FS KKR Capital Corp

NYSE:FSK

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to FS/KKR Capital Corporations Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note that this conference call is being recorded. At this time, Robert Paun, Head of Investor Relations, will proceed with the introduction. Mr. Paun, you may begin.

[Robert Paun, IR]

Thank you. Good morning, and welcome to FS/KKR Capital Corp.'s Third Quarter 2019 Earnings Conference Call. Please note that FS/KKR Capital Corp. may be referred to as FSK, the fund, or the company throughout the call. Today's conference call is being recorded and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued on November 7, 2019. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 30, 2019. A link to today's webcast and the presentation is available on the Investor Relations section of the company's website under Events and Presentations. Please note that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Today's conference call includes forward-looking statements, and we ask that you refer to FSK's most recent filings with the SEC for important factors that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's third quarter earnings release that was filed with the SEC on November 7, 2019. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website.

Speaking on today's call will be Michael Forman, Chairman and Chief Executive Officer of FSK; Dan Pietrzak, Chief Investment Officer and Co-President of FSK; and Brian Gerson, Co-President of FSK. We are also joined by Steven Lilly, Chief Financial Officer of FSK; and Bill Goebel, Chief Accounting Officer of FSK. I will now turn the call over to Michael.

[Michael Forman, Chairman & CEO]

Thank you, Robert, and welcome, everyone, to FS/KKR Capital Corp.'s Third Quarter 2019 Earnings Conference Call. On today's call, I will introduce a new addition to the FSK team and share some news regarding well-deserved promotions, and then I will discuss some of the key reasons we believe FSK is well positioned as a leading company in the BDC industry. I also touch upon our public policy work as it has been a topic of significant interest for many investors. Following my remarks, Dan Pietrzak will provide the company's perspective on the current lending environment and review our investment activity for the quarter. Brian Gerson will discuss our financial results for the third quarter, and then we will open the call for Q&A.

To start, I'm pleased to introduce Steve Lilly, who today became the new Chief Financial Officer of FSK. Steven brings a wealth of experience to the company as he most recently served for 13 years as the Chief Financial Officer of Triangle Capital Corporation, a publicly traded BDC that was sold to Benefit Street in Barings in 2018. At Triangle, Steven built the company's financial and operating infrastructure, oversaw listings on the NASDAQ in 2007, and the New York Stock Exchange in 2010 and led all corporate M&A and strategic processes involving the BDC. As CFO, Steven will partner with Bill Goebel who previously served as CFO, and who will continue with many of the same responsibilities as FSK's Chief Accounting Officer.

In addition, we are elevating Brian Gerson and Dan Pietrzak to Co-Presidents of FSK. The strength of the partnership between FS and KKR is due in large part to their leadership and commitment. Dan will also remain as the company's Chief Investment Officer. In addition, we recently announced the appointments of Drew O’Toole and Ryan Wilson as Co-Chief Operating Officers. Drew and Ryan have done a superb job contributing to the execution of our key initiatives. Todd Builione will step down as President of FSK, but will continue to serve as President of the Investment adviser and as a Director of the company. I will continue my capacity as CEO and as a director. I would like to express that all of these changes are part of a natural evolution of the leadership team and speak to the truly collaborative nature of the FS/KKR partnership.

Now turning to how we are positioned in the marketplace. Starting with the asset side of our balance sheet, we've made significant progress improving the diversification of investment -- of our investment portfolio, reducing our concentration risk, adding asset-based finance investments and leveraging our joint venture with South Carolina Retirement Systems Group Trust in order to participate across a wider range of KKR credit's robust investment pipeline. Our team continues to focus on older vintage credits as we position the portfolio for the future. As we look forward, we continue to be encouraged by the strong deal flow and disciplined approach to investing, demonstrated by KKR Credit platform.

As we have talked about on prior calls, we've also been focused on our liabilities and capital structure, and we believe we are well positioned with a strong maturity ladder, diversified sources of capital, reduced mark-to-market risk and a best-in-class revolving credit facility. All of these building blocks provide us flexibility to execute against our business plan.

Finally, we remain focused on positioning FSK as a best-in-class BDC. To this end, we have delivered on a specific quantifiable shareholder-friendly actions since the close of the merger of FSIC and CCT almost 1 year ago.

In January, we began executing on our $200 million share repurchase program. I'm pleased to report that through November 6, we have purchased approximately 136 million of shares under the share repurchase program. This is in addition to significant repurchase activity that proceeded the December 2018 merger of CCT and FSIC. Over the past 18 months, the combined FSK entity has repurchased approximately $236 million in shares and including CCT's post-listing tender, approximately $420 million since November 2017.

In addition, as you can see in our financial results, the incentive fee look-back provision, we proactively added to our advisory agreement, had a positive impact on our net investment income during the third quarter. We believe the look-back provision is another tangible example of our alignment with shareholders and is working precisely as it was intended. Over the past 5 quarters, the adviser waived approximately $35 million in incentive fees as a result of the look-back provision. Brian will discuss this concept in more detail during his comments later on the call. Beyond our work on the company, we continue to provide leadership on public policy issues which have the potential to benefit not only FSK shareholders, but investors across the entire BDC space. Over the years, we have led advancements on a number of fronts and we are now working with industry groups, other BDC managers, index firms, mutual fund managers and exchanges to advance BDC-friendly AFFE policy. We have listened carefully in our many meetings with analysts and investors and are optimistic the issues will be addressed as we continue to work through SEC and legislative processes, both of which take time, and as many of you know, are often unpredictable. We look forward to updating you on progress with the issue in the months to come.

In summary, I'm pleased with the evolution of our team, the rotational position of our assets and our progress strengthening in the right side of our balance sheet. As the industry's largest BDC platform, we believe we are well positioned to capitalize on the full benefits of the combined FS/KKR platform, and we look forward to continuing to provide the industry and its investor's leadership in Washington. I will now turn the call over to Dan to discuss the market environment and our portfolio activity during the quarter. Dan?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Thank you, Michael. I will offer a few highlights on what we are seeing in the market and provide an update on our portfolio and investment activity during the quarter. Recent weakness in the broadly syndicated loan market, driven by slower CLO formation, ongoing outflows from retail funds and idiosyncratic issuer credit performance, continues to create volatility for the broader market, while also creating opportunities for us to invest. With heightened volatility, we are starting to see larger opportunities to deploy capital that are only available to direct lenders of scale, such as ourselves and a select few others. This scale allows us to deliver certainty of execution for our upper middle-market borrowers, providing an alternative to volatile syndicated markets.

The KKR credit platform continued to see a high level of deal volume in the third quarter with over 350 transactions evaluated, and we remain highly selective, as shown by our 3% close rate during the quarter. This activity is driven by our direct origination platform, our broad network of financial sponsor relationships as well as our unique asset-based finance investment efforts. In terms of investment activity, our total deployment increased in the third quarter to $698 million compared to $513 million in the second quarter and $549 million in the first quarter of 2019. In the third quarter, $150 million of our new investment commitments were to existing borrowers, representing the power of being an incumbent lender. Sales and paydowns were $723 million during the third quarter compared to $692 million in the second quarter and $510 million in the first quarter of 2019. Third quarter sales and pay downs included $274 million of sales to our joint venture.

Excluding these sales, net deployments were $249 million, which is the highest level of net deployments since FS/KKR began as the investment adviser, highlighting the growing momentum of our combined platform. One paydown worth highlighting during the third quarter was our term loan in A.P. Plasman, which occurred at par. This is an excellent example of rotating out of an older vintage, higher risk loan position with a positive outcome. The loan was set to mature in December of this year, and we work closely and directly with the company and the sponsor to achieve this desired outcome. The A.P. Plasman loan had been outstanding for nearly 8 years, and prior to its repayment was at top 5 position in FSK. Despite a continued competitive private credit environment and overall lower year-on-year transaction volumes, we continue to see strong deal flow. Post quarter end, during the month of October, we experienced robust origination activity as we funded approximately $393 million of new transactions versus $251 million of repayments. As we begin to look towards 2020, we believe our size and scale positions us well to take advantage of market opportunities as they may present themselves, especially in volatile markets.

Turning to Slide 9 of the earnings presentation. We thought it would be helpful to review key highlights from a few of the larger transactions that occurred during the third quarter. FSK committed $74 million to J.S. Held where KKR acted as joint lead investor in a $594 million first-lien financing for Kelso's purchase of J.S. Held, a specialty-consulting firm that is primarily engaged by insurance carriers and loss adjusters to provide consulting services on a range of engineering matters relating to high cost insurance claims.

Additionally, KKR Credit was a lead investor in a €430 million first-lien credit facility to fund the acquisition of [indiscernible]. The company is headquartered in Europe and produces active pharmaceutical ingredients used to treat chronic liver disease and gallstones. Our BDC platform and other KKR managed accounts initially committed to the entire credit facility with FSK committing €123 million of such amount. During the quarter, we also supported Genstar Capital's purchase of OEconnection, a provider of software and data solutions that facilitates the distribution and sale of original equipment parts and services between global OEMs, dealers and collision and repair shops.

KKR was the joint lead investor on the $185 million second-lien facility. We have mentioned in the past that we think our size and scale as well as the depth of our broad relationships provides us unique opportunities. As an example, during the quarter, we purchased a portfolio from Citigroup of 38 secured loan positions from 23 different sponsor-backed issuers, representing approximately $430 million in aggregate commitments. This investment will sit in our joint venture, and we believe provides a compelling return on equity. In addition, this purchase is intended to come with a direct lending referral program, whereby new direct lending like deal flow Citi is seeing will be referred to us. We will have the right of first refusal on all opportunities that fall within the scope of the program.

Now I'd like to turn to Slide 14 and discuss our joint venture in more detail. Our joint venture's investments at fair market value grew 94% quarter-over-quarter from $644 million at June 30, 2019 to $1.25 billion at September 30, 2019, largely driven by the Citigroup portfolio purchase. We will look to continue to scale our joint venture with an allocation target of up to 10% for FSK. On prior calls, we also spoke about our focus in investing in asset-based finance opportunities and how investing in these transactions can provide compelling returns as well as creating additional diversification across our investment portfolio. We have started to see the growth potential and benefits of these assets in the past few quarters, specifically from the growth in the dividend income from two of our investments, Toorak and K2.

The two investments contributed $7.9 million in dividend income in the third quarter compared with $5.4 million in the second quarter and $2.2 million in the first quarter of 2019. We believe it's important to look at a meaningful component of our dividend income as recurring in nature for the quarter. Dividend income from the joint venture and many of our asset-based finance investments are expected to be recurring, given the underlying assets of regular cash flows that will be paid to us in the form of dividends.

I will now turn the call over to Brian to discuss our financial results during the quarter.

[Brian Gerson]

Thanks, Dan. I'll provide a summary of the financial results for the third quarter of 2019. You can find this information, starting on Slide 4 of the earnings presentation.

For the three months ended September 30, 2019, our net investment income was $0.22 per share, which compares to $0.19 per share in the second quarter of 2019. The increase in net investment income quarter-over-quarter was largely driven by the look-back provisions impact on incentive fees. That said, excluding the impact of the look back, net investment income still covered the dividend this quarter. As Michael mentioned earlier, we believe that the look-back provision is a shareholder-friendly component of our investment advisory agreement, which resulted in approximately $16 million of incentive fee reductions in the third quarter. Absent material portfolio appreciation, we would anticipate that the look-back provision will continue to reduce incentive fees over the next several quarters, providing additional net investment income. Assuming stable underlying performance, we currently project incentive fee reductions in aggregate of approximately $60 million over the next 4 quarters or approximately $0.12 per share.

Getting back to Q3. Net realized gains were $21 million and unrealized losses were $65 million, resulting in net losses of $44 million or $0.08 per share. Our net asset value was $7.86 per share as of September 30, 2019, as compared to $7.88 per share at June 30, 2019. The main drivers of the change in NAV can be seen on Slide 6 of the earnings presentation, which include realized and unrealized gains and losses, the benefit of the share repurchase activity and are over-earning the dividend. During the quarter, we paid a regular $0.19 per share dividend, representing a 9.7% annualized yield based on September 30, 2019, net asset value. Our Board of Directors declared a fourth quarter dividend of $0.19 per share, which will be paid on or about January 3, 2020, to our stockholders of record as of the close of business on December 18, 2019. One of our key initiatives is to deliver to our shareholders a competitive dividend supported by recurring net investment income. While we were pleased that our NII through the first 9 months of the year has covered our dividend on a cumulative basis, we believe we have the ability to further enhance dividend coverage. This information can be seen on Slide 17 of the earnings presentation.

First, we are focused on further reducing our equity exposure and rotating out of nonincome-producing assets. At the end of the third quarter, equity investments represented approximately 7.4% of our portfolio based on fair value. We are targeting a 3% to 5% allocation over the long term. Second, the maturation of our asset-based finance investments will continue to increase recurring dividend income as illustrated by our investments in Toorak Capital and K2 Aviation. Asset-based finance investments represented 9.7% of the portfolio based on fair value as of September 30, and we are targeting a 10% to 15% allocation. Third, as Dan spoke about earlier, we will continue to increase our exposure to our strategic joint venture. Our joint venture now has $1 billion of equity commitments. And as of September 30, this allocation represented 5.9% of our total portfolio based on fair value, and we are targeting up to a 10% allocation. And fourth, we look to increase our regulatory leverage target to 0.95x to 1x debt-to-equity from our previous target range of 0.75x to 0.8x. We believe all of these actions can provide incremental returns as well as continue to further diversify our investment portfolio.

Now turning to the portfolio. As seen on Slide 8 of the earnings presentation. At September 30, our investment portfolio had a fair value of $7.2 billion, consisting of 201 portfolio companies. At the end of the third quarter, our top 10 largest portfolio companies by fair value represented 22% of the portfolio compared to 21% of the portfolio at the end of the second quarter. We continue to focus on portfolio diversification, which we view as a key risk mitigation tool. Additionally, we remain focused on senior secured investments, as our portfolio is comprised of 72% senior secured loans, with 51% in first-lien loans by fair value as of September 30. Also, consistent with our focus on financing borrowers at the upper end of the middle market, the median EBITDA of our borrowers were $58 million, and the median leverage was 5.1x. This compares to a median EBITDA of $53 million, and median leverage of 5.1x at June 30, 2019. As far as the portfolio return profile, the weighted average yield on accruing debt investments was 10.1% at September 30, 2019, as compared to 10.5% at June 30, 2019. The decline in portfolio yield was attributable to the decline in LIBOR as well as the repayment of certain higher-yielding investments. At the end of the third quarter, approximately 1.7% of FSK's portfolio was on nonaccrual on a fair value basis as compared to 1.2% at June 30, 2019.

During the third quarter, we had 3 investments placed on nonaccrual, Acosta, Bellatrix Exploration and Art Van Furniture. We placed Acosta on nonaccrual due to ongoing restructuring negotiations during the quarter and chose to exit this position after the quarter end at a gain to our third quarter mark. Bellatrix files the bankruptcy protection in Canada, and we expect the company to run a sale process in the near future. Art Van Furniture is the Midwestern value-oriented furniture retailer. While the company continued to pay us cash interest during the quarter, we elected to place it on nonaccrual given our concerns regarding the deteriorating financial performance of the company. The company does have a meaningful revenue base and geographical footprint, and we are working closely with the sponsor, we recently hired a new CEO and several other senior managers to maximize the value of our investments.

Turning to our balance sheet. As of September 30, 2019, total investments at fair value were $7.2 billion. Total cash was $126 million and total assets were $7.8 billion. This compares to total investments at fair value of $7.3 billion, total cash at $288 million and total assets of $7.7 billion at June 30, 2019.

Moving to the right-hand side of the balance sheet, total debt was $3.5 billion, with total committed debt of $4.8 billion, diversified across lenders and markets. Our net debt-to-equity at the end of the third quarter was 78% as compared to 76% at June 30, 2019. Our weighted average interest rate on debt was approximately 4.3% at September 30, 2019, relatively in line with the end of the second quarter. As we highlighted in our last call, we have made significant progress on the liability side of our balance sheet during the past 2 quarters, further strengthening our capital structure through our first middle market CLO and 2 unsecured bond offerings. In addition, over 90% of our liabilities has the maturity of 2022 or greater, and we have approximately $1.3 billion of undrawn revolving debt capacity. I will now turn the call back to Michael.

[Michael Forman, Chairman & CEO]

Thanks, Brian. And thank you to everyone for your time today. As always, we appreciate your support. With that, we will now open the call for questions.

[Operator]

[Operator Instructions]. Our first question comes from Rick Shane with JPMorgan.

[Richard Shane, JPMorgan Chase & Co.]

Thank you for the updates on the new nonaccruals. I would love to get a quick update on Hilding Anders as well that seems to be the largest one that's been on the balance sheet for a while and just like to hear the developments there?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Sure. Thanks for the question, Rick. It's Dan. I think we've seen some positive developments there. Number one, I think we talked about this on prior calls, they were out in the market with an amendment to their senior debt. That got done with a good amount of support. So that gives the company additional runway. And then on the cost and raw materials of the input side, we've also seen some better performance. So the financial performance over the last quarter has been better than prior, and we're happy to see that. And we're happy that amendment got done.

[Richard Shane, JPMorgan Chase & Co.]

Got it. And I saw there was a modest markup there. Is that a reflection of the better margins because of the lower raw material costs? Or is that because of the improved structure with the refinancing?

[Daniel Pietrzak, MD, KKR Credit Advisors]

The financial performance.

[Operator]

Our next question comes from Casey Alexander with Compass Point.

[Casey Alexander, Compass Point Research & Trading]

Could you discuss a little bit more the timing of the sale of assets into the JV and how we might think of dividends from the JV developing over time, given the fact that these were on balance sheet assets, at least for some portion of time during the quarter. And so just sort of contouring how we think about interest income to the general balance sheet as opposed to impact of dividends from the JV?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Good question, Casey. Maybe a couple of things. I think, one, a lot of those assets were -- the sales would have been back half of the quarter. And then the Citi portfolio that has driven up the asset base inside the JV was also back half of the quarter. So I think from expectation perspective, we should expect that the JV dividend income will be higher next quarter with these increased assets in there and the effective NIM that spits out. So I think we've been happy with that. I think we've talked about the JV as an important tool for us. I think you've seen kind of quarter-on-quarter growth there. Obviously, it's a little bit less than the last quarter because we had to clean up from the move to South Carolina. But all in all, we're quite happy with that growth. And you should expect it to be higher on the following quarter.

[Casey Alexander, Compass Point Research & Trading]

Okay. So if I'm hearing you right, since these were all back half of the quarter activity to begin with, we shouldn't be sacrificing a lot of interest income that was coming through the balance sheet as -- and still could expect some better dividend income from the JV?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes, that's right. I mean, I think you should expect the better dividend income from the JV. And then obviously, when we think about that net deployment number was quite positive this quarter. So I think the interest income of the regular sort of balance sheet side. We'll be in a good spot as well. We're effectively replacing those assets that would have been sold.

[Casey Alexander, Compass Point Research & Trading]

Yes. Okay, great. Secondly, and then I'll get out of the way and let some other people ask some questions. I appreciate the comments about the taking advantage of the weakness in the leveraged loan market and sort of the single B pocket that is opened up from CLOs. Do you see that as -- is that a short-term opportunity? Or do you think that, that has some legs and might last for a while?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes. It's probably tough to say how long, I mean, we do believe that the volatility in the markets is going to be there for the medium term. You've got a lot of things going on in the world. You've had some of these almost technical like matters with your CLO point. I think you've seen a fair amount of divergence in the loan market for kind of "winners and losers" and those that have noise around them or our more story credits or just harder to get done. So I think that the volatility continues. I think that medium term, clearly, it can sort of ebb and flow, but that volatility is beneficial to, I think, platforms like us and capital like BDC Capital, and we will look to do what we can to take advantage of that.

[Operator]

Our next question comes from Fin O'Shea with Wells Fargo Securities.

[Finian O'Shea, Wells Fargo Securities]

And welcome aboard Mr. Lilly, if you're there. The first question on the new promotions. Is there any shift in day-to-day responsibility, understanding these were -- and I mean, the Co-President, Co-CEOs, you all 4 work already senior management in place, just curious if there's a shift in what each of you will be doing day-to-day?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Fin, it's Dan. I'll take that. The short answer, no. I think this is something that is -- was kind of the natural evolution and as you've seen from the time you spent with all of us and all having been sort of heavily involved, probably just putting it in a better and more sort of formalized structure, but no changes day-to-day.

[Finian O'Shea, Wells Fargo Securities]

Okay. And then, Dan, while I have you. I want to talk about the -- one of the new investments and OEC connection, looking at the rare LCD reports out there, I understand the title game can be a bit nuanced. But on the second lien, your affiliate, KKR Capital Markets was reported to be the left lead while KKR Credit was the lead investor. So can you give us, first, sort of the high level mechanics as to how those two entities, one of which you lead clubbed up to solve or provide for this second lien solution.

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes. I'm happy to. As you know, and as we've talked about in the past, we can -- I think we are trying to position ourselves to our sponsor clients and sort of borrowers has definitely that solutions provider. And there will be times when deals like this, where we may either have, I feel certain limits of how much we want to hold and those folks can come in, and our capital markets team can come in and help us distribute the rest. We view it as a benefit to, again, try to be that holistic solutions provider. The important thing to note, though, is under no circumstances would our capital markets platform skim from our BDC platform. That's not something that happens. Wherever we commit the full dollars, we get paid sort of full fees. And for lack of a better word, coupled with kind of client demands, the BDC as well as our accounts effectively always eat first. So you get filled to what you want to get filled. Here, this was a bit of a club deal put together at the end of the day, where they married this up with a few different people, and the KCM role here was more just helping to arrange the rest of that club.

[Finian O'Shea, Wells Fargo Securities]

Sure, that's helpful. And when you collaborate or they present their services to do the club part. Is there any guideline you have as to whether they'll do a best effort or firm commitment?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes. I mean, I think every situation is sort of specific, right? And there are certain situations where they are doing that for potentially no fee as well. This situation because you use this as an example, I think the whole tranche here is about $185 million. I think we got asked to effectively club up with a handful of others, but someone need to kind of help put that deal together. But again, it's situational. There's other circumstances. Some of them we've talked about publicly. I mean, if you go back to a transaction we did more than a year ago for Staples Canada, we committed as much as we are prepared to commit to out of the funds. There were some other sort of points there because that was non-EPC and your Capital Markets franchise went on risk to sell down the rest. That was providing that full one-stop solution, which we think was important for the borrower.

[Finian O'Shea, Wells Fargo Securities]

Then just a small portfolio question. It looks like home partners was reduced a bit. Was that understanding the nature, maybe private? I'm just curious if the reduction there on cost basis was a dividend or if in another manner you sold?

[Daniel Pietrzak, MD, KKR Credit Advisors]

No, that's a really good question. And to pick up some of that detail. So thank you. I think that was -- at the end of the day, all it was, was a portion of the investment was sold to the joint venture. As we think about a portfolio diversification in there. And obviously, you've heard us talk about before, using that to make sure we're maximizing kind of the non-EPC bucket, a portion of that was sold there, nothing left the overall kind of system between FSK and the JV.

[Operator]

Our next question comes from John Hect with Jefferies.

[John Hecht, Jefferies]

Most of my questions have already been asked and answered. But I'm wondering just thinking about the, I guess, the pipeline, given the changing rate environment and, I guess, modestly changing economic environment. How would you describe spreads in terms within the pipeline and opportunities within the pipeline?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes. I mean, I'll start and then maybe Brian wants to add to it. I think overall pipelines been pretty good, right? I mean, I think you've seen less M&A activity in the market. But with the volatility that we talked about, both in our prepared remarks as well as some of the early Q&A., I think that has flown through into some good deal flow opportunity. I don't think we've seen a tremendous amount of move in spreads. I think if you've heard us on prior calls, and we are not reaching for the last 50 basis points here. We're much more focused on finding the right company that we want to partner with and lend money to. But I think the opportunities are there. I think you can see that in our Q3 numbers, although clearly, there's a little bit of a lag to that. But even in what we talked about for October. So I think we feel good with where we are situated today. In some ways, I'd like to think that maybe the market's coming a bit towards us. That said, it's a competitive market, and we need to exploit what advantages and/or relationships we have.

[Brian Gerson]

Yes, and this is Brian, John. I think the only thing I'd add to that is that we're probably seeing some larger opportunities, particularly in unitranche land, given that volatility in the syndicated markets or looking at private debt as an alternative solution to that. So $500 billion unitranche are becoming available in the market that we're seeing.

[John Hecht, Jefferies]

Okay, interesting. That's helpful. And then I think you guys -- maybe I misheard it, but did you restate your leverage or debt-to-equity target on the call and what are your kind of plans and thoughts and timing to get there?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes, I don't think we've restated. I think we've always talked about 0.95 to sort of 1x add that number, I think, in certain circumstances, I was just talked about 0.95. We believe we're on a path to get there. We think that's a 12-month sort of type process. And that clock is probably starting now, as we talked about in the slides. We did just extend our revolver for another essentially 13 months, which we're quite happy about that. I think we got -- we do have a best-in-class revolver. So I think we're on a path to get there. I think there will be market conditions where we will go above that if we think we can lean into opportunities, but really no change to what we're thinking in terms of targets.

[John Hecht, Jefferies]

Okay. And then final question is, welcome, Steve Lilly. I've worked with Steve before. Steve, assuming you're in the room there, kind of just wondering your thoughts on joining the team and what your plans are for the -- as you kind of get integrated within the team there.

[Steven Lilly, CFO]

John, thank you for the warm welcome. Certainly happy to be here. I may reserve a little judgment of time on the back end of your question, but certainly on the forefront of your question, I'm again, delighted to be here and have been so impressed with what I guess, I would say, FS over the years has architected from a structural standpoint of a really strong balance of capital to create a leading BDC franchise. And I think when you compare that and then marry that with the credit team at KKR that Dan and his team are -- how they're executing things with -- certainly with Brian and I'm sure you've done this analysis and others on the phone have probably done this analysis, but as you look at what percentage of the portfolio has actually been rotated or turned since the change in adviser, at least from my quick math, it's somewhere around 40% of the portfolio. And certainly, from an individual standpoint, looking at a fortunate time to join, it certainly feels that way to me. And looking forward to working closely with the rest of the team and learning from them. But thank you for the warm welcome.

[Daniel Pietrzak, MD, KKR Credit Advisors]

And John, just to reiterate what Michael said in the start, I mean, we're very happy that Steve is here. And as we continue to sort of bolster the management team. So we look forward to continuing to move that forward and get going with Steve.

[Operator]

[Operator Instructions]. Our next question comes from Ryan Lynch with KBW.

[Ryan Lynch, KBW]

First, Steve, and I also wanted to just welcome you back into the BDC space. And then maybe, Dan, if you could give a comment on -- I saw your investment in Belk was -- took another negative mark this quarter, is marked to now 73% still paying interest income on accrual status, if you could just give an update on what really drove that mark this quarter?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes. I think there's actually been good news here. The first-lien completed amend and extend, I think you've actually seen the first-lien sort of trade up from the time that's gotten done. I think where we kind of sit in the second, it's a pretty productive and positive amendment for us, not just has it given an extended runway of time. It has forced cash flow sweep for a company that generates a lot of cash. It's removed some open baskets that might have been available for sort of dividends or otherwise. So I think all in all, from a structure perspective, the structure has improved meaningfully. And so I think no change to kind of how we feel about the position, there's still a large generator of free cash flow. They've historically bought down first-lien debt and retired it. And this amendment is positive. I think, obviously, the -- with the 1 L out there, we can market the 2 L sort of off of that, and I think you saw that 1 L down, but I think you've seen the 1 L sort of pop back up with that post.

[Ryan Lynch, KBW]

Okay, that's helpful commentary. And then regarding the portfolio from Citi. Can you maybe just give us a flavor of what those assets look like, what sort of spreads they had, structures, industries that they were in. And then also, with that relationship going forward, are those deals that will mostly be funded into the JV? Or can you also put some of those deals based on the deal flow, you expect that relationship? Could those deals also go on your balance sheet?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes. No, fair question. We were pretty happy to be able to execute that transaction. We've got a great relationship with the Citi team, and our site has done a lot of hard work to get that done. In terms of the portfolio itself, I would classify it as generally first-lien, roughly kind of 8-ish percent kind of unlevered. The portfolio purchase did come with financing. So we do think about that in many ways like an ROE inside of the JV that we think is very attractive. And just the data point, we've sold, I think, roughly $70 million of certain of the physicians that maybe we had a little bit less conviction in because it was a portfolio sale since quarter end, and that $70 million has been sold at a positive number to its mark. So I think the process for that has been good. In terms of the referral program, that would go into our regular way funnel and be available for the regular way, kind of BDC balance sheet, not the JV sort of direct.

[Ryan Lynch, KBW]

Okay. That makes sense. And then one last one. You guys had about a $24 million unrealized gain recorded in Toorak in the quarter and a smaller, about a $4 million gain record in Home Partners. Now each of those entities have an approximately $50 million unrealized gain in those equity positions. I know that space is really hot right now. There's been some acquisitions. Can you just talk about what drove the particularly, the unrealized gain in our Toorak this quarter. And do you have any intention in the future of actually monetizing these investments and realizing these gains? Are these just going to be basically operating companies in your portfolio that you will collect income from?

[Daniel Pietrzak, MD, KKR Credit Advisors]

Yes. No. It's a very good question. I mean, maybe just to refresh kind of for all on the call. I mean, Toorak is an entity that we provide capital to, based in somewhere New Jersey. That is an acquirer of residential mortgage bridge loans in the United States or what we call -- or what the market sometimes calls fixed and flip. I think there's a couple of points in there, Ryan, that are important. One, our investment in Toorak continues to grow even from a book value perspective. They continue to ramp that business. I think they've acquired north of $3.2 billion, $3.3 billion of loans. We are realizing that sort of constantly in some ways, though. They've -- this is the overall portfolio, not just FSK share. But roughly half of that's already been repaid in the loans themselves. These are nine months to sort of one year type loan.

So the origination volume grows, the repayment volume grows, and then we actually have Toorak paying roughly a 10% annualized dividend. So I think we've been really happy with that. And I think we're something like this, it's not an operating company. It's a portfolio of assets, it's a portfolio of actually short duration loans that we, hopefully, will look to continue to grow. We're doing a lot of new loans considering the amount you're getting repaid. And then the last point is they've -- the loans that are owned inside of that Toorak entity are financed. The company has done an excellent job of continuing to access the capital markets. They've, in addition to the 2 bank lines they have, they've done now their third securitization. They did that in the third quarter. The results of that were tremendous. The management team deserves a big kudos for their success there. That's obviously driving our returns and that financing market for this asset class is deep, and we've been really happy with what we've seen. So nothing kind of particular other than those points. But I hope that was helpful.

[Operator]

And our next question comes from Matt Tjaden with Raymond James.

[Robert Dodd, Raymond James & Associates]

It's actually Robert. I just hopped on from another call so you might have covered some of this. But I'm -- as the CFO of BDC used -- that I used to cover always told me every quarter, BDCs have a certain level of recurring, nonrecurring income and then a certain level of nonrecurring, nonrecurring income. And if I look this quarter, I'm trying to get a handle of what that kind of the baseline number is. It looks like you had about $8 million -- probably a $4 million acceleration in OID during the quarter over your normal OID recognition. So obviously, a lot of prepayments? Or did you get any prepay income with that? And then also on the dividend side, a mix of nonrecurring and occurring, but what's the kind of the recurring level, any indication you can give us on that? I mean, just trying to get a kind of a baseline of...

[Daniel Pietrzak, MD, KKR Credit Advisors]

It's a great question. I think we tried to talk about that a little bit on the -- on this -- our prepared remarks because we do view a lot of. I'll start with the dividend income. We do view a lot of that as recurring in nature. I think you see $18 million for the third quarter. We -- $10 million of that is from the JV. I think we expect the JV number to go up as a lot of the asset sales to the JV or the Citi portfolio were back-weighted in the second half of the quarter, so they didn't get a full quarter benefit of that. So the JV is sitting there as scheduled to be a quarterly event and should be going up from the $10 million. I think a handful of our asset-based finance investments, we view the same way. Toorak, which we just talked about, because that's actually set up if that cash is available to pay a 10% sort of running sort of dividend and we've seen some consistency in dividends in K2, which is an aviation leasing position. So in many ways, we feel a lot of that '18 has recurring characteristics to it. And we would expect that '18 to go up as our quarters progress.

[Michael Forman, Chairman & CEO]

Yes. And on the fee side, there was about $7 million of fee income. And I'd say about half of that was prepayment premium.

[Operator]

And our next question is a follow-up from Fin O'Shea with Wells Fargo Securities.

[Finian O'Shea, Wells Fargo Securities]

I just had a follow-on the Citi program. Can you expand on the why as you see it on behalf of Citigroup? Just thinking from my seat here, there's a ton of, well, let's say, a fair amount of private lenders with a lot of money and a lot of appetite for loan. So it sounds like anyone would love to get referrals from Citi. So in terms of what you are bringing to them, is it ability to add to the research perspective, to the commitment perspective? Or is there a fee on their behalf on the origination side? Just any context there would be helpful.

[Daniel Pietrzak, MD, KKR Credit Advisors]

No. It's a fair question. Yes, I think we're going to try to bring a couple of things, right? We would love to be a good partner there. I think they are probably looking for someone who has size and scale who could definitely speak for bigger deals or speak for the, we'll call it, the whole ticket. They would get paid some type of fee for that referral. But I think they're just looking at it as the ability to find a solution for one of their clients, if they're not able to do it. Obviously, if they are able to do it, then it would make its way through the referral agreement. So I think it's intended to be just a constructive dialogue and partnership. One that we're happy to have with them.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.