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Summary

  • I am projecting Prospect Capital will report a total increase (decrease) in net assets of $929.4 million for the fiscal nine months ended 3/31/2014.
  • I am projecting Prospect Capital will report a minor decrease in net asset value ("NAV") as of 3/31/2014 (exact NAV per share projection and range is stated within the article).
  • I am projecting Prospect Capital will generate a minor economic return for the fiscal third quarter of 2014 (exact economic return percentage is stated within the article).
  • A material portion of Prospect Capital's loan originations occurred within the last week of the fiscal third quarter of 2014, having negative impacts on net investment income ("NII") and NAV.
  • Prospect Capital's $1.26 billion of loan originations for the fiscal third quarter of 2014 will begin having positive impacts on NII and NAV next quarter.

Focus of Article:

The focus of this article is to provide a detailed projection of Prospect Capital Corp.'s (NASDAQ:PSEC) net asset value ("NAV") per common share as of 3/31/2014. Prior to results being provided to the public on 5/6/2014 (via the company's quarterly press release), I would like to analyze PSEC's NAV as of 3/31/2014 and provide readers a general direction on how I believe this recent quarter has panned out.

I will also include my quarterly "net investment income" ("NII") and "net increase (decrease) in net assets resulting from operations" (also known as "earnings per share" ("EPS")) projections in this article. My buy, sell, or hold recommendation for PSEC will be in the conclusion paragraph of this article.

Author's Note: Predicting certain accounting figures within the business development company ("BDC") sector is usually more difficult when compared to other sectors due to the valuation adjustments that occur on a company's investment portfolio each quarter. Specifically, the following two PSEC accounts are typically more difficult to project: 1) net realized gain (loss) on investments, and 2) net unrealized appreciation (depreciation) on investments. As such, there are several assumptions used when performing such an analysis. PSEC's actual reported values may differ materially from my projected values within this article due to unforeseen circumstances. This could occur because management deviates from a company's prior business strategy and pursues a new strategy that was not previously disclosed. This could also occur when the company has a "one-time" extraordinary event which was previously unforeseen. Readers should be aware as such. All projections within this article are my personal estimates and should not solely be used for any investor's buying or selling decisions. All actual reported figures that are above my ranges within this article will be deemed a positive sign, in my judgment. All actual reported figures that are below my ranges within this article will be deemed a negative sign, in my judgment.

Overview of PSEC's NAV as of 3/31/2014:

Due to the fact that several figures needed to project/calculate PSEC's NAV as of 3/31/2014 come directly from the company's consolidated statement of operations, I provide Table 1 below. Table 1 shows PSEC's consolidated statement of operations from a nine-months ended perspective. Using Table 1 below as a reference, one must add certain account figures from the fiscal first, second, and third quarters of 2014 for purposes of projecting a suitable NAV as of 3/31/2014.

Table 1 - PSEC Nine-Months Ended Consolidated Statement of Operations

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database)

Having provided Table 1 above (in particular PSEC's "Nine-Months Ended (ESTIMATE)" column), we can now begin to calculate PSEC's projected NAV as of 3/31/2014. This projection will be calculated using Table 2 below.

Table 2 - PSEC Three, Six, and Nine-Months Ended NAV Calculation/Projection (NAV as of 3/31/2014)

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 2 above as a reference, let us take a look at the calculation for PSEC's projected NAV as of 3/31/2014. Unless otherwise noted, all figures below are for the "nine-months ended" time frame. Let us look at the following figures in corresponding order to the "Ref." column shown in Table 2 next to the March 31, 2014 column:

A) Operations

B) Stockholder Transactions

C) Capital Share Transactions

A) Operations:

- Net Increase (Decrease) in Net Assets From Operations Estimate of $244.7 Million; Range $204.7-$284.7 Million

- Confidence Within Range = Moderate-to-High

- See Red Reference "A" in Table 2 Above Next to the March 31, 2014 Column

This "net increase (decrease) in net assets from operations" figure consists of the following three accounts that come directly from PSEC's consolidated statement of operations: 1) net investment income (see blue reference "A" in Tables 1 and 2 above); 2) net realized gain (loss) on investments (see blue reference "B" in Tables 1 and 2 above); and 3) net unrealized appreciation (depreciation) on investments (see blue reference "C" in Tables 1 and 2 above). Since I have refrained from writing a quarterly consolidated statement of operations projection article for PSEC (due to time constraints), I will summarize what I believe will occur within these three accounts during the fiscal third quarter of 2014. Let us first discuss PSEC's NII account.

1) Net Investment Income:

- Estimate of $263.9 Million; Range $248.9-$278.9 Million

- Confidence Within Range = Moderate-to-High

- See Blue Reference "A" in Tables 1 and 2 Above Next to the March 31, 2014 Column

PSEC reported NII of $82.3 and $92.2 million for the fiscal first and second quarters of 2014, respectively. I am projecting PSEC will report NII of $89.4 million for the fiscal third quarter of 2014. Using Tables 1 and 2 above as a reference, when combined, this is a projected NII of $263.9 million for the nine months ended 3/31/2014.

Per PSEC's quarterly SEC filings, management disclosed the company had loan originations of $1.26 billion during the fiscal third quarter of 2014. This was a record quarter for PSEC regarding loan originations. However, it should also be noted a majority of these loan originations occurred late in the quarter. In fact, out of the $1.26 billion of quarterly loan originations, $852 million (or 67.8%) were closed within the last week of the quarter. This factor should be considered when projecting PSEC's interest income accounts for the fiscal third quarter of 2014.

Management also disclosed the company had portfolio sales and repayments of ($163.5) million during the fiscal third quarter of 2014. When combining the company's quarterly loan originations less portfolio sales/repayments, PSEC's total investment portfolio should increase by approximately $1.09 billion for the fiscal third quarter of 2014 (prior to all quarterly fair market value ("FMV") fluctuations). For PSEC, this is a continued modest-to-rapid increase in the company's investment portfolio.

The projected minor decrease in quarterly NII ($89.4 million for the fiscal third quarter of 2014 versus $92.2 million for the fiscal second quarter of 2014) is mainly attributed to a minor drop in the total income versus total expense ratio during the quarter. Specifically, I am projecting a modest increase in PSEC's base management fee and income incentive fee. I'm projecting modest increases in these two expense accounts due to the nature of how PSEC's base management fee and income incentive fee are calculated (one factor is the size of the balance sheet, which materially expanded by the end of the quarter). Now let us discuss PSEC's net realized gain (loss) on investments account.

2) Net Realized Gain (Loss) on Investments:

- Estimate of ($4.4) Million; Range ($14.4)-$5.6 Million

- Confidence Within Range = Moderate

- See Blue Reference "B" in Tables 1 and 2 Above Next to the March 31, 2014 Column

PSEC reported a net realized gain (loss) on investments of $3.8 and ($5.7) million for the fiscal first and second quarters of 2014, respectively. I am projecting PSEC will report a net realized gain (loss) on investments of ($2.5) million for the fiscal third quarter of 2014. Still using Tables 1 and 2 above as a reference, when combined, this is a projected net realized gain (loss) on investments of ($4.4) million for the nine months ended 3/31/2014.

Regarding the fiscal first and second quarters of 2014, PSEC recorded the following material valuation fluctuations within this account: 1) realized gain (loss) of $3.3 million on NRG Manufacturing, Inc.; 2) realized gain (loss) of $1.2 million on Apidos CLO VIII, Ltd.; 3) realized gain (loss) of ($7.9) million on National Bankruptcy Services, LLC; and 4) net realized gain (loss) of $1.5 million on all remaining investment portfolio companies who had realized activities.

Regarding the fiscal third quarter of 2014, I am projecting a net realized gain (loss) of ($2.5) million due to various minor gains (losses) in association with the investment portfolio's sales/repayments. This projection is formed from a detailed investment portfolio table that will not be provided within this article due to the sheer size of the spreadsheet. Now, let us discuss PSEC's net unrealized appreciation (depreciation) on investments account.

3) Net Unrealized Appreciation (Depreciation) on Investments:

- Estimate of ($14.9) Million; Range ($29.9)-$0.1 Million

- Confidence Within Range = Moderate

- See Blue Reference "C" in Tables 1 and 2 Above Next to the March 31, 2014 Column

PSEC reported a net unrealized appreciation (depreciation) on investments of ($6.2) and ($1.2) million for the fiscal first and second quarters of 2014. I am projecting PSEC will report a net unrealized appreciation (depreciation) on investments of ($7.5) million for the fiscal third quarter of 2014. Once again, using Tables 1 and 2 above as a reference, when combined, this is a projected net unrealized appreciation (depreciation) on investments of ($14.9) million for the nine months ended 3/31/2014.

Regarding the fiscal first and second quarters of 2014, PSEC recorded various material valuation fluctuations within this account. These quarterly material unrealized FMV fluctuations were covered in past PSEC articles. As such, I would refer readers to the following linked articles:

Prospect Capital's Dividend Sustainability Analysis (Post Fiscal Q1 2014 Earnings)

Prospect Capital's Dividend And Net Asset Value Sustainability Analysis (Post Fiscal Q2 2014 Earnings) - Part 2

Specifically, please refer to "Table 4" within the first linked article and "Table 8" within the second linked article.

Regarding the fiscal third quarter of 2014, I am projecting a net unrealized appreciation (depreciation) of ($7.5) million due to various minor-to-material gains (losses) in association with PSEC's investment portfolio. This projection is formed from a detailed investment portfolio table that will not be provided within this article due to the sheer size of the spreadsheet. Notably, I am projecting most unrealized depreciation occurs within PSEC's control investments. I am also projecting PSEC's non-control/non-affiliate and collateralized loan obligation ("CLO") investments have a minor net appreciation.

Let us now combine the three accounts described above to come up with a proper net increase (decrease) in net assets from operations figure for the nine months ended 3/31/2014. When combining NII of $263.9 million, a net realized gain (loss) on investments of ($4.4) million, and a net unrealized appreciation (depreciation) on investments of ($14.9) million, I am projecting PSEC has an increase (decrease) in net assets from operations of $244.7 million for the nine months ended 3/31/2014 (see red reference "A" in Table 2 above).

B) Stockholder Transactions:

- Net Increase (Decrease) in Net Assets From Stockholder Transactions Estimate of ($289.8) Million; Range ($309.8)-($269.8) Million

- Confidence Within Range = High

- See Red Reference "B" and Blue Reference "D" in Table 2 Above Next to the March 31, 2014 Column

- See Blue Reference "D" in Table 3 Below

Side Note: As shown in Table 2 above, PSEC's "net increase (decrease) in net assets from stockholder transactions" figure is the equivalent to the company's "distribution of net investment income" figure. Since this is the only account within this specific classification, both figures will have the same amount.

This is a fairly simple calculation. This is PSEC's dividend distributions for the fiscal first, second, and third quarters of 2014.

Table 3 - PSEC Nine-Months Ended Distributions to Common Stockholders Projection

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 3 above as a reference, the number of outstanding shares of common stock as of 1/29/2014 is projected to be 311.9 million. As such, I am projecting 10.6 million shares of common stock were issued between 1/1/2014 and 1/28/2014. When broken out, this consists of 10.5 and 0.1 million shares of common stock being issued under PSEC's at-the-market ("ATM") offering program and dividend reinvestment plan, respectively. The monthly common stock dividend for the month of January 2014 was $0.110325 per share. When calculated, I am projecting a January 2014 dividend distribution of ($34.4) million.

Still using Table 3 as a reference, the number of outstanding shares of common stock as of 2/26/2014 is projected to be 319.2 million. As such, I am projecting 7.3 million shares of common stock were issued between 1/29/2014 and 2/25/2014. When broken out, this consists of 7.2 and 0.1 million shares of common stock being issued under PSEC's ATM offering program and dividend reinvestment plan, respectively. The monthly common stock dividend for the month of February 2014 was $0.110350 per share. When calculated, I am projecting a February 2014 dividend distribution of ($35.2) million.

Once again using Table 3 above as a reference, the number of outstanding shares of common stock as of 3/27/2014 is projected to be 333.7 million. As such, I am projecting 14.5 million shares of common stock were issued between 2/26/2014 and 3/26/2014. When broken out, this consists of 14.4 and 0.1 million shares of common stock being issued under PSEC's ATM offering program and dividend reinvestment plan, respectively. The monthly common stock dividend declared and accrued for in the month of March 2014 was $0.110375 per share. When calculated, I am projecting a March 2014 dividend payable of ($36.8) million.

When these three monthly dividend distributions are combined with the prior six-months ended dividend distributions of ($183.3) million, I am projecting PSEC has an increase (decrease) in net assets from stockholder transactions of ($289.8) million for the nine months ended 3/31/2014 (see red reference "B" in Table 2 above and blue reference "D" in Tables 2 and 3 above).

C) Capital Share Transactions:

- Net Increase (Decrease) in Net Assets From Capital Share Transactions Estimate of $974.5 Million; Range $924.5 Million-$1.025 Billion

- Confidence Within Range = High

- See Red Reference "C" in Table 2 Above Next to the March 31, 2014 Column

This "net increase (decrease) in net assets from capital share transactions" figure consists of the following three accounts: 1) issuance of common stock, net of underwriting fees (see blue reference "E" in Table 2 above and Table 4 below); 2) offering costs on issuance of common stock (see blue reference "F" in Table 2 above and Table 4 below); and 3) issuance of common stock under dividend reinvestment plan (see blue reference "G" in Table 2 above and Table 5 below).

1) Issuance of Common Stock, Net of Underwriting Fees:

- Estimate of $963.8 Million; Range $916.3 Million-$1.011 Billion

- Confidence Within Range = High

- See Blue Reference "E" in Table 2 Above Next to the March 31, 2014 Column

- See Blue Reference "E" in Table 4 Below

This is a more complex calculation. This is PSEC's issuance of common stock, net of underwriting fees for the fiscal first, second, and third quarters of 2014.

Table 4 - PSEC Nine-Months Ended Issuance of Common Stock, Net of Underwriting Fees Projection

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database [link provided below Table 1])

Originally discussed within PSEC's distribution of NII figure, I projected 10.5 and 7.2 million shares of common stock were issued under PSEC's ATM offering program for the months of January (through 1/28/2014) and February 2014 (through 2/25/2014), respectively. Using Table 4 above as a reference, when calculated, this is projected gross proceeds of $117.8 and $81.0 million for the months of January and February 2014, respectively.

I projected 14.4 million shares of common stock were issued under PSEC's ATM offering program for the month of March 2014 (through 3/27/2014). Still using Table 4 above as a reference, when calculated, this is projected gross proceeds of $158.3 million for the month of March 2014 through 3/27/2014. On 3/31/2014, PSEC also issued 2.3 million shares of common stock in relation to the recapitalization of Harbortouch Payments, LLC. As such, these shares also need to be added. When calculated, this is projected gross proceeds of an additional $24.9 million for the month of March 2014.

When adding projected gross proceeds of $117.8, $81.0, and $183.2 million for the months of January, February, and March 2014, I am projecting total gross proceeds of $382.0 million for the fiscal third quarter of 2014. When excluding ($2.8) million of quarterly underwriting fees, I am projecting PSEC reports an issuance of common stock, net figure of $379.2 million for the fiscal third quarter of 2014.

Therefore, when this figure is combined with the prior six-months ended figure of $584.6 million, I am projecting PSEC reports a nine-months ended issuance of common stock, net of underwriting fees figure of $963.8 million (see blue reference "E" in Tables 2 and 4 above).

2) Offering Costs on Issuance of Common Stock:

- Estimate of ($1.6) Million; Range ($2.1)-($1.1) Million

- Confidence Within Range = High

- See Blue Reference "F" in Table 2 Above Next to the March 31, 2014 Column

- See Blue Reference "F" in Table 4 Above

This figure consists of all the offering costs associated with the issuance of common stock. This figure was originally projected within the issuance of common stock, net of underwriting fees figure above. However, I reclassified ($0.6) million of offering costs originally projected within the ($3.3) million of underwriting fees and offering costs for the fiscal third quarter of 2014.

Once again, using Table 4 above a reference, when this figure is combined with the prior six-months ended figure of ($1.0) million, I am projecting PSEC reports a nine-months ended offering costs on issuance of common stock figure of ($1.6) million (see blue reference "F" in Tables 2 and 4 above).

3) Issuance of Common Stock Under Dividend Reinvestment Plan:

- Estimate of $12.3 Million; Range $10.3-$14.3 Million

- Confidence Within Range = High

- See Blue Reference "G" in Table 2 Above Next to the March 31, 2014 Column for Reference

- See Blue Reference "G" in Table 5 Below

This is a simple calculation. This is PSEC's issuance of common stock under the company's dividend reinvestment plan for the fiscal first, second, and third quarters of 2014.

Table 5 - PSEC Nine-Months Ended Issuance of Common Stock Under Dividend Reinvestment Plan Projection

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database [link provided below Table 1])

Originally discussed within PSEC's distribution of NII figure, I projected 0.1 million shares of common stock were issued under PSEC's dividend reinvestment plan for the months of January, February, and March 2014. Using Table 5 above as a reference, when calculated, this is projected proceeds of $1.2, $1.0, and $1.0 million for the months of January, February, and March 2014, respectively. When combined, I am projecting PSEC reports an issuance of common stock under the company's dividend reinvestment plan figure of $3.2 million for the fiscal third quarter of 2014.

Therefore, when this figure is combined with the prior six-months ended figure of $9.1 million, I am projecting PSEC reports a nine-months ended issuance of common stock under the company's dividend reinvestment plan figure of $12.3 million (see blue reference "G" in Tables 2 and 5 above).

When combining equity raised in common stock issuances, net of underwriting fees of $963.8 million, offering costs associated with the issuance of common stock of ($1.6) million, and equity raised in relation to the company's dividend reinvestment plan of $12.3 million, I am projecting PSEC has an increase (decrease) in net assets from capital share transactions of $974.5 million for the nine months ended 3/31/2014 (see red reference "C" in Table 2 above).

Remainder of NAV Calculation:

After combining the three referenced figures discussed earlier (see red references "A, B, C" in Table 2 above), I am projecting PSEC has a "total increase (decrease) in net assets" of $929.4 million for the nine months ended 3/31/2014 (see red reference "(A + B + C) = D" in Table 2 above).

Having this figure established, let us now calculate PSEC's projected NAV per common share as of 3/31/2014 (see red references "D, E, F, G" in Table 2 above):

Total Increase (Decrease) in Net Assets: $929.4 million

(+) Net Assets at Beginning of Period: $2.656 billion

(=) Net Assets at End of Period: $3.586 billion

(/) Outstanding Shares of Common Stock as of 3/31/2014: 336.0 million

(=) NAV Per Common Share as of 3/31/2014: $10.67 per share

Conclusions Drawn:

To sum up all the information discussed above, I am projecting PSEC will report the following NAV per common share as of 3/31/2014:

PSEC's Projected NAV as of 3/31/2014 = $10.67 Per Common Share

PSEC's Projected NAV Range as of 3/31/2014 = $10.57 - $10.77 Per Common Share

This projection is an increase (decrease) of ($0.06) per share from PSEC's NAV as of 12/31/2013. This minor decrease in NAV can be attributed to the following per share changes:

Table 6 - PSEC Quarterly NAV Per Share Changes

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(Source: Table created entirely by myself, including all calculated figures and projected valuations)

Using Table 6 above as a reference, I am projecting PSEC's net increase (decrease) in net assets resulting from operations (also known as EPS) will be $0.25 per share for the fiscal third quarter of 2014. In comparison, I am projecting PSEC had dividend distributions of ($0.33) per share for the fiscal third quarter of 2014. I am also projecting PSEC had NAV accretion (dilution) in relation to the company's equity raises of $0.02 per share for the fiscal third quarter of 2014. After adding these three amounts together, an increase (decrease) of ($0.06) per share for the fiscal third quarter of 2014 is obtained.

Final Note Regarding My Personal BUY, SELL, or HOLD Recommendation:

PSEC recently closed at $10.79 per share as of 5/2/2014. This is a $0.12 per share premium (discount) to my projected NAV of $10.67 per common share as of 3/31/2014. This calculates to a price-to-NAV ratio of 1.011, or a premium (discount) of 1.1%. I feel there are several factors to consider prior to my personal recommendation for PSEC.

First, PSEC continues to have an annual dividend yield between 11%-12.5%. This is one reason why investors are attracted to this stock and to the BDC sector in general. More investors are looking for a steady stream of dividend income in this continued low interest rate environment. I believe PSEC could be an enticing proposition for some investors looking for a steady stream of income, while having a somewhat lower risk tolerance when compared to other high-yielding sectors. I also believe PSEC's dividend should continue to be stable (fractionally higher) through the foreseeable future (supported through evidence from past articles). Even though there has been a minor overpayment of NII when compared to dividend distributions over the past few quarters, PSEC continues to have a material cumulative NII surplus from last year. Furthermore, PSEC's net investment company taxable income ("ICTI") has slightly exceeded dividend distributions for the past few quarters.

Second, even though I am projecting PSEC will report an increase (decrease) in NAV of (0.51%), I am also projecting the company will generate an "economic return" (dividends paid and net change in NAV) of 2.57% for the fiscal third quarter of 2014. The economic return for PSEC for the fiscal third quarter of 2014 should be seen as a positive sign. Also, the $852 million of loan originations that occurred within the last week of the fiscal third quarter of 2014 negatively impacted earnings and NAV. However, since these loan originations will have a full quarter's worth of activity for the fiscal fourth quarter of 2014, this should positively impact earnings and NAV next quarter.

Third, I like the diversification of PSEC's business operations. The following are seven origination strategies management currently implements regarding PSEC's investment portfolio: 1) lending in private equity sponsored transactions; 2) lending directly to companies not owned by private equity firms; 3) control investments in corporate operating companies; 4) control investments in financial companies; 5) investments in structured credit; 6) real estate investments; and 7) investments in syndicated debt. Furthermore, PSEC has the flexibility and expertise to add additional types of origination strategies when deemed appropriate/lucrative.

Therefore, I rate PSEC as a SOLID HOLD when the stock trades up to a modest premium to NAV (up to a 5% premium), a BUY when the stock trades at or slightly below NAV, and a STRONG BUY when the stock trades at a modest discount to NAV (over 5% discount).

Full Disclosure of "Long" Position in Regards to PSEC: I initiated a position in PSEC in October 2013 at prices ranging from $10.80-$10.85 per share. Prior to these acquisitions, I did not own PSEC as an investment. I believe the current risk versus reward profile continues to be moderately (some could argue highly) attractive. Personally, I would look to increase my position in PSEC if the stock price decreased below my projected NAV of $10.67 per share as of 3/31/2014. I have taken both cash and reinvested stock dividends, depending on the stock price of PSEC when the monthly dividends were distributed. All investors should understand each buy, sell, or hold decision is based on one's risk tolerance, time horizon, and dividend income goals.

Source: Prospect Capital's Upcoming Fiscal Q3 2014 Net Asset Value Projection