Greetings. Welcome to the Gladstone Capital Corporation third quarter 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. Please note this conference is being recorded. I'll now turn the conference over to your host, David Gladstone, Chief Executive Officer. You may begin.
Well, thank you so much. That was a nice introduction and good morning, everybody. This is David Gladstone, Chairman, and this is the earnings conference call on Gladstone Capital for the quarter ending June 30, 2022. Thank you all for calling in. Always happy to talk with our shareholders and the analysts who follow us. Welcome the opportunity to provide an update for our quarter that ended. Now we'll hear from our General Counsel, Michael LiCalsi. He'll make a statement regarding certain forward-looking statements. Michael, take over.
Thanks, David, and good morning, everybody. 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. Now these forward-looking statements involve certain risks and uncertainties. They're based on 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 you can find in our Forms 10-Q, 10-K and other documents we file with the SEC. You can find them on the investor relations page of our website. That's www.gladstonecapital.com. You can also sign up for our email notification service. You'll also find these documents on the SEC's website. That's 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. Now, today's call is an overview of our results. We ask that you review our press release in Form 10-Q, both issued yesterday for more detailed information. Again, if you go to the investors page of our website, you can find them there. Now I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Bob.
Thank you, Michael. Good morning, and thank you all for dialing in this morning. I'll cover the highlights for last quarter and provide some comments on the state of the portfolio market outlook before turning the call over to Nicole Schaltenbrand, Gladstone Capital's CFO, to review our financial results for the period and our capital and liquidity positions. Beginning with our last quarter results. Originations for the quarter recovered after a slow Q1 and totaled $67 million for the period, which included three new platform investments and several add-on investments to existing portfolio companies. Amortization and repayments were $6 million, so net origination were a strong $61 million for the period.
Interest income for the quarter fell 2.8% to $12.6 million, as the average outstandings were down approximately $8 million and the weighted average yield, loan yields fell approximately 20 basis points, with the roll-off of an investment which represented a large component of our PIK interest income. In the absence of material exits and repayment and fee income, it declined to $1.2 million, which was down from the elevated levels of the past several quarters. Borrowing costs and administrative costs were largely unchanged. However, net management fees declined by $1.8 million- $2.5 million as the new deal closing fees credited against the base management fee rose to $1.1 million, and incentive fee credits were $400,000 for the quarter.
Net investment income came in at $6.9 million or $20.25 per share and covered 100% of the recently increased common distributions for the period. The net realized and unrealized losses on the portfolio for the period rose to $12.5 million on a combination of loan depreciation associated with elevated market spreads, reduced equity valuation multiples, and the decline of two equity investments. As a result, NAV declined $0.37 per share or 3.9% to $9.12 per share as of June 30. Despite the last quarter NAV impact, we're pleased to report our cumulative return on equity over the last year is still 14.9%. With respect to the portfolio, our portfolio continues to perform well with generally modest leverage metrics and favorable liquidity.
As such, we did not experience any payment defaults last quarter. Credit performance aside, the third-party market valuation of our debt investments, combined with a 4.3% decline in the enterprise value multiples on our equity portfolio, combined to total approximately $5.2 million of depreciation or roughly 45% of the depreciation on the quarter. During the quarter, we also completed the restructuring of Circuitronics, which had been a challenge for some time and coincident with the relocation of the manufacturing operations and the exiting bankruptcy as Lonestar EMS, we recognized $8.5 million of depreciation previously accrued. Lastly, most of the balance of the unrealized depreciation for the quarter is associated with two equity positions in modestly leveraged businesses, which experienced isolated revenue shortfalls and we expect to recover over the balance of 2022.
The asset mix as of the end of the quarter continued to shift in favor of first lien loans, which rose to 74% of assets at fair market value. Looking over the balance of 2022, there are a couple of comments I'd like to leave you with. We have a number of new proprietary investments or follow-on investments to existing portfolio companies we anticipate closing in the near- term. In addition, we expect near-term prepayment activity to moderate in the face of higher rates and market conditions and net originations to remain elevated for the balance of the year. We'll be closely managing our leverage within the target range of 90%-110% of NAV going forward.
Consistent with the tighter credit environment, we also expect to see an improvement in pricing and relative leverage metrics in the newer originations over the balance of the year. We continue to be well positioned to benefit from the increase in short-term rates with 93% of our investment portfolio subject to floating rates. As of June 30, 71% of our debt was at fixed rates. Now that LIBOR has increased above the average LIBOR floor in the portfolio of 1.16%, we expect that for each 75 basis points increase in LIBOR above the level as of June 30, which was 1.8%, we will increase our quarterly net interest margin by $500,000 and NII per share by a penny.
We will continue to assess the outlook for portfolio growth and net interest income increases to sustain any future increases to the shareholder distributions. Now I'd like to turn the call over to Nicole Schaltenbrand, the CFO for Gladstone Capital, to provide some details of the fund's financial results for the quarter. Nicole?
Thanks, Bob. Good morning, everyone. During the June quarter, total interest income declined $400,000 or 2.8% to $12.6 million. The investment portfolio weighted average balance decreased by $8 million- $506 million compared to the prior quarter. The weighted average yield on our interest-bearing portfolio also declined 20 basis points to 10%, most of which was impacted by the PIK interest, which declined 30%- 5.1% of interest income. Other income declined by $3.1 million- $1.2 million. As a result, total investment income declined to $13.8 million for the quarter.
Total expenses decreased by $1.7 million quarter-over-quarter, as net management fees declined $1.8 million, with the $1.1 million of new deal closing fees credited against the base management fee and incentive fee credits of $400,000. Net investment income for the quarter ended June 30th was $6.9 million or $20.25 per share and covered 100% of our shareholder distribution. The net decrease in net assets resulting from operations was $5.6 million or -$0.16 per share for the quarter ended June 30th, 2022, compared to a net increase in net assets resulting from operations of $8.3 million or $0.24 per share for the prior quarter. The primary drivers for this change was the realized and unrealized valuation depreciation, as covered by Bob earlier.
Moving over to the balance sheet. As of June 30th, total assets rose to $597 million, consisting of $586 million in investments at fair value and $11 million in cash and other assets. Liabilities increased to $284 million as of June 30th, 2022, and consisted primarily of $150 million of 5.125% senior notes due 2026, $50 million of 3.75% senior notes due May 2027. As of the end of the quarter, advances under our line of credit were $80 million. As of June 30th, net assets declined by $12.5 million from the prior quarter and with the realized and unrealized valuation depreciation.
NAV declined from $9.49 per share as of March 31st to $9.12 per share as of June 30th. Our leverage as of the end of the quarter rose with the increase in total assets and the NAV decline and now stands at 91% of net assets. At quarter end, we had an excess of $70 million of current borrowing availability under our line of credit, the revolving period of which ends in October 2023. With respect to distribution, Gladstone Capital has remained committed to paying its stockholders a cash distribution. In July, our board of directors declared monthly distributions to our common stockholders of $6.75 per common share per month for July, August, and September, which is an annual run rate of $0.81 per share.
The board will meet again in October to determine the monthly distribution to common stockholders for the following quarter. At the current distribution rate for our common stock and with a common stock price at about $10.99 per share yesterday, the distribution run rate is now producing a yield of about 7.4%. Distributions in addition to the NAV growth over the past year of $0.60 per share have resulted in a total return of $1.39 per share or 16.3% in NAV over the past year. Now I'll turn it back to David to conclude.
Thank you, Nicole. That was a very good presentation. Bob and Michael and Nicole, you all did a great job of informing shareholders and the analysts that follow our company. In summary, I think it's just another solid quarter for Gladstone Capital. I mean, the company closed $67 million in new proprietary originations and add-on investments to existing investments, which lifted the total investments to a new high water mark of almost $600 million. The company has a solid deal pipeline to support the asset growth continuing into the current quarter. Investment income did fall a little bit due to reduced exit fees. However, the combination of investment portfolio growth, the recent uptick in LIBOR, and in addition to that, the potential for increasing the common distribution rate to common two in the coming quarter.
To be specific. $531 million of loans on the books at the end of the quarter, of which 93% is floating rate and 83% is senior secured, all current and performing. We only have $80 million of floating rate debt in Gladstone Capital. I think we're very well-positioned to support the dividends to stockholders. Just a side note, there's a lot of debate on whether we're in a recession or not, and I can conclusively report that Gladstone Capital is not in a recession. In summary, the company continues to stick with its strategy of investing in growth-oriented middle-market businesses with good management. Many of these investments are supported by mid-sized private equity funds that are doing buyouts, and they're looking for experienced partners to support the acquisition and growth of the businesses they're investing in.
We can provide that. This gives us the opportunity to make attractive interest paying loans to support our ongoing commitment to pay cash distributions to shareholders. Congratulations to the team at Gladstone Capital. It was another good quarter. Now, the operator will come on and tell callers how they can ask some questions. We'll take some questions from all the people following us.
Thanks, David. At this time, we'll be conducting a question and answer session. If you would 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 would 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
Go ahead.
I'm sorry. Our first question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.
Good morning, everybody. I'm gonna apologize up front. I had a little trouble getting into the call, so I'm gonna ask you to repeat a couple of things if I can. Bob, I caught very briefly at the beginning. Excluding Lonestar EMS, the restructuring there, which I understand the realized loss and the reversal of the unrealized, how much of the unrealized depreciation would you say was credit-driven versus just mark-to-market? I think you gave some numbers. I caught the very end of it, but I didn't get to write them down, so I apologize.
Robert, that's fine. I would say in my comments, the amount of credit performance was probably in the $2 million-$3 million range. In segmenting those, I would say, the vast majority of the movement on the quarter had to do with the revaluation of the yields, the depreciation of the enterprise value multiples applicable to our equity investments, and then some movement in our underlying equity investments, which we believe to be temporary, dislocations in EBITDA. Obviously, the bigger the EBITDA, the bigger the equity component, the larger the EBITDA moves. Your question around credit performance, it's a relatively small portion of the overall move.
Got it. That's what I thought. Thank you on that. On the outlook for the rest of the year, obviously lower repayments, I think, are expected. I mean, you do sound quite bullish on the amount of new capital being deployed with follow-ons, et cetera. Can you give us any color on kind of what the drivers are? Are those follow-on investments that have been, you know, working on a long time? Or are they follow-on investments where the business that's seeking the additional capital has now identified an acquisition? Or, you know, is it people seeking to just boost their liquidity given a potentially tough economic environment out there?
Can you give us any color on that?
Yeah. Let me. I'll give you two examples that I think are indicative of the trend. you know, we've been supporters of certain businesses and sponsors for a while, and occasionally those deals will grow in size, and they'll get beyond our capacity. we as agent and longstanding investors will work on behalf of our sponsors to find other investments to club and participate in a transaction. When we bring in new investors into those situations, we always like the opportunity for them to reciprocate and bring us volume. we have steered some volume to a couple of large-scale investors and earned favor, and we have several investments that are being brought to us on a non-competitive basis to participate in very attractive transactions. That's one scenario that we've been playing.
The second is, you know, with respect to yield movement and opportunities, you know, in a rockier outlook as we face today in certain sectors, the consistency and the strategy that we have of supporting the growth and expansion of a business is even more important. You want partners that can stick with you, that understand your business and are willing to, you know, weigh in. We, in fact, have been fortunate enough to sign up several investments, that are in very stable food-oriented, food and beverage-oriented businesses that, are looking to, transition from family ownership to more entrepreneurial and growth-oriented ownership. They recognize the ability to grow is gonna be a function of the partner they select.
We have won competitive auctions in the food and beverage business, which traditionally is a very stable and good credit play for us to help those businesses expand. You know, in that particular case, modestly leveraged, attractively priced with an equity co-investment. If somebody wants to grow over the course of the next two years, having the right partner in that kind of a business is very important to them. We're seeing a combination of, you know, banks are out of the market. People are looking for consistency and support. You know, we can either increase our yield or we can continue to invest in good, solid businesses at modest leverage multiples. We're kind of seeing both.
I appreciate that color and yeah. I mean, that's kind of the whole advantage of the private credit market, right? Is just sticking with people long- term. Last one if I can. I appreciate the color you gave on the earnings interest rate sensitivity. Obviously, there were disclosures in the Q on that as well. Do you think that if rates do go up at 75 basis points, another 150 basis points, at what level do you get nervous about the impact on interest coverage at borrowers? I mean, how high do rates have to go from here before that becomes a significant concern?
I don't see, you know, right now, I think we're factoring in, you know, something in the low to mid threes. When you look at the majority of our credits, the average portfolio of the core leverage is probably in the mid threes to mid to high threes. Most of those credits have not only cash availability, but are not stretched in terms of their overall leverage. I guess I wouldn't have any significant concerns outside of certain limited or isolated instances, frankly, until we get probably closer to 5%, which is, you know, probably twice where we are today. I mean, at that point, I think, you know, folks are going to be looking at, you know, our average spread. I mean, look at what our yield would be.
Given our floating rate and where we are at 10% today, you'd be talking about on average yield in the portfolio, probably in the low teens. That's a lot of interest expense to carry. Frankly, I just don't see anything in the cards right now. In fact, I think the noise that we're continuing to anticipate is things are slowing and maybe will start to come down by the end of next year. I don't think it's a long duration, even if it were to spike, which is obviously would be a greater concern on a duration of that level.
Thank you. I really appreciate the color. It's really helpful. Thanks.
Thanks for calling in.
Next question. Before we go with the next question, just a reminder, if anyone has any questions, you may press star one to join the question and answer queue. Our next question comes from the line of Mickey Schleien with Ladenburg. Please proceed with your question.
Yeah. Yes, good morning, everyone. Notwithstanding the comments at the beginning of the call that the portfolio is not in recession, could you give us a sense of how revenues and margins are trending amongst your borrowers, at least broadly speaking? And what's your thesis on how that will develop, you know, for the rest of this year and into next year?
Good morning, Mickey. You know, our portfolio is so varied. It's hard to make any particular judgments. I would say the two credits that we identified that were certainly, you know, more challenged did have an EBITDA decline, and that was tied to revenue declines and order of magnitude of, you know, 20% ±. The balance of the portfolio, you know, for the most part was, you know, plus or minus single-digit percentages. For the most part, you know, some of it's seasonal, some of it may be slowed logistical demand, supply chain issues. Some of it is just, you know, we're not a very consumer-centric businesses. It's all business-to-business for the most part.
It's not going to get whipsawed by consumer spend or housing demands or construction-related activities. You know, the two that have affected us the most are one was in the was a logistical challenge. The ports in the West Coast are still slow at delivering containers, and they couldn't supply the inventories to book the sales they expected. The other was a wireless construction-related business where a major customer decided to slow down their spend and resulted in a dip in revenues. Overall, we're still seeing relatively solid demand. Remember, most of our businesses are domestic manufacturing. You know, the focus on domestic manufacturing versus foreign sourcing continues to be a highlight for most folks in trying to manage their supply chains.
You know, we're just not seeing, you know, any particular slowdown, in those sectors. You know, the auto market, which we have a few credits in that arena, is still relatively slow, expecting pickups as we get into the fall and the chip availability continues to improve. You know, I would argue that's certainly on the upside. I would also argue we've faced the downside on the couple of energy-related credits in the last couple of quarters, and they're booming. You know, we have two that are doing extraordinarily well, paying down their credits faster than expected. You know, proportionally, I can't even measure that magnitude of increase. I think right now, our core focus on sustainable growth-oriented domestic businesses is still intact.
feel that, you know, whether it's up 5% or down 5%, we're in the right place with these companies.
That's very helpful, Bob. Just one more follow-up question, if I may. We're sort of in this strange environment where, you know, we hear the R- word in the media, but we see results like yours, we see a tight labor market, we see corporate borrowers performing generally well. It begs the question, you know, you know, where are we gonna be later this year? What I wanna ask about is your thesis on the net originations remaining strong. I guess you said for the balance of this year. What are the main drivers of that, given at least at the top line, the economy looks like it's slowing down?
Well, I do believe that, you know, the deal environment, while the mega deals have slowed down and it's kind of weighing on the markets and certainly some of the larger banks, I believe that there are still significant opportunities for businesses to go through transformational ownership. Private equity-oriented owners are still the most likely place where the transformation of the business, whether it's digital or just operational, is going to create value. I see family businesses selling with the idea that we're gonna put in new measurement systems, new performance, new technologies, improved efficiencies, better automation. That transformation is part of the reason why I think we will continue to see private equity investing in businesses and affecting those changes and improvements.
I don't think that changes because interest rates are up 100 basis points or, you know, the housing market dips, you know, by 20%. I think there is an ability to transform and create value through managing those businesses. We're seeing that in some of our investments. Secondly, certain sectors are certainly stronger. You know, I will say that one area that we're seeing a lot of activity is in healthcare. Healthcare is not going away. There are continuing to be demographic and fundamental changes in the configuration and delivery systems for healthcare, and that is going to be, you know, an opportunity for us to go forward.
I think, you know, the broader thesis of business transformation, domestic manufacturing capability and supply, and demographic growth and changes are creating opportunities. You know, folks that understand where that is and are willing to dig in and underwrite that business are gonna do fine. It just so happens at the moment that there are a lot of folks that are not digging in and are pulling back, and it's giving us an opportunity, you know, to take on some very nice businesses. I’ll give you a point reference. We were told that in a recent award that we have and in process of closing, they went to 75 lenders, got dozens of term sheets, and we won the transaction because we understood the business and leaned in to support their growth.
That kind of a partnership is something that people seek. It's not transactional. It's about your ability to understand and your reputation in supporting businesses and their growth. That's why I think we're winning.
Those are really interesting comments, Bob. There is data, as we know, that, you know, lower middle market investments can perform as well or maybe even better than upper middle market investments. With that in mind, and maybe for the benefit of the audience, you mentioned, you know, targeting family-owned businesses. What sort of typical EBITDA are you looking at? I know it varies by the sector, but what sort of average EBITDA are these companies that you're investing in generating when you invest?
Typically, they're in, let's say, the $4 million to $6 million to $8 million range. They quickly accelerate. You know, some of that is probably stripping out costs and improving efficiencies, and then it's the ability to infuse, you know, sales capabilities or acquisitions. We like to get them at that size, and if we can ride them until they get to $30 million or $40 million, then, you know, we've made a lot of money and our partners have made a lot of money as well.
Terrific. That's it for me this morning. Thank you for your time.
Thanks, Mickey.
Okay. Do we have another question?
Nope. We have reached the end of the question and answer session. I'll now turn it back over to you, David, for closing remarks.
All right. Well, thank you all for calling in, and we hope the next meeting, about a month from now, will be just as strong as the one you saw at the end of this call.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.