Earnings call transcript: Prospect Capital misses Q4 2024 EPS forecast

Prospect Capital (NASDAQ:PSEC) Corporation reported its fourth-quarter 2024 earnings, revealing a significant earnings miss with an EPS of -$0.07 compared to the forecast of $0.14. The company’s revenue also fell short, reaching $185.5 million against the expected $197.7 million. Despite these results, the stock showed a modest increase of 0.72% in the latest trading session. According to InvestingPro data, the company maintains a significant 12.95% dividend yield and has sustained dividend payments for 22 consecutive years, making it notable among income-focused investors.

Key Takeaways

• EPS of -$0.07 missed the forecast of $0.14.
• Revenue came in at $185.5 million, below the expected $197.7 million.
• Stock price rose by 0.72% despite the earnings miss.
• Net Investment Income (NII) was $86.4 million, or $0.20 per share.
• Portfolio consisted of 64.9% first lien debt, showing strategic focus.

Company Performance

Prospect Capital Corporation faced a challenging quarter with earnings and revenue both missing expectations. The company’s net investment income reached $86.4 million, translating to $0.20 per share, indicating a robust income stream despite the overall miss. The firm continues to focus on first lien debt, which now comprises 64.9% of its portfolio, up 620 basis points from the previous year. InvestingPro analysis reveals concerning metrics, including a current ratio of 0.48 and revenue decline of 7.23% over the last twelve months. For deeper insights into Prospect Capital’s financial health and additional ProTips, subscribers can access the comprehensive Pro Research Report, which covers over 1,400 US equities.

Financial Highlights

• Revenue: $185.5 million, below the forecast of $197.7 million.
• Earnings per share: -$0.07, compared to a forecast of $0.14.
• Net Asset Value (NAV): $3.4 billion, or $7.84 per share.
• Net debt to total assets: 28.1%.

Earnings vs. Forecast

Prospect Capital’s EPS of -$0.07 missed the forecast by $0.21, marking a significant deviation from expectations. The revenue shortfall was $12.2 million, highlighting challenges in meeting market forecasts. This performance contrasts with previous quarters where the company either met or exceeded expectations.

Market Reaction

Despite the earnings miss, Prospect Capital’s stock rose by 0.72%, closing at $4.17. This increase suggests investor confidence in the company’s long-term strategy or a focus on other positive aspects, such as the strong net investment income. With a market capitalization of $1.83 billion and a beta of 0.98, the stock trades near its 52-week low of $4.09, significantly below its high of $5.86. InvestingPro subscribers can access additional valuation metrics and expert analysis to better understand the stock’s potential in the current market environment.

Outlook & Guidance

Looking forward, Prospect Capital plans to continue its strategy of rotating assets into first lien senior secured middle market loans. The company aims to amortize subordinated structured notes and reinvest asset sale proceeds into value-add capital expenditures. Maintaining a diversified funding strategy remains a priority.

Executive Commentary

John Berry, Chairman and CEO, emphasized the company’s pioneering role in BDC financing, stating, "We’ve been doing this for over two decades." Greer Leiszek, President and COO, highlighted the company’s approach to generating attractive risk-adjusted yields. CFO Kristin Van Dask noted, "We have substantially reduced our counterparty risk," reflecting a focus on financial stability.

Risks and Challenges

• Potential for continued revenue shortfalls if market conditions do not improve.
• Interest rate fluctuations impacting investment yields.
• Economic uncertainty affecting portfolio company performance.
• Competition in the BDC sector potentially compressing margins.
• Regulatory changes that could impact investment strategies.

Q&A

During the earnings call, analysts inquired about the company’s unsecured debt strategy and the preferred securities exchange offer. Executives reiterated the flexibility of their financing approach, which is designed to adapt to changing market conditions.

Full transcript - Prospect Capital Corporation (PSEC) Q2 2025:

Conference Moderator: Hello and welcome to the Prospect Capital’s Second Fiscal Quarter Earnings Release and Conference Call. All participants will be in listen only mode. After today’s presentation, there will be an opportunity to ask questions. As a reminder, this conference is being recorded. I would now like to hand the call to John Berry, Chairman and CEO.

Please go ahead.

John Berry, Chairman and CEO, Prospect Capital Corporation: Thank you, MJ. Joining me on the call today are Greer Leiszek, our President and Chief Operating Officer and Kristin Van Dask, our Chief Financial Officer. Kristin?

Kristin Van Dask, Chief Financial Officer, Prospect Capital Corporation: 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.

John Berry, Chairman and CEO, Prospect Capital Corporation: Thank you, Kristin. And as I told our Board, Kristen is absolutely crushing it. Thank you, Kristen. Thanks, John. Okay.

Thank you, Kristen. In the December, our net investment income or NII was $86,400,000 or $0.2 per common share. Our NAV was $3,400,000,000 or $7.84 per common share. At December 31, our net debt to total assets was 28.1%. Unsecured debt plus unsecured preferred is 91.9 percent of total debt plus preferred.

Since inception over twenty years ago through our April 2025 declared distribution, we will have distributed over $4,400,000,000 or $21.39 per share, 2.7 times December 2024 NAV per share. We are announcing monthly common shareholder distributions of $0.045 per share for each of February, March and April. We plan on announcing our next set of shareholder distributions in May. Our preferred shareholder cash distributions continue at their contractual rate. We continue to rotate assets into first lien senior secured middle market loans, sometimes with select equity investments, amortize our subordinated structured notes, exit from equity linked assets, including real estate, enhance portfolio company operating performance and utilize our revolver.

Thank you. I’ll now turn the call over to Greer.

Greer Leiszek, President and Chief Operating Officer, Prospect Capital Corporation: Thanks, John. Over the past two decades, Prospect Capital Corporation has invested $11,700,000,000 in over 300 exited investments that have earned a 13% unlevered investment level gross cash IRR to Prospect Capital Corporation. This more than two decade time period includes the GFC and has been dominated in general by low interest rates. As of December, we held 114 portfolio companies across 33 different industries with an aggregate fair value of $7,100,000,000 For the December, our portfolio at fair value comprised sixty four point nine percent first lien debt that’s up six twenty basis points from the prior year, ten point two percent second lien debt that’s down five thirty basis points in the prior year 5.8% subordinated structured notes with underlying secured first lien collateral that’s down two ten basis points in the prior year and 19.1% unsecured debt in equity investments, resulting in 81% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral. In our middle market lending strategy, we recently provided a first lien senior secured term loan, a first lien senior secured convertible term loan and a preferred equity investment to Taos Footwear aggregating $65,000,000 in collaboration with Taos’s founder and leadership team.

Taos is a leading innovative footwear brand providing customers with stylish and supportive footwear products over the last twenty years. Examples of similar recent investments in our middle market lending strategy with both first lien senior secured debt and selected equity linked investments include Druid City Infusion and Discovery (NASDAQ:WBD) Point Retreat. Druid City is an infusion therapy services company with multiple locations across the South And Mountain West regions of The United States. Since closing, Druid has made an add on acquisition, expanding the reach of the company into Louisiana. We’ve worked with Druid’s management team to evaluate improved market penetration and enhanced collection recovery strategies, which Druid management believes will lead to continued growth.

Discovery Point Retreat is a rapidly growing detox and rehabilitation provider in North Texas. Recent EBITDA has increased by approximately 37% from underwritten EBITDA only a few months ago. We’ve worked with Druid’s management team to enter into a new service agreement with the goal of purchasing such facility in the future as an expansion into California. Druid has also moved its Dallas outpatient program to a new location that more than doubles capacity and has begun construction at one of its inpatient facilities to expand capacity. Discovery management believes these initiatives each will lead to continued growth.

Our subordinated structured notes portfolio as of December represented 5.8% of our investment portfolio, a reduction of two ten basis points from 7.9% as of December 2023. Since inception of this strategy for Prospect Capital Corp. In 2011 and through December 2024, we have exited 15 subordinated and structured notes investments, earning an unlevered investment level gross cash internal rate of return of 12.1% and cash on cash multiple of 1.3 times. As of December based on fair value and excluding investments being redeemed, the remaining subordinate structured notes portfolio had a trailing twelve month average cash yield of 24.4% and annualized GAAP yield of 3.9% with a difference between cash and GAAP yield representing amortization of our cost basis. We expect to continue to amortize our subordinated structured notes portfolio and to reinvest primarily into first lien senior secured middle market loans.

In our real estate property portfolio at National Property ReCorp or NPRC, since the inception of the strategy for Prospect Capital Corp. In 2012 and through December 2024, we have exited 51 property investments, earning an unlevered investment level gross cash IRR of 24.3% and cash on cash multiple of 2.5 times. We exited two additional properties in the December. The remaining real estate property portfolio includes 59 properties that paid us an income yield of 6.9 for the December. Prospect’s aggregate investments in NPRC had a $522,000,000 unrealized gain as of December.

We expect to continue to redeploy future asset sale proceeds primarily into both property value add capital expenditures as well as more broadly first lien senior secured middle market loans. Prospect’s approach is one that generates attractive risk adjusted yields and our performing interest bearing investments were generating an annualized yield of 11.2% as of December. Our interest income in the December was 91% of total investment income, reflecting a strong recurring revenue profile to our business. Payment in kind income for the quarter ended December 2024 was $20,000,000 down 39% from the prior quarter and down nearly 50% from the June 2024 quarter. Non accruals as a percentage of total assets stood at approximately 0.4% in December.

Weighted average EBITDA per portfolio company stood at $102,000,000 Investment originations in the December aggregated $135,000,000 and were comprised of $120,000,000 of first lien senior secured loans or close to 90% of total originations. We also experienced $383,000,000 of repayments and exits as a validation of our capital preservation objective, resulting in net repayments of $248,000,000 During the December, our originations comprised 67.7 middle market lending, 14.5% middle market lending and buyouts, 17.8% real estate and 0% in subordinated structured notes. So far in the current March, we have booked $111,000,000 in originations and experienced $19,000,000 of repayments. Our originations have consisted of 86.4% middle market lending and 13.6% real estate. Thank you.

I’ll now turn the call over to Kristin. Kristin?

Kristin Van Dask, Chief Financial Officer, Prospect Capital Corporation: Thanks, Greer. 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 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 twenty seven years into the future. Our unfunded eligible commitments to portfolio companies totals approximately $62,000,000 of which $29,000,000 are considered at our sole discretion, representing approximately 0.90.4% of our assets as of December 2024, respectively. Our combined balance sheet cash and undrawn revolving credit facility commitments stood at $1,900,000,000 as of December, and we held $4,800,000,000 of our assets as unencumbered assets, representing approximately 66% of our portfolio.

The remaining assets are pledged to Prospect Capital Funding, a non recourse SPV. We currently have $2,120,000,000 of commitments from 48 banks, demonstrating strong support of our company from the lender community with a 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 basis and have successfully issued securities in an array of markets.

Crossact 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 December, unsecured term debt represents 85% of all of prospects indebtedness. We’ve tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration of twenty seven years with our debt maturities extending through 02/1952. With so many banks and debt investors across so many unsecured and non recourse debt tranches, we have substantially reduced our counterparty risk.

At 12/31/2024, our weighted average cost of unsecured debt financing was 4.49%. Now, I’ll turn the call back over to John.

John Berry, Chairman and CEO, Prospect Capital Corporation: Thank you, Kristen. I think we can take questions now.

Conference Moderator: Thank you, John. We will now begin the question and answer session. Today’s first question comes from Sinead O’Shea with Wells Fargo (NYSE:WFC). Please go ahead.

Sinead O’Shea, Analyst, Wells Fargo: Hey, everyone. Good morning. A question on the debt, specifically the unsecured. Can you talk about how the rating changes will impact how you shape that going forward if you intend to replace the over the next year or two the public maturities in similar channels or might you lean more on the revolver there? Thank you.

Greer Leiszek, President and Chief Operating Officer, Prospect Capital Corporation: Thanks, Finney, for that question. We don’t anticipate significant changes in our financing strategy. Recall Prospect is the pioneer that basically introduced to the BDC industry. We’ve been doing this for over two decades. First to issue convertible bond, first to issue an institutional bond, first to issue program notes, preferreds, many, many types of financing that the rest of the industry enjoys today as a result of our leadership.

We’re big believers in having a diversified array of markets to tap into. We do plan on utilizing our facility that matches on a floating rate basis with our assets that are dominated by floating rate. We have a well diversified set of strong bank relationships close to 50 in that facility. We plan on continuing to tap the bond markets over time, the program notes markets as well and our preferred markets. Our credit spread versus treasuries is actually tighter now than where it was in July of twenty twenty four, which I think is a reflection of our strong credit profile as a company.

Sinead O’Shea, Analyst, Wells Fargo: Okay. Thanks. That’s helpful. And just one on the preferreds. There was a, I think, a disclosed offer at the January for an exchange.

I know it’s just a few days in, but if you could talk about how that’s going, if there’s a lot of participation? And then I think 7.5% is the rate for the new securities if that’s indicative on where you would issue a new class of preferreds? Thanks.

Greer Leiszek, President and Chief Operating Officer, Prospect Capital Corporation: Sure. I’ll take those two questions in turn. In terms of exchanges, we have selectively offered for various convertible tranches of older series to exchange their paper into non convertible, but still perpetual preferreds and still providing credit support to our bonds as junior capital for same and attractive financing for our common equity. We’ve had strong participation in those exchange offers historically and would expect the same going forward. In terms of our new preferred series, yes, you have the coupon correct for that, which is a reflection in balancing decisions across different fixed income markets.

Short term rates are down a little bit, but medium five to ten year rates are up a bit. We had previously had a floater with a floor based on short term that had declined to the floor level. And we saw a lot of demand at the prior level where we’re issuing sort of last summer on more of a fixed basis decided to move away from using a floater with the floor? It turns out people like floaters and rates are going up, big surprise and not so much when rates are going down. Did that help, Finian?

Conference Moderator: Pardon me, it looks like we have lost Finian’s line.

Greer Leiszek, President and Chief Operating Officer, Prospect Capital Corporation: Okay. I think we can wrap up.

Conference Moderator: Okay. In that case, this concludes our question and answer session. I’d like to turn the call back to Mr. Barry for closing remarks.

John Berry, Chairman and CEO, Prospect Capital Corporation: Okay. Here are my closing remarks. Thank you very much. Bye now.

Conference Moderator: The conference is now concluded. Thank you for your participation. You may now disconnect your lines.

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