Q1 2025 Gladstone Capital Corp Earnings Call
Greetings and welcome to the Gladstone Capital Corporation first quarter earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
Speaker Change: If you require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to introduce Mr. David Gladstone Chief Executive Officer.
Speaker Change: You may begin.
David Gladstone: Well, thank you very much nicer.
David Gladstone: This is David Gladstone Chairman.
David Gladstone: And this is the earnings conference call for Gladstone capital.
David Gladstone: Trading symbol G L. A D and the quarter ending December 31st 'twenty 'twenty four.
David Gladstone: And I want to thank you all for calling in we're always happy to talk to our shareholders and analyst and welcome the opportunity to provide an update for our company.
David Gladstone: Now, we'll hear from our general counsel Michael accounts, they regarding certain forward looking statements Michael.
David Gladstone: Thanks, David Good morning, everybody. Today's report May include forward looking statements under the Securities Act of 1933 Securities Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable and many factors may cause our actual results to be material.
David Gladstone: Really different from any future results expressed or implied by these forward looking statements, including all the risk factors in our forms 10-Q, 10-K, and other documents, we file with the SEC and find them on the investors page of our website Www Dot Gladstone capital Dotcom.
David Gladstone: Also sign up for our email notification service, while you're there you'll also find documents on the Sec's website at Www Dot FCC that G. L b.
David Gladstone: Now we undertake no obligation to publicly update or revise any of these forward looking statements whether as a result of new information future events or otherwise, except as required by law that todays call with an overview of our results. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information again, you can find them on the investors.
David Gladstone: Our website and with that I'll turn it over to Gladstone Capital's President Bob Marcotte Bob.
Bob Marcotte: Thank you Michael Good morning, all and thank you for dialing in this morning I'll cover the highlights for the quarter ended December 31st and a few of those subsequent events before concluding with some comments on our near term outlook for the company.
Bob Marcotte: Beginning with our last quarter results fundings were strong last quarter totaling $152 million, including six new portfolio companies, representing a combination of attractive refinancing opportunities and a pickup in the pace of lower middle market buyout activity.
Bob Marcotte: As anticipated exits and prepayments spiked to $165 million.
Bob Marcotte: Ever since the inflows includes a large equity gain on a R E <unk>.
Bob Marcotte: $64 million, our total debt investments actually increased by $45 million in the quarter.
Bob Marcotte: Investment income for the period declined by $1 8 million to $22 million as the decline in sofa rates accounted for the bulk of the 90 basis point reduction in the weighted average portfolio yield of 13, 1% average earning.
Assets also declined two 6% at the magnitude of the portfolio turnover and because of an additional investment being added to our non earning asset list.
Bob Marcotte: Interest and financing costs declined by 700000 or 13% on lower average line borrowings and net management fees declined by $1 7 million with the surge in new deal origination fee credits, leading to an increase in net investment income of 300000 to $11 2 million.
Bob Marcotte: Ian.
Net realized gains came in at $58 million for the quarter and contributed to the $15 9 million of net realized and unrealized gains which lifted our all rose to just over 22% for the quarter and the TTM period.
Bob Marcotte: With respect to the portfolio the reinvestment of the E. R. I proceeds lifted our senior debt holdings to 73, 4% of the fair value of the portfolio in total death holdings by 5% to 89, 3% of the portfolio at fair value.
Bob Marcotte: During the quarter, we foreclosed on E. G. So regional U S are based in the southwest and today are well into the operational restructuring of the business, including new management and the closing of unprofitable locations and significant overhead cost reductions, we expect to achieve the timely completion of this process, which should result in that.
Bob Marcotte: Sale of the investment or return of the investments who are performing status.
Bob Marcotte: With the addition of this company to our non earning investments. The total at the end of the quarter rose to $52 7 million of cost or $28 5 million or 4% of assets at fair value.
Bob Marcotte: The bulk of the $15 9 million of net appreciation for the quarter was led by our equity co investment in Socal Foods, which was sold to a strategic buyer. Shortly after the end of the quarter and a small incremental appreciation of our position in a or at the improved performance of several.
Bob Marcotte: Smaller manufacturing consumer and service oriented businesses also outpaced the underperformers and we elected to exit our small underperforming positioned in VK I at a modest loss.
Bob Marcotte: Following the end of the quarter, we exited two additional portfolio investments representing that Prudes proceeds of $26 1 million and a $5 $8 million equity proceeds from our social investment and.
Bob Marcotte: Consistent with last quarter's activity, we remained maintained our momentum by closing two new portfolio investments, thus far this quarter, representing a total originations of 38 million.
Bob Marcotte: And reflecting on our outlook for the next quarter or two I'd like to leave with the following week. We continue to expect the elevated level of portfolio exits and repayments to continue for the next one to two quarters and are very focused on the timely redeployment of these extra proceeds to maintain our investment asset base.
Bob Marcotte: Prepayments are closing fees are expected to remain elevated during this period of portfolio turnover and the magnitude of margin compression in the lower middle market has been more muted as evidenced by our originations last quarter, which.
Bob Marcotte: We're closed at a weighted average spread above 700 basis points over sofa and a weighted average closing leverage of three four times EBITDA.
Bob Marcotte: We continue to see healthy well, a healthy level of attractive lower middle market financing opportunities typically under $10 million of EBITDA, and we're low leverage or pricing dictate we will consider teaming with commercial banks to blend down the overall cost of the financing. So we can deliver.
Bob Marcotte: In addition to.
Bob Marcotte: To recycling some mature investments, we expect to continue to benefit from incumbent position as the originator lead lender and in some case equity co investor in the newer vintage growth oriented businesses as they look to grow through acquisition or expansion and support the appreciation of their equity position.
Speaker Change: We ended the quarter with conservative leverage position with debt at 70% of the Navy and the bulk of our bank credit facility available to support the growth of our earning assets and shareholder distributions in the coming year and now I'd like to turn the call over to Nicole Sultan Brown, the CFO of Gladstone capital to provide some more details on the fund's results for the quarter.
Speaker Change: Thanks, Bob Good morning, everyone. During the December quarter total interest income declined $2 1 million or eight 8% for playing 139.
Speaker Change: Weighted average yield on our interest bearing portfolio declined from 14% attachment, 0.1% like the 62 basis point decline in the average tariff rate from last quarter.
Speaker Change: Other income rose to 600000 in total investment income of 22 million, which was down one.
Speaker Change: For our personal lines kind of last quarter.
Speaker Change: Total expenses declined 2 million acquire them or acquire as net management fees decreased $1 7 million like the surge in origination fee credits.
Speaker Change: Interest expenses declined 700000.
Speaker Change: And lower bank borrowings and other expenses increased 300000 with several one time deal related expenses.
Speaker Change: Investment income for the quarter was two 5% to 11 2 million or 50 cents per share the net increase in net assets, resulting from operations of 21 million.
Speaker Change: Or $1 21 per share for the quarter ended December 31st as impacted by the realized and unrealized valuation depreciation covered by Bob earlier.
Speaker Change: Moving over to the balance sheet as of December 31st total assets are slightly to 800 and Sichuan.
Speaker Change: Consisting of $799 million in investments at fair value and 16 million in cash and other assets.
Speaker Change: Liabilities declined with the retained earnings retained equity down to $335 million as of December 31st and consisted primarily of $254 million in senior notes.
Speaker Change: And 61.5 on advances under our line of credit.
Speaker Change: As of December 31st that assets rose to $489 from the prior quarter end with investment appreciation and a small amount of shares issued under our ATM program. Specifically early last quarter. We issued just under 100000 shares raising two and a half at an average price of $24 90 per share as well.
Speaker Change: The NAV per share rose one dollar in 'twenty, one that I'm, playing an 18 to 21 51.
Speaker Change: <unk>.
Speaker Change: Our leverage as of December 31st declined to 70% of net assets and after they ended the quarter. We funded 10, new investments, including an $18 million second lien investment in a private label for a pretty fair and a $19 4 million in the first lien loan to values on international. We also received $20 7 million from the pay off.
Speaker Change: I've heard that in the bathroom and fix it and a debt repayment of $5 4 million and equity proceeds of $5 8 million from the sale of our interest in Stockholm.
With respect to distribution monthly distributions for January February and March 16, and a half cents per common share, which is an annual run rate of $1 98 per share.
Speaker Change: Well ever meet in April to determine the monthly distribution to common stockholders for the following quarter.
David Gladstone: The current distribution rate for our common stock with the common stock price at about $28.09 per share yesterday. The distribution run rate is now producing a yield of about 7% and now I will turn it back to David kick them cleared.
Speaker Change: Alright. Thank you so much Bob Nichol, Michael you all did a great job of informing our stockholders and analysts that company is doing a great job in Wow, what a quarter that was.
David Gladstone: In summary, just a wonderful quarter.
Speaker Change: And Gladstone capital, including <unk>.
Speaker Change: Team rose to the challenge of sourcing and closing on $152 million of new investments.
Speaker Change: That's a great way to start the quarter.
Speaker Change: And when you look at the underwriting and the leverage and the pricing discipline to maintain the portfolio investment balance and almost 800 million now company.
Speaker Change: The company delivered a net investment income and realized gains totaling $69 million.
Speaker Change: And that's about 300.
Speaker Change: $3.09 per share, which is more than supporting be $895 million in regular capital gains and dividends and distributions paid out last quarter.
Speaker Change: Strong portfolio performance generated another quarter of net profitable.
Speaker Change: Portfolio appreciation, bringing the cumulative portfolio appreciation in the past year to $2.53 per share and lifted N. A the per share by 12% compared to December 2023.
Speaker Change: In summary, the company continues to stick with our strategy that has proven.
Speaker Change: For the last 20 years to bring nice returns and then and dividends to our shareholders.
Speaker Change: We're investing in growth oriented lower middle market businesses with good management. Many of these investments are supported by midsized private equity funds. This is about the same size as alpha and some of them.
Speaker Change: And they are looking for experienced partners to support the acquisition and growth of the business in which they're investing in.
Speaker Change: And this gives us an opportunity to make attractive interest paying loans with small equity investments along the way we've called them sometimes equity kickers.
Speaker Change: And it's just a wonderful business I've been doing that for most of my career and Bob picked it up and run with it and have a great team of people that we brought along with US now so we're in a very strong position.
Speaker Change: And now operator, if you'll come on and that's have some questions from the analysts or investors in our company.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad are.
Speaker Change: A confirmation tone will indicate your line is in the question queue you.
Speaker Change: You May press star two to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys one moment. Please for your first question.
Speaker Change: Yeah.
Our first questions come from the line of Mickey <unk> with Ladenburg Thalmann. Please proceed with your questions.
Mickey: Yes, good morning, everyone, Bob many bdcs avoid investing in restaurants, because they're very difficult to underwrite, but you've had success. There recently with salt and straw with this I'll try exit I know you've invested in wings and more could you tell us what.
Speaker Change: Due to this sector and and what do you look for in a restaurant deal before you invest.
Mickey: Yeah.
Mickey: Good question good morning Mickey.
Mickey:
Mickey: The bar is very high on restaurants.
Mickey: Typically what we're looking for is a compelling business model that has a margin profile a loyal customer base.
Mickey: A management team that can continue to perpetuate that and we go in with a very disciplined approach to the leverage structure that generally true that generally squeezes down leverage the moment that you know.
Mickey: <unk> or challenges arise.
Mickey: We've been invested in several restaurants.
Mickey: And are very focused on sustainable margins at on a cost basis, certainly food and protein costs are somewhat volatile.
Mickey: Very efficient labor.
Mickey: Labor models, where they are cognizant of hours hourly and scheduled.
Mickey: Labor burden and lastly, restaurants that don't require massive build out since that extends the life period to achieve a reasonable return most of the restaurants. We're looking at are somewhere between three and four years in terms of payback. So you know when we look.
Mickey: At our restaurants, typically we're going into those well under three turns of leverage.
Mickey: And in cases, where <unk>.
Mickey: <unk> as an example things did not work out.
Mickey: The ability to.
Mickey: Squeezed down costs closed some locations and see a path to exiting.
Mickey: Two a strategic or through cash flow continue to exist. It's just a sector that.
Mickey: We drill and deepen and and focus on those issues and have been able to to manage them to reasonable overall returns.
Mickey: That's great.
Mickey: We had Mickey we're probably not going to be putting a ton more of restaurants on the on the on the portfolio. There's a point at which saturation makes makes some sense.
Mickey: No I understand and thanks for that.
Speaker Change: Bob you're in this position with you know a lot of liquidity on the balance sheet and the stock trading at a very large premiums and a V C.
Speaker Change: So in that situation would you would you consider temporarily investing in more liquid credits to put some of this capital to work.
Mickey: Mickey it's an interesting question.
Speaker Change: Frankly.
Speaker Change: I don't think so and the simple reason is our marginal capital or bank lines. Our bank lines are not cheap and when you look at the spreads that are available on liquid liquid credits today I think the marginal return on equity would be very low given the spread compression on those issues.
Speaker Change: And most of those larger liquid names quite frankly, we can't get the primary diligence. So we can't engage with the customer with the management teams or sponsors as much as we'd like.
Speaker Change: We don't get the covenant structure were looking for and we're basically along the ride on documents that we may not necessarily control. So I don't see us going in that direction for a variety of reasons.
Speaker Change: I understand.
Speaker Change: My last question is Oh, you if you could give us some insight into the outlook for engineer manufacturing Tech reengineering manufacturing Tech.
Speaker Change: Yeah.
Speaker Change: A good question that company.
Speaker Change: It's a very highly automated attractive.
Speaker Change: Our capital base that they can produce a variety of products.
Speaker Change: Hmm.
Speaker Change: It it has capability and diversity of its customer base.
Speaker Change: Unfortunately, one of the larger customers last year late in the year decided to in source a significant amount of revenue it was actually the largest customer.
Speaker Change: And and we have been back filling some of that customer opportunity.
Speaker Change: I will say that there is some additional management that we're putting in place in that particular situation.
Speaker Change: And the outlook for 'twenty five is actually fairly strong and they've had the largest or the most significant increase in January.
Speaker Change: That they've had in a number of years.
Speaker Change: Some of it's driven by.
Speaker Change: Data center customers that are that are continuing to build out and looking for precision products.
Speaker Change: Others are.
Speaker Change: Folks that are resourcing.
Speaker Change: Or or or.
Speaker Change: Altering their supply chain to bring products back to the U S. So we are we are working to.
Speaker Change: Retool some of the sales efforts replaced that sales exit and capitalizing on current trends in the marketplace.
Speaker Change: It's still generating a reasonable level of cash flow and supporting instead, it's the.
Speaker Change: It's the EBITDA momentum that we're looking to rebuild given what I've described.
Speaker Change: I understand that it's good to hear.
Speaker Change: Those are all my questions. This morning, Thanks for your time.
Speaker Change: Thanks Vicki.
Speaker Change: Do we have another question.
Speaker Change: We do I just wanted to remind callers as well if you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Our next question will come from the line of Robert Dodd with Raymond James. Please proceed with your questions.
Robert Dodd: Hi, everybody and congrats on the quarter and then in the realized gains generating just just kind of.
Speaker Change: Going back to <unk> you you said you know you're well along the way do you have and I know this sounds right.
Speaker Change: But last time I mean, how long do you think it would be before that the capitalized becomes income producing again all gets liquidated I mean is it six months 12 months I mean do you have any view on how that how long that's going to be.
Speaker Change: I'll say six months, Mickey, but I hope it significantly.
Speaker Change: Significantly less than that.
Speaker Change: Got it thank you and then.
Speaker Change: Excuse me I mean.
Speaker Change: Your activity levels are all very robust I mean, obviously, you've just started.
Speaker Change: Big Big inflows as well, but nonetheless, you're deploying a lot of capital well.
Speaker Change: And I believe you're in a target which is about one to one I think if you talk to them, but how long do you think you can you can take to get them, if 20 fives and active yeah, you're you're clearly finding them.
Speaker Change: Yeah, good opportunities with constructions et cetera. So I mean do you think you could be at say one to one leverage at this time next year or is that.
Speaker Change: I'm realistic with the amount of repayment activity that by becoming an.
Speaker Change: Excuse me.
Speaker Change: I think you asked a similar question last quarter.
Speaker Change: I wouldn't I would say aye.
Speaker Change: I would say what I told you what I last year last quarter was.
Speaker Change: The mission is to hold serve I mean, a $150 million on an $800 million million.
<unk> portfolio is.
Speaker Change: <unk> is close to 20% turned in one quarter.
Speaker Change: I would expect that we could see a similar amount over the course of the next quarter or two so 40% in two quarters. If we can run ahead of that I think it's a plus and then it just becomes a matter of of whether things calm down.
Speaker Change: I do think that.
Speaker Change: You know continue.
Speaker Change: Continuing to string together $150 million.
Speaker Change: Origination quarters is well above our historical pace of probably 200 a year.
Speaker Change: But I do think that.
Speaker Change: There is a reasonable prospect in the last two quarters of the year to move the leverage up.
Speaker Change: I would say that part of that equation is.
Speaker Change: What are what are we looking for in terms of yield given the overall market situation, we've been very disciplined in trying to hold our overall incremental.
Speaker Change: Ro.
Speaker Change: All of these investments and so as I said.
Speaker Change: Limited amount of of return degradation.
Speaker Change: To manage that there's probably two things one scale will help but we also need to address our capital costs and whether it's our bank line or whether it's the refinancing of a couple of our outstanding AR.
Speaker Change: Liabilities those would be part of the equation too to drive incremental volume in the second half of the year I'll remind you that we have a fairly expensive baby bonds mature.
Speaker Change: A call date in September at seven and three quarters refinancing that's lower our cost to give us additional flexibility to take on additional assets and grow.
Speaker Change: <unk>.
Speaker Change: Grow the pacing so the answer is a multi multi tiered solution, but we're not going to push it. If we don't get the yields were looking for or can't modify our cost to preserve our ROA.
Speaker Change: Thank you for that.
Speaker Change: Very helpful. If I got one more.
Speaker Change: Susan.
Speaker Change: Have you got any put them in.
Speaker Change: Preliminary analysis that you don't like exposure to tariffs on with devolution exposure to government contracts et cetera, I mean, how do you feel about yet you exposure on those fronts with our with things.
Speaker Change: Changing rather rapidly at the moment.
Speaker Change: Yeah, it's interesting we are.
Speaker Change: We obviously deal with businesses that fabricate precision products and.
Speaker Change: Metals are a big part of that.
Speaker Change: Most of the most of the folks that are processing those today are going into.
Markets that feel pretty good about I mean are you know.
Speaker Change: Fence or aircraft engines.
Speaker Change: You know aerospace type products.
Speaker Change: I do.
Speaker Change: Those are relatively insensitive markets and certainly the final cost of the product.
Speaker Change: Is is relatively low from a metal perspective, the processing is a meaningful percentage.
Speaker Change: We don't really have a ton of commodity.
Speaker Change: Like.
Speaker Change: Processors.
Speaker Change: We've clearly steered clear of most of the foreign operations and foreign sourcing given the given the BDC and domestic assets.
Speaker Change: The one area that I would say, we're probably got some exposure to is the is the auto market.
Speaker Change: <unk> market is one where supply chains extend into Mexico, and as you've probably heard in the news between metal and and and tariffs. There's a lot of turmoil going on and I think the chairman of Ford came out earlier today about what the implications.
Speaker Change: B, we have two smaller investments in that category.
Speaker Change:
Speaker Change: We are watching them closely they've got good solid platforms, but certainly these changes are going to going to create some some stress at least in the near term. So I would say the auto market is probably the single largest area, where I think we have some some concern about that but.
Speaker Change: But we're monitoring those situations very closely.
Speaker Change: Got it thank you very much.
Speaker Change: Next question please.
Speaker Change: Thank you I'm not showing any further questions at this time. So the floor is yours, Mr. Gladstone for any closing comments.
Speaker Change: Alright, Thank you all for calling in.
Speaker Change: Great quarter, and we continue to go forward in.
And make dividends for our shareholders. So tune in next time, and we will answer questions again, that's the end of this call.
Speaker Change: Thank you that does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Uh huh.
Speaker Change: Uh huh.