Gladstone Investment Corporation (GAIN) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gladstone Investment Corporation's first quarter earnings call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to David Gladstone. Sir, you may begin. Mr. Gladstone, you may begin.

Thank you, Shannon. Nice introduction. Hello, and good afternoon. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. Common stock trading symbol is GAIN. And we have 3 preferred stocks: One is GAINO and GAINP and then GAINN. So 3 different versions of that. We thank you all for calling in. We're happy to talk to our shareholders and potential shareholders. We love to give updates on our company and our portfolio and our business environment. We wish we could do this more often, and you all have an invitation to stop by and say hello if you're in the Washington, D.C. area. We're in a suburb known as McLean, Virginia. And please stop by and say hello. A lot of people here. You'll meet some very fine people. And now we'll hear from our General Counsel and Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration, which serves as the administrator to all the Gladstone funds and related companies. And he'll make a statement regarding forward-looking statements. Michael?

Good afternoon, everyone. This conference call may include statements that 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. And 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 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 these forward-looking statements, including those factors listed under the caption Risk Factors in this Form 10-Q filing and our Form 10-K filing and our registration statement as filed with the SEC, all of which 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 future results. Please 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, @GladstoneComps. And 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-Q for the quarter ended June 30, 2015, which we filed yesterday with the SEC. Those can be accessed on our website, gladstoneinvestment.com. And before I forget, we're having our Annual Stockholders Meeting tomorrow, August 6, 2015, and everyone is invited. Please make sure you vote your shares to help us avoid costs associated with the solicitation campaign. If you have not voted your shares, let me tell you how you can vote. You can vote -- you can cast your vote quickly and easily by signing and dating, mailing in your proxy card accompanying your proxy statement or by calling in 1 (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 phone or Internet will require that you have your proxy control number available, and that number is printed on the proxy card that accompanies your proxy statement that you received in the mail. 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 (866) 366-5745. And stockholders may also vote by attending the annual meeting in person, which will be held tomorrow at 11 a.m. Eastern time at our corporate headquarters located on 1521 Westbranch Drive, Suite 100 in McLean, Virginia. If you are unable to attend, please vote your shares using one of the methods I described earlier. Now let's turn to David Dullum, the President of Gladstone Investment, to get an update on the fund's performance and outlook.

Thank you, Mike. So our company, Gladstone Investment, is a fund focused on buying middle-market U.S. businesses with the annual sales generally between $20 million and $100 million. Our funding structure in any buyout usually consists of secured first and second lien debt in combination with a direct equity investment, giving us a significant ownership position. This combination of debt and equity produces a mix of assets, which is the basis of our strategy for Gladstone Investment. So the debt portion of our investments provide income to pay and grow our monthly distributions, while we look for the equity portion to increase in value and provide capital gains from time to time. So with our continued growth in operating income and the periodic realized gains that we have recognized, our board was able to declare a common share distribution of $0.0625 per share per month for April through September, which is a run rate of $0.75 per share per annum, which represents an over 4% increase year-over-year. Just generally, we like to indicate how we are different from other BDCs or other finance-type companies in that what we do is we take a significant equity position in the companies that we invest in, and this differs from the other public BDCs that are predominantly debt-oriented and generally referred to as credit-type BDCs. So for instance, the proportion of equity-to-debt for the investments in our portfolio, you'll see, is approximately 25:75 ratio. Most of the BDCs' portfolios are somewhere closer to about 10:90 proportion of equity-to-debt with their equity generally coming through warrants that are issued with the debt that they place or a small co-investment through and with the primary equity sponsor in any one transaction. As for more traditional private equity funds, which are generally 10-year private partnerships with a longer liquidity horizon for their investors, we are different in that as a publicly traded entity, our structure allows daily liquidity for shareholders, so allowing essentially ownership in portfolio companies that we buy through a public vehicle, which provides liquidity to shareholders. Also, we are able to keep an investment generally longer in our portfolio while we generate income prior to an exit, thereby creating the gain on equity. Now exit strategies. On previous earnings calls, we have discussed the topic of selling or exiting companies. Realizing capital gains through portfolio company exits is very much a component of the value proposition of an investment in our company, and I would like our shareholders to know that we do develop and manage plans around the exiting of these companies from time to time. These are generally based on the market conditions and our assessment of the risk and return in continuing to hold an investment versus exiting. We are currently evaluating possible sales over the next several months, so, so much more to come on these as we move further into our fiscal year, which ends March 31, 2016. We should note that although we may hold our investments for long periods of time, we do quarterly equity valuations of our portfolio, which can be volatile and not always representative of the potential value which we might attain on an exit. It is important, therefore, that we do look to the possible future realizable equity portion of our assets as one aspect of the overall future value of our company. Since June of 2010, we've exited 5 of our management-supported buyout investments and generated, as a result of that, about $54 million in realized capital gains. Now while the buyout market is still somewhat seller-friendly, we must keep in mind that while we -- if we were to sell a portfolio company in this market, and it may be tempting, it would reduce the income-producing asset base, and then we would be challenged to incrementally replace that investment, obviously, in a higher purchase value environment at the current time. So let's look at our deal-generating activities and how we do that. Our deal-generating activities do have a very high priority, and our recent press releases do reflect the results of our continued growth in making new buyouts. We do it by -- as a result of having a broad and deep geographic footprint with offices in New York City, Los Angeles, Chicago and here in McLean, outside of Washington, D.C. We primarily market ourselves to what we call independent sponsors, middle-market investment bankers and other sources that help create proprietary investment opportunities. We do not depend on others to negotiate or structure our investments for us. Generally, our investments include partnering with the management teams of these companies and other sponsors that are -- would be involved in the purchase of any business. Our strategy of providing a financing package, which includes both the secured debt and the majority of the equity, is a competitive advantage as it gives the seller, the independent sponsor if there's one involved and the management team a very high degree of comfort that the purchase and the transaction will occur at least from the financing perspective. In addition, actually, to outright purchase, we occasionally may find opportunities to partner with a business owner who will sell a portion of their company to us and then use that capital to grow the business. So where do we focus our efforts? Generally, we invest in companies with consistent operating cash flow or, as we call it, EBITDA, which means earnings before interest, taxes and depreciation, generally of at least $3 million, and we'd like it to obviously have a potential to be able to expand that cash flow. Some areas of interest from an industry perspective that we focus on are a light specialty manufacturing; specialty consumer products and services; industrial products and services; occasionally, aerospace and energy, although we've not done much of that recently. And those typically are the 4 broad areas of industries that we focus on. Now as to the types of investments, generally, our investments, as briefly mentioned, are secured debt investments, and those investments will carry a first lien, typically also a cash yield, which is going to be in the mid- to the high teens. And that helps to balance the equity portion of the investment when we make it, which gives us a blended current cash yield, which does help support our distribution expectations to shareholders. We generally also have an additional yield enhancer on these loans, which we generally call a success fee. And usually, these are paid in cash on a change of control or, in some cases, in advance at the portfolio company's option. Further, the equity portion of our investments we generally target to create a minimum of 2 to 3x cash-on-cash return. Now let's look at the actual origination activity for this first quarter which ended June 30, 2015. We are pleased to report that during the first quarter we invested $17 million in 1 new deal and existing portfolio companies, which continues our strong origination activity into this fiscal 2016. We also successfully exited 1 small portfolio investment. Specifically, in May, we purchased Brunswick Bowling Products through a combination of secured first lien debt and the equity investment for a total of about $16.3 million. Brunswick, which is headquartered in Muskegon, Michigan, is a leader in the recreation industry, providing industry expertise, products, installation and the maintenance for the development and renovation of new and existing bowling centers as well as mixed-use facilities across the entertainment industry. In June, we also sold our investment in Roanoke Industries Corp., which resulted in a realized gain of $200,000 and a full repayment of our secured first lien debt of $1.7 million. We do believe there is a strong positive origination trend as we continue through our second quarter of fiscal 2016 as we are in various stages of a diligence phase on a few new investments, which we hope will close sometime in the upcoming fiscal quarters. In this regard and as a subsequent event to the first quarter, we did announce beginning of this week that we acquired a company called GI Plastek, that was on July 31, with a total financing of the equity and debt of approximately $21 million. So we continue expanding our marketing efforts and growing our presence in the marketplace. So in summary, our goal for GAIN is to continue to strategically add accretive investments and position our existing portfolio for potential exits. Thus, we expect maximizing distributions to shareholders with solid growth in both the equity and the income portion of our assets. So that takes care of my part of the presentation. I'll turn it over now to Julia Ryan, our CFO, so she can fill in some of the details on the financial performance. Julia?

Thanks, Dave, and good afternoon, everyone. The big news this quarter, as Dave mentioned, is that we originated 1 new deal and successfully exited 1 existing investment. We also raised almost $44 million of capital, consisting of over $40 million Series C preferred stock and over $3 million of new common stock, which was the overallotment of our $24 million March common offering. This additional capital affords us flexibility to continue to expand our balance sheet via future new deals. Through this quarter's originations, together with highly successful originations last year, we achieved another very strong quarter with over $12 million in total investment income and over $5 million in net investment income. We were also pleased to announce that our portfolio continues to perform, resulting in over $3 million of net appreciation, which was driven by improvements in operating performance as well as increases in market comparables of certain portfolio companies. The cumulative effect of these positive trends resulted in a net asset value of $9.24 per share as compared to $9.18 per share at March 31. On the balance sheet side. At the end of June, we had $502 million in assets, consisting of $481 million in investments at fair value, $6 million in cash and cash equivalents and $15 million in other assets. Our portfolio's allocation net cost is currently $377 million of debt securities and $140 million of equity securities for a 73%-27% split between debt and equity. Our liabilities and equity at June 30 consisted of approximately $90 million in borrowings outstanding on our credit facility, $122 million in term preferred stock and $10.5 million of other liabilities in addition to $280 million in equity. Listeners will remember that in March 2015, we completed the offering of 3.3 million common shares for net proceeds of approximately $23 million. Following on the heels of that successful capital raising in fiscal '15, in April, we closed on the overallotment of the common share offering and issued an additional 495,000 common shares for net proceeds of $3.4 million. In May, we issued approximately 1.6 million shares of our newly issued 6.5% Series C Term Preferred Stock and generated net proceeds of $38.6 million. These financing successes have allowed us to raise capital to support our deal origination activities over the past several months and provide flexibility for future originations. 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 requirements. As I mentioned, our net asset value was $9.24 per share as of June 30, which is a 6% -- $0.06 increase since March 31 and primarily results from strong operating performance in the current quarter, including the previously mentioned appreciation. Consistent with the fourth quarter of fiscal '15, we continue to use an external third-party valuation specialist to provide additional data points regarding market comparables and other information related to certain of our more significant equity investments. We will continue this practice, and we'll 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 June quarter end. Total investment income was $12.7 million versus $11.2 million in the prior quarter. Total expenses net of any credits were $7.5 million versus $6.2 million in the prior quarter, leaving net investment income of $5.2 million versus $5 million in the prior quarter. The increase in net investment income quarter-over-quarter was primarily due to higher interest income as a result of holding a larger portfolio, which was partially offset by the additional cost incurred in originating and carrying the portfolio, which includes financing costs and management fees. As mentioned on previous calls, other income has historically been as high as 16% of our total investment income as compared to about 10% during the latest quarter. We expect that other income, which is primarily composed of success fees and dividend income, will remain meaningful, but variable from quarter-to-quarter. Our net expenses increased in the current quarter primarily due to higher interest and dividend expense, driven by increased borrowings in our credit facility and by our newly issued Series C Term Preferred Stock. As a result of these factors, including the newly issued common stock in March and April, our net investment income decreased to $0.17 per common share for the June quarter from $0.19 for the previous quarter. Our net investment income and a prior year spillover amount covered our quarterly distributions to shareholders of $0.1875 per common share 100%. Now let's turn over to realized and unrealized changes in our assets. Realized gains and losses results from actual sales or disposals of investments. Unrealized appreciation and depreciation is a noncash event and is driven by the requirement to mark our investments to fair value on our balance sheet with the change in fair value from one period to the next recognized in our income statement. During the June quarter, we recorded $200,000 in realized gains relating to the exit of 1 portfolio company. Additionally, our portfolio went up in fair value by $3.2 million. This change was mainly driven by improvement in performance and an increase in the comparable multiples of certain portfolio companies. As a result, for the June quarter end, our entire portfolio was fair valued at 93% of costs, up from 92.2% of cost last quarter. All of our portfolio companies are current in payment, except for one, which continues to remain a nonaccrual, and this portfolio company represents less than 1% of the fair value and less than 3% of the cost basis of our total debt investments. As far as our portfolio, in general, the debt portfolio is well positioned for any interest rate increases that may come about in the future with 81% of our loans having variable rates with a minimum floor and the remaining 19% having fixed rates. The weighted average yield on interest-bearing debt investments remains consistent quarter-over-quarter at 12.6% versus 12.5% in the previous quarter. This strong yield excludes any success fees, as Dave previously mentioned. It also does not include any paid-in-kind, or PIK, income as we do not currently have any debt securities with a PIK feature. Success fees are yield enhancements that are contractually due generally upon a change in control, although there are times when the portfolio company can elect to pay it earlier. We generally only recognize success fees in 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 a paid-in-kind interest like other BDCs do, our weighted average yield interest-bearing assets would approximate 16.3% during the current quarter. And as of June 30, the success fee accruing off balance sheet totaled $27.4 million or approximately $0.90 per common share. There's no guarantee that we will be able to collect all of these success fees or have any control over the timing of the collection. From a credit priority perspective, 100% of our loans are secured with 81% having a first lien priority and the remaining 19% having a second lien priority in the capital structure of the respective portfolio companies. Overall, Gladstone Investment had another good origination quarter, which helped the company generate strong financial results. As previously mentioned, we increased our distribution rate on our common stock and have maintained that increased distribution while still remaining committed to covering our distributions by current or prior year net investment income as we have done consistently over the last 4 fiscal years. And now I will turn the call to David Gladstone.

All right. Thank you. Julia, that was a good report; and Dave and Michael, good reports. During the past quarter, we were able to report some great accomplishments, such as good originations, increased value in the portfolio and several successful financing activities, increasing our net investment income and declaring a dividend increase. One of our portfolio companies, as we keep mentioning, has moved closer to being sold. I think we have a couple of buyers, one now moving a little bit further ahead than the others. So I'm hopeful that before the end of the year -- end of the quarter, this quarter, that we'll have some good information for you. To recap, we closed a new investment, $16.3 million. We invested $1 million in an existing portfolio company, increased our net asset value to $9.24 and raised our run rate on monthly distributions by about 4% and believe we can continue this success going into the second quarter of fiscal 2016 and are already off to a really good start as far as doing things. And we got a lot of things under diligence and documentation phases. So I think you're going to see the quarter-ending this quarter, September 30, it looks good. We feel it's a great time to invest in smaller, middle-market companies like the ones we invest in. However, these types of companies can be significantly impacted by the economy in which they operate, although we've seen some of the positive trends in the recent economic indicators. And I think we're continuing to see the economic recovery even though it's a sluggish pace. Just a couple of things to mention to watch out for. Of course, there's still uncertainty around the Federal Reserve's monetary policies. They keep indicating maybe September. That always increases interest rates a bit, but we're pretty much protected from that. There's volatility still in the oil and gas industry as they continue to have layoffs. 10,000 to 15,000 a month seem to be going away. Low oil prices, though, were terrific benefits to the economy and also very great benefit to many of the companies that we have investments in. So our own oil and gas concentrations have been historically minimal. And right now, we're just at a 0. Fiscal crisis in the federal government, we still have a deficit of over $18 trillion this year. It just continues to climb as the government spending goes without any end in sight. I'm not sure when the day of reckoning will come, but we all know that you can't keep doing something like that. Many of the private companies, like those in which we invest, feel there's far too much regulation, and we feel it here in our company as well. Health care, financial services and energy emissions, all of those are hindering the performance of a lot of these small and midsize businesses and, of course, job growth since they produce probably 80% of all the new jobs. In light of all these concerns, our company, Gladstone Investment, has strengthened its balance sheet in the form of significant new equity. We've used new equity to buy into the list of good portfolio companies. So I think we're in good shape. I think our companies are in good shape. Despite the past current economic issues, our fund has continued to make consistent monthly distributions, including the increase of our dividend over time. April and July 2015, our board of directors declared our monthly distributions for our common stockholders at 6.25% -- $0.0625 per share, and that's up from $0.06 in the prior year per common share for each of the 6 months, April through September. Through the date of this call, we've made 121 sequential monthly cash distributions on our common stock and some bonus extras along the way. Since inception, we've paid about $7 -- over $7 now in dividends. The current distribution rate of common stock with the common stock trading at $7.90 is where it closed today. We got a 9.5% yield, and I was very excited about that. I bought a whole lot of shares in mid-June, and I think this is one that everybody should load up on. We do have 3 preferred stocks. I'm not going to go through those in terms of what they are. We have one at 7.25%, another at 6.75%, and then the last one we did at 6.5%. And I think all of these are trading above their original price. So they're in good shape. In summary, I believe Gladstone Investment is an attractive investment for all of the shareholders, its monthly distribution with potential special distributions or increase in capital gains. I think it's a great company, and we will continue to be disciplined in our investment approach and focus on making strategic debt and equity investments in good old American middle-market businesses. We expect a good quarter for September 30, 2015, and hope to continue to show you a strong return as we go forward for the rest of the year. Let me remind you again what Michael talked about. You need to cast your vote. We'd sure like to see everyone voting. It's always hard to get enough votes in, in order to have a quorum. You can call (800) 690-6903 (sic) [ 1 (800) 690-6903 ], and with your proxy card, it's toll-free. You can also do it on the web at www.proxyvote.com. You can even note that voting over the phone or the Internet will require you to have that proxy control number that Michael mentioned, and the number is printed right there on the proxy card accompanying your proxy statement. You also can -- if you call in, they can verify who you are, and you can vote your shares that way as well. So give them a call. Georgeson is at (800) 790-6795 (sic) [ 1 (800) 790-6795 ], or you can call an 800 number, (866) 366-5745. All of these are good ways for you to vote and help us get the shares in so that we don't have to have a second meeting. Stockholders also may vote by attending the annual meeting. We'd love to see you. We only see 2 or 3 shareholders at our meetings. It's 11:00 Eastern time. It's here at 1521 Westbranch Drive. You can vote your shares when you come, if you want to. If you're unable to attend, do vote your shares. And now if the operator will come on, we'll have some questions from our shareholders as well as some of the analysts that may have called in.

[Operator Instructions] Our first question is from Kyle Joseph with Jefferies.

I was just hoping to get a little bit more of your thoughts on sort of the middle market. We've seen more volatility in the broader public markets. Are the markets that you're looking at somewhat insulated from that? And I'm just asking in the context that you said it remains a seller's market. I'm just wondering if you've seen any relief there at all.

Yes. Kyle, thanks. This is Dave Dullum. I'll try to answer it from our perspective, won't really tie in necessarily to the public markets, of course, because we deal in private businesses. And as I mentioned earlier, generally, companies we're looking at are low end $3 million, really up to $7 million or $8 million of EBITDA. In that space, what we're seeing over the last, certainly, 4 or 5, 6 months, that it stayed fairly strong if you are a decent company selling, meaning that you probably are able to get in the 7 to 8x multiple for the enterprise value for that company. That's a challenge. We tend to -- we would like to pay more like 5x. And so we work really hard at that, 5 or 6x. What I think -- this is just me thinking that I'm hoping that might moderate a bit over the next year or so, in particular, since I think the leverage availability, driven somewhat by commercial banks, et cetera, might to some degree put some pressure obviously on the amount of leverage that the equity guys can get to be able to buy a business. And that means they will have to probably put more equity in. And therefore, you might find some moderation of that. But as of right now, I would say it's holding about where it's been for a while. And in our case, we just keep working hard to find those decent companies that we can bring some of our benefit to it to be able to buy them at hopefully lower than what the general market seems to want to pay.

Kyle, do you have another question?

Yes, if that's all right. I was going to ask about the investment in trade. It looked like the fair value of the investment went up a bit quarter-on-quarter. I was wondering if you could just talk about the performance of that investment specifically.

Sure, thanks. We actually are seeing some improvement in that company. I won't go into the detail, obviously, but we're seeing a positive trend in EBITDA. They're working hard on that. And as a result of that, it's gotten a little bit of a bump, relatively speaking. And that is the one company, of course, that is on nonaccrual right now. It's the only one that we have, but they actually are generating positive EBITDA for their fiscal year. So we keep plugging away on that, and I hope it'll continue to get better.

Okay, great. And then I'll ask last question. Just your yields have been stable overall when we're looking at x success fees and whatnot. Is that your outlook for ongoing stability in that portfolio yield? Or -- I noticed the yield on the Brunswick investment was pretty attractive, but what's your outlook for the yield on the portfolio?

Yes, I'd say pretty stable where we have been. As you know, the way we structure our deals, where we do this combination of equity and debt, we have some flexibility to the extent that we, obviously, are, I would say, commanding the presence on the right-hand side of the balance sheet. So as a result of that, we can sort of moderate it. But it's going to stay about where it is as we drive through a fairly, hopefully, consistent cash flow on the total investment, which is what's important for us, obviously, from a distribution standpoint.

Our next question comes from Mickey Schleien with Ladenburg.

I just wanted to circle back to the valuation. I did see that there were some nice movements upwards, like Funko and Cambridge and Frontier, but there was also weakness in names like Old World and B&T. Could you just give us an update on the realignment of the valuation process? And how are you using the third party in terms of the number of companies that they've looked at? And where do you see that going on the next few quarters?

Mickey, thanks for the question. And Julia is going to try to tackle that, and then we can come and see if there's anything specific else on that. Julia?

Mickey, on the specialist side or the third-party involvement, this quarter, as we had indicated last quarter, we had 5 of our significant equity deals being reviewed by the third party. We -- I think we gave guidance last quarter that we intend to present them between 4 and 6 each quarter and continue that practice for each of the next -- succeeding fiscal quarters and then cycle through the entire significant equity investment portfolio every year.

Okay, I understand, fair enough. My next question is related to operating leverage. We -- during the quarter, you posted nice portfolio growth and nice growth in investment income. But it didn't flow through to NII per share, mostly due to professional fees and other expenses. Can you give us a sense of how much operating leverage there is in the business on a go-forward basis?

I guess, Mickey, the only other thing I would answer on that is it might not show up immediately, keeping in mind that, as you point correctly, there's a slight, relatively speaking, downtick in NII per share. But we also did increase, of course, the number of shares kind of in that time frame. So I think what you're finding is that we're not yet benefiting, so to speak, from those dollars going to work to immediately flow through on the net II per share. And I think that's -- I hate to be too general in the answer, but I think that's certainly, I think, the way to think about it. And hopefully, we'll continue to increase the leverage as a result of now having the capital to deploy in the deals that we've just closed, the new deals. And as you know, we don't immediately pick up the interest income from the new deals we do. We do get a closing fee, et cetera, but not the accompanying pickup in overall portfolio income. So I would think that we'll see that starting to increase that leverage.

Appreciate that, Dave, and that's kind of a good segue to my last question. With the deal that you announced, the GI Plastek, and I understand that you may have a sale of a portfolio company this quarter, but then again, you may not. If you don't and you fund it with leverage, you're going to be back up to levels which, in the past, you've sort of maxed out at. If that happens, are you open to an equity offering even at these share prices?

Mickey, we never want to do offerings at these share prices, obviously. But we always need to keep in mind, clearly, as we have said before, we are sensitive, obviously, to the leverage ratio compared to debt-to-equity. We're at an okay range right now. We have some capacity. We just -- we will -- all I can tell you is we'll keep to manage being aware of the sensitivity of that. And obviously, the fact that we would rather not be, if we don't need to, raising equity at, say, below NAV, although the good news is we started moving much closer to NAV on our -- on the share price. So again, it's something we look at carefully, we manage carefully, and we'll do the right thing for the shareholders and the company.

And Dave, remind me, in the shareholder meeting, are you asking for authorization to issue below NAV?

Yes.

You are? Okay.

Well, we ask for that every year. It's just a routine. We don't want to have to do some other mechanism if we need money. So this is an easy way. Now we're not going to raise money just to raise money. A lot of people that are externally managed could raise a lot of money because the fees go up. But we're not in that business. We're in the business of making money for our shareholders, first of all, because mainly, I'm a big shareholder. So I like to see my stock go up and the dividend go up. But the point being here on raising money is we've got pretty good capacity to put a couple of more deals on. I think, by the time we put 2, maybe 3 more deals on, we will have to raise some form of equity. We're pretty much out of raising preferred stock. But if we do sell this one business and get a big chunk of equity -- and by the way, that company is in both companies. It's in Gladstone Capital and GAIN and GLAD. So we've got 2 ways to make money on that one. And I think if that happens, we probably would not need to raise any money for maybe 6 months or a year because it is a powerful reward for us. So anyway, I don't know the future. Nobody does. We will just keep plodding along doing a couple of more deals and see what the world looks like next time.

[Operator Instructions] Our next question comes from Jeremy Roane with Hilliard Lyons.

I just wanted to speak a little bit about the origination activity and if you could comment on really what you're targeting this year in terms of originations. And also if you could comment on asset sales and possibly the level of those that you might expect this year and perhaps the timing of those as well, please.

Jeremy, great, thanks. This is Dave Dullum. As you know, we have to be a little cautious obviously in specifics, both as to origination and also, certainly, exits. But I'll just say that certainly our -- as we look forward, we certainly think we are in the position of similar sort of origination activities as this past year. And I think the way the quarter has started -- the year has started off, certainly, with the first quarter and this recent acquisition we just made beginning of the second quarter, I think we're on the kind of the sort of run rate that we've been on. And looking at backlog and the work we're doing, I feel reasonably good about that. In terms of the exit sale or the asset sales, again, we are -- David Gladstone has made a couple of comments around that. We are actively pursuing some things, and we'll keep working through those and sensitive to, again, as I've said in my commentary, the idea that we really -- in selling, we reduce assets. So we don't want to do that just to do it, but indeed, to take advantage, opportunity of, say, the right time to sell is what always we've tried to do in combination with the management teams of the portfolio companies. So again, I think we look ahead, we look forward, and I think we think our plans are pretty good to similar to what we were looking at last year, certainly, from a production perspective.

I know what you're going through, Jeremy. It's really tough to build a model around what we're trying to do. We spend a lot of time forecasting. Each time we come up with a few more deals, we want to put them on a forecast and see what they're doing to the balance sheet and the P&L. And it's a very lumpy business. And unfortunately, it's very hard to forecast what the top line in terms of revenue is going to be because you don't know how many deals you're going to close. And sometimes, you close a deal that has a lot of fees, and that will make a very nice income go up. And then sometimes, you're selling something. And as Dave mentioned, when you sell something, you got to turn around and replace it. One of the things we do is we look at each deal every year, and we do it on a quarterly basis sometimes. And we try to say this is our asset plan for that transaction. And if it just happens to be some leftover debt that we've already sold at equity or we've done some kind of clearing, like writing off a piece of equity and we've just got debt left, many times, it's better to go ahead and get that debt paid off with a bank coming in and turning around and putting that money to work in something that has a significant upside. So we're constantly looking at the portfolio with that color in our eyes, looking for those kind of transactions. So you're constantly working your portfolio. We've got people that spend every day thinking about what to do with 1 or 2 or even a dozen portfolio companies over the next year. And that's just the way this business works, unfortunately. So we don't have a good way of telling you what we're going to buy and what we're going to sell. But I think Dave is right on target, it -- probably from a buying standpoint, it will be much like it was last year, unless we find 2 or 3 really excellent deals, then it will be bigger.

That's helpful. And then just one more question. Should you do an asset sale perhaps the next quarter or 2, where would you guys look to cut your expenses to help manage that bottom line?

We probably wouldn't have to cut any expenses because we would pay off the debt with anything that comes in, and Dave's got a pretty good backlog of transactions. So I think anything we sell we'd probably replace. Remember, a lot of the appreciation is in the equity, and that equity has no income on it. And so we're talking about getting paid off on the debt. Many of the portfolio companies as they go forward gets stronger, and they find cheaper debt, and we encourage them to pay it off because we do only equity. So as a result, usually, a transaction in which a lot of money comes in is out of the equity section. And so therefore, it doesn't harm the ability to pay dividends. It just adds money to the company to turn around and invest and increase the dividend. I hope that answers the question.

I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Gladstone for closing remarks.

All right. Thank you all for calling in, and we'll see you again next quarter. Hopefully, we'll have even more news, good news. Thanks a lot. Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.