Q3 2022 Gladstone Capital Corp Earnings Call
Greetings and welcome to the Gladstone Capital Corporation third quarter earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host David Gladstone, Chief Executive Officer, you may begin.
Well. Thank you so much I was a nice introduction and good morning, everybody.
This is David Gladstone Chairman and this is the earnings conference call on Gladstone capital for the quarter ending June 32022. Thank.
Thank you all for calling in always happy to talk with our shareholders and the analysts who follow us.
Welcome the opportunity to provide an update for a quarter that ended.
And now we will hear from our general counsel, Michael the Kalsi he'll make a statement regarding certain forward looking statements Michael takeover. Thanks, David and good morning, everybody. Today's report May include forward looking statements under the Securities Act.
And the Securities Exchange Act of 94.
Including those regarding our future performance. These forward looking statements involve certain risks and uncertainties are based on our current plans, which we believe to be reasonable. 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 you can find on our forms 10-Q10-K.
The other documents, we file with the SEC and find them on the Investor Relations page of our website Thats Www Dot Gladstone capital Dotcom.
For our email notification service also find these documents on the SEC's website at Www Dot FCC Dot G O V.
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 matter of today's call is 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.
On the investors page of our website.
Now I'll turn the call over to Gladstone Capital's President Bob Mark.
Thank you Michael Good morning, and thank you all for dialing in this morning.
I'll cover the highlights for last quarter and provide some comments on the state of the portfolio market outlook before turning the call over Nicole Shelton Brennan Gladstone Capital's CFO to review, our financial results for the period, and our capital and liquidity positions.
So beginning with our last quarter results originations for the quarter recovered after a slow Q1 and totaled $67 million for the period, which included three new platform investments and several add on investments to existing portfolio companies.
Amortization and repayments were 6 million so net of rate originations were strong $61 million for the period.
Interest income for the quarter fell two 8% to $12 6 million as the average outstandings were down approximately $8 million and the weighted average yield loan yields fell approximately 20 basis points with the roll off of an investment which represented a large component of our pik interest income.
In the absence of material exits and repayments and fee income it declined to $1 2 million, which was down from the elevated levels of the past several quarters.
Borrowing costs and administrative costs were largely unchanged. However, net management fees declined by $1 8 million to $2 5 million as the new deal closing fees credit against the base management fee rose to $1 1 million and incentive fee credits were 400000 for the quarter.
Net investment income came in at $6 9 million or 22, five cents per share and covered 100% of the recently increased common distributions for the period.
The net realized and unrealized losses on the portfolio for the period rose to $12 5 million on a combination of loan depreciation associated with elevated market spreads reduced equity valuation multiples and a decline of two equity investments as a result <unk> declined.
37 per share or three 9% to $99 12 per share as of June 30.
Despite the last quarter NAV impact we're pleased to report a cumulative return on equity over the last year is still a 14, 9%.
With respect to the portfolio our portfolio continues to perform well with generally modest leverage metrics and favorable liquidity and as such we did not experience any payments defaults last quarter.
Credit performance aside the third party market valuation of our debt investments combined with a four 3% decline in the enterprise value multiples on our equity portfolio combined to total approximately $5 $2 million depreciation of roughly 45% of the.
Jason on the quarter.
During the quarter. We also completed the restructuring of <unk>, which had been a challenge for some time and coincident with the relocation of the manufacturing operations and the exiting bankruptcy as Lonestar MFS, we recognized $8 5 million of depreciation previously accrued.
Lastly, most of the balance of the unrealized depreciation for the quarters associated with two equity positions in modestly leveraged businesses, which experienced isolated revenue shortfalls and we expect to recover over the balance of 2022.
The asset mix as of the end of the quarter continue to shift in favor of first lien loans, which rose to 74% of assets at fair market value.
Looking over the balance of 'twenty. Two there are a couple of comments I'd like to leave you with.
We have a number of new proprietary investments or follow on investments to existing portfolio companies. We anticipate closing in the near term. In addition, we expect near term pre.
Prepayment activity to moderate in the face of higher rates and market conditions and net originations to remain elevated for the balance of the year and we'll be closely managing our leverage within the target range of 90% to 110% of NAV going forward.
Consistent with a tighter credit environment. We also expect to see an improvement in pricing and relative leverage metrics and the newer originations over the balance of the year.
We continue to be well positioned to benefit from the increase in short term rates with 93% of our investment portfolio is subject to floating rates and as of June 30, 71% of our debt was at fixed rates now that LIBOR has increased above the average LIBOR floor in the portfolio of one.
One 6%.
We expect that for each 75 basis point increase above.
In LIBOR above the level as of 630, which was one 8%.
We will increase our quarterly net interest margin by a half a million dollars and NII per share by a penny.
We continue to 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 Shilton Brown, the CFO for Gladstone capital to provide some details of the fund's financial results for the quarter Nicole.
Good morning, everyone. During the June quarter total interest income declined 400000, or two 8% to $12 6 million investment portfolio weighted average balance decreased by 8 million to $506 million compared to the prior quarter.
The weighted average yield on our interest bearing portfolio also declined 20 basis points, 10% most of which are with him.
Interest rates declined 30%.
Interest income.
Other income declined by $3 1 million to $1 2 million and as a result total investment income declined to $13 8 million for the quarter.
Total expenses decreased by $1 7 million quarter over quarter is that management fees declined one 8 million with a one 1 million of new deal closing fees credit is against the base management fee.
Fantasy credit thus far in 2000.
Net investment income for the quarter ended June 30 was $6 9 million for 2025 cents per share and covered 100% of our shareholder distributions.
The net decrease in net assets, resulting from operations of $5 6 million or negative <unk> 16 per share for this program ended June 32020, compared to a net increase in net assets, resulting from operations of $8 3 million or 24 cents per share for the prior quarter.
The primary drivers.
This change was the realized and unrealized valuation depreciation is covered by Bob earlier moving.
Moving over to the balance sheet as of June 30, total assets rose to 597 million consisting of 586 million of investments at fair value and $11 million in cash and other assets.
Liabilities increased to $284 million as of June 30 of 2022 and consisted primarily of $150 million five and eight senior notes due 2020.
$15 million of three and three quarter senior notes due may of 2027 and as of the ended the quarter advances under our line of credit were $80 million.
As of June 30th net assets declined by $12 5 million from the prior quarter end with the realized and unrealized valuation would be appreciated.
NAV declined from $9 49 per share as of March 31 to $9 12 per share as of June 30.
Our leverage as of the end of the quarter rather than the increase in total assets and the NAV decline and now stands at 91% of that asset at.
At quarter end, we had an excess of $70 million of current borrowing availability under our line of our line of credit the revolving period of which ends in October of 2023.
With respect to distributions Gladstone capital has remained committed to paying its stockholders of cash distributions and in July our board of directors declared monthly distributions to our common stockholders of $6 75 per common share per month for July August and September which is an annual run rate of 81 per share.
The board will meet again in October to determine the monthly distribution to common stockholders for the following quarter.
At the current distribution rate for our common stock with a common stock price at about $10 99 per share yesterday. The distribution run rate is now producing a yield of about seven 5% distributions. In addition to the NAV growth over the past year of <unk> 60 per share have resulted in a total return of $1 39 per share.
Our 16, 3% in NAV over the past year and now I'll turn it back to David to conclude.
Nicole I was very good presentation, and Bob and Michael on how old you all did a great job of informing shareholders.
And the analysts that follow our company.
Summary, I think its just another solid quarter for Gladstone capital and.
The company closed 67 million of new proprietary originations and add on investments to existing investments, which lifted the total investments to a new high watermark of almost $600 million. The company has a solid deal pipeline to support the asset growth continuing into.
The current quarter.
<unk> income did fall a little bit due to reduce exit fees. However, the combination of investment portfolio growth the recent uptick in LIBOR.
And in addition to that the potential for increasing the common distribution rate to common too in the coming quarter.
To be specific.
531 million of loans on the books at the end of the quarter.
Of which 93% is floating rate and 83% as senior secured all current and performing.
We only have $80 million of floating rate debt and.
In Gladstone capital.
I think we're very well positioned for support in the dividends to stockholders and just a side note. There's a lot of debate on whether we're in a recession or not and I can conclusively reports that Gladstone capital is not in a recession.
In summary, the company continues to stick with this strategy of investing in growth oriented middle market businesses with good management.
Many of these investments are supported midsized private equity funds that are doing buyouts and theyre looking for experienced partners to support the acquisition and growth of the businesses, they're investing in weaker.
We can provide that this gives us the opportunity to make attractive interest paying loans to support our ongoing commitment to pay cash distributions to shareholders.
So congratulations to the team at Gladstone capital was another good quarter and now if the operator will come on and tell callers how they can ask some questions. We'll take some questions from all the people following us.
Thanks, David and at this time, we'll be conducting a question and answer session.
We would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
And our first question comes.
Go ahead.
I'm sorry, our first question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.
Good morning, everybody I'm going to apologize upfront I had a little trouble getting into the cold. So I'm going to ask you to repeat a couple of things if I can Bob I Couldnt.
We will begin excluding.
<unk> restructuring, which I understand.
Lastly slowly on their lives.
Much of the mall.
The unrealized depreciation would you say it was.
Credit driven versus just mark to market I think you gave some numbers like.
But I didn't catch it.
I apologize.
Robert Thats fine I would say.
My comments.
Yeah.
The amount of <unk>.
Credit performance was.
Was probably in the $2 million to $3 million range.
And.
In segmenting, those I would say.
The vast majority of the movement on the quarter had to do with the revaluation of the yields.
The depreciation of the enterprise value multiples are applicable to our equity investments and then some movement in our underlying equity investments, which we believe to be temporary.
Dislocations in EBITDA, and obviously the bigger the EBITDA the bigger the equity component the larger the EBITDA moves so.
Your question around credit performance, it's a relatively small portion of the overall move.
Got it got it.
What I thought thank you on that.
The outlook for the rest of the year, obviously, no repayments I think expected.
You do sound quite quite bullish on the amount of new capital being deployed with follow on et cetera can you give us any color on kind of.
The drivers of those follow on investments that have been working on a long time or are they.
Follow on investments.
Business that seeking additional capital is now identified an acquisition or all.
Is it people seeking to just push that liquidity.
Uh huh.
Potentially tough economic environment out there can you give us any.
Let me I'll give you two examples that I think are indicative of the trend.
We've been supporters of certain businesses and sponsors for a while and occasionally those deals will grow in size and they will get beyond our capacity and so we as agent and longstanding investors will work on behalf of our sponsors.
To find other investments to club and participate in a transaction and when we bring in new investors into those situations.
We always like the opportunity for them to reciprocate and bring us volume and so we have here some volume to a couple of large scale investors and encourage favor and we have several investments that are being brought to us on a noncompetitive basis to participate in very attractive transactions.
That's that's one scenario.
That we've been playing the second is.
Yes.
With respect to yield movement and opportunities.
In a.
Rockier outlook as we face today in certain sectors the consistency.
The strategy that we have of supporting the growth and expansion of our business is even more important tier one partners that can stick with you that understand your business and are willing to weigh in and we in fact have been fortunate enough to sign up several investments.
That are in very stable food oriented food and beverage oriented businesses.
<unk>.
Are looking to transition from family ownership to more entrepreneurial and growth oriented ownership.
And they recognize the ability to grow is going to be a function of the partner they select and we have one competitive auctions in the food and beverage business, which traditionally is a very stable and good credit play for us.
To help those businesses expand so.
In that particular case modestly leveraged attractively priced within equity co investment and if somebody wants to grow over the course of the next two years, having the right partner in that kind of a business is very important to them. So we're seeing a combination of <unk>.
Banks are out of the market people are looking for consistency in support and.
We can either increase our yield or we can continue.
Continue to invest in good solid businesses at.
Modest leverage multiples and we're kind of seen both.
I appreciate that color and yes, yes, I mean thats.
Got it.
The credit market.
Yes.
Sticking with people long term.
Just one last one if I can I appreciate the color you gave on the earnings interest rate sensitive.
The Q on that as well.
Any.
G C.
Yes.
Rates do go up 75 basis points to another 150 basis points of what level do you get this.
About the impact on <unk>.
Interest coverage.
I mean, how high the rates have to go from here before that becomes a significant.
Significant.
Great.
I don't see.
Right now I think we're factoring in something in the low to mid threes and when.
When you when you look at the majority of our credits.
The average portfolio of the core leverage is probably in the mid threes mid to high threes. So most of those credits have not only cash availability, but are not stretched in terms of their overall leverage.
I guess I wouldn't have any significant concerns out slight a certain limited or isolated instances.
Frankly until we get probably closer to 5%.
Is probably twice, where we are today I mean at that point I think.
Folks are going to going to be looking at our average spread I mean look at what our yield would be given our floating rate and where we are at 10% today you'd be talking about an average yield in the portfolio probably in the low teens.
That's a lot of interest expense to carry so frankly I just.
I don't see anything in that in the cards right now.
In fact, I think the noise that we're continuing to anticipate as things are slowing and maybe we will start to come down by the by the end of next year. So I don't think it's a long duration, even if it were to spike, which is which is obviously would be a greater concern on a duration of.
Of that level.
Thank you I really appreciate the color is really helpful.
Thanks for calling in next question.
Okay.
And before I go over the next question is just a reminder, if anyone has any questions. You May press star one to join the question queue. Our next question goes come from the line of Mickey.
Dealing with Ladenburg. Please proceed with your question.
Yes, good morning, everyone.
Notwithstanding the comments at the beginning of the call that the portfolio is not in recession could you give us a sense of how.
Revenues and margins are trending amongst your broad payer borrowers at least broadly speaking and whats your thesis on how that will develop for the rest of this year and into next year.
Good morning Mickey.
It's.
Our portfolio is so so varied.
It's hard to make any particular judgment I would say the two credits that we identified.
That were certainly more challenged did have an EBITDA decline and that was tied to revenue declines.
And order of magnitude of.
20% plus or minus the balance of the portfolio.
For the most part was.
Plus or minus single digit percentages.
So for the most part.
<unk>.
Some of it's seasonal.
Some of it may be slowed logistical demand.
Supply chain issues.
And some of it is is just.
We're not we're not a very consumer centric businesses, it's all business to business for the most part so it's not going to get whipsawed by.
Consumer spend or housing demands or construction related activities.
The two that have affected us. The most are one was in the.
Was a logistical challenge the ports in the West coast are still slow at delivering containers and they couldnt supply the inventories to book the sales they expected and the other was a wireless construction related business, where a major customer decided to.
Too slow down their spend and resulted in a dip in revenues.
Overall, we're still seeing relatively solid demand remember most of our businesses our domestic manufacturing.
The focus on domestic manufacturing versus foreign sourcing continues to be a highlight for most folks and trying to manage their supply chains.
And.
We're just not seeing.
Any particular slowdown.
In those sectors.
The auto market, which we have a few few credits in that in that arena.
Is still relatively slow.
<unk> pickups, as we get into the fall and.
And the chip availability continues to improve so.
I would argue that's certainly on the upside.
I would also argue we've been we've faced the downside on the couple of energy related credits in the last couple of quarters and they are booming.
We have two that are doing extraordinarily well.
Paying down their credits faster than expected.
So.
Proportionally.
Can't even measure that magnitude of increase so.
I think right now our core focus on sustainable growth oriented domestic businesses is still intact.
And feel that.
Whether it's up five or down five we're in the right place with these companies.
That's very helpful. Bob just one more follow up question if I may.
In this strange environment, where we hear the R word in the media, but we see results like yours that we see a tight labor market we.
We see corporate borrowers performing generally well.
And then.
Begs the question.
Where are we going to be later this year so.
Wanted to ask about is your thesis on the on the net originations remaining strong I guess you said for the balance of this year what are the main drivers of that given that at least at the topline the economy looks like it's slowing down.
Well.
I do believe that.
The deal environment, while the Mega deals have slowed down and its kind of weighing on.
The markets and certainly some of the larger banks.
I I believe that there are still.
Significant opportunities.
For businesses to go through transformational ownership.
In private equity oriented owners.
Still though.
Most likely.
The place where the transformation of the business, whether it's digital or just operational is going to create value. So IC family businesses selling with the idea that we're going to we're going to put in new measurement systems, New performance New technologies improved efficiencies.
Better automation.
That transformation is part of the reason why I think we will continue to see.
Private equity investing in businesses and affecting those changes and improvements and I don't think that changes because interest rates are up 100 basis points or.
The housing market dip speak bye.
By 20% I think there is.
Ability to transform and create value through managing those businesses and we're seeing we're seeing that in some of our investments.
Secondly.
Certain sectors are certainly stronger.
I will say that one one area that we're seeing a lot of activities in healthcare healthcare is not going away. They are continuing to be demographic and fundamental changes in the configuration and delivery systems for healthcare and and that is going to be.
An opportunity for us to go forward, So I think the.
The broader thesis of business transformation domestic manufacturing.
Manufacturing capability and supply.
Demographic growth and changes are creating opportunities.
Folks that understand where that is and are willing to dig in and underwrite that business are going to do fine.
It just so happens at the moment that there are a lot of folks that are not digging in and are pulling back and it's giving us an opportunity.
To take on some very nice businesses.
I'll give you a point of reference we were told that in a in a recent award that we have and in process of closing.
They went to 75 lenders got dozens of term sheets and we won the transaction because we understood the business and leaned in.
To support their growth.
That kind of a partnership is something that people seek that's it's not transactional it's about your ability to understand and your reputation and supporting businesses in their growth.
That's why I think we're winning.
Those are really interesting comments, Bob and there is data as we know that lower middle market investments Ken.
Can perform as well or maybe even better than upper middle market investments with that in mind and maybe for the benefit of the audience.
You mentioned <unk>.
Any family owned businesses, what sort of tipping.
Typical EBITDA are you looking at I know it varies by the sector, but.
What sort of average EBITDA are these companies that you were investing in generating when you when you invest.
Typically they are in let's say, a four to $6 million to $8 million range and they quickly quickly accelerate.
Some of that is probably stripping out cost and improving efficiencies and then it's the ability to infuse.
Sales opportunity of sales.
The capabilities or acquisitions so.
We'd like to get them at that size and if we can ride them until they get to 30 or 40, then we've made a lot of money and our partners have made a lot more a lot of money as well.
Perfect. That's it for me. This morning. Thank you for your time, Thanks Niki.
Okay do we have another question.
We have reached the end of the question answer session I'll now turn it back over to David for closing remarks.
Alright, well, thank you all for calling in and we hope the next meeting.
A month from now just as strong as the one you saw at the end of this call.
And today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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Yes.
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