Q3 2024 Stellus Capital Investment Corp Earnings Call

Speaker Change: Good day ladies and gentlemen and thank you for standing by. At this time I would like to welcome everyone to Stella's Capital Investment Corporation's conference call to report financial results for its third fiscal quarter ended September 30, 2024.

Speaker Change: Participants are currently on a listen-only mode and we will have a question-and-answer session following the presentation.

Speaker Change: If you require operator assistance during the call, please press star zero on your telephone keypad.

This conference is being recorded today, November 8th, 2024.

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

Robert Ladd: Thank you, Ali. And good morning everyone and thank you for joining the call. Welcome to our conference call covering the quarter-ended September 30th of this year. 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. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Stullis Capital Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited.

Todd Huskinson: 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 also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information.

Todd Huskinson: 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 any forward-looking statements unless required by law.

Todd Huskinson: To obtain copies of our latest SEC filings, please visit our website at www.stulliscapital.com under the Public Investors link or call us at 713-292-5400.

Todd Huskinson: Now I'll cover our operating results for the quarter. I would like to start with our life data activity.

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 while maintaining stable asset quality. We've paid over $273 million of dividends to our investors, which represents $16.28 per share to an investor in our IPO in November 2012, which was offered at $15 per share.

Todd Huskinson: Turning now to operating results. In the third quarter, we generated 39 cents per share of GAAP net investment income, and core net investment income was 40 cents per share, which excludes estimated excise taxes.

Todd Huskinson: Net asset value per share increased 19 cents during the quarter due to net unrealized depreciation on our investment portfolio, primarily related to one equity investment.

Todd Huskinson: Our ATM program was also active during the quarter. We issued $14.6 million in shares at an average gross price of $13.79. All issuances were above net asset value.

and the

Todd Huskinson: With respect to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $908.7 million across 99 portfolio companies, up from $899.7 million across 100 companies as of June 30, 2024.

Todd Huskinson: During the third quarter, we invested $9.4 million in one new portfolio company and had $8.4 million in other investment activity at par.

Todd Huskinson: We also received one full repayment totaling $8.4 million and received $5.5 million of other repayments, both at par.

Todd Huskinson: We also received one equity realization that generated proceeds of $2.6 million and a realized gain of 2.2 million.

Todd Huskinson: At September 30th, 98% of our loans were secured and 95% were priced at floating rates. The average loan per company is $9.5 million and the largest overall investment is 19.6 million, both at fair value. All but one of our portfolio companies are backed by a private equity firm.

Todd Huskinson: Overall, our asset quality is slightly better than planned. At fair value, 26% of our portfolio is rated a 1 or ahead of plan, and 18% of the portfolio is marked in an investment category of 3 or below, meaning not meeting plan or expectations.

Todd Huskinson: Currently, we have loans to six portfolio companies that are non-accrual, which comprise 4.7% of the fair value of the total loan portfolio.

Robert Ladd: And 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 fourth quarter, I'll cover portfolio growth, equity realizations, capital management, and dividends.

Robert Ladd: Based on an active pipeline, we expect to end the fourth quarter with a portfolio between $930 million and $950 million.

Robert Ladd: We do expect some loan repayments, approximately $29 million in the quarter, and equity realization proceeds to total about $5.3 million, which will result in realized gains of $4.3 million.

Robert Ladd: one which is disclosed in our subsequent events for a million seven of proceeds and a realized gain of over six hundred thousand

Speaker Change: As Todd noted earlier, we had a good third quarter for equity issuance under our ATM program. After quarter end, we increased our bank facility by $55 million from $260 million to $315 million and have a meaningful amount of capacity.

Speaker Change: Given our current capitalization, we have the ability to grow the portfolio to a billion dollars plus.

Speaker Change: Finally, regarding dividends, we did declare the dividend for the fourth quarter at a rate of 40 cents per quarter payable monthly, and of which the record date for November, December are forthcoming.

Speaker Change: And with that, I'll open it up for questions. And Ali, if you'll please begin the question and answer session, please.

Speaker Change: Thank you. Ladies and gentlemen, at this time we will be conducting our question and answer session.

Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad.

Speaker Change: The 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.

Speaker Change: 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.

Thank you.

Speaker Change: Our first question is coming from Paul Johnson with KBW. Your line is live.

Speaker Change: Good morning, Paul. Good morning. Thanks for taking my question. With just NII a little light of our expectations and slightly below the dividend this quarter, activity was fairly light. Was there any kind of...

Speaker Change: I mean, was there any sort of temporary drivers there with NII being below the dividend this quarter with the incentive fee waiver and the timing of investments or anything like that?

[inaudible]

Speaker Change: But nothing unusual. And as I recall in last quarter, we had a little bit more in other income. So this would have driven last quarter to be a little bit higher. But again, I think a reasonable quarter in terms of expectation given the current interest rates.

Speaker Change: But as you noted, Paul, too, that were our investment activity was lighter than expected, which again, as I mentioned, we expect to pick up in the fourth quarter. So that that would have been impacted a little bit too. We thought we'd end up.

third quarter at 930 and ended it closer to 900.

[inaudible]

Speaker Change: Got it. So, this, the kind of range that we're in, the 39 cents, you know, low 40s, I mean, is that, if there's nothing unusual in there, is that a pretty good run rate going forward?

Speaker Change: So we'll have to see how other income comes in the quarter in the fourth quarter, but just as a reminder that SOFR did drop again, our loans would have repriced, most of them repriced again at 930.

Speaker Change: And that drove the yield you'll see nominally from 11-7 in the prior quarter to 11-even for the fourth quarter.

Speaker Change: Got it. Okay. So, it's mainly the base rates. That makes sense. They're driving the... Correct. Yeah. Yeah. Declining sulfur curve. Yeah.

Speaker Change: Okay, and then can you again just walk through maybe kind of the what drove the write-up and the portfolio this quarter, the sort of the unrealized gains?

Speaker Change: Yes, so there are a number of 99 companies, so a number of movements up and down. We did have one portfolio company that had some meaningful appreciation.

Speaker Change: that's tied to a potential transaction, but just increased value in a one of our equity co-invests.

Speaker Change: Got it, so it was just the one company that kind of drove most of the appreciation this quarter then? That's correct, Paul.

Okay.

Speaker Change: Okay, that's all the questions for me. Thank you. Yeah, thank you, Paul.

Speaker Change: Thank you. Our next question is coming from Christopher Nolan with Ladenburg Thalmann. Your line is live.

Speaker Change: Hey, just a follow-up on Paul's questions on the EPS run rate. So, given the recent Fed action on lowering rates,

Speaker Change: That'd be a downward bias on EPS together with the higher non-accruals, just want a little clarification.

Speaker Change: Yes, that's right. It should have a little bit of impact again as we move down in the quarter.

Speaker Change: The interesting, it looked like the Fed's announcement yesterday hadn't changed the forward curve, but again, we did have a lower SOFR in the fourth quarter, or we will have a lower SOFR in the fourth quarter versus the third.

Speaker Change: Got it. And then the lack of a fee waiver. Should we expect the fee waiver to be a recurring item or just sort of a one-timer?

Speaker Change: At the moment, we don't expect one this quarter, but we do, if nothing else changes, would expect to see a waiver.

Speaker Change: maybe in the second quarter of 25, so in the future. But that's, and then nothing after that. But that's if nothing changes. So, you know, if there's a change up or down, that could affect the waiver.

Speaker Change: And as you know, Chris, all just a function of the 12 quarter test. Right, exactly.

Speaker Change: Absolutely. And then I guess final question, what's the spillover income?

stands at 42 million right now.

Okay, thanks guys.

Speaker Change: Apologies ladies and gentlemen I pressed the wrong button by mistake and next question

Speaker Change: Apologies. Our next question is coming from Robert Dodd with Raymond James. Your line is live.

Robert Dodd: Hi, guys. I think you'd probably prefer to hear than hear it from me, but on the appreciation, you mentioned, you know, it's tied to a potential transaction.

Robert Dodd: Is that one of the ones that you think might occur in Q4, or is it a longer term?

No, it would, it's expected. Yeah, it's a good question.

It's expected to occur in Q4.

Speaker Change: And I've got to ask, while that spillover comes on, that $42 million, does that include the

Speaker Change: The perspective of realized gains that are going to come in Q4, or is that just as of the end of Q3?

Speaker Change: It says at the end of Q3, but the realized gains expected in Q4 are regular way, if you will, and we'll be able to distribute them. There will not be a tax impact.

Okay, got it. Thank you

Thank you. Bye-bye.

Speaker Change: So, on the yield, Rob, I mean, as you said, most of it is base rates.

Speaker Change: There does look like there has been, you know, versus, you know, a little bit of spread compression, which obviously is an issue like thematic. What's your...

Speaker Change: Has that leveled out in terms of where new onboarding spreads are today? Has it stabilized or are we going to continue to see a little bit of that?

Speaker Change: you know, as we go into, you know, Q4 through early next year.

Speaker Change: Yes, it's a good question. So, so we're certainly seeing spreads come down from what we're in the sixes to now in the fives.

Um,

So the impact of that is rolling.

through.

Speaker Change: So you're not seeing, if everything repriced, that would be a different number.

Speaker Change: We're seeing that in the fourth quarter. So newer opportunities are coming on in the fives versus the sixes, whereas the average yield currently is probably in the sixes. Yeah, average spread in the sixes.

Speaker Change: So it'd just be a question if that continues. We certainly have seen it stabilize, certainly not seeing it go down further.

And it's one thing that we've seen historically as

Speaker Change: When you get lower, what used to be LIBOR or SOFR, you can see spreads actually stop compressing because I think people are also solving for an absolute yield.

But in any event, the.

Speaker Change: baked into the quarter would be things that are being booked more in the fives than the sixes.

Speaker Change: Got it, got it, thank you. And then on the, just the...

Speaker Change: Obviously Q3 came in a little, in terms of portfolio overall size, came in a little bit below where you were thinking, you know, a quarter ago. So how confident would you say you are in that 930 to 950?

Speaker Change: by year end. I mean, it sounds like some things during the quarter might have slipped, but what's the risk of that happening again?

Speaker Change: Yeah, no, that's a good question based on last quarter. So, so if it's helpful we have 10 to 15 active deals

Speaker Change: and we would be, you know, pretty confident to get to the 930 and could be higher. So, if it's helpful, our activity is picked up quite meaningfully.

Speaker Change: Thank you. As we have no further questions in the queue at this time, I would like to hand it back to Mr. Ladd for his closing remarks.

Robert Ladd: Okay. Thank you, Ellie, and thank you everyone for being on and your support of our company. And we look forward to speaking with you in the spring as we report on the whole year.

Take care now.

Speaker Change: Thank you ladies and gentlemen, this does conclude today's call and you may disconnect your lines at this time and we thank you for your participation.