Gladstone Investment Corporation\De Q4 FY2024 Earnings Call

Greetings and welcome to the Gladstone Investment Corporation Fourth Quarter and Year-End Earnings Conference Call. 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.

Okay. Thank you, Latoya. That's a very nice introduction, and good morning to you all. This is David Gladstone, Chairman of Gladstone Investment. This is the fourth quarter and fiscal year-end March 31, 2024, earnings conference call for shareholders and analysts of Gladstone Investment. We are listed on NASDAQ under the trading symbol GAIN for the common stock, and we also have three preferred stocks: GAININ, GAINZ, and GAINL, along with three other registered notes. Now I'll turn it over to Michael LiCalsi, our General Counsel, who will provide some initial remarks. Go ahead, 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, and 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 risk factors listed on our Forms 10-Q, 10-K and other documents we filed with the SEC. You can find them on the Investors page of our website, gladstoneinvestment.com or on the SEC's website, which is www.sec.gov. And 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. And 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, that's gladstoneinvestment.com; you could sign up for e-mail notification service there. You can also find us on Twitter @GladstoneComps and on Facebook, the keyword is the Gladstone Companies. Today's call is simply an overview of our results through March 31, 2024, so we ask you to review our press release and Form 10-K, both issued yesterday for more detailed information. With that, I'll turn it back to Dave Dullum, President.

Mike, thank you, and good morning to everyone on the call. We are excited to share that GAIN has reported strong results for the fourth quarter and the fiscal year ending in March 2024, building on the solid performance from the first three quarters of this fiscal year. For the fiscal year that concluded on March 31, 2024, we achieved an adjusted net investment income of $1 per share and raised the total fair value of our portfolio to $921 million, a notable increase from $754 million at the end of the previous year. This growth results primarily from increased assets through new buyout activities and additional financing for existing portfolio companies, although it was slightly offset by a successful exit that resulted in a realized capital gain of $43.5 million. In total for fiscal year '24, we invested $184 million, up from $134 million the prior year. Of this amount, approximately $61 million went into two new buyouts, while $123 million was allocated to add-on investments or recapitalizations of existing portfolio companies. It's important to note that these recapitalization events were not due to negative circumstances; they presented opportunities for us to generate capital gains, some income, and maintain a significant ownership stake in those companies. These recapitalizations did not involve buyouts, as I clarified there were two new companies involved, and four companies were included in the recapitalization and add-on categories. We will continue to seek out additional investment opportunities as they allow us to deepen our involvement with companies whose management teams we know well and for which we have confidence in their future, enabling us to build value for future equity gains. Expect more of these add-on opportunities in the future. Throughout the year, we maintained our monthly distribution to shareholders at $0.08 per share, resulting in an annual total of $0.96 per share. Additionally, we distributed a total of $1.24 per share in supplemental distributions, leading to overall annual distributions of $2.20 per share for the fiscal year. These substantial supplemental distributions showcase the success of our buyout strategy, which allows us to reward shareholders with additions from realized capital gains as well as income from our regular monthly distributions. As our portfolio has matured since 2005 and its equity values have risen, we are well-positioned to continue realizing these gains for the benefit of our shareholders. Our model enables us to hold onto certain investments for an extended period, which ultimately benefits our shareholders by allowing us to avoid rushing exits. We've made investments totaling approximately $1.7 billion across 58 buyout companies since our inception in 2005, exiting 31, which has contributed to our asset growth to the previously mentioned $921 million. This has allowed us to realize roughly $290 million in net gains and about $42 million in other income from these exits, reinforcing our goal of being a fundamental private equity-style fund while providing monthly distributions alongside capital gains. Our balance sheet remains robust, and we maintain low leverage. Rachael will provide further details on this shortly. We will continue to support our portfolio companies and consider add-ons or interim financing as necessary while growing our assets through new buyouts. Looking at the outlook, deal flow remains strong, with a growing backlog of new opportunities reported by investment bankers we collaborate with. The overall quality of opportunities is decent, but the volume has rebounded to pre-existing levels. We are actively engaged in new buyout deals and add-ons at various stages of our buyout process, having issued initial indications of interest and advancing to letters of intent and due diligence. We anticipate completing something in the next three months. The market has significant liquidity and is competitive, prompting us to remain conservative, as we have successfully managed in the past. We will compete for new acquisitions but will carefully consider the values we are willing to pay. Our portfolio is positioned well to proceed cautiously. I am optimistic about our current momentum and the company's state. In summary, our portfolio's condition is strong, with a liquid balance sheet and ongoing buyout activity, setting us up for solid earnings and distributions in the upcoming year. We have the right components in place to sustain our performance. Now, I will hand it over to Rachael Easton, our CFO, who will provide further insights into our performance. Rachael?

Thank you, David, and good morning to everyone on the call. Looking at our operating performance, we finished fiscal year 2024 strong, generating total investment income of $87.3 million, up from $81.5 million in the prior fiscal year. This was driven by an increase in the weighted average yield on our debt investments to 14.4% for the year as well as interest income earned on new investments made during the year. This increase in interest income was partially offset by lower dividend and success fee income, which can be variable in timing and due to amounts that did not recur in the current year. Additionally, we ended the year with adjusted net investment income of $34.5 million or $1 per share, down slightly from $36.7 million or $1.10 per share in the prior fiscal year, although still more than enough to cover our annual regular monthly distribution of $0.96 per share. Focusing just on the fourth quarter of FY '24, we generated total investment income of $23.6 million, up from $23.1 million in the prior quarter. This was primarily due to an increase in success fee income, the timing of which can be variable, as I mentioned. Net expenses for the fourth quarter were $18.3 million, up from $13.3 million in the prior quarter. The increase is primarily due to a $4.1 million increase in accrued capital gains-based incentive fees due to the net impact of realized and unrealized gains and losses as required to be reported under U.S. GAAP. This resulted in net investment income for the quarter of $5.3 million compared to $9.7 million in the prior quarter. The fluctuation is primarily due to that large accrued capital gains-based incentive fees recognized in the current quarter. Adjusted net investment income, which is net investment income exclusive of any accrued capital gains-based incentive fees for the quarter was $8.8 million or $0.24 per share, down slightly from $9.1 million or $0.26 per share in the prior quarter. We do continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations. During the quarter ended March 31, 2024, the number of portfolio companies on nonaccrual was reduced to 2 companies from 3 upon the dissolution of 1 investment. We will continue working with the remaining 2 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 3 public note issuances, we have long-term fixed rate capital in place and as of yesterday's release, we had $135 million available on our $200 million credit facility. Additionally, we were very successful on our common stock ATM program this quarter, raising approximately $19 million in net proceeds on the sale of over 1.3 million shares of our common stock with all shares being accretive and above NAV. Overall, our leverage remains low, with an asset coverage ratio at March 31, 2024, of 219%, providing plenty of cushion to the required 150% coverage. Our NAV increased this quarter to $13.43 per share compared to $13.01 per share in the prior quarter. The increase was primarily driven by $0.88 per share of net unrealized depreciation of investments and $0.15 of net investment income. These amounts were partially offset by $0.41 per share of realized losses on investments and $0.24 per share of distributions paid to common shareholders during the quarter. Consistent with prior quarters, distributable book earnings to shareholders remain strong. We ended the fiscal year with $20.1 million or $0.55 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 the fiscal year, we've seen an aggregate $1.24 per share in supplemental distributions. As Dave mentioned, we look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of our exits. In the aggregate, we paid $2.20 per share in regular monthly and supplemental distributions during the fiscal year, which is a yield of about 15.5% using yesterday's closing price of $14.16. This covers my part of today's call. Back to you, David.

Okay. Thank you. That's very nice, Rachael, and nice report by Dave and Michael. And it's good information for our shareholders. This call and the 10-K filed with the SEC yesterday should bring everyone up to date at this point in time. The team has reported solid results for the quarter and the year ending March 31, 2024, including the investment in exit activity associated with those net realized gains. We believe the team is in a great position to continue this success for the next fiscal year, which is less than a year away, we believe that Gladstone Investment is an attractive investment for investors seeking monthly distributions as well as supplemental distributions from potential capital gains and other income. The team hopes to continue to show you a good solid return as we go forward with this new year. Now let's have some questions from our shareholders and analysts that are on the line, Latoya.

Our first question comes from Mickey Schleien with Ladenburg Thalmann.

Dave, your fund reported a very nice unrealized gain of $0.88 per share apart from the reversal for the Mountain. Can you highlight what drove that? And any themes that would help us understand what caused that appreciation?

Sure. Mickey, I'll let Rachael have a quick stab, and then I'll come in and fill in some thoughts behind that.

Sounds great. Looking at the portfolio as a whole, from an unrealized depreciation perspective, it's almost entirely due to performance at many of the portfolio companies. We did see decreased multiples across the portfolio. This was offset by decreased performance at a handful of companies, but it was really performance driving the unrealized depreciation we saw. There was a bit in there that was due to the reversal of unrealized depreciation of the Mountain as we realized that this quarter with the final dissolution, but really it's the performance of many of our companies.

Yes. And I think as we reported in our K, where we showed the individual breakdown of the portfolio companies for the year ended, you know we'll notice that a good number of those have appreciated relatively significantly. There are a small handful that are off by 1 million here and a couple of million here, so to speak. A fair amount of that. And I can tell you, based on the portfolio, my personal view and knowledge with the individual portfolio companies, that those that are slightly off with the exception of a couple that have been in our portfolio for a while that are all actually performing better, and I feel like we're headed in the right direction on most of them. Obviously, and as Rachael said, some of it is a function of EBITDA being down a little bit in some cases. At the same time, multiples are down, but by and large, I'd say there are no major issues in there, just overall fundamentally good performance. And frankly, a good handful of these companies performing at a very high level, generating fairly significant individual net gains. I think that's really the best I can address on it.

Thank you for that, Dave. Given your comments about strong performers in the portfolio, there is significant demand in private equity for acquiring well-performing companies. I understand that in the past, you've mentioned that it can be challenging for you to decide to sell an investment because you would then need to find a replacement. However, I imagine you must be receiving some attractive offers for these investments in the upcoming fiscal year. Is it fair to say that you might realize some of those unrealized gains?

You make excellent points. I agree with your observations. We have always maintained that our decisions to exit a business often depend on the management teams we’ve invested in. If they approach us indicating a need for liquidity or that the time is right to exit, as we saw with Counsel Press last year, we take those insights seriously. Generally, our business model allows us to hold on to these companies, and when we do exit with significant realized gains, we need to find replacements. We carefully evaluate the opportunities that arise, whether it's from investment bankers suggesting market entry or other reinvestment decisions. If we truly value a business and its leadership, we consider reinvesting, which we do regularly as we assess our portfolio. Additionally, it's crucial for our model to generate realized gains for our supplemental distributions. Looking ahead, it seems more likely that we will achieve a favorable exit in the upcoming year rather than not. We will exercise caution in our approach to exits while ensuring we maintain our asset levels to support monthly income distributions. It’s a delicate balance, and this is undoubtedly a topic we grapple with. But overall, I believe we are well-positioned in this regard.

That's really helpful, Dave. And one last question for me. You and your affiliated companies in the Gladstone universe have a track record of fixing problem investments. Sometimes we see situations like the Mountain that just don't work out, but I can think of others where you've merged companies, or you've replaced managements, you recapitalized businesses. So with that in mind, can you tell us what you're doing with Edge and Hobbs, which if I'm not mistaken, have both been on nonaccrual for a while. And I'm sure you'd like to rectify those?

Yes, Hobbs has seen benefits from our meeting last September. You had the opportunity to meet some of the management teams, and Hobbs has a very capable management team. Without going into detail, their positive performance right now stems from a few factors. One issue has been their rapid growth with new business and contracts, which unfortunately came with less favorable pricing than they should have had. As a result, they were losing money on some fixed-price contracts based on a percentage of completion. We believe we have managed to address most, if not all, of those issues, and currently, they've reduced their volume, meaning the revenue figure is lower compared to a year ago. However, the margin and EBITDA are now positive and moving in the right direction. The team remains strong, and we have good people on the board. We will continue to work on this, and with some luck, we might be back on accrual within a year or less. Regarding Edge, there are a couple of components in play right now, and we've recently made some changes in one aspect of that business. I cannot share further details, but we are actively addressing it, and hopefully, we will see some positive outcomes there as well.

Dave, and congratulations to you and your team on the end of a very good fiscal year for Gladstone.

Thank you, sir. I hope you're feeling better, by the way, and I hope we get to see you soon.

We do have a question that just came in from Bryce Rowe with B. Riley.

David, I just wanted to ask about a comment you made in your prepared remarks; it sounded like maybe the volume of opportunities was up and in a good spot. But maybe the quality of those opportunities was a little more spotty, if you will, just any thoughts around kind of where that comment came from and what in particular you're seeing with deals that maybe makes them a little less attractive than you'd like them to be?

Thank you, Bryce. I'm glad you could join us, or we would certainly miss you. Looking at the investment banking side, companies that were on hold at the end of last year are now starting to reappear in the backlog. I see a fair number of new deals coming our way, but we need to be very selective about where we invest our time. The deals we focus on are generally those we believe we can acquire for around 6x to 7.5x EBITDA. However, in some cases, even when we consider the value to be good, we often don't get the opportunity to meet with management due to competition from others offering 8x to 9x. While these competing companies might seem attractive, it's hard for us to understand how one justifies paying those multiples. The quality of opportunities can be inconsistent; some companies look promising on the surface but are smaller, have less reliable EBITDA, and lack clear market positioning or differentiation. They are fundamentally decent businesses, but not ones we feel we can effectively take on. Usually, executing 3 to 5 new deals a year is quite good for us, so we must be extremely selective. The overall activity level has increased, allowing us to make thoughtful decisions on how to pursue new deals in the next nine months or so.

Bryce, just to mention that some of our folks are saying that everybody and their mother is trying to put together deals. So there are a lot of what they call independent sponsors out there trying to take a company and call it a beginning roll-up, and we don't believe in some of these fictitious numbers that come through. And so from that standpoint, we're just seeing a lot that we don't like. We may see 5 or 6 and then pick 1 of the best of the lot. There's another thing going on in the marketplace now that has not been mentioned that is inflation. Inflation helps everybody out who wants capital gains because things go up in 5 years, and you get a chance to sell it at a very, very attractive price compared to where you bought it. So we've seen some of that. So don't count out inflation because inflation is here for a good amount of time.

Are there any other questions?

Okay. Thank you, Latoya. And you guys didn't come up with enough questions this time. Would you please work on that before you come to the next meeting? Thank you very much for attending, and that's the end of this conference call.

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