Q1 2024 Prospect Capital Corp Earnings Call
Hello, and welcome to the prospect capital first quarter fiscal year, 'twenty 'twenty four earnings release and conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions.
I'll ask a question you May press Star then one on your telephone keypad to withdraw from the question queue. Please press Star then tail.
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 Jay.
Yeah.
Joining me on the call today, I realize vick, our president and C O O.
And Christian band ask our Chief Financial Officer Christian.
Thanks, John.
This call contains forward looking statements that are not intended to be subject to safe Harbor protection future results are highly likely to vary materially we do not undertake to update our forward looking statements for additional disclosure see our earnings press release, and 10-Q filed previously and available on our website prospects.
Street Dot Com now I'll turn the call back over to John.
Thank you Kristen.
Yeah.
In the September quarter, our net investment income or NII was $125 $6 million.
Or basic NII of 25 cents per common share.
Exceeding our distribution rate per common share by seven cents.
Our basic NII coverage of our common distribution is now 139%.
Our annualized basic NII yield is 10, 8% on a book basis and 18, 7%.
Based on our November 7th stock price clubs.
Our N. A V stood at 925 per common share in September up one cent or 1% from the prior quarter.
Since inception in 2004 prospect has invested $24 billion across 419 investments.
Exiting 283 of these investments.
We have outperformed our peers during past periods of macro volatility as a direct result of our previous derisking not chasing leverage.
As well as other risk management controls, including avoidance of cyclical industries.
And utilization of longer dated and unsecured flexible financing.
We are staying true to the strategy that has served us well since 1988.
Controlling and reducing portfolio and 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.
Net debt to equity ratio.
Was 46, 5%.
Down 27.6 percentage points from March 'twenty 'twenty.
And down 2.3 percentage points from the June 2023 quarter.
We continue to run an under leveraged balance sheet, which has been the case for us over multiple quarters and years.
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 November December and January.
Three months represent the 75th.
76, and 77th consecutive six cents per share cash distributions.
Consistent with past practice, we plan on announcing our next set of shareholder distributions in February.
Since our IPO nearly 20 years ago through January.
'twenty 'twenty four distribution at the current share count.
We will have distributed $20 58 per common share to original shareholders, representing 2.2 times September common N V per share.
And aggregating over $4.101 billion in cumulative distributions to all common shareholders.
Since October 2017.
Our NII per common share.
Preferred dividends.
Is that aggregated $4.89.
While our common shareholder distributions per common share.
Have aggregated $4.32.
With our NII exceeding.
Distributions during this period.
By 57 cents per share and.
And representing 113.
Percent coverage.
I will now turn the call over to Greer.
Yeah.
Thank you John.
Our scale platform with nearly $9 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 120 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 spans third party private equity sponsor related lending.
Direct non sponsor lending.
Prospect sponsored operating and financial buyouts.
Structured credit.
And real estate yield investing.
Assistant 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 leveraged ones.
Unlike many other groups.
We have maintained and continue to maintain significant dry powder and balance sheet flexibility that.
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 thousands of opportunities annually.
And invests in a disciplined manner in a low single digit percentage.
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.
Consistent with our investment strategy.
Our secured lending and first lien mix has continued to increase.
As of September 2023, our portfolio at fair value comprised 57, 3% first lien debt, that's a 0.8% from the prior quarter 15.
15.9% second lien debt, that's down 5% from the prior quarter eight.
Eight 1% subordinated structured notes with underlying secured first lien collateral.
That's down <unk>, 5% from the prior quarter, and 18.7% unsecured debt and equity investments.
Up 2% from the prior quarter.
Again, 81, 3% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral.
Down 0.2% 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 12.7% as of September 2023.
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 September 2023, we held 128 portfolio companies a decrease of two from the prior quarter.
With a fair value of $7 7 billion in.
An increase of approximately $12 million.
We also continued 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, 2%.
As of September our asset concentration in the energy industry stood at 1.6%.
For hotels restaurants, and leisure sector, 0.3%.
And retail industry.
3%.
Non accruals as a percentage of total assets stood at approximately 0.2% in September of 2023, that's down <unk>, 9% from the prior quarter.
Our weighted average middle market portfolio net leverage stood at five three times EBITDA substantially.
Substantially below reporting peers our.
Our weighted average EBITDA per portfolio company stood at $111 million.
Originations in the September quarter, aggregated 131 million.
We also experienced $301 million of repayments sales and exits.
As a validation of our capital preservation objective.
Resulting in net repayments of $170 million.
As we continue to take a cautious approach toward new credit underwriting given macroeconomic conditions.
During the September quarter, our originations comprised 48.5% real estate.
46% middle market lending and 10.9% middle market lending and buyouts.
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 on accumulative basis.
We've acquired $3 8 billion in 105 properties across multifamily 81 properties.
Student housing eight properties.
Self storage 12 properties and senior living four properties and the current higher financing cost environment, we're focusing on preferred equity structures with significant third party capital support underneath our investment attachment points.
N P. R C. Our private REIT has real estate properties that have benefited over the last several years and more recently.
Rising rents.
Showing the inflation hedge nature of this business segment.
Strong Occupancies 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.
N P. R C as of September and not including partially exited deals we have where we have received back more than a capital invested from distributions and recapitalization.
Has exited completely 45 properties at an average net realized IRR to N PRC of 25, 2% and 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 and providing strong collateral underwriting through primary issuance as well as focusing on favorable risk adjusted opportunities.
As of September <unk>.
We held 627 million across thirty-three Don recourse subordinated structured notes investments.
We maintained a relatively static to slightly declining signs for subordinate structured notes portfolio on a dollar basis electing to grow our other investment strategies and resulting in the structured notes portfolio now comprising 8% of our investment portfolio.
These underlying structured credit portfolios comprised nearly 1600 loans in.
In the September quarter, this portfolio generated a GAAP yield of 10, 7% and.
And a cash yield of 17, 5% with a difference representing an amortization of our cost basis.
As of September our current subordinated structured credit portfolio has generated 1.4 billion in cumulative cash distributions to us.
Representing over 116% of our original investment.
Through September we've also exited 15 investments with an average realized IRR of 12% and.
And cash on cash multiple of 1.3 times, our subordinated structured credit portfolio 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 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.
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.
The investment period to enhance value.
Completed 32, refinancings and resets since December of 'twenty 17.
So far in the current December 'twenty, two 'twenty three quarter across our overall business.
We booked $57 million in originations and experienced $1.7 million of repayments for over $55 million of net originations. Those originations have consisted of 53, 5% real estate two.
24.5% structured notes and 22% middle market lending.
Thank you I'll now turn the call over to Kristen Kristen.
Thanks, 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 opportunities.
Yeah.
Our company has locked in a ladder of liabilities extending 29 years into the future.
Our total unfunded eligible commitments to portfolio companies totaled approximately 27 million, representing approximately 0.3% of our assets, our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at approximately 968 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 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 our balance sheet.
As of September 2023, we held over $4 8 billion of our assets as unencumbered assets, representing over 61% of our portfolio.
The remaining assets are pledged to prospect capital funding, a nonrecourse SPV where in September 2022, we completed an upsizing and extension of our revolver to a refreshed five year maturity.
We currently have 195 billion of commitments from 53 banks, an increase of 11 lenders from August 2022, and demonstrating strong support of our company from the lender community with a diversified unmatched diversity unmatched by any other company in our industry.
Shortly after the well publicized bank failures in March we added two new banks and upsizing existing bank within our credit facility.
The facility revolves until September 2026, followed by yet amnesty amortization with interest distributions continuing to be allowed to us.
Our drawn pricing is now so far plus 2.0% to 5%.
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 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 B double a three rating from Moody's and investment grade Triple B minus rating from Kroll and.
And investment grade Triple B rating from Egan, Jones, and an investment grade Triple B low rating from D. B R. S.
In 2020, one we received a lot of 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 have now tapped the unsecured term debt market on multiple occasions to ladder, our maturities and to extend our liability duration out 29 years our.
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 September 2023 quarter, we have continued utilizing our revolving credit and have continued with our weekly programmatic internet issuance on an efficient funding basis.
To date, we have raised nearly $1 7 billion in aggregate issuance of our perpetual preferred stock across our preferred programs unlisted preferred including $80 million in September 2023 quarter and $32 million to date in the current December 2023 corner.
We have five separate unsecured debt issuances aggregating $1 2 billion not including our program notes with maturities extending through October 2028.
As of September 2023, we had $359 million of program notes outstanding with staggered maturities through March 23rd detail.
At September 30th 2023, our weighted average cost of unsecured debt financing with 4.08% an increase of 0.0% to 1% from June 30 of 2023, and a decrease of 0.25% from September 30th 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 drip participants as.
As many brokerage firms either do not make trips automatic or have their own synthetic drafts 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 the same from your broker.
Our preferred preferred holders can also elect to drive at a 5% discount to the stated value per share of $25 now I'll turn the call back over to John.
Okay. Thank you Kristen.
Why don't we go ahead and answer questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Today's first question comes from Finian O'shea with Wells Fargo. Please go ahead.
Hey, everyone, Thanks, and good morning.
First question on N P REIT trying to get a sense of the underlying maury.
Mortgage liability profile.
At.
First it looks like a lot of their rates have been stable per per your disclosures, but.
Can you give a breakdown of say.
Say interest rate caps that.
Roll off soon or resets that are soon approaching.
That would lead to more pressure there.
And second part given the headwinds on on CRE debt that we all read about.
Seeing if you needed to put more money in for any of your recent refinancings. Thank you.
Thanks, Finian, it's grill tick that so our philosophy with real estate and multi.
Multifamily as a where we significantly focused in the last several years not exclusively but significantly.
Is has been with cap rates at lower than historical averages. It behooves, one as the purchaser to finance with a largely fixed rate.
Funding in a matchbook fashion and in a very attractive.
Attractive when we put on that financing.
Fashion as well I would estimate here that are 90% of the financing.
Now that we have utilized perhaps more than that.
In our real estate portfolio company in PRC has utilized fixed rate funding. We've also had a philosophy of using long term.
Funding to reduce not just interest rate risk, but maturity risk and our typical deal done over the last.
Decade, plus and we exited.
The vast bulk of the earlier vintages.
Utilized 10 year financing.
Financing in some cases 12 years typically with interest.
Interest only Io period of at least five years and in some cases.
Seven years.
Of course, these are investments, where we deploy capital in enhanced net operating income from our value add renovation programs at the unit level and the common areas are.
And that de levers investments over time through NOI growth than you've had on top of that through inflationary forces through shortages of workforce housing which continues in many markets.
Strong rent growth and occupancy to drive NOI further.
Even beyond what the value add programs have generated so that's how we've been able to generate so many exits.
95% IRR as we talked about.
The extent book I'm not aware of.
Any deals where we've had to put in capital.
From a reefer.
Refinancing need and we have years to run for the.
The existing book as well.
Right now it's Ah.
On the new deal front is of course is tricky because of high financing cost, but hey, that's true across the board in the corporate world too.
Not just real estate.
Borrowing money at 12, 9% for first lien loan in the corporate world in birth that that's an eight X multiple and you're an equity sponsor paying more than at extra company, you've got a negative arb a negative spread on the corporate world.
Not just in real estate, where it's talked about even more obviously want to examine the underlying profit of your underlying business as the case may be.
To make sure there is sufficient growth to justify if one were to be that sort of a sponsor.
Within real estate, we viewed it as more attractive to focus on sort of a tweener capital.
Preferred equity.
Solutions or solutions, where there's a advantageous tax abatements or other type of situations, where we can purchase for a pro forma cap rate.
It is attractive to give ourselves a more advantageous spread we're working on such deals right now.
Did I answer your questions opinion.
Yes sure that's helpful.
Just drilling down a bit on on.
Adding new capital the recent.
Additional investment or loan to N. P. REIT was was explained for for Capex and working capital for existing properties.
Normally I would think that would be handled at the property level. So is is that a function of.
Of higher interest rates at the property levels say for the smaller part of your book that's floating rate.
And should we expect any more of that near term.
Well, there's two things going on one is the.
Financing the prospect Capital Corporation has to earn PRC the portfolio company.
So that's the dynamic that you saw last quarter, but the second aspect is you'll typically see fundings each quarter.
That occurs from.
In P&C the portfolio company too.
Individual properties, that's normal and expected because we're deploying capex dollars over time in our value added renovation program and then other uses for Capex. So when you spend the capex moneys, it's over a multiyear period you of course have occupied apartments people living.
Those and you're only going to renovate upgrades.
A particular unit when it turns over.
Of course, now when someone's actually living there.
Because of what's happened with.
Individual housing and what the financing costs look like they're making prohibitively expensive and causing a sharp downturn in housing volumes and purchasers of folks are staying in their apartments much longer.
Our turnover is less.
Far less than in past years. So that's good news from an occupancy standpoint.
The good news from a rent growth standpoint.
It does sometimes cause a slower rollout of the renovation programs at least within the unit separate from the common areas.
Because you do the upgrade when someone moves out does that helpful.
Very much so and if I could do a bonus question.
On the preferreds.
The new issuance has fallen quite a bit.
In recent quarters, so seeing if that's maybe a function of interest rates, if you might need to start offering higher rates, there or if or if you are happy with this level.
And in that in that context can you provide a reminder.
On the sort of target.
Preferred stock composition in your capital structure. Thanks, so much.
Sure.
The year over year comparisons are challenging.
Or let's say not necessarily apples to apples for 2023 compared to 20.
'twenty two there are a couple of significant liquidity events that happened in the non traded.
Channel four other issuers in 2022, and what happened was holders of that paper ended up recycling.
Onto prospects program.
Since we're the number one market leader and over 50% market share player. We picked up for those volumes are there havent been such liquidity events, which actually occurred in the REIT space in 2023, I'm not aware of any significant one as expected.
So you're comping that year over year means.
Of course, there's been a decline in volumes and then the second point you mentioned is.
A continued increase in prevailing.
<unk> rates, which is also no doubt had an impact on volumes as well we're not currently envisioning any changes to our rates, we manage our cost of capital.
Quite carefully and were very happy.
With our cost of capital I think your unsecured debt cost of capital is around 4% right now and even after you factor in the.
Preferreds were five and change we're.
We're seeing folks out there issue.
Paper much more expensively than that.
We're not in a position where we have to necessarily do that with very little in the way of maturities coming up for the next couple of years, but as always we'll examine what the various capital markets offer us for for dancing recall prospect is the.
Firm that pioneered the vast bulk of liability structures in the BDC industry going back to being the first convertible bond issuer first institutional bond issuer.
About a decade ago, and then have pioneered medium term notes institutional bonds.
T M programs preferreds perpetual preferreds non traded preferred so we don't necessarily have certainty composition targets. What we do is we are focused on the various markets and see what's most attractive for us as an issuer.
And when we issue we want to do so as a choice and from a position of strength and also being opportunistic about.
The climate, we find ourselves and so we're very happy couple.
A couple of years back in a low rate environment, we were quite proactive in doing a three bond deals during that time period.
And have not been so interested in chasing.
That market. Unlike some of our peers, who perhaps have done so out of necessity rather than balance sheet strength choice.
So hopefully that helps with your bonus question Fithian. Thank you, yes. Thanks, so much.
Thank you. The next question is from Sean Paul Adams with Raymond James. Please go ahead.
Good morning, guys touching back on the series a fixed rate preferred stock.
How did you guys quite arrive to the valuation of about 36% discount to par.
I know you guys talked about anticipating.
Future perpetual stock offers to pay a higher dividend but implies.
Implies like a value dividend pay rate is closer to 8%.
Are you referring to our existing a tender offer or what we just announced.
For our traded perpetual preferred.
Well, it's a balancing act.
And it's an option of course, not an obligation for any holder.
Should they choose to utilize this option.
As opposed to.
Obtaining liquidity in a fairly limited volume.
Issue and it's a balancing act.
We think that the premium offered to what was launched just attractive.
But bouncing that is as an issuer and it's a perpetual instrument, we want to make sure. It's net investment income and net asset value accretive as well. So we struck what we thought was the right balance.
Between the two and we'll see what folks think later this month.
Okay. Thank you and turning to the NPR C portfolio are you anticipating the terminal cap rate when used to value the common equity to change materially.
Relatively.
Given that the public multifamily Reits are now trading in the six 5% to 7% cap rate range and Youre currently sitting at five 8%.
Hello cap rate.
Right, where we're participants in the private markets not the public markets, we don't purchase public REIT equity.
Equity, we don't purchase public REIT securities really of any kind, it's a private equity private capital investment strategy at N. P. R. C. Just like the rest of our business, we invest in private companies almost exclusively sometimes we'll make a loan to a micro cap public company, but.
That's usually the exception.
Not the rule.
There's been a you know delta between a private real.
Our real estate properties, and where they trade in the public.
<unk> for as long as I can remember.
But that's those aren't the markets in which we participate and of course there are other.
G&A and trading and other costs pertaining to a public Reits and lack of control.
As well there was a control premium aspect that's advantageous of course, when you buy one of these properties and you have the ability to effectuate change through our value add renovation program like what I described to the last questioner. We're also not in the prediction.
Business for cap rates for interest rates for for any of those.
Types of markets and what is arrived at there is all done on a third party.
Independent valuation basis approve by independent directors independent auditors, we think we have best practice governance and this is what we brought to the industry as the first company in our industry to use.
100% every quarter since inception.
Fair valuations.
In 2004, when we IPO that did not exist before prospect capital brought it to bear and we'll continue to utilize.
That best practice approach. Thank you.
Perfect that's great color.
Thank you. This concludes our question and answer session I would now like to hand, the call back to John Barry for closing remarks.
Okay, well, thank you and have a wonderful afternoon, everyone by now.
Thank you all.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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