Carlyle Secured Lending Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 3 speakers on the call.

Operator

Hello, and welcome to the Carlyle Secured Lending, Inc. 3rd Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

It is now my pleasure to introduce Daniel Hahn, Shareholder Relations.

Speaker 1

Good morning, and welcome to Carlyle Secured Lending's Third Quarter 2023 Earnings Call. With me on the call this morning is Aaron Lee Kong, our Chief Executive Officer and Tom Hennigan, our Chief Financial Officer. Last night, we filed our Form 10 Q and issued a press release with a presentation of our results, which are available on the Investor Relations section of our website. Following our remarks today, we will hold a question and answer session for analysts and institutional investors. This call is being webcast and a replay will be available on our website.

Speaker 1

Any forward looking statements made today do not guarantee future performance and any undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section Our Annual Report on Form 10 ks. These risks and uncertainties could cause actual results to differ materially from those indicated. Carlisle Secure Lending assumes no obligation to update any forward looking statements at any time. With that, I'll turn the call over to Aaron.

Speaker 2

Thanks, Dan. Good morning, everyone, and thank you all for joining. I will focus my remarks on 3 topics for today's call. First, I'll provide an overview of the Q3 financial results. Next, I'll touch on the current market environment.

Speaker 2

And finally, I'll conclude with a few comments on the quarter's investment activity and portfolio positioning. Starting off with earnings, we continue to see our portfolio yield benefit from the higher base rate environment. In the Q3, we generated total core NII of $0.52 per share, which is an increase of 18% from the prior year and represents an annualized return on equity of 12.4%, continuing to trend upward from last quarter and the LTM period. Our Board of Directors declared a total 4th quarter dividend of $0.44 consisting of $0.37 of base dividends plus a $0.07 supplemental, both of which were in line with the prior quarter. Our net asset value as of September 30 $16.86 per share, up $0.13 or approximately 1% from the June 30 period, As a result of our Q3 earnings outpacing our dividend and net positive movement in valuations.

Speaker 2

Turning now to the current environment. Private credit continued to take share from the BSL market and we've seen sponsors continue to favor the private credit market to finance the limited number of new LBO transactions. Refinancing transactions drove the majority of activity during the quarter, which included a number of high profile BSL names Being refinanced by the private credit space. Similar to prior quarters, terms and pricing during the Q3 leaned favorably to lenders. However, We continue to remain highly selective in putting new money to work and look for new transactions that improve the credit quality of our book and are accretive to CSL's ROE.

Speaker 2

The weighted average spread of new investments outpaced the spread on the 3rd quarter's repayments for the 5th quarter in a row. We continue to see the trend for leverage in LTVs on platform originations improve. On a year to date basis, average leverage in LTVs on new originations Originations benefited from the 1 Carlyle platform both in the U. S. And Europe.

Speaker 2

As discussed last quarter, we are focused on complementing our traditional sponsor pipeline with other sources of transaction flow, including callout generated and non sponsored transactions. Outside of new deals, we continue to see momentum in mining the existing portfolio For add on transactions that provided incremental economics and allowed for improvements in the cap structure of current portfolio companies. Lastly, I'd like to spend a few minutes on current positioning. Our portfolio remains highly diversified and is comprised of 171 Investments In 124 companies across over 25 industries, the average exposure in any single portfolio company is less than 1% and 94% of our investments are in senior secured loans. We continue to be pleased with the overall credit performance of our existing portfolio with revenue and EBITDA up quarter over quarter and since origination.

Speaker 2

In addition, despite persistent inflationary pressures, Our borrowers' EBITDA margins have generally remained stable. The median EBITDA across our core portfolio at the end of the quarter was $80,000,000 and importantly, we've not seen any meaningful increase in the level of non cash add backs. I'll now hand the call over To our CFO, Tom Hennigan.

Speaker 1

Thank you, Aaron. Today, I'll begin with a review of our 3rd quarter earnings, Then I'll discuss portfolio performance and I'll conclude with detail on our balance sheet positioning. As Aaron previewed, we had another strong quarter on the earnings front. Total investment income for the 3rd quarter was $61,000,000 up modestly from the prior quarter. The continued positive impact of higher base rates was partially offset by a lower average investment balance.

Speaker 1

Total expenses of $34,000,000 also inched up versus prior quarter, again due to higher interest expense from RISI base rates. The result was total investment income for the Q3 of $26,000,000 or $0.52 per share, in line with prior quarter. Importantly, this recent level of earnings is materially above our quarterly earnings from 2022. Our Board of Directors declared the dividend For the Q4 of 2023, at a total level of $0.44 per share, that's comprised of the $0.37 base dividend Plus the $0.07 supplemental, which is payable to shareholders of record as of the close of business on December 29. Similar to prior quarters, the total dividend level of $0.44 per share allows us to bolster NAV In the face of an increasingly complex macroeconomic environment, our base dividend coverage of over 140% is among the highest in the BDC peer set, and we've grown the base dividend by nearly 16% since mid-twenty 22.

Speaker 1

At the same time, The total dividend level also represents an attractive yield of over 12% on the share price as of September 29. In terms of the forward outlook for earnings, We see stability in the $0.50 plus level based on the combination of the current forward interest rate curve and attractive economics on new deals. Despite rising rates, we've maintained a conservative disciplined approach that we believe will enable us to continue consistent dividend payouts in a variety of rate environments, including when rates normalize. So we remain highly confident in our ability to comfortably meet and exceed our $0.37 base dividend and continue paying out supplemental dividends each quarter. On valuations, our total aggregate realized and unrealized net gain With about $3,000,000 for the quarter, supported in part by tightening market spreads and improvement in valuations in some of our healthcare names.

Speaker 1

This increase in valuations combined with Q3 earnings exceeding the dividend resulted in our NAV increasing from $16.73 The $16.86 per share. Turning to the portfolio, we continue to see overall stability in credit quality across the book. Importantly, this quarter there were no new non accruals and no additions to our watch list, which deals with risk rating 4 or 5. Total non accruals were effectively flat quarter over quarter as we continue to see financial performance improvement And positive valuation migration and investments like Dermatology Associates and Bayside, which is formerly known as ProPT. And as Aaron noted, Most of our portfolio companies continue to weather the inflationary environment very well, and we remain confident in the credit strength of our overall portfolio.

Speaker 1

I'll finish by touching on our financing facilities and leverage. We continue to be well positioned on the right side of our balance sheet. Leverage is down quarter over quarter and we're intentionally running leverage conservatively at the lower end of our target range to maintain the flexibility to invest in attractive opportunities. Statutory leverage was about 1.2 times And net financial leverage ended the quarter modestly lower at 1.06 times, the lowest levels in over a year. This positioning allows us to opportunistically deploy capital given the attractive yields and terms available for new investments in the current market environment.

Speaker 1

With that, I'll turn it back over to Aaron.

Speaker 2

Thanks, Tom. I would like to finish by highlighting the consistency of our investment approach and reiterate our overall strategy. We're primarily focused on making senior secured floating rate investments to U. S. Companies backed by high quality sponsors, primarily in the mid market.

Speaker 2

We utilize a rigorous approach based on disciplined underwriting, prudent portfolio construction and conservative risk management. While market demand for private credit remains high, our approach has not changed and we remain focused on sourcing differentiated lending opportunities via the breadth and scope of the One Carlyle platform. I'd like to now hand the call over to the operator to take your questions. Thank you.

Operator

Thank I'm showing no further questions. So with that, I'll hand the call back over to CEO, Aaron Lee Kong for any closing remarks.

Speaker 2

Thank you so much, everyone. Look forward to speaking to you all in your scheduled calls and thank you for the support. Have a great day.

Operator

Ladies and gentlemen, thank you for participating. This concludes today's program and you may now disconnect.

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Earnings Conference Call
Carlyle Secured Lending Q3 2023
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