Prospect Capital Corporation (NASDAQ:PSEC) Q3 2024 Earnings Call Transcript

Prospect Capital Corporation (NASDAQ:PSEC) Q3 2024 Earnings Call Transcript May 9, 2024

Prospect Capital Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. John Barry, Chairman and CEO. Please go ahead.

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

Kristin 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 and 10-Q filed previously and available on our website prospectstreet.com. And now I’ll turn the call back over to John.

John Barry: Thank you, Kristin. In the March quarter, our net investment income or NII was $94.4 million, $0.23 per common share. Our NAV was $3.74 billion or $8.99 per common share, up $0.07 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 and August. We plan on announcing our next set of shareholder distributions in August. Grier?

Grier Eliasek: Thank you, John. 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% 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. 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.

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Q&A Session

Our interest income in the March quarter was 91% of total investment income, reflecting a strong recurring revenue profile to our business. As of March, we held 122 portfolio companies, the decrease of four from the prior quarter with a fair value of $7.8 billion, an increase of approximately $175 million. We also continued 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% in the hotel, restaurant and leisure sector stood at 0.3%, and the retail industry stood at 0.3%. Nona-ccruals 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. 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, 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 multifamily workforce, stabilized yield acquisitions with attractive in-place multiyear financing. To date, on a cumulative basis, we’ve invested in $3.9 billion across 110 properties, including three triple net lease, 83 multifamily, 8 student housing, 12 self-storage and four 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. We’re also focusing on distressed sellers where there’s an opportunity to take advantage of the sellers need to recapitalize the 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% and average realized cash multiple of 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 million across 33 non-recourse subordinated structured notes investments. 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 of 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 1,600 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 prospects 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. Through March, we’ve also exited 15 investments with an average realized IRR of 12% in cash on cash multiple of 1.3 times.

So, far in the current June quarter, we booked $29 million in originations and experienced $55 million of repayments for approximately $26 million of net repayments. Originations have consisted of 57% middle market lending and 43% real estate. Thank you. I’ll now turn the call over to Kristin. Kristin?

Kristin Van Dask: 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 $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.

The remaining assets are pledged to prospect capital funding, a nonrecourse SPV. 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. 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%. We recently increased the accordion limit to $2.25 billion with two existing lenders upsizing commitments in the current June 2024 quarter. 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.