Prospect Capital Corporation Q3 2023 Earnings Call

It didn't rain local to prospect capital third quarter fiscal year 2020 earnings release and conference call.

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Please note this event is being recorded.

I'd now like to turn the conference over to John Barry Chairman and CEO . Please go ahead ma'am.

Thank you Jordan.

Joining me on the call today are grill, Isaac our President and Chief operating Officer, and Kristin Van desk, 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 see our earnings press release, and 10-Q filed previously and available on our website Prospect Street Dotcom now I'll turn the call back over to John .

Yeah.

Thank you Christian.

In the March quarter, our net investment income or NII was $102.2 million or basic NII of 21 cents per common share.

Exceeding our distribution rate per common share by three cents.

Our basic NII coverage of our common distribution is now 117%.

Our annualized basic NII yield.

Is 8.9% on a book basis and 13, 2%.

Based on our May eight stock price close.

Prospects, 92.1% interest income as a percent of total investment income in March 2023 was at the highest level since September 2020, demonstrating prospects strong recurring.

Revenue model.

Our basic net income net loss applicable to common shareholders was $108.9 million or 27 cents per common share.

Our N a V stood at $9.48 per common share in March.

Down 46 cents and four 6%.

From the prior quarter.

Largely due to unrealized mark to market depreciation.

Since inception in 2004.

Prospect has invested $20 billion across 414 investments exiting.

278.

Of those investments.

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 six cents per share for each of May June July and August .

These four months rep.

Represent the 69 70, 71st.

And seventy-second consecutive six cents per share cash distributions.

Consistent with past practice, we plan on announcing our next set of shareholder distributions.

In August .

Since our IPO 19 years ago through our August 20 twenty-three distribution.

At the current share count.

We will have paid $20.28 per common share to original shareholders, representing two one times.

March common N a V and aggregating over 3.96 billion in cumulative distributions to all common shareholders.

Since October 2017.

Our NII per common share, whereas preferred dividends.

The aggregated $4 40 sets, while our common shareholder distributions per common share handbag aggregated $3.96.

With our NII exceeding distributions during this period.

By 44 cents per common share.

$166 million of X.

S NII representing.

111% coverage.

We're also pleased to announce continued preferred shareholder distributions.

Successful launches.

$2 billion non traded preferred programs.

And $150 million of wisdom preferred.

We've raised over 1.5 billion in preferred stock today.

With strong support from institutional investors Ria's and broker dealers, including the addition of two top five sized independent broker dealer systems.

As well as top wire houses and regional broker dealer systems.

Thank you I will now turn the call over to Greer.

Yeah.

Thank you John .

Our scaled platform with over $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.

We continue to focus on a diversified investment strategy that spans third party private equity sponsor related lending die.

Direct non sponsor lending prospect sponsored operating and financial buyouts.

Structured credit.

In real estate yield investing.

Consistent with past cycles we.

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 leveraged ones.

Like many other groups, we have maintained and continue to maintain significant dry powder and low leverage that we expect will enable us to capitalize on such attractive opportunities as they arise.

This diversity of origination approaches 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 typically evaluates.

Tens 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 of the corporate capital stack.

With a preference for secured lending and senior loans.

Consistent with our investment strategy, our secured lending in first lien mix has continued to increase.

As of March our portfolio at fair value comprised 54.4% first lien debt up 1.4% from the prior quarter.

$17, 6% second lien debt down four 9% from the prior quarter nine.

9.2% subordinated structured notes with underlying secured first lien collateral up 2% from the prior quarter and 18, 8% unsecured debt.

And equity investments.

<unk>, 7% from the prior quarter, resulting in 81, 2% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral that's up one 7% from the prior quarter.

Prospects approach is one that generates attractive risk adjusted yields and our performing interest bearing investments were generating an annualized yield of 13, 4% as of March an increase of 0.5 percentage points from the prior quarter as we continued to benefit from increases in <unk>.

Short term rates.

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 origination approach.

As of March we held 127 portfolio companies.

Down three from the prior quarter with a fair value of $7 6 billion.

Decrease of approximately $178 million.

We also continue to invest in a diversified fashion.

Across many different portfolio company industries with a preference for avoiding cyclicality it with no significant industry concentration the largest is 18%.

As of March our asset concentration in the energy industry stood at one 7%.

Hotel restaurant leisure sector <unk>, 3%.

And retail 0.4%.

Non accruals as a percentage of total assets stood at approximately point <unk>, 2% in March 2023.

0.3% from the prior quarter and down <unk>, 7% from June of 2020.

Our weighted average middle market portfolio net leverage stood at five three times EBITDA.

Which is substantially below our reporting peers, our weighted average EBITDA per portfolio company stood at $114 million.

Originations in the March quarter aggregated $92 million, we also experienced $114 million of repayments and exits as a validation of our capital preservation objective.

Resulting in net repayments of 22 million as we continue to take cautious are cautious approach toward new credit underwriting given macro economic conditions.

During the March quarter, our originations comprised 42, 8% middle market lending and buyouts.

34% real estate and 26.1% middle market lending.

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 in the past year and expansion into senior living.

With attractive in place five to 12 year financing.

To date, we have acquired $3 8 billion in 105 properties across multifamily 81 properties student housing eight properties.

Self storage 12 properties and senior living for properties in the current higher financing cost environment, we're focusing on preferred structures with significant third party capital support.

Underneath our investment attachment points.

N P R C or 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 Occupancies high 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 if you are seeing as of March and not including partially exited the deals where we have received back more than our capital invested from distributions and recapitalizations.

As exited completely forty-five properties at an average net realized IRR to N. P. R. C of 25, 2% and an 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 of 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 March we held $698 million across 35, 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 more than 1600 loans.

In the March quarter, this portfolio generated a GAAP yield of 13.8% down one 1% from the prior quarter.

As of March our current subordinated structured credit portfolio has generated 1.43 billion in cumulative cash distributions to us representing around 110% of our original investment through March. We've also exited 13 investments with an average realized IRR of <unk>.

13.7% and cash on cash multiple of 1.39 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 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 rather than when loan asset valuations might be temporarily low waste.

We as majority investor can refinance liabilities on more advantageous terms.

Bond baskets in exchange for better terms from debt investors in the deal and extend or reset the investment period to enhance value.

We've completed 32 of these refinancings and resets since December of 2017.

So far in the current June 2023 quarter across our overall business, we booked 136 million in originations and experienced $27 million of repayments for 109 million of net originations.

Originations have consisted of 51, 5% middle market lending.

34, 5% real estate, and 14% middle market lending and buyouts.

I'll now turn the call over to Kristen Kristen.

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.

Quiddity to capitalize on attractive opportunities are.

Our company has locked in a ladder of liabilities extending 29 years into the future.

Our total unfunded eligible commitments to non controlled portfolio companies totaled approximately $53 million, representing approximately 0.7% of our assets.

Our combined balance sheet cash and Undrawn revolving credit facility commitment currently stand at approximately 864 million.

We are 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 lesser first.

In 2020, we also added our programmatic perpetual preferred issuance to that list of 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 the balance sheet.

As of March 2023, we held over $5 1 billion of our assets as unencumbered assets, representing over 66% of our portfolio.

The remaining assets are pledged to prospect capital funding nonrecourse SPV wherein September 2022 we completed an upsizing and extension of our revolver to a refreshed five year maturity.

We currently have 1.78 billion of commitments from 51 banks, an increase of nine lenders from August 2022.

And demonstrating strong support of our company from the lender community with the diversity unmatched by any other company in our industry.

Shortly after the well publicized bank failures in March we added two new banks and Upsized and existing bank within our credit facility.

The facility revolves until September 2026, followed by a year of amortization with interest distributions continuing to be allowed to us.

Our John pricing is now so far plus 2.05%.

Of our floating rate assets, 94% have LIBOR, so for floors with a weighted average floor of one point to 1%.

Short term rates have now exceeded the floor is 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 few 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 has 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 B double a three 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 D. B R S and.

In 2021, we received the ladder 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 29 years.

Our debt maturities extend through 2052.

With so many banks and debt investors across so many unsecured and nonrecourse debt tranches, we substantially reduced our counterparty risk over the years.

In the March 2023 quarter, we have continued utilizing our low cost revolving credit with an incremental $6 seven 1% cost.

We also have continued with our weekly programmatic internet issuance on an efficient funding basis.

To date, we have raised over one 5 billion in aggregate issuance of our perpetual preferred stock across our preferred programs enlisted preferred including 138 million in the March 2023 quarter.

53 million to date in the current June 2023 corner.

With the ability potentially to upsize such programs based on significant balance sheet capacity.

We now have five separate unsecured debt issuances aggregating $1 2 billion not including our program notes with maturities extending through October 2028.

As of March 2023, we had 355 million of program notes outstanding with staggered maturities through March 2050 Tam.

At March 31st 2023, our weighted average cost of unsecured debt financing with 4.07% a decrease of 0.26% from December 31, 2022, and a decrease of 0.28% from March 31 2022.

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 steam from your broker.

Our preferred holders can also elected yet at a price per share of $25.

Now I'll turn the call back over to John .

Yeah.

Yeah.

Thank you we can now take any questions.

Okay.

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At this time all momentarily similar roster.

Okay.

Yeah.

Yeah.

Our first question comes from Sean <unk> with Raymond James. Please go ahead.

Hey, guys good morning.

My question is do you guys have any realized gains from the pipeline sets us about incremental earnings for the course for the quarters looking forward.

Hey, Greer why don't you take that.

Sure.

Well, you'll realize gain would be based in the future on our future.

Our realization hasn't happened yet so.

If were quote in the pipeline it would already have.

An executed agreement.

With Oh, maybe at closing.

Pending same.

I'm not aware of any in that category right now, but over the years in our.

Equity oriented book will call middle market lending and buyouts or realizations have generated around a mid thirties percent IRR across.

All of our capital that includes that as well as equity.

And then within our real estate business, although the flows work a little bit differently coming back to prosper.

Prospect Capital Corporation, but within N P. R C.

Zara ours as just discussed.

Repaired remarks have been in the mid 20.

Twenties.

So we've actually over the last year or two.

Ben.

I'm spending more time prioritizing.

Deals they tend to be a little bit smaller than our average portfolio company with an EBITDA of over $110 million.

So more of the middle market or even lower middle market, we've been evaluating equity linked deals where you can purchase equity you're not necessarily majority equity.

But also minority equity loss share and RK logistics, our two deals that come to mind that we've closed in the last year and a half. We've also been active with the add on.

Acquisitions for our platform deals in that particular <unk>.

Segment of our portfolio, it's been a frothy M&A market as we know for for quite some time.

Until until recently and you know many buyers are or previously competing buyers are sitting more in their hands hesitant to act or have financing costs that are perhaps prohibitively expensive because we bring your own financing to bear with these investments.

Since we have a bit more flexibility and in general would expect that sort of one stop.

Buyout or equity linked business to have more not fewer opportunities when markets get more seized up when their economic downturns et cetera.

So we think the futures promising that particular segment that again, we're prioritizing.

But nothing.

Imminent I would say comes to mind.

For realizations.

Anything you'd add to that thank you very much.

Ah well I have nothing to add so how about the next question.

Okay.

There are no more questions at this time. This concludes the question and answer session I would like to turn the conference back over to John Barry for closing remarks.

Okay. Thank you everyone and have a wonderful day bye now.

You all bye.

Okay.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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