Q4 2021 Prospect Capital Corp Earnings Call
Good day and welcome to the prospect capital fourth quarter fiscal <unk> earnings release and conference call. All participants will be in a listen only mode should you need assistance. Please signal our conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
Withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to John Barry Chairman and CEO. Please go ahead.
Thank you Matt.
Joining me on the call today are <unk>.
Zero, Isaac our President and Chief operating Officer, and Kristin Van desk, our Chief Financial Officer.
Kristin.
John.
This call is the property of prospect capital.
Capital Corporation unauthorized use is prohibited.
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 forecasts due to the impact of many factors.
We do not undertake to.
Our forward looking statements unless required by law for.
For additional disclosure see our earnings press release, and our 10-K filed previously and available on the Investor Relations tab on our website Prospect Street Dot Com now ill turn the call back over to John.
Thank you Kristen.
To update in the June quarter, our net investment income or NII was $73.2 million.
We're 19 cents per common share exceeding our distribution rate per common share by a penny.
Our basic net income.
Attributable to common shareholders was $242.4 million or 62 cents per common share as.
As the value of our portfolio increased for the fifth consecutive.
They've corridor.
Due to a combination of positive company specific.
And macro factors.
In the June 2021 fiscal year.
We earned basic net income of <unk>.
Tribute doable to common shareholders.
$962.1 million.
Or $2.51 per common share.
A 31% return.
Our net asset value.
Our N a V stood at $9.
There's 31 cents per.
Common share in June.
Up 43 cents.
And 5% from the prior quarter.
Our fifth quarter in a row delivering N a V growth.
Our NAV per common share.
It is now at its highest level since September 2015.
Six years ago.
We have outperformed our peers during the past multiple quarters of macro volatility.
As a direct result of our previous Derisking.
<unk> not chasing leverage.
And other risk management controls.
We are staying true to the strategy that has served us well since 1988.
Controlling and reducing portfolio and balance sheet risk to protect capital.
So to us.
To protect the ability of such capital to generate earnings for our shareholders.
In the June quarter, our net debt to equity ratio was 55.9%.
Down.
One 8%.
From March 2020 and down.
60 basis points from the March 2021 quarter.
As we continue to run.
And under leveraged balance sheet.
As has been the case.
For us for multiple quarters.
Over the past three years.
Otherwise the Bdcs overall have increased leverage.
With the typical was the BTC now at around 109%.
Debt to equity.
We're over 50 percentage points higher than prospect.
<unk> does not increase that leverage instead, electing lower risk from lower debt leverage with a cautious approach given macro dynamics.
In May 2020.
We moved our minimum 1940 Act.
Our regulatory asset coverage.
250%.
Equivalent to.
200% debt to equity.
Which not only increased our cushion.
But it also gave us flexibility to pursue our recently announced junior capital perpetual preferred equity issuance.
Which counts toward 40 act asset coverage, but which gets significant equity treatment.
By our <unk>.
Agencies.
We have no plans to increase our actual drawn.
Debt leverage beyond our historical target of 0.7 to 0.85 debt to equity.
And we are seeking and we are currently.
Rating significantly below such target range.
Yeah.
Prospects balance sheet is highly differentiated from peers with 100% of prospects funding.
Coming from unsecured and nonrecourse debt.
Which has been the case for <unk>.
For over 14 years unsecured.
Unsecured debt was 84% of prospects total debt in June 'twenty, 'twenty, one or about 23 percentage points higher than around 61% for the typical listed BDC.
Our own.
Scared and diversified funding profile provides us with significantly lower risk and significantly more investment strategy and balance sheet flexibility than many of our BDC peers.
On the cash shareholder district.
Unsecure issuer front.
We are pleased to report the board's declaration of continued steady monthly distributions.
We are announcing monthly cash common shareholder distributions of six cents per share for each of September.
Distributor in October.
These two months.
Represent the 49th in 50 years in a row consecutive stable per share dividend rate.
As we've now crossed the four year Mark for stable Maam.
Monthly.
September unchanging.
Gosh shareholder distributions.
Consistent with past practice.
We plan on our next set of shareholder distribution announcements in November.
Our goal over the long term is to maintain.
Really ideally grow.
This steady monthly cash shareholder distribution.
As we seek to provide low volatility stability to our shareholders.
Mr macro market backdrop.
Delivers greater volatility elsewhere.
And.
Since our IPO.
Over 17 years ago.
Through IRA October 2021 distribution at the current share count.
We will have paid out $18.96.
Elsewhere or common share.
Two original shareholders.
Aggregating approximately.
$3.4 billion in cumulative distributions to all common shareholders.
Since October 2017.
Our NII per common share has aggregated $2.94.
While our shareholder distributions per share.
How 'bout aggregated $2.70.
Causing our NII to exceed distributions.
Since 2017 by 24 cents per share.
Our NII covered distributions in the June 2020 fiscal year.
And have exceeded distributions and the 2021 fiscal year by three cents per share.
We are also announcing continued preferred shareholder distributions on the heels of successful launches over a $1 billion.
Five 5% preferred program.
And $150 million, 5.35%.
Sure.
Prefer.
We've raised over $337 million.
And preferred stock to date.
With strong support from institutional investors.
All right.
And broker dealers.
The recent addition of a top five.
Five independent broker dealer system.
As well as top wire house.
And regional broker dealer systems.
Yeah.
We are currently focused on multiple initiatives to enhance.
Our NII and reduce.
Risk.
Including number one.
Our 1 billion perpetual preferred equity program.
Number two our recent 150 million, 535% listed perpetual preferred stock.
<unk> issuance.
Number three a greater utilization of our cost efficient revolving credit facility.
With an incremental cost of approximately 1.44%.
At today's one month LIBOR.
Number four.
Yeah.
Retirement of higher cost liabilities.
Including multiple recent successful tender offers.
And repurchases.
Thank you John nicely.
Number five is showing lower cost notes, including.
I'm, a 30 year senior unsecured note issuances with coupons of approximately 2.5% to 4%.
And number six increased originations.
Senior secured debt.
And selected equity investments to deliver targeted risk adjusted yields and total returns.
As we deploy available capital from our current under leveraged balance sheet.
We believe there is no greater alignment.
Between management and shareholders than for management to purchase a significant amount of stock.
Particularly when management has purchased stock.
On the same basis.
As other shareholders.
In the open market as we have.
Prospect management is the largest shareholder in prospect.
And has never sold a share.
Senior management and.
An employee insider ownership.
Is currently 28% of shares outstanding.
Representing approximately one.
Point $1 billion.
Our net asset value.
Thank you.
I will now turn the call over to Greer.
Thank you John.
Our scale platform with around 7 billion of assets and Undrawn credit.
<unk> continues to deliver solid performance in the current challenging environment.
Our experienced team consists of around 100 professionals, representing one of the largest middle market investment groups in the industry.
With our scale.
Long Gemini.
And deep bench, we continue to focus on a diversified investment strategy that spans third party private equity sponsor related lending.
Direct non sponsor lending.
Prospect sponsored operating and financial buyouts.
Structured.
<unk>.
And real estate yield investing.
Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities coupled with wider spread primary opportunities with a pullback from other investment groups, particularly highly.
Third credits ones.
This diversity allows us to source, a broad range and high volume of opportunities.
Then select in a disciplined bottoms up manner.
The opportunities, we deem to be the most attractive on a risk adjusted basis.
Our team.
Lovely evaluates.
<unk> of opportunities annually.
And invests in a disciplined manner in a low single digit percentage of such opportunities.
Our non bank structure.
It gives us the flexibility to invest in multiple levels.
Typically the corporate capital stack with a preference for secured lending and.
And senior loans.
As of June 'twenty, 'twenty, one our portfolio at fair value.
Comprised 50.9% secured first lien debt.
15, 8% other senior secured debt.
12.2% subordinated structured notes with underlying secured first lien collateral.
And 21, 1% unsecured debt other debt and equity investments combined.
<unk> are resulting in 78, 9%.
Of our investments being assets with underlying secured debt benefiting from borrower pledged collateral.
Prospects approach.
Is one that generates attractive risk adjusted yields and are performing.
And interest bearing investments were generating an annualized yield of 11.7% as of June down 0.1% from the prior quarter.
We achieved an increase of 0.4%.
From June 2020.
Despite a headwind from the past year a decline in LIBOR.
Though we expect reasonable stability now due to our LIBOR floors. We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors.
As such positions generate distributions.
We've continued to prioritize senior and secured debt.
With our originations to protect against downside risk, while still achieving above market yields through credit selection discipline and a differentiated.
<unk> origination approach.
As of June we held 124 portfolio companies up one from the prior quarter with a fair value of $6.2 billion.
An increase of $318 million from the prior quarter.
We also continue to invest in a diversified fashion across many different portfolio company industries with a preference for avoiding cyclicality and with no significant industry concentration the largest is 17.7%.
As of June our asset concentration in the energy industry stood at 1.3% our concentration in the hotel restaurant and leisure sector stood at 0.4%.
And our concentration in the retail industry stood at zero percent.
Non accruals as a percentage of total assets.
Stood at approximately 0.6% in June.
Down 1% from the prior quarter and down <unk>, 3% from June of 2020.
Our weighted average middle market portfolio net leverage.
Or censored at five point O one times EBITDA substantially below our reporting peers, our weighted average EBITDA per portfolio company stood at $89.1 million in June an increase of 7.2 million for March as we continued to achieve.
Solid profit growth with our portfolio companies origination.
Originations in the June quarter, aggregated 307 million, we also experienced $156 million of repayments and exits as a validation of our capital preservation objective.
Resulting in net originations of 150 million.
During the June quarter, our originations comprised 77, 4% middle market lending.
18.9% real estate.
One 8% subordinated structured notes.
At 1.7% middle market lending and buyouts and 0.2% other.
To date, we've deployed significant capital in the real estate arena through our private REIT strategy largely focused on multifamily workforce stabilized yield acquisitions.
With attractive 10, plus year financing N P. R. C. Our private REIT has real estate properties that have benefited over the last several years from rising rents strong occupancies high collections suburban work from home dynamic.
High returning value added renovation programs and attractive financing recapitalizations, resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit.
Credit businesses.
N P. R. C. As of June has exited completely 34 properties at an average IRR of 23.4% with an objective to redeploy capital into new property acquisitions.
Including with repeat property manager relationships. We currently have multiple other property exits in process that we expect to add to our growing track record of positive realizations.
Our structured credit business has delivered.
Liver attractive cash yields demonstrating the benefits of pursuing majority stakes working with World class management teams, providing strong collateral underwriting through primary issuance and focusing on attractive risk adjusted opportunities as of June.
<unk>, we held $756 million across 39, nonrecourse subordinated structured notes investments these underlying structured credit portfolios comprised around 1700 loans and a total asset base of around.
17 billion.
As of June 2021 the structured credit portfolio experienced a trailing 12 month default rate of 100 basis points down 71 basis points.
From the prior quarter and represented.
A 25 basis points less than the broadly syndicated market default rate of 125 basis points in the June quarter. This portfolio generated an annualized cash yield of 19, 1% and GAAP yield of 14.2.
Percent.
As of June our subordinated structured credit portfolio has generated 1.33 billion.
In cumulative cash distributions to us representing around 95% of our original investment.
Through June we've also exited nine investments totaling $263 million with an average realized IRR of 16.7% and cash on cash multiple of 1.5 times, our subordinated structured credit portfolio.
Yeah.
Consists entirely of majority owned positions.
Those positions can enjoy significant benefits compared to minority holdings in the same tranche in many cases, we receive fee rebates because of our majority position.
As a majority holder we control the.
The ability to call a transaction in 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 remove bond baskets in exchange for better terms from debt investors in the deal and.
And extend or reset the investor.
And period to enhance value, we completed 30 refinancings and resets.
Since December 2017.
So far in the current September 2021 quarter, we've booked 351 million in originations and experienced 160.
<unk> 5 million of repayments for $186 million of net originations. Our originations have consisted of 97, 2% middle market lending and two 8% real estate. Thank.
Thank you.
I'll now turn the call over to Kristin.
Thanks Grant.
We believe our prudent leverage diversified access to matched book funding substantial majority of unencumbered assets weighting toward unsecured fixed rate debt.
Avoidance of unfunded asset commitments and lack of near term maturities demonstrate both balance sheet strength as well as substantial.
Liquidity to capitalize on attractive opportunities.
Our company has locked in a ladder of liabilities extending 30 years into the future.
Today, we have zero debt maturing until July 2022.
Our total unfunded eligible commitments to non controlled portfolio companies totaled.
Approximately $52 million or 0.8% of our assets.
Our combined balance sheet cash and Undrawn revolving credit facility commitments currently stand at over $800 million.
We are a leader and an innovator in our marketplace. We were the first company in our industry.
<unk> Oh, a convertible bond develop a notes program.
Issue under a bond ATM.
Acquire another BDC and many other lists of first.
In 2020, we also added our programmatic perpetual preferred issuance to that list. The first followed by our listed perpetual preferred as.
<unk> is first here in 2020 one.
Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right hand side of our balance sheet.
As of June 2021 we held approximately four point.
Another 8 billion of our assets as unencumbered assets, representing approximately 71% of our portfolio.
The remaining assets are pledged to prospect capital funding, where in April 2021 we completed an upsizing and extension of our revolver to a.
Our refreshed five year maturity.
We currently have 1.1575 billion of commitments from 36 banks.
An increase of six lenders from before and demonstrating strong support of our company from the lender community.
The facility revolves until April.
2025, followed by a year of amortization with interest distributions continuing to be allowed to us.
Our John pricing is now LIBOR, plus 2.05% a decrease of 15 basis points from before.
Our undrawn pricing between 35% and.
And 60% utilization has been reduced by 30 basis points.
We also now have an improvement in our borrowing base due to a change in concentration baskets, which we estimate increased our borrowing base by approximately $150 million.
Of our floating rate assets.
92, 5% have LIBOR floors with a weighted average LIBOR floor weighted average floor of 1.61%.
Outside of our revolver and benefiting from our unencumbered assets, we've issued at prospect Capital Corporation, including in the past five years multiple types of investment grade.
Unsecured debt.
Including convertible bonds institutional bonds baby bonds and program notes.
All of these types of unsecured debt have no financial covenants, no asset restrictions and no cross defaults with our revolver.
We enjoy an investment.
Great Triple B negative rating from S&P and.
And investment grade B double a three rating from Moody's.
And investment grade Triple B negative rating from Kroll and.
And investment grade Triple B rating from Egan Jones and.
And in investment grade Triple B low rating from D. B R. S.
We recently.
Definitely if the ladder investment grade rating, taking us to five investment grade ratings more than any other company in our industry.
We've now tapped the unsecured term debt market on multiple occasions to ladder, our maturities and to extend our liability duration out 30 years.
Our debt maturity.
We received extend through 2051.
With so many banks and debt investors across so many debt tranches, we have substantially reduced our counterparty risk over the years.
In the June 2021 quarter, we completed successful redemptions tender offerings and repayments retiring two.
$243 million of our Intranets 74, 1 million of our 2028 notes.
And 1 million of our 2023 notes.
In the current September quarter, we have retired 154 million of our internet.
In the June 2021 quarter, we issued 300 million.
In unsecured debt maturing in November 2026, with a coupon of 3.364%.
We have continued to substitute more expensive term debt with significantly lower cost revolving credit with an incremental 1.45 per cent cost and our newly issued $3 three.
Six 4% 'twenty 'twenty six notes.
We also have continued with our weekly programmatic internet issuance on an efficient funding basis.
To date, we have raised over 337 million in aggregate issuance of perpetual preferred stock across across our preferred program analyst.
Unlisted preferred.
Yeah.
We now have seven separate unsecured debt issuances aggregating $1.4 billion not including our program notes with maturities extending to June 2029.
As of June 2021 we had 509 million of program notes.
That's outstanding with staggered maturities through October 2043.
At June 30th 'twenty, 'twenty, one our weighted average cost of unsecured debt financing was 4.86% a decrease of 0.36% from March 31, 2021, and a decrease.
Kris a 0.88% from June 32020.
In 2020, we added a shareholder loyalty benefit to our dividend reinvestment plan or drip.
That allows for a 5% discount to the market price for drip participants.
As many brokerage firms either do not make.
Make drifts automatic or have their own synthetic drips with no such 5% discount benefit.
We encourage any shareholder interested in drip participation to contact your broker.
Make sure to specify you wish to participate in the prospect Capital Corporation Drip plan through D. T C at a 5%.
Discount and obtain confirmation of same from your broker.
Our preferred holders can also elect to drip at a price per share of $25.
Shareholders participating in our common stock drip for our fiscal year ended June 30th 2021 received a return of 7.2%.
Greater than Nonparticipating shareholders for a total return of over 85%.
Now I'll turn the call back over to John.
Thank you Kristen we can now answer any questions.
We will now begin the question and answer session to ask a question you May Press Star then one.
One on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys.
If at any time your question Thats been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question will come from Finian O'shea with Wells Fargo. Please go ahead.
Hi, everyone. Good morning, Congrats on the quarter just first question on first tower, we've see.
<unk> seen continued strength there translating to.
Other income can you.
You give us some color on.
What's driving.
The other income and should we view it as such or something more sustainable.
Yeah.
Okay. It's a grille I'll take that question. Thank you very much.
Howard.
Continues to.
Perform well we've now owned.
That business for majority shareholder in conjunction with the management team.
We own about 80% of that business.
Management team about 'twenty.
Percent.
And the business is doing well in terms of loan.
Loan growth and originations and mute.
Muted charge offs with its multi state approach really it's continuing.
The same aspects have worked well for this.
A loan installment lender for for decades, and enjoys low volatility benefits across cycles. That's a.
Big reason that attracted us to acquire the business in the first place in a tax efficient manner.
We have successfully.
Fully.
In the past year and navigated through.
Expansion and growth on the right hand side of the balance sheet for that business by a growing on a net basis, our count of bank lenders as well as.
The size of the ABL facility.
There are banks have been financing.
How are for for decades at this point very happy with the credit performance. Other income your question will emerge from time to time with.
With this business.
Conjunction with those periodic refinancing and upfront fees that will we will charge to the business.
As a secured.
The first lien term.
Primarily cash flow lender.
Lender to the business and you saw that occur for for tower in the in the past quarter.
But largely that comes out in the wash over time.
Time, because any such income.
<unk> will come.
Come out of what.
Otherwise could be distributed to us.
On a junior basis as an equity holder in the business. So it tends to.
Not having a meaningful effect to income over time, but can cause some short term.
Upward moves in income like what we saw in the.
Quarter.
And it does.
Is that helpful.
Yes very much.
Just a follow on on the REIT I think alright.
Greg you mentioned that.
That you would expect there or planned on a bit of a rotation there into new properties.
And so forth.
Yes, there is.
Okay.
A lot of equity gains.
<unk>.
Do you expect to.
Keep the size as a percent of the portfolio.
Level or.
Perhaps real.
Realizing.
Distribute.
Some of those games.
So N PRC are a REIT real estate business has delivered significant returns as you pointed out we've had.
34 exits predominantly in multifamily.
But also with the other diversified tenant properties like on the self storage side of things it is.
Similar in nature to multifamily with diversified tenants.
Consistent with many.
Any markets out there, it's a sellers' market.
And we have been selectively.
Monetizing our assets and have a fairly rigorous approach that we go through.
Each quarter in which we run an NPV.
D in forgone IRR optimization on every single asset in our real estate book.
Figure out.
Whether it's better to divest an asset on the price, we hope and expect to get or hold the asset with continued.
Status quo value add renovation.
Optimization or hold the asset and do some sort of a refinancing or recapitalization that could potentially return additional capital to us it will take the highest hold versus an exit.
And compare those for NPV and forgone Irr's and then of course, we have to go out and see if there are buyers willing to pay what we think based on that optimization.
And generally speaking that's come in even more positively than our expectations.
Given.
How strongly this asset classes performed and how much capital. It is attracting so we do have other deals.
Teed up for exit in various stages of that process, we'll have more to.
Report on that undoubtedly and in the coming.
Months, and and corridors and we're also looking at new deals where.
Our underwritten returns can also benefit from.
<unk> drops.
And and tenure Treasury. So we look at those Opportunistically when there are such drops because we take a very conservative financing.
Profile towards new originations are in wanting to lock in you know generally seven to 12 year financing.
A lot of times 10 year, plus fixed rate and so if we can lock in that financing based on a.
A low relative to our.
Historical and recent periods Treasury, then that's beneficial you saw that occur and we.
They are.
Flurry of transactions at the end of.
2020.
For example, and we're looking at other diversified tenant.
Areas as well and are just areas that we think are attractive within real estate the meet our yield and total return.
Criteria, we do have capacity to grow this business.
A little bit on a percentage basis, but really just replenishing what we have after our exit keeps us busy I think the bigger aspect is that we intend on growing our overall balance.
Then she visa V are highly successful.
Preferred program so.
We could potentially add in conjunction with our preferred and significantly under leveraged debt balance sheet relative to our own internal conservative.
<unk> targets and definitely peers.
That combination gives us over $2 billion of additional firepower as that.
Preferred comes then to grow the balance sheet are not immediately prudently and selectively.
And thoughtfully and we've been at this a long time, we've seen the negative part of the cycle and we're very cautious about our credit quality.
But originations are picking up we've already originated on a gross and net basis here are just over halfway through the September.
<unk> or what we did for all of the June quarter, and we are cautiously hope and expect that pace to pick up a post labor day and into the fall months as well. So just maintain its existing share within real estate would cause <unk> dollars to grow.
From from where they are today.
Maybe I'll pause there and see if.
If anyone else in our N wants to if John wants to supplement for tower or for our real estate business John.
Well I the only thing I would add to what you said career is that.
None of this happens.
Without careful management.
And add prospect.
Ted power has.
Has run our real estate group for a year.
And those results are a great complement to Ted.
And with respect to first tower.
And isn't that a inverse.
Investment.
Edwards human and Dennis Shinko, but the person who gets the biggest award of Vol is frankly, who has been running first tower for over a decade, I think 12 years.
Since we've owned.
Mitch Tower and I believe for another 15 years prior.
Prior to our propitious purchase and I feel that sometimes.
The daily efforts of our employees and our managers at the portfolio level and their teams Jody.
Further as it first tower.
I've forgotten when people just look at the numbers, we have great people. We're proud of them. They are doing a wonderful job for shareholders and we believe they will continue to do a wonderful job.
As we go forward.
So thank you very much I believe that's the end of.
D in Q&A is that right.
Another question Okay.
Our next question will come from Robert Dodd with Raymond James. Please go ahead.
Hi, guys, Yeah, just two.
Two questions first one follow up on them.
Hum.
You're looking at the Michigan.
Self storage portfolio, which is what was exited in in 'twenty. When T. I mean, a total proceeds of little over 100 million looks to me like the original cost was about 65, so very nice return on that but.
But a big Delta. This is a request for more disclosure to be blunt a big Delta.
Obviously between the market value of what it was kind of like that.
Which obviously factors into valuation of REIT and its you know internally you have an estimate for that we don't see that.
Makes it quite difficult obviously to to evaluate the valuation of.
As it's carried on your balance sheet, how conservative or aggressive.
Being on that one.
So just a request.
More disclosure, maybe about estimated market value of some of those assets.
The exits in 2020, we're well above obviously original purchase price.
So that's that's visible on the REIT balance sheets, but anyway, that's a request.
One one other one if I can.
Can the dividend.
Paid in 2020 looks about a third of that was return of capital, which tends to imply a big mismatch between taxable income.
Income and GAAP NII can you give us any color on what's generating that mismatch is the CLO is it you know.
Company loans, I mean, where's that mismatch coming from and should we expect a.
A big continued mismatch between NII and taxes.
<unk> and the implication of what that does for the.
The dividend coming from the turn of capital, which has different tax consequences.
Sure.
Yes, Okay. Robert Thank you very much let me take the the.
First a quick.
Our first question first.
As bears repeating.
Repeating.
Or valuations are the result of a.
Valuation process, which is rigorous is consistent is repeated every quarter.
And which is managed by external an affiliate.
<unk> third party expert valuation firms.
So give her phone got themselves.
King.
We make sure it does.
Valuation firms.
CVR is another have.
All of the information that we have.
Did they have all the information that they ask for them.
They have information they don't even ask for them.
Those firms then perform.
<unk> as they occur.
According to their own lights.
Our job.
Job is to manage that process make sure. It is conducted.
Properly.
Hmm.
We I'm not sure what internal valuations, you're referencing because I'm not aware of any.
I'm not aware of any effort at our company to.
<unk> outside of that processed so as a result when evaluated.
Sorry, its about and John you're saying that you don't look at the market value of the assets intra quarter and decide whether.
To.
To sell them that the market.
Market value of the assets.
Never evaluated internally, except at the end of quarters, no I'm, not saying that I'm, saying that I am unaware of a set of shadow valuate internal shadow valuation.
Papers or memos or anything like that I, certainly haven't seen them now.
We do do is we do look at what we think we might be able to sell an asset for.
When.
We have some information, which we typically share with the valuation expert.
Yeah, it could be a bit it could be a letter.
Could be an indication of interest.
Could be a broker indication of value all of which we share with these valuation experts.
<unk>.
When we consider selling an asset we try to ascertain.
As best we can.
The value that we think we will receive and that can be based on a number of inputs, which we do share with the valuation expert.
When we have those so but we don't have an internal schedule of shadow valuations, Here's what we think things are really worth.
It's just on a property by property basis.
If we were considering selling a property.
We will hone in on what we think is possible out there and as I've said, we share whatever information we have with the valuation expert.
So.
I don't know what else you would want us to do I, we certainly arent going to step.
Step up and start to disagree with.
With the process that we have it's a rigorous process.
Disciplined we've followed every quarter.
From time to time things are sold for more than where they're valued from time to time I would expect things will be sold.
Sold for less than their value.
Maybe if I can jump in and yes. Please right.
Robert I thought your question was a little bit different maybe I misunderstood it but I thought. Your question was you simply wanted to see published in our Qs and Ks.
Case evaluation of each asset in our real estate book not just a singular single aggregated number four for all of those that that is more what I was kind of war right like what because clearly in the self storage portfolio sold for a lot more than.
Then it was carried out obviously at all.
And I would presume that on various assets your estimated market value. This is not a shadow of value or anything like that.
What you think and what you tell the.
Ah the valuation consultants differs from.
From the county.
Well, obviously, it's like carrying value was cost less depreciation right. So there's a there's a big GAAP disclosure on that like what the estimated market value of the company.
The historic depreciated value is would be really helpful. That's my point.
I understand the question.
Let's let's take a look at the Roberts you know, it's a reasonable request so to what we can do.
On that front I mean, historically, we don't do.
Do sort of sub valuation.
Disclosures into.
You know, let's take first tower for example, and if it were in.
Five or six different states, let's value the business of every single state or value to different lines of business. We just you know value of the business in the aggregate and PRC is obviously a larger.
Holding I understand why you'd want to see perhaps a little bit more.
We do have bottoms up our numbers how else could you some in aggregate to two the total that that is true.
I'll check on Michigan, and I'm not sure you say there was a significant.
Gain versus our our Mark let's go check on that.
I know, there's significant game versus versus cost.
Generally I didn't think both his box I bet.
No cost Oh, well, yes, that'd be true that's true across the board I mean, you know when you generate 20% to 30% plus IRR is on deals, we're getting significant gains versus original cost and.
And that's a function of buying smart and in a disciplined fashion as well as our our value add.
Capex renovation, which usually generates unlevered.
Thirtyish percent IRR, and then you add the leverage benefit of that and it's it's even.
Greater so that's a significant booster and we view as very attractive risk adjusted reward because it's a highly predictable investment you've done 10 renovations.
And I know exactly what the cost is an exact with the rent bump is then that gives you confidence to do 10 more.
And rinse and repeat.
So so what Chuck on the disclosures in terms of.
I thought you had a question about realization versus the most recent mark in general we haven't been crew.
Crazily far off we've tend to exceed it but by a little bit.
But.
In general we have.
It hasnt been some massive decoupling I think from where we've realized versus.
Where we think the value is that every evaluation as we all know is an estimate.
As opposed to a a precise number.
Number and the answer depends on you know what.
With someone is paying are willing to pay at that moment in time.
I would point out I'm, not saying we won't.
Disclose the asset by asset valuation there is a in the practitioners world in which we participate some.
Awkwardness and balancing act in that.
Buyers often do look at marks of public companies to invest in companies Bdcs. They say hey, you say the price is X.
For any asset now let me some buyers now let me say that the ceiling.
And you say, it's not worth more than that so I'm not paying more than that so that's an unintended consequence of excess disclosure.
Robert that practitioners go through we go through.
Then we'd like to avoid doesn't mean, we're going to stop disclosing items, but.
It is something too.
To be mindful of you know for example, incentives and we've aggregated syndicated positions there've been someone said hey, we should put every trade we put out there one second later well that's obviously not a good thing if youre trying to build a position reasonably quietly and something so these things are a bouncing act and what's good for shareholders well evaluate that are required.
Request, which is a reasonable one with but which may have some unintended consequences and we'll get back to you.
I understand the conflict issue, but as you said right, we really big [laughter] within Europe.
Right right in.
In terms of your question about return of capital from attacks.
<unk> standpoint, which of course is a great thing I mean, that's tax sufficiency Vasily right, there who would want a how about a zero tax rate on a third or so of the distribution, bringing down the weighted average tax rate for those shareholders that are a tax paying.
Entities and individuals.
The the biggest reason for that is our structured credit portfolio.
Which it turns out has shown itself over many years now to be a significantly tax.
Efficient.
And the reason for that is.
If you have a and it's an actively managed.
Active CLO reinvestment.
Deal portfolio. So if you sell an asset at 95, and then you turnaround.
Turn around and purchased another asset at 95, maybe economically it's a push or a obviously there'd be some reason to do that transaction to be beneficial and what someone expects of us over the long term, but short term economically a push but tax wise you get to.
Take a deduction.
For the asset sold at 95, maybe you paid a 99 four.
And and that creates a tax shield.
Benefit coming out of the.
Portfolio, so we've seen that dynamic yet, particularly.
Particularly increases and more.
Macro volatile types of years calendar year 2000.
'twenty was one such year of course, because of the virus and a lot of volatility.
Associated with it.
2015.
And <unk> with what was going on predominantly in energy would have been other periods, but theres always some type of dynamic.
That can cause this tax deductibility benefit and volatility ends up net net being a plus for this particular asset.
Asset class.
Because you're financing is locked in and you get the ability to purchase assets in and trade in and buy at a discount.
And then ultimately potentially receive par upon early prepayment or.
Just prepayment.
Through our principal repayments in excess cashflow sweeps.
Add to that volatility benefit the tax deductibility aspect, what it'll be the case going forward its little bit hard to to model I think.
And also in part because we're on for Storable reasons.
A bit off calendar quarter cycle and all against attacks here.
Different from our June fiscal and certainly a calendar.
Yes.
Which you know most in many entities used for their own tax reporting, but I think it's we're cautiously optimistic we'll have similar type of dynamic for return of capital going forward, its a bit hard to quantify but that dynamic and also comped.
Yes, his peers that don't have the multi line approach that we do makes us more tax efficient than any other company. So thank you for pointing out that that benefit Robert.
Sure sure. Thank you.
This concludes our question and.
Answer session I would like to turn the conference back over to John Barry for any closing remarks.
Okay. It's high noon, thank you everyone and have a wonderful afternoon.
See you in a quarter bye.
Thanks, All bye now.
The conference has now concluded thank you for attending today's presentation.
You may now disconnect.