Gladstone Investment Corporation (GAIN) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's Fourth Quarter and Year Ended March 31, 2015, Earnings Call and Webcast. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to turn the call over to David Gladstone. Please begin.

All right. Thank you, Latoya. Nice introduction. Hello, and good morning, everybody. This is David Gladstone, the Chairman, and this is the quarterly and year-end conference call for shareholders and analysts of Gladstone Investment Corporation. Common stock is traded on NASDAQ under the symbol GAIN. We do have 3 preferred stocks that trade as well. There's GAINO, GAINP and GAINN. So there are 3 other securities for this company that are traded. We thank you, all, for calling in. We love this time we have with our shareholders and potential shareholders. We like to give updates on our company and our portfolio and our business environment. I wish there were more often opportunities. And by the way, there is an invitation open to all of you to stop by the offices in McLean. We're just outside Washington, D.C. You'll see some very happy people here. We have a team of about 60 people now and some of the finest people in the business. And now we hear from our General Counsel and Secretary. He's also President, the administrator of the fund, Michael LiCalsi. He'll 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 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 are based on our current plans, which we believe to be reasonable. And many of these forward-looking statements can be identified by the use of words such as anticipate, 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 these forward-looking statements, including those factors listed under the caption Risk Factors in our Form 10-K filing and our registration statement as filed with the SEC, all of which can be found in our website, www.gladstoneinvestment.com or the SEC's website, www.sec.gov. 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 are not a guarantee of future results. Please take the opportunity to visit our website, gladstoneinvestment.com, and sign up for our email notification service. You can also find us on Facebook, keyword The Gladstone Companies, and on Twitter, at keyword GladstoneComps. The presentation today will be an overview, so we ask that you read our press release issued yesterday and also to review our Form 10-K for the year-end March 31, 2015, again, filed yesterday with the SEC. You can access the press release and the 10-K on our website, www.gladstoneinvestment.com. Now let's turn over to the President of the fund, David Dullum, to get an update on the fund's performance and outlook.

Thank you, Mike, and good morning, everyone. Happy to report for this quarter and for the year-end March 31, 2015. It's been a good year. Gladstone Investment, of course, is a fund which is focused on the buyout of middle market U.S. businesses with annual sales that are generally between $20 million to $100 million. Our funding structure in any buyout is comprehensive in that it usually consists of secured first and second lien debt in combination with a significant direct equity investment. So this combination of debt and equity produces the mix of assets, which is a basis of the strategy for Gladstone Investment, whereby the debt portion of our investments will provide the income to pay and grow our monthly distributions, and then we look to the equity portion of these investments to increase in value and over time, provide the capital gains that we all look forward to. So with our continued growth in the operating income and the periodic realized gains that we've had and recognized in April of this year, our board declared a common share distribution of $0.0625 per share per month for April, May and June, which is a run rate of $0.75 per share per annum, which represents a bit more than a 4% increase year-over-year. Additionally, we also were able to have a onetime distribution of $0.05 per share, which was made in December of 2014, and this actually represents the third calendar year in a row that a onetime cash distribution to common stockholders has been paid. So we're very happy with that. So -- and really, how are we different from other BDCs and other finance-type companies or private equity firms? So generally, as we've talked before, we take large equity positions in the companies that we purchase, and this differs from other public BDCs, which are predominantly debt-oriented. And so, for instance, the proportion of the equity to debt for the investments in our portfolio is approximately 30% equity, 70% debt, where most of the BDCs' portfolios are generally around 10% equity and 90% debt. And so generally, their equity portion comes through warrants that they get issued with the debt, which is the main part, or some small coinvestment, which is made alongside the private equity sponsor that these other debt-oriented or credit-oriented BDCs tend to follow. As to, say, private equity funds, the typical private equity funds generally are 10-year-type private partnerships, longer liquidity horizon for their investors. And where we're different is as a publicly traded entity, our structure, of course, allows daily liquidity for our shareholders because they own common stock. And also, we are able to keep an investment longer in our portfolio so long as it's generating the income prior to an exit, which creates the gain on the equity that we look forward to. So again, it's important to understand that there are some differences between us mainly and other credit-oriented BDCs, even though we're in the BDC space. Now exit strategies. On previous earnings calls, actually, the last earnings call, I really -- I introduced this topic of exiting portfolio companies, which is our ability to realize capital gains on exits is a component of the value proposition of any investment in GAIN, shareholders' investment in GAIN. And you should know that the management team develops plans around exiting companies from time to time, so we really focus on this. These exits, generally, are based on market conditions and obviously an assessment of what we would call the risk-return in continuing to hold an investment versus, perhaps, exiting if it's appropriate and timely. We currently have a couple of exits that we're contemplating over the next several months, so look for more to come on these as we move through our fiscal year 2016. We should note that although we are able to hold our investments for long periods of time, the quarterly equity valuations of our portfolio can be volatile, and we bring this up in every call, that that's the case, and therefore, not always at the time representative of the underlying exit value that we either have realized when we've taken the exits or we would contemplate going forward. So it's important, therefore, that we look to the realized equity portion of our assets as one aspect of the overall future value of our company gain. In fact, since inception in 2005, we have exited 4 of our manager-supported buyout investments and generated approximately $54 million in realized gains, which is pretty significant for us. And so while the buyout market right now is still someone seller-friendly, we don't -- keep in mind that we're always assessing this, that while we might sell a portfolio company in this market and it may be tempting to be so, it would obviously reduce the income-producing asset base that we have. And therefore, we would be challenged, frankly, to then incrementally replace that investment in this still -- this sort of high, what I would call, purchase value environment, meaning multiples tend to be a bit higher. So exiting is important. We would want folks to be aware of that, and that's why I wanted to be sure we make this a topic of our call. Turning to the deal origination side, which is obviously critical to us. We have a high priority. And obviously, the recent press releases that we've put out reflect the results of our continued growth in new buyouts. We do have a very broad and deep geographic footprint. We have offices in New York City, Los Angeles, Chicago and here in McLean, which is outside of Washington, D.C. Primarily, we're calling on independent sponsors, middle market investment bankers and other sources to try to create what we would think of as proprietary-type investment opportunities. We do not, when we do a transaction, depend on others to negotiate or structure our investments. And generally, our investments include partnering with the management teams of these portfolio companies, that's very important, and if there are other independent-type sponsors that work with us in helping purchase the business. Our strategy of providing the financing package, which includes both secured debt and the majority of the equity, is a competitive advantage, so it does give the seller that we've been negotiating against or the independent sponsor who we might be working with and the management team a high degree of comfort that the purchase will occur from the financing perspective. So -- and also, of course, in addition to outright purchases, we occasionally might find opportunities to partner with a business owner who will sell a portion of the company to us and might use that capital to grow the business. Our focus, generally, we are investing at companies with consistent operating cash flow or EBITDA, which stands for earnings before interest, taxes and depreciation, of at least $3 million and obviously, with the potential for it to be able to expand that cash flow. Areas of industry that we are interested in generally are light, specialty manufacturing, specialty consumer-type products and services, industrial products and services and from time to time, we look at aerospace and energy-related type businesses. The secured debt investments that we make typically carry a higher cash yield in the mid- to high teens, which balances the equity portion of our investment so that we are able to get a blended current cash yield, which is what we focus on to support our distributions to shareholders -- preferred shareholders. We generally also have an additional yield enhancement on our debt, which we call a success fee, and these are generally paid in cash on a change of control or can be paid by the portfolio company in advance at their auction. In addition, on the equity portions of our investments, we generally target at least -- expect a 2x cash-on-cash return for the equity portion of the transaction. So let's turn a bit now and talk about the portfolio origination activity for the fourth quarter and the fiscal year ended March 31. We are pleased to report that during the fiscal year 2015, we invested $133 million in new deals and in existing portfolio companies. The fourth quarter ended March 31, 2015, was again strong in that we actually made 2 new investments of approximately $43 million. One was in March, where we purchased a company called Logo Sportswear, Inc., which, again, was a combined secured debt and equity investment of approximately $10.8 million. Logo, which is headquartered in Cheshire, Connecticut, is an online provider of user-customized uniforms and apparel for teams, leagues, schools, businesses and other organizations. The second investment was made in March also, and we purchased a company called Counsel Press, Inc., which, again, we did through a combined secured debt and equity investment, a total of $32 million. Counsel Press is headquartered in New York City. It provides expert assistance in preparing, filing and serving appeals in state and federal appellate courts nationwide and several international tribunals. So including these 2 buyouts in March, we originated 6 new proprietary investments during the fiscal year, which totaled $108 million, and we made 8 add-on investments in existing portfolio companies. So the portfolio asset base is actually up 5 investments year-over-year. We believe there is a positive origination trend going into the first quarter of fiscal 2016, and we're actually in the final diligence phase of a few new investments. And we expect to close -- our first fiscal quarter, which ends June 30, we expect to close a couple of these transactions. So we continue expanding our marketing efforts, and we are growing our presence in the marketplace. So our outlook in summary is -- and our goal is to continue to strategically add accretive investments, position our existing portfolio for potential exits, thus helping to maximize distributions to shareholders with a solid growth in both the equity and the income portion of our assets. And so with that, I will conclude my part of the presentation. I'm going to turn it over to Julia Ryan, who is our Chief Accounting Officer, and have her tell you more about the great financial results. Julia?

Thanks, Dave, and good morning, everybody. The big news this quarter, as Dave mentioned, is that we originated 2 new deals totaling $43 million, and we raised 27.5 million in new common stock, including an over-allotment that closed subsequent to year-end. In addition, we raised 40 million of new Series C term preferred stock in May 2015. This additional capital has enabled us to expand our balance sheet and to raise capital for future new deals that Dave alluded to earlier. Through this use origination, together with highly successful [indiscernible] last year, we achieved our best year of operating performance with over $41 million in total investment income and over $19 million in net investment income. We were also really pleased with our net unrealized appreciation during the period, which totaled almost $30 million, and was driven by improvements in operating performance as well as increases in market comparables on certain portfolio companies. The cumulative effect of these positive trends in opening performance of the fund resulted in NAV of $19.18 per share or a 10% increase over last year's NAV per share. Turning to the balance sheet. The balance sheet position at the end of March had $484 million in assets, consisting of $466 million in investments at fair value, $5 million in cash and cash equivalents and $13 million in other assets. Our portfolio's allocation net cost is currently $370 million in debt securities and $135 million in equity securities or a 73%-27% split. As for our liabilities and equity at March 31, we had $190 million in borrowings outstanding on our credit facility, $81 million in term preferred stock, $10 million in other liabilities and $273 million in equity. Listeners will remember that in June and September 2014, we amended our credit facility to, one, increase the capacity, extend the maturity date and to lower our interest rate. We also raised $41 million in series B term preferred stock in November 2014. In March, we completed the offering of 3.3 million common shares for net proceeds of approximately $23 million. Following on the heels of the successful capital raising efforts in '15, in April, we closed on the over-allotment of the March common share offering and issued an additional 495,000 common shares for net proceeds of $3.5 million. Additionally, in May, we issued approximately 1.6 million shares of our newly issued 6.5% Series B term preferred stock for net proceeds of approximately $38.6 million. These financing successes have allowed us to raise capital to support our new deal origination activities over the past several months. We will continue to monitor and explore additional ways to raise capital to fund deal flow over the upcoming months while also meeting our BDC leverage requirement. Our net asset value was $9.18 per share as of March 31, up $0.63 from December 31, 2014, primarily resulting from $24 million of net unrealized appreciation recorded in the current quarter due to the factors previously mentioned. Beginning with the current quarter, we issued -- we used an external third-party valuation specialist to provide additional data points regarding market comparables and other information using our valuation related to certain of our more significant equity investments. We will continue this practice and will plan to generally update this externally provided data on an annual basis for all of our significant equity investments. Moving over to the income statement. For the March quarter, total investment income was $11.2 million versus $11.6 million in the prior quarter. Total expenses, net of credits, were $6.2 million versus $5.2 million in the prior quarter, leaving net investment income of $5 million versus $5.8 million for the prior quarter, a decrease of 14.5%. The slight decrease in our investment income quarter-over-quarter was due to a decrease in other income of about $0.5 million as a result of fewer success fees and dividend income, partially offset by an increase of $0.2 million in interest income from holding a larger portfolio due to the new deal origination. As mentioned on previous calls, over the past 5 fiscal years, other income was over 16% of our total investment income as compared to 12% during the latest fiscal year. We expect other income, which is primarily composed of success fees and dividend income, to remain meaningful but variable from quarter-to-quarter. Our net expenses increased quarter-over-quarter, primarily due to a $0.3 million increase in dividend expense on our Series B term preferred stock issued in November 2014. As a result of the above, our net investment income decreased to $0.19 per common share for the March 2015 quarter from $0.22 per common share for the December 14 quarter or a 13.6% decrease. Our net investment income 100% covered our distribution to shareholders, which, during fiscal year 2015, was at an 18% per common share quarterly run rate. And as Dave mentioned earlier, we recently increased this dividend. For the fiscal year, total investment income was $41.6 million versus $36.3 million in the prior year. Total expenses, net of credit, were $21.7 million versus $17 million in the prior year, leaving net investment income of $19.9 million or $0.75 per share versus $19.3 million or $0.73 per share for the prior year. This is an approximate 3% increase year-over-year. This increase was driven by an increase in interest income of $6 million from holding a larger portfolio due to deal origination, partially offset by a decrease in other income and in current costs relating -- related to holding such a larger portfolio, which includes borrowing and management costs, including base management incentive fee. Other income of $5 million was again significant in the current year, but declined 15% year-over-year, primarily due to lower success fees in the current year. Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation is a noncash event and comes from our requirement to mark investments to fair value on the balance sheet, with the change in fair value from one period to the next recognizing our income statement. During the quarter and year ended March 31, we recorded minimal realized activity related to previous exits. In contrast, we recognized significant unrealized appreciation of $24 million and $30 million, respectively, during the quarter and year ended March 2015. This change was mainly driven by increased financial and operating performance of our portfolio investments as well as fairable market comparables. During the March quarter end, our entire portfolio was valued at 92.2% of cost, up from 86.2% of cost last quarter. All of our portfolio companies are current in payment, except for one, which continues to remain on nonaccrual status and represents less than 1% of the fair value and less than 3% of the cost basis of our total debt investments at year-end. The total portfolio makeup consists on the debt side of 80% of our loans having variable rates with a minimum or floor and then the remaining having a 20% fixed interest rate. The weighted average yield on interest-bearing debt investments remained consistent quarter-over-quarter at 12.5%. The strong yield excludes success fees on our debt investment. As discussed in previous calls, success fees or yield enhancements that are contractually do generally upon a change in control, although there are times when the portfolio can elect to pay it earlier. We generally only recognize success fees on our income statement when they are received in cash. For comparison purposes, if we had accrued these success fees as we would if it was structured as a paid-in-kind interest like other BDCs do, our weighted average yield on interest-bearing assets would approximate 15.3% during the March quarter. As of year-end, the success fees accruing off-balance sheet totaled $24.3 million or approximately $0.82 per common share. There is no guarantee that we will be able to collect all of the success fees or have any control over their timing. From a credit priority standpoint, 100% of our loans are secured, with 77% having a senior priority and the remaining 23% being senior subordinated in the capital structure of the respective portfolio companies. Overall, Gladstone Investment had a strong origination year, which helps equate to a strong financial result. We increased our distribution rate on our common stock for the second year in a row and have maintained that increased distribution by still remaining committed to covering our distributions by net investment income as we have done consistently over the last 4 fiscal years. And now I'll turn the call over to David Gladstone.

All right. Thank you, Julia. That was Julia's first time through, and she did a great job. And we've heard from Michael and Dave, and they had great reports as well. During this fiscal year, we're able to report some great accomplishments, such as strong originations, increased valuations, several successful financing activities and most of all, including an expansion of our line of credit and selling common and preferred stock. This increases our net investment income. And in addition, we declared special dividends, and then we increased the dividends. So this company is cruising along in a good pace now. In the fourth quarter, we closed 2 new investments for $43 million. We invested cash in existing portfolio companies of about $10.6 million, and we had our net asset value rise substantially to $9.18, a 7.4% increase. After the end of the quarter, our board took a look at the projected earnings and raised the run rate on our monthly dividend by 4%. I just think that we're going to continue to see success going into fiscal 2016. That's -- March 2016 will be our year-end. We're already off to a good start. We raised the monthly dividend and -- by about $0.03 per share annually. So we will not have to declare, perhaps, an extra dividend. Or perhaps we will have a small extra dividend this year. And the issuance of $40 million of our Series C term preferred stock gives funding, and we really needed to do that because we have several investments that are in the final diligence and documentation phases and target to close before June 30, 2015. I always feel it's a great time to invest in small businesses during these sort of choppy periods. The middle market companies like the ones we invest in are doing well. However, these type of companies can have a significant impact by the economy. And we see some positive trends out there in the economy today, but we also still have the same concerns. I bring these up almost every time. There's still a great deal of uncertainty about the Federal Reserve and their monetary policies and the impact on future interest rates. They keep talking about raising interest rates. And while we have most of our loans at variable rates, it's never good time when interest rates go up as it's more costly to the small business concern. The volatility of oil and gas in their industry, I mean, it's wonderful now that oil prices are low. It's a terrific benefit to the economy. We just don't know how long that will last. And our oil and gas industry concentrations have been historically minimum. In fact, I don't think we have anything to -- that's going to be impacted by that, but all portfolio companies are impacted when prices of oil and gas go up. The fiscal crisis and the federal government still is the top of my mind. The federal deficit is now over $18 trillion and continues to climb at just a ridiculous rate. There doesn't seem to be any government spending reduction in sight today. Many private companies like those we invest in are feeling there's far too much regulation around all aspects of their business, health care, financial services, energy, emissions. It is hindering their performance and their growth and as well as their job growth. In light of these concerns, we here at the company have strengthened the balance sheet in the form of significant new equity. We've used the new equity to buy a list of good portfolio companies that we think would stand up in any kind of recession. And our plan is to exit 1 or 2 of them in this fiscal year, which should give us some -- a fairly nice capital gain. Despite the past and current economic issues, our fund has continued to make consistent monthly distributions, including increasing the dividend. I think this is the third one in the last 5 years. In April 2015, our Board of Directors declared a monthly distribution of common shareholders at a little over $0.06, $0.625, and that's up from the regular $0.06 per common share for each of the month of April, May and June of 2015. We're now in a run rate of $0.75 per share per year. Through the date of this call, we've made 118 sequential monthly cash distributions to our common stockholders, and we've done 3 or 4 extra dividends now almost every year. At the current distribution rate, the common stock, which closed yesterday at about $7.55, is almost at 10% return. So it's just a great one to hold in your [indiscernible]. Our distributions also come from some of our preferred stocks. We have a 7.125% Series A Preferred Stock. That's $1.78 annually. It's trading at $25.74, so good strong yield there. Distribution also a 6.75% on our series B preferred stock, which translates into $1.69 annually. And that's trading at $25.25 again over a 6.5% return for people holding that. And our newly issued Series C preferred stock has just started trading. Its first distribution will be at the end of June. It's traded on NASDAQ under GAINN, and it's trading at $25.18, so just a little above the issue of 6.5%. In summary, the company is really doing well. Gladstone Investment is attractive investment, I think, whether you're in the preferred or the common stock. We continue to distribute monthly distributions and also a few special distributions, and we hope some special distributions from capital gains. We'll continue to be disciplined in our investment approach while we focus on making very strategic debt and equity investments in American middle market businesses. I expect a good quarter for June 30, 2015, and I hope to continue to show you strong returns on your investment in our fund. And now, Latoya, would you come on? And we'd like to have some questions from analyst or any of our loyal shareholders.

[Operator Instructions] And we have a question from Mickey Schleien of Ladenburg.

A question for Dave -- a couple of questions for Dave Dullum. Dave, I understand your comments at the beginning of the call regarding acquiring new companies versus selling, but I wanted to perhaps get a little bit more color on that. How are you balancing the opportunity to sell at these elevated multiples that we have, given that we're deep into the economic cycle versus your interest and willingness to continue to acquire companies? In other words, is there some sort of arbitrage that you're trying to affect? And my second question, a little more straightforward. Can you just discuss any changes you've made to your valuation processes?

Okay, Mickey. First question, I wish I could tell you it was as sophisticated as some arbitrage. You will know the kinds of businesses that we buy, that we own, that we manage are smaller and medium-sized companies. And being able to just run out and sell one, if you will, is not always easy. A lot of factor is involved, not the least of which will be the management teams and so on. I think the way we think of it, as I tried to really describe, is 2 things. One, we are, obviously, going to be more sensitive, I'll say, to the idea that with a portfolio of company -- and depending on how long it's been in the portfolio and given what I would consider certainly a somewhat robust marketplace around valuations and interest in acquiring good businesses like we have, that if it makes sense from the standpoint of taking a realized gain, especially for our shareholders, relative to the idea of thinking through do we hold it for a longer period of time because, obviously, we're generating current income, and we still think there's upside on the equity. We -- it's kind of that classic take a look and do I want to continue owning this business and buying it again, so to speak. So we really think about that carefully. That, frankly, I would say, is not tied directly, obviously, to the acquisition of new investments, which is our fundamental business. So I hope that helps answer the question. I mean, we really obviously don't really take a holistic view overall. But we're very -- but we're sensitive to -- I don't just want to run out and sell a business for the sake of selling it. If it makes sense, we will. And I'm going to -- we're going to be more thoughtful around that part of the process because I think capital gains are important. And I think we touched on the fact, and David Gladstone also reiterated, we have a couple that potentially could happen this year, this fiscal year. At the same time, we obviously are working hard. I think we've done a really good job in finding opportunities to acquire that fit our model, that are valuations that make some sense. It's hard work. It's not easy. But I think that's the best answer, Mickey, I can frankly give you on that one. As it relates to the valuation methodology, what I'd like to do is turn it over to perhaps our finance folks and ask, perhaps, Julia. She touched on it. She mentioned briefly what we did. If she would like to elaborate on that part of the process.

Sure, Dave. Mickey, there really hasn't been a change in the valuation process per se. We've merely consulted with an external specialist in the field evaluation to provide additional data points and market comparables to include in our internal models. And this really is an industry practice used by many other BDCs and market participants, and we believe that this makes our internal process stronger. And we really plan to cycle most of our significant equity investments through this external review. And obviously, we will continue to use S&P for our debt investment.

I apologize if I didn't catch that on the prepared remarks. But Julia, did you -- what proportion of the portfolio did you apply the -- that new third-party valuation firm to?

We strive to do about 4 to 6 a quarter.

That's roughly a quarter every quarter?

Yes, we do -- we did a little more this quarter just because it was a startup mode. We had, Mickey, before relied on our internal review as well as touching base with a couple of people on the outside. We -- our Chief Valuation Officer, she looked at what everybody else was doing and suggested that we hire somebody to look at the equity portion more carefully and help us through that. Quite frankly, it's actually increased the valuation by using external folks. They seem to have a better handle on the multiples that are being paid in the marketplace and...

Right. And I understand, that's why I asked because I'm wondering if there's -- how much more upside there might be to NAV as this process is applied to the rest of the equity positions.

I can't answer that until we get around to doing 4, 5 or 6 and maybe more each quarter. And the hope would be that it's more accurate as opposed to hoping that it always goes up in situations. It could just as easily be taken down. As you probably know, Pricewaterhouse, our accountants, have to go through all of these valuations as well. And so we are well analyzed in terms of our portfolio of companies. But I can tell you from experience, things can change very quickly, and values can change very quickly as well. And on your point on -- talking about the acquisitions. The acquisitions occur in companies that we think we can build up as well. And then when they're built up, usually, they can attract much lower-cost debt. So keeping us on as a low-cost debt provider is not very good for us. And so when they finally grow up, so to speak, and are able to tap the regular marketplace where debt is much cheaper, it becomes obvious to us at that time that we just have an equity holding, which is not producing any income to speak of. And that pressures us to think about selling off that company. So our goal is always to buy a company and perhaps add more companies to it or just to internal growth. And at some point in time, the management, many times, will come to us and say, "We like to sell the company." And sometimes, we go to management and say, "You should think about selling it because you've grown this company to a point that it may be difficult to grow it much further." So there...

I agree with you, David. And given what you just said and how deep we are into the economic cycle, multiple years of GDP growth, I imagine what you've just described has gone on with many of your portfolio investments. It would just seem to me to be a time to take some money off the table. I do understand that it's difficult to replace those deals. But in the end, that's sort of the business model. So I'm having a hard time understanding why you don't monetize some of those gains and let the market come back to you down the road.

Well, we...

Let me -- if I can weigh in again, Mickey. I think this whole question, I think the key, though, is you've got to -- again, I use the word holistically. We have a portfolio that we're going to gradually build over time. Again, as David Gladstone touched on and I mentioned earlier, the management teams of these companies are partners with us, and the monetizing is important. But I -- remember, we're not in a debt business, right, just pure debt, we -- that we know. We have the debt portion, and we have the equity. And so we're going to take what I would call a sensible approach to evaluating whether we've received an equity gain, we -- potential equity gain on a business that we think makes sense to equitize it. And I -- frankly, I don't -- there's no magic to this. But given the size of our portfolio, given the nature of our portfolio, if we have the ability and could see through selling 1 or 2 companies a year, as an example, for the reasons you mentioned, that's probably kind of where it ought to be. Because again, the objective is, as we grow and build the business, we still want to keep that base of income to continue growing our dividend distributions, et cetera. So I think -- I wouldn't want to get into a mode of saying, "Let's rush out and sell a whole bunch of companies." We got to look at each company individually again and appreciate whether or not yet, where it fits in the exit strategy at the time from obviously a realized value perspective.

But Dave, why focus so much on a stable regular dividend? It's now -- if valuations are attractive, it's a sellers' market now, why are you opposed to, okay, let's try to monetize some of these gains that we have. And if that means we have to lower the regular dividend until the market comes back to us, so be it. But you're still -- that would seem to me to end up being a better place than writing everything on down. If the economy starts to contract, the valuations will come down. That will be reflected in a NAV. You'll have pressures if you do that as well. So why this focus on a stable regular dividend as opposed to generating the best total returns that you can?

Yes, well, in all due respect, finding the kinds of companies we acquire isn't easy, right? And I think that's a very important ingredient of this thing. So what I -- the way I would, frankly, answer that from our shareholders perspective, unless we felt -- again I got to say this, each company has its own characteristics. And we have to look at where it is, even though the overall market may be, using my word, a bit frothy or what have you, not every company, depending on industry and various other aspects, are going to be able to quote at the point in time gets, say, the maximum or what we might perceive to be the maximum value. So what I'd not want to do, which I think would be harmful to the shareholders, frankly, would be to just to go and try to sell a business for the sake of selling it if we still fundamentally believe that it's got opportunity for continued growth. You're right, there's always opportunity for cycles and down cycle, but we valuate that on the same basis that we're actually going out doing the work to find new companies. So again, we don't do many -- get in many of these very high multiple auctions. That's not the business we're in. It takes hard work to even make like we did this past year with the 5 new assets that we acquired at really relatively good multiples, given the marketplace today. I'm very proud of that. And so that -- it's -- again, it's a management process. And so the best way I would give you an answer again is simply, look, we're doing as far as I'm concerned thinking through now how we manage exits because it makes sense to exit when we're exiting. We're not insensitive to the marketplace today, may be advantaged to do that. And that's what we are doing it. That is -- as we mentioned, we're going to -- looking at a couple and then for the right reasons, for exactly what you said. But to then sort of go to think through selling off a bunch of all this probably is not in the best interest of the shareholders while we're still looking to acquire good solid businesses.

Okay, I appreciate that insight, Dave. And I will follow up with you, I think, off-line to get a little bit more background.

The next question is from Mitchel Penn of Janney.

Just a real quick one. What is your target leverage?

We don't have a target leverage other than the one that the government imposes on us. And the idea is to not get very close to that. We don't want to ever trip the 1:1 kind of ratio. But we do like leverage. This is a low-leverage business that we're in, in the sense that we can't go above 1:1. As you know, most banks are 10:1. So the goal is to be in the at least at 50% leverage and maybe as much as 75% or 80%, but we don't want to get up around 90% or 95%. And if we do, then it's time to have an equity offering.

So today, are you guys at around 75%?

75%.

And so with the new deals that you guys just discussed that might close in, like, by June, should we assume anything that happens might temporarily spike leverage and over time, you'd get back to the 75%?

Two things going on. Yes, if the capital gains that we're expecting from one of our transactions happens first, then leverage would go down. On the other hand, if the closing happens first, leverage would go up. We are expecting, perhaps, before the end of this quarter, but most likely in July or August, a substantial transaction. And then as Dave Dullum mentioned, we have another one on the agenda to get sold hopefully later in the year. So it depends on what you trigger. We do get payoffs, as you probably know. We sometimes like payoffs, depending on how the company's doing. If it's doing extremely well, it's not welcome. If they are just chugging along, it's a good idea to get it back, put it to work again. So there are projected payoffs that would lower the debt level as well. Other questions?

[Operator Instructions] There are no further questions at this time. I'll turn the call back over to David for closing remarks.

All right. Thank you, all, for calling in. We had a great quarter. Good questions. Thank you, all, for calling in, and that's the end of this conference call.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.