Earnings Call Transcript - PSEC Q4 2020

Operator, Operator

Good day and welcome to the Prospect Capital Corporation Fiscal Year Earnings Release and Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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.

John Barry, Chairman and CEO

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

Kristin Van Dask, Chief Financial Officer

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

John Barry, Chairman and CEO

Thanks, Kristin, and thank you again to you and your team for all the work that goes into filing our 10-K, which is a massive document indeed, everything you ever wanted to know about Prospect is right in there. For the June 2020 fiscal year, our net investment income, or NII, was $265.7 million, or $0.72 per share, matching our cash dividends in an uneventful and underleveraged quarter for originations due to the virus. In the June quarter, our NII was $58.3 million, or $0.16 per share. Our net income was $162.6 million, or $0.44 per share, as the value of many of our investments rebounded due to a combination of positive company-specific and macro factors. In the June quarter, our net debt-to-equity ratio was 69.6%, down 4.5% from March, as we continue to run an underleveraged balance sheet, following the risk-off policy we put in place eight quarters ago. Over the past two years, other listed BDCs have increased leverage, with a typical listed BDC in June 2020 at 110% debt to equity, or 40 percentage points higher than for us. We have not increased our leverage, instead electing lower risk. In May, we moved our minimum 1940 Act regulatory asset coverage to 150%, which increased our cushion and gave us flexibility to execute our recently announced perpetual preferred equity issuance. While preferred stock provides us more equity, we do not intend to increase leverage beyond our historical target of 0.7 to 0.85 debt to equity. Prospect's balance sheet is highly differentiated from peers, with 100% of Prospect's funding coming from unsecured and non-recourse debt, which has been the case here for the last 13 years. Unsecured debt was 89.1% of Prospect's total debt in June 2020, compared to half that for the typical listed BDC. Our unsecured and diversified funding profile provides us with significantly lower risk and significantly more investment strategy and balance sheet flexibility. Our NAV rebounded to $8.18 per share in June, up $0.20 and 2.5% from the prior quarter. We've outperformed our peers during the past two quarters because we moved to risk off eight quarters ago. We are now cautiously optimistic and going on offense. We have announced cash dividends of $0.06 per share for each of September and October, the 37th and 38th consecutive $0.06 cash distributions. I will now turn the call over to Grier.

Grier Eliasek, President and Chief Operating Officer

Thank you, John. Our scale platform with over $6 billion of assets and undrawn credit continues to deliver solid performance in the current challenging environment. Our experienced team consists of approximately 100 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's 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. As of June, our controlled investments at fair value stood at 43.2% of our portfolio, up 0.2% 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 June, our portfolio at fair value comprised 46.9% secured first lien, an increase of 2.1% from March, 24.4% other senior secured debt, up 0.8%, 13.5% subordinated structured notes with underlying secured first lien collateral and down 0.2%, 1% unsecured debt, which is up 0.1% and 14.2% equity investments down 2.8%, resulting in 84.8% of our investments being assets with underlying secured debt benefiting from borrower-pledged collateral. Prospect's approach is one that generates attractive risk-adjusted yields and our performing interest-bearing investments were generating an annualized yield of 11.4% as of June 2020, down 1% from the prior quarter. This decrease is largely due to the decline in LIBOR, though we expect stability now due to our LIBOR floors. 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 June, we held 121 portfolio companies flat with the prior quarter and with a fair value of $5.2 billion. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration. The largest is about 15%. As of June, our asset concentration in the energy industry stood at 1.6%, down 0.1% from the prior quarter, our concentration in the hotel restaurant and leisure sector stood unchanged at 0.4% and our concentration in the retail industry stood unchanged at 0%. Non-accruals as a percentage of total assets stood at approximately 0.9% in June, down 0.7% from the prior quarter. Our weighted average portfolio net leverage stood at 4.5 times EBITDA, down 0.12 from the prior quarter. Our weighted average EBITDA per portfolio company stood at $72 million in June, similar to the prior quarter. Originations in the virus-muted June quarter aggregated $37 million. We also experienced $64 million of repayments and exits as a validation of our capital preservation objective and the sell-down of larger credit exposures resulting in net repayments of $28 million. During the June quarter, our originations comprised 53% real estate, 36% agented sponsor debt, 2.9% rated-secured structured notes, and 8.5% corporate yield 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 with attractive 10-year-plus financing. NPRC, our private REIT, has real estate properties that have benefited over the last several years 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 over 30 properties at a more than 20% IRR with an objective to redeploy capital into new property acquisitions including with repeat property manager relationships. We continue to monitor our rent collections that are holding up well in the current environment. 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 June, we held $709 million across 39 non-recourse subordinated structured notes investments. These underlying structured credit portfolios comprised around 1,700 loans and a total asset base of around $18 billion. As of June, the structured credit portfolio experienced a trailing 12-month default rate of 146 basis points, representing 177 basis points less than the broadly syndicated market default rate of 323 basis points. In June, this portfolio generated an annualized GAAP yield of 12.5%. As of June, our subordinated structured credit portfolio has generated $1.21 billion in cumulative cash distributions to us, representing around 87% of our original investment. Through June, we've also exited nine investments totaling $263 million with an average realized IRR of 16.7% and a cash-on-cash multiple of 1.5 times. Our subordinated structured credit portfolio consists entirely of majority-owned positions. 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 majority holder, we control the ability to call a transaction at 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. As majority investors, we 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 have completed 27 refis and resets since December 2017. So far in the current September quarter, we've booked $110 million in originations and experienced $64 million of repayments for $46 million of net originations. The originations have comprised 43.9% agented-sponsored debt, 22.7% non-agented debt, 20% rated-secured structured notes, and 13.4% real estate. Thank you. I'll now turn the call over to Kristin.

Kristin Van Dask, Chief Financial Officer

Thank you, Grier. We are confident that our careful approach to leveraging, diverse funding sources, a significant portion of unencumbered assets oriented toward unsecured fixed rate debt, avoiding unfunded asset commitments, and having no imminent maturities illustrate the strength of our balance sheet and our liquidity to pursue appealing opportunities. Our company has structured a series of liabilities that extends over the next 23 years. Currently, we have no debt maturing until July 2022, which is about two years away. Our total unfunded eligible commitments to portfolio companies that we do not control is around $24 million, representing less than 0.5% of our assets. The cash on our balance sheet, along with undrawn revolving credit commitments, totals approximately $498 million. We are an industry leader and innovator, having been the first in our sector to issue convertible bonds, develop a notes program, utilize a bond ATM, and acquire another BDC, among other milestones. We are now adding our programmatic perpetual preferred issuance as another first. Shareholders and unsecured creditors should recognize our distinctive approach to building the right side of our balance sheet. As of June 2020, we possessed roughly $3.77 billion in unencumbered assets, which constitutes about 71% of our portfolio. The rest of our assets are pledged to Prospect Capital funding, with a five-year maturity extension completed in September 2019. We currently have commitments of $1.0775 billion from 30 banks with a total facility size of $1.5 billion, which includes an accordion feature available at our discretion. This revolving facility is valid until September 2023 and includes a year of amortization while still permitting interest distributions to us. Among our floating rate assets, 85.2% have LIBOR floors with a weighted average at 1.67%. Beyond our revolver and leveraging our unencumbered assets, we have issued various types of investment-grade unsecured debt, like convertible bonds, institutional bonds, baby bonds, and program notes. None of these unsecured debts impose financial covenants, asset restrictions, or cross-defaults related to our revolver. Our ratings include investment-grade BBB negative from S&P, Baa3 from Moody's, BBB negative from Kroll, and BBB from Egan-Jones. We have repeatedly accessed the unsecured term debt market to stagger our maturities and prolong our liabilities through 2043. With numerous banks and debt investors across various tranches, we have effectively diminished our counterparty risk over time. In the June 2020 quarter, we fully repaid $128 million of our April 2020 notes at maturity, demonstrating our successful term issuance. We also bought back $1.4 million of our program notes and continued our weekly programmatic InterNotes issuance. Recently in the September 2020 quarter, we executed a successful tender offer for our July 2022 notes, retiring about $30 million, which reduced that tranche to $229 million and replaced higher-cost 5% term debt with lower-cost revolving credit at an additional 1.3% cost. In the first half of 2016 during market instability, we lowered our leverage ratio by limiting new originations and letting repayments and exits happen naturally, and we anticipate similar advantages in the current climate. We now have eight different unsecured debt issuances totaling $1.9 billion, excluding our program notes, with maturities extending to June 2029. As of June 2020, we had $680 million in program notes outstanding with staggered maturities through October 2043. We have also recently introduced a shareholder loyalty benefit as part of our dividend reinvestment plan (DRIP), offering a 5% discount on market prices for DRIP participants. Since many brokerage firms either do not automatically enroll in DRIPs or operate their own synthetic DRIPs that lack the 5% discount, we urge shareholders interested in DRIP participation to contact their brokers, specify their desire to join the Prospect Capital Corporation DRIP through DTC at a 5% discount, and secure confirmation from their brokers. Now, I will hand the call back to John.

John Barry, Chairman and CEO

Thank you, Kristin. Now it's time for the Q&A.

Operator, Operator

We will now begin the question-and-answer session. Our first question will come from Robert Dodd with Raymond James. Please go ahead.

Robert Dodd, Analyst

I have a couple of questions. First, John, based on your remarks earlier, your leverage target is between 0.7 and 0.85. It sounds like for that calculation you will treat the preferred as equity. However, from the perspective of an asset coverage ratio, preferreds are counted as debt. Can you provide any insight on what the target leverage would look like on a regulatory basis if the preferreds were treated as debt instead of equity?

John Barry, Chairman and CEO

Yes, I'm happy to clarify that. Thank you, Robert. I want to point out that under the 1940 Act, preferred stock, including this particular preferred, can be seen as leverage for regulatory purposes. However, I consider perpetual preferred stock to be an equity cushion for any debt that exceeds it. Therefore, I view our leverage ratio as the percentage of debt relative to our assets while excluding the preferred stock. I do not classify the preferred as debt, so I haven't made the calculation you requested, but perhaps Grier or Kris can provide additional insights. Yes, please go ahead, Grier.

Grier Eliasek, President and Chief Operating Officer

Our target for the preferred is $1 billion, which represents about 0.3 of our common equity base. This means that a debt to common equity ratio of 0.7 to 0.85 would result in a total debt plus preferred to common equity ratio of roughly 1.0 to 1.15. You can then interpret the asset coverage accordingly.

Robert Dodd, Analyst

Yeah, I can. I appreciate that. Thank you for that. On the common equity side, obviously, you utilized the ATM a little in the quarter. I mean, can you give us any thought process on to why? I mean your underlevered trading below book, why was the ATM usage appropriate in the view of the management or the Board? And John you might be to give us some thoughts on why the Board thought it was appropriate in this circumstance given it did cost you a little bit of NAV this quarter?

John Barry, Chairman and CEO

Yes. While the stock market is performing well, companies outside of the FAANG group aren't faring as well as the top five on the NASDAQ during this crisis, and we need to be mindful of that. Some of the companies in our portfolio raised concerns for us at times. Out of caution, we determined it was necessary to take every reasonable measure to minimize and manage the risks posed by the economy on our portfolio. In March, April, and early May, as we were assessing the impact of the lockdown on our holdings, we found ourselves coming out of the challenges of March and April in better condition than we had anticipated. One reason for this improvement was our risk-off strategy that we had implemented for the past eight quarters. We reduced leverage, refrained from taking on more, enhanced our regulatory flexibility, and obtained approval from our shareholders, subject to Board endorsement, to sell stock under the ATM when deemed prudent. We considered it wise to sell a small quantity of stock worth $5 million under the ATM around May or June to demonstrate our substantial equity reserves to any observers. After making this demonstration, we felt it was appropriate to put that additional defensive strategy aside. Our portfolio has performed better than we expected, which may lead some to conclude that our risk management measures were unnecessary. However, just as I maintain fire insurance on my home and am glad to pay that premium despite never having experienced a fire, we believe that our primary responsibility is to safeguard the capital our investors have entrusted to us. We are committed to implementing steps that control and reduce risk, which is what our shareholders expect from us, and that is the rationale behind the $5 million stock sale under the ATM.

Robert Dodd, Analyst

I appreciate that color…

Grier Eliasek, President and Chief Operating Officer

Maybe I can answer that.

John Barry, Chairman and CEO

Hold on, Robert. Just one second. I think Grier has something to add please.

Grier Eliasek, President and Chief Operating Officer

Yeah. Just to add to that, I think the word insurance is an excellent one. And also I'd add in hindsight the phrase is 2020 perfect hindsight. No one really knows where level three valuations will sell out ahead of time. You close the quarter and then you get to find out where they were. So a good prudent risk manager takes steps to protect on both sides of the balance sheet in this case on the right-hand side, ahead of time. So, we did do a very small, very small amount of insurance. We ceased immediately upon quarter end. We are under-levered now. I think you'll see us as highly unlikely users in the near future of the ATM for that reason. But we have – we have optionality and demonstrate that's a path, which is very, very good to have. And we never take for granted, Robert, financing, we never take for granted the bond market, we never take for granted the bank market. We lived and breathed through the dislocation of 2007 to 2009. Many of our peers have never gone through that before, and know what it's like, when you have a strike of financing. So we're determined to always have optionality, multiple markets to access. The preferred market is a good example of de-risking. You talked about where you are on risk versus a common, I argue substantial de-risking. Not only is there no maturity ever due on that paper, it's truly perpetual, it also gives additional access to another market on top of the convertible bond market, the institutional market, our retail program notes, which are highly differentiated, and the baby bond market, our bank financing, and other financing. So we have many, many different markets to play in that de-risk our business. And then finally, on below NAV since that was touched on. We are examining in real-time various multiple accretive potential acquisitions that are not identical to, but similar in nature to ones we've done in the past of purchases of businesses and portfolios at low multiples of cash flow on an accretive basis. We don't close very many of those. We're highly selective, but getting that authorization that we did in the spring gives us that optionality, as John said to go on offense. Back to you, Robert, I guess some other questions.

Robert Dodd, Analyst

I appreciate that insight. I experienced the period from 2006 to 2009 as well, and insurance stands out to me. I have one more question. Regarding the CLO yields, your default rates have indeed performed better than the industry average, but your yields have decreased. There are several factors at the GAAP level that could explain this decline. Is this due to expectations of blocked cash flows or a projected significant increase in default rates? Can you provide any details on what led to the decrease in GAAP yield, which depends on your future assumptions? Additionally, the cash yield has also dropped significantly. Was this related to blocking defaults? Any information you can share would be helpful.

Grier Eliasek, President and Chief Operating Officer

Sure. I'll start with the cash situation. There was a one-time factor this quarter related to the assets and liabilities. Liabilities in the CLO market are usually tied to three-month LIBOR, while more than 50% of borrowers chose one-month LIBOR for better borrowing costs. Consequently, with the Fed's aggressive rate hike of 150 basis points in March, the re-pricing on assets happened more quickly, resulting in lower payments on assets, whereas liabilities took an additional quarter to adjust. This was a unique occurrence and was the main reason for the drop in cash yield, which will not happen again. Regarding GAAP yield, which is based on model assumptions, there are several factors influencing its reduction. One factor is the decline in LIBOR, affecting the part of the return that adjusts with LIBOR levels. Additionally, we saw a significant drop in the forward curve during that 90-day period. There are also expectations for higher defaults and only a partial offset from higher asset spreads. However, collateral managers are actively mitigating risk by opting for higher-rated assets, which typically offer lower spreads, so we don’t see a significant increase in asset spreads. The positive news is that the rate of collateral downgrades in the syndicated market and tranche downgrades has slowed down considerably. Earlier predictions from this spring suggested a default rate of around 12%, but this figure has now been halved in consensus estimates. Defaults are becoming a lagging indicator, with a gradual increase already factored in, but based on the current economic situation, things are looking much better than initially feared. As for the diversion of cash flows, around 25% of deals are seeing this issue. It's important to recognize the significant advantages of securitization financing, especially in challenging times. Unlike traditional financing, CLOs are resilient; they abide by the indenture rules, allowing cash to either buy new collateral or pay down liabilities. This process enables a return to normal cash flow streams after some time. We anticipate that in three months, diversions will drop to less than 10% of deals, allowing us to benefit from this self-healing process. Furthermore, having a diversified portfolio of approximately 40 deals, with only a quarter facing diversions, demonstrates strength, similar to a temporary setback in the unlevered loan market. Would you like to add anything, John?

John Barry, Chairman and CEO

For those on this call who may not have in-depth knowledge of CLOs, it's important to understand that they function as Grier described: self-healing. This means that if there are credit issues within the CLO, such as defaults or non-payment, the cash flow generated by the CLO uses incoming cash to pay down debt until the debt-to-equity ratio is restored. When capital is used to pay down debt in a CLO, it reduces the risk of the CLO. While this is positive, it also lowers the return. CLOs leverage low borrowing rates to invest in higher rates. Thus, paying off inexpensive AAA leverage to maintain a healthy debt-to-equity ratio will naturally decrease returns to the equity. However, this is still preferable to experiencing a default on our investments. That's all I wanted to add. Kristin, do you have anything else to contribute about CLOs?

Kristin Van Dask, Chief Financial Officer

No, John, I think that that was well said.

John Barry, Chairman and CEO

Okay. Thank you. Okay. Robert, anything else?

Robert Dodd, Analyst

Just one clarification. On that self-healing and the projection that in three months you'll be under 10% diverted, is that the assumption built into the common GAAP yield? Or is that yield just assuming status quo on that front?

John Barry, Chairman and CEO

Grier?

Grier Eliasek, President and Chief Operating Officer

The GAAP yield will be calculated based on each individual deal. There are numerous calculations involved, and it will vary depending on the specific deal. This is an important aspect of the cash flow modeling as it reflects how each indenture operates.

Robert Dodd, Analyst

Yeah. Got it. I appreciate it. Thank you.

Grier Eliasek, President and Chief Operating Officer

Sure.

John Barry, Chairman and CEO

Thank you, Robert.

Operator, Operator

Our next question will come from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Finian O'Shea, Analyst

Hi, everyone. Good afternoon. Thanks for having me on. I just had a question on taxable income understanding that you don't have that information finalized yet for the August year-end. But can you offer us any direction from the major portfolio drivers that would lead you to expect lower or higher taxable income this year as it relates to your net operating income level? Any color there you could provide?

John Barry, Chairman and CEO

Grier?

Grier Eliasek, President and Chief Operating Officer

Sure. So we concluded some years ago, Finian, that taxable income. While it may be and is a driver of the tax regulatory minimum RIC distribution requirement for a company like ours from sort of a bare minimum standpoint is not really a reliable metric to use from which to set a distribution policy if you're seeking to provide a long-term stabilized yield to investors. So in other words, choosing to pay distribution to investors has become something to do on more of an economic basis than a business basis and looking at perhaps other metrics with greater weight like net investment income. And the reason taxable income is not so reliable for a business like ours is because, we, as part of our tax returns include other types of streams that go beyond just basic loan book, which, of course, we have first-lien loans, some second-lien loans, et cetera. And where you see a decoupling is in two primary areas. One is our controlled investments that are financial services companies that we figured out some years ago, perhaps one of the list of many firsts in the industry that we could purchase a financial services business and hold such business as a tax partnership and not have a corporate taxpayer at the portfolio company level as a result as long as that was a good tax set of revenue streams coming to us. So First Tower is a good example. But you pick up, as part of that, other tax shields, like for example goodwill, amortization will be one associated with that business that we bought just over eight years ago. And it's been a wonderful investment for us I might add, very high teens yields and higher than that total returns to date. We've already gotten all our money back from that investment just off of current cash distributions. That's a long-term hold business. And Frank Lee and team do a wonderful job running that. Second area is in the CLO structured credit business that we were just talking about where taxable income and cash and GAAP yields can decouple quite substantially, especially if you have volatility in a particular year and especially where you have migration and portfolio turnover in those businesses. So for example, if you have a pool of loans and a CLO with an average price of say 95, if a collateral manager sells one loan at 95 and purchases another loan also at 95, there may be no delta – immediate delta from an economic standpoint. But from a tax standpoint, those five percentage points act as a tax shield and the deduction in that particular year that would reduce taxable income. And this is one of those years because of what's transpired with the virus. Another example would have been energy and its impact back in say 2015 and to a certain extent 2016 as you saw rotation away from that sector for obvious reasons. The good news is as a result you can have particular situations then we think that's likely to happen this year. We don't know for sure but some portion of a taxpayers – tax characterization would be a tax but not economic. Return of capital distribution, which of course will be subject to zero taxation for that investor. So it's hard to estimate what that percentage will be as you pointed out ahead of time but I think it's likely to be some percentage, meaningful percentage this year related to a zero tax return of capital situation. And again, if you're a taxpayer as an investor, that's very good news indeed. John, anything you'd add to that?

John Barry, Chairman and CEO

No.

Grier Eliasek, President and Chief Operating Officer

Anything else, Finian?

Finian O'Shea, Analyst

Yes sure. Thanks for all that color and I guess just one sort of follow-on on the regular dividend. Obviously, a little bit underearned this quarter as you reduce leverage and so forth, take a more conservative approach. Are you – do you think you're able to maintain this dividend level while you maintain this conservative posture at the BDC? I know you declared I think a couple more months of the current payout. But any outlook on getting earnings back up to the dividend level or kind of underearning for a little while?

John Barry, Chairman and CEO

Thank you for your question, Finian. I appreciate it because we have paid close attention to our dividend policy during the 16 or 17 years we've been running this public company. Over this time, we've recognized that our shareholders value the dividend, especially its stability and predictability. As many of you may know, the capital asset pricing model highlights that the lowest discount rate and the highest multiple apply to the steadiest and most reliable cash flows. Our intention is to maintain the dividend at its current level indefinitely, unless we find a compelling reason to adjust it, with any changes ideally being positive. For now, I envision our monthly dividend remaining at $0.06 for the foreseeable future, as our shareholders expect and often rely on it. Occasionally, there may be a quarter when we do not earn the dividend. I recall an amusing instance from about 10 or 12 years ago during an earnings call when I was asked a similar question. I used a baseball analogy, noting that there are nine innings, and we might not score in every inning, although I knew we would perform well in the next quarter, which we did. However, I cannot predict our next quarter performance. Typically, we out-earn the dividend, and Grier can provide you with statistics to support that. While there may be times we under-earn, that will not lead us to change the dividend. We want to maintain this steady and boring $0.06 monthly dividend for as long as possible. Grier?

Grier Eliasek, President and Chief Operating Officer

In terms of the factors that will help us close the earnings gap and ideally surpass previous growth, we have several initiatives. One key strategy is to shift our liabilities to lower-cost options. The largest challenge we faced last quarter was the 150 basis point decline in short-term rates, which affected our revenue due to our floating-rate assets. By effectively utilizing our revolving credit facility, which has a four-year duration, we can recover a significant portion of that lost revenue. We've already taken steps to refinance a portion of our bonds maturing in the next few years and will target additional term debt. We’ve successfully eliminated all other term debt due in the near future, except for the specific tranche I mentioned. Using our floating rate facility, which has an incremental cost of about 1.4%, is highly beneficial for repurchasing debt that is maturing soon, making it an obvious choice for us. The timeline for this is contingent on our tendering activities, which we've historically executed multiple times. Another important initiative is our preferred program, which we believe will be significantly advantageous for our common equity. Although the capital doesn’t come in all at once, the program allows for timely financing that aligns with our increasing originations. We are currently ramping up this effort, which is another key driver as we deploy existing capital prior to new issuances. Our current borrowing base of around $0.5 billion provides liquidity that will expand as we add eligible assets. This past quarter, we and many others were cautious in our lending due to the macroeconomic downturn; in uncertain times, lenders prefer to wait for more favorable conditions. We believe this strategy is prudent and are observing signs of stabilization in the marketplace. Our real estate sector has also been a strong performer in recent years, with 33 realizations yielding a 23% realized internal rate of return. We continue to invest in new projects while enhancing income through upgrades and renegotiating rents across various diversified properties. We are also focused on operational improvements and are exploring additional acquisitions that we expect to add value. If an economic downturn similar to what occurred in March arises, we are prepared to make strategic purchases of both liquid and illiquid assets, as well as opportunistically repurchase our debt at a discount. These initiatives comprise the potential catalysts and drivers for enhancing profitability moving forward.

Finian O'Shea, Analyst

I appreciate the information very much. If I could ask a third question, I promise it will be the last one. I value all of your insights on the dividend and the possibility of temporary under-earning. With the option available, some of your peers have opted to pay up to 80% or even 90% of the dividend in stock, often referred to as the ACAS letter. Is that something you are considering as part of your strategy to navigate the recession and your approach to paying the dividend in stock?

John Barry, Chairman and CEO

Well, Finian, I want to start by saying that we currently have no intention of paying dividends in stock, mainly because we have no reason to. The company is generating cash, and I believe our shareholders prefer cash. We haven't observed that companies tend to perform well when they distribute dividends as stock unless there’s a valid reason, which typically indicates a problem. We are not facing any issues right now, and we don’t foresee any in the near future. Therefore, we don’t have any plans to issue stock in lieu of cash. Grier, would you like to add anything?

Grier Eliasek, President and Chief Operating Officer

I want to emphasize that, unlike some companies with limited liquidity, our company maintains a strong liquidity position, managing our resources to ensure substantial liquidity is available at all times, amounting to hundreds of millions, not counting additional options for enhancing liquidity. This situation is applicable to other companies, but not us. Regarding taxable income, you mentioned how some individuals use stock to fulfill their minimum distribution requirements. While that might be a strategy for them, it requires complex steps, such as choosing between stock and cash, which doesn't align well with our approach as a monthly dividend payer. We've been consistent with our monthly dividends, and I doubt we've seen others make those elections every month. There are several challenges associated with this. I'm not ruling out that it could be relevant in a severe downturn, but currently, we don't view this as necessary. The IRS has allowed this mechanism for everyone involved in REITs to use at their discretion, but we don’t see it as something we need to pursue.

Finian O'Shea, Analyst

Okay. Thanks very much, everybody.

Grier Eliasek, President and Chief Operating Officer

Thank you.

Operator, Operator

This will conclude our question-and-answer session. I would like to turn the conference back over to John Barry, Chairman and CEO for any closing remarks.

John Barry, Chairman and CEO

Okay. Well, thank you, everyone. We appreciate your interest in our company and we look forward to seeing you all and others on the next earnings call. Thanks so much. Bye now.

Grier Eliasek, President and Chief Operating Officer

Thank you all.

Operator, Operator

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