Sixth Street Specialty Lending, Inc. Q3 FY2024 Earnings Call

Good morning and welcome to Sixth Street Specialty Lending, Inc.'s Third Quarter Ended September 30th, 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded on Wednesday, November 6, 2024. I will now turn the call over to Ms. Cami VanHorn, Head of Investor Relations.

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 Sixth Street Specialty Lending, Inc.'s 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 third quarter ended September 30th, 2024, and posted a presentation to the Investor Resources section of our website, www.sixthstreetspecialtylending.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 third quarter ended September 30th, 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 at Sixth Street Specialty Lending, Inc.

Thank you, Cami. Good morning, everyone, and thank you for joining us. With us is my partner and our President, Bo Stanley; and our CFO, Ian Simmonds. For our call today, I will provide highlights of this quarter's results and pass it over to Bo to discuss activity in the portfolio. Ian will review our quarterly financial results in detail, and I will conclude with final remarks before opening the call to Q&A. After the market closed yesterday, we reported third quarter financial results with adjusted net investment income per share of $0.57, corresponding to an annualized return on equity of 13.2% and adjusted net income per share of $0.41, corresponding to an annualized return on equity of 9.6%. As presented in our financial statements, our Q3 net investment income and net income per share, inclusive of the unwind of the non-cash accrued capital gains incentive expense, were $0.59 and $0.44, respectively. Our net investment income this quarter continued to reflect the impact from the higher interest rate environment, combined with a small increase in activity-based fees. Adjusted net investment income of $0.57 per share exceeded our base quarterly dividend by $0.11 per share or 23%. $0.05 per share was statistically related to activity, which is up from the average of $0.04 per share that we've experienced since the start of the tightening cycle. Since our last earnings call, the shape of the forward interest rate curve has declined in the near term, following the rate cut in September and now bottoms out at a slightly higher terminal rate in 2026. Based on the latest curve, our base dividend level remains well supported through that terminal rate. As a reminder, our dividend policy is based on our through-the-cycle earnings power, inclusive of credit losses and absent any activity-based fee income. Rounding out the earnings summary, the $0.15 per share difference between this quarter's net investment income and net income was due to net unrealized losses, primarily from the markdown of our investment in Lithium Technologies. Consistent with our valuation policy, we have marked this name taking into account a range of outcomes. We believe the distribution of outcomes has skewed lower since last quarter and our fair value mark as of 9/30 reflects the updated view. Given the continued underperformance of this name, we've also added to nonaccrual cash at the beginning of Q3. As for the economic impact, the Lithium Technology position represents less than 1% of our total portfolio fair value. To illustrate the impact on earnings, we assume we were earning approximately 11% return on equity on the $30 million of unrealized losses we recognized to date. This return on equity number is based on the cost of equity from Bloomberg of roughly 9% and our valuation on book value of 1.2 times. An 11% assumed return on equity on $30 million implies less than $0.01 per share of lost net income on a quarterly basis or 15 basis points of annual ROE. Credit losses are incorporated as part of our base case assumption, and the capital we put to work will continue to earn in excess of our cost of equity, inclusive of the potential for losses. This requires discipline in our investment decisions despite the tighter spread environment that persists. According to data published by the LCD, the portion of BDC portfolios based on count was spread below 550 basis points reached 24% as of Q2 2024. This compares to 7% of our portfolio by count and less than 5% of our portfolio on a weighted average basis as of 9/30, which we view as a more meaningful way to analyze the data. We believe the drastically lower percentage of sub-550 deals in our portfolio underscores our disciplined capital allocation approach. We are confident that our asset selection will continue to drive best-in-class returns for our investors. At quarter end, net asset value was $17.12, down $0.07 per share compared to $17.19 per share as of June 30. Over the last 12 months, reported NAV per share has grown from $16.97 to $17.12. Ian will walk through net asset bridge in more detail. Yesterday, our Board approved a base quarterly dividend of $0.46 per share to shareholders of record as of December 16, payable on December 31. Our Board also declared a supplemental dividend of $0.05 per share related to our Q3 earnings to shareholders of record as of November 29, payable on December 20. Our Q3 2024 net asset value per share adjusted for the impact of the supplemental dividend is $17.07. With that, I'll pass it over to Bo to discuss this quarter's investment activity.

Thanks, Josh. I'd like to start by sharing some thoughts on the broader economic backdrop followed by observations on the current deal environment. As rates continue to decline based on the shape of the forward interest rate curve, we generally expect corporate credit and activity levels to benefit from the shift in economic policy. On corporate credit, the lower cost of capital should improve the cash flow profile of borrowers after a prolonged period of slower growth and higher interest rates. We've started to see this play out across our own portfolio as the weighted average interest coverage on our core portfolio of companies improved quarter-over-quarter. In terms of activity levels, we anticipate that rates unlocking will support a more active M&A environment, which we already started to see in Q3 as BSL volumes to finance LBOs reached the highest level in 2.5 years. While it's encouraging to see this activity, we believe a more significant increase in deal flow will take time as today's valuations generally remain below the purchase prices paid in the low-interest rate era prior to 2022. Turning now to our investment activity. During the third quarter, we closed on $269 million of commitments across eight new investments and upsizes to four existing portfolio companies. Consistent with our long-term approach of investing at the top of the capital structure, 100% of our Q3 fundings were in first lien positions contributing to our 93% first lien asset mix across the entire portfolio. As for industry exposures, our eight new investments were diversified across seven different end-user industries. Our top industry exposure continues to be software and business services. Cyclical exposure, excluding our asset-based loan and retail remains limited at 4.4% of our portfolio. During Q3, we continued to lean in on our capabilities across the Sixth Street platform to differentiate our capital. This includes focusing on sector themes that coincide with our platform's underwriting expertise and leveraging our deep relationships to source unique investment opportunities. To highlight one of the sector themes where we were active during the quarter, Sixth Street closed and funded a $400 million senior secured credit facility for Arrowhead Pharmaceuticals, which is a clinical-stage biotech company focused on the development of drugs for a wide range of conditions. We worked alongside our health care sector team to provide the company with long-term capital to fund R&D and platform development. The combination of Sixth Street's scale, expertise, and flexibility contributed to the sourcing and execution of this attractive investment opportunity for SLX shareholders. We also added to our retail ABL portfolio during Q3 through our investment in Belk, which is our largest funding for the quarter. Belk is a regional department store retailer with a strong collateral base. The transaction was part of a balance sheet restructuring ultimately allowing the company to delever and improve its financial positioning. Long-time followers of our business know that the track record in this theme spans over a decade and has contributed to the above-market asset level yield profile for SLX. Our ability to create value for shareholders in this theme has been built over a number of years by investing in resources, team, and relationships, which cannot be replicated overnight. We have been increasingly active in the opportunistic and non-sponsored channel to drive shareholder returns. Both of the investments I highlighted, Arrowhead and Belk, represent non-sponsored transactions, which comprised 43% of total new investments funded in Q3. The weighted average yield at fair value on these investments was 13.5% compared to 10.1% for other new investments during the quarter. On the repayment side, we had two full and five partial investment realizations totaling $90 million in Q3. Consistent with the increase in refinancing activity in the credit markets, our two largest repayments during the quarter, Bestpass and IntelePeer, were driven by refinancings. I'll spend a moment to highlight the exit of Bestpass, as this investment demonstrates the benefit to shareholders of our newer vintage portfolio as well as our willingness to pass on new deals that do not represent an appropriate risk-return for our business. We made our initial investment in Bestpass in May of 2023 and continued to support the company through an upside in November. Over the short period of 1.2 years, we generated a 20% unlevered IRR and 1.2x multiple on invested capital, including $0.02 per share of activity-based fee income from the crystallization of call protection and the acceleration of amortization of upfront fees. Given our ability to deploy capital in the wider spread environment in 2022 in the first half of 2023, we expect to see an increase in activity fee-based income should our portfolio experience higher velocity in the declining interest rate environment. From a credit quality standpoint, the overall performance rating of our portfolio remains strong, with a weighted average rating of 1.14 on a scale of 1 to 5, with 1 being the strongest, representing no change from the prior quarter. Non-accruals represent 1.9% of the portfolio at fair value with one new investment added to non-accrual status in Q3. Moving on to portfolio composition. In Q3, our portfolio's weighted average yield on debt and income-producing securities at amortized costs decreased from 13.9% in the prior quarter to 13.4%. Across our core borrowers for whom these metrics are relevant, we continue to have conservative weighted average attach and detach points for our loans of 0.6 times and 5.0 times, respectively, and their weighted average interest cover increased from 2.1 times to 2.2 times quarter-over-quarter. As of Q3 2024, the weighted average revenue and EBITDA for our core portfolio of companies were $327 million and $111 million, respectively. Beginning this quarter, we will also note going forward the median revenue and EBITDA for those same borrowers, which was $149 million and $52 million respectively, for Q3. With that, I'd like to turn it over to Ian to cover our financial performance in more detail.

Thank you, Bo. For Q3, we generated adjusted net investment income per share of $0.57 and adjusted net income per share of $0.41. Total investments were $3.4 billion, up 3.7% from $3.3 billion in the prior quarter, driven by net funding activity. Total principal debt outstanding at quarter end was $1.9 billion and net assets were $1.6 billion, or $17.12 per share prior to the impact of the supplemental dividend that was declared yesterday. Our debt-to-equity ratio increased from 1.12 times as of June 30 to 1.19 times as of September 30 and our weighted average debt-to-equity ratio for Q3 was 1.14 times. We continue to have significant liquidity for the size of our balance sheet with nearly $1.1 billion of unfunded revolver capacity at quarter end against $226 million of unfunded portfolio company commitments eligible to be drawn. As of September 30, our funding mix was represented by 68% unsecured debt. Post quarter end, we satisfied the maturity of our $347.5 million November 1, 2024 unsecured notes through utilization of undrawn capacity on our revolving credit facility. The settlement had no impact on leverage and marginally decreases our prospective weighted average cost of debt resulting in a positive economic impact of almost $0.01 per share quarterly in 2025. Pro forma for the maturity, our funding mix is represented by 50% unsecured debt. After satisfying this maturity, we continue to have approximately $743 million of unutilized revolver capacity, representing more than 3 times our unfunded portfolio company commitments eligible to be drawn. Moving to our presentation materials, Slide 8 contains this quarter's NAV bridge. Walking through the main drivers of NAV movement, we added $0.57 per share from adjusted net investment income against our base dividend of $0.46 per share. As Josh mentioned, there was a $0.02 per share unwind of non-cash accrued capital gains incentive fee expenses, the reversal of net unrealized gains on the balance sheet related to investment realizations resulted in a $0.03 per share reduction to NAV. The impact of tightening credit spreads on the valuation of our portfolio increased net asset value by $0.03 per share. Finally, there were net unrealized losses on investments amounting to $0.13 per share. Shifting to our operating results detailed on Slide 9. We generated total investment income for the third quarter of $119.2 million, down slightly compared to $121.8 million in the prior quarter. Walking through the components of income, interest and dividend income was $110.9 million, down from $112.2 million in the prior quarter. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were higher at $4.3 million compared to $4 million in Q2, given the slight increase in activity-based income we experienced this quarter. Other income was $4 million compared to $5.5 million in the prior quarter. Net expenses, excluding the impact of a non-cash accrual related to capital gains incentive fees was $65.8 million, down from $66.8 million in the prior quarter. This was primarily due to seasonal expenses incurred last quarter for the annual and special shareholder meetings held in May. Our weighted average interest rate on average debt outstanding remained flat at 7.7%. As a reminder, our liability structure is entirely floating rate which means we will experience a decrease in our cost of debt, as interest rates are expected to decline. We did not see a decrease this quarter due to the roughly one quarter lagged impact of falling interest rates on the weighted average interest rate on average debt outstanding. We estimate undistributed income of approximately $1.19 per share at quarter end. As always, we will continue to review the level of undistributed income as the tax year progresses to ensure we comply with direct distribution requirements, minimize potential return on equity drag from the excise taxes and prioritize returns to our shareholders. Before turning it back to Josh, I'd like to briefly provide an update on our ROEs. At the beginning of this year, we communicated an annualized ROE target range of 13.4% to 14.2% based on our expectations over the intermediate term for our net asset level yields, cost of funds, and financial leverage. Year-to-date, we've generated an annualized ROE on adjusted net investment income of 13.6%, consistent with that target range. Based on our performance this year through Q3, we continue to expect adjusted NII per share for the full year to be within the range previously stated of $2.27 to $2.41. With that, I'll turn it back to Josh for concluding remarks.

Thank you, Ian. I'd like to add on to your comments regarding ROEs. As many of you heard me say in the past, shareholders can't eat net investment income. For that reason, we focus on earnings after net unrealized and realized gains and losses or net income. On an LTM basis, we generated a net income return on equity of approximately 12%, inclusive of the unrealized losses we recognized this quarter. We earned a return for shareholders that significantly exceed our estimated cost of equity of 9%. As a result of investing in assets that generate a return greater than our cost of equity, inclusive of credit losses that we assume in our base case model. In closing, I'd like to take a moment to focus on what's most important to us, which is the shareholder experience. We are an investor firm first and have built the architecture of the Sixth Street platform to deliver the best risk-adjusted returns for our shareholders. We have invested in the talent and resources including with 250 investment professionals across sector and capabilities, including direct lending. For SLX, we have access to the scale, resources, and intellectual capital across the entire platform while operating a constrained balance sheet of roughly $3.5 billion of total assets. This allows us to remain highly selective, given the wide range of investment opportunities that we evaluate relative to the capital we have available to invest. We strongly believe that structuring our business in this way will allow us to continue to deliver top-tier results for our shareholders over the long term. With that, thank you for your time today. Operator, please open the line for questions.

Our first question comes from Brian McKenna with Citizens JMP.

Okay, great. Thanks. Good morning everyone. So a question on your non-sponsored business to start. It was great to see all the activity here during the quarter. I think it speaks to the broad capabilities of Sixth Street, as well as your ability to pivot across different parts of the market to deliver the best returns for shareholders. But it would be great just to get a little bit more detail on this business, how big is the team, how do they collaborate with the rest of the Sixth Street platform? And then how do they cover the market from a sector and size perspective? And then just as we move forward here, the incremental yield you're getting from these types of deals is quite notable. So should we continue to expect you'll lean into these non-sponsored transactions over the next couple of quarters?

Thank you, Brian, for your question. I appreciate it. I'm sure everyone had an interesting evening while tuning in. I’m grateful for your early participation in the earnings call. To give some context, historically, our business has been 65% sponsored and 35% non-sponsored. This quarter, however, it was roughly 50-50. Notably, two of our three largest transactions this quarter were non-sponsored, including Belk and Arrowhead, which is a publicly traded specialty pharmaceutical company. Additionally, our sponsored business is different from traditional sponsorship models; it is more thematic. Instead of bidding on every sponsored deal based on relationships, we concentrate on sponsors that align with our industry themes where we can add value and have a strong understanding of their business models. We have about 250 investment professionals organized into strategy teams, such as direct lending and ABS, as well as industry teams covering sectors like healthcare, consumer, retail, energy, and software infrastructure. For example, in healthcare, we have a significant focus on specialty pharma, which typically involves direct company engagement, as it is not sponsor-driven. We appreciate the flexibility of toggling between risk and return and efficiently allocating our capital. This has historically been a major contributor to our shareholder returns. I hope this provides some insight. In a potentially more volatile world with higher rates, our platform is equipped to navigate complexities and identify opportunities.

Okay. That's great. Thanks Josh. And then just a follow-up on that a little bit in sponsored M&A. There's clearly been a lot of focus on the election. And I think some sponsors have been waiting for clarity here before moving forward on transacting. So just looking across your network of sponsors, as well as your deal pipeline, is there any way to quantify how many sponsors and related companies were in fact on the sidelines waiting until they have more clarity on the election? And I'm just trying to get a sense of the magnitude and the acceleration we could see in deal flow post-election here.

I think it's a bit complex, and I'll pass it to Bo. Traditionally, the expectation is that as rates decrease and there's clarity on rates—which may not happen as much now due to the change in administration—economic policies under the new administration could be slightly more inflationary, potentially keeping rates up, though this might benefit growth. We can observe this in equity markets and futures. Historically, it was thought that a reduction in rates would lead to an increase in the M&A pipeline. However, what we've noticed is that many assets were acquired in a zero-rate environment at high valuations and now need time to mature and yield returns. These were acquired between 2020 and mid-2022, and a significant portion of the net asset value is in private equity and sponsored transactions. They just need time to work through these high valuations, so there's potentially a minor unlocking. However, I’m unsure if it will be fully unlocked due to changing valuations in the private sector, the current rate environment, and the influence of leverage on businesses given the new rate structure. Bo, do you have anything to add?

I think that's accurate. It's quite challenging to gauge the situation. There was a cautious atmosphere as we entered the election cycle, which is common in such times. Typically, Q4 is the busiest period for mergers and acquisitions, but during election years, that tends to be more evened out across Q4 and Q1. I anticipate that will be the case this year. From what I have heard, some people were waiting to see the election results. Overall, the situation will likely be more influenced by interest rates and the valuation adjustments that Josh mentioned earlier.

Yes. The simple math is that if you purchased something at 14 or 15 times earnings, and now the market is at 10 times with limited free cash flow going to creditors, it will take longer to realize that investment. This creates a counterbalancing effect.

All right. I leave it there. Thank you guys.

Thank you.

Thank you.

Our next question comes from Mark Hughes with Truist Securities. Your line is now open.

Yeah, thank you. Good morning. You mentioned that the interest coverage, I think, had improved sequentially. I don't know if you gave those specific numbers, but any sense of how much improvement and then how much of that might have been this lower base rates or growth in EBITDA?

Yeah. So it went from 2.1 times to 2.2 times. And I think it's both base rates, which take a little bit longer to reset because if you're on 90 days SOFR election, you don't get that benefit immediately. You obviously saw that in our cost of interest, given the delay. And then there was earnings growth in the portfolio. So I think it's mostly earnings growth with a little bit of help from rates.

Yes. And then how about the amendment activity in the quarter, anything noteworthy there? And then just a broader comment on your credit outlook coming up?

Amendment activity was very low this quarter, with most amendments being positive credit adjustments. There were a total of eight amendments, seven of which were upsizes, all positive, with some repricing and spread compression. This reflects a strong credit outlook, as amendment activity is seen as a leading indicator of credit quality, registering at just 0.1% for the quarter. In terms of credit overall, we have no names in our portfolio below 90% except for an equity position and a small second lien of about $400,000. We feel positive about credit, as the fundamentals remain strong. If we assume we've moved past the less stable names and dispersion impacts, the core net interest income, excluding activity-based fees, would suggest about $0.50 for $2 annualized, with additional activity fees this quarter bringing that to around $0.57 of net interest income. Overall, the fundamentals of the business look promising.

Appreciate that detail. One other question, I'm seeing it properly, the new investments in the quarter, about 24% of those were fixed rate. Is that fraction of the mix, sponsored, non-sponsored? What's driving that?

That was just the one which was Arrowhead, which was a fixed-rate security.

Okay, thank you very much.

Thanks, Hughes.

Our next question comes from Robert Dodd with Raymond James.

Hi, everyone. I have a couple of questions. Regarding the interest coverage, it's noted to be between 2.1 and 2.2, but as is typical for your company and other BDCs, there is a caveat for companies purchased in a traditional cash flow way. Can you tell us what percentage of your portfolio this interest coverage metric applies to?

Yes, Rob, we may need to get back to you on that. However, I believe it applies to most of the portfolio, Robert. Regarding the software companies, where there is significant growth, to normalize the growth, as we discussed previously, software is unique in that it does not capitalize customer acquisition costs on a GAAP basis; instead, all costs are expensed. Therefore, the faster the growth, the lower the GAAP earnings appear. In a steady-state scenario, earnings would reflect cash flows if customer acquisition costs were capitalized. This is the adjustment for some of the software companies. Outside of that context, I think it applies to all of them.

Got it. Thank you. So going to the sponsored, non-sponsored mix. On the non-sponsored, I mean, 35%. I mean even that it's not traditional non-sponsored, right? I mean it's not necessarily just a cash flow loan to a company buyout with no sponsor behind them, things like Belk. So how much of the non-sponsored mix is to what would perhaps the non-sponsored and kind of the rest of the industry, i.e., it's cash flow loan, but there isn't a sponsor versus it's something else?

This quarter was quite different, as Belk and Arrowhead represent asset-based lending deals. The value is based on collateral such as intellectual property and the speculative pharmaceutical portfolio. Overall, this quarter lacked traditional non-sponsored cash flow; instead, everything was asset-based, with collateral that we can access and underwrite.

Got it. The one thing I'd note is that retail ABL is underwritten to collateral coverage regardless of whether it's cash flowing or not. So that's how we underwrite it. We think about collateral coverage and liquidation values for asset recoveries and oftentimes the cash flowing sometimes they are not.

Because these are assets that can be converted into cash if needed. I need to correct a statement I made during the last call regarding the fixed rate; I mentioned $50 million out of $180 million, but it was actually $30 million out of $180 million. Arrowhead accounted for $32 million of that funding versus the total of $180 million. I apologize for the confusion. That wasn't your question, Robert; it was from Mark.

You mentioned the election results and the existing valuation gap. If interest rates remain high, what are the risks associated with non-accrual rents in the industry? In particular, with Lithium, which has faced some unexpected challenges. This business has performed reasonably well, and while the sponsor has been supportive in a high-rate environment, they recently withdrew support. There are other similar cases. What is the risk of encountering more unexpected issues that are difficult to foresee if rates continue to stay elevated for an extended period?

Yes, that's a great question. Lithium is a significant topic, and you're right about it. The sponsor has been supportive, investing around $50 million to $70 million a year ago or a month prior. However, Lithium has faced tough fundamentals, including negative revenue growth and earnings pressure. We've previously mentioned that if we made one mistake during COVID, it was thinking of companies negatively impacted as potential opportunities, but some actually improved their fundamentals, and Lithium was among those. Yet, Lithium remains fundamentally challenged. In examining our portfolio, we’ve noted that companies with negative revenue growth in our book appear to have a high overlap with non-accrual names. It doesn't seem like there are more companies facing fundamental challenges. While some companies are growing slower and others are growing faster, it appears we're moving past that situation.

Got it. Thank you.

Thank you. Our next question comes from the line of Bryce Rowe with B. Riley. Your line is now open.

Thanks, good morning. Appreciate you taking the question here. I wanted to ask, I mean, you've made some comments here about portfolio velocity and what we might see post-election. And obviously, there are some puts and takes. But Josh, how do you square that up with maybe your outlook from a net portfolio growth perspective? And I'm trying to think about the prospects for repayments relative to originations was spread where they are today.

Yes. I think there are some important points to make. First, we have invested significantly in the portfolio. We were one of the few in the industry with the capital to invest after the rate hikes in 2022. As of March 31, 61% of that portfolio is invested. I believe some of those investments will mature simply because they are solid investments and market conditions have improved. We have the option to maintain those investments, as incumbency typically allows, but we will make decisions on a case-by-case basis. It's difficult to assess the overall portfolio churn. It seems we are nearing the bottom of our activity level fees, which increased by 20% quarter-over-quarter from $0.04 to $0.05 per share. Am I completely certain about this? No, but it does seem plausible as rates are decreasing. As timelines extend, it becomes necessary to move assets and increase transaction volumes. However, it’s challenging to confirm that. I don't have exact figures, but we continuously strive to acquire quality assets, manage risks, and ensure sound underwriting practices, which has been reflected in the absence of credit losses. We might have set the bar a bit too high in this area. I believe the rest will fall into place. Another important aspect is that we price new loans not to perfection, but we do factor in potential credit losses. We will maintain this approach going forward. Our understanding of velocity is often influenced by macroeconomic factors, which are beyond our control.

Yes. Okay. One more for me. As we think about kind of the forward curve and you noted the terminal rate might end up being a bit higher. That's certainly a good thing, I think from a dividend coverage perspective, at least for you all, if credit kind of continues to hold. You've had the base dividend set here at $0.46 for seven quarters, give or take. What gets you to the point where you can increase the base dividend again?

Yes. I believe our perspective is focused on how to return capital to shareholders, which we view as crucial for several reasons. One important aspect is that shareholders have the opportunity to reinvest at a discount to our reinvestment plan, making that option extremely valuable. We are committed to returning capital while also looking to lower the excise tax. When we consider the base dividend, we see it as a liability that accounts for credit losses and low activity fees, ensuring we are comfortable that it will always be covered. Currently, we think a base dividend of $0.46 is appropriate. We have a solid mechanism for returning capital through our quarterly supplemental payments, which were $0.05 this quarter, representing half of the overearning, and through special dividends aimed at reducing the excise tax, which is a significant economic burden for the business.

All right. That’s it from me. Appreciate it.

Thank you.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Joshua Easterly for closing remarks.

Great. Well, first of all, thank you for everybody's participation. We really appreciate it. We hope everybody has a great Thanksgiving, a great holiday season with their family. If we don't talk to you, we will talk to you after our Q4 earnings. Thanks, everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.