Q3 2021 Sixth Street Specialty Lending Inc Earnings Call
Good morning, and welcome to the sixth Street Specialty lending Inc. Third quarter ended September 32021 earnings Conference call.
Before we begin today's call I would like to remind our listeners that remarks made during the call may contain forward looking statements.
I was going to statements of historical facts.
During this call may constitute forward looking statements.
Not guarantee the future performance all the ball and involve a number of risks and uncertainties.
Actual results may differ materially.
The peak statement as.
As a result of a number of factors, including those described from time to time and sixth Street person living Inc filings with the Securities and Exchange Commission.
The company assumes no obligation to update any such forward looking statements.
Yesterday after the market closed the company issued its earnings press release for the third quarter ended September 32021, and posted a presentation to the Investor resources section of its website.
E W. W that sixth street, especially lending dot com.
The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC six.
<unk> specialty lending Inc. Earnings release is also available on the company's website.
In the Investor Resources section.
Unless noted otherwise all performance figures mentioned in today's prepared remarks.
And for the third quarter ended September 32021.
As a reminder, this call's being recorded for replay purposes.
Now I'll turn the call over to Joshua easterly Chief Executive officer of fixed rate, especially lending Inc.
Thank you good morning, everyone and thank you for joining US with me today is my partner and our President both family and our CFO Ian Simmonds.
For our call today I will review this quarters results and then pass over to Bo to discuss this quarter's origination activities and portfolio metrics.
He will review our quarterly financial results in more detail.
I will conclude with final remarks before opening the call to Q&A.
After market closed yesterday, we reported third quarter adjusted net investment income of 55 cents per share and adjusted net income of 80 cents per share.
Yeah.
Correspond to an annualized year to date return on equity and adjusted net investment income of 12, 9%.
And an adjusted net income of 21, 5%.
This quarter's robust net investment income was driven by higher fees from elevated repayment activity relative to the first half of the year. It was also supported by a robust level of interest.
Income from the strength in the core earnings power of our portfolio.
Difference between this quarter's net investment income and net income was due to the net unrealized and realized gains from portfolio company specific events, which Bo and Ian will discuss later in the call.
As a result of the sports Netsuke Nat games, we continue to accrued capital gains incentive fees fee expenses totaling five cents per share, which we've excluded in presentation for this quarter's adjusted results again. This is because we believe the expense accrual requirement.
<unk> noise around the fundamental earnings power of our business every.
If a year or two have ended on September 30th word they calculate the capital gains incentive fees that are actually payable to the advisor and cash.
It would be it would be would have been zero because the games driving this fee accrual our unrealized.
At quarter end, we had approximately 21 cents per share of cumulative accrued capital gains incentive fees on the balance sheet the packs and approximately half of these would be payable in cash for our entire portfolio will be realized at the quarter end Mark in normal course, the rest of their crude fees are tied to unrealized gains.
Resulting from the valuation of our debt investments inclusive of call protection, which if prepaid will result in the recognition of fees and investment income and trigger a reversal of previously accrued capital gains incentive fees.
Made to these investments.
If we were to hold these debt investments to maturity realizing them in normal course at par with time, there will be an uplift to our navy of approximately 10 cents per share related to the reversal of accrued capital gains incentive fees.
Returning to our Q3 results the over earning of our base dividend and net gains this quarter drove growth in our reported net asset value per share to a new high of 17 18.
This result.
This represents a 2% increase from the prior quarter and its two cents per share in excess of our prior record high in Q4, 2000, 20-F 17 16.
Recall that upon their release of our Q4 results in February.
Our board declared a special dividend of $1 25 per share.
Since that time, we have fully rebuilt rebuilt our net asset value per share primarily through a net gains in our portfolio that continued over earning of our base dividend and the benefit of tightening credit spreads on the valuation of our investments.
Over the trailing 12 months period, we generated total shareholder shareholder economic return of 20% to dividends and growth in net asset value per share.
Let me now provide an update on our convertible notes due in August 2022 of which 143 million principle, we value remain outstanding at quarter end on September 30th. These notes became eligible for early conversion and holders of approximately $43 million principal value of notes opted to earn.
We converted subsequent to quarter end.
Based on our calculations blade unadventurous, nearly all stock settlement, we've elected to apply proportional and those translate to approximately four cents per share of accretion and net asset value.
The offset the deleveraging impact of the stock settlement. Our board has declared a special cash dividend of <unk> 50 per share to shareholders of record as of December 7th payable on December 20th.
This special dividend also serves enhance our capital efficiency by eliminating eliminate nearly all of the excise tax drag on our spillover income, which is currently estimated to be two cents per share on an annualized basis.
Given that and given that the combination of these transactions is leverage neutral the reduction in our excise tax burden will result in approximately 10 basis points of ROE.
Uplift on an annualized basis.
Yesterday, our board also approved debates poorly dividend 41 cents per share to shareholders of record as of December 15 payable on January 14th.
Our board also declared a supplemental dividend of seven cents per share based on Q3 adjusted net.
Investment income to shareholders of record as of November 30th payable on December 31st.
Net asset value per share inclusive of the impact of the special and supplemental dividend that was declared yesterday.
Would be $16 61.
That I will now pass it over to Bob to discuss this quarter's origination activities and portfolio metrics.
Thanks, Josh Let me first provide our thoughts on the current direct lending environment and how our business is positioned to serve borrowers management teams as well as our stakeholders for the period ahead.
It was 10 years ago when T. S. L. Ax made its first direct lending investments and landscape private credit has changed dramatically since then.
And the last 10 years private debt AUM has grown over threefold.
And what was a relatively niche asset classes become increasingly institutionalised, attracting new managers and investors into the space.
The value proposition of private credit for borrowers over this time has remained constant.
Speed and certainty of execution.
Documentation flexibility for management teams to achieve strategic goals.
And the opportunity to work with value added trusted financing partners.
Yeah.
The pandemic induced market volatility and growth trends in sponsor M&A I've only underscored the value proposition of direct lenders.
More so than ever we're seeing an increasing number of borrowers and sponsors turned into the direct lending market for larger financings instead of the traditional syndicated markets.
We believe this broadening of the opportunity set is a net positive for our sector and specifically for our business and our stakeholders given our ability to be solutions providers at scale to co investment with our affiliated funds.
While competition for direct lenders is likely to remain strong in both the larger cap and traditional mid market for the foreseeable future. We believe that our thematic investment approach and differentiated underwriting capabilities.
I'll allow us to expand our borrower and sponsor relationships and continued generating attractive risk adjusted returns for our shareholders.
Moving now to this quarter's origination activity, we funded five investments, including upsize it to our existing portfolio investments totaling $105 4 million in commitments and $65 4 million in fundings.
We mentioned on our last earnings call that we had strong funding pipeline heading into the second half of the year.
Given the timing of various M&A processes.
Funding activity is now back end weighted for the fourth quarter.
First quarter and to date, we've already funded approximately $100 million of new investments.
Including one where we're the agent on our $975 million credit facility.
Based on our current pipeline, we would expect to find another $150 million to $250 million of net investments by Corp by year end.
<unk> what is funded to date.
Circling back to Q3 activity and new investments this quarter was $317 million Tfl X agent and its senior secured facility to support a sponsor acquisition of extra hop networks.
A provider of cloud based cyber security solutions.
We believe that the sponsor chose us to leave the financing as a result of our deep knowledge of the sector and our ability to be constructive early on our financing process.
This in turn allowed us to structurally attractive risk adjusted returns to our security approximately $50 million of which was held by Tfl X at quarter end.
Also this quarter, we in the sixth Street platform completed $250 million term loan.
So with the upsides for bio Haven, a biopharmaceutical company.
Our initial $500 million Bio Haven term loan facility was completed in August of last year to support the company's commercialization of its F. D. A approved migraine drug.
Which has had strong fundamental performance post our investment to date.
The upsides facility with generate an attractive blended yield to maturity of over 11%. Our total investment will be used to support the continued commercialization of this drug and the clinical development of the company's pipeline assets.
We believe that extra hop in bio Haven are examples of how our platforms expertise across sectors and teams allows us to source and underwrite strong risk adjusted returns across both sponsored and non sponsored landscape.
On the repayment side after a quiet first half of the year, we fully realized six investments and partially sold one investment totaling $284 million in the third quarter.
All of them, but a full investment realizations were driven by a combination of company specific M&A as well as a favorable refinancing environment.
Through prepayment related fees and equity upside that restructured into these fully realized investments we generated a weighted average MLR of approximately $1 <unk> based on our capital invested.
From a portfolio yield perspective funding and repayment activity. This quarter had a slight positive impact for a weighted average yield on debt and income producing securities at amortized cost.
Yields increased from 10, 1% to 10, 2% quarter over quarter and is on par with what it was a year ago.
The weighted average yield at amortized cost on new investments, including Upsizing. This quarter was 11, 7% compared to a yield of nine 5% on exited investments.
Moving on to the portfolio composition and credit stats this quarter, our portfolio's equity concentration increased slightly from 6% to 7% on a fair value basis quarter over quarter, primarily driven by our increase in the fair value of our existing equity positions.
The biggest driver was our IRG equity position, whose fair value at quarter end reflected the pending sale of certain of the company's assets at a contracted price meaningfully above what was implied by our prior quarter's fair value marks.
BRG sale process expected to be completed in the first half of 2022.
While we continue to be focused on investing at the top of the capital structure with approximately 93% of our portfolio being first lien at quarter end from time to time, we may look to selectively increase our junior capital exposure.
Sectors and companies that we believe have strong <unk> and resilient business models.
Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of 112 on a scale of one to five with one being the strongest we continue to have minimal non accruals at less than 1.0 or 1% of the portfolio at fair value.
With that I'd like to turn it over to Anne to cover this quarter's financial results in more detail.
Thanks Budd.
For Q3, we generated adjusted net investment income per share of <unk> 55, and adjusted net income per share of <unk> 80.
At quarter end total investments of $2 4 billion down from $2 6 billion in the prior quarter as a result of net repayment activity.
Total principal debt outstanding at quarter end was $1 1 billion and net assets were $1 3 billion or $17 18 per share prior to the impact of the special and supplemental dividend that was declared yesterday.
Our average debt to equity ratio decreased slightly quarter over quarter from 1.07 times to 1.01 times and our debt to equity ratio at September 30 was <unk> nine times.
As bode previewed the net funding activity with experienced post quarter and to date has brought our debt to equity ratio back to approximately one times and we expect to finish the quarter at 1.05 to 1.15 times leverage.
Given that the size of the stock settlement on our convertible notes in Q4 will approximate our special dividend payment there will be no material net impact from those two transactions on our financial leverage.
As we head into year end liquidity position remains robust with over $1 3 billion of unfunded revolver capacity at quarter end against the 122 million of unfunded portfolio company commitments eligible to be drawn.
Note that during the quarter, we increased the size of our revolver by $25 million to $1. Five 1 billion with the addition of a new Linda we now have 21 lenders in our credit facility.
Looking across our debt maturities as Josh mentioned, we have approximately $100 million remaining principal value of 2022 convertible notes that will mature in August of next year.
Similar to our approach on the early conversion on a portion of these notes. This fall we plan to settle our remaining convertible notes in cash stock or a combination thereof as permitted by the indenture, depending on our balance sheet leverage and our investment opportunity set at the time any election is required.
As you can expect we will choose settlement methods that consider the overall impact of conversion on our NAV and Roe.
We continue to believe that maintaining a strong balance sheet with diversified funding sources and well staggered maturities is important to our ability to create value for our shareholders in any environment.
As such we will continue to actively manage the right hand side of our balance sheet to ensure we have appropriate funding mix diversity and remaining duration on our liabilities.
Moving to our presentation materials slide eight contains this quarter's NAV.
Ridge.
Looking through the main drivers of NAV growth, we added 55 per share from adjusted net investment income against a base dividend of <unk> 41 per share.
As Josh mentioned at the beginning of this call. It was <unk> <unk> per share of accrued capital gains incentive fee expenses related to this quarter's net realized and unrealized gains.
The impact of tightening credit spreads on the valuation of our portfolio had a positive <unk> <unk> per share impact and there was a positive <unk> 39 per share impact from other changes primarily net unrealized gains on investments due to portfolio company specific events of 34 cents per share a large portion of this was driven by our investment in <unk>.
G, which both mentioned earlier.
Note that this quarter there was a realized loss of <unk> 18 per share related to the sale of our pre petition jcpenney term loan and secured notes.
The recognition of this loss in our income statement corresponded with an unwind of prior period realized losses on our balance sheet totaling the same amount and therefore, the overall impact was net neutral.
There was however, a positive impact from the recognition of this loss in the form of a reduction to our excise tax accrual.
The context recall that last December upon jcpenney as emergence from bankruptcy, a preposition term loan and notes were converted to non interest paying instruments with rights to immediate and future distributions and cash and other instruments, including the exit term loan and earn out and <unk> interests.
A combined value of these other instruments and cash distributions that we've received to date so far.
Our exceeded our total capital invested in the original J C. Penney repetition securities.
Through September 30, we've generated an MLM have 123 times and a gross unlevered IRR of 26% on our total capital invested.
Moving onto our operating results detailed on slide nine total investment income for the quarter was $71 2 million compared to $62 8 million in the prior quarter.
Walking through the components of income.
Interest and dividend income was $59 4 million stable from the prior quarter.
Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns with $10 million up from $2 2 million in the prior quarter due to higher portfolio repayment activity.
Other income was $1 8 million up from $1 1 million in the prior quarter.
Net expenses, excluding the impact of a noncash accrual related to capital gains incentive fee with $31 2 million up slightly from $29 7 million in the prior quarter. This was primarily due to higher incentive fees as a result of this quarter's overrunning.
Due to the decrease in the effective LIBOR on our floating rate liability structure, our weighted average interest rate on debt outstanding decreased by approximately five basis points.
Similar to Q2, we applied a fee waiver on base management fees related to the portion of average gross assets this quarter financed with greater than one times leverage.
As Josh mentioned through the first three quarters of the year, we've generated an annualized return on equity unadjusted net investment income of 12, 9% and on adjusted net income of 21, 5%.
This quarter and elevated level of portfolio repayments contributed to robust activity related fees and we expect this trend to continue through Q4.
Dovetailing this without active funding pipeline, we would expect to drive strong ROA results for Q4 through the combination of activity related fees and an increase in our financial leverage as a result, we would expect our full year 2021, adjusted net investment income to exceed $2 per share, which is above the upper end of that.
Beginning year ROE target of 12% or $1 19 per share.
With that I'd like to turn it back to Josh for concluding remarks.
Thank you and with this being the 10 year anniversary when we first began our investment activities. We think it's a good time to reflect on the basis of the success we have.
Enjoyed to date.
We think there are two drivers for this with the first being our one team culture, our cultural philosophy of collaborating across platforms to harness best ideas and best practices allow us to continue to provide thoughtful solutions for our management teams and sponsors will also create a strong outcomes for our shareholders. Examples of this.
<unk> put our thematic and back to retail ABL.
Financing former royalty streams.
Upstream E&P and growth capital, which have all contributed in their own way to the alpha and our portfolio's performance to date.
This one team culture extends for a capital base the power to co invest with our affiliated funds, which in Q3 surpassed 9 billion in cumulative sixth Street direct lending investments has allowed us to expand our investment opportunity set.
And our relationships with sponsors and management teams, our ability to scale up to a co investment co investing with affiliated funds continue to benefit <unk> shareholders as it allows us the size of our funds are.
Properly to remain nimble in any environment, we're supporting middle market borrowers.
The second driver of our success today, if any we believe is simply our focus on doing good fundamental credit work.
Our emphasis on first principles thinking using tools to manage the inherent agility of our credit assets are in our view the foundation of our strong track record to date.
Since inception, we've experienced an annual.
We experienced an average annual growth realized loss rate on assets of seven basis points or net realized gain of five basis points. This compares to a net loss of 115 basis points across all.
Private credit.
During this period and.
An outperformance of 120 basis points. According to the cliff water direct lending index.
Given that Bdcs are now levered approximately one to one debt to equity. This is this means in theory that we've generated an outperformance of 250 basis points on equity solely attributed to our credit function looking.
Looking ahead, we will continue to be focus on on the shareholder experience.
As you can see since around since the end of 2019, we've kept we've kept net asset value per share of fairly stable or distributing a total of $5 42 per share in regular supplemental.
And special dividends.
One final note yesterday.
In consultation with our board, we decided to amend our existing $50 million stock repurchase program. So again would be purchased features automatically when our stock trades at prices starting at one penny below zero five of our most recently reported pro forma net asset value per share to set a below one given the strength in our.
Earnings power of our portfolio.
Sure.
Our ongoing cadence of supplemental and special dividends and our expectations of operating in a targeted debt to equity range. We believe that reinvesting in our existing portfolio of prices starting below 1.05 times book value would be highly ROE accretive with a short payback period compared to any.
Dilution and net asset value at the end of the day. Our goal is to make the optimal capital allocation choices for our shareholders and depending on what it means for asset growth and the implications for fee income for the manager with that thank you for your time today operator, Please open the line for questions.
Secondly, and ladies and gentlemen to ask a question simply press star one on your telephone to withdraw the question press the pound or hash key.
Again that is Taiwan to gaining the queue. Please standby, while we compile the Q&A roster.
First question comes from Devin Ryan with JMP Securities. Your line is helping.
Good morning, this is Kevin <unk> on for Devon.
First question just looking at investments.
Just looking at investment activity during the quarter gross originations were fairly healthy at $572 million, but new investment commitments were fairly light at 105, which is.
This is more than 80% of originations were sold down just curious given where leverage is that in the level of repayments that gross origination number was skewed by a larger deal during the quarter.
The small share that you retained was the result of originating investments over less suitable for that portfolio.
Yes, great Great question.
So that gross origination number I think is largely impacted by bio Haven.
Which we.
<unk> had capped out basically at our position size risk position size, our risk appetite for the for the portfolio. The other thing I would note on an origination activity in this quarter.
There is a as Ian noted in BOE in their prepared comments.
There was a timing issue.
Which is there's been a large net origination already in Q4, and we expect that to continue and so.
Quarter for somewhat arbitrary right in the sense that.
They are a moment in time, we don't tell the entire story.
<unk> this year.
Obviously, the portfolio has grown significantly year over year, our expectation is it will on a calendar year basis experienced net portfolio growth to it.
And to be slipped into Q4.
Okay that makes sense, Josh and then just on the repayment side.
Obviously, the repayment activity was elevated during the third quarter could you talk about how repayment activity is tracked quarter to date and your expectations for repayment activity through the end of the year.
Yeah, so by the way it is.
Finally, just to take a step back and we one I know it's hard for people re wine. If you talked about Q2, I think it was like very little repayment activity and people were questioning.
What was happening with.
Investment income given that there was no activity based fees. So again, there happened to be signing in Q3, which helped economics and helped earnings I think in Q4. It feels like it's a pretty good mix, which there will be most definitely repayment activity. One that's public is motive.
It will be taken out of modus, which was a long time client of ours I think in the syndicated loan market.
Also had an equity co investment modus and so I would say generally the portfolio activity.
It's pretty balanced.
Kind of looks like historical between repayment new activity and less repayments.
But net portfolio growth so.
That's how I would frame frame it.
If that's helpful.
Okay. That's helpful and thank you for taking my questions and congratulations on a strong quarter great.
Great. Thank you so much.
Thank you. Our next question comes from Ryan Lynch with <unk>. Your line is helping.
Good morning, and thanks for taking my questions.
First one I had was.
Josh do you or sixth street really have any high level views on.
How the inflation picture will look over the coming quarters or even in coming years and are there any actions that you guys are taking within your portfolio of companies existing portfolio companies or potential new deals and how to prepare for this.
Yes, it's a great question Ryan we most definitely have views.
And I would say they are informed.
Reality is is that.
Is a complicated issue and I think there is.
Divergent opinions in the firm.
I'm not sure my opinion matters.
But I can tell you kind of a framework how I think about the framework and I can tell you about how we position the portfolio.
Look so.
Obviously, a lot of money printing.
Inflationary factor look as people knowing that we participated in the portfolio construction side, we've been a early investor in in software and and technology and that that industry sector is a mass of Ah exporter of deflation the global.
Basis, and so I think that is a that is a that surely I think people need to take a step back and look at the world and the world over the last 10 to 15 years or 20 years has been really deflationary driven by globalization and technology.
Demographics, and I think except for globalization, which we probably were P. Global globalization part of the global financial crisis.
Those those factors, we're actually going to continue so I'm I'm not as concerned about inflation as as as the average the average bear so to speak Ah I think there's divergent views in our in our in our in our in our divergent views and our group that being said.
I think how we've set the portfolio generally speaking, we take typically finance companies and liked the finance companies that have a ton of pricing power.
That living ecosystems that they have that where they were pricing power exists and where where they're they're not commodity whether or not you know quote unquote commodity providers and so.
Our expectation of our portfolio given the average EBITDA margin our portfolio I think is.
Of the core portfolio is probably in the 30 35 or 40% range is that which tells you. They have pricing power is that if inflation does come they will be able to pass along.
And by the way their cost structure is.
Typically.
Hi.
Gibbons high margin I gross margin they have there's less impact on inflation, but there'll be able to pass along and have pricing power. So from a portfolio construction standpoint, I think our portfolio Super robust from a from a from an inflation standpoint.
And then when you look at our when you look at the the behavior or the model for Tsls is that we have a little bit with a little bit of a pinch point between zeff. If there is inflation between the floors, we have basically fully right.
People structure 40, right left has a balance sheet plugging away right has a balance sheet.
There will be EPS expansion once we get through our floors as a little pinch point on the floors, but if there was inflation I expect my expectation is is that we were kind of ripped through those floors pretty quickly.
And and be in EPS expansion.
So.
Kind of my framework for inflation, the how the portfolio behaves.
And an inflationary environment, which is I think robust and then.
And then the the the earnings power of <unk> and an inflationary environment.
Does that help you get over there yeah.
Super comprehensive and very thoughtful response I very much appreciate that.
Kind of on the opposite end more just a technical question I think for for Ian.
Can the convertible owners can they convert continue to convert early.
Until the maturity in August 2022, or is that just like a one time does that that that they have the option to do with that and then.
After the side window when it comes to maturity right right I just want to point out that I can answer technical questions too, but I will let me.
And I think that we know Josh.
I just want to give you an error.
Messing with Ya.
There's kind of two path.
Question, one depends on whether the early conversion triggers have been met prior to six months prior to a maturity. So think of it as two periods. Prior to February one of next year. There has to be an early conversion trigger met as of today. There is no early conversion triggers met so as of today, there's no really minimal early conversion.
Until we get to February one, which is six months prior to maturity and then the early early conversion triggers are not applicable and holders can convert early at their option. Yeah. Let me, let me pull it up so the.
That is right on the early early conversion trigger was a.
Broker bed parity calculation and for some reason in a moment in time, the eh the broker beds.
And I think 98% of of of of parody that that doesn't seem to exist today. It sometimes happens in high paying dividends stocks and what what what.
What I would say is we take.
Take another step back is that there is to basically nature, just to kind of holders of the convertible bonds hedge holders and non headshot holders in the hedge holders when the bonds get deeply in the money.
And and like really deeply any more money in a delta hejda bonds are basically are hedging the bonds and the one on one basis, because they're effectively just on the stock and therefore, they're short the dividend of S. O X and they only have four and a half points on the coupon and the.
<unk> is much higher and so they have a cash flow. So they really wanna issues. So they really want to unwind the hedge which is why that early and they can unwind that had basically through two things one is either selling the bonds and unwinding, the hedge or and the trigger exist that which is at the bond for similar.
These are trading below parity that they have a liquidity options are they going to unwind. The hedge it has felt like all of the hedged buyers have exercise early.
Early conversion trigger I mean early convergent option. In addition to that it feels like that environment of where the bonds trade at parity no longer exist and so I would expect that does that.
That we won't see that again that was a point in time given.
A little bit of a market dislocation on the price of the bonds.
And and then the nature of the holders in the nature of the holders are no longer had shoulders.
Okay, Yeah that makes sense I understood that's nowhere behind that yeah technical technical answer yes.
Alright, well I appreciate that the time today in a nice for guys.
Thanks.
Thank you. Our next question comes from at least have went out with J P. Morgan and you and I need something.
[noise] one last night.
Alright.
I'm sorry.
We can't hear you sorry your muscle.
Sorry about that.
Yeah, Yeah, okay.
Well.
I wanted to clarify the hundred million inactivity that you mentioned, so far quarter today with that growth or not.
That was gross.
Cross Okay, and then the 100 450 additional that you would think that that was a net number correct. That's.
That's correct. That's a net number that's expected okay and then just found out that.
NASA.
Also can can eat here.
Prepayment activity into four Q.
Yeah, I think what Josh said as we expect normalized repayment activity in queue for to what.
What we've seen it typical levels uhm and combine that with a robust pipeline coming into the queue for we expect those net fundings between 150 and.
215, Yeah look I think I think the math historically and somebody can correct me if I'm wrong typical average repayments tend to be.
201, 75 to $2 50, and then and then net and gross originations tend to be you know somewhere between 202 75.
And I would expect that.
150, 100, 150 net on the quarter.
Is that helpful.
We may lobster.
We lost her.
Alright.
You can reach you.
Shall we continue within next question Sir.
Sure sure.
Some finian O'shea with Wells Fargo. Your line is open.
Hi, everyone. Good morning.
<unk> first question for Joshua Bow on the a.
A b L opportunity set high level, we haven't seen a new portfolio company to recently is is this part of the the private credit arenas is Bo described we're.
There's a lot of new entrants in terms of come into much or are you just not.
Seeing your your style of opportunity preferred opportunity there.
Yeah, Hey, good morning.
So thanks for your question good question, so what about the.
The good news is I don't think there's one in queue for we actually have one that we've committed to that.
That we've been actually running a little bit of a commitment views along the way over last quarter and this quarter. That's taken some <unk> some time to get regulatory approval, but that should close early next week.
Consistent with what you've seen in the past I.
I would say is that really a private credit.
Competition issue is really a broader issue, which is when you look at Prepandemic, what retail look like was that you had foot traffic declining.
Declining and store based in store base retailers, you had a low barriers industries you get a lot of competition you had <unk>.
Sure being taken away from being taken away from.
Oh for some omnichannel providers and from and from Amazon and so.
You saw a lot of pressure on those business models.
Including.
On a gross margin basis and are discounting basis.
And then.
Then the consumer was kind of stable down and then when the pandemic head.
You had was you had basically calling his or her ah retailers only the strong survive and got to reduce your footprint.
And rebase, so they were themselves better positioned and that there was less competition.
Foot traffic has remained stable was slightly declining consumers are a much better shape.
Given excess savings and so you've had no discounting you had margin expansion and retailers are generally those who survive are living in a slightly better environment with a better consumer.
My guess is the big secular will continue to play out but in this moment in time retail relatively healthy.
Yeah.
It makes sense just.
A follow up we can call it technical or high level, but either way it goes to Ian.
Is there a change in the in the supplemental.
Dividend policy I think he used to pay out about half of the NOI spillover I know, there's a few wrinkles going on this quarter with the.
The big special on the preferred and everything but.
Are we seeing any change too.
What you pay out.
No.
<unk>.
And it's the same formula I think maybe what we didn't do as good a job of articulating we're using the adjusted NII figure to calculate that search for 55 cents less the base dividend of 41, and then 50% of that so that's how we got to the seven.
Because I'll give you.
<unk>.
Part two and capital gains incentive fees are not paid in cash and are not expected to be paid in cash anytime soon.
That you have to make an adjustment to the adjusted net investment income number to give to their new power on the kashering as part of the business.
Awesome. Thank you so much.
Q.
And as a reminder, ladies and gentlemen to get into <unk> with your question simply press Taiwan.
Our next question is from a rather dot Raymond James.
Hi, everyone excuse me and congratulations on a quarter of it for what it's worth my my question, So anybody could answer so.
[laughter].
Uhm on the though I suspect.
This one on on that kind of talk portfolio makes going forward I mean, <unk> and I don't mean, firstly and secondly, I mean more by vertical. So I mean, you addressed APL, but you've got farmer loyalty expertise you got a whole bunch of all the extra.
Extra cheese beyond just regular way L. P O sponsor finance.
Do you expect to.
To shift the mix, that's all I mean, as as you pointed out right.
The the the regular way business seems to be getting more competitive big managers come in in large pools of capital you've always run.
Typically ha Ahs, Emma wise whichever metric you want to look at.
Because of those more niche vertical so a lot of because don't participate in so it should we expect the kind of.
The the number of vehicles, you're willing wants to operate into to increase or expand as.
Piece of the mixes the mall vanilla enter the market get increasingly competitive.
So that's a great question and all that fishy answered no I'm just joking, but appreciate it here and you can hop in.
And then I like your I like your your approached who would you have to question that but I'll I'll take a shot and Bo and other video first of all look I think you're right. We've tried to we try to be very thoughtful and the sectors in ways that we've operated in and quite frankly that there there is inefficiencies where.
We operate what you find over now and the 10 year anniversary of the business, you've found us having <unk> or higher.
<unk> or <unk>.
Higher spreads and less the falls significantly less defaults like actual.
Net games versus losses, and so we've we've found ways to offer higher risk adjusted returns that's the power of the six three platform.
The 60 platform as we have you know.
400 people now and we have a whole bunch of people in sectors and hunting and thinking about what's happening in those individually ecosystems, and where we can have drug dialogue with companies and picker lanes and pick pick pick them in a thoughtful way, where we can find the balance of providing.
A tremendous amount of value to our issuers, but also value to our shareholders.
I think you will see us continue to evolve.
This year retail is down my expectation is retail will come back when when that industry is less healthy in the secular overrides the cyclical visa visa consumer.
I think you'll see us do some energy stuff.
And then coming moment, given the pullback of capital in that space I think you'll you'll continues to install a pack.
Software as we have and we have we have a little bit of an incumbency benefit there and so I just think that there is you know on the farm aside y'all will continue to be a thoughtful investor there as well. So I just think that there were.
Given the.
That's six feet specialty community, because really focus on the no market and <unk> focus on specialty vehicles I think you'll continue.
Also do CSU, our thing and you know across sectors. When we fine you know good relative value and good rest adjusted returns where we can provide value tour issuers fishy you have anything that fishy fishy, just the background always judging by any higher as well I think I would have.
Add as we say software right, it's such a broad.
Category. It encompasses so much I think one of the things. We've done is kind of dig deeper sort of subverticals, whether it's you know health care or education or.
Or payments I mean, it's such a.
We're developing I guess expertise I would call in and.
Subverticals of something that's very very broad so we're constantly looking for you know.
I would say a differentiator view.
In different areas and uhm.
Just just just throw wraps up robot. So that's the only thing I would wait sorry.
Only thing that.
No I mean like what what I would add is when I look forward to queue for pipeline. It's it's across a number of themes and a good mix of both sponsor Nonsponsor deals I think that it has been the power of the platform that's constantly rotating dramatic approach.
Where we have you know.
Hundreds of investment professionals speaking directly to management teams sponsors intermediaries to find the best risk adjusted return so that's.
And I think that's that's going to be represented in our queue for results and then.
Alright, I know you didn't ask this question, but I think it's worth saying.
We didn't get the spillover question and I Wanna talk quick quickly about the spillover looks spillover given the unrealized gains in the portfolio spillovers going to quickly.
Quickly increase again that being said I am not sure of the value of keeping all will just go over and come in the system ultimately what matters is the border empower the business and protecting the dividend.
As visa visa for it or he is part of the business.
And so we've tried to do a decent job of being thoughtful and appropriately choosing our capital structure and eliminating the excise tax although that excess tax will probably build again given as we convert the unrealized book to realize.
Will create more spillover income that'd.
That'd be inside I think are are.
Philosophy is a little bit shifting and where you were using that as a lever to to optimize our capital structure at any given time to create the right balance to generate orderings of the power.
The business and making sure that we can.
Rowe is an acceptable level. So I wanted to have that the other thing I wanted to have.
Uhm no I think is.
Earnings estimate, which was in the access of $2 for sure I would probably slightly reframe that it's probably gonna be well in excess of $2 per share.
Or.
Four Q for my gas and so I I I.
Oh, well defined well access that can be it's gonna be it's gonna be it's gonna be that would be my next question.
People should a model model $2 a share for the year that that that that that that would be wrong. So oh, I think would be wrong, but and then the Robert offline. We can debate the spillover income Keith because I.
I think the spillover income concept with this idea of providing protection to the dividend ultimately.
If you're paying a dividend through spillover income you reduce the net asset value per share.
From that moment forward. So what we're trying to really find that balance of you know kind of letting spill over income increase.
Which will and then using it as a as a as a kind of letting their out of the balloon to make sure. We keep the optimal financial leverage in and make sure that we don't have a drag underneath the access that.
I appreciate that and you're not the only one who's b one spillover maybe philosophically of opening is what I.
I look forward to that debate later I appreciate those that that color. So that'd be great. Thank you.
Okay, great. Thank you so much.
Thank you and this concludes that Kenny I would like to turn to call back to Joshua easterly for his final remarks.
So a quick.
So thank thank you thanks for the time and attention and participation from everybody. What I will say is this year at this time of year always makes me feel a little bit sad because it's not gonna be for a while it's gonna be a longer period before we connect next I think in February sometime given the the queue for additional timing.
To facilitate the year and all that so.
Uhm first I want to watch people are happy Thanksgiving a lot to be thankful for this year.
And a lot to reflect on it's obviously been a difficult.
Two years for for for people and given the pandemic and the uncertainty in the world and a lot of other issues of this diversity and equity issues that are real and affecting parts of our community so and.
We have to deal with them as as a society deal with the reckoning of some of <unk> some of our history and so a lot to be thankful for so thank you for your time and efforts and I.
A deeply from our team hope people will have a healthy holiday season, and can take some time to spend with their family given the the last two years.
Thanks, everybody.
Thank you, ladies and gentlemen for participating in today's conference and you may now disconnect gang.
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