Sixth Street Specialty Lending, Inc.

Good morning and welcome to the Sixth Street Specialty Lending, Inc. fourth quarter and fiscal year ended December 31st, 2022 earnings conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded on Friday, February 17th, 2023. I will now turn the call over to Ms. Kami Van Horn, Head of Investor Relations. Thank you. Hello.

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. 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 fourth quarter and fiscal year ended December 31, 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-K 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 fourth quarter and fiscal year ended December 31st, 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 6th Street Specialty Lending.

Thanks, Cammie. Good morning, everyone, and thank you for joining us. With us today is my partner and our president, Bo Stanley, and our CFO, Ian Simmons. For our call today, I will review our full year and fourth quarter highlights and pass it over to Bo to discuss our originations, activity, and portfolio metrics. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported fourth quarter adjusted net investment income of 64 cents per share or an annualized return on equity of 15.5%, an adjusted net income of $0.56 per share, or an annualized return on equity of 13.6%. As presented in our financial statements, our Q4 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gains incentive fee expense, were both 1 cents per share higher at 65 cents and 57 cents respectively. For the full year 2022, we generated net investment income per share of $2.01 or return on equity of 12% and a full year adjusted net income per share of $1.27 or return on equity of 7.6%. The difference between net investment income and net income for the year was driven overwhelmingly by unrealized losses as we incorporated the impact of wider credit market spreads on the valuation of our portfolio. The impact of increased risk premiums was presented throughout nearly every asset class in 2022. During the calendar year, LCD 1st and 2nd lean spreads widened by 135 and 686 basis points respectively. There has been a lot of talk about the lack of volatility in private asset marks. In this regard, we agree with Cliff Asens' description of this as volatility laundering. As we've said in the past, And four, the reasons we outlined in our previous public shareholder letter, we believe that using inputs from the market is not only critical but required in determining fair value of assets. Of the 75 cents per share difference between our net investment income and net income results for 2022, the majority, or 57%, was related to to unrealized losses from credit spread movements alone that we expect to recover over time as credit spreads tighten or investments are paid off. And 20% was driven predominantly from the decline in equity valuations. The remaining difference between net investment income and net income is primarily related to one, the unwind on our interest rate swaps that are not subject to hedge accounting, and two, the reversal of unrealized gains that flow through net investment income upon realization. The overall health of our portfolio remains strong with no changes in non-accruals from the last quarter. For the third consecutive quarter, our board has increased our quarterly based dividend, raising the figure by one cent per share to 46 cents per share the shareholders of record as of March 15th and payable on March 31st. Year over year, we've increased our base dividend by 12.2%. We are also pleased to share that our board declared a supplemental dividend of 9 cents per share related to our Q4 earnings to shareholders of record as of February 28th, payable on March 20th. In the near term, we expect that net investment income will exceed our newly established base dividend level due to our increased earnings power. However, we determined 46 cents per share to be an appropriate level based on looking at the forward interest rate curve through 2025, which is subject to changes in the market. 2022 was a year characterized by spread income as a driver of earnings given repayment activity slowed in the wake of increased market volatility. Portfolio turnover, which is calculated as total repayments over total assets at the beginning of the year, was 26% in 2022 compared to 43% and 41% in 2021 and 2020, respectively. The wider spread environment naturally causes slowdown in repayment activity. As a result, fee generating income represented a smaller portion of our total investment income for the year relative to historical trends. We generated a return on assets calculated as total investment income divided by average assets of 11.6% for 2022 compared to 11.3% in 2021, which was a year defined by record level of repayment activities. This further highlights the positive impact on the rise in reference rates and driving incremental returns for our shareholders. Our year and net asset value per share adjusted for the impact of the supplemental dividend that was declared yesterday is 1639, and we estimate that our spillover income per share is approximately 77 cents. We would like to reiterate that our supplemental dividend policy is motivated by, one, RIC distribution requirements. Two, not burdening our returns with excess friction costs incurred through excise tax. And three, the goal of steadily building net asset value per share over time. Before passing it to Beau, I'll spend a moment on how we're thinking about the broader macroeconomic environment. Big picture, we're cautious. But when we think about our portfolio, we are constructive on how we are positioned for the road ahead. The U.S. economy faces a number of headwinds in 2020-23 that are largely the result of inflation and the resulting shift in monetary policy in 2022. The restrictive monetary environment will surely have an impact on growth. The idea of a near-term Fed pivot remains challenging until job growth slows and a consumer weakens. In summary, it feels like we're living in a transitionary period with restricted Fed policy that will continue to dampen growth until we see an increase in unemployment and further demand destruction. A broad base flow down in the economy, coupled with the current rate environment, will cause some stress for borrowers. This highlights the importance of why we are focused on business models with high variable cost structures and with those that have pricing power. Eighty-two percent of our portfolio by fair value was comprised of software and business services companies at quarter end and are generally characterized by high levels of recurring revenue, predictable cash flows, variable cost structures, and pricing power. Our portfolio has shown resiliency to date, and we believe that underlying business models of our borrowers are robust and durable. However, we believe economic cycles do exist. As such, we will continue to focus on staying on top of the capital structure and operate in the middle of our target leverage range. With that, I'll pass it over to Beau to discuss this quarter's investment activities.