Q3 2024 Prospect Capital Corp Earnings Call
Operator: Good day, and welcome to the Prospect Capital third quarter fiscal year 2024 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 star key followed by zero. After today's presentation, there will be an opportunity to ask questions; to ask a question, you may press the star key, then one, on a touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would like now to turn the conference over to Mr. John Barry, Chairman and CEO. Please go ahead.
Good day and welcome to the prospect capital third quarter fiscal year, 'twenty 'twenty four earnings release and conference call.
Operator: All participants will be in listen only mode.
Operator: 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 one unattached shown phone.
Operator: Draw. Your question. Please press Star then two please note. This event is being recorded I would like now to turn the conference over to Mr. John Barry Chairman and CEO. Please go ahead.
John Francis Barry: Thank you, Alan. Joining me on the call today are Greer Eliasek, our President and Chief Operating Officer, and Kristen Van Dask, our Chief Financial Officer. Kristin?
John Francis Barry: Thank you Alan.
Kristin: Joining me on the call today are gorilla, Isaac our President and Chief operating Officer, and Kristin Van <unk>, Our Chief Financial Officer Kristin.
Kristin Lea Van Dask: Thanks, 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 the 10-Q filed previously and available on our website, ProspectStreet.com. Now I'll turn the call back over to John.
Kristen: Thanks, Jon This call contains forward looking statements that are intended to be subject to safe Harbor protection future results are highly likely to vary materially.
Kristin Lea Van Dask: 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 Dot Com and now I'll turn the call back over to John.
John Francis Barry: Thank you, Kristen. In the March quarter, our net investment income, or NII, was $94.4 million, 23 cents per common share. Our NAV was $3.74 billion, or $8.99 per common share, up 7 cents from the prior quarter. As of March 31st, our net debt-to-equity ratio was 46.2%. We are announcing monthly common shareholder distributions of $0.06 per share for each of May, June, July, and August. We plan on announcing our next set of shareholder distributions in August.
John: Thank you Kristen.
John Francis Barry: In the March quarter, our net investment income or NII was $94.4 million.23 per common share.
John Francis Barry: Our N a V was $3.74 billion or $8.99 per common share up seven cents from the prior quarter.
John Francis Barry: At March 31st our net debt to equity ratio was 46.2%.
John Francis Barry: We are announcing monthly common shareholder distributions of six cents per share for each of May June July and August we plan on announcing our next set of shareholder distributions.
John Francis Barry: Against.
John Francis Barry: Greer.
Speaker Change: Thank you John.
John Francis Barry: As of March 31, our portfolio at fair value comprised 59% first lien debt. That's up 0.3% from the prior quarter. 14.6% second lien debt, that's down 0.9% from the prior quarter. 7.3% subordinated structured notes, with underlying secured first lien collateral. That's down 0.6% from the prior quarter and 19.1% of unsecured debt and equity investments. That's up 1.2% from the prior quarter, which results in 81% of our investments being assets with underlying secured debt. Benefiting from Borrower Pledged Collateral
John Francis Barry: As of March 31, our portfolio at fair value comprised 59% first lien debt, that's a 0.3% from the prior quarter.
John Francis Barry: 14.6% second lien debt, that's down 9% from the prior quarter.
John Francis Barry: 7.3% subordinated structured notes with underlying secured first lien collateral.
John Francis Barry: That's down 0.6% from the prior quarter.
John Francis Barry: And 19.1% unsecured debt and equity investment.
John Francis Barry: That's up one 2% from the prior quarter.
John Francis Barry: Which results in 81% of our investments being assets with underlying secured debt.
John Francis Barry: Fitting from borrower pledged collateral.
John Francis Barry: Prospect's approach is one that generates attractive risk-adjusted yields, and our performing interest-bearing investments were generating an annualized yield of 12.1% as of March 2024, a decrease of 0.2 percentage points in the prior quarter. Our interest income in the March quarter was 91% of total investment income, reflecting a strong recurring revenue profile for our business. As of March, we held 122 portfolio companies, a decrease of four from the prior quarter, with a fair value of $7.8 billion, an increase of approximately $175 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 18.4%.
John Francis Barry: Prospects approach is one that generates attractive risk adjusted yields.
John Francis Barry: And our performing interest bearing investments were generating an annualized yield of 12, 1% as of March 'twenty 'twenty four.
John Francis Barry: A decrease of 0.2 percentage points in the prior quarter.
John Francis Barry: Our interest income in the March quarter was 91% of total investment income.
John Francis Barry: Reflecting our strong recurring revenue profile to our business.
John Francis Barry: As of March we held 122 portfolio companies.
John Francis Barry: The decrease of four from the prior quarter.
John Francis Barry: With a fair value of $7 8 billion an increase.
John Francis Barry: Of approximately 175 million.
John Francis Barry: We also continue to invest in a diversified fashion across many different portfolio company industries with.
John Francis Barry: With a preference for avoiding cyclicality.
John Francis Barry: With no significant industry concentration.
John Francis Barry: The largest is 18.4 percents.
John Francis Barry: As of March, our asset concentration in the energy industry stood at 1.4%, in the hotel, restaurant, and leisure sector stood at.3%, and the retail industry stood at 0.3%. Non-accruals as a percentage of total assets was approximately 0.4% in March, a 0.2% increase in the prior quarter. Our weighted average middle market portfolio net leverage stood at 5.5 times EBITDA, substantially below our reporting peers. Our weighted average EBITDA per portfolio company stood at $106 million, and originations in the March quarter aggregated $219 million. We also experienced $114 million of repayments, sales, and exits, resulting in net originations of over 105 million. During the March quarter, our originations comprised 65.3% middle market lending.
John Francis Barry: As of March our asset concentration in the energy industry stood at 1.4%.
John Francis Barry: And the hotel restaurant and leisure sector stood at four 3%.
John Francis Barry: And the retail industry stood at 0.3% non.
John Francis Barry: Non accruals as a percentage of total assets.
John Francis Barry: Was approximately <unk>, 4% in March.
John Francis Barry: 0.2% increase in the prior quarter our.
John Francis Barry: Our weighted average middle market portfolio net leverage stood at five five times EBITDA.
John Francis Barry: Substantially below our reporting peers our.
John Francis Barry: Our weighted average EBITDA per portfolio company stood at $106 million.
John Francis Barry: Originations in the March quarter, aggregated 219 million.
John Francis Barry: We also experienced $114 million of repayments sales and exits resulting.
John Francis Barry: Resulting in net originations of over $105 million.
John Francis Barry: During the March quarter, our originations comprised 65, 3% middle market lending.
John Francis Barry: 29% real estate, and 5.6% middle market lending and buyouts. To date, we've deployed significant capital in the real estate arena through our private REIT strategy, which is largely focused on the multifamily workforce. Stabilized Yield Acquisitions, with attractive in-place multi-year financing. To date, on a cumulative basis, we've invested in $3.9 billion across a hundred and ten properties, including three triple net lease, and 83 multifamily. 8 student housing, 12 self-storage, and 4 senior living.
John Francis Barry: 29% real estate.
John Francis Barry: And five 6% middle market lending and buyouts.
John Francis Barry: To date, we've deployed significant capital in the real estate Arena.
John Francis Barry: Through our private REIT strategy.
John Francis Barry: Which is largely focused on multifamily workforce stabilized yield.
John Francis Barry: Acquisitions.
John Francis Barry: With attractive in place multiyear financing today.
John Francis Barry: That's on a cumulative basis, in the current higher financing cost environment. We've added to our investment focus to include preferred equity structures, with significant third-party capital support underneath our investment attachment point. We're also focusing on distressed sellers, where there's an opportunity to take advantage of the seller's need to recapitalize a property or generate liquidity to address other issues in their portfolio. NPRC, our 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 documents to use.
John Francis Barry: To date on accumulative basis, we've invested.
John Francis Barry: In 3.9 billion.
John Francis Barry: Across 110.
John Francis Barry: [noise] properties, including three Triple net lease eighty-three multifamily eight.
John Francis Barry: Eight student housing.
John Francis Barry: <unk> self storage and four senior living.
John Francis Barry: That's on accumulative basis.
John Francis Barry: In the current higher financing cost environment.
John Francis Barry: We've added to our investment focus to include preferred equity structures.
John Francis Barry: With significant third party capital support underneath our investment.
John Francis Barry: Attachment points.
John Francis Barry: We're also focusing on distressed sellers, where theres an opportunity to take advantage of the sellers need to recapitalize a property.
John Francis Barry: Or generate liquidity to address other issues.
John Francis Barry: In their portfolios.
John Francis Barry: N P. R C. Our private REIT has.
John Francis Barry: It has real estate properties that have benefited over the last several years from rising rents showing the inflation hedge nature of this business segment.
John Francis Barry: Solid occupancy is high.
John Francis Barry: High Collections. Suburban work-from-home tailwinds, a high-returning value-added renovation program, 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 business. In PRC, as of March, and not including partially exited deals where we have received back more than our capital invested from distributions and recapitalization, we have exited completely 46 properties, at an average net realized IRR to NPRC of 25.2%, an average realized cash multiple invested capital of 2.5 times.
John Francis Barry: Hi collections.
John Francis Barry: Suburban work from home tailwind.
John Francis Barry: High returning value added renovation programs.
John Francis Barry: And attractive financing recapitalizations.
John Francis Barry: Resulting in an increase over time in cash yields as a validation of this income growth business.
John Francis Barry: Alongside our corporate credit businesses.
John Francis Barry: And if you ever see.
John Francis Barry: As of March and not including partially exited deals where we have received back.
John Francis Barry: More than our capital invested from distributions and recapitalization.
John Francis Barry: Has exited completely 46 properties.
John Francis Barry: At an average net realized IRR to N P. R. C. If twenty-five 0.2% and average realized cash multiple of invested capital of two five times.
John Francis Barry: Our structured credit business has delivered attractive cash yields, demonstrating the benefits of pursuing a majority stake, 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 $572 million across 33 non-recourse subordinated structured notes investments. We expect to continue to amortize our subordinated structured notes portfolio and to reinvest it into middle market, senior secured debt, and selected equity investors. As a result, the structured notes portfolio now comprises 7% of our investment portfolio and is expected to decrease over time.
John Francis Barry: Our structured credit business has delivered attractive cash yields demonstrating the benefits of pursuing majority stakes.
John Francis Barry: Working with World Class management teams.
John Francis Barry: Providing strong collateral underwriting through primary issuance.
John Francis Barry: And focusing on favorable risk adjusted opportunities.
John Francis Barry: As of March we held 572 million across thirty-three nonrecourse subordinated structured notes investments.
John Francis Barry: We expect to continue to amortize our subordinated structured notes portfolio.
John Francis Barry: And to reinvest into middle market senior secured debt and selected equity investments.
John Francis Barry: As a result, our structured notes portfolio now.
John Francis Barry: Now comprises 7% of our investment portfolio and is expected to decrease over time.
John Francis Barry: These underlying structured credit portfolios comprise nearly 1,600 loans. In the March quarter, this portfolio generated a gap yield of 3.3% and a cash yield of 22.1%. The difference represents amortization of our cost basis, and returns capital to prospect that we intend to use for other investment strategies and corporate purposes. As of March, our current subordinated structured credit portfolio has generated $1.5 billion in cumulative cash distributions to us, representing 121% of our original investment.
John Francis Barry: These underlying structured credit portfolios comprised nearly 1600 loans in the March quarter. This portfolio generated a GAAP yield of three 3% and a cash yield of 22.1% the difference representing amortization of our cost basis, the returns capital to prospect.
John Francis Barry: We intend to use for other investment strategies and corporate purposes.
John Francis Barry: As of March our current subordinated structured credit portfolio has generated 1.5 billion in cumulative cash distributions to us.
John Francis Barry: Representing 121% of our original investment.
John Francis Barry: Through March, 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 June quarter, we've booked $29 million in originations and experienced $55 million of repayments, for approximately $26 million of net repayment. Originations have consisted of 57% middle market lending and 43% real estate.
John Francis Barry: Through March we've also exited 15 investments.
John Francis Barry: With an average realized IRR of 12% and cash on cash multiple of one three times.
John Francis Barry: So far in the current June quarter.
John Francis Barry: We booked 29 million in originations and experienced 55 million of repayments.
John Francis Barry: Approximately 26 million of net repayments.
John Francis Barry: Originations have consisted of 57% middle market lending and 43% real estate.
Kristin Lea Van Dask: Thank you. I'll now turn the call over to Kristen. Kristen?
John Francis Barry: I'll now turn the call over to Kristen Kristen.
Kristen: Thanks, Greg.
Kristin Lea Van Dask: We believe our prudent leverage, diversified access to matched book funding, a 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 total approximately $25 million, representing approximately 0.3% of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at $1.1 billion. As of March 2024, we held approximately $4.9 billion of our assets as unencumbered assets, representing approximately 62% of our portfolio.
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 liquidity to capitalize on attractive.
Kristin Lea Van Dask: Kennedy.
Kristin Lea Van Dask: Our company has locked in a ladder of liabilities extending 28 years into the future.
Kristin Lea Van Dask: Our total unfunded eligible commitments to portfolio companies totals approximately 25 million representing approximately 0.3% of our assets are.
Kristin Lea Van Dask: Balance sheet cash and Undrawn revolving credit facility commitments currently currently stand at 1.1 billion.
Kristin Lea Van Dask: As of March 2024, we held approximately $4 9 billion of our assets unencumbered assets, representing approximately 62% of our portfolio.
Kristin Lea Van Dask: The remaining assets are pledged to Prospect Capital Funding, a non-recourse SPV. We currently have $2.04 billion of commitments from 53 banks, demonstrating strong support from the lender community for 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. The facility revolves until September 2026, followed by a year of amortization with interest distributions continuing to be allowed to us.
Kristin Lea Van Dask: The remaining assets are pledged to prospect capital funding a nonrecourse SPV.
Kristin Lea Van Dask: We currently have 2.04 billion of commitments from 53 banks, demonstrating strong support of our company from the lender community with the diversity unmatched by any other company in our industry.
Kristin Lea Van Dask: Shortly after the well publicized bank failures in March 2023, we added two new banks and Upsized, an existing bank within our credit facility.
Kristin Lea Van Dask: The facility revolves until September 2026, followed by a year of amortization with interest distributions continuing to be allowed to us.
Kristin Lea Van Dask: Our drawn pricing is now SOFR plus 2.05%. We recently increased the accordion limit to $2.25 billion with two existing lenders increasing their commitments in the current June 2024 quarter. 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.
Kristin Lea Van Dask: Our drawn pricing is now stouffer, plus 2.0% to 5%.
Kristin Lea Van Dask: We recently increased the accordion limit to 2.25 billion with two existing lenders upsizing commitments in the current June 2024 quarter.
Kristin Lea Van Dask: 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.
Kristin Lea Van Dask: 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 currently have five investment grade ratings, more than any other company in our industry. We have now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out to 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 have substantially reduced our counterparty risk. To date, we have raised $1.8 billion in aggregate issuance of our Perpetual Preferred stock across our preferred programs and listed preferred, including $69.4 million in the March 2024 quarter and $28.7 million to date in the current June 2024 quarter.
Kristin Lea Van Dask: We currently have five investment grade ratings more than any other company in our industry.
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.
Kristin Lea Van Dask: With so many banks and debt investors across so many unsecured and nonrecourse debt tranches, we have substantially reduced our counterparty risk.
Kristin Lea Van Dask: To date, we have raised $1 8 billion in aggregate issuance of our perpetual preferred stock across our preferred programs enlisted preferred including $69 4 million in the March 2024 quarter and $20 7 million to date in the current June 2024 corner.
Kristin Lea Van Dask: At March 31, 2024, our weighted average cost of unsecured debt financing was 4.14%, a decrease of 0.01% from the December quarter and an increase of 0.07% from March 31, 2023. Now, I'll turn the call back over to John.
Kristin Lea Van Dask: At March 31, 2024, our weighted average cost of unsecured debt financing was 4.14% a decrease of 0.0% to 1% from the December quarter, and an increase of zero point here of 7% from March 31, 2023 now.
Kristin Lea Van Dask: Now I'll turn the call back over to John.
Kristin Lea Van Dask: Yeah.
John Francis Barry: Thank you, Kristen. We can take questions now. We will now begin.
John: Thank you Kristen.
John: We could take questions now.
Operator: We will now begin the question and answer session. To ask a 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 answered and you would like to withdraw it, please press star, then two. At this time, we will pause momentarily to assemble our roster. It appears we have no questions at this time. I would like to turn the call all back over to John Barry for his closing remarks.
John: We will now begin the question and answer session to ask a 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 it. Please press Star then two.
John Francis Barry: Okay, thank you everyone. I have some closing remarks, and I just finished them. Thank you very much. Bye now. This conference is now concluded.
John Francis Barry: At this time, we will pause momentarily to assemble our roster.
John Francis Barry: Okay.
John Francis Barry: Yeah.
John Francis Barry: It appears we have no questions at this time I would.
John Francis Barry: I'd like to turn the call back over to John Barry for closing remarks.
John Francis Barry: Okay. Thank you everyone I have some closing remarks and I just finished them. Thank you very much bye now.
John Francis Barry: The conference has now concluded.
John Francis Barry: Okay.
Operator: ???
John Francis Barry: [music].