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Gladstone Investment Corp (NASDAQ:GAIN)
Q3 2021 Earnings Call
Feb 3, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Gladstone Investment Corporation's Quarter Ended December 31st, 2020 Earnings Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] At this time, I will turn the conference over to Mr. David Gladstone, Chief Executive Officer. Mr. Gladstone, you may begin.

David J. Gladstone -- Chairman and Chief Executive Officer

Thank you, Rob, and good morning to all of you out there. This is David Gladstone, the Chairman of Gladstone Investment, and this is the third quarter for fiscal year 2021. This is the earnings conference call for shareholders and analysts of Gladstone Investment traded on NASDAQ under the trading symbol GAIN for the common stock and GAINM and GAINL for the two preferred stocks we have outstanding. Thank you all for calling in. We're always happy to talk to our shareholders and analysts and provide a view of the current business environment. Our goal today is to help you understand what happened in the past and give you a view of the future.

I'll turn it over now to our General Counsel and Secretary, Michael LiCalsi, for his reading up.

Michael LiCalsi -- General Counsel and Secretary

Good morning, everybody. Today's call may include forward-looking statements under the Securities Act of 1933 and 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.

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 and these can be found on our website at www.gladstoneinvestment.com or the SEC's website at www.sec.gov.

Now 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 future results. We ask that everyone visit our website once again, gladstoneinvestment.com, and sign up for our email notification service. You can also find us on Twitter, @GladstoneComps, and on Facebook keyword there is The Gladstone Companies. Today's call is simply an overview of our results through December 31, 2020, so we ask you 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 David Dullum, he's the President of Gladstone Investment. Dave?

David Dullum -- President

Great. Thanks, Mike. So good morning, everyone. Given all of the certain stresses and uncertainties of the past year and what have you, I am really pleased to be able to report that we actually had a really good quarter and another good quarter of operating results and that the -- for this quarter, which ended 12/31/2020, we generated adjusted net investment income of $0.24 per share, which is relative to $0.15 per share for the quarter ended 9/30/2020.

Importantly is that our total portfolio income, which improved quarter-over-quarter, part -- in great part because we also generated what we call other income, which comes from dividend income, exit fees from our portfolio companies and at the same time, our baseline of interest income was pretty consistent.

Now just keep in mind that this other income we refer to can vary and probably will vary quarter-to-quarter, but we look at it and we try to manage this on an annualized basis. So again, good to see it this quarter relative to last quarter, and hopefully, we'll be able to continue that.

So throughout most of calendar 2020 and primarily due to COVID, we were pretty conservative. And in regards to this other income category, we did not expect frankly or really pressure portfolio companies because the emphasis certainly for them had to be on their preservation of their cash flow, which is most important. And we really worked hard on that. Good news is, we are beginning to experience improvement and stability in our companies. Those certainly were affected by COVID. And we hopefully should be able to see some opportunity to continue generating this other income category during our calendar year 2021.

Obviously, we will continue to closely monitor our portfolio of companies, and the emphasis, again, is going to be on their cash flow and their working capital needs. And the other good news is that really since the start of the pandemic and through December, we did not have to provide much in the way of additional financial support to our portfolio companies as a result of certainly the COVID impact.

Also, our aggregate portfolio fair values are beginning to stabilize, and as we've navigated through this period of the pandemic and we did have a very positive quarter-over-quarter increase in fair values, including -- and when you exclude the appreciation reversal, which is related to the exit of Frontier Packaging. To that point, we exited Frontier Packaging in December, which contributed both other income and a realized gain on our equity.

We also did a recapitalization, this is a good thing, not a bad thing, of Old World Christmas, one of our portfolio companies. And it's what we refer to and most folks would know it, as what's called a dividend recap. Old World has been a strong performer for us, a very good investment, and we certainly wanted to keep it in the portfolio. So we were able to make a new secured debt investment. This allowed the company, meaning Old World Christmas, to repay its bank debt and make a payment to GAIN, thereby creating income, a return of preferred equity capital cost basis and a realized gain on equity.

Old World continues as a portfolio company with GAIN and we are retaining our significant ownership interest. So a very positive transaction, which is something we are able to consider doing from time to time given the relationships we have with our portfolio companies and, in fact, our ownership positions in these companies.

Also that we have very solid values now and low leverage and our balance sheet continues to be strong, and -- it allows us now to make new acquisitions and certainly assist our companies should it be necessary going forward. Regarding our outlook, we definitely are seeing signs of deal activity picking up. We are pursuing some new opportunities and some of them are actually in the due diligence phase.

Although it still is a very competitive environment with very high valuations relatively speaking, in part because there's lots of liquidity in the buyout market and the competition is pretty stiff. So we keep being challenged on the new deal front. But that's what we keep doing every day, and I certainly hope and look forward to seeing some new acquisitions somewhere over the next certainly six to nine months.

So with that, our focus for the near-term, will be continuing our close involvement with our portfolio companies, providing assistance as necessary and certainly making new acquisitions for the portfolio. We are maintaining our monthly distributions to shareholders, which we feel really good about at the current levels. And consistent with our policy, our Board will continue to evaluate supplemental distributions as we make capital gains going forward.

So with that, I'm going to turn it over to our CFO, Julia Ryan, and let her go into some more detail. Julia?

Julia Ryan -- Chief Financial Officer and Treasurer

Thanks, Dave. Let me start with a summary of the fund's operating performance for the past quarter. We generated net investment income of $6.3 million, which compared to NII of $4.4 million in the prior quarter. Interest income stayed consistent quarter-over-quarter, while other income as Dave mentioned, in particular, dividend income, increased $5.2 million as a result of the investment transactions.

We continue to monitor and closely work with the companies that have loans on non-accrual status, one of which has started making payments again. And we believe we can expect to see some improvement during the balance of this fiscal year, which is ending March 31. Net expenses totaled $11.1 million in the current quarter compared to $7.5 million in the prior quarter. The increase was primarily related to income-based incentive fees of $2.2 million -- sorry, $2 million as a result of the increase in pre-incentive fee NII and $1.8 million of capital gains-based incentive fees.

This compares to no income-based incentive fee and a $0.5 million capital gains-based incentive fee last quarter. The change in the capital gains-based incentive fee is due to the net impact of realized and unrealized gains and losses between quarters. As of 12/31/2020, no capital gains based incentive fee was contractually due.

When adjusting net investment income to exclude the capital gains-based incentive fee, adjusted net investment income per weighted average common share was $0.24 in the current quarter or a $0.09 increase compared to last quarter. As Dave mentioned, we completed several investment transactions this quarter, which in aggregate resulted in net realized gains of $9.1 million. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. We have availability under our credit facility of about $96 million as of 12/31/2020. We also raised about $12.9 million in proceeds under our Series E TPS ATM.

Our NAV increased to $11.11 per common share quarter-over-quarter primarily related to net realized gains. In addition, distributable income to shareholders remains solid. On a book basis, undistributed net investment income combined with net realized gains totaled $14 million or about $0.42 per common share.

As you know, this amount is already reduced by the book accrual of the GAAP capital gains-based incentive fee, which is roughly $9 million at 12/31 and which is not contractually due. With that in mind and as previously announced, in January 2021, our Board of Directors maintained the current monthly distribution run rate of $0.84 per common share, which represents a current yield of around 8%, excluding any supplemental distribution.

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

David J. Gladstone -- Chairman and Chief Executive Officer

All right, Julia, a very nice presentation from you and Dave and Michael, all this good information for our shareholders at presentation in the Form 10-Q that you filed yesterday. That should get everyone up-to-date on all the things that we've been doing.

I believe the team today is in good position to continue these successes and -- for the remainder of the fiscal year ending March 31st, 2021 and manage the portfolio through the current times of uncertainty. I believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and the potential for supplemental distributions. Team hopes to continue to show strong returns as they did this quarter.

But now I'm going to stop and ask the operator to come on, and let's get some questions from those on the line listening to us.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Thank you. Our first question comes from the line of Ryan Carr with Jefferies. Please proceed with your questions.

Ryan Carr -- Jefferies -- Analyst

Hi, good morning guys. And thanks for taking my question. First question is specifically on the other income. I know you had mentioned it at the beginning of the call. It's not really a normal thing to see it that high in a quarter. So just curious to hear your thoughts on really the cadence of that line item going forward just given the deal activity you have going on.

David Dullum -- President

Yeah, hi. So, as I mentioned -- and Julia certainly should jump in here if she feels. As I mentioned, it is and always has been somewhat inconsistent, if you will, quarter-over-quarter because it is driven primarily by two things. One, dividends that we might take from our portfolio companies or receive from the portfolio companies, which is really dividends on usually the preferred stock investment that we have in those companies.

And first of all, for a Company to pay out a dividend to us, they also have to have what's called earnings and profits. So we generally don't see a lot of preferred dividends necessarily. Where you do see them more, is as in the case of this past quarter with the exit of both, if you will, Frontier Packaging and the Old World Christmas recap, we are in a position then to have those companies as part of the transaction payout on the accumulated dividend that they would have. So that's one.

So again, you'll see probably, as I say, less of that, and it's driven in part by exits that we might take going forward as well as any time the Company has earnings and profits and they choose to pay out a dividend. So that's that part. And the other one is the other, what we call an exit fee or a success fee. Other folks would normally think of that as what's called PIK on their debt securities. And as you might know, we do not have PIK, which just means Payment In Kind, which is not cash related. We do not take it in income until actually the Company is able to pay us that proportionate share of their quote, exit fee or success fee, which can occur during the life of the Company, not necessarily just on an exit.

And the reason a Company would do that is it helps them from a tax perspective. So when they pay it out to us, we take it into income and it is cash-based so we do not have any non-cash income which obviously we would be inclined to have to -- not inclined but we'd have to be required to pay out. So long answer to it, but the answer is really, we look at it, as I mentioned, on an annual basis. And between quarters, it will be inconsistent but we try to manage to a level where we can generate another income line item to help support the nature of our interest income line item, which comes off of the debt securities. Because remember, we have -- about 70% of our assets are in roughly in the debt securities of these companies and about 30% in the equity, which is important to us and is a part of our strategy.

So we look to generate income from that from time-to-time. And then we take cap gains obviously going forward. Hopefully, that helps.

Ryan Carr -- Jefferies -- Analyst

Yes, thank you very much. And then second question is on the dividend. So obviously, NOI has been -- over the past several quarters as the economies recover, you've seen an upward trajectory in that. I was curious, what is your current level of spillover? And then beyond that, what are your thoughts moving forward on a special distribution?

David Dullum -- President

Julia, do you want to take that?

Julia Ryan -- Chief Financial Officer and Treasurer

Sure. So Ryan, as I stated earlier, we have roughly $14 million of undistributed income right now on the balance sheet. That's obviously book basis, so the tax numbers vary a little bit from that. That is available for distribution at any one point. And we ended last year with a good amount of -- the last fiscal year with a good amount of spillover as well. So that obviously started the year off with some cushion. And you're right. The first two quarters, we weren't quite making our monthly run rate.

However, as Dave just alluded to, we really manage our earnings on an annual basis. So we try to match the annual income to the annual dividend and that's how we operate. And some of that is related to how our income can fluctuate as you just pointed out. So that is for one. And then number two, as far as supplemental distributions are concerned, we are monitoring where the portfolio is going through the end of this fiscal year. And if all holds true, we hope that we can declare another one.

Ryan Carr -- Jefferies -- Analyst

Great. Thank you very much for answering my questions.

David J. Gladstone -- Chairman and Chief Executive Officer

Okay. Next question?

Operator

The next question is from David Rothschild, a Private Investor. Please proceed with your questions.

David Rothschild -- Analyst

Yes. Thank you for taking my question. David, you talked in your remarks about I guess I'd describe it as tightness in new deals coming forward. Do you see that as maybe bringing out -- bringing down the total earnings that the portfolio is going to be earning going forward?

David Dullum -- President

Yeah. Thanks, David. I appreciate you being an investor also. I don't -- I wouldn't say so because the portfolio as we stand right now, obviously, we're -- as we've just been talking, we really focus a lot on the income coming off of the existing portfolio. It's not unusual, by the way. For us, as you know, our general level of activity is we don't do -- we don't go into a whole bunch of new deals. We're very careful in how we go about doing them. Our underwriting is pretty thoughtful. Really, the key is that when I say tightness, it's tight because there is a lot of money out there in the private equity world and in the buyout business, which is where we compete. So we try to be cautious as we look at new companies.

The good news is that we are seeing, as I mentioned, more activity, meaning more companies that are looking to be sold that we have an opportunity to look at. So I don't see it as really -- as bringing down the income. It's really more a question of how rapidly, so to speak, we can add to our assets and continue to increase the income and thereby obviously slightly increase our monthly dividend payout. So that's really our target, our goal. But it's what we do every day. And I'm not overly optimistic. But I'm certainly encouraged by what I'm seeing on the new deal pipeline front, so to speak.

David Rothschild -- Analyst

All right. Thanks for the answer. Keep up the good work.

David Dullum -- President

Thanks sir.

David J. Gladstone -- Chairman and Chief Executive Officer

Okay. Next question?

Operator

The next question is from Mickey Schleien with Ladenburg. Please proceed with your questions.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Yes. Good morning everyone. Dave, just wanted to ask you about liquidity at your borrowers because when we think about the pace of vaccinations here and the virus' mutation, it looks like the pandemic will probably go on longer than we had originally hoped for. And that could obviously continue to stress companies you've invested in, in some industries. So with that in mind, how do you feel about your borrowers' liquidity and their ability to see the light at the end of the tunnel and get through the pandemic?

David Dullum -- President

Yeah. Thanks, Mickey. Good question. Right now, I feel like we've gone through the worst in a sense with our portfolio companies, the one or two that obviously were most impacted, if you will, because of their nature of their product or service, which -- where they would interact more with the public as an example. And one of those, which early in the pandemic, I think we talked about this actually on our last call, that provides in-home cleaning services, they obviously saw a drop in their initial revenue.

They've actually seen a pick back up again. And they've all -- a lot of these companies have managed to figure out how to manage through some of this activity also. So as an example, in their case, we don't see any need there. They're doing really well. One other company that has been impacted because they're sort of tied to the rented car industry obviously saw a pretty significant decline. But again, they managed exceptionally well. And we see them starting to pick back up again. And it just depends obviously on travel, how quickly that's going to pick up.

But all in all, I'd say right now, as we look at the portfolio, we're not seeing any need for our portfolio companies to have to fund any activity as a result of COVID. So again, I'm cautiously optimistic in that regard. And we -- obviously, we're in a position to help provide some funding if necessary or do some things. But as of right this minute, I don't see any that -- necessarily that we're going to have to do that with.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

That's good to hear, thank you for that, Dave. I wanted to also ask about non-accruals. Some of your non-accruals have been on your balance sheet for quite some time. I imagine you're working on them. Could you give us any indication of the prospects for bringing some of those back on to accrual basis?

David Dullum -- President

Right. So I think right now, Mickey, and Julia can certainly correct me on this, there are -- there is one that's related, as I was just discussing on the COVID. That one possibly -- as we move nearer the end of this year, this calendar year, we anticipate we could possibly see that one come back on. So I mean that's -- need to be done for that reason.

Of the five I think, that we have on non-accrual right now, there are -- besides that one, there are two others, one of which Julia alluded to that actually is paying its interest now, although technically, it's still on non-accrual just because of the way in which we sort of -- the sort of internal rules, if you will.

So over the next couple of months or so, I think that will come back on accrual. There's another one that I think as we move through the year given its activity will come back on.

So long answer is I think of the five, there are two of them that are -- there are companies that are performing reasonably well. They're not back on accrual yet and probably won't be on accrual for a while. But they're doing what they need to do. So again, I think we're working through on them. And hopefully, by the end of this -- certainly this year, we'll see most of them back on an accrual status.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Thank you for that. And thank you for taking my questions. Congratulations on a good quarter, Dave.

David Dullum -- President

Thanks.

David J. Gladstone -- Chairman and Chief Executive Officer

Next question.

Operator

There are no additional questions, Mr. Gladstone.

David J. Gladstone -- Chairman and Chief Executive Officer

All right. If there are no more questions, we'll see you next quarter. And thank you 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 -- General Counsel and Secretary

David Dullum -- President

Julia Ryan -- Chief Financial Officer and Treasurer

Ryan Carr -- Jefferies -- Analyst

David Rothschild -- Analyst

Mickey Schleien -- Ladenburg Thalmann -- Analyst

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