Hello, and welcome to the Prospect Capital First Quarter Fiscal Year 2024 Earnings Release and Conference Call. 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, MJ. Joining me on the call today are Grier Eliasek, our President and COO; and Kristin Van Dask, our Chief Financial Officer. Kristin?

Thanks, John. This call contains forward-looking statements that are not 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.

Thank you, Kristin. In the September quarter, our net investment income, or NII, was $125.6 million, or basic NII of $0.25 per common share, exceeding our distribution rate per common share by $0.07. Our basic NII coverage of our common distribution is now 139%. Our annualized basic NII yield is 10.8% on a book basis and 18.7% based on our November 7 stock price close. Our NAV stood at $9.25 per common share in September, up $0.01 or 0.1% from the prior quarter. Since inception in 2004, Prospect has invested $20.4 billion across 419 investments, exiting 283 of these investments. We have outperformed our peers during past periods of macro volatility as a direct result of our previous derisking, not chasing leverage, as well as other risk management controls, including the avoidance of cyclical industries and the utilization of longer-dated and unsecured flexible financing. We are staying true to the strategy that has served us well since 1988: controlling and reducing portfolio and balance sheet risk both to protect the capital entrusted to us and to protect the ability of such capital to generate earnings for our shareholders. In the September quarter, our net debt-to-equity ratio was 46.5%, down 27.6 percentage points from March 2020 and down 2.3 percentage points from the June 2023 quarter, as we continue to run an underleveraged balance sheet, which has been the case for us over multiple quarters and years. On the cash shareholder distribution front, we are pleased to report the Board's declaration of continued steady monthly distributions. We are announcing monthly cash common shareholder distributions of $0.06 per share for each of November, December, and January. These 3 months represent the 75th, 76th, and 77th consecutive $0.06 per share cash distributions. Consistent with past practice, we plan on announcing our next set of shareholder distributions in February. Since our IPO nearly 20 years ago to January 2024 distribution at the current share count, we will have distributed $20.58 per common share to original shareholders, representing 2.2x September common NAV per share, and aggregating over $4.10 billion in cumulative distributions to all common shareholders. Since October 2017, our NII per common share, less preferred dividends, has aggregated $4.89, while our common shareholder distributions per common share have aggregated $4.32, with our NII exceeding distributions during this period by $0.57 per share and representing 113% coverage. I will now turn the call over to Grier.

Thank you, John. Our scale platform with nearly $9 billion of assets and undrawn credit at Prospect Capital Corporation continues to deliver solid performance in the current dynamic environment. Our experienced team consists of over 120 professionals, representing 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 highly leveraged ones. Unlike many other groups, we have maintained and continue to maintain significant dry powder and balance sheet flexibility that we expect will enable us to capitalize on such attractive opportunities as they arise. This diversity of origination approaches allows us to source a broad range and high volume of opportunities, then select in a disciplined bottom-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. Consistent with our investment strategy, our secured lending and first-lien mix has continued to increase. As of September 2023, our portfolio at fair value comprised 57.3% first-lien debt, that's up 0.8% from the prior quarter; 15.9% second-lien debt, that's down 0.5% from the prior quarter; 8.1% subordinated structured notes with underlying secured first-lien collateral, that's down 0.5% from the prior quarter; and 18.7% unsecured debt and equity investments, up 0.2% from the prior quarter. Resulting in 81.3% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral, down 0.2% from the prior quarter. Prospect's approach is one that generates attractive risk-adjusted yields. And our performing interest-bearing investments were generating an annualized yield of 12.7% as of September 2023. We also hold equity positions in 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 our originations to protect against downside risk, while still achieving above-market yields through credit selection discipline and a differentiated origination approach. As of September 2023, we held 128 portfolio companies, a decrease of 2 from the prior quarter, with a fair value of $7.7 billion, an increase of approximately $12 million. We also continue to invest in a diversified fashion across many different portfolio company industries with a preference for avoiding cyclicality and with no significant industry concentration. The largest is 18.2%. As of September, our asset concentration in the energy industry stood at 1.6%; for hotels, restaurant, and leisure sector 0.3%; and retail industry 0.3%. Nonaccruals as a percentage of total assets stood at approximately 0.2% in September of 2023, that's down 0.9% from the prior quarter. Our weighted average middle market portfolio net leverage stood at 5.3x EBITDA, substantially below reporting peers. Our weighted average EBITDA per portfolio company stood at $111 million. Originations in the September quarter aggregated $131 million. We also experienced $301 million of repayments, sales, and exits, as a validation of our capital preservation objective, resulting in net repayments of $170 million, as we continue to take a cautious approach toward new credit underwriting given macroeconomic conditions. During the September quarter, our originations comprised 48.5% real estate, 40.6% middle market lending, and 10.9% middle market lending and 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 acquisitions, and in the past year, expansion into senior living, with attractive in-place 5- to 12-year financing. To date, on a cumulative basis, we've acquired $3.8 billion in 105 properties across multifamily 81 properties, student housing 8 properties, self-storage 12 properties, and senior living 4 properties. In the current higher financing cost environment, we're focusing on preferred equity structures with significant third-party capital support underneath our investment attachment points. NPRC, our private REIT, has real estate properties that have benefited over the last several years and, more recently, from rising rents, showing the inflation hedge nature of this business segment, strong occupancies, high collections, suburban work-from-home dynamics, 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 as of September, and not including partially exited deals where we have received back more than our capital invested from distributions and recapitalizations, has exited completely 45 properties, at an average net realized IRR to NPRC of 25.2% and average realized cash multiple of invested capital of 2.5x, with an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships. Our structured credit business has delivered attractive cash yields, demonstrating the benefits of pursuing majority stakes, working with world-class management teams, and providing strong collateral underwriting through primary issuance, as well as focusing on favorable risk-adjusted opportunities. As of September, we held $627 million across 33 nonrecourse subordinated structured notes investments. We maintained a relatively static to slightly declining signs for subordinated structured notes portfolio on a dollar basis, electing to grow our other investment strategies, and resulting in the structured notes portfolio of now comprising 8% of our investment portfolio. These underlying structured credit portfolios comprised nearly 1,600 loans. In the September quarter, this portfolio generated a GAAP yield of 10.7% and a cash yield of 17.5%, with the difference representing an amortization of our cost basis. As of September, our current subordinated structured credit portfolio has generated $1.4 billion in cumulative cash distributions to us, representing over 116% of our original investment. Through September, we've also exited 15 investments with an average realized IRR of 12% and cash-on-cash multiple of 1.3x. Our subordinated structured credit portfolio consists entirely of majority-owned positions. Those 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. 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 a 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 32 refinancings and resets since December of 2017. So far in the current December 2023 quarter, across our overall business, we booked $57 million in originations and experienced $1.7 million of repayments for over $55 million of net originations. Those originations have consisted of 53.5% real estate, 24.5% structured notes, and 22% middle market lending.

Thanks, Grier. We believe our careful use of leverage, diverse access to matched book funding, a significant majority of unencumbered assets, focus on unsecured fixed-rate debt, avoidance of unfunded asset commitments, and absence of near-term maturities illustrate both our balance sheet strength and significant liquidity to take advantage of attractive opportunities. Our company has established a schedule of liabilities that extends 29 years into the future. Our total unfunded commitments to portfolio companies is about $27 million, which represents around 0.3% of our assets. Our combined cash and undrawn revolving credit facility commitments currently amount to about $968 million. We are a leader and innovator in our market. We were the first in our industry to issue a convertible bond, create a notes program, issue under a bond and equity ATM, acquire another BDC, and many other pioneering firsts. In 2020, we also added our programmatic perpetual preferred issuance to this list, followed in 2021 by our listed perpetual preferred as another industry first. Both shareholders and unsecured creditors should recognize the strategic approach we have taken to building the right side of our balance sheet, which is distinct in our industry. As of September 2023, we held over $4.8 billion in unencumbered assets, making up more than 61% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, a nonrecourse special purpose vehicle, where we completed an upsizing and extension of our revolver to a new 5-year maturity in September 2022. We currently have $1.95 billion in commitments from 53 banks, an increase of 11 lenders since August 2022, showing strong support from the lending community, with a diversity unmatched by any other company in the industry. Shortly after the widely reported bank failures in March, we added two new banks and increased our commitment with an existing bank within our credit facility. The facility will revolve until September 2026, followed by a year of amortization, with allowed interest distributions continuing to us. Our drawn pricing is now SOFR plus 2.05%. Beyond our revolver and benefiting from our unencumbered assets, we have issued various forms of investment-grade unsecured debt at Prospect Capital Corporation, including convertible bonds, institutional bonds, baby bonds, and program notes, all of which have no financial covenants, no asset restrictions, and no cross defaults with our revolver. We have an investment-grade BBB- rating from S&P, a Baa3 rating from Moody's, a BBB- rating from Kroll, a BBB rating from Egan-Jones, and a BBB Low rating from DBRS. In 2021, we achieved an investment-grade rating ladder, giving us five investment-grade ratings, more than any other company in our industry. All these ratings have stable outlooks. We have accessed the unsecured term debt market multiple times to stagger our maturities and extend our liability duration to 29 years. Our debt maturities extend through 2052, substantially reducing our counterparty risk with a wide range of banks and debt investors across various unsecured and nonrecourse debt tranches. In the September 2023 quarter, we continued to utilize our revolving credit and maintained our weekly programmatic InterNotes issuance on an efficient funding basis. To date, we have raised nearly $1.7 billion in total issuance of our perpetual preferred stock across our preferred programs and listed preferred, which includes $80 million in the September 2023 quarter and $32 million in the current December 2023 quarter. We have five distinct unsecured debt issuances totaling $1.2 billion, not counting our program notes, with maturities extending through October 2028. As of September 2023, we had $359 million in program notes outstanding, with staggered maturities through March 2052. On September 30, 2023, our weighted average cost of unsecured debt financing was 4.08%, which is an increase of 0.01% from June 30, 2023, and a decrease of 0.25% from September 30, 2022. In 2020, we introduced a shareholder loyalty benefit to our dividend reinvestment plan that allows for a 5% discount to the market price for DRIP participants. Since many brokerage firms do not have automatic DRIPs or offer their own synthetic DRIPs without this 5% discount benefit, we encourage any shareholder interested in participating in DRIP to contact their broker. Be sure to specify that you want to participate in the Prospect Capital Corporation DRIP plan through DTC at a 5% discount and get confirmation from your broker. Our preferred holders can also choose to DRIP at a 5% discount to the stated value per share of $25.

Okay. Thank you, Kristin. Why don't we go ahead and answer questions?

We will now begin the question-and-answer session. Today's first question comes from Finian O'Shea with Wells Fargo.

First question on NP REIT, trying to get a sense of the underlying mortgage liability profile. First, it looks like a lot of the rates have been stable or per your disclosures. But can you give a breakdown of, say, interest rate caps that might roll off soon or resets that are soon approaching that would lead to more pressure there? And second part, given the headwinds on CRE debt that we all read about, seeing if you've needed to put more money in for any of your recent refinancings.

Thank you, Finian. It's Grier, and I’ll respond to that. Our approach to real estate and multifamily, which we've focused on significantly in recent years, emphasizes financing primarily with fixed-rate funding, particularly when interest rates are below historical averages. I estimate that 90% or more of the financing used in our real estate portfolio company, NPRC, involves fixed-rate funding. We've also prioritized long-term funding to mitigate interest rate and maturity risks. Over the past decade, we have typically used 10-year financing, sometimes extending to 12 years, often with interest-only periods lasting at least five years and occasionally up to seven years. These investments involve deploying capital to enhance net operating income through value-add renovations at both the unit level and in common areas, which helps to improve our investments over time through growth in NOI. Additionally, we've seen strong rent growth and occupancy rates driven by inflationary pressures and ongoing shortages in workforce housing, which further enhances NOI beyond what our value-add programs can contribute. This strategy has enabled us to achieve exits with a 25% IRR, as previously mentioned. For our existing investments, we have not encountered situations where refinancing necessitated additional capital. We still have several years remaining on our existing investments. Currently, the landscape for new deals is challenging due to high financing costs, a trend observed across various sectors, not just real estate. If corporations are borrowing at 12.5% for first-lien loans and equity sponsors are paying more than 8x for their companies, they are facing a negative arbitrage in the corporate environment, not solely within real estate, which often garners more attention. Clearly, it’s important to assess the underlying profitability and growth potential of the business in question before making any commitments as a sponsor. In real estate, we believe it’s more advantageous to focus on niche capital solutions, preferred equity options, or scenarios that offer beneficial tax abatements or similar arrangements to achieve a favorable cap rate and enhance our profit margin. We are currently working on such deals. Did I address your questions, Finian?

Yes, sure. That's helpful. Just drilling down a bit on adding new capital. The recent additional investment or loan to NP REIT was explained for CapEx and working capital for existing properties, normally, I think that would be handled at the property level. So is that a function of higher interest rates at the property level, say, for the smaller part of your book that's floating-rate? And should we expect any more of that near term?

There are two main factors at play. First, Prospect Capital Corporation's financing to NPRC, our portfolio company, which was reflected in the last quarter. Second, each quarter, we usually see funding transferred from NPRC to individual properties, which is a normal process as we allocate CapEx for our value-added renovation program and other CapEx needs. Spending CapEx occurs over several years since renovations are typically executed only when apartments become vacant. With the current housing situation and rising financing costs, many residents are staying in their apartments longer, resulting in significantly reduced turnover compared to previous years. This trend is positive for occupancy and rent growth but may slow the pace of renovations within units, as upgrades are made only when tenants move out. Is that clear?

Very much so. If I could do a bonus question. On the preferreds, the new issuances fallen quite a bit in recent quarters. So seeing if that's maybe a function of interest rates, if you might need to start offering higher rates there, or if you're happy with this level. And in that context, can you provide a reminder on the sort of target preferred stock composition and your capital structure?

The year-over-year comparisons are difficult for 2023 compared to 2022. In 2022, there were significant liquidity events in the nontraded channel for other issuers, leading many holders to invest in Prospect's program, since we hold more than 50% market share. In contrast, there haven't been similar liquidity events in the REIT space in 2023, and I don't anticipate any significant ones in the near future. This naturally results in a decline in volumes when comparing the two years. Additionally, the continuous rise in prevailing rates has also negatively impacted volumes. We currently don't foresee any changes to our rates and manage our cost of capital with care, which we are satisfied with. Our unsecured debt cost of capital is around 4%, and even including preferreds, we're at just over 5%. Others are issuing debt at much higher costs, but we are in a strong position with minimal maturities in the coming years. We will always evaluate the financing options available in capital markets. Prospect has a history of leading in liability structures within the BDC industry, including being the first issuer of convertible bonds and institutional bonds around ten years ago, as well as introducing medium-term notes and various types of preferreds. We don't set specific composition targets but focus on what is most appealing in the market. When we choose to issue, we do so strategically and from a strong position, being opportunistic based on market conditions. A couple of years ago, when rates were low, we actively completed three bond deals, while some peers might have felt compelled to chase that market due to necessity rather than from a place of strength. I hope that addresses your bonus question, Finian. Thank you.

The next question is from Sean-Paul Adams with Raymond James.

Touching back on the Series A fixed-rate preferred stock. How did you guys quite arrive to the valuation of a 36% discount to par? I know you guys talked about anticipating the future perpetual stock offers to pay a higher dividend, but I mean, it implies like evaluate a dividend pay rate of closer to 8%.

You're referring to our existing tender offer or what we just announced for our traded perpetual preferred? Well, it's a balancing act. And it's an option, of course, not an obligation for any holder should they choose to utilize this option, as opposed to obtaining liquidity in a fairly limited volume issue. And it's a balancing act. We think the premium offer to what was launched is just attractive. But balancing that as an issuer, and it's a perpetual instrument, we want to make sure it's net investment income and net asset value accretive as well. So we struck what we thought was the right balance between the two. And we'll see what folks think later this month.

Okay. And turning to the NPRC portfolio. Are you anticipating the terminal cap rate, one used to value the common equity, to change materially? Relatively given that the public multifamily REITs are now trading in the 6.5% to 7% cap rate range and you're currently sitting at like a 5.8% terminal cap rate.

Right. We're participants in the private markets, not the public markets. We don't purchase public REIT equity. We don't purchase public REIT securities really of any kind. It's a private equity, private capital investment strategy at NPRC, just like the rest of our business. We invest in private companies almost exclusively. Sometimes we'll make a loan to a microcap public company, but that's usually the exception, not the rule. There's been a delta between private real estate properties and where they trade and the public REITs for as long as I can remember. But those aren't the markets in which we participate. And of course, there are other G&A and trading and other costs pertaining to public REITs. And lack of control as well, there's a control premium aspect that's advantageous, of course, when you buy one of these properties and you have the ability to effectuate change through a value-add renovation program like what I described to the last questioner. We're also not in the prediction business for cap rates, for interest rates, or any of those types of markets. And what is arrived at there is all done on a third-party independent valuation basis approved by independent directors and independent auditors. We think we have best practice governance. And this is what we brought to the industry as the first company in our industry to use 100% of every quarter since inception fair valuations in 2004 when we IPO-ed. That did not exist before Prospect Capital brought it to there, and we'll continue to utilize that best practice approach.

Thank you. This concludes our question-and-answer session. I would now like to hand the call back to John Barry for closing remarks.

Okay. Well, thank you, and have a wonderful afternoon, everyone. Bye now.

Thank you all.

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