CGBD - Carlyle Secured Lending: We're Adding To This 13%-Yielding BDC

2023-03-21 06:00:00 ET

Summary

• We discuss quarterly results from the BDC Carlyle Secured Lending and highlight key income dynamics of the portfolio.
• Net income, adjusted for one-off events, rose 9% over the quarter while the NAV fell 1% - resulting in a +1.6% total NAV quarterly return.
• CGBD continues to outperform the sector while trading at a wide discount to book.
• We switched the stock's rating back to Buy on the back of the recent drop in the BDC sector.

In this article, we catch up on the Q4 results of Carlyle Secured Lending ( CGBD ). Overall, the stock did well in Q4 with a continued rise in net income (adjusted for one-off events) and a modest fall in the NAV. Over 2022, CGBD delivered double the return of the broader sector. Although the stock's valuation discount relative to the sector has narrowed, it continues to trade at a wide discount to book. The recent drop in the BDC sector caused us to rate CGBD stock a Buy once again.

Quarter Update

GAAP and adjusted net income (i.e. net of the preferred dividend) both fell over Q4. However, if we strip out the impact of one-off income of $0.14 due to one position coming back to accrual in Q3, net income rose 9%. Both Q3 and Q4 saw adjusted net income rise $0.04 or 10% and 9% respectively.

The total dividend remained the same, as the base dividend ticked up 1 cent (for the third consecutive quarter) while the supplemental ticked down 1 cent for a wash.

The base dividend is now back to its IPO level, after a reduction in 2020 however the total dividend is higher by 19%.

Dividend coverage remained at a strong 109% for Q1.

The NAV fell by 1% entirely due to unrealized depreciation. There was a $0.04 NAV accretion from $7.3m of share repurchases. Over 2022, the NAV grew by about half a percent - a very good result for investors in a tough year.

Income Dynamics

Net new investments were positive as new originations outpaced sales and repayments. Management described the investment environment as lender friendly, suggesting they are having a relatively easy time allocating to attractive deals.

Net financial leverage ticked up to 1.16x due to continued share buybacks and positive net new investments. This level of leverage is unexceptional in the context of the broader sector.

Portfolio yield jumped to 11.4%, however interest cost rose a bit more to 5.8%. CGBD has a relatively high interest cost due to a high amount of floating-rate debt, about double the sector average.

Because of a relatively high amount of floating-rate debt, the company's net income beta is on the lower side at +7.4% for a 1% rise in short-term rates or about 3% below the sector average.

Portfolio Quality

PPT Management - a healthcare facilities company - was added to non-accrual. Total non-accruals by fair-value increased to 2.9% which is about double the sector average.

Overall portfolio quality according to internal ratings worsened slightly.

Net realized gains / losses were flat. Over the last couple of years the portfolio generated net gains - a good sign.

Valuation And Return Profile

CGBD put together a very impressive performance run, particularly over the last couple of years, outperforming the sector by 2.5% per annum over the last 3 years in total NAV terms and by 1.5% per annum over the median BDC.

The company delivered positive quarterly total NAV returns each quarter after Q1-2020 and has outperformed the sector over the last 6 quarters. The yellow line which shows the trailing-twelve month average of relative performance is increasing which is great to see, indicating the company's performance is improving relative to the sector.

A few weeks ago we downgraded the stock to Hold as its valuation rose to the highest level over the past 4 years. The recent wobble across markets brought it back down to today's 79% valuation which has caused us to upgrade it back to Buy .

Until recently the stock has tended to trade at a significant discount to the sector average of around 20% which has compressed recently on the back of continued strong performance.

Takeaways

Overall, CGBD remains one of the most attractive positions in the BDC space at the moment. It continues to deliver strong results alongside an attractive valuation. Its share buybacks continue to add to the NAV and support the stock. And although its net income beta is below the sector average, it is still positive. So net income should continue to rise on the back of higher short-term rates even if we see a pause in the Fed's hikes over the next couple of months.

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