Gladstone Capital Corp (GLAD) 2022 Q1 法說會逐字稿

Greetings, and welcome to Gladstone Capital First Quarter Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Gladstone, Chief Executive Officer. Thank you, and over to you, sir.

All right. Thank you, Amit. This was a nice introduction, and this is the first quarter earnings call for Gladstone Capital for the quarter ending December 31, 2021, and thank you all for calling in. We're always happy to talk to shareholders and analysts and welcome the opportunity to provide further update of the information that was filed yesterday with the SEC. But first, I'll turn it over to the General Counsel, Michael LiCalsi, who will make a statement regarding certain forward-looking statements. Michael?

Thanks, David, and good morning, everybody. Today's report will include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. And these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. And many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors, the forms 10-Q, 10-K and other documents that we file with the SEC. You can find these on the Investors page of our website, www.gladstonecapital.com. Could also sign up for our e-mail notification service there. Also find the 10-Qs, 10-Ks on the SEC's website, which is 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, and that today's call is an overview of our results. So we ask you to review our press release and Form 10-Q both issued yesterday for more detailed information. Again, you can find them on the Investors page of our website. Now I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Bob?

Good morning, all, and thank you for dialing in this morning. Last quarter was a busy one for us. So I'll cover the highlights for the period and provide some comments on the state of the portfolio and market outlook. Before turning the call to Nicole Schaltenbrand, Gladstone Capital's CFO, to review our financial results for the period and our capital and liquidity position. So beginning with last quarter's results. Originations for the quarter came in at a record $111 million, which included 6 new proprietary investments which represented approximately $140 million of total commitments. As covered in our last call, we also anticipated a number of exits and repayments which came in at a total of $97 million, so net originations were $14 million for the period. Exits for the period include the previously discussed sale of Lignetics, which represented just under 50% of the total exits for the period, and included a net realized gain of $13.4 million. Interest income for the quarter declined 3% or $400,000 as the average interest-bearing investment portfolio increased of 1.4% did not offset the $600,000 of past due interest we received in the prior period. Other income surged with the $1.6 million exit fee generated by the Lignetics sale and other prepayment fees to $3.3 million, which is an increase of $2.2 million over the prior quarter and contributed to the 12.6% increase in total investment income to $16.2 million for the quarter.

Borrowing costs were unchanged and administrative costs rose slightly with new debt issuance. However, net management fees declined by 20% to $2.7 million as the increase in new deal closing fees remitted to the management company and credited against the base management fees resulted in a $700,000 decline in the net management fees compared to last quarter. With investment income up and expenses down, net investment income rose $2.3 million to $9.2 million or $0.27 a share.

Net assets from operations came in at $12.1 million or $0.35 a share, which included the realized gain from Lignetics sale as well as $5 million of net unrealized portfolio appreciation on the quarter, largely related to the improved performance of several credits negatively impacted at the early stages of the COVID pandemic.

For the period, NAV rose $0.16 a share or 1.7% to $9.44 per share as of December 31. Despite our modest leverage, we're pleased to report the cumulative return over the past 2 years for Glad has risen to 17.6%. With respect to the portfolio, our portfolio continues to perform well and for the quarter, we did not experience any payment defaults. In addition to the Lignetics gain, improved operating performance in several energy and communication businesses supported the reduction in the depreciation of these investments and the bulk of the unrealized depreciation for the period.

This quarter's portfolio performance and equity investment appreciation bring the net NAV appreciation to $39.8 million since December 31, 2019, prior to the pandemic, which represents a $1.36 per share or 16.8% increase in NAV over the last 2 years.

The asset mix as of the end of the quarter continued to shift in favor of first lien loans as 80% of the exits last quarter were second lien or equity investments and 65% of the new originations were senior loans. So first lien assets rose to 69% of assets at fair value at the end of the quarter.

The weighted average yield on the new debt investments was 9.7%, which trailed the 10.3% weighted average yield on the exited investments. However, by reinvesting last quarter's equity gain into yielding investments, the overall yield on the new investments was approximately 55 basis points higher than the exited investments. And for reference, the average yield on our earning assets overall was unchanged to 10.3% from the prior quarter end.

Looking over the balance of fiscal '22, there are a couple of comments I'd like to leave you with. We've received $14 million of repayments since the end of the quarter and anticipate several others in the near term, but anticipate we'll be able to maintain or grow our investment portfolio as we did last quarter.

As you may note, a number of our recent investments are growth -- are to growth-oriented PE platform companies and include future funding commitments, which we anticipate to make up a larger portion of our investment activity going forward, and consistent with our investment strategy, 4 of the 6 investments made last quarter included small equity co-investments. We are well positioned to absorb any impending increase in short-term rates as only 21% of our debt was subject to floating rates.

And given the modest spread between our borrowing rate and the average flooring investments of 1.17%. The average floor on our floating rate assets exceeds -- the average floor in our floating rate assets exceed the floating rate debt by a substantial margin. While we're able to generate onetime fee income last quarter to exceed the current dividend, we are focused on increasing NII through some combination of earning asset growth, higher leverage, sustained margins or increase in interest rates to support sustaining any adjustment to the current shareholder distributions. And now I'd like to turn it over to Nicole Schaltenbrand, the CFO for Gladstone Capital, to provide some details on the fund's financial performance for the quarter. Nicole?

Thanks, Bob. Good morning, everyone. During the December quarter, total interest income declined $400,000 or 3% to $12.9 million, which was driven by the receipt of $600,000 in past due interest during the prior quarter, whereas we received no such amount during the current quarter. The investment portfolio weighted average balance did increase slightly by $7 million or 1.4% to $494 million compared to the September 30 quarter. And the weighted average yield on our interest-bearing portfolio was unchanged at 10.3% despite the increased proportion of first lien loans. Other income rose by $2.2 million to $3.3 million and drove the 12.6% increase in total investment income to $16.2 million for the quarter.

Total expenses declined by $500,000 quarter-over-quarter, driven by a decline in net management fees associated with the surge in new deal origination fee credits. Net investment income for the quarter ended December 31 was $9.2 million, which was an increase of $2.3 million compared to the prior quarter or $0.27 per share and covered 137% of our shareholder distribution. The net increase in net assets resulting from operations was $12.1 million or $0.35 per share for the quarter ended December 31 compared to $32.7 million or $0.95 per share for the prior quarter. The current quarter increase was driven by the increase in earnings as well as the net unrealized portfolio appreciation, as covered by Bob earlier.

Moving over to the balance sheet. As of December 31, total assets rose to $587 million, consisting of $576 million in investments at fair value and $11 million in cash and other assets. Liabilities rose to $263 million at December 31 and consisted primarily of $150 million of 5 1/8 senior notes due 2026, $50 million of 3/4 senior notes due May of 2027.

And as of the end of the quarter, advances under our line of credit were $53.9 million. As of December 31, net assets rose by $5.4 million from the prior quarter end with the net realized and unrealized portfolio appreciation as well as earnings in excess of distribution.

NAV rose 1.7% from $9.28 per share at September 30 to $9.44 per share as of December 31. Our leverage as of the end of the quarter increased slightly with the increase in total assets from the prior quarter and stands at 81% of net assets. We currently have in excess of $100 million of borrowing availability under our line of credit, the revolving period of which ends in October of 2023.

With respect to distributions, we have remained committed to paying our stockholders a cash distribution. And in October, our Board of Directors declared monthly distributions to common stockholders of $0.065 per common share per month for January, February and March, which is an annual rate of $0.78 per share.

The Board will meet again in April to determine the monthly distribution to common stockholders for the following quarter. At the current distribution rate for our common stock and with a common stock price at about $11.06 per share yesterday, the distribution run rate is now producing a yield of about 7.1%. Distributions in addition to the NAV growth over the past year of $1.74 per share have resulted in a total return of $2.52 per share or 33% over the past year. And now I'll turn it back to David to conclude.

All right. Thank you, Nicole and Bob and Michael, you all did a great job of informing shareholders and analysts that follow our company. In summary, another solid quarter for Gladstone Capital company closed 6 new proprietary investments, representing about $111 million of new investments during this period. These investments represent nice diversity of industry sectors and several new private equity sponsors and relationships and include a small equity co-invest in 4 of these growing businesses.

The company realized net gains of $13.4 million and $1.6 million of fee income associated with the sale of Lignetics, which represented a blended return of about 18.5% over the 7-year investment period. The combination of investment activity and exits lifted net investment income by 34% and is a very good number of about $9.2 million for the quarter. It brings the distribution net asset value appreciation of about 33% over the past year, I think that's absolutely fantastic.

In summary, the company continues to invest in growth-oriented middle market businesses with good management. Many of these investments are supported of midsized private equity funds that are looking for experienced partners to support their acquisition and growth of the business they've invested in. This gives us an opportunity to make an attractive interest-paying loan to support their ongoing commitment and to pay cash distributions to our stockholders. It was, by all accounts, a very good quarter. And now operator, would you please come on and tell people how they can ask us some questions.

(Operator Instructions)

Do we have some questions?

(Operator Instructions)

Well, that's disappointing. Somebody should ask a question.

The first question comes from Adrian Day with Adrian Day Asset Management.

Listen, David, could you just say a little bit more maybe or somebody about the equity investments, how high might you go? And could you just give us a little bit more about that, please?

Well, from my standpoint, I like the idea. We've not done it as much in the past year. But as you remember, Allied Capital always picked up some equity, some warrants or something every time it made a loan. So Bob is moving a little bit in that direction now that he's got a little more flexibility in his balance sheet. Bob, do you want to comment on that?

Sure. Generally speaking, we are still holding to the 10% of the overall portfolio. Now that swings for 2 reasons. One, as things appreciate, that certainly increases it over our 10% threshold, but with some of the liquidations, it made sense to reinvest in a number of the recent companies.

Generally speaking, I look at a 10% of cost is kind of the target. Also to be mindful, we don't invest in all of the companies. Certainly, private equity sponsors sometimes are receptive and other times are not. We're also selective in the companies that we invest in. So overall, I would say 10% adjusted for appreciation. At the current time, I think we have a significant number of investments that have appreciated. So that's probably driving the current percentage more than historically. I would expect that number to continue to go up a little bit, but I also would expect some additional liquidation of those investments over the coming quarters. So I know that's not specific. But generally speaking, we're probably are where we'd like to be with some variance around that number based on liquidations and activity.

Other questions? Well, we got one good question. So I guess we'll have to wait until next quarter to get some good questions. Thank you very much.

Thank you. So ladies and gentlemen, we have reached the end of question-and-answer session. And I would like to turn the call back to Mr. David Gladstone for closing remarks. Thank you.

All right. Thank you very much, everybody, and we'll see you again next quarter. That's the end of this call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.