Gladstone Investment Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Erich: David Gladstone - Chairman and Chief Executive Officer Michael LiCalsi - General Counsel and Secretary David Dullum - President Rachael Easton - Chief Financial Officer
Operator: Greetings and welcome to the Gladstone Investment Corporation Third Quarter Earnings 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, David Gladstone. Thank you, Mr. Gladstone. You may begin.
David Gladstone: Thank you, Cath. 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 taking about for year ending December 31, 2023. Our fiscal year ends in a couple of months. Earnings conference call is for all the shareholders and analysts that follow us and we're listed on NASDAQ under the symbol GAIN and it's for capital gains, gain and then that’s the common stock and there is GAIN and GAINZ and GAINL all 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. Thank you for calling in. We're always happy to provide an update to our shareholders and analysts that provide are view of the current business environment. So there's really two goals here to help you understand what has happened. And even though we don't have a crystal ball, we'll give you our current view of the future.
Erich:
Erich Hellmold: 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're 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 the risk factors listed in our Forms 10-Q, 10-K and other documents that 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 email notification service. You can also find us on Twitter @GladstoneComps and our 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.
David Dullum: Thanks, Erich and good morning, everyone. We are happy to report that GAIN produced very good results for the third quarter of fiscal year '24 which follows on the previous solid first two quarters of fiscal year '24, which of course ends in March. We ended the third quarter of fiscal year '24 on 12/31/2023 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, obviously, we are always looking and 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 then 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 $0.8 per share or $0.96 per share on an annual basis, and we paid an aggregate supplemental distribution of $1.00 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 through new buyouts. Turning to the outlook, the deal flow, as we call it, appears to be picking up somewhat as the sellers who have been holding back over the past six months or so are testing the market. And we do hear from the merger and acquisition groups, the 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 six months or so of last year were 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.
A close up of a businessperson's hand holding a pen as they sign papers contained in a stack on the desk, illustrating the completion of a financial transaction.
But in any event, we continue working on a few new possible buyout deals, and we're 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 finances of the quarter.
Rachael?
Rachael Easton: 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. 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 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 continued to have three 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 three 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 $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 a $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 remained 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 of supplemental distributions. We look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of our exits. 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 $2.20 per common share, or a yield of about 16% using yesterday's closing price of $13.96 [ph]. This covers my part of today's call. Back to you, David.
David Gladstone:
Erich,: I just think Gladstone Investment is an attractive investment for investors at this point in time. You've got monthly distributions and then you've got supplemental distributions from the potential capital gains and 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.
Operator: Thank you. [Operator Instructions] Our first question comes from Mickey Schleien from Ladenburg Schlein from Leidenberg Capital. Please proceed.
