Gladstone Capital Corp (GLAD) 2026 Q1 法說會逐字稿

Greetings. Welcome to Gladstone Capital Corporation first quarter earnings call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Thank you, Sheri. That was nice, and this is Gladstone Capital's Quarter ending December 31, 2025, call, and thank you all for calling in. We're always happy to talk to our shareholders and analysts and welcome the opportunity to provide updates on our company and answer any questions.

Before we get to this quarter's results, Catherine Gerkis, our Director of Investor Relations and ESG will provide a brief disclosure regarding certain regulatory matters that we enter here to. Go ahead, Catherine.

Good morning. 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, gladstonecapital.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 e-mail notification service and find information on how to contact our Investor Relations department.

Now I will turn the call over to Gladstone Capital's President, Bob Marcotte.

Good morning. Thank you, Catherine. I will cover the highlights for the quarter and conclude with some comments on our near-term outlook for the company. Beginning with our last quarter's results, fundings last quarter totaled $99.1 million and included two new private equity-sponsored investments totaling $37.8 million and $61.3 million of additional advances to existing portfolio companies. Exits and prepayments declined relative to the past couple of quarters to $52.8 million so net originations were $46.3 million for the quarter.

Interest income for the period rose to $23.9 million as the increase in average earning assets offset the 30-basis-point decline in the average SOFA rates compared to last quarter as our weighted average debt yield came in at 12.2% for the period. Interest and financing costs increased $200,000 on higher average bank borrowings incurred to complete the fixed rate note refinancing last quarter and higher average investment balances.

In addition, net management fees rose $600,000 with the increase in average assets and lower origination fee credits. So net investment income came in at $11.3 million for the period. Net realized gains were $300,000 as the exit of our remaining equity in Sokol more than offset the $1.4 million write-off associated with the unamortized costs with the note refinancing completed last quarter. Unrealized losses rose to $5.3 million last quarter and were concentrated in three investment positions impacted by the recent government shutdown or where we have replaced senior management and are expecting significant improvements over the balance of 2026.

With respect to the portfolio, the portfolio growth for the period did not have a material impact on our investment mix or spread profile as first lien debt and total debt investments came in at 73% and 91% of the portfolio cost, respectively. As of the end of the quarter, our three nonearning asset debt investments were unchanged with a cost basis of $28.8 million or $13.2 million at fair value or 1.6%.

In addition, PIK income for the quarter rose to $2.3 million or 9.6% of interest income. However, we also collected $2.8 million of PIK for the period, so our crude pick balance declined accordingly. Since the end of the quarter, we've experienced on significant prepayment of Vets Choice in the amount of $42.8 million, which also generated a large prepayment fee of $855,000 and on the period. And to date, we've funded an additional $6 million senior debt investment in a precision machining business. Although earning assets have declined since the end of last quarter, our current pipeline of late-stage deals, which have been vetted, awarded or diligence or documentation is quite robust at over $100 million and should more than offset the recent repayments.

The level of net -- the level of near-term investment opportunities we are working through in what is traditionally a slow Q1 is frankly a bit surprising. I would attribute this investment activity to the resilience of the lower middle market deal flows and the growth prospects within our existing portfolio.

We ended the quarter with a conservative leverage position and net debt at a modest 93% of NAV and have increased our floating rate bank borrowings to better match our asset rate sensitivity while bringing down our net funding costs as short-term interest rates ease, and we reduce our unused facility fees accordingly. Our current line of credit facility totals $365 million and net of the recent repayments, our borrowing availability is more than $150 million, which is more than ample to support our near-term investment activities.

And now I'll turn the call over to Nicole Schaltenbrand our CFO, to provide some details on the fund's financial results for the quarter.

Thanks, Bob. Good morning. During the December quarter, total interest income rose 100% to $23.9 million as the average earning assets rose $20.3 million or 3%, while the weighted average yield on our interest-bearing portfolio declined 30 basis points to 12.2% for the period.

Total investment income was $24.5 million on higher interest earnings and fee income rose $400,000 from last quarter. Total expenses rose $800,000 or 6% versus the prior quarter, as total -- as interest expenses rose $200,000 with increased bank borrowings and net management fees rose $600,000 on higher average investments and lower deal closing fees credits.

Net investment income for the quarter declined to $11.3 million or $0.50 per share. The net increase in net assets resulting from operations was $5.5 million or $0.24 per share for the quarter ended December 31 as impacted by the realized and unrealized valuation depreciation covered by Bob earlier.

Moving over to the balance sheet. As of December 31, total assets rose to $923 million, consisting primarily of $903 million in investments in fair value and $20 million in cash and other assets. Liabilities rose $20 million quarter-over-quarter to $445 million as of December 31 with the increase in LSC borrowings to call and repay our $150 million of 5% notes previously due January 2026 and our $57 million of 7.75% notes previously due in 2028 and to fund our net originations. The remaining balance of our liabilities consist primarily of $149.5 million of 5.875% convertible debt due 2030 and $50 million of 3.75% notes due May 2027 and $29 million of 6.25% perpetual preferred stock.

As of December 31, net assets declined $4.7 million to $477 million, and NAV per share declined from $21.34 to $21.13. Our gross leverage as of December 31 rose to 93.3% of net assets. Monthly distributions for February and March will be $0.15 per common share, which is an annual run rate of $1.80 per share.

The Board will meet in April to determine the monthly distribution to common stockholders for the following quarter. At the current distribution rate for our common stock and with a common stock price at about $20.44 per share yesterday, the distribution run rate is now producing a yield of about 8.8%.

And now I will turn it back to David to conclude.

Well, thank you. That was good summary in this solid quarter for Gladstone Capital again. The team for Glad, continues to deliver attractive net originations and growth was very healthy backlog of attractive growth-oriented lower middle market companies. The company has a strong balance sheet ample bank lines and capacity to grow our investment portfolio to deliver more dividends to our shareholders and delivery of net interest margins required to sustain the shareholders' dividends.

And now we'll open the questions up and operator, if you'll come on and tell us what to do.

(Operator Instructions) Eric Zwick, Lucid Capital Markets.

I apologize in advance for any background noise I'm traveling today. But I wanted to start with a question. During the prepared remarks, you mentioned increasing the usage of the revolver due to the floating rate kind of function there. Curious if you could just talk a little bit on the loans to what extent you use floors and how many of those are at the floors now, just kind of given the SOFR curve would indicate that the market is expecting some more reductions in the base rates.

Yes. The majority of our variable rate loans do have floors. We're not obviously at those floors yet. So as interest rates decline, our interest income will decline. That's part of the reason why for our strategy right now, we do intend to rely on our floating rate debt somewhat more.

And Eric, one way to think about this is I think we were very direct that we're not experiencing much in the way of spread compression last quarter, so competition is not driving it. And if you look at the big picture, based upon our average margin, our bank spread and our marginal fees and costs. Our general feeling is we can absorb most of the decrease and still be able to sustain the underlying dividend as we did this quarter. The other thing that's happening is last year, we ran a very high commitment fees. We were very low in our utilization of lines.

And if you compare the roughly $2.6 million of line commitment fees we paid last year. We're currently at a run rate that's closer to $1 million. So there's about $1.5 million, almost $1.5 million of savings that we will see from increasing utilization of our line fee. So we have a number of things that we are working to try to mitigate what might be the headwinds of lower rates if that were to evolve.

No, that's very helpful. And next one for me, just looking at the investment in IMX Power Holdings. Just curious if you're seeing in your origination funnel more opportunities for AI and data center-related opportunities, just how you kind of view this trend likely a longer-term trend if you're watching it more cautiously. Just curious on your take back.

We don't directly invest in data centers. That's a big boys game. What was Google's announcement today, $180 billion or whatever the number was. We used to do that, but that's not really something that we see in the lower middle market. We do see some of the spend from those projects coming through in our portfolio.

It might be bus bars that are going into data centers that, frankly, IMX does make. And certainly, there are construction or HVAC or air handling services that might come through to some of those segments. We are very cautious about the sustainability. There's an awful lot of folks jumping into that market. And we are watching the reliance on that end of the market as we think about the play, but we are not directly investing in what I would say is a significant reliance on the continuation of that investment spend. That's just not where our companies particularly play.

And last one for me. You noted the increase in PIK. It's kind of gone up over the past couple of quarters. Could you just kind of generally talk about what's driving that? Is it certain companies that performance has slowed a little bit? Or are they just looking for some cash flow flexibility for investment opportunities. Wondering if you could just talk a little bit about that.

There's a couple of credits that are in that category. One which is undergoing a more systematic or scaling up of the underlying business and the working capital consumption that is behind that growth is stressing the free cash flows. And given the underlying business performance, we provided them the flexibility in the case of PIK. Obviously, we are closely monitoring the EBITDA and the enterprise value as we increase our exposure to that situation and feel that we are more than adequately covered.

And a second one, the company is in the process of liquidating a portion of their underlying business that has been underperforming and the proceeds are more than ample to cover some of the accumulation of that PIK exposure and we expect that company to be in a position to deleverage as it unloads a portion of its investment activity. So it's a case-by-case basis. We focus on what's the right move for the business and what's the terminal exit for getting out from underneath that PIK exposure that we focus on.

And those two credits are by far the dominant portion of what's there. As you will note, we did exit a deal last quarter where we did have some accumulated PIK, and we recouped it. So our strategy of working with our credits and getting that money back and getting them cash paying is obviously a consistent part of how we work with our credits.

Christopher Nolan, Ladenburg Thalman.

Why was the -- why did the diluted share count change quarter-over-quarter so much?

So part of that is because just the accounting requirement for how you do the calculation in the initial period. So the only thing that's impacting our diluted shares is the convertible debt. So we do a calculation to show on the if converted method, what is repeated. That's really the only factor coming into play there.

Okay. So that's going to be continuing issue, not an issue, but just increased dilution share count is 1 sustained as loans convertible debt stream around?

That's correct.

And the conversion price?

And the conversion price will only change if we do additional supplemental distributions. That change, we expect to be very, very inconsequential though.

That issue can be settled with cash or stock as the case may be. So there's a lot of flexibility. It's more of a disclosure requirement, frankly, than a practical expectation that we would ever issue that amount of shares.

That's exactly right.

Just a more broad and more strategic question. Have you guys -- given that you're sort of co-located near Washington, D.C., have you heard anything in terms of updates for the regulatory structures expecting BDCs, specifically the AFFE rule, any sort of consideration of altering that.

AFFE has been under discussion for, what, 7 or 10 years now. Obviously, there's a general relaxation in the market. But I don't think there's anything particularly concrete. And frankly, I think it's a two-stage process, even if it weren't relieved, it doesn't mean that it's going to very quickly change the way the indexes are underlying calculations. So it would take probably a number of years to roll out whatever might come.

So we've been of the view that it will take us several years before is something were to become effective. So frankly, not counting on that as much as we would like it to improve the liquidity in our shares and expansion of our investor base. I don't think we were operating in the presumption, that's a short-term issue.

Our next question is from Robert Dodd with Raymond James.

Congrats on the quarter. On the discussion of the pipeline, and semis obviously quite positive for this quarter. And you said activity is surprising. How are -- is any of that actually kind of spillover from Q4? Or are these deals that kind of came to you in -- with January launches, so to speak, with the expectation they'd always be a March quarter deal?

And then kind of the second part of that question, sorry, is -- what are you seeing in the very early stage, do you expect activity to remain robust kind of through the middle or whole year? Or is this just kind of a surprising bump in the March quarter?

Good question, Robert. Yes, there's definitely a few of those deals that spilled over. I would generally say, in today's marketplace, given volatility, trade flows, tariffs, I think most of the private equity that we're working with is pretty vigilant on diligence and diligence periods can take time. Some of the transactions we're working on have been in the works for probably three quarters now. So there's definitely probably half of that spillover our transactions that folks are doing multiple rounds of quality of earnings and reviews of those businesses before they're actually pulling the trigger and executing on that.

I would say that obviously, the general downward trend in rates, combined with better clarity in terms of certain industries is a positive. I mean, for example, it just takes a while for things like defense contractor, precision manufacturing businesses to see the pipeline activity understand where the long-term trends are to acquire the machinery to support some of those programs.

So a number of our businesses at the moment are in that category of strong domestic growth, precision manufacturing, reshoring production capabilities and are now getting around to the point of either acquiring businesses to achieve those objectives. We're investing in their own assets to expand. So I would say, carryover is meaningful, but there is a consistent build of domestic manufacturing for some of these private equity-owned businesses to capitalize on the reshoring trend that started last year.

Got it. One kind of sort of related. I think one of the issues you pointed out to, for the unrealized depreciation, what there was of it was shutdown impact. And obviously, you've historically had been done a fair amount of work with businesses that work for the federal government or do work for the federal government at least. How is your appetite for that kind of business softened.

I mean this -- the number of government shutdowns is obviously up versus historic norms over the last couple of years. And it have necessarily great confidence that we won't continue to see sporadic shutdowns at a greater cadence than we've seen in the past. So just is that kind of segment as appealing to you as it has been in the past, given those kind of risks?

Robert, the situation that I referenced that shutdown was implicated or impacted was a very unique circumstance. Generally speaking, we don't do government contractors. I mean they're manufacturing stuff on long-term munitions or aircraft or platforms and there's better visibility. Short-term government services is not a core focus for the business. That said, we do have a company in the portfolio that actually believe it or not, does dredging activity that works for the Army Corps of Engineers that is general recurring maintenance, maintaining ports and clearances for vessels.

And the fact of the matter was, there was an interruption or disruption in the Army Corps contracting for general maintenance services. And it caused a bit of a hole. Now that has already been corrected. And believe it or not, obviously, whatever builds up and whatever dredging activity is going to have to be caught up down the road if it wasn't done last quarter.

So that business is not permanently impacted and it will need to be maintained on a go-forward basis. It just happened in one quarter, they stop spending. That is not the usual and that is not the norm for our business. And I don't think that that's a permanent impairment of this company in any way, shape or form.

Got it. One last one, if I can. I mean EGs saw some more stress in the equity piece of that, which is pretty small. But can you give us any color on -- is that still going through the transition? And you mentioned one of the businesses has additional management transitions. I don't know if that's EEGs again. But how is the workout on that progressing? I mean, just because the equity went down doesn't mean it's not on track, but any color there?

I think there's a combination of factors on that one. Obviously, if you were to research it, you'll figure out that it's an Arizona-based company, so it tends to be seasonal and selling quick service and selling frozen drinks is not a big thing in the winter. So you tend to have quarters. The other thing that I will note and this may be indicative of other credits out there, things that are in border states or heavily Hispanic areas are facing significant downdraft associated with elevated ICE activities. So population, spend, economic drivers are all being impacted.

I would say as much as we have confidence in the team and some of the challenges that are naturally associated with QSR type businesses. They are moving forward. They are evolving the business. There are some incremental headwinds on and I don't think we expected early last year when we went through the restructuring and took that business over, Management is continuing to perform.

But some of these headwinds were unanticipated, and we are doing our best to accelerate the changes in cost structure in order to see our way through some of the incremental challenges. So it's still a work in process. The company has launched a new menu and some additional offerings, which we think are going to drive traffic in -- and we will see as that evolves in the spring. But that's a little bit probably more than you wanted to hear about what's going on in that business, but we're working it.

I always love the extra detail there.

Okay. We have any other questions?

Sean-Paul Adams, B. Riley Securities.

Tagging of Eric's question, do you currently have an estimate of remaining SOFR exposure and basis points before the majority of your embedded floors kick in? You talked about spreads not being a material impact for the quarter. So just trying to highlight the pure base rate exposure.

I think our average -- what's our average floor, probably 120 million Yes. So right now, what was average so for last quarter 390. Average SOFR for last quarter was roughly 390, so we're roughly running what is about 370 today. Average floor is probably about 1.25. So we've got some material move potentially on that.

My comment before was if you eliminate if you just focus on what our average spread is, what our bank line spread is and what our marginal management fee and costs are you net down to about a 250 plus or minus spread ignoring the underlying base rate -- and if we were to close $150 million -- $100 million, that's $2.5 million of incremental net interest margin, which, if you look at our rate sensitivity, if we -- I think it's back in the tail end of our Q, I think down 50 basis points. I think the sensitivity was about $2.4 million. So we could more than offset the first 50 basis points as we get past that, we would need to dig into one fees, which are just excluded from that calculation or the additional commitment fee savings that I referred to. So we're working through the challenges were down 100 basis points, that's a $5.3 million down on potential rate exposure given our current portfolio.

Frankly, that's about as far as we've been thinking and planning, given the current rate outlook. But we certainly are well positioned to absorb at least the first 50 and probably 75. Beyond that, we'd obviously take additional actions to support the dividend and as you recognize, we obviously have some additional coverage based on the current economics of the portfolio. So I think we're monitoring that downward exposure and have a variety of levers that we're currently using to manage that and support the dividend going forward. When we reset the dividend last quarter, we were looking out with some of these sensitivities in mind and feel pretty confident that we've got the coverage that we need for the near term.

Okay. Do we have one more question?

There are no further questions at this time.

My question. So there’ll be more next time. Thank you all. At the end of this meeting.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.