Stellus Capital Investment Corporation (NYSE:SCM) Q4 2023 Earnings Call Transcript
Stellus Capital Investment Corporation (NYSE:SCM) Q4 2023 Earnings Call Transcript March 5, 2024
Stellus Capital Investment Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 Fourth Fiscal Quarter and Year-Ended December 31, 2023. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] This conference is being recorded today, March 5, 2024. 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.
Robert Ladd: Okay. Thank you, Holly. Good afternoon, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter and year-ended December 31, 2023. Joining me, of course, 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 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: Okay. Thank you, Todd. We’ll begin this afternoon by discussing our operating results followed by a life-to-date review, a review of the portfolio, including asset quality, and then the outlook.
Todd Huskinson: Thank you, Rob. First, I’ll cover operating results. We continue to benefit from our favorable asset liability mix, in which 98% of our loans are floating and only 27% of our liabilities are floating. As a result, we had solid results in the fourth quarter as we more than covered our $0.40 per share dividend through core net investment income of $0.50 per share and GAAP net investment income of $0.49 per share. Net asset value increased $0.07 per share to $13.26 per share. During the fourth quarter, we recorded a tax refund of $3 million. which was the result of recording a realized loss on previously marked down positions. Since our IPO in November 2012, we’ve invested approximately $2.4 billion in over 195 companies and received approximately $1.5 billion of repayments, while maintaining stable asset quality.
We have paid over $246 million of dividends to our investors, which represents $15.08 per share to an investor in our IPO in November 2012. Now, turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $874 million across 93 portfolio companies, slightly down from $886 million across 96 companies at September 30, 2023. During the fourth quarter, we invested $40.3 million in 3 new and 11 existing portfolio companies and along with additional fundings of $3.9 million and received 5 full repayments and 4 full realizations, totaling $39.9 million, and $153 million of other repayments resulting in a net portfolio decline at cost of $39.5 million. At December 31, 99% of our loans were secured and 98% were priced at floating rates.
We’re always focused on diversification. The average loan per company is $9.9 million and the largest overall investment is $18.9 million, both at fair value. Substantially, all of the portfolio companies are backed by a private equity firm. The average leverage of the portfolio companies is around 4 times and average EBITDA of approximately $19 million per company. Overall, our asset quality is slightly better than plan, 24% of our portfolio is rated a 1 or ahead of plan and 14% of the portfolio is marked at an investment category of 3 or below. As of year-end, we had 4 loans on non-accrual, which comprised 1.3% of fair value of the total loan portfolio. And with that, I’ll turn it back over to Rob to discuss dividends and overall outlook.
Robert Ladd: Okay. Thank you, Todd. As a reminder, part of our investment strategy has been to invest in the equity of our portfolio companies in a modest way, but in order to generate realized gain sufficient to offset losses over time. While we’ve had modest equity realizations more recently, we expect this activity to pick up over the next 6 to 12 months. To this end, we are aware of two possible equity realizations that could occur in the second quarter. The aggregate proceeds of approximately $7 million and a potential realized gain of $4 million. As of the end of the year, we have $60 million of equity investments at cost that were marked at $72 million. Our historical performance would indicate that the ultimate realization for this portfolio would be greater than 2 times our portfolio’s cost basis.
However, of course, the ultimate performance of our current equity positions will depend on a variety of factors including, among other things, the current economic environment and sponsors equity [ph] exit strategies. Now turning to dividends, we continue to cover our 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. As Todd mentioned, we are well positioned to benefit from the higher interest rates as our portfolio is over 98% floating and our liability structure is approximately 73% fixed rate. Looking forward to Q2 of this year, we expect, subject to our Board of Directors approval, to continue our monthly dividend of approximately $0.13 per share, resulting in aggregate dividends of $0.40 per share for the second quarter.
It’s worth noting that based on the average price of our stock over the last 10 days ending yesterday, our current dividend equates to an annual yield of about 12.4%. Now turning to outlook, since year-end, we have funded $4.7 million at par in 7 existing portfolio companies and have received 1 full repayment of $16.2 million. This brings our total portfolio to approximately $863 million at fair value with 92 portfolio companies. We are experiencing a somewhat slower environment for originations than in the previous few quarters and we expect our funding for the remainder of the quarter will be offset by expected repayments of approximately the same amount. It is worth noting, we do expect for a variety of reasons that investment activity will pick up in the second half of this year.
We have substantial capacity for new investments which, of course, would increase with likely repayments. With that, we’ll open it up for questions. And, Holly, we can begin the Q&A session, please.
Operator: Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from Paul Johnson with KBW.
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