Stellus Capital Investment Corp (SCM) Q2 2019 Earnings Call Transcript
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Stellus Capital Investment Corp (NYSE: SCM)
Q2 2019 Earnings Call
Aug 9, 2019, 11:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and thank you for standing by. At this time, I'd like to welcome everyone to Stella's Capital Investment Corporation's conference call to report second quarter 2019 results. [Operator Instructions] The call will be open for a question and answer session following today's speakers remarks. The conference is being recorded today, Friday, August 9th, 2019. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Steel's Capital Investment Corporation. Mr. Ladd, you may begin your conference.
Robert Todd
Ok. Thank you, Cody. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended June 30, 2019. Joining me this morning is Doug Hoskinson, our Chief Financial Officer, who will cover important information about forward looking statements as well as an overview of our financial information.
Doug Hoskinson -- Chief Financial Officer
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 include forward looking statements and projections, and we ask that you refer 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 Todd -- Chief Financial Officer
Thank you, Doug. We'll 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.
Doug Hoskinson -- Chief Financial Officer
Thank you, Rob. We're pleased to report another caller got another quarter of solid earnings in which we generated realized income of $0.43 per share, including gains of $2.7 million or $0.14 which exceeded our $0.34.
per share dividend by $0.09. GAAP and core net investment income were both $0.29 per share which were short of our distributions for the quarter by $0.05. 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 per share which exceeds our distributions of $0.68 per share for the same period. Net asset value increased 2.3 million over the quarter, primarily due to the issuance of underwriters over allotment 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.
Robert Ladd -- Chief Executive Officer
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 toward secured lending at floating rates. At June 30th, 95% of loans were secured of which 70% were first lane and 91% were priced at floating rates. This move to more senior lending as resulting lower coupons. However, we expect that will also result in stronger asset quality over time. We continue to maintain good diversification with the largest industry sector with approximately 70% of the total portfolio, our average investment per company is $9.3 million and our largest investment is $22.6 million, both of those figures are at fair value.
52 of the 57 portfolio companies are backed by private equity firm. At 81% of our total investment portfolio is rated at a category of two or better which means on plan or ahead of plan. We did have one loan going on accrual during the quarter which now results in four lines of non accrual which comprise 4.8% of 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 downward, as we discussed on last quarter's call and is reflected in our current yield, we are expecting lower overall yield in the loan portfolio. This is driven by lower LIBOR which you've seen and a continued rotation to first line untranche type loans. This quarter End we've funded 33.9 million of debt.
at par and two new portfolio companies we've identified likely fundings of approximately 40 million to 50 million over the balance of the quarter and expect potential repayments of approximately $30 million during the same period.
As we've mentioned in our last few calls, 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. As our business has matured over the last six and a half years, we've begun to see somewhat regular realized gains in our portfolio. In fact, in 2017, we generated 4.6 million of such gains. In 2018, we add 5.3 million of such gain. And it's Doug reported earlier, thus far in 2019. We generated $12.9 million of gains and we're also aware that we may have an additional $7 million of potential gains by the balance of this calendar year.
As a result of these realized gains, we believe it is likely now that 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.
Questions and Answers:
john
Absolutely. [Operator Instructions] And we'll take our first question from Robert Dodd with Raymond James. Please go ahead.
Robert Dodd
Hi, guys. A couple of questions on the non-accrual side and I appreciate your cover you -- probably you don't think it's a trend but I won't But Protect America, obviously, you put it on non-accrual, I think June 28th, so toward the end of the quarter. So can I assume first that so it contributed a full quarter of income and was then placed on non-accrual? And then I guess the question is, it's one of your second liens? Was the non-accrual event a result of blocking? I mean, you still got it by say, a senior lender. You've still got it marked 85 which looks pretty healthy. So what's your -- can you give us any more color about precisely how that came apart, what came to play out, whether it was a material deterioration of the business, in which case the marks looks a lot versus the structure that led to the non-accrual?
Robert Ladd -- Chief Executive Officer
Yes, Robert. For sure, so let me -- Todd and I will cover that together. So with respect to the Company, of course.
A privately held company, so we're careful about what we discuss. But I would say that there was some activity that would have caused us to think that it was certainly a 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.
Robert Todd -- Raymond James
Okay. Got it.
Robert Ladd -- Chief Executive Officer
And that's -- that's what led to the placing on non-accrual.
Robert Todd -- Raymond James
Got it. Just trying to scoop on that pent up. Your other comment about that one of your old non-accruals may come back in the third quarter, I'm going to presume that -- that probably means we fact up optical but it's marked pretty basically at cost now and it's been improving over the last couple of quarters. Is there any particular trend that is leading to that? I mean, obviously, it's been worked through over a period of time and we've seen that go through but is there any particular trigger that still needs to happen for that to go on or back onto accrual?
Robert Ladd -- Chief Executive Officer
So I would is a general matter, we either be the improvement through the payment of interest or would be the pay off of the loan.
Robert Todd -- Raymond James
Okay. Got it thank you.
Robert Ladd -- Chief Executive Officer
-- one of those circumstances.
Robert Todd -- Raymond James
Yes, fair enough. When we look at the portfolio as a whole, can you give us any -- obviously, we've been kind of a seen this quarter concerns and I think that's been not your portfolio specific. There's been a mixed -- and I would bet it's a mixed message from BDC, some seeing EBITDA slowing on average in portfolio companies, some seeing growth stable. Can you give us any color on what you're seeing broadly, maybe on the accruing side of the portfolio as such?
Robert Ladd -- Chief Executive Officer
Yes, it's a good question, Robert. So one of the things, we would look at is, a question of recession, it's a kind of national recession coming or has it started to occur. So we're not seeing that in the portfolio companies. We would say that which has been true for a number of years now that if we have a problem it's company specific. So we're not seeing that trend downward and EBITDA of the portfolio companies. So, in fact, year-over-year coming into the first quarter which would be measuring the calendar year is 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.
Robert Dodd
Got it. I appreciate it. And then as the subsequent events as you said you have deployed 33, I think you haven't got any repayments yet. Any color -- have you had any call saying you're going to get repaid or anything like that? Any indication about any payments in the third quarter?
Robert Ladd -- Chief Executive Officer
Sure. So the number that I've expressed is approximately 30 million which we think is likely.
Robert Todd -- Raymond James
Okay. Yes. I guess. I mean that.
Robert Ladd -- Chief Executive Officer
Yes, we would-- that would be our best estimate. It always could be more but those we think are more likely than not. And in terms of the findings, I think the same but 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 findings and 30-ish million on repayments.
Robert Dodd
Got it. I appreciate it. Thank you.
Robert Ladd -- Chief Executive Officer
Thank you, Robert.
Operator
Thank you. We will now take our next question from Christopher Nolan with Ladenburg Thalmann.
Robert Ladd -- Chief Executive Officer
Good morning, Chris.
Christopher Nolan -- Landenburg Thalmann
Hi guys. Hi Rob, Protect America. I estimate that's roughly $0.02 a share per quarter. Is that right?
Robert Ladd -- Chief Executive Officer
Yes Chris, let me just calculate here.
Christopher Nolan -- Landenburg Thalmann
Okay. And then on a follow up to Robert's question on Refac. Is it correct that the serve value of that credit actually went up quarter over quarter? I thought I saw that between looking and comparing and Qs, most probably that's correct-- please go ahead.
Robert Ladd -- Chief Executive Officer
No, that. That's correct. And that would hopefully be a reflection of what we think the outcome is.
Christopher Nolan -- Landenburg Thalmann
Ok. So on the face of it, I mean, that could be a harbinger to a positive resolution for Refac?
Robert Ladd -- Chief Executive Officer
Yes.
Christopher Nolan -- Landenburg Thalmann
Okay, great. Going forward, giving everything that you're seeing -- we're seeing something portfolio deterioration in multiple BDC. So it's not isolate SCM. 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 puts the costs around there?
Robert Ladd -- Chief Executive Officer
Yes. So first of all with respect to our portfolio, we don't think there's been a material deterioration. In fact, as an example there, we know a risk grade 3 that's likely to come off in the third quarter to a risk rate 2. So we connect that this Protect America is like a Delta shift, but I think it's one company. Hopefully, that's helpful. We will report if we have otherwise, we feel otherwise in the third quarter but that's our view for now. In terms of what's informing our investing going forward, of course, there's a lot of concerns about a global economy slowing which can impact US companies and of course, we're more likely than not insulated from that.
You know, we approach our investing and always have as do the companies we invest in survive a recession and so what are the characteristics of those companies that could survive a recession? So that's the lens we always had. Actually it's a general matter we're probably more cautious than we've been if you go back six months, so we're having more cautious lens. That's so our rotation to more secure and now 70% first thing which is the highest percentage we've had in the portfolio, would be indicative of that. The new fundings we're looking at in this quarter are on an all but one is a first lien. 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 impacted by the trade situation this was early before there was a consensus. So again, I think this as approaching the market cautiously. Having said that, when we find a good company that's being well capitalized by high quality owner and it's well structured, we're interested. So we remain active in the market and that's of course why we have an interesting pipeline that I reported on earlier.
Christopher Nolan -- Landenburg Thalmann
I appreciate it.
Robert Ladd -- Chief Executive Officer
Yes. Chris, one thing going back to your question about the impact the Protect America, Doug is going to respond to that.
Doug Hoskinson -- Chief Financial Officer
Yes, Chris, you're right. It's a little over $0.02 a share so for and $75,000 in a quarter which is about $0.025 per share.
Christopher Nolan -- Landenburg Thalmann
Thanks, Doug.
Doug Hoskinson -- Chief Financial Officer
Sure.
Christopher Nolan -- Landenburg Thalmann
I guess this is sort of my final statement would be as we're going into this sort of choppy economic period, how well positioned do you think the PE sponsors of many of these companies are to inject more capital to backstop these companies if things get choppy economically? From your perspective, are the private equity firms sort of, fully deployed or have plateaued? I mean what's your sense there please?
Robert Ladd -- Chief Executive Officer
Yes, 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, we are 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 life? What's the dry powder in that fund? So that's part of the calculus we use.
So --- it doesn't mean we wouldn't fund the last investment in the 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 in dry powder just a function of where they are on that life cycle of the fund but-- people that we work with had that mentality and we would expect and we've seen historically that's very much the case.
So this is of course, the benefit of providing capital to well capitalized and smart private equity investors. And so going through a period that we might go through, this is very helpful.
Christopher Nolan -- Landenburg Thalmann
Okay. Thank you for the call. That's it for me.
Robert Ladd -- Chief Executive Officer
Thank you.
Operator
Thank you. We'll move on to our next question from Ryan Lynch with KBW.
Ryan Lynch -- KBW -- Analysts
Hi. Good morning. Thanks for taking my question. I just have two of them. I just want a clarification, --you said you expect about $40 million to $50 million in investments over the balance of this 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?
Robert Ladd -- Chief Executive Officer
Good morning, Ryan. Yes, that's correct.
Ryan Lynch -- KBW -- Analysts
Okay, and then just one more sort of clarification, -- I think -- I believe you said -- there could be $7 million of potential realized gains that you guys could hope to achieve through the remainder of the year? One: did I get that number correct? And 2: those $7 million of potential realized gains, are those already reflected in the fair values of those investments today? Meaning if they do actually become realized there would actually be no change in book value, those gains would just now be crystallized? Or is that potential upside to the fair value of any of those investments today?
Robert Ladd -- Chief Executive Officer
Yes, Ryan. So, first of all, you are correct. That's 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 has come up since the books were closed effectively. So I think, one: there are created to NAV and 2: of course they would be realized which means that we would put them as such.
Ryan Lynch -- KBW -- Analysts
Okay, that's all for me this morning, I appreciate the time.
Robert Ladd -- Chief Executive Officer
Yes. Thank you, Ryan.
Operator
Thank you. We'll take our next question from Chris Kotecki with Oppenheimer & Company.
Chris Kotecki -- Oppenheimer Company
Yeah. Good morning. Your income tax expense, $340,000 that was kind of unusually high, what's the explanation for that? And what should we factor in kind of going forward?
Doug Hoskinson -- Chief Financial Officer
Yes. Chris this is Doug. So the primary thing that's driving that is excise tax. So, we had a little over 9 million of spill over income at the end of 2018. And so, we're now accruing excise tax on that during the year.
Chris Kotecki -- Oppenheimer Company
So that'll be a quarterly run rate as long as you have the debt level of spillover?
Doug Hoskinson -- Chief Financial Officer
Yes. Some of that was accrued from a prior period. So I would say I think about $9 million. 4%. So for the year, that's about $400,000 of total excise tax for the year. So I'd say somewhat like going forward.
Chris Kotecki -- Oppenheimer Company
And just county question, why do you accrue it all in one quarter and why in the second quarter? Is that a seasonal or tax year thing or should one for going forward and just expect it through the year or?
Doug Hoskinson -- Chief Financial Officer
Yes. No it was just an accrual from a prior year spillover. So it's just larger than normal but 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 quarter.
Chris Kotecki -- Oppenheimer Company
Okay. So one should assume that goes down to 75,000 -- between 75,000 and 100,000 something like that?
Doug Hoskinson -- Chief Financial Officer
Yes, that's right.
Chris Kotecki -- Oppenheimer Company
Okay. That's it for me. Thank you.
Robert Ladd -- Chief Executive Officer
Thank you.
Operator
Thank you. We will now take a follow-up from Robert Todd with Raymond James.
Robert Todd -- Raymond James
Actually, Chris just asked most of my question. But when we look-- hypothetically if we look at the 2020 year, you have $9 million of spillover. Obviously, in the '18 right now looking at '19 with all the realized gains that you could be looking at ballpark 20 million in realized gains total this year which obviously flow in the spill over and less than blockers, etc. what also realized gains sort of have occurred so far year or previous year, how many are at the vic vs shielded from becoming an incrementally higher excise tax liability next year?
Robert Ladd -- Chief Executive Officer
Yes. Robert. So I would say the majority of that 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's question is considering what do we need to accrue some of that as we go along since it's related to 2019 but the tax is not paid until 2020. But you're right the majority of that will be in spill over for a sure.
Doug Hoskinson -- Chief Financial Officer
I think it's a right Todd, $2.7 is marked.
Robert Ladd -- Chief Executive Officer
And that's about right. So roughly 2.7 so far is not in the spill over rate calculation.
Robert Todd -- Raymond James
Ok, got it. thank you.
Robert Ladd -- Chief Executive Officer
Okay. Thank you, Rob.
Operator
Thank you, and that does conclude today's question and answer session. I'd like to turn the conference back over to management for any additional or closing remarks.
Unidentified Speaker
OK. Thank you, everyone, for joining and questions and your support of the company and we'll look forward to updating you on the third quarter on our call in November. Bye bye.
Operator
[Operator Closing Remarks]
Duration: 27 minutes
Call participants:
Doug Hoskinson -- Chief Financial Officer
Robert Ladd -- Chief Executive Officer
Unidentified Speaker
Robert Todd -- Raymond James
Robert Dodd
Christopher Nolan -- Landenburg Thalmann
Ryan Lynch -- KBW -- Analysts
Chris Kotecki -- Oppenheimer Company
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