Gladstone Capital Corporation

Hello, and welcome to the Gladstone Capital Third Quarter Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to CEO David Gladstone. Please go ahead.

Well, thank you, Kevin. Nice introduction. And this is the quarterly earnings call that we do at the end of each quarter. Gladstone Capital's third quarter ends June 30, 2021. Thank you all for calling in. We're always happy to talk with shareholders and analysts and welcome the opportunity to provide an update for this company and its investment portfolio. Well, we start with our General Counsel, Michael Lacalce. He'll make some statements regarding certain forward-looking statements. Michael?

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. Now, 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 10Q, 10K, and other documents that we file with the SEC, and you can find them on the investor page of our website. That's www.gladstonecapital.com, or you can also sign up for our email notification service, or you can find them on 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. Today's call is an overview of our results, so we ask that you 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, with that, I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Bob?

Thank you, Michael. Good morning and thank you all for dialing in this morning to discuss the results for Gladstone Capital for the quarter end of June 30. Let's get into it. Originations for the quarter were strong, totaling $53 million, including three proprietary investments and add-ons to existing investments. However, as anticipated, we had three exits, which contributed to lifting prepayments and exits to $54 million for the period. Interest income rose 7.2% to $12.7 million over the prior quarter, driven by the collection of $600,000 of past due interest on a non-earning credit. Other income fell slightly. However, total investment income rose to $13.7 million. Barring cost increased $200,000 with the full quarter of the $50 million add-on to our senior notes and an increase in unused fees paid on a line of credit, which we expect to abate as our floating rate borrowings rise with asset growth and the potential redemption of our higher cost senior notes due in 2024 later this year. Administrative costs and expenses rose $200,000 with professional fees associated with the renewal and extension of our bank line of credit in the quarter. And net management fees on the quarter increased with the incentive fees However, net investment income rose to 6.6 million, or 19.5 cents a share. Net assets from operations came in at 18 million, or 53 cents a share, which included 6.5 million of realized gains and 4.8 million of unrealized portfolio appreciation on the quarter. As a result, for the period, NAV rose to 41 cents rose 41 cents a share, or 5.1% to $8.52 per share as of June 30. With respect to the portfolio, our portfolio continues to perform well, and for the quarter we did not experience any payment defaults, and our one non-accrual investment has continued to recover, which supported the collection of most of the accumulated past due interest, and that credit now has been moved to accrual status. We exited two seasoned second lien and equity co-investments last quarter associated with ag trucking and ATRG, which generated $6.4 million of after-tax gains. For the quarter, the bulk of the portfolio appreciation was driven by six equity investment positions in a variety of industries, most of which are experiencing strong operating performance, and in total, they easily outpaced the few decliners and generated net appreciation of $13 million. Based on the portfolio performance and loan market recovery, the cumulative gains in portfolio appreciation of the past four quarters have exceeded the COVID-related markdowns of the March 2020 quarter by 32% and contributed to the 5.4% increase in NAV since December 31, 2019. The asset mix as of the end of the quarter continued to shift in favor of first lien loans, as the private equity community has continued to favor the flexibility and certainty of Unitranche loans, and the majority of the repayments were second lien or equity exits. As a result, first lien assets rose to 66% of the portfolio cost, while second lien exposure declined to 25% of the portfolio cost. Despite this shift in asset mix, we've been able to maintain an average yield on our loan portfolio of 10.5%. Looking forward, last quarter was active for originations, and we absorbed most of the expected repayments, and we expect much the same in the near term as the private market liquidity is driving an elevated level of refinancing and recapitalization activity. As we've reiterated in the past couple of quarters, we continue to target a one-to-one debt-to-equity leverage, however, based on the magnitude of the portfolio appreciation last quarter and the pace of repayments our leverage continues to be below our target range at 76 percent debt to equity. Despite the modest leverage, we are pleased to report that our cumulative return on equity for the 2020 and 21 period, inclusive of the challenging COVID markdowns in 2020, has approached 11.3 percent. Based on our modest leverage position, and our reduced secured line borrowings, we have an unprecedented level of debt capacity to take on additional yielding assets to further enhance our earnings and leverage coverage in the coming quarters. And now I'd like to turn the call over to Nicole Schultenbrown, the CFO for Gladstone Capital, to provide some more details on the fund's financial performance. Nicole?

Thanks, Bob. Good morning, everyone. During the June quarter, total interest income increased $900,000, or 7.2%, to $12.7 million. With the collection of $600,000 of past due interest, additionally, the investment portfolio weighted average balance increased by $9.5 million, or 2.1%, to $463.6 million compared to the March 31, 2021 quarter, also contributing to the increase in interest income. The weighted average yield on our interest-bearing portfolio declined by 10 basis points to 10.5% compared to the prior quarter, associated with the increased population of first lien loans in our portfolio. Other income fell by $79,000 compared to last quarter. With these items, total investment income for the quarter increased to $13.7 million. Total expenses rose by $600,000 quarter over quarter, driven by the increase in interest expense, professional fees, including mainly legal fees and net management fees. Net investment income for the quarter ended June 30th was $6.6 million, which is an increase of $200,000 compared to the prior quarter. or 19.5 cents per share and covered 100% of our shareholder distributions. The net increase in net assets resulting from operations was 18 million or 53 cents per share for the quarter ended June 30th compared to 21.3 million or 65 cents per share for the quarter ended March 31st, 2021. The current quarter increase is driven by after-tax gains of 6.5 million as well as 4.8 million of net unrealized portfolio appreciation. Moving over to the balance sheet. As of June 30th, total assets rose to $514 million, consisting of $506 million in investments at fair value and $8 million in cash and other assets. Liabilities declined to $222 million as of June 30th and consisted primarily of $150 million of newly issued 5 and 8 senior notes due 2026, $38.8 million of 5 and 3 8 senior notes due 2024, and as of the end of the quarter, the advances under our line of credit were only $23 million. Net assets rose by $21.5 million from the prior quarter end, with $11.4 million of net realized and unrealized portfolio appreciation and the issuance of approximately 908,000 common shares under our ATM program, which generated net proceeds of $10.1 million for the quarter and $2.7 million in excess NAV, or $0.08 of appreciation. NAV rose 5.1% from $8.11 cents per share as of March 31st to $8.52 per share as of June 30th, 2021. Our leverage as of the end of the quarter declined with the increase in NAV from the prior quarter end at 76% of net assets. We currently have an excess of $130 million of borrowing availability under our recently renewed line of credit. As part of the line of credit amendment, we successfully extended the revolving period to October 31st, 2023. With respect to distribution, Gladstone Capital has remained committed to paying its stockholders a cash distribution, and in July, our Board of Directors declared monthly distributions to our common stockholders of 6.5 cents per common share per month for July, August, and September, which is an annual rate of 78 cents per share. The Board will meet in October to determine the monthly distribution to common stockholders for the following quarter. At the current distribution rate for our common stock, and with the common stock price at about $11.50 per share yesterday, the distribution run rate is now producing a yield of about 6.8%, 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.

Thank you, Nicole. You and Bob and Michael all did a great job of bringing people along in terms of analysis of our good company. If you take what you've said today and add it to the 10Q filed analysis, And you can read that 10Q at www.gladstoneglad.com. So we've got a strong opportunity here to continue to grow. We had a solid quarter for the period ending June 30. We're off to a good start where we are today. Solid originations in the past of $53 million. Very attractively priced investments. We've generated net investment income to cover the current dividends, so we're not supporting that some other way. Between realized gains, appreciation, and accretive stock issuance lifted the net asset value to $0.41. That's up about 5.1% for the last quarter. It enhanced the ability and stability of the company to make sure we pay those dividends every quarter. That's our goal in life. here at this company. So in summary, the company continues to invest in growth-oriented middle market businesses with good management. Many of these investments are supported by mid-sized private equity funds that are looking for experienced partners like the team that's here. And so we've been able to find relationships in the market, good interest-paying loans to support our ongoing commitment to pay cash distributions to stockholders. Summary, it was a very good quarter. Now, we'll have some questions. So, operator, if you'll come on and tell the callers how they can ask some questions.

Absolutely. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment or have your phones on mute, it may be necessary to pick up your handset or take your phone off mute before pressing star 1. One moment, please, while we poll for questions. Once again, that's star 1 to be placed in the question queue.

Okay, folks, you need to ask your questions or we're going to hang up and wait for next quarter.

If there are no questions at this time, do you have any further closing comments, sir?

No, that's all. We had a great quarter. I'm not surprised that we don't have a lot of questions. It was a great quarter with not many differences that aren't shown up in all of our filings. So thank you very much, everybody, for calling in, and see you next quarter.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.