Gladstone Investment Corp (GAIN) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Gladstone Investment Corporation's Third Quarter ended December 31, 2014 earnings call and webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce to your host for today's conference, Mr. David Gladstone, Chairman. Sir, you may begin.

All right. Thank you, Amanda and hello and good morning to all of you out there. This is David Gladstone, your chairman, and this is the third quarter earnings conference call for shareholders and analysts of Gladstone Investment Corporation. Stocks traded on NASDAQ under the symbol GAIN. There are two preferred stocks, one is called AINO and the other is GAINT. Thank you all for calling in. We love this time with shareholders and able to tell you about what's going on in the company you invested in, your potential shareholder tell you what's going on. So you can buy some shares. We like to give updates on the company, our portfolio and the business environment. I wish we could do this more often, but we'll only do it once a quarter. You have an open invitation (inaudible)in the area where in McLean, Virginia outside of Washington, DC. So stop by and say hello to team about 60 people now and some of the finest people in the business.

Now, we are going to hear from the General Counsel Secretary is also President of the administrator Michael LiCalsi. He'll will make the statement regarding forward-looking statements. Michael?

Good morning, everyone. This conference call may include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including those with regard to the future performance of the company. These forward-looking statements inherently involve certain risks and uncertainties and other factors even though they are based on our current plans, which we believe to be reasonable. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, and similar expressions.

There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including those factors listed under the caption "Risk Factors" in our form 10-K filing and our registration statement as filed with the SEC, all of which can be found on our website at www.gladstoneinvestment.com, or the SEC's website, www.sec.gov. The Company undertakes 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. And please also note that past performance or market information is not a guarantee of future results.

Please take the opportunity to visit our website, www.gladstoneinvestment.com and signup for our email notification service. You can also follow us on Facebook, the keyword The Gladstone Companies, and on Twitter keyword gladstonecomps. Presentation today will be an overview, so we ask you to read our press release issued yesterday and also to review our form 10-Q for the December 2014 quarter-end, which we filed yesterday with the SEC and you can access that on our website as well as the press release www.gladstoneinvestment.com.

Now, let's turn to the president of the fund, David Dullum.

Thanks Michael, and good morning to everyone. Generally, I'd like to briefly review what it is that we actually do it in our game, and this helps really to keep us focused on what our long-term goals are for GAIN while we update here and discuss the near-term results. So Gladstone Investment provides capital for the buyout of businesses generally with annual sales between $20 million to $100 million. Our investment in A1 Company is comprehensive in that it usually consists of senior and subordinated debt in a combination with equity. This combination of debt and equity produces a mix of assets, which is the basis of our strategy for Gladstone Investment. Whereby the debt portion of our investment provides the income to pay and grow our monthly distributions and then we look to the equity portion to increase the value and provide capital gains going forward from time to time.

We might think about how are we different from other BDC's and other finance companies, in that, well we take a large equity position in the companies that we purchase and that differs from other public BDC's business development companies that are predominantly debt focused. So for instance, the proportion of equity and debt for the investments in our portfolio is approximately 30 to 70. Most other BDC's portfolios around 10 to 90 in their proportion of equity to debt.

As to other private equity funds, which are generally 10-year term private partnerships with a longer liquidity horizon for the investors, we are different in that as a publicly traded entity our structure allows daily liquidity for shareholders, frankly, just by going to the stock exchange in trading stock. So also we are able to keep an investment longer in our portfolio as we do generate income prior to the exit foreign equity gain.

Now I would like this time to talk a little bit about our exit strategies, we've not necessarily done this previously but I believe it's important, so we get a better understanding of our profile. Although we are able to hold our investments that I mentioned for long periods of time, our quarterly equity valuations of our portfolio can be volatile and not always actually representative to underlying exit value of those companies.

So it is necessary therefore that we look to the realized equity portion of our assets as they contribute to the overall future value of our company and we must manage these exits accordingly.

Since inception in 2005 we've actually exited four of our management supported buyout investments which generated over $54 million in realized capital gains. Each one in turn, actually generating a realized capital gain. The buyout market today is currently quite frothy and the prices being paid for good companies continues to quite steep. So in this environment, we will carefully assess and manage the risk reward merits of liquidity in our equity positions. Keeping in mind that while it is tempting to sell a portfolio company in this market, it would reduce our asset base and then we're challenged incrementally replace that investment in a high purchase value environment.

So the sum of this is just, we need to focus on managing exits, which we have done in the past and we'll continue doing going forward. And with the continued growth in our operating income and the periodic realized gains, our Board did declare distribution of $0.06 per share per month for January, February, and March, which is a run rate of $0.72 per share per annum, which in fact will cover our -- recover with our NII.

Additionally, we also had a one-time special distribution of $0.05 per share in December 2014. So this represents a third calendar year in a row that a one-time special cash distribution has been made to our common stockholders.

Lets talk about our deal origination and see how that works. So, we have a very high priority on our deal origination. We have a broad and deep geographic footprint with offices in New York City, Los Angeles, Chicago, and of course here in McLean outside of Washington D.C.

We primarily focus our efforts -- our calling efforts on what we call independent sponsors, middle market investment bankers and other sources that help us create proprietary investment opportunities. We do not depend on others to negotiate or structure our investments. Generally our investments will include partnering with the management team and other sponsors in the parts of a business, and actually our strategy of providing a financing package, which includes both the debt and the majority of the equity is a competitive advantage as it gives the seller, any independent sponsor if one is involved, and the management team that would be looking to be involved in the business, a high degree of comfort that this purchase will happen at least from the financing perspective.

In addition to these outright purchases, occasionally we might find opportunities to partner with a business owner, who will sell a portion of their company to us and using that capital to grow the business.

So where do we focus our attention from a deal -- from an industry perspective? Generally, first of all, we invest in companies with least $3 million of consistent operating cash flow or what we generally refer to as earnings before interest, taxes, depreciation and amortization, EBITDA and potential to expand that cash flow. Areas of interest -- industry interest to us are light and specialty manufacturing, specialty consumer products and services, industrial products and services and from time to time aerospace and energy, and we have no concentration of course at this time in those areas.

Looking into the activity of the fund for this past quarter, we're very pleased with what we did and I like to mention that we invested $79.3 million in new deals and in an existing portfolio company. The third quarter, which ended December 31, 2014 was strong in originations as we invested $44 million in two new deals. In October, we purchased Old World Christmas to a combined debt and equity investment of $24.4 million. Old World Christmas which is headquartered in Spokane, Washington. It's a designer of an extensive collection of blown glass Christmas ornaments, tabletop figurines, vintage style light covers and nostalgic greeting cards, which are distributed primarily into the independent gift channel.

In December, the second deal we did repurchase B&T Group through a combined debt and equity investment of $19.6 million is headquartered in Tulsa, Oklahoma and it's a full service provider a structural, engineering construction and technical services to the wireless tower industry.

Looking forward on potential our investments in our pipeline, the goal is to continue to find opportunities that fit our investment parameters, which are cash-on-cash equity returns of at least two times and yields on our debt investments in the mid to high teens. Again emphasizing the interest on these debt investments with a low coverage of our distribution to shareholders. As demonstrated by the two new investments I mentioned, we are able to keep adding to our asset base. We have a positive origination trend going into our fourth quarter which is ending March 31, 2015 as we are fairly close to executing on a few new investments.

So we continue expanding our marketing efforts and growing our presence in the marketplace to support our activity in the pipeline for new investments, but please keep in mind and as demonstrated by the past two quarters the deal flow of course and the closings of most companies is erratic. So in summary, our goal for this fund is to maximize distribution to shareholders with solid growth in both equity and the income portion of our assets.

So this concludes my part of the presentation. I'd like to turn it over to our CFO and Treasurer, Melissa Morrison to go in a bit more detail. Melissa?

Thank you. Good morning everyone. The big news this quarter is that we originated two new deals totaling over $44 million and we raised $41 million in new preferred equity. These actions have enabled us to expand our balance sheet and raise capital for future new deals. At the end of the December quarter we had $412 million in total assets on our balance sheet, consisting of $394 million in investments at fair value, $5 million in cash and $13 million in other assets.

Our portfolio at fair value increased by over 13% quarter-over-quarter. Our portfolio's allocation at cost is currently $333 million in debt investments to $124 million in equity investments, which is 73% to 27% debt to equity. The equity portion is where we have in the past and hope to continue to produce capital gains. As for our liabilities at December 2014, we had $96 million in borrowings outstanding on our $185 million credit facility. $81 million in term preferred stock and $9 million in other liabilities. Listeners will remember that in June 2014 we amended our credit facility, which allowed us to extend the maturity date of our line of credit to June 2017 plus two one-year extension.

We were also able to reduce our cost of capital by decreasing the interest rate from LIBOR plus 375 to LIBOR plus 325. In addition, in September 2014, we upsized our credit facility capacity from $105 million to $185 million by adding additional lenders.

In November 2014, we successfully completed a public offering of approximately $1.7 million shares of 6.75% Series B preferred stock, at a public offering price of $25 per share. Gross proceeds totaled $41.4 million and net proceeds after deducting underwriting discounts and offering expenses borne by us was $39.7 million.

While these capital raising activities were successful, we will need to continue to monitor additional ways to raise capital over the upcoming months, in order to support our deal origination activities, while also meeting our BDC leverage requirements.

Our net asset value per share was $8.55 per share as of December 31, 2014, which was up $0.06 from September 30, 2014, primarily due to the $2 million net unrealized appreciation recorded in the December 2014 quarter end, related to certain portfolio companies improved financial and operational performance. Partially offset by declines in financial and operational performance and a few other portfolio companies.

Moving over to the income statement. For the December 2014 quarter end, total investment income was $11.5 million versus $9.1 million in the prior quarter, an increase of 27.5%.

Total expenses, including credits were $5.7 million versus $4.9 million in the prior quarter, resulting a net investment income of $5.8 million versus $4.2 million for the prior quarter, an increase in net investment income of 38.9%. The increase in our investment income was due to an increase in other income of $1.3 million, which primarily resulted from $1.3 million in dividend income that we received during the December 2014 quarter. We also received $500,000 over the nine months ended December 31, 2014. Other income totaled $3.8 million and accounted for 12.4% of our total investment income. And we believe this run rate is a great indicator of the other income we expect to receive in our fourth quarter ending March 31, 2015.

Our net expenses increased by $900,000 or 17.6% quarter-over-quarter due to a variety of factors including increases in the incentive fee earned by the advisor as well as our interest expense. We also had an increase in our preferred dividend expense, which was due to the offer mentioned November offering.

In total, our net investment income, which was $0.22 per common share for the quarter ended December 31st as a $0.06 per common share increased when compared to the prior quarter ended September 30, 2014. In regard to the debt investments in our portfolio, 82% of our loans have variable rates and they all have a minimum . The remaining 18% are at fixed rate. The weighted average yield on interest-bearing debt investments remain consistent quarter-over-quarter at 12.5%. This strong yield excludes success fees on our debt investments.

Success fees as we've talked about before on these calls are contractually due generally upon a change in control of the portfolio Company; although, there are times when the portfolio Company can elect to pay it earlier. We generally only recognize success fees in our income statement, when they are received in cash.

For comparison purposes, if we had accrued this success fees if we would if it was paid in-kind interest like other BDC's do, then our weighted average yield on interest bearing assets would approximate 15.5% during the December quarter. As of December 31, 2014, the success fees accruing off balance sheet totaled $23.5 million or approximately $0.89 per common share. From a credit priority standpoint 76% of the loans in our portfolio are senior in priority with the remaining 24% being senior subordinated in the capital structure of the respective portfolio Companies.

Overall Gladstone Investment had a strong origination quarter which helped equate strong financial results. We increased our distribution rate on our common stock over a year ago and have maintained that increased distribution while still remaining committed to covering our distributions by net investment income as we have done consistently of our last four fiscal years. Due to a buildup of excess earnings from prior years, we paid a $0.05 one-time special distribution in December 2014. Let's turn to realized and unrealized changes in our assets, which are below net investment income. Realized gains and losses come from actual sales or disposals of our investments. Unrealized appreciation and depreciation come from our requirement to mark our investments to fair value on our balance sheet. The change in fair value from one period to the next is recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event.

During the three months ended December 31, we record a minimal realized activity related to previous access. For our unrealized activity, our net unrealized appreciation was $2 million for the three months ended December 31. For the quarter ended December 31, our debt investments had net depreciation of $1.7 million and our equity investments had net appreciation of $3.7 million. For the December quarter end, our entire portfolio with fair valued at 86.2% of cost, which is up from 84.2% of cost last quarter.

Now, let's turn to our bottom line, net increase and net assets from operations. This term is a combination of net investment income unrealized activity and realized gains and losses. For the December 2014 quarter end, this number was an increase of $7.6 million or $0.29 per share versus an increase of $2.7 million or $0.10 per share in the September of 2014 quarter.

The quarter-over-quarter change is primarily due to the aforementioned increased in both total investment income and unrealized appreciation over the two quarters. All of our portfolio companies are current in payment except one, which continues to remain on nonaccrual, representing 0% of the fair value and 3.2% of the cost basis of our total debt investments as of December 31.

And with that, now I'll turn the call back to David.

All right, Melissa. Thank you for that good report. Thanks to Michael and Dave for their good reports. Gladstone investment's third quarter was a great quarter. We are able to report some great accomplishments such as the strong origination activity, the Series B preferred stock offering and our one-time extra dividend.

Net investment income of $0.22 a share exceeded our distribution run rate of $0.18 per share and we continue the success going forward especially for the quarter ending March 31, 2015. Each year in April, Dave Dullum and Melissa Morrison, our CFO worked on the projections in an effort to figure out what we're going to have income for the next year. And right now, it's a daunting task because you never want to increase the dividend and then not earn the dividend. Our Board is very conservative, they don't want to raise the dividend and then not earn at all worse yet have to cut it, so it's a bit too early in the process to predict the dividend for the fiscal year ending March 31st, 2016. We just have to wait and see what happens when we go through all of that analysis in April.

So looking at the outlook for this company and really for all of the companies in the United States has just been very sluggish recovery. We still have the same economic concerns that we mentioned each quarter. There's still a great deal of uncertainty around the Federal Reserve's monetary policy and the impact it will have on future interest rates. And while we have variable interest rates on most of our loans, increasing rates won't hurt us, but it's really not good for the economy of whole part of the people borrowing money from us.

The volatility in oil and gas industry is just continuing to be a mystery of what's going to happen there. Overall prices are terrific benefit to the economy, but how long will all of that last. Fiscal crisis in the federal government still top of my mind and I think top of mind to a lot of people, but federal deficit now is $18 trillion dollars and continues decline as the governments then just seems to see no end. And also many private companies like those in which we invest still there is far too much regulations around healthcare, financial services, the energy area and certainly commissions and they have (inaudible)those kind of things. So I think that hinders performance probably more than anything in today's economy.

This company Gladstone Investment is in a very strong position today to move forward with strengthen its balance sheet now and large equity interest in some of these companies where we own 60%, 70%, 80%. I hope we can exit one or two of them in this calendar year 2015 and we have excess earnings that we roll forward and used to pay distributions and we have equity interest in companies that if they're sold in the future and hopefully being big capital gains as we had in the past.

In order to fund new deals, we do need to access future capital raising efforts in order to provide further liquidity. We're just going to have to do something somewhere along the way on to relieve our leverage because it's getting pretty high. Despite the past current economic issues, our fund has continued to make consistent monthly distributions and make good progress increasing the distributions during this last fiscal year, then this fiscal year our gain is up primarily because of extra dividend.

In January 2015, our Board of Directors declared a month with distribution on our common stock of $0.06 common share each of the months of January, February, and March, 2015 and the Board will meet again in April to consider and Board upon the distributions for the next three months after that's in April. And that will be a good time to look at projections for the year ending March 31 2016, so just see where we going.

Through the date of this call, we've made a 115 sequential monthly cash distributions on our comp through our common stockholders and some extra bonus dividends almost every year. The current distribution rate for common stock with common stock price at about $7.37 yesterday, the yield on the distribution is about 9.8% and our distributions of $7.125 on our Series A preferred stock is about 14.84 months late or $1.78 annually. The preferred stock closed yesterday at $26.45 NASDAQ under the symbol of GAINT and that gives you a yield about 6.7%.

Distribution of 6.7% on our Series B preferred stock, which translates into just a little bit over $0.14 a month or $1.69, that preferred stock had a closing market price yesterday of $25.40 on the NASDAQ and under the ticker symbol GAINO and that's about a 6.65% yield on that stock today.

Again, we believe gladstoneinvestment is a very attractive investment for all investors seeking continuous monthly distributions for the potential of some special distributions along the way if we hit these bigger capital gains and we'll continue to be disciplined in our investment approach and we're focused on making conservative investments in these American businesses that we'll [follow] so much. We expect a strong quarter for (inaudible)31, 2015 to you next time on that.

So now let's have some questions from our analysts and loyal stockholders. So, come on, please, operator, and tell them how they can ask some questions.

(Operator Instructions) I'm showing no questions at this time. I'd like to turn the call back to David Gladstone for any closing remarks.

Okay. We have no questions. That's unusual we usually get to before questions and so we'll move on now and thank you all for calling GAIN and please read the case mix (inaudible)that's end of this call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.