Gladstone Investment Corp
NASDAQ:GAIN
Earnings Call Analysis
Q3-2024 Analysis
Gladstone Investment Corp
The company produced solid results in the third quarter of fiscal year '24, following a strong performance in the first half of the year. Ending December 31, 2023, adjusted Net Investment Income (NII) increased to $0.26 per share, with total assets reaching $918 million. Investment activities included a $65 million investment in an existing portfolio company and a successful exit from another portfolio company, realizing a capital gain of approximately $43.5 million. Distributions to shareholders remained stable at $0.08 per share monthly, with an aggregate supplemental distribution of $1 per share in November and December 2023.
The company boasts of a strong balance sheet with very low leverage and a highly positive liquidity position, allowing for sustained monthly distributions and confidence in a good state of the portfolio . Deal flow, or the rate of incoming investment opportunities, is experiencing an uptick, which might be encouraged by the potential decrease of interest rates. The earnings and distribution outlook for the next year remains promising.
The total investment income rose to $23.1 million, up from $20.3 million in the prior quarter. Net expenses declined significantly to $13.3 million from $22 million in the preceding period. Consequently, the net investment income surged to $9.7 million, a rebound from a net investment loss of $1.7 million in the previous quarter.
The company realized gains over the quarter and made strategic distributions to shareholders. Despite a slight decrease in net asset value (NAV) to $13.01 per share, due to net unrealized depreciation and distributions, the monthly distribution rate remained consistent at an annualized rate of $0.96 per share. Aggregate estimated fiscal year distributions are expected to total at least $2.20 per share.
The firm exercised conservative financial management, reflected in activities such as expanding the credit facility to $200 million, which signifies an enhanced capacity to support new deals. They have maintained a conservative approach to leverage and liquidity, which provides a cushion against market volatility and ensures continued competitiveness in the private equity market, despite a landscape marked by higher costs and more significant equity requirements for deal completions.
The company's leadership conveys a strong outlook with an operational strategy that prioritizes maintaining healthy relationships with portfolio companies and cautious leverage usage. This approach is expected to sustain the company's competitiveness even in a tightening credit market.
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Greetings, and welcome to the Gladstone Investment Corporation Third Quarter Earnings Call.
[Operator Instructions]
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone. Thank you, Mr. Gladstone, you may begin.
Thank you, Kate. That was a good beginning, and this is David Gladstone, Chairman of Gladstone Investment, and this is the third quarter that we're going to be talking about year ending December 31, 2023. Our fiscal year ends in a couple of months and earnings conference call is for all the shareholders and analysts that follow us. And we listed on NASDAQ under the symbol GAIN, that's for capital GAINS, GAIN and that's the common stock and then there's GAIN in GAINZ and GAINL. All 3 of these are different registered notes.
So you can buy those if you wish as well. We won't be talking much about them today. But thank you for calling in. We're always happy to provide an update to our shareholders and analysts that provide our view of the current business environment. So there's really 2 goals here, help you understand what has happened in the past. And even though we don't have a crystal ball, we'll give you our current view of the future. And now we'll hear from our Deputy General Counsel, Erich Hellmold, Erich.
Thank you, and good morning, everyone. Today's call 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 and other factors, even though they 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 risk factors listed in our Forms 10-Q, 10-K and other documents we filed with the SEC. These can all be found on the Investors page of our website at www.gladstoneinvestment.com or the SEC's website at www.sec.gov.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please also note that past performance or market information is not a guarantee of future results. Please take the opportunity to visit our website, www.gladstoneinvestment.com, and sign up for our e-mail notification service. You can also find us on Twitter at GladstoneComps; and on Facebook, keyword the Gladstone Companies. Today's call is simply an overview of our results through December 31, 2023. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information. Now I'll turn it over to Dave Dullum, President of Gladstone Investment.
Thanks, Erich, and good morning, everyone. We are happy to report that GAIN produced very good results for this third quarter of fiscal year '24 and which follows on the previous solid first 2 quarters of fiscal year '24, which, of course, ends in March. We ended the third quarter fiscal year '24 on 12/31/'23 and with adjusted NII of $0.26 per share and total assets of $918 million.
You'll learn more about this from Rachael Easton, our CFO when she describes the details around that, again, those are good results. In regards to activity for the quarter, we did invest $65 million, which helped us to fund an add-on acquisition in one of our existing portfolio companies. And again, we obviously -- we are always looking and are doing new deals, making new investments and new acquisitions, and that continues to be our goal and objective.
However, doing add-ons to certain of our existing portfolio companies is really an important aspect of our value-building process because it allows us to increase our investment in companies where we know the management team, the business itself and where we have a strong belief in its future and it continues to allow us to really build very good value in these fundamental businesses. So we'll continue to do that as necessary and in certain specific cases, obviously, while pursuing our main business, which is adding new acquisitions as we go along.
We also, as we have in our buyout strategy exits, and we did have a very successful exit with one of our portfolio companies where we actually generated pretty meaningful realized capital gain for us of about $43.5 million. We were able to maintain our monthly distribution to shareholders at $0.08 per share or $0.96 per share on an annual basis and we paid an aggregate supplemental distribution of $1 per share during November and December of 2023. Again, this large supplemental distribution is a result of the buyout strategy and is our ability to continue rewarding our shareholders with these meaningful distributions from realized capital gains, which are generated on the equity portion of our exits in addition, of course, to the income that we continue to generate for the monthly distributions and which is obviously very important for the basis of distributions to our shareholders on a monthly basis.
Our balance sheet continues to be strong with very low leverage and a very positive liquidity position with additional availability on our credit facility. So we will continue providing support to our portfolio companies, both for add-on acquisitions, interim financing if the need arises, while actively growing our assets to new buyouts. Turning to the outlook. The deal flow, as we call it, pairs to be picking up somewhat as the sellers who have been holding back over the past 6 months or so are testing the market.
And we do hear from the merger and acquisition groups, investment bankers who are our primary sources for new acquisition opportunities that the backlog of new opportunities has been building. It seems like the last 6 months or so of last year, we're fairly slow somewhat and deals were coming to the market and they were being taken back, et cetera. Now it looks like there's continue to be a bit of an increase in this regard, maybe somewhat as a result of interest rates perhaps coming down, et cetera. But in any event, we continue working on a new -- few new possible buyout deals, and we are currently in that early phase of the process. There does continue to be very significant liquidity in the market, meaning that our competitive situation is of course, being challenged all the time. So we're going to remain value sensitive, while we aggressively compete for new acquisitions.
So in summing up the quarter and looking forward, we believe the state of our portfolio is very good. We have a strong and liquid balance sheet, an active level of buyout activity and continued prospects of very good earnings and distributions over the next year. So I'll turn it over to Rachael Easton, our CFO, and she can give more details on the financials of the quarter. Rachael?
Thank you, and good morning, everyone. Looking at our operating performance in the third quarter of fiscal year '24, we generated total investment income of $23.1 million. That was up from $20.3 million in the prior quarter. This increase was primarily due to increased interest income, which was driven by new debt investments made in the quarter as well as higher dividend and success fee income resulting from fees received associated with an exit during the quarter, as compared to not receiving any of these fees in the prior quarter.
Net expenses as of December 31, 2023, were $13.3 million. This was down from $22 million in the prior quarter. This decrease is primarily due to a $10.4 million decrease in accrued capital gains-based incentive fees due to the net impact of realized and unrealized gains and losses as required under U.S. GAAP. This decrease was partially offset by an increase in borrowing costs. This resulted in net investment income for the quarter of $9.7 million compared to a net investment loss of $1.7 million in the prior quarter. This fluctuation is primarily due to the large accrued capital gains-based incentive fees recognized during the prior quarter.
Adjusted net investment income, which is net investment income or loss exclusive of any accrued capital gains based incentive fees for the quarter was $9.1 million or $0.26 per share, up $0.02 from $8.1 million or $0.24 per share in that prior quarter. We continue to believe that adjusted net investment income is a useful and representative indicator of our ongoing operations. Consistent with the prior quarter at December 31, 2023, we continue to have 3 portfolio companies that are on nonaccrual status, and we will continue working with those companies to get back on accrual status when possible.
We believe that maintaining liquidity and flexibility to support and grow our portfolio are key elements of our success. With our 3 public note issuances, we have long-term fixed rate capital in place. And as announced yesterday, we have amended and expanded our credit facility, increasing the capacity to $200 million. And as of yesterday's release, we had over $120 million available of that capacity.
Additionally, during the quarter, we were very successful on our common stock ATM program, raising approximately $21 million in net proceeds as well as an additional $7.7 million in net proceeds raised in January with all sales being accretive and above then current NAV. We anticipate continuing to be active in the ATM program. Overall, our leverage remains relatively low with an asset coverage ratio at December 31, 2023, of 207%, providing plenty of cushion to the required 150% coverage.
Our NAV decreased to $13.01 per share for the quarter compared to $14.03 per share at the end of the prior quarter. The decrease was primarily driven by $1.36 per share in net unrealized depreciation on investments and $1.24 per share of distributions paid to common shareholders during the quarter, of which $1 per share related to supplemental distributions. These decreases were partially offset by $1.27 per share of realized gains on investments and $0.28 per share of net investment income.
Consistent with prior quarters, distributable book earnings to shareholders remain strong. We started the fiscal year with $32 million or $0.95 per share in spillover and our monthly distribution remains consistent at $0.08 per share per month for an annual run rate of $0.96 per share. During this past quarter, in November and December 2023, we paid an aggregate dollar per share supplemental distributions. We look to continue funding future supplemental distribution as we recognize realized capital gains on the equity portion of our assets.
Using the monthly distribution run rate of $0.96 per share per year and $1.24 per share in supplemental distributions paid so far in the fiscal year 2024, our aggregate estimated fiscal year distributions would total at least of $2.20 per common share or a yield of about 16% using yesterday's closing price $13.96. This covers my part of today's call. Back to you, David.
Thank you very much. That was a very, very good quarter, Rachael and Dave, you've done a great good job and Erich, good information for our shareholders. This call and the 10-Q filed yesterday with the Securities and Exchange Commission should bring everyone up to date. The team has reported a solid results for the quarter ending December 31, including the add-on investments and exit activity associated with net realized gains. We believe the team is in a great position to continue these successes through the remainder of the fiscal year, and fiscal year ends March 31, 2024. I just think Gladstone Investment is an attractive investment for investors at this point.
And you got monthly distributions, and then you got supplemental distributions from the potential capital gains and some other income. The team hopes to continue, of course, to show you a strong return and rather than keep talking about it, let's get some questions from the analysts and shareholders that are on the line. So operator, if you'll come on and manage that, that'd be good.
We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Mickey Schleien from Ladenburg Capital.
Dave, I wanted to understand from you how your portfolio companies are progressing in terms of their revenues and margins outside of consumer. We're all aware that the consumer-facing companies have headwinds. But are you seeing any trends in the rest of the portfolio?
Mike, nice to talk to you. Not truly not really. We're seeing, I would say, pretty consistent, not decline, but a little slower, call it, growth, but things are holding up pretty well across the board, cost of materials, in some cases and distribution costs, which impacted some of our industrial companies, et cetera, from the supply chain side. I would say those have eased a bit, so that's obviously held on that end.
But frankly, all in all, we are seeing, I would say, a fairly -- it's again, moderate going -- go slow, but nothing dramatic one way or the other. Interestingly, some of our consumer products companies actually are doing reasonably well even though, as you said, the consumer side tends to be a little bit slower right now. But generally, I would say, pretty stable.
That's good to hear. Dave, in terms of deal flow, we're hearing that, part of what we're seeing, I'm not sure that's the case with you, but part of what we're seeing is private equity funds conducting dividend recaps for their stronger performers in order to extract some results for themselves and for their shareholders. Is that something you're considering doing or in the near future for some of your better performing companies which also may help optimize their balance sheets.
Right, right. Nothing honestly right now, as you know, we have done a couple of dividend recaps over the last couple of years. One company in particular, we did a couple actually with that company. And then one other one, we did one last year, and those were for all the reasons you mentioned. But as of right now, it's not something -- we are always looking at it because it is a good way especially if it's a good business that we like, and we're able to sort of stay involved in a very meaningful way, as you say, extract some value for shareholders and for the management teams by the way, of those companies.
And any time we've done it, it's always been in sync with the management teams of our portfolio companies, which, as you know, is something that's really important to us. So right now, I don't see that necessarily. And then my only other commentary on the market in general, as I mentioned briefly, is there seem to have been really kind of a weird last half of last year, where a fair number of deals were in the market, then they got pulled, et cetera. and they seem to be slowly coming back right now.
So we are seeing a bit of, again, of a pickup at least in the deal flow. I will tell you that the ones that we're looking at and we're curious about -- as usual, we're going in with values that makes sense for us. and that seems to be working reasonably well. Others, frankly, there are still some crazy values that are at least being paid, and we can't compete in those and not going to compete in those. But generally, I'd say the outlook looks reasonably good.
Okay. That's interesting and helpful. Dave. My last question, the more liquid markets for credit have reopened as we all know, are you concerned about refinancing risk for some of your better-performing investments? In other words, could some of these investments go to other suppliers of debt capital at cheaper rates than you're offering them and you'd be taken out?
Yes. No, that's a great question, and obviously something we always look at and have looked at over many, many years. And frankly, I can only think of one company where that actually happened with an unusual circumstance. I would say the fact that our capital is really, as you know, is a combination of the debt and the equity, right, in the transaction.
So the effective yield, so to speak, is comparison to say what just pure debt might be even with this environment where debt is coming down. I would say we're still very competitive in that regard. The relationship with the portfolio companies is probably as important as anything. And then the other aspect to that is while as you point out, the spreads might be getting a bit tighter, meaning interest rates are coming down. The availability still, I think, at least from what we're seeing, is not just all of a sudden the flood gates have opened, so to speak, right? And you can get all the capital you need at low rates.
So right now, honestly, I'm not seeing any challenges for our portfolio companies in that regard. Could it happen? Sure. But I'm not seeing anything right now. And so I'm not overly concerned we're going to get taken out in any situations that we may not want to be taken out of.
Our next question comes from Kyle Joseph from Jefferies.
Just want to get your thoughts on leverage. Obviously, you guys have a lot of dry powder right now, and it sounds like you're getting more optimistic about deal flow into '24. But just talk about where you're comfortable taking leverage to if we do get that deal flow? Or is it really just more a function of the market and what deals get done?
Kyle, I think what you said, a function of the market and what deals we get done. So as you know, we keep a pretty conservative leverage profile, I think, compared to the greater BDC peer group. And that's something we do believe is really important, but it's also to provide us the flexibility to support that potential new deal flow.
So we want to be able to be in a position where if we need to fund new deals, we have the ability to take on additional borrowings, and it doesn't threaten breaking that 150% test.
Yes. And Kyle, I might just briefly add to that. And as Rachael said, in her part of the call, we've had a fairly successful ATM program, of course, which we sort of put in place being able to, and we're very rigorous on what the cushion is, if you will, relative to NAV, and we're going to stick with that. So we're not going to do anything crazy there.
But it gives us the ability to -- especially looking forward and the expectation, hopefully, we can start doing some newer deals and obviously using some of this leverage that we're likewise providing the support from the equity side to as Rachael said, be able to maintain a level of the coverage ratio that's not going to put us at risk in that regard.
And then one follow-up for me, just talking about the competitive environment of essentially lower middle market private equity, have you seen -- obviously, you expect deal flow to pick up, but on the other side would be competition. And has the market really changed as we've seen rates go from essentially 0 to substantially higher even with some potential cuts this year?
I would say the market, really what we're seeing and what kind of got reflected, I think, near the end of last year, at least from our perspective, may not be across the board, but I can only speak from our vision, is that the rates coming -- going up, of course, helped to slow down the ability for not only the cost, but also the amount of leverage was being available.
So those deals, I think, that we're getting done were, to some extent, perhaps being overequitized, if you will, to get the deals done. We're seeing that might change a little bit, but not to the point where I think it's, again, going to be all of a sudden, leverage goes back to really high multiples of EBITDA. I think it's still going to be fairly cautious and careful. And again, I think, again, as I said, even though there are some deals we're seeing where the relative enterprise value might be 1 or 2 turns higher than we think it's worth.
Clearly, there are folks willing to do those deals. And if they are, I think they are having to do a little bit more equity than debt. I don't think the debt side of the equation has gotten to the point yet where we're back to much higher leverage per transaction, even at these higher values. If that makes any sense.
Our next question comes from Bryce Rowe from B. Riley Securities.
I wanted to ask about the upsized credit facility. You've had, I guess, some changes, I think you took the available amount down last quarter, and obviously, it's moved back up. So maybe there was a bit of a process to get to that higher level. Could you just -- if you can kind of talk about that process? And did you add some banks to the facility? Just any kind of detail there would be helpful.
Yes, absolutely. So yes, we were really excited to announce yesterday that we have expanded the credit facility up towards $200 million. When we went through our regular amendment process, which closed in October at the beginning of the quarter, and we weren't able to announce in our last earnings call, we had taken it down to $135 million, and that was a result of just losing a couple of banks during that process.
We were working on this expansion. Unfortunately, we couldn't get the 2 to close at the same time. So we were able to increase the facility by bringing in a new bank, we brought in Fifth Third. And we also were able to increase some of -- one of the other bank's commitments as well to get back up to that $200 million amount. And we believe this additional capacity is really important in providing flexibility as we contemplate future pipeline in the deal flow process.
Got it. That's helpful. Helpful context, Rachael. And then maybe one for Dave. You had this add-on opportunity for an existing portfolio company here this quarter. Can you just talk a little bit about that? And then other maybe other opportunities in the pipeline for your existing portfolio companies to do add-on acquisitions.
Sure. So that particular one, Bryce, was a company that we've had in the portfolio for a few years. It's somewhat of an industrial-based business. We've been really improving it all around, both from the overall management level, et cetera. And we had an opportunity to acquire a fairly substantial size business to bring into it, which was really integrated very nicely with the product, and it not only gave us additional capacity, manufacturing capacity, but also distribution and access in Europe and other parts of the country.
So we took our company from order back the 2, now, I'm not going to give you specifics, but order magnitude about $40 million, $50 million in revenue to over $100 million in revenue and very significant increase in the EBITDA. And I would say that the integration has come along really well. So we've clearly enhanced the overall value. So I feel really good about that transaction.
Without, by the way, getting that particular company in a very highly leveraged situation, relatively speaking. So really, really good opportunity. So we'll continue. And yes, some of our existing portfolio companies are seeing some opportunities like that, and we continue -- some of them are on the smaller end, some of them do not require additional financing from gain per se because their own balance sheets are strong enough to handle some smaller add-ons where it really makes some sense, whether it be a product line or what have you.
And so yes, we continue to do that because, frankly, as I said in my remarks, and you appreciate if we can keep adding value to an existing portfolio company, again, where overall, we know it and it's accretive we're happy to do that. One other company -- another one of our portfolio companies actually where they made a fairly good sized acquisition, and we were able to go back in as well and help to add to that particular investment as well. And so yes, so short answer is, yes, we're going to continue looking at those opportunities.
This concludes our question-and-answer session. I would like to turn the floor back over to David Gladstone for closing comments.
Thank you. That was a good quarter, and I think when we put the numbers together for the year ended March 31, it's only one of our best years ever, and we will probably be over $1 billion in assets but anyway, I don't have a crystal ball, so I have no idea where we're -- what's really going to happen. But we're guessing that things are back strong and growing, a lot of people in investing world are thinking that business development plan is like this one, a place to put some money. But thank you all, and that's the end of this presentation.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.