Greetings, and welcome to the Gladstone Capital Corporation fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, David Gladstone, Chief Executive Officer. Please proceed, sir.
Okay. Thank you very much, Latanya. This is, what, the 10th time we've talked with you on there. This is very nice. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital for the quarter end and also the fiscal year-end of September 30, 2023 . Thank you all for calling in. We're always happy to talk with our shareholders and the analysts that follow us, and welcome an opportunity to provide updates with regard to the corporation. Now we'll hear from our General Counsel, Michael LiCalsi, who will make a statement regarding certain forward-looking statements. Michael?
Thanks, David. 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. 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 the Forms 10-K, 10-Q and other documents we file with the SEC. You can find them on the Investors page of our website. That's gladstonecapital.com. While you're on there, you can also sign up for our email notification service. You'll find the documents on the SEC's website as well, 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. Just a reminder, today's call is an overview of our results, so we ask that you review our press release and Form 10-K, both issued yesterday, for more detailed information. Again, go to the Investors page of our website to find them. Now I'll turn the call over to Gladstone Capital's President, Bob Marcotte.
Thank you, Michael. Good morning, and thank you all for dialing in this morning. I'll cover the highlights for last quarter and the fiscal year ended September 30, and conclude with some commentary as we look forward into fiscal 2024, before turning the call over to Nicole Schaltenbrand to review the details of our financial results for the period. Beginning with the last quarter results, originations last quarter below trend and totaled $27 million, mostly to existing portfolio companies as we enter the quarter, closely managing our overall leverage and with a cautious view on investment leverage levels in the face of slowing price escalation and elevated interest rates. Prepayments have been modest this year. However, we did have one sizable prepayment from Encore Dredging, which, combined with the portfolio amortization, resulted in a $13 million decline in our ending investment balance as of September 30.
Short-term SOFR rates increased 30 basis points on average over the quarter, and were the primary reason the weighted average yield on our investment portfolio rose to 13.8%. The average earning assets for the period also increased 3.7%, and the two combined increased total interest income by 6.7% to $23.3 million for the quarter. Borrowing costs rose slightly as average bank borrowings declined with the proceeds of the lower cost GLAD Z baby bond issuance in August. As a result, our net interest income rose $1.3 million to $17.1 million for the quarter. Deal closing and advisory fees fell with the modest originations, and management fees rose by $1.5 million, given the reduced fee credits to $5.6 million for the period.
Despite the $2.1 million decline in fee income and deal closing and advisory fee credits, net investment income came in at $11 million or $0.28 a share for the quarter, which was down $700,000 from the prior quarter. The net realized and unrealized gains on the portfolio for the period totaled $2.1 million, which lifted our ROE for the quarter to 13.7% and 11.9% for the last 12 months.
Consistent with our outlook for significant growth of private credit within the lower middle market over the next couple of quarters, we elected to capitalize on significant investor demand into our common stock ATM program and issued 4.9 million shares last quarter, which generated proceeds of $48.3 million and increased our NAV to $409 million or $9.39 per share. With respect to the portfolio, the 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 in cost, or 0.4% of assets fair value. We continue to prioritize our portfolio monitoring in areas where revenue headwinds appear to be most prevalent, which seems to be mostly consumer-facing sectors, which is a small portion of our overall investment.
Thankfully, our couple of exposures to the auto segment were relatively unaffected by the recently settled strikes. Appreciation for the quarter of $2.1 million was driven by the equity appreciation of our position in a manufacturer of defense-related electronics, which was partially offset by the depreciation of a handful of senior debt positions, most of which are private equity sponsored, with significant underlying equity support. In reflecting on our 2023 performance and outlook for what is now our fiscal 2024, there are a couple of comments I'd like to leave you with. While 2023 deal activity has been volatile, we've been able to grow our investment portfolio by 10% to over $700 million, while still maintaining our focus on investing in growth-oriented, lower middle market companies and broadening our private equity network in the process.
Today, our portfolio is comprised of over 50 companies, and our core portfolio represents companies with an average EBITDA of approximately $11.7 million. We've maintained our underwriting rigor and are fortunate to have our portfolio heavily weighted to senior secured loans with relatively low PIK and non-earning assets. With the expectation of the continued growth opportunities inside the portfolio and the growth of private credit market more broadly across the lower middle market, we've ended the quarter with a very conservative leverage position at just 74% of NAV and ample availability under our bank credit facility. So we are very well positioned to grow our earning assets as the primary driver of our net interest income growth and shareholder distributions in the coming year.
Now I'll turn the call over to Nicole Schaltenbrand, the CFO for Gladstone Capital, to provide more details on the fund's financial results for the quarter.
Thanks, Bob. Good morning, everyone. During the September quarter, total interest income rose $1.5 million, or 6.7% to $23.3 million, based on the increase in short-term rates and an increase in earning assets. The weighted average yield on our interest-bearing portfolio rose 30 basis points to 13.8%, with the increase in floating rates on the 89% of the investment portfolio that carries floating rates. The investment portfolio weighted average balance increased to $668 million, which was up $24 million, or 3.7% compared to the prior quarter. Other income declined to $500 thousand, and total investment income rose $900 thousand or 4.1% to $23.8 million for the quarter.
Total expenses increased by $1.6 million quarter- over- quarter, as net-based management fees rose $1.7 million with the reduced deal closing and advisory fee credits. Net investment income for the quarter ended September 30 was $11 million, which was a decrease of $700,000 compared to the prior quarter, or $0.28 per share, which exceeded the $0.2675 per share dividends paid. The net increase in net assets resulting from operations was $13.1 million, or $0.33 per share for the quarter ended September 30th, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. With respect to the full fiscal year, total investment income for 2023 was $86.4 million, which represented an increase of $23.3 million, or 37% over the prior year.
The year-over-year increase was primarily due to the 21.2% increase in the weighted average principal balance of our interest-bearing investment portfolio, and the increase in the weighted average yield from 10.4% during the year ended September 2022, to 13.3% during the year ended 2023. Expenses increased $14.5 million or 47.1% in 2023 as compared to the prior year. This increase was primarily due to a $7.9 million increase in interest expense on borrowings and a $3.2 million increase in the net incentive fee. Net investment income for the year ended September 30, 2023, was $41 million, an increase of $27.1 million as compared to the prior year, or $1.10 per share.
The net increase in net assets resulting from operations was $42.7 million or $1.14 per share for our fiscal year ended 2023, compared to $19.9 million or $0.58 per share for 2022. The current year increase was driven by net investment income and $12.7 million in net realized gains, partially offset by $11 million in net unrealized depreciation. Moving over to the balance sheet. As of September 30th, total assets declined to $720 million, consisting of $705 million in investments at fair value and $50 million in cash and other assets.
Liabilities declined to $311 million and consisted primarily of $253 million of senior notes, including the $57 million of 7.75% GLAD Z baby bond due September 2028, which we closed during the quarter. Advances under our $223 million line of credit declined to $48 million as of the end of the quarter. As of September 30th, net assets rose by $50.7 million from the prior quarter end, with the net proceeds from common share issuance under our ATM of $48 million and our undistributed earnings. NAV rose from $9.27 per share at the end of the prior quarter to $9.39 per share as of September 30th.
Our leverage as of September 30th declined, with the common stock issuance and debt reduction to 74% of net assets. Subsequent to September 30th, we closed an $11 million secured first lien debt and preferred equity investment in Quality Environmental. With respect to distributions, in October, our board of directors declared monthly distributions to common stockholders of $0.0825 per share per month for October, November, and December, which is an annual run rate of $0.99 per share. The board will meet again in January to determine the monthly distribution to common stockholders for the following quarter. At the current distribution run rate for our common stock and with the common stock price at about $9.98 per share yesterday, the distribution run rate is now producing a yield of about 9.9%.
Now I'll turn it back to David to conclude.
Well, thank you, Nicole. Nice presentation. And Bob, another good year. Michael did a nice job, too, presenting things that will help our analysts and stockholders understand who we are and what we've been up to. In summary, it was another solid quarter and a solid fiscal year for Gladstone Capital. For the year, the company delivered some impressive results. 25% growth in average earning assets, 27% growth in net investment income, 11.9% return on equity, and 22% increase in the common stock distribution rate. Very nice numbers. While the fiscal year 2023 results were good, the company also is very well positioned for the coming year as the portfolio is in good shape, modest leverage and very low non-performing assets.
As a strong balance sheet today to support further growth, and I think we'll get good growth for this new year, fiscal year 2024. In summary, the company continues to stick with its strategy of investing in growth-oriented, lower middle market businesses with good management. Many of these investments are in support of mid-sized private equity funds that we have been friends with for many years, and they are looking for an experienced partner to support their acquisition and growth of that business, which they've invested in. This gives us an opportunity to make attractive interest paying loans to support our ongoing commitment to pay cash distributions to shareholders.
We love to pay dividends, and I love that since I'm a shareholder, and I'm gonna turn it back over to our, the lady who's handling this, [LaToya], and we'll get the operator to tell callers how they can ask for a question.
Thank you. We will now conduct 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 key. Once again, that's star one to ask a question at this time. One moment while we pull for our first question. Our first question comes from Robert Dodd with Raymond James. Please proceed.
Morning, and yeah, congratulations on the quarter and a good year. Bob, can you give us, sorry, some color about pipeline or anything like that? I mean, you sound very confident, and positioned the balance sheet to capitalize on some significant onboardings of new deals, potentially. I mean, so can you give us any color about, you know, is that hopeful or is it actually already showing up in the pipeline and the kind of deals? Because Q2 was pretty light, obviously.
Thank you for calling, Robert. I guess a couple of observations. We went through last quarter with almost $30 million of core growth in existing portfolios. So we're finding our existing businesses that we feel good about are certainly in looking for solutions to continue to grow. I would expect over the near term to see continue to see a significant investment on that front. Secondly, you know, we've been very judicious in pursuing new activities. We've already closed one this quarter, and there are definitely a few on the horizon. I will say, not all of those are necessarily private equity buyout situations.
The complexion of the marketplace today is, there are lenders and investors that are withdrawing from the market, given the capital limitations and the availability of capital more broadly. So we're finding businesses that the existing lenders are not able to step up and support the growth of the businesses, as well as, you know, certainly some selective buyout activity. But at current marginal rates, there's no doubt that the overall volume of private equity buyout activity has come down a bit. So I think the idea of seeing flow and picking up from where we were in Q2 when we frankly took on no new assets is part of why I'm relatively bullish. The unknown, Robert, is prepayments. Our portfolio continues to mature.
We have roughly a little more than 50% of the portfolio with EBITDA north of $10 million. So depending upon where interest rates are and how the liquidity returns to the market, we may see a pickup in, in prepayment activity, but that's, that's a tough one to call at this point. I think our view is rates are staying high, and the banks currently aren't aggressively pursuing refinancing activities. So we're seeing those assets probably stick around longer. A number of our portfolio companies have considered refinancings and been somewhat challenged based on the market reception. The last thing that I would also say is, consistent with that private equity market is, businesses are not selling, and private equity is not necessarily raising a ton of new funds today.
So a lot of portfolio companies and sponsors are looking to extend the life of their investment horizon. So you're seeing a tremendous amount of continuation funding, dividends and recapitalization activities because they can't necessarily sell the assets at the multiples they expected, given the current interest rate environment. So overall, we feel like the market's there, it's just slightly different pockets of activity. It's not all buyout activity. It's coming in a variety of different forms. And I think the idea of us being able to put out, you know, an average of roughly $50+ million a quarter, which is what we've been averaging for the most part on a normalized quarterly basis, is the reason why we've created the capacity we have on the balance sheet.
Just for round numbers, we'd need to put out another $100 million in order for us to get to close to one-to-one leverage. That's currently what I would say is the target, and if we can do that over the course of the next two-three quarters, I think that's really the plan of why our balance sheet is currently as strong as it is.
Thank you for that. That was really really helpful color. Second one, if I can, on credit quality. I mean, to your point earlier about one not a core, the only thing the consumer, you mentioned consumer headwinds in the consumer sector, we don't have a lot of exposure. Any other areas where maybe margins are moving the wrong way or anything like that, where there's an emergence of perhaps credit concerns? Or is it just the consumer right now?
I will say we're going into year-end, and in the past couple of years, year-end has been a market where some of the industrial companies, you know, we are in a metal bending, metal processing, precision manufacturing business. Their end customers would be large industrial manufacturers. Order visibility and order momentum is a little soft. Nobody wants to be stuck with year-end inventory more than they otherwise would, given the current rates and the current liquidity profile in the marketplace. So we're definitely seeing a tick down in some order flows for those. We tend to look at those as year-end related matters. It happened last year. It's happened in the prior years. I think at this point the businesses are solid. They're not, they're not looking to source it overseas.
They're not chasing, you know, alternative suppliers. This is not about pricing. This is about managing their order flows and maybe getting a little leaner. So some of the metal processing industrial businesses, I think are gonna be down, you know, single digits in their revenue profile over the course of Q4. And we'll have to see what the beginning of Q1 next year looks like.
Really, really helpful. I mean, kind of following on to that avenue, this year-end. I mean, have you had preliminary or you've gotten any feedback from portfolio companies about expected budgets for 2024? Or maybe it's too early in that cycle. I mean, by the sound of it, with the industrials, that's what you're hearing. Any other general expectations? I mean, are people budgeting for a recession next year or just a more moderate economy?
I don't think anybody's budgeting recession. For most of our businesses, it's about, you know, has the market moved? Where do they need to be going? Diversifying their underlying customers. As you may appreciate, when you start at a lower middle market business, you tend to have a limited set of core customers that drive the business. And depending upon the selection of customers you've got or the diversity, there may be sectors that are not as robust. And so part of the challenge is broadening the horizon to grow the underlying business. At this point, I would say, I think people are cautiously optimistic. I think they know they're gonna have to work harder. They know they're gonna have to diversify more.
They're gonna have to broaden the funnel of deal opportunities to build on to 2024 volume. But we're still focusing on the core. Most domestic businesses are still reshoring. They are still looking for capable, lower middle market or middle market businesses that can support and be more flexible in their supply chain on fulfilling their production needs. And so, we don't feel like the market's moving away from us, and it's certainly not about pricing. It's about diversity and stability of the customer base, and we feel pretty good about this. It's not about price for the most part.
You know, I was down visiting one of our smaller companies in the electronic printed circuit board business, and they've had the biggest quarter they've had in the last couple of years last quarter, because people don't want to be dealing with foreign suppliers. And it's created a resurgence in flexibility for those folks that are capable and responsive to their underlying customers. So at this point, you know, it's not a recession horizon. It's about continuing to continuously improve the business and diversify the businesses that we're most focused on.
Got it. Thank you very much.
Thanks for calling in.
Okay, Latanya? Next question.
Our next question comes from Mickey Schleien with Ladenburg . Please proceed.
Yes, good morning, everyone. Bob, I realize these are not particularly large investments, but I wanted to ask you about the prospects for DKI Ventures and 8th Avenue Food. Just asking in relation to their valuation.
Taking them in reverse order. 8th Avenue Food is a large syndicated position in a buyout business that is in the grain and commodity processing. It is affiliated with what used to be the old Post Foods. It had a tough couple of quarters, but it has consolidated its manufacturing and is reasonably solid in the food service business. You know, as a second lien loan in this marketplace, things don't trade very well, and I think that one's probably trading at a relatively low point compared to its enterprise value. Frankly, I'm not terribly worried by that. That is actually a position that is owned by Apollo, and they have significant capital invested in that business.
Food service tends to go through some cycles and but it tends to have a long-term horizon to grow. That's one that don't really spend a ton of time on, and give you a little color on that one. In terms of DKI, DKI is a, it's an environmental kind of a restoration company, kind of like a BELFOR- type of business, where it deals with events, such as flood, storm damage, fire restoration type of obligations. The business has gone through a bit of a transition. It used to be a franchise business with local operations. It that franchise platform is morphed to a services, more of a TSP platform.
They recently hired some additional resources to expand and grow its network of property owners and managers that they service. The business has a core supply GPO underlying it, which also produces a fair bit of profitability. Because of the current events, whether it's climate change or otherwise, we seem to have plenty of occasions for that kind of support. And then given what's going on in the property market, we see large property managers desperately in need of a consolidated outsourced provider to service those particular incidents when they arise in their managed properties. So the underlying performance of the business has probably trailed what I think is the broader marketplace.
We've repurposed the marketing side of the business and feel like it's in pretty good shape. The underlying sponsors in this case and the founders of the business are continuing to fund money into the business to support the transition that's ongoing. It's a business we are working hard on, but we think the long-term fundamentals supporting the business and the equity ownership is supportive of the business and feel like it's a small business that has a reason to continue to grow and come out of the situation it's in.
Bob, just to follow up to that explanation. Does Quality Environmental, the new investment you made, operate in the same space?
It actually does not. Quality Environmental is an asbestos abatement firm, focusing on certain segments of the healthcare and educational sectors. So it's more about curing environmental problems that exist, not fixing problems that have occurred, unfortunately.
I understand. Those are all my questions. Appreciate your time. Thank you.
Thanks for calling in, Mickey.
Do you have any more questions?
Once again, to ask a question, please press star one on your telephone keypad. Our next question comes from Kyle Joseph with Jefferies. Please proceed.
Yeah. Hey, Bob. Good morning. Thanks for t aking my questions. Just, just wanted to pick your brain. Obviously, the portfolio has seen some good, good yield expansion on rates, but kind of give us a sense for, you know, what, what spreads have been doing and the outlook for yield into 2024, given the forward curve? Thanks.
The rates are a tough one, Kyle. Thanks, thanks for the question there. When you look at current market, you know, the SOFR seven type pricing puts rates, you know, at 12, low 12s. That starts to sound like traditional, you know, mezz or subordinated debt. And what's happening is there's a little bit of a convergence and blurring of the categories. If it is a good, solid business, you know, you'll get—you'll tend to get a little bit more pricing compression, and we've seen good-sized businesses attract large capital sources, and maybe what might have been in the high sixes and the spread over SOFR can be bid down to maybe six over.
So there's been about, you know, 50+ basis points of compression for the better credits. And so, you know, they're clearing probably closer to the in the 11s as opposed to other places where it might have been a recapitalization, and it might have been a slightly wider. So I think what's happening today is buyouts of good credits, good companies are getting a little bit more aggressive if they're of size. And so what we're finding is, we wouldn't expect spreads to widen from where they are today. In fact, I probably suspect they will start to contract slightly, and we'll see less of that in the lower middle market.
It's the large funds where they've got capital on the balance sheet that they need to be put to work, where we're seeing the most amount of price compression. And that's not the average for us. What we're seeing for us is it's still in the SOFR seven range for us, so I would not expect that compression to hit us. Some of our larger credits, you know, we do have a fair number that I said average over 10. We may see some compression, but we'll see significant upsides in those situations.
So if somebody—if one of our credits happens to be very lowly leveraged because of growth, you know, if, if we want to recapitalize that business or fund an acquisition, we may see that compression come through slightly, but we'll get the upside associated with the additional volume. So in the lower middle market, I think you're gonna see slight compression in the larger credits. I think we're seeing at least 50 basis points in tightening, just because of competition.
Got it. Very helpful. Thanks for taking my questions.
Do you have any additional questions?
Mr. Gladstone, there are no further questions at this time. I'd like to turn it back to you for closing comments.
Okay. Well, thank you all for calling in. We certainly appreciate those questions from the analysts. They help us continue to go forward and explain where we are and what we're doing. But we'll stop for now, and we'll see you again next quarter. That's the end of this call. Thank you.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.