Q3 2024 Blue Owl Capital Corp III Earnings Call
Good morning, everyone and welcome to Blue <unk> Capital Corporation Three's third quarter 2024 earnings call. As a reminder, this call is being recorded.
Operator: Good morning, everyone, and welcome to Blue Owl Capital Corporation III's third quarter 2024 earnings call. As a reminder, this call is being recorded.
Mike Mosticchio: At this time, I'd like to turn the call over to Mike Mosticchio, head of BDC and Rescue Relations. Thank you, operator, and welcome to the Blue Owl Capital Corporation III's third quarter earnings conference call. Yesterday, Blue Owl Capital Corporation III issued its earnings release and posted a presentation for the third quarter ended September 30th, 2024. These should be reviewed in conjunction with the company's 10Q filed yesterday with the SEC. All materials referenced on today's call, including the earnings press release, earnings presentation, and 10Q, are available on the investor section of the company's website at blueowlcapitalcorporation3.com.
Speaker Change: This time I'd like to turn the call over to Mike for CTO of BDC Investor Relations.
Mike: Thank you operator, and welcome to the <unk> Capital Corporation Three's third quarter earnings Conference call yesterday, with all capital Corporation three issued its earnings release and posted a presentation for the third quarter ended September 30th 2024.
Should be reviewed in conjunction with the company's 10-Q filed yesterday with the SEC all materials referenced on todays call, including the earnings press release earnings presentation, and 10-Q are available on the investors section of the company's website at dwell Capital Corporation three dot com.
Mike Mosticchio: Joining us on the call today are Craig Packer, Chief Executive Officer, Logan Nicholson, President, and Jonathan Lamm, Chief Financial Officer. I'd like to remind listeners that remarks made during today's call may contain forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside of the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in OBDE's filings with the SEC. The company assumes no obligation to update any forward-looking statements. Certain information discussed in this call and in the company's earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified.
Mike: Joining us on the call today are Craig Packer, Chief Executive Officer, Logan Nicholson, President and Jonathan Lamb, Chief Financial Officer.
Mike: I'd like to remind listeners that remarks made during today's call may contain forward looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside of the company's control actual.
Mike: Actual results may differ materially from those in forward looking statements as a result of a number of factors, including those described in Ob D E filings with the S. E T. The company assumes no obligation to update any forward looking statements.
Certain information discussed in this call and in the company's earnings materials, including information related to portfolio companies was derived from third party sources and has not been independently verified the company makes no such representations and warranties with respect to this information with that I'll turn the call over to Craig Packer, Chief Executive Officer of <unk>.
Mike Mosticchio: The company makes no such representations or warranties with respect to this information.
Craig Packer: With that, I'll turn the call over to Craig Packer, Chief Executive Officer of OBE. Thank you, Mike. Good morning, everyone, and thank you for joining us today. I'll start by highlighting our third quarter 2024 results.
Mike: Yeah.
Craig Packer: Thank you Mike Good morning, everyone and thank you for joining us today.
Craig Packer: I'll start by highlighting our third quarter 2024 results before giving an update on our proposed merger with Ob D C.
Craig Packer: before giving an update on our proposed merger with LBDC. and Logan will provide additional color on our portfolio performance for the quarter.
Craig Packer: And Logan will provide additional color on our portfolio performance for the quarter.
Craig Packer: After Jonathan provides more detail on our financial results, I will close with some perspective on the current market environment. To start, we are pleased to report strong third quarter results driven by excellent portfolio performance and robust investment activity. we achieved a double-digit ROE reflecting the quality of our investment. Our net asset value per share was $15.49 at quarter end, just off from all-time highs and up 10% since our inception in 2020. The fundamental performance of the portfolio remains strong, and our non-accrual rate remains well below the industry average. Net investment income for the quarter was $0.41 per share, in line with the prior quarter, and well in excess of our third quarter dividend of $0.35 per share.
After Jonathan provides more detail on our financial results I will close with some perspective on the current market environment.
Speaker Change: To start we are pleased to report strong third quarter results driven by excellent portfolio performance and robust investment activity.
Speaker Change: We achieved a double digit Roe, reflecting the quality of our investments.
Mike: Our net asset value per share was $15 49 at quarter end.
Mike: Off from all time highs and up 10% since our inception in 2020.
Mike: The fundamental performance of the portfolio remains strong and our non accrual rate remains well below the industry average.
Mike: Net investment income for the quarter was 41 cents per share in line with the prior quarter and well in excess of our third quarter dividend of 35 per share.
Craig Packer: Results for the quarter reflect the benefits of our consistent credit performance, the higher rate environment, and maintenance of leverage in the higher end of our target range.
Mike: Results for the quarter reflect the benefits of our consistent credit performance, the higher rate environment and maintenance of leverage and the higher end of our target range.
Craig Packer: We continue to be very pleased with OBD's performance as a public company since our direct listing in January and we're excited about the proposed merger with OBDC, which we believe will further generate attractive risk-adjusted returns and create meaningful benefits to shareholders. Now I'd like to give an update on the merger process, which we announced last quarter. As we discussed on our last earnings call, we expect this merger will streamline our direct lending platform, enhance our scale with a high-quality, diversified portfolio with significant investment overlap. improve our trading profile as shares of OBDC trade at a higher multiple and offer deeper liquidity.
Mike: We continue to be very pleased with obedience performance as a public company since our direct listing in January and we're excited about the proposed merger with Ob D C, which we believe will further generate attractive risk adjusted returns and create meaningful benefits to shareholders.
Mike: Now I'd like to give an update on the merger process, which we announced last quarter.
Mike: As we discussed on our last earnings call. We expect this merger will streamline our direct lending platform.
Mike: Enhance our scale with a high quality diversified portfolio with significant investment overlap.
Mike: Improve our trading profile as shares of Ob DC trade at a higher multiple and offered deeper liquidity.
Mike: Increase our access to lower cost sources of debt and create operational efficiencies and cost savings.
Craig Packer: increase our access to lower cost sources of debt, and create operational efficiencies and cost savings. We believe the transaction will be immediately accretive to net investment income for OBDE shareholders, driven by OBDC's higher portfolio yield and lower cost of debt and operational savings. Over the long term, NII should benefit further from incremental yield as we optimize the portfolio mix and generate cost savings from capital structure improvements. The joint proxy statement of OBDC and OBDE was declared effective by the SEC in October and the proxy solicitation process has begun. The shareholder meetings for OBDE and OBDC are scheduled for January 8th.
Mike: We believe the transaction will be immediately accretive to net investment income for Ob the shareholders driven by Ob Dcs higher portfolio yield a lower cost of debt and operational savings.
Mike: Over the long term NII should benefit further from incremental yield as we optimize the portfolio mix and generate cost savings from capital structure improvements.
Mike: The joint proxy statement of Ob DC Adobe D was declared effective by the SEC in October and the proxy solicitation process has begun.
Mike: The shareholder meetings for all BD and Ob D. C are scheduled for January.
Craig Packer: and we encourage all shareholders to review the proxy materials and vote your shares accordingly. The Board of Directors of OBDE, myself included, has unanimously recommended shareholders vote in favor of their proposals on the ballot. Our current expectation is that the transaction will close in January 2025.
Mike: We encourage all shareholders to review the proxy materials and vote your shares accordingly.
Mike: The board of directors of Ob D myself included.
Mike: Has unanimously recommended shareholders vote in favor of the proposals on the ballot.
Mike: Our current expectation is that the transaction will close in January 2025.
Mike: Now I will turn it to Logan to provide more detail on our portfolio activity in the quarter.
Logan Nicholson: Now I will turn it to Logan to provide more detail on our portfolio activity in the quarter. Thanks, Craig. We continue to find attractive opportunities to deploy capital in the third quarter, despite normalization from the historic highs we saw in the prior quarter. During the third quarter, we deployed approximately $575 million in new investment commitment. We have long believed our scale and incumbency are our largest competitive advantage. Over 98% of this quarter's origination activity consisted of first-line investments as we continue to believe that first lien and unit tranche loans provide the most attractive relative value in the market today with a weighted average total yield of 11.1% of the portfolio at fair value.
Logan Nicholson: Thanks, Craig.
Logan Nicholson: We continue to find attractive opportunities to deploy capital in the third quarter. Despite normalization from historic highs we saw in the prior quarter.
Mike: During the third quarter, we deployed approximately $575 million in new investment commitments, we have long believed our scale and incumbency are our largest competitive advantages.
Mike: Over 98% of this quarter's origination activity consisted of first lien investments as we continue to believe that first lien and unitranche loans provide the most attractive relative value in the market today with a weighted average total yield of 11, 1% of the portfolio at fair value.
Logan Nicholson: The significant scale of Blue Owl's credit platform is a competitive advantage as we have a large number of incumbent lending positions. With our $128 billion of assets under management and credit, we have a deep pool of existing borrowers and sponsor relationships we can draw upon for deal flow, even in a period of modest new buyout activity. Across our platform, we are lead or co-lead lender on roughly 90% of our deals, administrative agent on approximately 65% of our investments, and have the ability to commit over $1 billion to any single investment. This significant presence typically makes us the first call when a new financing for one of our portfolio companies is in the works, driving significant deal flow.
Mike: The significant scale of Blue <unk> credit platform as a competitive advantage as we have a large number of incumbent lending positions.
Mike: With our $128 billion of assets under management and credit we have a deep pool of existing borrowers and sponsor relationships. We can draw upon for deal flow even in a period of modest new buyout activity.
Mike: Across our platform, we are lead or co lead lender on roughly 90% of our deals administrative agent on approximately 65% of our investments and have the ability to commit over $1 billion to any single investment.
Mike: This significant presence typically makes us the first call when a new financing for one of our portfolio companies is in the works driving significant deal flow.
Logan Nicholson: To that end, roughly two-thirds of our fundings this quarter were deployed into existing borrowers in refinancings or add-on acquisitions. We believe this reflects both the confidence we have in our portfolio companies and the trust that private equity sponsors place in us as a preferred lending partner. We invested in 21 new companies, bringing the average investment size across the portfolio to around 50 basis points. We note that the total number of companies in the portfolio decreased to 185 in the third quarter, reflecting sales of the broadly syndicated loans as we capitalize on the strength of the public market.
Mike: To that end roughly two thirds of our fundings this quarter were deployed into existing borrowers and refinancings or add on acquisitions.
Mike: We believe this reflects both the confidence we have in our portfolio companies and the trust that private equity sponsors place in us as a preferred lending partner.
Mike: We invested in 21, new companies, bringing the average investment size across the portfolio to around 50 basis points.
Mike: We'd note that the total number of companies in the portfolio decreased to 185 in the third quarter, reflecting sales of the broadly syndicated loans as we capitalize on the strength of the public markets.
Mike: We believe our long standing and disciplined approach to investing and upper middle market businesses with significant operating histories and resilient sectors has resulted in an attractive highly diversified portfolio.
Logan Nicholson: We believe our longstanding and disciplined approach to investing in upper middle market businesses with significant operating histories in resilient sectors has resulted in an attractive, highly diversified portfolio. Our average investment represents less than one-half of 1% of the portfolio, minimizing our exposure to any single company. The median EBITDA of our portfolio is $141 million. Weighted average EBITDA is $217 million, and average LTV is 39%. We believe this scale can provide strategic benefits and operational stability, as many of our borrowers are market leaders within their sector. Within our portfolio, the sustained earnings growth of our borrowers continues to be the most significant driver of credit health.
Mike: Our average investment represents less than one half of 1% of the portfolio minimizing our exposure to any single company. The median EBITDA of our portfolio is $141 million weighted.
Mike: Weighted average EBITDA is $217 million and average LTV is 39%.
Mike: We believe this scale can provide strategic benefits and operational stability as many of our borrowers are market leaders within their sectors.
Mike: Within our portfolio the sustained earnings growth of our borrowers continues to be the most significant driver of credit helps in.
Logan Nicholson: In line with our commentary in recent quarters, on average, our borrowers are growing revenues and EBITDA in the mid-single digits year-over-year. We note that earnings growth of our borrowers ticked up modestly quarter over quarter as well. Our portfolio companies have the advantages of size, scale, and sponsor support, which we believe will continue to serve us well. We remain confident in the resilience of our portfolio across varying economic environments and a changing rate landscape. At quarter end, our nonaccrual rate in our debt portfolio decreased to 16 basis points of fair value, which reflects the removal of one name from nonaccrual and no new addition.
Mike: In line with our commentary in recent quarters on average our borrowers are growing revenues and EBITDA in the mid single digits year over year.
Mike: We'd note that earnings growth of our borrowers ticked up modestly quarter over quarter as well.
Mike: Our portfolio of companies have the advantages of size scale and sponsor support which we believe will continue to serve us well.
Mike: We remain confident in the resilience of our portfolio across varying economic environments and the changing rate landscape.
Mike: At quarter end, our non accrual rate and our debt portfolio decreased to 16 basis points of fair value, which reflects the removal of one named from nonaccrual and no new additions.
Logan Nicholson: Our average interest coverage in the portfolio remains around 1.7 times. in line with last quarter's and consistent with the level we have been highlighting as the expected trough coverage in today's higher rate environment. We are beginning to see the easing effects of lower base rates on our portfolio companies as well. And finally, the subset of names on our watch list remains steady, quarter over quarter. We are not seeing any material pick up in amendment activity or other signs of stress. Our portfolio companies continue to be stable and resilient, giving us confidence in our ability to deliver strong credit performance and returns for our shareholders going forward.
Mike: Our average interest coverage and the portfolio remains around one seven times.
Mike: In line with last quarters.
Mike: And consistent with the level, we have been highlighting as the expected trough coverage in today's higher rate environment.
Mike: We are beginning to see the easing effects of lower base rates on our portfolio companies as well.
Mike: And finally, the subset of names on our watch list remains steady quarter over quarter, we are not seeing any material pickup in amendment activity or other signs of stress.
Mike: Our portfolio companies continue to be stable and resilient, giving us confidence in our ability to deliver strong credit performance and returns for our shareholders going forward.
Jonathan Lamm: And now I'll hand it to Jonathan for a more in-depth look at our financial performance. Thank you, Logan. Our third quarter financial results demonstrated the consistency of our earnings, despite the changing rate environment. OBDE ended the third quarter with total portfolio investments of $4.2 billion, outstanding debt of $2.5 billion. total net assets of $1.9 billion. At quarter end, net asset value per share was $15.49. reflecting the impact of credit-related markets. As Craig mentioned, we believe our NAV demonstrates the resilience of our portfolio as it remains near our historical high.
Speaker Change: And now I'll hand, it to Jonathan for a more in depth look at our financial performance.
Jonathan Lamb: Thank you Logan.
Jonathan Lamb: Our third quarter financial results demonstrated the consistency of our earnings despite the changing rate environment.
Mike: <unk> ended the third quarter with total portfolio investments of $4 2 billion outstanding debt of $2 5 billion.
Mike: And total net assets of $1 $9 billion.
Mike: At quarter end.
Mike: The value per share was $15 49.
Mike: Reflecting the impact of credit related markdowns on a select few investments.
Speaker Change: As Craig mentioned, we believe our NAV demonstrates the resilience of our portfolio as it remains near our historical highs.
Speaker Change: Turning to the income statement.
Jonathan Lamm: Turning to the Income State. We earned net investment income of $0.41 per share in the third in line with the prior quarter, reflecting the benefit of maintaining leverage towards the higher end of our target. Similar to prior quarters, we meaningfully over-earned our regular dividends. generating a six cent benefit to NAV per share. Our Board of Directors declared a base dividend of 35 cents per share. payable on or before January 15, 2025. to shareholders of record as of December 31st, 2024, which is consistent with the level we set at our listing in January. As a reminder, in conjunction with the list The board also previously declared five special dividends of six cents per share.
Speaker Change: We earned net investment income of 41 cents per share in the third quarter in line with the prior quarter, reflecting the benefit of maintaining leverage towards the higher end of our target range.
Speaker Change: Similar to prior quarters, we meaningfully over earned our regular dividend generating a 6% benefit to NAV per share.
Speaker Change: Our board of directors declared a base dividend of 35 per share payable on or before January 15th 2025 to shareholders of record as of December 31, 2024, which is consistent with the level, we set at our listing in January.
Speaker Change: As a reminder, in conjunction with the listing the board also previously declared five special dividends of six cents per share.
Jonathan Lamm: second of which was paid in. In the near term, OBDE shareholders will receive the third special dividend. $0.06 per share, payable on December 13th, 2024. to shareholders of record as of November 29th, 2020.
Speaker Change: The second of which was paid in September.
Mike: In the near term <unk> shareholders will receive the third special dividend of <unk> <unk> per share payable on December 13th 2024 to.
Mike: Shareholders of record as of November 29, 2024.
Mike: Additionally, assuming our proposed merger with <unk> closes in early January and with the approval of the board on or after the closing date.
Jonathan Lamm: Additionally, assuming our proposed merger with OBDC closes in early January, and with approval of the board on or after the closing. Shareholders can also expect to receive the last two special dividends, two special dividends. totaling $0.12 per share. quarterly dividend of $0.35 per share, I just mentioned, plus a payment of undistributed spillover. left after the payment of the previously declared which would total an estimated $0.29 per share as of September 30. Of course, if the merger does not close on this timeline or at all, shareholders will receive the last two previously declared special dividends and the quarterly dividend by the previously announced.
Mike: Shareholders can also expect to receive the two special dividend two special dividends totaling 12 cents per share.
Mike: A quarterly dividend of 35 per share I just mentioned.
Mike: A payment of undistributed spillover income left after the payment of the previously declared dividends, which would total an estimated 29 cents per share as of September 30th.
Mike: Of course, if the merger just not close on this timeline or at all shareholders will receive the last two previously declared special dividends and the quarterly dividend by the previously announced payment fees.
Jonathan Lamm: All told, we remain very pleased with our results this quarter and look forward to closing on the merger with OBDC early in the first quarter.
Mike: All told we remain very pleased with our results this quarter.
Mike: Look forward to closing on the merger with <unk> early in the first quarter.
Craig Packer: With that, I'd like to turn the call back to Craig for some closing. With inflation easing, the interest rate outlook has shifted considerably since last quarter, with the markets anticipating additional rate cuts over the remainder of the year. While we are hopeful that green shoots will form, M&A activity remains muted. Despite this, we continue to find attractive risk-adjusted opportunities to deploy capital to maintain a fully-invested, high-quality portfolio. During times of reduced deal activity, we are able to maintain strong deal flow and selectivity by leveraging our differentiated scale and centralized origination platform that bring together an experienced underwriting team with deep sector-specific expertise.
Speaker Change: With that I'd like to turn the call back to Craig for some closing remarks.
Craig Packer: Thank you Jonathan.
Craig Packer: With inflation easing the interest rate outlook has shifted considerably since last quarter with the markets anticipating additional rate cuts over the remainder of the year.
Speaker Change: While we are hopeful that green shoots will form M&A activity remains muted.
Speaker Change: Despite this we continue to find attractive risk adjusted opportunities to deploy capital to maintain a fully invested high quality portfolio.
Mike: During times of reduced deal activity, we're able to maintain strong deal flow and selectivity by leveraging our differentiated scale and centralized origination platform that bring together an experienced underwriting team with deep sector specific expertise.
Craig Packer: We always maintain an emphasis on structural protection in our documentation and capital structure. Our scale provides us a distinct advantage to source investments in the upper middle market. Our ability to generate significant deal flow has allowed us to remain highly selective, even as we deployed over $9.5 billion across the platform this quarter. All this has allowed us to deliver consistent returns to our shareholders. We believe that the proposed merger will deliver a more scale and diversified portfolio to help navigate the dynamic operating environment ahead, while also allowing shareholders to benefit from increased efficiencies and a lower cost of financing over time.
Mike: We always maintain an emphasis on structural protection in our documentation and capital structures.
Mike: Our scale provides us a distinct advantage to source investments in the upper middle market.
Mike: Our ability to generate significant deal flow has allowed us to remain highly selective even as we've deployed over $9 $5 billion across the platform this quarter.
Mike: All of this has allowed us to deliver consistent returns to our shareholders.
Mike: We believe that the proposed merger will deliver a more scale and diversified portfolio to help navigate the dynamic operating environment ahead, while also allowing shareholders to benefit from increased efficiencies and a lower cost of financing over time.
Mike: Upon merger closed in the first quarter of next year as the second largest publicly public BDC, we expect that the combined company will continue to be a market leader.
Craig Packer: Upon merger close in the first quarter of next year, as the second largest public BDC, we expect that the combined company will continue to be a market leader.
Mike: While we wait for the merger to close I wanted to take a moment to reflect on <unk> time as a public company since the direct listing in January.
Craig Packer: While we wait for the merger to close, I wanted to take a moment to reflect on OBD's time as a public company since the direct listing in January. We've been extremely pleased with OBD's fundamentals and trading performance following a series of lock-up releases in conjunction with a list... As Jonathan laid out earlier, OBD shareholders are set to receive significant distributions, including a base dividend, a special dividend, and spillover income. This all presents a particularly compelling entry point for investors. Overall, we are confident in how we are positioned today. Our portfolio is healthy, credit quality remains strong, and we're confident in our ability to continue to deliver attractive returns to our shareholders.
Mike: We've been extremely pleased with <unk> fundamentals and trading performance. Following a series of lock up releases in conjunction with the listing.
Mike: Jonathan laid out earlier <unk> shareholders are set to receive significant distributions, including a base dividend special dividend and spillover income.
Mike: This all percents, a particularly compelling entry point for investors.
Mike: Overall, we're confident in how we are positioned today.
Mike: Our portfolio is healthy credit quality remains strong and we're confident in our ability to continue to deliver attractive returns to our shareholders.
Craig Packer: On behalf of the entire Blue Owl team, thank you in advance for your support and for joining us on today's call.
Speaker Change: On behalf of the entire Boral team. Thank you in advance for your support and for joining us on today's call.
Speaker Change: And ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Operator: And ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Mike: [music].
Mike: Yes.