Yahoo Finance Gladstone Capital Corporation (NASDAQ:GLAD) Q2 2024 Earnings Call Transcript
Gladstone Capital Corporation (NASDAQ:GLAD) Q2 2024 Earnings Call Transcript May 2, 2024
Gladstone Capital Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Gladstone Capital Corporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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. You may begin.
David Gladstone: Thank you, Latanya, that was a nice introduction and hello everybody. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital for the quarter ending March 31, 2024. Thank you all for calling in. We're always happy to talk with our shareholders and analysts and welcome the opportunity to provide updates to the company. I hope we have some good questions today, but we're going to start off first with our General Counsel, Michael LiCalsi. He's going to make a few statements regarding forward-looking statements. Michael?
Michael LiCalsi: 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. Now these forward-looking statements involve certain risks and uncertainties that 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 in our forms 10-Q, 10-K and other documents that we file with the SEC, and you can find them on our Investors page of our website, gladstonecapital.com. And while you're on there, you could also sign up for our email notification service.
You could also find the documents on the SEC's website, which is www.sec.gov. 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 as required by law. Today's call is simply 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. With that, I'll turn the call over to Gladstone Capital's President, Bob Marcotte.
Bob Marcotte: Thank you, Michael. Good morning and thank you all for dialing in this morning. I'll cover the highlights for last quarter before turning the call over to Nicole to review the details of our financial results for the period. So beginning with our last quarter results, fundings last quarter were modest at $45 million given the traditionally slow first quarter and limited new deal buyout activity in the market. And like recent quarters, about two-thirds of the fundings were add-ons to the existing portfolio investments. Prepayments and amortization totaled $15 million, so net originations were $30 million for the period. SOFR rates were unchanged, so the weighted average yield on our investment portfolio was largely unchanged at 14%.
However, average earning assets for the period rose 3.5% resulting in a 3% increase in our total interest income to $23.7 million for the quarter. The combination of increased interest costs from higher average bank borrowings and an increase in non-earning assets offset the increase in earning assets and net interest was unchanged at $17.5 million for the quarter. Management fees rose to $5.7 million in the absence of new deal advisory fee credits and net investment income declined by 9.7% to $10.8 million. However, net realized gains rose to $2.2 million and the combination totaled $0.298 per share or 120% of dividends for the period. In the aggregate, net realized and unrealized gains on the portfolio totaled $12.9 million, which lifted our ROE for the quarter to 22.3% and 17% for the last 12 months.
With respect to the portfolio, our portfolio continues to perform well, with senior debt representing 71% of the portfolio and we ended the quarter with 2 non-earning debt investments which represent $20.4 million at cost or 1.8% of assets at fair value. Appreciation for the quarter of $12.9 million was led by the appreciation of 5 equity positions driven by strong underlying operating performance or preferred share liquidation preference amounts and a $1.9 million realized gain related to residual interest associated with the sale of a former investment. Regarding our near term outlook, I'd like to leave you a couple of comments. We continue to benefit from our incumbent position supporting growth oriented businesses across a variety of industry sectors.
And with PE sponsors facing extended investment hold periods, if they have not hired a banker to sell, they are continuing to seek ways to creatively grow and recapitalize their investments, and supporting these performing businesses we know well is a low risk way to grow our assets. The syndicated loan market for larger well-established credits improved significantly last quarter, which has led to some spread compression for these companies, which we expect will trigger an uptick in prepayment activity for some of our larger positions over the balance of the year. We ended the quarter with conservative leverage position at just below 89% of NAV and ample availability under our bank credit facility. So, we're well positioned to grow our earning assets and fee income to continue to support our shareholder distributions in the coming year.
Now, I'd like to turn the call over to Nicole Schaltenbrand, the CFO of Gladstone Capital to provide some more details regarding the fund's financial performance for the quarter.
Nicole Schaltenbrand: Thanks, Bob. Good morning, everyone. During the March quarter, total interest income rose $700,000 or 3% to $23.7 million with the increase in average earning assets. The weighted average yield on our interest-bearing portfolio was largely unchanged at 14%. The investment portfolio weighted average balance increased to $680 million, which was up $23 million or 3.5% compared to the prior quarter. Other income was $300,000 and total investment income rose $800,000 or 3.3% to $24 million for the quarter. Total expenses rose by $1.9 million as net management fees rose $1 million with lower new deal closing and advisory fee credits and a $700,000 increase in interest expenses from higher bank borrowings. Net investment income for the quarter was $10.8 million, which was a decline of $1.2 million, compared to the prior quarter or $0.2475 per share.
The net increase in net assets resulting from operations was $23.6 million or $0.54 per share for the quarter ended March 31, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of March 31st, total assets rose to $812 million consisting of $792 million in investments at fair value and $20 million in cash and other assets. Liabilities rose as net originations to $380 million as of March 31 and consisted primarily of $254 million senior notes. And as of the end of the quarter, advances under our $244 million credit facility were $117 million. As of March 31, net assets rose to $431 million from the prior quarter end with investment appreciation. NAV rose 3% from $9.61 per share as of December 31 to $9.90 per share as of March 31.
And subsequent to March 31, as I think most of you are aware, we executed a 1 for 2 reverse stock split and our shares of common stock and as a result the approximate NAV per share is $19.80 and the ongoing monthly distributions doubled to $0.165 per share per month. Additionally, after the end of the quarter, we invested $7.3 million in a new proprietary investment, including senior debt and preferred equity. We also received the payoff of our second lien debt investment in Giving Home Health, which included prepayment penalties of $900,000 and a distribution on our warrant position of $2.5 million. We also received the payoff of our second lien debt investment in Gray Matter Systems, which included prepayment fees of $200,000. With respect to distribution, our monthly distributions to common shareholders of $0.165 per common share were announced for the months of April, May and June, which is an annual run rate of $1.98 per share.
The Board will meet into July to determine the monthly distributions to common stockholders for the following quarter. At the current distribution rate for our common stock and with the common stock price at about $21.77 per share yesterday, the distribution run rate is now producing a yield of about 9.1%. And now, I'll turn it back to David to conclude.
David Gladstone: Thank you. And you did a great job Nicole and Bob with earnings for that quarter. Michael, you did a great job too in letting our stockholders know and the analysts know that they're following our company and all about our recent performance. Highlights to me would be the Company continues to scale its investment portfolio and have eclipsed now the $800 million last quarter which is over 37% in the past 2 years while maintaining the lower middle market focus. It's a different discipline than others might see but this is a good yield for this kind of Company with such a good track record. While we saw a small uptick in the non-performing assets, the investment team is on top of the situation and otherwise portfolio continues to perform well having supported significant net and portfolio appreciation again this quarter, which lifted net asset values by share of 6.8%.
And between the high rates and the portfolio performance, GLAD has achieved a return on investment of about 17% for the past year which puts the company in the top end of all the business development company peers that we compare ourselves too. In summary, the company continues to be well positioned as a portfolio and it's in good shape and strong balance sheet and I think that will support us well for further growth and hopefully the growth orientation will increase our dividends as well. Many of these investments are in support of midsize private equity funds that are looking for experienced partners to support their acquisition and growth of their businesses in which they have invested pretty substantial amount of equity. This gives us an opportunity to make an attractive interest paying loans to support our ongoing commitment and to pay cash distributions to our shareholders.
So now, Latanya, if you'll come on, we'll get some good questions from the people that have called in today. Latanya?
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