Q1 2020 Earnings Call
Release Conference call.
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Please note this event as being recorded I would now like to turn the conference over to Mr. John Barry Chairman and see Oh. Please go ahead.
Thank you I leave.
Joining me on the call. This morning, our <unk>, our president and Chief operating Officer.
And Kristin band.
Our Chief Financial Officer, Kristen things John .
Call It the property prospects capital Corporation unauthorized use it for him.
This call contains forward looking statements within the meaning of the securities laws that are intended to be subject to safe Harbor protection.
Actual outcomes and results could differ materially from those forecast due to the impact of many factors.
We do not undertake to update our forward looking statements unless required by law.
For additional disclosure.
Earnings press release, and our 10-Q . filed previously and available on the Investor Relations tab on our website prospect Street Dot Com [noise].
Trying to call back over to John .
Thank you Kristin [noise].
For the September 2019 corridor.
Oh, and then investment income or and I was $71.1 million, we're 19 cents per share.
The same as the prior corridor and again exceeding our current driven in rate at 18 cents per share.
I'm a ratio of and I to distributions was 100 and and 7%.
In the September 2019 quarter hour net debt to equity ratio was 66.3% down 3.7%. The prior quarter as we continue to maintain a prudent leverage profile and cautious approach to capital.
Appointment in the current environment.
Our net income for the quarter was $18.1 million were five cents per share a decrease of six and from the last quarter, primarily due to a decrease in portfolio evaluations during the September 2900 quarter.
We have multiple discipline strategies in place.
The goal of enhancing our future risk adjusted income.
On the asset management side, we plan on executing on our pipeline of new originations.
Improving cash flows in our structured credit portfolio.
Including through extensions refinancing and calls.
Enhancing N.P.R.C.'s largely multi family real estate portfolio.
Including through realizations refinancings.
And supplemental dividend Recapitalisations.
Increasing results I controlled investments, including improving operating performance.
Closing, a creative both on acquisitions and monetizing at attractive exit points.
On the liability management side, we plan on protecting against maturity risk through continue liability laddering issue in.
Of diverse instruments.
To a diverse investor Bayes.
While managing both our cost of capital and leverage profile.
We are announcing monthly cash distributions to shareholders six cents per share.
Each of November December and January .
Representing 138 consecutive shareholder distributions.
[noise], we plan on announcing our next series I'm shareholder distributions in February 2020.
[noise] since our I.P.O.C.R. February 2020 distribution at our current share account.
We will have paid out $17.70 per share to original shareholders aggregating approximately $3 billion.
Cumulative distribution to all shareholders.
I ran navy stood at $8.87 per share in September down 14 cents from the prior courtroom.
Our balance sheet.
As of September 2019 consisted of 86.9% floating rate assets.
95.2%.
<unk> liabilities.
In recent months, we've trimmed our cost of term that issuing commensurate with reductions in treasuries.
While also retiring.
More expensive upcoming maturities.
[noise] our percentage of total investment income.
<unk>.
Was 90.2% in September 2019 quarter.
A decrease of 2%.
From the prior quarter.
We believe there is no greater alignment between management and shareholders them from management to purchase a significant amount of stock, particularly when management has purchased stock only on the same basis as other shareholders in.
In the open market.
Project management is the largest shareholder and prospects.
It has never sold a single share.
Management in affiliates.
On a combined basis had purchased at costs.
Approximately $400 million of stock in prospect.
Our management team has been in the investment business for decades.
With experience handling both challenges and opportunities provided by then that by dynamic economic interest rate cycles.
We have learned winter it is more productive to reduce risk than to reach for yield.
And the current environment is one of those time period.
At the same time, we believe the future will provide us with substantial opportunities to purchase attractive assets.
Utilizing the dry powder, we have built in reserved including through our research reduction in leverage during the September 2900 core.
Thank you I will now turn the call over too rare.
Thank you John .
Our scale business with over 6 billion of assets and Undrawn credit continues to deliver a solid performance. Our experience team consists of approximately 100 professionals, representing one of the largest middle market credit groups in the industry.
With our scale longevity experience in deep bench, we continue to focus on a diversified investment strategy that covers third party private equity sponsor related and direct nonsponsored lending prospects sponsored operating in financial Bios.
Extra credit real estate yield investing.
Online lending.
As of September 2019 are controlled investments that fair value stood at 44% of our portfolio a 0.2% found the prior corridor.
This diversity allows us to source, a broad range and high volume of opportunities, then select and a disciplined bottoms up manner. The opportunities we deem to be the most attractive on a risk adjusted basis.
Our team typically evaluates thousands of opportunities annually.
Invest in a disciplined manner and a low single digit percentage of such opportunities.
Are nonbanks structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans.
As of September 2019, our portfolio at fair value.
Comprise 43.3% secured first lane.
23.1% secured second lien.
15 per cent subordinated structured notes with underlying secured first lane collateral lumper sent raided secured structured notes.
0.8% unsecured debt.
16.8% equity investments, resulting in 82.4% of our investments being assets with underlying secured debt benefiting from bar or pledge collateral <unk>.
Prospects approach is one that generates attractive risk adjusted yields.
Are performing interest bearing investments, we're generating an annualized yield of 12.7% as of September 2019 down 0.4% from the product quarter. We also hold equity positions in certain investments that can act as yields enhancers or capital gains contributors as such positions.
Generate distributions.
Continue to prioritize senior insecure debt.
With our originations to protect against downside risk, while still achieving above market yields through credit selection discipline and differentiated origination approach.
As of September 2019, we held 125 portfolio companies down 10 from the prior quarter due to repayments and exits.
With a fair value of 5.4 or 5 billion. We also continued to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration the largest is 15.7%.
As of September 2019 are asset concentration in the energy industry stood at 2.7%.
Concentration the retail industry stood at zero percent.
Not a cruel says the percentage of total assets to.
Sit at approximately 2.4% in September 2019.
Decrease the 0.5% for the prior quarter or weighted average portfolio net leverage stood at 4.69 times, even though.
0.02 for the prior quarter.
Are weighted average even per portfolio company stood at 62.4 million in September 2019 up from 60.7 million the product quarter.
Originations in the September 2019 quarter aggregated 95 million.
We also experienced 245 million of repayments and exits as the validation of our Capitol preservation objective and sell down of larger credit exposures, resulting a net repayments of 151 million.
During the September 2019 quarter or originations comprise 79% non agented debt.
Including early look anchoring and club investments.
Eight per cent corporate yield buyouts seven per cent raided secured structured notes and six per cent agented sponsored debt.
To date leave deployed significant capital in the real estate arena through our private read strategy.
Largely focused on multi family workforce stabilize yield acquisitions with attractive 10 year plus financing.
N.P.R.C.R. private rate has real estate properties that have benefited from rising rents strong occupancy is.
Hi, returning value added renovation programs and attractive financing recapitalisations, resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses.
N.P.R.C. has exited completely 21 properties with an objective to redeploy capital into new property acquisitions.
Including with repeat property manager relationships, we expect our exits to continue and have identified multiple additional properties for potential exit.
Calendar year, 2019, 2020 and beyond.
Structure credit business has delivered attractive cash shields, demonstrating the benefits of pursuing majority steaks.
Working with World Class management teams, providing strong collateral underwriting through primary issuance.
Focusing on attractive risk adjusted opportunities.
As of September 2019, we held 818 million across 39 nonrecourse subordinated structured notes investments.
Underlying structured credit portfolios comprised around 1800 loans.
And a total asset base of over 18 billion.
As of September 2019, this structured credit portfolio experienced a trailing 12 month default rate.
40 basis points.
Representing 89 basis points less than the broadly syndicated market default rate of 129 basis points.
And the September quarter, this portfolio generated and analyze gap yield 15.5, <unk> a preset as of September 2019 are subordinated structured credit portfolio has generated 1.1 billion and cumulative cash distributions to us representing around 81 per.
A set of our original investment through September 2019, we've also exited nine investments totaling 263 million with an average realized I are are 16.7, a preset and cash on cash multiple of 1.5 times.
Or subordinate is structured credit portfolio consists entirely of majority on positions such positions can enjoy significant benefits compared to minority holdings in the same troche in many cases, we receive fee rebates because of our majority position.
As a majority holder, we control the ability to call a transaction and our sole discretion in the future and we believe such options add substantial value to our portfolio.
We have the option of waiting years to call a transaction in an optimal fashion rather than when loan asset valuations might be temporarily low.
We as majority investor can refinance liabilities on more advantageous terms.
Move bond baskets in exchange for better tourists are dead investors on the deal extend or reset the investment period enhanced value. We've completed 26 revise and reset since September since December rather 2007 team.
So far in the current December quarter, we booked 19 million and originations added received repayments of 23 million, resulting in net repayments, a 4 million originations have comprised 53% real estate.
25% non age that debt and 22% Agented sponsor debt. Thank you all know turn the call over to Kristen.
Unclear.
We believe our prudent leverage diversified access matchbook funding.
<unk> unencumbered out.
And waiting to work on security fixed rate that demonstrate balance sheet strength as long as substantial liquidity.
I don't attractive opportunity.
Our company has locked in a ladder of liability extending 24 years into the future.
We are liter an innovator in our market way, we were the first company in our industry issue a convertible bond develop and notes program issue under a bond H.T.M. acquire another B.D.C. and many other <unk> <unk>.
Shareholders and I'm secured creditors alike she'd appreciate a thoughtful approach differentiated in our industry, which we have taken toward construction or the right hand side of our balance sheet.
As of September 2019, we had approximately 4.02 million of our assets on income right.
Representing approximately 72% of our portfolio.
Remaining assets are pledged prospect capital funding wearing September we completed an extension of our revolver to a refreshed five year maturity.
We currently have 1.0775 until you know commitments from 30 banks with a 1.5 billion total aside accordion feature on her option.
But there's so many revolves until September 2023, followed by a year at amortization with interest distributions continuing to be allowed to.
[noise] outside of our revolver and benefiting from our unencumbered assets.
We've issued at prospect Capital Corporation, including in the past two years multiple type of investment grade on secure DAT.
Leading convertible bonds institutional bond baby bonds and program that.
All of these types of unsecured that have no financial company, no asset restrictions and no cross defaults with our revolver.
We enjoy an investment grade Tripoli rating from coal and investment grade it'll be reading rating from <unk>.
And an investment grade triple be negative rating from I.B.M.P.
And and investment grade B.W. three waiting for nudity. So a total us for investment grade ratings.
We have now perhaps secure it turns out market on multiple occasions to ladder I'm maturity extend our liability duration out 24 years.
Hi debt maturities extend through 2043.
With so many banks and got investors across so many that.
We have substantially reduced our counterparty risk over the years.
In the September 29 quarter, we V. purchased 47 million of our April 2020 notes as well like 144 million of our program that.
We also continued our weekly Programatic Internet issue it.
If they need should arrive to decrease our leverage ratio, we believe we could slow origination and allow repayments an exit.
During the ordinary course.
As we had demonstrated in the first half of the calendar year 2016 during market volatility.
We now have eight separate I'm secured debt issuance aggregating 1.5 billion not including our program that you know with maturity is extending to June 2029.
As of September 2019, we had 657 million a program that's outstanding with staggered maturity through October 2043.
Now I'll turn the call back over to John .
Thank you very much Kristen.
No answer any questions.
[laughter].
The question and answer session to ask that question you make Prestart then one on your Touchstone sound.
Using a speaker phone please pick up your handset before pressing the keys to try your question. Please press start then too.
Our first question comes from that.
With Raymond James.
Hey man, while I'm on the line width raw or for Robert Good morning.
Dr. Robert give him our best I definitely well. So first question in a couple of leading off of it will kind of be related to live or so Ah last quarter. I know, we kind of talked about decreasing rate environment, Kansas. Some signal softening economic conditions have have you all been seeing any of that in your underlined.
Oil companies.
Well when you want to take that Greer sure.
Well look at you know I I I'm not sure.
We want.
<unk> macro economic conditions that obviously live or went down because of fed cutting based on that comic weakness and.
I'm more in the the manufacturing and and selected part of the corporate sector.
And the consumer continues to be to be very strong.
<unk> anything it's consumers centric in or a book for example, or consumer finance businesses are putting up some very nice numbers today. So it's it's uneven I I would say like the rest of the economy as the manufacturing and industrial and energy.
Our challenge because of the terrorist situation, but we have very little exposure to those segments today energy is less than 3% of our book and.
Is you know really a pittance exposure compared to where it was many many years ago in our book. So we're not really seeing a dramatic slowed down but we are concerned.
Even the length of you know the bull Mark that we've had to date. We're also concerned because of structures we've seen.
A crying with Ah loans out there given the significant influx of capital specially on the institutional side.
Significant allocation stir private debt in the last three to five years that money has to go somewhere and it's going into to looser structures without covenants at higher leverage and most concerning with very aggressive adjustments. So a big reason why are originations.
We're down in the prior a quarter on the new capital employment side as we've been saying no.
To so many deals in part it's the underwriting.
Aspects and we have you'll fulltime people that do nothing but basically say no to to adjustments what comes pushed out us from you know big six accounting firms in their their T.V.'s.
And in part it's because of how we run our underwriting models where base cases.
Always assume a recession.
Occurring within the investment Horizon say, a five year you first thing senior secured loans and you on the earlier side of that five years now with our corporate expectation and underwriting. So when you send cyclicality you end up saying no to a lot of deals that others say, yes to and and that's a challenge with also challenges.
We have a significant reduced our underwriting hold size or risk management standpoint, so that means more and more deals to deploy you'll similar dollars compared to before we think that's uprooted risk management approach as well and encouraged by what we're saying the pipeline right now going forward, but it has meant a net.
Repayments.
In the last a couple of quarters.
<unk> [noise], Matt This is John I I liked the question so much I just mentally reviewed all 125 positions.
Yeah, we have.
And I think the common theme at least for me.
[noise] is it [noise].
Each one depends farm or on the abilities of management.
To run their companies efficiently.
To take advantage of opportunities and that's how the middle market is where typically these smaller companies have a a very large opportunity set and if they execute on that they will be less subject to a macro develop.
<unk>.
So that's an opportunity for us, but it's also a challenge because we do have to find and back the very best managers, which is trust me, we're busy doing that thank you.
Oh, that's very helpful. And then kind of a a follow up question related to that through the second half of 2019 as it relates to originations are you seeing any spread widening.
A little bit well, you say through the second half <unk> through today, there's a little bit of a response.
You're not quite some metric with the spread tightening that occurred with an increase in in lie bore it's not quite asymmetric response with a spread widing with a decrease.
And lie board I think the reason for that is that influx of Capitol that I mentioned before the us to have a a place to go at least in the middle market, especially in the middle market, where capital can't disappear from the scene.
Right. So quickly as a can of the larger side and syndicated market, where you have fun flows can reverse streams and work capital can actually exit and then you have you know, especially for selling through redemptions that can cause a gap out in spread so we actually see that more on the larger side of things and we cover both based.
Directly and indirectly through our structure credit business that in the middle market a little bit.
I would say, we're spending a lot more time on lower middle market and and smaller credit situations then before in part it's because of what I mentioned before about reducing hold size and part is because of our you know desire to have covenants in age and it deals.
And in part, it's because of lessened Ah competition and improved spreads. So it really depends on the segment I would say that that middle portion in between the lower middle market and probably syndicated is is you know stubbornly not shelling an increase in spreads do you might.
To see at this point of the fed cycle.
And then kind of a shift away from the rates specifically on inter dense. So it's 60 million dollar marked out on the term loan see just given the the large relative size it'd be investment any any guidance you all are willing to provide on the us up.
Well just to give a little bit of color on that with yeah, I didn't dental services company highly recurring revenue business you know that the fundamental demand is not in in question.
Given its you know they basically at Ti cleaning and recurring.
Service.
One part of the business is a you'll see for services are largely private pay business and the other as a a Medicaid centric business based in in Oregon.
There was that you know downtick in in volumes in in Oregon, because of contracting activity in the last year now there's a new set of contracting activity occurring we're cautiously optimistic we're going to pick up you know some portions not clear how much of the of the last volumes the businesses.
I've been focused on right sizing, it's cost structure there've been some labor cost increases because of the you know tightening.
Employment market, especially within within healthcare and and the dental part of thought healthcare, so the businesses adjusting to that as well.
I'd say, we're you know cautiously optimistic about seeing improve performance is we had into 2020.
Right and then kind of similar to that question 20 million dollar marks doubt about on the equity of valley electric any guidance so stuff.
Yeah, that's really more of less to do with how the businesses performing the the company's doing terrifically well recalled in.
A business that's in electrical infrastructure focused services company in the Pacific Northwest largely in Washington.
State.
And and benefiting from the technology boom of that state that used to be driven by Microsoft years ago, and still a major infrastructure employer, but but also of course, Amazon and many other technology based companies. So.
Seattle area in other parts of Washington State or are doing quite well growing infrastructure and the corporate side, which translates into the governmental side industrial healthcare et cetera, corporate you'll <unk> office side real estate, all of which valley benefits from so the company's doing well, there's you know basically.
Change in valuation inputs that get refreshed every quarter based on comps based on comparable trading multiples emanating multiples et cetera. So you saw it basically an adjustment there based on on input, but we're we're quite pleased with the company and how the.
Management team has been not performing their.
Well. Thanks, all that is all I had.
Thank you thank you math.
That's good question and answer session.
Trying to conference back over to John .
Closing remarks.
Well.
I could wax poetic, but I bet, everybody wants to get to lunch. So thank you very much by now [noise].
Thank you all.
Conference is now concluded thank you for attending today's presentation.