PennantPark Floating Rate Capital Ltd. Stock

Good morning, and welcome to the PennantPark Floating Rate Capital's Third Fiscal Quarter 2026 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]

It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.

Thank you, and good morning, everyone. Welcome to PennantPark Floating Rate Capital's Third Fiscal Quarter 2026 Earnings Conference Call. I'm joined today by Rick Allorto, our Chief Financial Officer.

Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Floating Rate Capital. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website.

I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may also include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com, or call us at (212) 905-1000.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I'll begin with an overview of our third quarter results, including the continued expansion of our PSSL II joint venture. I will then discuss the current market environment and how we believe PFLT is positioned going forward. Rick will follow up with a detailed review of our financial results, after which we will open up the call for questions.

For the quarter ended June 30, our core net investment income per share was $0.26. This exceeded our current base dividend of $0.08 per share per month, or $0.24 per share for the quarter. In accordance with our revised dividend policy, PFLT will pay a supplemental dividend of $0.0033 per share over the next 3 months for an aggregate supplemental dividend of $0.01 per share. The supplemental dividend represents 50% of the excess of net investment income above the base dividend.

As of June 30, our NAV per share was $10.26, which is down approximately 2% from the prior quarter. The portfolio continues to perform well. The decline in NAV was primarily attributable to a write-down in one of our nonaccrual investments.

Our portfolio remains highly diversified and conservatively positioned. Median debt-to-EBITDA was 4.6x, median interest coverage of 2.1x and a loan-to-value was 44%. PIK income equaled just 2.4% of total investment income, among the lowest levels in the industry. We ended the quarter with 4 nonaccrual investments, representing just 1% of the portfolio at cost and 0.4% at market value. These portfolio metrics reflect the consistency of our underwriting process and our disciplined approach to credit selection.

During the quarter, we invested $212 million in both new and existing investments at a weighted average yield of 9%. We invested $106 million into 5 new platform portfolio companies with a median debt-to-EBITDA ratio of 2.3x, interest coverage of 4.2x and a loan-to-value of 30%. Our existing portfolio continues to generate attractive deal flow. During the quarter, we invested an additional $106 million across 18 existing platform companies with credit metrics that were similarly attractive to our new investments.

We remain focused on scaling PSSL II in a measured and disciplined manner. As of today, the portfolio totaled $390 million. Over time, we expect to grow the joint venture to more than $1 billion of assets, consistent with our existing joint venture. Based upon the current conditions, we expect this expansion to occur over the next 12 to 18 months while maintaining our disciplined underwriting standards. For the quarter ended June 30, PSSL II has generated a cash yield on invested capital of 12.7%.

During the quarter, we generated a meaningful realization from the equity co-investment in the leading defense technology company. We received approximately $45 million in proceeds on our original $3.2 million investment, representing nearly a 14x multiple on invested capital. Government services and defense continues to be one of our highest conviction investment sectors and has consistently been among our best-performing verticals. Since inception, we've invested approximately $3 billion across this sector, including roughly $1.3 billion through PFLT. These investments are 92% first lien senior secured and generated an overall IRR of 12.2%, demonstrating our ability to identify businesses operating in strategically important markets.

We remain highly constructive on the long-term outlook for government services and defense because the sector possesses several characteristics that align well with our investment philosophy. Demand has historically been supported by durable federal funding priorities and long-term contracts that provide meaningful revenue visibility and stability. Many of these businesses exhibit resilient cash flow profiles, variable cost structures and are generally less sensitive to broader economic cycles than many commercial industries. In addition, the sector continues to benefit from active M&A markets and strong valuation support, thereby providing multiple avenues for value creation.

Our portfolio is concentrated in businesses supporting the Department of War (sic) [Department of Defense] and other mission-critical government agencies. We focus on companies addressing high-priority national security initiatives, including modernization of defense systems and digital infrastructure, cyber and electronic warfare capabilities, modeling and simulation, counter-drone technologies and next-generation autonomous systems. We believe these priorities will remain central to U.S. defense spending for years to come, creating a favorable backdrop for continued investment opportunities. Today, government services and defense represents approximately 18% of PFLT's portfolio. And given our experience, sourcing capabilities and the attractive opportunity set, we intend to maintain or increase that exposure over time.

Software remains an area of focus for market participants. Our exposure is limited to approximately 4.3% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash-pay, covenant-protected loans with moderate leverage, relatively short durations as well. They are concentrated on mission-critical enterprise software businesses serving regulated end markets, including defense, health care and financial services.

Now let me turn to the broader market environment. M&A activity has increased over the last 6 to 9 months, although overall conditions remain uneven. Private equity sponsors remain active, and we are seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. We are optimistic that activity levels will remain elevated throughout the back half of this year. We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and redeploy that capital into income-generating investments.

In the core middle market, the pricing for high-quality first lien term loans remains attractive, typically ranging from SOFR plus 500 to 550 basis points, with leverage of approximately 4.5x EBITDA. Importantly, these structures continue to include meaningful covenant protections in contrast to the covenant-lite structures prevalent in the upper middle market. We believe the current market environment favors lenders with established private equity sponsor relationships, consistent access to deal flow and disciplined underwriting, and these are long-standing strengths of our platform.

We continue to believe that the core middle market offers attractive risk-adjusted opportunities. Companies in this segment generally have EBITDA of $10 million to $50 million and often operate below the practical threshold of the broadly syndicated loan and high-yield markets. As a result, lenders can typically conduct extensive diligence, negotiate meaningful financial covenants, structure transactions with appropriate leverage and equity cushions and maintain regular access to company financial information.

Our credit quality since our inception over 14 years ago has been excellent. PFLT has invested $9.2 billion in 556 companies, and we've experienced only 27 nonaccruals. Since inception, our loss ratio on invested capital is only 13 basis points annually. As a provider of strategic capital, it fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through June 30, we've invested over $629 million in equity co-investments, have generated an IRR of 25% and have generated a multiple on invested capital of 2x.

Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. Our mission remains consistent to deliver a stable and well-covered dividend while preserving capital. Everything we do is aligned to that objective. We continue to focus on investing in high-quality middle market companies with strong free cash flow generation. We capture that value through first lien senior secured loans, and we pay out those contractual cash flows in the form of dividends to our shareholders.

With that overview, I'll turn it over to Rick for a more detailed review of our financial results.

Thank you, Art. For the quarter ending June 30, GAAP and core net investment income was $0.26 per share. Investment income was comprised of $59 million in interest income, $6.2 million in dividends from our joint ventures and $0.8 million in other income. Our operating expenses for the quarter were as follows: Interest and expenses on debt were $25 million. Base management and performance-based incentive fees were $12.9 million. General and administrative expenses were $2.3 million. And provision for taxes was less than $0.1 million.

Net realized and unrealized change on investments, including provision for taxes, was a loss of $18.3 million for the quarter. As of June 30, NAV was $10.26 per share compared to $10.47 per share last quarter. At quarter end, our debt-to-equity ratio was 1.56x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. Subsequent to quarter end, we reduced borrowings under our revolving credit facility, bringing our debt-to-equity ratio to 1.5x, within our target range of 1.4 to 1.6x.

As of June 30, our key portfolio statistics were as follows: The portfolio remains well diversified, comprising 159 companies across 51 industries. The weighted average yield on our debt investments was 9.8% and approximately 99% of the debt portfolio is floating rate. LTM PIK income equaled only 2.3% of total interest income. The portfolio is comprised of 89% first lien senior secured debt, 1% in second lien and subordinated debt, 3% in equity of PSSL and PSSL II, and 7% in equity co-investments.

With that, I'll turn the call back to Art for closing remarks.

Thanks, Rick. In conclusion, I'd like to thank our exceptional team for their continued dedication and our shareholders for their trust and partnership. We remain focused on delivering durable earnings, preserving capital and creating long-term value for all stakeholders. That concludes our remarks.

At this time, I would like to open up the call to questions.

[Operator Instructions] We will take our first question from Chris Muller with Citizens Capital Markets.

Nice to be on with you this morning. So I wanted to ask about the government services part of your portfolio. So it looks like rates are poised to move higher into 2027, which tends to precede an uptick in credit issues. So I guess, how does that government services sector perform in times of stress compared to other sectors you guys have in the portfolio?

Yes. Thanks, Chris, and welcome. Look, government services has been extraordinarily resilient. A lot of it goes into the defense and intelligence uses. We don't need to worry about the bills getting paid. It's through different presidential administrations. It's been very solid. So our track record of $3 billion over 65 deals or so is kind of from inception kind of 19 years ago. So it's been a really great space. Not a lot of people traffic in it. It's a differentiator for us.

And given the geopolitical winds and given what's going on kind of in the United States, we think it will continue to be a resilient space. We just had that big win with that defense tech deal where the equity co-invest was 14x on the equity. So that is kind of really nice validation for us, and we can -- we expect and continue to be doing more of that type of thing.

Got it. And where do you think the exposure in that sector trends over time? Is this a good level? Or could we see you guys lean into that a little more going forward?

I mean, we're at 18% now. I think it's probably in this zone. We still want to maintain proper diversification. It's been a great space. We've had a great track record. But kind of at 18%, it's kind of plus or minus. Obviously, the equity co-invest can -- if they're marked up, can move that a little bit. But kind of in this zone is probably appropriate because we do want to maintain proper diversification.

We'll next go to Paul Johnson with KBW.

So I'm just curious, you mentioned higher -- potentially higher repayments here if activity picks up, which could be beneficial for the portfolio and rotation there. But if I'm looking at your guys' dividend yield just based on where you trade today, almost a 16% dividend yield, and a cost of debt that's stepping up here. There was a recent bond issuance that was a little north of 7%. So incrementally higher cost of capital would also say that you would need a relatively high yield on the asset side or a relatively accretive environment to offset the higher cost of capital today.

So how -- I guess in terms of what you're looking at, you seem to have a favorable outlook on the investment -- favorable investment outlook, I'll say. How are you balancing all of that with where the stock trades today and balancing that with potential leverage reduction or return of capital? How do you kind of balance that out?

Yes. It's a great question, Paul, and thank you. It is a balanced act. We do have the 2 JVs. One is fully mature. One is growing and ramping. And those JVs, as we know, can generate teens returns. So in some sense, if we do bonds at 7% or so and we're generating a teens, that's accretive. That's kind of how we think about the ROE.

And then, of course, we want to make sure we're appropriately leveraged and also prudently leveraged at the PFLT level. So we have this kind of 1.5x kind of zone that we're -- we think is the appropriate leverage for the underlying portfolio, which is among the lowest risk portfolios in the space. You could see it in our PIK percentage. You could see it in the leverage ratios of our underlying portfolio. So we think we're appropriately balanced.

It's not going to surprise you if I say I think the stock is cheap. Most management teams say that, but it is cheap relative to the underlying risk in the portfolio, we believe, as well as the levers we have to be prudently leveraged and also optimize NII. So that's what we're trying to modulate.

Okay. Got it. And then one just on maybe credit overall. I mean, what are you guys doing in terms of amendment activity? You mentioned you guys have low PIK. But if amendments are coming up in the portfolio, are you typically able to extract tighter terms and documentations where they're occurring? Are they requiring you to be a little bit more flexible with the sponsor at this point? It didn't look like there was an increase in PIK or anything, but what are you seeing there in terms of amendments in the portfolio?

Yes. It's a good question. And the portfolio is relatively clean. The one area we have, and we saw why is the NAV down a little bit this quarter, it's from that post-COVID vintage in the zero interest rate environment when consumer strength was through the roof. So the 1 or 2 nonaccruals we have are really from that post-COVID vintage now going on 5 years. So the rest of the portfolio is pretty clean.

We're always going to have a handful of amendments. You have about 159 companies in this portfolio. So there's always something going on, but it's been relatively light. And we're just churning through whatever remains of that post-COVID vintage and getting beyond that and kind of leaning into the government services and defense and other health care -- resilient health care companies and other areas where we think there's solid risk-adjusted return. I mean the new loans we're originating, as you can see with the credit stats are really on the lower end of the risk spectrum of the industry. And we think that mixes well with how we capitalize the company, how we manage the risk. But the amendments itself are relatively light.

Got it. That's helpful. And what percent, I guess, would you say the portfolio today is kind of in this post-COVID vintage?

Yes. Let me -- I actually have a chart here. I think it's probably on the order of 10%, 15%. Most of them have performed well. There's just a few that the world reverted to the mean and the one issue we had this quarter was a consumer company that was doing very well for a long period of time. So you had the reversion to the mean and then you had tariffs. So kind of a series of unfortunate events with that particular company, kind of the reversion to the mean with consumer and then tariffs kind of really hurt it.

We'll next go to Robert Dodd with Raymond James.

Congrats on the progress. Kind of switching 2 things together, to your point, the post-COVID vintage, there was a big swell during COVID of consumers being cash-rich, et cetera. So certain underlying metrics look better when things were underwritten and caught a lot of people out. Is there any risk of that in the government services side? To your point, it seems really great right now. Is there an excess of spend in that sector right now that has any chance? I mean, I guess budgets never seem to go down, but is there any risk that there's some inflated cash flows within that sector that could turn around 3, 4 years from now?

Yes. So it's a great question. And just to give you some historical context, during the Obama administration, there was that period of sequestration, you may remember, where military expenditures were tightened. And we did have quite a bit of exposure then. The companies made it through okay. It wasn't a happy, happy time, but they did what they needed to do. We didn't really have any big issues with government services and defense at that point in time. But it's a good question.

We always kind of -- when we were underwriting a new loan, always kind of hark back to the sequestration time and try to figure out if something like that happened again, if we had a different administration, what might it look like. And then you also have in the space itself, things going on. As you could tell, our big win recently was this defense tech company that is all wrapped up into AI and drones and autonomy, which is kind of where the action is happening and less so on kind of traditional.

Now we've historically been most focused on services, government services where you have people walking into an office building somewhere and sitting behind a computer doing something. And that could be intelligence, that could be satellites, that could be a lot of different things. So we've been less focused on actual equipment and more focused on the services. So that's remained resilient. But it's something we look at, and that's why we always -- throughout the portfolio, not just in government services, try to keep leverage low. That's why our new deals are 4x, 4.5x or less. That's why we always make sure there's substantial interest coverage so that kind of if something were not -- something bad were to happen, you still got cushion.

By the way, that's why I think our health care is another big sector for us. We've outperformed our peers in health care, as I look at our peers, it crops up quite a bit with our peers. And why do we have a much lower default rate in health care, it's because we just keep leverage lower. To keep leverage lower, you just build more cushion into the system. And as stuff happens, you can weather a storm a little bit better. So we do the same in government services.

Yes. Got it. Got it. On the pipeline, I mean, you mentioned it looks pretty good in the second half. Is there any -- I mean, is that skewed in any direction? I imagine there's not a lot of software in your pipeline, but there might be obviously government services, but you're also expecting a lot of -- or potentially a ramp-up in repayment, some monetization. So is there kind of in the pipeline, any mix skew that's different from your overall portfolio and maybe on a net basis, right, if the repayments come in and the originations go out, are we going to see anything different in overall mix?

Not dramatically. Consumer is an area that when we do consumer, it usually means consumer services. We are we're okay with our exposure there. We're not necessarily looking to increase it. We've got to be very careful around the consumer these days. Whether you think it's a K-shaped economy or a C-shaped economy or whatever economy you think it is, you just got to be careful around that. I'd say it's still the same verticals.

I mean I think just one thing that's popping up a little bit more and you see it elsewhere, the industrial-related companies, and we have some industrial distributors. And then a lot of that goes into the data centers and the AI build. That area is doing very well, of course. So you're probably just across all of our portfolios in the industry, including ours. As those companies have more needs in the industrial space, there's probably going to be more capital flowing in there.

Again, you can talk about, is it going to get overdone or not overdone? We tend to -- we're exposed to that right now through -- we like high free cash flow companies. So it's less CapEx heavy, but more like industrial distributors, things like that where there's high free cash flow and any cyclical downturn in that or secular downturn in that just ends up being managed within the box because inventory just gets used. So -- but we are seeing more and more of that given what's going on elsewhere in the economy.

We'll next go to Christopher Nolan with Ladenburg Thalmann.

Art, was the actual name of the company realized defense tech? Or is that just a reference to its...

Yes, we covered it last time. It's called Aechelon, A-E-C-H-E-L-O-N. It was sold to a company called Shield AI. Shield AI is one of these neoprime type companies, along with Palantir and those folks.

And Rick, what was the drivers for the elevated unrealized depreciation, I assume, beyond accounting true-ups?

The primary driver, Art mentioned it in some of his earlier comments, was a write-down on one of the nonaccrual names, KNS. And then additionally, there was a write-down in one of the equity positions, Athletico Holdings. Those are the primary -- and KNS was also held within the joint venture. So there was some kind of flow-through effect there.

And then finally, Art, on your comments in terms of the attractive characteristics of government defense-related companies, don't these companies have -- are in a better position to command for a premium, lower cost capital or higher leverage or favorable terms and conditions? Can you comment a little bit on that, please?

Yes. It's a good question. So like much in our portfolio, these are companies where there's a private equity sponsor investing in the company and who wants to do a roll-up, wants to do add-on acquisitions. So our cost of capital, typically first lien, S plus 500, 550 and what's usually delayed draw term loans, we give them fuel to do add-on acquisitions is usually attractive for them as part of the package of financing of what they're trying to achieve.

So again, typically, it's 4x levered. There's a delayed draw term loan. We give them the firepower to do add-on acquisitions. There's 50%, 60% equity underneath us. And in many cases, we'll co-invest in the equity, which is this big defense tech win we had as an example. And it's -- that's just the model that seems to work for them. And for us, these are not unlevered companies. These are levered companies by definition. We think levered appropriately and also with excess liquidity to go do add-on acquisitions.

And I'd now like to turn the call back over to Art Penn for any closing or final remarks.

Thank you. Thanks, everybody, for joining us today. Next time we speak, we'll be reporting our 10-K, our annual 10-K, and that will be kind of in mid-November. So we wish everybody a great rest of the summer, and we'll speak with you then.

Thank you. And this does conclude today's call. We thank you for your participation. You may now disconnect.

Good morning, and welcome to the PennantPark Floating Rate Capital's Second Fiscal Quarter 2026 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.

Thank you, and good morning, everyone. Welcome to PennantPark Floating Rate Capital's Second Fiscal Quarter 2026 Earnings Conference Call. I'm joined today by Jose Briones, Senior Partner at PennantPark. Rick Allorto, our CFO, is unable to be with us today due to a prior commitment. Jose, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Floating Rate Capital. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may include forward-looking statements and projections.

Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of the latest SEC filings, please visit our website, pennantpark.com or call us at (212) 905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Jose. I'll begin with an overview of our second quarter results, including our dividend adjustment and an outlook for net investment income. I'll then discuss the current market environment and how we believe PFLT is positioned going forward. Jose will follow up with a detailed review of our financial results, after which we will open up the call for questions. We are pleased with the continued strong performance and quality of our portfolio in what remains a challenging market environment. The risk/reward profile of the core middle market remains meaningfully more attractive than that of the upper market.

NAV was flat quarter-over-quarter. Median portfolio company leverage remains moderate at 4.6x. Last 12 months PIK interest is only 2.2% of total interest and nonaccruals are less than 1% of the portfolio, and we do not have material software exposure. The substantial growth of the PSSL II JV this past quarter provides a solid base and positions us for growth in NII over time as the JV ramps. Let me now walk through our quarterly results.

For the quarter ended March 31, core net investment income was $0.27 per share. During the quarter, we continued to scale our new joint venture, PSSL II, investing $148 million in new and existing investments. At quarter end, the portfolio totaled $340 million. We are encouraged by the pace of deployment and remain focused on methodically scaling PSSL II to over $1 billion of assets, consistent with our existing joint venture. Based upon the current market environment, we expect this ramp to occur over the next 12 to 18 months while maintaining our disciplined underwriting standards.

In light of the current market dynamics and in consultation with our Board, we are updating our dividend framework to better align with net investment income. Beginning with the July dividend, we will set a base monthly dividend at $0.08 per share, a level we believe is well supported by current earnings. In addition, we will introduce a variable supplemental dividend equal to 50% of the excess NII above the base dividend. The supplement will be declared and paid monthly along with the base dividend.

Let me now turn to the broader market environment. M&A activity has increased over the last 6 to 9 months and although overall conditions remain uneven. Private equity sponsors remain active, and we are seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. However, activity levels remain below the unusually strong levels observed in 2024 as the market transitions toward a more normalized backdrop. We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and redeploy capital into income-generating investments.

Notably, we expect a meaningful realization from our equity co-investment in Aechelon this quarter. Aechelon is a leading defense technology company sponsored by Sagewind Capital, our long-term sponsor relationship. Aechelon announced that it has agreed to be acquired by Shield AI, another cutting-edge defense technology company. Upon closing, we expect our $3.2 million equity co-investment to generate approximately $47 million in total proceeds. Proceeds will consist of $40 million of cash and $7 million of value in Shield AI stock. This represents nearly a 15x multiple on invested capital and demonstrates the value of our equity co-investment program.

Given the current geopolitical environment and the Aechelon news, it is important to highlight that approximately 20% of our portfolio is exposed to government services and defense. In the core middle market, pricing for high-quality first lien term loans remains attractive, typically ranging from SOFR plus 500 to 550 basis points with leverage of approximately 4.5x EBITDA. Importantly, these structures continue to include meaningful covenant protections in contrast to the covenant-like structures prevalent in the upper middle market.

We believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting, areas where we have a clear competitive advantage. During the quarter, we invested $295 million at a weighted average yield of 9.3%, including $117 million invested in 6 new platform portfolio companies with a median debt-to-EBITDA ratio of 3x, interest coverage of 3.4x and a loan-to-value of only 44%. Our portfolio remains conservatively positioned.

PIK income represents just 2.5% of total interest income among the lowest levels in the industry. Median leverage was 4.6x, median interest coverage was 2x and median loan-to-value was 44%. We ended the quarter with 3 nonaccrual investments, representing just 0.8% of the portfolio at cost and 0.5% at market value. These results reflect the rigor of our underwriting process and the discipline of our investment approach.

Turning to software exposure, which has been an area of recent market focus. Our exposure remains limited at approximately 4.3% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash pay, covenant-protected loans with moderate leverage and shorter durations. Importantly, they are concentrated in mission-critical enterprise software serving regulated industries such as defense, health care and financial institutions. We believe this represents a meaningful point of differentiation relative to our peers.

We continue to believe that our focus on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. Core middle market companies, those typically with $10 million to $50 million of EBITDA, operate below the threshold of broadly syndicated loan or high-yield markets. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence. We thoughtfully structure transactions with sensible leverage, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity co-investment.

Additionally, from a monitoring perspective, we received monthly financial statements to help us stay informed on the performance of our portfolio companies. Regarding covenant protections, while the upper middle market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital. Our credit quality since our inception over 14 years ago has been excellent. PFLT has invested $9 billion in 551 companies, and we have experienced only 27 nonaccruals. Since inception, our loss ratio on invested capital is only 12 basis points annually.

As a provider of strategic capital that fuels the growth of our portfolio companies, in many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through March 31, we've invested over $618 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 2x.

Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. Our mission remains consistent to deliver a stable and well-covered dividend while preserving capital. Everything we do is aligned to that objective. We continue to focus on investing in high-quality middle market companies with strong free cash flow generation. We capture that value through first lien senior secured loans, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn it over to Jose for a more detailed review of our financial results.

Thank you, Art. For the quarter ended March 31, GAAP net investment income was $0.26 per share and core net investment income was $0.27 per share. Core net investment income includes the add-back of $1.1 million of debt issuance costs related to the refinancing of our securitization due 2038. Our operating expenses for the quarter were as follows: interest expense on the debt were $24.1 million, base management and performance-based incentive fees were $12.8 million, general and administrative expenses were $2.1 million, credit facility amendment and debt issuance costs were $1.1 million and provision for taxes was less than $0.1 million.

For the quarter ended March 31, net realized and unrealized change of investments, including the provision for taxes was a gain of $3 million. As of March 31, NAV was $10.47 per share, essentially flat from $10.49 per share last quarter. As of March 31, our debt-to-equity ratio was 1.6x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. Subsequent to quarter end, we paid down our revolving credit facility and reduced our debt-to-equity ratio to 1.5x, which is within the target range of 1.4x to 1.6x. As of March 31, our key portfolio statistics were as follows: the portfolio remains well diversified, comprising 162 companies across 51 industries. The weighted average yield on our debt investment was 9.8% and approximately 99% of our debt portfolio is floating rate.

LTM PIK income equal to 2.2% of total interest income. The portfolio is comprised of 87% first lien senior secured debt, 1% in second lien and subordinated debt, 3% in equity of PSSL I and PSSL II and 9% in equity co-investments. Debt-to-EBITDA in the portfolio is 4.6 and interest coverage was 2.0. With that, I'll turn the call back to Art for closing remarks.

Thanks, Jose. In conclusion, I'd like to thank our exceptional team for their continued dedication and our shareholders for their trust and partnership. We remain focused on delivering durable earnings, preserving capital and creating long-term value for all stakeholders. That concludes our remarks. At this time, I would like to open up the call to questions.

[Operator Instructions] And we'll take our first question from Brian McKenna of Citizens.

So NAV per share was roughly flat in the quarter. That's a pretty notable standout here within the group for the first quarter. What's driving the resiliency here? You do have the forthcoming pretty sizable realization event, I believe, coming in the next quarter or so. So I'm assuming that drove some incremental gains across the portfolio. But anything else just to note across the rest of the portfolio?

Thanks, Brian. Yes, Aechelon is a big piece of the equation there, really showing the value of equity co-invest. And we also have a few other equity co-invests that are percolating along nicely, and you'll see those in the SOI. We have one called Guild Garage, which is an equity co-invest, which has already been exited. And we have some others that are certainly not the size of Aechelon, but are percolating along and provided some nice singles and doubles.

And that's really -- just to zoom out, that's really part of the reason we do equity co-invest. Many of our peers do it. Some of our peers do not. It's nice to have something in the portfolio that can give you some lift that can offset the inevitable nonaccruals that you're going to have in a broadly diversified loan portfolio. So the program in this quarter is certainly meeting its mission and providing a stable NAV.

Got it. That's helpful. And then when you look at your pipeline of new originations today, I mean, where are you leaning in? Is it a lot of the same sectors? I know you've been active in defense and government services. But kind of what's the mix of the pipeline there? And then how does spreads compare on these transactions versus spreads that are really tied to the prepayments that have come in over the last quarter or 2? Just trying to gauge where the spreads are coming in today versus maybe some of the recent prepays.

Yes. Jose, do you want to answer that one?

Sure. With regards to areas of opportunities and what we're seeing, defense and government services is a big part of our investment philosophy as well as health care and some business services. And so we're quite active with our private equity sponsors looking at those type of deals in the industries, and you saw the benefit of our exposure to defense with Aechelon. With regards to spreads, by and large, in our market, we're in that 500 to 550 over SOFR. And our view is that that's pretty consistent over the last couple of quarters.

Yes. I'll also add in on the industry focus. Obviously, government services and defense, a big one. We also have substantial exposure to health care, which we think is a resilient and can be a resilient area of the economy, certainly a big part of the GDP. Some of our peers have stumbled a little bit in health care over time. Thankfully, for us, by and large, we've done very well with it. And it's just -- I think, basically, we keep leverage low. We don't get out over our skis, we keep leverage low, keep it reasonable. I think where you've seen stumbles in health care, it's kind of higher leverage situation. So when you have higher leverage, you just don't have the cushion to be able to withstand bumps in the road.

So we're pleased with health care. Obviously, we have a big business services. Consumer services are a big area. We've been doing quite a bit in kind of services around the home. That's been an active area. So those are kind of some of the areas where we focus.

[Operator Instructions]

Okay. We do have an extra question here, please.

We'll go next to Christopher Nolan with Ladenburg Thalmann.

Apologies if I missed part of the call. Art, on your comments earlier on the dividend adjustment, should we look at that as a proxy for the run rate direction for PFLT?

Yes. It's a great question as we -- look, we still believe that as we ramp this joint venture, this JV II that we can earn over time north of $0.30 a share per quarter. And if you were to model it out, Chris, I think you'd see that. Just with what was going on in the M&A market, which was not quite as robust as we would have hoped, we said, hey, let's not force it. Let's take our time in this more muted M&A market. The deals will be -- forcing investment usually doesn't pay off. So we said, look, let's take this time, adjust the dividend to be more comfortable.

We clearly want to position ourselves as a prudent, stable BDC. BDCs today are kind of a little bit out of favor. And as the market turns, and we hope they will be in favor again, we want to come out of it well positioned as a BDC that easily covers its dividend, comfortably covers its dividend and also has dividend upside. So this was an opportunity for us to kind of clear the table a bit, align the dividend comfortably to the NII, which is why we've chosen the $0.24 a quarter, $0.08 a month, plus 50% of the difference between the base and GAAP NII.

And then we will pay that out monthly. So we've already stated that for the month of July, there'll be an $0.08 per share base dividend and a $0.0033 supplemental dividend for July, August, September. We'll announce earnings in August. We'll be back here in a few months. We'll see what GAAP NII was, and we will adjust -- the supplemental will be adjusted to whatever that was. So we just thought it was a good time given what's going on to kind of reset the table, make sure our investors know that we can comfortably cover it and not force the issue on ramping the JV in a more muted M&A market. I hope that makes sense.

Yes. No, it does. And I guess from a broader perspective, I mean, you guys see a lot of deals. And for this quarter, at least from my chair, it looks like asset quality for BDCs in general seems to be deteriorating. And I just want to -- and I'm not isolating PFLT or any PennantPark entity. But in general, where do you see us in the cycle for credit for these market companies.

Yes. So for us, as you missed the first part of the call, but our nonaccruals are under 1%. So for us, that's pretty good. We'll take below 1% in any environment. But let me comment on the broader picture. Obviously, those BDCs that have significant software exposure, by definition, had to mark those loans down, right? Now they still hopefully will perform well. Hopefully, it will pay off, all good. But by definition, there was a mark-to-market, particularly for those who have a big software exposure. We have very limited software exposure.

So we did not get hung up on that. I will highlight that, theory that where we do have our minimal nonaccruals and where everyone in the industry has some nonaccruals is, I'll call it the post-COVID vintage of '21, '22 deals where right post-COVID, there was a lot of money flowing around and there was a perception that the era that we were in, for instance, consumer products were doing well, other areas of the economy that were more of an at-home economy, there was a perception by everybody that things would be kind of for the long term in that space.

Guess what? Here we are in 2026, there's been a reversion to the mean. Some of those companies that were doing really well in 2022 or 2023 are doing less well. So for us, in our below 1% nonaccruals, and you see -- I think you see it elsewhere in the industry, that's -- I kind of think that's where you're seeing some of the nonaccruals hit. Does that answer your question, Chris?

Yes, it does.

And at this time, there are no further questions. I'll turn the call back to Art for any closing remarks.

Thank you. Thanks, everybody, for being on the call today. We look forward to speaking with you in early August after our next earnings release. In the meantime, we're wishing all the mothers out there a great Mother's Day. Have a great summer, and we'll speak to you in August. Thank you very much.

This does conclude today's conference. We thank you for your participation.

Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Floating Rate Capital. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website.

I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our marks today may also include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or Coles at 212-905-1000.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I'll begin with an overview of our first quarter results and recent strategic initiative. The launch of our new joint venture, PSSL 2, which commenced investment activities during the quarter. I will then share our perspective on the current market environment and how PFLT is positioned for continued growth. Rick will follow up with a detailed review of the financials, and then we will open up the call for questions.

For the quarter ended December 31, core net investment income for the quarter was $0.27 per share. During the quarter, we began investing in our new joint venture, PSSL, PSSL invested $197 million during the quarter and an additional $133 million after quarter end. Its total portfolio is currently $326 million. PSSL 2 recently closed on an additional $100 million commitment to the credit facility, bringing the total to $250 million and the credit facility has an accordion feature to increase commitments to $350 million. Our objective is to scale PSSL 2 to over $1 billion in assets, consistent with our existing joint ventures. Our run rate NII is projected to cover our current dividend as we ramp that portfolio.

Turning to the market environment. We are seeing an increase in M&A transaction activity across the private middle market. This trend is expanding our pipeline of new investment opportunities. We also expect that this increase in M&A activity will drive repayments of our existing portfolio investments, including opportunities to exit some of our equity co-investments and rotate that capital into new current income-producing investments. We continue to believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting, areas where we have a clear competitive advantage. In the core middle market, the pricing on high-quality first lien term loans remains attractive, typically ranging from SOFR plus 475 to 525 basis points, with leverage of approximately 4.5x EBITDA.

Importantly, we continue to get meaningful covenant protections in contrast to the covenant-light structures prevalent in the upper middle market. Our portfolio remains conservatively structured as of December 31, PIK interest represented just 2.5% of total interest income among the lowest levels in the industry. Median leverage across the portfolio was 4.5x with median interest coverage of 2.1x. During the quarter, we originated 4 new platform investments with a median debt-to-EBITDA ratio of 4x interest coverage of 2.9x and the loan-to-value ratio of 43%.

With regard to the software risk that has been a recent market focus, we have stuck to our knitting. Only 4.4% of the overall portfolio is software, and that 4.4% is structured consistently with how we invest in the core middle market, primarily all cash pay loans with covenants with leverage of 5.3x and matures in only 3.4 years on average. It's enterprise software that is integral to the customers' businesses, the vast majority of which is focused on heavily regulated industries such as defense, health care and financial institutions where safety, security and data privacy are paramount and where change will be slower. Peers typically invested much larger percentage of their portfolios in software, 20% to 30% and much higher leverage, 7x plus or loans against revenue, not EBITDA with substantial PICC, covenant light and long maturities.

This story is a significant differentiator from our peers. We ended the quarter with 4 nonaccrual investments representing only 0.5% of the portfolio at cost and 0.1% in market value. These results reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. Core middle market companies, typically those with $10 million to $50 million of EBITDA, operate below the threshold of the broadly syndicated loan or high-yield markets. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence. We thoughtfully structure transactions with sensible leverage meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity coinvestment.

Additionally, from a monitoring perspective, we received monthly financial statements to help us stay informed on the performance of our portfolio companies. Regarding covenant protections, while the upper market has seen significant erosion. Our originated first lien loans consistently include meaningful covenants that safeguard our capital. Our credit quality since inception over 14 years ago has been excellent. PFLT has invested $8.7 billion and 545 companies, and we have experienced only 26 nonaccruals. Since inception, our loss ratio on invested capital is only 13 basis points annually. As a provider of strategic capital, he fuels the growth of our portfolio companies in many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall for our platform from inception through December 31 we've invested over $615 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 1.9x.

During the quarter, we continue to originate attractive investment opportunities and invested $301 million at a weighted average yield of 10%. $95 million was invested in new portfolio companies and $206 million was invested in existing portfolio companies. From an outlook perspective, our experienced and talented team and our wide origination funnel are well positioned to generate strong deal flow. Our mission and goal are a steady, stable and protected dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in first lien senior secured instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

With that overview, I'll turn it over to Rick for a more detailed review of our financial results.

Thank you, Art. For the quarter ended December 31, GAAP net investment income and core net investment income were both $0.27 per share. Our operating expenses for the quarter were as follows: interest and expenses on debt were $27.2 million, base management and performance-based incentive fees were $13.5 million. General and administrative expenses were $2.1 million. Provision for taxes was $0.2 million and credit facility amendment costs were $0.5 million. For the quarter ended December 31, net realized and unrealized change on investments, including provision for taxes was a loss of $30 million. As of December 31, NAV was $10.49 per share, which is down 3.1% from $10.83 per share last quarter.

As of December 31, our debt-to-equity ratio was 1.57x and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. Subsequent to quarter end, we sold $27 million of assets to the PSSL 1 joint venture and $133 million of assets to the PSSL 2 joint venture. We used the net proceeds from these sales to pay down our revolving credit facility and reduced our debt-to-equity ratio to 1.5x, which is within our target range of 1.4x to 1.6x. As of December 31, our key portfolio statistics were as follows: the portfolio remains well diversified, comprising 160 companies across 50 industries. The weighted average yield on our debt investments was 9.9% and approximately 99% of the debt portfolio is floating rate.

Ticincome equaled only 2.5% of total interest income. The portfolio is comprised of 89% first lien senior secured debt, less than 1% in second lien and subordinated debt. 4% in equity of PSSL 1 and PSSL 2 and 7% in equity co-investments. The debt to EBITDA on the portfolio is 4.5x, and interest coverage was 2.1x.

With that, I'll turn the call back to Art for closing remarks.

Thanks, Rick. In conclusion, I'd like to thank our exceptional team for their continued dedication and our shareholders for their trust and partnership. We remain focused on delivering durable earnings, preserving capital and creating long-term value for our stakeholders.

That concludes our remarks. At this time, I would like to open up the call to questions

[Operator Instructions] We will take our first question from Paul Johnson with KBW.

Interesting to hear that you guys have what I would consider an underweight software exposure in the portfolio. I know you've mentioned software as defensive sector in the past. You've obviously done loans there in the past. I'm just curious, why is software is such a low exposure within the portfolio? Is that a strategic investment decision you guys have made? Or is there anything else driving that?

Thanks, Paul. It's a good question. We basically just kind of stick to our knitting, which is cash flow loans at a reasonable multiple where we think there's great defensibility where we can get covenants where we can get cash interest. And we saw -- obviously, we saw this massive parade of software loans come by, and much of them were marching at 7x leverage, 8x leverage, leverage against revenues, ARR loans. We saw many of them covenant light or PIK and for us, that was not -- those were not comfortable loans for us to make. So we have done some software, about 4% of the portfolio, where with a reasonable multiples of cash flow where we get our maintenance tests where there -- we feel safe as enterprise software that's integral to their customers' lives and in industries that are heavily regulated or data privacy, safety and security mean that any change that may happen will be -- it will take some time.

So that's kind of military, that's health care, that's financial services. And we have maturities today in about 3 years, an average maturity of about 3 years on that 4% of the portfolio that's software related. So we feel very safe and comfortable. And so we basically just stuck to our knitting and didn't chase the supply that was coming through.

Got it. Very helpful. And then last question I would just have just on the NII this quarter mostly in relation to the new JV. You guys have mentioned that you expect to cover the dividend and I believe most of the plug there was from ramping the second JV. So I'm curious, when you -- when you say that you expect to ultimately cover the distribution with NII, does that assume essentially the JV at the $1 billion asset target and generating sort of run rate earnings from the JV, so essentially full optimization there or does it not necessarily assume full deployment within the JV as well as I would ask about the Fed cut -- the Fed rate cuts, does that assume that rate cuts in the meantime?

Yes. No, it's a great question. So look, and you can look at it, it's all public information. We have JV1 in PFLT, PSSL 1 with Kemper, we have a JV over a PNNT with Pantheon -- and so this is our third. You can look at those 2 as models in terms of ramp in terms of income generation and percentages of the vehicle that each BDC owns -- so basically, the way we look at it is once you get up to about $1 billion with our 75% ownership we should be covering that dividend. When is that going to happen? It's not going to be next quarter, but we're off to a good start. We're at about $330 million now from a standing start last quarter. A lot of it will depend on M&A and M&A is obviously the feedstock that will populate this -- but we feel pretty good about it, helping us cover that dividend.

That does not include any equity rotation. We do expect -- if M&A happens, which we think it will, it will not only populate the JV, it will also imply some equity rotation on the existing portfolio, which will be helpful. And then you model in whatever base rate decrease, you'd like 50 basis points, 100 basis points we can go to Rick can go through the model with you at some other time or a model with you. But there's a bunch of offsets, but we feel like we're well set up to have a pathway to cover that dividend.

We will take our next question from Robert Dodd with Raymond James.

On the software question, right? I mean your portfolio is a fraction over 4% in terms of software where if I understand right, that's where software is the product of the business. Can you give us any thought -- I mean, how much of the portfolio is kind of software exposed? I mean, where it's not producing software but it might be in the business of implementing software for the government or anybody else or where software is a core part of the business, but the business is not producing software itself.

Yes. It's a great question, which is kind of how you define it and where you draw the line and some out to the bigger picture. The bigger picture question is, how does AI impact every company in every portfolio, right? So that's a -- that's above our pay rate for sure. The difference here is software is the main product. That's how we define it. And I think that's -- it's pretty kind of including where software is a big, big element of the company. A lot of our -- almost all of our companies use software in some way, shape or form AI can be a help or it could be a hindrance but we tried to really hone in on where it was the product itself, where there's a human being attached to it, where we feel very good that AI is not going to impact the human nature of the job anytime soon.

That did not -- we have a bunch of -- we do have service businesses. We have a bunch of home service businesses where it's HVAC repair and plumbing and okay, that's probably not that impacted by AI. AI could be helped. So that's 1 end of the spectrum. And then you have -- we do have a lot of military defense, government services exposure a, that's less likely for safety, security and privacy reasons to move to AI quickly, it could adopt but requires human analysis. Like there's a lot of government services that ultimately human being needs to be -- needs to analyze the to synthesize AI, could very well help those companies. So I don't know. I mean it's -- we're all grappling with how you define it and what is in the bucket and what isn't and where AI kind of impacts portfolios. So we try to be with this 4.4% or whatever, we try to be really pure as to what our software really was the product. And I know I'm rambling, but I don't know if I gave you any color there, Robert.

No, no, -- that was really helpful. So yes, I mean it's -- it's a difficult topic. On -- just next 1 in kind of copy or like you said, I mean, you've gotten up to north of $300 million already from kind of a standing start. Now some of that, I do think you've kind of had, in a sense, pre-stocked the on-balance sheet portfolio so that you could drop things down and obviously, you've done it post quarter end as well. So that the initial ramp was possibly faster than we should expect on a quarterly basis would be my guess. I mean, if the market is normal, like defining that. How long -- what's plausible to get to $1 billion? Is it another -- is it 3 or 4 quarters? Or is it 8 to 12?

I would just to throw it out there because it gives me a lot of range because this is going to be a lot driven by M&A, right? Right, which last year, Media struck in the M&A market called Liberation Day, M&A was spiked for most of the rest of the year. It feels like it's coming back here. We had J&F and PNNT. -- as that's an early indication that maybe maybe this time, it happens. We are feeling it. We're seeing it in our backlog of deals that we're looking at. So I'll throw out 18 months just as a big, broad kind of number, which gives me a lot of wiggle room on either side of the in 12 to 24 months, you want to do a range. You want to do a 24 months outside case, you can model that in. But quite frankly, it's going to be driven by M&A.

We will take our next question from Brian McKenna with Citizens.

Sorry if I missed this, but can you walk through the drivers of the unrealized marks in the quarter? And then when you look across the portfolio and the watch list today, are there any additional markdowns coming over the next quarter or and I'm just trying to think through some of the puts and takes and what that means for the trajectory of NAV moving forward.

Yes. Most of the markdowns, I'll call -- and good question, Brian. Most of the markdowns I'll call are. And we have a little bit of this, we'll call the 2021 vintage, which was the post-COVID vintage where people thought that consumers were not going into stores again, where logistics and supply chain stuff was really doing very well. So we have a little bit of that thankfully, it's not that large, and that is kind of what is working its way through the pipeline here of markdowns. I'll point out a company called PL acquisition stands for Pink Lilly, which is a direct-to-consumer women's apparel business. I'll point out Research -- now or Dynata, which is a marketing services business, which has been softer.

And I'll point out in the JV, a company called Wash & Wax which is a car wash company known as ZIPs. People were we're doing a lot of car washing post-COVID. So they're washing their cars again with all the bad weather in the north in the last couple of weeks. So seeing a little bit of balance in car washing, but I'd say that's generally the theme you've seen much bigger movements with some other BDCs that have reported NAV diminution due to Amazon relationships and home furnishing stuff. So we've got a little bit of that here. It's kind of working its way through. We don't really see much more, quite frankly, in that is kind of here we are 5 years later. And I think with M&A starting to move, hopefully, we're going to start to see some upside in equity and some equity rotation to offset what I'll call a little bit of this 2021 vintage.

Got it. That's helpful. And then just a follow-up there. If you look at your portfolio today, what's the mix of loans just by the vintage here? And I'm curious how much of your portfolio has turned over since 2021?

We don't have that handy right now, let us do some work and we can chat at a convenient time. And then look, presumably that, that is in there, anyone we and you could sit there and look at the origination date of the -- of the portfolio. But I think it might be some good work for research analysts to do just an idea.

We will take our next question from Christopher Nolan with Ladenburg Solman.

Rick, the $3.6 million charge leg of the credit amendment and debt issuance costs. I presume that's nonrecurring. And is that related to the $75 million debt issuance in January?

Sure. The first part, for PFLT, it was about $500,000, not $3.6 million. And yes, that is a onetime item and now it was not related to. Again, the $75 million that was raised was at PNNT.

Okay. My press releases. And also just as a follow-up. On the M&A comments, what is the -- is there a lot of activity around the software sector I'm just kind of curious, given everything going on with AI, whether or not software is...

Yes. We're -- as you can tell, we're not 1 of the big software lenders. So we're probably not the best party to ask around M&A in the software sector. My presumption would be when you have times of kind of like this, where the market is trying to figure things out in the sector, my assumption would be M&A would be lower for a while as things settle down and people revalue both equity and debt in the space. But again, we're probably not the best people to ask.

Great. That's it for me, and apologies for confusing companies there.

No problem. Good news is on you have an opportunity to ask the same questions again.

And gentlemen, there are no further questions at this time. I will now turn the conference back over to Mr. Penn for any additional or closing remarks.

Thanks, everybody, for your participation this morning. We look forward to speaking with you next in early May. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.

Good morning, and welcome to the PennantPark Floating Rate Capital's Fourth Fiscal Quarter 2020 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.

Thank you, and good morning, everyone. Welcome to PennantPark Floating Rate Capital's Fourth Fiscal Quarter 2025 Earnings Conference Call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Floating Rate Capital. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information.

Our remarks today may also include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I'll begin today's call with an overview of our fourth quarter results and recent strategic initiatives, including the $250 million portfolio acquisition and our new joint venture, PSSL, I'll then share our perspective on the current market environment and how PFLT is positioned for continued growth. Rick will conclude with a detailed review of the financials, and then we'll open up the call for Q&A. For the quarter ended September 30, core net investment income for the quarter was $0.28 per share. We previously announced the acquisition of a $250 million portfolio and the formation of a new joint venture with an initial targeted portfolio of $500 million.

These initiatives underscore our focus on enhancing PFLT's earnings power through scale diversification and disciplined capital deployment, key pillars of our long-term growth strategy. The portfolio acquisition adds high-quality well-known assets, that are projected to increase net investment income by $0.01 to $0.02 per share on a quarterly basis. The JV with Hamilton Lane, a respected global investor enhances our funding sources and provides a scalable platform for future growth. The PSSL 2 JV began investing this month and closed a $150 million revolving credit facility, which bears interest at SOFR plus 175 basis points. The credit facility has an accordion feature, allowing total commitments to increase to $350 million. Our run rate NII is projected to approximate our current dividend as we ramp the PSSL 2 portfolio. Our game plan is to grow PSSL 2 to be in excess of $1 billion in assets similar to our existing joint ventures.

As we achieve this game plan, our NII should be well in excess of our current dividend. Regarding the current market environment for private middle market lending, we are encouraged by a steady increase in transaction activity, which we expect will translate into a higher loan origination volumes in the quarters ahead. Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth initiatives, demonstrating the depth and resilience of our origination platform.

We are optimistic that the increase in transaction activity will also result in opportunities to exit some of our equity co-investments and rotate that capital into new current income-producing investments. We believe the current environment will favor lenders with strong private equity sponsor relationships and disciplined underwriting, areas where PFLT has a clear advantage. We continue to see opportunities to deploy capital into core middle market companies where leverage is lower and spreads are higher than in the upper middle market. In the core middle market, the pricing on high-quality first lien term loans is SOFR plus $4.75 to $5.25. Leverage is reasonable, and we continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant light.

Turning to our current portfolio. We continue to maintain what we believe is one of the most conservatively structured portfolios in the direct lending industry. This is evidenced by having among the lowest PIK percentages in the industry at 1.8% for the quarter. As of September 30, our portfolio's median leverage ratio through our debt security was 4.5x and the portfolio's median interest coverage was 2x. For new platform investments made during the quarter, the median debt-to-EBITDA was 4.4x. Interest coverage was 2.3x and the loan-to-value was 44%. We had three investments on nonaccrual status and total nonaccruals represent only 0.4% of the portfolio at cost and 0.2% at market value. These strong credit metrics reflect the rigor of our underwriting process and the discipline of our investment approach.

We continue to believe that our focus on core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. The PennantPark platform has a demonstrated track record of value creation through the successful financing of growing middle market companies across five key sectors. These sectors in which we possess deep domain expertise, enabling us to ask the right questions and consistently deliver strong investment outcomes. They are business services, consumer government services and defense, health care and software technology.

These sectors have been recession resilient, tend to generate strong free cash flow and have a limited direct impact to the recent tariff increases and uncertainty. Core middle market companies, typically those with $10 million to $50 million of EBITDA, operating below the threshold of broadly syndicated loan or high-yield markets. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity co-investment.

Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies. Regarding covenant protections, while the upper middle market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital. Our credit quality since our inception over 14 years ago has been excellent. PFLT has invested $8.4 billion and 539 companies, and we have experienced only 25 nonaccruals. Since inception, PFLT's loss ratio on invested capital is only 11 basis points annually. As a provider of strategic capital, he fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity coinvestment.

Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through September 30, we've invested over $596 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 2x. As of September 30, our portfolio grew to $2.8 billion, up from $2.4 billion in the prior quarter. During the quarter, we continue to originate attractive investment opportunities and invested $633 million and 11 new and 105 existing portfolio companies at a weighted average yield of 10.5%. As of September 30, the PSSL 1 portfolio totaled $1.1 billion and during the quarter, invested $89 million in 4 new and 14 existing portfolio companies. We believe that the increase in scale of PSSL's balance sheet will continue to drive attractive mid-teens return on invested capital and enhanced PFLT's earnings momentum.

From an outlook perspective, our experienced intelligent team and our wide origination funnel are well positioned to generate strong deal flow, our mission and goal or a steady, stable and protected dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in first lien senior secured instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

With that overview, I'll turn it over to Rick for a more detailed review of our financial results.

Thank you, Art. For the quarter ended September 30, GAAP net investment income and core net investment income were both $0.28 per share. Operating expenses for the quarter were as follows: interest and expenses on debt were $25.8 million, Base management and performance-based incentive fees were $13.4 million. General and administrative expenses were $2 million and provision for taxes was $0.2 million. For the quarter ended September 30, net realized and unrealized change on investments, including provision for taxes was a loss of $10 million. As of September 30, NAV was $10.83 per share, which is down 1.2% from $10.96 per share last quarter. As of September 30, our debt-to-equity ratio was 1.6x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Subsequent to quarter end, we sold $118 million of assets to the PSSL 1 joint venture and $191 million of assets to the new PSSL 2 joint venture. We used the net proceeds from these sales to pay down our revolving credit facility and reduce our debt-to-equity ratio to 1.4x and which is at the lower end of our target range of 1.4x to 1.6x. As of September 30, our key portfolio statistics were as follows: the portfolio remains well diversified, comprising 164 companies across 50 industries. The weighted average yield on our debt investments was 10.2% and approximately 99% of the debt portfolio is floating rate. PIK income equaled only 1.8% of total interest income.

We have three nonaccruals, which represent of the portfolio at cost and 0.2% at market value. The portfolio is comprised of 90% first lien senior secured debt second lien and subordinated debt, 2% in equity of PSSL and 7% in equity co-investments. The debt to EBITDA on the portfolio is 4.5x and interest coverage was 2x. Now let me turn the call back to Art.

Thanks, Rick. In conclusion, I'd like to thank our exceptional team for the continued dedication and our shareholders for their trust and partnership. We remain committed to delivering strong performance, preserving capital and creating long-term value for all stakeholders. That concludes our remarks. At this time, I would like to open up the call to questions.

[Operator Instructions]. We will take our first question from Robert Dodd with Raymond James.

I guess, on the portfolio acquisition, particularly, I mean how -- I mean, I guess how did that come about? And secondly, are there more opportunities like that? And what way do you think that is you obviously get a pool of assets there, you don't get to pick and choose, I presume. So I mean what's the value of an acquisition which was a big lump versus deploying the capital into individual investments?

Thanks, Robert. Just to take a step back. That was another joint venture that we had with a third-party with all of the same assets in self-originated assets that we originated Actually, those were originated a couple of years ago, so the spreads are high. We know the portfolio very well. So that was really just an acquisition of more of the same type of assets that we already have in PFLT and in fact, many of the same assets that we already have in PFLT.

Got it. Got it. On the -- and then just to the point on the market, I mean, it does seem like it's ramping up. Are you seeing any kind of bifurcation. I mean, I think, obviously, logistics companies have been an issue post-COVID, not you, right? I mean -- so are you seeing any kind of application about what you would like to do or what is coming to market in terms of still some things having COVID handovers or these handovers or any thoughts there?

Yes. So look, logistics, as you mentioned, is an area that's still dealing with post-COVID. There is a general reversion to the mean that we're seeing throughout the economy where we're seeing softness and this has been broadly reported in the media. The consumer -- the average consumer is relatively soft. Inflation has remained high, and the tariffs did not help that. So the average consumer in America is a little soft, which is kind of in the back of our mind as we underwrite credit. We have very little amounts in consumer brands. We do have consumer services, consumer services, we tend to have are more related to the home, which generally is hanging in there. pretty well. But that's what we think about. The other area is that we focus on government services, defense, health care, those remain pretty strong.

Got it. And on that, like -- you do have some good exposure to the government and contracting, et cetera. Is that the shutdown of which obviously went on a while? Did it have any impact on any of the portfolio companies?

We have very little exposure to so-called civilian government activities. It's more defense, intelligence things of that nature where the shutdown did not really have an impact. So we're no pun intended, we're well defended there.

We will take our next question from Brian McKenna with Citizens.

Good morning, Art and Rick. I appreciate the disclosure around the $310 million of assets that were sold to both JVs post quarter end. I'm curious, when were these loans initially originated? And I'm just trying to figure out the NII contribution from these assets in fiscal 4Q, and then really the starting point for NII in fiscal 1Q, given these sales, the scaling of the second JV as well as the full quarter run rate from the portfolio acquisition.

Yes. So the -- I think we sent out a press release when we did the portfolio acquisition. I think it was kind of mid-quarter. So we did not get a full quarter of ramp from those assets that we bought the $250 million portfolio. So in our comments, when we said full quarter, it should add about $0.01 to $0.02 per share of NII for a full quarter of those assets. The JV starts to become much more accretive as it scales. So day 1, it's not really accretive. But as it gets to $500 million, $750 billion, $1.2 billion like the other JVs, that's when you start to see the benefit of the scale of it, the financing that you get. You can see the returns that our other two JVs are generating the JV we have in PFLT and in the JV we have in PNNT. If you model a 15% return on that junior capital and you deploy a reasonable amount in that in the Hamilton Lane JV, we're 75% of the junior capital.

It starts to become in a very, very attractive addition to the NII. But it's it probably takes a year or 2 before you start to get the benefits of that ramp. We certainly want to ramp it, but we also want to be careful and conservative along the way. And make sure we're putting really solid assets into that joint venture. So the NII contribution for that is probably over, call it, a year depending on deal flow and all of that. So I don't know if I answered your question with that, Brian, but please continue to ask if I didn't.

Yes. No, that's helpful. I appreciate it. And then I guess just a follow-up on the dividend. I think in the prepared remarks, you said as the second JV scales NII should be well in excess of the dividend. And so I appreciate to your prior comments, it's going to take a year or 2 to full year ramp. But thinking about that comment in excess or well in excess of the dividend, I mean is that contemplating the forward curve? Is that contemplating any other kind of credit quality changes? And then what other kind of core assumptions are in that?

Yes. Look, we can run models with each other. Certainly, well in excess with the existing surfer curve, certainly the market indicates we have some room to head downward with SOFR. But I think even if you take the market's assumption of where SOFR is going to be a year out, I think we should -- based on our numbers, and we can compare models, I think we're still covering the dividend reasonably well.

We will take our next question from Doug Harter with UBS.

Thanks. Can you just talk about kind of where you're seeing new loan spreads and sort of kind of any stabilization there? And then how that compares to what you're seeing on new financing costs?

Yes. So I think we talked about our new JV guide credit facility at the SOFR plus 175. So that's kind of our most recent comparable kind of loan that we can access. I think we said in our stated remarks that we've seen it kind of in the 4.75% to 5.25% range on average in our world now our world a little bit lower risk, i.e., our average debt to EBITDA is in the mid-4s, we're not stretching for -- we're not stretching for yield. Our loan to values are kind of 40-ish percent. So in our box, we're okay taking we're okay taking a little lower yield if the credit is really, really solid. So we will do a $475 million or $500 million.

If we really feel good about the credit, the and the value and the low leverage. Again, that shows up in the PIK percentage 1.8%, we're probably among the lowest in the industry in terms of the amount of PIK Obviously, if you have higher leverage in your book, whether it's 6x, 7x ARR loans, whatever you want to call them, pick is more of a requirement because of the higher leverage.

We will take our next question from Arren Cyganovich with Truist Securities.

Following up on the prior questions. The portfolio acquisition boosted leverage to around 1.6x and then subsequently to that, so it went back down to 1.4x. Is that 1.4x? Does that run rate cover the dividend? And how much if you were just to exclude PSSL, does that cover the dividend? I'm just trying to kind of have the puts and takes and put those to your comments.

Yes. Look, we're happy to go through model inputs and such. Our general leverage range is 1.4x to 1.6x. So as you saw, sometimes we'll take it up to 1.6x, we'll move assets into our two JVs. We'll get down to 1.4x. And so I guess if you wanted to model 1.5x kind of middle of that range. And yes, if you kind of model -- our belief is if you model 1.5x, if you grow the JV over time, we should be able to easily cover our dividend. And even if you took a SOFR reduction and put that and we believe so. So we can go through the -- we can go to model with you and go through scenarios with you, but that's -- as we look at the scenarios of ramping the second JV. We do hope we do get some equity rotation. As M&A happens, we believe we should be able to get some equity rotation, which help out a lot if you take this joint venture and you model it out similar to our other two joint ventures, that's kind of where we land.

Got it. That's helpful. And then the credit quality has been solid, really for the industry. Here, you have some small one-offs here and there. Maybe you could talk a little bit about the strength of your underlying portfolio companies and what you're seeing in terms of trends and average EBITDA and revenues for your portfolios?

Yes. I don't know if we put it in prepared remarks, we are seeing kind of double-digit growth in revenues and probably single-digit growth and mid-single-digit growth. Again, kind of what we chatted about earlier, it's industry and company specific, of course. Logistics we talked about, there's a couple choppier credits there. we're focused a lot on the consumer and kind of how the consumer is faring in this environment. So we're focused on that. By and large, the portfolio is healthy. So to have all the names that we had well over 100 and have a handful of choppier names is totally expected. It's what we model.

Of course, we're -- any of these portfolios, you're going to have a handful of names that are one way share perform experiencing issues. Sometimes they rebound, sometimes they don't. But we think the number of choppier credits is relatively minor at this point. And the watch list of things that we're kind of looking is nothing really unusual about what's going on right now. We're not seeing any systemic issues with credit at this point in the economy or direct lending at this point in the economy. It's kind of the same old story here.

We will take our next question from Paul Johnson with KBW.

What happened with your investment in Bilight quarter-over-quarter? It looked like maybe there was a little bit of a payoff there some sort of realization. But just curious what happened in that company?

Yes. There was a dividend recapitalization and we are in the equity, that's one where we have an equity co-invest. There was a realized gain of about $0.04 a share.

And that's $0.04 in terms of dividend income this quarter? Or is that just the realized gain that was taken?

That was not an income element. That was a NAB element. So we had some realized gains. We had some realized losses. Walker Edison was the big realized loss that was already written down. It was unrealized, it became realized something called LAV gear was realized and when through a restructuring. So it was a realized $0.05. So Walker Edison was realized $0.12 per share LAV gear was realized $0.05 per share and then this Bilight was a realized positive of $0.04 a share.

We will take our next question from Christopher Nolan with Ladenburg Thalmann.

Is it correct here that the EBITDA coverage was 4.5x, 4.4x?

4.4x would be the debt to EBITDA, yes.

Am I correct that it sort of seems like either the leverage is going down on these portfolio companies or the EBITDA is going up? I presume your EBITDA is going up. Is that a fair assumption?

Well, it could be both. It depends on the company as we just said, EBITDA is going up a bit in the portfolio. And also if we're underwriting correctly, the companies are deleveraging and paying debt down, which is -- which, of course, is our goal. We'd love to see pay down and -- and then on the new deals, the new deals that come in are again relatively low leverage and kind of in the low to mid 4s.

Okay. And then on the stock price is trading 17% below book. Any consideration in terms of buybacks? Or does all the joint ventures sort of restrict your abilities to do that given the leverage ratio?

The Board of Directors always considers all options including buybacks, insiders or continual buyers of our portfolios, both public funds and private funds. So it does appear to be a good value right now.

There are no further questions at this time. I will now turn the conference back to Mr. Penn for any additional or closing remarks.

Thanks, everybody, for your participation in this Thanksgiving season. We are certainly grateful for the trust that our shareholders have given us. We wish everyone a terrific Thanksgiving and holiday season, and we'll speak to you in early February.

This concludes today's call. Thank you for your participation. You may now disconnect.