Gladstone Investment Corporation
Q4 2018 Earnings Call Transcript

Published: 14 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's Fourth Quarter and Year Ended March 31, 2019 Earnings Call and Web Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, David Gladstone. You may begin.

[David Gladstone:]

Well, thank you all for calling in. This is your Chairman for Gladstone Investment. This is the fiscal year 2019 year ending conference call to shareholders and analysts of the Gladstone Investment, that’s traded on NASDAQ, symbol GAIN and we have some preferred stock under GAINM and GAINL, and thank you all for calling in. We're always happy to talk with our shareholders and analysts and provide a view of the current business environment. Our key goals obviously are to help you understand what happened during the last year and the last quarter and give you a view of the future. We've changed these reports to exclude most of the history of the company and exclude the section on how this company is different from other BDC investment companies because it's seeking capital gains and income, so not just income. Hope you like the new report. Now we'll here from our General Counsel and Secretary, Michael LiCalsi. Michael?

[Michael LiCalsi:]

Thanks, David. Good morning, everyone. Today's call may include forward-looking statements under the Securities Act of 1933, the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties and other factors, although 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 listed on our forms 10-Q, 10-K and other documents that we file with the SEC. You can find all these on our website, which is www.gladstoneinvestment.com, or the SEC's website, which is www.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. Please also note that past performance or market information is not a guarantee of any future results. We also ask you to take the opportunity to visit our website, once again, gladstoneinvestment.com, sign up for our e-mail notification service. You can also find us on Twitter, the handle there is @GladstoneComps and on Facebook keyword there is The Gladstone Companies. Today's call is simply an overview of our results through March 31, 2019. So we ask that you review our press release and Form 10-K, both issued yesterday for more detailed information. Now with that, I'll turn it back over to the President of Gladstone Investment, David Dullum. Dave?

[David Dullum:]

Hey, Mike. Thanks, and morning, everyone. So I'm pleased actually to report that we did have very solid operating results for this quarter and for the fiscal year and which is 3/31/19. It has been a very active fiscal year, and that we exited four of our buyout portfolio companies, which generated a net realized gain of about $98 million. We also made two new buyout investments for about roughly $58 million. Our net asset value, which is our book value, increased about $12.40 per share at 3/31/19 and that is up from $10.85 per share at 3/31/18. So over the year, we had a pretty nice increase. This increase in NAV really resulted in part from an increase in the equity values of our buyout portfolio companies, along with some of the successfully --successful exit that we did have, pretty significant realize gains. And during this fiscal year, we were able to increase our monthly distributions to an annual run rate of $0.82 per common share. And we also maintained our semi-annual supplemental distributions with payments totaling $0.12 per common share that was $0.06 each. Now subsequent though, to the fiscal year end and in April, our Board did approve an increase in these semi-annual payments, which will be May 1st and June and that's up from $0.06 to $0.09 per common share. So as a result of these significant net realized gains that were generated, we also took the decision to retain a large portion of these gains. Therefore, we have to pay required tax and declare what we call a deemed distribution to common shareholders. Now we believe that this is a prudent way to maintain capital for reinvestment and growth of the portfolio and also to minimize the need for secondary common stock offerings to raise capital if we may need to. So in the near term, it also allows us to pay down on our line of credit and therefore reduce the interest costs to gain. Now I want to further to this point, though, say that as we successfully exit these companies, we will lose interest income, obviously on the debt for some of those investments. So we are mindful of the level of income to which we need to keep on monthly distributions at current levels, and also hopefully grow them as we make new investments. And again, I really do need to stress this because this is consistent with our strategy of being a buyout-oriented fund. But we are very mindful of providing these meaningful dividend yields to shareholders on a monthly basis. So now a few of our portfolio companies have been underperforming. So proactively, we made operational changes. We provided significant restructurings to improve the capital structures of these companies. And while these restructures may result in some realized losses in the short-term, it does provide these companies the best chance for improving results and successes to protect and enhance shareholder value in the long-term. We've done this in the past and we've proven this to work. And so we believe also that these steps are properly reflected in our portfolio valuation and are taken into account into consideration when we do prepare our own internal plans and our projections of future income and operating results. It is worth emphasizing that our differentiated investment approach of being a provider of a significant portion of the equity and most of the debt in our transactions, does give us an advantage and that we have some influence on these companies when we buy them. So thus our involvement with the management teams is similar to traditional private equity fund, where we do work with our portfolio companies able to provide the assistance and making changes as necessary. And again, this will happen from time-to-time, we had some companies we had to do this with over the last year and we in the future probably will have to do the same thing. But we have that capability. And that's a very important part to keep in mind for how we operate. Now, we're pleased with the results of this year, but also we thought we'd review the past fiscal years from 3/31/14 to 3/31/19 as we believe that we've created a pretty strong track record. In that

[Julia Ryan:]

Good morning, everybody. Operating results remained consistent quarter-over-quarter, while interest income decreased about 0.5 million this quarter and it was largely due to placing [Meridian] on non-accruals, other income increased 1.6 million given the variable nature and timing of dividends and success fee income. Net expenses increased by 1.7 million in the current quarter, which was primarily driven by lower credits from the advisor and was partially offset by a decrease in interest expense given proceeds from sales in December, and therefore a lower average borrowing outstanding, and the income based incentive fee as a result of lowering net investment income coupled with the increase in net assets which drives the hurdle. When adjusting net investment income to exclude the capital gains based incentive fee accrual, adjusted net investment income per weighted average common share was $0.23 in the current quarter. We continue to believe that adjusted net investment income is a useful and representative indicator of operations exclusive of any capital gains based incentive fees as net investment income does not include realized or unrealized investment activity which is associated with such fee. During the quarter ended December 30 -- Sorry, March 31, 2019, we recognized net realized losses on investments of $19.5 million, which are primarily a result of the restructures Dave noted earlier. We also recorded net unrealized appreciation of investments of $30 million in the current quarter which consisted of about $20 million of reversals of previously unrealized depreciation upon those restructures, and $10 million of net unrealized appreciation of existing portfolio companies which was predominantly due to an improvement in operating performance of certain portfolio companies. Now looking at the balance sheet. As of the year-end, total assets increased to over $635 million compared to about $620 million last quarter, primarily as a result of net increases in the value of our portfolio companies. Liquidity remained strong with over $137 million available under our line of credit and asset coverage of over 300%. Net assets totaled about $407 million or $12.40 per share, which is down $0.13 from last quarter primarily as a result of the taxes on the deemed distribution. And those are partially offset by the unrealized appreciation net of realized losses. As a reminder while our balance sheet may show over-distributed net investment income of $7.3 million, this is a direct result of the roughly $22 million capital gains based incentive fee accrual that is not due to be paid and that was accrued under GAAP. As of year-end and on a book basis, undistributed net investment income plus net realized gains totaled over $6 million or about $0.19 per common share, which is already net of the $50 million deemed distribution. This is the amount that would be available for distribution to shareholders in future period, even if the entire capital gain based incentive fee accrual were to be paid. And this covers my part of today's call. And now back to you, David.

[David Gladstone:]

Alright. Thank you. Julia. That was a good report. Dave yours was excellent as well and Michael all of you have done a good job of informing our shareholders. And that presentation, including the 10-K that was filed yesterday should bring everyone up-to-date on this company. This team has reported some great accomplishments during the fiscal year including significant investment exits with realized gains and two new buyout investments and a good number of add-on investment transactions. The team is in a good position to continue these successes during the next fiscal year ending March 31, 2020. In summary this buyout front is attractive investment for investors seeking continuous monthly distributions, as well as some supplemental distribution from potential capital gains and other income. Team hopes to continue to show you a strong return on your investment in this fund. As noted this fund is different from income only funds that gives income and as well as they are hard at work triggering capital gains to pay out every six months or so. The Board in April declared a regular dividend a $0.068 cents per share per month. So the run rate now is $0.816 per share per year. The stock trading as it was yesterday at 12.04, that's about a 6.8% return on the regular dividends if the company keeps paying out dividend. In addition, the Board declared a $0.09 per share extra dividend for June and I hope the Board will do the same $0.09 per share in December for a total of $0.18. That gives you a run rate of $0.996, almost $1 per share. So at that rate, it's about 8.3% payout to stockholders if the company can keep doing what it is doing today, and there's no guarantee, but that's our goal. And now let's not forget the $1.52 deemed dividend per share for stockholders at the end of March. It is not cash of course, but it benefits our shareholders and the after tax the money goes to work to earn more income and benefits the shareholders for helping pay more dividends. And of course the stock price is up, it's not up quite as much since Mr. Market held a sale yesterday of our stock at 12.04, I don't know why it's trading so low, since our NAV is at 12.40, but that's where we are. But anyway, the money in the company now from the deemed dividend will help us move up the dividend hopefully over time. And of course, I don't want to forget that at March 31, 2019, we reported a booming year, outpacing many others in this field. And it sets up the company good for the year end March 31, 2020. I like these deemed dividends. I know people kind of can't quite figure out what they are. But because it raises my cost basis by the amount of money paid out and not paid out and I get a tax deduction of $0.21 per share. And now there's more money in the company working for me as a stockholder and I'm excited about that future. And it's the stock in my IRA. I do plan -- I know some of you know this, but our plan for the stock that I have in my IRA to get the administrator of my IRA to file a Form 990-T and have that $0.21 per share paid to my plan by the United States Government. So I'm happy and I hope you are too. Now the team has to work harder to have a 2020 be even bigger than last year. No guarantees of course, but that's what the plan is working for. And now Gigi would you come on and tell people, how they can ask them questions for today?

[Operator:]

[Operator Instructions]. And our first question is from Henry Coffey from Wedbush. Your line is now open.

[Henry Coffey:]

I guess if I make the observation, while this has been amazing my analyst colleagues will think I've lost my objectivity, but it has been very, very impressive since we picked up the stock and congratulations all around. A couple of detailed questions, the credit related to lower net receivable write-downs that shows up in the interest expense, can you tell us what that was in the fourth quarter as well as what it was for the full year?

[David Gladstone:]

Henry, where are you reading from? I'm trying to follow it.

[Henry Coffey:]

No. It wasn't -- isn't there in your overhead, though you have either a credit or a loss on related loans and receivables?

[David Gladstone:]

Yes, we may have reversed some interest income there, but it can't be much. I missed it. I'm sorry.

[Henry Coffey:]

We'll go. I'll reach out after the call. And then if you could articulate a little bit about what the actual realized losses in the portfolio were in the quarter that would be helpful?

[David Gladstone:]

So Dave?

[David Dullum:]

Yes. Hi, Henry. It's Dave Dullum. So a couple of our companies, Henry as I mentioned we had to do some recall or restructuring mainly around either transferring some of the debt investments we have to some sort of quasi equity. This is where, the EBITDA is either -- it's that not positive EBITDA, but not enough necessarily to cover all of the interest. So for the near term, what we do is take a hard look at it and obviously we're concerned about the businesses operating and performing going forward. So the ability we have is, as I mentioned, is to be able to make some of those adjustments and the capital structure of those businesses. We generally then are going to bring in either someone from the outside to help work with a management team, et cetera, and try to get it turn around. We've done that many times in the past. And that is the nature of our business to some degree. When you buy businesses, you have things that do happen. So in general, it's around a couple of those companies that we had to do that with, by the way, would not net new per say, because some of those companies that have already been written down but we actually went ahead and took the opportunity to do the restructure, which then generated a realized loss and obviously, we had the benefit of being at loss, that’s again some pretty significant realized gains. So that netted out to for the number that I mentioned. So that's basically a part of what we do. We don't like to have to do it necessarily, but we can do it as we need to make these companies perform and then ultimately we will recoup it later on we hope.

[Henry Coffey:]

Were those companies identified specifically in the 10-K, we can obviously go look it up there?

[Julia Ryan:]

Yes, Henry. And they were with SOG and the Mountain.

[Henry Coffey:]

SOG and what was the name of the other ones Julia?

[Julia Ryan:]

The Mountain.

[David Gladstone:]

It's a T-shirt company.

[Henry Coffey:]

Thank you very much. And I know -- yes, I know you had been working with that second one for a while. Great quarter and thank you for all your hard work.

[David Gladstone:]

And just to follow up on that before we go to the next question. Sometimes the restructures are to make management -- a new management coming in have a lower basis so they can make some money. If you just throw more money in and leave the debt outstanding, when the people come in, they've got a quite a lot to get over before they can get any return on their investment. So that's one of the reasons we do that. I'm sorry. Go ahead Gigi and bring in the next question.

[Operator:]

Thank you. [Operator Instructions]. And our next question is from [Ryan Baar] from Jefferies. Your line is now open. Pardon me, Ryan from Jefferies. Your line is now open.

[Unidentified Analyst:]

Hi. Good morning. This is [Ryan Kohr] on for Kyle Joseph. Congratulations on the good quarter guys. So I had a question related to your restructuring. So you said that you restructured SOG and the Mountain in the quarter. Obviously, we're paying attention to the non-accruals which remain elevated relative to historical. What's your outlook on regaining some of the investments that you've restructured and what's the timeline for that? And then in terms of non-accruals that they've been elevated this year, do you have any outlook moving forward on the resolution to that?

[David Dullum:]

Yes, I can't give you a definitive answer certainly on the restructures. Again, typically, we're doing those where we know that the company is going to be tight, cash wise, if you will, for a period of time. Hopefully, we would like to think that there's a chance to see those get turned around in a year or so. And if we are able to start generating some income we’d do that. As far as the non-accruals, I think we're going to see that improve near the end of this year, given some of the other companies that are impacted in that regard. So, I just have to tell you that it's we’re working hard, and we don't think we're going to see any further elevation, as you say, on non-accruals and I really am expecting that we will see an improvement on that certainly by the end of this calendar year.

[Operator:]

And we have another question from Henry Coffey from Wedbush. Your line is now open.

[Henry Coffey:]

David, I know in the past, you've given us a fairly healthy perspective way, how you think the large macro environment is going to affect your companies. Can you give us a sense on how you think the current arm wrestling with China is going to affect you or do you think your companies are not overly exposed to these kinds of things or what are your general thoughts?

[David Gladstone:]

If you looked at this company, it's got a couple of situations in China where we bring in product from China and sell it. Also looking at moving some of that out of China and move it to other countries like everyone else is thinking about it, haven't done much about it. In other companies, for example, Gladstone Land, there's really nothing to worry about there. Only almonds are the only thing that they sell a lot of to China but not anything else. The two -- the other REIT is in good shape in terms of not having a lot of Chinese business going through its buildings. And finally, if you think about Gladstone Land, I mean Gladstone Capital, we've got some companies there that are bringing stuff in from China. So yes, they can be some pain, but not much, not enough to down our companies, because of what's going on between them.

[Operator:]

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to David Gladstone for closing remarks.

[David Gladstone:]

Alright. Thank you very much everybody for calling in and listening to this and we'll see you again next quarter.

[Operator:]

Ladies and gentlemen, thank you for your time participation in today's conference. This concludes the program. You may now disconnect.