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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 the Stellis Capital Investment Corporation first quarter 2021 results conference call. At this time, all participants have been placed on a listen-only mode. The call will be open for a question and answer session following the speaker's remarks. This conference is being recorded today, Friday, May 7, 2021. 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 your conference.
spk04: Thank you, Katie. And good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31st, 2021. 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.
spk02: 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 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.stelliscapital.com under the Public Investors link, or call us at 713-292-5400. This time I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.
spk04: Thank you, Todd. I'm pleased to report a solid quarter in which net asset value and asset quality were stable. We covered our dividend and notably had significant originations. We continue to see an increase in investment opportunities, and as a result, it funded $93 million on a cost basis during the quarter and then $19 million since quarter end. Since year end through today, our portfolio has increased by $69 million net of payoffs to $727 million on a cost basis. We'll begin by discussing our operating results, followed by a review of the portfolio, which will include asset quality, and then an outlook. Todd will cover our operating results first.
spk02: Thank you, Rob. For the quarter ended March 31, 2021, we covered our dividends of $0.25 per share with GAAP net investment income of $0.26 per share. Core net investment income was $0.28 per share, which excludes the capital gains incentive fees and income tax expense. Net asset value per share was unchanged at $14.03. In January 2021, we completed an institutional bond offering of $100 million of notes due in March 30, 2026 at a fixed rate of 4.875%. We used the proceeds to redeem our $48.9 million of notes due in 2022 and the remainder to pay down our bank credit facility. Finally, we've continued to commit and fund equity capital to our second SBIC subsidiary, which allows us to draw low-cost 10-year debentures on a two-to-one basis. And with that, I'll turn it back over to Rob.
spk04: Okay. Yeah. Thank you, Todd. I'd like to cover the following areas. Just a reminder about the life-to-date review and then portfolio asset quality and outlook review. So since our IPO in November 2012, we've invested approximately $1.7 billion in over 135 companies and received approximately $1 billion of repayments while maintaining stable asset quality. We paid over $164 million of dividends to our investors, which represents $11.16 per share to an investor in our IPO back in November of 2012. Now turning to the portfolio. We ended the quarter with an investment portfolio at fair value of $714.5 million. This is across 70 portfolio companies, and this is up from $653 million across 66 companies at year end. During the first quarter, we invested $93.4 million in seven new and eight existing portfolio companies and received $33.6 million of repayments, which again results in a growth of about $60 million for the quarter. Our portfolio continues to be weighted towards secured lending at floating rates. At March 31st, 95% of loans were secured and 93% were at floating rates. That's now 86% of the loan portfolio's first lien or unit tranche. We continue to maintain good diversification across the portfolio. Our average investment per company is $10.2 million, and the largest investment is $21.6 million, both at fair value. And 65 of the 70 portfolio companies are backed by a private equity firm. Overall, our asset quality is stable at a 2 on our investment rating system or on plan. 17% of our portfolio is rated a 1 or ahead of plan. And about 8% of the portfolio is marked in an investment category of 3 or below, which is below plan. And finally, in total, we have four loans on non-accrual, which comprise 1.8% of fair value of the loan portfolio. Now turning to Outlook, beginning in the fourth quarter of last year, we began to see a significant increase in our actual pipeline. And as mentioned previously, since quarter end, we've funded another $19 million in cost for two companies. We have received one repayment since quarter end of $14 million. And probably maybe more importantly, we've identified potential fundings of approximately $75 million that we could very well find by the end of this quarter we're in. And we're not aware of any substantial repayments in the next 30 to 60 days. With that, I'll open up for questions. Thank you. And Katie, you may begin the Q&A session, please.
spk00: Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off. to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question will come from Christopher Nolan with Lamberg-Thalman.
spk01: Hey, guys.
spk04: Yeah, good morning, Chris.
spk01: Hey, Chris. What do you guys are thinking about using this excess cache for in the second query, just keeping it for potential investments or should we expect paydowns of the facility?
spk04: Yes. So, uh, Chris, uh, most of the cash that we had at quarter end, uh, is in the SBIC licenses one and two. And so, um, one in the case of the first license from payoffs that will be reinvested in the case of the second license from the ventures that we've drawn. So we would expect, um, I think likely all of that to be invested by June 30. Gotcha.
spk01: And Grupo HEMA, if I'm correct, you have two investments with them on non-accrual, a new first lien investment as well as a second lien investment, which has been non-accrual for a long time. What is your outlook for Grupo? I know it's been a problem child for a while.
spk04: Yes, so this is a Puerto Rican hospital system. I think you know that. And so obviously a troubled situation has been for a good while. We put the loan, the first lien loan on non-accrual in the first quarter. And as you said, the second lien has been on non-accrual for some time. We have the second lien marked at zero, and I believe the first lien is less than 50 cents. So probably it would be resolved in the next 12 months or so, but fortunately it's a very small position relative to the total portfolio.
spk01: Gotcha. That's it for me. Thanks, guys.
spk04: Yeah. Thank you, Chris.
spk00: Thank you. Our next question comes from Robert Dodd with Raymond James.
spk03: Good morning, Robert. Hi, guys. Good morning. On another non-agreement question, I can't remember the name. It's commercial lighting companies. that appears to be a new non-accrual. Is that kind of, you know, legacy COVID issues kind of finally flowing through to necessitate a non-accrual? Could you give us any – or is it a new event at that company? Any color you can give us on that would be appreciated.
spk04: Sure, sure. And as you know, we typically – for these private companies for privacy reasons, don't, don't say a lot, but I'd say, um, let's COVID related it, you know, a little bit of challenges with it over time. It's a structural issue about the non-accrual. Um, but if it's helpful, we think that the ultimately we should do fine there. It's a well-sponsored, um, well-sponsored company.
spk03: Um, just to, has the sponsor, um, put in additional capital over the last 12 months?
spk04: The sponsor has done all the right things there, yes.
spk03: Okay, got it. Perfect. Thank you. Just then, I'm obviously seeing a lot of activity and incremental, considerably more potentially closing in the remainder of this quarter. What, since kind of Q4... With all this activity, what have you seen on the terms front for those and maybe what do terms look like in the very early stage companies, early stage in terms of early stage in your pipeline that you're looking at today versus things that you looked at maybe in Q4 and have closed already? Mm-hmm, mm-hmm.
spk04: Yes, so I'd say, Robert, characteristics would be very similar. So I don't think it's changed materially since the fourth quarter. So arguably it was some pent-up demand after the second and third quarters were relatively slow for everyone. So I think it's a continuation of what we saw in the fourth quarter. And again, as you heard earlier, so pretty robust second quarter expected for us. So I think the good news is that the underwriting and selectivity that we've always had is the same. And so on average, these companies have 45 to 50% equity checks below us, so in terms of the overall capital structure. And the leverage quotients are the same as we've always done, typically in the low four times, kind of an average leverage. The one difference, though, and I mentioned this on our last call, is we're finding more SBIC qualifying opportunities, which is very helpful because of our second license. And as a result, the EBITDA of the businesses would typically be a little bit less. So, you know, perhaps in the high single digits, 10 million to 12 million versus an average that might be more like 15 million in non-SBIC qualifying. So, but all have covenants, all are properly structured, All of the transactions that we've been closing have private equity sponsorship with firms that we know well. So I think that's the good news, just a continuation of our normal business and a lot of very interesting activity. And these are typically businesses that we expect quite a bit of growth from, which is helpful in two ways. One, in that they therefore would, if the company meets their plan, they'll likely deliver in both absolute and relative terms over the first couple of years. So a nice turnover of capital. And then in turn would make their equity co-investments valuable. So again, I think the only good news, I mean, the good news is that very active, more SBIC than not, and using our lower cost capital base as a result.
spk03: Got it. Thank you.
spk04: Yeah. Yeah. Thank you, Robert.
spk00: Thank you. Our next question comes from Ryan Lynch with KBW.
spk05: Hey, good morning. Thanks for taking my questions. The first one I had was, you know, if I kind of, I'm glad you kind of mentioned some of your performance longer term, because, you know, if I look back at kind of your portfolio construction over the last several years, it's, It's changed pretty dramatically. At one point a few years ago, you guys were running with almost 30% first lien debt investments, and now it's closer to 80%. And you had a portfolio yield in the 11% to 12% range, and now that's 8.3%. So you've seen a much, I would say, a pretty significant de-risking of the portfolio as far as where you are in the capital structure as well as, you know, the portfolio yield standpoint. So I'm just curious, you know, as we, you know, start to come out of COVID and the economy, you know, starts to recover, should we expect any sort of, tilt back into the portfolio from a risk standpoint to move, you know, to reduce the first lien exposure, to try to increase the portfolio yield at all? Or is this sort of the new normal of how you guys want to operate the BDC?
spk04: Yeah, thank you, Ron. That's a really good question. And I think the statistics you indicated there go back quite a ways. So maybe close to our inception seven when one personally would have been much lower. So I think it's probably the latter that this is our investing philosophy and style today and not expecting to change it materially.
spk05: Okay. And then last that I remember, on my notes kind of talking with you about the leverage, you kind of talked about running regulatory leverage closer to one-to-one as kind of a target and maybe total leverage of, you know, upwards to two-to-one potentially. I'm just wondering, is that where you guys are thinking post-COVID or any sort of update you could just give on where you guys see operating from a leverage standpoint, kind of post-COVID, both from a regulatory standpoint or a total standpoint, however you guys are thinking about it.
spk04: Sure, Ryan. Those are still good numbers. So one-to-one on a regulatory test and two-to-one on a gap test, which includes the SBIC debentures. So don't expect that to change materially. You know, there's a good argument that on the – Perhaps both fronts because of the nature of the first lien portfolio that we could operate at a little bit higher leverage. So you may see us have that creep up, you know, could be 1.1 or so on the regulatory side, but not materially higher.
spk05: Okay, understood. That's all for me. I appreciate the time today. Thanks. Yeah, thank you very much, Ryan.
spk00: Thank you. That concludes today's Q&A. I would now like to turn the call back over to Mr. Ladd for closing remarks.
spk04: Okay, great. Well, thank you, everyone, for being on the call. Thank you very much for your support of the company, and we'll look forward to speaking with you again in early August when we report the second quarter results. Thanks again.
spk00: This concludes today's call. Thank you for your participation. You may now disconnect.
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