Q3 2022 Carlyle Secured Lending Inc Earnings Call

November 9, 2022

Good day and welcome to Carlisle secured lending third quarter 2022 earnings call at this time, all participants in listen only mode.

After the Speakers' presentation, there'll be a question and answer session and instructions will be given at that time.

As a reminder, this call may be recorded I would like to turn the call over to Daniel Hajj hit of shareholder Relations you may begin.

Good morning, and welcome to Carlyle's secured lending third quarter 2022 earnings call.

With me on the call. This morning is our Chief Executive Officer, Linda pace, and our Chief Financial Officer, Tom Hennigan.

We issued a press release and earnings presentation, highlighting our quarterly results both of which are available on the Investor Relations section on 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 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 of.

Our annual report on Form 10-K that could cause actual results to differ materially from those indicated.

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

Thank you Dan Good morning, everyone and thank you all for joining us to discuss another strong quarter of performance.

We're extremely pleased with our third quarter results with growth in core earnings and net asset value a lower level of non accruals and another 6% increase in our base dividend rate.

These results demonstrate the power and resiliency of our platform and our ability to deliver on our objective of generating sustainable income level, well above our base dividend and a stable NAV.

With that said I would like to focus my remarks on three areas for today's call.

I'll start with an overview of our third quarter financial results.

Next I'll touch on the current market environment, and finally, I'll conclude with a few thoughts on our investment activity and current positioning.

In Q3, we generated net investment income of 58 per share, which included <unk> 14 per share of one time income from restoring direct travel to accrual status.

Net of this one time income core earnings for the quarter was <unk> 44 cents, which benefited from both the continued resolution of our non accrual credits and higher base rates.

We declared total fourth quarter dividend of 44 per share consisting of our newly increased $36 per share dividend plus an <unk> <unk> per share supplemental dividend.

We have now increased our base dividend rate in 2022 by a total of 12, 5%.

Our net asset value increased by over 2% in the third quarter was $17 16 per share.

This increase was primarily driven by our NII outpacing our dividend and higher valuations from credit improvement across watch list credits, which Tom will discuss later in further detail.

We repurchased an additional $7 $1 million of our common stock during the quarter.

Belting and three cents of accretion to our net asset value per share.

In total we have repurchased almost 11 million shares or 17, 5% of our float since the commencement of our share repurchase program, resulting in 60 of total accretion to our net asset value per share.

Now as for the current market the macro environment remains complex and continues to evolve with a broad range of factors driving volatility across the global debt and equity capital markets.

Fed rate hikes aimed at lowering inflation has increased the cost of borrowing and strength in the U S. Dollar.

Geopolitical risks.

Main elevated from the Russia, Ukraine conflict and disruptions in the global supply chain.

With this as the market backdrop, we feel it's important to remind investors, how we think about constructing our portfolio.

We prioritize floating rate investments at the top of the capital structure of high quality U S. Middle market companies that are scaled to withstand market disruption and backed by leading private equity sponsors with a track record of supporting businesses.

We utilize our competitive edge the one carlyle approach leveraging the knowledge and expertise across our broader platform at each stage of our investment process.

Turning now to the portfolio. Despite the complexities in the market environment. We continue to be pleased with the financial performance and liquidity positions of our portfolio companies.

We have yet to see any meaningful uptick in either amendment activity or drawdowns of revolver capacity by our borrowers beyond the ordinary course.

We also continued to see positive credit performance across our book during the third quarter, especially in our watch list names.

That said given the significant increase in benchmark rates.

<unk> been increasing our focus on assessing both current and future cash generation and interest coverage metrics across all position to the portfolio.

As for investment activity, we funded $268 million of new investments in the third quarter, essentially all of which were in a first lien position.

In addition to our regular sponsor deal flow, we were able to leverage the sourcing capabilities of carlyle's broader credit platform for several attractive investments during the quarter.

Total repayments and sales in the third quarter were $212 million we.

Ended the quarter with approximately $1 9 billion of investments slightly up from the prior quarter.

Lastly, I want to address the leadership transition announced during the quarter.

As reported in September Taylor, Boswell has decided to leave Carlyle to pursue other opportunities.

On behalf of Carlyle I want to thank Taylor for his leadership and invaluable contribution to Carlisle secured lending in the broader Carlyle direct lending business.

I am extremely grateful for the work that Taylor and the entire direct lending team have done over the past couple of years to reshape our investment process.

As a result of the team's substantial efforts I believe we are well positioned to continue creating long term value for our shareholders for many years to come.

With that I'd like to hand, the call over to our CFO Tom Hennigan.

Thank you Linda.

Today I'll begin with a review of our third quarter earnings.

Further details on our balance sheet positioning and I'll 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 third quarter was $59 million.

Up from 45 billion in the prior quarter.

The primary drivers of the onetime impact of direct travel.

And the benefit of rising benchmark rates.

Importantly, the improvement in core investment income was aided by lower net non accruals.

Total expenses increased in the quarter from 24%.

Primarily as a result of higher interest expense from higher base rates and higher incentive fees.

The result was total investment income for the third quarter of $30 million or <unk> 58 per share.

And core earnings excluding direct travel or <unk> 44 per share.

Substantially above our core earnings of 47 per share earned the last few quarters.

Our board of directors declared the dividends for the fourth quarter of 2022 at a total level of <unk> 44 per share.

That's comprised of our new 36 base dividend.

Up from the prior level of 34.

So it's an <unk> supplement.

Which is payable to shareholders of record at the close of business on December 30.

In terms of the forward outlook for earnings base.

Based on the combination of higher benchmark rates.

At attractive economics on new investments we.

We see continued growth in NII for the fourth quarter.

With further upside in 2023 based on the latest rate curves.

And as noted on prior calls for every 33 basis points of additional increase in LIBOR or sofa Wil.

We will experience a <unk> increase in NII each quarter.

So we remain highly confident in our ability to comfortably meet and exceed the 36% base dividend and continue paying up supplemental dividends each quarter.

And based on this anticipated increase in earnings in the coming quarters, we intend to.

Evaluate and consider incremental increases to the base dividend level.

When valuations our total aggregate realized and unrealized net gain was $7 million for the quarter.

This increase was almost entirely driven by improvements across watch list credits.

The trend that continued from the prior quarter.

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

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

Statutory leverage was about $1 two six times.

While net financial leverage ended the quarter up slightly at one point over nine times.

So while up modestly compared to prior quarter, our leverage remains at the lower end of our target range.

This positioning allows us to effectively deploy capital given the attractive yields in terms available for new investments in the current market.

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

We continue to see overall stability in credit quality across the book.

An improvement in physicians historically with performance issues.

The total fair value of transactions risk rated three to five indicating some level of downgrades since we made the investment improved.

Improved by over $60 million this quarter.

While watch list names rated four or five reduced by about 50%.

In addition, total non accruals decreased substantially from four 4% to two 3% based on amortized cost.

With direct travel and the first half portion of the amended U S derm investment being restored to accrual status.

With that back to Linda for some closing remarks.

Thanks, Tom.

Before opening it up for your questions I wanted to take a moment to comment on the change in my role at the company.

As many of you are aware I recently announced that I'm stepping down as CEO at the end of the year I will continue to serve as chair of the board of directors, but I am pleased to be handing over the reins to the very capable hands of aarons com.

Eric brings a wealth of experience to this role as well as strong knowledge of the company from this time on the board I.

I look forward to continuing to work with Aaron and the entire direct lending team.

With that I'd like to finish by reiterating that we remain highly confident in our strategy and portfolio construction.

Cautiously optimistic given the inherent volatility in the current market.

I'd like to now hand, the call over to the operator to take your questions.

Thank you if you'd like to ask a question. Please press star one one.

Again that star one wanted to ask a question.

Our first question comes from Melissa Wedel with Jpmorgan. Your line is open.

Hi, Good morning, Thanks for taking my question today Linda.

Linda Congratulations on your transition.

I'd like to actually start there if we could given.

Your the evolution in your role and then also with Taylor lease.

Can we walk through sort of the team.

Who will be filling.

His shares.

Maybe just dig into the depth of the team a little bit more thank you.

Sure Melissa Thanks, Thanks for your question and thanks for the congratulatory note as well it's been a it's been a.

Terrific kind of double decade, plus career Carlisle. So I appreciate your thoughts.

Yes, just to talk about the team a little bit and I think I think team is definitely the right word.

We don't want.

Our investors to think that our platform is.

As just one person there is a whole team of people.

Around the person that has that CEO title and just to name a couple of people.

0.2, obviously, Tom has been here.

With us since the beginning so he has been here for well over a decade, Tom I think are you approaching 10 years now.

Let's try to time, but so.

He has been a long term member of the team.

Also a gentleman named Michael Hadley, who we recently promoted as Chief investment Officer.

He's been at Carlyle also for about 15 years and has worked he originally worked with me on the liquid side of the Carlyle Global credit platform.

Given his his investment and underwriting.

Strength. He was personally ahead of our credit committee and on the liquid side.

He moved over several years ago too.

Our BDC and direct lending business and.

Of <unk>.

Most the vast majority actually of the team of underwriters, which is now approximately 2000 people. He has hired so.

He'll report to him. So he is really a key key person in making sure that our investment process is working well.

And that our underwriting standards remain remained high.

Also.

We've got a number of people that are.

Yeah.

Executive officials for.

For the company you can kind of look back at our filings and see all the people that we added and.

One thing I want to point out is.

We have we have a really robust investment committee.

So we've got about a dozen people on the investment committee from all walks of the global credit platform.

And our risk or risk management platform in Washington, So.

We can't.

Can't get sort of much more talent talking about investment committee, if we if we wanted so.

<unk>.

If you ever if everyone talk to anybody specifically, let us know Melissa we're happy to put you in contact but.

I think youre, sorry for my long winded answer, but I think hopefully everybody feels comfortable that there are there are plenty of eyes and ears on the direct lending team kind of looking looking after the portfolio and looking after the new investments that we make.

I appreciate that.

Very open ended question to that.

Yeah.

I think it would be helpful too.

Certainly see that trajectory.

On non accruals and watch list and assessments.

No.

Which is fantastic, particularly in this uncertain environment.

Cross the broader portfolio I know you talked about seeing stable credit are you seeing any even at the margin any erosion in sort of interest coverage ratio as theirs.

<unk>.

Any any weakness our topline or softening at least on top line.

From any.

Corners of the portfolio.

Sure Tom you want me to take that or do you want to take it or.

Yes.

And then let me I'll start and Melissa.

Look we've got diversified portfolio over 100 different.

<unk> in the portfolio. So certainly in this environment, you're going to see our results to span the gamut, but overall, we are happy to report solid performance across the portfolio.

Revenue continues to grow both organically and via acquisitions, EBITDA and leverage statistics across the broad portfolio continued to be relatively stable up modestly.

The point on interest coverages on a run on a LTM basis interest coverage still remains north of two times, but we're really focused on the forward outlook for both interest coverage and overall cash flows and so certainly as rates go from up to north of 4%, we're going to see that interest coverage ratio across the portfolio.

Down across the broad portfolio with its 222 times now, it's maybe less than two times.

But we're really focused keenly focused on individual credits.

The gamut in terms of if we have a strong performing credit maybe day, one we started higher leverage so we're going to be comfortable looking at that portfolio company with a lower interest coverage ratio is going to be really the credits that are underperforming that may have.

EBITDA declines and maybe have a higher excess coverage, but we're going to be more focused on those credits I think it's going to be credit by credit, but we're certainly very focused on interest coverage ratios and then more importantly, just overall free cash flow looking at working capital taxes interest.

And <unk>.

LTM basis, but really more importantly go forward because company may have generated cash in the last 12 months, but certainly their interest burden is going to drop dramatically in the next 12 months.

Yes, maybe Melissa I can just add.

We definitely don't have blinders on right. This is.

While we love the new opportunities, we're seeing in the market.

Going to be some stresses in everybody's portfolios given.

The increase in.

In input costs across the board.

But we do one of the one of the assets that we have at Carlyle is an experienced workout team. So to the extent that we do have individual problems in the portfolio.

We've got we've got a lot of muscle power to help work those out and not.

Not everyone is going to work out as well as the Alero dead or direct travel.

But I think those represent two great examples of our workout team really kind of doing it doing a doing a good job to maximize value win when things aren't looking so good on the individual names.

Got it.

Maybe I can ask one last question given portfolio leverage levels and certainly here.

Track record sort of consistent lay of repurchasing shares.

When trading at a decent discount to announce.

It fair to think that you guys are as committed as ever to continuing share repurchase.

And could you just quickly recap how much is left on the current authorization. Thanks, so much.

Yes sure. It does what it says we continue to be steady purchasers in this market.

The board and.

Last quarter increased the authorization. So we still have over $50 million left under the authorization.

We renewed it last.

Quarter, we renewed it through November of 'twenty, three so effectively reset.

The annual renewal last quarter.

There are no further questions I'd like to turn the call over to Linda pace for any further remarks.

Thank you everyone for your time today.

And we look forward to talking to you in the new year enjoy your the rest of the year and enjoy your holidays take care.

This concludes the program and you may now disconnect everyone have a great day.

The conference will begin shortly.

Raise your hand during Q&A, you can dial star one one.

[music].

Yes.

Sure.

[music].

Yes.

Uh huh.

[music].

Good day and welcome to Carlisle secured lending third quarter 2022 earnings call at this time, all participants on listen only mode.

After the Speakers' presentation there'll be a question answer session and instructions will be given at that time.

As a reminder, this call maybe recorded.

I would like to turn the call over to Daniel Hajj Should've shareholder relations you may begin.

Good morning, and welcome to Carlisle secured lending third quarter 2022 earnings call with me on the call. This morning is our Chief Executive Officer, Linda pace, and our Chief Financial Officer, Tom Hennigan last night, we issued a press release and earnings presentation outlining our quarterly results both of which are.

Available on the Investor Relations section on 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 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 of our annual report on Form 10-K that could cause actual results to differ materially from those indicated.

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

Thank you Dan Good morning, everyone and thank you all for joining us to discuss another strong quarter of performance.

We're extremely pleased with our third quarter results with growth in core earnings and net asset value a lower level of non accrual and another 6% increase in our base dividend rate.

These results demonstrate the power and resiliency of our platform and our ability to deliver on our objective with <unk>.

<unk> sustainable income level, well above our base dividend and a stable <unk>.

With that said I would like to focus my remarks on three areas for today's call.

I'll start with an overview of our third quarter financial results.

Next I'll touch on the current market environment, and finally, I'll conclude with a few thoughts on our investment activity and current positioning.

In Q3, we generated net investment income of 58 per share, which included <unk> 14 per share of one time income from restoring direct travel to accrual status.

Net of this one time income core earnings for the quarter was 44 cents, which benefited from both the continued resolution of our non accrual credits and higher base rates.

We declared total fourth quarter dividend of 44 per share consisting of our newly increased 36 cents per share dividend less than 8% per share supplemental dividend.

We have now increased our base dividend rate in 2022 by a total of 12, 5%.

Our net asset value increased by over 2% in the third quarter to $17 16 per share.

This increase was primarily driven by our NII outpacing our dividend and higher valuations from credit improvement across watch list credits, which Tom will discuss later in further detail.

We repurchased an additional $7 $1 million of our common stock during the quarter, resulting in <unk> <unk> of accretion to our net asset value per share.

Now as for the current market.

Macro environment remains complex and continues to evolve with a broad range of factors driving volatility across the global debt and equity capital markets.