Prospect Capital Q3 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the Prospect Capital Third Quarter Fiscal Year 20 24 Earnings Release and Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would like now to turn the conference over to Mr. John Barry, Chairman and CEO.

Operator

Please go ahead.

Speaker 1

Thank you, Alan. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer and Kristin Van Dask, our Chief Financial Officer. Kristin?

Speaker 2

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 and 10 Q filed previously and available on our website, prospectstreet.com.

Speaker 2

And now I'll turn the call back over to John.

Speaker 1

Thank you, Kristin. In the March quarter, our net investment income or NII was $94,400,000 0 $0.23 per common share. Our NAV was 3.74 $1,000,000,000 or $8.99 per common share, up 0 point 0 $7 from the prior quarter. At March 31, 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 August.

Speaker 1

We plan on announcing our next set of shareholder distributions in August. Grier?

Speaker 3

Thank you, John. As of March 31, our portfolio at fair value comprised 59% 1st lien debt, that's up 0.3% from the prior quarter 14.6 percent 2nd lien debt, that's down 0.9% from the prior 7.3% subordinated structured notes with underlying secured 1st lien collateral that's down 0.6% from the prior quarter and 19.1% 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 pledge collateral. Prospect's approach is one that generates attractive risk adjusted yields. In our performing interest bearing investments, we're 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 to our business.

Speaker 3

As of March, we held 122 portfolio companies, the decrease of 4 from the prior quarter, with a fair value of $7,800,000,000 an increase of approximately 175,000,000 We also continue to invest in a diversified fashion across many different portfolio company industries with a preference for avoiding cyclicality and with no significant industry concentration. The largest is 18.4%. As of March, our asset concentration in the energy industry stood at 1.4 percent, in the hotel, restaurant and leisure sector stood at 0.3% 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 5.5x EBITDA, substantially below our reporting peers.

Speaker 3

Our weighted average EBITDA per portfolio company stood at $106,000,000 Originations in the March quarter aggregated $219,000,000 We also experienced $114,000,000 of repayments, sales and exits, resulting in net originations of over $105,000,000 During the March quarter, our originations comprised 65.3 percent middle market lending, 29% real estate and 5.6% middlemarketlending and buyouts. To date, we've deployed significant capital in the real estate arena through our private REIT strategy, which is largely focused on multifamily workforce, stabilized yield acquisitions with attractive in place multiyear financing. To date, on a cumulative basis, we've invested in $3,900,000,000 across 110 properties, including 3 triple net lease, 83 multifamily, 8 student housing, 12 self storage and 4 senior living. 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 points.

Speaker 3

Also focusing on distressed sellers where there's an opportunity to take advantage of the sellers' need to recapitalize a property or generate liquidity to address other issues in their portfolios. 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 occupancies, high collections, suburban work from home tailwinds, 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. NPRC, as of March and not including partially exited deals where we have 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 and average realized cash multiple invested capital of 2.5 times. Our structured credit business has delivered attractive cash yields demonstrating the benefits of pursuing majority stakes, working with world class management teams, providing strong collateral underwriting through primary issuance and focusing on favorable risk adjusted opportunities. As of March, we held $572,000,000 across 33 non recourse subordinated structured notes investments.

Speaker 3

We expect to continue to amortize our subordinated structured notes portfolio and to reinvest into middle market senior secured debt and selected equity investments. As a result, the structured notes portfolio now comprises 7% of our investment portfolio and is expected to decrease over time. These underlying structured credit portfolios comprised nearly 1600 loans. In the March quarter, this portfolio generated a GAAP yield of 3.3% and a cash yield of 22.1%. The difference representing amortization of our cost basis, the returns capital to prospect that we intend to use for other investment strategies and corporate purposes.

Speaker 3

As of March, our current subordinated structured credit portfolio has generated $1,500,000,000 in cumulative cash distributions to us, representing 121 percent of our original investment. Through March, we've also exited 15 investments with an average realized IRR of 12% and cash on cash multiple of 1.3x. So far in the current June quarter, we booked $29,000,000 in originations and experienced $55,000,000 of repayments for approximately $26,000,000 of net repayments. Originations have consisted of 57% middle market lending and 43% real estate. Thank you.

Speaker 3

I'll now turn the call over to Kristin. Kristin?

Speaker 2

Thanks, Grier. We believe our prudent leverage, diversified access to matched book funding, 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 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 $25,000,000 representing approximately 0.3% of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at $1,100,000,000 As of March 2024, we held approximately $4,900,000,000 of our assets as unencumbered assets, representing approximately 62% of our portfolio.

Speaker 2

The remaining assets are pledged to Prospect Capital Funding, a non recourse SPV. We currently have $2,040,000,000 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 2 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 distribution continuing to be allowed to us. Our drawn pricing is now SOFR plus 2.05%.

Speaker 2

We recently increased the accordion limit to $2,250,000,000 with 2 existing lenders upsizing commitments in the current June 2024 quarter. Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prostate 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 5 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 28 years.

Speaker 2

Our debt maturities extend through 2,052. With so many banks and debt investors across so many unsecured and non recourse debt tranches, substantially reduced our counterparty risk. To date, we have raised $1,800,000,000 in aggregate issuance of our perpetual preferred stock across our preferred programs and listed preferred, including $69,400,000 in the March 2024 quarter and $20,700,000 to date in the current June 2024 quarter. 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 percent from March 31, 2023. Now, I'll turn the call back over to John.

Speaker 1

Thank you, Kristen. We could take questions now.

Operator

We will now begin the question and answer session. It appears we have no questions at this time. I would like to turn the call back over to John Barry for closing remarks.

Speaker 1

Okay. Thank you, everyone. I have some closing remarks, and I just finished them. Thank you very much. Bye now.

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