Q3 2021 Gladstone Investment Corp Earnings Call
Greetings and welcome to the Gladstone investment Corporation's quarter ended December 31, 'twenty and 'twenty earnings call at.
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At this time I'll turn the conference over to Mr. David Gladstone, Chief Executive Officer, Mr. Gladstone and you may begin.
Thank you, Rob and good morning to all of you out there. This is David Gladstone, the chairman of Gladstone investment and this is the third quarter for fiscal year 'twenty 'twenty. One. This is the earnings conference call for shareholders and analysts of Gladstone investment.
Traded on NASDAQ under of the trading symbol G. A I N. The common stock and G. A I N M and G. A I and al for the two preferred stocks we have outstanding.
Thank you off of calling in and we're always happy to talk to our shareholders and analysts and provide a view of the current business environment. Our goal today is to help you understand what happened in the past and give you a view of the future.
Turn it over now to our General Counsel and Secretary Michael The Council for his reading of.
Good morning, everybody of today's call May include forward looking statements under the Securities Act of 1933, and the Securities Exchange Act of 1934, including those regarding our future performance forward looking statements involve certain risks and uncertainties and other factors, even though they are based on our current plans, which we believe to be reasonable and many factors may cause our actual.
And well results to be materially different from any future results expressed or implied by these forward looking statements, including all risk factors listed of our forms 10-Q, 10-K, and other documents we file with the.
And these can be found on our website at www Dot Gladstone investment dot com or the SEC's website at Www Dot says that Giovanni and we undertake no obligation to publicly update or revise any of these forward looking statements whether as a result of the new information future events or otherwise except as required.
Wired by law of please also note that past performance or market information is not a guarantee of future results, we ask that everyone and visit our website and once again Gladstone investment dot com and sign up for our email notification service you can also find us on Twitter and that's at Gladstone comps and on Facebook keyword there is the <unk>.
And that's stone companies today's call is simply an overview of our results through December 31, and 2020. So we ask you that you review our press release and form 10-Q, both issued yesterday for more detailed information with that I'll turn the presentation over to David doll of him. He's the president of Gladstone investment, David Hey, Thanks, Mike and good morning.
Everyone.
Given all of the certain of stresses.
And uncertainties of the past year and what have the I'm really pleased to be able to report that we actually had a really good quarter.
And another good quarter of operating results and.
The Fort for this quarter, which ended 12 31, 'twenty, we generated adjusted net investment income of 24 cents per share.
Which is relative to 15 cents per share for the quarter ended 930 20.
Importantly is that all of our total portfolio income, which improved quarter over quarter part and great part because we also generated what we called other income which comes from dividend income of exit fees from our portfolio of companies and at the same time, our baseline of interest income was pretty consistent.
And just keep in mind that this other income we referred to can vary and probably will vary quarter to quarter and but we look at it and we try to manage this on a on an annualized basis. So again good to see it this quarter relative to last quarter and hopefully we'll be able to continue that.
And throughout most of calendar 'twenty and 'twenty and primarily due to Covid, we were pretty conservative and then.
In regards to this other income category, we did not expect frankly or really pressure portfolio of companies because of the emphasis certainly for them had to be on their preservation of their cash flow, which is most important and we really worked hard on that good news is we are beginning to experience improvement and stability and.
Our company's those and certainly were affected by Covid and we hopefully should be able to see some opportunity to continue generating this other income category during our calendar year 2021.
Obviously, we will continue to closely monitor our portfolio of companies and the emphasis again is going to be on their cash flow and their working capital needs.
And the other good news is that early since the start of the pandemic and through December we did not have to provide much and the way of additional financial support to our portfolio.
Folio of companies as a result of certainty of the Covid impact.
Also our aggregate portfolio of fair values are beginning to stabilize and as we've navigated through the spirit of the pandemic and we did have a very positive quarter over quarter increase and fair values, including and when you exclude the appreciation of reversal, which is related to the exit of frontier packaging to that point we are.
Exhibited frontier packaging in December of which contributed both other income and the realized gain on our equity. We also did a recapitalization and this is a good thing not a bad thing of old World Christmas one of our portfolio of companies and its what we refer to and most folks would know it has what's called the dividend recap.
Old World has been a strong performer for us of very good investment and we certainly wanted to keep it in the portfolio. So we were able to make a new secured debt investment. This allowed the company, meaning old World Christmas to repay its bank debt and make a payment to gain thereby creating income a return of.
The preferred equity capital cost basis, and the realized gain on equity all world continues as the portfolio of company with gain.
And we are retaining our significant ownership interest so a very positive transaction, which is something we are able to consider doing from time to time given the.
Relationships, we have one of our portfolio of companies and in fact, our ownership positions and these companies.
So that we have very solid values now and low leverage on.
And of our balance sheet continues to be strong and it allows us now to make new acquisitions, and certainly assist or of companies should it be necessary going forward.
Regarding our outlook, we definitely are seeing signs of deal activity picking up we are pursuing some new opportunities and some of them are actually and the due diligence phase.
Although it still is a very competitive environment with very high valuations relatively speaking and part because there's lots of liquidity and the buy up market and the competition is pretty stiff. So we keep being challenged on the new deal front, but that's what we keep doing every day and I, certainly hope and look forward to seeing some new.
<unk> somewhere over the next day, certainly six to nine months, so with that our focus for the near term, we'll be continuing our close involvement with our portfolio of companies, providing assistance as necessary and certainly making new acquisitions for the portfolio.
We are maintaining of our monthly distributions to shareholders, we feel free.
Really good about at the current levels and consistent with our policy. Our board will continue to evaluate supplemental distributions as we make.
The capital gains going forward, so with that I'm going to turn it over to our CFO Julia Ryan let her go into some more detail Julia.
Thanks, David Let me start with the summary of the Fund's operating performance for the past quarter, we generated net investment income of $6 3 million, which compared to NII of four 4 million and the prior quarter interest income stayed consistent quarter over quarter, but other income as Dave mentioned and particulate dividend income increased $5 2 million.
And the results of the investment transactions.
We continue to monitor and closely work with the companies that have loans on non accrual status one of which has started making payments again and we believe we can expect to see some improvement during the balance of this fiscal year, which is ending March 31.
Net expenses totaled $11 1 million and the current quarter compared to $7 5 million and the prior quarter the <unk>.
Increase was primarily related to the income based incentive fees of $2 2 million, sorry, $2 million as a result of the increase and pre incentive fee NII and $1 8 million of capital gains based incentive fees.
This compares to income based incentive fee and a half million dollar of capital gains based incentive fee last quarter the.
The change and the capital gains based incentive fee is due to the net impact of realized and unrealized gains and losses between quarters as of 12 31, 'twenty no capital gains based incentive fee was contractually due.
And when adjusting net investment income to exclude the capital gains based incentive fee and <unk>.
Adjusted net investment income per weighted average common share was 20% and the current quarter or and <unk> increased compared to last quarter.
As Dave mentioned, we completed several investment transactions this quarter, which in aggregate resulted in net realized gains of $9 1 million.
We believe that maintaining liquidity and flexibility to support and grow our portfolio of key elements of our success, we have availability under our credit facility of about 96 million as of trial study one and 'twenty. We also raised about $12 9 million and proceeds under our of serious E. G. P. S. A T M.
Our NAV increased to $11 and the 11 cents per common share quarter over quarter, primarily related to net realized gains.
In addition, distributable income to shareholders remains solid and a book basis Undistributed net investment income combined with net realized gains totaled $14 million or about 42 cents per common share.
That's the amount has already reduced by the book accrual of the GAAP capital gains based incentive fee, which is roughly $9 million at 12, 31, and let's just not contractually due.
With that and mine and as previously announced in January of 'twenty, 'twenty, one and our board of directors maintained the current monthly distribution of run rate of 84 cents per common share, which represent the current yield of around 8%, excluding any supplemental distributions.
This covers my part of todays call back to you David.
Alright, Julia very nice presentation from you and Dave and Michael All of this good information for our shareholders.
At the presentation and form 10-Q that you filed yesterday and should get everyone up to date and all the things that we've been doing.
And I believe the team today is in good position to continue the successes and for the remainder of the fiscal year ending March 31, 'twenty 'twenty one.
And manage the portfolio through the current times of uncertainty and.
Believe Gladstone investment is an attractive investment for investors seeking continuous months of the distributions and the potential for supplemental distributions team hopes.
And to continue the show strong returns as they did this quarter, but now I'm going to stop and ask the operator to come on and let's get some questions from those on the line and listening to us.
Thank you.
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Okay.
Thank you.
First question comes from the line of Ryan Carr with Jefferies. Please proceed with your questions.
Hey, good morning, guys and thanks for taking my question. The first question and specifically on the other income and I know you had mentioned and the beginning of the call.
Not really and a normal thing to see at that high in the quarter. So just curious to hear your thoughts on really the cadence of that line item going forward, just given the deal activity and Illinois.
Yes, hi, so as I mentioned and Julia certainly you should jump in here of she feels as I mentioned it is and always has been.
And somewhat inconsistent if you will quarter over quarter, because it is driven primarily.
By two things one dividends that we might take from our portfolio of companies or receive from the portfolio of companies, which is really dividends on usually the preferred stock investment that we have and those companies and first of all for a company to payout of dividend to us. They also have to have lets call earnings and profit. So we generally.
And we don't see a lot of preferred dividends necessarily where the what you do see them more as in the case of this past quarter with the exit of both if you will a frontier of packaging and the old World Christmas a recap.
We are in a position then to have those companies as part of the transaction payout on the accumulated dividend that they would have so that's one so again, you'll see probably as I say less of that and it's driven in part by exits that we might take going forward as well as anytime the company has earnings and <unk>.
<unk> and they choose to pay out the dividend. So that's that part and the other one is the other what we call and exit fee or a success fee. Other folks would normally think of that as what's called Pik.
On their debt securities and as you might know, we do not have pick which as means of payment and kind, which is not cash related we do not taken and income until actually the company is able to pay us that proportionate share of their quote exit fee of success fee, which can occur during the life of the company not net.
<unk> just on an exit.
And the reason of the company would do that is it helps them from a tax perspective, so when they pay it out to us we take it and the income and it is cash based so we do not have any noncash income, which obviously, we would be inclined to have the knocking and climb but we'd have to be required to pay out so long long answer to it but the the answer is.
Really we look at it as I mentioned on an annual basis and between quarters. It will be inconsistent and we try to manage the level, where we can generate and other income line item to help support the nature of our interest income line item, which comes off of the debt securities. Because remember we have about 70% of our assets are and roughly in the <unk>.
Net securities of these companies and about 30% and the equity which is important to us and as a part of our strategy. So we look to generate income from that from time to time.
And then we take cap gains obviously going forward hopefully that helps.
And yes, thank you very much and.
And then second question is on the dividend.
The NOI has been over the past several quarters as the economies recover you've seen and upward trajectory and Matt.
I'm just curious what is your current level of spillover and then beyond that what are your thoughts moving forward on a special distribution.
Julie do you want to take that sure.
So Ryan as I as I stated earlier, we have roughly $14 million of undistributed income right now on the balance sheet.
And that's obviously book basis of the tax numbers vary a little bit from that.
That is available for distribution and at any one point.
And we ended last year with and good amount of the last fiscal year with a good amount of spillover as well so that obviously it started at the off with some cushion.
And your rights and the first two quarters, we weren't Cui.
Quite making our.
Monthly run rate and however, as Dave just alluded to we really manage our earnings on an annual basis. So we tried to match the annual income to the annual dividend and and that's how we operate and some of that is related to how how our income can fluctuate and you just pointed out to that status for one and then number two as far as supplemental.
And of that concern we are monitoring where the portfolio is going through the end of this fiscal year and.
And so all holds true and we hope that we can declare another one.
Great. Thank you very much for answering my questions.
Okay and next question the.
The next question is from David Rothschild of private Investor. Please proceed with your questions.
And thank you for taking my question.
David you talked and your remark about I guess I would describe it as tightness and new deals coming forward do you see that as maybe bringing out bringing down the.
Total learning that the.
The portfolio is going to be earning going forward.
Yes, Thanks, David.
Appreciate you being in the Investor also.
I don't I Wouldnt say, so because of the portfolio as we stand right now obviously, we're as we've just been talking we know really focused a lot on the income coming off of and exit of the existing portfolio.
It's not unusual by the way you know for US as you know our general level of activity as we don't do you know we don't go into a whole bunch of new deals and we're very careful and how we go about doing them all.
Our underwriting is it's pretty thoughtful.
Really the key is that when I say tightness, it's tight because there is a lot of money out there and the private equity world and and the buyout business, which is where we compete.
So we try to be cautious as we look at new companies. The good news is that we are seeing as I mentioned, the more activity, meaning more companies that are looking to be sold that we have and opportunities to look at so.
Don't see it as really as it bringing down the income its really more question of how rapidly so to speak we can add to our assets and continue to increase the the income and their thereby obviously you know slightly increase our monthly dividend payout. So that's really our target of our goal of it but it's what we do every day and.
And you know.
Not not overly optimistic, but I'm certainly encouraged by what I'm seeing on the on the new deal pipeline front so to speak.
Alright, thanks for the thanks for the answer keep up the good work and Sir.
Okay next question.
The next question is from Mickey Schlein with Ladenburg. Please proceed with your questions.
Yes, good morning, everyone.
David just wanted to ask you about liquidity at your borrowers because when we think about the pace of vaccinations here and the.
And the viruses mutation it looks like the pandemic will probably go on longer than we had originally hoped for and that could obviously continue to stress the company's you've invested in and some industries, so with that and mind, how do you feel about your borrowers liquidity and.
The ability to.
See the light at the end of the tunnel and get through the pandemic.
Yes. Thanks, Vicki good good question right now.
Feel like we've gone through.
The worst and a sense with our portfolio of companies of the one or two that obviously, we're most impacted if you will because of their nature of their product or service, which and where were they would interact more with the public as an example.
And one of those which early and the pandemic I think we've talked about this actually on our last call.
And you know that that provides and home cleaning services. They obviously saw a drop in their initial revenue they've actually seen of pick back up again and they've all of lot of these companies have managed to figure out how to manage through some of this activity also so as an example, and their case.
We don't see any any need there, they're doing really well.
You know one other company that has been impacted because there they are sort of tied to the rent a car industry, obviously saw pretty significant decline, but again, they're managed exceptionally well and we see them starting to pick back up again and you know.
Just depends obviously on travel and how quickly that's going to pick up but all in all I'd say right now as we look at the portfolio, we're not seeing any any need for a portfolio of companies to have two to fund any activity as a result of COVID-19.
So.
Again, I am cautiously optimistic.
And in that regard and we're obviously, we're in a position to help provide some some funding if necessary or do some things, but as of right. This minute I don't see any debt necessarily that we're gonna have to do that with.
That's good to hear thank you for that Dave I wanted to also ask about non accruals of some of your non accruals have been on your balance sheet for quite some time.
Imagine you're working on them could.
Could you give us any indication of of the prospects for bringing some of those back onto accrual basis right.
Right. So I think right now Mickey and Julia can certainly correct me on this there are there is one thats related as I was just discussing on the.
Covid.
And that one possibly as we move nearer the end of this this year. This calendar year, we anticipate we could possibly see that won't come back on so I mean that needs to be done for that reason.
The of the five I think that we have on non accrual right. Now there are besides that one there are two others, one of which Julia alluded to that actually is paying its interest now.
Although technically it's still non non accrual just because of the way in which we we sort of the.
And sort of internal.
The rules if you will so over the next couple of months or so I think that will come back on accrual and there's another one that I think as we move through the year given its activity will come back on so long answer is I think of the five there are two of them that are there companies that are performing reasonably well they're not back.
On an accrual yet and probably won't be an accrual for a while but you know there they're doing what they need to do so again, I think where we.
We're working through all of them and hopefully by the end of this certainly this year, we'll see most of them back on non accrual status.
Thank you for that and thank you for taking my questions. Congratulations on a good quarter David.
Yes.
Next question.
There are no additional questions of Mr. Gladstone.
All right and if there are no more questions. We all will see you next quarter and thank you for calling in and that's the end of this call.
This concludes today's conference. Thank you for your participation you may now disconnect your lines at this time.
Yeah.