Gladstone Capital (GLAD) Q1 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals mixed signals: while there are positive elements like a healthy deal pipeline and strategic debt refinancing, concerns arise from unrealized losses and the impact of government shutdowns. The Q&A session highlights cautious management responses and uncertainties in AI and data center trends. Despite some positive elements, the overall sentiment is tempered by challenges, leading to a neutral outlook.
Key Financial Performance
Fundings $99.1 million, including 2 new private equity-sponsored investments totaling $37.8 million and $61.3 million of additional advances to existing portfolio companies.
Net Originations $46.3 million for the quarter, as exits and prepayments declined to $52.8 million.
Interest Income $23.9 million, increased due to higher average earning assets despite a 30 basis point decline in average SOFR rates.
Net Investment Income $11.3 million, impacted by a $200,000 increase in interest and financing costs and a $600,000 rise in net management fees.
Net Realized Gains $300,000, driven by the exit of equity in Sokol, offsetting a $1.4 million write-off from note refinancing costs.
Unrealized Losses $5.3 million, concentrated in 3 investments affected by the government shutdown or senior management replacements.
PIK Income $2.3 million, representing 9.6% of interest income, with $2.8 million collected, reducing the accrued PIK balance.
Total Assets $923 million, primarily consisting of $903 million in investments at fair value and $20 million in cash and other assets.
Liabilities $445 million, increased by $20 million due to LLC borrowings for note repayments and net originations.
Net Assets $477 million, declined by $4.7 million, with NAV per share decreasing from $21.34 to $21.13.
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Operating Highlights
Pipeline of late-stage deals: The company has a robust pipeline of late-stage deals worth over $100 million, which is expected to offset recent repayments.
Investment in precision machining business: Funded an additional $6 million senior debt investment in a precision machining business.
Net originations: Net originations for the quarter were $46.3 million, driven by $99.1 million in fundings and $52.8 million in exits and prepayments.
Interest income: Interest income rose to $23.9 million, supported by an increase in average earning assets.
Net investment income: Net investment income for the quarter was $11.3 million.
Leverage position: Maintained a conservative leverage position with net debt at 93% of NAV.
Borrowing availability: Borrowing availability exceeds $150 million, sufficient to support near-term investment activities.
Focus on lower middle market: Attributed investment activity to the resilience of lower middle market deal flows and growth prospects within the existing portfolio.
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Risk or Challenges
Unrealized Losses: Unrealized losses rose to $5.3 million last quarter, concentrated in three investment positions impacted by the recent government shutdown or where senior management was replaced. This indicates potential challenges in recovering value from these investments.
Non-Earning Assets: The company has three non-earning asset debt investments with a cost basis of $28.8 million or $13.2 million at fair value, representing 1.6% of the portfolio. These assets are not generating income and could weigh on overall portfolio performance.
Decline in NAV: Net assets declined by $4.7 million, and NAV per share dropped from $21.34 to $21.13. This decline reflects valuation depreciation and could impact shareholder confidence.
Interest and Financing Costs: Interest and financing costs increased by $200,000 due to higher average bank borrowings and refinancing activities. This rise in costs could pressure net investment income if not offset by higher returns.
Leverage Position: Gross leverage rose to 93.3% of net assets, which, while described as conservative, could pose risks if market conditions deteriorate or if asset performance weakens.
Regulatory and Forward-Looking Risks: The company acknowledges uncertainties and risks outlined in its SEC filings, including forward-looking statements that may not materialize as expected, posing potential strategic and operational risks.
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Guidance & Outlook
Near-term investment opportunities: The company has a robust pipeline of late-stage deals exceeding $100 million, which are expected to offset recent repayments. This level of investment activity is attributed to the resilience of lower middle market deal flows and growth prospects within the existing portfolio.
Leverage and borrowing capacity: The company maintains a conservative leverage position with net debt at 93% of NAV. It has increased floating rate bank borrowings to align with asset rate sensitivity and reduce net funding costs. The current line of credit facility totals $365 million, with borrowing availability exceeding $150 million, sufficient to support near-term investment activities.
Interest rate and funding costs: Short-term interest rates are expected to ease, which will help reduce unused facility fees and net funding costs.
Dividend sustainability: The company aims to sustain shareholder dividends through net interest margins and growth in the investment portfolio. Monthly distributions for February and March are set at $0.15 per common share, with the Board meeting in April to determine future distributions.
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Shareholder Return Plan
Monthly Distributions: 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%.
Dividend Sustainability: The company has a strong balance sheet, ample bank lines, and capacity to grow its investment portfolio to deliver more dividends to shareholders and sustain the shareholders' dividends.
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Key Q&A
Q:During the prepared remarks, you mentioned increasing the usage of the revolver due to the floating rate function. Can you talk about the loans, the extent of floor usage, and how many are at their floors given the SOFR curve?
A:The majority of variable rate loans have floors, but they are not at those floors yet. As interest rates decline, interest income will also decline. The strategy is to rely more on floating rate debt. Additionally, savings from reduced line commitment fees (from $2.6 million last year to a $1 million run rate) will help mitigate the impact of lower rates.
Q:Are you seeing more opportunities for AI and data center-related investments, and how do you view this trend?
A:The company does not directly invest in data centers, as it is not a focus in the lower middle market. However, some spend from data center projects flows into the portfolio, such as bus bars and HVAC services. The company is cautious about the sustainability of this trend and does not rely significantly on it.
Q:What is driving the increase in PIK (payment-in-kind) over the past couple of quarters?
A:The increase in PIK is due to two credits: one undergoing business scaling and working capital consumption, and another liquidating an underperforming business segment. The company monitors EBITDA and enterprise value closely and expects to recoup PIK exposure. The strategy includes working with credits to recover and transition them to cash-paying.
Q:Why did the diluted share count change significantly quarter-over-quarter?
A:The change is due to the accounting requirement for calculating diluted shares, primarily impacted by convertible debt. The diluted share count will remain elevated as long as convertible debt exists. The conversion price will only change with additional supplemental distributions, but this is expected to be inconsequential.
Q:Have there been any updates on regulatory structures affecting BDCs, specifically the AFFE rule?
A:The AFFE rule has been under discussion for years, but there is no concrete update. Even if changes occur, it would take years to implement and affect indexes. The company does not expect short-term changes but acknowledges potential long-term benefits for liquidity and investor base expansion.
Q:Is the current pipeline activity a spillover from Q4, or are these new deals? Do you expect robust activity throughout the year?
A:About half of the pipeline activity is spillover from Q4, with some deals in progress for three quarters. The rest is driven by trends like reshoring and domestic manufacturing growth. The company expects consistent activity due to these trends, though some deals take time due to diligence and industry clarity.
Q:Has your appetite for businesses working with the federal government changed given the increased frequency of government shutdowns?
A:The company generally avoids short-term government services contracts and focuses on long-term manufacturing projects. A recent disruption due to a government shutdown affected a dredging company in the portfolio, but this is not typical. The company does not see shutdowns as a permanent risk to its business.
Q:Can you provide an update on Eegee's and its equity stress?
A:Eegee's faces seasonal challenges and headwinds from elevated ICE activities in border states. Management is addressing these issues by evolving the business and launching new offerings. While progress is being made, the company continues to work through unanticipated challenges.
Q:What is the remaining SOFR exposure and basis points before embedded floors kick in?
A:The average floor is about 1.20%, and the average SOFR last quarter was 3.90%. With SOFR currently at 3.70%, there is room before floors are reached. The company has strategies to offset rate declines, including savings from commitment fees and other measures to support the dividend.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer on the AFFE rule updates, stating that discussions have been ongoing for years without concrete outcomes. They also used vague language regarding the long-term impact of government shutdowns and the sustainability of trends in AI and data center-related investments.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Choice amount
Director Investor
Gladstone Capital
Instructions conference
Investor Relations
LLC borrowing
Liabilities increase
Marcotte highlight
NAV rate
Nicole Schaltenbrand
PIK balance
PIK period
Relations ESG
Sokol write
Vet Choice
activity Nicole
activity resilience
addition fee
advance portfolio
amount prepayment
asset NAV
asset debt
asset distribution
balance addition
balance respect
borrowing asset
borrowing note
closing fee
company Exits
cost end
credit investment
date debt
deal closing
deal diligence
deal prospect
debt note
funding
income interest
investment activity
term investment
GLAD Transcript
Gladstone Capital (GLAD) Q1 2026 Earnings Call Transcript
Unknown2-5
The earnings call reveals mixed signals: while there are positive elements like a healthy deal pipeline and strategic debt refinancing, concerns arise from unrealized losses and the impact of government shutdowns. The Q&A session highlights cautious management responses and uncertainties in AI and data center trends. Despite some positive elements, the overall sentiment is tempered by challenges, leading to a neutral outlook.
Gladstone Capital (GLAD) Q4 2025 Earnings Call Transcript
Unknown11-18
The earnings call presents mixed signals: strong portfolio growth and high ROE are offset by increased financing costs and net realized losses. The Q&A reveals optimism about pipeline growth and asset quality, but unclear responses about dividend cuts and portfolio challenges raise concerns. The company's strategic focus on growth and leverage management is positive, but the lack of specific guidance and dividend reduction temper market enthusiasm. Given these factors, the stock price reaction is likely to be neutral.
Gladstone Capital (GLAD) Q3 2025 Earnings Call Transcript
Unknown8-5
The earnings call reveals a mixed picture: While the company maintains a healthy pipeline and conservative leverage, there are concerns about economic uncertainties and elevated leverage ratios. The Q&A section highlights management's cautious stance on future M&A activity and lack of clarity on addressing upcoming debt maturities. Despite a slight increase in portfolio yield, net assets declined. These factors, combined with a flat net investment income, suggest limited short-term stock price movement, resulting in a neutral sentiment rating.
Earnings call transcript: Gladstone Capital Q1 2025 sees stable income
Unknown5-7
The earnings call presents a mixed picture: strong ROE and shareholder distribution commitment are positives, but net originations are negative, and NAV per share has decreased slightly. The Q&A reveals confidence in domestic operations and limited government contract exposure, but management's vague responses on tariffs and economic impacts introduce uncertainty. The lack of strong guidance and the need to increase leverage over several quarters suggest a cautious outlook. Overall, the sentiment is neutral, with no major catalysts for significant stock price movement in the short term.
GLAD Report
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