Earnings Transcript for CGBD - Q1 Fiscal Year 2023

Operator: Good day, and thank you for standing by. Welcome to the Carlyle Secured Lending First 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. Please be advised today’s conference is be recorded. And, I would like to hand it to your speaker today, Daniel Hahn. Please go ahead.

Daniel Hahn: Good morning, and welcome to Carlyle Secured Lending’s first quarter 2023 earnings call. With me on the call this morning is Aren LeeKong, our 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 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. With that, I’ll turn the call over to Aren.

Aren LeeKong: Thanks, Dan. Good morning, everyone, and thank you all for joining. I will focus my remarks on three topics for today’s call

Thomas Hennigan: Thank you, Aren. Today, I’ll begin with a review of our first quarter earnings, then I’ll discuss portfolio performance, and I’ll conclude with detail in our balance sheet positioning. As Aren previewed, we had another strong quarter on net earnings front. Total investment income for the first quarter was $58 million, up 4% from the prior quarter. This increase was primarily driven by higher benchmark rates. Total expenses increased in the quarter from $31 million to $33 million. Similar to last quarter, this was primarily due to higher interest expense from rising base rates. The result was total net investment income for the first quarter of $26 million, or $0.50 per share, up 4% versus $0.48 per share in Q4. This recent level of earnings is material above our quarterly core earnings from earlier in 2022, which ranged from $0.40 to $0.44 per share. Our Board of Directors declared the dividends for the second quarter of 2023 at a total level of $0.44 per share. That’s comprised of the $0.37 base dividend plus a $0.07 supplemental, which is payable to shareholders of record as of the close of business on June 30. This total dividend level of $0.44 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 and over 12% on the latest share price, which review is a very healthy level. In terms of the forward outlook for earnings, we still see some potential for modest upside in NII compared to Q1 levels, based on the combination of higher benchmark rates and attractive economics on new investments. So we remain highly confident in our ability to comfortably meet and exceed our $0.37 base dividend and continue paying out supplemental dividends each quarter. On valuations, our total aggregate realized and unrealized net gain was about $1 million for the quarter. This increase was primarily driven by unrealized gains from tightening market spreads combined with some mixed results for individual credits. While we continue to see overall stability in credit quality across the book, we are actively monitoring each of our investments to identify any early signs of deterioration. The total fair value of transactions risk rated 3 to 5, indicating some level of downgrade since we made the investment was up modestly this quarter. Total non-accruals increased from 2.9% to 3.5% based on fair value due to the addition of American Physician Partners. Aren noted that most of our portfolio companies have reacted well to the inflationary environment. The exception has been a couple of our healthcare services book, namely American Physician and ProPT, where labor shortages and wage inflation have persisted and the structural nature of the businesses makes it difficult for those management teams to pass along these cost increases. Despite underperformance in these two names, we continue to see financial performance improvement and positive valuation migration in 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. Statutory leverage was about 1.3 times and net financial leverage ended the quarter at 1.16 times. This is in line with the prior quarter and comfortably within our target range. This positioning allows us to effectively deploy capital given the attractive yields and terms available for new investments in the current market. With that, I’ll turn it back to Aren.

Aren LeeKong: Thanks, Tom. I would like to finish by reiterating that we remain highly confident in our strategy and portfolio construction and are excited to apply our disciplined sourcing and underwriting approach during such an attractive vintage for direct lending. I’d like to now hand the call over to the operator to take your questions. Thank you.

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] At this time, I would like to turn it back to the speakers for any further comment.

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Aren LeeKong: Thank you so much, everyone. We appreciate your partnership and we look forward to speaking to you in the future. Have a great day.