Blackstone Secured Lending Fund (NYSE:BXSL) Q3 2023 Earnings Call Transcript

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Parallel to our borrower experience, we are highly focused on shareholder experience. BXSL has among the lowest fee structures, expense ratios, and cost of debt of our peer set as of the end of the second quarter, which allows us to pass on more returns to our investors. Additionally, 100% of deal fees owed to BXSL are paid to BXSL. We believe these are important points of distinction, ones that complement our strong results and strengthen our ability to continue to drive attractive risk adjusted returns for our investors. And with that, I’ll turn it over to Teddy.

Teddy Desloge: Thanks, Carlos. I will start with our operating results on Slide 12. In the third quarter, BXSL’s net investment income was $161 million or $0.95 per share. Our total investment income was up $57 million or 25% year-over-year driven by increased interest income primarily due to higher rates. Payment-in-kind, or PIK, income remained flat year-over-year and represents less than 4% of total investment income. GAAP net income in the quarter was $171 million or $1.01 per share, up from $0.58 per share a year ago, driven in part by $21 million of net unrealized appreciation this quarter. Our net investment income yield of $0.95 per share represents a 14.4% annualized return on equity. Importantly, as Brad mentioned, the quality of our earnings remains high with limited payment-in-kind non-recurring and fee-driven income.

Interest income, excluding PIK fees and dividends, represents 96% of our total investment income in the third quarter. Turning to our balance sheet on Slide 13, we ended the quarter with $9.5 billion of total portfolio investments, of which 98.8% are floating rate loans with a weighted average yield at fair value of 11.9%. This compares to less than $5 billion of outstanding debt with a weighted average cost of just over 4.9%. That spread between our floating rate assets and lower cost mostly fixed rate liabilities provides the company with potential for additional earnings growth if rates continue to rise. As a result of strong earnings in excess of our dividend in the third quarter, NAV per share increased to $26.54, up from $26.30 last quarter.

Next, Slide 14 outlines our attractive and diverse liability profile, which includes 56% of drawn debt in unsecured bonds. These unsecured bonds have a weighted average fixed coupon of less than 3%, which we view as a key advantage in this rising rate environment. We maintained our three investment grade corporate credit ratings and BXSL was the first listed BDC to receive an improved outlook from stable to positive by Moody’s. We ended the quarter with approximately $1.5 billion of liquidity in cash and undrawn debt available to borrow. We believe this provides us with significant flexibility and cushion. Average fund leverage was 1.11x over the quarter and ending leverage was 1.8x. Based on our pipeline activity, we would expect to remain within our target of 1x to 1.25x through the balance of the year.

Additionally, we have low level of debt maturities over the next few years. The next maturity date for any of our outstanding debt facilities is 2025 with only 6% of debt maturing within the next 2 years and an overall weighted average maturity of 3.5 years. We continue to believe BXSL is well-positioned to maintain earnings in excess of our dividends as rates on 98.8% floating rate debt investments have continued to reset higher. As Brad and Jon mentioned, while floating rate debt brings higher yield for investors, it also may result in more pressure for our borrowers. And to that end, we established a Chief Investment Office several years ago aimed at leveraging data, insights and resources unique to Blackstone to enhance investment and portfolio management processes to ultimately drive positive outcomes across our portfolios.

We believe early intervention and proactive management will be a key driver of differentiation across managers through this cycle. Today, this team is nearly 60 individuals, which includes resources dedicated to financial reunderwriting, legal and restructuring expertise, data science and operational asset management. We deployed quantitative screens on a regular basis and have an independent review process for assets that we deem to be on our watchlist ultimately rolling up to senior Blackstone management. We have applied lessons learned from over 17 years history managing direct lending portfolios through cycles and have established a culture and process that supports and encourages early intervention benefits from unique insights across Blackstone and deploys specialized resources to our portfolio of companies.

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