FS KKR Capital Corp.

Good morning, ladies and gentlemen. Welcome to the FSKKR Capital Core's fourth quarter and full year 2024 earnings conference call. Your lines will be in a listen-only mode during the remarks by FSK's management. At the conclusion of the company's remarks, we will begin the question and answer session, at which time I will give you the instructions on entering the queue. Please note that this conference is being recorded. At this time, Anna Kleinhen, Head of Investor Relations, will proceed with the introductions. Ms.

Kleinhen, you may begin. Thank you.

Good morning and welcome to FSKKR Capital Corp's fourth quarter and full year 2024 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 yesterday. 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 December 31st, 2024. 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 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, reconciliation for the most directly comparable GAAP measures can be found in FSK's fourth quarter earnings release that was filed with the SEC on February 26, 2025. 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 Foreman, Chief Executive Officer and Chairman, Dan Pietrzak, Chief Investment Officer and Co-President, and Stephen Lilly, Chief Financial Officer. Also joining us on the call today are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.

Thank you, Anna, and good morning, everyone. Thank you all for joining us for FSK's fourth quarter and full year 2024 earnings conference call. My opening comments this morning will cover two specific topics, our accomplishments during 2024 and our goals for 2025. During 2024, we were highly focused on four specific objectives. First, our goal is to improve credit quality and overall portfolio stability. To that end, during the year, we reduced our non-accrual investments by 58% to 33.7% on a cost basis and 2.2% on a fair value basis. Second, our goal was to remain extremely disciplined from an origination standpoint, even if that discipline meant passing on certain transactions. During 2024, our investment team deployed $4.7 billion of capital into compelling new transactions. We're entering 2025 with significant available liquidity and view this as a competitive strength as we expect M&A activity to increase, perhaps materially, during 2025 and beyond. Third, our goal is to provide shareholders with an annual distribution of $2.90 per share. We achieve this goal as our base and supplemental distributions total $2.80 per share, and we pay 10 cents per share in special distributions during the first half of the year. Fourth, our goal is to maintain our strong balance sheet. During the second quarter, we issued $600 million of unsecured notes maturing in 2029, and during the fourth quarter, we issued $700 million of unsecured notes, maturing in 2030. For 2025, our goals are as follows. First, we expect our investment team will continue to utilize its deep relationships to originate attractive, well-structured investments which will be accretive to the quality of our investment portfolio. We recognize that we are starting from a position of strength given our relatively low leverage as of year end. Second, based upon our current view of interest rates for the year, we expect to provide shareholders with $2.80 of total distributions through a combination of our quarterly base distribution of 64 cents per share and our quarterly supplemental distribution, which is equated to 6 cents per share for the last several quarters. And while we recognize that the recent decline in interest rates will reduce our net investment income, we believe our healthy balance of spillover income will enable us to continue awarding shareholders by returning to them the additional earnings we generated during the recent higher interest rate period. Third, we expect to continue proactively laddering the right side of our balance sheet to maintain and over time enhance our investment grade ratings. Turning to our fourth quarter results, FSK generated net investment income totaling $0.61 per share and adjusted net investment income totaling $0.66 per share. As compared to our public guidance of approximately $0.63 per share and $0.68 per share respectively. The difference in our reported financial results as compared to our guidance relates to a few new investment opportunities which closed after year end. In keeping with my earlier comments, our board has declared a first quarter distribution of 70 cents per share consisting of our base distribution of 64 cents per share and a supplemental distribution of 6 cents per share. And with that, I'll turn the call over to Dan.

Thanks, Michael. As Michael indicated, 2024 was a strong year of execution for our credit platform and for FSK. I'm proud of the performance we delivered, which is a testament to the hard work, dedication, and strategic focus of our entire team. Since the establishment of the FSK Care Advisor almost seven years ago, we have originated over $27 billion of new investments, which have generated an unlevered IRR of 9.6% since inception. Additionally, Our strong 2024 performance enabled us to deliver shareholders a 12.1% yield on our average net asset value, and shareholders were further rewarded with a total return of 23%. Turning to the state of the economy and the lending environment, the current macroeconomic environment for many is a balancing act between a desire for growth, lingering inflationary pressures, and recent and expected interest rate adjustments. the current administration's issuance of a significant number of executive orders and swift moves across multiple geopolitical and international economic fronts, including the ongoing threats of significant tariffs with large trading partners, have somewhat tempered enthusiasm for a quick start to the year from an M&A standpoint. Instead, companies are taking steps to quantify what effects these potential policies may have on their businesses. As a result, while our expectations still call for a robust increase in M&A activity over the next few years, we caution investors that a significant increase in M&A activity may take longer to materialize than certain industry observers are forecasting. That being said, I would note that our early stage pipeline has been building meaningfully, supporting our view of a continued increase in deal activity during 2025 and beyond. Against this backdrop, we continue to see strong tailwinds in the direct lending market. The current level of interest rates has created a very balanced scenario where interest burdens for portfolio companies have been reduced from the highs of 2023. While simultaneously, the current rate environment is still producing attractive levels of income-driven total return for investors. Credit defaults have remained largely contained across the industry. and borrowers continue to generate revenue and earnings growth. All of this points to direct lending market fundamentals remaining strong, and we believe the scales will continue moving in the favor of private credit providers. Turning to our investment activity during the fourth quarter, we originated $891 million of new investments compared to $1.46 billion of exits. There were no sales from FSK to our joint venture this quarter. We continue to benefit from incumbency across our portfolio, as the majority of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. New originations consisted of approximately 63% in first lien loans, 36% in asset-based finance investments, and 1% in equity or other investments. Our new direct lending investments have the weighted average EBITDA of approximately $206 million, 5.4 turns of leverage through our security, and a weighted average coupon of approximately SOFR plus 516 basis points. We continue to focus on the upper end of the middle market as the weighted average EBITDA of our portfolio companies was $239 million as of December 31st, 2024. And our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 16% across companies in which we have invested in since April of 2018. Interest coverage levels have rebounded to 1.7 times compared to 1.6 times last quarter and 1.5 times during the fourth quarter of 2023. As of the end of the fourth quarter, non-accruals represented 3.7% of our portfolio on a cost basis. and 2.2% of our portfolio on a fair value basis. This compares to 3.8% of our portfolio on a cost basis and 1.7% of our portfolio on a fair value basis as of September 30, 2024. We also believe it's helpful to provide the market with information based on the FSK assets originated by KCARE credit. Non-accruals relating to the 89% of our total portfolio, which has been originated by KKR Credit and the FS KKR Advisor, were 2% on a cost basis and 80 basis points on a fair value basis as of the end of the fourth quarter. This compares to 2.2% on a cost basis and 50 basis points on a fair value basis as of the end of the third quarter. During the fourth quarter, two investments were added to non-accrual status and one investment was removed. Our first lien senior secured position in Alacrity Solutions Group was added to non-accrual, contributing $22 million of cost and $16 million of fair value. In addition, our preferred equity investment in Cubicorp was added to non-accrual, contributing $56 million of cost and $42 million of fair value. Also during the quarter, certain parts of our debt position in Miami Beach Medical Group were written off in conjunction with the company's Chapter 11 process. We expect to receive certain additional proceeds in relation to our remaining debt exposure as the investment is winding down post the sale of the company. In terms of other portfolio updates, WorldWise, the pet product provider, which we discussed on our last earnings call, was restructured during the fourth quarter. The sponsor contributed approximately $42 million of additional capital into the business, with $30 million being used to repay the term loan of PAR. As a result of the restructuring, FSK received $19 million of first lien senior secured take-back debt, committed $1.7 million to a new DDTL, and received equity in the business. Across FSK and other funds, KKR now has a 35% equity ownership and three board seats. Lastly, we are pleased to note that Maverick Natural Resources, a legacy position which has been in the portfolio since 2014, has announced a sale to Diversified Energy. As a result, FSK's $37 million investment will be monetized. We expect the transaction will close in the coming quarters, subject to the customary closing conditions. And with that, I'll turn the call over to Stephen.

Thanks, Dan. As of December 31, 2024, our investment portfolio had a fair value of $13.5 billion, consisting of 214 portfolio companies. At the end of the fourth quarter, our 10 largest portfolio companies represented approximately 21% of the fair value of our investment portfolio, compared to 20% as of the end of the third quarter. We continue to focus on senior secured investments, as our portfolio consisted of approximately 58% first lien loans and 64% senior secured debt as of December 31st. In addition, our joint venture represented approximately 10% of the fair value of our portfolio. As a result, when investors consider our entire portfolio, Looking through to the investments in our joint venture, then first lien loans total approximately 67% of our total portfolio, and senior secured investments total approximately 73% of our portfolio as of December 31st. The weighted average yield on accruing debt investments was 11% as of December 31, 2024, a decrease of 50 basis points compared to 11.5% as of September 30th. The decrease primarily is attributable to the decline in base rates and incremental spread compression. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. From an operational perspective, our total investment income decreased by $34 million quarter over quarter to $407 million, primarily due to the decline in base rates and the delayed closing of certain new investments until the first quarter of this year. The delay in investment closings resulted in lower fee income quarter over quarter and also lower leverage as a quarter end. The primary components of our total investment income during the quarter were as follows. Total interest income was $324 million, a decrease of $32 million quarter over quarter. Dividend and fee income totaled $83 million, a decrease of $2 million quarter over quarter. Our total dividend and fee income during the quarter is summarized as follows. $53 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $23 million during the quarter, and fee income totaling approximately $7 million during the quarter. Our interest expense totaled $116 million, a decrease of $2 million quarter over quarter, and our weighted average cost of debt was 5.4% as of December 31st. Management fees totaled $53 million, a decrease of $1 million quarter over quarter, and incentive fees totaled $35 million, a decrease of $9 million quarter over quarter. Other expenses total $9 million during the fourth quarter, a decrease of $1 million. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows. Our ending third quarter 2024 net asset value per share of $23.82 was increased by GAAP net investment income of 61 cents per share and was decreased by 9 cents per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our 70 cents per share total quarterly distribution paid during the quarter. The sum of these activities results in our December 31, 2024 net asset value per share of $23.64. From a forward-looking guidance perspective, We expect first quarter 2025 GAAP net investment income to approximate 66 cents per share, and we expect our adjusted net investment income to approximate 64 cents per share. Detailed first quarter guidance is as follows. A recurring interest income on a GAAP basis is expected to approximate $310 million. We expect recurring dividend income associated with our joint venture to approximate $46 million. We expect other fee and dividend income to approximate $41 million during the first quarter. From an expense standpoint, we expect our management fees to approximate $53 million. We expect incentive fees to approximate $38 million. We expect our interest expense to approximate $112 million. And we expect other G&A expenses to approximate $9 million. And as Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.80 per share, comprised of $2.56 per share of base distributions and 24 cents per share of supplemental distributions. Turning to our capital structure, during the fourth quarter, we issued $700 million of 6.125% unsecured notes due 2030 which subsequently were swapped to floating rate via interest rate swap agreements at an average of SOFR plus 2.127%. Proceeds were used to repay outstanding debt on our revolver. We continue to proactively manage our liability structure for upcoming maturities, and we expect we will access the unsecured market on an opportunistic basis during 2025. Our gross and net debt to equity levels were 112 percent and 104 percent, respectively, at December 31, 2024, compared to 121 percent and 109 percent at September 30, 2024. At December 31, our available liquidity was $4.8 billion, and approximately 75 percent of our drawn balance sheet and 47 percent of our committed balance sheet was comprised of unsecured debt. And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Thanks, Stephen. As we move into 2025, we remain highly focused on our strategy and the opportunities ahead of us. Our portfolio continues to demonstrate strong credit performance, and our balance sheet provides us with ample liquidity to take advantage of quality transactions during 2025 and beyond. We thank you for your continued support and we look forward to updating you on our progress toward our goals during the year. With that operator, we'd like to open the line for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.

Please stand by while we compile the Q&A roster. Our first question comes from Ken Lee of RBC Capital Markets.

Your line is now open.

Hey, thanks for taking my question. Good morning. Just one on the dividends outlook there. I guess I wonder if you could just further flesh out your confidence in terms of the dividend outlook. It sounds as if spillover income is a big factor there. I just wonder if you could just provide some color in terms of what it implies about adjusted net investment income outlook as well. Thanks.

Yeah, good morning, Ken. I'm happy to start, and Stephen might want to add to it. I think, you know, a couple of different points there. You know, we have set up our dividend policy. you know, from the last couple of years now with this kind of idea of the base and the supplemental. You know, the base being the 64, the supplemental being the 6. You know, I would note at the 64 cents, I think at current NAV, it's still roughly 11%, so still attractive. You know, we did have several quarters of over-earning over the last handful of years considering the rate as well as the spread environment. you know, we think it's prudent to kind of reward the shareholders, you know, with that level of additional earnings. That's been the conversation with our board as well. So I think we remain focused on that, you know, base and supplemental sort of components, but are providing the guidance of expecting, you know, $2.80 for the year.

Yeah, and Ken, Steven, just to add on to what Dan was saying, you know, we have been, I call it successful, you know, in building the spillover balance that we've talked to the market about. uh you know as we sit today that's that represents 2.7 quarters worth of total dividends you know in terms of the strategy this year we would reduce that to somewhere around 2.3 quarters worth of total dividends which you know on a long-term basis and you've certainly covered the stock for a long time you know we said we'd like to be plus or minus two quarters so it brings us back to that that level that sort of long-term target level you know in that range so um you know, nothing more than that and think it's a good signal, obviously, you know, for shareholders as well to have some certainty of payments this year.

Got you. Very helpful there. And just one follow-up, if I may. I think in the prepared remarks, you mentioned seeing a decline in base rates as well, some spread compression in the quarter there. I wonder if I could just get your thoughts around how would you characterize the spread you're getting per unit of risk, like, for example, leverage? what kind of trends are you seeing there? Thanks.

Yeah, I mean, I think, Ken, we've seen almost across all credit markets, you know, a decent amount of spread compression. You know, I think in a lot of ways, at least for kind of the new deal flow, we probably saw more of that spread compression, you know, in the first half of 2020. Um, you know, last year sort of going into the, to the third quarter. So I think we've seen, you know, maybe some, you know, stability on the new deals, albeit, maybe still testing certain kind of new levels. I think you could argue the regular way, you know, direct lending deal these days is 475 or kind of 5%, um, you know, before fee income though. Um, but you've seen the syndicated market, you know, tightened down pretty meaningfully as well. You know, I think we've also seen a certain amount of repricings in the book. You know, that said, I think the repricings are generally highly correlated to names that are performing well. And I think if, you know, we would also, though, on the other side of that, use those repricings to potentially exit certain positions if we didn't necessarily, you know, love the risk-reward. But, you know, so I think you can put in context that it's, you know, a bit of a, you know, more borrower-friendly market these days when it comes to spreads. I think on the other side of that, you know, the total return of these deals that we're still seeing is, you know, roughly 10% considering, I think, the strength of the company, the size of the company. You know, it's still, you know, pretty attractive in our mind.

Gotcha. Very helpful there. Thanks again.

Thanks. Have a good day.

Thank you. Our next question comes from Casey Alexander of Compass Point Research and Trading. Your line is now open.

Thank you. Since the deals have already closed and because it might help for modeling purposes, is there any way to give any granularity or quantify how much in terms of new originations got rolled over from Q4 to Q1?

Good morning, Casey. You know, I think you, I'm trying to think about the right to the number. We're talking a couple of, you know, a handful of deals, you know, kind of two that probably would have generated, you know, two odd cents, you know, three odd cents instead of fee income.

Okay.

Those deals closed, just a timing difference.

Okay. And then, you know, you talked about how you know, M&A may be delayed, but at the same time, you said that your pipeline is filling. So where are you getting the pipeline fill? Are private equity sponsors starting to, you know, bring forward some of the back books that they need to get rid of? Or are these companies that are just completely insulated from, you know, the bulk of government policies? Where are you seeing that pipeline fill fill? if M&A, you know, pickup is being delayed?

Yeah, no, it's a fair question. And maybe we should have been a little bit crisper in the prepared remarks. But I think, you know, we were, I think we and probably the rest of the market has been kind of waiting for what I'll call that, you know, meaningful impact in, you know, M&A volume sort of across the market. I'm not sure it gets maybe all the way to 21 levels, but I'm not sure it's that far off that. In many ways, everything was lining up for that. You've got private equity LPs wanting to get capital back. You've got a bunch of dry powder. It's been a slow couple of years. I think the capital markets and others were probably further pulled up on that trend as it relates to the new administration coming on board. I think In our mind, with some of the points, whether it's, you know, tariffs or sort of otherwise, I think people are doing a little bit more maybe work at the portfolio company level. It's slowing down in our mind, you know, that larger wave that we're expecting. That said, maybe in a simpler way, you know, I think we're kind of busier now than we were, you know, in different points of 23 and 24. But I think we're expecting to get busier as the quarters go forward.

Okay, thank you for that. And one last one. on Maverick, would you characterize that sale kind of at the mark, above, or below?

Fair question. I would characterize it as below the mark. I think the mark that's in Q4 is quite a fair mark. actually above the mark. I'm doing my math the wrong way. The sale price was kind of above the mark. I think, you know, as we got to go through the closing conditions, as there's certain ways which will monetize that on a go-forward basis, I think in all of our valuations, we would, you know, incorporate certain, you know, kind of, you know, points in there to not just bring it to straight kind of you know, market value to the price. But I think that's in line with how we would value something like that. But the sale was above the mark you would have seen.

All right, great. Thank you. Appreciate it.

Thank you. Our next question comes from Robert Dodd of Raymond James. Your line is now open.

Hi, guys. On the kind of type of the M&A build, right? I mean, a lot of the larger players in the market are just focused on sponsor finance, but you're not. Um, so how would you characterize separately from the sponsor back, um, uh, outlook for 25 and building pipeline, the asset back finance side, obviously has been a lot of market talk about that. It's kind of the next race wave, but I mean, you've been in it for a while, but what, what's your, what's your outlook on that side of the book?

Yeah. I mean, I think you're right, Robert, we're, we've got a big kind of business there. You know, we've got. you know, roughly 50 people focused on that. We've got, you know, north of 65 billion of total AUM. It's always been a part of what we're doing here at FSK. You know, we've been, you know, active there. I think that's had a fair amount. That's had a certain amount of activity for kind of different reasons, right? We've seen different things going on with banks. We've seen different asset portfolios come out of banks. We've seen a thematic, which I think is almost equity market driven, where the equity market is rewarding companies for being balance sheet lights. You think about our asset-backed businesses or others, we're essentially in the asset storage business, so there's good partnerships that we can do with those corporates there. A bunch of those corporates are probably names that we wouldn't historically get to do business with. The size of that market is meaningful. I do think in a lot of ways that market, at least on the institutional side, probably feels like the direct lending market did five or 10 years ago in terms of people starting to get more interest. But it's a big market. I think we've got a bunch of unique or proprietary origination angles we're going to continue to try to exploit.

Got it. Thank you. And then just on, normals are down. I mean, Are you seeing areas of weakness? Obviously, not broadly, right? I mean, you said EBITDA growth across portfolios where you average 16%. That's clearly not weak, right? But, you know, that's across the whole portfolio. I mean, are there any areas of either the portfolio or the market where concerns are ramping up?

It's the right question. I think the issues that we probably have seen either across the portfolio or maybe a couple of names that we would have mentioned here have probably been more idiosyncratic to those specific issuers, whether it was customer loss or otherwise. I would say kind of more broadly that You know, we've been in an environment where interest coverage ratios, even though they're sort of rebounding, have been, you know, probably on the lower side for the last handful of years. I think that does expose companies when there is a bump in the road that it bubbles up or becomes an issue sort of faster. So, you know, there's probably, you know, a little bit more of that as kind of time goes on. But, again, it's been probably more idiosyncratic. You know, I do think – You know, there are things out there that are top of mind these days, right? We touched on tariffs. We touched on the Department of Government Efficiency. You know, there are different, I think, scenarios or concerns around either continued wage inflation or the ability to get the right amount of employees, you know, that's kind of top of mind. So I think we're pretty constructive on the economy. We're pretty constructive on the big levers, you know, of the U.S. economy. But I do think there's some, you know, either, you know, events or scenarios out there that have some downside to it. And we're, you know, using our portfolio monitoring unit. We're using the whole team to be pretty focused on those.

Thank you very much.

Thank you.

Thank you. Our next question comes from Finian O'Shea of Wells Fargo Securities. Your line is now open.

Hey, everyone. Good morning. A couple questions on the fees. Is the 41, I think you said, for the non-recurring, that's an improvement? Should we think of that as more of a one-off? strong quarter or the sort of rebound level. And then similar question for the CCOP dividend. That's a recurring one, but understanding in practice it moves around a little bit. So seeing what we should think of that, the $46 million there as well. Thanks.

Yeah, good morning, Vince. I mean, on the joint venture dividend maybe first, you know, I think you're right. I mean, it will move a bit. Obviously, there could be different events, you know, repayments or, you know, what kind of other fees earned within there. Obviously, we've got a great joint venture partner there as we think about how we you know, kind of manage, you know, distributions there. But I think with inside that, you know, range of what you would have seen the last couple of quarters is probably fair. I would note, I think we got some room to grow the joint venture. You know, I think that's kind of top of mind for us, you know, almost in line with, you know, I like where we're at from a target leverage perspective, right? Where we're at from a leverage perspective right now, right? Obviously, we're more on the lower side of our target. I think we'd be pretty comfortable at, you know, 115 versus kind of 104. But that's at least the way I think about, you know, the joint venture. I think you're kind of broader, you know, fee and dividend income. I think that will bounce around, right? You know the asset-backed space, right? Well, you know, not all those deals are necessarily linear in terms of when cash flow is released. I think we've probably continued to see, you know, lower what I'll call regular way fee income, just because, you know, originations have been probably a bit more muted. And, you know, maybe even a little bit, you know, kind of may call or sort of call pro-income as, you know, the we were holding on to assets for a fairly, you know, lengthy amount of time and sort of that call pro is sort of rolling off. But yeah, I think that one will bounce around a bit, but I think the joint venture probably a little bit more consistent to your point.

Okay. Thanks. So sort of tying into that and quick question on the dividend discussion that you covered pretty well in the remarks in the Q and a here. What's the, like ongoing level, if any, of taxable income over NOI, I imagine ABF might generate some. Non-accruals might generate some. And, you know, that, looking at it from that way, if there's a significant amount, like does this, does this pay out and say an assumed low to mid 60s NOI this year, does that get you back down to the target two quarters, or is there a good chance that this sort of same policy extends into 26 when, you know, we revisit a year from now?

Yeah, let me start, and then Stephen's going to take it. I think it's probably difficult to forecast out or think about what happens in 26, right? I think that would be very dependent upon, you know, deal activity, what we're seeing, kind of, you know, markets, et cetera. You know, but I think we wanted to make the statement and provide the clarity as it relates to 25. But, Stephen, add to the rest.

No, I think that's right. You know, and, Finn, as you remember, when we entered and came into 2024, Then our spillover on, again, a total quarter's worth of dividends basis was kind of 2.9 quarters, close to three. We paid the special last year in the first two quarters. That helped us a little bit there. and as mentioned earlier on one of the questions you know we're 2.7 quarters now at the end of this year all things being equal we'd be down around 2.3 uh quarters worth of dividends which is you know in our range kind of you know the closer to the top end of our range of plus or minus two quarters worth of dividends so um again it you know spillover will move a little bit too it always does just because there's so many puts and takes there on a year-over-year basis but You know, we think it's, again, a very good strategy returning some of this capital to shareholders this year. And then as Dan says, you know, we'll sort of up Periscope next year and see where things are.

Is there like, you know, just going forward, say beyond this year, are you always going to try to stick close to that two quarters? Like it did feel like you let it, fan up to the high end for some time, you know, as did many of your peers. But, you know, is that sort of, is this maybe sort of like a lesson learned, like we let it get too hot and we're going to stick to this too going forward? Or might there be times where, I don't know, you find it advantageous and run it back up?

Well, I think the the increase is really more rate driven. You know we were in the environment as Dan mentioned in his prepared remarks with higher rates and you know so that you know there were. materially higher earnings on a per share basis from, as you would indicate, you know, we and also many of our peers. And so I think that accounted for, you know, the increase in spillover over sort of our target. And different companies have different target levels, you know, so we would readily say that. You know, we're very comfortable in our, you know, plus or minus two quarters, think that's a good healthy balance. You know, we weren't upset that it, you know, grew incrementally so to speak above that balance in the last several quarters because it was again a really nice rate environment we just didn't want to take the the total payout uh you know to an artificially high level just for a couple of quarters you know we wanted to save that because we had an expectation that rates at some point you know would come back down um so it's it's frankly worked and moved as we would be very comfortable with awesome uh thanks so much for the color thank you

Thank you. Our next question comes from Maxwell Fritcher of Truist Securities. Your line is now open.

Hey, good morning. I'm calling in for Mark Hughes. You've hit on the economic topics of the day around executive orders, tariffs, et cetera. I think more broadly, and sorry if I missed this, but as you look at your portfolio today, how do you think you're positioned relative to some of these dynamics?

Yeah, good morning, Maxwell. Good question. You know, I would, you know, take a step back in some ways. I think we, you know, for multiple months now, you know, going back even, you know, kind of before the actual election, you know, as a firm we're focused on, you know, different scenarios or kind of what the impacts of things could be. You know, we're using the whole resources of the firm as we kind of think through this We have gone through position by position, both with our portfolio monitoring team, the deal teams, but actually going out to the portfolio companies themselves to think about where the tariff risk might be or where anything that might relate to government contracts could have an issue. It's not a large percentage of the portfolio. I think that's the good news. I think the thing that we're keeping our eye on is it could be material, though, to a certain individual name. But also, I would note this whole thing is pretty dynamic in the sense of how it will really play out at the end. I think some of the conversations around tariffs has probably been almost a catalyst for other conversations with certain of these countries. It's live, you know, we've got effectively a list of names that we're focused on because of it, and I suspect it'll continue to evolve.

Yeah, that's helpful, Collin. Thank you. And then just as M&A picks up, you know, half of this year, I wanted to get your thoughts or your views on how you expect the mix of incumbent borrowers versus new borrowers to trend over the course of this year.

Yeah, you know, I think you're right in the sense of, you know, we talked about this at length in the prepared remarks in the Q&A. You know, we are confident about that M&A level going up. I think that would almost by definition, you know, reduce that incumbency sort of number. You know, I think the larger platforms, you know, do have an advantage with the size of their portfolios. I think that advantage is not even just loans that are on the books today, but it's loans that you may have lent to even sort of prior, but you've got the history on the company. It's loans that we might know very well from our leveraged credit business. I think that incumbency point in my mind is not just helpful on an origination side. It's also helpful on a diligence side. Almost in its most simplistic format, it's easier to lend to a company that you've lent to before. But I think you should expect that number just by definition of increased market activity for M&A probably trends down a bit on the incoming percent. Got it. Thank you. Thanks. Have a good day.

Thank you. Our next question comes from Melissa Wedel of JP Morgan. Your line is now open.

Good morning. Thanks for taking my questions. The first one is wanting to follow up on the fee income line item for 4Q. I take your point that a few deals slipped into, it sounds like, the first quarter. But even looking at the sort of average fee income over the first three quarters in the year, it was in the high teens. And for 4Q, it looks like it was less than half that. Is there something beyond a few deals slipping into 1Q that would drive that fee income lower?

Yeah, and Stephen can add to this. I mean, I think that line will have a certain amount of, you can use the word volatility to it, right? It's obviously dependent on kind of new activity. You know, I think the deals in the asset-backed business are not all necessarily kind of linear when they can pay distributions on. But, you know, I would kind of continue to expect that. I do think the number was artificially probably low, respect to any historical-type average. But, Stephen, you might want to add.

Yeah, now, Melissa, just adding to that a bit, I think the $7 million we had in the fourth quarter, as Dan mentioned in a question earlier with a couple of the deals that were delayed, you know, that $7 had those deals closed, you know, probably would have been more in the, you know, 10 to 11 range, I would have imagined, you know, something along those lines. if you look at our long-term average it's sort of between 15 16 million uh on a quarterly basis obviously it goes above and below that that's just the average and you know so i think dan's comments about the the mix of activity in the fourth quarter was more unique to it coupled with a couple of deals that were delayed okay thank you for that um and then

Sort of related to the slipping of deals into 1Q, I mean, we're two-thirds of the way through the first quarter at this point. In terms of repayment activity and exits, is there anything you can share with us? Certainly, it was elevated in 4Q. Can you share how first quarter's shaping up?

Yeah, I think you're correct on, you know, the probably I think everyone should expect a certain amount of additional repayments, right? You have the syndicated market open. We always expect these markets to act in some ways in sort of concert. I think obviously there'll be points in time when the private markets can step in, when the syndicated markets might not be open. But as I think we're seeing some of that, I think we are seeing certain instances of deals that are being repriced or a new refinancing being put in place we're taking as an opportunity to get repaid and just move on. I think you should probably expect the balance of new deals versus repayments to be better in Q1.

Thank you for that. And I'll throw in one last one. Just given the tight-spread environment, to your point about the markets being, the broadly syndicated market being open, how, you know, how urgent do you feel about relevering the portfolio a little bit? Thank you.

Yeah, I think urgent is probably not the right word because that would probably imply you know, just kind of racing to do deals. I do think this is an environment where discipline kind of matters. You know, I always do describe, you know, the direct lending market as will be certain moments, you know, when it's lender friendly, there's certain moments when it's borrower friendly. You know, I think that the theme, though, is always about downside protection. You know, you're underwriting a deal with a view of, you know, not having a default, but if there is a default, having a high recovery rate. So it is more borrower-friendly today. But as I said, I think the total return sort of still remains attractive. We are at the lower end of our range, I think, unequivocally. I think that's a positive thing. I think it speaks to the strength of the liability structure we have, which in these vehicles you know is very important. You know, I think you should expect that, you know, we're going to trend back up to that midpoint of the 115, you know, over the coming course, you know, with kind of that upper range of kind of you know, one-to-one in the quarters, what we've always talked about for target leverage.

That's very helpful. Thank you.

Thank you. Have a good day.

I'm showing no further questions at this time. I would now like to turn it back to Dan Petersack for closing remarks.

Well, thank you, everyone, for joining us today on the call. As always, we appreciate your time. If you do have any further questions or things that we didn't address on the call, please don't hesitate to reach out. And if not, we'll speak to you again next quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.