Q1 2020 Gladstone Investment Corp Earnings Call
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Ladies and gentlemen, thank you for standing by a whopping because I Gladstone investment Corporation first quarter a year ended June Thirtyth 2020 earn is calling webcast.
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I would now like to hand, the conference over to your speaker today babies glass. So please go ahead.
Right. Thank you Sarah Nice introduction. This is David Gladstone <unk> Chairman and this is the first quarter ending for 2021, our year end is March 31st.
And this conference call for the analysts and shareholders Gladstone investment [laughter] NASDAQ under the trading symbol gain G.A. a in.
But we're always trying to trigger some capital gains and gain EM and gain our preferred stock. So we've got some stocks out there.
I hope one of those fits what you're looking for thank you all for calling in today, we're always happy to provide some information about our company to the shareholders and analysts and provide a view of current business environment.
Two goals in the call of course is to understand what happened in the past quarter or past year even.
And also best we can do not easy these days, what's going on in the future for us well start out with our general Counsel and Secretary Michael Macau see Michael go ahead. Thanks, David Good morning, everybody.
Today's call May include forward looking statements under the Securities Act of 1933 into Securities Exchange Act of lighting 34, including those regarding future performance of these forward looking statements involve certain risks and uncertainties and other factors, even though they're based on our current plans, which we believe to be reasonable and many factors may cause actual results to be.
Materially different from any future results expressed or implied by these forward looking statements putting off risk factors listed on forms 10-Q 10-K. Other documents that we file with the FCC. These can all be found at our website, which is www dot Gladstone investment dot com or the Fccs website, it FCC that geography.
We undertake 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 any past performance or market information no guarantee of future results.
Please visit our website once again www dot Gladstone investments dot com for our email notification service can also find us on Twitter at Gladstonecomps and on Facebook keyword. The Gladstone companies, we remind everybody todays call simply an overview of our results through June 32020, So we.
Due to review our press release, some form 10-Q, both of which were issued yesterday for more detailed information on last matter, we want to remind everybody to vote their shares whether you own preferred shares of common shares in the company both for our upcoming annual shareholders meeting, which is going to take place on August six which is next Thursday at 11 am.
I'm very important that everyone cast a vote. So that we can at least to ensure that of course is met at the meeting the easiest way to vote is to contact our proxy solicitor correctly, that's georgeson LLC and their phone number is 800 903 to 897.
Once again 800 903 to 897, if you call them you can quickly caster vote over the phone. It takes about two minutes now I'll turn the presentation over to David Dullum President of Gladstone investment say, hey, Thanks, Mike.
Good morning, everyone.
Just reflecting on.
The last report, which we gave you are not all that many months ago for our fiscal year in March and it seems like it's been didn't quite a long time in part because obviously with everything going on with with coal that and.
We've all had to deal with didn't lots of different ways.
In our case Gladstone investment as we go through this off hopefully leave you all with a sense that one we all know we came off of actually probably ought to our best years in fiscal <unk> 20, ending March 20.
So that helped us with a good head of steam going into this fiscal year, but of course, we all have to deal with the reality of where within.
And so we'll touch on that and let you know what we're doing to assure that our company keeps doing all the right things going forward and getting through this and as a result of that.
You know we didn't know what to expect obviously right in the beginning of going into cold. It as it turned out we were able to end the quarter.
At June 30, and with you know reporting adjusted net investment income of 11 cents per share and while this was against 19 cents per share for the quarter ended 323, 31, sorry, I will explain a bit more about that we feel pretty good about that under the circumstances and more importantly, as we move through the.
Year, where we're headed on a comparative basis actually the total portfolio income.
Which is primarily interest income on our debt investments was actually relatively stable our quarter to quarter, which is which is a good thing and as a testament to the foundation of the of the assets that we that we own.
Both the debt and the equity.
Really think thats important to to understand and we'll hear more about that going forward. So.
Just keep that in mind.
Our primary operating focus obviously has been since we got into this and continues to be clearly closely monitoring our portfolio companies.
The emphasis is on the cash flow and the working capital dynamics. If you will have each of our portfolio companies.
It's really is important in this and this time to just stress that.
And we keep keep working with our company's chip to get through that most of our company's happily I can say have performed pretty well.
Including some of them, which have actually exceeded our expectations. When we were going into this so those where we've had some drop off or decline really are all a function clearly over the cobot activity.
And what's going on in the economy in general and frankly, not so much around the underlying operations to those companies.
To date as a result of that we've not necessary needed to provide very much additional financial support which is a good thing, but even if we needed to and if we did we do have sufficient liquidity for that purpose.
As I mentioned, obviously in our fiscal year end report back a number of months ago. We had exited a few of our portfolio companies last year, which generated very significant liquidity for us through the net realized capital gains and obviously the repayment of our debt securities. So we ended a really strong again.
The year last year, not just a calendar 19, but also our fiscal year March 20, and Thats put us in good position to support our portfolio companies going forward. We also are able and we'll continue to grow and rebuild the portfolio and in this regard in July. So it was just after our call.
Order end at 630, we actually did make a new biota investment for about $47 million, which was a combination of equity and debt and obviously that 47 million a pretty significant part of that is the debt security, which is a good thing because that does generate obviously interest income for us.
Our end Avi show book value for the 630 period was $10, an 87 cents per share and that compares to $11 in 17 cents at the 331 20 quarter end. So a decrease of 30 cents per share.
But again, if we that was a result in part obviously some of our companies that were affected in some more than others.
By a decline obviously initially in operating earnings and as we evaluate them.
They have to come down and value fundamentally as a result actually as the coal that activity and not underlying operating we had a number of our companies that are really good businesses that were in sectors.
That were directly impacted by coal bid and obviously you know their earnings were off relatively speaking and that's reflected in these in these valuations.
And this this was the again the navy for 630 compared to what it was at 331 20. So in terms of the pandemic and the actions that we have taken.
Just follow along the report that we gave our actions early on we couldn't we were continuing to actively monitor the potential issues in the portfolio. We are proactively engaged with their management teams to providing this support as necessary our managing directors our team.
Who worked very closely with each portfolio company and we're focused on things such as re forecasting the potential for temporary capital needs at any of these companies might have obviously is a fair amount of stuff that goes into the legal resources. If you will around HR related in great part because people are coming back to work and.
Each company has to be responsible.
For employees and being sure that we're doing all the right things. So the good news there as we are seeing activity with companies and people coming back to work and again, we have not had to provide at this point much support either through additional investments are really accommodation on interest obligations and that's something we're going to keep striving for.
And working very hard on.
The aggregate portfolio values.
From 12, 31, 19 to 331, 20, depreciated about 8%, which I mentioned before that was primarily again due to effect as a pandemic, obviously affecting not only the operation as a portfolio companies, but market multiples, but this quarter again, Fortunately, we've seen stable disease.
Station in these values and we had essentially only only about a 1% decline in fair values from the 331 quarter to 630 quarter. So I'm really encouraged by that and obviously, we're seeing some companies that are slightly more effective than others again based on their sector.
And also the geographic location or those companies so depending on the duration of the pandemic and the timing of an economic recovery. It is possible we might experience a bit further individual portfolio company devaluation same time, we might see as well improvement in others. So this this is a balancing act obvious.
Three and again I want to reemphasize emphasize that we work with our company is very carefully and Thats why in times like these as we keep saying the type of our approach being a an equity and debt provider and majority owner of most of these companies that really provides us this advantage that gives us all.
A lot more flexibility, whether we have to financially do some restructuring to help with the cash flow management of the companies in the portfolio preservation of value and so on and we when we will talk a bit more about companies that are on non accrual. We've only had one that's had to go on non accrual as a function of really Cold Act.
Tivity and you'll hear a little bit more about that but but I want to again leave us with the thought that those that are on non accrual or good companies. We continue working with made some progress with them and we expect the Nord hope to see some of them as we go through the years come back off of non accruals. So thats what were working on terms of our out.
Look in general our focus obviously is continuing this close involvement with the portfolio companies.
We also actively continue to review potential acquisitions.
The challenge obviously continues to be how would you pursue quality due diligence and determine as I would say the rational views on what the right purchase value may be and obviously, our expected returns, we're going to maintain and stick with our our philosophy of the kinds of returns that we look for and this might give us an opportunity.
As as the market, we are seeing having a tendency to come back to some rationalization in valuations and Thats a good thing for US obviously, we're trying to conduct a bulk of this activity on due diligence in what is now become as I would call. It a resumed type environment.
That's an interesting experience, but we don't add and actually.
The new acquisition, we made right at the beginning of July we were able to to get that close by effectively using this this zoom capability. So that's where we're going we are seeing some pickup in deal flow and we keep working on that part beyond just the one of preservation of our existing portfolio.
So all in all I think it's in a really good position and we just have to be a little patient as we pull through over the next nine months, so I'm going to stop there and turn it over to Julia Ryan Our CFO Julia.
Thanks, Dave Let me start, but the summary on operating performance for the past quarters, we generated eni of 4.2 million as compared to.
14.8 million upright.
That's a result dump and investment income declining by approximately 1.3 million, but just due to placing the one investment on a call during the current quarter.
And as you know our investment in horizon in travel dependent and significantly affected by Kogut shutdown and declines in travel I'm very hopeful that the business will return to stable levels. Some we learn how to manage this buyers.
Net expenses totaled 6.5 million and the current quarter compared to an expense reversal of 2.8 million in prior quarter.
Change of 9.3 million, which was primarily driven by 8.4 million reversal of previously accrued capital gains incentive fees due to the net impact of realized and unrealized gains and losses in the prior quarter and that compares and a 1 million dollar decrease in credit checks census.
Absent. These two factors expenses relatively consistent and only slightly increased primarily due to Pakistan stockholder expense.
When adjusted net investment income to exclude the capital gains incentive fee reversal adjusted net investment income per weighted average common share with 11 cents in the current quarter. We continue to believe that this metric if it useful and representative indicator of operation exclusive of any capital gains based incentive fee as net investment income does not include the realized.
Or unrealized investment activity associated with a seat.
And as Dave noted above our balance sheet and liquidity remained strong at June Thirtyth, we had available availability under our line of credit up about 104 million as up 630 20.
We also raised about 2.3 million net proceeds under our new series E TPS ATM.
And about 1.7 million in that proceeds under our common stock ATM and all of those are above NAV.
Well now has declined as a result, unrealized depreciation and lower net investment income as compared to distributions paid this quarter, which is primarily as result of nine cents supplemental distribution distributable income to shareholders remain solid.
And on a book basis Undistributed net investment income combined with net realized gains that have not yet then distribute it totaled.
And millions or about 20 cents per common share.
This amount as already net of the 38 million in distribution declared as at March 31st 2020, and it's also reduced by the book accrual of any potential capital gains based incentive fee accrued undergo and that's a number it's roughly 6.6 million.
All else equal to 20 cents per common share are available for distribution to shareholders will get your period, even if the entire capital gains incentive fee accrual bar to be paid.
And with that in mind and its previously announced in July our board of directors maintained the current monthly distribution run rate of 84 cents per year, which represents a current yield of about 8.4% excluding any supplemental distribution.
This covers my part of today's call that keep it.
Okay. Thank you Dave Julio Michael I was good information for our shareholders in that presentation combined with the 10-Q filed yesterday should really bring everybody up to date on where we then give you an indication of where we think we can go we believe the team here is in a good position to continue this excess.
The fiscal year, ending March 31st 21, and manage the portfolio through the current time of uncertainty I believe that Gladstone investment is an attractive investment toward distributions that is shareholders, who like distributions and regular distributions and hopefully some capital gains as time goes.
Goes along I think this is a great company for doing that the general economy of courses in recession today caused by the government's reaction to these Chinese viruses that we have floating around.
Yeah.
What makes it so difficult here and trying to give you an indication of where we're going is that we have no clue, where the government is going to go and what they're going to do next with regard to covert 19 virus. That's out there is no place to hide in the marketplace. Today. If you go into government securities you're going to yet.
Nothing as return.
So I hope some of you will use our stock is a place to park, some money and pick up some good cash while you're waiting any way at this point in time, Sarah would you come on and well have some pictures from our analysts and shareholders.
His time.
Thank you.
As a reminder to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound team again that is start than one if he would like to ask the question.
Our first question comes on the line of making sleeping with Ladenburg Thalmann. Your line is now open.
Yes, good morning, everyone hope you're doing well up there.
Several questions. This morning, My first is.
Location in the market since covert began and the obvious impact on spreads could you give us a sense of the terms you received on Mason West.
Sure.
Dave.
I would the answer is and as I tried to generally remind ourselves.
I am not a sensitive to spreads per se.
Remembering you know we're buying companies, we're combining our debt or equity. So we look at total return on our total assets.
Both the equity and the debts and then we obviously look at what we are expecting for our capital gains on our equity, which we have consistently no been able to to show based excuse me based on our results within over three X cash on cash on the equity component and our debt yields.
Tend to be on average somewhere in the only with consistent again, maintaining a 12% on the debt portion so without going into the specific details on that deal. You. Just you know our we would normally price and put our combined equity and debt in any deals to give us say aggregate yield at any point.
Time somewhere in the high nines to up to 10% effective yield on those dollars and that that deal pretty much is consistent with that.
Okay. Thank you for that David that that's helpful and.
So missing west was a significant.
Investment a subsequent to the quarter.
I just wanted to confirm you haven't had any.
Material exits subsequent to the quarter is that correct.
Correct, Okay, we had lots of exits last year, but.
So far this this quarter correct right right well there are some businesses that folks are obviously very interested in acquiring.
And then make and I'm just curious.
So moving on the horizon facilities that was marked at par at March and then again at par at June but it's now one non accruals. So can you just walk through what what's going on there why.
Why is it on non accrual and what does the outlook for the company.
Jay do you want to tackle part of that and I can add some color to it.
Sure you just.
Horizon is heavily focused or dependent upon the travel industry. They provide rental car services without going into too much detail. So as traveled decline so well its business in general and now we've seen some pickup.
Here recently, and that's my earlier comment as to as far as learning how to deal with them buyers will significantly impact how people look at travel and.
That was in our investment should return to normal status.
So did they miss an interest payment or what caused the non accrual.
Yes so.
Normally we placed something on accrual if we either don't believe they will continue to pay or if they already have not started more started not paying us into two criterion is generally a three month type concept.
Okay. So the valuation reflects your optimism that.
In the not too distant future things will quote unquote sort of return back to normal.
Correct, Yes, I would I would add to that makes you. This the good news for this company.
Their management team is superb and they did all the right things and so again I referenced earlier preservation of capital is somewhere or companies, where we have the flexibility. In this example, we would not put the pressure on them to necessary pay interest when they've had.
Obviously relatively significant call it decline in their operations all related to cold, but in the meantime, they've done a heck of a good job in actually that's starting to come back and so on we don't want to get ahead of ourselves, but it's certainly a business that longer term and even near term is going to be a good one for us so.
This helps them.
Happens to be one where we actually have a third party lender in the deal providing working capital financing and actually Theyve, Dave that they've stayed with them and thats been a really good thing. So yes, it's it I certainly believe thats, a temporary situation and devaluation I think does reflect as you say.
If not optimism certain reality about where they're going.
Okay.
Dave decides horizon.
What other investments caused the decline in your average risk rating I know you don't.
Break it out.
Bye bye core tile or anything like that but it did decline.
Anything else meaningfully underperforming the clothes that decline.
No not anything Mickey I mean that I can think of our Pan and Julie I don't know that you have anything you want to add to that.
Let me give assistant general as you as you look at the market currently that that's how we are assessing it it's not.
Not perfect.
So we'll just be closely monitoring that.
Okay, and one thing let me add this because this is a true statement I don't know if we touched on this allows quarterback it's important.
One of our investments that we had at December which we exited for a very significant capital gains and it's obviously in our filings and degree.
Which was an outstanding business and a great management team. We were we exited as I mentioned was reported very significant capital gains that this is tied directly to the trade show industry and speaking about companies in industries and visit the good news for US as we exited we did because of the tree.
Transaction as we reported before it's worth emphasizing maintain a very small equity position at a cost basis, but when we exited the value relatively speaking was fairly high for that small piece that we kept that business. Obviously has had a significant decline in value. So if you look at our assets since.
See where we've seen decline in value in our assets a reasonable portion of it ironically is in that piece that we have maintained and had to maintain after December 2019. So it's one of those those aspects of it's a business that again small piece.
Declined in value, it's affected our valuations, but it's not certainly other than we like the folks that are there. We don't have a very significant position that company any further and more importantly, we were able to fortunately exited at again, a very substantial net realized capital gains on on that company.
I did I did see that decline David and I appreciate the clarification, how about another new deal.
The maids.
My understanding is that the franchise company that provides cleaning residential cleaning, which is something that somewhat from where I sit would be something that folks might try to avoid in the pandemic.
Hi, how are they performing.
In the current environment and do you expect deterioration in that business is.
The wave of a virus seems to be ongoing.
Right. So good question.
Obviously, we that's one where out of the box when the pandemic, we did see across the board a drop off at the franchisee level. It's a company that you mentioned, we own the franchise or.
We ended within that we have about eight company owned stores. If you will but then about the bulk of them over 100 are all spread around the country in different concentration we did see through the franchisee and initial drop off obviously, however, we are seeing that picking up now.
Not only at the franchisee level, but also the company store level and also again management did a wonderful job in making adjustments you know in their operating expenses et cetera.
And as a result of that we're actually and an another piece of it they actually tactically when about adding a service capability on the industrial cleaning side I know thats in sort of its early days, but because as we all know what I touched on a little bit we see it from our companies as they come back online actually needing to.
Go out and bring in cleaning services, because they have to so the hour the major while their focus obviously the bulk of it is in home cleaning.
They have also been able to add to their their portfolio. If you will some industrial cleaning capability and they're working on that thats been a help so actually that's one I do see as coming back on.
Not declining from where it is unfortunately that they've been able to keep doing their thing actually ironically they did.
Access and PPP money and the reason, they're able to do that is because there is an exemption for franchisees franchise doors. So they were able to get some PPP money, which really was a very positive thing for them. So that's one that I am excited about seeing them sort of track backup and they are not on non accrual so they're doing well.
Well, that's good news, Dave and in terms of PPP and I'm almost all my questions.
And during the last earnings call you mentioned that.
Very few of your company's qualified because of the affiliation rules, but was there any progress in the second calendar quarter I mean, as PPP program sort of evolved did you manage to get more PPP money into the system or.
Does it remained very limited yes, no remains them is strictly the made.
The other one that did get ERP money, which was good for them. Ironically is this ends degree.
And that's mainly because one of the invest stores in there as an FDIC related and that was an exemption under that but basically our companies for the same reason.
Due to the attribution of ownership.
We're not able to access it but as it turned out to be truthful, it's not the necessary something that that I don't think would have been might help much along the way and where we have needed to in very small amounts to date had to help few companies. We've been able to do that ourselves. So yes, I did notice that the follow on investments were very small this quarter.
So.
How would you characterize the outlook for the liquidity of your borrowers in general.
Assuming.
I guess the optimistic scenarios of vaccine is approved maybe by the end of the year, but realistically that doesn't mean people get vaccinated until.
So the first half of next year, so we're going to be dealing with this for a while and.
Folks have too.
Deal with liquidity issues for many more quarters, how do you feel about your average borrowers liquidity.
Yes so.
It's our portfolio companies that we obviously have significant investments in equity and debt.
I would say that they on average there are one or two as we look forward that we as I mentioned, we are very very hard at work with each of our portfolio companies focused on that.
Doing everything working with the management teams to to get.
Liquidity through their own working capital, which is obviously things like working hard on reduction of inventory collection of receivables at those kinds of things.
So if you if I answered on an average for the portfolio given that we have roughly 27 companies in the portfolio I'd say on average.
In good shape.
There are one or two for potentially good reasons, which might help us down the road.
Might put some money into again for the right reasons.
But at this point, where I would say on average we look look pretty good.
And those that do have a bank a third party lender class a typical bank actually in most cases with phone that you know they've been able to work work with their banks.
Some a little more stressful than others, but by and large pretty good.
Okay.
That's helpful. My last question just looking at the dividend.
I think Julia said that the spillover stands at 20 cents.
Is there still expectation for another semiannual supplemental dividend this year.
Well you know we when we started the semi annual dividend distributions, which are a function of realized capital gains as we've stressed you know we've been able to maintain its pretty effectively we made the one in June.
As we move forward during the year in part as a function of liquidity our self being that we are doing new deals also we'll we'll take a hard look at that but that's something we'll obviously have put to our board.
As we as we go down the road. So I can't really say that we'll have one or not have one at this point.
And in terms of the regular dividend.
Obviously that was not covered by either gap and.
Justin.
Hi.
Given the spillover that you have is the expectation at least at this time took to.
Maintain the dividend at this level I know, it's been maintain through September but.
It is putting pressure on the company or is that something the board is thinking about revisiting.
Well I think as you pointed out the you know who knows and as David Gladstone said.
We don't know where the economy is going and we have to be in for the long haul I think at this point.
Based on where we are the portfolio. The right thing to say is we're going to do everything we can as we work with our companies. So some of those that we'll see starting to to improve et cetera will will help in terms of the other income stream as you know we have to basically to revenue streams, right, which directly affect the.
The dividend one is the base as I mentioned interest income coming off the portfolio Thats held relatively steady and I think thats going to continue that way might to pick up and then the other one of course is the other income stream, which is where we've been able to.
Get income from portfolio companies through exit fees that they pay us dividends at the company's might be in a position to pay where we're going to frankly try to do not put pressure on the companies to do that because again preservation of capital. So right now a best I will tell you is we're going to do everything we can and work hard to maintain our current level.
But we'll look at it as we move forward during the year and as you say decide and put it to our board as we go through the year. So again.
Second do on that one.
Appreciate it.
Dave.
Thanks for your time this morning, and your patience I hope everyone sees that's it thanks, Vince well we're all.
Looking at at the same where you are we're all trying to figure out where tomorrow or the and I think if we had something that everybody believed in I'm personally I believe in Hydroxyurea chloroquins.
Out of people aren't but I think those could settle out and save us all but Sarah come on and see if theres a second group that wants to ask a question.
Thank you. Our next question comes on the line a wind caught with Jefferies. Your line is now open.
Hi, Good morning, everyone and thank you for taking my question is not my first centers around the yield.
I'm curious to hear why.
Why the yield.
Contracted it's 11.8% was it driven by the light repayment.
Basically what's driving that yield.
Traction there and then beyond that as well you thinking longer term the.
So should we go into that more uncertain.
Lower yield.
Lower benchmark rate.
Your debt portfolio.
Not at Livewatch was the impact that living for banks.
Julia I'll go ahead and take that one yet so let's let's start with the latter part of the question and LIBOR floors and I think.
Our 10-K, you've had a chance to look at that we detailed the expectation surrounding lied boring how it might impact how operations and the answer in a nutshell is not very much and because most of our capital is that term preferred stock, which is a fixed rate.
Fixed rate and then Atlanta credit Validus.
Slide where basin, what fluctuate and limited and then on the investment side, so income producing side and most if not all of our floors are well in excess of what it libraries currently for sure.
And so we do not expect to see a decline of of our income as a result of labor fluctuations. So that's that and then the yield.
Any one quarter, it's really difficult to look at as I think Dave has mentioned a few times, we tend to look at our functional you over the course of a year. So any one quarter it might be impacted by no extra payment of income or reductions in rates on alone and permanent or temporarily so anyone thing can impact.
On a quarterly basis, let's just how what impacted this quarter's yields on west with the outlook being that overtime will play in that 12% range.
Okay. Thank you very much and then in terms of the deployment outlook or the deal environment.
From a from a from a deal perspective last quarter was light and then.
You announce the subsequent quarter investment activity a.
I'm curious as to what your views on now on the current environment, where you see things going over the next six months in how you think you'll be able to take advantage of those opportunities and then im curious as to what changed subsequent to the quarter end.
What catalyze camp that activity. Thank you.
Sure I'll, Dave I'll try to take that.
That particular investment that we bought Mason Wes we'd actually had been working on it prior to the oil to the essentially the pandemic hit.
So we were able to essentially revive it as we got through the quarter. We stayed in touch obviously in and we're able to to get the deal deal done.
More importantly, though perhaps into your question as we look forward we are seeing.
I believe a somewhat of a pickup in activity in deal flow.
And that is a function I think of a couple of things there are companies that might have been thinking about going out.
Firms like Jefferies and others on the investment banking side that might have put things on hold.
Think of said Hey, you know what Theres, an off we should come back into market keep testing. It. So there is some of that going on income and certainly good companies some of which that had obviously like most companies had some effects in decline in the lease in the first quarter second quarter, even our you know maybe starting to see some pickup and believe the time is.
Right to these go back to the market. So the gentlemanly I think that that's happening the other thing that's going on is that structurally we're seeing.
Where.
Year ago for argument's sake multiples on deals that were good companies. We've all been saying you know seemed a little crazy meeting high we're seeing maybe little more commonsense coming into that number one number two we're also seeing sellers.
Being more willing to look at structures that will accommodate a transaction, which might mean, taking back some seller paper themselves doing some other things because frankly the lenders the banks the classic third party lenders that are driving on have driven some of these bigger valuations because leverage was sold.
Level some of that's compressing so the the typical say private equity fund is either having to more than ever put in either more equity in a transaction because you're not getting as much leverage and as a result at obviously are looking to moderate the devaluation. So we're seeing that going on so the combination of those.
Two things I believe are going to perhaps lead to opportunities that.
No that will be somewhat perhaps to our advantage we have an advantage in that all else being equal because we do the debt and the equity that we can provide our own leverage so were not as dependent on third party. So long answer to your question, but I wouldn't say that's all the some things are going to burst okay.
But I would say that it's certainly better than it was three months ago.
Great. Thank you that's very helpful and then in terms of.
Folio companies themselves with respect to help our.
Trends at that level at this point.
Out of the how they change from pre pandemic level, and then moving forward as as you're evaluating existing portfolio what else be looking at the site those metrics.
To make that.
[music].
Julien.
Doesn't have a tough one so and the one thing I will say in and I believe that would be true across the market. It at least based on what were hearing and working with specialists on that front of course when it comes to evaluations every quarter is that youre.
You know we're locked in there is no longer cost about where appropriate and what I mean by that is that.
By and large our valuation tends to be based on a trailing 12 month EBITDA metric, but in this environment given the uncertainty given that parts that met our temporary versus other states, perhaps not quite so temporary that is no longer how we market participant, but what I mean does petroleum company and therefore nine.
There are we in our valuation every quarter and that's been validated across the board and the market with specialist implied so I'm.
Regular averaging seven range, if I'm not quite so meaningful at this particular point.
Great. Thank you very much for answering all my questions and hope all of your well and green to catch up.
We're all good down here nobody with covert 19, Weve Dodge the role as if you want to say it that way, but Sarah come on and see if theres anybody else with a question.
Thank you. Our next question comes on the line of Henry Coffey with Wedbush. Your line is now open.
Good morning, everyone and thanks for taking my question.
If we look at the current quarter and compare it to.
Anything in the last three or four quarters. So that's a little thing to all of us that seems a little off.
[noise], though.
It's about a $2 million shortfall between where you are today and getting back to say 19 or 20 cents a share what what is the likely bridge.
That gets you there, where we where do we where do you find over the next couple of quarters, an extra one or $2 million of.
Net interest income or.
Other other possible driver so those numbers.
Yeah, Hey, Henry Dave.
So I take the areas we focused on.
Lastly, potentially.
One or two companies that might actually come back off of non accrual.
Based on some things, where we cannot that would be one area generally obviously I'm not going to make any promises or specifics, but you know that to total portfolio. The other is the idea of finding those companies, where we believe from a cash flow perspective were able to now I'll go back.
And.
Get the other income side of things again, whether that's you know there their willingness or are we are a desire to pay.
An agency accrued part of an accrued exits the or what have you. Those those are the primary drivers a third obviously is new deals.
As we do a new dealers, we just did with Mason West and we got a done it right at the beginning of the of the quarter. So that helps because that's a pretty good chunk of of debt. If you will other good interest rate.
Then as we do new deals we also generate incremental fee income so those would be the I'd say the three broad categories.
Obviously, the other side of the equation is expense management.
Some degree, though the some of that so that combination is where we would have to look to it.
If you I know you don't like to make it an immediate forecast, but you know if you were kind of coming up with the risk weighted you is it.
It's just an event that can occur quickly or is this an event that might take two or three quarters for things to kind of worked their way through I mean.
Obviously this year is gonna be a tough year everyone's you know.
Accepted that and you get a great capital structure. This go around like.
Yeah, I'd say I'd say, you know and again, we all keep saying, we don't know what the future holes and David Gladstone points very carefully as a big part of is a function of what our government doesn't actions along those lines, obviously et cetera, but from a microcosm our little companies as we look at each one of them and see the activities I'd say, it's over two to three quick.
Orders kind of activity in the interesting thing for us at that point on a very beginning the good news and bad news to some degree is we came off of our were one of our best year. So on a comparative basis.
Relative to as you point out you know we ended last quarter as I mentioned 19 cents in this this quarter 11 cents.
Normal circumstances, even 11 cents may not necessarily be bad. So the objective is to bring that back as best as we can.
I think this is a tough environment, obviously to try to replicate.
The great year, we certainly had last year by still the same token.
I think I still a very constructive positive and more importantly that I think you just sort of alluded to our balance sheet our to our overall liquidity, where we're at a good position to to work through this and again, that's our objective with all of our portfolio companies keep them keep them going and we.
Bill will hopefully get back to that level that we want to be ads and Henry just to chime in on that if we sell another company as we hope to do this year you'd make up a lot of that income because so much of its coming back in comes in from the dividend on the preferred stock.
That income and any income on the data of course is going to be very accretive to the dividends. So I'm not so worried about the dividend this year.
I think there's about 1.5 billion dollars' worth of money sitting out there in a venture capital money, whatever and they're trying to put it to work and we may help from put it to work by selling them something so that's a goal and I.
Again, I'm hopeful that we can do another couple of deals in terms of putting them into the portfolio during the year and that would give us some fees in structuring fees as well as some others. So we'll see we'll have a better view of it and October when we talk.
And you can ask the question again, we'll try to answer it.
I know how important the dividends already you, David and I always have appreciated that.
Are the people, we work, whereas who own the stock could be a lot of money over the last few years because of your efforts and not paying to supplement or reducing the dividend for a couple of quarters. You know maybe that doesn't build up a lot of capital, but this is more of a partnership than just the a trade and you know.
Clearly as you think about at least the supplement maybe this is trying to back off a little bit and built up some capital and.
But when we know you'll make the right decision.
Yeah, Hi, sheer amount.
[laughter] unconscious dividend if I can help it that's the last thing we'd look at but go ahead Im sorry handling I appreciate the clarity on that Sir. Thank you very much [laughter], but Henry we will as you said it is a partnership and we're here for the long haul and we'll we'll do the things we have.
To do so.
[noise] to make it a long term investment there you want to component as anyone else asking a question.
Thank you. Our next question comes on the line as well with National Securities. Your line is now open.
Hi, Thanks, Sara I'm good good morning, everyone I'm, just maybe a couple of follow up.
David on the you mentioned mentioned the makes it less investment.
Obviously, a good size and the mid $40 million range I'm, just curious with with I guess repayment activities as slow it as it is right now should we expect you to draw on the credit facility to fund that a that deal.
Alright, well yeah. That's out of course that was a subsequent event. So subsequent to June so the short answer is yes, we have.
Okay already drawn.
Okay. That's helpful. And then just wanted to ask about the the the ATM program with the preferred stock and then.
The the notes.
Then the notes I guess.
Offering that that's out there through Gladstone Securities I'm, just curious what your you cannot your appetite is too.
<unk> take down the either the unsecured notes and issue those to help fund subsequent act activity or do should we expect [noise] more activity on the on that on the preferred ATM to generate some capital for future for future years.
So for IC ATM as you point on the preferred subject, obviously to a blackout periods.
When we when we have to be out or the market. You know as you well know with ATM is there sort of the good news is it's a good way if markets accommodated too to raise capital in general what we're doing is taking a a long term look at how we keep funding our cells.
Over time, and you know the idea of the of is that notes that were sort of starting to to put out there and work through its not a it's not a program. That's an overnight program. So it's you know as time goes along that we will raise capital hopefully from from from that source and as.
We do that we will manage our overall capital.
Structure.
As a result of that obviously, so think think of it as where we're focused on our strategy here is let's lay in the best.
Types of securities for the long term for this business, we are long term business and as we would say raise capital from the notes. We obviously will not we're not looking just increased leverage and certainly not having cash sit on our balance sheet, but we will we will adjust.
You know our other funding sources accordingly, so that we maintain a you know what a a conservative level of leverage.
Relatively speaking at the same time, providing the capital to doing new deals and so on and so forth. So it's kind of all of the above its it's a it's a management of our of our capital structure is the best way to answer the question.
Okay. That's helpful. David.
And then I wanted to ask.
About the portfolio and some of the valuation sneaky, obviously discuss some of the depreciation for the quarter I wanted to.
Ask about the some of the appreciation in the quarter non there were several.
Several at least equity investments. That's all that's also some appreciation and made maybe you could you could speak to what what's driving that is is there something within that business.
Whether it be related because it or not.
That has helped propel the valuations.
Because of those businesses higher here over the over the quarter.
Julia you want to tackle that.
Sure so bright.
It it always helps to look at what industry any companies and so on the largest appreciation for the quarter, What's pioneer square, Iran, and you may or may not know, but they are in the K through 12.
[noise] electronics support.
Industry I have a hard time, describing is accurate when they make taste as in other supporting accessories for I pad laptop.
All those things so with ship schools being closed down you can imagine that the demand for those items has skyrocketed and hence they are doing really well I'm, Dave alluded to it and in his part about the a call earlier that we have seen outperformance in our portfolio and desktop in that category.
Okay. That's helpful Julien.
Right I mean I presented.
Let me just add to that though you that company will obviously as Julie alluded to have some impact and a positive vein.
On coal bid and buying habits, right and we're seeing you see that across the board some of our ecommerce oriented types of companies some improvement there, but but I'd also add that the fundamentals of those companies that also we saw upticks on valuation some higher than others are also very very stay.
Wrong too so it's a combination of things, obviously, a little bit of an uptick and who knows with covidien. They may some of that slow down a little bit it's hard to tell but generally the fundamentals still are sound and that's really a very important aspect of valuation.
Excellent. Thank you for the time this morning.
They have a have a good rest of the summer. Thanks. Thanks Ren.
Sarah you got anybody else.
There are no further questions in the queue at this time.
Alright, well, we'll end up by just saying thank you all for calling in asking good questions and we'll see you again in October at 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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