Greetings, and welcome to the Gladstone Capital Corporation first quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Gladstone, Chairman and CEO of Gladstone Capital Corporation. Thank you. You may begin.
Well, thank you so much, and good morning, everyone. This is David Gladstone, and this is the earnings conference call for Gladstone Capital for the quarter ending December 31, 2023. Thank you all for calling in. We're always happy to talk with you and share information about this company and your company, and we'll get started, of course, and hear from our Assistant General Counsel, Erich Hellmuth, and he'll tell you some stuff that you need to know before you listen to Bob, and go ahead, Erich.
Thank you, David, and good morning. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based upon our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-Q, 10-K and other documents we file with the SEC. Those can be found on the investor relations page of our website, www.gladstonecapital.com, where you can also sign up for our email notification service or on the SEC's website at www.sec.gov.
We undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q, issued yesterday, for more detailed information. Again, those can be found on the investors page of our website. Now I'll turn the call over to Gladstone Capital's president, Bob Marcotte.
Good morning. Thank you all for dialing in this morning. I'll cover the highlights for last quarter and some comments regarding the outlook for the balance of fiscal 2024, before turning the call over to Nicole Schaltenbrand, to review the details of our financial results for the period. Beginning with our last quarter's results, originations last quarter rebounded and totaled $58 million, including one new portfolio company and several existing portfolio companies. Prepayments, repayments continue to be modest, which, combined with portfolio amortization, totaled $22 million. Net originations were $37 million for the period. Short-term SOFR rates were unchanged, so the weighted average yield on our investment portfolio was also consistent at 13.9%. Average earning assets for the period declined slightly, resulting in a 1% decline in our total interest income to $23 million for the quarter.
Borrowing costs declined with lower average bank borrowings, given our equity issuance in the September quarter and debt placement. As a result, our net interest income rose 2.3% to $17.5 million for the quarter. Higher net interest income, improved originations and advisory fee credits lifted the net investment income by 8.6% to $11.9 million, or just over $0.27 per share. The net realized and unrealized gains in the portfolio for the period totaled $8.1 million, which lifted our ROE for the quarter to 19.4% and 14.9% for the last twelve months.
With respect to the portfolio, our portfolio continues to perform well, with senior debt representing 73% of the portfolio, and we ended the quarter with only one non-earning asset, representing $6.1 million at cost, or 0.4% of assets at fair value. We continue to prioritize our portfolio monitoring in areas where revenue headwinds appear to be most prevalent, which seem to be mostly consumer-facing sectors, which is fortunately a small portion of our portfolio. Appreciation for the quarter of $8.1 million was led by the broad-based appreciation of our debt investments, which totaled $6.3 million, while the net appreciation of our equity co-investments contributed an additional $1.6 million. In reflecting on our first quarter of fiscal 2024 performance and our near-term outlook, a few comments I'd like to leave you with.
Last quarter's deal activity certainly demonstrated the benefit of our incumbent position in supporting growth-oriented businesses across a variety of industry sectors in an otherwise slow deal environment. PE sponsors are dealing with extended hold periods and continuing to seek ways to creatively grow or capitalize their investments. In supporting performing businesses we know well is a low-risk way to grow our assets. That said, deal flow has improved, and we expect new originations to increase, along with potential prepayment activity over the balance of the year, as short-term interest rates are expected to decline and PE sponsors are expected to bring more of their more seasoned investments to market to generate liquidity events for their investors. We ended the quarter with a conservative leverage position at just 83% of NAV and ample availability under bank line. Our bank credit facilities.
So we're very well positioned to grow our earning assets and fee income to continue to support our shareholder distributions over the balance of the year. Now I'll turn the call over to Nicole to review detail, the fund's detailed financial results.
Thanks, Bob. Good morning. During the September quarter, total interest income fell $300,000, or 1% to $23 million, based on the small decline in average earning assets. The weighted average yield on the interest-bearing portfolio was consistent at 3.9%, and the investment portfolio weighted average balance declined to $658 million, which was down $11 million or 1.6% compared to the prior quarter. Other income declined by $300,000, and total investment income fell by $500,000 or 2.3% to $23.2 million for the quarter. Total expenses declined by $1.5 million quarter-over-quarter, as net management fees declined $1.2 million, with higher deal closing and advisory fee credits, and $700,000 in lower financing costs from the reduction in average bank borrowings.
Net investment income for the quarter ended December 31st was $11.9 million, which was an increase of $900,000 compared to the prior quarter, or $0.274 per share, which exceeded the $0.2475 per share dividends paid. The net increase in net assets resulting from operations was $20 million or $0.46 per share for the quarter ended December 31st, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of December 31st, total assets rose to $767 million, consisting of $750 million in investments at fair value and $17 million in cash and other assets.
Liabilities rose with net originations to $349 million as of December 31, and consisted primarily of $253 million of senior notes, and as of the end of the quarter, advances under our $234 million line of credit were $85 million. As of December 31, net assets rose to $418 million from the prior quarter end, with investment appreciation and undistributed earnings. NAV rose 2.3% from $9.39 per share as of September 30, to $9.61 per share as of December 31. Our leverage as of the end of the quarter, with the asset growth, rose with the asset growth to 83% of net assets. Subsequent to December 31, we had a small $3 million prepayment of a syndicated second lien debt investment.
With respect to distributions, our monthly distributions to common stockholders of 8.25 cents per common share was announced for the months of January, February, and March, which is an annual run rate of 99 cents per share. The board will meet in April to determine the monthly distributions to common stockholders for the following quarter. At the distribution rate for our common stock, and with a common stock price at about $10.30 per share yesterday, the distribution run rate is now producing a yield of about 9.6%. And now I'll turn it back to David to conclude.
Thank you very much, Nicole, you did a great job, and so did Bob and Erich, and you all did a good job. So they've informed our stockholders and analysts that follow the company. So with your report that you got, the 10-Q filed yesterday, to shareholders and this, this call that we're making, you're pretty much brought up to date about everything going on. So in summary, it's just another solid quarter. Sometimes that's pretty boring, but it's pretty nice when we have boring, profitable quarters. They increased the net investment income by 8% over the prior quarter. That's really good. That gives good coverage over the current common distributions. Strong portfolio performance and generating net portfolio appreciation increased the net asset value by 2.3% from the last quarter.
I love it when that goes up every quarter, and it helps us pay our dividend. For 2023, the whole GLAD achieved GLAD achieved returns on equity of 14.9%, which compares very favorably with the other business development companies in our peer group. The company is also very well positioned for the coming year, as the portfolio is in good shape, with modest leverage and very low non-performing assets, and a strong balance sheet to support further growth. In summary, the company continues to stick with its strategy of investing in growth-oriented, lower middle-market businesses with good management teams. Many of these investments are supported by mid-sized private equity funds that are looking for experienced partners to support their acquisition and growth profile of that business, which they are invested in.
This gives us an opportunity to make an attractive investment, paying loans to support payments on these paying loans that support our ongoing commitment to pay cash distributions. I'm going to stop now and ask the operator to see if there's anybody that has a question for the group here today.
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.
Hey, good morning. Thanks for taking my questions. Bob, just kind of want to get your, your thoughts, in terms of, where spreads have been going in the, in the lower middle market. Obviously, we track, public credit markets, which have been very strong. Obviously, your markets tend to be a little bit more insulated or lag, but just get a sense for, for, for spreads you've been seeing on new deals.
Good morning, Kyle. Spreads really have not moved consistent with the overall yields. I would say, you know, as we commented last quarter, you know, there's definitely a lot of capital upmarket from us, and in sponsor-oriented deals where there's reasonable size, we occasionally will see some pricing compression, you know, in the 50 basis points range. But for the most part, in our initial investments, which tend to be, you know, $10 million-$20 million and grow, we don't, at this point, see that level of compression. Certainly, that leaves interest rates at a relatively high level, so deal flow is not exactly as robust as we'd like. But we're really not seeing much in the way of spread compression today. That's just not where the market is right now.
People are obviously expecting those rates to come down, but at this point, we're not seeing that pricing compression.
Got it. Very helpful. And then, on credit performance, obviously, non-accruals were stable in the quarter. But just get a sense for, you know, top line growth, margins, EBITDA growth, and, you know, how your companies continue to do well in the face of higher rates and ongoing inflation.
Well, it's obviously a, you know, mix. As I said, you know, we definitely increased investments in some performing assets on the quarter, which, you know, was a big part of our fundings. You know, and those higher performers are probably looking at 10%-15% EBITDA lifts. There's certainly some where there's a little bit more headwinds. If you look at the portfolio overall, EBITDA roughly was down slightly at, you know, low single digits, you know, 3%-5%. There are definitely some sectors where there's more challenge. You know, those challenges would be in places like, you know, consumer-facing business, anything in the restaurant business, anything in discretionary healthcare. You know, certain sectors are more exposed in those cases. I will say that those tend to be our smaller sectors.
You know, where there is some level of headwinds, as I've said in the past, our second lien exposure, which is where it would be most impacted, tends to be the larger credits. On average, our leverage in our second lien portfolio is significantly below our average for the portfolio. Our second lien leverage average is something under three. So where we see headline pressure, it tends to be in the smaller credits where we control the credits as the senior lender. So overall, I would say we're still modestly defensive on the consumer side of the businesses. You know, expecting things to improve, but most of those cases, we are the senior lender and in pretty good shape to manage the underlying portfolio risk profile.
The overall leverage for the portfolio still runs at just under four turns of EBITDA. So we've got some cushion in those cases relative to enterprise value.
Got it. Very helpful. Thanks for taking my questions.
Thank you.
Next question.
Thank you. As a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.
Good morning, and congratulations on another excellent quarter. If I can, Bob, can you give us some more color on the characteristics of the originations? I mean, you had $47 million to existing portfolio companies, and I think those were quite chunky in general. I mean, like, Zupas was over $10 million, or several others that were quite large. So, I mean, can you give us any kind of w as that add-on acquisitions by those portfolio companies, recapitalizations, anything? It's you know, a handful of big add-ons, rather than sometimes we see more, you know, a large number of small ones. So any color you can give us about what the drivers were that, the size of those follow-ons?
Well, the follow-ons, for the most part, were somewhere in the $10 million-$12 million range. I think the big ones, Zupas, when actually, up and down. I mean, we, the company's continuing to grow and expand. We had to bring in another lender since it was getting so large, and once we brought in the other lender, there were additional fundings that happened on the quarter. So it, it actually today is still below where we were the prior quarter. There are two other credits that we were in. One was ALS went up and, Leadpoint went up. In both of those cases, leverage had gotten very low. In fact, leverage was approaching, you know, well under 2. And, sponsors looking to take a distribution, looking to reposition and manage their extended hold periods were part of it.
One transaction decided not to sell at a very escalated valuation, and the, you know, our loan-to-value in that case is well under 30%. So most of those were probably positioning by part on the part of the sponsor. Those were the only notable ones. There were a couple of others that were in the, you know, couple $1 million range. But it turns out that I think there was a total of six investments in the portfolio at that point of any consequence above $1 million, that was represented the most of the total dollars of those fundings. You know, it just happens to be a case where strongly performing assets were we were opportunistic in putting out additional capital to those companies.
Nobody wants to take their company to market when, you know, the interest rates are where they are and some of the buyers are kind of on the sidelines right now.
Got it. Got it. Understood. I mean, that goes on to the follow up. I mean, you mentioned it in your prepared remarks as well, like deal flow is, you know, you're improving, you're expecting there's going to be more activity later in the year. And you're also, you know, positioned for portfolio growth over the rest of the year. What's your comfort level that the portfolio is gonna be up from here by year end, given, you know, you talk about maybe prepayment activity accelerates as well? I mean, can you give us some more thoughts on how you think the increase in prepayments, combined with increase in deal flow, how that's gonna work out to ballpark what your portfolio could look like at year end, up, flat? Any color?
You know, prepayments is probably the toughest thing to predict. I mean, at this point, there's probably two or three decent sized investments that we see likely to prepay. You know, if those prepayments come in at somewhere between, you know, $10-$25 million, maybe $30 million, the pace of growth originations, we are eventually gonna be pressed to outpace that. I think in the past, we've generally targeted to grow somewhere in the range of $20-$25 million a quarter. So if we're seeing, you know, similar amounts of prepayments, it's gonna take two or three deal closings a quarter to get that number back up. That's not unheard of in the market where we're playing.
You know, when you're dealing with unitranches, you know, in the range that we're talking about, $20-$25 million deals are normal. And 2 or 3 deals a quarter is also fairly normal. So I think if you look back at our origination history, when the deal market was running, you know, doing $200-$250 million in gross originations per year is certainly doable. You know, so I think putting on $25 million net, $25 million net conservative is a conservative number for us to continue to grow the assets. Is that gonna happen every quarter? I'm sure it's not. But I will also say, you know, we're feeling pretty good where we are, and given our current capital base.
We tend to slot in above the SBICs, which cap out around $20 million for the most part, and we tend to slot in below the large scale billion-dollar funds, which really don't wanna put out anything less than 40. So if it's a zip code of $20-$40 million, we are in pretty good shape to be competitive on that profile. And there's obviously a few other guys that are out there, but that's the size deal that we are, I think, pretty well positioned to continue to originate. And you know, the mix may change a little bit.
I expect with rates coming down, we may look at a little bit more second lien paper, which will negate some of the compression and spreads likely to happen as rates come down. But for the most part, I think ± 25 in net asset growth a quarter is still a track record that we've averaged and a track record I would expect for the balance of 2024.
I appreciate that, [Tyler]. Thank you very much.
Thank you.
Next question.
Thank you. Our next question comes from the line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.
Good morning, everyone. Bob, following the common share issuance in the September quarter, the balance sheet leverage has been running a little bit below your target level. Is that purposeful because of your view on the economy or something else? Or, do you expect your leverage to climb towards your target level as you invest your liquidity?
Good morning, Mickey. I think there's two factors there. One, we were flattered to have institutional buyers come into the stock in the volumes that they did. We've always had a long-term strategic objective to increase the institutional holding and the float in our shares, and when they showed up, we felt it appropriate to take that advantage. And you will note that our institutional share counts probably doubled as a result of that issuance. So strategically, it was good for the investor base and the flow in the stock market for us. We took advantage of it. I think the second is, we wanted to be in a position where we were strong relative to our capital base.
Bank market conditions were a little unsettled in the summer, so we felt going along on the equity gave us a little bit more strength in that viewpoint. Lastly, I would say, yes, we are going to increase our leverage as the spreads probably start to contract with interest rates coming down. We're obviously skewed very much towards a fixed cost of capital right now. Having a strong equity base will allow us to put on assets and optimize our capital structure, and allow us to continue to maintain the level of dividend coverage that we're gonna look for to try to continue to maintain the dividend level at or above where it is today. So we'll grow into that leverage level with higher assets over the course of the next, you know, 12-18 months.
That's very helpful. Thank you, Bob. That's it for me this morning.
Thank you.
Next question?
Nope.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Gladstone for final comments.
Okay, thank you very much. Appreciate you all calling in. Wish we had a few more questions. We like it when you ask questions, but we'll wait for next quarter to get some more questions. That's the end of this conference call.
Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.