Blue Owl Capital Corporation (NYSE:OBDC) Q4 2023 Earnings Call Transcript

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Blue Owl Capital Corporation (NYSE:OBDC) Q4 2023 Earnings Call Transcript February 22, 2024

Blue Owl Capital Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Blue Owl Capital Corp. Q4 and Fiscal Year 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dana Sclafani, Head of BDC Investor Relations for Blue Owl. Please go ahead, Dana.

Dana Sclafani: Thank you, operator. Good morning, everyone, and welcome to Blue Owl Capital Corporation's Fourth Quarter Earnings Call. Joining me this morning are our Chief Executive Officer, Craig Packer; and our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, as well as Alexis Maged, our Chief Credit Officer; and Logan Nicholson, Portfolio Manager for OBDC. I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements, which are not a guarantee of few performance or results and involve a number of risks and uncertainties that are outside 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 OBDC's filings with the SEC.

A successful investor with a portfolio including Finance Receivables, biotechnology, and medical device investments.

The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in our 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 or warranties with respect to this information. OBDC's earnings release, 10-K and supplemental earnings presentation are available on the Investor Relations section of our website at blueowlcapitalcorporation.com. With that, I will turn the call over to Craig.

Craig Packer: Thanks, Dana. Good morning, everyone, and thank you all for joining us today. We are very pleased to report another record quarter of earnings with continued excellent credit performance across the portfolio. Net investment income was $0.51 per share, up $0.02 from last quarter. Our NII increased in each quarter of 2023, we generated new record NII for the fourth consecutive quarter. In total, we earned $1.93 of NII in 2023, up $0.52 or 37% year-over-year. Our strong results throughout the year are the outcome of our emphasis on great credit selection and a proactive approach to liability management. Results also benefited from the higher rate environment and continued strong economic conditions. Based on these results, our Board has approved another $0.02 increase in our base dividend to $0.37 per share.

This is our third $0.02 increase since the fourth quarter of 2022. This reflects our strong results to date and incorporates our expectations for the future trajectory of earnings even in a more normalized rate environment. In addition, for the fourth quarter, our Board declared a supplemental dividend of $0.08. We instituted the supplemental dividend framework in the third quarter of 2022 to allow shareholders to participate in earnings upside in a predictable manner, and we are pleased to pay $0.36 per share of supplemental dividends over these last six quarters also meaningfully growing net asset value. Going forward, we believe shareholders will continue to benefit from the supplemental dividend framework. Net asset value per share increased to $15.45, up $0.05 from the third quarter.

This represents the highest NAV per share since our inception in the second quarter in a row of record net asset value. As a result of strong earnings and continued NAV growth, we earned a record 13.2% return on equity in the fourth quarter, resulting in an annual ROE of 12.7% for the full year. This is right in line with the expectations we set at our Investor Day in May. Looking at our borrowers results, we saw continued resilience across our portfolio companies throughout 2023. We came into the year appropriately cautious and prepared for a more challenging economic environment. Over the last 12 months, our borrowers on average, delivered low to mid-single-digit growth in both revenue and EBITDA each quarter. They were proactive in cutting costs and raising prices where appropriate to combat inflationary pressure and supply chain challenges.

These initiatives contributed to the solid performance we saw this year. Further, we believe our borrowers are well-positioned coming into 2024. Our largest sectors continue to be software, insurance brokerage, food and beverage and health care, all of which serve diversified and durable end markets. The weighted average EBITDA of our portfolio companies is over $200 million, and we believe this scale provides strategic benefits and operational stability as many of our borrowers remain market leaders within their sectors. Looking forward, while markets are expecting rates to decline, short-term rates remain elevated, now that we remain focused on potential portfolio company challenges. We believe coverage levels will trough in the first half of 2024 at around 1.5x to 1.6x interest coverage.

We continue to have a small list of borrowers who we believe may see challenges in the months ahead. Our underwriting and portfolio management teams are closely monitoring these situations and we believe any challenges ultimately will be manageable across our portfolio as a whole. I would note, we had a few borrowers migrate lower in our rating scale, but overall, the names on our watch list remains consistent. Based on the visibility we have today and the strong positioning of our borrowers, we expect that the vast majority of our portfolio companies will maintain solid coverage metrics and adequate liquidity throughout this period. While we added one very small position to nonaccrual in the quarter for a total of four names, our nonaccrual rate remains low at 1.1% of the fair value of the debt portfolio.

Overall, our record year in 2023 demonstrates the resilience of our portfolio companies and the strength of our investment and portfolio management process. With that, I'll turn it over to Jonathan to provide more detail on our financial results.

Jonathan Lamm: Thanks, Craig. We ended the quarter with total portfolio investments of $12.7 billion, outstanding debt of $7.1 billion and total net assets of $6 billion. Our fourth quarter NAV per share was $15.45, a $0.05 increase from our third quarter NAV per share of $15.40 attributable to the continued overall earning of our total dividends. In terms of deployment, we continue to largely match originations with repayments to maintain a fully invested portfolio. Repayments increased this quarter to $1.1 billion, which was matched by $1 billion of new investment fundings. This was a sizable increase compared to the roughly $390 million of repayments we saw in the third quarter as consistent with our belief that we will see an increase in repayments as the market environment continues to be more favorable for refinancings.

We ended the quarter with net leverage at 1.09x, down slightly from the prior quarter. This is largely reflective of the timing of repayments versus new originations in the quarter. Turning to the income statement. We earned a record $0.51 per share in the fourth quarter, up from $0.49 per share in the prior quarter. The increase in NII was driven by roughly $0.015 quarter-over-quarter increase of accelerated income, driven by a pickup in repayments as well as modest increases in our dividend and interest income. For the fourth quarter, the $0.08 per share supplemental dividend will be paid on March 15 and to shareholders of record on March 1. Reflecting this supplemental and the previously declared $0.35 regular dividend, shareholders will receive total dividends of $0.43 which equates to an annualized dividend yield of over 11% based on our NAV per share for the fourth quarter.

For the full year 2023, we paid a total of $1.59 per share in dividends, an increase of $0.30, roughly 25% from the prior year. The Board also declared a first quarter regular dividend of $0.37, which will be paid on April 15 to shareholders of record as of March 29. Pro forma for our new increased regular dividend coverage remains robust at 138%. We finished the year with $0.30 of spillover income as a result of meaningful overearning of our dividends, inclusive of our supplemental dividends throughout 2023. Turning to the balance sheet. We continue to proactively manage our liability structure to maximize returns to our shareholders. In the fourth quarter, we increased our revolver capacity to $1.9 billion and continue to maintain a robust liquidity position, which increased to $2.1 billion.

This is well in excess of our unfunded commitments to our portfolio companies. In January, we opportunistically raised $600 million in new 5-year unsecured notes. A portion of the proceeds will be used to repay our $400 million unsecured notes that mature in April 2024. Taken together, these actions will modestly improve our overall cost of unsecured financing and increase our total unsecured debt as a percentage of total debt to 61%. We continue to be very focused on maintaining a well-laddered liability structure and lowering our financing costs. The spread on this new issuance represents one of our tightest spreads to treasuries Further, we were able to swap this new issuance at a rate of S-plus 212 basis points, which when taken together with the maturity of the April 2024 notes is accretive to ROE for our shareholders and attractively priced relative to our current secured financing costs.

The BDC bond market continues to deepen and expand with investors. We are pleased to see investors recognition of OBDC's high-quality portfolio and continued performance, which allowed us to drive improved pricing for this issuance, even in a higher rate environment. As we have since inception, we continue to be proactive at addressing our financing needs and continuing to deepen our investor base and improve our liability costs. With that, I'll turn it back to Craig for closing comments.

Craig Packer: Thanks, Jonathan. To close, I wanted to spend a minute on what we are seeing in the market today and what we expect for 2024. We continue to see deal activity pick up in fourth quarter. As Jonathan noted, we had over $1 billion in both originations and repayments in OBDC. This nearly equates to the total activity we saw in the first 3 quarters combined. Across our broader Blue Owl direct lending platform, we deployed over $8 billion in the quarter, the highest quarterly level since 2021. We continue to believe the scale of our platform is an advantage for OBDC as our large origination effort allows us to efficiently match our repayment and deployment activity each quarter in order to maintain a fully invested portfolio and to scale up deployments in quarters where repayment activity is higher.

We closed on several attractive new deals in the fourth quarter, including the $1 billion-plus financings for [indiscernible], New Relic and IFS [indiscernible], all three of which Blue Owl serves as lead arranger [ph] and administrative agent on. We believe our role as administrative agent on these large deals demonstrates the private equity firm's confidence in our platform and as importantly, positions us to maintain frequent dialogue and to have the greatest influence on credit documentation and terms. Further, we continue to benefit from incumbency across our portfolio, with significant add on activity for our current borrowers in the quarter. As noted earlier, repayments stepped up materially in the fourth quarter as we saw a more active market for refinancings and company exits.

We expect repayment activity to continue to revert to these higher, more normalized levels which could generate meaningful repayment income for OBDC. Looking forward, we expect to see increased market activity throughout 2024. We believe there is substantial pent-up desire for private equity firms to return capital to LPs by exiting companies and increased clarity on the rate environment that could more activity. That said, to date, activity in the first quarter has been lighter, which is consistent with the typical seasonality we see after many issuers seek to transact before year-end. Reflecting this dynamic, and with strengthening public and private markets, we are seeing some pressure on spreads across new investment opportunities. However, we continue to see larger and larger companies doing direct deals, the credit quality is some of the highest we've seen in our history and the structures and terms on new deals remain attractive.

Finally, on behalf of the entire OBDC management team, I want to reiterate how pleased we are to have delivered another quarter of impressive results. We are grateful to the investment and portfolio management teams who continue to assess new opportunities, carefully monitor our portfolio companies, the financing team who continues to optimize our liability structure and the entire Corporate Solutions group who support the company's complex operations. As a result of these efforts, we delivered a total return of more than 40% to shareholders in 2023. We once again delivered record NII and a record high NAV per share ultimately providing a 12.7% ROE for the year to our shareholders. We are also pleased to be able to raise our regular dividend, which we believe reflects our continued confidence in the portfolio.

We are entering 2024 on strong foot and believe we are well-positioned for the year to come. With that, thank you for your time today, and we will now open the line for questions.

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