Stellus Capital Investment Corporation (NYSE:SCM) Q1 2023 Earnings Call Transcript

Stellus Capital Investment Corporation (NYSE:SCM) Q1 2023 Earnings Call Transcript May 10, 2023

Stellus Capital Investment Corporation beats earnings expectations. Reported EPS is $0.46, expectations were $0.44.

Operator: 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 for its fiscal quarter ended March 31, 2023. This conference is being recorded today, May 10, 2023. 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: Thank you, Kelly, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2023. 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 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 a telephone number and PIN provided in our press release announcing the call. I’d also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today’s conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections.

We will not update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.stelluscapital.com under the Public Investors link or call us at 713-292-5400. At this time, I’d like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Robert Ladd: Thank you, Todd. We’ll begin by discussing our operating results followed by a review of the portfolio, including asset quality and then the outlook. Todd will cover our operating results.

Todd Huskinson: Thank you, Rob. As interest rates have continued to rise in recent quarters, we continue to benefit from our favorable asset liability mix, in which 97% of our loans are floating and only 32% of our liabilities are floating. As a result, we had another quarter of solid earnings. In the first quarter, we more than covered the dividend of $0.40 per share with GAAP net investment income of $0.46 per share. Core net investment income was $0.45 per share, which excludes estimated excise taxes and the reversal of approximately $600,000 of capital gains incentive fees. Net asset value increased $5.1 million due to the issuance of equity under our ATM program and earnings in excess of the dividend of $1.2 million, offset by net unrealized losses on our investment portfolio of $4.2 million. On a per share basis, net asset value for the quarter dropped from $14.02 to $13.87, or $0.15 per share. With that, I’ll turn it back over to Rob.

Robert Ladd: Thank you, Todd. I’d like to cover the following areas: a life-to-date review, portfolio and asset quality, dividends and then outlook. Since our IPO in November of 2012, we’ve now invested approximately $2.3 billion in over 180 companies and received approximately $1.4 billion of repayments, while maintaining stable asset quality. We have declared over $223 million of dividends to our investors, which represents $14.15 per share to an investor from our IPO back in November of 2012. Portfolio and asset quality. We ended the quarter with an investment portfolio at fair value of $877 million across 88 portfolio companies, up from $845 million across 85 companies at year-end. During the first quarter, we invested $41 million in 4 new and 2 existing portfolio companies, yet received no full repayments.

We did have $6 million of other repayments, which resulted in net portfolio growth of $35 million. At March 31, 99% of our loans were secured and 97% were priced at floating rates, as Todd indicated earlier. We continue to move toward first lien loans. In fact, those are principally the only loans we’re making today is unitranche. They were 88% of our home portfolio at quarter end, up slightly from 87% at year-end. We’re always focused on diversification. The average loan per company is about $10.8 million, and our largest overall investment is $20.8 million. These numbers are both at fair value. 86 of the 88 portfolio companies are backed by a private equity firm. Overall, our asset quality is stable at a 2 on our investment rating system or on plan.

17% of our portfolio is rated a 1 or ahead of plan and 70% of the portfolio is market and investment category 3 or below, which would be below plan. In total, we have four loans on nonaccrual, which comprised 2% of fair value of the total loan portfolio. Now turning to dividends. As you know, we raised our dividend meaningfully in the first quarter. We continue to cover it as a result of greater earnings that we’re generating in this higher interest rate environment. As I said earlier, we’re well positioned to benefit from the higher interest rates as our portfolio is 97% floating rate and our liability structure is over 65% fixed rate. Since interest rates have increased again at March 31 for the second quarter, that’s when most of our loans reprice, we would expect second quarter earnings to exceed those of the first quarter.

As a reminder, part of our strategy has been to invest in the equity of our portfolio companies in a modest way in order to generate realized gains sufficient to offset losses over time. As our business has matured over the last 10 years, we’ve begun to see somewhat regular realized gains in our portfolio. While we did not have any equity realizations during the first quarter, we do expect some during 2023. Now turning to outlook. As a reminder, our platform at Stellus Capital Management includes a number of private institutional funds that co-invest along SCIC, our public company. This additional capital allows us to invest in larger transactions remain active in the market when our public company may have limited capital and built all portfolios in a diversified manner.

Today, total assets under management across the Stellus platform were $2.9 billion. From a macro perspective, the higher interest rate environment, coupled with stress in the regional banking sector, we are approaching the overall economic environment cautiously. Since quarter end, we have funded $17.1 million at par in 2 new and 6 existing portfolio companies and have received no repayments. This brings our portfolio now to $892 million in 90 portfolio companies. With the additional equity raised since 12/31 that Todd referred to earlier under our ATM program, we expect to grow our investment portfolio to over $900 million this year. For the balance of the quarter, we are starting to see repayments pick up, however. As a result, it is likely that new fundings for the rest of this quarter will be at least offset by repayments.

And with that, I’ll open it up for questions. Kelly, please begin the question-and-answer session, please.

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Q&A Session

Operator: [Operator Instructions]. Your first question is coming from Erik Zwick with Hovde Group.

Operator: Your next question is coming from Paul Johnson with KBW.

Operator: Your next question is coming from Christopher Nolan with Ladenburg Thalmann.

Operator: There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Rob Ladd for any closing remarks.

Robert Ladd: Okay. Thank you, Kelly. Again, thanks, everyone, for joining us this morning for our call. We look forward to speaking with you this summer when we report on the second quarter results.

Operator: Thank you. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.