Gladstone Investment Corp (GAIN) Q4 2021 Earnings Call Transcript

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Gladstone Investment Corp (GAIN -0.56%)
Q4 2021 Earnings Call
May 12, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Gladstone Investment Fourth Quarter and Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

I would now like to turn the conference over to Mr. David Gladstone, Chief Executive Officer. Please proceed, sir.

David J. Gladstone -- Chairman & Chief Executive Officer

All right. Thank you, Natalia. This is -- good morning to all of you out there. This is David Gladstone, Chairman. And this is the fiscal year ending for 2021 for this fund. And shareholders and analysts, hopefully, you'll ask us some good questions at the end. We are listed on NASDAQ, under the trading symbol GAIN for the common stock, and we have got two other trading out there, GAINL for the preferred stock 6.275%, and then GAINN for the registered note, that's 5%, matures in 2026.

Thank you all, again, for calling in. We are always happy to talk to you and provide updates to our shareholders and those great analysts that follow us. Dave Dullum and Julia Ryan will be up in a few minutes. But first, we are going to start with our General Counsel and Secretary, Michael LiCalsi. Mike?

Michael LiCalsi -- General Counsel and Secretary

Thanks, David. 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 are based on our current plans, which we believe to be reasonable. Now, 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 in our Forms 10-Q, 10-K and other documents we filed with the SEC. You can find them all on the Investors page of our website, which is www.gladstoneinvestment.com, or the SEC's website, which is 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. And please also note that past performance or market information is not a guarantee of any future results. Now, please take the opportunity to 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.

Now, today's call is simply an overview of our results through 03/31/2021, so we ask you review our press release and Form 10-K, both issued yesterday for more detailed information.

Now, with that, I will turn the presentation over to Dave Dullum, President of Gladstone Investment. Dave?

David Dullum -- President

Hey, Mike. Thanks much, and good morning, likewise to everybody. Certainly, I am happy today to report that we have come through the fiscal year 03/31/21 with a minimum of COVID scars. We did end the year with an adjusted NII of $0.69 per share, with the last two quarters really importantly showing a recovery trend with the adjusted NII per share at $0.20 and $0.24, respectively. I want to just say that this trend really an income level reflects the COVID impact on the first two quarters, where we did limit the other income from portfolio companies and obviously, where we reduced some interest income as well.

Along the lines, we also increased NAV per share from $11.17 at 03/31/20 to $11.52 per share at 03/31/21, and we are able to increase assets to $644 million from $576 million. We maintained our monthly distribution at $0.07 per share, or $0.84 per share on an annual basis, and also paid a supplemental dividend of $0.09 per share in June of 2020. We were able to exit one portfolio company, completed a dividend recapitalization of another, both of which generated other income which was from exit fees and/or dividends, and we also had realized capital gains on equity. We made one new buyout investment and then also incremental investments on some existing portfolio companies, and in one case, help facilitate actually an accretive add-on acquisition.

I'd like to mention here, though, that since inception in 2005 and through 03/31/21, we have invested in 53 buyout portfolio companies. We're in an aggregate of about $1.4 billion. We exited 23 of these companies, generating about $238 million in net realized gains and over $31 million in other income on exit. I mentioned this, as it really reinforces our buyout in investing strategy to generate, both income from monthly distributions to shareholders and capital gains on equity for supplemental distributions. This provides some stability, especially in periods as we have recently experienced.

It is also important to note the effect of the quarterly changes in our portfolio companies equity values, as there is a very high correlation to the overall portfolio value, given that about 25% of our assets at cost are equity securities. And again, this is a somewhat of a differentiator to other public BDCs. So, where we experienced primarily equity valuation declines early in the COVID cycle, we are seeing clearly improving valuations and, therefore, increases quarter-over-quarter.

Two other areas I would like to briefly touch on is one, we are seeing two of our portfolio companies that were on non-accrual come back on accrual status this quarter, and hope to continue that trend during the next fiscal year with at least two other companies. And given the exits and the favorable financings that we were able to execute before 03/31/21, we begin the new fiscal year with a very strong and low levered balance sheet and excellent liquidity availability. And Julia, actually, will elaborate more on this in her section.

Regarding pandemic, I briefly want to review that the portfolio companies that we did have that experience, any disruption in earnings decline are starting to see some real improvement and fortunately, we did not have to provide much financial support, although, we do continue to actively monitor potential issues and are proactively engaged with our Company's management teams to provide support as necessary. And as I mentioned, we are in a strong liquidity position and able to provide support to any of our companies really to face temporary liquidity needs.

So looking forward, we just continue to provide managerial financial support to our portfolio companies, while we continue to actively review potential acquisitions. And the buyout market, though, does continue to present challenges with purchase price expectations being elevated. So, we have to maintain our discipline as usual and a high level of due diligence. Although, we currently are engaging in discussions with a few acquisition opportunities, I do believe we might be in a position to take advantage of attractive valuations and close some deals.

Overall, I am encouraged by the state of our portfolio, the strength of our balance sheet, and the prospect of good earnings and distributions over the next year. I want to just elaborate that the structure of our portfolio is geared to providing consistent monthly distributions with a view to increasing as appropriate. And in that respect, we expect to continue our run rate monthly distribution of $0.84 per share annually, and we have declared another supplemental distribution of $0.06 per share to be paid in June of 2021.

So with that, I will turn it over to Julia, and she can go with some more details. Julia?

Julia Ryan -- Chief Financial Officer and Treasurer

Good morning. Thanks, Dave. Looking at operating performance for the past year and quarter, fiscal 2021 certainly had its challenges, but we are happy to report the positive trends during the latter part of the year, resulting in total investment income of $56.6 million, adjusted NII of $0.69 per share and over $11 million of net realized gains on investments. We are also excited about our financing success during the last fiscal quarter, with the issuance of our 2026 notes, the redemption of the Series D Term Preferred Stock and the extension of our credit facility.

As for the most recent quarter, we generated adjusted NII of $6.7 million, or $0.20 per share, as compared to $8 million or $0.24 per share in the prior quarter. We continue to believe that adjusted NII is a useful and representative indicator of our operations. Investment income declined slightly quarter-over-quarter as the decrease in other income, which was due to the investment transactions in the prior quarter, was partially offset by an increase in interest income. As Dave mentioned, two of our loans will return to accrual status during the quarter, and we believe we can expect further improvement going into this new fiscal year for us.

Net expenses increased by $2.4 million, compared to the prior quarter, which was primarily driven by a $1.8 million increase in the capital gains based incentive fee, which was due to the net impact of realized and unrealized gains and losses in the current quarter. Again, to reiterate, the fee is not yet contractually due.

We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With the successful financing transactions this quarter, we have new long-term capital in place, and have availability under our credit facility of about $158 million as of 03/31/21. Our NAV increased to $11.52 per common share quarter-over-quarter, primarily related to net unrealized appreciation of $17.3 million. In addition, distributable income to shareholders remains very solid. On a book basis, undistributed net investment income, combined with net realized gains, totaled $11.3 million, or about $0.34 per common share.

With that in mind, and as previously announced in April 2021, our Board of Directors declared another $0.06 supplemental distribution to common shareholders to be paid in June of 2021. Assuming the current monthly distribution run rate of $0.84 per share per year, and estimating $0.12 per share in supplemental distribution, the total of which has not yet been determined or declared, our annual distributions would total $0.96 per common share, which would result in a yield of about 7% using yesterday's closing price.

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

David J. Gladstone -- Chairman & Chief Executive Officer

All great, Julia, very nice work. You and Dave and, Michael have informed shareholders, and along with that 10-K that you filed yesterday, which is one of the largest ones I've ever seen, I think the people who are following our stock have plenty of information about how strong we are.

Our team has reported solid results for the fiscal year, including financings, buyout investment transactions and exit activity with significant realized gains. We believe the team is in great position to continue to succeed for our fiscal year, ending March 31, 2022.

I personally believe that Gladstone Investment is one of the attractive investments for investors seeking continuous monthly distributions of income that we're generating and supplemental distributions from potential capital gains. I think the record during the year in which COVID-19 and the government's reaction to it has been extremely good. Assets increased from $576 million to $644 million, net assets up from $11.17 to $11.52, all this while paying a steady dividend. So those of who love dividends like me, have enjoyed going right through this recession for COVID-19 with our dividend being paid. So great job by the team that's running Gladstone Investment.

Now let's stop and have our operator come on, and we'll have some questions from the analysts or any other shareholder out there.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Kyle Joseph with Jefferies. Please proceed.

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning. Thanks very much for having me on. Quick question, in terms of the markets you guys focus on, just want to get a sense for where spreads and pricing is kind of in contrast to pre-COVID levels?

David Dullum -- President

Hey, Kyle. Good morning, it's Dave. I won't answer the question really in terms of spreads, if you will, because as you know, what we -- the market we're at, looking to buy companies, right. So what I'd say is, not much change, to be honest, because we think of it more around enterprise value of companies that we're looking to buy. And I'm saying pre-COVID multiples for good companies, not great companies, good companies was pushing seven times trailing EBITDA. We're seeing, frankly, that same sort of environment, in fact, even some elevated multiples. And the trickier part, frankly, is that a number of companies that went through COVID, some did very, very well, relatively speaking. Others, obviously, did not do as well. So the thing you've got to really look through are what's called COVID adjustments, which are financed way into EBITDA, so that's really the tricky part. But having said all of that, I'd say, generally, from an enterprise value perspective and therefore, the challenge we have on looking to buy a business, the multiples are still fairly high and really requires some rigor in seeing how you ultimately get a return on it. That helps.

Kyle Joseph -- Jefferies -- Analyst

Very helpful. Thanks. And then on non-accruals, great to see two investments turn back on. Just curious, would you say this resulted from kind of broader economic improvement, or is it specific things you've done at these companies that resulted in them being going back on accrual?

David Dullum -- President

Yeah. I would say, and then Julia should certainly answer it here. I'd say, couple of things, one, generally, things that we have been, as you know, work on with our portfolio companies, whether that's a change in management, or improved management or that sort of thing. I'd say it's a combination, frankly. Generally, their business were improving, but they also were doing a good job managing the companies. And as we said in there, hopefully, there are a couple more. And if that all happens here by the end of this calendar year, we pretty much could be out of all our non-accruals with maybe exception of one company.

Kyle Joseph -- Jefferies -- Analyst

Very helpful. Thanks for answering my questions.

David Dullum -- President

Yes, sir.

David J. Gladstone -- Chairman & Chief Executive Officer

Okay. Second question?

Operator

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to Mr. Gladstone for closing comments.

David J. Gladstone -- Chairman & Chief Executive Officer

All right. Thank you for calling in. I wish you had more questions. We'd like to answer any questions that are out there floating around. But at this point in time, we'll see you next quarter. And that's the end of this call.

Operator

[Operator Closing Remarks]

Duration: 17 minutes

Call participants:

David J. Gladstone -- Chairman & Chief Executive Officer

Michael LiCalsi -- General Counsel and Secretary

David Dullum -- President

Julia Ryan -- Chief Financial Officer and Treasurer

Kyle Joseph -- Jefferies -- Analyst

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