MidCap Financial Investment Corp (MFIC) 2021 Q4 法說會逐字稿

Good afternoon, and welcome to Apollo Investment Corporation's earnings conference call for the period ended March 31, 2021. (Operator Instructions) I'll now turn the call over to Elizabeth Besen, Investor Relations Manager for Apollo Investment Corporation.

Thank you, operator, and thank you, everyone, for joining us today. Speaking on today's call are Howard Widra, Chief Executive Officer; Tanner Powell, President and Chief Investment Officer; and Greg Hunt, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited.

Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. Forward-looking statements involve risks and uncertainties, including, but not limited, statements as to our future results, our business prospects and the prospects of our portfolio companies.

You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.apolloic.com.

I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company's financial performance. At this time, I'd like to turn the call over to our Chief Executive Officer, Howard Widra.

Thanks, Elizabeth. Good afternoon. Thank you, everybody, for joining today. I'll begin today's call with a few thoughts about how AINV has performed throughout the pandemic, followed by an overview of our results for the quarter. Following my remarks, Tanner will discuss the market environment and review our investment activity for the quarter and provide an update on credit quality. Greg will then review our financial results in greater detail and provide an update on our liquidity position. We'll then open the call to questions.

During today's call, we will be referring to some of the slides in our investor presentation, which is posted on our website. Given that it's been a little over a year since the initial volatility from the pandemic, I'd like to begin today's call with a few thoughts about how AINV has successfully navigated this challenging. Period. First, our corporate lending portfolio continues to perform well and has recovered the vast majority of the unrealized losses recording during the March 2020 quarter. Given the stable credit metrics of our portfolio companies, we believe there is potential for some additional recovery in our corporate lending portfolio.

We believe this strong performance validates our investment strategy and our ability to underwrite as well as improved market conditions. Second, we significantly reduced AINV's net leverage from its high year ago without being forced to sell assets or issue dilutive equity. By being patient and with normal course repayments, AINV's net leverage is now slightly below its target range.

As we look ahead, we are confident in our ability to grow our portfolio and operate within our target leverage range, given the tremendous need for creative and flexible private capital and the unique and robust nature of the Apollo and MidCap platform. With that said, as Tanner will discuss later, the current market environment is competitive, and we will remain disciplined in our credit selection process.

Moving to our financial results. We delivered solid results for the quarter. Net investment income for the March quarter was $0.39, which reflects no incentive fee being accrued during the quarter, given the total return hurdle in our fee structure. Net investment income exceeded the base and supplemental distribution recorded during the period.

We ended the quarter with net asset value per share of $15.88, up $0.29, or 1.9%, quarter-over-quarter. The increase was driven by net gains across the portfolio, including the continued recovery of our corporate lending portfolio due to a combination of improved portfolio company performance as well as spread timing. We also saw continued stabilization in our investment in Merx, our aircraft leasing portfolio company, which had a slight net unrealized gain and we also had a net unrealized gain on our noncore portfolio during the period.

Moving to investment activity. Originations returned to more normal level for a seasonally low quarter. As expected, we saw strong repayment activity, which resulted in negative portfolio growth during the period. Net leverage declined to 1.36x at the end of March, below our target range of 1.4 to 1.6x. We remain committed to our disciplined approach to invest in and expect to steadily return to our target leverage range, but may operate below the target range in the near term.

Looking ahead to fiscal year 2022, we will continue to seek to optimize and derisk our portfolio and rotate out of our remaining noncore and second lien assets and into core assets. Turning to our distribution. For the quarter, the Board has declared a base distribution of $0.31 per share and a supplemental distribution of $0.05 per share. Both distributions are payable on July 7, 2021, to shareholders of record as of June 17, 2021.

With that, I'll turn the call over to Tanner to discuss the market environment and our investment activity.

Thanks, Howard. Beginning with the market environment, the U.S. economy continues to strengthen due to the significant fiscal and monetary relief and the continued rollout of the vaccine. Specific to the direct lending market, given the improved economic backdrop, we are seeing a pickup in sponsor activity. With that said, competition for attractive new investments remains elevated due to robust repayment activity and a strong syndicated loan market, which is offering borrowers, including the upper end of the middle market, attractive financing. As a result, pricing leverage and terms have generally returned to pre-pandemic levels, particularly for companies with little to no impact from the COVID-19 pandemic.

Moving to AINV's investment activity. New corporate lending commitments for the quarter were $106 million, across 11 companies for an average new commitment of $9.6 million. Consistent with our strategy, all of these new commitments were first lien floating rate loans with a weighted average spread of 690 basis points and a weighted average net leverage of 4.2x. All of these new commitments include LIBOR floors, and 91% were made pursuant to our co-investment order. Gross fundings for the quarter totaled $116 million, excluding revolvers and Merx. Repayments totaled $172 million, excluding revolvers and Merx. Net fundings for revolvers totaled $13 million and Merx repaid $9.5 million to AINV on a net basis. Repayments included our $22 million second lien position in Hayward. Net repayments were $53 million in total.

I will now provide an update of our post quarter end investment activity. From April 1 to May 18, we have made new commitments of approximately $193 million, all of which were first lien corporate loans. Gross fundings have totaled $157 million. Sales and repayments have totaled $149 million, including $57 million of second lien corporate lending positions.

Moving to Merx. While there are still many challenges facing the aviation industry, we continue to see a slow but steady recovery in air traffic in many regions. We are optimistic that demand for air travel will continue to grow with the ongoing rollout of the vaccine and lifting of travel restrictions.

Notwithstanding the current challenges, we believe the aircraft leasing market will continue to be an important and growing percentage of the world fleet as airlines increasingly look at third-party balance sheets to finance their operating assets. Merx has remarketed most of its aircraft that are due -- have come off-lease in 2021, either via extensions with existing lessees or re-leasing to other airlines on long-term leases.

Of the 7 aircraft leases that are maturing in 2021, extensions for 4 have already been executed; one is in the process of being finalized and one is currently under negotiation for extension or sale. Merx is actively remarketing the remaining one aircraft. In addition, during the quarter, one aircraft in Merx' owned fleet was sold above its carrying value. During the period, Merx paid $14.3 million to AINV, consisting of $4.8 million in interest payment and a $9.5 million return of capital.

Additionally, we had a net gain of approximately $500,000 on our investment in Merx, which reflects the stabilization of the business. We believe Merx' fleet compares favorably with other major lessors in terms of asset, geography, age, maturity and lessee diversification. Merx' fleet is skewed towards the most widely used types of aircraft, which means demand for Merx' fleet is anticipated to be resilient. Merx' fleet primarily consists of narrow-body aircraft serving both U.S. and foreign markets.

Turning to the overall AINV portfolio, our investment portfolio had a fair value of $2.45 billion at the end of March across 135 companies in 25 industries. We ended the quarter with core assets representing 92% of the portfolio and noncore assets representing 8%. First lien assets represented 87% of the corporate lending portfolio.

The weighted average spread on the corporate lending portfolio was 628 basis points. As a reminder, the weighted average LIBOR floor on our floating rate investments is approximately 1%, well above today's current LIBOR. The weighted average net leverage was 5.3x, and the weighted average attachment point was 0.6x. And investments made pursuant to our co-investment order, represented 80% of corporate lending portfolio at the end of the quarter.

Amendment activity remained modest this quarter with no material amendments. No investments were placed on or removed from nonaccrual status during the quarter. At the end of March, investments on nonaccrual status represented $34 million, or 1.4%, of the portfolio at fair value.

With that, I will now turn the call over to Greg, who will discuss the financial performance for the quarter.

Thank you, Tanner, and good afternoon, everyone. Before I begin, I'd like to remind everyone that Merx financial statements are included as an exhibit to our 10-K that we filed today. Beginning with -- on AINV's statement of operations, total investment income was $50.8 million for the quarter, reflecting lower interest income, lower dividend income and lower fee income, partially offset by greater prepayment income.

The sequential decline in the interest income was attributable, somewhat, to certain nonrecurring items in the December quarter as well as a smaller average portfolio due to deleveraging. Fee income declined to approximately $700,000 for the quarter, down from $1.2 million. Prepayment income was $3.3 million compared to $2.4 million last quarter. Dividend income was $300,000 compared to $1.1 million last quarter.

The weighted average yield at cost on the corporate lending portfolio was 7.8%, unchanged quarter-over-quarter. Expenses for the quarter were $25.2 million, down $900,000 quarter-over-quarter due to lower G&A, lower management fees and interest expense. This was -- there was no incentive paid during the quarter. Net investment income per share for the quarter was $0.39. Net leverage at the end of March was 1.36x down from 1.43x at the end of December, due to $53 million of net sales repayments during the quarter. The increase in net assets was driven by $16.8 million, or $0.26, of net gain on the portfolio and $2.1 million, or $0.03 a share of retained earnings, as net investment income was in excess of the distribution recorded during the period.

On Page 16 in the earnings supplement, we have broken out the net gain or loss by strategy over the past 5 quarters. As Howard mentioned, our corporate lending portfolio has recovered the vast majority of the unrealized losses recorded during the year ago quarter.

During the quarter ended March 31, 2021, our corporate lending book had a gain of $12.4 million, or $0.19 per share, and Merx had a gain of $500,000, or $0.01 per share. Noncore and legacy assets had a gain of $3.9 million, or $0.06 per share, from our oil and gas and renewable investments. NAV per share at the end of March was $15.88 million, a 1.9% increase quarter-over-quarter.

Moving to liquidity. Given the reduction in AINV's net leverage and improved quality of our investment portfolio, our liquidity position continues to strengthen. At the end of the quarter, we had $1.47 billion of debt outstanding, a decrease of $47 million quarter-over-quarter. At the end of March, we had $360 million of immediately available liquidity and $330 million of additional capacity under the facility.

Our liquidity position provides us with strong coverage of our unfunded commitments. As you can see on Page 18 in the earnings supplement, of the $264 million of unfunded revolver and bridge loan commitments outstanding at the end of the quarter, $151 million were available to borrowers and $113 million were not available to borrowers. Availability is based upon borrowing base limitations and other covenants. There were no stock repurchases during the quarter, but we continue to evaluate repurchasing securities over time.

Earnings -- on outlook. Before opening the call to questions, we wanted to briefly discuss the outlook for our earnings and distribution. Given the total hurdle feature in our fee structure and the net losses recorded during the look-back period, we have not paid an incentive fee since the quarter ended December 2019.

Given the significant recovery in the portfolio over the past several quarters, we wanted to make sure everyone is aware that we may begin paying a partial incentive fee in the quarter ending September 2021. The exact timing and amount may vary based upon future gains and losses as well as the level of net investment income. As you may recall, on the conference call last August, we said that we believe a $0.31 base distribution reflects a conservative estimate of the long-term earnings power of our core portfolio.

And that the supplemental distribution would be a function of the redeployment of nonearning and lower yielding assets from noncore and legacy assets as well as an increase in yield we received from our Merx investment. We remain constructive on each of these drivers, although we expect some of the benefits of these drivers will occur after we start accruing incentive fees.

As a result, net investment income may fluctuate over the next few quarters as we continue to reposition out of noncore and legacy assets and grow the portfolio to -- within our target leverage range. That said, we currently intend to declare a quarterly distribution of $0.31 and a quarterly supplemental distribution of $0.05 for the next 4 quarters. This concludes our remarks today. And operator, please open the call to questions.

(Operator Instructions). Your first question is from Kyle Joseph with Jefferies.

First question. I think, Greg, you talked about dividend income and it was a little light. Any onetime issues there? Or is that a fair run rate going forward?

Yes, that -- I think, the run rate is between there and $1 million. It's a function of our shipping investments at this point and just the cash flow that's coming out of those. So I would say the run rate will be closer to $1 million going forward.

Got it. Helpful. And then for Tanner on portfolio performance. Obviously, nonaccruals were stable in the quarter. But just give us a sense for revenue and EBITDA growth and how that's been trending, particularly as we start to comp against COVID-impacted months?

Yes. Absolutely, Kyle. So first of all, so going forward, what's in the LTM, so to speak, does not have those easy comps yet. And then one of the -- one caveat is, not surprisingly, given the focus on acquisitions and roll-ups within the sponsor community, comparisons are somewhat difficult. But whether -- looking at what we're seeing real-time as well as also what we experienced in kind of fourth quarter numbers, which are -- form the basis for the valuations as of 3/31, the outlook has been very encouraging on an organic basis in the mid-single digits very, very easily, haven't started seeing much effect on the margin side, which has gotten -- has certainly gotten a lot of press.

And even more impactfully, if you look at -- and I think this has also been broadcast more broadly is confidence, CEO confidence, management team confidence and willingness to spend has seen a noticeable uptick in recent months, and I think that will bear out in continued outperformance from an operating standpoint.

Your next question is from Casey Alexander with Compass Point.

I have a couple of questions. One is in relation to -- this is a couple of questions in relation to Merx. How many of the planes, if any, are currently off lease? And how many lease expirations do you have in 2021? And how does the market look for releasing of those assets?

And then secondly, the acquisition of Fly leasing during this last quarter, how did that improve in any way the price discovery of the market for commercial aircraft or inform you as to the demand for commercial aircraft?

Yes, sure. I'll take a first stab at that. And apologies if I went pretty quickly in my prepared remarks, we tried to give some of that detail, and let me try to go back to it. And then, Casey, of course, please correct me if I haven't hit everything that you asked there.

In terms of 2021 and the lease expirations, that news is good, and we have -- of the 7 that were maturing in 2021, we've already executed 4 extensions. One is in the process, one's in negotiation and then we're actively remarketing the one other. In terms of strictly off lease, we have 2 planes that are off lease. And then we have a handful that are in a bankruptcy proceeding or are currently affected by broader restructuring.

But what I would say on that account is -- and again, going back to the prepared remarks, to a certain extent, we've definitely seen stabilization in our ability to deal with those lease maturities as reflective of kind of growing confidence and improving conditions in the market environment. And then the second part of your question, Casey, is fly leasing, which you -- broadly speaking, when you see things transact, that usually is a good thing in terms of people's outlook on the future and liquidity in the market.

Fly leasing and our portfolio, there are limited comparisons available. Obviously, fly leasing was a public company and the multiple is tough to get at from the outside without the benefit of what was exactly in book value. Fly leasing also skewed -- even though it's a similar size to Merx in terms of total planes, it skews a little bit more heavily to wide-body, which we've talked a lot about. We think that Merx outperforms peers in as much as much lower wide-body concentration.

So I think it's good that you're starting to see things transact, even more so than the fly leasing transaction, the ability for the sale-leaseback market to get up and running and then the hard data with TSA hitting highs in terms of passenger volumes as well as the vaccine rollout as corroborating an improving marketplace. So sorry, (inaudible) make sure I hit.

No. You got them -- a, you got them all; and b, we would agree with you that it's extremely difficult to evaluate commercial aircraft, looking at it from the outside because that's what we're trying to do as well. My next question is, Greg, thank you for the update on the partial resumption of the incentive fee because it looks like that's moved up a quarter with this quarter's gains. And I'm just kind of -- and the -- sort of your statement that you're going to maintain the $0.31 per share and the $0.05 per share for the next 4 quarters is interesting in that the math of it suggests that when you fully resume the incentive fee, your net investment income based upon the weighted average yield of the portfolio would be somewhat below $0.36 a share.

And so, is your statement about the distribution plus the supplemental, how do you come about covering that? Is it by getting back up into the target leverage ratio? Is it some asset mix shift? I'm just curious because currently, looking at the math, it's not quite there.

So. Yes, Casey, I'll take a shot at that. So basically, the -- our model and goal for the business is to be in our target leverage range, which portfolio that is vastly in the assets that we targeted with maybe just occasional exceptions, little sort of equity tagalongs we do or some other opportunistic things we think are accretive. But having a portfolio in our target leverage range produces enough money to cover both the dividend and the supplemental if we are -- if over time, we deploy -- we are able to sort of recover the cash from our noncore assets.

And frankly, not even -- because right now, the noncore assets are generating about a 4% or 5% return. So as we generate cash off those assets, and redeploy them into our current yield and we get Merx back to a level of producing income, not to where it was before, but to sort of a new moderated level, we can generate enough income after the incentive fee to cover that dividend.

And so, the reason why we wanted to clarify this $0.31 and $0.05 in the next 4 quarters, is that the timing of that redeployment, whether it's getting to our target leverage, which we have more control over, or it's getting some -- continuing to get some of that redeployment done or starting to generate the equity returns off Merx that we did historically may not match to the timing of the incentive fee.

So I think you're right. It doesn't show that it works, but it isn't product mix. It isn't all of a sudden going to a barbell approach and doing higher yielding stuff. It's just the -- continuing all these drivers that are -- incrementally get us to the level that we can -- the model works. Does that make sense?

Yes, it does. And just to clarify, when I was talking about changing the asset mix, I was thinking more of out of equity and into interest-earning assets than thinking about moving into greater risk investment.

Well, that is right. So then you are right because the equity we have are these noncore assets, right, like other than little cats and dogs, the big equity positions are the noncore assets that aren't producing something. So that's correct.

Your next question is from Finian O'Shea with Wells Fargo Securities.

I guess a couple of follow-ons there. Tanner, first, with the lease renegotiations that you're going through. I think you said there's 7 or so, and they're going well. How do the rates that you are negotiating compare to the portfolio and your newly constructed return from Merx?

So a couple of things there. So the -- when you're undertaking a lease negotiation, there's a number of different factors other than just headline rate. And then furthermore, when we are re-leasing there's a -- there is, in all cases, a reduction from what that initial rate would otherwise be. Think of it in terms of when a lease is first signed when a plant's brand new, it's not the least rate that it will command at first lease maturity 10 years hence.

And so, if I understood your question, the -- what we're able to realize now is in line with our modified expectations within our valuation. But clearly, at a level lower than what we would have otherwise seen, if we had all been so fortunate as to never have seen COVID.

Let me just try to jump in for a second. So first of all, Sin, like, of the 7 that we talked about, 4 are already re-leased and 2 are sort of in advanced negotiation. So it's not that 7. So they have been released. So we have a sense of it. And so, what Tanner was saying, like when we -- the value of each of the assets, is based on both the lease they have in place and the value of the plane when the lease is over.

And so, when you re-lease that plane, obviously, as Tanner said, it's not -- it doesn't get leased for as much as it did 5 years before when the other lease was signed. But when you sign a new lease, that has value. That cash flow stream has value, you're pushing off the residual off to the end. And so, what Tanner is saying is that these re-leasings that we have done have basically supported the value that we've had on those planes post sort of like the correction we had in March when there was like an overall write-down of Merx.

In other words, like it's supporting that value, which is why -- and then -- so that's the answer on the valuation. And then the other part of it is the cash flow. The cash flow off of Merx in historical years over the 3, 4, 5 years prior to the COVID was in something like the $10 million to $12 million a quarter range. Right now, from an income perspective, we had return of capital, it's in about the $5 million quarter range.

In order for us to sort of have our earnings model work, we need it to be in between those 2 numbers in terms of earnings going forward. So we don't need it to get back to the levels it was previously. We need it to get back to the levels that we expect to get to when these leases are, effectively, producing cash.

They're paying now, but they're paying down debt in our securitization. So the answer is that the valuation, as of now, the leases that we have resigned support the valuations that we had when we sort of like took into account the correction that occurred. That could always change, obviously. But so far, does that Tanner -- did I say anything incorrect there?

No, no, no.

Yes. No. And that was the question. So I appreciate that. And then just a follow-on on the legacy. I think in your prepared remarks, Howard, did you say expected rotation or hopeful rotation was by 2022 or sometime in 2022? And then can you just expand on that time frame, where you are in the process? And any helpful information you can provide us around that legacy rotation?

I don't think I put in -- I think I referenced the 2022 fiscal year because that's current for us since -- so I don't think I'd put a date on that. Because we've always said as soon as possible. That said, there's really effectively 3 significant sort of buckets. One is the 2 shipping investments we have, and we are actively looking appropriately to divest parts of those investments.

So individual ships as we can, and we expect to have progress even this quarter, next quarter for some amount of that. So we're making progress. The oil and gas investments, it's really Spotted Hawk is the one of size. And we are -- sort of now that oil prices have picked up, and there's some sense of -- there's some -- visibility is too strong a word. There's some possibility of sort of constructive transactions. We're going to be as aggressive as we can there to sort of exit that, but we don't have anything.

And then the last is carbon free, which is -- which has some really good developments there. And that's an all equity debt investment that had been converted to our equity. But that's all equity and is a carbon-efficient business that has a lot of demand, obviously, where the world is going right now. And so, we hope that one over the next year can have some real significant positive things happen to it.

It's too early to certainly put that money in the bank. But -- so it's those 3. So it's lumpy. So unfortunately, we can't put timing on it. We've continued to want to be not do anything on a fire sale basis. And -- but we would hope at least one of those buckets would have a significant movement in the next -- during this time period, we're talking about it. We shoot for all of them, but certainly at least one of them.

And that really moves the needle from an earnings perspective, if any of them that get moved.

Your next question is from Melissa Wedel with JPMorgan.

I'm curious about some of the positive net funding activity that you saw on revolvers during the March quarter. I'm wondering if there's anything you can share with us about, sort of common themes in terms of the use of funds, maybe across portfolio companies that are drawing down.

So just let me -- I'm going to give that to Tanner on the stuff. But our revolver draw numbers look higher than they might be in a leverage loan-only portfolio because we have a bunch of asset-based revolvers. So those fund up and fund down in the normal course because they're -- they -- effectively money sweeps to us. So I don't -- I think on the leverage loan basis, there were not significant revolver draws. I don't know, Tanner if you have those numbers on the cash flow side.

Yes, sorry, I don't have the specific number. But conceptually, you're spot on, Howard. Our number is a little bit different owing to those revolvers that Howard alluded to. But let's -- conceptually, you definitely have a dynamic wherein understandably companies kind of manage down inventory in the last year. And that -- on the margin now, to -- as business picks up, we are seeing a need for liquidity in the near term, which is the good kind of need.

It's less cash flow problems and more investment in working capital. And I think that would rhyme with or corroborate the statements we made about the broader confidence and kind of fundamentals picking up.

(Operator Instructions) Your next question is from Robert Dodd with Raymond James.

One quick housekeeping one, if I can. On the -- maintaining the $0.05 per quarter for the next 4 quarters, does that include the one that you announced today? So it's 3 after this? Or it's 4 into the future?

No, it's 4, including the one that we announced today.

Okay. Fair enough. Got it. Then just on to Merx again, but not least with (inaudible), if I can. I mean, looking at the financials for Merx, I mean, it seems like revenue was barely down year-over-year. The expenses were -- the problem, those are mainly noncash, right? I mean it was asset impairment and allowance for credit losses.

So would it -- how do you -- on the asset value side, everything you said, I feel you're pretty comfortable with the asset values within that portfolio now. And presumably, the credit impairment has been taken. So would it be fair to say that you don't expect those items? Certainly, at the level they did to recur at any kind of that scale.

And if that doesn't happen, Merx looks like they're going to be profitable very soon, and cash flow doesn't seem to be a problem. So could we expect dividends sooner rather than later?

Yes. I'm happy to take a stab at part of that and then open up to Greg's comment as well. So first, in terms of thinking about valuations and at the risk of stating the obvious, these are not bonds and our return and principal is not written on a piece of paper. And so, where we've written the metal down to is to a level that we're comfortable with in terms of our discounted cash flow analysis, wherein we do assume a residual in the future. But it's not -- you can't think about it the same way that you would where you mark down a security but you still have a par claim.

We do feel better about -- as I mentioned, with some of the stabilization that we're seeing in the market that's giving us more confidence. But we are owners of that asset and the volatility and ultimate asset prices are going to be borne by us as the equity holders of those particular assets. And I don't know if, Greg, you wanted to make another comment more broadly about the asset impairment.

Yes. I think you're right to ask the question, right, because you can only provide dividends to the extent that you have earnings. And when you do look at the results for this year, you had $80 million worth of asset impairment and $32 million worth of allowance for credit losses. We don't expect that type of impairment and credit losses going forward as the aviation sector is stabilized, our portfolio is stabilized.

So I think you're absolutely right. But I think just a couple of other notes, when you do go through, Merx financial statements. Merx for the year paid down, inclusive of our joint ventures, over $140 million worth of debt year-over-year. So I think that's a really important factor. We impaired the assets by $79 million.

If you look at our external value, we were -- externally, we wrote down the metal by over 25%, which is another -- which is very close to the GAAP write-down, even though they're not -- they're apples and oranges. So there's some real good that has kind of settled down at Merx. And I think we're in a good position today going forward.

The way...

Sorry, if I can butt in for one second. I mean that's kind of my point. I think that the numbers -- and obviously, I'm just seeing the financials. You see -- you sound more hesitant in the comments, in the prepared remarks, et cetera, than the numbers look to me. It looks like it's in better shape, maybe. I mean you've paid down debt, the cash flow was up. (inaudible)

So Robert, I think I can bridge that gap. So the reason why there's more hesitancy is because the cash flows, the revenue that you're seeing that are coming through are currently being used to continue to pay down debt until our securitizations are caught up. And so, from a GAAP basis, there is real income there, and it's making the equity more valuable, if you will, by paying down the debt. But it's not cash that's available to be paid.

And so, the equity dividends that Merx may decide to declare may lag its earnings power. But you're right in that it is -- if we are right about sort of our valuation, and it is stable, it is producing enough income to begin paying dividends in the near future, whether it's producing that cash or that drags it a little bit or it's paying down excessive debt remains to be seen, just in terms of timing, depending on when people catch-up payments when leases happen.

And so, that's why there's a little hesitancy with regard to the exact timing of when the dividends pick up. But again, it goes back to what we were talking to Casey about is that we feel like there's more earnings power than you're seeing at the moment, and that will run through the dividend line. The timing of that will depend somewhat on the cash flow as opposed to the earnings because we may be paying down more debt than you would have otherwise thought we would, which again, is why we want to give sort of people some -- the timing of that is sort of irrelevant to the long-term value of Merx.

It's just -- but it is relevant to the quarterly predictability for investors.

And there are no further questions in queue at this time. I'll turn the call back over to management for closing remarks.

All right. Thank you, operator, and thank you, everybody, for listening and your questions. On behalf of the whole team, we thank you for the time today. And obviously, please feel free to reach out with any questions you have. Have a good day.

Okay.

This concludes today's conference call. Thank you for participating. You may now disconnect.