Gladstone Investment Q1 2024 Earnings Report

Gladstone Investment EPS Results

• Actual EPS: $0.25
• Consensus EPS: $0.26
• Beat/Miss: Missed by -$0.01
• One Year Ago EPS: N/A

Gladstone Investment Revenue Results

• Actual Revenue: $20.30 million
• Expected Revenue: $20.19 million
• Beat/Miss: Beat by +$110.00 thousand
• YoY Revenue Growth: N/A

Gladstone Investment Announcement Details

• Quarter: Q1 2024
• Date: 8/2/2023
• Time: N/A
• Conference Call Date: Thursday, August 3, 2023
• Conference Call Time: 8:30AM ET

Gladstone Investment (NASDAQ:GAIN) is business development company, specializes in lower middle market, mature stage, buyouts; refinancing existing debt; senior debt securities such as senior loans, senior term loans, lines of credit, and senior notes; senior subordinated debt securities such as senior subordinated loans and senior subordinated notes; junior subordinated debt securities such as subordinated notes and mezzanine loans; limited liability company interests, and warrants or options. The fund does not invest in start-ups. The fund seeks to invest in manufacturing, consumer products and business/consumer services sector. It seeks to invest in small and mid-sized companies based in the United States. The fund prefers to make debt investments between $5 million and $30 million and equity investments between $10 million and $40 million in companies. The fund seeks to invest in companies with revenue between $20 million and $100 million. The fund invests in companies with EBITDA from $3 million to $20 million. It seeks minority equity ownership and prefers to hold a board seat in its portfolio companies. It also prefers to take majority stake in its portfolio companies. The fund typically holds the investments for seven years and exits via sale or recapitalization, initial public offering, or sale to third party.

Gladstone Investment Q1 2024 Earnings Call Transcript

Key Takeaways

• Adjusted net investment income was $0.25 per share in Q1 2024 and total assets increased to $847 million, while the monthly dividend remained steady at $0.08 per share.
• The company deployed roughly $50 million in one new buyout, an add-on acquisition and a dividend recapitalization—actions that generated realized gains—and declared a $0.12 per share supplemental distribution for September.
• Gladstone raised $74.8 million of new 8% notes maturing in 2028 and netted about $4 million through its ATM equity program, maintaining low leverage and over $133 million of undrawn credit facility capacity.
• With M&A deal flow picking up and several buyout opportunities in due diligence, management anticipates deploying cash in the coming months and targets at least $1.20 per share of total distributions for fiscal 2024 (approximately an 8.9% yield).
• Portfolio valuations held relatively flat as higher multiples offset modest EBITDA declines in a few consumer-oriented companies; three portfolio firms remain on non-accrual status, with management working to restore accrual.

[Operator]

Greetings, and welcome to the Gladstone Investment Corporation First Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer.

[Operator]

Thank you, sir. You may begin.

[Speaker 1]

Thank you, Latonya. This is David Gladstone. This is our Q1 of fiscal year 2024 and it ends June 30 and The year end is 9 months or so away. Earnings conference call and this is for shareholders and analysts of Gladstone Investment. We're listed on NASDAQ, trading symbol GAIN for the common stock and then we have 3 other listings Gain N And Gain Z and Gain L.

[Speaker 1]

These three different registrations are Our shareholders and analysts providing a view of the current business environment. The two goals of this call as it always is, is To help you understand what happened in the last quarter and to give you our current view of the future. And now we'll hear from our General Counsel and Secretary, Michael LiCausi.

[Speaker 2]

Good morning, everybody. 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, 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 the risk factors listed on our Forms 10Q, 10 ks and other documents that we file with the SEC, you can find them on the Investors page of our website at gladstoneinvestment.com or the SEC's website at www.sec.gov. And 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.

[Speaker 2]

Please also note that any past performance information or market information is not a guarantee of any future results. And please take the opportunity Visit our website, once again, gladstoneinvestment.com, sign up for our e mail notification service. You can also find us on Twitter at gladstonecomps And on Facebook, keyword The Gladstone Companies. Today's call is simply an overview of our results through June 30, 23, So we ask that you review our press release and Form 10 Q both issued yesterday for more detailed information. And with that, I'll turn it over to Gladstone Investments' President, Dave Dallin, Dave?

[Speaker 3]

Thanks, Mike, and good morning to everyone on the call. I am pleased to report that we did have a very good Q1 of fiscal year 'twenty four and that in fact follows on the previous very solid Q4 we had of fiscal 'twenty 3. We ended this Q1 on sixthirtytwenty 3 with adjusted NII of $0.25 per share And total assets of $847,000,000 and those assets, that amount of assets is up from $766,000,000 which So the deal activity for this quarter actually was pretty good, in that we invested an aggregate Approximately $50,000,000 in one new buyout investment and add on acquisition of 1 of our existing portfolio companies, And we were able to make an investment to facilitate a dividend recapitalization of another of our current portfolio companies. This recap actually helped to produce both the realized capital gain and other income for the quarter. We actually Find that these add ons and these dividend recap opportunities, they are important to pursue and they do allow us to increase the investment in an existing company and in fact one where we would know the management team well, we know the business and we have a strong belief in the future so we can build incremental value So a dividend recap is a positive thing and we might do it again from time to time as may come up.

[Speaker 3]

We were also able to maintain our monthly distribution to shareholders at $0.08 per share or 0.9 Subsequent to this quarter end, we declared another supplemental distribution of $0.12 per share, which will be paid in September 2023. We currently right now anticipate being able to fund future supplemental distributions as we continue to recognize realized capital gains on the A portion of future exits and potentially from other recapitalizations. Our buyout focused strategy, which does differentiate us from other BDCs, Continues to successfully generate both the income for the monthly distributions as mentioned and also capital gains on the equity when it comes from along the supplemental distributions. During the quarter, we also successfully issued $74,800,000 in new publicly traded eight percent notes and those go along the other 2 publicly traded notes that we have currently, and these notes will mature in 2028. Our balance sheet continues to be strong.

[Speaker 3]

We have low leverage and a very positive liquidity position, including additional availability on our credit facility. So we will continue being able to provide support to our portfolio companies for add on acquisitions, which is one of the areas we've been focusing on, As also, interim financing if the need arises, while we actively grow the assets from new buyouts. So looking ahead, the deal flow, first, it seems to be picking up somewhat. The sellers Who had been somewhat holding back over the past 6 months seem to be testing the market. We, of course, are in the market all the time and what we can gather from the Merger and Acquisition Groups and the sell side Investment Bankers is that the backlog of new opportunities seems to be building And we may be seeing an increasing supply of buyout opportunities going into the end of the year.

[Speaker 3]

So there continues therefore to be significant liquidity in buyout funds, which Does reinforce a strong competitive environment that we face. As a result of that, we will remain value sensitive, While we aggressively compete for new acquisitions that really do fit our criteria, we are currently in the due diligence phase on a Few new buyout opportunities, so we will see how that plays out over the next few quarters as far as adding to our portfolio, which obviously continues to be Our main objective and goal is we grow the assets of Gladstone Investment Corporation. So in summing up the quarter and looking forward, we believe the State of our portfolio is very good. We have a strong and liquid balance sheet and active level of buyout activity and a continued prospect of very good earnings And distributions over the next year. So with that, I'm going to turn it over to our CFO, Rachel Easton, so she can give you a bit more detail on that.

[Speaker 3]

Thanks, Rachel.

[Speaker 4]

Thank you, Dave, and good morning, everyone. Looking at our operating performance, in the Q1 of fiscal year 'twenty four, we generated total investment income of $20,300,000 up from $19,900,000 in the prior quarter. This increase was primarily due to increased interest Which was driven by an increase in the weighted average yield on our debt investments to 14.7% from 14.3%, which was directly correlated to increased SOFR. This increase in total investment income was limited as our dividend and success fee income, which is variable and timing, was not as high as the prior Net expenses as of June 30 were $11,900,000 up from $10,200,000 in the prior quarter. This was primarily due to an increase in capital accrued capital gains based incentive fees due to the net impact of realized and unrealized gains and losses as required under U.

[Speaker 4]

S. GAAP, as well as an increase in interest expense, which was primarily due to the new 8% notes issued during the quarter. This resulted in net investment income for the quarter of $8,400,000 or $0.25 per share, down from $9,600,000 or $0.29 per share. Adjusted net investment income for the quarter was $8,500,000 or $0.25 per share, down a penny from $8,600,000 or $0.26 per share in the prior quarter. We continue to believe that adjusted net investment income, which is net investment income exclusive of any capital gains based incentive fees, is a useful and representative indicator of our ongoing operations.

[Speaker 4]

Consistent with the prior quarter, at June 30, 2023, we continue to have 3 portfolio companies that are on non accrual status, and we will continue working with those companies to get back on accrual status if possible. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. As Dave mentioned, during the quarter, we successfully issued $74,800,000 in new publicly traded 8% note Maturing in 2028. With these new notes and our prior 2 public issuances, we have long term fixed rate capital in place. And at June 30, 2023, we had over $133,000,000 available on our $180,000,000 line of credit.

[Speaker 4]

Additionally, in July, we raised approximately $4,000,000 in net proceeds under our common stock ATM program, all sales of which were above NAV. We anticipate continuing to be active in the ATM program. Overall, our leverage remains relatively low with an asset coverage ratio at June 30 of 211 providing plenty of cushion to the required 150 percent coverage. Valuations in the aggregate remained relatively flat this quarter, Resulting from offsetting fair value fluctuations. This was led by higher valuation multiples across the portfolio and was offset by decreased EBITDA at a few portfolio companies.

[Speaker 4]

Our NAV decreased to $12.99 per share compared to $13.09 per share at the end of the prior quarter. The decrease was primarily driven by $0.36 per share of Contributions paid to common shareholders during the quarter of $0.12 per share was related to a supplemental distribution. This was partially offset by $0.25 per share of NII generated during the quarter. Consistent with prior quarters, distributable book earnings to shareholders remain strong. We started the fiscal year with $32,000,000 or $0.95 per share in spillover and our monthly distribution remains consistent at $0.08 per share for an annual run rate of $0.96 per During this past quarter in June 2023, we paid a $0.12 per share supplemental distribution and in July, we declared an additional $0.12 per share Distribution to be paid next month in September.

[Speaker 4]

We look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of exit. Using the monthly distribution run rate of $0.96 per share per year and $0.24 per share in supplemental distribution Paid or declared so far in the current fiscal year, our aggregate estimated fiscal year distributions would total at least $1.20 per common share or yield of about 8.9% using yesterday's closing price of $13.46 This covers my part of today's call. Back to you,

[Speaker 1]

All right. Thank you, Rachel. It was a very nice presentation, Rachel, and also a good one from Dave and Michael. This is good information for our shareholders. This call and the 10 ks filed with the SEC yesterday should bring Everybody up to date.

[Speaker 1]

The team has reported solid results for the quarter, including the buyout investment activity and There is exit activity associated with the net realized gains that's been increasing. We believe The team is in a great position to continue these successes through the remainder of our fiscal year ending March 31, 2024. I'll just say it again. I believe Gladstone Investment is an attractive investment for those investors Seeking continuous monthly distributions and supplemental distributions from potential capital gains and other income. Team hopes to continue to show you strong returns on your investment and 8.9% yield on a current basis is pretty good.

[Speaker 1]

So now I'm going to stop and ask our analysts and shareholders if they have some questions they'd like to ask us.

[Operator]

Thank you. We will now conduct a question and answer session. A confirmation tone will indicate your line is in the question One moment while we poll for questions.

[Speaker 5]

No

[Operator]

questions. Our first question comes from Mickey Shleen with Ladenburg, please proceed.

[Speaker 5]

Yes. Good morning, everyone. Dave, I'd like to follow-up on your investment in I see that this quarter you invested $30,000,000 as a follow on and then subsequent to the quarter you announced You're providing funding to support mSouth's acquisition of Exposition Holding and that will be joined with Nth degree, so I'm a little confused. Could you describe ultimately what the structure of these investments will be? And will you merge Nth degree with Exposition?

[Speaker 3]

No. So, very brief history, Mickey. We sold nth Degree in 20 19, at the end of 2019 to M South. When we exited, we actually retained a small Ownership percentage, I think, was around 10% with an investment cost of about $1,000,000 We did that for some structural reasons in the nature of selling the business. Obviously, we sold it, as you, I think, might recall, at a very, very nice capital gain.

[Speaker 3]

2020 came along. That business went down pretty dramatically. They were able, though, then to Come back out of it very nicely in the 'twenty one period and going into 'twenty two. They started ramping up their EBITDA. And as a result of that, they were able to make this company came along expositions and actually really add significantly to Nth Degree.

[Speaker 3]

So Nth Degree acquired Expositions and what we did was we were able to provide Some capital, both debt and equity, into nth degree as the current structure is. And in fact, that increased our equity ownership Vince agree. So not only have we now got a reinvestment of debt at a really nice rate, but we now have a stake again in the company. Obviously, we really like the management team. They know with this acquisition are somewhere in the $50,000,000 almost EBITDA range, so it's a significant business now and one that frankly gives us opportunity to have 2nd shot at a great company.

[Speaker 3]

So we're very pleased with it.

[Speaker 5]

So just so I make sure I'm on the same page, Dave, There is no additional capital required in this transaction? No. At this moment? No. Okay.

[Speaker 5]

And so the cash It's on the balance sheet, which is high for you, that the use of that is going to be toward other investments, not this one? Correct.

[Speaker 3]

Absolutely, yes.

[Speaker 5]

Okay. I also wanted to ask you about trends in your portfolio's companies Performance in terms of revenues and EBITDA and what part of the

[Speaker 3]

I'll turn that over to Rachel, let her have a chance to weigh in.

[Speaker 4]

Sure. From a performance perspective, we did see multiples across the portfolio increase. And as I said in my prepared remarks, EBITDA across much of the portfolio did increase as well, but that was offset by EBITDA which was down from a handful of our portfolio companies, we've remained relatively flat on an aggregate basis quarter over quarter From a fair value perspective, from an internal risk rating perspective, this is the risk that we use internally to estimate the probability of default on our debt securities and any expected loss. Overall, there was a slight decrease in the weighted average balance, but nothing that we remain concerned about.

[Speaker 5]

And in terms of the underperformers, can you tell us what sort of sectors you're seeing those trends develop?

[Speaker 3]

Mickey, I'd just say it's sort of across the whole portfolio. There are none that we're Seeing any significant decline in a couple of them that are in the consumer type products businesses, We had a very modest decline and keeping in mind that a small Change in EBITDA times a fairly good sized multiple can have an impact in terms of our quote Valuation, if you will, right? So again, I would say it was around a couple of the companies that are in the Consumer oriented products area, nothing again that we are overly concerned about in any of those companies. These are all in good shape and doing well. So yes, and the other sectors have all performed pretty well actually.

[Speaker 3]

And so that's how I would respond to that.

[Speaker 5]

Okay. My last question, Dave, how long do you think it might take to Invest the cash that's on the balance sheet.

[Speaker 3]

Well, as I mentioned in my remarks, we've Got a couple of deals that we're working on right now that are in the due diligence phase. And so we'll keep hitting the whip, And hopefully, we'll find a couple of those that might get done here in the next couple of months.

[Speaker 5]

Okay. That's it for me this morning. I appreciate your time. Thank you.

[Speaker 3]

Thanks, Mickey. Good to talk to you.

[Operator]

Mr. Gladstone, there are no further questions in queue at this time. I would like to turn it back to you for closing comments.

[Speaker 1]

Okay. Thank you so much and thanks to all of you for calling in, for doing so well. It makes the call pretty boring because We don't have anything much to talk about except our successes. Appreciate all of you calling in and we'll see you next quarter. That's the end of this call.

[Operator]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.