Apollo Investment: Earnings End a Two-Year Slide in Book Value

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For the first time in two years, Apollo Investment Corporation (AINV -0.47%) reported a sequential increase in book value per share. Book value increased on a per-share basis due to earnings in excess of its dividend, share repurchases, and stability in the value of its investment portfolio.

By the numbers

Apollo Investment makes money in two ways. First, it collects routine interest, dividend, and fee income from the companies in which it invests. Second, Apollo Investment can earn income from capital gains or losses in the value of its investment portfolio.

Capital gains and losses are inherently volatile from quarter to quarter and from year to year. Apollo's losses have largely exceeded its gains as it suffered from repeated markdowns on the value of its investments, primarily those in the oil and gas industry. But this quarter, Apollo reported that gains exceeded losses, albeit marginally, which is a positive development in light of its investment losses in recent history.

Data source: Securities and Exchange Commission filings.

What happened this quarter

• The portfolio shrank this quarter. Net investment activity was minus $87.4 million during the quarter, as proceeds from repayments and asset sales exceeded new investment activity.
• The company reported that no new investments were placed on non-accrual. Non-accrual investments are those in which the company does not recognize interest or dividend income because it is unlikely to be collected.
• At the end of the quarter, non-accrual assets tallied to 3.9% of its portfolio at fair value and 11.1% at cost. These poorly performing investments are primarily energy and mining related but also include a for-profit college, a restaurant group, and a portion of an investment in a debt collector. 
• The company repurchased about 3.1 million shares of stock at an average price of $5.95 this quarter. Apollo Investment disclosed that it repurchased 2.1 million more shares after the quarter ended, which is further evidence of its commitment to improve returns for shareholders. Importantly, repurchasing shares benefits shareholders at the expense of its management company, due to the company's fee agreement with its manager.
• Book value increased $0.05 on a per-share basis, due to $0.03 of earnings in excess of dividends and $0.02 in accretion from buying back stock below book value.

Looking ahead

Apollo Investment is a good position to make new investments on an opportunistic basis, while funding continued share repurchases at a discount to book value.

The company reported that its net leverage ratio fell to 0.63 times equity this quarter, significantly lower than net leverage of 0.73 times in the year-ago period. Apollo Investment is required by law to keep its borrowings at less than one times its equity, and has historically targeted a leverage ratio of around 0.75 times.

As for what Apollo Investment is shopping now, management noted only that it would carefully weigh new investments with the ability to repurchase shares at a discount. Despite the potential bargains energy sector -- an industry that hasn't been good to the company in the last two years -- management indicated that it has a preference for companies with less commodity price exposure.