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Gladstone Investment Corp (GAIN) Q3 2020 Earnings Call Transcript

By Motley Fool Transcribers – Feb 5, 2020 at 6:30PM

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GAIN earnings call for the period ending December 31, 2019.

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Gladstone Investment Corp (GAIN -5.58%)
Q3 2020 Earnings Call
Feb 5, 2020, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ladies and gentlemen, thank you for standing by and welcome to the Gladstone Investment Corporation Third Quarter's Earning Ending December 31st, 2019 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions].

I would now like to hand the conference over to your speaker today, David Gladstone. Please go ahead.

David J. Gladstone -- Chairman & Chief Executive Officer

All right. Thank you, Sarah. This is the quarterly earnings conference call for the quarter ending December 31st, 2019 for shareholders and analysts of Gladstone Investment. This is a common stocks traded on NASDAQ, GAIN and the preferred stocks under two symbols GAINM and GAINL. Thank you all for calling in. We're always happy to provide an update to our shareholders and analysts and provide a view of the current business environment. Two goals from this call; help you understand what happened and give you a view of the future.

We'll start out of course with our General Counsel and Secretary, Michael LiCalsi. Michael go ahead.

Michael LiCalsi -- President, General Counsel and Secretary

Thanks David and 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 we file with the SEC, all of which can be found on our website, which is or the SEC's website, which is

We undertake no obligation to publicly update or revise any forward-looking statement, 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. We ask that you take the opportunity to visit our website once again,, sign up for our email notification service. You can also find us on Twitter. The handle there is @GladstoneComps, and on Facebook keyword The Gladstone Companies. Today's call is simply an overview of our results through December 31, 2019, so we ask that you review our press release and Form 10-Q both issued yesterday for more detailed information.

And with that, I'll turn the presentation over to Gladstone Investment's President, David Dullum. Dave?

David Dullum -- President

Thank you, Mike. Thanks very much and good morning to all our shareholders and participants on this call. We're pleased to again report solid operating results for the most recent quarter ending 12/31/19, and that our adjusted net investment income of $0.23 per common share was consistent with the last quarter, and was greater than our regular quarterly distribution of $0.20 per common share. And based on our current portfolio performance, the valuations and income-generating potential, the outlook for the balance of the fiscal year ending 3/31/20 is strong. In particular, when considering the past three fiscal quarters where we have already generated adjusted net investment income of $0.71 per share.

During the quarter, we made incremental investments in existing portfolio companies to support add-on acquisitions, and we exited two buyout investments during that quarter also. And with these exits and since our inception in 2005, we've actually exited 21 portfolio companies and generated an overall four times cash-on-cash return on the equity portion of those investments, again with our thesis of making equity investments and also generating income for shareholders. Along with this exit activity, we have continued to grow total assets and the monthly distributions to shareholders over that period.

Our net asset value also remained strong at $12.51 per share at 12/31/19, and as we plan for the future and look to our long-term capital needs, we determined that with the strong performance of our common stock price and the resulting dividend yield, that it would be wise to raise some common equity. So, in January, we began selling common stock under our new ATM program and to-date, we have raised net proceeds of about $3 million all above net asset value, which is accretive to our existing shareholders. We will continue this program so long as we determine is positive for shareholder value and our overall cost of capital.

During the 12/31/19 quarter, we maintained our monthly distributions at an annual rate of $0.82 per common share for the quarter. Subsequently, in January, our Board declared a 3% increase to $0.07 per common share for our monthly distributions or an annual run rate of $0.84. And reflecting additional capital gain realization successes during the calendar year, we made another supplemental distribution of $0.09 per common share in December.

So, just briefly on the outlook; the buyout environment continues to be very competitive. But the good news though is, that we are seeing a pickup in new investment activity and we're very much involved on a daily basis, in reviewing and analyzing new investment opportunities that fit our profile. And as mentioned, we made two new acquisitions, several add-ons in the fiscal year-to-date, and as I mentioned, evaluating a number of other potential opportunities.

So we anticipate continuing to pay the semi-annual supplemental distributions 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 that ability to make these additional supplemental distributions, their amounts and the timing, as well as any further deemed distributions of capital gains, which would be similar to the one that we declared in fiscal 2019.

So on that basis, I'm going to turn it over to our CFO, Julia Ryan, to give you more detail of the actual financial performance of this past quarter. Julia?

Julia Ryan -- Chief Financial Officer and Treasurer

Thanks Dave. Let me start with a summary of the fund's financial performance. We ended the December quarter with NII of $6.2 million, which compared to NII of $6.6 million in the prior quarter. Investment income declined slightly, due to a $2 million decrease in interest income, which was primarily driven by the collection of past due amounts upon the exit of one portfolio company in prior quarter, and which was offset by $1.4 million of an increase in other income, which can be variable.

Net expenses decreased slightly compared to the prior quarter, which was primarily driven by a decrease in other expenses, most notably excise taxes and interest expense, given the paydown of our credit facility with proceeds from exits as well as an increase in credits to fees from the advisor. This decrease was partially offset by a $0.8 million increase in the income-based incentive fee, due to higher pre-incentive fee net investment income and a $0.5 million increase in the capital gains based incentive fee, given net realized and unrealized gains this quarter.

When adjusting, net investment income to exclude the capital gains based incentive fee accrual, adjusted NII for 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 those realized or unrealized investment transactions associated with this fee.During the quarter ended December 31, 2019, we recognized a net realized gain on investments of $34 million, which was primarily a result of those two exits.

On the balance sheet and liquidity side and as of December 31, total assets decreased to $582 million compared to about $620 million at the end of September, because prepayments and exits exceeded disbursements to existing portfolio companies and due to a roughly $1 million decline in the existing portfolio.

Liquidity remained strong, with almost $170 million available under our credit facility and an asset coverage of 384%. Net assets totaled about $410 million, or $12.51 per common share as of December 31st, compared to $12.39 per share at September 30th, primarily a result of realized gains exceeding unrealized depreciation, which includes the reversal of previously recorded unrealized appreciation or depreciation upon exits, and the impact of distributions made during the quarter.

As of December 31st and on a book basis, undistributed net investment income combined with net realized gains totaled almost $58 million or about $1.76 per common share. This amount is net of the $50 million deemed distribution we declared for the fiscal year 2019, and also reduced by the book accrual of the capital gains based incentive fee, which is roughly $24 million; of which only $8.1 million is contractually due currently.

All else equal, the $1.76 per common 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 to the advisors.

With that in mind and as previously announced, in January our Board of Directors increased monthly distributions to $0.07 per common share for the first calendar quarter of 2020. Assuming this monthly distribution run rate of $0.84 per share per year and estimating $0.18 per share in supplemental distribution, which have not been yet determined or declared annual distributions totaled $1.02 per common share, which is roughly a yield of 7.7%, based on yesterday's closing price of $13.30.

This covers my part of today's call, and back to you, David.

David Dullum -- President

Okay. Thank you Dave, Julia, Michael. All good information to our shareholders, presentation and the 10-Q filed yesterday should bring everyone up to date. Team has reported I think excellent results, including add-on investment transactions and exit activity with significant net realized gains. I did see one of the large brokerage houses that has a list of BDCs. They follow and GAIN was number two on their list, with regard to the last 12 months' total return and that was 58.2%, that's quite significant. Now, some of that's due to the fabulous time that we're in today. Fantastic returns come from good times and if you can't make it now, it'd be hard never to make it. And so, my own view of this is, we have a great team that's running this company now and we're in the best position that we've ever been in, and I think the future looks tremendous. The team is in a good position to continue these successes that they've just reported today throughout our fiscal year ending March 31, 2020 and longer, I hope it goes for another year as well.

We believe Gladstone Investment is an attractive investment for investors seeking continuous, monthly distributions and supplemental distributions from potential capital gains and other income.

The team hopes to continue to show you a strong return and at this point, we'll stop and have some questions from our analysts and shareholders about what you heard today and seen in our 10-Q that was filed yesterday. Sarah, would you come on and tell them how they can ask questions?

Questions and Answers:


[Operator Instructions]. Our first 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 just have one question today about capital allocation. And Dave, I do appreciate that you noted that the pipeline looks healthy, and I obviously realize that issuing equity at the current stock price is nicely accretive to NAV. But why not use your available debt capital instead, since it's meaningfully cheaper than common equity and your leverage is still quite low?

David Dullum -- President

So Mickey, again I think as we've talked many times. I think about capital and availability sort of being somewhat fungible. The decision around raising some equity through the ATM, frankly was less driven by our immediate capital needs, as much as really taking a longer view and thought about who knows what the world is going to look like in the next nine to 12 months. We're in a wonderful position to be able to shore up our capital base and especially our common equity base, without diluting shareholders, and as you point out actually being somewhat accretive. The objective is not to go and raise a slew of equity at this point, because we need to put it to work. We thought it was a relatively effective way to do it. The cost of that equity, if you look at the relative yield based on the dividend that we're paying out and will continue to pay out on the common stock price, at the current levels of course if they start to decline for whatever reasons, we will be, as I mentioned very careful in how we do that.

So again somewhat opportunistic in terms of a good way of thinking about the corporate finance of this company, and the relative ability to lay in, if you will, some fairly low cost equity. So that's sort of a long answer Mickey, but it's really more about that. The good news to your point, is we have lots of availability and indeed, as we move forward with new investments we'll be able to access that availability both really through our line of credit that we have, and frankly also, some excess cash that we have, that is a result of the gains we've generated. So that's basically the answer.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay. I understand, Dave. And just one follow-up question that came to my mind. Gladstone as a platform has particular expertise in manufacturing industries. And I know its early days, but have you started to formulate your thoughts on how potentially the coronavirus could impact some of your borrowers, given that some of them may be importing materials or supplies from China?

David Dullum -- President

So, we do have a few companies that do indeed import product from China, and I will say that, it's not just the coronavirus, but obviously, we've been working with all of these companies. And more importantly, they have been working internally themselves, based on the tariff issues and so on, which have had some impact to a lot of companies, not necessarily ours, but as we know across the board. So I would say this, they've -- a couple of them have worked and prior to the coronavirus, they even moved some production to places like Vietnam etc, and so yeah, I think we anticipate to see some effect. But at this point, I'm not hearing from any of our -- CEOs of our manufacturing companies that do indeed manufacture in China or import, that right now there's a significant impact. But it's possible that it could have a slowdown on product coming in.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

I understand. That's it for me this morning. Thank you for your time, Dave.

David Dullum -- President

Thanks, Mickey.

David J. Gladstone -- Chairman & Chief Executive Officer

Next question.


Thank you. [Operator Instructions].

David J. Gladstone -- Chairman & Chief Executive Officer

We have any other questions, please come on board.


We do have a question from the line of Mark Ferron [Phonetic], individual investor. Your line is now open.

Unidentified Participant

Hey, guys. Another fantastic quarter. And it was nice to hear Julia talk about the total dividend return being at about $1.02 a share. As far as the effect of China on companies like SOG etc, you sounded like it's pretty minimal. Are there any other things you're watching out for in the future? Thank you.

David Dullum -- President

Nothing other than the economy in general. We're seeing a very reasonably good economy with most of our manufacturing companies. Everyone's predicting. We've been talking about a recession of course, and we haven't really started seeing that yet. All the inputs I'm getting from our CEOs, has again been very careful, conservative. Lots of moves toward more automation, main issues we all run into and a lot of our companies are around getting and hiring and keeping good qualified employees. So moves to higher automation is one important thing. But generally, I think we're -- all the usual basics for all the businesses we have to look at are kind of what we focus on.

Unidentified Participant

All righty. Thank you, Dave. Your guys and girls are doing great job as always. Thank you very much.

David J. Gladstone -- Chairman & Chief Executive Officer

Another question.


We do have a question from the line of David Kopza [Phonetic], individual investor. Your line is now open.

Unidentified Participant

Thank you. Hello. My name is David Kopza, and I just called to express my thanks and gratitude for your performance for your team. I initiated my position in Gladstone Investment about five years ago and have an average cost basis of $7.25, and I own 15,500 shares. I rely on this investment income along with a few other companies to -- for my monthly income. And so I'm most grateful, and out of the companies that I own including a few other BDCs and some other companies, I can say that Gladstone Investment Corporation is far and away, the best investment that I've owned. And again, thank you so much, and I'm most grateful and may the Lord and Lady bless and keep you always. Thank you.

David J. Gladstone -- Chairman & Chief Executive Officer

Well, thank you for that nice compliment and we appreciate people who are holders and like our monthly dividends. Do we have another question?


We have no further questions at this time.

David J. Gladstone -- Chairman & Chief Executive Officer

All right. Well, thank you all for calling in. We appreciate the time together and we'll see you next quarter. That's the end of this call.


[Operator Closing Remarks].

Duration: 20 minutes

Call participants:

David J. Gladstone -- Chairman & Chief Executive Officer

Michael LiCalsi -- President, General Counsel and Secretary

David Dullum -- President

Julia Ryan -- Chief Financial Officer and Treasurer

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Unidentified Participant

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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