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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Second Fiscal Quarter Earnings Release and Conference Call for Prospect Capital Corporation. [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, Carrie. Joining me on the call today, as usual, are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer.
Kristin?
Thank you, 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 forecasts 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-Q filed previously and available on the Investor Relations tab on our website, prospectstreet.com. Now I'll turn the call back over to John.
Thank you, Kristin. In the December quarter, our net investment income, or NII, was $81.6 million or $0.21 per common share, up $0.06 from the prior quarter. Our net income was $306 million or $0.80 per common share. Up $0.35 from the prior quarter. Our NAV stood at $8.96 per common share in December, up $0.56 and 7% from the prior quarter and representing our third quarter in a row with NAV growth. In the December quarter, our net debt-to-equity ratio was 61.1%, down 13% from March and down 7% from September. In May, we moved our minimum 1940 Act Regulatory asset coverage to 150%, equivalent to 200% debt-to-equity. We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.7 to 0.85 debt to equity. And we are significantly below such target range now. We are announcing monthly cash common shareholder distributions of $0.06 per share for each of February, March and April. These 3-months represent the 42nd, 43rd and 44th consecutive $0.06-dividends. Consistent with past practice, we plan on our next set of shareholder distribution announcement in May.
Since our IPO nearly 17-years ago, through our April 2021 distribution at the current share count, we will have paid out $8.60 per common share to original shareholders, aggregating over $3.3 billion in cumulative distributions to all common shareholders. Since October 2017, our NII per common share has aggregated $2.55 while our shareholder distributions per share have aggregated $2.34, resulting in our NII exceeding distributions during this period by $0.21 per share. Our NII covered distributions in the June 2020 fiscal year and have covered distributions in the 2021 fiscal year-to-date as well. We are also pleased to announce continued preferred shareholder distributions on the yields of successful launches over $1 billion, 5.5% preferred stock program. And $250 million, 5.5%, preferred Stock program. Thank you. I'll now turn the call over to Grier.
Thank you, John. Our scale platform with over $6.1 billion of assets and on John Credit continues to deliver solid performance in the current challenging environment. Our experienced team consists of around 100 professionals, which represents 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 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 groups, particularly more highly leveraged one.
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 nonbank 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 December, our portfolio at fair value comprised over 47% secured first lien, 21% other senior secured debt, 13% and subordinated structured notes with underlying secured first lien collateral and 18% equity investments, which results in a stable 82% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral.
Prospect's approach is one that generates attractive risk-adjusted yields. And are performing interest-bearing investments, we're generating an annualized yield of 12.2% as of December, which was up 0.6% from the prior quarter. We achieved this increase despite a headwind from the past year decline in LIBOR though we except stability now due to our LIBOR floors. We also hold equity positions in certain investments, they can act 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 down-side risk while still achieving above-market yields through credit selection discipline and a differentiated origination approach.
As of December, we held 122 direct portfolio companies even with the prior quarter with a fair value of over $5.6 billion, which is an increase of $239 million from the prior quarter. We also continued to divest in a diversified fashion across many different portfolio company industries, with no significant industry concentration. The largest is 16%.
As of December, our asset concentration in the energy industry was 1.2%. In the hotel, restaurant, leisure sector, 0.4%. And in the retail industry, 0%. Non-accruals as a percentage of total assets stood at approximately 0.7% in December, flat from the prior quarter. Our weighted average middle market portfolio net leverage stood at 4.97x EBITDA, down 0.31 from the prior quarter and substantially below our reporting peers. Our weighted average EBITDA per portfolio company stood at $83 million in December, which was an increase from $78.5 million in the prior quarter.
Originations in the December quarter aggregated at $346 million. We also experienced $338 million of repayments and exits as a validation of our capital preservation objective and sell-down of larger credit exposures, which resulted in net originations of $8 million. During the December quarter, our originations comprised 25%, middle market finance, 24.8% real estate and 0.2%, middle market lending 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 acquisition. 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 recapitalization, resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses. NPRC as of December has exited completely 33 properties at an average IRR of 23.5% 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 December, we held $745 million across 39 nonrecourse subordinated structured notes investments. These underlying structured credit portfolios comprised around 1,700 loans. And a total asset base of around $17 billion. As of December, the structured credit portfolio experienced a trailing 12-month default rate of 206 basis points down 14 from the prior quarter and representing 177 basis points less than the broadly syndicated market default rate of 383 basis points.
In December, this portfolio generated an annualized cash yield of 17.2% and a GAAP yield of 16.8%. As of December, our subordinated structured credit portfolio has generated $1.26 billion in cumulative cash distributions to us, representing around 90% of our original investment. Through December, we've also exited non investments totaling $263 million with an average realized IRR of 16.7% and cash-on-cash multiple of 1.48x. 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 in our sole discretion in the future, and we believe such options add substantial value to our portfolio. With 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've completed 27 refinancings and resets since December 2017. So far in the current March quarter, we have booked $12 million in originations and experienced $53 million of repayments for $41 million of net repayments. Originations have comprised 56.5% real estate, 41.4% middle market finance and 2% middle market lending buyouts. Thank you. I'll now turn the call over to Kristin.
Thank you, Grier. We believe our prudent leverage, diversified access to match book funding, substantial majority of unencumbered assets, waiting towards unsecured extended 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 22-years into the future. Today, we have zero-debt maturing until July 2022. Our total unfunded eligible commitments to noncontrolled portfolio companies totaled approximately $21 million or less than 0.4% of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at approximately $845 million. We are a leader and an innovator in the 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've added 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 December 2020, we held approximately $4.21 billion of our assets as unencumbered assets, representing approximately 74% of our portfolio. The remaining assets are pledged to prospect capital funding, where in September 2019, we completed an extension of our revolver to a refreshed 5-year maturity. We currently have $1.0775 billion from 30 banks. 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, 89.6% have LIBOR floors with a weighted average floor of 1.63%. Outside of our revolver and benefiting from our unencumbered assets, we've issued that 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- rating from S&P, an investment grade BAA3 rating from Moody's, an investment-grade BBB- rating from Kroll and an investment-grade BBB rating from Egan-Jones. We've now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 22 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 December 2020 quarter, we completed successful tender offerings, retiring around $66 million of our 2022 notes, $30 million of our 2023 notes and $10 million of our 6.375% 2024 notes. In the current March quarter through tender processes, we have retired $20 million in 2025 notes and another $27 million of 2022 notes, thereby taking that tranche down to $136 million. We recently, in the current March quarter, issued $325 million in unsecured debt maturing in January 2026 with a coupon of 3.7%.
We have continued to substitute more expensive term debt with significantly lower cost revolving credit with an incremental 1.3% cost and our newly issued 2026 notes. We also have continued with our weekly programmatic internotes issuance on an efficient funding basis. We now have 8 separate unsecured debt issuances aggregating $1.4 billion, not including our program notes, with maturities extending to June 2029. As of December 2020, we had $759 million of program notes outstanding with staggered maturities through October 2043. We also recently added a shareholder loyalty benefit to our 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 your 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 stain from your broker. Now I'll turn the call back over to John.
Thank you, Kristin. We could take questions now.
[Operator Instructions] The first question is from Finian O'Shea with Wells Fargo Securities.
I guess first question, Grier, on the CLO portfolio this quarter. You saw a pretty good rebound there in yields. I know cash yields were up this quarter for that asset class. But any expanded color on longer term improvement there?
Sure. So this portion of our book, which is about 13% of our book, a small portion of our assets. Essentially, worked as advertised, these are self-healing vehicles and you go through a time of stress like you saw in 2020, including a host of ratings downgrades, rippling through the syndicated loan market. And you see -- you saw a temporary dispersion or diversion rather of cash flows on a minority of deals and that is largely updated now, cash yields up to 17.2%, that was up about 1,100 basis basis points from the prior quarter and GAAP yields up about 320 basis points to just under 17%. From a longer-term perspective, we're seeing not just an increase in loan prices, but now a reversal of those ratings downgrades becoming upgrade, which tend to be slower than the downgrades, typically asymmetric. But that's moving in the right direction. You saw a troughing trailing 12-month default rates as well.
We've always outperformed the overall loan market generally by about 50%. So that has continued, but you're seeing a decline in those LTM default rates and we'd expect that to continue just looking forward and a runoff of things that occurred 12-months prior for defaults. So we're optimistic about the loan space. We're also seeing benefits from LIBOR floors, by the way. Sometimes floors work to your advantage sometimes to your disadvantage. And the floor is obviously above prevailing rates and there's an increase in prevailing rates. It works a little bit to your disadvantage in terms of -- that's how your assets are structured. Here, the work to the advantage because of those floors, often 100 basis points or so with LIBOR close to zero. We're being paid nicely on the asset side of the ledger with the floor plus the spread, while the liabilities have no such floor. So a number of positive things occurring here. This, again, is just a small part of our book and not likely to grow on our balance sheet. Any follow-ups there, Finian?
That was helpful. And I just -- if I could do 2 follow-up on the right side of the balance sheet for your -- perhaps, Kristin. I think you were saying that you would utilize the revolver more. We've noticed that. Any additional -- I mean, I guess how much ideally would you say? And then if you have the numbers, can you remind us of your available borrowing base?
I'll answer the first part, and I'll ask Kristin to respond on the borrowing base, which, of course, is an iterative topic as you fund more originations, you pledge more the borrowing base growth. So it stair steps upward as opposed to being static. But from a revolver utilization standpoint, historically over the long term, we've only had about 15% utilization. We've stepped that up to be closer to 35%. And we like to strike the right balance between having significant liquidity on hand at all times. I think that's an important derisking element with utilizing our most efficient form of financing. We have been retiring more expensive debt through a series of tenders. We just called a more expensive traded baby bond, that will actually be retired this week from notice it was given almost 30-days ago in conjunction with our new institutional bond issuance. So we're calling paper that is in the 5% to 6.5%-ish range, and we're replacing it with paper in -- or the 3% to 4% range on a term basis, plus a revolver just over 1% money.
So we've made nice strides to trim our cost of financing on the right-hand side of our balance sheet. We'd like to continue shaping that and use that as a driver. But then, of course, just in terms of utilizing financing period, we are under-levered pretty significantly right now with only 61% net debt-to-equity versus a target range of 70% to 85%. And we're cautious, but we have a nice pipeline of deals we look to deploy that capital as well. So cost of financing and amount of financing are significant levers to pull as positive earnings calls as we see it for the future. And we have about $845 million of combined cash and undrawn revolver. Kristin, do you want to comment on the borrowing base, which again, is data and increases as you pledge more assets.
Sure, Grier, you just mentioned the $845 million that we have on the cash and undrawn. We currently have about $370 million borrowed with an additional – additional $430 million available to us on our current borrowing base.
The next question comes from Robert Dodd of Raymond James.
Congrats on an impressive NAV quarter among other things and congrats on being a top 100 stock on Robinhood too. So the NAV performance, obviously, up 7%. A good chunk of that came from 2 assets in particular, not all of it, by any means, but a good chunk of it, InterDent and your REIT. So I got a couple of questions about that. On InterDent, so obviously, a material markup, first time that asset has been marked up above cost in a while. And that business has obviously been troubled more than a decade, I think, before you got involved with it. So the question is, has there been another restructuring? I mean, what's changed that, that now seems to be on a better path I mean the -- obviously, dental was impacted better, but there's been a rebound there but -- and there's still some headwinds there, but what drove the big markup in that business this quarter?
Sure. Well, I'm not sure I completely agree. InterDent has been sort of a troubled company for the longer term. The company has 2 parts to it. It has a Medicaid based business in -- substantially in Oregon. And then outside of Oregon, it has a fee for services business in other states, primarily in the western region. The Medicaid based business actually end up being a substantial plus counter-cyclicality in the course of the past year when you paid a per member per month rate and your utilization drops -- your cost drop, but you still pay the same amount. We saw substantial outperformance in that part of the business model compared to fee for services, probably speaking out there. In the industry. So while you're subject to reimbursement risk and what is the Medicaid enrollment in a particular region, you have other substantial benefits during downturns that shown through quite brightly.
The business has been picking up market share and also winning from an overall growth enrollment in that state. And just a general improvement in the blocking and tackling inefficiencies, broadly speaking, across the business. So the dental services, recurring revenue business, get your teeth clean twice a year. A lot of the -- early on with the virus, there were concerns about going to the dentist. There's still a little bit of a lingering impact of that, but we're not nearly where we were in the spring of 2020 from that standpoint. So we're happy the trajectory of the business. It's performing well. Valuations continue to be robust from a comps standpoint. So that's InterDent. And I would say we didn't really see our valuation is concentrated in a couple of credits we had an across the board, robust increase in valuations in the book. I think we had 20-plus credits, roughly more than a $1 million increase in valuations. Whereas on the downside, we had maybe only 4 or 5 deals that had a more than $1 million decrease. So the increase in valuations was very much broad-based. Across the book and not just concentrated in 1 or 2.
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A fair point, but $120 million of the depreciation, it did come from 2 assets. That is not an even split. But on the V, if I can. At the risk of picking up a very old issue. At what point does it become appropriate to get maybe spin-off isn't the right thing to discuss, but it's 30% of NAV now. That's a very large concentration. And yes, there's diversity. It owns lots of different properties. But if you had a manufacturing business that had 100 different products, you still wouldn't want a manufacturing business to be 30% of your NAV, even if their product set was diversified. So what's the right level for that to account for of portfolio concentration because right now, it looks like if it continues on this path, which I don't think there's any reason to together right now. It's going to become an even more concentrated part of the book and what's the right level now?
Right. Well, a couple of predicates there, I'm not sure in complete agreement. The first is we have historically sold individual assets as we have received. In fact, we've sold 33 properties.
So while NPRC and our real estate business have performed strongly from a cash flow and until return and realized IRR standpoint, those 33 exits have generated a 23.5% IRR. As we sell assets selectively, and you'll probably see us continue to pursue that. 2020 was a little bit muted for M&A across the board, not just within real estate. Then that's a mitigating factor to, what I would call, high-quality problem of having increases and positive results.
We don't look at it the way you started the question of a single concentration. We look at this on more of a look-through basis from a business standpoint where we have dozens of separately financed properties with a diversity of management teams and a diversity of geographies. So much like you wouldn't take our middle market lending book and say that's a 69% concentration either. So real estate is about 19% of our assets, but it is very significantly diversified. There is no cross-collateralized debt or other obligations. Every asset is its own individual financing. So we look at a look-through basis. In terms of portfolio construction and our allocation to real estate. I think it's unlikely to see your real estate kind of take over the book and become a majority or anything like that. We maintained a balanced origination approach. It includes real estate, it includes corporate credits.
I mean you mentioned spin-off, I suppose that could be interesting to consider at some point potentially but what you see is that private markets' valuations are higher. And it has been the case for actually several years, Robert, compared to public REITS. And there's a number of reasons for that. One is the leverage at which assets run. One is the -- I think the players in the market and the capital that's aggregated and earmarked, and the private market's different from the public REIT side of things. Some of it may be macro fashion sentiment comparing REITs auto to tech stock. But you do better selling your individual assets in the private marketplace as opposed to putting them into a separate stand on public format. But that's something we can continue analyzing over time in case that changes.
That's fair. If I can make a request, to your point, on -- I mean, if I look in the disclosures in the queue that we have on NPRC, I mean in revenue minus Opex, minus interest expense, it's simplified cash flow, it's negative. Obviously, that's not representative of your point that average IRR on exits is 23%. So perhaps you could do us a favor? Give us better disclosure on the REIT about cash flows and the mechanics of the IRR? Because right now, if we look at the disclosures, it appears to be a cash flow negative business that does represent quite a large chunk of NAV. So that's just a request. But other than that congratulations...
To respond to that because I mean, a couple. First of all, real estate generates depreciation, right? It's not an investment company, and it doesn't use investment company accounting. Our REITs don't use investment company accounting, right? So the depreciation of the spin-off which may have been money spent years prior is a factor, number one. Number two is what you're quoting there is also after giving effect to the interest rate that Prospect Capital Corp. charges to NPRC, which, of course, comes to PSEC as the home team. So we're a beneficiary of that, that substantially absorbs a good chunk of the net operating income.
So I don't think looking at some type of net income figure which includes noncash depreciation and amortization.
For what it's worth, that's excluding the depreciation. And that's -- I'm sorry to interrupt but that's precisely my point, I mean if I had -- if there was more disclosure, we'd have an easier time pigmenting that. As it is just revenue minus Opex, minus interest, excluding depreciation and market fair value adjustments. That is negative because that doesn't tell the whole story?
Well, we will -- again, that's after it pays PSEC. So that's a huge factor. This is a significantly -- I just want -- for the record, this is a significantly profitable net operating income business. It's not a money loser at all, period. Full stop. But we will review the disclosures and we already put in a ton of disclosures. We really saw that annual financials for NPRC, we have pages and pages of additional disclosures. But we're happy to take any comments, suggestions. Feel free to make them. We'll definitely evaluate them. Always happy to evaluate increasing and improving disclosures, for sure. But this is not a money-losing business by any stretch.
And this concludes our question-and-answer session. I would now like to turn the conference back over to John Barry for any closing remarks.
Okay. Well, I do have a couple. One is that the improved performance at InterDent is the result of the persistent, diligent hard work, dedication of a wonderful management team that we have there. We have 2-people leading the effort there who have overcome challenge after challenge, many outside of their control. That’s one of the -- I guess it’s not exactly a secret, but I think people often fail to appreciate the importance of having a great management teams at our portfolio of companies.
And one of the absolute best is the team at InterDent, they’ve done a fabulous job. As well, the internal prospect, which spends many, many hours on that asset, optimizing it, has done a wonderful job. And we hope to see more of that. Normally, what happens in our business unfortunately when there’s a problem, and we handed the keys to a company as it occurred with InterDent. That is after the sponsor has tried everything. Every Hail Mary pass, every good indifferent and bad idea. And they’ve all failed. And the sponsor, a brand name leverage by firm on the tip of everyone’s tongue on the front page of the Wall Street Journal again and again, has completely given up.
I wish that were all that happened. But usually, what also happens in the case of certain sponsors, and we know who they are. They’ve hollowed the company out. Well, we can’t fix this. We try everything. So let’s leave with as much money in our pocket as possible and give it to Prospect. And then occasionally, there’s a demand that we pay money for that privilege, which we have never exceeded to. So we definitely start out deep in our own end zone. When we take over these companies. And I think the case of InterDent shows that we’re getting better and better at doing what the sponsor should have done in the first place. And performing where the sponsor has failed and fixing problems that should have been identified ahead of us and fixing them.
And in the case of InterDent, we started by my making significant management changes, and that’s the whole story there. In the case of our REIT or any other asset class where we invest. I hope we continue to have this problem that Robert Dodd has identified where the asset class performed so well under our supervision that we had to think about rebalancing by spinning off assets, selling assets and the like. We hope to have that problem again and again and again throughout and across our portfolio. It turns out that the REIT is fully diversified many, many properties there.
I’ve noticed talking to our shareholders and many of our shareholders appreciate the stability of the cash flows at Prospect Capital Corporation. Maybe one business unit is doing better than another at a given time. Maybe aircraft leasing is doing well at one point and real estate is not doing so well, where online lending is doing better than our energy business. Shareholders I speak to like to know that because of the diversity of our assets and the diversity of the cash flows, the significant cash flows, those assets throw off that a problem in the oil patch is not a giant hit to NAV or our income or travel largely shutting down in the airline business isn’t another heavy blow to us. Because what happens is or people can’t eat in restaurants, how exposed are we to that, not varying hotels, same.
So while the idea of spinning things off, when they do really well, has some facial attraction. The shareholders I speak to like to know that there are 8 cylinders under their hood that are all operating, making this car drive as steady as she goes. So while we will consider spin-offs. Right now, it’s not at the top of our list. And as far as the real estate business being extremely highly profitable and remunerative you can’t be earning these high IRRs, almost 30%. If the business were not positive cash flow in every single quarter.
So we are going to continue to work with what has worked well in the past. We’re going to be steady as she goes. We’re not going to be making any sudden changes to business strategies that have worked well for us since 1988. We believe steady as she goes. Okay. Thank you, everyone. Have a wonderful afternoon. Bye now.
The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.