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spk00: Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellis 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. This conference is being recorded today, March 5th, 2024. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellis Capital Investment Corporation. Mr. Ladd, you may begin.
spk06: 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 31st, 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.
spk07: 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 Stellis 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.steluscapital.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. Rob Ladd Okay.
spk06: Thank you, Todd. We'll begin this afternoon by discussing our operating results, followed by a live-to-date review, a review of the portfolio, including asset quality, and then the outlook.
spk07: 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 40 cent per share dividend through core net investment income of 50 cents per share and gap net investment income of 49 cents per share. Net asset value increased 7 cents 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. 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 30th, 2023. During the fourth quarter, we invested $40.3 million in three new and 11 existing portfolio companies, and along with additional fundings of $3.9 million, and received five full repayments and four full realizations, totaling $39.9 million, and $153 million of other repayments, resulting in a net portfolio decline at cost of $39.5 million. On December 31st, 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 four times an average EBITDA of approximately $19 million per company. Overall, our asset quality is slightly better than plan. 24% of our portfolio is rated a one or ahead of plan, and 14% of the portfolio is marked at an investment category of three or below. As of year end, we had four loans on non-recrual, 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.
spk06: 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 gains 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 six to 12 months. To this end, we are aware of two possible equity realizations that could occur in the second quarter. with aggregate proceeds of approximately $7 million and a potential realized gain of $4 million. As at 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 two 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 exit strategies. Now, turning to dividends, we continue to cover our dividend of 40 cents 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 percent floating. and our liability structure is approximately 73 percent 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 13 cents per share, resulting in aggregate dividends of 40 cents per share for the second quarter. It's worth noting that based on the average price of our stock over the last 10 days and in 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 seven existing portfolio companies and have received one 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.
spk00: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Paul Johnson with KBW.
spk04: Good morning. Good afternoon. Good afternoon. Thanks for taking my question. So just on... Some of the remarks you gave on the portfolio, 14% or so as square value in your sort of internal risk rated three or below. Kind of setting aside the non-equal, I think that accounts for 1% of that. Correct me if I'm wrong. I mean, how do you kind of think about those situations? I mean, do you think that those are, you know, situations you feel are stabilized and performing, albeit maybe below? sort of projection, or are any of these still just a work in progress?
spk06: Yes, so, Paul, as a general matter, we certainly think these are all manageable positions. They vary by company. The one attribute that would be true for substantially all of them is that they do have private equity ownership and backing and support. And so I think the way to think about our risk grade threes and below is perhaps, you know, performing under plan. That combined though with private equity support, you know, we think that the results are, you know, quite predictable. But again, ups and downs in the portfolio, but I'd say no change, you know, substantial change over our history.
spk04: Thanks for that, Rob. You know, kind of looking, you know, in the next year, you know, fee income or other income this year is relatively light. I mean, I'm just thinking about kind of activity as you mentioned. You expect it to sort of pick up in the next year. You expect that to drive any sort of central prepayment income activity in your, you know, depending on what sort of turnover I guess you're expecting for the year.
spk06: Paul, just in terms of one way to think about it, we had a little bit more than normal other income in the fourth quarter based on repayments. We think that slowed in the first quarter of this year, but we see repayments picking up toward the middle and latter part of the year. On balance, you'll see it more, but just to flag that in the first quarter, we would expect less of that other income than we had in the fourth quarter.
spk04: Thanks for the clarification there. And then lastly for me, just in terms of liabilities, I realize I think your unsecured notes are due in 2026, but there's some SBA debentures that are rolling off in the next year or so. Where are you guys in terms of SBIC licenses and current capacity on those?
spk06: Yes, so as a quick recap and then Todd will add in here, so we have two licenses currently. All of the debentures have been drawn, which amount to $325 million. We do have some debentures from the first license that come due next year in 2025, roughly $25 million. So those will be prepared to retire, certainly on or in advance of their coming due. And then so we are looking at working with the SBA for a third license as we've reached some of the dimensions from the first license is starting to come due. And our investment period for the second license is coming up toward the end of this year. So we'll be in discussions with the SBA to see if we can obtain a third license.
spk00: Your next question is from Eric Zwick with Hovde Group.
spk08: Good afternoon. I wanted to start just on the comments Robbie made about expectations for funding to pick up in the second half of the year. I'm just curious if that is driven by kind of increase in pipeline activity that you're saying or more based on kind of broad market developments or potentially a combination of both of those.
spk06: Yes, so probably, Erica, thank you for joining. So a variety of factors. So certainly when we've, over time, if things are slower, they tend to pick up. So that'd be one overall observation. But more importantly, we know there's a tremendous amount of dry powder in all private equity hands, but especially in the lower middle market where we operate. We also know that there are holdings in private equity firms that that are either the fund life is reaching an end or some continuation end, and there'll be some realizations that private equity firms will start to generate. So our general impression is that things will pick up toward the second half of the year. We are seeing activity, but it's not as heavy as it has been. So this is a more forward-looking toward the end of Q2 and third and fourth quarters.
spk08: Thanks for that insight there. And then just looking at the 4Q funding activity as well as what's been done quarter to date, you know, greater percentage of add-on new investments versus new and wondering if that's just kind of based on the opportunities that you're seeing or if you have a preference for those, you know, certainly companies that you've already made investments for and continue to grow. I'm sure you would love to build and continue to support them. So curious about that mix, you know, as we look at into 24, what it could look like as well.
spk06: Sure, sure. So I'd say that, I'd say we like both. We really like the new financing where it's an acquisition of a fresh company, fresh diligence, new equity capital. So that's an ideal structure for us. But then I'd say, you know, equally as good would be an add-on where we already know the company, it's performing well, and they're expanding. This would be a lot of the strategy of the companies that we back is that the private equity firm takes the platform, initial acquisition, and then their plan is to grow it from here with add-ons or acquisitions, if you will. So, again, both are attractive to us. The add-ons come more naturally as when we're already in the credit. In terms of looking forward this year, we would expect many of our portfolio companies and their owners to be acquisitive. So you should see more activity there. But I think that that comes naturally with the existing. And then, of course, we're always searching for new opportunities and new new companies.
spk08: Thanks, man. Last one for me, and I'll step aside just looking at the. kind of the exits and some of the restructurings that took place towards the back half of the year. Any expectations for what a PIC income may look like in 24?
spk06: You know, it would be, we've had a little bit of an increase in 23, where we've had, you know, some restructurings worked on. So I don't think we expect it to materially change in 24. We have noted in the past that when we're the only lender or just a small group of lenders and you have a company that might be struggling making their interest coverage, which most of ours, substantially a lot of ours can, but if you have that case, we have the flexibility as a lender to provide some pick interest. Ultimately, it will collect it, but this can help the cash flow. But don't expect that to materially change in 24.
spk05: Thanks for taking my questions today. Thank you.
spk00: Your next question for today is from Christopher Nolan with Lattenberg Salmon.
spk02: Hey, guys. Rob, on your comments in terms of slowing deal activity, I presume that's simply because the private equity partners you work with are just seeing slower investment activity as well. Is that a correlation?
spk06: That's correct. It's highly correlated. I'd say M&A activity is down, and I think you may have heard that from others as well. So that's the most impact for sure.
spk02: And then I guess in terms of the reinvestments, do the private equity firms have a drag-along clause for you guys where if they reinvest into a portfolio company, you need to invest as well, or how does that work?
spk06: Yeah, and Chris, do you mean when they're making a new acquisition?
spk02: A follow-on acquisition to an existing portfolio company.
spk06: Sure. So in many cases, we'll have already established a delayed draw term loan that they would automatically draw upon if the acquisition follow on qualified. So this would be normal. Absent that, where there's not a pre-existing commitment, any new acquisition they'd make, we'd have to re-underwrite.
spk02: Gotcha. And then I guess the final question is, you know, last year you had some pretty good dividend supplements. What's the spillover income and, you know, what are your thoughts about supplements these days?
spk07: Sure. Let me turn it over to Todd for that. Sure, Chris. So our spillover is going to be about $37 million, and our current dividends are $38.5. So at our current dividend level, you know, with the additional shares that we raised or issued, we've got enough regular dividend to to cover the spillover going forward. But things can change in terms of gains and losses and taxable income in future years.
spk02: Okay. Thank you for the detail. That's it for me. Thanks, guys.
spk07: Thank you, Chris.
spk04: Thank you, Chris.
spk00: Your next question is from Robert Dodd with Raymond James.
spk03: Hi, guys. you mentioned there's going to be potentially realizations in the second quarter, and maybe equity realizations in realized gains, and maybe more activity in the second half of the year. I mean, everything we're hearing is, you know, private equity or LPs in private equity funds want realizations before they'll fund new funds. If If there are more realizations from your private equity partners and private equity environment as a whole, would you expect or are there going to be more equity realizations in the back half of the year? Could we accelerate that as a source of capital to be reinvested as we get later into this year?
spk06: Yes, Robert, and that's a good point that you brought out that I alluded to, which is LPs and longer dated funds looking for realizations. So we think this will drive new activity for us as these companies are sold and we have the chance to finance it for the next owner. But as you're pointing out, would also result in realizations for us. So yes, and as I said in my remarks that we do think that the equity realizations activity will pick up and that there are a few more that we know of. that I didn't mention, but not as clear as the two that we're hearing about. So I think that's right. And again, we have substantial capital to invest. As a reminder, our entire platform is roughly $2.8 billion of AUM across the Stellis platform. And then within the public company, of course, quite a bit of capacity to invest, given that our credit facility, we're only borrowed at about $150 million currently. So again, that coupled with repayments. So we'll be ready for the new deals that come the second half of the year.
spk03: Got it. Thank you. Any particular industries that you're thinking are increasingly attractive in this, if we've got higher rates right now, but if they are going to decline, are there any particular areas you think are appealing in that kind of environment?
spk06: You know, it's interesting. We haven't thought of it in those terms. We're looking for a handful of basic kind of requirements in companies we look at, which start with substantial free cash flow generation, as well as growth that's built into the company. You know, we avoid commodity price risk. We avoid high maintenance capex. So, we really look more at those factors versus any one industry sector per se, if that's helpful. And as you've heard me say before, we also look at companies and industry sectors that there's some history of how they perform in a recession, and this is helpful in terms of resiliency if you have such a downturn. So, again, I think we've approached it more that way versus specific industry sectors.
spk05: I appreciate that. Thank you. Thank you, Robert.
spk00: Your next question is from Bryce Rowe with B. Riley.
spk01: Thanks. Good afternoon. Good afternoon, Bryce. Hey, Rob. I wanted to start with the NAV movement quarter over quarter. Obviously, you covered the dividend and saw the NAV go up. here over the quarter. Can you speak to maybe the marks within the quarter? You know, what maybe, what kind of effect did, you know, broader market, broader credit markets have on, you know, on the fair value marks in the quarter? And then were there any kind of specific call outs beyond, you know, beyond the non-accruals that we've already talked about?
spk06: Please, I'll turn it over to Todd.
spk07: Sure. Yeah, Bryce. So we did have, you know, we had the realized loss that was reversed. We had, I'd say, in general, you know, there was a general decline from an unrealized loss perspective, but we also had a few specific write-downs on specific companies, and you can tell from the from the SOI, one of them was J.R. Watkins where we had written that down some as well. So that was the primary difference between, you know, offsetting the taxes and the dividend.
spk06: And maybe just to add to what Todd said, so no general market decline. Right. These would just be as in previous quarters, except during COVID, this was company specific. Yeah. Okay.
spk01: Okay. And, I mean, on a J.R. Watkins, in particular, Todd, I know it's just one investment, but it looks like it's marked below 50% of cost. I mean, what's the comfort level there? How do you think about, you know, that staying on accrual versus putting it on non-accrual or maybe asked a different way? Is there a certain threshold where even if it's still accruing interest, paying interest, you know, even if it's marked at a certain level, you'll consider putting it on non-accrual versus keeping it on accrual?
spk06: And I might just jump in here. So I think that's definitely, that's definitely right. And as an example, this one will be looked at in this quarter.
spk01: Okay. That's, that's helpful, Robin. And last one for me, you know, in terms of kind of balance sheet leverage and managing the balance sheet, no, no, no, no ATM activity in the, in the quarter, you know, after a few quarters of some activity. Any reason for that? Is that more driven by repayment activity outpacing originations, or is there some other way to think about it? Thanks.
spk06: Yeah, so no, I think that's right. We had a very fortunate, successful year for the ATM coming into the fourth quarter, and as I said earlier, substantial capital invest, so we're focused on investing what we've raised at this point. Got it.
spk05: Okay.
spk01: I think that's it for me.
spk05: Appreciate the time. Okay. Thank you, Bryce.
spk00: We have reached the end of the question and answer session, and I will now turn the call over to Robert Ladd for closing remarks.
spk06: All right. Very good. Thank you, everyone, for being on. Thank you for your support, and we look forward to updating you again for the first quarter, which our call will be in early May. Thanks again.
spk00: This concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
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