Q2 2023 Gladstone Investment Corp Earnings Call

Greetings and welcome to the Gladstone investment second quarter earnings call. At this time all participants are in a listen only mode. A brief 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 as a reminder, this conference being recorded it is not my pleasure to introduce your.

Your host David Gladstone, Chief Executive Officer. Thank you, Sir you may begin.

Thank you Latanya that was very nice introduction and good morning to all of you that are listening in this is David Gladstone Chairman Gladstone investment and this is the second quarter ending that's for the fiscal year that ends March 31 2023.

And spirit.

Ending the quarter at September 30 is 2022 to talk to you about.

All the shareholders and analysts that are on hopefully you're all ready to ask us lots of good questions. Let me get to that part of it and we are talking about.

The symbol G. A I N as well as to others and yeah. I N is the common stock and G. A I N N N G. A I N Z is for the registered notes and things that we've listed as well. So thank you for calling in we're always happy to provide updates to shareholders and.

A list who are on the phone call and.

Two goals here to help you understand what happened in the last quarter and also to give you a current view of the future.

Now I'll start out with our general counsel as we always do Michael Kalsi, Michael Thanks, David Good morning, everybody. 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. These forward looking statements involve certain risks and.

These and other factors, even though they are based on our current plans, which we believe to be reasonable now 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 listed in our forms 10-Q, 10-K, and other documents filed with the FCC and find them on the investors page of our.

Our web site at Www Dot Gladstone investment dot com or the SEC's website, which is www dot FCC that G. O V and we undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law. Please also note that any past.

Performance or market information is not a guarantee of any future results. We ask that you take the opportunity to visit our website once again Gladstone investment Dot com sign up for our email notification service you can also find us on Twitter at Gladstone comps and all Facebook keyword. The Gladstone companies that today's call is simply an overview of our results.

Through 930 22, so we ask that you review our press release and 10-Q, both issued yesterday for more detailed information with that I'll turn it over to Gladstone Investment's, President, Dave Doll and Mike. Thank you very much and good morning, everyone. Welcome.

Again, we're pleased to report the gain had another good quarter for fiscal year 'twenty. Three this follows on the previous solid first quarter of the fiscal year.

We clearly are in a challenging period with rising interest rates and inflationary costs. However, our portfolio of companies. We're happy to say are meeting these challenges and as a result, we ended the second quarter of fiscal year, 'twenty, three which was a 930 22.

Adjusted NII of 29 cents per share and total investments at fair value of $738 million.

Which is up from $690 million at 630 22.

Our deal activity this quarter was fairly good.

We made one new acquisition and investing $39 million, we also invested $30 million and recapitalized one of our existing portfolio of companies.

Now in connection with this investment we received a return of our preferred equity investment of $10 million, we receive dividends and success fee income of $4 8 million and recognized a realized gain of $2 2 million, thereby increasing our debt investment in that company when the dust settled.

To 57.7 million. So again, we were able to generate capital gains fee income and indeed increase our actual investment in this portfolio company I.

I should note that we will have opportunity for recapitalization from time to time.

These are positive events as they generally allow us to generate capital gains and other income while increasing our investment in a company, where clearly we know the management team and the business. So it's it's a good opportunity with the buyout market still frothy, meaning relatively expensive.

And pretty competitive this is a good way for us to create value within the portfolio and therefore reward shareholders.

Subsequent to the quarter end, we invested an additional $8 4 million to fund an add on acquisition of one of our portfolio companies.

Also subsequent to the quarter end, we announced a six 7% increase in our monthly dividend to eight cents per share.

Excuse me up from seven and a half cents per share for a new annual run rate of 96 cents per share.

Additionally, we declared a supplemental distribution of <unk> 12 per share, which will be paid in December of 'twenty 'twenty. Two we currently anticipate being able to fund future supplemental distributions and this comes as we recognized realized gains excuse me realized cap gains on the equity portion of future exits and potentially from <unk>.

The recapitalization that we might do.

Our buyout focused strategy continues to successfully generate both income from multi distributions to shareholders and capital gains on equity for supplemental distributions.

Now we did experience a small decline in valuations in the aggregate across our portfolio and this was primarily as a result of declining valuation multiples, even though we had increases in EBITDA at many of our portfolio companies.

Our balance sheet continues to be strong with low leverage and a very positive liquidity position with significant availability in your credit facility and you'll hear a lot more about this from Rachel <unk> CFO .

This allows us to continue providing support to our portfolio of companies for add on acquisitions and interim financing if the need arises while actively seeking new buyout opportunities and growing our assets. So looking forward, even though there does seem to be some moderation in the multiples being used to determine the values of buyouts the <unk>.

Market is still very competitive with deal flow being strong and significant liquidity in buyout funds of course, who is our competition.

We will remain patient and selective in our due diligence and review process, while aggressively seeking new acquisitions and implementing recapitalization with existing portfolio companies as appropriate.

Let you know that the new acquisition effort effort is very important and is a high priority for us so in summing up the quarter and looking forward. We believe the state of our portfolio is very good we have a strong liquid balance sheet and active level of buyout activity and continued prospect of good earnings and distributions over the next year. So Rachel would you tell us a little.

More detail about all of that absolutely. Thanks, Dave Good morning, I'll start with a summary of the fund's operating performance for the quarter ended September 32022.

In the second quarter of fiscal year 'twenty three we generated adjusted net investment income of $9 7 million or 29 cents per share. This was up from $8 3 million or 25 cents per share in the prior quarter. We continue to believe that adjusted net investment income, which is net investment income exclusive of any capital gains based incentive fees is a useful and representative indicate.

There are ongoing operations.

The increase in adjusted NII was driven by an increase in total investment income to $20 8 million compared to $19 3 million in the prior quarter as well as a decrease in net expenses to $9 4 million from $11 99 prior quarter. The 1.5 million increase we saw in total investment income was primarily due to an increase in data masking it from the current quarter as well.

With an increase in LIBOR impacting our interest rate.

Additionally, driving the increase in interest income we had one portfolio company that was previously on nonaccrual come back on accrual status. This quarter going forward. There are two portfolio companies that remain on non accrual status and we will continue working with those companies to get back on accrual status if possible.

The $2.5 million decrease in that expense as we experienced was primarily driven by a decrease in accrued capital gains based incentive fee is this is due to the net impact of realized and unrealized gains and losses as required under U S. GAAP.

We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. We have long term capital in place and at 930, 2022 had 163.4 million available on our $180 million credit facility. Additionally, we raised approximately half a million dollars in net proceeds under our new common stock ATM program.

All sales of which we're a button app overall, our leverage is low with an asset coverage ratio at 930 2022 of 254.1%.

Our NAV per share declined during the quarter to $13.31 per share at 930. This is compared to $13 44 per share in the prior quarter. The decrease was primarily driven by $10 $6 million of net unrealized depreciation and $7.5 million of distributions paid to common shareholders. These amounts were partially offset.

By $11 $4 million of net investment income and $2 3 million of realized gains on investments.

Consistent with prior quarters, our distributable book earnings to shareholders remain strong with that in mind and as previously announced in October 2022, Our board of directors increased our monthly distribution run rate 296 cents per share per year and declared a <unk> 12 cents per share supplemental distribution to be paid in December of this year.

The new monthly distribution run rate of 96 cents per share per year, and B 24 cents per share in supplemental distributions paid and declared so far for the year, noting that this may not actually be.

Of what ultimately may be declared for the year, our fiscal year distributions with a total of $1 20 per common share or a yield of about 9.2% using yesterday's closing price of 12 99.

This covers my part of todays call back to you David.

Oh, Thank you very nice Rachel.

And its very nice for Dave and Michael as well given good information to our shareholders.

This call and our 10-Q filed with the F. C. C yesterday should bring everyone up to date on the company.

The team has reported solid results for the quarter and we believe the claims in a great position to continue these successes through the remainder of our fiscal year March 31 2023.

Telling you are getting up over 9% yield on the price of the stock These days.

Very strong return hope all of you call your broker and get some shares.

We believe that Gladstone investment is an attractive investment and we're seeking continuous monthly distributions supplemental distributions from potential capital gains and other income.

The team hopes to continue to show you strong returns.

Or your investment in Oh Boy will take good care of your money as you know most of US here at the company have a lot of shares in this company as well as the other funds. So now I'm going to stop and we'll ask our analyst friends and maybe some shareholders to ask us some questions and we'll do our best to give you a good answer.

Thank you we will now conduct a question answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line has been a question queue.

You May press star two if he 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 this darkies once again Thats star one at this time, one moment, while we poll for our first question.

Our first question comes from Mickey <unk> with Ladenburg Thalmann. Please proceed.

Good morning, everyone.

Dave I wanted to ask you about how business owners are behaving in terms of their willingness to perhaps sell their businesses. When we think about you know the headwind of rising interest rates for them and the headwinds also from a potential recession in other words is that.

Driving them to have more interest in selling and providing you perhaps a bigger pipeline than you have in the past.

Hmm.

Hey, Mickey good morning, Thanks for that question.

I can't honestly tell you that we're seeing that I would say that there has been a probably a bit of a slowdown in a pure family owned or controlled business somewhat to that degree. Obviously there are other variables such as you know what sort of succession there is.

And what we're finding unless and we've had a few situations like this where you started getting into diligence and you know the values come down when you really get into it and as a result of that actually the sellers and we will back off and not not move forward. So to your point. There is there is a bit of that where they'd love to try to sell it.

But if it's not at a value they'd rather you know stick with it and so on so I don't I wouldn't say that that's really helped.

Helping and crew improve the deal flow in that regard and then the other obviously seller.

Group would be you know other private equity firms frankly, and they are more looking to if they're at the point, where they need to exit they're going to exit sort of regardless, but having said all of that as I mentioned there are still enough demand. If you will and capital that that is still keeping some of those valuations.

At a higher value than frankly, we think we can support so net net it's a it's a it's a it's a struggle.

Okay I appreciate that Dave you know your portfolio sort of includes many companies that are you know fundamental.

Fundamental businesses focused on the U S economy. So I think it would be really interesting to understand if you or if you could just give us some.

Sense of how their revenues are.

Developing in their margins as well given all of this tightening that the fed is doing.

Mhm, So I would say, we're starting to just feel a little bit of a slowdown as you know we have what I think of it as three sort of categories that are I'll call them necessary industries, the categories manufacturing business services, and and you know, especially consumer.

We're starting to see a little bit of a slowdown I would say on the demand side on on the consumer side manufacturing that's slowing a little bit also and then on the business services side, that's actually pretty pretty robust right now the bigger challenge continues to be in certain categories finding labor.

Even though you know we know that there are folks that are not looking for jobs, frankly, which I think impacts the way in which we think of unemployment, but having said that the.

Bigger challenge really is more around good quality labor prices and labor prices seem to be moderating a bit and obviously supply chain.

The struggles are improving also we've seen clearly the cost for argument's sake of importing from say, China or the far east where you were dealing with container costs that were 15 to $20000 back you know not but six months ago now those are back more normal kind of in the five to $7000.

[noise] per per container type of costs and that impacts clarity those companies that we have that are importing. So we're seeing improvement there so across the board I would say, it's starting to slow a little bit, but nothing nothing dramatic in that regard.

And Dave when you think about all those comments you just made.

And look at the forward.

Interest rate curves.

What level of concern do you have regarding your your company's ability to fund their debt service in terms of cash interest coverage ratios and and their ability to absorb.

It looks like going to be you know meaningfully higher interest rates over the next couple of quarters right. So currently as you know the way our deals are structured you know was a LIBOR plus daniela and floors, we've been always pretty much in the category, where we're above the floors. We are at our Florida, If you will.

And so now with LIBOR, increasing we're starting to see a bit of an increase over and above what they've been paying so because our floor. So to speak had been relatively high I would say because as you know the yield on our total portfolio is 11.9, 12% ish. So we're not seeing as big an impact right now and the other thing, obviously, which you know as you wish.

No because of the way in which we own these companies and the way in which we capitalize these companies we have a little bit of flexibility if we weren't needing to give our company. Some some help so to speak and you know in a in a deferral or a slight reduction as things really got tight which we've had to do in the past from time to time, but right now.

Now, we're not seeing that to be a big problem with any of our portfolio companies. We obviously have two that have been on nonaccrual for a while one that actually came off of nonaccrual, which is a very good thing and the two that are currently on non accrual. We as Rachel said you know we're working hard with those companies are I think one of them very good.

Chances are it will sometime in the next six to nine months could come off nonaccrual. The other one not so sure, but that's not a huge frankly driver to affect our results going forward.

I appreciate that Dave.

Couple of last questions more housekeeping sort of questions.

The portfolio's weighted average yield climbed only 20 basis points, but during that period LIBOR increased 150 basis points you.

You just talked about LIBOR floors is where your LIBOR floors. So high that that accounts for that change or is there something else that I should understand.

So you're right. There are floors are generally around 2% to 3% across the portfolio. So.

As LIBOR continues to increase this quarter, we should see that yield lift as well.

Okay, you'll see your for your floors are higher than what's typical in the middle market.

And my last question is just Oh.

Your view on balance sheet leverage or you know, what what sort of level of debt to equity or are you comfortable with in the in the current market environment.

You know right now we're at about a 250% and I think that's a level that we are comfortable with them. We have we're at current about $20 million out on our line of credit. So you know I think we have a lot of room. There are but you know we we look at it holistically.

At our business and our capital structure and you know we were conservative in our leverage metrics. Then I don't think we're looking to change that.

And obviously as we look forward and start you know hopefully we'll be making some new acquisitions. This year, we have the capacity. That's the good news is rachel's pointing out terms of where we would start to be a little nervous call. It around the leverage ratio I would say if we start to get into kind of 180% sort of range is probably where we start to look at it.

As you know, we we put in an ATM program earlier this year in common stock and we were raising.

Not aggressively but we were raising until of course prices started moving down for everybody. So were clearly were slowly back to about now or a little bit below NAV. So we're certainly not going to raise any common.

Certainly at this level as we go forward and as prices hopefully would start you know stock prices move back up will gradually add some equity to the balance sheet as we look forward and sort of match it with.

New acquisitions that were making but you know right now as Rachel said to reinforce that we're in really good shape right now and we think as we look forward even with some some pretty good new acquisitions will be in decent shape, both from a leverage perspective and from a capital perspective, probably up through halfway up next year thereabouts that would be my thinking.

Okay.

That's it for me. This morning I appreciate your time as always thank you. Thanks, Michael Thank you.

So next question.

Once again to ask a question. Please press star one our next question comes from Kyle Joseph with Jefferies. Please proceed.

Hey, good morning, guys and thanks for taking my questions.

Just curious on your commentary regarding you know things remaining competitive in the.

The middle market in terms of buyouts.

What would be the outlook for you you know if rates continue to rise do you ultimately see.

Some competitive disruptions there and then in terms of capital allocation priorities are our add on acquisitions kind of the near term focus for you guys.

Yeah, Hey, Kyle good to talk to you.

So add ons, yes, we've been making some of those and as we mentioned this past quarter, we added onto one of our portfolio companies and we're continuing to grow that business. We are aggressively looking for add ons are that's a good way for us to do as I mentioned recapitalization with some other companies that are sensible. That's another another good way for us to do it in term.

Of the competitiveness so what what we're starting to see is as rates rise where the impact there clearly is around for the traditional private equity funds, meaning our competition.

The leverage that they're being made available for them is certainly declining a little bit we think in other words, just getting tougher for them to get our leverage forget the rate, even so that should thereby mean that we're more competitive because we you know right we bring her own our own leverage without the Miss a total package.

We are seeing some of that but having said that what we're also seeing as private equity firms frankly, just being more aggressive on the equity don't in other words are there less leverage putting more equity in the deal and presumably that thinking that down the road they'll be able to lay that off in some regard so the short term.

Answer would be it's still a struggle it's still competitive.

And you know we are not going to pay some of the multiples that we're seeing because it really doesn't work for our model and it's not not the right way to go so we'll keep being patient and I think we'll do a good job this year, but it's going to take us.

It take us a while to make the kind of acquisitions, we'd like to make.

Got it very helpful. Thanks for answering my questions.

Next question please.

There are no further questions in queue at this time Mr. Gladstone. So if you have any closing comments for the group.

Well that's sad we like good question. So we're missing out on this one will have to wait till next quarter in order to hear some really strong questions. Hopefully next time at the end of this thank you all for tuning in.

Yeah.

Thank you. This does conclude today's teleconference webcast you may disconnect. Your lines at this time and have a great day.