Q3 2019 Earnings Call
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It is now my pleasure to turn the call over to Mr., David Gladstone, Sir the floor is yours.
Thank you and Hello, everyone. Thank you for calling and this is David Gladstone Chairman and this is the quarterly earnings conference call Gladstone capital for the quarter ending June 32019.
Again, thank you for calling in we're always happy to talk with our shareholders and analysts and welcome the opportunity to provide updates on the company and its investment portfolio that we're going to start off with Michael accounts. He is our general counsel and make some statements with regard to form for forward looking statements. Thanks, David and good morning. Today's report May include forward looking statements under the Securities Act of 933, and the Securities Strange active 1934 included including those regarding our future performance. These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable.
The main factors may cause our actual results could be materially different like future results expressed or implied by these forward looking statements, including all risk factors in our forms 10-Q, 10-K, and other documents that we file with the FCC to find these on our website, which is www dot Gladstone capital Dot com.
Specifically look on the Investor Relations page four on the S. IXYS website, which is www dot FCC dungy away.
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.
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Today's call is an overview of our results. So we ask that you review our press release and Form 10-Q , both issued yesterday for more detailed information those can be found on the Investor Relations page of our website with that I'll turn the presentation back over to Gladstone Capital's President Bob Marcotte, Bob Good morning, and thank you all for dialing in today to spend a few minutes with US This morning, and now let's get into the headlines for Gladstone capital for the quarter ended June 32019.
Originations on the quarter were strong at 58 million as we referenced in our prior call and included two new proprietary investments in three syndicated investments.
Exits and repayments were higher than anticipated at 41 million and included the repayment of our senior debt investment I Tech, which at 30 million was one of our top five which was prepaid at par plus a prepayment fee.
Net originations on the quarter, thus were 17.3 million after all other portfolio of movements.
Interest income rose slightly to 11.2 million on the quarter from the prior.
As the decline in the average yield on our investment portfolio to 11.8% was offset by a small increase in the average interest bearing investment portfolio from the prior quarter.
Prepayment fees and exit prepayment fees exit fees and dividend income rose on the quarter to 1.7 million, including the high Tech prepayment fee of 900000, which lifted our total investment income to $12.9 million or 2.9% higher than the March quarter.
Our borrowing related costs were unchanged on the quarter as average borrowings fell slightly and commitment fees associated with the lower utilization of our credit line rose on the quarter.
Net net investment income was up slightly at 6.2 million or 21 cents a share as operating expenses were unchanged net management fees rose compared to the prior quarter as incentive fees increased with the increased investment income and incentive fee credit decline.
The net assets from operations Rose to 8.9 million on the quarter, we're 30% 30 cents per share as a result of the 2.6 million of net portfolio appreciation on the quarter.
And any the rose to 12 cents per share or 1.5% to eight $8 and 23% $8.23 per share at June 30.
With respect to the overall portfolio.
The asset mix is at the end of the quarter shifted slightly with all the portfolio activity, resulting in the senior secured assets falling 3% to 46% of our investment portfolio at fair value, while the second lien investments rose to 42% of the portfolio.
A major contributor to the portfolio appreciation in the quarter was the continued improvement in 80 seize operating results and better visibility to the potential exit opportunities for that investment detracting from this momentum was a realized loss and the exit the non core defense sector fund investment that cap and unrealized depreciation of our equity interest in like Fedex.
During the quarter.
There was no change to our two non earning assets, which represent an aggregate cost of 8.5 million or 2.2, 0.2% of all debt investments.
And an aggregate fair value of 2.1 million or 0.6% of the fair value of all debt investments.
Since the end of the quarter, we closed an additional $5 million follow on investment.
And between repayments and exits.
Total investments have increased by 3.8 million Saar, earning assets are up slightly as of today. We also expect to close new proprietary deal in the very near term.
With respect to the near term outlook.
Within our lower middle market focused principally.
Sub $10 million EBITDA business.
We have seen a healthy level deal flow in the past several months.
That said competitive pressures have also increased particularly for senior investments, causing lending margins to inch down.
Between our current investment backlog and follow on fundings to our existing portfolio companies, we expect to be able to outpace some of the anticipated like liquidity events on the horizon and continue to increase our average investments and core net interest income.
Interest rates are not obviously expected to.
Pretty provide much near term lift to our interest income. However, we do expect fee and other income to remain elevated as our portfolio continues to mature and expected exits are realized.
The flipside of the declining interest rate outlook is that we are optimistic that we are able to refund our existing 6% glad in preferred early next quarter at a lower effective cost through some combination of capital market issuance or bank facility borrowings.
This refunding is a prerequisite to clearing the last hurdle to be able to lift the 200% minimum asset coverage coverage limitation.
However, given our 242% coverage as of June 30, we're probably several quarters of solid originations away from being in a position to utilize any of this additional leverage capacity.
And now I'd like to turn the call over to Nicole Hilton Brown, the CFO for Gladstone capital will provide some details on the phones financial results for the quarter Nicole Thanks, Bob Good morning, everyone.
During the June quarter total interest income rose, 1% to 11.2 million as higher average investments more than offset the 20 basis point decline in the average yield on the investment portfolio. Other income rose by 300000 to $1.7 million with the Eyetech prepayment fee as well as other exit fees and dividends are seeing.
Total investment income rose 400000, or 2.9% to 12.9 million on the quarter.
Total expenses for the quarter increased by 200000, driven mainly by a $600000 increase in net incentive fees, partially offset by a $400000 decreasing happy solvency.
The increase in net incentive fees driven by both an increase in net investment income and the $400000 decrease in advisor fee credit quarter over quarter.
The $400000 decrease in net base management fees is driven by the credits received associated with origination fees on our new investments during the quarter.
Financing expenses were unchanged at $3.2 million and other expenses were also unchanged at 800000 or 79 basis points on average assets on the quarter.
For the quarter ended June Thirtyth net investment income was 6.2 million or 21 cents per share and covered 100% of our shareholder distribution.
Moving over to the balance sheet as of June Thirtyth total assets for 415 million consisting of 408 million in investments at fair value and 7 million in cash and other assets.
Liabilities rose by 8 million to 169 million and consisted of 59 million in borrowings on our credit facility $55.6 million over six and 2023 senior notes.
And $52 million of series 2024 term preferred stock.
Net assets rose by 11.3 million since the prior quarter end with 2.6 million of net realized and unrealized portfolio appreciation in common stock issued under our ATM program, which generated net proceeds of 8.6 million.
For the quarter, we issued 939000 common shares at an average price of $9.34 per share or 113.5% of NAV.
The accretive ATM issuance accounted for approximately one third of the 12 cents increase in now which rose to $8.23 as of June Thirtyth 2019, compared to $8, an 11 cents as of March 31 2019.
Our leverage as of June Thirtyth was unchanged from the prior quarter end at 69% of net assets. Despite the increase in assets for the period.
As of the ended the quarter, we had an excess of 75 million of current investment capacity and approximately 170 17 million available under our line of credit.
With respect to distribution Gladstone capital has remained committed to paying shareholders a cash dividend and in July our board of directors declared a monthly distribution to our common stockholders of seven cents per common share per month for July August and September .
Which is an annual rate of 84 cents per share.
The board will meet in October to determine the monthly distribution to common stockholders for the following quarter.
At the current distribution rate for our common stock the common stock price of about $9.21 yesterday. The distribution run rate is now producing a yield of about 9.1%, which continues to be attractive relative to most yield oriented alternatives.
And now David will conclude the presentation. Okay. Thank you Nicole Good report and good report from Bob and Michael as well I. Thank our shareholders and the analyst are well informed of what we're doing this is another good quarter for Gladstone capital originated more than 60 million.
Add to more than offset the spike in payments and continued growth over the assets.
Generating a record $12.9 million of investment income aided by some significant fees, but nonetheless made good money.
Maintaining a strong balance sheet with significant dry powder to grow the investment portfolio in this area that we specialize in and that's the lower middle market businesses.
And the company, we believe has enough liquidity to weather any kind of recession should there be one.
In summary, the company sees strength in the private businesses that are mid size with a good management team. Many of these are owned by mid size buyout funds that are looking for experienced partners that can lend money to the businesses. They are invested their equity and this gives us a chance to make attractive interest paying loans, which support our ongoing commitment to pay cash distributions to stockholders.
Have a great team here and they're doing a good job and now I'm going to ask the operator to come in and get some questions from those out there that would like to ask us some more particulars.
Thank you Mr. Glassen, ladies and gentlemen, if you would like to ask a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or wish to remove yourself from the phone queue. You may press the pound key.
One moment for questioners to queue.
Our first question in queue will come from the line of Henry Coffey with Wedbush. Please go ahead. Your line is now open.
And are you there.
That's the golfing. Your line is open please check your mute.
Can you hear me now.
Yes.
Sorry about that so with with rates as low as they are.
You know how how are you managing around that challenge and how how is market pricing.
Being affected and if prices if yields on investments were low other alternatives to.
In terms of cutting your funding costs to offset that and keep spreads where they need to be.
Henry as you as you know obviously, a significant part of our capital stack about a third of our debt is floating rate bank debt. So thats, obviously going down with it.
The second piece as I mentioned in my comments.
We're going to we're going to call out our preferred early next quarter and that's at a 6% yield on it.
More than likely there will be some mix of floating rate funding that will come into that and that's going to be you know.
Significantly less expensive than the current dividend on that preferred so those are certainly two parts of it.
The more challenging part in the marketplace today is there's clearly been some spread compression.
In the lower middle market.
As it it's continued to be an active buyout area, probably even more active than the larger middle market buyouts.
So we've seen some incursion of other funds coming in creating some pressure on margins. So we obviously are are ramping up what we see in deal flow and very mindful of the competitive conditions that we're focusing so at this point I would say hit rates are a little bit lower but we're still in a situation, where we're lowering our costs and managing to our current yield and obviously.
We would we would love.
A little bit of rate increase to be able to offset some of the compression, but I think at this point we're still.
We're still.
Seeing positive investment opportunities that are accretive to our current book So it's.
It's tight but I think we are.
We're still managing flow and.
I think thats one of the reasons why you don't see our assets growing more dramatically the incremental asset growth is coming from places where competitive pricing is probably less attractive.
So look at there is obviously.
Different sectors of the economy and there are different sectors of the economy get affected by.
Administration is up too.
For example, you know soybean agriculture or something like that when you look at your portfolio companies.
What sort of economic read do you get.
I'll just give you are looking at the stock market.
What are your portfolio companies, telling you about how business conditions are now the economy is going.
Well, we've always had a healthy mix of of manufacturing smaller manufacturing businesses and.
You know theres certainly been in the past.
Five seven years, a significant outsourcing, but domestic manufacturing, which is what bdcs really focus on actually are growing quite well.
You know as people.
Realign their supply chains domestic manufacturing plant expansion.
Migration to domestic production, where automation labor costs delivery times inventory requirements are all more.
Favorable so we're getting to a point, where whether its aerospace or maybe some auto related businesses those have become a much more significant uptick and opportunity.
Obviously.
Each of those have their own challenges, but domestic manufacturing certainly is stronger I think in some of the other areas.
We're seeing you know.
Services businesses continued to be strong.
We see activity in.
Software related businesses or.
Things in in other service categories are certainly positive and probably more positive than you would think given basic wage increases and some of the pricing pressures their costs, but they are still very positive on the on their outlook. So I would say its decidedly a domestic swing.
For for for businesses.
That is creating some of the updraft for us.
Great. Thank you very much.
Okay next question.
Thank you Sir our next question comes from the line I think its Lennon with Landenburg. Please go ahead. Your line is now open.
Yes, good morning, everyone.
Bob could you give us a bit more background about the trends at alloy.
That supported its valuation increase and also.
How correlated is its business to a potential slowdown of the economy.
Mmm.
80 C.
Die casting business is.
Symbolic of what I mentioned into Henry's question, it's a west coast base manufacture that serves.
Aerospace lighting and some auto related businesses.
The business when it was acquired.
Some deferred capital.
Expenditures and over the course of time between those expenditures and some significant management changes as you may know that say co in one of the few co investments. We have these days and is controlled by gain.
So we have significant insight to whats going there between capital and swap out and management and a.
Refocus on domestic customers and and what we've seen is.
Huge inflow of orders from large scale.
Multinational corporates that are lifting that business.
The result has been significant sales increase significant margin expansion and at this point that the cash flow run rate in that business is up very dramatically over the last three years. So in today's market environment. They are.
Building cash significantly and we feel is a business that.
Has clearly turned the corner and is currently well above where the original investment was and Thats reflected in our in our equity.
Adjustment on the quarter so.
I would say that's endemic of of what I think is a very strong story and the domestic manufacturing business that.
Is is certainly well supported by the underlying fundamentals.
So I guess I'll congratulate you and Dave Dullum on.
Turning that around.
I guess the downside Bob is that it sounds like Thats a business that.
Could potentially be a nice tuck in acquisition for somebody and this will go off your books or potentially I guess, if the cash flow profile is as nice as.
Indicating that you could be refinanced is that reasonable.
Were I guess.
We are exploring options and those regards and.
Between the accumulated liability in the ultimate helpful. In the value of that business, that's a fair assumption.
That you're that Dave and his team are pursuing.
Okay.
Just a couple of questions on.
On the risk profile of the portfolio could you tell us how your average borrower revenue and EBITDA compares for your first lien versus your second lien investments.
We don't we don't really break that information down.
Obviously, each individual business can be very different as you can imagine when you're financing.
A manufacturer versus a.
A software business versus the health care business, you come up with very very different profile. So we don't try to lump that I can certainly follow up with you directly and talk a little bit about specifically overall.
But the blend across the portfolio on all of the underlying investments, which we obviously report and have very exacting.
Metrics that are required by our secured lenders is approximately 3.73 0.8 times leverage.
Across the entire portfolio so.
When you think about market comps.
Thats, probably closer to senior relative to where the middle market might be that's would be probably significantly north of that.
That's helpful.
Perhaps I could just follow up and ask just conceptually when you look at second liens do you tend to prefer.
Sponsored deals.
With lower ltvs or or is there a different approach in order for you to get interested in the second lien.
You know that's a that's a interesting question and probably moves a lot with the market conditions.
I would say.
When the leverage starts to increase.
Second lien certainly.
Become more challenging you will note that we have closed the number of syndications in the last quarter.
Because we felt the second lien marketplace, the lower leverage levels and the.
Significant equity sponsorship and equity support.
Warranted that so that's a clear example, where sponsor in equity were a differentiating factor for us.
As it relates to you know.
The.
Only restricting our second lien investments too.
To sponsor deals that's not always the case in the proprietary transactions.
In the proprietary marketplace. Many of the sponsors are looking for second lien to reduce leverage and and and spike there their return on equity.
We don't necessarily look at that situation, where we're we're comfortable.
Taking on that level of investment.
You also should know that when we classified as the second lien and this is a bit of a.
A detailed but.
There are times, where we might originate a unit tranche loan and we would sell off a strip of the first lien piece inside that loan. So if we provided.
Four turns of leverage in a buyout we might sell off the first two turns of leverage to a bank at a much lower rate. We would then classify that as a second lien loan as you would expect but its really inside a first lien leverage facility. So from a collateral and control perspective and from an overall leverage perspective, we're going to be lower than what traditional second lien would look like.
So we continue to work the second lien angle, it's certainly an important part of our portfolio, but but for the most part I think there is in the syndicated fashion either a large equity or in a proprietary deal significant control that we continue to exert over those assets.
I understand that's helpful color.
Particularly labeling.
Second lien and second lien as opposed to many of your peers, which don't.
I appreciate your time this morning. Thank you.
Thank you Nicky Okay.
We have any other questions.
Im showing no additional questions in the queue I will turn the program back over to David.
Great all right. Thanks.
Thank you off are listening to the presentation that accompanies in great shape today, and we look to see and.
About three months, that's the end of this call.
Thank you to our presenters and thank you to all of our attendees for joining US. This concludes today's call. You may now disconnect and have a wonderful day.