Blackstone Secured Lending Fund

Good day and welcome to the Blackstone Secured Lending First Quarter 2023 Investor Call. Today's conference is being recorded. If you require assistance at any time, please press star zero. All participants are in listen-only mode. We will conduct a question and answer session after our prepared remarks. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. At this time, I'd like to turn the conference over to Weston Tucker, head of Blackstone Shareholder Relations. Please go ahead.

Great. Thank you, Katie. And good morning and welcome to Blackstone Secured Lending's first quarter call. Earlier today, we issued a press release with a 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 this 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 factor section of our most recent Form 10-K. This audio cast is copyrighted material of Blackstone and may not be duplicated without our consent. With that, I'll turn the call over to BXSL's Co-Chief Executive Officer, Brad Marshall.

Thank you, Weston, and good morning, everyone. With me today is John Bach, Co-Chief Executive Officer, and we are excited to be joined by Teddy DeLose, our newly appointed Chief Financial Officer, effective as of close of business today. Many of you know Teddy as he has been with Blackstone Credit since 2015, first on the direct lending investing team, and then in a portfolio manager capacity for our direct lending business. We're excited to have him officially join BXSL's management team. Turning to this morning's agenda, I'd like to start with some high-level perspective before John and Teddy go into the detail of our portfolio and first quarter results. Turning to slide four, BXSL's reported another strong quarter with significant growth in net investment income, higher net asset value, and strong credit performance, all in a period that was marked by meaningful uncertainty ranging from commercial bank failures to stubbornly high core inflation. Net investment income, or NAI, increased 3% quarter over quarter to 93 cents per share, which represented a 14% annualized return on equity and our highest NAI per quarter since inception. Primarily driven by rising interest rates, that have increased the average yield on our debt investments from 10.7% last quarter to 11.4% at quarter end. This earning power further reflects the quality and strength of our well-sourced portfolio, which as of March 31st was 98% senior secured first lien, 45.2% loan to value. Using cost basis to measure, less than 0.14% of the investments are in non-accrual, or 0.07% on a fair market value basis, and less than 2% of our assets are marked below 90 at cost. Our net asset value per share, which increased 0.7% to $26.10 from $25.93 the previous quarter, further reflects portfolio stability. Earnings power again exceeded our quarterly dividend of $0.70 per share, which was increased 17% last quarter and has increased over 30% since the fund's IPO in late 2021. Our current dividend represents a 10.7% annualized yield for shareholders based on the higher first quarter NAV of $26.10 per share. We believe this represents the highest dividend yield for any listed BDC with as much of its portfolio invested in first lien senior secured assets. Slide five provides additional highlights on our portfolio activity and stability in our liquidity position. First quarter sales and repayments were $109 million, matched by $108 million in new investment commitments. The result of lower net origination was tied to both a seasonally slow period for new deal activity as well as a lower overall level of deal volume as private equity sponsors selectively adjust to the new market and rate dynamics. That said, we are beginning to see more market activity, which may lead to an increase in portfolio turnover. Subsequent to quarter end, we realize our debt and equity investments in Westland, the impact of which we expect to be accretive to NAI by more than $0.05 per share. In terms of our balance sheet, we also believe we remain well positioned for both defense and continued growth with $1.2 billion of liquidity from cash and our undrawn lending lines. Our lending lines were set up two years ago at what are now below market prices with high-quality counterparties. We had zero direct exposure to Silicon Valley Bank, Signature Bank, and First Republic Bank. and we have less than 1% of all secure debt commitments from regional banks in general. Turning to slide six, we ended the quarter with $9.6 billion of investments and leverage of 1.31 times, which is down from 1.34 times the previous quarter. Importantly, the ending yield of our portfolio, which is 98% floating rate, expanded over 400 basis points over the last 12 months. Taking a moment on this slide, I want to outline that each quarter the market continues to witness increased earnings power associated with floating rate nature of our loans and the attractive fixed rate liabilities. However, I believe that there is a growing demand for BXSL due to its defensive positioning during these more volatile times. In fact, if you look at senior secured debt, which is 98% of BXSL's portfolio composition, the private credit asset class, as measured by Cliffwater Direct Lending Index, has generated consistent returns, ranking as the top first or second performer in fixed income in 13 out of the past 18 years since Blackstone, then GSO, launched its private credit strategy in only one down year, which was during the great financial crisis. And prior to the GFC, the average loan-to-value was 66% versus 57% in 2022 and 45% in PXSL. Part of the focus on limiting risk in our portfolio is to focus on larger deals. Our leadership in large private credit transactions, where we have led or been the sole lender in approximately 50% of the 1 billion plus direct lending deals, is important as we have control over the outcome in these deals. That focus on building right, lending to the right businesses, which some may consider to be a first line of defense, continues to generate solid returns for BXSL shareholders. Comparing our NAV returns to public market benchmarks, BXSL generated a total return of 3.4% in the quarter, compared to 3.2% for leveraged loans, 3.6% for high yield bonds, and 3% for investment grade bonds. John will speak more to the portfolio later in the call. Additionally, there's a second line of defense to protect capital. Often just as important as the first, but goes less recognized by investors. That is the potential value add a manager can bring to the portfolio after investments are made. Many of you have heard us outline the benefits of Blackstone Credit Value Team, formerly Blackstone Credit Advantage, but I'd like to put a few numbers behind this value add. Recall we have an internal Blackstone team of 109 professionals who work with our portfolio companies, including over 20 professionals in Blackstone Credit. This team offers the scale and operating capabilities of the Blackstone network to our portfolio companies that drive both revenue and cost synergies to the benefit of the portfolio company and the private equity sponsor. We believe these benefits are unique to Blackstone Credit, and they provide substantial value to our shareholders. Let me share some detail with two examples where we held the equity. Last summer, we realized our position in a company called DataSites, a leading provider of virtual data room, or VDR, services in which BXSL had invested in equity and warrants alongside the debt commitment, which was never called. Recall, VDRs are independent platforms used to host and share highly confidential files and manage workflows. By leveraging the Blackstone value creation team, and the broader Blackstone network, we were able to identify and help DataCite execute on meaningful cross-sell opportunities and cost savings. One important element to assist DataCite was Blackstone's over 93 introductions across the Blackstone ecosystem, including Blackstone's internal teams, the Blackstone portfolio companies, advisors, and private equity partners. Subsequent to quarter end, as I mentioned earlier, We realized our investment in Westland, a Canadian insurance brokerage business, and its sale to Broad Street Partners. We first invested in Westland in 2021 and have provided a combination of debt and equity-based growth capital that helped turn them from a regional broker into a national-scale player with nearly twice the operating profits. With the help of our advisor expertise, we provided support on their IT transformation to support growth culminating in a payoff that we expect to be accretive to NAI by more than $0.05 a share. Across these two investments, VXSL invested $207 million and received $265 million in proceeds on the sales, a 28% increase on our initial investment in addition to the $28 million of interest we received during our hold period. Remember, we offer cross-sell, cost-saving, and advisory opportunities to all of our boards at no additional fee because we understand the end benefit to the investment portfolio. And while we are a lender first with a portfolio overwhelmingly invested in first lien senior secured loans, our operating platform allows us to realize additional equity upsides or help de-risk our debt investments. Datasite and Westland are two very recent and successful case studies of how truly unique our platform and our capital can be for the companies that we partner with. Generally, across our direct lending business, a substantial majority of the portfolio companies that are introduced to the valuation creation team actively participate in the program. And while we have a large portfolio monitoring team that is one of the largest in the world in private credit, we go beyond that. with our own resources and infrastructure to drive outcomes. That benefit not only our portfolio companies, but also our shareholders in real, tangible ways. With that, I'll turn it over to John to speak about the portfolio.