Q1 2024 Gladstone Capital Corp Earnings Call
Operator: At this time, all participants are in a listen-only mode. A 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 is being recorded. I would now like to turn the conference over to your host, Mr. David Gladstone, Chairman and CEO of Gladstone Capital Corporation. Thank you. Well, thank you so much and good morning, everyone.
Western 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 is being recorded.
I'd now like to turn the conference over to your host Mr. David Gladstone, Chairman and CEO of Gladstone Capital Corporation. Thank you you may begin.
Well. Thank you so much and good morning to everyone and this is David Gladstone and this is the earnings conference call for Gladstone capital for the quarter ending December 31st 2023.
David Gladstone: This is David Gladstone, and this is the earnings conference call for Gladstone Capital for the quarter ending December 31st, 2023. Thank you all for calling in. We're always happy to talk with you and share information about this company and your company, and we'll get started, of course, and hear from our... Assistant General Counsel Eric Helmuth, who'll tell you some stuff that you need to know before you listen to Bob. Thank you, David, and good morning.
Thank you all for calling in we're always happy to talk with you and share information about this company and your company as well.
We'll get started of course and hear from Mark.
Our assistant General Counsel Erich how much and he'll tell you some stuff that you need to know before you listen to Bob and.
Go ahead, Eric Thank you David and good morning. 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. These forward looking statements involve certain risks and uncertainties that are based upon our current plans, which we believe to be reasonable.
Eric Helmuth: 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. These forward-looking statements involve certain risks and uncertainties that are based upon 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 in our Forms 10-Q, 10-K, and other documents we file with the SEC. Those can be found on the Investor Relations page of our website, www.gladstonecapital.com, where you can also sign up for our email notification service, or on the SEC's website, at www.sec. 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.
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-Q, 10-K, and other documents we file with the S E C.
Those can be found on the Investor Relations page of our website Www Dot Gladstone Capital's Dot Com, where you can also sign up for our email notification service or on the Sec's website at Www Dot FCC Dot Gov. 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.
Eric Helmuth: Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q issued yesterday for more detailed information. Again, those can be found on the investors page of our website. Now, I'll turn the call over to Gladstone Capital President Bob Markoff. Good morning.
Today's call is an overview of our results. So we ask that you review our press release and Form 10-Q issued yesterday for more detailed information again those can be found on the investors page of our website now I'll turn the call over to Gladstone Capital's President Bob Marcotte. Good morning. Thank you all for dialing in this morning I'll cover the highlights for last quarter and some.
Bob Markoff: Thank you all for dialing in this morning. I'll cover the highlights for the last quarter and some comments regarding the outlook for the balance of Fiscal 24 before turning the call over to Nicole Schultenbrand to review the details of our financial results for the period. So beginning with our last quarter's results, Originations' last quarter rebounded and totaled $58 million, including one new portfolio company and several existing portfolio companies. Prepayments, and repayments continue to be modest, which combined with portfolio amortization totaled $22 million. So net originations were $37 million for the period. Short-term SOFR rates were unchanged, so the weighted average yield on our investment portfolio was also consistent at 13.9%.
Comments regarding the outlook for the balance of fiscal 'twenty four before turning the call over to Nicole Shilton Branch review the details of our financial results for the period.
So beginning with our last quarter's results originations last quarters quarter rebounded and totaled 58 million, including one new portfolio company in several existing portfolio companies.
Prepayments are repayments continue to be modest, which combined with the portfolio amortization totaled 22 million. So net originations were 37 million for the period.
Short term sofa rates run change so the weighted average yield on our investment portfolio was also consistent at 313.9%.
Bob Markoff: Average earning assets for the period declined slightly, resulting in a 1% decline in our total interest income to $23 million for the quarter. However, borrowing costs declined with lower average bank borrowings given our equity issuance in the September quarter and debt placement. As a result, our net interest income rose 2.3 percent to $17.5 million for the quarter. Higher net interest income, improved originations, and advisory fee credits lifted our net investment income by 8.6% to $11.9 million, or just over $0.27 per share. The net realized and unrealized gains in the portfolio for the period totaled $8.1 million, which lifted our ROE for the quarter to 19.4% and 14.9% for the last 12 months. With respect to the portfolio, our 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.
Average, earning assets for the period declined slightly as resulting in a 1% decline in our total interest income to 23 million for the quarter.
Borrowing costs declined with lower average bank borrowings given our equity issuance in the September quarter.
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Debt placement as a result, our net interest income rose, 2.3% to $17 5 million for the quarter.
Higher net interest income improved originations and advisory fee credits lifted the net investment income by eight 6% to $11 9 million or just over 27 cents per share.
The net realized and unrealized gains in the portfolio for the period totaled $8 1 million, which lifted our ROA for the quarter to 19, 4% and 14, 9% for the last 12 months.
With respect to the portfolio our 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.
Bob Markoff: We continue to prioritize our portfolio monitoring in areas where revenue headwinds compare to be most prevalent, which seem to be mostly consumer-facing sectors, which is fortunately a small portion of our portfolio. Appreciation for the quarter of $8.1 million was led by the broad-based appreciation of our debt investments, which totaled $6.3 million, while the net appreciation of our equity co-investments contributed an additional $1.6 million, in reflecting on our first quarter of Fiscal 24 performance and our near-term outlook. A few comments I'd like to leave you with.
We continue to prioritize our portfolio monitoring and areas, where revenue headwinds compared to be most prevalent which seem to be mostly consumer facing sectors, which is fortunately a small portion of our portfolio.
Depreciation for the quarter of $8 1 million was led by the broad based appreciation of our debt investments, which totaled $6 3 million, while the net appreciation of our equity co investments contributed an additional $1 6 million.
In reflecting on our first quarter of fiscal 'twenty four performance and our near term outlook a few comments I'd like to leave you with <unk>.
Bob Markoff: Last quarter's deal activity certainly demonstrated the benefit of our incumbent position, supporting growth-oriented businesses across a variety of industry sectors in an otherwise slow-deal environment. PE sponsors are dealing with extended hold periods and continuing to seek ways to creatively grow or capitalize their investments, and supporting performing businesses we know well is a low-risk way to grow our assets. That said, deal flow has improved, and we expect new originations to increase along with potential prepayment activity over the balance of the year as short-term interest rates are expected to decline and PE sponsors are expected to bring their more seasoned investments to market to generate liquidity events for their investors. We ended the quarter with a conservative leverage position at just 83% of NAV and ample availability under bank credit facilities. So we're very well positioned to grow our earning assets and generate income to continue to support our shareholder distributions over the balance of the year. Now, I'll turn the call over to Nicole to review the fund's detailed financial results. Thanks, Bob. Good morning.
Last quarter's deal activity certainly demonstrated the benefit of our incumbent position.
<unk> is supporting growth oriented businesses across a variety of industry sectors in an otherwise slow deal environment P. E sponsors are dealing with extended hold periods and continuing to seek ways to creatively grow capitalize their investments in supporting performing businesses, we know well, it's a low risk way to grow our assets.
That said deal flow is improved and we expect new originations to increase along with potential prepayment activity over the balance of the year as short term interest rates are expected to decline in P sponsors.
<unk> are expected to bring more they're more seasoned investments to market to generate liquidity events for their investors.
We ended the quarter with a conservative leverage position at just 83% of NAV and ample availability under bank line, our bank credit facilities. So, we're very well positioned to grow our earning assets and fee income to continue to support our shareholder distributions over the balance of the year and now I'll turn the call over to Nicole to review.
You detailed the fund's detailed financial results. Thanks, Bob Good morning during the September quarter total interest income fell 300000, or 1% to 23 million based on the small decline in average earning assets the weighted average yield on the interest bearing portfolio was consistent at three 9% in the investment portfolio.
Nicole Schultenbrand: During the September quarter, total interest income fell $300,000, or 1% to $23 million based on the small decline in average earning assets. However, the weighted average yield on the interest-bearing portfolio was consistent at 3.9%. The investment portfolio weighted average balance declined to $658 million, which was down $11 million, or 1.6% compared to the prior quarter. Other income declined by $300,000, and total investment income fell by $500,000, or 2.3%, to $23.2 million for the quarter. Total expenses declined by $1.5 million quarter over quarter as net management fees declined $1.2 million with higher deal closing and advisory fee credit and $700,000 in lower financing costs from the reduction in average bank borrowings. Net investment income for the quarter ended December 31st was $11.9 million, which was an increase of $900,000 compared to the prior quarter, or $0.274 per share, which exceeded the $0.2475 per share dividends paid. The net increase in net assets resulting from operations was $20 million or $0.46 per share for the quarter ended December 31, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet,
Weighted average balance declined to 658 million, which was down $11 million or one 6% compared to the prior quarter. Other income declined by 300000 in total investment income fell by 500000 or two 3% to $23 2 million for the quarter.
Total expenses declined by 1.5 million quarter over quarter as net management fees declined 1.2 million with higher deal closing and advisory fee credit and 700000 and lower financing costs from the reduction in average bank borrowings.
Net investment income for the quarter ended December 31st was 11 9 million, which was an increase of 900000 compared to the prior quarter or 27.4 cents per share, which exceeded the 24.75 cents per share of dividends paid.
The net increase in net assets, resulting from operations was 20 million or 46 cents per share for the quarter ended December 31st as impacted by the realized and unrealized valuation depreciate depreciation covered by Bob earlier.
Moving over to the balance sheet.
Nicole Schultenbrand: As of December 31, total assets rose to $767 million, consisting of $750 million in investments at fair value and $70 million in cash and other assets. Liabilities rose with net originations to $349 million as of December 31, and consisted primarily of $253 million of senior notes, and as of the end of the quarter, advances under our $234 million line of credit were $85 million. As of December 31st, net assets rose to $418 million from the prior quarter end due to investment appreciation and undistributed earnings.
As of December 31st total assets Rose to 767 million consisting of 750 million in investments at fair value and 17 million in cash and other assets.
Liabilities rose with another is originations to 349 million as of December 31st and consisted primarily of $253 million of senior notes and as of the end of the quarter advances under our $234 million line of credit were $85 million.
As of December 31st that assets rose to $418 million from the prior quarter end with investment appreciation and undistributed earnings now.
Nicole Schultenbrand: NAV rose 2.3% from $9.39 per share as of September 30th to $9.61 per share as of December 31st, and our leverage as of the end of the quarter, with the asset growth, rose with the asset growth to 83% of net assets. Subsequent to December 31st, we had a small $3 million prepayment to a syndicated second lien debt investor. With respect to distributions, our monthly distributions to common stockholders of $0.825 per common share were announced for the months of January, February, and March, which is an annual run rate of $0.99 per share. The Board will meet in April to determine the monthly distributions to common stockholders for the following quarter.
<unk> rose two 3% from $9 39 per share as of September 30th $9.61 per share as of December 31st.
Our leverage as of the end of the quarter with the asset growth.
Pros with the asset growth to 83% of net assets.
Subsequent to December 31st we had a small $3 million prepayment of a syndicated second lien debt investment.
With respect to distributions our monthly distributions to common stockholders of 8.25 cents per common share was announced for the months of January February and March which is an annual run rate of 99 cents per share.
The board will meet in April to determine the monthly distributions to common stockholders for the following quarter.
At the distribution rate for our common stock and with a common stock price at about $10.30 per share yesterday distribution run rate is now producing a yield of about nine 6%.
David Gladstone: At the distribution rate for a common stock, and with the common stock price at about $10.30 per share yesterday, the distribution run rate is now producing a yield of about 9.6 percent, and now I'll turn it back to David. Thank you very much, Nicole, and so did Bob and Eric, and you all did a good job so they've informed our stockholders and analysts that follow the company, so... With your report that you got, the So, in summary, it's just another solid quarter. Sometimes that's pretty boring, but it's pretty nice when we have it.
Now I'll turn it back to David to conclude.
Thank you very much Nicole you did a great job and so did Bob and Eric and you all did good job so they've informed our stockholders and analysts that follow the company. So what's your report that you got a 10-Q filed yesterday to shareholders and this this call that.
We're making it pretty much brought up to date about everything going on.
So in summary, it's just another solid quarter, sometimes it's pretty boring, but it's pretty nice when we have boring profitable quarters. They increase the net investment income by 8% over the prior quarter, that's really good.
David Gladstone: Boring profitable quarters. They increased their net investment income by 8% over the prior quarter. That's really good, giving good coverage of the current common distribution.
Good coverage over the current common distributions.
Strong portfolio performance and generating net portfolio appreciation increase the net asset value by two 3% in the last quarter I love. It when that goes up every quarter and it helps us pay our dividend.
David Gladstone: Strong portfolio performance and generating net portfolio appreciation increased the net asset value by 2.3 percent from the last quarter. I love it when that goes up every quarter, and it helps us pay our dividend. For 2023, the whole GLAAD achieved returns on equity of 14.9%, which compares very favorably with the other business development companies in our peer group.
Our 'twenty to 'twenty three the whole glad achieved glad achieved returns on equity of 14, 9%, which compares very favorably with the other business development companies in our peer group.
David Gladstone: The company is also very well positioned for the coming year. The portfolio is in good shape with modest leverage and very low non-performing assets, and a strong balance sheet to support further growth. In summary, the company continues to stick with its strategy of investing in growth-oriented lower middle market businesses with good management. Many of these investments are supported by mid-sized private equity funds that are looking for experienced partners to support their acquisition and growth programs, and the growth profile of that business in which they are invested. This gives us an opportunity to make an attractive investment, paying loans, on these paying loans that support our ongoing commitment to pay cash distribution. I'm going to stop now and ask the operator.
The company is also very well positioned for the coming year.
Portfolio is in good shape with modest leverage and very low nonperforming assets and a strong balance sheet to support further growth in.
In summary, the company continues to stick with its strategy of investing in growth oriented lower middle market businesses.
With good management teams.
These investments are supported by a midsized private equity funds that are looking for experienced partners to support the acquisition and growth for our.
The growth profile of that business, which are they are invested in this gives us an opportunity.
To make an attractive investment paying loans to pay on these paying loans that support our ongoing commitment to pay cash distributions.
I'm going to stop now and ask the operator to.
Operator: Let's see if there's anybody that has a question for the group here today. Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue... You may press star 2 if you'd like to remove your question from the queue.
See if there's anybody that has a question for the group here today.
Thank you.
If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd 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.
Kyle Joseph: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question. Hey, good morning.
Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.
Hey, good morning, Thanks for taking my questions, Bob just kind of wanted to get your your thoughts are.
Bob Markoff: Thanks for taking my questions. Bob, I just kind of want to get your thoughts on where spreads have been going in the lower middle market. Obviously, the public credit markets we track have been very strong. Obviously, your markets tend to be a little bit more insulated or lagged, but just get a sense for the spreads you've been seeing on new deals. Good morning, Kyle.
In terms of where spreads have been going and are in the lower middle market. Obviously, we track our public credit markets have been very strong obviously your markets tend to be a little bit more insulated or lag, but just get a sense for for for spreads you've been saying on new deals.
Good morning, Kyle the spreads really have not moved consistent with the overall yields I would say.
Bob Markoff: Spreads really have not moved consistent with the overall yield. I would say, you know, as we commented last quarter, there's definitely a lot of capital up market from us. And in sponsor-oriented deals, where there's reasonable size, we occasionally will see some pricing compression, you know, in the 50 basis point range, but for the most part, in our initial investments, which tend to be, you know, $10 million to $20 million and grow, we don't, at this point, see that level of compression.
As we commented last quarter.
You know, there's definitely a lot of capital upmarket from us and in sponsor oriented deals where there's reasonable size, we occasionally we'll see some pricing compression.
And the 50 basis point range, but for the most part.
In our initial investments, which tend to be you know $10 million to $20 million and grow.
We don't at this point see that level of compression certainly that leaves interest rates at a relatively high level. So deal flow is not exactly as robust as we'd like.
Bob Markoff: Certainly, that leaves interest rates at a relatively high level, so deal flow is not exactly as robust as we'd like, but we're really not seeing much in the way of spread compression today. It's just not where the market is right now. People are obviously expecting those rates to come down, but at this point, we're not seeing that pricing compression. Got it, very helpful. And then on credit performance, obviously, non-accruals were stable in the quarter, but just get a sense for, you know, top line growth, margins, EBITDA growth, and, you know, how the companies continue to do well in the face of higher rates and ongoing inflation. Well, it's obviously a, you know, mix.
But we're really not seeing much in the way of spread compression today.
It's not where the market is right now.
People are obviously expecting those rates to come down but at this point.
We're not seeing that pricing compression.
Got it very helpful. And then on credit performance, obviously, non accruals or were stable in the quarter, but just get a sense for you know topline.
Top line gross margins EBITDA growth and you know how here.
Companies continue to do well in the face of higher rates and an ongoing inflation.
Well, it's obviously you know mix as I said you know, we we definitely increased investments in some performing assets on the quarter, which was a big part of our fundings.
Bob Markoff: As I said, you know, we definitely increased investments in some performing assets during the quarter, which, you know, was a big part of our funding. You know, and those higher performers are probably looking at 10 to 15 percent EBITDA lifts. There's certainly some where there's a little bit more headwinds. If you look at the portfolio overall, EBITDA was down slightly at, you know, low single digits, you know, three to five percent. There are definitely some sectors where there's more challenge. You know, those challenges would be in places like, you know, consumer-facing businesses, anything in the restaurant business, anything in discretionary health care. You know, certain sectors are more exposed in those cases.
You know in those higher performers are probably looking at 10% to 15% EBITDA lifts theres, certainly some where there's a little bit more headwinds. If you look at the portfolio overall EBITDA roughly was down slightly.
Low single digits, you know 3% to 5%.
There are definitely some sectors, where there's more challenge.
You know those challenges would be in places like <unk>.
Consumer facing business anything in the restaurant business anything in discretionary health care.
Hum.
You know certain sectors are are more exposed in those cases.
Bob Markoff: I will say that those tend to be smaller sectors and, you know, where there is some level of headwinds, as I've said in the past, our second lean exposure, which is where it would be most impacted, tends to be the larger credits, and on average, our leverage in our second lean portfolio is significantly below our average for the portfolio. Our second lean leverage averages something under three. So where we see headline pressure, it tends to be in the smaller credits where we control the credits as the senior lender. Overall, I would say we're still modestly defensive on the consumer side of the businesses.
I will say that those tend to be they're smaller sectors.
And are you now.
Where they where there is some level of headwinds.
As I've said in the past our second lien exposure, which is where it would be most impacted tends to be the larger credits and on average our leverage and our second lien portfolio is significantly below our average for the portfolio. Our second lien leverage averages something under three so where we see head.
Headline pressure.
It tends to be in the smaller credits, where we control the credits as the senior lender. So.
Overall, I would say, we're still modest modestly defensive on the consumer side of the businesses.
Kyle Joseph: Uh, you know, expecting things to improve, but in most of those cases, we are the senior lender and in pretty good shape to manage the underlying portfolio risk profile. The overall leverage for the portfolio still runs at just under four terms of EBITDA. So we've got some cushion in those cases relative to enterprise value. Okay. Very helpful.
Expecting expecting things to improve but most of those cases, we are the senior lender and in pretty good shape to manage the underlying portfolio risk profile. The overall leverage for the poor portfolio still runs at just under four four turns of EBITDA. So we've got some cushion in those cases.
Relative to enterprise value.
Bob Markoff: Thanks for taking my question. Thank you. Thank you for the question. Thank you. As a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad.
Got it very helpful. Thanks for taking my questions.
Thank you next question.
Thank you.
As a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.
Robert Dodd: Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question. Good morning, and congratulations on another excellent quarter. If I can, Bob, could you give us some more color on the characteristics of the originations?
Good morning, and congratulations on another excellent quarter, if if I can build on the can you give us some more color on the characteristics of the originations I mean, you had 47 million to existing portfolio companies and it seems like we're quite chunky in general I mean, like Xuthus was reserve of 10 million and several others.
Bob Markoff: I mean, you had 47 million for existing portfolio companies, and I think those were quite chunky in general. I mean, like Zupas was over 10 million, and there were several others that were quite large. So I mean, can you give us any color?
But were quite large I mean can you give us any color was that at all acquisitions by those portfolio companies recapitalization has anything like it it's a handful of a big add ons rosin, sometimes receive more.
Bob Markoff: Was that add-on acquisitions by those portfolio companies, recapitalizations, anything? It's, you know, a handful of big add-ons rather than sometimes we see more, you know, a large number of small ones. So any color you can give us about what the drivers were, the size of those followers?
A large number of smaller ones. So any any color you can give us about what the drivers whether it's the size of those smaller ones.
Bob Markoff: Well, the follow-ons, for the most part, were somewhere in the $10 to $12 million range. I think the big ones... ZUPAs went up and down. I mean, the company's continuing to grow and expand. We had to bring in another lender since it was getting so large. And once we brought in the other lender, there were additional fundings that happened during the quarter. So it actually today is still below where we were the prior quarter. There are two other credits that we were in. One was ALS, and LeadPoint went up. In both of those cases, leverage had gotten very low.
Well the follow ons for the most part we're somewhere in the $10 million to $12 million range I think the big ones.
ZIP is a win actually.
Up and down I mean, we are the companies continuing to grow and expand we had to bring in another lender since it was getting so large and once we brought in the other lender there were additional fundings that happened on the quarter. So it it actually today is still below where we were the prior quarter. There are two other.
Credits that we were in one was a.
A L. S went up and lead point went up in both of those cases leverage had gotten very low in fact leverage was approaching.
Bob Markoff: In fact, leverage was approaching well under two, and sponsors looking to take a distribution, looking to reposition, and manage their extended hold periods were part of it. One transaction decided not to sell at a very escalated valuation, and our loan to value, in that case, was well under 30%. So most of those were probably positioning on the part of the sponsor. Those were the only notable ones.
Well under two and sponsors.
Sponsors looking to take a distribution looking to reposition and manage their extended hold periods, where part of it.
One transaction decided not to sell at a very escalated valuation.
And the.
Our loan to value in that cases, as well under 30%. So most of those were probably positioning by part on the part of the sponsor.
Those were the only notable ones they were a couple of others that were in.
Bob Markoff: There were a couple of others that were in the couple of million dollar range. But it turns out that I think there were a total of six investments in the portfolio at that point of any consequence above a million dollars that represented the majority of the total dollars of those funding. You know, it just happens to be a case where strongly performing assets were, were, and we were opportunistic and putting out additional capital to those companies. Nobody wants to take their turn.
In the couple of million dollar range, but.
It turns out that I think there was totaled six of six investments in the portfolio at that point of any any consequence above a million that was the rep was represented the most of the total dollars of those fundings.
It just happens to be a case, where strongly performing assets were where we were opportunistic in putting out additional capital to those companies nobody wants to take their mark nobody wants to take their company to market when.
Bob Markoff: Nobody wants to take their company to market when, uh... the uh... you know the interest rates are where they are and uh... and some of the buyers are kind of on the sidelines, right? I understood. I mean, that goes on to the follow up. I mean, you mentioned in your prepared remarks as well, like the old flow is, you know, you're improving, and you're expecting there's going to be more activity later in the year. And you're also, you know, positioned for portfolio growth over the rest of the year. What's your comfort level that the portfolio is going to be up from here by year end, given you talk about maybe prepayment activity accelerating as well? Can you give us some more thoughts on how you think the increase in prepayments will affect you? combined with increasing deal flow. How is that gonna work out to ballpark what your portfolio could look like at year-end, up, flat, any color. You know, prepayments are probably the toughest thing to predict.
The you know the interest rates are where they are in.
And some of the buyers are kind of on the sidelines right now got it.
Got it understood I mean that goes up to the follow up I mean, you you mentioned in your prepared remarks, as well like Gil slowest you're improving your expecting there's going to be more activity later in the year yeah.
You also.
<unk> positioned the portfolio.
The message here, what's your comfort level that the portfolio is going to be up from here by year end. Given you talk about may be prepayment activity accelerates as well I mean can you give us.
Some more thoughts on how you think the increase in prepayments combined with increasing deal flow, how how that's going to work out.
Ballpark, what your portfolio could look like.
Flat.
Any color there.
You know prepayments is probably the toughest thing to two <unk>.
Predict them.
Bob Markoff: I mean, at this point, there's probably two or three decent-sized investments that we see likely to prepay, and you know if if those prepayments come in at somewhere between you know ten to twenty five maybe thirty million dollars the pace of growth uh... originations we we are actually going to be pressed to to to outpace that i think in the past we've generally targeted to grow somewhere in the range of twenty to twenty five million dollars a quarter if we're seeing you know similar amounts of prepayments uh... it's going to take two or three deal closings a quarter to get that number back up that's not unheard of uh... in the market where we're playing uh... you know when you're dealing with unit launches uh... you know in in the range that we're talking about, $20 to $25 million deals are normal, and two or three deals a quarter is also fairly normal. So I think if you look back at our origination history when the deal the deal market was running, doing 200 to 250 in gross originations per year is certainly doable. So I think putting on 25 net is a conservative number for us to continue to grow the asset. Is that going to happen every quarter? I'm sure it's not.
I mean at this point, there's probably two or three decent sized investments that we see likely to prepay.
And you know if if those prepayments come in at somewhere between you know 10 to 25, maybe $30 million the pace of growth originations. We are eventually going to be pressed to two to outpace that I think in the past we've generally targeted to grow.
ROE somewhere in the range of $20 million to $25 million a quarter.
So if we're seeing you know.
Similar amounts of prepayments.
It's going to take two or three deal closings a quarter to get that number back up that's not unheard of.
In the market, where we're playing.
You know when you're dealing with unit tranches.
In.
In the range that we're talking about 20 to 25 million dollar deals are normal and two or three deals a quarter is also fairly normal. So I think if you look back at our origination history when the deal.
The deal market was running you know doing 200, and 215 gross originations per year.
<unk> is a is certainly doable.
Yeah, So I think putting on twenty-five net 25 net conservative is a conservative number for us to continue to grow the assets.
Is that going to happen every quarter I'm sure it's not.
Bob Markoff: But I will also say we're feeling pretty good where we are and given our current capital base. We tend to slot in above the SBICs, which cap out around $20 million for the most part, and we tend to slot in below the large-scale billion-dollar funds, which really don't want to put out anything less than $40. So if it's a zip code of $20 to $40 million, we are in pretty good shape to be competitive on that profile. And there are obviously a few other guys that are out there, but that's the size deal that we are, I think, pretty well positioned to continue to originate. And the mix may change a little bit.
But I will also say.
You know, we're feeling pretty good where we are and given our given our current capital base.
We tend to we tend to slot in above the spic's, which cap out around $20 million for the most part and we tend to slot in below the large scale billion dollar funds, which really don't want to put out anything less than 40. So if it's a ZIP code of 20 to 40 million.
We are pretty good shape to to be competitive on that profile and there's obviously a few other guys that are that are out there but.
That's the size deals that we are I think pretty well positioned to continue to originate and you know.
The mix may change, a little bit I expect with rates coming down we may look at.
Bob Markoff: I expect with rates coming down, we may look at a little bit more second lien paper, which will negate some of the compression and spreads likely to happen as rates come down. But for the most part, I think 25 plus or minus in net asset growth a quarter is still a track record that we've averaged and a track record I would expect for the balance of 24.
Little bit more second lien paper.
Which will negate some of the compression in spreads likely to happen as rates come down but for the most part.
Think 25, plus or minus in net asset growth a quarter is still is still a track record that we've averaged in a track record I would expect for the balance of 'twenty four.
I appreciate that color. Thank you very much. Thank you.
Robert Dodd: Thank you very much. Thank you. Next question. Thank you. Our next question comes from the line of Miki Shaleen with Ludenburg Zalman.
Next question.
Thank you. Our next question comes from the line of making sure Li with Ladenburg Thalmann. Please proceed with your question.
Miki Shaleen: Please proceed with your question. Good morning, everyone. Bob, following the common share issuance in the September quarter, the balance sheet leverage has been running a little bit below your target level. Is that purposeful because of your view on the economy or something else, or do you expect your leverage to climb towards your target level as you invest your liquidity?
Good morning, everyone, Bob following the common share.
Issuance in the September quarter, the balance sheet leverage has been running a little bit below your target level is that a purposeful because of your view on the economy or something else or do.
Do you expect your leverage to climb towards your target level as you invest your liquidity.
Good morning, Mickey I think there's two factors there one.
Bob Markoff: I think there are two factors there. One, we were flattered to have institutional buyers come into the stock in the volumes that they did. We've always had a long-term strategic objective to increase the institutional holding and the float in our shares, and when they showed up, we felt it appropriate to take that advantage.
We were flattered to have institutional buyers come into the stock in the volumes that they did.
We've always had a long term strategic objective to increase the institutional holding in the float in our shares and when they showed up we felt it appropriate to take that advantage and you will note that our institutional share count's, probably doubled as a result of that issuance. So strategically it was good for the.
Bob Markoff: And you will note that our institutional share counts probably doubled as a result of that issuance. So strategically, it was good for the investor base and the flow in the stock market for us. We took advantage of it. I think the second reason is that we wanted to be in a position where we were strong relative to our capital base. Bank market conditions were a little unsettled in the summer.
Good for the Investor base, and the flow and the cat in the stock market for us.
We took advantage of it I think the second is we wanted to be in a position, where we were strong relative to.
Our capital base.
Bank market conditions were a little unsettled in the summer so.
Bob Markoff: So we felt going long on the equity gave us a little bit more strength in that regard. Lastly, I would say yes, we are going to increase our leverage as the spreads probably start to contract with interest rates coming down. We're obviously skewed very much towards a fixed cost of capital right now, so having a strong equity base will allow us to put assets on and optimize our capital structure and allow us to continue to maintain the level of dividend coverage that we're going to look for to try to continue to maintain the dividend level at or above where it is today.
So we felt going long on the equity gave us a little bit more.
Strength in that viewpoint.
Lastly, I would say, yes, we are going to increase our leverage as this spreads probably start to contract with interest rates coming down.
Obviously skewed very much towards the fixed cost of capital right now.
Having a strong equity base will allow us to put on assets and optimize our capital structure.
And allow us to continue to.
Maintain the level of dividend coverage that we're going to look for to try to.
To continue to maintain the dividend level at or above where it is today, so we'll grow into.
Bob Markoff: So we'll grow into that leverage level with higher assets over the course of the next 12 to 18 months. That's very helpful. Thank you, Bob. That's it for me. Thank you. Next question.
That leverage level with higher assets over the course of the next 12 to 18 months.
That's very helpful. Thank you Bob that's it for me this morning.
Thank you.
Next question.
Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Gladstone for final remarks. Okay, thank you very much. We wish we had a few more questions. We'd like it when you ask questions, but we'll wait for next quarter to get some next more questions. That's the end of this conference call. Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Gladstone for final comments.
Hey, Thank you very much I appreciate you all calling in wish we had a few more questions and we like it when you ask questions, but well.
Well wait for next quarter to get some more questions. That's the end of this conference call.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.