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Gladstone Investment Corp (GAIN -0.07%)
Q1Â 2020 Earnings Call
Aug 1, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to Gladstone Investment Corporation's First Quarter Ended June 30, 2019 Earnings Call and Webcast.[Operator Instructions].
I would now like to introduce your host for today's conference, David Gladstone. Mr. Gladstone, you may begin.
David J. Gladstone -- Chairman and Chief Executive Officer
Thank you, Sarah. This is the quarterly earnings conference call for the shareholders for June 30, 2019, and we also invite our analysts in and hopefully they'll ask some questions. This is the common stocks traded on NASDAQ GAIN, and it's 2 preferred stocks, one is GAINM and the other is GAINL. I want to thank you all for calling in. We're always happy to provide an update to our shareholders and analysts to provide for a view of the current business environment. There's 2 goals here: one, to help you understand what happened in the past, and also to give you a view of the future.
Now we'll start out with Michael LiCalsi. He's our General Counsel. Mike?
Michael LiCalsi -- President, General Counsel and Secretary
Good morning, everyone. 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 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 that we filed with the SEC. You can find all these on our website, www.gladstoneinvestment.com, or even 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. Please also note that any past performance information or market information is not a guarantee of future results.
We ask that you take the opportunity to visit our website, once again, gladstoneinvestment.com, sign up for our email notification service. It can also be found on Twitter @GladstoneComps; and on Facebook, keyword there is The Gladstone Companies. As a reminder, today's call is simply an overview of our results through June 30, 2019. So we ask you to review our press release and the Form 10-Q, both issued yesterday for more detailed information.
And with that, we can turn the presentation back over to Gladstone Investment's President, David Dullum. Dave?
David Dullum -- President
Hi, Mike, thank you very much, and welcome, and good morning to everyone, our shareholders and analysts. So I'm pleased to report very solid operating earnings and results for this quarter ended June 30, 2019, which is the first quarter, of course, of our fiscal year, which ends 3/31/20. Our adjusted net investment income for the quarter was $0.25 per share, up from $0.23 per share last quarter and which was greater than our quarterly dividend of $0.20 per share. And based on the mix of our current portfolio, sustainability and the income-generating potential, I'm encouraged for the outlook of the balance of the fiscal year ending 03/31/20. Also in June, we made 1 new buyout investment for about $39 million and exited 2 buyout investments in April. So with these exits and since inception for this fund in 2005, we have actually exited 18 portfolio companies and generated approximately a 4.2x cash-on-cash return on the equity portion of those investments, same time while we continue to grow total assets, increase our monthly distributions to shareholders.
Additionally, at this quarter end, our net asset value, or NAV, remained strong at $12.29 per share. We maintained our monthly distributions at an annual rate of $0.82 per common share, reflecting -- and reflecting our good results in the capital gain realization area, we made a $0.09 per common share distribution in June as the first of our semiannual supplemental distributions program for the calendar year 2019. This is an increase, actually, from the $0.06 per share that we made in December 2018 as the second semiannual supplemental for calendar 2018. Our Board also recently approved a onetime additional supplemental distribution of $0.03 per common share, which is to be paid in September. Now this onetime distribution is related to the realized gains that were generated with the recent exits and the associated deemed distribution that we made earlier this year. And as a reminder, we generated significant net realized gains in the last fiscal year, which ended 03/31/19 -- '20, sorry, and we made the decision to retain a large portion of these gains, pay the required tax and declare a deemed distribution to common shareholders. And we do this because we believe this is a prudent way to maintain capital for reinvestment and growth of the portfolio, and we may consider doing this again when we create additional capital gains.
Quickly turning to the outlook of where we are today. And as we look forward, the buyout environment, which is where we operate, it continues to be extremely competitive, even though we're still focused on buying companies that are accretive to both income and the equity portions of our assets. The good news is we're seeing a pickup in new investment activity. And as mentioned, we made 1 new acquisition in June, and we are evaluating a number of other potential opportunities. So we anticipate continuing to pay the semiannual supplemental distributions as the portfolio matures and grows, and we're able to manage exits and realize additional capital gains. Of course, it is with our Board of Directors that we will evaluate this ability to make these additional supplemental distributions, their amount and their timing as well as further deemed distributions of capital gains. Now our CFO Julia Ryan is on a temporary family leave and will return at the end of this month. So I'm going to actually sub for her and give a quick overview of a little more detail of our financial performance. For the operating results, we ended the June quarter with an NII, net investment income, of $8.9 million as compared to a net investment income of $5.5 million in the prior quarter or NII per share of $0.27 this quarter, up from $0.17 last quarter.
Interest income remained stable, while other income increased by about $2.1 million, which is a function of the variable nature and the timing of dividends and success fee income. Our net expenses decreased by approximately $2.2 million in the current quarter, which was primarily driven by a decrease in the capital gains-based incentive fee due to unrealized depreciation, which was recognized during the quarter as well as an increase in credits from the advisor associated with our origination fees that we received on our new investment. These factors were partially offset by an increase in the income-based incentive fee to the advisor, which was also further driven by an increase in our net investment income increase. So when adjusting the net investment income to exclude the capital gains-based incentive fee accrual, adjusted net investment income per weighted average common share was $0.25 in the current quarter. And again, this was up from $0.23 per share in the prior quarter. We continue to believe that adjusted net investment income is a useful and representative indicator of operations exclusive of any capital gains-based incentive fee as net investment income does not include realized or unrealized investment activity, which is associated with the capital gains-based incentive fee. Also, during the quarter ended June 30, we recognized a net realized gain on investments of approximately $500,000, which is primarily results of the exits that we noted earlier. Quickly looking at some balance sheet items.
The total assets as of June 30, increased to $642 million, which compares to about $635 million at March 31. This is as a result of new investment income, investments and disbursements to existing portfolio companies, which exceeded repayments and exits. Our liquidity remains very strong with over $120 million available under our credit facility, with an asset coverage ratio of approximately 287%. And our net assets totaled about $404 million or $12.29 per share as of June 30, which actually is down $0.11 from March 31, primarily as a result of small unrealized depreciation net of realized gains. In terms of distributions and accruals as of June 30, and on a book basis per the balance sheet, undistributed net investment income and net realized gains in aggregate totaled over $6 million or about $0.19 per common share. So this amount is net of the $50 million deemed distribution, which we declared as of 03/31/19 and also accounting for the capital gains-based incentive fee accrual, which is roughly $22 million.
That is not yet due to be paid. So this amount of $0.19 per share would be available for distribution to shareholders in future periods, even if the entire capital gains-based incentive fee accrual were to be paid. So with that in mind and as previously announced in July, our Board of Directors declared monthly distributions of $0.068 per common share for July, August and September of 2019, and that additional onetime supplemental distribution of $0.03 per common share to be paid in September. So assuming the current monthly distribution rate, which is an annual rate of $0.82 and the $0.18 per share in the supplemental distribution does not including a $0.03 onetime, we would have a total of roughly $1 per common share in annual distributions, which is about an 8.8% yield at yesterday's closing price of $11.33.
So with that, I'm going to turn it back over to David to wrap up our call. David?
David J. Gladstone -- Chairman and Chief Executive Officer
Dave, very good. And Michael, good information for our shareholders. That presents the information in the 10-Q filed yesterday, bring everyone up to date. The team has reported a great start to a new fiscal year, including new buyout investment, 2 exits with net realized gains and some add-on investment transactions that they finish. The team is in a good position to continue these successes throughout the fiscal year, March 31, 2020. We believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from potential capital gains and other income. Team hopes to continue to show you a strong return on your investment in our funds. And just as a note, we're still counting the votes for our Annual Meeting. So I want to urge all of you to vote your shares, you can do that by calling the 800 number, (800) 690-6903 and you'll need your control number. If you don't have any of that, and you see a note on your phone, it says Broadridge, that's not Spam, that is the people who are counting your votes.
So now let's have some questions from our analysts and shareholders. So operator Sarah, would you come on and tell them how to do it?
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Kyle Jeffrey -- I'm sorry, Kyle Joseph with Jefferies. Your line is now open.
Kyle Jeffrey -- Jefferies -- Analyst
Hey good morning guys. And congratulations on a good quarter. I've gone through the Q briefly, but I was hoping you could give us some more color in terms of credit performance. It looks like there were some moving parts in nonaccruals. Can you talk to us about additions, reductions in nonaccruals as well as your outlook for recoveries there?
Nicole Schaltenbrand -- Chief Financial Officer
Hi This is Nicole Schaltenbrand, acting as the Interim CFO, while Julia is on leave. There were not that many movements in nonaccruals. So we have 4 investments that were previously on nonaccrual that remained. B-Dry went off as we structure -- or working on our restructure with that investment and the debt portion was converted to equity. So it's no longer listed as a nonaccrual.
David Dullum -- President
Kyle, Dave here. Yes, there's nothing new to add. And further, what Nicole said, actually B-Dry, we exited and we are working on a couple of those that are probably going to come off of nonaccrual over the next number of months. So as I mentioned earlier, I feel really good about where the portfolio is today. We've got -- obviously, quarter-to-quarter, we'll have small movements in valuations, just depending on either up or down on EBITDA times, so multiple. So all told, I think we're in great shape on the portfolio.
Nicole Schaltenbrand -- Chief Financial Officer
Yes. And no new items added this quarter.
Kyle Jeffrey -- Jefferies -- Analyst
Okay. Sorry, no, I was just -- I was talking about how nonaccrual costs went down and fair value went up, but everything you said explains that. So I appreciate that. And then last one for me. Obviously, you guys have a unique strategy compared to most BDCs out there, but if you could give us an update on your competitive environment, specifically, that would be helpful?
David Dullum -- President
So yes, it continues to be difficult, if you want to call it that are challenging, as I always say, but I would -- but not any different than it's been for the last 6 to 9 months. We did make 1 new investment at the end of the June quarter, as I mentioned, which is great. We got a number that we're working on that are either in for us, what's called the letter of intent stage or in fact even due diligence. So again, stay tuned. I mean, we are -- I feel good about where we are and where we're going. And we're also working on a couple of exits, which could be very beneficial from a cap gains perspective. So all-in-all, I think we're in a pretty good year this year.
Kyle Jeffrey -- Jefferies -- Analyst
Great. Thanks very much for answering my question.
David Dullum -- President
Thanks.
Operator
Thank you. Our next question comes from the line of Mickey Schleien with Ladenburg. Your line is now open.
Mickey Schleien -- Ladenburg -- Analyst
Dave, could we just go back to B-Dry and could you walk us through your strategy for converting their debt and the outlook for capturing some value in those preferred and common shares?
David Dullum -- President
Yes. So Mickey, that entity, we have converted it and then we exited the company. So we don't -- we no longer own B-Dry.
Mickey Schleien -- Ladenburg -- Analyst
Okay. And did you exit near the fair value?
David Dullum -- President
No.
Mickey Schleien -- Ladenburg -- Analyst
All right. I'd also like to ask about the outlook for J.R. Hobbs. I see that you extended them a credit facility. And then you wrote down your preferred shares pretty sharply. Just an update on what's going on there and the outlook, please?
David Dullum -- President
Yes. So they are in the contracting business, HVAC contracting business, and they've actually been growing very dramatically. And that puts some stress on, as you might imagine, working capital. We made an add-on acquisition to that business back earlier in the year. So from the fundamentals of the business, they're doing very, very well. We had a couple of contracts that were not properly reported very frankly. In terms of the profitability, it's a very stable business now and continuing to grow. So again, we had a -- what I would call a temporary blip in great part driven by fairly aggressive growth, frankly. So all-in-all, they're doing a great job and working capital just needed some incremental working capital and we were able to provide that.
Mickey Schleien -- Ladenburg -- Analyst
So the decline in the value of the preferreds is just the waterfall from the valuations?
David Dullum -- President
Yes, exactly.
Mickey Schleien -- Ladenburg -- Analyst
Okay. And dividend income, there was $3.1 million from affiliates. I know Jackrabbit was part of dividend income, but what was the $3.1 million from?
Nicole Schaltenbrand -- Chief Financial Officer
So it was made up of Jackrabbit as well as Brunswick with the rest of our dividend income. So that investment was able to pay us a fairly sizable dividend this quarter, making up to $3.1 million.
Mickey Schleien -- Ladenburg -- Analyst
Was there something so specific event at Brunswick that drove the dividend?
David Dullum -- President
No, you got to keep in mind, we -- I try to, of course, talk about this all the time, and one, it's -- with all of our investments, we have a couple of things that we are able to work with. One is those that have dividend income and especially if they have, what's called, earnings and profits for tax purposes, where they then are able to actually make a dividend distribution to their shareholders. So that's one item. And the other, of course, are fees that we generate with those portfolio companies. So what we do is as we work through each portfolio coming from time to time, we're able to either generate and have the company pay part of their exit fee, which in other BDCs, as you know, I talked a lot of times before, would be pick income, which, of course, is noncash, but we don't do it that way. When we can get an exit fee or a partial exit fee paid, that is cash income to us and report that, likewise, dividend distribution from one of our portfolio companies. So nothing unusual other than the company is doing very, very well. They had the ability to do pay a dividend. And so we work with our portfolio companies, and we try to manage that as a part of our overall income strategy, and we were able to bring it in that quarter.
Mickey Schleien -- Ladenburg -- Analyst
I understand. Just a couple of more questions. Is there a potential for the Virginia taxes on the deemed distribution to be much larger than the $3 million accrual?
Nicole Schaltenbrand -- Chief Financial Officer
No, we do not anticipate that it would be larger, any larger than that amount. And we do hope...
Mickey Schleien -- Ladenburg -- Analyst
Okay. And Dave, I know you made some -- I'm sorry.
Nicole Schaltenbrand -- Chief Financial Officer
No, we do hope to have that resolved within this fiscal year. So we'll provide a further update on that with our next filing.
Mickey Schleien -- Ladenburg -- Analyst
All right. So you've made the accrual, but you haven't paid them anything yet?
Nicole Schaltenbrand -- Chief Financial Officer
That's correct, yes.
Mickey Schleien -- Ladenburg -- Analyst
All right. And lastly, Dave, I know in your prepared remarks, you talked about supplementals, but it was pretty quick. Could we just review that again? Last year, you paid supplemental distributions in the first and the third fiscal quarters. And this year, you've declared them in the first and the second quarters. So based on your taxable income position, do you expect more special dividends to be declared in the near term?
David Dullum -- President
So the methodology that we're currently under, which our Board addresses, is if we do supplemental, it's basically twice a year, would be -- as we've done it in the past, in June and December. The one we did declare this year and paid was in June of this year. And of course, we would hope and anticipate, we can do another one, similarly, in December. So the only other issue or difference there was there was this incremental $0.03 that was declared and will be paid in September, that was actually kind of a left over, if you want to call it, based on the amount that we anticipated being able to distribute from the deemed distribution. So that truly is a onetime really relative to the deemed distribution, but the supplementals that I referred to on a semiannual basis, that is a program we'd like to obviously continue is the one that's going to be paid in June and December. And as I mentioned, we were at $0.06 last year per June and December, and we were able to step it up to $0.09 this June, and hopefully, likewise, in this December.
Mickey Schleien -- Ladenburg -- Analyst
I understand that's really helpful. Those are all my questions. I appreciate your time. Thank you.
David Dullum -- President
Okay. Thanks man.
Operator
Thank you. Our next question comes from the line of Mark Faron, he is a shareholder. Your line is now open.
Mark Faron -- shareholder -- Analyst
Good morning gentlemen and ladies. Just wanted to congratulate you on a great quarter. I do have one question about the deemed distribution, a lot of tax repercussions with that for the individual investors with retirement savings and 990-Ts and 2439s and all that kind of stuff. And I was just wondering, in the future, if you planned on a deemed distribution, if there was any chance you would consider maybe 50% of it going straight to the shareholders and the other 50% ending up in the deemed distribution?
David Dullum -- President
We evaluate any time. And if we have an opportunity for deemed distribution or cap gains as we take them, we'll evaluate them in the context, as I mentioned in my prepared remarks. And what we think is and believe is in the best interest, obviously, of all shareholders, the value of the company and the ability to recycle capital in a sensible way for reinvestment as we continue to grow. So there are benefits by having it and retaining it, one, you don't have to think too much about potentially doing an equity offering, which could be dilutive to equity shareholders. So it's a consideration. And the percentage and the amount will always be under consideration by management and our Board at the time. So we certainly are not going to set any hard and fast policy at this point.
Mark Faron -- shareholder -- Analyst
That sounds great. I understand the ability to capture that capital and reinvest it for the shareholders is great. One consideration that might introduce some transparency into it all would be the problem with those 2439s and 990-Ts and maybe when that all gets straightened out in the next few months, there could be some type of announcement on the Investor Relations Board, just to clarify for the individual investors. But once again, just want to thank you all for the hard work. Fantastic quarter, fantastic year and thanks again guys.
Operator
Thank you. There are no further questions on the phone lines at this time. I would now like to turn the call back to Mr. David Gladstone for closing remarks.
David J. Gladstone -- Chairman and Chief Executive Officer
All right. Thank you all for calling in. And as mentioned by our last person on the phone, we are working on trying to make sure everybody understands what a 990-T is. Thank you all for calling in. That's the end of this call.
Operator
[Operator Closing Remarks]
Duration: 24 minutes
Call participants:
David J. Gladstone -- Chairman and Chief Executive Officer
Michael LiCalsi -- President, General Counsel and Secretary
David Dullum -- President
Nicole Schaltenbrand -- Chief Financial Officer
Kyle Jeffrey -- Jefferies -- Analyst
Mickey Schleien -- Ladenburg -- Analyst
Mark Faron -- shareholder -- Analyst
