Blue Owl Capital Corporation

Good morning and welcome to the Owl Rock Capital Corporation first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Dana Sclafani, head of IR. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Owl Rock Capital Corporation's first quarter earnings call. Joining me this morning are our Chief Executive Officer, Craig Packer, our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, and other members of our senior management team. I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements, which are not a guarantee 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 in the forward-looking statements as a result of a number of factors, including those described in ORCC's filings at the SEC. The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in our earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. ORCC's earnings relief, 10Q, and supplemental earnings presentation are available on the investor relations section of our website at owlrockcapitalcorporation.com. With that, I'll turn the call over to Craig.

Thanks, Dana. Good morning, everyone, and thank you all for joining us today. We are pleased to report another quarter of very strong results driven by continued growth in earnings and strong credit performance. Our net investment income for the first quarter was 45 cents per share, A four cent increase from the prior quarter and a 14 cent increase compared to a year ago. This is a new record quarterly NII for the company. I want to start by putting this strong quarter in context. Going into the third quarter of last year, we were confident that rising rates and continued credit performance were going to drive significant improvement in earnings. As a result, we increased our regular dividend by two cents and added a formulaic supplemental dividend to our quarterly dividend structure. We recognized that we would significantly outperform the regular dividend in a rising rate environment and wanted to create a predictable mechanism to share that upside with shareholders. Compared to the second quarter of 2022, the average base rate in the portfolio increased roughly 300 basis points and the NII has grown by over 40%. which has driven the growth in our supplemental dividend. For the first quarter, our board approved a supplemental dividend of six cents per share, which is an increase of two cents from the prior quarter. This is in addition to our previously declared 33 cent regular dividend, which results in total dividends of 39 cents for the quarter. In total, this represents an annualized dividend yield of over 12% based on the current share price, which we believe is very attractive in today's market. We also delivered an ROE of 12.1% for the quarter, and we would expect to deliver an ROE in excess of 12% over the full year, based on our current outlook for rates and credit performance. Our continued earnings growth is complemented by the strength of our portfolio. Net asset value per share increased to $15.15, up 16 cents, or 1% from the fourth quarter. The majority was driven by over-earning our dividend by 8 cents, and by roughly $0.08 of net realized and unrealized gains in the portfolio. The average mark on our debt positions this quarter increased to 97.6 from 97 last quarter. However, the primary driver of this change was the improved marks on certain debt investments which were restructured during the quarter. Excluding those, the average change in the mark on the remainder of the debt portfolio was roughly 15 basis points. We also benefited from the increase of the mark in the equity investment in our senior loan fund, reflecting improved public market loan trading levels. In addition to higher rates, our results were driven by the strength of our credit quality, which is reflected in our very low non-accrual rate, which stands at just 0.3% of the fair value of the portfolio, with only two names on non-accrual as of quarter ends. We are very pleased with these results and believe we are in a position to maintain this level of earnings, power, and credit performance in today's environment. That said, we continue to expect and are prepared for more challenging conditions in the back half of the year. Like many in the market, we have been anticipating a shift in consumer demand on the back of the higher rate environment and a subsequent contraction in the economy. We remain vigilant and are proactively analyzing our portfolio. Similar to last quarter, we have not yet seen any early signs of challenges across our borrowers who continue to deliver stable operating performance. Revenue and EBITDA are growing at a modest, albeit slowing, pace. Many of our borrowers are experiencing improved profitability as a result of receding supply chain disruptions and lower input costs. We also take comfort that our portfolio is primarily comprised of senior secured first lien investments with low loan-to-values across companies that have strong financial sponsor backing. We are closely monitoring the interest coverage levels of our borrowers. As we expected, reported interest coverage continued to decline, finishing the quarter with a weighted average coverage ratio of 2.2 times. We fully recognize that the current rate environment, as it works its way through borrowers' financials, will reduce interest coverage levels over the course of the year. We believe average interest coverage on our portfolio will drop around one and a half times in the second half of this year. This will undoubtedly pressure liquidity at some borrowers more than others. However, we believe we have good visibility into the small number of borrowers which could be most affected, and therefore we think that these challenges will be manageable. Further, as we've said before, most of our borrowers benefit from financial and operational support from sophisticated financial sponsors. Sponsors are also preparing for a tougher environment later in the year and we've seen sponsors positioning their companies more defensively. This includes cutting costs, putting projects on hold, and shoring up liquidity. Lastly, when these situations do get more stressed, we have the tools in place to ensure that we are in dialogue early and often with borrowers and their sponsors. This information flow and our strong documentation and covenant protections ensure that we have a seat at the table at the earliest signs of trouble. We can then work with the sponsors. We're generally incentivized to put in additional capital to provide near term support in order to protect the longer term value of their investment. For these reasons, we believe we are well prepared for further challenges to come. As you said before, while we may see increased levels of stress, We believe defaults or potential losses will be manageable and will be more than offset by the continued strength of our earnings across the balance of the portfolio. We are proud of the highly diversified and well-insulated portfolio we have built. Our borrowers have the advantages of size, scale, and sponsor support as we enter a potentially more challenged environment, and we believe this will serve us well. With that, I'll turn it over to Jonathan to provide more detail on our financial results.