Q2 2024 Stellus Capital Investment Corp Earnings Call

August 8, 2024

Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's conference call to report financial results.

Operator: I would like to welcome everyone to Stellus Capital Investment Corporation's conference call to report financial results for its second fiscal quarter ended June 30th, 2024. There will be an opportunity to ask questions after today's presentation. Please press star one on your phone if you wish to ask a question today.

Operator: I welcome everyone to Stellus Capital Investment Corporation's conference call to report financial results for its second fiscal quarter ended June 30, 2024. There will be an opportunity to ask questions after today's presentation. Please press star 1 on your phone if you wish to ask a question today. This conference is being recorded. August 8th, 2024. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Operator: Stellus Capital Investment Corporation's conference call to report financial results for its second fiscal quarter ended June 30, 2024. There will be an opportunity to ask questions after today's presentation. Please press star 1 on your phone if you wish to ask a question today. This conference is being recorded. August 8th, 2024. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Operator: for its second fiscal quarter ended June 30th, 2024. There will be an opportunity to ask questions after today's presentation. Please press star 1 on your phone if you wish to ask a question today.

Operator: This conference is being recorded August 8th, 2024.

Robert Ladd: It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference. Okay, thank you, Paul, and good morning everyone, and thank you for joining our conference call today covering the quarter ended June 30th, 2024.

Operator: This conference is being recorded. August 8, 2024. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Robert Ladd: Okay, thank you, Paul. And good morning, everyone. And thank you for joining our conference call today covering the quarter ended June 30, 2024. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements as well as an overview of our financial information.

Todd Huskinson: Okay, thank you, Paul, and good morning, everyone, and thank you for joining our conference call today covering the quarter ended June 30, 2024.

Todd Huskinson: Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about four living statements, as well as an overview of our financial information.

Robert Ladd: Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements, as well as an overview of our financial information.

Todd Huskinson: Thank you, Rob.

Todd Huskinson: 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 Stellus 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 this call.

Todd Huskinson: I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Stellus 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 pen 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 materially differ from these projections.

Todd Huskinson: 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 materially differ from these projections. We will not update any forward-looking statements unless required by law.

Todd Huskinson: We will not update any forward-looking statements, unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the public investor's link or call us at 713-292-5400.

Todd Huskinson: To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Public Investors link or call us at 713-292-5400. Now I'll cover our operating results for the quarter, but we'd like to start with our activity so far. Since our IPO in November 2012, we've invested approximately $2.5 billion in over 195 companies and received approximately $1.6 billion of repayment while maintaining stable asset quality. We've paid over $262 million of dividends to our investors, which represents $15.75 per share to an investor in our IPO in November 2012, which was offered at $15 per share. Turn to Operating Results.

Todd Huskinson: We will not update any forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Public Investors link or call us at 713-292-5400.

Todd Huskinson: Now we'll cover our operating results for the quarter, but we'd like to start with our life-to-date activity. Since our IPO in November 2012, we've invested approximately 2.5 billion in over 195 companies and received approximately 1.6 billion of repayments while maintaining stable asset quality. We've paid over 262 million of dividends to our investors, which represents $15.75 per share. To invest in our IPO in November 2012, which was offered at $15 per share.

Todd Huskinson: In the second quarter, we more than covered the declared dividend of $0.40 per share with GAAP net investment income of $0.48 per share. Core net investment income was $0.50 per share, which excludes estimated excise tax. Net investment income per share was benefited by increased fee income from a variety of sources and the waiver of $1.6 million or $0.06 per share of incentive fees during the quarter due to a limitation in the total return test.

Todd Huskinson: In the second quarter, we more than covered the declared dividend of $0.40 per share with GAAP net investment income of $0.48 per share. Core net investment income was $0.50 per share, which excludes estimated excise taxes. Net investment income per share was benefited by increased fee income from a variety of sources and the waiver of $1.6 million or $0.06 per share of incentive fees during the quarter due to a limitation in the total return test.

Speaker Change: Now I'll cover our operating results for the quarter, but we'd like to start with our life-to-date activity.

Todd Huskinson: The net asset value per share decreased $0.05 during the quarter due to net unrealized depreciation on our investment portfolio, offset by the generation of net investment income in excess of the dividend. We also realized a gain of $2 million, or $0.08 per share, on an equity investment during the quarter. Our ATM program was active during the quarter, and we issued $25.2 million in shares at an average gross price of $13.89 per share.

Todd Huskinson: Since our IPO in November 2012, we've invested approximately $2.5 billion in over 195 companies and received approximately $1.6 billion of repayments.

Todd Huskinson: while maintaining stable asset quality.

Todd Huskinson: We've paid over $262 million of dividends to our investors, which represents $15.75 per share, to an investor in our IPO in November 2012, which was offered at $15 per share.

Todd Huskinson: Turned operating results. In the second quarter, we more than covered the declared dividend of $0.40 per share with net investment income of $0.48 per share. Core net investment income was $0.50 per share, which excludes estimated excise taxes. Net investment income for share was benefited by increased fee income from a variety of sources. And the waiver of $1.6 million or $0.6 per share have been sent of fees during the quarter due to a limitation from the total return test. Net asset value per share decreased $0.05 during the quarter due to net unrealized appreciation on our investment portfolio, offset by the generation of net investment income and excess of the dividend.

Todd Huskinson: Turn to operating results. In the second quarter, we more than covered the declared dividend of $0.40 per share with GAAP net investment income of $0.48 per share. Core net investment income was $0.50 per share, which excludes estimated excise taxes.

Todd Huskinson: Net investment income per share was benefited by increased fee income from a variety of sources.

Todd Huskinson: And the waiver of $1.6 million, or $0.06 per share, of incentive fees during the quarter due to a limitation from the total return test.

Todd Huskinson: Net asset value per share decreased 5 cents during the quarter due to net unrealized depreciation on our investment portfolio offset by the generation of net investment income in excess of the dividend.

Todd Huskinson: We also realized a gain of $2 million or $0.8 per share on an equity investment during the quarter. Our ATM program was active during the quarter, and we issued $25.2 million in shares at an average gross price of $13.89 per share. All issuances were above net asset value. We ended the quarter with an investment portfolio at fair value of $900 million across 100 portfolio companies, up from 876 million across 94 companies as of March 31st, 24. During the second quarter, we invested 53 million in eight new portfolio companies and had 13.3 million in other investment activity at par.

Todd Huskinson: We also realized a gain of $2 million, or $0.08 per share, on an equity investment during the quarter.

Todd Huskinson: Our ATM program was active during the quarter and we issued $25.2 million in shares at an average gross price of $13.89 per share. All issuances were above net asset value.

Todd Huskinson: All issuances were above net asset value. We ended the quarter with an investment portfolio at a fair value of $900 million across 100 portfolio companies, up from $876 million across 94 companies as of March 31, 2024. During the second quarter, we invested $53 million in eight new portfolio companies and had $13.3 million in other investment activity at par. We also received two full repayments, totaling $31 million, and $9.7 million of other repayments, both at par, resulting in net portfolio growth of $23.8 million at fair value.

Todd Huskinson: We ended the quarter with an investment portfolio at fair value of 900 million dollars across 100 portfolio companies, up from 876 million across 94 companies as of March 31st, 2024.

Todd Huskinson: During the second quarter, we invested $53 million in eight new portfolio companies and had $13.3 million in other investment activity at par. We also received two full repayments.

Todd Huskinson: We also received two full repayments totaling $31 million and $9.7 million of other repayments, both at par, resulting in net portfolio growth of 23.8 million at fair value. At June 30th, 99% of our loans were secured, and 98% were priced at floating rates. Our average loan per company is $9.5 million, and the largest overall investment is 19.6 million, both at fair value. All but one portfolio company of our portfolio companies are backed by private equity firms. Overall, our asset quality is slightly better than plan. At fair value, 23% of our portfolio is rated a one or a head of plan, and 15% of the portfolio is marked at an investment category of three or below, meaning not meeting plan or expectations.

Todd Huskinson: totaling $31 million and $9.7 million of other repayments, both at par, resulting in net portfolio growth of $23.8 million at fair value.

Todd Huskinson: At June 30th, 99% of our loans were secured, and 98% were priced at floating rates. Our average loan per company is $9.5 million, and the largest overall investment is $19.6 million, both at fair value. All but one portfolio company of our portfolio companies are backed by private equity. Overall, our asset quality is slightly better than plan. At fair value, 23% of our portfolio is rated one or ahead of plan, and 15% of the portfolio is marked in an investment category of three or below, meaning it is not meeting plan or expectation. Currently, we have five loans on non-accrual, which comprise 2.9% of the fair value of the total loan portfolio. With that, I'll turn it back over to Rob to discuss the overall outlook.

Todd Huskinson: At June 30th, 99% of our loans were secured, and 98% were priced at floating rates. Our average loan per company is $9.5 million, and the largest overall investment is $19.6 million, both at fair value. All but one portfolio company of our portfolio companies are backed by private equity. Overall, our asset quality is slightly better than planned. At fair value, 23% of our portfolio is rated one or ahead of plan, and 15% of the portfolio is marked in an investment category of three or below, meaning not meeting plan or expectation. Currently, we have five loans on non-accrual, which comprise 2.9% of the fair value of the total loan portfolio. With that, I'll turn it back over to Rob to discuss the overall outlook.

Todd Huskinson: At June 30th, 99% of our loans were secured and 98% were priced at floating rates.

Todd Huskinson: Our average loan per company is $9.5 million and the largest overall investment is $19.6 million, both at fair value.

Todd Huskinson: All but one portfolio company of our portfolio companies are backed by private equity firms.

Rob: Overall, our asset quality is slightly better than planned. At fair value, 23% of our portfolio is rated a 1 or ahead of plan, and 15% of the portfolio is marked in an investment category of 3 or below, meaning not meeting plan or expectations.

Todd Huskinson: Currently, we have five loans on non-cruel, which comprise 2.9% of the fair value of the total loan portfolio.

Todd Huskinson: Currently we have five loans on non-accrual which comprise 2.9% of the fair value of the total loan portfolio.

Robert Ladd: With that, I'll turn it back over to Rob to discuss the overall outlook. Okay, thank you, Todd. As we look ahead to the third and fourth quarters, I'll cover portfolio growth, equity realizations, capital management, and dividends. Based on an active pipeline, we expect to end the third quarter with a portfolio between 920 million and 940 million. We did not know of any loan repayments in Q3, although we did have an equity realization, which is disclosed in our subsequent events for 2.6 million of proceeds and a realized gain of a little over $2 million. For Q4, we are aware of two likely repayments totaling 17 million, and one of the companies has an equity co-investment which is currently carried at 1.8 million at fair value.

Robert Ladd: Okay, thank you, Todd. As we look ahead to the third and fourth quarters, I'll cover portfolio growth, equity realizations, capital management, and dividends. Based on an active pipeline, we expect to end the third quarter with a portfolio between $920 million and $940 million. We do not know of any loan repayments in Q3, although we did have an equity realization, which is disclosed in our subsequent events for $2.6 million of proceeds, and a realized gain of a little over $2 million.

Robert Ladd: With that, I'll turn it back over to Rob to discuss the overall outlook.

Robert Ladd: Okay, thank you, Todd. As we look ahead to the third and fourth quarters, I'll cover portfolio growth, equity realizations, capital management, and dividends.

Robert Ladd: Based on an active pipeline, we expect to end the third quarter with a portfolio between $920 million and $940 million.

Robert Ladd: We do not know of any loan repayments in Q3, although we did have an equity realization, which is disclosed in our subsequent events, for $2.6 million of proceeds.

Robert Ladd: For Q4, we are aware of two likely repayments totaling $17 million, and one of the companies has an equity co-investment, which is currently carried at $1.8 million at fair value. We expect that new funding will exceed repayments for Q4.

Robert Ladd: and a realized gain of a little over $2 million.

Robert Ladd: For Q4, we are aware of two likely repayments totaling $17 million.

Robert Ladd: and one of the companies has an equity co-investment, which is currently carried at $1.8 million at fair value.

Robert Ladd: We expect that new fundings will exceed repayments for Q4. As Todd noted earlier, we had a good second quarter for equity issuance under our ATM program. We have a meaningful amount of capacity in our bank facility and cash in our SBICs, but we will look to continue to increase the bank facility over time. Given our current capital base, we have the ability to grow the portfolio to over $960 million.

Robert Ladd: We expect that new fundings will exceed repayments for Q4.

Robert Ladd: As Todd noted earlier, we had a good second quarter for equity issuance under our ATM program. We have a meaningful amount of capacity in our bank facility and cash in our SBICs, but we will look to continue to increase the bank facility over time. Given our current capital base, we have the ability to grow the portfolio to over $960 million. And finally, regarding dividends, we expect to continue, subject to board approval, to pay at a rate of $0.40 per share per quarter, payable monthly through the rest of the year. And with that, I'll open up to questions, and Paul, please, we'll start the Q&A session now.

Robert Ladd: As Todd noted earlier, we had a good second quarter for equity issuance under our ATM program. We have a meaningful amount of capacity in our bank facility and cash in our SBICs, but we will look to continue to increase the bank facility over time. Given our current capital base, we have the ability to grow the portfolio to over $960 million. And finally, regarding dividends, we expect to continue, subject to board approval, to pay at a rate of 40 cents per share per quarter, payable monthly through the rest of the year. And with that, I'll open up to questions, and Paul, please, we'll start the Q&A session now.

Robert Ladd: As Todd noted earlier, we had a good second quarter for equity issuance under our ATM program.

Robert Ladd: We have a meaningful amount of capacity in our bank facility and cash in our SBICs, but we will look to continue to increase the bank facility over time.

Robert Ladd: Given our current capital base, we have the ability to grow the portfolio to over $960 million.

Robert Ladd: And finally, regarding dividends, we expect to continue, subject to board approval, to distribute at a rate of 40 cents per share per quarter, payable monthly through the rest of the year. This should be supported by earnings and a large amount of spillover income.

Robert Ladd: And finally, regarding dividends, we expect to continue, subject to board approval, to distribute at a rate of 40 cents per share per quarter, payable monthly, through the rest of the year. This should be supported by earnings and a large amount of spillover income.

Robert Ladd: And with that, I'll open up for questions, and Paul, please, we'll start the Q&A session now.

Robert Ladd: And with that, I'll open up for questions. And Paul, please, we'll start the Q&A session now.

Operator: Certainly. Thank you.

Operator: Certainly, thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Operator: 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 participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one if you wish to ask a question.

Operator: Certainly, thank you. At this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Operator: You may press star 2 if you would like to remove your question from the queue.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one if you wish to ask a question. On today's call, one moment please while we poll for questions.

Operator: Once again, that is Star 1 if you wish to ask a question. On today's call, one moment, please, while we poll for questions. And the first question today is coming from Christopher Nolan from Ladenburg-Dalton. Christopher, your line is live.

Operator: On today's call, one moment please, while we pull for questions.

Operator: And the first question today is coming from Christopher Nolan from Ladenberg, Talman. Christopher, you're Linus Lives.

Operator: And the first question today is coming from Christopher Nolan from Ladenburg-Thalmann. Christopher, your line is live. Hey guys, can you hear me?

Christopher Nolan: Hey guys, can you hear me?

Christopher Nolan: Hey guys, can you hear me? Good morning, Chris. Hey, nice quarter, by the way.

Operator: Good morning, Chris. Nice quarter, by the way. The fee waiver, is that something that we should expect to repeat in coming quarters?

Robert Ladd: Good morning, Chris. Hey, nice quarter by the way. The fee waiver, is that something that we should expect to repeat in coming quarters?

Robert Ladd: Good morning, Chris. Hey, nice quarter, by the way. The fee waiver, is that something that we should expect to repeat in coming quarters?

Christopher Nolan: The fee waiver, is that something that we should expect to repeat and come in quarters?

Speaker Change: Good morning, Chris. Hey, nice quarter, by the way. The fee waiver, is that something we should expect to repeat in coming quarters?

Todd Huskinson: So, Chris, first I would say, you know, it depends, of course, on each quarter's performance going forward in the mechanics of the 12-quarter test, but I think at this point, we don't expect anything for the remainder of this year under the test, you know, absent any other movements in the current performance.

Todd Huskinson: So, Chris, first, I would say, you know, it depends, of course, on each quarter's performance going forward in the mechanics of the 12-quarter test, but I think at this point, we don't expect anything for the remainder of this year under the test, absent any other movements in the current performance.

Todd Huskinson: So, Chris, first I would say, you know, it depends, of course, on each quarter's performance going forward and the mechanics of the 12-quarter test, but I think at this point, we don't expect anything for the remainder of this year under the test, absent any other movements in the current performance.

Todd Huskinson: So Chris, at first I would say it depends, of course, on each quarter's performance going forward in the mechanics of the 12-quarter test. But I think at this point we don't expect anything for the remainder of this year under the test absent any other movements in the current performance.

Todd Huskinson: So, Chris, first I would say, you know, it depends, of course, on each quarter's performance going forward and the, you know, mechanics of the 12 quarter test, but.

Todd Huskinson: I think at this point we don't expect anything for the remainder of this year under the test, you know, absent any other movements in the current performance.

Christopher Nolan: Got it. And then, I guess, turning to non-accruals, EH Real Estate, obviously, that's a big position there. It's a big driver for the non-accruals. Can you give a little color in terms of what sector they're involved in and what their strategy is?

Christopher Nolan: And then I guess turning to non-accruals, EH Real Estate, obviously that's a big position there. It's a big driver for non-accruals.

Christopher Nolan: Got it. And then I guess turning to non-accruals, EH Real Estate, obviously that's a big position there. It's a big driver for the non-accruals. Can you give a little color in terms of what sector they're involved in?

Todd Huskinson: Can you give a little color in terms of what sector they're involved in and a little color?

Todd Huskinson: Chris, this is a residential realtor title company and insurance business in the Midwest.

Todd Huskinson: Chris, this is a residential REALTOR® title company insurance business in the Midwest.

Todd Huskinson: Chris, this is a residential realtor title company and insurance business in the Midwest.

Todd Huskinson: Sure, Chris.

Todd Huskinson: Chris, this is a residential, realtor, title company insurance business in the Midwest. Okay.

Chris: Chris, this is a residential REALTOR® title company insurance business in the Midwest.

Christopher Nolan: Okay, and then And then I guess the final question: it's just the unrealized appreciation in the quarter. You know, any particular color was just a normal mark adjustment.

Todd Huskinson: And then I guess the final question is just the unrealized appreciation in the quarter. Any particular color with this normal mark adjustments. So it's driven more on company-specific activities. But again, overall, not a large number. Okay.

Christopher Nolan: Okay, and then.

Christopher Nolan: And then I guess the final question, it's just the unrealized depreciation in the quarter.

Christopher Nolan: Any particular color was just normal mark adjustments.

Todd Huskinson: So it was driven more on company-specific activities. But again, overall, not a large number.

Todd Huskinson: So it's driven more on company specific activities, but again, overall, not a large number.

Christopher Nolan: Okay, and then I guess finally, Rob, you mentioned how you're looking to increase the credit facility, but your leverage ratios are so low. Is the thinking here to, you know, allow the uncertain credit environment to tap the credit facility more going forward, or are you just...

Christopher Nolan: And then I guess finally, Rob, you mentioned how you're looking to increase the credit facility. But your leverage ratios are so low.

Christopher Nolan: Okay, and then I guess finally, Rob, you mentioned how you're looking to increase the credit facility, but your leverage ratios are so low. Is the thinking here to, you know, give the uncertain credit environment to tap the credit facility more going forward?

Robert Ladd: Is the thinking here to give any uncertain credit environment to tap the credit facility more going forward? Or you just be more cautious. Yes, yes. So we have quite a bit of unused capacity in the current credit facility, which has a commitment of 260 million. And so we certainly will use that up as we grow the portfolio.

Robert Ladd: Yes, so we have quite a bit of unused capacity in the current credit facility, which has a commitment of $260 million. And so we certainly will use that as we grow the portfolio. But again, we'd like to, given the additional capital base that was raised last year and so far this year, to have that start to better match the equity base. And this would enable us to take what I described as a portfolio potential of over $960 million to over $1 billion.

Robert Ladd: just

Speaker Change: Just be more cautious.

Robert Ladd: Yes, so we have quite a bit of unused capacity in the current credit facility, which has a commitment of $260 million. And so we certainly will use that up as we grow the portfolio. But again, we'd like to, given the additional capital base that was raised last year and so far this year,

Robert Ladd: But again, we'd like to give in the additional capital base that was raised last year. And so far this year to have that start to better match the equity base. And this would enable us to take what I described as a portfolio potential of over 960 to over a billion.

Robert Ladd: to have that start to better match the equity base. And this would enable us to take what I described as a portfolio potential of over 960 to over a billion. Okay. That's it for me, guys. Thank you.

Christopher Nolan: Okay, that's it for me, guys. Thank you.

Christopher Nolan: Okay.

Christopher Nolan: So, for me, guys, thank you.

Christopher Nolan: Thank you, Chris. Thank you.

Operator: Thank you. And the next question is coming from Sean Paul Adams from Raymond James. Your line is live.

Sean Paul Adams: And the next question is coming from Sean Paul Adams from Raymond James; your line is live. Hey, guys. Good afternoon, and congrats on the quarter. Really quick question.

Speaker Change: Thank you, Chris.

Operator: Thank you and the next question is coming from Sean Paul Adams from Raymond James. Your line is live.

Sean Paul Adams: Hey guys, good afternoon, and congratulations on the quarter. Really quick question touching back on the non-accruals. I know you guys added one new non-accrual last quarter, JR Watkins. I think now we're sitting at five total non-accruals. Is there any timeline or pathway for resolution for any of these?

Sean Paul Adams: Hey guys, good afternoon and congrats on the quarter. Really quick question touching back on the non-accruals.

Sean Paul Adams: Touching back on the monocruels. I know you guys added one new monocruel last quarter, JR Watkins. I think now we're sitting at five total monocruels.

Sean Paul Adams: I know you guys added one new nonaccrual last quarter, J.R. Watkins. I think now we're sitting at five total nonaccruals. Is there any timeline or pathway for resolution for any of these?

Robert Ladd: Is there any timeline or pathway for resolution for any of these? You know, they all have kind of specific paths from here, Sean. So you know, probably wouldn't describe anything as you know, we've somewhat guarded about talking about individual companies that operate in our country. But each will have their own path, and they're being worked hard.

Todd Huskinson: You know, they all have kind of specific paths from here, Sean. So, you know, probably wouldn't describe anything. As you know, we are somewhat cautious about talking about individual companies that operate in our country, but each will have their own path, and they're being worked hard. How's that?

Robert Ladd: You know, they all have kind of specific paths from here, Sean. So, you know, probably wouldn't describe anything. As you know, we are somewhat guarded about talking about individual companies that operate in our country, but each will have their own path, and they're being worked hard. How's that?

Robert Ladd: You know, they all have kind of specific paths from here, Sean. So, you know, probably wouldn't describe anything. As you know, we, we.

Robert Ladd: somewhat guarded about talking about individual companies that operate in our country but each will have their own path and they're being worked hard. How's that?

Sean Paul Adams: How's that? That's perfect. That's great.

Sean Paul Adams: That's perfect. That's great. And then turning over to leverage, you guys are a little bit higher in terms of a total leverage basis. What are your thoughts on either moderating or staying exactly where you're at over the coming quarters in terms of the changes and the forward rate curve?

Sean Paul Adams: And then turning over to leverage, you guys are a little bit higher in terms of a total leverage basis.

Sean Paul Adams: That's perfect, that's great. And then turning over to leverage, you guys are a little bit higher in terms of a total leverage basis.

Robert Ladd: What are your thoughts on either moderating or staying exactly where you're at over the coming quarters in terms of the changes and like the forward rate curve? Sure, sure. So I'd say a few things to look at leverage. So we're actually less levered now than we normally are. This is due to the equity rates. So as we bring the portfolio back up to kind of full potential, you know, think of us being target leverage on a regulatory test of about one to one and on a total test gap test, including the SBIC adventures that little over two to one.

Speaker Change: What are your thoughts on either moderating or staying exactly where you're at over the coming quarters in terms of the changes and like the forward rate curve?

Robert Ladd: Sure, sure. So I'd say a few things about leverage. So we're actually less leveraged now than we normally are. This is due to equity.

Robert Ladd: Sure, sure. So I'd say a few things about leverage. So we're actually less levered now than we normally are. This is due to equity.

Robert Ladd: Sure, sure. So I'd say a few things to look at leverage. So we're actually less levered now than we normally are. This is due to the equity raise.

Robert Ladd: So as we bring the portfolio back up to kind of full potential, you know, think of us being, target leverage on a regulatory test would be about one to one, on a total test, gap test, including the SBIC debentures at a little over two to one. So we'd like to increase the leverage, but not significantly, but more back to our target level. One thing that might be less obvious is we have over $30 million in cash right now on our SBIC licenses, so when that's deployed, that won't increase the leverage. So it's just a footnote there.

Robert Ladd: So as we bring the portfolio back up to kind of full potential, you know, think of us being, target leverage on a regulatory test would be about one to one, on a total test, gap test, including the SBIC debentures at a little over 2 to 1. So we'd like to increase the leverage, but not significantly, but more back to our target level. One thing that might be less obvious is we have over $30 million of cash right now on our SBIC licenses, so when that's deployed, that won't increase the leverage. So it's just a footnote there.

Robert Ladd: So as we bring the portfolio back up to kind of full potential, you know, think of us being, target leverage on a regulatory test would be about one to one, on a total test, gap test, including the SBIC debentures at a little over two to one. So we'd like to increase the leverage, but not significantly, but more back to our target level. One thing that might be less obvious is we have over $30 million of cash right now in our SBIC licenses, so when that's deployed, that won't increase the leverage. So it's just as a footnote there.

Robert Ladd: So as we bring the portfolio back up to kind of full potential, you know, think of us being

Robert Ladd: target leverage on a regulatory test would be about one-to-one and

Robert Ladd: on a toll test, gap test, including the SBIC debentures at a little over 2 to 1.

Robert Ladd: So we'd like to increase the leverage, but not significantly, but more back to our target levels. One thing that might be less obvious is we have over 30 million of cash right now in our SBIC licenses. So when that's deployed, that won't increase the leverage. So it's just as a footnote there.

Robert Ladd: So we'd like to increase the leverage, but not significantly, but more back to our target levels.

Robert Ladd: One thing that might be less obvious is we have over 30 million of cash right now in our SBIC licenses. So when that's deployed, that won't increase the leverage. So it's just as a footnote there. And then as we look ahead,

Sean Paul Adams: And then as we look ahead, we think it's a very interesting time to invest in the lower middle market in this country, and we're optimistic about the future. And you know the many private equity firms we work with. So we're very selective in our investing, and we'll continue to invest in a smart way. And again, we'd like to see our leverage come back up to more of the target.

Robert Ladd: And then as we look ahead, we think it's a very interesting time to invest in the lower middle market in this country. And we're optimistic about the future and, you know, the many private equity firms we work with. So we're very selective in our investing, and we'll continue to invest in a smart way. And again, we'd like to see our leverage come back up to more of the target.

Robert Ladd: And then these who, as we look ahead, we think it's a very interesting time to invest in the lower middle market in this country. And we're optimistic about the future and the many private equity firms we work with. So we were very selective in our investing. And so we'll continue to invest in a smart way. And I think we'd like to see our leverage come back up to more of the target. That's a wonderful answer. Thank you for the color. I appreciate it.

Sean Paul Adams: We think it's a very interesting time to invest in.

Sean Paul Adams: The lower middle market in this country and we're optimistic about the future and you know the many private equity firms we work with.

Sean Paul Adams: So we're very selective in our investing, and so we'll continue to invest in a smart way. And again, we'd like to see our leverage come back up to more of the target.

Robert Ladd: That's a wonderful answer. Thank you to the caller. I appreciate it.

Robert Ladd: That's a wonderful answer. Thank you for the color. I appreciate it.

Sean Paul Adams: That's a wonderful answer. Thank you for the color. I appreciate it.

Operator: Thank you. There were no other questions in queue at this time. I would now like to hand the call back to Mr. Robert Ladd for closing remarks.

Robert Ladd: Okay, thanks everyone for your support of our company, and we'll see you next time.

Sean Paul Adams: Yeah, thank you. Thank you.

Speaker Change: That's a wonderful answer. Thank you for the color. I appreciate it. Yeah, thank you.

Operator: Thank you. There were no other questions in queue at this time. I would now like to hand the call back to Mr. Robert Ladd for closing remarks.

Operator: There were no other questions in queue at this time.

Robert Ladd: I would like to hand the call back to Mr. Robert Lab for closing rocks. Okay, thanks everyone for your support of our company. And we look forward to updating you again in early November for the results from the third quarter. Thank you.

Speaker Change: Thank you. There were no other questions in queue at this time. I would now like to hand the call back to Mr. Robert Ladd for closing remarks.

Robert Ladd: Okay, thanks everyone for your support of our company, and we look forward to updating you.

Robert Ladd: Okay, thanks everyone for your support of our company, and we look forward to updating you again in early November with the results from the third quarter.

Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator: Okay, thanks everyone for your support of our company and we'll look forward to updating you again in early November for the results from the third quarter.

Operator: This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Thank you.

Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: Thank you. Thank you. Thank you.

Operator: This conference is being recorded August 8th, 2024.

Todd Huskinson: Joining me this morning is Todd Huskinson, our Chief Financial Officer who will cover important information about four living 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 of Stellus 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 pen provided in our press release announcing this call.

Todd Huskinson: 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 materially differ from these projections. We will not update any forward looking statements, unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the public investor's link or call us at 713-29254-00.

Todd Huskinson: Net asset value per share decreased $0.05 during the quarter due to net unrealized appreciation on our investment portfolio, offset by the generation of net investment income and excess of the dividend. We also realized a gain of $2 million or $0.8 per share on an equity investment during the quarter. Our ATM program was active during the quarter, and we issued $25.2 million in shares at an average gross price of $13.89 per share.

Todd Huskinson: All issuances were above net asset value. We ended the quarter with an investment portfolio at fair value of $900 million across 100 portfolio companies, up from 876 million across 94 companies as of March 31st, 24. During the second quarter, we invested 53 million in eight new portfolio companies and had 13.3 million in other investment activity at par. We also received two full repayments totaling $31 million and $9.7 million of other repayments both at par, resulting in net portfolio growth of 23.8 million at fair value.

Todd Huskinson: At June 30th, 99% of our loans were secured and 98% were priced at floating rates. Our average loan per company is $9.5 million and the largest overall investment is 19.6 million both at fair value. All but one portfolio company of our portfolio companies are backed by private equity firms. Overall, our asset quality is slightly better than plan. At fair value, 23% of our portfolio is rated a one or a head of plan and 15% of the portfolio is marked at an investment category of three or below, meaning not meeting plan or expectations. Currently, we have five loans on non-cruel which comprise 2.9% of the fair value of the total loan portfolio.

Robert Ladd: With that, I'll turn it back over to Rob to discuss the overall outlook. Okay, thank you, Todd.

Robert Ladd: As we look ahead to the third and fourth quarters, I'll cover portfolio growth, equity realizations, capital management, and dividends. Based on an active pipeline, we expect to end the third quarter with a portfolio between 920 million and 940 million. We did not know of any loan repayments in Q3, although we did have an equity realization which is disclosed in our subsequent events for 2.6 million of proceeds and a realized gain of a little over $2 million.

Robert Ladd: For Q4, we are aware of two likely repayments totaling 17 million and one of the companies has an equity co-investment which is currently carried at 1.8 million at fair value. We expect that new fundings will exceed repayments for Q4. As Todd noted earlier, we had a good second quarter for equity issuance under our ATM program. We have a meaningful amount of capacity in our bank facility and cash in our SBICs, but we will look to continue to increase the bank facility over time.

Robert Ladd: Given our current capital base, we have the ability to grow the portfolio to over $960 million. And finally regarding dividends, we expect to continue subute to board approval to distribute at a rate of 40 cents per share per quarter payable monthly through the rest of the year. This should be supported by earnings and a large amount of spillover income.

Operator: And with that, I'll open up for questions and Paul, please, we'll start the Q&A session now. Certainly. Thank you.

Christopher Nolan: and the first question today is coming from Christopher Nolan from Ladenberg, Talman. Christopher, you're Linus lives. Hey guys, can you hear me? Good morning, Chris. Hey, nice quarter by the way. The fee waiver, is that something that we should expect to repeat and come in quarters? So Chris, at first I would say it depends, of course, on each quarter's performance going forward in the mechanics of the 12 quarter test. But I think at this point we don't expect anything for the remainder of this year under the test absent any other movements in the current performance.

Christopher Nolan: And then I guess turning to non accruals, EH real estate, obviously that's a big position there. It's a big driver for non accruals. Can you give a little color in terms of what sector they're involved in and a little color? Sure, Chris. Chris, this is a residential, realtor, title company insurance business in the Midwest. Okay. And then I guess the final question is just the unrealized appreciation in the quarter. Any particular color with this normal mark adjustments.

Christopher Nolan: So it's driven more on company specific activities. But again, overall, not a large number. Okay. And then I guess finally, Rob, you mentioned how you're looking to increase the credit facility. But your leverage ratios are so low. Is the thinking here to give any uncertain credit environment to tap the credit facility more going forward? Or you just be more cautious. Yes, yes. So we have quite a bit of unused capacity in the current credit facility, which has a commitment of 260 million.

Christopher Nolan: And so we certainly will use that up as we grow the portfolio. But again, we'd like to give in the additional capital base that was raised last year. And so far this year to have that start to better match the equity base. And this would enable us to take what I described as a portfolio potential of over 960 to over a billion. Okay.

Christopher Nolan: So for me, guys, thank you. Thank you, Chris. Thank you.

Sean Paul Adams: And the next question is coming from Sean Paul Adams from Raymond James, your line of life. Hey, guys.

Sean Paul Adams: Good afternoon and congrats on the quarter. Really quick question. Touching back on the monocruels. I know you guys added one new monocruel last quarter, JR Watkins. I think now we're sitting at five total monocruels. Is there any timeline or pathway for resolution for any of these? You know, they all have kind of specific paths from here, Sean. So you know, probably wouldn't describe anything as you know, we've somewhat guarded about talking about individual companies that operate in our country. But each will have their own path and they're being worked hard. How's that?

Sean Paul Adams: That's perfect. That's great.

Sean Paul Adams: And then turning over to leverage, you guys are a little bit higher in terms of a total leverage basis. What are your thoughts on either moderating or staying exactly where you're at over the coming quarters in terms of the changes and like the forward rate curve? Sure, sure. So I'd say a few things to look at leverage. So we're actually less levered now than we normally are. This is due to the equity rates.

Sean Paul Adams: So as we bring the portfolio back up to kind of full potential, you know, think of us being target leverage on a regulatory test of about one to one and on a total test gap test, including the SBIC adventures that little over two to one. So we'd like to increase the leverage, but not significantly, but more back to our target levels. One thing that might be less obvious is we have over 30 million of cash right now in our SBIC licenses.

Sean Paul Adams: So when that's deployed, that won't increase the leverage. So it's just as a footnote there. And then these who as we look ahead, we think it's a very interesting time to invest in the lower middle market in this country. And we're optimistic about the future and the many private equity firms we work with. So we were very selective in our investing. And so we'll continue to invest in a smart way. And I think we'd like to see our leverage come back up to more of the target.

Sean Paul Adams: That's a wonderful answer. Thank you for the color. I appreciate it. Yeah, thank you. Thank you.

Operator: There were no other questions in queue at this time.

Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Operator: Thank you.

Q2 2024 Stellus Capital Investment Corp Earnings Call

Request a DemoDemo

SCM

Stellus Capital Investment

Earnings