Q3 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 Corporation third quarter 2021 results conference call. At this time, all participants have been placed on a listen only mode.
The call will be opened for question and answer session. Following the Speakers' remarks there.
The conference is being recorded today Friday October 29th 'twenty 'twenty. One it is now my pleasure to turn the call over to Mr. Robert Ladd.
Executive Officer, Astellas Capital Investment Corporation. Mr. <unk>, you may begin your conference.
Yeah. Thank you can't you very much good.
Good morning, everyone and thank you for joining the call and welcome to our conference call covering the quarter ended September 30th 2021.
Joining me. This morning is taught us concerning 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 is the property Astellas capital investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited.
A replay of the call will be available by using the telephone number and pin provided in our press release announcing this call.
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 our forward looking statements unless required by law.
Copies of our latest SEC filings. Please visit our website at Www Dot stylus capital Dot com under the public investors link or call.
All of us at 71329 to 5400.
At this time I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.
Thank you Todd I'm.
I am pleased to report another solid quarter in which we've covered our dividend increase net asset value.
Receive realized gains of $7 9 million and maintained stable asset quality.
In addition, as a result of our continued dividend coverage our board increased our regular dividend to an aggregate of 28 cents per share beginning in the fourth quarter.
We've continue to see many interesting opportunities and as a result funded 60 million on a cost basis during the third quarter.
Since year end, we've originated 245 million of new investments in our portfolio has increased by 128 million net of payoffs.
$787 million on a cost basis.
We'll begin by discussing our operating results followed by a review of the portfolio, including asset quality.
And then our dividend strategy and outlook and Tom will now cover our operating results.
Thank you Rob.
For the quarter ended September 32021, we covered our dividend 27 per share with core net investment income of 31 cents per share.
GAAP net investment income was 21 cents per share, which includes capital gains incentive fees of $1 $7 million related to our realized and unrealized gains during the quarter and income tax expense related to our spillover income.
We generated realized gains of $7 $9 million related to the realization of an equity investment and unrealized gains of $2 $1 million related primarily to the appreciation of our equity co investment portfolio.
During the third quarter, our board declared a regular dividend of an aggregate of 27 per share in.
In aggregate <unk> per share of supplemental dividends in the fourth quarter dividend of an aggregate of 28 cents per share.
The early decorate declaration of our fourth quarter dividend was required in order to complete the distribution of spillover income from 2020 in a timely manner consistent with maintaining our qualification for taxation as a regulated investment company and to eliminate a liability for corporate level U S. Federal income tax.
Despite this additional accrual in the third quarter net asset value increased during the quarter to $14 15 per share.
I'd like to note that these distributions constitute all remaining distributions for the year. So our fourth quarter net asset value will not be further reduced by distributions paid in the fourth quarter.
We continue to recycle capital in our first Spi see license and deploy the low cost debentures and a second license.
The $100 million of debentures, and our second license in a pooled so far the all in cost is approximately two 5%.
To date, we've committed the full 87 5 million of equity to the test be IC, two our second license and have funded $70 million of that commitment.
We have drawn $100 million of the $175 million of debentures there'll be available when equity is fully funded.
And with that I'll turn it back over to Rob.
Okay. Thank you Todd.
I'd like to now cover the following areas our life to date review portfolio and asset quality.
Dividend policy and outlook.
So life to date review so it was like minus of this so since our IPO in November of 2012, So just reaching our ninth anniversary we've.
We've invested approximately $1 $9 billion and over 143 companies and received approximately $1 1 billion of repayments, while maintaining stable asset quality.
We've now paid over $180 million of dividends to our investors, which represents $11.99 per share to an investor in our IPO in November of 2012.
Now turning to portfolio and asset quality.
We ended the quarter with an investment portfolio at fair value of 786 million across 74 portfolio companies up from $653 4 million across 66 companies.
At calendar year end.
During the third quarter, we invested $60 5 million in four new and tend to existing portfolio companies and reached receive $67 4 million of repayments.
Overall, our asset quality is stable at 1.9 on our ratings.
System or on plan.
23% of our portfolio is rated a one or ahead of plan and 13% of the portfolio is marked at an investment category of three or below plan.
In total we have four loans on nonaccrual, which comprised one 1% of fair value of the loan portfolio.
Now I'd like to talk a little bit about dividends.
In addition to our regular dividend of 28 cents per share in the aggregate for the fourth quarter.
We are today, declaring a dividend for the first quarter of 2022 of six cents per share in the aggregate or <unk> pay.
Paid per month.
This additional dividends based on the significant realized gains income we were generating from our equity portfolio.
This is the realized gains both from Q3 and currently expected for Q4.
Looking forward, we expect to continue this six cent dividend each quarter for the foreseeable future.
So when you combine the current dividend of 28 cents per share per quarter and the additional six cents per share per quarter.
Shareholders will be receiving an aggregate of 34 cents per quarter of dividends.
At this rate will be back to the pre COVID-19 level of $1 36 per year.
Which as a reminder is a 9% return.
On our IPO price of $15.
Now just turning to outlook.
Beginning in the fourth quarter of last year, we began to see a significant increase in our actionable pipeline, which continues to this fourth quarter.
We do expect meaningful repayments over the balance of this quarter.
But we expect to be those to be at least offset by new fundings.
And then just to note that these potential repayments should generate additional fee acceleration of income as we saw in the third quarter.
And we're now expecting or.
Possibility, but expecting realized equity gains that as much as $7 5 million in the fourth quarter.
And with that.
Included in our remarks, and we'll open up for questions.
Thank you Sir.
He would like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure your mute function is turned off.
All your signal to reach our equipment.
Please press star one to ask a question.
Well pause for just a moment to allow everyone the opportunity to signal for questions.
Thank you. Our first question will come from Ryan Lynch with K B W.
Good morning, Ryan.
Hey, good morning, Thanks for taking my questions.
The first one I had I mean, there was pretty there was a pretty substantial increase in total revenues this quarter.
$17 million versus the 15 1 million.
In the previous quarter and portfolio.
Actually had net repayments so what I wanted to get a sense of is is what sort of level and that no I know you had big.
Strong net originations in Q2, so maybe some of that's timing falling.
Falling through getting the full impact in the third quarter, but what I'm trying to get a sense of is what is what was the level of accelerated or one time fees or OID that you recognized in the third quarter and how does that compare you know.
Based on what you guys are kind of an average of what you guys have historically received.
Mhm yeah.
Good question Ryan So so in the in the third quarter the fee acceleration was approximately $700000.
And then previous quarters, it would've been a fraction of that because there were relatively few repayments.
Okay.
Okay. So there wasn't one.
Sure.
Let's just say the quarter was benefited from just what you said.
A full quarter, where we were operating at a higher.
Portfolio level as compared to the first two quarters and then two from.
From early repayments.
Meaningful fee reclassification now.
Not not very little of it in fact, I don't think there was any actual call premium just given the duration of how long we've held along so it was just the early.
OID, if you will is coming back upon the repayment.
Okay.
Okay. So its a 700000 of a kind of acceleration versus versus very little in the past.
Okay.
No.
It kind of brings me to my next question.
This quarter you guys broke above the upper end of your incentive fee hurdle range and actually broke out like that that range.
Would you anticipate that you guys would fall back within your incentive fee hurdle range going forward and now will be kind of what you guys will operate within on a consistent basis, besides sort of one off quarters.
Popping out like we saw in the third quarter or do you guys expect to get above that hurdle range on a consistent basis going forward.
Yes, and this came up last quarter so.
I'd say, there will likely operate in the range and then quarters, where we have these.
Early repayments you may remember that we.
We had a nominal repayments during COVID-19 and then coming into this first part of the year. We did expect the second half of the year those repayments would pick up.
And a subsidiary of <unk>, we're expecting a number in the fourth quarter that we're now in.
So.
It's possible, we'll operate above the range in the fourth quarter, but I think on a normalized basis, we'll probably be in the range on the catch them.
Okay understood.
And then just one last one for me then I'll hop back in the queue, you mentioned $7 5 million of potential realized gains could be recognized in the fourth quarter. I'm. Just curious is all of that already.
<unk> previously been recognized as an unrealized gain in your portfolio or could there actually be further gains when you guys actually if you guys actually do recognize though.
Yes, Ryan so if they came in.
The delta between the expected proceeds.
And now valuations about $2 $8 million.
So if they all came in.
You'd see all things being equal and increasing NAV by $2 8 million.
Okay.
Perfect. That's all for me I appreciate the time today and a nice quarter.
Yes, thank you very much right.
Thank you. Our next question comes from Christopher Nolan with Ladenburg Thalmann.
Hey, good morning.
Hey, Rob Rob on the sixth sense supplemental dividend if I understood correctly starts in the first quarter of 2022 and should be a regular quarterly event going forward.
Yes, that's that's the plan.
Okay, and then the taxes the excuse me the point $2 million in excise.
Excise taxes in this quarter I'm wondering if you guys just do a distribution just to.
Getting into the you know distributions. So you can avoid that.
Yes. So so this is you know approximately our run rate.
And that's based on the 20 plus million of spillover that we will continue to spillover for the time being so so we'd have to pay all of it out to eliminate that.
Gotcha.
Hum COO.
Do you have an exact number for the spillover income at September 30th.
I'd say well it's a.
Spillover from last year was was about $21 million so.
That may move around just depending on.
Kind of how things are ultimately classified and so forth, but I would you know Chris.
Chris assume it's about $21 million.
Right Andrew Scott.
Alright, thanks, guys.
Okay. Thank you Chris.
Thank you. Our next question comes from Robert Dodd with Raymond James.
Good morning.
But again I'm talking about.
First on the you.
You gave some color obviously, you expect repayments I mean somebody active market out there.
But you expect it to at least equal them in deployments on the deployment side right now with that competitive market.
Have you seen any.
Any shifts in dynamics I mean is it is the spi see sized type assets with a lot of those that's why you've got capital, but it was just more attractive as well any any dynamics about different parts of the market that you play in that you can give us color.
Sure. So we're continuing to see a number of interesting Spi C qualifying opportunities and now we're seeing some that are larger companies that would not qualify them. So I think we're seeing good activity on both fronts. We just went through the pipeline with our.
Teams this morning, and a very robust activity some are closer to being finalized than others, but I think you'll see a nice mix going forward of both <unk>.
Helpful to that.
Although it is a competitive market as always.
You know, we continue to see proper capital structures, where the equity checks are 40% to 50% of the capital.
Leverage is typically you know for us from four to four and a half times it could be less depending on the company.
You know appropriate pricing and structures and the continued ability to to earn equity co invests. So the market is quite good competitive but lots of opportunities for us.
On the Spi.
Non spic's yourself.
Thank you for that and then just one more sort of spillover I mean, if you generate.
The.
Seven 5 million in realized gains in the fourth quarter.
Along with the.
Almost eight that you generated this quarter I mean is any of that shielded either in blockers.
Again, you can see in our previous losses or anything like that because obviously, if not that accrues to.
Quite a lot of spillover going into next year.
Sure the 20.
Sure sure Robert So very good question.
The bulk of the equity gains that we've seen in the third and likely in the fourth or actually in blockers and so they would not increase the spillover income.
Okay got it thank you.
Yes. Thank you.
Thank you. Our next question comes from Bryce Rowe with HUD for grip.
Yeah, Good morning, Brian.
Good morning.
Thanks for thanks for taking the questions here.
Wanted to I guess start.
Maybe along the same lines of Robert questioning there in terms of what Youre seeing in the market.
Could you could you guys kind of describe what youre seeing from a from a pricing perspective on newer deals relative to some of the activity that might be coming out of the portfolio right now.
Yes, so so I'd say as you can see from the schedule of investments.
The all in yields that were on new investments are ranging at about an 8%. When you include the fee accretion.
Well, you know typically LIBOR plus six with a LIBOR floor of one sometimes a little bit higher.
And so.
Payments and new loans are about the same yield.
You could see this.
Eight 3% yield come down just a little bit, but we think we'll be able to maintain it.
And at least the 8% level.
So and that that pricing has roughly been true now for over a year or so.
Okay.
It's good news.
And then you know.
Maybe you all could scale, we certainly heard you all talk about kind of the.
The leverage profile of <unk> balance sheet.
You know in quarters past, but any any thoughts on how you think about balance sheet leverage now you've got access to some more SBA debentures through your second license.
So just trying to trying to gauge how quickly you might.
Go through that and then how you think about kind of.
Your your your strategy to fund new investments once you get beyond the the available debenture capacity.
Sure. So so I think as a general matter on the leverage profile.
To maintain our regulatory leverage at one to one it could be a little bit higher 1.1, or so around that level.
And then including test see debentures, certainly get to a two to one level, which we're very comfortable with given the long dated nature of the of the Sps debentures.
We have and what's happening now Bryce just because of the significant repayments were receiving both in our S. P. I C licenses as well as in a regular way capital at the BDC.
A lot of opportunity to recycle capital. So I think you'll see us continue to grow over the next year, but but we'll be funding many of the new opportunities with just repayments.
And then I would say so we do intend to fully tap the.
Second license debentures, we currently have $100 million drawn against the.
Potential of $1 75, so we intend to draw the balance of that likely in the coming year.
And eventually you know we may have the opportunity to raise additional equity capital and.
And.
To maintain our our overall leverage profile, we would add leverage to that but but there's plenty of capital currently without raising more equity to operate in.
Right. Okay. That's good.
Okay. That's good commentary Robin and then maybe just some more questions around the the realized gains are the companies that are.
<unk> exited the equity investments that are they're seeing some exits.
Can you can you speak to kind of what what's driving those decisions.
Is it more tax tax planning tax driven or is there is there the potential for a lot of this activity that we've seen especially in the back half of this year to persist into next year.
Mhm, yeah. So so I'd say that it's it's mostly would appear to be.
Pent up demand on the sell side that during COVID-19.
M&A activity slowed down materially.
And now it's picked back up so we would just see it as something that.
Some companies might have sold a year ago, but for Covid and now they're coming to market.
On the tax side, you know our tax advisors have indicated that the.
New tax law relative to capital gains would be effective in September.
So any sales now would be covered by the new tax regime, but we will see whether that's the case. So we think this is less tax driven given that the rates seem to be going up.
We moved up retroactively.
So it's more just we think pent up demand on the sell side.
And I'd say, yeah, we we would look out to the next year and expect that.
Continue to see COO.
Companies be sold.
Assuming that the market and the individual company performance.
It was good.
It's also a brushy good to raised as to is this is part of.
As you know from their very started the company back in 2012, but we've always said this strategy not everyone does that in addition to the lending we like to always buy them.
All are piece of equity in the companies, we lend money to.
We thought over time that this would be helpful to our shareholders and of course it has been.
So so this we're glad to see that these gains have continued and this is of course, why we feel comfortable now having additional dividends be paid into next year.
Course declared the first quarter.
These had been coming in.
Got it great I appreciate that.
All the all the questions are the answers thanks.
Yes, Thank you Bryce.
Yeah.
Thank you. Our next question comes from Christopher Nolan with Ladenburg Thalmann.
Rob given all these moving pieces with the macroeconomic picture what are you hearing from your portfolio companies.
Are they hunkering down to be more defensive or what I mean.
Can you just give us some sort of a little color on that.
Sure sure.
As a general matter you know our company portfolio companies, which are over 70 today are performing well.
And I think there's a lot of optimism and.
Around those businesses and around the economy generally I know, we're all concerned about potential inflation.
But but all operating well that we have some portfolio companies that experienced labor.
Labor shortages or or wage increases that there.
They're having to work with.
And others are dealing this you know the supply chain logistics issues.
But you know.
These are well managed businesses with very professional owners and private equity firms.
And you know managing through it so we would be we'd be very positive about what our portfolio companies are seeing.
And continuing to grow in and effectively end up delevering as a result so.
Positive.
But you know we're always cautious for what's next in and you know we continue to be very selective in our investing new investing.
And you know.
Just because.
We can't predict the future, but we're quite optimistic at this point.
Great. Thank you.
Thank you.
Thank you I'm showing no further questions at this time I would now like to turn the call back over to Mr. Ladd for closing remarks.
Okay. Thank you Katie and thank you everyone for your support over this last nine years and.
We look forward to speaking with you in the spring when we'll have the results from the fourth quarter and for our 10-K.
Thank you this close today's call. Thank you for your participation you may now disconnect.
Sure.
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