Gladstone Investment Corp (GAIN) 2025 Q3 法說會逐字稿

Greetings and welcome to Gladstone Investment Corporation third-quarter earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Well, thank you, Sherry. This is David Gladstone, Chairman of Gladstone Investment. This is the earnings conference call for the third quarter ending December 31, 2024, and we're now into the fiscal year for 2025 for shareholders. This is for shareholders and analysts of Gladstone Investment, listed on Nasdaq under the trading symbol GAIN. And as for the common stock, we've got some other ones that notes and preferred GAINN and GAINZ and GAINL and GAINI. Four different registered notes.

So thank you all for calling in. We're always happy to provide updates for our shareholders and analysts. And provide you on our current business environment, as well as our two goals; one, to help you understand what happened to us in the past, and also give you a current view of the future. And now we'll start with our General Counsel, Secretary Michael Licalsi. Michael, are you ready to go?

Absolutely. Thanks, David. Good morning, everybody. Today's call may include forward-looking statements in the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance of 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. The 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'd see in our Forms 10-Q, 10-K, and other documents that we filed with the SEC. You can find these on the investors page of our website, gladstoneinvestment.com, or on the SEC's website, which is www.sec.gov.

Now we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. And please also note that any past performance or market information is not a guarantee of any future results. We ask everyone to visit our website, once again, gladstoneinvestment.com. Sign up for our email notification service, and also find us on Twitter @GladstoneComps, and on Facebook, keyword: The Gladstone Companies.

Today's call is simply an overview of our results through December 31, 2024. So we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. And with that, I'll turn it over to Gladstone Investments President, Dave Dullum. Dave?

Thank you, Mike, and good morning, everyone. So for this third quarter of fiscal year '25, I am pleased to report that the GAIN team produced consistent positive quarterly results while we expanded our portfolio of operating companies. So we ended the third quarter, which is 12/31/24, with adjusted NII of $0.23 per share, total assets of about $1.1 billion, which is up from $869 million at the end of the prior quarter. We believe this increase in assets and the investing momentum should continue as we are seeing a good volume of attractive buyout opportunities.

We have also added new and experienced talent to our investing team, which helps support our continuing growth in the management of our current portfolio of 26 operating companies, which is extremely important given our model of buying and working with these companies over time. Now this quarter we successfully acquired three new companies, deployed over $187 million of new capital, making our single largest investment quarter.

We also have been actively evaluating potential dividend recaps at a few of our existing portfolio companies. And we hopefully will have some results on that shortly. We view these recaps as important opportunities as they allow us to increase our investment in companies where we actually have a strong management team and we have confidence in the business, which will help support our future equity gains.

We maintained our monthly distribution to shareholders of $0.08 per share or $0.96 per share on an annual basis. And we paid the previously declared supplemental distribution of $0.70 per share during the quarter. Now this supplemental distribution, as you know, like we've done in the past, are direct results of our buyout strategy and the goal of rewarding our shareholders with meaningful supplemental distributions from the realized capital gains that are generated on the equity portion when we exit a business or sell a business.

As our portfolio goes through the various maturity cycles and the equity values increase, we will continue to constructively harvest these gains, again, for the benefit of shareholders. And along with investing in new portfolio companies and adding assets, we try to balance the timing of these exits with the necessary level of debt assets that indeed produce the income which supports our monthly dividends, and over time, the growth of those monthly dividends.

Now, during the quarter, we successfully issued $126.5 million in new publicly traded 7.875% notes which mature in 2030. Our balance sheet continues to be strong with low leverage and a very positive liquidity position given that added availability in our credit facility. So we continue providing the support to our portfolio companies, including for add-on acquisitions, which we're very active with as well; dividend recaps as I mentioned; and any interim financing if the need arises, while we continue to actively grow our assets through new buyouts, which of course is our main thrust.

So the outlook, there is significant liquidity in the M&A market. This makes it a very competitive environment, but certainly upward pressure on valuations. However, we're in the mix and we will aggressively compete for new acquisitions that we believe fit our buyout model, while maintaining our principles of being a value investor, generating income on a current basis with the upside through the capital appreciation. So we're actively involved in a number of near the end due diligence on a few companies, so hopefully we'll see some of this activity coming to fruition.

So in summing up the quarter and looking forward, we believe the state of our portfolio is very good. It's growing. We have a strong liquid balance sheet and a high level of buyout activity and the prospect of continued very good earnings and distributions over this next year. So with that, I'm going to turn it over to Taylor Ritchie, our CFO, and have him give you some more details in that regard. Taylor?

Thank you, Dave, and good morning, everyone. Looking at our operating performance in the third quarter for fiscal year '25, we generated total investment income of $21.4 million, down slightly from $22.6 million in the prior quarter. The decrease was due to the prior quarter, including $1.4 million of dividend income that did not reoccur as the timing of such fee is variable, as well as a $0.5 million decrease in interest income. The decrease in interest income was primarily a result of the decrease in weighted average yield on an interest-bearing portfolio from 14.5% to 14% due to the decreased sub-rates throughout the quarter. The decreases were partially offset by a $0.7 million increase in success fee income.

Net expenses for the quarter were $20.2 million, up from $15.3 million in the prior quarter. This increase was primarily due to $5.8 million increase in capital gains-based incentive fees, resulting from the positive net impact of realized and unrealized gains and losses during the quarter, accrued as required under the [USA]. In addition to a $1.3 million dollar increase in our income-based incentive fees, these expense increases were partially offset by $2.2 million increase in credits to fees from Adviser, which were driven by the significant investment activity that Dave discussed previously. This resulted in net investment income for the quarter of $1.2 million compared to $7.3 million in the prior quarter.

Most importantly, adjusted net investment income, which is net investment income or loss, exclusive of any capital gains-based incentive fees for the quarter was $8.6 million or $0.23 per share, down slightly from $8.9 million or $0.24 per share in the prior quarter. The adjusted net investment income is a useful and represented indicator of our ongoing operations. Consistent with the prior quarter, as of December 31, 2024, we continue to have four portfolio companies on non-accrual status. Overall, there are no portfolio credit concerns.

We continue working closely with these companies and their management teams to get back on the process or exit the investments when possible. In particular, we continue to see improvement in two of these companies as they are back to generating a profit.

Valuations in the aggregate were up $37.3 million (technical difficulty) portfolio. This unrealized appreciation was driven by higher valuation multiples across the portfolio and increased performance in a number of our portfolio companies, which was partially offset by decreased performance at a few of our other portfolio companies.

Our NAV increased to $13.30 per share compared to $12.49 per share at the end of the prior quarter. The increase was primarily a result of $1.02 per share of net unrealized appreciation on our investments and $0.03 per share of net investment income. These increases were partially offset by $0.24 per share of distributions declared and paid to common shareholders during the quarter.

Moving on to our balance sheet, we believe that maintaining liquidity and flexibility to support and grow our portfolio is key to our continued success. During the quarter, we successfully issued $126.5 million in new publicly-traded 7.875% notes maturing in 2030. Additionally, we raised approximately $2 million in net proceeds under our common stock ATM while prices were accredited to NAV.

After quarter-end, we completed an upsizing of our credit facility, bringing our total commitment levels to $250 million, resulting in a $50 million increase in overall capacity. With our four public note issuances, we have long-term fixed-rate capital in place, and as of yesterday's release, we had approximately $160 million available on our $250 million credit facility. The (technical difficulty) newly issued notes and the additional available capital from our line of credit will allow us to drive portfolio growth (technical difficulty) opportunities emerge.

Overall, our leverage remains in a strong position with an asset coverage ratio as of December 31, 2024 of 185.9%, providing cushion to the required 150% coverage. (technical difficulty) [distribution with shareholders' distributable marked earnings], shareholders remain strong. We started the fiscal year with $21 or $0.55 per share and spillover, and our monthly distribution remains at $0.08 per share for an annual run rate of $0.96 per share.

Along with our consistent monthly dividend, during the most recent quarter, we paid the previously declared $0.70 per share supplemental distribution as a result of the successful exit of an existing portfolio company. We will look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of future exits. Using the monthly distribution run rate of $0.96 per share per year and $0.70 per share in supplemental distributions paid so far in fiscal year 2025, our aggregate estimated fiscal year distributions would yield about 12.5%, using yesterday's closing price of $13.31 (sic - see press release, $13.30"). This covers my part of today's call. I'll hand it back over to you, David, to wrap us up.

Well, thank you. Very nice, Taylor. You do a good job and nice for Dave and Michael. That's good information for our shareholders along with the 10-Q filed with the SEC yesterday, should bring everyone up to date. The team has reported solid results for the quarter ending December 31, 2024, and I believe the team is in a great position to continue these excesses through the remainder of the fiscal year, ends at end of March.

We believe Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions, and then we also often pay supplemental distributions from potential capital gains and other income that we get. The team hopes to continue to show you a strong return on your investment in our fund. And now I'm going to switch over analysts and shareholders who want to ask some questions. So operator, if you'll come on now. Let's get some questions.

(Operator Instructions) Matthew Hurwit, Jefferies.

Just curious what changes at Nocturne, E3, and SFEG drove the unrealized appreciation in the quarter?

So trying to take each one separately. Nocturne had an increase in both EBITDA and also multiple. That's one we've been actively involved with. Adding on, we bought a fairly large business there, which was in the Grand Cayman Islands, which helped to add to its operating results. So that one's just fundamental. It's just doing very well, and so an increase as in, again, both EBITDA and multiple was up slightly. E3 is just actually just performing exceptionally well. Big pick up in EBITDA and, obviously to some extent, somewhat in the multiple.

And SFEG, the multiple actually did not really change from our evaluation perspective, but we were up in EBITDA again. That's one that we've made out on acquisitions to and that company's performing exceptionally well. So without specific, generally, it's all of the above. So fundamentals are up from an EBITDA perspective and, to some extent, multiples a little bit, help that.

Okay. Great. Congrats on that. And then just on the flip side, if you could describe what changes that Educators, PSI, and Galaxy Technologies through the depreciation quarter-on-quarter and maybe what your outlook is there?

Yeah, so Galaxy going to that one first, the multiple was up slightly. EBITDA was down slightly. It's performing well. There's a part of that business that we're working on that -- it's a combination, really, has been of three companies performing the same fundamental services to a broad array of customer base from aerospace through industrial manufacturing. The company, overall, has performed well. Just had a slight downtick in the EBITDA for the year. But again, it's not a concern of any fashion. So that's what caused that one being down slightly.

PSA -- PSI, sorry, again the multiple was slightly up. Again, EBITDA was down. We made some changes over this past, roughly about 6 months, in terms of moving one facility, selling a building, there was a lot of moving parts in that one, and again that one has three major facilities now. So, frankly, the cost of moving was a little bit more than we anticipated, and as a result of that we saw a slight down in EBITDA. So that's really what attributed to the majority of any decline there in valuation, I think about $2.7 million. So relatively speaking, not hugely significant.

Educators, both the multiples down slightly, and the EBITDA was down slightly. But that's a very solid business. And one that we're -- really feel very good about and are going to plan on keeping that company in our portfolio for quite a while. Really good management team, nothing unusual there in terms of why the EBITDA was down slightly, again. Relatively speaking, it's been up, certainly, significantly from when we acquired the business some years ago. So again, a little bit of movement quarter to quarter affecting that valuation. But, again, nothing -- that to the contrary, I'd say, is a really good business.

Okay. Thank you for that. If I could squeeze in one more, just trying to understand how NII per share might change in the quarter we're currently in, combining the new investments you made at the end of last quarter and after quarter-end, plus higher leverage and declining portfolio yields. Are you expecting an increase this quarter, or -- and also how should I think about the credits from the Adviser in the quarter you just reported and could those reverse in future quarters?

Yeah, so I'll get a response to that one. So NII for the 12/31 quarter, it was much lower because of the large cap gains incentive fee. So really that's what's putting the depression on NII for the quarter. Tying into the questions you had previously about the fair value changes, you could see from the top three investments there with Nocturne, E3, and SFEG, those are all sizable increases. Obviously, we hope that they continue to increase in value, but that is a pretty large driver of that cap gains incentive fee for the quarter. So it may come down slightly as we see some valuation changes.

Then moving on to the yields, we continue to keep a blended rate of 11.5%. And our focus with high level of Interest rate floors with our portfolio companies is that yes, it may come down, but we still expect to have significant interest income from our portfolio companies because of our high interest rates that we have in place.

Then moving on to the fees from our Adviser or credits to Adviser. That is tied significantly with new investment activity. So as we do have those new investments that come on board, we will have higher fee credits from quarter to quarter. So there could be some fluctuation in those numbers, but if we continue to expand our portfolio, you'll see those elevated fee credits.

Okay. Great. Thanks very much.

Okay. Next question, please.

(Operator Instructions) Mr. Gladstone, I don't see any more questions at this time. Do you have any closing remarks?

Yeah, it's really sad. We're not getting enough questions. We really want people to ask a lot of questions and dig in, but it seems like we must be doing an extremely good job in the market today because we don't get many questions. Everybody likes what we're doing, so thanks again to everybody who's a shareholder and we enjoyed doing this for you, and that's the end of this meeting.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.