Gladstone Investment Corporationde Q4 FY2020 Earnings Call

Greetings, and welcome to Gladstone Investment Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. David Gladstone, Chief Executive Officer. Please proceed, sir.

All right. Thank you, Atalia. Good morning to all of you out there. This is David Gladstone, Chairman, and this is the fiscal year ending for 2021 for this fund. Shareholders and analysts, hopefully, you will ask us some good questions at the end. We are listed on NASDAQ under the trading symbol GAIN for the common stock and we’ve got two other trading symbols, GAINL for the preferred stock 6.275% and then GAINM for the registered note at 5% that matures in 2026. Thank you all again for calling in. We are always happy to talk to you and provide updates to our shareholders and those great analysts that follow us. Dave Dullum and Julia Ryan will be up in a few minutes. But first, we are going to start with our General Counsel and Secretary, Michael LiCalsi. Mike?

Thanks, David. Good morning, everybody. 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 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 listed on our Forms 10-Q, 10-K and other documents we filed with the SEC. You can find them all on the Investors page of our website or the SEC's website. 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 past performance or market information is not a guarantee of any future results. Please take the opportunity to visit our website once again and sign up for our email notification service. You can also find us on Twitter @GladstoneComps and on Facebook using the keyword Gladstone Companies. Today’s call is simply an overview of our results through March 31, 2021, so we ask you to review our press release and Form 10-K, both issued yesterday for more detailed information. Now, with that, I will turn the presentation over to Dave Dullum, President of Gladstone Investment. Dave?

Hey, Mike. Thanks very much and good morning to everybody. I am happy to report that we have come through the fiscal year ending March 31, 2021, with minimal COVID scars. We ended the year with an adjusted NII of $0.69 per share, with the last two quarters showing a recovery trend with the adjusted NII per share at $0.20 and $0.24, respectively. This trend reflects the COVID impact on the first two quarters, where we limited the other income from portfolio companies and obviously reduced some interest income as well. We also increased NAV per share from $11.17 on March 31, 2020, to $11.52 per share at March 31, 2021, and increased assets to $644 million from $576 million. We maintained our monthly distribution at $0.07 per share, or $0.84 per share on an annual basis, and paid a supplemental dividend of $0.09 per share in June of 2020. We were able to exit one portfolio company, completed a dividend recapitalization of another, both of which generated other income from exit fees and/or dividends, and we also realized capital gains on equity. Since inception in 2005 and through March 31, 2021, we have invested in 53 buyout portfolio companies, with an aggregate of about $1.4 billion. We exited 23 of these companies generating about $238 million in net realized gains and over $31 million in other income on exit. This reinforces our buyout investing strategy to generate both income from monthly distributions to shareholders and capital gains on equity for supplemental distributions. This provides stability, especially in periods as we have recently experienced. It is important to note the effect of quarterly changes in our portfolio company’s equity values as they are highly correlated to the overall portfolio value, given that about 25% of our assets at cost consist of equity securities. Where we experienced primarily equity valuation declines early in the COVID cycle, we are now seeing clearly improving valuations and therefore increases quarter-over-quarter. We are seeing two of our portfolio companies that were on non-accrual come back on accrual status this quarter, and we hope to continue that trend during the next fiscal year with at least two other companies. Given the exits and favorable financings executed before March 31, 2021, we begin the new fiscal year with a very strong and low leveraged balance sheet and excellent liquidity availability, and Julia will elaborate more on this in her section. Regarding the pandemic, we briefly want to review that the portfolio companies that experienced disruption in earnings decline are starting to see real improvement. Fortunately, we did not have to provide much financial support, although we continuously monitor potential issues and are proactively engaged with our company’s management teams to provide support as necessary. Looking forward, we will continue providing managerial financial support to our portfolio companies while actively reviewing potential new acquisitions. The buyout market does continue to present challenges with elevated purchase price expectations, so we must maintain our discipline and a high level of due diligence. Currently, we are engaging in discussions with a few acquisition opportunities where I believe we might take advantage of attractive valuations and close some deals. Overall, I am encouraged by the state of our portfolio, the strength of our balance sheet, and the prospect of good earnings and distributions over the next year. The structure of our portfolio is geared toward providing consistent monthly distributions with a view of increasing them as appropriate. We expect to continue our run rate monthly distribution of $0.84 per share annually, and we have declared another supplemental distribution of $0.06 per share to be paid in June of 2021. With that, I will turn it over to Julia, and she can go with some more details. Julia?

Good morning. Thanks, Dave. Looking at operating performance for the past year and the quarter, fiscal 2021 certainly had its challenges, but we are happy to report positive trends during the latter part of the year, resulting in total investment income of $56.6 million, adjusted NII of $0.69 per share, and over $11 million of net realized gains on investments. We are excited about our financing success during the last fiscal quarter with the issuance of our 2026 notes, the redemption of the Series D term preferred stock, and the extension of our credit facility. For the most recent quarter, we generated adjusted NII of $6.7 million, or $0.20 per share, compared to $8 million, or $0.24 per share in the prior quarter. We continue to believe adjusted NII is a useful and representative indicator of our operations. Investment income declined slightly quarter-over-quarter due to a decrease in other income, which was attributed to investment transactions in the prior quarter, partially offset by an increase in interest income. As Dave mentioned, two of our loans will return to accrual status during the quarter, and we expect further improvement going into this new fiscal year. Net expenses increased by $2.4 million compared to the prior quarter, primarily driven by a $1.8 million increase in the capital gains-based incentive fee due to the net impact of realized and unrealized gains and losses in the current quarter. Again, to reiterate, the fee is not yet contractually due. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With the successful financing transactions this quarter, we have new long-term capital in place and availability under our credit facility of about $158 million as of March 31, 2021. Our NAV increased to $11.52 per common share quarter-over-quarter, primarily related to net unrealized depreciation of $17.3 million. Distributable income to shareholders remains very solid. On a book basis, undistributed net investment income combined with net realized gains totaled $11.3 million or about $0.34 per common share. Our Board of Directors declared another $0.06 supplemental distribution to common shareholders to be paid in June of 2021. Assuming the current monthly distribution run rate of $0.84 per share per year and estimating $0.12 per share in supplemental distribution, our total distributions would total $0.96 per common share, resulting in a yield of about 7% using yesterday's closing price. And this covers my part of today’s call. Back to you, David.

All great, Julia, very nice work. You and Dave and Michael have informed shareholders and along with that 10-K that you filed yesterday, which is one of the largest I’ve ever seen. I think the people who are following our stock have plenty of information about how strong we are. Our team has reported solid results for the fiscal year, including financings, buyout investment transactions, and exit activity with significant realized gains. We believe the team is in a great position to continue to succeed for our fiscal year ending March 31, 2022. I personally believe Gladstone Investment is one of the attractive investments for investors seeking continuous monthly distributions of income that we’re generating and supplemental distributions from potential capital gains. I think the record during the year, in which COVID-19 and the government’s reaction to it, has been extremely good. Assets increased from $576 million to $644 million, net assets up from $11.17 to $11.52, all while paying a steady dividend. For those who love dividends, like me, we’ve enjoyed going right through this recession caused by COVID-19 with our dividends being paid. So, great job by the team that’s running quite some investment. Now let’s stop and have our operator come on, and we’ll have some questions from the analysts or any other shareholders out there.

Thank you. Our first question comes from Kyle Joseph with Jefferies. Please proceed.

Hey, good morning. Thanks very much for having me on. Quick question, in terms of the markets you guys focus on, just want to get a sense for where spreads and pricing are in contrast to pre-COVID levels?

Hey, Kyle. Good morning. It’s Dave. I won’t answer the question really in terms of spreads, because as you know, we view the market we’re at when looking to buy companies. Not much has changed, to be honest, regarding enterprise value of companies that we are looking to buy. Pre-COVID multiples for good companies were pushing 7x trailing EBITDA. We’re seeing frankly, that same sort of environment, and even some elevated multiples. The tricky part is that several companies that went through COVID did very well, while others obviously did not do as well. The important thing is to look through the adjustments that are financed way into EBITDA. Generally, from an enterprise value perspective, the multiples are still fairly high, which really requires some rigor in seeing how you ultimately get a return on it.

Very helpful. Thanks. And then on non-accruals, great to see two investments turn back on. Just curious, would you say this resulted from broader economic improvement or specific actions you’ve taken with these companies?

Yes. I would say, and Julia should answer this as well. It’s a combination of things. Generally, the businesses were improving, and they were also doing a good job managing the companies. Hopefully, there are a couple more returning to accrual status, and if that happens by the end of this calendar year, we could be out of all our non-accruals with perhaps the exception of one company.

Okay, helpful. Thanks for answering my questions.

Yes, sir.

Okay. Second question.

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Gladstone for closing comments.

All right. Thank you for calling in. I wish you had more questions. We’d like to answer any questions that are out there floating around. But at this point in time, we’ll see you next quarter. That’s the end of this call.

Thank you, ladies and gentlemen. You may disconnect your lines at this time, and have a great day.