Stellus Capital Investment Corporation Q1 2023 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by at this time I would like to welcome everyone to Astellas capital Investment Corporation's Conference call to report financial results for its fiscal quarter ended March 31st 2023.

This conference is being recorded today May 2023. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive offer Astellas Capital Investment Corporation. Mr. Ladd you may begin your conference.

Thank you Kelly and good morning, everyone and thank you for joining the call welcome to our conference call covering the quarter ended March 31, 2023. Joining me. This morning is Todd Hodgkinson, 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.

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 pin provided in our press release announcing the 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.

Not update our forward looking statements unless required by law to obtain 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 700 329 to $5 400 at this time I'd like to call turn the call back over to our Chief Executive Officer, Rob Ladd.

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

Thank you Rob.

As interest rates have continued to rise in recent quarters, we continued to benefit from our favorable asset liability mix and wish 97% of our loans are floating and only 32% of our liabilities are floating.

As a result, we had another quarter of solid earnings.

In the first quarter, we more than covered the dividend of <unk> 40 per share with GAAP net investment income of 46 cents per share core net investment income was <unk> 45 per share, which excludes estimated excise taxes and the reversal of approximately $600000 of capital gains incentive fees.

Net asset value increased $5 $1 million due to the issuance of equity under our ATM program.

Earnings in excess of the dividend of $1 2 million offset by net unrealized losses on our investment portfolio of $4 $2 million on a per share basis net asset value for the quarter dropped from 2014 to 14 O. Two to 13 87 or <unk> 15 per share.

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

Todd I would like to cover the following areas of life to date review portfolio and asset quality dividends and then outlook.

Since our IPO in November of 2012, we've now invested approximately $2 3 billion and over 180 companies and received approximately $1 $4 billion of repayments, while maintaining stable asset quality.

We have declared over $222 million of dividends to our investors, which represents $14 15 per share to an investor from our IPO back in November of 2012.

Portfolio of asset quality, we ended the quarter with an investment portfolio at fair value of $877 million across 88 portfolio companies up from $845 million across 85 companies at year end.

During the first quarter, we invested $41 million in for new and two existing portfolio companies you have.

We received no full repayments, we did have 6 million of other repayments, which resulted in net portfolio growth of $35 million.

At March 31, 99% of our loans were secured and 97% were priced at floating rates as Todd indicated earlier.

We continue to move toward first lien loans in fact, those are principally the only loans, we're making today as unit tranche. They were 88% of our home portfolio at quarter end up slightly from 87% at year end.

We're always focused on diversification the average loan for companies is about $10 8 million our largest overall investments is $28 million.

Numbers are both at fair value.

86 of the 88 portfolio companies are backed by a private equity firm.

Overall, our asset quality is stable at the two on our investment rating system or on plan.

17% of our portfolio is rated a one or ahead of plan.

70% of the portfolio margin and investment category, three or below which would be below plan.

In total we have four loans on nonaccrual, which comprised 2% of fair value of the total loan portfolio.

Now turning to dividends as you know we raised our dividend meaningfully in the first quarter, we continue to cover it.

As a result of greater earnings that were generating in this higher interest rate environment.

As said earlier, we are well positioned to benefit from the higher interest rates as our portfolio is 97% floating rate and our liability structures over 65% fixed rate.

Since and since interest rates have increased again at March 31.

For the second quarter, that's when most of our loans reprice, we would expect second quarter earnings to exceed those of the first quarter.

As a reminder, 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 losses over time.

As our business has matured over the last 10 years, we've begun to see somewhat regular realized gains from our portfolio.

While we did not have any equity realizations during the first quarter, we do expect some during 2023.

Now turning to outlook.

As a reminder, our platform at <unk> capital management includes a number of private institutional funds that co invest along CIC our public company.

This additional capital allows us to invest in larger transactions remain active in the market what our public company May have limited capital and build all portfolios under diversified manner.

Today total assets under management across the sales platform, our $2 $9 billion.

From a macro perspective, the higher interest rate environment, coupled with a stress on the regional banking sector.

Pardon me.

We are approaching the overall economic environment cautiously.

This quarter end, we have funded $17 1 million at par in two new and six existing portfolio companies and received no repayments.

This brings our portfolio now to 892 million and 90 portfolio companies.

With the additional equity raise since 12 31 that Todd referred to earlier under our ATM program, we expect to grow our investment portfolio to over 900 million this year.

For the balance of the quarter pardon me again, we're starting to see repayments pick up however, as a result, it is likely that new fundings for the rest of this quarter will be at least offset by repayments.

And with that I'll open it up for questions. Kelly. Please begin the question and answer session. Please.

Certainly the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question. Please pickup your handset if listing honesty Hassan to provide optimal sound corny peaceful Justin on that while we poll for questions.

Your first question is coming from Erik Zwick with Boenning. Please pose your question your line is live.

Thank you good morning.

Wanted to first start.

On the dividend and curious if you can.

Update us on that the level of spillover income you have today and just kind of update us on your thoughts in terms of potentially paying a special dividend at some point.

Yeah, Eric it's Todd Thanks for the question. So so our current spillover income from from last year is a little over $28 million. So that the current dividend level in 2023 will be enough to repay that spillover.

Now going into it so we don't expect a special dividend with respect to that now our earnings going forward could you know we could wind up having spillover income at a special dividend next year, but don't expect to have won this year.

Got it that makes sense, just with the increased base dividend.

It takes care of that spillover from last year, so okay great.

And then just curious on the switching gears to credit and maybe kind of two questions. There one curious if you've seen any.

Uptake or acceleration and amendment request and secondly, I'm just curious about the sentiment of PE sponsors today. If we were to go into a more severe you know economic environment. Just as you kind of continue to have ongoing discussions with them. How you would kind of measure our way categorized there with our current willingness to step up with additional equity.

<unk> if needed.

Okay.

Sure I'll take that one Eric this is Rob.

So with respect to additional amendment request I would say not an unusual number.

So it is a fluid portfolio, but I'd say no unusual increase in those requests.

<unk> to private equity firms so.

So as part of our underwriting of course, we're looking at the quality and the history. If you will and track record as a private equity firm, who is the owner of the business, we lend money to.

So we would expect they will operate as they have for now we've been doing this over 19 years there'll be responsible in and when capital is needed to come into a situation that there'll be there to provide it there does come a time when you get to where it doesn't make economic sense or.

Reputation says, but certainly to solve problems early rebound private equity sponsors to step up meaningfully.

Great. Thanks, and just last one for me I noticed the Pik income.

Increase in <unk> relative to <unk> and.

Does that kind of a good run rate to go forward or is there anything in the quarter that would not recur in Tokyo.

But the number is very modest, but we wouldn't expect a material change in that whatsoever.

Great. Thanks for taking my questions today. Thank.

Thank you.

Your next question is coming from Paul Johnson with <unk>. Please pose your question your line of sight.

Yeah. Good morning, guys. Thanks for taking my questions.

Good morning.

I'm just curious, though it sounds like there's a little bit of a remaining upside of the portfolio, which is good.

Good to hear I'm sorry.

For next quarter, potentially but I'm just kind of hope.

Hoping to get kind of some color I mean it.

In terms of NII in kind of ROE for the quarter, which was basically flat.

Quarter over quarter, you know you would've expected that to be a little bit higher just with the net growth hobbies that you guys had this quarter as well as just you know the direction of interest rates I'm curious was there anything in there that was kind of delayed or just.

It kind of reducing that at any in the numbers is there I think you know maybe it's potentially due to the weaker repayments but.

Any color there would be helpful.

And Paul as your question about NII or an EV.

NII in this kind of the ROE I'm, just you know where I'm looking at you know roughly like 12, 5% of our wheat from last quarter basically flat to this quarter.

Would have expected that to be a little bit higher.

Yeah. So I'd say there were some repayments in the fourth quarter that provided fee acceleration income that would probably be the principal difference.

And again as I said earlier that there were no.

Sure repayments in the first quarter.

Got it.

And then my last question is just kind of around the your comment on equity realizations. This year. I mean is your kind of expectation for incremental you know E realizations in some of your equity investments just sort of normal course for what you would expect in any given year or is there.

Any sort of lineup.

Your line of sight that you have I guess, an ongoing discussion and activity taking place in your portfolio.

Sure sure I would say that the.

The comment that I made was just to remind everyone that we do have them, but I would say just as repayments have slowed we would expect equity realizations and slowed versus really the last couple of years, where they were more robust in 'twenty, one and 'twenty two.

So do you have a line of sight on two or three.

But at a reduced pace.

Yeah.

Okay. Thanks for that that's all for me.

Okay. Thank you Paul.

Your next question is coming from Christopher Nolan with Ladenburg Thalmann. Please post your question your line of sight.

Hey, guys.

Rob given your experience long experience in and costing money cycles.

What advice are you providing to your portfolio companies in terms of how they can better positioned themselves financially for.

The continuation of this.

Current economic cycle.

But it probably starts Chris and you know a lot of the lot of the kind of dies and passed it comes with is the company properly capitalized at the start and then or.

If theres a need over time for additional capital to come in until about equity capital would come in.

They had a good position from an equity capital base I E. An over Levered and then say the secondarily would be of course, a day of adequate working capital liquidity.

So I think thats kind of fundamental and unfortunately, that's the way we approach our underwriting.

From an operational standpoint, we are focused on businesses that have.

Meaningful growth potential, but also have cost structures that are variable.

So as economic climate change they have the levers to pull that.

Uh huh.

Allow them to adapt to.

Example, a lower revenue base, so I'd say that would be the overall advice.

One thing that is helpful. In this higher interest rate environment, which we think is the appears to.

Due to its higher level. We also think it should stay there for a while.

Level, you know if you've got got much higher you may get over time requests for GE.

G could you pick a little bit of the interest here.

Silver went to seven or so.

And so of course, we have that flexibility to do within our.

Our structures since it's principally ourselves or other people of like mind, but we've now done to that point and again, our sense is that interest rates have gotten closer to where they'll be on the high level and so at this point not anticipating many of those requests.

And then as a follow up and this is more of a general.

Or are you seeing a broader demand for.

In the manufacturing and the type of cash flow type of lending that you do is you.

Offshoring and China starts to come back into the U S and so forth like that.

<unk> seen the effect in terms of through deal flow.

You know.

Not not in a big way, we certainly have seen some companies reposition away from China and this has been going down for now two or three years in terms of other offshore in locations like Vietnam.

But have not seen a big increase in terms of U S manufacturing.

Likely to happen to some extent great.

Great. Thank you very much.

Yes, Thank you Chris.

There appear to be no further questions in queue. At this time I would now like to turn floor back over to Rob Ladd for any closing remarks.

Thank you Kelly again, thanks, everyone for joining us.

This morning for our call.

We look forward to speaking with this summer when we report on the second quarter results.

Okay.

Thank you. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.

Yeah.