Earnings call transcript: Prospect Capital Q4 2025 sees EPS beat, revenue miss

Prospect Capital Corporation (PSEC) announced its Q4 2025 earnings, reporting an earnings per share (EPS) of $0.17, surpassing analysts’ forecast of $0.13 by 30.77%. However, the company fell short on revenue, posting $166.95 million against a projected $171.35 million, a surprise of -2.57%. Despite the mixed results, the stock increased by 1.26% to $2.83 in regular trading but fell 1.52% in premarket activity. According to InvestingPro data, the company maintains a significant 19.39% dividend yield and has consistently paid dividends for 22 consecutive years, though recent financial metrics indicate challenges ahead.

Key Takeaways

• EPS exceeded expectations by 30.77%, marking a strong performance.
• Revenue fell short by 2.57%, indicating challenges in sales.
• The stock showed mixed reactions, with a slight gain in regular trading but a drop in premarket.
• Continued focus on middle market lending and first lien senior secured loans.
• Anticipation of double-digit growth in real estate portfolio NOI.

Company Performance

Prospect Capital continues to focus on middle market lending, with a significant portion of its investments in first lien senior secured loans. The company has reduced exposure to riskier second lien and subordinated structured notes, aligning with its conservative investment strategy. The investment portfolio’s fair value stands at $6.7 billion, with a diversified approach across 97 portfolio companies in 33 industries.

Financial Highlights

• Revenue: $166.95 million, below the forecast of $171.35 million.
• EPS: $0.17, exceeding the forecast of $0.13.
• Net Investment Income: $79 million.
• Net Asset Value: $6.56 per common share.
• Monthly common shareholder distributions: $0.45 per share.

Earnings vs. Forecast

Prospect Capital’s EPS of $0.17 outperformed the forecast by 30.77%, reflecting strong cost management and investment performance. However, revenue of $166.95 million missed expectations by 2.57%, highlighting potential sales challenges or market conditions affecting the top line.

Market Reaction

The stock price rose by 1.26% to $2.83 during regular trading, indicating positive investor sentiment towards the earnings beat. However, in premarket trading, the stock fell by 1.52%, suggesting caution among investors due to the revenue miss. The stock remains near its 52-week low of $2.73, reflecting broader market pressures. InvestingPro analysis reveals the stock has declined 30% over the past six months, with a relatively defensive beta of 0.84. For deeper insights into PSEC’s valuation and growth potential, including 8 additional ProTips and comprehensive financial analysis, explore the Pro Research Report available on InvestingPro.

Outlook & Guidance

Prospect Capital plans to continue rotating assets into first lien senior secured loans and redeploy proceeds from asset sales into middle market loans. The company anticipates double-digit growth in its real estate portfolio’s net operating income (NOI), maintaining a conservative investment approach.

Executive Commentary

President and COO Grier Isaac emphasized the company’s focus on middle market lending and first lien senior secured loans, stating, "We are focused on middle market lending, first lien senior secured." CFO Kristin Van Dask highlighted risk management improvements, noting, "We’ve substantially reduced our counterparty risk."

Risks and Challenges

• Revenue shortfall could indicate market saturation or competitive pressures.
• Macroeconomic factors might impact middle market lending demand.
• Real estate portfolio growth depends on favorable market conditions.
• Continued reliance on interest income, which represents 95% of total investment income.
• Non-accruals, though low at 0.3%, could pose future risks if economic conditions worsen.

Q&A

During the earnings call, analysts questioned the performance of the company’s real estate investment trust (REIT) holdings. Management provided insights into the challenges and opportunities within the multifamily real estate sector, highlighting a 7% like-for-like NOI increase in the real estate portfolio.

Full transcript - Prospect Capital Corporation (PSEC) Q4 2025:

Conference Operator: Good day, and welcome to the Prospect Capital Fourth Quarter and Fiscal Year End Earnings Release and Conference Call. All participants will be in a listen only mode. 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.

John Barry, Chairman and CEO, Prospect Capital Corporation: Thank you, Betsy. Joining me on the call today are Grier Isaac, 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 ks filed previously and available on our website, prospectstreet.com.

Now I’ll turn the call back over to John.

John Barry, Chairman and CEO, Prospect Capital Corporation: Thank you, Kristen. In the June, our net investment income or NII was $79,000,000.00 $17 per common share. Our NAV was $3000000000.6.56 dollars 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 $0.45 per share for each of September and October. We plan on announcing our next set of shareholder distributions in November. Since our IPO twenty years ago through October 2025 declared distribution, we will have distributed approximately $4,600,000,000 or $21.66 per share. Our preferred shareholder cash 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 six forty two 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 $50,000,000 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 two zero two basis points to 14.4% from last year and with two additional second lien loans having been repaid since 06/30/2025, further reducing our second lien mix 69 basis points to 13.7% based on the investment portfolio as of 06/30/2025. Number three, selling our subordinated structure notes. With our subordinated structure notes, mix decreasing seven eighty one basis points to 0.6% from last year.

Number four, prudent exits of equity linked assets including real estate with six properties sold in the last six 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 Greer.

Grier Isaac, President and Chief Operating Officer, Prospect Capital Corporation: Thank you, John. Over the past two decades, Prospect Capital Corporation has invested $12,600,000,000 in over three fifty exited investments that have earned a 12% unlevered investment level gross cash IRR to Prospect Capital Corporation. This over two 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 $6,700,000,000 For the June, our portfolio at cost comprised seventy point five percent first lien debt, up six forty two basis points in the prior year, fourteen point four percent second lien debt, almost entirely secured, down two zero two basis points from the prior year, 0.6% subordinated structured notes with underlying secured first lien collateral, down seven eighty one basis points in the prior year and nearly completely exited and 14.5% unsecured debt in 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 eight seventy eight 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 $167,000,000 of originations during the quarter. Investments during the quarter included a new investment in Verified 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 seven eighty one 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 06/30/2025, we’ve exited 52 property investments that have earned an unlevered investment level gross cash IRR of 24% and cash on cash multiple of 2.4 times.

The remaining real estate property portfolio included 58 properties that paid us an income yield of 4.5% for the June. Prospect’s aggregate investments in NPRC included a $378,000,000 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 was 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 basis and 65 basis points respectively. Investment originations in the June aggregated $271,000,000 and were comprised with 91% middle market investment with a significant majority of first lien senior secured loans. We also experienced $445,000,000 of repayments and exits as a validation of our capital preservation objective, resulting in net repayments of $174,000,000 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 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 twenty six years into the future. Our unfunded eligible commitments to portfolio companies totals approximately $41,000,000 of which $16,000,000 are considered at our sole discretion, representing approximately 0.60.2% of our total assets as of June 2025, respectively. Our combined balance sheet cash and undrawn revolving credit facility commitments stood at $1,300,000,000 as of June, and we held $4,200,000,000 of our assets as unencumbered assets, representing approximately 62% of our portfolio.

The remaining assets are pledged to Prospect Capital Funding, a nonrecourse 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 2029 and revolves until 2028. Our drawn pricing continues to be SOFR plus 2.05 percent. 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. We’ve tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out twenty six years with our debt maturities extending through two thousand and fifty two. With so many banks and debt investors across so many unsecured and nonrecourse debt tranches, we have substantially reduced our counterparty risk. At 06/30/2025, our weighted average cost of unsecured debt financing was 4.52%.

Now I’ll turn the call back over to John.

John Barry, Chairman and CEO, Prospect Capital Corporation: Okay. We’re ready to take questions.

Conference Operator: We will now begin the question and answer session. The first question today comes from Finian O’Shea with Wells Fargo. Please go ahead.

Finian O’Shea, Analyst, Wells Fargo: Hey, everyone. Good morning. 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?

Thanks.

Grier Isaac, President and Chief Operating Officer, Prospect Capital Corporation: 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 Sunbelt, which weren’t as targeted for development and actually have some fairly healthy rent growth.

For certain assets in larger cities in the Sunbelt, 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 two 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 $1,000,000,000 check plus for the entire portfolio compared to ones that can buy individual assets or many 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-fifty million dollars EBITDA companies have had an average spread of around $750,000,000 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 zero or near zero where they were only three point five 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 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 5,000,000 and $150,000,000 of EBITDA. The upper middle market where there’s so many problems in the 50,000,000 to 150,000,000 range has only about 10,000 of those companies and the other $220,000 are sub-fifty 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’re 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.

Finian O’Shea, Analyst, Wells Fargo: That’s very helpful. Appreciate all the color. That’s all for me. Thank you.

Grier Isaac, President and Chief Operating Officer, Prospect Capital Corporation: Thank you.

John Barry, Chairman and CEO, Prospect Capital Corporation: Thank you, Finian.

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

John Barry, Chairman and CEO, Prospect Capital Corporation: Okay. Well, there are my closing remarks right there. Thank you everyone. Have a wonderful afternoon. Bye now.

Conference Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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