Gladstone Investment Q2 2026 Earnings Call Transcript

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November 5, 2025

Key Takeaways

  • Positive Sentiment: Adjusted net investment income was $0.24 per share, which management says is sufficient to cover the maintained monthly distribution of $0.08 per share and current supplemental plans.
  • Positive Sentiment: Balance sheet and liquidity remain strong with $174 million available on the credit facility, ~$31.1 million of net ATM proceeds this quarter, and total assets of $1.1 billion, supporting continued buyout activity.
  • Negative Sentiment: Reported net investment income fell to $4.3 million from $9.1 million, primarily due to a $5.1 million increase in capital gains–based incentive fees and higher interest expense timing, which compressed GAAP earnings.
  • Neutral Sentiment: The company reduced non-accruals from four to three after restructuring JR Hobbs, which produced a $29.9 million realized loss but converted into a $20 million term loan now paying interest; non-accruals represent ~3.9% of cost (1.7% of fair value).
AI Generated. May Contain Errors.
Earnings Conference Call
Gladstone Investment Q2 2026
00:00 / 00:00

There are 9 speakers on the call.

Speaker 6

Greetings and welcome to Gladstone Investment Corporation's second quarter earnings conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Helmold, General Counsel. Please go ahead.

Speaker 7

Thank you, Donna and good morning. This is Eric Helmold, General Counsel of Gladstone Investment. This is the earnings conference call for the second quarter ended September 30, 2025, of the 2026 fiscal year for shareholders and analysts of Gladstone Investment. Listed on NASDAQ under trading symbols GAIN for the common stock, GAIN N, GAIN Z, GAIN L, and GAIN I for our four different registered notes. Thank you for all calling in. We're happy to provide updates to our shareholders and analysts and provide our view of the current business environment. Two goals for our call today are to help you understand what has happened and give you our current view of the future. Now we'll hear from Catherine Gerkus, our Director of Investor Relations and CSP, to provide a brief disclosure regarding certain regulatory matters concerning this call and report.

Speaker 2

Good morning, everyone. Today's call may include forward-looking statements, which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the investors' page of our website, gladstoneinvestment.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our email notification service and find information on how to contact our investor relations department. We are also on X at gladstonecomps as well as Facebook and LinkedIn. Keyword for both is the Gladstone Companies.

Speaker 2

Now I will turn the call over to David Dullum, President of Gladstone Investment.

Speaker 4

Thanks, Catherine, and good morning to everybody. Also, thank you for being on the call. I am again pleased to report that our second quarter of fiscal 2026, we experienced strong performance. This was driven by the continued growth in the portfolio and the results also of our existing portfolio companies. We ended the second quarter with adjusted NII of $0.24 per share, which is sufficient to cover our monthly distributions to shareholders, and our total assets of $1.1 billion are up $90 million from the end of the prior quarter. Now, this increased quarter-over-quarter in assets resulted from one new buyout investment during the current quarter, along with appreciation of our investment portfolio, I should say net appreciation. With the new buyout investment, we currently have 28 operating companies and a very healthy pipeline for new acquisitions, which we will discuss a little further.

Speaker 4

To date and through the first six months of fiscal year 2026, we have invested approximately $130 million in three new portfolio companies, and this compares now to a total of $221 million, which we invested in all of fiscal year 2025. We are at a pretty good run rate relative to where we were in fiscal 2025. These new investments, they are in line with our strategy to continue growing our portfolio through the acquisition of operating companies at what we deem to be attractive valuations. As usual, these acquisitions are made with a combination of our equity and debt, where we look to generate capital gains on the equity when we exit the business and the operating income from the debt securities that we hold for the monthly distributions to shareholders.

Speaker 4

From our operating income, we were able to maintain our monthly distribution to shareholders of $0.08 per share or $0.96 per share on an annual basis. We have earned our ability to distribute from our income that we generated. Now, for perspective, excuse me, since inception in 2005 and through this period in September 30, 2025, we have invested in 65 buyout portfolio companies for an aggregate of approximately $2.2 billion. We exited 33 of these companies. This leaves total investments currently valued at approximately $1.1 billion, while we generated approximately $335 million in net realized gains and $45 million in other income on exit over that period of time. Now, let's turn into the outlook, which is probably the most important part. Where are we today and what do we see going forward?

Speaker 4

First of all, there is very good liquidity in the M&A market, which is where we compete, which does create this very competitive environment. In trying to make new acquisitions at these reasonable valuations that I referenced. In addition, we are in a bit of uncertainty, obviously, with the added variable tariffs, potentially slowing of the economy, which obviously will impact the analysis when we evaluate new opportunities. It is not that easy, but we believe we have a pretty good handle on these variables and take them very carefully, again, coming back to our desire to have reasonable valuations on these companies. Now, not every business is affected in the same manner, which then both creates opportunity and obviously, again, adds to the uncertainty. We seem to be able to compete effectively for acquisitions that fit our model. As we mentioned earlier, we have been active.

Speaker 4

We closed on three new investments during the first six months of the fiscal year. We are in the final stages of diligence on some new opportunities and in review and negotiation of a number of other new opportunities. Our activity level is strong. We're very active in the marketplace. As a result of this, this activity keeps me somewhat optimistic for closing on some new buyouts during the balance of our fiscal year. As to our existing portfolio, we have a few companies that are consumer-focused, and while they've experienced very good results to date, we are cautious due to supply chain disruption, tariff costs on the ultimate consumer prices, which may have an effect on the actual demand and the margin impact on those particular companies.

Speaker 4

We continue to work with all of our companies in evaluating supply chain alternatives and the production strategies as we continue to navigate the current environment. As I've mentioned over the past years, as a group, we're very proactive in working with our businesses from an operating perspective as well. We feel pretty good about where we are in this. In summing up the quarter and looking forward to the rest of the fiscal year, our current portfolio is in good shape. We have a strong and liquid balance sheet, a good level of buyout activity with the prospect of continued good earnings and distributions over the next year while we navigate the challenges of an uncertain economic landscape. With that, I'm going to turn it over to Taylor Ritchie, our CFO, to provide us with some more direct information. Taylor?

Speaker 1

Thank you, Dave. Good morning, everyone. Looking at our operating performance for the second quarter, we generated total investment income of $25.3 million, up from $23.5 million in the prior quarter. The increase was primarily driven by an additional $1 million of interest income resulting from the continued growth of our debt investment portfolio. The weighted average yield on our debt investments decreased from 14.1% to 13.4% during the quarter. However, after adjusting for the collection of past due interest income from investments that had previously been on non-accrual status, our portfolio's weighted average yield increased modestly from 13.1% to 13.2%. This improvement affects our recent buyout debt investments, which generally include interest rate floors in the 13%-13.5% range. Excluding non-accrual investments, the weighted average interest rate floor of our current debt portfolio was 12% as of September 30th.

Speaker 1

We believe these elevated interest rate floors position us well to mitigate potential compression in net interest income in the event of future declines in Silver. Additionally, we experienced a $0.7 million increase in dividend and success fee income, the timing of which can be variable. Net expenses for the quarter were $21 million, up from $14.5 million. The increase was primarily due to the increase in incentive fees, which included a $5.1 million increase in capital gains-based incentive fees, as well as a $0.3 million increase in income-based incentive fees. Interest expense increased in the current quarter due to the timing of borrowings for new investment activity from both the current and prior quarter, partially offset by our ATM sales in the current quarter. This resulted in net investment income of $4.3 million compared to $9.1 million in the prior quarter.

Speaker 1

Overall, portfolio company valuations in the aggregate were up $54.5 million. The increase was a result of both the net unrealized appreciation of $35.3 million and $19.1 million of reversal and unrealized appreciation from our restructuring of our investment in JR Hobbs. The unrealized appreciation was driven by increased performance at some of our portfolio companies, partially offset by lower valuation multiples across the portfolio and decreased performance at some of our other portfolio companies. Adjusted net investment income, which represents net investment income excluding any accrued or reversed capital gains-based incentive fees, was $9.2 million or $0.24 per share compared to $8.9 million or $0.24 per share in the prior quarter.

Speaker 1

We believe that adjusted net investment income remains a meaningful measure of our ongoing performance as it removes the impact of the capital gains-based incentive fee, which is an expense recorded under US GAAP each quarter but is not yet contractually due. During the quarter, we reduced the number of portfolio companies on non-accrual status from four to three. This reduction reflects the restructuring of our debt investments in JR Hobbs, which resulted in a $29.9 million realized loss while establishing a new $20 million term loan that is now paying interest. We are confident in the management team in place at JR Hobbs and believe that the restructuring will position the company for long-term success. Despite continued macroeconomic uncertainty, we do not see any broad-based credit concerns across the portfolio.

Speaker 1

We continue to stay closely engaged with the three companies currently on non-accrual, working alongside their management teams to support efforts to return to accrual status or pursuing exits where appropriate. Following JR Hobbs' return to accrual status, our non-accrual investments represent 3.9% of our total portfolio at cost and 1.7% at fair value. Our NAV increased to $13.53 per share compared to $12.99 per share at the end of the prior quarter. The increase was primarily a result of $1.42 per share of net unrealized appreciation, $0.11 per share of net investment income, and $0.06 of accretion from our issuing of shares on our ATM at prices in excess of NAV. These increases were partially offset by $0.78 per share of realized losses and $0.24 per share of distributions to common shareholders.

Speaker 1

Looking at our balance sheet, we believe that maintaining strong liquidity and financial flexibility is essential to supporting and growing our portfolio. As of yesterday's release, we had $174 million in availability under our credit facility. In addition, we raised approximately $31.1 million in net proceeds through our common stock ATM program during the quarter, and we intend to continue utilizing the program while pricing remains accretive to NAV. Looking ahead, we expect to access both the equity and debt markets to support what continues to be a healthy pipeline of new buyout opportunities and to refinance upcoming debt maturities. Overall, our leverage remains in a strong position with an asset coverage ratio as of September 30 of 193%, providing what we believe to be ample cushion to acquire a 150% coverage ratio.

Speaker 1

Focusing on our distributions to shareholders, we ended the prior fiscal year with $55.3 million or $1.50 per share in spillover, sufficient to cover our current monthly distribution of $0.08 per share for an annual run rate of $0.96 per share, as well as the $0.54 per share supplemental distribution paid in June. We will seek to continue paying future supplemental distributions as we recognize realized capital gains on the equity portion of future exits. Using the monthly distribution run rate of $0.96 per share per year and the $0.54 per share in supplemental distributions paid in the current fiscal year, our aggregate estimated fiscal year distributions would yield about 10.9% using yesterday's closing price of $13.79. This covers my part of today's call. I'll now hand it back over to David Gladstone to wrap us up.

Speaker 3

Thank you very much, Taylor. It's nice for you and Dave and Catherine. Good information for our shareholders. This call and the Form 10-Q we filed should bring us up to date for everyone that follows us. The team has reported solid results for the quarter ending September 30, 2025, including new investment activity. Improvements in non-accrual balances, that's a good one to get out of the way, and a strong liquidity position to grow the portfolio through the rest of the fiscal year, which will end on the next quarter. We believe that Gladstone Investment is an attractive investment for investors seeking continuous monthly distributions and supplemental distributions from potential capital gains and other income that we have. The team hopes to continue to show you a strong return on your investment in our fund.

Speaker 3

Why don't we slow down now and have some questions from our analyst and other shareholders? Operator, if you'll please come on and ask some questions.

Speaker 6

Certainly. The floor is now open for questions. If you would like to ask a question, please press Star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the Star keys. Again, that is Star 1 to register a question at this time. Our first question is coming from Mickey Schleien of Clear Street. Please go ahead.

Speaker 6

Yes. Good morning, everyone. Taylor, in your remarks, you mentioned that the net unrealized appreciation, excluding the Hobbs reversal, was due to some companies performing well. Could you give us a sense of which sectors are the strongest in the portfolio and what sectors you're seeing the most challenges?

Speaker 4

Hey, Mickey. It's Dave. Taylor.

Speaker 4

Hey, Dave.

Speaker 4

Sort of pointed at me and said, "Hey, maybe you should take that question." So I'll try.

Speaker 4

That's fine.

Speaker 4

He can jump in. Frankly, it is really truthfully across the board. It is not like a couple of our consumer-oriented companies. We are seeing not only a slight change downwards in multiples in general, and one or two that are slightly down in EBITDA, which, of course, combines, where again, these are not huge, frankly, unrealized valuation decreases are all in line, relatively speaking. I would say in that, we have got a couple that are somewhat related to the government sector stuff where there has been some slowdown, if you will, or pushing backwards on some of the activity, clearly because of the shutdown, etc., but not anything dramatic. The business is all performing really well. Truly, I cannot give you one sector that I would say is performing worse, let us say, than any others.

Speaker 4

The oil and gas or energy sector, we've got a couple of pretty good holdings there. They're doing quite well. We've seen multiples pretty much across the board are actually down. It's really more functional where EBITDA on any one of the individual companies is actually up, which is combined to give the sort of unrealized appreciation aspect of it. The short answer is, relatively speaking, it's pretty broad spread.

Speaker 4

Dave, I was.

Speaker 4

Yeah. I'm sorry. Go ahead, Taylor.

Speaker 1

Sorry. I was just going to add in, if you look at the top three portfolio companies moving up from the quarter, they spread all three of our kind of traditional sectors between SFEG, E3, and Schilling. We are seeing it kind of across the board.

Speaker 1

That's helpful. Thanks, Taylor. Dave, you mentioned the government shutdown, which is obviously a new development since the last earnings call and since your investor day in Utah. Could you give us a little more color on how that's impacting the portfolio and which companies are most exposed to that?

Speaker 4

The ones that would be most exposed are those that are where we have direct involvement with. Services, products related, obviously, to military and so on. Again, fundamentally, they're all doing well. I would say it's less of an issue now. We went through a period where we were concerned, let's use that word carefully, on maybe pushing back of demand because of the uncertainty from the government, not that the fundamentals or what we needed to do or supply were in question. It was really more whether something might get funded or not. What we learned, actually, and what's occurred is it really has not been an issue for our specific portfolio company. It is just something we keep an eye on. Again, it had an impact earlier in the year, but it, frankly, now seems to be smoothing out.

Speaker 4

No, I wouldn't want to highlight any one particular of our companies that has got an issue with that because that would be misleading.

Speaker 4

Thanks for that, Dave. My last question. Hobbs had been an issue for a long time, so it's good to see the restructuring. I noticed you cut your investment in Hobbs by about half. Did another investor get involved, whether another sponsor or another lender? How would you describe that company's outlook now?

Speaker 4

Yeah. No. So we are the only continuing investor. As we mentioned, we did a restructuring, if you will, and that allowed us to really sort of set the table with the dollars we have invested to generate income, as Taylor mentioned, which is a good thing. We've seen a really nice turn in the business. They're a business that are a function of the construction-related projects generally in multifamily and, to some extent, commercial down in the Southeast generally, which, frankly, has continued well. What they've done very well in the last, I'd say, 9 months to 12 months is to really realize which are the contracts that they need to take on, and we reduced the revenue as a result of that.

Speaker 4

The revenue run rate is order of magnitude $100 million, which is still pretty significant, but it has caused us to really be critical and not take contracts that, while it might be nice to have the revenue, might run the risk of not being able to provide any margin, if you will, just because of the nature of the beast. All in all, I'd say the management team has done an exceptional job in bringing it to where it is. Now we're looking at positive EBITDA, positive cash flow. Yeah, we're happy that we've continued to remain in that investment and now got it at least on an income-producing basis.

Speaker 4

Thanks, Dave. Those are all my questions this morning. Thank you for taking them.

Speaker 6

Thank you. The next question is coming from Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Speaker 6

Hi. Hey, Taylor. In case I missed it, what was the spillover income per share in the quarter, please?

Speaker 1

We don't disclose that quarter by quarter, just given the fluctuations. We really don't manage the spillover on a quarterly basis. We're really looking on an annual basis. To put it in perspective, again, we started the year with $1.50, which covers a supplemental of $0.54 in June, and each month of $0.08. We really have only been eating into the spillover that we started the year with. We still feel comfortable and are confident in where we're going to end the year.

Speaker 1

Okay. Thank you. And then following up on the JR Hobbs comments from Mickey, should we look for other restructurings for the other companies on non-accrual?

Speaker 4

Chris, this is Dave. No, I would say not. I think the other companies that are on non-accrual are on non-accrual for slightly different reasons. They're actually producing income, etc. We just have to work through with some of the other folks that are in the investment, senior lender and what have you, in terms of some certain restrictions, function of covenants. No, I would not anticipate any restructuring on those other couple of companies.

Speaker 4

Okay. Thanks, Dave. Final question is, I noticed there was a slowdown in the ATM issuances. Quarter to date. Does that really reflect just smaller windows where you can accretively issue the shares or just slower seasonal balance sheet growth?

Speaker 1

Chris, it's Taylor. Now, to confirm, when you say quarter to date, are you talking about subsequent to 9/30, or are you talking about the 9/30 quarter itself?

Speaker 1

Oh, subsequent to 9/30, please. The 515,000 cum shares issued.

Speaker 1

Yes. Subsequent to 9/30, again, with us having the ability to be active on the ATM, but only when we're trading at a price sufficiently above NAV, between covering our costs and commissions and then providing a little bit of cushion for any kind of downturn. The trading window for while we were in a position based on our 9/30 NAV, which, again, increased meaningfully from $12.99 up to $13.53. When factoring in the commission and the cushion, there were only so many days that we were trading above that. As I mentioned in my prepared remarks, we will continue to utilize the ATM as price remains above NAV and the cushion discount that we factor in.

Speaker 1

Okay. Thank you for taking my questions.

Speaker 4

Thanks, Chris.

Speaker 6

Thank you. The next question is coming from Dylan Nise of B. Riley Securities. Please go ahead.

Speaker 8

Hey, thanks for taking the call. I was just wondering if you could provide some more detail or color on the diligence and conversations you're having for upcoming commitments in general scale and industries.

Speaker 4

Yeah. Obviously, I have to be a little sensitive to, with our legal team sitting here with me, about what we're saying about those. But seriously, we are, as I say, active in a number of companies right now, kind of in the final phases of diligence, which means that with any success, we'll sometime in the next month or so, hopefully, see some new acquisitions for us. There are others where we're very active constantly in evaluating new businesses with indications of interest, and those turn into letters of intent if we generate a couple of those right now as well. No guarantee that those LOIs, as we call them, will get accepted because these are competitive processes, as you know.

Speaker 4

I'd say right now, all in all, given the level of activity, given that when we look at those that are in IOI, indication of interest, those that are in LOI, those that are actually in what we call initial review, the level is probably as high as it's been for a while. Subject to just getting through those processes, I think we're in really good shape for adding to the portfolio.

Speaker 8

Okay. Thank you. I just wanted to provide more color on the variability of tariff uncertainties. If there are specific holdings or industries that are worse than others in your view.

Speaker 4

Yeah. Certainly, some of those, we're fortunate, frankly, in a lot of our companies that would import products, say, from China, which is obviously the big area, have been able to find other sources. There are a couple of companies. And part of it, to be honest, because of the demand for the product, even though we had fairly significant tariff increase, primarily in a consumer-related company, it did not affect the demand at all. In fact, demand continued, and the profitability of the business is pretty significant. It is really more around those companies, the ones that we have where they use a lot of steel, let's say, or what have you, are not particularly impacted. It is really those that are where we have a very significant supply, say, from China specifically.

Speaker 4

So far to date, most of our companies that are doing that, we've been able to mitigate it to some degree. We're cautious just because you never know. I mean, we seem to think that it looks like we might be seeing some pushback now on tariffs, some reductions. If so, that would be a good thing.

Speaker 8

Thank you. That's all I have.

Speaker 6

Thank you. Our next question is coming from Eric Zwick of Lucid Capital Markets. Please go ahead.

Operator

Morning. This is Justin On for Eric today. I had a question on the JR Hobbs preferred position. We noticed it was previously marked at zero, and now it's marked well above the cost basis. Was that a result of the restructuring, or is that more a function of improving business performance?

Speaker 1

The primary driver is obviously the restructuring, which eliminated essentially $29.9 million of debt that was ahead of the preferred when you come to the valuation process. As we look at kind of our waterfall method of coming up with a TEV for the company each quarter, you go through the debt stack, allocate value there, and then what is left over will fall into equity fair value. As we got rid of the debt investments, that left over fair value for the preferred equity piece.

Operator

Okay. Yep. That makes sense. You guys had another really solid quarter of net new investments. I was hoping you can expand on how the pipeline is looking compared with last quarter and where you're seeing the most compelling opportunities.

Speaker 4

Yeah. I think, as I was indicating a little bit earlier, yeah, we are, as I mentioned, seeing a volume that's probably as good as it's been in the last quarter or so, last couple of quarters, actually. Part of it is a function of, obviously, I think, our team doing a really good job getting out there and seeing opportunities that meet what we want to do. The other thing we've been doing, frankly, is gradually increasing the size of investments that we're making. So per investment, we're actually putting more money to work because we think that the businesses that are a little bit larger, generating more consistent EBITDA, will be better value creation over time. All in all, again, nothing spectacular other than we're active, we're out there, we're putting out a lot of indications of interest on some good quality businesses.

Speaker 4

It is a competitive environment. Again, I feel like we're in really good shape for net new deals as we look forward. It's similar to like we've done the last couple of quarters.

Operator

Okay. Thanks. Last one for me, I'm just kind of curious about market dynamics and the competitive landscape. We've heard some larger BDCs are moving down market to smaller deals. Are you seeing any evidence of this in the borrowers that you're looking at?

Speaker 4

Yeah. No. Keep in mind that our approach is less than being a credit-oriented fund, if you will, right? We fall in that category of the businesses we're looking at, we're buying them. When we bring our debt and our own leverage from our own balance sheet to the transactions. I would say we don't fall in that broad category of competing necessarily with those folks who might be coming down market on the debt pieces. I think where we are is looking more at the middle market on the companies that we can buy. As I mentioned, we're increasingly looking at slightly larger businesses for us, relatively speaking, because we think that's where we can, over time, create higher value and consistently put more money to work in both the debt and the equity investments in those particular companies.

Speaker 4

I wouldn't say that we're seeing necessarily greater competition. Because people are coming down market. I just say that generally, there is enough capital out there, certainly in the M&A world and where we sort of compete, that it is a struggle to some degree to find these businesses at values that we think make some sense. But we obviously have been doing it reasonably successfully and think we can continue doing that.

Speaker 1

I think the only thing I would add to that, to what Dave just mentioned, is really that when we are going after portfolio companies or potential acquisitions, our competitors are typically going to be private equity funds that are focusing on the middle market space. While other BDCs in the industry may be moving down market, they're often looking at companies that we may not be looking at. Our competitors are a different subset of the industry.

Operator

Got it. Okay. Thanks for the call, though. That's all for me today. Thanks for taking my questions.

Speaker 6

Thank you. At this time, I would like to turn the floor back over to Mr. Gladstone for closing comments.

Speaker 3

Thank you all for calling in. It's nice to know that this place will keep rocking and rolling, even if I'm stuck in traffic as I was this morning. I got to see the new way into Tysons Corner, which is a disaster. Nonetheless, I'm here still working. I want to thank you all for calling in. If you have other questions, we'll catch you next quarter. That's the end of this message.

Speaker 6

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast and enjoy the rest of your day.

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