Q2 2021 Gladstone Investment Corp Earnings Call
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Greetings and welcome to the Gladstone Investment Corporation earnings call for the quarter ended September Thirtyth Twentytwenty at this time, all participants on a listen only mode.
Question and answer session will follow the formal presentation.
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Now my pleasure to introduce your host Mr., David Gladstone, Chief Executive Officer. Thank you Sir you may begin.
Okay, well, thank you Don and good morning, everyone out there this is David Gladstone and this.
This is the second quarter ending.
March 31st 2021 is our beginning.
For the year and so this is the second quarter fiscal year 2021. This.
This is the conference call for shareholders and analyst Gladstone investment listed on NASDAQ under the trading symbol G. Eight I am quite a common stock and then we have two preferred G.A. I am yeah.
Gee I in al. Thank you all for calling in we're always happy to provide an update to our shareholders and analysts.
Our view on the current business environment two goals of course help me understand what's happening and give you a glimpse of the future as we see it now well hear from our General Counsel and Secretary Michael Licalsi Hi, Good morning, everyone. Today's call May include forward looking statements. Other Securities Act of 1933 six.
Ladies Exchange Act of 934.
During those regarding our future performance. These forward looking statements involve certain risks and uncertainties and other factors, even though they are based on our current plans [laughter] reasonable. So many factors may cause our actual results to be materially different.
Future results expressed or implied.
[music], putting all risk factors listed in our forms 10-Q, 10-K, and other documents we filed with the FCC.
Find these on our website www dot Gladstone investment, but oh, well the Fccs website at Www Dot C.C. Dot GLP, we undertake 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. Once again. Please visit our website <unk> website Gladstone investment dotcom sign up for email notification service can also find us on Twitter at the Gladstonecomps War on Facebook keyword. The Gladstone companies that today's call is an overview of our results through September 30.
2020, So we ask you to review our press release and form 10-Q, both of which were issued yesterday for more detailed information and with that I'll turn the presentation over to Gladstone Investment's, President, Dave Dullum, Dave anything.
Mike and a welcome and good morning to all of our shareholders analysts. We appreciate you all being on.
We are pleased today that we can report good operating results.
For the quarter ended at 930, 20, and when we consider the past six months and certainly the continuing challenges due to cold at 19. We are we are very pleased with where we are and where we look going forward. We actually ended the quarter with adjusted net investment income of 15 cents per share and this just compare.
Her to the 11 cents per share for the quarter ended 630 20 so.
So on a comparative basis, all saw or total portfolio income has improved in part due to resuming some interest on certain portfolio company debt Securities, which we had to just somewhat as a result of covert. So we're now back to in some cases are pre Colgate levels, which is a good thing. In addition, we also made one acquisition.
In a company called Mason West Industries, which includes obviously, a new interest bearing debt security so that adds to our income stream.
Of course, we made that investment on the debt security along with an equity investment as well.
So our primary operating focus does continue to be close monitoring of our portfolio companies with the emphasis on their cash flow and they're working capital dynamics certainly in this very trying time in this regard we have not needed to provide much additional financial support to our portfolio companies, which is a good thing at the same time.
<unk>, we are focused on the rebuilding of the portfolio given that we had very significant and successful exit activity last year, which obviously reduced assets and it will get a good way and also of course, the slowdown in new investment activity, which we have been experiencing really since since cold and early part of this year.
As a result, though in July as I mentioned briefly we did make a newbuild investment with through a combination of equity and debt our net asset value for the quarter was $10.86 per share and that's consistent with the prior quarter, even given all the pluses and minuses.
Just touching briefly on pandemic actions.
As we mentioned on our last call and early in the pandemic, we proactively engaged with the management teams of our portfolio companies, we provided support related to their issues around HR human resources people legal issues and any sort of financial concerns that they may have had so we can do.
When you're doing that and we are experiencing though improvement across the portfolio and while we're still actively engaged with our companies on these pandemic related issues. The attention is now turning to forward planning on our portfolio companies 2021 budgets and of course, new acquisitions, not only add on acquisitions, but also for our.
Existing pool for our portfolio nice on investment.
The other positive is that our aggregate portfolio fair values have stabilized certainly since initial effect to the pandemic, which obviously affected the operations our portfolio companies and even though we've seen stabilization market multiples, which does have an impact on valuations have also though have been slower to recover generally or poor.
At folio values, so actually the increased quarter over quarter and of course within that some companies have outperformed others.
And this is certainly based on their sector and their geographic location.
Our balance sheet continues to be very strong we have solid values low leverage and we're in a very good position to assist our companies should it be necessary and this sort of ties back a bit to the strength of our differentiated investment approach is that we provide the significant portion of the equity in most of the debt in our transactions and therefore, we do have.
Significant flexibility with the financial structuring and the cash flow management of our portfolio companies, maybe worth an old briefly that most of the debt securities in our portfolio are performing really well, obviously from a valuation perspective impact has been more on the equity values, but overall as I mentioned, we've seen an uptick in overall value.
Quarter to quarter, so briefly the outlook as I'd mentioned touched on the buyout industry has experienced a pretty good slowdown in terms of new deals and according to one of the firms that we work with capstone headwaters, which is a major investment banking financial advisory firm, we're seeing new deal that they've seen new deal activity down approximately 40.
8% from Q1, this year, and which is an about 22% year over year. There are those some new signs of deal activity picking up and as I mentioned again, we made a new investment in July and we are pursuing a number of other prospects, which we'll see where that shakes out over the next six to nine months. So our focus for the near term is continuing.
We're close involvement with our portfolio companies, providing assistance is necessary and certainly making new acquisitions for Gladstone investment Corporation, we have maintained and look forward to maintaining our monthly distributions to shareholders at the current levels and again consistent with our policy our board will continue to evaluate any supplemental.
Distributions, which we can make and may make from capital gains so with that I'm going to turn it over to our CFO Julia Ryan and have a little more detail on the financials Julia.
Thank you, Dave let me start with a summary of the funds operating performance, we generated 4.4 million this quarter, which was slightly higher than $4.2 million in the prior quarter interest income increased approximately 1.3 million primarily to the new investments made during the current quarter that Dave mentioned and to a lesser extent as a result.
Increasing the interest rate on one investment to create cobot levels.
We continue to monitor it closely work with the companies that have loans on non accrual status and belief we can expect to see some improvement during the balance of this fiscal year now.
Net expenses totaled 7.5 million in the current quarter compared to $6.5 million in the prior quarter.
The increase was primarily related to accrued capital gains based incentive fees of 2.5 million this quarter versus.
0.8 million reversal of previously accrued cap gains incentive fee last quarter and that is all due to the net impact of realized and unrealized gains and losses between those two quarters.
When adjusting net investment income to exclude the capping incentive fee reversal adjusted net effect and for cool net investment income per weighted average common share was 15 cents in the current quarter or four or four cents increase compared to last quarter. We continue to believe that this metric is it useful and representative indicator of operation.
Exclusive of any capital gains based incentive fees as net investment income does not include any realized or unrealized investment activity associated with the speed.
Now moving over to the balance sheet, we believe that maintaining liquidity and flexibility to support and grow our portfolio a key element of our success in that regard we amended our credit facility during the current quarter to provide us with improved flexibility should our portfolio faced cobot related disruption.
We had availability under the credit facility up about 64 million as of 930 2020, and we also raised about 3.9 million net proceeds under our series E preferred stock ATM.
I would now stay consistent quarter over quarter with a nice pickup in unrealized appreciation of 1.6 million.
In addition, distributable income to shareholders remains solid on a book basis Undistributed net investment income combined with net realized gains totaled over 5 million or about 16 cents per common share.
This amount is reduced by the book accrual of that.
Applegate based incentive fee that's required under us GAAP and that number is roughly 7 million, which is not contractually due yet all else equal the 16 cents per common share would be available for distribution to shareholders in future periods, even if the entire capital gains incentive fee accrual were to be contractually due which it does not.
And with that in mind and as previously announced in October 2020, Our board of directors maintained a current monthly distribution run rate of 84 cents per common share, which currently represents a yield of about 9.8% excluding any supplemental distribution that's.
This covers my part of todays call and back to you David.
Okay. Thank you Julia Dave and Michael you all gave good information for our shareholders and those presentations and the form 10-Q filed yesterday should bring everybody up to date.
We believe the team is in good position to continue these successes in our fiscal year ending March 30, Onest 2021.
And just so you know we're now entering into a time to designate some of the management team for the future. We appointed two members to the executive Vice Presidents as we announced in our press release cow large and Peter Rudy in combination of course without Chief Financial Officer, Julia Ryan ensures the future of this.
John is in really good hands working together they have their responsibilities in their positions to the members of the senior leadership team to ensure continued success in the long term growth now, Dave Dullum and I'm not changing our positions were just adding to the group.
We believe Gladstone investment is an attractive investment for investors seeking continuous monthly distributions and some potential supplemental distributions from capital gains. So Donna if you'll come on now we'll have some questions from the analyst and shareholders out there tell them how they can ask a question.
Thank you, Sir ladies and gentlemen, the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
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Our first question is coming from Ryan Connors of Jefferies. Please go ahead.
Hi, Good morning, guys. Thanks for taking my questions and congratulations on the good quarter first.
First question from my end looks like this quarter you didnt have any other income.
What would what really drove the decline there.
And then moving forward is there a change in the outlook for that area.
Hi. This is a this is Dave I'll take a crack at that Julian wants to add certainly.
Keeping in mind that our other income line item as we always address it is something that is a function of either dividends on preferred investments we might have in some of our portfolio companies, which we harvest from time to time. The other is basically from what we call exit fees or success fees.
His which again, we harvest from our portfolio companies from time to time, so consistently we've all and as Weve shown before it's always going to be volatile and certainly different quarter to quarter. What we have done in this last couple of months and quarter or so is try it from the perspective of.
The cash again flow issues with our portfolio companies, meaning not putting any undue burden on them until we start moving further out of this whole pandemic situation. We have not really gone ahead and taken some of these fees. If you will which would come through the other income line item that we might have perhaps done in the past.
So no change in policy.
It's we're going to we see and expect some of that going forward certainly, it's a bit unpredictable, but we but we manage it carefully hopefully.
Hopefully that answers it.
Yes.
That was that was very helpful. And then in terms of the non accrual and in this quarter you saw an improvement on a fair value and cost basis, but.
And it looks to me looks like the same investments quarter to quarter and for quite a while quite frankly, the antique horizon the mountain PXI and Bob I mean have you.
Made any progress in terms of resolving these nonaccrual, especially in the context of the current environment and what's.
What's the outlook over maybe the next.
Two quarters through the end of the fiscal year in terms of resolution.
Judy you want to take a crack at that I have my comment I would add yep.
Yes, so you're correct, it's the same companies quarter over quarter and even for the last yes last two quarters horizon is the one that is has just been added in April so that hasn't been on for that quite that long and if you recall that somebody or a company that was significantly boasts two co that and given that it is heavily focused on the track.
The industry and the others have been on the left a little bit longer but I quickly touched upon this in my section we are working with each and every one of these companies and some of those are expect to see improvement over the next three to six months or the balance of this fiscal year.
I can promise you exactly when that will occur, but we're working on it.
Yes, the only further comment I'd make and again without being too specific it's possible that because of the definition. If you will that we use for what means non accrual and the timing.
We could actually collect income.
From one or two of these companies, but it still leaves it on a non accrual status. So that's one of the things that that's a positive for the income stream and we're working on that as well and I think that's an improvement versus where within.
Got it and then last question for me.
You had mentioned earlier in the call that deal activity on a year over year basis from the first quarter of this year is still pretty muted.
But can you give us a sense for how much improved quarter to quarter and then in terms of here in terms of your dealmaking ability has anything changed from the prior quarter. For example are you now traveling to clients or are you.
Are you seeing a pickup in discussions and.
Potential transactions out there in the market.
Yeah. Good question. So one yes, we have been actually traveling we've been as I mentioned briefly worked on a number of new things and and our folks beyond just the zoom calls that we've been doing we've actually had.
Some of our managing director is actually visit companies from management meetings. So overall I would definitely say in the last certainly two months or so we've clearly seen a pickup in activity in terms of the.
Companies that we would consider viable and potential acquisitions.
Acquisitions, so I'm I'm optimistic going forward there is still a challenge in that there is a lot of money out there believe it or not.
And valuations even in this environment.
Our our tough so you know we'll continue our policy of being you know you know good concise conservative careful invest stores in that regard, but overall, yes. We have seen is seeing some pickup and we're working really hard in that in that area and I guess I mentioned also as we are able now to have.
Our folks put less time, let's say.
More intense time on existing portfolio companies. It's you know the activity level is working with our capability to also process you know new new investment opportunities.
Thank you very much okay.
Okay. Donna next question.
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Just as a reminder, if you do have a question. Please press star one at this time. Our next question is coming from Mickey Schleien.
Please go ahead.
Yes, good morning, everyone I hope all is well on your end.
Dave I just wanted to follow up on your comments about the market environment.
It's still we're still in the middle of earnings season, obviously, but.
Clearly I think we're in a world of haves and have nots and strong performing companies.
Have all kinds of capital being thrown at them. So.
Within your portfolio is there do you have any visibility into potential exits to take advantage of.
In some cases is a tremendous sellers market.
Mhm.
So maybe I got to fall back on what we've sought to set our general I'll call. It policy is the way we think of exits as you know from our perspective, having good solid businesses that are continuing to grow generate income, we're not going to rush to the exits necessarily.
We saw that we do it where it again, if our CEO is the company folks running those companies feel the time is right for a variety of reasons or if we certainly get some times, which we do and have exited in certain cases with unsolicited sought to offer. So you know that's how we think about it generally you're right this environment.
Right no seems to be a little bit heavy in that regard and so we we are managing exits on companies that that we believe it makes sense to do and so if we can take a benefit from the activity level, you're talking about we we are we will do that and that probably will play out.
Over the next really say call it six months or so.
Okay and in that regard Dave.
The balance sheet leverage just measured by debt to equity.
Is at a level, we haven't seen since.
The end of fiscal 18 March March 18 quarters quite a while.
What is this sort of the maximum leverage you're willing to operate.
That's still an investment or you know are.
Are you comfortable enough with the economic outlook to take leverage even higher.
Julie you want to tackle that one.
Sure Mike.
I think.
Footnotes and obviously subsequent events announced as part of we've had large paydown that cleared on 930 and then subsequently was used to pay down the line and that to the tune of roughly $10 million. So the leverage is actually a little bit lower than what my 30 as reported.
Good point, we are confident we are more.
Comfortable with where we are we are comfortable to add to it should we need to.
We believe in our portfolio and I don't believe we're changing our operating outlook or our investment strategy that has been applied historically to make any foolish decision.
New investments so I believe we are where we need to be.
I understand Juliet in terms of that Paydown.
This does we're talking about Mason West, which is which is a new investment a couple of questions related to that.
Hi can you just walk us through you make you made a new investment in May some listen they turned around and repaid you.
Very shortly thereafter.
How what happened there and is there any fee income prepayment fee income associated with that we can expect.
There's no fee income associated with that debt repayment was anticipated at closing it just took a while to get it all figured out from a legal perspective between when we close the deal and been disclosed.
So to make you a little more color on that that the company did not repay us we did the deal and because of the size of the investment again, we're in a position to close it and as you know we do with the majority of the debt and the equity but that was one where we were looking to bring in a partner.
To take part of it and that's where the Paydown came from another invest store.
Coming in which spokes, we've worked with before and that was that was what it was not that the company repaid us I understand that that was going to be my next question.
Dave you mentioned resuming interest or changing interest rates on a deal that was previously affected by by Cove. It are you, referring to a pik toggle or a repricing and which deal are you talking about.
Yes, so no pik toggle no repricing all we did was which again, we can do as necessary from time to time, we just decided hey, Gil I wont go into the specifics, but the interest rate, let's say for argument sake. It was 12%. We decided we could you know for the period of time and take it down to say 7%.
Give them a little bit of breathing room, and then once we knew we were in good shape, which actually wasn't very long frankly after that resumed at back to that previous interest rate level. So that was that's kind of what it was and again its flexibility that we you know good news for us with our structure. We can we can do that okay.
Okay.
And.
Let me see just one last question maybe for Julie can you remind us what one does your tax year and what do you guys use.
The attack here is the same as the fiscal year. So March.
March Okay and Utah.
You told US what you tea is those are all my questions. This morning, I very much appreciate your time.
Thanks Mickey.
Thank you at this time I'd like to turn the floor back over to Mr. Gladstone for closing comments.
All right, we don't have any other questions for today and we'll see you guys next time in.
Probably January end of January or beginning of February.
Thank you all for tuning in and that's the end of this conference call.
Ladies and gentlemen, thank you for your participation. This concludes todays event you may.
Disconnect your lines at this time.
Path and have a wonderful day.
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