Hello and welcome to the New Mountain Finance Corporation’s Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to John Kline, president and CEO. Please go ahead.

Thank you and good afternoon, everyone. Welcome to New Mountain Finance Corporation’s second quarter 2023 earnings call. On the line with me here today are Steve Klinsky, chairman of NMFC and CEO of New Mountain Capital; Robert Hamwee, Vice Chairman of NMFC; and Laura Holson, COO and Interim CFO of NMFC. Steve is going to make some introductory remarks. but before he does, I'd like to ask Laura to make some important statements regarding today's call.

Thanks, John. Good afternoon, everyone. Before we get into the presentation, I would like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of New Mountain Finance Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our August 2nd earnings press release. I would also like to call your attention to the customary safe harbor disclosure in our press release and on page 2 of the slide presentation regarding forward-looking statements. Today's conference call and webcast may include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those statements and projections. We do not undertake to update our forward-looking statements or projections unless required to by law. To obtain copies of our latest SEC filings and to access the slide presentation that we will be referencing throughout this call, please visit our website at www.newmountainfinance.com. at this time, I would 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?

Thanks, Laura. It's great to be able to address you all today, both as NMFC's Chairman and as a major fellow shareholder. Adjusted net investment income for the second quarter was $0.39 per share, more than covering our $0.32 per share regular dividend that was paid in cash on June 30th. Our earnings improved by $0.08, compared to Q2 of last year and $0.01 sequentially over Q1 of 2023. Our net asset value per share remains stable at $13.14 compared to last quarter, demonstrating continued strong credit performance across our portfolio. We believe our loans are well positioned overall in defensive growth industries that we think are right in all times and particularly attractive in less certain economic times. New Mountain's private equity funds have never had a bankruptcy or missed an interest payment, and the firm now manages over $40 billion of assets. Similarly, as shown on page 13 of this presentation, since inception over 12 years ago, NMFC has experienced net gains across all of its realized credit investments. With only $72 million of unrealized depreciation on our books as of the end of Q2, the rising rate environment continues to be a substantial positive for our quarterly earnings, since we chiefly lend on floating rates. As page 16 of the presentation shows, we expect to continue to significantly outearn our $0.32 per share regular dividend at current interest rates if all other factors hold constant. Given our earnings of $0.39 per share this quarter, we will make our second consecutive variable supplemental dividend in the amounts of $0.04 per share, which is equal to approximately half of the Q2 quarterly earnings in excess of our regular dividend of $0.32. This additional $0.04 dividend will raise the total dividend to $0.36 per share all in for this quarter,…

Good afternoon again, everyone. Thank you for joining us today. I would like to offer some more details on our overall investment strategy and performance metrics. Starting on page 7, we highlight our disciplined industry selection, which shows exposure to a diversified list of defensive non-cyclical sectors. These sectors and industry niches are characterized by durable growth drivers, predictable revenue streams, margin stability and great free cash flow conversion. We have successfully avoided cyclical, volatile and secularly challenged industries, which could be riskier areas to invest in today's high-rate environment. Our strategy has been consistent over our 12 plus years as a public company and it allows us to operate with confidence in any economic environment. Page 8 provides a high-level snapshot of our business, where we show a long-term track record of delivering consistent, enhanced yield to our shareholders by avoiding losses and distributing virtually all of our excess income to shareholders. Since our IPO in 2011, NMFC has returned over $1 billion to shareholders through our dividend program, generating an annualized return of 10%. Our current portfolio is exposed to companies in good industries that are performing well and where our last dollar of risk is approximately 40% of the purchase price paid for the business. We lend primarily to businesses owned by financial sponsors, who are sophisticated and supportive owners with significant capital that is junior to the loans that we make. Notably, over 20% of our portfolio companies across our credit platform have attracted additional equity capital in the last 12 months. This capital has been deployed to support M&A, bolster liquidity and to pursue general business expansion. This is a great indication that our portfolio consists of companies that are performing well and are able to attract additional investment, healthy valuations even in more challenging…

Thanks, John. We believe the outlook for the rest of 2023 in the sponsor-backed direct lending market is positive, while deal flow continues to be down overall, the direct lending market remains the primary financing market available for sponsors. and there are pockets of activity, where we have the opportunity to make loans at attractive yields while remaining very selective. We remain bullish on the medium-term outlook for M&A, given the magnitude of dry powder for private equity and have started to see new deal activity pickup in recent weeks. We also continue to see good opportunities to make incremental loans to existing, well-performing portfolio companies seeking to pursue accretive M&A. deal structures remain compelling with leverage levels, meaningfully below peak levels and significant sponsor equity contributions representing the vast majority of the capital structures. Page 16 presents an interest rate analysis that provides insight into the positive effect of increasing base rates on NMFC's earnings. As a reminder, the NMFC loan portfolio is 89% floating rate and 11% fixed rate, while our liabilities are 56% fixed rate and 44% floating rate. Given this capital structure mix, we are long SOFR and thus have material positive exposure to increasing rates. In Q2, we saw average base rates close to current levels, with an average base rate on our assets of 5% versus current SOFR of about 5.4% and about 10 basis points lower than the average rate on our liabilities. If rates follow the projected SOFR curve and settle in the 3.5% area, we would still expect our net investment income to exceed our regular dividend as shown on the bottom chart, all else equal. Moving on to origination activity on page 17. In Q2, we originated about $30 million of new loans as we were fully invested during the…

Thank you, Laura. As we look out over the balance of 2023, we remain confident in the quality of our investment portfolio and believe we are on track to deliver great risk-adjusted returns to our shareholders. We once again, thank you for your support and look forward to maintaining an open and transparent dialogue with all of our stakeholders. I will now turn things back to the operator to begin Q&A. Operator?

[Operator Instructions] Our first question comes from Bryce Rowe with the Hovde Group [ph]. Go ahead.

Hi. I guess, good afternoon now.

Hey, Bryce.

I wanted to maybe start on the -- hey, John, wanted to start on the comments around the fair value marks on the orange and red-rated names kind of moving lower quarter-over-quarter. Just curious if there's something specifically going on within the portfolio companies or just kind of a measure of conservatism on your part to lower those fair values.

Sure. I guess, what I'd say is when we think about this quarter, we think it was a really great quarter. When we look at the vast majority of our portfolio companies in NMFC, we're really pleased with the way they're performing in this higher interest rate environment. There are just a couple of names in the portfolio that have been weaker, and they continue to be a little weaker. And as a result, we've marked those down. And so I think it's really as simple as that. And I think the really good news is the earnings are really good, the portfolio is solid, and there are just a few names that are weaker and we have to reflect that.

Got it. Okay. That's helpful, John. And then just the comments around kind of pace of originations in the quarter and then opportunistically, selling out of some investments to reduce balance sheet leverage. Are you trying to possibly operate with less balance sheet leverage certainly in the target range that you've set. but just kind of wanting to understand how you're thinking about balance sheet leverage and being able to invest in this market? Thanks.

Sure. I can take a shot that, I'm sure Laura may have some additional comments. but I think we had a number of quarters, where we were at the high end of our range. and we just felt like it was appropriate to not be at the high end of every quarter. And we're very comfortable being at the middle end of the range. And I think now we're a little bit more in the middle at 1.19. we really did see a golden opportunity to sell, as Laura mentioned, some lower yielding names at really good prices, so that we could just achieve that a little bit of extra financial flexibility. So going forward, I think we'll continue to be within our range. and certainly, we're very comfortable operating this business between 1.15 and 1.25, and I think that's what you should expect to see.

That's great, John. Appreciate it.

Great, thanks.

Our next question comes from Ryan Lynch with KBW. Go ahead.

Hey. good afternoon. First question I had was, can you just maybe give us an update on your net lease portfolio? Obviously, there's been a lot of discussions broadly about commercial real estate and how that's going to fare, and there's obviously stronger sub-positions and not office maybe being one of the weaker positions. But if you could just talk about your overall, what are your sort of allocations you have in your net lease portfolio and how has that been holding up?

Sure, yes. Very much like to talk about that. So, when we think about the strategy for net lease portfolio. we own property that is occupied by a lot of companies, many of which are owned by sponsors. And they're mission critical assets that the businesses need to operate and that's a big part of our underwriting thesis. And so when we think about the character of the assets, it's a lot of industrial assets, it's a lot of warehousing. but it really has no real office exposure or any exposure to the asset classes that you read negative things about in the Wall Street Journal. So, this is mission-critical assets that are owned by businesses that we know well and they're entering into long-term leases. And we feel very good about that strategy, even in an environment, where we do see problems in different areas of the real estate asset class, which is a massive asset class. So hopefully, that gives you just a sense. And when we think about these properties I mentioned, there are long-term leases. They have contractual escalators that make our lease payments more valuable every valuable. And so it’s a good part of our portfolio.

Okay. That’s helpful. And then obviously, there’s some commercial real estate space is going through some changes, there’s obviously some very strong sectors and then potentially some weaker sectors. Are you guys looking at more opportunities in this space, given kind of the dynamics that are playing out, or are you guys kind of set with what you have right now?

We like the position that we have in the long-term triple net lease assets that we own on the balance sheet. And we think that as capital becomes available on our balance sheet, we see a great opportunity to invest that capital into sponsor backed direct lending uni-tranche loans. And that's what we plan to do. So, that's the way I would answer that question.

And just one last one. Can you maybe just give us I know it's hard to do a broad overview, but kind of a broad overview of how your healthcare services portfolio is performing? that's obviously a sector that, broadly speaking, potentially could be having some challenges with higher labor costs and then maybe some contractual fixed rates from insurance. So, I'd love to just get an update on how that portfolio is performing and then how are the fundamentals trending? Are they improving, worsening versus maybe three to six months ago?

Sure. I can start. I mean clearly, healthcare has been a space that I think you can really differentiate yourself as an investor. And I think healthcare is probably one of our strongest verticals for New Mountain Capital overall. So, Steve might have some comments he wants to add in addition to that. So, when I think about our credit portfolio and healthcare services, we do have some physician practice management type businesses. but I think we've done a nice job of really delineating between the sectors within physician practice management that maybe are better than some others. When I look at our portfolio overall, we do have some exposure to dental and dermatology, and eye care et cetera. but I would say the businesses that we lend to in these sectors have generally performed reasonably well. I mean, these are operationally-intensive businesses. and so it's a sector, where execution really matters. So, we've tried to be mindful of that as we think about backing the right sponsors in these sectors. And as I said, really relying on the in-house expertise that we have within New Mountain Capital to help us kind of pick the winners and losers within healthcare. And performance wise, I would say in aggregate, performance has been probably a little bit stronger lately. We've seen some of the wage pressure that we had seen previously impacting the healthcare services sector. It's not gone, but it definitely seems like it's improving at the margin. But Steve, do you want to add anything just about that.

no. I guess, one thing I would say is healthcare technology and life science has been one of the very, very best areas for our private equity firm for many years. We're very deep in the space as owner operators. So, I think, for example, if you look at our CLO portfolio, where we're ranked and how many markdowns were very high up on the top of safety, because we can distinguish or try to distinguish good from bad names. Just we don't just say, it's healthcare, let's do it. There's a lot of specificity in the healthcare models and we try to use that for both private equity and credit.

Understood. I understand there's a lot of nuance in each individual investment there in that portfolio. That's all from me. I appreciate the time today.

Great. Thanks, Ryan.

[Operator Instructions] We'll wait a moment for any additional questions. With no further questions, this concludes the question-and-answer session. I would like now to turn the conference back over to Mr. John Kline for any closing remarks.

Great. Well, thank you and thanks to everyone, who joined us on our second quarter conference call today. And we very much look forward to speaking to you on our third quarter call, which will take place in November. Have a great day. Thanks.

This concludes our conference. Thank you for attending today's presentation. You may now disconnect.