Gladstone Capital Aktie

Greetings. Welcome to the Gladstone Capital Corporation's Second Quarter Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Erich Hellmold, General Counsel. Thank you. You may begin.

Good morning, and thank you for that nice introduction. This is the earnings conference call for Gladstone Capital for the quarter ended March 31, 2026. Thank you all for calling in. We're always happy to talk to our shareholders and analysts and welcome the opportunity to provide updates on our company. Now I'll have Catherine Gerkis, our Director of Investor Relations and ESG provide a brief disclosure regarding certain regulatory matters regarding this call.

Thank you, Erich, and 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 e-mail notification service and find information on how to contact our Investor Relations department.

Now I will turn the call over to Gladstone Capital's CEO and President, Bob Marcotte.

Thank you, Catherine. Good morning, all. I'll 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 $44 million and included 3 new private equity sponsored investments totaling $34 million and $10 million of additional advances to existing portfolio companies. Exits and prepayments declined relative to what we experienced in 2025 and came in at $46 million, so assets were largely unchanged for the quarter.

Interest income for the period declined slightly to $23.2 million, with a 30 basis point decline in the average SOFR rates compared to last quarter as our weighted average debt yield was 11.8% for the period. Other income for the period came in at $2.8 million, which was up $2.2 million from the -- on prepayment fees and dividends. Interest and financing costs declined with lower SOFR rates and reduced unused commitment fees. Net management fees rose $875,000, with the lower origination fee credits.

However, net interest -- net investment income rose $574,000 to $11.8 million for the period. Net portfolio appreciation came in at $4.2 million, largely driven by the unrealized appreciation of 3 of the larger companies in our portfolio, which continued to scale. 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 70% and 90% of the portfolio cost, respectively.

Our healthcare-related industry concentration declined and is expected to fall further in the short term with a pending exits as we do not -- and we do not have any existing software-related exposures. As of the end of the quarter, our 3 nonearning debt investments were unchanged with a cost basis of $28.8 million or $13 million or 1.6% of debt investments at fair value. In addition, our PIK income for the quarter declined to $1.7 million or 7.4% of interest income. Since the end of the quarter, we funded 2 new portfolio companies representing a total of $44 million of senior secured debt.

And while earning assets have increased since the end of last quarter, we are expecting a couple of exits in the near term and are actively managing a healthy pipeline of investment opportunities, which should more than cover any repayments and support our continued modest asset growth. The strength of our investment outlook represents a combination of the resilience of the growth opportunities within the lower middle market and add-on financing opportunities within our existing portfolio.

In particular, we're seeing strong demand for precision manufacturing businesses where customers are looking to move sourcing back to the U.S. or scale in support of building defense-related backlogs. We ended the quarter with a conservative leverage position and net debt at a modest 92% of NAV and expect to continue to leverage our floating rate bank facility to support our floating rate assets thereby mitigating the impact of short-term rate decline. Our current line of credit facility totals $365 million. And as of the end of the quarter, borrowing availability is more than $150 million which is ample to support our near-term investment activities. And now I'll turn the call over to Nicole Schaltenbrand, Gladstone Capital's CFO, to provide some details on the fund's financial results for the quarter. Nicole?

Thanks, Bob. Good morning all. During the March quarter, total interest income declined $700,000 or 2.9% to $23.2 million as the average earning assets rose $21.7 million or 2.8% while the weighted average yield on our interest-bearing portfolio declined 40 basis points to 11.8% for the period. Total investment income was $26 million as dividends and fee income rose $2.2 million from the prior quarter. Total expenses rose $900,000 or 6.8%, driven primarily by $900,000 of higher net management fees due to higher average assets and lower closing fee credits versus the prior quarter. Net investment income for the quarter rose $11.8 million or $0.52 per share or 116% of cash distributions per common share.

The net increase in net assets resulting from operations was $15.5 million, or $0.68 per share for the quarter ended March 31 as impacted by the valuation appreciation mentioned by Bob. Moving over to the balance sheet. As of March 31, total assets rose to $925 million, consisting of $907 million in investments at fair value and $18 million in cash and other assets. Liabilities declined $3 million quarter-over-quarter to $442 million as of March 31, with the decrease in LOC borrowings. The remaining balance of our liabilities consist primarily of $149.5 million of [indiscernible] convertible debt due 2030, $50 million of 3.75% notes due May 2027 and $35 million of 6.25% of perpetual preferred stock.

As of March 31, net assets rose $5.3 million to $483 million, and NAV per share rose from $21.13 to $21.36. Our gross leverage as of March 31 rose to 91.8% of net assets. Monthly distributions for May and June will be $0.15 per common share, which is an annual run rate of $1.80 per share. The Board will meet in July to determine the monthly distributions to common stockholders for the following quarter. At the current distribution rate for our common stock and with a common stock price at about $19.21 per share yesterday, the distribution run rate is now producing a yield of about 9.4%. And now I'll turn it back to Bob to conclude.

Thank you, Nicole. In sum, it was another solid quarter for Gladstone Capital. The team continued to deliver strong earnings performance bolstered by prepayment fees and portfolio distributions which more than cover the current shareholder dividends. The team is doing a good job managing the portfolio, sourcing attractive private equity-backed lower middle market investment opportunities. The company is also in a very strong balance sheet position with ample borrowing capacity to prudently grow our investment portfolio and deliver the earnings to support our shareholder dividends and now we will -- operator tell our callers how to submit their questions. .

[Operator Instructions] Our first question comes from the line of Erik Zwick with Lucid Capital Markets.

I wanted to start with a question, just thinking a little bit about the future path of the portfolio yield. If the Fed funds futures curve is right, there shouldn't be -- market is not expecting any changes. So base rate should be more stable. But wondering if you could talk a little bit about the spreads that you saw for your April activity as well as what's in the pipeline and how those compare to the weighted average spread for the existing portfolio?

Thank you, Erik. Good question. The activity on the quarter, we really didn't see any compression in spreads what we were closing essentially is on par with our prior quarters. So we really don't see any degradation, and that's really coming from a couple of things. One, it's a disciplined approach and an added value approach in the lower middle market. We've never seen quite the same competition as upmarket transactions. Obviously, in the last quarter, there's also been a bit of a selloff with spreads backing up upmarket from us.

And so we've seen less competitive pressure from larger transactions, which are probably backed up 50 to 75 basis points. So we really don't see, at the moment, much in the way of degradation on the outlook. So with closing spreads in the range of roughly 7% on average last quarter, I wouldn't expect much to impact there. We do have some impact as companies get larger, there is some trade-off, but for the most part, it's pretty stable. The other thing is I do expect that we will be funding add-ons to existing portfolio companies in the next quarter, which tend to be consistent with the existing spreads on those transactions. So I think you're correct that in the near term, the pressure on margins are going to be fairly limited.

When we originally reset the dividend, we were anticipating a curve where we might have 2 or 3 rate reductions over the course of 2026. Obviously, that's not happening. And the combination of lower upmarket pressure is part of that process, which is one of the reasons why we feel pretty confident in where we stand today with respect to dividend coverage.

That's great. And good to hear. Looking at just the dividend income in the most recent quarter, it was up quarter-over-quarter. I'm curious if that was driven by kind of one large dividend or if there were multiple companies that contributed to it, whether you view those more as kind of onetime or if they'll be recurring?

There are really 2 components of the income. One was the prepayment fee which we broadcast at the end of last call, last quarter. The second one was a fairly large dividend, a single transaction of a company that had been scaling and we owned a slug of the business. I would expect that there may be some additional distributions coming, but they do tend to be onetime events. So I think we do have some companies that are deleveraging that are performing well. And if the private equity sponsor feels so compelled and there aren't good acquisition opportunities, distributions is something that they will look to do. We should expect that we'll see more of those in the future, but I would not -- I would continue to characterize them as onetime events, but we are monitoring that and expect some of that to be realized over the course of 2026.

And last one for me. I know you addressed this a little bit last quarter, but just your thoughts on kind of repurchasing shares at this point, whether you view that as a good use of capital, certainly, the stock has come back a little bit from the lows a couple of months ago, but trading at a 10% discount to NAV today, curious how you view that opportunity.

Erik, we are seeing tremendous opportunities to continue to execute our plan and strategy. And based upon where that returns are being generated, scale is important. So I don't think you'll likely see us buying shares in. I think we are going to be looking to scale the capital base to capitalize on our market position in the lower middle market. The long-term returns on our portfolio have been pretty good. We think it's best interest of the shareholders to continue to scale that opportunity and this is, frankly, a good time. Turmoil, the uncertainty and the issues in the marketplace provide a nice window for us to continue to execute against our long-term strategy.

We've been doing this for 25 years. I think the idea is we can continue to grow it and produce good returns for our shareholders.

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann.

Bob, congratulations on the promotion. And please pass our best wishes to David Gladstone. On the nonaccruals, it stepped up a little bit and your asset quality is good. Can you share with us some observations you're seeing in the market? I mean is higher fuel prices just generally creating increased stress in lower middle market, middle markets? Is it less sponsor support? Because I'm seeing increased nonaccruals across multiple BDCs, incrementally, nothing huge yet, but I'd like to get a little broader perspective, if possible.

Sure. The only reason that our nonaccruals went up in fair value is because one of them, in particular, is performing very well. And so we're optimistic that it will be turned to a cash paying and go off nonaccrual. It's been a while for that Xcel situation to turn around, but we're feeling very good about it, given where it's executed. So it's not bad that it went up. It's actually good in a weird way. In terms of your specific question around energy, we don't tend to have a lot of energy-related businesses or energy-impacted businesses.

I will say that we do have businesses that might provide services and there are energy costs in delivering their products. And certainly, the delivery companies, the FedExs of the world, were very quick in adjusting their rates. And so passing through surcharges has been something that I think we've encouraged and our portfolio companies have been pretty adamant on and that's really been kind of a neutral event. It's not necessarily negatively affected their business, and it's well understood cost of doing business.

In terms of other energy-related matters, I would say we're seeing a little bit of slowing or uncertainty as we've said in the past we do have 1 or 2 investments that are related to the auto market. And energy and auto is a little bit up in the air right now. Certainly, whether it's electric vehicles or whether it's transitioning model years or general auto sales, they're soft. So we are closely monitoring some of those.

We feel the business is on the right programs, but the volume in that market is relatively soft. Beyond that, obviously, one of the benefits is we have zero software. So some of I think what you're seeing is just momentum and decision-making in the software side of things. I don't think anybody is making any fast moves to grow the revenue or to expand their software investments at the moment.

I think we're all pretty impressed at the relatively low cost and incredibly efficient AI-related tools that we're all toying with. So I think that's affecting a significant number of others, and we really don't have that exposure. So right now, I would generally say we don't see a ton of slowing. We don't see much in the way of direct impact of energy. I would almost argue it's the other way around because we do have some precision manufacturing businesses. They are seeing huge inbound order requests and frankly, we're being asked to fund capital expenditures to grow those businesses. So we kind of feeling like it's a decent opportunity for us if we're close to our businesses to take share and scale some of our opportunities.

And just as a follow-up, in general, are you seeing private equity sponsors being a little bit more hesitant in general or any equity providers or is it just sort of pretty stable?

I definitely think that private equity sponsors are being very diligent. Deals are not closing at the same pace. I think there's a lot of making sure the numbers are real, and there's no ambiguities. I think there's a fair bit of being cautious. But most of the businesses that we see, it's really about the long-term growth, not the financial structure, not the financial timing.

Most of the lower middle market businesses on average are trading plus or minus 7x on EBITDA. That is a business that you can buy and grow and absorb some variability and headwinds and still make good money. If you're trading a large-scale business at 9.5, 10, 12x, you don't have the cushion to be able to absorb that.

So I suspect you're seeing much more caution upmarket because the window of growth and equity appreciation is far narrower and the exit multiple that you can get to is going to be harder to achieve. For us. the idea of trading at that lower multiple in the lower middle market, you've already got 2 to 2.5 turns of potential appreciation just from scaling the business.

And that drove one of -- a couple of our marks on the quarter. When we go into a business and trades at a lower multiple, and next thing you know it's $25 million or $30 million of EBITDA and the multiple for those businesses is 2 to 3 turns higher that's a natural appreciation that we as well as the private equity sponsors are able to achieve. So I guess it's just a much more forgiving entry point that is part of the process as long as the numbers are solid. Sorry to take so much on it, but that's a fundamental value to the lower middle market.

Our next question comes from the line of Robert Dodd with Raymond James.

Yes, congratulations, Bob. Just kind of sticking with that point, I mean, the color on strong demand from precision manufacturing, I mean, it sounds for me saying that's primarily for add-ons to those already in your portfolio. And then if we step back, I mean, to your point, the upper market valuations are tighter, spreads seem to be showing maybe -- not just precision manufacturing maybe widening, certainly widening in software, but you don't have any of that. .

But to your point, is -- are you starting to see any spread expansion in your end of the market, I mean I would think if something like precision manufacturing, where the demand dynamics, like you say, onshore defense et cetera, are so good. But might be increasingly crowded from a competitive perspective for new deals, right? Obviously, the ones you already have. I mean, so do you think those markets that you're in are going to be more resistant spread expansion even if it moves in the upper market? Or any thought on how the pricing for those kind of -- the kind of businesses you do might evolve even if the upper market moves on a pricing front.

I would not expect spread to be widening in our market. Just for broad strokes, the upper markets were dipping down sub-5 over LIBOR and that ROE at the leverage point was starting to get tight. The fact that the funding costs have backed up has probably pushed those spreads up to 5.5% or 5.75% or something like that. We've always been, let's say, mid-6s and I don't think that I would expect that to expand much. It's more of a relative play at 150 basis point spread to a upper market deal, the sponsor is going to say you're way too expensive. I'd rather continue to shop it at a 50 to 75 basis point spread, they're not going to say it's not worth my time given the size of the transaction. So I think we will see less competitive spread pressure because the sponsors understand smaller deals are going to be more expensive and on a relative basis.

I think the other point that I would make is, once these large platforms are as large as they are, it's very hard to go back down market, right? Once you're as big as you are, and there's not a ton of capital coming into the lower middle market. I mean, look at where the BDC equities are trending, look at who the brand names are that are raising the new funds. The only people that are actually accessing the capital markets or accessing funding sources that might compete with us would be the SBICs. And they are, by definition, somewhat constrained in their overall size.

And government SBA financing is not exactly cheap these days either. So we find ourselves particularly well positioned to compete with those folks, and we obviously have a scale advantage over them. So I don't think it goes down, but I think the pressure is less and the opportunities are going to be as -- continue to be relatively positive for us to see modest asset growth within our desired balance sheet leverage constraints.

Our next question comes from the line of Sean-Paul Adams with B. Riley.

It looks like the quarter was quite solid. Nonaccruals kind of went up in fair value, but it looks like they could be on the decline. So those legacy 3 positions might go down to 2. You guys experienced NAV accretion in a quarter where there's just been a wave of NAV losses. And the zero software exposure usually means materially less impact to this widespread market repricing. You talked a little bit about spreads. And besides potentially that auto exposure, is there just any concern about just future declines in net origination volume potentially from any other partners trying to come downstream and operate in this lower middle market segment.

Sean-Paul, it's hard. I think I would make 2 observations. One, we spend a lot of time focusing on the underlying businesses. What's the long-term growth story? What's the market position. We don't look at these as financial transactions, we look at these as businesses, what is the organic growth of this company and what's the ability of the sponsor and our ability to support and be a partner in growth of the business. .

It's a very different view in looking at the business than a financial transaction that somebody is looking to invest their capital and it's a spread and a leverage decision that they make when they buy that paper. That's a different mindset, and we've always had that business orientation and focus and that's where we align ourselves with the underlying sponsor.

I think that's relatively unique. And the larger transactions, the larger funds, it's about putting money out and scaling and taking advantage of the opportunity, not necessarily as focused on the underlying business. So you add the fact that it's a lot more efficient to raise capital in $1 billion increments, I mean what's the math? Last year, in 2025, more than 90% of the private capital raised were in funds bigger than $1 billion. $1 billion fund is not going to come down market to compete with us.

It just -- it doesn't make economic sense. They can't put out the money fast enough to be able to achieve their investment opportunities. We may see -- we have -- there are plenty of guys out there that are in our ZIP code. It's 4 or 5 folks, but we're also talking about a market that's broad and deep. And if we're looking at [indiscernible] deals a year and all we need to do is 20, that's a good flow of opportunities that we can cherry-pick to make our investments.

I don't think the big guys think that way. They think about they need to get a certain percentage share, they need to get a certain investment, they need to make a certain investment scale and they're going to continue to stay up market. I think it's going to be very difficult for them to come down market and think and focus on the lower middle market the way we are. Thank you, all. I appreciate the time. Do you want to wrap it?

We're going to take a minute. This is David Gladstone. [indiscernible] maybe poor. Accident in our area, so it kind of clogged up everything. There is no accident at this company. It's very straightforward. We've watched all the private lending companies go over to the high technology area and God bless them. I hope they make it. We're just going to continue to do what we've done for the last 20 years, and that is look at solid small businesses and midsized businesses and finance them where they need it. So since there are no other questions, we'll see you next quarter. That's the end of this call.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.

Greetings. Welcome to Gladstone Capital Corporation First Quarter Earnings Call. [Operator Instructions] 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, and this is Gladstone Capital's quarter ending December 31, 2025, call, and thank you all for calling in. We're 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 e-mail 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 2 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 balances. 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 3 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% and 91% of the portfolio cost, respectively. As of the end of the quarter, our 3 nonearning 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 crude PIK balance declined accordingly.

Since the end of the quarter, we've experienced on significant prepayment of Vet's 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've 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 the diligence or documentation is quite robust at over $100 million and should more than offset the recent repayments.

The level of net -- 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'll 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, total 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 total -- 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 in 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 5.125% notes previously due January 2026 and our $57 million of 7.75% notes previously due in 2028 and to fund our net originations. The remaining balance of our liabilities consist primarily of $149.5 million of 5.875% convertible debt due 2030 and $50 million of 3.75% 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 distribution to common stockholders for the following quarter. At the current distribution rate for our common stock and with a 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 good. In Summary, a solid quarter for Gladstone Capital again. The team for Glad, continues to deliver attractive net originations and growth with 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 we'll open the questions up. And operator, if you'll come on and tell us what to do.

[Operator Instructions] Our first question is from Erik Zwick with Lucid Capital Markets.

I apologize in advance for any background noise. I'm traveling today. But I wanted to start with a question. During the prepared remarks, you mentioned increasing the usage of the revolver due to the floating rate kind of function there. 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, just kind of 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're not obviously 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.

And Eric, one way to think about this is I think we were very direct that we're not experiencing much in the way of spread compression last quarter, so competition is not driving it. And 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. The other thing that's happening is last year, we ran a very high commitment fees. We were very low in our utilization of lines.

And 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 $1.5 million, almost $1.6 million of savings that we will see from increasing utilization of our line fee. So 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.

No, that's very helpful. And next one for me. Just looking at the investment in IMX Power Holdings. Just curious if you're seeing in your origination funnel more opportunities for AI and data center-related opportunities, just how you kind of view this trend, if it's likely a longer-term trend or if you're watching it more cautiously. Just curious on your take there.

We don't directly invest in data centers. That's a big boys game. What was Google's announcement today, $180 billion or whatever the number was. We used to do that, but that's not really something that 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 are going into data centers that, frankly, IMX does make. And certainly, there are construction or HVAC or air handling services that might come through to some of those segments. We are very cautious about the sustainability. There's an awful lot of folks jumping into that market. And we are watching the reliance on that end of the market as we think about the play, but we are not directly investing in what I would say is a significant reliance on the continuation of that investment spend. That's just not where our companies particularly play.

And last one for me. You noted the increase in PIK. It's kind of gone up over the past couple of quarters. Could you just kind of generally talk about what's driving that? Is it certain companies that performance has slowed a little bit? Or are they just looking for some cash flow flexibility for investment opportunities? Wondering if you could just talk a little bit about that.

There's a couple of credits that are in that category. One which is undergoing a more systematic or scaling up of the underlying business and the working capital consumption that is behind that growth is stressing the free cash flows. And given the underlying business performance, we provided them the flexibility in the case of PIK. Obviously, we are closely monitoring the EBITDA and the enterprise value as we increase our exposure to that situation and feel that we are more than adequately covered.

And a second one, the company is in the process of liquidating a portion of their underlying business that has been underperforming and the proceeds are more than ample to cover some of the accumulation of that PIK exposure and we expect that company to be in a position to deleverage as it unloads a portion of its investment activity. So it's a case-by-case basis. We focus on what's the right move for the business and what's the terminal exit for getting out from underneath that PIK exposure that we focus on.

And those 2 credits are by far the dominant portion of what's there. As you will note, we did exit a deal last quarter where we did have some accumulated PIK, and we recouped it. So our strategy of working with our credits and getting that money back and getting them cash paying is obviously a consistent part of how we work with our credits.

Our next question is from Christopher Nolan with Ladenburg Thalman.

Why was the -- why did the diluted share count change quarter-over-quarter so much?

So part of that is because just the accounting requirement for how you do the calculation in the initial period. So the only thing that's impacting our diluted shares is the convertible debt. So we do a calculation to show on the if-converted method, what it would be, but that's really the only factor coming into play there.

Okay. So that's going to be continuing issue -- not an issue, but just increased dilution share count is going to be sustained as long as convertible debt is around?

That's correct.

And the conversion price?

And the conversion price will only change if we do additional supplemental distributions. That change, we expect to be very, very inconsequential though.

That issue can be settled with cash or stock as the case may be. So there's a lot of flexibility. It's more of a disclosure requirement, frankly, than a practical expectation that we would ever issue that amount of shares.

That's exactly right.

Just a more broad and more strategic question. Have you guys -- given that you're sort of co-located near Washington, D.C., have you heard anything in terms of updates for the regulatory structures affecting BDCs, specifically the AFFE rule, any sort of consideration of altering that?

AFFE has been under discussion for, what, 7 or 10 years now. Obviously, there's a general relaxation in the market. But I don't think there's anything particularly concrete. And frankly, I think it's a 2-stage process, even if it weren't relieved, it doesn't mean that it's going to very quickly change the way the indexes are underlying calculations. So it would take probably a number of years to roll out whatever might come. So we've been of the view that it will take us several years before if something were to become effective. So frankly, not counting on that as much as we would like it to improve the liquidity in our shares and expansion of our investor base. I don't think we're operating in the presumption that's a short-term issue.

Our next question is from Robert Dodd with Raymond James.

Congrats on the quarter. On the discussion of the pipeline, it sounds obviously quite positive for this quarter, and you said activity surprising. How -- is any of that actually kind of spillover from Q4? Or are these deals that kind of came to you in -- with January launches, so to speak, with the expectation they'd always be a March quarter deal? And then the second part to that question, sorry, is what are you seeing in the very early stage, i.e., do you expect activity to remain robust kind of through the middle or a whole year? Or is this just kind of a surprising bump in the March quarter?

Good question, Robert. Yes, there's definitely a few of those deals that spilled over. I would generally say, in today's marketplace, given volatility, trade flows, tariffs, I think most of the private equity that we're working with is pretty vigilant on diligence and diligence periods can take time. Some of the transactions we're working on have been in the works for probably 3 quarters now. So there's definitely probably half of that spillover our transactions that folks are doing multiple rounds of quality of earnings and reviews of those businesses before they're actually pulling the trigger and executing on that. I would say that obviously, the general downward trend in rates, combined with better clarity in terms of certain industries is a positive.

I mean, for example, it just takes a while for things like defense contractor, precision manufacturing businesses to see the pipeline activity, understand where the long-term trends are to acquire the machinery to support some of those programs. So a number of our businesses at the moment are in that category of strong domestic growth, precision manufacturing, reshoring production capabilities and are now getting around to the point of either acquiring businesses to achieve those objectives. We're investing in their own assets to expand. So I would say, carryover is meaningful, but there is a consistent build of domestic manufacturing for some of these private equity-owned businesses to capitalize on the reshoring trend that started last year.

Got it. Got it. One kind of sort of related. I think one of the issues you pointed out to for the unrealized depreciation, what there was of it was shutdown impact. And obviously, you've historically had been done a fair amount of work with businesses that work for the federal government or do work for the federal government, at least. Has your appetite for that kind of business softened. I mean the number of government shutdowns is obviously up versus historic norms over the last couple of years. And I don't have necessarily great confidence that we won't continue to see sporadic shutdowns at a greater cadence than we've seen in the past. So is that kind of segment as appealing to you as it has been in the past given those kind of risks?

Robert, the situation that I referenced that shutdown was implicated or impacted was a very unique circumstance. Generally speaking, we don't do government contractors. I mean they're manufacturing stuff on long-term munitions or aircraft or platforms and there's better visibility. Short-term government services is not a core focus for the business. That said, we do have a company in the portfolio that actually believe it or not, does dredging activity that works for the Army Corps of Engineers that is general recurring maintenance, maintaining ports and clearances for vessels. And the fact of the matter was, there was an interruption or disruption in the Army Corps contracting for general maintenance services. And it caused a bit of a hole. Now that has already been corrected.

And believe it or not, obviously, whatever builds up and whatever dredging activity is going to have to be caught up down the road if it wasn't done last quarter. So that business is not permanently impacted and it will need to be maintained on a go-forward basis. It just happened in one quarter, they stop spending. That is not the usual and that is not the norm for our business. And I don't think that, that's a permanent impairment of this company in any way, shape or form.

Got it. One last one, if I can. I mean Eegee's saw some more stress in the equity piece of that, which is pretty small. But can you give us any color on -- is that still going through the transition? And you mentioned one of the businesses has additional management transitions. I don't know if that's Eegee's again. But how is the workout on that progressing? I mean, just because the equity went down doesn't mean it's not on track, but any color there?

I think there's a combination of factors on that one. Obviously, if you were to research it, you'll figure out that it's an Arizona-based company, so it tends to be seasonal and selling quick service and selling frozen drinks is not a big thing in the winter. So you tend to have mute quarters. The other thing that I will note and this may be indicative of other credits out there, things that are in border states or heavily Hispanic areas are facing significant downdraft associated with elevated ICE activities. So population, spend, economic drivers are all being impacted. I would say as much as we have confidence in the team and some of the challenges that are naturally associated with QSR type businesses, they are moving forward. They are evolving the business.

There are some incremental headwinds and I don't think we expected early last year when we went through the restructuring and took that business over. Management is continuing to perform. But some of these headwinds were unanticipated, and we are doing our best to accelerate the changes in cost structure in order to see our way through some of the incremental challenges. So it's still a work in process. The company has launched a new menu and some additional offerings, which we think are going to drive traffic in '26, and we will see as that evolves in the spring. But that's a little bit probably more than you wanted to hear about what's going on in that business, but we're working it.

I always love the extra detail there.

Okay. We have any other questions?

Yes, we do. We have a question from Sean-Paul Adams with B. Riley Securities.

Tagging of Eric's question, do you currently have an estimate of remaining SOFR exposure and basis points before the majority of your embedded floors kick in? You talked about spreads not being a material impact for the quarter. So just trying to highlight the pure base rate exposure.

I think our average -- what's our average floor, probably 1.20%?

Yes.

So right now, what was average SOFR last quarter, is 3.90%.

Yes.

Average SOFR for last quarter was roughly 3.90%, so we're roughly running what is about 3.70% today. Average floor is probably about 1.25%. So we've got some material move potentially on that. My comment before was if you eliminate -- if you just focus on what our average spread is, what our bank line spread is and what our marginal management fee and costs are you net down to about a [ 250 ] plus or minus spread ignoring the underlying base rate and if we were to close $150 million -- $100 million, that's $2.5 million of incremental net interest margin, which, if you look at our rate sensitivity, if we -- I think it's back in the tail end of our Q, I think down 50 basis points. I think the sensitivity was about $2.4 million. So we could more than offset the first 50 basis points. As we get past that, we would need to dig into one fees, which are just excluded from that calculation or the additional commitment fee savings that I referred to.

So we're working through the challenges. We're down 100 basis points, that's a $5.3 million down on potential rate exposure given our current portfolio. Frankly, that's about as far as we've been thinking and planning, given the current rate outlook. But we certainly are well positioned to absorb at least the first 50 and probably 75. Beyond that, we'd obviously take additional actions to support the dividend and as you recognize, we obviously have some additional coverage based on the current economics of the portfolio. So I think we're monitoring that downward exposure and have a variety of levers that we're currently using to manage that and support the dividend going forward. When we reset the dividend last quarter, we were looking out with some of these sensitivities in mind and feel pretty confident that we've got the coverage that we need for the near term.

Okay. Do we have one more question?

There are no further questions at this time.

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.

Greetings, and welcome to the Gladstone Capital Corporation Fourth Quarter 2025 Earnings Call. [Operator Instructions] 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 for the quarter and fiscal year ending September 30, 2025. Thank you all for calling in. We're always happy to talk to you about you, our shareholders and analysts, and we welcome the opportunity to provide updates on our company.

And now we hear from Catherine Gerkis. She is Director of Administer of Relations and ESG to provide a brief disclosure regarding certain regulatory matters. Melissa?

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-K and earnings press release for more detailed information. You can also sign up for our e-mail 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 5 new private equity-sponsored investments in a variety of industry sectors, much of which we previewed on our last call. Exits and prepayments declined relative to the past couple of quarters to $23.5 million, so net originations were healthy $103.1 million. Interest income for the period rose 14% to $23.8 million, with a 16.2% increase in average earning assets and a 30 basis point decline in the weighted average portfolio yield to 12.5% for the quarter.

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 decline. So net investment income for the period came in at $11.4 million. Net realized losses were $6.3 million last quarter, which relates to the exit of FES Resources, a legacy oil and gas services investment. 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% and of the fair value of the portfolio and total debt holdings came in at 90% of the portfolio fair value. As of the end of the quarter, we had 3 nonearning 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 in the quarter to $2 million or 8.4% of interest income as much of the increase was generated by 2 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 2, I'd like to leave you with the following: fiscal '25 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're 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're continuing to see a healthy flow of attractive investment opportunities and remain cautiously optimistic that the lower middle market will remain relatively insulated from spread erosion, leverage escalation and financing terms erosion experienced in the larger middle market.

As we ended the quarter with a conservative leverage position with net debt at a modest 82.5% 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, 7.75% 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.

And 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 the September quarter, 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 $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, 5.75% 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% notes due January of 2026. We and our $57 million of 7.75% notes due in 2028. The remaining balance of our liabilities consists primarily of $50 million notes due May of 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 $207 million note retirements with cash on hand and approximately $157 million of floating rate bank borrowings to balance our floating rate assets.

With respect to distribution, Monthly distributions for November and December will be $0.15 per common share, which is an annual run rate of $1.80 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 and update in our stockholders and the analysts who follow us. and our 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 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 5 years, that puts them right near the top and certainly ahead of the top peer group in developing returns for their shareholders.

In summary, Limestone 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 midsized private equity funds that are looking for experienced partners to support the acquisition and growth of the companies they invest in. This gives us an opportunity to make attractive interest paying loans and small equity investments and pay strong distributions to our stockholders.

Now operator, could you please come on and tell people how they can call in and ask questions.

[Operator Instructions] Our first question comes from the line of Erik Zwick with Lucid Capital Markets.

Thank you. Good morning, everyone. Good evening. 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 in 2025, you've significantly expanded a number of PE sponsor relationships. So 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. .

5 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 to the portfolio. On the potential deals at any given time, we're probably tracking -- order of magnitude, maybe $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 million to $50 million 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 returned 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 our 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 transition 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, $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. And then switching gears to the decline quarter-over-quarter in 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, but maybe I misheard that.

Most of that was the base rate, which I think came down from in the fourth -- sulfur was probably 430 range and probably ended the quarter closer to [ 390 ]. 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 7% million. and the leverage is pretty attractive. But even if we were at 7.5% using round numbers on 4, that increase would probably put you at 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. .

And 1 last one, if I could. Just looking through the SOI noticed WB Xcel, which is on nonaccrual, had a slight improvement in the valuation. So just curious kind of what you're seeing there, some improved operational performance and that expectations that, that might continue to trend in a positive direction.

I think they're up to 18 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 -- turn it on to 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. .

Our next question comes from the line of Christopher Nolan with Lonberg Thalmann.

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 30-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've broadened the relationships our origination bucket -- originations went from $178 million to almost $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 9 and change as a percentage. I was thinking beyond that...

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? It did look like it was an imperative. 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 is 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 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 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 in the restructuring of the business. We also had a very light quarter from fee load perspective, I expect those fees to increase. And the combination of those as well as some of the dividend reduction, I think it 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 as you just thinking just pay $0.45 going forward?

I think we could certainly see a supplemental on a go-forward basis. We provided 2 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-10%, the overall yield on equity with NAV growth has been almost, I think, as David outlined, 16.7% over the last 5 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 adjustment in the dividend.

[Operator Instructions] Our next question comes from the line of Robert Dodd with Raymond James. .

Everybody. On the look at the outlook for next year, Bob, I mean, congratulations, you did grow over a very high level of portfolio churn in over the last 12 months. But still 60% of the portfolio didn't turn over. So -- I mean the lower mill 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 the elevated repayment activity continues going into 2026, because to your part 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 it did. I mean, could that -- could you still see extremely high levels in the following 12 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 we're 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 of 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 the whole 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 nonaccruals this quarter. WB Xcel seems to be improving. I mean, are there any cracks developing anywhere in the portfolio of 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, we -- I think as you understand our strategy, we sit on the boards and observe what's going on in the business. And I can't tell you that there aren't issues inside those businesses. But when you go into a relatively low leverage and you see it at the vantage point that we see at the Board level, it becomes a lot more manageable, right? It doesn't ripen into the situation where they report 60 or 90 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 2 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 nonearning assets.

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're hoping to move into a next quarter, but thank you all for calling in. That's the end of this call. .

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

Greetings, and welcome to the Gladstone Capital Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] 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.

Well, 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, and its 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. Welcome -- we welcome the opportunity to provide updates for our company.

And now before we get going, we're going to have Catherine Gerkis, our Director of Investor Relations and ESG, to provide a brief declaration regarding certain regulatory matters concerning this call. 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, both issued yesterday, for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X at GladstoneComps and Facebook, keywords: The Gladstone Companies.

Now I will turn the call over to Gladstone Capital's President, Bob Marcotte.

Thank you, Catherine. 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 2 new PE-sponsored investments in the health care and industrial manufacturing sectors. Exits and prepayments remained elevated at $82 million as we exited 2 sizable investments in the aerospace and restaurant industries. So net originations were a negative $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 onetime items associated with the prepayments.

Interest and financing costs fell 8.8% with lower bank borrowings, while net management fees rose $0.5 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 3 nonearning 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 4 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.

And 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 8 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 3x EBITDA and an average margin over SOFR of in excess of 7%.

And reflecting on our outlook for the next quarter or 2, 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 6 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 grow through 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.

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 2-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 depreciation, 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. And 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 distribution for August and September will be $0.165 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%.

And now I'll turn it back to David to conclude.

Well, thank you very much, Bob, Nicole and Catherine, 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 past us. And we did a good job, I think.

Okay. 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 8 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 in expense -- 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 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 then, the company continues to stick with the strategy of investing in growth-oriented lower middle-market businesses with good management. Many of these investments are supported by midsized private equity funds that put a lot of equity in underneath this 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.

[Operator Instructions] Our first question comes from the line of Mickey Schleien with Clear Street.

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?

Mickey, generally speaking, I would say no. What we're seeing is our starting investments, if you take our 8 deals and $160 million average about $20 million. So 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 in their -- as they start up their deals. But it doesn't come down in competition, it comes down more in private equity expectations. And we've been generally pretty successful at resisting that.

And while our average is certainly well north of a 7% spread over SOFR, there are some where we will dip slightly below that. But 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.

That's really good news. I'm glad to hear that. Bob, one follow-up for 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. And now the job market is weak and inflation's climbing again.

So how do you feel about the overall health of the portfolio? Do you see any tail risks developing? And how is all this uncertainty playing into M&A activity and the expectations for that to pick up later this year or next year?

Mickey, I think most of our investments have a pretty well-articulated growth strategy. They have technology, they have a service model, they have a competitive advantage or a growth-oriented capability. And so they tend to have a multiyear outlook for growth. And 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. So 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 economy -- economic growth or 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, yes, we are certainly concerned about how the headwinds in certain spending or consumption patterns may be affected. And we certainly are both running those sensitivities as well as stressing the cases.

But I would also say, as I outlined, we're going into these businesses with relatively conservative leverage, on average, under 3 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.

And I would also say that virtually all of our investments that we've spoken to since our last call have been sponsored deals. So 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. But 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 cash flow cushion that these businesses have when we underwrite them.

Our next question comes from the line of Sean-Paul Adams with B. Riley Securities.

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?

Not -- Sean-Paul, not -- 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 efficient and pricing have been a little bit more competitive. And so those will show up on our SOI as secured assets. There may be a turn or 1.5 turns 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. And in those cases, we will do a second lien behind it. And in those cases, we're getting attractive pricing and generally fall within the purview of the overall asset support for the facility.

So those are the two angles that we're playing to manage some of our yields targets. But 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 1.5 turns is a very small investment. Generally, it creates more complications than not.

So 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. So we're managing all those angles, but straight second lien doesn't really work in the lower middle market.

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

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann.

In your comments, you mentioned that quarter-to-date, the leverage ratio increased to 81% of NAV. Is that correct?

Yes.

And should we expect to be dialed back with repayments later in the quarter? How does the pattern of prepayments typically do in the quarter? Is it sort of back-ended towards the last weeks in the quarter?

Yes. We'd love to be able to predict those things. I would say, they've been coming at a fast and furious. If you tally up the last 2 quarters plus, 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 of the beginning of next. And the second, believe it or not, is under contract to be sold, and we are, as the incumbent, the preferred lender to go forward.

So we really don't see much in the way of additional repayments at this stage due to sale of the company. But there's very little predictability other than the normal transaction sell-side time frame.

So 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. So 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. So it's -- I wish I could plan it, but it's a tough thing to call.

And 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 facility or go for 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 are 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.

So 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 quarters.

So 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 had a call on an expensive piece of paper that starts in September that we can also manage. So more to come on the capital markets front.

Operator, who's our next questioner?

Our next question comes from the line of Eric Zwick with Lucid Capital Markets.

This is Justin on for Eric today. So 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?

Sure. The -- there are a number of deals in advanced stages right now that are -- we expect to continue. We do have a healthy number of additional investments on the horizon. And 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 obviously, it may not be as robust as what we've done in the last month, 1.5 months, I think it will continue to be in that $50 million to $100 million range on originations, which we've traditionally done on a quarterly basis.

I think the positive is also that frankly, we don't see $75 million to $100 million of repayments coming. So we have to look at what the net originations are going to look like. And given the current situation being in a positive net originations in the range of $50 million or more a quarter is a nice place of -- for -- to support our organic growth. And that's probably where we were before the recent swing-up in repayments. And I think we're going to get back there very, very quickly.

Okay. Great. And 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 nonaccrual?

That investment is in the wind-down mode and will probably be 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 our recovery time frame. So those are probably situations where there may be some realization of that accumulated depreciation.

Operator, do you have another question coming?

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

Congratulations on the quarter. On -- just a follow-up first on that activity above. I mean it sounds like your -- I mean, obviously, the beginning of this quarter was extremely active. Can I get a feeling that you're seeing the future pipeline rebuild sufficiently -- maybe not to produce another quarter like that in the December quarter. But to your point, normally, December obviously is a pretty strong seasonal quarter.

Would you -- do you think that 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?

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 for the balance of the year.

And 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 slipped past the 30 -- quarter end.

So 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, but 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. So interest rates are not as impactful on the valuation multiples in our market. So you can still trade at 7 or 8x and still afford to finance it at current rates. And I would expect if those rates go down, we could have a stronger year-end opportunity.

But right now, I would say we've gone through a pretty elevated state of growth. And I would expect originations in that 50 to 100 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. And so there's a natural limitation as to how much we're going to book in a given quarter because of the size deals we do. And that's not going to change.

So 50 to 100 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. Got it. I appreciate the color there. Just following up on answer to an earlier question. On the first thing, last out, right, I mean, as you said, you're effectively getting second-lien pricing. But I mean, how much of the first-lien structure you're selling down to a bank? Because obviously, I think you said like a turn, which would be a lot less than would normally done if you were the second lien behind the first lien, right, you'd normally have that.

So are you getting second-lien pricing but materially better first dollar in effective once the FILO taken into account structure than you would get if it was a straight second lien? I mean, you're getting higher pricing with better risk?

As long as you don't spread the word, Robert, yes. 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.

So if that unitranche is, let's say, 3.25 turns of leverage, and let's use round numbers, let's say, $8 million of EBITDA, so you're talking about roughly $30 million -- $26 million, $28 million of debt. So we might bring in a $15 million first lien, and we might take a $13 million last out.

So the debt -- the senior is in for something less than 2 turns, 1.5 turns, and we are getting second-lien pricing inside of 3.25 turns. To me, that's a pretty attractive attachment point, and we control the documents, we control the structure, we control the covenants, and we're getting essentially second-lien pricing at first-lien leverage limitation.

So yes, it is an attractive play, if you can put enough to work and in getting and managing that origination, the diligence and the documentation.

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

Yes, but we don't want 26 or 28 at 5.25 to 5.5. That doesn't work in our model, right? we'd much rather be at 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.

Robert, you've been following this industry almost as long as I've been working in it. So I know you know we are 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. But thank you for...

And I appreciate that, David. And Bob, I mean, yes, sticking to your strategy is important. That's where your expertise is. So stick to it, yes.

Okay. Operator, do we have anybody else?

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

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. So make sure you get a good sheet flow of questions for next time, and we'll see you at the next meeting. That's the end of this conversation.

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