Prospect Capital Corporation

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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would like now to turn the conference over to Mr. John Barry, Chairman and CEO. Please go ahead.

Thank you, Alan. Joining me on the call today are Greer Isaac, our President and Chief Operating Officer, and Kristen Van Dask, our Chief Financial Officer. Kristen.

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 in 10Q filed previously and available on our website, prospectstreet.com. And now I'll turn the call back over to John.

Thank you, Kristen. In the March quarter, our net investment income or NII, was $94.4 million, 23 cents per common share. Our NAV was $3.74 billion, or $8.99 per common share, up 7 cents from the prior quarter. At March 31st, 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. Greer?

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 investment. 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 pledge collateral. Prospect's approach is one that generates attractive risk-adjusted yields. In our performing interest-bearing investments, we're generating returns in annualized yield of 12.1% as of March 2024, a decrease of 0.2 percentage points in the prior quarter. 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 continue 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%. Non-accruals 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 multi-year financing. To date, on a cumulative basis, we've invested in $3.9 billion across 110 properties, including three triple net lease, 83 multifamily, eight 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 seller's need to recapitalize a 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%, an average realized cash multiple 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, the structured notes portfolio now comprises 7 percent of our investment portfolio and is expected to decrease over time. These underlying structured credit portfolios comprise nearly 1,600 loans. In the March quarter, this portfolio generated a gap yield of 3.3 percent and a cash yield of 22.1 percent. 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've 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?

Thanks, Greer. 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 strengths 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 non-recourse 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. 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 have now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 28 years. Our debt maturities extend 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. To date, we have raised $1.8 billion in aggregate issuance of our perpetual preferred stock across our preferred programs and listed preferred, including $69.4 million in the March 2024 quarter and $28.7 million to date in the current June 2024 quarter. At March 31, 2024, our weighted average cost of unsecured debt financing was 4.14%, a decrease of 0.01% from the December quarter, and an increase of 0.07% from March 31, 2023. Now, I'll turn the call back over to John.

Thank you, Kristen. We can take questions now.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star, then two. At this time, we will pause momentarily to assemble our roster. It appears we have no questions at this time. I would like to turn the call back over to John Barry for closing remarks.

Okay. Thank you, everyone. I have some closing remarks, and I just finished them. Thank you very much. Bye now.