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Gladstone Investment Corp (GAIN 0.25%)
Q2Â 2021 Earnings Call
Nov 4, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the Gladstone Investment Corporation's Earnings Call for the Quarter Ended September 30, 2020. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions]
It is now my pleasure to introduce your host Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.
David J. Gladstone -- Chairman and Chief Executive Officer
Okay. Well, thank you, Donna, and good morning everyone out there. This is David Gladstone, and this is the second quarter ending -- March 31, 2021 is our beginning of the year. And so, this is the second quarter for fiscal year 2021. This is the conference call for shareholders and analysts of Gladstone Investment listed on NASDAQ under the trading symbol GAIN for the common stock and then we have two preferreds GAINM and GAINL.
Thank you all for calling in. We're always happy to provide an update to our shareholders and analysts, provide our view on the current business environment. Two goals, of course, help you understand what's happening and give you a glimpse of the future as we see it.
Now, we will hear from our General Counsel and Secretary. Michael LiCalsi. Mike?
Michael LiCalsi -- 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 are based on our current plans, which we believe to be reasonable.
Many factors may cause our actual results to be materially different than 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. You can find these on our website, www.gladstoneinvestment.com or on the SEC's website at www.sec.gov. 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.
Once again, please visit our website, gladstoneinvestment.com, sign up for our email notification service. You can also find us on Twitter @GladstoneComps, or on Facebook, keyword The Gladstone Companies.
And today's call is an overview of our results through September 30, 2020. So we ask you to review our press release and Form 10-Q, both of which were issued yesterday for more detailed information.
And with that, I'll turn the presentation over to Gladstone Investment's President, Dave Dullum. Dave?
David Dullum -- President
Great. Thanks, Mike, and welcome and good morning to all of our shareholders, analysts. We appreciate you all being on.
We are pleased today that we can report good operating results for the quarter ended 09/30/20. And when we consider the past six months and certainly the continuing challenges due to COVID-19, we are very pleased with where we are and where we look going forward. We actually ended the quarter with adjusted net investment income of $0.15 per share, and this is compared to the $0.11 per share for the quarter ended 06/30/20.
So on a comparative basis, also, our total portfolio income has improved, in part due to resuming some interest on certain portfolio company debt securities, which we had to adjust somewhat as a result of COVID. So, we're now back to, in some cases, their pre-COVID levels, which is a good thing. In addition, we also made one acquisition, a company called Mason West Industries, which includes, obviously, a new interest-bearing debt security. So, that adds to our income stream. And of course, we made that investment on the debt security along with an equity investment as well.
So our primary operating focus does continue to be close monitoring of our portfolio companies, with the emphasis on their cash flow and their working capital dynamics certainly in this very trying time. In this regard, we have not needed to provide much additional financial support to our portfolio companies, which is a good thing.
At the same time, we are focused on the rebuilding of the portfolio, given that we had very significant and successful exit activity last year, which obviously reduced assets in a good way, and also, of course, the slowdown in new investment activity, which we've been experiencing really since COVID in early part of this year. As a result though, in July, as I mentioned briefly, we did make a new buyout investment with -- through a combination of equity and debt. Our net asset value for the quarter was $10.86 per share, and that's consistent with the prior quarter, even given all the pluses and minuses.
Just touching briefly on pandemic actions. As we've mentioned on our last call and early in the pandemic, we proactively engaged with the management teams of our portfolio companies, we provided support related to their issues around HR, human resources, people, legal issues and any sort of financial concerns that they may have had. So, we continue doing that, and we are experiencing though improvement across the portfolio. And while we're still actively engaged with our companies on these pandemic-related issues, the attention is now turning to forward planning on our portfolio companies' 2021 budgets, and of course new acquisitions, not only add-on acquisitions, but also for our existing -- for our portfolio in Gladstone Investment.
The other positive is that our aggregate portfolio of fair values have stabilized, certainly since initial effect of the pandemic, which obviously affected the operations of our portfolio companies. And even though we've seen stabilization, market multiples, which does have an impact on valuations, have also though been slower to recover generally. Our portfolio values though actually have increased quarter-over-quarter. And of course within that, some companies have outperformed others. And this is certainly based on their sector and their geographic location.
Our balance sheet continues to be very strong. We have solid values, low leverage and we're in a very good position to assist our companies should it be necessary. And this sort of ties back a bit to the strength of our differentiated investment approach is that, we provide a significant portion of the equity and most of the debt in our transactions.
And therefore, we do have significant flexibility with the financial structuring and the cash flow management of our portfolio companies. Maybe worth to note briefly that most of the debt securities in our portfolio are performing really well. Obviously from a valuation perspective, impact has been more on the equity values, but overall, as I mentioned, we've seen an uptick in overall values quarter to quarter.
So briefly, the outlook, as I mentioned -- touched on, the buyout industry has experienced a pretty good slowdown in terms of new deals and according to one of the firms that we work with Capstone Headwaters, which is a major investment banking financial advisory firm. We're seeing new deal -- they've seen new deal activity down approximately 40% [Phonetic] from Q1 this year, and which is -- and about 22% year-over-year. There are though some new signs of deal activity picking up. And as I mentioned, again, we made a new investment in July, and we are pursuing a number of other prospects, which we'll see where that shakes out over the next six to nine months.
So, our focus for the near-term is continuing our close involvement with our portfolio companies, providing assistance as necessary and certainly making new acquisitions for Gladstone Investment Corporation. We have maintained and look forward to maintaining our monthly distributions to shareholders at the current levels. And again, consistent with our policy, our Board will continue to evaluate any supplemental distributions, which we can make and may make from capital gains.
So with that, I'm going to turn it over to our CFO, Julia Ryan, and have a little more detail on the financials. Julia?
Julia Ryan -- Chief Financial Officer and Treasurer
Thank you, Dave. Let me start with a summary of the fund's operating performance. We generated NII of $4.4 million this quarter, which was slightly higher than NII of $4.2 million in the prior quarter. Interest income increased approximately $1.3 million, primarily to the new investments made during the current quarter that Dave mentioned, and to a lesser extent as a result of increasing the interest rate on one investment to pre-COVID levels. We continue to monitor and closely work with the companies that have loans on non-accrual status, and believe we can expect to see some improvement during the balance of this fiscal year.
Net expenses totaled $7.5 million in the current quarter compared to $6.5 million in the prior quarter. The increase was primarily related to accrued capital gains-based incentive fees of $0.5 million this quarter versus -- and $0.8 million reversal of previously accrued cap gains incentive fees last quarter. And that is all due to the net impact of realized and unrealized gains and losses between those two quarters.
When adjusting net investment income to exclude the cap gains incentive fee reversal, adjusted net -- and for accrual, net investment income per weighted average common share was $0.15 in the current quarter or a $0.04 increase compared to last quarter. We continue to believe that this metric is a useful and representative indicator of operations, exclusive of any capital gains-based incentive fees, as net investment income does not include any realized or unrealized investment activity associated with this fee.
Now, moving over to the balance sheet. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. In that regard, we amended our credit facility during the current quarter to provide us with improved flexibility, should our portfolio face COVID-related disruptions. We had availability under the credit facility of about $64 million as of 09/30/20, and we also raised about $3.9 million in net proceeds under our Series E Term Preferred Stock ATM. Our NAV stayed consistent quarter-over-quarter with a net pickup in unrealized appreciation of $1.6 million.
In addition, distributable income to shareholders remained solid. On a book basis, undistributed net investment income, combined with net realized gains, totaled over $5 million, or about $0.16 per common share. This amount is reduced by the book accrual of the capital gains-based incentive fee that's required under U.S. GAAP, and that number is roughly $7 million, which is not contractually due yet. All else equal, the $0.16 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 contractually due, which it is not.
With that in mind, and as previously announced in October 2020, our Board of Directors maintained the current monthly distribution run rate of $0.84 per common share, which currently represents a yield of about 9.8%, excluding any supplemental distribution.
This covers my part of today's call. And back to you, David.
David J. Gladstone -- Chairman and Chief Executive Officer
Okay. Thank you, Julia, Dave, and Michael. You all gave good information for our shareholders, and those presentations in the Form 10-Q filed yesterday should bring everybody up to date. We believe the team is in good position to continue these successes in our fiscal year ending March 31, 2021.
And just so you know, we're now entering into a time to designate some of the management team of the future. We appointed two members, two Executive Vice Presidents as we announced in our press release, Kyle Largent, Peter Roushdy in combination, of course, with our Chief Financial Officer, Julia Ryan, ensures the future of this fund is in really good hands. Working together, they have their responsibilities and their positions to the members of the senior leadership team to ensure continued success in the long-term growth.
Now, Dave Dullum and I'm not changing our positions. We're just adding to the Group. We believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and some potential supplemental distributions from capital gains.
So, Donna, if you'll come on now, we'll have some questions from the analyst and shareholders out there. Tell them how they can ask a question.
Questions and Answers:
Operator
Thank you, sir. [Operator Instructions] Our first question is coming from Ryan Carr of Jefferies. Please go ahead.
Ryan Carr -- Jefferies -- Analyst
Hi. Good morning, guys. Thanks for taking my questions, and congratulations on the good quarter. First question from my end. Looks like this quarter you didn't have any other income. What really drove the decline there? And then moving forward, is there a change in the outlook for that area?
David Dullum -- President
Hi, this is Dave. I'll take a crack at that, and if Julia wants to add, certainly. Keeping in mind that our other income line item, as we always address, it is something that is a function of either dividends on preferred investments we might have in some of our portfolio companies, which we harvest from time to time. The other is basically from what we call exit fees or success fees, which again we harvest from our portfolio companies from time to time. So consistently, we've -- and as we've shown before, it's always going to be volatile and certainly different quarter to quarter.
What we have done in this last couple of months and quarter or so is tried from the perspective of the cash, again flow issues with our portfolio companies, meaning not putting any undue burden on them until we start moving further out of this whole pandemic situation. We have not really gone ahead and taken some of these fees, if you will, which would come through the other income line item that we might have perhaps done in the past. So no change in policy. It's -- we're going to -- we see and expect some of that going forward certainly. It's a bit unpredictable, but we manage it carefully. Hopefully, that answers it.
Ryan Carr -- Jefferies -- Analyst
Yes, thank you. That was very helpful. And then, in terms of the non-accruals and this quarter you saw some improvement on a fair value and cost basis, but it looks like the same investments quarter-to-quarter. And for quite a while, quite frankly, B&T, Horizon, The Mountain, PSI, and SOG, I mean have you made any progress in terms of resolving these non-accruals and especially in the context of the current environment? And have you -- what's the outlook over maybe the next two quarters through the end of the fiscal year in terms of resolution for these?
David Dullum -- President
Julia, you want to take a crack at that? I have a comment I would add.
Julia Ryan -- Chief Financial Officer and Treasurer
Sure. Yeah. So you're correct. It's the same companies quarter-over-quarter and even for the last two quarters. And Horizon is the one that is -- has just been added in April. So that hasn't been on for that quite that long, and if you recall that somebody or a company that was significantly exposed to COVID and given that it is heavily focused on the travel industry. And the others have been on the list a little bit longer, but I quickly touched upon this in my section. We are working with each and every one of these companies. And some of those are expected to see improvement over the next three to six months of the balance of this fiscal year. I can't promise you exactly when that will occur, but we're working on it.
David J. Gladstone -- Chairman and Chief Executive Officer
Yeah. The only further comment I'd make, and again, without being too specific, it's possible that because of the definition, if you will, that we used for what means non-accrual and the timing that we could actually collect income from one or two of these companies, but it still leaves it on a non-accrual status. So that's one of the things that's a positive for the income stream and we're working on that as well. And I think that's an improvement versus where we've been.
Ryan Carr -- Jefferies -- Analyst
Got it. And then last question for me. I know you had mentioned earlier in the call the deal activity on a year-over-year basis from the first quarter of this year is still pretty muted. But can you give us a sense for how much it's improved quarter-to-quarter? And then in terms of your deal-making ability, has anything changed from the prior quarter? For example, are you now traveling to clients? Are you seeing a pickup in discussions and potential transactions out there in the market?
David Dullum -- President
Yeah, good question. So one, yes, we have been actually traveling. We've been, as I mentioned briefly, worked on a number of new things. And our folks beyond just the Zoom calls that we've been doing, we've actually had -- some of our managing directors actually visit companies for management meetings. So overall, I would definitely say in the last, certainly two months or so, we've clearly seen a pickup in activity in terms of companies that we would consider viable and potential acquisitions.
So, I'm optimistic going forward. There is still a challenge and that there is a lot of money out there, believe it or not, and valuations even in this environment are tough. So we will continue our policy of being good, conservative, careful investors in that regard. But overall, yes, we've seen some pick up and we're working really hard in that area. And as I mentioned, also, as we are able now to have our folks put less time, let's say, more intense time on existing portfolio companies, it's -- the activity level is working with our capability to also process new investment opportunities.
Ryan Carr -- Jefferies -- Analyst
Thank you very much.
David J. Gladstone -- Chairman and Chief Executive Officer
Okay. Donna, next question?
Operator
[Operator Instructions] Our next question is coming from Mickey Schleien of Ladenburg Thalmann. Please go ahead.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Yes. Good morning, everyone. Hope all is well on your end. Dave, I just wanted to follow up on your comments about the market environment. It's still -- we're still in the middle of earnings season obviously. But clearly, I think we're in a world of haves and have-nots and strong performing companies have all kinds of capital being thrown at them. So within your portfolio, is there -- do you have any visibility into potential exits to take advantage of what in some cases is a tremendous seller's market?
David J. Gladstone -- Chairman and Chief Executive Officer
So, Mickey, I'm going to fall back on what we've thought or said [Phonetic] our general, I'll call it policies the way we think of exits. As you know from our perspective, having good solid businesses that are continuing to grow, generate income, we're not going to rush to the exits necessarily. We sort it. We do it, where again, if our CEO, the Company folks running those companies, feel the timing is right for a variety of reasons, or if we certainly get some times, which we do and have exited in certain cases with unsolicited sort of offers.
So that's how we think about it generally. You're right. This environment right now seems to be a little bit heavy in that regard. And so, we're managing exits on companies that we believe it makes sense to do. And so, if we can take a benefit from the activity level you're talking about, we're -- we'll do that and that probably will play out over the next really say, call it six months or so.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay. And in that regard, Dave, your -- the balance sheet's leverage, just measured by debt to equity, is at a level we haven't seen since the end of fiscal '18 or the March '18 quarter, so quite a while. What -- is this sort of the maximum leverage you're willing to operate Gladstone Investment at, or are you comfortable enough with the economic outlook to take leverage even higher?
David J. Gladstone -- Chairman and Chief Executive Officer
Julia, you want to tackle that one?
Julia Ryan -- Chief Financial Officer and Treasurer
Sure. Mickey, I think our footnotes and obviously subsequent events announced that part of -- we've had a large paydown that cleared on 09/30 and then subsequently was used to pay down the line to the tune of roughly $10 million. So, the leverage is actually a little bit lower than what 09/30 has reported. But to your point, we are confident, we're comfortable with where we are, we're comfortable to add to it should we need to we believe in our portfolio. And I don't believe we're changing our operating outlook or our investment strategy that has been applied historically to make any foolish decisions on new investments. So, I believe we are where we need to be.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
I understand, Julia. And in terms of that paydown, this -- we're talking about Mason West, which is a new investment. A couple of questions related to that. Can you just walk us through, you make -- you made a new investment in Mason West and they turned around and repaid you very shortly thereafter. How -- what happened there? And is there any fee income -- prepayment fee income associated with that that we can expect?
Julia Ryan -- Chief Financial Officer and Treasurer
There is no fee income associated with that. This repayment was anticipated at closing. It just took a while to get it all figured out from a legal perspective between when we close the deal and when it is closed [Phonetic].
David J. Gladstone -- Chairman and Chief Executive Officer
So Mickey, a little more color on that. The company did not repay us. We did the deal and because of the size of the investment, again, we're in a position to close it. And as you know, we do with the majority of the debt and the equity, but that was one where we were looking to bring in a partner to take part of it and that's where the paydown came from another investor coming in, which -- folks we've worked with before and that was what it was, not that the company repaid us.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
I understand. That was going to be my next question. Dave, you mentioned resuming interest or changing interest rates on a deal that was previously affected by COVID. Are you referring to a PIK toggle or a repricing and which deal are you talking about?
David J. Gladstone -- Chairman and Chief Executive Officer
Yeah. So, no PIK toggle, no repricing. All we did was, which again we can do as necessary from time to time. We just decided, hey, I won't go into the specifics, but the interest rate, let's say, for argument sake, it was 12%. We decided we could for the period of time take it down to say 7%, give them a little bit of breathing room. And then once we knew we were in good shape, which actually wasn't very long frankly after that, resumed it back to that previous interest rate level. So that was -- that's kind of what it was. And again, it's flexibility that we -- good news for us with our structure, we can do that.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay. And let me see, just one last question, maybe for Julia. Can you remind us when does your tax year end? What month do you guys use?
Julia Ryan -- Chief Financial Officer and Treasurer
The tax year is the same as the fiscal year, so March.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
March. Okay. And you told us what UTI is. Those are all my questions this morning. I very much appreciate your time.
David J. Gladstone -- Chairman and Chief Executive Officer
Thanks, Mickey.
Operator
Thank you. At this time, I'd like to turn the floor back over to Mr. Gladstone for closing comments.
David J. Gladstone -- Chairman and Chief Executive Officer
All right. We don't have any other questions for today, and we'll see you guys next time in probably January or end of January or beginning of February. Thank you all for tuning in, and that's the end of this conference call.
Operator
[Operator Closing Remarks]
Duration: 25 minutes
Call participants:
David J. Gladstone -- Chairman and Chief Executive Officer
Michael LiCalsi -- General Counsel and Secretary
David Dullum -- President
Julia Ryan -- Chief Financial Officer and Treasurer
Ryan Carr -- Jefferies -- Analyst
Mickey Schleien -- Ladenburg Thalmann -- Analyst
