Earnings Call Transcript - FSK Q3 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to FS KKR Capital Corp's Third Quarter 2020 Earnings Conference Call. The lines will be in a listen-only mode during remarks by FSK's management. At the conclusion of the company's remarks, we'll begin the question-and-answer session, at which time, I will give you instructions on entering the queue. Please note that this conference is being recorded. At this time, Robert Paun, Head of Investor Relations will proceed with the introduction. Mr. Paun, you may begin.

Robert Paun, Head of Investor Relations

Thank you. Good morning and welcome to FS KKR Capital Corp.'s Third Quarter 2020 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 9, 2020. 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, 2020. 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 a property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward-looking statements and are subject to risks and uncertainties, including risks associated with the possible impact of COVID-19 that could affect FSK or the economy generally. We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, 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 9, 2020. 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; Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Stephen Lilly, Chief Financial Officer. Also joining us on the phone are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson. I will now turn the call over to Michael.

Michael Forman, Chairman and CEO

Thank you, Robert, and welcome, everyone, to FS KKR Capital Corp.'s Third Quarter 2020 Earnings Conference Call. First, let me offer my continued well wishes to each of you, your loved ones, and your coworkers as our country continues to adapt to a post-COVID world. The FS KKR team continues to function largely in a virtual work environment, thanks to the ongoing dedication of our investment and operating teams. The day-to-day cadence of our business somehow has begun to seem almost normal. I continue to be extremely proud of the job our team is doing during these extraordinary times. In recent weeks, our country has been almost entirely consumed by events leading up to the presidential election. The uncertainties associated with the election, combined with the effects of the pandemic and social unrest, seem to have permeated every aspect of our society. Our hope is that as we move toward the Thanksgiving holiday season in just a few weeks, our country will begin the process of healing by recognizing we are stronger together than we are divided. Across our investment portfolio, we have seen management teams and sponsors continue to make well-informed business decisions focused on positioning their companies for long-term value creation. These decisions have included such things as building cash reserves, streamlining operations, communicating proactively with customers, and realigning supply chains to maximize time-to-market for products. These decisions are manifesting themselves in tangible ways as the value of our investment portfolio appreciated during the third quarter, resulting in an increase in our net asset value per share of 4.7% as of quarter-end. The FS KKR investment team has done an exceptional job working closely with these companies. From an operating perspective, our net investment income was $0.53 per share during the quarter, which was $0.03 above our third quarter dividend of $0.60 per share, and also 3% per share above our public guidance. From a liquidity perspective, we ended the quarter with approximately $1.5 billion of available liquidity with no meaningful near-term debt maturities. Looking forward consistent with our dividend strategy of targeting a long-term yield to investors of 9% of our net asset value, we currently expect our fourth quarter adjusted net investment income to approximate $0.64 per share. As such, our Board has declared a distribution of $0.60 cents per share for the fourth quarter, which equates to an annualized yield of 9.8% on our NAV share of $24.46 as of September 30, 2020. And with that, I'll turn the call over to Dan and the team to provide additional color on the market and end of quarter.

Dan Pietrzak, Chief Investment Officer and Co-President

Thanks, Michael. From a macro perspective, many trends we discussed in our second quarter earnings calls have continued, including a rebuilding of our investment pipeline and a resurgence of M&A activity. While transaction volumes in the market have not fully returned to pre-COVID levels, we estimate a recovery to about 75% or 80% of those levels. Furthermore, the disconnect between the markets and the overall U.S. economy remains a concern, particularly regarding short-term economic performance and ongoing recovery. The high yield market is experiencing record monthly issuance levels, with $338 billion total issuance year-to-date through September 30, just $7 billion shy of the 2012 full-year record of $345 billion. This high yield market growth is largely driven by unprecedented levels of refinancing not seen since the Great Recession. In the leveraged loan market, the record monthly issuances of January and February diminished in March and stayed low through July. However, August and September marked a return to record issuing levels as borrowers accessed the market with a balance of LBO, M&A, and refinancing activities. Pricing for leveraged loans has remained competitive, partly due to the low yield environment and the eagerness of many managers to deploy capital for better yields. From KKR's perspective, we believe the Federal Reserve's goal of reducing unemployment from 6.9% to 4.1% while targeting an inflation rate around 2% demonstrates a priority on job recovery, with inflation being a secondary focus. Consequently, we expect significant government stimulus to persist into 2021 and possibly longer. Across the FS KKR platform, we are involved in several active processes for new investments but are approaching them cautiously during this unprecedented time. While we strive for attractive risk-adjusted returns, given the fragile nature of the economy, we are exercising careful judgment in underwriting. The healthy financing markets, particularly in the upper middle market where we focus, have led to a strong demand for high-quality transactions. In some instances, we see pricing and structural terms returning to pre-COVID conditions. Our fundamentals allow us to benefit from strong positions with existing borrowers and deep relationships with key sponsors, resulting in access to new opportunities while prioritizing principal protection over yield. During the third quarter, we originated $174 million in new investments, which is below our capabilities. This amount, combined with $231 million of net sales and repayments, resulted in a net portfolio reduction of approximately $57 million. Additionally, from October 1 to November 4, FSK completed another $300 million in investments. While remaining disciplined in our origination approach, we feel well-positioned overall as we head into the year's final months. Last quarter, we began providing detailed investment performance metrics for the FS KKR Advisor, available on our website. The updated metrics show that since the FS KKR Advisor was established, through December 31, 2019, we made around $3.2 billion in new investments, achieving 42 basis points of cumulative appreciation. From then to September 30, 2020, we have originated about $4.2 billion in new investments with a cumulative depreciation of 1.17%, reflecting COVID impacts. We are satisfied with the investment performance during this period, evidencing our shift toward more conservative investment structures in companies with stable operating positions. As of the end of the third quarter, approximately 51% of our portfolio originated from the FS KKR Advisor, while 81% came from KKR. Looking ahead, we anticipate the federal government will find ways to support the economy until either an effective COVID vaccine is developed or herd immunity is achieved. We believe the broader market, having received government stimulus, will continue to operate relatively normally, with liquidity available for both borrowers and lenders, ongoing corporate M&A activity, and generally stable public markets. However, these expectations largely hinge on investor and operator confidence in future federal actions. We also recognize that unwinding government intervention in the economy may become increasingly challenging if monetary support is needed for an extended period. We are pleased with our investment portfolio's performance this quarter. While we trust that our current investment decisions are made with rigorous analysis, we must acknowledge the operating landscape is far from normal. These observations lead us to believe that the path to full recovery may be volatile, primarily due to the capital markets' dependence on government support. Nonetheless, we are pleased with the quarter and feel well-prepared as we look toward 2021. I'll now hand over the call to Brian to delve into some specifics about the investment portfolio.

Brian Gerson, Co-President

Thanks, Dan. As of September 30, our investment portfolio had a fair value of $6.6 billion consisting of 172 portfolio companies. This compares to a fair value of $6.6 billion and 173 portfolio companies as of June 30, 2020. At the end of the third quarter, our top 10 largest portfolio companies represented approximately 23% of our portfolio, which remains in line with our results for the last several quarters. We continue to focus on senior secured investments as our portfolio consisted of 54% of first lien loans and 68% senior secured debt as of September 30. The weighted average yield on occurring debt investments was 8.6% at September 30, 2020, as compared to 8.7% at June 30, 2020. The decline in our weighted average portfolio yield was primarily due to exits of certain higher yielding assets throughout the quarter. From a non-accrual perspective, as of the end of the third quarter, our non-accruals represented approximately 8% of our portfolio on a cost basis and 2.8% of our portfolio on a fair value basis, compared to 9.9% and 3.8% as of June 30. We did not place any new investments on non-accrual in the third quarter, and four previous non-accrual debt positions were restructured. From an overall valuation perspective, our investment portfolio increased by approximately 2% or $132 million during the quarter. The details associated with our quarterly valuation results are as follows. The total amount of realized and unrealized depreciation experienced across the portfolio during the quarter was $356 million. Our quarterly appreciation includes the reversal of $180 million of unrealized depreciation associated with certain portfolio company restructuring, including Borden Dairy, FourPoint and Mood Media. Our remaining $176 million of portfolio appreciation primarily was driven by a combination of positive operating results and improved valuation inputs during the quarter for specific investments initially impacted by spread widening in general market conditions during the first and second quarters, but which continue to recover. Our realized and unrealized depreciation total $224 million during the quarter, over 90% of our unrealized depreciation was related to certain legacy investments, many continuing to be impacted by the effects of COVID. In addition, approximately $182 million of depreciation related to realized losses, primarily from the previously mentioned restructurings. While we discussed many of the specifics of these investments during our second quarter earnings call, having a series of completed restructurings across the legacy portion of our portfolio represents a meaningful step for us from both an operating and valuation perspective. KKR's dedicated restructuring group was instrumental during these complicated and time-consuming processes, which we believe demonstrates the value of having a dedicated internal team of investment professionals able to work seamlessly alongside our investment teams to navigate these challenging situations. And with that, I'll turn the call over to Steven to discuss our financial results in more detail.

Steven Lilly, Chief Financial Officer

Thanks, Brian. My comments will be less-focused on reporting financial metrics already contained in our earnings press release and 10-Q, but rather focus more on the color behind our results, hopefully linking them in a more transparent and informative way to the broader comments on which Michael, Dan, and Brian have touched. First, the $3 million decline in our total investment income quarter-over-quarter was impacted by the following. We experienced a decline of $12 million in our interest income, primarily due to repayments of higher yielding assets across our investment portfolio, coupled to a lesser extent with continued declines in LIBOR. Given that 98% of our floating rate investment portfolio has floors, which average 88 basis points, we believe the vast majority of LIBOR-based interest rate compression has now worked its way through the portfolio. Our fee and dividend income increased by $9 million during the third quarter, as compared to the second quarter. The largest components of our fee and dividend income included $17.5 million of dividend income from our joint venture during the quarter. As many of you know, we typically expect this recurring dividend income to approximate between $15 million and $20 million on a quarter-to-quarter basis. Other dividends primarily from our asset-based finance investments totaled approximately $12 million during the quarter, and fee income totaled $3 million during the quarter. Our interest expense declined by $2 million during the quarter as we benefited from the reduction in LIBOR as approximately 54% of our drawn balance sheet is floating rate. Management fees decreased by $2 million during the quarter due to the lower amount of average gross assets during the quarter compared to the prior quarter. The detailed bridge and our net asset value per share on a quarter-over-quarter basis is as follows. Our starting Q3 2020 net asset value per share of $23.37 was increased by net investment income of $0.63 per share and was further increased by $1.06 per share due to an increase in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.60 per share dividend; the sum of these activities results in our September 30 net asset value per share of $24.46. From a forward-looking guidance perspective, we expect our fourth quarter recurring net investment income per share to approximate $0.64 and we expect our GAAP net investment income per share to approximate $0.57. The bridge from our $0.63 per share of net investment income during the third quarter to our fourth quarter guidance is as follows. Our recurring interest income is expected to be relatively flat quarter-over-quarter as new investments and repayments somewhat offset each other, coupled with more static yields associated with our floating rate portfolio given that most of our LIBOR floors have now been achieved; we expect dividend income associated with our joint venture to approximate $20 million; we expect other fee and dividend income to approximate $15 million during the fourth quarter. From an expense standpoint, we expect our interest expense will remain relatively flat quarter-over-quarter; we expect our quarterly management fee will increase by approximately $2 million during the fourth quarter based on the higher average value of our investment portfolio during the quarter; and we expect other general and administrative expenses will remain flat quarter-over-quarter. Finally, during the fourth quarter we expect to pay excise taxes totaling approximately $9 million. To reflect more accurately, the ongoing operational nature of the business, we add back excise taxes to calculate our recurring net investment income and net investment income per share. Nevertheless, we believe it is important to provide the market a bridge for both calculations. As a reminder, over the long term, we expect our dividends per share will equate to a 9% yield on our net asset value per share, but we acknowledge there will be certain quarters where our annualized yield may be greater or less than this range due to quarter-to-quarter fluctuations in the business from an operational standpoint. That being said, we are pleased that during the first three quarters of 2020 despite the far-reaching effects of COVID and the resultant volatility on most companies' investment portfolios, we have been able to exceed our 9% target dividend yield to investors. Obviously, our dividend policy of achieving a 9% target dividend yield on our net asset value means that over time, it would be normal for our quarterly dividend to fluctuate somewhat in concert with the quarter-to-quarter change in our net asset value. In terms of the right side of our balance sheet, our gross and net debt to equity levels are 131% and 120% respectively. These leverage levels represent a decline from our leverage levels during the first and second quarter of this year. Our available liquidity of $1.5 billion equates to approximately 22% of the value of our investment portfolio, which is a very comfortable percentage. And as we said on our second quarter earnings call, we continued to be pleased with our liability structure, which is 36% unsecured and 64% secured with an overall weighted average cost of debt of 3.7%. In terms of debt maturities, we have no maturities until the middle of 2022. Our largest year maturities is 2024 on approximately 50% of our capital structure will roll forward. Finally, from an unfunded commitments perspective, as of September 30, 2020, we had approximately $311 million of unfunded debt commitments, of which approximately $46 million represented revolver facilities and $212 million of unfunded equity commitments primarily associated with commitments related to our asset-based finance portfolio. As we said during both our first and second quarter earnings calls, the majority of our unfunded debt and equity commitments are generally used for capital expenditures or acquisitions and therefore subject to performance or other threshold tests including in certain situations, our specific consent. As a result, while these commitments are disclosed in our 10-Q for informational purposes, we do not believe they will be drawn in any meaningful capacity on a quarter-to-quarter basis. And with that, I'll turn the call back to Michael, for a few closing comments before we open the call for questions.

Michael Forman, Chairman and CEO

Thanks, Steven. As we've mentioned throughout this call, there's no shortage of issues our world faces as we believe the federal government will continue to play an active role in the economy for the foreseeable future. That said, we continue to believe the long-term benefits that we believe would accrue to investors from the establishment of the FS KKR platform are beginning to materialize in tangible ways. From deep sponsor relationships to the rigor of investment committee decision making, to proactive portfolio management, to broad-based dedicated work teams, the seasoned BDC industry operators, the best of what we structured and planned for as we established FS KKR, our advisor seems to be coming to fruition at a very opportune time. We will look forward to continuing to update you on future progress. And with that, operator, we would like to open the call for questions.

Operator, Operator

And our first question comes from the line of Casey Alexander with Compass Point. Your line is now open.

Casey Alexander, Analyst

Hi, good morning. Can you provide a rough estimate around the run rate for dividends being generated by the portfolio? There has been a fair amount of fluctuation, and came in at a higher than normal number. I'm just trying to get to the right run rate going forward?

Dan Pietrzak, Chief Investment Officer and Co-President

Yes, Casey, it's Dan, good morning. I think you've seen the dividend growth out of the joint venture over the last several quarters. I think we have started to get that to a steady state; maybe there's a little bit more growth there. We did have some strong performance out of the asset-based finance portfolio this quarter. Some of those, mainly due to sort of COVID reasons, had been turned off but have returned to a paying state. Those numbers are probably in some ways maybe a little bit higher because there was some sort of catch-up in there. And the only other thing I noticed, if you look at our fee income for the quarter, it was $3 million. I think the range in the four quarters prior was $6 million to $16 million. But that's probably the ranges and the bounds for what you're seeing in dividend and fee income.

Casey Alexander, Analyst

Okay, well, you stole my next question, which was about fee income. You discussed that pricing and structural terms, in some cases, have returned to pre-COVID levels. From a logical standpoint, it seems to me that the deals that got into the pipeline first were kind of the no-brainers that performed exceedingly well through COVID and would have been done under any circumstances? Is there a point in time where we start to see somewhat COVID-impacted companies that are going to come to market for money because they have to for refinancing reasons where spreads may be a little bit better, terms may be a little bit stronger because of their financial condition at the point in time that they're coming to market?

Dan Pietrzak, Chief Investment Officer and Co-President

It's a good question. I would approach it in a few ways. Many companies impacted by COVID may have already sought capital, possibly from different market participants rather than us. Currently, we see that the pipeline has certainly rebuilt, and we mentioned the 75% to 80% figure. Our teams are quite busy with transactions that are solid opportunities worth investing in. From a credit standpoint, we're observing levels similar to those before COVID. However, there's increased scrutiny on documentation and add-backs. Pricing seems influenced by supply and demand as we continue to respond to pipeline activity. There are investors eager to deploy capital in this market. For credits that aren't necessarily COVID-impacted but have a unique narrative, it might be slightly tougher with a bit more effort required, potentially resulting in spreads widening by 50 to 75 basis points compared to what we saw in January or February. That's our current perspective on the market.

Casey Alexander, Analyst

Okay. All right, thank you. I'll step back in the queue and let some other folks ask some questions. Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Rick Shane with JP Morgan. Your line is now open.

Rick Shane, Analyst

Good morning, everybody. And thank you for taking my questions. I hope everybody's well. First of all, really appreciate the effort to provide so much guidance; it's helpful as we look forward. When we think about the overall mix of the portfolio and the combination of repayments, and you highlighted the fact that higher yielding loans were repaid disproportionately in the third quarter. When we think about where spreads are now in the opportunities, particularly that you're considering, do we think that spreads are going to stabilize, drift higher, or drift lower again? I realize, given the size of the portfolio, it's very marginal, but where do you see the marginal investment at this point?

Dan Pietrzak, Chief Investment Officer and Co-President

Good morning, Rick, and hope you're well as well. I think spreads are let's call that fairly stable now. I think we would have talked about in April, or May a scenario where we would have thought every deal would have been 100 to 200 basis points wide. That didn't last very long, and there weren't necessarily a lot of deals that were done there. You know, I think for that regular way, we'll call it the unitranche type loan. I think we're seeing fairly stable sort of spread environment. I think there are things that on an opportunistic basis that we can do, whether it be second lien or maybe back to Casey's question, something that may have had a little bit more of a COVID impact, but we're comfortable on the recovery that we can out-earn kind of that normal type investments. So I think those opportunities exist. I think the way we've constructed the portfolio today is a way that we will continue in terms of portfolio construction. I think the comment you made about your repayments of the quarter being sort of higher yielding investments, I mean, there weren't that many repayments in the quarter, so that was skewed really just sort of a couple of names. But obviously, we're looking to build the portfolio in a very diversified basis with principal protection first and yield second, but knowing we've got dividend goals to meet.

Rick Shane, Analyst

Got it. And then I'll ask the same question, basically, in the context of covenants and protections in terms of regained power in the market in terms of structure?

Dan Pietrzak, Chief Investment Officer and Co-President

Yes, I think we have. While pricing has for that center of the fairway deal has sort of come back to what we'll call pre-COVID levels, I do think there is just a bit more discipline out there as it relates to add-backs and structure and covenants. I think you've heard us say this before; we're a big believer that the first lien unitranche product is supposed to have a covenant. Right, you're not getting paid enough to sort of notch, and I think you will continue to see us employ that strategy on a go forward basis. I think a little bit more weighted to the lender sides of it.

Rick Shane, Analyst

Dan, thank you very much.

Operator, Operator

Thank you. And our next question comes from the line of John with Jefferies. Your line is now open.

Unidentified Analyst, Analyst

Good morning, guys. Thanks very much. First question, a little bit of a tag on to the last question, characteristics of the recent pipeline, and the recent post-end of Q3 investment activity? But maybe not terms, but any industry or geographical characteristics we should be thinking about?

Dan Pietrzak, Chief Investment Officer and Co-President

Good morning, John. I don't think any geographical per se; I think you should assume that with the higher risk bar, underwriting bar that we have today, we are focused on non-cyclical in many ways, not names that we wouldn't be worried about being impacted by we will call it the second wave of COVID. Hopefully the news yesterday changes that dynamic a bit but I think we're playing defense when we think about sort of underwriting today, and those would be the kind of industries that you should expect. We're sort of playing. Obviously, a lot of the deals that closed in that first month of this quarter were things that were committed to sort of last quarter, but I think that's the way we expect the pipeline to come together over the next sort of quarter or two for sure.

Unidentified Analyst, Analyst

Okay. And then within the last quarter of your net deployments, asset-based finance was a pretty big portion. Was that one particular deal, or was that just sort of an opportunity that presented itself in that quarter, or is that something more of a long-term focus? How do we just think about that component of the originations in the quarter?

Dan Pietrzak, Chief Investment Officer and Co-President

Yes, no, it's a good question. I'd start on the portfolio construction sort of piece. I think we've talked about asset-based finance being somewhere between 10% and 15% of the portfolio. We're kind of there now. So I think we're happy about that. You know, because I think the total numbers inside of Q3 on the origination side were fairly small versus kind of normal quarters, I think that's probably skewing a little bit. There was one more opportunistic transaction that does come to mind that we sort of did, but I wouldn't read too much into that focus on the 10% to 15% guidance of the portfolio construction.

Unidentified Analyst, Analyst

Okay. And then last question. Dan, you talked about in a lot of parts of the markets kind of terms getting back to normal or even pre-COVID level. But you also kind of referred to other activities, like LBO and maybe acquisition kinds of financings creeping up. Just as you look into 2021. Assuming more of the same or we have a slow recovery that might not be straight-lined but more or less the recovery some levels of stimulus, do you guys have an opinion on how the kind of deal market shapes up next year in terms of the drivers of the flow?

Dan Pietrzak, Chief Investment Officer and Co-President

You know, it's a good question. I think we've seen a lot of add-ons and recent sort of months; that's companies just effectively going on the offensive as their businesses have stabilized. I think it's probably been easier to buy a competitor today than arguably do sort of a new deal. So I think for us, percentage-wise, that has probably been higher. I think we're starting to see more regular way M&A processes happen and occur and advisors are hired. I mean, people are not traveling as much as they used to or as much as maybe with historical norms will be, but I think people are finding ways to get deals done. I think if we're in and around the environment we are today, so let's call that large second wave lockdowns, maybe sort of an understanding of the economy can be a bit bumpy and volatile, but people have some comfort around that, I think you'll just continue to see that more traditional pipeline sort of pick up on the M&A side.

Operator, Operator

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

Finian O'Shea, Analyst

Hey, good morning. Thank you. Just a first question on the dividend again, appreciating the target levels you all laid out. Is there a certain point where you'll go back to a fixed dividend, perhaps when you feel NAV is stabilized? Should we think of this variable policy as more transitory or a permanent concept?

Dan Pietrzak, Chief Investment Officer and Co-President

Yes, Fin maybe I'll start and Steven can add to this. I think we've gotten a lot of feedback from the market. You know, I think it's probably a bit of a combination of creating a sense of stability. But also, I think, understanding what this product is and what the BDC is. I think that variable component does make some real sense to us. But, Steven, why don't you kind of add to that?

Steven Lilly, Chief Financial Officer

Yes. So I think Dan's right that we think of this more as a permanent shift rather than a transitory shift. And we think, frankly, the industry would benefit itself in the same way, not just our platform. There's so many variables every quarter that BDCs deal with in terms of changing interest rate environments, changing deal environments. We've talked a lot about pricing a pipeline, credit quality; it's just lots of inputs that you handle every quarter as an operator. And to have a fixed dividend over time becomes very difficult for all BDC. So we think having more of a floating type policy that matches NAV and creates a target yield for investors over a long sustained period of time is a more enlightened, better way to go for the industry as the industry continues to mature, frankly.

Finian O'Shea, Analyst

That's helpful. What do you think of a similarly the concept of a floating hurdle rate?

Dan Pietrzak, Chief Investment Officer and Co-President

Yes, it's an interesting question, Fin. I mean, you could argue it does align with what the general investments of these types of vehicles are, which are floating rate loans. You know, the other side of that it probably puts a little bit of complexity in there, as you think about how to manage your asset liability sort of side. You know, and I think there's also some complexity because most of the deals do sort of come with LIBOR floors. So, I mean, I think that concept is probably interesting. I think the complexities could be a challenge, though to be honest.

Finian O'Shea, Analyst

Understand, that's all for me. Thank you, guys.

Operator, Operator

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

Robert Dodd, Analyst

Hi, guys. Good morning. Back to kind of a pricing question but not just about spreads. Obviously, I mean, with your comments, Dan, talking about better structures, maybe lower leverage, etc. I mean, the spread might have been given back, so to speak, in a very competitive market after the COVID spike. But what about if you can kind of talk about what's the forward risk-adjusted total return yield or however you want to word it? Given if add-backs are reduced, if documents are better, it's not just the spread that's higher. The spread might have been competed away, but those other components don't seem to have been. So what impact did those have right now in kind of the implied total return pricing rather than just spread pricing?

Dan Pietrzak, Chief Investment Officer and Co-President

Yes, it's an interesting question. I'm not entirely sure those other pieces are so far away from pre-COVID items that you would give them a ton of value in a pricing sort of common standpoint. I mean, documents are better, but documents are not what they would have been in an April or May deal. You know, covenants, I think, are holding; I think the focus on add-backs are sort of better, for sure. And I think the market saw certain challenges was on deals where add-backs were done; obviously, that was inflating EBITDA, maybe that cash didn't come through. So, I think it's an impact, I would say this for your benefit I mean that your regular way unitranche steel is probably LIBOR plus 625, it's probably two points of all ID, you probably get an assumption of some level of call fees or call pro when you think about your overall portfolio, that's putting you maybe sort of 80%-ish on an unlevered basis. We've been pretty selective in the second lien space, but we're prepared to do those; a lot of times those second lien credits will be locked down, and all the time, there will be larger companies, but in our mind, they can be some of the better credits in the portfolio. You know, they're probably 400 basis points back of the first lien syndicated markets, so now talking probably 200 basis points back of what we just said on the unitranche. So, I think there's ways to build an overall pretty attractive yield here, especially considering where overall rates are. But I think that's the way we've been thinking about.

Robert Dodd, Analyst

Appreciate that. On the asset back, I mean, obviously, you paid a dividend this quarter. So you're seeing a rebound in those areas, but still kind of maintaining the 10% to 15% target for that mix in the portfolio. Even, obviously, asset backed securities have something going for it versus other loans in the market, but what would it take for you for lack of a better term for you to be interested in shifting that 10% to 15% either higher or lower?

Dan Pietrzak, Chief Investment Officer and Co-President

It is a sector that we are very fond of and you've heard us talk about it on calls prior; we like the kind of collateral backing of those deals. They are generally paying a higher sort of overall margin. I think there probably is a governor to why we would not take that higher; obviously, the strategic purpose of our platform here is to focus on directly originated, sort of corporate loans, focused on that uptrend in the middle market. So, I think you've got one sort of natural governor and obviously a lot of this stuff can be non-EPC; so that's another sort of piece of that. But again, I think we really like what we see there as real downside protection and very attractive return. So I think we're comfortable with that balance today. I think we could have some flex to take it down if we saw other lending situations, spreads just wide and maybe we didn't see the spreads widen in the asset base and finance space. But we are dynamic as we think about portfolio allocation. We're more cognizant in these and the liquid asset book. So you just can't move into that quickly. But I would probably stay in that 10% to 15% range.

Robert Dodd, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Bryce Rowe with National Securities.

Bryce Rowe, Analyst

Thanks. Good morning, and I appreciate you taking the questions here. Wanted to ask a little bit about the restructurings, Dan and/or Brian. You mentioned the $180 million of reversals associated with realized losses. So curious what the mark might have been on those assets and what kind of gain or loss was associated with those exits?

Brian Gerson, Co-President

Bryce, it's Brian. So we had $180 million of reversal of unrealized depreciation and $182 million of realized losses associated with those same assets. So it's pretty much on top of each other.

Bryce Rowe, Analyst

That's encouraging. Regarding the restructuring, you mentioned the four restructurings in the third quarter. Dan, could you share your thoughts on the outcomes and the internal process related to the restructuring? Also, looking at the current pipeline of potential restructurings, which you provided some details on last quarter, how do you view the current portfolio of possible restructurings over the next three to six months? Thanks.

Dan Pietrzak, Chief Investment Officer and Co-President

Thanks for that, and I'll take the first part, and Brian will sort of add, too. Maybe I'll just start off with the team. I think really dating back to the end of 2017, we sort of leaned into the idea of wanting to have a dedicated restructuring team. We've added that over time; we actually added someone there. April's sort of timeframe. I think we're very happy that we have that. I think the team has worked tremendously hard; our minds are very effective. I think it adds not just value for these names when they get to the spot, but adds us a lot of value when just a company is kind of on the watch list because we can be thoughtful with what amendments we might make. We're not in the business of trying to take over sort of all these companies, but we need to be prepared to do that; people need to know we're prepared to do that. So we think that team adds us a lot of value generally. I think Borden was sort of one example inside the quarter. We think that we put ourselves in a good position there; we took some take-back paper, we got an equity stake. That equity stake is marked effectively at zero. We've partnered with what I would call a best-in-class management team to do that. That was a lot of, I think, hard work and brain damage to get to that point. But I think we were happy with where we sit; we're going to work hard to support that team to try to maximize our recovery versus our initial investment.

Brian Gerson, Co-President

Yes, and Bryce, FourPoint is probably another name worth mentioning. We were investors in a second lien tranche and we had some equity as well in that business. The company was certainly impacted by COVID and the decline in commodity prices. Back in the summer in July, we basically were part of a restructuring where we converted the second lien notes to equity, took control of the business, significantly de-levered the balance sheet, took it from close to 6x under 1x leverage. We also did some of their hedges so they're 80% to 90% hedged. We think control of that business is important. It allows us to focus on some SG&A opportunities as well as potentially M&A down the road.

Bryce Rowe, Analyst

Okay, that's helpful. And just any forward guidance on how to think about the current portfolio of non-accruals? Are you closer to getting some more restructured here over the near term?

Brian Gerson, Co-President

Yes, I'm not sure of these things and so the guidance perspective, I think we're pretty happy and pleased with how we've rotated the portfolio, sort of where we sit today and clearly, there are some names that were focused on. But I don't think we see anywhere near we'll call it, ‘restructuring pipeline', I think was your words, on sort of a forward basis.

Bryce Rowe, Analyst

Okay. All right, thank you guys. Appreciate the time.

Brian Gerson, Co-President

Thank you.

Operator, Operator

Thank you. And our next question comes from the line of Ryan Lynch with KBW. Your line is now open.

Ryan Lynch, Analyst

Good morning, thanks for taking my questions. Really, credit performance has been the focus for FSK investors over the past several quarters and in fact, maybe the last several years. Q2 versus Q3's credit performance was dramatically different despite, I think a pretty similar background for liquid loan prices and credit spreads, and I think that was due to some specific credit issues and some markdowns in Q2 that caused a pretty big decline in NAV. And then in Q3, you saw the opposite of that big, big uptick in NAV. So what do you think changed between Q2 and Q3's performance in your portfolio? And do you think that the portfolio has really turned the corner from a credit perspective, with the restructuring and the current markdowns of those stressed investments? Or is there still just too much uncertainty out there to make that call?

Dan Pietrzak, Chief Investment Officer and Co-President

Good morning, Ryan. Thank you for that. There are a few different aspects to consider. I don't believe the credit performance has changed much from Q2 to Q3; it was more about certain specific names we continue to address. We've been very focused on rotating the portfolio. As mentioned earlier, over 50% originated from the FS KKR Advisor, and 81% from KKR overall. We have faced some real challenges with some of these older names, which has required us to delve deeply into restructuring. Unfortunately, the recovery rates on some of these have not been favorable, and that's been a significant factor. It's important for the market to understand that since the start of this Advisor, we've originated over $4.5 billion in assets over 10 quarters, with total cumulative depreciation of about $49 million. In context, that's nearly $4.5 billion in investments with $49 million in losses over 10 quarters, which aligns with our target of around 1% annual losses. We've made notable progress, and we’re proud of what the team has achieved on both the origination and portfolio fronts. While there's still work to be done with certain names, we believe we have turned the corner, and we look forward to continuing our strong originations with solid and defensive companies while building this portfolio in a value-adding manner for our investors.

Ryan Lynch, Analyst

Okay. Thanks for the color. And then I just had one other one. I know there's been a lot of discussion on terms and pricing in the market, as well as your current pipeline. Just as I look at you guys' leverage levels today, I understand where you guys' leverage targets are set at. What's the expectation going forward? At this point, are you just going to match repayments with originations? Or what's the thoughts from leverage levels going forward from here?

Dan Pietrzak, Chief Investment Officer and Co-President

Yes. I'm not too sure if that's the wrong assumption. We were happy to see the leverage come down this quarter. We've at that 1.2x net, it's within our target range. Our target range of 1x to 1.25x hasn't changed. So I think you should expect us to operate within there. I think we feel very good where we are from a liquidity perspective, both from available liquidity and from near term debt maturities. The only time that I think that we would probably take it above there would be to capitalize on what we see as a market opportunity and volatility, which is obviously not there today the way it may have been in Q1 or the beginning of Q2.

Ryan Lynch, Analyst

Okay. Understood. That's all for me. I appreciate the time today and congrats on the next quarter.

Dan Pietrzak, Chief Investment Officer and Co-President

Thank you.

Operator, Operator

Thank you. And our last question and follow-up question comes from the line of Casey Alexander with Compass Point. Your line is now open.

Casey Alexander, Analyst

Yes, real quick for Steve because this is just math that I want to check. If you level-set your earnings stream going forward, do you know how many quarters of additional incentive fee waivers we have in front of us before they're absorbed if we look back?

Steven Lilly, Chief Financial Officer

Casey, we gave guidance I guess probably two quarters ago now that we said we expected it to be kind of in the five to six quarter range from that period of time. Clearly in our guidance for the fourth quarter, there's not an incentive fee. Clearly, the books moved in a positive direction too. So forgive me for not having the exact math, but hopefully, that's maybe a bit of a bookend for you and we can also follow up offline.

Casey Alexander, Analyst

Yes. If you want to follow up offline, that'd be great. Thank you.

Steven Lilly, Chief Financial Officer

Great. Thanks so much.

Operator, Operator

Thank you. And this does conclude today's question and answer session. I would now like to turn the conference call back to Dan Pietrzak for closing remarks.

Dan Pietrzak, Chief Investment Officer and Co-President

Thank you. We want to thank everyone again for taking the time today. We do hope that you and your family remain safe and healthy and we do look forward to talking to you again soon. Thanks, again.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for standing by. Everybody, you may now disconnect.