Gladstone Investment Q4 2025 Earnings Call Transcript

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May 14, 2025

There are 7 speakers on the call.

Operator

and welcome to Gladstone Investment Corporation Fourth Quarter and Year End Earnings Conference Call. At this time, all participants are in a listen only mode. A 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. Please go ahead.

Speaker 1

Well, thank you, Donna, and good morning to everybody out there who's listening to this. This is David Gladstone, Chairman of Gladstone Investment. This is the earnings conference call for the fourth quarter and fiscal year end 03/31/2025 for shareholders and analysts of Gladstone Investment listed on NASDAQ under the trading symbol GAIN or capital gains for us for our common stock. And then we have some preferred stock GAINN and GAINZ and GAINL and GAINI. And these are the four registered notes that we have.

Speaker 1

And thank you all for calling in. We're always happy to provide updates to our shareholders and analysts and provide our views on the current business environment. Two goals for this call is to help you understand what happened and also give you some current views on what we think the future will be like. Now we hear from our General Counsel and Secretary, Michael LiCalsi. Mike?

Speaker 2

Yes, that's right. Speaking of the future, 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, although they are 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 expressed or implied by these forward looking statements, including all the risk factors that we have in our 10 Q, 10 ks and other documents that we file with the SEC. You can find them all on the Investors page of our website, that's gladstoneinvestment.com, or you can even find them on the SEC's website, which is sec.gov.

Speaker 2

Now 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. Please also note that any past performance is never a guarantee of future results. We ask that you visit our website once again to gladstoneinvestment.com. Sign up for our e mail notification service while you're there. You can also find us on Twitter, keyword there is GladstoneComps.

Speaker 2

And on Facebook, the keyword is The Gladstone Companies. And today's call is an overview of our annual results through March 3125. So please review our press release and Form 10 ks for more detailed information. With that, I'll turn it over to Dave Dullum. He's the President of Gladstone Investment.

Speaker 2

Dave?

Speaker 3

Hey, Mike. Thanks very much. Good morning to everyone. We are again pleased to report that GAIN did produce very positive results for the fourth quarter and the fiscal year ended 03/31/2025. For the fiscal year, we generated adjusted NII of $0.97 per share, which is earning our $0.96 per share annual dividend.

Speaker 3

We also increased the total fair value of our portfolio at threethirty onetwenty 5 to $979,000,000 which is up from roughly $921,000,000 at the prior year end, though slightly lower than the 1,100,000,000 at the end that we reported at the end of last quarter. Now this slight decrease quarter over quarter in assets actually really resulted from a couple of positive things. One, we had an increase in assets from new buyouts that we made, but then we reduced that by the successful exit of one of our existing portfolio companies, which actually reduced while reducing the assets also generated significant realized capital gains of $19,800,000 We also, of course, had some movement in the net valuation of our portfolio, certainly year to year and quarter over quarter, a number of which were a function of some increases in the multiple and slight decreases in EBITDA, but all of those movements were certainly all positive in some regard. During the year, we did add experienced talent to our investing team, which is in support of our continuing portfolio growth and being able to help manage our current portfolio of 25 operating companies. For the year, we invested a total of $221,000,000 which is up from $184,000,000 in the prior year.

Speaker 3

This included investments in four new portfolio companies, some add on investments and we also completed a dividend recap, which was a positive thing of one of our portfolio companies, Educators Resource, which generated both dividend income and provided for an additional interest bearing investment in that company. So throughout the year, we maintained our monthly distribution to shareholders of $08 per share, which is a $0.96 per share I mentioned. We paid a supplemental distribution of $0.70 per share and then another $1.66 excuse me, which aggregated to $1.66 per share for the year. Further in April, subsequent to the year end, we declared an additional $0.54 per share supplemental distribution. Now these supplemental distributions I've said before and those that we made previously are a direct result of our buyout strategy and the goal of rewarding our shareholders with meaningful supplemental distributions from the realized capital gains, which are generated on the equity portion of our exits, while we still maintain and try to grow our monthly distributions from operating income.

Speaker 3

Just to recap, since inception in 02/2005 and through threethirty onetwenty five, we've invested in 62 buyout portfolio companies for an aggregate of approximately $2,000,000,000 exited 33 of these companies. This resulted in total investments, which are currently valued, as I mentioned, at $979,000,000 while generating approximately $353,000,000 in net realized gains and another $45,000,000 in other income on exit. Turning to the outlook, which is obviously important these days. From our perspective, there continues to be good liquidity in the M and A market. It is a very competitive environment, though we have now added variables, of course, regarding tariffs, which are impacting the analysis, which we have to do when we evaluate a new opportunity.

Speaker 3

We are though competing effectively for new acquisitions that we believe do fit our buyout model, while we're being careful in assessing that risk and forecasting the tariff impact on costs, customer demand and supply chain dynamics. Obviously, this is not easy, but we have to take a hard look at these actual aspects of evaluating a new deal. Now not every business is affected in the same manner and that of course creates both opportunity and adds to

Speaker 4

the uncertainty. With that said though, we are very far along and expect to close two new acquisitions shortly,

Speaker 3

if not by the end of this quarter. We also are in various stages of review and diligence on a number of new opportunities and I am cautiously optimistic for our new buyout activity during the year. Looking at our existing portfolio, we do have a few companies that are consumer focused. And while they've had very good results to date, we are cautious due to the tariff costs on the ultimate consumer prices that may have to be passed through and therefore, the demand and the margin impact on those companies. We are working with all of our companies in evaluating supply chain alternatives and various production strategies so that we can navigate the current environment.

Speaker 3

The recently announced pause a few days ago on tariffs does bring a bit of relief, although we have to see what the permanent solution will be. So again, we will continue to be cautious, but we believe we have a fairly good handle as it impacts our existing portfolio companies. So in summing up the quarter and the fiscal year and looking forward, our current portfolio, we feel, is in good shape. We have a strong and liquid balance sheet, a good level of buyout activity and then with the prospect of continued good earnings and distributions over the next year, albeit having to navigate the challenges we face due to the uncertain economic landscape. So I'll turn it over now to our CFO, Taylor Ritchie, to go into more detail on the actual results.

Speaker 3

Taylor?

Speaker 4

Thank you, Dave, and good morning, everyone. Looking at our operating performance, we had a strong finish to the fiscal year, generating total investment income of $93,700,000 up from $87,300,000 in the prior year. This increase was primarily the result of a $4,500,000 increase in dividend and success fee income following the successful exits of two portfolio companies, as well as a $1,800,000 increase in interest income. The interest sorry, the increase in interest income was primarily due to the increased weighted average principal balance of our interest bearing portfolio, partially offset by a decrease in the weighted average yield. Additionally, we ended the year with adjusted net investment income of $35,500,000 or $0.97 per share, up slightly from $34,500,000 or $1 per share in the prior fiscal year, fully covering our annual regular monthly distributions of $0.96 per share.

Speaker 4

Focusing on the fourth quarter results, we generated total investment income of $27,500,000 up from $21,400,000 in the prior quarter, primarily due to an increase in dividend and success fee income as a result of the exit of our investment in Nocturne and our recapitalization of Educators Resource as well as an increase in interest income. Net expenses for the quarter were $20,300,000 up slightly from $20,200,000 in the prior quarter. This increase was primarily due to an increase in interest expense and a decrease in credits to fees from advisor, which were driven by the significant new investment activity in the prior quarter. Additionally, base management fee expense, income incentive fees and bad debt expense increased compared to the prior quarter. These expense increases were partially offset by a decrease in capital gains based incentive fees resulting from the net impact of realized and unrealized gains and losses during the quarter and accrued as required under U.

Speaker 4

S. GAAP. This resulted in net investment income for the quarter of $7,200,000 compared to $1,200,000 in 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 $9,400,000 or $0.26 per share, up from $8,600,000 or $0.23 per share in the prior quarter. We continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations.

Speaker 4

Consistent with the prior quarter, as of 03/31/2025, we continue to have four portfolio companies on non accrual status. Overall, there are no portfolio wide credit concerns and we continue working closely with these companies and their management teams to get them back on accrual status or exit the investments when possible. In particular, we continue to see improvement in two of these portfolio companies as they are back to generating profit. Excluding the $24,300,000 reversal of unrealized appreciation upon the exit of Nocturne, valuations in the aggregate were up $14,100,000 across the portfolio. This unrealized appreciation was driven by higher valuation multiples across portfolio and increased performance at a number of our portfolio companies, which was partially offset by decreased performance at a few of our other portfolio companies.

Speaker 4

Our NAV increased to $13.55 per share compared to $13.3 per share at the end of the prior quarter. The increase was primarily the result of a $0.57 per share of net realized gains and $0.20 per share of net investment income. These increases were partially offset by $0.28 per share of net unrealized depreciation and $0.24 per share of distributions paid to common shareholders during the quarter. We believe that maintaining liquidity and flexibility to support and grow our portfolio is key to our continued success. During the year, we issued $126,500,000 of publicly traded notes and completed the upsize of our credit facility to a total commitment of $270,000,000 As of yesterday's release, we had $214,000,000 in availability on our line of credit.

Speaker 4

Additionally, we raised approximately $2,000,000 in net proceeds under our common stock ATM while prices were accretive to NAV. We believe that the recently issued notes, the additional available capital from our line of credit and the ability to raise equity capital through our common stock ATM will allow us to drive portfolio growth opportunities emerge and to weather any potential economic slowdowns as a result of tariffs or other economic uncertainties. Overall, our leverage remains in a strong position with an asset coverage ratio as of 03/31/2025 of 204% providing cushion to the required 150% coverage ratio. Consistent with prior quarters, distributable book earnings to shareholders remained strong. We ended the fiscal year with $55,300,000 or $1.5 per share in spillover, sufficient to cover our current monthly distribution of $08 per share for an annual run rate

Speaker 5

of

Speaker 4

$0.96 per share and the recently declared $0.54 per share supplemental distribution to be paid in June. We will look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of future exits. Using the monthly distribution run rate of $0.96 per share per year and $0.70 per share on supplemental distributions paid in the fiscal year twenty twenty five, our aggregate estimated fiscal year distributions would yield about 11.3% using yesterday's closing price of $14.05 This covers my part of today's call. I'll now hand it back over to you David to wrap us up.

Speaker 1

All right, Taylor. Very nice. You and Dave and Michael, good information to the shareholders that you've been delivering in this call and the 10 ks filed with the SEC yesterday should bring everyone up to date. Michigan has reported solid results for the quarter ending 03/31/2025, including new investment activity and significantly realized gains generated during the year. We believe the team is in a great position now continue these successes.

Speaker 1

I often ask myself, I wonder if anyone knows that there's a $0.54 dividend that's record date is June 4 and the payment date is June 13. And when you add that to what's being paid is the monthly, you get a great return. I believe Gladstone believe attractive investment for anyone seeking continuous monthly distributions

Speaker 1

and supplemental distributions from the potential capital gains and other income that's generated by this company. Team hopes to continue to show you a strong return on your investment just like we did last year. But now let's stop and ask the operator, Donna, to let some people come in and ask us questions. We like all your questions. Donna?

Operator

Thank you. The floor is now open for Our first question is coming from Mickey Schleien of Ladenburg. Please go ahead.

Speaker 6

Good morning, everyone. Dave, I appreciate your comments on the tariff issue, But I was hoping you could give us some sense of on a quantitative basis, how much of your portfolio does have exposure to tariff risk?

Speaker 3

Yes. I guess, Mickey, the correct answer is probably most of them in some regards. I mean, certainly, we have a couple of companies that currently have produced and manufacture a good part of their product in China, some of that's already being shifted, had been working on that. That's a relatively small portion actually of the portfolio that are directly affected that way. The others that could be impacted were obviously things around steel, issues like that.

Speaker 3

So I guess, again, in fairness, the majority of them, but frankly, with the exception of one or two, none that we are, I would say, overly concerned about. Those that have that direct impact, again, have already started working on and had been working on advancing, obviously, product ahead of the tariffs to some degree. So there's been a buildup of inventory, which obviously affects working capital, but in a positive way before some of these prices hit. And then obviously, how the supply chain as things start to hopefully unravel here over the next number of months. So long answer, but again, everyone is going to be impacted in some regard, but the ones where they're directly producing a product almost exclusively in China, those are just a few companies and we've already been taking some things to help that.

Speaker 3

And these companies are doing well regardless, actually been doing very well going in the year. So I'm not overly concerned per se about those in that regard, but we have to work through being sensitive to it and alternatives.

Speaker 6

Okay. I think I understand. Thanks for that. And Dave, in the consumer sector, how much exposure does the portfolio have to lower income customers, which seems to be the groups that are the weakest?

Speaker 3

Say that again about what about customers?

Speaker 6

So in the consumer sector, how much exposure does the portfolio have to lower income customers?

Speaker 3

Lower income. I wouldn't honestly know how to answer that question. I mean, when you look at the consumer type products we have, things like specialty toys, products that go through people like Walmart, I wouldn't necessarily classify those as higher income or lower income per se. So I don't think we have any that I would really consider. It's not like their foodstuffs, as an example, that would go to a, let's say, again, I hate to use expression, a much lower income type category.

Speaker 3

We don't have that kind of exposure. I would say these are more normal type, maybe some discretionary to some degree, which would affect obviously various folks. But again, the movement in tariff costs to our companies that then might or might not get passed, and we're not passing everything through from a dollar perspective actually on each item is actually relatively small in a sense, right? Even though I know 145 percent tariff sounds high, especially if we go back to 40% tariff, a product that we might be selling at $10 now is going to be more like maybe $12 to $14 So it's not again like we're talking about items that are going to be just egregiously overpriced and therefore no one's going to take them on.

Speaker 6

I understand. Dave, a couple of quarters ago, you were somewhat optimistic on the outlook for hops going back on accrual around now. Obviously, that hasn't happened yet. I think there may have been something in the prepared remarks, but there was some background noise, so it was hard to see hard to hear. Could you update us on the outlook for Hobbs and maybe your other nonaccruals?

Speaker 3

Yes. So I think the comment that was made that Taylor made is that we still have four companies that are nonaccrual. And actually, three of them are all profitable, including Hobbs. Hobbs has continued to improve its profitability. We are still, yes, optimistic we're going to be able to bring them back on to accrual.

Speaker 3

Probably, again, things do move around a bit, but they're actually the way they're performing, I'm hopeful we might bring them back on accrual by the end of this year. And then two of the other companies are profitable, moving in the right direction and some things are going on with those companies that again, if not back on accrual, they're certainly not getting worse, if you will, in that regard. So yes, I continue to be, as I say, optimistic. But overall, it's not impacting and has not impacted necessarily the results of the portfolio overall and the results that we actually have achieved in spite of that.

Speaker 6

And Dave, when you talk about profits, you referring to EBITDA or net income or operating income? What are you referring to?

Speaker 3

Yes. We look at generally EBITDA because that's obviously an important thing. So I look at that because that's cash flow, right, basically for these companies. And so when I refer to profitability, yes, that's obviously, gross margins improved. Overall operating income has improved.

Speaker 3

But the key thing then is, obviously, as we look at it in a way we because that's how we generally value our companies as well is through the EBITDA and how that impacts actual cash flow, which indeed is also what allows for the payments, say, of our interest and what have you as we look at a company like Hobbs as it continues to improve. In fact, we're even looking at some add on things to do with Hobbs. So fundamentally, yes, it's well managed now. It's doing really well. And I think it's going to be good over time.

Speaker 6

So generally optimistic on the non accruals, but on the flip side, what's going on with Horizon still marked at a fairly distressed level, doesn't seem to be going in the right direction?

Speaker 3

Actually, Horizon is very profitable actually. And its EBITDA, again, has continued to improve. Horizon, you may or may not recall, we actually did a dividend recap with Horizon back just about not quite two years ago, one point years or so ago and about two years ago and which was a positive event, right? And when we did that, we obviously put leverage, more leverage on the business. We effectively had some issues around some of their customer base.

Speaker 3

Remember, sell they service people like Hertz, etcetera, in the car rental space. And we did see some drop off in the EBITDA relatively speaking. It's again still positive. So as a result of that, we've been working on just kind of redoing a bit of the of that leverage scenario that we did when we took the dividend recap, so we can give the company the ability to continue to grow and perform as we like it. So yes, it got hit from a mark standpoint because of multiple and also, again, it's EBITDA being down relatively speaking.

Speaker 3

But again, it's performing under the circumstances in pretty decent shape.

Speaker 6

Understand. Those are all my questions, Dave. Thanks for your time this morning.

Speaker 3

Yes, sir. Thanks.

Speaker 1

Hey, Donna, do we have another question?

Operator

We do. The next question is coming from Eric Zwick of Lucid Capital Markets. Please go ahead.

Speaker 5

Thanks. Good morning, everyone. Wanted to start with just a follow-up to one of your prepared remarks where you indicated that you're cautiously optimistic for buyout activity in the current year. I'm wondering if you could maybe just kind of address the two components of that. One, what you're seeing that gives you some optimism?

Speaker 5

And two, what gives you a little bit of a cautious stance, whether it's more than just the current market volatility and economic uncertainty?

Speaker 3

Sure. Thanks, Eric. Glad you're here. So the cautiously optimistic is based on the fact I mentioned in my remarks, we've got a couple that we're close to actually closing that which is a good thing. And secondly, from our standpoint, obviously, we always are looking at our, I'll call it backlog of companies that we have in for us a couple of important categories are what we call initial review, where we've actually taken a look at some material, whether it's from an investment banker or other sources.

Speaker 3

We've gotten interested enough. We probably met the management, talked to the management team, and we're doing our evaluations and then moving forward to the stage that we might then put together what we would call a letter of intent, which would need to get approved by our investment committee to then, if that gets accepted from a valuation standpoint from the seller, move into the actual full board due diligence. So thinking about it that way, we have a couple right now that are actually in that are pretty close to being in that due diligence phase that we've received approval on moving forward and a number of others that are in that early initial review and where we've actually where we've initiated, again, what we call an indication of interest to the company in terms of what we're willing to pay. So that activity level is an important thing to look at. It's like you might call it a funnel, right?

Speaker 3

That's in we feel really in good shape. And the cautious reason or the cautious optimism is the companies that we are looking at that are filling that funnel are at values because of probably some of the economic uncertainty that our values that we believe make some sense. So the fundamentals of the business are still pretty good. Not all of them, as I mentioned, necessarily are impacted by the tariff. There are a couple we're looking at, and we're doing really thorough analysis around what the tariff impact could be and we've factored that into our evaluation.

Speaker 3

So we're not backing away just because, yes, there's a global issue and we've got to be concerned. We are concerned, but we're working to try to find those where we think it might make some sense. Keep in mind also our activity level is such that we don't we generally don't target doing six, seven, eight new acquisitions a year. We do really well as we did last year. We had a really good year, a couple of hundred million of new investments.

Speaker 3

And if we can be in that same general category, grow that number a bit, that's kind of where we want to be. So it's kind of in that context that we're able to the companies we're working on, the companies we're evaluating are all in that category of numbers that we believe those companies are good and well valued at. We're in a competitive position with them in the various stages. And as the next number of months go by, especially if we get some clarity, let's call it around the level of tariffs and we can factor that now into the math. That's why I feel like it's not like we're just closing, putting pencils down is expression we use and not doing anything.

Speaker 3

We're actually working pretty aggressively on trying to find closure opportunities. Long answer, I'm sorry, but that's kind of where how we see it.

Speaker 5

Yes. No apology needed. That was very thorough. I was going to ask about the impact of the current market volatility on valuation, you addressed that as well. So thank you.

Speaker 5

Maybe moving to educators resource and the dividend recap there, maybe if you can just walk me through the rationale for why this is the right time and strategy, what the new capital will help them to do? And maybe a second part, just are there any other dividend recap opportunities that you see in your portfolio today?

Speaker 3

Yes. As to the last part of the question today, I don't see any necessarily, but we're always obviously continuing to evaluate that. Keep in mind, when we do a dividend recap, we've done a few, we've not done great many, but when we do a dividend recap, it's usually around a couple of things. One, we have a management team that has got investment in the company, and it's an opportunity for them to get some liquidity. We like them.

Speaker 3

We like the basics and the fundamentals of the business. And so we collectively believe it makes sense going forward. In doing that, we then also, obviously, for us, are to have the opportunity to put in a bit more capital. Usually, it's in the form of some leverage, which obviously increases the opportunity for us to generate income on that incremental, call it, debt investment at the same time that we took out some money and either generated a cap gain. In the educator side, we didn't do it where we generated a cap gain per se, but we did generate incremental income for us, dividend income, which was a positive.

Speaker 3

And specifically in their case, the management team that when we bought the business some years ago, it was with a family team, really, really experienced, very good in this business. And frankly, it was we've been looking at the idea, would we exit the whole company, potentially sell it. We felt that frankly, the way things were going in the team, we liked it well enough that it was kind of a reinvestment decision. So we and the management team agreed to stay in, to recap it. As I mentioned, they took some money off, we took some money out and we keep going forward with the business.

Speaker 3

And yes, that's kind of where that one stands.

Speaker 5

Excellent. And last one for me, just I think I missed it in the prepared remarks. Taylor, think you mentioned the current spillover amount and I neglected to write that down fast enough. Could you repeat that please?

Speaker 3

Sure. So we ended the

Speaker 4

year with $55,300,000 of spillover, which is at the current level $1.5 per share. So that amount covers the current run rate for the monthlies of $08 per share, so $0.96 and our $0.54 supplemental that we're going to pay in June.

Speaker 5

Perfect. Thank you so much for taking my questions today.

Speaker 1

Thanks, Eric. And just to make one point here, I know we talk about buyouts. We're not in that giant buyout game, which seems to be stalled because there's no exit for them in the public marketplace. So there's a lot of people with investments in large buyouts that don't have any liquidity. We're not in that.

Speaker 1

We put something up for sale and usually get it sold pretty quick. That's just the difference in our business versus the giant buyout business that goes on in the marketplace. Any other questions?

Operator

None at this time, sir. I would like to turn it back over to you for closing comments.

Speaker 1

Okay. Thank you all for listening to our report. And unfortunately, we don't have enough questions. We wish you guys would dream up some more questions for us to answer. We are pleased to do that.

Speaker 1

And thank you so much for attending this meeting and we'll see you next quarter. That's the end of this call.

Operator

Ladies and gentlemen, thank you for your participation and interest in Gladstone Investments. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.

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