Transcript: Gladstone Cap Q3 2026 Earnings Conference Call

Gladstone Cap (NASDAQ: GLAD ) held its third-quarter earnings conference call on Wednesday. Below is the complete transcript from the call. This content is powered APIs. For comprehensive financial data and transcripts, visit Access the full call at Summary Gladstone Capital Corporation reported $82 million in fundings for the quarter, with a net origination of $42 million.

5 million due to a decline in other income. 49 per share, largely due to lower one-time prepayment fees. The portfolio saw $3 million in net appreciation, with first lien debt constituting 71% of the portfolio. The company exited the oil and gas sector and anticipates maintaining yield with new investments despite expected prepayments.

Total assets rose to $970 million, with liabilities increasing due to a new $60 million note issuance. 50. 3% yield. Management highlighted a strong investment pipeline and a focus on lower middle-market opportunities.

Concerns were noted about certain consumer-facing businesses and the impact of commodity prices on domestic manufacturing. Full Transcript OPERATOR (Operator) Greetings and welcome to the Gladstone Capital Corporation's third quarter earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

If anyone should require operator assistance, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. I'll now turn the conference over to David Gladstone, Chairman. Thank you, David.

You may begin. David Gladstone, Chairman and CEO Well, thank you for bringing all these things together, and good morning to everyone out there. This is the earnings conference call for Gladstone Capital for the quarter ending June 30, 2026. Thank you all for calling in.

We're always happy to talk to our shareholders and analysts and welcome the opportunity to provide some updates on our company that's doing very well. And before we get to the last quarter's results, Kathryn Kirkus, Director of Investor Relations, will provide a brief disclosure about certain regulatory matters. Catherine, go ahead. Kathryn Kirkus, Director of Investor Relations Thanks, David, and good morning all.

Today's call may include forward-looking statements, which are based on management's estimates, assumptions, and projections. com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information.

You can also sign up for our email notification service and find information on how to contact our Investor Relations department. Now I will turn the call over to Gladstone Capital CEO and President Bob Marcotte. Bob Marcotte, CEO and President Good morning. I'll cover the highlights for the quarter and a few comments on the near-term outlook for the company, beginning with last quarter's results.

Fundings last quarter totaled $82 million and included four new investments totaling $67 million and $15 million advances to existing portfolio companies; exits and repayments came in at $40 million, so net originations were $42 million for the quarter. 8% was unchanged for the period. 5 million. Interest and financing costs rose $700,000 with increased borrowings, which included the $60 million December 2029 note issued in the period.

1 million with the increased origination fee credits. 49 per share for the period. Net portfolio appreciation came in at $3 million, driven by unrealized portfolio appreciation, as our gainers outnumbered the decliners by a 2 to 1 margin with respect to the portfolio. The investment portfolio composition is largely unchanged, with first lien debt and total debt investments at 71% and 91% of the portfolio at cost, respectively.

We're pleased to report that the leverage and return profile of our new debt investments last quarter were all first lien and with weighted average leverage under 3 times EBITDA and an average 7% spread over SOFR. Our healthcare and education sector concentration declined as we elected to exit giving home health healthcare and redeploy the capital to higher returning investments. 1% of our debt investments at fair value. The credits added are Lone Star, a Texas-based printed circuit board contractor, and EG's, an Arizona-based quick-serve sandwich chain.

Both credits are Glad-controlled investments and have recently undergone senior management changes and are in the process of developing additional revenues and expense reductions to return them to earning asset status. As far as the outlook is concerned, since the end of the quarter we received an anticipated prepayment of Imperative totaling $12 million, which will eliminate our exposure to the oil and gas sector, and we anticipate a slightly larger prepayment this week, which should reduce our PIK interest income in coming quarters.

Our committed investment pipeline is well more than the recent repayments and includes several attractive follow-on investments in existing portfolio companies which are continuing to scale. Between upsizing existing credits and new investment yields, we are not expecting our weighted average yield to be negatively impacted by these reinvestment activities. Our leverage position ticked up at the end of the quarter with net debt at a modest 100% of NAV, and we expect to continue to use our floating-rate bank facilities to support our near-term investment activities.

And now I'll turn the call over to Nicole Schildenbrand, our CFO, to provide details on the fund's financial results for the quarter. Nicole, thanks. Nicole Dubas Schaltenbrand, Chief Financial Officer Good morning everyone. 8% for the period.

5 million, as dividends and prepayment fee income declined from the large one-time payments in the prior quarter. 1 million and higher closing fee credits, and other expenses also fell $300,000 mainly due to lower legal expenses. These factors were offset by a $700,000 increase in interest expense. 49 per share, or 109% of cash distributions per common share.

59 per share, for the quarter ended June 30, as impacted by the unrealized valuation appreciation covered by Bob earlier. Moving over to the balance sheet, as of June 30, total assets rose to $970 million, consisting of $953 million in investments at fair value and $17 million in cash and other assets. Liabilities rose $32 million since the prior quarter to $439 million, with the decrease in LOC borrowings funded by the new $60 million 7% note issue due in December of 2029. 25% preferred stock as of June 30.

50 as of June 30. Our gross leverage as of June 30 rose to 100% of net assets. 80 per share. The Board will meet again in October to determine the monthly distributions to common stockholders for the following quarter.

3%. And now I'll turn it back to David to conclude. David Gladstone, Chairman and CEO Well, in summary, again it was just another solid quarter for Gladstone Capital. The team is doing an excellent job of sourcing attractive private equity-backed lower middle-market investment opportunities, so again, Bob, you're on top of the world again.

The team continues to deliver strong earnings performance driven by healthy increases in net interest margins and bolstered net investment income to more than cover the current shareholder dividends. 3% for a great little company. The company has a strong balance sheet, ample borrowing capacity to grow our investment portfolio, and continue to support our shareholders with dividends. We love dividends here and we love paying them out to our folks.

So I'm going to stop now and call on the operator to tell people how they can ask some questions, and we'll try to help you out there. OPERATOR (Operator) Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star one on your telephone keypad.

A confirmation tone will indicate your line is in the queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions.

Thank you. Our first question comes from the line of Eric Zewick with Lucid Capital Markets. Please proceed. Eric Zewick, Analyst at Lucid Capital Markets Thank you.

Good morning, everyone. Bob, I think you may have touched on this a little bit in talking about the expectation for the portfolio yield to remain kind of relatively consistent, but just curious if maybe you could give a little bit more detail in terms of the investment pipeline today. One, in terms of the size of the pipeline relative to maybe three months ago, and then also the spreads that you're seeing today and how they compare to the existing portfolio yield. Bob Marcotte, CEO and President Sure, Eric.

The pipeline is pretty strong. Most of our investments are looking for acquisitions in this marketplace. Strategic add-ons to the small credits have huge equity appreciation opportunities. So we are seeing, I don't know, anywhere half dozen, plus or minus, of additional add-ons to the portfolio.

So I would expect that to be a meaningful percentage of the pipeline on a go-forward basis, as it was last quarter. In addition, I would say the opportunities are not slowing down. In fact, we're probably raising the bar given where we are in our leverage profile. And the result is, you know, $75, plus or minus, million a quarter in originations is a relatively easy mark.

It's consistent with what we did last year. We're also seeing fewer repayments. The repayment process, the repayment repayments velocity has slowed down a fair bit given what's gone in the marketplace. So, you know, $35 to $50 million of repayments and exits a quarter put us in a position where we could see fairly consistent net asset growth.

Obviously that's tempered by where we are in our leverage profile. So I will say we would expect to continue to grow modestly and, in light of those competitive dynamics, leverage yields in and around the high sixes, low 7s I think is where we would expect to continue to participate. 8 as the average. So that's obviously excluding any increases in underlying rates for that to happen.

So, you know, I think it's pretty much the same as we experienced this quarter. I will say that, you know, the one thing that we continue to see is the lower middle market. There's a lot of deal opportunities. It's really finding the ones that fit our credit profile and the organic growth that we're looking for.

I think some of our peers are continuing to see similar flow of volume opportunities. So it continues to be a strong market for us. Eric Zewick, Analyst at Lucid Capital Markets That's great color. Thank you.

And second question for me, just kind of bigger picture as you look across your portfolio, very diverse from an industry perspective and kind of end customer. There's a lot of talk about kind of a K-shaped growth in the economy and the lower-end consumer having some difficulty to some degree. And I know you don't have a whole lot of exposure there. But just thinking maybe about EGS and maybe other things, are you guys seeing any kind of real signs that there's kind of this bifurcation or separation in the growth of the economy?

And if so, how are you managing that and thinking about the growth that you just mentioned going forward? Bob Marcotte, CEO and President Well, traditionally we have not done a ton of consumer-facing businesses. It doesn't provide the same revenue visibility that we typically look for to support the cash flow leverage that we put on these businesses. We do have a few, you mentioned EGS, so we have a couple of restaurants obviously facing a variety of pressures.

I don't think there's any doubt that consumer spend has softened. You know, traffic, check size and costs are a challenge in a business like that. But that's a very small snippet of our portfolio. I will say we have other consumer-facing businesses that, you know, we have gone through adjustments and are seeing strong momentum, you know, positive movement in some of the other restaurants that we're invested in, positive movement in the apparel business that we have, that's called Xcel, which is a wetsuit-type business.

So structured appropriately, I think we are seeing decent momentum in some of the consumer sectors. But that's a very small portion of our overall portfolio. Most of our businesses are industrial precision manufacturing suppliers to large-scale companies, including aerospace and defense-type businesses. And the backlogs are strong and continuing to grow.

The only thing that I would add in that category is in prior quarters we talked about the ability to bring production back to the states. We are still seeing some of that. But I would also add tariffs and commodity prices are disrupting some of that because to source it domestically, given some of the steel, copper and other commodity prices, it's still extremely expensive. And domestic manufacturers are hesitating in moving as much production back to the US in the face of very expensive commodity prices.

So we're still seeing a fairly robust demand, but it's tempered by some of the tariff-related impacts on some of the raw materials. So I guess what I would say is the manufacturing businesses are strong and we are looking at obviously businesses where there's a high degree of automation to improve operating efficiencies and cost structure. Eric Zewick, Analyst at Lucid Capital Markets Thank you for taking my questions. Bob Marcotte, CEO and President Certainly.

Thank you for calling in. OPERATOR (Operator) Next question. Thank you. Our next question comes to the line of Christopher Nolan with Ladenburg Thalmann.

Please proceed. Christopher Nolan, Analyst at Ladenburg Thalmann Hi, thanks for taking my question. On a follow up to Eric's question, you mentioned leverage in the high sixes, low 7s, which seems to be a little bit above some of the other BDCs I cover. Is that really a function of their focus on long contracts so you have a better view in terms of what the cash flows are and so forth?

Nicole Dubas Schaltenbrand, Chief Financial Officer To be clear, that was spread, not leverage. Our leveraged portfolio last quarter, as I mentioned, was an average of 3 times EBITDA. Our spreads are typically in the high sixes, low 7s. Christopher Nolan, Analyst at Ladenburg Thalmann Okay, thank you for the clarification.

That was my misunderstanding. But on your comments that you're seeing a lot of opportunity in the lower middle market, do you view it as more of a buyer's market and what does that say about where private equity is in terms of their growth phase? Bob Marcotte, CEO and President I think there are certain sectors that get hot and it becomes a little bit more of a bidding war. If you've got 15 platforms that are doing roofing or doing HVAC or doing dental and they're all looking to add contribution margin and scale their businesses, the ability to buy those businesses on attractive multiple gets bid up.

It's purely a flow question. In other sectors where it's maybe not as active or there aren't as many buyers chasing the business, we're continuing to see reasonable margins. I think if you go back to some of the detailed stats that are available and I'll give them a plug. GF Data does a lot of research and disclosures around sub-$100 million transactions.