Gladstone Investment Corporation (GAIN) Q1 2022 Earnings Call Transcript

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Gladstone Investment Corporation (GAIN 0.57%)
Q1 2022 Earnings Call
Aug 3, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Gladstone Investment First Quarter Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, David Gladstone. Mr. Gladstone, you may begin.

David J. Gladstone -- Chairman & Chief Executive Officer

Thank you, Alex, nice introduction. And this is the first quarter of our fiscal year that ends in March 31, 2022, and this is the conference for shareholders and analysts at Gladstone Investment. We're on NASDAQ under the symbol GAIN and then we have GAINL for preferred stock and we have some registered notes, GAINN for registered notes.

And thank you all for calling in. We're always happy to provide updates to shareholders and analysts and provide a view of the current business environment. And remember, our two goals here are to understand what happened in the last quarter and then give you some view of the future. Of course, nobody knows the future, but we'll give you a shot at it.

And we'll start out with our General Counsel and Secretary, Michael LiCalsi.

Michael LiCalsi -- General Counsel and Secretary

Good morning, everyone. 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 involves certain risks and uncertainties and other factors, even though they're 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 on our Forms 10-Q, 10-K and other documents that we file with the SEC. You can find all these on the Investors page of our website, that's www.gladstoneinvestment.com or even the SEC's website, which is www.sec.gov. And we undertake no obligation to publicly update or revise any 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 are not a guarantee of any future results. We ask that you take the opportunity to visit our website, once again, gladstoneinvestment.com, 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 6/30/2020. So we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information.

Now, I'll turn the presentation over to Dave Dullum, who is the President of Gladstone Investment. Dave?

David Dullum -- President

Hey, Mike, thanks. And I'm very pleased to report [Technical Issues] everything going on in the world, certainly, on a very good quarter in terms of our operating results for gain, the portfolio quality and also the progress we have and we are experiencing in returning to pre-COVID operating status, despite the uncertainties that we are now, somewhat, facing regarding virus variants.

However, we ended the first quarter of fiscal year '22 with adjusted NII of $0.24 per share, which is continuing the improving trend started over the last two quarters of fiscal year '21, where we reported adjusted NII per share at $0.20 and $0.24, respectively. So we're very pleased, again, with this positive trend, hopefully continuing forward. We are encouraged by these results because they do reflect improvement in the operations and the health of our portfolio companies and certainly the prospects for future earnings.

In addition, our NAV, net asset value per share, increased from $11.52 at 3/31/21 to $12.66 at 6/30/21. Assets increased to $713 million from $644 million. This is, in large part, due to the continuing recovery of the values of our equity holdings, which do make up about 25% of our total portfolio at cost. We also did maintain our monthly distribution at $0.07 per share, which is $0.84 per share on an annual basis. We also paid a supplemental distribution of $0.06 per share in June 2021 and declared another supplemental distribution of $0.03 per share, which will be paid in September, remembering that these supplemental distributions are coming from generally our exits and capital gains, which again is a big part of the long view [Phonetic].

During this first quarter of fiscal year '22, we exited two portfolio companies, which resulted in a net realized gain and significant other income. We also made one new buyout investment and incremental investments in existing portfolio companies. So our strategy as a buyout entity continues successfully to generate both income for monthly distributions to shareholders and capital gains on equity, which again we generally pay out through these supplemental distributions.

As importantly, our balance sheet continues to strengthen with low leverage and a very strong liquidity position. So this allows us now to provide support to our portfolio companies, both for add-on acquisitions and any interim financing, if the need were to arise, and also to actively seek, which we are doing, new buyout opportunities.

So it's sort of in this regard and kind of the outlook, the flow of buyout opportunities is robust -- very robust, I would say. And then the challenges really are in making new successful acquisitions. Really it's the discipline around sort of the triage, in other words, how we value and look at companies upfront, where we spend our time, the review process, the valuation analysis, all of these, because purchase price expectations still remain very elevated in our opinion.

In any event, though, and in this regard, subsequent to 6/30/21, we financed the add-on of another operating company to our recent buyout platform investment, which is called Nocturne Villas. And we closed on a new buyout investment, which is called Utah Pacific Bridge & Steel. This company actually provides large steel components in bridge replacement, rehabilitation and construction, so somewhat playing into the whole infrastructure developments that will occur in this country.

So in summing up the quarter, the state of our portfolio is great. We have a strong and liquid balance sheet and active level of buyout activity and the prospect of very good earnings and distributions during this fiscal year.

So, with that, I'm going to turn it over to our CFO, Julia Ryan, to give you a bit more detail on the financials. Julia?

Julia Ryan -- Chief Financial Officer and Treasurer

Thanks, Dave. As far as operating performance for the quarter, we continue to see improvement after the initial impact of the pandemic. We generated adjusted NII of $8 million or $0.24 per common share as compared to adjusted NII of $6.7 million or $0.20 per common share in the prior quarter. We continue to believe that adjusted NII is a useful and representative indicator of our operations.

Investment income increased quarter-over-quarter as interest income was lifted by the collection of past due interests from those loans that were previously on non-accruals and other income benefited from the close of transactions and related other income in the current quarter. While we added one loan to non-accrual this quarter, which we believe will be a relatively short-term change, over the past -- over the last two quarters, we returned four portfolio companies to accrual status. So with all that said, as of 6/30, only two of our portfolio companies were on non-accrual status.

Net expenses increased by $6.8 million this quarter, which was primarily driven by a $6.7 million increase in capital gains-based incentive fees, which was due to the net impact of realized gains and unrealized gains in the current quarter. And all of this is required by U.S. GAAP, but is not contractually due.

So moving over to our liquidity position, which is obviously very important and we still continue to believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With the successful financing transactions last quarter, if you recall, we registered some debt, we have new long-term capital in place to do just about that and significant availability under our credit facility for the next -- the remainder of this fiscal year and going into the future.

Our NAV increased to $12.66 per common share and that was primarily related to the unrealized depreciation we had this quarter. Dave already touched upon that. Consistent with prior quarters, distributable book earnings to shareholders remained solid, especially when considering that, that number has been reduced by a cumulative $22.7 million of GAAP accruals of capital gains-based incentive fees, which equates to about $0.68 per common share. Again, those fees are not currently due or deductible for tax purposes.

With that in mind, and as previously announced in July, our Board declared an additional $0.03 supplemental distribution to common shareholders to be paid in September. And if we assume that the current monthly distribution run rate of $0.84 per year, per share, and then also assume $0.15 per common share in supplemental distribution, those are the two $0.06 one, plus the $0.03 one for December, our annual distributions for total of $0.99 per common share and that results in a yield of about 6.9% 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 right, very nice Julia and nice for Dave as well and Michael. That's lot of good information there to our shareholders. And that presentation and the 10-Q filed yesterday should bring everyone up-to-date. Team has reported solid results for the quarter, including buyout investment transactions and exit activity, which is positive to net realized gains. We believe these teams are in a great position to continue the success that they've had into fiscal year ending March 31, '22.

So, again, Gladstone Investment is an active investment for investors seeking continuous monthly distributions. And in addition to that supplemental distributions from potential capital gains and other income, team hopes to continue this going forward.

I'm going to stop now and, Alex, would you come in and we're going to have some questions from the analysts and shareholders that want to talk to us.

Questions and Answers:

Operator

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

Kyle Joseph -- Jefferies -- Analyst

Hey, good morning. Thanks a lot for taking my questions here. First one on reported yields in the quarter, they were really strong, up nearly 200 basis points quarter-on-quarter. Was there any one-time items in that and can you give us a sense for your outlook going forward there?

David Dullum -- President

Julia, do you want to take that one?

Julia Ryan -- Chief Financial Officer and Treasurer

Yeah, sure. Kyle, that was related to my earlier comment on the loans returning to non-accrual. So as you often see in periods where loans come back on accrual, they miss some catch-up payments and that's what particularly lifted yield this quarter.

Kyle Joseph -- Jefferies -- Analyst

Got it. That makes sense. And then I think on that note, non-accruals obviously came down. Can you give us a sense for how you were able to work through those, any sort of restructurings? Were they -- or did they all return to accrual and your outlook for non-accruals going forward?

David Dullum -- President

Yeah, Kyle, I'll take that one. Julia, go ahead.

Julia Ryan -- Chief Financial Officer and Treasurer

I was just going to say maybe, Dave, you can touch upon that.

David Dullum -- President

Okay, I'll do that. We're not quite in the same place today. That's why I apologize for that little bit of back and forth. Yeah, Kyle, basically this was all -- no, there were no restructurings there that affected that. It was simply having gone through the COVID period and where we had to sort of give the companies an opportunity and in fact, in certain cases, working with, say, commercial banks that were in a senior position because of a revolver or what have you, just getting back into compliance, if you will, on some of the required covenants, etc., just, fundamentally, just good progress toward the operations of the companies.

And the one that did go on non-accrual, kind of, its paying or in a position to pay but again because of just some constraints regarding senior bank, we just had to put it on non-accrual, but it will probably come back on accrual pretty quickly. So, generally, I feel pretty good about where we are with all of those, again, somewhat temporarily, but now we feel really good about going forward.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then last question for me, just wanted to talk about the investment environment and kind of weighing what you said, we saw investment activity and repayments picked up to a certain extent this quarter, but at the same time, it sounds like you guys are finding good capital deployment opportunities even subsequent to 6/30. Is it kind of -- it's a very active market, competitive, but at the same time, it's kind of supply and demand are fairly balanced at this point, you're still seeing good opportunities. Is that fair?

David Dullum -- President

Yeah. Yeah, I'd say we're seeing a lot of opportunities and the challenge for us, as I mentioned, is just sticking with our format, the things that work for us. The two that I mentioned that we closed on, one, Nocturne, the other is Utah Bridge, those are really good companies and evaluations that work for our model. I mean, we -- again, there is a whole slew of activity out there with the investment bankers in the M&A shops. And again, we just have to stick to our strengths and I feel very good about doing that. So we'll make a couple of new acquisitions yet over the next year or so, but we're not going to rush out and just go crazy because multiples are just really pretty bizarre to be perfectly honest with you on companies that we see.

Kyle Joseph -- Jefferies -- Analyst

That makes sense. Thanks for answering all my questions. Appreciate it.

David Dullum -- President

Yes, sir.

David J. Gladstone -- Chairman & Chief Executive Officer

Okay, next question.

Operator

Thank you. Our next question comes from Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Good morning, everyone. Dave, I just wanted to follow up on your comments about the activity in the M&A market. I certainly agree with you and I'm happy to see that you can find some transactions that meet your return requirements. But could you give us some sense of whether any of your companies are in a sale process, given how high the multiples are and your willingness to take advantage of those valuations?

David Dullum -- President

Sure. Mickey, the answer I always give are a couple of things. One, the good news for us as a public entity and sort of an evergreen-type fund is we don't have any pressure to exit companies. Usually, again, it truly is working with the management teams and when and if they believe the time is right to exit for a variety of reasons, we will take that seriously. We -- as you've pointed out, we have had exits. As we go forward, we will certainly be faced with opportunities for exits and we'll do that on a very careful basis because, frankly, again, we exit a really good company and back to the earlier comments, then we just have to figure out how we're going to get a new opportunity, so to speak, to replace it, right, because, as you know, we keep focus very much on the income that we generate for it because we want to keep growing our dividend, our distributions to shareholders, so the debt pieces are really important.

So, again, yes, we will certainly entertain opportunities to exit if it really makes sense and we might see some of that over the next six to nine months, but we're not just going to rush out there and just do it just for the sake of doing it very frankly. We want to keep balance and I think we've done a good job at that. And we'll continue doing that.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

That's helpful, Dave. And on Utah Pacific, that really seems to fit your business model quite well and now in an industry that is getting a lot of attention. Can you give us a sense of what sort of terms you had -- you paid on, on that in terms of leverage, and maybe the interest rate?

David Dullum -- President

Yeah, well, again, we stick with our format. As you know, when we buy a business, roughly 30% of the dollars that we put out are going to be in the equity component and the balance is going to be in the debt component. Generally, again, we -- as we publish, our yield on the debt component of our portfolio is generally in the sort of 12%-ish range. That's kind of how that works for our model. So any one particular deal could see the debt piece be in that sort of interest range that we blend it out with the equity components. So that's pretty consistent with Utah.

As far as the terms of the deal, again, we generally don't publish out too much, but we generally try to stay in, and the companies we're looking at, we need to stick within kind of the 6 to maybe 7, 7.5 times EBITDA. And so as long as we're kind of in that range, it works well for our model.

This particular company has a very strong ownership, owned by an individual who really built the business and, fortunately, we've been able to have them stay involved with us. So we got really strong management, good team going forward. And it's a kind of deal that other people might have overlooked, very frankly, and that's where we worked a little bit harder to find those kind of transactions. Yeah, we're very excited about this one, given their position that they have in their market area.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Well, congrats on that deal, Dave. It sounds good. A couple of housekeeping questions, maybe for Julia. Could you give us a sense of how much interest you recognized back -- past due interest you recognized on B&T [Phonetic] and Horizon? And did you reverse anything for SBS?

Julia Ryan -- Chief Financial Officer and Treasurer

We did not -- Mickey, we did not reverse anything for SBS. So that was solely within this quarter. And then the amount that was collected in past dues, these periods, was roughly $2 million.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay. So sizable amount. And, Julia, can you give us your undistributed taxable income balance?

Julia Ryan -- Chief Financial Officer and Treasurer

Sure. I need to look that up. So, it is -- maybe, I will have to get that to you after this call.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay, that's fine. Dave, just a couple of more follow-ups and then I'll let someone else get into the queue. Did you take out another lender at J.R. Hobbs? I noticed you refinanced that deal.

David Dullum -- President

No, we didn't -- we did not have another lender in that deal. It's just us and management.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay. And lastly, obviously, we're entering another upward cycle of the COVID pandemic, which is unfortunate, and at least to me it seems unclear how much more support the federal government is willing to provide. Could you describe how you would expect your portfolio to perform without PPP and TALF and everything else that the government was doing to keep things moving, assuming the pandemic continues to deteriorate?

David Dullum -- President

Right. So, the good news or bad news, depending on one's point of view, is that our experience over the last year is that we actually only had one company that accessed PPP and that was because it was an exception because it -- and that's actually a company called The Maids and which, ironically, they really have done a great job in working through it, didn't really need it, very frankly, but they are a franchisor. So there was an exception to that. We have not been able to access with our other companies. So where our companies have needed either some relief, which wasn't very many, it's either been with us putting a little incremental money in to help them and so on. So the good news is, if you will, we are not relying on that. Looking forward, I don't, right now, see any of that impacting us.

The biggest issue, I think, which is not just us but across the board, many companies, very frankly, is just getting people to work. That's the big challenge and how that might impact if this occurs again is really -- it's a little bit of the unknown, but we're doing everything with our companies to increase efficiencies. Obviously, there's some cost impact because of labor cost increases and overtime and that sort of thing, but we're very -- we're working very hard on that with each of our portfolio companies. And so I don't -- we just have to keep doing what we've been doing very frankly.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

I understand. Those are all my questions. I appreciate your time this morning. Thank you very much.

David Dullum -- President

Thanks, Mickey. Thanks.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

You're welcome.

David J. Gladstone -- Chairman & Chief Executive Officer

Okay, next question.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I will now turn the call over to David Gladstone for closing remarks.

David J. Gladstone -- Chairman & Chief Executive Officer

All right, thank you all for tuning in and listening to this and asking good questions. We'll see you again next quarter. That's the end of this call.

Operator

[Operator Closing Remarks]

Duration: 23 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

Mickey Schleien -- Ladenburg Thalmann -- Analyst

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