Sixth Street Specialty Lending, Inc.

Good day and thank you for standing by. Welcome to the 6th Street Specialty Lending, Inc. Q1 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's 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. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Kami 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 6th 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 first quarter ended March 31, 2024, 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 first quarter ended March 31st, 2024. 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.

Good morning, everyone, and thank you for joining us. With us today are President Bo Stanley and our CFO, Ian Simmons. For our call today, I will review our first quarter highlights and pass it over to Beau to discuss activity and the portfolio. 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 first quarter adjusted net investment income of 58 cents per share or an annualized return on equity of 13.6%. an adjusted net income of 52 cents per share, or an annualized return on equity of 12.3%. As presented in our financial statements, our Q1 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gain incentive fee expense, were a penny per share higher. The difference between this quarter's net investment income and net income was driven by 9 cents per share of net unrealized gains from the impact of tighter credit spreads, on the valuation of our investments, 14 cents per share on net unrealized losses from portfolio company-specific events, and 3 cents per share of unrealized losses from the reversal of prior period unrealized gains related to investment realizations, and 3 cents per share of realized gains from investment sales. With these results in mind, I'd like to start by circling back to two remarks I made on previous earning calls. in February. First, the BDC sector is at peak earnings, and second, the tail within portfolios is getting longer. On the first comment, we reported another strong quarter from an earnings perspective as net investment income continued to benefit from higher interest rates. Q1 was the first time in eight quarters or since the start of the rate hiking cycle that we experienced a modest decline in the weighted average reference rate resets on debt and income-producing securities of five basis points. That said, the strength of the reset economic data and the higher for longer shape of the forward interest rate curve continues to support net investment income. Since our last earnings call, the forward curve has shifted towards higher for longer with year-end base rates estimated to be 4.9%, which is up from 4.2% as of our last earnings call in February. We anticipate the current environment will likely drive a dispersion between operating and gap earnings as higher base interest rates may ultimately lead to credit deterioration and potential for losses as we previously talked about. On my second comment, we're adding a nuance to the view that this quarter, which is that the tail is growing on the margin. While we're seeing evidence of idiosyncratic credit issues arising from across the private credit sector, We remain optimistic about the ability for private credit portfolios to withstand the headwinds of today's macroeconomic environment for a couple reasons. First and foremost, private credit managers underwrite investments with the intent of holding that risk until maturity, given the largely illiquid nature of the asset class. For us, this means extremely thorough due diligence and bottoms-up analysis on every credit we undertake, coupled with active portfolio management to the life of the investments. And second, private credit managers have the ability to be selective in terms of sector exposure. We have demonstrated selectivity in our portfolio by avoiding cyclical businesses, staying away from certain industries, and leaning into specific sector themes. This optionality differs from the public debt market, which are forced to hold a much broader range of sector exposures, including those that we have deliberately avoided. And it's important to note that both of these benefits to private credit are not given and ultimately rely upon active management. Having the ability to determine when to invest as well to what to invest is a feature of our business model and a core principle of operating our business within a capital allocation discipline. Turning to our portfolio specifically, the difference between this quarter's net investment income and net income highlights our point on the growing tail. Individual portfolio company specific events result in a 14 cents per share net unutilized losses in Q1. A significant portion of this, or 11 cents per share, was relayed to the markdown in our investment in Astra Acquisition Corp. At quarter end, we add this investment to non-accrual status driven by continued underperformance of the company. While this is evidence that the tail is growing on the margin, we remain focused on the bigger picture, which is our ability to grow net asset value over the long term. Despite idiosyncratic issues as existed in our portfolio, we have steadily and consistently grown net asset value over the 12 and a half years since we started this business, represented by a 3.5% annualized NAV growth before special and supplemental dividends since inception. We feel confident and our ability to continue this growth in the future, which we believe will result in outperformance relative to the sector. Turning now to the broader portfolio, credit quality remains strong with non-accruals limited to 1.1% of the portfolio by fair value. Revenue and EBITDA growth continued for another consecutive quarter. Several of our portfolio companies have started to see cost-saving initiatives flow through the P&L, resulting in margin expansion and positive EBITDA trends. All things considered, Our underlying portfolio companies have shown resilience, which we believe is reflective of our disciplined credit selection and effective portfolio management. Yesterday, our board approved a base quarterly dividend of 46 cents per share to shareholders of record as of June 14th, payable on June 28th. Our board also declared a supplemental dividend of six cents per share related to our Q1 earnings to shareholders of record as of May 31st, payable on June 20th. Our net asset value per share pro forma for the impact of the supplemental dividend that was declared yesterday is 1711, and we estimate that our spillover income per share is approximately $1.06. Before passing it to Beau, I would like to note that on March 26th, Fitch Ratings Agency published their annual review for the BDC sector, and we are pleased to note that 6th Street Specialty Lending's rating of BBB flat was revised from a stable to a positive outlook. Of the 22 firms in their rated universe, TSLX is one of two BDCs to hold a rating with a positive outlook from Fitch. With that, I'll now pass it over to Bo to discuss this quarter's investment activities.