Golub Capital BDC, inc (GBDC) Q3 2021 Earnings Call Transcript

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Golub Capital BDC, inc (GBDC -0.23%)
Q3 2021 Earnings Call
Aug 10, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to GBDC's August 10, 2021 Quarterly Earnings Conference Call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's filings with the SEC.

For materials, the company intends to refer to on today's earnings conference call. Please visit the Investor Resources tab on the homepage of the company's website, www.golubcapitalbdc.com and click on the Events Presentations link. GBDC's earnings release is also available on the company's website in the Investor Resources section. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC.

David B. Golub -- Chief Executive Officer

Thanks, operator. Hello everybody, and thanks for joining us today, I'm joined by Ross Teune, our Chief Financial Officer; Gregory Robbins, Senior Managing Director; and Jon Simmons, Managing Director. Yesterday afternoon, we issued our earnings press release for the quarter ended June 30, and we posted an earnings presentation on our website. We'll be referring to that presentation throughout the call today.

For those of you who are new to GBDC, I want to briefly describe our investment strategy. Our investment strategy is, and since inception has been, to focus on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership-oriented private equity sponsors. The headline for the quarter ended June 30 is that GBDC's results were very strong. GBDC had solid net investment income, continued strong credit performance and robust new deal activity. We'll be discussing each of these topics in greater detail as we go through today's presentation.

Gregory is going to start by providing a brief overview of GBDC's performance for the June 30th quarter and then, he will hand it off to John and Ross for a more detailed review of those results. I'll then provide some closing commentary. And then, we'll open the line for questions.

With that, let's take a closer look at GBDC's results for the quarter and the key drivers of those results. Gregory?

Gregory A. Robbins -- Managing Director

Thank you, David. Turning to Slide 4 for the quarter ended June 30. GBDC's adjusted NII per share was $0.29; adjusted EPS was $0.49; and ending NAV per share was $15.06. The key drivers of those strong results are summarized on Slide 6. Two key themes I want to highlight. First, our portfolio continued to perform well. The Golub Capital Middle Market Report or GCMMR for June 30, which we published about a month ago, reflected the strength. The GCMMR normally looks at year-over-year revenue and profit growth of Golub Capital middle market borrowers, but our approach for June 30 was a bit different. We didn't think year-over-year comparisons were particularly informative as they would be comparing the lockdown economy of April and May 2020 to the booming economy of April and May 2021. We thought it would be more informative to compare 2021 to the pre-COVID economy of April and May 2019. And the results are striking. The median EBITDA growth from 2019 to 2021 exceeded 30%. Strong earnings growth across GBDC's portfolio was reflected in the four positive credit quality trends listed on the right-hand side of the slide. We'll go into them in more detail shortly.

Second, middle market new deal activity was strong. The quarter ended June 30 was a new record for Golub Capital origination volume. You may recall that the quarter ended December 31, 2020 was a record breaker at the time, but we beat that record by 30% of the June quarter. While the impact on GBDC's portfolio growth was muted by elevated repayments in the June quarter, we think the key takeaway is that GBDC is delivering strong originations amid a robust M&A environment by leveraging the competitive advantages of the Golub Capital platform.

Let's now drill down on the four positive credit quality trends listed on the right-hand side of the slide, starting with our internal performance ratings. Slide 7 summarizes the positive trends in the internal performance ratings of GBDC's portfolio in the post-COVID period. Two key trends continued through the quarter ended June 30. First, portfolio companies performing materially below expectations in categories 1 and 2 remained very few in number. Those two categories constituted only 1.1% of the portfolio at fair value at quarter end. We've also seen continued upward migration in credit quality, a steady increase in categories 4 and 5, those are loans performing at or better than our expectations at underwriting, and a corresponding decrease in Category 3, those are loans that are performing or expected to perform below expectations.

Specifically, in the quarter ended June 30, categories 4 and 5 increased from 86.9% of the portfolio as of 03/31 to 89.4% of the portfolio as of June 30, an improvement of 13.4 percentage points year-over-year. Category 3 decreased from 12% of the portfolio as of 03/31 to 9.5% of the portfolio as of 06/30. The proportion of the portfolio rated 3 as of 06/30 was right in line with our pre-COVID normal of around 10% as you can see from the fiscal year-end 2018 and 2019 data at the far left of the slide.

A second key indicator of continued credit improvement is the fact that non-accruals remained very low, just 1% of investments at fair value at quarter-end. The non-accrual rate was unchanged quarter-over-quarter, but about 50% lower year-over-year. We'll come back to this point in our usual discussion of GBDC's financial results.

Slide 8 shows two other indicators of improving credit quality, net realized gains and net unrealized gains. This slide provides a bridge from GBDC's $14.86 NAV per share of 03/31 to increased $15.06 NAV per share as of 06/30. Let's walk through the bridge. Adjusted NII per share was $0.29, in line with our quarterly dividend. No net realized losses were recorded during the quarter. In fact, there were $0.03 per share of net realized gains, and net unrealized gains were $0.21 per share, excluding the purchase premium adjustment reflecting the continued reversal of unrealized losses incurred in the March '20 quarter. In fact, on a price basis, 90% of the unrealized losses recorded in the quarter ended March 31, 2020 have been recovered as of June 30, 2021.

Finally, Slide 9 shows that the continued strength and quality of GBDC's portfolio enabled us to further optimize the company's debt capital structure post quarter end. On August 3, 2021, GBDC completed its third unsecured bond offering. The $350 million issuance of new unsecured notes mature in February 2027 and have a fixed interest rate of 2.05%, a lowest coupon ever achieved by a BDC at that time. Pro forma for the August offering, unsecured debt represents approximately 50% of GBDC's debt capital stack. You can see from the chart on the right-hand side of the slide that GBDC is expected to have no contractual debt maturities until 2024 and the vast majority of GBDC's funding matures in 2025 or later. In short, we believe GBDC's balance sheet is stronger and more flexible than ever.

Let's now take a closer look at our results for the quarter ended June 30, and for that, let me hand the call over to Jon Simmons to walk you through the results in more detail. Jon?

Jonathan D. Simmons -- Director of Corporate Strategy

Thanks, Gregory. Slide 11 summarizes our results for the quarter ended June 30. You can see in the column on the right that adjusted NII per share was in line with our quarterly dividend and that our credit results remained strong as GBDC generated $0.20 a share of adjusted net realized and unrealized gains. As a result, our net asset value per share at June 30, 2021 increased to $15.06. On August 6, our Board declared a quarterly distribution of $0.29 a share payable on September 29, 2021 to stockholders of record as of September 8, 2021.

Turning to Slide 12. New investment commitments totaled $614.7 million for the quarter ended June 30. After factoring in total exits and sales of investments, the $583.5 million as well as unrealized appreciation and other portfolio activity, total investments at fair value increased by 1% or $44.3 million during the quarter. As Gregory noted, originations this quarter were strong, while repayments were also elevated. As of June 30, 2021, we had $45.4 million of undrawn revolver commitments and $171.9 million of undrawn delayed draw term loan commitments. These unfunded commitments are relatively small in the context of GBDC's large balance sheet and strong liquidity position. As shown on the bottom of the table, the weighted average rate on new investments and spread over LIBOR on new floating rate investments, each increased slightly quarter-over-quarter.

Slide 13 shows that GBDC's portfolio mix by investment type remained consistent quarter-over-quarter with one-stop loans continuing to represent 80% of the portfolio. Slide 14 shows that GBDC's portfolio remained highly diversified by obligor with an average investment size of less than 40 basis points. As of June 30, 96% of our investment portfolio remained in first lien senior secured floating rate loans and defensively positioned in what we believe to be resilient industries.

Turning to Slide 15. This graph summarizes portfolio yields and net investment spreads for the quarter. Focusing first on the light blue line, this line represents the income yield or the actual amount earned on our investments, including interest and fee income, but excluding the amortization of upfront origination fees and the GCIC purchase price premium. The income yield decreased by 10 basis points to 7.4% for the quarter ended June 30, 2021. The investment income yield or the dark blue line, which includes the amortization of fees and discounts also decreased by 10 basis points to 7.9% during the quarter. Our weighted average cost of debt or the aqua blue line decreased by 20 basis points to 2.8%, primarily due to the early redemption of $165 million in higher priced SBIC debentures in the prior quarter. Our net investment spread, the green line, which is the difference between the investment income yield and the weighted average cost of debt increased by 10 basis points to 5.1%.

With that, I'll hand the call over to Ross to continue the discussion of our quarterly results. Ross?

Ross A. Teune -- Chief Financial Officer and Treasurer

Thanks, Jon. Putting to the next two slides, non-accrual investments as a percentage of total debt investments at cost and fair value remained low and consistent quarter-over-quarter at 1.4% and 1% respectively as of June 30. During the quarter, the number of non-accrual investments remained unchanged at six portfolio company investments. As Gregory discussed in opening commentary as a result of continued strong portfolio company performance, the percentage of investments rated 3 on our internal performance rating scale decreased to 9.5% of the portfolio at fair value as of June 30. As a reminder, independent valuation firms value at least 25% of our investments each quarter.

Slide 18 and 19 provide further details on our balance sheet and income statement as of and for the three months ended June 30. Turning to Slide 20, the graph on the top summarizes our quarterly returns on equity over the past five years and the graph on the bottom summarizes our regular quarterly distributions as well as our special distributions over the same time period.

Turning to Slide 21, this graph illustrates our long history of strong shareholder returns since our IPO. As illustrated, investors in GBDC's 2010 IPO have achieved a 10% IRR on NAV since inception. Slide 22 summarizes liquidity and investment capacity as of June 30, which remained strong with over $800 million of capital available through cash, restricted cash and availability in our various credit facilities. We also highlight our continued progress in optimizing the right-hand side of the balance sheet.

Three key highlights here. First, on April 13, 2021, we amended our revolving credit facility with Morgan Stanley to among other things, extend the reinvestment period to April 12, 2024 for May 3, 2021, extend the maturity date to April 12, 2026 from May 1, 2024 and reduced the interest rate on borrowings to one month LIBOR plus 2.05% from one month LIBOR plus 2.45%. Second, on July 16, we issued a notice of redemption to redeem all of the $189 million of notes issued under the 2020 debt securitization, which are priced at three-month LIBOR plus 2.44%. This redemption is expected to occur on August 26, 2021. And third, as Gregory mentioned earlier, on August 3, we issued $350 million of unsecured notes, which bear a fixed interest rate of 2.05% and mature on February 15, 2027 bringing unsecured debt up to approximately 50% of GBDC's total funding mix.

Slide 23 summarizes the terms of our debt capital as of June 30 and lastly, Slide 24 summarizes our recent distributions to stockholders and most recently, our Board declared a quarterly distribution of $0.29 per share payable on September 29, 2021 to stockholders of record as of September 8, 2021.

With that, I'll turn it over to David for his closing remarks. David?

David B. Golub -- Chief Executive Officer

Thanks, Ross. To sum up, GBDC had a very strong quarter. Adjusted NII matched our dividend. Realized and unrealized gains were substantial, and robust new origination enabled the portfolio to grow despite unusually high pay-offs. Let me talk about our outlook and then, I'll take your questions. The headline is the same as last quarter. We're cautiously optimistic. I'll start with why we're cautious. We've been concerned about COVID variance for some time. You've heard us talk about this in our last two earnings calls. As much as we'd all like to put this tragic pandemic behind us, it seems we're far from done with hundreds of millions of COVID cases around the globe, 85% of people worldwide not yet fully vaccinated, and the possibility of more mutations. That said, there are also reasons for optimism. We believe GBDC is prepared for this environment that we're in right now and has set of powerful tailwinds.

I'll focus on three. We've spoken about them before, but they bear repeating. The first tailwind is GBDC's strong portfolio performance. We've highlighted throughout today's presentation the positive credit trends at March 31, 2020. Our pre-COVID underwriting has proved to be strong. Realized and unrealized gains and losses for the 18 months from January 1, 2020 through June 30, 2021 have netted to a loss of only $7 million or 0.16% of the portfolio at cost. That's an annualized loss rate of less than 11 basis points.

And as Gregory described, the portfolio today has very low non-accruals in minimal Category 1 and 2 loans. So it's apparent we're not going to be distracted by needing to play defense on a troubled portfolio. A second tailwind is the attractive opportunity set before us. Two of the last three quarters set new records for Golub Capital origination. All signs are pointing to robust middle-market M&A activity in the second half of the year. While it's too early to tell it will set another record before year-end, we think Golub Capital's capturing more than our fair share of attractive deals. The competitive advantages of leading lenders have grown stronger through this COVID period, advantages like scale and sponsor relationships, incumbencies, breadth of solutions, industry expertise and reputation for reliability. We believe GBDC has a compelling opportunity to grow its portfolio in this environment without compromising on credit quality.

And finally, a third tailwind, the third tailwind is that GBDC has ample liquidity and flexibility to capture opportunities. We've achieved our goal of substantially increasing the proportion of unsecured debt in GBDC's funding mix, while keeping our cost of debt very low. Unsecured debt is now about 50% of our debt stack, and we believe GBDC has among the lowest unsecured funding costs of any BDC GBDC's debt stack is well diversified, long term, low cost and highly flexible. We're currently operating at the low end of our target leverage range of 0.85 to 1.15 times debt to equity, and we think we have room to operate closer to the high end of that range in the coming quarters, which would help drive even stronger earnings power for the company.

Thank you, operator. Please open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Finian O'Shea with Wells Fargo Securities.

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

Hi, good afternoon. First question, David, on, I guess, the comments you were just touching on the market opportunity and your market share, which remains very strong. Can you go specifically into the comeback of these larger private $1 billion, $2 billion transactions. Last time around before COVID, you were the obvious ring-leader in these, especially on a senior basis and this time around, there's a couple of more big players in those as I'm sure you're familiar with. So how do you feel that your market share and competitiveness in terms of underwriting is holding up? And then, as a second part there, how much of a challenge is that is, do you think that paper is much better than the core middle market paper, or is it less of a challenge to the Golub platform?

David B. Golub -- Chief Executive Officer

Sure. Thanks, Finn. Thanks for your question. So by way of context first, we -- at Golub Capital, we underwrite loans that range in size from $10 million or $20 million at the low end up to multiple billions. As you pointed out Finn, we've been a market share leader in what we call mega one-stops, which are $500 million and up one-stops since those really began to be on the scene in 2019. Mega one-stops remain a relatively small portion of the overall mix of what we do. The predominance of what we do is financing companies that generate between $20 million and $50 million of EBITDA. Those are not companies where a mega one-stop would be appropriate. In the last quarter, we closed 95 separate loans representing a bit more than the $9 billion in total commitments.

So if you just do the math on that, you can quickly calculate that our average loan size is in the approximately $90 million range. Over the course of the last couple of years, we've seen -- and as you pointed out Finn, we've been a pioneer in expanding the role of private debt in larger sized transactions. And I've said previously that there are couple of key drivers of that phenomenon. One is that sponsors increasingly are looking at buy and build transactions, transactions where they're building a company over time through acquisitions as a means of creating a company of great scale and of great promise. They're not just doing financial engineering anymore. They are looking at creating great companies in large measures through acquisition strategies.

The broadly syndicated bank loan market is not -- it's not an extremely efficient way of financing a company that's doing serial acquisitions. What many sponsors have found is that using a one-stop and a series of either delayed draw term loans or serial expansions of that one-stop can be a more effective way of financing their portfolio company that's doing serial acquisitions. Until relatively recently, that large scalable one-stop was not on the menu. It wasn't one of the choices that a sponsor could choose from, if they were looking at financing a company that had loan needs in excess of $500 million. That's now changed. And as you point out in the last six months or so, we've seen transactions as high as $3 billion being pursued by private market by direct lenders. And we're not alone in this. We're still among the market leaders, but there are a number of very large players who are also capable of playing in this arena.

My view is that the mega one-stop product is a great option for sponsors. It is not always a great opportunity for direct lenders. We -- here, just as we are in smaller loans, we need to be very selective. We need to make sure that we're backing really good companies that the terms and conditions of the loans that the pricing of the loans are attractive relative to other options that we have. So we're always going to be evaluating the relative attractiveness of different niches within direct lending that we operate in and we're purposefully going to be moving around as we see the best opportunities arise in one area, one industry sector, one geography versus others. And I think that's what we've been doing over the course of recent months.

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

That's helpful. Thank you. And just a follow-on the equity co-invest. It looks like the other paramount [Phonetic] this quarter, I guess at least versus historical and given you're able to earn your dividend at such a low rate of leverage, one might say that you have the ability to strengthen that a much more often on equity co-invest. So any thoughts on the above there?

David B. Golub -- Chief Executive Officer

We've been pretty consistent in our percentage of the portfolio that's in equity co-investments. If you look at Page 13 of our investor presentation, it's been in the 2% to 3% range for an extended period of time. I think that you can reasonably expect that we're going to continue to grow the portfolio that we're going to move our debt-to-equity ratio from where we are now, which is at the low end of our range more toward the middle or higher end of our range. I don't anticipate a meaningful change at this point in the mix that we're going to see. Of course, that's always subject to change based on market conditions, but that's my expectation now. Thanks, Finn. Phyllis, we can go to the next question.

Operator

Your next question comes from the line of Paul Johnson with KBW.

Paul Johnson -- KBW -- Analyst

Good afternoon, guys. Thanks for taking my questions. First, I know you guys were just slightly below the low end of your hurdle rate this quarter and therefore, did not earn the incentive fee. I'm just curious, are you OK with I guess operating around that area kind of right at or even below the low end of your hurdle or would you -- is the goal to essentially generate an ROE that's maybe above that 8%? I'm just trying to get your thoughts around the hurdle rate.

David B. Golub -- Chief Executive Officer

Yeah, I think this quarter was a bit of an anomaly because the degree of repayments was as high as it was. My expectation, as I mentioned, is that we're going to see growth in the size of the portfolio that in turn will grow net investment income and will give us more a pre-incentive fee net investment income. I think when we look backwards, we'll see this quarter is a bit of an anomaly in the respect that you're mentioning. I think it's good for shareholders if we can operate in or above the catch-up as opposed to below the catch-up provided we can do so without taking too much credit risk. Right now, I think we can do that.

Paul Johnson -- KBW -- Analyst

Great. Thank you. Thanks, David. That's very helpful. And then, just one on your software lending portfolio, it's I think 26% or so I think from the slide deck of your portfolio. I'm just maybe trying to get your thoughts on how you guys view that market today, how you guys view that sort of competitive landscape. Obviously, we've seen a lot of growth in popularity of that type of lending. So is there anything that you guys see differently today maybe versus several quarters ago or what are you looking out for in the new deals that you evaluate there today?

David B. Golub -- Chief Executive Officer

Sure. Again, let me just provide some context. So we've been leaders in software lending to sponsor-backed companies for more than a decade. I think we have a larger portfolio and more transactions under our belt in this sector than any of our competitive brethren. It's an area where we have very strong sponsor relationships, very strong incumbencies because of the portfolio that we've built and very strong expertise. We have a group within our underwriting team that specializes in software lending. We think we're very good at it. Our results over time in software have been outstanding, and we think that it's a robust area for future opportunity. I think your statement is fair that we are seeing somewhat more competition in the software area than we did years back, but the flip side is also true that the private equity ecosystem, the component of that ecosystem that software companies continues to grow. And so, we continue to find very attractive opportunities in the software space. We really haven't changed our approach in any meaningful way. We continue to be focused on really high-quality companies with missing critical software tools that have been well integrated and are difficult to rip out of their clients with high recurring revenue streams and high renewal rates, but the same sorts of underwriting criteria that we started out investing in the industry with more than 10 years ago.

Paul Johnson -- KBW -- Analyst

Got it. Thanks for that. And then, my last question was just again your thoughts around the market for one-stop unitranche loans versus maybe the senior loan, first lien traditional, first lien/second lien structure, what we've kind of seen the returns have compressed over time obviously in the unitranche market. I'm wondering, it doesn't seem to show up in your new investment mix, but do you evaluate those two markets any differently today in terms of just the value proposition of one-stop loans versus the first lien traditional structure?

David B. Golub -- Chief Executive Officer

So every time, we're looking at a new transaction. We're thinking about what the right way to play in it is and what the right answer is for the transaction and will proceed with a first lien solution, if we think that it's compelling from a risk reward standpoint and right for the transaction or alternatively, will proceed with a one-stop solution, if we think the risk reward is compelling and it's right for the transaction. So it's a multifaceted tests that we used to assess, what's the right solution to be emphasizing in our discussions with sponsors. At the end of the day, obviously, it's -- the sponsors make that choice. We don't make the choice as to what financial structure to put in place, but we do have choices about where we play and where we don't play. Right now, I would tell you that we continue to find a lot of attractive one-stop opportunities. To your point, we're seeing a lot of steadiness in our income yield and in our weighted average net investment spread. I think you are seeing meaningful compression in junior debt spreads. Second lien spreads in particular have come down. And so, I think perhaps that's putting some pressure on, if you think about one-stop is being an instrument that's priced as a hybrid, that could be seen as putting some pressure on one-stop spreads as well, but I think the data suggests more steadiness, more continuity than change there.

Paul Johnson -- KBW -- Analyst

Great. Thanks for that. Those are all my questions.

Operator

Your next question comes from the line of Ray Cheesman with Anfield Capital.

Ray Cheesman -- Anfield Capital Management, LLC -- Analyst

Thank you for taking my questions. David, as we approach the end of the year and we get closer to LIBOR going puff [Phonetic] and going away, do you perceive there to be any challenges in rolling all of the clients over to a -- I think they are now talking about SOFR term as the preferred way they're going to steer everybody? Is everybody ready for that? And do you perceive there'll be any impact on any income lines in your P&L?

David B. Golub -- Chief Executive Officer

So thanks for the question about LIBOR and SOFR. I think -- you may know, I serve on the Board of the LSTA that the main Industry. Trade association has been very involved in this LIBOR transition and in ensuring from an industry standpoint that the industry is ready. We at Golub Capital have also dedicated significant resources to make sure we are ready. Look, I think it's going to be a meaningful amount of work. Whether this transition happens at the end of this year or later, I think that's still an open question. I'm confident that whenever the timing is, we will be ready and we'll have the resources in place to do the work with our borrowers to make sure that whatever changes are required and loan agreements are made, this is going to be a very significant lift. But I'm not -- I say that from a work standpoint, not from a risk standpoint, I think from a risk standpoint, it's quite under control.

Ray Cheesman -- Anfield Capital Management, LLC -- Analyst

Super. Based upon the experience that you've had when loans -- at the beginning, you were saying that the number of loans outperforming expectations, Category 4 and 5 has increased at a very good speed coming up out of the lousy period a year ago. When your portfolio performs above expectations, should we expect to see a higher churn or higher repayments than otherwise because obviously, they've got higher profit levels?

David B. Golub -- Chief Executive Officer

Sure. Let me clarify one thing. Category 4 is performing at or above and Category 5 is performing above. So the statement that I hope we made before, I'm not sure exactly how we phrase this is that the proportion of our portfolio that's performing in categories 4 and 5, meaning they're performing at or above expectations has grown significantly. If you flip to Page 17 of our presentation deck, you'll see that those two categories are just under 90% of our loans as of June 30, 2021 and that's right -- that's back in the range of the pre-COVID numbers. I think you're onto an important point, which is more relevant for Category 5 loans and for Category 4 loans. I think Category 5 loans do have a tenancy to be refinanced or repaid more quickly than loans in other categories. And I think that has been part of the story of the more rapid than expected repayment rate that we saw in this last quarter. I don't think that's the main factor. I think the main factor is the very rapid pace of M&A that we've seen in the middle market generally. But I think you make an interesting point, which is that the Category 5 loans do tend to refinance more quickly than 1, 2, 3 and 4 loans.

Ray Cheesman -- Anfield Capital Management, LLC -- Analyst

It's always to choose. You lose the good ones, right?

David B. Golub -- Chief Executive Officer

Yeah, natured credit.

Ray Cheesman -- Anfield Capital Management, LLC -- Analyst

Last is kind of a -- it's an open-ended question, and you've done unbelievably well at steering the company through a credit thunderstorm, you've lowered the cost of your funding, what are we looking for in the next couple of quarters to move the whole organization back from -- I'm just going to use the base number for shareholders, $0.29 to $0.32, or is it a function that we need the macro rate environment to change or is it something else?

David B. Golub -- Chief Executive Officer

Great question. So you'll recall in prior quarters, I've talked about how our dividend policy has historically been linked to our NAV. We seek to over time have a dividend that corresponds to about 8% annual rate of our NAV per share and we seek to change it rarely and to increase it over time. So the past for us to raise our dividend is twofold. Right now, it's to increase our NII per share pre-incentive fee by increasing our portfolio size and to continue to see some net unrealized and realized gains that increase our NAV per share, and those two will put us in a position where we can start to raise the dividend from $0.29 to north of that.

Ray Cheesman -- Anfield Capital Management, LLC -- Analyst

Thank you.

Operator

Your next question comes from the line of Robert Dodd with Raymond James.

David B. Golub -- Chief Executive Officer

Hello, Robert.

Robert Dodd -- Raymond James & Associates -- Analyst

Hi, guys and hey, how you doing? Congratulations, particularly on all the work you've done on the liability side and [Indecipherable] to be honest. On the kind of a follow-up to -- these are the questions from me, to get back into just the catch-up by January [Phonetic] and what you need to do [Indecipherable] is growing the portfolio alone, but -- and you've talked about your -- you're comfortable with that going for. I mean, do you expect repayments from a really elevated level this quarter to -- is that going to moderate somewhat? And I mean -- obviously, I'm not particularly concerned about your ability to originate that the repayment question is much harder to predict [Speech Overlap].

David B. Golub -- Chief Executive Officer

Let's look together at Page 12 of the presentation and the second line in the table exits and sales of investments incorporating repayments and you can see that the June 30, 2021 quarter at $583.5 million is the outlier on this chart. It's literally more than twice the December 31 quarter, 1.5 times the March 31 quarter. So if you ask me to make a prediction, my prediction is that we will not see a sustained level of exits and sales of investments at the June 30 level. Over time, in my experience, our assets tend to have a weighted average life between 2.5 and three years. The $583.5 million is effectively a weighted average life that's closer to two. So I just -- I don't see a high likelihood of that sustaining over time, Robert. I think we're going to be able to continue to make good progress on originations. I think exits and sales will moderate. And I think we'll start seeing some portfolio of growth.

Robert Dodd -- Raymond James & Associates -- Analyst

Excellent. Thank you. And then, one more if I can on the credit question and this may be overly picky, but I'll ask anyway. You're rating three assets, right, slightly below expectations in terms of performance. 9.5, it's improved sequentially again. It's still a tiny bit above where it was in 2019. I presume those are still the somewhat the COVID-impacted assets that aren't in categories 1 and 2. Of the ones when -- of the assets that a Category 3 this quarter and were last quarter because obviously some of them got upgraded, wants the performance like for those assets. I mean, yes, they're below expectations, but are they less below expectations this quarter than they were last quarter, if that makes sense?

David B. Golub -- Chief Executive Officer

So, couple of comments. First, again, let's look at the numbers together if you flip to Page 17 of the presentation. You're correct that Category 3 assets at 9.5% now are a little bit above where they were at the end of 2019, but they're actually lower than they were at the end of 2018, 2017 and 2016. So I think it's fair to say that the overall picture of performance ratings right now looks very much like it looked in pre-COVID periods. As to the specifics of the Category 3 loans, most of them were actually challenged loans pre-COVID. These are not so much COVID impacted loans as they are just ones that have been underperforming for some time. Are we making progress and seeing improved performance from this group? In many cases, yes. I can't speak with specificity in this forum on a loan-by-loan basis, but we have, as you know, a workout team that focuses on working with management teams to improve our underperforming credits and they do a really good job. So I'm cautiously optimistic that we're going to see continued improvement in the portfolio over the coming several quarters.

Robert Dodd -- Raymond James & Associates -- Analyst

Got it. Thank you.

Operator

You have a follow-up question from the line of Ray Cheesman with Anfield Capital.

Ray Cheesman -- Anfield Capital Management, LLC -- Analyst

I wanted to specifically say thank you very much, because you gave us great comfort when you released that middle market reports and you show us things like 31.5% improvement in earnings in the portfolio performance. I'm wondering, it is already the 10th of August and your measurement period for the next report closes in about 20 days. Will we be as happy when we see the trend in the next report? Will it -- will the good stuff continue?

David B. Golub -- Chief Executive Officer

I think that's more speculative than unprepared to answer right now on August 10. But thank you for the compliment and I appreciate your enthusiasm for the GC MMR. Phyllis, do we have any last question?

Operator

At this time, there are no further questions. I would like to turn the call back over to management for closing remarks.

David B. Golub -- Chief Executive Officer

Great. Thank you, Phyllis for your help. And thank you to all of you who have been listening today. We very much appreciate your support. As always, if you have questions that we didn't get you today, please feel free to reach out to any of the four of us from GBDC management, and we look forward to talking to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

David B. Golub -- Chief Executive Officer

Gregory A. Robbins -- Managing Director

Jonathan D. Simmons -- Director of Corporate Strategy

Ross A. Teune -- Chief Financial Officer and Treasurer

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

Paul Johnson -- KBW -- Analyst

Ray Cheesman -- Anfield Capital Management, LLC -- Analyst

Robert Dodd -- Raymond James & Associates -- Analyst

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