Q1 2024 Gladstone Investment Corp Earnings Call

Participants

David A. R. Dullum; President; Gladstone Investment Corporation

David John Gladstone; Chairman & CEO; Gladstone Investment Corporation

Michael Bernard LiCalsi; General Counsel & Secretary; Gladstone Investment Corporation

Rachael Z. Easton; CFO & Treasurer; Gladstone Investment Corporation

Mickey Max Schleien; MD of Equity Research & Supervisory Analyst; Ladenburg Thalmann & Co. Inc., Research Division

Presentation

Operator

Greetings, and welcome to the Gladstone Investment Corporation First Quarter Earnings 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 John Gladstone

Thank you, Latonia. This is David Gladstone. This is our First Quarter Fiscal Year 2024 that ends June 30 and year end is 9 months or so away earnings conference call and this is the shareholders and analysts of Gladstone Investment. We are listed on NASDAQ, trading symbol GAIN, for the common stock. And then we have 3 other listings GAINN and GAINZ and GAINL. These 3 different registrations are preferred stock or in some cases, manage your bonds as they call them. Thank you all for calling in. We're always happy to provide an update to our shareholders and analysts providing a view of the current business environment.
The 2 goals of this call as it always is, is to help you understand what happened in the last quarter and to give you our current view of the future. And now we hear from our General Counsel and Secretary, Michael LiCalsi.

Michael Bernard LiCalsi

Today's call may include forward-looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties and other factors, they are based on our current plans, which we believe to be reasonable. Now 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 the risk factors listed on our Forms 10-Q, 10-K and other documents that we file with the SEC, you can find them on the Investors page of our website at gladstoneinvestment.com or the SEC's website at www.sec.gov.
And 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 information or market information is not a guarantee of any future results. And please take the opportunity to visit our website, once again, 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 June 30, '23, so we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information.
And with that, I'll turn it over to Gladstone Investment's President, David Dullum. Dave?

David A. R. Dullum

Thanks, Mike. I'm pleased to report that we did have a very good first quarter of fiscal year '24. And that, in fact, follows on the previous very solid fourth quarter we had of fiscal '23. We ended this first quarter on June 30, 2023 with adjusted NII of $0.25 NII of $0.25 per share and total assets of $847 million. And those assets -- that amount of assets is up from $766 million, which was at the end of the prior quarter.
So the deal activity for this quarter actually was pretty good in that we invested an aggregate of approximately $50 million in one new buyout investment, and add-on acquisition in one of our existing portfolio companies and we were able to make an investment to facilitate a dividend recapitalization of another of our current portfolio companies. This recap actually helped to produce both a realized capital gain and other income for the quarter. We actually find that these add-ons and these dividend recap opportunities, they are important to pursue, and they do allow us to increase the investment in an existing company.
And in fact, one where we would know the management team well. We know the business and we have a strong belief in the future so we can build incremental value in that particular company. So a dividend recap is a positive thing, and we might do it again from time to time as may come up.
We were also able to maintain our monthly distribution to shareholders at $0.08 per share or $0.96 per share on an annual basis. We also paid a supplemental distribution of $0.12 per share in June and then subsequent to this quarter end, we declared another supplemental distribution of $0.12 per share, which will be paid in September 2023. We -- currently right now, I anticipate being able to fund future supplemental distributions as we continue to recognize realized capital gains on the equity portion of future exits and potentially from other recapitalizations.
Our buyout-focused strategy, which does differentiate us from other BDCs continues to successfully generate both the income for the monthly distributions, as mentioned, and also capital gains on the equity when it comes from along the supplemental distributions. During the quarter, we also successfully issued $74.8 million in new publicly traded 8% notes, and those go along the other 2 publicly traded notes that we have currently. And these notes will mature in 2028. Our balance sheet continues to be strong. We have low leverage and a very positive liquidity position, including additional availability on our credit facility.
So we will continue being able to provide support to our portfolio of companies for add-on acquisitions, which is one of the areas we've been focusing on as also interim financing if the need arises, while we actively grow the assets from new buyouts.
So looking ahead, the deal flow, first, it seems to be picking up somewhat. They're sellers who had been somewhat holding back over the past 6 months, seem to be testing the market. We, of course, are in the market all the time and what we can gather from the merger and acquisition groups and the sell-side investment bankers is that the backlog of new opportunities seems to be building and we may be seeing an increasing supply of buyout opportunities going into the end of the year.
So there continues, therefore, to be significant liquidity in buyout funds, which does reinforce a strong competitive environment that we face. As a result of that, we will remain value-sensitive while we aggressively compete for new acquisitions that really do fit our criteria. We are currently in the due diligence phase on a few new buyout opportunities. So we will see how that plays out over the next few quarters as far as adding to our portfolio, which obviously continues to be our main objective and goal as we grow the assets of Gladstone Investment Corporation.
So in summing up the quarter and looking forward, we believe the state of our portfolio is very good. We have a strong and liquid balance sheet, an active level of buyout activity and a continued prospect of very good earnings and distributions over the next year. So with that, I'm going to turn it over to our CFO, Rachael Easton, so she can give you a bit more detail on that. Thanks, Rachael.

Rachael Z. Easton

Thank you, Dave, and good morning, everyone. Looking at our operating performance. In the first quarter of fiscal year '24, we generated total investment income of $20.3 million, up from $19.9 million in the prior quarter. This increase was primarily due to increased interest income, which was driven by an increase in the weighted average yield on our debt investments to 14.7% from 14.3%, which was directly correlated to increase over. This increase in total investment income was limited as our dividend and success fee income, which is variable and timing was not as high as the prior quarter.
Net expenses as of June 30 were $11.9 million, up from $10.2 million in the prior quarter. This was primarily due to an increase in capital -- 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 well as an increase in interest expense, which was primarily due to the new 8% notes issued during the quarter. This resulted in net investment income for the quarter of $8.4 million or $0.25 per share, down from $9.6 million or $0.29 per share.
Adjusted net investment income for the quarter was $8.5 million or $0.25 per share, down $0.01 from $8.6 million or $0.26 per share in the prior quarter. We continue to believe that adjusted net investment income, which is net investment income exclusive of any capital gains-based incentive fees is a useful and representative indicator of our ongoing operations.
Consistent with the prior quarter, at June 30, 2023, we continue to have 3 portfolio companies that are on nonaccrual status, and we will continue working with those companies to get back on accrual status if possible. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. As Dave mentioned, during the quarter, we successfully issued $74.8 million in new publicly traded 8% notes maturing in 2028.
With these new notes and our prior 2 public issuances, we have long-term fixed rate capital in place. And at June 30, 2023, we had over $133 million available on our $180 million line of credit. Additionally, in July, we raised approximately $4 million in net proceeds under our common stock ATM program, all sales of which were above NAV. We anticipate continuing to be active in the ATM program.
Overall, our leverage remains relatively low with an asset coverage ratio at June 30 of 211%, providing plenty of cushion to the required 150% coverage. Valuations in the aggregate remained relatively flat this quarter, resulting from offsetting fair value fluctuations. This was led by higher valuation multiples across the portfolio and was offset by decreased EBITDA at a few portfolio companies. Our NAV decreased to $12.99 per share compared to $13.09 per share at the end of the prior quarter. The decrease was primarily driven by $0.36 per share of distributions paid to common shareholders during the quarter, of $0.12 per share was related to a supplemental distribution. This was partially offset by $0.25 per share of NII generated during the quarter.
Consistent with prior quarters, distributable book earnings to shareholders remained strong. We started the fiscal year with $32 million or $0.95 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 this past quarter, in June 2023, we paid a $0.12 per share supplemental distribution and in July, we declared an additional $0.12 per share distribution to be paid next month in September.
We look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of exits. Using the monthly distribution run rate of $0.96 per share per year and $0.24 per share in supplemental distributions paid or declared so far in the current fiscal year, our aggregate estimated fiscal year distributions would total at least $1.20 per common share or a yield of about 8.9% using yesterday's closing price of $13.46. This covers my part of today's call. Back to you, David.

David John Gladstone

All right. Thank you, Rachael. It was a very nice presentation from Rachael and also a good one from Dave and Michael. This is good information for our shareholders, this call and the 10-K filed with the SEC yesterday should bring everybody up-to-date and team has reported solid results for the quarter, including the buyout investment activity. And there's exit activity associated with the net realized gains that's been increasing. We believe the team is in a great position to continue these successes through the remainder of our fiscal year ending March 31, 2024.
I just say it again, I believe Gladstone Investment is an attractive investment for those investors seeking continuous monthly distributions and supplemental distributions from potential capital gains and other income. Team hopes to continue to show you strong returns on your investment and 8.9% yield on a current basis is pretty good. So now I'm going to stop and ask our analysts and shareholders, if they have some questions they'd like to ask us. Latonia?

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Mickey Schleien with Ladenburg.

Mickey Max Schleien

Dave, I'd like to follow up on your investments in Nth Degree. I see that this quarter, you invested $30 million as a follow-on. And then subsequent to the quarter, you announced you're providing funding to support MSouth's acquisition of Exposition Holding and that will be joined with Nth Degree. So I'm a little confused. Could you describe ultimately what the structure of these investments will be? And will you merge Nth Degree with Exposition?

David A. R. Dullum

No. So a very brief history, Mickey. We sold Nth Degree in 2019 -- at the end of 2019 to MSouth. When we exited, we actually retained a small ownership percentage, I think it was around 10% with an investment cost of about $1 million. We did that for some structural reasons in the nature of selling the business. Obviously, we sold it, as you, I think, might recall, at a very, very nice capital gain. Subsequently, 2020 came along. That business went down pretty dramatically. They were able, though, then to come back out of it very nicely in the '21 period and going into '22.
They started ramping up their EBITDA and as a result of that, they were able to make this company came along Expositions and actually really add significantly to Nth Degree. So Nth Degree acquired Expositions and what we did was we were able to provide some capital, both debt and equity into Nth Degree as the current structure is. And in fact, that increased our equity ownership percentage in the business up to, I think, roughly around 15% of Nth Degree.
So not only have we now got a reinvestment of debt at a really nice rate, but we now have a stake again in the company. Obviously, we really like the management team. They know with this acquisition are somewhere in the $50 million almost EBITDA range. So it's a significant business now and one that, frankly, gives us opportunity to have a second shot at a great company. So we're very pleased with it.

Mickey Max Schleien

So just -- so I'll make sure I'm on the same page, Dave. There's no additional capital required in this transaction here at this moment. .

David A. R. Dullum

No.

Mickey Max Schleien

Okay. And so the cash that's on the balance sheet, which is high for you, that -- the use of that is going to be toward other investments, not this one.

David A. R. Dullum

Correct, absolutely, yes.

Mickey Max Schleien

Okay. I also wanted to ask you about trends in your portfolio companies' performance in terms of revenues and EBITDA and what part of the portfolio caused the decline in the average risk rating of the portfolio this quarter?

David A. R. Dullum

I'm going to -- I'll turn that over to Rachael, let her have a chance to weigh in.

Rachael Z. Easton

Sure. From a performance perspective, we did see multiples across the portfolio increase and as I said in my prepared remarks, EBITDA across much of the portfolio did increase as well, but that was offset by EBITDA, which was down from a handful of our portfolio companies. We've remained relatively flat on an aggregate basis quarter-over-quarter from a fair value perspective.
From an internal risk rating perspective, this is the risk rating that we use internally to estimate the probability of default on our debt securities and any expected loss. Overall, there was a slight decrease in the weighted average balance, but nothing that we remain concerned about.

Mickey Max Schleien

And in terms of the underperformers or can you tell us what sort of sectors you're seeing those trends develop?

David A. R. Dullum

Mickey, I'd just say it's sort of across the whole portfolio, there are none that we are seeing any significant decline in a couple of them that are in the consumer-type products businesses. We had a very modest decline and you're keeping in mind that a small change in EBITDA times a fairly good-sized multiple can have an impact in terms of the -- our quote valuation, if you will, right? .
So again, I would say it was around a couple of the companies that are in the consumer-oriented products area, nothing, again, that we are overly concerned about in any of those companies, are all in good shape and doing well. So yes, and the other sectors have all performed pretty well, actually. And so that's how I would respond to that.

Mickey Max Schleien

Okay. And my last question, Dave. How long do you think it might take to invest the cash that's on the balance sheet?

David A. R. Dullum

Well, as I mentioned in my remarks, we've got a couple of deals that we're working on right now that are in the due diligence phase. And so we keep -- we'll keep hitting the whip and hopefully, we'll find a couple of those that might get done here in the next couple of months.

Mickey Max Schleien

Okay. That's it for me this morning. I appreciate your time.

Operator

(Operator Instructions) Mr. Gladstone, there are no further questions in queue at this time. I would like to turn it back to you for closing comments.

David John Gladstone

Okay. Thank you so much, and thanks to all of you for calling in. We're doing so well, makes the call pretty boring because we don't have anything much to talk about except our successes. I appreciate all of you calling in, and we'll see you next quarter. That's the end of this call.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

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