Prospect Capital Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 29, 2024

There are 5 speakers on the call.

Operator

Good day, and welcome to the Prospect Capital Fourth Quarter Fiscal Year 20 24 Earnings Release and Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Operator

John Barry, Chairman and CEO. Please go ahead, sir.

Speaker 1

Thank you, Chuck. Joining me on the call today are Grier Oisek, 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 forward looking statements. For additional disclosure, see our earnings press release and 10 ks filed previously and available on our website, prospectstreet.com.

Speaker 2

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

Speaker 1

Thank you, Kristin. Prosser Capital Corporation is celebrating our 20th anniversary as a leading provider of private debt and equity to U. S. Middle market companies. Since 2004, we've invested $20,900,000,000 across 423 investments exiting 303 investments.

Speaker 1

Over the past 5 years, we've generated higher total returns than our peer BDC median. In the June quarter, our net investment income or NII was 102 $900,000 or $0.25 per common share. Our NAV was $3,710,000,000 or $8.74 per common share. At June 30, our net debt to total assets ratio was 30.5%. Unsecured debt plus preferred is 80.3% of total debt plus preferred per prospect.

Speaker 1

We are announcing monthly common shareholder distributions of $0.06 per share for each of September October with the latter representing our 86th consecutive such distribution. We plan on announcing our next set of shareholder distributions in November. Since inception through October 2024, declared distribution, we will have distributed $4,300,000,000 or $21.12 per share, representing 2.4x June 2024 common NAV per share and 4.1x our Tuesday stock price. As majority shareholder in several private companies, we support company investments by providing capital, expertise and guidance. When companies make acquisitions, purchase property, plant and equipment or need working capital, including to meet increased demand, we often provide capital by directing such companies to pay for such expenditures using cash on hand instead of using such cash to make interest payments to us, recording the resulting payment in kind interest or PIK interest as additional debt.

Speaker 1

PIK interest is typically covered by aggregate portfolio company enterprise value. Portfolio company enterprise value as calculated by 3rd party valuation firms for June 30, 2, 2024 covers or substantially covers our net debt, including all PIK interest on accrual for substantially all of our control company investments, which had PIK in the last 2 fiscal years. Thank you. I'll now turn the call over to Grier.

Speaker 3

Thank you, John. As of June 30, our portfolio at fair value comprised 60.3% first lien debt, that's up 3.8% from the prior year, 13.6 percent second lien debt, down 2.8% from the prior year 6.9% subordinated structured notes with underlying secured 1st lien collateral that's down 1.7% from the prior year and 19.2% unsecured debt and equity investments, up 0.7% from the prior year, resulting in 81% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral. For the current September quarter to date, we've exited another $198,000,000 of second lien debt, representing a further 2.3% decline to 11.3%. We're quite pleased with our continued success in executing our plan to increase our 1st lien mix, while reducing our 2nd lien and subordinated structured notes exposure, thereby reducing portfolio risk. Prospect's approach is one that generates attractive risk adjusted yields.

Speaker 3

In our performing interest bearing investments, we're generating an annualized yield of 12.1% as of June, no change in the prior quarter. Our interest income in the June quarter was 89.2% of total investment income, reflecting a strong recurring revenue profile to our business. As of June, we held 117 portfolio companies, a decrease of 5, primarily due to repayments and exits from 2nd lien loans from the prior quarter, with a fair value of 7,700,000,000 We also continue to invest in a diversified fashion across many different portfolio company industries with a preference for avoiding cyclicality and industry concentration. Our largest industry concentration is below 20%. As of June, our asset concentration in the energy industry stood at 1.6%.

Speaker 3

Our concentration in the hotel, restaurant and leisure sector stood at 0.3% and our concentration in the retail industry stood at 0.3%. Non accruals as a percentage of total assets stood at approximately 0.3% in June, representing a 0.1% decrease from the prior quarter. The weighted average middle market portfolio net leverage stood at 5.5x EBITDA, even with the prior quarter and substantially below our reporting peers. Our weighted average EBITDA per portfolio company stood at $107,000,000 an increase of $1,000,000 from the prior quarter. Originations in the June quarter aggregated $242,000,000 We also experienced $245,000,000 of repayments and exits as a validation of our capital preservation objective, resulting in net repayments of $3,000,000 During the June quarter, our originations comprised 62.9% middle market lending, 27% real estate and 10% middle market lending and buyouts.

Speaker 3

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 multiyear financing. To date on a cumulative basis, NPRC has invested in 110 properties with a $4,000,000,000 aggregate initial property value across multifamily, 83 properties, student housing, 8 properties, self storage 12 properties and senior living, 4 properties. 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. We are also focusing on distressed sellers where there is 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.

Speaker 3

NPRC as of June has exited completely 49 properties at an average net realized IRR to NPRC of 24.4% and an average realized cash multiple of invested capital of 2.5x, not including partially exited deals where we've received back more than our capital invested from distributions and recapitalizations. 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 June, we held $532,000,000 across 32 non recourse subordinated structured notes investments, a reduction of $41,000,000 from the prior quarter. 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 less than 7% of our investment portfolio and is expected to continue to decrease over time.

Speaker 3

These underlying structured credit portfolios comprised nearly 1600 loans. In the June quarter, this portfolio generated a GAAP yield of 4.1%, up 0.8% from the prior quarter and a cash yield of 22.3%, up 0.2% from the prior quarter. The difference represents amortization of our cost basis that returns capital to prospect that we intend to use for other investment strategies and corporate purposes. Our aggregate subordinated structured credit portfolio has generated 2,100,000,000 in cumulative cash distributions to us through June, representing 126 percent of our original investment. Through June, we've exited 16 investments with an average realized IRR of 11.2 percent and cash on cash multiple of 1.3x.

Speaker 3

So far in the current June quarter, the current September quarter, we booked $161,000,000 in originations and experienced $253,000,000 of repayments for approximately $92,000,000 of net repayments. Originations have consisted of 92% middle market lending and 8% real estate. Thank you. I'll now turn the call over to Kristin. Kristin?

Speaker 2

Thank you, Greer. We believe our prudent leverage, diversified access to match 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 $35,000,000 representing approximately 0.4 percent of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at 1,400,000,000 dollars As of June, we held approximately $5,000,000,000 of our assets as unencumbered assets, representing approximately 63% of our portfolio.

Speaker 2

The remaining assets are pledged to Prospect Capital Funding, a non recourse SPV. In June, we successfully completed and amended and extended credit facility with a new 5 year maturity. We currently have $2,120,000,000 of commitments, an increase of $168,000,000 from March from 48 banks, demonstrating strong support of our company from the lender community with a diversity unmatched by any other company in our industry. The facility revolves until June 2028 followed by a year of amortization with interest distributions continuing to be allowed to us. Our drawn pricing continues to be sulfur plus 2.05%.

Speaker 2

Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect Capital Corporation, including in the past few years, multiple types of investment grade unsecured debt, including convertible bonds, institutional bonds, baby bonds and program notes. All of these types of unsecured debt has no financial covenants, no asset restrictions and no cross defaults with our revolver. We currently have 5 investment grade ratings more than any other company in our industry. 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 with our debt maturities extending through 2,052. With so many banks and debt investors across so many unsecured and non recourse debt tranches, we have substantially reduced our counterparty risk.

Speaker 2

At June 30, 2024, our weighted average cost of unsecured debt financing was 4.25%, an increase of 0.11 percent from March 31, 2024 and an increase of 0.18% from the prior year June 30, 2023. Now, I'll turn the call back over to John.

Speaker 1

Thank you, Kristen. We can now answer any questions.

Operator

And the first question will come from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Speaker 4

Hey, everyone. Good morning. A couple of questions on the preferreds to convertible preferreds to start out. Those conversions picked up this quarter and we want to see what trends you're seeing post quarter in those? And second part, the PSEC sort of crisis option as described, if the Board determines there's a risk to 40 Act limitations, ratings, liquidity, Can you describe like under what circumstances you envision the prospect board forcing the conversion in all of these?

Speaker 4

Could it be something as simple as one of the rating agencies or a dividend cut or would it have to be a more onerous liquidity constraint? Thank you.

Speaker 1

Sure. I guess, let me address that question. Is this something in a legal document like break glass here? If your house is on fire, here's the path out. I mean, why are we talking about something like that?

Speaker 4

Well, it would it's in the documents that not only the holder can convert them, but the prospect board could as well and it would be that your stock price, it would be very dilutive to common. It was a bit dilutive this quarter.

Speaker 1

Okay. Well, first, I'm sure there's lots of things and lots of our documents that our risk controls, I'm not going to just try to list them all here. You found this one. No one's discussed it with me. I'm on the Board.

Speaker 1

I'm the Chairman. We've never discussed it, never contemplated it, never thought about it.

Speaker 4

Okay. So fair enough. You don't anticipate evoking that. How about a follow-up on the more standard issuer option conversion when the 5.35 preferred stock is out of the way. I think that's the hurdle for that.

Speaker 4

Like do you anticipate converting it then or do you want this preferred to remain in place? Or do you want to list it or ultimately convert it? Like how do you see that capital structure?

Speaker 1

Well, if it ain't broke, don't fix it, right? If everything is going well, if we're meeting all of our obligations, if we have 5 investment grade ratings, if we have over 50 banks in our credit facility, no, we're not running over and looking at break glass here. I just I'm amazed at these questions. I'm just amazed. No, we're not contemplating any of that.

Speaker 1

We're not thinking about it. We're not cogitating on it. We're not reviewing it. We're not discussing it. We don't see any reason to spend time on stuff like that.

Speaker 1

I'm amazed you are. We have 5 investment grade ratings. How many banks are in our facility? Do you know?

Speaker 4

What was it? 50 or

Speaker 1

You don't know. You don't even know. And you cover us. How much do we just increase the bank facility by with how many banks?

Speaker 4

I think you mentioned it was a couple more banks.

Speaker 1

Hey, why are you relying on me? You're a research guy.

Speaker 4

Okay. Can we go to the fair enough on this topic?

Speaker 1

Break glass here. Oh, the building is on fire. Quick, I've got to break glass. How ridiculous.

Speaker 4

Can I ask one on the CLOs? There was a lot of movement on unrealized and unrealized there, less so on earnings and cash flow. But can you talk about the sort of what was underneath maybe change in assumptions here and what that might mean for the earnings trajectory on those going forward? Thanks.

Speaker 1

Absolutely. So how much do you think that affected our net that reclassification affected our net asset value by?

Speaker 4

Can you tell me?

Speaker 1

You don't know? And you're a research guy? That's not true. And you're a research guy. Well, but you prepared this question like you're some type of expert.

Speaker 1

Okay, it didn't affect the NAV 1p. Okay. So now you're asking about another irrelevant immaterial non burger, it doesn't it's just called a reclassification, all right. The fair value was at X, it was moved from unrealized to realized. This is what accountants do.

Speaker 1

They move things from right down to right off, back and forth, it's very important to them. It doesn't mean anything to me. It doesn't affect the NAV of the company $0.01 It doesn't affect the future of the past 0.01p. But you think it's a big deal just like break glass here. What else do you want to ask about?

Speaker 4

I'll do it. Why don't you

Speaker 1

do the world a favor and do a little research before you come on an earnings call with absurd questions like this. You don't even know what you're talking about.

Speaker 4

One more on the REIT. Did you guys put I think about $20,000,000 into there this quarter? Can you talk about what that went into underneath? Was that for more working capital, CapEx or how do we think of that?

Speaker 1

Here we go again. Here we go again. The REIT owns a giant portfolio of multifamily properties, giant. The REIT generates huge cash flows up to PSEQ. You probably don't even know what they are.

Speaker 1

And each time the REIT wants to go buy a new building, Prospect being an investment company injects capital into the REIT to buy a new building. What is complicated about that? What is it about that that you don't understand? I don't have the numbers right at my fingertips. The REIT pays dividends.

Speaker 1

It's like any REIT. They pay dividends and then when the REIT wants to go buy something else, Prospect Capital Corporation will consider whether or not to inject more capital into the REIT and grow the REIT's capital base, which as Grier said, has generated a 21% IRR. That's not high enough for you? Where do you get that elsewhere? Nowhere.

Speaker 1

Well, maybe venture capital. This isn't venture capital. This is an extremely high performing REIT. Maybe you missed that because you didn't do the research.

Speaker 4

We're trying. I appreciate the answers. I'll hop back in the queue. Thanks, John.

Speaker 3

Let me expand on a couple of items here on those three topics. First, with the preferred, there was one chunky conversion from the largest holder institution in Israel. I think we know what's going on in Israel right now and there is a need for liquidity. The size of that holder's head and shoulders larger than any other holder in a highly distributed private wealth raise. So that will not be repeated.

Speaker 3

2nd, related to the preferred, we can't invoke the issuer option conversion that you mentioned because there are new A4M4 series and not just the 5.35 percent listed preferred. So that doesn't exist. You're discussing something in the documents that is legacy and cannot be invoked. Number 3, you also missed that we've been exchanging preferreds as opposed to having conversions. That's been quite successful from some of the older 5.5% holders to newer series preferreds.

Speaker 3

Our current one is a floating rate one and is non convertible and is non dilutive. We expect that to continue as well. Related to CLOs, which as John mentioned, there's no NAV impact from the reclassification. I think you ask about that every quarter. That's now less than 7% of our portfolio and amortizing off.

Speaker 3

It's a very small part of our book. And the reclass had to do with older deals. Again, successful business. For us, it's generated double digit IRRs on a cash realized basis and is generating 22% cash yields right now with capital being returned to us. And then finally on the REITs and the question about the $20,000,000 investment, 2 important items.

Speaker 3

1, we purchased value add multifamily. There's an ongoing multiple year need for value added capital expenditures that's ordinary that we're making new investments during high IRR investments and upgrading units in common areas. You don't do all that at time 0 when you purchase a property, you do that over multiple years. Again, we've exited close to 50 properties at a 24%, 25% realized IRR, 2.5x cash on cash multiple, as I discussed. We also did a very attractive preferred investment.

Speaker 3

That's been a terrific way to handle the current cap rate financing interplay and are quite pleased to expect a mid to high teens return on that investment. The REIT is an important portfolio company, but again less than 20% of our book. What seems to get lost here is that the vast bulk of what we do is senior secured and 1st lien middle market lending as opposed to the smaller businesses being discussed. Thank you.

Speaker 4

Thank you, Greer.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. John Barry for any closing remarks. Please go ahead, sir.

Speaker 1

Okay, everyone. Well, we got an early start. Have a wonderful day. Bye now.

Operator

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

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Key Takeaways

  • Prospect reported Q4 net investment income of $102.9 million (or $0.25 per share) and a NAV of $3.71 billion ($8.74 per share), and declared monthly distributions of $0.06 per share for September and October, marking its 86th consecutive distribution.
  • The portfolio is now 81% secured debt—upweighting first-lien to 60.3% while reducing second-lien and subordinated notes—to de-risk and optimize return profiles.
  • Performing interest-bearing assets generated an annualized yield of 12.1%, with interest income comprising 89.2% of total investment income, and structured credit producing a 22.3% cash yield in Q4.
  • Through its private REIT (NPRC), Prospect has invested in 110 properties (mainly multifamily) and exited 49 with an average realized IRR of 24.4% and a 2.5× cash multiple, while expanding value-add and preferred equity strategies in a higher-cost financing environment.
  • Balance sheet liquidity remains robust, with $1.4 billion in cash and undrawn revolver capacity, 63% of assets unencumbered, a diversified $2.12 billion credit facility maturing in 2028, unsecured debt ladders out to 2052, and five investment-grade ratings.
AI Generated. May Contain Errors.
Earnings Conference Call
Prospect Capital Q4 2024
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