Sixth Street Specialty Lending, Inc.

Good morning and welcome to 6th Street Specialty Lending, Inc.' 's fourth quarter and fiscal year ended December 31st, 2023 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 16th, 2024. I will now turn the call over to Ms. Cammie Van Horn, Head of Investor Relations. 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 fourth quarter and fiscal year ended December 31, 2023, and posted a presentation to the Investor Resources section of our website, www.sixthstreetspecialtylending.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, 2023. 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, Kimmy. Good morning, everyone, and thank you for joining us. With us today is our president, Bo Stanley, and our CFO, Ian Simmons. For our call today, I will review our full year and fourth quarter highs and pass it over to Bo to discuss activity in the portfolio. Ian will review our financial performance in more detail, and I will conclude with final remarks before opening up the call to Q&A. After the market closed yesterday, we reported fourth quarter adjusted net investment income of $0.62 per share or an annualized return on equity of 14.5%. an adjusted net income of 58 cents per share, or 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 gain instead of fee expense, were less than a penny per share higher. The difference between this quarter's net investment income and net income per share was primarily driven by the reversal of prior period unrealized gains related to investment realizations. Other drivers include unrealized losses from portfolio company-specific events, which were largely offset by realized and unrealized gains, largely from the impact of tightening credit spreads on the valuation of our investments. For the full year 2023, we generated adjusted net investment income per share of $2.36 representing a return on equity of 14.4% and a full year adjusted net income per share of $2.66 or return on equity of 16.2%. Long-time followers of our business will know that we measure success based on returns, and 2023 was a strong year for shareholder returns. Excluding the post-COVID year rebound in 2021, full year return on equity on adjusted net income of 16.2% reflects the highest calendar annual return equity since our IPO in 2014. While this partially reflects the round tripping of 2022 results, reviewed on a combined basis over the last two years, we remain pleased with our performance relative to the sector and in context of a complex macroeconomic environment. Over the last two years, we experienced the fastest rate hiking cycle in history, contributing to increased volatility and economic uncertainty. Despite these headwinds, we generated an average annualized return on equity on adjusted net income of approximately 12% for fiscal years 2022 and 2023. While we don't have a complete set of peer data available yet, we believe these returns are nearly double that of our peers over the same two-year period. That is supported by a two-year return on equity on a net income of 6.5% for our peers through September 30th, 2023. We believe that the return profile we delivered is largely the result of our disciplined approach to capital allocation. During 2023, we capitalized on attractive opportunities set by growing the balance sheet and issuing equity in May while operating at the upper end of our target leverage range throughout the year. We lead into an investment environment where the deployment opportunity is generated with earnings in excess of our marginal cost of capital. Our track record for efficiently allocating shareholder capital has been rewarded as evidenced by our stock trading above book value. As a result, our shareholders benefit from access to the more recent asset vintage. We believe this exposure will continue to drive differentiation in our returns relative to the industry. We are humbled by what we've achieved in the past, but I'd like to spend time on how we're positioned in the future, starting with the health of the portfolio. Despite the challenging operating environment over the last two years, from elevated interest rates, higher inflation, and uncertain geopolitical events, The portfolio has shown resilience and remains in good shape. The weighted average revenue and EBITDA of our core portfolio companies both increased 6% quarter over quarter. We continue to have only one portfolio company on non-incrual, which represents less than 1% of the total portfolio by cost and fair value. Interest coverage remains stable on a weighted average basis of 2.0 based on interest rates as of quarter end. Given the shape of the forward interest rate curve, we expect this to be the trough for interest coverage of our portfolio companies. While we highlight the overall health of the portfolio, the tails are getting bigger. We anticipate this will be a theme for 2024 for the sector as idiosyncratic credit issues arise and portfolios and losses drive divergence in returns, which I'll discuss further in a moment. The reality for private credit managers is the illiquid nature of the investment assets and the requirement to be long-only makes it challenging to reposition an existing portfolio with any level of speed as macroeconomic conditions change. We feel confident about the strength of our in-the-ground portfolio today for two key reasons. First, there's a deliberate asset allocation in our portfolio characterized by 91% personally and senior secure loans to businesses with strong underlying union economics. And second is a significant exposure we have to recent vintage assets, which makes up nearly 40% of our debt investments by fair value as of quarter end. These investments were underwritten after the start of the rate hiking cycle for higher quality companies with lower LTVs. Yesterday, our board approved a base quarterly dividend of 46 cents per share to shareholders of record as of March 15th, payable on March 28th. Our board also declared a supplemental dividend of $0.08 per share relating to our Q4 earnings to shareholders of record as of February 29th, payable on March 20th. Our quarter in net asset value per share, pro forma for the impact of the supplemental dividend that was declared yesterday, is $16.96. And we estimate that our spillover income per share is approximately $1.04. We would like to reiterate our supplemental dividend policy is motivated by careful consideration of a number of factors, including the RIC distribution requirements, not burdening our returns with excess friction costs incurred through excise tax, and our goal is steadily building net asset value per share over time. In connection with the board, we analyze this framework on an ongoing basis. Before passing it to Beau, I'll spend a moment on how we're thinking about the broader macroeconomic environment and the impact for the sector. As we said in our last two earnings calls, we believe BDCs were at peak earnings and we reiterate this view based on the shape of the forward interest rate curve. More broadly, our outlook for this sector remains cautious as we know from history that credit deterioration takes time and therefore losses lag. This was evidenced during the global financial crisis which began in 2007 and defaults didn't peak until 2009. As the credit cycle continues to evolve in 2024, we expect to see three impacts for the sector. First is a decline in net investment income driven by the downward shape of the forward interest rate curve. Second is an uptake in non-recruits from credit deterioration resulting in further declines in net investment income. And third is a downward pressure on net asset value driven by the potential for lower fair values from credit weakness and dividend policies and excessive earnings that result in a return of capital. The good news for our business is that we feel confident in our asset selection and credit quality, given our approach for being highly selective in our ability to lead in attractive investment environments. Additionally, we view the potential for lower interest rates and tighter spreads will likely increase portfolio turnover. This will result in potential for incremental economics through activity-based fees to offset the decline in net investment income from lower base rates. And finally, we are highly confident in our ongoing ability to overrun our base dividend, which Ian will discuss in more detail. With that, I'll pass it over to Beau to discuss this quarter's investment activity.