Greetings, welcome to the Gladstone Capital Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now turn the call over to Mr. David Gladstone, Chief Executive Officer. Mr.

Gladstone, please go ahead..

Thank you, Rob, nice introduction. Good morning, everybody. This is David Gladstone, Chairman. This is the quarterly earnings conference call for Gladstone Capital for the quarter ending March 31, 2021. Thank you all for calling in. We're always happy to talk with our shareholders and those analysts that follow us.

We welcome the opportunity to give you an update. Bob Marcotte, the President will be on in a minute, but first we’re going to need to hear from our General Counsel, to talk to you about the legal warnings about this presentation.

Michael?.

Thanks, David, and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and 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.

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 Forms 10-Q, 10-K, and other documents that we file with the SEC. You can find all these on the Investors page of our website www.gladstonecapital.com.

You could also sign up for email notification service there, or you can find the documents on the SEC's website and that's www.sec.gov. 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 this on the Investors page of our website. With that, I'll turn the presentation 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 ended March 31, 2021. Originations for the quarter were strong, totaling $72 million, including three new proprietary investments.

However, we had three exits during the period, which totaled $48 million, so net originations came in at $24 million for the period. Interest income declined slightly to $11.9 million over the prior quarter, driven mainly by a slight decrease in the weighted average portfolio yield.

Prepayments and dividend income rose with repayments and lifted total investment income to $12.9 million, which was unchanged relative to last quarter. Borrowing costs increased on the quarter with the closing of an additional $50 million add-on to our five-year senior notes offered last quarter. The add-on was attractively priced to yield 4.28%.

And while it reduced our lower cost floating rate line borrowings, we expect floating rate borrowings to increase with asset growth, and should we elect to call our higher cost senior notes due in 2024 later this year.

In addition, we have now eliminated much of the risk associated with rising short-term interest rates, given most of our assets are currently supported by interest rate floors. Administrative costs and net management fees declined, which contributed to a drop in total expenses and net investment income rose to $6.4 million or $0.195 per share.

Net assets from operations rose to $21.3 million or $0.65 per share, which included $16 million of net unrealized portfolio appreciation on the quarter, and $1.2 million in unrealized loss, associated with the call of our 2023 senior note issue. For the period, NAV rose $0.50 per share or 6.6% to $8.11 per share as of March 31.

With respect to the portfolio, our portfolio continues to perform well, and most of our investments are past any COVID-related effects, as indicated by the broad base asset appreciation last quarter. In addition, the cumulative portfolio appreciation over the past four quarters has now eclipsed the COVID-related markdowns of the March 2024.

While our weighted average risk rating for the portfolio dropped slightly on the quarter, this was primarily due to the repayment of two very highly-rated credits in the period.

For the quarter, we did not experience any payment defaults in our one non-accrual investment, which represents 1.5% of our portfolio at fair value has seen a material uptick in business volumes, and we're optimistic that it will transition to earning status this quarter.

For the quarter, three of the top four appreciation contributors, which represent roughly 60% of the appreciation on the quarter are associated with our equity positions in these businesses, and are supported by pending sales.

The asset mix as the end of the quarter shifted materially in favor of first lien loans, which rose 8 points to 58% of cost, while, second lien exposure declined to 32% of the portfolio at cost.

Looking forward, last quarter was active for originations as we absorbed a number of expected repayments, and we're pleased to be able to achieve net investment portfolio growth.

We expect much of the same in the near-term, as market valuations and private market liquidity are driving an elevated level of refinancing and recapitalization activity, and several sales processes differ from 2020 are nearing conclusion.

As we have reiterated in the past couple of quarters, you can expect us to continue to target leverage in the vicinity of one-to-one debt to equity. However, the scale of the portfolio appreciation last quarter contributed to our leverage remaining below our target range.

Based on our modest leverage position and reduced secured line borrowings, we have an unprecedented level of debt capacity to take on additional yielding investments to enhance our earnings and dividend coverage.

And now I'd like to turn the call over to Nicole Schaltenbrand, the CFO for Gladstone Capital to provide details of the quarter’s funds financial results for the quarter.

Nicole?.

Thanks, Bob. Good morning, everyone. During the March quarter, total interest income declined $200,000 or 1.6% to $11.9 million, primarily due to a small decline in the weighted average yield. Investment portfolio weighted average balance increased slightly by $10.7 million or 2.4% to $454.1 million, compared to the December 31st quarter.

The weighted average yield on the interest bearing portfolio declined by about 20 basis points to 10.6% compared to the prior quarter, with the increased population of first lien loan.

Other income rose by $200,000 compared to last quarter, with the elevated level of prepayment fees realized, and as a result, total investment income for the quarter was unchanged at $12.9million.

Total expenses were largely unchanged declining $100,000 or 1.8%, as higher interest costs associated with the additional note offering were mitigated by a decline in administrative expenses, and a reduction in management fees, associated with the elevated originations during the quarter.

Net investment income for the quarter ended March 31 was $6.4 million, which was an increase of $100,000 compared to the prior quarter, or $0.195 per share and covered 100% of our shareholder distribution.

The net increase in net assets resulting from operations is $21.3 million or $0.65 per share for the quarter ended March 31, 2021, compared to $12.3 million or $0.38 per share for the quarter ended December 31, 2020.

The current quarter increase is driven by $16 million of net portfolio of appreciation, as Bob covered earlier, and a $1.2 million loss that we recognized associated with the early redemption of our 2023 notes.

Moving over to the balance sheet, as of March 31, total assets were $504 million, consisting of $493 million in investments at fair value, and $11 million in cash and other assets.

Liabilities rose to $233 million as of March 31, and consisted primarily of $150 million of newly issued 0.625% senior notes due 2026, and $38.8 million of 5.625% senior notes due 2024. As of the end of the quarter, the advances under our line of credit were $41 million and our weighted average borrowing costs of 4.6%.

Net assets rose by $23.8 million from the prior quarter-end with $14.9 million of net realized and unrealized portfolio appreciation, and the issuance of approximately 906,000 common shares under our ATM program, which generated net proceeds of $8.9 million. NAV rose 6.6% from $7.61 per share at December 30 to $8.11 as of March 31, 2021.

Our leverage as of March 31st was unchanged from the prior quarter-end at 86% of net assets. And we currently have an excess of $100 million of borrowing availability under our line of credit, and expect to be able to announce the renewal and extension of our credit facility in the coming weeks.

With respect to distributions, Gladstone Capital has remained committed to paying its stockholders in cash distributions, and in April, our board of directors declares monthly distributions to our common stockholders of $0.065 per common share, per month for April, May and June, which is an annual rate of $0.78 per share.

In addition, effective April 1, 20 21, the advisor extended the agreement to reduce the incentive fee payable by increasing the hurdle rate, above which the incentive fee accrues, from 7% to 8%, through March 31, 2022. This incentive fee reduction serves to increase the net earnings available for stockholder distributions.

And, as the prevailing interest rates recover, we expect to revisit the level of distributions and restoration of the hurdle rate and incentive fees with the management company. The board will meet in July to determine the monthly distribution to common stockholders for the following quarter.

At the current distribution rate for our common stock, and with the stock price at about $10.95 per share yesterday, the distribution run rate is now producing a yield of about 7.1%, 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..

All right. Thank you, Nicole. That was a good presentation. Bob and Michael, you all did a great job in informing our stockholders and analysts that follow our company. In summary, it was a very busy first-half of the fiscal year for Gladstone Capital and the company did well, had a busy six months.

For the three months, the team originated about $72 million of new attractively priced investments, and lifted the asset base now over $500 million.

Bob and the team also managed to keep non-performing assets low at 1.5% of investments, and posted a substantial level of assets appreciated, which lifted the net asset value sometimes considered our book value by $0.50 to about 6.6% in the last quarter.

Enhancing the stability of the company's capital position and flexibility by issuing another $50 million, a very attractive price senior term loans. It's nice to be in this position, because you never know what the economy is going to turn into.

Maintaining leverage at a low end of the company's peers provides a capacity to take additional middle market investment opportunities, and grow their earnings in the coming quarters. In summary, the company continues to invest in midsize private businesses with good management.

Many of these investments are supported by midsize private equity funds that are looking for experienced partners, like our team here. And this helps them get their acquisitions done and grow their businesses, and that we've and they have invested in.

This gives us an opportunity to make attractive interest paying loans to support our ongoing commitment to pay cash distributions to shareholders. In short, it was a very good quarter. Now Rob, if you'll come on and tell callers how they can ask questions about the company..

Sure, Mr. Gladstone. [Operator Instructions].

No questions..

No questions at this time Mr. Gladstone..

Okay, so you'll just have to wait till next quarter to ask your questions. We appreciate you all calling in, and we'll see you next quarter. That's the end of this meeting..

Thank you..

Thank you. This will concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..