Gladstone Investment Corporation (NASDAQ:GAIN) Q4 2024 Earnings Call Transcript

Gladstone Investment Corporation (NASDAQ:GAIN) Q4 2024 Earnings Call Transcript May 9, 2024

Gladstone Investment Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Gladstone Investment Corporation Fourth Quarter and Year End Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

David Gladstone: Okay. Thank you, Latanya. That’s a very nice introduction and good morning to you all. This is David Gladstone, Chairman of the Gladstone Investment. This is the fourth quarter and fiscal year end March 31, 2024 earnings conference call for shareholders and analysts of Gladstone Investment. We’re listed on NASDAQ under the trading symbol GAIN for the common stock, and then we have three preferred stocks, GAINN, GAINZ, and GAINL, three other registered notes. So I’ll turn it over now to Michael LiCalsi, our General Counsel, and he’ll warm you up with some, no, he’s just going to give you the warning, go ahead, Mike.

Michael LiCalsi: Thanks David. Good morning, everybody. 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 and these forward-looking statements involve certain risks and uncertainties and other factors even though they’re 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 in our Forms 10-Q, 10-K and other documents we file with the SEC. You can find them on the Investor’s page of our website, gladstoneinvestment.com or on the SEC’s website which is www.sec.gov.

Then we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise shift as required by law. Please also note that past performance or market information is not a guarantee of any future results. Please take the opportunity to visit our website once again that’s gladstoneinvestment.com. You can sign up for our email notification service there. You can also find us on Twitter @GladstoneComps is the key word and on Facebook the key word is TheGladstoneCompanies. Today’s call is simply an overview of our results through March 31, 2024. So we ask you to review our press release and Form 10-K both issued yesterday for more detailed information. With that I’ll turn it back to Dave Dullum, President.

Dave Dullum: Hey, Mike. Thanks very much and good morning to all that’s on the call. First off, obviously, we are very pleased that we’re able to report GAIN, again, produced very good results for the fourth quarter and for the fiscal year ending in March 2024, which follows on the previous solid very, first few quarters we had for this fiscal year. So for the fiscal year, which did end 3/31/24, we generated adjusted NII of a $1.00 per share and increased the total fair value of our portfolio to $921 million, which is up pretty significantly from $754 million at the prior year end. Now, this growth, it’s a net result really of increasing our assets through new buyout activity and incremental financings for add-ons to existing portfolio companies while being reduced by one successful exit where we generated a significant realized capital gain of $43.5 million.

So for the fiscal year ‘24 to get to that net number, we invested a total of $184 million, which is up from $134 million in the prior year. Now, of this amount, roughly $61 million was invested in two new buyouts and an additional $123 million is invested as part of add-on investments or recapitalization event at some existing portfolio companies. Now just for clarification, these recap events were not for bad reasons. They were actually for opportunities for us to in fact take some cap gains, a little bit of income and still maintain a significant ownership interest in that particular portfolio company. They were actually on the, not buyouts I mentioned, there were two new companies there and, on this recap, and add-ons, there were actually four companies that were made up that grouping.

So we continue to pursue add-on opportunities as they do allow us to increase our investment in companies where we do know the management teams and obviously have a pretty strong knowledge of the business with a strong belief in its future and therefore are able to continue building value for future equity gains. So you should expect that we will continue to do these add-on opportunities going forward. And during the year, we did maintain our monthly distribution to shareholders, which was $0.08 per share or $0.96 per share on an annual basis. We also paid a total of $1.24 per share in supplemental distributions. So therefore we had aggregate annual distributions to shareholders of $2.20 per share for the fiscal year. Now, clearly these large supplemental distributions, which we’ve been able to build actually on over the years, demonstrating that we’re actually having success with our buyout strategy, which allows us to reward shareholders with these supplemental distributions coming from the realized capital gains on the exits that we take, in addition obviously to the income which we generate from our monthly distributions.

As our portfolio has matured, we’ve been at this since 2005, and the equity values have been, we clearly will be able to continue to constructively harvest these gains for the benefit of shareholders. As you all know, we are able to, because of our model, be in some of these companies for a long period of time and really, it’s to the benefit of shareholders that we’re not having to exit companies too rapidly unable to maintain them. So we will continue to balance the timing of the exits while maintaining the level of our assets that produce the income that we need to support the monthly dividend levels that we currently are able to have and hopefully over time continue to grow them. So actually since our inception in 2005 and through this 3/31/24 period, we actually invested in 58 buyout companies for an aggregate of approximately $1,007 million, exited 31 of these companies and this has resulted in our total assets growing to the $921 million I mentioned earlier while we generated approximately $290 million in net realized gains and about $42 million in other income on the exits of these companies.

Again, reinforcing our goal and our function as a fundamental private equity type fund but providing monthly distributions to shareholders as well as additional capital gains. Our balance sheet is strong. We’ve got low leverage. You’ll hear more about this from Rachel and we will continue providing support to our portfolio companies for the add-ons I mentioned, any interim financing if the need arises while we obviously continue growing the assets through the new buyout. So quickly looking at the outlook, I would say deal flow is strong. The backlog of new opportunities has been building and we’ve actually been hearing from the investment bankers and the other folks that we deal with in finding new opportunities that backlogs are building. I’d say the quality we’re seeing is okay frankly but the volume is clearly back to levels that we were seeing before.

So right now we’re actively working on some new buyout deals including add-ons as I mentioned and these are in varying stages of our buyout process which is where we put out what we call initial indications of interest. We then go on to what we call a letter of intent, an LOI and then obviously move into due diligence and as right now I would say we’re in pretty good phases with each of those and we may in fact hopefully have something we’ll be closing in the next say three months or so. So there is significant liquidity though in the market and it is a strong competitive environment so as everyone knows on this call, we are pretty conservative, we’ve done it well over the years and we’re going to stick with that. So while we’re going to be aggressively competing for new acquisitions, we are going to be careful in terms of what values that we are prepared and willing to pay.

And our portfolio, frankly, is in a position that we can really do that carefully. So I feel very good right now about where our momentum is and the nature of the company. So in summing up the quarter and the fiscal year and looking forward, we believe that the state of our portfolio, as I mentioned, is very good. We have a strong liquid balance sheet, an active level of buyout activity, continued prospect of very good earnings and distributions over the next year. In other words, we have the pieces in place to really maintain our performance. So with that, I’ll turn it over to Rachael Easton, our CFO, and she can give you some more detail on the actual performance. Rachael?

Rachael Easton: Thank you, Dave. And good morning to everyone on the call. Looking at our operating performance, we finished fiscal year 2024 strong, generating total investment income of $87.3 million, up from $81.5 million in the prior fiscal year. This was driven by an increase in the weighted average yield on our debt investments to 14.4% for the year, as well as interest income earned on new investments made during the year. This increase in interest income was partially offset by lower dividend and success fee income, which can be variable in timing and was due to amounts that did not recur in the current year. Additionally, we ended the year with adjusted net investment income of $34.5 million or a $1.00 per share, down slightly from $36.7 million or a $1.10 per share in the prior fiscal year.

Although still more than enough to cover our annual regular monthly distribution of $0.96 per share. Focusing just on the fourth quarter of FY24, we generated total investment income of $23.6 million, up from $23.1 million in the prior quarter. This was primarily due to an increase in success fee income, the timing of which can be variable, as I mentioned. Net expenses for the fourth quarter were $18.3 million, up from $13.3 million in the prior quarter. The increase is primarily due to a $4.1 million increase in accrued capital gains based incentive fees, due to the net impact of realized and unrealized gains and losses, as required to be recorded under US GAAP. This resulted in net investment income for the quarter of $5.3 million, compared to $9.7 million in the prior quarter.

The fluctuation is primarily due to that large accrued capital gains based incentive fees recognized in the current quarter. Adjusted net investment income, which is net investment income exclusive of any accrued capital gains based incentive fees, for the quarter $8.8 million or $0.24 per share, down slightly from $9.1 million or $0.26 per share in the prior quarter. We do continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations. During the quarter ended March 31, 2024, the number of portfolio companies on non -accrual was reduced to two companies from three, upon the dissolution of one investment. We will continue working with the remaining two companies to get back on accrual status when [inaudible].

We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With our three public note issuances, we have long-term fixed rate capital in place, and as of yesterday’s release, we had $135 million available on our $200 million credit facility. Additionally, we were very successful on our common stock ATM program this quarter, raising approximately $19 million in net proceeds on the sale of over 1.3 million shares of our common stock, with all shares being accretive and above NAV. Overall, our leverage remains low, with an asset coverage ratio at March 31, 2024, of 219%, providing plenty of cushion to the required 150% coverage. Our NAV increased this quarter to $13.43 per share, compared to $13.01 per share in the prior quarter.

The increase was primarily driven by $0.88 per share of net unrealized depreciation of investments and $0.15 of net investment income. These amounts were partially offset by $0.41 per share of realized losses on investments and $0.24 per share of distributions paid to common shareholders during the quarter. Consistent with prior quarters, distributable book earnings to shareholders remain strong. The end of the fiscal year was $20.1 million, or $0.55 per share in spillover, and our monthly distribution remains consistent at $0.08 per share, for an annual run rate of $0.96 per share. During the fiscal year, we’ve paid an aggregate $1.24 per share in supplemental distributions. As Dave mentioned, we look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of our exits.

In the aggregate, we paid $2.20 per share in regular, monthly, and supplemental distributions during the fiscal year, which is a yield of about 15.5%, using yesterday’s closing price of $14.16. This covers my part of today’s call. Back to you, David.

David Gladstone: Okay, thank you. That’s very nice, Rachael, and a nice report by Dave and Michael. That’s good information for our shareholders. This call and the 10-K file with the SEC yesterday should bring everyone up to date at this point in time. The team has reported solid results for the quarter and the year ending March 31st, 2024, including the investment and exit activity associated with those net realized gains. We believe the team is in a great position to continue this success. For the next fiscal year, which will be less than a year away, we believe the Gladstone Investment is an attractive investment for investors seeking monthly distributions as well as supplemental distributions from potential capital gains and other income. The team hopes to continue to show you a good, solid return as we go forward with this new year. Now let’s have some questions from our shareholders and analysts that are on the line. Latoya?

Operator: [Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg Thalmann.

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Q&A Session

Mickey Schleien: Yes, good morning, everyone. Dave, your fund reported a very nice, unrealized gain of $0.88 per share. Apart from the reversal for the Mountain, can you highlight what drove that and any themes that would help us understand what caused that appreciation?

Dave Dullum: Sure. Mickey, I’ll let Rachel have a quick stab, and then I’ll, if it’s all right, come in and fill in some thoughts behind that.

Rachael Easton: Sounds great. Good morning, Mickey. Looking at the portfolio as a whole, from an unrealized depreciation perspective, it was almost entirely due to performance at many of the portfolio companies. We did see decreased multiples across the portfolio. This was offset by decreased performance at a handful of companies, but it was really performance driving the unrealized depreciation we saw. There was a bit in there that was due to the reversal of unrealized depreciation of the Mountain as we realized that this quarter with the final dissolution, but really it was performance at many of our companies. And Dave, if you want to fill in any holes there.

Dave Dullum: Yes, and I think as we reported in our K, where we show the individual breakdown of portfolio companies for the year ended, we’ll notice that a number of those are appreciated relatively significantly. There is a small handful that are off by a million here, and a couple million here, so to speak. A fair amount of that, and I can tell you based on the portfolio, my personal view and knowledge with the individual portfolio companies, that those that are slightly off, with the exception of a couple that have been in our portfolio for a while that are all actually performing better and I feel like we’re headed in the right direction on most of them obviously and as Rachael said some of it is a function of EBITDA being down a little bit in some cases at the same time multiples being down but by and large I’d say there are no major issues in there just overall fundamentally just good performance.

And frankly a good handful of these companies performing at a very high level generating fairly significant individual net gains. I think that’s really the best I can address on it.

Mickey Schleien: Thanks for that Dave. So given what you just said with some strong performers in the portfolio, there’s so much demand in private equity for the acquisition of good performing companies and I know in the past you’ve always told me your sort, I don’t know, if reluctant is the right word but it’s hard for you to make the decision to sell something because then you have to replace it but your phone must be ringing with some pretty good offers for some of these investments for this coming fiscal year. Is it reasonable to assume that you’re going to harvest some of those unrealized gains?

Dave Dullum: Well, you make very good points and I think you hit it right. We’ve always said, I always like to say and it’s really true that when we look to exit a business, a lot of it honestly is driven by the management teams, the folks that we’re invested with and if they come to us and say guys, you know what, we need some liquidity ourselves or anything the time has come which indeed is which a couple of the exits we had this past year. Counsel Press being one which is very successful and so we listen to that but we generally and again because as you well know our model is really in a good position to allow us to maintain and hold these companies and to exactly the point if we exit something while it’s a really good realized gain, we have to as you say go and replace it.

So we really take a hard look at either where we’re getting as you point out these calls of the investment bankers coming at us to take our companies to market and what have you, really almost that reinvestment decision approach, right. So we think about it and if we really like the business and the people why not quote reinvest and we do that on a pretty regular basis as we look at the portfolio. Having said all of that, it’s also important to the model to us to regenerate realized gains as we say for supplementals. So the best I can say there is it would be more likely over the next year or so that we might have a pretty good exit versus not having one. And would be very cautious in which and how we do that, the same time maintaining our level of assets to keep generating the income for monthly distribution.

So it’s kind of a balance and it’s a really good question and it’s one that obviously we struggled with. We’re in a good position with that, but I think that’s how I would add to that, Mickey.

Mickey Schleien: That’s really helpful, Dave. And one last question for me. You and your affiliated companies in the Gladstone universe have a track record of fixing problem investments. Sometimes we see situations like the Mountain that just don’t work out, but I can think of others where you’ve merged companies or you’ve replaced management, you recapitalized businesses. So with that in mind, can you tell us what you’re doing with Edge and Hobbs, which, if I’m not mistaken, have both been a non-accrual for a while and I’m sure you’d like to rectify those.

Dave Dullum: Yes. So Hobbs first, I think, and you’ve benefited by being at our meeting last September. I think you got to see some of the management teams and we really have a very good management team at Hobbs. They actually, without going into detail, are on a positive performance track right now, which is a function of a couple of things. One of the things that really affected them somewhat is they grew so rapidly with new business and new contracts and, frankly, the pricing of those contracts was perhaps not as good as they should have been, so when certain, someone were fixed price contracts and these are percentage of completion basically, so over time, they were actually were losing money on someone’s contract. So we’ve been able, we believe, to wash most, if not all of those out and right now we’ve actually reduced the volume, so the top line number and revenue is lower than it was, say, a year ago, but having said that, the margin and therefore the EBITDA, if you will, is now positive and headed in the right direction.

So, and again, the team is a really good team. We’ve got good folks on the board, so we’ll just keep working on that one and with any, hopefully, by a year or so or maybe less, we might be back frankly on accrual with that one. Edge has a couple of components to it; some things are going on with that right now not negative. We made some changes there recently with one aspect of that business and I don’t feel I can comment any more detail on that other than to say that we’re working with it, and again with any luck we might see some positive effect there but that’s where those two are.

Mickey Schleien: Thanks for that Dave and congratulations to you and your team on the end of a very good fiscal year for Gladstone.

Dave Dullum: Thank you, sir. I hope you’re feeling better by the way and hope we get to see you soon. More questions?

Operator: We do have a question just came in from Bryce Rowe with B. Riley.

Bryce Rowe: Thanks. Good morning. Busy BDC morning for all of us down here so glad to have an opportunity to ask a question. David, just wanted to ask about a comment you made in your prepared remarks. It sounded like maybe opportunities, the volume of opportunities was up and in a good spot but maybe the quality of those opportunities was a little more spotty, if you will. Just any thoughts around kind of where that comment came from and what in particular, you’re seeing with deals that maybe makes them a little less attractive than you’d like them to be?

Dave Dullum: Right. So thanks Bryce and by the way I’m happy you’re able to get on we were going to miss you. I would say, look, from the investment banking side, we definitely are, I think, companies that were being put on the holding near the end of last year are now starting to flow back into the backlog. And there’s this, I feel like, a fair number of new deals that are coming, and we are seeing them. And obviously, we have to be very selective in where we spend our time as we look at new deals. So the ones that we spend our time on are generally companies that we believe we’re going to be able to, frankly, buy for our own anywhere from six to maybe seven, seven and a half times EBITDA. And while we’ve been clearly in some processes where when we feel like that’s a good value, we’re not even getting to go to a management meeting because there are other people out there that are eight to nine times.

And so that’s part of my comment, frankly. And honestly, while those companies look good on the surface, I’m sure they are, we don’t understand how one so to speak really pays that kind of multiple. So it’s really more around a bit of our how our model works with what we’re seeing and as you use the word it’s kind of spotty, the quality, it’s a little bit [inaudible] their companies that look on the surface but they’re smaller, the EBITDA are less consistent the model, the general positions in the marketplace it’s not clear they have much of a differentiator so to speak, but they’re fundamentally decent businesses but not something that we feel we could get our arms around. And as you know, if we’re doing three or four even five new deals a year that’s pretty good for us.

So we have to be really, really selective, but the activity level, the main part is the activity level is up and we are able to actually make some conscientious decisions on how we spend our time to try to get new deals on the books over the next say nine months or so.

Bryce Rowe: That’s great. Appreciate the color there and the time.

Dave Dullum: Okay man, take care thanks.

David Gladstone: Bryce just to mention that some of our folks are saying that everybody and his mother’s trying to put together deals, so there are a lot of what they call independent sponsors out there trying to take a company and call it a beginning roll-up. And we don’t believe in some of these fictitious numbers that come through. And so from that standpoint we’re just seeing a lot that we don’t like. We may say five or six and then pick one of the best of the lot. There’s another thing going on in the marketplace now that has not been mentioned that is inflation. Inflation helps everybody out who wants capital gains because things go up in the land in five years and you get a chance to sell it at very, very attractive price compared to where you bought it. So we’ve seen some of that, so don’t count out inflation because inflation is here for a good amount of time and that’s all. Do we have any other questions?

Operator: There are no further questions in queue. I’ll turn it back to you for closing comments.

David Gladstone: Okay. Thank you, Latanya, and you guys didn’t come up with enough questions this time. Would you please work on that before you come to the next meeting? Thank you very much for attending and that’s the end of this conference call.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a great day.