Q3 2023 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 stellar <unk> capital Investment Corporation's Conference call to report financial results for its third fiscal quarter ended September 30th 2023.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone Keypad. This conference is being recorded today November eight 2023.

It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer, Astellas Capital Investment Corporation. Mr. Ladd you may begin your conference.

Okay. Thank you Holly good morning, everyone and thank you for joining the call and welcome to our conference call covering the quarter ended September 32023. Joining me. This morning is Todd House can set 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.

Cardio 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.

We will not update any forward looking statements unless required by law.

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 5400.

This time I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd. Okay. Thank you Todd Todd will now cover our operating results life to date review and portfolio and asset quality.

Ron.

In the third quarter, we more than covered the dividend of <unk> 40 per share with GAAP net investment income of 47 per share core net investment income was 49 per share, which excludes estimated excise taxes and the impact of capital gains incentive fees.

Net asset value per share was lower as a result of some unrealized losses in our investment portfolio. These were company specific and we don't believe are indicative of overall asset quality net.

Net investment income exceeded the dividend by $1 $5 million and we also issued additional shares of $21 $5 million on a net basis, all at or above net asset value.

From a life per day perspective, since our IPO in November 2012, we've invested approximately $2 4 billion and over 191 companies and received approximately $1 $5 billion of repayments, while maintaining stable asset quality, we have paid over $233 million of dividends to our investors which represents $14.

<unk> 55 per share to an investor in our IPO in November 2012.

We ended the quarter with an investment portfolio at fair value of $886 million across 96 portfolio companies up from $882 million across 93 companies at June 32023.

During the second quarter third quarter, we invested $44 $1 million in six new and six existing portfolio companies and along with additional fundings of $4 7 million and received two full repayments totaling $21 million and $15 million of other repayments, resulting in net portfolio growth at cost of $4 $7 million.

At September 30th 99% of our loans were secured and 97% were priced at floating rates.

We're always focused on diversification the average loan per company is $9 $9 million and the largest overall investment is $18 9 million both at fair value.

Substantially all of the portfolio companies are backed by a private equity firm.

Overall, our asset quality is below where rating of two therefore slightly better than plan.

25% of our portfolio is rated a one or ahead of plan and 14% of the portfolio is marked at an investment category of three or below.

Currently we have five loans on nonaccrual, which comprised one 6% of the fair value of our total loan portfolio.

With that I'll turn it back over to Rob to discuss dividends and the overall outlook. Okay. Thank you Todd.

As a reminder, part of our investment 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.

We've had modest equity realizations. So far this year, we expect this activity to pick up over the next six to 12 months as of the end of the quarter, we have sub $57 million of equity investments at cost that were marked at $66 million.

Our historical performance would indicate that the ultimate realization of this portfolio could be greater than two times. Our portfolio is cost basis. However of course, the ultimate performance of our current equity positions will depend on a variety of factors, including among other things the current economic environment and sponsors equities exit strategies.

Yeah.

Now turning to dividends, we continue to cover our 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.

We are well positioned to benefit from the higher interest rates as our portfolio is over 97% floating rate and our liability structure as approximately 65% fixed rate.

As a reminder, as we are now in the fourth quarter.

November dividend is paid on December 15th and the December dividend is paid on December 29.

Okay.

Looking forward to Q1 of 2024, we expect subject to our board of directors approval to continue our monthly dividend of approximately <unk> 13 per share, resulting in aggregate dividends of <unk> 40 per share for the quarter.

It's worth noting that based on the average price of our stock over the last 10 days ending yesterday, our current dividend equates to an annual yield of 12, 5%.

Now turning to outlook since quarter end, we have funded $3 2 million at par and five existing portfolio companies and have received one repayment of 400000.

This brings our total portfolio to approximately $888 million at fair value with 95 portfolio companies.

We are experiencing a somewhat slower environment for originations than in the previous few quarters and we expect our funding for the remainder of the year will be offset by expected repayments of approximately the same amount as a result, we estimate when the year flat quarter over quarter.

Now with that I'll open it up for questions. Thank you and Hollie you can begin the Q&A session. Please.

Certainly at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue for.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Your first question for today is coming from Christopher Nolan at Ladenburg Thalmann.

Hey, good morning, Chris.

The increase in non accrual assets what is the thinking is.

Given the broader economy is the inclination to work through these or to try to exit them.

So Chris good good question.

It has been our mode for now almost 20 years that we work through things and versus sell them off and.

So so that's our.

That would not change so continue to work through problems.

And ultimately we found the realizations are better overall that way.

Okay, and then Rob what is the thoughts on leverage you're already covering the dividend.

Is the thought to keep the leverage low take the excise tax hit.

And just for just to increase leverage in.

How are you thinking about it.

Sure. So we have reached the point on leverage.

Based on equity issue under the ATM program, and some repayments where were less levered than normal we target the regulatory leverage to be at one to one or so we're now I believe about eight or so to one so we would expect our leverage to tick back up to one to one and have a more full portfolio, which we think.

So it's a good position.

Positioned to be yet.

Final question in your comments you mentioned the first quarter 2004 dividend of 13 cents per share per month did you mean fourth quarter 'twenty three or.

Yes, so what I was referring to is where now we've declared the dividends for the fourth quarter of this year. So just to indicate that based on the performance of where we're headed we would expect that dividend to continue on to into the first quarter of next year again subject to board approval great. Thank you for the clarification that's it for me.

Thank you Chris.

Your next question for today is coming from Robert Dodd with Raymond James.

Good morning, Rob.

Morning.

Just.

Wanted to ask you about <unk> works, obviously last quarter, you told US you can put all the quote which which you did.

And it's.

It's a pretty large chunk of the unrealized depreciation this quarter and so because even work <unk> also then in October made a small.

Couple of hundred thousand dollars, followed one can you give us any kind of is that is that working capital is that part of the.

The work at food process or is that the sponsor stepped up and put into equity and you've put in a little bit of that as well can you give us any.

Any color on that since that was.

What are your biggest moves this quarter.

Sure Yes. So this again as you know, we we really limit our discussion about project company.

For competitive reasons, but I would say this is the normal working through a situation with the sponsor.

He has been supportive and where there is some modest additional fundings on both sides.

Got it got it thank you.

Just looking.

To your point on the equity co invest potential realizations over the next call it call it yeah.

Can you give us.

So what kind of market.

<unk> needs to be going on for those realizations to occur.

And what would that mean more broadly for the rest of the portfolio sits about what may be.

Getting the leverage back up to your target.

All of those two things just.

Intrinsic key related why you couldn't have the realizations without portfolio growth or what are your thoughts there.

Yes, so maybe take them separately.

In terms of portfolio growth.

As indicated in my remarks that we have seen a slowdown and I think others are experiencing this but at the same time seeing very interesting opportunities.

So our pipeline is growing just a matter of we're very selective as you know so I would expect you'll see continued portfolio growth we are targeting to take the.

888, or so up to at least 950.

Based on activity over the next six months or so.

And then in terms of equity realizations your point's a good one so.

The equity overall public equity markets have been somewhat muted lately seem to be rally in the last few days.

So theres certainly drives.

Exits, but it's they're typically not to a public offering.

But rather just influences market multiples.

So we found that the equity realizations are more company specific.

And tied to what the private equity firm is able to do with the platform and now has achieved the time, where there's significant EBITDA growth and they're exiting the position. So so although it's become a little bit muted, we would expect it to pick up.

In part Robert just because of the vintage of some of our portfolio.

And one thing I Didnt mentioned in the remarks is we went back and studied the history of the equity co invest portfolio and it looks like on average.

They're they're they're realized in just over four years. So we have some positions that are longer than that which would drive eventually from historical math that that will be having some coming up again in the next year or so.

So I'd say there.

Different they are different and of course, the cash that would come from the realizations.

It would be very helpful. Because it's not earning a coupon. So we would of course reinvest the cash that came in from realizations into principally the loan portfolio and again with about a 5% typically co invest that's attached to each new loan.

Got it thank you for that color I appreciate it.

Thank you rose.

Your next question is coming from Paul Johnson with K B W.

Good morning, Yes, Hey, guys.

They set.

My questions.

On your comments on your internal credit rating on the portfolio I just want to make sure I'm clear I think you said, 14% was rated three or below I think rated three or four is that on cost basis or is that on air value.

Yes, Paul Thats faced all of those are based on fair value.

Gotcha.

Obviously that includes.

Non accruals on that list.

I mean is it fair.

I guess are you able to offer any other color on those.

The other portfolio that kind of falls into that bucket in terms of.

Formats kind of outside of the non accruals I guess they are included in that number.

I would say that the the percentage there is about normal.

Over time.

So not anything as Todd said earlier, not that would indicate a broader concerned about the portfolio. So we will always have a number of a handful of risk grade threes.

That we consider somewhat like on our watch list that we're working through.

So not any material difference than in the past.

Okay got it.

And then.

I guess from your.

Good morning.

To your portfolio.

<unk>.

What are you guys seeing so far in terms of.

And then in activity.

Really request is there any sort of instances.

And then that's just for credit relief.

Any trends that youre seeing there that are notable.

Yes, so I'd say that you know very few requests in that way now there is no question that as nominal interest rates have come up roughly.

Depending on the floors, but roughly 400 plus basis points. So all companies are bearing that difference in interest expense that they didn't have a couple of years ago. So I think it is reduced but.

Company's cash flows, but not in a material way that's affected performance. So when we have something that's again a risk grade three or below it's really company related specific performance versus a macro Gee, we just can't cover the cover the interest expense and just as a reminder, we do have the <unk>.

<unk> ability, which is part of your question I'll take.

That if we got rates too high we could certainly pick some part of the interest.

Knowing that we would ultimately collect that upon a refinancing or a sale.

So so I would say not.

Not a broad based issue in the portfolio and were certainly try to be flexible when theres a need but we've had very few requests that have come just from interest rates increasing.

Okay got it thanks for the color that's all for me.

Yes, Thank you Paul.

Your next question is coming from Bryce Rowe with B Riley.

Hi, Thanks, Good morning, Hi, Rob.

<unk> had good morning, Brian.

Good morning Bryce.

Good morning.

Wanted to just clarify again, maybe with Chris's question about about leverage in your prepared remarks, too I mean, clearly you're comfortable operating at one to one from a regulatory perspective, you've been active with the ATM.

And I think in the second quarter not third you subsidize some of the offering expense.

To achieve NAV.

Curious.

In this current backdrop are you still interested in raising equity.

On the ATM over the short term despite that one to one.

Regulatory leverage target that you kind of have had over time. Thanks.

Sure sure I'd say, we're certainly always interested in raising equity if it's positive for the company.

But given our current leverage position I think you'd find us more of investing the capital than issuing new shares, but again, we would be open minded and would look at that each quarter as the.

The opportunity presents itself.

Okay. That's good clarification. Thank you.

Thank you.

We have reached the end of the question and answer session and I will now turn the call over to Robert for closing remarks.

Okay. Thank you Holly very much. So we thank everyone for your support for participating this morning on the call and we look forward to updating you in early March one we'll have the year end figures.

Okay.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Sure Danielle.