FS KKR Capital Corp

NYSE:FSK

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to FSKKR Capital Corp's First Quarter 2021 Earnings Conference Call. Your lines will be in a listen-only mode during remarks by FSK's management. At the conclusion of the company's remarks, we'll begin the question-and-answer session, at which time I will give you instructions on entering the queue. Please note that this conference is being recorded.

At this time, Robert Paun, Head of Investor Relations will proceed with the introduction. Mr. Paun, you may begin.

[Robert Paun, Head, Investor Relations]

Thank you. Good morning and welcome to FSKKR Capital Corp's first quarter 2021 earnings conference call. Please note that FSKKR Capital Corp may be referred to as FSK, the Fund or the Company throughout the call. Today's conference call is being recorded and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued on May 10, 2021. In addition, FSK has posted on its website, a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended March 31, 2020. A link to today's webcast and the presentation is available on the Investor Relations section of the company's website under Events and Presentations. Please note, that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Today's conference call includes forward-looking statements and are subject to risks and uncertainties including risks associated with the possible impact of COVID-19 that could affect FSK or the economy generally.

We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's first quarter earnings release that was filed with the SEC on May 10, 2021. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation, or as a substitute for the related financial information prepared in accordance with GAAP.

In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website.

Speaking on today's call will be Michael Forman, Chairman and Chief Executive Officer; Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Stephen Lilly, Chief Financial Officer. Also joining us on the phone are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson.

I will now turn the call over to Michael.

[Michael Forman, Chairman & Chief Executive Officer]

Thank you, Robert and welcome everyone to FSKKR Capital Corps first quarter 2021 earnings conference call. The first quarter represented another positive stable quarter for FSK. During the quarter, our investment team originated $417 billion of new investments, we experienced an increase in our net asset value, and we again out earned our target 9% annualized dividend yield on our net asset value.

I'm pleased to report that the first quarter of 2021 represents the fifth consecutive quarter since the establishment of our current dividend policy that we have over earned our target annualized. Again, I congratulate our team for achieving these solid results, especially during such a volatile period.

During the first quarter, our net investment income was $0.63 per share, which was $0.03 per share above our quarterly dividend of $0.60 per share, and also $0.02 per share above our public guidance at the end of the fourth quarter.

From a liquidity perspective, we ended the quarter with approximately $1.9 billion of available liquidity with no meaningful near term debt maturities. Looking forward to the second quarter, assuming the proposed merger between FSK and FSKR closes before the end of the second quarter, we plan to file a single combined 10-Q for the quarter for this -- entity FSK.

From an FSK dividend perspective, our board has declared a distribution of $0.60 per share for the second quarter, which equates to an annualized yield of 9.2% on our net asset value per share of $26.03 as of March 31, 2021. Assuming the proposed FSK and FSKR our merger closed on schedule. On our second quarter earnings call we will provide detailed guidance with regard to our near term operating expectation.

However, based on the positive feedback we have received from the market regarding our existing dividend policy. Assuming current market conditions remain relatively intact, we currently expect to continue to target a 9% minimum unrealized revenue.

As we prepare for the closing of the preferred proposed merger of FSK and FSKR, the board and I are extremely pleased with how the FS KKR team is performing, and how well our investment portfolio is positioned for the future. As a result, we believe that the proposed merger of FSK and FSKR will be consummated at an opportune time.

And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thanks, Michael. In early November of last year, on our third quarter 2020 conference call, we shared our belief that the feds primary focus was reducing unemployment, with a secondary goal of targeting inflation at around 2% per year. At that time, unemployment was 6.9%. Today, just two quarters later, unemployment is 6.1% an impressive decline and its own right, but even more so and what accounts for the number of eligible workers still choosing not to work due to lingering pandemic related concerns, as well as the extra financial support provided by the most recent stimulus package.

Going forward, we believe that policymakers will continue to lead with a primary focus on the labor market, and the hiring in certain sectors such as travel, hospitality and leisure, infrastructure, and home building will lead to a continued near term drop in unemployment, with wage growth perhaps occurring sooner than many observers may expect.

In our conversations with financial sponsors and portfolio companies, we have been encouraged by their operating and financial performance, which has included meaningful increases in both revenues and EBITDA on a quarterly basis for the last three to four quarters.

Going forward, we believe the coming quarters will be marked by continued improvement in free cash flow growth across many sectors, offset only partially by the effects of expected higher near term inflation. Over the immediate term while we continue to believe that modest inflation is healthy for the overall economy, we believe inherent structural forces, including technology and demographic trends, will help balance longer term inflationary pressures.

From an investing perspective, we like other large BDC platforms, continued to experience the repayment of certain assets, as sponsors and portfolios take advantage of the strength of the syndicated markets.

While repayments are normal in our business, we recognize the markets focus on our ability to reinvest. To this end, we continue to be encouraged by the significant growth which has occurred in the private credit markets over the last several years. As both sponsors and portfolio companies have come to depend on larger well-funded platforms as traditional and regular way sources of financing.

As we move forward in 2021, we will continue to be highly selective in our underwriting as we adhere to our internal view that we want to be well downside protected in this market. Also, later in the call, Brian will speak about a few repayments of legacy positions, which were originated prior to the establishment of the FS KKR advisor, where we played active roles with both the portfolio companies and their sponsors to create positive outcomes.

In terms of new investing activity during the first quarter, the FS KKR advisor closed on approximately $1.1 billion of total investments across our BDC franchise, $417 million of which were within FSK.

From a volume standpoint, the first quarter began slowly as it frequently does. As our transaction pipeline began to expand, we continue to exercise caution by being highly selective, focusing only on investment opportunities, which met our criteria.

During the quarter, our closure rate approximated 2%, which compares to our historical closure rate of approximately 4%. Approximately 40% of our FSK originations this quarter came from opportunities and companies previously invested in by KKR. Again, illustrating the power of incumbency and relationships.

Our $470 million of total investments combined with $684 million of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio decrease of $267 million during the quarter.

During April, we close $350 million in investments and we experienced $530 million in repayments. As we said during our fourth quarter call, we continue to forecast a higher than average level of repayments over the next few months, given the continued strength and abundant liquidity within the syndicated markets.

In terms of color around a few of our investments during the quarter KKR credit was the lead arranger and committed $320 million through a $505 million first lien delay drawl term loans for MB2 Dental Solutions, a dental service organization with a total of 266 practice locations across 21 states.

FSKs portion of the commitment was $66 million, while FSKR and other KKR managed accounts committed the remainder. KKR credit also committed $175 million to a second lien financing for Peraton Corporation, a large government services IT business focused on intelligence and defense. The sponsor, Veritas Capital acquired a separate government IT services business and merged with Peraton.

The combination creates a scaled leader in the government IT services sector with a particular focus on higher end cybersecurity and product development work with over 10,000 employees. FSK committed $57 million to the financing, while FSKR and other KKR managed accounts committed the remainder. The financing is an example of an investment opportunity with a larger company where we believe the dynamics of the second lien structure are compelling.

Both of these investment opportunities are examples of the types of transactions we find attractive, well capitalized, solid operating companies that appear well positioned for future growth. About a year ago, we began providing detailed investment performance metrics for the FS KKR advisor. The updated information is summarized as follows; Since the FS KKR advisor was formed through March 31 2021, we have originated approximately $4.8 billion of new investments in FSK, and have experienced 86 basis points of cumulative appreciation.

We continue to be pleased with the investment performance our team has been able to deliver. And we believe these data points continue to illustrate the manner in which we have taken measurable steps to turn the investment portfolio toward what we believe to be more conservative investment structures and companies with more defensible operating positions. This information is detailed on slide 12 in our investor presentation on our website.

And with that, I'll turn the call over to Brian to discuss some investment portfolio specific.

[Brian Gerson, Co-President]

Thanks, Dan. As of March 31, our investment portfolio had a fair value of $6.5 billion consisting of 152 portfolio companies. This compares to a fair value of $6.8 billion and 164 portfolio companies as of December 31 2020. At the end of the quarter, our top 10 largest portfolio companies represented approximately 23% of our portfolio, which remains in line with our results for the last several quarters. We continue to focus on secured investments, as our portfolio consisted of 51.2% of first lien loans and 63.5% senior secured debt as of March 31.

In addition, our joint venture represented 11.3% of the portfolio, and our asset based finance investments represented 14.7% equating to an additional 26% of the portfolio, which is comprised predominantly of first lien loans, or asset based finance investments, which we believe have meaningful principal protection.

The weighted average yield on accruing debt investments was 8.6% as of March 31 2021, as compared to 8.8% at December 31 2020. The decline in our weighted average yield during the quarter was primarily associated with the repayment of higher yielding assets during the quarter and new lower yielding assets which closed during the quarter.

In terms of collars surrounding the repayments we experienced during the quarter, approximately 20% of our repayments were related to investments made by the FS KKR advisor since its establishment in April 2018. The other 72% of our repayments were associated with legacy investments.

As Dan mentioned, two of these legacy investments are highlighted as follows. First is Kodiak Building Partners, which distributes building products to commercial builders and remodelers. The investment was originated in December 2017 when Court Square purchased Kodiak, American builders and two small tuck-in acquisitions. We provided the full $174 million unit charge and $52 million Accordion to support the business.

Since the time that SSKs original investment, Kodiak completed more than 10 acquisitions. In August 2018, we increased our investment by providing an incremental $100 million commitment to the company's delayed draw term loan to fund the company's growth.

In February of this year, the business completed the dividend re-capitalization through the syndicated market, and our investment was repaid in full at a call price of 101. Another sizable legacy investments that was repaid during the quarter was all systems. The company is a human capital solutions provider in the U.S., serving a diverse set of blue chip customers. The investment in all systems was originated in October 2016 when THL Partners acquired the business, and was highly acquisitive during our whole period.

In July 2019, we opportunistically refinanced the company with the new Uniton’s [ph] facility. This refinancing allowed us to repay the first [Indiscernible], thereby improving our financing position. Our loan is repaid in full at par in January of this year upon the sale of the company.

Including the effects of these and other repayments, as of March 31 2021 approximately 84% of our yielding investment portfolio is now comprised of investments originated by KKR.

Turning back to our existing portfolio, during the first quarter, we experienced net portfolio appreciation of $121 million. The total amount of realized and unrealized appreciation we experienced across the portfolio during the quarter was $249 million. And our realized and unrealized depreciation totaled $128 million during the quarter.

During the quarter, we placed two investments on non-accrual, Sequel Youth & Family Services and Central Park Leasing. Sequel has been on our watch list and Central Park Leasing, a static pool of 34 Airbus and Boeing aircraft has been heavily impacted by the Covid-19 pandemic. Also during the quarter, we placed one asset NBG Home back on accrual status. NBG is a designer, manufacturer and distributor of products for the home decor market.

During the depths of the COVID pandemic, we invested additional capital to support the company. And now several months later, the business has recovered meaningfully driven by strong consumer demand for its products. As a result of these activities at the end of the first quarter, our non-accruals represented approximately 6.8% of our portfolio on a cost basis and 3.6% of our portfolio on a fair value basis compared to 6.6% on a cost basis, and 2.5% on a fair value basis, as is December 31 2020.

And with that, I'll turn the call over to Steven to discuss our financial results in more detail.

[Steven Lilly, Chief Financial Officer]

Thanks, Brian. In terms of color behind our financial results, the $12 million decline in our total investment income quarter-over-quarter was impacted by the following. We experienced a decrease of $11 million in our interest income, primarily due to the investment activity about which Dan and Brian spoke as several of our higher coupon investments were refinanced during the quarter.

This activity was partially offset by new investments, which carried weighted average yields of 8%. Our fee and dividend income remained flat quarter-over-quarter. The largest components of our fee and dividend income included $22 million in dividend income from our joint venture during the quarter.

Other dividends from various portfolio companies total approximately $9 million during the quarter. Finally, fee income totaled $11 million during the quarter, representing a decrease of $1 million quarter-over-quarter with the change tied directly to our origination and repayment activity during the quarter.

Our interest expense for relatively flat quarter-over-quarter and management fees decreased by $1 million during the quarter due to the lower amounts of average gross assets during the quarter as compared to the prior quarter.

The detailed bridge and our NAV per share on a quarter-over-quarter basis is as follows; our starting 4Q 2020 NAV per share of $25.02 was increased by GAAP net investment income of $0.63 per share, and was increased by $0.98 per share due to an increase in the overall value of our investment portfolio. Our NAV per share was reduced by our $0.60 per share dividend. The sum of these activities results in our March 31 2021 NAV per share of $26.03.

From a forward looking guidance perspective, we expect our second quarter net investment income prior to any effects of the proposed merger with FSKR to approximate $0.61 per share. The bridge from our $0.63 per share of net investment income during the first quarter to our second quarter guidance is as follows.

Our recurrent interest income is expected to decline by approximately $6 million due to a combination of the following; anticipated repayments of certain higher yielding assets during the second quarter, and the effects of lower origination volumes that we experienced during the first quarter.

We expect recurring dividend income associated with our joint venture to remain flat with the first quarter at approximately $22 million. We expect other fee and dividend income to approximate $24 million during the second quarter. From an expense standpoint, we expect our operating expenses, including interest expense, management fees, and G&A costs to remain relatively flat quarter-over-quarter.

In terms of the right side of our balance sheet, our gross and net debt-to-equity levels for 113% and 100%, respectively, as of March 31, 2021. This compares to gross and net debt to equity of 131% and 119% respectively, at the end of the fourth quarter. Our available liquidity of 1.9 billion equates to approximately 29% of the value of our investment portfolio, which is a very comfortable percentage and allows for future portfolio growth.

At March 31, approximately 55% of our committed balance sheet and 77% of our drawn balance sheet was comprised of unsecured debt. We continue to be pleased with our overall weighted average cost of debt of 4.2%.

And with that, I'll turn the call back to Michael, for a few closing remarks before we open the call for questions.

[Michael Forman, Chairman & Chief Executive Officer]

Thanks, Steven. The first quarter of 2021 represent a strong start to what we believe will be an active year from an investment standpoint. In addition, our team has been preparing for our proposed merger with FSKR and we continue to be excited by the strategic opportunities a single BDC platform will provide our shareholders.

The last few years has represented time of change across our platform, from the establishment what of what has proved to be an excellent partnership with KKR, to repositioning our investment portfolio, to broadening and deepening our team, to fortifying our balance sheet we are well positioned for the future.

On behalf of our entire team of more than 200 professionals, we look forward to keeping you informed of our progress, and we appreciate your interest and support. And with that operator, we would like to open the call for questions.

[Operator]

Thank you [Operator Instructions] Our first question comes from Casey Alexander with Compass Point. You may proceed with your question.

[Casey Alexander, Compass Point]

Hi, good morning, I have three and I'll just give them all to you at one time. First, if you could generally discuss the pipeline and the pipeline relative to the competition from the broadly syndicated loan channel.

Secondly, if you could discuss the potential for rotation from equity assets, which are close to 10% of the portfolio, and obviously you have 10% of the portfolio that's not income producing.

And then my last question is a given the high level of pre-payments and pre-payments during the quarter wide sell 193 million of investments down into the JV as opposed to holding them on balance sheet and maintaining some more of the interest earning assets on balance sheet Those are my three questions. Thank you.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Casey, good morning. Thank you. And I'll go through them. Tell me if I missed something, Brian might add as well. Yes, I think we've been happy with pipelines, rather than we've talked about, January, as it historically is probably a little bit slower. You saw the $1.1 billion across the entire BDC franchise. And we have been seeing a certain amount of repayments happening as people were getting refinanced in the syndicated market. Right, that market has generally been frothy for most of the year, probably cooled down a little bit, or we'll say, normalize sort of a bit. That is what we expect, right? We're investing in companies, we weren't expecting them to grow, and they have access to cheaper sort of forms of capital.

I don't view that we're in there, kind of slugging it out and competing every day with a syndicated market. Because in many ways, we just, we're not trying to do that on a cost of capital game. Right. That said, we have found more and more borrowers. And sponsors are looking for what the private credit market provides, right, certainly execution, maybe some flexibility in terms of the delayed draw term loan. And as I said, my remarks, I think the larger platforms have the ability to do that.

So I think there was a good tailwind in terms of the market dynamic. Obviously, the, the strength of the syndicated market has maybe been a little bit of a headwind interest, just in terms of a net deployment number, but I think we feel good about pipeline. I think on the it has been a focus of ours, as for many quarters on rotating out of some of the equity positions, we've exited a fair amount of individual line items over the last, handful of quarters, like that's been sort of positive. We have got a miss maybe some of the larger ones in terms of moving the needle. That said, one of the larger positions, a company called ASG, you can find that announcement that business was sold, I think either Q2 or Q3, we would get fully repaid there. I think we're happy to see that. I think that was a good transaction for sort of all involved.

And maybe last question in terms of the high level sort of piece, obviously, we're keeping the super majority of the economics when it does go to the JV. So it's not that material will move. Right, that said, we are managing the portfolio for different things, including managing sort of non-EPC capacity.

[Casey Alexander, Compass Point]

All right, thank you. Yes, I think I got it. Thank you.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you.

[Operator]

Thank you. Our next question comes from John Hecht with Jeffries. You may proceed with your question. John, can you hear us? Our next question comes from Finian O’Shea with Wells Fargo. You may proceed with your question.

[Finian O’Shea, Wells Fargo]

Hey, everyone, good morning. First question for Michael or Dan, perhaps, do you have the final estimate of how far you'd be behind on the incentive fee? And how that compares to the 90 million of fee waivers?

[Dan Pietrzak, Chief Investment Officer & Co-President]

I can take that Finian. And then I'm assuming you're meeting sort of inside of FSK, we could probably follow up offline because I don't have the sort of details here. That said, I think we've been pretty happy with what we've seen vis-à-vis NAV growth over the last handful of quarters. I think some of that has been, we'll call it just general market bounce back. Yes, but there has been a handful of names, like, sound united like NCI like NVG, where we've talked about the script where we actually proactively put money into them, during some of the darker days of COVID. And we've seen sort of that bounce, but we can we can follow up offline with some of that exact math for you, if you'd like after the call.

[Finian O’Shea, Wells Fargo]

Okay. Yes, I was interested on FSK and combined entity. We can follow up. I just had a second question on platform fundraising. Once you get these, the potential merger complete this you as an entity, or perhaps separately, the FSI and the KKR side plan to resume fundraising efforts for direct lending and how will that look on the platform side?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, Fin I obviously, we've been laser focused on getting the merger done. All things are pointing, as we talked about in the prepared remarks to hopefully getting that done into the Q2. We do think about various kind of pools of capital raised from time to time. I think you've heard us sort of talk about in the past. Right. That said, I think we've been mindful about having what I will call the right amount of capital, to address this market. We do believe this is a space where size and scale matter. But we're also pretty cognizant about making sure that we are, you know, appropriately deployed inside of these companies, both inside of our target leverage for the numbers, but also to ensure that we're covering kind of the dividends that we're sort of out there sort of targeting. So I don't think anything unique or different than a normal course of business, but those are the ways we think about.

[Finian O’Shea, Wells Fargo]

Okay, great. Thank you. That’s all for me.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thanks Fin.

[Operator]

Thank you. And next question comes from Ryan Lynch with KBW. You may proceed with your question.

[Ryan Lynch, KBW]

Hey, good morning. Thanks for taking my questions. Kind of following up on Casey's question regarding just portfolio growth and leverage, I mean, this quarter, you guys, when you combine kind of your balance sheet and FSKRs balance sheet, you guys are going to be under your leverage target when you kind of use that that average. So, how much of a priority will you guys have at growing your portfolio? Is that even a main priority? Right now, given kind of the strength, that you guys are going to get into [Indiscernible] And do you think that that's even possible with how strong our market is right now?

[Michael Forman, Chairman & Chief Executive Officer]

Yes, sure. Good morning, Ryan. Ryan -- your math, right, right. I mean, we're roughly one time. So the net here is at under that in FSKR. If you look at the numbers that came out last night. I think we're actually feeling pretty good about being kind of under that target leverage number, right. That means we have ample room for sort of growth. As we've invested meaningfully in our origination footprint over the last several years, we've made, in our opinion, sort of a bunch of very good hires, from very good sort of firms. So our origination pipeline is quite active.

As I sort of said in the prior question, I don't really view us kind of competing day in and day out. Right, that said, the feeling of that market, or the terms and conditions of that market and the pricing of that market can sort of definitely bleed into ours. And that also has driven, some of those repayments. But I think we feel quite good about being at our target leverage number in the medium term. I think we feel good about the footprint of the business. And some of those tailwinds that I mentioned, for the overall industry, but I think also in markets like this, I don't think Brian and I are necessarily unhappy about, having a fair amount of dry powder to deploy when the opportunities do present themselves.

And maybe just last point, Ryan. I mean, we're focused every day on origination. That's the name of the game of this business, but we are trying to be very disciplined when it comes to risk and underwriting side. And you're going to see that continue.

[Ryan Lynch, KBW]

Okay, fair enough. And then you mentioned, M&A is increasing, you guys are seeing more deal opportunities, that are still remaining, highly selective on only investments that really meet your investment criteria. I'm just curious, has your investment approach changed at all, as you guys are at the point cap day, given the backdrop of the U.S. economy versus what you were maybe targeting or focusing on back in 2018, or 2019?

[Michael Forman, Chairman & Chief Executive Officer]

A little bit, obviously, most of the teams still working from home. So that's a change, right? You're doing kind of appropriate levels of diligence, but doing that in a different manner. I think dramatically in 18, and 19, we're underwriting for a recessionary environment to sort of that, maybe in the normal course, never really came over. That was the general sort of view. Now we're sitting in a, an economic maybe sort of tailwind. Now on the other side of this pandemic. It feels like we're going to have a pretty darn good couple of years of economic performance.

By that said, I think we're, we're thinking about other things, right? We're thinking about, is there any potential for rising rates, we're thinking about wage inflation. We're thinking about probably that potential recessionary environment, two, three sort of plus years sort of out. So I think a lot of the same basics and fundamentals but try to adjust for the market environment that we're in today.

[Brian Gerson, Co-President]

Yes, the only thing this is Brian, is that, when we underwrite credit, we're always in terms of the scenarios that we're looking at, we're always underwriting a recession in the next year or two after we, after we fund an investment. So we're focused, very much on quality versus quantity in terms of our underwriting, and, you know, I don't think our discipline is changed.

[Ryan Lynch, KBW]

Okay, understood. You guys did have a have a really nice quarter, this quarter, but I didn't want to just bring out one investment, you guys investment in SQL? There, there are some really ugly articles out there on that investment involving some human tragedy and other things. Regarding that business, does that change kind of the kind of how public some of those, those items are does that change the way you guys, approach really, achieving some sort of resolution in that challenge that investment in business?

[Michael Forman, Chairman & Chief Executive Officer]

Yes. Well, I guess, Ryan, thanks for the kind words on order. Yes, I mean, it has been a challenge of essence, as it is a legacy investment. It was originated 2017. I think, we've, we're happy that we've kind of built the team on our side with a fairly deep bench specifically of workout professionals, to help us address situations like this. I think we're quite capable to do that. And this is, this is the top of the priority list. Without going maybe into too much detail on the call, I think we are cognizant to make sure that we're sort of, doing the right thing, but also cognizant of the risk position. And we've got a very good I think, dialogue with the existing sponsor, and we're going to work hard to find a resolution there.

[Ryan Lynch, KBW]

Okay. That's all for me. I appreciate the time today, guys.

[Michael Forman, Chairman & Chief Executive Officer]

Thank you Ryan.

[Operator]

Thank you. Our next question comes from Bryce Rowe with Hovde. You may proceed with your question.

[Bryce Rowe, Hovde]

Thanks. Good morning. Just wanted to hit on a couple questions here. First, in terms of some of the commentary from the last couple quarters really around the 9%, NAV dividend yield target. So I guess my question is just around kind of how we've seen the equity portion of the of the portfolio from a fair value perspective really increased, especially this quarter, both at FSK and FSKR. So how do you -- how do you think about that, relative to that, to that 9% target, it feels like it might be a tougher bogey to hit so to speak, that 9% target with more equity in the portfolio?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes. And Bryce thanks for the question. And Steven Lilly might want to sort of act as well. I mean, I think we've gotten a good reaction for the dividend policy we put in check is now five quarters ago. I think we've been happy that we've been able to over earned. I think you're correct, we have seen some appreciation in that equity portfolio. Some of that can be driven by sales processes that we talked about before, some of that is just driven by new situations where we put some new dollars in a new scene, some meaningful uplift into earnings with those businesses, and on the other side of the, the darker days of the pandemic.

So I think we're happy to sort of see that equity growth. I mean, obviously, I think, we're mindful about the tension between the two, but I think we feel good about the dividend policy, where we sit now and so that 9%, but, Steven, feel free to add.

[Steven Lilly, Chief Financial Officer]

No, I think you covered it. I think you covered it well.

[Bryce Rowe, Hovde]

Alright, and then maybe another question on the outstanding debt from a capital structure perspective. Usage on the revolving facilities at FSK is, it's come down as the balance sheet or the portfolio is, is come down here this quarter. So I'm curious how you're how you're thinking about and if you can comment on kind of the combined organization and how that how the capital structure might look on the right side of the balance sheet, being able to possibly, combine some revolving facilities, just any, any guidance there would be helpful.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, no, happy to. I mean, maybe a couple of points. One, I think on the revolver coming down, probably a combo of two things, right. Number one, is correct. Obviously our leverage has come down. But we've also now I think, from a financial statement perspective, the full sort of benefit of the recent bond deals that were done being used to reduce that sort of revolvers. I think that's the change you'll see at least over the past couple of quarters.

I think what we've talked about in the past is, the FSK sort of writes out of the balance sheet is probably what you should expect for the roadmap on a go-forward basis. We've been happy that we've been able to access the unsecured market from time to time. I think our expectation is we would look to continue that. And then from the revolver perspective, the way the revolver is set up, is it can be collapsed into one just as part of the regular way deal. So there's no sort of consensus of the needed for that. So the joint revolver, you can sum them together in a pro forma entity.

[Bryce Rowe, Hovde]

Okay, great. Thanks so much.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you.

[Operator]

Thank you. Our next question comes from Robert Dodd with Raymond James. You may proceed with your question.

[Robert Dodd, Raymond James]

Hi, guys. Congratulations on the on the NAV and earnings this quarter. If I kept on the bat, what do you think? Or how do you feel about the quality of the originations Q1? And maybe pipeline? Obviously, you saw some pay downs, but interest coverage actually kicked up? Which is, which is pretty tough to do in a very competitive environment generally. So it would tend to say your originations were the only one metric, but then maybe in the repayments. Is that true? And how does that look in the pipeline? And maybe for your expectations as we go through the remainder of say, the first half of the year?

[Michael Forman, Chairman & Chief Executive Officer]

Yes, no, fair question. I think in terms of quality reservations, we feel good, right? I think we've got to use the numbers and the prepared remarks that showed, where we've been, selective. I think we've been focused both on quality of business, as well as quality of structure. And at the end of the day, kind of not chasing basis points, right, we need to sleep well at night. And that's got to be a material sort of focus. I think we also feel good about the just that percentage of incumbency positions that we talked about, a lot of these are names that we've known for a long time, have a lot of sort of comfort in the numbers. So I think overall quality, Robert, we feel good about, I think there's a good amount of transaction volume out there, which is allowing us to be selective, obviously, some of the names you would prefer if you didn't get financed, financed out of because they were performing so well. But again, that's that's the base case in the credit business, right, you're making the loan, and at some point, you'll, you'll try to protect it, but you could very well be taken out.

[Robert Dodd, Raymond James]

Got it got it. Just kind of a follow up on the on the 2% close rate in the quarter over half of the historical average, is that I mean selectivity is good, don't get me wrong, but is there a theme that you guys are looking for, but that maybe isn't coming to market right now. Or yet that that's driving that lower closed rate, or is there some issue that, desk bills are higher, because of some particular thing you're looking for? I mean, any color on that?

[Michael Forman, Chairman & Chief Executive Officer]

I don't think there's anything specific, right. I think there's your there's definitely certain situations that we just will not lend into without a covenant. So that could very clearly be a driver. I think we've are a big believer that the unitronics [ph] market is supposed to be for lack of a better word covenant heavy, that doesn't mean we wouldn't do a [Indiscernible] deal. But that needs to be the more the exception and sort of the rule.

I think that's one, and then in markets like this, you do see people looking at sort of a private option or a syndicated option. So that 2% could be a little bit artificially low because we just know we're not going to compete with a syndicated option and they you know, they're looking for a public one may be a private, two well, maybe it's not a business we're prepared to lend to from a second lien perspective, the matter of bigger companies.

[Robert Dodd, Raymond James]

Appreciate it. Thank you.

[Michael Forman, Chairman & Chief Executive Officer]

Thank you.

[Operator]

Thank you. [Operator Instructions] Our next question comes from John Hecht with Jefferies. You may proceed with your question.

[John Hecht, Jefferies]

Morning guys apologize. My phone blew up earlier. And then I was because my phone blew up. I was – also I apologize if some of these questions are redundant. But first of all, thanks for the thanks for just the additional disclosure this quarter at super clear. It makes it kind of easier to assess what's going on. So appreciate the disclosure. So first question is, in this quarter particularly the it was very clear, there was a lot of focus on first lien relative to second link in terms of the percentage mix of ads. It's consistent with your focus on being more conservative. So is that mix what we should expect for the near term based on your interest in pipeline or how do we think about the evolution of that over time?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, I think it's a pretty safe assumption, John. We are trying to build that the overall portfolio with that level of conservatism. That said, we are very much prepared to do a second lien and play in that part of the capital structure. I think we're probably just a little bit more selective there both in both in terms of the quality and the size of a business, as well, as, a pretty, I think, maybe more firm minimum, total return target. Well, we sort of put those together.

But I think, conceptually, you're correct. In individual quarters, we could definitely be weighted and have a bit more sort of too well, but I think you're, you're kind of starting on assumptions, a fair one.

[John Hecht, Jefferies]

Okay. And then you do with the SCJV, once the two entities are combined in the second quarter here, does that. What does that do in terms of the capacity and your ability to continue to grow that out?

[Dan Pietrzak, Chief Investment Officer & Co-President]

I think it does two things. I mean, our intention will be to also urge the two individuals, sort of JVs together. I think, dramatically no different than the combined. So the regular way BDC balance. Yes, I think so larger sort of balance sheets there will give us some more flexibility. I think the team has been able to be a little bit more creative on the liability side of that sort of JV. So I would view it as a positive, albeit it doesn't just sort of magically create additional sort of capacity, but I think some of the flexibility, the financing structure as well.

[John Hecht, Jefferies]

Okay, great. Thanks very much, guys.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you.

[Operator]

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Dan Pietrzak for any further remarks.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Right. Thank you to everyone for taking the time for the call this morning. We look forward to talking with you again in the coming months. Have a good day.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.