GLAD - NASDAQ

Good morning, and welcome to the Gladstone Capital Corporation Fourth Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Gladstone, Chairman of Gladstone Capital Corporation. Please go ahead, sir.

Thank you, Melissa. This is David Gladstone, Chairman, and this is our earnings conference call for Gladstone Capital Corporation for the quarter and fiscal year ending September 30, 2025. Thank you all for calling in. We are always happy to talk to you, our shareholders and analysts, and we welcome the opportunity to provide updates on our company. And now we will hear from Catherine Gerkis. She is Director of Investor Relations and ESG, to provide a brief disclosure regarding certain regulatory matters. Melissa?

Good morning. Today's call includes forward-looking statements, which are based on 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-Ks 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. Now, I will turn the call over to Gladstone Capital's President, Bob Marcotte.

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. Beginning with our last quarter results, fundings last quarter totaled $126.6 million and included five new private equity-sponsored investments in a variety of industry sectors, much of which we previewed in our last call. Exits and prepayments declined relative to the past couple of quarters to $23.5 million, so net originations were a 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. Interest and financing costs increased $1.4 million on higher average bank borrowings, and net management fees increased $0.5 million as incentive fee credits declined. So net investment income for the period came in at $11.4 million. Net realized losses were $6.3 million for the quarter, which relates to the exit of FES Resources, a legacy oil and gas services investment. 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 lien debt, which rose to 72% of the fair value of the portfolio, and total debt holdings came in at 90% of the portfolio at fair value. As of the end of the quarter, we had three non-earning debt investments with a cost basis of $28.8 million or $13 million at fair value, which is 1.7% of our debt investments. In addition, PIK income increased for the quarter to $2 million or 8.4% of interest income as much of the increase was generated by two recent investments which included supplemental PIK above the underlying 10% cash interest yield on those assets. Since the end of the quarter, originations have largely paced with repayments, and we continue to work through a healthy pipeline of deals going into our traditionally strong fourth quarter. In reflecting on our recently concluded fiscal 2025 and the outlook for the next quarter or two, I'd like to leave you with the following. Fiscal 2025 was a huge challenge for us. 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 $63 million increase in fair value of our investment portfolio for the year. 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. In addition to recycling the wave of investment exits, we significantly expanded our private equity sponsor relationships, and as the lead lender in most of our deals, we are well-positioned to increase our investments as these new PE platforms look to drive growth in equity appreciation through acquisition or expansion. At present, we are 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. As we ended the quarter with a conservative leverage position with net debt at a modest 2.5% of NAV, having refunded our 2026 debt maturity shortly after the end of the quarter with the $149 million convertible issue. As part of the debt recapitalization, we also called our $57 million 7.5% 2028 notes and increased our floating rate bank borrowings to capitalize on the projected decline in short-term rates, which will also serve to reduce our unused facility costs going forward. Pro forma for these refinancing activities, our line of credit borrowings availability is approximately $130 million, more than enough to support our near-term investment activities. Now I'd like to turn the call over to Nicole Schaltenbrand, Gladstone Capital's CFO, to provide some details on the Fund's financial results for the quarter and year-end.

Thanks, Bob. Good morning. During September, total interest income rose $2.9 million or 14% to $23.8 million as the average earning assets rose $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. Total investment income was $23.9 million on the higher interest-earning assets as fee income declined $600,000 from last quarter. Total expenses rose $2.1 million or 20.5% versus the prior quarter as interest expenses rose $1.4 million with increased bank borrowings and net management fees rose on the reduction of incentive fee credit. Net investment income for the quarter rose to $11.4 million or $0.52 per share. The net increase in net assets resulting from operations was $14 million or $0.63 per share for the quarter ended September 30, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of September 30, total assets rose to $908 million consisting of $859 million in investments at fair value, and $49 million in cash and other assets. Liabilities rose $100 million quarter over quarter to $406 million as of September 30 with the completion of the $149.5 million 5.5% convertible note issue in September, which was used to pay down our LOC borrowings and increased temporary cash investments which were subsequently used to call and repay our $150 million of 5.2 notes due January 2026 and our $57 million of 7.75 notes due in 2028. The remaining balance of our liabilities consists primarily of $50 million 3.75 notes due May 2027 and $19.4 million of preferred stock. As of September 30, net assets rose $7.6 million to $482 million from the prior quarter end with the sale of approximately 263,000 shares under our ATM program, netting approximately $7 million for the quarter. NAV per share rose from $21.25 to $21.34 as of September 30. Our gross leverage as of September 30 rose to 84.3% of net assets. After the end of the quarter, we have funded the $272.7 million note retirements with cash on hand and approximately $157 million of closing rate bank borrowings to better match our floating rate assets. With respect to distributions, monthly distributions for November and December will be $0.15 per common share, which is an annual run rate of $1.8 per share. 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%. And now I'll turn it back to David to conclude.

Well, thank you, Bob, Nicole, Catherine, you all did a great job in updating our stockholders and the analysts who follow us. And the recent performance is really strong. In summary, the team maintained their underwriting leverage and also the investment totals of $396 million for the year, almost $400 million. So the company has a very strong balance sheet today. We've refinanced any debt that's coming due in the future, and so we're in 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. And for anyone keeping score, the Glad 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. 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 experienced partners to support the acquisition and growth companies they invest in. This gives us an opportunity to make attractive interest by paying loans and small equity investments and pay strong distributions to our stockholders. Now operator, would you please come on and tell people how they can call in and ask questions?

Thank you. Our first question comes from the line of Eric

Thank you. Good morning, everyone. Good morning. Wanted to start with a question on the pipeline. You obviously had a very nice quarter of originations in the most recently reported quarter. And I know you mentioned 2025, you've significantly expanded the number of PE sponsor relationships. 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?

Sure. Fourth quarter is always pretty strong. I will say that we've definitely seen some of the newer assets that we put on with follow-on acquisition opportunities, some of which have already closed and some of which are pending. So we're definitely seeing that effect through the portfolio. On the potential deals, at any given time, we're probably tracking an order of magnitude, $100 million of potential volume. 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. 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. I think we increased a little more than that last year. I think we would expect it to be a little bit more than that this year because we've had such a turn. 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. I would say one more point. We tend to see a barbell of transactions coming through. One, the transactions that are add-ons for existing deals, those are companies that are getting larger. They might be in the $10 million, $15 million, $20 million EBITDA range. Those deals will be bigger. The new deals where we're starting new originations, those tend to be smaller deals. They're first-time transitions from family or privately held businesses to private equity. They tend to start smaller and then grow. So a $10 million to $20 million deal on the initial side will then become a $20 million to $30 million deal on the second bite at the growth profile for that business. So that's a little bit more than you probably asked for, but that's what's going on right now.

No, that's great color. Thank you. And then switching gears to the decline quarter over quarter and the portfolio yield. Curious how much of that was reflective of lower base rates working through the portfolio versus potentially maybe new originations coming on at lower yields, although I think you mentioned that you're not seeing maybe a whole lot of spread compression at this point on newer deals, maybe I misheard that.

Most of that was the base rate, which I think came down from in the four-thirty range and probably ended the quarter closer to 3.9. So most of the move was underlying base rates. If you just isolate what we closed on the quarter, the metrics on the margin were well north of seven, and the leverage was pretty attractive, but even if we were at 7.5% using round numbers on four, that increase would probably put you at an 11.5% yield, which compares to the 12.8% that we were at the end of last quarter. So while our spreads are very attractive, the overall impact on our combined portfolio yield, the new definitely brought it down a bit as well.

Thank you. And one last one if I could. Just looking through the SOI notice WBXL, which is on non-accrual, had a slight improvement in the valuation. So just curious kind of what you're seeing there, some improved operational performance, and if that expectation might continue to trend in a positive direction.

I think they're up to eighteen straight months of sales increases and profitability increases. They are currently EBITDA positive and continuing to grow. We've been through both sales and operating cost restructurings. They are not to a point where we are ready to turn it on and make it an earning asset. But we're feeling very strong about where the business has gone and the consistency and sustainability of the underlying brand in that business.

Good news. Thanks for taking my questions this morning.

Sure. Next question.

Thank you. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.

Given where the stock price is and your low leverage, any consideration of doing material share repurchases?

Relative to where we're performing, I'm certainly tempted. I think the last time we brought that up, we were probably trading at a thirty-ish percent discount. It was a number of years ago. We're definitely getting in the range where that's going to be a discussion. And then, given following up on the comments earlier talking about new private equity partnerships, should we expect accelerating portfolio growth in fiscal 2026?

I guess if you extend the comments I made earlier, I think the answer is probably yes. If we have lower turnover in the underlying portfolio, we broaden the relationships, our origination bucket originations went from $178 million to $400 million. I think we could probably outrun a modest repayment stream. So I think we are in that position. I think the question following on your last one, at some point, another equity is going to become an issue for us. So buying an equity when we have the opportunity to continue to expand profitably will be the crux of the discussion around that until the stock recognizes that we have that earnings power and the opportunity it's going to be a challenge to chew up the equity through buying back the shares.

Final question. For the fiscal first quarter, the quarterly dividend has been reduced to $0.45. The dividend is not yielding that high on NAV. It's like nine and change as a percentage. I was thinking beyond that. Yes, 9.6% as I think Nicole outlined. Yes. And I get it, lower base rates, but you're maintaining investment spreads and leverage is low and so forth like that. What's sort of thinking behind the reduction of the dividend? Didn't look like it was imperative, but I may be missing something.

Well, I think we were trying to be responsible. And I think as you look out over the course of the next year, I think we have about $650 million at year-end of floating rate assets. About $150 million of floating rate debt. I think any further compressions in rates are going to become a challenge for us as well as everyone else. We did very well to substitute and work through our refinancing activities to essentially a neutral cost of capital and maintaining our financial flexibility and maturity profile. I think the challenge is a 100 basis point decline is going to pressure us as well as everyone else. And how do we absorb that? Well, we'll absorb it through if you would note in our financials, we paid an awful lot of commitment fees on our line of credit that we didn't use. So we probably are going to reduce that by virtue of what we've done. We also had a very light quarter from a fee load perspective, I expect those fees to increase. And the combination of those as well as some of the dividend reduction, I think, puts us in a much more healthy position to maintain the current dividend. I don't feel that we're under any particular pressure at this point. It was just really more of setting expectations going into 2026. Given the rates are already beginning to decline.

Great. And final question on the dividend. Is it sort of switching to 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?

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. And the other thing to your earlier point about the yield, I think while the current cash yield is at that range, I think we've also on an ROE basis cleared that by a wide margin on some of our equity gains. And I would expect that to be a material part of those supplementals on a go-forward basis. 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. 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 change in the dividend.

Got it. Thank you.

Okay. Next question.

Thank you. Before we take the next question, our next question comes from the line of Robert James Dodd with Raymond James. Please proceed with your question.

Hi, guys. On the outlook for next year, Bob, I mean, congratulations, you did grow over a very high level of portfolio churn over the last twelve months. But still, 60% of the portfolio didn't turn over. So I mean, the lower middle market does seem to be healthy. There's a lot of activity going on, which obviously is what drove that turnover. What do you think the risks are that elevated repayment activity continues going into 2026? Because to your point, I mean, the 42% that you already turned over, that's probably not going to turn over again. But there is still more than half the portfolio that didn't. I mean, could you still see extremely high levels in the following twelve months?

Robert, that's a question I would say that the maturity of the investments and where the private equity are in achieving their appreciation plan and maturity is a big one. As I described earlier, most of the smaller deals will take several years to professionalize and scale. So a number of the ones that we would have recently funded are in that situation. 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-Liberation Day. So we could see some of those larger exposures turnover. 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. But I do think the question really boils down to are the private equities selling their companies as rapidly as they have in the past? And I think the generic answer is no. I think that the hold periods are extended. The maturity and appreciation plans have not necessarily been fully achieved. So we still see some stickiness to the underlying portfolio, but I'm not terribly worried about our ability to outpace it having survived 2025.

Okay. Fair enough. Then one more if I can. On credit, I mean, obviously, no new non-accruals this quarter. WBXL seems to be improving. I mean, are there any cracks developing anywhere in the portfolio or themes that you're seeing that you're incrementally concerned about? Because it certainly doesn't seem to be showing up anywhere from a credit perspective.

Well, Robert, I think as you understand our strategy, we sit on the boards and observe what's going on in these businesses. And I can't tell you that there aren't issues inside those businesses. But when you go in under 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? It doesn't ripen into the situation where the report sixty or ninety days post quarter end and liquidities are getting tight. So we are in a position to take action sooner. Now there are certainly some assets that we are focused on, and there's likely to be equity infusions on the part of the sponsors, or they may be in the market to be sold. But I think we are still in a very safe position. So even if we end up waiving 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. So I guess there's two questions there. Do we believe there are businesses that are having challenges? Yes, there are a couple. But do we believe that there's an exposure on an 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.

Got it. Thank you and congratulations on the performance over the last year.

Thanks for calling in.

Thank you. Ladies and gentlemen, there are no other questions at this time. I'll turn the floor back to Mr. Gladstone for any final comments.

Well, thank you all for being with us for another quarter and ending another year so successfully. And we hope we can even do that in the next quarter. But thank you all for calling in. That's the end of this call.