Gladstone Capital (NASDAQ:GLAD) reported results for its quarter ended December 31, 2025, highlighting positive net originations, higher interest income and a “robust” near-term investment pipeline, while also discussing portfolio marks tied to a small number of credits and the potential impact of declining base rates.
Originations, exits, and interest income
President Bob Marcotte said total fundings for the quarter were $99.1 million, including two new private equity-sponsored investments totaling $37.8 million and $61.3 million of additional advances to existing portfolio companies. Exits and prepayments were $52.8 million, producing net originations of $46.3 million for the period.
Marcotte said interest and financing costs rose by about $200,000 on higher average bank borrowings related to the company’s fixed-rate note refinancings completed in the prior quarter and higher average investment balances. He also noted that net management fees increased by $600,000, driven by higher average assets and lower origination fee credits.
Earnings, realized activity, and valuation changes
CFO Nicole Schaltenbrand said total investment income was $24.5 million, with fee income up $400,000 from the prior quarter. Total expenses increased $800,000, or 6%, primarily due to higher interest expense and higher net management fees.
Net investment income (NII) for the quarter was $11.3 million, or $0.50 per share. Schaltenbrand also reported that the net increase in net assets resulting from operations was $5.5 million, or $0.24 per share, reflecting the period’s realized and unrealized items.
Marcotte said net realized gains were $300,000, as the exit of the company’s remaining equity in Sokal more than offset a $1.4 million write-off tied to unamortized costs associated with the note refinancing completed last quarter.
Unrealized losses totaled $5.3 million and were concentrated in three investment positions. Management said these were impacted by a recent government shutdown or involved situations where senior management had been replaced and the company is expecting improvements over the balance of 2026.
Portfolio composition, non-accruals, and PIK trends
Management said portfolio growth during the quarter did not materially change the investment mix or spread profile. As of quarter-end, first lien debt represented 73% of the portfolio at cost and total debt investments represented 91% at cost.
Marcotte said the company’s three non-earning asset debt investments were unchanged, with a cost basis of $28.8 million and a fair value of $13.2 million (about 1.6%).
Payment-in-kind (PIK) income rose to $2.3 million, or 9.6% of interest income, though Marcotte said the company collected $2.8 million of PIK during the period, leading to a decline in accrued PIK balances.
In response to analyst questions, management said the increased PIK was driven primarily by two credits. One involved a business scaling up with working capital needs that were pressuring free cash flow, where Gladstone provided flexibility while closely monitoring EBITDA and enterprise value coverage. The second involved a company liquidating an underperforming portion of its business, where proceeds were expected to cover accumulated PIK exposure and support deleveraging.
Post-quarter activity and pipeline outlook
Since quarter-end, management disclosed a significant prepayment: Vets Choice repaid $42.8 million, generating a prepayment fee of $855,000. Marcotte said the company also funded an additional $6 million senior debt investment in a precision machining business.
Despite the decline in earning assets following repayments, management described its late-stage pipeline as “quite robust” at over $100 million, covering deals that have been vetted, awarded, or are in diligence or documentation. Marcotte said the level of activity was surprising given that the first quarter is typically slow, attributing it to resilience in lower middle-market deal flow and growth prospects within existing portfolio companies.
On the call, management also addressed whether current activity represented spillover from the prior quarter. The company said some transactions have extended diligence timelines—sometimes taking multiple quarters—driven by market volatility and heightened diligence by private equity sponsors. Management also cited reshoring and domestic manufacturing investment as themes, including activity among precision manufacturing businesses.
Balance sheet, leverage, dividends, and rate sensitivity
Schaltenbrand said total assets increased to $923 million as of December 31, including $903 million in investments at fair value and $20 million in cash and other assets. Liabilities rose to $445 million, reflecting increased borrowings under the line of credit used to call and repay $150 million of 5.125% notes due January 2026 and $57 million of 7.75% notes due 2028, as well as to fund net originations.
Management listed other liabilities as including $149.5 million of 5⅛% convertible debt due 2030, $50 million of 3¾% notes due May 2027, and $29 million of 6¼% perpetual preferred stock.
Net assets declined $4.7 million to $477 million, and net asset value per share decreased to $21.13 from $21.34. Gross leverage rose to 93.3% of net assets, which Marcotte characterized as a conservative leverage position, with net debt at a “modest” 93% of NAV.
Management said the company increased floating-rate bank borrowings to better match asset rate sensitivity and lower net funding costs as short-term rates ease, also citing reduced unused facility fees from higher utilization. The company’s line of credit totals $365 million, and management said borrowing availability was more than $150 million after recent repayments.
The company declared monthly distributions for February and March of $0.15 per common share (an annual run rate of $1.80). Schaltenbrand said the board will meet in April to determine distributions for the following quarter. Based on a referenced stock price of about $20.44, management said the distribution run rate implied a yield of about 8.8%.
On rate exposure, management said the majority of variable-rate loans have floors and that the portfolio is not yet at those floors, meaning interest income would decline if base rates fall. Management cited an average floor of roughly 1.25% and noted average SOFR for the quarter was roughly 3.90%. Management discussed steps intended to mitigate headwinds from lower rates, including greater reliance on floating-rate debt and savings tied to lower line commitment fees, which it said have fallen from about $2.6 million last year to a run rate closer to $1 million.
During the Q&A, the company also addressed diluted share count variability, stating it is driven by accounting requirements related to the convertible debt using the “if converted” method. Management added that the conversion price would only change if supplemental distributions were paid, which it expects to be inconsequential, and noted the convertible could be settled with cash or stock.
About Gladstone Capital (NASDAQ:GLAD)
Gladstone Capital Corporation is a publicly traded business development company (BDC) that provides debt and equity financing solutions to U.S. lower middle-market companies. Operating under an external management agreement with Gladstone Management L.P., the firm offers senior secured loans, mezzanine debt and equity investments designed to support growth initiatives, acquisitions and recapitalizations. Through its focus on privately held businesses, Gladstone Capital seeks to construct a diversified portfolio across various industry sectors.
Since its formation in 2003, Gladstone Capital has developed a track record of working closely with management teams and business owners to meet their capital needs.
