Gladstone Capital - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 was stable operationally: total investment income rose slightly to $21.66M, NII was flat at $11.29M ($0.50/sh), and NAV/share declined modestly to $21.25 on realized losses tied to a restructuring; portfolio yield ticked up to 12.8%.
• EPS (tracked as NII/share) met consensus at $0.50, while revenue (total investment income) modestly missed ($21.66M vs. $21.89M est.); prior two quarters also saw small revenue shortfalls and ~1–3c EPS shortfalls [GetEstimates*].
• Post-quarter, originations accelerated ($93M funded in July/early Aug; net +$89M), leverage moved to 81% of NAV, and the bank facility was upsized/extended to $320M through 2029—positioning GLAD to re-grow earning assets into year-end.
• Portfolio quality/mix remained conservative: ~70% first-lien at cost; three non-earning investments, but one key exposure (EG’s) was returned to accrual; management expects net originations of $50–$100M/quarter and a strong seasonal Q4 pipeline, supporting dividend sustainability.

What Went Well and What Went Wrong

What Went Well

• Portfolio yield and composition: Weighted average yield increased 20 bps q/q to 12.8%, with first-lien continuing to represent >70% of debt investments at cost, supporting resilient NIM and credit profile.
• Funding momentum and liquidity: Subsequent to quarter-end, GLAD closed four new platforms and one add-on totaling $93M (net +$89M), and upsized/extended the credit facility to $320M (revolver to Oct 2027, final maturity Oct 2029) to fund growth.
• Management conviction on growth resumption: “We anticipate a resurgence in our portfolio growth” with attractive lower middle market deal flow and six new sponsors since March 30, per President Bob Marcotte.

What Went Wrong

• Realized loss drove lower net asset growth: Net increase in net assets fell to $7.45M ($0.33/sh) from $8.80M ($0.39/sh) sequentially, primarily due to $3.6M net realized losses in the quarter (EG’s post-restructuring valuation) despite flat NII.
• Revenue vs. Street: Q3 revenue (total investment income) modestly missed consensus; the prior two quarters also missed on revenue as elevated repayments and lower SOFR pressured top line [GetEstimates*].
• Non-accrual/valuation pockets: A printed circuit board investment faced booking slowdowns; Edge Adhesives remains non-accrual and in wind-down; three non-earning debt investments stood at $28.8M cost; valuation mix offset broadly, but underlying idiosyncratic risks persisted.

Transcript

Speaker 4

Greetings and welcome to the Gladstone Capital Corporation Third 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Mr. David Gladstone, Chief Executive Officer for Gladstone Capital Corporation. Thank you. You may begin.

Speaker 1

Thank you for that nice introduction and good morning to everyone out there. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital Corporation, and it's the quarter ending June 30, 2025. Thank you all for calling in. We're always happy to talk to our shareholders and the analysts who follow us. We welcome the opportunity to provide updates for our company. Before we get going, we're going to have Kathryn Gurkhis, our Director of Investor Relations and ESG, provide a brief declaration regarding certain regulatory matters concerning this call. Kathryn?

Speaker 3

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, both issued yesterday, for more detailed information. You can also sign up for our email notification service and find information on how to contact our Investor Relations Department. We are also on X @gladstonecomps, and Facebook, keyword the Gladstone Companies. Now, I will turn the call over to Gladstone Capital Corporation's President, Bob Marcotte.

Speaker 2

Thank you, Kathryn. Good morning, and thank you all for dialing in this morning. I'll cover the highlights for the quarter and a few subsequent events and some comments on our near-term outlook for the company. Beginning with our last quarter results, fundings last quarter totaled $73 million and included two new PE-sponsored investments in the healthcare and industrial manufacturing sectors. Exits and prepayments remained elevated at $82 million as we exited two sizable investments in the aerospace and restaurant industries. The net originations were -$9 million for the period, as the bulk of the new deal pipeline we discussed last quarter slipped past the quarter end. Interest income for the period fell slightly to $20.9 million, largely as a result of the 5.2% decline in the average earning assets.

However, the weighted average portfolio yield rose 20 basis points to 12.8% for the quarter, with one-time items associated with the prepayments. Interest and financing costs fell 8.8%, with lower bank borrowings, while net management fees rose half a million, as incentive fee credits declined to $700,000, and net investment income was flat at $11.3 million for the period. Net realized losses were $3.6 million for the quarter, the bulk of which was related to the post-restructuring valuation of our investment in EGs, which is now a performing debt investment. One of the larger contributors to the unrealized depreciation for the quarter was our printed circuit board investment, which hit a slowdown in bookings, which we are addressing. However, on balance, the portfolio appreciation offset the decliners, so for the TTM period, our ROE came in at a respectable 15.8%.

With respect to the portfolio, the portfolio turnover for the period did not have a material impact on our investment mix, as new originations were predominantly first lien debt, which was maintained at 70% 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 $11.5 million, or 1.7% of our debt investments at fair value. As I mentioned earlier, since the end of the quarter, we've been busy working through our deal pipeline and have closed on four new platform investments and an add-on, bringing July and early August originations to $93 million, and net of the $3.8 million payoff of our last material broadly syndicated loan, net originations for July and early August were $89 million.

While I'm sure I'll get some questions about the recent spike in investment activity in face of the broader market conditions, our core strategy of focusing on growth-oriented lower middle market investments backed by PE sponsors is unchanged. For context, of the eight deals funded since the end of last quarter and thus far this quarter, which have totaled $159 million, 88% were first lien investments, with an average closing leverage of three times EBITDA and an average margin over SOFR of in excess of 7%. In reflecting on our outlook for the next quarter or two, I'd like to leave you with a couple of comments. The vast majority of the anticipated portfolio events are behind us, and between our remaining new deal pipeline and new investment opportunities, we anticipate a resurgence in our portfolio growth.

Market volatility aside, we continue to see a healthy flow of attractive lower middle market deal opportunities and are thrilled to have closed deals with six new sponsors since March 30. In addition to recycling the wave of investment exits in the past couple of quarters, we expect to continue to benefit from our incumbent position as the originator, lead lender, and in some cases, equity co-investor in the newer vintage growth-oriented businesses closed recently as they look to growth or acquisition or expansion and support the appreciation of their equity position. We ended the quarter with a conservative leverage position with debt at 64% of NAV and the bulk of our upsized and renewed bank credit facility available to support the growth of our earning assets in the next couple of quarters.

Now, I'd like to turn the call over to Nicole Schaltenbrand, Gladstone Capital's CFO, to provide some details on the fund results for the quarter.

Speaker 3

Thanks, Bob. Good morning, everyone. During the June quarter, total interest income declined 2.3% to $20.9 million as the average earning assets declined 5.2%, while the weighted average yield on our interest-bearing portfolio rose slightly to 12.8% for the period. Total investment income of $21.7 million was unchanged from last quarter as prepayment fees lifted the other income for the quarter. Total expenses were largely unchanged versus the prior quarter as interest expenses declined $500,000 with lower bank borrowings, however, net management and incentive fees rose by a similar amount. Net investment income for the quarter was $11.3 million or $0.50 per share. The net increase in net assets resulting from operations was $7.4 million or $0.33 per share for the quarter ended June 30, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier.

Moving over to the balance sheet, as of June 30, total assets rose to $780 million, consisting of $751 million in investments at fair value and $29 million in cash and other assets. Liabilities rose $7 million to $306 million and consisted primarily of $255 million of senior notes and, as of the end of the quarter, advances under our $320 million line of credit of $27.5 million and $14.5 million of preferred stock. During the quarter, we successfully closed on a two-year extension and upsize of our bank line, which included a reduction in the revolver borrowing margin. As of June 30, net assets declined $3.6 million to $474 million from the prior quarter end with the realized appreciation, and NAV per share fell $0.16 from $21.41 to $21.25 as of June 30. Our leverage as of June 30 rose slightly to 64% of net assets.

Subsequent to June 30, we have funded net originations of $89 million, funded with cash on hand and bank borrowings, bringing our line of credit outstandings to $104 million and total leverage to 81% of NAV. With respect to distributions, monthly distributions for August and September will be $0.1650 per common share, which is an annual run rate of $1.98 per share. The board will meet in October to determine the monthly distribution to common stockholders for the following quarter. At the current distribution run rate for our common stock and with a common stock price at about $26.91 per share yesterday, the distribution run rate is now producing a yield of about 7.4%. I'll turn it back to David to conclude.

Speaker 1

Thank you very much, Bob and Nicole and Kathryn. You all did a great job in informing the shareholders and the analysts out there that follow our company, and glad to have that quarter passed us, and we did a good job, I think. In summary, a stellar quarter for Gladstone Capital, I think. Team maintained their underwriting and leverage and pricing and discipline. As you know, we're always working all of those positions in order to be conservative. We closed eight new investments since our last call for $159 million. That's a good run rate. The company has a very strong balance sheet and recently redid and expanded the bank line to support our healthy leverage and the amount of deal opportunities. The team has done a great job weathering the last couple of quarters of repayments.

Always get in the way of those repayments, and then we have to find another deal to replace it. They're well on their way to growing the company and its investment portfolio to support the shareholders' distributions, which is what we live for. In summary, the company continues to stick with its strategy of investing in growth-oriented lower middle market businesses with good management. Many of these investments are supported by mid-sized private equity funds that have put a lot of equity in underneath us and that are looking for experienced partners like our team to support the acquisition growth of the companies they've invested in. This gives us an opportunity to make attractive investment paying, interest-paying loans, and small equity investments along with the way. This is the end of our presentation, so if the operator will come on and tell people how they can ask some questions.

Speaker 4

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. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Mickey Schleien with Clear Street. Please proceed with your question.

Speaker 0

Yes, good morning, everyone. Bob, a couple of high-level questions if I can. Much has been written about the growth of private credit and the impact on spreads. I'm interested in understanding whether you're seeing that capital drift down into the lower middle market where you focus and whether that's impacting your outlook for spreads on new deal flow.

Speaker 2

Mickey, generally speaking, I would say no. What we're seeing is, you know, our starting investments, if you take our eight deals and $160 million, average about $20 million. We're still well below the threshold for most of the large funds. What we do see are sponsors who may be starting up their platforms. They've seen the pricing up market, and they try to push for lower spreads as they start up their deals. It doesn't come down in competition. It comes down more in private equity expectations. We've been generally pretty successful at resisting that. While our average is certainly well north of a 7% spread over SOFR, there are some where we will dip slightly below that. For the most part, we continue to operate at least 100 basis points or more north of where the middle market spreads are currently clearing.

Speaker 0

That's really good news. I'm glad to hear that. Bob, one follow-up from me. We're obviously getting mixed signals on the economy with GDP rebounding in the second quarter, but that was off of a weak first quarter impacted by tariffs and all of that. Now the job market's weak and inflation's climbing again. How do you feel about the overall health of the portfolio? Do you see any tail risks developing? How is all this uncertainty playing into M&A activity and the expectations for that to pick up later this year or next year?

Speaker 2

You know, Mickey, I think most of our investments have a pretty well-articulated growth strategy. They have a technology, they have a service model, they have a competitive advantage or a growth-oriented capability. They tend to have a multi-year outlook for growth. In many cases, it's in the current economy. Obviously, we don't, as we've discussed in the past, do a ton of consumer-oriented businesses. When we underwrite the long-term growth along with the private equity teams that are investing in these businesses, we're buying into what that strategy is. We're generally not buying on the basis of economic growth or a particular broad base of economic assumptions. That visibility doesn't really work in the cash flow model that we use. In terms of changes and uncertainty, yeah, we are certainly concerned about how the headwinds in certain spending or consumption patterns may be affected.

We certainly are both running those sensitivities as well as stressing the cases. I would also say, as I outlined, we're going into these businesses with relatively conservative leverage. On average, under three turns, we have the ability to withstand some headwinds at that level, but these companies can generate reasonable free cash flow over and above our debt service and sustain definitely some headwinds. I would also say that virtually all of our investments that we've spoken to since our last call have been sponsored deals. You're talking about new investments. You're talking about sponsors who put in significant money and are willing to defend those assets. With respect to the overall portfolio, sure, there's a couple of folks that we are mindful of and we are watching very closely.

I don't think at the moment that we are terribly concerned of any in particular, given the current tariff outlook or the like, given the growth profile and the cash flow cushions that these businesses have when we underwrite them.

Speaker 0

Thanks for that explanation, Bob. That's really helpful. I appreciate it. That's it for me this morning.

Speaker 2

Thank you for calling in, Mickey.

Speaker 1

Operator, can you come on and get the second question?

Speaker 4

Yes, sir. Thank you. Our next question comes from the line of Sean Paul Adams with B. Riley Securities. Please proceed with your question.

Good morning. You've largely stayed around the same portfolio mix in first lien. However, matching the theme of the second lien and equity co-investments from post-quarter end, are you evaluating shifting that structure mix around to boost portfolio yields?

Speaker 2

There's no fundamental core strategy to change that. I think we look at each individual investment. There's no overall macro intention. As long as we're able to generate unitranche assets with yields that make sense for us, it's not really what we're focused on. I will say two caveats to that. One, in some of the larger investments, we have brought in bank partners, so have done kind of first out, last out situations where scale and efficiency and pricing have been a little bit more competitive. Those will show up on our SOFR as secured assets. There may be a turn or a turn and a half of bank financing in front of us in those situations, and we are getting essentially second lien pricing. The number of transactions we've done there has been very, very limited.

The second thing that I would say is we have been successful doing a number of transactions where asset-backed facilities are more cost-effective and are appropriate for the business. In those cases, we will do a second lien behind it. In those cases, we're getting attractive pricing and generally fall within the purview of the overall asset support for the facility. Those are the two angles that we're playing to manage some of our yield targets. For the most part, we're not... When you go into the lower middle market, the number of situations where a straight strip of second lien or subordinated debt doesn't tend to be the case because you think of a $4 million or $5 million or $6 million or $8 million EBITDA business, a turn to a turn and a half is a very small investment. Generally, it creates more complications than not.

Most of our investments are unitranche, and the question is whether we want to bring in a bank to effectively leverage the pricing and get to almost a pseudo second lien, but within the confines of a unitranche facility. We're managing all those angles, but straight second lien doesn't really work in the lower middle market.

That's very helpful. Thank you.

Speaker 4

Thank you.

Speaker 1

Operator, can you find if we have another question, please?

Speaker 4

Yes, sir. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.

I think I've taken your questions. In your comments, you mentioned that your quarter to date, the leverage ratio increased to 81% of NAV. Is that correct?

Yes.

Should we expect to be dialed back with repayments later on in the quarter? How does a pattern of repayments typically go in the quarter? Is it sort of back-ended towards the last weeks in the quarter?

Yeah, we'd love to be able to predict those things. I would say they've been coming at a fast and furious pace. If you tally up the last two quarters plus, you know, I think the number last count was something like 40% of our portfolio, and we don't really control the timing of them. As far as companies, normally we see those as companies that are up for sale, that the sponsor has been in long enough, it's time to exit. There are two companies that we are aware of in the portfolio that are up for sale. One, which may close in the coming quarter, and it would be at the very end or the beginning of next. The second, believe it or not, is under contract to be sold, and we are, as the incumbent, the preferred lender to go forward.

We really don't see much in the way of additional repayments at this stage due to sale of the company. There's very little predictability other than the normal transaction sell side time frame. At this point, it's fairly erratic. In fact, last quarter, I think there was a period in time where we were actually net in cash. Getting through last quarter with a relatively low amount of leverage, we ended the quarter on a fairly strong note and obviously have continued it since then. I wish I could plan it, but it's a tough thing to call.

For my follow-up, you guys have a large debt maturity in early 2026. Can you share with us your thinking in terms of whether or not it's better to possibly finance that with an adjustable rate bank credit facility or over term debt, given the uncertainty about further rate cuts?

We've been evaluating that maturity on the horizon for some time. We certainly have the capacity under our line to deal with it. That would not be our preferred course. We're evaluating options to knock a portion of that off, but frankly, have been somewhat disappointed in the current spreads that the markets are pricing for companies in our size range. We are pursuing a variety of alternatives to address that maturity, given what we believe is the relatively low leverage and consistency of our performance, and we'll be moving forward with that over the coming quarter. We're on it. We have a backup plan, but at this stage, there's nothing concrete. We certainly have not only the January maturity, but we have a call on an expensive piece of paper that starts in September that we can also manage. More to come on the capital markets front.

Okay, thank you.

Speaker 1

Operator, who's our next questioner?

Speaker 4

Thank you. Our next question comes from the line of Erik Zwick with Lucid Capital Markets. Please proceed with your question.

Good morning. This is Justin. I'm for Eric today. It sounds like some of the spike in investment activity may have been related to timing. Can you talk about how your pipeline and backlog are looking for the remainder of the quarter and this year?

Speaker 2

Sure. There are a number of deals in advanced stages right now that we expect to continue. We do have a healthy number of additional investments on the horizon. I would say that follow-on acquisitions for some of the recent companies is also part of that equation. I look at it two ways. One is the number of transactions and volumes, and while it obviously may not be as robust as what we've done in the last month and a month and a half, I think it will continue to be in that $50 to $100 million range on originations, which we've traditionally done on a quarterly basis. The positive is also that, frankly, we don't see $75 to $100 million of repayments coming. We have to look at what the net originations are going to look like.

Given the current situation, being in a positive net originations in the range of $50 million or more a quarter is a nice place for us to support our organic growth. That's probably where we were before the recent swing up in repayments. I think we're going to get back there very, very quickly.

Okay. Great. I think I heard in the prepared remarks that EGs has been returned back to accrual status. Any update on Edge Adhesives, which remains on non-accrual?

That investment is in the wind-down mode and will probably be, you know, sold off at some point in the very near future. I don't think that business is likely to be held long enough to see a recovery timeframe. Those are probably situations where there may be some realization of that accumulated depreciation.

Okay. Great, thanks for taking my questions.

Sure.

Speaker 1

Operator, do you have another question coming?

Speaker 4

Yes. Our final question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Hi, guys, and congratulations on the quarter. Just follow up first on that activity level, Bob. It sounds like you're, obviously, the beginning of this quarter was extremely active. Kind of get the feeling that you're seeing the future pipeline rebuild sufficiently, maybe not to produce another quarter like that in the December quarter. To your point, you normally, December obviously is a pretty strong seasonal quarter. Do you think there's a possibility that the December quarter kind of matches the September quarter, or do you think that the pipeline isn't rebuilding at a sufficient pace for that to happen?

Speaker 2

Robert, I would say we are continuing to see attractive inbound opportunities. I think $50 million to $100 million of originations a quarter is something that we can do. We have been averaging better than that. I do think that we may have some prepayments, but we will have strong net originations through the balance of the year. You're right, December is always a busier quarter. I have to be cautious in the sense that there's constantly movement around in terms of economic uncertainties, and certainly, deals are taking longer to close. That's why a lot of the transactions slip past the 6/30 quarter end. I have to be somewhat cautious, but I would say yes, I think we would expect to see a pretty strong Q4. Traditionally, that's when a lot of these deals get closed. I'm a little bit more cautious given the uncertainty in the current market.

I think also the pace or change in interest rates tends to change some of the momentum in the marketplace. I think one of the benefits of the lower middle market is the transactions typically are trading at much more reasonable multiples. Interest rates are not as impactful on the valuation multiples in our market. You can still trade at seven or eight times and still afford to finance at its current rates. I would expect if those rates go down, we could have a stronger year-end opportunity. Right now, I would say we've gone through a pretty elevated state of growth, and I would expect originations in that $50 million to $100 million per quarter net would still be pretty attractive growth. We are talking about transactions where we're investing $15 million to $25 million.

It takes a lot of manpower to prudently underwrite and to document and diligence those number of transactions. There's just a natural limitation as to how much we're going to book in a given quarter because of the size deals we do. That's not going to change. $50 million to $100 million is probably more than I would want. It's an acceptable range. More than that really doesn't work given our origination models.

Got it. Appreciate the color there. Thank you. Just following up on the answer to an earlier question, on the first lien last out, right? I mean, as you said, you're effectively getting second lien pricing. How much of the first lien structure are you selling down to a bank? Because obviously, I think you said like a turn, which would be a lot less than would normally be done if you were the second lien behind the first lien, right? You'd normally have that. Are you getting second lien pricing, but materially better first dollar in effective, you know, once the filer's taken account, structure than you would get if it was a straight second lien? I mean, are you getting higher pricing with better risk, for lack of a better term?

As long as you don't spread the word, Robert. Yes. You know, people come to us because they want an experienced partner and they want unitranche structuring. We have banks that recognize and value what we bring to the table. If that unitranche is, let's say, three and a quarter turns of leverage, and let's use round numbers, let's say $8 million of EBITDA, you're talking about roughly $26 million, $28 million of debt. We might bring in a $15 million first lien, and we might take a $13 million last out. The senior's in for something less than two turns, a turn and a half, and we are getting second lien pricing inside of three and a quarter turns. To me, that's a pretty attractive attachment point.

We control the documents, we control the structure, we control the covenants, and we're getting essentially second lien pricing at first lien leverage limitations. Yes, it is an attractive play if you can put enough to work and manage that origination, the diligence, and the documentation.

I appreciate that color. Taking the flip side to it, right, to your point, obviously you're only putting out half the capital because it's the $13, $14 that you would normally. If you took the whole thing, you'd be in for $26, $28, to your numbers, but you actually impact.

Yeah, we don't want 26 or 28 at 5.25% to 5.5%. That doesn't work in our model, right?

Yeah, yeah.

We'd much rather be at $7, $7, $7.50 or more and have a slightly smaller investment. We still have the opportunity to grow, and we still have the opportunity to generate the fees off the transaction, and we still service a strong relationship with our private equity clients.

Got it. Yeah, I appreciate it. Thank you.

Speaker 1

Robert, you've been following this industry almost as long as I've been working in it. I know you know we're not going to change. We're going to continue to do what we always do and do it in a way that rewards our shareholders. Thank you for your time.

I appreciate that, David and Bob. Yes, sticking to your strategy is important. That's where your expertise is, so stick to it. Yeah, thank you.

Okay. Operator, do we have anybody else?

Speaker 4

No, sir. There are no other questions at this time. I'll turn the floor back to you for any final comments.

Speaker 1

All right. Thank you very much, all of you. We appreciate you calling in, and we love it when you have a lot of questions. Make sure you get a good sheet full of questions for next time, and we'll see you at the next meeting. That's the end of this conversation.

Speaker 4

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.