Good day, and thank you for standing by. Welcome to the TCG BDC, Inc Fourth Quarter 2021 Earnings Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that this call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Head of Investor Relations, Allison Rudary. Please go ahead.
Good morning, and welcome to TCG BDC's Fourth Quarter 2021 Earnings Call. Last night, we issued an earnings press release and detailed earnings presentation with our quarterly results, a copy of which is available on TCG BDC's Investor Relations website. Following our remarks today, we will hold a question and answer session for analysts and institutional investors. This call is being webcast, and a replay will be available on our website. Any forward-looking statements made today do not guarantee future performance and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the Risk Factors section of our annual report on Form 10-K, that could cause actual results to differ materially from those indicated. TCG BDC assumes no obligation to update forward-looking statements at any time.
With that, I'll turn the call over to our Chief Executive Officer, Linda Pace.
Thank you, Allison Rudary, and good morning, everyone. Thank you all for joining us on our call this morning to discuss our fourth quarter and full year 2021 results. Joining me on today's call is our Chief Investment Officer, Taylor Boswell, and our Chief Financial Officer, Thomas Hennigan. I'm going to focus my remarks today on three topics. First, I want to touch on this quarter's results. Second, I'll highlight some of the momentum of the last year. Finally, I'll conclude with some thoughts on our positioning for 2022. Let me begin with this quarter's financial results, which demonstrated continued strength across the board. We again generated solid earnings with net investment income of $0.40 per common share while declaring $0.40 in total dividends, which represents an annualized yield on our stock of over 11%.
Net asset value per share of $16.91 saw a positive progression for the seventh consecutive quarter, up 1.6% from Q3 2021. As we will detail later, strengthening credit performance, especially in our non-accrual and watchlist names, drove most of this increase. Solera, a non-accrual name we have been invested in for seven years and been working out for three, provided the largest impact. In the first quarter, we exited the position and expect another meaningful boost to Q1 2022 performance and a reduction in our non-accrual rates as a result. As we have said before, the recovery of our watchlist and non-accrual names remains a significant tailwind for performance. During the fourth quarter, given the continued attractive returns available, we purchased $7.8 million of our common stock, resulting in $0.03 of accretion to net asset value.
Since we launched our program in late 2018, we have repurchased over $125 million of stock, which represents nearly 15% of the total shares outstanding, demonstrating our ongoing commitment to shareholder returns. On the investment front, we funded $236 million in the fourth quarter, reflecting the robust deal environment in 2021 and the deep origination capabilities of Carlyle's platform. We had repayments and strategic sales of $272 million and ended the year with just over $1.9 billion of investments. This is a very comfortable funded position, allowing us to be highly selective and defensively oriented on new investments. Next, I'd like to reflect for a moment on 2021's full year results. Simply put, it was a great year for our business with strong income delivery, substantial NAV growth, and outstanding stock performance.
We posted full year net investment income of $1.53, considerably out-earning our base dividend each quarter. We paid a $1.50 in dividends, representing a 9.7% yield on NAV and a 14.6% yield on the stock price as measured from the beginning of 2021. We grew our NAV almost 10% in 2021 and 2.2% since year-end 2019, reflecting excellent results through the COVID cycle. Our shareholders as of January 1, 2021, received a full year return of almost 50%, inclusive of reinvested dividends. We're proud of this performance, which we view as among the best in the industry for conservative lending-focused BDCs.
We're confident it reflects not only the strong macroeconomic backdrop of 2021, but also the resilience of our investing approach, the benefits offered by Carlyle's platform, and the hard work of a large and talented team. We thank each of them for their efforts. As we begin another year, our investment objective, the delivery of sustainable income to our shareholders, hasn't changed, but the investment environment is both changing and getting more complicated. We've been investing in leveraged credit for over two decades here at Carlyle, and our approach has been tested through many cycles, a focus on senior secured debt, the extraction of illiquidity premium from the true middle market, harnessing our platform to derive competitive advantages at all stages of our process, and finally, safe and defensive portfolio construction. All of these position us well to deliver again in 2022 for our shareholders.
Thanks for joining us this morning. I'd like to now hand the call over to Taylor Boswell.
Thanks, Linda. As usual, I'll begin today by sharing some macroeconomic perspectives derived from our global investment footprint. After that, I'd like to spend a few moments detailing the investment setup as we see it for CGBD in 2022. Inflation is understandably our focus topic today. In short, it remains high, and our portfolio data provide little reason to expect price pressures to abate meaningfully anytime soon. Capacity constraints continue to bind from inventories to shipping to labor. The good news is that we're seeing cost increases largely being passed on to end customers. While this is positive for the portfolio's gross margins, near-term financials, and credit performance, it further complicates the inflation outlook and suggests more cumulative Fed tightening may be necessary. In markets, we are, of course, seeing a meaningful shift in forward rate expectations.
Thus far, floating rate credit, which comprises the vast majority of our portfolio, has been largely unaffected. The sell-off in high-yield bonds can be almost entirely explained by rate risk rather than credit spreads. Equity market volatility, on the other hand, has risen with Treasury market volatility. Returns in the most rate-sensitive equity categories, loss-making and long-duration growth stories, are down significantly. Conversely, the equity assets most sensitized to the near-term economic outlook, companies with more traditional cash flow-based valuations and shorter investment horizons, have actually held up quite well. Despite this volatility, equity markets seem to be telling us the same thing as credit markets. Liquidity conditions and the valuation environment are shifting, but fears of recession are not yet driving markets. Shifting back to CGBD.
As Linda noted, 2021 was undeniably a great year for the company, with strong income delivery, good NAV growth, and outstanding stock performance. Of course, what's next should always be our focus. Our investment objective remains the delivery of sustainable income. Looking forward, we are equally optimistic about our prospects for both fundamental and stock performance in 2022. Allow me to delve into the building blocks. First, fundamental corporate performance and credit. 2021 was a year of strong cyclical recovery for corporates and tremendous liquidity tailwinds across markets, which buoyed performance across nearly all investment strategies. 2022 promises to be more complicated and is likely to demonstrate slower but still positive cyclical earnings growth prospects with inflationary pressures across sectors, as well as rising rates and the more balanced liquidity conditions they engender.
At Carlyle, we welcome this environment as it offers substantial opportunity for discerning investors to differentiate their performance. We're confident the sourcing and credit engine of our competitively advantaged platform will continue to deliver through cycles. Second, yield and income. We continue to find attractive absolute yields and strong investment relative value in our core strategy through middle-market senior lending. The source of that return is the structural illiquidity premium we access when not forced to compete with traditional broadly syndicated loan and high yield markets. Alongside that core, our complementary and opportunistic efforts in junior investing, ABL, recurring revenue finance, non-sponsor lending, and other areas offer both yield enhancement and risk diversification benefits. Of course, with 98% of our loans invested in floating-rate instruments, we are significantly insulated from the risk of rising rates.
Our borrowers typically have meaningful cash flow to absorb increased financing costs, limiting credit impacts, while all else equal, returns on our assets will increase. As Tom will detail later, the current path of the forward LIBOR curve implies that we will quickly pass through any headwind from LIBOR floors sometime in the third quarter, after which we would see increasing returns on the portfolio. We're pleased to have this benefit, but that said, it's an important time to re-reiterate the following. We are conservative investors here at Carlyle. Our shareholders hire us to generate sustainable income, which we do principally by extracting structural illiquidity premium and tightly managing credit performance. We do not view it as our mandate at CGBD to make macro bets on the interest rate curve.
As we have always done, we will continue to appropriately match and balance our funding profile to our assets to ensure overall stability of income through cycles. Third, our watch list and non-accruals. As we stated last year, we've been working these assets for a long time, years in most cases, and we are very comfortable they now rest on a strong footing. In fact, as you see in our results today and are likely to see again in the coming quarters, these investments are proving to be net assets, not liabilities for CGBD's performance. In this quarter, I'll highlight Solera, a loan made in 2014 that has been on non-accrual since the end of the second quarter of 2018. To be sure, this investment did not perform as expected.
Due to the strong capabilities and persistent efforts of our workout team, we've been able to manage this underperforming investment to a solid outcome. In Q4 2021, Solera accounted for 14% of our non-accrual investments at fair value after a $6 million markup. In Q1 2022, having now sold the business, this position will deliver an incremental $9 million of gains. Behind Solera, we continue to work Dermatology Associates and Direct Travel, both of which have credible paths to outperformance in 2022, offering further potential NAV and earnings upside, all else equal. Finally, a comment on our stock. We are approaching three years since Linda and I joined Tom to lead CGBD's investment effort.
Since that time, CGBD's fundamental return, our change in NAV plus our dividends paid, has been solid, comfortably in the top half of the industry and top quartile in more recent periods, while we have been delivering against our primary investment objective of generating sustainable income. Despite this, our stock can still be acquired with over 2% incremental dividend yield or an approximate 15% discount on price to NAV of the industry. We believe this provides a compelling margin of safety for investors who want attractive, sustainable income. We're confident that over time, investors will see the same strong fundamental performance we do, and valuation reversion will offer further upside to current shareholders. In the meantime, we expect to continue to be active repurchasers of our shares. With that, I'd like to turn it over to Tom.
Thank you, Taylor. Today, I'll begin with a review of our fourth quarter earnings, then I'll provide further detail on our balance sheet positioning and conclude with a discussion of our portfolio performance, including some very positive developments in some of our historically underperforming assets. As Linda previewed, we had another strong quarter on the earnings front. Total investment income for the fourth quarter was $44 million, up modestly from prior quarter. The primary driver was an increase in prepayment fees and OID accretion from a higher level of repayment activity. Core interest income on our investment book was down modestly due to a lower average investment balance, while income from the two JVs again remained stable versus prior quarter levels. Total expenses were flat at $22 million in the quarter.
The result was net investment income for the fourth quarter of $22 million or $0.40 per common share. That's our highest level since March 2020. On February 18, our board of directors declared the dividends for the first quarter of 2022 at a total level of $0.40 per share. That comprises the 32-cent base dividend plus an 8-cent supplemental, which is payable to shareholders of record as of the close of business on March 31. I may sound like a broken record with this. As we look forward into 2022, we remain highly confident in our ability to comfortably deliver that 32-cent base dividend plus continue the sizable supplemental dividends. We'll note the impact of rising rates.
Given most of our loans have LIBOR floors, while our floating rate debt does not, based on the most recent curves, rising rates will result in mild earnings headwinds in the near term. However, the current curves also indicate benchmark rates will quickly become a positive earnings driver. By the end of 2022, we begin to see a net positive impact. For every 33 basis points of additional increase in LIBOR, we'll experience a $0.01 increase in NII each quarter. In addition, we also expect a positive earnings impact from the improvement in our level of non-accruals. I'll touch on that point in more detail later. Moving on to the performance of our two JVs, total dividend income was again $7.5 million in the quarter, in line with the last few quarters.
On a combined basis, our dividend yield from the JVs was again about 11%, so continued stability. On to valuations. Our total aggregate realized and unrealized net gain was $12 million for the quarter. The seventh consecutive quarter of positive performance following the drop in the first quarter of 2020. First performing lower COVID-impacted names, plus our equity investments in the JVs increased in value about $2 million compared to 9/30. The largest component was $8 million gains from our equity book, offset by a $5 million decline in the value of our investment in MMCF I JV. I'll note the decline in the JVs value was driven by lower leverage of the vehicle, not underlying credit. Next is the moderate to heavier COVID-impacted names.
Valuations for this category were flat for the quarter, as we saw overall stability in the underlying fundamentals in this group. The final category, assets that have been underperforming pre-pandemic, were up $9 million, marking the seventh consecutive quarter of stability or improvement. This was driven primarily by Solera and continued positive migration in Dermatology Associates. Next, I'll touch briefly on our financing facilities and leverage. We continue to be very well-positioned with the right side of our balance sheet. Statutory leverage was about 1.2x, while net financial leverage was about 1.0. We're still sitting close to the lower end of our target range, giving us flexibility to invest in attractive new investment opportunities. I'll finish with a review of the portfolio and related activity.
We continue to see overall stability and improvement in credit quality across the book, specifically in some of the positions with more severe historical credit issues. The total fair value of transactions risk-rated 3- 5, indicating some level of downgrade since we made the investment, improved again this quarter by $15 million in the aggregate. Total non-accruals increased to 4% based on fair value. That's actually a good thing because our valuations for these assets improved during the quarter. Last quarter, we said we saw a path to both NII expansion and increased recovery from our non-accruals. In the fourth quarter, we had an increase in fair value of our investments in Solera from a mark of 38- 90, accounting for a $6 million unrealized gain. That was based on a potential sale of the business.
We're very pleased to say that sale was consummated earlier this quarter, with the incremental gain on our debt and equity above our 12/31 valuation totaling almost $9 million or 18 cents per share. You'll see that benefit in our results for the first quarter of 2022, including a reduction in non-accruals of about 60 basis points on both a cost and fair value basis. As Taylor noted, we continue to work hard on our other watch list names and see a path for further reduction in non-accrual levels later in the year as these processes play out. With that, back to Linda for some closing remarks.
Thanks, Tom. Before I turn the call over to the operator, I'd like to reiterate that delivering a sustainable and attractive dividend to our shareholders alongside a stable or growing NAV remains our top priority.
Since we changed our dividend policy in the third quarter of 2020 to include a base dividend of $0.32 plus a supplemental dividend, we've earned and distributed between $0.36 and $0.40 a share per quarter. Our shareholders should have a high degree of confidence that future quarterly payments will continue in this range and that we will continue to pay out the excess earnings over and above our $0.32 base dividend. Thank you for joining us today. I'd like to now hand the call over to the operator to take your questions.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by. We compile the Q&A roster. Our first question comes from Melissa Wedel from JP Morgan. Your line is now open.
Good morning. Thanks so much for taking my questions today. Lot to digest in this quarter end with the update you provided this morning. I think given the conversation you had about the interest rate outlook and given the magnitude of NII performance above the base dividends, thought it would be helpful to kind of explore your thinking around at what point you might revisit the discussion around the level of the base dividend, potentially increasing that over time.
Yeah. Hey, Melissa. Thomas Hennigan. Thanks for the question. You know, we feel very comfortable with that $0.32 dividend, and we expect to continue to exceed that. As we've noted and continue to note, there certainly are some near-term headwinds from the interest rate curve. We think we'll be quickly through that in the next couple quarters. Then when you look at the curve, it'll really be the fourth quarter where we start to see a positive impact on earnings, all else equal from the interest rate curve. We also see upside from our two remaining large non-accrual names. Overall, very positive signs. We feel very comfortable with those levels. Certainly as the year plays out, it's something we look at.
You know, as of right now, there is no intention to increase that base dividend as we sit here today.
Yeah. Melissa, it's Linda. Let me just chime in because, you know, your question is one that obviously we ask ourselves every quarter. We're never gonna have perfect visibility, but I think as, you know, as Tom said, and as Taylor pointed out in his discussion, we think there's gonna be a lot going on this year. Some of it's really good in terms of, you know, fundamentals in our portfolio, and some of it is unknown vis-a-vis, you know, the macro environment and the interest rate environment. Really, we think the best thing for shareholders right now is to just give them a high degree of predictability in a very unpredictable world that we think is, you know, where we are in 2022. You know, we're gonna stay with our current dividend policy today.
You know, feel free to keep asking that question as time goes on.
Noted. Thank you. One follow-up. On the repurchase activity as we look at it over the last few quarters, it's been pretty consistently in the $7 million-$8 million range for the last three quarters. Certainly sounds like you're well aware of the value there, given trading levels currently. Given where portfolio leverage is, given the opportunity set right now, is your thinking evolving at all on the level or pace of deployment on repurchases over the next few quarters, given the remaining capacity on the existing authorization?
Hey, Melissa, it's Tom again. You know, I think that based on we've been trading in, we'll call it the mid-80s range, and we've been stuck there for the last couple of quarters. We think that at that level, you know, we're comfortable at the current level, so don't see any change to the level of repurchases. I think that, you know, we certainly would hope that based on looking at the discount of this quarter as our price creeps up towards the 90% of NAV range, that's where I think that you may see the decline in those overall repurchases. You know, right now we're comfortable at that modest level. We'll call it that modest level. We want to be in the market, consistent purchasers.
That's where we've been in the last number of quarters as we've been in like, we'll call it the mid-80s trading range.
Melissa, it's Taylor. I mean, you'll hear a common thread through the answers to both of your last questions, which is we are just super focused on stability and consistency. You know, those are the things that we think investors want to see out of us, and we think that there's ample room for us to perform both fundamentally and for our stock to perform if we just keep delivering solid, consistent performance. You know, that's driving a lot of the philosophy and the response to both those questions. There's more opportunity on both, you know, likely. You know, with where we sit today, we think investors just wanna see us deliver quarter in, quarter out.
That's really helpful context. Thank you so much.
And thank you. If you have a question, that is star one. Our next question comes from Ryan Lynch from KBW. Your line is now open.
Hey, good morning. Thanks for taking my questions in next quarter. The first one I wanted to touch on was can you maybe speak to, you know, what was the biggest difference in your successful exit of Solera that you guys accomplished in Q1 of 2022 and kind of the long progress that you guys made of working through that investment and turning that around versus maybe some of the investments that you guys have had in the past that haven't had such a positive outcome. I know, you know, several of those were in the Unitranche program. Maybe it's just, you know, how you structure those investments.
I would love to just hear, you know, what you guys learned and where you guys thought why this investment was a successful exit turnaround versus, you know, maybe some in the past that weren't so much.
Yeah. You know, Ryan, I think you're referencing the sort of 2018 period, you know, when we had some underperformance that was very localized on credit in our CUP program. You know, we took a couple of high-severity losses. That really goes back to sort of the strategic decision around that program, which was very focused on small borrowers and junior debt. When you look at our current, you know, nonaccrual portfolio, it's mostly first lien assets of, you know, more scaled businesses at this point. You've heard us say previously that, you know, we have the capabilities to work those assets over long periods of time to drive maximum value creation. We don't need to, you know, punt them or manage around them in a shorter timeframe.
In the first case, you know, three years ago, however many years that was, you know, those were losses that were unavoidable given the strategic choice around them. In this case, this is more sort of the natural outcome with solid first lien investing and good workout capabilities. Tom, I don't know if you wanna pick up any details around Solera from there.
Yeah. What I'd add is the similarity of Solera and our other two watch list nonaccrual names is we're first lien, so the lenders effectively control the destiny. Second is we believe and support these businesses, and we've done so with capital. Third is the patience point, is we're not in a rush. We're maximizing value over time by doing the right thing, getting the right management team, the right board of directors, using other Carlyle resources, and those are similarities with the various credits. We used all those for the Solera investment. We were the largest lender, we were the largest equity holder ultimately, and we helped drive the turnaround in that business by being patient, providing capital when some other lenders maybe were not willing to provide capital. There's patience in getting and then exiting, we think, at the right time.
Ryan, you know, even when we're not the biggest, we tend to have a lead role in these workouts, largely because of the resources that Carlyle brings to the table. Obviously, you know, given our private equity background, we're good at determining value. And, you know, we have resources to source board members and management teams and, you know, a plethora of other kind of things that we can bring to the table. So, you know, given that we have that capability, in the names that in Solera and in the other two names, we see value, you know, over and above where things are trading, if you will. So we're happy to be patient and work them out.
Okay. That's helpful commentary on that. Switching gears a little bit, you know, Taylor, in some of your prepared remarks, you talked about, you know, which is no surprise, you know, inflation, whether it's, you know, input cost or labor inflation sort of being the probably biggest headwinds that businesses are managing through today and trying to pass along those costs. You know, when I look at your current two, you know, the largest nonaccruals in your portfolio, Dermatology Associates and Direct Travel, I wouldn't think that those would, you know, inflationary pressures would be huge headwinds to that business. But I'd love to hear your comments on how do you think those two businesses are particularly positioned for kind of rising inflation expectations.
also maybe broadly, are there any particular companies or industries, or how are you just generally feeling about CGBD's portfolio's ability, you know, for your underlying portfolio companies to manage through kind of a high inflationary environment?
On the first question first, you know, those two names, just to give you a sense of them, you know, one of them is a diversified set of scaled dermatology practices, the other is a corporate services provider. Neither of them are having, you know, notable inflationary impacts on their performance. Both of them, frankly, have far more opportunity from the combination of inherent operational improvement and macroeconomic recovery to overwhelm any, you know, marginal impacts they may feel from inflation.
I think that those two businesses are really kind of riding the curve to recovery pretty comfortably at this point, Ryan, and that's why, you know, we are stepping forward and saying that, you know, we think we have plenty of opportunity for continued positive performance out of those names as 2022 rolls forward. In the larger conversation about credit, you know, listen, we've got a highly diversified book, and to suggest that we aren't seeing the impacts of inflation would be completely disingenuous. We always try to be very direct with people here. Inflation is real, and it's in the portfolios. We're not seeing any evolving risk to our forward credit performance from inflation because pass-through is real.
Generally speaking, borrowers are achieving, you know, pass-through of their increased costs. The problem with that for all of us, of course, is that that's a loop, right? You know, the fact that, I mean, rising costs are being passed through is what's creating inflation. I think that, you know, a lot of those pressures are flowing into the macro and liquidity environment more than they're flowing into fundamental corporate credit performance right now, Ryan. That's what we're seeing across our portfolios, not just in CGBD, but Carlyle generally.
Cool. Great. That's helpful details on those specific companies and also, you know, broadly on your portfolio to definitely understand, you know, that there can be inflation, you know, issues on all businesses today. That's all for me. I appreciate the time today. Again, congrats on the nice quarter, and more importantly, you know, congrats on really the nice 2021.
Thanks, Ryan.
Thank you. I am showing no further questions. I would now like to turn the call. Actually, pardon me. We have a question from Derek Hewett from Bank of America.
Good morning, everyone, and congrats on the good quarter. Could you comment on any updated thoughts on the preferreds? Should we expect any sort of either an announcement or any sort of movement on that preferred issuance to give the market a little bit more certainty?
Sure, Derek. Hi. It's Linda. Thanks for your question. You know, short answer is not yet. You know, just to maybe reiterate and a little bit of background on the preferred, you know, if you recall, it was put in at a very, you know, volatile time in the market, and it was really a nice show of support from the Carlyle Group. As we sit here today with the market having recovered as much as it has, we're still pretty comfortable having it in our capital structure. You know, to remind you, it's a 7% cash pay.
When you compare that to the yield on our common stock, it's pretty attractive for us and really, really accretive, we think, to the overall balance sheet. It's $50 million, so it's not, you know, not something that's kind of moving the needle for us. As we sit here today, we sort of like where it sits in the capital structure. Obviously it's there. There are some, you know, call dates and whatever that'll come up eventually, and we'll address that. At this point in time, you should think that it's just gonna be, you know, as Taylor said, and using his words of stability and consistency, that applies to the pref too.
It's in our balance sheet, and you should expect it to be there for a bit.
Okay. Thank you.
Thank you. I'm showing no further questions. I would now like to turn the call back over to Linda Pace for closing remarks.
Thank you everyone for joining us today. Appreciate your time and your questions, and we look forward to talking to you in the spring. Have a good day.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.