Good morning, ladies and gentlemen and thank you for standing by. At this time, I would like to welcome everyone to the Stellus Capital Investment Corporation Year End 2020 Results Conference Call. At this time, all participants have been placed in a listen-only mode. The call will open for a question-and-answer session following the speaker's remarks. Please note this conference is being recorded today, Friday, March 5, 2021. 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.

Thank you, Holly. Good morning, everyone and thank you for joining the call. Welcome to our conference call covering the quarter and year ended December 31, 2020. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements and then also cover 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 a telephone number and PIN provided in our press release announcing this call. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections and we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections. We 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.

Thank you, Todd. The past year has certainly been a challenging one for everyone. We're thankful that the members of our firm have remained healthy and that we've been able to operate remotely without interruption. Our portfolio has performed well throughout the unprecedented pandemic and we've been able to significantly improve our liquidity and available capital position. In addition, our net asset value has risen back to about $14 per share. For 2021, we've seen an increase in investment opportunities and as a result of $158 million on a cost basis thus far in the first quarter. So since year-end, our portfolio has increased by $43 million net of payouts. We'll begin by discussing our operating results followed by a review of the portfolio including asset quality and then the outlook. And Todd will cover our operating results now.

Thank you, Rob. For fiscal year 2020, we covered our dividend from $14.14 to $14.03. Turning to the fourth quarter, our distributions of $0.25 per share which we declared in the third quarter were covered through net investment income of $0.26 per share and core net investment income of $0.28 per share. Net asset value per share increased $0.86 during the quarter from $13.17 to $14.03 due to the early declaration of the fourth quarter dividend and net appreciation on our investment portfolio. We reported a net realized loss of $7.7 million, primarily related to one investment, which was offset by unrealized gains during the quarter of $19.6 million due primarily to the reversal of previously recorded unrealized losses on the debt portfolio and unrealized gains in our equity portfolio.

Thank you, Todd. I'd now like to cover the following areas; our life-to-date review of our portfolio and asset quality, and then turn to outlook. Relative to life-to-date since our IPO in November 2012, we've invested approximately $1.7 billion in over 130 companies, we received approximately $983 million of repayments, while maintaining stable asset quality. Life-to-date, we paid over $161 million of dividends to our investors, which represents $11 per share to an investor in our IPO again in November of 2012. Relative to our portfolio and asset quality, we ended the year with an investment portfolio at fair value of $653 million across 66 portfolio companies. This is up from $629 million across 63 companies back a year ago on December 31 of 2019. During 2020, we invested $152 million in 10 new and 20 existing portfolio companies, and received $129 million of repayments. So our net portfolio growth at cost was about $23 million for the year. Our portfolio of companies continues to be weighted towards secured lending at floating rates, therefore, as of December 31, 97% of our loans were secured and 93% were priced at floating rates. This move has coincided with greater first lien movement or tranche lending. We continue to maintain good diversification with the largest industry sector at 17% of the total. Our average investment per company is about $10 million and our largest investment is $21.6 million, both numbers measured at fair value. And of the 66 portfolio companies, 62 are backed by private equity firms. Overall, our asset quality is stable at a 2.0 on our investment rating system or on plan; 13% of our portfolio is rated a 1 or ahead of plan; and approximately 11% of the portfolio is marked at investment grade of three or below. And then relative to non-accruals, we have three loans on non-accrual, which comprise 1% at fair value of the total loan portfolio.

Thank you so much. And our first question today will come from Christopher Nolan with Ladenburg Thalmann.

Hey, guys.

Hey, good morning.

I guess, for Todd, keep track as I recall that was a non-accrual last quarter and still longer there, is that a fair read of it? So it's back on accrual?

Well, we've got a preferred equity position in it that's been written up, but Rob you may want to address it more fully than that.

Yes. So, Chris, two things have happened. One, there's a note for about $1.5 million in an equity -- preferred equity position for $4 million. The equity position was written up based on really outstanding performance since December and the loan amount was put on accrual. So that's -- it has gone on accrual.

Okay. My second question is more strategic. Congratulations on the investment-grade offering, but given the coupon is so low and given the risk of inflation coming back and given that you guys have relatively low leverage ratios, is there a temptation to actually put on more investment-grade debt? And would you use the revolver less going forward? And that's it for me. Thank you.

Yes. So good question, Chris. So on our revolver, we borrow at the margin at 2.75%. And think about the fees associated with it have already been paid, so that's the marginal cost. And the bond offering which was attractive at four and seven-eighths and includes some sales growth is a little over 5% all-in cost.

Okay. Thank you.

Thank you, Chris.

Thank you. And our next question will come from Robert Dodd with Raymond James.

Hi, guys. Congrats on the quarter and again NAV back over $14. On the pipeline, Rob, I mean you say you're seeing increased opportunities you've funded a lot already. How many of those opportunities that look like they can close this quarter? Your original -- change your attention, so to speak in Q4. I mean, is the pipeline continuing to refill in Q1? Or is this kind of spill-over from Q4?

Yes. So Robert, I'd say that it's a pretty constant pipeline. And I'd say, if something is closing in say the first week in March, we would have likely seen it in November, December or perhaps as late as January and so there's a gestation period here. So -- but again, we're seeing lots of interesting opportunities. And one thing, so we would continue to -- we would expect this to continue. And probably some pent-up demand from an M&A perspective certainly coming out of COVID. And then also interestingly, just want to clear about half of what we looked at is SBIC qualified. And it is helpful over the last -- in the fourth quarter and including what we're doing this quarter roughly 80% of what we're closing is SBIC qualifying. So this is very helpful because of our second license.

That is very helpful and the SBIC has -- it attracts some cost of capital as well on financial. I mean, what about -- and just to kind of you gave us some color on repayments over the next 30, 60 days possible repayments and they are very hard to predict. But can you give us any color on kind of how you feel that may flow through the course of the year? Do you expect it to be a high repayment year? And then obviously, there was that balance where if you've seen a lot of opportunities that those who offset. But can you give us any color on there? And I guess one again over the course of the year do you expect the portfolio to grow? Or bounce around a little bit and come out even the same?

Yes. So again hard to predict the future, but our goal this year after the fundings of this quarter and finish up the month, we're in, we would expect our portfolio to be roughly $700 million and our goal this year is to get that to $800 million by the end of the year. So we would expect additional investments net of repayments, we'll probably go to the portfolio close to $100 million this year and a lot of that will come in SBIC financings.

Got it. I appreciate that. On just the last kind of -- on this the quality of the deals you're seeing when obviously secured unitranche et cetera. But I mean are you -- is leverage starting to rise in those deals? So is structured starting to weaken? Or how is that going given the amount of kind of pent-up M&A that's coming?

Yes. So I think the good news is that, so first almost everything we're looking at is first lien unit tranche. In case, we see an interesting second lien, so you may see us -- so now one or two of those might come forward, but most everything we're doing now is in this first lien unit tranche. The leverage quotients have stayed the same. And that leverage is as low as three times. We looked at something this morning that was under three times. And then, as high as high fours. But on average around, four times EBITDA multiple, so leverage has not changed. And then, the same structure we've always had equity checks approximately 45% to 50% of the capital structure. And if the business is being purchased for, let's say, 12 or 13 times that the leverage quotient hasn't changed, but that equity component is much higher. So again, it could be in a very expensive business, it's purchased for 12 or 13 times our leverage might be four and the delta is being covered by equity, so a much larger percentage of the capital structure. And then, we continue to have serious covenants in all the lending we do. And so, good news in our market, that's not changed and we don't expect it to change.

I appreciate all that color and good luck for the rest of the year. Thanks.

Yes. Okay. Thank you very much, Rob.

Thank you. And next, we'll hear from Ryan Lynch with KBW.

Good morning, Ryan.

Hey. Good morning, Rob. Thanks for taking my questions, and really nice quarter guys. My question I had was of the roughly $20 million of unrealized gains that you guys recorded this quarter, can you give us a ballpark breakdown of what percentage of that was driven by recovery of previously recorded unrealized losses on debt investments versus upside that you recorded unrealized gains in your equity portfolio?

Yes, Ryan. It's Todd, I'll cover that. So, of the $19 million of unrealized gains, roughly $10 million of it was related to a reversal of unrealized losses previously for the -- primarily related to FFO. So, with that realization, we had about a $2 million pickup from that. And then, the remainder of it is the debt was up a little bit, with respect to with spreads generally. And then, the rest of it the majority of it was, in our equity portfolio where we had one investment made up about half of that. And then, the rest, I would say, are -- most of them were under $1 million but just kind of across the board in the equity portfolio, they were written up.

And maybe I'll add to that line. So, it's some spread impact on our model, but more company-specific. In terms of your equity appreciation or a realization as Todd said like for FFO, which was sold in November.

Okay, understood. And then, maybe kind of a higher-level question. As you all -- over the last several years kind of prior to COVID, I think you're all well aware of how far back the last credit cycle was. And I think we're investing as such of a potential credit cycle coming. Now that 2020 happened, if we're going through a credit cycle, it seems like the economy is now on a little bit of an upswing as the economy gradually recovers and reopens. Does your investment philosophy change at all of how you approach the market in 2018, 2019 versus how you're approaching 2021 in terms of either targeted sectors you guys are focusing on? Or just where you're willing to go into the capital structure?

Yes. So, I'd say that our investment philosophy or approach has really not changed. And the reason I'd say that is that, the characteristics we're looking for in companies are very similar to those days, it would have been in the best of times. And one of those that we're looking for is, can this business and can this sector survive a downturn in the recession? So that's our initial underwriting screen is can the company survive a recession? And so, as an example, we'd be looking for a business that has low maintenance capital expenditures and can change their cost structure quickly in response. And we saw that in a number of the businesses at the outset of COVID last year. And then, of course, as things came back, they were able to ramp up the other way. So, I'd say very open-minded to sectors and approach, but if it's helpful, there are a lot of characteristics we look for, but I'd start with how does this business perform during a downturn.

Okay, understood. Kind of on that note, it is interesting though if the investment philosophy at the core really hasn't changed, what's really the driving force behind so many more of your investments today being eligible for the SBIC versus in the past?

Yeah. So I'd say it's somewhat of a natural flow. So as you know we operate a national business and are active with as many as 100 sponsors and maybe at one time 50 or so, so all over the -- the sponsors are all over the country and the companies you invest in are all over the country and in all kinds of sectors and honestly quite a variety in sizes. Other than that I think it's too large we're probably now to get a shift. So that natural flow that we see throughout the year currently is producing more in the SBIC-qualifying way. So I'd like to say we targeted it, but it's more naturally coming out of the flow we're seeing. Now implied in our SBIC qualifying investment is a kind of a nominal basis, it would have a lower than a higher EBITDA level. But we're still seeing the EBITDA levels in this area that we'd like to see in them. So anyway, it's that natural flow that's helpful and when you see a lot of opportunities. And I'd say if it's also helpful, if we're looking at something that's SBIC qualifying or not, our cost of capital for SBIC financing. So we might be more geared to that. But a broad opportunity set and fortunately it's more skewed to that level today. One of the things I'd say that we also look in -- for in businesses is that real growth profile, which is true like lower middle market private equity generally. And so these higher growth companies with low maintenance capital expenditures if they perform and meet their claim they will deleverage in both an absolute and relative way in a couple of years and will be refinanced out. So that's another one of the ingredients we look for in the financings we do.

Okay. That’s really helpful background and power on, on that market. Those were all my questions today. I really appreciate the time, and really nice quarter guys.

Yeah. Thank you very much.

Thank you. And at this time we have no further questions in our queue. I'll turn the conference back over to our speakers for any additional or closing remarks.

Okay. Nothing more here. We very much appreciate everyone's support and we'll be back with you in early May to report on the first quarter. Thank you very much.

Thank you. And this concludes today's call. We thank you for your participation. You may now disconnect.