Q3 2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Gladstone Investment Corporation third quarter's earnings ending December 31st 2009 Teen earnings call him webcast. At this time all participant lines are in listen only mode.

After the speakers presentation, there will be a question and answer session to ask the question. During the session you would need to press Star then one on your telephone.

Please be advised of today's conference is being recorded if you acquire any further assistance. Please press Star then zero I would not unlike the hand the conference over to your Speaker today, David Gladstone. Please go ahead.

Alright. Thank you Sarah this is the quarterly earnings conference call for the quarter ending December 31st 2019 for shareholders and analysts Gladstone investment.

As a common stocks traded on NASDAQ G. Eight a in the preferred stocks under two symbols G. I am and <unk> and.

Hello.

Thank you all have called again, we're always happy to provide an update to our shareholders an analyst and provide you. The current business environment two goals from this call help me understand what happened then give you view of the future.

I'll start out of course, with our General Counsel Secretary Michael Licalsi. Michael Go ahead, Thanks, Devin and good morning, everyone. Today's call May include forward looking statements on the Securities Act of 1933 Securities Exchange Act 1934, including.

<unk> performance.

These forward looking statements involve.

Studies.

Based on current plans.

We believed to be reasonable and many factors may cause our actual results to be materially from any future results expressed or implied by these forward looking statements.

All risk factors listed all forms 10-Q 10, okay.

The documents, we file with yes, you see.

We found on our website www <unk> Gladstone investment Dot com well the Fccs website were just www dot FCC dot GLP.

Undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law. Please also note that performance or market information no guarantee of future result, we asked it can take the opportunity.

I'm, sorry, once again Gladstone investment dotcom Signup for our email notification service, but also find us on Twitter they handled errors outlet is gladstonecomps.

And on Facebook keyword, the Gladstone companies today's call simply an overview of our results through December 31, 2019, we ask that you were your press release and form 10-Q, both issued yesterday for more detailed information now with that I'll turn the presentation over to Gladstone investment President David Dullum, Dave Hey, Mike Thanks, very much.

And good morning to all our shareholders and participants on this call.

We're pleased to again report solid operating results for the most recent quarter ending 12, 30 119 and that are adjusted net investment income of 23 cents per common share was consistent with the last quarter and was greater than our regular quarterly distribution of 20 cents per common share and based on our current portfolio performed.

The valuations the income generating potential the outlook for the balance of the fiscal year ending 331 square he is strong.

Particular, when considering the past three fiscal quarters, where we have already generated adjusted net investment income 71 cents per share.

During the quarter, a we made incremental investments in existing portfolio companies to support add on acquisitions and we exited two buyout investments during that quarter also.

And with these exits incenting our since inception in 2005, we've actually exited 21 portfolio company isn't generated an overall four times cash on cash return on the equity portion of those investments again with our thesis of making equity investment and also generating income for shareholders.

Along with this exit activity, we have continued to grow total assets and the monthly distributions to shareholders over that period.

Our net asset value also remained strong at $12.51 per share.

At 12, 30, 119, and as we plan for the future and look troll long term capital needs, we determine that with the strong performance or common stock price and the resulting dividend yield that it would be wise to raise some common equity. So in January we began selling common stock under our new ATM program and to date we ever.

Raised net proceeds of about $3 million, all above net asset value, which is accretive to our existing shareholders. We will continue this program. So long as we determined is positive for shareholder value add overall cost of capital.

During the 12 30 119 quarter, we maintained our monthly distributions at an annual rate of 82 cents per common share for the quarter. Subsequently in January or board declared a 3% increased to seven cents per common share for a multi distributions or an annual run rate of 84 cents.

And reflecting additional capital gain realization successes during the calendar year, we made another supplemental distribution of nine cents per common share in December.

So just briefly on the outlook the buyout environment continues to be very competitive.

The good news always that we are seeing a pickup in new investment activity and we very much involved on a daily basis in reviewing and analyzing new investment opportunities that fit our profile and as mentioned we made two new acquisitions several add ons into fiscal year to date and as I mentioned evaluating a number of other potential opportunities. So.

We anticipate continuing to pay the semiannual supplemental distributions as the portfolio matures in gross and were able to manage exits and realize additional capital gains of course, we in our board of directors, we'll evaluate that ability to make these additional supplemental distributions their amounts and the timing as well as any further de.

Im distributions of capital gains, which would be similar to the one that we declared in fiscal 2019, so on that basis I'm going to turn it over to our CFO Julia Ryan to give you more detail of the actual financial performance for this past quarter Julia Thanks, Dave Let me start with a summary of the funds finance a funny.

We ended the December quarter, with an eye of 6.2 million, which compared to Eni of 6.6 million in the prior quarter investment income declined slightly due to a $2 million decrease in interest income, which was primarily driven by the collection of past due amounts upon the exit of one portfolio company in the prior quarter and which was that.

By $1.4 million of an increase in other income which can be variable.

<unk> expenses decreased slightly compared to the prior quarter, which was primarily driven by a decrease in other expenses, most notably excise taxes and interest expense given to pay down of our credit facility with proceeds from exits as well as an increase in credit to see somebody advisor.

The decrease was partially offset by a.

<unk> 8 million dollar increase in the income based incentive fees due to higher pre incentive fee net investment income and a half million dollar increase in a couple against based incentive fee given net realized and unrealized gains this quarter.

When adjusting net investment income to exclude the capital gains basis until April adjusted and I are 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 operation exclusive of any capital gains based incentive fee as net investment income does not include does.

Realized or unrealized investment transactions associated with the state.

During the quarter ended December 31, 2019, we recognized a net realized gain on investments of 34 million, which was primarily a result of those to exit.

On the balance sheet and liquidity side and as of December 31st total assets decreased to 582 million compared to about 620 million at the end of September because repayments and exits exceeded disbursements to existing portfolio companies and due to a roughly 1 million dollar decline and the existing portfolio.

Liquidity remains strong with almost 170 million available under our credit facility and an asset asset coverage of 384%.

Net assets totaled about 410 million or $12.51 per common share as of December 31st compared to $12.39 per share at September Thirtyth, primarily a result of realized gains exceeding unrealized depreciation which includes the reversal of previously recorded unrealized appreciation or depreciation.

Our next it and the impact of distributions made during the quarter.

As of December 31st in on a book basis Undistributed net investment income combined with net realized gains totaled almost 58 million or about $1.76 cents per common share. This amount is net of 50 million net of the $50 million deemed distribution, we declared for the fiscal year 2019 and also.

Produced by the book accrual of the capital gains based incentive fee, which is roughly 24 million of which only 8.1 million is contractually due currently.

All else equal the dollar and 76 cents per common share would be available for distribution to shareholders in future periods, even if the entire capital gains based incentive fee accrual work can be paid to the advisor.

With that in mind and as previously announced in January our board of directors increase monthly distributions to seven cents per common share.

For the first calendar quarter up 2020.

Assuming that's monthly distribution run rate of 84 cents per share per year, and estimating 18 cents per share and supplemental distribution, which have not been yet determined or declared annual distribution total <unk> dollar and two cents per common share, which is roughly a yield of 7.7% based on yesterdays closing price of $13 in 30 cents.

This covers my part of todays call and back to date, Okay. Thank you, Dave Julia Michael Oh, good information to our shareholders.

Presentation, and the 10-Q filed yesterday should bring everyone up to date.

Team has reported I think excellent resolved, including or add on investment transactions and exit activity was significant net realized gains I did see one of the large brokerage houses that has a list of bdcs. They follow and gain was number two on their list with regard to the last.

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Total return and that was 58.2% that's quite significant as some of that's due to the fabulous time that we're in today, a fantastic returns or come from good times and if you can't make it now and be hard never to make it then so my own view of the.

This is we have a great team that's running this company now and when the best position that we've ever been on I think the future looks a tremendous.

The team is a and a good position to continue these successes that Steve just reported today throughout our fiscal year, ending March 31st 2020 and longer I hope it goes for another year as well.

We believe Gladstone investment as an attractive investment for investors seeking continuous monthly distributions and supplemental distribution from potential capital gains in other income a team hopes to continue to show you a strong return and at this point I will stop and have some questions from our analysts and shareholders about.

Oh, what you heard today and seen in our 10-Q that was filed yesterday.

Sarah would you come on and tell them, how they can ask questions.

Certainly as a reminder to ask a question you would need to press Star then one on your telephone to withdraw your question. Please press the pound key again that is star then one if he would like to ask a question. Please standby, while we compile the culinary roster.

Our first question comes from the line of Mickey Leann with Ladenburg. Your line is now open.

Yes, good morning, everyone I'm I just had one question today about capital allocation I'm, Dave I do appreciate that you noted that the pipeline looks healthy and I, obviously realize that issuing equity at the current stock prices nicely accretive to any v., but why not use your available.

Debt capital instead, since it's meaningfully cheaper than common equity and your leverage is still quite low.

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So it makes you again I think as we've talked many times I think about capital and availability sort of being somewhat fungible the decision around raising some equity through the ATM frankly was less driven by our immediate capital needs as much as.

It really taking a longer view and thought about you know who knows what the world is gonna looked like in the next nine to 12 months, a we're in a wonderful position to be able to shore up our our capital base and especially our common equity base.

Without diluting shareholders and as you point out actually being somewhat accretive. The objective is not to go and raised a slew of equity a at this point because we need to put it to work we thought it was a relatively effective a way to do it the cost of that equity if you look at the relative.

Of yield based on the dividend, we're paying out and we'll continue to pay out on the common stock price at the current levels of course, if they start to decline for whatever reasons will be as I mentioned very careful in how we do that so again somewhat opportunistic and turns up a good way of thinking about the corporate finance of this company and.

The <unk> relative ability to relay in if you will some fairly low cost equity. So that's that's sort of a long answer Mickey but it but it's really more about that the good news to your point is we have lots of availability and indeed as we move forward with new investments will be able to access that availability both really through.

Through our line of credit that we have and frankly also some excess cash that we have that as a result of the gains that we've generated so that's basically the answer.

Okay I understand David just one follow up question that came to my mind Gladstone as a platform has a particular expertise in manufacturing industries and I know, it's early days, but have you started to formulate your thoughts on.

Oh potentially the Corona virus could impact some of your borrowers.

Given that you know some of them maybe importing materials are supplies from China.

Mhm.

So oh, we do have a few companies that do indeed import product from China, and I will say that it's not just the corona virus, but obviously, we've been working with all of these companies and more importantly, they have been working internally themselves with you know based on the terrorist issues and saw which have had some.

Impact a lot of companies not necessary hours, but as we know across the board. So I would say this theyve couple of them have worked in prior to the krona virus, even move some production to places like Vietnam, etcetera, and so yeah. I think we anticipate to see some you know some effect, but at this point I'm not.

Hearing for many of our <unk> Ceos of our manufacturing companies that do indeed menu manufacturer in China or import that right now there's a significant impact, but it's possible that it could have a slowdown on on a product coming in.

I understand I that's it for me. This morning. Thank you for your time, Dave Thanks Mickey.

Next question.

Thank you as a reminder to ask a question you would need to press Star then one on your telephone.

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We have any other questions. Please come onboard.

We do have a question on the line of Mark.

Oh on.

Individual Investor Your line is now open.

Hey, guys on another fantastic quarter.

And it was nice to hear Julio talk about your total.

Dividend return being at about a dollar.

And two cents a share.

As far as the.

The effect of all trying on companies like that's so GE et cetera are you sounded like it's pretty minimal are there any other.

Things you're watching out for in the future. Thank you.

Nothing other than you know a the economy in general we're seeing a very reasonably good economy with most of our manufacturing companies.

Everyone's predicting and I've been talking about a recession of course, and we haven't really started seeing that get all the inputs I'm getting from over Ceos as you know again be being very careful conservative lots of moves towards more automation main issues. We all run into in all of our companies are around getting in hiring in keeping good qual.

The fight employees, so moves to higher automation is one important thing, but generally I think where you know all the usual basics for all the businesses, we have to look at our kind of what we focus on.

Alright. Thank you David you guys and girls are doing great job as always thank you very much.

The question.

We do have a question from a line of David Hamzah individual investor.

I'm honest now open.

Thank you Hello. My name is stayed coax, though not just call to express my thing and gratitude for your performance, where your team I initiated or my position in Gladstone investment about five years ago, and I have an average cost basis of 7025 cents and Uh huh.

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Our own 50500 shares.

I rely on its a investment income along with a few other companies to for my monthly I Love My My monthly income.

So I'm, most grateful and all that up to a couple things that I own including a few other bdcs and some other companies I can say that Gladstone investment Corporation as far and away all the best a investment that I've owned.

Again, thank you so much and I'm, most grateful and a male Gordon Lady bus and keep you always.

Thank you.

Well. Thank you for that nice complement and we appreciate a people who are who are holders and like our monthly dividends do we have another question.

We have no further questions at this time.

All right well. Thank you all four calling in we appreciate the time together and we'll see you next quarter. That's the end of this call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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