Q4 2022 Carlyle Secured Lending Inc Earnings Call

Speaker 2: The conference will begin shortly. To raise and lower your hand during Q&A you can dial Star 1-1.

Speaker 3: Good day and thank you for standing by.

Speaker 3: Welcome to CarLow Secure at Lendings 4th quarter, 2022, earnings call.

Speaker 3: At this time, all participants aren't even listening to the only mode.

Speaker 3: After the speaker presentation, there will be a question and answer session.

Speaker 3: Please be advised that today's conference is being recorded.

Speaker 3: I would now like to hand the call over to your speaker today.

Speaker 3: Daniel Hahn. Please go ahead.

Speaker 4: Good morning and welcome to Carlisle Secured, Mademois XIV, 2022, Ernst Kult.

Speaker 4: With me on the call this morning is Linda Pace, the chair of our Board of Directors. Aaron Lee Kong, our newly appointed Chief Executive Officer, and Tom Hemigant, our Chief Financial Officer.

Speaker 4: That night we filed a 410K and issued a press release with a presentation of our results, which are available on the Investor Relations section of our website.

Speaker 4: Following our remarks today, we will hold a question and answer session for analysts and institutional investors.

Speaker 4: This calls being webcast and a replay will be available on our website.

Speaker 4: Any form of looking statements made today do not guarantee future performance and any undurations should not be placed on them.

Speaker 4: These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factor section of our annual report on Form 10K.

Speaker 4: These risks and uncertainties could cause actual results to differ materially from those indicated.

Speaker 4: Carl also cares lending assumes no obligation to update any forward looking statements at any time. With that, I'll turn the call over to Linda Pace.

Speaker 5: Thank you, Dan. Good morning, everyone, and thank you all for joining us to discuss our fourth quarter and full year 2022 results.

Speaker 5: I will focus my remarks on three topics for today's call. I'll start with an overview of our fourth quarter results.

Speaker 5: Second, I'll comment on the current market environment and investment activity. And finally, I'll conclude with a few thoughts on our full year 2022 performance.

Speaker 5: We generated net investment income of 48 cents per share in the fourth quarter. This was an increase of 9 percent from the core earnings in Q3, as the portfolio continued to benefit from higher base rates.

Speaker 5: consisting of our new base dividend of 37 cents, which we have increased for the third consecutive period, plus a 7 cent supplemental.

Speaker 5: We have now increased our base dividend rate by a total of almost 16% over the last three quarters. And our police to highlight that the 37 cents per share is now back at our IPO level.

Speaker 5: Our net asset value decreased by 1% in the fourth quarter to $16.99 per share, primarily due to the impact of widening market yields.

Speaker 5: We repurchased an additional $7.3 million of our common stock during the quarter, resulting in four cents of accretion to our net asset value per share.

Speaker 5: Turning now to the market. The current environment continues to be lender-friendly, allowing us to selectively deploy capital into attractive opportunities.

Speaker 5: From a macro perspective, we have still not seen a recessionary contraction in the U.S. economy, despite the increased velocity of fed rate hikes, which occurred much more quickly than most market participants expected.

Speaker 5: We've seen a reduction in the level of uncertainty around interest rates and a reduction in inflation level.

Speaker 5: However, fixed income and private credit continue to see volatility driven by less liquidity and capital formation across the debt markets.

Speaker 5: This backdrop informed our investment activity and we remain focused on deploying primarily first-linked capital at attractive yields with better economics and terms.

Speaker 5: During the fourth quarter, we funded $129 million and saw total repayments and sales of $87 million.

Speaker 5: We ended 2022 with approximately $2 billion of investment at fair value.

Speaker 5: Before turning things over to Tom, I'd like to spend a few minutes on our full year 2022 results.

Speaker 5: We generated net investment income of a dollar 93 per share, which was an increase of 26% compared to the prior year. We declared total dividends of a dollar 64 per share during the year, resulting in dividend coverage of 118%.

Speaker 5: We also repurchase shares that provided an additional 14 cents of accretion to NAV during the year. Our net asset value ended the year at $16.99 per share, up from $16.91 as of Q4 2021 due to strong fundamental credit performance.

Speaker 5: We're extremely pleased with these results and believe they demonstrate not only the power of our platform, but also our commitment to creating long-term shareholder value regardless of the market environment.

Speaker 5: With that, I'd like to hand the call over to our CFO , Tom Hennigan.

Speaker 4: Thank you, Linda. Today, I'll begin with a review of our fourth quarter earnings.

Speaker 4: I provide further detail at 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.

Speaker 4: Total end up in income for the fourth quarter was $569.

Speaker 4: I'll put the prior quarter after taking into account the one-time impact of direct travel in Q3.

Speaker 4: This increase was driven by higher benchmark rates.

Speaker 4: A higher average investment balance.

Speaker 4: and an increase in dividend income from our JVs. This increase was partially upset by lower OIB accretion and C income.

Speaker 4: Total expenses increased in the quarter from 29 to 31 million.

Speaker 4: Primarily do the higher interest expense from rising base rates on our financing facilities.

Speaker 4: The result was total net investment income for the fourth quarter of $25 million or 48 cents per share.

Speaker 4: Up 9% versus 44% for share of core earnings in Q3.

Speaker 4: Furthermore, this is substantially above our core earnings that will buy 40 cents per share each quarter in the first half of 2022.

Speaker 4: Our Board of Directors declared the dividends for the first quarter of 2023 at a total level of 44 cents per share.

Speaker 4: That's comprised of our new 37 cent base dividend.

Speaker 4: up from the prior level of 36 cents plus a seven cents supplemental.

Speaker 4: which is able to share hold as a record as the close of business on March 31st.

Speaker 4: In terms of the forward outlook for earnings, based on the combination of higher benchmark rates,

Speaker 4: Attracted economics are new investments.

Speaker 4: We seek in secret growth and NILI for the first quarter.

Speaker 4: With further upsides for us the rest of 2023 based on the latest rate curves.

Speaker 4: So we remain highly confident in our ability to comfortably meet and exceed the new 37 cent base dividend.

Speaker 4: and continue paying out supplemental dividends each quarter.

Speaker 4: And as Linda mentioned, 37 cents with the base dividend at IPO, and we're very pleased to be back at this level.

Speaker 4: On valuations, our total aggregate realized and unrealized net loss was 13 million for the quarter.

Speaker 4: 50 Chris was primarily driven by unrealized losses from widening market yields.

Speaker 4: Next, we'll touch on our financing facilities and leverage.

Speaker 4: We continue to be well positioned on the right side of our balance sheet.

Speaker 4: Statutory leverage was about 1.3 times, and that financial leverage ended the quarter of 1.16 times.

Speaker 4: So all up modestly compared to prior quarter, our leverage remains comfortably within our target range.

Speaker 4: This positioning allows us to effectively deploy capital, given the attractive yields in terms available for new investments in the current market.

Speaker 4: I'll finish with the review of the portfolio related activity.

Speaker 4: We continue to see overall credit stability and credit quality across the book.

Speaker 4: The total fair volume trend actions risk-graded 3-5, indicating some level of downgrad since we made the investment was flat this quarter.

Speaker 4: Total amount of fuel is increased from 1.9 to 2.9 based on fair value due to the addition of PPP management.

Speaker 4: However, we expect further developments for that investment in the coming months, which will result in restoring the position to a cruel status.

Speaker 4: In addition, we anticipate any credit softness from the current macroeconomic headwinds will be buffered by further upside on the dermatology associates and direct travel physicians.

Speaker 4: With that, I'll turn it back to Linda.

Speaker 5: Thanks Tom. We view 2022 as a year of very strong performance for the company, which we believe translated into excellent performance for our stockholders. We generated almost 18% of total return for our shareholders, which included a solid double digit dividend yield and price appreciation in our stock price.

Speaker 5: This return represented the best total return experience for shareholders of all publicly traded BDCs with a market capitalization of over $500 million for the year. I would like to take a moment to thank the entire Carlisle team for all their hard work, as they are the reason we were able to deliver this top-tier performance. Lastly, before opening up the call for questions,

Speaker 5: I'd like to introduce our newly appointed CEO , Aaron Lee Kong.

Speaker 4: Thanks Linda. I would like to actually take this moment to publicly thank you. You've played an instrumental role in building the best in class credit platform over the last 20 plus years.

Speaker 4: Your contributions to the success of the platform are impressive and have been invaluable. It has been an absolute pleasure to spend my time working with you.

Speaker 4: and the Kull-Alsend Chair lending team as part of my role on the board of directors over the last few years. I've also worked with a number of the senior members of Kull-Als global credit platform in various forms over the better part of the previous two decades.

Speaker 4: Finally, I've been fortunate enough to spend the end of 2022 and the first couple of months of this year solidifying relationships with the deep bench of talent that exists within call-out direct lending and across the border call-out platform. I could not be more impressed.

Speaker 4: I have every confidence in this team and in their ability to continue to deliver the results that our shareholders have come to expect. So with that said, thank you all for joining and operator. Please open the call for questions.

Speaker 3: Thank you. As a reminder to ask a question, you will need to press star 11 on your telephone. Again, that's star 11 on your telephone to ask a question.

Speaker 3: Please stand by while we compile the Q&A roster.

Speaker 3: Our first question comes from the line of Aaron Saganovich of City.

Speaker 3: Your question, please, Aaron.

Speaker 4: Thank you. Maybe you could just talk a little bit about the environment right now, how private equity sponsors are thinking about the market and whether or not you feel like there's going to be an increase in any kind of deal opportunities as we enter the new year.

Speaker 5: not that easy, but there's still activity. And the big benefit to folks like ourselves and others in the private credit market is we're really seeing a pullback from the traditional

Speaker 5: sources of lending activity. So the banks and the high yield market, the CLO market, really have not been that active. So private equity sponsors, when they do want to do a deal and

Speaker 5: Carlisle will be in the mix on this. They're going to private credit because they can get.

Speaker 5: certainty of execution. They get term sheets that don't have, you know, just incredible flex language that can give banks an out for, you know, anything they, they deem abnormal. And they can, you know, have they, you know,

Speaker 5: in this environment, maybe they're paying a little bit more, maybe they're not. They're not getting as loose terms, but they're not getting super-ownerous terms either. So the private credit markets, which BDCs like ourselves are obviously a part of, are the beneficiaries of that. So we continue to expect to see deal flows, not, you know, but enough that we can be.

Speaker 5: highly selective in what we're picking.

Speaker 4: Is anybody else? It's Aaron Lee Kong. Nice to meet you Aaron. So I'd say I'm in the first quarter.

Speaker 4: The new transactions we have, and I'm literally looking at our pipeline and closed deals as we speak. We're seeing obviously base rates are higher, spreads are a lot closer to 700 basis points over. That is going to continue and Tom has always spoken about it today that it's going to continue to be a positive impact to the portfolio.

Speaker 4: spread transactions so that is going to continue to provide possible momentum. We're seeing as Linda alluded to.

Speaker 4: Leverage levels on new transactions are quite attractive to historical with wider spreads.

Speaker 4: because of the dirt of capital and the large liquid market and just period because of the world a little bit rockier, we are seeing tighter documents effectively. There's nothing in our pipeline that doesn't have provenance. So, you know, it is a positive market for new transactions and as you alluded to Aaron, I think.

Speaker 4: We view within our portfolios quite attractive. So we're also taking this opportunity for, you know, to be very close to our sponsors and work with them on transactions that we know have spent lots of hours knowing the companies to figure out how to keep those credits in our portfolio at more attractive rates for our shareholders.

Speaker 4: So that's sort of what we're seeing right now and probably frankly we do have the ability to be selective and we're taking pull advantage of that.

Speaker 4: Thank you. That was a good color. I appreciate that. The second question I had was on the PBT non-accrual. I think in the prepared remarks you mentioned that you expect that to go back to a cruel, I don't know if you can add any commentaries to what would potentially improve that situation.

Speaker 4: a new capital structure for that business and a positive outcome in terms of our position in that credit.

Speaker 3: We'll come on out one next. All right, let's turn it up. Thank you. I would now like to turn the conference back to Linda Pace for closing remarks. Madam.

Speaker 5: Oh, thank you. And thank you everyone for joining us today. And we look forward to speaking with you next quarter. Have a great day. This concludes today's conference call. Thank you for participating. You may now disconnect.

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