Stellus Capital Investment Q3 2024 Earnings Call Transcript

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November 8, 2024

There are 6 speakers on the call.

Operator

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 3rd fiscal quarter ended September 30, 2024. Participants are currently on a listen only mode and we will have a question and answer session following the presentation. This conference is being recorded today, November 8, 2024. It is now my pleasure to turn the call over to Mr.

Operator

Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Speaker 1

Thank you, Ali, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30 this year. 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 announcing this call. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward looking information.

Speaker 2

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. 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. Now I'll cover our operating results for the quarter and would like to start with our life to date activity. Since our IPO in November 2012, we've invested approximately $2,500,000,000 in over 195 companies and received approximately $1,600,000,000 of repayments, while maintaining stable asset quality.

Speaker 2

We've paid over $273,000,000 of dividends to our investors, which represents $16.28 per share to an investor in our IPO in November 2012, which was offered at $15 per share. Turning now to operating results. In the Q3, we generated $0.39 per share of GAAP net investment income and core net investment income was $0.40 per share, which excludes estimated excise taxes. Net asset value per share increased $0.19 during the quarter due to unrealized appreciation on our investment portfolio, primarily related to one equity investment. Our ATM program was also active during the quarter.

Speaker 2

We issued $14,600,000 in shares at an average gross price of $13.79 All issuances were above net asset value. With respect to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $908,700,000 across 99 portfolio companies, up from $899,700,000 across 100 companies as of June 30, 2024. During the Q3, we invested $9,400,000 in one new portfolio company and had $8,400,000 in other investment activity at par. We also received one full repayment totaling $8,400,000 and received $5,500,000 of other repayments both at par. We also received one equity realization that generated proceeds of $2,600,000 and realized gain of $2,200,000 At September 30, 98 percent of our loans were secured and 95% were priced at floating rates.

Speaker 2

The average loan per company is $9,500,000 and the largest overall investment is $19,600,000 both at fair value. All but one of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 26% of our portfolio is rated A1 or ahead of plan and 18% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. Currently, we have loans to 6 portfolio companies that are non accrual, which comprise 4.7 percent of the fair value of the total loan portfolio.

Speaker 1

And with that,

Speaker 2

I'll turn it back over to Rob to discuss the overall outlook.

Speaker 1

Okay. Thank you, Todd. As we look ahead to the Q4, I'll cover portfolio growth, equity realizations, capital management and dividends. Based on an active pipeline, we expect to end the Q4 with a portfolio between $930,000,000 $950,000,000 We do expect some loan repayments approximately $29,000,000 in the quarter and equity realization proceeds to total about $5,300,000 which will result in realized gains of 4,300,000 dollars 1 which is disclosed in our subsequent events for $1,700,000 of proceeds and a realized gain of over $600,000 As Todd noted earlier, we had a good third quarter for equity issuance under our ATM program. After quarter end, we increased our bank facility by $55,000,000 from $260,000,000 to $315,000,000 and have a meaningful amount of capacity.

Speaker 1

Given our current capitalization, we have the ability to grow the portfolio to $1,000,000,000 plus. And finally regarding dividends, we did declare the dividend for the 4th quarter at a rate of $0.40 per quarter payable monthly and of which the record date for November December are forthcoming. And with that, I'll open it up for questions. And Ali, if you'll please begin the question and answer session, please.

Operator

Thank Our first question is coming from Paul Johnson with KBW. Your line is live.

Speaker 3

Yes. Good morning Paul. Good afternoon. Good morning. Thanks for taking my question.

Speaker 3

With just NII, a little light of our expectations and slightly below the dividend this quarter, activity was fairly light. Was there any kind of I mean was there any sort of temporary drivers there with NII being below the dividend this quarter with the incentive fee waiver and the timing of investments or anything like that?

Speaker 1

Yes. I'd say nothing unusual. We certainly one had a lower SOFR rate for the quarter. We did have a little bit of tick up in non accrual, but nothing unusual. And as I recall in last quarter, we had a little bit more in other income.

Speaker 1

So this would have driven last quarter to be a little bit higher. But again, I think a reasonable quarter in terms of expectation given the current interest rates. But as you noted, Paul, too that our investment activity was lighter than expected, which again, as I mentioned, we expect to pick up in the Q4. So that would have been impacted a little bit too. We thought we'd end the Q3 at 9:30 and ended it closer to 900.

Speaker 3

Got it. So this the kind of range that we're in the 0.39 dollars low 40s. I mean is that if there's nothing unusual in there, is that a pretty good run rate going forward?

Speaker 1

So we'll have to see how other income comes in the quarter in the 4th quarter, but just as a reminder that SOFR did drop again, our loans would have repriced, most of them repriced again at 9:30 and that drove the yield you'll see normally from 11.7 in the prior quarter to 11 even for the 4th quarter.

Speaker 3

Got it. Okay. So it's mainly the base rates, if that makes sense, are driving the

Speaker 1

Correct. Yes, declining sulfur curve.

Speaker 3

Okay. And then, can you again just walk through maybe kind of the what drove the write up in the portfolio this quarter, the sort of the unrealized gains?

Speaker 1

Yes. So, there are a number of 99 companies, so a number of movements up and down. We did have one portfolio company that had some meaningful appreciation that's tied to a potential transaction, but just increased value in one of our equity co invests.

Speaker 3

Got it. So it was just the one company that kind of drove most of the depreciation this quarter then?

Speaker 1

That's correct, Paul.

Speaker 3

Okay. Okay. That's all the questions for me. Thank you.

Speaker 1

Okay. Yes. Thank you, Paul.

Operator

Thank you. Our next question is coming from Christopher Nolan with Ladenburg Thalmann. Your line is live.

Speaker 4

Hey, just a follow-up on Paul's questions on the EPS run rate. So given the recent Fed action on lowering rates, that'd be a downward bias on EPS together with the higher non accruals, just want a little

Speaker 1

clarification? Yes, that's right. It should have a little bit of impact, again, as we move down in the quarter. The interesting, it looked like the Fed's announcement yesterday hadn't changed the forward curve. But again, we did have a lower SOFR in the Q4 or we will have a lower SOFR in the Q4 versus the 3rd.

Speaker 4

Got it. And then the lack of a fee waiver, should we expect the fee waiver to be a recurring item or just a sort of a one timer?

Speaker 2

Go ahead, Taki. Yes. So, Chris, thanks for the question. So, it kind of depends on what happens in the quarter, of course, which we can't predict, but with respect to gains and losses. At the moment, we don't expect one this quarter, but we do if nothing else changes, would expect to see a waiver maybe in the Q2 of 2025, so in the future.

Speaker 2

But that's and then nothing after that, but that's if nothing changes. So if there's a change up or down that could affect the waiver.

Speaker 1

Yes. And as you know, Chris, all just a function of the 12 quarter test.

Speaker 2

Right. Exactly.

Speaker 4

Absolutely. And then I guess final question, what's the spillover income?

Speaker 2

It stands at $42,000,000 right now.

Operator

Okay. Thanks, guys.

Speaker 3

Thank you,

Speaker 1

Chris.

Operator

Apologies, ladies and gentlemen, I pressed the wrong button by mistake. No worries. Apologies. Our next question is coming from Robert Dodd with Raymond James. Your line is live.

Speaker 5

Hi, guys. I think you'd probably prefer to hear the music from me. But on the appreciation, Rob, you mentioned it's tied to a potential transaction. Is that one of the ones that you think might occur in Q4? Or is it a longer term?

Speaker 1

No, it would expect yes, it's a good question. It's expected to occur in Q4.

Speaker 5

Got it. I just want that spillover income plug. That $42,000,000 does that include the perspective of realized gains that are going to come in Q4? Or is that just as of the end of Q3?

Speaker 1

It's as of the end of Q3, but the realized gains expected in Q4 are regular way, if you will, and we'll be able to distribute them. There will not be a tax impact.

Speaker 5

Okay, got it. Thank you. Sorry, just scribble on the yield, Rob, I mean, as

Speaker 4

you said, right, most of it

Speaker 5

is base rates. It does look like there has been versus a little bit of spread compression, which obviously is industry wide thematic. What's your view is that leveled out in terms of where new onboarding spreads are today as it stabilized? Or are we going to continue to see a little bit of that flow through as we go into Q4 to early next year?

Speaker 1

Yes. So it's a good question. So we're certainly seeing spreads come down from what were in the 6s to now in the 5s. So the impact of that is rolling through. So you're not seeing if everything repriced that would be a different number.

Speaker 1

But so we're seeing that in the Q4. So newer opportunities are coming on in the 5s versus the 6s, whereas the average yield currently is probably in the 6s yes, average spread in the 6s. So it'd just be a question if that continues. We certainly have seen it stabilize, certainly not seeing it go down further. And it's one thing that we've seen historically as when you get lower what used to be LIBOR or so for you can see spreads actually stop compressing because I think people are also solving for an absolute yield.

Speaker 1

But in any event, the baked into the quarter would be things that are being booked more in the 5s than the 6s.

Speaker 5

Got it. Got it. Thank you. And then on the just the obviously, Q3 came in a little in terms of portfolio overall size came in a little bit below where you were thinking a quarter ago. So how confident would you say you are in that $930,000,000 to $950,000,000 by year end?

Speaker 5

I mean, it sounds like some things during the quarter might have slipped, but what's the risk of that happening again?

Speaker 1

Yes. No, that's a good question based on last quarter. So if it's helpful, we have 10 to 15 active deals and we would be pretty confident to get to the 9:30 and could be higher. So if it's helpful, our activity has picked up quite meaningfully.

Speaker 5

Got it. Thank you.

Operator

Thank you. As we have no further questions in the queue at this time, I would like to hand it back to Mr. Ladd for his closing remarks.

Speaker 1

Okay. Thank you, Ali, and thank you everyone for being on and your support of our company. And we look forward to speaking with you in the spring as we report on the whole year. Take care now.

Operator

Thank you. Ladies and gentlemen, this does conclude today's call. And you may disconnect your lines at this time. And we thank you for your participation.

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Key Takeaways

  • Q3 net investment income: Generated $0.39 per share of GAAP net investment income and $0.40 per share of core net investment income, while NAV per share rose $0.19 driven by unrealized appreciation on a key equity investment.
  • Portfolio size and quality: Ended the quarter with $908.7 million in fair value across 99 companies—98% secured, 95% floating-rate—and non-accrual loans comprising 4.7% of the total loan portfolio, with 26% rated A1 or better.
  • Capital and liquidity: Issued $14.6 million of shares under its ATM program at prices above NAV and post-quarter increased its credit facility from $260 million to $315 million, supporting growth toward a $1 billion portfolio.
  • Q4 outlook: Expects to end the quarter with $930–950 million in assets, approximately $29 million of loan repayments, $5.3 million of equity realization proceeds (with $4.3 million in gains), and has declared a $0.40 per share quarterly dividend payable monthly.
  • Cumulative track record: Since its November 2012 IPO, the company has invested about $2.5 billion across 195 companies, received $1.6 billion of repayments, and paid $273 million in dividends.
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Earnings Conference Call
Stellus Capital Investment Q3 2024
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