Q2 2024 Prospect Capital Corp Earnings Call

Good day and welcome to the prospect capital second quarter fiscal year 2024 earnings release and conference call.

Operator: Good day, and welcome to the Prospect Capital second quarter fiscal year 2024 earnings release and conference call. All participants will be in a listen-only mode.

All participants will be in a listen only mode.

Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by 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.

Operator: To withdraw your question, please press the star then. Please note, this event is being recorded. I would now like to hand the conference over to Mr. John Barry, Chairman and CEO. Please go ahead.

To withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to hand, the conference over to Mr. John Barry Chairman and CEO. Please go ahead.

John Francis Barry: Thank you, Betsy. Joining me on the call today are Greer Eliasek, our President and Chief Operating Officer, and Kristin Van Dask, our Chief Financial Officer. Kristin?

Thank you Betsy.

Joining me on the call today are Greer logic, our president and Chief operating officer.

And Christian <unk>, our Chief Financial Officer Kristin.

Kristin Lea Van Dask: Thank you, John. This call contains forward-looking statements that are 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 in 10Q filed previously and available on our website, ProspectStreet.com. Now I'll turn the call back over to John. Thank you, Chris.

Thank you John.

This call contains forward looking statements that are 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 Prospect Street Dotcom.

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

Thank you Christie.

John Francis Barry: In the December quarter, our net investment in..., or NII was $96.9 million, or 24. Our revenue stood at $3.68 billion, or $8.92 billion, for comments, down 33 cents from the prior. Since inception in 2004, Prospect has invested $1.6 billion across 420 investors, exiting 287 of those.

In the December quarter, our net investment income.

And I I was $96 $9 million or 24 cents per common share.

I ran a bean stood at $3.68 billion or $8.92 per common share down 33 cents from the prior quarter.

Since inception in 2004 prospect has invested $20.6 billion across 420 investments.

Exiting 287 of those investments.

John Francis Barry: In the December quarter, our net debt-to-equity ratio was 46%, to precip, down 27.9% and down 0.3 percent from this September 22nd, as we continue to run and Under Leveraged Value, which has been the case for us over multiple quarters and years. We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.7 to 0.85, yet to act, and we are currently significantly below such a range

In the December quarter or not.

Net debt to equity ratio was 46, 2%.

Down 27.9 percentage point from March 2020.

And 0.3 percentage points.

The September 2023 quarter.

We continue to run.

And under leveraged balance sheet.

Which has been the case for us over multiple quarters and years.

We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.7 0.85 debt to equity.

And we are currently significantly below such range.

We are announcing monthly cash common shareholder distributions of six cents per share for each of February March and April.

Michael Grier Eliasek: We are announcing a monthly cash common shareholder distribution of $0.06 per share for each of February, March, and May. These three months represent the 78th, 79th, and 80th consecutive $0.06 per share cash distribution. Consistent with past practice, we plan on announcing our next share of shareholder distribution in May. Since our IPO nearly 20 years ago, through our April 2024 distribution at the current share count, we will have distributed $20.70 per common share to original shareholders, aggregating approx. $4.2 billion, cumulative distribution to all common shareholders. Thank you. I will now turn the call over to Greer. Thank you, John.

These three months represent a 70 879 and 88th consecutive.

Six cents per share cash distribution.

Consistent with past practice, we plan on announcing our next share of shareholder distributions in may.

Since our IPO nearly 20 years ago.

Through our April 202 for distribution at the current share count.

We will have distributed $20.76 per common share to original shareholders aggregating approximately $4.2 billion in cumulative distributions to all common shareholders.

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

Thank you John our scale platform with $8 9 billion of assets and Undrawn credit at Prospect Capital Corporation.

Michael Grier Eliasek: Our scale platform, with $8.9 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 nearly 150 professionals, which represents 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. 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 leveraged ones, unlike many other groups. We have maintained and continue to maintain significant dry powder and balance sheet flexibility 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, bottom-up manner the opportunities we deem to be the most attractive on a risk-adjusted basis.

Continues to deliver solid performance and the current dynamic environment.

Our experienced team consists of nearly 150 professionals.

Which represents 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.

Suspect sponsored operating and financial buyouts structured credit and real estate yield investing.

Consistent with past cycles, we expect during the next downturn.

Just 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 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.

Oh 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.

Michael Grier Eliasek: 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. Consistent with our investment strategy, our secured lending and first lien mix has continued to increase. As of December, our portfolio at fair value comprised 58.7% first lien debt, up 1.4% from the prior quarter. 15.5% second lien debt, down 0.4% from the prior quarter; 7.9% subordinated structured notes with underlying secured first lien collateral, down 0.2% from the prior quarter; and 17.8% unsecured debt in equity investments, down 0.8% from the prior quarter, resulting in 82.1% of our investments being assets with underlying secure debt benefiting from Borrower Pledge Collateral.

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.

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 December our portfolio at fair value comprised 58, 7% first lien debt up one 4% from the prior quarter.

15.5% second lien debt.

<unk>, 0.4% from the prior quarter.

7.9% subordinated structured notes with underlying secured first lien collateral down 2% from the prior quarter.

And 17, 8% unsecured debt and equity investments.

Down four 8% from the prior quarter, resulting in 82.1% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral that's up <unk>, 8% from the prior quarter.

Michael Grier Eliasek: That's up 0.8% from the prior quarter. Prospect's approach is one that generates attractive risk-adjusted yields, and our performing interest-bearing investments were generating an annualized yield of 12.3% as of December 2023, a decrease of 0.4 percentage points from the prior quarter. Our interest income in the December quarter was 92.3% of total investment income, reflecting a strong recurring revenue profile for our business. We also hold equity positions in certain investments. They can act as yield enhancers or capital gains contributors as those positions generate distributions. We've continued to prioritize senior and secure debt with our originations to protect against downside risk, while achieving above-market yields through credit selection discipline and a differentiated origination approach. As of December, we held 126 portfolio companies, a decrease of 2 from the prior quarter, and a fair value of $7.6 billion, a decrease of approximately $105 million. 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 share is 17.8%.

Prospects approach is one that generates attractive risk adjusted yields.

And our performing interest bearing investments were generating an annualized yield of 12.3% as of December 2023.

Decrease the 0.4 percentage points from the prior quarter.

Our interest income in the December quarter was 92, 3% of total investment income.

Reflecting a strong recurring revenue profile to our business.

We also hold equity positions in certain investments.

They can act as yield enhancers or capital gains contributors as those positions generate distributions we've.

We've continued to prioritize senior unsecured debt with our originations to protect against downside risk, while achieving above market yields through credit selection discipline and a differentiated origination approach.

As of December we held 126 portfolio companies.

A decrease of two for the prior quarter.

The fair value of $7 6 billion.

A decrease of approximately $105 million.

We also continue to invest in a diversified fashion across many different <unk>.

Portfolio of company industries.

With a preference for avoiding cyclicality and with no significant industry concentration.

The largest is 17, 8%.

As of December our asset concentration in the energy industry stood at 1.4%.

Michael Grier Eliasek: As of December, our asset concentration in the energy industry stood at 1.4%. The Hotel-Restaurant-Leisure Sector, 0.2%, and the Retail Industry, 0.3%. Non-accruals as a percentage of total assets stood at approximately 0.2% in December. No change from the prior quarter. The weighted average middle market portfolio net leverage was 5.4 times EBITDA, substantially below our reporting peers, and our weighted average EBITDA per portfolio company was $110 million. Originations in the December quarter aggregated $171 million.

Hotel restaurant leisure sector, 0.2% and retail industry, 0.3%.

Non accruals as a percentage of total assets stood at approximately 0.2% <unk>.

In December.

No change from the prior quarter.

Weighted average middle market portfolio, and net leverage was 5.4 times EBITDA.

Substantially below our reporting peers, and our weighted average EBITDA per portfolio company.

$110 million.

Originations in the December quarter aggregated $171 million.

Michael Grier Eliasek: We also received $131 million of repayments, sales, and exits as a validation of our capital preservation objectives, resulting in net originations of over $40 million, as we continue to take a cautious approach toward new credit underwriting given macroeconomic conditions. During the December quarter, our originations comprised 53.8% middle market lending. 30.2% real estate, 10.5% middle market lending and buyouts, and 5.5% subordinated structured notes investment. To date, we have deployed significant capital in the real estate arena through our private REIT strategy, largely focused on multifamily workforce housing and stabilized Yield Acquisitions, with attractive in-place and largely fixed-rate multi-year financing. To date, on a cumulative basis, we've invested in $3.8 billion in 108 properties, including three triple net leases.

We also received $131 million of repayments sales and exits.

As a validation of our capital preservation objective.

<unk> in net originations of over $40 million.

As we continue to take a cautious approach towards do credit underwriting given macro economic conditions.

During the December quarter, our originations comprised 53, 8% middle market lending.

30.2% real estate.

10.5% middle market lending and buyouts.

And five 5% subordinated structured notes investments.

To date, we deployed significant capital in the real estate arena through our private REIT strategy.

Largely focused on multifamily workforce stabilized yield acquisitions.

With attractive in place and largely fixed rate multi year financing.

To date on a cumulative basis, we've invested in $3 8 billion.

108.

Properties.

<unk> three triple net lease.

Michael Grier Eliasek: 81 Multifamily, 8, Student Housing, 12, Self Storage, and 4, Senior Living, and the current higher financing cost environment, which has recently started to abate a bit. Our new investment focus includes preferred equity structures, with significant third-party capital support underneath our investment attachment point. NPRC or Private REIT has real estate properties that have benefited over the last several years from rising rents, showing the inflation hedge nature of this business segment, solid occupancies, high collections, work from home tailwinds, high-returning value-added renovation programs and attractive financing recapitalization, resulting in an increase over time in cash yields as a validation of this income growth business alongside our corporate credit businesses, and PRC as of December and not including partially exited deals where we've received back more than our capital invested from distributions and recapitalizations, has exited completely 46 properties, at an average net realized IRR to NPRC of 25.2 percent.

81 multifamily eight.

Eight student housing 12, self storage and four senior living.

And the current higher financing cost environment.

Which has recently started to abate a bit.

Our new investment focus includes preferred equity 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 from rising rents.

Knowing the inflation hedge nature of this business segment.

Solid occupancies higher.

Hi collections.

Work from home tailwind.

High returning value added renovation programs and attractive financing recapitalizations.

Resulting in an increase over time in cash yields as a validation of this income growth business alongside our corporate credit businesses.

N P R C.

As of December and not including partially exited deals where we've received back more than a capital invested from distributions and recapitalization.

Completely 46 properties.

At an average net realized IRR to N P. R. C of 25, 2%.

Michael Grier Eliasek: Average realized net multiple of invested capital of 2.5 times, and 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 December, we held $601 million across 33 non-recourse, subordinated, structured notes investments. We have focused on amortizing our subordinated structured notes portfolio while electing to grow our other investment strategies. As a result, the structured notes portfolio now comprises less than 8% of our investment portfolio and is expected to decrease over time. These underlying structured credit portfolios comprise nearly 1,600 loans.

Average realized net multiple of invested capital of two five times.

And 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 December we held 601 million across 33 nonrecourse subordinated structured notes investments we've focused on amortizing our subordinated structured notes portfolio, while electing to grow our other investment strategies.

As a result, the structured notes portfolio now comprises less than 8% of our investment portfolio and is expected to decrease over time.

These underlying structured credit portfolios comprised nearly 1600 loans.

Kristin Lea Van Dask: In the December 2023 quarter, this portfolio generated a gap yield of 5.8%, down 4.9% from the prior quarter, and a cash yield of 20%, up 2.5% from the prior quarter. The difference represents amortization of our cost basis that returns capital to prospects that we intend on utilizing for other investment strategies and corporate purposes. As of December, our current subordinated structured credit portfolio has generated $1.45 billion in cumulative cash distributions to us, representing over 118% of our original investors. Through December, we've also exited 15 investments with an average realized IRR of 12% and a cash-on-cash multiple of 1.3 times. So far in the current March quarter, across our overall business... We've booked $63 million in originations and experienced $22 million of repayments for approximately $41 million of net originations. Originations have consisted of 62.3% middle market lending and 37.7% real estate. Thank you. I'll now turn the call over to Kristin. Kristin?

In the December 2023 quarter. This portfolio generated a GAAP yield of five 8% down four 9% from the prior quarter.

And a cash yield of 20% up two 5% from the prior quarter.

The difference represents amortization of our cost basis, the returns capital to prospect that we intend on utilizing for other investment strategies and corporate purposes.

As of December our current subordinated structured credit portfolio.

Has generated 1.45 billion in cumulative cash distributions to us representing over 118% of our original investment.

Through December we've also exited 15 investments with an average realized IRR of 12%.

And cash on cash multiple of one three times.

So far in the current March quarter across our overall business.

We booked 63 million in originations and.

And experienced $22 million of repayments for approximately 41 million of net originations originations.

Originations have consisted of 62.3% middle market lending and 37.7% real estate.

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

Kristin Lea Van Dask: Thanks, Greer. We believe our prudent leverage, diversified access to matchbook funding, a substantial majority of unencumbered assets, waiting toward unsecured fixed-rate debt, avoidance of unfunded asset commitments, and lack of near-term maturities demonstrate both balance sheet strengths as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 20 years into the future. Our total unfunded eligible commitments to portfolio companies totals approximately $28 million, representing approximately 0.4% of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at approximately $1.02 billion. We are a leader and innovator in our marketplace.

Thanks Grier.

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 28 years into the future.

Our total unfunded eligible commitments to portfolio companies totals approximately 28 million, representing approximately 0.4% of our assets, our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at approximately 1.0 to 2 billion.

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 issue unlisted perpetual preferred undertake a preferred program and many other lesser first.

Kristin Lea Van Dask: 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, issue a listed perpetual preferred, undertake a preferred program, and many other lists of firsts. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry that we have taken toward construction of the right-hand side of our balance. As of December 2023, we held approximately $4.7 billion of our assets as unencumbered assets, representing approximately 60% of our portfolio.

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 December 2023, we had approximately $4 7 billion of our assets as unencumbered assets, representing approximately 60% of our portfolio.

The remaining assets are pledged to prospect capital funding nonrecourse SPV.

Kristin Lea Van Dask: The remaining assets are pledged to Prospect Capital Funding, a non-recourse SPV. We currently have $1.95 billion of commitments from 53 banks, demonstrating strong support from the lender community with diversity unmatched by any other company in our industry. Shortly after the well-publicized bank failures in March 2023, we added two new banks and upsized an 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 drawn pricing is now SOFR plus 2.05%. Outside of our revolver and benefiting from our unencumbered assets, we've issued multiple types of investment-grade unsecured debt 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 currently have 1.95 billion of commitments from 53 banks, demonstrating strong support of our company from the lender community with a diversity unmatched by any other company in our industry.

Shortly after the well publicized bank failures in March 2023, we added two new banks and Upsized, an existing bank within our credit facility.

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

Our drawn pricing is now so far plus 2.05%.

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.

Kristin Lea Van Dask: We enjoy an investment grade BBB- rating from S&P, an investment grade BAA3 rating from Moody, an investment grade BBB rating from Kroll, an investment grade BBB rating from Egan Jones, and an investment grade BBB low rating from DBRS. We currently have five investment grade ratings, more than any other company in our industry. All of these ratings have stable outlets.

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 an investment grade Triple B low rating from D. B R. S.

We currently have five investment grade ratings more than any other 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 28 years.

Kristin Lea Van Dask: We have now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 28 years. Our debt maturities extend through 2052. With so many banks and debt investors across so many unsecured and non-recourse debt tranches, we've substantially reduced our counterparty risk over the years. In the December 2023 quarter, we continued to utilize our revolving credit and continued with our weekly programmatic internet issuance on an efficient funding basis. To date, we have raised over $1.7 billion in aggregate issuance of our perpetual preferred stock across our preferred programs and listed preferred, including $66.5 million in the December 2023 quarter and $11.7 million to date in the March 2024 quarter. During the December 2023 quarter, we commenced a tender offer to purchase for cash any and all of 5,882,351 shares of outstanding 5.35% perpetual preferred stock, resulting in 631,194 shares validly tend We have four separate unsecured debt issuances aggregating $1.2 billion, not including our program notes, with maturities extending through October 2028. As of December 2023, we had $391 million of program notes outstanding, with staggered maturities through March 2052.

Our debt maturity extended 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 December 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 over $1 7 billion in aggregate issuance of our perpetual preferred stock across our preferred programs enlisted preferred including $66 5 million in the December 2023 quarter and $11 7 million to date in the March 2024 acquire.

During the December 'twenty, two 'twenty three quarter, we commenced a tender offer to purchase for cash any and all as 5 million 882351 shares of outstanding 5.35% perpetual preferred stock, resulting in 631194 shares validly tendered at a pre.

The $15.88 plus accrued and unpaid dividends for a total consideration of $16 per share.

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

As of December 2023 we had 391 million of program notes outstanding with staggered maturities through March 2050 Tam.

At December 31st 2023, our weighted average cost of unsecured debt financing with 4.15% an increase of 0.07% from September 30th 2023, and a decrease of 0.18% from December 31 2022.

Kristin Lea Van Dask: At December 31, 2023, our weighted average cost of unsecured debt financing was 4.15%, an increase of 0.07% from September 30, 2023, and a decrease of 0.18% from December 31, 2022. Now I'll turn the call back over to John. Thank you, Kristin. We can now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.

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

Thank you Christian.

We can now answer any questions.

Yeah.

We will now begin the question answer session.

Good question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

If at any time. Your question has 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.

Yeah.

The first question today comes from Finian O'shea with Wells Fargo. Please go ahead.

Operator: If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then. At this time, we will pause momentarily to assemble our roster. The first question today comes from Finian O'Shea with Wells Fargo. Please go ahead. Hi, good morning everybody.

Hi, good morning, everybody. Thanks for having me on.

For first question on the preferred stock.

<unk> been buying down the series a.

Should we anticipate you exercising the issuer optional conversion feature when those series a.

Preferreds are ultimately out of the way.

Hyphen and thanks for your question I'm not sure what you mean by buying down the series day I don't think we've been doing that but we have no plans to.

John Francis Barry: Thanks for having me on. First question on the preferred stock: you've been buying down the Series A. Should we anticipate you exercising the issuer optional conversion feature when those Series A preferreds are ultimately out of the way? I'm not sure what you mean by buying down the Series A. I don't think we've been doing that, but we have no plans to exercise such an option, and we actually can exercise such an option for another two-and-a-half years because of an undertaking related to our listed preferred, but we have no plans to do so.

To exercise such option and we actually can't exercise such option for another.

Two and a half years because of an undertaking are related to our listed prefer.

But we have no plans to do so.

Anyway in actually moving the other direction, we just launched a new series.

Michael Grier Eliasek: Anyway, and actually, moving in the other direction, we just launched a new series that's not converbal at all, uh... common stock, so we've actually are moving the other way. Okay, appreciate that. And just to follow up on the REIT, you, it looks like you sold a property there this quarter. I hope I didn't get that one wrong as well.

Theories.

Got convertible at all into a common stock. So we were actually are moving the other direction.

Oh, Okay, I appreciate that and just a follow up on on the REIT you.

It looks like you sold a property there this quarter I hope I didn't get this one wrong as well.

Michael Grier Eliasek: But curious, given the market environment, the headlines we all read, like how that exit shook out, any color you can give on, you know, the IRR you experienced, you know, what it, what you sold versus your mark, what the cap rate you sold at was, um, I would really appreciate color there. And that's all for me. Thank you. Sure, thanks. The asset we sold was an asset in... The Student Housing Portfolio. The Student Housing book is actually performing quite well, and there is a significant buyer interest in that segment of the real estate market. So we're happy to have diversification in our real estate portfolio. I know we sold it close to our mark; I don't have the IRR at our fingertips, but I know it was well into the double digits.

But curious given the market environment the headlines we all read.

Like like how that that exit shook out any color you can give on.

The IRR you experienced.

Got it what you sold versus your Mark what the cap rate you sold that was.

Would really appreciate color there and that's all for me. Thank you.

Sure. Thanks.

So if we sold was a an asset in the.

Student lending I'm, sorry, our student housing portfolio.

Student housing our book is actually performing.

Quite well.

And there is a significant buyer interest in that segment of the real estate market. So we're happy to have <unk>.

Diversification in our real estate.

I know, we sold close to or Mark I don't have the IRR.

At our fingertips, but I know it was well into the double digits.

Michael Grier Eliasek: Overall, within real estate, our book is doing quite well. Recall, we focus on workforce housing and multifamily. We don't invest in office. We don't invest in retail.

You know overall within within real estate.

Our book is doing quite well.

Recall, we focus on workforce housing multifamily.

We don't invest in office, we don't invest in retail.

Michael Grier Eliasek: These are the areas that have been most deeply impacted, of course, within real estate. They're sort of on the wrong side of the digital divide, if you will. We're on the right side of the digital divide. Folks need a place to live.

These are the areas that have been most.

Most deeply impacted of course within real estate sort.

Sort of on the wrong side of the digital divide if you will we're on the right side of the digital divide.

Folks need a place to live.

Michael Grier Eliasek: Multifamily has benefited significantly from problems in the affordability of the single-family housing market, keeping people in their apartments to actually see less turnover, and folks want to and need to stay in their apartments for a lot longer. We also have a greater mix of exposure into markets like the Midwest, for example, and selected mid-Atlantic markets. Northeast markets that have had less supply additions compared to the western states and certain markets in the southeast. Nashville and Austin, for example, have had huge surges of supply, and we've declined to purchase any properties in those areas because of supply concerns.

Multifamily has benefited significantly from problems and affordability issues.

In the single family.

Housing market keeping people in their apartments, so actually you see less turnover and folks want to and need to stay in their apartments for a lot longer.

We're also have a greater mix exposure into markets like the Midwest. For example in selected mid Atlantic northeast markets that have had less supply additions compared to the western states.

And certain markets in the southeast are places like Nash.

Nashville, and Austin for example have had huge surges of supply and we've declined to purchase any properties and in those areas because of our supply concerns.

Michael Grier Eliasek: Even in those markets with additional supply, when you look at the forward pipeline past twenty... It sort of falls off a cliff, so most folks in the industry expect absorption to occur, and over the long term, significant positive rent growth to continue from there. So we're very happy to have our real estate book, and it's performing well. Thank you, Greer. And I was just thinking, if I'm able to sneak in a third topic we've touched on over the years, of course, which has been sort of running off the CLO book. Just wondering, with the sort of resurgence and, you know, resets and refis starting to build up, is there any... are you compelled to pursue that kind of strategy, you know, kind of rebuild the CLO book, extend these out And that's all for me.

Even in those markets with additional supply when you look at the forward pipeline past 'twenty 'twenty four sort of falls off a cliff. So most folks in the industry expect absorption to to occur and over the long term for us.

Significant positive rent growth to continue from there. So we're very happy to have our real estate book and it's performing well.

Awesome. Thank you Greer and I was just thinking if I'm able to sneak in a third sure.

The topic, we've touched on over the years of course.

Which has been.

Sort of running off the CLO book, just wondering with the sort of resurgence and.

You know resets and Refis starting to build up is there any.

Yeah.

Or are you compelled to pursue that.

That kind of strategy, you know kind of rebuild the CLO book extend these out or should we still.

<unk> view them as well.

Runoff or such.

Thats all for me thank you.

Michael Grier Eliasek: Sure. So what we do with our CLO book is really no different than what we do with any of our positions, on an ongoing basis, including real estate, including middle market lending, including middle market buyouts. When we examine a range of options for an investment, we're always looking at the NPV, the net present value of each potential option, and we're desiring, of course, to select the highest NPV option. With CLOs, the range of options for an existing investment, and it is an actively managed book, includes calling an investment.

Sure. So what we do with our CLO book is is really no different than what we do with any of our positions on an ongoing basis.

Including real estate, including middle market lending, including middle market buyouts.

When we examine a range of options for an investment.

We're looking always at the NPV net present value.

Of each potential option and we're designing a course to select the highest NPV option with cielo is the range of options for an existing investment and it is an actively managed book.

Includes calling in investments and we get the benefit of having call premium optionality as a majority holder are in.

Michael Grier Eliasek: And we get the benefit of having call premium optionality as a majority holder in our book here, number one. Number two, refinancing one or more tranches of the liability stack, and we're pursuing that in one of our deals, for example. Number three would be, as you referenced, extending or resetting a deal. We're looking at, number four would be selling a position on a secondary basis. So we're constantly looking at all four of those options. Our desire is not a one-size-fits-all, sort of tops down, but rather bottoms up.

Our book here.

That's number one number two refinancing one or more tranches of the liability stack.

No we're pursuing that in one of our deals for example.

Number three would be as you referenced extending or resetting.

A deal.

We're looking at and number four would be selling up a position on a secondary basis. So we're constantly looking at all four of those options are our desire is not a one size fits all sort of tops down, but rather bottoms up it is a diversified portfolio of over.

Michael Grier Eliasek: It is a diversified portfolio of over 30 positions, and so what's appropriate for one deal may not be appropriate for another deal. But, in general, to be a smaller percentage of our portfolio over time as other strategies grow and the overall balance sheet grows. We've got a very under-leveraged balance sheet with a lot of dry powder.

30 positions and so what's appropriate for one deal may not be appropriate for another deal.

But in general.

Expect for that book to be a lesser percentage of our portfolio over time as other strategies grow and the overall balance sheet grows we've got a very under leveraged.

<unk> balance sheet with a lot of dry powder and then on a dollar basis I would expect for it to decline over time as well we've got significant amortization occurring it is true in the last couple of years.

Michael Grier Eliasek: And then on a dollar basis, I would expect it to decline over time as well because we've got significant... amortization. It is true that in the last couple of years, because of where liability spreads have been, activity for refinancings and extensions has been somewhat muted. In the current environment, as you pointed out, liability spreads are starting to tighten up, so there is some more optionality there, and it wouldn't be out of the question to do a refinancing and still continue to amortize at a higher end, or do an extension and still

Because of where liability spreads have been activity for refinancings and extensions have been somewhat muted.

In the current environment as you pointed out a liability spreads are starting to tighten up. So there is some more optionality there and it wouldn't be out of the question to do a refinancing and still continue to amortize with at a higher NPV or do an extension and a still sell.

Michael Grier Eliasek: So these aren't mutually exclusive exits for us, but over time, I mean, this book at one point was almost 20% of our portfolio, and now it's in the 7th percent. It's declined substantially, and I would expect that. Thanks, Greer. Thank you, Vinny. The next question comes from Robert Dodd with Reign and James. Please go ahead. Good morning.

So these aren't mutually exclusive exits for us but over time I mean this book at one point was almost 20% of our portfolio.

And now it's in the 7% it's declined substantially and I would expect for that to continue.

Thanks, Greg.

Thank you Vinnie.

The next question comes from Robert Dodd with Raymond James. Please go ahead.

Hi, Good morning, you just answered my other question so.

Michael Grier Eliasek: You just answered my Cielo question, so the only other one I had was on the allocation to prospect administration. It spiked this quarter. Is that a new normal, or was there any one-time expense embedded in that, I mean, maybe related to the preferred tender or whatever. Can you give us any color on that?

The other one I had was on the allocation to prospect administration. It spiked up this quarter is that a new normal was.

Any one time.

Expense embedded in that I mean, maybe it's related to the.

And Oh water can you give us any color on that $10 million sequentially.

Michael Grier Eliasek: And there were like 10 million sequential. Sure. Thank you for your question. It's not the new normal. We should expect a lesser number, probably more in the five range per quarter going forward, Robert. What you saw there were a couple of things.

Sure. Thank you for your question, it's not the new normal should expect a.

Lesser number are probably more in the five range.

Per quarter going forward, Robert what you saw there was a couple of things one comping it to the past from.

Michael Grier Eliasek: One, comparing it to the past. From time to time, we will have a contra expense that will happily reduce that number. We had a significant litigation settlement in our favor in the past, which reduced that number associated with assisting one of our portfolio companies. And then there's some sort of catch-up allocation on top of that.

From time to time, we will have a contra expense that will happily reduce.

That number.

We had a significant litigation settlement in our favor in the past, which reduced that number associated with assisting one of our portfolio companies.

And then there is some sort of a catch up allocation on top of that but the answer is no. That's not the new normal and we should expect more in the range of a $5 million per quarter got.

Michael Grier Eliasek: But the answer is no, that's not the new normal, and we should expect more in the range of 5 million per quarter. I appreciate it. Thank you. Thank you, Robert. This concludes our question and answer session. I would like to turn the conference back over to John Barry for any closing remarks. Well, thank you, everyone. Have a wonderful day, and we'll see you in 90 days. Thanks all. Bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. www.projectchambermusic.com, The Ultimate Parody Site!

Got it I appreciate it thank you.

Thank you Robert.

This concludes our question and answer session I would like to turn the conference back over to John Barry for any closing remarks.

Well. Thank you everyone have a wonderful day and we'll see you in 90 days. Thanks, all right. Thank you.

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

Yeah.

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