Q3 2024 Gladstone Investment Corp Earnings Call
Participants
David Gladstone
Erich Hellmold
David Dullum
Rachael Easton
Mickey Schleien
Kyle Joseph
Bryce Rowe
Presentation
Operator
Greetings and welcome to the Gladstone Investment Corporation Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, David Gladstone. Thank you, Mr. Gladstone. You may begin.
David Gladstone
Thank you, Cath. That was a good beginning and this is David Gladstone, Chairman of Gladstone Investment and this is the third quarter that we're going to be taking about for year ending December 31, 2023. Our fiscal year ends in a couple of months. Earnings conference call is for all the shareholders and analysts that follow us and we're listed on NASDAQ under the symbol GAIN and it's for capital gains, gain and then that’s the common stock and there is GAIN and GAINZ and GAINL all of these are different registered notes, so you can buy those if you wish as well. We won't be talking much about them today.
Thank you for calling in. We're always happy to provide an update to our shareholders and analysts that provide are view of the current business environment. So there's really two goals here to help you understand what has happened. And even though we don't have a crystal ball, we'll give you our current view of the future.
And now, we'll hear from our Deputy General Counsel, Erich Hellmold. Erich?
Erich Hellmold
Thank you and good morning everyone.
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. 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 the risk factors listed in our Forms 10-Q, 10-K and other documents that we filed with the SEC. These can all be found on the Investors page of our website at www.gladstoneinvestment.com or the SEC's website at 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, and sign up for our email notification service. You can also find us on Twitter @GladstoneComps and our Facebook keyword The Gladstone Companies.
Today's call is simply an overview of our results through December 31, 2023. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information.
Now I'll turn it over to Dave Dullum, President of Gladstone Investment.
David Dullum
Thanks, Erich and good morning, everyone. We are happy to report that GAIN produced very good results for the third quarter of fiscal year '24 which follows on the previous solid first two quarters of fiscal year '24, which of course ends in March. We ended the third quarter of fiscal year '24 on 12/31/2023 with adjusted NII of $0.26 per share and total assets of $918 million. You'll learn more about this from Rachael Easton, our CFO, when she describes the details around that. Again, those are good results.
In regards to activity for the quarter, we did invest $65 million, which helped us to fund an add-on acquisition in one of our existing portfolio companies. And again, obviously, we are always looking and doing new deals, making new investments and new acquisitions, and that continues to be our goal and objective. However, doing add-ons to certain of our existing portfolio companies is really an important aspect of our value building process, because it allows us to increase our investment in companies where we know the management team, the business itself, and where we have a strong belief in its future and it continues to allow us to really build very good value in these fundamental businesses. So we'll continue to do that as necessary and then in certain specific cases, obviously, while pursuing our main business, which is adding new acquisitions as we go along.
We also, as we have in our buyout strategy, exits and we did have a very successful exit with one of our portfolio companies where we actually generated pretty meaningful realized capital gain for us of about $43.5 million. We were able to maintain our monthly distribution to shareholders at $0.8 per share or $0.96 per share on an annual basis, and we paid an aggregate supplemental distribution of $1.00 per share during November and December of 2023.
Again, this large supplemental distribution is a result of the buyout strategy and is our ability to continue rewarding our shareholders with these meaningful distributions from realized capital gains, which are generated on the equity portion of our exits, in addition, of course, to the income that we continue to generate for the monthly distributions, and which is obviously very important for the basis of distributions to our shareholders on a monthly basis.
Our balance sheet continues to be strong with very low leverage and a very positive liquidity position with additional availability on our credit facility. So we will continue providing support to our portfolio companies, both for add-on acquisitions, interim financing if the need arises, while actively growing our assets through new buyouts.
Turning to the outlook, the deal flow, as we call it, appears to be picking up somewhat as the sellers who have been holding back over the past six months or so are testing the market. And we do hear from the merger and acquisition groups, the investment bankers who are our primary sources for new acquisition opportunities, that the backlog of new opportunities has been building. It seems like the last six months or so of last year were fairly slow somewhat, and deals were coming to the market and they were being taken back, et cetera.
Now, it looks like there's continue to be a bit of an increase in this regard, maybe somewhat as a result of interest rates perhaps coming down, et cetera. But in any event, we continue working on a few new possible buyout deals, and we're currently in that early phase of the process. There does continue to be very significant liquidity in the market, meaning that our competitive situation is, of course, being challenged all the time. So we're going to remain value sensitive while we aggressively compete for new acquisitions.
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 continued prospects of very good earnings and distributions over the next year.
So I'll turn it over to Rachael Easton, our CFO and she can give more details on the finances of the quarter. Rachael?
Rachael Easton
Thank you and good morning everyone. Looking at our operating performance in the third quarter of fiscal year '24, we generated total investment income of $23.1 million. That was up from $20.3 million in the prior quarter. This increase was primarily due to increased interest income, which was driven by new debt investments made in the quarter, as well as higher dividend and success fee income resulting from fees received associated with an exit during the quarter as compared to not receiving any of these fees in the prior quarter.
Net expenses as of December 31, 2023 were $13.3. This was down from $22 million in the prior quarter. This decrease is primarily due to a $10.4 million decrease 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. This decrease was partially offset by an increase in borrowing costs. This resulted in net investment income for the quarter of $9.7 million compared to net investment loss of $1.7 million in the prior quarter. This fluctuation is primarily due to the large accrued capital gains based incentive fees recognized during the prior quarter.
Adjusted net investment income, which is net investment income or loss exclusive of any accrued capital gains based incentive fees for the quarter, was $9.1 million or $0.26 per share, up $0.02 from $8.1 million or $0.24 per share in that prior quarter. We continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations. Consistent with the prior quarter at December 31, 2023, we continued to have three portfolio companies that are on nonaccrual status and we will continue working with those companies to get back on accrual status when possible.
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 announced yesterday, we have amended and expanded our credit facility, increasing the capacity to $200 million. And as of yesterday's release we had over $120 million available of that capacity. Additionally, during the quarter, we were very successful on our common stock ATM program, raising approximately $21 million in net proceeds, as well as an additional $7.7 million in net proceeds raised in January with all sales being accretive and above then-current NAV. We anticipate continuing to be active in the ATM program.
Overall, our leverage remains relatively low with an asset coverage ratio at December 31, 2023 of 207%, providing plenty of cushion to the required 150% coverage. Our NAV decreased $13.01 per share for the quarter compared to $14.03 per share at the end of the prior quarter. The decrease was primarily driven by a $1.36 per share in net unrealized depreciation on investments and $1.24 per share of distributions paid to common shareholders during the quarter of which $1 per share related to supplemental distributions. These decreases were partially offset by $1.27 per share of realized gains on investments and $0.28 per share of net investment income.
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 per month for an annual run rate of $0.96 per share. During this past quarter in November and December 2023, we paid an aggregate dollar per share of supplemental distributions. We look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of our exits.
Using the monthly distribution run rate of $0.96 per share per year and $1.24 per share in supplemental distributions paid so far in the fiscal year 2024, our aggregate estimated fiscal year distributions would total at least $2.20 per common share, or a yield of about 16% using yesterday's closing price of $13.96 [ph].
This covers my part of today's call. Back to you, David.
David Gladstone
Oh, thank you very much. That was a very, very good quarter. Rachael and Dave, you've done a great job and Erich, good information for our shareholders. This call and the 10-Q filed yesterday with the Securities and Exchange Commission should bring everyone up to date. Our team has reported solid results for the quarter ending December 31, including the add-on investments and exit activity associated with net realized gains. We believe the team is in a great position to continue these successes through the remainder of the fiscal year. That fiscal year ends March 31, 2024.
I just think Gladstone Investment is an attractive investment for investors at this point in time. You've got monthly distributions and then you've got supplemental distributions from the potential capital gains and other income. The team hopes to continue, of course, to show you a strong return and rather than keep talking about it, let's get some questions from the analysts and shareholders that are on the line.
So, operator, if you'll come on and manage that, that'd be good.
Question and Answer Session
Operator
Thank you. (Operator Instructions) Our first question comes from Mickey Schleien from Ladenburg Schlein from Leidenberg Capital. Please proceed.
Mickey Schleien
Yes, good morning, everyone. Dave wanted to understand from you how your portfolio companies are progressing in terms of their revenues and margins outside of consumer. We're all aware that the consumer facing companies have headwinds, but are you seeing any trends in the rest of the portfolio?
David Dullum
Hey, Mickey. Good morning. Nice to talk to you. Not truly, not really. We're seeing, I would say, pretty consistent, not decline, but little slower, call it growth, but things are holding up pretty well across the board. Cost of materials in some cases, and distribution costs, which impacted some of our industrial companies, et cetera from the supply chain side, I would say those have eased a bit. So that's obviously held on that end. But frankly, all-in-all, we're seeing, I would say a fairly, just again, moderate go slow, but nothing dramatic one way or the other.
Interestingly, some of our consumer products companies actually are doing reasonably well, even though, as you said, the consumer side tends to be a little bit slower right now, but generally, I'd say pretty stable.
Mickey Schleien
That's good to hear. Dave in terms of deal flow, we're hearing that part of what we're seeing, I'm not sure that's the case with you, but part of what we're seeing is private equity funds conducting dividend recaps for their stronger performers in order to extract some results for themselves and for their shareholders. Is that something you're considering doing in the near future for some of your better performing companies which also may help optimize their balance sheets?
David Dullum
Right. Nothing, honestly, right now, as you know, we have done a couple of dividend recaps over the last couple of years. One company in particular we did a couple, actually, with that company and then one other one, we did one last year, and those were for all the reasons you mentioned. But as of right now, it's not something, we are always looking at it because it is a good way, especially if it's a good business that we like and we're able to sort of stay involved in a very meaningful way, as you say, extract some value for shareholders and for the management teams. By the way, of those companies, anytime we've done it, it's always been in sync with the management teams of our portfolio companies, which, as you know, is something that's really important to us.
So right now I don't see that necessarily. And then my only other commentary on the market in general, as I mentioned briefly, is there seemed to been really kind of a weird last half of last year where a fair number of deals were in the market, then they got pulled, et cetera, and they seemed to be slowly coming back right now. So we are seeing a bit of, again, of a pickup, at least in the, "deal flow". I will tell you that the ones that we're looking at and we're serious about, as usual, we're going in with values that make sense for us and that seems to be working reasonably well. Others, frankly, there's still some crazy values that are at least being paid and we can't compete in those, are not going to compete in those. But generally, I'd say the outlook looks reasonably good.
Mickey Schleien
Oh, okay. That's interesting and helpful. Dave, my last question. The more liquid markets for credit have reopened, as we all know. Are you concerned about refinancing risk for some of your better performing investments? In other words, could some of these investments go to other suppliers of debt capital at cheaper rates than you're offering them and you'd be taken out?
David Dullum
Yes, no, that's a great question, and obviously something we always look at and have looked at over many, many years. And frankly, I can only think of one company where that actually happened was an unusual circumstance. I would say the fact that our capital is really, as you know, is a combination of the debt and the equity right in the transaction. So the effective yield, so to speak, is comparison to say what just pure debt might be even with this environment where debt is coming down. I would say we're still very competitive in that regard. The relationship with the portfolio companies is probably as important as anything.
And then the other aspect to that is while as you point out, the spreads might be getting a bit tighter, meaning interest rates are coming down. The availability still, I think, at least from what we're seeing, is not just all of a sudden that flood gates have opened, so to speak. Right? And you can get all the capital you need at low rates. So right now, honestly, I'm not seeing any challenges for our portfolio companies in that regard. Could it happen? Sure. But I'm not seeing anything right now and so I'm not overly concerned we're going to get taken out in any situations that we may not want to be taken out of.
Mickey Schleien
I understand. Those are all my questions this morning. I appreciate your time. Thank you.
David Dullum
Thank you.
Erich Hellmold
Okay, any questions? Any further questions from people?
Operator
Kyle Joseph, Jefferies.
Kyle Joseph
Hey, good morning. Thanks for taking my questions. I just want to get your thoughts on leverage. Obviously, you guys have a lot of dry powder right now, and it sounds like you're getting more optimistic about deal flow into '24. But just talk about where you're comfortable taking leverage to if we do get that deal flow or is it really just more of a function of the market and what deals get done?
Rachael Easton
Hey Kyle, good morning. You know, I think what you said, a function of the market and what deals we get done. So, as you know, we keep a pretty conservative leverage profile, I think, compared to the greater BDC peer group. And that's something we do believe is really important. But it's also to provide us the flexibility to support that potential new deal flow. So we want to be able to be in a position where if we need to fund new deals, we have the ability to take on additional borrowings, and it doesn't threaten breaking that 150% test.
David Dullum
And Kyle, I might just briefly add to that, and as Rachel said in her part of the call, we've had a fairly successful ATM program, of course, which we sort of put in place, being able to, and we're very rigorous on what the cushion is, if you will relative to NAV, and we're going to stick with that. So we're not going to do anything crazy there, but it gives us the ability to especially looking forward in the expectation, hopefully we can start doing some newer deals and obviously using some of this leverage that we're likewise providing the support from the equity side to, as Rachel said, be able to maintain a level of the coverage ratio that's not going to put us at risk in that regard.
Kyle Joseph
Got it, very helpful. And then one followup from me, just talking about the competitive environment of essentially lower middle market private equity. Obviously you expect deal flow to pick up, but on the other side would be competition. And has the market really changed as we've seen, rates go from essentially zero to substantially higher, even with some potential cuts this year?
David Dullum
Yes, I would say the market really what we're seeing and what kind of got reflected, I think near the end of last year, at least from our perspective, it may not be across the board, but I can only speak from our vision is that the rates coming, going up, of course, helped to slow down the ability for not only the cost, but also the amount of leverage was being available. So those deals I think that were getting done were to some extent perhaps being over equitized, if you will, to get the deals done. We're seeing that might change a little bit, but not to the point where I think it's again going to be all of a sudden leverage goes back to really high multiples of EBITDA. I think it's still going to be fairly cautious and careful.
And again, I think again, as I said, even though there are some deals we're seeing where the relative enterprise value might be one or two turns higher than we think it's worth, clearly there are folks willing to do those deals, and if they are, I think they are having to do a little bit more equity than debt. I don't think the debt side of the equation has gotten to the point yet where we're back to much higher leverage per transaction even at these higher values. Does that make any sense?
Kyle Joseph
Yes, very helpful. Thanks for taking my questions.
David Dullum
Yes sir.
Erich Hellmold
Okay, next question?
Operator
Bryce Rowe, B. Riley Securities.
Bryce Rowe
Thanks a lot. Good morning.
David Dullum
Hey, Bryce.
Bryce Rowe
Hey Dave. Hey, how are you?
David Dullum
Good, awesome.
Bryce Rowe
Hey, I wanted to ask about the upsized credit facility you've had. I guess some changes. I think you took the available amount down last quarter and obviously it's moved back up. So maybe there was a bit of a process to get to that higher level. Could you just, if you can kind of talk about that process and did you add some banks to the facility? Just any kind of detail there would be helpful, thanks.
Rachael Easton
Yes, absolutely. Good morning, Bryce. So yes, we were really excited to announce yesterday that we have expanded the credit facility up towards $200 million. When we went through our regular amendment process, which closed in October at the beginning of the quarter and we weren't able to announce in our last earnings call, we had taken it down to $135 million and that was a result of just losing a couple of banks during that process. We were working on this expansion. Unfortunately, we couldn't get the two to close at the same time. So, we were able to increase the facility by bringing in a new bank. We brought in Fifth Third, and we were also able to increase one of the other bank's commitments as well to get back up to that $200 million amount. And we believe this additional capacity is really important in providing flexibility as we contemplate future pipeline in the deal flow process.
Bryce Rowe
Got it. That's helpful context, Rachael. And then maybe one for Dave. You had this add-on opportunity for an existing portfolio company here this quarter. Can you just talk a little bit about that? And then maybe other opportunities in the pipeline for your existing portfolio companies to do add-on acquisitions. Thanks.
David Dullum
Sure. So, that particular one, Bryce, was a company that we've had in the portfolio for a few years. It's somewhat of an industrial based business. We've been really improving it all around, both from the overall management level, et cetera. And we had an opportunity to acquire a fairly substantial sized business to bring into it, which was really integrated very nicely with the product. And it not only gave us additional capacity, manufacturing capacity, but also distribution and access, actually in Europe and other parts of the country. So we took our company from order magnitude.
Now, I'm not going to give you specifics, but order magnitude, about $40 million to $50 million in revenue to over $100 million in revenue, and very significant increase in the EBITDA. And I would say that the integration has come along really well. So we've clearly enhanced the overall value. So I feel really good about that transaction without, by the way, getting it that particular company in a very highly leveraged situation, relatively speaking, so really, really good opportunity.
So we'll continue and yes, some of our existing portfolio companies are seeing some opportunities like that, and we continue. Some of them are on the smaller end. Some of them do not require additional financing from GAIN per se because their own balance sheets are strong enough to handle some smaller add-ons where it really makes some sense, whether it be a product line or what have you. And so yes, we continue to do that because frankly, as I said in my remarks, and you appreciate, if we can keep adding value to an existing portfolio company again, where overall we know it and it's accretive, we're happy to do that.
One other company, another one of our portfolio companies actually, where they made a fairly good sized acquisition and we were able to go back in as well and help to add to that particular investment as well. And so the short answer is yes, we're going to continue looking at those opportunities.
Bryce Rowe
That's great. I appreciate the time.
David Dullum
Yes, sir. Thank you.
Erich Hellmold
Question?
Operator
This concludes our question-and-answer session. I would like to turn the floor back over to David Gladstone for closing comments.
David Gladstone
Thank you. That was a good quarter and I think when we put the numbers together for the year end of March 31, one of our best years ever, I think we'll probably be over $1 billion in assets by then. But anyway, I don't have a crystal ball, so I have no idea what's really going to happen. But we're guessing that things are back strong and growing. A lot of people in the investing world are thinking that business development companies like this one are a place to put some money. But thank you all and that's the end of this presentation.
Operator
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
