Q4 2021 Stellus Capital Investment Corp Earnings Call

Ladies and gentlemen, thank you for standing by at this time, we're admitting additional participants and should be underway. Shortly we'd like to thank you for your patience and that's what you. Please continue to standby.

[music].

Please standby we're about to begin.

Good morning, ladies and gentlemen, and thank you for standing by at this time I would like to welcome everyone to the stellar <unk> capital Investment Corporation fourth quarter 2021 results conference call.

At this time all participants have been placed on a listen only mode. The call will be opened for a question and answer session. Following the Speakers' remarks. This conference is being recorded today Wednesday March 2nd 'twenty 'twenty. Two it is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Astellas.

Capital Investment Corporation, Mr. Ladd, you May begin your conference.

Okay very good. Thank you Paul good morning, everyone and thank you for joining the call and welcome to our conference call covering the fourth quarter and year ended December 31 2021.

Joining me. This morning is taught us concerned our chief financial Officer, who will cover important information about forward looking statements as well as an overview of our financial information.

Yeah.

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 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 Pat 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 our forward looking statements unless required by law.

Copies of our latest SEC filings. Please visit our website at Www Dot Astellas capital Dot com under the public investors link or call us at 71329 to 5400.

I'd like to turn the call back over to our Chief Executive Officer, Bob West.

Thank you Todd will begin by discussing our operating results followed by a review of the portfolio, which will include asset quality and outlook.

Doug will cover operating results first.

Yeah.

Thank you Rob.

We had solid results in the fourth quarter and for fiscal year 2021 first I'll cover our annual results.

For fiscal year, 2020 , one we more than covered the dividend of $1 14 per share with realized income of $2.08 per share, which included $28 million of net realized gains after taxes or $1 six per share.

Core net investment income was $1 22 per share and GAAP net investment income was $1 one per share.

Core net investment income excludes $2 $9 billion of capital gains incentive fees accrued on realized and unrealized gains which are not included in net investment income.

And $1 $1 billion of estimated income taxes.

Net asset value increased $11.8 million from $273 4 million to $285 1 million year over year due primarily to the realized gains.

On a per share basis, net asset value increased from $14 three to $14 61 per share year over year.

Turning to the fourth quarter, our distributions of <unk> 28 per share which were declared in the third quarter were covered through core net investment income of 33 per share and realized core income per share of $1 10.

On a GAAP basis net investment income was 26 per share and realized income was $1 two per share.

During the quarter, we generated $14 $8 million of realized gains after tax or <unk> 76 per share. In addition, our board declared an additional dividend of <unk> per share in the aggregate to be paid in February March and April of 2022.

Net asset value per share increased 46 cents during the quarter from $14.15 to $14.61 due to the early decorate declaration of our fourth quarter dividend and the realized gains from our equity portfolio.

Finally, we increased our bank facility in December from 230 million to $250 million.

Order to enable us to participate and investment opportunities in anticipation of upcoming repayments, while maintaining adequate liquidity to cover our unfunded commitments.

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.

Folio and asset quality dividends and then outlook.

So like today review since our IPO in November of 2012, we've invested approximately $2 billion in over 160 companies and received approximately $1 3 billion of repayments and equity gains while maintaining stable asset quality.

Like today, we paid over 181 billion of dividends to our investors, which represents $12.05 per share to an investor in our IPO in November of 2012.

Yeah.

Relative to portfolio and asset quality, we ended the portfolio with an investment portfolio at fair value.

$772 9 million across 73 portfolio companies. This is up from $653 4 million across 66 companies a year earlier.

During 2021, we invested $389 4 million and 27, new and 37 existing portfolio companies and received $266 1 million of repayments and games.

Which results in a net portfolio growth at cost of $126 4 million for the year of 2021.

With respect to the fourth quarter, we were very busy we invested $144 million in nine new and 13 existing portfolio companies and received repayments and gains of $147 million.

Our portfolio continues to be weighted towards secured lending at floating rates at December 31, 99% of our loans were secured and 96 were priced at floating rates.

This move has coincided with greater first lien and Unitranche lending as we have reported in the past.

We continue to make good diversification with the largest industry sector at 23% of the total.

The average loan per company is $12 2 million and our largest overall investment is $20 5 million both at fair value.

69% to 73 portfolio companies are backed by a private equity firm.

Overall, our asset quality is stable at two point O nine on our investment rating system eight.

8% of our portfolio is ready to one are ahead of plan and 16% of the portfolio is marked at an investment category of three or below.

In total we have three loans on nonaccrual, which comprise.

8% of fair value of the total loan portfolio.

Now turning to dividends.

During 2021, we increased our regular dividend, which we pay monthly from 25 cents per share per quarter in the aggregate to 28 cents per share per quarter.

In addition, we declared additional dividends of three and.

And six cents per share, which were paid in the third quarter of 2021, and what remains of the first quarter of 2022, respectively.

These additional dividends are based on the significant realized gains we are generating from our equity portfolio.

As a reminder, an important part of our strategy has been to invest in the equity of our portfolio companies in a modest way in order to generate realized gains sufficient to offset possible credit losses over time.

As our business has matured over the last nine years, we've begun to see somewhat regular realized gains from our portfolio.

To this end during 2021, we generated 28 million net realized gains after taxes and.

And we expect more to come this year.

In fact, we received an additional equity again yesterday, a $3 2 million or 16 cents per share.

I would also like to point out this strategy in part has also allowed us to generate an accumulated undistributed surplus.

Life to date, which you'll see in the equity section of the balance sheet and the amount of tenant a half million.

This represents realized and unrealized retained earnings since inception.

This is significant as it demonstrates our ability to cover dividends and grow net asset value.

Now looking forward, we expect to continue this six additional dividend each quarter for the foreseeable future.

When combined with the current dividend of 28 cents per quarter and the additional six sites per quarter, our shareholders, receiving an aggregate of 34 cents per quarter of dividends.

<unk> 36 in the aggregate annually.

Subject to board approval of course, this will return a store in store if dividend payment rate of $1 36 per share per year and as a reminder, this is 9% return on our IPO price of $15.

And now to turn to outlook.

Across our platform in 2021 was an historic year for originations.

In addition, we were able to fund many of these investments through our Spic's subsidiaries, which as you know are a source of long term low cost capital.

Our pipeline remains robust and we're off to a good start in the first quarter.

I'd like to sure we that we benefit from our larger platform has dealt with <unk> capital management.

Which includes a number of private institutional funds that co invest alongside S. E M.

Since January of last year, we have raised in excess of $800 million in these vehicles and today total assets under management across our entire platform.

Approximately $2 four a $2 $4 billion.

This additional capital allows us to invest in larger transactions remain active in the market. When SCM may have limited capital and Bill all portfolios in a diversified manner.

Since year end, we have funded $42 million at par in six new portfolio companies, we've identified likely fundings of approximately 20 over the balance of the quarter.

And for repayments also were approximately looking at approximately $20 million of potential pay offs all during the quarter. So therefore from here, we'd expect the portfolio to be relatively flat as we get to March 31.

This is of course in addition to $3 2 million of capital gains proceeds I mentioned earlier.

And with that we'll open it up for questions. So thank you and Paul up please will begin the Q&A session now.

Thank you to signal for a question. Please press star one on your telephone keypad also if you are using a speaker phone. Please make sure that your mute button is turned off to allow your signal to reach our equipment. Once again. It is star one at this time for questions and we'll pause to give everyone the opportunity to signal.

Okay.

And our first question will come from Christopher Nolan with Ladenburg Thalmann.

Hey, guys good morning, Chris Hey.

Hey, Hey, Rob Hey.

Todd Hey, Todd in your comments did I hear you correctly, when you say core EPS was <unk> 26 cents.

Our core EPS was <unk> 33 sets so gas was 26%.

Okay. Thank you and I guess, the congratulations on the quarter congratulations on the dividend supplements.

As we look ahead and given the prospects of.

Fed hikes, what do you think that will do to the outlook for realized gains going forward.

So overall, our view of interest rates would be they'll likely rise and but but.

Not materially and so we would not expect it to have a material impact on both.

Both realizations.

New originations and repayments. So again based on the forecast are increasing but not too.

Hi.

We don't expect a material change what what really drives the equity gains since you know is our portfolio of companies being sold by their private equity owners.

And we think that continued realization will occur.

And also as we know that the middle market private equity world has significant dry powder to invest which which in turn ends up being in some cases, the purchaser of these businesses that refinance and have an equity co invest in.

Great. Okay. Thank you that's it for me.

Okay. Thank you Chris.

And moving on we'll go to Matt Tjaden with Raymond James.

Yeah, Good morning, Matt.

Hey, good morning, guys. Thanks for taking my questions Todd Todd maybe first one for you in 'twenty 'twenty. One I know you guys, where you were taking dividends out of Nab based on me. The declaration date, which is maybe a little bit different than some of your peers do you expect that to continue in 2022 or maybe take it out of NAV based on me.

Dx debate.

Yeah, Matt. Thanks. Thank you. So at this point, we know that it's acceptable to do it both ways.

And at this point, we don't have an intention to change it will continue to take it out on the or the declaration date, but.

But if we.

We could change it but my guess is we'll keep it keep it where it is.

Certainly with you know.

We'd highlighted if we decided to change that treatment.

Got it.

As a follow up Rob maybe for you the $3 $2 million realized gain that just occurred a couple of days ago any chance you could you give us a sense how that compares to kind of marks at 12 31, or if we should expect any any impact that a V.

Sure. Good question Mats, So it's roughly 700000 higher than the market at 12 31, so any V would increase by that amount, whereas the overall gain would be the larger amount of $3 2 million.

Total proceeds roughly.

Proceeds of just under $3 7 million.

Got it that's helpful last one for me Rob maybe.

Sticking with you.

I'd be interested how hard it is right now too to get equity positions.

Some of your portfolio companies relative to historic levels.

You know Matt we've.

As Ive said earlier and you know, it's a core part of our business and our strategy and although we don't always receive them. We we ask that all companies all situations.

And so I wouldn't see a meaningful change in that we continue to receive them in and.

So don't expect that to change.

Got it that's it for me I appreciate the time this morning guys.

Yeah. Thank you Matt.

And moving on we'll go to Ryan Lynch with K B W.

Yeah, Good morning, Ryan.

Hey, good morning, Thanks for taking my questions.

The first one.

Maybe clarify your comment on activity you guys expect a Q1 2022 that look like.

Have like 41 barrier now investments kind of quarter to date and then.

It looked like can you talk maybe about 20 million of additional findings and then repayment for them.

Flat. So can you just clarify exactly.

What do you think or Q1.

Eddie.

Again, it's hard to predict.

King.

Yes, so best we can tell at this point, we would be therefore up about $40 million over.

Q4, and so the portfolio would be roughly 820.

Which is where we are today.

Okay.

Okay, and then just from a.

Kind of an environment portfolio activity outlook, and obviously you know.

We've done pretty well in Q1 our worldwide.

So far but as valuations you know her.

Have come down in the public market I would think somebody that would trickle over into the private market valuations coming lower.

And then there's also the potential for interest rates to rise.

Have you seen any.

Slow now.

At the port, but youll activities.

As we get out of Q1 and kind of looking forward and sponsors less willing to do deals or anything like that.

Yes, Ryan so I'd say overall.

As you can tell from the pace in.

Q1, assuming we fund the remaining 20 million that would be a pace of roughly 60 million in annualized of 240.

And that would be lower than last year. So the first quarter is certainly slower than the third and fourth quarters of 2021.

But we do have a lot of activity today. So we really haven't seen probably just a lull after the year end, but we haven't seen a slowdown in opportunities.

In front of us.

I will say this though that too.

To kind of go back to some of the observations you've made.

That.

As you know, we mark our equity portfolio offers.

You know the earnings of the companies, but also we use public markets as proxies.

And then at which you know the equity markets are off right now.

And then relative to that position suite models use credit spreads that are you can you can observe.

They have widened since 12 31.

So I think as a general matter the industry.

It could have a slightly lower valuation on a portfolio basis, just based on the public markets. Although we don't expect it to be material.

For us.

And then we have it and maybe too and going back to your original question. We haven't seen this phenomenon in the impact.

The opportunity flow, though.

Okay.

Okay. That's helpful color both on the.

Market activity as well as.

You know internally, how you guys Mark stuff, you know relative to market conditions that are there and environment today. So.

That's helpful and I appreciate the time this morning.

Okay. Thank you very much Ryan.

And that does conclude our question and answer session I would like to turn it back to Mr. Ladd for any additional or closing comments.

Okay. Thank you Paul and first thank everyone for joining the call and also for your support over the last year and for many of you. Since we started this company in November 2012, we look forward to speaking with everyone. In early May as we report the first quarter.

Thanks again.

Thank you and this does conclude today's call we'd like to thank everyone for their participation you may now disconnect.