Q2 2020 Earnings Call
This time all participants are in listen only mode. After the speech your presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone. Please be advised of today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand the call.
Over to your Speaker David Gladstone. Please go ahead Sir.
Well. Thank you Sydney Nice introduction. This is David Gladstone Chairman of the Gladstone investment and this is a quarterly earnings conference call.
Quarter ending September 32019.
And this is for shareholders and analysts that like to ask questions. At the end of this that common stocks traded on NASDAQ under the symbol G.A. <unk> and thank you all for calling in.
I always happy to provide an update to our shareholders and analysts that follow Oh.
Providing our view of the current business environment. Our goal is to help you understand what's happened and then give you a view that future.
We have change. These calls there's many of you know we used to do a lot of history, but we've excluded most of the history of this company and and the detailed discussion of how the company is different from other bdcs.
And we seek to do capital gains and income noninterest income. So hope you like to streamline reporting method that we're going through and now I hear from our general Counsel and Secretary Michael Licalsi. Good morning, everyone. On today's call May include forward looking statements of security fact of 1933 and the securities.
Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties and other factors you know there based on our current plans, which we believed to be reasonable. So many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all risk.
There is less than our forms 10-Q kind of playing other documents we filed with the FCC you can find them all on our website Gladstone investment dot com or even on the Fccs website, which is www dot SCC Dot G. O V. Now the company undertakes no obligation to publicly update or revise any of these forward looking statements whether.
As a result of new information future events or otherwise, except as required by law. Please also note that past performance or market information is not a guarantee of any future results.
We ask you to take the opportunity to visit our website once again www Dot Gladstone investment Dotcom, you could sign up for our email notification service you can also find us on Twitter sat at Gladstonecomps and all Facebook keyword there is the Gladstone companies.
As a reminder, today's call is simply an overview of our results through September 32019. So we ask that you review our press release and Form 10-Q , both issued yesterday for more detailed information with that I'll turn the presentation over to Julia Ryan She's Gladstone investments Chief Financial Officer, Julia Good morning, everyone.
Well, David on vacation I will provide an update on our business and outlook. We're pleased to again reported solid operating results for the most recent quarter adjusted net investment income of 23 cents per common share for the quarter was greater than our regular quarterly distributions of 20 cents per common share.
Based on our current portfolio performance values and income generating potential we believe the outlook for the balance of the fiscal year ending March 2020 to be positive. We made one new buyout investments to add ons and successfully exited one buyout investment during the past past quarter with this exit since inception in 2005, we have exit.
At 19 portfolio companies and generated a 4.2 times cash on cash return on the equity portion of those investments, while focusing on growing total assets and increase our monthly distributions to shareholders.
Additionally, our net asset value remains strong at 12 39 for share at 930 19, we maintained our monthly distributions at an annual run rate of 82 cents per common share, reflecting additional capital gain realization successes and made another onetime additional supplemental distribution of three cents per common share.
In September .
Our board also recently approved the second semiannual supplemental distribution of nine cents per common share to be paid in December of this year.
Well the buyout environment continues to be very competitive. The good news is that we're seeing a pick up and new investment activity as mentioned, we made two new acquisitions and the fiscal year to date and are evaluating a number of other potential opportunities, we anticipate continuing to pay semiannual supplemental distribution, that's the portfolio matures and growth and work.
Well to manage exits and realize additional capital gains of course, we and our board of directors will evaluate the ability to make these additional supplemental distribution their mouth and timing as well as any further deemed distributions of capital gains similar to the one be declared and mark of 29 team.
Now, let's turn to a summary of the funds financial performance.
We ended the September quarter, with an eye of 6.6 million as compared to an <unk> of 8.9 million in the prior quarter investment income declined slightly due to its 2.9 million decrease in other income the timing of which can be variable, which affect the 2.3 million increase in interest income, which was primarily driven by the collection of past.
Do amounts upon the exit of one of our portfolio companies.
Not expenses increased by 1.6 million in the current quarter, which was primarily driven by is your point 8 million increase in other expenses and is your point 8 million inc. decreasing credits to fee somebody advisor the 1.3 million decrease in the income based incentive fees, resulting from lower pre incentive fee net investment income was offset by a one point.
1 million dollar increase any capital gains based incentive fee given realized and unrealized gains this quarter.
When we are adjusting net investment income to exclude the capital gains based incentive fee accrual adjusted net investment income per weighted average common share was 23 cents in the current quarter. We continue to believe that this metric is a useful and representative indicator of operations exclusive of any capital gains based incentive fee as net investment income does not.
Include realized or unrealized investment activity associated with the seat.
During the quarter ended September Thirtyth 2019, we recognized a net realized gain on investments of 21 million, which is primarily the result of one of those assets I mentioned earlier.
On the balance sheet side and as of September Thirtyth total assets decreased to 620 million compared to about 642 million at June Thirtyth as repayments and the exit I mentioned exceeded new investment and I don't.
Activity and due to a roughly 4 million dollar decline a fair values quarter over quarter.
Liquidity remains strong with over 125 million available under our credit facility and that asset coverage start in asset coverage of 316%.
Net assets totaled about 407 million or $12 at 39 cents per share as of September thirtyth compared to $12.29 per share at June Thirtyth, which is primarily a result of realized gains exceeding any unrealized depreciation this period.
As of September Thirtyth and on a book basis Undistributed net investment income combined but net realized gains totaled over 27 million or about 83 cents per common share.
This amount is already net of the 50 million deemed distribution, we declared in March of 2019, and it's also reduced.
By the book accrual of the capital gains based incentive fee, which is roughly 23 million at this point and this amount is not currently do all else equal the 83 cents per share would be available for distribution to shareholders in future periods, even if the entire capital gains based incentive fee accrual were to be Pete.
Now with that in mind and as previously announced in October 19. The board declared monthly distributions of 6.8 cents per common share for October November and December of 2019, and the second semiannual supplemental distribution of nine cents per common share to be paid in December assuming the current monthly distribution run rate of 82.
<unk> per share per year, and 18 cents per share per year and supplemental distribution, meaning it does not include the additional three cents per share we paid in September annual distributions totaled roughly one dollar per common share or a yield of about 7.7% based on yesterdays closing price up $12, a 95 cents and does.
Covers my part of today's call back to you David well that's good good report Julia No. Dave Dullum is listing wherever he is.
We'll be out today and it will be back soon on the next call.
Julien Michael gave good information for our shareholders.
That is presented in the 10-Q filed yesterday.
This team is reported solid results, including a new buyout investment in one exit from a significant unrealized gain and some add on investments in fact, they add ons is the way we throw some of these companies we have a company and then we buy smaller company and added to it.
Team is in a really good position to continue these successes throughout our fiscal year ending March 31st 2020.
We all believe that Gladstone investment as an attractive investment for investors seeking continuous monthly distributions with some supplemental distributions from potential capital gains and some other income that comes and from time to time.
The team hopes to continue to show you a strong return on your investment and are fun.
Now, let's have some questions from analysts so Sydney would you come on and instructions for asking question.
Yes. Thank you.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question. Please press the pound.
Our first question comes from Henry Coffey with Wedbush. Your line is now open [laughter] a good morning, everyone. I, maybe it's just winning the world series, but a great quarter and a lot of enthusiasm on the call.
Yeah. The challenge for US is to always figure out what's next.
When you look at your portfolio companies in aggregate.
Are there.
Not specific issues because those would be captured in fair value adjustments, but are there you know sort of general opportunities constraints to gross new doors opening new doors closing when you. When you when you look at the World about what is your thought process in terms of.
They did the operating environment for your portfolio companies.
I think is good Henry we are in the smaller end of the buyout world as you know.
We're in the middle market middle markets about.
The third largest economy in the world.
And so there's opportunities coming and going in this sector section and we're just sitting in there trying to pick off a couple every quarter.
And I think it's a good opportunity for us.
The fact that nobody knows where we're going right now that is a their economies booming, but at the same time as a lot of down in the marketplace gives us a chance to buy things.
And I think we're going to continue to do well you don't never see anything more than about six months out. So I think for the rest of the fiscal year ending March 30, Onest 2020, we're in really good shape and we should continue to grow and have a good time building up this company and hopefully have some.
Huge capital gains someday down the road, but I think were in good shape. There is no no real blow back at this point in time from anything that we see so headwinds and tailwinds as they always column, we see some going in different directions, and just try to stay out of the way of the.
Tailwinds and.
Good good local companies and they're running these things.
With adjusted net income that Eni per share at 23 cents is the thought on the dividend just to sort of keep it where it is.
Uh huh.
And then and then just continue to let it.
Flow from a a series of sort of supplemental and and regular payments.
Well, we certainly don't want to cut the dividend that's always been I know for US and were raised the dividend when we get in a position to raise it.
There's nothing other than just good feeling about where we are today so.
I would hope that we can raise it sometime in the near future, but we're we debate that every time the board gets together and as you know our next board meetings in January So we'll keep.
Keep rise on that and I want to raise the dividend I'm, a big proponent of raising the dividend and Dave Dullum and Julia who have to manage the balance sheet at PNM will always pushing back in making sure I don't get too excited about raising the dividend, but we have a good discussion every quarter.
About raising the dividend and I think you should look at the capital gains side of the business. It's still strong and if you looked at what we could do if everything works I think you'll get really really happy with the aspect of getting some extra dividends during during the next year.
Thank you.
Okay next question.
Thank you and your next question comes from the line of Mickey.
Your line is <unk>.
Yes, good morning, everyone I want to start by asking about repayments I noticed that the last couple of quarters. The principal repayments have been pretty significant I'm curious, what's driving that trend and how do you feel about your deal pipeline for the second half of the fiscal year.
[noise] Mickey it's Joe Yeah, and bad debt repayments have sort of obviously when we exit a deal which we've exited quite a few already this year the.
That side of things get labeled as our repayment. So that's why you see that number.
A little bit higher comparatively to the prior period and the last fiscal year other than that this is just part of our managing our exit strategy. There's nothing off hand, that's happening right now and I think I alluded to it and earlier part of my my call. We are seeing some pick up in the deal volume that we're looking at and things.
That make it on our radar so where we're happy with Adam we're hoping that we can close enough PD L.C. and then you have to future.
One other things is one of the things that's driving.
This this industry were in is that people are worried that somehow we're going to have another recession. So they want to sell now and we're taking advantage of that we're not in a.
And our belief that there's going to be some kinda catastrophic event soon and so we're playing that game today, maybe the wrong game, but most likely is the right games since everything seems so strong what what's your next question, making my next question was about what was the nature of the past due interest on 80.
Yeah.
If you recall two years ago 80 see had some operational struggle if somebody had it on non accrual for awhile and when they came out of that they started paying back some of those contractual interest that they hadn't been Tang out during the non accrual period and then upon exit we negotiated that we would get all past due amounts.
Okay. That's that's a that's straightforward couple more questions.
I noticed it last quarter, meaning the previous quarter you extend into line of credit to cheer Hobbs and the prefers were written down in this quarter.
Line of credit was repriced and debt was reclassified from first second lien and the prefers were written down again, so who's the lender ahead of you.
What issues in general is that company confronting.
So you're right we brought any senior lender with the idea that in the near future. We would be our line of credit would be refinanced out.
The company has had some issues on the backlog side, just you know managing pricing entirely but the backlog is really strong wear out of all those projects they've run that term. So you should see a nice pick up in that company and then your future.
So just to make sure I understand you brought in a bank.
Facility ahead of years, and you expect them to take out your facility.
Hi, yes in the and then near term.
Okay, and sort of a housekeeping question your gionee climb quarter to quarter was there something specific going on there.
<unk> taxes, that's it acts and generally the quarter, where we accrue our excise taxes, because we're nearing calendar year end.
Okay and SOG remains a.
But that remains valued at par.
In a position to be making to begin to be making interest payments and going back on accrual was that too optimistic.
It's too often an optimistic for the balance of the fiscal year about we're working on it.
Okay. That's it for me I appreciate your time thank you.
Oh Sidney you got any other questions for US Yes. Our next question comes from the line of Matt Sherwood.
Your line is open.
Hey, guys.
Great corridor.
Just a quick one on the on the interest sorry on the be dry write off subsequent to quarter end.
How does that impact these excess via the 82 cents you were talking about the excess.
Inclined for distribution.
Good question. So it would reduce it once that number is realized the unrealized losses will slip into a realized loss in there for a reduced the number on that I quoted if you look on our balance sheet that number actually includes the unrealized piece of the portfolio I Smile. So if you want to go with a liquidating.
Something like 30 perspective, I would point you to the balance sheet and amounts.
Right. So soon 82 cents due to Gothic capital incentive.
The or does that just go down by 15 million or how did they work.
So the total accumulated.
Gains and losses would be reduced by the amount that I just so the be dry losses. So you were just getting new total to divide by the total number of shares outstanding.
Okay.
Due to be Sig substantially lower next quarter because of the realized.
Assuming no other again Youre correct.
Okay Gotcha perfect. That's helpful. That's just trying to clarify thanks, so much.
Okay, Sydney any other questions.
Yes. Our next question comes from the line of Ryan car with Jefferies. Your line is now open.
Good morning, guys index, congratulations on the good quarter.
Thank you.
So my main question relates to the yield it seems like it's been picking up quarter to quarter year over year.
And you know that's definitely favorable I'm curious is that related to the repayment of the and the late repayment of the asset or what's what's that what's driving that yield enhancement, especially given the impending rate outlook.
That is exactly right. So the slight operation as you might call. It for this quarter is related to that collection of the past amounts, but otherwise yield is strong and that 13% range.
Okay, and and the equity portion of your portfolio continues to wind down I mean is that what affected that have on your portfolio is it rotates in terms of the yield.
One of the portfolio. If you look at what's going on in the portfolio you sell something that has reached its point and your sell it get your capital gains or trigger a loss and move onto the next one so you're seeing.
Later stage deals that we hold in the portfolio being replaced one new deals and hopefully two to three years from now those will be yielding the same as the ones in the portfolio. So the yield you. After remember the yield in this company is determined by us that is.
If you own all of a or most of the equity on a company or large chunk.
You can set the yield as much as you want to take out.
And so if you got a very strong company you can.
For sure I'll yield up and if it's not yielding not strong than your yield comes down some but yield is a function of how much we want to take out a going along as we go through the development of the company.
Great and credit it seems to be trending well.
Yeah, it's showing year over year improvements as well on that front and you mentioned that your outlook in terms of the macro economy continues to be strong, especially in the competitive deal environment. You have you have a good amount of liquidity moving forward. I mean are you changing maybe your creditor underwriting strategy given this part of the cycle or or is there.
Anything different about your origination strategy moving forward.
No. It's the same business I I've been in it for lifetime and you go through these cycles and when the economy is a hot you need to keep putting good deals on the books with the idea that next quarter might be the down quarter.
And we get caught every now and then a making a bad yes about a certain part of the economy and where it's going but it's rare that everything goes down like it did and 789 and so my guess is that we've picked the right places if you look at where each of these new.
New deals are.
I think we've picked the right place to increase our increase our investments.
Well. Thank you David Thank you Julia.
All right Sydney any other questions.
I'm showing no further questions at this time I'll now turn the call back over to David Gladstone. Furthermore.
Alright. Thank you all four calling in and I think this will be a good quarter. When you get to December 31st and get your call going sometime in January February early February that will be I think another good time to talk if that's the end of this and I'm going to shutter sale.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.