Gladstone Investment (NASDAQ:GAIN)
Q1 2016 Earnings Conference Call
August 2, 2016 8:30 AM ET
David Gladstone - Chairman and Chief Executive Officer
Michael LiCalsi - President, General Counsel and Secretary
David Dullum - President
Mickey Schleien - Ladenburg Thalmann & Company Inc.
Kyle Joseph - Jefferies LLC
Andrew Stapp - Hilliard Lyons
Mitchell Penn - Janney Montgomery Scott
Good day, ladies and gentlemen, and welcome to Gladstone Investment Corporation’s First Quarter Earnings Ended June 30, 2016 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded.
I would now like to introduce your host for today’s conference, Mr. David Gladstone. Sir, you may begin.
All right, thank you, Chelsey, nice introduction, and hello and good morning to all of you out there. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for shareholders and analyst of Gladstone Investment.
Common stock, NASDAQ traded GAIN, and then we have three preferred stocks; GAINO, GAINP, and GAINN, so all kind of ways of investing in our company.
Thank you all for calling in. We’re really happy to talk to you, all these loyal shareholders that get on the line and potential shareholders. We like to give you an update on the company and its investments, and we like to give you a view of the business environment. I wish we could do this a lot more often.
Also, you have an invitation that you’re in the area to stop by. We’re in McLean, Virginia. It’s located just outside Washington D.C. So stop by and say hello. There’s a team here of about 60 or so people and we have some of the finest people in the business.
Now, we’ll hear from General Counsel, Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the administrator for all of the funds and the related companies. He will make a statement regarding forward-looking statements and some other important information. Michael?
Good morning, everyone. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and Securities Exchange Act of 1934, including statements with regard to the company’s future performance. These forward-looking statements involve certain risks and uncertainties and other factors, even though they are based on our current plans, which we believe to be reasonable. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar words or expressions.
And there are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including information listed under the caption Risk Factors in our Form 10-Q and 10-K filings and in our registration statement as filed with the SEC. All can be found on our website, www.gladstoneinvestment.com or the SEC’s website, www.sec.gov.
And 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 this conference call, except as required by law. And please also note that past performance or market information is not a guarantee of any future results.
We ask that you take the opportunity to visit our website, gladstoneinvestment.com, and sign up for our e-mail notification service. You can also find us on Facebook, keyword, The Gladstone Companies and on Twitter at GladstoneComps.
The call today will be an overview of our results through June 30, 2016. So for more detailed information, we ask that you read our press release issued yesterday and also review our Form 10-Q for the quarter ended June 30, 2016, and we filed that yesterday with the SEC as well. And you can access those documents on our website, gladstoneinvestment.com.
And before I forget, we’re having our Annual Stockholders Meeting on August 4, you’re all invited. Please make sure to vote your shares to help us avoid costs associated with the solicitation campaign. And if you’ve not already voted your shares, let me tell you how you can vote at this point in time, because the meeting date is two days from today, your vote can be cast quickly and easily by signing, dating, and mailing via overnight mail your proxy card accompanying your proxy statement, or you can call 800-690-6903 to vote over the telephone toll-free, or by voting over the Internet at www.proxyvote.com.
And please note that voting over the telephone or the Internet will require that you have your proxy control number available, and that number is printed on the proxy card accompanying your proxy statement. Stockholders with questions on how to vote are strongly encouraged to contact our proxy solicitor Georgeson Inc at 1-800-790-6795, or you can call us at Gladstone Investment at 866-366-5745.
The stockholders also may vote by attending the actual meeting in person and the meeting will be held on the 4th on Thursday at 11 AM Eastern time at the corporate headquarters of the Gladstone companies, and we’re located at 1521 Westbranch Drive, Suite 100 in McLean, Virginia 22102. If you are unable to attend, please vote your shares using one of the methods I described earlier.
Now, I’ll turn it over to David Dullum, he is the President of Gladstone Investment, he will give you an update on the fund’s performance and outlook.
Okay, Mike, thank you very much, and good morning, everyone. Generally give a very quick recap of what it is we do here at Gladstone Investment for those of you that might be new to our stock or trying to learn. Basically, we are in the business of focusing on the buyouts of businesses that are in the United States, is a company is generally of a size range that are anywhere from about $5 million up to about $30 million in earnings.
And also the way, which we go about this is actually providing both debt and equity when we make these investments. And the reason we do it is, because this combination of the debt and equity in these individual transactions and we will learn more about this as we go along, produces really the assets that really give us the income that we need to distribute to our stockholders on a monthly basis, at the same time creating the opportunity for capital gains when we actually sell or exit these portfolio companies, which we do from time to time.
So there are many other BDCs that I just like to quickly highlight, where we believe GAIN is different to a typical, what’s called traditional credit, or debt-oriented BDC, and you might say what does that mean. Well, when we invest in operating companies, in other words, when we make an acquisition, when we make an investment in the company, we take a significant equity position in that company. This really differs from the other public BDCs that predominantly are focused on the debt investments and those BDCs are the ones that I referred to generally as credit-oriented BDC.
So, for example, if you look at the current portion of the equity to get for the investments in our portfolio, you’ll find that the equity portion is approximately 28% and the debt portion is approximately 72% at cost, whereas most of the BDCs, their portfolios are closer to about 10% of equity and more like 90% of debt. So a higher proportion of equity to debt in our portfolio. This is intentional on our part, because our strategy indeed and our value proposition is a bit different than most other public BDCs. In that, we choose and we would like to have the debt portion of our investments provide us income stream, which allows us to pay and certainly over time grow our monthly distributions.
Now, that part similar to other BDCs, however, along with the debt investment we want this equity – significant equity positions that we take to increase in value and thereby providing a further stream of income to be able to distribute to shareholders in the form of capital gains. So, as we execute this strategy, these potential capital gains may then be distributed to our shareholders in the form of special distribution.
A further advantage to this approach, frankly, is that as a provider of both the equity and the majority of the debt in any transaction in a buyout, that gives us a lot of flexibility in the way in which we can establish the term of the debt, the interest rate on the debt, and certainly gives us an ability to have significant influence over the financial structure of the company over time, if necessary. This is important to us as investors and certainly to our shareholders.
So I’ve touched on exits previously here, so let’s talk about our exit strategies. So as our fund matures and we’re now approximately nine years into this fund, we continue with new buyouts and we should expect now some turnover in the portfolio, which is consistent with that strategy. So generally, we’re going to be governed by market conditions and certainly continuing to assess the risk reward of continuing to hold an investment versus perhaps exiting it.
So, how have we done? Well, since our inception which was in 2005, we’ve actually achieved eight buyout liquidity events. This in the aggregate have generated approximately $88.4 million in net realized gains and approximately $19 million in other income, which has resulted in an aggregate cash-on-cash return on the equity portion of these investments of approximately four times. And that’s in turn generated a total increase to our net assets of approximately $107 million.
As previously reported, we had sold Acme Cryogenics, one of our companies in this quarter. And this was in keeping with our strategy, and it resulted in a realized gain of approximately $19 million and other income of around $2.8 million for total cash proceeds of approximately $44.6 million, which included the repayment of our $14.5 million debt investment at its par.
So consistent with my previous comments, we will continue to evaluate the sale of additional companies to the extent that market conditions remain favorable and company-specific performance dictates.
Now, given that we are – we will be reducing our income-producing asset base, as we sell portfolio companies. It’s obviously very important to continue to maintain the ability to provide our dividend distributions. Therefore, deal generation is very high – has a very high priority. And as a result and then, for instance, we previously announced that we’d partnered with the management in the buyout of a company called the Mountain, where we invested approximately $25.5 million, in a combination of secured debt and preferred equity.
So along with that transaction, we continue to increase our presence in the marketplace and in many geographic areas of the U.S. To generate these new investment opportunities, our team primarily calls on independent sponsors, middle market investment bankers, and other sources, which will help us to create what we consider a proprietary investment opportunity.
Now, we do not depend on others to negotiate or structure our investments. Generally, the investments we make include partnering with the management teams, as in the case of the Mountain as we described, and other sponsors, if there are others in the purchase of any one business.
Our strategy of providing this financing package, including secured debt and the majority of the equity, indeed, we believe is a competitive advantage, as it gives the seller the independent sponsor if there’s one and the management team a very high degree of comfort that the purchase will occur, at least, from the financing perspective.
So we believe that our strict adherence investment fundamentals and our thorough due diligence process have enabled us to provide shareholders return in both our consistent regular monthly distributions, as well as special distributions, which we will make from time to time.
Our investment focus is generally in companies that have very strong earnings, as mentioned earlier, in operating cash flow, and certainly with an opportunity to expand those. The industry areas of interest to us are generally light in specialty manufacturing, company in our portfolio GI Plastek is such an example; specialty consumer products and services and two examples of that would be Brunswick Bowling, which we acquired last year and the Mountain, I just mentioned; industrial products and services, companies, such as, Counsel Press and Nth Degree, which are recent acquisitions at our portfolio; and we will from time to time look at the aerospace and energy areas, although we have very minimum exposure here and we’ll only look at these areas very opportunistically.
Also beyond, obviously, the equity we – our secured debt investments, which we make primarily our first lien loans, they typically carry a cash yield that are in the mid-teens. This balances the equity portion of our investment, which helps us to produce the blended current cash yield that we need to help support our shareholder distribution expectation.
Typically, we also have what we call success fees. These are generally additional payments made upon a change of control in any one investment. And they – but they may be paid in cash in advance in limited circumstances at the portfolio companies option. The target in general for the equity portion of our investments is a return somewhere around two to three times cash-on-cash return. As I mentioned previously with the exits, our cash-on-cash and equity has actually been closer to about four times.
So the activity for the quarter, we report that, we ended June 30, 2016, we invested about $29 million in one new deal, which is the Mountain, and some existing portfolio companies, and we successfully exited the one portfolio company, Acme, which we did at a significant gain.
So what’s our outlook? Well, in summary, our goal is to continue to strategically add accretive investments and position our existing portfolio for potential exit. Thus we hope to maximize distributions to shareholders, with solid growth in both the equity and the income portion of our assets.
Now, that concludes my part of the presentation. And today, however, you’ll have to listen to me a little bit longer, as our Chief Financial Officer, Julia Ryan is unable to be on the call today. So I’m going to discuss the financial aspects of the quarter in more detail, and we have our Chief Accounting Officer, Jon Aronson, who is here to help as we move through this and certainly any questions later on.
So let’s talk again about our originations of the new investment this quarter with a successful exit of Acme, as I mentioned, which generated about $6.8 million in net investment income totally. We also announced that our portfolio does continue to perform well, resulting in over $20 million in net unrealized appreciation, which excludes the reversal of $21.2 million previously recorded unrealized appreciation upon the sale of Acme. The cumulative net effect of these positive trends resulted in a NAV of $9.84 per share.
Turning to the balance sheet, at the end of June, we had over $507 million in assets, which consisted of approximately $491 million in investments, at fair value, about $5.2 million in cash and cash equivalents, and about a $11 million in other assets.
Our portfolio’s approximate allocation was about $375 million in debt securities, and about $147 million in equity securities, or roughly 72% to 28% debt to equity allocation, at par, as I previously mentioned.
The liabilities and the equity at the end of the quarter consisted of $79.6 million in borrowings outstanding on our credit facility, approximately $121.7 million in term preferred stock, about $8 million in other liabilities, and about $298 million in equity.
Our net asset value was 9.84 per share, as of June 30, which is up $0.62 from the March 31 period, which primarily resulted from the net unrealized appreciation of $20 million, exclusive of reversals relating to exists this quarter.
This increase was principally due to improved performance of certain portfolio companies. And consistent with the previous five quarters, we continue to use an external third-party valuation specialist, which provides additional data points regarding market comparables and other information related to certain of our more significant equity investments. We plan to continue this practice, which helps to update externally provided data on an annual basis for all of our significant equity investments.
Regarding income statement for the June quarter-end, total investment income was $14.4 million versus $12.4 million in the prior quarter. Total expenses net of credits was approximately $7.6 million versus $7.5 million in the prior quarter, which leaves net investment income of about $6.8 million versus $4.9 million in the prior quarter. This increase in total and net investment income was primarily due to $2.8 million of dividend income, which was also received in the current quarter resulting – as a result of the Acme transaction.
Other income was about 19% of total investment income in this current quarter, which compares to 6% in the prior quarter. Now, as we’ve mentioned on previous calls, we expect other income primarily composed of success fees, dividend income, and so on to remain meaningful, but will vary from quarter-to-quarter.
Net expenses stayed relatively flat in the current quarter, which was in line with the comparable size of the portfolio again quarter-over-quarter. As a result of these factors, our net investment income, NII increased to $0.23 per common share for June from $0.16 per common share for the March quarter.
Now, consistent with previous quarters, our current period net investment income together with undistributed net investment income from the prior year, or as we term it, prior year spillover amount more than covered our quarterly distributions to shareholders of $0.1875 per common share.
And our current period distribution payout ratio, which is calculated by dividing the current period distributions by the sum of that net investment income in excess of distributions and the current period distributions was about 43%, and that compares to about 47% last quarter. So we continue to actively manage our current year with the prior year spillover amounts with a goal to maintain an over time increase our distributions to shareholders.
Now, looking at the realized and unrealized changes in our assets. First off, realized gains and losses generally result from an actual sale of an investment. Unrealized appreciation and depreciation is a non-cash event and is driven by the requirement to mark our investments to the fair value on our balance sheet, with the change in fair value from one period to the next recognized in our income statement.
So for the quarter ended June 30, we reported a net realized gain of $18.6 million primarily related to the sale of our investment in Acme. We recorded $1 million of net unrealized depreciation in the current quarter and this consisting of about $20 million of net appreciation of our current portfolio and $21 million of reversals of the previously recognized net appreciation related to the realized gains and exits of the investments mentioned earlier.
Such reversals of previously recognized appreciation or depreciation are recorded when the realization events occur such as exits in the case again of Acme or restructures. The net appreciation on our existing portfolio was principally due to the improved performance of certain portfolio companies.
So at June 30, our entire portfolio was fair valued about 94% of costs, which compares to approximately the same amount 94.1% of costs last quarter. One portfolio company continues to remain on nonaccrual, which represents less than 1% of the fair value and the cost basis of our total debt investments as of June 30.
So the portfolio is made up with our debt portfolio being very well-positioned for any interest rate increases we believe, with 90% of our loans having variable rates with a minimum or a floor, and the remaining 10% having fixed rates. The weighted average yield on the investment-bearing investments remain consistent quarter-over-quarter at about 12.7%. This strong yield does exclude, which previously mentioned success fees, which we have on our debt investments, also we do not include any paid-in-kind or PIK income and we do not plan on having that in the future.
Success fees, which we have mentioned before as we’re talking about because these are yield enhancements that generally a contingent upon a change in control such as an exit or sale, although there are certain circumstances when the portfolio company may elect to pay it earlier. Now we only recognize these success fees on our income statement when there are earned, which generally coincides with the actual receipt of cash.
So for comparison purposes, if we had accrued these success fees as we would – if it was paid-in-kind or PIK interest like other BDCs – some BDCs due. Our weighted-average yield on interest-bearing assets would approximate 15% during the quarter versus the reported 12.7%.
As of June 30, 2016, these success fees are as we mentioned we accrued them off balance sheet, they totaled approximately $30 million or almost $1 per common share. Now there is no guarantee that we will be able to collect any or all of these over time or actually have any real control over the timing of their collection.
From a credit priority standpoint, a 100% of our loans are secured with 79% having a first lien priority and the remaining 21% having a second lien priority in the capital structure of the respected portfolio companies and this is the cost.
So overall Gladstone Investment had, we believe a very good quarter both in terms of investment activity and have therefore started 2017 in a very good position with the first again the exit of Acme and the closing of a new investment in the Mountain. We maintain our distribution rate while still remaining committed to covering our distributions by current or prior year net investments spillover income as we’ve done consistently over the last four fiscal years.
So now, I will turn it over to David Gladstone.
Very good Dave, good report. Michael, you gave a good report as well. And during the past quarter, we were able to give some really good accomplishment for shareholders and good originations, sold a portfolio company at a very strong return and just to let you know again, we say this, I think often we do have other portfolio companies that are on the path of being positioned for sale and one keeps saying they want to go public if the IPO market ever gets any better, so lots of activities in our portfolio.
We did sell one investment, which resulted in over $18 million, $18.6 million in realized gains, in addition to repaying the $23.7 million in debt and equity cost basis and about $2.8 million in other income – that that money was used to make these – the second investment that we talked about today and that was the company’s investment of $25.5 million in the Mountain.
And if you haven’t been to that website, please go www.themountain.com. You’ll look at that and you’ll say, well looks – doesn’t look too good, but those shirts and those ads are virtually indestructible. They can be washed and not torn to pieces, so go look at those. Children really love them and some adults may have a childish approach to life, also love them as well.
We believe that we can continue the success that we put in place now going into the second quarter of fiscal year, which is March 31, 2017. We keep looking at the outlook and monitoring the economy. There are some that say that we are again entering into a recession. This company is well positioned to handle a recession should have occur.
With regard to the current concerns mainly, the Federal Reserve. We like others are still watching, which way the direction of the Federal Reserve is going to go, obviously they don’t have much room to go down in terms of rates. But they can go up and we keep wondering if they’re going to go up, and while we have variable rate, so most of our loans increasing rates are not good for the economy. However, I doubt that there is going to be able to raise rates again until is much stronger signal in the economy now.
As you all know, the last quarter, the economy had very poor growth. The main reason that the Fed is pushing for higher rates of course is because they have to find buyers for the money that they keep printing, borrowing using Treasury notes and T-Bills, they got to find somebody to sell those too.
The volatility of the oil and gas industry continues to worry us. Oil prices keep going down, then they go up a little bit. But low oil prices are a terrific benefit to consumers and many of the businesses. But all of us know that oil industry is an integral part of the U.S. economy and the loss there will be a tremendous pain in the overall economy.
Now, fortunately, for this fund, we don’t have a significant investment in the oil and gas companies. The federal deficit is now over $19 trillion and continue to climb as the government spending continues with no end in sight. After this last round of spending, it’s probably going to tip over $20 trillion, and all that spending is putting huge pressure on the Fed to find someone to sell those notes to, and they’re borrowing money at a furious rate, and as we all know that can’t continue forever.
So the question is, when will they put an austerity program and stop the insanity that’s going on with all that borrowing. Many of the private companies like the ones, which we invest in, we’re in the middle market, they feel there is far too much regulation around things like healthcare, financial services, energy, emissions, and now, of course, minimum wage keeps picking up and people talking about and raising wages, may be all right, but it’s still going to have an impact on the economy.
All of these are hindering the performance of these middle-market companies. They can’t expand. They don’t increase the number of jobs that they have. So it’s a – it’s really depressing in some of the cases how much regulations are out there.
In light of all these concerns, our company Gladstone Investment has continued to be very, very selective in investing in new businesses. We want to go slow. We want to make sure, we don’t make any missteps at this point in time.
In July 2016, our Board of Directors declared monthly distributions on the common stock at $0.0625 per common share for each of the months, July, August and September, annual run rate of $0.75 per common share, which is consistent with prior year’s and they declared the dividend for all of our preferred stocks.
Through the date of this call, we’ve made a 132 sequential monthly cash distributions to our common stockholders and additionally have made some special distributions along the way.
As of June 2016, we’ve distributed about $200 – $173 million, $174 million round numbers, or about $7.73 per share to common stockholders based on a number of shares outstanding at the time of the payment. If you look at the common current distribution rate on the common with the common stock price at $7.50, it’s a nice solid 10% yield, while you wait for Mr. Dullum and his team to find this some more things to sell and trigger some more capital gains.
Our Series A preferred stockholders are receiving $1.78 annually, that’s trading under the symbol GAINP for preferred, it’s about a 6.9% yield right now. We have a Series B, that trades under the symbol GAINO, that pays $1.69 at about $25.38. And then we have a third version, a Series C, they’re receiving $1.63 annually, and that’s trading at $25.30, that’s about a 6.5% yield. So there’s multiple ways to invest in our company and we would encourage everyone to invest in all four of those opportunities.
In summary, we see Gladstone Investment as a wonderful investment for investors seeking continuous monthly distribution, and hopefully, we can continue to trigger capital gains. We expect a really good quarter for September 30, 2016, and hope to continue to show you strong returns on your investment in our fund.
And let me remind you, again, please go, vote your shares. You can vote it quickly and easily by signing and dating, and mailing the proxy card came with your proxy statement, and you have an envelope to do all of that in. You also can just pick up the phone and call the 800 number, it’s toll-free, 800-690-6903, so you can vote over the telephone, and you can also vote on the Internet by going to www.proxyvote.com, proxyvote.com.
Please note that voting over the phone or the Internet will require you to have that proxy control number that’s on the proxy card for you. And also, if you call your stockholder – your stockbroker, you can usually get some good help in getting that done. You also can contact the company’s proxy solicitor, that’s Georgeson, they’re at 800-790-6795, they can help you out as well, and you can call us here at the company, we have somebody that can help you 866-366-5745.
Stockholders can of course vote by attending the Annual Meeting. The meeting would be held tomorrow at 11 AM Eastern Time at the corporate headquarters, located at 1521 Westbranch Drive. We’re at Suite 100, McLean, Virginia. If you’re unable to attend, please vote your shares using one of the methods I described earlier.
Now let’s stop and have some question. So Chelsey, if you’ll come on, we’ll have some questions from all of our good shareholders and a few of those analysts that are out there.
Certainly, [Operator Instructions] and our first question comes from the line of Mickey Schleien with Ladenburg Thalmann. Your line is now open.
Yes, good morning everyone one. Let me start by congratulating you on the sale of Acme. That’s a very strong result, and obviously a terrific thing for shareholders. I wanted to ask in relation to sales in general, the BDC sector has experienced several strong months as the risk on trade has sort of developed and I’m curious how that’s impacting the bid/ask spread for other transactions you might be reviewing at this time?
Well, Dave, you can answer that better than I do in terms of what you’re paying for deals that you’re looking at these days.
Yes, so Mickey, not to be honest in our world, gains world, size company, the type company, the way in which we go about it. I really would tell you, I don’t think we’ve seen a lot of increased pressure necessarily on that. Multiples have tended to stay for the ones we’re looking at relatively consistent so to speak.
A competition is about the same as it’s been. That’s really more relevant quality of the opportunities that we’re looking at. So maybe a slight tick up in multiples, but not anything significant, so the real challenges in just finding the better quality companies that suit our profile.
David, in the last couple of quarters, if I recall correctly, you mentioned that the spread between what sellers are looking for and what buyers willing to pay is pretty meaningful and that’s making it hard to find not only good quality deals, but define deals can actually be a closed? Is that still the case?
Yes, I think the spread is there. I think deals are getting done because I think as you alluded to availability of capital is still pretty high and turning to the extent that folks on the pure private equity world are looking to and will put more equity into a deal. They’re able to raise the respective amount of leverage so to speak, the debt side.
So I’d say that the spread is still pretty high and again I think the quality companies, the ones that have demonstrated reasonably good, earnings, there is no major to say up tick all of a sudden in earnings and believable earnings. I think those deals are getting done and they’re getting done at multiples that are – in my opinion a little bit on the higher side than we’d like to pay, but there are opportunities out there at appropriate to fact that we did the Mountain and that’s one where we believe. Again we stuck to our disciplines and paid a value that is reflective of what we think the upside can be for us.
Dave, with regard to the Mountain, you said there was a management buyout, correct?
Management was involved in the transaction, right.
Right, so do they own the first lien, or who is ahead of you in that deal?
We own the first lien. We have a small working capital loan that’s ahead of us, but that’s again very typical of our transactions. The majority of the debt that that’s required to make the transaction is generally ours and from time-to-time, we might have a – of commercial bank come in and take a revolver type loan for working capital purposes.
I understand. And I see that Tread drew on its line of credit, but you marked it down given what’s going on in the energy sector. Could you just give us an update? I know it’s not a large position, but given how important this sector is in general to BDCs. I’d certainly like any feedback you can provide us?
Yes, I can’t give you a lot of feedback on the energy sector, because as you point out, and we – we’re not greatly in the energy sector. I mean, Tread happens to be related – more related in the mining, broadly defined mining industry. That company, I would say, it’s performance, frankly, relative to last quarter actually have slightly improved in terms of what it’s seeing from a demand and a backlog perspective.
So, again, it’s sort of keeping its own. From a energy sector perspective, frankly, I’m not in a good position to give you any great insights there just based on our portfolio.
So I’m a little confused, you say Tread’s performance improved, but the mark declined. Can you help me reconcile that? It was marked [Multiple Speakers] marked at par?
Yes, well, it’s improving going forward, but it hasn’t improved to a point where, given the methodology we use for valuation and the marks on the debt nothing that’s going to be significant. And as you point out, it’s a pretty – relatively small investment. It’s still the one that’s on nonaccrual, and so, it’s like everything else. We can have companies sometimes that their earnings are starting to move in the right direction.
As we look out, as I mentioned, backlog does not necessarily reflect itself immediately in earnings, and therefore, immediately into the look-back that we use when we – our valuations, again, remembering they are trailing numbers generally. So that may not quite always tie together at any one specific point in time.
Okay, I got it. And just one sort of housekeeping question. If I’m reading the figures correctly, it looks like the dividend on Acme represented all of the fee income in this quarter. Is that correct?
So we need to be sure, we say this, say, our income we look at obviously when we say fee income, fee income comes from a number of different areas. One is, when we close a new transaction, we generate a fee directly in the transaction. Also distributions from a portfolio company like Acme, where the structure might be a preferred with a preferred dividend. We take that income into – that dividend into income as we call it other income.
And we keep mentioning on our calls that the other income line for us is an important line, it’s one that we manage carefully. So in this particular instance a significant portion of the other income came from the dividend, which was paid out in cash based on the fact that the transaction occurred in this quarter.
I understand. Those are all my questions. Congrats on the quarter, and I appreciate your time.
Next question please.
Thank you. And our next question comes from the line of Kyle Joseph with Jefferies. Your line is now open.
Good morning, guys. Congrats on a good quarter and thanks for taking my questions. I just wanted to get a little bit – I know you guys don’t provide specific earnings guidance. But for going forward, should we expect sort of results similar to the last few quarters, in the sense, where you have some quarters where you are a little under the dividend and then in other quarters you have an uptick in other income, and then you cover the dividend substantially to the point where on an annual basis you guys do have dividend coverage? Is that fair to say?
Well, that’s certainly the goal is to be strong in that regard. We’re getting big enough now hopefully if the market stands continue to get strength that every year we should be able to sell one company and make some capital gains, but that’s the goal, it’s not necessarily something that you can put in your projections. So, Kyle, I wish, we could help you more, but this is the business of being pretty lumpy. So it’s pretty hard for us to give you more than I have just said.
Yes, Kyle, if I may add to that, though, I think regards to the what you might be thinking about in terms of the monthly distributions out of operating NII, as you point out, the good news for this quarter is that, we had $0.23 of NII per share. We paid out $18.75, and as one looks forward, that’s a kind of thinking about where we head.
So we’ve – I’d say a great start to the year. And as you pointed out, quarter-to-quarter may have slight ups and downs, depending on whether we get a deal close exactly in a quarter generate some fee income, et cetera. So I think the way I’d phrase it is, we’re off to a very good start on the operating income side of things and covering our dividend from operations. And as David Gladstone indicated, looking forward to further exits that – will generate that additional opportunity for cap gains types distribution.
Okay, great. Thanks. I’m all set, I’m on the road and I have got a lot of noise here. I’ll let you guys go.
Thanks Kyle. Next, question?
Thank you. And our next question comes from the line of with Andy Stapp with Hilliard Lyons. Your line is now open.
Yes, just wondering what you’re seeing in terms of opportunities for new investments versus a quarter and a year ago?
Yes, so Andy – hi, this is Dave Dullum. I think it’s about the same. I would say we started the year pretty good with the deal that we closed. Looking out our backlog and pipeline is – I would say improving. I think we had a little low near the end of the calendar year and I think we’re starting to see things trending upwards. So – but I would say about the same.
Okay, my other questions have been answered. Thank you.
All right, other questions?
Thank you. And our next question comes from the line of Mitchell Penn with Janney. Your line is now open.
Good question, the unrealized gains during the quarter seemed to be in a Galaxy, Head Country and Jackrabbit. And the question I have is do you have any flexibility? I assume the gains reflect stronger EBITDA at those companies. Do you have any flexibility to get dividends from the companies that are growing their EBITDA quarter-to-quarter?
Sure, you have opportunities, but taking a dividend from them would in essence just pull money out of the company. So unless they are extremely strong, we don’t really take the dividends out during the – during their growth period. We’re betting on the equity side of it. So we’d like to see it grow. Dave, do you want to comment on that?
So I think that that’s right. Typically, we – Mitch, we do not generally take the dividends. The way we structure our deals is with a preferred stock, that’s predominantly the equity piece, unless the company has build up significant earnings and profits and make sense to – for them to pay it out. But generally, we are not going to take much in the way of the dividend.
Got it, thanks.
Thank you. [Operator Instructions] And I’m not showing any further questions at this time. I would now like to turn the call back to Mr. David Gladstone for closing remarks.
Okay, thank you Chelsey, and thank you all for calling in. We appreciate those questions. Wish there were more questions, but guess you’ll have to hold it now till next quarter. Thanks again. That’s the end of this call.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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