Gladstone Investment Corp

NASDAQ:GAIN

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Greetings, and welcome to the Gladstone Investment Corporation first quarter earnings call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chairman of Gladstone Investment Corporation. Thank you, Mr. Gladstone, you may begin.

[David Gladstone, executive]

Thank you. As good morning. This is David Gladstone, Chairman of Gladstone Investment. This is the first quarter for fiscal year ending June 30, 2024 earnings conference call for shareholders and analysts of Gladstone Investment listed on NASDAQ under the trading symbol GAIN for the common stock and GAINN and GAINZ and GAINL are the three different registered notes that we have now outstanding. Thank you all for calling in. We're always happy to provide an update to our shareholders and analysts and provide our view of the current business environment. Two goals for this call is to help you understand what happened to your company and give you our current view of the future. And now we'll hear from our General Counsel, Michael LiCalsi is going to talk about forward-looking statements.

[Michael LiCalsi, executive]

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'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 the risk factors, you can find them in our Forms 10-Q and 10-K and other documents that we file with the SEC, and they can be found on the Investors page of our website, www.gladstoneinvestment.com or on the SEC's website, which is www.sec.gov.

And 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 no guarantee of any future results. We ask that you visit our website, once again, it's gladstoneinvestment.com, sign up for our e-mail notification service. You can also find us on Twitter, which is at Gladstone comps or on Facebook, keyword there is -- the Gladstone Companies.

And today's call is an overview of our results through June 30, 2024. So please review our press release and Form 10-Q, both issued yesterday for more detailed information.

Thank you all. With that, I'll turn it over to Gladstone Investment's President, Dave Dullum. Dave?

[Dave Dullum, executive]

Mike, thank you very much, and everyone, welcome. We are pleased to report again that the GAIN team produced very good results for the first quarter for fiscal year '25, which ended March '24 -- '25, sorry, following on the previous solid fourth quarter and annual results for fiscal '24.

We ended the first quarter of fiscal year '25 on 6/30/24 with adjusted NII of $0.24 per share and total assets of $940 million.

So this quarter was very active, both from working on significant number of new investment opportunities while managing some of the various activities within our 23 existing portfolio companies. Now while we made no new acquisitions in the quarter, subsequent to the quarter end, we invested $18.5 million in the form of secured first lien debt to fund an add-on acquisition of one of our existing portfolio companies, where we actually have a significant equity position.

So this follows some of the other important add-on activities at a few of our portfolio companies over the past year. Now as I've mentioned on prior calls, these add-on opportunities allows us to increase our total investment, build value in the companies where we know the management team and where we have a strong belief in its future and enhancing the opportunity for future equity gains. Now this activity is not a substitute for making new acquisitions and is a component of our investing strategy as it allows us to continue building our assets and income certainly in times when valuations through new acquisitions is a challenge.

Now the stability of our operating model allowed us to maintain our monthly distribution to shareholders at $0.08 per share or $0.96 per share on an annual basis. Recall that we paid $1.24 of supplemental distributions in fiscal '24. And while we've not paid any during this quarter we're reporting on, our history of supplemental distributions demonstrates the success of the buyout strategy and is our intent to continue rewarding our shareholders with meaningful supplemental distributions from the realized capital gains on exits. As our portfolio, of course, goes through maturity cycles and equity values will increase, we will continue to constructively harvest these gains for the benefits of shareholders.

Now since exits generally involve a pay down of our debt, we strive to balance the timing of these exits without sacrificing the level of debt assets to produce the income to support the monthly dividend and their growth. Our balance sheet continues to be strong with low leverage and good availability on our credit facility. Now we currently have 4 companies on nonaccrual to which we just put on nonaccrual, which represent about 7.8% of the fair value of the debt investments in our portfolio. I really want to stress that this is not indicative of any portfolio-wide concerns. Two of these companies combined to represent approximately $32 million of the total amount of the debt and both of these are now profitable. We anticipate returning these to accrual status sometime within the next year. We also have meaningful equity holdings in those 2 companies.

So again, this will happen from time to time but we will work with these companies to get them back where they need to be. And again, I do want to stress that our portfolio is functioning at a very high level, and I'm not concerned about having these 2 companies just recently going on nonaccrual status.

So as far as the outlook is concerned, as I mentioned in the beginning, we are seeing an increase in opportunities for new acquisitions. There seems to be growing momentum in new deals coming to the market, especially as the past few quarters have been relatively quiet. There is significant liquidity in the M&A market and is a very competitive environment with upward pressure on valuations. This means we will aggressively compete for new acquisitions that we believe fit our model of providing debt and equity while maintaining our principles of being a value investor and generating income on a current basis with upside through capital appreciation.

We currently are actively working on a number of new buyouts in various due diligence phases. So in summing of the quarter and looking forward, we believe the state of our portfolio is very good. We have a strong and liquid balance sheet, a positive level of buyout activity and the prospect of continuing very good earnings and distributions over the next year. For more detail, I'm going to turn it over to our CFO, Rachael Easton. Rachael?

[Rachael Easton, executive]

Thank you, Dave, and good morning, everyone. Looking at our operating performance in the first quarter of fiscal year '25, we generated total investment income of $22.2 million, down slightly from $23.6 million in the prior quarter. This was due to decreased interest income as a result of 2 portfolio companies going on nonaccrual status and lower success fee income, which can be variable in timing due to amounts that did not occur to the same magnitude in the current quarter.

Net expenses for the quarter were $9.8 million, down from $18.3 million in the prior quarter. This decrease was primarily due to a $9.4 million aggregate decrease in accrued capital gains-based incentive fees, which is due to the net impact of realized and unrealized gains and losses as required under U.S. GAAP and income-based incentive fees.

This resulted in a net investment income for the quarter of $12.4 million, up from $5.3 million in the prior quarter. Adjusted net investment income, which is net investment income exclusive of any accrued capital gains-based incentive fees for the quarter was $8.6 million or $0.24 per share, down slightly but remaining consistent on a per share basis from $8.8 million or $0.24 per share in the prior quarter.

We continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations. As Dave mentioned, during the quarter ended June 30, 2024, we had certain loans to 2 portfolio companies placed on nonaccrual status, bringing the total to 4 companies on nonaccrual. We believe the stress at these 2 new companies will be short term, and we'll continue working closely with them to get back on accrual status when possible. In one case, the company has a smaller legacy debt investment where we have no equity, and we are looking to ultimately have our debt repaid at some time in the future.

For the second company, the industry is cycling down a bit right now. And while there is some stress, we do see near-term relief with increasing industry rebound. We anticipate bringing this company back on accrual in the near term. Overall, there are no portfolio-wide credit concerns. These are 2 specific instances where companies are unable to currently service their debt, and it is not indicative of any portfolio-wide trends.

Additionally, we are seeing continuing improvement at one of the companies that has been on nonaccrual for some time. They are back to generating a profit, and we continue to work closely with them. Valuations in the aggregate were down $18.9 million. This was driven by lower valuation multiples across the portfolio and decreased performance at a number of our portfolio companies. This was partially offset by increased performance at several other portfolio companies. Our NAV decreased to $13.01 per share compared to $13.43 per share at the end of the prior quarter. The decrease was primarily driven by $0.52 per share of net unrealized depreciation on investments and $0.24 per share of distributions paid to common shareholders. This was partially offset by $0.34 per share of net investment.

We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With our 3 public note issuances, we have long-term fixed rate capital in place. And as of yesterday's release, we had over $113 million available on our $200 million credit facility. Additionally, we entered into a new ATM program during the quarter in which we have the ability to sell up to 75 million shares of our common stock, and we anticipate continuing to be active in that ATM. Overall, our leverage remains relatively low with an asset coverage ratio at June 30, 2024, of 216%, providing plenty of cushion to the required 150% coverage.

Consistent with prior quarters, distributable book earnings to shareholders remains strong. We started the fiscal year with $20 million or $0.55 per share in spillover and our monthly distribution remains consistent at $0.08 per share for an annual run rate of $0.96 per share.

Additionally, we will look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of future exit. Using the monthly distribution run rate of $0.96 per share per year, our aggregate estimated fiscal year distributions would yield about 7.3% using yesterday's closing price of $13.19. This covers my part of today's call. Back to you, David.

[Dave Dullum, executive]

Thank you, Rachael. Very nice report. And Dave and Michael, good information to our shareholders. This call and the 10-Q that we filed with the SEC yesterday should bring everybody up-to-date on what's going on at your company. Team has reported solid results for the quarter ending June 30, '24, and we believe the team will be in a great position to continue these successes through the remainder of the fiscal year and hope on into the future.

We believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from potential capital gains and other fees and other income. The team hopes to continue to show you a strong return on your investment. Well, now let's stop with the report and see if we have some questions from analysts or stockholders that they'd like us to respond to.

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mickey Schleien with Ladenburg Thalmann.

[Mickey Schleien, analyst]

Dave, when we look at the forward interest rate curve and consider that all your debt investments are at floating rates and most of your debt liabilities are at fixed rates. There is a scenario where NII per share could decline below your distribution, assuming no changes in the size of the portfolio or its credit quality. So GAIN has a great track record of not cutting the dividend. And I'd like to understand what levers you can pull to avoid that scenario. And would the board be comfortable with NII running below the dividend for a while?

[Dave Dullum, executive]

Yes, Mickey, thanks for the question. Yes, I would -- I'm not sure I can answer it really the way you're asking. What I'll tell you is this. Right now, as we look forward, and of course, we do our projections and try to understand where our portfolio is. We don't see, frankly, a decline in that spread where we would be looking to cut our dividend. And as you point out, this is not something that we consider doing. We also remember, supplement our, call it, the spread income with other income that we generate during -- doing any one period of our portfolio. And as a result of that, we would expect that we will continue to have total NII available for distribution above what our run rate dividend is. And Rachael, would you like to add to that?

[Rachael Easton, executive]

Yes, absolutely. Mickey, as you said, as rates come down, we will see yields begin to compress. But you did say most of our debt is fixed rate, but we also do have variable debt on our line of credit. So we will also see those borrowing costs come down a bit. We obviously look to maintain the same level of performance across both high and low interest rate environments. And so even with those narrowing -- the potential for narrowing spreads, there's no real concern given the way we structure our deals. Our debt portfolio has floors generally in the 11.5% to 12% range. And we look at that as protection in a lower interest rate environment.

[Dave Dullum, executive]

Which is how we've always managed it actually, which is why we've been able to keep not like a typical lender, if you will, we've been able to manage that, plus we again, harvest dividends when we can from the equities on our portfolio as well. And so again, would not anticipate the scenario that you suggested.

[Unknown Executive]

Yes, I am sorry.

[David Gladstone, executive]

Right. Just so you know, Mickey, we have run many of our companies. As you know, we have 4 of them that are dividend-oriented -- we've run any number of them over the time in which earnings were lower for several quarters, and we continued paying a dividend. So I don't anticipate that slowing down this company.

[Mickey Schleien, analyst]

I appreciate that. Rachael, could you repeat what the average SOFR floors are on your debt investments?

[Rachael Easton, executive]

In the aggregate, there it's between 11.5% to 12%.

[Mickey Schleien, analyst]

Okay. That's the total then. Dave, in terms of the pipeline for new acquisitions, could you give us an idea perhaps of how many term sheets you've got out there and the likelihood that you expect some of those to close over the next year?

[Dave Dullum, executive]

Yes. I wish I could give you that specific number. Recognize that at any point in time and with our deal team, we are working on probably 15, 16 plus companies and we have the process, as you know, that we go through is we see an initial investment, we do a fair amount of work on it, we prepare what we call an indication of interest, which goes to the -- presumably to the investment banker that brought us the deal. And then assuming we get accepted at that level, that then involves spending time then with the management teams of the companies getting better knowledge, doing some more due diligence on the side. And then assuming we like what we're seeing, we go ahead and put in what we call a letter of intent which is approved by our investment committee. And if that gets accepted by the seller, then, of course, we move to the final process.

So it's a lot of moving parts, if you will. So I'm not in a position to really give you a specific number to be perfectly honest with you, it's just that it's a constant process. And the way I think of it is, we'd like to be able to maybe close 3 to 4, 5 new deals in a 12-month period. I mean that's kind of our goal, and the size might vary. And then remembering too, that we have this whole add-on acquisition. So again, we have our goals. We set in mind how much we think we are able to put out in a year, and we strive to do that.

So it's a constant activity between the IOIs and the LOIs and then ultimately getting the deals done. And as you know, once we get approval and move forward, it can be a 2-month time frame to do due diligence, get the deal done. So there are a lot of moving parts. But consistent with how we've operated in the past, maybe that's more important is kind of what our look forward would be in terms of new deals. And as I say, if we could close 3 to 5 new deals in the year, that probably would be really good performance and very supportive, by the way, of the results that we've generated in the past.

[Mickey Schleien, analyst]

Yes, I appreciate that. Rachael made several comments about credit quality, but it was pretty quick. So I want to back up and ask a couple of questions about that. You marked down Nth Degree, Mason West and Horizon facilities. I think that was most of the decline this quarter. Is there some trend there? Or can you give us some insight as to what happened with those companies?

[Dave Dullum, executive]

Well, I think without going into a lot of the detail, Nth Degree, pick that as an example. Now that's a company that has a very significant EBITDA level. And I think there we had a slight downtick in the multiple. And you got to keep in mind that any of these companies, right, if you have even almost half a turn on an EBITDA company doing, let's say, $20 to $60-plus million of EBITDA, which, in some cases, that's true. That's a fairly significant dollar movement.

So I think what you're seeing is that more than anything else. I will say to you that all of those companies that you mentioned, Nth degree of course, is an exceptional business generating very, very significant EBITDA. Mason West is a very solid business. Horizon is a good -- it's a very good business. They're the one that provides labor to the rental car business, and there has been some softness in that market. No surprise there. Having said that, they are still very profitable, doing very well. And so again, I think you've got to be careful when we look at some of these changes when you do have both a multiple coming down, which we first don't control. And likewise, a small downtick even in EBITDA that can relate to a -- or translate into a meaningful dollar decline in the actual value of the asset. Does that make sense?

[Mickey Schleien, analyst]

I understand. Yes, I understand. And in terms of Diligent delivery, which is a new nonaccrual; that investment is still marked at par. I think Rachael may have alluded to that as something you expect to put back on accrual soon. Am I correct? Or did I misinterpret those remarks?

[Dave Dullum, executive]

Yes. That one -- that as I think was alluded to, is where we only have that small debt investment, if you will, it's a legacy. It has been, frankly, paying its interest really good. It's been going through a process potentially of an exit of some sort. They've been working on it over a number of years and so on. So what we anticipate, I think what she was alluding to, and Rachael can correct me here, is that that's one that we would hope and anticipate maybe we actually get the debt paid off and we're done with it sometime in the next period.

So yes, that's where that one comes in. That's not one that we have any equity in. And frankly, it's just kind of hate to say it to sort of a tag in of an investment we had from before.

[Mickey Schleien, analyst]

And the issues on B&T are just a down cycle and spend by telecom or is that something else? Is there something else there?

[Dave Dullum, executive]

I think No, it's pretty much spend my Telecom. They're actually seeing an uptick in that business right now as a matter of fact. And again, I'd say B&T, Hobbs that has been on nonaccrual for a while. I think I alluded to, again, both companies are profitable, where we obviously, as you know, work with these companies to get them back in a position where at some point, we're either going to clearly get them back on accrual and/or work to exit those businesses. But right now, I'd say they're both headed in the right direction, and we're just working through what we have to work through with them.

But yes, there was slight -- it's not even as much though there was a downturn in some of their customers that they have to work with people like Verizon, AT&T, what have you, it can be a very challenging customer to some degree, and the team is really there at B&T done a really good job. And I feel like we're, again, in the right direction with those guys. And this was kind of a temporary and actually, we have a line of credit -- revolving line of credit piece that it did not go in on accrual actually.

[Mickey Schleien, analyst]

That is total...

[Dave Dullum, executive]

Total investment yes.

[Mickey Schleien, analyst]

And my last question, I do appreciate your patience. There was an increase in G&A quarter-to-quarter was pretty meaningful. Rachael, is there any insight you can give us on that? And what's the outlook for G&A?

[Rachael Easton, executive]

Yes. So that will be a onetime hit. There was bad debt expense related to the write-off of prior period income related to B&T and Diligent one.

[Mickey Schleien, analyst]

Okay. Those are all my questions this morning. I appreciate your time. Thank you.

[Dave Dullum, executive]

Thanks, Mickey.

[David Gladstone, executive]

Okay. Thank you very much. Do we have anybody else that wants to ask us a question. We would like more questions.

[Operator]

[Operator Instructions] Our next question comes from the line of Bryce Rowe with B. Riley Securities.

[Bryce Rowe, analyst]

I think Mickey handled most of my questions as well. Rachael, I did want to ask about the fee income. I guess it was either other or success fee income here in the quarter. Can you give us a sense for the source of that given the lack of activity in the quarter?

[Rachael Easton, executive]

Sure. So as we've talked about, I think, in the past, that other income line item is a little bit variable, period-over-period and can be challenging to compare. It's generally made up of dividends on our preferred investments or success fee income from our portfolio companies. That success fee income, as you said, is generally due upon a change in control or an exit. So oftentimes, some of our portfolio companies for various reasons, do choose to prepay. So that was the case this quarter. We had one of our portfolio companies choose to prepay about $1.6 million of their outstanding success fees.

[Dave Dullum, executive]

Which is a good thing.

[Bryce Rowe, analyst]

Understood. And then in terms of nonaccruals, and I guess it relates to that comment about the bad debt expense and other G&A expense. What was the timing of those companies being put on nonaccrual. I'm just trying to understand if the yield for the quarter or the interest income for the quarter had some level of interest income from those newly nonaccrual investments.

[Rachael Easton, executive]

Yes. So both companies were placed on nonaccrual as of April 1. So as of the beginning of the quarter, so that yield excludes any income related to B&T or Diligent. So we essentially did not recognize about $750,000 of income we otherwise would have this quarter.

[Bryce Rowe, analyst]

Okay. And then maybe one more for you, Dave. In terms of -- I mean, I think you've talked quite a bit in the last, I don't know, 12 to 18 months about the competitive conditions and trying to get new deals signed up. And Mickey did ask about a number of term sheets that are out there right now. Just kind of curious if there's been any change in competitive conditions, whether more competitive or less?

[Dave Dullum, executive]

I'd say it's probably about the same that one, I call it change, as trying to suggest is that you look back over the last quarter or so before this quarter, let's say, -- the deal flow was okay and the deals that we were seeing, and this affects everybody, obviously, that we compete with, some of those companies, as you might well know from your firm's investment banking side as well. Some deals that were being sold back -- they backed off of them. They pulled them one have you. So we went through what I'd call a period of slowdown, so to speak, in terms of quality deals. We're seeing that pick up for sure.

So we're seeing deals come back on the market that might have been pulled that are now coming back. However, the appetite from the buy side is pretty high and people are really striving to get money out. So as a result of that, yes, it's more -- it's as competitive because of the amount of money that's available. And I'd say, though, the deal flow, which is the other side of that equation has picked up. So that's giving us a little more opportunity to see, frankly, more deals that are legitimate that fit our profile that we can compete on. But again, it still is challenging because multiples are relatively high for the deal. So I'd say about the same, but the deal flow is higher and better, which is a good thing.

[Bryce Rowe, analyst]

Okay. I think that's it for me. I appreciate the time.

[David Gladstone, executive]

Okay. Do we have any more questions?

[Operator]

There are no further questions at this time. I'd like to turn the floor back over to Mr. Gladstone for closing remarks.

[David Gladstone, executive]

I'm sorry. We don't have more questions. We really enjoy the questions that you give us. But I understand, we've given you a lot of answers and take some time to digest that. We appreciate you all being our shareholders, and we'll see you again next quarter. That's the end of this call.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.