Blue Owl Capital Corporation

Good morning and welcome to Owl Rock Capital Corporation's fourth quarter and year-ended 2020 earnings call. I would like to remind our listeners that past performance is not indicative of future results and remarks made during the call may contain forward-looking statements. Forward-looking statements are not guarantees of future 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 forward-looking statements As a result of a number of factors, including those described from time to time in Owl Rock Capital Corporation's filings with the Securities and Exchange Commission, the company assumes no obligation to update any forward-looking statements. As a reminder, this call is being recorded for replay purposes. Yesterday, the company issued its earnings press release and posted an earnings presentation for the fourth quarter and year-ended December 31, 2020. The presentation should be reviewed in conjunction with the company's Form 10-K filed on February 23rd with the SEC. The company will refer to the earnings presentation throughout the call today, so please have that presentation available to you. As a reminder, the earnings presentation is available on the company's website. I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our fourth quarter earnings call. This is Craig Packer, and I am CEO of Owl Rock Capital Corporation and a co-founder of Owl Rock Capital Partners. Joining me today is Alan Kirshenbaum, our CFO and COO, and Dana Scafani, our head of investor relations. Welcome to everyone who is joining us on the call today. We hope you and your families remain safe and well. I will start today's call by briefly discussing our financial highlights for the fourth quarter before providing an update on our portfolio and deal activity in the quarter. Then, after Alan covers our financial results, I will discuss our outlook and make some closing remarks. Getting into the fourth quarter financial highlights, net investment income per share was $0.29. I would note that the fee waiver, which was put in place in conjunction with our IPO, expired on October 18, 2020, and culminated in total fee waivers of over $200 million that were passed on to shareholders via special dividends. As a result, the fourth quarter NII reflects the impact of our full fee structure for almost the entire quarter. We ended the year with net asset value per share of $14.74. up $0.07 from the third quarter or $0.15 excluding the payment of the final special dividend distribution. This reflects our third consecutive quarterly NAV increase since the COVID crisis hit in the first quarter of 2020, which is a result of both the improved market conditions and demonstrated resilience of our borrowers. As a result, our current NAV is down only 3% versus the end of 2019. Looking forward for the first quarter of 2021, our board has declared a regular dividend of $0.31 per share, the same amount we have paid each quarter since our IPO. As a reminder, in addition to our regular dividend for the fourth quarter, we also paid the final of our six previously declared special dividends of $0.08 per share for shareholders of record as of December 31st. We saw a very strong origination activity this quarter, a topic I will spend more time on shortly, and this provided for solid portfolio growth and an increase in leverage. We ended the quarter with leverage of 0.87 times, which is up from 0.46 times at year-end 2019. We continue to be pleased with the progress we have made towards our targeted range of 0.9 to 1.25 times. We are optimistic about the current market opportunity set and believe our favorable market position will allow us to continue to invest in attractive opportunities as we work to grow the portfolio, which when fully deployed, we expect will be approximately $11.5 billion. Regarding our balance sheet, we remain very well capitalized with $2.1 billion of liquidity. I would highlight that on December 8th, we issued $1 billion of unsecured notes at our most attractive pricing level to date. We believe having a significant portion of our financing liabilities as unsecured provides us with optimal financial flexibility and allows us to prudently manage our capital structure. In addition, we are pleased with the continued progress we've made on lowering our cost of financing. We'd also like to welcome Melissa Weiler, who has joined ORCC's Board of Directors as an independent director. Melissa brings a great deal of experience in the credit space, including most recently at Crescent Capital, where she served on the management committee and oversaw several credit businesses. And we look forward to working with her as we continue to pursue our objectives for our shareholders. Lastly, on December 23rd, Owl Rock Capital Group, which is the parent of ORCC's investment advisor and Owl Capital Partners, announced that they are merging to form Blue Owl Capital, Blue Owl will enter the public market via business combination with Altamar Acquisition Corp., a special purpose acquisition company. As noted in our definitive proxy statement filed on January 27th, this triggers a change of control in the advisory agreement. A special meeting has been scheduled for March 17th for shareholders to vote whether to approve the proposals outlined in the proxy. We are pleased to note that we recently received word that the independent proxy advisory firms ISS and Glass Lewis both recommended that ORCC shareholders vote for the proposals. We also note that there are no expected changes to ORCC's investment strategy, team, or process as a result of the transaction. While there remain many steps prior to the closing of the merger, we are certainly excited about the opportunities that this expanded platform may provide for ORCC. Turning to the portfolio, we continue to be proud of the strength of our credit performance over the course of a very challenging year. We are pleased that the core thesis of our investment strategy has borne such strong results and that our focus on credit selection and downside protection have served us well. Looking at our internal credit ratings, our portfolio remains quite stable, with overall results largely consistent with last quarter. Names in our one or two rating categories, which are names performing in line with or exceeding our expectations at time of underwriting, comprise approximately 90% of the fair value of the portfolio. The percentage of our lower names is 10% of fair value, down from 12% last quarter. While we certainly have a small number of credits which remain challenged, the vast majority of our portfolio continues to demonstrate solid financial performance and has proved to be resilient in the face of an uncertain economic environment. While we remain vigilant about the economic impacts of COVID and recognize that the winter months have seen stricter lockdowns in certain geographies, we would note that the adverse economic impact has been less severe than what we experienced in the spring of last year. Businesses have adapted, and based on what we are hearing from our borrowers, many are continuing to recover towards pre-COVID operating levels despite these ongoing challenges. Amendment activity this quarter remained modest with three material amendments. Our amendment activity peaked in the second quarter at eight amendments. For the last two quarters, our pace of amendments has moderated to more ordinary levels. Where we do have amendments, we continue to see financial sponsors provide support in these situations. either through material debt pay downs or additional equity support. Pick interest represents less than 5% of 2020 annual total investment income and no new borrowers were moved to pick interest in the quarter. As a quarter end, we had one name on non-accrual representing 0.5% of the total cost of the portfolio and 0.3% of fair value. down from two names representing 2.1% of the portfolio on a cost basis last quarter. CIBT Global remains on non-accrual status and no new borrowers were added to non-accrual status in the quarter. Swipe Acquisition Corp, a manufacturer of gift cards and hotel key cards, which was placed on non-accrual in the third quarter, was moved back to accrual status in the fourth quarter as a result of a capital structure right-sizing. As I noted on our last earnings call, commensurate with Swipe's debt restructuring, Alrock has become the controlling shareholder of the company. As this is the first time in our history where we've had to take control of a borrower, I would like to spend a minute here. We remain very supportive of the business and management team and continue to believe in the long-term sustainability of the company. In order to best position the company in the near term, we right-size the outstanding debt amount and equitize the remainder of the debt balance. In contrast to the quick resolution we had on National Dentex last quarter, which was repaid at par, we recognize that this process will likely have a longer runway. We are working closely with the company to maximize the long-term value of our position. We are well prepared for this moment by having proactively made significant investments in our workout and portfolio management team over the last two years, and we will bring the full resources of our platform to bear in order to support the company going forward. Moving on to originations, we saw robust investment activity in the fourth quarter, reflecting increased levels of M&A across the market. As I noted on last quarter's call, improving economic conditions and market strength stimulated M&A activity for private equity firms, with increased sales processes and tack-on acquisitions for portfolio companies, particularly for those least impacted by COVID. Alrock was well positioned to capture share in this more active market environment. We are very pleased with the investments we made. Gross originations for the quarter were $1.5 billion with funded originations of $1.3 billion. We had sales and repayments of $520 million for net funded activity of $755 million. For context, while this is one of our strongest quarters ever, it is not a record for us and we've exceeded these quarterly volumes on multiple occasions before. Three positions were fully repaid or exited and we had partial pay downs or sales across 10 borrowers. Given the strong market conditions, we took the opportunity to sell some high quality but lower spread paper at attractive prices. This is the type of mix shift you can expect to continue to see as we optimize the portfolio as it reaches full deployment. In the quarter, we added 12 new portfolio companies and provided incremental capital for 14 existing borrowers as we saw a significant amount of strategic acquisition activity across our borrowers. We are pleased to see the benefits of our growing incumbency positions as our borrowers are able to turn to us to support their strategic initiatives and we're able to deploy additional capital into businesses we know well and where, in some cases, we have years of experience with the company. We're pleased with the volume of investments we closed in the fourth quarter, which include three large Unitranche or Stretch first lien facilities and our sole commitment to a second lien facility for PCI Pharma Services, as well as the increased yield we were able to achieve while still maintaining our focus on credit quality. The weighted average spread of new investments was roughly 690 basis points, which helped increase our total portfolio spread to 655 basis points. For frame of reference, at the time of our IPO, the portfolio spread was 610 basis points, and it has increased consistently in each quarter since then. In addition to the economic terms, the leverage levels, covenants, and documentation terms were all attractive on the investments we made. As I noted earlier, our portfolio at quarter end now stands at over $10.8 billion across 119 portfolio companies. We are very happy with the continued strong credit performance of our borrowers. Now I'll turn it over to Alan to discuss our financial results in more detail.

Thank you, Craig. Good morning, everyone. I'm going to start off on slide seven of our earnings presentation, where you can see that we ended the fourth quarter with total portfolio investments of $10.8 billion Outstanding debt of $5.3 billion and total net assets of $5.7 billion. Our net asset value per share increased to $14.74 as of December 31st compared to $14.67 as of September 30th. We ended the quarter with leverage of 0.87 times debt to equity and $2.1 billion in liquidity. Our dividend for the fourth quarter was $0.31 per share plus our final special dividend of $0.08 per share. and our net investment income was 29 cents per share. On the next slide, slide eight, I'm gonna talk through in a bit of detail the results of our revenues and expenses for the fourth quarter. You can see total investment income for the fourth quarter was 221 million, up 34.2 million or 18% from last quarter. This increase was primarily driven by increased interest income, a result of our ability to continue to grow the portfolio and progress towards our leverage target. This increase also includes income we booked in the fourth quarter related to the full pay down of National Dentex, which was two cents per share. On the expense side, what you'll see is a large increase in net expenses, primarily driven by our fee waiver expiration and increased interest expense. Total expenses were $112.9 million, up $11.5 million, or 11% from last quarter. You will also see net expenses, which is total expenses net of our fee waiver of $104.9 million up $44.1 million for the quarter. We did still have $8 million of fee waivers in the fourth quarter since the fee waiver didn't terminate until October 18th, which is about $0.02 per share benefit to NII this quarter. That will go away for next quarter. So to try to summarize here a bit, we're really pleased with our progress in building the portfolio. The activity level in the quarter allowed us to grow the portfolio at attractive spreads, which will help us, which will help allow us to generate the expected earnings power to cover our dividend by the second half of the year. As we look to the first quarter, there are a few items I want to call attention to. As I've mentioned, there are two non-recurring items in the fourth quarter that we will not have the benefit of in the first quarter. The $0.02 per share of revenue from the national Dentex pay down and the $0.02 per share from the partial quarter fee waiver. Some of this $0.04 per share we expect will be partially offset by interest from new investments in the first quarter and a full quarter's benefit of income from our investments made in the fourth quarter, the majority of which closed in December. As a reminder, we had previously expected our NII would dip as the fee waivers expired and then improve as we approached our leverage target. So consistent with that, we should see NII per share down a little in the first quarter versus the fourth quarter before coming back up in the second and third quarters this year. However, I would note there are a number of factors that will impact NII in any given quarter, including origination and repayment levels. A few final closing comments before handing back over to Craig. We continue to be well positioned in the industry given the strength of our balance sheet. We issued the largest bond ever in the BDC space in December, a $1 billion issuance at our lowest cost to date, and our credit spreads have continued to tighten since that issuance. We very intentionally have built a well-diversified financing landscape, diversifying the number of facilities we have, the types of facilities, and number of lenders we partner with. Matching duration between the left and right sides of our balance sheet is another important aspect of our landscape. Our weighted average debt maturity is over six years, and we do not have any debt maturities until June of 2023. We continue to have one of the lowest leverage levels in the industry at 0.87 times debt to equity. As of December 31st, we had $2.1 billion of liquidity. In total now, we have issued $3 billion of unsecured debt, which brings us to a current funding mix of 56% unsecured debt. Because of this, we continue to have a meaningful amount of excess collateral for our secured facilities. and we continue to have a significant cushion to our regulatory asset coverage of 150%. Overall, we believe our funding profile continues to be very sound and we continue to be in a very good position. Thank you all very much for your support and for joining us on today's call. Craig, back to you.