Release Date: November 14, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Gladstone Capital Corp (NASDAQ:GLAD) reported a significant increase in realized and unrealized gains on the portfolio, amounting to $21 million, which boosted the return on equity to 21.5% for the last 12 months.
• The company successfully exited its investment in AR A, resulting in a substantial equity gain and plans to make a supplemental distribution of 40 per share in December.
• Net investment income for the year rose by 12% to $46.1 million, providing ample coverage for the current common distribution.
• The company maintains a conservative leverage position at 73% of NAV, with ample capacity in its bank facility to support future growth.
• Gladstone Capital Corp (NASDAQ:GLAD) continues to see a healthy level of attractive lower middle market financing opportunities, indicating potential for future growth and investment returns.

Negative Points

• Total investment income declined by $2 million or 8% to $23.7 million for the quarter, primarily due to a decrease in other income.
• Net investment income for the quarter decreased by $1.4 million or 12% to $11 million, reflecting a decline in earnings.
• The company faces challenges with certain investments, such as DK I and EGS, which are underperforming and require increased management attention.
• There is potential pressure from declining SOFR rates, which could impact future earnings and distributions.
• The issuance of common equity despite an underlevered balance sheet and near distribution coverage raises concerns about capital management and future financial strategy.

Q & A Highlights

• Warning! GuruFocus has detected 6 Warning Sign with GLAD.

Q: Can you help us understand why you have issued common equity at the same time that the balance sheet is already underlevered and NII is near the distribution, especially with the added pressure of declining SOFR? A: The issuance was a modest move to counter a significant concentrated event. We wanted to avoid being pressured on the balance sheet due to a large liquidity event on the horizon. The equity appreciation was largely from a single investment, and we wanted to ensure we weren't short if that valuation was impaired. - Respondent: Unidentified_4

Q: Are you still looking for balance sheet leverage, debt to equity of 0.9 to 1.25, or have you changed that target range? A: We will move back up to that range. There were times last quarter when the marginal funding cost of equity was below that of debt, which doesn't push us to increase leverage as much as before. - Respondent: Unidentified_4

Q: Are there any success fees receivable from the Antenna Research exit? A: No, it was a straight-up equity gain. Exit fees are not a material factor in our investment activity. - Respondent: Unidentified_4

Q: What's your outlook for DK I and EGS, which seems to be struggling? A: Optimism for DK I has diminished, and we're working on the best exit strategy. For EGS, we're elevating engagement to realize the investment, including potential sales and cost cuts. - Respondent: Unidentified_4

Q: Have you considered including preferred dividends above the line for calculating pre-incentive fee income? A: It's an accounting concept, and while we think about it for other modeling, accounting rules dictate its classification on the balance sheet and income statement. - Respondent: Unidentified_5

Q: Can you give an indication of the scale of portfolio activity in the December quarter? A: The deals currently in queue will exceed cash proceeds. We expect the most active quarter of potential turnover, aiming to be flat or slightly positive in terms of portfolio scale. - Respondent: Unidentified_4

Q: Are you considering working with commercial banks on a blending solution for financing? A: Yes, we consider first-in-last-out structures and asset-backed solutions with commercial banks, especially as rates compress. This helps us deploy capital cost-effectively. - Respondent: Unidentified_4

Q: Is there a concern about being overexposed to a single vintage due to high activity in one quarter? A: Vintage is not a major factor; we focus on growth and sector diversity. We monitor sectors closely and are selective, closing less than 5% of deals we evaluate. - Respondent: Unidentified_4

For the complete transcript of the earnings call, please refer to the full earnings call transcript.