Blue Owl Capital Corporation

Good morning and welcome to Owl Rock Capital Corporation's first quarter 2021 earnings call. I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Forward-looking statements are not guaranteed of future performance or results and involves a number of risks and uncertainties that are outside of 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 from time to time in our Rock Capital Corporation's filings with the Securities and Exchange Commission. The company assumed no obligation to update any further 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 first quarter ended March 31, 2021. This presentation should be reviewed in conjunction with the company's Form 10-Q filed on May 5 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'm now going to 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 first 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 Kirschenbaum, our CFO and COO, and Dana Scafani, our Head of Investor Relations. Welcome to everyone who is joining us on the call today. I will start today's call by briefly discussing our financial highlights for the first 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 view on the current market and make some closing remarks. Getting into the first quarter financial highlights, net investment income per share was 26 cents. As we had expected, NII was down this quarter, and Alan will provide more detail on this later in the call. I will also discuss our future earnings outlook in my closing remarks. We ended the quarter with net asset value per share of $14.82, up 8 cents from the fourth quarter. The average fair value mark on our portfolio is 98% of par, Back to where it was before COVID. We believe that the full recovery of the value of our assets over the course of the year reflects the strong credit quality of our portfolio and investment process. Looking forward for the second 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. We are pleased with our origination activity this quarter, although, as we expected, volumes across the market were lower than the fourth quarter, given the pull forward of deals at the end of last year. We ended the quarter with net leverage of 0.92 times, which is up from 87 times last quarter and up from 0.6 times year over year. We've made steady progress to get to the low end of our targeted range of 0.9 to one and a quarter, and expect to modestly increase our leverage within that range in the coming quarters. In addition, our balance sheet remains strong with $2.5 billion of liquidity available today and we continue to lower our overall cost of financing. As mentioned on our last call, we held a special meeting on March 17th for shareholders to approve the change of control in our advisory agreement in connection with the Blue Owl transaction. We received shareholder approval for the proposal and appreciate our shareholders' overwhelming support for what we believe will be a beneficial expansion of our platform that will provide improved sourcing capabilities and expanded platform resources for ORCC. Earlier this week, Altamar announced that it will hold a special meeting on May 18th for its shareholders to approve the business combination with Dial and Alrock Capital. If the proposals are approved, the business combination is expected to close on May 19th. Turning to the portfolio, our credit performance remains very strong. We are optimistic about the economy given the pace of vaccinations and businesses reopening, and our fundamental outlook for the performance of our portfolio companies is positive for the rest of the year. Across our portfolio, we continue to see many borrowers showing positive trends in operational and financial performance. and many more. We believe that economic conditions will continue to improve over the course of the year and our borrowers are well positioned for this environment. We believe one of the key drivers of the strong positioning of our overall portfolio is the strength of our largest industries, including software, healthcare, insurance, food and beverage, and distribution. Many of these companies, many of the companies in these sectors, were either only modestly impacted by COVID and rebounded quickly, or in certain cases actually saw revenue grow faster in the COVID environment. In particular, I want to call attention to the software sector, which is our largest sector. We like software businesses because they often have predictable and consistent recurring revenue streams, and many are experiencing growth well in excess of the broader economy. This trend continued throughout the COVID period. In addition, the software loans we provide often give us above average returns, solid credit documents, and the lowest loan to value of any of the sectors we invest in. For other sectors which were more meaningfully impacted, including consumer products, education, and childcare, we're now seeing a nice recovery, and the outlook is strong as these businesses are expecting meaningful growth in 2021. Certainly, a small number of sectors have been more acutely impacted, including travel, leisure, and aerospace. We have a few investments in these sectors, although they are a small portion of the portfolio. Still, even here, we have seen recent outperformance versus the revised forecasts and are seeing reasons to be cautiously optimistic given the pace of reopening trends and improved travel industry performance metrics since the beginning of the year. Looking at our internal credit ratings, our portfolio remains quite stable, with overall results largely consistent across the last few quarters. names in our one or two rating categories remain at roughly 90% of the fair value of the portfolio. The percentage of our low rated names, rated three or four, is largely unchanged, now below 10%, and there are no names in the lowest five rating category. No material amendments were signed in the quarter. Going forward, while we expect to have amendments from time to time, we believe the period of elevated amendment activity due to COVID has ended. As is typical, we would expect to have discussions with a small number of borrowers occasionally as part of our ordinary course portfolio management activities. As of quarter end, we continue to have just one name on non-accrual representing 0.5% of the total cost of the portfolio and 0.2% of fair value. No new borrowers were added to non-accrual status in the quarter. Moving on to originations, we were pleased with our investment activity this quarter. Gross originations were $864 million, with $684 million of funded activity. Net funded originations were $172 million, reflecting $512 million of combined sales and repayments. We received full or majority repayments from six borrowers, which we had anticipated given the strength of the financing and M&A markets, as well as the vintage of some of our investments. In addition, similar to last quarter, we took the opportunity to sell some high quality but lower spread paper at attractive prices. We added eight portfolio companies in the quarter. Activity with new borrowers was well diversified across six sectors, and we were pleased with the terms we obtained. We also executed add-ons for 11 borrowers as we continue to see the benefits of incumbency. Almost all of our investments this quarter were first lien or Unitronge term loans. We certainly evaluated many second lien deals, but ultimately our bar for these types of deals remains high. We did not close on any new second lien investments. Our average spread on new commitments was 6.4%, which we feel is attractive given our activity was largely in first lien and Unitronge facilities. Overall, the portfolio yield was flat with last quarter at 8.1%, despite the fact that public loan markets saw spreads tighten 75 basis points over the quarter. This reflects our ability to originate new deals and attractive spreads and to continue to optimize the portfolio. Our portfolio now stands at over $11.2 billion across 120 portfolio companies. We are very happy with the continued strong credit performance. ORCC was formed in 2016. As we now approach the targeted fully ramped size of our portfolio, our focus is shifting from portfolio construction to portfolio optimization. We expect to see repayments increase, and as we get repayments, we will look to redeploy that capital in unit tranche or on occasion select second lien investments. We will maintain the same rigorous credit quality standards and selectivity that we've employed since inception, having looked at over 5,000 opportunities across the platform and ultimately closing on less than 5% of those deals. Now I'll turn it over to Alan to discuss our financial results in more detail.

Thank you, Craig. Good morning, everyone. To start off on slide seven of our earnings presentation, you can see that we ended the first quarter with total portfolio investments of $11.2 billion, outstanding debt of $5.5 billion, and total net assets of $5.8 billion. Our net asset value per share increased to $14.82 as of March 31st compared to $14.74 as of December 31st. We ended the quarter with net leverage of 0.92 times debt to equity and $2.5 billion in liquidity pro forma for post-quarter end financings. Our dividend for the first quarter was $0.31 per share and our net investment income was $0.26 per share. As you'll recall from our remarks last quarter, We had $0.04 per share in one-time items that benefited us, including $0.02 per share from the national Dentex pay down and $0.02 per share from the partial quarter fee waiver. As a result, the fourth quarter without the benefit of these one-time items would have been $0.25 per share. So as compared to that, we grew NII by an additional penny per share to $0.26 this quarter. This reflects the full quarter benefit of Q4 originations plus the net benefit of new originations and sales and repayments in the first quarter. And please note that while we had approximately $500 million of sales and repayments, roughly half of that was from sales which do not provide the same NII benefit as we see from repayments since sales do not generate accelerated amortization of OID or prepayment fees. As a result, fees from repayments continue to lag our expectations. As Craig and I have been discussing over the past year or so, We do expect repayments to pick up later this year based on the continued seasoning of our portfolio. I would also note that we had some higher yielding repayments early on in the quarter. As Craig also noted, our originations were largely first claim investments, which once again were weighted towards the end of the quarter. And as a result, the net one penny per share of growth in NII is not reflective of the full benefit of Q1 originations. In addition, dividend income was lower this quarter. which also impacted NII by approximately one penny per share. The contribution from one portfolio company declined by $4 million from last quarter. However, while the company continues to have strong performance, its dividend is variable and may fluctuate based on operating results and seasonality. Thinking ahead to the rest of this year, we expect interest income to continue to increase each quarter over the coming quarters as we modestly increase our leverage within our target range and as we optimize the left side of our balance sheet, as Craig just noted. On the expense side, you can see that management and incentive fees increased from $55 million net of the final fee waiver in the fourth quarter to $63.9 million and interest expense increased from $42.4 million in the fourth quarter to $48.1 million in the first quarter. And as we expect expenses not to meaningfully change other than management fees, and interest expense continuing to slightly increase with leverage going up. And as I've mentioned in the past, we continue to focus on optimizing our funding costs. In that regard, we had two notable transactions we did that helped further us in reducing costs on the right side of our balance sheet. We priced our sixth CLO, this one for $260 million of incremental financing, at a blended spread of 149 basis points. A great print and very cost efficient for us. and we issued our seventh bond, this one for 500 million of incremental financing at a fixed coupon of two and five eighths percent, our tightest print ever. So overall, we feel we are in a good position starting off the year. We feel we continue to be on track to earn our dividend in the back half of this year. And we have one of the strongest funding profiles and balance sheets in the industry. Thank you all very much for your support and for joining us on today's call. Craig, back to you.