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DATE
Thursday, February 5, 2026 at 8:30 a.m. ET
CALL PARTICIPANTS
- President — Bob Marcotte
- Chief Financial Officer — Nicole Schaltenbrand
- Chairman and Chief Executive Officer — David Gladstone
TAKEAWAYS
- Fundings -- $99.1 million in total fundings, including $37.8 million to two new private equity-sponsored investments and $61.3 million in additional advances to existing portfolio companies.
- Net Originations -- $46.3 million, after exits and prepayments totaling $52.8 million.
- Interest Income -- $23.9 million, which increased by $100,000 or 1%, driven by a 3% growth in average earning assets despite a 30 basis-point decline in weighted average yield to 12.2%.
- Total Investment Income -- $24.5 million, reflecting a $400,000 increase in fee income compared to the previous quarter.
- Total Expenses -- Rose by $800,000 or 6%, due to a $200,000 increase in interest expenses from greater borrowings, and a $600,000 increase in net management fees tied to higher average investments and reduced origination fee credits.
- Net Investment Income -- $11.3 million, or $0.50 per share, reflecting a decline from the prior period due to valuation impacts.
- Net Asset Result from Operations -- $5.5 million net increase, or $0.24 per share, with results affected by realized and unrealized depreciation.
- Net Realized Gains -- $300,000 realized, as the sale of Sokol equity more than offset a $1.4 million write-off for note refinancing costs.
- Unrealized Losses -- $5.3 million, mainly from three investment positions affected by the government shutdown or undergoing senior management changes.
- Portfolio Composition -- First lien debt represented 73.91% of portfolio cost; non-earning asset debt investments remained unchanged at $28.8 million cost basis or $13.2 million fair value, equal to 1.6% of the portfolio.
- PIK (Payment-in-Kind) Income -- Rose to $2.3 million or 9.6% of interest income; $2.8 million in PIK was collected, reducing the accrued PIK balance.
- Significant Prepayment -- $42.8 million prepayment from Vets Choice after the quarter-end, generating an $855,000 prepayment fee.
- New Funding -- $6 million senior debt investment in a precision machining business funded after the end of the period.
- Investment Pipeline -- Pipeline of late-stage deals is over $100 million and described by Marcotte as "quite robust," expected to offset recent repayments.
- Leverage and Borrowing -- Net debt at 93% of NAV; gross leverage rose to 93.3% of net assets; $365 million line of credit facility with more than $150 million available after recent repayments.
- Balance Sheet -- Total assets rose to $923 million, comprising $903 million in investments at fair value and $20 million in cash/other assets; liabilities increased $20 million quarter over quarter to $445 million, primarily from LLC borrowings to repay higher-cost notes and to fund net originations.
- Net Assets and NAV -- Net assets declined $4.7 million to $477 million; NAV per share declined from $21.34 to $21.13.
- Distribution -- Monthly distribution for February and March set at $0.15 per share, implying a $1.80 annualized rate and approximately 8.8% yield on the latest share price; Board to determine future distributions in April.
- Convertible Debt and Dilution -- $149.5 million in 5.78% convertible debt due 2030 is the only factor affecting diluted share count, which will persist as long as the debt is outstanding.
- SOFR and Rate Sensitivity -- Average floor on variable loans about 125 basis points; average SOFR during the quarter was 3.90%; current SOFR is roughly 3.70%, meaning further declines needed before rate floors are hit; management stated that a 50 basis-point rate reduction could be offset by increased margin and fee strategies.
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RISKS
- Unrealized Portfolio Losses -- $5.3 million in unrealized losses concentrated in three investment positions impacted by the recent government shutdown or where senior management has been replaced, with management expecting improvements over the balance of 2026.
- PIK Income Concentration -- Increased PIK income is primarily concentrated in two credits; one faces working capital stress, while the other is liquidating assets to manage underperformance.
- Equity Investment Headwinds -- Management acknowledged "incremental headwinds" in an Arizona-based quick-service business due to seasonality and regional economic factors following restructuring, with performance described as still a "work in process."
- Interest Rate Exposure -- While the first 50-75 basis points of rate cuts can be absorbed through internal actions, a 100 basis-point reduction could result in a $5.3 million decline in earnings sensitivity, per management.
SUMMARY
Management reported higher period fundings, elevated fee income, increased leverage, and a strong late-stage deal pipeline. The company completed a significant refinancing, paying down higher-cost notes, and generated net realized gains from equity exits while offsetting write-off expenses. Net investment income and NAV declined due to valuation impacts and unrealized losses from specific portfolio issues.
- Convertible debt remains a source of ongoing dilution in reported share count, though management does not expect significant share issuance from conversions under current conditions.
- Late-stage investment pipeline exceeds $100 million and is expected to counterbalance recent repayments, with management attributing activity to resilience in lower middle market deal flows.
- Increased PIK income is being actively monitored, with exposures concentrated in two credits undergoing distinct situational pressures and recovery strategies.
- Line commitment fee savings, improved borrowing mix, and robust distribution coverage provide management with flexibility to address anticipated rate volatility while supporting the dividend.
INDUSTRY GLOSSARY
- PIK (Payment-in-Kind) Income: Interest paid by portfolio companies in the form of additional securities rather than cash, increasing the lender's investment balance and often reflecting borrower liquidity constraints.
- SOFR (Secured Overnight Financing Rate): A broad measure of the cost of borrowing cash overnight using U.S. Treasuries as collateral, commonly used as a floating rate benchmark in lending.
- First Lien Debt: Loans or credit facilities with the highest priority claim on the assets of a borrower in the event of default.
- AFFE (Acquired Fund Fees and Expenses): An SEC disclosure rule for registered investment companies, relevant to business development companies (BDCs) impacting investor liquidity and index inclusion.
Full Conference Call Transcript
Bob Marcotte: Good morning. Thank you, Catherine. I will cover the highlights for the quarter and conclude with some comments on our near-term outlook for the company. Beginning with our last quarter's results, fundings last quarter totaled $99.1 million and included two new private equity-sponsored investments totaling $37.8 million and $61.3 million of additional advances to existing portfolio companies. Exits and prepayments declined relative to the past couple of quarters to $52.8 million, so net originations were $46.3 million for the quarter.
Interest income for the period rose to $23.9 million as the increase in average earning assets offset the 30 basis point decline in the average SOFR rates compared to last quarter as our weighted average debt yield came in at 12.2% for the period. Interest and financing costs increased $200,000 on higher average bank borrowings incurred to complete the fixed-rate note refinancings last quarter and higher average investment balance. In addition, net management fees rose $600,000 with the increase in average assets and lower origination fee credits. So net investment income came in at $11.3 million for the period.
Net realized gains were $300,000 as the exit of our remaining equity in Sokol more than offset the $1.4 million write-off associated with the unamortized costs with the note refinancing completed last quarter. Unrealized losses rose to $5.3 million last quarter and were concentrated in three investment positions impacted by the recent government shutdown or where we have replaced senior management and are expecting significant improvements over the balance of 2026. With respect to the portfolio, the portfolio growth for the period did not have a material impact on our investment mix or spread profile as first lien debt and total debt investments came in at 73.91% of the portfolio cost respectively.
As of the end of the quarter, our three non-earning asset debt investments were unchanged with a cost basis of $28.8 million or $13.2 million at fair value or 1.6%. In addition, PIK income for the quarter rose to $2.3 million or 9.6% of interest income. However, we also collected $2.8 million of PIK for the period, so our accrued PIK balance declined accordingly. Since the end of the quarter, we have experienced one significant prepayment of Vets Choice in the amount of $42.8 million, which also generated a large prepayment fee of $855,000 on the period. And to date, we have funded an additional $6 million senior debt investment in a precision machining business.
Although earning assets have declined since the end of last quarter, our current pipeline of late-stage deals which have been vetted, awarded, or in the diligence or documentation is quite robust at over $100 million and should more than offset the recent repayments. The level of near-term investment opportunities we are working through in what is traditionally a slow Q1 is frankly a bit surprising. I would attribute this investment activity to the resilience of the lower middle market deal flows and the growth prospects within our existing portfolio.
We ended the quarter with a conservative leverage position and net debt at a modest 93% of NAV, and have increased our floating rate bank borrowings to better match our asset rate sensitivity while bringing down our net funding costs as short-term interest rates ease and we reduce our unused facility fees accordingly. Our current line of credit facility totals $365 million and net of the recent repayments, our borrowing availability is more than $150 million, which is more than ample to support our near-term investment activities. And now I will turn the call over to Nicole Schaltenbrand, our CFO, to provide some details on the Fund's financial results for the quarter.
Nicole Schaltenbrand: Thanks, Bob. Good morning. During the December quarter, interest income rose $100,000 or 1% to $23.9 million as the average earning assets rose $20.3 million or 3%, while the weighted average yield on our interest-bearing portfolio declined 30 basis points to 12.2% for the period. Total investment income was $24.5 million on higher interest earnings, and fee income rose $400,000 from last quarter. Total expenses rose $800,000 or 6% versus the prior quarter as interest expenses rose $200,000 with increased bank borrowings, and net management fees rose $600,000 on higher average investments, and lower deal closing fees 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 5.18% notes previously due January 2026, and our $57 million of 7.34% notes previously due in 2028. And to fund our net originations.
The remaining balance of our liabilities consists primarily of $149.5 million of 5.78% convertible debt due 2030, $50 million of 3.5% notes due May 2027, and $29 million of 6.25% perpetual preferred stock. As of December 31, net assets declined $4.7 million to $477 million and NAV per share declined from $21.34 to $21.13. Our gross leverage as of December 31 rose to 93.3% of net assets. Monthly distributions for February and March will be $0.15 per common share, which is an annual run rate of $1.80 per share. The Board will meet in April to determine the monthly distributions to common stockholders for the following quarter.
At the current distribution rate for our common stock and with the common stock price at about $20.44 per share yesterday, the distribution run rate is now producing a yield of about 8.8%. And now, I will turn it back to David to conclude.
David Gladstone: Well, thank you. That was a good summary and solid quarter for Gladstone Capital again. The team for Glad continues to deliver attractive net originations and growth with a very healthy backlog of attractive growth-oriented lower middle market companies. The company has a strong balance sheet, ample bank lines, and capacity to grow our investment portfolio to deliver more dividends to our shareholders. And delivery of net interest margins required to sustain the shareholders' dividends. And now open the questions up. And operator, if you will come on and tell us what to do.
Operator: Our first question is from Eric Zwick with Lucid Capital Markets. Please proceed.
Eric Zwick: Thank you. Good morning. I apologize in advance for any background noise. I'm traveling today. But wanted to start with a question. During your prepared remarks, you mentioned increasing the usage of the revolver due to the floating rate function there. 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.
Nicole Schaltenbrand: Yes. The majority of our variable rate loans do have floors. We are 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.
Bob Marcotte: And Eric, one way to think about this is, I think we were very direct at 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 million, almost $1.6 million of savings that we will see from increasing utilization of our line fees. 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.
Eric Zwick: That was very helpful. Thank you. And next one for me, just looking at the investment in IMX Power Holdings, just curious if you are seeing in your origination funnel more opportunities for AI and data center-related opportunities and 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.
Bob Marcotte: We do not directly invest in data centers. That's a big boys game of what we've Google's announcement today? $180 billion or whatever the number was. We used to do that, 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, you know, certainly, 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 what I would say is a significant reliance on the continuation of that investment spend. That's just not where our companies particularly play.
Eric Zwick: Got it. Thank you. 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 talk a little bit about that.
Bob Marcotte: 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. In the 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 two 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.
Eric Zwick: Thank you for taking my questions today.
David Gladstone: Next question.
Operator: Our next question is from Christopher Nolan with Ladenburg Thalmann. Please proceed.
Christopher Nolan: Hi, thanks for taking my question. Why did the diluted share count change quarter over quarter so much?
Nicole Schaltenbrand: 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 gift converted method you know, what it would be. But that's really the only factor coming into play there.
Christopher Nolan: Okay. So that's going to be a continuing issue, not an issue, but just that increased dilution share count is going to be sustained as long as convertible debt is around?
Nicole Schaltenbrand: That's correct. Yes. And the conversion price?
Bob Marcotte: And the conversion price will only change if we do additional supplemental distribution. That change, we expect to be very, very inconsequential, though.
Nicole Schaltenbrand: Great. Then, think 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.
Christopher Nolan: Okay. Just a more broad and more strategic question. Have you guys given that you're sort of co-located near Washington DC, 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?
Bob Marcotte: AFFE has been under discussion for what seven or ten years now. Obviously, there's a general relaxation in the market. But I do not think there's anything particularly concrete. And frankly, I think it's a two-stage process even if it were relieved it does not mean that it's going to very quickly change the way the index is our underlying calculation. So it would take probably a number of years to roll out whatever might come. So even of the view that, it will take us several years before 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 do not think we're operating in the presumption that's a short-term issue.
Christopher Nolan: Great. Thanks for the color, Bob.
Nicole Schaltenbrand: Next question.
Operator: Our next question is from Robert Dodd with Raymond James. Please proceed.
Robert Dodd: Hi, everyone, and congrats on the quarter. On the discussion of the pipeline, sounds obviously quite positive for this quarter. And you said activity surprising. How much is any of that actually kind of spillover from Q4? Or are these deals that kind of came to you with January launches, so to speak, with the expectation they'd always be a March deal? And then the kind of the second part to that question, sorry, Ronald, is what are you seeing in the very early stage? Do you expect that to remain robust kind of through the middle or a whole year? Or is this just kind of a surprising bump in March?
Bob Marcotte: 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, you know, 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, you know, have been in the works for probably three quarters now. So there's definitely probably half of that spillover are 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 trends in rates combined with better clarity in terms of certain industries is a positive. I mean, for example, you know, it just takes a while for, things like defense contracts or mint, you know, 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, you know, strong domestic growth, precision manufacturing, reshoring production capabilities, and are now getting around to the point of either acquiring businesses to achieve those objectives or investing in their own assets to expand.
So I would say carryover is meaningful, but there's a consistent build of domestic manufacturing for some of these private equity-owned businesses to capitalize on the reshoring trend that started last year.
Robert Dodd: Got it. Got it. I thank you for that color. One kind of sort of related. I think one of the issues you pointed out too for the unrealized depreciation what there was of it was, with shutdown impact. And, obviously, you've historically had, you know, been, you know, 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, you know, the number of government shutdowns is obviously up versus historic norms over the last couple of years.
And it does not have necessarily great confidence that we will not continue to see sporadic shutdowns at a greater cadence than we've seen in the past. So just is that kind of segment as appealing to you as it has been in the past given those kinds of risks?
Bob Marcotte: Robert, the situation that I referenced that shutdown was implicated or impacted was a very unique circumstance. Generally speaking, we do not do government contracts. 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, you know, 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. 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 stopped spending. That is not the usual, and that is not the norm for our business. And I do not think that's a permanent impairment of this company in any way, shape, or form.
Robert Dodd: Got it. Thank you. One last one, if I can. I mean, you know, EG'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 do not know if that's EG's again. But, you know, how's the workout on that progressing? I mean, just because the equity went down doesn't mean it's not on track, but, you know, any color there?
Bob Marcotte: 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 weak quarters. The other thing that I will note, and this may be indicative of other credit out there, things that are in border states or heavily Hispanic areas are facing significant downdraft associated with elevated ice activities. So population, spend, you know, 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 do not 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 offerings which we think are going to drive traffic in 2026. 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.
Robert Dodd: I always love the extra detail there. Thank you.
Bob Marcotte: Okay. Do we have any other questions?
Operator: Yes, we do. We have a question from Sean-Paul Aaron Adams with B. Riley Securities. Please proceed.
Sean-Paul Aaron Adams: Tagging off Eric's question, do you currently have an estimate of remaining SOFR exposure and basis points before the majority of your embedded floors kicked in? You talked about spreads not being a material impact for the quarter, so just trying to highlight the pure base rate exposure?
Bob Marcotte: I think our average what's our average floor? Probably one twenty?
Nicole Schaltenbrand: Yeah. Or one twenty.
Bob Marcotte: Yeah. So the right now, what was average SOFR last quarter is three ninety?
Nicole Schaltenbrand: Mhmm.
Bob Marcotte: Yeah. Average SOFR last quarter is roughly three ninety, so we're roughly running what is about three seventy today. Average floor is probably about one twenty-five. So we've got some, you know, material move potentially on that. You know, my comment before was you know, if you eliminate you know, if you just focus on what our average spread is, what our bank line spread is, is, and what our marginal management fee and costs are, you net down to about a $250 million plus or minus spread, ignoring the underlying base rate, And if we were to close $150 million a $100 million, that's 2 and a half million of incremental net interest margin.
If you look at our rate sensitivity, if we I think it's back at the tail end of our queue. 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 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 current economics and portfolio. So 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 you know, some of these sensitivities in mind and feel pretty confident that we've got the coverage that we need for the near term.
Sean-Paul Aaron Adams: Got it. Really appreciate the color. Thank you.
David Gladstone: Okay. Do we have one more question?
Operator: There are no further questions at this time.
David Gladstone: Oh, shucks. We like questions. So there'll be more next time. Thank you all. That's the end of this meeting.
Operator: Thank you. This will conclude today's conference. You may disconnect at this time and thank you for your participation.