Prospect Capital Corporation (PSEC) Q3 2025 Earnings Report, Transcript and Summary

Good day and welcome to the Prospect Capital Third Fiscal Quarter Earnings Release and Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would like now to turn the conference over to John Barry, Chairman and CEO. Please go ahead.

Thank you, Allen. Joining me on the call today are Grier Eliasek, our President and COO; and Kristin Van Dask, our CFO. 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-Q filed previously and available on our website, prospectstreet.com. Now I'll turn the call back over to John.

Thank you, Kristin. In the March quarter, our net investment income or NII was $83.5 million, $0.19 per common share. Our NAV was $3.2 billion, $7.25 per common share. At March 31st, our net debt to total assets ratio was 28.7%. Unsecured debt plus unsecured preferred is 87.5% of total debt plus preferred for Prospect. Since inception over 20 years ago through our August 2025 declared distribution, we will have distributed over $4.5 billion or $21.57 per share. We are announcing monthly common shareholder distributions of $0.45 per share for each of May, June, July and August. We plan on announcing our next set of shareholder distributions in August. Our preferred shareholder cash distributions continue at the contractual rates of such distribution. Thank you. I'll now turn the call over to Grier.

Thank you, John. Over the past two decades, Prospect Capital Corporation has invested $11.8 billion in over 325 exited investments that have earned a 13% unlevered investment level gross cash internal rate of return to Prospect Capital Corporation. This two decade time period includes the GFC and has been dominated in general by low interest rates. As of March 2025, we held 114 portfolio companies across 33 different industries with an aggregate fair value of $6.9 billion. For the March quarter, our portfolio at fair value comprised 65.5% first lien debt that's up 650 points from the prior year, 10.5% senior secured second lien debt, that's down 410 basis points from the prior year. 4.2% subordinated structured notes with underlying secured first lien collateral that's down 310 basis points as a mix from the prior year and 19.8% unsecured debt in equity investments, resulting in 80.2% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral. In our middle market lending strategy, we continue to focus on first lien senior secured loans during the quarter with such investments totaling $149 million over $196 million of originations during the quarter. Investments during the quarter included our new platform investment in Taos Footwear, a leading innovative footwear brand with a two decade history, in other follow-on investments in existing portfolio companies to support acquisitions, working capital needs, organic growth initiatives and other objectives. Our subordinated structured notes portfolio as of March represented 4.2% of our investment portfolio, a reduction of 310 basis points from 7.3% as of March 2024. Since the inception of this strategy in 2011 and through March of 2025, we've exited 15 subordinated structured note investments earning an unlevered investment level gross cash internal rate of return of 12.1% and cash-on-cash multiple of 1.3x. As of March 2025 based on fair value and excluding investments being redeemed, the remaining subordinated structured notes portfolio had a trailing 12 month average cash yield of 30.2% and an annualized GAAP yield of 4.4% with the difference between cash yield and GAAP yield representing amortization of our cost basis. We expect to continue to amortize and exit our subordinated structured notes portfolio and to reinvest primarily in the first lien senior secured middle market loans. In our real estate property portfolio at National Property REIT Corp or NPRC, since the inception of this strategy in 2012 and through March 2025, we've exited 52 property investments earning an unlevered investment level gross cash IRR of 24% and cash on cash multiple of 2.4x. We exited an additional property in the recently completed March 2025 quarter. The remaining real estate property portfolio includes 58 properties that paid us an income yield of 4.5% for the March quarter. Prospects aggregate investments in NPRC had a $460 million unrealized gain as of March. We expect to continue to redeploy future asset sale proceeds primarily into property value add capital investment and first lien middle market loans. Prospect's approach is one that generates attractive risk adjusted yields. In our performing interest bearing investments, we're generating an annualized yield of 11.5% as of March. Our interest income in the March quarter was 93% of total investment income reflecting a strong recurring revenue profile for our business. Payment in kind income for the quarter ended March was $19.5 million down nearly 50% from the June 2024 quarter. Non-accruals as a percentage of total assets stood at approximately 0.6% in March. Our weighted average EBITDA per portfolio company stood at just under $100 million. Investment originations in the March aggregated $196 million and were comprised of $149 million of first lien loans or 76% of total originations. We also experienced $192 million of repayments and exits as a validation of our capital preservation objectives resulting in net originations of $4.5 million. During the March quarter, our originations comprised 81% middle market lending, 4.9% middle market lending and buyouts, 14.1% real estate and 0% in subordinated structured notes. So far in the current June 2025 quarter, we booked $65 million in originations and experienced $20 million of repayments. Our originations have consisted of 75.5% middle market lending and 21.3% real estate. Thank you. I'll now turn the call over to Kristin. Kristin?

Thanks, Grier. We believe our prudent leverage, diversified access to matched book funding, substantial majority of unencumbered assets, waiting toward unsecured fixed rate debt and avoidance of unfunded asset commitments all demonstrate balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 27 years into the future. Our unfunded eligible commitments to portfolio companies totals approximately $43 million of which $17 million are considered at our sole discretion representing approximately 0.6% and 0.2% of our assets as of March 2025 respectively. Our combined balance sheet cash and undrawn revolving credit facility commitments stood at $1.7 billion as of March and we held $4.4 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. We currently have $2.12 billion of commitments from 48 banks demonstrating strong support of our company from the lender community with the diversity unmatched by any other company in our industry. The facility does not mature until June 2029 and revolves until June 2028. Our drawn pricing continues to be SOFR plus 2.05%. Outside of our revolver, we have access to diversified funding sources across multiple investor types and have successfully issued securities in an array of markets. Prospect has issued multiple types of unsecured debt, institutional non-convertible bonds, institutional convertible bonds, retail baby bonds and retail program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions, and no cross defaults with our revolver. As of March, unsecured term debt represents 78% of all of Prospects indebtedness. We have tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 27 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 March 31, 2025, our weighted average cost of unsecured debt financing was 4.33%. Now, I'll turn the call back over to John.

Thank you, Kristin. I think we can take questions now.

Apologies for the disruption everyone. We will now begin this question-and-answer session. [Operator Instructions]. Our first question comes from Finian O'Shea from Wells Fargo. Please go ahead.

Hey, everyone. Good morning. First question on the top line, other income from the control, namely NP REIT had been a pretty recurring feature for a while and that was very low if there's not anything this quarter. Seeing how we should think about that, if this should bounce back or the new -- this reflects the new sort of rack rate total earnings? Thanks.

Thank you, Finian. Grier, you want to take that one?

Sure. So we had as you can see in our financials for multiple periods going back a few years actually fairly significant other income coming out of NPRC associated with the real estate book, primarily associated with exit related income as we had successfully completed our value add capital improvement program and exited assets. The pacing of such exits understandably slowed a bit as the Fed hikes and in particular 10 year treasuries spiked. We think things are starting to normalize whenever you have sharp movements in macro indices like that it tends to make buyers and sellers pause. But we're looking to achieve a value maximizing orderly reduction in the size of NPRC and our real estate portfolio. We just sold an additional assets as we mentioned in the quarter just completed. We have some additional assets we're exploring as well and other ways to unlock potential capital upstairs from NPRC. That business line as we discussed a couple of quarters ago has achieved terrific total returns for us 24% IRRs after exiting several dozen over 50 investments in the last two decades of or nearly two decades of making these investments, but lower on the current yield side of things that's more competitive in at least as it relates to compared with middle market lending. It's competitive in a low short term interest rate environment, but not as competitive in a higher rate environment that we find ourselves here. Still today within 100 basis points of peak SOFR for Fed tightening. So that other income line, you may see some activity there in the future. We're not really guiding to anything specifically. It depends on the pacing and magnitude of those exits as they transpire.

Very helpful. Thanks. So say that remains subdued for a little while. You have the incentive fee this quarter that wasn't full. You assume that comes back. And everyone, the whole industry being mostly floating rate is now sort of pretty tight on dividend coverage with SOFR pointed down. I think you said you declared through August. Is there another lever to pull on leverage or adding to other sort of higher yielding investments? Like how do we think about dividend coverage, I guess, beyond August at today's SOFR curve?

Right. So I think yes and yes to both of those. First of all, we've been prioritizing more and more sort of lower middle market and core or traditional middle market lending. We have not been big fans of the upper end of the market and what's transpired especially in the last couple of years and have been prioritizing our originations in the less efficient part of the market where spreads are wider and also where SOFR floors are much higher as you pointed out what went up can and already has started to and is projected to based on the forward curve that you mentioned go down again and it will be in a symmetrical fashion for others with low to no. SOFR floors prioritizing the upper end of the market where competition is fierce, spreads are tight, floors are low and covenants are non-existent from a seat of the table standpoint. Lower end of the market, we get the opposite of all those things, wider spreads, higher floors, better covenants that act as a repricing event. So we're getting that from our focus on lower end of the market number one. Number two, there's a portfolio rotation aspects occurring, which we're looking to boost our yields. One area is our subordinated structured notes portfolio CLO equity portfolio, which is down to only 4% of our assets, but is a low GAAP contributor, high cash contributor, which is amortization of our cost basis. So that unlocks capital that could be invested in high returning deals. Real estate is a significant storehouse of value for us. Our real estate book is only yielding about 4.5%. Again, that's a total return strategy, lower on yield, attractive for total returns and we think rotating those assets selectively prudently in an orderly value maximizing way, as I mentioned to the last question, is also going to help to boost your yield. And then we're also under levered, significantly under levered from a standpoint of debt to total cap only around 30% or so. Our leverage is half or less than half of compared to peer companies in the industry, which reflects conservatism. It also reflects being careful and reluctant about tying up too much of our balance sheet with more expensive financing with less borrower friendly call protections along the way. So we'd like to have locked in capital 3% to 4% rates from several years ago. We're being advantageous and opportunistic as it pertains to thinking about such issuance. And we have multiple areas of financing to look at that can be adjusted over time based on what's happening with short and medium term prevailing rates in more of a programmatic fashion as we raise significant capital there. So all those are available levers to pull they're looking at to enhance net investment income.

One more on that, like this quarter on the multiple sources, the program notes slowed, the preferred raises were pretty good. I know that's sort of -- the preferreds are sort of in between, but just considering them leverage for now. Should we anticipate that continues like a more of a ramp on the press as opposed to traditional unsecured debt?

I think you'll look at us prioritizing both unsecured debt and preferred unsecured financing of course is a significant de-risker of the balance sheet and we've been big fans of that. We also have our $2.1 billion revolving credit facility with close to 50 banks more than any other company in our industry. We all know what has transpired in the last few weeks and at the tail end of the last quarter just tremendous volatility. So it's no surprise you saw issuance slow during that sort of a period from our program notes. But we have multiple areas to look to with program notes, with preferreds and in other types of financing as well. I think we've issued more diversified financing in our history than any other company in the industry pioneering the first convertible notes, printing the first institutional bond, printing the first and only perpetual preferred and so on and so on. So we're always looking at different avenues that help with cost of capital, but also provide a diversity and access including during more volatile time periods having this programmatic type of issuance is very valuable and differentiating about our company that tends to be sticky. Maybe the volumes can fluctuate a bit, but it's available in there and represents more just in time type of financing.

Helpful. That's all for me. Thanks so much, Grier.

Thank you, Finian.

Good, thank you. This concludes our question-and-answer session. I would like to hand the call back over to Mr. John Barry.

Okay. Thank you, everyone. Have a lovely morning and a great weekend. Thank you very much. Bye now.

This concludes our question-and-answer session. This concludes our call. Thank you for attending our conference. You may now disconnect.