Gladstone Capital Q3 2024 Earnings Report

Gladstone Capital EPS Results

• Actual EPS: $0.57
• Consensus EPS: $0.53
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: N/A

Gladstone Capital Revenue Results

• Actual Revenue: $25.69 million
• Expected Revenue: $24.69 million
• Beat/Miss: Beat by +$1.00 million
• YoY Revenue Growth: N/A

Gladstone Capital Announcement Details

• Quarter: Q3 2024
• Date: 8/7/2024
• Time: N/A
• Conference Call Date: Thursday, August 8, 2024
• Conference Call Time: 8:30AM ET

Gladstone Capital (NASDAQ:GLAD) is a business development company specializing in lower middle market, growth capital, add on acquisitions, change of control, buy & build strategies, debt refinancing, debt investments in senior term loans, revolving loans, secured first and second lien term loans, senior subordinated loans, unitranche loans, junior subordinated loans, and mezzanine loans and equity investments in the form of common stock, preferred stock, limited liability company interests, or warrants. It operates as a business development company. The fund also makes private equity investments in acquisitions, buyouts and recapitalizations, and refinancing existing debts. It targets small and medium-sized companies in United States. It is industry agnostic and seeks to invest in companies engaged in the business services, light and specialty manufacturing, niche industrial products and services, specialty consumer products and services, energy services, transportation and logistics, healthcare and education services, specialty chemicals, media and communications and aerospace and defense. The fund seeks to invest between $7 million and $30 million in companies that have between $20 million and $150 million in sales and EBITDA between $3 million and $25 million. It prefers to acquire minority stakes. It seeks to exit its investments through strategic acquisitions by other industry participants or financial buyers, initial public offerings of common stock, or other capital market transactions.

Gladstone Capital Q3 2024 Earnings Call Transcript

[Operator]

Greetings, and welcome to the Glad Capital Corporation Third Quarter Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Gladstone.

[Operator]

Thank you, Mr. Gladstone. You may begin.

[Speaker 1]

Thank you, Kate. It's a nice introduction and good morning and hello to everyone out there. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital for the quarter ending June 30, 2024. Thank you all for calling in. We're always happy to talk with our shareholders and the analysts who follow us and welcome the opportunity to provide an update.

[Speaker 1]

We now will hear from our General Counsel, Michael LiCalsi, who will make a statement regarding some certain forward looking statements. Michael?

[Speaker 2]

Thanks, David. Good morning, everybody. Today's report may include forward looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all risk factors in our Forms 10Q, 10 ks and other documents that we file with the SEC.

[Speaker 2]

You can find them on the Investors page of our website, www.gladstonecapital.com, where you can also sign up for our e mail notification service. You can also find them on the SEC's website, which is www.sec.gov. We undertake no obligation to publicly update or revise any of these forward looking statements, whether as a result of new information, future events or otherwise, except as required by law. Today's call is an overview of our results, so we ask that you review our press release and Form 10 Q, both issued yesterday for more detailed information. Again, you can find them on the Investors page of our website.

[Speaker 2]

With that, I'll turn it back to Gladstone Capital's President, Bob Marcotte.

[Speaker 3]

Thank you, Michael. Good morning and thank you all for dialing in this morning. I'll cover the highlights for last quarter and then turn the call over to Nicole Solgenbrand to review the details of our financial results for the period. Beginning with our last quarter results, fundings last quarter were modest at $46,000,000 as new deal buyout activity was building over the period and several transactions carried over to the current quarter. We did close 2 new platform investments, which represented 2 thirds of the originations with add ons to our existing portfolio representing the balance.

[Speaker 3]

Consistent with the spike in refinancing activity for larger middle market credits, 2 of our larger investments in Giving Health and Pan Sophic refinanced, lifting the total prepayments and amortization for the quarter to $86,000,000 so net originations were negative at 40,000,000 dollars Short term SOFA rates were unchanged, so the weighted average yield on our investment portfolio is largely unchanged at 13.9%. Average earning assets for the period declined slightly, resulting in 2.2% decline in total interest income to $23,200,000 for the quarter. However, other income rose to $2,500,000 with the an increase in prepayment fees and dividends, which lifted total investment income by $1,700,000 to $25,700,000 Interest costs declined slightly on reduced line borrowings and net management fees rose with the increased investment income rose by $1,600,000 or 15 percent to $12,400,000 Net realized and unrealized gains on the portfolio totaled $6,700,000 which lifted our ROE to just under 18% for the quarter in the last 12 months. With respect to the portfolio, our portfolio continues to perform well with senior debt representing 72% of the portfolio and our 3 non earning investments representing $26,400,000 at cost or $13,900,000 or 2.1 percent of assets at fair value. Appreciation for the quarter of $6,700,000 was led by $3,300,000 of realized appreciation.

[Speaker 3]

The unrealized appreciation of our position in ARA, which was partially offset by the depreciation of several smaller manufacturing, consumer and service related businesses. Regarding our near term outlook, I'd like to leave with a couple of comments. The majority of our investments are proprietary originations of lower middle market buyouts often associated with the business founder transition or first institutional capital rates and are not driven by refinancing activities. While several more mature and larger investment positions in the portfolio did take advantage of credit market conditions and lower spreads, we continue to see a healthy level of attractive lower middle market financing opportunities, typically with under $10,000,000 of EBITDA. We entered the current quarter with a significant pipeline of awarded and high probability transactions, which we expect will support the resumption of our asset growth in the near term.

[Speaker 3]

In addition to recycling some of our matured investments, we expect to continue to benefit from our incumbent position as the originator, lead lender and in some cases equity co investor in a variety of smaller growth oriented businesses as they look to grow through acquisition or expansion and support the appreciation of to support the appreciation of their equity position. We ended the quarter with a conservative leverage position at 77% of NAV and have increased the size of our bank credit facility to $269,000,000 to support the growth of our earning assets and fee income to continue to support our shareholder distributions in the coming year. And now I'd like to turn the call over to Nicole Schultenbrand, the CFO for Gladstone Capital to provide some more details on the fund's financial performance for the quarter. Nicole?

[Speaker 4]

Thanks, Bob. Good morning, everyone. During the June quarter, total interest income declined $500,000 or 2.2 percent to 23,200,000 dollars with the decline in average earning assets as the weighted average yield on our interest bearing portfolio was largely unchanged at 13.9%. Investment portfolio weighted average balance declined to $665,000,000 which was down $16,000,000 or 2.3% compared to the prior quarter. Other income of $2,500,000 and total investment income rose $1,700,000 or 7.1 percent to $25,700,000 for the quarter.

[Speaker 4]

Total expenses rose $100,000 quarter over quarter as net management fees increased $300,000 with higher investment income and interest expenses declined $200,000 from reduced bank borrowings. Net investment income for the quarter ended June 30 was $12,400,000 which was an increase of $1,600,000 compared to the prior quarter or 0 point in net assets resulting from operations was $19,100,000 or $0.88 per share for the quarter ended June 30 as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of June 30, total assets declined to $775,000,000 consisting of $758,000,000 in investments at fair value and $17,000,000 in cash and other assets. Viabilities declined with net originations to $330,000,000 as of June 30 and consisted As of June 30, net assets rose to $439,000,000 dollars As of June 30, net assets rose to $439,000,000 from the prior quarter end with investment appreciation on distributed earnings.

[Speaker 4]

NAV rose 2% from $19.80 per share as of March 31, which is retroactively adjusted for the 1 for 2 reverse stock split to $20.18 per share as of June 30. Our leverage as of June 30 declined to 77 percent of net assets. Subsequent to the end of the quarter, a $5,000,000 syndicated loan paid off at par and we funded an additional $6,500,000 senior first lien investment to an existing portfolio company. As far as distribution, we will pay distributions for July, August September of $0.165 per common share, which is an annual run rate of $1.98 per share. The Board will meet again in October to determine the monthly distribution to common stockholders for the following quarter.

[Speaker 4]

At the current distribution rate for our common stock and with the common stock price at about $22.28 per share yesterday, the distribution run rate is now producing a yield of about 8.9%. And now I'll turn it back to David to continue.

[Speaker 1]

Well, thank you, Nicole. Bob, Nicole, Michael, you all did a great of informing our shareholders and the analysts that follow the company with information that should be good for them. In summary, another solid quarter for Gladstone Capital, including net investment income rose by 15% to $0.57 per share and provided ample coverage of our current common distribution, so in good shape there and running at 8.9 Strong portfolio performance generated net portfolio appreciation, which increased net asset value by $0.38 per share from last quarter and $1.64 or 9% from June 2023. For the past year, Gladstone Capital achieved returns on equity of 18%, which compared favorably to the BDC peer group we follow. Company is also very well positioned for the coming year as the portfolio is in good shape, modest leverage and a strong balance sheet to support further growth of the lower middle market investment portfolios that we look at.

[Speaker 1]

In summary, the company continues to stick with the strategy of investing in growth oriented lower middle market businesses with good management. Many of these investments are in support of midsized private equity funds that are looking for experienced partners to support their acquisition and grow the business in which they've made a strong investment. This gives the opportunity to make attractive and interest paying loans and to support the ongoing commitments to pay cash distributions to our shareholders. And now, operator, Cat, if you'll come on and let's see if we have some questions from the folks out there.

[Operator]

Certainly. We will now be conducting a question and answer session. Question comes from Robert Dodd from Raymond James. Please proceed.

[Speaker 5]

Good morning and congratulations on the quarter. Last quarter you told us you expected repayment activity to pick up in the second half and you were definitely right. Do you expect that to how much of what you expected to be elevated repayments has actually already happened now? I mean this past quarter was extremely elevated. Or do you expect that to do you expect it to moderate a little bit from that level or remain elevated for the rest of the year?

[Speaker 5]

And I think you gave indications you expect the portfolio to grow on a net basis, but any additional color there?

[Speaker 3]

Good morning, Robert. Good morning. I think it will moderate slightly. Clearly, anybody who had access to the bank market and the spreads that were out there jumped. I will say that there are several on the queue, but it has less to do with refinancing activity and has more to do with companies that are long in their hold cycle as much of the private equity market is.

[Speaker 3]

And so there are a number of our companies that are testing the waters for potential sale transactions. The predictability of those sale transactions is obviously less certain than a refinancing activity. We are tracking a handful of companies that are at various stages of offering. I would expect some of our larger positions to continue to come forward, but probably the high watermark was established last quarter. So I think there will be continued activity, but it may not be at quite the same pace as we've experienced recently.

[Speaker 3]

And I think the other thing to keep in mind is, as I alluded to in my comments, the sale activity will obviously then create more investment activity for us given the general buyout activity. So the Q1 was dominated because it was refinancing and not buyouts As we go forward with the buyout activity and potential repayments, we should expect a reasonable position in new investment opportunities. So the 2 should be more in lockstep as we go out over the balance of the year. Now I will say one last comment there. Mature portfolio companies that have grown that are well north of the $10,000,000 where we typically enter a company, they're going to be larger deals.

[Speaker 3]

And so we may see some of the larger companies prepay at maturity levels, whereas we'll be investing in new deals at a lower point in their growth cycle. So it will be a bit more of an accelerated pace to offset some of those larger roll offs, but the activity should be more better more closely aligned as we go out over the balance of the year.

[Speaker 5]

Got it. Thank you. Very clear. Then just one more, if I could, on credit. You put on some trenches of B&T, which I think is a wireless cellular network engineering firm, which is obviously you've given us some color earlier in the year that you were seeing headwinds in consumer facing businesses, etcetera.

[Speaker 5]

And wireless engineering obviously is very much a business services. So can you give us any color on was that idiosyncratic to the company, obviously, but what your level of optimism or pessimism is for that business, which is not really my impression or at least, is it's not consumer facing and maybe the headwinds are different?

[Speaker 3]

Yes. The challenge associated with a business like that is it's a CapEx business. So the limited number of customers out there are highly driven by CapEx. And there's 2 factors, I think, that are driving CapEx these days. 1, the interest rates are relatively high.

[Speaker 3]

So for companies in that sector, incurring additional investment activity or funding CapEx given the pressure on general cash flows is certainly challenging. The second is the consumer market and the net adds in the wireless business are somewhat more modest. I do think there is a positive in the business in that there continues to be a reasonably elevated level of spend on fiber, which is somewhat surprising. Just Internet and infrastructure spend that in some ways is supported by Washington's infrastructure bills is positive, but it's more fragmented. I would tend to say that business is going to continue to face some headwinds net net of all those pressures.

[Speaker 3]

So it's a CapEx cycle business. We generally steer clear of CapEx cycle businesses. The expertise that they have and the long term view of wireless continues to grow, but it's a concentrated customer base with significant CapEx headwinds that probably make us a little bit less optimistic on where that business is going to go. But we are continuing to focus on it and we have brought in some additional resources to try to steer that in the right direction to capitalize on their competitive advantages. So if

[Speaker 5]

I can dig in, it sounds like that it's a cycle issue. It's not like loss of a major customer or anything like that.

[Speaker 3]

So it's more like that. No, they're just they're battling quarter to quarter for awards of business. And depending on how big how active people are, some people will underprice that business to keep working and that's not a particularly positive way to grow a business. So the pricing discipline and the volume of CapEx opportunities affect the revenue line for that service oriented business.

[Speaker 5]

Got it. Thank you. Really appreciate that.

[Speaker 3]

Thanks for calling in.

[Speaker 5]

Other questions?

[Operator]

I suppose not. So this concludes our question and answer session. I would like to turn the floor back over to David Gladstone for closing comments.

[Speaker 1]

Well, it's disappointing that we don't have more questions. We like it when you ask a lot of questions and we can improvise off of that and give you more information about the companies that we've backed. But I guess we're going to have to wait until next quarter since nobody is asking questions this quarter except Robert. That's the end of this call. Thank you.