Prospect Capital Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2025

There are 5 speakers on the call.

Operator

Good day and welcome to the Prospect Capital Third Fiscal Quarter 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 Isaac, our President and COO and Kristin Van Dask, our CFO. 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

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

Speaker 1

Thank you, Kristin. In the March, our net investment income or NII was $83500000.0.00 $19 per common share. Our NAV was $3200000000.0.7.25 dollars per common share. At March 31, our net debt to total assets ratio was 28.7%. Unsecured debt plus unsecured preferred is 87.5% of total debt plus preferred for prospect.

Speaker 1

Since inception over twenty years ago through our August '5 declared distribution, we will have distributed over $4,500,000,000 or $21.57 per share. We are announcing monthly common shareholder distributions of $0.45 per share for each of May, June, July and August. We plan on announcing our next set of shareholder distributions in August. Our preferred shareholder cash distributions continue at the contractual rates of such distributions. Thank you.

Speaker 1

I'll now turn the call over to Greer.

Speaker 3

Thank you, John. Over the past two decades, Prospect Capital Corporation has invested $11,800,000,000 in over three twenty five exited investments that have earned a 13% unlevered investment level gross cash internal rate of return to Prospect Capital Corporation. This two decade time period includes the GFC and has been dominated in general by low interest rates. As of March 2025, we held 114 portfolio companies across 33 different industries with an aggregate fair value of 6,900,000,000.0 For the March, our portfolio at fair value comprised sixty five point five percent first lien debt, that's up six fifty basis points from the prior year 10.5% senior secured second lien debt, that's down four ten basis points from the prior year 4.2% subordinated structured notes with underlying secured first lien collateral, that's down three ten basis points as a mix from the prior year and 19.8% unsecured debt in equity investments, resulting in 80.2% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral. In our middle market lending strategy, we continue to focus on first lien senior secured loans during the quarter with such investments totaling $149,000,000 of our $196,000,000 of originations during the quarter.

Speaker 3

Investments during the quarter included our new platform investment in TAUS footwear, a leading innovative footwear brand with a two decade history and other follow on investments in existing portfolio companies to support acquisitions, working capital needs, organic growth initiatives and other objectives. Our subordinated structured notes portfolio as of March represented 4.2 of our investment portfolio, a reduction of three ten basis points from 7.3% as of March 2024. Since the inception of this strategy in 2011 and through March of twenty twenty five, we've exited 15 subordinated structured note investments, earning an unlevered investment level gross cash internal rate of return of 12.1% and cash on cash multiple of 1.3 times. As of March 2025, based on fair value and excluding investments being redeemed, the remaining subordinated structured notes portfolio had a trailing twelve month average cash yield of 30.2% and an annualized GAAP yield of 4.4% with the difference between cash yield and GAAP yield representing amortization of our cost basis. We expect to continue to amortize and exit our subordinated structured notes portfolio and to reinvest primarily into first lien senior secured middle market loans.

Speaker 3

In our real estate property portfolio at National Property REIT Corp or NPRC, since the inception of this strategy in 2012 and through March 2025, we've exited 52 property investments, earning an unlevered investment level gross cash IRR of 24% and cash on cash multiple of 2.4 times. We exited an additional property in the recently completed March. The remaining real estate property portfolio includes 58 properties that paid us an income yield of 4.5% for the March. Prospects aggregate investments in NPRC at a $460,000,000 unrealized gain as of March. We expect to continue to redeploy future asset sale proceeds primarily into property value add capital investments and first lien middle market loans.

Speaker 3

Prospect's approach is one that generates attractive risk adjusted yields. In our performing interest bearing investments, we're generating an annualized yield of 11.5% as of March. Our interest income in the March was 93% of total investment income, reflecting a strong recurring revenue profile for our business. Payment in kind income for the quarter ended March was $19,500,000 down nearly 50% from the June. Non accruals as a percentage of total assets stood at approximately 0.6% in March.

Speaker 3

Our weighted average EBITDA per portfolio company stood at just under 100,000,000 Investment originations in the March aggregated $196,000,000 and were comprised of $149,000,000 of first lien loans or 76% of total originations. We also experienced $192,000,000 of repayments and exits as a validation of our capital preservation objective, resulting in net originations of $4,500,000 During the March, our originations comprised 81% middle market lending, 4.9% middle market lending and buyouts, 14.1% real estate and zero percent in subordinated structured notes. So far in the current June, we booked $65,000,000 in originations and experienced $20,000,000 of repayments. Originations have consisted of 75.5% middle market lending and 21.3% real estate. Thank you.

Speaker 3

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

Speaker 2

Thanks, Greer. We believe our prudent leverage, diversified access to matched book funding, substantial majority of unencumbered assets, weighting toward unsecured fixed rate debt and avoidance of unfunded asset commitments all demonstrate balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending twenty seven years into the future. Our unfunded eligible commitments to portfolio companies totals approximately $43,000,000 of which $17,000,000 are considered at our sole discretion, representing approximately zero point six percent and zero point two percent of our assets as of March 2025, respectively. Our combined balance sheet cash and undrawn revolving credit facility commitments stood at $1,700,000,000 as of March, and we held $4,400,000,000 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. We currently have $2,120,000,000 of commitments from 48 banks, demonstrating strong support of our company from the lender community with the diversity unmatched by any other company in our industry. The facility does not mature until June 2029 and revolves until June 2028. Our drawn pricing continues to be SOFR plus 2.05%. Outside of our revolver, we have access to diversified funding sources across multiple investor types and have successfully issued securities in an array of markets.

Speaker 2

Prospect has issued multiple types of unsecured debt, institutional non convertible bonds, institutional convertible bonds, retail baby bonds and retail program notes. All of these types of unsecured debt has no financial covenants, no asset restrictions and no cross defaults with our revolver. As of March, unsecured term debt represents 78% of all of Prospect's indebtedness. We have tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out twenty seven years, with our debt maturities extending through 02/1952. With so many banks and debt investors across so many unsecured and nonrecourse debt tranches, we have substantially reduced our counterparty risk.

Speaker 2

At 03/31/2025, our weighted average cost of unsecured debt financing was 4.33 percent. Now I'll turn the call back over to John.

Speaker 1

Thank you, Kristen. I think we can take questions now.

Operator

Apologies for the disruption everyone. We will now begin this question and answer session. Our first question comes from Finian O'Shea from Wells Fargo. Please go ahead.

Speaker 4

Hey, everyone. Good morning. First question on the top line. Other income from the control, namely NP REIT, had been a pretty recurring feature for a while and that was very low, if not anything this quarter. Seeing how we should think about that, if this should bounce back or the new this reflects the new sort of frac rate total earnings?

Speaker 4

Thanks.

Speaker 1

Thank you, Finian. Greer, you want to take that one?

Speaker 3

Sure. So we had had, as you can see in our financials for multiple periods going back a few years actually, fairly significant other income coming out of NPRC associated with the real estate book, primarily associated with exit related income, as we had successfully completed our value add capital improvement program and exited assets. The pacing of such exits understandably slowed a bit, as the Fed hikes and in particular ten year treasuries spiked. We think things are starting to normalize whenever you have sharp movements in macro indices like that it tends to make buyers and sellers pause. But we're looking to achieve a value maximizing orderly reduction in size of NPRC and our real estate portfolio.

Speaker 3

We just sold an additional asset as we mentioned in the quarter just completed. We have some additional assets we're exploring as well and other ways to unlock potential capital upstairs from NPRC. That business line, as we discussed a couple of quarters ago, has achieved terrific total returns for us, 24% IRRs after exiting several dozen over 50 investments in the last two decades of or nearly two decades of making these investments, but lower on the current yield side of things that's more competitive in at least as it relates to compared with middle market lending. It's competitive in a low short term interest rate environment, but not as competitive in a higher rate environment that we find ourselves here still today within 100 basis points of peak so far for Fed tightening. So that other income line, you may see some activity there.

Speaker 3

In the future, we're not really guiding to anything specifically. It depends on the pacing and magnitude of those exits as they transpire.

Speaker 4

Very helpful. Thanks. So, that remains subdued for a little while. The you have the incentive fee this quarter that wasn't full. You assume that comes back.

Speaker 4

And everyone the whole industry being mostly floating rate is now sort of pretty tight on dividend coverage with SOFR pointed down. I think you said you declared through August. Is there another lever to pull on leverage or adding to other sort of higher yielding investments? Like how do we think about dividend coverage, I guess beyond August at today's SOFR curve?

Speaker 3

Right. So I think yes and yes to both of those. First of all, we've been prioritizing more and more, sort of lower middle market and core or traditional middle market lending. We have not been big fans of the upper end of the market and what's transpired, especially in the last couple of years and have been prioritizing our originations in the less efficient part of the market where spreads are wider and also where so for floors are much higher. As you pointed out, what went up, can and already has started to and is projected to based on the forward curve that you mentioned go down again and it will be in a symmetrical fashion for others with low to no.

Speaker 3

So for floors, prioritizing the upper end of the market where competition is fierce, spreads are tight, floors are low, and covenants are non existent from a seat at the table standpoint. Lower end of the market, we get the opposite of all those things, wider spreads, higher floors, better covenants that act as a repricing event. So we're getting that from our focus on lower end of the market, number one. Number two, there's a portfolio rotation aspect occurring, which we're looking to boost our yields. One area is our subordinated structured notes portfolio or CLO equity portfolio, which is down to only 4% of our assets, but, is a low GAAP contributor, high cash contributor, which is amortization of our cost basis.

Speaker 3

So that unlocks capital that could be invested in high returning deals. Real estate is a significant storehouse of value for us. Our real estate book is only yielding about 4.5%. Again, that's a total return strategy, lower on yield, attractive for total returns. And we think rotating those assets selectively, prudently in an orderly value maximizing way, as I mentioned to the last question, is also going to help to boost our yield.

Speaker 3

And then, we're also under levered, significantly under levered from a standpoint of debt to total cap only around 30% or so. Our leverage is half or less than half of compared to peer companies in the industry, which reflects conservatism. It also reflects being careful and reluctant about tying up too much of our balance sheet with more expensive financing with less borrower friendly call protections along the way. So we'd like to have locked in capital 3% to 4% rates from several years ago. We're being advantageous and opportunistic, as it pertains to thinking about such issuance.

Speaker 3

And we have multiple areas of financing to look at, that can be adjusted over time based on what's happening with short and medium term prevailing rates in more of a programmatic fashion as we raise significant capital there. So all those are available levers to pull that we're looking at to enhance net investment income.

Speaker 4

One more on that. Like this quarter on the multiple sources, the program notes slowed, the preferred races were pretty good. I know that's sort of the preferreds are sort of in between, but just considering them leverage for now. That should we anticipate that continues like a more of a ramp on the prefs as opposed to traditional unsecured debt?

Speaker 3

I think you'll look at us prioritizing both unsecured debt and preferred unsecured financing of course is a significant de risker of the balance sheet. And we've been big fans of that. We also have our $2,100,000,000 revolving credit facility with close to 50 banks, more than any other company in our industry. We all know what has transpired in the last few weeks and at the tail end of the last quarter, just tremendous volatility. So it's no surprise that you saw issuance slow, during that sort of a period, from our program notes.

Speaker 3

But we have multiple areas to look to, with program notes, with preferreds and in other types of financing as well. I think we've issued more diversified financing in our history than any other company in the industry, pioneering the first convertible notes, printing the first institutional bond, printing the first and only perpetual preferred and so on and so on. So we're always looking at different avenues, that help with cost of capital, but also provide a diversity in access, including during more volatile time periods. Having this programmatic type of issuance is very valuable and differentiating about our company that tends to be sticky. Maybe the volumes can fluctuate a bit, but it's available in there and represents more just in time type of financing.

Speaker 4

Helpful. That's all for me. Thanks so much, Grier.

Speaker 3

Thank you, Finian.

Speaker 1

Good. Thank This

Operator

concludes our question and answer session. I would like to hand the call back over to Mr. John Barry.

Speaker 1

Okay. Thank you everyone. Have a lovely morning and a great weekend. Thank you very much. Bye now.

Operator

This concludes our Thank you for attending Earth Conference. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Prospect Capital Q3 2025
00:00 / 00:00