Stellus Capital Investment Q1 2025 Earnings Report

Stellus Capital Investment EPS Results

• Actual EPS: $0.37
• Consensus EPS: $0.37
• Beat/Miss: Met Expectations
• One Year Ago EPS: N/A

Stellus Capital Investment Revenue Results

• Actual Revenue: $24.95 million
• Expected Revenue: $26.76 million
• Beat/Miss: Missed by -$1.81 million
• YoY Revenue Growth: N/A

Stellus Capital Investment Announcement Details

• Quarter: Q1 2025
• Date: 5/12/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, May 13, 2025
• Conference Call Time: 12:00PM ET

Stellus Capital Investment (NYSE:SCM) is a business development company specializing in investments in private middle-market companies. It invests through first lien, second lien, unitranche, and mezzanine debt financing, often with a corresponding equity investment. The fund prefers to invest in US and Canada. The fund seeks to invest in companies with an EBITDA between $5 million and $50 million.

Stellus Capital Investment Q1 2025 Earnings Call Transcript

Key Takeaways

• In Q1, the company generated $0.35 per share of GAAP net investment income and $0.37 per share of core net investment income, while NAV per share declined by $0.21 due to specific portfolio write-downs and lower spillover income.
• The investment portfolio grew to $991.1 million across 110 companies, with 90% secured and 91% priced at floating rates; non-accrual loans fell to 4% of fair value, and 52% of loans are on or ahead of plan.
• On April 1, the company issued $75 million of 7.25% notes due 2030 to repay its bank facility and remained active in its ATM program, issuing 656,085 shares for $9.3 million at an average price above NAV.
• Stellus received a green light letter for its SBIC III license, paving the way to draw up to $350 million of lower-cost SBA debentures to fund qualifying portfolio investments.
• For Q2, the portfolio is expected to be approximately $985 million with originations offset by repayments, the dividend was set at $0.40 per share (monthly) and the company sees potential equity gains of over $10 million by year-end.

Presentation

[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 first fiscal quarter ended 03/31/2025. This conference is being recorded today, 05/13/2025. It is now my pleasure to turn the call over Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Okay. Thank you, Jenny. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended 03/31/2025. Joining me as usual 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 and portfolio.

[Todd Huskinson, Partner, CFO, Chief Compliance Officer, Treasurer and Secretary at Stellus Capital Investment]

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.

[Todd Huskinson, Partner, CFO, Chief Compliance Officer, Treasurer and Secretary at Stellus Capital Investment]

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'd like to cover our operating results for the quarter, but start first with life to date activity. Since our IPO in November 2012, we have invested approximately $2,700,000,000 in over 200 companies and received approximately $1,700,000,000 of repayments while maintaining stable asset quality.

[Todd Huskinson, Partner, CFO, Chief Compliance Officer, Treasurer and Secretary at Stellus Capital Investment]

We have paid $295,000,000 of dividends to our investors, which represents $17.9 per share to an investor in our IPO in November 2012, which was offered at $15 per share. Turning to operating results. In the first quarter, we generated $0.35 per share of GAAP net investment income and core net investment income of $0.37 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.21 during the quarter due primarily to company specific write downs in our loan portfolio and a reduction of spillover income. Our ATM program was active during the quarter, and we issued 656,085 shares for $9,300,000 at an average gross price of $14.11 All issuances were above net asset value.

[Todd Huskinson, Partner, CFO, Chief Compliance Officer, Treasurer and Secretary at Stellus Capital Investment]

Turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $991,100,000 across 110 portfolio companies, up from $953,500,000 across 105 companies as of 12/31/2024. During the first quarter, we invested $46,700,000 in seven new portfolio companies and had $8,700,000 in other investment activity at par. We also received one full repayment totaling $8,500,000 and received $6,500,000 of other repayments, both at par. At March 31, '90 '8 percent of our loans were secured and 91% were priced at floating rates. The average loan per company is $9,400,000 and the largest overall investment is 21.9, both at fair value.

[Todd Huskinson, Partner, CFO, Chief Compliance Officer, Treasurer and Secretary at Stellus Capital Investment]

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, 52% of our portfolio is rated two or on or ahead of plan, and 21% of the portfolio is marked at an investment category of three or below, meaning not meeting plan or expectations. Currently, we have loans to five portfolio companies on non accrual, which comprise 6.7% of the total cost and 4% of fair value of the total loan portfolio, respectively, which represents a decrease from the prior quarter. Turning to capital.

[Todd Huskinson, Partner, CFO, Chief Compliance Officer, Treasurer and Secretary at Stellus Capital Investment]

On 04/01/2025, we issued $75,000,000 in aggregate principal amount of 7.25% notes due 04/01/2030. We used the proceeds to repay the bank facility. On 04/24/2025, we received a green light letter from the Small Business Administration for Stellus Capital SBIC three. This is an important step in the process, and we therefore expect to receive a license, although it's not guaranteed. In general, as our existing debentures are repaid, we intend to draw new leverage under the SBIC III license to continue funding qualifying portfolio company investments. And with that, I'll turn it back over to Rob to discuss the overall outlook.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Okay. Thank you, Todd. As we look ahead to this, the second quarter of twenty twenty five, I'll cover portfolio growth, equity realizations and dividends. We expect to end the second quarter of twenty twenty five with a portfolio, which approximates where we are today at about $985,000,000 We expect new loan originations to be offset by loan repayments for the remainder of the second quarter. As Todd noted earlier, we had a good first quarter for equity issuance under our ATM program.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Given our current capitalization, we certainly have the ability to grow the portfolio to over $1,000,000,000 For our equity co investment portfolio, which is $83,000,000 at fair value, we have the potential for more than $10,000,000 of equity gains by year end. And finally, regarding dividends, we declared the dividend for the second quarter of this year at a rate of $0.40 per share for the quarter payable monthly, and we expect the third quarter to also be payable at $0.40 per share, of course, subject to Board approval. And with that, I'll open it up for questions. Jenny, you may begin the Q and A session, please.

[Operator]

Thank you very much. At this time, we are conducting our question and answer please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press 2 if you would like to remove your question from the queue. For anyone using speaker equipment, it may be necessary to pick up Your first question is coming from Erik Zwick of Lucid Capital Market. Eric, your line is live.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Thank you. Good morning, Rob and Todd. Wanted to start with a question just in terms of kind of maybe the yield and timing on the first quarter originations and just trying to get a sense of, you know, how much impact there was in the first quarter to interest income and and whether there might be some additional impact for the full quarter effect.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. So a couple of things. The average portfolio in the first quarter was higher than the fourth, and that will continue on for the full second quarter. So there should be some pickup there in terms of yield in dollars. And then Sadr is reminding me there, in the first quarter we had lighter other income than in the fourth quarter.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

And so to be determined what that number will be for the second quarter. But we should pick up some earnings in actual dollars as a result of the higher portfolio Q2 over Q1.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Excellent. That's helpful. And just given the strength of the originations in 1Q, and I did hear some commentary that you thought in 2Q originations and repayments would be balanced. But I'm just curious kind of what the if you could provide any color in terms of what the pipeline looks like today, you know, relative to maybe three months ago and where you're seeing opportunities, whether there's certain industries or certain types of lending opportunities, new versus versus add on. Just a little kind of color there would be great.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yeah. No. Good good question. In fact, I'm glad you mentioned the add ons. So as you can see from our results, we continue to have some interesting add ons for for existing portfolio companies, which is very helpful because we're already in the credit.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

We understand the company. So we think those will continue. In terms of pipeline today versus three months ago, slower. No question. I think this has affected the industry and maybe the economy overall that the tariff activity has caused some slowness in this country, in particular around M and A.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

We're optimistic that we'll be picking up now that there is greater clarity. So a little bit slower than we were. We do have interesting opportunities that we expect to to close this quarter and next. But just being a little bit conservative, we know of some payoffs too, so you can't quite predict the timing. And so that's why I indicated I think we'll be flat on average for this quarter.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Got it. And you mentioned potential for some pickup in interest income and the adjusted NII this quarter was a little bit shy of the dividend. And it sounds like you'd like to maintain that at least to the third quarter at the $0.40 level. Remind me if I'm incorrect here, but I do believe that the spillover amount is probably equal to about four quarters or so of the regular dividend. So just curious about your thoughts on the trajectory of NII to cover the regular dividend going forward.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

I know you're kind of aiming to get the portfolio to at least $1,000,000,000 or so, but just your expectations for closing that gap.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Sure. So let me take it first and then Todd should add to this. So that we are running at a level of NII less than the dividend. And as you point out, we entered the year, Todd, I think about $45,000,000 of spillover income, which we're starting to reduce. We think as we get to the end of this year, we'll be in a good spot for next year.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

But but I think it's just based on current yields and so and the level of SOFR will will be less than that 40¢ throughout the balance of the year from NII. But just as a reminder, as I indicated in my remarks, and this has happened to us in the past, we do have some interesting equity co investments that we think will start to to take in, and this would cause us to be in excess of the dividend in terms of realized earnings for the year. So so we're entering a phase to also look at that. But from a pure NII basis, we would be short.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Okay. And thanks. I think you mentioned there's about 10,000,000 or so in in terms of what you can see for potential realized gains by the end of the year?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. In in fact, in excess of 10,000,000.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

In excess. Okay. Great. And just one last one for me, and I'll step aside. Excuse me.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Just curious a little bit about trade education acquisition. It looks like that was, you know, nonaccrual from about the middle of last year. It looks like that may have been restructured into simpler trading, but just curious if you could provide any commentary in terms of what transpired in your expectations going forward.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. So we don't like to talk about private businesses this country, but at the same time, we'll say that the business was restructured as you indicated in the first quarter and was recapitalized, we think, in a in a satisfactory way and expect it to perform well from here.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Okay. And and did that have a an equity sponsor, and did did they contribute any additional capital as part of the restructure?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. They did. It did have an equity sponsor, and they did contribute capital meaningfully. But it reached the point at this recapitalization, no further capital was available. And so we've together restructured it in a new form, if you will.

[Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC]

Great. Thanks for taking my questions today.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. Thank you, Eric.

[Operator]

Thank you very much. And your next question is coming from Christopher Nolan of Ladenburg Thalmann. Christopher, your line is live.

[Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc]

Hey, guys.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Hey, good morning, Chris.

[Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc]

Rob, thank you for your comments. Given given the market's pricing in rate cuts by the Fed later in 2025, last time I checked was three the forward markets pricing and three rate cuts. What was the logic behind issuing the fixed rate debt?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. So we had a couple couple things, Chris. We have bonds that are maturing in March of twenty six, and so this was a part part of these proceeds we would expect will retire some of those bonds. So something we needed to do from a fixed rate basis. And also it's helpful to have some unsecured debt in the capital stack to supplement our floating rate liabilities.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Know, hard to know the right timing for these things and, but that was our that was the time when we took and also to be frank, wanted to avoid what might have been more uncertainty as the year, draws on.

[Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc]

Right. And then I saw, that quarter to date, you guys issued roughly 300,000 shares common shares. Were this under the ATM, and were these accretive?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. They were all under the ATM, and all were issued above NAV and therefore accretive.

[Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc]

So should we expect that you guys gonna be hitting the ATM a bit harder as opportunity presents itself?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

You know, it'd really be a function of how our stock price is trading. We we want these to be accretive or certainly not dilutive to NAV. So I think that will drive it more of what market, what our market price is. But but we certainly will be considering issuances, throughout the year. Mark with market market conditions excuse me. Market conditions supporting.

[Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc]

And final question. I've been covering you guys long enough to know that when the outlook starts improving for the market in general, you guys tend to put in a little bit more second lien loans. I take it that you guys are have no contemplation of that at the moment. Right?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

That's right. In fact, Chris, I'm glad you raised that. We we haven't had any new second lien loans in a number of years and do not expect to. You know, you could, but it would be unlikely. Our our mode of investing has really become very much a first lien unitranche secured lending with with equity co invests.

[Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc]

Sure. But it's more of a defensive posture just given the uncertainty of the broader environment. Is that a fair way to look at it?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

I I think that's right. But we really, I'd say, four to five years ago, moved to this mode where, and also was really where unitranche lending became popular also for our private equity clients who are looking for a one stop financing. So one lien and ideally one lender. And so the second lien and junior capital became less of a demand, but we also made that decision for risk management. We thought that the risk return profile was much more attractive to be in the first lien unit tranche.

[Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc]

Great. And then a final question. Given the third SBA green light letter, assuming that you get the approval and you lever up that SBA vehicle, that would basically, deceptively, I would say, you know, increase your the impact of a lower interest rate environment on your earnings. Is that correct?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. It and and in a positive way. Yes. So the so two things. As a a reminder, the SBA debentures issued under the SBA agency, if you will, are priced at the ten year treasury rate plus a market premium, which historically has been 50 to 80 basis points more, but approximates the ten year treasury.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

So this, if you look at our capital stack, the potential for SBIC debentures is $350,000,000 We're like $3.00 9,000,000 right now because we've already paid back some. But the full amount that we could have outstanding is $3.50. So think of our capital of a billion dollars. 3 50 can be at lower rates than we would otherwise borrow both on a fixed rate basis and on a floating rate basis. So this would be a complement to the question I got earlier about issuing those unsecured notes that are at seven and a quarter.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

So these notes, you know, based on the current treasury rate of 10, should be less than 5%. So this is very advantageous for us from a funding mix going forward.

[Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc]

Great, thank you.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Okay, thank you Chris.

[Operator]

Thank you very much. And your next question is coming from Robert Dodd of Raymond James. Robert, your line is live.

[Robert Dodd, Director - Equity Analyst at Raymond James]

Hi, guys. Good morning, Rob. Good of follow-up on Eric's question. I mean, on the pipeline, I mean, it makes sense, right? Can you characterize where it was sitting out, like now versus, say, March 31?

[Robert Dodd, Director - Equity Analyst at Raymond James]

How much of the fall off in pipeline and maybe the expectation of a flat portfolio this quarter is is due to the disruption about, you know, Liberation Day? And, you know, and if there is a fall how many how much of that falloff there is related to that? Do you think it's, like, permanently gone versus just delayed maybe into the back half, maybe later? Any any color there?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. It's a good question, Robert. The I would think of it this way for m and a. If if a business was being marketed for sale and and the seller thought it was a good time, and with clarity now around tariffs for both buyers and sellers, then we would expect almost all, if not all, that activity to come back. So this would be what we would describe as a temporary disruption. So so we would expect it to come back.

[Robert Dodd, Director - Equity Analyst at Raymond James]

Got it. Got it. Thank you. On on to your point, I mean, you you you kinda got ahead of ahead of if if you can hear that ringing, that's a reminder on my phone. I apologize.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

No worries.

[Robert Dodd, Director - Equity Analyst at Raymond James]

On the the bonds, what would you do do you think you've you've the the one you've done, the 07:00, you shouldn't have access sufficient that you don't need to do more ahead of the maturity you've got next year, and you got good timing on that, by the way, doing it ahead of duration day. Or do you think you need to do more on the unsecured fixed rate ahead of the maturity? Are you kind of you you kinda done there in combination with, obviously, the SBIC and and and the broader revolver?

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Yes. So so we will need to issue more unsecured debt before the bonds mature, the older bonds mature. And the magnitude of that still being determined. I would think of it this way, the issuance that closed on April first of seventy five million, we would have wanted at least 25,000,000 to be used for growth and potentially more. So so which would mean that we'll definitely need to issue more bonds before, you know, before we get to I'd say before we get to the end of the year.

[Robert Dodd, Director - Equity Analyst at Raymond James]

Got it.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

So more to come, but but it would not be it would not be a hundred million.

[Robert Dodd, Director - Equity Analyst at Raymond James]

Okay. Got it. Thank you.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Certainly be less than that.

[Todd Huskinson, Partner, CFO, Chief Compliance Officer, Treasurer and Secretary at Stellus Capital Investment]

Mhmm.

[Operator]

Okay. Thank you so much. Well, we appear to have reached the end of our question and answer session. I will now hand back over to Robert Ladd for closing comments.

[Robert Ladd, Managing Partner & CEO at Stellus Capital Investment]

Okay. Very good. Thanks, everyone, for joining us. Thank you for your support of our public company and we look forward to giving you another update as we get to early August to cover the second quarter. Thanks again.

[Operator]

Thank you so much, Robert. That does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.

Participants

Executives

• Robert Ladd, Managing Partner & CEO
• Todd Huskinson, Partner, CFO, Chief Compliance Officer, Treasurer and Secretary

Analysts

• Erik Zwick, Managing Director, Equity Research at Lucid Capital Markets LLC
• Christopher Nolan, Senior VP - Equity Research at Ladenburg Thalmann & Co. Inc
• Robert Dodd, Director - Equity Analyst at Raymond James