Q3 2021 Apollo Investment Corp Earnings Call
Ladies and gentlemen.
Peter.
The conference is scheduled to begin momentarily until that.
So they can be placed on music hold thank you for your patience.
[music].
Yeah.
Good afternoon, and welcome to Apollo Investment Corporation's earnings Conference call. What the period ended December 31 of 2020.
All participants.
Placed in a listen only mode.
Well the open before the question that answer session. Following the Speakers' prepared remarks, if you would like to ask a question at that time.
It's simply press star one on your telephone keypad, if you would like to withdraw your question press the pound key.
Now I'll turn the call of where two of Elizabeth session Investor Relations manager for Apollo Investment Corp.
Thank you operator, and thank you everyone for joining us today speaking on today's call are Howard maker of Chief Executive Officer, Tanner Powell, President and Chief Investment Officer, and Greg <unk>, Chief Financial Officer, I'd like to advise everyone that today's call and webcast are being recorded. Please note that there of the property of Apollo investment.
And that any unauthorized broadcast in any form is strictly prohibited information about the audio replay of this call is available on our earnings press release.
I'd also like to 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 forward looking statements involve risks and uncertainties, including but not limited to statements as to our future results our business prospects and the prospects of our portfolio of companies you should refer.
Our most recent filings with the SEC for risks out of playwear business and that may adversely affect any forward looking statements. We make we do not undertake to update our forward looking statements or projections of what's required by law.
The pain copies of our SEC filings. Please visit our website at Www Dot Apollo I E. The outcome.
I'd also like to remind everyone that we've posted the supplemental financial information package on our website, which contains the information about the portfolio as well as the company's financial performance.
At this time I'd like to turn the call over to our Chief Executive Officer Howard Mitra.
Thanks, Elizabeth and good day.
Good afternoon, and thank everyone for joining us today.
I'll begin today's call with a review of the progress we've made repositioning our portfolio over the past year, followed by an overview of the December quarter, including a review of our financial results. Following my remarks Channel will review our investment activity for the quarter and provide an update on sort of thing.
Greg will then review our financial results in greater detail and provide an update on our liquidity position. We will then open up the call. The questions. During today's call, we will be referring to some of the slides in our investor presentation, which is posted on our risks on our website.
Have you said previously we have been very focused on improving the quality of our investment portfolio and despite the challenging environment. We continue to make significant progress towards this objective in calendar year 2020, we continue to reduce our exposure to non core and legacy assets, which are higher on the risk spectrum non core and legacy assets declined from 12 per cent of the portfolio a year ago.
Two 8% at the end of December on the fair value basis, we continue to improve the quality of our core corporate lending portfolio as evidenced by our higher exposure to the first lien loans and improving credit metrics first lien loans increased from 82% of of the corporate lending portfolio a year ago to 86% at the end of December 2nd lien loans decreased from <unk>.
17% of the corporate lending portfolio to 13% over the same period the weighted average net leverage of our corporate lending portfolio was $5. Three one times at the end of December relatively unchanged year over year, despite the more challenging environment and the weighted average of tablet attachment point decline from <unk> nine times, a year ago to six time.
At the end of December as we look ahead the calendar year 2021, we believe our corporate lending portfolio will continue to perform well given these credit quality metrics. We will continue to focus on monetizing our remaining non core assets regarding merck's aviation our aircraft leasing portfolio of company. We believe our aviation team has the experience of skillfully navigate the.
Unprecedented challenges in the industry.
The attitude of the true Corona virus pandemic.
Moving to the quarter, specifically as mentioned on the last call, we entered the quarter with visibility into a meaningful amount of repayments as expected net leverage declined significantly from 1.56 times at the end of September the 1.43 times at the end of December driven by a strong net repayments as well as the slight increase in stockholders' equity.
Importantly, repayments during the quarter included investments that we've been seeking to exit including non core assets and second lien investments given the reduction in AI vs. Net leverage we have begun to shift our focus to new investment activity as we continue to manage our existing portfolio. As a reminder, AI. The operates as part of Apollo is broader.
Direct origination business, which has over $30 billion of commitments under management. So although ANV has been focused on reducing leverage for the past the past few quarters. The broader platform has remained active the direct origination platform close more transactions in the month of December than any month in its history.
Shifting to the portfolio, our corporate lending portfolio, which consists primarily of first lien floating rate loans to companies in less cyclical businesses continues to hold up relatively well as we continued to recoup some of the losses recorded during the March quarter over the past three quarters, our first lien corporate lending portfolio has recovered approximately $32 six.
<unk> million or <unk> 49, representing 62% of losses recorded in the March quarter, We believe the performance of our corporate lending portfolio. During this challenging period demonstrates its resiliency and quality the corporate lending portfolio, which represents 79% of the total investment portfolio is the 86% first lien of 100 per cent.
Floating rate and the 88% sponsor backed we also believe that we are seeing some stabilization of our investment in merck's, our aircraft leasing portfolio of company, which recorded a slight net gain during the period Tanner will discuss <unk> in greater detail later during the call. The repayment of one of our renewable investments also resulted in a net gains during the period our oil invest.
Spin all of our oil and gas investments had a net loss during the period in aggregate there was a $4 9 million net gain on the total portfolio during the quarter Slide 16 in our Investor presentation shows the game last night strategy over the last four quarters.
Moving to our financial results net investment income for the quarter was <unk> 43 per share, reflecting a smaller portfolio, giving given our net sales and repayments, partially offset by an increase in fee income compared to the prior quarter. In addition, given the total return feature in our incentive fee no incentive fees were accrued during the quarter net.
Asset value per share at the end of December was $15.59 of 15 cent or 1% increase.
<unk> sense of the increase was attributable to net gain on the portfolio and seven cents was attributable to retained earnings excluding the <unk> supplemental distribution recorded during the quarter NAV per share would have increased one 3% during the quarter.
Turning to our distribution as discussed on our last few call calls in addition to our quarterly base distribution. The company's board expects to declare a supplemental distributions due to the amount to be determined each quarter for this quarter. The board has declared the base distribution of <unk> 31 per share and the supplemental distribution of <unk> <unk> per share payable on April five 2020.
One to shareholders of record as of March 19th 2021, with that I'll turn the call over to Tanner to discuss our investment activity in our portfolio.
Thanks, Howard beginning with the market environment activity picked up during the quarter due to pent up demand as companies rush to close deals before year end. Despite the increase in activity of the environment remained competitive credit documents structures and pricing are close to if not at pre COVID-19 levels that said private credit continues to be a solution of choice.
This for many borrowers.
Moving to AI and vs activity, we were selective investors during the period, given our focus on reducing our leverage new corporate lending commitments for the quarter were 108 million across 13 companies for average new commitment of $8 3 million of 100% of these new commitments were first lien floating rate loans, 92%.
Were made pursuant to our co investment order of the weighted average spread on these new commitments was 598 basis points. The weighted average net leverage on new commitments was 4.4 times total sales and repayments were relatively strong during the quarter sales were $18 million repayments were $185 million and grocery what the revolver paid.
<unk> were $85 million for total exits of $287 million net repayments for the quarter were $130 million, including 33 million of net revolver Paydowns. Notable repayments during the quarter included our $39 million first lien position and Wright medical are $31 million second lien investment in <unk>.
Allergies and of $14 million Paydown from Amp Solar group of noncore renewable energy investment, which resulted in a net gain of approximately $5 6 million during the quarter.
As Howard mentioned, given our current leverage we have begun to shift our focus to new commitments just as we are seeing a pick up in overall market activity looking forward, we will continue to focus on reducing our exposure to non core and secondly investment.
Turning to the portfolio of composition, our investment portfolio had a fair value of 2.48 billion at the end of December across 143 companies in 27 industries. We ended the quarter with core assets, representing 92% of the portfolio of non core assets, representing 8% first lien assets represented 80.
The 6% of the corporate lending portfolio, the weighted average spread on the corporate lending portfolio was 633 basis points. The weighted average attachment point was <unk> six times.
And the investments made pursuant to our co investment order of where 80% of the corporate lending portfolio at the end of the quarter moving.
Moving to credit quality, while we continue to see some need for covenant relief within our portfolio. We did see a decline in the number of amendments during the quarter, we placed one new investment on non accrual status during the quarter, our second lien investment in ambrosia buyer or trademark was placed on non accrual status. The company is a distributor of foodservice equipment and supplies.
In North America and has been struggling during the pandemic as its restaurants customers were forced to close.
We continue to receive scheduled cash interest payments from the company, but we'll be applying those proceeds to the amortized cost of our position.
At the end of December investments on non accrual status represented 155 million or five six percentage of the portfolio of cost and $28 million of one 1% at fair value.
In addition, we wrote off several investments that had been on non accrual status and which had a total cost of $7 9 million in zero of fair value.
Moving to Burkes during the December quarter, the fair value of AI and these investment in Merck's increased $1 1 million or of <unk>, 3%.
The slight increase quarter over quarter reflects the lease extension and roofing refinancing of the Mer.
<unk> freighter on attractive terms, reflecting the current strong demand for cargo aircraft in the post COVID-19 market, particularly offset.
Partially offset by a decrease in the fair value of certain of Merck's as passenger aircrafts reflective of the ongoing impact of the pandemic is having on passenger air travel.
Similar to other industry participants many of Merck's lessees were requested rent deferrals Andrew of rent reductions during the during the pandemic and the first part of the calendar year. Most of Merck's lessees have exited their deferral periods and have begun to repay prior rents in line with the amended lease terms, we believe merchants portfolio compares favorably with.
The other major lessors in terms of asset geography age maturity and lessee diversification merck's its portfolio of skewed towards the most widely used types of aircraft, which means demand from merck's as fleet is anticipated to be resilient.
The sleep consists primarily of narrow body aircraft, serving both U S and foreign markets.
At the end of December <unk> Zone portfolio consisted of 81 aircraft 10 aircraft types 40, lessees in 26 countries with an average age of 10 five years.
She is fleet includes 78 narrow body aircrafts to wide body aircraft and one freighter.
Mercury is focused on remarketing aircraft that are due to come off lease in 2021, either via extensions with existing lessees or re leasing to other airlines on long term leases at the end of December eight aircrafts were scheduled to come off lease in 2021 extensions for two of the eight aircraft have already been executed four aircrafts are currently under negotiation.
Or for extension or sale of.
Mercury's actively remarketing the remaining two aircrafts.
As Howard mentioned, our aviation team has the experience of skillfully navigate this period of market stress and the requisite capabilities to mitigate potential adverse outcomes. Additionally, the Apollo aviation platform will continue to seek to opportunistically deploy capital in the face of widespread uncertainty and market disruption to be clear merck's is focused on its existing poor.
Folio and not seeking to materially grow its balance sheet portfolio. However growth in the overall of Apollo aviation platform will inure to the benefit of merck's as the exclusive servicer for aircrafts owned by the other Apollo funds.
As discussed on prior calls Merck's has built the best in class servicing platinum platform and acts as a servicer technical adviser for aviation assets assets across the broader Apollo platform with that I'll turn the call over to Greg who will discuss the financial performance for the quarter.
Thank you Tanner and good afternoon, everyone I'll.
Beginning with the statement of operations total investment income was $54 four.
$4 million for the quarter, reflecting lower interest income due to a smaller investment portfolio, partially offset by an increase in fee income and a slight increase in with prepayments fee income increased to $1 2 million compared.
Up to $200000 last quarter prepayment income was up slightly to $2 4 million compared to $2 million last quarter.
Dividend income was $1 1 billion essentially flat quarter over quarter, the weighted average yield at cost on the corporate lending portfolio was seven 8% essentially unchanged quarter over quarter expenses for the quarter were $26 1 million down approximately $1 million.
Warner over quarter, primarily due to lower interest expense and lower management fees interest expense declined due to the net sales and repayments.
Within the portfolio the weighted average interest cost increased slightly quarter over quarter due to the decreased utilization of the credit facility given our deleveraging management fees declined due to the decline in the average portfolio.
No there was no incentive paid during the quarter.
Net investment income for the quarter was 43.
As Howard mentioned net leverage at the end of December was 143 times down from 1.56 times at the end of September due to a $130 million net sales and repayments.
During the quarter the increase in net assets was driven by $4 9 million or eight cents per share.
Of net gain on the portfolio.
And $4 8 million or <unk> <unk> per share of retained earnings as net income was in excess of the distribution of recorded during the period.
Within our supplement on page 16, we have broken out the net gain or loss by strategy, our corporate lending portfolio had a net gain of $11 million or <unk> 17 cents during the quarter Merck had a gain of $1 1 million of <unk>.
Non core and legacy assets at a loss of $7 million of 11 cents during the quarter.
I appreciate her at the end of December was $15 59, tenths of 1% increase quarter over quarter.
As previously announced during the quarter, we extended the final maturity of our $1 8 billion senior secured revolving credit facility by two years.
The two ended December 2025.
There were no changes to pricing or advance rates in connection with this extension we greatly appreciate the support from our lending syndicate.
With this extension moving.
Moving to liquidity as the pandemic began more many of our portfolio of companies drew on the revolvers or in the March quarter to shore up liquidity.
Many of these drawdowns were repaid in the June quarter and repayments continued in the in the December and December quarters mid.
The mid cap is the agent from nearly all of our revolvers and delayed draw term loan commitments and is actively monitoring every commitment for context.
Mid cap leveraged loan revolvers, where 23% utilized pre pandemic revolver utilization peaked at 70% in mid April and has since declined to approximately 27% today.
Given the reduction of many aam's net.
Net leverage and improved.
Quality of our investment portfolio, our liquidity position continues to strength at the end of the quarter. We had 1.5 billion of total debt outstanding a decrease of $88 million quarter over quarter and a decrease of $289 million since the end of March at the end of December.
We had $330 million of immediately available liquidity up 62 million quarter over quarter and of $107 million. Since the end of March also at the end of December we had 313 million of additional capacity.
The facility of 26 million quarter over quarter and $182 million since the end of March.
Moving to unfunded commitments, which we disclosed on page 18 of our earning supplement alright.
Our outstanding commitments at the end of <unk>.
December totaled $310 million of.
<unk> hundred revolver and bridge commitments outstanding 212 were available to borrowers and 99 million of.
The 310 were not available to borrowers availability is based on borrowing base limitations and other covenants.
There were no stock repurchases made during the quarter.
But we will continue to evaluate repurchasing purchasing of our securities as appropriate.
This concludes our prepared remarks.
And please open the call to questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw.
The question press the pound key.
The Q&A roster.
Your first question is from the Kyle Joseph with Jefferies.
Hey, good afternoon, guys. Thanks for having me I'm, taking my questions.
Just wanted to get of sensing and given the the Delevering you guys have done a good job doing there are you guys kind of backing back in investment mode or are there still some some assets youre looking to rotate on your balance sheet.
Yes.
The boat.
We are we are open the business as we.
We said, we're doing a lot of volume across the platform. So we're now sort of selecting the assets.
That fit our strategy and doing those and we continue first of all we've always we've been in a rotation anyway from the second lien in the non core but in addition, we're.
There is a reasonable sort of velocity across the portfolio of things paying off either opportunistically or strategically. So you know the ability to originate relatively regularly given where our leverage is a as you know.
Both the result of where our leverage came down too and also the fact that we continue to sort of have you know.
Pay downs across the portfolio.
Got it and then one follow up from me in terms of the credit performance. It sounds like some some puts and takes in terms of non accruals, but in the in the corporate lending portfolio can you give us a sense for.
A revenue and EBITDA growth trends youre seeing in the fourth quarter and how that compared to the third quarter and then just discuss how you know them.
Men activity trended the close at the end of the year Yeah sure. So.
In terms of Q3 versus Q4 definitely an acceleration there has been Kyle as will not come as any surprise. There is the delineation of those that are affected and those that the that arent and and and.
Obviously, the the different fortunes are as a result in terms of amendment activity. There was the decline we do quote numbers that are based on total amendments and we try not to two of them too.
To impugn kind of what what is actually really the we incur.
<unk> everything of that number but if you look at the you know the amendments that are indicative of stress that has gone down which it should in any event because likely those companies that had required in the amendment have already undertaken one but certainly.
Certainly of decline is a good sign in that no no further less further stresses is is materializing.
Got it that's it from me thanks for answering my questions.
Your next question is from Casey Alexander with Compass point.
Hi, good afternoon, and thanks for taking my questions I have two questions one if you're back in investment mode.
Does that also mean that the company may be back in two of position where it can start to become active on the share repurchase program again.
Oh, yeah, Okay, sorry, if I can ask both the once the the answer the answer is yes that that stock repurchase plan is open obviously as we said before it sort of depends on the coffee you know a combination of things, which is sort of R. R.
The amount of the amount of liquidity, we have added given the amount of time and really where the stock's trading at the.
But it continues to be and I think we've been through this on the call before obviously you know a good return on the stock. So you know.
There were there were a number of things obviously working through at the end of the year in terms of wanting to get our bank facility Diamond getting our leverage down, but yes, I mean, we have a stock repurchase plan that is approved in the open and we will continue to take advantage of it and use it appropriately.
Going forward.
Alright, and secondly, and this question May sound harsh but.
I think it's a fair question for investors to ask and if I. If I look at page 16 of your schedule.
And look at the losses that took place in the March quarter, and what the gains and losses had been since then.
<unk> is one of the very few Bdcs, where NAV is lower than where it was at the end of the first quarter, whereas the the vast majority of the universe has had at least some sort of bounce back if not a substantial bounce back and so to what extent are some of the losses that have been taken over the last 12 months, which is your <unk>.
This shows the $3 of share would you say are still recoverable at this point in time.
So there's a part I.
I agree totally fair question so.
So feel free to ask.
The more fun anyway.
You know there's three there's three categories of of of the.
Sort of the write downs during the.
One is the corporate portfolio, which we regained back I think we said 62% of the losses attributable to that and we think you know the the.
The the vast majority of that is still recoverable like there is you would see those loans on non performing or why all of our watch list if not.
And so in their particular names that debt you know are that make up sort of the bulk of still of that GAAP that we feel pretty good about.
It's merck's, which is responsible for a reasonable amount of that in merck's. We also believe that you know that we have we have you know hit a pretty conservative level of evaluation of how we're running it.
Tentative on that just because the pandemic is not over and airlines.
And how airlines are going to do going forward is not set but you know assuming a rig a recovery over time.
This next amount of time without picking a date.
We think that you know our plane most of the airlines we work with have worked through stuff we are.
We have things back on lease we have a sense of where sort of the cash flow is going to go and we think that that's positioned for some of that recovery.
The last thing that drove a bunch of it was the oil and gas was written down quite a bit of where the commodity you're one of the oil and gas and the.
And carbon free which is commodity driven those.
Those both have the idiosyncratic issues about them Ah Ah you know.
And and also commodity exposure and its long term commodity prices are.
And so the.
Those are.
People have historically and certainly you Casey had viewed those as you know not worth much anyway, regardless of where they are valued.
And and we.
We hope we think we value them as best we can given the inputs, we've had but that that that you know our.
Our view has always been exiting those as best we can we'll give more clarity and you won't have to ask that question. Because you wouldn't have the volatility. So if I can just return back to your initial question I think if you looked at our corporate book, we would compare very the corporate business would compare very similarly to.
Of our competitors.
Okay.
Alright, thank you for debt.
No I understand that with debt. The last 12 months in the corporate book is 35 cents a share out of $3. So I'm just trying to figure out how much of of the rest of may be realizable and look I understand oil and gas as the commodity oil in the ground is still oil in the ground I actually I'm more concerned about how about merck's aviation.
Does the planes on the ground become older planes on the ground and they depreciate. So you know I the.
That's where I'm wondering kind of what's recoverable there yes. So so.
The tenant you spent some time of that and I do think it's relevant to spend a lot of time on it because I agree obviously, that's that's something that people need to focus on value where aviation is.
The.
The expected depreciation of these planes goes into the evaluation and quite tight if time passes by day depreciate and that's built into the valuation of relatively meaningful discount rates that gets so theres two portions of the valuation of what the planes of work down the road.
Which which go down over time and what are what our cash flows are off the planes and if those cash flows change because of our leases change the those things change.
The the stability of that value is driven by like a bunch of things like ultimately.
What do you what are these planes going to be worth at the end of the day and the fact that we had sort of narrow body planes that consistently stay in place.
<unk> helps that and you've even seen those values stay up even throughout this crisis the diversity of our of our lessors as well as our ongoing relationships across the Apollo platform with those less orders to continue to deliver value to them and have those strong relationships.
And then in addition, just the pure structure of remarks, which is that you know everything is not they are in separate pools of value of theres lots of them.
Theres cargo jets, there's some we own completely there is some of the securitization of servicing platform and so the diversity of those pools of value basically.
Basically of lessening the volatility of.
Lessen the volatility of the or the worst case scenarios as you work through it but theres no question that we you know we continue to need to see more visibility to the recovery for people to get complete comfort with that value. There. We feel like we are positioned to the to the.
We feel like we are positioned to recover from where we are today, but that could be wrong.
The timing.
Time will tell.
Alright, great. Thank you for taking my questions I appreciate it.
Yeah.
Your next question is from.
With Wells Fargo Securities.
Hi, everyone. Good afternoon, I'll actually ask a to continue on merck's just the small question.
I think.
10 of I appreciate the color you've been giving.
It sounded like the change this quarter was.
It continues to be stable and there's a lot of good things about the the value.
Of the residual value and such but some of the I think you said passenger.
Category caused the decline or maybe took away what would've been a bigger gain can.
Can you expand a bit on that just given.
Since you last talked you know the <unk>.
Pfizer of vaccine came out in the world looks a lot better.
Did something happen to passenger aircrafts broadly or was this of more.
Isolated incident in the portfolio.
Yeah sure happy to fan.
So the.
The I would I would answer that question by saying, yes.
Yes, the Pfizer vaccine amongst others is one thing that the market has been been looking through to you. When we look at that when we look at when we value the asset we're looking at.
A number of things, including near term cash flows and while things are broadly been in line with expectations. There have been some puts and takes I did mention that we're very pleased that many of our lessee customers came back online. After the initial deferral period, certain others are getting and and and.
Taking into account of that to your point offset some of the the gain that we saw from the.
The extension that we were able to get done with the the the freighter. So some some negativity there which in some ways does not comport with maybe a broader markets and their their faith in the vaccine I think from here I would call upon Howard's comment as well I think we are positioned to the extent that the.
The vaccine does the does start to pick up pace that will be of very good thing.
To state the obvious and then also with harp upon from a valuation standpoint.
The the lever we have with respect to incremental transactions that are the Apollo platform does as providing incremental rubber of revenue opportunity with no stress to the balance sheet of Indian merck's from the servicing revenues that we get that could help to buoy that valuation.
In the coming quarters in coming years.
Okay. That's helpful. Thank you and.
So I just thought one more higher level question.
On the net run off this quarter.
You know in the context of.
You Howard said, the the platform origination was very robust, but a little less so on the BDC.
It felt like last quarter that.
The that you were okay. You are more confident in your ability to deploy.
Given the progress and leverage you've made to at that point, obviously now you've made.
Progress, but was there.
If you agree.
Was there any change in leverage posture of this quarter.
Given my impression was last quarter that you were more more willing and able to.
<unk> engaged in the market just any commentary there yes sure good.
And no there is no no no change in the posture for.
For instance, I'll just give an example.
As we are within within our target now and we did mentioned last quarter that we wanted to get back into the market. You know for instance, one of the events that happened. This quarter was we had of second lien investment that got taken out by a broadly syndicated loan and the deployment is always it's not nest.
Sara Lee on the screws Theres of lead time to it and so it was I think that the the management.
Of cash and and and and that the sometimes idiosyncratic nature of of repayments. So youre right to ask the question, but you should not interpret it as a change in posture with respect to all of our leverage guidance or comfort level.
Okay. That's all from me very well thank you.
Your next question is from Melissa Wedel with JP Morgan.
Good afternoon.
One of the following up on the.
The repayment activity certainly the elevated in the last quarter I'm wondering if you have any visibility into all the.
Can you in the quarter ahead or several quarters ahead.
We do maybe not exactly at this level, but there is still.
Meaningful activity in the portfolio as you would expect in the normal course, we would the.
The corporate portfolio of the first lien portfolio should generally have an average life of three years. So that corp, corporate portfolio of normal environment should be paying off one two months or something like that.
Per quarter, and you know and we and I don't know.
Maybe like 125, something like that.
The market is starting to come back to that normalized behavior. So we do see like reads of whether it's exactly that amount of a given quarter, who knows but there is certainly some significant loans either set up to be repaid in the near future through sort of normal transactions.
As well as obviously as we've continued to say you know.
Trying to monetize R. R.
Our non core investments as best we can to get.
Get repayments there as well.
Yes, I mean, I don't think the amount of repayment activity. If you went through all of the quarters over the past three years.
You know against the corporate portfolio was such an outlier.
It was just.
It was just a robust quarter of activity. So it was more of repayments and we do expect to continue to see.
No reasonable velocity.
Okay.
Following up on that.
You are with them Leverages down, but also sort of within the range.
How do you think about balancing the trade off of.
Ramping new investment.
So if you're interested in doing versus what.
Moving back the gasoline from.
The dry powder.
So just locations or sort of operating.
Yeah. So one thing that I think is really important for us and sort of what we're trying to lay out we have to.
Sort of cross wins, one is our corporate portfolio, that's very predictable and understandable for everybody and we think has a history based on mid caps origination and the our history with the corporate portfolio of very solid and predictable.
And then we have these other assets.
Merck's and these these non core assets, which.
Or have more volatility to them, which is which is.
One of the challenges for investors on the corporate side one of the best things that we can do is have as many names as possible. So generally if we see of transaction, we'd like to be into we are more likely to toggle. The amounts we do than we are to decide whether the do it or not and then that can be more of a real.
Time decision based on sort of where we see actual repayments coming in in the next 45 days versus.
What new originations, we had and so.
We feel pretty confident about our ability to keep leverage within sort of the range of powers.
I was going to say like if it's if the if we can keep the portfolio in the range of a $100 million of show or so that's between one four and one five and we feel like we have pretty good control of that because remember like these deals are generally bigger the originated by the platform AAV can choose how much it wants to take and it can really choose real time up to closing how much of it wants to take.
So we have a pretty good capability so.
That's how we.
We you know we basically chose we want to continue to sort of diversify the portfolio choose the ones that fit best based on the yield profile, we want going forward and the credit risk, we werent going forward and we think we can we can continue to sort of <unk>.
<unk> all of that.
Even even as the opportunities even as the market fluctuates. It does feel like and I think you have.
Heard this probably from other people and we'll hear that more during the course of this quarter that the market is.
Returning to pre COVID-19 levels and so the.
The.
The disconnect in the market, obviously could come but is not where it's trending right now in the short term.
Thanks for taking my questions.
As a reminder, ladies and gentlemen, if you would like to ask a question at this time simply press Star then the number one on your telephone keypad. Your next question is from Ryan Lynch with K B W.
Hey, good afternoon, thanks for taking my questions the <unk>.
One of had was just around your guidance targeted leverage range.
Did you guys say when I look at that and compare that to your pre COVID-19.
The target range I mean, I think the upper end the.
The same or a little bit higher than that in the bottleneck is also a little bit higher so the little bit more of an aggressive leverage range today and you had pre COVID-19.
And of course, Hindsight's always 2020, but in your prepared remarks, you talked about.
Now beginning to it given that you've reduced leverage now beginning to shift focus to making new investment in this environment.
Anytime you also talked about the environment of investment today really returning to pre COVID-19 levels.
So because of your leverage level was so high coming into the downturn.
You guys had there really pause and we're net.
Sellers and asking of investment when the investment opportunities with the most attractive.
And now that the market has kind of returned to pre COVID-19 levels from term fees structure of this is now the time when you've got sort of point capital again so.
And part of that might've been you guys, having to hire the leverage target and operating at too high of leverage coming into the downturn. So.
I Wonder what your thoughts were on on that thought process and how do you guys consider keeping kind of of the.
The leverage range, that's even more aggressive today, then of watch pre COVID-19 when it kind of kept you on your heels during the last downturn.
So I don't know if I would agree with some of those characterizations, but let me let me sort of go through them. This was the.
This was around the leverage range, we said I mean I know there was something we were one three to one five and then we said one four to one six but we were always right around you know the one four to one five range being sort of the sweet spot and Thats still is sort of where we are I would say certainly right COVID-19 caused stress for <unk>.
People, but I would underline that we did not do a rights offering we had no liquidity issues and we were able to manage our portfolio of well through all of this despite what people's perception of would be and I think that is largely because of the type of portfolio. We had it all paid.
There werent concentrations in that corporate portfolio, and we were able to sort of get liquidity off that portfolio of when we needed it and I will also add.
I do agree with you obviously when you're when you get to a higher leverage and you have to stop investing you can lose an opportunity I don't believe we ended up losing that much of an opportunity. During this crisis because you didn't see any of our competitors even the ones that are under levered originate very much in the second or third quarter. So the.
Market was sort of paused because of uncertainty. So in this case and I think part of the reason we have been active this past quarter is that the opportunity is still there versus pre COVID-19, but it's just compressing from.
Where it was before so I don't think it maybe through some fortuity, but I don't think this was navigate.
Think the wave has navigated through was.
Necessarily like an indictment on where we were before so there is a question.
With regard to what should or what should our strategy be should we be at 125. So we always have dry powder, we always can take advantage of the disconnect.
We have said over and over that of our approach is we will have the highest quality most senior most diverse and most close to that corporate portfolio by the time you know everything is cleared out that the predictability of that and the stability of that of one four times we will.
Match by a long shot what many of our competitors do obviously, there's lots of people do really good job in doing niche things and do them well and so we think running at that level.
It will.
It gives us plenty of flexibility.
Uh huh.
And deliver sort of the value proposition to the investors good dividend return on their money.
With with real predictability and is consistent with what is effectively one of the few biggest origination platforms in the country. There is just lots of deal flow coming in is the ability to cherry pick that type of portfolio. So that's sort of our strategy.
I don't think this particular crisis.
Hit us poorly on that strategy.
Because I don't know if I've seen any other bdcs do the flip side of what you just said.
Yes.
Got it Yep Yep Yep I understand those are those are.
Some fair points with that.
The kind of pivoting a little day, returning back to merck's.
I know you said, you're not going to be super active as far as expanding merchant balance sheet.
But obviously you guys are looking at at.
And potentially expanding the debt.
Benefiting from from the servicing business you get manage you know there are other funds of airplanes of across the Apollo platform.
Are there any meaningful transactions or movements.
Regarding the servicing side in the calendar fourth quarter and what is specifically the debt.
What is your kind of as you sort of today outlook on the potential to kind of expand that part of the business. You know you know.
Call. It first half of 2021 calendar 'twenty 'twenty one.
So yes.
Yeah sure I'll take the Sun.
There.
We have amongst other opportunities we have a dedicated commingled fund debt we are in the process of.
Investing there have been.
Some additional deployment.
Well it is exits and you can think about exits as in certain cases as pulling forward some of those future.
Servicing revenues that you would you would otherwise get and so as it relates to outlook.
We are we value the what we have like in the ground today and we have significant unused capacity both in the fund that.
Is.
<unk> is the the dedicated servicer of that's a that's the aircraft leasing fund as well as also a significant opportunity to do things across the broader platform. So with just investing the capital that we have available to us additional opportunity to turn revenue to your question.
Yes.
Okay.
Thanks for that and then.
Greg I just have one last one per U.
These are two consecutive quarters.
With gains in the portfolio you guys, obviously still arent, earning any.
In spite of you see.
If we would hold the portfolio of constant today, no gains or losses going forward.
Do you of any estimate of when you think your guidance incentive fees would turn back on.
Yes.
You know what.
When we kind of look at it you'd be looking at the December.
<unk>.
You know this december quarter of 'twenty one.
That's why I would turn back on the part of it I don't think all of it would come back at that point kind.
The full back starting in 'twenty two.
Okay.
Okay.
That's all my questions I appreciate the time this afternoon.
Okay. Thanks, a lot.
Your final question is from.
Robert Dodd with Raymond James.
Good afternoon, and thanks for taking my question two questions. If I can the first one at the risk of beating the dead horse.
The about Moocs.
Can you give us any color on the weighted average lease left is three nine years.
How much meantime, instead of available on the aircraft and the.
The engines I mean, basically is the have enough cash flow within the portfolio that.
The the amongst can fund.
The funds from the shop visits too.
To refresh the engines or is the the risk depending on how many.
How long this the.
Lower passenger demand et cetera, et cetera of drags out that could be additional capital needs of books just to keep the the equipment fresh and pliable.
Yeah, sure Hey, Robert I'll, I'll take a stab at that and there are a couple of things there. So I'll try to remember each aspect of your question, but please.
Follow up if I don't hit it so in terms of let's talk about useful life right. You've got you rightly pointed out we have about four years left in terms of lease term right. But then you can also think about it in the context of our average age of plane is in around 10 years and the average life of a.
The passenger airline passenger.
Airplane excuse me.
His 20 years, so you've got a lot of useful life embedded in that in that asset.
As it relates to.
As it relates to what what what needs to be done in terms of.
Maintenance.
And maintenance overhauls to the planes.
Often times receiving.
Payments alongside the lease payments to defray those those costs from from our lessees and you know in many of the the instances we've had those amounts reserved which gives us the ability and then the other thing I'd say there is that when you take a when you invest in it.
Plain when you do the the maintenance overhaul and you take the the number of.
The remaining cycles.
That is something that is liquid debt you do generally get that debt that value back that can be whether it's in the form of an engine, where you can repurpose it somewhere else or moved the plane and so in addition to have any of that capital already reserved.
And in certain cases, so two also when you do invest that money as it is typically.
Do you can you can get the day you need it.
As liquidity and you can refurbish the plane.
And then I think the final.
Uh huh.
Alright, and I think you had one more question the I'm trying to trying to sort through all of that.
That's the.
That's very helpful. I mean, my only question Theres, obviously, you talked about reserves.
It is not necessarily the cash right.
So I mean talking about the cash flow, but I'm sure you accounts correctly with lizards et cetera, et cetera, but is that the cash flow to do that or would that be additional cash needs rather than reserves et cetera, because you're correct. I mean, when you. When you open one of these things you get something with value back.
They have the lease out of again, but it takes.
The cash flow to kind of fund that process, Yeah cool, yeah, excellent alright, and so when the reserves. The answer is in certain cases, we do actually have have the cash.
In hand to undertake that and then the other part of your question that the sorry now I'm remembering you asked the question about passenger levels and the way to think about it I think if you look more broadly you can look at aircraft leasing as having been certainly more resilient than the performance of the under airlines to state.
The obvious and so while certainly.
The ultimate value of these planes and residual value in particular as well as also in the interim in certain instances the ability for airlines to make these payments is obviously compromised and in the case of residual values could go down as it relates to you know where passenger levels get too, but it is it is more resilient.
Yet right in terms of yes, yes.
If you go out of business and it liquidates, but so long as those planes are flying you do have some modicum of increased resiliency relative to the airlines that it's important to understand in that context.
Got it I appreciate all of that Colin. Thank you second one if I can not to do with mix.
And obviously all of you said.
Your leverage is in your target range I mean, what what's your view of the unsecured market.
Bdcs have been to say the least open.
This year in terms of avail.
The ability.
Some of the lowest.
All in costs on the unsecured we've ever seen in the space.
You have relatively.
Not very very low, but but only.
20% of your debt stack is unsecured what's the the interest appetite if you will flow for taking that up or are you happy with that mix, where it is right now.
Greg.
I'll answer that Robert I mean, I think if you.
One we were able to.
You know move out the maturity of our senior credit facility.
The other percent support from our banks, so that that was very important to us.
Today, we're running at a cost of.
The combined cost of debt of 3%.
And we're very.
Conscious about that.
Where we are today, but also if you think we still have the.
On March 25 maturity.
Our unsecured notes.
So we are taking that there you know we know kind of within the next two years we.
We need to take advantage of.
Kind of refinancing part of that.
We today have enough liquidity under our credit facility.
But that's not really where we want to put it we do want to have.
A 25% to 30% of our capital other than equity and unsecured debt. So we will look to take advantage of that I think what we wanted to do.
It's the right size of the portfolio.
Get it to a point.
Get our dividends debt.
And manage the funds so that we can say as we look forward what is the best way.
Two is is merck's comes back on as you know some of the hour. If you look at our non recurring.
<unk> assets, we have $194 million of fair market value of assets and the earning a <unk> 4%.
So I think as we look at.
Our going forward, we're measuring all of those things.
And the impact of taking on higher cost debt.
But we will have to do some of that and we've talked to our banks about it the market is open for us.
And we're just balancing when we should do it.
Based upon a lot of different factors and our earning capacity within our portfolio.
Does that makes sense. It does thank you.
Makes a lot of assets.
Robert I think the other thing that Tanner.
Looking about merck's of little bit I don't mean to but we have you know.
We disclosed the season every year, we disclosed the merck's financial statements, we have reserved cash of.
Over $60 million for airplanes, and that's where there was from maintenance reserves that are in cash that.
So we have so those are the trapped in securitizations, but they are there to support.
The maintenance of those planes. So there is cash inside.
Merck's.
<unk> for your.
To your question Yeah I appreciate that it's just the I didnt get the financials once of yes.
Well I think we had 90 of them. The last time you saw it was 90 days. So it went down a little bit.
Thank you.
Okay.
There are no further questions in queue at this time I will turn the call back over to management for any closing remarks.
Thank you and thanks, everybody for listening to today's call on behalf of the team. We thank everybody for their timing of their continued to their continued support as we continue to navigate through this challenging environment. Please feel free to reach out to any of US. If you have any other questions hope everybody stays healthy and safe have a good day.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Of course.
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