Gladstone Capital Stock

Greetings, and welcome to the Gladstone Capital Corporation's Third Quarter Earnings Call.

[Operator Instructions]

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.

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, Catherine Gerkis, Director of Investor Relations, will provide a brief disclosure about certain regulatory matters. Catherine, go ahead.

Thanks, David, and good morning, all. 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.

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 in advances to existing portfolio companies.

Exits and repayments came in at $40 million, so net originations were $42 million for the quarter. Interest income for the period rose 4.7% to $24.3 million on higher average assets as our weighted average debt yield of 11.8% was unchanged for the period. However, other income declined from the large prepayment fee received last quarter, so total investment income declined $1.5 million to $24.5 million.

Interest and financing costs rose $700,000 with increased borrowings, which included the $60 million December 2029 note issued in the period. However, net management fees declined $1.1 million with the increased origination fee credits. Net investment income declined by $800,000, largely on lower onetime prepayment fees to $11 million or $0.49 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 2:1 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 3x EBITDA and an average 7% spread over SOFR. Our health care and education sector concentration declined as we elected to exit Giving Home Health Care and redeploy the capital to higher returning investments.

As of the end of the quarter, our non-earning debt investments increased to 5 with a cost basis of $46 million or $26.7 million or 3.1% of our debt investments at fair value. The credits added are Lone Star, a Texas-based printed circuit board contractor and Eegee'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, 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 Schaltenbrand, our CFO, to provide details on the fund's financial results for the quarter. Nicole?

Thanks, Bob. Good morning, everyone. During the June quarter, total interest income rose $1.1 million or 4.7% to $24.3 million as the average earning assets rose $28.4 million or 3.6%, while the weighted average yield on our interest-bearing portfolio was unchanged at 11.8% for the period.

Total investment income was $24.5 million as dividends and prepayment fee income declined from the large onetime payments in the prior quarter. Total expenses declined $700,000 or 4.7% versus the prior quarter due to a decrease in net management fees of $1.1 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.

Net investment income for the quarter fell to $11 million or $0.49 per share or 109% of cash distributions per common share. The net increase in net assets resulting from operations was $13.3 million or $0.59 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. The remaining balance of our liabilities consists primarily of the $149.5 million of [indiscernible] convertible debt, $50 million of 3.75% notes due May 2027 and $45 million of 6.25% schedule preferred stock.

As of June 30, net assets rose $3.1 million to $485.7 million, and NAV per share rose from $21.36 to $21.50 as of June 30. Our gross leverage as of June 30 rose to 100% of net assets. With respect to distributions, monthly distributions for August and September will be $0.15 per common share, which is an annual run rate of $1.80 per share.

The Board will meet again in October to determine the monthly distributions to common stockholders for the following quarter. At the distribution run rate for our common stock and with the common stock price at about $19.35 per share yesterday, the distribution run rate is now producing a yield of about 9.3%. And now I'll turn it back to David to conclude.

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.

That's 9.3% 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 Instructions]

Our first question comes from the line of Erik Zwick with Lucid Capital Markets.

And 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 3 months ago and then also the spreads that you're seeing today and how they compare to the existing portfolio yield?

Sure, Erik. 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 $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 velocity has slowed down a fair bit given what's gone on in the marketplace. So $35 million 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 6s, low 7s, I think, is where we would expect to continue to participate. And as a result, we really wouldn't see an effective yield degradation to where we are today at 11.8% as the average.

So that's obviously excluding any increases in underlying rates were that to happen. So I think it's pretty much the same as we experienced this quarter. I will say that 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.

That's great color. 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 Eegee's 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?

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 Eegee's.

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. Tractions, 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 we have gone through adjustments and are seeing strong momentum, 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 wet suit 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 U.S. 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.

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

On a follow-up to Erik's question, you mentioned leverage in the high 6s, 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?

To be clear, that was spread, not leverage. Our leverage portfolio last quarter, as I mentioned, was an average of 3x EBITDA. Our spreads are typically in the high 6s, low 7s.

Okay. That was my misunderstanding. But are you -- on your comments that you're seeing a lot of opportunity for -- 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 pace?

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 at 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. The leverage multiple for those transactions has been remarkably consistent at roughly 7 to 7.5x EBITDA.

So on average, it's still attractive multiples. There are certain sectors where high-quality companies or hot sectors can get bid up. But for the most part, there's still plenty of opportunities. And frankly, we're seeing both the lower middle market buyers and also some of the pledge funds or independent sponsors playing in the marketplace. It's just -- it's a fairly wide swath of opportunities in this segment because most of the capital and competition has come at the top of the market, not where we particularly play.

Great. And Nicole, what was the spillover income for the quarter, if you have that?

So the accumulated spillover is a little over $6 million right now.

Our next question comes from the line of [indiscernible] with Raymond James.

Going back to sort of M&A and the activity you're seeing in the market. Obviously, this quarter saw more originations than last. Are you seeing that activity build throughout the rest of the year?

And are there any more catalysts down the line that will drive more activity? And then a quick second part on that. Is -- are you seeing any bifurcation between the lower middle market versus the larger market? Is there anything specific that you're seeing in the lower middle market?

Seasonally or catalyst-wise, we typically see a smaller quarter or a lighter quarter in the first quarter of the year as we experienced this year, people putting their numbers together and getting things sorted out. Over the balance of the year, we tend to see fairly consistent flow of opportunities as we did last quarter. So -- and there does tend to be a bump as we get to the end of the year. Fourth quarter tends to be stronger.

So over the course of the year, based on last fiscal year's experience, the originations were roughly $350 million. If you look at the pacing, that's pretty much where I would expect us to head towards this year. As far as catalysts are concerned, I think the only question that might damper that, quite frankly, is what the rate outlook is going to be. If rates were to move up, I think that does cause some repricing that does cause some valuation adjustments that are required, and that might slow down some of the activity pending those reset expectations.

In terms of other catalysts or expectations, most of the businesses that we are focused on, the companies are modestly leveraged and are generating reasonable growth -- and so their choice is to deleverage and repay us or continue to make acquisitions to, as I said, scale into their infrastructure and their management capabilities.

I think the appreciation opportunity of continuing to buy businesses that are reasonable multiples in 7 plus or minus range, combined with the scale benefit that they get once they get EBITDA over $10 million or $20 million and the multiple expansion comes about, that's a pretty compelling opportunity for them to generate additional equity gains. So I would expect there's a natural continuation that will come, adding to some of the smaller credits in the sectors where we're currently exposed.

So to me, even if some of the new investment volume slows, I think the consistency and the opportunity for equity appreciation on the existing portfolio assets is particularly attractive and continues to be so. I think we just need to make sure that we stay out of the sectors where there's a lot of competition and their prices are getting bid up because the natural consequences there will be asks for a higher level of leverage when those companies trade at higher multiples, and that increases our credit risk significantly.

It also diminishes our control and competitive dynamic. The larger the transaction, the less capable we are to be able to write the entire ticket. And two, the larger the transaction, the more likely some of the larger funds or the more aggressive banks might want to weigh in, and that's obviously going to be a compression of the underlying spread.

So from our perspective, it's using our incumbency in those lower situations to continue to grow those credits. And I would expect that to be a meaningful contributor over the course of the balance of the year regardless of the economic environment that we're facing.

If I can just sneak another quick one in on Eegee's, obviously, redefaulted this past quarter. Is that just the overall macro? Or were there any new big potholes with the assets?

I would say the challenge, and we have mentioned this in prior quarter calls, the market for consumers in the heavily Hispanic communities, particularly as it relates to Southern Arizona has been a fairly difficult operating environment for the better part of the last year. And that consumer and population profile has been negatively affected. The cumulative element of that has certainly been taxing.

There were several initiatives to try to scale the revenues that were less successful than we expected. So we are retooling that in order to manage it going forward. Some of the expenses will come out as a result of some of that changed strategic direction.

So it's not anything in particular. It's the cumulative effect of a tough consumer market, some actions as it related to trying to improve the business and a retooling of some of the strategies that we're using based on what we've been able to experience over the last year that is causing us to recognize there's additional investment probably required to be able to reposition that business successfully. Any further questions?

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

So you guys talked a little bit about the juice kind of not being worth a squeeze with some of these high-interest industries, HVAC, dental, physician practices, roofing. Moderating around that, does that have any noticeable impact on your pass rate for the next few quarters on deals screened? And so the broader focus will just be the pre-existing held position expansions?

I don't think it changes. And obviously, we're always looking for the next growth sector, the expansion opportunities, things that have momentum that is not necessarily coming through in the multiple or coming through in the financing expectations. I use an example of dental. Last quarter, we did fund a add-on to an existing dental platform.

That business is now approaching $20 million plus or minus of EBITDA, which is a pretty significant level that makes that company very attractive from an add-on and consolidation to some of the larger operators in the business. I just wouldn't start a new one at that level. I think the fact is that is significantly larger than where we typically enter and it's probably at the tail end of the existing sponsors hold period.

So we're mindful of where those credits are maturing, and we probably aren't going to get on the merry-go-round for another small one in light of some of the market challenges of that business. There are obviously other businesses, as you mentioned, that we are less enthralled with because of some of the traditional competitive dynamics. Some of the businesses like a roofing type business or maybe a landscaping type business, the barriers to entry are very low.

It's a marketing-oriented type of business, labor challenges, competitive dynamics. Those are very difficult businesses to see forward and consistency of the cash flow. And so we have traditionally steered away from those businesses. It's just -- it's not going to change our flow. We've never really participated in a lot of those businesses. So it's not going to change the opportunities on a go-forward basis. So I think the broad stroke is we'll look at 100 to 125 deals a quarter, and we'll do 4 or 5.

I mean that's the nature of our business. And when you add in the continuing demand from some of our existing portfolio companies, the combination gets us to the originations and scale momentum that we've consistently been able to deliver. Any more questions?

No. I'll pass it back to you, David.

Okay. Thank you very much, folks. We're not getting enough questions in these calls. You need to make some notes to yourself and ask us questions because we get to you with the questions you asked. But anyway, we had a great quarter. Everybody is happy here, and we're going to go out and produce another good quarter. So see you next quarter.

Thank you.

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

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.