Q4 2020 Gladstone Capital Corp Earnings Call

Greetings and welcome to the Gladstone Capital Corporation earnings call for the fiscal year ended September Thirtyth 2020.

At this time all participants are in a listen only mode.

Question and answer session will follow the formal presentation. If you would like to ask a question. Please press star one on your telephone keypad.

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As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr., David Gladstone Chief Executive Officer. Thank you Sir Please go ahead.

Thank you Donna for that nice introduction and good morning, Hello, everybody. This is David Gladstone Chairman and this is the quarterly earnings conference call.

Gladstone capital for fiscal year, ending September 32020, Thank you all for calling in always happy to talk to stockholders and less well.

Well from an opportunity to provide an update for the company.

Now lets skip ahead and head here from General Counsel, Michael account see I.

I guess the first.

Collyn.

Thanks, David Good morning, everybody. Thanks report May include forward looking statements under the Securities Act and making 33 Securities Exchange Act of 1934.

Regarding our future performance. These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. The main factors may cause actual results to be materially different from any future results expressed or implied by these forward looking statements. During all risk factors listed our form 10-Q, 10-K, and other documents we filed with the.

Yes. He can find all of these on the investors page of our website at Www Dot Gladstone capital Dot Com get also sign up for our email notification service there as well, but also find the documents on the Fccs website at Www Dot C.C. that she'll be now.

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 of course as required by law.

This call with an overview of our results. So we ask that you review our press release and form 10-K, both issued yesterday for more detailed information again look on the Investor page of our website Www Dot Gladstone capital back up.

And with that I'll turn the call over to Gladstone Capital's President Bob Marcotte, Bob [laughter].

Good morning, and thank you all for dialing in this morning to discuss the results for Gladstone capital for the quarter ended September 32020, after which I'll provide some comments on the fiscal year as a whole and outlook for the current fiscal year.

Originations for the quarter totaled 22 million, including one new proprietary investment however, repayments and proceeds also totaled 22 million and included the exit of one proprietary investment and the sell down of one of our larger second lien positions. So assets were largely unchanged for the period.

Interest income rose to 11.9 million or 2.6% over the prior quarter, where the increase in average investments as the portfolio yield remained consistent at 10.9%.

Prepayment and dividend income recovered with the resumption of more normal deal activities and lifted total investment income.

To 12.6 million, which was up 900000 over last quarter.

Borrowing it administrative expenses were unchanged from the prior quarter as average LIBOR or the average life for benchmark fell slightly and net management fees rose by 900000 with the reduction of incentive fee credits, resulting in net investment income of 6.1 million or 19.5 cents.

Per share.

Net assets from operations were 10.2 million worth 33 cents per share, which included 3.6 million of net realized portfolio appreciation on the quarter.

And for the period, and maybe rose 13 cents to 740 per share as of September 30.

With respect to the portfolio.

As we've discussed previously we're fortunate that our portfolio diversity limited our exposure to the consumer retail and travel services sectors, most impacted by the COVID-19 pandemic.

For the period, we did not experience any payment default and our one non accrual investment was unchanged at 1.4% of the portfolio at fair value.

From a valuation perspective, the top gainers were largely driven by the continued improvement in operating performance and resumption of strategic investment activities also the number of gainers outnumbered decliners, which gave rise to the 3.6 million of net portfolio appreciation in the quarter.

The decliners continued to be concentrated in the energy and auto service auto sectors. However, recent strength, particularly in the latter has position these investments well for recovery in the coming quarters.

The asset mix at the end of the quarter was relatively unchanged. Its first lien loans rose slightly to 49% in cost and second lien exposure declined to 40% 42% of the portfolio cost.

For the fiscal year just ended the couple of summary comments.

On the year, we were pleased with the overall level and quality of originations would came in at 150 million and given the decline in transaction activities over the past six months prepayments fell to 79 million, resulting in lifting the ending portfolio to $450 million at fair value.

Despite the record low interest rate environment, we're operating in we were able to increase our net investment net interest income by 3.9% on the year to 34.5 million compared to the prior year.

Fee income declined on the year with lower levels of exits and prepayments. However, much of this decline was absorbed by incentive fee credits, which reflects the managers long term commitment to supporting shareholder distributions.

And while portfolio valuations have not fully recovered from the pre pandemic levels.

The portfolio continues to perform with low non earning levels and we remain optimistic the current trends will support the recovery of much of the unrealized depreciation incurred earlier in last year.

Looking forward, we continue to be optimistic and enthusiastic about the growth opportunities in the lower middle market and while there will undoubtedly continue to be competition for quality, yielding assets, our focus and experience will continue to position us well to grow our assets.

As we have demonstrated in the past couple of quarters, you can expect us to continue to manage our leverage in the vicinity of one to one debt to equity, which combined with our more normal deal environment and fees should improve our earnings and dividend coverage.

We remain cautious regarding any lasting co bid related financial impacts on new business opportunities and the sustainability of recent growth as we evaluate the recent pickup in new deal inquiries.

We intend to continue to proactively manage our investment capacity.

And where appropriate sell existing assets to support new investments to maintain our targeted leverage level, while enhancing our net interest income.

And now I'd like to turn the call over to Nicole Schaltenbrand, the CFO Gladstone capital to provide some details in the funds financial results for the quarter and fiscal year end.

Thanks, Good morning, everyone.

During the September quarter total interest income increased 300000, or 2.6% to 11.9 million due to a slight increase in the average balance of our interest bearing investments the.

The weighted average balance of the interest bearing portfolio increased by 6.7 million to 437 million compared to 429 million for the quarter ended June thirtyth the.

The weighted average yield on our interest bearing portfolio remained consistent quarter over quarter at 10.9%.

Other income rose by 500000 compared to last quarter as prepayment fees and dividends lifted total investment income for the quarter by 850000 or 7.2% to 12.6 million.

Total expenses increased 800000, or four point, 14.5% quarter over quarter, primarily due to a $700000 decrease in closing fees and incentive fee credit.

Net investment income for the quarter ended June Thirtyth was 6.1 million and was unchanged compared to the prior quarter.

At 19.5 cents per share and covered 100% of shareholder distribution.

The net increase in net assets, resulting from operations of 10.2 million or 33 cents per share for the quarter ended September thirtyth compared to 15 million or 48 cents per share for the prior quarter. The current quarter increase is driven by net investment income and 3.6 million of net portfolio appreciation as Bob covered earlier.

Moving over to the balance sheet as of September Thirtyth total assets were 450 million consisting of 400.

Sorry, total assets were 459 million consisting of 450 million in investments at fair value and 9 million in cash and other assets.

Liabilities declined to 225 million as of September Thirtyth and consisted primarily of 128 million and borrowings on our credit facility.

$57.5 million of six in a senior notes due 2023 and $38.8 million of five and three senior notes due 2024.

Net assets rose by 6.9 million from the prior quarter and 4.1 million of net realized and unrealized portfolio depreciation and the issuance of 374.2 thousand common shares under our ATM program, which generated net proceeds of 2.8 million.

NAV rose, 1.8% from $7.27 per share as of June thirtyth to $7.40 per share as of September 30, yes.

Our leverage as of September 30, a decline from the prior quarter end to 96% of net assets from 102% last quarter with the increase in net assets for the period.

We currently have in excess of 46 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 in October our board of directors declared monthly distributions to our common stockholders of six and a half cent per share per month for October November and December does an annual rate.

At 78 cents per share.

The war of them hit in January to determine the monthly distribution to common stockholders for the following quarter.

At the current distribution rate for our common stock and with the common stock price at about $7.87 yesterday. The distribution run rate is now producing a yield of about 9.9%, which continues to be attractive relative to the extraordinary low yields generally available in the market today.

And now I will turn it back to David to conclude the presentation right Nice report Nicole that was a good one from Bob and Michael you All did a great job of informing our shareholders and the analysts out there about this company.

In summary, it was a solid quarter fiscal year for Gladstone capital and the company did.

Did well in terms of delivering a number of fronts first of all 22 million new attractive price investments during the quarter and 150 million for the year.

Proactive managing the portfolio and was able to keep the nonperforming assets at a low rate of 1.4% of the total portfolio.

And despite all of this going on with co but out there on portfolio has not been grossly impacted as some other investment companies have been.

We have higher assets drove a nice increase in the company's core net interest income to $9.2 million for the quarter and 34.5 million for the year.

We maintained a strong capital position with leverage on a low end of it appears.

And best position them well to continue to take the additional middle market investment opportunities and some front in summary, the company continues to invest in midsized private businesses with good management. Many of these situations are supported by mid sized private equity funds that are putting in the equity underneath us.

And they are looking for experienced partners to support the acquisition and growth of the businesses. They're testing in this gives us an opportunity to make an attractive interest paying loan to support our ongoing commitment to pay cash distributions as you know from our press release, we are beginning to identify people who will carry our.

Companies to the next generation might break was.

Promoted to executive.

Vice president and they're probably be others.

Bob Marcotte, Michael a calcium Nicole Schaltenbrand might Mcquigg I think this phone is in very strong hands.

They are the ones that have a passion for paying dividends and distributions.

And now operator would you come on until the call is how to ask questions about the company.

Thank you ladies and gentlemen, the floor is now open for questions you would like to ask a question. Please press star one on your telephone keypad at this time.

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Yes.

Okay.

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Once again, ladies and gentlemen that is star one to register a question at this time.

Okay.

Thank you. Our first question today is coming from Mickey clean of Ladenburg Thalmann. Please go ahead.

Yes, good morning, everyone.

Bob I want to start by asking Oh.

Apart from energy in autos, what percentage of the portfolio would you say.

As high risk related to Cove it.

Mickey Good morning, I think most of the companies have adapted to cope with it at this stage.

If I was going into it I would have said restaurants would have been affected but.

Our restaurant business is currently producing nice profitability. So I would I would really limit any meaningful impact to the autos and energy.

And I effect, frankly think that the autos.

Our back to full production in fact, both of our companies are performing above budget. So.

It was just a more severe pothole that cobot created when the auto companies literally shut down in the proportion of revenues fell more dramatically. So those companies are beginning to earn their way out of it.

Other than that.

I wouldn't put anybody else in the in the category of being.

Significantly impacted by cobot.

That's that's that's good news Bob it given what you just said what accounted for the slight decline then in the portfolio's average risk rating.

It probably has to do with the little bit of mix.

You know the energy credits in the auto credits as those results were reported.

Some deterioration in the underlying numbers. So when you when all of a sudden the Q2 numbers came through into July and August you had you know really four credits that rolled through and when those financial results hit their hit their stats.

It caused the deterioration.

To give you give you us.

A AFFO.

A flavor Mickey.

If you back out autos in energy yes.

Yes, the overall debt service leverage in the portfolio today, including both first and second liens.

3.5 turns of leverage.

So the overall portfolio is performing well, it's those two sectors that were more severe and are beginning to beginning to earn their way out, particularly around the auto auto segment.

Okay. That's very helpful. So Bob it sounds like you wouldn't be particularly concerned about potential for.

Future stay in place orders, given how bad the cobot curves is progressing right now.

You're asking us the cobot Crystal ball at this point I see you know we've got.

Health care companies and you know.

Do you end up with you know things getting shut down again do you mean the.

I guess I would say.

People have accommodated anticipated our operating on a remote basis, I think the incremental shock and peril paralyzed results and impacted businesses.

I think companies have adapted and are much better prepared for anything that might come at this stage and sense.

As I stated in my comments.

There's very little that was directly impacted other than the industry sectors I outlined I would be surprised to see another down cycle on our credits given the current leverage profile that we have.

That's that's very useful and just to make sure I understand you said the portfolio's average debt to EBITDA was three and a half times without auto and energy correct correct.

Just a few questions on the right hand side of the balance sheet.

What percentage of the portfolio would you say is in liquid syndicated deals.

Nicole.

Probably around.

Between eight and 9% right now.

So some liquidity there and.

Nicole.

Could you remind us what the limitations are on your credit facility, which is at least as of September reduced the borrowing base below the commitment to melt I know, it's it's super complicated and.

Theres a variety of factors, but what's what's driving that.

So that reduction was temporary Mickey and that was due to just.

Some amendments minor amendments, we had done to some of our portfolio investments and just getting those through the necessary approvals that we needed to with Keybank, which we have subsequently done so that was more of a temporary decline.

And I think you mentioned your current availability nickel, but could you repeat that please yes. So today, our availability is in excess of 46 million.

Okay that's useful.

And to be clear Mickey that $46 million.

There's two tests one is collateral second is credit facility size.

That capacity is dictated by the credit facility size, we have more collateral than would be implied by that number. So were we to increase the credit facility size would drama it would increase the amount of availability.

I understand.

And Bob to your baby bonds allow you to employ the reduced asset coverage ratio yes.

Yes, they do and my last question.

Do you how would you characterize your appetite to additional to issue additional unsecured debt given sort of the current rate environment.

Timely question Mickey.

I would say that.

[music].

It's taken a little bit of time for the baby bond market to fully recover I think our securities have been generally trading well.

And as the credit spreads have gradually contract did.

We are getting into the range, where it would be interesting to pursue.

And I would.

I would suggest that that is a topic that we are currently evaluating I.

I understand that that would that's what.

I expect that those are all my questions. This morning I. Appreciate your time very much. Thank you. Thank you for calling in Mickey.

You have any other questions.

We're showing no further questions in queue at this time I would like to turn the floor back over to Mr. Gladstone for closing comments. Okay. Thank you all of them. Those are nice questions. We'd like to have more questions next time, so save up to your questions.

Then in June.

January.

In February. Thank you that's the end of this call.

Okay gentlemen, thank you for your participation you may.

Disconnect your lines at this time or log off the webcast and have a wonderful day.

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