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    GLAD
    Earnings call· Jun 2026(Q3 FY26)

    GLADSTONE CAPITAL Q3 FY26 earnings call GLAD

    Aug 5, 2026 Source

    Executive summary

    Gladstone Capital Corporation Q3 FY26 — Strong Originations and Dividend Coverage

    Gladstone Capital delivered a solid Q3 FY26, marked by robust net originations and a healthy increase in interest income, leading to strong net investment income that comfortably covered shareholder dividends. The company maintains a strong balance sheet and ample borrowing capacity, positioning it for continued modest growth despite a slight increase in non-earning assets and anticipated reductions in PIK interest income from prepayments. Management remains focused on sourcing attractive lower middle market opportunities and leveraging existing portfolio companies.

    Highlights

    5

    • Net originations of $42 million for the quarter, driven by $82 million in fundings (four new investments totaling $67 million and $15 million in advances) against $40 million in exits.

    • Interest income rose 4.7% to $24.3 million on higher average assets.

    • Net investment income of $11 million or $0.49 per share, covering cash distributions per common share by 109%.

    • Net portfolio appreciation of $3 million, with gainers outnumbering decliners by a 2:1 margin.

    • NAV per share rose from $21.36 to $21.50 as of June 30.

    Concerns

    5

    • Total investment income declined $1.5 million to $24.5 million due to lower other income from a large prepayment fee received last quarter.

    • Interest and financing costs rose $700,000 with increased borrowings.

    • Net management fees declined $1.1 million due to increased origination fee credits.

    • Non-earning debt investments increased to 5, with a cost basis of $46 million or $26.7 million at fair value (3.1% of debt investments).

    • Anticipated prepayment of Imperative totaling $12 million will reduce PIK interest income in coming quarters.

    Guidance & targets

    6
    CategoryTargetConfidence
    Monthly distribution per common share
    $0.15
    high materiality
    High
    Monthly distributions determination
    To be determined
    medium materiality
    High
    Pipeline composition (add-ons)
    Meaningful percentage
    low materiality
    Medium
    Quarterly originations
    $75M plus or minus
    medium materiality
    High
    Quarterly repayments and exits
    $35M to $50M
    medium materiality
    Medium
    Full-year originations
    Roughly $350M
    high materiality
    Medium

    Operational metrics

    51
    Fundings
    $82M
    Q3 FY26

    Included four new investments totaling $67 million and $15 million in advances to existing portfolio companies.

    New investments
    $67M
    Q3 FY26

    Part of total fundings, comprising four new investments.

    Advances to existing portfolio companies
    $15M
    Q3 FY26

    Part of total fundings.

    Exits and repayments
    $40M
    Q3 FY26
    Net originations
    $42M
    Q3 FY26

    Fundings of $82 million minus exits and repayments of $40 million.

    Interest income
    $24.3Mup 4.7% YoY
    Q3 FY26

    Driven by higher average assets.

    Weighted average debt yield
    11.8%unchanged
    Q3 FY26
    Total investment income
    $24.5Mdown $1.5M
    Q3 FY26

    Declined from large prepayment fee received last quarter.

    Interest and financing costs
    rose $700,000
    Q3 FY26

    Due to increased borrowings, including $60 million December 2029 note.

    Net management fees
    declined $1.1M
    Q3 FY26

    Due to increased origination fee credits.

    Net investment income
    $11Mdeclined $800,000
    Q3 FY26

    Primarily on lower one-time prepayment fees.

    Net investment income per share
    $0.49
    Q3 FY26
    Net portfolio appreciation
    $3M
    Q3 FY26

    Driven by unrealized portfolio appreciation, with gainers outnumbering decliners by 2:1.

    First lien debt as % of portfolio at cost
    71%largely unchanged
    Q3 FY26
    Total debt investments as % of portfolio at cost
    91%largely unchanged
    Q3 FY26
    Weighted average leverage of new debt investments
    under 3x
    Q3 FY26

    All new debt investments were first lien.

    Average spread over SOFR for new debt investments
    7%
    Q3 FY26
    Non-earning debt investments count
    5increased
    Q3 FY26

    Includes Lone Star and Eegee's.

    Non-earning debt investments cost basis
    $46M
    Q3 FY26
    Non-earning debt investments fair value
    $26.7M
    Q3 FY26

    Represents 3.1% of debt investments at fair value.

    Non-earning debt investments as % of debt investments at fair value
    3.1%
    Q3 FY26
    Anticipated prepayment (Imperative)
    $12M
    since Q3 end

    Will eliminate exposure to oil and gas sector and reduce PIK interest income.

    Net debt to NAV
    100%ticked up
    Q3 FY26
    Average earning assets
    rose $28.4Mup 3.6%
    Q3 FY26
    Average earning assets growth
    3.6%
    Q3 FY26
    Total expenses
    declined $700,000down 4.7% vs prior quarter
    Q3 FY26

    Due to decrease in net management fees and lower legal expenses, offset by increased interest expense.

    Other expenses
    fell $300,000
    Q3 FY26

    Mainly due to lower legal expenses.

    Net increase in net assets from operations
    $13.3M
    Q3 FY26

    Impacted by unrealized valuation appreciation.

    Net increase in net assets from operations per share
    $0.59
    Q3 FY26
    Total assets
    $970M
    as of June 30

    Consisting of $953 million in investments at fair value and $17 million in cash and other assets.

    Investments at fair value
    $953M
    as of June 30
    Cash and other assets
    $17M
    as of June 30
    Total liabilities
    $439Mrose $32M since prior quarter
    as of June 30

    Decrease in LOC borrowings funded by new $60 million 7% note.

    Total liabilities increase
    $32Msince prior quarter
    Q3 FY26
    Net assets
    $485.7Mrose $3.1M
    as of June 30
    Net assets increase
    $3.1M
    Q3 FY26
    NAV per share
    $21.50rose from $21.36
    as of June 30
    NAV per share (prior quarter)
    $21.36
    prior quarter
    Gross leverage
    100%rose
    as of June 30
    Annual distribution run rate
    $1.80
    current

    Based on $0.15 monthly distribution.

    Distribution yield
    9.3%
    current

    Based on $19.35 common stock price.

    Common stock price
    $19.35
    yesterday
    Net investment income coverage of cash distributions
    109%
    Q3 FY26

    Per common share.

    Spillover income
    a little over $6M
    accumulated
    Average leverage multiple for sub-$100M transactions
    7 to 7.5xremarkably consistent
    current

    Referenced GF Data research.

    Quarterly originations target
    $75M plus or minus
    per quarter

    Described as a 'relatively easy mark'.

    Quarterly repayments and exits target
    $35M to $50M
    per quarter

    Expected to lead to consistent net asset growth.

    Full-year originations expectation
    roughly $350Mconsistent with last year
    FY26
    Deals screened per quarter
    100 to 125
    per quarter
    Deals closed per quarter
    4 or 5
    per quarter
    Dental platform EBITDA
    approaching $20M plus or minus
    current

    An existing dental platform that received an add-on funding.

    Deals & partnerships

    5
    Four unnamed companiesNew debt and equity investments in four companies$67M

    These were part of the $82 million in total fundings for the quarter.

    Unnamed investorsIssuance of 7% note due December 2029$60Muntil December 2029

    This 7% note was issued to fund a decrease in LOC borrowings.

    Unnamed investorsConvertible debt$149.5M

    Part of the remaining balance of liabilities.

    Unnamed investorsNotes$50Muntil May 2027

    Part of the remaining balance of liabilities.

    Unnamed investorsPreferred stock$45M

    Part of the remaining balance of liabilities.

    Risks & headwinds

    7
    Decline in total investment income due to lower one-time prepayment feesQ3 FY26

    Total investment income declined $1.5 million to $24.5 million.

    Mitigation: Management is focused on sourcing higher-returning investments and expects pipeline to offset this.

    Increased non-earning debt investmentsQ3 FY26

    Increased to 5 investments, with a cost basis of $46 million or $26.7 million at fair value (3.1% of debt investments).

    Mitigation: GLAD-controlled investments (Lone Star, Eegee's) are undergoing senior management changes and developing additional revenues/expense reductions to return to earning status.

    Reduction in PIK interest income from anticipated prepaymentsComing quarters

    Anticipated prepayment of Imperative totaling $12 million, with a slightly larger prepayment expected this week.

    Mitigation: Management expects to redeploy capital to higher-returning investments and does not anticipate a negative impact on weighted average yield.

    Potential negative impact of rising interest rates on investment activityFuture

    If rates were to move up, I think that does cause some repricing that does cause some valuation adjustments that are required, and that might slow down some of the activity pending those reset expectations.

    Mitigation: Focus on existing portfolio add-ons and lower middle market where competition is less intense.

    Challenges in consumer-facing businesses due to softened consumer spendPast year, ongoing

    Eegee's (restaurant) facing pressures from softened consumer spend, traction, check size, and costs.

    Mitigation: Re-tooling strategies for Eegee's, managing expenses, and focusing on industrial/manufacturing sectors with strong backlogs.

    Tariffs and commodity prices disrupting domestic productionOngoing

    Sourcing domestically is "extremely expensive" due to steel, copper, and other commodity prices.

    Mitigation: Focus on businesses with high automation to improve operating efficiencies and cost structure.

    Competition in "hot" sectors leading to higher leverage and diminished controlOngoing

    Leverage multiples can get bid up in certain sectors.

    Mitigation: Steering away from highly competitive sectors with low barriers to entry (e.g., roofing, landscaping) and focusing on incumbency in lower situations to grow credits.

    What to watch in Q4 FY26

    5

    Non-earning debt investments

    Next quarter
    Current5 investments, $26.7M fair value (3.1% of debt investments)
    TargetReduction in number or fair value, or return to earning status for Lone Star and Eegee's.

    Why it matters

    Indicates credit quality and potential for future income generation.

    As of the end of the quarter, our non-earning debt investments increased to 5 with a cost basis of $46 million or $26.7 million or 3.1% of our debt investments at fair value. The credits added are Lone Star, a Texas-based printed circuit board contractor and Eegee's, an Arizona-based quick-serve sandwich chain. Both credits are GLAD-controlled investments and have recently undergone senior management changes and are in the process of developing additional revenues and expense reductions to return them to earning asset status.

    Q&A highlights

    5

    Erik asked about the current size of the investment pipeline compared to three months ago and the spreads on new investments versus the existing portfolio yield.

    Robert Marcotte stated the pipeline is strong, with add-ons to existing portfolio companies being a meaningful percentage. He expects $75M+/- quarterly originations and $35M-$50M quarterly repayments. New investment spreads are in the high 6s to low 7s, not expecting a negative impact on the 11.8% weighted average yield.

    “The pipeline is pretty strong. Most of our investments are looking for acquisitions... $75 plus or minus million a quarter in originations is a relatively easy mark.”

    asked by Erik Zwick · answered by Robert Marcotte

    2 min read5 chapters

    Detailed Narrative

    01

    Investment Activity and Portfolio Composition

    Gladstone Capital funded $82 million in new investments during Q3 FY26, including four new companies and advances to existing ones, resulting in net originations of $42 million after $40 million in exits. The portfolio remains heavily weighted towards first lien debt (71% of cost) and total debt investments (91% of cost). New debt investments maintained a weighted average leverage under 3x EBITDA and an average 7% spread over SOFR, indicating a disciplined investment approach.

    02

    Non-Earning Assets and Credit Quality

    The company saw an increase in non-earning debt investments to five, totaling $46 million at cost or $26.7 million at fair value (3.1% of debt investments). These include Lone Star and Eegee's, both GLAD-controlled, which are undergoing management changes and strategic retooling to return to earning status. Management noted that the consumer market in Southern Arizona, where Eegee's operates, has been challenging, leading to retooling efforts.

    03

    Outlook and Pipeline

    Management anticipates continued strong deal flow, with add-ons to existing portfolio companies expected to be a significant part of the pipeline. They project quarterly originations of approximately $75 million and repayments of $35 million to $50 million, leading to modest net asset growth. The full-year originations are expected to be around $350 million, consistent with the prior fiscal year. The weighted average yield is not expected to be negatively impacted by reinvestment activities.

    04

    Market Dynamics and Strategy

    The lower middle market continues to offer ample deal opportunities, with leverage multiples remaining attractive at roughly 7 to 7.5x EBITDA. Gladstone Capital focuses on sectors with strong backlogs, such as industrial, precision manufacturing, and aerospace/defense suppliers, while generally avoiding highly competitive consumer-facing businesses or those with low barriers to entry. The company emphasizes organic growth and equity appreciation opportunities within its existing portfolio.

    05

    Capital Structure and Distributions

    The company's gross leverage increased to 100% of net assets as of June 30. Monthly distributions for August and September 2026 are set at $0.15 per common share, an annual run rate of $1.80, yielding about 9.3% based on recent stock prices. The Board will determine Q4 FY26 distributions in October. The company has ample borrowing capacity to support investment growth and shareholder distributions.

    AI-generated summary of the company’s earnings call. Not investment advice.