Ladies and gentlemen, thank you for standing by, and welcome to the Gladstone Investment Corporation second quarter earnings call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker, David Gladstone. Please go ahead, sir.
Well, thank you, Sydney. Nice introduction. This is David Gladstone, Chairman of the Gladstone Investment, and this is the quarterly earnings conference call for the quarter ending September 30, 2019. This is for shareholders and analysts that like to ask questions at the end of this. The common stock is traded on NASDAQ under the symbol GAIN. Thank you all for calling in. We're always happy to provide an update to our shareholders and the analysts that follow us, providing our view of the current business environment. Our goal is to help you understand what's happened and then give you a view of the future. We have changed these calls. As many of you know, we used to do a lot of history, but we've excluded most of the history of this company and the detailed discussion of how the company is different from other BDCs.
We seek to do capital gains and income, not just income. Hope you like this streamlined reporting method that we're going through. Now we hear from our General Counsel and Secretary, Michael LiCalsi.
Good morning, everyone. Today's call 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 and other factors, even though they're based on 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 listed in our Forms 10-Q, 10-K, and other documents that we file with the SEC. You can find them all on our website, gladstoneinvestment.com, or even on the SEC's website, which is www.sec.gov. The company undertakes 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.
Please also note that past performance or market information is not a guarantee of any future results. We ask you to take the opportunity to visit our website. Once again, www.gladstoneinvestment.com. You could sign up for our email notification service. You can also find us on Twitter. That's @GladstoneComps. On Facebook, keyword there is The Gladstone Companies. As a reminder, today's call is simply an overview of our results through September 30, 2019. We ask that you review our press release in Form 10-Q, both issued yesterday, for more detailed information. With that, I'll turn the presentation over to Julia Ryan. She's Gladstone Investment's Chief Financial Officer. Julia.
Good morning, everyone. While Dave is on vacation, I will provide an update on our business and outlook. We are pleased to again report solid operating results for the most recent quarter. Adjusted net investment income of $0.23 per common share for the quarter was greater than our regular quarterly distributions of $0.20 per common share. Based on our current portfolio performance, values, and income generating potential, we believe the outlook for the balance of the fiscal year ending March 2020 to be positive. We made one new buyout investment, two add-ons, and successfully exited one buyout investment during the past quarter.
With this exit, since inception in 2005, we have exited 19 portfolio companies and generated a 4.2 times cash on cash return on the equity portion of those investments while focusing on growing total assets and increase our monthly distributions to shareholders. Additionally, our net asset value remains strong at $12.39 per share at 9/30/2019. We maintained our monthly distributions at an annual run rate of $0.82 per common share, reflecting additional capital gain realization successes and made another one-time additional supplemental distribution of $0.03 per common share in September. Our board also recently approved the second semiannual supplemental distributions of $0.09 per common share to be paid in December of this year. While the buyout environment continues to be very competitive, the good news is we are seeing a pickup in new investment activity.
As mentioned, we made two new acquisitions in the fiscal year to date and are evaluating a number of other potential opportunities. We anticipate continuing to pay semiannual supplemental distribution 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 the ability to make these additional supplemental distributions, the amounts, and timing, as well as any further deemed distributions of capital gains similar to the one we declared in March of 2019. Let's turn to a summary of the fund's financial performance. We ended the September quarter with NII of $6.6 million as compared to NII of $8.9 million in the prior quarter.
Investment income declined slightly due to a $2.9 million decrease in other income, the timing of which can be variable, which offset the $2.3 million increase in interest income, which was primarily driven by the collection of past due amounts upon the exit of one of our portfolio companies. Net expenses increased by $1.6 million in the current quarter, which was primarily driven by a $0.8 million increase in other expenses and a $0.8 million decrease in credits to fees from the advisor.
The $1.3 million decrease in the income-based incentive fee resulting from lower pre-incentive fee net investment income was offset by a $1.4 million increase in the capital gains-based incentive fee given realized and unrealized gains this quarter. We're adjusting net investment income to exclude the capital gains based incentive fee accrual, adjusted net investment income per weighted average common share was $0.23 in the current quarter. We continue to believe that this metric is a useful and representative indicator of operations exclusive of any capital gains based incentive fee, as net investment income does not include realized or unrealized investment activity associated with this fee. During the quarter end of September 30th, 2019, we recognized a net realized gain on investments of $21 million, which is primarily the result of one of those exits I mentioned earlier.
On the balance sheet side, as of September 30th, total assets decreased to $620 million compared to about $642 million at June 30th, as repayments and the exit I mentioned exceeded new investment and add-ons activity, and due to a roughly $4 million decline in fair values quarter-over-quarter. Liquidity remains strong with over $125 million available under our credit facility and asset coverage of 316%. Net assets totaled about $407 million, or $12.39 per share as of September 30th, compared to $12.29 per share at June 30th, which is primarily a result of realized gains exceeding any unrealized appreciation this period. As of September 30th, on a book basis, undistributed net investment income combined with net realized gains totaled over $27 million or about $0.83 per common share.
This amount is already net of the $50 million deemed distribution we declared in March of 2019, and it's also reduced by the book accrual of the capital gains based incentive fee, which is roughly $23 million at this point, and this amount is not currently due. All else equal, the $0.83 per 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. Now, with that in mind, and as previously announced in October 19th, the board declared monthly distributions of $$0.07 per common share for October, November, and December of 2019, and the second semiannual supplemental distribution of $0.09 per common share to be paid in December.
Assuming the current monthly distribution run rate of $0.82 per share per year and $0.18 per share per year in supplemental distribution, meaning it does not include the additional $0.03 per share we paid in September, annual distributions total roughly $1 per common share or a yield of about 7.7% based on yesterday's closing price of $12.95. This covers my part of today's call. Back to you, David.
That's good. Good report, Julia. I know David Dullum is listening wherever he is, and he'll be out today, and he'll be back soon and on the next call. Julia and Michael gave good information for our shareholders. That is presented in the 10-Q filed yesterday. This team has reported solid results, including a new buyout investment and one exit from a significant realized gain and some add-on investments. In fact, the add-ons is the way we grow some of these companies. We have a company, and then we buy a smaller company and add it to it. Team is in a really good position to continue these successes throughout our fiscal year ending March 31st, 2020.
We all believe that Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions, with some supplemental distributions from potential capital gains and some other income that comes in from time to time. The team hopes to continue to show you a strong return on your investment in our fund. Now, let's have some questions from our analysts. Sydney, would you come on and give instructions for asking questions?
Yes. Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Our first question comes from Henry Coffey with Wedbush. Your line is now open.
Good morning, everyone. Maybe it's just winning the World Series, but great quarter and a lot of enthusiasm on the call. The challenge for us is to always figure out what's next. When you look at your portfolio companies in aggregate, are there, not specific issues, because those would be captured in fair value adjustments, but are there sort of general opportunities, constraints to growth, new doors opening, new doors closing? When you look at the world about, what is your thought process in terms of the operating environment for your portfolio companies?
I think it's good, Henry. We're in the smaller end of the buyout world. As you know, we're in the middle market. Middle market's about the third largest economy in the world. There's opportunities coming and going in this section, and we're just sitting in there trying to pick off a couple every quarter. I think it's a good opportunity for us. The fact that nobody knows where we're going right now, that is, the economy is booming, but at the same time, there's a lot of doubts in the marketplace, gives us a chance to buy things. I think we're going to continue to do well. You don't never see anything more than about six months out.
I think for the rest of the fiscal year ending March 31st, 2020, we're in really good shape, and we should continue to grow and have a good time building up this company and hopefully have some huge capital gains someday down the road. I think we're in good shape. There's no real blowback at this point in time from anything that we see. Headwinds and tailwinds, as they always call them, we see some going in different directions and just try to stay out of the way of the tailwinds and get good little companies in there running these things.
With adjusted net investment income at NII per share at $0.23, is the thought on the dividend just to keep it where it is, and then just continue to let it flow from a series of supplemental and regular payments?
Well, we certainly don't want to cut the dividend. That's always been a no-no for us. We'll raise the dividend when we get in a position to raise it. There's nothing other than just good feeling about where we are today, I would hope that we can raise it sometime in the near future. We debate that every time the board gets together. As you know, our next board meeting is in January, we'll keep our eyes on that. I want to raise the dividend. I'm a big proponent of raising the dividend, David Dullum and Julia, who have to manage the balance sheet and the P&L, are always pushing back and making sure I don't get too excited about raising the dividend. We have a good discussion every quarter about raising the dividend.
I think you should look at the capital gains side of the business. It's still strong. If you looked at what we could do, if everything works, I think you'll get really happy with the aspect of getting some extra dividends during the next year.
Thank you.
Okay. Next question.
Thank you. Our next question comes from the line of Mickey Schleien with Ladenburg. Your line is now open.
Yes. Good morning, everyone. I want to start by asking about repayments. I noticed that the last couple of quarters, the principal repayments have been pretty significant. Curious what's driving that trend, and how do you feel about your deal pipeline for the second half of the fiscal year?
Mickey, it's Julia. The repayments have obviously, when we exit a deal, which we've exited quite a few already this year, the debt side of things gets labeled as a repayment. That's why you see that number be a little bit higher comparatively to the prior period and the last fiscal year. Other than that, this is just part of our managing our exit strategy. There's nothing offhand that's happening right now. I think I alluded to it in the earlier part of my call. We're happy with that, and we're hoping that we can close on a few deals in the near future.
One of the things that's driving this industry we're in is that people are worried that somehow we're going to have another recession, so they want to sell now. We're taking advantage of that. We're not in a belief that there's going to be some kind of catastrophic event soon. We're playing that game today. May be the wrong game, but most likely is the right game since everything seems so strong. What's your next question, Mickey?
My next question was about what was the nature of the past due interest on ADC?
If you recall, two years ago, ADC had some operational struggles, we had it on non-accrual for a while. When they came out of that, they started paying back some of those contractual interests that they hadn't been paying us during the non-accrual period. Upon exit, we negotiated that we would get all past due amounts.
Okay. That's straightforward. Couple more questions. I noticed that last quarter, meaning the previous quarter, you extended a line of credit to J.R. Hobbs, and the prefers were written down. In this quarter, that line of credit was repriced, and the debt was reclassified from first to second lien, and the prefers were written down again. Who's the lender ahead of you, and what issues in general is that company confronting?
Mickey, you're right. We brought in a senior lender with the idea that in the near future, our line of credit would be refinanced out. The company has had some issues on the backlog side, just managing pricing internally, but the backlog is really strong, where out of all those projects, they've run their term. You should see a nice pickup in that company here in the near future.
Just to make sure I understand, you brought in a bank with a facility ahead of yours, and you expect them to take out your facility?
Yes. In the near term.
Okay. Sort of a housekeeping question. Your G&A climbed quarter-to-quarter. Was there something specific going on there?
Taxes.
Taxes.
This is generally the quarter where we accrue our excess taxes because we're nearing calendar year-end.
Okay. SOG, the debt remains valued at par. Are they in a position to begin to be making interest payments and going back on accrual, or is that too optimistic?
It's too optimistic for the balance of this fiscal year, but we're working on it.
Okay. That's it for me. I appreciate your time. Thank you.
Sure.
Sydney, you got any other questions for us?
Yes. Our next question comes from the line of Matt Sherwood with CCP. Your line is open.
Hey, guys. Great quarter. Just have a quick one sorry, on the B-Dry write-off subsequent to quarter end. How does that impact the excess via the $0.82 you were talking about of excess?
income for distribution?
Good question. It would reduce it. Once that number is realized, the unrealized loss will flip into a realized loss and therefore reduce the number that I quoted. If you look on our balance sheet, that number actually includes the unrealized piece of the portfolio as well. If you were to go with a liquidating as of 9/30 perspective, I would point you to the balance sheet amount.
Right. With the $0.82, do you take off the capital incentive fee or does that just go down by $15 million, or how does it work?
The total accumulated gains and losses would be reduced by the amount that the B-Dry losses. You would just get a new total to divide by the total number of shares outstanding.
Okay. It'll be substantially lower next quarter because of the realized loss.
Assuming no other gains, you're correct.
Okay. Gotcha. Perfect. No, that's helpful. That's what I was just trying to clarify. Thanks so much.
Okay. Sydney, any other questions?
Yes. Our next question comes from the line of Ryan Carr with Jefferies. Your line is now open.
Good morning, guys, and congratulations on the good quarter.
Thank you.
My main question relates to the yield. It seems like it's been ticking up quarter-to-quarter, year-over-year. That's definitely favorable. I'm curious, is that related to the late repayment of the asset or what's driving that yield enhancement, especially given the impending rate outlook?
That is exactly right. The slight aberration, as you might call it, for this quarter is related to the collection of the past due amounts. Otherwise, yield is strong in the 13% range.
Okay. The equity portion of your portfolio continues to wind down. What effect does that have on your portfolio as it rotates in terms of the yield?
The portfolio, if you look at what's going on in the portfolio, you sell something that has reached its point and you sell it, get your capital gains or trigger a loss and move on to the next one. You're seeing later stage deals that we hold in the portfolio being replaced by new deals and hopefully two to three years from now, those will be yielding the same as the ones in the portfolio. You have to remember, the yield in this company is determined by us. That is, if you own all of or most of the equity in a company or a large chunk, you can set the yield as much as you want to take out. If you've got a very strong company, you can push your yield up. If it's not strong, then your yield comes down some.
Yield is a function of how much we want to take out of going along, as we go through the development of the company.
Great. Credit seems to be trending well, showing year-over-year improvements as well on that front. You mentioned that your outlook in terms of the macroeconomy continues to be strong, especially in the competitive deal environment. You have a good amount of liquidity moving forward. Are you changing maybe your credit or underwriting strategy given this part of the cycle, or is there anything different about your origination strategy moving forward?
No, it's the same business. I've been in it for my lifetime, you go through these cycles. When the economy is hot, you need to keep putting good deals on the books with the idea that next quarter might be the down quarter. We get caught every now and then, making a bad guess about a certain part of the economy and where it's going. It's rare that everything goes down like it did in 2007, 2008, 2009. My guess is that we pick the right places. If you look at where each of these new deals are, I think we've picked the right place to increase our investments.
Well, thank you, David. Thank you, Julia.
All right. Sydney, any other questions?
I am showing no further questions at this time. I will now turn the call back over to David Gladstone for any further remarks.
All right. We thank you all for calling in, and I think this will be a good quarter when we get to December 31st and get your call going sometime in January, February, early February. That will be, I think, another good time to talk. That's the end of this, and I'm going to shut us down.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.