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spk02: Greetings and welcome to Gladstone Capital first quarter earning conference call. At this time, all participants are in listen only mode. Question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Gladstone, Chief Executive Officer. Thank you, and over to you, sir.
spk05: All right. Thank you, Amit. That was a nice introduction, and this is the first quarter earnings call for Gladstone Capital, the quarter ending December 31, 2021, and Thank you all for calling in. We're always happy to talk to shareholders and analysts and welcome the opportunity to provide further update of the information that was filed yesterday with the SEC. But first, I'll turn it over to the General Counsel, Michael Lacalse, who will make a statement regarding certain forward-looking statements. Michael?
spk00: Michael Lacalse, General Counsel, General Counsel, General Counsel, General Counsel, General Counsel Thanks, David, and good morning, everybody. Today's report includes forward-looking statements on the Securities Act of 1933 and the Securities Exchange Act of 1934. including those regarding our future performance. Now, 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. The forms 10Q, 10K, and other documents that we file at the SEC, and you can find these on the Investors page of our website, www.gladstonecapital.com, You can also sign up for our email notification service there. You can also find the 10Qs, 10Ks on the SEC's website, which is 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. Now, today's call is an overview of our results. So, yes, the reviewer press release and Form 10Q, both issued yesterday, for more detailed information. Again, you can find them on the Investors page of our website. Now I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Bob?
spk04: Bob Marcotte Good morning, all, and thank you for dialing in this morning. Last quarter was a busy one for us, so I'll cover the highlights for this period and provide some comments on the state of the portfolio and market outlook. Before turning the call to Nicole Scholtenbrand, Gladstone Capital CFO, to review our financial results for the period and our capital and liquidity position. So beginning with last quarter's results, originations for the quarter came in at a record $111 million, which included six new proprietary investments, which represented approximately $140 million of total commitments. As covered in our last call, we also anticipated a number of exits and repayments, which came in at a total of $97 million, so net originations were $14 million for the period. Exits for the period include the previously discussed sale of Lugnetics, which represented just under 50 percent of the total exits for the period, and included a net realized gain of $13.4 million. Interest income for the quarter declined 3 percent, or $400,000, as the average interest-bearing investment portfolio increase of 1.4 percent did not offset the $600,000 of past due interest we received in the prior period. Other incomes surged with the $1.6 million exit fee generated by the lignitic sale and other prepayment fees to $3.3 million, which is an increase of $2.2 million over the prior quarter and contributed to the 12.6 percent increase in total investment income to $16.2 million for the quarter. Borrowing costs were unchanged and administrative costs rose slightly with new debt issuance. However, net management fees declined by 20% to $2.7 million as the increase in new deal closing fees remitted to the management company and credited against the base management fees resulted in a $700,000 decline in the net management fees compared to last quarter. With investment income up, When expenses down, net investment income rose $2.3 million to $9.2 million, or 27 cents a share. Net assets from operations came in at $12.1 million, or 35 cents a share, which included the realized gain from the lignetic sale, as well as $5 million of net unrealized portfolio appreciation on the quarter, largely related to the improved performance of several credits negatively impacted at the early stages of the COVID pandemic. For the period, NAV rose 16 cents a share, or 1.7%, to $9.44 per share as of December 31st. Despite our modest leverage, we're pleased to report the cumulative return over the past two years for GLAD has risen to 17.6%. 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 gain, improved operating performance in several energy and communication businesses supported the reduction in the depreciation of these investments and the bulk of the unrealized depreciation for the period. This quarter's portfolio performance and equity investment appreciation bring the net NAV appreciation to 39.8 million since December 31st of 2019, prior to the pandemic, which represents a $1.36 per share, or 16.8 percent increase in NAV over the last two years. The asset mix as of the end of the quarter continued to shift in favor of first lien loans, as 80 percent of the exits last quarter were second lien or equity investments, and 65 percent of the new originations were senior loans. So, first lien assets rose to 69 percent of assets at fair value at the end of the quarter. The weighted average yield on the new debt investments was 9.7%, which trailed the 10.3% weighted average yield on the exited investments. However, by reinvesting last quarter's equity gain into yielding investments, the overall yield on the new investments was approximately 55 basis points higher than the exited investments. And for reference, the average yield on our earning assets overall was unchanged to 10.3 percent from the prior quarter end. Looking over the balance of fiscal 22, there are a couple of comments I'd like to leave you with. We've received $14 million of repayment since the end of the quarter and anticipate several others in the near term, but anticipate we'll be able to maintain or grow our investment portfolio as we did last quarter. As you may note, a number of our recent investments are growth or to growth-oriented PE platform companies and include future funding commitments, which we anticipate to make up a larger portion of our investment activity going forward. And consistent with our investment strategy, four of the six investments made last quarter included small equity co-investments. We are well positioned to absorb any impending increase in short-term rates, as only 21 percent of our debt was subject to floating rates. And given the modest spread between our borrowing rate and the average floor in investments of 1.17 percent, the average floor on our floating rate assets exceeds the floating rate debts by a substantial margin. While we're able to generate one-time fee income last quarter to exceed the current dividend, we are focused on increasing NII through some combination of earning asset growth, higher leverage, sustained margins, or increase in interest rates to support sustaining any adjustment to the current shareholder distributions. And now I'd like to turn it over to Nicole Schultenbrand, the CFO for Gladstone Capital, to provide some details of the fund's financial performance for the quarter. Nicole?
spk01: Thanks, Bob. Good morning, everyone. During the December quarter, total interest income declined $400,000, or 3%, to $12.9 million. which was driven by the receipt of $600,000 in past due interest during the prior quarter, whereas we received no such amounts during the current quarter. The investment portfolio weighted average balance did increase slightly by $7 million or 1.4% to $494 million compared to the September 30th quarter, and the weighted average yield on our interest-bearing portfolio was unchanged at 10.3% despite the increased proportion of first lien loans. Other income rose by $2.2 million to $3.3 million and drove the 12.6% increase in total investment income to $16.2 million for the quarter. Total expenses declined by $500,000 quarter over quarter, driven by a decline in net management fees associated with the surge in New Deal origination fee credits. Net investment income for the quarter ended December 31st was $9.2 million, which was an increase of $2.3 million compared to the prior quarter. or 27 cents per share and covered 137% of our shareholder distributions. The net increase in net assets resulting from operations was 12.1 million or 35 cents per share for the quarter ended December 31st compared to 32.7 million or 95 cents per share for the prior quarter. The current quarter increase was driven by the increase in earnings as well as the net unrealized portfolio appreciation as covered by Bob earlier. Moving over to the balance sheet, as of December 31st, total assets rose to $587 million, consisting of $576 million in investments at fair value and $11 million in cash and other assets. Liabilities rose to $263 million December 31st and consisted primarily of $150 million of five and an eighth senior notes due 2026, $50 million of three and three quarters senior notes due May of 2027, And as of the end of the quarter, advances under our line of credit were $53.9 million. As of December 31st, net assets rose by $5.4 million from the prior quarter end with the net realized and unrealized portfolio appreciation as well as earnings in excess of distribution. NAV rose 1.7% from $9.28 per share at September 30th to $9.44 per share as of December 31st. Our leverage as of the end of the quarter increased slightly with the increase in total assets from the prior quarter and stands at 81% of net assets. We currently have in excess of $100 million of borrowing availability under our line of credit, the revolving period of which ends in October of 2023. With respect to distributions, we have remained committed to paying our stockholders a cash distribution. In October, our Board of Directors declared monthly distributions to common stockholders of $0.065 per common share per month for January, February, and March, which is an annual rate of $0.78 per share. The Board will meet again in April 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 $11.06 per share yesterday, the distribution run rate is now producing a yield of about 7.1%. Distributions, in addition to the NAV growth over the past year of $1.74 per share, have resulted in a total return of $2.52 per share, or 33% over the past year. And now I'll turn it back to David to conclude.
spk05: All right. Thank you, Nicole and Bob and Michael. You all did a great job of informing shareholders and analysts that follow our company. In summary, another solid quarter for Gladstone Capital. Company closed six new proprietary investments representing about $111 million of new investments during this period. These investments represent nice diversity of industry sectors and several new private equity sponsors and relationships and include a small equity co-invest in four of these growing businesses. The company realized net gains of $13.4 million and $1.6 million of fee income associated with the sale of Lignetics, which represented a blended return of about 18.5% over the seven-year investment period. The combination of investment activity and exits lifted net investment income by 34% as a very good number, or about $9.2 million for the quarter. It brings the distribution net asset value appreciation of about 33%. Over the past year, I think that Absolutely fantastic. In summary, the company continues to invest in growth-oriented middle market businesses with good management. Many of these investments are supported of mid-sized private equity funds that are looking for experienced partners to support their acquisition and growth of the business they've invested in. This gives us an opportunity to make an attractive and interest-paying loan to support their ongoing commitment and to pay cash distributions to our stockholders. It was, by all accounts, a very good quarter. And now, operator, would you please come on and tell people how they can ask us some questions?
spk02: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
spk05: We have some questions.
spk02: Again, if we have a question, please press star 1 on your telephone keypad.
spk05: Well, that's disappointing. Somebody should ask a question.
spk02: The first question comes from Adrian Day with Adrian Day Asset Management. Please go ahead.
spk03: Yeah, thank you. Listen, David, could you just say a little bit more maybe or somebody about the equity investments? You know, how high might you go? And could you just give us a little bit more about that, please?
spk05: Well, from my standpoint, I like the idea. We've not done it as much in the past year. But as you remember, Allied Capital always picked up some equity, some warrants or something every time it made a loan. So Bob is moving a little bit in that direction now that he's got a little more flexibility in his balance sheet. Bob, you want to comment on that?
spk04: Sure. Generally speaking, we are still holding to the 10% of the overall portfolio. Now, that swings for two reasons. One, as things appreciate, that certainly increases it over our 10% threshold. But with some of the liquidations, it made sense to reinvest in a number of the recent companies. Generally speaking, I look at a 10% of cost as kind of the target. Also to be mindful, we don't invest in all of the companies. Certainly private equity sponsors sometimes are receptive and other times are not. We're also selective in the companies that we invest in. So, overall, I would say 10 percent adjusted for appreciation. At the current time, I think we have a significant number of investments that have appreciated, so that's probably driving the current percentage more than historically. I would expect that number to continue to go up a little bit, but I also would expect some additional liquidation of those investments over the coming quarter. So, I know that's not specific, but generally speaking, we're probably are where we'd like to be. with some variance around that number based on liquidations and activity.
spk03: Okay, super. Thank you.
spk05: Other questions? Well, we got one good question, so I guess we'll have to wait until next quarter to get some good questions. Thank you very much.
spk02: Thank you. So, ladies and gentlemen, we have reached the end of question and answer session. And I would like to turn the call back to Mr. David Gladstone for closing remarks. Thank you.
spk05: All right. Thank you very much, everybody. And we'll see you again next quarter. That's the end of this call.
spk02: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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