MidCap Financial Investment - Q2 2023

Transcript

Operator (participant)

Good afternoon, and welcome to the earnings conference call for the period ended June 30, 2023 for MidCap Financial Investment Corporation. At this time, all participants have been placed in a listen-only mode. The call will be open for a question-and-answer session following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star one on your telephone keypad. If you would like to withdraw your question, please press star two. I'll now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Please go ahead, ma'am.

Elizabeth Besen (Investor Relations Manager)

Thank you, operator, and thank you everyone for joining us today. Speaking on today's call are Tanner Powell, Chief Executive Officer, Ted McNulty, President, and Greg Hunt, Chief Financial Officer. Howard Widra, our Executive Chairman, as well as additional members of the management team, are on the call and available for the Q&A portion of today's call. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of MidCap Financial Investment Corporation, and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available on our press release. I'd like to also call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements.

You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.midcapfinancialic.com. I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company's financial performance. Throughout today's call, we will refer to MidCap Financial Investment Corporation as either MFIC or the BDC, and we will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland. At this time, I'd like to turn the call over to our Chief Executive Officer, Tanner Powell.

Tanner Powell (CEO)

Thank you, Elizabeth. Good afternoon, everyone, thank you for joining us today. I will begin today's call by highlighting our results for the June quarter, will then provide our thoughts on the current environment. Following my remarks, Ted will cover our investment activity and portfolio will also provide an update on credit quality. Lastly, Greg will review our financial results in detail. We'll open the call to questions. Beginning with our results, we're very pleased with our performance for the June quarter, given our strong net investment income, a slight increase in net asset value per share stable credit quality. Net investment income per share for the June quarter was $0.44, well above the current $0.38 dividend, as we continue to see the benefit of higher base rates on our floating-rate assets.

We are particularly pleased with these results when considering the relatively muted transaction environment, which resulted in below normal prepayment income. At the end of June, NAV per share was $15.20, an increase of $0.02 from the end of March, which reflects earnings in excess of a dividend, stable credit quality, and includes approximately $0.01 per share accretion from stock buybacks. We are pleased to report that we continue to observe relatively stable credit quality in our portfolio. We're seeing that most of our portfolio companies are able to handle higher interest costs. We constructed our portfolio to withstand challenging periods.

As a reminder, our corporate lending and other portfolio, which makes up 92% of our portfolio, primarily consists of first lien, top-of-the-capital structure loans, is well diversified by borrower and industry, is largely sponsor-backed, and has what we consider to be robust documentation and financial covenants. At the end of June, 96% of our corporate lending debt portfolio on a cost basis, or 97% on a fair value basis, had one or more financial covenants. Next, let me give a brief update on MERX. As discussed previously, we are focused on reducing our investment in MERX. While we don't expect paydowns to occur evenly, we believe aircraft sales and servicing income should allow for the pay down of third-party trade level debt and MFIC's equity and debt investment in MERX.

Although MERX did not sell any aircraft in its portfolio during the June quarter, MERX repaid $3.5 million to MFIC, which was applied to the revolver. At the end of June, our investment in MERX totaled $193 million, representing approximately 8% of our total portfolio at fair value. Turning now to the market environment, the heightened volatility that we saw in the first quarter stemming from the regional banking crisis subsided as the quarter progressed, despite ongoing concerns about inflation, higher interest rates, and fears about recession. Against this backdrop, new issue volumes were slow, driven primarily by slower M&A activity, partially offset by add-on activity as sponsors pursued bolt-on acquisitions. We still see financial sponsors, particularly those focused on the middle market, seeking financing solutions in the private credit market.

We continue to observe more lender-friendly pricing and terms on new commitments compared to prior vintages, although we are seeing the pace of increases plateau. Moving to the dividend, our board of directors declared a dividend of $0.38 per share to shareholders of record as of September 12, 2023, payable on September 28, 2023. A $0.38 dividend represents an annualized dividend yield of 10% at NAV, on NAV. At current base rates, we are well positioned to generate net investment income in excess of this dividend level. We believe our portfolio will continue to earn above the current dividend in a normalized rate environment. Our board and management team continue to evaluate potential dividend increases versus retaining earnings. With that, I will turn the call over to Ted.

Ted McNulty (President)

Thank you, Tanner. Good afternoon, everyone. Beginning with investment activity, as a reminder, MFIC is focused on investing in loans sourced by MidCap Financial, an affiliate of Apollo Global, which provides MFIC with a large pipeline of investment opportunities. MidCap Financial is a leading middle market lender with one of the largest direct lending teams in the U.S., with close to 200 investment professionals.

MidCap Financial was active during the June quarter, closing approximately $4.4 billion in new commitments. Specific to MFIC, new corporate lending investment commitments during the quarter totaled $79 million, all first lien, across 15 different borrowers for an average new commitment of $5.2 million, as we continue to emphasize diversification by borrower. 17% of new commitments were made to existing portfolio companies. We continue to observe favorable pricing at lower leverage levels for newly originated loans. The weighted average spread on new commitments was 681 basis points, with an average OID of approximately 266 basis points. This translates into a very attractive weighted average yield of approximately 12.5% based on current base rates. The weighted average net leverage of new commitments was 3.7x.

In terms of funded investment activity, gross fundings, excluding revolvers for the corporate lending portfolio, totaled $73 million. Higher interest rates and a lack of new deal activity led to a slowdown in repayment activity. Sales and repayments totaled $58 million. Net revolver fundings totaled $11 million, and we also received a $3.5 million pay down from MERX, as Tanner mentioned. In aggregate, net fundings for the quarter totaled $22 million. Turning to our investment portfolio. At the end of June, our investment portfolio had a fair value of $2.41 billion and was invested in 150 companies across 25 different industries. Corporate lending and other represented 92% of the total portfolio, and MERX accounted for 8% of the total portfolio on a fair value basis. 95% of our corporate lending portfolio was first lien.

We continue to have conservative weighted average attachment and net leverage on our corporate loans of 0.1x and 5.45x, respectively. Both of these metrics were flat compared to the prior quarter, which we consider to be another indication of our portfolio's stable credit quality. At the end of June, the average funded corporate lending position was $15.4 million, or approximately 0.7% of the total corporate lending and other portfolio. MFIC is focused on lending to the core middle market, where MidCap Financial has strong, long-standing relationships with sponsors and borrowers and a proven track record across cycles. As of the end of June, the median EBITDA of MFIC's corporate lending portfolio companies was approximately $55 million.

We believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high yield market. The weighted average yield at cost of our corporate lending portfolio was 11.7% on average for the June quarter, compared to 11.3% last quarter, driven by an increase in base rates. These yield figures are an average of the beginning and the end of the quarter. At the end of June, the yield of the corporate lending portfolio at cost was 11.9%, up from 11.5% at the end of March. The weighted average spread across the corporate lending portfolio was 614 basis points, up 1 basis point compared to last quarter. Turning to credit quality.

Our portfolio companies continue to have solid fundamental performance with positive revenue and EBITDA growth. We're not seeing any signs of overall credit weakness, although we have observed a deceleration in top-line growth and some margin pressure. We've not seen a meaningful increase in covenant breaches or a pickup in amendment activity. We believe our credit quality has benefited from MidCap Financial's strong sourcing and underwriting capabilities. Based on data since mid-2016, which is the approximate date upon which we began utilizing our co-investment order, MFIC's annualized net realized and unrealized loss rate on loans sourced by MidCap Financial is extremely low at approximately 1 basis point. The weighted average net leverage of the companies in our corporate lending portfolio was 5.45x, unchanged compared to the prior quarter.

As mentioned, the net leverage on new commitments was 3.7x, well below the portfolio average. Moving to interest coverage. The weighted average interest coverage ratio was 2.1x, down from 2.3x last quarter, with four companies below 1x. If we utilize June 30 base rates, the interest coverage would be 1.6x compared to 1.7x last quarter in that stress test scenario. In the coming quarters, excuse me, we are closely monitoring these situations, which we believe are manageable, as these companies either have strong current liquidity or the underlying businesses are performing well. We want to underscore that we have not increased PIK income to create interest coverage. Importantly, MFIC benefits from MidCap Financial's large, dedicated portfolio management team of nearly 60 investment professionals, which helps identify and address issues early.

It is also important to note that MidCap Financial leads and serves as administrative agent on the majority of our deals, which provides meaningful downside protection. As agent, we're in active dialogue with the borrowers and have enhanced information flow, which allows us to be proactive in resolving problems in credits, problem credits as issues arise. We are also monitoring near-term maturities to identify any potential risk of repayment, so that we can address any issues early and proactively work with borrowers to help them meet their liquidity needs. As part of our investment process, we're mindful of the specific fund making an acquisition, as we believe sponsors are more likely to support businesses and funds with greater remaining duration. We continue to have very low levels of non-accruals. No investments were placed on non-accrual status during the quarter.

At the end of June, investments on non-accrual status totaled $7.5 million, or 0.3% of the total portfolio at fair value. With that, I will now turn the call over to Greg to discuss our financial results in detail.

Greg Hunt (CFO)

Thank you, Ted, and good afternoon, everyone. Beginning with our financial results, net investment income per share for the June quarter was $0.44, as we continue to benefit from higher base rates on our floating-rate assets and improved net interest margin. Prepayment income declined quarter-over-quarter due to lower prepayment activity. Prepayment income was approximately $600,000 compared to $2.6 million last quarter. Fee income also declined compared to the prior quarter. Fee income was approximately $1 million in the June quarter, compared to $2.2 million last quarter. Tick income remains very low, representing approximately 1.2% of total investment income for the quarter. GAAP net income per share for the quarter was $0.39.

NAV per share at the end of June was $15.20, an increase of $0.02 since the end of June. The $0.02 increase reflects net investment income of $0.44, which is $0.06 above the $0.38 dividend, $0.05 per share net loss on the portfolio, and approximately $0.01 accretion from stock buybacks. Additional details on unrealized net gain and losses are shown on page 16 in the earnings supplement. Total expenses for the quarter were $39.8 million, up $1.5 million compared to last quarter, primarily due to higher interest expense. Gross management fees totaled $4.3 million, essentially flat quarter-over-quarter. As a reminder, MFIC's base management fee was reduced to 1.75% on equity beginning January of 2023.

Among listed BDCs, MFIC's management fee is the lowest, and we are the only BDC to charge management fees on equity, which we believe provides a greater alignment and focus on net asset value. Gross incentive fees totaled $6.1 million for the quarter. As a reminder, our incentive fee on income is 17.5% and includes a total return hurdle with a rolling 12-quarter look-back. We believe our fee structure is best in class amongst listed BDCs and provides a strong alignment of interest with our shareholders. For the quarter, we generated an annual ROE based on net investment income of 11.6% and an annualized ROE based on net income of 10.2%. Moving on, from a balance sheet perspective, our net leverage stood at 1.4x at the end of June.

As highlighted last quarter, in April, we were pleased to extend the maturity of our senior secured revolving credit facility by over two years to April 2028. We also are pleased that Kroll affirmed our investment grade rating in June. During the quarter, we repurchased approximately $2.3 million of stock, which had a $0.01 accretive impact on NAV per share. This concludes our prepared remarks. operator, please open up the call for questions.

Operator (participant)

Yes, sir. At this time, if you would like to ask a question, please press the star key followed by the one key on your touchtone phone. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. Our first question comes from Arren Cyganovich with Citi.

Arren Cyganovich (Director and Senior Analyst)

Thanks. Maybe you could just talk a little bit about how your conversations with equity sponsors are right now? Are you seeing any kind of loosening up in terms of, you know, increasing activity? I know it's August now, so I imagine seasonal slowdown happening, but just in general, relative, you know, since we have some better lender-friendly cycle of terms today.

Tanner Powell (CEO)

Sure. Thanks for the question, Arren. In terms of, I'll try to handle it in two aspects. As it relates to, I think, which is primarily what your question is getting at, in terms of overall activity, notwithstanding the, you know, the kind of the summer doldrums which we notably encounter in, in August, we are seeing a modest tick-up, you know, from earlier in, in the year, you know, off of a, a relatively low base. I think that, you know, there's a Bain report, Bain Capital report that came out that said, LBO volume was down, you know, 50% in the second quarter. We're seeing a modest uptick, in a more and a greater willingness to engage from LBO sponsors.

The second aspect of our conversation of sponsors, you know, relates to, you know, those companies where either, you know, they're trying to do something strategic and/or things are, are moving sideways. We continue to see a very healthy level of support from the sponsors. In particular, in this type of environment, one of the ways that sponsors are electing to try and counter, you know, the bid-ask spread, if you will, in terms of, you know, expectations of multiples, is by completing add-on acquisitions. That dialogue has been very, very healthy and shows, you know, continued equity support for the underlying borrowers.

Arren Cyganovich (Director and Senior Analyst)

Thank you.

Operator (participant)

Our next question comes from Kyle Joseph with Jefferies.

Kyle Joseph (Finance Equity Research Analyst)

Hey, good afternoon. Thanks for taking my questions. Just on the portfolio yield side, obviously, you've-- it's been expanding. You know, how much of that is base rates, and how much of it is, is spread movement? I know you mentioned it's kind of- still kind of a more lender-friendly environment out there.

Tanner Powell (CEO)

Yeah, thanks. Thanks, Kyle. In terms of the spread, let's just talk spread to, to help you disaggregate it there. In the quarter, we deployed at 681 basis points and a OID of just over 2.5 points, which reflects what we've seen for, for a number of quarters, which is a very attractive, environment for private credit lenders. Notwithstanding the downdraft in an M&A, private credit is able to service a disproportionate share of M&A that's getting done. More broadly, against that backdrop, it continues to be, lender-friendly.

To my response to Arren's question, you were seeing, you know, if I were to, you look at the deals that are being screened today, there might be a slight tightening in terms of spread as, you know, M&A picks up and people are feeling better, you know, about prospects, and/or there is some level of stabilization which is enabling your sponsors to make better decisions and/or risk appetite has improved as we get further from the some of the stress that we saw earlier this year. Not to say that, you know, all, all has been mitigated, but generally speaking, banks and markets are feeling, you know, a little bit better, you know, relative to, you know, what was a relatively low base for much of the first half of the year.

Kyle Joseph (Finance Equity Research Analyst)

Very helpful. Thanks. Then one follow-up for me. You mentioned some of the banking volatility negatively impacting deal flow, but, you know, stepping back from a, from a longer-term perspective with, you know, potentially higher capital requirements at banks, you know, do you see that as a longer-term opportunity for MidCap Financial, but also the BDC sector as a whole?

Tanner Powell (CEO)

Absolutely. I'm sorry, I should have drawn the distinction there. I think, Kyle, when we see periods of volatility, which in this case earlier this year happened to be related to banking stress, there was more broadly, you know, a greater reticence to transact. It wasn't necessarily a function of whether banks were able to provide that financing or not, but you just saw, you know, reduced volumes which were more connected to, to volatility and had less to do on whether or not the banks were, were providing it. As we and our peers have stressed, and we are huge believers in, we continue to benefit very much from a secular trend that has private credit taking share from the banking system as we roll forward and expect that to continue.

Kyle Joseph (Finance Equity Research Analyst)

Got it. Thanks very much for answering my questions.

Operator (participant)

Our next question comes from Sean-Paul Adams, Raymond James.

Sean-Paul Adams (Senior Equity Research Associate)

Hey, guys. I think you guys shared some light on the amount of companies you guys have that are below a 1x interest coverage ratio. Do you guys have the exact numbers about the portion of the total portfolio that those companies represent? Maybe share some thoughts on your total outlook for, you know, your general portfolio as interest coverage might continue to decline later in the year.

Ted McNulty (President)

Yeah, sure. Thanks for your question. I'll start with the outlook, you know, which is, you know, if, if base rates, to state the obvious, if base rates continue to increase, you know, our borrowers, as well as everyone else's borrowers, are going to face increased pressures. You know, we've run a number of different stress tests and scenarios around, you know, what those numbers, you know, could look like in, in different types of situations. You know, as to, you know, the existing portfolio, you know, the ones that we have that are, that are, you know, below 1x now, you know, in some cases, you know, sponsors are putting in equity to cover that. In other cases, you know, there's still sufficient liquidity, you know, and we're in active dialogue with those.

Sean-Paul Adams (Senior Equity Research Associate)

Got it.

Ted McNulty (President)

Thank you.

Sean-Paul Adams (Senior Equity Research Associate)

Thank you. I appreciate it.

Operator (participant)

Our next question comes from Melissa Wedel, JPMorgan.

Melissa Wedel (VP of U.S. Equities Research)

Good afternoon. Thanks for taking my questions today. First, wanted to start with some of the capital return activities and comments you made on the call. I know last quarter you talked about a potential special dividend at some point. Based on the comments you made today about the board continuing to evaluate sort of overearning and whether to pay that out versus retain it, I guess the question would be: is, is the board still thinking about a potential payout in the form of a special, or has that conversation evolved a bit to something else?

Howard Widra (Executive Chairman)

This is Howard. I think, you know, effectively, everything's on the table. You know, meaning, we have... It is a cornerstone of our goal for us is to have stable NAV. We are helped by that by overearning the dividend. You know, we also have, you know, both requirements, obviously, to pay out, you know, a certain amount of income, as well as sort of a desire, obviously, to return to the shareholders, you know, the, the, you know, some excess return. So, you know, the answer is, if you did this over a, you know, a longer period of time and we were out earning what is our core dividend, $0.06, $0.07 a share each quarter, as were the last two quarters, there's sort of room for both.

But, but it's a year-- it's, it's effectively a decision. I would say as much as the thing that sort of has been decided is a decision that we will sort of make at the end of the year. That, like, we'll, you know, we'll retain it for now, and then make a decision in a year about the size of what we may or may not do. I know that's not that definitive, but we're just sort of trying to like, you know, balance all things.

Obviously, if, if, if base rates continue to go up or, or even they went up in July, obviously just now, and, you know, and our fee income builds off even, you know, a very low base, we could even out earn, you know, the dividend by even more, so then there's even more, more room for, for, you know, both options.

Melissa Wedel (VP of U.S. Equities Research)

Okay, understood. I appreciate the delving into the framework that way. It's helpful. In terms of the share repurchase activity that you did, noticed that, you know, obviously it picked up, I think the last repurchase activity was about a year ago. As we think about, you know, moving forward and the capital allocation choices that you have in front of you, you've got a really attractive investment environment. You've got net leverage, you know, kind of where it is, I think towards the midpoint of your target range, if I'm looking at this right. You know, how should we think about you guys evaluating those opportunities for, you know, appetite for additional share repurchase versus, you know, deploying capital into an attractive environment?

Howard Widra (Executive Chairman)

Yeah, I mean, you know, the buying back of shares is a, is definitely a function of the things you said. Obviously, you know, how levered we are and how much capital we have, but more importantly, is comparing it against alternative investments. You know, we bought back those shares much earlier in the quarter at markedly lower prices than we're at today. You know, which changes sort of the return on that buyback multiple hundreds of basis points. It does change that metric. We're always looking at it. Obviously, if yields on assets or opportunities went down, that could change the appetite at this price because we still think that it's a good value.

When there are these lending opportunities at, at, at this level, based on where we've traded to now, you know, that balance is different. I think the answer is, we will buy back shares when it is clearly accretive to the shareholders versus all other options, right? Paying, paying dividends, making a different loan, delevering. And we felt that was the case at the, at the level we were able to buy shares very early in this quarter.

Melissa Wedel (VP of U.S. Equities Research)

Thank you. That's really helpful.

Operator (participant)

Just a reminder, to ask a question, please press star one. Our next question call comes from Paul Johnson, KBW.

Paul Johnson (Equity Research Analyst)

Yeah, good evening, guys. Thanks for taking my question. I guess just with, you know, everything, you know, that's occurred, you know, I guess in the first half of this year, and based on kind of what you're seeing from sponsors, you know, behavior, and appetite for deals today, do you think that we've reached or maybe we're approaching an inflection point, you know, in terms of just kind of risk appetite from sponsors? You know, if that is the case, I guess, you know, what do you guys kind of expect for the remainder of the year and, and maybe more so like 2024? Are you expecting a big year or just kind of a, a, a slower recovery to, to normalization?

Tanner Powell (CEO)

Yeah, sure. Thanks, Paul. Let me make a quick comment before opining on your question. I think one of the parts of our story that we try to stress quite a bit is that, you know, we're $2.4 billion of a $30 billion business, and that affords us a nice strategic advantage in that in any given quarter, there is plenty of volume. As we called out in our prepared remarks, MidCap Financial, the broader MidCap Financial, the Bethesda MidCap Financial, did $4.4 billion of originations in, in the given quarter, and that gives us a dynamic where we're less sensitive to the ebbs and flows in deal volume.

You know, in terms of, you know, the inflection point, you know, what we hear from sponsors in our discussions, and not to give you a half answer by any stretch of the imaginations, but what we have seen, while there is some volatility, the dispersion, you know, from the, you know, has been reduced, and there's some modicum of, you know, stabilization. While things were, and that's not to say that no one's discounting the potential for higher rates.

At least being able to say that I've got something that's unlikely to go up materially from, from here has enabled, you know, sponsors when they digest the implications to the, the next buyer's ability to pay, particularly if it's a sponsor-to-sponsor buyout, that enables, you know, you know, models to be able to be run with a greater degree of confidence, and precision. I think that's the impetus currently, as well as also, you know, some distance from the, you know, the stresses that we saw earlier in the year, as well as some upside to, you know, economic trends.

It, it would be, it would be very premature to, to call, you know, the, the inflection point as data on the, on the, on the, you know, on the front lines is, is, is, is changing, but certainly, you know, some modicum of, of, of, of, of reprieve there, and that's what we've sort of seen in the kind of post, quarter end period with, with, with some modestly higher M&A volume and activity levels.

Paul Johnson (Equity Research Analyst)

Got it. Thanks for that. I understand, it's always difficult to predict. My other question is just a little more specific to MERX. I'm, I'm trying to kind of understand, you know, as, as I do understand, these are obviously fixed, fixed rate, you know, fixed payment leases on the underlying aircraft. You know, this is obviously a portfolio company that's, you know, in, in runoff with you guys. You know, in terms of aircraft leasing, comparable lease rates, I guess, is how I would term it. You know, for any sort of borrower in the market, what are the current, I guess, set of comparable rates that are available to, to lessees?

What I'm sort of getting at is, are any of these borrowers, you know, when they go to renew leases, or I don't know if it's possible to refinance leases, are these being done at higher fixed payments? You know, is that driving a longer average life of the assets, you know, pushing out that sort of termination date? I'm just curious how that works.

Tanner Powell (CEO)

Yeah, absolutely. Well, well, well, what could be a very long, long answer, I'll try to be succinct here. And first and foremost is, you know, with respect to the assets that we have in the, you know, in the books today, yes, they are fixed leases, but we have fixed, you know, debt, costs against those. So then as you play it forward and we look at kind of a next buyer analysis, or we look at transitioning those leases, you know, ultimately, a plane is an economic instrument utilized by airlines to, to make money. In the same way, you see, you know, plane tickets going up, to, to, you know, kind of recover the, the broader, increase in interest rates.

Ultimately, because of the long duration of a lot of leases, the, you know, there's a, there's a lag there, maybe even more significant than what you'd otherwise see in, in maybe the leveraged loan market. Notwithstanding, that, that, that does adjust, and you will see that, you know, become, you know, reflected in how those the, the, the lease rates. One quick comment also, one of the, the aspects that gives us, some, some cautious opt- optimism in terms of reducing our exposure in MERX right now, is that it is, generally speaking, a, a good yield environment for leasing companies. The increase in demand is well, is, is well documented, and at this juncture, actually, domestic, revenue passenger miles are actually above COVID levels.

International is, is, is lagging slightly, and overall, we're at 96%. Importantly, with Asia having recently come back online, we would expect, you know, increases in demand there. On, on the other side of the equation, in terms of supply, we continue to see issues with Airbus and Boeing to deliver significant amounts of lift. As a result, you know, put aside the question you asked about, you know, lease rates and interest rates. Notwithstanding, we're seeing a healthy environment for lease rates and leasing on account of those supply-demand dynamics, which we, we hope will support our disposition efforts at MERX and to reduce that exposure.

Paul Johnson (Equity Research Analyst)

Thanks for that. I appreciate that. It's an interesting dynamic, and, obviously, this conversation could go on a lot longer, but, appreciate the abbreviated answer, and that's all for me.

Operator (participant)

Great. Our final question comes from Kenneth Lee, RBC Capital Markets.

Kenneth Lee (VP and Senior Equity Research Analyst)

Hey, good afternoon, and thanks for taking my question. Wasn't sure whether this was discussed already, but wondering if you could just talk about any amendment activity you've been seeing in the portfolio, whether they're just routine or whether they're out of the ordinary. Thanks.

Ted McNulty (President)

Yeah, sure. The activity level on the amendment side of things has not ticked up materially. We do have, you know, most of our borrowers and most of our transactions, you know, have a set of covenants in them. When borrowers come back and, you know, want to grow, as we've mentioned before, they're looking to do accretive acquisitions, or, you know, if there are things where covenants are getting tight and sponsors want to be proactive, you know, that brings us to the table to have those discussions. Our stance when, when we've been doing that, you know, is looking to, you know, de-risk, you know, and/or get enhanced economics around it.

You know, if, if a sponsor is, is looking for additional cushion on a leverage covenant, for example, you know, we're going to put-- we, we may grant that cushion, but then we're going to have step downs. It also provides the opportunities for fees, and we can also, you know, look at the at the spreads as well. You know, the, the bigger picture is, you know, we have covenants, so we are in dialogue. You know, the tone and the pace of amendments, you know, has not increased, materially, you know, as kind of at the same pace as it has been over the last several quarters.

When it does occur, you know, we view that, you know, as an opportunity, as well to either de-risk or enhance the economics.

Kenneth Lee (VP and Senior Equity Research Analyst)

Gotcha. Gotcha. Very helpful there. And, and then just one follow-up, if I may, and, and this is just a, a follow-up question from, from an early one, about originations. Given that, that you see a lot of the potential deal flow from, from the broader MidCap origination platform, and perhaps you're a little bit less dependent upon deal, deal flow there or M&A activity. Would it be fair to say that, that the key constraints to originations over the near term would be more on the, you know, the underwriting, finding the appropriate deals, the appropriate returns, leverage constraints, more so than the broader industry trends? Thanks.

Ted McNulty (President)

Yeah. Yeah. I mean, as we've mentioned, you know, MidCap closed on, on over $4 billion of new commitments in the last quarter. You know, we get to look at those, look to see what fits, you know, into our portfolio from a diversification standpoint, and, you know, obviously from, from a yield and structure standpoint. In terms of constraints to new activity, you know, it's certainly not the top of the funnel, because, because we get that via MidCap. What we've, you know, continually, you know, expressed in terms of leverage, you know, is a range of 1.4x-1.6x, and a desire to stay at the lower end of that range.

So, you know, you've kind of seen us in between 1.4x and 1.45x, you know, over the last several quarters. And so as we think about deploying into new capital, we're balancing, you know, our, our desire to be in that leverage range, you know, with the attractive opportunities that are out there.

Kenneth Lee (VP and Senior Equity Research Analyst)

Gotcha. Very helpful there. Thanks again.

Operator (participant)

We have no further questions in the queue at this time. I would now like to turn the call back over to today's speakers.

Tanner Powell (CEO)

Thank you, operator. Thank you, everyone, for listening to today's call. On behalf of the entire team, we thank you for your time today. Please feel free to reach out to us if you have any other questions. Please have a good evening.

Operator (participant)

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