New Mountain Finance Corporation 8.250% Notes due 2028 (NMFCZ) Q3 2016 Earnings Report, Transcript and Summary

Good day and welcome to the New Mountain Finance Corporation Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to, Mr. Rob Hamwee, Chief Executive Officer. Please go ahead, Sir.

Thank you and good morning, everyone and welcome to New Mountain Finance Corporation's third quarter earnings call for 2016. On the line with me here today are Steve Klinsky, Chairman of NMFC and CEO of New Mountain Capital; John Kline, President and COO of NMFC; Teddy Kaplan, Head of our Net Lease effort and Shiraz Kajee, CFO of NMFC. Steve Klinsky is now going to make some introductory remarks, but before he does, I’d like to ask Shiraz to make some important statements regarding today's call.

Thanks, Rob. Good morning, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our November 8, 2016 earnings press release. I would also like to call your attention to the customary Safe Harbor disclosure in our press release and on Page 2 of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com. At this time, I’d like to turn the call over to Steve Klinsky, NMFCs Chairman who will give some highlights beginning on Page 4 and 5 of the slide presentation. Steve?

The team will go through the details in a moment, but let me start by presenting the highlights of another solid quarter for New Mountain Finance. New Mountain Finance’s adjusted net investments income for the quarter ended September 30, 2016, was $0.34 per share in the middle of our guidance of $0.34 to $0.35 per share and once again covering our Q3 dividend of $0.34 per share. New Mountain Finance’s book value was $13.28 per share as compared to $13.23 per share last quarter, a $0.05 increase per share. We’re also able to announce our regular dividend for the current quarter which will again be $0.34 per share and annualized yield in excess of 10% based on Monday’s close. The company invested $172 million in gross originations in Q3 and had $141 million of repayments in the quarter maintaining a fully invested balance sheet. During this quarter, we further diversified our sources of credit, issuing two attractively priced tranches of unsecured debt. Additionally in light of a very strong pipeline of investment opportunities in Q4. In October we raise $79 million of new equity. NMFC’s external manager provided significant financial support for this offering allowing the Company to raise this capital at an effective price of $13.75 per share, significantly above our book value. Finally, we made our first two investments in our new net lease vehicle, an area we believe strengthens and diversifies NMFC’s core franchise and which Teddy Kaplan will discuss in greater depth shortly. In summary, we are pleased with NMFC’s continued performance and progress overall. With that, let me turn the call back over to Rob Hamwee, NMFC's CEO.

Thank you, Steve. Before diving in details of the quarter, as always I'd like to give everyone a brief review of NMFC and our strategy. As outlined on page 6 of our presentation, NMFC is externally managed by New Mountain Capital, a leading private equity firm. Since the inception of our debt investment program in 2008, we have taken New Mountain’s approach to private equity and applied it to corporate credit with the consistent focus on defensive growth of business models and extensive fundamental research within industries that are already well known to New Mountain, or more simply put, we invest in recession resistant businesses that we really know and that we really like. We believe this approach results in a differentiated and sustainable model that allows us to generate attractive risk-adjusted rates of return across changing cycles and market conditions. To achieve our mandate, we utilized the existing New Mountain investment team as our primary underwriting resource. Turning to page 7, you can see our total return performance from our IPO in May, 2011 through November 4, 2016. In the 5.5 years since our IPO, we have generated a compounded annual return to our initial public investors of 10.1%, meaningfully higher than our peers in the high-yield index. Page 8 goes into a little more detail around relative performance against our peer set, benchmarking against the 10 largest externally managed BDCs that have been public at least as long as we have. Page 9 shows return attribution. Total cumulative return continues to be driven almost entirely by our cash dividend which in turn has been more than 100% covered by NII. As the bar on the far right illustrates over the 5.5 years we have been public, we have effectively maintained a stable book value inclusive of special dividends, whilst generating a 10% cash-on-cash return for our shareholders fully supported by net investment income. We are very happy to be able to deliver this performance over a period of time, where risk-free rates have been effectively zero and will strive to continue this performance. We attribute our success to, one, our differentiated underwriting platform; two, our ability to consistently generate the vast majority of our NII from stable cash interest income and now that covers our dividend; three, our focus on running the business with an efficient balance sheet and always fully utilizing inexpensive, appropriately structured leverage before accessing more expensive equity; and four, our alignment of shareholder and management interest. Our highest priority continues to be our focus on risk control and credit performance which we believe over time is the single biggest differentiator of total return in the BDC space. If you refer to page 10, we once again lay out the cost basis of our investments both the current portfolio and our cumulative investments since the inception of our credit business in 2008 and then show what has migrated down the performance ladder. Since inception, we have made investments of $4 billion in 186 portfolio companies, of which only six, representing just $84 million of cost, have migrated to non-accrual and only three, representing $32 million of cost, have thus far resulted in realized default losses. This $32 million figure is like the 80% of the transfer position classified as the realized loss. No new names have been put on non-accrual this quarter and approximately 98% of our portfolio at fair market value is currently rated 1 or 2 on our internal scale. Page 11 shows leverage multiples for all of our holdings above $7.5 million when we entered an investment and leverage levels for the same investment as of the end of the current quarter. While not a perfect metric, the asset by asset trend in leverage multiple is a good snapshot of credit performance and helps provide some degree of empirical, fundamental support for our internal ratings and marks. As you can see by looking at the table, leverage multiples are roughly flat or trending in the right direction, with only a few exceptions. The three loans that show negative migration of 2.5 turns are the same name we have been discussing for a number of quarters including our two prior period nonaccruals Transtar and Permian. The final loan is a first lien loan to an energy services businesses that while cyclically challenged, continues to have substantial liquidity and which we expect to be current for the foreseeable future. Permian have completed its restructuring earlier in Q4 and we believe long-term prospects for a meaningful recovery on our initial investments are good. The Transtar restructuring is still ongoing, but given its current status we do expect a significant loss as reflected in our 930 mark of $0.10 on the dollar. The chart on page 12 helps track the Company's overall economic performance since its IPO. At the top of the page, we show how the regular quarterly dividend is being covered out of net investment income. As you can see, we continue to more than cover 100% of our cumulative regular dividend out of NII. On the bottom of the page, we focus on below-the-line items. First, we look at realized gains and realized credit and other losses. As you can see, looking at the row highlighted in green, we've had success generating real economic gains every year through a combination of equity gains, portfolio company dividends and trading profits. Conversely, realized losses including default losses, highlighted in orange, have been smaller and less frequent and show that we are typically not avoiding non-accruals by selling poor credit at a material loss prior to actual defaults. We have suffered our first significant realized loss since our IPO with Transtar, but despite that, we continue to have a net cumulative realized gain of $21 million highlighted in blue. Looking further down the page, we can see that cumulative net unrealized depreciation highlighted in grey, stands at $50 million and cumulative net realized and unrealized loss highlighted in yellow is at $29 million, an improvement of $3 million from last quarter. I will now turn the call over to John Kline, NMFC's President to discuss market conditions and portfolio activity. John?

Thanks, Rob. As outlined on page 13, throughout 2016, we have seen continued strong performance in the credit markets driven by good economy conditions, generally positive flows into leverage credit and an increased desire for yield in the current low rate environment. As expected post-summer yield activity has been stronger. Generally, there has been a healthy balance between new deal flow and investor demands. Recently however the broader markets, particularly, the high yield market has been slightly weaker due to concern about the prospects for higher rates in the future. This continues a reoccurring theme that we've seen that shows healthy tension between positive and negative market forces that have maintained asset yields and an acceptable range for our testing strategy. Looking forward, we expect a good environment for deal activity for the remainder of the fourth quarter. Turning to page 14, NMFC is well positioned in the event of future rate increases at 86% of our portfolios invested in floating rate debt. Meanwhile, we have locked in about half our liabilities at fixed rates to ensure attractive borrowing costs over the medium term. The bottom line as the chart of the bottom of the page shows, is that given our investment portfolio and liability mix, NMFC is positively exposed to continue rising short-term rates. Moving on to portfolio activity as seen on pages 15 and 16 Q3 investments activity increased from Q2. Total originations were $172 million offset by $141 million repayments and $12 million of sale proceeds yielding a use of cash of $20 million. Our new originations consisted of new platform investments, continued investment in the SLP-II and investment in our newly formed net leased real estate entity. Since the end of the quarter, we’ve continued our strong investment pace with $88 million of new investments offset by $127 million of sales and repayments yielding a net source of cash at $40 million. Based on our pipeline of both committed and expected deals we expect to utilize the proceeds from our equity operating and continued to operate the business within our target leverage range. Page 17 shows that during the quarter our originations and repayments were skewed towards first lien by asset type, which is a reflection of good opportunities that we found in the first lien and unit tranche loan markets. Meanwhile our sales repayments were 58% first lien and 42% percent second lien and other. Asset yields as shown on Page 18, kicked up slightly from last quarter to 10.4%. Despite the continued strong market, we've had success finding portfolio investments with attractive yields in our core defensive growth industries like software, distribution logistics and business services that we believe will perform well in a variety of economic environments. On page 19 we show a balanced portfolio across our defense and growth oriented sectors, and a healthy mix between first and second lien investments. On the lower right, it is important to note that the vast majority of our portfolio continues to reform at or above our expectations. Finally as illustrated on page 20, we have a broadly diversified portfolio with our largest investment at 3.6% of fair value and the top 15 investments accounting for 39% of fair value. With that I will now turn over the Teddy Kaplan to discuss our net lease investment strategy. Teddy?

Thank you, John. I want to give everyone a brief overview of our strategy within the single tenant net lease estate space. The area of focus of NMFC's newly formed REIT entity. We seek to buy operationally critical real estate assets with long-term leases. Just as with NMFC’s credit investments, these real estate investments reflect the benefit of the existing New Mountain investment team from an origination and underwriting perspective. We are first and foremost focused on the credit quality of our [indiscernible]. We are further focused on identifying mission critical real estate assets that are operationally complex to vacate thus providing long-term high rates of occupancy within the portfolio with limited downsides. Underwriting these operational complexities is something we feel New Mountain is well position to do given its extensive experience owning and operating businesses as a private equity investor. Overall we target non-cancellable leases of 12 to 20 years with low double digit yields using modest asset level mortgage financing. In the third quarter we closed two transactions with an average cash-on-cash yield of in excess of 12% and a targeted IRR inclusive of annual rent escalators in excess of 15%. With that I will now turn it over to our CFO, Shiraz Kajee to discuss the financial statements and key financial metrics. Shiraz?

Thank you, Teddy. For more details on our financial results and today's commentary please refer to the Form 10-Q that was filed last evening with the SEC. Now, I would like to turn your attention to Slide 22. Portfolio had approximately $1.55 billion in investments at fair value at September 30, 2016 and total assets of just over $1.6 billion. We had total liabilities of $769 million, of which total statutory debt outstanding was $597 million, excluding $121.7 million of drawn SBA-guaranteed debentures. Net asset value of $848.2 million or $13.28 per share was up $0.05 from the prior quarter. As of September 30, our statutory debt-to-equity ratio was 0.71. On slide 23, we showed the historical NAV per share and leverage ratios which are broadly consistent with our current target statutory leverage of between 0.7 and 0.81. We also show the NAV adjusted for the cumulative impact of special dividends which portrays a more accurate reflection of true economic value creation. On slide 24, we show our quarterly income statement results. We believe that our adjusted NII is the most appropriate measure of our quarterly performance. This slide highlights that, while realizations and unrealized appreciation and depreciation can be volatile below the line, we continued to generate stable net investment income above the line. Focusing on the quarter ended September 30, 2016, we earned total investment income of approximately $41.8 million, slightly up from the prior quarter. Total net expenses of $20.1 million were also up slightly from the prior quarter. As mentioned on prior calls, due to the merger of our Wells Fargo credit facilities and consistent with the methodologies since IPO, the investment advisor will continue to wave management fees on the leverage associated with those assets that share the same underlying yield characteristics with investments leveraged under the legacy SLF credit facility. This results in an effective annualized management fee of 1.4% for the quarter, which is in line with prior quarters. It is expected, based on our current portfolio construct, that the 2016 effective management fee will be broadly consistent with prior years and it is important to note that the investment advisor cannot recoup management fees previously waived. This results in third quarter adjusted NII of $21.7 million or $0.34 per weighted average share, which is in line with guidance and covers our Q3 regular dividend of $0.34 per share. In total, for the quarter ended September 30, 2016 we had an in increase to net assets resulting from operations of $25.1 million. As slide 25 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see 93% of total investment income is recurring, and cash income remains strong at 94% this quarter. We believe this consistency shows, the stability and predictability of our investment income. Turning to slide 26, as briefly discussed earlier, our adjusted NII for the third quarter covers our Q3 dividend. Given our belief that our Q4 adjusted NII will fall within our guidance of $0.33 to $0.35 per share, our Board of Directors has declared a Q4 dividend of $0.34 per share, in line with the past 18 quarters. The Q4 quarterly dividend of $0.34 per share will be paid on December 29, 2016 to holders of record on December 16, 2016. Finally on slide 27, we highlight our various financing sources. During the quarter we upsized our convertible notes and unsecured notes by approximately $40 million each. We believe that both these deals enhance our liquidity and provide stable capital at attractive rates with no borrowing base requirements. Taking into account SBA-guaranteed debentures, we had a little over $1 billion of total borrowing capacity at September 30, 2016. As a reminder, our Wells Fargo credit facility's covenants are generally tied to the operating performance of the underlying businesses that we lend to, rather than to the marks on investment at any given time. At this time, I would like to turn the call back over to Rob.

Thanks Shiraz. It continues to remain our intention to consistently pay the $0.34 per share on a quarterly basis for future quarters, so long as the adjusted NII covers the dividend in line with our current expectations. In closing, I would just like to say that we continue to be pleased with our performance to-date. Most importantly, from a credit perspectives, our portfolio overall continues to be healthy. Once again, we like to thank you for your support and interest and at this point, turn things to the operator to begin Q&A. Operator?

[Operator Instructions] The first question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead.

Good morning Joe Mazzoli filling in for Jonathan Bock this morning. You have no doubt generated substantial returns for shareholders since the IPO, but today's environment is becoming more competitive, right. We've got a lot of capital formation in the middle market, strong technicals in the syndicated market. With an estimated costs of capital of you know over 10% on the recent equity offering. Can you provide some colors how your deal pipeline is kind of coming together because you would average new investment yields in the quarter of around 9.5%. It seems that new investments could be falling below that threshold.

Sure, Joe. So I'm not sure what your 9.5% is coming from. If you look at the slide on page 18, with sort of mid-10%s, now that obviously is consistent with sort of where we have been and sort of where we expect to continue to be. So we do feel like you know we are earning this hypothetical cost of capital. I'm not overly sympathetic to this whole “cost of capitals” argument frankly. I think if we can earn - whether its 10.5% or 9.5% in this rate environment with de minimis default offers, that's a great outcome for our investors. So, but in any event we're currently running kind of in the 10%s and our expectation is even in what is arguably a competitive market we can continue to do that.

Okay that totally makes sense and you know I think I may have been actually the yield on the new read that that may have been the difference there. Now until the largest new investment in the quarter was the investment - the first investment in Redbox and so this was an L plus 7.50% which is attractive for a 3B facility rating you know first lien position. But you know when kind of approaching an investment like this. Do you think of it as again this is a great risk adjusted return here on this asset and you know so we're going to kind of put capital to work? Or do you kind of consider that within the overall investment mix in the quarter?

Yeah, I mean we've always done a blend of things that yields ranging you know from as low as to the 7s to as high as the mid-teens. And that's always been a key part of our strategy and to blend that into that sort of 10 plus minus that we have been consistently able to deliver for the shareholders. It's critical for us is less whether it’s an 8 or a 12 or a 10 than do we have great insights into the business and based on those insights do we fully expect to get paid under virtually all circumstances that we can imagine. So that's our litmus test not so much any one off absolute yield or exactly where it is in the capital structure.

Okay, thank you for that. Now the final question, so you invested $17 million this quarter into the into REIT strategy. While we know that there certainly could be the potential and I'm sure there will be the potential for outsized returns here. We've also seen other BDCs you know dive into this a REIT strategy, albeit a different type of REIT strategy from what we've seen. Do you believe that it's appropriate to move beyond traditional real estate assets within your newly formed REIT and you know then we also saw that you made a strategic higher. So if you could just provide a little bit more color as to your realistic capabilities, I think that would be helpful.

Yeah, absolutely. So just to be clear right the REIT is a wrapper. What's important are the underlying assets. And those underlying assets are effectively loans to operating businesses that once again we know and like to our New Mountain work. So to us, this is just another way to have frankly a differentiated product offering to our sponsored clientele that allows to get the incremental security, not just the corporate credit, but actually have the backdrop of the real estate as well. So we're really excited about this niche business. We think we can really earn some excess return given the niche nature of it. You're not going to see us buying office buildings and hotels and other things in the REIT. The REIT again is a wrapper of convenience. What's key are the assets going in there and again we're not doing this. We believe we sort of over-resourced this effort by bringing in someone of Teddy's status in the industry, really one of a leader in this nichey field and you know Teddy is going to further build out his team over time. But yeah to us this is just a another way in an enhanced security way, to do what we've done sort of all along the business.

Yeah and this is Steve Klinsky, let me add one comment because I work to recruit Teddy. And this was an effort that we started preparing for, I think a year and three quarters ago. Teddy was one of the leaders of Angelo Gordon’s practice in the space, which is you know one of the major practices. Has as an outstanding personal track record and again, if you can get the yield, that we’re talking about getting without prepayment risk because these are long duration assets, where you don't - if the company's doing great, you don't prepaid, you can own it for a long duration. Have the rents rise over time, so they become a more valuable asset and are collateralized by both of the credit and the value of the real estate and these are assets that are indispensable to the company even if they did go bankruptcy, they would keep the assets and they’re going to just stay in existence. We think it's just another great way to strengthen the diversified core franchise. So that's the philosophy behind it.

That totally makes sense and thank you very much for taking my questions this morning.

Our next question will come from Ryan Lynch of KBW. Please go ahead.

Good morning, thanks to taking my question. Just to follow-up a little bit more on the conversation about the leasing. So you brought in Teddy to kind of run this operation. So obviously he has some expertise in this area, but are there any sort of benefits or can you – I’m assuming there are, can you describe the benefits that that you guys are going to tap in from the New Mountain platform that allows you and give you guys confidence to you know making these, leases going forward?

Yeah, sure I think Teddy probably is the best to answered that, so I’ll turn it Teddy. A –Teddy Kaplan: Just to take a step back if you think about what we're buying, these are all primarily operationally critical real estate assets that are leased to the portfolio companies of financial sponsors. So at the name level, the credits, if you will, look very similar to the credits that we’ve bought through NMFC, over a very long period of time and that we're capable of underwriting from a private equity perspective. So two of the things that we do is first and foremost, we underwrite credit in very much the way that we've underwritten credit at NMFC and PE deals at NMFC level. Furthermore, we underwrite the way that the real estate connects to the credit from a operational criticality standpoint. And I would argue that we're very well positioned to do that because of our history of owning and operating businesses as a firm and as an adviser to NMFC. You know that was what was very attractive to me in terms of thinking about joining the firm, was that is the critical capability of underwriting these investment successfully is one to get the credit underwriting correct and two, to understand how the real estate connects to such credits through operational criticality and I'd argue that New Mountain is uniquely positioned to do that.

Okay. Is there any sort of size limitation or how big you guys foresee this asset class being you know as either percentage of portfolio or just an absolute dollar amount call it you know, two to three years from now?

Yeah I think the best way to think about it is percentages, we talked about sort of 10% to 15% as sort of the upper bound and that's still sort of where I would be guiding people towards.

Okay. And one – last technical – one of the least one. Because the structure as a REIT is this considered a non-qualified asset or not?

Yes.

Very good.

Yeah, it would be non-qualified assets, so it will be [indiscernible].

Yeah, it’s a qualifying, [indiscernible] yeah, we are still preserving our capabilities within our 30% bucket we really haven't used that very aggressively so we still have that, you know, I mean, like.

Sorry, you broke up for a second there. So this is one of the 70% qualifying assets.

Yeah.

Perfect. And then what about your fee structure, you guys have done a really good job and made a point of waving fees for loans that was originally sitting here at our original SLF facility and that’s definitely shareholders nicely and its basically effectively reduced your guys management fee to around 1.4% from 1.75%. So it's been really beneficial you know concession you guys are giving to shareholders. I'm not sure that the market gives you guys full credit for it. So I mean pending that there isn't any meaningful plans to meaningfully shift your guys portfolio or investments strategy around it. Why not change the fee structure to the more simplified version, which I think were to give you guys you know more credit in the markets?

You know I guess, there’s really two elements of that and thank you we appreciate that at least some folks do recognize I think we get you know maybe a little more credit than hopefully none. But we do like the flexibility that the mix overtime does change that does deserve flexibility and also there's a technical element to this that that change would require shareholder approval, which is you know obviously expense and degrees of pain associated with that. So you know I think we do think about the issue, I’ll say never say never, but right now it’s just not in our near term revenues [ph].

Okay, great. Those are all the questions for me. Thanks for taking them.

Great. Thanks, Ryan.

Our next question will come from Jim Young of West Family Investments. Please go ahead.

Hi, Jim.

Hi. I just want to clarify the offering of 5.75 million shares, where you mentioned that you had net proceeds of $79.1 million or $13.75 per share. But that excludes operating expenses. So net of operating expenses, how much did you raise per share?

So the shares were offered to the public at $13.50 per share. However – and then the manager paid all expenses associated with that deal, so the true net proceeds to the company were $13.50 per share. But then on top of that the manager also made a payment effectively covering the reoffer discount to get the actual proceeds, the cash proceeds received by the company back to $13.75 per share.

Okay. Great, thank you for the clarification. Appreciate it.

Our next question will come from Chris Kotowski of Oppenheimer and Co. Please go ahead with your question.

Hi, Chris.

Hi, just back on the lease vehicle because its new and it's interesting. How much do you intend to lever the vehicle and it's described as non-recourse asset leverage, I assume that means non-recourse to NMFC. But it's recourse to the REIT?

No, no. Actually that’s one of the great things about the business is, if there is no leverage at the REIT level each asset has leverage against it that leverage is both the non-recourse back to NMFC obviously. But more importantly is non-recourse to the REIT and to all the other asset within the REIT. So if there is any ever a problem with any of the asset, individual assets within the REIT and the associated leverage, there's no way for that problem to impact any other elements of the REIT. So you're truly only exposed to your individual equity investments at each asset level and that - we really like that element of the strategy.

All right. Okay and it's generally how long term is the funding one of these – or is each deal bespoke?

Yeah, they are generally bespoke for 10 years and we're pretty well matched from a life of lease and the term of the asset level funding.

And 10 years in fixed rate for 10 years.

Okay, interesting. So what we will see when we’d see disclosures on this is we'll just see NMFC’s equity contribution, we won't see the individual assets or the leverage on the assets, it'll just be - it'll look like just an equity contribution to the lease.

That is correct and what we’ll recognize from an income perspective, will be the dividend and that the REIT pays up to NMFC.

Okay, alrighty. Thank you. That's it for me.

Great. Thanks Chris.

[Operator Instructions] :

Great. Thanks, good morning.

Hey, how you doing?

Doing well. Was curious all the questions I had on the net lease were asked and answered. But did want to get a feeling for the upcoming pipeline? And if there are any SBA eligible investments that you might the capacity on the SBA on?

Yeah, so we have one SBA eligible investment that’s approved through our committee that you know they're done until they're done, but where in documentation on and we would expect to close in the next few weeks. And then there are two of the visible pipeline that is in you know advanced diligent and advanced turn. There are two candidates, at least within the pipeline. You neither of those to get to the finish line, both of them could, one of them could. But yes, we do have some, reasonably advanced candidates there.

That’s helpful, Rob. And then, just carry if what you're seeing from a mix standpoint you know within the capital structure this past quarter was heavier first lien than what would be in the overall portfolio now? Is that that kind of the focus or is that just more flavor of what you're seeing right now and what's available to you?

Yeah, I mean you know I hate to just kind of beat the dead horse, but you know we focus first and foremost on the business and the security leads us to where the opportunity is or the opportunity leads us to the security. We don't go out, saying, okay we’re trying to source you know extra first lien this quarter or extra mezz [ph] this quarter or whatever, it may be. So I’d say the current pipeline is reflective of kind of our traditional and you know very durably consistent roughly 50-50 mix. But any quarter, it’s such a small sample every quarter the idiosyncratically we could be like we were this quarter two-third first and one-third other. In other quarters you’ve seen we've been one-third first and two-thirds others. So it’s just, it’s so dependent on which of the remaining deals in the pipeline gets to the finish line you know whether we’re at 50-50, 60-40 or 40-60.

Yeah, all right. Thank you guys. Appreciate it.

Yeah, thank you.

Our next question will come from Mitchell Pen of Janny [ph]. Please go ahead.

Hey, Mitchell.

Hey, a quick question, on the REIT, are you guys exposed to either rising cap rates or rising interest rates?

Sure, yeah. I’d start with yes, but let me Steve speak a little bit to that.

So we think about a lot and one thing I just want to mention is that real estate cap rates are less correlated to broader interest rates than I think might be intuitive and there’s plenty of data to support that. Where there is a greater correlation is between cap rates and risk spreads and we’re still seeing very wide risk spreads on our underlying cost of debt, that we would expect could absorb raises in the underlying base rate or risk free rate and historically that has been the case. Most importantly, the debt that we put on these deals is assumable by future buyers. So to the extent that our cap rate, wind up looking to be below market cap rates, typically what that means is that the assumable debt in place, also is below market level debt and therefore the equity yield that we can pass on to your future buyer remains whole and that is something that we've in my personal history has proven to be the case for, I've been able to execute on the sale of assets at below market cap rates because the debt that was being passed on an assumed basis to the buyer was also a below market level rate of debt, I should say.

Will the rising cap rates impact the dividend, so quarter-to-quarter are we subject to, let’s say cap rates rise 1%. Would that impact the mark on the property and then the dividend would be impacted?

The dividend will certainly not be impacted. Like all assets we own, we will use varying techniques to determine fair market value, so yes, all else equal material changes in cap rates could have an impact from values perspectives, but you could say the same thing about any other interest rate rise on our fixed rate FX within the portfolio. I would also say you know if you look at page 14 you know we've pretty materially in recent quarters increased the fixed component of our funding sources, you know we’re all the way up to 50-50, fixed, floating. So we've been very conscious about that, using the current low interest rate environment to add to our fixed sources of funding which we think gives us some flexibility to add a little bit of duration to the portfolio. And you know as we said the flipside of adding the duration is that we do get very strong call protection, i.e. not callable, and they do have escalators built in. So you know we think we're very consciously thinking about our match between our funding sources and our assets. And under all circumstances you know we’ll maintain a positive exposure to rising rates.

Got it. One last question, are you guys responsible for tenant improvements?

No. Under traditional structure, we’re not responsible for any tenant improvements. In rare circumstances we might be willing to fund tenant improvements for the tenant. But we would do so only if we earned a specific return, equal or greater to the deal level return on that capital. And most importantly we would push the construction risk to the extent that any existed on to the tenant and to be very specific the way that we would do that, is the tenant would perform the work and all liens would be waived on the construction work before we have to advance any capital against such work.

Got it. Okay. Thank you.

Yes, thank you.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Hamwee for any closing remarks.

Great. Well, thanks everyone. As always we appreciate the support and the interests and look forward to getting back on the phone next quarter. Have a great day. Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.