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Gladstone Capital Corporation (NASDAQ:GLAD) Q4 2022 Earnings Call Transcript

Gladstone Capital Corporation (NASDAQ:GLAD) Q4 2022 Earnings Call Transcript November 15, 2022

Gladstone Capital Corporation beats earnings expectations. Reported EPS is $0.22, expectations were $0.2.

Operator: Greetings. Welcome to the Gladstone Capital Corporation Fourth Quarter and Year-End Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . Please note this conference is being recorded. I will now turn the conference over to David Gladstone, Chief Executive Officer. Thank you. You may begin.

David Gladstone: Thank you, Sharron. That was a nice introduction, and good morning, everybody. This is David Gladstone, Chairman -- the earnings conference call for Gladstone Capital for the quarter and fiscal year ending September 30, 2022. Again, thank you all for calling in. We're always happy to talk to our shareholders and the analysts that follow us. And we welcome the opportunity to provide an update for our company. And now, we'll hear from our General Counsel, Michael LiCalsi. Who will make a statement with regarding to certain forward-looking statements. Michael?

Michael LiCalsi: Thanks, David. Good morning, everybody. Today's report 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 that 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 find in our Forms 10-Q, 10-K and other documents we file with the SEC. And you can find them in the Investor Relations page of our website, gladstonecapital.com. You can also sign up for an e-mail notification service there.

And you can also find them on the SEC's website, which is www.sec.gov. 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. Now today's call is an overview of our results, so we ask that you review our press release and Form 10-K issued yesterday for more detailed information. Again, you can find them on the Investors page of our website. Now, I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Bob?

Robert Marcotte: Thank you, Michael. Good morning all, and thank you all for dialing in this morning. I'll cover the highlights for last quarter and the fiscal year ended September 30 and conclude with some market commentary as we look forward into fiscal €˜23. Before turning the call over to Nicole Schaltenbrand, our CFO to review the financial results for the period and our capital and liquidity position. So beginning with last quarter's results, originations for the quarter totaled $86 million, which included three new platform investments and included $26 million of add on investments to existing portfolio companies. Amortization of repayments were $22 million, so net origination were strong at $64 million for the quarter.

Interest income for the quarter rose 24% to $15.6 million as the average investment balance was up approximately $47 million or 9.3% and the weighted average loan yield for the quarter rose 120 basis points to 11.2%. In the absence of material exits, prepayment fees and fee income declined to $400,000. However, total investment income still rose by 16% to $15.9 million for the quarter. Borrowing costs rose $700,000 or 20%with increased bank borrowings and higher LIBOR rates, as well as fees associated with the $50 million increase to our credit facility commitments. However, our net interest margin jumped by $2.3 million or 25% to a record $11.5 million for the quarter. Administrative costs were largely unchanged, however, net management fees rose by $900,000 to $3.4 million with the increase in assets, higher incentive fees associated with the increase in investment yields and the absence of incentive fee credits compared to the prior quarter.

Net investment income rose $500,000 to $7.5 million or $0.22 per share. The net realized and unrealized losses on the portfolio for the period came in at $2.4 million, as loan depreciation on a couple of credits and the markdown of legacy equity valuation anticipation of a subsequent exit outpaced the generally favorable operating performance of the portfolio. As a result, NAV declined $0.04 per share to $9.08 million as of September 30. While we've only begun to realize the benefit of higher interest rates, we're pleased to report our cumulative net interest income generated a 10.1% return on our net assets over the past year. With respect to the portfolio, our portfolio continues to perform well with generally modest leverage metrics and favorable liquidity.

And as such, we did not experience any prepayments last quarter. Depreciation for the quarter totaled $2.3 million as the rise in the number of our equity position -- positions was more than offset by yield driven discounts on several recently closed debt investments, a reduction in the cumulative appreciation of our legacy common stock position in Targus in anticipation of an exit. And loan depreciation associated with soft operating performance at Edge Adhesives. Since the end of the quarter, notable portfolio events include the sale of the common equity investment in Targus and the liquidating distributions from our LP investment in Leeds Novamark Capital. In reflecting on our fiscal '22 performance and outlook for what is now our fiscal '23, there are a couple of comments I'd like to leave you with.

During fiscal '22, our originations increased by 50% to almost $280 million, which lifted our net originations to $115 million for the year, while still maintaining our focus on investing in growth oriented lower middle market companies. Today, our portfolio is over 50 companies and we've broadened our private equity network in the process. We've maintained our underwriting rigor and are fortunate to have our portfolio heavily weighted towards senior secured loans which have risen over the past year to 71.4% of our investments. Secured debt investments have increased to 89.2% of total investments and the core portfolio continues to be modestly leveraged at under 3.5 times EBITDA. Based on the cumulative asset growth of the past year, we've elevated our balance sheet leverage to the target range of 90% to 110% of NAV as we previously referenced.

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And we'll look to maintain our leverage in that range as we grow our assets going forward. While our asset growth may moderate with our leverage profile, we do expect our net interest income to rise with the full quarter impact of the current interest rates, as well as the increased spreads and more conservative leverage metrics of the currently tighter credit environment. With our floating rate investments exceeding our floating rate liabilities by approximately $400 million and the current floating rates on pace to be up about 125 basis points for the quarter, we would expect our net interest margin to be up in the range of $1.25 million this quarter. Based on the portfolio performance and as the net interest income is realized, we expect to be in a position to consider increase in the shareholder distributions in the coming quarters.

And now, I'll turn the call over to Nicole Schaltenbrand, the CFO for Gladstone Capital to provide some more details on the fund's financial performance for the quarter. Nicole?

Nicole Schaltenbrand: Thanks, Bob. Good morning, all. During the September quarter, total interest income rose $3 million or 23.6% to $15.6 million based on an increase in both earning assets as well as prevailing rate. The investment portfolio weighted average balance increased to $553 million which was up $47 million or 9.3% compared to the June 30 quarter. The weighted average yield on our interest bearing portfolio rose 120 basis points to 11.2% with the increase in floating rates on the 89% of the investment portfolio that has carried at floating rates. Other income declined by $800,000 to $400,000. However, total investment income still rose by $2.2 million or 15.6% to $15.9 million for the quarter. Total expenses rose by $1.6 million quarter-over-quarter as interest expenses increased $600,000 and we had a $900,000 increase in net management fees driven by higher average assets, increased yields and reduced incentive fee credits.

Net investment income for the quarter ended September 30 was $7.5 million, which was an increase of $500,000 compared to the prior quarter or $0.22 per share and covered more than 100% of our shareholder distributions. The net increase in net assets resulting from operations was $5.1 million or $0.15 per share for the quarter ended December 30, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of September 30, total assets rose to $660 million consisting of $649 million in investments at fair value and $11 million in cash and other assets. Liabilities increased to $345 million and consisted primarily of $150 million of (ph) senior notes due January 2026, $50 million of 3 3/4% senior notes due May of 2027, and as of the end of the quarter advances under our line of credit were $142 million.

As of September 30, net assets rose by $2.6 million from the prior quarter end with the realized and unrealized valuation depreciation, which was offset by common share issuance under our ATM program of $4.5 million. NAV declined by $9.12 per share as of June 30 to $9.8 per share as of September 30. Our leverage as of the end of the year rose with the increase in total assets to 110% of net assets. During the quarter, we amended our line of credit to increase the facility commitments to $225 million. And at quarter end, we had an excess of $60 million of current borrowing availability under our line. Following the end of the quarter, we added another bank to our facility, bringing the total commitment to $245 million. With respect to distributions, our monthly distributions to common stockholders increased to $0.07 per share effective for the month of October, November and December, which is an annual rate of $0.84 per share.

The Board will meet in January to determine the monthly distribution to common stockholders for the following quarter. At the distribution rate for our common stock and with the common stock price at about $10.04 per share yesterday, the distribution run rate is now producing a yield of about 8.4%. And now, I'll turn it back to David to conclude.

David Gladstone: Thank you. Bob, Nicole, you did a good job of letting our shareholders know what's going on at the company and Michael, I appreciate your comments as well. In summary, just another solid quarter for Gladstone Capital, which capped a stellar year for the company as well. The company closed $86 million of new and add-on investments of existing portfolio company, which lifted the total investments to $649 million, which represents an increase of $92 million or 17% over the last year. Interest income for the quarter was up 25% based on the higher interest rates in the company's favorable capital structure. We expect the current rates to sustain this momentum and support potential increases in our common distributions in the coming quarters.

In summary, the company continues to stick to its strategy of investing in growth oriented lower middle market businesses with good management. Many of these investments are supported by mid-sized private equity funds. And they're looking for an experienced partner to support the acquisition and growth of the business over the time that they are invested. This gives us an opportunity to make an attractive interest paying loans and support our ongoing commitment to pay cash distributions to shareholders. I'm going to stop now and ask the operator to come on and we'll get some questions from the analyst and other people that are on the line. Sharron?

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