital Corporation held its third quarter earnings call for 2023, where CEO Craig Packer and CFO/COO Jonathan Lamm led the discussion, joined by Chief Credit Officer Alexis Maged and newly appointed portfolio manager Logan Nicholson. The leadership team highlighted the company's strong momentum and record net investment income (NII), with a nod to their tradition of resilience and careful financial maneuvering.
In the quarter, Blue Owl Capital showcased their impressive financial strength, reporting a record NII of $0.49 per share and a return on equity (ROE) of 12.7%. This was achieved through increased interest income due to higher rates and dividend income. Subsequently, the board announced a supplemental dividend of $0.08 per share on top of the regular dividend of $0.33, showcasing a 30% hike in total quarterly dividends since Q2 2022. The firm's net asset value (NAV) per share touched a high of $15.40, indicating strong underlying asset performance.
Blue Owl's portfolio investments stood at $12.9 billion with a net leverage of 1.13 times. The organization stressed growth in NAV by 3.7% year-over-year and pointed to the 13.9% total return when including distributions. New investments and portfolio rebalancing were also a focus, with new investment commitments matching repayments to maintain liquidity and benefit from a higher total yield in the portfolio.
The company's approach goes beyond interest coverage ratios to ensure borrower health, incorporating free cash flow and loan-to-value considerations. Their strategy involves working closely with private equity owners to sustain businesses, and they've seen sponsors contribute additional capital in 70% of the credit amendments this year, reflecting their robust underwriting process and the sponsors' commitment.
CEO Craig Packer provided a glance at the market conditions, underlining increased deal activities with positive outcomes from both refinancing and M&A activities. The firm has demonstrated notable success leading substantial financings, like those for Finastra and PetVet, underscoring sponsor confidence in their capabilities. About 70% of originations in the last quarter grew from pre-existing relationships, illustrating Blue Owl's strong market positioning and positive expectations for the future.
With Blue Owl's portfolio continuing to perform well and its borrowers reporting steady year-over-year EBITDA growth, the firm has shown resilience in the higher interest rate environment. Amendments remain low, exhibiting controlled credit quality, and the management feels comfortable with the dividend coverage extending into future quarters, assuming consistent portfolio performance and interest rate scenarios.
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Greetings, and welcome to the Blue Owl Capital Corporation Third Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded.
At this time, I'd like to turn the call over to Dana Sclafani, Head of Investor Relations. Thank you. You may begin.
Thank you, operator. Good morning, everyone, and welcome to Blue Owl Capital Corporation's third quarter earnings call. Joining me this morning are our Chief Executive Officer, Craig Packer; and our Chief Financial Officer and Chief Operating Officer, Jonathan Lam. We're also joining this quarter as senior members of our team, including Alexis Maged, our Chief Credit Officer; and Logan Nicholson, who joined the firm in September and serve as a portfolio manager for several of our diversified direct mining funds, including OBDC.
I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those forward-looking statements as a result of a number of factors, including those described in OBDC's filings with the SEC.
The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in our earnings material, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. OBDC's earnings release, 10-Q and supplemental earnings presentation are available on the Investor Relations of our website at blueowlcapitalcorporation.com.
With that, I'll turn the call over to Craig.
Thanks, Dana. Good morning, everyone, and thank you all for joining us today. In the third quarter, we saw continued strong momentum, delivering excellent credit performance across the portfolio and another quarter of record earnings. Net investment income was $0.49 per share, reflecting our third consecutive quarter of record NII. This was driven by increased interest income due to higher rates solid dividend income and our resilient portfolio performance.
These increased earnings translated into an attractive return on equity of 12.7% and in addition to growing distribution for our shareholders. Based on our earnings well in excess of the regular dividend, our Board has declared a supplemental dividend for the third quarter of $0.08 per share called with our previously declared regular dividend of $0.33. This equates to total dividends paid for the third quarter of $0.41 reflecting our confidence in both the sustainability of NII and the continued credit performance of our portfolio, our Board has also approved a $0.02 increase to our regular dividend increasing the fourth quarter regular dividend to $0.35 per share.
The business is generating record earnings, and we continue to share those earnings with our shareholders. This is the second increase in our base dividend since the second quarter of 2022, and total dividend of $0.41 for the third quarter represents a more than 30% increase in our total dividend during this period.
Net asset value per share increased to $15.40, up $0.14 from the second quarter. This marks the highest NAV per share since our inception. Our nonaccrual rate remains low at 0.9% of the fair value of the debt portfolio with just 3 names on nonaccrual unchanged from last quarter. We continue to demonstrate our ability to resolve nonaccruals and protect our principle.
Since inception, we have deployed over $25 billion of capital and experienced a net loss ratio of only 15 basis points. Our borrowers operating performance remained solid, continuing to reflect the strength of the U.S. economy. Consistent with last quarter, our borrowers reported modest quarterly growth in revenues and EBITDA with many borrowers delivering margin expansion as a result of price increases and moderating inflation levels.
Borrowers performance has grown steadily over the past year. On a year-over-year basis, our borrowers reported revenue and EBITDA growth of roughly 10% to 12% for each of the last 2 quarters. Our largest sectors, software, insurance, food, beverage and health care continued to deliver strong results, reflecting the durable nature of these industries and the less discretionary services they provide. We believe the portfolio will continue to be resilient and to perform in line with our underwriting expectations.
Even still, we are closely monitoring the impact of the higher weight environment on our portfolio. Over the course of this year, we have seen interest coverage levels come down as rates have increased, with coverage moving from 2.3x to 1.8x today. While the [ REIT ] outlook today is higher than it was 6 months ago, the impact on coverage ratios has been meaningfully mitigated by better-than-expected operating performance.
As a result, although rates are higher, we continue to believe interest coverage ratios will reach trough levels of mid-1x in the first half of 2024. We expect that the vast majority of our borrowers will maintain an adequate coverage cushion and strong operating performance through this period. The list of borrowers, we believe, could see more challenged liquidity needs remain small. Our underwriting and portfolio management teams remain very focused and engaged with these borrowers, and we believe any challenges will be manageable across our portfolio as a whole. We continue to be very pleased with the performance of our companies despite the higher rates.
With that, I'll turn it over to Jonathan to provide more detail on our financial results.
Thanks, Craig. We ended the quarter with total portfolio investments of $12.9 billion, outstanding debt of $7.1 billion and total net assets of $6 billion. Our third quarter NAV per share was $15.40, a $0.14 increase from our second quarter NAV per share of $15.26 largely attributed to the continued overearning of our dividends from NII as well as the net unrealized gains in the portfolio. Year-over-year, we have grown NAV by 3.7% and in addition to paying up 10.2% in distributions, which equates to a total return of 13.9%.
In terms of deployment, we continue to largely match originations with repayments to maintain a fully invested portfolio. OBDC had $500 million of new investment commitments of which $387 million were funded, offset by the $390 million of repayments for the quarter. The weighted average total yield of the portfolio was 11.8% and up from 10% in the third quarter of the prior year.
Turning to the income statement. We earned a record $0.49 per share in the third quarter, up from $0.48 per share in the prior quarter. Based on these results, our Board declared a supplemental dividend of $0.08 per share for the third quarter of 2023, which will be paid on December 15 to shareholders of record on November 30.
For the fourth quarter of 2023, our Board has increased our regular dividend to $0.35 per share, which we believe is still a very comfortable level relative to our earnings power, and we expect to continue to declare and pay supplemental dividends quarterly to provide further distributions to shareholders.
The fourth quarter dividend will be paid on or before January 12 to shareholders of record as of December 29. Since we instituted the supplemental dividend in the third quarter of 2022, we have paid out $0.28 of additional dividends per share. This dividend structure provides increased income to our shareholders while also allowing us to build NAV through excess earnings. As a result, we have $0.26 of spillover income through the end of the third quarter.
OBDC continues to benefit from its flexible balance sheet and well-diversified financing structure. Overall, we continue to maintain significant liquidity of $1.9 billion, and we ended the quarter with net leverage of 1.13x. In line with the prior quarter and within our target range.
With that, I'll turn it back to Craig for closing comments.
Thanks, Jonathan. I'd like to spend some time addressing one of the most frequent questions we're hearing today. How will borrowers fare in the higher for longer rate environment? Interest coverage is the metric that is most widely cited and it is certainly a meaningful high-level statistic to assess the health of the portfolio. However, in our ongoing portfolio monitoring, we evaluate borrowers on many different metrics to give us a more comprehensive perspective.
In addition to interest coverage, free cash flow and liquidity expectations, we believe loan-to-value and potential equity owner support are also key considerations in assessing the overall health of our borrowers. Over the course of the year, private equity owners have been proactive in addressing the higher rate environment through cost-cutting initiatives and liquidity management. These include reducing operating costs improving working capital and reducing capital expenditures and acquisition spending. We believe these actions and the sponsor's willingness to support the business with additional equity when needed, are critical components to the preservation of long-term value for these businesses.
While we have had a limited number of comprehensive credit amendments this year, sponsors have contributed additional capital in 70% of these cases. An important part of our underwriting assessment is loan-to-value. On average, we invest at approximately 40% loan-to-value. Even in a lower valuation environment, the sponsors retained significant equity investments in their companies. While not contractually required, this means that the private equity firms have a strong economic motivation to continue to support the business. It also means that if we need to take over a business, we believe we will have the opportunity for a very high recovery.
Of course, all this doesn't minimize the amount of time and effort that it takes to work through more challenging situations. We have both the resources and the time horizon associated with our permanent capital base to work with borrowers to provide the operating runway needed to optimize value. We continue to invest in our team with over 115 investment professionals today, reflecting our commitment to ensure we have the resources necessary to work on troubled situations and protect our portfolio.
To close, I wanted to spend a minute on the current market opportunity and our outlook for the fourth quarter and into next year. The activity has picked up nicely since the first half of the year driven by increased refinancings, add-on acquisitions and new buyout activity. We have seen the reopening of the public markets, which has led to some tightening of spreads. However, we are still able to earn 11% to 12% returns on unitranche loans, which we believe is a very attractive absolute return on new opportunities.
Direct lenders continue to provide a compelling financing solution for borrowers of scale, and we've had notable success in leading the financings on many of the largest deals announced in recent months, including the multibillion-dollar refinancing facilities for Finastra and PetVet. Many of these larger deals and across our broader portfolio, we typically serve as the administrative agent which is not just a technical title, but instead is an important role, awarded only one lender on each deal.
As the administrative agent, we are in direct dialogue with the borrower and sponsor in shaping the transaction terms and the credit documentation. In addition, this rollup allows our team to maintain a frequent dialogue with the borrower over the life of the loan, which gives us the singular best insight to its operating performance and liquidity profile on a real-time basis. Our franchise continues to win this important role across some of the most attractive deals in the market. In recent months, we have committed to 7 deals with financing sizes over $1 billion and serve as the administrative agent on 5 of them. We believe this reflects the confidence that the private equity sponsors have in our firm.
We are also seeing the benefit from incumbency with roughly 70% of our origination this quarter deployed into existing borrowers, reflecting both our confidence in our borrowers and the power of this growing incumbency with 187 borrowers in the portfolio today.
Looking forward, we expect deal activity will continue to rebound as valuations and the rate environment stabilize. Driving increased interest in M&A by both companies and sponsors. We believe this more robust market environment will lead to a continued increase in repayment activity which could drive further income for OBDC and allow us to redeploy capital into the new opportunities.
Finally, I just want to reflect on OBDC's continued success and what a strong quarter this was. This is our third quarter of record NII. We achieved the highest NAV since our inception and we delivered an attractive ROE of 12.7%. Credit performance remain strong and is driving consistent earning and increase distributions to shareholders. We expect that our portfolio will continue to perform well, and we will be able to deliver strong operating results and returns to our shareholders.
With that, thank you for your time today, and we'll now open the line for questions.
[Operator Instructions]. Our first questions come from the line of Brian McKenna with JMP Securities.
So just a question on the dividend to start. Coverage of both the regular and supplemental dividends has been running around 120% year-to-date. So I guess, is this a reasonable expectation for the next few quarters assuming no material shift in the rate backdrop and then also continued healthy underlying credit trends across the portfolio.
Sure, Brian. We felt really comfortable increasing the base dividend. Obviously, supplemental dividend has worked really well and delivered additional dividends to shareholders. We certainly feel extremely comfortable with this new base, and I think folks should expect us to continue to pay this going forward with the conditions that you suggested, if the portfolio continues to perform well and rates continue to stay high, we currently have a little additional room as well. So feel really comfortable where we are. And if conditions warrant, we will always evaluate whether we should increase it. But I think it's a good representation of where we sit right now.
Got it. Helpful. And then switching gears a little bit. So if I look at the average investment size of your portfolio companies, it's been holding steady around $70 million the last several quarters. That said, I know the broader Blue Owl platform is more focused on the large end of the market and deal sizes in this part of the industry continue to trend upwards. So how should we think about the size of new investments and then kind of the overall average size of the portfolio at OBDC over time?
Sure. We've been really pleased with the number of large high-quality new investment opportunities. I talked a minute ago about $7 billion deals, 5 of which we're leading. We continue to see this trend in this quarter and in our pipeline with large companies tapping direct lending more and more. So I think that's very exciting, particularly because quality of the companies are very high.
As for our position size, as a platform when we sign up these new deals our aggregate investment is quite large. It could be $400 million, $500 million, $600 million, $700 million in total investment across our platform. When it comes to sizing OBDC specifically, it's really a function of our capital available at the fund at that moment in time. The fund is squarely in our target leverage level. And so we are sizing new investments essentially to replace repayments. And so in this quarter, we got it, I think is perfectly accurate as you can get it, but it can be a little bit lumpy.
So if we get more repayments and those repayments are greater size than we would love to put marginally larger investments in this in OBDC. Having said all that, I really like the increased diversification that we've been able to achieve over the last couple of years. And so that also a goal. So any 1, 2 or 3 quarters is not going to change the average size of the portfolio given the number of names in it and 187 names that would take a lot of turnover. But I think the average size probably won't drift much higher over time, which I think is a good thing because the diversification is very attractive.
Our next questions come from the line of Robert Dodd with Raymond James.
Congrats on the quarter. I mean 2 questions. I mean, one, your comments on liquidity and interest coverage et cetera, Craig, very helpful. I mean have you seen any change in revolver draws at the portfolio companies? I mean you disclosed upon the commitment, but sometimes hard to see when they move from one quarter to the next or whatever, whether those are getting drawn or the commitments of expiring or whatever. So have you seen any change in pattern there? Or is it just making it across the business?
Thanks, Robert. No change in behavior on revolvers, business as usual. Companies use revolvers to fund the short-term liquidity needs of their business and no change in those regards. Our companies are performing really well. I highlighted some of the statistics, but we've been really pleased with the strong operating performance, revenue growth, EBITDA growth, both quarter-over-quarter, year-over-year. And so nothing of note to comment on revolvers. I think it reflects just the overall strength of the portfolio company performance.
Got it. The second one, I mean, on the outlook, I mean, as you said, I mean, you're winning some very large deals. And are you -- do you expect 2024 to kind of obviously, it's very hard to predict in the future. But do you expect that kind of to continue that theme, more deals, bigger deals and a rebound in the market? Or are you think the near term is maybe a spurt of activity by the industry and could it level up again? Any thoughts there?
I'm pretty optimistic that in 2024 we'll see a significant pickup in activity. We're seeing that already as we look to the fourth quarter of this year. I noted off that in my comments, our pipeline of deal activity for the fourth quarter looks good, both in terms of repayments and new activity. There's a lot of pent up appetite from the private equity firms to exit portfolio companies.
For those of you who follow the private equity industry, you'll be aware that private equity fundraising is more challenged because private equity firms have not had the opportunity to return capital to their LPs as much as they would like, given some of the volatility over the last 12 months. They would like to exit their companies, and that is the single biggest driver of deal activity.
And so we're seeing that beginning to happen. And I think if we get stability in the rate environment, and in the markets and the economy stays in a reasonable place. I think they'll see a meaningful pickup in M&A activity that will drive new deals for us. You will also see a pickup in refinancings in our portfolio. What we've been really pleased with is there have been some really sizable companies of very high quality that had been previously financed in the public markets that are increasingly choosing to refinance in the private markets Finastra, PetVet would be 2 great examples, Hyland.
This is, I think, an extremely strong trend for direct lenders such as OBDC. These are large companies and they offer us really attractive risk-adjusted returns. And we're seeing some. I think we're going to continue to see meaningfully more in 2024. So I'm optimistic about deal activity both in terms of repayments, income generation off of those repayments as well as deploying capital in high-quality situations.
Our next questions come from the line of Ryan Lynch with KBW.
Nice quarter, guys. One of the questions I had was, you've talked a lot about some large deals that you guys are leading as well as potentially the pickup in 2024. There's a lot of loans coming from the broadly syndicated loan market that are now going to the private credit route. I think you mentioned some from PetVet, Finastra, Hyland. Just an example of a few that you guys are either leading or participating in.
Can you maybe just speak to the notion that some of these large borrowers that were maybe in the broadly syndicated loan market before are choosing the private credit solution versus not being able to access the broadly syndicated loan market that this is more of a choice versus them not being able to access that, and that's why they're coming to the private credit side?
Sure. Look, it's -- obviously, there's a multitude of factors, but I think that this phenomenon is extremely attractive for private credit. The public loan market by far, the dominant purchaser of those loans are CLOs. In strong market environments, when CLO creation is high, CLOs have lots of cash. And can deploy and they do so at reasonable spreads. But when those factors are not in place, then the largest buyer base is missing, CLO creation has been spotting this year. There have been times when it's been wide. There's been times when it's rebounding. It's bumping around. CLOs need a certain ratings profile. And the rating agencies have a served rubric that they use to evaluate credits. And so if you get to serve rating, you can go to the public markets, you don't get it for whatever reason. You can't.
The other factor is the private equity firms have become sensitized that even when they have a deal that is issued in the public markets, and you got a rating that over time, they are vulnerable to that rating changing, meeting them with lack of access to the public markets. And that risk is one that they have had to live with that they no longer have to live with because the private credit markets, we can do our own independent work, our own credit analysis and make our own judgments about the creditworthiness. And we don't have that short-term time horizon, if there's a downgrade.
So the private equity firms have become more and more comfortable as choosing a private credit solution with a certainty, the privacy, the customization and the private equity firms are willing to pay a premium for that. So I think this is a great trend for our investors to get access to these extremely high-quality companies. And so it's our choice, in some cases, there may be companies that just don't have a range profile or they're trying to finance it in the market where CLO creation is light.
Generally private credit, we can also offer customization that the public markets can't offer. We can offer maybe a bit more leverage for a high-quality company. Again, we're financing at 40% loan value. So I think it's a combination of these things. But I would very much look at if there's an opportunity for our portfolio to invest in high-quality businesses. And we're -- that opportunity set is growing, and we have more to come from and our capital base as an industry is allowing much bigger financings to get done in private credit markets. So I think it's very much a sign of strength and something the sponsors tell us regularly that they like and would like to see more ways to finance in the private markets.
Okay. That's really helpful. background and color on that. The other question I had was, for you guys credit quality has favoured really well as shown by the low nonaccruals and really nice NAV performance. But you mentioned something on the call that I was curious on, and I want to make sure I got that number correct. But I believe you said with some of the performance-related amendments that you guys have made in your portfolio, private equity sponsors have contributed 70% of capital in 70% of those cases, I should say.
I'm just curious on the remaining 30% that the private equity sponsor didn't contribute additional capital into. Was that because that was not a request that you guys had made? Was that something that the private equity sponsor was unwilling to do? Or is that something that the private equity sponsor maybe just didn't have any capital remaining in that fund to do so? Just love to get a little color on that remaining 30% where private equity capital wasn't contributed.
Sure. Every situation is unique. We -- and I think that's, again, one of the great attributes of private credit. If you have a broader syndicated loan and there's a credit problem, there's no way to talk to. They're all sold by 200 CLOs that you don't know. You've no ability to have a negotiation. We have, we've a bilateral loan. We are typically on more than half of it, and the sponsors like being able to call us and discuss what's going on with the company.
One of the main things our investors ask for is equity, if the company, in our opinion, needs some deleveraging. That is always very high on our list. But there are situations where a company might be popping into a covenant, where it can comfortably cover its interest and maybe we price, high-quality loan at a spread where leverage is mildly elevated, and it doesn't require new equity. It requires some type of economic solution. And so in those cases, we will work out a different type of solution with the private equity firm maybe we'll ask for additional call protection or some repayments. There's a lot of ways for us to solve problems with the private equity firms. Equity is certainly one that we really like for obvious reasons, but it's not the solution in every case.
The general answer to your question is, in our material amendments, we have very amicably reached good solutions for us in the private equity firms. You shouldn't read it as a sign that we just had to amend the deal and couldn't get what we wanted and had a [indiscernible]. That's not representative of the other 30%.
Our next questions come from the line of Mark Hughes with Truist Securities.
Earlier on the amendment activity. I don't know if you suggested whether you've seen any trend there, whether it ticked up, steady. Obviously, you're getting a lot of private equity support, but how has the trend been lately?
I would say it's been very light. It's really in a good way. I mean we, at the beginning of the year, I was quite cautious given rates were higher. I had expected by now we would have more stress in the portfolio. We really haven't seen it. It's low single-digit amendment activity, garden variety, amendment activity. We haven't seen any pickup. And I would say it's lighter then anybody would have expected. I'm quite pleased with it. The SaaS we gave on sponsor support, we're really -- it's over the course of the last 12 months, really, in the last quarter, this quarter was a really light amendment quarter and sitting here into the fourth quarter. Now it remains light, and we'll see how the rest of the quarter plays.
Yes, yes. The 10% to 12% EBITDA growth, I think you suggested for the last couple of quarters is pretty impressive. Do you have a sense of whether there's an expectation for that to slow as the Fed does it work? Any nuance on the economy here?
Sure. So just to be clear, the 10% to 12% that I referenced was a year-over-year statistic for revenues to EBITDA. And I also referenced in my comments quarter-over-quarter growth, that growth is in the low single digits. So quarter-over-quarter continued growth but at a lower level year-over-year, more significant growth. I think what we've been most pleased with is just the breadth of the performance. It's really in all of our sectors and most of our companies. And so, we're pleased with it.
I just want to remind everyone, I don't think of our portfolio as the perfect representation of the U.S. economy, we are very purposefully focused on recession resistant businesses that we expect to be stable in most economic environments, sectors like software, healthcare, food and beverage, insurance, et cetera. We are not trying to be an early warning sign for economic weakness. We have almost little to no exposure in the commodity sectors like energy and chemicals, homebuilding and retail and restaurant. These are the sectors the we would look to as early warning signs.
As an example, we had a very significant strike in the auto industry which is [ now on sell ]. I mean we have literally almost zero exposure to the auto industry in our entire portfolio. So I'm pleased with the performance. If the economy stays the way it is. I expect that performance to continue. We do have some businesses that are exposed to just general industrial conditions or general consumer demand. And so we'll watch that closely.
If the economy stays strong, we'll do well. If the economy goes and has a downturn, which I think at this point, most economic servers I follow think we will avoid a recession, but if they had a mild recession, I still think our portfolio will do really well. So cautiously optimistic, but we'll feel better as the next 12 months unfold.
[Operator Instructions] Our next questions come from the line of Erik Zwick with Hovde Group.
First, I just wanted to start with the question. One, I appreciate all of the detail that you put in the slide deck and just looking through a bunch of that and notice as I look at the new investments, both the average interest rate and average spread has come down over the past 2 quarters. But given the increase in base rates, you've still been able to exhibit some increase in the weighted average yield in the portfolio.
So just curious kind of given those, the 2 trends of the declining rates on and spreads on, on new opportunities, SOFR is obviously up a little bit from 6.30% to 9.30%, so I would think there's maybe a little bit more opportunity to expand the overall yield. But would you think kind of given those trends, if interest rates hold in the cycle, you kind of near the peak of the yield for the portfolio for this cycle? Or are there other opportunities to kind of hold the line there?
Sure. So I'll make a couple of comments. The last couple of quarters have been -- this quarter was a little more active, but these are alike quarters from a volume standpoint. So they're not going to have a meaningful impact in the overall return in the portfolio because they're a small sliver of the portfolio. If you look at the average spread that we have in the book, it's been a rock solid for 5 quarters in a row into 6.7%. And so it wouldn't reach too much into any 1 or 2 quarters worth of activity.
I did note in my comments this quarter as the public markets have reopened, we have seen a bit of tightening of spread. And so spreads had been really wide in the first half of this year, public markets shut, other private providers pulling back. That was a great opportunity for us to get lots of spread. And that is gaining a bit. We're seeing some tightening of spread, absolute returns, still extremely high 11%, 12%. I made the comment in the script.
So I do think that these market conditions will move up down on a given quarter based on what's happening and for other syndicated markets based on what our peers are doing with their capital. The base rate environment is extremely attractive overall turns for new deals extremely attractive. Are we -- I think that you're asking forward-looking, are we at the peak? It's hard to say. It's just so market dependent. I think that our expectation, investor expectation on rates right now in a growing sentiment that maybe rates are out of peak and will come down. Certainly the forward curve would suggest that as to where spreads will go, that is a function of, as I just said, market appetite and where additional capital will deploy.
We're always trying to get the best of both worlds. We want to have great credits and great credit protections and get as much spread as we can. But we certainly have competitive environment that we live with. So I'd be very pleased if it stay like this for a while. So if we can do a little bit better, we can. I do think deal flow activity will pick up and that will generate some prepayment income that we haven't had for a while. But we're -- these are really attractive returns and really attractive spreads, the likes of which 18 months ago or 12 months ago, we're on these calls, I don't think anyone expected. And so we're certainly very pleased with what we're seeing.
But it will move up and down. The spreads operated in a general band but it's 550 to 700 over depending, and we've moved in and up on that band, down on that band or over the last -- since our existence every quarter, we've operated somewhere on that band, right now, it's on the tighter end. If it's wide now, all it takes is some dislocation in the broadly syndicated markets for a quarter or 2 and spreads are widen out again.
That's very helpful. I appreciate the detailed comments there. And second one for me, just on leverage. The leverage has come down over the past few quarters, closer to the lower end of your target range. Curious to wonder if that was purposeful or more just reflective of the fact that there's been more exit to repayments relative to new commitments over the past couple of quarters?
Yes. I mean, it was basically flat this quarter versus last quarter, but it has come down from earlier in the year. Again, it's mostly a timing issue. We're matching repayments and new investments. And so we're sort of squarely and I would call it like 115 area. We could tick up a little bit but we're certainly happy where we are and certainly operating a little bit higher, which is where we were operating earlier in the year. I wouldn't read anything much here.
I mean it's -- what I'm really pleased about is even with a tick lower of leverage, our ROE is extremely high. So I think it's a great combination of great returns with some dry powder. And so we can invest. We see great opportunities, we take leverage up a bit. I really like where we sit in our target leverage range.
Our next questions come from the line of Mickey Schleien with Ladenburg.
I just have one question at this point. I wanted to ask, when do the reinvestment periods in your CLO financings begin to end? And how significant could that unwinding be on your interest expense over the next couple of years when you consider the current terms available in the market?
Thanks, Mickey. So yes, our CLO reinvestment periods are typically 2 to 4 years, generally more 4 years. And so their, on a regular basis or coming close to -- when they're coming close to or within a year of effectively that reset period, we will go out and do a reset. So that has already occurred in some of our CLOs and it will continue to be the case. We're not that concerned in terms of what that will look like from a financing cost perspective from a repricing of those transactions.
On the unsecured side, obviously, we do have lower cost financing there. Again, nothing really material in 2024. In future years, we do have some refinancings there, but that will come up and we'll be doing those accordingly in those future years.
Jonathan, if I can just follow up. I mean, AAA spreads in the CLO world are still pretty wide. That's the reason that the machine is not working very well. So are you indicating that those spreads available in the market today are sort of similar to where you're already at? Or because of your platform...
A little bit wider, but not meaningfully wider from where we printed all of these CLOs. And we have a fair number of CLOs in this, in OBDC. And some of them were printed at wider levels. So the later ones a little bit tighter, but the earlier ones a little bit wider. And I think we're...
Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Craig Packer for any closing comments.
Great. Thanks all for joining. We're extremely pleased with the quarter. Hopefully, the results speak for themselves. But we're really excited to deliver the dividend increase, in particular and the supplemental dividend continues to work well and just very happy. So thanks all for joining, if you have any questions as a follow-up, we're easily reachable. And if we would be pleased to take them. And with that, that will be all. Have a great rest of your day.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.