Gladstone Investment Corporation\De Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Gladstone Investment Corporation's First Quarter and Year Ended June 30, 2020, Earnings Call and Webcast. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, David Gladstone. Please go ahead.

Thank you, Sara. Nice introduction. This is David Gladstone, the Chairman, and this is the first quarter ending for 2021, our year-ended March 31. In this conference call for the analysts and the shareholders of Gladstone Investment NASDAQ under the trading symbol GAIN, that we are always trying to figure some capital gains and GAINM and GAINL are our preferred stocks. We've got some stocks out there and I hope one of those fits what you're looking for. Thank you all for calling in today. We're always happy to provide some information about our company to the shareholders and analysts and provide a view of the current business environment. Two goals in the call, first, to understand what happened in the past quarter or past year even; and also best we can do, what’s going on in the future for us. We'll start out with our General Counsel and Secretary, Michael LiCalsi. Michael, go ahead?

Thanks, David, and good morning, everybody. Today's call may include forward-looking statements under the Securities Act of 1933 and Securities Exchange Act of 1934, including note regarding future performance. These forward-looking statements involve certain risks and uncertainties and other factors, even though they're based on current plans, which we believe to be reasonable. The main factors can make actual results materially different than future results expressed or implied by these forward-looking statements, including all Risk Factors listed on our Forms 10-Q, 10-K, and other documents that we file with the SEC. These can all be found on our website or the SEC's website. Now 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 any past performance or market information is no guarantee of future results. Please visit our website, once again, sign up for our e-mail notification service. You can also find us on Twitter @GladstoneComps and on Facebook, keyword there is The Gladstone Companies. We remind everybody today's call is simply an overview of our results through June 30, 2020. So we ask you to review our press release and Form 10-Q, both of which were issued yesterday for more detailed information. One last matter, we want to remind everybody to vote their shares whether you own preferred shares or common shares in the company, both for our upcoming Annual Shareholders Meeting which is going to take place on August 6. It's very important that everyone cast their vote, so that we can ensure that a quorum is met at the meeting. The easiest way to vote is to contact our proxy solicitor directly as Georgeson LLC and their phone number is (800) 903-2897. Once again (800) 903-2897. If you call them you can quickly cast your vote over the phone. It takes about two minutes. Now I'll turn the presentation over to David Dullum, President of Gladstone Investment. Dave?

Great. Thanks, Mike, and good morning, everyone. Just reflecting on the last report, which we gave a few months ago for our fiscal year-end March, it seems like it's been quite a long time partly because obviously with everything going on with COVID, we've all had to deal with this in many different ways. In our case, Gladstone Investment, as we go through this, I'll hopefully leave you all with a sense that we came off of one of our best years in fiscal 2020 ending March 20. So that helped us with a good head of steam going into this fiscal year. But of course, we all have to deal with the reality of where we've been. So, we'll touch on that and let you know what we're doing to ensure that our company keeps doing all the right things going forward and getting through this. We didn't know what to expect obviously right in the beginning of COVID. As it turned out, we were able to end the quarter at June 30 reporting adjusted net investment income of $0.11 per share. While this was against $0.19 per share for the quarter ended 3/31, we feel pretty good about that under the circumstances, and more importantly, as we move through the year, where we're headed. On a comparative basis, the total portfolio income, primarily interest income on our debt investments, was actually relatively stable quarter-to-quarter which is a good thing and is a testament to the foundation of the assets that we own both the debt and the equity. It's important to understand and we'll hear more about that going forward. Our primary operating focus has been since we got into this and continues to be clearly closely monitoring our portfolio companies. The emphasis is on the cash flow and the working capital dynamic of each of our portfolio companies. Most of our companies have performed well, including some of them exceeding our expectations when we went into this. The drop-off or decline is clearly a function of the COVID activity and what's going on in the economy; however, we've not necessarily needed to provide much additional financial support at this point, which is a good thing. We had exited a few of our portfolio companies last year, which generated significant liquidity for us through realized capital gains. We are also able and will continue to grow the portfolio. In July, we made a new buyout investment for about $47 million, a combination of equity and debt, which generates interest income for us. Our NAV, book value for the 6/30 period, was $10.87 per share compared to $11.17 at the 3/31 quarter-end, representing a decrease of $0.30 per share. However, this was primarily a consequence of some companies that were significantly impacted by the COVID crisis, affecting their operating earnings. So, we continue to monitor our portfolio. We are proactively engaged with their management teams providing support as necessary. We've seen activity with companies and employees returning to work. And we've not had to provide much support yet. The aggregate portfolio values from 12/31/19 to 3/31/20 depreciated about 8%; however, fortunately, we've seen stabilization in values with only about a 1% decline from the 3/31 quarter to the 6/30 quarter. This is a balancing act as we help our companies during this time. Our focus is continuing close involvement with the portfolio companies while conducting due diligence for new acquisitions. We are adapting to a Zoom-type environment for much of our due diligence. So we're seeing a pickup in deal flow and continue to work on preserving our existing portfolio. Overall, we're in a good position and just have to be a little patient as we pull through over the next nine months. I'm going to stop there and turn it over to Julia Ryan, our CFO. Julia?

Thanks, Dave. Let me start with a summary of the fund's operating performance for the past quarter. We generated NII of $4.2 million compared to NII of $14.8 million in the prior quarter. This decline was due to investment income decreasing by approximately $1.3 million, mainly from placing one investment on nonaccrual during the current quarter. Our investment in Horizon is travel-dependent and has been significantly affected by COVID shutdowns and declines in travel. Net expenses totaled $6.5 million in the current quarter compared to an expense reversal of $2.8 million in the prior quarter, primarily driven by an $8.4 million reversal of previously accrued capital gains-based incentive fees due to the net impact of realized and unrealized gains and losses in the prior quarter. We continue to believe that adjusted net investment income is a useful indicator of operations, exclusive of capital gains-based incentive fees. This quarter, adjusted net investment income for weighted average common shares was $0.11. Our balance sheet and liquidity remain strong as of June 30. We had availability under our line of credit of about $104 million. In July, our board of directors maintained a monthly distribution run rate of $0.84 per year, representing a current yield of about 8.4%, excluding any supplemental distributions. This concludes my part of today's call, back to you, David.

Okay, thank you, Dave, Julia, Michael. It's good information for our shareholders, and that presentation combined with the 10-Q filed yesterday should really bring everybody up to date on where we've been and give you an indication of where we think we can go. We believe the team here is in a good position to continue the success of the fiscal year ending March 31, 2021, and manage the portfolio through the current time of uncertainty. Gladstone Investment is an attractive investment for shareholders who like distributions and hopefully some capital gains over time. The general economy, of course, is in recession today because of the government's reaction to the COVID-19 virus. What makes it difficult to provide indications of where we're going is the uncertainty of government actions regarding COVID-19. There is no safe place in the marketplace today. So I hope some of you will use our stock as a place to park some money and pick up good cash while you're waiting. Sara, would you come on for questions from our analysts and shareholders?

Thank you. Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann. Your line is now open.

Yes, good morning everyone. Hope you're doing well. Several questions this morning. My first is with the dislocation in the market since COVID began and the obvious impact on spreads, could you give us a sense of the terms you received on Mason West?

Sure, Mickey, it's Dave. I would say, the answer is, I'm not as sensitive to spreads per se. Remembering, we're buying companies, we're combining our debt and our equity. So we look at total return on our total assets, both equity and debt. Our debt yields tend to be on average around 12%. We combine our equity and debt in a deal to give us a total yield in the high 9% to 10% range, and that deal was consistent with that.

Okay, thank you for that, David. That's helpful. And Mason West was a significant investment subsequent to the quarter. I just want to confirm you haven't had any material exits subsequent to the quarter; is that correct?

Correct. We had lots of exits last year, but not so far this quarter, correct.

Right, right. Well, there are some businesses that folks are obviously very interested in acquiring in the pandemic. And I was just curious about Horizon facilities. It was marked at par at March and then again at par at June, but it's now on non-accrual. So can you just walk through what's going on there, why it's on non-accrual and what is the outlook for the company?

Sure, Mickey. Horizon is heavily dependent upon the travel industry, providing rental car services. As travel declines, so will its business in general. We have seen some pickups recently as we learn to manage the virus better. Our investment should return to normal levels as travel resumes.

So did they miss an interest payment or what would cause the non-accrual?

Yes. We place something on non-accrual if we either don't believe they will continue to pay or if they missed a payment. Those are the two criteria.

Okay. So the valuation reflects your optimism that in the not-too-distant future things will return to normal for Horizon?

Yes, I would add to that, Mickey. The good news for this company is their management team is superb, and they did all the right things to preserve capital. So I believe it's a temporary situation and the valuation reflects that.

Okay. Dave, besides Horizon, what other investments caused the decline in your average risk rating? Was there anything else meaningfully underperforming that caused that decline?

Not anything that I can think of offhand.

No, Mickey, this is general as you look at the market currently, that's how we are assessing it. It's not perfect. We'll just be closely monitoring that.

One of our investments, Nth Degree, was an outstanding business we exited for very significant capital gains, however it has faced a significant decline in value due to the pandemic.

I did see that decline, Dave, and I appreciate the clarification. How about another new deal, The Maids? How are they performing in the current environment?

Good question. Initially, we did see a drop-off at the franchise level; however, we are now seeing that picking up. Management did a wonderful job of making adjustments in operating expenses. Additionally, they added a service capability in industrial cleaning, which has been a help. They did access some PPP money, which was a very positive thing for them. So, I see them coming back and doing well.

That's good news, Dave. And in terms of PPP, did you manage to get more PPP money into the system this quarter, or does it remain limited?

It remains limited; The Maids and Nth Degree are the only ones that received PPP money due to the affiliation rules. Where we've needed to, we've been able to provide our own support.

Yes, I noticed the follow-on investments were very small this quarter. So, Dave, how would you characterize the outlook for liquidity of your borrowers in general?

On average, we're in good shape. There may be one or two companies needing additional support down the road, but for the REST of the portfolio, we look pretty good. Most of our companies have been managing well.

Okay, that's helpful. My last question just looking at the dividend. Given the spillover that you have, is there still an expectation for another semi-annual supplemental dividend this year?

When we started the semiannual dividends, we've maintained it effectively. We'll take a hard look at that, but I can't say we will have one or not at this point.

And in terms of the regular dividend, given the spillover, is there an expectation to maintain the dividend at this level?

We're doing everything we can to maintain our current levels. This will be reviewed by the board as we move forward during the year.

I appreciate it, Dave, and thanks for all your time this morning and your patience. I hope everyone stays safe. That's it for me.

Thank you.

We're all looking at it the same way you are. We are trying to figure out where tomorrow will be. I think if we had something that everybody believed in, I'm personally a believer in hydroxychloroquine. A lot of people aren't, but I think that could be a solution. But Sara, come on and see if there's a second group that wants to ask a question.

Thank you. Our next question comes from the line of Ryan Carr with Jefferies. Your line is now open.

Hi, good morning, everyone and thank you for taking my questions. My first here is around the yield. Curious to hear why the yield contracted to 11.8%, was it driven by light repayments?

Let's start with the latter part of the question and LIBOR floors. Most of our capital is term preferred stock which is a fixed rate. Our line of credit, while LIBOR based, would fluctuate limited. Most of our floors are well in excess of where LIBOR is currently. Therefore, we do not expect to see a decline in our income as a result of LIBOR fluctuation.

Okay, thank you very much. And then in terms of the deployment outlook or the deal environment, curious as to what your views are now on the current environment going into the next six months?

We are seeing a pickup in activity in deal flow. There are companies that might have been previously thinking about going out to market. We are witnessing sellers more willing to look at structures that accommodate transactions due to the recent changes in the market, which are leading to rational valuations. We have an advantage in that we can provide debt and equity.

Great, thank you. And then in terms of the portfolio companies themselves, how are average EBITDA trends holding up compared to pre-pandemic levels?

It's tough; evaluations are no longer based on just the last 12 months. We have to factor in the temporary versus long-term impacts of COVID-19 on these companies.

Great, thank you very much for answering all my questions and hope all of you are well.

We're all good down here. Thank you for your time. Sara, do we have anyone else with a question?

There are no further questions in the queue at this time.

Alright. Well, we'll end up by just saying thank you all for calling in and asking good questions, and we'll see you again in October. That's the end of this call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.