Stellus Capital Investment Q1 2026 Earnings Call Transcript

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Provided by Quartr
May 12, 2026

Key Takeaways

  • Neutral Sentiment: Stellus reported GAAP net investment income of $0.26 per share and core net investment income of $0.27 per share for the first fiscal quarter, while total realized income was $0.29 per share including a small equity gain.
  • Negative Sentiment: NAV declined $0.28 per share in the quarter, driven by dividends paid in excess of earnings and a $0.20 per share net realized/unrealized loss tied mainly to two debt investments.
  • Negative Sentiment: The company said non-accrual loans remain elevated, with six loans on non-accrual representing 9.2% of cost and 5.2% of fair value, and management expects progress to be gradual rather than immediate.
  • Positive Sentiment: Management announced a $20 million share repurchase authorization, arguing the stock’s roughly 25% discount to NAV makes buybacks an attractive use of capital.
  • Positive Sentiment: Stellus sees growth potential from a planned move to the Ridgepost Capital platform and from capital recycling, and it expects the portfolio could expand by $75 million to $100 million over time.
AI Generated. May Contain Errors.
Earnings Conference Call
Stellus Capital Investment Q1 2026
00:00 / 00:00

There are 7 speakers on the call.

Speaker 2

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 March 31, 2026. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. This conference is being recorded today, May 12, 2026. 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 5

Okay. Thank you, Holly. Good morning, everyone, thank you for joining the call. Welcome to our conference call covering the quarter ended March 31st, 2026. We have 6 topics to cover this morning. First, the financial results for the quarter, portfolio and asset quality, outlook update, opportunities with Ridgepost Capital, our share buyback program, and future growth in the portfolio. 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 6

Thank you, Rob. I'd like to remind everyone that today's call is being recorded. Please note that the 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 PIN 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. 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 forward-looking statements unless required by law.

Speaker 6

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. 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 $2.8 billion in over 225 companies and received approximately $1.8 billion of repayments while maintaining stable asset quality. We've paid $339 million of dividends to our investors, which represents $18.49 per share to an investor in our IPO in November 2012.

Speaker 6

In the first quarter, we generated $0.26 per share of GAAP Net Investment Income, and core Net Investment Income was $0.27 per share, which excludes estimated excise taxes. During the quarter, we also realized gains of $750,000 on one equity position, which resulted in total realized income for the quarter of $0.29 per share. Net Asset Value decreased $0.28 per share during the quarter from two components. The first was $0.08 per share of dividend payments that exceeded earnings, which was necessary to continue to pay out the spillover balance from 2025. The second was a net realized and unrealized loss of $0.20 per share related primarily to two debt investments.

Speaker 6

We ended the quarter with an investment portfolio at fair value of $990 million across 116 portfolio companies, a decrease from $1.01 billion across 115 portfolio companies as of December 31, 2025. During the first quarter, we invested $18 million in 3 new portfolio companies and had $9 million in other investment activity at par. We also received 3 full repayments totaling $35 million, 1 equity realization, which resulted in a realized gain of $750,000 and received $6.6 million of other repayments at par. In March 31, 99% of our loans were secured and 92% were priced at floating rates.

Speaker 6

The average loan per company is $9 million, and the largest overall investment is $18.5 million, both at fair value. Substantially, all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a 1 or a 2 or on or ahead of plan, and 19% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We added one new loan to our non-accrual list during the quarter. Currently, we have six loans to six portfolio companies on non-accrual, which comprise 9.2% of the total cost and 5.2% of the fair value of the total investment portfolio respectively, which represents a slight increase from the prior quarter.

Speaker 6

We recognize that the level of non-accrual loans is higher than we would like. We're focused on reducing the number and dollar magnitude of these loans. We're actively working each position and are making progress in exiting the positions or bringing them back onto an accrual status. There's been much speculation about the impact of artificial intelligence on the large-scale SaaS software industry. As we mentioned on our last call, Stellus does not have exposure to the large-scale SaaS software sector. We do have portfolio companies in the-

Speaker 6

enhance the software and information they provide, in many cases, deal with proprietary data. We believe AI will enable these and many of our portfolio companies across a variety of industry sectors to improve the speed information. Each of these companies is rated on our risk rating system as either a 1 or 2, meaning on plan or ahead of plan. Now I'd like to turn the call back over to Rob to cover a number of other topics.

Speaker 5

Thank you, Todd. As we look ahead to the second quarter of 2026, I'll cover four topics: the outlook for Q2, our advisor's plans to join the Ridgepost Capital's platform, our $20 million share buyback program, and opportunities for growth. With respect to outlook. As of today, our portfolio is approximately $970 million across 117 portfolio. The balance of the quarter, we would expect repayments to equal new fundings, thus ending the quarter approximately where we are today. We expect to continue realizations throughout the year. At this point, we estimate $9 million for the balance of the year, with approximately $6 million of this in realized gains. Regarding dividends, in April, we declared the dividends for the second quarter of this year of $0.34 per share in the aggregate payable monthly.

Speaker 5

Looking forward, we are making progress in reducing the amount of spillover income, and we expect that over time, our dividend will approximate our net investment income plus realized gains. At this point, that would be at a lower level than the current dividend. Turning to Ridgepost. We look forward to our external advisor, Stellus Capital Management, joining the Ridgepost Capital platform this summer. We've been impressed with Ridgepost Capital's organization. They have excellent leadership, we should benefit from meaningful new investment opportunities working with them, particularly through their lower middle market private equity fund to fund strategy known as RCP Advisors. RCP has relationships with over 200 private equity firms, with their focus on the lower middle market, many of these sponsors are candidates for us to provide financing for their portfolio companies.

Speaker 5

We think this could provide hundreds of millions of dollars of new lending possibilities across the entire Stellus platform each year. Now, turning to the share repurchase program. We recently announced a common stock repurchase program of up to $20 million. This decision reflects the current trading level of our shares, which are approximately a 25% discount to net asset value. Historically, our stock has traded at or above NAV for many years. At the current price levels, we believe repurchasing shares represents a good opportunity to generate value for our shareholders. Now opportunities for growth. I'd like to conclude our remarks by outlining the opportunity to grow our portfolio. We project that we have the capacity to increase our investment portfolio by $75 million-$100 million from here. This opportunity comes from two sources.

Speaker 5

The first is from a third SBIC license, which we're optimistic will be re-awarded this summer. The second is from recycling equity gains and non-accrual loans that have been resolved. As a reminder, a dollar of an equity position or a non-accrual loan that turns to cash can be reinvested into a new loan close to three dollars through our leverage facilities. In closing, let me thank everyone for your continued support, and we'll now turn to the Q&A session.

Speaker 2

At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Your first question for today is from Erik Zwick with Lucid Capital.

Speaker 5

Good morning, Erik.

Speaker 1

Good morning, Rob and Todd. Wanted to start just to make sure I understood some of the commentary there in the prepared remarks. With relation to the expectation for kind of dividends to be in line with NII plus realized gains, did I understand that you kind of mentioned that the way it was lined up currently that NII plus realized gains would be kind of lower than the current dividend level. Just trying to figure out, are you expecting to be able to, you know, grow NII over time or potentially, you know, think about resetting the dividend level as well? Just trying to kind of hone in on that a little bit.

Speaker 5

Sure. I'd say that although we'd like to grow the NII per share from here, we think we're probably at a level that we'll be at for a while. Our expectation is that the dividend will be coming down associated with that.

Speaker 1

Got it. Okay. That's helpful. That's what I thought I heard. just with regard to, you know, share repurchases, I know you talked about it, last quarter as well in terms of being attractive given where the stock is trading today. correct me if I'm wrong, I don't think you repurchased anything in 1Q. was anything that kept you out of the market, potentially the pending acquisition of the advisor by RidgePost or anything else?

Speaker 5

Yeah, no. Good question. Good point. We did not repurchase any shares after the previous quarter end, but a reminder, when issuing a K, we have a short period from the issuance of the K to the end of the quarter. There's just limited periods we can be repurchasing. We will have a much longer window this quarter. It was strictly tied to the timing of that, and nothing else.

Speaker 1

Gotcha. Okay. Understood. Thank you. Last one for me. Wondering if you can just talk about, you know, the pipeline a little bit. I know you expect it to grow in the back half of the year, you know, post to the Ridgepost tie-up. Curious from a spread perspective, if you can talk about, you know, where you're seeing spreads in the pipeline today relative to 90 days ago and also kind of compared to the, you know, current existing portfolio yield.

Speaker 5

Yes. Relative to spreads, as the private credit has been disrupted a little bit, we are seeing some, I'd say, steadiness in spreads. We've not seen the same widening that the upper market has seen, but I think we've certainly seen stabilization. I'd say our average deal we're looking at today is, you know, approximately a 5% spread over SOFR. You know, could be higher, but it's stabilized, but not meaningfully wider yet.

Speaker 1

Okay. Good, good to hear that it's at least stabilized and hopefully some widening going forward. Great. Well, that's all for me today. Thank you so much.

Speaker 5

Okay. Many thanks, Erik.

Speaker 2

Your next question is from Christopher Nolan with Ladenburg Thalmann.

Operator

Hey, guys. I guess for Todd. Todd, I know your leverage, your regulatory leverage ratios are low, but when including the SBA, you know, it's somewhat higher. Does the SBA in any way restrict what your regulatory leverage ratios could be?

Speaker 6

No. No. The SBA leverage is excluded from regulatory leverage. It's a 2 to 1 regulatory leverage. Our regulatory leverage is, you know, around 1 times, and then it's 2 times with the SBA debentures. A little bit less than 2 times now, you know, because we've paid off a number of debentures.

Operator

Okay. your unsecured notes and so forth doesn't put any sort of restrictions on your total leverage, just on your regulatory leverage, correct?

Speaker 6

Correct. Yep, that's right.

Operator

Okay.

Speaker 6

Yeah. The notes and the credit facility are part of regulatory leverage, and then the debentures are in addition to that as total leverage.

Operator

Got it. We can see, you know, your regulatory leverage ratios are impressively low, so we can just see that you guys have a fair amount of balance sheet flexibility from that. Is that a fair interpretation?

Speaker 6

It, it-

Speaker 5

I think that's correct.

Speaker 6

Yeah. Yeah.

Speaker 5

That's correct.

Speaker 6

Yeah, I think that's correct. It's of course limited by borrowing base, but that's right. We have a lot of, you know, a lot of running room with respect to that.

Operator

Okay. I guess, you mentioned in your comments that you didn't have a much software exposure, but your industry list, is it buried into another industry like high-tech industries?

Speaker 6

Yeah. It would be in several. It could be in high-tech, it could be in the industry it serves, because as I mentioned, those software products are very industry specific, and could be like a service as well that might be industry specific, and those might be in different industry categories.

Operator

We see with other BDCs where they've had to take down, you know, unrealized depreciation on software positions. Have you guys experienced that as well?

Speaker 6

We have not.

Speaker 5

Those positions are marked approximately where they were at last quarter end and are basically marked close to par. Yeah.

Speaker 6

Yeah. They're all, you know, good, solid performing loans. I mentioned they're either a 1 or a 2 on our risk rating scale, so all doing fine.

Operator

Okay. Thank you.

Speaker 6

Yeah. Thank you, Chris.

Speaker 5

Thanks, Chris.

Speaker 2

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

Speaker 6

Good morning, Robert.

Speaker 4

Morning. Just sticking with that software, well, not really software, the marks. On the qualities that there's $0.22 in NAV attrition, primarily markdowns in debt investments, can you give us any idea how much of that was spread as you just marked to market versus actual company specific elements?

Speaker 6

Yeah. I would say, Robert, most of that is coming from kind of debt company movements. We had, you know and most of those markdowns were on two specific positions. You know, we did have certainly some spread markdowns in terms of just the models, but the majority of that was coming from two equity positions. We also had-

Speaker 4

Got it. Got it.

Speaker 6

We had a little bit of right equity as well. I mean, two debt positions.

Speaker 4

Yeah

Speaker 6

I'm sorry, that are wiped down on the equity as well.

Speaker 4

Got it. Got it. Thank you. On going back to the Erik's question on spreads, and you said that you've seen some stability. There sometimes obviously can be a lag between how the smaller end of the market, so to speak, responds to spread movements versus the upper end of the market, and to your point. Do you think the spread stability, rather than expansion you're seeing right now is more a function of just things lagging what's going on in the upper market? Do you think that it's just that the competitive environment in your end of the market has just not moved and you just don't expect those spreads to widen materially or at all?

Speaker 5

Yeah, Robert. I would say that it's driven by the latter, that still a competitive space that we're in. I think we're seeing things getting done in the high fours up to the mid to high fives. I'd say it's a competitive nature. Things are slower in terms of deal flow. I think as you see deal flow pick up, there's certainly the opportunity to have the spreads also widen some. So far, I think it's not a lag. I think it's just the competitive nature of where we are.

Speaker 4

Appreciate that. Thank you. Just one more. On the non-accruals, and you addressed this, that like they are a little elevated. You've got some, you know, you wanna work that down, rotate those into to, you know, either back onto accrual or into income-producing assets. I mean, any color you can give on. I mean, I think you mentioned, you know, you're making some progress. I mean, how? It's a slow process. I wouldn't say fast. I don't mean fast. What kind of timeline do you think that could go noticeably lower than where it is currently in terms of the non-accrual and non-income-producing debt capital assets?

Speaker 5

Yes. We discussed this on the last call, and I think I would say the same thing.

Speaker 4

Yeah.

Speaker 5

I think we're, you know, I think not gonna be immediate. I would be thinking toward the end of the year, this year, and then these are, you know, generally in 12 to 24 month resolution, so to speak. Just we wanted to make sure that we haven't, you know, we're very focused on it, but I think it's gonna take, you know, some more time. We are seeing some progress in some. The other thing that you've noted, and I mentioned in my remarks, is that as we get some of these equity realizations in, and we have some larger positions, you know, this is a great opportunity to recycle, put what are non-earning assets. They could appreciate, but non-current earning assets, to put leverage on them and grow the portfolio again.

Speaker 5

We think we'll start to see that come to fruition toward the end of this year. Those two things combined, think of it more toward the end of this year into first of next year, but not immediately.

Speaker 4

Got it. Got it. Thank you.

Speaker 5

Yeah. Thank you, Robert.

Speaker 2

Your next question is from Paul Johnson with KBW.

Speaker 5

Good morning, Paul.

Speaker 3

Yeah. Good afternoon, guys. Thanks for taking my questions. Just a little bit more on the non-accruals. As Robert said, those are elevated. I think they're probably as high as they've ever been for Stellus. I'm, you know, just curious, you know, what I guess has been kind of the weakness there? I mean, has it just been kind of a challenging vintage, or has there been something maybe more specific in terms of kind of what's driven, you know, the more recent, I guess, increase in non-accruals?

Speaker 5

Mm-hmm. Yeah. Good question, Paul. I'd say they're all company specific, not driven by any kind of a macro trend or an underwriting trend. You know, all of our businesses when we underwrite them, there are few key characteristics. 1, they have a substantial equity partner behind it, a private equity firm. 2, the equity component to the company is at least or typically at least 50% of the capital structure, and each has serious covenants, traditionally a fixed charge coverage and a leverage test. When we go into it, we're not expecting problems, but we certainly underwrite, if we went through a recession, how would this company do? We ended up having not a recession, but again, company-specific issues that have made some of them challenging.

Speaker 5

Also, it's worth noting that because there's a private equity sponsor beyond substantially all of these, it is typical that a private equity firm will put in capital at least twice to solve problems. If that's helpful to say that if we have something on non-accrual, the sponsor owner has supported this over time and just gotten to the point where they're not able to support it anymore. Again, company specific, nothing we could tie down to anything that would be a overall trend. Part of it, too is, you know, we've also had in the past, we've not had things come off non-accrual or be resolved, and we're having some slowness in that activity, and that's why I noted that we're working it and, you know, working it hard to get that to reduce over time.

Speaker 5

I think it's. We haven't been able to take as many off as we've added. Anyway, thanks for the question, and that's where we are.

Speaker 3

Got it. Okay. Appreciate that. I mean, it sounds like, if I'm not mistaken, your, you know, 1 to 2 rated names, roughly around 19% of the portfolio, I believe last quarter. I don't think there's too much change quarter-over-quarter in terms of, like, the internal watch list of, you know, with the new addition here to non-accrual, I believe that may have already been captured within, you know, your internal watch list. Is that safe to say that, you know, any of the, you know, addition here to non-accrual is not necessarily a surprise and is, you know, was more or less kind of within the bucket of, you know, underperforming rated names, and that's relatively unchanged quarter-over-quarter?

Speaker 5

That's right, Paul. It's 19% that is risk grade 3 or below, and you're right, that number didn't change.

Speaker 3

My mistake.

Speaker 5

No, no worries. That the one that did move to non-accrual was already a risk grade 3 before.

Speaker 3

Got it. Okay. Thanks. That's all for me.

Speaker 5

Yeah. Thanks so much, Paul.

Speaker 2

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

Speaker 5

Okay. Thanks again, Holly. Thanks for your help, and thanks everyone for participating, your support over many years of our company. We look forward to giving you an update again in early August, relative to the second quarter. Thank you.

Speaker 2

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

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