GLADSTONE INVESTMENT CORPORATION\DE(GAINI)Q3 2026 法說會逐字稿

Good morning, and welcome to the Gladstone Investment Corporation Third Quarter 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. It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.

Well, thank you, Latonya, and good morning to everybody. This is David Gladstone, Chairman of Gladstone Investment. This is the earnings conference call for the third quarter ending 12/31/2025 for the 2026 fiscal year, which ends on March 31. We hope we have all of our shareholders and analysts on the line to tell you about the future of the company. We are listed on NASDAQ under the trading symbol GAIN for the common stock, and we have three preferred stocks: GAIN N, GAIN Z, and GAIN I. We also have three different registered notes. Thank you all for calling in. We are always happy to provide updates to our shareholders and analysts and provide a view of the current business and the environment that we are in. Two goals of this call are to help you understand what happened to us during the last quarter and give you our current view of the future. And now we will hear from Catherine Gerkis, our Director of Investor Relations and ESG, to provide a brief disclosure regarding certain regulatory matters concerning this call. Catherine, go ahead.

Good morning, everyone. 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, gladstoneinvestment.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our email notification service and find information on how to contact our Investor Relations department. We are also on X at Gladstone Comps, as well as Facebook and LinkedIn. The keyword for both is The Gladstone Company. Now I will turn the call over to David Dullum, President of Gladstone Investment.

Thanks, Catherine, and good morning to everybody. I am pleased to report that fiscal '26, which ends on March 31 as David mentioned, continues to build on the prior quarters with a very strong performance so far this fiscal year, driven by our continued growth in the portfolio and the results of our existing portfolio companies. We ended the third quarter with adjusted NII of $0.21 per share, and total assets of about $1.2 billion, which is up about $92 million from the end of the prior quarter. This increase in assets quarter over quarter resulted from one new buyout investment during the current quarter along with fairly significant appreciation of our investment portfolio. With the new buyout investment, we currently have 29 operating companies and a very healthy pipeline for new acquisitions. To date for fiscal 2026, we have invested $163 million in four new portfolio companies, which compares to about $221 million that we invested for all of fiscal year 2025. These new investments are consistent with our buyout strategy where we grow the portfolio through the acquisition of operating companies at attractive valuations, and where we generally are the majority economic owner. We make our acquisitions through a combination of equity and debt, with the equity providing the potential upside through capital gains upon exit, and the debt securities generating the operating income which supports our monthly distributions to shareholders. That is an important aspect of our portfolio and differentiates us from other traditional credit-focused BDCs — we provide both the debt and the equity when we make an acquisition. From our operating income, we maintained our monthly distribution to shareholders of $0.08 per share, or $0.96 per share on an annual basis. Put in perspective, since inception in 2005, through 12/31/2025, we have invested in 66 buyout portfolio companies for an aggregate of approximately $2.2 billion and exited 33 of these companies. This resulted in the total investments currently being valued at $1.2 billion while generating approximately $353 million in net realized gains and $45 million in other income on exit. As we look forward, we are finding there is very good liquidity in the M&A market. This creates a very competitive environment for new acquisitions and makes it challenging at reasonable valuations. Nevertheless, we have been able to compete effectively, as evidenced by the investments we have made this fiscal year. We are out there working hard and effectively competing for acquisitions that fit our model, where we provide both the equity and the debt to complete the acquisition. One thing we look at in underwriting our debt securities is meaningful fixed charge coverage and an income yield on our total investment that is in excess of our cost of capital. As I mentioned, we closed on four new investments during the first nine months of the fiscal year and are in varying stages of diligence on additional opportunities, including accretive add-on acquisitions to existing portfolio companies. Regarding add-on acquisitions, given how we manage our portfolio, it is not unusual for us to constantly look for acquisitions to add to existing portfolio companies to grow the value of our overall investments through add-on activity. This could lead to closing on new buyout investments during the remainder of the fiscal year. One word that keeps coming up is spread compression, given that interest rates, especially SOFR, have been declining. I want to emphasize that one differentiator for GAIN from other credit-oriented BDCs is that we put floors on our debt securities while we have a stated rate that is spread over SOFR. So while we may see a decline in yield because SOFR has come down, we have the protection of floors. The floor is usually set high enough to establish an effective yield on our total investments, which helps mitigate the impact of spread compression or declines in SOFR over time. You will hear more about this from Taylor Ritchie, our CFO, in a little bit. We continue to work with our portfolio companies and evaluate opportunities, and we remain focused on generating operating income that supports our distributions to shareholders. With that, I will turn the call over to our CFO, Taylor Ritchie, for more detail. Taylor?

Thank you, Dave, and good morning, everyone. Looking at our operating performance for the third quarter, we generated total investment income of $25.1 million, down slightly from $25.3 million in the prior quarter. The decrease was primarily driven by a decrease in dividend and success fee income, partially offset by additional interest income resulting from the continued growth of our debt investment portfolio. The weighted average principal balance of our interest-bearing investments was $699 million in the current quarter, representing an increase of $30 million compared to the prior quarter. After adjusting for the prior year's collection of past due interest income from investments that were previously on nonaccrual status, our portfolio's weighted average yield decreased modestly from 13.2% to 12.9%. This 24 basis point decrease is in line with the 32 basis point decrease in SOFR during the quarter and was mitigated by the interest rate floors included in each of our debt investments. Excluding non-accrual investments and revolving lines of credit, the weighted average interest rate floor for our debt portfolio was 12.1% as of December 31. We continue to underwrite our new debt investments with elevated interest rate floors in the 13% to 13.5% range to mitigate potential declines in SOFR. With over half of our debt portfolio currently at their interest rate floors, we believe our yield is well protected against future rate declines. Further, the overall interest rate floors will offset higher interest expense that will result from the future refinancing of our low-cost long-term debt that will be maturing in the coming quarters and years. Additionally, dividend and success fee income declined by $400,000 quarter over quarter. Dividend income from our equity investments is dependent on the portfolio company's ability to pay the distribution, while also having sufficient earnings and profits to support the characterization of the distribution as dividend income. Success fee income is derived from an interest rate associated with our debt investment that accrues off-balance sheet for both GAIN and the portfolio company and is not contractually due until a change of control event. However, similar to dividend income, a portfolio company may elect to prepay a portion of this accrual from time to time. Given that collection of both dividend income and success fee income is dependent on multiple factors, the timing of this income will be variable. Net expenses for the quarter were $31.6 million, up from $21 million in the prior quarter. The increase was primarily due to a $9.9 million increase in the accrual of capital gains-based incentive fees. Base management fee expense increased by $500,000 compared to the prior quarter as a result of new buyout investment activity and a significant increase in unrealized appreciation of our investments. Credits from the advisor, the level of which is correlated to the timing and volume of new originations, declined $400,000 quarter over quarter. Interest expense decreased $200,000 in the current quarter due to the timing of the issuance of our 6.875% notes and the reduction of our 8% notes in new investment activity. This resulted in a net investment loss of $6.5 million compared to net investment income of $4.3 million in the prior quarter. Overall, portfolio company valuations in the aggregate increased $7.2 million. This unrealized appreciation was driven by both increased performance at some of our portfolio companies along with higher valuation multiples across the portfolio, partially offset by decreased performance at other portfolio companies. Adjusted net investment income, which represents net investment income or loss excluding any accrued or reversed capital gains-based incentive fees, was $8.2 million or $0.21 per share, compared to $9.2 million or $0.24 per share in the prior quarter. We believe adjusted net investment income remains an indicative metric of our ongoing and core performance as it removes the impact of capital gains-based incentive fees, which is an expense recorded under U.S. GAAP each quarter but is not yet contractually due. For the current quarter, we continue to have three portfolio companies on non-accrual status. We have been working closely with each of these companies and their management teams to support efforts to return to accrual status or pursuing exits where appropriate. Our non-accrual investments represent 3.8% of our total book portfolio at cost and 1.5% at fair value. Our NAV increased to $14.95 per share compared to $13.53 per share at the end of the prior quarter. The increase was primarily a result of $1.77 per share of net unrealized appreciation and $0.09 per share of net realized gains. These increases were partially offset by $0.24 per share of distributions to common shareholders, $0.016 per share of net investment loss, and $0.03 per share of realized losses associated with the redemption of our 8% note. Moving on to our balance sheet, maintaining sufficient liquidity, financial flexibility, and managing a fluctuating interest rate environment is essential to supporting growth of our portfolio. As part of proactive balance sheet management, we redeemed the full $74.8 million outstanding balance of our 8% notes using proceeds from the recently issued $60 million 6.875% notes and borrowings under our line of credit. This redemption and new debt issuance reduced our interest burden for approximately $75 million of debt capital by about 110 basis points. We also expanded our credit facility to include City National Bank with a $30 million commitment level. As a result of this expansion, we now have a total commitment level of $300 million under our facility. During the quarter, we raised approximately $3.2 million in net proceeds through our common stock ATM program. While the price level of our common stock limited the number of days we were active on the ATM, we will look to sell under our ATM program in the future when prices are accretive to NAV. We believe we are in a sufficiently strong liquidity position with our ability to access the debt capital markets and, when possible, the equity markets to support both the refinancing of upcoming debt maturities and our pipeline of new buyout opportunities. Overall, our leverage remains in a strong position with an asset coverage ratio as of 12/31/2025 of 201%, providing what we believe to be ample cushion to the required 130% coverage ratio. Focusing on our distribution to shareholders, we ended the prior fiscal year with $55.3 million or $1.50 per share in spillover, sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 per share, as well as the $0.54 per share supplemental distribution we paid in June. As of December 31, our estimated spillover was approximately $22.9 million or $0.58 per share. We ended the quarter with total distributable income of $108.7 million or $2.73 per share. Total distributable income primarily consists of the net unrealized appreciation of our investments as well as the GAAP adjusted balance of our spillover presented on our balance sheet. Including the $0.54 supplemental distribution in the current fiscal year, we paid an aggregate of $3.26 per share across 13 supplemental distributions over the last five fiscal years, in addition to $4.68 per share of monthly distributions during this time. This track record reflects our ability to maintain a stable monthly dividend while also delivering incremental returns to shareholders, underscoring the strength and consistency of our focused equity-oriented investment strategies. Looking ahead, we expect supplemental distributions to remain an important component of our overall shareholder return strategy, with the amount and timing of future payments driven by realized capital gains on our equity investments along with other capital allocation considerations. This covers my part of today's call. I will now hand it back over to David to wrap us up.

Well, thank you. Very nice, Taylor, and thank you, Dave and Catherine as well. This will tide over our shareholders until the next call, which will be at the annual meeting in March as well as the third quarter. The call and Form 10-Q should bring everyone up to date. We have reported solid results for the quarter ending 12/31/2025, including new investment activity and a strong liquidity position to grow the portfolio throughout the fiscal year. We believe Gladstone Investment is an attractive investment for investors seeking continued monthly distributions and supplemental distributions from potential capital gains and other income. The team hopes to continue to show a strong return on investment for our funds. Now let's stop for some questions from the analysts and other shareholders. Please go ahead, Mathewa. Thank you.

We will now conduct a question-and-answer session. Once again, that's star one at this time. The first question comes from Mickey Schleien with Clear Street. Please proceed.

Yes. Good morning, everyone. Dave, a good portion of the appreciation in NAV this quarter came from three investments, Shilling, Old World, and SFEG. Can you discuss the operational or valuation changes that drove that appreciation for each of those companies?

Sure, Mickey. Nice to chat with you. Those three you mentioned were large contributors, but we had a number of other companies that also had relatively significant increases. Fundamentally, the large increases you called out were driven primarily by EBITDA increases rather than multiple changes, which is obviously the best situation. That was true of all three companies you specifically mentioned.

Interesting. I'm not sure if it's pronounced Shilling or Shelling, but Shilling and Old World are obviously consumer-oriented companies, and there's a lot being written about a k-shaped economy. What is different about those two companies that is allowing them to grow their EBITDA even with headwinds in the consumer sector?

I think the primary answer is the products they make and sell. Shilling is an interesting business; they have a very unique product that represents a reasonable portion of their revenue — something called needle — where there's consistent demand for a variety of reasons, and they have different types of that product. That product has had strong demand even despite broader consumer headwinds and tariff impacts, because a significant portion of similar products historically came from the Far East. Even with tariffs, they've maintained demand and performed at a high level. Old World, which includes Christmas tree ornaments, is a well-run business as well. All of these companies have strong management teams, and they have managed through tariff impacts and other headwinds. So it's largely a combination of quality products, strong management, and the ability to navigate cost pressures that has allowed them to grow EBITDA despite consumer-sector challenges.

That's good to hear. You also recently invested in Rowan Energy. Can you walk us through how you underwrote that deal, particularly how you assess cyclicality in the energy equipment/fracking/sand filtration sector and what assumptions you made about where Rowan stands in its business cycle?

Best answer I can give you, Mickey, is we can certainly discuss this offline if you want more details and include others who were directly involved in underwriting. We have a couple of investments in energy-related sectors, including E3, which had a nice valuation increase. In those cases, we have quality and experienced teams running the companies, which helps us evaluate similar opportunities such as Rowan. We have knowledge and experience within our portfolio that helps us properly evaluate these businesses and their cycles. Through that lens, we believe there's upside and that valuations are at levels where we're not overpaying. If you want more detail, we can discuss later.

I appreciate that. Dave or maybe Taylor, if I look at the table in the press release regarding floor rates, I want to make sure I understand it. Is it correct to say that about half the portfolio has about 80 basis points of downside in average yields?

Yes, but to reach that level you would need significant decreases in SOFR. It wouldn't be just an 80 basis point drop to get to the 12.1% floor across that portion of the portfolio. We would need closer to a 210 basis point decline in SOFR before many additional portfolio companies would hit their floors. So there is some wiggle room. As you can see in the sensitivity table, as SOFR decreases, the decrease in the overall portfolio yield is not one for one because more investments begin to hit their interest rate floors, which mitigates the decline.

Okay. I understand. Lastly, given the types of portfolio companies you attract, is it reasonable to say there's limited risk from AI disruption in the portfolio, and how are you considering AI in the pipeline?

The term 'AI' is broad. Many of our companies are using AI to some degree, and in many cases it's enhancing efficiency or product design. If you recall our conference last year, AI topics were discussed, and a number of our portfolio companies are utilizing aspects of AI. For example, Shilling has used AI for a couple of years to help design products more efficiently. So in many cases we are beneficiaries of AI rather than being disrupted by it. We generally do not have pure-play tech companies in the portfolio where competitive disruption from AI is a primary risk, so the portfolio is not highly exposed to that specific risk.

That's good to hear. Those are all my questions. I appreciate your time this morning. Thank you.

Thank you. The next question comes from Christopher Nolan with Ladenburg Thalmann. Please proceed.

Hi, thanks for taking my question. As a follow-up to the unrealized gains, were those mostly related to equity gains in the portfolio?

Yes, the unrealized gains were predominantly equity-driven. We did have a handful of portfolio companies that experienced debt fair value increases as the overall total enterprise value for those companies increased, driven by both multiple increases and EBITDA increases. But the bulk of the unrealized appreciation was in equity.

In the prepared comments, you said there is good liquidity in the M&A market. I've heard other management teams say credit is widely available to middle-market companies but equity is less so. Do you have a different take? If equity is less prevalent, does that give you a competitive advantage?

From our experience, some competitors — private equity shops — may be able to access leverage at more attractive rates and thus can put less equity into a transaction and still be competitive. However, our ability to provide both equity and debt gives us an advantage because we can speak for the whole capital stack and provide certainty to management teams. That said, the market is competitive: some buyers can access lower-cost leverage which makes them competitive. Our advantage is that we can moderate the structure between debt and equity, we can underwrite the debt with floors, and we often bring certainty to the seller because we can fund both components internally. So it is an edge, but there is a fair amount of capital available in both debt and equity markets.

Great. Final question: Given the decline in base rates over the last year or so, will that have any positive effect on the discount rates used in your fair value calculations for portfolio companies going forward?

Most of our investments are valued using TEV (total enterprise value) approaches, where we look at EBITDA and apply a multiple for the portfolio company. Discounted cash flow models are not the primary valuation method for the bulk of our investments. So while, in theory, lower risk-free rates would improve DCF valuations, our primary valuation approach is multiple-based rather than DCF-based, so the direct impact is limited.

Right.

Great quarter. Very unusual dynamics: a gap between EPS profit and NII EPS, and a large jump in NAV per share, but good show. Thank you.

Thanks, Chris. The next question comes from Erik Zwick with Lucid Capital. Please proceed.

Thanks. Good morning. This is Justin on for Erik today. Just wondering if you could speak on the current state of underwriting conditions and specifically if you are seeing any pressure on terms or structure given the tighter spread environment?

For us, I would say probably not. As I mentioned earlier, because of the availability of leverage at lower costs for some buyers, the market is competitive. For our part, we try to stick to our underwriting formula. Typically, our investments are roughly 70% debt and 30% equity on a dollar basis. When we combine those, we drive for an effective yield on the total dollars relative to our cost of capital and look for equity upside such as two times cash-on-cash on the equity portion. Our model has not changed materially. There have been occasions where we've been a few turns off on multiples in competitive processes, but we stay disciplined. If we find an opportunity where we can add a bit more debt without significantly sacrificing equity upside, we may do so, but generally our approach remains consistent.

Thanks. And Dave, in your prepared remarks you described the pipeline as very healthy. How does it look compared to a year ago? Are there any sectors where you're seeing better deals than others?

Compared to a year ago, the pipeline is similar and certainly not weaker. We're seeing opportunities across sectors. Consumer has shown some pressure in parts due to tariffs and input cost sensitivity, so we are more selective on consumer deals and sensitive to product costs. We see reasonably good activity in business services and some pickup in manufacturing, including areas that touch aerospace and defense driven by government spending. Generally, it's about the same as a year ago with perhaps consumer being the one area where we exercise more selectivity going forward.

Thank you. One more: it's good to see non-accruals were stable quarter over quarter. Could you talk about the current outlook for credit quality and any near-term opportunities to resolve the remaining names on non-accrual?

The three companies currently on non-accrual are in differing situations, and I feel better about them today than I might have a year ago. We're taking actions and working with management teams. All three are generating positive EBITDA, but there are structural reasons why they haven't returned to accrual yet. Between operational improvements, potential exits, and other actions, we expect continued improvement and see a positive outlook. It does not feel like they'll revert fully next quarter, but each quarter the outlook improves and we're encouraged by the trends.

Great. Thanks for that. That's all for me today.

There are no further questions at this time. I would like to turn it back to you, Mr. Gladstone, for closing comments.

Okay. Well, thank you. We appreciate all those questions. We hope there are even more next time. We always like to answer your questions because that sheds light on the things we are doing. Remember, these are not just portfolio companies; these are platforms, and we are supporting management teams that are often taking some of the proceeds they have made over the years and reinvesting, retaining equity and creating ongoing income streams for the future. We are oriented toward building and supporting platform companies. It is a different way of running our business, but it works for us. Thank you all for calling, and we will see you next time in April.

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.