Greetings. Welcome to the Gladstone Investment first 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 during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, David Gladstone. Mr. Gladstone, you may begin.
Thank you, Alex. A nice introduction. This is the first quarter of our fiscal year that ends in March 31st, 2022. This is the conference for shareholders and analysts at Gladstone Investment. We're on NASDAQ under the symbol GAIN. Then we have a GAINL for preferred stock. We have some registered notes, GAINN for registered notes. Thank you all for calling in. We're always happy to provide updates to shareholders and analysts and provide a view of the current business environment. Remember, our two g oals here are to understand what happened in the last quarter, then give you some view of the future. Of course, nobody knows the future. We'll give you a shot at it. I'm going to start out with 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 are based on our current plans, which we believe to be reasonable. Now, 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 Forms 10-Q, 10-K, and other documents that we file with the SEC. You can find all these on the investors page of our website. That's www.gladstoneinvestment.com, or even 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 past performance or market information is not a guarantee of any 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, @GladstoneComps, and on Facebook. Keyword there is The Gladstone Companies. Today's call is simply an overview of our results through 06/30/2020, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. I'll turn the presentation over to Dave Dullum, who's the president of Gladstone Investment. Dave?
Hey, Mike. Thanks. I'm very pleased to report, with everything going on in the world certainly, on a very good quarter in terms of our operating results for GAIN, the portfolio quality, and also the progress we have and we are experiencing in returning to pre-COVID operating status, despite the uncertainties that we are now somewhat facing regarding virus variants. However, we ended the first quarter fiscal year 2022 with adjusted NII of $0.24 per share, which is continuing the improving trend started over the last two quarters of fiscal year 2021, where we reported adjusted NII per share at $0.20 and $0.24 respectively. We're very pleased again with this positive trend hopefully continuing forward. We are encouraged by these results because they do reflect improvement in the operations and the health of our portfolio companies, and certainly the prospects for future earnings.
In addition, our NAV, net asset value per share, increased from $11.52 at March 31, 2021 to $12.66 at June 30, 2021. Assets increased to $713 million from $644 million. This is in large part due to the continuing recovery of the values of our equity holdings, which do make up about 25% of our total portfolio at cost. We also did maintain our monthly distribution at $0.07 per share, which is $0.84 per share on an annual basis. We also paid a supplemental distribution of $0.06 per share in June 2021 and declared another supplemental distribution of $0.03 per share, which will be paid in September. Remembering that these supplemental distributions are coming from generally our exits and capital gains, which again is a big part of what we do.
During this first quarter of fiscal year 2022, we exited two portfolio companies, which resulted in a net realized gain and significant other income. We also made one new buyout investment and incremental investments in existing portfolio companies. Our strategy as a buyout entity continues successfully to generate both income from monthly distributions to shareholders and capital gains on equity, which again, we generally pay out through these supplemental distributions. As importantly, our balance sheet continues to strengthen with low leverage and a very strong liquidity position. This allows us now to provide support to our portfolio companies, both for add-on acquisitions and any interim financing if the need were to arise. Also to actively seek, which we are doing, new buyout opportunities. It's sort of in this regard and kind of the outlook. The flow of buyout opportunities is robust. Very robust, I would say.
The challenges really are in making new successful acquisitions really is the discipline around sort of the triage, in other words, how we value and look at companies up front, where we spend our time, the review process, the valuation analysis, all of this because purchase price expectations still remain very elevated in our opinion. In any event, though, and in this regard, subsequent to June 30, 2021, we financed the add-on of another operating company to our recent buyout platform investment, which is called Nocturne Luxury Villas, and we closed on a new buyout investment, which is called Utah Pacific Bridge & Steel. This company actually provides large steel components in bridge replacement, rehabilitation, and construction. Somewhat playing into the whole infrastructure developments that will occur in this country. In summing up the quarter, the state of our portfolio is great.
We have a strong and liquid balance sheet, an active level of buyout activity, and the prospect of very good earnings and distributions during this fiscal year. With that, I'm going to turn it over to our CFO, Julia Ryan, to give you a bit more detail on the financials. Julia?
Thanks, Dave. As far as operating performance for the quarter, we continue to see improvement after the initial impact of the pandemic. We generated adjusted NII of $8 million or $0.24 per common share as compared to adjusted NII of $6.7 million or $0.20 per common share in the prior quarter. We continue to believe that adjusted NII is a useful and representative indicator of our operations. Investment income increased quarter-over-quarter as interest income was lifted by the collection of past due interest from those loans that were previously on non-accrual and other income benefited from the close of transactions and related other income in the current quarter. While we added 1 loan to non-accrual this quarter, which we believe will be a relatively short-term change, over the last two quarters, we returned four portfolio companies to accrual status.
With all that said, as of 6/30, only 2 of our portfolio companies were in non-accrual status. Net expenses increased by $6.8 million this quarter, which was primarily driven by a $6.7 million increase in capital gains-based incentive fees, which was due to the net impact of realized gains and unrealized gains in the current quarter. All of this is required by U.S. GAAP but is not contractually due. Moving over to our liquidity position, which is obviously very important, and we still continue to believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With the successful financing transactions last quarter, if you recall, we registered some debt.
We have new long-term capital in place to do just about that and significant availability under our credit facility for the remainder of this fiscal year and going into the future. Our NAV increased to $12.66 per common share, that was primarily related to the unrealized appreciation we had this quarter. Dave already touched upon that. Consistent with prior quarters, distributable book earnings to shareholders remained solid, especially when considering that that number has been reduced by a cumulative $22.7 million of GAAP accruals of capital gains-based incentive fees, which equates to about $0.68 per common share. Those fees are not currently due or deductible for tax purposes. With that in mind, as previously announced in July, our board declared an additional $0.03 supplemental distribution to common shareholders to be paid in September.
If we assume that the current monthly distribution run rate of $0.84 per year per share, and then also assume $0.15 per common share in supplemental distribution, those are the two $0.06 ones plus the three $0.03 one for December. Our annual distributions would total $0.99 per common share, and that results in a yield of about 6.9% using yesterday's closing price. This covers my part of today's call. Back to you, David.
All right. Very nice, Julia, and nice for Dave as well, and Michael. A lot of good information there to our shareholders. That presentation and the 10-Q filed yesterday should bring everyone up to date. Team has reported solid results for the quarter, including buyout investment transactions and exit activity, which is positive to net realized gains. We believe these teams are in a great position to continue the success that they've had in the fiscal year ending March 31st, 2022. Again, Gladstone Investment is an active investment for investors seeking continuous monthly distributions. In addition to that, supplemental distributions from potential capital gains and other income. Team hopes to continue this going forward. I'm going to stop now and Alex, would you come in, and we're going to have some questions from the analysts and shareholders that want to talk to us.
Thank you. At this time, we will be conducting a question and answer session. If you 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 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. Our first question comes from Kyle Joseph with Jefferies. Please proceed with your question.
Hey, good morning. Thanks a lot for taking my questions here. First one, on reported yields in the quarter, they were really strong, up nearly 200 basis points quarter-on-quarter. Was there any one-time items in that, and can you give us a sense for your outlook going forward there?
Julia, do you want to take that one?
Yeah, sure. Kyle, that was related to my earlier comment on the loans returning to non-accrual. As you often see in periods where loans come back non-accrual, they make some catch-up payments.
Particularly lifted yield this quarter.
Got it. That makes sense. I think on that note, non-accruals obviously came down. Can you give us a sense for how you were able to work through those? Any sort of restructurings? Did they all return to accrual? In your outlook for non-accruals going forward?
Yeah. Kyle, I'll take that one. Julia, go ahead.
I was just going to say, maybe, Dave, you can touch upon the.
Okay. I'll do that. Thanks.
Process.
We're not quite in the same place today. That's why I apologize for that little bit of back and forth. Kyle. Basically, there were no restructurings there that affected that. It was simply having gone through the COVID period and where we had to sort of give the companies an opportunity. In fact, in certain cases, working with, say, commercial banks that were in a senior position because of a revolver or what have you. Just getting back into compliance, if you will, on some of the required covenants, et cetera. Just fundamentally, just good progress towards the operations of the companies. The one that did go on non-accrual, kind of, it's paying, in a position to pay, but again, because of just some constraints regarding senior bank. We just had to put it on non-accrual. It will probably come back on accrual pretty quickly.
Generally, I feel pretty good about where we are with all of those. Again, somewhat temporarily, no, we feel really good about going forward.
Got it. Then last question from me. Just want to talk about the investment environment and kind of weighing what you said. We saw investment activity and repayments picked up to a certain extent this quarter. At the same time, it sounds like you guys are finding good capital deployment opportunities even subsequent to June 30. It's a very active market, competitive, but at the same time, it's kind of supply and demand are fairly balanced at this point. You're still seeing good opportunities. Is that fair?
Yeah. I'd say we're seeing a lot of opportunities, the challenge for us, as I mentioned, is just sticking with our format, the things that work for us. The two that I mentioned that we closed on, one Nocturne, the other's Utah Bridge. Those are really good companies and evaluations that work for our model. Again, there is a whole slew of activity out there with the investment bankers and the M&A shops. Again, we just have to stick to our strengths, and I feel very good about doing that. We'll make a couple new acquisitions yet over the next year or so. We're not going to rush out and just go crazy because multiples are just really pretty bizarre, to be perfectly honest with you, on companies that we see.
That makes sense. Thanks for answering all my questions. Appreciate it.
Yes, sir.
Okay, next question.
Thank you. Our next question comes from Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.
Good morning, everyone. Dave, I just wanted to follow up on your comments about the activity in the M&A market. I certainly agree with you, and I'm happy to see that you can find some transactions that meet your return requirements. Could you give us some sense of whether any of your companies are in a sale process, given how high the multiples are and your willingness to take advantage of those valuations?
Sure. Mickey, the answer I always give are a couple of things. One, the good news for us as a public entity, in sort of an evergreen type fund, is we don't have any pressure to exit companies. Usually, again, it truly is working with the management teams. When and if they believe the time is right to exit for a variety of reasons, we will take that seriously. As you point out, we have had exits. As we go forward, we will certainly be faced with opportunities for exits, and we'll do that on a very careful basis. Frankly, again, we exit a really good company, and back to the earlier comments, then we just have to figure out how we're going to get a new opportunity, so to speak, to replace it, right?
As you know, we keep focused very much on the income that we generate because we want to keep growing our dividend, our distributions to shareholders. The debt pieces are really important. Again, yes, we will certainly entertain opportunities to exit if it really makes sense, and we might see some of that over the next six to nine months. We're not just going to rush out there and just do it just for the sake of doing it, very frankly. We want to keep balanced, and I think we've done a good job at that, and we'll continue doing that.
That's helpful, Dave. On Utah Pacific, that really seems to fit your business model quite well. Now in an industry that is getting a lot of attention. Can you give us a sense of what sort of terms you paid on that in terms of leverage and maybe the interest rate?
Yeah. Well, again, we stick with our format. As you know, when we buy a business, roughly 30% of the dollars that we put out are going to be in the equity component, and the balance is going to be in the debt component. Generally, again, as we publish our yield on the debt component of our portfolio, is generally in the sort of 12% range. That's kind of how that works for our model. Any one particular deal could see the debt piece be in that sort of interest range. We blend it out with the equity components. That's pretty consistent with Utah.
As far as the terms of the deal, again, we generally don't publish that too much, but we generally try to stay, and then companies we're looking at, we need to stick within kind of the six to maybe 7.5 times EBITDA. As long as we're kind of in that range, it works well for our model. This particular company has a very strong ownership, owned by an individual that really built the business, and fortunately, we've been able to have them stay involved with us. We got really strong management, a good team going forward, and it's the kind of deal that other people might have overlooked, very frankly. That's where we work a little bit harder, to find those kind of transactions. Yeah, we're very excited about this one, given their position that they have in their market area.
Well, congrats on that deal, Dave. It sounds good. Couple of housekeeping questions, maybe for Julia. Could you give us a sense of how much past due interest you recognized on B+T and Horizon? Did you reverse anything for SBS?
We did not, Mickey. We did not reverse anything for SBS, so that was solely within this quarter. The amount that was collected in past dues this period was roughly $2 million.
Okay, a sizable amount. Julia, can you give us your undistributed taxable income balance?
Sure. I need to look that up. It is Mickey, I will have to get that to you after this call.
Okay, that's fine. Dave, just a couple more follow-ups, and then I'll let someone else get into the queue. Did you take out another lender at J.R. Hobbs? I noticed you refinanced that deal.
No, we did not have another lender in that deal. It's just us and management.
Okay. Lastly, obviously we're entering another upward cycle of the COVID pandemic, which is unfortunate, and at least to me, it seems unclear how much more support the federal government is willing to provide. Could you describe how you would expect your portfolio to perform without PPP, and TALF, and everything else that the government was doing to keep things moving, assuming the pandemic continues to deteriorate?
Right. The good news or bad news, depending on one's point of view, is that our experience over the last year is that we actually only had one company that accessed PPP, and that was because it was an exception, and that's actually a company called The Maids, and which ironically, they really have done a great job in working through it. Didn't really need it very frankly, but they are a franchisor, so there's an exception to that. We have not been able to access it with our other companies. Where our companies have needed either some relief, which wasn't very many, it's either been with us putting a little incremental money in to help them and so on. The good news is, if you will, we are not relying on that. Looking forward, I don't right now see any of that impacting us.
The biggest issue, I think, which is not just us but across the board, many companies, very frankly, is just getting people to work. That's the big challenge, and how that might impact if this occurs again, is really a little bit of the unknown, but we're doing everything with our companies to increase efficiencies. Obviously, there's some cost impact because of labor cost increases and overtime and that sort of thing, but we're working very hard on that with each of our portfolio companies. We'll just have to keep doing what we've been doing, very frankly.
I understand. Those are all my questions.
All right.
I appreciate your time this morning. Thank you very much.
Thanks, Mickey. Thanks.
You're welcome.
Okay. Next question.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I will now turn the call over to David Gladstone for closing remarks.
All right. Thank you all for tuning in and listening to this and asking good questions. We'll see you again next quarter. That's the end of this call.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.