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Gladstone Capital Corporation (NASDAQ:GLAD)

F1Q13 Earnings Call

January 30, 2012 8:30 am ET

Executives

David J. Gladstone – Chairman and Chief Executive Officer

George Stelljes III – President and Chief Investment Officer

David Watson – Chief Financial Officer

Analysts

Greg Mason – Stifel, Nicolaus & Company

Casey J. Alexander – Gilford Securities, Inc.

Operator

Good morning, and welcome to the Gladstone Capital First Quarter ended December 31, 2012 Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

And now, I would like to turn the conference over to David Gladstone. Please go ahead.

David J. Gladstone

Well, thank you Emily, and thank you all for joining us this morning. This is David Gladstone, the Chairman, and this is our quarterly earnings call for shareholders and analysts of Gladstone Capital Common stock trading under the symbol, GLAD, and our Preferred stock trading under the symbol, GLADP for preferred.

Thank you all for calling in. We love these moments when we are able to talk to shareholders about the company, and we still have many more of these calls. Hope you will take an opportunity to visit our website, www.GladstoneCapital.com, where you can sign up your e-mail notifications, so that you can receive information and timely information about what’s going on at the company. And please remember that, if you happen to be in the Washington D.C. area, we are here in McLean, Virginia and you have an open invitation to come by and see us and say, hello. You will see the finest people in the business.

And remember that we are holding our Annual Shareholders Meeting on Thursday February 14, at the Hilton, McLean Tysons Corner at 7920 Jones Branch Drive, in McLean, Virginia. So please remember to vote your shares for your proxy proposals that are coming up for approval, we need to get the votes in.

Now, I need to read a statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements with regard to the future performance of the company.

These forward-looking statements inherently involve certain risks and uncertainties and other factors even though they’re based on our current plans and we believe those plans to be reasonable. Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may, and similar expressions.

There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by the forward-looking statements, including those factors listed under the caption, “risk factors” in our 10-K and 10-Q filings and in our legislation statements as filed with the Securities & Exchange Commission. All of those can be found on our website at www.gladstonecapital.com and also on the SEC website.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of the conference call. Please also note that past performance or market information is not a guarantee of future results.

Well, first of all we’ll start off by hearing from Chip Stelljes, President and a Board member of the company. Chip is also the Chief Investment Officer of the company; company’s publicly traded funds with the exception of Gladstone land. And through our press release and 8-K in November of last year, we notified everyone that Chip intends to resign from the company and his position is in other Gladstone publicly traded funds as sometime in the very near future. We will be working with him on a new type of fund for him to manage, so this may be the last report from Chip, and he will have to listen to media for the reports as I used to do. We have two possible firms that we are selecting from to search for Chip’s replacement as President of this fund. If you have any idea or resumes, please send them into me.

And now Chip, would you give a report on the past quarter?

George Stelljes III

Sure, good morning. During our last our first fiscal quarter ended December 31, 2012, we had a lot of new investment activity, which we are excited about. We also experienced several early payoffs at par which provided additional liquidity to pay down our line of credit and invest in new portfolio, also providing $1.1 million in success fees and $0.5 million in prepayment fees this quarter.

Overall, net production was slightly down this quarter as compared to the quarter in September 30. We invested in aggregate of $50.2 million in six new portfolio companies, and an aggregate of $1.6 million through existing portfolio companies through existing revolver draws.

Net revenue portfolio company’s payoff early at par for an aggregate of $47.7 million. Our two proprietary investments are in the quarter were the following; $14 million in combined senior, subordinated debt and equity securities and AG Transportation Holdings, which is a regional food-grade liquid and dry bulk carrier providing a variety of bulk transportation services, and $19.5 million senior subordinated debt Allen Edmonds Shoe Corporation, which is a premier women footwear and accessories manufacturer.

In addition, we sold one non-accrual investment for net proceeds of $5.9 million, which was $4.3 million above the prior quarter valuation and we’re off another non-accrual investments valued at zero during the quarter and combined cost basis of these two investments was $9.2 million.

During the quarter, we continue to manage our current portfolio by working on our pipeline for new deals that fit within our current investment strategies and objectives to one, achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time. And two, provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains.

Our aim is to invest approximately 95% of our portfolio in debt securities and 5% in equity securities. Our focus continues to be making consistent distributions to our stockholders that will grow over time. (inaudible) December 31, 2012, we’re pleased to report that we were able to amend our credit facility to remove the minimum LIBOR floor of 1.5%. This will provide a lower cost of capital from making the investments going into the future, the incurred fees of $600,000 related to this amendment and all of the terms of the credit facility remain unchanged.

In addition, on January 18, 2013, the Securities and Exchange Commission declared our registration statement effective. This registration statement allows us to (inaudible) some securities to raise additional capital into it.

Since December 31, 2012, we’ve made two new investments for a combined $6 million and invested $200,000 in existing portfolio through existing revolver draws. We’ve also received $900,000 scheduled and unscheduled principal prepayments.

We continue to see increased competitive pressure in the BDC and assessment company marketplace for senior and subordinated debt resulting in lower yields for increasingly riskier investments. In spite of this increased competition, we’ve maintained a weighted average yield on our accruing investments of approximately 11.5% for the past three quarters. We continue to work hard to fill our pipeline with solid yield and provide good returns.

During the fourth quarter of 2012 fiscal year the SEC approved an exemptive order that allows us to co-invest with our affiliated BDC funds, Gladstone Investment Corporation. And this provides origination opportunities on a broader range of companies and flexibility to invest in larger companies. To date, we’ve not made co-investments under this order, but we are looking for the right opportunities.

Additionally, in October 2012, our Board of Directors approved limited revisions to our investment objectives and strategies, which went into effect on January 01, 2013, and all of our current portfolio investments fit within the [stick and this can] provide with our objectives and strategies and no change will leads to our current portfolio as a result of the revision.

As of December 31, 2012, our portfolio consisted of loans to 48 companies in 27 states in 21 different industries. Our portfolio is comprised of approximately 97% in debt investments and 3% in equity investments at fair value as of December 31, 2012. We aim to have a diversified portfolio by industry classification and by geographic region and are not too heavily invested in either one of those specifically nor we invested significantly in any one portfolio company.

We’re constrained in certain concentration limits in our portfolio by our credit facility as well in our regulated investment company passed under IRS rules, which we have met and continue to be as of December 31, 2012.

As of December 31, 2012 we had cumulative unrealized depreciation of $86.2 million, a decrease of $4.9 million quarter-over-quarter. Of our current investment portfolio, 18 portfolio companies have originated through December 31, 2007, which represents approximately 51% of the entire cost base of portfolio for valued at 59% of cost include all of our non-accruals – for the 30 portfolio companies originated after 2007, which represented approximately 49% of the power cost basis of our portfolio valued at 93% of cost.

While we’re disappointed in the size of the amount of cumulative unrealized deprecation, we still believe we will be able to recover a meaningful portion value of our portfolio. The cumulative unrealized depreciation on our investments does not have an impacted on current availability to pay distribution to stockholders, although it maybe an indication of future realized losses which could ultimately reduce our income available for distribution. On a related note, the number of our non-accrual investments is still higher. We consider acceptable, even though we’re able to decrease the number of non-accruals by June this quarter. All the remaining four non-accrual investments were originated in 2006 and 2007 and likewise were significantly impacted by the recession. We’ll continue to work with fix these companies and recover a wining portion of our capital.

We reduced the number of non-accrual coming by two from last quarter due to the sale of Viapack Inc. for net proceeds with $5.9 million and the write-off of Access Television Network, Inc. In the quarter ended December 31, 2012, we recognized realized losses with $2.4 million on the sale of Viapack and $900,000 on the write off of Access. We had exhausted all viable strategies and turn them around and though this was a prudent step of two investments and in fact, Viapack had sold that value that was $4.3 million and probably we had that marked as September 30, 2012. We remain diligent and focused on managing our current portfolio until we’ve been able to stabilize and improve some of non-accrual companies, which was all due to unrealized appreciations from the company during the quarter.

In addition, subsequent to December 31, 2012 we signed a purchase agreement to sell another one of our non-accrual companies which we expect to close in the second quarter of our fiscal year. The four investments classified as non-accruing at a cost basis of $56.6 or about 15.4% for the cost basis of all debt investments of our portfolio as on December 31, 2012. From a fair value perspective, the non-accruals fair value represents $5.9 million. It’s about 2.3% of the fair value of all debt investments in the portfolio at quarter end. No new non-accrual investments have been added for the last five quarters and none of it added into the quarter.

Regarding interest rate risk, our portfolio continues to have a high concentration of variable rate loans approximately 59% as of December 31, 2012. These variable rate loans usually have a minimum LIBOR Floor so that the effects of the declining interest rates which – certainly seen over the last number of years are mitigated when rates begin to increase, we should see higher income. This is consistent with last quarter and our approach to managing interest rate risk in general. All of our variable rates loans generally have sales associated with the one month LIBOR rates.

Weighted-average floor on our variable rate loans was 2.5% in relation to one month LIBOR with an average margin of 8.8% resulting in all of average rate of at 11.3% on our income producing investments as of December 31, 2012 as compared with 11.3% as of September 30, 2012. It means the quality of our income is consistently good. We generally limit income generated from paving time or original efficient discount structures and these generate non-cash income and have represented less than 1% of our taxable income over the last two years.

On the other hand, our investors have seen a high level of success fee income recorded over the last several quarters, particularly $1.1 million earned in the first quarter of 2013 and a combined total of $4 million earned during fiscal year 2012 all related to portfolio content that exited from payoffs during this period.

Success fees are contractually due up on a change of control of the portfolio company generally through a sale and are not recognized until we see it in cash. And we do not include success fees in our reported year since they’re not consistent with your actual current cash run rate. As of December 31, 2012, approximately 42.6% of our transparent securities had success fee related to them. Success fees have a weighted average contractual accrual rate of 2.6% per annum on their accruing principal balance. And as of December 31, 2012, we had a current off balance sheet contractual success fee receivable – receivables down approximately $12.2 million on our accruing debt investments that would be owed to us based on our current portfolio, gets paid off and a change of control occurs.

Because the approvals are not reported in our income statement or balance sheet, the recognized success fee income is earnings in our income statement at the time of receipt. Due to the contingent nature, there are no guarantees that we will be able to collect all these success fee looking at the timings of such collections.

As for the marketplaces, the senior and senior subordinate at that marketplace for larger middle market continues to improve. We believe that there are encouraging economic trends in those marketplace coupled with decent liquidity.

The market for loans to come into the lower end of the middle market which we seek to invest, our capital have seen more competition from banks, competitions generally coming from other public funds like firms and many small private funds. We still feel like we have a good market opportunity. A focus on our pipeline, we’ll be able to show our shareholders some new quality deals over the next several quarters before turning solid income growth. We believe we’ve got the capital to deploy for the right opportunities in line with a definite strategy and objectives.

And with that, I’ll turn the presentation back to David.

David J. Gladstone

Thank you, Chip. That was a good report. Now, let’s turn to the financials for the quarter ending December 31, 2012 and our first quarter for the fiscal year 2013 and for that, we hear from David Watson, Chief Financial Officer and Treasurer of the company.

David Watson

Hi, good morning everyone. Yesterday, we released our first fiscal quarter earnings press release and filed our Form 10-Q which I hope you’ve had a chance to review. On this call, I will provide a financial overview of the quarter and I’ll start with the income statement. For our first quarter ended December 31, 2012, net investment income was $4.9 million or $0.23 per share as compared to the prior quarter ended September 30, 2012 a $4.5 million or $0.22 per share. The 7% increase in net investment income was primarily due to a decrease in total operating expenses of $500,000 offset by decrease in total investment income of $200,000.

Operating expenses decreased in the three months ended December 31, 2012 as compared to the prior quarter primarily due to a decrease in interest expense resulting from decreased borrowings on our line of credit. Interest income on investments decreased $600,000 quarter-over-quarter due to several early pay offs at par occurring during the fourth quarter of fiscal year 2012 and the first quarter of fiscal year 2013.

Other incomes increased by $400,000 quarter-over-quarter due to an increase in success of prepayment fees resulting from the early pay offs during the quarter in December 31, 2012. Please keep in mind that other income is relatively high for both quarters when compared to historical norms and that this type of income can be very uneven and unpredictable.

100% of common and preferred stock distributions paid in the three months ended December 31, 2012 and frankly over the last two years were covered by net investment income which highlights our commitment to prudent growth and building shareholder value.

Let’s turn to realized and unrealized changes in our portfolio. Realized gains and losses come from actual sales or disposals of investments. Recoding unrealized appreciation and depreciation as the U.S. GAAP requirement to mark our investments differed value on our balance sheet, but the change fair value from one period to the next recognized in our income statement, unrealized appreciation and depreciation as a non-cash event.

Regarding our realized investment activity, we recorded a net realized loss of $3 million in the first quarter and this primarily related to the sale of Viapack for $2.4 million in the line up of Access TV of $0.9 million. These realized losses were partially offset by aggregate realized gains of $0.2 million from unamortized discounts from several early pay offs during the quarter.

From an underline stand point for December 2012 quarter end, we recorded net unrealized appreciation of the investments, an aggregate amount of $4.9 million which included the reversal of $7.6 million in combined aggregate unrealized depreciation primarily related to the sale, again of Viapack and Access TV. Excluding reversal, we had $3.2 million in net unrealized depreciation for the three months ended December 31, 2012. And this is primarily driven by decline of certain portfolio company’s financial and operating performance.

Our entire portfolio, fair valued at 75.8% of cost as of December 31, 2012 and this is relatively consistent with the 75.1% of costs as of September 30, 2012. The Q4 net unrealized appreciation of our investments largely related to the investments made in 2007 and earlier as Chip does not impact our ability to pay distribution to stock holders, but does indicate that the test value is low and maybe neutralize losses that could ultimately reduce our distributions.

Net increase and net assets resulting from operation; this term is a combination of net investment income, net unrealized depreciation or appreciation and a net realized gains and losses. For December 2012 quarter end, the net increase in net assets resulting from operations increased to $8.4 million or $0.40 per share versus an increase of $5.5 million or $0.26 per share in the September quarter.

Moving on to the balance sheet, as of December 31, we had approximately $292 million in total assets, consisting of $271 million in investments at fair value and $21 million in cash and other assets. Our borrowings totaled $55.8 million at cost on our line of credit and $38.5 million in our 7.125% Series 2016 Term Preferred Stock, which was issued in November 2011 and has a mandatory redemption feature.

For the quarter ended December 31, 2012, we had approximately $193 million in net assets as compared to $189 million in net asset as of September 30, 2012. It represents a NAV per common share of $9.17 as of December 31, as compared to $8.98 as of September 30. Our $137 million credit facility matures in January of 2015 with the ability to expand it to a maximum of $237 million through the addition of other lenders.

Yesterday, we were able to remove the LIBOR floor and our interest rate is now LIBOR plus $375 million or roughly 4% today. So from the liquidity perspective, at the time of this call, we have about $65 million in aggregate in cash and availability on our $137 million credit facility. But we have ability to deploy more capital for the right opportunities in line with our investment objectives strategies. We believe this is a safe balance sheet for company like ours and we believe our overall risk profile as well.

Now I’ll turn the program back over to David.

David J. Gladstone

All right, David Watson, thank you. I hope all of our listeners read our press releases and review our quarter with reports, that’s the Form 10-Q, which we just filed with the SEC. So you can access the press release and the 10-Q on our website www.GladstoneCapital.com and also on the SEC website.

The big news this quarter obviously was we had good production this quarter. However, we also had a lot of good loans to payoff and also we exited two non-performing loans that enabled our team to focus on the remaining portfolio and we well as new investments.

We had growth in net investment income by about 7% over the last quarter and maintained our interest bearing portfolio, pretty good rate at this time about 11.5% given the interest rate environment. Also noted on the earlier call, as the quarter end, we were able to amend our line of credit and remove the LIBOR Floor, so all of those were nice big event for us this quarter.

Still the biggest challenge today is accessing long-term capital marketplace for debt and equity. We have a line of credit and supported lenders on the line of credit. But we also make long-term loans and investment. So we need long-term debt and long-term equity. In order to make those new long-term loans and long-term debt, we’ll have to look into raising long-term capital such as our November 11 issuance of Term Preferred Stock.

For our portfolio companies, we worried too that they’re not going to be able to get long-term senior loans as they needed from some other banks out there. There are a spare number of regional banks that are making new loans based on primarily on the assets of the business. These asset-based lenders are more plentiful than they’ve been in a long, long time. But still our portfolio companies need long-term senior debt as well.

I think the banks are getting much better and I think they’ll be much better in the coming years. We still have concerned about the economy. We certainly are not going in the right direction. We’re a little better than Japan and Europe. But still we’re not out of the woods yet.

Oil prices continue to tick up and that’s a big risk for the economy because meeting the gas for cars and trucks, it hurts every business. It has to ship anything around and we don’t need oil prices to go up any further than they are today.

I think we all know inflation is on the way. I think government keeps spending money. The only reason we’ve not seen it is because the turmoil in the global marketplace and people all over the world are buying bonds and that just keeps the U.S. rolling along plenty more bonds.

Spending by the federal government is unsustainable as we keep hearing. It set over and over again the federal deficit is $16 trillion today. Federal government is now borrowing over 40%. We have about 46% by one of the commentators yesterday of every dollar that they spend in, I don’t know the remaining of 2013. We may get to as much as 50%.

The amount of money being spent on the war in Afghanistan continues. Although, we told this going to end in 2014 and we certainly hope that we’d like to see all of our troops come home. We’re seeing taxes go up on all U.S. workers due to the conferences, passing the law that they just passed. There is a desire and some of the government people to increase taxes even more. We hear on the Fox shows that they’re going to increases taxes even further on all of our U.S. citizens.

Trade deficit with China and certain other nations is extremely high and that’s unsustainable. China continues to subsidize their industries to the disadvantage of our businesses. They subsidize their oil prices significantly in this meeting. But U.S. companies just can’t compete with them in jobs and leave the U.S. and go to Asia.

The outsourcing of jobs, just because our taxes are too high as well, lot of companies that would come here and start businesses are going elsewhere, because our taxes are too high. It continued stagnation of housing industry and the related disaster in home mortgage default area. It’s just another example of why the economy isn’t taken off. That was the main reason for the recession. And lack of a quick recovery is being supported by same thing and the economy is not taking off, because the housing market is none.

European debt crisis doesn’t hurt our companies, because we don’t have a lot of companies that were selling in Europe, but it certainly hurts others in the U.S. And unemployment in the U.S. is still far too high. The numbers used by the government don’t include all those who are working part-time, but seeking full-time. And we heard a lot of smaller businesses are now putting people on part-time work, simply because they don’t want to pay very, very high expense of buying health insurance. I think the more realistic unemployment rate number today is probably around 15%.

In spite of these negative, some parts of the industry base in U.S. today are not a disaster, the lingering recession is having an impact on our portfolio companies, but not a disasters one. Like most companies, some of our portfolio companies have not seen and an increase in revenue or backlog, however, some others are seeing good increases and a few are really seeing outstanding increases. So this recession is still very uneven and we’re hope that it will even out during this year and next year. We believe that the downturn began and began in late 2007 has improved, obviously when I think it’s probably going to be better as the share goes on.

In January 2013, our Board of Directors declared our monthly distribution to stockholders of $0.07 per common share, but we see the months January, February, and March 2013. And the Board will meet again in April to consider and vote upon the monthly distribution to April, May and June 2013.

Through the date of this call, we’ve made about a 111 sequential monthly cash distributions to our common stockholders in several quarterly distributions before that. This is an important purpose for the Gladstone Capital Fund to distribute our net investment income to our shareholders monthly and consistently. We believe, this differentiates us from other BDCs and stocks in general and we’re going to try to keep up our goal as to keep that going forever in the day.

At the current distribution rate, the common stock with the common stock price is about $9.18. Yesterday, the yield is still very, very high at 9.2%. I think that’s a solid dividend and sold be in place. Our monthly distribution of 7.125% for our term preferred stockholders that translates into $1.78 per year and Term Preferred Stock is trading in that $25.50, $25.70 range, 10% go to GLADP.

Again our annual shareholders meeting will be held, Thursday, February 14, at 11 am Eastern Standard Time at Tysons Corner, Hilton; Located in McLean, Virginia, 7920 Jones Branch Drive. Please vote your shares before that meeting or come to the meeting and vote your shares. The proposals were all outlined in the proxy statement and we really appreciate seeing some of you there at the meeting. We don’t get much of the turnout, but we’d love to have a big turnout and have a big discussion.

Please go our website at www.GladstoneCapital.com and sign up for our e-mail notification service. Again we don’t send that junk mail, just news about the company. We also have a Facebook, the keyword is Gladstone Companies and you can follow us on Twitter at GladstoneComps.

In summary, I think we’re moving forward at a good pace. We hope to make a continued progress in this 2013 New Year. We are stewards of your money. We’ll stay the course and continue to be conservative in that disciplined approach to investing and we start to deliver shareholders value as we continue to invest your money in new businesses.

So let’s open it up now to the lines for analyst and loyal shareholders who want to ask a question.

Question-and-Answer Session

Operator

We will now begin the question-and-answer-session. (Operator Instruction) And our first question will come from Greg Mason of Stifel Nicolaus. Please go ahead.

Greg Mason – Stifel, Nicolaus & Company

Great. Good morning. Thank you, David. Can you talk a little bit about the Viapack? I was impressed by, I believe you had it marked around $1.6 million last quarter and sold it for $5.9 million, as you mentioned $4 million above where you had it marked. Could you talk about that process? Did somebody come in and bid much more than you were thinking it was worth, last on September 30? Can you just talk about that extra…

David J. Gladstone

Sure. This is a problem of valuation as opposed to sort of realistic values. And it’s very hard to say on the one hand that our valuation process wasn’t correct. I think it was correct at the time. We started looking into this and found that our biggest problem was the purchase of raw materials. Raw materials were a very large percent of the cost basis of getting the product to marketplace. And we ended up selling the company to someone that uses huge amounts of the resins that are used in the process and they have a much lower cost base, because they’re buying in huge volume.

So the value to them was much greater than the value it would be to someone like us in a small business situation. And that was really the difference of being able to add that to the profit of the company based on the lower cost. And it’s an in-place company producing and for those people who want to buy something that’s a good little company with a problem with cost basis, it was just a good bid. So that was a big difference.

Greg Mason – Stifel, Nicolaus & Company

And then can you talk about, I know for the industry, there’s kind of a flurry of year end activity due to potential tax considerations. You said you closed $6 million so far this year. Can you talk about the pipeline that you’re seeing now for deal activity, as well as the potential for repayment activity as you’re seeing it today?

George Stelljes III

HI, sure, this is Chip. Yeah, we are seeing a wider pipeline than we saw coming into the fourth calendar quarter, but not measurably lighter. So we still feel pretty good about the ability to both new investments going forward. The prepayment activity, we just typically don’t know a number of the ones that sold in the fourth quarter. And we sort of getting call on Thursday and by Monday, it’s been repaid.

We don’t see that level of prepayment, so that we’ve also said that before. So we just doesn’t’ feel pretty good about those repayments and new investment activity. But you just don’t know and it’s been lumpy. And I will tell you that most of what we close, almost everything we closed in this past quarter was not really tax related and so we’ll see what happens going forward.

Greg Mason – Stifel, Nicolaus & Company

Great, thank you. And then one final question. Yesterday on GAIN’s conference call, you talked about GAIN issuing equity and you don’t like to do that below. Can you talk about from GLAD’s standpoint how you’re viewing the equity issuance here and is that something on a table for GLAD as well?

David J. Gladstone

We don’t have any dire need for it. We were a little bit against the wall in GAIN, but not much and we just needed some equity. We really don’t need a lot of equity here and surprised we’re trading at net asset value. So we sort of moved up until we’re comfortable with that. But again, there’s no plan, no immediate plan to sell stock. I’m sure someplace down the road, we’ll need to sell stock as we grow, because we pay out as you know all of our net investment income.

Greg Mason – Stifel, Nicolaus & Company

Great. Thank you, Dave and Chip.

Operator

And our next question comes from Bob Brown, Private Investor. Please go ahead.

Unidentified Analyst

Yes, thank you, just a long-term investor, thank you guys. Just three quick questions; first of all, Chip you mentioned, I thought you said that after the post-January one, we have a contact still – I thought you said a non-accrual company that sell through close in the second quarter. Assuming it goes through as, for whatever in terms of the contract, give a sense of where it is relative to the March, have we been carrying it out?

George Stelljes III

Yeah, I really can’t address that at this point. We think it’s a fair price for the asset and it’s within the realm of words mark. But at this point, I don’t have any clarity that it’s even going to close. Do you think it’s going to close? I really can’t comment on that at this point.

Unidentified Analyst

Okay. Second question, I was just wondering if you could give us a sense in terms of on some of the equity that we have. So remember, I think we did in April or July quarter last year, you talked about one particular company where you thought we had a pretty sizable appreciation in there. And obviously didn’t know when it would be realized. But just wondering if you could give us a sense of some of what we have?

George Stelljes III

Well, it varies dramatically by company, I mean we have some assets that we get regular calls on that are strategic and much like the one that David discussed and that we think would sell substantially higher than where we may have at March. We don’t have any contracts to sell those companies. We have another company or two that we’ve done the equity for a while, the equity may move up and down. But we feel like we’re in the money on that equity and at some point when it’s the right time to sell, we’ll make a return, a nice return on our equity investments there, but it varies dramatically.

Unidentified Analyst

Okay. And the last question, any sense in terms of this year being the year where we might just see an increase in the dividend?

David J. Gladstone

We get that question just about every day and I just can’t comment on it. The goal obviously is to build up the net investment income and if you do that, you have to pay it out. So I can just say, we’re working hard towards that goal.

Unidentified Analyst

All right, okay.

George Stelljes III

Next question please.

Operator

The next question comes from Casey Alexander of Gilford Securities. Please go ahead.

Casey J. Alexander – Gilford Securities, Inc.

Hi, good morning. Two questions; one, I couldn’t find in the QD ratio of fixed rate investments to floating rate investments in the portfolio, do you have that number?

David Watson

We do. Do you have another question while we look it up?

Casey J. Alexander – Gilford Securities, Inc.

Yeah, the second question is, according to your schedule of investments, it looks like $91 million or a third of your portfolio is going to invest this year. Can you kind of discuss the challenges of getting that money back to work given the fact that you said deals which you’re seeing are of a more risky nature with tighter spreads now. What’s the challenge of getting that money back to work?

David Watson

I think you’re talking about contractual repayments at which we typically will, obviously report this. In a number of those situations, we’re already in discussions and especially in the ones that we’ve enjoyed a good relationship, profitable for both parties to extend those. So I don’t personally foresee that everything maturing is going to be we paid, so we’ll have certain extensions and we’ll have some renewals within that.

We are seeing increased competition. We said that last quarter two and we’re still able to put that $50 million. So it’s very likely that we just have to work hard to find good investments that we can meet our objectives, and provide a good return within a pretty competitive marketplace.

The year 2012 was not banner year of the yield. But I think most of our industry expected. So for all we know 2013 could be a better year for everyone. But we’re cautiously optimistic that even the contractual payments that do come back to us and the companies are so that we will be able to put that to work.

David J. Gladstone

Casey, this is David. The fixed rate versus variable rates is located in the back of the 10-Q in item 3. We’ve had about 11% of our portfolio in fixed rate and then we have the remainder in variable rates and other ones that are in variable rates approximately 84% of them have towards associated with them.

Casey J. Alexander – Gilford Securities, Inc.

Okay, great. Thank you very much.

Operator

(Operator Instructions) I’m showing no further questions. This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Gladstone for any closing remarks.

David J. Gladstone

Well, thank you all for calling in and we look for you next quarter. That’s the end of this conference call.

Operator

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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