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Gladstone Capital Corp (GLAD -0.23%)
Q4Â 2020 Earnings Call
Nov 11, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Gladstone Capital Corporation Earnings Call for the Fiscal Year Ended September 30, 2020. [Operator Instructions] It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Thank you sir, please go ahead.
David Gladstone -- Chairman and Chief Executive Officer
Thank you, Donna, for that nice introduction, and good morning. Hello, everybody. This is David Gladstone, Chairman. And this is the quarterly earnings conference call for Gladstone Capital for the fiscal year ending September 30, 2020. Thank you all for calling in. We're always happy to talk to stockholders, analysts and welcome an opportunity to provide an update for the Company.
Now let's skip ahead and hear from General Counsel, Michael LiCalsi, who will make a statement regarding forward-looking statements.
Michael LiCalsi -- General Counsel and Secretary
Thanks, David. Good morning, everybody. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance, and these forward-looking statements involve certain risks and uncertainties that are 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 Form 10-Q, 10-K, and other documents that we file with the SEC.
You can find all of these on the Investors page of our website at www.gladstonecapital.com. You can also sign up for our email notification service there as well. You can also find the documents 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, of course, as required by law.
Today's call is an overview of our results, so we ask that you review our press release and Form 10-K, both issued yesterday, for more detailed information. Again, look on the Investor page of our website, www.gladstonecapital.com.
And with that, I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Bob?
Bob Marcotte -- President
Good morning and thank you all for dialing in this morning to discuss the results for Gladstone Capital for the quarter ended September 30, 2020, after which I'll provide some comments on the fiscal year as a whole and outlook for the current fiscal year.
Originations for the quarter totaled $22 million, including one new proprietary investment. However, repayments and proceeds also totaled $22 million and included the exit of one proprietary investment and the sell down of one of our larger second lien positions, so assets were largely unchanged for the period. Interest income rose to $11.9 million or 2.6% over the prior quarter, with the increase in average investments as the portfolio yield remained consistent at 10.9%. Prepayment and dividend income recovered with the resumption of more normal deal activities and lifted total investment income to $12.6 million, which was up $900,000 over last quarter.
Borrowing and administrative expenses were unchanged from the prior quarter as the average LIBOR benchmark fell slightly and net management fees rose by $900,000, with the reduction of incentive fee credits resulting in net investment income of $6.1 million, or $0.195 per share. Net assets from operations were $10.2 million, or $0.33 per share, which included $3.6 million of net realized portfolio appreciation on the quarter. And for the period, NAV rose $0.13 to $7.40 per share as of September 30.
With respect to the portfolio, as we've discussed previously, we were fortunate that our portfolio diversity limited our exposure to the consumer, retail and travel services sectors most impacted by the COVID-19 pandemic. For the period, we did not experience any payment defaults and our one non-accrual investment was unchanged at 1.4% of the portfolio at fair value.
From a valuation perspective, the top gainers were largely driven by the continued improvement in operating performance and resumption of strategic investment activities. Also, the number of gainers outnumbered the decliners, which gave rise to the $3.6 million of net portfolio appreciation in the quarter. The decliners continued to be concentrated in the energy and auto service -- auto sectors. However, recent strength, particularly in the latter, has positioned these investments well for recovery in the coming quarters. The asset mix at the end of the quarter was relatively unchanged as first lien loans rose slightly to 49% of the cost and second lien exposure declined to 42% of the portfolio cost.
For the fiscal year just ended, a couple of summary comments. On the year, we were pleased with the overall level and quality of originations, which came in at $150 million. And given the decline in transaction activities over the past six months, prepayments fell to $79 million, resulting in lifting the ending portfolio to $450 million at fair value. Despite the record low interest rate environment we are operating in, we were able to increase our net investment -- net interest income by 3.9% on the year to $34.5 million compared to the prior year.
Fee income declined on the year with lower levels of exits and prepayments. However, much of this decline was absorbed by incentive fee credits which reflects the managers' long-term commitment to supporting shareholder distributions. And while portfolio valuations have not fully recovered from the pre-pandemic levels, the portfolio continues to perform with low non-earning levels and we remain optimistic the current trends will support the recovery of much of the unrealized depreciation incurred earlier last year.
Looking forward, we continue to be optimistic and enthusiastic about the growth opportunities in the lower middle market. And while there will undoubtedly continue to be competition for quality yielding assets, our focus and experience will continue to position us well to grow our assets. As we have demonstrated in the past couple of quarters, you can expect us to continue to manage our leverage in the vicinity of one to one debt-to-equity, which combined with our more normal deal environment and fees should improve our earnings and dividend coverage.
We remain cautious regarding any lasting COVID-related financial impacts on new business opportunities and the sustainability of recent growth as we evaluate the recent pick-up in new deal inquiries. We intend to continue to proactively manage our investment capacity and where appropriate, sell existing assets to support new investments to maintain our targeted leverage level while enhancing our net interest income.
And now, I'd like to turn the call over to Nicole Schaltenbrand, the CFO of Gladstone Capital, to provide some details on the funds financial results for the quarter and fiscal year end.
Nicole Schaltenbrand -- Chief Financial Officer and Treasurer
Thanks, Bob. Good morning, everyone. During the September quarter, total interest income increased $300,000 or 2.6% to $11.9 million due to a slight increase in the average balance of our interest-bearing investments. The weighted average balance of the interest-bearing portfolio increased by $6.7 million to $437 million, compared to $429 million for the quarter ended June 30. The weighted average yield on our interest-bearing portfolio remained consistent quarter-over-quarter at 10.9%.
Other income rose by $500,000 compared to last quarter as prepayment fees and dividends lifted total investment income for the quarter by $850,000 or 7.2% to $12.6 million. Total expenses increased $800,000 or 14.5% quarter-over-quarter primarily due to a $700,000 decrease in closing fees and incentive fee credits.
Net investment income for the quarter ended June 30 was $6.1 million and was unchanged compared to the prior quarter at $0.195 per share and covered 100% of shareholder distributions. The net increase in net assets resulting from operations was $10.2 million or $0.33 per share for the quarter ended September 30 compared to $15 million or $0.48 per share for the prior quarter. The current quarter increase was driven by net investment income and $3.6 million of net portfolio appreciation, as Bob covered earlier.
Moving over to the balance sheet, as of September 30, total assets were $450 million, consisting of -- sorry, total assets were $459 million, consisting of $450 million of investments at fair value and $9 million in cash and other assets. Liabilities declined to $225 million as of September 30 and consisted primarily of $128 million in borrowings on our credit facility, $57.5 million of 6.125% senior notes due 2023, and $38.8 million of 5.375% senior notes due 2024.
Net assets rose by $6.9 million from the prior quarter end with $4.1 million of net realized and unrealized portfolio depreciation and the issuance of 374,200 common shares under our ATM program, which generated net proceeds of $2.8 million. NAV rose 1.8% from $7.27 per share as of June 30 to $7.40 per share as of September 30. Our leverage as of September 30 declined from the prior quarter end to 96% of net assets from 102% last quarter with the increase in net assets for the period. We currently have an excess of $46 million of current investment capacity and availability under our line of credit.
With respect to distributions, Gladstone Capital has remained committed to paying its shareholders a cash dividend. And in October our Board of Directors declared monthly distributions to our common stockholders of $0.065 per share per month for October, November and December, which is an annual rate of $0.78 per share. The Board will meet in January to determine the monthly distribution to common stockholders for the following quarter. At the current distribution rate for our common stock and with a common stock price at about $7.87 yesterday, the distribution run rate is now producing a yield of about 9.9%, which continues to be attractive relative to the extraordinary low yields generally available in the market today.
And now, I'll turn it back to David to conclude the presentation.
David Gladstone -- Chairman and Chief Executive Officer
All right. Nice report, Nicole. That was a good one from Bob and Michael. You all did a great job of informing our shareholders and the analysts out there about this Company.
In summary, it was a solid quarter and fiscal year for Gladstone Capital. And the Company did well in terms of delivering on number of fronts. First of all, $22 million of new attractively priced investments during the quarter and $150 million for the year, proactively managing the portfolio and was able to keep the non-performing assets at a low rate of 1.4% of the total portfolio. And despite all of this going on with COVID out there, our portfolio has not been grossly impacted as some other investment companies have been.
We have higher assets, drove a nice increase in the Company's core net interest income to $9.2 million for the quarter and $34.5 million for the year. We maintained a strong capital position with leverage at a low end of our peers and thus positioned them well to continue to take the additional middle-market investment opportunities.
In summary, the Company continues to invest in midsized private businesses with good management. Many of these situations are supported by midsized private equity funds that are putting in the equity underneath us and they're looking for experienced partners to support the acquisition and growth of the businesses they're investing in. This gives us an opportunity to make an attractive interest paying loan to support our ongoing commitment to pay cash distributions.
As you know from our press release, we are beginning to identify people who will carry our Company to the next generation. Mike McQuigg was promoted to Executive Vice President and there will probably be others. With Bob Marcotte, Michael LiCalsi and Nicole Schaltenbrand and Mike McQuigg, I think this fund is in very strong hands. They are the ones that have a passion for paying dividends and distributions.
And now, operator, would you come on and tell the callers how to ask questions about the Company?
Questions and Answers:
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator instructions] Our first question today is coming from Mickey Schleien of Ladenburg Thalmann. Please go ahead.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Yes. Good morning, everyone. Bob, I want to start by asking, apart from energy and autos, what percentage of the portfolio would you say has high risk related to COVID?
Bob Marcotte -- President
Mickey, good morning. I think most of the companies have adapted to COVID at this stage. If I was going into it, I would have said restaurants would have been affected. But our restaurant business is currently producing nice profitability, so I would really limit any meaningful impact to the autos and energy. And frankly, I think that the autos are back to full production. In fact, both of our companies are performing above budget, so it was just a more severe pothole that COVID created when the auto companies literally shut down and the proportion of revenues fell more dramatically, so those companies are beginning to earn their way out of it. Other than that, I wouldn't put anybody else in the category of being significantly impacted by COVID.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
That's good news. Bob, given what you just said, what accounted for the slight decline then in the portfolio's average risk rating?
Bob Marcotte -- President
It probably [Technical Issues] mix. The energy credits and the auto credits, as those results were reported caused some deterioration in the underlying numbers. So you -- when all of a sudden the Q2 numbers came through into July and August, you had really four credits that rolled through. And when those financial results hit their stats, it caused the deterioration.
To give you a flavor, Mickey, if you back out autos and energy, the overall debt service leverage in the portfolio today, including both first and second liens, is 3.5 turns of leverage, so the overall portfolio is performing well. It's those two sectors that were more severe and are beginning to earn their way out, particularly around the auto segment.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay, that's very helpful. So Bob, it sounds like you wouldn't be particularly concerned about potential for future stay-in-place orders, given how bad the COVID curve is progressing right now?
Bob Marcotte -- President
You're asking us -- the COVID crystal ball at this point, I -- we've got healthcare companies, and do you end up with things getting shut down again, do you -- I mean, the -- I guess, I would say people have accommodated [Phonetic], anticipated, are operating on a remote basis. I think the incremental shock paralyzed results and impacted businesses. I think companies have adapted and are much better prepared for anything that might come at this stage. And since -- as I stated in my comments, there is very little that was directly impacted, other than the industry sectors I outlined, I would be surprised to see another down cycle on our credits given the current leverage profile that we have.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
That's very useful. And just to make sure I understand, you said the portfolio's average debt-to-EBITDA is 3.5 times without auto and energy, correct?
Bob Marcotte -- President
Correct. That's right.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay. Just a few questions on the right-hand side of the balance sheet. What percentage of the portfolio would you said is in liquid syndicated deals?
Bob Marcotte -- President
Nicole?
Nicole Schaltenbrand -- Chief Financial Officer and Treasurer
Probably around -- between 8% and 9% right now.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay, so some liquidity there. And Nicole, could you remind us what the limitations are on your credit facility, which at least as of September reduced the borrowing base below the commitment amount? I know it's super complicated and there's a variety of factors, but what's driving that?
Nicole Schaltenbrand -- Chief Financial Officer and Treasurer
That reduction was temporary, Mickey, and that was due to just some amendments, minor amendments we had done to some of our portfolio investments and just getting those through the necessary approvals that we needed to with Keybanc, which we have subsequently done. So that was more of a temporary decline.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
And I think you mentioned your current availability, Nicole, but could you repeat that, please?
Nicole Schaltenbrand -- Chief Financial Officer and Treasurer
Yeah. So, today our availability is in excess of $46 million.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Okay, that's useful.
Bob Marcotte -- President
And to be clear, Mickey, that $46 million, there's two tests: one is collateral; second is credit facility size. That capacity is dictated by the credit facility size. We have more collateral than would be implied by that number, so were we to increase the credit facility size, it would increase the amount of availability.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
Understand. Bob, do your baby bonds allow you to employ the reduced asset coverage ratio?
Bob Marcotte -- President
Yes.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
They do. And my last question, do you -- how would you characterize your appetite to additional -- to issue additional unsecured debt, given sort of the current rate environment?
Bob Marcotte -- President
Timely question, Mickey. I would say that it's taken a little bit of time for the baby bonds market to fully recover. I think our securities have been generally trading well, and as the credit spreads have gradually contracted, we are getting into the range where it would be interesting to pursue. And I would suggest that that is a topic that we are currently evaluating.
Mickey Schleien -- Ladenburg Thalmann -- Analyst
I understand. That's would -- that's what I expected. Those are all my questions this morning. I appreciate your time very much. Thank you.
Bob Marcotte -- President
Thank you for calling in, Mickey.
David Gladstone -- Chairman and Chief Executive Officer
Do we have any other questions?
Operator
We're showing no further questions in queue at this time. I would like to turn the floor back over to you, Mr. Gladstone, for closing comments.
David Gladstone -- Chairman and Chief Executive Officer
Okay, thank you all. And those were nice questions. We'd like to have more questions next time, so save up your questions and we'll see you then in January or early February.
Bob Marcotte -- President
Thank you.
David Gladstone -- Chairman and Chief Executive Officer
That's the end of this call.
Operator
[Operator Closing Remarks]
Duration: 22 minutes
Call participants:
David Gladstone -- Chairman and Chief Executive Officer
Michael LiCalsi -- General Counsel and Secretary
Bob Marcotte -- President
Nicole Schaltenbrand -- Chief Financial Officer and Treasurer
Mickey Schleien -- Ladenburg Thalmann -- Analyst
