• Fundings: $152 million, including six new portfolio companies.
• Exits and Prepayments: $165 million, with a large equity gain on ARA of $64 million.
• Investment Income: Declined by $1.8 million to $22 million.
• Weighted Average Portfolio Yield: 13.1%, a 90 basis point reduction.
• Interest and Financing Costs: Declined by $700,000 or 13%.
• Net Investment Income: Increased by $300,000 to $11.2 million.
• Net Realized Gains: $58 million for the quarter.
• Return on Equity (ROE): Just over 22% for the quarter.
• Non-Earning Investments: Totaled $52.7 million at cost or $28.5 million at fair value.
• Total Assets: $815 million, with $799 million in investments at fair value.
• Net Assets: Rose to $480 million, with NAV per share increasing to $21.51.
• Leverage: Declined to 70% of net assets.
• Monthly Distributions: $0.165 per common share, annual run rate of $1.98 per share.
• Distribution Yield: Approximately 7% based on a stock price of $28.09 per share.

• Warning! GuruFocus has detected 11 Warning Signs with GLAD.

Release Date: February 12, 2025

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

Positive Points

• Gladstone Capital Corp (NASDAQ:GLAD) reported strong fundings of $152 million, including six new portfolio companies, indicating robust investment activity.
• Net realized gains for the quarter were $58 million, contributing to a significant increase in net realized and unrealized gains, boosting the return on equity to over 22%.
• The company maintained a conservative leverage position with debt at 70% of NAV, providing flexibility for future growth and shareholder distributions.
• Gladstone Capital Corp (NASDAQ:GLAD) achieved a net investment income increase of $300,000 to $11.2 million, demonstrating effective cost management and deal origination.
• The company reported a 12% increase in NAV per share compared to December 2023, reflecting strong portfolio performance and appreciation.

Negative Points

• Investment income declined by $1.8 million to $22 million due to a reduction in the weighted average portfolio yield and a decline in average earning assets.
• The addition of a company to the non-earning investments list increased the total to $52.7 million at cost, representing 4% of assets at fair value.
• Interest and financing costs, although reduced, still reflect the impact of lower average line borrowings, indicating potential challenges in managing financing expenses.
• The company foreclosed on EGs, a regional QSR, indicating challenges in certain investments and the need for operational restructuring.
• The weighted average yield on the interest-bearing portfolio declined from 14% to 13.1%, reflecting a decrease in SOFR rates and potential pressure on income generation.

Q & A Highlights

Q: Bob, many BDCs avoid investing in restaurants due to underwriting challenges. What attracts you to this sector, and what do you look for in a restaurant deal before investing? A: Robert Marcotte, President: We look for a compelling business model with sustainable margins, a loyal customer base, and efficient labor models. We focus on restaurants with a payback period of three to four years and typically go in with leverage well under three turns. While we've had success, we don't plan to significantly increase our restaurant investments.

Q: With a lot of liquidity and the stock trading at a premium to NAV, would you consider investing in more liquid credits? A: Robert Marcotte, President: No, because our bank lines are not cheap, and the marginal return on equity would be low. We prefer investments where we can engage with management and sponsors, which is not possible with larger liquid credits.

Q: Can you provide insight into the outlook for Engineering Manufacturing Tech? A: Robert Marcotte, President: The company is highly automated with a diverse customer base. Despite losing a major customer, we're backfilling opportunities and expect strong performance in 2025. We're retooling sales efforts and capitalizing on market trends, maintaining reasonable cash flow and debt support.

Q: Regarding EGs, how long before it becomes income-producing again or gets liquidated? A: Robert Marcotte, President: We hope to resolve the situation in about six months, but it could be sooner.

Q: With robust activity levels, how long to reach 1:1 leverage, and what factors influence this? A: Robert Marcotte, President: Achieving 1:1 leverage depends on maintaining high origination levels and managing capital costs. We aim to preserve ROE by refinancing expensive liabilities and maintaining yield discipline. The goal is to increase leverage in the second half of the year if conditions allow.

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