Sixth Street Specialty Lending, Inc.

Good day and welcome to the 6th Street Specialty Lending, Inc. 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker. Ms. Cami Van Horn, Head of Investor Relations. Please go ahead.

Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending Inc's filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday, after the market closed, We issued our earnings press release for the third quarter ended September 30th, 2022, and posted a presentation to the investor resources section of our website, www.sixstreetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC. Sixth Street Specialty Lending, Inc.' 's earnings release is also available on our website under the investor resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the third quarter ended September 30th, 2022. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending, Inc.

Thank you, Cami. Good morning, everyone, and thank you for joining us. With me today is my partner and our president, Bo Stanley, and our CFO, Ian Simmons. For our call today, I will review this quarter's results and then pass over to Bo to discuss our origination, activity, and portfolio. Ian will review our quarterly financial results in more detail, and I will conclude with final remarks before opening the call to Q&A. After market closed yesterday, we posted third quarter financial results with adjusted net investment income per share of 47 cents, corresponding to an annualized return on equity of 11.5%, and adjusted net income per share of 43 cents, or an annualized return on equity of 10.6%. For the second consecutive quarter, our board has increased our quarterly base dividend, raising this figure by approximately 7.1% or 3 cents per share to 45 cents per share to shareholders of record as of December 15th and payable on December 30th. By the way, I hope people can hear me now. This quarter's net investment income and the rise in our base dividend was driven by an increase in the core earnings power of our portfolio. As we previewed in prior quarters, we're now seeing the positive asset sensitivity from higher base rates impacting core earnings. Since we reported last quarter, the forward curve has steepened, resulting in core earnings in excess of what we previously anticipated. Over the last five years, the rolling four-quarter dividend coverage on our core earnings, core earnings defined as excluding all activity-based income, averaging 102%. At the new quarterly base dividend level of 45 cents per share, we expect our core earnings to exceed this level and highlights the significant influence that all in yields has had in the core earnings generating ability for a portfolio. Based on the enhanced levels of the dividend coverage that we anticipate extending through 2023, and an understanding of our anticipated leverage levels, our board felt comfortable raising the quarterly dividend. As the operating environment continues to evolve, the board will continue to evaluate further increases on a quarterly basis. This is consistent with our philosophy of establishing a base dividend level that we have a high degree of confidence in meeting each period and maximizing the efficiency of our capital base. While the base dividend level in Q3 was well covered through core earnings, no supplemental dividend was declared related to Q3 earnings given the NAV limiter in our distribution framework, which serves to retain capital and stabilize net asset value. The revised level of our quarterly base dividend increases the quarterly book dividend yield to 11% from our prior quarterly annualized book dividend yield of 10.3%. Our supplemental dividend framework remains in place, allowing for the opportunity to increase book dividend yields with future supplemental dividends. Rounding out the earnings summary, the four cents per share difference between this quarter's net investment income and net income was due to unrealized losses, primarily from wider market spreads, and not as a result of material changes in the underlying credit quality of our investments. As Beau will discuss, the performance of our portfolio has remained strong. Growth in our reported net asset value per share from 1627 to 1636 was primarily driven by the creative impact of issuing shares to sell the majority of our 2022 convertible notes, which matured in August. As you may recall from our conference call and the accompanying letter we published last quarter, our valuation framework includes the impact of market spreads movements into the valuation of our portfolio, adjusting for the expected weighted average life and other idiosyncratic factors. Spread widening and lower implied equity values during this quarter resulted in approximately 5 cents per share of unrealized losses, thereby partially offsetting the increase in net asset value we experienced from the combination of accretion from the notes conversion and earnings above our base dividend levels. Turning now to a few thoughts on the current environment. We are seven months into the rate hiking cycle and the Fed has increased rates 300 basis points year-to-date with the expectation of more to come. Despite this being the most rapid rate increasing cycle since the 1970s, it feels like we're in the mid-innings as corporates and consumers, two of the three main sectors of the economy, remain in a position of strength. In our view, the key to taming inflation will be real demand destruction, which we anticipate will be long, which will be a long battle for a number of important reasons. First, overstimulus during the pandemic coupled with decades of low rates, low inflation, and increasing asset prices has resulted in strong corporate and consumer balance sheets and excess household savings for consumers. Second, while interest rate increases continue, consumers have been somewhat insulated to date from the immediate impact as mortgages are fixed in nature rather than floating rate or adjustable, and wage growth has remained strong in an environment of historically low unemployment. This latter aspect has helped offset the effect of inflation on the levels of consumption. Third, given the Fed's ability to pivot is compromised by their need to tame inflation, it seems that the only way to create real demand destruction is through a rise in unemployment, which likely begins once we see decline in nominal corporate earnings. As quantitative tightening continues and monetary policy feeds through with its usual lag, the impact of rising rates will be felt differently across asset classes. Risky assets will likely struggle in an environment where the Fed keeps financial conditions tight. Returns for long-duration assets such as tech and biotech equities have been more meaningfully and negatively impacted by movement in rates as small moves result in large changes to the net present value of future cash flows. On the other hand, private credit, and more specifically our portfolio, is predominantly compromised with shorter-duration assets and not sensitive to change in rates and less sensitive to widening risk premiums given the ability to reprice those assets every two to three years. The benefit to our portfolio of holding floating rate short duration assets and rising rate and spread environment is fundamentally dependent, however, upon credit selection and active portfolio management. We believe these factors will ultimately be what drives the dispersion returns across the sector over time. Given our track record through COVID, 11 years of investing through SOX, and 25 years since our first direct lending investment, we feel well-positioned to navigate the uncertainty, uncertain macro environment, and take advantage of the opportunity set that it presents. With that, I'll turn it over to Beau to discuss this quarter's origination activity and portfolio.