Gladstone Capital - Earnings Call - Q4 2020
November 11, 2020
Transcript
Speaker 0
Greetings, and welcome to the Gladstone Capital Corporation Earnings Call for the Fiscal Year Ended 09/30/2020. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
David Gladstone, Chief Executive Officer. Thank you, sir. Please go ahead.
Speaker 1
Thank you, Donna, for that nice introduction, and good morning. Hello, everybody. This is David Gladstone, chairman, and this is the quarterly earnings conference call for Gladstone Capital quarter fiscal year ending 09/30/2020. Thank you all for calling in. We're always happy to talk to stockholders, analysts, and welcome an opportunity to provide an update for the company.
Now let's skip ahead and head here from general counsel Michael LiCalsi. He'll make a statement regarding forward looking statements.
Speaker 2
Thanks, David. 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. The main 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 listed in our Form 10 Q, 10 ks, and other documents that we file with the SEC.
You can find all of these on the Investors page of our website at www.gladstonecapital.com. You can also sign up for our email notification service there as well. You can also find the documents on the SEC's website at www.sec.g0v. 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, of course, as required by law. Today's call is an overview of our results, so we ask that you review our press release and Form 10 k, both issued yesterday, for more detailed information.
Again, look on the investor page of our website, www.gladstonecapital.com. And with that, I'll turn the call over to Gladstone Capital's President, Bob Marcott. Bob?
Speaker 3
Good morning, and thank you all for dialing in this morning to discuss the results for Gladstone Capital for the quarter ended 09/30/2020, after which I'll provide some comments on the fiscal year as a whole and outlook for the current fiscal year. Originations for the quarter totaled $22,000,000 including one new proprietary investment. However, repayments and proceeds also totaled 22,000,000 and included the exit of one proprietary investment and the sell down of one of our larger second lien positions. So assets were largely unchanged for the period. Interest income rose to €11,900,000 or 2.6% over the prior quarter, with the increase in average investments as the portfolio yield remained consistent at 10.9%.
Prepayment and dividend income recovered with the resumption of more normal deal activities and lifted total investment income to €12,600,000 which was up €900,000 over last quarter. Borrowing and administrative expenses were unchanged from the prior quarter as the average LIBOR benchmark fell slightly and net management fees rose by $900,000 with the reduction of incentive fee credits, resulting in net investment income of $6,100,000 or $0.01 $95 per share. Net assets from operations were $10,200,000 or $0.33 per share, which included $3,600,000 of net realized portfolio appreciation on the quarter. And for the period, NAV rose €0.13 to €7.4 per share as of September 30. With respect to the portfolio, as we've discussed previously, we were fortunate that our portfolio diversity limited our exposure to the consumer, retail and travel services sectors most impacted by the COVID-nineteen pandemic.
For the period, we did not experience any payment defaults and our one nonaccrual investment was unchanged at 1.4% of the portfolio at fair value. From a valuation perspective, the top gainers were largely driven by the continued improvement in operating performance and resumption of strategic investment activities. Also, the number of gainers outnumbered the decliners, which gave rise to the €3,600,000 of net portfolio appreciation in the quarter. The decliners continued to be concentrated in the energy and auto service auto sectors. However, recent strength, particularly in the latter, has positioned these investments well for recovery in the coming quarters.
The asset mix at the end of the quarter was relatively unchanged as first lien loans rose slightly to 49% in cost and second lien exposure declined to 42% of the portfolio cost. For the fiscal year just ended, a couple of summary comments. On the year, we were pleased with the overall level and quality of originations, which came in at €150,000,000 And given the decline in transaction activities over the past six months, prepayments fell to €79,000,000 resulting in lifting the ending portfolio to €450,000,000 at fair value. Despite the record low interest rate environment we're operating in, we were able to increase our net investment net interest income by 3.9% on the year to 34,500,000 compared to the prior year. Fee income declined on the year with lower levels of exits and prepayments.
However, much of this decline was absorbed by incentive fee credits, which reflects the manager's long term commitment to supporting shareholder distributions. And while portfolio valuations have not fully recovered from the pre pandemic levels, The portfolio continues to perform with low nonearning levels, and we remain optimistic the current trends will support the recovery of much of the unrealized depreciation incurred earlier in last year. Looking forward, we continue to be optimistic and enthusiastic about the growth opportunities in the lower middle market. And while there will undoubtedly continue to be competition for quality yielding assets, Our focus and experience will continue to position us well to grow our assets. As we have demonstrated in the past couple of quarters, you can expect us to continue to manage our leverage in the vicinity of one:one debt to equity, which combined with our more normal deal environment and fees should improve our earnings and dividend coverage.
We remain cautious regarding any lasting COVID related financial impacts on new business opportunities and the sustainability of recent growth as we evaluate the recent pickup in new deal inquiries. We intend to continue to proactively manage our investment capacity and where appropriate, sell existing assets to support new investments to maintain our targeted leverage level while enhancing our net interest income. And now I'd like to turn the call over to Nicole Scholtenbrand, the CFO of Gladstone Capital, to provide some details on the Fund's financial results for the quarter and fiscal year end.
Speaker 4
Thanks, Bob. Good morning, everyone. During the September, total interest income increased $300,000 or 2.6% to $11,900,000 due to a slight increase in the average balance of our interest bearing investments. The weighted average balance of the interest bearing portfolio increased by $6,700,000 to $437,000,000 compared to $429,000,000 for the quarter ended June 30. The weighted average yield on our interest bearing portfolio remained consistent quarter over quarter at 10.9%.
Other income rose by $500,000 compared to last quarter as prepayment fees and dividends lifted total investment income for the quarter by 850,000 or 7.2% to 12,600,000.0. Total expenses increased 800,000 or four point 14.5% quarter over quarter, primarily due to a $700,000 decrease in closing fees and incentive fee credits. Net investment income for the quarter ended June 30 was $6,100,000 and was unchanged compared to the prior quarter at $0.01 $95 per share and covered 100% of shareholder distributions. The net increase in net assets resulting from operations was $10,200,000 or $0.33 per share for the quarter ended September 30 compared to $15,000,000 or $0.48 per share for the prior quarter. The current quarter increase is driven by net investment income and $3,600,000 of net portfolio appreciation, as Bob covered earlier.
Moving over to the balance sheet. As of September 30, total assets were 450,000,000, consisting of 400 sorry. Total assets were 459,000,000, consisting of 450,000,000 in investments at fair value and 9,000,000 in cash and other assets. Liabilities declined to 225,000,000 as of September 30 and consisted primarily of a 128,000,000 in borrowings on our credit facility, 57,500,000.0 of 6% senior notes due 2023 and $38,800,000 of 5.3% senior notes due 2024. Net assets rose by $6,900,000 from the prior quarter end with $4,100,000 of net realized and unrealized portfolio depreciation and the issuance of 374,200.0 common shares under our ATM program, which generated net proceeds of $2,800,000 NAV rose 1.8% from $7.27 per share as of June 30 to $7.4 per share as of September 30.
Our leverage as of September 30 declined from the prior quarter end to 96% of net assets from 102% last quarter with the increase in net assets for the period. We currently have in excess of $46,000,000 of current investment capacity and availability under our line of credit. With respect to distributions, Gladstone Capital has remained committed to paying its shareholders a cash dividend. And in October, our Board of Directors declared monthly distributions to our common stockholders of $0.65 per share per month for October, November and December, which is an annual rate of $0.78 per share. The Board will meet in January to determine the monthly distribution to common stockholders for the following quarter.
At the current distribution rate, our common stock and with the common stock price at about $7.87 yesterday, the distribution run rate is now producing a yield of about 9.9%, which continues to be attractive relative to the extraordinary low yields generally available in the market today. And now I'll turn it back to David to conclude the presentation.
Speaker 1
All right. Nice report, Nicole. That was a good one from Bob and Michael. You all did a great job of informing our shareholders and the analysts out there about this company. In summary, it was a solid quarter fiscal year for Gladstone Capital and the company.
We did well in terms of delivering a number of fronts. First of all, dollars 22,000,000 of new attractive price investments during the quarter and $150,000,000 for the year. Proactive managing the portfolio and was able to keep the nonperforming assets at a low rate of 1.4% of the total portfolio. And despite all of this going on with COVID out there, our portfolio has not been grossly impacted as some other investment companies have been. We have higher assets drove a nice increase in the company's core net interest income to $9,200,000 for the quarter and $34,500,000 for the year.
And we maintained a strong capital position with leverage at a low end of our peers and thus positioned them well to continue to take the additional middle market investment opportunities. In summary, the company continues to invest in mid sized private businesses with good management. Many of these situations are supported by mid sized private equity funds that are putting in the equity underneath us, and they're looking for experienced partners to support the acquisition and growth of the businesses they're investing in. This gives us an opportunity to make an attractive interest paying loan to support our ongoing commitment to pay cash distributions. As you know from our press release, we're beginning to identify people who will carry our companies to the next generation.
Mike McQuigg was promoted to executive vice vice president, and there'll probably be others with Bob Marcotte, Michael Lacalsi, and Nicole Shelton Brown, and Mike McQuigg. I think this fund is in very strong hands. They are the ones that have a passion for paying dividends and distributions. And now, operator, would you come on and tell or call us how to ask questions about the company?
Speaker 0
Thank you. Ladies and gentlemen, the floor is now open for questions. You may press two if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to register questions at this time.
One Our first question today is coming from Mickey Schleien of Ladenburg Thalmann. Please go ahead.
Speaker 5
Yes. Good morning, everyone. Bob, I want to start by asking, from energy and autos, what percentage of the portfolio would you say, you know, has high risk related to COVID?
Speaker 3
Mickey, good morning. You know, I think most of the companies have adapted to COVID at this stage. You know, if I was going into it, I would have said restaurants would have been affected, but, you know, our restaurant business is is currently producing, you know, nice profitability. So I would I would really limit, you know, any meaningful impact to the autos and and energy. And I fact frankly, think that the autos are back to full production.
In fact, both of our companies are performing above budget. So it was just a more severe pothole that COVID created when the auto companies literally shut down and the proportion of revenues fell more dramatically. So those companies are beginning to earn their way out of it. Other than that, I I wouldn't put anybody else in the in the category of being, you know, significantly impacted by COVID.
Speaker 5
That that's that's that's good news. Bob, given what you just said, what accounted for the slight decline then in the portfolio's average risk rating?
Speaker 3
It probably has to do with a little bit of mix. You know, the the energy credits and the auto credits, as those results were reported, caused some deterioration in the underlying numbers. So, you know, when you all of a sudden the Q2 numbers came through into July and August, you had really four credits that rolled through. And when those financial results hit their stats, It caused the deterioration. To give you to give you a flavor, Mickey, if you back out autos and energy
Speaker 5
Yes.
Speaker 3
The overall debt service leverage in the portfolio today, including both first and second liens, is 3.5 turns of leverage. So the overall portfolio is performing well. It's those two sectors that were more severe and are beginning to earn their way out, particularly around the auto segment.
Speaker 5
Okay. That that's very helpful. So, Bob, it it sounds like you wouldn't be particularly concerned about potential for, you know, future stay in place orders given how bad the, COVID curve is progressing right now?
Speaker 3
You're asking us you know, the the COVID crystal ball at this point, I I you know, we've got health care companies and, you know you know, do do you end up with, you know, things getting shut down again? Do you I mean, you know, the I guess I would say people have accommodated, anticipated, are operating on a remote basis. I think the incremental shock and, you know, paralyzed results and and impacted businesses, I I think companies have adapted and are much better prepared for anything that might come at this stage. And since, as I stated in my comments, there's very little that was directly impacted other than the industry sectors I outlined. I would be surprised to see another down cycle on our credits given the current leverage profile that we have.
Speaker 5
That that's that's very useful. And just to make sure I understand, you said the portfolio's average debt to EBITDA is 3.5x without auto and energy, correct?
Speaker 3
Correct.
Speaker 5
That's right. Just a few questions on the right hand side of the balance sheet. What what percentage of the portfolio would you say is in, you know, liquid syndicated deals? Nicole?
Speaker 4
Probably around between 89% right now.
Speaker 5
Okay. So some liquidity there. And, Nicole, could you remind us what the limitations are on your credit facility, which is, at least as of September, reduced the borrowing base below the commitment amount? I know it's it's super complicated, and there's a variety of factors. But what's what's driving that?
Speaker 4
So that reduction was temporary, Mickey, and that was due to just some amendments, minor amendments we had done to some of our portfolio investments and just getting those through the necessary approvals that we needed to with KeyBank, which we have subsequently done. So that was more of a temporary decline.
Speaker 5
And you I think you you mentioned your current availability, Nicole. But could you repeat that, please?
Speaker 4
Yep. So today, our availability is in excess of 46,000,000.
Speaker 5
Okay. That's useful. And to be
Speaker 3
clear, Mickey, that $46,000,000, there there's two tests. One is collateral. Second is credit facility size.
Speaker 1
Yeah.
Speaker 3
That capacity is dictated by the credit facility size. We have more collateral than would be implied by that number. So were we to increase the credit facility size, it would it would increase the amount of availability.
Speaker 5
Understand. And and, Bob, do your baby bonds allow you to employ the reduced asset coverage ratio? Yes. They do. And my last question, do you how would you characterize your appetite to additional to issue additional unsecured debt given sort of the current rate environment?
Speaker 3
Timely question, Mickey. I would say that it's taken a little bit of time for the baby bond market to fully recover. I think our securities have been generally trading well. And as the credit spreads have gradually contracted, we are getting into the range where it would be interesting to pursue. And I would I would suggest that that is a topic that we are currently evaluating.
Speaker 5
I understand. That that would that's what I expected. Those are all my questions this morning. I I appreciate your time very much. Thank you.
Speaker 3
Thank you for calling in, Mickey.
Speaker 1
Do we have any other questions?
Speaker 0
We're showing no further questions in queue at this time. I would like to turn the floor back over to you, Mr. Gladstone, for closing comments.
Speaker 1
Okay. Thank you all. And those were nice questions. We'd like to have more questions next time. So save up your questions, and we'll see you then in January or early February.
Thank you. That's the end of this call.
Speaker 0
Ladies and gentlemen, thank you for your participation. You may disconnect your lines at this time or log off the webcast, and have a wonderful day.