Stellus Capital Investment Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 10, 2023

There are 7 speakers on the call.

Operator

Morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to the Stellus Capital Investment Corporation's conference call to report financial results for its 2nd quarter ended June 30, 2023. At this time, all participants have been placed on a listen only mode. Fiscal

Speaker 1

year.

Operator

Fiscal year. This conference is being recorded today, August 10, 2023. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr.

Operator

Ladd, you may begin your conference.

Speaker 2

Fiscal year 2019.

Speaker 3

Thank you, Matthew, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended June 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 4

Thank you, Rob. I'd like

Speaker 5

to remind everyone that today's call is being recorded. Quarter. 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. Fiscal year. Audio replay of the call will be available by using the telephone number and pen provided in our press release announcing this call.

Speaker 5

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 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. We will not update our forward looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stellascapital.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 Wadd.

Speaker 2

Fiscal year.

Speaker 3

Thank you, Todd. We'll begin by discussing our operating results followed by a review of the portfolio, including asset quality and then the outlook. Fiscal year. Todd will cover our operating results.

Speaker 5

Thank you, Rob. Fiscal year. As interest rates have continued to rise in recent quarters, we continue to benefit from our favorable asset liability mix in which 97% of our loans are floating fiscal year. As a result, we had another quarter of solid earnings. In the 2nd quarter, we more than covered the dividend of $0.40 per share with GAAP net investment income of $0.49 per share.

Speaker 5

Core net investment income was $0.51 per share, which excludes estimated excise taxes. Net asset value increased $27,500,000 due primarily to the issuance of equity under our ATM program fiscal year 2019. And earnings in excess of the dividend of $1,800,000 offset by net unrealized losses on our investment portfolio of 6,300,000

Speaker 2

fiscal year.

Speaker 5

The unrealized loss was driven primarily by markdowns on specific positions offset by markups on many of the other loans in the portfolio due to tightening spreads. Fiscal fiscal 2020. During the quarter, we issued 2,300,000 shares under the ATM, which were at or above net asset value per share for net proceeds of 32,400,000 fiscal year. This brings total equity raised under the ATM in 2023 to $40,700,000 net. And with that, I'll turn

Speaker 4

it back over to Rob.

Speaker 3

Fiscal year 2019. Okay. Thank you, Todd. I'd like to cover the following areas: life to date review, portfolio and asset quality, fiscal year. As we customarily do our life to date review, so since our IPO in November 2012, fiscal year.

Speaker 3

We've invested approximately $2,300,000,000 in over 185 companies and received approximately $1,400,000,000 of repayments, fiscal year 2019, while maintaining stable asset quality. We have paid over $223,000,000 of dividends to our investors, which represents $14.50 per share to an investor in our IPO in November of 2012. Now turning to the portfolio. Quarter. We ended the quarter with an investment portfolio at fair value of $882,000,000 across 93 portfolio companies, fiscal year 2019.

Speaker 3

We expect to be approximately $1,000,000 to

Speaker 2

be approximately $1,000,000 across 80 8

Speaker 3

companies at March 31. During the quarter, we invested $37,000,000 in 5 new and 10 existing portfolio companies and along with additional fundings of $11,400,000 fiscal year. We received 2 full repayments totaling $20,800,000 and then $17,600,000 of other repayments, All that resulted in net portfolio growth for the quarter of approximately $10,000,000 at cost. Fiscal year. At June 30, 99% of our loans were secured and 97% were priced at floating rates.

Speaker 3

We're always focused on diversification.

Speaker 2

Year. The average loan per

Speaker 3

company is $10,400,000 and largest overall investment is $19,000,000 both at fair value. 90 1 of the portfolio companies are backed by a private equity firm. Fiscal year. Overall, our asset quality improved to better than 2, approximately 1.9 on our investment rating system. This would be better than planned.

Speaker 3

Fiscal year 2019. 25% of our portfolio is rated at 1 or ahead of plan. This is up from 70% at March 31 and 13% of the portfolio is marked in investment grade category of 3 or below. Currently, we have 5 loans non accrual, which comprised 3.3 percent of fair value of the total loan portfolio at fair value.

Speaker 2

Fiscal year 2019.

Speaker 3

As Todd mentioned earlier, during the quarter, we recorded an unrealized loss of $6,300,000 primarily from company specific write downs. And quarter end, we placed one loan on non accrual effective July 1, which is included in the 3.3% figure I gave earlier. Fiscal year. We continue to cover our increased dividend of $0.40 per share per quarter as a result of the greater earnings that we are generating in this higher interest rate environment, which in our view will continue for the foreseeable future. We are well positioned to benefit from the higher interest rates as our portfolio is approximately 97% floating and our liability structure is approximately 63% fixed rate.

Speaker 3

Fiscal year. As a reminder, integral to our 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. As our business has matured over the last 10 years, fiscal year. We've of course begun to see regular somewhat regular realized gains from our portfolio. And you might find it interesting that life to date, fiscal year 2019.

Speaker 3

The net realized equity gains are in excess of $60,000,000 We are expecting one fiscal year 2019. We expect the full year 2019 to be approximately $2,000,000 of which the actual gain will be about $1,000,000 fiscal year. And now turning to outlook. As many of you know, our platform at Stellus Capital Management includes a number of private institutional funds that co invest along the public company, SCIC. This additional capital allows us to invest in larger transactions, remain active in the market fiscal year.

Speaker 3

When SCIC may have limited capital and build all portfolios in a diversified manner. Today, total assets under management across Stellus platform is $2,900,000,000 And then for the quarter, since quarter end, we funded 47.5 sorry, dollars 47,400,000 at par and 5 new and 2 existing portfolio companies and have received one repayment of 10,900,000 fiscal year. This brings our portfolio to $915,000,000 99 portfolio companies. We'll likely hit 100, I guess, before quarter end. We estimate we'll end the quarter at $900,000,000 or higher in terms of total portfolio.

Speaker 3

Fiscal year. And with the additional equity raise this year that Todd referred to earlier, we expect to grow our portfolio in excess of $930,000,000 fiscal year 2019. With that, I'll open it up for questions. Thank you. And Matthew, I'll turn it over to you for the Q and A session.

Speaker 2

Fiscal

Operator

year. Fiscal year. Fiscal year. Your first question is coming from Christopher Nolan from Ladenburg Thalmann. Your line is live.

Speaker 6

Good morning, Chris.

Speaker 2

Yes. Rob, on Real Estate Investments, it seems like there was a material expansion number of non accruals there. Is that related to the higher interest rate environment?

Speaker 3

Fiscal year. Yes. This is a specific situation tied to the housing industry in the Midwest and just tied to The slowdown there that's occurred there and throughout the country in terms of real estate residential closings.

Speaker 2

Okay. So I guess the gist of my question is we're not I'm seeing increased non accruals across BDCs and I just want to see whether or not This might be just related to companies being unable to handle the change in the interest rate environment, but that's not the case with right?

Speaker 3

Yes. The question would be tied though to the fact that interest rates have risen, which has caused fewer home sales.

Speaker 2

Got you.

Speaker 3

So yes, it is.

Speaker 2

I guess for Todd is, was there any non recurring items in the earnings?

Speaker 5

No, nothing material. No, it's nothing unusual.

Speaker 2

Great. And then, on finally the facility, Before and after, it seems like the capacity is 265,000,000 which didn't really seem to change. I'm just trying to understand what the material changes were

Speaker 3

for the Yes.

Speaker 5

So the credit facility didn't increase in size. The $265,000,000 is the total fiscal amount of the facility. The borrowing base is lower than that, about $225,000,000 And then what had change at the end of the year is with the ATM proceeds we paid down the credit facility. But then also we had a very active quarter in terms fiscal year 2019. So kind of the movements in there have masked kind of pay downs as well as draws on the facility and made it look a little bit smaller fiscal year.

Speaker 5

We might otherwise expect, but there wasn't a change in the credit facility itself.

Speaker 2

Okay. That's it for me. Thank you.

Speaker 3

You too. Thank you, Chris.

Speaker 2

Fiscal year.

Operator

Thank you. Your next question is coming from Eric Zwick from Holt Group. Your line is live.

Speaker 6

Quarter. Good morning, Eric.

Speaker 4

Thank you. Thanks. Good morning. Hey, I wanted to start just first on the increase in PIK income in the quarter. What's driving that and whether you think that's going to be something temporary or whether that last potentially a couple of quarters?

Speaker 3

Yes. The PIK income is very modest Todd. It's Less than 1% as I recall. And but in any event, you may find some situations in this higher interest rate environment Where there may be a picking of a few points, but we would not expect that to be a material part of the portfolio, Eric.

Speaker 4

Great. Thank you. And then similarly, the increase in fiscal year 2019. Kind of repayment and sales activity in the quarter. I'm curious if that was reflective of 1 or 2 companies or maybe something more larger in the market.

Speaker 4

Fiscal year. We've heard from some other BDCs that the M and A market is starting to increase again. So maybe there is just fiscal year. Some companies that decided to sell are curious what drove the uptick there?

Speaker 3

Yes. So I'd say that if you'd asked us in fiscal May, we would have said things have slowed down and if you'd asked us now, things have sped up. So quite a bit of activity over the summer so far. And I'd say those are kind of company specific things, but tied to either refinancings fiscal year. But I think the things have picked up on both ends.

Speaker 3

And we've had limited repayments though in the last couple of quarters. So We would expect more deal flow and more repayments going forward.

Speaker 4

Fiscal year. Appreciate the color there. That's helpful. And last one for me. Just in terms of, I wonder if you could kind of categorize or quantify fiscal year.

Speaker 4

The size of the pipeline today, how maybe it's changed over the past 3 to 6 months and if there's any particular concentrations of fiscal year. On industries that are particularly strong in there today as well.

Speaker 3

We're so active, fiscal year. Eric around the country and all industries except for a few. And so I'd say it's pretty broad, which is helpful. So our natural flow creates Interesting industry diversification, so nothing in particular.

Speaker 4

Got it. And in terms of just the size of the pipeline today. How are you doing?

Speaker 3

Sorry. So I would just we don't describe it in nominal dollars, but I would say that it's as I said earlier, it's very active fiscal year. And quite a bit busier than we were in April May. And again, if it's helpful too just in terms of capacity fiscal year. Because of our credit facilities and the equity that we've raised, we have the ability to really get up to $950,000,000 or so as a limit.

Speaker 3

So think of us today at 9:15. So we have lots of things, but you can quickly fill up the balance. Fiscal year. So think of us as we've got more capital to invest, but also we'll be reinvesting repayments. So again, I think plenty of pipeline to keep us full in terms of the portfolio.

Operator

Fiscal year. Your next question is coming from Robert Dodd from Raymond James. Your line is live.

Speaker 3

Good morning, Robert.

Speaker 1

Fiscal quarter. Congratulations on the realized equity gain in Q3. I mean, on that Pipeline pickup, etcetera. Are you expecting an acceleration in kind of equity realizations as well? Is that the kind of activity That might go on where you're getting maybe taken out on the debt and the equity gain and then redeploying or any color on that?

Speaker 3

Yes, Robert. So none other that are in front of us that we could speak to. I would say Probably there's more of the case of refinancing than actual sales of companies, although we would expect that to pick up as well. So more to come, but I think at this point just one that we know of for this quarter.

Speaker 1

Got it. Thank you. And then fiscal year. On the ones where you maybe have seen there's a little bit of pick because of highlights and things like that. How are the sponsors responding in these situations in terms of providing us Additional support, etcetera, etcetera.

Speaker 1

I mean, just give us some color on how are they stepping forward being fiscal year? Just how is the environment with the sponsor of this right now?

Speaker 3

Yes. So I'd say that Substantially all of our sponsors have responded very well, which has been true fiscal year. Over time, throughout our history and that's a principal reason that we've gone to principally a sponsor backed strategy.

Speaker 2

Fiscal year.

Speaker 3

So we found very, very good responses from sponsors. And in many cases, they're putting equity in. So imagine In the few cases where we might have some pick in addition to cash income, you can assume the sponsors put in cash equity below us.

Speaker 1

Got it. Thank you.

Speaker 3

Yes. Thank you.

Operator

Thank you. Your next question is coming from Ryan Lynch from KBW. Your line is live.

Speaker 3

Good morning, Ron.

Speaker 6

Hey, good morning. First question I had was, You guys mentioned in the press release about ArborWorks getting placed on non accrual at the beginning of Q3. Can you just describe exactly what that business does, provide a little background on it and fiscal year. What I guess is going on with that business? And as well as does the market you guys currently have at the end of the second quarter sort of reflect fiscal

Speaker 3

year. Yes. So this business is active principally in the West part of the United States including cleaning for power lines and activities related to storms. So that's the general business and we normally don't talk more than that about it. And then in terms of the mark, we mark things as best we call them at each quarter and That's reviewed by our outside firm valuation firm.

Speaker 6

Okay. The other question I had was, obviously, you delevered a little bit this quarter. Is it the expectation that you guys want to get back up to a higher leverage level? If you look at just kind of like total leverage, gross leverage including the SBA debentures. You guys were above 2 times and now you guys are below that by a bit.

Speaker 6

Do you guys have an area that you guys would like to operate at or was this just opportunistic of fiscal year. The market being open and deleveraging a little bit to get more capital in a pretty favorable deployment environment.

Speaker 3

Yes, Chris, good question. I'm sorry, Ryan, good question. So I'd say that we're our target leverage would continue to be 1 to 1 fiscal year 2020. On the regulatory test and a little over 2 to 1 including the SBIC debenture. So that has not changed.

Speaker 3

This is fiscal year. It's really a reflection of the equity that's been raised and then some repayments, but we're still targeting the same leverage quotient.

Speaker 6

Fiscal year. That's all for me. I appreciate the time today.

Speaker 3

Great. Thank you.

Speaker 2

Fiscal year.

Operator

Thank you. That concludes our Q and A session. I will now hand the conference back to CEO, Robert Ladd, for closing remarks. Please go ahead.

Speaker 3

Fiscal year. Okay, great. Thanks everyone for being on, being a supporter of the company. We look forward to giving you the 3rd quarter results in November.

Speaker 2

Fiscal year.

Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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Key Takeaways

  • Stellus reported strong 2Q results with $0.49 GAAP and $0.51 core net investment income per share, comfortably covering its $0.40 quarterly dividend.
  • Under its ATM program, the company issued 2.3 million shares for net proceeds of $32.4 million in the quarter, bringing 2023 YTD ATM equity raised to $40.7 million and boosting NAV by $27.5 million.
  • The investment portfolio totaled $882 million across 93 companies at quarter end, with $37 million deployed in new and existing deals, net portfolio growth of ~$10 million, and 99% of loans secured and 97% floating rate.
  • Asset quality improved to a 1.9 average rating on Stellus’s scale, with five non-accrual loans representing 3.3% of fair value and an unrealized loss of $6.3 million driven by specific markdowns.
  • With total AUM of $2.9 billion, an active deal pipeline and a 97% floating-rate asset mix against 63% fixed-rate liabilities, Stellus expects the portfolio to exceed $930 million by year end and to continue benefiting from higher interest rates.
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Earnings Conference Call
Stellus Capital Investment Q2 2023
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