Gladstone Investment Q3 2024 Earnings Call Transcript

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February 7, 2024

There are 8 speakers on the call.

Operator

Greetings and welcome to the Gladstone Investment Corporation Third 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.

Operator

Thank you, Mr. Gladstone. You may begin.

Speaker 1

Thank you, Cat. That was a good beginning. And this is David Gladstone, Chairman of Gladstone Investment. And this is the 3rd quarter that are going to be talking about the year ending December 31, 2023. Our fiscal year ends in a couple of months And earnings conference call is for all the shareholders and analysts that follow us.

Speaker 1

And we listed on NASDAQ under the symbol GAIN, that's for capital gains, gain and then the common that's the common stock and then there's Gain N, Gain Z and Gain L, all 3 of these are different registered notes. So you can Hi, those if you wish as well. We won't be talking much about them today. But thank you for calling in. We're always happy to provide an update to our shareholders and analysts that provide our view of the current business environment.

Speaker 1

So there's really two goals here, help you understand What has happened in the past and even though we don't have a crystal ball, we'll give you our current view of the future. And now we'll hear from our Deputy General Counsel, Eric Hellman. Eric?

Speaker 2

Thank you, and 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 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 10Q, 10 ks and other documents we file with the SEC. These can all be found on the Investors page of our website at www.gladstoneinvestment.com or the SEC's website atwww.sec.gov.

Speaker 2

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 future results. Please take the opportunity to visit our website, www.gladstoneinvestment.com and 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 December 31, 20 So we ask that you review our press release and Form 10 Q both issued yesterday for more detailed information.

Speaker 2

Now I'll turn it over to Dave Dullum, President of Gladstone Investment. Thanks, Eric, and good morning, everyone.

Speaker 3

We are happy to report that GAIN produced very good results for this Q3 of fiscal year 'twenty four, which follows on the previous solid first two quarters of fiscal year 'twenty four, which, course ends in March. We ended the Q3 of fiscal year 'twenty four on Twelvethirty Onetwenty 3 with adjusted NII of 0.26 dollars per share and total assets of $918,000,000 You'll learn more about this from Rachel Easton, CFO and she describes the details around that. Again, those are good results. In regards to activity for the quarter, We did invest $65,000,000 which helped us to fund an add on acquisition in one of our existing portfolio companies. And again, we obviously we are always looking and are doing new deals, making new investments and new acquisitions and that continues to be our goal and objective.

Speaker 3

However, doing add ons to certain of our existing portfolio companies is really an important aspect of our value building process strong belief in its future and it continues to allow us to really build very good value in these fundamental businesses. So we'll continue to do that as necessary and in certain specific cases, obviously, while pursuing our main business, which is adding new acquisitions as we go along. We also, as we have in our buyout strategy exits and we did have a very successful exit with 1 of our portfolio companies where we actually generated pretty meaningful realized capital gain for us of about $43,500,000 We were able to maintain our monthly distribution to shareholders $8 per share or $0.96 per share on an annual basis and we paid an aggregate supplemental distribution of $1 per share during November December 2023. Again, this large supplemental distribution is a result of the buyout strategy and is our ability to continue rewarding our shareholders with these meaningful distributions from realized capital gains, which are generated on the equity portion of our exits In addition, of course, to the income that we continue to generate for the monthly distributions and which is obviously very important for the basis of distributions to our shareholders on a monthly basis.

Speaker 3

Our balance sheet continues to be strong with very low leverage and a very positive liquidity position with additional availability on our credit facility. So we will continue providing support to our portfolio companies both add on acquisitions, interim financing if the need arises, while actively growing our assets through new buyouts. Turning to the outlook. The deal flow, as we call it, appears to be picking up somewhat as the sellers who have been holding back over the past 6 months or so are testing the market. And we do hear from the merger and acquisition groups, investment bankers, who are our primary sources for new opportunities that the backlog of new opportunities has been building.

Speaker 3

Seems like the last 6 months or so of last year were fairly slow somewhat and deals were coming to the market and they were being taken back, etcetera. Now it looks like there's continued to be a bit of an increase in this regard, maybe somewhat as a result of interest rates perhaps coming down, etcetera. But in any event, we continue working on a new few new buyout deals and we're currently in that early phase of the process. There does continue to be very significant liquidity in the market, meaning that our competitive situation is, course, being challenged all the time. So we're going to remain value sensitive while we aggressively compete for new acquisitions.

Speaker 3

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 an active level of buyout activity and continued prospects of very good earnings and distributions over the next year. So I'll turn it over to Rachel Leeson, our CFO, and she can give more details on the finances of the quarter. Rachel?

Speaker 4

Thank you, and good morning, everyone. Looking at our operating performance in the Q3 of fiscal year 2024, we generated total investment income of $23,100,000 that was up from $20,300,000 prior quarter. This increase was primarily due to increased interest income, which was driven by new debt investments made in the quarter as well higher dividend and success fee income resulting from fees received associated with an exit during the quarter as compared to not receiving any of these fees in the prior quarter. Net expenses as of December 31, 2023 were $13,300,000 This was down from $22,000,000 in the prior quarter. This decrease is primarily due to a 10 $4,000,000 decrease in 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. This decrease was partially offset by an increase in borrowing costs. This resulted in net investment income for the quarter of $9,700,000 Compared to net investment loss of $1,700,000 in the prior quarter, this fluctuation is primarily due to the large accrued capital gains based incentive fees recognized during the prior quarter. Adjusted net investment income, which is net investment income or loss exclusive of any accrued capital gains based incentive fees for the quarter was $9,100,000 or $0.26 per share, up $0.02 from $8,100,000 or $0.24 per share in that prior quarter.

Speaker 4

We continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations. Consistent with the prior quarter at December 31, 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 when possible. We believe that maintaining liquidity ability to support and grow our portfolio are key elements of our success. With our 3 public note issuances, we have long term fixed rate capital in place. And as announced yesterday, we have amended and expanded our credit facility, increasing the capacity to $200,000,000 And as of yesterday's release, we had over 120,000,000 available of that capacity.

Speaker 4

Additionally, during the quarter, we were very successful on our common stock ATM program, raising approximately $21,000,000 in net proceeds, as well as an additional $7,700,000 in net proceeds raised in January, with all sales being accretive and above than current NAV. We anticipate continuing to be active in the ATM program. Overall, our leverage remains relatively low with an asset coverage ratio at December 31, 2023 of 7%, providing plenty of cushion to the required 150% coverage. Our NAV decreased $13.01 per share for the quarter compared to $14.03 per share at the end of the prior quarter. The decrease was primarily driven by 1 point $0.36 per share in net unrealized depreciation on investments and $1.24 per share of distributions paid to common shareholders during the quarter, of which $1 per share related to supplemental distributions.

Speaker 4

These decreases were partially offset by $1.27 per share of realized gains on investments and $0.28 per share of net investment income. Consistent with prior quarters, distributable book earnings to shareholders remained 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 per month for an annual run rate of $0.96 per share. During this past quarter, in November December 2023, we paid an aggregate dollar per share of supplemental distributions. We look to continue funding future supplemental distribution as we recognize realized capital gains on the equity portion of our assets.

Speaker 4

Using the monthly distribution run rate of $0.96 per share per year and $1.24 per share in supplemental distributions paid so far in the year 2024, our aggregate estimated fiscal year distributions would total at least $2.20 per common share or a yield of about 16% using yesterday's closing price of $30.96 This covers my part of Call back to you, David.

Speaker 1

Thank you very much. That was very, very good quarter. Rachel and Dave, you've done a great job and Eric, Good information for our shareholders. This call and the 10 Q filed yesterday with the Securities and Exchange Commission Should bring everyone up to date. The team has reported a solid results for the quarter ending December 31, including the add on investments and exit activity associated with net realized gains.

Speaker 1

We believe the team is in a great position to continue these successes through the remainder of the fiscal year, that fiscal year ended March 31, 2024. I just think Gladstone Investment is an attractive investment for investors at this point in time. You got monthly distributions and then you got supplemental distributions from the potential capital gains and some other income. The team hopes to continue, of course, To show you a strong return and rather than keep talking about it, let's get some questions from the analysts and shareholders that are on the line. So operator, if you'll come on and manage that, that'd be good.

Operator

Our first question comes from Mickey Schleien from Ladenburg Capital. Please proceed.

Speaker 5

Yes, good morning, everyone. Dave, wanted to understand from you how your portfolio companies are progressing in terms of their revenues and margins outside of consumer. We're all aware that the consumer facing companies have headwinds. But are you Any trends in the rest of the portfolio?

Speaker 3

Hey, Mickey. Good morning. Nice to talk to you. Not Truly, not really. We're seeing, I would say, pretty consistent, Not decline, but little slower, call it, growth, but things are holding up pretty well across the board, cost of materials In some cases, in distribution costs, which impacted some of our industrial companies, etcetera, from the supply chain side, I would say those have eased a bit, so that's obviously held on that end.

Speaker 3

But frankly, all in all, we're seeing, I would say, a fairly Just again, moderate, go slow, but nothing dramatic one way or the other. Interestingly, some of our consumer products companies actually are doing reasonably well, even though as you said, The consumer side tends to be a little bit slower right now, but generally, I'd say pretty stable.

Speaker 5

That's good Dave, in terms of deal flow, we're hearing that part of what we're seeing, I'm not sure that's Part of what we're seeing is private equity funds conducting dividend recaps for their stronger performers in order to extract some results for themselves and for their shareholders. Is that something you're considering doing in near future for some of your better performing companies, which also may help optimize their balance sheets?

Speaker 3

Right, right. Nothing, honestly, right now. As you know, we have done a couple of dividend recaps over the last couple of years. One company in particular, we did Actually with that company and then one other one, we did one last year and those were for all the reasons you mentioned. But as of right now, it's not something we are always looking at it, because it is a good way, especially if it's a good business that we like We are able to sort of stay involved in a very meaningful way, as you say, extract some value for shareholders and for the management teams, by the way, of those companies.

Speaker 3

And anytime we have done it, It's always been in sync with the management teams of our portfolio companies, which as you know is something that's really important to us. So right now, I don't see that necessarily. And then my only other commentary on the market in general, as I mentioned briefly, As you know, there seemed to have been really kind of a weird last half of last year where a fair number of deals were in the market, then they got pulled, etcetera, and they seem to be slowly coming back right now. So we are seeing a bit of, again, of a pickup at least in the deal flow. I will tell you that the ones that we are looking at and we are serious about, as usual, we are going in with values that make sense for us And that seems to be working reasonably well.

Speaker 3

Others, frankly, there's still some crazy values that are at least being paid and we can't compete in those, not going to compete in those, but generally, I'd say the outlook looks reasonably good.

Speaker 5

Okay. That's interesting and helpful. Dave, my last The more liquid markets for credit have reopened as we all know. Are you concerned about refinancing risk for some of your better performing investments? In other words, Could some of these investments go to other suppliers of debt capital at cheaper rates than you're offering them and You'd be taken out?

Speaker 3

Yes. No, it's a great question and obviously something we've always looked at and have looked at over many, many years. And I can only think of one company where that actually happened with an unusual circumstance. I would say the fact that our capital is really, as you know, is a combination of the debt and the equity, right, in the transaction. So the effective yield, so to speak, is Comparison to say what just pure debt might be even with this environment where debt is coming down, I would say we're still very competitive in that regard.

Speaker 3

The relationship with the portfolio companies is probably as important as anything. And then the other aspect of that is while, as you point out, the spreads might be getting a bit tighter, meaning interest rates are coming down, the availability still I think, at least What we are seeing is not just all of a sudden that floodgates have opened, so to speak, right? And you can get all the capital you need at low rates. So right now, Honestly, I am not seeing any challenges for our portfolio companies in that regard. Could it happen?

Speaker 3

Sure. But I am not seeing Right now, and so I'm not overly concerned we're going to get taken out in any situations that we may not want to be taken out of.

Speaker 5

I understand. Those are all my questions this morning. I appreciate your time. Thank you. Thank you, sir.

Speaker 3

Thank you.

Speaker 1

Okay. Any questions? Any further questions from people?

Operator

Our next question comes from Kyle Joseph from Jefferies. Please proceed.

Speaker 6

Hey, good morning. Thanks for taking my questions.

Speaker 3

Just want

Speaker 6

to get your thoughts on leverage. Obviously, you guys have a lot of dry powder right now, and it sounds like you're getting more About deal flow into 2024, but just talk about where you're comfortable taking leverage to if do get that deal flow or is it really just more a function of the market and what deals get done?

Speaker 4

Kyle, good morning. I think What you said, a function of the market and what deals we get done. So as you know, we keep a pretty conservative leverage I think compared to the bigger BDC peer group, and that's something we do believe is really important, but it's also to provide us the flexibility to support that potential new deal flow. So we want to be able to be in a position where if we need to fund new deals, we have the ability to take on additional borrowings and it doesn't threaten breaking that 150% test.

Speaker 3

Yes. And Kyle, I might just briefly add to that. And as Rachel said In her part of the call, we've had a fairly successful ATM program, of course, which we sort of put in place being able to and we're very rigorous on what The cushion is, if you will, relative to NAV and we're going to stick with that. So we're not going to do anything crazy there. But it gives us the ability To especially looking forward and the expectation, hopefully, we can start doing some newer deals and obviously using some of this leverage that we're likewise providing the support from the from the equity side to, as Rachel said, be able to maintain a level of the coverage ratio that's not going to put us at risk in that regard.

Speaker 6

Got it. Very helpful. And then one follow-up for me, just talking about the competitive environment of essentially lower middle market private equity. Haven't you seen obviously you expect the overflow to pick up, but On the other side would be competition. Has the market really changed as we've seen rates go from essentially 0 to Substantially higher even with some potential cuts this year?

Speaker 3

Yes, I would say the market Really what we're seeing and what kind of got reflected I think near the end of last year at least from our perspective may not be across the Board, but I can only speak from our vision is that the rates coming going up, of course, help to slow down the ability for not only the cost, but also the amount of leverage was being available. So those deals I think that we're getting done were to some Perhaps being over equitized, if you will, to get the deals done. We're seeing that might change a little bit, but Not to the point where I think it's again going to be all of a sudden leverage goes back to really high multiples of EBITDA, I think, is still going to be fairly cautious and careful. And again, I think, higher than we think it's worth. Clearly, there are folks willing to do those deals.

Speaker 3

And if they are, I think they are having to do a little bit more equity than debt. I don't think the Debt side of the equation has gotten to the point yet where we're back to much higher leverage per transaction even at these higher values, if that makes any sense?

Speaker 6

Yes, very helpful. Thanks for taking my questions.

Operator

Our next question comes from Bryce Roe from B. Riley Securities. Please proceed.

Speaker 7

Thanks a lot. Good morning.

Speaker 3

Hey, Bryce.

Speaker 7

This is Dave. Hey, how are you? Good. Awesome. Hey, I wanted to ask about The upsized credit facility you've had, I guess, some changes.

Speaker 7

I think you took The available amount down last quarter and obviously it's moved back up. So maybe there was a bit of a process to get to that higher level. Could you just, if you can, kind of talk about that process and did you add some banks to the facility? Just any kind of detail there would be helpful.

Speaker 6

Thanks.

Speaker 4

Yes, absolutely. Good morning, Bryce. So yes, we were really excited to announce yesterday that we have expanded the credit facility up towards $200,000,000 When we went through our regular amendment process, which closed in October at the beginning of the quarter and we weren't able to announce In our last earnings call, we had taken it down to $135,000,000 and that was a result of just losing a couple of banks during that process. We were working on this expansion. Unfortunately, we couldn't get the 2 to close at the same time.

Speaker 4

So we were able to increase the facility by bringing in a new bank, we brought in 5th Third, and we also were able to increase some of one of the other banks commitments as well to get back up to that $200,000,000 amount. And we believe this additional capacity is really important in

Speaker 7

Rachel. And then maybe one for Dave. You had this add on opportunity for an existing portfolio company here this quarter. Can you just talk a little bit about that? And then other maybe other opportunities in the pipeline for your existing portfolio companies to do add on acquisitions?

Speaker 7

Thanks.

Speaker 3

Sure. So that particular one, Bryce, was a company that we've had in the portfolio for a few years. It's somewhat of an industrial based business. We've been really improving it all around between both from the overall management level, etcetera. And we had an opportunity to acquire Fairly substantial size business to bring into it, which was really integrated very nicely with the product and it not only gave us additional capacity manufacturing capacity, but also distribution and access in actually in Europe and other parts of the country.

Speaker 3

So we took our company From order of magnitude, now I'm not going to give you specifics, but order of magnitude about $40,000,000 $50,000,000 in revenue to over $100,000,000 in revenue and very significant increase in the EBITDA. And I would say that the integration has come along really well. So we've clearly enhanced the overall value. So I feel really good about that transaction, without, by the way, getting it that particular company in a very highly levered situation relatively speaking. So really a really good opportunity.

Speaker 3

So we'll continue, and yes, some of our existing portfolio companies are seeing some opportunities like that, and we continue some of them on the smaller end. Some of them do not require additional financing from GAIN per se because their own balance sheets are strong enough to handle some smaller add ons where it really makes some sense, whether it be a product line or what have you. And so, yes, we continue to do that because frankly, as I said in my remarks and you would appreciate if we can keep adding value to an existing portfolio company, again, where overall we know it and it's accretive, we're happy to do that. One other company, another one of our portfolio companies actually where they made a fairly good sized acquisition. We were able to go back in as well and help to add to that particular investment as well.

Speaker 3

And so, yes, so long short answer is yes, we're going to continue looking at those opportunities.

Speaker 7

That's great. I appreciate the time.

Speaker 3

Yes, sir. Thank you. Question?

Operator

This concludes our question and answer session. I would like to turn the floor back over to David Gladstone for closing comments.

Speaker 1

Thank you. That was a good quarter and I think when we put the numbers together for the year ended March 31, it's going to be one of our Best years ever and it will probably be over $1,000,000,000 in assets by then. But anyway, I don't have a crystal ball, so I have no idea where we're What's really going to happen, but we're guessing that things are back strong and growing. A lot of people in investing world are thinking that business development is like this one, a place to put some money. But thank you all and

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