Q3 2019 Earnings Call
2019 results at this time, all participants I've been placed on the listen only mode. They call be open for a question and answer session. Following the speakers remarks. This conference is being recorded today Thursday November 7th 2019. It is not my pleasure to send the call over to Mister <unk>, Chief Executive Officer of Stellus Capital Investment Corporation Mister <unk>.
Maybe can your conference.
Thank you just good morning, everyone and thank you for joining the call welcome to our conference call covering the quarter ended September 30th 2019.
Joining me this morning, as Tuscan send our Chief Financial Officer, who will cover important information about forward looking statements as well as an overview of our financial information.
Thank you Rob I'd like to remind everyone that today's call is being recorded.
Please note that this call it the property of Stylus capital Investment Corporation and the any unauthorized broadcast this call in any form is strictly prohibited.
Audio replay of the call will be available by using a telephone number in and 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 and they also include forward looking statements and projections and we ask that you refer to our most recent filing with the S.D.C. for important factors that could cause actual results to defer materially from these projections.
We will not have data are forward looking statements unless required by law.
Jane copies of our latest S. and see violence. Please visit our website W.W.W. Dot Dallas capital Dot com under the public investors like or call us at Southern went 329 to five 400.
It is time I'd like to Kurt during the call back over to our Chief Executive Officer, Rob Lab.
Thank you John will begin by discussing are operating results followed by a review the portfolio, which will include asset quality and then I'll provide an outlook.
Todd will now cover operating results. Thank you. We're pleased to report another quarter of solid earnings in which we generated realized income of 63 cents per share including gains of 33 cents per share, which exceeded our 34 cents per share dividend by 29 cents.
Core net investment income, which excludes the capital gains incentive via cruel and excise taxes was 35 cents per share and gap net investment income was 31 cents per share.
Total realized income to date.
Including 19.1 million of realized gains is $1.92 per share, which exceeds our distributions of a dollar two per share for the same period.
This represents an annualized return on equity of 12.4% during the third quarter in 12.7 cents per cent here today.
As a result of these realize gains we believe it's likely that more than half of the dividends paid this year will be characterized as long-term capital gains for tax purposes.
<unk>.
Asset value increase $2.1 million over the quarter or 11 cents per share from $14.29 to $14 at 40 cents per share primarily due to the realize games.
That I'll turn it back over to Rob.
Okay. Thank you <unk>.
I'd like to now cover the areas of portfolio NASA quality and then outlook.
The respect to the portfolio, we ended the quarter, where their portfolio 586.4 million, it's very value, which is a cross 61 portfolio companies.
Proximately, a 55 million dollar increase over the second quarter.
This increase included 96.6 million at par value of new investments in six new into existing portfolio company.
And also the reduction for me payments are realizations of approximately 43 million.
Or portfolio continues to be weighted toward the first thing in your inner traunch loans, which now stand at 73% of the total portfolio.
Just moved to more senior lending his resulting in lower coupons. However, we expect it will also result is stronger acid quality overtime.
We continue to Maine, good diversification with the largest industry sector to approximate 13% of the total portfolio.
The average investment company is 9.6 million.
And the largest investment is 21.2 million both it fair value.
Our largest exposure at the end of June was 21.6 million and that loan was repaid during the third quarter.
57 of the 61 portfolio companies are backed by a private equity from.
80% of our total investment portfolio is rated at a category two or better meeting on plan ahead of the plan.
With respect to non accrual loans, a 7.9 million dollar loan that was on non accrual as of June 30th was repaid unfold during the quarter, including unpaid interest.
The unpaid interest had been previously reserve, so dish, which resulted in an additional interesting be income of approximately a million three during the quarter.
As a result of this pay off we now have loans to just three portfolio companies that are non a cruel and they comprise 2.3% of fair value of the total portfolio.
This is down for for loans at 4.8%.
In the prior quarter.
With respect to outlook first were please report than an August we received or a second S.B.I.C. license.
When fully capitalize this will allow us to have access to up to 175 million of S.B.A. Adventures.
Which are long term low cost source of capital.
And as of today, we funded 12 million of equity and drawn 6 million it'd be ventures under the new license.
As we discussed on last quarter's call and is reflected in our current yield we're expecting a lower lower overall yield and the loan portfolio.
During 2019 to yield on our dead portfolios decrease from 10.9% to 9.4%.
Which was principally driven by a lower libel raid and it continued rotation towards first plane and you know trunks loans.
During the quarter now since quarter, and we funded 63.7 million of dead at par in three new and one existing portfolio companies and ever see repayments of 18.9 million in one company.
Also as of today are portfolios approximately 630 million up from 42 million up 42 million since quarter N.
But we'll say, though for the balance of the quarter, we're just expecting modest growth given the activity you've already experienced.
And the first part of the quarter.
Then with respect to earnings for the fourth quarter, we do not to expect to fully cover the dividend from gap and I do to the lower yields and our current leverage level.
But we will likely cover that gap from additional realize games, which we expect will exceed a million dollars.
Well that'll open up for questions and thank you Justin will go to the Q. and a session. Please.
If you would like to ask a question. Please signal oppressing store one on your telephone keypad, if you're using a speaker phone. Please make sure you mute function is turned off to allow your signal to retry equipment again. Please press store one if he would like to ask a question.
Our first question comes from Paul Johnson with K.W.
You guys get morning thing it good morning.
First question loan portfolio.
[noise] color.
Furniture factory out.
Did mark.
Yeah.
In the quarter and other smaller subject.
<unk>.
Any kind of.
<unk>.
Excuse me <unk>, we're having trouble hearing you.
Why don't we started first with repeating the question and.
Are you able to hear me now.
A better.
Please go ahead.
Sorry about that haven't.
She's <unk>. My question was just around the portfolio company furniture factory outlet is helping you can give a little bit of color on the performance of that company just given the the the mark down or slight mark down in the in the first lean peace, while the smaller subdebt pieces basically mark that zero.
<unk>.
Hmm.
Well as you is you know we don't talk about the private companies in our portfolio for obvious privacy reasons, but this is a business space than the retailing sector of the mid continent or mid west United States.
The small no. It's the zero value is a kind of a stub piece of equity so.
Would would really look at the first plane loan is relevant.
[noise] okay. Thanks.
And then I was wondering for the Devin Touristy SBM ensures that you've drawn down a quarter to date, what what has been sort of the average cost range of those <unk>.
Yes, so one thing I'd like to say as a general matter that given the current rate environment. The so far.
Although these weren't priced in September w. priced in March, but <unk> ventures that were priced in September as a general matter.
And the rape, it's paid during the interim period.
Or less than our current batteries we hold.
So so I would think of this as being.
Lower.
Right environment continues these will be at a lower costs and our current adventures, which are priced in the high treats all in when you include fees.
So so polished okay give you a cent think of it more like 3% than 4%. So so lower in the current environment, which which will be helpful to us.
Sure Yeah great.
Great.
Then lastly on the tax expense that you guys are recorded this quarter that 350000, or so that you adjusted in earnings his dad related to the like an excise tax it for the quarter or is that related to some sort of capital gain cruel.
Yeah. Paul This just shot it's effectively all excise tax that we've been accruing during the year. We grew at a crew in each quarter based on what our our our current estimate of spill over it.
Okay. Great. Thanks, those are all my question.
Okay. Thank you.
The next question comes from Christopher Nolan with Ladenberg Feldman.
I got yeah, good morning <unk>.
Hey, Rob what percentage of your Dealflow would you say is F.B.I.C. complying I mean I guess my point is is you know how quickly can you deploy he couldn't you grow the F.B. I see some.
Mm mm [noise].
<unk>. So historically, what we found is that approximately 50% of our activity now we may not close everything.
50 per cent of what we're looking at has qualified and this goes back for you know roughly seven or eight years. So.
So that's a good number to think of what we actually closed could be a different percentage could be a little bit less.
I would say realistically it'll take US you know a couple of years to deploy the ventures in full.
Or last license was probably over three years or so.
But it's a very important source for us as pointed out earlier, we we think that this would be one of the things that assist us as lie wars lower.
And our first one unit traunch businesses growing.
There will still provide is interesting margin to cover the dividend. So so we're very incentivised to deploy it but realistically I would say it'll take a couple of years in total it probably 18 months at the earliest.
So funding with the F.B.I.C. is a more profitable business then funding on balance sheet, you would say.
It is although would also point out that from here as we grow the portfolio a goal now will be in excess of 700 million. We're now it over 600 million.
Incremental growth from here will come from one the S.P.C. to ventures.
But to our bank facility, which is a floating rate facility five stuff. The 30 day libel rate and so marginal growth will come in that you know marginal cost. If you will is now in the low for us.
Right and I guess I'll follow up would be on the bank facility itself I mean, if he jumped quite a bit and I I can understand that is a source of future funding, but what's form of bats rate our banks charging.
These days.
So advanced rate or borrowing rate.
The the battery.
<unk>.
Yeah, how much yes assets you have to Collateralizing, but you get one dollar for yes.
Sure sure. So it varies by the lean position and companies specifics, but it's certainly an access at 50 per cent and probably closer to 60% on our unit Trochmann Nancy.
Right. Okay. Thanks, guys.
Our next question in case of Robert Dodd with Raymond James.
Hi, guys I mean, just one and I know you don't usually like to to to talk about.
Specifics of the company's report funny, but once you get co investors in in Grupo He might just.
Gave an update earlier today about some some dress that occurred lakes in in the third quarter then in even more so that that has been disclosed by that boil watt since the end of the court could you give us any date on how much of that is factored into the the the mark.
Today, and if you've got any.
Ah kind of feel about what what that drive up for that is.
So so Robert B. I would say that are worth do reduction in the mark.
That occurred and a quarter.
Was to reflect that new news.
And then.
You wouldn't mind repeat the second part of their question.
<unk> Yep you'd call any.
So I'll pick up a handset.
If if you've got any kind of idea about what the driver once because it sounded like that the the weakness.
Came on mental activity separately.
Edgy have any visibility about what what corestates and whether that short term operational.
Yeah.
Yeah.
<unk> sure and again I hope you'll respect, we we try not to comment on companies big issue as.
Competitive and other factors they might have in their market place.
But again I would just say that we believe that are reduced mark on the first lean reflects that information.
And reduce mark on the second lien <unk>.
I I would say as a general matter Yeah, you know the first lanes should.
Should it be worth full value ultimately, so, but we think it this market 82 cents in the personally and reflects the current information.
Oh God I appreciate that color and if I can't I mean, you gave some some indications for Q4 don't expect to cover the dividend with gap N.I. and and the full of caught up including the <unk> total realized earnings would.
Can you give us any.
Yeah about where you think the portfolio needs to be size wise, given the <unk> yield few seeing with some spread contraction you know <unk>.
How big <unk> need to be to come the dividend from from a gap I know I basis.
E.S. Robert So so this would be thank you for that question. This wouldn't be now looking to 2020.
And so one of our goals was to get the portfolio to 600 million, plus which would know cheat Hmm Hmm Hmm I would say expressed in a couple of woods, one think of the regulatory love Rouge would need to be at approximately one to one.
It's been operating it about 0.68 or point 71, so that would imply a portfolio in excess of 700 million.
And then we aren't benefited so did you think this is positive for the outlook.
Benefited from one the lower cost S.B.C. adventures, which will be deployed.
Into it as as our 90 day rate that we lend against his dropped so as or marginal cost of our bank facility, which which will also fun part of the new growth.
So I'd say, the combination of greater leverage or portfolio growth, but certainly in excess of 700 million portfolio.
One to one regulatory leverage.
Which may approximate closer to you know up to 221, including S.P.C. Adventures.
So combination of that in the lower cost of debt should get us in a much better position.
God I I appreciate that color and then give this year you've had a a very good.
Yeah.
<unk> harvesting pry equity positions et cetera, I mean.
<unk>.
Leveled the thing and this is they spent conducive for 2020 do you expect that level to drop significantly given the the valid to the age of some of the equity positions in your portfolio well could you give us any any color on that.
Yeah, Yeah. The that's also very good question. So I'd say this is certainly an unusual year. If you looked at our business over the last few years, but has been growing part of the business as or equity positions and mature.
So we certainly would expect to see additional realize games, but we certainly not projecting this point they would be of the magnitude currently.
And you know if I had if I had to give you a number certainly could be half as much next year.
So a lot of this I I'd say the maturity or the age of the equity positions. There's still a number that are relatively new.
So we think there's more.
More gains to calm, but it just to be fair would be this has been you know an outsized year.
And also I would say that.
As you know that we also think these realize games can be helpful. And eventually we'll have losses, and hopefully w. modest, but but this is a nice cushion for us with respect to that.
Oh God I appreciate the column in a good quarterback thanks.
Yeah. Thank you Robert.
[noise] showing no further questions and cute I would like to turn the conference back over to Mr. Laughter closing remarks.
Okay, great. Thank you everyone for your support and we'll look forward to speaking with you in the spring.
Thank you very much.
Thank you ladies and gentlemen, that's concludes this helicopter and see me now disconnect.
Justin Thanks very much.
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