Blackstone Secured Lending Fund

Good day and welcome everyone to the Blackstone Secured Landing Second Quarter 2022 Investor Call. At this time, all participants are in listen-only mode. If you require assistance at any time during the call, please press star zero. If you would like to ask a question, please press star one to be entered into the queue. I'd like to advise all parties that this conference is being recorded. And with that, let me hand the call over to Michael Needham, Head of Shareholder Relations. Michael, please go ahead.

Good morning, and welcome to Blackstone Secured Lending's second quarter call. Joining me today are Brad Marshall, Chief Executive Officer, and Steve Kuppenheimer, Chief Financial Officer. Earlier today, we issued a press release with a presentation of our results and filed our 10-Q, both of which are available on our website. 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 to update 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. On to our results. We reported GAAP net income of 47 cents per share for the second quarter and net investment income of 62 cents per share. With that, I'll turn the call over to Brad.

Good morning and thank you everyone for joining today's call. Thank you, Michael, for those opening remarks. As Michael said, BXSL reported a very strong quarter highlighted by a 1.9% total return based on NAV along with outstanding credit performance and a well-covered dividend. For the first half of the year, we reported two regular dividends and three special dividends. for a total of $1.51 per share, and we will pay another 20 cent special dividend later this year. Over the last 12 months, while LIBOR has averaged only 57 basis points, we have generated a dividend yield of approximately 10% for our investors. In the second quarter, we continued to out-earn the regular dividend with net investment income exceeding the regular dividend by 17%. We believe our dividend coverage is poised to grow in the near term as portfolio yields benefit from higher interest rates, something we discussed last quarter and are now seeing play out across the portfolio. Today I'd like to cover a few key themes before I turn it over to Steve to review our financial results. First, on rates. We expect material growth and net investment income from the recent increase in short-term interest rates. Second, on credit, the portfolio remains in great shape. Overall sector selection, being senior in the capital structure, and focusing on larger companies combined with active portfolio management has proven to be an effective strategy. And third, on the outlook. We believe BXSL is well-positioned to benefit from positive NII tailwinds, along with defensive portfolio positioning, lower effective leverage than our peers, and the fact that our four major share unlocks are behind us. So first, framing the upside from higher rates. Since the start of the year, three-month LIBOR has increased more than 200 basis points to 2.29% as of June 30th. and 2.92% as of this morning. The forward LIBOR curve has it reaching 3.89% by the end of the year. As we have noted previously, BXSL benefits from rising rates because of its favorable asset liability profile. The portfolio is approximately 100% floating rate, and the liabilities are 55% fixed rate. To put some context around the potential near-term earnings uplift from rising rates, 97% of BXSL's loans reset base rates on three-month schedules or more frequently than that. As a result, the average base rate earned in second quarter was 1.1% despite three-month LIBOR of 2.3% and three-month SOFR of 2.1% on June 30th. The average base rate would have been at June 30th level for the entire quarter. We estimate that second quarter net investment income would have been 18% higher or an additional 11 cents per share. If base rates were to increase another 100 basis points from June 30th level, we estimate that another $0.09 benefit to net investment income, or 32% above second quarter actual NAI, all else being equal. As we noted last quarter, we expect the benefit from higher rates to largely begin this quarter, given the timing of base rate resets. Our macro view from Blackstone's chief investment strategist, Joe Zeidel, is that base rates should go higher and stay elevated for longer than the curve suggests, driven in large part by continued near-term economic momentum and inflation that could prove more persistent than consensus expects, with pressures across wages and shelter costs. In short, we believe interest rates represent a meaningful near-term tailwind to the earnings power of BXSL and our ability to pay dividends. Second, BXSL was designed to protect investor capital in challenging market environments. And we expect that to be a defining differentiator for us in the future. Today, we continue to have zero assets on non-accrual. And I want to spend a bit of time on this defensive approach, our philosophy, and the resources of BXSL. As we have highlighted previously, our fees and expenses are industry leading. As compared to most BDCs, our management fees are lower, our incentive fees are lower, our G&A expenses are lower, and our liability expenses are lower despite being over 50% fixed rate. When we took BXL public, our goal was to offer the lowest fee structure across the public BDCs. which allows us to take less risk in our portfolio through cycles without compromising returns. To that end, we have a portfolio of 98% first lien assets, generally in larger companies, in less cyclical, high cash flow sectors. These companies should be well positioned to withstand headwinds created by higher inflation, higher interest rates, and an economic slowdown should one materialize. fundamental performance across the portfolio has been supportive including healthy revenue growth with net leverage and loan to value levels consistent with prior quarters we are seeing particularly strong trends across our tech services and healthcare sectors which are our largest sector exposures I also wanted to spend a bit more time on our operating platform which we call Blackstone credit advantage We believe we are the only BDC manager with a dedicated operating team that utilizes the scale and breadth of its broader platform. The 16-person group responsible for this inside Blackstone credit seeks to drive value for our portfolio companies through areas such as procurement, cross-selling products and services, cybersecurity, and data analytics, among other areas. We have five people alone focused on calling our portfolio companies every day on procurement. To give you a sense of how impactful this can be, Blackstone Credit provided a financing package to a company including a Unitranche loan and equity. During our investment to date, the company has grown nicely and we helped drive revenue growth through over 75, 75 new customer introductions. We also plugged in our group purchasing team who helped significantly lower expenses across software licenses, rental car expenses, and we helped with cybersecurity. Earlier in this quarter, in the third quarter, we exited our equity position at a significant gain in this company. While we recognize the zero default environment, may not last forever and are cognizant of potential risks in the broader economy, we are highly focused on minimizing mistakes and maximizing recoveries through how we design the portfolio, how we underwrite the risk, and add value after we make our investment. Since 2006, this active management approach has resulted in Blackstone Credit's annualized loss rate in U.S. direct lending of only 11 basis points. Third, despite potential macroeconomic headwinds on the horizon, we believe the outlook for BXSL shareholders is bright. On July 1st, we completed our fourth major share unlock related to our IPO, which was an important milestone. Those unlocks, while creating temporary pressure on our stock, have led to higher trading volumes and higher float. Our trading volume has multiplied more than tenfold since January. Taking a step back, we formed BXSL over four years ago to build a company that harnesses the best attributes of private credit in a public BDC structure. I talked about our industry-leading fees and expenses, the quality of our assets and liabilities, and the resources we are offering our portfolio companies. We also added a look back into performance fee structure. We waived some of our already industry-leading fees. We bought back shares at a discount, as you will hear later from Steve. Investor experience is exceptionally important to us. We believe we are entering a period where quality will outperform from a credit standpoint. Incorporated in all of this is a defensive portfolio construction with first-lane assets, with an average LTV loan to value of 46%. Taken together, we believe that BXSL's position as a premium BDC with a differentiated risk return profile should ultimately benefit shareholders. It has both defensive qualities to protect investors' capital and meaningful earnings upside. With that, I will now turn it over to Steve.