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New Mountain Finance Corp  (NYSE:NMFC)
Q1 2019 Earnings Call
May. 07, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the New Mountain First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask question. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Rob Hamwee, CEO. Please go ahead.

Robert Hamwee -- Chief Executive Officer

Thank you, and good morning, everyone, and welcome to New Mountain Finance Corporation's first quarter earnings call for 2019. 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; and Shiraz Kajee, CFO of NMFC. Steve Klinsky is 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.

Shiraz kanji -- Chief Financial Officer and Treasurer

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're 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 May 6 earnings press release.

I'd 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. 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, NMFC's Chairman, who will give some highlights beginning on Page 4 of the slide presentation. Steve?

Steven Bruce Klinsky -- Chairman

The team will go through the details in a moment, but let me start by presenting the highlights of another strong quarter for New Mountain Finance. New Mountain Finance's net investment income for the quarter ended March 31, 2019, was $0.35 per share, at the high end of our guidance of $0.33 to $0.35 per share, and more than covering our quarterly dividend of $0.34 per share. New Mountain Finance's book value increased by $0.23 per share to $13.45 per share, largely reflecting overall financial market strength since December 31, consistent with our comments on last quarter's call.

We're also able to announce our regular dividend which, for the 29th straight quarter, will again be $0.34 per share, an annualized yield of approximately 10% based on last Wednesday's close. The company had a productive quarter of deal generation investing $158 million in gross originations versus repayments of only $6 million. This balance sheet growth fully deploys February's equity issuance and keeps us fully levered in our target range.

We're also very pleased to have secured an investment grade rating from Fitch this quarter. And last week, completed $117 million note issuance, the proceeded of which are earmarked for repayment of one of our convertible notes in June. Credit quality remains strong with once again no new non-accruals. I and other members of New Mountain continue to be very large owners of our stock with aggregate ownership of 10.1 million shares, approximately 13% of total shares outstanding.

Finally, the broader New Mountain platform that supports NMFC continues to grow with over $20 billion of assets under management and over 145 team members.

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.

Robert Hamwee -- Chief Executive Officer

Thank you, Steve. Before diving into the 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 a consistent focus on defensive growth 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 May 1, 2019. In the eight years since our IPO, we have generated a compounded annual return to our initial public investors of 11%, meaningfully higher than our peers and the high yield index, and approximately 1,000 basis point per annum above relevant risk-free benchmarks.

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 largely driven 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 eight years we have been public, we have effectively maintained a stable book value inclusive of special dividends, while generating a 10.3% cash on cash return for our shareholders. We attribute our success to: one, our differentiated underwriting platform; two, our ability to consistently generate the vast majority of our net investment income from stable cash interest income in an amount 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.

Credit performance continues to be strong with no new non-accruals during the quarter and no material quarter-over-quarter credit deterioration in any single name.

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 approximately $6.7 billion in 260 portfolio companies. Of which, only eight representing just $125 million of cost have migrated to non-accrual of which only four representing $43 million of cost has thus far, resulted in realized default losses. Further, effectively 100% of our portfolio at fair market value is currently rated one or two on our internal scale.

Page 11 shows leverage multiples for all of our holdings over $7.5 million when we entered an investment and leverage levels for the same investment as of the end of the most recent reporting period. While not a perfect metric, the asset by asset trend and 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 have had a negative migration of 2.5 turns or more are the same three names we discussed last quarter and where prospects this quarter are broadly unchanged.

As a reminder, one loan is the previously restructured Edmentum, where prospects remain bright. The second loan is an issuer, where we believe the likelihood of payment default is low in light of a recent equity contributions from the sponsor that resulted in a 29% loan pay down. And the third issuer is in the final stages of the process which will result in a significant equity infusion that will meaningfully derisk our position.

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 have 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 generally been smaller and less frequent, and show that we are typically not avoiding non-accruals by selling poor credits at a material loss prior to actual default.

As highlighted in blue, we continue to have a net cumulative realized gain which currently stands at $18 million. Looking further down the page, we can see that cumulative net unrealized depreciation, highlighted in gray, stands at $46 million, and cumulative net realized and unrealized loss highlighted in yellow is at $28 million. The decrease in cumulative unrealized depreciation this quarter reflects the market strength experienced since December. The net result of all this is that in our eight years as a public company, we have earned net investment income $615 million against total cumulative net losses including unrealized of only $28 million.

Turning to Page 13. We have seen significant growth in the portfolio over the last year as we have increased our statutory leverage from 0.81 to 1.25. Consistent with the strategy we articulated when we received shareholder authorization to increase leverage, the preponderance of our asset increase has been in the form of senior loans. In fact, over the 12-month period, significantly more than 100% of the growth in assets has come from senior securities as through repayments and sales, non-first liens that have actually shrunk on an absolute basis by $127 million, while first lien assets have grown by $658 million.

I will now turn the call over to John Kline, NMFC's President, to discuss market conditions and portfolio activity. John?

John Kline -- President and Chief Operating Officer

Thanks, Rob. As outlined on Page 14, credit markets stabilized in Q1 after experiencing volatility in the month of December. Structures and pricing for new deals are similar to those seen in the fall of 2018, and the general competitive environment for high-quality loans remains robust. Competition in our business has been exacerbated by sluggish middle market leverage buyout volumes in Q1 which was the weakest quarter we have seen in the last three years.

Looking forward, we believe that new deal flow will improve as our sponsor clients have reported an increased number of auction processes and actionable portfolio company M&A. As a team, we continue to focus on building relationships with new sponsor clients, deepening existing sponsor relationships, enhancing club deal flow, so that we can maximize our access to quality companies within our defensive growth verticals.

Turning to Page 15, throughout 2018, steady increase in three-month LIBOR has been a meaningful earnings tailwind for NMFC. This benefit has been driven by our floating rate loan portfolio combined with our fixed rate liabilities which currently account for 51% of our total debt. The forward LIBOR curve currently suggests that three-month LIBOR will remain stable in 2019, and potentially decline by approximately 25 basis points in 2020. Such small movements in LIBOR do not have a material earnings impact on our business. As shown on the lower half of the page, more significant downward movements in LIBOR of 50 to 100 basis points would pressure earnings. However, in our view, any such material move lower would signal challenging financial market conditions which would be accompanied by higher loan spreads.

Turning to portfolio activity on Page 16. Despite the sluggish deal environment in Q1, NMFC had a good quarter with total originations of $158 million, offset by $6 million of portfolio repayments, representing a $152 million expansion of our investment portfolio. Our new investments were highlighted by a number of middle market club deals and add-on investments, driven by portfolio company M&A. We are pleased to report that these new investments have allowed us to reach our leverage target, resulting in a fully invested portfolio.

Page 17 shows our origination activity since the end of the quarter. While the deal environment in the first part of Q2 has been somewhat slow, the fully invested nature of our portfolio has enabled us to be highly selective on new investments. In the coming months, we are confident that our backlog of actual deals combined with our forward pipeline will approximately equal our expected repayments. Looking out further, over the next few quarters, we believe that deal flow will return to normal levels.

Turning to Page 18, our mix of originations continues to skew meaningfully toward first lien loans, again accounting for over 60% of total new originations this quarter. Repayments were de minimis and had virtually no effect on our portfolio mix. Overall, Q1 origination showed a continued shift toward first lien assets consistent with our stated plan to employ increased portfolio level leverage with a more senior-oriented asset mix.

As shown on Page 19, the asset level yield on the portfolio has been impacted by the change in the future expectation for LIBOR, which determines the interest rate on our floating rate assets. Pro forma for the decline in the forward curve, our portfolio yields have remained steady compared to Q4, and new originations have been in line with the overall portfolio average. We remain comfortable with our portfolio yield of 10% which solidly supports our quarterly dividend.

The top of Page 20 shows a balanced portfolio across our defensive growth-oriented sectors. In the services section of the pie chart, we break out subsectors to give better insight into the significant diversity within our largest sector. The chart on the bottom left of the page presents our portfolio by asset type, where you can see the shift toward first lien-oriented assets that we discussed earlier in the call. The chart on the lower right shows that virtually all of our portfolio is performing broadly in line with expectations and we have no performing loans that have a substantially elevated risk of non-accrual.

Finally, as illustrated on Page 21, we have a diversified portfolio with our largest investment at 3.3% of fair value, and the top 15 investments accounting for 37% of fair value.

With that, I will now turn it over to our CFO, Shiraz Kajee, to discuss the financial statements and key financial metrics. Shiraz?

Shiraz kanji -- Chief Financial Officer and Treasurer

Thank you, John. For more details on the financial results and today's commentary, please refer to the Form 10-Q that was filed last evening with the SEC.

Now I'd like to turn your attention to Slide 22. The portfolio had approximately $2.5 billion in investments at fair value at March 31, 2019, and total assets of $2.7 billion, with total liabilities of $1.6 billion, of which, total statutory debt outstanding was $1.4 billion, excluding $165 million of drawn SBA guaranteed debentures. Net asset value of $1.1 billion or $13.45 per share was up $0.23 from the prior quarter. As of March 31, our statutory debt-to-equity ratio was 1.25:1.

On Slide 23, we show our historical leverage ratios. The step-up in leverage over the past four quarters is in line with our current target statutory debt-to-equity ratio. On the slide, we also show our historical NAV adjusted for the cumulative impact of special dividends which shows the ability of -- the stability of our book value since our IPO.

On Slide 24, we show our quarterly income statement results. We believe that our NII is the most appropriate measure of our quarterly performance. This slide highlights that while realized and unrealized gains and losses can be volatile below the line, we continue to generate stable net investment income above the line.

Focusing on the quarter ended March 31, 2019, we had total investment income of $64.2 million, a slight increase from the prior quarter, and total net expenses were approximately $36.7 million. As in prior quarters, our investment advisor continues to waive certain management fees. The effective annualized management fee this quarter was 1.32%. It is important to note that the investment advisor cannot recoup fees previously waived. This results in first quarter NII of $27.5 million or $0.35 per weighted average share which is at the high end of our guidance and more than covered our Q1 regular dividend of $0.34 per share. As a result of the net unrealized appreciation during the quarter ended March 31, 2019, with an increase in net assets resulting from operations of $43.9 million.

Slide 25 demonstrates our total investment income is recurring in nature and predominantly paid in cash. As you can see, 96% of total investment income is recurring and cash income remained strong at 87% this quarter. We believe this consistency shows the stability and predictability of our investment income.

Turning to Slide 26. As briefly discussed earlier, our NII for the first quarter covered our Q1 dividend. Given our belief that our Q2 2019 NII will fall within our guidance of $0.33 to $0.35 per share, our Board of Directors has declared a Q2 2019 dividend of $0.34 per share which will be paid on June 28, 2019, to holders of record on June 14, 2019.

On Slide 27, we highlight our various financing sources. Taking into account SBA guaranteed debentures, we had over $1.7 billion of total borrowing capacity at quarter end. During Q1 we added two new lenders and $60 million of additional capacity to our Wells Fargo credit facility. As a reminder, both our Wells Fargo and Deutsche Bank credit facilities' covenants are generally tied to the operating performance of the underlying businesses that we lend to, rather than the marks of our investments at any given time.

Finally, on Slide 28, we show a leverage maturity schedule. As we've diversified our debt issuance, we've been successful at laddering our maturities to better manage liquidity. To address the one near-term maturity in 2019, we recently issued $116.5 million of unsecured notes and expect to fund the difference from our revolving credit facility.

With that, I would like to turn the call back over to Rob.

Robert Hamwee -- Chief Executive Officer

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 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 perspective, our portfolio overall continues to be quite healthy. Once again, we'd like to thank you for your support and interest.

And, at this point, turning things back to the operator to begin Q&A. Operator?

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Ryan Lynch of KBW. Please go ahead.

Robert Hamwee -- Chief Executive Officer

Hey, Ryan.

Ryan Patrick Lynch -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Hey. Good morning. Thanks for taking my questions. The first one, I know repayments are very wonky and I know you guys don't control them, but just with the $6 million this quarter, almost non-existent. Can you just explain, that was just very unusually low, can you just explain what was really behind that, that really low number?

Robert Hamwee -- Chief Executive Officer

Yes. And I would say two things, predominantly. I mean, one, is look again idiosyncratically, it is a collection of individual companies that are all going to have their own decisions about repaying loans. They've done M&A activity, et cetera, so I think there's some randomness to it. But I do think it was, secondarily, a function of the volatile market in Q4 which bled into Q1, and that dampens the type of activity whether to refinancings, whether it's sales transactions, that typically lead to repayment. So I think that's the main rationale behind it and I don't think it speaks to long-term exchange and be multi-year velocity, over which, we're likely to get repaid on these loans.

Ryan Patrick Lynch -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Sure, makes sense. The other question I had was on Slide number 11, where you guys kind of outlined New Mountain's leverage ratios from -- start as -- purchasing and currently and I just was looking through a couple of those and just two companies, company, AN and AQ, those are both company purchases made in 2018, and they both had over 9 times leverage on those companies, so just from kind of from a higher level, companies with over 9 times leverage on those businesses, can you maybe just speak to what are the underlying characteristics you guys see in those companies that allow you to get comfortable making investments in those companies with relatively high leverage levels?

Robert Hamwee -- Chief Executive Officer

Yes, and there are two different things going on, so AN, is actually, it's National HME, which you'll recall we restructured last year, so that's a function and we obviously are recognizing an unrealized loss on that in terms of our holding value. So that's a function of the restructuring we went through on a national HME. Now AQ is a relatively new -- a buyout that is of a business that we know very, very well from private equity underwriting that it was transacted, and I think it was a 16 times multiple from a purchase perspective. And we participated -- in a pretty modest-sized but in a layer of preferred stock there, where we're getting, what I tell you is attractive yield relative to the balance of the portfolio.

And, look, we're willing to do that when: one, we have that type of loan-to-value cushion; two, when we have a business whose business model we really understand intimately from extensive private equity underwriting; and three, where we believe, with high conviction, based on that underwriting, that there is limited volatility around the business performance both historically and prospectively. It's a function of typically of contracted revenue base and variable expenses and other factors that allow us to have that degree of confidence to go that deep into the capital structure. So it's something we do sparingly, but we do feel that there are opportunities where the risk-reward is in our favor, and we're frankly excited about taking those opportunities and putting them in the portfolio.

Ryan Patrick Lynch -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. That makes sense. And then one last one, as you guys kind of hit your leverage target range in the first quarter. As I look at Slide 13 as your portfolio. As you guys have grown leverage you guys have shifted the portfolio mix as you guys have discussed into more first lien loans. As we sit here today, is this the kind of portfolio composition that, that you guys expect to kind of have going forward? Or should we still expect as more second lien loans runoff your books and you guys continue to add more first lien loans that this portfolio even grows more -- the first lien composition actually grows more and you are kind of happy with it as you sit here today.

Robert Hamwee -- Chief Executive Officer

Yes. No, we feel pretty good about the mix today and we're also constantly reevaluating based on the opportunities in the market. But no I would currently guide that the mix sort of sitting here today, it'll jump around right to plus or minus 2%, 3%, 5%, but that rough 60-40 mix is sort of a mix we're very comfortable with. But ultimately, we manage the business not targeting a specific mix, but building off a portfolio of the best possible investments that we see in the marketplace given our very targeted strategy.

Ryan Patrick Lynch -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Those are all my questions. I appreciate the time today.

Robert Hamwee -- Chief Executive Officer

Great. Thanks, Ryan.

Operator

(Operator Instructions) The next question comes from Finian O'Shea of Wells Fargo. Please go ahead.

Robert Hamwee -- Chief Executive Officer

Hi, Finian.

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Hi, guys. Good morning, and thanks. I guess I'll start to continue on the credit performance slide which is very (technical difficulty) most of the names are within plus or minus 0.5 turn, which you'd expect for a newer issues, you see a lot of these are 2018. But for some of these there are 2015, '16, '17. What -- how do we read a generally consistent leverage multiple assuming if a company grew and recap, you'd be taken out. Is there a lot of that happening where you stay in? Or is this -- or are these kind of naturally flat issuers, if you could give any color on that or break down perhaps.

Robert Hamwee -- Chief Executive Officer

Yes, I think what you're saying, and it's a good question, but I think what you're seeing in the seasoned issuers, where you have a broadly consistent leverage profile is the utilization of incremental leverage to fund M&A, where a lot of the landing we do are to private equity platforms that will utilize a consistent mix of debt or equity. Frankly just the same way we run our business to grow both organically and through M&A, so that's not applicable to every single name that is the broad theme when you think about the issuers that are two, three, four years old. When you've had a significant organic growth, but you are using the balance sheet capacity as governed by a -- agreed upon upfront multiple to add debt to the capital structure in that ratio to allow the business to be acquisitive.

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

That's helpful, thanks. And just another question on non-cash dividend component as the earnings driver, interest driver for you guys, correct me if I'm wrong, this looks to come from the net lease real estate holdings. If that's right, can you explain the driver as to why you have those structured as non-cash dividends.

Robert Hamwee -- Chief Executive Officer

No. The net, just to be clear, the net lease is structured as a REIT that sits six underneath the BDC and that REIT in turn have a collection of SPVs. Each SPV houses a specific net lease transaction. The dividends we get from the REIT are actually in cash and reflect the upstreaming of the net lease payments from the SPVs to the REIT and then that cash from the REITs to the public company.

So really the source of the non-cash income, and I think the best place to see this is probably on Page 25, and you can see that the percent of total investment income that is in cash, the non-cash component is going to be the handful of PIK issuers that we have and you can see that there's been a meaningful step up as we got repaid out of income at the end of last year. We went in sort of that 82%, 83% to now kind of 88%, 87%, so you've got a combination of the handful of issuers, where we are utilizing PIK interest income/dividends on some preferred and then obviously a little bit of OID accretion that rolls through is effectively not non-cash. Does that make sense?

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Yes, that's -- it's helpful. I want to first listened to the Q and it said the non-cash comes from select -- outside of the SLP equity holding. But it looks to be beyond the control name, so are these the preferred equity holdings?

Robert Hamwee -- Chief Executive Officer

Yes. It's primarily the preferred equity. And again, of course, we've had a handful of restructurings in the portfolio. We've reinstated debt, but with some component of PIK. So it's a combination of those two sources.

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Sure. And then just one more on the net leases, the newer platform fund you raised -- you're raising. Is this the same vertical? And would this be an area you find attractive looking forward today?

Robert Hamwee -- Chief Executive Officer

Yes so we did raise that approximately $500 million fund to invest directly into net lease assets which was really always the intention of building that business. We do find that area quite attractive and we'd expect in future net lease originations to be in the stand-alone fund as well as in certain instances, some portion of them to find their way into the BDC consistent with past practices. Yes, we continue to find that business to be attractive. And we've always said the BDC would have a small, but meaningful exposure to that piece as further diversifier in a way to get a little bit of duration into the portfolio.

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Okay. Thank you so much, guys.

Robert Hamwee -- Chief Executive Officer

Yes. You're very welcome.

Operator

(Operator Instructions) The next question comes from Angelo Guarino, a private investor. Please go ahead.

Angelo Guarino -- Private Investor -- Analyst

Good morning, and thanks for taking my call.

Robert Hamwee -- Chief Executive Officer

Hi. Good morning.

Angelo Guarino -- Private Investor -- Analyst

On the fee waiver, waive -- the fees waived for management. As far as I can tell, categorically, since your IPO, they have been really consistent. And I guess the questions -- the kind of a broad question is, to the extent that, that -- those fees exist, it is sort of a, you can think of it as a hammer over the head of the company that never drops. And quantitatively, that's going to have some effect on beyond the market perception of the company even though it continuously gets waived. My question is since it has been continuously waived through thick and thin, why isn't that just -- why don't we just all agree that that's not going to happen and take that hammer away in the next negotiation for the management agreement?

Robert Hamwee -- Chief Executive Officer

Right. So let me -- it's a good question. Let me just clarify one thing, just for everyone. So again the fees waived historically can never be recollected. So there's no contingent liability around that for the company. When you speak of the hammer, you're referring to the chance that in a future quarter, a fee may not be waived...

Angelo Guarino -- Private Investor -- Analyst

Correct. Yes.

Robert Hamwee -- Chief Executive Officer

And that's great. So look, and we think about this as well, obviously, we want to get the benefit of into the stock price of the fees that are not being collected. I will say though that the rationale behind doing it is a way we do, do it, is a variable component, you can really see how's that played out.

Even in the last five quarters, right, if you go back to Q1, I think you can actually see this on Page 24, on Q1 of 2018, the fee was 1.46%, that fee implies as opposed to the headline of 1.75%, and that was a function of the mix of the portfolio, right? Because we respectively waived the fees on the senior assets and not on the junior assets. And as the mix shifted that percent declined modestly, but meaningfully, from 1.46% to 1.32% this most recent quarter to the benefit of the shareholders.

If we just said, hey, 18 months ago, we were running at approximately 1.5% fee, let's get rid of the waiver, simplify everyone's life, which I know people would like and just call our base fee 1.5%, then we wouldn't have the kind of dynamic of as the portfolio shifted getting the benefit to the shareholder of yesterday, we've added levered, we've added bulk, but we've decreased our percentage fee to try to keep the dollar fee in a roughly consistent place.

And so having that dynamism, and again, look, it can work both ways, right, because there may be a point in time that we delever, with the way the market goes a year from now and the more junior mix, and then I think we do feel because these junior assets are higher yielding more work intensive, less leveraged, the fee percentage should probably move back the other way.

So that would be the rationale. By the way, we do talk internally like maybe we -- that trade-off is something that we should reconsider, but that, just so you know, we're not being completely blind to it. But that's the cost benefit, right, the simplicity and the clear cut element of having a fixed, but reduced management fee against the dynamism where there actually is rationale of that fee moving up or down as the portfolio moves in different ways.

Angelo Guarino -- Private Investor -- Analyst

So you feel just that visibility has some tangible value?

Robert Hamwee -- Chief Executive Officer

We do. That the dynamism has some tangible value. But we do take the point and you're not the first one to make it that there is value on the other side if we have the simplicity and the direct known number. So it's something that we continue to evaluate as a management.

Angelo Guarino -- Private Investor -- Analyst

Yes, thanks. I mean, it just seems to me that we've seen it operate over the last 8 years through a variety of market conditions and the consistency is not to drop it, right? So at some point, it just seems moved in a way and an unnecessary complication. But that would be my only comment. But congratulations on your great performance. Thanks.

Robert Hamwee -- Chief Executive Officer

Thank you. I appreciate that.

Operator

The next question comes from Chris Kotowski of Oppenheimer. Please go ahead.

Robert Hamwee -- Chief Executive Officer

Hi, Chris.

Christoph Kotowski -- Oppenheimer & Co. -- Analyst

Yeah. Good morning. I guess kind of along the same lines of the last question, which I kind of agree with that the fee waivers are, you know. It's just unlike the things we see at other BDCs. It's -- you've increased the leverage, right, from 0.79 to 1.25, and I guess, is the goal of using more leverage at some point to kind of drive the core level of net investment income above that $0.34, $0.35 level so that there is a chance of increasing the dividend at some point in the future? Or is the goal of using the increased leverage primarily just that you think you can shift the asset mix to higher quality assets and generate the same $0.34, $0.35 quarterly dividend with a lower risk asset base?

Robert Hamwee -- Chief Executive Officer

Yes, it's really the latter, Chris. And I think we've been pretty consistent with that messaging going back to when we went out to the shareholder base to get the approval a year-or-so ago that we feel that we can consistently deliver that $0.34, $0.35, which is a 10% ROE in this rate environment, least, that's a great value proposition for everybody, and so we do that with de minimis credit losses. And so our goal is not to drive to 11%, 12%. The goal of the increase in the leverage is to allow us to be even more selective at the asset level perhaps with, over time, a lower asset yield and derisk on the asset side, while clearly adding risk on the liability side, we think, systemwide, we're optimizing around the lowest possible risk point to deliver that 10% ROE.

Christoph Kotowski -- Oppenheimer & Co. -- Analyst

Okay. All right. That's it for me. Thank you.

Robert Hamwee -- Chief Executive Officer

Great. Thank you.

Operator

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Hamwee for closing remarks.

Robert Hamwee -- Chief Executive Officer

Great. Well, thanks, again, everyone. Always appreciate the time and the support and look forward to speaking again next quarter. Have a great day. Bye-bye.

Operator

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

Duration: 43 minutes

Call participants:

Robert Hamwee -- Chief Executive Officer

Shiraz kanji -- Chief Financial Officer and Treasurer

Steven Bruce Klinsky -- Chairman

John Kline -- President and Chief Operating Officer

Ryan Patrick Lynch -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Finian Patrick O'Shea -- Wells Fargo Securities -- Analyst

Angelo Guarino -- Private Investor -- Analyst

Christoph Kotowski -- Oppenheimer & Co. -- Analyst

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