Q1 2024 Gladstone Capital Corp Earnings Call
Participants
David Gladstone; Chairman & CEO; Gladstone Capital Corporation
Bob Marcotte; President; Gladstone Capital Corporation
Nicole Schaltenbrand; CFO & Treasurer; Gladstone Capital Corporation
Kyle Joseph; Analyst; Jefferies LLC, Research Division
Robert James Dodd; Analyst; Raymond James & Associates, Inc.
Mickey Max Schleien; Analyst; Ladenburg Thalmann & Co. Inc.
Presentation
Operator
Greetings, and welcome to the Gladstone Capital Corporation First Quarter 2024 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
(Operator Instructions)
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. David Gladstone, Chairman and CEO of Gladstone Capital Corporation.
Thank you. You may begin.
David Gladstone
Thank you so much and good morning, everyone. And this is David Gladstone focused on capital for the quarter ending December 31, 2023. Thank you all for calling in. We're always happy to talk with you and share information about this company. Your company forget started, of course, and hear from Mark assistant, General Counsel. Eric, how much? And he'll tell you some stuff that you need to know before you listen to Bob Evans. Go ahead, Eric.
Thank you, David, and good morning. 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 is forward looking statements involve certain risks and uncertainties that are based upon 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 in our Forms 10-Q, 10-K and other documents we file with the SEC.
Those can be found on the Investor Relations page of our website, www.gladstonecapital.com, where you can also sign up for our e-mail notification service or on the SEC's website at www.SEC.gov.
We undertake no obligation to publicly update or revise these forward looking statements whether as a result of new information, future events or otherwise, except as required by law for today's call is an overview of our results, so ask that you review our press release and Form 10-Q issued yesterday for more detailed information.
Again, those can be found on the Investors page of our website.
Now I'll turn the call over to Gladstone Capital's President, Bob Marcotte.
Bob Marcotte
Good morning, and thank you all for dialing in this morning.
I'll cover the highlights for last quarter and some comments regarding the outlook for the balance of fiscal 2024 before turning the call over to Nicole Schultz and branch review the details of our financial results for the period.
So beginning with our last quarter's results, originations last quarter to quarter rebounded and totaled $58 million, including one new portfolio company in several existing portfolio companies.
Prepayments and repayments continue to be modest, which combined with portfolio amortization totaled $22 million. So net originations were $37 million for the period.
Short term, so for rates were unchanged. So the weighted average yield on our investment portfolio was also consistent at three 13.9%.
Average earning assets for the period declined slightly as resulting in a 1% decline in our total interest income to $23 million for the quarter.
Borrowing cost declined with lower average bank borrowings given our equity issuance in the September quarter and debt placement.
As a result, our net interest income rose 2.3% to $17.5 million for the quarter.
Higher net interest income improved originations and advisory fee credits lifted. The net investment income by 8.6% to $11.9 million were just over $0.27 per share for the net realized and unrealized gains in the portfolio for the period totaled $8.1 million, lifted our ROE for the quarter to 19.4% and 14.9% for the last 12 months.
With respect to the portfolio, our portfolio continues to perform well, with senior debt representing 73% of the portfolio, and we ended the quarter with only one non-earning asset representing $6.1 million of cost or 0.4% of assets at fair value.
We continue to prioritize our portfolio monitoring in areas where revenue headwinds compared to the most prevalent, which seem to be mostly consumer facing sectors, which is unfortunately a small portion of our portfolio.
Depreciation for the quarter of $8.1 million was led by the broad-based depreciation of our debt investments, which totaled $6.3 million, while the net appreciation of our equity co-investments contributed an additional $1.6 million in reflecting on our first quarter of fiscal 2024 performance near term outlook, a few comments I'd like to leave you with last quarter's deal.
Activity certainly demonstrated.
The benefit of our incumbent position is supporting growth oriented businesses across a variety of industry sectors in an otherwise slow deal environment.
PE sponsors are dealing with extended hold periods and continuing to seek ways to creatively grow. We'll capitalize their investments and supporting performing businesses. We know well has a low risk way to grow our assets.
That said, deal flow has improved and we expect new originations to increase along with potential prepayment activity over the balance of the year as short-term interest rates exceed our expected decline in PE sponsors that are expected to bring more so they're more seasoned investments to market to generate liquidity.
The events for their investors.
We ended the quarter with a conservative leverage position.
It just 83% nav and ample availability under our bank line, our bank credit facilities.
So we're very well-positioned to grow our earning assets and fee income to continue to support our shareholder distributions over the balance of the year.
And now I'll turn the call over to Nick Coulter. I will review details of the funds detailed financial results.
Nicole Schaltenbrand
Thanks, Bob.
Good morning.
During the September quarter, total interest income fell $300,000 or 1% to $23 million.
Based on the small decline in average earning assets that were weighted average yield on interest-bearing portfolio, it's consistent at 30.9%.
The investment portfolio weighted average balance declined to $658 million, which was down $11 million or 1.6% compared to the prior quarter.
Other income declined by $300,000. In total investment income fell by $500,000 or 2.3% to $23.2 million for the quarter.
Total expenses declined by $1.5 million quarter-over-quarter as net management fees declined $1.2 million with higher deal closing and advisory fee credits and $700,000 in lower financing costs from the reduction in average bank borrowings.
Net investment income for the quarter ended December 31 was $11.9 million, which was an increase of $900,000 compared to the prior quarter or $27.4 per share, which exceeded the $24.75 per share dividends paid.
A net increase in net assets resulting from operations was $20 million or $0.46 per share for the quarter ended December 31, as impacted by the realized and unrealized valuation depression depreciation covered by Bob earlier.
Moving over to the balance sheet.
As of December 31, total assets rose to $767 million, consisting of $750 million.
Investment at fair value and $70 million in cash and other assets and liabilities rose, if necessary, originations to $349 million as of December 31, and consisted primarily of $253 million of senior notes and at the end of the quarter, advances under our $234 million line of credit were $85 million as of December 31
That assets rose to $418 million from the prior quarter end with investment appreciation and undistributed earnings Nevro's 2.3% from $9.39 per share as of September 30, to $9.61 per share as of December 31.
Our leverage as of end of the quarter with the asset growth rose with the asset growth to 83% of net assets.
Subsequent to December 31, we had a small $3 million prepayment Allison educated second lien debt investment.
With respect to distributions, our monthly distributions to common stockholders of $8.25 per common share was announced, which isn't a run rate of $0.99 per share.
The Board will meet in April to determine the monthly distributions to common stockholders for the following quarter at the distribution rate for our common stock and with a common stock priced at about $10.30 per share yesterday, distribution run rate is now producing a yield of about 9.6%.
And now I'll turn it back to David to conclude.
David Gladstone
Thank you very much.
Nicole and I did a great job and so that Bob and Eric and all that good job. So they've been torn our stockholders and analysts that follow the Company. So you report that you got 10-Q filed yesterday to shareholders in this call that we're making in pretty much brought up to date about everything going on.
So in sum is just another solid quarter, sometimes as pretty boring, but it's nice when we have borrowing profitable quarters. The increase in net investment income by 8% over the prior quarter, and that's really good.
It gives a good coverage of the current common distributions, strong portfolio performance and generating net portfolio appreciation increase that net asset value by 2.3% from last quarter.
I love it when that goes up every quarter and it helps us pay our dividend or 2023. The whole gland achieve Glad achieved returns on equity of 14.9%, which compares very favorably with other business development companies in our peer group.
The Company is also very well positioned for the coming year. The portfolio is in good shape with modest leverage and very low nonperforming assets and a strong balance sheet to support further growth.
In summary, the Company continues to stick with its strategy of investing in growth oriented, lower middle market businesses with good management teams.
Many of these investments are supported by mid-sized private equity funds that are looking for experienced partners to support their acquisition and growth profile of that business, which they are invested in.
This gives us an opportunity to make attractive investments, paying loans to pay on these paying loans, support our ongoing commitment to pay cash distributions.
Going to stop now and ask the operator to see if there's anybody has a question for the group here today.
Question and Answer Session
Operator
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Kyle Joseph, Jefferies.
Kyle Joseph
A good morning.
Thanks for taking my questions.
Bob, so kind of want to get your thoughts in terms of where spreads have been going in the lower middle market.
Obviously, we track public credit markets have been very strong.
Receive markets tend to be a little bit more insulated or lag, but just get a sense for spreads, you can say on new deals?
Bob Marcotte
Good morning, Kyle.
Um, the spreads really have not moved some consistent with the overall yields.
I would say, as we commented last quarter, there's definitely a lot of capital up market from U.S. and in sponsored oriented deals where there's reasonable size.
We occasionally we'll see some pricing compression in the 50-basis point range.
But for the most part in our initial investments, which tend to be, you know, $10 million to $20 million and grow, we don't, at this point see that level of compression.
Certainly that leaves interest rates that are relatively high level.
So deal flow is not exactly as robust as we'd like, but we're really not seeing much in the way of spread compression today.
Let's just not where the market is right now. People are obviously expecting those rates to come down. But at this point, we're not seeing that pricing compression.
Kyle Joseph
Got it. Very helpful. And then on credit performance, obviously nonaccruals are were stable in the quarter off. Let's just get a sense for, you know, top line growth margins, EBITDA growth in higher and companies continue to do well in the face of higher rates and ongoing inflation.
Bob Marcotte
But obviously, mix. As I said, um, you know, we definitely increased investments in some performing assets on the quarter, which was a big part of our fundings in those higher performers are probably looking at 10% to 15% EBITDA lifts on. There's certainly some where there's a little bit more headwinds.
If you look at the portfolio overall, EBITDA roughly was down slightly at a low single digits in oh 3% to 5%, um, they're definitely some sectors where there's more challenge, um, you know, those challenges would be in places like from a consumer facing business, anything in the restaurant business, anything in discretionary health care from a certain sectors are more exposed in those cases, I will say that those tend to be there are smaller sectors and where they where there is some level of headwinds.
As I've said in the past, our second lien exposure, which is where it would be most impacted, tends to be the larger credits that, on average, our leverage in our second lien portfolio is significantly below our average for the portfolio. Second lien leverage averages something under three. So where we see hadn't headline pressure, it tends to be in the smaller credits where we control the credits as senior lender. So overall, I would say we're still modest modestly defensive on the consumer side of the businesses.
I'm expecting things to improve.
But most of those cases, we are the senior lender and in pretty good shape to manage the underlying portfolio risk profile.
The overall leverage for the port portfolio still runs at just under four 4 times of EBITDA. So we've got some cushion in those cases relative to enterprise value.
Kyle Joseph
Got it.
Very helpful.
Thanks for taking my questions.
Thank you.
Operator
Robert Dodd, Raymond James
Robert James Dodd
Good morning and congratulations on another excellent quarter. If I can build on the can you give us some more color on the characteristics, the originations?
I mean, you had $47 million to existing portfolio companies and the single-use was quite chunky in general. I mean, like zooplus was over $10 million of several others, so that was quite large.
So I mean, can you give us any kind of was that add-on acquisitions by those portfolio companies, recapitalizations or anything?
It's a handful of big add-ons, wasn't sometimes we see more going to a loss and give us what the drivers were the size of those fault once well, the follow on?
Bob Marcotte
For the most part, we're somewhere in that $10 million to $12 million range. I think the big ones zippers when actually stood up and down, I mean, we have the Company's continuing to grow and expand. We had to bring in another lender since it was getting so large. And once we brought in the other lender, there were additional fundings that happened on the quarter.
So it actually today is still below where we were the prior quarter. There are two other credits that we were in. one was ALS went up and lead point went up in both those cases leverage and gotten very low.
In fact, leverage was approaching well under 2%. And um, sponsors looking to take a distribution looking to reposition and manage their extended hold periods were part of it.
one transaction have decided not to sell with a very escalated valuation and the, um, our loan to value in that case is well under 30%. So most of those were probably positioning by part on the part of the sponsor from those were the only notable ones.
They were a couple of others that were in the couple of million dollar range, but it turns out that I think that was totals six of six investments in the portfolio at that point of any consequence above $1 million that was the rep was represented the most of the total dollars of those fundings on it just happens to be a case where strongly performing assets were we were opportunistic and putting out additional capital to those companies.
Nobody wants to take their mark. Nobody wants to take their company to market when the of the interest rates are where they are and some of the buyers are kind of on the sidelines right now.
Robert James Dodd
Got it. Got it. Understood.
I mean that goes on to the follow-up. I mean, you mentioned in your prepared remarks as well, like deal flow as you improving, you expect to it's going to be more activity later in the year.
And you're also going to be positioned to portfolio growth of the messaging. What's your comfort level that the portfolio is going to be up from here by year end, given you talk about maybe prepayment activity accelerates as well?
And then can you give us some more thoughts on how you think the increase in prepayments combined with increasing deal flow, how that's going to work out to ballpark what your portfolio could look like you end up flat? Net color?
Bob Marcotte
prepayments is probably the toughest thing to do.
I predict.
I mean, at this point, there's probably two or three of decent size investments that we see likely to prepay.
And if those prepayments come in at somewhere between $10 million to $25 million, maybe $30 million, the pace of growth in originations, we are obviously going to be pressed to outpace that.
I think in the past, we've done generally targeted to grow somewhere in the range of $20 million to 25 million a quarter.
So if we're seeing a similar amounts of prepayments is going to take two or three deal closings a quarter to get that number back up. That's not unheard of in the market where we're playing.
You know, when you're dealing with unitranches, you know, in the range that we're talking about, $20 million to $25 million deals are normal and two or three deals a quarter is also fairly normal.
So I think if you look back at our origination history, when the deal the deal market was running, um, you know, doing 200 to 250 in gross originations per year.
Tom is it is certainly doable.
So I think putting on 25 is a conservative number for us to continue to grow the assets.
Is that going to happen every quarter? I'm sure it's not some, but I will also say from where fuel feeling pretty good where we are. And given our given our current capital base, we tend to us we tend to slot in above the SBIC.s, which cap out around $20 million for the most part.
And we tend to slot in below the large scale billion-dollar funds, which really don't want to put out anything less than 40 on. So if it's a ZIP code of $20 million to $40 million, we are pretty good shape from two to be competitive on the profile.
And there's obviously a few other guys that are that are out there, but that's the size deal that we are, I think pretty well positioned to continue to originate and the mix may change a little bit from I expect with rates coming down.
We may look at a little bit more second lien paper from which will negate some of the compression in spreads likely to happen as rates come down.
But for the most part, I think 25-plus or minus net asset growth quarters still is still a track record that we've averaged in the track record. I would expect for the balance of 24.
Robert James Dodd
I appreciate that color.
Thank you very much.
Thank you.
Next question thinking.
Operator
Mickey Schleien, Ladenburg Thalmann.
Mickey Max Schleien
Good morning, everyone of Club.
Following the common share issuance in the September quarter, the balance sheet leverage has been running a little bit below your target level. Is that a purposeful because of your view on the economy or something else? Or do you expect your leverage to climb towards your target level as you invest your liquidity?
Bob Marcotte
Good morning, Mickey. I think there's two factors there. one, we were flattered to have institutional buyers come into the stock in the volumes that they did. We've always had a long-term strategic objective to increase the institutional holding and the float in our shares. And when they showed up, we felt it appropriate to take that advantage.
And you will note that our institutional share counts probably doubled as a result of that issuance. So strategically, it was good for the good for the investor base and the flow in the case in the stock market for us, we took advantage of it.
I think the second is we wanted to be in a position where we were strong relative to our capital base. The bank market conditions were a little unsettled in the summer, um, so we felt going long on the equity gave us a little bit more strength in that viewpoint.
Lastly, I would say, yes, we are going to increase our leverage as this breads probably start to come contract with interest rates coming down. We're obviously skewed very much towards a fixed cost of capital right now. I'm having a strong equity base will allow us to put on assets and optimize our capital structure and allow us to continue to maintain the level of dividend coverage can do to maintain the dividend level at or above where it is today.
So we'll grow into that leverage level with higher assets over the course of the next 12 to 18 months.
Mickey Max Schleien
That's very helpful.
Thank you, Bob.
That's it for me this morning.
Thank you.
Bob Marcotte
Next question.
Thank you.
Operator
Ladies and gentlemen, that concludes our question and answer session.
I'll turn the floor back to Mr. Gladstone for final comments.
Okay.
David Gladstone
Thank you very much.
Appreciate your all hauling in which we had a few more questions. We'd like it when you ask questions, but we'll wait for next quarter to get some mix. More questions. At the end of this conference call.
Operator
Thank you. This concludes today's conference call. You may disconnect your lines at this time.
Thank you for your participation.
