Q2 2021 Gladstone Capital Corp Earnings Call

Greetings and welcome to the Gladstone capital second quarter earnings call.

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

The question answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

I will now turn the call over to Mr. David Gladstone, Chief Executive Officer.

Mr. Gladstone. Please go ahead.

Well. Thank you Rob Nice introduction good morning, everybody. This is David Gladstone Chairman and this is the quarterly earnings conference call for Gladstone capital.

For the quarter ending March 31, 2021. Thank you all for calling in we're always happy to talk with our shareholders and that was the analysts that follow us.

Well from the opportunity to give you an update.

The Mark on the President will be on in a minute, but first we're gonna need the year from my General Counsel to talk to you about the legal warnings about this presentation Michael It's David in the morning. Today's report May include forward looking statements. Other Securities Act of the lessons earned greater on the Securities Exchange Act of 1934 gross.

Now regarding the future performance of these forward looking statements involve certain risks and uncertainties of their base of our current plans, which we believe.

The factors may cause our actual results to materially differ from any future results expressed or implied moving forward looking statements, including on risk factors listed on our forms 10-Q, 10-K, and then the other documents filed with the SEC filings on the investors page of our website Www Dot Gladstone capital Dot Com can also sign up for.

The email notification service there.

The final documents or on the SEC's website at Www Dot said the GLA now.

We undertake no obligation to publicly update or revise any of these forward looking statements whether as a result of all information future events or otherwise except as required by law on today's calls for an overview of our results. So we ask that you review our press release and form 10-Q, both issued yesterday for more detailed information again, you can find the filing invest.

First page of our website with that I'll turn the presentation of all of the Gladstone Capital's President Bob Marcotte, Bob. Thank you Michael Good morning, and thank you all for dialing in this morning to discuss the results for Gladstone capital for the quarter ended March 31 2021.

Originations for the quarter was strong totaling 72 million, including three new proprietary investments. However, we had three exits during the period, which totaled $48 million. So net originations came in at $24 million for the period.

Interest income of the Sky declined slightly to $11 9 million over the prior quarter.

Driven mainly by the slight decrease in the weighted average portfolio yield.

Prepayments from dividend income rose with repayments and lifted total investment income to $12 9 million, which was unchanged relative to last quarter.

Borrowing costs increased on the quarter with the closing of the additional $50 million add on to our five year senior notes offered last quarter. The add on was attractively priced to yield for two eight per cent and while it reduced our lower cost floating rate line borrowings, we expect floating rate borrowings to increase with.

Asset growth and should we elect to call our higher cost senior notes due in 2020 for later this year. In addition, we have now eliminated much of the risk associated with the rising short term interest rates given most of our assets are currently supported by interest rate floors.

The administrative costs of net management fees declined which contributed to a drop in total expenses and net investment income rose to $6 4 million or 19 in the half cents per share.

Net assets from operations rose to $21 3 million or <unk> 65 per share, which included $16 million of net unrealized portfolio appreciation on the quarter and $1 2 million in realized loss associated with the call of our 2023 senior note issue.

For the period now of rose 50 cents per share or 6.6% to $11 eight $8 11 per share as of March 31.

With respect to the portfolio our portfolio continues to perform for them well and most of our investments are passed on a COVID-19 related effects as indicated by the broad based asset appreciation last quarter. In addition, the cumulative portfolio appreciation over the past four quarters has now eclipsed the COVID-19 related.

Markdowns of the March 2020 quarter.

While our weighted average risk rating for the portfolio dropped slightly on the quarter. This was primarily due to the repayment of two very highly rated credits during the period.

For the quarter, we did not experience any payment defaults in our one non accrual investment, which represents one 5% of our portfolio of fair value has seen a material uptick in business volumes and we're optimistic that it will transition to earning status this quarter.

For the quarter three of the top for appreciation contributors, which represent roughly 60% of the appreciation on the quarter are associated with our equity positions in these businesses and are supported by pending sales.

The asset mix at the end of the quarter shifted materially in favor of first lien loans, which rose eight points to 58% of costs, while second lien exposure declined to 32% of the portfolio at cost.

Looking forward last quarter was active for originations as we absorb the number of expected repayments and we're pleased to be able to achieve net investment portfolio growth. We expect much of the same in the near term as market valuations and private market liquidity are driving in.

<unk> weighted level of refinancing and recapitalization of activity in several sales processes deferred from 2020 are nearing conclusion.

As we have reiterated in the past couple of quarters, you can expect us to continue to target leverage in the vicinity of one to one debt to equity however, the scale of the portfolio appreciation.

Last quarter contributed to our leverage remaining below our target range.

Based on our modest leverage position and reduced secured line borrowings we have an unprecedented level of debt capacity to take on additional yielding investments to enhance our earnings and dividend coverage and now I'd like to turn the call over to Nikolas Hilton brand on the CFO for Gladstone capital.

To provide details of the quarter's financials for.

<unk> financial results for the quarter, Nicole Thanks, Bob Good morning, everyone.

During the March quarter total interest income declined 200000, or one 6% to $11 9 million, primarily due to a small decline on the weighted average yield investment portfolio weighted average balance increased slightly by $10 $7 million of two 4% for $454 1 million compared to the December 31st quarter.

Weighted average yield on the interest bearing portfolio declined by about 20 basis points to 10, 6% compared to the prior quarter with the increased population of first lien loans.

Other income rose by 200000 compared to last quarter with the elevated level of prepayment fees realized and as a result of total investment income for the quarter was unchanged at $12 9 million.

Total expenses were largely unchanged declining of 100000 of one 8% as higher interest costs associated with the additional note offering were mitigated by a decline in administrative expenses and a reduction in management fee associated with the elevate elevated originations during the quarter.

Net investment income for the quarter ended March 31 was $6 4 million, which was an increase of 100000 compared to the prior quarter or $19.05 per share and covered 100% of our shareholder distributions.

Net increase of net assets, resulting from operations of $21 3 million or 65 cents per share for the quarter ended March 31, 2021, compared to $12 3 million or <unk> 38 per share for the quarter ended December 31 2020 the.

The current quarter increase was driven by $16 million of net portfolio appreciation of Bob covered earlier and on $1 2 million loss that we recognized associated with the early redemption of our 2023 net.

Moving over to the balance sheet as of March 31, total assets for 504 million consisting of $493 million in investments at fair value and $11 million in cash and other asset liabilities relative to $233 million as of March 31, and consisted primarily of $150 million of new news.

The issue by the name of senior notes due 2020 and.

And $38 $8 million of five and create the units to 2024.

And we ended the quarter the advances under our line of credit were $41 million and our weighted average borrowing cost of four 6%.

Net assets rose by $23 8 million from the prior quarter end of $14 9 million of net realized and unrealized portfolio appreciation and the issuance of approximately 906000 common shares under our ATM ATM program, which generated net proceeds of $8 9 million.

Now for a six 6% from $7 61 per share at December 30, <unk> to $8, an 11% as of March 31 2021.

Our leverage as of March 31 was unchanged from the prior quarter end at 86% of net assets and we currently have in excess of $100 million of borrowing availability under our line of credit and expect to be able to announce the renewal and extension of our credit facility in the coming week.

With respect for distributions Gladstone capital has remained committed to paying stockholder of the cash distributions and in April our board of directors declared monthly distributions to our common stockholders of $6.05 per common share per month for April may and June which is an annual rate of 78 cents per share.

In addition, effective April one 2021, the adviser extended the agreement to reduce the incentive fee payable by increasing the hurdle rate above which the incentive fee of crews from 7% to 8% through March 31 2022.

This incentive fee reductions serves to increase the net earnings available for stockholder distributions and as the prevailing interest rates for copper and we expect to revisit the level of distribution and restoration of the hurdle rate and incentive fees with the management company.

The board will meet in July to determine the monthly distribution to common stockholders for the following quarter.

At the current distribution rate for our common stock and with the stock price at about $10 95 per share yesterday. The distribution run rate is now producing a yield of about seven 1%, which continues to be attractive relative to the extraordinarily low yields generally available in the market today.

And now I'll turn it back to David to calculated alright. Thank you Nicole that was a good presentation, Bob Michael All day, or a great job on informing our stockholders and analysts.

That follow our company and summary of is a very busy first half of the fiscal year for Gladstone capital on the company did well and of busy six months for the three months the team originated about $72 million of new attractive in the price investments and lifted the asset base now over 500 million.

Bob on the team also managed to keep nonperforming assets low at one 5% of investments and posted a substantial level of assets appreciating, which lifted the net asset value sometimes considered on book value.

By 50 cents.

About six 6% in the last quarter.

Enhancing the stability of the company's capital position and flexibility by issuing another $50 million of very attractive price senior term loans.

It's nice to be in this position because you never know what the economy is going to turn and do maintain.

Maintaining leverage at a low end of the company's peers.

Provides the capacity to take additional middle market investment opportunities and grow their earnings in the coming quarters.

In summary of the company continues to invest in midsized private businesses with good management. Many of these investments are supported by midsized private equity funds that are looking for experienced partners like our team here.

This helps them get their acquisitions done and grow their businesses and that we have and they have invested in this gives us an opportunity to make attractive interest paying loans to support our ongoing commitment of cash distributions to shareholders.

In short it was a very good quarter now Rob if you'll come on until callers how they can ask questions about the company.

Sure Mr. Gladstone, if you'd like to ask the question at this time. Please press star one from your telephone keypad and the confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to move for your question from the queue.

For participants using speaker equipment, it may be necessary to pick up for handset before pressing the star keys.

One moment. Please so we pull for questions and once again Thats star one.

Hello.

Yeah, we are on the call.

Okay.

Yes.

Once again, if you'd like to ask the question at this time you May press star one from your telephone keypad.

No questions.

No questions at this time Mr. Gladstone.

K. So youll just have to wait till next quarter to ask your questions. So we appreciate you all calling in and let's see of next quarter. That's the end of this meeting thank you.

Thank you. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.