Q2 2023 Stellus Capital Investment Corporation 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's Conference call to report financial results for its second fiscal quarter ended June 30th 2023.

At this time, all participants have been placed on a listen only mode.

If you have any questions or comments during the presentation. You May press star one on your phone to enter the question queue at any time this.

This conference is being recorded today August 10th 2023.

It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Dallas Capital Investment Corporation.

Mr. Ladd you may begin your conference.

Thank you Matthew and good morning, everyone and thank you for joining the call and welcome to our conference call covering the quarter ended June 32023. Joining me. This morning is Todd House consider 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.

Please note that this call is the property Astellas Capitol investment Corp any.

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 patent 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.

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 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 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 which 97% of our loans are floating and only 37% of our liabilities are floating.

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

In the second quarter, we more than covered the dividend of <unk> 40 per share with GAAP net investment income of 49 per share core net investment income was <unk> 51 per share, which excludes estimated excise taxes.

Net asset value increased $27 5 million due primarily to the issuance of equity under our ATM program.

And earnings in excess of the dividend of $1 8 million offset by net unrealized losses on our investment portfolio of $6 3 million.

Unrealized losses, driven primarily by markdowns on specific positions offset by markups on many of the other loans in the portfolio due to tightening spreads.

During the quarter, we issued $2 3 million shares under the ATM, which were at or above net asset value per share for net proceeds of $32 4 million.

This brings total equity raised under the ATM in 2000 $23 million to $47 million and with that I'll turn it back over to Rob.

Thank you Todd I'd like to cover the following areas life to date review portfolio and asset quality, our dividend and outlook.

As we customarily do our life to date review so since our IPO in November 2012, we've invested approximately $2 $3 billion in over 185 companies and received approximately $1 4 billion of repayments, while maintaining stable asset quality.

As we customarily do our life to date review so since our IPO in November 2012, we've invested approximately $2 $3 billion in over 185 companies and received approximately $1 4 billion of repayments, while maintaining stable asset quality.

We have paid over $222 million of dividends to our investors, which represents $14 50 per share to an investor in our IPO in November of 2012.

Now turning to the portfolio, we ended the quarter with an investment portfolio at fair value of 882 million across 93 portfolio companies up from $877 $5 million across 88 companies at March 31.

During the second quarter, we invested $37 million in five new antenna existing portfolio companies and along with additional fundings of $11 4 million. We received two full repayments totaling 28, and then $17 6 million of other repayments all of that resulted in net portfolio growth for the quarter of approximately 10.

Billion at cost.

At June 30 is 99% of our loans were secured and 97% were priced at floating rates were always focused on diversification. The average loan per company is $10 4 million and largest overall investment is 19 million those at fair value.

1993 of the 91 of their portfolio companies are backed by a private equity firm.

Overall, our asset quality improved who better than to approximately 1.9 on our investment rating system. This would be better than plan.

25% of our portfolio is rated a one or ahead of plan. This is up from 70% at March 31.

13 presented the portfolio's margin investment grade category of three or below.

Currently we have five loans on nonaccrual, which comprised three 3% of fair value of the total loan portfolio at fair value.

As Todd mentioned earlier during the quarter, we recorded an unrealized loss of $6 3 million primarily from company specific write downs.

And subsequent to quarter end, we placed one loan on non accrual effective July one.

Which is included in the three 3% figure I gave you earlier.

We continue to cover our increased dividend of <unk> 40 per share per quarter. As a result of the greater earnings that we are generating in this higher interest rate environment.

Which in our view will continue for the foreseeable future.

We were well positioned to benefit from the higher interest rates as our portfolio is approximately 97% floating and our liability structure is approximately 63% fixed rate.

As a reminder, integral to 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 of course, we begun to see regular somewhat regular realized gains from our portfolio and you might find it interesting that life to date, the net realized equity gains are in excess of $60 million.

We are expecting one equity gain in the quarter of approximately $2 million.

It's the actual game will be about a $1 million.

And now turning to outlook.

As many of you know our platform itself is capital management includes a number of private institutional funds that co invest along the public company yesterday I see this.

This additional capital allows us to invest in larger transactions.

<unk> active in the market when NCIC may have limited capital and build all portfolios in a diversified manner.

Today total assets under management across the stellate cells platform.

It's $2.9 billion.

And then for the quarter since quarter end, we funded 47.5, sorry, $47 4 million at par in five new and two existing portfolio companies and have received one repayment of $10 9 million.

This brings our portfolio to $915 million and 99 portfolio companies the likelihood of 100, I guess before quarter end.

We estimate we will end the quarter at 900 million or higher in terms of the total portfolio.

And with the additional equity raise this year that Todd referred to earlier, we expect to grow our portfolio in excess of $930 million by the end of the year.

With that I'll open it up for questions.

Thank you and Matthew will turn over to you for the Q&A session.

Certainly everyone. At this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.

We do ask that while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.

Once again, if you have any questions or comments. Please press star one on your phone.

Your first question is coming from Christopher Nolan from Ladenburg Thalmann. Your line is live.

Hey, good morning, Chris Yep.

Rob on E H real estate investments it seemed like there was a material expansion in the number of non accruals there is that related to the higher interest rate environment.

Yes. This is a specific situation tied to the housing industry in the Midwest and just tied to this.

The slowdown there that certain quarters, there and throughout the country in terms of real estate residential closings.

Okay. So I guess the gist of my question that says we're not obscene increased non accruals across bdcs are just want to see whether or not this might be just related to company's been unable to handle the change in the interest rate environment, but that's not the case with the H right. Yeah. The question would be tied to the fact that interest rates have risen which has caused.

Fewer home sales.

Gotcha.

So Dennis I.

I guess for Todd is was there any non occurring nonrecurring items in the earnings.

No nothing nothing material that was dug there's nothing unusual.

Great and then and finally the facility to before and after it seems like the capacity is $265 million, which didn't really seem to change.

I'm just trying to understand what the material changes were for the ASO and the credit facility didn't increase in size. The $265 million is the total amount of the facility.

The borrowing base is lower than that of about $225 million.

And then what it changed at the end of the year is as you know with the ATM proceeds we paid down the credit facility. But then also we had a very active quarter in terms of fundings as well. So so so kind of the movements in there have masked oh.

Kind of pay downs as well as draws on facility made it look a little bit smaller than you might otherwise expect but but there wasn't a change in the credit facility yourself.

Okay. That's it for me thank you.

Okay. Thank you Chris.

Thank you. Your next question is coming from Erik Zwick from Hovde Group. Your line is live.

Good morning. Thank you. Thanks, good morning, Hey.

I wanted to start just first on the increase in pick income in the quarter whats driving that and whether you think that's going to be something temporary or whether that last thing to say a couple of quarters.

Yeah. The the Pik income is very modest less than 1% as I recall and but in any event you may find some situations in this higher interest rate environment, where there may be picking up a few points, but we would not expect that to be a material part of the portfolio or.

Great. Thank you and then similarly the increase in.

Kind of repayments and sales activity in the quarter I'm curious if that was you know reflective of one or two companies or maybe something more larger than the market.

We've heard from some other bdcs at the M&A market is starting to increase again. So maybe there is just you know some companies that decided that the seller I'm curious where you know what drove.

The uptick there.

Yeah, So I'd say that if you'd asked us in May we would've said things have slowed down and if you'd asked us now things have sped up so so quite a bit of activity over the summer so far and I'd say those are kind of company specific things, but tied to.

Either refinancings or or sales, but I think that things have picked up on both ends and we've had limited repayment. So in the last couple of quarters. So.

We would expect a more deal flow and more repayments going forward.

I appreciate the added color there that's helpful. And then last one for me just in terms of I Wonder if you could kind of categorize or quantify the size of the pipeline today, you know how maybe it's changed over the past three to six months and if there's any particular concentrations of the industries that are that are particularly strong in there.

Today as well.

You know were so active Eric around the country and all industries, except for a few and so I'd say, it's pretty broad which is helpful. So our natural flow creates interesting industry diversification. So nothing in particular.

Got it and in terms of just the size of the pipeline today, how would you like to us sorry.

You know, we don't we don't describe it in nominal dollars, but I would say that it's as I said earlier, it's very very active in and put quite a bit busier than we were in April and may.

And again, if it's helpful to just in terms of capacity because of our credit facilities and the equity that we've raised we have the ability to really get up to 950 million or so as a limit so think of us today at 915. So we have lots of things, but you can quickly fill up the balance so.

So think of US as we've got more capital to invest but also we'll be reinvesting repayments. So again I think plenty of pipeline to keep us full in terms of the portfolio.

Thanks, so much for taking my questions. This morning.

Thank you Eric.

Thank you. Your next question is coming from Robert Dodd from Raymond James Your line is live.

Good morning, Robert Hi, guys morning, one congratulations on the on the realized equity gain.

I mean, all of that pipeline trade conflicts that right you expect more acceleration than kind of equity realization as well is that the claims activity that that the.

That might go one way you can maybe.

<unk> taken out the debt and equity.

The point or any color on that.

Yes, Robert so none other that are in front of us that we can speak to I would say probably there is more of the case of refinancing than actual sales are companies. Although we would expect that to pick up as well so so more to come but.

I thank God.

At this point just one that we know for this quarter.

Got it. Thank you and then one on the ones where maybe.

Maybe you have seen.

There's a little bit of pick because of.

Highlights and things like that I wasn't a sponsored.

One being in these situations in terms of providing additional support and that's what it exactly I mean, just give us some color on how.

All are they stepping forward being proactive role.

How's the environment with the sponsor.

Yeah, So I'd say that substantially.

Substantially all of our sponsors.

And responded very well, which has been true over time throughout our history and that's <unk>.

Principal reason that we've gone to principally a sponsor backed strategy. So so we've found you know very very good responses from sponsors and in many cases, they were putting equity in so imagine in the.

Few cases, where we might have some pick in addition to cash income.

<unk> assumed the sponsors put in cash equity below us.

Got it thank you.

Thank you.

Thank you. Your next question is coming from Ryan Lynch from K B W. Your line is live.

Good morning, Ron.

Hey, good morning.

First question I had was you guys mentioned in the press release about Arbor works being placed on non accrual.

Many of the third quarter.

Can you just describe exactly what what that business is probably a little background on it and and.

What I guess it is going on with that business and as well as does the Mark that you guys. Currently have at the end of the second quarter sort of reflect the challenges that that business is facing.

Yes. So this business is active principally in the west coast and part of the United States, including.

Cleaning for power lines and activities related to storms. So that's the general business and we normally don't talk more than that about it and then in terms of the Mark we Mark things as best we call them at each quarter and that's reviewed by our outside.

Our firm.

Valuation firm.

Oh, Okay. The other question I had was obviously you did elaborate a little bit this quarter or is it the expectation that that you guys want to get back up.

To a you know a higher leverage level went up if you look at just kind of like total leverage gross leverage including the SBA debentures are you know you guys were above two times and now you guys are you know bill.

So that by by a bit.

You guys have an area that you guys would like to operate at all or was this just opportunistic.

You know the market being open indeed lot, Virginia, a little bit to get more capital and up and up.

Pretty favorable deployment environment.

Yes, Chris good question.

I'm sorry, Ryan Good question, So I would say that where our.

Our target leverage would continue to be one to one on the regulatory test and a little over two to one including the <unk> debentures. So that has not changed this is really a reflection of the equity that's been raised and then some repayments but.

We're still targeting the same leverage quotient.

Okay.

That's all for me I appreciate the time today.

Great. Thank you.

Thank you that concludes our Q&A session I will now hand, the conference back to CEO , Robert Ladd for closing remarks. Please go ahead.

Okay, great. Thanks, everyone for being on being supportive of the company. We look forward to giving you the our third quarter results in November .

Okay.

Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.