Q2 2023 Carlyle Secured Lending Inc Earnings Call
Yeah.
Good day, everyone and thank you for standing by welcome to the Carlisle secure lending Inc. Second quarter 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask the question you will need to press star one one on your telephone.
We'll then hear message out dicing your hand this race to withdraw your question simply press Star one again.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Daniel Hahn. Please go ahead.
Good morning, and welcome to Carlisle secured lending second quarter 2023 earnings call.
With me on the call. This morning is there any Kong Chief Executive Officer, and Tom Hennigan, Our Chief Financial Officer.
Last night, we filed our Form 10-Q and issued a press release with a presentation of our results which are available on the Investor Relations section of our website.
Following our remarks today, we will hold a question and answer session for analysts and institutional investors.
This call is being webcast and a replay will be available on our website.
Any forward looking statements made today do not guarantee future performance and any undue reliance should not be placed on them. These.
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.
These risks and uncertainties could cause actual results to differ materially from those indicated Carlyle secured lending assumes no obligation to update any forward looking statements at any time.
That I will turn the call over to Eric.
Thanks, Dan Good morning, everyone and thank you all for joining.
I will focus my remarks on three topics on today's call I will start with an overview of our second quarter results.
Next.
I'll touch on the current market environment.
Finally, I'll conclude with a few thoughts on our investment activity and current positioning.
Starting off with the earnings we continue to see the benefit of higher base rates and attractive pricing on new investments generating total net investment income of 52 per share for the quarter.
This is up 30% year on year.
Our net asset value at June 30 was $16 73 per share as compared to $17 nine times for Q1.
As Tom will detail later the change in NAV for the quarter was primarily driven by a markdown on one of our health care services investments was partially offset by earning NII in excess of the dividend.
With a clear total Q3 dividends of 44.
Consisting of our 37 base dividend plus a seven supplemental both of which were in line with the prior quarter.
Although we are pleased with the quarter's earnings we remain.
Focused on the credit performance of the overall portfolio.
Credit fundamentals of our portfolio in the aggregate have continued to perform well with revenues up more than 30% and EBITDA margins largely flat year over year, despite inflationary pressures to the economy.
And importantly.
Borrowers have reported.
Assistant quality results as we've not seen a meaningful increase in noncash add backs and interest coverage remains stable.
This gives us comfort in the strength of our portfolio.
Turning now to the current market environment.
We saw the key trend discussed on our last call continued through the balance of the second quarter.
Terms and pricing leading favorably to lenders.
Deal activity in high yield and syndicated markets is still sluggish with overall net multiplied 15 year loans.
Given these market dynamics sponsors continue to favor the private credit markets with limited number of LBO transactions that have been completed.
While we continue to view the LBO market as a core component of our strategy. We also complemented our traditional sponsored pipeline with other sources of transaction close.
In particular, we've seen attractive sourcing opportunities from three main areas.
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I've mentioned new deal flow from sponsored backed companies. This is our largest generator of our deal flow and we've continued to be increasingly selective.
Sure.
Carlyle generated.
And non sponsored deal flow.
The one Carlyle platform provides us access to a wide swath of deal flow.
And three finally.
What I would call farming the portfolio.
We were able to leverage our position as an incumbent lender along with our long standing relationships with companies and sponsors to execute collaborative solutions for amendments extension and M&A activity to provide added flexibility to borrowers and attractive incremental economics to our portfolio.
Regardless of sourcing channel, we focused our efforts in Q2 or the opportunities that were accretive to the portfolios return.
One example, there.
Our average spread at origination or new deals to improve by approximately 100 basis points compared to this period last year.
In addition, as previously mentioned, we generated significant incremental value from our existing borrowers from amendment activity, which has driven tighter documentation incremental fees additional equity contribution from sponsors.
And spread increases.
In the second quarter alone approximately 16% of our loans saw an improvement in one or more of these areas due to amendment and other related activities.
I'll now hand, the call over to our CFO Tom Hennigan.
Thank you Erin.
Today I'll begin with a review of our second quarter earnings.
Pat will discuss portfolio performance and I'll conclude with details on our balance sheet positioning.
As Erin previewed we had another strong quarter on the earnings front.
Total investment income for the second quarter was $60 million.
Up 3% from the prior quarter.
This increase was primarily driven by higher benchmark rates.
Total expenses increased in the quarter from $33 million to $34 million.
Similar to last quarter. The increase was primarily driven by higher interest expense from rising base rates.
The result was total net investment income for the second quarter of $26 million or.
<unk> 52 per share.
4% versus prior quarter.
Importantly, this recent level of earnings is materially above our quarterly core earnings from 2022.
Our board of directors declared the dividend for the third quarter of 2023 at a total level of 44 per share.
That's comprised of.
37% base dividend plus a <unk> <unk> supplemental.
It is payable to shareholders of record as of the close of business on September 29th.
This total dividend level of 44.
Allows us to build NAV in the face of an increasingly complex macroeconomic environment.
At the same time. It also represents an attractive yield of over 10% on NAV.
Over 11% on the latest share price.
And the 52 cents of NII that we earned this quarter equates to a 12% plus return on 630 NAV.
In terms of the forward outlook for earnings.
We see stability if its 52 set level based on the combination of current benchmark rates and attractive economics on new deals.
So we remain highly confident in our ability to comfortably meet and exceed our 37 base dividend.
And continue paying out a supplemental dividend each quarter.
While evaluations, our total aggregate realized and unrealized net loss was about $22 million for the quarter.
The decrease was driven by a markdown on one of our health care services named American physician partners.
As we've noted in the past the healthcare services sector has faced headwinds from labor shortages wage inflation and regulatory changes in the U S.
However, recent financial performance of our other health care services names has trended favorably.
And we see evaluation and earnings upside in these other investments.
Additionally, one of the key tenants to our strategy is an acute focus on portfolio management and construction.
Maintaining a highly diversified portfolio that is conservatively marked.
Prudent use of leverage has allowed us to deliver consistent dividends.
Part of our strategy also has been retaining NII.
We've retained 15% of NII or <unk> 32 per share during the LTM period to act as a buffer to NAV volatility.
This also has resulted in a dividend coverage ratio of over 140%.
Outside of ATP, we continue to see overall stability in credit quality across the book.
Total fair value of transactions risk rated three to five indicating some level of downgrade since we made the investment.
Down slightly from last quarter.
Total non accruals decreased from 353, 5% to one 8% based on fair value.
Aided by the completion of the <unk> restructuring this quarter.
Aaron noted that most of our portfolio companies have whether the inflationary environment well.
And of note, we continue to see financial performance improvement and positive valuation migration and investments like direct travel and dermatology associates.
I'll finish by touching on our financing facilities and leverage.
We continue to be well positioned on the right side of our balance sheet stat.
Statutory leverage was about one three times and net financial leverage ended the quarter slightly lower at one one times comfortably within 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.
With that I'll turn it back to Aaron.
Thanks, Tom.
I would like to finish by highlighting the consistency of our investment approach and reiterate our overall strategy.
We're focused on primarily making investments to U S companies.
Backed by high quality sponsors in the middle market.
The media the EBITDA across our core portfolio at the end of the first quarter with $72 million.
Our approach allows us to remain focused on disciplined underwriting prudent portfolio construction and conservative risk management.
Our portfolio remains highly diversified and is comprised of over 170 investments in.
130 companies.
Over 25 industries.
The average exposure to any single portfolio company is less than 1% and 94% of our investments are in senior secured loans. So we feel very well positioned in the current environment.
I'd like to now hand, the call over to the operator to take your questions. Thank you.
Thank you and ladies and gentlemen, that's a reminder to ask a question simply press star one on your telephone and wait for your name to be announced to withdraw your question simply press Star One again, one moment, while we compile the Q&A roster.
And our first question.
Comes from the line of Melissa Wedel with Jpmorgan. Please proceed.
Hey, this is AJ entre Melissa I have a question on capital returns.
How are you all thinking about share repurchases going forward and then given that you're out earning the dividend could we see a special dividend at the end of the year.
Thank you good morning, Hi, its Tom.
On the share repurchases, we take close look at where our current trading prices and.
That's certainly a big factor in evaluating the level of repurchases you can see this last quarter were trading up in the 90% to 95% of NAV territory. We've stated in the past that we got that level, we'd certainly look to curtail the buybacks and that sort of what you saw this past quarter will continue to evaluate.
Where the stock is trading.
As well as looking importantly at our overall float that's something we keep a close eye on and we want to be mindful of when we talk to investors some of them say, hey that those buybacks, yes, depending on level of accretion, but we also want to make sure. We have got good floating that stock.
So.
Historically, we've purchased over $150 million, we've been very supportive over the years I think based on our current level of trading we're certainly going to look to modify that mitigate that maybe a little bit smaller just based on the current trading levels.
As of the dividend.
We have noted we are focused on retaining.
Some of that NII.
And that's what we've done historically when you look at the our level of returns we feel really good at that 44 level in terms of delivering really solid returns on both NAV and on the current share price.
As we I'll say stockpile some of that NII, we're going to look at do we potentially it wouldn't be it wouldn't potentially be this year, perhaps next year, we may be required to pay a special dividend just based on the 90% pay.
Payout requirement. So that's something we're going to take a look at but otherwise I think we'll continue to retain that NII payout that 44 based on what we see is it.
Feeling pretty good about assuming benchmark rates stay where they are earning $50 to 52 per share.
Okay got you and then just one more can you walk us through the Bayside restructuring.
Sure that was a.
Transaction, it's a typical restructuring where the lenders.
A.
Right off of that.
And in exchange for majority equity in that company, so that youll see that there is.
There's multiple levels of debt now on the Soi as well as equity that we're marketing at zero.
There are two different tranches, there's a hope to the Holdco loan.
And as well as two different loans at the operating company level.
You'll see the multiple line items in that capital structure.
Great. Thank you.
Thank you.
For our next question please.
It comes from the line of Bryce Rowe with B Riley.
Thanks, a bunch good morning.
Wanted to maybe ask about portfolio activity originations and repayments here for the for the quarter.
I'm, just kind of curious how the pipeline looks and the repayment in sales activity exceeding originations.
Just curious how kind of intentional that was or that was that kind of more normal course.
In terms of in terms of the repayment activity.
Yeah.
Hey, guys good morning.
Characterize it just is not what was normal course.
So hey, it's fair and we call it nice to meet you so I would say.
Look we view the world.
There are some strategic decisions that we make.
At any given moment, we have a portfolio today I've mentioned in the in my opening remarks, if you think of sort of the three big places that we're focused we're focused on farming. The portfolio. So that we can get more out of it we're focused on.
One carlyle sourcing opportunities and we are being exceptionally.
Picky when it comes to just regular way sponsor finance now.
Now.
If our goal today Youll see I think year to date, our average spread we have originated transactions on is somewhere between <unk> 76 to 80.
Significant premium to last year.
Our goal is focused on improving the portfolio at every moment. So when we're thinking about what's being repaid over the next year, we have a.
Early.
Detailed model everything.
Upper maturity, where at all times thinking about replacing what's being repaid which on average has a five handle on it.
Sort of $6 52 and above spreads.
With fairly tight docs so.
Bottom line is we're not.
I know that.
A constant conversation on private credit land where folk.
On quality and portfolio construction.
<unk>.
To be fair in the previous question also touched on this we're fine holding a little bit more cash to make sure that we have a.
Very steady battle tested.
Cap structure and balance sheet here, and we're improving our portfolio. So yes, yes.
As things as things come off we don't have we.
We're focused on quality in our products.
Okay, and kind of reading into that.
Is there an expectation that maybe we see balance sheet leverage compress a little bit more versus <unk>.
<unk> leverage over the I don't know.
Next six months or so.
So.
It's great question, so when we think about.
And we can obviously talk about this offline as well in further detail but.
This is sort of a.
Three D chess match. So we're playing so we're thinking about Tom just mentioned that we bought over the course of last year and a half two years almost.
A little over 23% of our float back for 65 and total accretion.
Held back on NII and been able to take leverage down a little bit. So that we can actually have more dry powder, but also taking less risk in this market. We've tried to focus on.
Higher quality names.
And while repaying a while repaying some of the older vintages so to the point we are.
Quite frankly thinking about all of it and trying to create.
Create the best portfolio, we can but.
The answer is we are all of these things are under control.
Got it I appreciate that Eric and then maybe last one for me just thinking about capital structure seeing debt capital markets start to open back up here.
Really over the last last month.
<unk> got maturities at the end of next year, so a decent decent ways away.
But just kind of curious how youre thinking about capital structure, maybe any commentary around the preferreds too.
It would be helpful. Here in our office you must be sitting here in our office in our planning sessions.
Thank you Bob.
Okay.
Tom do you want do you want to start and I'll bring up the road, yes sure.
We're in constant dialogue with our banking relationships and Pekka was we had a meeting.
Less than two months ago. It was I hate the public market is shut well guess what.
It's opened very quickly so.
We're certainly considering various options we're mindful of those maturities at the end of 2020 for always looking at what's the best optimizing the capital structure diversified capital structure and looking at the press looking at potential public bond offering and getting the right mix in the capital structure is something that we have constant dialogue in and.
We will continue to assess and do what's best for our shareholders and in terms of it now.
Tom said, we're kind of focused holistically and everything I've mentioned and Tom mentioned kind of all works together and perhaps.
We are in constant contact.
Contact in dialogue with Carlisle proper as well as the board thinking about.
How to think about that as a long term part of our cap structure right. Now if you look at the comparable preferred trades in the market.
Frankly, our processes at 7%, which was about 200 basis points cheap to what comparable trades are today so actually.
A pretty good piece of paper haven't stands, but we arent along with the unsecured.
Thinking about long term shareholder value so stay tuned.
Got it okay I appreciate the comments guys.
Thank you.
Thank you one moment, our next question and as a reminder, if you do have a question simply press star one one.
Our next question is from Aaron <unk> with Citi.
Thank you maybe you could talk a little bit about your investment pipeline how that's.
Flowing in the competitive environment that youre seeing from from other bdcs or non bank competitors.
So I'm going to take your questions because I liked your name.
Eric.
So.
I'd say, if you think about.
I mentioned it.
Two questions ago, if you think about the three.
Sure.
Three sleeves of where we source capital.
Yes, the sponsor market sponsor market is quite busy.
Obviously, the BSL market is still choppy high yield markets coming back a little bit, but it is quite busy.
Our average deal.
Our portfolio is kind of low $70 million of EBITDA.
The the large market.
Transactions that we've seen are priced a lot more competitively today.
And we so.
So were kind of shying away from those to be able to get better terms and better rate down at our core mid market.
But we are being quite selective in terms of spot.
One carlyle sort of.
Sourcing channel.
Some transactions that we've announced over the last week or two those were.
Those transactions are less sponsor driven and more one carlyle source. So source from other teams within Carlyle that put that.
Sourcing channel is fairly robust today.
Trying to partner with Carlisle as a whole in the us.
Carlyle direct.
Direct lending, but our other partners showing up to be a solution provider. So I would expect that to be.
Much bigger contributor and then the last piece, which I view as the highest ROIC.
Segment today.
Which again after this call we're happy to get on the phone to work through things.
Preliminary farm in the portfolio there is a pretty significant portion of this portfolio.
<unk>.
We're going after that half.
Yields that can be improved docks. It can be improved amendment fees that can be taken to cash that can be contributed by sponsors in order to amend or extend the transactions and do what's right for the company.
Solution provider sponsors, but also actually approved our current portfolio with credits were already very familiar with.
Any changes to the current portfolio that those improvements dropped straight to the bottom line. So if you were inside of our offices August two or three weeks ago. When we did our Q2 review you would've kind of heard that message, probably ad-nauseum, which is let's focus on our portfolio and trying to you're trying to be.
<unk> providers, but also grab value.
And extract value for our current shareholders because quite frankly, that's the best risk we have.
Loans that were already quite familiar with and improving those terms. So I'd say those are the three.
Three general buckets.
Is that helpful.
Yes, Thank you and then.
On the American physician right down.
That seemed to kind of move relatively quickly.
I guess speaking to your part of the year to Mark down last quarter.
What happened there with whats more specific to that investment versus some of the other healthcare investments.
Yeah Erinn. This one remains inactive insensitive situations. So we can't get into too many of the deal specifics of that transaction, but I think that some of the broader items, we've highlighted across the industry are inherent here.
Discuss healthcare services the headwinds in the industry labor shortages wage inflation regulatory changes specifically the no surprises Act.
In summary costs have gone up dramatically and the top line has been squeezed. When you were getting last two years ago, youre getting $150 million per.
And counter and now it's 130, while you are faced with.
<unk> inflation.
Results in the.
Pretty sharp.
Depression of your earnings and it does really industry wide, we've seen it with other large cap healthcare firms for example, envision health.
Similar space.
What I will notice we've continued we've actually compared to our peers. We value. This one relatively conservative last quarter, we were 20 points lower than the other.
Other BDC, marking this one.
The good and bad Alice.
The zero valuation right now full non accrual so the current NAV and the <unk>, that's fully reflective of any negatives of this particular position.
And look through.
I think everyone's asked great questions today, because they are all kind of actually related Erin so.
For us we have a super that's a technical term super diversified portfolio, our average position is less than.
Is less than 1%.
The goal of.
Keeping leverage low.
Maintaining kind of reserving NII just in the event that there is any bumps in the road.
Managing portfolio risk and trying to improve each quarter that allows us to quite frankly, mark a little bit more conservatively so for us.
We marked conservatively last quarter.
We are we decided that it was most prudent to mark dispositions, even more considerably here.
The goal of direct lending portfolio is to have a diversified portfolio of it also has a predictable and sustainable cash flow. So for us it isn't really about the position is about kind of the overall portfolio management. So we are trying to be very conservative here, but.
<unk>.
Quite frankly took a much larger portfolio view as to how conservatively in the market.
Thanks I appreciate it.
Okay.
Thank you and I see no further questions in queue ill pass it back to Andy Cohen for closing comments.
Everyone have a great morning. Thank you we look forward to speaking to you. Some of you next quarter. We look forward to speaking to some of you over the next few days to go deeper on the story and thank you all for your support have a great rest of your summer.
Thank you all for your participation in today's conference. This does concludes the program and you may now disconnect.
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