Gladstone Navigates Rate Pressure with Strong Margins and New Deals

Date of Call: Feb 5, 2026

Financials Results

• Revenue: $23.9M interest income, up 1% quarter-over-quarter
• EPS: $0.24 per share net increase in net assets from operations

Business Commentary:

Solid Financial Performance:

• Gladstone Capital reported net investment income of $11.3 million for the quarter, with interest income rising to $23.9 million.
• This performance was supported by an increase in average earning assets, despite a 30 basis point decline in average SOFR rates.

Portfolio and Investment Activity:

• The company's portfolio remained stable with first lien debt and total debt investments comprising 73% and 91% of the portfolio cost, respectively.
• Gladstone experienced significant prepayments, including $42.8 million from Vet's Choice, and funded an additional $6 million in a precision machining business, indicating robust investment opportunities.

Leverage and Liquidity Management:

• Gladstone Capital ended the quarter with a leverage position at 93% of NAV and increased floating rate bank borrowings to better match asset rate sensitivity.
• The company's bank line utilization resulted in a reduction of line commitment fees, saving approximately $1.6 million.

Unrealized Losses and Valuation Adjustments:

• The company reported unrealized losses of $5.3 million, concentrated in three investment positions affected by the government shutdown and management changes.
• These adjustments reflect expectations of significant improvements over the balance of 2026.

Interest Rate Sensitivity and Strategy:

• Gladstone's average floor rate is approximately 1.25%, with current SOFR rates around `3.70%%, indicating potential for significant interest rate exposure.
• The company is positioned to absorb potential rate decreases by utilizing a variety of financial levers to support the dividend.

Sentiment Analysis:

Overall Tone: Positive

• "a solid quarter for Gladstone Capital again" and "The company has a strong balance sheet, ample bank lines and capacity to grow our investment portfolio to deliver more dividends to our shareholders and delivery of net interest margins required to sustain the shareholders' dividends."

Q&A:

• Question from Erik Zwick (Lucid Capital Markets): Could you talk about the use of floors on variable rate loans and how many are at their floors given potential SOFR reductions?
  Response: The majority of variable rate loans have floors, but the company is not at them yet. They can absorb rate decreases and sustain the dividend, with savings from lower line commitment fees helping offset potential headwinds.

• Question from Erik Zwick (Lucid Capital Markets): Are you seeing more AI and data center-related opportunities in the origination funnel?
  Response: They do not directly invest in data centers but see some indirect benefit from related spend. They are cautious about sustainability due to many entrants in the market.

• Question from Erik Zwick (Lucid Capital Markets): What is driving the increase in PIK income?
  Response: A couple of credits: one is scaling and using more working capital, and another is liquidating an underperforming business. They are monitored closely and strategies are in place to recoup PIK and delever.

• Question from Christopher Nolan (Ladenburg Thalmann): Why did the diluted share count change significantly quarter-over-quarter?
  Response: The change is due to accounting requirements for convertible debt using the if-converted method, and it will continue as long as convertible debt remains outstanding.

• Question from Christopher Nolan (Ladenburg Thalmann): Are there updates on regulatory structures affecting BDCs, specifically the AFFE rule?
  Response: No concrete changes expected soon; any change would take several years to rollout, so they are not counting on it in the near term.

• Question from Robert Dodd (Raymond James): Is the strong pipeline activity spillover from Q4 or new deals, and will it remain robust?
  Response: Some spillover, but also new deals driven by diligence periods and trends in domestic manufacturing and reshoring, suggesting a build of activity.

• Question from Robert Dodd (Raymond James): Has your appetite for government contractor businesses softened due to increased shutdown risks?
  Response: They generally don't focus on short-term government services; the one impacted by shutdown was a unique case and is already recovering, not a permanent impairment.

• Question from Robert Dodd (Raymond James): Can you give color on the workout for Eegee's and other businesses with management transitions?
  Response: Eegee's faces seasonality and headwinds from ICE activity, but management is evolving the business with a new menu to drive traffic in 2026.

• Question from Sean-Paul Adams (B. Riley Securities): What is the remaining SOFR exposure before floors kick in?
  Response: Average floor is about 1.25%, current SOFR is ~3.70%, so there is material potential move. They are positioned to absorb at least the first 50-75 basis points of a rate cut.

Contradiction Point 1

Portfolio Growth and Asset Addition Expectations

Contradiction on the expected pace of portfolio growth for the upcoming year.

Is the robust pipeline activity due to Q4 spillover or new deals, and will it remain robust? - Robert Dodd (Raymond James)

2026Q1: The positive trend is supported by a general downward trend in rates and better industry clarity. The company expects continued activity... with some deals in the pipeline for the next quarter. - Robert Marcotte(President)

Will portfolio growth accelerate in fiscal 2026 due to private equity sponsor expansion? - Christopher Nolan (Ladenburg Thalmann & Co. Inc.)

2025Q4: Asset growth in 2026 is expected to be slightly higher than in 2025... The company expects accelerating growth. - Robert Marcotte(President)

Contradiction Point 2

Outlook on Interest Rate Floors and Financial Flexibility

Contradiction regarding the company's ability to manage potential rate decreases and its financial flexibility.

Okay, so the user wants me to rewrite the earnings call question into a concise version. The original question is: "What is the remaining SOFR exposure in basis points before floors kick in?" First, I need to understand what the key elements are here. The main components are "remaining SOFR exposure," "basis points," and "before floors kick in." The user is asking about the amount of SOFR (Secured Overnight Financing Rate) exposure that's left, measured in basis points, before the floors (which are likely interest rate floors) become active.Now, I need to make this concise. The original is already pretty direct, but maybe I can shorten "remaining SOFR exposure" to "current SOFR exposure" or just "SOFR exposure." However, "remaining" might be important here to indicate what's left before the floors take effect. "Basis points" is necessary for the unit. The phrase "before floors kick in" can be rephrased to "before floors activate" or "prior to floors applying," but "kick in" is commonly used in financial contexts, so maybe keep it as is.Putting it all together: "What is the remaining SOFR exposure in basis points before floors kick in?" Hmm, maybe "remaining" can be kept. Let me check if there's a more concise way without losing meaning. "What is the SOFR exposure in basis points remaining before floors kick in?" That's the same length. Alternatively, "What's the remaining SOFR exposure in basis points before floors kick in?" Using "What's" instead of "What is" is more concise. But the original uses "What is," so maybe stick with that for formality. I think the original is already concise. Maybe "remaining" is essential to convey that it's the amount left before the floors take effect. So the rewritten question should keep "remaining," "SOFR exposure," "basis points," and "before floors kick in." Therefore, the concise version would be: "What is the remaining SOFR exposure in basis points before floors kick in?" But wait, that's the same as the input. Did I miss something? The user wants it more concise. Let me see. Perhaps "remaining" can be replaced with "current" but "remaining" is more precise here. Maybe "What is the remaining SOFR exposure in basis points before floors activate?" But "activate" is not as common as "kick in." Alternatively, "What is the SOFR exposure in basis points remaining before floors take effect?" That's slightly longer. The original is already pretty concise. Maybe there's no better way. The key is to not add any explanations or prefaces, just make it as short as possible. So perhaps the original is acceptable. But the user might expect a shorter version. Let me check again. Original: "What is the remaining SOFR exposure in basis points before floors kick in?" Possible concise version: "What is the remaining SOFR exposure in basis points before floors kick in?" Wait, maybe "remaining SOFR exposure in basis points before floors kick in" is the core. So the question is already as concise as possible. Maybe the user just wants it rephrased but not necessarily shorter. However, the instruction says "concise question," so perhaps using "What's" instead of "What is" to save space. Final answer: "What's the remaining SOFR exposure in basis points before floors kick in?" That's shorter by a couple of characters. But the user might accept either. Since the instruction says "concise," using "What's" is acceptable. So the rewritten question would be "What's the remaining SOFR exposure in basis points before floors kick in?" But wait, the user provided the input as the original question. So maybe the assistant's task is to rephrase it without changing the meaning. The original uses "What is," so maybe the assistant should use "What is" as well. However, "What's" is more concise. The user didn't specify whether to use contractions, but since the instruction is to make it concise, using "What's" is appropriate. So the final answer is: "What's the remaining SOFR exposure in basis points before floors kick in?" But I need to check if that's the case. Alternatively, maybe the assistant can make it even shorter. Let's see. "Remaining SOFR exposure in basis points before floors kick in?" But the question format requires "What is..." So the answer must start with "What is..." or similar. Another angle: "What is the SOFR exposure in basis points remaining before floors kick in?" That's the same number of words. Hmm. The user might consider "What is the remaining SOFR exposure in basis points before floors kick in?" as already concise. So maybe the answer is the same as the input. But the user wants it rewritten, so perhaps the assistant - Sean-Paul Adams (B. Riley Securities)

2026Q1: The company has significant levers to manage potential rate decreases. It can absorb the first 50-75 basis points of a decline... The dividend reset last quarter was done with these sensitivities in mind, providing confidence for the near term. - Robert Marcotte(President) & Nicole Schaltenbrand(CFO & Treasurer)

Why was the quarterly dividend reduced to $0.45 (implying a 9.6% yield) given favorable spreads and leverage? - Christopher Nolan (Ladenburg Thalmann & Co. Inc.)

2025Q4: The reduction was a proactive, responsible measure to set expectations for 2026 in light of potential further declines in short-term interest rates. The company aims to maintain the dividend and has financial flexibility (e.g., reduced unused line of credit costs). The overall return on equity (ROE) and NAV growth... remain strong... - Robert Marcotte(President)

Contradiction Point 3

Predictability and Volume of Portfolio Company Prepayments

Contradiction on whether prepayments are predictable and their typical volume.

Is the robust pipeline activity a carryover from Q4 or new deals, and will it remain robust? - Robert Dodd (Raymond James)

2026Q1: The company expects continued activity as private equity firms focus on domestic manufacturing and reshoring trends, with some deals in the pipeline for the next quarter. - Robert Marcotte(President)

Did the leverage ratio reach 81% of NAV quarter-to-date, and will repayments reduce it later in the quarter? - Christopher Nolan (Ladenburg Thalmann)

2025Q3: Prepayments are erratic and not predictable. Over the last two quarters, about 40% of the portfolio has been repaid. - Robert L. Marcotte(President)

Contradiction Point 4

Origination Pipeline Volume and Activity Expectations

Contradiction on the expected volume of originations per quarter.

Is the robust pipeline activity due to Q4 carryover or new deals, and will it remain robust? - Robert Dodd (Raymond James)

2026Q1: The company expects continued activity... with some deals in the pipeline for the next quarter. - Robert Marcotte(President)

Was the recent spike in investment activity timing-related? How are your pipeline and backlog positioned for the remainder of the quarter and year? - Justin (Lucid Capital Markets, on for Eric Zwick)

2025Q3: The origination volume is expected to be in the $50 million to $100 million range per quarter, similar to traditional levels. - Robert L. Marcotte(President)

Contradiction Point 5

Nature and Outlook of Fee Income

Contradiction on whether high fees are an anomaly or a new normal.

What is causing the rise in PIK interest? - Erik Zwick (Lucid Capital Markets)

2026Q1: The increase is driven by a couple of credits... The strategy is to work with portfolio companies to recoup PIK. - Robert Marcotte(President)

Explain the portfolio company fee credit and the outlook for fees in the coming quarters? - Mickey Schleien (Ladenburg Thalmann)

2023Q3: Overall, fee levels are now higher than in the prior competitive environment... The high level from last quarter was an anomaly. - Bob Marcotte(President)