Stellus Capital Investment Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 5 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 2nd Fiscal Quarter Ended June 30, 2024. There will be an opportunity to ask questions after today's presentation. This conference is being recorded, August 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

Okay. Thank you, Paul, and good morning, everyone, and thank you for joining our conference call today covering the quarter ended June 30, 2024. 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 materially differ 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, but 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 $262,000,000 of dividends to our investors, which represents $15.75 per share to an investor in our IPO in November 2012, which was offered at $15 per share. Turning to operating results. In the 2nd quarter, we more than covered the declared dividend of $0.40 per share with GAAP net investment income of $0.48 per share. Core net investment income was $0.50 per share, which excludes estimated excise taxes. Net investment income per share was benefited by increased fee income from a variety of sources and the waiver of $1,600,000 or 0 point during the quarter due to a limitation from the total return test.

Speaker 2

Net asset value per share decreased $0.05 during the quarter due to net unrealized depreciation on our investment portfolio, offset by the generation of net investment income in excess of the dividend. We also realized a gain of $2,000,000 or $0.08 per share on an equity investment during the quarter. Our ATM program was active during the quarter and we issued $25,200,000 in shares at an average gross price of $13.89 per share. All issuances were above net asset value. We ended the quarter with an investment portfolio at fair value of $900,000,000 across 100 portfolio companies, up from $876,000,000 across 94 companies as of March 31, 24.

Speaker 2

During the Q2, we invested $53,000,000 in 8 new portfolio companies and had $13,300,000 in other investment activity at par. We also received 2 full repayments totaling $31,000,000 $9,700,000 of other repayments both at par resulting in net portfolio growth of $23,800,000 at fair value. At June 30, 99% of our loans were secured and 98% were priced at floating rates. Our average loan per company is $9,500,000 and the largest overall investment is $19,600,000 both at fair value. All but one portfolio company of our portfolio companies are backed by private equity firm.

Speaker 2

Overall, our asset quality is slightly better than planned. At fair value, 23% of our portfolio is rated a 1 or ahead of plan and 15% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. Currently, we have 5 loans on non accrual, which comprise 2.9% of the fair value of the total loan portfolio. With that, 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 3rd and 4th quarters, I'll cover portfolio growth, equity realizations, capital management and dividends. Based on an active pipeline, we expect to end the 3rd quarter with a portfolio between $920,000,000 $940,000,000 We did not know of any loan repayments in Q3, although we did have an equity realization, which is disclosed in our subsequent events for $2,600,000 of proceeds and a realized gain of a little over $2,000,000 For Q4, we are aware of 2 likely repayments totaling $17,000,000 and one of the companies has an equity co investment, which is currently carried at $1,800,000 at fair value. We expect that new fundings will exceed repayments for Q4.

Speaker 1

As Todd noted earlier, we had a good second quarter for equity issuance under our ATM program. We have a meaningful amount of capacity in our bank facility and cash in our SBICs, but we will look to continue to increase the bank facility over time. Given our current capital base, we have the ability to grow the portfolio to over $960,000,000 And finally, regarding dividends, we expect to continue subject to Board approval to distribute at a rate of $0.40 per share per quarter payable monthly through the rest of the year. This should be supported by earnings and a large amount of spillover income. And with that, I'll open up for questions.

Speaker 1

And Paul, please, we'll start the Q and A session now.

Operator

Certainly. Thank you. At this time, we'll be conducting a question and answer session. And the first question today is coming from Christopher Nolan from Ladenburg Thalmann. Christopher, your line is live.

Speaker 3

Hey, guys. Can you hear me?

Speaker 1

Yes, Chris. Good morning, Chris.

Speaker 3

Hey, nice quarter by the way. The fee waiver, is that something that we should expect to repeat in coming quarters?

Speaker 2

So Chris, first, I would say, it depends, of course, on each quarter's performance going forward in the mechanics of the 12 quarter test. But I think, at this point, we don't expect anything for the remainder of this year under the test absent any other movements in the current performance.

Speaker 3

Got it. And then I guess turning to non accruals, real estate, obviously that's a big position there. It's a big driver for the non accruals. Can you give a little color in terms of what sector they're involved in and

Speaker 1

a little color Sure, Chris. Yes, Chris. This is a residential realtor title company insurance business in the Midwest.

Speaker 3

Okay. And then I guess the final question, it's just the unrealized depreciation in the quarter. Any particular color? Was this normal mark adjustments?

Speaker 1

So it's driven more on company specific activities, but again overall not a large number.

Speaker 4

Okay.

Speaker 3

And then I guess finally, Rob, you mentioned how you're looking to increase the credit facility, but your leverage ratios are so low. Is the thinking here to give the uncertain credit environment to tap the credit facility more going forward or you

Speaker 1

be more cautious? Yes. So we have quite a bit of unused capacity in the current credit facility, which has a commitment of 2 $60,000,000 And so we certainly will use that up as we grow the portfolio. But again, we'd like to given the additional capital base that was raised last year and so far this year to have that start to better match the equity base. And this would enable us to take what I described as a portfolio potential of over $960,000,000 to over $1,000,000,000

Speaker 3

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

Speaker 1

Thank you, Chris.

Operator

Thank you. And the next question is coming from Sean Paul Adams from Raymond James. Your line is live.

Speaker 4

Hey, guys. Good afternoon and congrats on the quarter. Really quick question, touching back on the non accruals. I know you guys added 1 new non accrual last quarter, JR Watkins. I think now we're sitting at 5 total non accruals.

Speaker 4

Is there any timeline or pathway for resolution for any of these?

Speaker 1

They all have kind of specific paths from here, Sean. So probably wouldn't describe anything. As you know, we somewhat guarded about talking about individual companies that operate in our country. But each will have their own path and they're being worked hard. How's that?

Speaker 4

Yes, that's perfect. That's great. And then turning over to leverage, you guys are a little bit higher in terms of the total leverage basis. What are your thoughts on either moderating or staying exactly where you're at over the coming quarters in terms of the changes and like the forward rate curve?

Speaker 1

Sure, sure. So I'd say a few things to look at leverage. So we're actually less levered now than we normally are. This is due to the equity raise. So as we bring the portfolio back up to kind of full potential, think of us being target leverage on a regulatory test would be about 1 to 1 and on a total test, GAAP test, including the SBIC debentures that little over 2:one.

Speaker 1

So we'd like to increase the leverage, but not significantly, but more back to our target levels. One thing that might be less obvious is we have over $30,000,000 of cash right now in our SBIC licenses. So when that's deployed, that won't increase the leverage. So it's just as a footnote there. And then Nishu, as we look ahead, we think it's a very interesting time to invest in the lower middle market in this country and we're optimistic about the future and the many private equity firms we work with.

Speaker 1

So we're very selective in our investing and so we'll continue to invest in a smart way. And again, we'd like to see our leverage come back up to more of the target.

Speaker 4

That's a wonderful answer. Thank you for the color. I appreciate it.

Speaker 1

Yes. Thank you.

Operator

Thank you. And there were no other we

Speaker 1

look forward to updating you again in early November for the we look forward to updating you again in early November for the results from the Q3.

Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Stellus reported GAAP net investment income of $0.48 per share in Q2—covering its $0.40 quarterly dividend—and core net investment income of $0.50 per share (ex‐excise taxes).
  • The investment portfolio grew to $900 million across 100 companies (up from $876 million/94 companies in Q1), with 99% of loans secured and 98% floating rate, an average loan size of $9.5 million, and 5 non-accruals representing 2.9% of the loan book.
  • Asset quality remained stable with 23% of the portfolio rated ahead of plan and 15% rated below expectations, while net unrealized depreciation of $0.05 per share was offset by realized equity gains of $2 million.
  • Capital management included an active ATM issuance of $25.2 million at an average gross price of $13.89 (all above NAV), ample capacity in a $260 million bank facility, and over $30 million of cash in SBIC licenses, with leverage targeted at ~1:1 (regulatory) and ~2:1 (GAAP including SBIC debentures).
  • Looking ahead, Stellus expects Q3 portfolio balances of $920–$940 million with no known loan repayments, anticipates new fundings to exceed repayments in Q4, and plans to maintain a $0.40 per share quarterly dividend subject to board approval.
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Earnings Conference Call
Stellus Capital Investment Q2 2024
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