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Gladstone Investment Corp (GAIN 1.01%)
Q2Â 2020 Earnings Call
Nov 5, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Gladstone Investment Corporation's Second Quarter Earnings Call. [Operator Instructions]
I would now like to hand the conference over to your speaker, David Gladstone. Please go ahead, sir.
David J. Gladstone -- Chairman and Chief Executive Officer
Well, thank you, Sidney. Nice introduction. This is David Gladstone, Chairman of the Gladstone Investment. And this is the quarterly earnings conference call for the quarter ending September 30, 2019. And this is for shareholders and analysts, and like to ask questions at the end of this, the common stocks traded on NASDAQ under the symbol GAIN. Thank you all for calling in. We're always happy to provide an update to our shareholders and the analysts that follow us, providing our view of the current business environment. Our goal is to help you understand what's happened and then give you a view of the future.
We have changed these calls, as many of you know, we used to do a lot of history, but we've excluded most of the history of this Company and the detailed discussion of how the Company is different from other BDCs and we seek to do capital gains and income, not just income. So hope you like this streamlined reporting method that we're going through. And now we'll hear from our General Counsel and Secretary, Michael LiCalsi.
Michael LiCalsi -- President, General Counsel and Secretary
Good morning, everyone. Today's call may include forward-looking statements under the Securities Act of 1933 and 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 and 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 them all on our website gladstoneinvestment.com or even on the SEC's website, which is www.sec.gov. Now the Company undertakes 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.
We ask you to take the opportunity to visit our website once again www.gladstoneinvestment.com. You can sign up for our email notification service. You can also find us on Twitter, that's @GladstoneComps; and on Facebook, keyword there is, The Gladstone Companies.
As a reminder, today's call is simply an overview of our results through September 30, 2019. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information.
With that, I'll turn the presentation over to Julia Ryan, she's Gladstone Investment's Chief Financial Officer. Julia?
Julia Ryan -- Chief Financial Officer and Treasurer
Good morning, everyone. While Dave is on vacation, I will provide an update on our business and outlook. We are pleased to again report solid operating results for the most recent quarter. Adjusted net investment income of $0.23 per common share for the quarter was greater than our regular quarterly distributions of $0.20 per common share. Based on our current portfolio performance, values and income-generating potential, we believe the outlook for the balance of the fiscal year ending March 2020 to be positive. We made one new buyout investments, two add-ons and successfully exited one buyout investment during the past quarter. With this exit, since inception in 2005, we have exited 19 portfolio companies and generated a 4.2 times cash-on-cash return on the equity portion of those investments, while focusing on growing total assets and increase our monthly distributions to shareholders.
Additionally, our net asset value remained strong at $12.39 per share at 9/30/'19. We maintained our monthly distributions at an annual run rate of $0.82 per common share reflecting additional capital gain realization successes and made another one-time additional supplemental distribution of $0.03 per common share in September. Our Board also recently approved the second semi-annual supplemental distributions of $0.09 per common share to be paid in December of this year.
While the buyout environment continues to be very competitive, the good news is that we are seeing a pickup in new investment activity. As mentioned, we made two new acquisitions in the fiscal year-to-date and are evaluating a number of other potential opportunities. We anticipate continuing to pay semi-annual supplemental distribution as the portfolio matures and grows and we're able to manage exits and realize additional capital gains. Of course, we and our Board of Directors will evaluate the ability to make these additional supplemental distributions, the amount and timing as well as any further deemed distributions of capital gains similar to the one we declared in March of 2019.
Now let's turn to a summary of the Fund's financial performance. We ended the September quarter with NII of $6.6 million as compared to NII of $8.9 million in the prior quarter. Investment income declined slightly due to a $2.9 million decrease in other income. The timing of which can be variable, which offset the $2.3 million increase in interest income, which was primarily driven by the collection of past due amounts upon the exit of one of our portfolio companies.
Net expenses increased by $1.6 million in the current quarter, which was primarily driven by a $0.8 million increase in other expenses and a $0.8 million decrease in credits to fees from the advisor. The $1.3 million decrease in the income-based incentive fee resulting from lower pre-incentive fee net investment income was offset by a $1.4 million increase in the capital gains-based incentive fee, given realized and unrealized gains this quarter. When we're adjusting net investment income to exclude the capital gains based incentive fee accrual adjusted net investment income per weighted average common share was $0.23 in the current quarter. We continue to believe that this metric 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 associated with the fee.
During the quarter ended September 30th, 2019, we recognized a net realized gain on investments of $21 million, which is primarily the result of one of those exits I mentioned earlier. On the balance sheet side, and as of September 30th, total assets decreased to $620 million, compared to about $642 million at June 30th as repayments and the exit I mentioned exceeded new investment and add-ons activity, and due to a roughly $4 million decline in fair values quarter-over-quarter.
Liquidity remains strong with over $125 million available under our credit facility and net asset coverage -- sorry, an asset coverage of 316%. Net assets totaled about $407 million or $12.39 per share as of September 30th compared to $12.29 per share at June 30th, which is primarily a result of realized gains exceeding any unrealized depreciation this period.
As of September 30th and on a book basis, undistributed net investment income, combined with net realized gains totaled over $27 million or about $0.83 per common share. This amount is already net of the $50 million deemed distribution, we declared in March of 2019. And is also reduced by the book accrual of the capital gains-based incentive fee, which is roughly $23 million at this point. And this amount is not currently due. All else [Phonetic] equal, the $0.83 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.
Now with that in mind, and as previously announced in October 19th, the Board declared monthly distributions of $0.068 per common share for October, November and December of 2019. And the second semi-annual supplemental distribution of $0.09 per common share to be paid in December. Assuming the current monthly distribution run rate of $0.82 per share per year and $0.18 per share per year and supplemental distribution, meaning it does not include the additional $0.03 per share we paid in September, annual distributions totalled roughly $1 per common share or yield of about 7.7% based on yesterday's closing price of $12.95.
And this covers my part of today's call. Back to you, David.
David J. Gladstone -- Chairman and Chief Executive Officer
That's good. Good report, Julia. Now Dave Dullum is listening wherever he is and he will be out today and he will be back soon on the next call. Julia and Michael gave good information for our shareholders, that is presented in the 10-Q filed yesterday. This team has reported solid results, including a new buyout investment and one exit from a significant realized gain and some add-on investments. In fact the add-ons is the way we grow some of these companies. We have a Company, and then we buy a smaller company and add it to it. Our team is in a really good position to continue these successes throughout our fiscal year ending March 31st, 2020.
We all believe that Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions with some supplemental distributions from potential capital gains and some other income that comes in from time to time. The team hopes to continue to show you a strong return on your investment and our fund.
Now let's have some questions from analysts. So, Sidney, would you come on and give instructions for asking questions?
Questions and Answers:
Operator
Yes, thank you. [Operator Instructions] Our first question comes from Henry Coffey with Wedbush. Your line is now open.
Henry Coffey -- Wedbush Securities -- Analyst
Good morning, everyone. I -- maybe it's just winning the World Series, but great quarter and a lot of enthusiasm on the call. The challenge for us is to always figure out what's next. When you look at your portfolio companies in aggregate are there -- just, not specific issues, because those would be captured in fair value adjustments, but are there sort of general opportunities, constraints to growth, new doors opening, new doors closing, when you look at the world about, what is your thought process in terms of the operating environment for your portfolio companies?
David J. Gladstone -- Chairman and Chief Executive Officer
I think it's good, Henry, we're in the smaller end of the buyout world, as you know, we are in the middle market -- middle markets about the third largest economy in the world. And so there is opportunities coming and going in this sector -- section and we are just sitting in there, trying to pick off a couple every quarter. And I think it's a good opportunity for us. The fact that it nobody knows where we're going right now, that is, the economy is booming. But at the same time, there is a lot of doubts in the marketplace, gives us a chance to buy things. And I think we're going to continue to do well. You don't -- never see anything more than about six months out. So, I think for the rest of the fiscal year ending March 31st, 2020, we're in really good shape and we should continue to grow and have a good time building up this Company and hopefully have some huge capital gains someday, down the road. But I think we're in good shape.
There is no real blow back at this point in time from anything that we see, so headwinds and tailwinds as they always column. We see some going in different directions, and just try to stay out of the way of the tailwinds and, get good lower companies and they are running these things.
Henry Coffey -- Wedbush Securities -- Analyst
With adjusted net income at, NII per share at $0.23, is the thought on the dividend just to sort of keep it where it is? And then just continue to let it flow from a series of sort of supplemental and regular payments?
David J. Gladstone -- Chairman and Chief Executive Officer
Well, we certainly don't want to cut the dividend. That's always been a no-no for us. And we will raise the dividend when we get in a position to raise it. There is nothing other than just good feeling about where we are today. So I would hope that we can raise it sometime in the near future, but we are -- we debate that every time the Board gets together. And as you know our next Board meeting is in January, so we will keep our eyes on that and I want to raise the dividend. I'm a big proponent of raising the dividend, and Dave Dullum and Julia who have to manage the balance sheet and the P&L, always pushing back and making sure I don't get too excited about raising the dividend. But we have a good discussion every quarter about raising the dividend.
And I think you should look at the capital gain side of the business. It's still strong and if you looked at what we could do, if everything works, I think you'll get really, really happy with the aspect of getting some extra dividends during the next year.
Henry Coffey -- Wedbush Securities -- Analyst
Thank you.
David J. Gladstone -- Chairman and Chief Executive Officer
Okay, next question.
Operator
Thank you. And our next question comes from the line of Mickey Schleien with Ladenburg. Your line is now open.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Yes, good morning, everyone. I want to start by asking about repayments. I noticed that the last couple of quarters, the principal repayments have been pretty significant, curious what's driving that trend and how do you feel about your deal pipeline for the second half of the fiscal year?
Julia Ryan -- Chief Financial Officer and Treasurer
Mickey, it's Julia. The repayments have sort of, obviously when we exit a deal, which we've exited quite a few already this year, the debt side of things gets labeled as a repayment. So that's why you see that number be -- a little bit higher comparatively to the prior period in the last fiscal year. Other than that, this is just part of our -- managing our exit strategy there is nothing off hand that's happening right now. And I think I alluded to it in earlier part of my call, we are seeing some pickup in the deal volume that we're looking at and things that make it on our radar. So we're happy with that and we're hoping that we can close on a few deals in the near future.
David J. Gladstone -- Chairman and Chief Executive Officer
One of the things that -- one of the things that's driving this industry we're in, is that people are worried that somehow we're going to have another recession. So they want to sell now. And we're taking advantage of that. We're not in a belief that there is going to be some kind of catastrophic event soon and so we are playing that game today, may be the wrong game. But most likely is the right since everything seems so strong. What's your next question, Mickey?
Mickey Schleien -- Ladenburg Thalmann -- Analyst
My next question was about, what was the nature of the past due interest on ADC?
Julia Ryan -- Chief Financial Officer and Treasurer
If you recall, two years ago ADC had some operational struggles, and we had it on non-accrual for a while. And when they came out of that, they started paying back some of those contractual interest that they hadn't been paying us during the non-accrual period and then upon exit, we negotiated that we would get all past-due amounts.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay, that's straightforward. A couple of more questions. I noticed that last quarter, meaning the previous quarter you extended a line of credit to J.R. Hobbs, and the preferreds were written down. In this quarter, that line of credit was repriced and the debt was reclassified from first to second lien and the preferreds were written down again. So, who is the lender ahead of you and what issues in general is that company confronting?
Julia Ryan -- Chief Financial Officer and Treasurer
Mickey, so you're right, we brought [Phonetic] an 18 year lender with the idea that in the near future, we would be, our line of credit would be refinanced out. The Company has had some issues on the backlog side, just managing pricing internally, but the backlog is really strong. We are out of all of those projects. They've run their term. So you should see a nice pick up in the company here in the near future.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
So just to make sure I understand you brought in a bank with the facility ahead of yours and you expect them to take out your facility?
Julia Ryan -- Chief Financial Officer and Treasurer
Yes, in the near term.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay. And sort of a housekeeping question, your G&A climbed quarter to quarter, was there something specific going on there?
Julia Ryan -- Chief Financial Officer and Treasurer
Taxes.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Taxes.
Julia Ryan -- Chief Financial Officer and Treasurer
This is generally the quarter where we accrue our excess taxes, because we're nearing calendar year-end.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay. And SOG remains -- the debt remains valued at par, are they in a position to be making, to begin to be making interest payments and going back on accrual or is that too optimistic?
Julia Ryan -- Chief Financial Officer and Treasurer
It's too optimistic for the balance of the fiscal year, but we're working on it.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay. That's it for me. I appreciate your time. Thank you.
Julia Ryan -- Chief Financial Officer and Treasurer
Sure.
David J. Gladstone -- Chairman and Chief Executive Officer
Sidney, you got any other questions for us?
Operator
Yes. Our next question comes from the line of Matt Sherwood with CCP. Your line is open.
Matthew Sherwood -- Cooper Creek Partners -- Analyst
Hey guys, great quarter. I just have a quick one on the interest, sorry on the B drive [Phonetic] write-off subsequent to quarter end. How does that impact the excess here, the $0.82 you were talking about of excess income for distribution?
Julia Ryan -- Chief Financial Officer and Treasurer
Good question. So it would reduce it, once that number is realized, the unrealized loss will slip into a realized loss and therefore reduce the number that I quoted. If you look on our balance sheet that number actually includes the unrealized piece of the portfolio as well. So if you were to go with a liquidating as of 9/30 perspective, I would point you to the balance sheet amounts.
Matthew Sherwood -- Cooper Creek Partners -- Analyst
Right. So with the $0.82, do you take off the capital incentive fee or does that just go down by $15 million or how does it work?
Julia Ryan -- Chief Financial Officer and Treasurer
So the total accumulated gains and losses would be reduced by the amount that I just -- B drive [Phonetic] losses, so you would just got a new total to divide by the total number of shares outstanding.
Matthew Sherwood -- Cooper Creek Partners -- Analyst
Okay. So it will be substantially lower next quarter because of the realized loss?
Julia Ryan -- Chief Financial Officer and Treasurer
Assuming no other gains, you're correct.
Matthew Sherwood -- Cooper Creek Partners -- Analyst
Okay, got you. Perfect. No that's helpful, that's -- I was just trying to clarify. Thanks so much.
David J. Gladstone -- Chairman and Chief Executive Officer
Okay. Sidney, any other questions?
Operator
Yes. Our next question comes from the line of Ryan Carr with Jefferies. Your line is now open.
Ryan Carr -- Jefferies -- Analyst
Good morning, guys and congratulations on the good quarter.
David J. Gladstone -- Chairman and Chief Executive Officer
Thank you.
Ryan Carr -- Jefferies -- Analyst
So my main question relates to the yield. It seems like it's been ticking up quarter-to-quarter, year-over-year and that's definitely favorable. I'm curious, is that related to the repayment of the late repayment of the asset or what's that -- what's driving that yield enhancement, especially given the impending rate outlook?
Julia Ryan -- Chief Financial Officer and Treasurer
That is exactly right. So the slight operation as you might call it for this quarter is related to the collection of the past due amounts, but otherwise yield is strong in the 13% range.
Ryan Carr -- Jefferies -- Analyst
Okay. And the equity portion of your portfolio continues to wind down, I mean does that -- what effect does that have on your portfolio? Does it rotates in terms of the yield?
David J. Gladstone -- Chairman and Chief Executive Officer
The portfolio, if you look at what's going on in the portfolio, you sell something that has reached its point and you sell it and get your capital gains or trigger a loss and move on to the next one. So you're seeing later-stage deals that we hold in the portfolio being replaced to new yields and hopefully two to three years from now. Those will be yielding the same as the ones in the portfolio.
So the yield, you have to remember, the yield in this company is determined by us. That is if you own all of, or most of the equity in a company or a large chunk, you can set the yield as much as you want to take out. And so if you've got a very strong company, you can from -- push your yield up. And if it's not -- yield, not strong, then your yield comes down some, but yield is a function of how much we want to take out of going along as we go through the development of the company.
Ryan Carr -- Jefferies -- Analyst
Great. And credit, seems to be trending well showing year-over-year improvements as well on that front. And you mentioned that your outlook in terms of the macro economy continues to be strong, especially in the competitive deal environment, you have a good amount of liquidity moving forward. Are you changing maybe your credit or underwriting strategy, given this part of the cycle or is there anything different about your origination strategy moving forward?
David J. Gladstone -- Chairman and Chief Executive Officer
Now, it's the same business. I've been in it for lifetime and you go through these cycles. And when the economy is hot, you need to keep putting good deals on the books with the idea that next quarter might be the down quarter. And we get caught every now and then, of making a bad guess about a certain part of the economy and where it's going. But it's rare that everything goes down, like it did in seven, eight, nine and so my guess is that we picked the right places, if you look at where each of these new deals are, I think we picked the right place to increase our investments.
Ryan Carr -- Jefferies -- Analyst
Well thank you, David. Thank you, Julia.
David J. Gladstone -- Chairman and Chief Executive Officer
All right. Sidney, any other questions?
Operator
I am showing no further questions at this time, I will now turn the call back over to David Gladstone for any further remarks.
David J. Gladstone -- Chairman and Chief Executive Officer
All right. We thank you all for calling in and I think this will be a good quarter, when we get to December 31st and get your call going sometime in January, February, early February that will be, I think another good time to talk. That's the end of this, and I'm going to shut us down.
Operator
[Operator Closing Remarks]
Duration: 24 minutes
Call participants:
David J. Gladstone -- Chairman and Chief Executive Officer
Michael LiCalsi -- President, General Counsel and Secretary
Julia Ryan -- Chief Financial Officer and Treasurer
Henry Coffey -- Wedbush Securities -- Analyst
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Matthew Sherwood -- Cooper Creek Partners -- Analyst
Ryan Carr -- Jefferies -- Analyst
