Greetings. Welcome to the Gladstone Capital Corporation's first quarter earnings call. This time, all participants are in 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 from your telephone keypad. Please note this conference is being recorded. At this time, I will turn the conference over to Mr. David Gladstone, Chief Executive Officer. Mr. Gladstone, please go ahead.
Thank you, Rob. Nice introduction and good morning, everybody. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital for the quarter ending December 31st, 2022. Thank you all for calling in. We're always happy to talk with our shareholders and analysts and welcome the opportunity to provide the update for the company. We'll hear from our General Counsel, Michael LiCalsi, who will give a statement regarding certain forward-looking statements. Michael?
Thanks, David. Good morning, everybody. Today's report may contain forward-looking statements on the Securities Act of 1933 and 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 we file with the SEC. Find them on the investors page of our website, www.gladstonecapital.com. You can also sign up for email notification service. You can also find the documents on the SEC's website, that's 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. Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Again, you can find those on the investors page of our website. With that, I'll turn it over to Bob Marcotte. Bob?
Thank you, Michael. Good morning, all, and thank you for dialing in this morning. I'll cover the highlights for last quarter and conclude with some market commentary as we look forward to the balance of 2023, before turning the call over to Nicole Schaltenbrand, our CFO, to review our financial results for the period and our capital and liquidity position.
Beginning with last quarter's results, originations for the quarter were modest at $11 million for the period, which were all add-on investments to existing portfolio companies. Amortization, repayments, and exits were $39 million, so our ending investment balance fell by $28 million for the period. Interest income for the quarter rose 18% to $18.4 million, as the weighted average loan yield rose 110 basis points to 12.3%.
The average investment balance rose 6.6% to $589 million. Fee income rose on the period by $900,000, with a number of year-end equity distributions, and contributed to the 21% rise in total investment income, which was $19.3 million for the quarter. Borrowing costs increased $900,000 or 22% with higher SOFR rates. However, our net interest margin also rose $1.9 million or 17% to a record $13.4 million for the quarter. Administrative costs were largely unchanged. However, net management fees rose by $1.2 million- $4.6 million or 2.9% of assets, as new deal closing fee credits were down and incentive fees associated with the increase in investment yields rose compared to the prior quarter.
Net investment income increased $1.2 million or 17% to $8.7 million or $0.25 per share. The net realized and unrealized losses on the portfolio for the period came in at $3 million. As a result, NAV declined $0.02 per share to $9.06. While higher rates lifted our net interest income, we also reduced our leverage last quarter, and we were still able to generate a 10.9% ROE for the quarter. Based upon the portfolio performance and increase in net interest income, we recently announced a monthly dividend increase to $0.075 or $0.90 annually and will consider further increases in the coming quarters. With respect to the portfolio continues to perform well with generally modest leverage metrics and favorable liquidity profile.
After market auto and building sector headwinds caused us to reclass Edge Adhesives to a non-earning, which represents $6.1 million or 0.4% of assets at fair value. Depreciation for the quarter of $3 million was primarily related to small moves in several equity positions, with very little of the depreciation associated with stress or performance of our debt portfolio. Notable portfolio exits for the period included the sale of a couple of equity investments in Targus and Leeds Novamark Capital, which generated realized gains of $10.3 million. The repayment of R2I, which is a highly leveraged credit and contributed to the 35% drop in PIK income for the quarter. In reflecting on our outlook for the balance of 2023, I'd like to leave you with a couple of comments.
Our balance sheet leverage at the end of last quarter was a bit elevated relative to our target range, and the investment exits, along with the accretive ATM share issuance.
Last quarter, have positioned us well to support the further growth of our asset base in the coming quarters. While disappointed with the level of originations last quarter, we continue to be optimistic and are well-positioned to continue to grow our debt investments in growth-oriented lower middle-market companies by $50 million-$100 million over the balance of the year as we did last year. Most recently, in January, we closed a new deal, NeoGraf, which was a $29 million first lien debt and $2 million of equity co-investment. We have managed our underwriting rigor in the face of interest rate escalation and are fortunate to have our portfolio heavily weighted to senior secured loans, which at present represent 72% of our investments.
Secured investments have increased to 91% of the total investments, with a modest overall leverage of under 3.5 turns. With our floating rate investments exceeding our floating rate liabilities by approximately $425 million and the current floating rates on pace to be up at least 70 basis points for the quarter, we would expect our net interest margin to be up in the range of $750,000 this quarter. Now I'd like to turn it over to Nicole Schaltenbrand. Nicole?
Thank you, Bob. Good morning. During the December quarter, total interest income rose $2.8 million or 18% to $18.4 million based on the increase in prevailing floating rates and increase in earning assets. The weighted average yield on our interest-bearing portfolio rose 110 basis points to 12.3%, with the increase in floating rates on the 91% of the investment portfolio that carries those floating rates. The investment portfolio weighted average balance increased to $590 million, which was up $37 million or 6.7% compared to the prior quarter. Other income increased by $600,000- $900,000, which contributed to the $3.4 million or 21% increase in total investment income for the quarter.
Total expenses rose by $2.1 million quarter-over-quarter as interest expenses rose $900,000 and higher net management fees rose by $1.2 million, with higher average assets, increased investment yields, and reduced new deal closing fee credits. Net investment income for the quarter ended December 31st was $8.7 million, which was an increase of $1.2 million compared to the prior quarter or $0.25 per share, which exceeds the $0.21 per share dividends paid and supported the increase to $0.225 Per quarter announced in January. The net increase in net assets resulting from operations was $5.7 million or $0.16 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 declined to $640 million, consisting of $622 million in investments at fair value and $18 million in cash and other assets. Liabilities declined to $315 million as of the end of the quarter 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 declined to $108 million. As of December 31st, net assets rose by $8.8 million from the prior quarter end with the realized and unrealized valuation depreciation, which was more than offset by net proceeds from our common share issuance under the ATM program of $10.5 million.
NAV declined slightly from $9.08 per share as of September 30th to $9.06 per share as of December 31st. Our leverage as of December 31st declined with a decrease in total assets and ATM share issuance to 97% of net assets. With respect to distributions, Gladstone Capital's monthly distributions to our common stockholders was increased to seven and a half cents per common share effective for the months of January, February, and March, which is an annual run rate of $0.90 per share. The board will meet in April 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 at about $10.36 per share yesterday, the distribution run rate is now producing a yield of about 8.7%. Now I'll turn it back to David to conclude.
Thank you, Nicole. You and Michael and Bob all did a great job of informing our stockholders and analysts that are following the company. In summary, another solid quarter for Gladstone Capital. Company didn't close much last quarter, but it did a good job of exiting some assets and de-leveraging the company. The company is building additional capacity to support the existing portfolio, but also additional investments in the coming quarters. The company has about $112 million of availability under its bank line, great shape there. Portfolio is in good shape, modest leverage, and very low non-performing assets. Net interest income in the quarter was up 17% based on the higher interest rates in the company's favorable capital structure and more support, the 7% increase to the common distributions that was announced last month.
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 support of midsize private equity funds that we partner with, and they're looking for experienced partners to support the acquisition and growth of the business in which they have invested. Usually a lot of equity. This gives us an opportunity to make an attractive interest-paying loans to support our ongoing commitment to pay cash distributions.
To shareholders. Now we'll call the operator. Rob, tell us how to ask questions about the company.
Thank you, Mr. Gladstone. To ask a question at this time, please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to withdraw your question from the queue. Participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Once again, that's star
one. Thank you. Thank you. Our first question is from the line of Mickey Schleien with Ladenburg. Please proceed with your questions.
Good morning, everyone. Bob, first a high level question. Could you give us a sense of what's going on in the market that prevented you from closing your new originations during the quarter?
Good morning, Mickey. As you may recall, we had a couple of two strong quarters leading up to last quarter. We were probably pretty well focused on closing, I think, about $120 million of assets. Our pipeline was a little bit thinner. We're also facing a pretty significant step up in underlying rates. I think we were being a little bit more conservative in the approach that we were taking in terms of which industries, which sectors were gonna be able to support the significant step up in rate. You know, I think we are being very careful about not only rates, but what's the economic headwinds are gonna affect the revenues in the underlying portfolio.
While we saw a number of credits that were not clearing, you know, we were a little bit more conservative. I think the fact that we've already closed one in January, and there are a number still to come. I'm not too worried about a quarter blip. We tend to have those from time to time. Don't tend to happen in fourth quarter, but the overall level of deal activity in the December quarter was generally lighter than what we would normally expect in our end of the market.
Thanks for that. That's very helpful. It actually leads to my next question in terms of rising interest rates. With the strong January jobs report, as you know, the forward interest rate curve implies about another 50 basis points of Fed tightening. How do you see that potentially impacting the portfolio's ability to service its debt?
Yeah. Let me give you a couple of quick stats, and we've talked about this before. You have to understand the nature of our portfolio. We start with smaller credits, and they gradually grow. At the moment, roughly 70% of our portfolio is to companies with EBITDA under $25 million. That leaves 30% that's over $25 million. Of the 70% that are the smaller credits that you would be probably most concerned about those issues, 56% of those credits have leverage under 2.5. The majority of the credits where we would probably face stress are extremely lowly leveraged, in fact, bordering on typical bank-type leverage. The overall leverage profile for that 70% is 3.1x
A interest rate move is certainly meaningful, but we're nowhere near anything that would cause particular stress. We're feeling like the vast majority of our smaller credits today are very lowly leveraged and absorbing any issues that are currently outstanding. And as I've said in the past, we have roughly 70% of the portfolio that is sponsored back, so it again has additional supports that come with it. At the moment, you know, if we were seeing anything in the way of stress, I think you would have seen a little bit more movement from our third party outside evaluations of the portfolio.
Since the majority of the loan movements were very minor, I think it just affirms the fact that the leverage profile and the performance of our portfolio in the face of the escalating interest rates is well positioned.
I understand. That's a great explanation, Bob. One last sort of housekeeping question, maybe for Nicole. When did you actually place Edge on non-accrual, and did you reverse any previously accrued interest income on Edge?
We placed it on non-accrual effective, October first, and we did reverse one month. The September of 2022 month of interest, which was less than $75,000 of interest was reversed.
Okay. That's it for me this morning. I appreciate your time. Thank you.
Thanks, Mickey.
Thank you. As a reminder, to ask a question today, you may press star one. The next question is from the line of Robert Dodd with Raymond James. Please proceed with your questions.
Hi, and congratulations on the quarter. I also wanna say thank you for that detailed answer to Mickey's question on the interest coverage and the leverage by kind of size tier . That's really, really helpful. On the pipeline, if I can. Like, you talked about, obviously it was a little... You had originated a lot, so it kind of emptied the pipeline. It started to refill again. How would you rank the pipeline in terms of, you know, looking forward, maybe, yeah, beyond January?
how it's stacking up and the quality of the businesses that are in it, given you work there, you're taking a somewhat more conservative stance on what you're willing to underwrite or how you're willing to underwrite in this kind of economic uncertainty period.
It's an interesting question. I would say there's probably a couple of different nuances there, Robert. First off, you know, I think if you read some of the recently re-released reports, tightening credit conditions has squeezed a lot of folks out of the marketplace today. A lot of the regional banks, a lot of the larger banks and capital constraints, in a number of places, have really moved all of the borrowers to the private capital markets. Being open as we are today, we're getting to see an awful lot of stuff. What we are seeing, you know, runs the gamut, deals that didn't close because somebody, you know, couldn't fund them to deals that probably shouldn't close given the uncertainty of the market conditions.
I think what we're seeing is a very wide swath of opportunities. It's really up to us to stress those against our historical screens to figure out, you know, which of those we feel have the forward momentum to be able to deleverage in the way we typically underwrite credits. For us, the good news is as time goes on, we're seeing current numbers. We're seeing current, you know, 23 outlooks and budgets. If people start to, you know, negatively trend to their plan, two things typically happen. Sponsors don't buy them because they're not gonna hit their targets. Two, they are not going to give us the profile to deleverage the risk that we were expecting.
Mm-hmm.
There's a natural... The deal falls away because the visibility or the sponsors don't think they can make the valuations work. For us today, you know, we do have a number of things out there, but it's all based on trends that we are seeing continued deleveraging. Obviously, you know, because we do deal with smaller credits, there are pockets where things are doing very well. And our, you know, focus in those is really just the sustainability of those businesses.
You know, if we're investing in something that might be positively impacted by electrical vehicles or energy consumption or, you know, things like recycling or closed loop or other things that are, you know, certainly more on trend and being driven by social trends and government investing, you know, those are, those are places where we're gonna see continued growth opportunities. We're just more mindful of what the realistic 23 outlook might bring for the wider swath of credits that we're seeing.
Got it. I appreciate that color. I'm kind of following on. I mean, the private capital markets, as you say, are still open. I mean, you're still lending. Are you seeing any increase in competition in your end of the market, given to your point, there's probably somewhat fewer businesses that actually meet everybody's kind of, not necessarily yours, but others' underwriting parameters, in this environment. Is it resulting in more crowding for the deals that are getting done? Doesn't seem to be, right? It's spread thin.
I don't think so. I think the idea of we're, you know, a consistent player. We've got, you know, an established position. you know, more often than not, we're getting calls from sponsors who, you know, the banks flaked on them or some lender that was relying on the CLO market to support their business or insurance company to back them, you know, isn't there and we'll certainly get those calls and have, you know, preferential opportunities. The thing in today's marketplace that I would say is there's no reason for us to stretch. I mean, given our traditional pricing, you know, use a benchmark 7 over or something like that. Today, that's gonna generate senior returns in excess of 11%.
There's no reason to stretch for extra credit risk. We have had situations where the senior is approaching what would traditionally be subordinated or second lien returns. There's no reason to stretch. The current level of interest rates and the current demand for private capital is giving us a tremendous opportunity to put money out as senior risk. As long as it's in the right business, it's generating great returns for us.
I appreciate that. Really clear answer. Thank you.
Thank you for calling in.
Thank you. At this time, we've reached the end of the question and answer session. I'll now turn the floor back to Mr. Gladstone for closing.
Okay. Thank you all for calling in. I would mention that there's a lot of junk in the marketplace today. A lot of banks have been out of the market and just closed their door to new loans. I guess the regulators are beating on them pretty hard. Anyway, we're in great shape to keep moving forward. I expect this quarter that we're in now, that began in January, is gonna be a strong quarter for us. That's really the end of this presentation. We'll see you next quarter. Thank you all for calling in. Rob.
Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.