Prospect Capital's (PSEC) CEO John Barry on Q1 2015 Results - Earnings Call Transcript

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Prospect Capital Corporation (NASDAQ:PSEC) Q1 2015 Results Conference Call November 7, 2014 11:00 AM ET

Executives

John Barry - Chairman & Chief Executives Officer

Grier Eliasek - President & Chief Operating Officer

Brian Oswald - Chief Financial Officer

Analysts

Terry Ma - Barclays

Jon Bock - Wells Fargo Securities

Robert Dodd - Raymond James

Greg Mason - KBW

Operator

Good morning and welcome to the Prospect Capital Corporation, first fiscal quarter earnings release conference call.

All participants will be in listen-only mode. (Operator Instructions). 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

Thank you Dan. Joining me on the call today once again are Grier Eliasek, our President and Chief Operating Officer and Brian, our Chief Financial Officer, Brian.

Brian Oswald

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 forecasts due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release, our 10-Q and our corporate presentation filed previously and available on the Investor Relations tab of our website, prospectstreet.com.

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

John Barry

Thank you, Brian. We are excited this morning to announce a strategy that we have been working on for many months to pursue spin-offs of certain businesses in our portfolio, including our CLO structured credit business, online lending business, even real-estate.

We believe spin-offs have significant potential to unlock shareholder value through pure play earnings, multiple expansion, moving strategies into faster growing non-BDC formats with reduced baskets and leverage constrains, and freeing up 30% basket and leverage capacity for new originations at Prospect.

These strategies have gown rapidly for us in recent years and we believe spin-offs will provide expanded capacity to continue that growth. We anticipated these non-BDC spin-offs will have tax efficient structures.

We would likely seek to spin-off these businesses in conjunction with capital raises for each such business, with the goal of leverage and earnings neutrality for prospect. The size and likelihood of these spin-offs, which maybe partially rather than complete spin-offs remain to be determined.

Our target timing for completion would be in early 2015. Prospect capital will continue as the only multi line BDC in the market place, with a continued diversified focus on originations that includes the strategies being spun-out.

Now, on to our financial results for the quarter. Our Net Investment Income or NII in the September quarter was $94.5 million or $0.28 per weighted average share. Our net income was $84.1 million or $0.24 per weighted average share. As a tax efficient regulated investment company, our shareholder dividend payout requirement is based on taxable income rather than GAAP net investment income.

Taxable income can decouple meaningfully from such net investment income. In the September quarter we generated taxable income of $151.3 million or $0.44 per weighted average share; that is $0.11 per share more than our dividends last quarter. This is the first time we have reported our taxable income in our earnings release and we think it is helpful disclosure to show that we’ve been covering our dividends out of taxable income.

In our earnings release we have detailed reconciliation of net investment income to taxable income for the September quarter. That table shows $0.11 of the $0.16 difference related to a significant dividend related to Echelon Aviation, our aircraft leasing business. Excluding this Echelon impact, our taxable income in the September quarter was $0.33 per share. Approximately the same as the dividends per share, prospect paid to shareholders during that period.

As described in more detail in our release, the other $0.05 relates to our CLO business, generating higher taxable income, which roughly tracks cash income, then GAAP income on a recurring basis throughout the life of each CLO.

Our CLO business performance has significantly exceeded our expectations, demonstrating the benefits of our strategy of pursuing majority stakes, working with world class management teams, providing strong collateral underwriting through primary issuance and focusing on the most attractive risk adjusted opportunities.

As of September 30, we held $1.16 billion across our fleet of 36 non-recourse CLO investments. Our underlined CLO portfolio consisted of over 3,100 loans and a total asset base of over $16.2 billion. As of September 30 our CLO portfolio experienced a trailing 12-month default rate of 0.16%, significantly less than the broadly syndicated market default rate of 3.34%. In the same quarter this portfolio generated an annualized cash yield of 20.7% and a GAAP yield of 14.9%.

We had previously announced our shareholder distributions through January 2015. The January 2015 dividend will be our 78-shareholder distribution and the 55th consecutive per share monthly increase. Because we have already announced several upcoming months of dividend distributions, we planned on announcing our next series of dividend distributions in February.

We have generated cumulative taxable income in excess of cumulative dividends to share holders since prospects IPO over 10 years ago. From the IPO through the September 30, 2014, our taxable income is $70.5 million in excess of dividends to shareholders, which represents $0.20 per share.

Since our IPO 10 years ago through January 2015 distribution at the current share account, we would have paid out $13.37 per share to initial continuing shareholders and $1.4 billion in cumulative distributions to all the shareholders. Our NAV stood at $10.47 on September 30, down $0.09 from the prior quarter. We’ve delivered solid returns while keeping leverage prudent. Net of cash and equivalents, our debt-to-equity ratio was 71.3% in September, down from 72.9% in March.

We have substantial liquidity to drive future earnings through prudent levels of matched-book funding. We are currently pursuing initiatives to lower our funding costs, including re-financing of existing liabilities at lower rates, opportunistically harvest certain controlled investments, optimize our origination strategy mix and rotate our portfolio out of lower-yielding assets into higher-yielding assets, while maintaining a significant focus on first lien senior secured lending.

Our company is locked in a ladder of fixed rate liabilities extending 30 years into the future, while most of our loans float with LIBOR, providing potential upside to shareholders should interest rates rise.

Thank you. I’ll now turn the call over to Grier.

Grier Eliasek

Thanks John. Our business continues to grow at a solid and prudent pace. Prospect has now scaled to over $7 billion of assets and undrawn credit. Our team has reached approximately 100 professionals, which represents one of the largest dedicated middle-market credit groups in the industry.

With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that covers third-party private equity sponsor-related lending, direct non-sponsor lending, Prospect-sponsored operating buyouts, Prospect-sponsored financial buyouts, CLO structured credit, real estate yield investing, online lending, aircraft leasing and syndicated lending.

As September 30, our controlled investments at fair value stood at 26.6% of our portfolio. This diversity allows us to source a broad range and a 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. Prospect’s originations in recent months have been well diversified across our nine-origination strategies. Prospect has originated nearly $3 billion of closed investments so far during the 2014 calendar year.

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. At September 30, our portfolio at fair value consisted of 54.7% first lien, 20.1% second lien, 18.5% CLO structured credit with underlying first lien assets, 0.2% small business whole loan, 1.5% unsecured debt and 5% equity investments, resulting in 93.3% 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 debt investments were generating an annualized yield of 11.9% as of September 30. We also hold equity positions and many transactions that can act as yield enhancers or capital gains contributors as such positions generate distributions.

While the market has experienced some yield compression in the past year, we have continued to prioritize first lien 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.

Originations in the September quarter were $887 million across 11 investments. We also experienced $863 million of repayments from five investments as a validation of our capital preservation objective. During the September quarter, our originations consisted of 76% third-party sponsor deals, 7% real estate, 6% online lending, 5% CLO structured credit and 4% operating buyouts.

As of September 30, we held 140 portfolio companies with a fair value of $6.254 billion, demonstrating both the long-term increase in diversity, as well as a migration toward larger positions and larger portfolio companies. Our number of companies is up 9% and portfolio size is up 37% year-over-year. We also continue to invest in a diversified fashion across many different portfolio company industries, with no significant industry concentration. The largest is about 10%.

Our financial services, controlled investments and CLO structured credit investments are performing well, with typical annualized cash yields ranging from 15% to 30%. To-date, we’ve made multiple investments in the real estate arena with our private REITs, largely focused on multi-family stabilized yield acquisitions with attractive 10-year financing. We hope to increase that activity with more transactions in the months to come.

We closed our platform acquisition of CP Energy in the September 2013 quarter and closed multiple follow-on acquisitions in the December 2013 quarter. In the March 2014 quarter, we closed the Harbortouch acquisition with the simultaneous financing of an add-on acquisition, with other add-on acquisitions being completed thereafter, including in the September quarter and in the June 2014 quarter, we closed the Arctic Energy acquisition.

In the September 2014 quarter we exited AirMall at a 17% IRR and 1.6 times cash-on-cash return, and we recently exited the Ajax investment. We currently have other one-stop acquisitions under LOI or near LOI at attractive multiples of cash flow, with both double-digit yield generation and upside expectations.

In the June 2014 fiscal year, we made three investments in non-controlled third-party-sponsor-backed companies. They brought our total investment in each such company to more than $100 million. And in the September quarter we made another two such investments demonstrating the competitive differentiation of our scaled balance sheet to close one-stop financing opportunities. We have also made multiple control investments that each individually aggregate more than $100 million in size.

Over the past year we have also entered the online lending industry with a focus on prime, near-prime and sub-prime consumer and small business borrowers. We intend on growing this investment strategy, which stands at just under $100 million today, across multiple third party and captive origination in underwriting platforms.

Our online business, which includes attractive advance rate financing for certain assets is currently generating yield in excess of 15%. The majority of our portfolio consists of agented and self-originated middle-market loans.

In general, we perceive the risk-adjusted reward in the current environment to be superior for agented and self-originated opportunities compared to the syndicated market, causing us to prioritize our proactive sourcing efforts. Our differentiated call center initiative continues to drive proprietary deal flow for our business.

As a yield enhancement for our business, earlier this year we launched a senior loan initiative in which we expect to collaborate with third-party investor capital that would acquire lower-yielding loans from our balance sheet, thereby allowing us to rotate into higher-yielding assets and to expand our ability to close scale one-stop invested opportunities with efficient pricing.

We hope, but cannot guarantee to close this initiative during the next few months. Our credit quality continues to be strong. Non-accruals as a percentage of total assets stood at less than 0.1% at September 30. We have booked $277.4 million of originations so far in the current December quarter. Net of $103.7 million of repayments, we’ve delivered $173.7 million of net originations so far this quarter.

Our advanced investment pipeline aggregates more than $200 million in potential opportunities, with significant neat term additions expected, boding well for the coming months.

Thank you. I’ll now turn the call over to Brain.

Brian Oswald

Thanks Grier. As John discussed, we’ve grown our business with prudent leverage, including in the June quarter through two scale unsecured term debt offerings to help drive our earnings.

Net of cash and equivalents, our debt-to-equity ratio stood at 71.3% in September, down from 72.9% in June. We believe our prudent leverage, diversified access to matched-book funding, substantial majority of unencumbered assets and weighting towards unsecured fixed rate debt demonstrate both balance sheet strength, as well as substantial liquidity to capitalize on attractive opportunities.

Our company has locked in a ladder of fixed-rate liabilities extending 30 years into the future, while most of our loans float with LIBOR, providing potential upside to shareholders as interest rates rise.

We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, conduct an ATM program, develop a notes program, issue an institutional bond and acquire a competitor as we did with Patriot Capital.

Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken towards construction of the right-hand of our balance sheet.

As of September 2014, we held more than $4.9 billion of our assets as unencumbered assets, representing approximately 78% of the portfolio. The remaining assets are pledged to Prospect Capital Funding LLC, which has a AA-rated $810 million revolver with 21 banks and with a $1.5 billion total size accordion feature at our option.

The revolver is priced at LIBOR plus 225 basis points, a 50 basis point reduction from the previous rate, and revolves for four and half years followed by a one-year amortization with interest distributions continuing to be allowed during the amortization period.

We informed shareholders and analysts during our last earnings release that we would reduce our cost of capital and extend our revolver and we did so promptly during the month of August.

Outside of our revolver and benefiting from our unencumbered assets, we’ve issued at Prospect Capital Corporation, multiple types of investment grade unsecured debt, including convertible bonds, a baby bond, institutional bonds and program notes. All of these types of unsecured debt had no financial covenants, no asset restrictions and no cross defaults with our revolver. We enjoy a BBB rating from S&P and a BBB plus rating from Kroll.

We've now taped the unsecured term debt market to extend our liability duration up to 30 years. We have no debt maturities until December 2015 with debt maturities extending through 2043. With so many banks and debt investors across so many debt tranches, we’ve substantially reduced our counterparty risk over the years.

As of today we have issued six tranches of convertible bonds with staggered maturities that aggregate approximately $1.25 billion of interest rate ranging from 4.75% to 6.25% and have conversion prices ranging from $11.23 to $12.61 per share. In the past we have repurchased such bonds and redeem such purchase to be attractive to us.

We have issued $100 million 6.95% baby bond due in 2022 and traded on the New York Stock Exchange under the ticker PRY. On March 15, 2013 we issued $250 million of 5.78% senior secured notes due in March 2023. This was the first institutional bond issued in our sector in the last seven years.

On April 7, 2014 we issued $300 million of 5% unsecured notes due July 2019. We currently have $784 million of program notes outstanding with staggered maturities between 2016 and 2040 and a weighted average interest cost of 5.38%.

With the closing of the facility one condition precedent to our borrowing required, an increase level of equity for us to fully utilize the $810 million of commitments. Our board believed it was in the best interest of shareholders to raise a modest amount of additional equity at a discount in NVA to enhance liquidity and maximize access to low cost facility financing. We have raised approximately $95 million of equity capital from September 11 through November 3 at an average price of $10.03 per share.

We currently have drawn $20 million under our revolver. Assuming sufficient assets are pledged to the revolver and that we are in compliance with all revolver terms and taking into account our cash balances on-hand, we now have over $660 million of new facility-based investment capacity.

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

John Barry

Thank you Brian. We can now answer any questions if anyone have then.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Terry Ma of Barclays.

Terry Ma – Barclays

Hey guys. Can you may be just give us a little more color on the process for the spinoffs and what type of approvals you need, and also how you’re thinking about the 30% bucket after you spin the CLOs off?

Grier Eliasek

Sure. So each of the three strategies would be at this point a separate registration statement that we would file. We would likely not file publicly the registration statements that are non-RIC formats and avail ourselves of the jobs act benefits, being able to get the regulatory process done confidentially and then have that information go out when you are closer to the point of the spinoffs.

So the main approval would be a regulatory one, but we have spent a good part of the last two years. This is something we’ve been working on for a long time, which characterizes lot of the projects. We don’t always talk too much about them, but we have a lot of interesting ideas going on at all times and this is the one we were working on with the regulator to device a program that we think will be successful.

We are not going to into specific mechanics on this call, and probably because we don’t necessary want to give a roadmap for others and think this is a distinctly prospect advantage to be putting that out there.

In terms of the 30% basket with the CLO structured credit investments, our goals for this to be leverage and earnings neutral, meaning we do the spinoff and we have the ability to replenish similar assets back at Prospect. The vehicle that we would spin the CLOs often to and while the specifics on that structural piece later – again, we don’t want to give others a roadmap for our proprietor idea, would be a non 30% basket type of structure.

So that business in particular which is constrained with our balance sheet today (a) because of the30% basket (b) because of the leverage and adjusted leverage ratios that we need to operate under appropriately to sustain our long standing investment grade rating, which we enjoy and want to continue.

So the spinoff into a non-rated entity without a 30% basket is valuable and we think really the biggest, biggest piece here from a shareholder perspective is the potential multiple expansion from allowing these investments to stand on their own feet in a pure play construct. If you look at comps, for example in the CLOs side, they have tended to trade at a premium to book value, when just about the entire BDC industry right now is trading at a discount to book value. So that’s something we’d like to avail ourselves of if we can.

And this is true from far beyond the CLO structure credit business. You look at the real estate industry and REIT’s have long traded at higher multiples, lower cap rates and lower dividend yields than their BDC brethren. So we think we can potentially unlock value there as well.

And perhaps the biggest hoped for, not guaranteed, but hope for anticipated unlock is our burgeoning online lending business. As many folks in this phone call are probably aware, there are multiple IPOs being planned, some significant sized originators in the online lending business who have don’t private rounds at more tech like multiples than finance-co multiples. And if we get any, even small portion benefit from that type of the multiple in spinning offer our online lending business, then that could be a very, very attractive proposition for shareholders.

There’s so much growth embedded in that market place right now because of technology, because of ease of access for customers, whether their consumers are small businesses wanting to obtain term financing in a straight forward way from a non-bank lender community that there’s significant growth going on in our portfolio right now on a prospect investment basis is just under $100 million; that’s our investment.

There’s readymade financing for that industry as well. We have warehouse lines with multiple banks that we continue to expense, we are looking at and planning securitizations in that market place where ones have already occurred over the last year. So these are readily financeable assets because of the granularity, as well as the performance of these cash flowing loans over the course of the last cycle and the last recession. So we think in its own true play vehicle, we can unlock a lot of value in particular with that one.

Terry Ma – Barclays

Okay, great. So I’m switching gears. Can you may be just give us some more clarity on the Echelon repayment, because the $38 million looked like a repayment on principle. So can you maybe just walk us through how that can be recognized as taxable income?

Brian Oswald

Sure. The actual event happened at a company that we’ve invested in called Airlift. Airlift received some insurance proceeds from a plane. It gets a little complicated, because a lot of tax depreciation and stuff comes in to play, but the answer is that at Airlift it actually generated a gain, because it had been depreciated significantly from the original purchase price of the plane.

When it generated that gain and Airlift made a distribution to Echelon, that distribution was for tax purposes a dividend distribution. When Echelon received the dividend distribution, it utilized the cash to repay its loan to Prospect rather than declaring a dividend to Prospect. So Echelon, the money that came to Prospect from a GAAP standpoint was a pay down on its loan.

From a tax perspective Echelon itself is a LLC that’s taxed as a partnership. The partnership then, anything that comes to Echelon, which if you remember the Airlift money came to Echelon as a dividend, Echelon would record it as dividend income and therefore because its tax as a partnership, its brought over to the Prospect tax return as a dividend rather than as a debt repayment.

Terry Ma – Barclays

Okay, maybe I’ll just follow up offline and go into more detail, but can you talk about…

Grier Eliasek

Maybe I can try it Terry. We consolidate the Echelon entity for tax, but not GAAP. As we do for any LLCs, when a RIC owns an LLC that’s taxed to the partnership, it consolidates that LLC on its tax returns, so hopefully that is a short answer that’s helpful.

Terry Ma – Barclays

Okay, so why was the decision made to dividend, the proceeds up instead of reinvest it into the business. Because it looks like you guys also marked down the equity position in Echelon by $9 million this quarter?

Brian Oswald

Yes. Well when the cash comes to you it’s deemed to be a distribution from a subsidiary of Echelon. So it’s coming to us as a distribution and we can put capital back into Echelon anytime to fund new investments that we deem appropriate. At any given point in time we are looking at various other aircraft transactions. But we are generally not a huge fan of leaving significant amounts of cash just laying around at controlled portfolio companies. We’d like for cash to be in use and productive for us at all times.

Terry Ma – Barclays

Okay, great. That’s it from me. Thanks.

Grier Eliasek

Thank you Terry.

Operator

The next question comes from Jon Bock, Wells Fargo Securities. Please go ahead.

Jon Bock - Wells Fargo Securities

Good afternoon and thank you for taking my questions and very interesting proposals put forth. So perhaps if we start to talk a bit about liquidity at the moment, Grier, at 0.72, 0.71 debt to equity, how much do you believe you have available to grow the balance sheet today and still remain within your target or comfortable leverage range.

Grier Eliasek

Sure. I think there’s a couple of ways to look at it. One is kind of risk management comfort and the second is a somewhat rating agency driven view of leverage. On the former, we have a 93% secured debt portfolio and a majority first lien portfolio that’s performing very strongly. We view these as highly leverageable assets.

From a rating agency perspective, 0.85 tends to be the typical investment grade cut off of debt to equity. That doesn’t mean if you go over for one nanosecond that’s a problem, but just on a long-term basis, that’s kind of a maximum place to run. So that gives us a decent amount of liquidity today, because we are running more in the low 70’s, currently on a debt to equity ratio basis. So we do have available capital, even if you didn’t have a single repayment or a single asset sale.

But then you have repayments of course that occur. We had over $800 million in the last quarter and so far in this quarter we’ve had $104 million approximately of repayments and we’ll get to the size books that we have that are matured and seasoned book. You’re going to have a fair amount of repayments. They’ll be lumpy just like originations, but we’ll have them.

There’s a couple of other additional storehouses of liquidity for us. One is the senior loan initiative, which is an important one, where we spend a tone of time on over the last few months, which is a portfolio rotation strategy to sell off our lower yielding assets. We’ve got, what would you say Brian, $600 million, $700 million of assets in the 6% to 7% yielding range, and if we can sell those in a thoughtful manner, one of which we retain ball control over the credit, which is very important to us, and rotate into higher yielding assets, that will be significantly accretive for our business and for shareholders. Got it.

Jon Bock - Wells Fargo Securities

Well, then I guess Grier the question is, and I’m sure industries have the same thing. If you have all these available buckets of liquidity, why did you raise $100 million of equity capital below book value?

Grier Eliasek

Sure. As we disclosed in our release, we have an additional condition precedence pertaining to allowable advances on our credit facility, which basically you can think of it as an equity raise requirement in order to fully draw on the facilitating financing.

We were quite pleased Jon last quarter, within a week of telling folks we are going to go reduce our cost of funding, we delivered and did just that and reduced our spread by 50 basis points and that’s financing that we’d like to have the ability to utilize.

On the equity issuance front, we have for two years and growing now, a decline to focus on discreet – we call them GAAP down equity offerings, as part of our strategy unlike other peers and have chosen to access from time to time after market equity. We like it because its efficient funding, its low cost on a underwriter-spread basis and it’s just in time capital to assist with us.

Our desire is to minimize that as much as possible, particularly in a below book environment where we find ourselves along with and probably 90% of the BDC community at the present time. But that was the logic and rational injustification for doing so Jon.

Jon Bock - Wells Fargo Securities

I know and I appreciate the explanation. I mean you obviously, its another secret that when we look at capital rates is at high yields, which effectively translate into high required asset yields that you need to put on the book to make that equity issuance accretive. Obviously we have questions and still do, but appreciate your answer.

I guess the question as it relates to the spinoff, what we find it interesting, at the end of the day investors are going to end up owning whether its on your balance sheet or in the public liquid form, the portfolio that’s generating net earnings and dividends.

So lets look at it holistically for a moment, rather than some of the parts split up here at the moment and lets just, maybe this question is, do you believe that the earnings power of the entirety of this business can cover your $0.33 dividend.

Grier Eliasek

Well, I’m not sure. I’m trying to understand your question. When we spin the business, we are looking to grow the business and grow the distributions of the spun companies and we are looking at it first and for – let me back up and say this; we have covered and more than covered our dividends out of taxable earnings over the life of our company and significantly in the past quarter we have under distributed to the tune of over $70 million that we have built back in a spill back fashion. So we are currently not only covering, but over covering.

Jon Bock - Wells Fargo Securities

Well then I guess the question is, then why haven’t you declared the dividends in the future as you normally have at the same consistent, if not growing level?

Grier Eliasek

Sure. Well, we have concluded that setting forward your divided many, many months in future and we’ve done that in the past, we are not sure that we’ve captured “credit” for doing so and we notice that the vast bulk of the industry declares the dividend on or about the time that they are announcing earnings for the subsequent months, and so we and the Board have decided to do that and have maximum information at that time.

At the same time, we spend a lot of time pulling together the data and making sure we put out their significant disclosure this quarter related to taxable earnings. We think that’s a very important disclosure. We think it shows where we are and we think the bottom line is, the taxable earnings distributions are required distributions. So we are making required distributions to our shareholders.

Jon Bock - Wells Fargo Securities

Great point and I understand it. So I guess when you think about taxable income, we understand the $0.11 that came off of Echelon, but it’s the 17.5 of taxable income coming off your CLO book, roughly $0.05 a share, which I believe John if we took that out right, as you kind of said, that $0.33 was covered if you removed the Echelon, but it would obviously fall below the dividend if you included the taxable income from CLOs as we’ll call it less stable.

I’m curious as to how you believe that that is recurring in the future. Can you explain how those CLO cash distributions are in fact recurring, because you’re at that same level, given that you mentioned that they were recurring in nature in the press release?

Brian Oswald

Jon, this is Brian. They are recovering. The answer is that since the CLOs are still in their reinvestment stage, the balances aren’t going down. That’s the only time that the amount, that the excess would be decreasing. So they continue to generate cash distributions in excess of what we are recognizing as GAAP earnings.

Jon Bock - Wells Fargo Securities

What happens if they go into the reinvestment period Brian?

Brian Oswald

When they go into the reinvestment period we actually have the right, because all of these we hold a majority interest in. We have the right to actually call them at that point. So we can control when the call happens on these. So we have optimized when that time is. It’s generally nine to 12 months after the end of the reinvestment period to maximize our GAAP returns and our cash returns.

Jon Bock - Wells Fargo Securities

So what your saying is when you call the CLO, your going to be effectively able to earn the same cash on cash returns that your earning today in effectively perpetuity.

Brian Oswald

Well, at that point we’ll replace the CLO as a new CLO and that will start the whole process over.

Jon Bock - Wells Fargo Securities

It's just a question to get at and Grier, just it’s to help us. I think the cash-on-cash returns you're booking are significant now, and the question is if there will be an environment where the cash-on-cash returns and the CLOs will no longer be what they are at today, whether it's credit losses, whether it's increasing interest rates, etcetera. So I'm just trying to understand how this number is recurring

Grier Eliasek

I think there’s a lot of misconception as it comes to CLOs and this is a great question to get at that. CLOs when you focus on primary issuance are really arbitrage vehicles and you can make money buying primary issuance CLOs, particularly in the majority you build the deal around you and get the best economics in the picture, whether your in a low spread rate environment, a high spread environment, a low interest rate environment, a high interest rate environment, a low credit loss environment, a high credit loss environment, a recession or a bull market. Because the moment you’re pricing the deal, you’re looking at the assets and your looking at the liabilities and your capturing the positive spread between the two and they both move.

So if you have a lower spread environment going with assets, then your going to make sure the model works, such that you’re getting very attractive AAA spreads, another liability pricing. If your not getting those attractive spreads, you don’t price the deal and we take our cash and we invest in something else in our business that’s attractive, maybe it’s the online lending business, maybe its an attractive buyout like a Harbortouch deal we did, whatever, we have full optionality of what we want to do.

But these businesses have generated strong returns in every vintage going back over the last 15 years. Its not an asset class where you’ve got three good years and two terrible years or three good years, that’s not how the data shows at all when it comes to CLOs.

At the same time, as with any of our investments, we are not attached to something saying, we are going to invest, take the call from a CLO and invest in the CLO and no matter what basis. We are going to study that very carefully against a very wide and disciplined investment preview and decide where we want to put that capital. We are not long and strong just doing that or any of our other strategies.

Jon Bock - Wells Fargo Securities

No, I appreciate that and definitely appreciate the view. I guess the question is, it’s not necessarily about return, because CLO returns are made up of NAV and NIM, right. I mean you’ve got the potential for NAV expansion or the potential for distribution. And if we were operating at BDC, distributions are what matters right, and so I guess Grier what your saying is the distribution levels that come off these CLOs will be fairly static in any environment. Is that how I interpret what your saying?

Grier Eliasek

No, I’m not saying they are going to be static in an environment, but what I’m saying is there’s a couple of things. One is, I was responding to your question about when a deal rolls offs, what does life look like when your trying to invest into a new deal?

The second question you were just getting at there is, what is the resilience of these vehicles to withstand credit losses and there is a significant resilience, because you don’t have financial covenance in a CLO, in a securitization structure you would have with say bank financing, another type of leverage.

Securitization debt is arguably the best type of debt you can have, because its matchbook funding. These are self-healing vehicles, where even if you took an over collateralization test, it just goes to purchase new assets. Our volatility is also your friends running a CLO. The more volatility you have in loan prices, its means your fleet of deals can go and buy assts at a discount to par, return par and then all of that accrues to your benefit.

CBC Apatos 8 (ph) is a great example, which is a deal we call a year ago in cash or the north of 32% IRR. When we printed that deal a couple of years prior, it was I think during one of the European mini flash crashes. Spreads had widened. Your liability costs were actually much higher than they are today, but they are booked very well and because we were able to buy assets at a steep discount, the deal benefited substantially from a pull to par strategy of those loans then trading back to par.

So with the CLO there’s really two primary risks to keep in mind. One is loss risk and one is reinvestment risk. On the loss risk front, we protested against that risk by number one, doing primary issuance where we underwrite a collateral in conjunction with our management teams.

Number two, we’re in the majority seat, so we can throw our weight around for the deal and what collateral shows up there. Number three, we work with only the best management teams, who have the best track records on the reinvest to protect against our losses. Number four, we insist upon only printing deals with a very strong-modeled arm, with a high ability to withstand losses.

We’ve modeled out with our deals that the default rate to jump to as high as 8% to 10% per annum and run at those high unprecedented levels every single year for the life of the deal and we still wouldn’t loose money. That’s what I call a resilient structure.

The second risk is reinvestment risk, where times get too good and spreads diminish as loans repay and prepay and we manage that risk by being in a majority seat, and we can call the deal whenever spreads start to diminish and your spread should decline. You do not get that right if you are just a bid player in the deal, if you only own 10%, 20%, 30%. You only have that right sitting in the majority seat, which has been our disciplined distinct strategy. For many years now that’s worked out quite well.

Jon Bock - Wells Fargo Securities

Now, I appreciate it Grier and guys, honest questions, honest answers. Thank you so much.

Grier Eliasek

Thank you Jon.

Operator

Our next question comes from Robert Dodd of Raymond James. Please go ahead.

Robert Dodd - Raymond James

Hi guys. Obviously I was too focused on the spinoff; that’s the topic of the day. First on the online lending strategy. You said you got $100 million currently. I mean where is it? Because I’ve gone through the scheduled investments and I don’t see it standing out anywhere. You’ve got $12 million in whole loans, which I know what those are. But where’s the other $88 million.

Grier Eliasek

Yes, it’s a great question. We hold our small business loans directly on our prospects balance sheet and that includes our on-deck loans, that includes the portfolio we purchased from direct capital that was sold to the CIT, that’s another part of the business and we bought this part of the business; that was in early July. We’ve got some very exciting initiatives in place to grow our small business strategy. It’s a good 70% basket asset and very attractive returns, especially if your going to strike advantageous deals with lower origination promotes.

So we’ve been out there and there’s a number of companies looking to grow in that space, so stay tuned for more. We’re hoping as we end this year and get in to 2015 to see stepped up growth in the small business-lending portfolio.

The other assets sit within national, which is one of our portfolio companies, which is actually structured as a REIT and is run by a management team with a background in online lending and other types of specialty finance businesses, and that’s where our existing, where the bank financing resides for that consumer business, sort of consumer businesses within national Robert and we have multiple banks now in one warehouse line.

We are looking at adding a second warehouse line with similar banks and hopefully some new ones as well. We are working on a securitization right now and the model of returns, it depends on whether your talking about super prime, prime, near prime or sub-prime, we really have those notes, sub-prim. Its all really the first three categories right.

We model out returns in a consumer book on a warehouse basis in the 15% to 20% return range, which is a yield as well. And in the near prime – and then when you securitize those assets, we can drive that well into the 20% if you are talking about an unrated securitization. We are also looking at potential rated securitizations, which would go even higher than that. So these are highly financeable assets.

Robert Dodd - Raymond James

Just to be clear, I mean is there an origination platform within your REIT or is this basically just a wholesale buying business?

Grier Eliasek

It’s a little bit of hybrid Robert, in the sense that with a larger originators who are more established, we are one of the small number of institutions typically that’s doing significant buying. We’ve been an early player in the market place and we define the precise parameters for what we want, so call it a hybrid there.

For some of the more nascent originators, and as you can imaging, this is a high growth market, where you have a lot of capital being raised for originators to go after this market opportunity, which is a distinct and a compelling value proposition for consumers and for small businesses.

And we are striking advantageous deals with those players and also we’ve looked at our own origination platform formation, which has its own pluses and minuses. We’ll likely have a multiple prong approach that includes many of those. We like to have diversified access to originations, much like we do at Prospect itself in wanting to be able to stimulate our own deals, as well as look to intermediary sources of flow. Right now we have several platforms that are sources of flow and we expect for that number to only increase in the future.

John Barry

Hey, Robert Dodd, I’m glad you asked about our own origination, because I’m counting you as agreeing with me that that’s a very important priority for us. We’ve been very busy selling up our underwriting criteria, developing relationships, sourcing, selecting, negotiating, other loans with existing platforms bring to us. So that’s taken a good amount of time.

In parallel we have looked at getting our own origination platform up and running. I would like to see that happen and I’m glad to hear that you are wondering about it too, because that gives me some more wind in my sales on that project.

Robert Dodd - Raymond James

Okay, great. On just kind of bridging or expanding the gap between – not gap, the connection in terms of returns to shareholders. If this via the REIT etcetera, you are generating north of 20% returns and potential to expand that further with securitization, why frankly bother will all these spins for the CLO and everything else?

Just sell the CLOs to the market-to-markbook, take the gains and redeploy that capital into the online lending business which generates higher cash returns than the CLO business does and the cash and the gap returns are compatible, instead of the level yield analysis versus cash flow analysis. It seems to me that shareholders will be better off if we just frankly dump the CLO business for a gain and invest it at higher returns in this new initiative. Why go through the extra complication?

Brian Oswald

Yes, I think – and we are looking at optimization decisions like that all the time. We sold a couple of CLOs in the current quarter.

I think the bottom line for us is earnings multiple expansion. When you look at our business, which we feel has performed strongly for a decade plus, been resilient across the recession, a buyer of other businesses as a diversified platform with low losses.

We look at our forward earnings multiple at a significant discount to the peer group and we say, one reason for that maybe our business – well, we view it as a sign of strength to be diversified. Do we ever be disciplined and say, I don’t like the deals I’m seeing in this segment. I’m going to rest or pause there or even sell off what I have and redeploy to your point.

We see it as a sign of strength and they create a bit of a complexity discount for folks in the market place. So we worry about that and we think, hey if we can take some of these great performing business that have real capacity limits and the online lending business has a capacity limit as well within how much can be at this particulate portfolio company, how much could be at Prospect’s balance sheet itself as a 30% basket asset for the consumer. Why not put that into another structure where you can potentially command a higher pure play multiple, which of course is the logic of why a company might examine spinoffs in the first place. So that’s what we are trying to achieve and that’s really the first and largest compelling reason.

In addition, when you have a market presence, as a significant players, take CLOs, we’re actually the largest investor in the equity tranche of the U.S. CLOs we think on the planet, and we have a market leadership and we are very, very – we only work with about a dozen teams out of 150 that are out there in the market place, and we’ve got the ability to do a piece of repeat business with a strong close relationship that’s performed strongly with us and for us. To have the available capital under certain capacity constrains to do the next deal, which we still view as attractive on a risk-adjusted basis in a current environment; it is important.

So to have another vehicles, it’s able to grow, its very helpful. It doesn’t mean Prospect’s and we want to make this very clear. Prospect is not – PSEC is not getting out of the CLO business, its not getting out of the real-estate business, its not getting out of the online lending business.

We would still have the ability to continue with those. We got exempted relief for co-investing in February. So we have the ability to co-invest with any Spinco that would pursue a similar strategy and PSEC may retain a retention and some ownership of such Spinco as well for a period of time or for a long time as well.

But that really Robert is the biggest, biggest justification to get this pure play multiples. I mean when you look at comps that are pure plays and they are pending comps, the online side. I mean the price to book I think of some of those online businesses were like 100x and we are not saying we are going to traded at 100x right after we spend. But you get even a tiny faction of that when you are in kind of a 1.0x, actually discount to that as a BDC industry, then that looks pretty compelling, that’s an investment opportunity we want to make available to our shareholders.

John Barry

Hey Robert, it’s John. I would like to add as well. We’ve found investing over multiple cycles. I mean we have been in business now 27 years investing over multiple cycles. We like to have multiple strategies, because the CLO business is great now, the online lending business is great now, but everything changes in the further. That’s the one thing that’s for sure. So we like to keep these businesses humming along inside of PSEC for the optionally, to be able to quickly take advantage.

With the Spin’s its our hope, no guarantee, but its our hope that those trade at multiples that are indicated by their peer group, which are higher multiples than were PSEC trades and hopefully when people do the analysis of PSEC they observe that oh, well inside of PSEC is this business, which should be at this multiple. This other business, which should be at this higher multiple and if that can bring down our cost to capital and bring up our stock price.

Robert Dodd - Raymond James

Okay, I appreciate that guys. That’s a lot.

John Barry

Robert, all we need is you to write and enthusiastic research report for that happen.

Robert Dodd - Raymond James

I understand.

John Barry

Thank you so much Robert.

Grier Eliasek

Hey Robert, thank you. You’ve been with us a long time, right.

Operator

The next question comes from Greg Mason of KBW. Please go ahead.

Greg Mason - KBW

Great, thanks guys. First on the potential REITs spinout. I assume you put your three REITs together. I’m just kind of trying to capture what size would that be, around $400 million if you put those altogether?

Grier Eliasek

We are still looking at the comps, but likely it would not be all three. It would likely be American and United and National would likely be – we still haven’t decided, but your Nation will likely just be not part of the three, because that’s where a good chunk of our online assets are held and we also have some self storage properties within National and within the REIT industry companies pretend to be pure play there as well.

So the best book of our real-estate book is multi-family garden style residential of apartments, and we think we have the best change for multiple expansion if we stick to solely that in the Spinco. There is an opportunity in the further where maybe that is slightly expanded to include analogous areas like student housing and senior living facilities. But self-storage probably belongs separate, and for that reason we keep National most likely out of it at this point.

Greg Mason - KBW

All right, so those two together get close to $200 million, spinning out the CLOs, which is $1 billion. Just thinking about the transaction. So the shareholders would get stock and does that mean that essentially the book equity of those and the price to book would fall as shareholders get that stock. Is that how the transaction would work, due to essentially those size a vehicles.

Brian Oswald


I guess and we said it could be a full spin or a partial spin. That could mean spinning out – just in case the CLOs all $1.16 billion, it could be mean spinning out a prorate slice across our approximately 36 deals a lesser portion of that. We also have to work out the PSEC retention of such vehicle. We need to be mindful of what that retention should be from a regulatory standpoint. Its nice to have a capital rate as well associated with that, so these vehicles perhaps have some dry powder for growth.

A lot of times with IPOs its good for companies to have three to six months of runway for dry powder to continue to originate rather than have to tap the markets quickly for additional capital. So there’s a lot of different considerations, but I think the headline here is multiple expansion.

Greg Mason - KBW

Right. What I was kind of leading to is, ultimate what is that due to the leverage impact, right. So if you spinout some of these assets and you are not getting cash back. So essentially the shareholders are getting the stock and the book equity falls. I would assume the debt on your balance sheet is unchanged, so it seemed like you’d have a rising impact to leverage. Is there some other movement aspect there or how do we think about the leverage impact from the spinout to PSECs balance sheet.

Brian Oswald

Sure. As we disclosed, we were intended to be leverage neutral. So any sold assets would get cash back and then there would be a PSEC retention of the Spinco with announced TBD. But we are not doing something to crank up the leverage ratio at PSEC. I want to make that crystal clear. That is not what our strategy right now anticipates. So bond holders and rating agencies can relax.

John Barry

I mean Greg, we are anticipating spinning these off to a value, selling new shares to the – well, some PSEC shareholders exercising rights. Some of new shareholders coming in and therefore PSEC receiving value back for what’s gone out.

Greg Mason - KBW

Got it. So you are actually looking to sell these assets into new vehicles versus just giving shareholders stock in new public companies.

John Barry

Right. Right what happens is you get it right buy this stock and you as the shareholder, you just look up other rights offering and you’ll see how they are done.

Greg Mason - KBW

I got it, okay. And then, do you for the new senior loan fund, do you need to do the CLO spin before you are able to effectuate that transaction for your 30% bucket or do you have enough capacity to do both the senior loan and still own your CLOs before the spin.

Brian Oswald

Sorry, can you rephrase your question Greg, so I understand it?

Greg Mason - KBW

Sure. I would assume the senior loan fund that you’re working on, that would be a 30% bucker. And just curious if you are able to do that based on your current utilization of your 30% bucket before the CLOs leave our balance sheet.

Brian Oswald

Okay, I got you. As we talked about in our last call, our senior loan strategy is quite different from others. We are not looking to replicate other peoples vehicles, but to do it much better, and we don’t like using the 30% basket for these off balance sheet senior loan funds that people have done. The returns that folks get off of those are not as good as our CLO business returns; they are not as good as our financial buyout returns.

Now people end up pledging a huge amount of assets in a recourse cost collateralized basis in one place as opposed to the non-recourse funding. We think very carefully about risk and 30% basket utilization.

Instead what we’re involved is selling assets off the balance sheet to one or more investors and then rotating into a higher yielding strategy while still retaining ball control, and we are not going to the Nth degree of disclosure.

Here’s what’s happened a lot of times. We come up with an innovation at Prospect and people copy it right away. So we are very mindful not to give all of the crown jewels away on this call. I’m speaking very plainly. When we did the first covert in this industry in December 2010 people ripped off our documents and copied it after we spent years doing this paperwork to get the regulatory approval and ripped it off within three weeks.

So that’s why we’ll file things confidentially if we can and folks will get all the full disclosure at the records of point on the mechanics, but I think the most important piece is, do you believe if you take a CLO business, if you take a real-estate business, if you take an online, high growth, teck-ish business and put them in a pure play that it will command a higher multiple than PSECs multiple today.

If you believe that and that’s what we anticipate, hope to anticipate. We can’t guaranty of course, but we’ll hope and anticipate it would happen, then this is an outstanding potential move for shareholders and that’s the real logical at the end of the day.

Greg Mason - KBW

Got it. One final question, not related to the spin. You exited AirMall, which you own. It looks like – you said you took a $3.5 million realized loss on the exit and a $3 million structuring fee on the exit. Given that you own the whole thing, kind of what was your through process of taking the structuring feel, but realizing the losses versus just kind of exiting it and no significant gain or loss without the structuring fee. So can you just talk about the AirMall exist.

Grier Eliasek

Sure. Well, we did not hire an investment bank to market that asset and our team at Prospect did enormous amount of work to source an international buyer, European buyer for that asset and so that was a fully earned fee.

Greg Mason - KBW

Great, I appreciate that.

John Barry

As well there is no economic loss there Greg. Bear in mind, number one, when we look to sell an asset, the choice is hire an investor bank or do it internal. In this case we chose to devote internal resources, adjust the people. They would not count the time they would spend on that in months, but instead in years, particularly the buyer that had to be spoken to over years.

Number two, the asset, there was a positive IRR on the investment overall, net of all the fees. So the question when you sell an asset is not to other people who worked on it, going to get paid an M&A fee only if magically at the end of the process someone’s earned a particular hurdle IRR. You’d have trouble signing people up to work on that, but any investment bank for example would not work on that basis. So we don’t feel that when we take on M&A assignments that we should.

Greg Mason - KBW

I would say the slight economic loss to shareholders though given the 20% incentive fee on the structuring fee versus would be none if it was just – the realized loss did not occur. But yes, I understand...

John Barry

Well, I guess you know Greg, for me as an investor I look at economic returns. Did I make money on the investment? I understand that the way these things are accounted for is dictated by regulatory and other, but to me number one, it is the economic that drives everything else and number two, we can’t devote resources to M&A activities and wait until the last second to see if we’ve hit some hurdle return in order to justify devoting those resources.

Greg Mason

Great, thanks John, I appreciate it.

John Barry

Thank you, Greg.

Operator

Our next question is follow up from Jon Bock at Wells Fargo Securities.

Jon Bock - Wells Fargo Securities

Thank you. So just one quick follow-up. John, you mentioned the word, rights offering, and I just want to try to make sure I understand this. So the way it would happen is you would offer – well, actually just imagine I don't know anything about…

John Barry

Hey Jon Bock, let me help you here, okay. I have three things I wanted to comment on that you asked about and I couldn’t get a word in edgewise. Number one, there are many methods, strategies, structures for spinning off assets to share holders. We haven’t decided definitely on one. I used the word rights offering, globally, that’s not any specific – I don’t have any specific structure that I can convey to you right now. So were I to attempt to describe the mechanics of how we intend to spin these assets off to shareholders on a leverage neutral basis, I’d be getting at ahead of myself.

Okay, so I don’t want to pretend I have an architects plan that has every little detail in it, because it turns out for a company like ours spinning assets off to shareholders and achieving leverage neutrality and NAV neutrality which is our objective. And also unlocking value for shareholders involves far more complexity than we are able to convey on this phone call, and I apologies for not being able to do it. It would really take days; part of it is still being work out.

Let me go to the other things. In the CLO business, to-date we’ve had excellent results. That’s not a guarantee that those will continue on infinitum forever. They could change, the CLO business, the market, the spreads, that can all change.

But as Grier mentioned, we set the arbitrage when we invest. We have the call right, being the biggest in the business, being able to in fact throw our weight around, invest with great managers on terms that we like and as a result, we’ve been able to maintain high positive returns on the entire fleet to-date. No guarantee that will go on forever just as it has, but we do like the business based on historic results.

Lastly on our cost of capital, you do need to recognize that when we sell or share a stock, add a dividend yield that we are not happy with, that we are working hard to get down and I think Grier’s put finger on this complexity discount, and we want to turn that around to our benefit where people say, wow, several exciting businesses in there, now they are being valued separately. The parts add up to more than the whole. We’d like to get our cost of capital down.

We don’t want to stand in place and wait for that to happen. We have to keep moving all these businesses forward, we don’t anything to show to shareholders, but you need to calculate when $1 dollar of stock frees up $1 of capacity in our credit facility, you have to give credit for that. You can’t just say, oh the margin across the capital is a dividend on stock. That’s only half the equation. I understand you know that, but somehow that seems to be getting lost in the discussion.

Jon Bock - Wells Fargo Securities

I appreciate it. We can follow-up with the cost of capital argument off line. I guess the only thing I want to make sure is correct is, in terms of the spinout, John as you think of all of the shareholders, there would be no net NAV dilution at all on a per share basis?

John Barry

Jon, you are on our wavelength. We believe we had several routes to achieve and we haven’t yet decided exactly which one we are going to take. There is some work to be done. I can’t whitewash the factory.

We are not finished doing the work, but at the end of the day it’s our intension and we believe we can achieve it, is to have the spinouts put value in the hands of shareholders at a higher, per share valuation mark than where they are now (a); ( b) be NAV neutral and (c) be leverage neutral. And when we have got all the jigsaw pieces getting together in the puzzle and we have a few but not all, we will be ready for prime time and you will be one of the first to see it. I know you will be watching your computer for the instant update.

Jon Bock - Wells Fargo Securities

Always am following this like I do fantasy football. So no, thank you so much guys. I appreciate it.

John Barry

Thanks Jon.

Operator

Our next question is a follow up from Terry Ma of Barclays. Please go ahead.

Terry Ma – Barclays

Hey, guys. Just one follow-up on the spinoff. As you move, let's call it like $1.6 billion of assets off the fixed balance sheet, how are you guys thinking about core earnings and also dividend policy? Will you look to reset the dividend?

Brian Oswald

I am sorry, where did you get $1.6 billion.

Terry Ma – Barclays

Just ballpark figure, assuming you spin off the CLOs and about $400 million in real estate?

Brian Oswald

As I said before, any assets sold in the balance sheet, the desire is that PSEC would cash for that and the rest would be retention. So any retained – if PSEC retained an ownership of Spinco, then PSECs getting its pro rata distributions from Spinco, similar of what’s happening today. So the goal is to be leverage neutral, earnings neutral and net neutral.

And then what you created then is entities that can be valued, hopefully much greater as pure plays. Entities then to have the ability to expand their own capitalization, prudently and accretively over time to fund the respective growth, and don’t have a tight regulatory basket limits in different structures. Because the BDC balance sheet is okay for CLOs, its okay for consumer lending, but it’s really held back by 30% basket and in some cases leverage restrictions for each of those. So much better to be as a pure play; you really want to grow it in a different vehicle altogether.

And then real-estate doesn’t necessarily have significant structural limitations as the BDC, but again, if you look at the valuation of REITs on a cap rate basis, on a dividend yield basis, arguably REITs have just done much better from a yield to return standpoint than BDCs have done over the last few years, and so we can tap into that benefit as well.

Terry Ma – Barclays

Yes, got it, thanks.

John Barry

Thanks Terry.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Barry for any closing remarks.

John Barry

I think we are all set. Have a wonderful lunch everybody. Thanks all.

Operator

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

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