管理層發言
Greetings. Welcome to Gladstone Capital Corporation First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.
Thank you, Sherry. That was nice. This is Gladstone Capital's quarter ending 12/31/2025 call, and thank you all for calling in. We are always happy to talk to our shareholders and analysts and welcome the opportunity to provide updates on our company and answer any questions. Before we get to this quarter's results, Catherine Gerkis, our Director of Investor Relations and ESG, will provide a brief disclosure regarding certain regulatory matters that we have to adhere to. Go ahead, Catherine.
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 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. Thank you, Catherine. I will cover the highlights for the quarter and conclude with some comments on our near-term outlook for the company. Beginning with our last quarter's results, fundings last quarter totaled $99.1 million and included two new private equity-sponsored investments totaling $37.8 million and $61.3 million of additional advances to existing portfolio companies. Exits and prepayments declined relative to the past couple of quarters to $52.8 million, so net originations were $46.3 million for the quarter. Interest income for the period rose to $23.9 million as the increase in average earning assets offset the 30 basis point decline in the average SOFR rates compared to last quarter as our weighted average debt yield came in at 12.2% for the period. Interest and financing costs increased $200,000 on higher average bank borrowings incurred to complete the fixed-rate note refinancings last quarter and higher average investment balance. In addition, net management fees rose $600,000 with the increase in average assets and lower origination fee credits. So net investment income came in at $11.3 million for the period. Net realized gains were $300,000 as the exit of our remaining equity in Sokol more than offset the $1.4 million write-off associated with the unamortized costs with the note refinancing completed last quarter. Unrealized losses rose to $5.3 million last quarter and were concentrated in three investment positions impacted by the recent government shutdown or where we have replaced senior management and are expecting significant improvements over the balance of 2026. With respect to the portfolio, the portfolio growth for the period did not have a material impact on our investment mix or spread profile as first lien debt and total debt investments came in at 73.91% of the portfolio cost respectively. As of the end of the quarter, our three non-earning asset debt investments were unchanged with a cost basis of $28.8 million or $13.2 million at fair value or 1.6%. In addition, PIK income for the quarter rose to $2.3 million or 9.6% of interest income. However, we also collected $2.8 million of PIK for the period, so our accrued PIK balance declined accordingly. Since the end of the quarter, we have experienced one significant prepayment of Vets Choice in the amount of $42.8 million, which also generated a large prepayment fee of $855,000 on the period. And to date, we have funded an additional $6 million senior debt investment in a precision machining business. Although earning assets have declined since the end of last quarter, our current pipeline of late-stage deals which have been vetted, awarded, or in diligence or documentation is quite robust at over $100 million and should more than offset the recent repayments. The level of near-term investment opportunities we are working through in what is traditionally a slow Q1 is frankly a bit surprising. I would attribute this investment activity to the resilience of the lower middle market deal flows and the growth prospects within our existing portfolio. We ended the quarter with a conservative leverage position and net debt at a modest 93% of NAV, and have increased our floating rate bank borrowings to better match our asset rate sensitivity while bringing down our net funding costs as short-term interest rates ease and we reduce our unused facility fees accordingly. Our current line of credit facility totals $365 million and net of the recent repayments, our borrowing availability is more than $150 million, which is more than ample to support our near-term investment activities. And now I will turn the call over to Nicole Schaltenbrand, our CFO, to provide some details on the Fund's financial results for the quarter.
Thanks, Bob. Good morning. During the December quarter, interest income rose $100,000 or 1% to $23.9 million as the average earning assets rose $20.3 million or 3%, while the weighted average yield on our interest-bearing portfolio declined 30 basis points to 12.2% for the period. Total investment income was $24.5 million on higher interest earnings, and fee income rose $400,000 from last quarter. Total expenses rose $800,000 or 6% versus the prior quarter as interest expenses rose $200,000 with increased bank borrowings, and net management fees rose $600,000 on higher average investments, and lower deal closing fee credits. Net investment income for the quarter declined to $11.3 million or $0.50 per share. The net increase in net assets resulting from operations was $5.5 million or $0.24 per share for the quarter ended December 31, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of December 31, total assets rose to $923 million consisting primarily of $903 million in investments at fair value and $20 million in cash and other assets. Liabilities rose $20 million quarter over quarter to $445 million as of December 31, with the increase in LLC borrowings to call and repay our $150 million of 5.18% notes previously due January 2026, and our $57 million of 7.34% notes previously due in 2028, and to fund our net originations. The remaining balance of our liabilities consists primarily of $149.5 million of 5.78% convertible debt due 2030, $50 million of 3.5% notes due May 2027, and $29 million of 6.25% perpetual preferred stock. As of December 31, net assets declined $4.7 million to $477 million and NAV per share declined from $21.34 to $21.13. Our gross leverage as of December 31 rose to 93.3% of net assets. Monthly distributions for February and March will be $0.15 per common share, which is an annual run rate of $1.80 per share. The board will meet in April to determine the monthly distributions to common stockholders for the following quarter. At the current distribution rate for our common stock and with the common stock price at about $20.44 per share yesterday, the distribution run rate is now producing a yield of about 8.8%. And now, I will turn it back to David to conclude.
Well, thank you. That was a good summary and solid quarter for Gladstone Capital again. The team for Gladstone Capital continues to deliver attractive net originations and growth with a very healthy backlog of attractive growth-oriented lower middle market companies. The company has a strong balance sheet, ample bank lines, and capacity to grow our investment portfolio to deliver more dividends to our shareholders, and delivery of net interest margins required to sustain the shareholders' dividends. And now open the questions up. Operator, if you will come on and tell us what to do.
分析師問答
Our first question is from Eric Zwick with Lucid Capital Markets. Please proceed.
Thank you. Good morning. I apologize in advance for any background noise. I'm traveling today. I wanted to start with a question. During your prepared remarks, you mentioned increasing the usage of the revolver due to the floating rate function there. I'm curious if you could just talk a little bit on the loans to what extent you use floors and how many of those are at their floors now, given the SOFR curve would indicate that the market is expecting some more reductions in the base rates.
Yes. The majority of our variable rate loans do have floors. We are not at those floors yet. So as interest rates decline, our interest income will decline. That's part of the reason why for our strategy right now, we do intend to rely on our floating rate debt somewhat more.
Eric, one way to think about this is we're not experiencing much in the way of spread compression last quarter, so competition is not driving spread compression. If you look at the big picture, based upon our average margin, our bank spread, and our marginal fees and costs, our general feeling is we can absorb most of the decrease and still be able to sustain the underlying dividend as we did this quarter. Another thing that's happening is last year we ran very high commitment fees with low utilization of lines. If you compare the roughly $2.6 million of line commitment fees we paid last year, we're currently at a run rate that's closer to $1 million. So there's about $1.6 million of savings that we will see from increasing utilization of our line fees. We have a number of things that we are working to try to mitigate what might be the headwinds of lower rates if that were to evolve.
That was very helpful. Thank you. Next, looking at the investment in IMX Power Holdings, I'm curious if you are seeing in your origination funnel more opportunities for AI and data center-related opportunities and how you view this trend, whether it's likely a longer-term trend or if you're watching it more cautiously.
We do not directly invest in data centers. That's a large-scale market more suited to very large investors. We used to do that but it's not something we see in the lower middle market. We do see some of the spend from those projects coming through in our portfolio. It might be bus bars that go into data centers that IMX makes, and certainly construction, HVAC, or air handling services that might come through to some of those segments. We are very cautious about the sustainability; a lot of firms are entering that market. We are watching reliance on that end market as we think about opportunities. But we are not directly investing with significant reliance on continuation of that investment spend; that's not where our companies typically play.
Got it. Thank you. Last one for me: you noted the increase in PIK, which has gone up over the past couple of quarters. Could you generally talk about what's driving that? Is it certain companies whose performance has slowed a bit, or are they seeking cash flow flexibility for investment opportunities? Wondering if you could talk a bit about that.
There are a couple of credits in that category. One is undergoing a scaling up of the underlying business where working capital consumption behind that growth is stressing free cash flow, and given the underlying business performance we provided them flexibility in the form of PIK. We are closely monitoring EBITDA and enterprise value as we increase exposure to that situation and feel that we are more than adequately covered. The second company is in the process of liquidating a portion of its underperforming business; the proceeds are ample to cover the accumulated PIK exposure, and we expect that company to be in a position to deleverage as it unloads a portion of its assets. It's a case-by-case basis. We focus on what's the right move for the business and the terminal exit to address PIK exposure. Those two credits are the dominant portion of what is there. As you will note, we did exit a deal last quarter where we had some accumulated PIK and we recouped it. Our strategy of working with credits and getting that money back and returning them to cash paying status is a consistent part of how we work with our credits.
Thank you for taking my questions today.
Next question.
Our next question is from Christopher Nolan with Ladenburg Thalmann. Please proceed.
Hi, thanks for taking my question. Why did the diluted share count change quarter over quarter so much?
Part of that is the accounting requirement for how you do the calculation in the initial period. The only thing impacting our diluted shares is the convertible debt. We do a calculation to show the if-converted method and what it would be, but that's really the only factor coming into play there.
Okay. So that's going to be continuing, not an issue, but that increased diluted share count is going to be sustained as long as convertible debt is around?
That's correct. Yes.
The conversion price will only change if we do an additional supplemental distribution. That change is expected to be very, very inconsequential.
I think that issue can be settled with cash or stock as the case may be. There's a lot of flexibility. It's more of a disclosure requirement than a practical expectation that we would ever issue that amount of shares.
Okay. Just a more broad and strategic question: given you're co-located near Washington, D.C., have you heard anything in terms of updates for regulatory structures affecting BDCs, specifically the AFFE rule? Any consideration of altering that?
AFFE has been under discussion for many years. There's a general relaxation in the market, but I don't think there's anything particularly concrete. Even if it were relieved, it doesn't mean it would quickly change the way indices or underlying calculations work. It would likely take a number of years to roll out whatever might come. So it's not something we're counting on in the short term, even though we'd like it to improve liquidity in our shares and expand our investor base.
Great. Thanks for the color, Bob.
Next question.
Our next question is from Robert Dodd with Raymond James. Please proceed.
Hi, everyone, and congrats on the quarter. On the discussion of the pipeline, it sounds obviously quite positive for this quarter and you said activity was surprising. How much of that is spillover from Q4 versus deals that came to you in January with the expectation they'd close in March? And second, what are you seeing in the very early stage? Do you expect activity to remain robust through the middle of the year, or is this a surprising bump in Q1?
Good question. There's definitely a few deals that spilled over. In today's marketplace, given volatility and diligence demands, most private equity is vigilant and diligence periods can take time. Some transactions we're working on have been in the works for probably three quarters. So half of that pipeline is spillover from deals where buyers are doing multiple rounds of quality-of-earnings and reviews. The general downward trend in rates combined with better clarity in certain industries is positive. For example, it takes time for defense contracts, precision manufacturing, and reshoring businesses to see pipeline activity and acquire machinery to support those programs. A number of our businesses are in the category of strong domestic growth, precision manufacturing, and reshoring production capabilities, and are now acquiring businesses or investing in assets to expand. So carryover is meaningful, but there's a consistent build of domestic manufacturing for some private equity-owned businesses to capitalize on the reshoring trend that started last year.
Got it. On the unrealized depreciation, you mentioned some of it related to shutdown impact. Historically you've done work with businesses that do government contracting. Has your appetite for that kind of business softened given the greater cadence of government shutdowns?
The situation I referenced related to the shutdown was a unique circumstance. Generally, we don't focus on short-term government services. We do have a portfolio company that performs dredging activity for the Army Corps of Engineers, which is recurring maintenance. There was an interruption in Army Corps contracting for maintenance services that caused a hole in one quarter. That has been corrected. If maintenance wasn't done last quarter, it will have to be caught up later. That business is not permanently impacted; it will need to be maintained going forward. This was not the usual situation and not the norm for our business.
Got it. One last one: EG's saw some more stress in the equity piece, which is small. Can you give color on whether that's still going through transition and whether that's related to management transitions? How is the workout progressing?
There's a combination of factors. It's an Arizona-based company and tends to be seasonal; selling quick-service frozen drinks is weaker in winter. Additionally, some businesses in border states are facing downdraft associated with elevated immigration enforcement activity, which impacts population and spend. We have confidence in the team; they are moving forward and evolving the business. There are incremental headwinds that were unanticipated, and we are working to accelerate changes in cost structure to get through these challenges. The company has launched a new menu and some offerings which we think will drive traffic in 2026, and we'll see how that evolves in the spring. It's a work in process.
I always love the extra detail there. Thank you.
Okay. Do we have any other questions?
Yes, we do. We have a question from Sean-Paul Aaron Adams with B. Riley Securities. Please proceed.
Tagging off Eric's question, do you currently have an estimate of remaining SOFR exposure in basis points before the majority of your embedded floors kick in? You talked about spreads not being a material impact for the quarter, so I'm trying to highlight the pure base rate exposure.
I think our average floor is probably 1.20%. Average SOFR last quarter was roughly 3.90%, and we're roughly running about 3.70% today. So we have some potential move before hitting floors. If you eliminate the underlying base rate focus and just consider our average spread, bank line spread, and marginal fees and costs, you net down to about a $250,000 spread, ignoring the base rate. If we were to close $150 million to $100 million, that's approximately $2.5 million of incremental net interest margin. Regarding rate sensitivity, down 50 basis points the sensitivity was about $2.4 million, so we could more than offset the first 50 basis points. As we get past that, we'd need to dig into fees which are excluded from that calculation or the additional commitment fee savings I mentioned earlier. Down 100 basis points would be about a $5.3 million potential exposure given our current portfolio. That's about as far as we've been thinking and planning given the current rate outlook. We are well positioned to absorb at least the first 50 and probably 75 basis points. Beyond that, we'd take additional actions to support the dividend. When we reset the dividend last quarter, we considered these sensitivities and feel reasonably confident we have the coverage needed for the near term.
Average floor around 1.20%. Average SOFR last quarter roughly 3.90%.
Got it. Really appreciate the color. Thank you.
Okay. Do we have one more question?
There are no further questions at this time.
Oh, shucks. We like questions. So there'll be more next time. Thank you all. That's the end of this meeting.
Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.