Q1 2022 Carlyle Secured Lending Inc Earnings Call

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Good day, and thank you for standing by and welcome to the Carlisle secured lending first quarter 2022 earnings call. At this time, all participants are in a listen only mode.

After the speaker's question, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

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I'd now like to hand, the conference over to your Speaker today Daniel Hahn. Please go ahead.

Good morning, and welcome to Carlisle secured lending as first quarter 2022 earnings call last night, we issued an earnings press release and detailed earnings presentation with our quarterly results a copy of which is 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.

Any forward looking statements made today do not guarantee future performance and 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 of our annual report on Form 10-K that could cause actual results to differ materially than those indicated.

Carlisle secured lending assumes no obligation to update forward looking statements at any time with that I'll turn the call over to our Chief Executive Officer Linda pace.

Okay.

Thank you Dan and good morning, everyone and thank you all for joining us to discuss Carlisle secured lending first quarter 2022 results.

Joining me on this call are our chief investment officer, and newly appointed President Taylor, Boswell and our Chief Financial Officer, Tom Hennigan.

Today I'm going to focus my remarks on three topics.

First I'll provide an overview of this quarter's financial results.

I'll touch on the investment activity in the current environment.

And finally, I'll conclude with a few thoughts around our current positioning.

Let me begin with an overview of our financial results.

Despite an increasingly complex market backdrop, we once again generated strong earnings this quarter.

Our total net investment income was 47 cents per common share, which included seven cents of nonrecurring income derived from the successful exit of our investment in celerity.

We declared a total dividend of <unk> 40 per share representing an annualized yield on our stock of over 11%.

The dividend payments are comprised of our 32 spent base dividend plus eight cents of our regular supplemental dividend of recurring earnings above the base dividend.

As Tom will detail later, we expect dividends, which have landed between 38 and 40 cents in recent quarters to remain in that range with the potential for upside as we progress through the rest of the year.

Net asset value per share of $17 11.

Positive progression for the eighth consecutive quarter up 1.2% from Q4 'twenty one is.

As Tom will discuss further strengthening credit performance, especially in our watch list names drove our first quarters results and outpaced any negative valuation impact from widening market yields where inflation driven earnings impacts.

This allowed us to deliver NAV, which now spans 3.3% above our pre COVID-19 level and higher than our NAV in Q2, 19, when Taylor and I joined the leadership team.

We repurchased an additional $7 million of our common stock in the quarter Reis.

The resulting in three cents of accretion to our net asset value.

As we have consistently said we remain active re purchasers of our stock at its current valuation levels given the attractiveness of the returns for our shareholders.

In total we have repurchased almost 10 million shares or 16% of our float since the commencement of our share repurchase program, demonstrating our firm and continued commitment to shareholders.

I'll now turn to this quarter's investment activity in the current environment.

We funded $114 million of new investments in the first quarter, almost all of which were in the first lien position.

This compares with repayments and strategic sales of $159 million during the first quarter.

As a result, we ended the quarter with just under $1 $9 billion of investments essentially flat versus last quarter.

Taylor will describe later the investment environment is changing and becoming more complicated.

With competition remaining intense we will continue our approach of being highly credit selected and defensively oriented.

In this moment of higher uncertainty, we are comfortably operating at a funded asset level closer to the bottom of our target leverage range as our income generation prospects remain solid.

Finally, a couple of organizational items to note as you no doubt saw we've changed your name the quarter from TCG BDC to Carlisle secured lending.

As you've heard from us before and will continue to say our strategy is to leverage carlyle's integrated investment platform to derive edge at each step of our investment process from origination to underwriting to portfolio management we.

We believe this new name better connects the company to the inherent strength of our manager as well as to the fundamental nature of our underlying investment activity.

For the avoidance of doubt our ticker C. G. B D will remain the same.

I'd like to conclude by taking a moment to congratulate the members of our large and capable team who assumed formal roles at Carlisle secured lending in the quarter.

Taylor Boswell, who I mentioned was appointed to President has also joined the company's board of directors.

He has been integral to the success of the company over the past three years and as new title in role on the board are reflective of his outstanding leadership.

In addition, you will note, we admitted Jonathan Pearl Vice President and head of sponsor coverage Michael.

Michael had Lee Vice President and head of underwriting and Alex Papa Vice President and head of illiquid credit as newly elected officers of the company.

Each of these professionals are long tenured members of the Carlyle team, we're fortunate to have such a deep bench of talented and we welcome their more prominent role at Carlisle secured lending.

For joining us this morning, I'd like to hand, the call over to our President Taylor Boswell.

Thanks Linda.

As usual I'll begin today by sharing some macroeconomic perspective derived from our global investment footprint.

And after that I'll provide comment on the current credit and investment climate.

The last time, we reported earnings we spoke about the ongoing transition we perceived from 2020. One one way market is what was shaping up to be an increasingly complex investment environment in 2022.

And we did that just one day before Russias tragic invasion of Ukraine, Tibet, which has of course only further complicated picture.

As a starting point it is worth saying that we've conducted intense portfolio reviews in recent months and are happy to report we have no consequential no direct exposure to business operations in Russia, Ukraine or eastern Europe broadly.

With our focus on middle market lending in the U S, which is 90% of our underlying exposure. This is not a surprising conclusion.

In addition, given our portfolio maintains a heavy non cyclical overweight, we see little direct impact from the volatility and dislocation experienced in commodity markets.

Based on this largely domestic lower cyclicality exposure profile, our primary investment focus in recent months has been the knock on inflationary impact.

Principally in food and fuel, which are currently layering in on top of an already inflationary environment.

Through the first quarter and as far as our data indicates continuing in the second quarter U S. Consumer spending remains resilient on the back of strong balance sheet and supportive labor market conditions.

But these conditions may not persist and we must respect that as we progress through this environment.

As for our borrowers. They generally continued to report success passing through increased inflationary costs.

But just like US corporate management teams are adjusting to a business environment that is fundamentally different from the trending markets, which dominated most of the last decade.

They have much work left to do to ensure the preservation of margin in this evolving and complex world.

So while we do see a favorable base case for credit performance developing we must also acknowledge it will be several quarters before the net annualized impact of increased cost and price recovery are fully settled and known for any given borrower.

Not surprisingly coming out of Covid, we redoubled, our focus both in new underwriting and portfolio management on understanding the detailed puts and takes affecting the current and near term performance of each borrower something that has only become more critical as inflationary pressures still in recent months, we will stay vigilant.

Based on these topics.

Now despite all the aforementioned complexity our portfolio performed extremely well again this quarter.

Ultimately the continued recovery from our watch list and Covid impacted names outweighed, both inflation driven earnings or market yield driven valuation impacts, resulting in another quarter of positive NAV progression.

We now have the map eight consecutive quarters of increases while our NAV stands three 3% higher than pre COVID-19 levels.

We fully exited one of our non accrual names solera, realizing 9 million of proceeds in excess of our Q4 'twenty one mark.

After several years of working to turnaround the business. We're happy to report the successful outcome for both Valero and our company <unk>.

Importantly, our three remaining non accrual investments all continue on a positive trajectory a trajectory, which if it holds will likely result in a return to accrual status proportions of those exposures this year.

Finally, I'll comment on transaction volumes, which are also topical in today's environment.

After exiting our record year in 2021, M&A leveraged loan and high yield volumes market wide were down in Q1, 'twenty, two by 17%, 9% and 38% respectively quarter over quarter.

Private transactional markets are healthy, but they're also facing tough comps it took a bit of a breather after a hectic Q4.

It's important to say even in this environment, we continue to see ample attractive investment opportunities at <unk>.

Rivet credit took meaningful share liquid markets in the first quarter.

And more importantly, our already strong platform continues to grow its capabilities.

Currently we have a strong transaction pipeline developing in Q2.

Overall, we remain extremely comfortable with both our funded asset position as well as our ability to maintain that position in any investment.

So it's a complex world for sure, but at Carlisle secured lending we're happy to report that portfolio construction credit performance and income generation all remain well position.

Literally we are generating consistent income well in excess of our base dividend and we expect that to continue.

We're frequently asked why don't you take the base dividend up.

Well first youll recall, our dividend policy compliments, our base dividend with consistent quarterly supplemental dividends of excess recurring income.

So investors are already getting the benefit of those excess earnings.

Second given the complexity of today's environment, we assess that this is not the time to reach for risk in order to push earnings.

This is the time to be highly selective on new investments until better clarity develops on the impact of this inflationary environment.

We're fortunate to generate one of the strongest dividend yields in the industry, while operating towards the low end of our target leverage range.

Just fine by US right now because this strong positioning, let's let's focus on what matters, most delivering a long term sustainable income stream.

With that I'd like to turn it over to Tom.

Thank you Taylor.

Hit up again with a review of our first quarter earnings, but I'll provide further detail on our balance sheet positioning and conclude with a discussion of our portfolio performance.

As Linda previewed we had another strong quarter on the earnings front.

Total investment income for the first quarter was $48 million up from 44 in the prior quarter.

Upside performance was primarily driven by the income received from the exit of our investment in <unk>, which had been on non accrual position.

Excluding this onetime income topline performance was essentially flat versus prior period, noting.

Noting that total dividend income from the two JV with again $7 $5 billion.

In line with the last few quarters.

Total expenses increased modestly in the quarter from $22 million to $23 million as higher incentive fees were partially offset by lower interest expense and lower management fees.

The result was net investment income for the first quarter of $25 million or <unk> 47 per common share that matches the highest level in the history of the company.

And even after adjusting for nonrecurring Salerno income, we still achieved 40 cents for the quarter.

On May 2nd our board of directors declared the dividends for the second quarter of 2022.

At a total level of <unk> 40 per share that's.

That's comprised of a 32% base dividend plus an eight cents supplemental.

Which is payable to shareholders of record as of the close of business on June 30.

Last quarter, we discussed the fact that most of our loans have LIBOR floors, while our floating rate debt does not so we may see some mild earnings impact on second quarter results.

That simply means instead of a 40 plus per share. We've just we've achieved the last two quarters, where maybe a touch lower in <unk>.

As LIBOR is at 331 was close to the level of our typical 1% floor.

However, the current curves indicate benchmark rates will become a positive earnings driver sooner than previously anticipated.

In the back half of 2022, we began to see a net positive impact and.

And again for every 33 basis points of additional increase in LIBOR will experience a one penny increase in NII each quarter.

And away from LIBOR as Taylor mentioned, we also expect a positive earnings impact this year from further improvement in our current non accrual loans.

And each of the last four quarters, we've earned a distributed at least 38 per share.

All things considered our shareholder should have confidence that future quarterly payments for the balance of 2022, we will continue to meet or exceed this level.

On valuations, our total aggregate realized and unrealized net gain was $5 million for the quarter.

The eighth consecutive quarter of positive performance.

The net gains were driven by higher valuations on our watch list names.

And an increase in the valuation of our investment in the Mcf JV.

The offset by the negative impact of widening market yields and to a lesser extent inflation driven earnings impacts at certain borrowers.

Next I'll touch on our financing facilities and leverage.

We continue to be very well positioned on the right side of our balance sheet.

Statutory leverage was just under 1.2 times, while net financial leverage was slightly under one turn of leverage so.

So we ended the quarter right at the bottom end of our target leverage range.

I'll finish with a review of the portfolio and related activity.

We continue to see net improvement in credit quality across the book, especially in positions with historical credit issues.

The total fair value of transactions risk rated three to five indicating some level of downgrade since we made the investment improved again this quarter by $6 million in the aggregate.

Total non accruals decreased to three 7% based on fair value driven by the exit of solera.

Regarding other high focus positions, we continue to see improvement in the fundamental performance and outlook for both dermatology associates and direct travel.

Those two borrowers account for the vast majority of current non accruals.

We continue to see these positions not as risk, but as opportunity for both NAV and NII expansion this year.

With that back to Linda for some closing remarks.

Thanks, Tom.

Before I turn the call over to the operator I'd like to reiterate that as always we are focused on using our platform to directly originate the widest possible range.

Credit transactions in the market.

We then apply our platform's capabilities and expertise to select only the highest quality credit profiles.

From there we built a diversified portfolio designed to deliver sustainable through cycle income.

We feel exceptionally well positioned to continue to meet that goal even in this complex environment.

Thanks for joining us today I'd like to now hand, the call over to the operator to take your questions.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Standby, while we compile the Q&A roster.

Once again Thats star one to ask a question at this time.

Yeah.

And I'm currently showing no questions at this time I'd like to turn the call back over to Linda pace for closing remarks.

Thank you and I guess everyone's going to be pretty easy on us this quarter.

I appreciate your attention today and if you think of anything you want to talk to US about please feel free to reach out.

Over the next couple of days take care everyone.

This concludes today's conference call. Thank you for participating you may now disconnect.

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