Prospect Capital Corp (PSEC) 2018 Q3 法說會逐字稿

Good day, and welcome to the Prospect Capital Corporation Third Fiscal Quarter Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO, please go ahead.

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

Thanks, John. This call is the property of Prospect Capital Corporation, unauthorized use is prohibited. This call contains forward-looking statements within the meaning of the securities laws that are intended to be subject to safe harbor protection. Actual outcomes and results could differ materially from those forecast due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law.

For additional disclosure, see our earnings press release, our 10-Q and our corporate presentation filed previously and available on the Investor Relations tab on our website, ProspectStreet.com. Now I'll turn the call back over to John.

Thank you, Kristin. We were delighted last month to name Kristin Van Dask as our Chief Financial Officer, a role Kristin is well equipped to perform as she moves into her second decade of tenure as part of our senior management team at Prospect.

I also want to take this opportunity to thank Brian Oswald for his 10 years of loyal service to Prospect, for which we are all most grateful. We hope Brian enjoys his retirement in sunny Florida and gets his golf handicap down to scratch, which has been an objective for Brian for many years. Brian may not be on the call because cell phones are not allowed on the golf course, but we do hope that Brain listens to the recording. Again, thank you very much Brian, for your decade of loyal service to Prospect.

Back to the results. For the March 2018 quarter, our net investment income or NII was $70.4 million or $0.195 per share, down less than $0.01 from the prior quarter and exceeding our current dividend rate of $0.18 per share. NII decreased due to higher administrative overhead expense.

As the economic cycle ages, we are not chasing yield, but are instead seeking to reduce risk and protect capital. We remain committed to our historic credit discipline, which has served us well in the past. While we have a robust pipeline of potential investments in our target range for credit quality and yield, we are not chasing risky assets with low returns and so remained under-invested at March 31. We believe our disciplined approach to credit will continue to serve us well in the coming years.

In the March 2018 quarter, we also maintained our objective to protect risk with a prudent net debt-to-equity ratio of 69.1%, down 6.5% from the prior year. Our net income was $51.9 million or $0.14 per share, down $0.20 from the prior quarter as a result of increased unrealized depreciation in the fair market value of certain investments. We have multiple discipline strategies in place with a goal of enhancing our future risk adjusted income.

On the asset management side, we plan on executing on a robust pipeline of new originations, improving cash flows in our structured credit portfolio, including 2 extensions, refinancings and calls and repacks; enhancing NPRC's multifamily real estate portfolio, including 2 realizations in supplemental financings; increasing results of controlled investments, including improving operating performance and closing accretive bolt-on acquisitions and enhancing yields through higher floating rate LIBOR-based rates.

On the liability management side, we plan on lowering our weighted average cost of capital through increased revolver utilization, while managing our maturity risk through continued liability laddering issuance, in a diversified capital markets fashion. We are announcing monthly cash distributions to shareholders of $0.06 per share for each of May, June, July and August, representing 121 consecutive shareholder distributions. We plan on announcing our next series of shareholder distributions in August. Since our IPO 14 years ago through our August 2018 distribution, at our current share count, we will have paid out $16.86 (sic) [$16.68] per share to original shareholders, exceeding $2.65 billion (sic) [$2.59 billion] in cumulative distributions to all shareholders.

Our NAV stood at $9.23 per share in March 2018, down $0.05 from the prior quarter. Our balance sheet as of March 31, 2018 consisted of 90.1% floating rate interest earning assets and 96.4% fixed-rate liabilities, positioning us to benefit from rate increases. Our percentage of total investment income, from interest income was 89.6% in the March 2018 quarter demonstrating our continued dedication to recurring income compared to one time structuring fees. We believe there is no greater alignment between management and shareholders than for management to purchase a significant amount of stock, particularly when management has purchased stock on the same basis as other shareholders in the open market.

Prospect management is the largest shareholder in Prospect and has never sold a share. Management and affiliates on a combined basis have purchased at cost over $350 million of stock in Prospect, including over $285 million since December 2015. On the last earnings call, I was asked why we as management team buy Prospect stock. The answer is, we think it's a good value and we believe in eating our own cooking, and we've done very well buying that stock.

Our management team has been in the investment business for decades with experience handling both challenges and opportunities provided by dynamic economic and interest-rate cycles. We have learned when it is more productive to reduce risk than to reach for yield, and the current environment is one of those time periods. At the same time, we believe the future will provide us with substantial opportunities to purchase attractive assets, utilizing dry powder we have built and reserved.

Thank you. I'll now turn the call over to Grier.

Thanks, John. Our scale business with over $6 billion of assets and undrawn credit continues to deliver solid performance. Our experienced team consists of approximately 100 professionals, representing one of the largest middle-market credit groups in the industry.

With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that covers third-party private equity sponsor-related and direct non-sponsor lending, Prospect sponsored operating and financial buyouts, structured credit, real estate yield investing and online lending. As of March 2018, our controlled investments at fair value stood at 34.7% of our portfolio.

This diversity allows us to source a broad range and high volume of opportunities, then select in a disciplined bottoms-up manner, the opportunities we deem to be the most attractive on a risk-adjusted basis. Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low single-digit percentage of such opportunities.

Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending, and senior loans.

As of March 2018, our portfolio at fair value comprised 44.9% secured first lien, 23.2% secured second lien, 16.5% structured credit with underlying secured first lien collateral, 0.5% unsecured debt and 14.9% equity investments, resulting in 84% 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. And our debt investments were generating an annualized yield of 12.9% as of March 2018, up 30 basis points from the prior quarter and the second straight quarterly increase.

We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions. We've continued to prioritize senior and secured debt, with our originations to protect against downside risk, while still achieving above market yields through credit selection discipline and a differentiated origination approach. As of March 2018, we held 134 portfolio companies, up 12 from the prior quarter with a fair value of $5.72 billion. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration, the largest is 12.8%.

As of March 2018, our asset concentration in the energy industry stood at 2.8% and our concentration in the retail industry stood at 0%. Non-Accruals as a percentage of total assets, stood at approximately 1.3% in March 2018, up 0.1% from the prior quarter. Our weighted average portfolio net leverage stood at 4.65x EBITDA, up from 4.44x the prior quarter. Our weighted average EBITDA per portfolio company stood at $62.6 million in March 2018, up from $48.3 million in June 2017. The majority of our portfolio consists of sole agented and self-originated middle market loans.

In recent years, we've perceived the risk-adjusted reward to be higher for agented, self-originated and anchor investor opportunities compared to the non-anchor broadly syndicated market, causing us to prioritize our proactive sourcing efforts. Our differentiated call center initiative continues to drive proprietary deal flow for our business. Originations in the March 2018 quarter aggregated $430 million. We also experienced $114 million of repayments and exits as a validation of our capital preservation objective, resulting in net originations of $316 million.

During the March 2018 quarter, our originations comprised 43% non-agented debt, including early look anchoring and club investments; 40% agented sponsor debt, 7% structured credit, 6% operating buyouts, 3% real estate, and 1% online lending. To date, we've made multiple investments in the real estate arena through our private REITS. Largely focused on multifamily stabilized yield acquisitions with attractive 10-year financing.

In the June 2016 quarter, we consolidated our REITs into NPRC. NPRC's real estate portfolio has benefited from rising rents, strong occupancies, high returning value-added renovation programs and attractive financing recapitalizations, resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses. NPRC has exited completely certain properties including Vista, Abbington, Bexley, Mission Gate, Hillcrest, Central Park and St. Marin. With an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships. We expect both recapitalizations and exits to continue.

Our structured credit business performance has performed largely in line with our underwriting expectations, demonstrating the benefits of pursuing majority stakes, working with best-in-class management teams, providing strong collateral underwriting through primary issuance and focusing on attractive risk adjusted opportunities. As of March 2018, we held $945 million across 43 non-recourse structured credit investments. The underlying structured credit portfolios comprise nearly 2,200 loans and a total asset base of nearly $19 billion.

As of March 2018, our structured credit portfolio experienced a trailing 12 month default rate of 1.10%, up 33 basis points from the prior quarter and 132 basis points less than the broadly syndicated market default rate of 2.42%. This 132 basis point outperformance was up from 128 basis points in the December 2017 quarter. In the March 2018 quarter, this portfolio generated an annualized cash yield of 13.2%, down 3.8% from the prior quarter, due to asset spread compression and a GAAP yield of 13.2% up 0.7% from the prior quarter.

As of March 2018, our existing structured credit portfolio has generated $1.11 billion in cumulative cash distributions to us, representing 74% of our original investment. Through March 2018, we've also exited 11 investments, totaling $291 million with an average realized IRR of 16.1% and cash-on-cash multiple of 1.48x.

Our structured credit portfolio consists entirely of majority-owned positions. Such positions can enjoy significant benefits compared to minority holdings in the same tranche. In many cases we receive fee rebates because of our majority position. As a majority holder, we control the ability to call a transaction in our sole discretion in the future and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion, rather than when loan asset valuations might be temporarily low.

We as majority investor can refinance liabilities on more advantageous terms, remove bond baskets in exchange for better terms from debt investors in the deal, and extend or reset the investment period to enhance value. We've completed 34 refinancings and resets in the past 2 years. Our structured credit equity portfolio has paid us an average 17.3% cash yield in the 12 months ended March 31, 2018. So far in the current June 2018 quarter, we've booked $182 million in originations and received repayments of $113 million, resulting in net originations of $69 million. Our originations have comprised 63% agented non-sponsor debt, 25% agented sponsor debt, 6% non-agented debt, 5% real estate and 1% operating buyouts.

Thank you. I'll now turn the call over to Kristin.

Thanks, Grier. We believe our prudent leverage, diversified access to matched book funding, substantial majority of unencumbered assets, and weighting toward unsecured fixed rate debt demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of 6 straight liabilities, extending over 25 years into the future, while the significant majority of our loans float with LIBOR, providing potential upside to shareholders as interest rates rise.

We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, develop a notes program, issue an institutional bond, acquire another BDC and many other lists of firsts. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right-hand side of our balance sheet.

As of March 2018, we held approximately $4.6 billion of our assets as unencumbered assets representing approximately 79% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, which has a double A rated, $885 million revolver with 21 banks and with a $1.5 billion total size accordion feature at our option. The revolver is priced at LIBOR plus 225 basis points, a 50-basis point reduction from the previous rate and revolves until March 2019 followed by 1 year of amortization with interest distributions continuing to be allowed to us.

Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect Capital Corporation 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 restriction, and no cross-defaults with our revolver. We enjoy an investment grade BBB rating from Kroll and an investment grade BBB- rating from S&P.

We've now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration more than 25 years. Our debt maturities extend through 2043. With so many banks and debt investors across so many debt tranches, we've substantially reduced our counterparty risk over the years. We have refinanced 5 non-program term debt maturities in the past 3 years, including our $100 million baby bond in May 2015; our $150 million convertible note in December 2015; our $167.5 million convertible note in August 2016; our $50.7 million convertible note in October 2017; and our $85.4 million convertible note in March 2018. The latter 2 which we had also significantly repurchased in the June 2017 quarter.

In the June 2017 quarter, we issued a 4.95% $225 million, July 2022 convertible bond, utilizing a substantial amount of the proceeds to repurchase bonds maturing in the upcoming year. We've also called $319 million of our program notes maturing through August 2020. Our $885 million revolver is currently drawn by $105 million. If the need should arise to decrease our leverage ratio, we believe we can slow originations and allow repayments and exits to come in during the ordinary course, as we demonstrated in the first half of calendar year 2016 during market volatility.

We now have 6 separate unsecured debt issuances aggregating $1.6 billion, not including our program notes, with maturities ranging from January 2019 to June 2024. As of March 31, 2018, we had $756 million of program notes outstanding, with staggering maturities through October 2043.

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

Thank you, Kristin. We're ready for questions.

(Operator Instructions) And our first question comes from Christopher Testa of National Securities Corporation.

Just wanted to talk about Atlantis Health Care. Obviously, operating in Puerto Rico since Hurricane Maria in September, I'm just curious if you could comment on if they had any power outages in any of the locations since the hurricane?

Say, Chris, this is John Barry. I greatly appreciate the question because we are worried about the people in Puerto Rico. It seems that it's been a very slow process, getting that grid back up and running, getting power, even water to these communities and people are really suffering there.

So of course, we also have an investment in Atlantis. To my great surprise, 16 of 17 locations have been operating continuously, since the hurricane, and I don't know Grier, what's the latest on the 17th? Is that up and running?

I'm not sure about the 17th, but there's backup power, which we -- the company had in place, when the hurricane hit as a prudent risk management and that was supplemented with greater redundant systems.

So from a credit standpoint, of course, we are a lender of the company, not an owner. The business had de-levered rapidly before that point. Leverage has picked up a bit, but this is not one that we are worried about since its accounts are growing again. Things are operating reasonably smoothly from a healthcare delivery standpoint. So this is not a credit right now on our worry list.

And have the evacuations of people there caused any slowdown for the services that they're providing?

Well, my understanding is that there were some patients that needed to be relocated to the mainland, particularly patients that didn't have the, let's say, family and friends support network to be able -- to get transported to our locations. But for those with that support network in place, they continued.

My understanding is some patients have returned, some are still on the mainland. So those accounts are not where they were in August before the hurricane struck, but they are -- they have increased and they get -- from a credit standpoint, this is one we're obviously watching very carefully, but not one on the worry list.

Okay, got it. And looking at the [COL] equity, the cash yields were down in the quarter, can you guys just sort of quantify how much of that was due to refi and reset during the quarter versus spread compression?

I don't have a specific breakdown but the vast bulk of the reduction was because of spread compression with an increase in the Feds fund -- funds rate increasing, LIBOR causing the cost of liabilities to go up. That's already modeled into largely on the GAAP side, what was expected because the LIBOR forward curve is used for GAAP income recognition and that -- those Fed moves were -- had very little surprise attached to them 1 quarter ago. So already largely factored in.

From a cash yield perspective, there is a partial impact short term from doing a reset in refinancing in that we often will use third-party financing, we all them x notes, which are just a way to fund upfront reset costs cheaply with third-party capital as opposed to injecting capital into the equity tranche. Some deals don't need any such capital as well, in fact, cash gets so-called flushed to the equity as additional consideration at times 0, call that an infinite IRR investment decision.

So if you remove some of those deals, which had the x notes, you see about 100 basis points increase in cash yield, just to give you a sense of that magnitude. So that's kind of a short-term aspect that should correct itself in the current June quarter, Chris.

Okay, so there should probably be less refi activity in the current quarter?

No not at all. In fact, the opposite. That just refers to the deals that we refinance largely through a resetting and refinancing, where we extend maturity. And it's not just reducing the cost of liabilities, it's also by extending the deal our management teams were able to purchase longer dated collateral, which has a higher spread attached to it.

When you get closer to the end of the deal and you're managing your weighted average life tests, you have to buy shorter dated collateral, which has thinner spreads attached to it than longer dated collateral. So there's a double benefit there, Chris.

We reset -- just to give you a sense, 7 deals in the March quarter and we are currently budgeting, we'll see how many we get done, but we are budgeting around 11 deals to reset, of which we have already done multiple deals, quarter-to-date, in the June quarter. So that's an increase in reset activity of about 50%. So it's a pretty active schedule for what's going on.

And we are quite proactive in making sure we are early in the queue for that activity to do what is appropriate and correct to do economically with these deals given where we are in the cycle. And as a majority investor, together with the management team, account for a large percentage of the tranche and so can act more swiftly than perhaps other deals, which take time to assemble the appropriate voting of the same tranche. We already have a lot of that in place already.

Okay, got it. And just, you guys have discussed, at length, for a few quarters now, kind of moving up the capital stack and being cognizant of where we are in the credit cycle. You guys had the board approve the leverage increase and then kind of withdrew it after S&P's reaction. Now Fitch has a different reaction.

Just curious, how you're looking at this decision and whether there's any inclination that you guys might actually revisit increasing the statutory leverage available to you?

Sure. We have no plans to revisit that level. It's pretty straightforward what occurred. We saw that as a 1940 Act regulatory level and we want to make sure to be careful to explain that a regulatory limit is not the same as actually availing yourself of utilizing higher leverage.

But there are certain benefits to -- from a cushion standpoint and mark-to-market and recessions, et cetera, that we saw from having a wider, call it, de facto regulatory covenant in place. Non- '40 Act corporations of course have no such limit and they don't lever infinitely so we shouldn't conflate those 2.

What we are seeing, I think here, now we have the benefit of 1.5 month or so from the new bill being passed and rating agency reaction the same. What I see -- what we see is a bifurcation in the market between folks interested in being relevant to the bond market which generally tends to mean staying at 200% asset coverage, and folks that are focused -- or shifting their model towards focusing on secured financings.

I would encourage folks to think about, it's not just the amount of leverage, but the type of leverage that matters and we intend on -- of course, we have our bank revolver. But we intend upon being quite relevant and managing our risk prudently and demonstrating that with the bond market and view that as a less risky place to be in the late innings of the business cycle, approaching some sort of economic slowdown or recession most likely in the next couple of years.

If you're 100% dependent on secured financings and the significant bells and whistles that come along with that, you'll have other risks that come into play and we saw that occur during the last cycle and we, of course, were a significant beneficiary of that as a consolidator in the industry. So short answer again is, 200%, we plan on staying at that level for asset coverage and continuing to be a relevant and leader for institutional and noninstitutional term debt issuance.

Got it okay. And what led to the pretty big increase in dividend income on control investments and the other income as well on the controlled investments on the quarter?

Sure. I mean, the biggest factor is that we've had wonderful success in our real estate business, which is really an income growth business, which is a nice counterweight and diversified revenue stream with the corporate credit book. In a par-loan corporate credit business of course, you have one direction to go, which is generally down through a default.

So unless you have some type of ups or income growth, it's hard to have a mitigant. We have that in our real estate business. I mentioned 7 different realizations, which we've had I believe more than a 25% internal rate of return, close to 2x cash-on-cash to-date. We do a very disciplined look at our real estate book frequently on whether it makes sense to exit a position, to add a supplemental financing, to do a complete refinancing or to hold the position and continue optimizing and executing on our value-add program, which involves essentially refurbishing units and the common areas with appropriate associated rent gains as well. So it's been a quite effective strategy.

We see, on a macro level, continued tailwind for that business, demographically, given homeownership trends and importantly given the activity of seniors that downsize into apartments. We see an attractive supply-demand equation as well. There's not been a huge surge of construction of so-called workforce housing, affordable type of housing, what little there's been, it's been more at the luxury end of the equation, which is not what we focus on.

So we intend on continuing with that business and through NPRC and our excellent management team there. And we've got a nice storehouse of dividend income there, that we see repeating itself by virtue of the success of that business, on top of the interest income. So that's largely what you saw occur in the March quarter, which we hope and expect to continue, Chris.

So was a lot of that increase, Grier, due to increases in realization as opposed to NOI on the properties?

It's both, Chris.

Okay. But I'm just trying to figure which because, I mean, the needle was moved pretty heavily on that so I'm just trying to quantify which one moved it more?

Well, the realizations -- we did have some realizations in the last few months. So from an immediate quarter standpoint, the realizations had a greater impact, but NOI growth has been significant and we expect that to continue.

Got it. And congrats on Brian for retiring. I'm just curious, if you have your CFO retiring as a public company, why not kind of announce this in advance and make a press release about it? There's a lot of confusion and people kind of speculating what's going on?

And then you guys reveal today that Mr. Oswald's retired. But there was a long period of time where there was kind of radio silence in terms of what was released to the public regarding his departure.

Well I guess, we received comments that we need to ballyhoo more our stock purchases. We need to ballyhoo more Kristin Van Dask being promoted to CFO after being #2 for so many years. We need to beat the drum for how much we hope Brian will enjoy sunny Florida.

I guess I have always felt being understated is the better approach to life. So people can rewind the call, they can hear it the beginning, we tried to address those points. We are grateful for all that Brian has done. We are thrilled that Kristin has been Brian's understudy for 10 years and we have a seamless transition.

Somehow it sounds like boasting to me and I'd rather not be boastful, I'd rather just be workman-like and do our job and let the numbers speak for themselves. I know people wish that there was more showmanship here, but it's just not our nature.

Our next question comes from Robert Dodd of Raymond James.

Following up with a couple of Chris' questions, actually. (inaudible) I had as well. On the REIT side, obviously been a successful business for you. It looks like it also got -- I don't want to say restructured, but the capital structure got adjusted during the quarter. So there's no loan through that to American consumer lending.

I mean is that business still held within the REIT? And was there a particular reason why the capital structure was adjusted to take out the loans directly to that and going to go through the REIT, if it's still there?

Yes. There are -- Robert, you're referring to is there's some direct loans to the -- ACL is a subsidiary of NPRC, where the management team focuses. A portion of the business, it's a smaller portion, you've got to be careful to monitor the REIT tax tests. So that's really associated with the online business.

The online business you didn't hear us say a whole lot about in our prepared remarks and the reason for that is that, that business is likely to be a smaller percentage of our book going forward than in the past. And the reason for that is significantly because of cycle expectations. We take all of our strategies from an underwriting standpoint through the wringer by having expected base cases and then, of course, downside cases.

But the expected cases across all of our strategies assume a recession occurring. This is not a shop that takes trailing 12 months' profitability and flatlines it ad infinitum. We don't think that's an appropriate way to underwrite at all. Particularly, if you have any type of cyclicality in those (inaudible) businesses' strategies are not completely immune to the business cycle.

So with consumer finance, unless you have a mitigant through a higher APR business and -- our bricks and mortar businesses, First Tower, Credit Central, especially are higher APR bricks and mortar businesses with state-by-state licenses and makes that a lot easier. It's very hard on a kind of a lower APR national lending model to get away from the cycle.

And in consumer credit, unlike corporate credit, when you have a default, generally it's because there's been a credit event of an individual, usually it's because they've lost their job and there's not much in the way of a mitigant when that happens in a recession. With a corporate default, you can as a lender work things out, take over the company, cut costs, focus hard on retaining customers, maybe even pick up new ones, ride out the storm, and then improve on the other side of the cycle. Consumer credit doesn't really work the same way.

So we don't want to have as much exposure heading into say 2020, which will be about 3 years since the more active phase of the Fed cycle, tightening cycle of ramping up, we don't want to have significant exposure. The good thing about that business is, it's a shorter duration, faster amortizing business than on the corporate side. So you get significant pay-downs relatively quickly, within a couple of year period. So we saw there was preparations for a reduction and it shows the benefits of being able to allocate capital and deploy where we see attractive opportunities.

We've done the same thing on the corporate credit side as well, Robert, where on the one hand our weighted average profitability has gone up through some larger credits. On the other hand, we recently in the last few weeks did deals with much smaller borrowers, where there's less competition, (inaudible) an uptick in competitive activity in corporate credit. We did a deal with a completely unsponsored company, an independent sponsored company and a small AUM sponsor, which is much of the same genre. So you'll see us moving capital around based on where we see opportunities are greatest and that's really what was going on as part of the preparations in the quarter associated with that online business, Robert.

At the same time, interestingly, in the controlled book that I mentioned, you've seen a significant improvement in credit stats. And an uptick in profitability, an uptick in cash yields coming to Prospect Capital Corporation. And we did a wonderful add-on acquisition at First Tower of a company called Harrison, which is an almost perfect overlap in the states in which First Tower operates and has a lot of, as you can imagine, strategic synergies that come along with that.

So we have great confidence in the CEO of that company, frankly, who's also a 20% owner and the rest of the management team and we're expecting -- it's early days since doing that add-on, but we're expecting nice results from it.

Great. I really appreciate that color. I mean, just the next point, I guess, is obviously National probably did pay $5.6 million dividend in the quarter. Was that related to a payout of retained earnings and a one-off or is that because the REIT business is doing well and that should be a continuing dividend payment?

Yes, this dovetails, Robert, with what we were just covering with Chris a moment ago. The combination of the business basically harvesting assets which we expect will be sort of a conveyer belt that will continue for a while. When we finish the value-added program for a property, we sell it, we bank it and there are dozens of properties in the book and we've only exited 7 to-date. So we have (inaudible).

But to your point, you've successfully done that several times in the past, not just this quarter in terms of harvesting those gains. But with -- this was the first time, that I can recall at least, we saw a dividend from that entity, and certainly in the last -- this year. This is first quarter we've seen that. So is it that every 7, there's going to be a dividend or, I mean, I'm just trying to get an idea of how lumpy.

No, we expect to see recurring dividend income for the remaining quarters of 2018 from NPRC. Not a one-off of just the March quarter. We expect this to reoccur. It is dividend income, so it would be imprudent to say that's going to be a 5-year phenomenon. It might be, but in terms of visibility for the rest of 2018, we feel pretty good about dividend income and there's cash available, earnings and profits. As you know, there are tax tests that need to be met for such dividend income.

But let's not also forget about just growth of net operating income in the rest of the book on a recurring basis. We're above 12% weighted average yields at the asset level for that business and that's up in the last couple years by at least a couple hundred basis points.

We've been successful finding some off-market acquisitions in conjunction with some of our more prominent, repeat property manager relationships. There's one asset we purchased, for example, at the very end of the December quarter, which had close to a 15% out-of-the-box cash yield, as sort of a special situation. Not every deal is going to be like that, Robert, but we are having good success finding deals to be done there.

And I would say it's interesting to compare and contrast real estate a bit with corporate credit. Every asset class faces greater competition at this point in the cycle, call it, cyclical competition. Corporate private debt is facing cyclical and secular increases in competition. So on a relative basis, we're interested in finding some one-off real estate deals that aren't quite as over-banked and overcompetitive as what we see on some of our sponsor financed deals.

By the way Robert, we like the area that you call home, the great Southeast of the United States.

I kind of like it, too. I appreciate your answers.

Thank you, Robert. And thank you, Chris.

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

Okay. Well we want to thank everyone for joining our call. Grier told me that Brian did join from sunny Florida. Hello Brian, if you have any words to say, we'd all like to hear from you. If you can't get on the call, again, we want to reiterate what we said at the very beginning. We are grateful for your decade of service to us and the great training you did of Kristin Van Dask. So thank you all very much. Have a wonderful afternoon. Bye now.

Thank you.

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