Q3 2024 Carlyle Secured Lending Inc Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to Carlisle Secure to Lending Inc. 3rd quarter, 2024 earnings conference call. At this time, we'll participate in a list and only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again.
Speaker Change: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today. Nishal Meta Head of Shareholder Relations. Please go ahead.
Nishal Meta: Good morning and welcome to CarLass Secured Lending Conference call to discuss the earnings results for 3rd quarter of 2024.
Speaker Change: I'm joined by Justin Plouffe, our chief executive officer and Tom Hennigan, our chief and anantel officer. By the time we filed our form 102, an issued a press release with the presentation of our results, which are available on the Investor Relations section of our website.
Speaker Change: Following our remarks today, we will hold a question and answer session for analysts and institutional investors.
Speaker Change: This is Calls Being Webcast and a replay will be available on our website.
Speaker Change: and Andy Relyons, Shinoppy Place on the.
Speaker Change: Today's conference call may include forward-looking statements reflecting our views with respect to, among other things, the timing or likelihood of the closing of the proposed merger.
Speaker Change: The expected synergies associated with the proposed merger.
Speaker Change: The ability to realize the anticipated benefits of the proposed merger, and our future operating results and financial performance.
Speaker Change: These statements are based on current management expectations and involve inherent risk and uncertainties.
Speaker Change: including those identified in the risk factors section of our 10-K and our 10-Qs.
Speaker Change: These risks and uncertainties could cause actual results to differ materially from those indicated.
Speaker Change: CGVD assumes no obligation to update any forward-looking statements at any time.
Speaker Change: During this conference call the company may discuss certain non-GAAP measures as defined by SEC Regulation G.
Speaker Change: Such as Adjusted Non-Investment Income or Adjusted NII.
Speaker Change: The company's manager believes adjusted non-investment income, adjusted non-investment income per share
Speaker Change: Adjusted Net Income and Adjusted Net Income Per Share are useful to investors as an additional tool to evaluate ongoing results and trends for the company without giving effect to one-time or non-recurring events, and are used by management to evaluate the economic earnings of the company.
Speaker Change: A reconciliation of GAAP net investment income per share, the most directly comparable GAAP financial measure to adjusted NII, can be found in the accompanying slide presentation for this call.
Speaker Change: In addition, reconciliation of these measures may also be found in our earnings release filed last night with the SEC on Form 8K.
Speaker Change: With that, I'll turn the call over to Justin, CGPD's Chief Executive Officer.
Speaker Change: Thanks, Nishal. Good morning, everyone, and thank you all for joining. I'm Justin Plouffe, the CEO of the Carlisle BDCs and Deputy CIO for Global Credit at Carlisle.
Speaker Change: On today's call, I'll give an overview of our third quarter 2024 results and discuss the quarter's investment activity and portfolio positioning. I'll then hand the call over to our CFO, Tom Hennigan.
Speaker Change: In the third quarter, our financial performance continued to benefit from stable credit performance as well as a higher base rate environment.
Speaker Change: Our adjusted NII represents an annualized yield of nearly 12% based on our 930 NAF. Our Board of Directors declared a total 4 quarter dividend of 45 cents per share consisting of our base dividend of 40 cents plus a 5 cent supplemental dividend.
Speaker Change: Our net asset value as of September 30th was relatively flat at $16.85 per share, down modestly from the prior quarter.
Speaker Change: Deal activity has continued to strengthen in the second half of 2024. While repricing activity continued, new issue spreads stabilized in the third quarter. This is despite the persistence of increased competition and cross-market refinancings between the broadly syndicated and private credit markets.
Speaker Change: Our originations in the third quarter were up significantly year over year, and our pipeline continues to grow. We expect volumes to remain strong in 2025 as the M&A pipeline expands. We continue to benefit from the One Carlisle platform, which differentiates us in the core middle market.
Speaker Change: While increasing origination activity is a positive for our strategy, we remain focused on overall credit performance and maintaining a highly diversified portfolio.
Speaker Change: As of September 30th, our portfolio is comprised of 175 investments in 128 companies across more than 25 industries.
Speaker Change: The average exposure in any single portfolio company is less than 1%, and 94% of our investments are in senior secured loans. The median EBITDA across our core portfolio at quarter end was $85 million.
Speaker Change: Thank you for watching.
Speaker Change: As always, discipline and consistency drove performance in the third quarter, and we expect these tenets to drive performance in future quarters.
Speaker Change: I'll now hand the call over to our CFO, Tom Hennigan.
Tom Hennigan: Thank you, Justin. Today, I'll begin with an overview of our third quarter financial results. Then I'll discuss portfolio performance before concluding with detail on our balance sheet positioning.
Speaker Change: CGBD had another strong quarter on the earnings front.
Speaker Change: Total investment income for the third quarter was $56 million.
Speaker Change: Modestly lower compared to prior quarter, due primarily to a lower average portfolio balance and lower rated average yields.
Speaker Change: Total expenses of $31 million were flat versus prior quarter as one-time expenses associated with the CLO reset offset reduced total interest expense for both a lower average outstanding debt balance and lower rates.
Speaker Change: Our Board of Directors declared the dividends for the fourth quarter of 2024 at a total level of $0.45 per share. That's comprised of the $0.40 base dividend plus a $0.05 supplemental dividend, which is payable to stockholders of record as of the close of business on December 31st.
Speaker Change: This total dividend reflects our variable supplemental dividend policy of paying out at least 50% of excess earnings, which allows us to be flexible as the portfolio evolves and base rates fluctuate.
Speaker Change: Our base dividend coverage of 118% for the quarter remains in line with the BDC Peer Set Average and we've consistently out-earned our dividend, resulting in $1.40 per share of cumulative spillover.
Speaker Change: At the same time, the total dividend level also represents an attractive yield of nearly 11% based on the recent share price.
Speaker Change: And looking ahead, we remain confident in our ability to meet and exceed our $0.40 base dividend. That said, the combination of expected lower base rates, tighter new issue spreads, and portfolio repricing activity, we do expect to see some contraction in earnings in coming quarters relative to the historical highs we've achieved over the last two years.
Speaker Change: On valuations, our total aggregate realized and unrealized net loss was about $5 million for the quarter.
Speaker Change: The largest contributor was a decline in value at one of the positions in our MMCFJV.
Speaker Change: However, we successfully exited that position last month at a price materially higher than our 930 valuation.
Speaker Change: And of note, some of our legacy healthcare names continue to improve, highlighted by incremental markups on SPF and Bayside.
Speaker Change: In terms of credit performance, we continue to see overall stability and credit quality across the portfolio.
Speaker Change: And as previewed on last quarter's call, non-accruals decreased to only 0.6% of total investments at fair value as we exited our investment in emergency communications at a price in line with our $630 fair value.
Speaker Change: And we continue to work towards favorable solutions with the other two borrowers currently on non-accrual status.
Speaker Change: I'll finish by touching on our financing facilities and leverage. It's been a busy last few months as we continue to improve our positioning on the right side of our balance sheet.
Speaker Change: As mentioned on last quarter's call, in early July, we closed a reset of the 2015-01 CLO, extending the reinvestment period and maturity date by four years, and reducing the cost of debt by more than 20 basis points within that vehicle.
Speaker Change: In September, we successfully received investment grade ratings from both Moody's and Fitch.
Speaker Change: And then in October, we issued $300 million of unsecured notes with a 6.75% fixed rate, which we swapped to a floating interest rate of SOFR plus 323 beginning in August 2025.
Speaker Change: At quarter end, statutory leverage was about 1.05 times, and net financial leverage was about 0.9 times.
Speaker Change: With leverage at the low end of our target range of 0.9 to 1.25 times, we have capacity to deploy capital into attractive opportunities in an accelerating deal environment.
Speaker Change: With that, I'll turn the call back over to Justin.
Justin Plouffe: Thanks, Tom. As a final point, I'd like to report that the merger between CGBD and Carlisle Secured Lending 3 announced on our second quarter earnings call.
Speaker Change: remains on track to close by the end of the first quarter of 2025, subject to approval from CGPD stockholders and satisfaction or waiver of other customary closing conditions.
Speaker Change: We continue to have high conviction in the strategic benefits the transaction will provide to CGVD, including an increase in scale and liquidity, a reduction in costs from operational efficiencies, and a decrease to both earnings and NAV per share.
Speaker Change: As a reminder, Carlisle has agreed to exchange its existing convertible preferred shares for common stock at a price of NAV, rather than the existing dilutive conversion price of $8.92.
Speaker Change: which will occur shortly before close of the proposed merger.
Speaker Change: We believe that this exchange is shareholder-friendly and demonstrates Carlyle's support for the ongoing success of CGVD. We expect to distribute proxy materials related to the merger in the coming months and urge all stockholders to vote in the merger approval process upon receiving a formal notification.
Speaker Change: As we look toward year-end, market demand for private credit remains strong.
Speaker Change: We continue to focus on sourcing transactions with significant equity cushions, conservative leverage profiles, and attractive spreads relative to market levels.
Speaker Change: With attractive new originations, a stable portfolio, and low non-accruals, CGBD stockholders are benefiting from the continued execution of our strategy.
Speaker Change: As always, we remain committed to delivering a resilient, stable cash flow stream to our investors through consistent income and solid credit performance.
Speaker Change: I'd like to now hand the call over to the operator to take your questions. Thank you.
Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: want to request.
Speaker Change: As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 11 again.
Speaker Change: One moment for our first question.
Speaker Change: Unknown Executive, Thomas Hennigan
Speaker Change: Unknown Executive, Thomas Hennigan
Thomas Hennigan: Our first question comes in the line of Bryce Rowe from B Riley.
Speaker Change: Unknown Executive, Thomas Hennigan
Bryce Rowe: Thanks, good morning. I wanted to just maybe start on the outlook from a portfolio perspective.
Bryce Rowe: and just get a get a feel for what the what the pipeline kind of looks like right now and
Bryce Rowe: Any thoughts around balance sheet leverage at this point? I think you highlighted that you're at a relatively low point from a balance sheet leverage perspective.
Speaker Change: and the sister BDCs is, you know, to the best of my knowledge, carrying even lower leverage. So just wanted to get a feel for how that could ramp as the two BDCs possibly come together, especially in light of some of the commentary around M&A picking up.
Speaker Change: I think the pipeline I would characterize.
Speaker Change: as
Speaker Change: meaningful and increasing. We certainly expect M&A activity to continue to pick up.
Speaker Change: in Q4 and in the first quarter of next year. So, we're very, very focused on the deployment that we need to do prior to the merger. And I think that the market is, it's coming our way in that respect in terms of deal volume. Now, of course, there is downward pressure on spreads, but that's market-wide phenomenon. We're really focused on deploying into great credits. And that's really what we're going to try to do over the next six months. Specifically on the amount of leverage, Tom, do you want to comment on that, where we are? Absolutely, Bryce.
Tom Hennigan: Our target at merger close is 1.1 across the combined entities.
Tom Hennigan: Again, as of 930.9 at CGBD, but right right now our pipeline, Justin noted
Speaker Change: Very solid on the New Deal front.
Speaker Change: repayments looking a little bit lighter this quarter. At least that's our current crystal ball and expectation. So right now we're closer to 0.95 times and by quarter end we think we'll be north of one. Oh, at least that's based on our current
Speaker Change: Visible Pipeline right now. So we think we're well on our way to achieving that 1.1 rough target when we get to the merger confirmation in the first quarter.
Speaker Change: Okay and Tom just to be just to be clear you know the 0.95 and the 1.0 comment you just made that that is just CGBD specific or is that is that pro forma?
Tom Hennigan: the CGBD.
Tom Hennigan: Yeah, okay.
Speaker Change: And maybe just some commentary around the repayment volume. Certainly appreciate that.
Speaker Change: You know, the pipeline looks strong. And, you know, as you as you as you progress towards the end of the year, you know, deals are coming together from an origination perspective. Is that continuing? Are you continuing continuing to see pressure from a
Speaker Change: repayment perspective I think if I just kind of look at maybe the last seven seven quarters you've had you know kind of repayments that have outpaced origination so just trying to get a feel for how how that could change in the dynamic that's you know that that will will make that change
Speaker Change: Yeah, we do see that reversing this quarter, I think it's just higher overall volume on the New Deal side, and then difficult to time repayments, but at least as of right now in terms of known repayments in the book, it's lighter this quarter than it's been the last couple of quarters.
Speaker Change: Okay.
Speaker Change: And then, Justin, you made a comment kind of early in your prepared remarks about spreads stabilizing. I think we've heard a lot about.
Speaker Change: spread compression in the space and have heard a couple comments here recently that spreads feel like they're stabilizing. Maybe expand that comment for us a little bit if you don't mind.
Speaker Change: Sure. I mean, I would say that for our typical
Speaker Change: First Linear Unitron Steels, we did see significant reduction in kind of the 12 months ending in the in the summer at the end of Q2. Since then, stabilization in the, let's call it SOFR 500 to 550 area, that we seem to be sticking there a little bit. Now, you know, who knows what the what the future will bring. And I will say that
Speaker Change: as rates.
Speaker Change: go down, if they go down more towards the kind of 4% terminal value that the market is predicting, we may even see
Speaker Change: Spreads widen out a little bit of history is any indicator. Typically, when we see reductions in base rates, we do get a little bit of spread widening. So I think there's reason to believe based on the deal flow that we have, and based on the reduction in rates in September, and maybe tomorrow, that spreads may stick where they are and maybe even widen a little bit.
Speaker Change: Okay.
Speaker Change: That's helpful. Thank you, guys.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for our next question.
Thomas Hennigan: Unknown Executive, Thomas Hennigan
Speaker Change: Our next question comes from the line of Melissa Weddle from J.P. Morgan.
Speaker Change: Unknown Executive, Thomas Hennigan
Speaker Change: Unknown Executive, Thomas Hennigan
Melissa Weddle: Good morning. Thanks for taking my questions today. You've addressed a lot of them. I was hoping that you could touch on trends that you're seeing just in terms of fundamentals. And I apologize if I missed it earlier. But in terms of revenue growth and EBITDA, what are you seeing within the portfolio? And what are you seeing within the opportunity set to deploy new capital?
Thomas Hennigan: Unknown Executive, Thomas Hennigan
Thomas Hennigan: Unknown Executive, Thomas Hennigan
Thomas Hennigan: Yeah, I would say fundamentals are strong. Companies...
Thomas Hennigan: In our book, as a general matter, and they continue to grow revenue, they continue to grow EBITDA across the market, the level of distress is on the lower end. There are always credits that we're eyeing, of course, that have idiosyncratic issues. But across the book, I would say it's a relatively benign credit environment. Companies seem to have survived the significant rise in rates over the past couple years generically better than I think the market expected.
Thomas Hennigan: So from a credit perspective, we're relatively pleased with where the market is and the new opportunities we're seeing. We're seeing good companies. They're strong credits. We like the companies we're seeing. I'd characterize the market overall right now as pretty constructive.
Speaker Change: Okay, and just to maybe a finer point to it in terms of revenue growth versus EBITDA growth across your portfolio generally, are you seeing one growing faster than the other?
Speaker Change: and any general range that you could provide. Thank you.
Speaker Change: Yeah, Melissa, I think that when you go back two years, three years when inflation started to hit, definitely the top line was growing faster than the bottom line. We saw 12, 18 months ago, that reverse where finally margins were catching up and we saw margin expansion.
Speaker Change: So, you go back a couple of quarters, we had revenue and EBITDA growth in the low double digits, you know, 10-12%. We've seen that slow down a little bit, and probably just based on inflationary pressures going away. So, we're seeing those growth rates and margins stabilize in more than mid-single digits, so still healthy growth.
Speaker Change: just probably not, we'll call it the inflation driven higher overall growth rates we were seeing, let's say a number of quarters back.
Speaker Change: Thank you.
Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Thomas Hennigan: Unknown Executive, Thomas Hennigan
Speaker Change: At this time, I would now like to turn the conference back over to Justin Plouffe for closing remarks.
Thomas Hennigan: Unknown Executive, Thomas Hennigan
Justin Plouffe: Thank you everyone for joining us today. We really appreciate all your attention and we will speak with you next quarter. Thank you so much. That'll conclude the call.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: Please Stand By
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Unknown Executive, Thomas Hennigan
Speaker Change: Unknown Executive, Thomas Hennigan
Speaker Change: Justin Plouffe, Daniel Hahn, Unknown Executive, Thomas Hennigan, Unknown Executive, Daniel
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Speaker Change: How Does It Feel To Be an Independent Journalist?
Speaker Change: Unknown Executive, Thomas Hennigan, Unknown Executive, Thomas Hennigan, Unknown Executive, Unknown Executive, Thomas Hennigan, Unknown Executive, Thomas Hennigan, Unknown Executive,
Speaker Change: Thank you for watching!
Speaker Change: Justin Plouffe, Daniel Hahn, Unknown Executive, Thomas Hennigan, Unknown Executive, Daniel Hahn, Unknown Executive, Thomas Hennigan, Unknown Executive, Thomas Hennigan, Unknown
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Speaker Change: Justin Plouffe, Daniel Hahn, Unknown Executive, Thomas Hennigan, Unknown Executive, Daniel Hahn, Unknown Executive, Thomas Hennigan, Unknown Executive, Thomas Hennigan, Unknown
Speaker Change: Unknown Executive, Thomas Hennigan