Gladstone Investment Corp (GAIN) 2026 Q3 法說會逐字稿

Greetings, and welcome to the Gladstone Investment Corporation third-quarter earnings call. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Well, thank you, Latonya, and good morning to everybody. This is David Gladstone, Chairman of Gladstone Investment. And this is the earnings conference call for the third quarter ending December 31, 2025, for the 2026 fiscal year, and that is the March 31st year.

And we hope we get all of our shareholders on board and analysts in order to tell you about the future of the company. We listed on NASDAQ under the trading symbol GAIN for or the common stock, and then we have three preferred stocks: GAINN, GAINZ, and GAINI for our three different registered notes.

Thank you all for calling in. We're always happy to provide updates to our shareholders and analysts and provide a view of the current business and the environment that we're in. Two goals of this call are to help you understand what happened to us during the last quarter and give you our current view of the future.

And now we'll hear from Catherine Gerkis, our Director of Investor Relations and ESG to provide a brief disclosure regarding certain regulatory matters concerning this call. Catherine, go ahead.

Good morning, everyone.

Today's call may include forward-looking statements which are based on management's estimates, assumptions and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investors page of our website, gladstoneinvestment.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information.

You can also sign up for our email notification service and find information on how to contact our Investor Relations department. We are also on X, @GladstoneComps as well as Facebook and LinkedIn. Keyword for both is the Gladstone Company.

Now I will turn the call over to David Dullum, President of Gladstone Investment.

Thanks, Catherine, and good morning to everybody. So I'm pleased to report again that the third quarter of fiscal year '26, which as David Gladstone mentioned, ends on March 31, that we, GAIN, continued to build on the prior quarters, a very strong performance in this fiscal year, driven by our continued growth in the portfolio and the results of our existing portfolio companies.

So we ended the third quarter with an adjusted NII of $0.21 per share, total assets of about $1.2 billion, which is up about $92 million from the end of the prior quarter. Now this increase quarter over quarter in assets resulted from one new buyout investment during the current quarter, along with fairly significant appreciation of our investment portfolio. So with the new buyout investment, we currently have 29 operating companies and a very healthy pipeline for new acquisitions.

In this regard, to date for fiscal '26, we've invested approximately $163 million, which is in four new portfolio companies, which compares to about $221 million that we invested for all of fiscal year '25. These new investments are consistent, of course, with the buyout strategy where we grow the portfolio through the acquisition of operating companies at attractive valuations and where we generally are the majority economic owner.

We also make our acquisitions through a combination of equity and debt and with the equity providing the potential upside through capital gains upon exit and the debt securities, of course, generating the operating income, which supports our monthly distributions to shareholders. And that is a very important aspect of our portfolio. Now this is one of the factors that, in fact, differentiates us from other traditional credit BDCs, the aspect that we provide both the debt and the equity when we make an acquisition.

So from our operating income, we maintained our monthly distribution to shareholders of $0.08 per share or $0.96 per share on an annual basis. Put this in perspective, since inception in 2005, and through 12/31/25, we've invested in 66 buyout portfolio companies for an aggregate of approximately $2.2 billion and exited 33 of these companies. This resulted in the total investments currently being valued at $1.2 billion while generating approximately $353 million in net realized gains and $45 million in other income on exit.

So as we look forward, what we are finding is there is very good liquidity in the M&A market. This creates a very competitive environment for new acquisitions, certainly at what we would consider reasonable valuations.

Now while this is challenging, we do seem to be able to compete effectively, as I mentioned, the investments we've made in this fiscal year. So we are out there working hard effectively competing for these acquisitions that do indeed fit our model. And again, this is where we're providing both the equity and the debt to complete the acquisition.

And one of the things that we do in looking at the debt securities that we do, we need a meaningful what we call fixed charge coverage and income yield on our total investment. So that is indeed in excess of our cost of capital.

As I mentioned earlier, we closed on four new investments during the first nine months of the fiscal year. We are continuing to be in varying stage due diligence on some possible new opportunities, including accretive add-on acquisitions to existing portfolio companies, and we're in review and negotiation with a number of other new opportunities.

I would just like to elaborate on the add-on acquisitions that I mentioned. Given the way in which we manage our portfolio, it's not unusual for us to be constantly looking for acquisitions to add to existing portfolio companies and indeed are able to grow the value of our overall investments and portfolio by this add-on activity.

So this activity all could lead to closing on new buyout investments during the balance of the fiscal year. And as it relates to the income that's generated for the portfolio, there is one word and question that seems to keep coming up, we hear about what we call spread compression and given that interest rates generally given SOFR coming down and so on that these interest rates may be declining. I want to again emphasize that one differentiator for GAIN from other credit-oriented BDCs that we put floors on our debt securities while we have a stated rate, which indeed is a spread over SOFR.

Now so while we may said seeing a decline in yield because SOFR has come down, rather that's coming down from a higher level, we still have the protection of the floors. And I think it is a very important point that we need to stress and you'll hear more about this from Taylor Ritchie, our CFO, in a little bit. So again, this floor is usually set high enough, which establishes an effective yield on our total investments, which does help to mitigate this quote, spread compression or the decline in SOFR over time.

As to our existing portfolio, most of the companies have experienced very good results to date, and this is reflected in a very significant increase in our net asset value. And though we continue to be cautious due to supply chain disruption, tariff costs and the other issues going on in the economy, we feel very good about where we are with our portfolio companies. We are working with all our companies in evaluating things such as supply chain alternatives, other cost efficiencies that we need to help navigate the current environment.

So in summing up the quarter and looking forward to the rest of the fiscal year, our current portfolio is in good shape. We have a strong and liquid balance sheet, a good level of bid activity with the prospect of continued good earnings and distributions over the next year. So with all of that, while we hopefully navigate the challenges of this uncertain economic landscape.

So I'll now turn it over to our CFO, Taylor Ritchie, and he can tell us a bit more detail. Taylor?

Thank you, Dave, and good morning, everyone. Looking at our operating performance for the third quarter, we generated total investment income of $25.1 million, down slightly from $25.3 million in the prior quarter. The decrease was primarily driven by a decrease in dividend and success fee income, partially offset by additional interest income resulting from the continued growth of our debt investment portfolio. The weighted average principal balance of our interest-bearing investments was $699 million in the current quarter, representing an increase of $30 million compared to prior quarter.

After adjusting for the prior quarter's collection of past due interest income from investments that were previously on non-accrual status, our portfolio's weighted average yield decreased modestly from 13.2% to 12.9%. This 24 basis point decrease is in line with the 32 basis point decrease in SOFR during the quarter and was mitigated by the interest rate floors included in each of our debt investments.

Excluding non-accrual investments in revolving lines of credit, the weighted average interest rate floor for our debt portfolio was 12.1% as of December 31. We continue to underwrite our new debt investments with elevated interest rate floors in the 13% to 13.5% range to mitigate potential declines in SOFR.

With half of our debt portfolio currently at their interest rate floors, we believe our yield is well protected against future rate declines. Further, interest rate orders will offset higher interest expense that will result from the future refinancing of our low-cost, long-term debt that will be maturing in the same quarters and years.

Additionally, dividend and success fee income declined by $0.4 million quarter over quarter. Dividend income from our equity investments is dependent on the portfolio company's ability to pay the distribution while also having sufficient earnings and profits to support the characterization of the distribution as dividend income.

Success fee income is derived from an interest rate associated with our debt investment that accrues off balance sheet for both GAIN and the portfolio company and is not contractually due until a change of control event. However, similar to dividend income, a portfolio company may elect to prepay a portion of this accrual from time to time. Given that collection of both dividend income and success fee income is dependent on multiple factors, the timing of this income will be variable.

Net expenses for the quarter were $31.6 million, up from $21 million in the prior quarter. The increase was primarily due to a $9.9 million increase in the accrual of capital gains-based incentive fees. Base management fee expense increased by $0.5 million compared to the prior quarter as a result of new buyout investment activity and the significant increase in unrealized appreciation of our investments.

Fee credits from advisor, the level of which is correlated to the timing and volume of new originations declined $0.4 million quarter over quarter. Interest expense decreased $0.2 million in the current quarter due to the timing of the issuance of our 6.875% notes, the reduction of our 8% notes and new investment activity. This resulted in a net investment loss of $6.5 million compared to net investment income of $4.3 million in the prior quarter.

Overall, portfolio company valuations in the aggregate increased to [$70.2 million]. This unrealized appreciation was driven by increased performance at some of our portfolio companies, along with higher valuation multiples across the portfolio. The increase was partially offset by decreased performance of other portfolio companies.

Adjusted net investment income, which represents net investment income or loss, excluding any accrued or reverse capital gains-based incentive fees, was $8.2 million or $0.21 per share compared to $9.2 million or $0.24 per share in the prior quarter.

We believe that adjusted net investment income remains an indicative metric of our ongoing and core performance as it removes the impact of capital gains-based incentive fees which is an expense recorded US GAAP at each quarter, but is not yet contractually due.

For the current quarter, we continue to have three portfolio companies on non-accrual status. We've been working closely with each of these three companies working alongside their management teams to support efforts to return to accrual status or pursuing exits where appropriate. Our non-accrual investments represent 3.8% of our total portfolio at cost and 1.5% at fair value.

Our NAV increased to $14.95 per share compared to $13.53 per share at the end of the prior quarter. The increase was primarily a result of $1.77 per share of net unrealized depreciation and $0.09 per share of net realized gains. These increases were partially offset by $0.24 per share of distributions to common shareholders, $0.16 per share of net investment loss and $0.03 per share of realized losses associated with the redemption of our 8% notes.

Moving on to our balance sheet. Our ability to maintain sufficient liquidity, financial flexibility, and managing a fluctuating interest rate environment is essential to supporting and growing our portfolio. As part of our proactive balance sheet management, we redeemed the full $74.8 million outstanding balance of our 8% notes using proceeds from the recently issued $60 million, 6.875% notes and borrowings under our line of credit.

This redemption and new debt issuance reduced our interest burden for $75 million of debt capital by approximately 110 basis points. Further, we expanded our credit facility to include City National Bank with $30 million commitment level. As a result of this expansion, we now have a total commitment level of $300 million under our facility, and as of yesterday's release, we had approximately [$171 million] and the remaining availability.

During the quarter, we raised approximately $3.2 million in net proceeds through common stock program issuances. While the price level of our common stock limited the number of days we were active on the ATM, we will look to sell under our ATM program in the future when prices are accretive to NAV. We believe that we are in a sufficiently strong liquidity position with our ability to access the debt capital markets and when possible markets to support both the refinancing of upcoming debt maturities and our pipeline of new buyout opportunities.

Overall, our leverage remains in a strong position with an asset coverage ratio as of December 31, 2025, of 201%, providing what we believe to be ample cushion to acquire 150% coverage ratio.

Focusing on our distributions to shareholders. We ended the prior fiscal year with $55.3 million or $1.50 per share in spillover and sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 per share as well as the $0.54 per share supplement distribution we paid in June.

As of December 31, our estimated spillover was approximately $22.9 million or $0.58 per share. We ended the quarter with total distributable income of $108.7 million or $2.73 per share. Total distributable income primarily consists of the net unrealized depreciation of our investments as well as the GAAP adjusted balance of our spillover presented on our balance sheet.

Including the $0.54 supplemental distribution in the current fiscal year, we paid an aggregate of $3.26 per share across 13 supplemental distributions over the last five fiscal years, in addition to the $4.68 per share of monthly distributions during this time. This track record reflects our ability to maintain a stable monthly dividend while also delivering incremental returns to shareholders, underscoring the strength and consistency of our focused, equity-oriented investment strategy.

Looking ahead, we expect supplemental distributions to remain an important component of our overall shareholder return strategy, with the amount and timing of future payments driven by realized capital gains on our equity investments, along with other capital allocation considerations.

This covers my part of today's call. I'll now hand it back over to you, David, to wrap this up.

Well, thank you. Very nice, Taylor, and nice by Dave Dullum and Catherine Gerkis as well. And this will tie over our shareholders until the next call, which will be at the end of March, which will be end of the year as well as the quarter.

The call and Form 10-Q should bring everyone up to date. We has reported solid results for the quarter ending December 31, 2025, including new investment activity and strong liquidity position to grow the portfolio throughout the fiscal year.

We believe Gladstone Investment is a very attractive investment for investors seeking continued monthly distribution and some supplemental distributions from potential capital gains and other income. The team hopes to continue to show you a strong return on investment in our funds.

Now let's stop for some questions from the analysts and other shareholders. Please come on, Latonya.

(Operator Instructions) Mickey Schleien, Clear Street.

Yeah, Dave, a good portion of the appreciation in NAV this quarter came from three investments: Schylling, Old World, SFEG. Can you discuss the operational or valuation changes that drove that appreciation for each of those companies?

Sure. Mickey, nice to chat with you. Yeah. And actually, we had a pretty significant -- those three you mentioned were large numbers, but we have a number of other companies, indeed, also that had relatively speaking, pretty significant increase as well.

But fundamentally, all the ones that were -- these large increases were fundamentally no multiple change, but pretty much all because of EBITDA increase, so -- which is obviously the best situation. So yeah, that was true of all three of those that you specifically mentioned. The -- sorry, go ahead.

It's interesting. I don't know if it's pronounced shy ling or shilling, but in Schylling and Old World are obviously consumer-oriented companies. And we're reading so much about the K-shaped economy. So what's sort of different about those two companies that's allowing them to grow their EBITDA even with the headwinds in the consumer sector.

Yeah. I think the only answer I can give is the products that they make and sell, obviously. Schylling is a very interesting business, and they have a very unique product, which makes up a reasonable portion of their -- of the overall revenue of something called NeeDoh. It's one of these things where you squeeze for a variety of reasons and they have different types of that.

And that product has had huge demand even with, as you point out, forget consumer demand generally, but the whole tariff increases that we've seen and their products, of course, a significant portion comes from the Far East.

So even with that, they have literally been able to maintain a level of demand that just frankly, has allowed the company perform at an exceptionally high level. Overall Christmas, obviously, Christmas tree ornaments, you're familiar with those, I think. You've seen them.

And again, they're well-run business. All of these companies are very well run. We've got great management teams. I'm pretty much, frankly, all of our portfolio comes right now, and they've just been able to outperform, I guess, really the consumer demand side of things, as you say. I don't have any further specific rail insights to that at hand, again, good management, quality products and been able to manage through the tariff impacts.

That's really good to hear. Dave, you also recently invested in Roan Energy. Can you walk us through how you underwrote that deal particularly how you assess the cyclicality in the energy equipment fracking sand filtration sector? And what assumptions you made about where Roan stands in its business cycle?

Best answer I can give you, Mickey, we can certainly chat all this off-line if you need and bring some of the other folks involved that were more directly involved in those companies. But as you know, we have a couple of investments now that are in the energy-related sector, one company in particular E3, which also had a very interesting and nice increase in valuation.

And what we have there is a quality and experienced team running that particularly E3, and that, frankly, helps us to move off into and to be able to evaluate companies such as what you mentioned, Smart Chemical is another one. And so we have knowledge and experience within our portfolio to help properly evaluate that.

So right now and through those lenses, we feel like where these guys are in their cycle, that we still have upside and been able to manage it through valuations, frankly, that also are at a level that aren't really, I'll use the words carefully, but overpaying, so to speak. But anyway, it's one that we can talk about in more detail, if you really want to later on.

I appreciate that. Dave or maybe Taylor, if I look at the table in the press release regarding floor rates, I want to make sure I understand it. Is it correct to say that about half the portfolio has about 80 basis points of downside in average yields?

Yes, but the way for us to get there, we would need significant decreases and SOFR. So it wouldn't just be 80 basis points would get to that level of 12.1% floor. We would need closer to 210 basis points to be able to bring SOFR down to a level where the other portfolio companies would then hit their floors. So there's some wiggle room.

And as you could see with the fact that the basis point decrease right below that table there, the 25%, 50%, 75%, 100% -- or 100 basis point decreases in SOFR. You can see as that decrease occurs, the decrease to the overall rate is not one for one. And that's because we start hitting the interest rate floors of more of the portfolio companies.

Okay. Yeah, I understand. And lastly, given sort of the typical portfolio companies that you are attracted to, is it reasonable to say that there's sort of limited risk from AI in the portfolio? And how are you looking at that in terms of the pipeline?

Yeah. That terminology, of course, is pretty broad, right, AI. I guess what I would say is that most of our companies are -- to the extent that AI is important, they're actually using it to some degree. And I think you -- in fact, if you recall, coming out to our conference last year, we had a fair amount of stuff on that. And I think you heard some of that as well.

So a number of our portfolio companies are utilizing various aspects of AI, which is enhancing their -- either their efficiency and whether it be designing some of the products you mentioned Schilling, again, actually for a couple of years now, they've been using some aspect of AI in helping them to really design efficiently some of their products and so on.

So I would say, yes, we're more a beneficiary to some extent than necessarily, as you point out, where we have a tech company that might be directly in that space and there may be real competition for that, I would say we don't have that in our portfolio. So you're correct.

Good to hear. Those are all my questions.

Christopher Nolan, Ladenburg Diamond.

As a follow-up to the unrealized gains, were those mostly related to equity gains in the portfolio?

Yeah. So they were predominantly equity. We did have a hand of portfolio companies that experienced debt debt fair value increases as the overall TV for that portfolio company was increasing as a result of both multiple increases and EBITDA increases. But the bulk of it, yes, it is equity driven.

And then in the comment section, you guys said there's good liquidity in the M&A market. I've heard from other managements where credit is widely available to all these middle market companies, but equity is less so. Do you have a different take on that? And if equity is less prevalent, did that give you a competitive advantage?

Yeah. So I guess, Chris, my response to that might be, from my experience, our experience, I think maybe our folks and let's say, we compete with the traditional private equity guys to the extent that they're able to access leverage at more attractive rates, I think that's where -- why if they can put less equity in a slightly higher leverage or lower rates, they're doing some of that. I think it gives us an advantage though as well because we're bringing, again, the equity and the debt and we can moderate that. So we get the leverage on our own equity.

But I would say that it's competitive frankly, with the M&A -- direct M&A shops because valuations while we're seeing some elevation, frankly, on elevations, the fact that they can get leverage at lower rates, relatively speaking, makes them pretty competitive as well. So to your point, that might put in less equity, put in more leverage and be competitive with us even though we're doing the debt and the equity.

So it gives us a slight advantage in that when we deal with the management team, and we're trying to buy the business. We at least are speaking the whole capital stack, and we have a bit more certainty there versus, say, a traditional firm that might have to go out and try to raise the debt whereas we at least can speak for all of it. So it gives us a slight edge. But yes, it's -- there's a fair amount of capital out there in both at I'd say that certainly the debt market and clearly on the equity side from our experience.

Great. And final question. Given the decline in base rates over the last year or so, will that have any positive effect in the discount rate used in your fair value calculations for your portfolio companies going forward?

Clarify that question again for me, Chris. Say it again.

Sure, sure. Yeah, the risk-free rates go down the Fed cuts rates. And does that affect the discount rate used in your discount of cash flow valuations when you're fair value an investment?

Well, most of our investments are being fair valued using the TEV valuation. So we're really looking at what EBITDA is multiple that we're setting for that portfolio company. So the using a DCF model isn't as prevalent for our overall valuation approach. But yes, you are correct in theory, that would improve it, but that's not how we're really valuing the bulk of our investments.

Great quarter or unusual in terms of the dynamics, you guys had a super GAAP EPS profit and the NII EPS loss and super jumping net per share but on good show.

Latonya, do you have another question?

Erik Zwick, Lucid Capital.

This is Justin on for Eric today. Just wondering if you could speak on the current state of underwriting conditions and specifically, if you're seeing any pressure on terms or structure given the tighter spread environment?

Yeah. I -- for us, I would say, Justin, probably not. As I mentioned earlier, because of availability of leverage, lower leverage. So when we're competing for a deal, for us, we still try to stick with our formula. Typically, it's about 70% of our assets or the investment that we make is in debt and the debt security, 30% roughly is in the equity security.

So when we combine those, we're driving for an effective yield on the total dollars relative to our essential cost of capital being very cognizant of the income aspect of it for dividend distribution. But likewise, we look for on the upside, we always try to see or way to say, 2 times cash on cash on the equity side of things.

So our model really hasn't changed. What we have found, yes, indeed, there have been a couple of deals that we've been working on that we liked. And we're bidding on, if you will, and we were a couple of turns off on the multiple, but we stay pretty disciplined.

And given what we're seeing out there, I don't see us having to change too dramatically our model. I mean, if we saw something we really like and we could say, put a bit more get on it and generate more income so long as we weren't sacrificing too significantly the equity side of things, we will do that. But that's not necessarily because of the market just because of the way we might look at the deal itself, if that helps.

Yeah, Dave. And Dave, in your prepared remarks, you described the pipeline is very healthy. Can you talk about how it's looking compared to maybe a year ago? And are there any specific sectors where you're seeing better deals than others?

Yeah. I'd say compared to year ago, probably similar. I don't -- certainly not lower. We're seeing really across all sectors. We have seen recently a few areas. The consumer side of things, as actually Mickey was asking earlier, even though our experience of our portfolio and our consumer companies are doing really well, consumer side of things are a little bit obviously slower, a great part because, again, we talk about tariffs. And so when we look at a new deal let's say, consumer driven, you have to really be very sensitive to the cost of product because of tariffs and so on, and that has some effect there certainly.

It's business services, we're seeing reasonably good things in the business service area, interestingly enough on the manufacturing side, seeing things just kind of reflected in our portfolio, kind of in the aerospace and defense area. There are certainly aspects of what government is doing, et cetera. So we've seen somewhat of a pickup in that area.

So generally speaking, I'd say pretty much across the board, everything is looking -- we're seeing about the same certainly as about a year ago. And if there's any one here that might be a little weaker in terms of looking forward might be somewhat in the consumer area.

And it was good to see -- sorry, I just got one more.

Go ahead.

It was good to see that your non-accruals was stable quarter over quarter. Just wondering if you could talk about your current outlook for asset quality and if there's any near-term opportunities to resolve any of the remaining names that are non-accrual?

Yeah. I would say this, the ones that are currently on non-accrual in differing degrees, I feel better about them, honestly, today than if you'd ask me that question perhaps a year ago in part because we're taking some actions.

Again, they're all generating actually positive EBITDA. There are some structural reasons why we don't have them back yet on accrual. But between some of the things that we're doing with them, we might even see a potential exit and certainly, an improvement to the point where we actually will be able to get them back on accrual. So I'd see as a positive looking forward versus it being a negative.

No, I agree. And where we stand with these three companies, there's no -- it doesn't feel like we are in a next quarter, it will change, but the outlook is much more positive in every quarter, it looks more positive. So we are encouraged by where each of the three are trending.

Latonya, any other questions?

There are no further questions at this time. I would like to turn it back to you, Mr. Gladstone for closing comments.

Okay. Well, thank you. We appreciate all those questions. We hope there are at least double questions next time. We always like to answer your questions because showed some light on all of the things we're doing.

You have to remember that these are not just portfolio companies. These are platforms and we're getting people that are coming in and getting from us because they're getting some of their money that they've made over the years back now, but they have equity in going forward.

So it's a bite now and a bit later of income for people who are joining us. We are all oriented toward these platform companies and thank you all for appreciating that. It's a different way of running our business, but when it works for us.

So thank you all for calling. And next time, we'll see you in April.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.