Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Gladstone Capital Corporation's third quarter earnings call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at the appropriate time. If you require any assistance during today's call, you may press star then zero on your touch-tone telephone for a live operator. As a reminder, today's conference may be recorded. It is now my pleasure to turn the call over to Mr. David Gladstone. Sir, the floor is yours.
Thank you, and hello, everyone. Thank you for calling in. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for Gladstone Capital for the quarter ending June 30, 2019. Again, thank you for calling in. We're always happy to talk with our shareholders and analysts and welcome the opportunity to provide updates on the company and its investment portfolio. Now we're going to start off with Michael LiCalsi. He's our general counsel, and make some statements with our forward-looking statements.
Thanks, 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 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 in our forms 10-Q, 10-K, and other documents that we file with the SEC. You can find these on our website, which is www.gladstonecapital.com, specifically look on the investor relations page or on the SEC's website, which is www.sec.gov. Now, 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.
We also ask you to take the opportunity to visit our website, once again, gladstonecapital.com. Please sign up for our email notification service. You can also be found on Twitter. The handle there is @gladstonecomps, and on Facebook, keyword, The Gladstone Companies. Today's call is an overview of our results. We ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Those can be found on the Investor Relations page of our website. With that, I'll turn the presentation back over to Gladstone Capital's President, Bob Marcotte. Bob?
Good morning, and thank you all for dialing in today to spend a few minutes with us this morning. Now let's get into the headlines for Gladstone Capital for the quarter ended June 30, 2019. Originations on the quarter were strong at $58 million, as we referenced in our prior call, and included two new proprietary investments and three syndicated investments. Exits and repayments were higher than anticipated at $41 million and included the prepayment of our senior debt investment in IA Tech, which at $30 million, was one of our top five, which was prepaid at par plus a prepayment fee. Net originations on the quarter thus were $17.3 million after all other portfolio movements.
Interest income rose slightly to $11.2 million on the quarter from the prior, as the decline in average yield on our investment portfolio to 11.8% was offset by a small increase in the average interest-bearing investment portfolio from the prior quarter. Prepayment fees, exit fees, and dividend income rose on the quarter to $1.7 million, including the IA Tech prepayment fee of $900,000, which lifted our total investment income to $12.9 million or 2.9% higher than the March quarter. Our borrowing-related costs were unchanged on the quarter as average borrowings fell slightly and commitment fees associated with the lower utilization of our credit line rose on the quarter.
Net investment income was up slightly at $6.2 million or $0.21 per share as operating expenses were unchanged and net management fees rose compared to the prior quarter as incentive fees increased with the increased investment income and incentive fee credit decline. The net assets from operations rose to $8.9 million on the quarter, or $0.30 per share as a result of the $2.6 million of net portfolio appreciation on the quarter. NAV rose to $0.12 per share or 1.5% to $8.23 per share at June 30. With respect to the overall portfolio, the asset mix as of the end of the quarter shifted slightly with all the portfolio activity, resulting in the senior secured assets falling 3% to 46% of our investment portfolio at fair value, while the second lien investments rose to 42% of the portfolio.
A major contributor to the portfolio appreciation in the quarter was the continued improvement in ADC's operating results and better visibility into the potential exit opportunities for that investment. Detracting from this momentum was a realized loss on the exit of a non-core defense sector fund investment, FedCap, and unrealized appreciation of our equity interest in Lignetics. During the quarter, there was no change to our two non-earning assets, which represent an aggregate cost of $8.5 million or 2.2% of all debt investments and an aggregate fair value of $2.1 million or 0.6% of the fair value of all debt investments. Since the end of the quarter, we closed an additional $5 million follow-on investment. Between repayments and exits, total investments have increased by $3.8 million, so our earning assets are up slightly as of today.
We also expect to close a new proprietary deal in the very near term. With respect to the near-term outlook, within our lower middle market focus, principally sub $10 million EBITDA business, we have seen a healthy level of deal flow in the past several months. That said, competitive pressures have also increased, particularly for senior investments, causing lending margins to inch down. Between our current investment backlog and follow-on fundings to our existing portfolio companies, we expect to be able to outpace some of the anticipated liquidity events on the horizon and continue to increase our average investments and core net interest income. Interest rates are not obviously expected to provide much near-term lift to our interest income. However, we do expect fee and other income to remain elevated as our portfolio continues to mature and expected exits are realized.
The flip side of the declining interest rate outlook is that we are optimistic that we'll be able to refund our existing 6% GLADN preferred early next quarter at a lower effective cost through some combination of capital market issuance or bank facility borrowings. This refunding is a prerequisite to clearing the last hurdle to be able to lift the 200% minimum asset coverage limitation. However, given our 242% coverage as of June 30, we're probably several quarters of solid originations away from being in a position to utilize any of this additional leverage capacity. Now I'd like to turn the call over to Nicole Schaltenbrand, the CFO for Gladstone Capital, to provide some of the details on the firm's financial results for the quarter. Nicole?
Thanks, Bob. Good morning, everyone. During the June quarter, total interest income rose 1% to $11.2 million as higher average investments more than offset the 20 basis point decline in the average yield on the investment portfolio. Other income rose by $300,000 to $1.7 million with the IA Tech prepayment fee, as well as other exit fees and dividends received. Total investment income rose $400,000 or 2.9% to $12.9 million on the quarter. Total expenses for the quarter increased by $200,000, driven mainly by a $600,000 increase in net incentive fees, partially offset by a $400,000 decrease in net base management fees. The increase in net incentive fees was driven by both an increase in net investment income and a $400,000 decrease in advisor fee credits quarter-over-quarter.
The $400,000 decrease in net-based management fees was driven by the credits received associated with origination fees on our new investments during the quarter. Financing expenses were unchanged at $3.2 million, and other expenses were also unchanged at $800,000 or 79 basis points on average assets on the quarter. For the quarter ended June 30th, net investment income was $6.2 million or $0.21 per share and covered 100% of our shareholder distribution. Moving over to the balance sheet. As of June 30th, total assets were $415 million, consisting of $408 million in investments at fair value and $7 million in cash and other assets. Liabilities rose by $8 million to $169 million and consisted of $59 million in borrowings on our credit facility, $55.6 million of our 6.125% Notes due 2023 senior notes, and $52 million of Series 2024 Term Preferred Stock.
Net assets rose by $11.3 million since the prior quarter end, with $2.6 million of net realized and unrealized portfolio appreciation and common stock issued under our ATM program, which generated net proceeds of $8.6 million. For the quarter, we issued 939,000 common shares at an average price of $9.34 per share or 113.5% of NAV. The accretive ATM issuance accounted for approximately one-third of the $0.12 increase in NAV, which rose to $8.23 as of June 30, 2019, compared to $8.11 as of March 31, 2019. Our leverage as of June 30 was unchanged from the prior quarter end of 69% of net assets, despite the increase in assets for the period. As of the end of the quarter, we had an excess of $75 million of current investment capacity and approximately $117 million of available under our line of credit.
With respect to distribution, Gladstone Capital has remained committed to paying its shareholders a cash dividend, and in July, our board of directors declared a monthly distribution to our common stockholders of $0.07 per common share per month for July, August, and September, which is an annual rate of $0.84 per share. The board will meet 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 the common stock price of about $9.21 yesterday, the distribution run rate is now producing a yield of about 9.1%, which continues to be attractive relative to most yield-oriented alternatives. Now David will conclude the presentation.
Okay. Thank you, Nicole. Good report. A good report from Bob and Michael as well. I think our shareholders and the analysts are well informed of what we're doing. This is another good quarter for Gladstone Capital. Originated more than $60 million in new investments to more than offset the spike in payments and continued growth of the assets. Generating a record $12.9 million of investment income, aided by some significant fees, but nonetheless, made good money. Maintaining a strong balance sheet with significant dry powder to grow the investment portfolio in this area that we specialize in, and that's the lower middle market businesses. The company, we believe, has enough liquidity to weather any kind of recession should there be one.
In summary, the company sees strength in the private businesses that are mid-size with a good management team. Many of these are owned by mid-size buyout funds that are looking for experienced partners that can lend money to the businesses they invested their equity in. This gives us a chance to make attractive interest-paying loans, which support our ongoing commitment to pay cash distributions to stockholders. Have a great team here, and they're doing a good job. Now I'm going to ask the operator to come in, and let's get some questions from those out there that would like to ask us some more particulars.
Thank you, Mr. Gladstone. Ladies and gentlemen, if you would like to ask a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or wish to remove yourself from the phone queue, you may press the pound key. One moment for questioners in the queue. Our first question in queue will come from the line of Henry Coffey with Wedbush. Please go ahead. Your line is now open.
Henry, are you there?
Mr. Coffey, your line is open. Please check your mute.
Can you hear me now?
Yes.
Sorry about that. With rates as low as they are, how are you managing around that challenge, and how is market pricing being affected? If yields on investments were low, are there alternatives too, in terms of cutting your funding costs to offset that and keep spreads where they need to be?
Henry Coffey, as you know, obviously, a significant part of our capital stack, about 1/3 of our debt is floating rate bank debt. That's obviously going down with it. The second piece, as I mentioned in my comments, we're going to call out our preferred early next quarter, and that's at a 6% yield on it. More than likely, there'll be some mix of floating rate funding that will come into that, and that's going to be significantly less expensive than the current dividend on that preferred. Those are certainly two parts of it. The more challenging part in the marketplace today is there's clearly been some spread compression in the lower middle market as it's continued to be an active buyout area, probably even more active than the larger middle market buyouts. We've seen some incursion of other funds coming in, creating some pressure on margins.
We obviously are ramping up what we see in deal flow and very mindful of the competitive conditions that we're focusing. At this point, I would say hit rates are a little bit lower, but we're still in a situation where we're lowering our costs and managing to our current yields, and obviously, we would love a little bit of rate increase to be able to offset some of the compression, but I think at this point, we're still seeing positive investment opportunities that are accretive to our current book. It's tight, but I think we're still managing flow, and I think that's one of the reasons why you don't see our assets growing more dramatically. The incremental asset growth is coming from places where competitive pricing is probably less attractive.
Look, there's obviously different sectors of the economy, and there are different sectors of the economy that are affected by what the administration is up to. For example, soybean agriculture or something like that. When you look at your portfolio companies, what sort of economic read do you get? Obviously, if you're looking at the stock market, you'd be very negative, but what are your portfolio companies telling you about how business conditions are and how the economy is going?
Well, we've always had a healthy mix of smaller manufacturing businesses. There's certainly been, in the past five, seven years, a significant outsourcing. Domestic manufacturing, which is what BDCs really focus on, actually are growing quite well. As people realign their supply chains, domestic manufacturing, plant expansion, migration to domestic production, where automation, labor costs, delivery times, inventory requirements are all more favorable. We're getting to a point where whether it's aerospace or maybe some auto-related businesses, those have become a much more significant uptick in opportunity. Obviously, each of those have their own challenges, but domestic manufacturing certainly is stronger. I think in some of the other areas, we're seeing services businesses continue to be strong. We see activity in software-related businesses or things in other service categories are certainly positive.
Probably more positive than you would think given basic wage increases and some of the pricing pressures, their costs, but they're still very positive on their outlook. I would say it's decidedly a domestic swing for businesses that is creating some of the updraft for us.
Great. Thank you very much.
Okay, next question.
Thank you, sir. Our next question comes from the line of Mickey Schleien with Ladenburg Thalmann. Please go ahead. Your line is now open.
Yes. Good morning, everyone. Bob, could you give us a bit more background about the trends at Alloy Die that supported its valuation increase? Also, how correlated is its business to a potential slowdown of the economy?
ADC Die Casting business is symbolic of what I mentioned into Henry's question. It's a West Coast-based manufacturer that serves aerospace, lighting, and some auto-related businesses. The business, when it was acquired, had some deferred capital expenditures. Over the course of time, between those expenditures and some significant management changes, as you may know, that's one of the few co-investments we have these days, and it's controlled by Gain. We have significant insight to what's going there. Between capital and a swap out in management and a refocus on domestic customers, what we've seen is huge inflow of orders from large-scale, multinational corporates that are lifting that business. The result has been significant sales increase, significant margin expansion, and at this point, the cash flow run rate in that business is up very dramatically over the last three years.
In today's market environment, they are building cash significantly, and we feel is a business that has clearly turned the corner and is currently well above where the original investment was, and that's reflected in our equity adjustment on the quarter. I would say that's endemic of what I think is a very strong story in a domestic manufacturing business that is certainly well supported by the underlying fundamentals.
I guess I'll congratulate you and David Dullum on turning that around. I guess the downside, Bob, is that it sounds like that's a business that could potentially be a nice tuck-in acquisition for somebody and this will go off your books, or potentially, I guess if the cash flow profile is as nice as you're indicating, you could be refinanced. Is that reasonable?
I guess we're exploring options in those regards. Between the accumulated liability and the ultimate value of that business, that's a fair assumption that Dave and his team are pursuing.
Okay. Just a couple questions on the risk profile of the portfolio. Could you tell us how your average borrower revenue and EBITDA compares for your first lien versus your second lien investments?
We don't really break that information down. Obviously, each individual business can be very different. As you can imagine, when you're financing a manufacturer versus a software business versus a healthcare business, you come up with very different profiles. We don't try to lump that. I can certainly follow up with you directly and talk a little bit about specifically overall. The blend across the portfolio on all of the underlying investments, which we obviously report and have very exacting metrics that are required by our secured lenders, is approximately 3.7, 3.8 times leverage across the entire portfolio. When you think about market comps, that's probably closer to senior relative to where the middle market might be. That would be probably significantly north of that.
That's helpful. Perhaps I could just follow up and ask just conceptually, when you look at second liens, do you tend to prefer sponsored deals with lower LTVs, or is there a different approach in order for you to get interested in a second lien?
That's an interesting question, and probably moves a lot with the market conditions. I would say, when the leverage starts to increase, second liens certainly become more challenging. You will note that we have closed a number of syndications in the last quarter because we felt the second lien marketplace, the lower leverage levels, and the significant equity sponsorship and equity support warranted that. That's a clear example where sponsor and equity were a differentiating factor for us. As it relates to only restricting our second lien investments to sponsored deals, that's not always the case in the proprietary transactions. In the proprietary marketplace, many of the sponsors are looking for second lien to juice leverage and spike their return on equity. We don't necessarily look at that situation where we're comfortable taking on that level of investment.
You also should know that when we classify it as a second lien, and this is a bit of a detail, but there are times where we might originate a unitranche loan, and we would sell off a strip of the first lien piece inside that loan. If we provided a 4 turns of leverage in a buyout, we might sell off the first 2 turns of leverage to a bank at a much lower rate. We would classify that as a second lien loan, as you would expect, but it's really inside a first lien leverage facility. From a collateral and control perspective and from an overall leverage perspective, we are going to be lower than what a traditional second lien would look like. We continue to work the second lien angle.
It's certainly an important part of our portfolio, but for the most part, I think there is, in a syndicated fashion, either a large equity or in a proprietary deal, significant control that we continue to exert over those assets.
I understand. That's helpful color, particularly labeling a second lien a second lien as opposed to many of your peers, which don't. I appreciate your time this morning. Thank you.
Thank you, Mickey.
Okay. Do we have any other questions?
Sir, I'm showing no additional questions in the queue. I'll turn the program back over to David for any additional closing remarks.
All right. Thank you all for listening to the presentation. Company's in great shape today, and we look to see you in about three months. That's the end of this call.
Thank you to our presenters, and thank you to all of our attendees for joining us. This concludes today's call. You may now disconnect and have a wonderful day.