Prospect Capital Corporation (PSEC) Q4 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Prospect Capital Corporation Fiscal Year Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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, Grant. Good morning, everyone. Joining me on the a call today 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 and our 10-K filed previously and available on the Investor Relations tab on our website prospectstreet.com. Now, I'll turn the call back over to John.

Thanks, Kristin, and thank you again to you and your team for all the work that goes into filing our 10-K, which is a massive document indeed, everything you ever wanted to know about Prospect is right in there. For the June 2020 fiscal year, our net investment income, or NII, was $265.7 million, or $0.72 per share, matching our cash dividends in an uneventful and also underlevered quarter for originations due to the virus. In the June quarter, our NII was $58.3 million, or $0.16 per share. Our net income was $162.6 million or $0.44 per share, as the value of many of our investments rebounded due to a combination of positive company-specific and macro factors. In the June quarter, our net debt-to-equity ratio was 69.6%, down 4.5% from March, as we continue to run an underleveraged balance sheet, following the risk-off policy we put in place eight quarters ago. Over the past two years other listed BDCs have increased leverage, with a typical listed BDC in June 2020 at 110% debt to equity, or 40 percentage points higher than for us. We have not increased our leverage, instead electing lower risk. In May, we moved our minimum 1940 Act regulatory asset coverage to 150%, which increased our cushion and gave us flexibility to execute our recently announced perpetual preferred equity issuance. While preferred stock provides us more equity, we do not intend to increase leverage beyond our historical target of 0.7 to 0.85 debt to equity. Prospect's balance sheet is highly differentiated from peers, with 100% of Prospect's funding coming from unsecured and non-recourse debt, which has been the case here for the last 13 years. Unsecured debt was 89.1% of Prospect's total debt in June 2020, compared to half that for the typical listed BDC. Our unsecured and diversified funding profile provides us with significantly lower risk and significantly more investment strategy and balance sheet flexibility. Our NAV rebounded to $8.18 per share in June, up $0.20 and 2.5% from the prior quarter. We've outperformed our peers during the past two quarters, because we moved to risk off eight quarters ago. We are now cautiously optimistic and going on offense. We have announced cash dividends of $0.06 per share for each of September and October, the 37th and 38th consecutive $0.06 cash distributions. I will now turn the call over to Grier.

Thank you, John. Our scale platform with over $6 billion of assets and undrawn credit continues to deliver solid performance in the current challenging environment. Our experienced team consists of approximately 100 professionals, representing one of the largest middle market investment groups in the industry. With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that spans third-party private equity sponsor related lending, direct non-sponsor lending, Prospect's sponsored operating and financial buyouts, structured credit and real estate yield investing. Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities, coupled with wider spread primary opportunities with a pullback from other investment group's particularly highly leveraged ones. As of June, our controlled investments at fair value stood at 43.2% of our portfolio, up 0.2% from the prior quarter. 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 June, our portfolio at fair value comprised 46.9%, secured first lien an increase of 2.1% from March, 24.4% other senior secured debt up 0.8%, 13.5% subordinated structured notes with underlying secured first lien collateral and down 0.2%, 1% unsecured debt which is up 0.1% and 14.2% equity investments down 2.8% resulting in 84.8% of our investments up 2.7% being assets with underlying secured debt benefiting from borrower-pledged collateral. Prospect's approach is one that generates attractive risk-adjusted yields and our performing interest-bearing investments we're generating an annualized yield of 11.4%, as of June 2020, down 1% from the prior quarter. This decrease is largely due to the decline in LIBOR, though we expect stability now due to our LIBOR floors. 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 June, we held 121 portfolio companies flat with the prior quarter and with a fair value of $5.2 billion. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration. The largest is about 15%. As of June, our asset concentration in the energy industry stood at 1.6%, down 0.1% from the prior quarter our concentration in the hotel restaurant and leisure sector stood unchanged at 0.4% and our concentration in the retail industry stood unchanged at 0%. Non-accruals as a percentage of total assets stood at approximately 0.9% in June down 0.7% from the prior quarter. Our weighted average portfolio net leverage stood at 4.5 times EBITDA, down 0.12 from the prior quarter. Our weighted average EBITDA per portfolio company stood at $72 million in June similar to the prior quarter. Originations in the virus-muted June quarter aggregated $37 million. We also experienced $64 million of repayments and exits as a validation of our capital preservation objective and sell-down of larger credit exposures resulting in net repayments of $28 million. During the June quarter, our originations comprised 53% real estate, 36% agented sponsor debt, 2.9% rated-secured structured notes, and 8.5% corporate yield 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 10-year-plus financing. NPRC our private REIT has real estate properties that have benefited over the last several years 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 over 30 properties at a more than 20% IRR with an objective to redeploy capital into new property acquisitions including with repeat property manager relationships. We continue to monitor our rent collections which are holding up well in the current environment. 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 attractive risk-adjusted opportunities. As of June, we held $709 million across 39 non-recourse subordinated structured notes investments. These underlying structured credit portfolios comprised around 1,700 loans and a total asset base of around $18 billion. As of June, the structured credit portfolio experienced a trailing 12-month default rate of 146 basis points, representing 177 basis points less than the broadly syndicated market default rate of 323 basis points. In June, this portfolio generated an annualized GAAP yield of 12.5%. As of June, our subordinated structured credit portfolio has generated $1.21 billion in cumulative cash distributions to us representing around 87% of our original investment. Through June we've also exited nine investments totaling $263 million with an average realized IRR of 16.7% and cash-on-cash multiple of 1.5 times. Our subordinated 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 majority holder, we control the ability to call a transaction and 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 have completed 27 refis and resets since December 2017. So far in the current September quarter, we've booked $110 million in originations and experienced $64 million of repayments for $46 million of net originations. The originations have comprised 43.9% agented-sponsored debt 22.7% non-agented debt 20% rated-secured structured notes and 13.4% real estate. 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 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 23 years into the future. Today we have zero debt maturing until July 2022 or around two years from now. Our total unfunded eligible commitments to non-controlled portfolio companies totaled approximately $24 million or less than 0.5% of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at approximately $498 million. 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 under a bond ATM, acquire another BDC and many other lists of firsts. Now we're adding our programmatic perpetual preferred issuance to that list 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 June 2020, we held approximately $3.77 billion of our assets as unencumbered assets, representing approximately 71% of our portfolio. The remaining assets are pledged to Prospect capital funding, wherein September 2019, we completed an extension of our revolver to a refreshed five-year maturity. We currently have $1.0775 billion of commitments from 30 banks with a $1.5 billion total size accordion feature at our option. The facility revolves until September 2023, followed by a year of amortization with interest distributions continuing to be allowed to us. Of our floating rate assets, 85.2% have LIBOR floors with a weighted average floor of 1.67%. 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 enjoy an investment-grade BBB negative rating from S&P, an investment-grade Baa3 rating from Moody's, an investment-grade BBB negative rating from Kroll and an investment-grade BBB rating from Egan-Jones. We have now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 23 years. Our debt maturities extend through 2043. With so many banks and debt investors across so many debt tranches, we have substantially reduced our counterparty risk over the years. In the June 2020 quarter, we retired in full at maturity $128 million of our April 2020 notes, as yet another reflection of a successful term issuance raised and repaid. We also repurchased $1.4 million of our program notes. We also continued our weekly programmatic InterNotes issuance. In the current September 2020 quarter, we recently completed a successful tender offering for our July 2022 notes retiring around $30 million to take that tranche down to $229 million and substituting more expensive 5% term debt with significantly lower cost revolving credit with an incremental 1.3% cost. In the first half of calendar year 2016 during market volatility, we reduced our leverage ratio by slowing originations and allowing repayments and exits to comment during the ordinary course, and we expect a similar benefit in the current environment. We now have eight separate unsecured debt issuances aggregating $1.9 billion not including our program notes with maturities extending to June 2029. As of June 2020, we had $680 million of program notes outstanding with staggered maturities through October 2043. We also recently added a shareholder loyalty benefit to our distribution -- dividend reinvestment plan or DRIP that allows for a 5% discount to the market price for DRIP participants. As many brokerage firms either do not make DRIPs automatic or have their own synthetic DRIPs with no such 5% discount benefit, we encourage any shareholder interested in DRIP participation to contact their broker, make sure to specify you wish to participate in the Prospect Capital Corporation DRIP plan through DTC at a 5% discount, and obtain confirmation of same from your broker. Now, I'll turn the call back over to John.

Thank you, Kristin. Now it's time for the Q&A.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Robert Dodd with Raymond James. Please go ahead.

I got a couple. Just first of all, John, from the commentary in your prepared remarks at the beginning, your leverage target 0.7 to 0.85. From how you worded that that sounds to me like you're going to be -- for the calculation of that ratio, you're going to be treating the preferred as equity. Obviously, from an asset coverage ratio preferred counts as debt. So can you give us any color on what the target leverage would be on a kind of regulatory basis if the preferred was treated as debt rather than equity?

Yes. It's glad to do that. And thank you Robert. Just for -- there may be some people on the call that don't realize that under the 1940 Act preferred stock, including this preferred can be categorized as leverage for purposes of the statute and leverage limitations. But perpetual preferred in my mind is an equity cushion for any debt that's above that. So that's why I look at our leverage ratio as the percent of -- as debt as a percent of our assets excluding the preferred. I don't view the preferred as debt. So I haven't made the calculation that you're requesting, but perhaps Grier or Kris -- yes, please go ahead Grier.

So it's -- our targeted with the preferred, Robert, is $1 billion. So that's about 0.3 of our common equity base. So debt to common equity of 0.7 times to 0.85 times would translate into debt plus preferred to common equity of approximately 1.0 times to 1.15 times. And then I'm sure you can do the asset coverage translation thereafter.

Yeah, I can. I appreciate that. Thank you for that. On the common equity side, obviously, you utilized the ATM a little in the quarter. I mean, can you give us any thought process on to why? I mean your underlevered trading below book, why was the ATM usage appropriate in the view of the management or the Board? And John you might be to give us some thoughts on why the Board thought it was appropriate in this circumstance given it did cost you a little bit of NAV this quarter?

Yes. Well, while the stock market is doing very well, companies that are not FAANG [me] [ph] are not doing quite as well as the NASDAQ top five in this virus and we need to be sensitive to that. Some of the companies in our portfolio at times caused us concern. As a matter of prudence, we felt that we should take every reasonable step that we could to minimize and control the risks from the economy impacting our portfolio. In March, in April and early May as we were sorting through the effects of the lockdown on our portfolio. Yes it's true, we came out of the difficulties of March and April in better shape than we had any reason to expect. But one of the reasons we came out in better shape was because we pursued a risk-off policy going back eight quarters. We lowered leverage, we did not take on additional leverage, we added to our regulatory flexibility and we obtained from our shareholders the right, the ability subject to Board approval to sell stock under the ATM if the Board felt doing so was prudent. We felt that selling some stock of a very minor amount worth $5 million of stock under the ATM in -- I think it was in May or June was prudent and appropriate in order to demonstrate to anyone watching that we have that very large reservoir of equity available to us. And having demonstrated that, we felt that we could put that additional defensive line back in the closet. We don't need it now. It turns out that our portfolio has performed better than we had any right to expect. And as a result someone might say that we did things to protect against risk that in the end were unnecessary. But I have a fire insurance policy on my house, I'm really glad to pay that premium even though there has not been a fire. And I don't think there will be one. We believe that our number one job here is to protect the capital entrusted to us. We believe that taking steps that control and minimize risk are what our shareholders expect us to do and that's why we sold whatever was $5 million of stock under the ATM.

I appreciate that color…

May be I can answer that.

Hold on Robert. Just one second. I think Grier has something to add please.

Yeah. Just to add to that, I think the word insurance is an excellent one. And also I'd add in hindsight the phrase is 2020 perfect hindsight. No one really knows where level three valuations will sell out ahead of time. You closed the quarter and then you get to find out where they were. So a good prudent risk manager takes steps to protect on both sides of the balance sheet in this case on the right-hand side, ahead of time. So, we did do a very small, very small amount of insurance. We ceased immediately upon quarter end. We are under-levered now. I think you'll see us as highly unlikely users in the near future of the ATM for that reason. But we have – we have optionality and demonstrate that's a path, which is very, very good to have. And we never take for granted, Robert, financing, we never take for granted the bond market, we never take for granted the bank market. We lived and breathed through the dislocation of 2007 to 2009. Many of our peers have never gone through that before, and know what it's like, when you have a strike of financing. So we're determined to always have optionality, multiple markets to access. The preferred market is a good example of de-risking. You talked about of, where are you on risk versus a common, I argue substantial de-risking. Not only, is there no maturity ever due on that paper, it's truly perpetual, it also gives additional access to another market on top of the convertible bond market, the institutional market, our retail program notes, which are highly differentiated, the baby bond market, our bank financing other financing. So we have many, many different markets to play in that de-risk our business. And then finally, on below NAV since that was touched on. We are examining in real-time various multiple accretive potential acquisitions that are not identical to, but similar in nature to ones we've done in the past of purchases of businesses and portfolios at low multiples of cash flow on an accretive basis. We don't close very many of those. We're highly selective, but getting that authorization that we did in the spring gives us that optionality, as John said to go on offense. Back to you Robert, I guess some other questions.

Yeah. I appreciate that color. And yeah I went through obviously 2006 to 2009 as well and insurance does come to mind. Just one more, if I can. On the CLO yields, obviously your default rates have performed better than the industry average, but your yields came down. There is a number of drivers on the GAAP level yield accounting that could result in that lower. Is that because you expect cash flows in there to be blocked or you expect default rates to move meaningfully higher than they are right now? Could you give us any color on, what resulted in the reduction in the GAAP yield, which obviously relies on your forward assumptions? And then also potentially, if you can give us any color on what happened the cash yield also came down substantially? Was that blocking defaults et cetera? Any color you can give us on that.

Sure. Let me take that first, and see if John wants to add to it. The – on the cash front, so there's a bit of a one-time factor from the quarter pertaining to assets versus liabilities. So liabilities in the CLO market are generally pegged to three-month LIBOR, while on the asset front, a high percentage north of 50% of borrowers have elected one-month LIBOR seeking slightly more advantageous borrowing costs. And as a result, when you have an aggressive move in the Fed 150 basis points in the month of March, the re-pricing happened faster to be paid less on assets, while liabilities took another quarter to kick-in. So that's a onetime factor. That was actually the biggest driver of the cash yield drop that would not reoccur. On the GAAP yield front, which as you noted is a model assumption, basically a calculation of a levelized yield. That's a combination of factors for reduction. Part of it is a drop in LIBOR. So the unlevered or unhedged if you will portion does move up and down that portion of the return based on LIBOR and of course the forward curve moved down pretty significantly in that 90-month -- sorry -- 90-day period. There's also an assumption of higher defaults and partial mitigation of higher asset spreads. But the latter has that mitigant if you will is not quite as much as one we imagined because collateral managers are derisking. They're also risk off using John's excellent parlance. They're going after higher-rated assets to reduce the probability of default, so substituting a higher-rated asset, which on its own would have a lower spread. So you're not necessarily seeing a huge jump in asset spreads to compensate. I think the good news is that the pace of both collateral downgrades in the syndicated market as well as tranche downgrades has substantially slowed. There were some pretty dire projections in the earlier part of spring back in the March, April time frame that did not come to fruition. And I've seen at one point a prediction of something like a 12% default rate. That's probably about half now as a consensus prediction. So there'll be -- defaults have become a lagging indicator, there'll be a continued uptick that's already modeled in. But so far based on the economic backdrop, it doesn't look it will be nearly as bad as before. You asked about diversion of cash flows. About one-fourth of deals are experiencing that. And what's easy to forget is the benefits of securitization financing that are substantial and show themselves in times like these. This is not the type of financing where you have a trip of a covenant and human beings in a conference room far away with dower faces make proclamations that your expense can accelerate for close put pressure what have you. Instead structured credit and CLOs are self-healing vehicles and the indenture rules the day and cash goes to either purchase new collateral or retire some liabilities you get back on the overcollateralization test and cash flow streams get freed up back to the equity after a period of time. We're projecting within three months that those diversions will be less than 10% of deals approximately and we'll reap the benefits from that self-healing process. But what it also shows is the benefits of having a diversified book of about 40 deals and only about one-fourth of those are experiencing diversions that call it akin to a short-term pick on the unlevered loan market equivalent. That's a pretty decent analogy. John anything you'd add to that?

Well, yes, just for the benefit of people on this call who may not have a PhD in physics, and therefore, have an edge over the rest of us analyzing CLOs or have been here with us for -- how many years have you been with us Kristin 12 years now? So for people who are not steeped in CLOs what is helpful to understand is that they are exactly as Grier described, self-healing. And what it means is if there are credit problems within the CLO even defaults, even non-payment what happens is the cash flow generated by the CLO book uses the incoming cash to pay down debt until the debt-to-equity ratio is restored. When capital is used to pay down debt in a CLO, it derisks the CLO. That's good news. It also though reduces the return. CLOs are levered vehicles part of their -- really one of the ways in which they generate returns is by borrowing at very low rates and investing in higher rates. Well, when you pay off that very cheap AAA leverage in order to restore a healthy debt-to-equity ratio, returns to the equity will decrease, and that's natural. It's of course way better than having a default on something that we own. So that's all I have to add. Kristin, do you have anything you'd like to add to the CLO discussion?

No, John, I think that that was well said.

Okay. Thank you. Okay. Robert, anything else?

Just one clarification. On that self-healing and the projection that in three months you'll be under 10% diverted, is that the assumption built into the common GAAP yield? Or is that yield just assuming status quo on that front?

Grier?

So the GAAP yield will model out. I mean, it bottoms up every single deal. So, there's quite a lot of calculations that go into it as you can imagine. It will be bottoms-up and differ by deal. But yes, that's appropriate part of the cash flow modeling, because that's how the -- how each indenture works.

Yeah. Got it. I appreciate it. Thank you.

Sure.

Thank you, Robert.

Our next question will come from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Hi, everyone. Good afternoon. Thanks for having me on. I just had a question on taxable income understanding that you don't have that information finalized yet for the August year-end. But can you offer us any direction from the major portfolio drivers that would lead you to expect lower or higher taxable income this year as it relates to your net operating income level? Any color there you could provide?

Grier?

Sure. So we concluded some years ago, Finian, that taxable income. While it may be and is a driver of the tax regulatory minimum RIC distribution requirement for a company like ours from sort of a bare minimum standpoint is not really a reliable metric to use from which to set a distribution policy if you're seeking to provide a long-term stabilized yield to investors. So in other words, choosing to pay distribution to investors has become something to do on more of an economic basis than a business basis and looking at perhaps other metrics with greater weight like net investment income. And the reason taxable income is not so reliable for a business like ours is because, we, as part of our tax returns include other types of streams that beyond just basic loan book, which of course we have first-lien loans, some second-lien loans, et cetera. And where you see a decoupling is in two primary areas. One is our controlled investments that are financial services companies that we figured out some years ago, perhaps one of the list of many firsts in the industry that we could purchase a financial services business and hold such business as a tax partnership and not have a corporate taxpayer at the portfolio company level as a result as long as that was a good tax set of revenue streams coming to us. So First Tower is a good example. But you pick up, as part of that other tax shields, like for example goodwill, amortization will be one associated with that business that we bought just over eight years ago. And it's been a wonderful investment for us I might add, very high teens yields and higher than that total returns to date. We've already gotten all our money back from that investment just off of current cash distributions. That's a long-term hold business. And Frank Lee and team do a wonderful job running that. Second area is in the CLO structured credit business that we were just talking about where taxable income and cash and GAAP yields can decouple quite substantially, especially if you have volatility in a particular year and especially where you have migration and portfolio turnover in those businesses. So for example, if you have a pool of loans and a CLO with an average price of say 95, if a collateral manager sells one loan at 95 and purchases another loan also at 95, there may be no delta – immediate delta from an economic standpoint. But from a tax standpoint, those five percentage points act as a tax shield and the deduction in that particular year that would reduce taxable income. And this is one of those years because of what's transpired with the virus. Another example would have been energy and its impact back in say 2015 and to a certain extent 2016 as you saw rotation away from that sector for obvious reasons. The good news is as a result you can have particular situations then we think that's likely to happen this year. We don't know for sure but some portion of a taxpayers – tax characterization would be a tax but not economic. Return of capital distribution, which of course will be subject to zero taxation for that investor. So it's hard to estimate what that percentage will be as you pointed out ahead of time but I think it's likely to be some percentage, meaningful percentage this year related to a zero tax return of capital situation. And again, if you're a taxpayer as an investor that's very good news indeed. John anything you'd add to that?

No.

Anything else, Finian.

Yes sure. Thanks for all that color and I guess just one sort of follow-on on the regular dividend. Obviously, a little bit underearned this quarter as you reduce leverage and so forth take a more conservative approach. Are you – do you think you're able to maintain this dividend level, while you maintain this conservative posture at the BDC? The – I know you declared I think a couple more months of the current payout. But any outlook on getting earnings back up to the dividend level or kind of underearning for a little while?

Finian, thank you very much for that question. I really appreciate it, because we've actually in the – I guess what, 16, 17 years running this particular public company, paid close attention to our dividend policy. And what we've noticed over the 17 years is what we noticed back in 2003 and 2004, our shareholders value this dividend. Most of all the stability and predictability of the dividend. Anyone I'm sure, there are many people on this call familiar with the capital asset pricing model Miller and Modigliani. So, do we really need professors to tell us that the lowest discount rate and the highest multiple is applied to the steadiest most predictable, most reliable, most boring cash flow? No, no we don't. So, our intention is to leave that dividend exactly where it is indefinitely for as long as possible in the absence of some compelling reason to make an adjustment. We would hope any adjustment would be on the positive side. But for now my outlook is just imagining $0.06 per month as far in the future as I can see. Our shareholders expect that. They want it. Some of them need it. Many of them need it. Now, what happens when we go through a quarter where we don't earn the dividend? Well, that will happen from time-to-time. You're reminding me of an amusing occurrence on our earnings call. I think it was perhaps 10 or 12 years ago when we -- in fact it was this call right after the K when I was asked the exact same question. And I said well, there's nine innings in a baseball game. We may not score a run in every single inning. And in fact I knew that we were going to do very well in the very next quarter and we did but I couldn't say that on the earnings call. And in this case I don't know what we're going to do next quarter. But we usually out-earn the dividend and I think Grier will be able to give you some statistics for that. So you said a dividend most of the time you out-earn it. And in a time like this you may under-earn it, but that doesn't that's not going to lead us to be making a change in the dividend. We want this dividend to last as long as anyone can imagine at this steady-eddy very boring $0.06 per month. Grier?

Sure. In terms of the earnings drivers to close the gap and then ideally leapfrog passed and grow earnings from there, we have a number of drivers Finian, one of the most straightforward ones is to simply rotate our liabilities into lower cost liabilities because the biggest headwind for us and for others in the past quarter was the 150 basis point drop in short-term rates when you have assets pegged to floating rate even with floors there's still with some impact -- non-trivial impact on our revenues. So, we can get a good chunk of that back by simply utilizing our revolving credit facility which has four years to run to a greater degree and we are intensively working on that rotation. You might have seen we just tendered for a good chunk of our bonds that come due in a couple of years and you'll see us attack other term debt. We've already done a good job of cleaning out 100% of other term debt due over the next couple of years absent that tranche I just mentioned. And it's economically advantageous to do so because our incremental cost of utilizing our floating rate facility is about 1.4%. So, it's massively accretive to use that to repurchase and arguably no-brainer to repurchase debt that matures inside of the revolver which we have a couple of tranches. That's one big catalyst that's pretty straightforward. How long it takes to do that really depends on some of those tendering programs and I think you've seen in the past we tended to do those multiple times. The second catalyst is our preferred program add that to the list of historic prospect first on a programmatic basis. And we see that as significantly accretive to the common equity, that program. It is programmatic. The capital does not come in all upfront. That's true. On the other hand that allows us to have just-in-time type of financing, as we ramp originations to match capital coming in and we are doing that ramp right now, which is really catalyst number three, putting existing capital to work even before getting to deploying capital from new issuance in an accretive fashion. We have the existing borrowing base about $0.5 billion of liquidity that will just grow as we add more eligible assets and pledge them. And not surprisingly, our activity was quite muted, ourselves and many others, this past quarter. When you're in the lending business, you're reluctant to deploy capital amidst a macro downturn, why lend money if profitability might be going down, that's sort of like a deflationary environment. You'd rather wait to hit perceived bottom and then deploy your capital then, with less underwriting risks. So we're behaving, we think, prudently and intelligently there and we're seeing stabilization in the underlying marketplace with companies out there. Other catalysts include our real estate business, that's been a huge bright spot for us in the last several years. You look at 33 realizations with 23% realized IRR and we have other deals we're looking to harvest, we're putting money into new deals. So we put money in. We upgrade the individual units and common areas in a value-added fashion. We enhanced net operating income. We might take a dividend or we might just go ahead and sell the business ahead of that and then rents and repeat with other assets. Highly diversified by geography, by property, by property manager, so that's been a significant driver for us and we hope we'll continue to be. We also are pleased with some of the improvements that have occurred in the controlled operating book. So we continue to focus relentlessly on those improvements. And then, there's additional acquisitions, as I mentioned, we're working on a number of those that we think will be accretive. And should a financial downturn come to bear financial beyond fundamental or akin to what started to occur in March and snap back relatively quickly, we're ready for that as well, secondary purchases of assets, liquid, illiquid loans, structured paper, patriot-type portfolio deals and then on the right-hand side of our balance sheet opportunistic repurchases of our debt at a discount, which we executed to a certain extent as well. So those are all potential catalysts and drivers for the future, Finian, to enhance profitability.

I appreciate the color very much. And if I could -- I'm sorry for a third question, if I may. Promise the last one. Appreciating all of your color on the dividend and perhaps you're under-earning temporarily. With the option that's on the table, a few of your peers have chosen to go with it, in paying up to 80% of the dividend in stock or 90% this year commonly, known as the ACAS letter. Is that on the table? Is that part of your thinking in terms of getting through the recession and your company's posture that is paying the dividend in stock?

Well, Finian, why don't I start by saying that, we have no current intention of paying dividends in stock, in part, because we have no reason to. The company is generating -- you saw the cash numbers. I think our shareholders prefer cash. And we haven't noticed that companies do well when they distribute dividends in the form of stock unless there's a good reason and usually the good reason is there's a problem. We're not having a problem right now. We don't see one on the horizon. So we don't have any current plan to be issuing stock in place of cash. Grier would you add anything to that?

Yeah. I'd add to that, I mean, I guess you've seen some companies do that they don't have much liquidity. Our company has very strong liquidity. We manage our business to have substantial liquidity available to us at all times in the several hundreds of million category not even including other levers to pull to build liquidity beyond that. So that seems like something applicable to other companies not us. In addition, I talked before about the -- you asked about taxable income. Folks seem to use stock as a means of meeting their minimum distribution requirements. So if they need to do that perhaps it's a mechanism it's -- I've seen what others do there. It's still a laborious you've got to do an election of the shareholder of stock versus cash. It's kind of hard to imagine doing that as a monthly dividend payer as well. We've been a monthly dividend payer for quite some time. So to do that election every month, I'm not sure I've ever seen folks do that. So a number of issues with it, I'm not saying it would never be available in some type of dire situation downturn that we don't face today. I guess, IRS made that mechanism available to everybody REITs and risk to utilize as they see fit without the need for a private letter ruling but I don't -- we don't see this as something that we need to do.

Okay. Thanks very much everybody.

Thank you.

This will conclude our question-and-answer session. I would like to turn the conference back over to John Barry, Chairman and CEO for any closing remarks.

Okay. Well, thank you everyone. We appreciate your interest in our company and we look forward to seeing you all and others on the next earnings call. Thanks so much. Bye now.

Thank you all.

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