Q4 2024 Gladstone Capital Corp Earnings Call
Greetings welcome to Gladstone Capital Corporation year end and fourth quarter earnings call. 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. Please press star zero on your kind of Funky pad as a reminder, this call is being <unk>.
Speaker Change: It is now my pleasure to introduce David Gladstone, Chief Executive Officer. Thank you Mr. Gladstone you may begin.
Alright. Thank you very much this is David Gladstone and chairman Dan.
Speaker Change: This is the.
Speaker Change: Call for Gladstone capital for the quarter, ending September 30, 'twenty 'twenty four and it's also our year ending at September 30th Thank.
Speaker Change: Thank you all for calling in we're always happy to talk to you and our shareholders and analysts.
Speaker Change: I welcome the opportunity to update you on what we've been doing for you and now we'll hear from well before I get started with Michael accounts. They are I'm not going to be on the call at the end of this I'm going downtown or 930 meeting with my wife and her foot Doctor.
Speaker Change: So I'm going to Miss out on all of the wonderful things that are going to tell you about next quarter that we did at the end of this quarter.
Speaker Change: So and now we'll hear from Michael.
Can't say he is our general counsel regarding certain forward looking statements Michael.
Michael: Thanks, David Good morning, everybody and good luck to you and your wife, David and the appointment. This 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 and these forward looking statements involve certain risks and uncertainties that are based on our current plans, which.
Michael: We believed to be reasonable and 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 in our forms 10-Q, 10-K and other documents we file with the SEC you can go to the investors page of our website Gladstone capital Dotcom, but also.
Michael: Sign up for email notification service there at all.
Michael: You'll find the documents on the Sec's website at Www Dot FCC that G. O V. Yeah, 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, but today's call is an overview of our results. So we ask that you will do a press release.
Speaker Change: Please and Form 10-K, both issued yesterday for more detailed information again, there on the investors page of our website with that I'll turn it over to Bob Mark got it. Thank.
Bob Mark: Thank you Michael Good morning, and thank you all for dialing in this morning I'll cover the highlights for last quarter. The fiscal year ended September 30, and subsequent events before concluding with some comments about our near term outlook for the company.
Bob Mark: Beginning with our last quarter results fundings last quarter were $29 million included several add on investments to our existing portfolio companies. The pace of new deal a buyout activity picked up significantly last quarter. However, the fundings carried over into the current quarter, which we'll cover later.
Bob Mark: Refinancing and Amortizations were light last quarter at 13 million. So net originations came in at $16 million.
Bob Mark: The fed's reduction in short term rates was late in the quarter. So our weighted average portfolio yield was unchanged and with limited movement in our average earning assets total interest income rose marginally to $23 4 million for the quarter.
Bob Mark: Given the modest asset turnover for the period and all the other income fell to 300000 in total investment income declined by 2 million to $23 7 million.
Bob Mark: Interest and financing costs were unchanged for the period on a modest reduction in average line borrowings while net management fees declined. So net investment income declined by one 4 million or 12% to $11 million for the period.
Bob Mark: A highlight of the period was the increase in realized and unrealized gains on the portfolio, which came in at $21 million and lifted our Aro <unk> to 21, 5% for the last 12 months.
Bob Mark: With respect to the portfolio our portfolio continues to perform well and while senior loans dropped to 70% of the portfolio. This was largely due to equity appreciation our three non earning investments were unchanged from last quarter and represented $28 3 million at cost.
Bob Mark: For $12 8 million or 1.9% of assets at fair value.
Depreciation for the quarter of $21 million was led by the unrealized depreciation of our position in a R E, which was partially offset by the depreciation of several smaller manufacturing consumer and service related businesses.
Bob Mark: With respect to subsequent events after the end of the quarter, we exited our investments in <unk>, which included a debt investment of $31 3 million and equity proceeds of $63 7 million. In addition to being a very successful outcome much of the gain was sheltered by our capital loss carryforwards.
Bob Mark: For tax purposes, as a result, we intend to make a capital gains.
Bob Mark: Based supplemental distribution of <unk> 40 per share in December and retain the balance to support the growth of the investment portfolio.
Bob Mark: Pro forma for the realized gain supplemental distribution and ATM issuance. After 930, the NAV per share will be approximately 20 $20.98 compared to the 21 18.
Bob Mark: Reported as of 930.
Bob Mark: In addition to array we add one additional repayment of 15 million from perimeter solutions have also made significant progress and reinvesting the proceeds.
Bob Mark: Since 930, we have funded one new platform investment with foreign documentation and expect to close shortly which should exceed the proceeds received to date and make this the most active quarter for originations for the company.
Bob Mark: And reflecting on our outlook for the next quarter or two of our fiscal 2025 I'd like to leave you a couple of comments.
Bob Mark: As we have suggested in the past a few of our pre COVID-19 investments have grown and the underlying sponsors have reached the end of their investment period. Our next and the companies are expected to be sold.
Bob Mark: We are actively monitoring these situations and while we may consider financing. The purchaser. We're also focused on the timely redeployment these exit proceeds.
Bob Mark: In the process of portfolio turnover, we expect our prepayment.
Prepayment or closing piece should increase and and thus far we have not seen significant margin erosion in connection with our lower middle market debt origination activity.
Bob Mark: We continue to see a healthy level of attractive lower middle market financing opportunities. These are typically with EBITDA is under $10 million and where low leverage or pricing.
Bob Mark: They're low leverage or pricing dictate we will consider teaming with commercial banks to blend down the overall cost of the financing solution we can deliver.
Bob Mark: In addition to recycling some mature investments, we expect to continue to benefit from our incumbent position as the originator lead arranger lead lender and in some cases equity co investor in newer vintage growth oriented businesses as they look to grow through acquisition expansion and support they appreciate it.
Bob Mark: Shin of their equity position.
Bob Mark: We ended the quarter with a conservative leverage position at 73 with leverage at 73% of NAV and with the reinvestment of the AIA equity proceeds and the bulk of our bank facility available to support growth of our earning assets were well positioned to absorb the impact of lower sofa rates and support our shareholders just.
Speaker Change: <unk> in the coming year, and now I'd like to turn the call over to Nicole <unk> Brown, the CFO of Gladstone capital to provide some details of the fund's financial results for the quarter.
Speaker Change: Good morning, Jerry.
Nicole Brown: The September quarter total interest income rose 200000, or 1% to $23 4 million with average, earning assets and the weighted average yield on our interest bearing portfolio largely unchanged. Other income was down 2.2 million and as a result total investment income was down 2 million or 8% to $23 7 million for the quarter.
Total expenses declined 500000 employer of acquired net management fees declined and interest related expenses were largely unchanged.
Net investment income for the quarter ended September 30th was 11 million, which was a decline of $1 4 million compared to the prior quarter or 50 cents per share. The net increase in net assets, resulting from operations was $31 8 million or $1.46 per share for the quarter ended September 30th as impacted by the unrealized.
Speaker Change: Valuation I appreciation covered by Bob earlier.
Speaker Change: Moving over to the balance sheet as of September 30th total assets rose to 812 million consisting of $796 million in investments at fair value and $16 million in cash and other assets.
Speaker Change: Liability Israelis with net originations of 342 million as of September 30th and consisted primarily of 254 million senior notes and 71 million of advances under our 294 million line of credit.
Speaker Change: As of September 30th net assets Rose to 471 million from the prior quarter end with investment appreciation and ATM issuance during the quarter. We issued 476000 shares under our ATM program, raising $10 8 million at an average price of $23.10 per share.
Speaker Change: NAV per share was $1 from $20 in 18 cents as of June 30th to $21.18 as of September 30th.
Speaker Change: Our leverage as of September 30th declined to 73% of net assets.
Speaker Change: Subsequent to September 30th in addition to our a and perimeter solutions exits we funded a $28 9 million second lien investment in giving home health.
Speaker Change: With respect to distributions monthly distributions for October November and December will be $16.05 per common share, which is an annual run rate of $1 98 per share. The board will meet in January to determine the monthly distribution to common stockholders for the following quarter.
Speaker Change: At the current distribution rate for our common stock and with the common stock price at about $25.68 per share yesterday. The distribution run rate is now producing a yield of about 7.7%.
Speaker Change: In addition to the regular monthly distributions glad we'll make a supplemental distribution of <unk> 40 per share on December 18th to shareholders as of December 4th.
Speaker Change: Now I'll turn it back to Mike to conclude.
Mike: Thanks, Bob and Nicole and summary was another great quarter for Gladstone capital, including net investment income for the year rose by 12% to $46 1 million, providing ample coverage of the current common distribution.
Speaker Change: Portfolio performance generated another quarter of net portfolio appreciation, which brought the cumulative total for the past year to $2.39 per share and lifted the NAV per share by 12, 7% compared to September 23, the recent realization of the gain on glad its investment in a R. A certainly a homerun them between the 40.
Speaker Change: <unk> per share supplemental distribution in December.
Speaker Change: Reinvestment of the equity proceeds into interest, earning investments and low leverage company is in great shape to continue providing strong returns for its shareholders. Now in summary, the company continues to stick with its strategy of investing in growth oriented lower middle market businesses.
Speaker Change: Good management and many of these investments are in support of midsized private equity funds that are looking for experienced partners to support the acquisition and growth of the business in which they're investing this gives us the opportunity to make attractive interest paying loans and small equity investments along the way to support our ongoing commitment to pay cash distributions to stockholders.
Speaker Change: On a monthly basis.
Speaker Change: And now with that I'll ask Sherry to set us up for someone's got some questions from our listener Sherry.
Sherry: Thank you.
Speaker Change: If he would 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 he would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment, while we poll.
Sherry: A question.
Our first question is from Mickey Schlein with Ladenburg Thalmann. Please proceed.
Mickey Schlein: Yes. Good morning, everyone first off I just wanted to congratulate you on on an excellent year overall I'm sure your shareholders really appreciate it more.
Mickey Schlein: Moving on can you help us understand why you have issued common equity at the same time that the balance sheet is already under Levered and NII as near the distribution and now we have the added pressure of declining so for.
Speaker Change: Mickey There was you know a lot of negotiation back and forth on reinvestment that we.
Speaker Change: We exited ultimately at the end of the quarter.
Speaker Change: As you can appreciate that's a pretty meaningful percentage of our assets, we did not want to be in a position where we.
We were.
Speaker Change: Put into a box of having to defer that that sell in and being pressured on the on the balance sheet. So it was it was more a matter of a very very modest issuance.
Expecting that we might have to play through and and defer that fairly large liquidity event that was on the horizon.
Certainly most of that equity appreciation was a single investment which has appreciated dramatically and that too also.
Speaker Change: Factors into the equation of making sure that we werent in a position to be short should that valuation.
Speaker Change: B b impaired in some way so yeah.
Speaker Change: A modest move to counter a fairly significant concentrated event that we could not necessarily control.
Speaker Change: I understand and Bob can you remind us are you still looking for.
Speaker Change: Balance sheet leverage debt to equity of 0.9 to 1.25 or have you changed that target range.
Bob Mark: No well, we will we will move that back up.
Bob Mark: It will it will take powering through some liquidity proceeds.
Speaker Change: I would also say.
Speaker Change: That there were significant times over the course of the last quarter that our marginal funding cost of our equity was below the marginal funding cost of our debt. So the idea that we are we will increase our leverage.
Speaker Change: But at the current time the yield on our equity was below the yield on our debt, which is not necessarily pushing us to push leverage as much as we might have in the past.
Speaker Change: I understand that's helpful.
Speaker Change: Just a few more questions are there any success fees receivable from the antenna research exit.
Speaker Change: No that was a straight up.
Equity gain most of the exit fees or we don't use that in the normal course. It may have been some a few legacy investments that's predominantly associated with some of the gain investments that we co invested in the past so that's not a material factor on our.
Speaker Change: On our investment activity.
Speaker Change: I understand and Bob in the past I think I've asked you about Dk I and its outlook and I think you were optimistic just curious if that's still the case and also what's your outlook for for E <unk>, which seems to be struggling a little bit.
Speaker Change: I'd, probably say my my.
Speaker Change: Optimism for four for Dk is probably diminished.
Speaker Change: It's been a challenge search and circumstance and we're working on the best way to probably exit that investment.
Speaker Change: In terms of in terms of EG <unk>. We are we are elevating our engagement on that particular situation.
Speaker Change: The restaurant business is not the easiest business in the current market environment.
Speaker Change: We will we will move forward to try to.
Speaker Change: Step up or the prospect of realization on that there have been some discussions about.
Speaker Change: Potential sales in other forms so I would say at this point, where we're stepping up our engagement to to realize on that investment.
Speaker Change: There are definitely things, including cost cuts that are part of the equation in any business like that.
Speaker Change: And we will we will be moving forward with those value a value adjustment steps to to effectively try to exit that situation.
Speaker Change: In the coming quarters.
Speaker Change: I understand and one last sort of more housekeeping question for me I noticed that you're reporting now your preferred dividends below the line.
Speaker Change: Have you considered.
Speaker Change: Including those above the line for purposes of calculating the the pre incentive fee income I realize the number right now is not large but the amount of preferred could grow over time since that's an ATM program.
Speaker Change: Yeah. Mickey this is Nicole that's it that's an accounting concept and we do think about it you know above the line for purposes of some for some of our other modeling and calculation.
Speaker Change: Just the accounting rules are dictating us to classify it there on the on the balance sheet income statement.
Speaker Change: Okay. That's good.
It helps so again congrats on a on a very good year Hum that's it for me this morning.
Mickey Schlein: Thank you Mickey.
Speaker Change: As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Robert Dodd with Raymond James. Please proceed.
Speaker Change: Good morning, and congratulations on a really good year, and obviously a really good outcome.
Speaker Change: Oh come on antenna.
Speaker Change: On that one and thanks for all the clarity you gave us on the call, particularly on the tax implications.
Speaker Change: Between antenna and I think you've said you've exited perimeter as well I mean, that's that's yeah.
Speaker Change: 85 million to 100 million of repayments just those two assets in the quarter you gave us some indications that's been spillover funding activity into Q4, but can you give us a.
Speaker Change: The indication of scale I mean, as the portfolio is likely to shrink obviously not all of that exit was I mean, most of it was the only income producing but is it.
Speaker Change: He did to shrink all stable growing and in the December quarter in terms of the scale of them.
Speaker Change: Amanda.
Speaker Change: Cash collections.
Speaker Change: Versus the fundings you've put out.
Robert Dodd: Robert That's that's my my 24 hours a day a question that I have to answer.
Robert Dodd: I.
Robert Dodd: Unlike unlike our sister BDC, who control their destiny, we we don't necessarily control the destiny on on whether and when some of these situations are going to be sold.
Robert Dodd: What I can tell you today is the deals that we currently have in queue.
Robert Dodd: Will more than exceed.
Robert Dodd: The cash proceeds there are several other investments that may exit by the end of the year.
Robert Dodd: I I am right now tracking essentially two to be flat.
Robert Dodd: Zinc somewhere plus or minus a that is is the target right now but.
Robert Dodd: The the challenges as much as you've added up the numbers that we've realized so far there's a few more so where we are expecting as I said, the most active quarter of potential turnover that we have ever had and we are as we are.
Robert Dodd: Waiting our deal activity to respond to that.
And right now I think if we hold serve I think we've done pretty good relative to the total amount of liquidity proceeds we've realized obviously.
Robert Dodd: As I mentioned in my comments, the ability to to reinvest that equity proceeds combined with the natural turnover is going to drive a fair bit of fee activity for the quarter.
Robert Dodd: So at the end of the day, even if we don't necessarily.
Get back to a flat the income.
Income implications should be pretty positive.
Speaker Change: Got it thank you very very helpful.
Speaker Change: In your prepared remarks, you said you would consider I think.
Speaker Change: Working with commercial bank from a blending solution. So you're talking about basically first in last out kind of structure.
Speaker Change: Hum companies.
Robert Dodd: Robert It depends on the circumstance, yes, we will consider that.
Robert Dodd: It it seamless from the sponsors perspective.
Robert Dodd: It.
Robert Dodd: It can work not not all situations are do that or.
Robert Dodd: Or work that way.
We also see situations, where the commercial banks will deliver an asset backed solution at a very low price and very low amortization and that's actually more consistent with what the sponsors want to support the acquisition and growth of their companies. Today. So we're we're just mindful I mean in fact the matter is.
Robert Dodd: You know the banks that are open where they're interested in lending we need to take advantage of that and participate with them where possible.
Robert Dodd: So we are looking at a few more of those situations I think in general I would assume as rates continue to compress we may see an increase in our subordinated or last out financings, because that's obviously, where our capital structure as most cost effectively and from a yield perspective deployed.
Robert Dodd: So that's that's kind of the subtlety of that that comment that we may see that increase slightly in the near term.
Got it thank you and then one.
Speaker Change: A question on online portfolio construction.
Speaker Change: I mean.
You, obviously haven't Cliff you said a couple times, you've got a very very active.
Our Q4.
Speaker Change:
Speaker Change: And that's going to mean is that kind of means.
Speaker Change: Oh, you know what.
Speaker Change: And you gotta be overexposed to a single vintage and I'm not sure that vintage is how do you think about portfolio construction, but it's it's one of the elements that you could end up with such a large amount of activity in one quarter that you end up with with.
Speaker Change: Our concentration to one one Titan and deals tend to come in and close as well like type of business tend to you know et cetera. So it's there tend to be concentrated.
Speaker Change: Have a concentration issue that you're focused on going through the rest of this year or is that just not a factor.
Speaker Change: It's an interesting question generally that the the vintage has not really been a factor for us.
Speaker Change: You know all of these businesses are we typically get into growth mode in <unk> and and for the most part theirs.
Speaker Change: There is a multi year period of growth and expansion remember most of our investments start.
Speaker Change: <unk> transitioned from a founder or you know.
Speaker Change: Aw family run type businesses that private equity or buying with the intention of professionalizing enhancing and growing so they tend to come in at lower multiples and there tends to be a multi year period in which to expand those businesses.
Speaker Change: I think the bigger bigger question is around around you know.
Speaker Change: The types of businesses or the sectors tend to run in streaks I can tell you for example, right now I've seen more dental deals in the last Ah last 60 days than I've seen in several years. So we will be mindful of that.
Speaker Change: As I commented on earlier.
Speaker Change: There's obviously stresses and we're seeing probably more restaurant deals than we would've seen.
Speaker Change: Obviously for a variety of reasons. So the way we would approach that is obviously, we're pretty selective we only closed about five less than 5% of the deals. We look at so we in those cases will if we see multiple deals will pick the best of them and maybe will raise the bar as we see.
Speaker Change: More in that particular sector, but the prospect of us closing.
Speaker Change: More than one deal in a given sector in a relatively short period of time tends to be very very low unless there's something unusual now I will say, we also continue to have pretty good visibility into the defense sector and some of the defense electronics.
<unk>, given our a R E exit and and we will probably see some additional investments in that in that.
Speaker Change: That sector as well given what's changing so we.
Speaker Change: We will monitor the sector is probably much more closely than the vintage and for us. The challenges. We we get we get into these newer smaller deals and the beauty is we have the opportunity to continue to invest and grow those businesses I mean as.
Speaker Change: As I said in my comments on a percent of last quarters fundings were additional growth to businesses that we're already invested and that's the beauty of the vintages, we're going after.
Speaker Change: So or is it the growth profile that we're going after so interesting question. We certainly think about it I don't think it's an issue for the portfolio.
Speaker Change: I think we're just living through the hangover.
Speaker Change: Hangover of companies that.
Speaker Change: Survive through Covid and had to take a quarter a couple of quarters to get their operations stabilize before they they came back out to the market.
Speaker Change: Very very helpful. Thank you.
Okay.
Speaker Change: With no further questions.
Speaker Change: I'd like to turn the conference back over to Mike Doyle for closing remarks.
Mike Doyle: Thanks, Sherry and thanks for everybody for calling in and we'll see you next quarter.
Speaker Change: Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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