Prospect Capital (PSEC) 9 Feb 242024 Q2 Earnings call transcript

Good day, and welcome to the Prospect Capital Second Quarter Fiscal Year 2024 Earnings Release and Conference Call. [Operator Instructions]

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

Betsy. Thank you,

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

This harbor protection. forward-looking results are John. Thank We statements vary likely statements. Future contains to do subject safe be not are that undertake you, to intended call to to materially. highly forward-looking our update

filed disclosure, prospectstreet.com. previously earnings and and on our press For see XX-Q additional website, available our release

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

Thank the $XX.X investment or In you, or $X.XX income share. net Kristin. our quarter, December common NII million was per

stood billion quarter. share, NAV $X.XX prior down per Our common at $X.XX the $X.XX from or

in percentage percentage points exiting debt-to-equity XXXX our inception across net X.X Prospect those points billion and was down December $XX.X XXX XXX down XX.X%, quarter. from quarter, Since ratio investments, XXXX March XX.X has investments. XXXX, from invested of In September the the

balance quarters run As been multiple over underleveraged we the to us sheet, continue and which for has an years. case

no and plans equity beyond X.X to debt increase debt significantly such to X.XX range. target leverage actual our below historical drawn are of have currently we We our to

These XX, each per monthly We per months for distributions and distribution. common of cash share XX the X April. February, of cash share represent and XXth March $X.XX $X.XX shareholder are announcing consecutive

at call will share all the April distribution over May. distribution shareholders. with IPO past $X.X in to billion per turn XXXX Consistent will practice, common Grier. we approximately current have nearly I you. cumulative $XX.XX through to we our next to original aggregating Since common shareholders, our distributed Thank distributions now in our years plan of shareholder share announcing share on XX count, ago, the

Thank John. you,

the Prospect $X.X dynamic and Our current solid billion Capital environment. in performance of at assets scale continues to platform deliver Corporation, credit undrawn with

market largest Our professionals, consists represents experienced in middle one of nearly industry. of groups investment which team the XXX the

operating strategy investment we estate to non-sponsor we the longevity, lending, next diversified on during spread third-party pullback an yield investment to as secondary capitalize highly other with private equity flexibility opportunities, groups, credit and powder coupled ] see from buyouts, ones. and opportunities they have continue significant sponsor-related such cycles, primary expect focus deep other and Unlike with a us a leveraged that structured and scale, arise. experience prospect [ past to groups, to sheet with expect bench, financial our direct sponsored continue Consistent spans With dry increase wider enable downturn investing. lending, will attractive we balance particularly maintained and opportunities that we maintain in on many real

basis. volume us risk-adjusted in diversity the opportunities This a a opportunities, the range a of most we approaches be select attractive origination and broad on disciplined high bottoms-up of source to allows manner to deem then

invests a Our opportunities. team typically such annually opportunities evaluates and manner disciplined thousands in single-digit in a low of of percentage

has Our the investment flexibility lending mix continued in structure senior with and to a us preference with secured of Consistent strategy, loans. lending gives the multiple first and corporate nonbank stack, levels our secured capital our for increase. to lien invest

underlying from December, at prior the from X.X% debt, X.X% XX.X% quarter. value of prior structured As the quarter, X.X% lien comprised the benefiting X.X% up investments debt subordinated XX.X% down secured from prior lien unsecured our assets with collateral, fair notes of in first and X.X% XX.X% prior being the portfolio debt borrower equity debt pledged XX.X% first the resulting second prior quarter up our quarter, quarter, from with lien down and collateral. from X.X% investments, secured down from That's underlying

points interest-bearing attractive December risk-adjusted percentage XX.X% quarter. from an XXXX. A of our as and is investments, yields generating performing decrease approach of of X.X Prospect's we're annualized the generates that prior one yield

December was the strong in investment income recurring our to of Our business. reflecting XX.X% total revenue interest income, profile a quarter

capital enhancers equity yield positions as certain act gains can generate hold also that as investments in We those contributors positions or distributions.

protect risk downside discipline through origination achieving selection yields We've continued credit our while and prioritize differentiated debt to senior and with a above-market originations approach. against secured to

XXX As of with million. from companies, December, a fair of quarter we of approximately decrease held billion, a portfolio a decrease prior the X% of value $X.X $XXX

many no diversified We also in industries a significant and largest with avoiding industry continue with XX.X%. a company invest concentration. to cyclicality across fashion different for preference The portfolio is

asset industry hotel our stood retail December, X.X%; X.X%. energy of sector, at concentration and As the X.X%; restaurant leisure in industry

prior per in EBITDA, Nonaccruals portfolio leverage as substantially weighted average the middle million. our EBITDA company our change peers a average December. market percentage of from stood portfolio reporting $XXX at X.X% was below Weighted No approximately net X.Xx quarter. total assets and was

Originations December quarter million. aggregated in the $XXX

new We over a macroeconomic objective, also cautious given of million, sales repayments, and $XXX in preservation originations of of $XX exits validation conditions. credit we capital net underwriting toward million received as resulting continue a to our approach take as

investments. originations To comprised XX XX.X% middle arena properties, lending, workforce, lending XX.X% REIT multifamily middle basis, estate deployed lease, we've estate, housing, X.X% triple XX billion yield $X.X notes our student including in and quarter, self-storage December X and [ with we senior and date, subordinated through multifamily, XXX largely X date, our net private in attractive fixed capital the significant on During focused acquisitions real living. ] To a on the rate in-place X invested financing. buyouts structured real stabilized market XX.X% market multiyear cumulative strategy, and largely in

significant private work financing this renovation business REIT, equity business last several in income solid focus rents, home attractive higher time nature yields the attachment and rising tailwinds, which alongside environment, structures cash includes high-returning the as our that a of benefited have businesses. validation increase a points. new collections, the has credit over over real from resulting NPRC with In hedge inflation financing current our value-added from recently growth started showing of abate this support has or investment occupancies, to properties cost programs recapitalizations, estate high an underneath years bit, segment, in third-party capital preferred our corporate investment

more deals from exited of Average to manager partially distributions IRR net XX we've realized net acquisitions, of average than realized XX.X%. exited capital multiple repeat redeploy of December into to with relationships. completely has back invested an received NPRC and capital where of property and property NPRC objective properties recapitalization and new invested at capital including not an our X.Xx as including

of business Our risk-adjusted on collateral pursuing opportunities. demonstrating cash has underwriting favorable the world-class stakes, through and structured credit teams, majority providing focusing benefits management attractive with working primary issuance delivered yields, strong

nonrecourse we investments. [ subordinated As ] of $XXX notes held across December, structured million XX

structured amortizing electing while our grow portfolio other focused notes investment strategies. on our to have We subordinated

the prior strategies and our X.X% capital yield of over As from These The generated we XX%, the down a nearly to less represents is from underlying comprised and of our this yield loans. that credit X.X%, prospect portfolios amortization for GAAP quarter than cost cash that notes returns the investment structured structured the of up result, corporate X.X% portfolio quarter. basis, a portfolio of and to intend a In December investment other purposes. quarter, comprises decrease portfolio expected utilizing X,XXX difference now XXXX time. prior X% on

of XX subordinated in realized multiple us, distributions current our Through structured XX% with cumulative As investment. IRR XXX% and of to of over of also investments representing our cash credit an December, original X.Xx. has $X.XX average December, cash-on-cash exited generated portfolio billion we've

current far overall experience across of originations. So booked [ for $XX our net the in million] $XX [$XX of million March approximately originations we've quarter million [ business, ] and repayments ]

and of consisted lending middle market XX.X% have Originations

you. I'll Thank estate. call to now real XX.X% Kristin. over turn Kristin? the

lack book matched well Thanks, of unencumbered balance maturities of believe access demonstrate [ assets, debt, strength substantial We unfunded substantial Grier. our commitments leverage, near-term both to asset sheet toward fixed funding, avoidance and unsecured opportunities. attractive diversified capitalize weighting liquidity on prudent of to as as rate ] majority

extending ladder [ has future. company into ] XX the locked in Our years a liabilities of

eligible portfolio Our of companies totals $XX to approximately approximately million, our representing X.X% commitments total assets. unfunded

Our revolving cash facility currently sheet approximately billion. undrawn $X.XX stand at commitments combined balance credit and

bond, and of our our toward should construction issue which listed a balance Shareholders were other and a issue leader sheet. marketplace. in acquire of and develop our approach innovator in industry, program, taken appreciate notes preferred, the of a first We're equity company to a issue the under BDC, in right-hand a thoughtful industry We another program [ differentiated convertible creditors undertake ]. lists perpetual a ATM, the have and alike we preferred our many firsts unsecured side bond

upsized our facility after until industry. Shortly our to we our within portfolio. As of from other X the SPV. March banks, as billion the existing an distributions added diversity have a bank assets community banks We our December year new assets, demonstrating are prospect approximately allowed interest in with revolves capital support XXXX, lender by The unmatched be failures a any XXXX, from $X.X well-publicized of held credit of our to funding, unencumbered and XX% with XX remaining continuing commitments of strong pledged in billion facility. approximately by representing to of nonrecourse $X.XX The amortization XXXX, we company of followed company us. currently bank September the assets

benefiting the past issued unsecured program bonds, plus Our bonds unencumbered of and including including assets, drawn at investment-grade from debt, institutional in SOFR pricing types our our bonds, revolver few convertible multiple now Capital X.XX%. we've and is Prospect Outside Corporation, of baby years, notes.

cross no have defaults no asset our types revolver. these and of of financial with All restrictions no debt covenants, unsecured

enjoy investment-grade DBRS. Egan-Jones BBB company rating an investment-grade We from investment-grade more rating an Kroll BBB- have rating from ratings BBB and S&P, than an BBB- from investment-grade BAAX X and an our any investment-grade Moody's, other from rating investment-grade currently in rating industry. We low from

ratings these stable have of outlooks. All

out on our ladder unsecured XX tapped now to have the liability duration to We market our occasions maturities and multiple years. debt extend term

risk years. maturities debt debt so through reduced substantially investors the debt and across banks many unsecured extend Our our with and over many tranches, counterparty nonrecourse so which XXXX

an December In we revolving continued our with we listed of the $XX.X $X.X date Internet our in in million efficient March credit issuance billion programs raised quarter. stock our utilizing including December have XXXX programmatic weekly on aggregate our basis. to preferred quarter and have over XXXX have date, issuance preferred and To continued funding perpetual in preferred, the million $XX.X and across the XXXX quarter,

validly preferred a December share. $XX.XX tender tendered price total per shares offer cash During we purchase and of consideration plus resulting X,XXX,XXX a any in at shares of quarter, XXXX unpaid for of commenced accrued perpetual a of for dividends to all XXX,XXX outstanding X.XX% stock, $XX and the

our We through debt billion, aggregating have program $X.X unsecured including maturities extending issuances with notes X XXXX. not separate October

XXXX. of million staggered decrease X.XX% of increase outstanding unsecured from XXXX, maturities XX, At XX, we through with debt a and cost December XXXX, X.XX%, XX, average of September our notes March an X.XX% December program of weighted XXXX. had was As $XXX from financing of December XXXX,

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

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

Instructions] The question from O'Shea comes first Wells with Finian today [Operator Fargo.

the on question First preferred stock.

out Should conversion You've been issuer Series you anticipate feature preferreds A. ultimately way. the those the buying A when optional are the of Series we down exercising

Fin, listed that's have that. direction. But and our for all another But so. don't not We sure for common buying exercise question. and a to day launched two down moving because the think years to option, exercise option Anyway new do plans been ]. have into we've thanks doing half plans we series at Series[ your actually we stock. mean other actually, we such of no undertaking related convertible an preferred. just and not by I'm the such I we no to can't

direction. So we are actually other the in moving

Okay. out? how all IRR I as I rate color like given there And hope give that's environment, color appreciate shook the the this And cap this didn't I you you follow-up appreciate all me. quarter. But that get that looks we sold Would mark, REIT. just a market was? the versus what the wrong that. Any sold experienced, well. curious, you property the headlines a on one like you read, your exit for on what sold really you there. It can

is a student market. housing in in housing performing Sure. portfolio. quite estate is Thanks. and student sold the an asset significant -- real Student the buyer was book sorry, interest lending we segment of there that well asset The actually

we're in So diversification happy portfolio. have our real to estate

from but I close double at real I was estate, fingertips, our into well know our to the book have don't we Overall, mark. know to of on live. folks the is has the significantly our Multifamily within I We're you the estate, digits. place it sold impacted, digital on of in wrong IRR benefited want focus we divide, housing workforce invest side sort right office. that issues multifamily. are the within side These stay will. the don't real turnover areas a in a lot and affordability been digital of We don't Recall, need if the divide need in for and well. have retail. apartments quite the in their deeply in longer. most their actually course, invest We doing on to at single-family to housing folks problems less apartments to market, people keeping and see of

into a huge had And of sort forward look supply, [ to also greater compared and like markets selected and Mid-Atlantic that declined supply. for with those less pipeline surges exposure supply places mix supply purchase off XXXX Southeast, markets markets a Western those We like have the in the states have for have the past in to additional in example, because cliff. when properties Northeast Austin, falls concerns. Midwest, we've of Even additions at had any Nashville you areas markets of the example, and certain ]

expect And there. continue folks the long in for significant industry rent occur. over to from term most growth positive the to So absorption

very well. real our estate book, performing it's happy we're to and have So

was third off on the I'm in we've I CLO years, book. of just over the able sort to if has topic sneak been running thinking course, a which touched of

Just starting build should them refis such? any and we to Or the kind with the kind that compelled these of and extend as out? -- rebuild to pursue run strategy of there you Is are or of book, off view still resets CLO wondering resurgence sort up.

Sure.

estate, than really positions So any including what including lending, with we with CLO do we including no our middle middle an book market do ongoing our basis is market different of real investment, we're on net NPV, potential for each option, of range value the and always a course, highest options of NPV option. we're looking examine of we desiring the the When at buyouts. select present what to

in of for and the existing as includes actively here. and an benefit and range optionality premium an one. majority having get That's calling options the we investments, book call With our it holder managed CLOs, investment of number is book.

in Number liability one We're deals, stack. the two, example. that pursuing refinancing our tranches of one or for more of

four, Number X as you We're a secondary looking referenced selling position be, deal. a the number -- would or extending resetting on a basis. at

constantly we're those of four options. looking So at all

It over a Our up. sort but rather desire tops bottoms is size is all down, of diversified positions. of one not XX a fits portfolio

what's so one And for deal. not may be appropriate for appropriate deal another

well. other a a of to sheet grows. It grow lot powder. our current would been last spreads We've spreads expect general, portfolio and expect lesser that starting to a overall with environment, book of sheet because in liability where pointed for the over decline as true for been the you But time, for muted. refinancings as of balance the occurring. to underleveraged extensions over be balance on got And percentage dry activity got liability it somewhat significant a in very strategies In are I years is have have We've then dollar and tighten out, of up. time as amortization couple basis,

question -- it wouldn't a there. sell. more some and extension at optionality refinancing with be do to NPV And to out still a an continue still or and there amortize is do So higher of the

at I this that So us. now exits exclusive was in continue. portfolio. would these substantially, XX% I point it's aren't But mutually time, one for the of for mean expect X%, over and declined our it's to almost And book

Raymond next with comes The from question James. Dodd Robert

the question. You answered much of just other

Can to up or that, spiked maybe there normal? allocation Prospect's to new mean us it mean, color onetime this tender the $XX on is sequentially. you up give that that? million water. any in quarter, a was had I any related was the one embedded was other I the I So administration, preferred expense on it Or

happily should number. new $X in that for We was normal. question. will to From number, time, expense more of We our then contra time lesser we on [ a ] comping a forward, quarter. Thank the top allocation will there per expect which the not One, that. settlement $X you, things. probably of range that's you saw catch-up with not It's quarter it the going more past. million a per number you your we some that And the range of Robert. Thank Sure. to have What expect the reduce the new our answer assisting past, the normal. in portfolio of Robert. had But reduced million is a no, associated that favor in And companies. significant there's sort of litigation one in should couple

This session. remarks. I turn over question-and-answer concludes for any Barry to like our the John closing would to conference back

in and see everyone. days. day, you, wonderful you Thanks thank Bye. Well, all. we'll Have a XX

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

You may disconnect. now