Prepared remarks
Greetings and welcome to Gladstone Investment Corporation Fourth Quarter and Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Thank you. Please go ahead.
Well, thank you, Donna, and good morning to everybody out there who's listening to this. This is David Gladstone, Chairman of Gladstone Investment. This is the earnings conference call for the fourth quarter and fiscal year end March 31st, 2025 for shareholders and analysts of Gladstone Investment listed on NASDAQ under the trading symbol GAIN or capital gains for us for our common stock. We have some preferred stock GAINN and GAINZ and GAINL and GAINI. Those are the four registered notes that we have. Thank you all for calling in. We're always happy to provide updates to our shareholders and analysts and provide our views on the current business environment. The two goals for this call are to help you understand what happened and also give you some current views on what I think the future will be like. Now we hear from our General Counsel and Secretary, Michael LiCalsi. Mike?
Yes, that's right. Speaking of the future, 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, although they 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 the risk factors that we have in our 10-Q, 10-K and other documents we file with the SEC. You can find them all on the investors page of our website, gladstoneinvestment.com, or you can also find them on the SEC's website, 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.
Please also note that any past performance is never a guarantee of future results. We ask that you visit our website, once again, gladstoneinvestment.com, and sign up for our email notification service while you're there. You can also find us on Twitter with the keyword GladstoneComps and on Facebook with the keyword The Gladstone Companies. Today's call is an overview of our annual results through March 31, 2025. Please review our press release and Form 10-K for more detailed information. With that, I'll turn it over to Dave Dullum, President of Gladstone Investment. Dave?
Hey, Mike, thanks very much, and good morning to everyone. We are again pleased to report that GAIN produced very positive results for the fourth quarter and the fiscal year ended March 31, 2025. For the fiscal year, we generated adjusted net investment income of $0.97 per share, which fully covers our $0.96 per share annual dividend. We also increased the total fair value of our portfolio as of March 31, 2025, to $979 million, which is up from roughly $921 million at the prior year-end, though slightly lower than the $1.1 billion we reported at the end of last quarter. This slight decrease quarter-over-quarter in assets actually resulted from a couple of positive things. We had an increase in assets from new buyouts we made, but we also reduced that by the successful exit of one of our existing portfolio companies, which generated significant realized capital gains of $19.8 million. Additionally, we had some movement in the net valuation of our portfolio, which was a function of some increases in multiples and slight decreases in EBITDA, but all those movements were positive in some regard.
During the year, we added experienced talent to our investing team in support of our continuing portfolio growth and to help manage our current portfolio of 25 operating companies. For the year, we invested a total of $221 million, which is up from $184 million in the prior year. This included investments in four new portfolio companies, some add-on investments, and we also completed a dividend recap with one of our portfolio companies, Educators Resource, which generated both dividend income and provided for an additional interest-bearing investment in that company. Throughout the year, we maintained our monthly distribution to shareholders of $0.08 per share, which equates to the $0.96 per share annual dividend I mentioned. We also paid a supplemental distribution of $0.70 per share, which aggregated to $1.66 per share for the year. Further, in April, subsequent to the year-end, we declared an additional $0.54 per share supplemental distribution.
These supplemental distributions are a direct result of our buyout strategy and the goal of rewarding our shareholders with meaningful supplemental distributions from the realized capital gains generated on the equity portion of our exits, while we still maintain and try to grow our monthly distributions from operating income. Since inception in 2005 and through March 31, 2025, we've invested in 62 buyout portfolio companies for an aggregate of approximately $2 billion, exited 33 of these companies, resulting in total investments currently valued at $979 million, while generating approximately $353 million in net realized gains and another $45 million in other income on exits. Turning to the outlook, which is obviously important these days. From our perspective, there continues to be good liquidity in the M&A market. It is a very competitive environment, though we have now added variables regarding tariffs, which are impacting our analysis when evaluating new opportunities.
We are competing effectively for new acquisitions that fit our buyout model, while being careful in assessing that risk and forecasting the tariff impact on costs, customer demand, and supply chain dynamics. It's not easy, but we have to take a hard look at these actual aspects when evaluating a new deal. Not every business is affected in the same manner, and that creates both opportunities and uncertainties. With that said, we are very far along and expect to close two new acquisitions shortly, if not by the end of this quarter. We are in various stages of review and diligence on several new opportunities, and I am cautiously optimistic for our new buyout activity during the year. Looking at our existing portfolio, we do have a few companies that are consumer-focused, and while they've had very good results to date, we remain cautious due to tariff costs on the ultimate consumer prices that may have to be passed through, potentially impacting demand and margin for those companies.
We are working with all our companies in evaluating supply chain alternatives and production strategies to navigate the current environment. The recently announced pause on tariffs provides a bit of relief, although we must see what the permanent solution will be. We will continue to be cautious, but we believe we have a fairly good handle on how it impacts our existing portfolio companies. To sum up, our current portfolio is in good shape. We have a strong liquid balance sheet, good buyout activity, and prospects for continued earnings and distributions over the next year, albeit while navigating the challenges of the uncertain economic landscape. I'll turn it over now to our CFO, Taylor Ritchie, to discuss more detailed results.
Thank you, Dave, and good morning everyone. Looking at our operating performance, we had a strong finish to the fiscal year, generating total investment income of $93.7 million, up from $87.3 million in the prior year. This increase was primarily driven by a $4.5 million increase in dividend and success fee income following the successful exits of two portfolio companies, along with a $1.8 million increase in interest income. The increase in interest income was primarily due to the increased weighted average principal balance of our interest-bearing portfolio, partially offset by a decrease in the weighted average yield. We ended the year with adjusted net investment income of $35.5 million or $0.97 per share, up slightly from $34.5 million or $1 per share in the prior fiscal year, fully covering our annual regular monthly distribution of $0.96 per share. Focusing on the fourth-quarter results, we generated total investment income of $27.5 million, up from $21.4 million in the prior quarter, primarily due to an increase in dividend and success fee income, a result of the exit of our investment in Nocturne and the recapitalization of Educators Resource, as well as an increase in interest income.
Net expenses for the quarter were $20.3 million, up slightly from $20.2 million in the prior quarter. This increase was mainly due to higher interest expense and a decrease in credits to fees from our adviser, driven by significant new investment activity in the prior quarter. Additionally, base management fee expenses, income incentive fees, and bad debt expenses increased compared to the prior quarter. These expense increases were partially offset by a decrease in capital gains-based incentive fees resulting from realized and unrealized gains and losses during the quarter, as required under US GAAP. This resulted in net investment income for the quarter of $7.2 million compared to $1.2 million in 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 $9.4 million or $0.26 per share, up from $8.6 million or $0.23 per share in the 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, as of March 31, 2025, we continue to have four portfolio companies on non-accrual status. Overall, there are no portfolio-wide credit concerns, and we continue working closely with these companies and their management teams to get them back on accrual status or exit the investments when possible. In particular, we continue to see improvement in two of these portfolio companies as they are back to generating profit. Excluding the $24.3 million reversal of unrealized appreciation upon the exit of Nocturne, valuations in the aggregate were up $14.1 million across the portfolio. This unrealized appreciation was driven by higher valuation multiples across the portfolio and increased performance at a number of our portfolio companies, which was partially offset by decreased performance at a few others.
Our NAV increased to $13.55 per share compared to $13.30 per share at the end of the prior quarter. The increase was primarily the result of $0.57 per share in net realized gains and $0.20 per share in net investment income. These increases were partially offset by $0.28 per share of net unrealized depreciation and $0.24 per share of distributions paid to common shareholders during the quarter. We believe that maintaining liquidity and flexibility to support and grow our portfolio is key to our continued success. During the year, we issued $126.5 million of publicly traded notes and completed the upsize of our credit facility to a total commitment of $270 million. As of yesterday's release, we had $214 million in availability on our line of credit. Additionally, we raised approximately $2 million in net proceeds under our common stock ATM while prices were accretive to NAV. We believe that the recently issued notes, the additional available capital from our line of credit, and the ability to raise equity capital through our common stock ATM will allow us to drive portfolio growth as new buyout opportunities emerge and weather any potential economic slowdowns due to tariffs or other economic uncertainties.
Overall, our leverage remains in a strong position with an asset coverage ratio as of March 31, 2025, of 204%, providing a cushion to the required 150% coverage ratio. Consistent with prior quarters, distributable book earnings to shareholders remained strong. We ended the fiscal year with $55.3 million or $1.50 per share in spillover, sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 per share and the recently declared $0.54 per share supplemental distribution to be paid in June. We will look to continue funding future supplemental distributions as we recognize realized capital gains on the equity portion of future exits. Using the monthly distribution run rate of $0.96 per share per year and $0.70 per share on supplemental distributions paid in fiscal year 2025, our aggregate estimated fiscal year distributions would yield about 11.3%, using yesterday's closing price of $14.05. This covers my part of today's call. I'll now hand it back over to you, David, to wrap us up.
All right. Taylor, very nice. You, Dave, and Michael provided good information to the shareholders that you've been delivering in this call, and the 10-K filed with the SEC yesterday should bring everyone up to date. The team has reported solid results for the quarter ending March 31, 2025, including new investment activity and significant realized gains generated during the year. We believe the team is in a great position now to continue these successes. I often ask myself, I wonder if anyone knows that there's a $0.54 dividend. That record date is June 4th, and the payment date is on June 13th. When you add that to what's being paid monthly, you get a great return. I believe Gladstone Investment is an attractive investment for anyone seeking continuous monthly distributions and supplemental distributions from the potential capital gains and other income generated by this company. The team hopes to continue to show you a strong return on your investment, just like we did last year. But now let's stop and ask the operator, Donna, to let some people come in and ask us questions. We'd like all your questions, Donna?
Questions and answers
Thank you. The floor is now open for questions. Our first question is coming from Mickey Schleien of Ladenburg. Please go ahead.
Yes, good morning everyone. Dave, I appreciate your comments on the tariff issue, but I was hoping you could give us some sense of, on a quantitative basis, how much of your portfolio does have exposure to tariff risk?
Yes, I guess, Mickey, the correct answer is probably most of them in some regards. Certainly, we have a couple of companies that currently have produced and manufacture a good part of their product in China, and some of that has already started being shifted. That's a relatively small portion actually of the portfolio that is directly affected in that way. The others that could be impacted were obviously things around steel and issues like that. So overall, the majority of the companies are affected in some regard, but with the exception of one or two, none are overly concerning to us. Those with a direct impact have already started working on, and they've been advancing their product ahead of the tariffs to some degree. So there's been a buildup of inventory, which affects working capital positively before some of these prices hit. How the supply chain evolves over the next months will also be important. It's a long answer, but everyone will be impacted to some degree, and the companies that are primarily producing a product in China are just a few, and we're already taking steps to mitigate that. These companies are doing well, and we are not overly concerned about them.
Okay. I think I understand. Thanks for that. And Dave, in the consumer sector, how much exposure does the portfolio have to lower-income customers, which seems to be the group that is the weakest?
I wouldn't honestly know how to answer that question. When you look at the consumer-type products we have, like specialty toys, which go through retailers like Walmart, I wouldn't necessarily classify those as higher or lower income per se. I don't think we have any direct exposure to much lower income demographics. Our products are more normal discretionary items, and the movement in tariff costs to our companies is actually relatively small in the grand scheme. Even though a 145% tariff sounds high, if we return to a 40% tariff on a product sold for $10, it might be priced at $12 to $14. So, while there is some cost impact, we are not talking about items that will be egregiously overpriced, making them undesirable.
I understand. Dave, a couple of quarters ago, you were somewhat optimistic on the outlook for Hobbs going back on accrual around now. Obviously, that hasn't happened yet. I think there may have been something in the prepared remarks, but there was some background noise, so it was hard to hear. Could you update us on the outlook for Hobbs and other non-accruals?
Yes. The comment made by Taylor earlier is that we still have four companies on non-accrual status, and actually three of them are all profitable, including Hobbs. Hobbs has continued to improve its profitability. We still remain optimistic that we will bring them back on accrual, likely by the end of this year. Two of the other companies are profitable, moving in the right direction, and we are confident about their status. Overall, I'm optimistic, as these non-accruals are not impacting the results of the portfolio, and we have achieved solid outcomes regardless of this situation.
And Dave, when you talk about profits, are you referring to EBITDA, net income, or operating income? What are you referring to?
Yes, we generally look at EBITDA as it is an important measure of cash flow for these companies. When I refer to profitability, I mean gross margins and overall operating income, as EBITDA is where we generate value for our companies. For Hobbs, as it continues to improve, we believe additional investments may be considered to enhance its performance. It's well managed and doing well.
So, generally optimistic on the non-accruals, but on the flip side, what's going on with Horizon still marked at a fairly distressed level, doesn't seem to be going in the right direction?
Actually, Horizon is profitable, and its EBITDA has continued to improve. About two years ago, we conducted a dividend recap with Horizon, which was a positive event. However, we encountered some drop-off in EBITDA due to customer-related issues; they service clients like Hertz in the car rental space. Despite this, it's performing reasonably well given the circumstances, and we are working on adjusting the leverage scenario to support continued growth.
Understand. Those are all my questions, Dave. Thanks for your time this morning.
Yes, sir. Thanks.
Hey, Donna, do we have another question?
We do. The next question is coming from Erik Zwick of Lucid Capital Markets. Please go ahead.
Thanks. Good morning everyone. I wanted to start with a follow-up to one of your prepared remarks where you indicated that you're cautiously optimistic for buyout activity in the current year. Could you address what you see that gives you optimism, and what makes you cautious, other than current market volatility and economic uncertainty?
Sure. Thanks, Erik. We are cautiously optimistic due to a couple of acquisitions we are close to closing. From our standpoint, we are reviewing a backlog of companies, which includes initial reviews and discussions with management. We have a few that are nearing due diligence stages, which is promising. Our caution stems from the values of the companies in that backlog due to economic uncertainties, which we believe have created more favorable valuation. We are also conducting thorough analysis on tariff impacts, but we are actively pursuing closures on new opportunities. We had a solid year last year and aim to grow our number of investments similarly this year.
Yes, that was very thorough. Thank you. Moving on to Educators Resource and the dividend recap, could you walk me through the rationale for this strategy and what the new capital will help accomplish? Also, are there any other dividend recap opportunities in your portfolio currently?
Currently, I don’t see any other dividend recap opportunities, but we're always evaluating. When we do a dividend recap, it’s around management interests; they often have skin in the game. It provides them liquidity while confirming that we believe in the business's fundamentals. We also bring in more capital through some leverage, generating income from that investment while giving management the chance to withdraw some capital. In the case of Educators Resource, we felt confident in their future and management's capabilities, so we chose to reinvest our resources.
Perfect. I missed the spillover amount in your remarks. Can you repeat that?
Sure. We ended the year with $55.3 million of spillover, which translates to currently $1.50 per share. This amount is sufficient to cover the current monthly distribution run rate of $0.08 per share for an annual total of $0.96, as well as the recently declared $0.54 supplemental distribution to be paid in June.
Thank you so much for taking my questions today.
Thanks, Erik. I want to note that while we envision a healthy buyout activity, we are not part of the giant buyout game, which appears stalled due to the lack of liquidity. We're positioned to close deals quickly when we have the opportunity. Any other questions?
None at this time, sir. I would like to turn it back over to you for closing comments.
Thank you all for listening to our report. Unfortunately, we didn't receive enough questions, and we wish you would think of more inquiries for us to address. We appreciate your attendance and look forward to seeing you next quarter. That's the end of this call.
Ladies and gentlemen, thank you for your participation and interest in Gladstone Investment. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.