Q1 2023 Prospect Capital Corp Earnings Call
Good day and welcome to the prospect capital first quarter fiscal year 2023 earnings release and conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
I ask a question you May press Star then one on your Touchtone phone Antwerp draw. Your question. Please press Star then two please note that this event is being recorded and I would now like to turn the conference over to Mr. John Barry Chairman and CEO . Please go ahead Sir.
Thank you Chuck.
Joining me on the call today I realize it our president and Chief operating Officer, and Kristin Van to ask our Chief Financial Officer Christian.
Thank you John .
This call is the property of prospect unauthorized use is prohibited.
This call contains forward looking statements that are intended to be subject to safe Harbor protection.
Actual developments and results are highly likely to vary materially and we do not undertake to update our forward looking statements unless required by law.
For additional disclosure.
Our earnings press release, and 10-Q filed previously and available on our website Prospect Street Dot Com now I will turn the call back over to John .
Thank you Kristen.
In the September quarter, our net investment income or NII was $99.3 million or basic NII of 22 cents.
Common share exceeding our distribution rate per common share by <unk>, <unk> and 22%.
Our basic net income applicable to common stockholders was a loss of $105 $2 million or 27.
Common share.
Largely due to unrealized mark to market depreciation from macro conditions.
Our NAV stood at $10.
And one cents per common share in September down.
147.
And four 5% from the prior quarter.
Due to unrealized mark to market.
Appreciation from macro condition.
Over the 10 quarters from the pre pandemic December 2019 quarter to the June 2022 quarter prospect delivered the highest growth in the business development company industry.
Net asset value per common share.
With NAV per common share increasing by 21%.
Over that time period.
Since inception in 2004 prospect has invested $19 $6 billion across 403 investments exiting.
Exiting 274 of these investments.
We have outperformed our peers during past periods of macro volatility.
As a direct result of our previous de risking not chasing leverage.
As well as other risk management controls, including avoidance of cyclical industries and utilization of longer dated flexible financing.
We are staying true to the strategy.
He has served us well since 1988.
Controlling and reducing portfolio.
Balance sheet risk both to protect the capital entrusted to us.
And to protect the ability of such capital to generate earnings for our shareholders.
In the September quarter, our net debt to equity ratio was $53.
5%.
Down 26 percentage points from March 2020, and down three three percentage points from the June quarter as we continue to run.
And under leveraged balance sheet.
Which has been the case for us.
Over multiple quarters and years.
Over the past four years.
There was the Bdcs have increased.
Average with a typical with the BDC now at 123% debt.
Total equity were approximately 69.
<unk> points higher than four prospect.
Running at half the debt leverage or the rest of the industry.
Prospect has not increased that leverage instead, electing lower risk from lower debt leverage with a cautious approach.
In May 2020.
We moved our minimum 1940 Act regulatory.
Asset coverage to 150%.
Equivalent to 200% debt.
Debt to equity.
Which not only increased our cushion.
It also gave us flexibility to pursue our subsequently announced junior capital perpetual preferred equity issuance, which counts toward 40 act asset coverage, but which get significant equity treatment.
By our rating agencies.
We have no plans to increase our actual drawn debt leverage.
And our historical target of <unk> 7.85 debt to equity and we are currently significantly below that target range.
Prospects balance sheet is highly differentiated from peers with 100% of prospects that funding coming from unsecured.
And nonrecourse debt.
<unk> for a prospect for at least 15 years.
Unsecured debt was 70%.
Prospects total debt in September 2022, or 22 percentage points higher than 48% for the typical with the BDC.
Our unsecured and diversified.
Funding profile provides us significantly lower risk and significantly more investment strategy and balance sheet flexibility than many of our BDC peers enjoy.
On the cash shareholder distribution front.
We are pleased to report the board's declaration of continued steady monthly distributions.
We are announcing monthly cash common shareholder distributions of <unk> <unk> per share for each of November .
<unk> in January .
These three months represent 63rd.
<unk> fourth and.
65.
Consecutive six.
Monthly cash distributions.
System with past practice, we plan on announcing our next set of shareholder distributions in February .
Our goal over the long term.
Is to sustain our shareholder distributions.
Biding low stability against a macro backdrop delivering greater volatility elsewhere.
Since our IPO 18 years ago through our January 2023 distribution at the current share count.
We will have paid $19 86.
For common share to original shareholders aggregating.
Aggregating approximately $3 8 billion in cumulative distributions to all common shareholders.
Since October 2017.
Our NII per common share, whereas preferred dividends has aggregated $3 97.
While our common shareholder distributions per common share have aggregated $3 60.
With our NII exceeding distributions during this period by 37.
Sure.
We have we are also pleased to announce continued preferred shareholder distributions.
<unk> successful launches of around $1 $75 billion non traded preferred programs.
And $150 million listed preferred.
We've raised approximately $1 2 billion in preferred stock to date.
With strong support from institutional investors.
The A's and broker dealers, including the addition of two <unk>.
<unk> sized independent broker dealer systems.
As well as top wire house and regional broker dealer systems. 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.
On the same basis as other shareholders.
In the open market.
Prospect management is the largest shareholder in prospect.
And has never sold a share.
Our senior management team.
<unk> happily eat our own cooking currently owning approximately 28%.
Common shares outstanding representing approximately $1 $1 billion of our common equity at <unk>.
Thank you I'll now turn the call over to Greg.
Thanks, John our scale platform with approximately $8 4 billion of assets and Undrawn credit at Prospect Capital Corporation continues to deliver solid performance in the current dynamic environment.
Our experienced team consists of over 100 professionals, representing one of the largest middle market investment groups in the industry.
With our scale longevity experience and deep bench, we continue to focus on a diversified investment strategy that is.
Spans third party private equity sponsor related lending.
Direct non sponsor lending.
Aspect sponsored operating and financial buyouts.
Structured credit.
Real estate yield investing.
Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities coupled.
Coupled with wider spread primary opportunities with a pullback from other investment groups, particularly highly leveraged ones.
Unlike many other groups, we've maintained and continue to maintain significant dry powder that we expect will enable us to capitalize on such attractive opportunities as they arise.
This diversity of origination approaches allows us to source.
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 typically evaluates thousands of opportunities annually.
And invests in a disciplined manner in a low single digit percentage of such opportunities.
Our non bank 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 our portfolio at fair value comprised 51, 8% first lien debt up one 9% from the prior quarter.
19% second lien debt down 4% from the prior quarter.
Nine 2% subordinated structured notes with underlying secured first lien collateral down 2% from the prior quarter.
20% unsecured debt and equity investments down one 3% from the prior quarter.
Resulting in 80% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral up one 3% from the prior quarter.
<unk> approach is one that generates attractive risk adjusted yields and our performing interest bearing investments were generating an annualized yield of 12, 4% as of September an increase of one three percentage points from the prior quarter.
A significant contributor to NII growth this past quarter.
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 unsecured debt with.
With our originations to protect against downside risk, while still achieving above market yields through credit selection discipline and a differentiated origination approach.
As of September we held 128 portfolio companies.
Increase of one from the prior quarter with a fair value of $7 6 billion flat with 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 18, 6%.
As of September our asset concentration in the energy industry stood at one 6%.
Our concentration in the hotel restaurant and leisure sector stood at <unk>, 3%.
And our concentration in the retail industry stood at <unk>, 4%.
Non accruals as a percentage of total assets stood at approximately 3% in September down <unk>, 1% from the prior quarter and down 6% from June 2020.
Our weighted average middle market portfolio net leverage stood at 529 times EBITDA.
<unk> below our reporting peers.
Our weighted average EBITDA per portfolio company stood at $114 2 million in September an increase of $3 4 billion and 3% from June <unk>.
As we continue to achieve solid profit growth with our portfolio companies.
Originations in the September quarter aggregated $305 million.
We also experienced $151 million of repayments and exits.
As a validation of our capital preservation objective.
Resulting in net originations of $154 million.
During the September quarter, our originations comprised 69, 6%.
Middle market lending 13, 6% structured notes 11, 9% real estate and four 9% middle market lending and buyouts.
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.
And more recently an expansion into senior living.
With attractive in place five to 12 year financing.
And the current higher financing cost environment, we're focusing on preferred structures with significant third party capital support underneath our investment attachment points.
And PRC are private REIT.
Has real estate properties that have benefited over the last several years and more recently from rising rents showing the inflation hedge nature of this business segment.
Strong occupancy is high.
Hi collections suburban work from home dynamics 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 businesses.
And PRC as of September and not including partially exited deals where we have received back more than our capital invested from distributions and recapitalization.
Exited completely 45 properties at an average net realized IRR and PRC of 25, 2%.
Average realized cash multiple of invested capital of two five times with an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships.
Our structured credit business.
Has delivered attractive cash yields.
Demonstrating the benefits pursuing majority stakes working with World class management teams, providing strong collateral underwriting through primary issuance and focusing on favorable risk adjusted opportunities.
As of September we held $695 million across 37, nonrecourse subordinated structured notes investments.
We maintained a relatively static size for our subordinated structured notes portfolio.
On a dollar basis electing to grow our other investment strategies and resulting in the structured notes portfolio now comprising less than 10% of our investment portfolio.
These underlying structured credit portfolios comprised around 1700 loans.
And a total asset base of around $15 billion.
As of September the structured credit portfolio experienced a weighted average trailing 12 month default rate of 85 basis points up 60 basis points from the prior quarter and representing a five basis point outperformance versus the overall <unk>.
Market.
In the September quarter. This portfolio generated an annualized cash yield of 17, 2% down three 8% from the prior quarter and GAAP yield of 13, 2% up two 6% from the prior quarter with the difference representing.
A significant amortization of our cost basis.
As of September our subordinated structured credit portfolio has generated $1 5 billion in cumulative cash distributions to us representing around 107.
7% of our original investment.
Through September we've also realized 34 investments totaling $1 5 billion with an average realized IRR of 13, 4%.
Cash on cash multiple of 162 times.
Our subordinated structured credit portfolio consists entirely of majority owned positions.
Such 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 the majority holder, we control 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.
Other 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 extend or reset the investment period to enhance value.
We completed 32, Refis and resets since December 2017.
So far in the current December 2022 quarter across our overall business, we booked a $117 million in originations and experienced $17 million of repayments for $100 million of net originations.
Originations have consisted of 85, 5% middle market lending.
10, 7% real estate and three 8% subordinated structured notes.
Thank you I'll now turn the call over to Kristen Kristen.
Thank you Greg.
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 opt.
<unk>.
Our company has locked in a ladder of liabilities extending 30 years into the future.
Our total unfunded eligible commitments to non controlled portfolio companies totals approximately $43 million, representing approximately <unk>, 6% of our assets.
Our combined balance sheet cash and Undrawn revolving credit facility commitments currently stand at approximately $940 million.
We're a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond develop a notes program.
Issue under a bond and equity ATM acquire another BDC and many other lists of first.
In 2020, we also added our programmatic perpetual preferred issuance to that Lisa first followed in 2021 by our listed perpetual preferred as another first in the industry.
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 September 2022, we held approximately 5 billion of our assets as unencumbered assets.
Presenting approximately 65% of our portfolio.
The remaining assets are pledged to prospect capital funding nonrecourse SPV, where in September 2022, we completed an upsizing and extension of our revolver to a refreshed five year maturity.
We currently have 168 billion of commitments from 48 banks and increase six lenders from August 2022, and demonstrating strong support of our company from the lender community with a diversity unmatched by any other company in our industry.
The facility revolves until September 2026, followed by year of amortization with interest distributions continuing to be allowed to us.
John price pricing is now so far plus 2.05%.
All of our floating rate assets 94, 3% have LIBOR or so for Florida floors with a weighted average floor of one <unk> percent.
Short term rates have now exceeded those floors, giving us the benefit of increased asset yields from fed rate hikes.
Outside of our revolver and benefiting from our unencumbered assets, we've issued at prospect Capital Corporation, including in the past two years.
Multiple types of investment grade unsecured debt.
<unk> 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 grade triple B minus rating from S&P.
And investment grade <unk> rating from Moody's and investment grade Triple B minus rating from Kroll.
And investment grade Triple B rating from Egan Jones.
And in investment grade Triple B low rating from BB RF and.
In 2021 be received the latter investment grade rating, taking us to five investment grade ratings more than any other company in our industry.
All of these ratings have stable outlooks.
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.
Our debt maturities extend through 2052 with.
So many banks and debt investors across so many debt tranches, we have substantially reduced our counterparty risk over the years.
In the September 'twenty to 'twenty two quarter, we have continued utilizing our low cost revolving credit with an incremental 545% cost. We also have continued with our weekly programmatic internet issuance on an efficient funding basis.
To date, we have raised approximately $1 2 billion in aggregate issuance of our perpetual preferred stock across our preferred programs enlisted preferred.
Including $288 million in the September 2022 quarter and $163 million to date in the current December 2022 quarter.
With the ability potentially to upsize such programs based on significant balance sheet capacity.
We now have six separate unsecured debt issuances aggregating $1 5 billion not including our program notes with maturities extending through October 2028.
As of September 2022, we had $349 million of program notes outstanding with staggered maturities through March 2050 Tam.
At September 32022, our weighted average cost of unsecured debt financing with 433% a decrease of 0.0% to 2% from June 30, and a decrease of <unk>, 3% from September 32021.
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 jet participants.
As many brokerage firms either do not make trips 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 DTC.
At a 5% discount and obtain confirmation of same from your broker.
Our preferred holders can also we'd like to drive at a price per share of $25.
Now I'll turn the call back over to John .
Thank you Kristen.
We can take questions now.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Again to ask a question. It is star then one.
This.
<unk> our question and answer session I would like to turn the conference back over to Mr. John Barry for any closing remarks.
Yes. Thank you very much everyone have a wonderful lunch.
Your next time Bye now thank you all.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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