Q2 2021 Stellus Capital Investment Corp Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by at this time I would like to welcome everyone to the Astellas Capital Investment Corp. Second quarter 2021 results conference call. At this time, all participants have been placed on a listen only mode.

And we'll be open for a question and answer session. Following the Speakers' remarks. This conference is being recorded today Tuesday August 3rd 2021 and it is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Astellas Capital Investment Corp. Mr. Lot of you may have.

Begin your conference.

Thank you Shelby and good morning, everyone and thank you for joining the call and welcome to our conference call covering the quarter ended June 32021, joining me. This morning as usual has taught US concerned our chief financial Officer, who will cover of 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 is the property of Astellas capital investment Corp, and that any unauthorized broadcast of this call and any form of strictly prohibit.

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 and 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 our forward looking statements unless required by law to obtain copies of our latest SEC filings.

And he's visit our website at www dot stellar capital Dot com under the public investors link or call us at 71329 to 5400.

At this time I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Okay. Thank you Todd I am pleased to reported another solid quarter, and which our net asset value and asset quality was stable.

We covered our dividend and had significant originations.

As a result of our dividend coverage, our board approved an increase and our regular dividend to <unk> 27 cents a share from 25 per quarter and also declared 3 cents of supplemental dividends.

We've continued to see an increase and investment opportunities and as a result, we funded $92 million on a cost basis during the second quarter.

Since year end, we've originated 185 million of new investments and our portfolio has increased by 127 million likes our year to date net of payoffs, which now brings us to $785 million on the cost basis.

We'll begin this morning by discussing our operating results followed by a review of the portfolio and putting asset quality and and the outlook and Todd will now cover all the operating results.

Thank you Rob for the.

The quarter ended June 30th 2021 we covered our dividends of 25 cents per share with GAAP net investment income of 28 cents per share core net investment income was <unk> 30 per share, which excludes the capital gains incentive fees and income tax expense.

During the quarter the portfolio of evaluation increased slightly which when coupled with the excess dividend coverage led to net asset value per share increasing to $14.7 per share from $14 and <unk> per share.

We continue to recycle capital and our first Spi see license and the split deploy the low cost debentures and our second license the all in rate and the $60 million of debentures, which you've pulled so far is 2.7 per cent.

To date, we've committed the full $87.5 million of equity to S. P. I see too and have funded 60 million of that commitment.

With that I'll turn it back over to Rob.

Thank you Todd I'll now cover of the following areas of life to date review.

The portfolio asset quality and then outlook.

The since our IPO in November of 2012, we've now invested and approximately.

And I'm, sorry of approximate $1.8 billion over 139 companies and have received the approximate $1 billion of repayments.

While maintaining stable asset quality throughout.

We've now paid over 169 million of dividends to our investors, which represents $11.41 per share to an investor and our IPO dating back to November of 2012.

The next turn to the portfolio and asset quality and.

As mentioned earlier, we ended the quarter with and investment portfolio at fair value of 782 million. This was across 76 portfolio companies and this is up from $653 million.

66 companies just the 12.31 'twenty.

During the second quarter, we invested $91.5 billion and 7 new and 8 existing portfolio of companies and received 24.8 million of repayments for net portfolio growth at cost of $66.7 million for the quarter.

We continue to maintain good diversification by industry sector.

And there are 60 portfolio of companies, where we have debt and our equity positions and that's an average investment of about $12.7 million at fair value per company.

71 of the 76 portfolio companies are backed by a private equity firm.

And overall of our asset quality of stable at a 1.9 out of our investment rating system or slightly better than plan.

And 19% of our portfolio is rated of 1 or ahead of plan and 11% of the portfolio's market and the investment category of 3 or below which is below plan.

In total we have 4 loans on non accrual, which comprised 1.1% of fair value of the total loan portfolio.

Now turning to outlook of beginning in the fourth quarter of last year, we began to see a significant increase and our actionable pipeline.

This quarter, and we've funded 11 million and cost and 1 new portfolio of company and received 1 repayment of $2 million.

For the balance of the quarter, we expect some growth and the portfolio.

I will note repayments are picking up.

And these potential repayments could also result, and equity gains which for the balance of the year it could be as much as $10 million to $15 million.

With that we'll open it up for questions and thank you Shelby and you. Please please start the question and answer period.

If you would like to ask a question. Please signal by pressing star 1 on your telephone keypad and Youre.

Using a speaker phone please make sure your mute function is turned off.

The signal to reach our equipment.

Again, Please press star 1.

The question well pause for just a few moments to allow everyone an opportunity to signal for questions.

Well take our first question from Bryce Rowe with half of the group.

Okay.

Thanks, Good morning, Hi, Rob and and Todd I guess, good afternoon, and good morning Bryce.

1 of 2.

Just ask about the the last comment you just made Rob you mentioned you expect some level of gross in the portfolio for the balance of the quarter does.

Does that does that contemplate the the repayment activity that debt.

Debt that you just mentioned.

Yes, it does it does but.

That's why I wanted to qualify it that whereas we've seen through.

Through Covid and it really really through the first 6 months of the year less repayments and normal we now have visibility that that will pick up but we'd still expect to have the portfolio of increased somewhat in the quarter.

And certainly over the balance of the year.

Okay. Okay.

That's helpful.

And then maybe maybe a couple of more from me.

And in terms of in terms of pricing wanted to get a sense for you know what youre seeing on kind of new originations in terms of pricing relative to the the to the current portfolio yield.

And are you are you.

I guess I've kind of see and another other companies some level of the stability in terms of spreads and pricing, but wanted to 1 of you get a sense for whether youre seeing that as well.

Yeah, So I'd say that our overall.

Portfolio yield on the debt side is a little is and the low 8%. We would expect that to continue and of course, that's the combination of the coupon and the amortization of the upfront fees.

<unk> seen that and the portfolio.

You know and unit tranches slightly less and then.

But I'd say overall should be able to hold at about the 8% level.

Okay.

Okay, and then last 1 for me it looks like you all of them even subsequent.

Sequential quarter and drew drew more of them on the SBA or drew more SBA debentures.

And any any sense for kind of the the pace of SBA draws whether whether it be over the next 6 months of or beyond just trying to get a sense for you now.

When when you when you feel you might kind of Max out the at the current capacity there.

Yes so.

I would say, there's a low base cases, we were substantially substantially all of the remainder of all of the remaining debentures by the end of the year or is perhaps late as the first quarter of next year.

So as I've mentioned on previous calls, we've seen an uptick and loan opportunities that qualify for the debentures.

So our plan is I'd say certainly by first quarter of next year to see them be substantially drawn.

Excellent.

That's good detail appreciate the appreciate you all taking the questions. Good talking to you. Thank you.

Thank you, Brian very much thanks Bryce.

Okay.

We'll take our next question from Christopher Nolan with Lindenberg Thalmann.

Hey, guys.

Rob the 27 cents dividend does that should we consider that the new base dividend going forward.

Yes and of course of the dividend is always subject to the board's approval, but we consider that the new baseline for the regular dividend great and then Todd what's the spillover income.

Yeah.

Yes, so Chris we have a 21 million almost exactly 21 of millions of spillover income from last year into this year.

So it's about a dollar than the total.

Total is about a dollar of Inc. As the.

Per share on the current share.

And I guess you know just in general can you provide some cant articulate some comments about what youre seeing in terms of.

Terms and conditions for deals that you are seeing is as the pricing and tighter, but you're holding firm on the.

Terms and conditions or any sort of color on that would be helpful.

Sure sure you know I'd say that.

In terms of structures of the cash.

Credits, there really what we've always done so there have financial covenants the equity capitalization of the company says.

Roughly 40 and 50%.

So and and leverage quotient as you know probably you know and threes up to the mid fours. So I'd say that the structures of our very.

Similar to the way they've always been for us.

And our pricing is probably a little bit less and of course as you know we've.

Really rotated substantially the portfolio to first lien slashed unit tranche and so.

And I think you're seeing a little bit of pricing pressure, but we've been disciplined about it and certainly on the credit side, the very disciplined and no changes there and of course as you know we.

I always like to be able to participate and the equity of the companies by being but buying of modest piece of equity alongside the owners and.

And that's turned out to be a good strategy for everyone.

Great nice quarter. Thank you.

Yes, Thank you Chris.

We'll take our next question from Matt Tjaden with Raymond James.

Hey, guys. Appreciate the time first question from me on the on the supplemental.

I know, obviously up to the board, but any any high level color you can give us on whether or not we should anticipate that 3 set supplemental to be more of a kind of recurring programmatic figure or just solely 1 time.

Yes, so thank you Matt the.

And I'd say, the supplemental be more of a quarter by quarter and and reviewing with the board so more to come on that.

Should note debt in terms of the dividends for the year and this is a fall of 2.2 of Chris's question on the spillover.

So as you may recall that we.

We need to have declared the dividends for the year to take care of the spillover by September 15th So you will see and this quarter. We're in as we did last year.

By September 15th will of declared all of the year's dividends.

Which will take care of of the spillover.

And so and <unk>.

Could see something in addition happened then but let's let's see when we get to that point.

So the good news is stored and recovered but that will also decrease and NAV for the quarter. Because you are declared in the quarter of the full balance of the year dividends and they're actually paid and the fourth quarter.

Got it and second 1 for me kind of a 2 part of our 2 partner and repayments picking up any any color you've received from the sponsors on kind of what's driving a higher expectation of repayments later in the year and related to that with repayments picking up how should we expect other income for the for the remainder of.

The year.

Yeah, Yeah, so I'd say that the repayment activity I think it's more a function. So it's almost like there was the pent up demand.

In terms of M&A activity post Covid, which is I think certainly fueled our pipeline.

And then and as a result, and repayments or sales of businesses had been slowed down because of Covid and that now is picking up as well.

So I think it's a natural evolution.

You know, we're expecting you could see some activity on the new fundings.

And the fourth quarter as people anticipate potentially of higher capital gains rate and next year.

Although that would not typically affect our.

Repayments.

Because most of the owners of the private equity firms are not really chicken on on that tax question.

So I think of so I think really driven just pent up demand and M&A activities picked up and now you're seeing some businesses sold and in our case now theyre more sales of businesses and refinancings.

And then the last question and thank you had met is just income impact potentially from these so because of the loans have been out for a good while there's really not and the call protection and left you should see some modest OID accretion and the bigger impact would be as I mentioned at the outset the equity gains.

Associated with the equity co invests.

That's really helpful. I appreciate the time.

Yes, Thank you Matt.

We'll take our next question from Brian Lynch with K B W.

Good morning, Rob.

Hey, good morning.

And just have.

1 question you know.

If I look at where you guys are today.

And your incentive fee hurdle you guys are.

And the most recent quarter junk at the bottom end of that hurdle range and say you guys are generating.

You know.

Our pre operating and incentive ROE between that debt 8 and 10% range.

Which equates to you know and operating ROE.

Hosting the of this.

The 8%.

And since you're just at the bottom of the range today.

There's a lot of work that would need to occur and taxes.

And I can get above that and you know the upper end of that range to actually grow operating EPS of any further than what you guys generated and the second quarter.

Is there a desire to try to get above the upper end of that hurdle range and grow operating EPS from here.

Because you'd need quite a few things you know to happen to get there or you guys.

Satisfy which is generating within that bad debt, the upper and lower and you guys sort of range of the point.

And so I'd say, the we certainly would like to continue to grow operating EPS for the benefit of our shareholders at the same time.

Given the risk profile of the portfolio, which is.

A lower risk profile than we've had historically.

That's probably the more and more important aspects of we'd start with <unk>.

Credit risk and what that translates into earnings.

So I think we'd love to grow it but we're also comfortable of the ROE. We're currently generating.

And then but to add that we do have.

Short of rates increasing.

Which would come through to our portfolio of eventually.

I'm, assuming that's not likely to happen in the near term and we have LIBOR floors as a reminder.

And average of about 1.2%.

So it would take a pretty meaningful change and LIBOR to change the revenue side.

But we do have the benefit of the additional SBA debentures 2.

To fund additional gross and as Todd noted earlier the the.

And those we've drawn so far on average and the second license are $2.7 per cent Ah <unk>.

Clothing the fee. So all in costs will have another 40 that will pool.

In mid September we think at a comparable or lower costs. So this could help us Ryan just in terms of the operating EPS income so more to come and that's just the function of additional fundings that we would have.

Okay understood.

And that's all I had today I appreciate the time.

Okay. Thank you.

That concludes today's question and answer session speakers at this time I will turn the conference back over to you for any additional or closing remarks.

Okay, well, thank you everyone for being on the call. Thank you for your support and we look forward to speaking with you again in early November.

This concludes today's call. Thank you for your participation you may now disconnect.

1 of them.

[music].

Okay.

And then.

And.

Okay.

Yes.