Stellus Capital Investment Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's Conference Call to report financial results for its 3rd fiscal quarter ended September 30, 2023. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. This conference is being recorded today, November 8, 2020 3.

Operator

It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Speaker 1

Okay. Thank you, Holly. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 2023. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward looking statements as well as an overview of our financial information.

Speaker 2

Thank you, Rob. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Stellus Capital Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone number and pen provided in our press release I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward looking information. Today's conference call may also include forward looking statements and projections, and we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections.

Speaker 2

We will not update any forward looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Public Investors link or call us at 713-292-5400. At this time, I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Speaker 1

Okay. Thank you, Todd. Todd will now cover our operating results, life to date review and portfolio and asset quality.

Speaker 2

Thank you, Rob. In the Q3, we more than covered the dividend of $0.40 per share with GAAP net investment income of $0.47 per share. Core net investment income was $0.49 per share, which excludes estimated excise taxes and the impact of capital gains incentive fees. Net asset value per share was lower as a result of some unrealized losses in our investment portfolio. These were company specific and we don't believe are indicative of overall asset quality.

Speaker 2

Net investment income exceeded the dividend by $1,500,000 and we also issued additional shares of $21,500,000 on a net basis, all at or above net asset value. From a Life Per Day perspective, since our IPO in November 2012, We've invested approximately $2,400,000,000 in over 191 companies and received approximately $1,500,000,000 of repayments while maintaining stable asset quality. We have paid over $233,000,000 of dividends to our investors, which represents $14.55 per share to an investor and our IPO in November 2012. We ended the quarter with an investment portfolio at fair value of $886,000,000 across 96 portfolio companies, up from $882,000,000 across 93 companies at June 30, 2023. During the Q3, we invested $44,100,000 in 6 new and 6 existing portfolio companies.

Speaker 2

And along with additional fundings of $4,700,000 and received 2 full repayments totaling $21,000,000 $15,000,000 of other repayments, resulting in net portfolio growth at cost of $4,700,000 At September 30, 99% of our loans were secured and 97% were priced at floating rates. We're always focused on diversification. The average loan per company is $9,900,000 and the largest overall investment is $18,900,000 both at fair value. Substantially, all of the portfolio companies are backed by a private equity firm. Overall, our asset quality is below a rating of 2, therefore, slightly better than planned.

Speaker 2

25 Currently, we have 5 loans on non accrual, which comprise 1.6% of the fair value of our total loan portfolio. With that, I'll turn it back over to Rob to discuss dividends and the overall outlook.

Speaker 1

Okay. Thank you, Todd. As a reminder, part of our investment strategy has been to invest in the equity of our portfolio companies in a modest way in order to generate realized gains sufficient to offset losses over time. While we've had modest equity realizations so far this year, we expect this activity to pick up over the next 6 to 12 months. As of the end of the quarter, we have $57,000,000 of equity investments at cost that were marked at 66,000,000 Our historical performance would indicate that the ultimate realization for this portfolio could be greater than 2 times our portfolio's cost basis.

Speaker 1

However, of course, the ultimate performance of our current equity positions will depend on a variety of factors, including among other things, the current economic environment and sponsors' equity exit strategies rather. Now turning to dividends. We continue to cover our dividend of $0.40 per share from the higher interest rates as our portfolio is over 97% floating rate and our liability structure is approximately 65% fixed rate. As a reminder, as we are now in the 4th quarter, the November dividend is paid on December 15th and the December dividend is paid on December 29. Looking forward to Q1 of 2024, We expect subject to our Board of Directors approval to continue our monthly dividend of approximately $0.13 per share, resulting in aggregate dividends of $0.40 per share for the quarter.

Speaker 1

It's worth noting that based on the average price of our stock over the last 10 days ending yesterday. Our current dividend equates to an annual yield of 12.5%. Now turning to outlook. Since quarter end, we have funded $3,200,000 at par in 5 existing portfolio companies and have received one repayment of $400,000 This brings our total portfolio to approximately $888,000,000 at fair value with 95 portfolio companies. We are experiencing a somewhat slower environment for originations than in the previous few quarters and we expect our funding for the remainder of the year will be offset by expected repayments of approximately the same amount.

Speaker 1

As a result, we estimate we'll end the year flat quarter over quarter. And with that, I'll open it up for questions. Thank you. And Holli, you can begin the Q and A session, please.

Operator

Your first question for today is coming from Christopher Nolan at Ladenburg Thalmann.

Speaker 3

Hey, guys. The increase in non accrual assets, what is the thinking? Is given the broader Economy, is the inclination to work through these or to try to exit them?

Speaker 1

So Chris, good question. It has been our mode for now almost 20 years that we work through things And versus sell them off. And so that's our that would not change. So continue to work through problems. And ultimately, we found the realizations are better overall that way.

Speaker 1

Okay.

Speaker 3

And then Rob, what is the thoughts on leverage? You're already Covering the dividend. Is the thought to keep the leverage low, take the excise tax hit and just or just to increase leverage and how are you thinking about?

Speaker 1

Sure. So we have reached a point on leverage Based on equity issue under the ATM program and some repayments where we're less levered than normal, We target the regulatory leverage to be at 1 to 1 or so. We're now I believe about 0.8 or so to 1. So we would expect the leverage to tick back up to one to one and have a more full portfolio, which we think is a good position to be in.

Speaker 3

Final question, in your comments, you mentioned the 1st quarter 'twenty four dividend of $0.13 per share per month. Did you mean Q4 'twenty three or?

Speaker 1

Yes. So what I was referring to is we're now we declared the dividends for the Q4 of this year. So just to indicate that based on the performance Where we're headed, we would expect that dividend to continue on to into the Q1 of next year, again, subject to Board approval.

Speaker 3

Great. Thank you for the clarification. That's it for me.

Speaker 1

Yes. Thank you, Chris.

Operator

Your next question for today is coming from Robert Dodd with Raymond James.

Speaker 1

Good morning, Robert.

Speaker 4

Hi, guys. Good morning. Just I want to ask you about ArborWorks. Obviously, last quarter, you told us you're going to put it on the quote, which you did. And it's a pretty large Shulk of the unrealized appreciation this quarter, so I presume you're working for it.

Speaker 4

But you've also then, in October, Made a small couple of $100,000 follow on. Can you give us any is that working capital? Is that part of The work it through process or is that the sponsors stepped up and put in equity and you put in a little bit of debt as well. Can you give us Any color on that since that was one of your biggest moves this quarter?

Speaker 1

Sure. Yes. So this again, as you know, we really limit our discussion about private companies for competitive reasons. But I would say this is the normal working through a situation with the sponsor who's been supportive and where there's some modest additional fundings On both sides.

Speaker 4

Got it. Got it. Thank you. I want just looking to your point on the Equity co invest potential realizations over the next quarter a year. Can you give us So what kind of market environment needs to be going on for those realizations to occur?

Speaker 4

And what would that mean more broadly for the rest of the portfolio to that point, maybe getting the leverage back Are those two things just intrinsically related, why you couldn't have the realizations without portfolio growth or What do you have to look there?

Speaker 1

Yes. So maybe take them separately. In terms of portfolio growth, Again, as I indicated in my remarks that we have seen a slowdown and I think others are experiencing this, but at the same time seeing very interesting opportunities That sort of pipeline is growing. Just a matter of we're very selective as you know. So I would expect you'll see Continued portfolio growth, we're targeting to take the $888,000,000 or so up to at least $9.50,000,000 based on activity over the next 6 months or so.

Speaker 1

And then in terms of equity realizations, your point is a good one. So The equity overall public equity markets have been somewhat muted lately, seem to be rallying the last few days. So this certainly drives Exits, but it's they're typically not to a public offering, but rather it just influences market multiples. So we found that the equity realizations are more company specific and tied to what The private equity firm is able to do with the platform and now has achieved the time where the significant EBITDA growth And they're exiting the position. So although it's become a little bit muted, we would expect it to pick up.

Speaker 1

In part, Robert, just because of the vintage of some of our portfolio that and one thing I didn't mention in the remarks is We went back and studied the history of the equity co invest portfolio and it looks like on average They're realized in just over 4 years. So we have some positions that are longer than that, Which would drive eventually from historical math that we'll be having some coming up again in the next year or so. So I'd say they're different. And of course, the cash that would come from the realizations It would be very helpful because it's not earning a coupon. So we would of course reinvest the cash that came in from realizations into principally the loan portfolio and again with about a 5% typically co invest that's attached to each new loan.

Speaker 4

Got it. Thank you for that color. Appreciate it.

Speaker 1

Yes. Thank you, Robert.

Operator

Your next question is coming from Paul Johnson with KBW.

Speaker 5

Good morning. Yes. Hey, guys. Thanks for Taking my questions. On your comments on your internal credit rating on the portfolio, I just want to make sure I'm Claire, I think you said 14% was rated 3 or below, I think rated 3 or 4.

Speaker 5

Is that on Cost basis or is that on fair value?

Speaker 1

Yes, Paul, that's based all of those are based on fair value.

Speaker 5

Got you. So I would say obviously that includes non accruals on that list. I mean, is it fair I guess, are you able to offer any other color on those Any other portfolio that kind of falls into that bucket in terms of performance kind of outside of the non accruals, I guess, that are included in that number?

Speaker 1

I would say that the percentage there is about normal over time. So not anything is, I think Todd said earlier, not that would indicate a broader concern about the portfolio. So We always have a number of handful of risk grade 3s that we consider somewhat like on our watch list that we're working through. So not any material difference than in the past.

Speaker 5

Okay, got it. And then, I guess from your the performing part of your portfolio, What have you guys seen so far in terms of amendment and activity relief requests? Has there Any sort of instances of amendments just for credit relief and any trends that you're seeing there that are notable?

Speaker 1

Yes. So I'd say that very few requests in that way. Now there's no question that as nominal interest rates have come up roughly Depending on the floors, but roughly 400 plus basis points. So all companies are bearing that difference And interest expense that they didn't have a couple of years ago. So I think it's reduced, but company's cash flows, But not in a material way that's affected performance.

Speaker 1

So when we have something that's again a risk grade 3 or below, It's really company related specific performance versus a macro, gee, we just can't cover the interest expense. And just as a reminder, we do have the flexibility, which is part of your question, I think that if we got rates too high, we could certainly pick some part of the interest knowing that we'd ultimately collect that upon a refinancing or a sale. So I'd say Not a broad based issue in the portfolio and we're certainly trying to be flexible when there's a need, but we've had very few requests That have come just from interest rates increasing.

Speaker 5

Got it. Thanks for the color. That's all for me.

Speaker 1

Yes. Thank you, Paul.

Operator

Your next question is coming from Bryce Roe with B. Riley.

Speaker 6

Thanks. Good morning. Hi, Rob and Todd.

Speaker 1

Good morning, Bryce.

Speaker 2

Good morning, Bryce.

Speaker 6

Good morning. Wanted to Just to clarify, I guess maybe with Chris' question about leverage in your prepared remarks too. I mean, clearly, you're comfortable operating At one to 1 from a regulatory perspective, you've been active with the ATM. And I think in the second quarter, not third, You subsidized some of the offering expense to achieve NAV. Just curious in this current backdrop, Are you still interested in raising equity on the ATM over the short term despite that one to regulatory leverage target that you kind of have had over time?

Speaker 6

Thanks.

Speaker 1

Sure, sure. I'd say we're certainly always interested in raising equity if it's positive for the company. We But given our current leverage position, I think you'd find us more of investing the capital than issuing new shares. But again, we would be Open minded and would look at that each quarter as the opportunity presents itself.

Speaker 6

Okay. That's good clarification. Thank you.

Speaker 1

Thank you.

Operator

We have reached the end of the question and answer session. And I will now turn the call over to Robert for closing remarks.

Speaker 1

Okay. Thank you, Holli, very much. So we thank everyone for your support for participating this morning on the call. And we look forward to updating you in early March when we'll have the year end figures.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Stellus Capital Investment Q3 2023
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