Earnings Call: Q3 2020

Feb 5, 2020

Ladies and gentlemen, thank you for standing by and welcome to the Gladstone Investment Corporation Third Quarter's Earnings Ending December thirty one, twenty nineteen Earnings Call and Webcast. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Gladstone. Please go ahead. David All right. Thank you, Sarah. This is the quarterly earnings conference call for the quarter ending December 3139 for shareholders and analysts of Gladstone Investment. This is the common stocks traded on NASDAQ GAIN and the preferred stocks under two symbols GAINM and GAINL. Thank you all for calling in. We're always happy to provide an update to our shareholders and analysts and provide a view of the current business environment. Two goals from this call: help you understand what happened and give you a view of the future. We'll start out, of course, with our General Counsel and Secretary, Michael LiCalsi. Michael, go ahead. Thanks, David, and good morning, everyone. Today's call may include forward looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties and other factors, as well as based on our current plans, which we believe 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 risk factors listed on our Forms 10 Q, 10 ks and other documents we file with the SEC. All of which can be found on our website, which is www.gladstoneinvestment.com or the SEC's website, which is www.sec.gov. We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please also note that any past performance or market information is no guarantee of future results. We ask that you take the opportunity to visit our website, once again, gladstoneinvestment.com, sign up for our email notification service. You can also find us on Twitter. The handle there is at is gladstone comps. And on Facebook, keyword, The Gladstone Companies. Today's call is simply an overview of our results through December 3139. So we ask that you review our press release and Form 10 Q, both issued yesterday, for more detailed information. Now with that, I'll turn the presentation over to Gladstone Investments' President, David Dullum. Dave? Hey, Mike. Thanks very much, and good morning to all our shareholders and participants on this call. We're pleased to again report solid operating results for the most recent quarter ending twelvethirty onenineteen and that our adjusted net investment income of $0.23 per common share was consistent with the last quarter and was greater than our regular quarterly distribution of 20¢ per common share. And based on our current portfolio performance, the valuations and income generating potential, the outlook for the balance of the fiscal year ending threethirty onetwenty is strong. In particular, when considering the past three fiscal quarters where we have already generated adjusted net investment income of $0.71 per share. During the quarter, we made incremental investments in existing portfolio companies to support add on acquisitions and we exited two buyout investments during that quarter also. And with these exits, and since in our inception in 02/2005, we've actually exited 21 portfolio companies and generated an overall four times cash on cash return on the equity portion of those investments. Again, with our thesis of making equity investments and also generating income for shareholders. Along with this exit activity, we have continued to grow total assets and the monthly distributions to shareholders over that period. Our net asset value also remained strong at $12.51 per share at twelvethirty onenineteen. And as we plan for the future and look to our long term capital needs, we determined that with the strong performance of our common stock price and the resulting dividend yield that it would be wise to raise some common equity. So in January, we began selling common stock under our new ATM program and to date we have raised net proceeds of about $3,000,000 all above net asset value, which is accretive to our existing shareholders. We will continue this program so long as we determine is positive for shareholder value and our overall cost of capital. During the twelvethirty onenineteen quarter, we maintained our monthly distributions at an annual rate of $0.82 per common share for the quarter. Subsequently, in January, our Board declared a 3% increase to $07 per common share for our monthly distributions or an annual run rate of $0.84 And reflecting additional capital gain realization successes during the calendar year, we made another supplemental distribution of $09 per common share in December. So just briefly on the outlook, the buyout environment continues to be very competitive. The good news though is that we are seeing a pickup in new investment activity and we're very much involved in a daily basis in reviewing and analyzing new investment opportunities that fit our profile. And as mentioned, we made two new acquisitions, several add ons in the fiscal year to date and as I mentioned, evaluating a number of other potential opportunities. So we anticipate continuing to pay the semiannual supplemental distributions as the portfolio matures and grows and we're able to manage exits and realize additional capital gains. Of course, we and our Board of Directors will evaluate that ability to make these additional supplemental distributions, their amounts and the timing as well as any further deemed distributions of capital gains, which would be similar to the one that we declared in fiscal twenty nineteen. So on that basis, I'm going to turn it over to our CFO, Julia Ryan to give you more detail of the actual financial performance for this past quarter. Julia? Thanks, Dave. Let me start with a summary of the Fund's financial performance. We ended the December with NII of $6,200,000 which compared to NII of $6,600,000 in the prior quarter. Investment income declined slightly due to a $2,000,000 decrease in interest income, which was primarily driven by collection of past due amounts upon the exit of one portfolio company in the prior quarter, and which was offset by $1,400,000 of an increase in other income, which can be variable. Net expenses decreased slightly compared to the prior quarter, which was primarily driven by a decrease in other expenses, most notably excise taxes and interest expense, given the pay down of our credit facility with proceeds from exits, as well as an increase in credits to fees from the advisor. This decrease was partially offset by a $800,000 increase in the income based incentive fee due to higher pre incentive fee net investment income and a $05,000,000 increase in the capital gains based incentive fee given net realized and unrealized gains this quarter. When adjusting net investment income to exclude the capital gains based incentive fee accrual, adjusted NII for weighted average common share was $0.23 in the current quarter. We continue to believe that this metric is a useful and representative indicator exclusive of any capital gains based incentive fee as net investment income does not include those realized or unrealized investment transactions associated with this fee. During the quarter ended December 3139, we recognized a net realized gain on investments of 34,000,000 which was primarily a result of those two exits. On the balance sheet and liquidity side, and as of December 31, total assets decreased to $582,000,000 compared to about $620,000,000 at the September, because repayments and exits exceeded disbursements to existing portfolio companies and due to a roughly $1,000,000 decline in the existing portfolio. Liquidity remains strong with almost $170,000,000 available under our credit facility and an asset coverage of 384%. Net assets totaled about $410,000,000 or $12.51 per common share as of December 31 compared to $12.39 per share at September 30, primarily a result of realized gains exceeding unrealized depreciation, which includes the reversal of previously recorded unrealized appreciation or depreciation upon exits and the impact of distributions made during the quarter. As of December 31 and on a book basis, undistributed net investment income combined with net realized gains totaled almost $58,000,000 or about $1.76 per common share. This amount is net of the $50,000,000 deemed distribution we declared for the fiscal year twenty nineteen and also reduced by the book accrual of the capital gains based incentive fee, which is roughly $24,000,000 of which only $8,100,000 is contractually due currently. All else equal, the 1.76 per common share would be available for distribution to shareholders in future periods, even if the entire capital gains based incentive fee accrual were to be paid to the advisers. With that in mind, and as previously announced in January, our Board of Directors increased monthly distributions to $07 per common share for the first calendar quarter of twenty twenty. Assuming this monthly distribution run rate of $0.84 per share per year and estimating $0.18 per share in supplemental distributions, which have not been yet determined or declared, annual distributions total $1.2 per common share, which is roughly a yield of 7.7% based on yesterday's closing price of $13.3 This covers my part of today's call. And back to you, David. Okay. Thank you, Dave, Julia, Michael. All good information to our shareholders. That presentation and 10 Q filed yesterday should bring everyone up to date. The team has reported, I think, excellent results, including add on investment transactions and exit activity with significant net realized gains. I did see one of the large brokerage houses that has a list of BDCs they follow. And Gain was number two on their list with regard to the last twelve months total return. And that was 58.2%. That's quite significant. Some of that's due to the fabulous time that we're in today. Fantastic returns come from good times and if you can't make it now it would be hard never to make it. And so my own view of this is we have a great team that's running this company now and we're in the best position that we've ever been in. And I think the future looks tremendous. The team is in a good position to continue these successes that they've just reported today throughout our fiscal year ending 03/31/2020, and longer. I hope it goes for another year as well. We believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from potential capital gains and other income. The team hopes to continue to show you a strong return. At this point we'll stop and have some questions from our analysts and shareholders about what you heard today and seen in our 10 Q that was filed yesterday. Sarah, would you come on and tell them how they can ask questions? Certainly. As a reminder, to ask a question, you would need to press star then one on your telephone. Our first question comes from the line of with Ladenburg. Your line is now open. Yes, good morning everyone. I just have one question today about capital allocation. And Dave, I do appreciate that you noted that the pipeline looks healthy and I obviously realize that issuing equity at the current stock price is nicely accretive to NAV. But why not use your available debt capital instead since it's meaningfully cheaper than common equity and your leverage is still quite low? So Mickey, again, think as we've talked many times, I think about capital and availability sort of being somewhat fungible. The decision around raising some equity through the ATM frankly was less driven by our immediate capital needs as much as really taking a longer view and thought about who knows what the world is going to look like in the next nine to twelve months. We're in a wonderful position to be able to shore up our capital base and especially our common equity base without diluting shareholders and as you point out actually being somewhat accretive. The objective is not to go and raise a slew of equity at this point because we need to put it to work. We thought it was a relatively effective way to do it. The cost of that equity, if you look at the relative yield based on the dividend that we're paying out and will continue to pay out on the common stock price at the current levels. Of course, if they start to decline for whatever reasons, we'll be, as I mentioned, very careful in how we do that. So again, somewhat opportunistic in terms of a good way of thinking about the corporate finance of this company and the relative ability to relay in, if you will, some fairly low cost equity. So that's sort of a long answer, Mickey, but it's really more about that. The good news to your point is we have lots of availability and indeed, as we move forward with new investments, we'll be able to access that availability both really through our line of credit that we have and frankly also some excess cash that we have that as a result of the gains that we've generated. So that's basically the answer. Okay, I understand Dave. And just one follow-up question that came to my mind. Gladstone as a platform has particular expertise in manufacturing industries. And I know it's early days, but have you started to formulate your thoughts on how potentially the coronavirus could impact some of your borrowers, given that some of them may be importing materials or supplies from China? So, we do have a few companies that do indeed import product from China. And I will say that it's not just the coronavirus, but obviously we've been working with all of these companies and more importantly, they have been working internally themselves with based on the tariff issues and so on, which have had some impact to a lot of companies, not necessarily ours, but as we know across the board. So I would say this, couple of them have worked and prior to the coronavirus even move some production to places like Vietnam, etcetera. And so yes, I think we anticipate to see some effect. But at this point, I'm not hearing from any of our CEOs of our manufacturing companies that do indeed manufacture in China or import that right now there's a significant impact. But it's possible that it could have a slowdown on product coming in. I understand. That's it for me this morning. Thank you for your time, Dave. Thanks, Vicky. Next question. Thank you. We have any other questions, please come on board. We do have a question from the line of Mark Farron, Individual Investor. Your line is now open. Hey, guys. Another fantastic quarter. And it was nice to hear Julia talk about the total dividend return being at about 1.2 a share. As far as the effect of China on companies like SOG, etcetera, you sound like it's pretty minimal. Are there any other things you're watching out for in the future? Thank you. Nothing other than, you know, the economy in general. We're seeing a very reasonably good economy with most of our manufacturing companies. Everyone's predicting, you know, we've been talking about a recession of course, and we haven't really started seeing that yet. All the inputs I'm getting from our CEOs is, you know, again being very careful, conservative. Lots of moves towards more automation. Main issues we all run into in a lot of our companies are around getting and hiring and keeping good qualified employees. So moves to higher automation is one important thing. But generally, I think we're, all the usual basics for all the businesses we have to look at are kind of what we focus on. All righty. Thank you, Dave. You guys, and girls are doing a great job as always. Thank you very much. Another question? We do have a question from the line of individual investor. Your line is now open. Thank you. Hello, my name is and I just called to express my thanks and gratitude for your performance, for your team. I initiated my position in Gladstone Investment about five years ago. And I have an average cost basis of 7025¢. And I own 15,500 shares. I rely on this investment income along with a few other companies to for my monthly income. And so I'm most grateful. And out of the companies that I own, including a few other BDCs and some other companies, can say that Glass Stone Investment Corporation is far and away the best investment that I've owned. And again, thank you so much. And I'm most grateful. And may our Lord and Lady bless and keep you always. Thank you. Well, thank you for that nice compliment. And we appreciate people who are holders and like our monthly dividends. Do we have another question? We have no further questions at this time. All right. Well, thank you all for calling in. We appreciate the time together. And we'll see you next quarter. That's the end of this call. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.