Q1 2020 Earnings Call

And welcome to the Gladstone Capital Corporation first quarter ended December 31 to document <unk> earnings call and back out at this time all participants I know, there's an only mode. Later, we'll conduct a question and answer session and instructions will follow at the time.

And your once you do quite a six cents during the conference.

Since these press that due out on your Touchtone telephone as a reminder, discuss it's called is being recorded I would like to turn the conference the material holes. So David Gladstone you may begin.

Thank you Sarah This is David Gladstone Chairman and this is the quarterly earnings conference call for Gladstone capital for the quarter ending December.

Number 31st 2019, Thank you all for calling in.

And now we're also Oh, so happy to talk to you and all our shareholders and analysts that we welcome the opportunity to provide an update on the company and our investment portfolio and now we'll hear from our General Counsel, Michael account say, who will make a statement regarding.

Certain forward looking statements Michael Thanks, David Good morning, everyone. Today's report May include forward looking statements on the Securities Act in 1933 security Injectafer 34, including those regarding our future performance.

Statements involve certain risks or uncertainties that are based on current plans, which we believed to be reasonable and they factor.

Occurs may cause our actual results to be materially different from future results expressed or implied by these forward looking statements putting all risk factors listed all forms 10-Q, 10-K and other documents we filed with the FCC find these older Investor Relations page four website Www Dot Gladstone capital Dot Com could also sign up for E Mail.

Notification service also on the Fccs website, www dot FCC that geography.

Take no obligation to publicly update or revise any these forward looking statements whether as a result in more information future events or otherwise except as required by law today's call. It simply an overview of our results. So we ask that you review our.

Yes, released and form 10-Q, both issued yesterday for more detailed information again, you can find.

Investor Relations page of our website.

I'll turn the presentation over to Gladstone Capital's President Mark got Bob.

Good morning, all thank you all for dialing in this morning, and lets dive right into the summary of the results for Gladstone.

For the quarter ended December 31st.

2019.

Net originations for the quarters totaled 30 million as originations of 42, and a half million, including two new proprietary first lien investments outpaced exits and repayments up 12 point Sixmillion.

Interesting.

Income declined 400000, or 3% to 11.5 million compared to the prior quarter. It's higher average investment balances did not offset the 900000, a previously deferred AGTC interest collected last quarter.

Prepayment fees exit fees in dividend income also declined.

700000 on the quarter from 900000 last quarter with a lighter volume of prepayments as a result total investment income for the quarter was down 600000 to 12.2 million.

Borrowing costs declined on the quarter with the refunding of our 6% preferred stock.

With the five in three AIDS glad L issue and higher bank borrowings the cost of which declined with lower LIBOR rates.

Excluding the 80 see interest collected last quarter, our net interest margin improved approximately 45 basis points on the quarter.

That.

Management fees declined by 500000 to 1.9 million with origination and higher incentive fee credits, resulting in net investment income of six point Fourmillion were 21 cents a share.

The net assets from operations declined to 700000 work.

Two cents per share.

Which included a $1.4 million write off of the on the amortized issuance cost associated with the calls our preferred stock at a 4.3 million of net portfolio depreciation on the quarter, resulting in the NAV declining 14 cents.

To $8, an eight cents per share as of December 31st.

Regarding the portfolio the asset mix at the ended the quarter shifted with the predominantly first lien originations and second lien syndicated loan exits lifting the first lien exposure by six points to 52.

2% at cost and dropping the second lien exposure similarly to 39% of the portfolio at cost.

The largest contributor to the portfolio appreciation on the quarter was the 1.5 million dollar increase in the equity investment in the Moshi ice cream company, which was.

It it after the ended the quarter.

Defiance, another portfolio company was the largest decline or on the quarter at 2.7 million.

In total the decliners outnumbered the gainers on the period, resulting in net portfolio appreciation of four point threemillion approximately 85% of this.

Jason was associated with our equity investments and not our core debt portfolio.

Much of the depreciation can be attributed to manufacturing sector investments, where Q4 disruptions and inventory drawdowns occurred including sectors, such as the heavy truck and.

Auto sectors for example.

In the quarter, we realized the 4.4 million dollar anticipated lost on our new Trident Syndicate investment and subsequent to the ended the quarter, we exited our position in meridian racking opinion.

There were no other nonperforming assets as of the end of the quarter.

Since the ended the quarter, we have close to follow on investments totaling 8.5 million and receive prepayment at par plus the 3 million of equity proceeds for MACI. So our net our interest earning assets are down slightly as of today.

Turning to the outlook for the balance of 20.

20.

We've been able to maintain a healthy flow of new deal opportunities and are cautiously optimistic based on our current pipeline, we should be able to continue to outpace.

Prepayment activity and prudently deploy the nearly 65 million of additional investment capacity, which would bring us to a one to one debt to equity.

Yeah.

That said our competitor to the competitive pressures are continuing particularly for senior Unitranche investments where margins are inching down in spite of the decline in LIBOR. In response, we have taken action to reduce our borrowing costs to improve our net interest margin, which will positively impact.

Packed our results as we work to grow the portfolio.

As you will know from our exits of last quarter. We were also deemphasizing or syndicated investment activity, which is predominantly second lien in light of the elevated leverage and credit profile of investments available in the current market, we intend to deploy some of this capacity.

The proprietary second lien or left out investments in Unitranche deals where returns leverage metrics credit protections are more favorable.

In conclusion, we continue to believe the depth and opportunities in lower middle market are attractive and we are well positioned.

And to take advantage of our strong capital position to grow our net interest margin to enable us to improve our returns to our shareholders and now I'd like to turn the call over to know Kohl's Hilton brand the CFO for Gladstone capital to provide some details on the funds financial performance for the quarter Nicole.

Good morning, everyone.

During the December quarter total interest income declined 400000, or 3% to 11.5 million primarily due to the absence of the 900000 of pass through interest collected in the prior quarter the growth in the investment portfolio offset much of the prior quarters past due collection has a weighted average principal balance of our interest bearing investment.

Portfolio Rose 25.6 million or 6.8% to 401.4 million for the three months ended December 31st compared to 375 point 8.8 million for three months ended September thirtyth.

The higher investment balance also helped mitigate the approximate 40 basis point decline in library.

As 84% of the portfolio is tied to floating rate.

Other income decreased by 200000 compared to the last quarter, driven by lower prepayment and a decrease in success fees received resulting in total investment income for the quarter declining 600000, our 4.4% to 12.2 million.

Okay.

Total expenses decreased by 9.6% quarter over quarter, primarily due to an 800000 dollar decrease in dividend expense on Mandatorily redeemable preferred stock and a 400000 dollar increase in the incentive fee credit granted by the advisor.

Partially offset by a 500000 dollar increase interest expense on long term debt.

With the new issuance during the quarter.

Net investment income for the quarter ended December 31st with 6.4 million, a slight increase of 20% as compared to the prior quarter or 21 cents per share covering 100% of our shareholder distribution.

The net increase in net assets, resulting from operations.

700000, our two cents per share for the quarter ended December 31st compared to 5.4 million or 18 cents per share for the quarter ended September thirtyth.

Our current quarter decrease was driven by 4.3 million of net portfolio depreciation and a 1.4 million dollar loss on extinguishment of debt recognize income.

Production with the voluntary redemption of our series 2024 term preferred stock in October.

Moving over to the balance sheet as of December 31st total assets for 439 million consisting of 429 million investments at fair value and 10 million in cash another asset.

Liabilities rose by 11.

1 million to 188 million and consisted of 91 million in borrowings on our credit facility 55.8 million of six in any senior notes due 2023, and 37.5 million of five and three senior notes due 2024.

That assets rose by 1.5 million from the prior quarter end with.

4.3 million of net realized and unrealized portfolio depreciation.

And common stock issued under our ATM program, which generated net proceeds of 7.2 million.

For the quarter, we issued 705000 common shares at an average price of $10.37 per share or a 126% of NAV.

He accretive ATM issuance offset a portion of the portfolio depreciation.

And now have dropped from $8.22 per share at September Thirtyth, the $8, an eight cents per share as of December 31st 2019.

Our leverage as of December 31st increased slightly from the prior.

Quarter end at 75% of net assets from 71% due to the increase in assets for the period.

As of the ended the quarter, we had in excess of 75 million of current investment capacity and availability under our line of credit.

With respect to distribution Gladstone capital has remained committed to paying.

Shareholders, a cash dividend and in January our board of directors declared a monthly distribution to our common stockholders of seven cents per common share herb.

January February and March which is an annual rate of 84 cents per share.

The board will meet in April to determine the monthly distributions to common stockholders for the following corridor.

At the current distribution rate for our common stock and with the common stock price at about $10.36 yesterday. The distribution run rate is now producing a yield of about 8.1%, which continues to be attractive relative to most yield oriented alternative.

And now I'll turn it back to David to conclude the.

Okay. Thank you, Nicole and Bob and Michael you all did a great job in informing our stockholders and analysts that follow the company in summary, Bastogne capital another good quarter originating 42 million in investments last quarter, ending December 31st 20 teen team.

Through the investment portfolio by 26 million.

To come in now at 429 million, which is a new high.

They redeem the last outstanding series at the company's preferred stock to achieve an added financial flexibility and reduce the company's financing costs to enhance the company's core interest earnings which.

We used to pay the dividend we've maintained a strong balance sheet with significant money to and borrowing capacity to grow the investments and attractive lower middle market businesses. In summary, the companies continue to demonstrate strength in finding opportunities of mid sized private businesses.

Any of these loans that we make to those businesses are in support of a mid sized private equity funds that are looking for experienced partners to support the acquisition and growth as a business that they are investing in this gives us an opportunity to make attractive interest paying loans support our ongoing commitment to pay.

Cash distributions to shareholders.

Well the strong team in place today and this will capitalize on this good market that's out there now and with the economy. So strong well quite frankly is the strongest economy I've seen in my lifetime, and we have a strong showing when compared to other bdcs that list I looked at from a large.

<unk> showing bdcs a this BDC was number form their list of 37 and they measured it by the last 12 months total return, which this company had a 47% according to that list.

I think I'll stop now and we'll move over to the operator, Sarah if you will come on until the call as how.

I can ask questions about the company.

Thank you, Sir ladies and gentlemen, if we have a question at this time.

Whereas the bar and vendor number one key on new attached on telephone if your question if you.

Are you wish tree loses how from Turkey. These brass stefanski.

Again, ladies and gentlemen, if we have a question at this time. Please press Star then a number one on your Touchtone telephone.

Your first question comes from to write off Amicus Cohen from Ladenburg you May ask your question.

Yes, good morning, everyone.

To start off with a housekeeping question.

Were there any adjustments to investment income for the new Trident exit or the upcoming brilliant exit.

Mickey no both of those investments has written down to zero. So there were no adjustments associated with those.

Okay.

And Bob could you expand on the deterioration in the valuation of Defiances common shares terms of what triggered that.

Sure I think as I said.

That is a amid heavy manufacturing business that serves the truck industry as well as some auto related.

Industries.

You may note that.

Last quarter in the December 31st quarter, there was.

They strike at GE, GM, which had some impact you also had a number of manufacturers.

Managing their year end inventory in the face of.

Uncertain growth outlook for 2020.

And so there was a temporary adjustment in the production flows to manage those and inventories.

And as a.

Well there was a dip in sales.

We're now obviously post that period.

Normal inventory.

Flow has commenced and in fact that business has a significant book.

Of new orders it expects to ramp over the balance of the year. So we view that adjustment as largely a temporary phenomenon.

And feel very strong about where the business is headed at this stage, but.

It's at quarter end activity.

And we adjusted our equity accordingly.

I understand that that's that's very helpful. Bob.

In your prepared remarks, I think you said something about target leverage of one to one it did I hear that correctly.

Yes, I think we've been guiding folks that we were headed.

In that direction. The question is how quickly we might get their.

In light of some of the prepayment activity, which we experienced a fairly heavy flow.

In the second and third quarters of last year. So we're we're working in that general direction, whether we can actually get there at the end of this.

Fiscal year will depend in large part on certainly market activities and the level of those prepayments.

I understand and my final question, Bob and.

Maybe difficult to answer but looking at the portfolio's structure Theres certainly some exposure to.

You know things like consumer durables, and as you mentioned transportation and cargo aerospace.

My question is have you started to see or have your.

The management teams of your borrowers started to convey to you any information about the impact of the Corona virus on their business.

I asked because given this morning I'm starting to read stories in the in the papers about.

Folks having problems getting supplies.

From China.

You know.

Given the size of the investments that we typically make.

In the focus on domestic businesses it tends to be.

Domestic manufacturing that said we are there are several companies in our portfolio the do a heavier flow of imports.

The the most noted.

Which I would say.

Yes.

The business has 70 suppliers.

From China.

So it's very diversified geographically.

Secondly.

It was somewhat fortuitous that most of these businesses with these long lead.

Supply chains.

Need to be carrying meaningful inventories given the time in transit.

So they do carry inventories that are are more than adequate and the third is.

This event occurring just before Chinese new year's it's fairly common for businesses to go a little longer on inventory in light of shutdowns that occurred during that time of year in China. So the one business that I'm referencing.

His is in pretty good shape, when you factor those three considerations in place.

Now obviously.

There's there's a.

Span and scope of shutdowns in disruptions that we can't necessarily fully anticipate.

But unless this.

Menus for some period.

This particular business does carry an extended inventory and should be able to manage should at least at least for the telling being.

I understand that's helpful. Those are all my questions. This morning I appreciate your time.

Thanks for calling in Mickey.

Any other questions. Please.

Again, ladies and gentlemen, if we have question at this time. Please press star and then number one key on your touched down kind of falling.

I'm showing.

We can afford to question at this time I would like to turn the conference back that Mr., David That's town.

Okay. Thank you very much for all of you tuning in and listening to this and I know a number of you will listen that the call at a later time. So thank you very much and that's the end of this call and we'll see you again next quarter that's in.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may disconnect.

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