Gladstone Investment Corp (GAIN) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's fourth-quarter and year ended March 31, 2015 earnings call and webcast. (Operator Instructions). And as a reminder, this conference call is being recorded. I would now like to turn the call over to David Gladstone. Please begin.

All right, thank you, Latoya. Nice introduction. Hello and good morning, everybody. This is David Gladstone, the Chairman. And this is the quarterly and year-end conference call for shareholders and analysts of Gladstone Investment Corporation. The common stock is traded on NASDAQ under the symbol GAIN. We do have three preferred stocks that trade as well as GAINO, GAINP and GAINN. So there are three other securities for this Company that are traded.

We thank you all for calling in. We love this time we have with our shareholders and potential shareholders. We like to give updates on our Company and our portfolio and our business environment. I wish there were more often opportunities.

And by the way, there is an invitation open to all of you to stop by the offices in McLean. We are just outside Washington DC. You will see some very happy people here. We have a team of about 60 people now and some of the finest people in the business.

And now we hear from our General Counsel and Secretary, he is also President, the Administrator of the fund, Michael LiCalsi. He will make a statement regarding forward-looking statements and some other important information. Michael.

Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements 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, 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 after the date of this conference call except as required by law. Please also note that past performance or market information are not a guarantee of future results.

Please take the opportunity to visit our website, gladstoneinvestment.com, and sign up for our email notification service. You can also find us on Facebook, keyword the Gladstone Companies, and on Twitter at keyword Gladstone comps.

The presentation today will be an overview, so the we ask that you read our press release issued yesterday and also to review our Form 10-K for the year end March 31, 2015, again filed yesterday with the SEC. You can access the press release and the 10-K on our website, www.gladstoneinvestment.com.

Now let's turn over to the President of the fund, David Dullum, to get an update on the fund's performance and outlook.

Thank you, Mike, and good morning, everyone. Happy to report for this quarter and for the year end March 31, 2015, it has been a good year.

Gladstone Investment of course is a fund which is focused on the buyout of Middle Market US businesses with annual sales that are generally between $20 million to $100 million. Our funding structure in any buyout is comprehensive in that it usually consists of secured first and second lien debt in combination with a significant direct equity investment.

So this combination of debt and equity produces the mix of assets which is the basis of the strategy for Gladstone Investment. Whereby the debt portion of our investments will provide the income to pay and grow our monthly distributions and then we look to the equity portion of these investments to increase in value and over time provide the capital gains that we all look forward to.

So with our continued growth in the operating income and the periodic realized gains that we have had and recognized, in April of this year our Board declared a common share distribution of $0.0625 per share per month for April, May and June which is a run rate of $0.75 per share per annum which represents a bit more than a 4% increase year over year.

Additionally, we also were able to have a one-time distribution of $0.05 per share which was made in December of 2014, and this actually represents the third calendar year and a row that a one-time cash distribution to common stockholders has been paid. So we are very happy with that.

So really how are we different from other BDCs and other finance type companies or private equity firms? So generally, as we have talked before, we take large equity positions in the companies that we purchase and this differs from other public BDCs which are predominantly debt oriented.

And so, for instance, the proportion of the equity to debt for the investments in our portfolio is approximately 30 equity, 70 debt where most other BDCs portfolios are generally around 10 equity and 90 debt. And so generally their equity portion comes through warrants that they get issued with the debt, which is a main part, or some small co-investment which is made alongside the private equity sponsor that these other debt oriented or credit oriented BDCs tend to follow.

As to say private equity funds, the typical private equity funds generally are 10-year type private partnerships, longer liquidity horizon for their investors. And where we are different is as a publicly traded entity our structure, of course, allows daily liquidity for our shareholders because they own common stock.

And also, we are able to keep an investment longer in our portfolio so long as it is generating the income prior to an exit, which creates the gain on the equity that we look forward to. So again, it is important to understand that there are some differences between us mainly and other credit oriented BDCs, even though we are in the BDC space.

Now exit strategies, on previous earnings calls, actually the last earnings call, I really -- I introduced this topic of exiting portfolio companies, which our ability to realize capital gains on exits is a component of the value proposition of any investment in gain, shareholders investment in gain. And you should know that the management team develops plans around exiting companies from time to time. So we really focus on this.

These exits generally are based on market conditions and obviously an assessment of what we would call the risk return and continuing to hold an investment versus perhaps exiting if it is appropriate and timely. Now we currently have a couple of exits that we're contemplating over the next several months, so look for more to come on these as we move through our fiscal year 2016.

We should note that although we are able to hold our investments for long periods of time, the quarterly equity valuations of our portfolio can be volatile. We bring this up in every call because that is the case. And therefore not always at the time representative of the underlying exit value that we either have realized when we taken exits or we would contemplate going forward.

So it is important therefore that we look to the realized equity portion of our assets as one aspect of the overall future value of our Company gain. In fact, since inception in 2005 we have exited four of our manager supported buyout investments and generated approximately $54 million in realize gains, which is pretty significant for us.

And so while the buyout market right now is still somewhat seller friendly we -- though we keep in mind and we're always assessing this -- that while we might sell a portfolio company in this market and it may be tempting to do so, it would obviously reduce the income producing asset base that we have and therefore we would be challenged frankly to then incrementally replace that investment in this still sort of high what I would call purchase value environment, meaning multiples tend to be a bit higher.

So exiting is important, we want folks to beware of that and that is why I wanted to be sure we make this a topic of our call.

Turning to the deal origination side, which is obviously critical to us, we have a high priority. And obviously the recent press releases that we have put out reflect the results of our continued growth in new buyouts. We do have a very broad and deep geographic footprint, we have offices in New York City, Los Angeles, Chicago and here in McLean, which is outside of Washington DC.

Primarily we are calling on the independent sponsors, Middle Market investment bankers and other sources to try to create what we would think of as proprietary type investment opportunities. We do not, when we do a transaction, depend on others to negotiate or structure our investments. And generally our investments include partnering with the management teams of these portfolio companies, that is very important, and if there are other independent type sponsors that work with us in helping purchase the business.

Our strategy of providing the financing package which includes both secured debt and the majority of the equity is a competitive advantage that does give the seller that we have been negotiating against, or the independent sponsor who we might be working with and the management team, a high degree of comfort that the purchase will occur from the financing perspective.

So -- and also of course in addition to outright purchases we occasionally might find opportunities to partner with a business owner who will sell a portion of the company to us and might use that capital to grow the business.

Our focus -- generally we are investing in companies with consistent operating cash flow, or EBITDA, which stands for earnings before interest, taxes and depreciation, of at least $3 million and obviously with a potential to be able to expand that cash flow.

Areas of industry that we are interested in generally are light specialty manufacturing, specialty consumer type products and services, industrial products and services and from time to time we look at aerospace and energy-related type businesses.

The secure debt investments that we make typically carry a higher cash yield in the mid- to high-teens, which balances the equity portion of our investment so that we are able to get a blended current cash yield which is what we focus on to support our distributions to shareholders -- preferred shareholders.

We generally also have an additional yield enhancement on our debt, which we call a success fee, and these are generally paid in cash on a change of control or can be paid by the portfolio company and advance at their option. In addition, on the equity portions of our investments we generally target at least expected two times cash-on-cash return for the equity portion of the transaction.

So let's turn a bit now and talk about the portfolio origination activity for the fourth quarter and the fiscal year ended March 31.

We are pleased to report that during the fiscal year 2015 we invested $133 million in new deals and in existing portfolio companies. The fourth quarter ended March 31, 2015 was again strong in that we actually made two new investments of approximately $43 million.

One was in March where we purchased a Company called LogoSportswear Inc. which again was a combined secure debt and equity investment of approximately $10.8 million. Logo, which is headquartered in Cheshire, Connecticut is an online provider of user customized uniforms and apparel for teens, leagues, schools, businesses and other organizations.

The second investment was made in March also and we purchased a company called Counsel Press Inc., which again we did through a combined secure debt and equity investment, a total of $32 million. Counsel Press is headquartered in New York City; it provides expert assistance in preparing, filing and serving appeals in state and federal appellate courts nationwide and several international tribunals.

So including these two buyouts in March, we originated six new proprietary investments during the fiscal year which totaled $108 million and we made eight add-on investments in existing portfolio companies. So the portfolio asset base is actually up five investments year over year.

We believe there is a positive origination trend going into the first quarter of fiscal 2016 and we're actually in the final diligence phase of a few new investments and we expect to close -- our first fiscal quarter, which ends June 30, we expect to close a couple of these transactions. So we continue expanding our marketing efforts and we are growing our presence in the marketplace.

So our outlook, in summary, is -- and our goal is to continue to strategically add accretive investments, position our existing portfolio for potential exits thus helping to maximize distributions to shareholders with a solid growth in both the equity and the income portion of our assets.

And so, with that I will conclude my part of the presentation. I'm going to turn it over to Julia Ryan, who is our Chief Accounting Officer, and have her tell you more about the great financial results. Julia.

Thanks, Dave, and good morning, everybody. The big news this quarter, as Dave mentioned, is that we originated two new deals totaling $43 million and we raised $27.5 million in new common stock including an overallotment that closed subsequent to year end. In addition, we raised $40 million of new Series C term preferred stock in May 2015.

This additional capital has enabled us to expand our balance sheet and to raise capital for future new deals that Dave alluded to earlier. Through this use origination, together with highly successful originations last year, we achieved our best year of operating performance with over $41 million in total investment income and over $19 million in net investment income.

We were also really pleased with our net unrealized appreciation during the period which totaled almost $30 million and was driven by improvements in operating performance as well as increases in market comparables on certain portfolio companies. The cumulative effect of these positive trends in operating performance of the fund resulted in NAV of $19.18 per share or a 10% increase over last year's NAV per share.

Turning to the balance sheet, the balance sheet position at the end of March had $484 million in assets consisting of $466 million in investments at fair value, $5 million in cash and cash equivalents and $13 million in other assets. Our portfolio's allocation at cost is currently $370 million in debt securities and $135 million in equity securities, or a 73%-27% split.

As for our liabilities and equity at March 31, we had $119 million in borrowings outstanding on our credit facility, $81 million in term preferred stock, $10 million in other liabilities and $273 million in equity.

Listeners will remember that in June and September 2014 we amended our credit facility to, one, increase the capacity, extend the maturity date and lower our interest rates. We also raised $41 million in Series B term preferred stock in November 2014. In March we completed the offering of $3.3 million common shares for net proceeds of approximately $23 million.

Following on the heels of the successful capital raising efforts in 2015, in April we closed on the overallotment of the March common share offering and issued an additional 495,000 common shares for net proceeds of $3.5 million. Additionally, in May we issued approximately 1.6 million shares of our newly issued 6.5% Series C term preferred stock for net proceeds of approximately $38.6 million.

These financing successes have allowed us to raise capital to support our new deal origination activities over the past several months. We will continue to monitor and explore additional ways to raise capital to fund deal flow over the coming months while also meeting our BDC leverage requirements.

Our net asset value was $9.18 per share as of March 31, up $0.63 from December 31, 2014, primarily resulting from $24 million of net unrealized appreciation recorded in the current quarter due to the factors previously mentioned.

Beginning with the current quarter, we used an external third-party valuation specialist to provide additional data points regarding market comparables and other information used in our valuations related to certain of our more significant equity investments. We will continue this practice and will plan to generally update this externally provided data on an annual basis for all of our significant equity investments.

Moving over to the income statement, for the March quarter total investment income was $11.2 million versus $11.6 million in the prior quarter. Total expenses net of credits were $6.2 million versus $5.2 million in the prior quarter, leaving net investment income of $5 million versus $5.8 million for the prior quarter, a decrease of 14.5%.

The slight decrease in our investment income quarter over quarter was due to a decrease in other income of about $500,000 as a result of fewer success fees and dividend income, partially offset by an increase of $0.2 million in interest income from holding a larger portfolio due to the new deal originations.

As mentioned on previous calls, over the past five fiscal years other income was over 16% of our total investment income as compared to 12% during the latest fiscal year. We expect other income, which is primarily composed of success fees and dividend income, to remain meaningful but variable from quarter to quarter.

Our net expenses increased quarter over quarter primarily due to a $0.3 million increase in dividend expense on our Series B term preferred stock issued in November 2014. As a result of the above, our net investment income decreased to $0.19 per common share for the March 2015 quarter from $0.22 per common share for the December 2014 quarter, or a 13.6% decrease.

Our net investment income 100% covered our distribution to shareholders which during fiscal year 2015 was at an 18% per common share quarterly run rate. And as Dave mentioned earlier, we recently increased this dividend. For the fiscal year total investment income was $41.6 million versus $36.3 million in the prior year.

Total expenses of credits were $21.7 million versus $17 million in the prior year, leaving net investment income of $19.9 million or $0.75 per share versus $19.3 million or $0.73 per share for the prior year. This is an approximate 3% increase year over year.

This increase was driven by an increase in interest income of $6 million from holding a larger portfolio due to deal originations, partially offset by a decrease in other income and in current costs related to holding such a larger portfolio, which includes borrowing and management costs including the base management incentive fee.

Other income of $5 million was again significant in the current year but declined 15% year-over-year primarily due to lower success fees in the current year.

Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation is a non-cash event and comes from our requirement to mark investments to fair value on the balance sheet with a change in fair value from one period to the next recognized in our income statement.

During the quarter and year ended March 31, we recorded minimal realized activity related to previous exits. In contrast we recognized significant unrealized appreciation of $24 million and $30 million respectively during the quarter and year ended March 2015. This change was mainly driven by increased financial and operating performance of our portfolio investments as well as favorable market comparables.

During the March quarter end our entire portfolio was valued at 92.2% of cost, up from 86.2% of cost last quarter. All of our portfolio companies are current in payment except for one which continues to remain on nonaccrual status and represents less than 1% of the fair value and less than 3% of the cost basis of our total debt investments at year end.

The total portfolio make up consists on the debt side of 80% of our loans having variable rates with a minimum or floor and then the remaining having a 20% fixed interest rate. The weighted average yield on interest-bearing debt investments remains consistent quarter over quarter at 12.5%. This strong yield excludes success fees in our debt investment.

As discussed in previous calls, success fees are yield enhancements that are contractually due generally upon a change of control, although they are timed to when the portfolio company can elect to pay it earlier. We generally only recognize success fees on our income statement when they are received in cash.

For comparison purposes, if we had accrued these success fees, as we would if it was structured as a paid in kind interest like other BDCs do, our weighted average yields on interest-bearing assets would approximate 15.3% during the March quarter.

As of year end the success fees [occurred] on off balance sheet totaled $24.3 million or approximately $0.82 per common share. There is no guarantee that we will be able to collect all of the success fees or have any control over their timing.

From a credit priority standpoint, 100% of our loans are secure with 77% having a senior priority and the remaining 23% being senior subordinated in the capital restructure of the respective portfolio companies.

Overall, Gladstone Investment had a strong origination year which helps equate to strong financial results. We increased our distribution rate on our common stock for the second year in a row and have maintained that increased distribution by still remaining committed to covering over distributions by net investment income as we have done consistently over the last four fiscal years. And now I will turn the call over to David Gladstone.

All right, thank you, Julia. That was Julia's first time through and she did a great job and we have heard from Michael and Dave, they had great reports as well.

During this fiscal year we were able to report some great accomplishments such a strong originations, increased valuations, several successful financing activities and, most of all, including an expansion of our line of credit and selling common and preferred stock. This increases our net investment income and, in addition, we declared special dividends and then we increased the dividend. So this Company is cruising along at a good pace now.

In the fourth quarter we closed two new investments for $43 million, we invested cash in existing portfolio companies of about $10.6 million and we had our net asset value rise substantially to $9.18, a 7.4% increase. After the end of the quarter our Board took a look at the projected earnings and raised the run rate on our monthly dividend by 4%.

I just think that we are going to continue to see success going into fiscal 2016 that is -- March 2016 will be our year end. We are already off to a good start. We raised the monthly dividend by about $0.03 per share annually. So we will not have to declare perhaps an extra dividend -- or perhaps we will have a small extra dividend this year.

And the issuance of $40 million of our Series C term preferred stock gives funding. And we really needed to do that because we have several investments that are in the final diligence and documentation phases and target to close before June 30, 2015.

I always feel it is a great time to invest in small businesses during these sort of choppy periods. The middle market companies, like the ones we invest in, are doing well. However, these type of companies can have a significant impact by the economy and we see some positive trends out there in the economy today, but we also still have the same concerns -- I bring these up almost every time.

There is still a great deal of uncertainty about the federal reserve and their monetary policies and the impact on future interest rates. They keep talking about raising interest rates. And while we have most of our loans at variable rates, it is never good time when interest rates go up as it's more costly to the small business concern.

The volatility of oil and gas and their industry, I mean it is wonderful now that oil prices are low; it is a terrific benefit to the economy. We just don't know how long that will last. And our oil and gas industry concentrations have been historically minimum. In fact, I don't think we have anything that is going to be impacted by that. But all portfolio companies are impacted when prices of oil and gas go up.

The fiscal crisis in the federal government still is the top of my mind. The federal deficit is now over $18 trillion and continues to climb at just a ridiculous rate. There doesn't seem to be any government spending reduction in site today.

Many private companies like those we invest in are feeling there is far too much regulation around all aspects of their business: healthcare, financial services, energy, emissions. It is hindering their performance and their growth as well as their job growth.

In light of these concerns, we here at the Company have strengthened the balance sheet in the form of significant new equity. We've used the new equity to buy a list of good portfolio companies that we think would stand up in any kind of recession. And our plan is to exit one or two of them in this fiscal year which should give us some fairly nice capital gains.

Despite the past and current economic issues our fund has continued to make consistent monthly distributions including increasing the dividend. I think this is the third one in the last five years.

In April 2015 our Board of Directors declared our monthly distribution of common shareholders at a little over $0.06, $0.0625 and that is up from the regular $0.06 per common share for each of the months of April, May and June of 2015. We are now at a run rate of $0.75 per share per year.

Through the date of this call we have made 118 sequential monthly cash distributions to our common stockholders and we have done three or four extra dividends now almost every year. At the current distribution rate the common stock, which closed yesterday at about $7.55, is almost a 10% return. So it is just a great one to hold in your IRA and Keogh.

Our distributions also come from some of our preferred stocks. We have a 7.125 Series A preferred Stock that is $1.78 annually; it is trading at $25.74, so good strong yield there. Distribution also a 6.75 on our Series B preferred stock, which translates into $1.69 annually, and that is trading at $25.25, again over a 6.5% return for people holding that.

And our newly issued Series C preferred stock has just started trading. Its first distribution will be at the end of June. It is traded on NASDAQ under GAINN, and it is trading at $25.18. So just a little above the issue of 6.5%.

In summary, the Company is really doing well. Gladstone Investment is an attractive investment I think whether you are in the preferred or the common stock. We continue to distribute monthly distributions and also a few special distributions and we hope some special distributions from capital gains.

We will continue to be disciplined in our investment approach while we focus on making very strategic debt and equity investments in American Middle Market businesses. We expect a good quarter for June 30, 2015 and I hope to continue to show you strong returns on your investment in our fund.

Now, Latoya, would you come on the and we would like to have some questions from analysts or any of our loyal shareholders.

(Operator Instructions). Mickey Schleien, Ladenburg.

A question for Dave -- a couple of questions for Dave Dullum. Dave, I understand your comments at the beginning of the call regarding acquiring new companies versus selling. But I wanted to perhaps get a little bit more color on that.

How are you balancing the opportunity to sell at these elevated multiples that we have given that we're deep into the economic cycle versus your interest and willingness to continue to acquire companies? In other words, is there some sort of arbitrage that you are trying to affect? And my second question, a little more straightforward, can you discuss any changes you have made to your valuation processes? Thanks.

Okay, Mickey, first question, I wish I could tell you it was as sophisticated as some arbitrage. You well know the kinds of businesses that we buy, that we own, that we manage are smaller medium-size companies. And being able to just run out and sell one, if you will, is not always easy, a lot of factors involved not the least of which would be the management teams and so on.

I think the way we think of it, as I tried to really describe it, is two things. One, we are obviously going to be more sensitive I will say to the idea that with a portfolio company -- and depending on how long it has been in the portfolio and given what I would consider certainly a somewhat robust marketplace around valuations and interest in acquiring good businesses like we have -- that if it makes sense from the standpoint of taking a realized gain, especially for our shareholders, relative to the idea of thinking through do we hold it for a longer period of time because obviously we are generating current income and we still think there is upside on the equity -- it is kind of that classic take a look and do I want to continue owning this business and buying it again, so to speak. So we really think about that carefully.

That frankly I would say is not tied directly obviously to the acquisition of new investments, which is our fundamental business. So I don't know if that helps answer the question. I mean we are really obviously -- don't -- we take a holistic view overall but we are very -- but we are sensitive to I don't just want to run out and sell a business for the sake of selling it.

If it makes sense we will and I'm going to -- we are going to be more thoughtful around that part of the process. Because I think capital gains are important and I think we have touched on the fact, and David Gladstone also reiterated, we have a couple that potentially could happen this year, this fiscal gear. At the same time we obviously are working hard -- I think we've done a really good job in finding opportunities to acquire that fit our model that are at valuations that make some sense.

It is hard work, it is not easy, but I think that is the best answer, Mickey, I can frankly give you on that one. As it relates to the valuation methodology, what I would like to do is turn it over to perhaps our finance folks and ask perhaps Julia -- she touched on it, she mentioned briefly what we did -- if she would like to elaborate on that part of the process.

Sure, Dave. Mickey, there really hasn't been a change in the valuation process per se. We have merely consulted with an external specialist in the field of valuation to provide additional data points and market comparables to include in our internal models.

This really is an industry practice used by many other BDCs and market participants and we believe that this makes our internal process stronger and we really plan to cycle most of our significant equity investments through this external review. And obviously we will continue to use S&P for our debt investments.

I apologize since I didn't catch that on the prepared remarks. But, Julia, did you -- what proportion of the portfolio did you apply that new third-party valuation firm to?

We strive to do about four to six a quarter.

That is roughly a quarter -- every quarter?

Yes. We did a little more this quarter just because it was a startup mode. We had, Mickey, before relied on our internal review as well as touching base with a couple people on the outside. Our Chief Valuation Officer, she looked at what everybody else is doing and suggested that we hire somebody to look at the equity portion more carefully and help us through that.

Quite frankly, it has actually increased the valuation by using external folks. They seem to have a better handle on the multiples that are being paid in the marketplace. And --.

Right, I understand. That is why I asked, because I am wondering if there is -- how much more upside there might be to NAV as this process is applied to the rest of the equity positions.

I can't answer that until we get around to doing four, five or six and maybe more each quarter. And the hope would be that it's more accurate as opposed to hoping that it always goes up in situations it could just as easily be taken down.

As you probably know Price Waterhouse, our accountants, have to go through all of these valuation as well. And so, we are well analyzed in terms of our portfolio of companies. But I can tell you from experience, things can change very quickly and values can change very quickly as well.

I understand.

And on your point on talking about the acquisitions. The acquisitions occur in companies that we think we can build up as well. And then when they are built up usually they can attract much lower cost debt. So keeping us on as a low cost debt provider is not very good for us.

And so, when they finally grow up, so to speak, and are able to tap the regular marketplace where debt is much cheaper, it becomes obvious to us at that time that we just have an equity holding which is not producing any income to speak of and that pressures us to think about selling off that company.

So our goal is always to buy a company and perhaps add more companies to it or just to internal growth. And at some point in time the management many times will come to us and say, we would like to sell the company. And sometimes we go to management and say, you should think about selling it because you have grown this company to a point that it may be difficult to grow it much further. So there are (multiple speakers).

I agree with you, David, and given what you just said and how deep we are into the economic cycle, multiple years of GDP growth, I imagine what you have just described has gone on with many of your portfolio investments. It would just seem to me to be a time to take some money off the table.

I do understand that it is difficult to replace those deals, but in the end that's sort of the business model. So I am having a hard time understanding why you don't monetize some of those gains and let the market come back to you down the road.

Let me if I can weigh in again, Mickey, I think this whole question, I think the key though is we've got to -- again, I use the word holistic. We have a portfolio that we are going to gradually build over time. Again as David Gladstone touched on and I mentioned earlier, the management teams of these companies are partners with us and monetizing is important.

But remember, we are not in the debt business, right, just pure debt, we have the debt portion and we have the equity. And so we are going to take what I would call a sensible approach to evaluating whether we have received an equity gain, a potential equity gain on a business that we think makes sense to equitize it.

And I frankly there is no magic to this, but given the size of our portfolio, given the nature of our portfolio if we had the ability and could see through selling one or two companies a year as an example for the reasons you mentioned, that is probably kind of where it ought to be. Because again the objective is as we grow and build the business we still want to keep that base of income to continue growing our dividend distributions, etc.

So I think -- I wouldn't want to get into a mode of saying let's rush out and sell a whole bunch of companies. We've got to look at each company individually again and appreciate whether or not it -- where it fits in the exit strategy at the time from obviously a realized value perspective.

But, Dave, why focus so much on a stable regular dividend if now -- if valuations are attractive? If it's a seller's market now why are you opposed to, okay, let's try to monetize some of these gains that we have? And if that means we have to lower the regular dividend until the market comes back to us so be it. But you are still -- that would seem to me to end up being a better place than writing everything down.

If the economy starts to contract the valuations will come down, that will be reflected in NAV. You will have pressures if you do that as well. So why this focus on a stable regular dividend as opposed to generating the best total returns that you can?

Well, in all due respect finding the kinds of companies we acquire isn't easy, right? And I think that is a very important ingredient of this thing. So the way I would frankly answer that from our shareholder perspective, unless we felt- - again, I have got to say this -- each company has its own characteristics.

And we have to look at where it is even though the overall market may be, using my word, a bit frothy or what have you, not every company, depending on industry and various other aspects, are going to be able to, quote, at the point in time get say the maximum or what we might perceive to be the maximum value.

So what I'd not want to do, which I think would be harmful to the shareholders, frankly, would be to just go out and try to sell a business for the sake of selling it if we still fundamentally believe that it has got opportunity for continued growth, you are right, there is always opportunity for cycles and down cycles. We valuate that on the same basis that we are actually going out and doing the work to find new companies.

So again, we don't do many -- get in many of these very high multiple auctions, that is not the business we are in. It takes hard work to even make like we did this past year with the five new assets that we acquired, at really relatively good multiples given the marketplace today, I'm very proud of that. And so again, it is a management process.

And so the best way I would give you an answer again is simply, look, we are doing, as far as I am concerned, thinking through how we manage exits because it makes sense to exit when we are exiting. We are not insensitive to the marketplace today, maybe advantaged to do that and that's -- we are doing that.

As we mentioned, we are looking at a couple and for the right reasons, for exactly what you said. But to then sort of go and think through selling off a bunch of others probably is not in the best interest of the shareholders while we are still looking to acquire good solid businesses.

Okay, I appreciate that insight, Dave, and I will follow up with you I think off-line to get a little bit more background. But meanwhile thanks for taking my question this morning.

Thank you, sir.

Mitchell Penn, Janney.

Just a real quick one. What is your target leverage?

We don't have a target leverage other than the one that the government imposes on us. And the idea is to not to get very close to that. We don't want to ever trip the 1 to 1 kind of ratio. But we do like leverage. This is a low leverage business that we are in in the sense that we can't go above 1 to 1. As you know, most banks are 10 to 1.

So the goal is to be in the -- at least at 50% leverage and maybe as much as 75% or 80%. What we don't want to get up around 90% or 95%. And if we do then it is time to have an equity offering.

So today are you guys at around 75%?

75%.

And so with the new deals that you guys just discussed that might close in -- by June, should we assume anything that happens might temporarily spike leverage and over time you would get back to the 75%?

Two things going on, yes, if the capital gains that we are expecting from one of our transactions happens first then leverage would go down. On the other hand, if the closing happens first leverage would go up. We are expecting, perhaps before the end of this quarter but most likely in July or August, a substantial transaction. And then as Dave Dullum mentioned, we have another one on the agenda to get sold hopefully later in the year.

So it depends on what you trigger. We do get payoffs. As you probably know, we sometimes like payoffs depending on how the company is doing. If it is doing extremely well it is not welcome, if they are just chugging along it is a good idea to get it back and put it to work again. So there are projected payoffs that would lower the debt level as well.

Okay, great. Thanks.

Other questions?

(Operator Instructions). There are no further questions at this time. I will turn the call back over to David for closing remarks.

All right, thank you, all, for calling in. We had a great quarter, good questions, thank you all for calling in and that is the end of this conference call.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.