Gladstone Investment Corporation (GAIN) Q3 2021 Earnings Call Transcript

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Gladstone Investment Corporation (GAIN 0.57%)
Q3 2021 Earnings Call
Nov 3, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Gladstone Investment Third [Phonetic] Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Gladstone. Thank you, David. You may begin.

David J. Gladstone -- Chairman & Chief Executive Officer

Well, thank you, Paul, and good morning to everybody. This is David Gladstone, Chairman of Gladstone Investment and this is the second quarter of our fiscal year ending March 31, 2022. And this is a conference call for shareholders and analyst of Gladstone Investment listed on NASDAQ under the trading symbol GAIN and we have some registered notes as well. Thank you all for calling in. We're always happy to provide updates for our shareholders and analysts and provide our view of the current business environment. And two goals today, of course are to help you understand what happened; and also give you our view of the future.

We always start out with our General Counsel and Secretary, Michael LiCalsi. Go ahead, Mike.

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. We know 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 the Risk Factors listed on Forms 10-Q, 10-K, and other documents that we file with the SEC. And you can find them all on the Investors page of our website www.gladstoneinvestment.com, or on 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. Please also note that past performance or market information is never a guarantee of any future results. And please take the opportunity to visit our website once again, gladstoneinvestment.com, sign-up for email notification service. You can also find us on Twitter @GladstoneComps, and on Facebook keyword there is The Gladstone Companies. Today's call is an overview of our results through 09/30/2021. So we ask that you review our press release and Form 10-Q both issued yesterday for more detailed information.

And with that, I'll turn it over to the President of Gladstone Investment, David Dullum. Dave?

David Dullum -- President

Hey, Mike, thanks. Good morning shareholders, analysts and interested parties. Happy to report another very good quarter for this second fiscal quarter. The operating results from our portfolio companies have been encouraging and I'm really pleased with the quality of the portfolio at this point. So while some of our companies have made progress toward pre-COVID operating status, we are certainly very mindful of the challenges that our economy still faces such as due to supply chain issues, which you've all heard a lot about and obviously clearly inflationary trends. But with all of that, though, we ended the second quarter of fiscal year 2022 with adjusted NII of $0.23 per share, which continues the improving trend of the previous three quarters, where we have reported adjusted NII per share of $0.20, $0.24 and $0.24 respectively.

And that's going from the earliest to the most recent quarter. So we're encouraged by these results as they do reflect the previously mentioned improvements in the operations and the health of our portfolio companies, and certainly the prospects for future earnings. In addition, our net asset value per share increased from $12.66 at 6/30/21 to $13.27 at 9/30/21. And our assets increased to $746 million from $713 million over the same period. This is in large part due to the continued recovery of the values of our equity portions of our holdings, which obviously is very important to us and which actually make up about 26% currently of our portfolio at cost.

So as a result and subsequent to the quarter end, we did increase our monthly distribution to shareholders by 7%, which is $0.075 per share or effectively $0.90 per share on an annual run rate basis. We also paid a supplemental distribution of $0.03 per share in September 2021 and declared another supplemental distribution of $0.09 per share, which will be paid in December of 2021. Now, during the second quarter of fiscal '22, we made one new buyout and this was of a company that's been around for quite a while, very good company, family owned for many, many years. And this is actually related to infrastructure expansion.

We also made incremental investments in existing portfolio companies in support of some add-on acquisitions, which actually is an area of focus for us, because it presents opportunities to keep building value in existing portfolio companies. So our buyout strategy continues to successfully generate both income from monthly distributions to shareholders and capital gains on equity, which allows for these aforementioned supplemental distributions. Our balance sheet continues to be very strong with very low leverage and a very positive liquidity position.

So this allows us to continue providing the support which our portfolio companies will need for these add-on type acquisitions and value building as well as interim financing, if the need arises. And this is all while obviously we're actively seeking new buyout opportunities, so we can continue to grow our assets. So briefly from an outlook looking forward, the flow of buyout opportunities continues to be strong. However, purchase price expectations out there still remain pretty elevated. And as a result of this dynamic, we really need to remain patient and selective in our due diligence and review process.

And that's one of the areas that we stress with our team and the way in which we look and way in which we evaluate, and then, ultimately devote time to potential add-on acquisitions and new acquisitions. So in summing up the quarter, the state of our portfolio is very good. We have a strong and liquid balance sheet, an active level of buyout activity and the prospect of continuing very good earnings and distributions during this fiscal year.

So now, I'll turn it over to Julia Ryan, our CFO, so she can give you some more details. Julia?

Julia Ryan -- Chief Financial Officer and Treasurer

Thanks, Dave. As far as operating performance for the quarter, as we reported last quarter, we continue to see improvement after the initial impacts of the pandemic. We generated adjusted NII of $7.8 million or $0.23 per share as compared to adjusted NII of $8 million or $0.24 per share in the prior quarter. We continue to believe that this metric is a very useful and representative indicator of operations. Investment income increased quarter-over-quarter, primarily due to other income. In the prior quarter, interest income was lifted by the collection of past due interest, which did not recur to the same extent this quarter.

While we added one loan to non-accrual this quarter, which caused part of the decline in interest income, we believe it will be a relatively short-term change. At 9/30/21, three of our portfolio companies were non-accrual. Net expenses decreased by $4 million this quarter, which was primarily driven by a $4.7 million decrease in the capital gains based incentive fee, which was due to the net impact of realized and unrealized gains this quarter, which was lower than the prior quarter.

Given the issuance of our new 2028 notes, interest expense increased, but this increase was offset by a decline in dividend expense due to the redemption of our Series E Term preferred stock. And we used proceeds from the note issuance to do so. We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With the successful issuance of our 2028 notes and the related redemption of the Series E this quarter, we had new long-term capital in place and significant availability under our line of credit.

Our NAV increased to $13.27 per common share this quarter, and primarily related to the net unrealized appreciation on our portfolio. Consistent with prior quarters, distributable book earnings to shareholders remain solid, especially when considering that book earnings have been reduced by $28.3 million of capital gains based incentive fees accrued under GAAP, which equates to about $0.85 per common share, which are not currently due or deductible for tax.

So with that in mind, and as previously announced in October 2021, our Board of Directors increased our annual distribution run rate to $0.90 per common share, and declared another $0.09 supplemental distribution to common shareholders to be paid in September of 2021. Assuming the current monthly distribution run rate of $0.90 per share per year, and estimating $0.18 per share in supplemental distribution, our annual distributions would total about $1.08 per common share, or roughly just shy of 7% yield on the closing price of our stock.

So this covers my portion of today's call. And back to you, David.

David J. Gladstone -- Chairman & Chief Executive Officer

All right. Thank you, Julia. That was a very nice report. And we had a nice report from Dave and Michael. The information that we've given to our shareholders, I hope brings you up-to-date, that presentation that we just made and the 10-Q filed yesterday at the SEC should bring everybody up-to-date where we are now. The team, of course has reported solid results for the quarter, including a buyout investment and financial transactions. We believe the team is in a great position to continue these successes through the remainder of fiscal year ending March 31, 2022.

Just so, you know, we always look to sell some portfolio companies and I'm sure we'll find some to sell in the future. And we don't have any way of sort of knowing what that's going to be until it gets very close. Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions. And then they do supplemental distributions, mostly from potential capital gains and other income. The team hopes to continue to show you some strong returns.

And now let's stop and have some questions from the analysts and others who follow us. Paul, if you will come on, and tell them how they can ask questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Thank you. Our first question is from Mickey Schleien with Ladenburg. Please proceed with your question.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Good morning, everyone. Dave, I wanted to ask, you mentioned the supply shortage problems in your prepared remarks. And given your business model, I'd like to understand how you're seeing your portfolio companies deal with those shortages? And are they also being able to pass on the inflation they're experiencing in their inputs to their customers?

David J. Gladstone -- Chairman & Chief Executive Officer

Yes, hi, Mickey, great. It's a very good question, obviously, one that a lot of companies are obviously working through and focusing on. I would say in from a general perspective, our companies are able to deal with it fairly well, some of them because of the nature of their, let's call it, seasons or what have you actually we're somewhat ahead of the game, if you will and so had product coming in early. We have some others that, the big problem of course is the stacking up of the containers and we do have a few companies that are subject to that, and then, obviously the increase in prices of those.

But as you suggest we have gone out with those companies and worked with their customer base and have indeed been able to get price increases. Not necessarily totally covering all the relative cost necessarily but indeed have been able to pass-through price increases and some more so than others. So, overall, I'd say, from those companies in the portfolio that are impacted by the supply chain shortages and the potential increases in prices, that they've been able to do a pretty decent job, we'll probably see a little bit of a tightening of margins in a few of those companies. But on average, we think we're in pretty decent shape.

The other obvious area of course is labor. And that's one that we work obviously as well hard on, and trying to be sure we can get people to work. Prices and costs are going up there, in some cases. So trying to get pretty creative with what folks are doing and how to not only get labor, but to keep labor. And that's a continuing operating challenge frankly. Having said all of that, we've had a number of our companies that actually have performed actually above what we might have expected during the whole COVID situation.

You've seen that I'm sure with other companies where it actually increased their activity. And we've certainly seen that as well. So and those of our companies that did see an initial decrease in revenues, and so on early in COVID, have certainly seen a very nice bounce back. And that's why, as I mentioned, our operating results look very good. And we're starting to see those increases and results come through, and it's certainly impacting our valuations in a sort of a positive way.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Dave, if I could follow-up, J.R. Hobbs is an HVAC company, if I'm not mistaken. Are they -- are the issues that they're facing related to supply shortages or something else going on there that you can tell us about?

David J. Gladstone -- Chairman & Chief Executive Officer

Yes, no again, it's a good question. Their issue is more to do with their -- ironically, they've got a very, very large backlog, probably the largest we've ever seen. Their customer base are by and large general contractors going to multi-family construction, and now some industrial-commercial. And so it's related to shortage in the sense that some of those buildings if you will, have been pushed back a bit.

And that slowed down for the first part of this year, but now is picking back up again. So indirectly impacting, but more because of a pushback on activity and didn't lose any business. So we now have a pretty significant -- if you might imagine backlog, which we'll have to work through the company, again, which is a positive thing going forward. So it puts some strings on working capital on companies like that but by and large itself is not necessarily had any shortages.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Just to make sure I understand J.R. Hobbs customers are delaying construction projects, is that due to the ongoing labor shortages or something else?

David Dullum -- President

That I couldn't tell you. I think couple of different things probably in turn as we all know early on the cost of lumber for argument sake, right, and the supply of lumber. So that slowed down some projects that were either waiting to try to get prices coming back down or what have you, I think it's more due to that than anything else that I'm aware of at this point.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay. Just a couple of more sort of modeling questions, you had another very strong quarter of unrealized appreciation, congratulations on that. I'm just curious was that due more to valuation multiples in spreads or to performance of the companies themselves?

David Dullum -- President

I'm going to let Julia jump in here and add some color to that. I will say very quickly, it was a combination of certainly improvement in operations and EBITDA improvements, if you will, which is obviously very important; not much in the way of increase in multiples. But Julia do you want to have a shot at that?

Julia Ryan -- Chief Financial Officer and Treasurer

Yeah, you're right, it's was a combination Mickey, but the impact of the performance uptick outweighed the uptick in multiples.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Thank you. And Julia, one last question. Did you reverse any previous income accrued for J.R. Hobbs for previous quarters or just started this quarter?

Julia Ryan -- Chief Financial Officer and Treasurer

We did. We did, not a significant amount by any means that that portion ran through bad debt expense.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay. Thank you for your time this morning. I appreciate it.

David J. Gladstone -- Chairman & Chief Executive Officer

Next question, please.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to David Gladstone for any closing comments.

David J. Gladstone -- Chairman & Chief Executive Officer

Well, thank you all for calling in. It's been a wonderful quarter for us and we hope to duplicate that in the next two quarters as well. So as a result it should be a wonderful year, but there are no guarantees in this world and thank you all for calling in and we'll see you in a month or two. That's the end of this.

Operator

[Operator Closing Remarks]

Duration: 19 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

Mickey Schleien -- Ladenburg Thalmann -- Analyst

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