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Edited Transcript of PSEC earnings conference call or presentation 7-Nov-18 3:00pm GMT

Q1 2019 Prospect Capital Corp Earnings Call

New York Nov 13, 2018 (Thomson StreetEvents) -- Edited Transcript of Prospect Capital Corp earnings conference call or presentation Wednesday, November 7, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Francis Barry

Prospect Capital Corporation - Chairman & CEO

* Kristin Lea Van Dask

Prospect Capital Corporation - CFO, Treasurer, Secretary & Chief Compliance Officer

* Michael Grier Eliasek

Prospect Capital Corporation - President & COO

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Conference Call Participants

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* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* Leslie Shea Vandegrift

Raymond James & Associates, Inc., Research Division - Senior Research Associate

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Presentation

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Operator [1]

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Good day everyone and welcome to the Prospect Capital Corporation First Fiscal Quarter Earnings Release and Conference Call. (Operator Instructions) And please note that this event is being recorded. I would now like to turn the conference over to Chairman and CEO, John Barry. Please go ahead.

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [2]

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Thank you, William. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer. Kristin?

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Kristin Lea Van Dask, Prospect Capital Corporation - CFO, Treasurer, Secretary & Chief Compliance Officer [3]

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Thanks, 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 forecast 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, our 10-Q and our corporate presentation filed previously and available on the Investor Relations tab on our website prospectstreet.com. Now I'll turn the call back over to John.

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [4]

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Thank you, Kristin. For the September 2018 quarter, our net investment income or NII was $85.2 million or $0.23 per share, up $0.01 from the prior quarter and exceeding our current dividend rate of $0.18 per share by $0.05. NII increased due to higher dividend income. In the September 2018 quarter, our net debt-to-equity ratio was 75.1%, up 3.5% from the prior year. Our net income for the quarter was $83.8 million or $0.23 per share, down $0.08 from the prior quarter.

We are announcing monthly cash distributions to shareholders of $0.06 per share for each of November, December and January, representing 126 consecutive shareholder distributions. We plan on announcing our next series of shareholder distributions in February. Since our IPO nearly 15 years ago through our January 2019 distribution at our current share count, we will have paid out $16.98 per share to original shareholders, exceeding $2.7 billion in cumulative distributions to all shareholders.

Our NAV stood at $9.39 per share at September 2018, up $0.04 from the prior quarter. Our balance sheet as of September 2018 comprised 87.8% floating rate interest earning assets and 85% fixed rate liabilities, positioning us to benefit from rate increases. Our percentage of total investment income from interest income was 88.4% in the September 2018 quarter, a decrease of 3.4% from the prior quarter, as we increased our quarterly dividend income from NPRC and other controlled investments while continuing to focus on recurring income compared to onetime structuring fees.

We believe there is no greater alignment between management and shareholders than for management to purchase a significant amount of stock, particularly when management has purchased stock on the same basis as other shareholders in the open market. Prospect management is the largest shareholder in Prospect and has never sold a single share. Management and affiliates on a combined basis have purchased at cost over $350 million of stock in Prospect.

Our management team has been in the investment business for decades with experience handling both challenges and opportunities provided by dynamic economic and interest rate cycles. We have learned when it is more productive to reduce risk than to reach for yield. And the current environment is one of those time periods. At the same time, we believe the future will provide us with substantial opportunities to purchase attractive assets utilizing the dry powder we have built-in reserve.

Thank you. I will now turn the call over to Grier.

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [5]

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Thanks, John. Our scaled business with over $6 billion of assets and un-drawn credit continues to deliver solid performance. Our experienced team consists of approximately 100 professionals, representing one of the largest middle market credit groups in the industry. With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that covers third-party private equity sponsor-related and direct non-sponsor lending; Prospect sponsored operating and financial buyouts; structured credit; real state yield investing and online lending.

As of September 2018, our controlled investments at fair value stood at 41.9% of our portfolio, down 21% from the prior quarter. 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 non-bank 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 September 2018, our portfolio at fair value comprised 44.4% secured first lien, up 0.5% from the prior quarter; 21.7% secured second lien, down 0.4% from the prior quarter; 16.3% structured credit with underlying secured first lien collateral, 0.5% unsecured debt; and 17.1% equity investments, resulting in 82% of our investments being assets with underlying secure debt benefiting from borrow-pledged collateral.

Prospect's approach is one that generates attractive risk adjusted yields, and our debt investments were generating an annualized yield of 13.5% as of September 2018, up 0.5% from the prior quarter and the fourth straight quarterly increase. We also hold equity positions and certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions. We've continued to prioritize senior and secured debt with originations to protect against downside risk while still achieving above market yields through credit selection discipline and a differentiated origination approach.

As of September 2018, we held 137 portfolio companies, up 2 from the prior quarter with a fair value of $5.94 billion. We also continued to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration, the largest is 14.1%. As of September 2018, our asset concentration in the energy industry stood at 3.2% and our concentration in the retail industry stood at 0%.

Non-accruals as a percentage of total assets stood at approximately 2.4% in September, down 0.1% from the prior quarter. Our weighted average portfolio net leverage stood at 4.58x EBITDA, down from 4.60x the prior quarter and the second straight quarterly decrease. Our weighted average EBITDA per portfolio company stood at $56.5 million in September, up from $55.4 million the prior quarter.

The largest segment of our portfolio consists of sole-agented and self-originated middle market loans. In recent years we perceived the risk-adjusted reward to be higher for agented self-originated and anchor investor opportunities compared to the non-anchor broadly syndicated market causing us to prioritize our proactive sourcing efforts.

Our differentiated call center initiative continues to drive proprietary deal flow for our business. Originations in the September quarter aggregated $255 million. We also experienced $55 million of repayments and exits as a validation of our capital preservation objective, resulting on a rounded basis in net originations of $199 million.

During the September quarter, our originations comprised 64% agented sponsor debt; 21% non-agented debt including early look anchoring and club investments; 9% structured credit; 4% real estate and 2% corporate yield buyouts. To-date, we've made multiple investments in the real estate arena through our private REIT strategy largely focused on multifamily stabilized yield acquisitions with attractive 10-plus year financing.

NPRC or private REIT as a real estate portfolio that has benefited from rising rents, strong occupancies, high-returning value-added renovation programs and attractive financing recapitalizations resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses. NPRC has exited completely certain properties, including Vista, Abbington, Bexley, Mission Gate, Hillcrest, Central Park, St. Marin, Matthews and Amberley with an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships. We expect both recapitalizations and exits to continue.

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 September, we held $965 million across 46 non-recourse structured credit investments primarily in the subordinated tranche. The underlying structured credit portfolios comprised over 1,900 loans and a total asset base of over $19 billion.

As of September, our structured credit portfolio experienced a trailing 12-month default rate of 113 basis points, down 2 basis points from the prior quarter and 68 basis points less than the broadly syndicated market default rate of 181 basis points. In the September quarter, this portfolio generated an annualized cash yield of 14.3% excluding recently reset deals with short-term yield compression and a GAAP yield of 14.4%, down 0.1% from the prior quarter.

Cash yield includes all cash distributions from an investment, while GAAP yield subtracts out amortization of cost basis. As of September 2018, our existing structured credit portfolio has generated over $1.19 billion in cumulative cash distributions to us, representing around 78% of our original investment. Through September, we've also exited 11 investments, totaling just under $300 million with an average realized IRR of 16.1% and cash and cash multiple of 1.48x.

Our structured credit portfolio consists entirely of majority-owned positions where we hold the subordinated tranche. 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 the 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.

We have 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 24 re-financings and resets since September 2017. Our structured credit equity portfolio has paid us in average 19.5% cash yield in the 12 months ended September 2018, excluding recently reset deals with short-term yield compression.

So far in the current December 2018 quarter, we have booked $87 million in originations and received repayments of $45 million, resulting in net originations on a rounded basis of $43 million. Our originations have comprised 83% non-agented debt; 10% structured credit; 6% agented sponsored debt, and 2% real estate. Thank you.

I'll now turn the call over to Kristin.

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Kristin Lea Van Dask, Prospect Capital Corporation - CFO, Treasurer, Secretary & Chief Compliance Officer [6]

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Thanks, Grier. We believe our prudent leverage, diversified access to matched-book funding, substantial majority of unencumbered assets and weighting toward unsecured fixed-rate debt demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of fixed-rate liabilities extending 25 years into the future, while the significant majority of our loans float with LIBOR, providing potential upside to shareholders as interest rates rise.

We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond; develop a notes program; issue an institutional bond; acquire another BDC and many other lists of first. 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 September 2018, we held approximately $4.7 billion of our assets as unencumbered assets, representing approximately 75% of our portfolio. The remaining assets are pledged to Prospect Capital funding, where we recently completed an extension of our revolver by 5.7 years, reducing the interest rate on drawn amounts to 1-month LIBOR plus 220 basis points.

We currently have $830 million of commitments from 21 banks with a $1.5 billion total size accordion feature at our option. We are targeting adding more commitments from additional lenders. The facility revolves until March 2022, followed by 2 years of amortization with interest distributions continuing to be allowed to us.

Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect Capital Corporation, including recently 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 commitments, no asset restrictions and no cross-defaults with our revolver. We enjoy an investment grade BBB rating from Kroll; an investment grade BBB rating from Egan-Jones; and an investment grade BBB- rating from S&P.

We've now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 25 years. Our debt maturities extend through 2043. With so many banks and debt investors across so many debt tranches, we've substantially reduced our counterparty risk over the years.

In the September 2018 quarter, we repurchased $154 million of our July 2019 notes as well as $29 million of our program notes. We also issued $100 million of 2014 institutional notes; $26 million of baby bonds through our ATM program; and continued weekly internet issuances. If the need should arise to decrease our leverage ratio, we believe we could flow origination and allow repayments and exits to come and join the ordinary course as we demonstrated in the first half of calendar year 2016 during market volatility. We now have 7 separate unsecured debt issuances aggregating $1.5 billion, not including our program notes with maturities extending until June 2028.

As of September 2018, we have $769 million of program notes outstanding with staggered maturities through October 2043.

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

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [7]

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Thank you, Kristin. We can now answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question will be Leslie Vandegrift with Raymond James.

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Leslie Shea Vandegrift, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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Dividend income this quarter was really healthy, $11 million from the private REIT and $3.5 million from Valley Electric. Going forward is that a run-rate or how much of that is sustainable?

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [3]

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Well, Leslie, as you know dividends from any operating company are less predictable than interest income, which is contractually stat. So I would say it's less predictable, but we would not be taking these dividends now unless we thought the companies were healthy enough to continue them. Grier?

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [4]

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Sure. To add that on, in expectation basis we've seen a substantial uptick in performance in both of those businesses. Valley and NPRC -- NPRC obviously is a substantially larger operation for us. We would expect for Valley that dividend to continue at least in the current quarter. And 2019 is looking quite promising as well given the growing backlog nature of that business. With NPRC, we currently expect these distributions to continue not only for the current quarter, but into each calendar quarter of 2019 as well. And we'll see about beyond that. We've had significant success with our value-added renovation program and it delivered realized IRRs on a growing number of assets in excess of 20%. We have multiple transactions under purchase agreements that are in closing mode right now, 3 more to be exact, beyond the ones that articulated, in each case with non-refundable deposits and well on their way towards closing. I suspect 2 of those have closed in the current quarter and another transaction in early 2019. And then we're always optimizing the book and in addition to purchasing and making new investments, we're looking at exiting -- increasing just through an outright sale that we have recapped deals and we've examined re-financing options as well. So we're quite pleased with not only the historical performance of a real estate book, but also the outlook and the pipeline of exits. At the same time, we're replenishing those with new originations. I think on a trailing 12-month basis, our new originations are almost identical to our exits that had been well in excess of 2x cash and cash multiples.

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Leslie Shea Vandegrift, Raymond James & Associates, Inc., Research Division - Senior Research Associate [5]

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And right now on the market with right where they are and a few more investors moving into leverage lending, is there any industry-specific investments that have just been I guess crazy would be the word for it on deal terms for pricing in any industry that is new that's worth avoiding right now?

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [6]

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Well, I'll give my thoughts and then see if John can add to a bit. We try not to be so tops down in analysis to like where it would redline certain industries versus others. Having said that, there are some industries that are quite challenged that we tend not to do a whole lot in. Retail is one of those where we have 0 retailers in our book today and that's a very difficult industry because of the secular trends towards online commerce and competitive margin drivers, grocery would be another area we're seeing significant oversupply go into it. But with every analysis, it's a company analysis and also a capital structure analysis. There's certain technology-related companies that get levered to the hill out there that are levered and priced for that matter to perfection. And we often pass on those opportunities as well. So it's difficult to give a generic answer to that. It's really an individual credit-by-credit analysis that comes into play. John, anything you'd add to that?

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [7]

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Well, I guess, Leslie, I bet you have your own list to auto supply chain, restaurants, gambling, right?

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Leslie Shea Vandegrift, Raymond James & Associates, Inc., Research Division - Senior Research Associate [8]

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Yes. Yes, I would agree, at least a few of those.

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [9]

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Yes. Yes. Right. Hotels -- so people that are price takers -- I remember somebody came in some years ago -- we would remember this quite well -- came in and the company's -- well, I shouldn't name the company, they might not appreciate it, but they came in for a loan and the company was in the middle of the auto supply chain. A price taker on all of the company's inputs or virtually all, which remain the commodities, rubber being a significant component and when the company manufactured its products and turned around to sell to the big 3, company discovered it was a price taker on that end. So that was an easy one to avoid. One of our competitors went into that transaction and what I saw was it was restructured. So we see certain areas where historically we've noticed there's what would I call price risk, volume risk, fashion risk and what happens, do we redline those industries? No. We bear in mind our hard experience in those sectors as we consider whether we might invest. And so as a result we do -- we make investments. I think it's proper to say in every industry and is just the -- what we do is I think we bring a different lens to each industry and may demand much lower multiples; much higher fixed charge coverage; more stringent covenants in some industries rather than others. One of things we do for example when we're looking at restaurants, obviously we want low multiples of debt plus fixed lease obligations to the earnings ability of any restaurant company. But also we want quick amortization. A lender's best friend is quick amortization, right? So we do things that have enabled us over the years to make loans in industries that maybe other people would consider tricky and that's one reason why we're in many cases able to get interest rates that are unavailable to other lenders who maybe don't bring the same expertise that we do to those industries. Is that helpful?

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Leslie Shea Vandegrift, Raymond James & Associates, Inc., Research Division - Senior Research Associate [10]

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That's very helpful.

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Operator [11]

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And our next questioner will be Chris Testa with National Securities Corporation.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [12]

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Just wanted to just touch a little bit on what Leslie was asking about the dividend income. So NPRC, you guys sold 3 properties, I'm just curious how much was the dividend of $11 million relative to the gain on the 3 of those properties combined?

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [13]

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I'll give that to Grier.

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [14]

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The 3 properties had total proceeds of $45 million or cost basis was $17 million, so you're talking about a $28 million gain. But we've actually been building up off of our prior gains undistributed even before that, Chris. And then we have as well as I mentioned 3 other deals that are in the process of closing and then further ones behind that. So since we have about 60 properties, I don't want to say these are on a perfect conveyor belt because it is M&A-related and end markets can of course change for exits. But we've got a pretty good backlog here, well, booked deals as well as a backlog here on a going-forward basis and so if with nothing incremental to what's already occurred or is already under contract, we feel pretty good about sustaining through the entirety of calendar year 2019 as I mentioned. And then beyond that, it is going to likely depend the magnitude on future exits beyond what's under contract and we're going through an optimization process right now and we'll be taking up some additional properties for exit. Generally after a whole period of say 3 to 5 years after which time we've -- you're running out a lot of the optimization benefits that we underwrote by substantially completing upgrades of the common areas and the individual units, it's time to exit and sell to a buyer that will pay a premium for those improved properties.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [15]

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Got it. And just to be clear, were these properties -- are they going to be replenished in the current quarter? Are you under contract basically to buy another 3 properties with the gain minus the dividend paid out?

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [16]

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We're selling -- we're in a contract with another 3 parties on top of the ones that just articulated, but what we already have booked gains, we've been banking gains for quite a while. We've exited I think it's close to 10 properties at this point and so then add another 3 to that and further beyond it. Some properties are of course larger than others. We just sold Amberley for example which was one of our larger properties. Yes, actually that's -- I should amend it, we have one that already sold since 9:30 to today and then we have 3 under contract. So that's actually 4 properties since quarter end that's not reflected in the historical exit results.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [17]

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Got it. So when you're talking about potentially more dividends continue in the current quarter and maybe through at least the beginning of '19 for NPRC up to the PSEC level, most of those are coming from kind of gains on sale, is that a good way to look at that?

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [18]

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End of 2019 is what guided towards, not beginning, end, throughout the entirety of 2019.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [19]

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So through all of '19, got it. And are you guys -- are you looking at this as just being sort of a net seller? Are you seeing a lot of the markets where you're getting these gains as kind of [frothy] and maybe you're not going to replenish the outsets as quickly as you're selling them? Or are there less opportunities in your opinion as to putting the money to work for this?

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [20]

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It's hard to tell, Chris. We don't have a predetermined -- we don't think it's healthy to have budgets on how much to purchase. If the deal makes sense economically, we'll do it and if we don't see deals, we'll do no new deals. It just kind of happened to be that our exits were about equal to our new originations when we added it up after the fact, so probably more coincidental than anything else. The business of buying garden-style, class B, multifamily in various markets across the U.S. is a highly -- highly fragmented market. Probably akin to on the corporate side lower middle-market corporate lending and you don't have the same secular shift boom of wall of money you have on a corporate credit side. You still have the normal cyclical money flows, they go in almost every asset class this part, but not the secular shift, the double whammy that we see hitting a lot of the corporate credit space that's been concerning to us and many others for a few years. So only thing, there's a lot of off-market deals; there's a lot of non-auction deals; there's lot of deals where someone -- it's a partnership that's ending, it's fixed life that needs to exit, it's a REIT that needs to meet certain strategic goals. There's all sorts of reasons why folks will need to monetize. There's also a wide range of operational capabilities out there. We feel very good about our roster of operating management teams and we built up a nice history of property after property in going the distance on a full-cycle basis with many of them. We continue to add horizontally with new management teams and then let's say vertically on a repeat basis by doing business with repeat management teams. We like the recession resilience of multifamily class B. These aren't big ticket numbers in terms of what's paid on multi-basis for rent. We like the interest rate resilience because when rates go up, yes, financing costs can also go up, but that also makes it more expensive for people to purchase homes and they stay in apartments and this was probably the most resilient asset class within real estate during the last cycle. So there's just lots and lots of pluses that makes this a great fit for us, a great fit on a yield and a total return basis. So we're going to right for the foreseeable future continue to deploy capital to this asset class.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [21]

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Got it. And just -- sure.

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [22]

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Chris, just a couple of things because these are great questions. We really -- I really appreciate your honing in on this. Much of our competition from what we can see in the real estate arena buys lower cap rate properties with the intention of doing some fixing up, some refurbishment, but holding the property and working around the edges, if you will, and benefiting from hopefully declining interest rates, of course I wouldn't be counting on that going forward in the near term, and counting on enhanced demand in trophy markets. So we see quite a bit of that. As I know you've discerned, we don't invest in those markets. We try to get to the undiscovered market before other people and then when -- and buy B or C, usually C to B properties and do a significant value ad upgrade, I believe you've noticed that in I believe every single -- maybe not every single, but almost every single property when we've made our purchase, we have done so with a capital expenditure plan that has been well-managed by Ted Fowler and Scott Ramsey and Peter Hopkins and Dan Ackerman, we're adding to that group as well. We believe we have a niche and because of the fragmented nature of this market we don't see our niche as one that will be readily competed away. Not everybody has what would I call it, the proclivity or willingness to roll up his or her sleeves and get in there and start changing refrigerators and stoves and upgrading plumbing and changing signs and landscaping and so on. So I see our strategy as one that takes what one might expect one could get in the real estate market and adds to it a premium return based on value-add operations. And I hope you won't hold it against me that there's 2 people at our company, they will go unnamed for now, who have been doing real estate investing since the 1970s when maybe half the people on this call were in bassinets or even younger. Real estate is one of those industries where experience pays significant dividends. I'm very proud of our real estate group in that from what I can see when I benchmarked their numbers and their performance, they have outperformed the competition using this value-add strategy.

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [23]

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Two quick things to add to that; Amberley that we sold since quarter end, Chris, generated proceeds of just over $50 million. Our cost basis was about half that. So that one asset alone is another -- I think it's $24 million or so of additional gains and that is before you get to the next 3 pending deals. The other piece I talked about deploying capital one of the things get frothy, in general I think we might have talked to you about this a little bit on our last call as well, we did a substantial amount of buying in the southeast going back 2 to 5 years ago. There's a lot more competition in Florida; in Texas; in the Carolinas; the general Sun Belt than there was a few years ago. We've moved a lot of our new originations to the Midwest and Mid-Atlantic. We're happy actually we just bought quite recently a property that is only about a 20-minute drive from Crystal City which I guess is the worst kept secret that Amazon is likely to put substantial operations there and we've actually purchased multiple properties in Prince George's County in Maryland, not too far from there. So we've been -- had good success in those areas and will continue to exploit it, it's a low hit rate business just like corporate credit of a single digit [book-to-look] ratio, Chris.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [24]

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Got it. And just want to touch on InterDent as well, so I know you guys had assumed control of this position for the 06/30/18 quarter. Prior to that, the maturity was pushed out from August to December of 2017. Then it was defined as past-due. I know you are currently accruing interest, so were you guys accruing interest when this was defined as past-due? And since you guys have taken control, just what if any changes have you made now that you control the company?

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [25]

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Sure. Well, we're now the controlling shareholder as you mentioned and what we see there is some very high-returning pent-up projects, investments that needed to be made for example a modernization and digitization on the X-ray side of things. Very high-returning investment, so we decided redeploying that capital into the business we'd generate higher medium to longer-term returns for us and decided to pick certain tranches as a result, Chris, so probably that is a rational decision-making process and rational outcome there. We've had multiple members of the team that live and breathe that company in credit and the dental services space is obviously a highly recurring one by its very nature and we think with some optimization we're cautiously optimistic about where we're headed, but these are not investments that should take a giant leap of faith to pay off on an individual location-by-location basis when we look at where we're deploying capital for digitization and modernization of X-ray equipment and the like.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [26]

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Understood. This was -- when this was defined as past-due prior to you taking control, was this accruing interest during that time period as well?

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [27]

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It was.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [28]

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And when -- I'm just thinking...

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [29]

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Chris, to be helpful on that, the rule that we understand is the rule that applies -- the first rule is when you get paid cash interest, we record that as income. We don't put things on non-accrual when we get cash interest. So we have recorded as interest income all of the cash interest that we receive. When we're looking at pick or any type of deferred interest stream at that point we look at collectibility, but once we get the cash in our bank account collectibility is no longer the issue. So I believe I'm not speaking out of turn with respect to InterDent that we've recognized 100% of the cash interest.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [30]

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Got it, so the cash coming in was 100% of what was contractually owed to you given the interest rates on the loans?

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [31]

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Well, what we recognized. We did not...

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [32]

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What you recognized, okay.

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [33]

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When we -- so we recognized all of the cash payments made as interest income.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [34]

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No, I understand that. I'm just inquiring whether -- so it was defined as past-due because of the cash payments coming in though were less than what they were contractually obligated to pay you in full, is that a correct way to look at InterDent?

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [35]

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Well, there's more than one tranche there and...

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [36]

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Hey John, let me...

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [37]

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Yes, go ahead, sir.

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [38]

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It's just simply we went past maturity, Chris, and owners don't always hand you the keys immediately, you've got to work at it a little bit.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [39]

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I understand.

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [40]

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And it's again control of [some funds].

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [41]

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So what happened was it went -- Chris, I believe I'm correct saying the loan, what happened was the maturity of the loan came and the sponsor was hoping for X, Y and Z to happen, allow the maturity to occur without paying the loan in full, but I believe all cash interest payments -- well, excuse me, I believe interest payments were made in cash and those were recognized, Chris, even though the loan was past maturity.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [42]

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That makes sense.

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [43]

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Okay.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [44]

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I just wanted to get a handle on that. It's just a lot of moving parts, so I appreciate your detail on that. And...

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [45]

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And we were -- how would I put this, appreciative that the sponsor acted in what we felt was a proper and constructive way when the company was unable to refinance, repay the debt, sell the company and we appreciated that.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [46]

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Got it. And...

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [47]

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So now it's our job to make it a great company again.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [48]

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Just looking at the COO, the equity cash yields were down pretty significantly on the quarter. Was a lot of that due to the refinances and reset activity during the quarter? And just wondering if you could provide some color on the par value of what was reset or refi-ed during the quarter?

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [49]

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Yes, let me help out with that, Chris, because there were a lot of moving parts and when you have significant -- it really actually comparing the June quarter to September because we reset I think it was 9 deals that was a record quarter for us for resets in June; September is much more muted with only 2 deals. So we had a somewhat elevated -- that's why we really encourage folks to look more at GAAP yield and cash yield because cash moves around not only because there is a return of capital on top of return on capital from the nature of the asset class, but also you get some volatility short term that occurs from reset, so especially people do it in different ways; for example, we like when we do resets if there's -- if sometimes there's resets where you have a so-called excess collateral par value flush and basically we get paid a big cash distribution at time 0 for certain deals that are performed extremely well and that's what happened in the June quarter to cause a spike in cash yield, but also if a deal requires more capital to pay the bankers and lawyers and to restore some OC tests potentially, but if there's any capital required rather than investing it, we rather use cheap financing for that and have a so-called X note tranche that typically amortizes over 2 years. So great [IRR] enhancer, but because you've got to amortize that X note, it temporary depresses the cash yield. So moving parts in both directions and across the 2 quarters. You asked about the last quarter, we only reset 2 deals, so I don't think it was a very high par value probably no more than $40 million or so give or take $40 million-$50 million there. From a GAAP yield perspective which really corrects for a lot of this stuff, we were recently flat down about 10 bps from quarter-to-quarter which is basically a function of asset spread compression continuing its march and only having 2 resets to offset it. Comparing it to the current quarter in December, we have already reset 3 deals, so we're already ahead of our September pace and we have in the queue, let's see if we get all these done, another 6 which will take us to 9 total equally in the pace of June. I don't know if we'll hit 9 or not, Chris, we'll see that, that's our objective. It's always it's going to be dependent on a lot of factors in our complex analyses on what's going on with our cost of liabilities and the transaction modeling and we're not going to print a deal for the sake of printing a deal, we're only going to do so if it's NPV-positive event, we generally look for accretive resets at least a 13% discount rate. So in many cases these deals have an imputed IRR that's triple digits for these resets as they're kind of the ultimate no-brainers if you will. But hopefully that helps a little bit. I know it's a little bit confusing on the cash side. We encourage folks to look at a bit more at the GAAP side for that reason.

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Operator [50]

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And this will conclude our question-and-answer session. I would now like to turn the conference back over to John Barry for any closing remarks.

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John Francis Barry, Prospect Capital Corporation - Chairman & CEO [51]

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Okay. Well, I have a couple of hours of closing remarks, but I don't think anyone is going to be that interested. So I'd like to thank everybody for joining our call and look forward to reconnecting 90 days from now. Thank you all. Bye now.

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Michael Grier Eliasek, Prospect Capital Corporation - President & COO [52]

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Thanks all. Bye.

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Operator [53]

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