This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: 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 third quarter 2021 results conference call. At this time, all participants have been placed on a listen-only mode. The call will be open for question and answer session following the speaker's remarks. This conference is being recorded today, Friday, October 29th, 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.
spk06: Yeah, thank you, Katie, very much. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30th, 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.
spk04: 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.stelliscapital.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 Lang.
spk06: Thank you, Todd. I'm pleased to report another solid quarter in which we covered our dividend, increased net asset value, received realized gains of $7.9 million, and maintained stable asset quality. In addition, as a result of our continued dividend coverage, our board increased our regular dividend to an aggregate of $0.28 per share beginning in the fourth quarter. We have continued to see many interesting opportunities, and as a result, funded $60 million on a cost basis during the third quarter. Since year end, we have originated $245 million of new investments, and our portfolio has increased by $128 million, net of payoffs $787 million on a cost basis. We'll begin by discussing our operating results, followed by a review of the portfolio, including asset quality, and then our dividend strategy and outlook. And Todd will now cover our operating results.
spk04: Thank you, Rob. For the quarter ended September 30th, 2021, we covered our dividend of 27 cents per share with core net investment income of 31 cents per share. Gap net investment income was 21 cents per share, which includes capital gains incentive fees of $1.7 million related to our realized and unrealized gains during the quarter and income tax expense related to our spillover income. We generated realized gains of $7.9 million related to the realization of an equity investment and unrealized gains of $2.1 million related primarily to the appreciation of our equity co-investment portfolio. During the third quarter, our board declared a regular dividend of an aggregate of 27 cents per share, an aggregate 3 cents per share of supplemental dividends, and the fourth quarter dividend of an aggregate of 28 cents per share. The early declaration of the fourth quarter dividend was required in order to complete the distribution of spillover income from 2020 in a timely manner, consistent with maintaining our qualification for taxation as a regulated investment company and to eliminate our liability for corporate-level U.S. federal income tax. Despite this additional accrual in the third quarter, net asset value increased during the quarter to $14.15 per share. I'd like to note that these distributions constitute all remaining distributions for the year, so our fourth quarter net asset value will not be further reduced by distributions paid in the fourth quarter. We continue to recycle capital in our first SBIC license and deploy the low-cost adventures in our second license. Of the $100 million of adventures in our second license that have pooled so far, the all-in cost is approximately 2.5%. To date, we've committed the full $87.5 million of equity to SBIC II, our second license, and have funded $70 million of that commitment. We have drawn $100 million of the $175 million of the ventures that will be available when equity is fully funded. And with that, I'll turn it back over to Rob. Okay.
spk06: Thank you, Tom. I'd like to now cover the following areas, life-to-date review, portfolio and asset quality, dividend policy, and outlook. So, live today review. So, I always like to remind us of this. So, since our IPO in November 2012, so just reaching our ninth anniversary, we've invested approximately $1.9 billion in over 143 companies and have received approximately $1.1 billion of repayments while maintaining stable asset quality. We've now paid over $180 million of dividends to our investors, which represents $11.99 per share to an investor in our IPO in November of 2012. Now turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $786 million across 74 portfolio companies, up from $653.4 million across 66 companies at calendar year-end. During the third quarter, we invested $60.5 million in four new and 10 existing portfolio companies and received $67.4 million of repayments. Overall, our asset quality is stable at a 1.9 on our rating system or on plan. 23% of our portfolio is rated a 1 or ahead of plan, and 13% of the portfolio is marked in an investment category of 3 or below plan. In total, we have four loans on non-recrual, which comprise 1.1% of fair value of the loan portfolio. Now I'd like to talk a little bit about dividends. In addition to our regular dividend of 28 cents per share in the aggregate for the fourth quarter, we are today declaring a dividend for the first quarter of 2022 of six cents per share in the aggregate, or two cents paid per month. This additional dividend is based on the significant realized gains income we are generating from our equity portfolio. This is the realized gains both from Q3 and currently expected for Q4. Looking forward, we expect to continue this six cent dividend each quarter for the foreseeable future. So when you combine the current dividend of 28 cents per share per quarter and the additional six cents per share per quarter, our shareholders will be receiving an aggregate of 34 cents per quarter of dividends. At this rate, we'll be back to the pre-COVID level of $1.36 per year, which as a reminder is a 9% return on our IPO price of $15. Now just turning to outlook. Beginning in the fourth quarter of last year, we began to see a significant increase in our actionable pipelines. which continues through this fourth quarter. We do expect meaningful repayments over the balance of this quarter, but we expect those to be at least offset by new fundings. And then just to note that these potential repayments should generate additional fee acceleration income, as we saw in the third quarter. And we're now expecting, or possibility, but expecting realized equity gains of as much as 7.5 million in the fourth quarter. And with that, we've concluded our remarks and we'll open up for questions.
spk01: 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 1 to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question will come from Ryan Lynch with KBW.
spk03: Good morning, Ryan. Hey, good morning. Thanks for taking my questions. The first one I had, I mean, there was a pretty substantial increase in total revenues this quarter, $17 million versus the $15.1 million in the previous quarter. And portfolio was actually heading that repayment. So What I wanted to get a sense of is what sort of level, and now I know you had big, very strong net originations in Q2, so maybe some of that's finally flowing through, getting a full impact in the third quarter. But what I'm trying to get a sense of is what was the level of accelerated or one-time fees or OID that you recognized in the third quarter that And how does that compare, you know, based on what you guys are, kind of an average of what you guys have historically received?
spk06: Yes, good question, Ryan. So in the third quarter, the fee acceleration was approximately $700,000. And in previous quarters, it would have been a fraction of that because there were, you know, relatively few repayments. Okay, so there was only around... I was going to say the quarter was benefited from just what you said, a full quarter where we were operating at a higher portfolio level as compared to the first two quarters, and then two from early repayments, meaningful fee reclassification. Not very little of it. In fact, I don't think there was any actual call premium just given the duration of how long we've held the loans. It was just the early OID, if you will, was coming back upon the repayment.
spk03: Okay. Okay. So it's a $700,000 kind of acceleration versus very little in the past. So that kind of brings me to my next question. This quarter, you guys broke above the upper end of your incentive fee hurdle range. and actually broke out of that range. Would you anticipate that you guys would fall back within your incentive fee hurdle range going forward? And that will be kind of what you guys will operate within on a consistent basis besides sort of one-off quarters of popping out like we saw in the third quarter? Or do you guys expect to get above that hurdle range on a consistent basis going forward?
spk06: Yes, and this came up last quarter. So I'd say that we'll likely operate in the range and then quarters where we have these early repayments. You may remember that we had nominal repayments during COVID and then coming into this first part of the year. We did expect the second half of the year those repayments would pick up. And as I said earlier, we're expecting a number in the fourth quarter that we're now in. So it's possible we'll operate above the range in the fourth quarter, but I think on a normalized basis we'll probably be in the range on the catch-up.
spk03: Okay, understood. And then just one last one for me, then I'll hop back in the queue. You mentioned $7.5 million of potential realized gains could be recognized today. in the fourth quarter. I'm just curious, is all of that already previously been recognized as an unrealized gain in your portfolio, or could there actually be further gains if you guys actually do recognize those?
spk06: Yes, Ryan. So if they came in, the delta between expected proceeds and now valuations is about $2.8 million. Yes. So if they all came in, you'd see all things being equal and increase in NAV by 2.8 million.
spk03: Okay, perfect. That's all from me. I appreciate the time today and a nice quarter.
spk06: Yeah, thank you very much, Ryan.
spk01: Thank you. Our next question comes from Christopher Nolan with Ladenburg-Ballman.
spk08: Hey, guys.
spk01: Good morning, Chris.
spk08: Hey, Rob. Rob, the $0.06 supplemental dividend, if I understood correctly, starts in the first quarter of 2022 and should be a regular quarterly event going forward?
spk06: Yes, that's the plan.
spk08: Okay. And then the $0.2 million in excise taxes in this quarter, why didn't you guys just do a distribution just to – get into the distribution so you can avoid that.
spk06: Yes, so this is approximately our run rate, and that's based on the $20-plus million of spillover that will continue to spill over for the time being. So we'd have to pay all of it out to eliminate that.
spk08: Gotcha. And, Todd, do you have an exact number for the spillover income at September 30th?
spk04: I'd say, well, you know, spillover from last year was about $21 million. So, you know, that may move around just depending on, you know, kind of how things are ultimately classified and so forth. But I would, you know, Chris, assume it's about $21 million.
spk05: And total spillover. Great. Thanks, guys. Thank you, Chris.
spk01: Thank you. Our next question comes from Robert Dobb with Raymond James.
spk07: Good morning, Rob. Good morning. First, you gave some color. Obviously, you expect repayments. It's a really active market out there, but you expect to at least equal them in deployments. On the deployment side right now with that competitive market, are you seeing any shifts in dynamics? I mean, is it Is the SBIC-sized type assets, or are those, you know, that's where you've got capital, but are those just more attractive as well? Or any dynamics about different parts of the market that you plan that you can give us color on?
spk06: Sure. So we continue to see a number of interesting SBIC qualifying opportunities. And now we're seeing some that are larger companies that would not qualify. So I think we're seeing good activity on both fronts. We just went through the pipeline with our teams this morning, and very robust activity. Some are closer to being finalized than others, but I think you'll see a nice mix going forward of both. If it's helpful, too, that although it is a competitive market, as always, You know, we continue to see proper capital structures where the equity checks are 40 to 50 percent of the capital. Leverage is typically, you know, for us from four to four and a half times. It could be less depending on the company. You know, appropriate pricing and structures and the continued ability to earn equity co-invest. So the market is quite good, competitive, but lots of opportunities for us. both on the SBIC and non-SBIC side.
spk07: Thank you for that. And then just one more sort of on spillover. I mean, if you generate the seven and a half million in realized gains in the fourth quarter, you know, along with the, obviously, almost eight that you generated this quarter, I mean, is any of that shielded either from in blockers against previous losses or anything like that? Because obviously, if not, that accrues to quite a lot of spillover going into next year as well, above the 20.
spk06: Sure, Robert. So very good question. The bulk of the equity gains that we've seen in the third and likely in the fourth are actually in blockers, and so that would not increase the spillover income.
spk05: Okay, got it. Thank you. Yeah, thank you.
spk01: Thank you. Our next question comes from Bryce Rowe with Holdford Group.
spk06: Good morning, Bryce.
spk02: Good morning. Thanks for taking the questions here. I wanted to, I guess, start maybe along the same lines of Robert's questioning there in terms of what you're seeing in the market today. Could you guys kind of describe what you're seeing from a pricing perspective on newer deals relative to some of the activity that might be coming out of the portfolio right now?
spk06: Yes. So I'd say, as you can see from the schedule of investments, the all-in yields that were New investments are, you know, ranging at about an 8% when you include the fee accretion as well. You know, typically LIBOR plus six with a LIBOR floor of one, sometimes a little bit higher. And so repayments and new loans are about the same yield. You know, you could see this 8.3% yield come down just a little bit, but we think we'll be able to maintain it. at least the 8% level. And that pricing has roughly been true now for over a year or so.
spk02: Okay. That's good news. And then maybe you all could speak. We've certainly heard you all talk about kind of the leverage profile of Stellis' balance sheet in quarters past. But any thoughts on how you think about balance sheet leverage now. You've got access to some more SBA debentures through your second license. So just trying to gauge how quickly you might go through that and then how you think about kind of your strategy to fund new investments once you get beyond the available debenture capacity.
spk06: Sure. So I think as a general matter on the leverage profile, we'd like to maintain our regulatory leverage at one-to-one. It could be a little bit higher, 1.1 or so, but around that level. And then including SBIC debentures, we'll certainly get to a two-to-one level, which we're very comfortable with given the long-dated nature of the SBIC debentures. We have, and what's happening now, Bryce, just because of these significant repayments we're receiving, both in our SBIC licenses as well as in our regular way capital at the BDC, a lot of opportunity to recycle capital. So I think you'll see us continue to grow over the next year, but we'll be funding many of the new opportunities with just repayments. And then I'd say, so we do intend to fully tap the second licensed adventures. We currently have a hundred million drawn against the potential of 175. So we intend to draw the balance of that likely in the coming year. And, and eventually, you know, we may have the opportunity to raise additional equity capital and, and you know, to maintain our, our overall leverage profile, we would add leverage to that. But there's plenty of capital currently without raising more equity to operate in. Right.
spk02: Okay. That's good. That's good commentary, Rob. And then maybe just some more questions around the realized gains or the companies that are being exited, the equity investments that are seeing some exits. Can you speak to kind of what's What's driving those decisions? Is it more tax planning, tax-driven? Or is there the potential for a lot of this activity that we've seen, especially in the back half of this year, to persist into next year?
spk06: Yes. So I'd say that it's mostly what appear to be almost pent up demand on the sell side that, you know, during COVID, you know, M&A activity slowed down materially and now it's picked back up. So we would just see it as something that some companies might've sold a year ago, but for COVID and now they're coming to market. It's interesting on the tax side, you know, our tax advisors have indicated that the new tax law relative to capital gains would be effective in September. So any sales now would be covered by the new tax regime. We'll see whether that's the case. So we think this is less tax-driven, given that the rates seem to be going to be moved up retroactively. So it's more just, we think, pent-up demand on the sell side. And I'd say, yeah, we would look out to the next year and expect to continue to see companies be sold Assuming that the market and the individual company performance was good. It's also, Bryce, good to raise this too. This is part of, as you know, from the very start of the company back in 2012, that we've always had this strategy. Not everyone does. In addition to the lending, we like to always buy a smaller piece of equity in the companies we lend money to. And we've thought over time that this would be helpful to our shareholders, and of course it has been. So we're glad to see that these gains have continued, and this is, of course, why we feel comfortable now having additional dividends be paid into next year. We've, of course, declared the first quarter as these have been coming in.
spk02: Got it. Great. Well, I appreciate all the questions or the answers. Thanks.
spk06: Thank you, Bryce.
spk01: Thank you. Our next question comes from Christopher Nolan with Ladenburg-Ballman.
spk08: Rob, given all the moving pieces with the macroeconomic picture, what are you hearing from your portfolio companies? I mean, are they hunkering down to be more defensive or what? I mean, can you just give some sort of a little color on that?
spk06: Sure. I'd say as a general matter, our portfolio companies, which are over 70 today, are performing well. And I think there's a lot of optimism around those businesses and around the economy generally. I know we're all concerned about potential inflation, but all are operating well. We have some portfolio companies that have experienced – labor shortages or wage increases that they're having to work with. And others are dealing with supply chain logistics issues. But these are well-managed businesses with very professional owners and private equity firms and managing through it. So we would be very positive about what our portfolio companies are seeing. and continue to grow and effectively end up delivering as a result. So positive, but, you know, we're always cautious for what's next, and, you know, we continue to be, you know, very selective in our investing, new investing, and, you know, just because we can't predict the future, but we're quite optimistic at this point.
spk05: Great. Thank you. Thank you.
spk01: Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Ladd for closing remarks.
spk06: Okay. Thank you, Katie. And thank you, everyone, for your support over this last nine years. And we look forward to speaking with you in the spring when we'll have the results from the fourth quarter and for our 10K.
spk01: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Disclaimer