Q4 2024 Carlyle Secured Lending Inc Earnings Call
Good day and thank you for standing by. Welcome to Carlisle Secured Lending Inc. fourth quarter 2024 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 a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.
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Please be advised that today's conference is being being recorded.
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.
The expected synergies associated with the proposed merger, the ability to realize the anticipated benefits of the proposed merger, and our future operating results and financial performance.
These statements are based on current management expectations and involve inherent risks and uncertainties.
including those identified in the risk factors sections of our 10-K.
These risks and uncertainties could cause actual results to differ materially from those indicated.
Thank you. Thank you.
CGBD assumes no obligation to update any forward-looking statements at any time.
During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G.
such as Adjusted Net Investment Income or Adjusted NII.
The company's management believes adjusted net investment income, adjusted net investment income per share.
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.
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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.
In addition, reconciliation of these measures may also be found in our earnings release filed last night with the SEC on Form 8K.
With that, I'll turn the call over to Justin, CGBD's Chief Executive Officer.
Thanks, Nishil. Good morning, everyone, and thank you all for joining. I'm Justin Plouffe, the CEO of the Carlyle BDCs and Deputy CIO for Carlyle Global Credit. On today's call, I'll give you an overview of our fourth quarter and full year 2024 results, including the quarter's investment activity and portfolio positioning.
Speaker Change: I will then hand the call over to our CFO, Tom Hennigan.
Speaker Change: In the fourth quarter, CGPD continued to benefit from stable credit performance in a higher base rate environment. During the quarter, we generated net investment income of $0.47 per share, which represents an annualized yield of over 11% based on our 1231 NAV.
Speaker Change: Our direct lending platform achieved record highs for deployment in both the fourth quarter and the full year of 2024.
Speaker Change: We continue to seek quality at the top of the capital structure with 94% of our 2024 originations in first lien investments and an average loan to value under 40%.
Speaker Change: Over the course of 2024, we made significant strides to deliver short and long-term value to investors.
Speaker Change: First, we propose a strategic affiliate merger with Carlisle Secured Lending 3, or CSL 3.
Speaker Change: We expect the merger to deliver increased scale and liquidity, eliminate the CGVD preferred stock dilution overhang, and reduce aggregate costs, all while seamlessly continuing our existing investment strategy.
Speaker Change: Next, we obtain investment grade ratings from both Fitch and Moody's, allowing us to issue our first ever institutional bond deal.
Speaker Change: Finally, we took steps in the first quarter of 2025 to optimize the long-term earnings power and capacity of our joint ventures, which Tom will discuss later in greater detail.
Speaker Change: As of December 31st, our portfolio was comprised of 189 investments in 135 companies across more than 25 industries.
Speaker Change: The average exposure in any single portfolio company is less than 1% of total assets, and 93% of our investments are in senior secured loans.
Speaker Change: Thank you, Justin. Today, I'll begin with an overview of our fourth quarter financial results.
Speaker Change: Then I'll discuss portfolio performance, before concluding with detail on our balance sheet positioning.
CGBD had another strong quarter on the earnings front.
Speaker Change: Total investment income for the fourth quarter was $56 million, in line with prior quarter, due primarily to higher average portfolio balance and increased dividends from the JVs, offset by lower weighted average yields.
Speaker Change: Total expenses of $31 million per flat versus prior quarter as a higher average outstanding debt balance offset lower interest rates.
Speaker Change: The result was net investment income for the fourth quarter of 24 million dollars or 47 cents per share.
Speaker Change: Flat compared to GAAP net investment income, and down two cents per share compared to adjusted net investment income in the prior quarter.
Speaker Change: Our Board of Directors declared the dividends for the first quarter of 2025 at a total level of 45 cents per share. That's comprised of the 40-cent base dividend plus a 5-cent supplemental dividend, which is payable to stockholders of record as of the close of business on March 24th.
Speaker Change: Our base dividend coverage of 118% for the quarter remains in line with the BDC peer-set average.
Speaker Change: On valuations, our total aggregate realized and unrealized net loss was about $0.004 million for the quarter.
Speaker Change: The largest contributor was a markdown on our investment in Ambridge, partially upset by markups in the value of the MMCF1JV and our equity position in SPF, formerly known as Durham Growth.
Speaker Change: Turning to credit performance, we continue to see overall stability and credit quality across the portfolio.
Speaker Change: There was little change during the quarter in risk ratings distribution and non-accruals were largely flat at 0.6% of total investments at fair value.
Speaker Change: During the quarter, we completed the restructuring of JEGS Automotive, which remained on non-accrual status as of 12-31.
Speaker Change: And our team has been dedicating significant resources to Maverick, working closely with the sponsor and management team to best position that company for improved financial performance.
Speaker Change: Now, while unknown accrual rates may fluctuate from period to period, we're confident in our ability to leverage the broader Carlyle network to achieve maximum recoveries for underperforming borrowers.
Speaker Change: Now moving on to the credit funds, we took steps over the last couple of months to optimize our joint ventures.
Speaker Change: First, we consolidated MMCF2 onto CGBD's balance sheet to address the static nature of that vehicle.
Speaker Change: Additionally, we're in the process of extending the investment period of MMCF 1 by 3 years and also closing a new credit facility which should materially improve ROE.
Speaker Change: Both these transactions enhance the earnings profile of the broader portfolio while increasing our non-qualifying asset capacity.
Speaker Change: thereby providing greater flexibility for complementary transactions and other strategic partnerships.
I'll finish by touching on our financing facilities and leverage.
Speaker Change: We strengthened and diversified the right side of our balance sheet throughout 2024, most notably with the issuance of our inaugural institutional bond in October.
$300 million of unsecured notes with a 6.75% fixed rate.
Speaker Change: In September, we successfully received investment grade ratings from both Moody's and Fitch.
Speaker Change: And as a reminder, in early July, we closed the reset of the 2015-01 CLO.
Speaker Change: These transactions provided additional diversification to our financing sources, repaid the 2024 unsecured notes, and provided additional capital to fund new investment opportunities.
Speaker Change: The quarter-end statutory leverage was about 1.2 times and net financial leverage was right about one term.
Speaker Change: We've leveraged comfortably within our target range of 0.9 to 1.25 times. We have capacity to deploy capital into attractive opportunities and what we believe will be an accelerating deal environment in 2025.
Speaker Change: Thank you for watching. This is a production of the U.S. Department of State.
With that, I'll turn the call back over to Justin.
Speaker Change: As a final point, I'd like to reiterate that the merger between CGBD and Carlisle Secured Lending III remains on track to close by March 31, subject to approval from CGBD stockholders and satisfaction or waiver of other customary closing conditions.
Speaker Change: We distributed proxy materials related to the merger in January and urge all stockholders to vote their shares in advance of our special meeting of stockholders on March 26.
Speaker Change: We continue to have high conviction in the strategic benefits that the transaction will provide the CGBD, including an increase in scale and liquidity, a reduction in aggregate costs from operational efficiencies, and accretion to both earnings and NAV per share.
Speaker Change: As a reminder, Carlyle 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 $8.87.
Speaker Change: With a growing pipeline of new originations, a stable portfolio, and low non-accruals, CGBD's shockholders 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.
Speaker Change: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Finian O'Shea from Wells Fargo.
I think Tommy said it all.
Speaker Change: Free the Unqualified Asset Bucket Capacity. Are you Suggesting you might do something else there or should we expect a Reramp of the first JV or perhaps a new similar one like will that be replaced with a similar thing With nothing or or with something else?
Speaker Change: Good morning. Thanks for the question. Regarding the two JVs on MMCF2, that's our second smaller JV. That was the one that we closed in 2020, which is really more of a static type vehicle. So taking those balance sheet, those assets back on balance sheet, that's about $70 million investment that now is a reduction in the non-qualifying bucket.
The JV1 we do anticipate based on the extending that
Speaker Change: relationship by three years and inking in the process of inking a very attractive credit facility we're going to look to
Speaker Change: ramp up that facility materially in the future. Based on the higher leverage profile under that new credit facility, we actually anticipate at least in the near term of having a distribution of equity, so a return of capital from that vehicle as well to create even more capacity. So overall, we'll look over time to
Speaker Change: Put more equity in that vehicle, but at least in the near term, we'll actually have a return of capital. We should see in the first quarter from both JVs.
Speaker Change: In terms of the future, you know, we're always working on different things. And there's nothing in the very near term hopper, but certainly we've got the flexibility now as we have very strategic conversations with partners in the marketplace, something we've got the flexibility and we've got some, some ideas that that we're working on, but not nothing imminent right now.
Speaker Change: Okay, helpful, thanks. And on the tax line, that dropped a bit in the fourth quarter. Is that sort of a true up thing?
Speaker Change: prior quarters in that general ballpark maybe maybe a little bit lower but I think in that in the range for the prior quarters.
discussion idea of growth plans for this BDC.
Justin Plouffe: Hey Finn, it's Justin. Look, right now we're really just focused on putting capital to work and
Great, thanks so much.
Thank you. One moment for our next question.
Melissa Weddle: Our next question comes from the line of Melissa Weddle from J.P. Morgan.
Melissa Weddle: Good morning. Thanks for taking my question. I was curious in the fourth quarter, was there any outside sort of fee income or prepayment income that we should be aware of?
Melissa Weddle: OID acceleration, it was actually probably lower than our historical average by about a penny per share. The one thing I'll note is that in anticipation of winding down or taking that JV2 on balance sheet just so that we had a pad of an incremental dividend from that JV that runs through the JV income line.
Speaker Change: Okay, got it. Thanks for that. And then I was curious, I'm wondering if this is related to the JV-2. On slide seven in the presentation, you've always kind of laid out the weighted average yield on debt investments.
Speaker Change: and then the weighted average yield on income producing investments at cost. And usually those are pretty tight, maybe 10 bits difference. That was wider this quarter, it was 11.2 versus 11.7. And I'm just curious, I just want to understand that better.
Speaker Change: Second line item is the JVs and then a very small percentage of other equity investments. So based on the
Speaker Change: Incremental JV payout for this quarter that resulted in about a 30 or 40 basis point pop to that 11.7. So more normalized but probably closer to about 11.3, 11.4. So you should see next quarter those two numbers be closer.
Got it. Thank you so much.
Thank you.
Speaker Change: At this time, I am showing no further questions. I wouldn't. Pardon me. I'm showing one more question. One moment.
Operator: Our next question comes from the line of Derek Hewitt from Bank of America.
Derek Hewitt: Good morning, everyone. What was the dollar amount of that incremental dividend related to the joint venture to in anticipation of the wind down?
Thank you.
Speaker Change: Hey Derek, it was about 1.2 million dollars, so net impact on NII, about two pennies per share for the quarter.
Thank you.
Thank you.
Speaker Change: At this time, I would now like to turn the conference back over to Justin Plouffe for closing remarks.
Speaker Change: Thanks everyone for joining the call today. Appreciate your engagement with us and we look forward to working with you going forward. Have a great day. Thank you.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.
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