Good morning, and welcome to the Owl Rock Capital Corporation's Third Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. I'd like to advise all parties that this conference is being recorded. I'd now like to turn the call over to Dana Sclafani, Head of Investor Relations for ORCC.
Thank you, operator. Good morning, everyone, and welcome to Owl Rock Capital Corporation's Third Quarter Earnings Call. Joining me this morning are Co-founder and Chief Executive Officer, Craig Packer, our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, and other members of our senior management team. I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside of the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in ORCC's filings with the SEC. The company assumes no obligation to update any forward-looking statements.
We will also be referring to non-GAAP measures on today's call, which are reconciled to GAAP figures in our earnings press release and supplemental earnings presentation available on the investor relations section of our website at owlrockcapitalcorporation.com. Craig will start by briefly discussing our financial results before providing an update on our portfolio and deal activity. Jonathan will then cover our results in more detail, after which Craig will close with some thoughts on our outlook before opening the call up for questions. With that, I'll turn the call over to Craig.
Thanks, Dana. Good morning, everyone, and thank you for joining us today to discuss our third quarter earnings. We are very pleased to report strong results for the quarter. Our net investment income per share was $0.33, up from $0.30 per share in the second quarter and in excess of our $0.31 per share dividend. This was driven by the continued growth of our portfolio, maintaining low operating expenses, the cost-effective and prudent use of our balance sheet, and our ongoing superior credit performance. We ended the third quarter with net asset value per share of $14.95, up $0.05 cents from the previous quarter, which represents our sixth consecutive quarter of NAV increases.
As you will recall, our NII had been previously impacted by the expiration of our fee waivers in the fourth quarter of 2020, and we had been expecting to achieve full coverage of our $0.31 per share dividend sometime in the second half of 2021. With these strong results, we have now achieved this milestone and are well positioned to continue to fully earn our dividend going forward. We experienced a record level of originations this quarter, which resulted in a fully ramped $12 billion plus portfolio. We also had a record level of repayments. Prior to this quarter, we had not yet seen the pace of repayments expected for a portfolio of our size, but this trend finally materialized in the third quarter. We had more than $2 billion of repayments, which generated healthy fee and amortization income.
At the same time, we were able to seamlessly replace those repaid investments with equally attractive new investments of a similar credit quality and comparable economics, which allowed us to finish the quarter in an equally strong position and with leverage comfortably in our target range. We are also benefiting from a terrific environment for direct lending. Continuing the trend we saw in the first half of this year, M&A activity remains at record levels. Private equity firms remain flush with capital and are investing at a very fast clip. We are also witnessing the continued penetration of direct lending into the overall leveraged finance space, taking share from the broadly syndicated markets. With larger pools of capital available for direct lending solutions, private equity firms are using these solutions more frequently and for larger transactions. In particular, we continue to see growing demand for large, privately placed unitranche loans.
This year, we have evaluated more than 30 opportunities over $1 billion in size, and this quarter alone closed on five loans $1 billion or more in size, most of which were structured as unitranches. We believe these trends favor large-scale direct lenders who can provide sizable financing solutions and who have the resources, relationships, and expertise to partner with the private equity community. The Owl Rock platform is especially well positioned for this trend due to our scale, full suite of products, and a large, deeply experienced team with strong relationships with financial sponsors. The broader Owl Rock platform deployed a record amount of capital in the third quarter, and we will look to further enhance our strong competitive position by investing in additional resources to remain a market leader.
Turning to our investment activity for the quarter, we were extremely pleased to originate $2.8 billion of investments with $2.3 billion of funded activity and $2.1 billion of repayments, resulting in net funded originations of $198 million. Our investment pace was driven in part by our strong and growing base of incumbency positions, which provide a natural pipeline of differentiated deal flow. Nearly half of our investment activity was in a handful of refinancings for existing portfolio companies where we were able to leverage our in-depth institutional knowledge and strong relationships. Two of these companies, Associa and Troon, have been in our portfolio for over three years and have delivered strong operating results over this time.
They have historically represented some of our largest positions, and we are pleased to be able to reinvest in names we know extremely well and have great confidence in. Another trend which drove the growth in our origination volume this quarter was the opportunity to make larger investments in larger companies. We deployed roughly $2.2 billion across 21 investments excluding add-ons. This compares to $1.2 billion across 16 investments last quarter. We were able to deploy 80% more capital with only five additional investments, which allows us to be efficient with our resources and continue to devote the full attention to credit underwriting that we think is so critical. We also continue to grow the size of the companies in our portfolio.
The weighted average EBITDA of our borrowers is now $114 million, which is up from $95 million a year ago. In addition to allowing us to invest more efficiently, we believe larger companies are safer to lend to, and that has been borne out by our results over the last five years. As you may recall, we had been expecting to see a pickup in repayments for a while. We finally saw this occur this quarter with 21 fully exited investments. While this quarter may prove to be on the higher end, we do expect repayments to continue to exceed the levels we have seen in the last couple of years. Importantly, we were able to deploy capital from our sizable repayments into attractive opportunities without deviating from our investment strategy.
Roughly 90% of activity this quarter was in first lien and unitranche loans, and our average spread on new commitments was approximately 625 basis points, which was in line with the average spread on repaid investments. As a result, the overall portfolio spread remained in line with previous quarters at roughly 650 basis points. Credit quality, leverage levels, and credit protections for new investments remain consistent with those of the rest of our portfolio. Despite the high repayments and competitive market conditions, we continue to feel very good about our ability to deploy capital and maintain a high-quality asset base. Today, the portfolio stands at $12.1 billion across 130 companies and continues to deliver extremely strong credit performance.
The overwhelming majority of the portfolio continues to perform very well, and the weighted average fair value remains at approximately 98%, and there were no significant change to our portfolio ratings. As we look at the performance of our borrowers, I would note that we have now had at least four quarters of normalizing performance since the worst of the COVID impact was felt in the second quarter of 2020. We are pleased to see the continued improvement in performance in each quarter since, and today many of our borrowers are reporting record sales driven by strong consumer health and economic activity. That said, we are carefully monitoring the current headwinds caused by the labor shortages and supply chain disruptions. To date, we have not seen a material impact as many of our companies are services businesses which have modest exposure to the manufacturing economy.
For example, some of our largest sectors are software, insurance, and healthcare, which are not as exposed to the current economic headwinds. In line with last quarter, our non-accruals remain low, with only two investments on non-accrual status, representing 0.4% of the portfolio based on fair value, one of the lowest levels in the BDC sector, and our annualized loss ratio is 14 basis points. I will now turn it over to Jonathan to discuss our financial results in more detail.
Thank you, Craig. We ended the third quarter with total portfolio investments of $12.1 billion, outstanding debt of $6.9 billion, and total net assets of $5.9 billion. Net asset value per share increased to $14.95, up $0.05 From last quarter. This increase was primarily driven by the growth in our net investment income, which exceeded our dividend by $10 million, as well as from $12 million of unrealized gains. We ended the third quarter with net leverage of 1.06 x debt to equity, roughly the midpoint of our target leverage range and with liquidity of $2.4 billion. Our net investment income was $0.33 per share, $0.02 above our previously declared third quarter dividend of $0.31 cents per share.
For the fourth quarter, our board has again declared a $0.31 per share dividend payable on January 31st, 2022 to stockholders of record on December 31st, 2021. Our total investment income for the quarter increased to $269 million, up $20 million from the prior quarter. This increase was primarily driven by dividend income, which increased by $8 million. We received our first dividend from Wingspire this quarter, as well as continued dividend income from Windows Entities and our senior loan fund. We expect dividend income from Wingspire and our senior loan fund to continue to increase as our committed capital is deployed. Craig noted we had a significant amount of repayments this quarter, which drove a material increase in earnings from accelerated accretion and prepayment fees.
While this is not a contractual earnings stream, we do expect repayment-related income to broadly stay around these levels in future quarters as we expect that our repayments will remain at a more normalized pace, recognizing that the timing of repayments is idiosyncratic in any specific quarter. Interest expense was $56 million, up from the prior quarter as our leverage slightly increased in the quarter. Management and incentive fees modestly increased to $73 million, reflecting the growth in the portfolio. From a capitalization perspective, we continue to be pleased with the strength and flexibility of our balance sheet. As of quarter end, 62% of our debt outstanding was in the form of unsecured bonds, and we continue to execute secured and unsecured financings at attractive levels. With that, I'll turn it back to Craig for closing comments.
Thanks, Jonathan. To close, I would like to touch on our outlook for the rest of the year. Based on our pipeline, we expect another active quarter for both originations and repayments. In terms of repayments, we expect to see a healthy level, likely lower than this quarter's record, but higher than previous quarters. Now that the portfolio is fully ramped, we will generally be targeting originations in line with repayments in order to maintain a fully levered, fully invested portfolio, and we have a strong backlog of attractive deals expected to close this quarter. We do see some ongoing competitive pressure on spreads, but we are focused on ways to offset this pressure while maintaining portfolio quality. To this end, we have made two strategic investments in the last few years that have generated attractive returns and we think can help us achieve this goal.
One is our investment in Wingspire, an asset-based lender to U.S.-based middle-market companies with roughly $350 million of assets and very strong credit performance. We currently have approximately $195 million invested in Wingspire and see opportunities to invest more capital going forward. We expect Wingspire will be run rate at a high single-digit ROE by the end of this year and can generate a 10%+ ROE over time. The other investment is in our Senior Loan Fund. As you'll recall, last quarter we increased our equity commitment in the fund to $325 million and our economic ownership to 87.5%.
The fund has already generated an attractive average quarterly ROE over the past three years of approximately 10%, and we will look to increase our capital invested over time. We continuously look at opportunities for additional investments such as these in situations where we can leverage our expertise, resources, and relationships in ways that are accretive to ORCC shareholders. Lastly, we continue to see an opportunity to improve our portfolio mix. We still have just over $1 billion of debt investments in the portfolio with a spread lower than 550 basis points. Our portfolio spread will benefit as these investments are repaid, and we seek to redeploy this capital into higher spread investments, typical unitranches, which is an area where we have been able to achieve attractive pricing. We are very proud of where the portfolio stands today.
It is fully scaled with leverage in our target range. We have executed on the earnings levers we have previously laid out and are now earning the dividend from NII. We have demonstrated our ability to originate and underwrite deals across credit cycles and have proven to be a lender of choice for sponsors, all while delivering one of the strongest credit performances in the sector. We had a record quarter for originations and have now deployed nearly $18 billion of capital since inception while delivering a very low loss rate. We look forward to continuing to build on our current progress. I would like to close with a note of appreciation for our investment and corporate solutions teams at Owl Rock.
Like many of you, we have recently reopened our office, and after more than 18 months of working remotely, it is wonderful to be able to interact in person with our colleagues after so long working apart and seeing each other only on video calls. Our team has worked tirelessly and selflessly during these 18 months to build a large portfolio with terrific investment results, maintain very high credit standards, and do it in a remote work environment that often created a unique level of stress and strain. They did it with tremendous pride, teamwork, and esprit de corps. On behalf of the entire Owl Rock leadership, I just want to thank our team for their incredible dedication to our company. With that, thank you all for joining us today. Operator, please open the line for questions.
Thank you. At this time, I'd like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. We'll take our first question from Devin Ryan with JMP Securities.
Great. Good morning, everyone.
Devin, how are you doing?
I'm doing terrific, thanks. Maybe start with one here on the liability side of the balance sheet. You guys have been obviously very active in growing and optimizing. Slide 13, you show how you've managed to reduce the weighted average interest rate on debt by 40 basis points over the past year, which is great. Where you guys sit today, you know, are there any other opportunities that maybe further optimize or diversify the funding profile? If there are, kind of what type of funding is maybe most appealing right now?
Yes, sure. Devin, on the margin there are opportunities. You know, we've fully raised capital really across all of the various legs of the stool, from a financing perspective, both in unsecured
In drop-down SPVs with banks as well as CLOs and our revolver. We're well-financed and well-diversified in our financing, you know, really out a number of years. There are things that we can continue to do on the margin, incremental CLOs, and opportunistic unsecured financings, but I wouldn't say that there's a massive amount of moves that we can do from a cost perspective in the very near term.
The unsecured bonds that we have are trading today 125 basis points tighter than where we issued, but they have call protection that makes it expensive for us to take them out. Over time, when they are callable or repayable, we will take them out, and we should experience meaningful savings, but that's not an immediate opportunity.
It's something that'll happen over time.
Yeah. Okay. No, that's helpful. Just wanted a little perspective there. Maybe a follow-up just on some of the conversation on more, I guess, large companies, and something you guys have been talking about for a while. It makes sense just given, you know, you can differentiate there. There's attractive opportunities. Yeah, is that a function of, you know, how the market more broadly is evolving? You know, there's just more opportunities, you know, at the large end of the spectrum, just given whether it's the M&A markets or just broader market dynamics or, you know, is it just more of a concerted effort at Owl Rock?
I understand it is a concerted effort, but like has that part of the market also grown and so there's more opportunities out there for you to do there?
It's both. It's not coincidental that it's both. I mean, part of the reason we started Owl Rock is we thought that more companies would want direct lending solutions if there were bigger pools of capital available, and we went out and raised a pretty sizable pool of capital. As bigger pools of capital have formed, we can offer the advantages of a direct lending solution to bigger companies, and we're finding great receptivity to them. The sponsors are finding more and more opportunities to come to us and other larger direct lenders and ask for direct lending solutions when they could find those options available in the syndicated market, and they're choosing direct lending solutions.
Direct lending is getting greater market share in the overall leveraged finance space. That by the way, that trend is accelerating, and it's doing so at a time where the broadly syndicated markets are extremely strong. They're not coming because they can't get a deal done in the broadly syndicated markets. They're coming despite that. What that means is, if we get a period where there's instability in the broadly syndicated markets, I would expect an even greater penetration of direct lending into the overall leveraged finance space. The trend's accelerating now as is, and with, I think, upside from a share standpoint, in the future.
Okay. Great to hear. I'll leave it there. I'm back in queue. Thank you.
Thank you.
Next we'll go to Robert Dodd with Raymond James.
Hi guys, congratulations on the quarter. I just want to go to one of the things in your prepared remarks, Craig. I mean, you talked obviously about Wingspire and the SLF and other areas where you can kind of combat competitive pricing conditions, right? I mean, obviously the SLF is a financially engineered similar product to the BDC versus Wingspire , which is a different vertical, right? It's not sponsor-backed lending. Are there other verticals that you're looking to expand into that are really differentiated from, you know, large-scale private credit where you've got advantages, but the competitive pressures are most elevated right now?
There's no area that I wanna highlight as an area you should expect us to go into. You know, obviously, if we were about to do that, I'd share that with you. We get approached regularly by teams that are in, I'll call it specialty finance verticals, across the spectrum that are attracted to the Owl Rock platform and are, you know, very significant capital base, that we look at and evaluate from time to time. And if we find something that we think provides a really attractive risk reward, and is, you know, an opportunity that makes sense relative to the rest of our platform, we would do it. I don't have anything I really wanna signal right yet other than to tell you I'd like to find one or two more.
We're actively looking, and you know, hope to find something. You know, we're quite picky about what we'll go into, and so we'd wanna make sure it was something that really made sense for us.
Okay. Understood. One more if I can sort of follow up. I mean, you also talked about obviously, you know, you're at scale now. Deployments would be targeted roughly at repayment levels to maintain portfolio size. Should we expect though that over time the number of assets in the portfolio would rise? Because if the BDC is the public BDC isn't growing, but the platform is, and the BDC represents a little bit over, I think 50% of the private credit kind of capital you're investing right now, but it arguably is shrinking as a percent. Are we gonna see more diversification within the BDC, more asset positions and a smaller average hold size?
Is the target to keep the hold size and number of positions similar as well while maintaining the portfolio size?
It's a good question. What I would say is this quarter we, you know, it stayed about flat. There's a number of different factors that are at play there. Without making it too complicated, with respect to ORCC, we've always been most comfortable targeting 1% or 2% position sizes, and we've been very consistent with that, and that's about where, you know, things have wound up. I think from when we size ORCC positions, you know, I think we're gonna continue to do what we're doing. As our platform has grown, you're right, you know, ORCC will shrink as a percentage of the incremental investment dollar.
You know, it really depends on, you know, other portfolios needs at a time, how much we're putting into ORCC. As we construct a portfolio, my guess is we grind higher on position sizes, but you know, not dramatically so. Over time, it wouldn't surprise me if we grind a bit higher, but not dramatically so.
Okay. I appreciate it. Thank you.
Next, we'll go to Ryan Lynch with KBW.
Hey, good morning. Thanks for taking my questions. First one I had, if I look at, you know, slide number six and your guys', the weighted average spread of new commitments, it's 6.2%, which is, you know, down, you know, pretty meaningfully over the last several quarters. I'm just wondering, you know, in this ever-evolving, you know, upper middle market mega unitranche market, which again, is changing as it's still in formation, there's new players entering it. Do you think that 6.2% is sort of hitting that spread, is kind of hitting a floor level that folks in that market are willing to go to? Or could you still see, you know, further pressure in those numbers?
Is there any sort of floor level that you guys feel, you know, comfortable stopping at and not going any less lower than?
Sure. One thing I would point out is this quarter, we were almost entirely first lien or unitranche. Whereas in the second quarter, we had meaningful second lien, and we also had a couple really high spread tech deals in there. What you're seeing in the drop from the second quarter to the third quarter is in part driven by mix, as well as a couple of really widespread deals done in the quarter. For example, if you went back to the first quarter, we're at 6.4 versus 6.2, you know, certainly lower, but not as significant. Having said that, there is spread pressure in the market. I mentioned that in my comments.
I think one of the real advantages now for us that we've gotten to fully invested is we can be very disciplined about the incremental investment. We are being disciplined about the incremental investment. We are being shown opportunities for, you know, high-quality credits that would fit our credit characteristics, but are being offered at spreads that we think are not super attractive. In those situations, we may do less than before or none at all. We are, I think, afforded the opportunity now to be disciplined, and we are. There is some spread pressure. My sense is that the spread pressure has leveled off, based on what I've seen market activity-wise in the last couple months.
A couple of other large lenders seem to have found their floor and maybe not kept pushing it lower than that. These things can vary, and so we'll just have to see. I know that for ORCC, we continue to find attractive spread opportunities, I would say in excess of the market spread and compared to the peers, what I'm seeing. I think we're continuing to find deals that are attractive, in part based on our growing base of incumbencies. We have the ability to offset some of that spread pressure. We're not totally immune to it, but offset some of it. Hopefully that gives a little bit of color what we're seeing, what I see out there. I think it's leveled off. I don't think it'll go tighter, but it's possible it could.
I don't know how other people run their business.
Sure. Understood. That's helpful color, though. I wanted to get some more detail on a comment you mentioned earlier, because where you are right now, you know, from a capital deployment standpoint, a leverage standpoint, it matters. You said you're at scale, so originations will, you know, roughly equate to repayments, I think you said, going forward. I'm just curious, you know, you guys have a, you know, the upper end of your leverage target is 1.25x. It looks like from a growth standpoint, you guys are 1.18 or so, but from a net standpoint, you guys are only about 1.05.
There's quite a bit of room to go if your leverage target of the upper end of 1.25 is on a net standpoint. Could you just give some clarity on your leverage range? Is that a net basis or growth basis? Do you feel comfortable going to the upper end? Because if it is the latter, that would suggest that you guys could still handle, you know, a decent amount of net growth from here.
We when we talk about it, we talk about it on a net basis. You know, obviously the cash can move around meaningfully, you know, at the end of a quarter as deals close. That's just so we're all speaking the same language. You know, we're comfortable operating anywhere in that range. You know, it's why we have the range. You know, we try to balance obviously great returns for shareholders, but also being terrific stewards of our balance sheet with respect to our lenders and our bondholders who've been terrific supporters of our growth, rating agencies, you know, all of these factors come into account.
We would be comfortable operating anywhere in that range, and where we'd land in any one quarter, you know, is dependent on deal activity for that quarter, which can be lumpy and, you know, we don't have perfect precision on where we might land at the end of a quarter. I think folks should expect in any given quarter, we could be anywhere in that range. I don't wanna signal that we're gonna go out and just operate at the high end of the range, which I think what you're asking me. I don't think that should be your expectation. In any quarter, we could drift towards the higher end of that range.
There's a trade-off there, but for shareholders overall, we wanna balance getting great returns, which come from higher leverage, but also maintaining very low financing costs, which is a countervailing force. We're trying to take all that into account.
Okay. Understood. I appreciate the time today.
All right. Thank you, Ryan.
Okay. I'd like to remind everyone, if you'd like to ask a question, you can press star one on your telephone keypad. Next, we'll go to Mickey Schleien with Ladenburg.
Yes. Good morning, everyone. Most of my questions have been answered. I just have a couple of housekeeping questions on Innovative Water. I see it's on non-accrual, but it's actually marked above par. Could you just give us some guidance on its outlook? Maybe for Jonathan, did you reverse any previous income accruals for Innovative Water?
Innovative Water is not on non-accrual, so we can take it offline, Mickey. It's a performing investment, so there was no reversal of income there.
Okay. Sorry, that must be my mistake. That's it for me this morning. Thank you.
Okay. Thanks, Mickey.
Once again, it's star one if you have a question. Next, we'll go to Kenneth Lee with RBC Capital Markets.
Good morning, and thanks for taking my question. It sounds like you're still expecting to see a potential benefit over time, in terms of pickup in portfolio yield as you rotate towards higher spread new investments. Just wondering, in terms of that remaining $1 billion, that's at lower spread, and it sounds like the time is dependent on prepayments. Is there any way to bracket the potential time frames for when you could expect it to start, you know, rotating a meaningful amount of that remaining investment? Thanks.
Sure. Not with any great precision. You know, there's a portion of that billion that I think there's a reasonable chance will get repaid in the next 1-2 quarters. Then there's a portion that I think will take longer than that. There's a portion in there that we might choose to sell over time, and then there's others that probably aren't easily sold, because there's not other lenders in the credit with us, not for a credit reason. So I don't want to put out. It's not a predictable thing for us. It depends what's going on at the companies. There's certainly some in there that probably will get repaid in the fourth quarter.
I talked about, you know, our expected repayments, you know, being meaningful in the fourth quarter. I don't have a number to give you to model in. If I was modeling in something, I would just assume it's over the next two years, two and a half years, something like that.
Gotcha. Very helpful. Just one follow-up, if I may. Wondering if you could just talk a little bit more about your current appetite for second lien loans. Just seeing that the percentage allocation within the portfolio has trended down slightly over the last couple of quarters, but just wanna gauge your latest thinking there. Thanks.
Sure. We have been consistent on this. We're very selective on the second liens that we do. We only do them, you know, in really very strong credits, with meaningful equity cushions and businesses that we think are really stable and sort of commensurate with taking the risk of being a junior lender. In situations like those, we like second liens and are more than willing to do them. We oftentimes get shown opportunities that we say no to, but if there are credits that meet those characteristics, you know, we'll be very pleased to do them. In any given quarter, could be zero , could be a couple deals. You know, I'd like to, on the margin, take that percentage up.
I've been saying that very consistently probably for eight quarters in a row. I think the fact that it's gone down a little bit is just the demonstration of our discipline. If we find quarters where we see good opportunities to do more second liens, I hope that that would not surprise anyone because we've been continuously pointing to this. They obviously help our overall spread and returns. Just so you have a sense of it, our average EBITDA on our second liens is twice the EBITDA on our portfolio. Our average EBITDA on our second lien borrowers tends to be $200 million plus with all the same credit characteristics of our overall portfolio in terms of leverage and loan to value.
Bigger companies, stable, we'll continue to do them, but we're very selective.
Got it. Very helpful. Thanks again.
Thank you.
That concludes today's question and answer session. I'll now turn the call back over to Craig Packer for any additional or closing remarks.
Well, terrific. Thanks for the questions. Thanks all for your tuning in. We're really pleased with the quarter. Appreciate everyone's support. We're pretty accessible. If anyone has follow-up questions, please reach out to Dana. Other than that, enjoy the rest of your afternoon. Thank you.
This concludes today's conference call. You may now disconnect.