Q2 2019 Earnings Call
Good morning, ladies and gentleman 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 second quarter 2019 results.
At this time, all participants have been placed any listen only mode.
The call will be opened for a question and answer session. Following todays speakers remarks.
The conference is being recorded today Friday August nine 2019.
It is now my pleasure to turn the call over to Mr., Robert Let Chief Executive Officer of Stellus Capital Investment Corporation.
So that you may begin your conference.
Okay. Thank you Cody.
Good morning, everyone and thank you for joining the call welcome to our conference call covering the quarter ended June 32019.
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.
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 10 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 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 www dot Stellus capital Dot com under the public investors link.
Or call us at 713 to nine to five 400.
This time I'd like to turn the call back over to our Chief Executive Officer, Rob let.
Thank you Todd will begin by discussing our operating results followed by a review of the portfolio, which will include asset quality.
And then we'll talk about the outlook.
Todd will cover operating results first.
Thank you Rob.
We're pleased to report another call. It got another quarter of solid earnings in which we generated realized income 43 cents per share, including gains of $2.7 million or 14 cents per share, which exceeded our 34 cents per share dividend by nine cents.
GAAP and core net investment income were both 29 cents per share, which were short of our distributions for the quarter by five cents. It's important to note that this was our first full quarter of dividends. After our secondary offering of 2.9 million shares that was completed in March.
Total realized income year to date.
Includes $12.9 million of realized gains, it's $1.29 cents per share, which exceeds our distributions of 68% 68 cents per share for the same period.
Net asset value increased 2.3 million over the quarter, primarily due to the issuance of underwriters' overallotment in April for our secondary offering in March.
Net asset value per share decreased slightly from $14.32 to 14 29.
With that I'll turn it back over to Rob.
Okay. Thank you Todd I'd like to cover the following areas portfolio and asset quality and outlook.
With respect to the portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $531.1 million across 57 portfolio companies.
During the second quarter, we invested $50 million at par value in four new and three existing portfolio companies and received $37 million of repayments and realizations.
Our portfolio continues to be weighted towards secured lending at floating rates at June Thirtyth 95, personal loans were secured of which 70% were first lien.
And 91% were priced at floating rates.
This move to more senior lending is resulting lower coupons. However, we expect it will also result in stronger asset quality overtime.
We continue to maintain good diversification of the largest industry sector approximately 70% of the total portfolio.
Our average investment per company is $9.3 million in our largest investment is $22.6 million both of those figures alright fair value.
52 of the 57 portfolio companies are backed by private equity firms.
81% of our total investment portfolio is rated a category of two or better which means on plan or ahead of plan.
We did have one loan go on non accrual during the quarter.
Which now results in four loans on non accrual, which comprise 4.8% the fair value of our total portfolio.
This is up from about 1.7% in the prior quarter.
We do not believe this is an ongoing trend at this time and in fact, one older non accrual may come off during the third quarter.
Now turning to outlook as we discussed on last quarter's call and is reflected in our current yield we're expecting low overall lower overall yield on the loan portfolio.
This is driven by lower LIBOR, which youve seen and a continued rotation to first thing.
Unit tranche type loans.
Since quarter end, we funded $33.9 million of debt at par in two new portfolio companies.
We've identified as likely fundings of approximately 40 to 50 million over the balance of the quarter.
And expect potential repayments of approximately $30 million during the same period.
As we mentioned on our last few calls part of our strategy has been to invest in the equity of our portfolio of companies in a modest way in order to generate realized gains.
As our business has matured over the last six and a half years, we've begun to see somewhat regular realized gains from our portfolio.
In fact in 2017, we generated $4.6 million of such gains in 2018, we had $5.3 million of such game.
And as Tom reported earlier.
Thus far in 2019, we generated $12.9 million gains.
And we're also aware that we may have an additional 7 million potential gains by the by the balance of this calendar year.
As a result of these realized gains we believe it is likely now.
The dividends paid from August forward will be categorized as long term capital gains for tax purposes.
And with that I'll open it up for questions. Thank you and Cody. Please open up the Q and a session.
Absolutely if you'd like to ask a question. Please stand by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach your equipment. Once again that is star one if youd like to ask a question.
Cost for just a moment to allow everyone an opportunity to signal for questions.
Well take our first question from Robert Dodd with Raymond James. Please go ahead.
Hi, guys.
Couple of questions on the non accrual side and I. Appreciate you coming up I mean, you don't think its a trend but.
Protect America, obviously, you put it on non accrual I think.
June 28 said towards the end of the quarter. So can I assume from that so it contributed a full quarter of of income and then placed on non accrual.
And then I guess the question, it's a so what have you.
Second lien.
What was the non accrual event a vessel of blocking I mean, you still got it by five say at senior lender that you've still got about 85.
Which looks pretty healthy.
So so what.
Can you give us any more color about precisely how that came apart what came.
It's it to play out whether it was a material deterioration of the business in which case the market looks a lot.
Versus investments.
That the structure that led to that know a cool.
Yes, Robert for sure. So let me today I'll cover that together so with respect to the company of course. This is a privately held company. So we're careful about what we discuss.
But I would say that.
There was a.
Some activity that would have caused us to think that it was certainly up.
Better rated loan and that activity changed we don't think the fundamentals of the company have deteriorated.
With respect to interest for the quarter, there was a partial payment, but the majority of the interest is not accrued in the quarter.
Okay.
Got it and Thats frankly, that's what led to the placing on non accrual.
Got it.
Just kind of supplement.
Yes, the comment about that one of your ALDA on another call.
May may.
Come back in the fourth quarter, I am going to presume that.
Thats a totally means we fats helped optical since its marked pretty it basically at cost now and it's been improving over the last.
A couple of quarters.
Is there any.
Particulate true and.
That's it.
Adding to that I mean, obviously, it's been work through over over a period of time, we've seen that but is there any particular, which make up.
That still needs to happen for that to go on back onto accrual.
So I would say as a general matter would either be the improvement through the payment of interest or would be the.
Pay off of the loan.
Okay got it thank you.
And then one of the circumstance.
Yes, yes fair enough.
Well when we look at the portfolio as a whole can you give us any any obviously weve been kind of a theme this quarter concerns and I think thats been no you'll provide specific.
This has been a mix.
I have a bad it's a mixed message from the BDC, some seeing EBITDA slowing on average in portfolio companies sell them seeing a quote stable I'm can you give us any color on what you're seeing.
Broadly maybe.
On on the accruing side of the portfolio et cetera.
Yes. So good question Robert So one of the things we would look at is.
Question of recession.
Kind of a national recession coming or has it started starting to occur. So we're not seeing that in the portfolio company.
Companies.
We would say that which is true been true for number of years now that if we have a.
Problem, It's company specific so we're not seeing that.
Trend downward and EBITDA was.
The portfolio companies.
So and in fact year over year coming into the first quarter, which would be measuring the calendar year, it's actually up.
And I think our best estimate for the so far this year is flattish to up so not not any big not seeing any concerns in the portfolio as a general matter.
Got it got it appreciate it and then.
As a subsequent event such as you said you've deployed 33, I think you haven't had any repayments yet.
Any any kind of a you have you have you.
Add any.
Call, saying, you're going to get repaid or anything like that any indication about me payments in the third quarter.
Sure sure so.
The number that I've expressed as approximately 30 million, which we think is.
Is likely.
Okay, Yeah, I guess I mean.
Yes, we would that would be our best estimate.
Always could be more but those we think are more likely than not and in terms of the fundings.
I think the same.
But you know it's always the case repayments end up being more certain than the new fundings, but we think again those are our best estimates 40 to 50 on new fundings and.
Thirtyish million on the payments.
Got it I appreciate it Thats my question. Thanks.
Yes, Thank you Robert.
Thank you, we'll now take our next question from Christopher Nolan with Ladenburg Thalmann.
Good morning, Chris Hey, guys.
Hey, Rob Rob protect America, I estimate that's roughly two cents a share per quarter.
Right.
Chris Let me just calculated here.
Okay, and then a follow up on to Robert's question Lisa.
It's correct.
Fair value that.
But it actually went up quarter over quarter.
I thought I saw that between booking during the queues.
So that's that.
Please please go ahead.
Yes, no that that's correct in that.
Hopefully be a reflection of what we think the outcome is.
Okay. So.
On the face of it I mean that could be a harbinger to a positive resolution for re frac.
Yes.
Okay great.
Going forward given everything that you're seeing we're seeing 'em. Please I'm sorry.
Portfolio deterioration multiple bdcs, so its not in Iceland.
How are you guys planning in terms of incremental investments.
Given that you have a low leverage ratio going forward I mean is it all going to be first lien or what's the thoughts around that.
Yes so.
First with respect to our portfolio.
We don't think theres been a material deterioration in fact it was example, there's we know for risk grade three that's likely to come off in the third quarter two risk rate too. So we.
I think this protect America is like Delta shift, but I think it's one company hopefully that's helpful.
We'll report if we have otherwise we feel otherwise in the third quarter, but thats our view for now.
Terms of what's informing our investing going forward so.
Of course, there is a lot of concerns about global.
I want to be slowing which can impact us companies and of course were more likely than not insulated from that.
We approach our investing and always have is due to the company's reinvest in survivor recession, and so what are the characteristics of those companies that could survive a recession. So that's the lens.
Always had I'd say as a general matter were probably more cautious than we've been if you go back six months. So we're having.
Cost is one.
Of that so our rotation to more.
Secured and now 70% first thing, which is the highest percentage we've had and the portfolio would be indicative of that.
The.
New fundings were looking at in this quarter.
Our I think all but one is in first lien. So so I think that's another approach we take.
You may recall that last year we.
Didn't approve a couple of.
In a robust environment a couple of deals we thought might be indicate impacted by the trade situation. This is early before.
There was a consensus so.
So again thanks.
Thank goodness is approaching the market cautiously.
Having said that.
When we find a good company, it's being well capitalized by high quality owner.
And it's well structured.
Interesting so we remain active in the market.
That's of course, while we have an interesting pipeline that I reported on earlier.
And then with your escalators.
Yeah, Chris one thing going back to your question about the.
The impact of protecting America top is going to respond to that yes, so Chris you're right. It's a little over two cents a share. So so $475000 in a quarter, which is about 2.5 cents a share.
Thanks Todd.
Sure I just.
As sort of my final thing would be.
As we're going into the sort of choppy economic period.
How well positioned do you think the PE sponsors of many of these companies are too.
Inject more kind of hurdle to backstop these companies.
Choppy economic.
From your perspective are the private equity firms sort of see the fully deployed or pardon me look what's your sense there foods.
Yes, so Chris.
It might be helpful. In terms of how we approach that and then I think the answer.
As a general matter is going to be.
Company specific.
So as we approach a new investment.
One assuming that it's a high quality owner and in our case those are mostly private equity firms and capable investors.
Second thing we look at is the status what's their fund size where are they in that fund like what's the dry powder in that fund so thats part of the calculus, we use.
So.
Doesn't mean, we wouldn't front in the last investment fund.
But but we are also mindful that very good sponsors that we work with.
Also retain dry powder, regardless of their investing pace to support portfolio companies and so we would expect that to be the case and with all the firms we deal with.
And so again I think in terms of where their fund life is and dry powder, just a function of where they are and that life cycle.
Of the fun, but.
People that we work with have that mentality, and we would expect and.
We have seen historically thats very much the case.
So this is of course, the benefit of providing capital.
Two.
Well.
Capitalize and smart private equity investors and so going through a period, where we might go through.
This is very helpful.
Great. Okay. Thank you for the color that's it for me.
Thank you.
Thank you we'll move on to our next question from Ryan Lynch with KBW.
Hey, good morning, Thanks for taking my question I just have two of them just wanted a clarification.
You said, you expect about $40 million to $50 million on investments.
Over the balance.
Third quarter, you guys have already done 34 million.
Quarter to date, so is that saying that you guys are actually expecting.
$70 million to $80 million for the full third quarter.
Good morning, Ryan, Yes, that's correct.
Okay.
And then just one more sort of clarification.
I think I believe you said there could be $7 million potential realized gains that you guys.
I would hope to achieve.
On through the remainder of the year.
One did I get that number correct and two.
Those 7 million of potential realized gains are those already reflected in the fair values of those investments today, meaning if you actually become realized there would actually be no change in book value. Those those gains were just now be crystallized or is that potential upside to the fair value of any those investments today.
Yes, Ron So first of all you are correct.
What we said about 7 million and.
I'd say that not all of that is reflected in the current marks and partly because one of the.
Opportunities come up since the books were closed effective.
So so I think one they are accretive to NAV and two of course, they would be realized which means that.
We book them as such.
Okay. That's all from me. This morning appreciate the time.
Yes, Thank you Ron.
Thank you we'll take our next question from Chris Kotowski with Oppenheimer and company.
Hi, good morning.
Your income tax expense of 340000, I was kind of unusually high is.
But whats the explanation for that and what should we factor in kind of going forward.
Yes, Sir.
Excuse me, Chris It's Todd.
So the primary thing thats driving that as excise tax so.
We had $9 million of spill over a little over 9 million of spillover income at the end of 2018, and so we're now accruing.
Excise tax on that during the year.
So.
It'll that'll be a quarterly run rate as.
As as.
As long as you have the debt level of spillover.
Yes, some of it was accrued from prior period, So I would say to think about $9 million.
As for 4% so.
For the year, that's about $400000 of total excise tax for the year.
Okay, I'd say somewhat light.
Somewhat like going forward.
And just.
County question, why do you accrue it all in one quarter and why in the second quarter is that it is not a seasonal or tax year thing or should run for going forward and just expected through the year or.
Yes, and I was just an accrual for prior from a prior year spell over so I was just a larger than normal, but we'll we'll be accruing the amount related to the current spillover on a quarterly basis going forward. So that's why it was larger in the upper and the.
In the quarter.
Okay sounds good one should assume that goes down to 75 Grand ours. The seven between 75 to 100 something like that.
Yes, that's right.
Okay. That's it for me thank you.
Thank you.
Thank you, we'll now take a follow up from Robert Dodd with Raymond James.
I see yes, Chris just asked most of my question.
But when we look at hypothetically if we look at in the 2020, you you had 9 million a spillover obviously the end 18, a light now looking at 19 with all the realized gains that yet again that you could be looking at commercial pop 20 million in realized gains total this year, which obviously is going to spill over and left that in block as et cetera. So walk all the realized gains that have occurred so far this year. All that you expect how many are at the mix of US is shielded from becoming an incrementally higher excise tax liability next year.
Yeah, Robert So I would say the majority of that.
He is going to be included in the spill over and then there will be a larger.
Excise tax going forward and one of the things that were kind of to Chris' question is.
Considering do do we need to accrue some of that as we go along since its related to 2019, but the taxes not paid until till 2020. So.
But you're right. That's that is the majority of that will be at spillover for for this year I think is that right got it 2.7 is now.
That's about right, yes, certainly 2.7, so far is not.
In the spillover written calculation, Okay got it thank you.
Okay. Thank you Rob.
Thank you and that does conclude todays question and answer session I'd like to turn the conference back over to management for any additional closing remarks.
Okay. Thank you everyone for joining and questions and your support of the company and we will look forward to updating you on the third quarter on our call in November .
Bye bye.
Thank you that does conclude today's conference. Thank you for your participation you may now disconnect.