BXSL - Retirement Passive Income: I Just Sold 11%-Yielding Blackstone Secured Lending

2023-09-23 07:46:14 ET

Summary

• We just sold 11%-yielding BXSL for a hefty profit.
• We share our original investment thesis and review its recent performance.
• We also discuss three reasons why we sold our shares.

We recently sold our position in Blackstone Secured Lending ( BXSL ) after holding it for nearly one year and earning a strong profit on our position. While the ~11% dividend yield is certainly attractive and appears sustainable for at least the near term, we sold our position for three reasons that undermine and/or threaten our original investment thesis. In this article, we will discuss why we bought BXSL in the first place and why we decided to sell it recently.

BXSL Stock: Investment Thesis

We originally bought BXSL on October 31st, 2022 at $23.46 per share. Since then, the stock has performed remarkably well, significantly outperforming both the S&P 500 ( SPY ) and the broader Business Development Company sector ((BIZD)):

We originally purchased shares because:

1. BXSL has an investment grade balance sheet (Baa3 with a Stable outlook from Moody's) and plenty of liquidity with a well-laddered debt maturity ladder, giving it a strong balance sheet.
2. It is managed by the world's leading alternative asset manager - Blackstone ( BX ) - which gives it significant competitive advantages such as access to Blackstone's vast wealth of proprietary data on macro and micro economic factors that benefit BXSL in making investment and portfolio management decisions. Moreover, BXSL's holdings are often able to collaborate with other companies across the Blackstone empire to improve efficiencies and implement synergistic cross-selling.
3. Nearly its entire portfolio is invested in first-lien senior secured floating rate debt, making it a great vehicle for gaining exposure to rising interest rates without taking on too much principal risk thanks to its conservative posture in the capital stacks of a well-diversified portfolio of companies.
4. Its low loan-to-value which was well under 50% and strong underwriting track record further added to the attractiveness of the investment.
5. The company also had a well-covered dividend that appeared safe and likely to grow as interest rates continued to rise, thereby pushing net investment income up with them, creating the capacity for the dividend to increase.

Our investment thesis proved to be right on, with BXSL performing very strong fundamentally and its stock price followed. For example, in its most Q2 results it reported :

• Net investment income increased from $0.93 to $1.06 sequentially and by 71% year-over-year, thanks to rising interest rates.
• Net investment income easily covered the regular dividend of $0.70 by 1.51x, combining with BXSL's conservatively positioned investment portfolio of almost all senior secured debt to make BXSL's dividend arguably the safest in the sector.
• BXSL capitalized on this stellar dividend coverage by hiking its dividend by 10% for Q3 to a level of $0.77 per share.
• The company made solid progress on deleveraging its balance sheet, bringing the ratio down from 1.31x to 1.15x sequentially.
• The company remains very well positioned to deal with higher for longer interest rates, thanks to the fact that a whopping 98.4% of the portfolio is invested in first lien, senior secured debt, and its debt investments stand at a 46.5% average loan to value.
• Meanwhile, its debt is well-structured, with 64% of it set at fixed interest rates with a weighted average rate of just 2.97% and its total cost of debt is a very reasonable 4.84% with weighted average maturity of 3.6 years.
• Underwriting performance also remains very strong, with a mere 0.1% non-accrual rate of fair value.

BXSL Stock: Why We Sold It

With so much going right for the company, why did we sell it? We decided to sell BXSL at $28.38 per share because:

• It was trading at a substantial ~10% premium to book value. While this does not make it necessarily expensive, it is not exactly cheap either. We are total return and value-focused investors first and foremost who want to buy stocks that not only provide an attractive current income yield, but also have a wide margin of safety and can deliver strong multiple expansion. BXSL not only no longer offers considerable valuation multiple expansion potential, but the bias appears to be to the downside, given that this is right around 52-week highs for its valuation multiple:

• Given that BXSL's loans are almost entirely floating rate, and our view and the Fed's Dot Plot's view are that interest rates are much more likely to decline in 2024 than they are to increase - with further declines expected in the years that follow - the outlook for the company's net investment income growth is very weak moving forward. We did not want to pay a premium for that.

• While BXSL does have a diversified portfolio, the support of Blackstone, and is concentrated heavily on senior secured loans, the counterparties for these loans are well below investment grade in their financial strength and therefore will likely not hold up terribly well during an economic downturn. Given that we think that an economic downturn in the not-too-distant future, we believe that this may weigh further on the stock's total return potential moving forward.

When you combine the negative headwinds of:

1. Potential multiple compression
2. Declining net investment income
3. Declining book value per share

You get a recipe for a strong chance of weak total return performance and even a dividend cut if the economy ends up entering a deep recession and interest rates plummet.

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