Prospect Capital Corporation (PSEC) Q4 2025 Earnings Report, Transcript and Summary

Good day, and welcome to the Prospect Capital Fourth Quarter and Fiscal Year-End 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.

Thank you, Betsy. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Kristin Lea 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. In the June quarter, our net investment income were NII with $79 million, $0.17 per common share. Our NAV was $3 billion, $6.56 per common share. At June 30, our net debt to total assets ratio was 30.4%. Unsecured debt plus unsecured preferred is 77.1% of total debt plus preferred. We are announcing monthly common shareholder distributions of $0.045 per share for each of September and October. We plan on announcing our next set of shareholder distributions in November. Since our IPO 20 years ago through our October 2025 declared distribution, we will have distributed approximately $4.6 billion or $21.66 per share. Our preferred shareholder count distributions continue at their contract rates. We continue to make progress repositioning our business, including rotation of assets into an increased focus on our core business of first lien senior secured middle market loans with our first lien mix increasing 642 basis points to 70.5% from last year. This rotation includes selected equity-linked investments. For new investments, we are focusing on companies with less than $50 million of EBITDA, a market with more than 200,000 companies in the United States, including companies sponsored by smaller private equity sponsors independent sponsors and direct loans to companies without financial sponsors. Number two, reduction in our second lien senior secured middle market loans with our second lien mix decreasing 202 basis points to 14.4% from last year. And with 2 additional second lien loans having been repaid since June 30, 2025, further reducing our second lien mix 69 basis points to 13.7% based on the investment portfolio as of June 30, 2025. Number three, selling our subordinated structured notes with our subordinated structured notes mix, decreasing 781 basis points to 0.6% from last year. Number four, prudent exits of equity-linked assets, including real estate, with 6 properties sold in the last 6 quarters and corporate investments, including the sale of Echelon assets in July 2025, with extra exits targeted. Number five, enhancement of portfolio company operations. And number six, greater utilization of our cost-efficient floating-rate revolver, which largely matches our floating rate assets. Thank you. I will now turn the call over to Grier.

Thank you, John. Over the past 2 decades, Prospect Capital Corporation has invested $12.6 billion in over 350 exited investments that have earned a 12% unlevered investment level gross cash IRR to Prospect Capital Corporation. This over 2-decade time period includes the GFC and has been dominated in general by low prevailing market interest rates. As of June 2025, we held 97 portfolio companies across 33 different industries with an aggregate fair value of $6.7 billion. For the June quarter, our portfolio at cost comprised 70.5% first lien debt, up 642 basis points from the prior year, 14.4% second lien debt, almost entirely secured, down 202 basis points in the prior year, 0.6% subordinated structured notes with underlying secured first lien collateral, down 781 basis points in the prior year and nearly completely exited and 14.5% unsecured debt and equity investments, resulting in 85% of our investments being senior and secured debt. Our middle market lending strategy is the primary focus of our company. With such strategy as of June, representing 85% of our investments at cost, an increase of 878 basis points in the prior year. In our middle market core lending strategy. We continue our focus on first lien senior secured loans during the quarter, with such investments totaling $167 million of originations during the quarter. Investments during the quarter included a new investment in Verify Diagnostics, a provider of advanced molecular diagnostic testing; a new investment in QC Holdings, a provider of consumer credit; and other follow-on investments in existing portfolio companies to support acquisitions, working capital needs, organic growth initiatives and other objectives. We've substantially completed the exit of our subordinated structured notes portfolio as of June 30, with such portfolio representing 0.6% of our investment portfolio at cost, representing a reduction of 781 basis points from 8.4% the prior year. In our real estate property portfolio at National Property REIT Corp. or NPRC, which represented 14% of our investments at cost as of June and which is focused on developed and occupied cash flow multifamily investments. Since the inception of this strategy in 2012, and through June 30, 2025, we've exited 52 property investments that have earned an unlevered investment level, gross cash IRR of 24% and cash-on-cash multiple of 2.4x. The remaining real estate property portfolio included 58 properties that paid us an income yield of 4.5% for the June quarter. Prospect's aggregate investments in NPRC included a $378 million unrealized gain as of June. We expect to continue to redeploy future asset sale proceeds primarily into first lien senior secured 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 12.2% for the quarter ended June 2025. Our interest income in the June quarter was 95% of total investment income reflecting a strong recurring revenue profile for our business. Payment in kind income for the quarter ended June 2025 is reduced by over 50% from the quarter ended June 2024. Non-accruals as a percentage of total assets as of June 2025, stood at approximately 0.3% based on fair market value and 4% based on cost, representing a reduction from the prior quarter of 30 and 65 basis points, respectively. Investment originations in the June quarter aggregated $271 million and were comprised of 91% middle market investment with a significant majority of first lien senior secured loans. We also experienced $445 million of repayments and exits as a validation of our capital preservation objective, resulting in net repayments of $174 million. 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, weighting 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 26 years into the future. Our unfunded eligible commitments to portfolio companies totals approximately $41 million, of which $16 million are considered at our sole discretion, representing approximately 0.6% and 0.2% of our total assets as of June 2025, respectively. Our combined balance sheet cash and undrawn revolving credit facility commitments stood at $1.3 billion as of June and we held $4.2 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 $2.12 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 2029 and revolves until 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 nonconvertible 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. We've tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 26 years with our debt maturities extending through 2052. With so many banks and debt investors across so many unsecured and nonrecourse debt tranches, we have substantially reduced our counterparty risk. At June 30, 2025, our weighted average cost of unsecured debt financing was 4.52%. Now I'll turn the call back over to John.

Okay. We're ready to take questions.

[Operator Instructions] The first question today comes from Finian O'Shea with Wells Fargo.

We wanted to ask about the REIT. You've seen industry challenges in multifamily both on inflation hitting OpEx, and it's also been hard to raise rents to our understanding. Where do you think we are in terms of getting through those headwinds and seeing if you could give some outlook for the income trajectory if it should improve sooner or later or if today's income rate is sort of appropriate to model out.

Thank you, Finian. I think you articulated many of the prior headwinds within multifamily, but we're seeing a substantial turning the corner occur in our portfolio, and I'll take each of those in turn. First, it's widely diversified from a geographic standpoint. Many of our assets are located in areas in the Midwest and Mid-Atlantic or more sort of tertiary areas of the Sun Belt which weren't as targeted for development and actually have some fairly healthy rent growth. For certain assets in larger cities in the Sun Belt where there were supply additions in the market in the last few years. That is now abating substantially. There's a lag effect for new development. So developments that were started prior to 2022 when rates shot up didn't get completed until 2023, 2024, even a little bit at the beginning of 2025. Now much of that new supply has ground to a halt because of higher interest rates and higher development costs. which is very good for incumbent landlords like in our portfolio. That's on the revenue, rents and occupancy side. In terms of the cost equation, we've seen a significant slowdown in inflation, property taxes, insurance and payroll and all of that is quite favorable. Our book has had a like-for-like sort of same property net operating income increase of 7% in the last year. And we anticipate that accelerating to double- digit growth going forward. We are strategically focused as a middle market first lien senior secured lender. Real estate is substantially lower yielding than our middle market book. We are selectively exiting investments at a value maximizing price over time in a careful and prudent way. Of course, if we expect substantial NOI growth in certain properties, it may make sense to exit in a year or 2 as opposed to this second. It also makes sense to exit in a methodical bottoms-up singular asset or mini portfolio way to maximize buyer interest. There are a lot fewer buyers that can stroke a $1 billion check plus for the entire portfolio compared to ones that can buy individual assets or mini portfolio. So we're very pleased with the direction of our real estate business. We view the rotation from that 4.5% yielding a part of our book into middle market senior secured loans as a huge value driver for our business. Our last 10 or so deals in the middle market, which have been focused, as John mentioned, on sub-$50 million EBITDA companies have had an average spread of around 750 and an average floor of 300 basis points. So we're talking about double-digit yields in an all-weather fashion, even if rates get cut to are near 0, where they were only 3.5 years ago. So we've been resisting the upper middle market urge to jump into deals with tight spreads, with loose covenants with lender liability, liability management exercises low to no floors, no maintenance covenants, significant problems, and we're staying away from those Wall Street ask or larger club deals where so much capital has been focused. There's maybe 230,000 middle-market companies between $5 million and $150 million of EBITDA. The upper middle market, where there are so many problems in the $50 million to $150 million range, has only about 10,000 of those companies and the other 220,000 are sub-$50 million. That's where we're focused. They're harder deals to originate to underwrite, to close, but we originate thousands of deals per annum and have a low 0.5% book-to- look ratio with our 150-person strong team. So we're well equipped to do that. We've already unlocked value and streamlined and simplified our business by exiting our CLO book, you are not seeing this company message itself as we have in the past as a multiline player, we are focused on middle market lending first lien, senior secured with a portion of our assets from time to time purchasing selected equity that in many cases is highly synergistic with our debt and helps to command better debt terms, plus, of course, give us upside in many cases, without trade-offs through warrants through convertible debt and other types of liquidation preference security attached to our position. So that's what we're doing strategically and as it relates to real estate, Finian.

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

Okay. Well, there are my closing remarks right there. Thank you, everyone. Have a wonderful afternoon. Bye now.

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