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Real Estate and Wage Growth: Impact on Prospect’s Originations

Robert Karr

Can Prospect Capital Build on Its Strong Platform in Fiscal 3Q16?

(Continued from Prior Part)

Consumer credit, real estate

Prospect Capital (PSEC) has a positive outlook for consumer credit in 2016 on the back of falling unemployment rates and commodity prices. Wage rates have either declined or remained steady in 2016. But any decline in wage rates or a slowing job market will likely impact originations in the consumer segment.

Notably, the company deployed $93.2 million in the December quarter into NPRC (National Property REIT Corp.) in support of the online consumer lending initiative. Its financial services holdings are returning an annualized yield of 18%–30%, reflecting strong demand for consumer credit.

Prospect has also made multiple investments in the real estate arena with its private REITs. These investments are focused on multifamily stabilized yield acquisitions with attractive tenure financing. The company’s portfolio has been benefiting from an improved housing market, increased rents, and higher occupancies as well.

Its earnings per share growth in the investment management space compares with the following:

  • CIT Group (CIT): 78%
  • American Capital (ACAS): 157%
  • United Rentals (URI): 33.8%

Together, these companies form 14.8% of the ProShares Global Listed Private Equity (PEX).

Controlled investments

Prospect Capital’s controlled investments in fiscal 2Q16, which ended December 31, 2015, was 32.5% of its total portfolio. That compares to 31.1% in fiscal 1Q16. The company has selectively monetized its controlled positions where it finds attractive pricing. Subsequently, it has deployed the proceeds into new, attractive opportunities yielding higher returns at lower risks. Prospect Capital is deploying investments for the online lending industry, with a focus on near-prime, prime, and subprime consumers as well as small business borrowers.

Prospect Capital generated 40% of its origination in fiscal 2Q16 through online lending. It currently delivers an expected leveraged yield of ~17%. In 2015, the company closed four bank credit facilities and one securitization in order to enhance its returns. Now it’s focusing on diversifying origination sources for its online business as well in order to generate more leads.

In the next part of the series, we’ll look at Prospect Capital’s higher leverage and its advantages.

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