Gladstone Capital Corp (GLAD) 2021 Q4 法說會逐字稿

Greetings, and welcome to the Gladstone Capital Corporation Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Thank you. Please go ahead.

Well, thank you, Donna. Very nice introduction, and hello, everyone. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital for the quarter ending -- and also this is the ending of our fiscal year at September 30, 2021. Thank you all for calling in. We're happy to talk with all the shareholders. And now we'll hear from our General Counsel, Michael LiCalsi, who makes a statement regarding certain forward-looking statements. Michael?

Thanks, David, and good morning, everybody. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable.

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 in our Forms 10-Q, 10-K and other documents that we file with the SEC, and you can find them on the Investors page of our website, www.gladstonecapital.com. You can also sign up for e-mail notification service there or you can get the documents on the SEC's website at 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.

Today's call is an overview of our results. So we have to really take a look at our press release from yesterday and our Form 10-K and get some more detailed information in there. And again, those can be found on the Investors page of our website. Now with that, I'll turn it over to Gladstone Capital's President, Bob Marcotte. Bob?

Thank you, Michael. Good morning, and thank you all for dialing in this morning. I'll cover some of the highlights for the quarter and the fiscal year ended September 30 and conclude with some market commentary before turning the call to Nicole Schaltenbrand, Gladstone Capital's CFO, to review our financial results and our capital and liquidity position.

So beginning with our last quarter results. Originations for the quarter came in at $27.6 million, all of which represented attractive add-on investments to several performing portfolio companies. We had no material repayments last quarter, so net originations totaled $24.8 million for the period. Interest income rose in line with asset growth and was up 3.9% over the prior quarter to $13.2 million. Other income, which is mostly dividend-related, increased and contributed to the 5.1% increase in total investment income to $14.4 million for the quarter.

Borrowing and administrative costs were unchanged for the quarter, while net management fees rose $600,000 with the increase in asset levels and lower new deal origination fee credits. However, net investment income rose to $6.8 million or $0.20 a share and fully covered the shareholder distributions without any incentive fee credits.

Net assets from operations came in at $32.7 million or $0.95 per share, which included a robust $26 million of unrealized portfolio appreciation on the quarter. While we had several strong quarters of appreciation this year with the loan market recovery from COVID, the increase this quarter was largely related to performance of a number of our equity investments.

Notably, our investment in Lignetics, which was under contract at the end of the quarter and has subsequently closed, represented about half of the total appreciation for the period. For the period, NAV rose $0.76 per share or 8.9% to $9.28 per share as of September 30. Despite our modest leverage, we are pleased to report our cumulative return on equity over the past 2 years, inclusive of the challenging COVID period, has now risen to approximately 16.5%.

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, especially for several businesses, with COVID weakening, 2020 results improved, and all of the valuation movements over 250,000, the gainers outnumbered the decliners 14:1 for the quarter.

This quarter's portfolio performance and equity investment appreciation brings the net NAV appreciation to $31.1 million over the past 2 years, which represents a 12.5% increase in NAV since September 30, 2019, and we believe demonstrates the resilience and attraction of our lower middle market investment strategy.

The asset mix as of the end of the quarter continued to shift in favor of first lien loans, which rose to 66.3% of assets at cost. And despite this shift in the asset mix, we've been able to maintain an average yield on our earning assets of 10.3%.

Since the end of the quarter, we've had a number of notable events, including the funding of a new proprietary senior debt and equity co-investment of $26.3 million in a precision manufacturing business and the exit of 2 second lien investments totaling $19 million. Additionally, the Lignetics exit, which included $29 million of second lien repayment, generated $1.6 million of exit fees and $16.6 million of proceeds on our equity investment or approximately 5.2x our cost. We are expecting several other repayments in the near term. However, the current deal flow is strong, and we are actively pursuing new opportunities, which we hope will more than offset these liquidity events.

In light of the scope of the expected investment activity, we recently completed the placement of additional $50 million of senior notes due in 2027 to replace the call of our 2024 notes and preserve our line of credit capacity for new deals.

Looking over the balance of fiscal 2020, there are a couple of comments I'd like to leave you with. The portfolios continue to perform, and the fair market value gains on our equity investments have not only generated attractive NAV appreciation for our shareholders but maintain a modest leverage position to support the further growth of our investment portfolio.

While we've seen modest earning asset yield compression through 9/30, the $48 million of prepayments since the end of the quarter, which have generated an average yield of 11.1%, will be difficult to replace. However, when you consider we have an additional $16.6 million of equity gains to reinvest in earning assets as well, I would not expect NII to be negatively impacted.

As we've reiterated in the past couple of quarters, we continue to target a 1:1 debt to equity leverage. However, based on the magnitude of portfolio appreciation last quarter, our leverage continues to be below our target range at $0.78 -- 78% debt to equity. While competitive pressures are undeniable, we'll continue to be selective, which, in combination with the NAV appreciation and excess debt capacity, we're well positioned to continue to grow our NII.

And now I'd like to turn the call over to Nicole Schaltenbrand, the CFO for Gladstone Capital, to provide some details of the fund's financial performance for the quarter.

Thanks, Bob. Good morning all. During the September quarter, total interest income increased $500,000 or 3.9% to $13.2 million. The investment portfolio weighted average balance increased by $24 million or 5.2% to $487.6 million compared to the June 30, 2021, quarter. The weighted average yield on our interest-bearing portfolio declined by 20 basis points to 10.3% compared to the prior quarter, which was associated with the increased proportion of first lien loans.

Other income rose by $196,000 to $1.1 million and contributed to the 5.1% increase in total investment income to $14.4 million for the quarter. Total expenses rose by $500,000 quarter-over-quarter driven by an increase in net management fees associated with the increase in asset levels and lower new deal origination fee credit. Net investment income for the quarter was -- ended September 30 was $6.8 million, which was an increase of $200,000 compared to the prior quarter or $0.20 per share and covered 102% of shareholder distributions.

The net increase in net assets resulting from operations was $32.7 million or $0.95 per share for the quarter ended September 30 compared to $18 million or $0.53 for the prior quarter. The current quarter increase was driven by the $26 million of net unrealized portfolio appreciation as covered by Bob earlier.

A couple of notes on the performance for the full fiscal year. The fund was able to generate an increase in total assets of $107.3 million despite the uptick in prepayments, and average earning assets rose 10.7% to $463 million over fiscal 2021. The weighted average yield on earning assets declined from 11% to 10.6% for fiscal 2021. However, other income doubled, which helped lift total investment income by 12.2% to $53.8 million for the year. Net investment income rose 3.8% to $26.1 million as net management fees increased with the higher assets and reduced incentive fee credits.

Moving over to the balance sheet. As of September 30, total assets rose to $567 million consisting of $558 million in investments at fair value and $9 million in cash and other assets. Liabilities rose to $248 million as of September 30 and consisted primarily of $100 million of 5 1/8 senior notes due 2026, $38.8 million of 5 3/8 senior notes due 2024. And as of the end of the quarter, the advances under our line of credit were $15.5 million.

Subsequent to the end of the quarter, the 2024 notes have been called. $50 million of new 3.75% senior notes due May 2027 were issued, and the line of credit borrowings have been eliminated with the aforementioned investment prepayments and net new debt issue proceeds.

It is worth noting that, over the past year, we have redone all of our existing liabilities, including refunding all of our unsecured senior notes while lowering the average rate by approximately 120 basis points and extending the earliest maturity to 2026. And we increased the increase in interest costs associated with the increased reliance on our fixed rate senior notes. However, we eliminated any earnings hit associated with any increase in floating rates.

As of the end of the year, net assets rose by $26.1 million from the prior quarter end with $25.9 million of net unrealized and realized portfolio appreciation. NAV rose 8.9% from $8.52 per share at June 30 to $9.28 per share as of the end of our fiscal year.

Our leverage as of September 30 increased slightly with the increase in NAV from the prior quarter end and stands at 78% of net assets. And we currently have an excess of $150 million of borrowing availability under our line of credit with the revolving period of which ends in October of 2023.

With respect to distribution, Gladstone Capital has remained committed to paying its stockholders a cash distribution. And in October, our Board of Directors declared monthly distributions to our common stockholders of $0.065 per common share per month for October, November and December, which is an annual run rate of $0.78 per share. The Board will meet again in January 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 $11.76 per share yesterday, the distribution run rate is now producing a yield of about 6.6%.

Distributions, in addition to the NAV growth over the past year of $1.88 per share, have resulted in a total return of $2.66 per share or 35.9% over the past fiscal year. And now I'll turn it back to David to conclude.

All right. Very nice job, Nicole, Bob, Michael. You all did a great job of informing our shareholders and analysts out there that follow the company. In summary, it's just another solid quarter, which kept a stellar year for Gladstone Capital. The company executed $27 million in attractive add-on investments to support the growth and diversification of the existing portfolio of companies; increased net investment income to $6.8 million, which was able to cover the current dividend without any incentive fee credits; and delivered just another strong quarter portfolio performance, which begins with a cumulative net asset value per share increasing over the past year to $1.06 per share or a total return of $1.84 per share or about 24.9%. Let's just round it out to about 25% per year for the past year. Bob, I'll say one thing: You got to beat this year next year. So...

And in summary, the company continues to invest in growth-oriented, lower middle market businesses with good management. Many of these investments that we go into are to support midsized private equity funds that are looking for experienced partners to support the acquisitions and growth of the business they're investing in. This gives us an opportunity to make an attractive interest-paying loan to support the ongoing commitments to pay cash distributions to stockholders. So it was a great quarter and a fantastic year.

And now operator, if you'll come on and let's see if we have some good questions from our team that's out there and following us.

(Operator Instructions) I'm showing no questions in queue at this time. I'd like to turn it over to Mr. Gladstone for closing comments.

Well, we don't understand that. But I guess when you have a terrific year like this, it's hard for anybody to ask a question that's going to be meaningful because I think the question we already asked was, Bob, what are you going to do to top that one. All right. Thank you all for calling in, and that's the end of this conference.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or log off the webcast, and enjoy the rest of your day.