Q4 2023 Gladstone Capital Corp Earnings Call
Greetings and welcome to the Gladstone Capital Corporation's fourth quarter earnings Conference call.
All participants are in a listen only mode.
Question and answer session will follow the presentation.
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This call is being recorded it is now.
My pleasure to introduce your host David.
Please proceed sir.
Okay. Thank you very much sure Tanya this is what's.
The 10th time, we've talked with you on there. This is very nice this is David Gladstone Chairman and this is the earnings conference call for Gladstone capital for the quarter in and also the fiscal year ending September 32023.
Thank you all for calling in we're always happy to talk with our shareholders and the analysts that follow us and welcome the opportunity to provide an update regarding our corporation.
And now we hear from our General counsel, Michael the cows he'll make a statement regarding certain forward looking statements Michael David Good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933, and the Securities Exchange Act of 1934, including those regarding our future performance.
Forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable.
And there are 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-K, 10-Q, and other documents, we file with the SEC to find them on the investors page of our website at Gladstone capital Dotcom.
While you're on there you can also sign up for our email notification service.
Find the documents on the Sec's website as well at Www Dot S E C G.
G O P. 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 and just a reminder, today's call is an overview of our results. So we ask that you review our press release and Form 10-K, both issued yesterday for more detailed information.
Go to the investors page of our website to find them now.
And now I'll turn the call over to Gladstone Capital's President Bob Marcotte. Thank you Michael Good morning, and thank you all for dialing in this morning.
I'll cover the highlights for last quarter and the fiscal year ended September 30, and conclude with some commentary as we look forward into fiscal 'twenty four before turning the call over to Nicole Shelton friends, who review the details of our financial results for the period.
So beginning with the last quarter results originations last quarter below trend and totaled 27 million, mostly to existing portfolio companies as we entered the quarter closely managing our overall leverage and with a cautious view on investment leverage levels in the face of slowing price escalation and elevated interest rates prepayments.
It's been modest this year. However, we did have one sizable prepayment from oncor dredging, which combined with the portfolio amortization, resulting in a $13 million decline in our ending investment balance as of September 30.
Short term sofa rates increased 30 basis points on average over the quarter and was the primary reason the weighted average yield on our investment portfolio rose to 13, 8% the average earning assets for the period also increased three 7% and the two combined increased total interest income by $6 seven.
Percent to $23 3 million for the quarter.
Borrowing costs rose slightly as average bank borrowings declined with the proceeds at a lower cost glad the baby bond issuance in August as a result, our net interest income rose 1.3 million to $17 one for the quarter.
[noise] deal closing and advisory fees fell with the modest originations and management fees rose by 1.5 million given the reduced fee credits to $5 6 million for the period.
Despite the $2 1 million dollar decline in fee income in deal closing and advisory fee credits net investment income came in at $11 million or 28 cents a share for the quarter, which was down <unk>.
700000 from the prior quarter.
The net realized and unrealized gains on the portfolio for the period totaled $2 1 million, which lifted our are we for the quarter to 13, 7% and 11, 9% for the last 12 months.
Consistent with our outlook for significant growth in private credit within the lower middle market over the next couple of quarters, we elected to capitalize on significant investor demand into our common stock ATM program and issued four 9 million shares last quarter, which generated proceeds of $48 3 million and increased.
Our NAV to $409 million or $9 39 per share.
With respect to the portfolio the portfolio continues to perform well with senior debt, representing 73% of the portfolio and we ended the quarter with only one non earning asset representing $6 1 million at cost or 0.4% of assets at fair value.
We continue to prioritize our portfolio monitoring and areas where revenue headwinds appear to be most prevalent which seems to be mostly consumer facing sectors, which is a small portion of our overall investments and thankfully our couple of exposure to the auto segment were relatively unaffected by the recently settled strikes APA.
Depreciation for the quarter of $2 1 million was driven by the equity appreciation of our position and a manufacturer of defense related electronics, which is partially offset by the depreciation of a handful of senior debt positions most of which are profit private equity sponsored with significant underlying equity support.
In reflecting on our 2023 <unk>.
Performance and outlook for what is now our fiscal 'twenty four there are a couple of comments I'd like to leave you with.
Well 2023 deal activity has been volatile we've been able to grub, our investment portfolio by 10% to over $700 million.
While still maintaining our focus on investing in growth oriented lower middle market companies and broadening our private equity network in the process today. Our portfolio is comprised of over 50 companies and our core portfolio represents companies with an average EBITDA of approximately $11 7 million.
We've maintained our underwriting rigor and are fortunate to have our portfolio heavily weighted to senior secured loans with relatively low picking non earning assets.
With the expectation of the continued growth opportunities inside the portfolio and the growth of private credit market more broadly across the lower middle market. We've ended the quarter with a very conservative leverage position at just 74% of NAV and ample availability under our bank credit facility. So we are very well positioned to grow.
Our earning assets is the primary driver of our net interest income growth and shareholder distributions in the coming year and now I'll turn the call over to Nicole Sheldon Brown, the CFO for Gladstone capital to provide more details on the fund's financial results for the quarter.
Thanks, Bob Good morning, everyone.
During the September quarter total interest income rose $1 5 million or six 7% to $23 3 million based on the increase in short term rates and an increase in earning assets the.
The weighted average yield on our interest bearing portfolio rose 30 basis points to 13, 8% with the increase in floating rate on the 89% of the investment portfolio that carry floating rate.
The investment portfolio weighted average balance increased to 668 million, which is up 24 million or three 7% compared to the prior quarter.
Other income declined to 500000, and total investment income rose 900000, or four 1% to $23 8 million for the quarter.
Total expenses increased by one 6 million quarter over quarter isn't that base management fees Rose 1.7 million with the reduced deal closing and advisory fees.
Net investment income for the quarter ended September 30 was $11 million, which was a decrease of 700000 compared to the prior quarter or two.
Eight cents per share, which exceeded the $26.75 per share given the.
The net increase in net assets, resulting from operations of $13 1 million or 33 cents per share for the quarter ended September 30th is impacted by the realized and unrealized valuation depreciation covered earlier.
With respect to the full fiscal year total investment income for 2023 with $86 4 million, which represented an increase of $23 3 million or 37% over the prior year. The year over year increase was primarily due to the 21, 2% increase in the weighted average principal balance of our interest bearing.
Investment portfolio and the increase in the weighted average yield from 10, 4%. During the year ended September 2022 to 13, 3% during the year ended 2023.
Expenses increased $14 5 million or 47, 1% in 2023 as compared to the prior year.
Increase was primarily due to a 7.9 million increase in interest expense on borrowings and a $3 2 million increase in the net incentive fee.
Net investment income for the year ended September 32020, with 41 million, an increase of $27 1 million as compared to the prior year or $1.10 per share.
Net increase in net assets, resulting from operations was $42 7 million.
Our one dollar and 14 cents per share for fiscal year ended 2023, compared to $19 $19 9 million or 58 cents per share for 2022.
Current year increase was driven by net investment income and $12 7 million in net realized gains, partially offset by $11 million and net unrealized depreciation.
Moving over to the balance sheet as of September 30, total assets declined to 720 million consisting of 705 million in investments at fair value and 15 million in cash and other asset liabilities declined to 311 million and consisted primarily of $253 million of senior notes.
Including the 57 million, a seven and three quarters glad the baby bonds due in September of 2028, which we closed during the quarter and advances under our $223 million line of credit declined to 48 million at the end of the quarter.
As of September 30th net assets rose by $50 7 million from the prior quarter end with the net proceeds from common share issuance under our ATM at 48 million and our undistributed earnings now.
<unk> rose from $9.27 per share of the end of the prior quarter to $9.39 per share at September 30th.
Our leverage as of September 30 has declined with the common stock issuance and debt reduction to 74% of net asset and subsequent to September 30th we closed an $11 million secured first lien debt and preferred equity investments and quality environmental.
With respect to distributions in October our board of directors declared monthly distributions to common stockholders of $8 8.25 cents per share per month for October November and December which is an annual run rate of 99 cents per share.
The board will meet again in January to determine the monthly distribution to common stockholders for the following quarter at the current distribution run rate for our common stock and with the common stock price at about $9.98 per share yesterday. The distribution run rate is now producing a yield of about nine 9%.
And now I'll turn it back to David to conclude.
Thank you Nicole nice presentation and Bob another good year.
Michael did a nice job to presenting things that will help our analysts and.
Dark holders understand who we are and what we've been up to in.
In summary, it was another solid quarter and a solid fiscal year for Gladstone capital.
For the year the company delivered some impressive results, 25% growth in average, earning assets, 27% growth in net investment income.
11, 9% return on equity and 22% increase in the common stock distribution rate.
Very nice numbers.
For fiscal year 2023 results were good the company also fair is very well positioned for the coming year as the portfolio is in good shape at modest leverage and very low nonperforming assets.
As a strong balance sheet today to support further growth and I think we'll get good growth for this new year fiscal year 'twenty 'twenty four.
In summary, the company continues to stick with the strategy of investing in growth oriented low middle market lower middle market businesses with good management.
Many of these investments are in support a midsized private equity funds that we have been friends with for many years.
And they are looking for an experienced partner to support their acquisition and growth of that business, which they've invested in.
This gives us an opportunity to make attractive interest paying loans to support our ongoing commitment to pay cash distributions to shareholders.
We'd love to pay dividends and I love that since I'm, a shareholder and.
I'm going to turn it back over to Ara.
The Lady who is handling the Astra Latoya and we'll get started they operated tell callers how they can ask a question.
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One moment, while we pull for first question.
Our first question comes from Robert Dodd with Raymond James. Please proceed.
Hi, good morning, and congratulations on the quarter and a good yet but can you give us.
That's right.
Some call it about <unk>.
Pipeline or anything like that I mean, you you sound very confident and positioned the balance sheet to see.
To capitalize on some significant onboarding costs.
Npls potentially I'm. So can you give us any color about it.
Is that.
Hopeful or is it actually already showing up in the pipeline and what kind of deals because in Q3 was pretty light.
Yeah.
Thank you for calling Robert.
Just a couple a couple of observations.
We went through last quarter was almost $30 million of core growth in existing portfolio. So we're finding.
Our existing businesses that we feel good about our are certainly and looking for solutions to continue to grow I would expect over the near term to see continue to see significant investment on that front secondly, we've been very judicious in pursuing new activities. We've already closed one this.
Quarter and they are definitely a few of them are on the horizon I will say not all of those are necessarily private equity buyout situations.
Complexion of the marketplace. Today is there are there are lenders and investors that are withdrawing from the market given the capital limitations and the availability of capital more broadly so where we're finding businesses that.
The existing lenders are not able to step up and support the growth of those businesses as well as you know certainly some selective buyout activity, but at current marginal rates. There's no doubt that the overall volume of private equity buyout activity is has come down a bit.
So I think the idea of seeing flow and picking up from where we were in Q2. When we frankly took on no new assets is is part of why I'm relatively bullish.
Unknown, Robert as prepayments our portfolio continues to mature.
We have roughly a little more than 50% of the portfolio with EBITDA north of $10 million and so depending upon where interest rates are and how.
The liquidity returns to the market.
We may see a pickup in prepayment activity, but that's that's a tough one to call at this point I think our our view is rates are staying high and the banks currently arent aggressively pursuing refinancing activities. So we're seeing we're seeing those assets probably stick around longer.
A number of our portfolio companies have considered.
Refinancings and <unk> been somewhat challenged based on the market reception.
The last thing that I would also say is consistent with our private equity.
Market is.
Businesses are not selling in private equity is not necessarily raising a ton of new funds today. So a lot of portfolio companies and sponsors are looking to extend the life of their investment horizon, So you're seeing a tremendous amount of continuation funding our dividends and.
Physician activities, because they can't necessarily sell the assets at the multiples they expected given the current interest rate environment. So.
Overall, we feel like the market's there it's just slightly different pockets of of activity. It's not all buyout activity, it's coming in a variety of different forms.
And and I think the idea of us being able to put out.
You know on average of roughly 50 plus million dollars a quarter, which is what we've been averaging for the most card on a on a normalized quarterly basis.
Is the reason why we've.
We've created the capacity we have on the balance sheet.
Just for round numbers.
We need to put out another $100 million in order for us to get to close to one to one leverage. That's currently what I would say is the target and if we can do that over the course of the next two to three quarters I think that's that's really the the plan of.
Why our balance sheet is currently.
As as strong as it is.
Thank you for that and that was really really helpful color.
A second one if I can on credit quality I mean to your point you only have one non accrual the only thing you yet the consumer you mentioned consumer headwinds in consumer that can be done there are a lot of exposure to any.
All of the areas, where maybe margins are moving the wrong way or anything like that the weather doesn't emergence perhaps credit concerns or is it just just the consumer right now.
I will say, we're going into year end and in the past couple of years year end has been a market where.
Some of the industrial companies.
We are in a metal bending metal processing precision manufacturing business.
Their end customers will be large.
Industrial manufacturers.
Order visibility and order momentum is is a little soft.
Nobody wants to be stuck with yearend inventory more than they otherwise would given the current rates in the current liquidity profile in the marketplace. So we're definitely seeing a tick down in in some order flows for those we tend to look at those as yearend related.
Matters that happened last year. It has happened in the prior years I think at this point the businesses are solid they're not they're not looking to source. It overseas, they're not chasing alternative suppliers. This is not about pricing. This is about managing their order flows and.
And and maybe getting a little leaner so some of the metal processing industrial businesses.
Think of it it can be down you know sing.
Single digits in their revenue profile over the course of Q4.
And we'll have to see what the beginning of Q O Q.
Q1 next year looks like.
Really really helpful.
Kind of following on to that this year that I mean have you had.
Kinda luminary or you've gotten any feedback from portfolio companies about expected budget.
2024, or maybe it's too early in that cycle I mean by the sound of it with the industrials that that's what you're hearing.
Any other general expectations I mean are people budgeting for a recession next year or just a more moderate economy.
I don't think anybody's budgeting re.
Assertion.
For most of our businesses.
It's about has the market moved where where do they need to be going diversifying their underlying customers is as as you may appreciate when you started the lower middle market business you tend to have a limited set of core customers that drive the business and depending upon the selection of customers you've got or the diversity.
There may be sectors that are not as robust and so part of the challenge is broadening the horizon.
To grow the underlying business at this point I would say.
I think people are cautiously optimistic I think they know theyre going to have to work harder they know they're going to have to diversify more they're going to have to broaden the funnel of deal opportunities to build on to 'twenty for volume, but we're still focusing on the on the core most domestic businesses.
Still reassuring.
They are still looking for capable lower middle market or middle market businesses that can support and be more flexible in their supply chain on fulfilling their their production needs and so.
We don't feel like the market's moving away from us and it's certainly not about pricing it's.
It's about diversity and stability of the customer base and we feel pretty good about the us it's not about price for the most part.
I was down visiting one of our smaller companies in the in the electronic printed circuit board business and they've had their biggest quarters they've had in the last couple of years last quarter.
Because people.
Don't want to be dealing with foreign suppliers and it's it's created a resurgence and flexibility for those folks that are capable.
And responsive to their underlying customers. So at this point you know, it's not a recession horizon, it's about continuing to continuously improve the business and diversify the businesses that we're most focused on.
Got it thank you very much.
Thanks for calling in Okay Tanya.
Your next question comes from Mickey <unk> with Ladenburg. Please proceed.
Yes, good morning, everyone.
Bob I realize these are not particularly large investments, but I wanted to ask you about the prospects for Dk I ventures, and eighth Avenue food, just asking in relation to their valuation.
Taking the reverse order.
<unk> Avenue food is a large syndicated position and a buyout business that.
That is in the.
Grain and commodity processing.
It is affiliated with what used to be deal post foods.
It had a tough couple of quarters, but it has is.
<unk> has manufacturing and as is.
Is reasonably solid.
In the foodservice business.
As a second lien loan in this marketplace things don't trade very well and I think that one is probably trading at a relatively low point compared to its enterprise value.
I I.
Frankly, I am not terribly worried by that that is actually a a position that is owned by Apollo.
And they have significant capital and invested in that business.
So foodservice tends to go through some cycles and but it tends to have a long term horizon to grow.
That's one that.
Don't really spend a ton of time on.
And give you a little color on that one in terms of DKNY.
Dk I is a.
It's an environmental kind of a restoration company kind of like a bow for type of business where is it deals.
<unk>.
<unk>.
Events, such as flood storm damage fire restoration type of <unk>.
Obligations.
The business has gone through a bit of a transition they used to be a franchise business with local operations.
That franchise platform is more to a service is more of a TSP platform. They recently hired some additional resources to expand and grow.
Its network of.
Property owners and managers that they service.
The business has a core supply GPO underlying it which also produces a fair bit of profitability.
Because of the current events, whether it's climate change or otherwise we seem to have plenty of plenty of of occasions for that kind of support and and given what's going on in the property market, we see large property managers.
Desperately in need of a consolidated outsource provider to service.
Those particular incidents when they arise and they're in their managed properties.
So the underlying performance of the business is probably trailed what I think is the broader marketplace. We've re purpose the marketing side of the business and feel like it's in pretty good shape and the underlying sponsors in this case and the.
The founders of the business are continuing to fund money into the business to support the transition that's ongoing so.
It's a it's a business we are working hard on.
But we think the long term fundamentals supporting the business and the equity ownership is supportive of the business and feel like it's it's a small business that has a reason to.
Two two to continue to grow and come out of the situations.
Bob just a follow up to to that explanation.
Polity environmental the new investment you've made.
Operating in the same space.
It actually does not quality environmental is an asbestos abatement firm focusing on certain segments of the health care and enter in the educational sectors. So it's it's more about curing environmental problems that exist not fixing problems that have occurred unfortunately.
I understand.
Those are all my questions I. Appreciate your time. Thank you thanks for calling in Mickey.
Do you have any more questions.
Once again to ask a question. Please press star one your telephone keypad.
Question comes from Kyle Joseph with Jefferies. Please proceed.
Okay.
Yeah, Hey, Bob Good morning, and thanks churn I was taking my questions just wanted to pick your brain.
Obviously the portfolio seeing some good good yield expansion on rates, but kind of give us a sense for.
What spreads had been doing and the outlook for yield into 24, given the forward curve.
<unk>.
The rates are a tough one kyle thanks, thanks for.
The question there.
When you look at current market.
Uh huh.
<unk>.
The sofa seven type pricing puts push rates.
At 12 low 12.
That starts to sound like traditional mezz or subordinated debt and what what's happening is there's a little bit of a convergence in blurring of the categories. If it is a good solid business.
You'll get you'll tend to get a little bit more pricing compression and we've seen good sized businesses attract large capital sources and maybe that what might have been in the high sixes and the spread over over sofa can be bid down to maybe six silver. So there has been about.
50, plus basis points of compression.
Before the better credits and so.
They're clearing probably closer to the in the elevens.
As opposed to other places, where it might've been a recapitalization and it might've been a slightly wider.
I think what's happening today is is buyouts of good credits good companies.
Are getting a little bit more aggressive if they're of size and so what we're finding is.
We wouldn't expect spreads to widen from where they are today in fact that probably suspect they will start to contract slightly and we'll we'll see less of that in the lower middle market. It's the large.
Funds, where they've got capital on the balance sheet that they need to be put to work, where we're seeing the most amount of price compression.
That's not the average for us.
What we're seeing is for US is it's still it's still in the so for 7% range for us So I would not expect that compression to hit us.
Some of our larger credits.
We do have a fair number that I said average over 10, we may see some compression, but we will see significant upsides in those situations. So if somebody if one of our credits happens to be very little deleverage because of growth.
If if we want to recapitalize that business or fund an acquisition, we may see that compression come through slightly.
But we'll get the upside associated with the additional volume so.
In the lower middle market.
Youre going to see slight compression in the larger credits I think we're seeing at least 50 basis points and in tightening.
Just because of competition.
Got it very helpful. Thanks for taking my questions.
You have any additional questions.
Mr. Gladstone there are no further questions at this time I would like to turn it back to you for closing comments.
Okay, well. Thank you all for calling in and we certainly appreciate those questions from the analyst day.
<unk> continue to go forward.
Explain where we are and what we're doing.
We will stop for now and we'll see you again.
Next quarter, that's the end of this call. Thank you.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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