Gladstone Investment Corporation (NASDAQ:GAIN) Q3 2023 Earnings Call Transcript

Gladstone Investment Corporation (NASDAQ:GAIN) Q3 2023 Earnings Call Transcript February 2, 2023

Operator: Greetings and welcome to the Gladstone Investment Third Quarter Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Chief Executive Officer, David Gladstone. Thank you. You may begin.

David Gladstone: Well, thank you very much and welcome to all of you coming in to this call. This is a good call coming up. So hope you stay tuned through the whole thing. This is the third quarter report for fiscal year 2023 this quarter ended December 31. So we are a little bit for further away from that. Earnings and conference call for shareholders and analysts of Gladstone Investment listed on NASDAQ trading symbol GAIN for the common stock and then we have two registered notes, one under GAINN and GAINZ and thank you all for calling in. We are always happy to provide an update to our shareholders and the analysts who call in provide a new point of entry in terms of information about the company. Two goals for this call, first, help you understand anything that’s happened in the past through December and give you a current view for the future.

Now, we will start out not with our General Counsel this time, but with his right hand man and Eric is going to do the Michael LiCalsi’s call. Go ahead, Eric.

Eric Purple: Good morning, everyone. Today’s call may include forward-looking statements under the Securities Act of 1933 and 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. 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 our Forms 10-Q, 10-K and other documents we filed with the SEC from time-to-time. These can all be found on the Investors page of our website www.gladstoneinvestment.com or the SEC’s website 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 future results. Please take the opportunity to visit our website, www.gladstoneinvestment.com, sign-up for our e-mail notification service. You can also find us on Twitter @GladstoneComps and on Facebook, keyword, The Gladstone Companies. Today’s call is simply an overview of our results through December 31, 2022. So we ask you to review our press release and 10-Q both issued yesterday for more detailed information. And I will turn it over to Dave Dullum, President of Gladstone Investment.

Dave Dullum: Thanks, Eric and to everyone out there listening in we appreciate you being here. We are pleased to report that GAIN did indeed have another good quarter for this part of the year €˜23 quarter end 12/31, including in this very challenging period obviously of rising interest rates and inflationary costs. Our portfolio companies are meeting these challenges and we must remain vigilant and cautious not only with our portfolio management of these companies, but also with our new acquisition activity. We ended the fiscal third quarter to 12/31/22 with adjusted NII of $0.30 per share, which is slightly up from $0.29 per share in the prior quarter. And you will hear more about this detail from our CFO, Rachael Easton shortly.

But this is good because we are also continuing the progress to our expectations for a strong fiscal year ending 3/31/23 and beyond that with future earnings. Total investments at fair value at 12/31/22 increased to $760 million from $738 million at the 9/30 quarter end. And this was primarily due to successful deal activity in the quarter. We did invest $15.5 million in a dividend recapitalization as we call it of one of our existing portfolio companies. And in connection with this investment we received dividend income of $4.5 million and recognized a realized gain of $13.4 million and increased our debt investment in that company at the same time up to $40.5 million. So it accomplishes a few things, increasing our investment in a really good company, but also able to harvest income and also capital gains and these opportunities may present themselves from time-to-time and we will pursue them, because they do allow us, as I mentioned, increase our investment in a company where we know the management team, we know the business and we have a strong belief in its future.

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So with a buyout market still pretty frothy, this is a good way if the opportunities present themselves to create value with the portfolio and also at the same time obviously reward our shareholders. During the quarter, we also invested an additional $8.4 million to fund an add-on acquisition to one of our portfolio companies. This actually is also a good opportunity for us with a number of our portfolio companies as we grow them and build them and we will continue to fund add-on acquisitions. We did exit one investment with our debt investment being repaid and we received success fee income of $1.1 million on that particular investment. Previously announced during the quarter we did increase our monthly dividend by 6.7% to $0.08 per share, which is up from $0.075 per share for a new annual run-rate of $0.96 per share.

We also paid a supplemental distribution of $0.12 per share in December of 2022. Subsequent to the quarter end, we declared a supplemental distribution of $0.24 per share, which will be paid in March of 2023. We currently anticipate being able to continue funding these supplemental distributions and they come from the recognition of realized capital gains on the equity portion and other future exits to compensate from other recapitalizations. Our Ohio focused strategy continues to successfully generate gold income from all the distributions to shareholders and of capital gains on equity, which allows us to make these supplemental distributions. And this is our game plan. Now, we did experience a very small decline in valuations in the aggregate across our portfolio.

This was primarily a result of declining valuation multiples even though there were increases in the actual EBITDA at many of our portfolio companies. Our balance sheet continues to be strong, low leverage, very positive liquidity position with significant availability in our credit facility. And this will allow us to continue providing support to our portfolio companies for add-on acquisitions and interim financing if the need arises, while actively seeking new buyout opportunities and allowing us to grow our assets. So looking forward, even though there does seem to be some decline in the multiples being used to determine the values of buyouts, the market is still very competitive, being strong, and a significant liquidity in the buy-out funds who we compete with.

But we will remain selective while aggressively seeking new acquisitions and we will be patient in our diligence and our review process. So briefly in summing up the quarter and looking forward, we believe the state of our portfolio is very good from a credit perspective. We have a strong liquid balance sheet. We have an active level of buyout activity and continued prospect of good earnings and distributions over the next year. So with that, I am going to turn it over to our CFO, Rachael Easton to go into some more detail. Rachael?

Rachael Easton: Thanks, Dave. I will start with a summary of the fund’s operating performance for the quarter ended December 31, 2022. In the fiscal third quarter of FY €˜23, we generated adjusted net investment income of $10 million or $0.30 per share, up from $9.7 million or $0.29 per share in the prior quarter. We continue to believe that adjusted net investment income, which is investment income, exclusive of any capital gains based incentive fees is a useful and representative indicator of our ongoing operations. In the fiscal third quarter of FY €˜23, we generated total investment income of $21.6 million, an increase compared to $20.8 million in the prior quarter. The $0.8 million increase in total investment income during the quarter was primarily due to an increase in overall yields on our debt investments driven by an increase in LIBOR as well as interest income on additional debt investments made during the current quarter.

The increase in total investment income was offset by an increase in net expenses to $13 million from $9.4 million in the prior quarter primarily due to a $3.1 million increase in accrued capital gains based incentive fees due to the net impact of realized and unrealized gains and losses as required under U.S. GAAP. As a result, net investment income for the quarter ended December 31, 2022 declined to $8.6 million or $0.26 per share from $11.4 million or $0.34 per share in the prior quarter. During the quarter, one portfolio company was moved to non-accrual status and we believe it will be back to paying interest in the next couple of quarters. We now have three portfolio companies that are on non-accrual status and we will continue working with these companies to get them back to non-accrual status when possible.

We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. We have long-term capital in place and at December 31, 2022 had over $150 million available on our $180 million credit facility. Additionally, we raised approximately $3 million in net proceeds under our common stock ATM program. Overall, our leverage is low with an asset coverage ratio at 12/31/2022 of 250.5%. Our NAV per share increased during the quarter to $13.43 per share at 12/31/2022. This is compared to $13.31 per share at 9/30/2022. The increase here was primarily driven by $8.6 million of net investment income, $3.8 million of net realized gains on investments, $3.4 million of net unrealized depreciation on investments, and $3 million of proceeds under our ATM program.

These amounts were then partially offset by $12 million of distributions that we paid to common shareholders. Consistent with prior quarters, distributable book earnings to shareholders remained strong. During the quarter, we increased our monthly distribution to $0.08 per share for a new annual run-rate of $0.96 per share and we paid a $0.12 per share supplemental distribution in December 2022. In January, we declared a $0.24 per share supplemental distribution to be paid next month in March 2023. Using the monthly distribution run-rate of $0.96 per share per year and $0.48 per share in supplemental distributions that have been paid or declared for the fiscal year, our aggregate fiscal year distributions would total $1.44 per common share or yield about 10.5% using yesterday’s closing price of $13.70.

This covers my part of today’s call. Back to you, David.

David Gladstone: Thank you very much. It’s very nice, Rachael and nice that Dave and Eric both provided more information to our shareholders. This call plus the 10-Q filed at the SEC yesterday, you can also find it on our website surely brings everybody up to date. The team again has reported solid results for the quarter believe the team that is in a great position to continue success through the remainder of our fiscal year, which ends in March 31, 2023. Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from capital gains. The team hopes to continue to show strong returns for the investment of the fund. Folks, you are now getting $0.96 per year, that’s a 7%, nice 7% yield and then if they can pay supplementals brought it up to 10.5% for this year.

So great performance back up the truck, buy a lot of shares, because I think we’re strong. You have been paying dividends for how long Dave? About 200

Rachael Easton: 227.

David Gladstone: 227, 227, that’s just fantastic. And I think all of you know the team here is presented to you our plan for going forward and paying dividends to shareholders. So now let’s have some questions from our analysts and shareholders. And operator, if you will come on and give them the signal on how to do that?

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Q&A Session

Operator: Thank you. Our first question has come from the line of Mickey Schleien with Ladenburg. Please proceed with your questions.

Mickey Schleien: Yes, good morning, everyone. Dave, I understand that you said in the prepared remarks that the market for buyouts remains frothy, but are you seeing any improvement in opportunities available to you given all the risks that and headwinds that we are seeing in the market currently?

Dave Dullum: Hey, Mickey. Good morning. So the short answer is we are seeing opportunities. There are still good companies out there I’d say that we have seen even though I say frothy, frothy being defined really as from a competitive perspective still a lot of money out there to be put to work, so as a result of that the companies that are coming to market represented by good quality investment bankers, we are still seeing fairly aggressive I would call it multiples from a valuation standpoint. I would also say though that to some degree that the volume actually overall has come down slightly. There seems to be a little bit of a holding pattern right now. So some companies that perhaps might be coming to market, they are kind of holding, just to be sure, as you just sort of reflected on seeing how the earnings are going to look for the rest of the year so to speak.

So instead of getting into a conversation about a reduced valuation is maybe better to hold and just wait and see how the year evolves. So all of that said, there still are good companies, we are in the process right now with a number of what we call indications of interest on some pretty decent sized businesses for us as well as actually moving into a couple of letter of intents, which means the process starts for the intense due diligence obviously that we do. So if I hope and we expect that we will do a couple of pretty decent deals this year, I think that’s highly likely. And but again, as you well know, we are going to be very careful with our valuation metrics, because we do the debt and the equity. And we have got to be careful about that.

Mickey Schleien: Yes, I agree and I appreciate that. Dave, I have a few questions about portfolio credit quality given the difficult outlook for the economy so bear with me here. When did you place Edge on non-accrual? And did you reverse any previously accrued interest income on it?

David Gladstone: Rachael, you want to answer that?

Rachael Easton: Yes, we placed Edge on non-accrual at the beginning of the quarter so as of October 1 and we reversed 1 month.

Mickey Schleien: You reversed a month, okay. And Dave, I mean, broadly speaking, what are the issues that Edge is confronting? Clearly, the previous valuation was already stressed and now it’s on non-accrual, but you mentioned that you are hoping for a positive outcome in a couple of quarters, can you €“ what insight can you give us into that company?

Dave Dullum: Well, interestingly enough, Mickey, some cases we have and this is one of those where actually the company is generating €“ has cash generating cash. We might have another lender in there and there is some constraints as a result of the fixed charge coverage metrics that say the lender would be looking at. So while the company indeed might be in a position to pay our interest. So from time to time, we may have to do that. Fundamentally, I would say that the company actually is performing quite well going into the beginning of this year. And as Rachael pointed out, I would hope and expect that we indeed somewhere in the next few quarters would be able to bring that back on accrual status.