Q2 2022 Gladstone Capital Corp Earnings Call
I would now like to turn the conference or what's your host Mr. David Gladstone Chief Executive Officer. Please go ahead Sir.
Thank you Peter and Hello, everybody. This is David Gladstone Chairman and this is the earnings conference call for Gladstone capital for the quarter ending March 31st 2022.
You all for calling in we're always happy to talk to our shareholders and analysts and welcome the opportunity to provide an update on the company.
Now we hear first from our General Counsel, Michael accounts say, who will make a statement regarding certain forward looking statements might go ahead. Thanks.
Thanks, David and good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those 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 and many factors may cause our actual results to be materially.
Different from any future results expressed or implied by these forward looking statements, including all risk factors in our forms 10-Q10-K any other documents we filed with the SEC you can find them on the investors page of our website Www Dot Gladstone capital Dot Com you can also sign up for our email notification service there you'll also find the documents on the SEC's.
Website, which is S. A C dot G O V.
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.
<unk> calls 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. They can you can find them on the investors page of our website now I'll turn the call over to Gladstone Capital's President Bob Marcotte, Bob. Thank you Michael Good morning, all and thank you all for dialing in this morning.
Cover a couple of highlights for the last quarter and provide some comments on the state of the portfolio and the market outlook before turning the call over to Nicole Shelton brand Gladstone Capital's CFO to review, our financial results for the period, and our capital and liquidity position.
So beginning with our last quarter results.
<unk> for the quarter were below our historical run rate. However.
That is not unusual for the first quarter of the year, especially after such a robust fourth quarter and generally appear consistent with the broader market activity levels for the period originations came in at $11 million, which included a couple of small add on investments to existing portfolio companies.
Exits and repayments for the period. However came in at a total of 51 million. So net originations were a negative $40 million for the period, However investments, which closed after the end of the quarter made up much of this run off which I'll cover later.
Just over half of the exits for the period.
Was the repayment at par of a large senior loans and that fortress in middle market Telecommunications services business. This effects. It was anticipated and in addition to generating $3 2 million a success fee income for the period and reducing our pik interest exposure going forward, we retained a small.
Residual interest in the acquirer.
Interest income for the quarter rose slightly to 13 million as the average outstandings and weighted average loan yields were largely unchanged.
Other income increased to 4.3 million for the period, which was up $1 million over the last quarter with a net fortress proceeds and supported the 7% increase in total investment income to $17 3 million.
As you May know fee income has been very strong for the past couple of quarters, which we would expect to moderate on a go on the future quarters.
Borrowing costs were unchanged and administrative costs also largely unchanged. However, net management fees rose by 1.7 million to $4 3 million.
As the new men at new deal closing fees remitted to the management company and credited against the base management fees declined materially compared to the December quarter.
While the increase in total expenses outpaced the higher investment income.
Investment income came in at a strong $8 7 million or just over 25 cents per share 130% of the distributions for the period.
Net of a small net unrealized portfolio depreciation the higher NII also contributed to a five cents per share increase in NAV to $9 49 per share as of March 31st.
Despite our modest leverage we're pleased to report our cumulative return on equity since December 2019, before the onset of Covid is now at 18.9% and we believe compares favorably to our peers.
With respect to the portfolio our portfolio continues to perform well we did not experience any payment defaults last quarter that said, we do expect the pending interest rate increases and potential economic headwinds may impact certain businesses within the portfolio and we will continue to proactively.
Age each of our investments to anticipate the challenges and limit any negative impact.
In addition to the net fortress exit improving operating performance at several energy related businesses supported the reduction in the depreciation of these investments and the bulk of the unrealized depreciation for the period.
The largest contributors to the unrealized depreciation for the quarter were a couple of equity positions in modestly leveraged business businesses, which experienced isolated revenue shortfalls and we expect to recover over the balance of 2022.
As of the end of the quarter the asset mix continue to shift in favor of first lien loans, which rose to 70% of assets at fair market value.
Looking over the balance of fiscal 'twenty. Two there are a couple of comments I'd like to leave you with we funded two new proprietary investments totaling $26 4 million since the end of the quarter and anticipate several others to close in the near term.
In addition, we expect near term prepayment activities to decline with none are realized that yet this quarter supporting higher net originations and portfolio growth going forward.
We're well positioned to benefit from the impending increase in short term rates given 90% of our investment portfolio are subject to floating rates and over 90% of our debt is at fixed rates.
With LIBOR expected to rise above the average LIBOR floor in the portfolio this quarter and as outlined on page 60 of our 10-Q, we are anticipating net interest income to increase by approximately 5.2 million per year or 15 cents per share.
For a should LIBOR rise 200 basis points over the 45 basis points applicable as of March 31st.
Since our last call I'm sure. Your ball noted the announcement of the increased our annual dividend to <unk> 81 per share per year and while the increase is well supported by recent earnings results. We will continue to assess the outlook for portfolio growth and net interest income increases to sustain any future increases to the shareholder.
Distributions.
And now I'd like to turn the call over to Nicole Shelton Brown, the CFO for Gladstone capital to provide some additional details on the fund's financial results for the quarter Nicole.
Good morning, all.
During the March quarter total interest income rose 100000, or one person.
The investment portfolio weighted average.
Million or 4% to 514.
The prior quarter.
The weighted average yield.
Portfolio declined slightly.
2%.
Other income rose.
Yeah.
Drove a 7% increase.
17, right now.
Total expenses rose by one point.
Partly driven by an increase in the net management fee associated with the decline.
C credits this quarter.
Net investment income for the March 31st quarter was $8 79, which was a decline of 500000 parents with the prior quarter or 25 cents per share and covered 130% of shareholder distributions.
The net increase in net assets, resulting from operations was $8 8 million.
24 cents per share requirement is march 31st compared to $12 1 million or $35 35 per share for the prior quarter.
Correct quarter increase was driven by the increase in earnings and small net unrealized portfolio depreciation however, it by Bob earlier.
Over to the balance sheet as of March 31st 2022 total assets declined by 148.
530, <unk> investments at fair value and $10 million.
Got that.
Liabilities declined to 220.
Right here.
Nearly $150 million.
The senior notes due 2020.
$50 million of five and three quarter senior notes due may 2027, and as at the end of the quarter advances under our line of credit borrowings 17 4 million.
As of March 31st net assets Rose by one 6 million prior quarter with a net earnings in excess of distributions naphtha.
<unk> rose from $9.44 per share at December 31st $9 49 per share as of March 31st.
Our leverage is at the end of the word decline.
Currently stands at 68%.
At quarter end, we had an excess of 139 current borrowing availability under our line of credit for that.
I didn't hear your questions in October of 2023.
With respect to distribution, we have remained committed to paying our stockholders in cash flow.
I will answer after declared monthly distributions on common stockholders of 675 per common share per month for April may and June is an.
The annual rate of 81 per share.
The board will meet again in July to determine the monthly distribution for the following quarter.
And the current distribution rate for our common stock and with the common stock price at about $11 80 per share yesterday. The distribution run rate is now producing a yield of about six 9%.
Distributions in addition to the NAV growth over the past year at $1.38 per share that resulted in a total return of $2 16 per share or 27% over a year.
Now I'll turn it back to David to conclude David.
Alright, Thank you very nice presentation, Nicole and Bob Good good work and Michael same to you great job as always.
Company closed the third 11 million in add on investments to support the growth and diversification of the businesses.
While at the same time rebuilding the pipeline of investment opportunities, which yield about 26 million of new investments closed, but after the end of the quarter.
The company successfully exited one of the largest investment positions, which generated a nice income lift for the quarter an attractive overall return of approximately 16% for the five year investment period.
So very nice deal I hate to say it go but we cashed in.
The company earnings over the past couple of quarters is.
That's clearly outpaced the common dividend based on the team's outlook to sustain an asset level and the interest income we're pleased to lift the dividend as Bob mentioned 81 cents per share now going at $6.75 per share and we began that in April .
So the company is on a good strong a strong run rate now and continues to invest in growth oriented middle market businesses with good management.
And many of these investments are supported by midsized private equity funds that are always looking for an experienced partner to support the acquisition and growth of the business. They are investing in this gives us the opportunity to make attractive investments.
These investments are interest paying loans and they support the ongoing commitment to pay cash distributions to our shareholders. In summary, it's a good quarter looking forward to some more good count at quarter's end and months.
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One moment, please while we poll for questions.
Okay.
Our first question is from Robert Dodd with Raymond James. Please go ahead.
Oh, good good morning, congratulations on all of them.
Excellent quarter.
And in terms of.
Restocking the the outlook.
Ken I mean, obviously net fortress this this quarter.
Excellent excellent with it with a very large success you've had a number that was over the last.
And call. It 18 months what are the structures are you confident that the structures you've seen I'm seeing in the market today for new originations.
Hopefully it can produce the same kind of levels of <unk>.
<unk> successfully hold total economic return and it doesn't matter if it's successful.
As as you've seen over the last kind of 18 months.
That basically is that sustainable going forward.
Thanks for the question Robert Robert.
My my.
The structure of the net fortress situation included a fairly healthy amount of of Pik or success income as the company was growing so it was a little bit unusual so I would not expect that in the norm. However, if you look back most of the other.
Their overall returns that youre, referencing where we're largely associated with.
Small equity co investments that we made in certain of our businesses I think that that.
Our strategy continues to be intact.
As I mentioned in my commentary, we have a number of equity co investments in small growth oriented businesses. We tend to go into them at a modest levels of of our enterprise value and through our credit facilities and the busy.
Strategies, those companies tend to grow and as they get closer to 10 or more than $10 million of EBITDA. There's a natural lift that comes from the scale of the underlying business. We have a number of those situations that we have been.
Percolating and supporting.
So we are happy to continue to invest in and even in this quarter added added some investments to existing portfolio companies. So the combination of the equity investments are funding the continued growth and the scaling of those businesses we feel are.
Our positive I do think that the timing may be somewhat erratic because certainly in an upward rate environment.
You may have less hum market buoyancy to support the sale of those companies. It's been a pretty good run over a course of 2022 but we still feel that our selectivity and the opportunities that we've seen it in the co investment side of our business.
Or are still going to produce above average returns so long winded way of saying we've got some in the Kitty that we're going to continue to expect demand and manage an end and monetize them on the on a go forward basis, and certainly where.
We're not where were looking forward to and anticipating some of the interest rate income increases given our our position in floating rate assets and fixed liabilities in the interim to support some of that return escalation as well.
I appreciate that detail. Thank you.
On that I'd be when things you mentioned there was obviously an upward rate environment you mentioned in your prepared remarks.
The rate environment economic environment could cut some businesses country, but within your portfolio, how big a segment of the portfolio do you have.
Elevated concerns or concerns about.
That's it.
6%, 2%, 10%.
Any particular industries that you think.
<unk> are particularly vulnerable in in that.
Current economic volatility utilizing light and <unk>.
Question on your model.
Well I think I think there's probably two general sectors that I would be concerned about but not necessarily a meaningful percentage of our portfolio.
The two that I would point to is you know some of the basic commodity businesses, where in the course of the last 12 months, we've seen dramatic escalation of prices and in some cases escalation beyond reason and the result is volume slow and.
And the closest point that I would reference there are things like aluminum marketplace, where the prices skyrocketed and last quarter. The volume started to fall since the buyers started to push back. So my biggest concern is escalation beyond reason that causes the markets to contract.
We don't have much in the way of commodity businesses in the portfolio. So that is not a big concern but.
It does it does ripple through the industrial platform and we do have some manufacturing related businesses that have to deal with metal prices, but they've generally been successful.
And pass through most of those commodity changes the other more more significantly to discern is the the impact of inflation and and the perception that some of the consumer related businesses may start to see pullback, obviously, there's a much more complicated formula that we would see there.
There, but anything thats directly consumer related which would obviously be be a concern as inflation increases you know, whether it's housing or or other forms of of a of a price.
Price points that are creating pressure for some of those producers. We have very few a consumer focused businesses. That's that doesn't have the kind of revenue visibility that we would normally expect to put our leverage behind.
We do have a restaurant or two in the portfolio.
Both of those situations are extremely lowly leveraged and have had both long term.
Growth and very defendable interest margins are margins on their business their operating margins and our sponsored deals. So we obviously have a deeper capital base be aloha. So it's the consumer side of the business that we're obviously monitoring as to.
Whether a pull back will be a problem certainly those businesses are seeing significant food price increases, they're seeing significant labor shortages in labor cost increases and it is.
It is pressuring their margins a bit but we're not concerned about the the companies. We currently have in the portfolio.
I appreciate that detail as well, thank you Bob and congratulations on the quarter Okay.
Robert.
Next question.
Thank you all ladies and gentlemen, there are no further questions at this time and I would like to turn the call back to Mr. David Gladstone for closing remarks, well. Thank you all for attending this meeting and we look forward to seeing you again next quarter and that's the end of this meeting.
Yeah.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.