Q2 2023 Gladstone Capital Corporation Earnings Call
Speaker 2: Greetings and welcome to the Gladstone Capital Corporation, second quarter earnings call. At this time, all participants are in elicinally mode. A brief question and suggestion will follow the formal presentation. If anyone wants to require operator assistance on a conference, please press star zero on your telephone keypad. As a reminder, this conference will be in recorded. It is now my pleasure to introduce your host.
Speaker 2: David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.
Speaker 3: And thank you, Latanya, for that nice introduction and good morning everybody. This is David Gladstone Chairman and this is the Ernie's conference call for Gladstone Capital for the quarter ending March 31st, 2023.
Speaker 3: We're here in Claim Virginia. It's a cool 45 degrees, we're outside of Washington, DC, but f oven the cold on on a minute and warm you up with a good report. Thank you all for calling in. We're always happy to talk to our shareholders and the analysts that follow us and from the opportunity to update you about this fine company.
Speaker 4: performance, these forward-looking statements involve certain risks and uncertainties that 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 the risk factors which we ??????? for us indeed are weak in our initial plans to speed up Christ's
Speaker 4: 10K and other documents that we file with the SEC and you can find them on the investors page of our website at gladstonecapital.com. Now while you're there you can also sign up for our email notification service and you can also find the documents on the SEC's website which is www.SEC.gov.
Speaker 4: Now 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.
Speaker 4: We remind everyone that today's call is an overview of our results, so we ask that you review our press release and Form 10Q, both issued yesterday, for more detailed information. Again, those are found on the investors page of our website. With that, I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Thank you, Michael.
Speaker 5: Good morning and thank you all for dialing in this morning. I'll cover some of the highlights for last quarter and conclude with some comments on the outlook for the balance of 2023 before turning the call to Nicole Schultenbran, our CFO to review our financial results for the period and our capital liquidity position. So, beginning with our last quarter results.
Speaker 5: Originations for the quarter rebounded to 64 million for the period, which included 16 million of add-on investments to existing portfolio companies.
Speaker 5: Amortization and repayments remodest to 10 million, so our ending investment balance rose by 54 million for the period.
Speaker 5: Higher short-term rates lifted the weighted average yield on our investment portfolio by 80 basis points to 13.1% and we're the primary driver behind the 7% increase in total investment income.
Speaker 5: Barring costs increased on the quarter as well. Up 300,000 with higher sofa rates, however, our net interest margin rose.
Speaker 5: $900,000 to $14.3 million for the quarter.
Speaker 5: Net management fees were unchanged at 4.6 million or 2.7% of assets as new deal closing the credits offset higher incentive fees associated with the increase in investment yields.
Speaker 5: Net investment income increased 10% to 9.6 million or just over 26 cents per share for the quarter.
Speaker 5: The net realized and unrealized gain on the portfolio for the period came in at $2.4 million, which combined with undistributed earnings and a creative share issuance under our ATM program combined to lift NAV per share by $0.13 to $9.19.
Speaker 5: The combination of the increased net interest income and equity appreciation lifted our RWE for the quarter to 11.6%.
Speaker 5: Based on the portfolio performance and increase in net interest income, we recently announced the monthly dividend increased 8 cents, or 96 cents annually, which last quarter's earnings covered by an adequate margin of 110%.
Speaker 5: From a portfolio perspective, our portfolio continues to perform well with generally modest leverage metrics and favorable liquidity profile. We ended the quarter with only one non-earning and debt investment representing $6.1 million in the cost for 0.4% of assets at fair value.
Speaker 5: The appreciation for the quarter of 2.4 million was primarily related to the net move in several equity co-investment positions as net depreciation on the debt investment portfolio was nominal at under 1 million.
Speaker 5: In reflecting on our outlook for the balance of 2023, I'd like to leave you with a couple of comments.
Speaker 5: While the broader market deal flows of moderated, we're continuing to see attractive investment opportunities within the lower middle market and expect follow-up investments.
Speaker 5: within our portfolio will continue. And in total, these should outpace repayments and support further growth of our investment portfolio.
Speaker 5: We've maintained our underwriting rigor in face of these interest rate escalations and continue to focus on our investment activity on lower risk, senior secured loans, which have grown to 74% of our investments. And today, the weighted average...
Speaker 5: Overall leverage for the portfolio is under 3.5 times EBITDA, which helps mitigate any potential debt service issues and the yield erosion associated with non-earning assets.
Speaker 5: We continue to actively manage our balance sheet leverage within our modest leverage target range and market conditions permitting plan to continue to issue equity under our ATM program to support further growth of our investment portfolio. With our floating rate investments exceeding our floating rate liabilities by just over 412 million.
Speaker 5: and the current flooding rates on pace to be up at least 40 basis points for the quarter, we would expect our net interest margin to be up an additional 400,000 this quarter. And now I'd like to turn the call over to Nicole Shelton Brown to provide some details on the funds financial results for the quarter. Nicole? Thanks, Bob. Good morning, all.
Speaker 6: During the March quarter total interest income rose 1.2 million or 7% to 19.6 million based on the increase in prevailing floating rates and an increase in earning assets. The weighted average yield on our interest-bearing portfolio rose 80 basis points to 13.1% with the increase in floating rates on the 91% of the investment portfolio that carries the three.
Speaker 6: Total expenses rose by 400,000 quarter over quarter with higher interest expenses. As that management fees were unchanged with new deal closing fee credits offsetting the higher intensive fees. That investment income for the quarter ended March 31 was 9.6 million, which was an increase of 9 million dollars, 900,000 compared to the prior quarter, or 26.3 cents per share, which exceeded the 22.5 cents per share dividends paid, and supported the increase to 24 cents per share.
Speaker 6: expenses rose by 400,000 quarter over quarter with higher interest expenses. As that management fees were unchanged with new deal closing fee credits offsetting the higher incentive fees. That investment income for the quarter ended March 31 was 9.6 million, which was an increase of 9 million dollars. 900,000 compared to the prior quarter, or 26.3 cents per share, which exceeded the 22.5 cent per share dividends paid and supported the increase to 24 cents per share per quarter announced in April .
Speaker 6: The net increase in net assets resulting from operations was 12 million or 33 cents per share for the quarter and in March 31st, as impacted by the realized and unrealized valuation depreciation covered by Bob Rolter. Moving over to the balance sheet, as of March 31st, total assets rose to 700 million, consisting of 679 million in investments at fair value.
Speaker 6: advances under our line of credit rose to 150 three million.
As of March 31st, net assets rose by 17.5 million from the prior quarter end with the net proceeds from common share issuance under our ATM program of $13.8 million and unrealized gains and undistributed earnings. NAV rose from $9.06 per share as of December 31st to $9.19 per share as of March 31st. Share leverage as of the end of the quarter rose with the
At the current distribution run rate for our common stock and with the common stock price at about nine dollars and forty two cents per share Yesterday the distribution run rate is now producing a yield of about ten point two percent And now I'll turn it back to David to conclude well, thank you and Bob and Nicole and Michael all of you did a great job of informing our shareholders and analysts about our company In summary another solid quarter Gladstone Capital doing it now for about 20 years It's a good company company delivered net investment income originations of about fifty four million for the quarter which lifted the net investment income.
Well, it's a 10.2% yield. I'm not sure you can find anything better out there in the lending area. In summary, the company continues to stick to its knitting and its strategy of investing in growth, or in at lower middle market businesses. And these have good management teams. Many of these investments are...
and being a large shareholder, I get great joy when it raises the dividend. And now operator Latori, if you'll come on and let's talk to some of the collars and answer their questions. Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your lines in the question queue. You may press star two if you would like to remove your question from the queue. For participants using the speak equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one at this time. One moment while we pull for our first question.
Our first question comes from Mickey Schliem with Lattenberg. Please proceed. Yes, good morning everyone. Bob, we obviously saw how weak US GDP growth was in the first quarter and the decline in consumer inflation certainly seems to be pointing toward...
That's a mouthful, Mickey, but I'll do my best. I start with a premise you understand that most of our companies are not consumer-facing businesses. When we look at growth-oriented businesses, we're focused on businesses that have competitive positions and revenue visibility, and those don't tend to be consumer-focused businesses. So we start with revenue visibility and commercial relationships, industrial relationships that are generally sustaining.
The second piece is, you know, we do start with a very low leverage profile. And I've commented in this on prior quarters, we're well under three and a half turns of overall leverage. And you have to understand that our...
investment strategy, when we start with lower middle market businesses, they tend to be growth-oriented businesses that we are providing flexible capital to expand. And so when you look at our profile of businesses, while we may start small, oftentimes the portfolio will grow fairly quickly. And as it does...
55% of our portfolio on a weighted average basis has evida of greater than 10 million. So these are not very small companies. They're reasonably sized companies and the overall leverage there is very attractive. The balance of the portfolio less than half has under $10 million of evida and for the most part has a very similar leverage profile. So when we track we've got bigger companies for roughly half of the business and the smaller companies we obviously have invested in are earlier in their growth profile and oftentimes
are growing organically. And so that is where, you know, while they may not grow at the same rate we originally expected, we're not terribly concerned. These are businesses that might be healthcare, might be industrial, might have technology or competitive differentiation.
not really concerned about where those are from a current performance basis.
We've seen negligible deterioration from our third party evaluations of all of those businesses, as I indicated in my comments. So again, further affirmation of where we are. The last two pieces that I would add are our peak income on the portfolio is very low today. It's under 5% of our interest income.
effectively unchanged from the prior quarter. So at this point, not terribly concerned, we're not seeing the kind of liquidity pressures. And if you run the math at 3.5 turns of leverage, even at today's interest rates, you're going to have...
net fixed charge coverage unless you have a material deterioration of the business. And for the most part we are not seeing that.
Bob, I appreciate that in depth answer, it's really helpful. And I'd like to understand how that philosophy applies to your aerospace segment, which is one of your largest allocations. More specifically, obviously, everybody's watching.
the government negotiate the budget given the debt limit issues. How exposed are your aerospace investments to these discussions in terms of a potential for a cutback and military spending? Well, I don't know what...
One of them is when you typically talk about aerospace, there's a mix of rocket-related pieces, and then there are also missile-related pieces and armaments.
And the majority of that exposure today is feeding the primes, which have significant order backlogs. And in fact, that credit that you're referencing is very large credit with record backlog at the moment.
And if you were to look at the backlog for a Northrop Grumman or a Lockheed Martin or some of the larger missile and armaments business, they are doing extremely well today. We are not concerned about that company. It also happens to be one of the largest companies in our portfolio.
uh... with uh...
It's about 30 million of exposure, but we're talking about a business with revenues approaching $300 million. So we're not typically concerned about that. The other business that falls in that category was a strategic investment we made a number years ago.
that was in the communications and radar technology space. And when you think about drones and think about incursions and monitoring activities, that business is doing extraordinarily well, has more than doubled its EBITDA.
and its continued to see significant revenue opportunities because the electronic components and the type of warfare we're logically going to see in the next couple years is not something that the government can turn down. It has to be increased and we are seeing that coming through in new
new order activities and new awards. So I guess the good news is we're in sectors that are growing and we're in sectors where there's significant visibility and backlog which obviously reduces the near term concerns.
I'm glad to hear that Bob and thanks for that and congratulations on another strong quarter. Those are all my questions this morning. I appreciate your time.
Thanks for calling in Mickey. Okay next question Latoya who's young
Our next question is from Robert Dodd with Raymond James. Please proceed. please repeat the question.
Hi everybody and congratulations on another strong corner. I just I do have one question on the liability side obviously with with key bank and you pushed out the
the maturing, the revolving period on the credit facilities to October from I think it was August before. But that still needs obviously to be addressed this year. Can you give us any color on what additionally you're doing on that front or should we expect you to just
and doing a lot of the capital and the volver before the revolving period expires? Or can you give us any comment? Obviously, there's a diversity of banks in that facility, Robert, and we have an arrangement under discussion with them today that we believe will...
will extend the maturity on that facility. I would be remiss to say that we're not going to consider alternatives in a way to diversify some of that exposure. It obviously is on the top of our list to address.
I think at the current time, maintaining a conservative balance sheet, a clean portfolio, we continue to represent an attractive investment opportunity. And we hope to conclude those discussions shortly, but will over the longer term be looking to diversify our liability mix.
If you've got any good ideas, we're open to them, but we're working it and we're not concerned at this point given where our assets...
resources to continue to support that port of our liability structure. Got it, got it. Thank you for that. And then if I can go back to the kind of following on to Mickey's question, from your point of view, the weighted average leverage under three and a half, even where rates are currently, that probably means the caption test coverage.
I can't get fixed charge coverage ratio. But cash interest coverage is probably well north of two on a weighted average basis across the portfolio, even with where rates are right now. And PIC obviously is low. Are there any elements of the portfolio where
You've started to have discussions with sponsors. You know, the way that average portfolio is about two, there's got to be some that are weaker. But you know, any come on, are there any emerging discussions there, or is it just, or is it in great shape?
Um, you know, I
There have always been in the smaller side of the market idiosyncratic risks where a given customer shifts and we have to replace that customer kind of thing. So whether it's marketing, whether it's pulling through additional wards.
We haven't seen a ton of that. And remember, most of these businesses are growth oriented. There's additional investments that they need to make in CapEx. So it's not all EBITDA to interest expenses.
of that business is very limited. I would say there's nothing extraordinary at this point. Look, I'll give you one example. We have a restaurant in the portfolio. You would think that's atypical for us.
That restaurant portfolio is a very large restaurant chain. It has essentially leverage under two and is continuing to grow their underlying businesses. Are they making the free cash flow that they were? No, it's a little tighter.
but the leverage is extremely low and at some point they just slow down their investments in new locations. So, you know, they can manage their leverage and their fixed charge coverage based on how fast they want to continue to expand their platform.
So we're not seeing any systemic issues that are causing concern for us at this point.
Got it. I appreciate that. Thank you. Latoya, would you come on and see if anybody else wants to ask us a question?
There are no further questions in queue at this time. I would like to turn it back to management for closing comments. Oh that's a shame. We had such a good quarter. We expected a lot of good questions but we'll wait till next quarter and maybe you'll dream up some good questions for us. Thank you all for tuning in and that's the end of the program.
Thank you. This thus concludes today's teleconference. You may disconnect your lines at this time. Please continue your participation and have a great day.