Prospect Capital Corp (PSEC) 2024 Q4 法說會逐字稿

Good day and welcome to the Prospect Capital fourth-quarter fiscal year 2024 earnings release and conference call.

(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, sir.

Thank you, Chuck.

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

Kristin?

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-K filed previously and available on our website, prospectstreet.com.

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

Thank you, Kristin.

Project Capital Corporation is celebrating our 20th anniversary as a leading provider of private debt and equity to US middle-markets companies.

Since 2004, we've invested $20.9 billion across 423 investments, exiting 303 investments.

Over the past five years, we've generated higher total returns than our peer, BDC median.

In the June quarter, our net investment income or NII was $102.9 million or $0.25 per common share.

Our NAV was $3.71 billion 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 for Prospect.

We are announcing monthly common shareholder distributions of $0.06 per share for each of September and 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 $4.3 billion or $21.12 per share, representing 2.4 times June 2024 common NAV per share and 4.1 times 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, we 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.

PIK interest is typically covered by aggregate portfolio company enterprise value.

Portfolio company enterprise value, as calculated by third-party valuation firms for June 30, 2024, covers or substantially covers our net debt, including all PIK interest on accrual for substantially all of our controlled company investments which had PIK in the last two fiscal years.

Thank you.

I'll now turn the call over to Grier.

Thank you, John.

As of June 30, our portfolio at fair value comprise 60.3% first-lien debt, that's up 3.8% from the prior year; 13.6% second-lien debt, down 2.8% from the prior year; 6.9% subordinated structured notes with underlying secured first-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 pledged collateral.

For the current September quarter to date, we've exited another $198 million 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 first-lien mix while reducing our second-lien and subordinated structured notes exposure, thereby reducing portfolio risk.

Prospect's approach is one that generates attractive risk adjusted yields, and our performing interest-bearing investments were generating an annualized yield of 12.1% as of June.

No change from 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 five, primarily due to repayments and exits from second-lien loans for the prior quarter with a fair value of $7.7 billion.

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%.

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.

Our weighted average middle market portfolio net leverage stood at 5.5 times EBITDA, even with the prior quarter and substantially below our reporting peers.

Our weighted average EBITDA per portfolio company stood at $107 million, an increase of $1 million from the prior quarter.

Originations in the June quarter aggregated $242 million.

We also experienced $245 million of repayments and exits as a validation of our capital preservation objective, resulting in net repayments of $3 million.

During the June quarter, our originations comprised 62.9% middle market lending, 27% real estate, and 10% middle market lending and buyouts.

To date, we've 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 billion 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're also focusing on distressed sellers where there is an opportunity to take advantage of the seller's need to recapitalize the property or generate liquidity to address other issues in their portfolios.

NPRC, our or 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 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 2.5 times, not including partially exited deals where we received back more than our capital invested for 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 million across 32 nonrecourse subordinated structured notes investments, a reduction of $41 million 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.

These underlying structured credit portfolios comprised nearly 1,600 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 $2.1 billion in cumulative cash distributions to us through June, representing 126% of our original investment.

Through June, we've exited 16 investments with an average realized IRR of 11.2% and cash and cash multiple of 1.3 times.

So far, the current June quarter -- the current September quarter, we booked $161 million in originations and experienced $253 million of repayments for approximately $92 million of net repayments.

Our originations have consisted of 92% middle market lending and 8% real estate.

Thank you.

I'll now turn the call over to Kristin.

Kristin?

Thank you, Grier.

We believe our prudent leverage, diversified access to matchbook 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 million, representing approximately 0.4% of our assets.

Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at $1.4 billion.

As of June, we held approximately $5 billion of our assets as unencumbered assets representing approximately 63% of our portfolio.

The remaining assets are pledged to Prospect Capital Funding, a non-recourse SPV.

In June, we successfully completed and amended an extended credit facility with a new five-year maturity.

We currently have $2.12 billion of commitments, an increase of $168 million 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 SOFR plus 2.05%.

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 have no financial covenants, no asset restrictions, and no cross defaults with our revolver.

We currently have five 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 2052.

With so many banks and debt investors across so many unsecured and non-recourse debt tranches, we have substantially reduced our counterparty risk.

At June 30, 2024, our weighted average cost of unsecured debt financing was 4.25%, an increase of 0.11% 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.

Thank you, Kristin.

We can now answer any questions.

(Operator Instructions) Finian O'Shea, Wells Fargo Securities.

A couple of questions on the preferreds to the 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 the second part, the PSEC sort of crisis option as described if the Board determines there is a risk to 40 Act limitations, ratings liquidity.

Can you describe like under what circumstances you envision the prospect for forcing the conversion in all of these?

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?

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 down.

I mean, why are we talking about something like that?

Well, 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.

Okay.

Well, I -- first, I'm sure there's lots of things in lots of our documents that are risk controls.

I'm not going to just try to list them all here.

You found this one.

No one has discussed it with me.

I'm on the Board.

I'm the Chairman.

We've never discussed it, never contemplated it, never thought about it.

Okay.

So fair enough.

You don't anticipate invoking 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.

But 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 yield capital structure?

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 five 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.

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.

I'm amazed you are.

We have five investment grade ratings.

Did you know that?

How many banks are in our facility, do you know?

What was it 50 or

--

You don't know.

You don't know.

You don't even know.

And you cover us?

How much do we just -- how much do we just increased the bank facility by with how many banks?

I think you mentioned it was a couple of more banks.

Hey, why are you relying on me?

You're a research guy.

Okay.

Can we go to the -- Fair enough on this topic.

Break glass here, oh, the building's on fire.

Quick, I've got to break glass.

How ridiculous.

Can I ask one on the CLOs?

There was a lot of movement on realized 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 going forward?

Absolutely.

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

Can you tell me?

You don't know?

Well, it's not

--

And you're a research guy.

It's not disclosed.

And you're a research guy.

No, but you -- You prepared this question like you're some type of expert.

Okay, it didn't affect the NAV one penny.

Okay.

So now you're asking about another irrelevant, immaterial, non (inaudible) it doesn't -- It's just because of reclassification, all right?

The fair value was at X. It was moved from unrealized to realized.

This is what accountants do.

They move things from right down to write 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 one penny.

It doesn't affect the future or the past, one penny.

But you think it's a big deal just like break glass here.

Fair enough.

What else do you want to ask about?

I'll do one more on the REIT's --

By the way, why don't you 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.

One more on the REIT.

Did you guys put, I think, about $20 million 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?

You know, here we go again.

Here we go again.

We -- the REIT owns a giant portfolio of multi-family properties, giant.

The REIT generates huge cash flows of the PSEC.

You probably don't even know what they are.

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.

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.

What, that's not high enough for you?

Where do you get that elsewhere?

Nowhere.

Maybe venture capital.

This is a venture capital.

This is an extremely high-performing REIT.

Maybe you missed that because you didn't do the research.

We're trying a -- I appreciate the answers.

I'll hop back in the queue.

Thanks, John.

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's a need for liquidity.

The size of that holder head and shoulder's larger than any other holder in a highly distributed private wealth raised, so that will not be repeated.

Second, related to the preferred, we can't invoke the issuer option conversion that you mentioned because there are no A4, M4 series and not just the 5.35% listed preferred.

So that doesn't exist.

You're discussing something in the documents that is legacy and cannot be invoked.

Number three, you also missed that we've been exchanging preferreds as opposed to having conversions.

That has been quite successful from some of the older 5.5% holders to newer series.

The preferreds, our current one, is a floating rate one and is nonconvertible and is nondilutive.

We expect that to continue as well.

Related to CLOs, which, as John mentioned, there's no net impact from the reclassification.

I think you ask about that every quarter.

That's now less than 7% of our portfolio and amortizing off it today, very small part of our book.

And the reclass had to do with older deals, again, successful business for us.

It has generated double-digit IRRs on a cash realized basis, and it's generating 22% cash yields right now with capital being returned to us.

And then finally, on the REITs and question about the $20 million investment, two important items.

One, we purchase value-add multifamily.

There's an ongoing multiple year need for value-add capital expenditures.

That's ordinary that we're making new investments, generally high IRR investments, and upgrading units in common areas.

You don't do all that at time zero 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.

That has been a terrific way to handle the current cap rate financing cost 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 first-lien, middle market lending as opposed to the smaller businesses being discussed.

Thank you.

Thank you, Grier.

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.

Okay, everyone.

Well, we got an early start.

Have a wonderful day.

Bye now.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.