Q4 2025 Gladstone Capital Corp Earnings Call

Speaker #3: Gladstone Capital Corporation fourth quarter 2025 earnings call. At this time, all participants are in a listen-only Greetings and welcome to the mode. A question-and-answer session will follow the formal presentation.

Speaker #3: If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

Speaker #3: I would now like to turn the conference over to your host, Mr. David Gladstone. Chairman of the Gladstone Capital Corporation. Please go ahead, sir.

Speaker #2: Thank you, Melissa. This is David Gladstone, Chairman, and this is our earnings conference call for Gladstone Capital for the quarter and fiscal year ending September 30, 2025.

Speaker #2: Thank you all for calling in. We're always happy to talk to you about our shareholders and analysts, and we welcome the opportunity to provide updates on our company.

Speaker #2: And now we're here with Catherine Gerkis, Director of Investor Relations and ESG, to provide a brief disclosure regarding certain regulatory matters.

Speaker #4: Good morning, Melissa. Today's call may include forward-looking statements, which are based on management 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.

Speaker #4: 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.

Speaker #4: 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-K and earnings press release for more detailed information.

Speaker #4: You can also sign up for our email 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.

Speaker #5: Good morning, and thank you all for dialing in. I'll cover the highlights for the quarter and the fiscal year-end and conclude with some comments on our near-term outlook for the company.

Speaker #5: Beginning with our last quarter results, funding's last quarter totaled $126.6 million. It included five new private equity-sponsored investments in a variety of industry sectors, much of which we previewed in our last call.

Speaker #5: prepayments declined relative to the past couple Exits and of quarters, to 23.5 million. So net originations were healthy, 103.1 million. Interest income for the period rose 14% to 23.8 million, with a 16.2% increase in average earning assets, and a 30 basis point decline in the weighted average portfolio yield to 12.5% for the quarter.

Speaker #5: Interest and financing costs increased 1.4 million, on higher average bank borrowings, and net management fees increased half a million as incentive fee credits declined.

Speaker #5: So, net investment income for the period came in at $11.4 million. Net realized losses were $6.3 million last quarter, which relates to the exit of FES Resources, a legacy oil and gas services investment.

Speaker #5: However, on balance, the portfolio appreciation offset the depreciation for the quarter, and for the TTM period, our ROE came in at 11.9%. With respect to the portfolio, the portfolio turnover for the period did not have a material impact on our investment mix, as the new originations were predominantly first-lean debt, which rose to 72% of the fair value of the portfolio, and total debt holdings came fair value.

Speaker #5: As of the end of the quarter, we had three in at 90% of the portfolio non-earning debt investments, with a cost basis of $28.8 million, or $13 million in fair value, which is 1.7% of our debt investments.

Speaker #5: In addition, PIC income increased for the quarter to $2 million, or 8.4% of interest generated by two recent investments, as much of the increase was due to supplemental PIC above the underlying 10% cash interest yield on those assets.

Speaker #5: Since the end of the quarter, originations have largely capaced with repayments, and we continue to work through a healthy pipeline of deals going into our traditionally strong fourth on our recently concluded fiscal quarter.

Speaker #5: 2025, and the outlook for the next quarter too. I'd like to leave you with the following: In reflecting, fiscal 2025 was a huge challenge for us.

Speaker #5: As we overcame the spike in repayments and liquidity events, which totaled 352 million, we were able to source and close 15 new investments, representing 397 million of originations, which contributed to the 6.3 million increase in fair value of our investment portfolio for the year.

Speaker #5: The combination of the depth of the deal origination opportunities in the lower middle market, the experience of our origination team, and the utility of our BDC private credit model to deliver attractive financing solutions to the private equity market all contributed to these record results.

Speaker #5: In addition to private equity sponsor exits, we significantly expanded our recycling the wave of investment relationships. And as the lead lender in most of our deals, we're well positioned to increase our investments as these new PE platforms look to drive growth in equity appreciation through acquisition or expansion.

Speaker #5: At present, we're continuing to see a healthy flow of attractive investment opportunities, and remain cautiously optimistic that the lower middle market will remain relatively insulated from spread erosion, leverage escalation, and financing terms erosion experienced in the larger middle market.

Speaker #5: As we ended the quarter with a conservative leverage position, net debt stood at a modest 82.5% of NAV. Shortly after the end of the quarter, we refunded our 2026 debt maturity with a $149 million convertible issue. As part of the debt recapitalization, we also called our $57 million 7.375% 2028 notes and increased our floating rate bank borrowings to capitalize on the projected decline in short-term rates.

Speaker #5: Which will also serve to reduce our unused facility costs going forward. Pro forma for these refinancing activities, line of credit borrowing availability is approximately $130 million, more than enough to support our near-term investment activities.

Speaker #5: And now I'd like to turn the call over to Nicole Schaltenbrand, Gladstone Capital CFO, to provide some details on the fund's financial results for the quarter and

Speaker #5: year-end. Thanks, Bob.

Speaker #6: Good morning. During the September quarter, total interest income rose $2.9 million, or 14%, to $23.8 million. Meanwhile, the average earning assets increased by $104.8 million, or 16.2%, while the weighted average yield on our interest-bearing portfolio declined 30 basis points to 12.5% for the period.

Speaker #6: Total investment income was $23.9 million, attributed to the higher interest-earning assets. However, fee income declined by $600,000 from last quarter. Total expenses rose by $2.1 million, or 20.5%, compared to the prior quarter.

Speaker #6: As interest expenses rose 1.4 million, with increased bank rose on the reduction of incentive fee credits. Net investment income for borrowings, and net management fees the quarter rose 11.4 million, or 52 cents per share.

Speaker #6: From operations was $14 million, or 63 cents per share, for the quarter ended September 30th. The net increase in net assets resulting from operations was impacted by the realized and unrealized valuation depreciation covered by Bob earlier.

Speaker #6: Moving over to the balance sheet. As of September 30th, total assets rose to $908 million, consisting of $859 million in investments at fair value and $49 million in cash and other assets.

Speaker #6: Liabilities rose $100 million, as of September 30th, with the million quarter over quarter to $406 million completion of the $149.5 million 5 and 7/8 convertible note issue in September, which was used to pay down our LOC borrowings and increased temporary cash investments that were subsequently used to call and repay our $150 million of 5 and 1/8 notes due January of 2026.

Speaker #6: And our $57 million of 7¾% notes due in 2028. The remaining balance of our liabilities consists primarily of $50 million 3¾% notes due May of 2027, and $19.4 million of preferred stock.

Speaker #6: 30th, net assets rose As of September 7.6 million to $482 million from the prior quarter end, with a sale of approximately $263,000 shares under our ATM million for the quarter.

Speaker #6: NAV per share rose from $21.25 to $21.34 as of September 30th. Our gross leverage as of September 30th rose to 84.3% of net assets.

Speaker #6: After the end of the quarter, we have funded the $27 million note retirements with cash on hand and approximately $157 million of floating rate bank borrowings to better match our floating rate assets.

Speaker #6: With respect to distributions, monthly distributions for November and December will be $0.15 per common share, which is an annual run rate of $1.80 per share.

Speaker #6: The board will meet in January to determine the monthly distribution to common stockholders for the following quarter. At the current distribution run rate for our common stock and with the common stock price at about $18.77 per share yesterday, the distribution run rate is now producing a yield of about 9.6%.

Speaker #6: And now I'll turn it back to David to conclude.

Speaker #7: Well, thank you. Bob, Nicole, Catherine, you all did a great job in updating our stockholders and the analysts who follow us. And in a recent performance is really strong.

Speaker #7: In summary, the team maintained their underwriting leverage and also the investment totals of $396 million for the year, almost $400. So the company has very strong balance sheet today.

Speaker #7: that's coming due in the future. And so we're in We've refinanced any debt good shape today. We've maintained ample bank lines of credit and capacity to support the healthy pipeline of new deals that we have to continue to support the asset growth and shareholders' dividends.

Speaker #7: And for anyone keeping score, the Gladstone team delivered a stellar 16.75% return on equity for the last five years. That puts them right near the top and certainly ahead of the top peer group in developing returns for their shareholders.

Speaker #7: In summary, Gladstone continues to stick with the strategy of investing in growth-oriented lower middle market businesses with good management. Many of these investments are in support of mid-sized private equity funds that are looking for experience partners to support the acquisition and growth of companies they invest in.

Speaker #7: This gives us an opportunity to make an attractive interest-paying loans and small equity investments and pay strong distributions to our stockholders. And now, operator, where could you please come on and tell people how they can call in and ask questions?

Speaker #8: Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

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Speaker #8: Our first question comes from the line of Eric Zwick with Lucid Capital Markets. Please proceed with your question.

Speaker #9: Thank you. Good

Speaker #9: morning, everyone.

Speaker #10: Good question.

Speaker #9: Good morning. I wanted to start with a question on the pipeline. You obviously had a very nice quarter of originations in the most recently reported quarter.

Speaker #9: And I know you mentioned that in 2025, you've significantly expanded the number of PE sponsor relationships. So, I'm just curious if you could give us an update on where the pipeline stands today in terms of size and maybe also the mix of new versus add-on opportunities.

Speaker #10: Sure. Fourth quarter is always pretty strong. I will say that we've definitely seen some of the newer assets that we've put on with follow-on acquisition opportunities.

Speaker #10: Some of which have already closed and some of which are pending. So we're definitely seeing that affect through the portfolio. On the potential deals, at any given time, we're probably tracking order of magnitude, maybe $100 million of potential volume.

Speaker #10: Obviously, those are going to fall out in a variety of different ways. But we feel like somewhere in the range of 10 deals, $100 million of near-term volume, that's going to be more than ample to clear any repayments that we might see and continue to grow.

Speaker #10: I think if you go back to our traditional history, we've been able to grow the assets somewhere in the range of 25 to 50 over the course of a year.

Speaker #10: I think we increased a little more than that. It to be a little bit more last year. I think we would expect more than that this year because we've had such a turn.

Speaker #10: We turned 42% of the portfolio from last September. So you would expect the rollover rate in 2026 to be lower, which I think positions us well to have a net add of assets because of the maturity of the existing assets.

Speaker #10: I would say one more point. We tend to see a barbell of transactions coming through. One, the transactions that are companies that are getting larger.

Speaker #10: I would say one more point. We tend to see a barbell of transactions coming through. One, the transactions that are add-ons for our existing deals, those are in the $10 million, $15 million, $20 million EBITDA range.

Speaker #1: to be Tend smaller deals . Their first time transition from or family privately held businesses to private equity . They tend to start smaller and then grow .

Speaker #1: So , you know , a 10 to 15 , 10 to $20 million deal on the initial side will then , become a 20 , $30 million deal on the second bite at the .

Speaker #1: Growth profile for that business. So that's a little more than probably asked for. But that's what's going on, right?

Speaker #2: No, that's a great color. Thank you. And then, gearing up to the decline quarter over quarter and the portfolio yield.

Speaker #2: How much of that was reflective of lower base rates working through the portfolio versus potentially originations coming on maybe new at lower yields?

Speaker #2: Although I think you not mentioned that you're seeing , you know , maybe a whole lot of spread compression at this point on newer deals , but maybe , maybe I misheard that .

Speaker #1: Most of that the was base rate , which I think down came from in the fourth , third , you know , Sofr was probably 430 range and probably ended the quarter closer to 390 .

Speaker #1: So, most of the move was due to underlying base rates. If you just isolate what we closed on the quarter, the metrics on the margin were well north of 7.

Speaker #1: And the leverage was pretty attractive . But you know , even if we were at seven and a half using round numbers that on for increase would probably put you at 11.5% yield , which compares to the 12 eight that we were at the end of last quarter .

Speaker #1: So while our spreads are very attractive , the overall impact on our combined portfolio yield , the new definitely brought it as well .

Speaker #2: Thank you . And one last could one , if I just , you know , looking through the Soi noticed wbcl , which is on Non-accrual had a a slight improvement in the valuation to just curious kind of what you're seeing there .

Speaker #2: If some improved operational performance if and that expectations that that might continue to in a in a trend positive direction .

Speaker #1: I think they're up to 18 straight months of sales increases and profitability increases. They are currently EBITDA positive and continuing to grow.

Speaker #1: We've been through both sales and operating costs restructurings . They to a are not point where we are ready to turn it on and and make it turn it on to an earning asset .

Speaker #1: But we're strong feeling very about where the is gone and the consistency and sustainability of the underlying brand in that business .

Speaker #2: That's good news. Thanks for taking my questions this morning.

Speaker #2: .

Speaker #3: Thanks . Question Sure . .

Speaker #4: Thank you . Our next from the question comes line of Christopher Nolan Lundberg with Thalmann . Please proceed with your question .

Speaker #5: Hi. I'll give you where the stock price is and your low leverage any consideration of doing material share repurchases.

Speaker #1: Relative to where we're performing , certainly I'm certainly tempted . I think the last time we brought that up , we were probably trading at a 30 ish percent discount .

Speaker #1: It was a number of years ago. We're definitely getting in the range where that's going to be a discussion.

Speaker #5: Then, given the following up on the comments earlier, talking about new private equity partnerships, should we expect accelerating portfolio growth in fiscal 2026?

Speaker #1: I guess if you extend the comments I made earlier , I think the answer is lower we underlying the yes . If portfolio , we broaden the probably relationships .

Speaker #1: You know , origination our bucket originations went from 178 million to almost 400 million . probably outrun I think modest a repayment repayment stream .

Speaker #1: So are in that think we I the position . on your following question your last one , at some another point , is going to become an equity issue for us .

Speaker #1: I think buying an equity when we have the opportunity to continue to expand profitably will be the crux of the discussion around that until the.

Speaker #1: Stock recognizes that we have that earnings power and the opportunity. It's going to be to chew up the equity through buying back the shares.

Speaker #5: Final question for the fiscal first quarter, the quarterly dividend has been reduced to $0.45. The dividend is not yielding that high NAV.

Speaker #5: on It's like nine and change as a percentage . What was the thinking behind .

Speaker #1: That nine . It's 99. 6% is I think Nicole outlined . .

Speaker #5: Yeah . And you know I get it . You know lower base rates . But you know you're maintaining investment spreads and and so forth like that .

Speaker #5: What's the sort of thinking behind this low dividend? Imperative. But I'm missing something.

Speaker #5: .

Speaker #1: think we responsible . And I Well , I you look the course

Speaker #1: were trying to be

Speaker #1: out over next think as think we year , I have it was an Didn't look like about think for us , debt . rates floating challenge $650 million else any further become .

Speaker #1: out over next think as think we year , I have it was an Didn't look like about think for us , debt . rates floating challenge $650 million else any further become as well of about did very in everyone year end We is a well to assets , refinancing activities essentially a to cost capital and maintaining our financial flexibility and maturity profile .

Speaker #1: think the challenge I is know , you , 100 basis point decline is going to pressure us as well as everyone else . And how do we absorb that ?

Speaker #1: Well, we'll absorb it through. If you note in our financials, we paid an awful lot of commitment fees on our line of credit that we didn't use.

Speaker #1: So we probably are going to reduce that by virtue of what we've done in the restructuring of the business. We also had a very light fee load perspective.

Speaker #1: I those fees expect to increase and the combination of those , as well as some of the reduction , dividend I think it puts a much more healthy position to us in current maintain the dividend .

Speaker #1: I don't feel I don't feel that we're under any pressure at this particular point . It was just really more of setting an expectations going into 2026 , given the rates are already beginning to decline .

Speaker #5: and final question on the Great Is it dividend . sort of switching to a more of a base dividend plus a supplement type of structure going forward , or is you're just thinking just pay $0.45 going forward ?

Speaker #1: I think we could certainly see a supplemental on a go forward basis . We've provided two supplementals in the last year for some of our capital gains , thing to your earlier the point about yield think , I current and the other yield while the is at that range , I think we've also on an ROE basis , cleared that wide margin by a on some of our equity gains , and I would expect that to be a material part of those supplementals on a go forward basis .

Speaker #1: So while the current cash yield may be sub ten , the overall yield on equity with Nav growth has been almost , I think as David outlined , 16.7% over the last five years .

Speaker #1: So, we wanted to be in a position to invest in the right deals and achieve the overall return for our shareholders. That's why we made the adjustment in the dividend.

Speaker #5: Got it . Thank you .

Speaker #3: Okay . Next question .

Speaker #4: Thank you. Before we take the next question, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad.

Speaker #4: next Our question comes from the line of Robert Dodd with Raymond James . Please proceed with your question .

Speaker #6: Hi , guys . And everybody on on the look at the outlook for next year . Bob . I mean , you know , congratulations .

Speaker #6: You did grow over a very high level of portfolio churn in in the 12 months . over the last But still 60% of the portfolio didn't over .

Speaker #6: turn So I mean , the lower middle market does seem to be a lot of healthy . There's is what drove that that turnover .

Speaker #6: What do you think the risks are that the elevated repayment activity continues going into 2026? Because, to your point, the 42 that you already turned over, that's probably not going to turn over again.

Speaker #6: But there is still more than half the portfolio that didn't I mean , could could that could you still see extremely high levels in in the following 12 months ?

Speaker #1: Robert , that's a , you know , a question I would I would say that the maturity of the investments and where the private equity are in achieving their appreciation plan and maturity is , is a big big one .

Speaker #1: As I described earlier , most of the smaller deals will take several years to to professionalize and scale . So a number of the ones that we would have recently funded are in that situation .

Speaker #1: I would say that we were somewhat opportunistic and were able , in the course of the last couple of quarters , to land some very attractive deals as the market was a bit dislocated post day , so we could see some of those larger exposures turn over , but net net , I think we're in a position where we will continue to grow , even if those larger transactions in the other 60% do turn .

Speaker #1: But I do think the the question really of boils down to , you know , are , are the private equity selling their companies as rapidly as they have in the past ?

Speaker #1: think the And I generic answer is no . I think the whole periods are extended . The maturity and appreciation , you know , plans have not necessarily been fully achieved .

Speaker #1: So we still see some stickiness to the portfolio underlying. But I'm not terribly worried about our ability to outpace it. Having survived 2025.

Speaker #6: Okay . Fair enough . Then one more if I can . On on credit . I mean , obviously no new non-accruals this quarter seems to be improving .

Speaker #6: I mean , are there any , you know , cracks developing anywhere in in the portfolio or themes that you're seeing that you're incrementally concerned about ?

Speaker #6: Because it certainly doesn't seem to be showing up anywhere from a credit perspective.

Speaker #1: Well, Robert, I think as you understand, our strategy is that we sit on the boards and observe what's going on in these businesses.

Speaker #1: And I can't tell you that there aren't issues inside those businesses. But when you go in at a relatively low leverage and you see it at the vantage point that we see at the board level, it becomes a lot more manageable, right?

Speaker #1: It doesn't ripen into the situation where the report 60 or 90 days post-quarter end and liquidities are getting tight. So, we are in a position to take action sooner.

Speaker #1: Now . are There certainly some assets that we are . We are focused on and there's likely to be , you know , equity infusions on the part of the sponsors , or they may be in the market to be sold .

Speaker #1: But I think we are still in a very safe position . So even if even if we end up , you know , waving a covenant or so to give them the breathing room to go to market and sell the business , our leverage position is still well covered by the enterprise value .

Speaker #1: So I guess there are two questions there. Do we believe there are businesses that are having challenges? Yeah, there are a couple.

Speaker #1: But do we believe that there's an exposure on a LTV basis ? No . There isn't . I don't feel that we are exposed on any of our positions that aren't otherwise in those non-earning assets .

Speaker #6: Got it . Thank you . And congratulations on the performance over the last year .

Speaker #1: Thanks for calling in

Speaker #1: .

Speaker #4: , ladies and gentlemen. Thank you. There are no other questions at this time. I'll turn the floor back to Mr. Gladstone for any final comments.

Speaker #3: Well , all for thank you being with us . For another quarter and ending another year . So successfully . And we hope we can even do better next quarter .

Speaker #3: But thank you all for calling in. That's the end of this call.