Earnings Call Transcript - SCM Q2 2023

Operator, Operator

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's Conference Call to report financial results for its second fiscal quarter ended June 30, 2023. At this time, all participants have been placed on a listen-only mode. This conference is being recorded today, August 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, CEO

Thank you, Matthew, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended June 30, 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, CFO

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 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. 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, CEO

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, CFO

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 37% of our liabilities are floating. As a result, we had another quarter of solid earnings. In the second quarter, we more than covered the dividend of $0.40 per share with GAAP net investment income of $0.49 per share. Core net investment income was $0.51 per share, which excludes estimated excise taxes. Net asset value increased $27.5 million due primarily to the issuance of equity under our ATM program and earnings in excess of the dividend of $1.8 million, offset by net unrealized losses on our investment portfolio of $6.3 million. The unrealized loss was driven primarily by markdowns on specific positions, offset by markups on many of the other loans in the portfolio due to tightening spreads. During the quarter, we issued 2.3 million shares under the ATM, which were at or above net asset value per share for net proceeds of $32.4 million. This brings total equity raised under the ATM in 2023 to $40.7 million net. And with that, I'll turn it back over to Rob.

Robert Ladd, CEO

Okay. Thank you, Todd. I'd like to cover the following areas: life-to-date review, portfolio and asset quality, our dividend and outlook. As we customarily do our life-to-date review. So since our IPO in November of 2012, we've invested approximately $2.3 billion in over 185 companies and received approximately $1.4 billion of repayments while maintaining stable asset quality. We have paid over $223 million of dividends to our investors, which represents $14.50 per share to an investor in our IPO in November of 2012. Now turning to the portfolio. We ended the quarter with an investment portfolio at fair value of $882 million across 93 portfolio companies, up from $877.5 million across 88 companies at March 31. During the second quarter, we invested $37 million in five new and 10 existing portfolio companies. Along with additional fundings of $11.4 million, we received two full repayments totaling $20.8 million and then $17.6 million of other repayments, all of that resulted in net portfolio growth for the quarter of approximately $10 million at cost. At June 30, 99% of our loans were secured and 97% were priced at floating rates. We're always focused on diversification. The average loan per company is $10.4 million and the largest overall investment is $19 million, both at fair value. 91 of the portfolio companies are backed by a private equity firm. Overall, our asset quality improved to better than two, approximately 1.9 on our investment rating system. This would be better than planned. 25% of our portfolio is rated at one or ahead of plan. This is up from 17% at March 31, and 13% of the portfolio is marked in the investment-grade category of three or below. Currently, we have five loans on non-accrual, which comprised 3.3% of fair value of the total loan portfolio at fair value. As Todd mentioned earlier, during the quarter we recorded an unrealized loss of $6.3 million primarily from company-specific write-downs. Subsequent to quarter end, we placed one loan on non-accrual effective July 1st, which is included in the 3.3% figure I gave earlier. We continue to cover our increased dividend of $0.40 per share per quarter as a result of the greater earnings that we are generating in this higher interest rate environment, which in our view will continue for the foreseeable future. We are well positioned to benefit from the higher interest rates as our portfolio is approximately 97% floating and our liability structure is approximately 63% fixed rate. As a reminder, integral to 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 have, of course, begun to see somewhat regular realized gains from our portfolio. You might find it interesting that life-to-date, the net realized equity gains are in excess of $60 million. We are expecting one equity gain in the quarter of approximately $2 million, of which the actual gain will be about $1 million. And now turning to the outlook. As many of you know, our platform at Stellus Capital Management includes a number of private institutional funds that co-invest along the public company, SCIC. This additional capital allows us to invest in larger transactions, remain active in the market when SCIC may have limited capital, and build our portfolios in a diversified manner. Today, total assets under management across the Stellus platform are $2.9 billion. And then for the quarter. Since quarter end, we funded $47.4 million at par in five new and two existing portfolio companies and have received one repayment of $10.9 million. This brings our portfolio to $915 million and 99 portfolio companies. We'll likely hit 100, I guess, before quarter end. We estimate we'll end the quarter at $900 million or higher in terms of total portfolio. With the additional equity raised this year that Todd referred to earlier, we expect to grow our portfolio in excess of $930 million by the end of the year. With that, I'll open it up for questions. Thank you. And Matthew, I'll turn it over to you for the Q&A session.

Operator, Operator

Certainly. Everyone at this time, we'll be conducting a question-and-answer session. Your first question is coming from Christopher Nolan from Ladenburg Thalmann. Your line is live.

Robert Ladd, CEO

Good morning, Chris.