Blackstone Secured Lending Fund (NYSE:BXSL) Q1 2024 Earnings Call Transcript

Blackstone Secured Lending Fund (NYSE:BXSL) Q1 2024 Earnings Call Transcript May 8, 2024

Blackstone Secured Lending Fund misses on earnings expectations. Reported EPS is $0.888 EPS, expectations were $0.92. Blackstone Secured Lending Fund isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Blackstone Secured Lending First Quarter 2024 Investor Call. Today’s conference is being recorded. [Operator Instructions] At this time, I’d like to turn the conference over to Stacy Wang, Head of Shareholder (sic) [Stakeholder] Relations. Please go ahead.

Stacy Wang: Thank you, Katie. Good morning and welcome to Blackstone Secured Lending Fund’s first quarter conference call. Joining me today are Brad Marshal; and Jonathan Bock, Co-Chief Executive Officers; Carlos Whitaker, President; and Teddy Desloge, Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation of our results and filed our 10-Q, both of which are available on the shareholder section of our website, www.bxsl.com. We will be referring to that presentation throughout today’s call. I’d like to remind you that today’s call may include forward-looking statements, which are uncertain and outside of the firm’s control and may differ materially from actual results. We do not undertake any duty in updating these statements.

For some of the risks that could affect results, please see the risk factors section of our most recent annual report on Form 10-K. This audio cast is copyright material of Blackstone and may not be duplicated without consent. With that, I’d like to turn over the call to Brad Marshall.

Brad Marshall: Thank you, Stacy, and good morning, everyone. Thanks for joining our call this morning. So turning to this morning’s agenda, I’m going to start with some high-level thoughts before Jon, Carlos and Teddy go into some more details around our portfolio and this quarter’s results. BXSL reported another strong quarter of results, including net investment income or NII of $0.87 per share, representing a 13.1% annualized return on equity. Our NII per share was impacted by $0.02 per share from accrued capital gains incentive fees. These results reflect continued strong credit performance with a minimal nonaccrual rate of 0.1% at cost, and a robust 11.8% weighted average yield on debt investments, benefiting from the current elevated rate environment.

We also have the second best quarter since our IPO from an earnings standpoint, with net income of $0.96 per share, which resulted in a NAV per share increase to $26.87. Our distribution of $0.77 per share is well covered at a 113% and represents a 11.5% annualized distribution yields, one of the highest among our traded BDC peers with as much of their portfolio invested in first lien senior secured assets with BXSL at 98.5%. Moving to Slide 5. As we discussed last quarter, we’ve been positioning BXSL for an anticipated ramp up in deal activity. We saw the start of that cycle in the fourth quarter, which has continued into the fourth quarter of this year, we had nearly $1.2 billion in new investments, commitments at par, which was the most active quarter since 2021.

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Q&A Session

Further, we had $719 million of fundings, 98% of which were into first lien senior secured debt, and overall had an average LTV of 44.5%. This reflects our continued focus on first lien debt investments and high-quality companies with what we believe are better risk adjusted returns. Additionally, new transactions for the quarter had a weighted average spread of approximately 570 basis points with an average OID of 174 basis points and over 2 years of call protection, representing approximately 11.4% all-in yield to maturity. Our commitment activity during the quarter aligns with the focus on our high conviction investment themes. We leverage BXCI’s incumbent relationships to originate opportunities and attractive industries, for example, IT services and software.

Benefiting from a wide network of internal source — sources including a public portfolio of over 2,700 credits, and from our existing portfolio and BXSL of over 250 private companies. And our repayment activity was partially in industries that may experience more cyclicality, including electrical equipment and energy equipment and services, a portfolio rotation that we believe supports ongoing quality. Just looking at the past two quarters collectively, we have seen more commitment activity than the preceding seven quarters combined and see this momentum carrying through into the second quarter as BXCI utilizes our global platform, including BXCI’s expanded European credit platform and seeks to create what we believe to be quality deal flow for our investors.

And despite a period of slower M&A activity, we see our continued deal flow being driven from four primary factors. First, BXSL benefits from having positions across 210 portfolio companies that in the absence of being sold may look to grow through debt and equity finance acquisitions. Second, with BXCI’s incumbency across over 4,500 issuers globally, we believe our scale and existing relationships helps to drive deal flow. In fact, approximately 65% of BXCL’s Q1 fundings were to incumbent borrowers of BXCI. Third, we have deepened our focus on specialization across sectors that we believe have long-term tailwinds. For example, in April, we opened a new credit office alongside our life science private equity colleagues in Cambridge, Massachusetts, where our Global Head of Health Care Brad Coleman, along with colleague Jonathan Braman, will expand our presence.

This is an area that is highly specialized and in great need of knowledgeable expertise. Finally, we continue to hear from companies that seek services offered by BXCI’s value creation program during a period of heightened inflation. While the services we provide are not a silver bullet, it can be quite additive. And as such, we believe a partnership with Blackstone is valued by sponsors in the market. You’ll hear more from the team, but I’m particularly excited about the overall quality of our earnings that continue to improve in NAV and our ability to lean into pipeline to drive income for our investors. With that, I’ll pass it over to my colleague, Jon.

Jonathan Bock: Thank you, Brad, and let’s jump to Slide 6. We ended the quarter with $10.4 billion of investments, an increase from $9.9 billion in Q4. This resulted in a modest increase in ending leverage of 1.03x and an average leverage of approximately 0.98x given the timing of some of our investment fundings. We maintain our strong liquidity position at $1.4 billion comprised of cash and available borrowing capacity across our revolving credit facilities, including ABL to lean into that expanded pipeline that Brad mentioned. The weighted average base rates over the quarter extended approximately 50 bps on our nearly 99% floating rate debt portfolio compared to Q1 last year as rates remained elevated. While spreads have modestly compressed, weighted average all-in yield on debt investments at fair value remains attractive at 11.8% this quarter compared to 12% last quarter.

New investments continue to be accretive to our net investment income. The yields on new debt investment fundings and assets sold and repaid during the quarter averaged 11.4% and 11.9%, respectively. Let’s take a look at the portfolio. Jump to Slide 7. Approximately 99% of BXSL’s investments are in first lien new secured loans and 99% of those loans are to companies owned by financial sponsors who have significant equity value in these capital structures demonstrated by an average loan to value of 47.8%. And as Brad noted, our nonaccruals are still at only 0.1% at cost. Our portfolio also starts from a strong LTM EBITDA base averaging $193 million, a 6% increase from last year. This is more than 2x larger than the private credit market, where we also see continued strength of performance from larger companies, the bedrock of our portfolio relative to their smaller EBITDA counterparts on both growth and defaults.

BXSL’s portfolio as compared to the broader private credit market measured by the Lincoln International Private Markets database have seen growth rates in line with the broader market and over 15% more profitability on an LTM EBITDA margin basis. Now we continue to stress the importance of interest coverage. The LTM EBITDA coverage based on average LTM EBITDA for BXSL portfolio companies over the last 12 months, that was 1.6x in Q1, which again compares favorably to the Lincoln database for the broader private credit market at 1.4x average coverage in Q1. On an LTM basis, only 2.4% of the portfolio has interest coverage below 1x versus 16% for the broader private credit market, of which 75% of this population represents companies with EBITDA less than $50 million.

And further Slide 8, this focus is on our industry exposure. In Q1 the number of portfolio companies in BXSL increased to 210. While we maintain nearly 90% of exposure to historically lower default rate industries, including nearly 40% of funding deals to new portfolio companies and software and IT services, our top conviction areas as we continue to build out expertise as Brad mentioned. Now, I’ll conclude with a point on amendment activity. Amendment activity continues to be relatively benign as the performance of the portfolio remain strong. And in the first quarter, there were 45 amendments for BXL private investments, the vast majority of which were associated with add on DDTL extensions or other technical matters. With that, I’d like to turn it over to Carlos.

Carlos Whitaker: Thanks, Jon. To expand on Brad’s point regarding deal activity, I’d like to take a few minutes to dive into a new deal for the quarter, a $2 billion debt financing for Park Place, a leading provider of third-party maintenance for data centers, and an incumbent portfolio company that we knew well. This marks one of the largest private financings to take out syndicated debt in the quarter. BXCI not only led, but also committed along with third parties 90% of the total financing package across the capital structure. We believe several key differentiating factors allowed BXCI to win the deal. First, scale. BXCI has the ability to commit quickly and size, taking down the vast majority of a very scaled loan package, something we believe few in the market can match.

Second, incumbency. We leveraged BXCI’s existing anchor position and the syndicated loan and strong relationship with the sponsor. Third, value creation. As an existing position for BXCI, Park Place has been a telling story for our value creation program. The borrower was introduced to Blackstone portfolio companies through cross-sell as a preferred provider and became active in a number of portfolio companies and had already experienced the benefits of our partnership approach. Fourth, deep diligence and sector knowledge. We utilized our internal Blackstone expertise, technologists and differentiated market insights and data centers along with strong prior institutional knowledge at Park Place. In fact, digital infrastructure, particularly data centers, is one of our highest conviction investment themes across Blackstone with $50 billion data centers owned or under construction globally, which also includes QTS, the largest data center company in North America today.

Finally, flexibility. BXCI offered a one stop service with multiple tranches of debt, creating ample flexibility, best suited for Park Place’s need. In an increasingly competitive private credit market, we believe we differentiate ourselves as not just a lender, but also a value added partner helping credits grow equity value. BXSL borrowers are offered full access to BXCI’s value creation program through cross-sell opportunities, cost savings procurement and capabilities, including cybersecurity and data science, all at no additional cost because we understand the end benefit to the investment portfolio. And with that, I’ll turn it to Teddy.

Teddy Desloge: Thanks, Carlos. I’ll start with our operating results on Slide 10. In the first quarter, BXSL’s net investment income was $166 million, an $0.87 per share. While our total investment income remained consistent with Q4, net investment income on $1 basis decreased primarily as a result of a full quarter impact of the fee waiver, which expired near the end of October, and capital gains based incentive fees accrued in the first quarter. BXSL recorded its highest quarterly GAAP net income and second highest in per share term since IPO at $184 million and $0.96 per share respectively, up 12% from a year ago. Total investment income for the quarter was up $39 million or 15% year-over-year driven by increased interest income primarily due to higher interest rates.

It is important to highlight the high-quality of our earnings as interest income, excluding PIC [ph] fees and dividends represented approximately 93% of total investment income in the quarter. Turning to the balance sheet on Slide 11, we ended the quarter with $10.4 billion of total portfolio investments at fair value, 5.3 billion of outstanding debt and approximately $5.2 billion of total net assets. With our strong earnings in excess of the distribution in the quarter, as well as healthy fundamentals and tightening spreads supporting asset values, NAV per share increased to $26.87, up from $26.66 last quarter. This represented the sixth consecutive quarter of NAV per share growth. Moving to Slide 12. In addition, we saw the fourth consecutive quarter of commitment growth as Brad outlined, with BXSL committing to nearly $1.2 billion in the quarter, funding $719 million and an estimated additional $347 million committed by [technical difficulty], we expect to see continued momentum through the second quarter and into the back half of the year.

Repayments remained relatively muted at $181 million in the quarter or a 7% annualized repayment rate. Next, Slide 13 outlines what we believe to be our attractive and diverse liability profile, which includes 53% of drawn debt in unsecured bonds. Our unsecured bonds have a weighted average fixed coupon of less than 3%, which we view as a key advantage in this elevated rate environment and contributed to an overall weighted average interest rate on our borrowings of 5.1%. This compares to a weighted average yield at fair value on our debt investments of 11.8%. Additionally, we have no maturities on our liabilities until 2026, and our debt and funding facilities have an overall weighted average maturity of 3.2 years. The strength of BXSL’s funding profile has been recognized by rating agencies as well.

We previously noted that BXSL earned improved outlook for Moody’s to Baa3 positive, and this quarter we earned notch upgrade from Fitch to BBB flat. We ended the quarter with $1.4 billion of liquidity in cash and undrawn debt available to borrow, providing us with significant capacity for continued portfolio growth. Ending leverage at March 31 was 1.03x, up from 1x at year end. We have positioned our balance sheet to have what we believe is ample capital to deploy into what we expect will be a growing opportunity set through year end. In closing, we are moving forward from what we believe is a position of strength with underlying earnings power, credit performance and investment capabilities and an optimized balance sheet that distinguish us in the market.

We will strive to remain laser focused on delivering returns and protecting investors capital. With that, I’ll ask the operator to open up for questions. Thank you.

Operator: [Operator Instructions] We’ll go first to Melissa Wedel with JPMorgan.

Melissa Wedel: Good morning. Thanks for taking my questions today. Definitely took your point about the higher volume and level of activity in the first quarter and that you’re looking for that to continue into the second quarter. The point of clarification on that, is that on a gross basis? Or are you also expecting net origination to remain elevated? Certainly, noting that repayment activity was particularly low, it seems in relation to gross originations in the first quarter.

Brad Marshall: Hi, Melissa, it’s Brad. I’ll take that question. When we talk about origination, obviously we’re talking about both on a gross basis. But really what grows the portfolio is a net — as you point out on a net basis, and we continue to expect that the portfolio will grow on a net basis on deals that are repaying. They feel somewhat muted, or we’re kind of extending our exposure. There’s a little bit less turnover in the market right now. And on the gross basis, we’re just seeing more and more capital solutions that we’re able to provide for issuers right now.

Melissa Wedel: Okay, appreciate that. Following up on the level of activity during the quarter, I’m wondering if there was anything in terms of a timing impact that we should think about whether originations were skewed towards the end of the quarter, or it was more evenly distributed versus timing of repayment. Thanks so much.

Brad Marshall: Yes. No, you hit the nail on the head, it was definitely skewed to the end of the quarter, which is why you saw leverage on a quarter end higher than what the average leverage was and some of the commitments spilled over into the second quarter.

Melissa Wedel: Got it. Is there any — have you quantified a rough estimate on what the impact NII might have been from that timing during the quarter?

Brad Marshall: No, we haven’t quantified it.

Melissa Wedel: Okay, thank you.

Operator: Thank you. We’ll go next to Mark Hughes with Truist.

Mark Hughes: Yes, thank you very much. You talked about the spreads being compressed a bit. I wonder if you could quantify that at all of the kind of your typical spread in Q1 versus what you might anticipate on the deals that are in the pipeline now?

Brad Marshall: Yes, so I would say, spread — you’ve seen some spread compression in some areas, and you’ve seen a nose [ph] spread compression in other areas, really depends on the type of deal whether it’s plugged up or whether it’s a proprietary deal, that’s kind of driving the spreads. So if you look at the fourth quarter, we’re about 11.7% on new deals. This quarter we were 11.4%. By the way, if you look at that on a more of a yield to 3-year basis, it gets closer to 12%. And if you look at kind of the assets that we did during the quarter, they range from 11%, to 13%, speaking to my point earlier, really depends on the type of deal. The one thing that we don’t kind of highlight and we should probably do a better job of this, but the spread for unit risk has actually come down, if you look at it on a comparative basis to, let’s say, 2021.

So companies just because rates are higher, companies are taking a little bit less leverage. Deals are set up with lower loan to value. So spread per unit of risk is fairly constant. And then in terms of on a go-forward basis, you’ll continue to see this range. You’ll see deals that will be closer to 11% and you’ll see deals that kind of are north of 12%. But overall, I would say the market putting us aside, the market has seen something like 50 to 75 basis points of spread compression since the start of the year.

Mark Hughes: Thank you for that. And then you’d mentioned that more of your existing portfolio companies are doing M&A. Is that part of the strong pipeline that even existing companies are borrowing — increasing borrowing for M&A purposes? Is that part of it? Or is that just kind of an ongoing dynamic?