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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 first quarter 2022 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. Today's conference is being recorded, Thursday, May 12, 2022. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellis Capital Investment Corporation. Mr. Light, you may begin your conference.
spk04: Okay. Thank you, Kyle. And good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31st, 2022. 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.
spk06: 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 Lev.
spk04: Thank you, Todd. I'm pleased to report solid results in the first quarter in which we grew our investment portfolio, maintained net asset value, covered the dividend, and generated $3.5 million of realized gains. We continue to see many interesting opportunities, and as a result, it funded $75 million on a cost basis during the first quarter. Our portfolio at fair value increased by $65 million, ending the quarter at $854 million on a cost basis. We will begin by discussing our operating results, followed by a review of the portfolio, including asset quality, our dividend strategy, and then the outlook. Todd will now cover our operating results.
spk06: Thank you, Rob. For the quarter ended March 31st, 2022, we covered our regular dividends of 28 cents per share with core net investment income of 29 cents per share. Gap net investment income was 28 cents per share, which includes income tax expense related to our spillover income. We generated net realized gains of $3.5 million related to the realization of an equity investment. Our portfolio valuation, excluding unrealized gain reversals related to our realized gains, was effectively unchanged, declining $1.3 million quarter over quarter. We continue to recycle capital in our first SBIC license and deploy the low-cost adventures in our second license. To date, we've committed the full $87.5 million of equity to SBIC II and have funded $70 million. We have drawn down $140 million of the $175 million in ventures that will be available when the equity is fully funded. And with that, I'll turn it back over to Robin. Okay, thank you, Todd.
spk04: I'd like to cover the following areas now. A life-to-date review, a portfolio and asset quality review, our dividend strategy, and then outlook. So life-to-date review. Since our IPO in November of 2012, we have invested approximately $2.1 billion over 160 companies and have received approximately $1.3 billion of repayments while maintaining stable asset quality. We have paid over $186 million of dividends for our investors, which represents $12.22 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 $838 million across 78 portfolio companies. This was up from $773 million across 73 companies at December 31st, 2021. During the first quarter, we invested $74.5 million in six new and seven existing portfolio companies and received just $10 million of growth at costs of $68.8 million for the quarter. Overall, our asset quality is stable at 2.03 on our investment rating system, or effectively on plan. 86% of our portfolio is rated a two or higher, meaning at or above plan. Thus, 14% of the portfolio is marked at an investment category of three or below. In total, we have three loans on non-accrual, which comprise 0.7% of fair value of the total loan portfolio. Now, turning to dividends. In addition to our regular dividend of 28 cents per share in the aggregate, for the second quarter, our board declared an additional dividend for that quarter of six cents per share in the aggregate, or two cents paid per month. As we discussed last quarter, this additional dividend is based on the significant realized gains we are generating, $23.7 million before tax in 2021, or $1.22 per share, and then $3.5 million in Q1, and expected additional realized gains in Q2. In fact, we have generated net realized gains of $2.8 million since quarter end. Looking forward, of course, subject to Board approval, We expect to continue this combined $0.34 dividend each quarter for the foreseeable future, which I'd note represents, at least based on yesterday's stock price of $13.09, an annualized yield of 10.4%. Now turning to outlook, I'd like to note a few things. First, relative to interest rates, the forward curve for 90-day LIBOR, which remains our principal benchmark rate for this year, reflects an excess of 3% by early next year. This is approximately 2% higher than the LIBOR rate that most of our loans were priced at March 31st. Since 97% of our loan portfolio is floating and only 34% of our funded liabilities are at a floating rate, we should be a significant beneficiary of this phenomenon. In any event, If LIBOR holds at a current level, our portfolio yield should reprice at about 8.2% versus 8% that it was at 331. Now, inflation, rising labor costs, supply chain constraints. Our country is, of course, facing many headwinds, which have been well publicized and which will likely lead to a slowdown in our economy. Our portfolio is well positioned for this eventuality. Over 97% of our loan portfolio companies are backed by private equity firms. The average contributed and rollover equity in our companies is approximately 50%, meaning that our debt is 50% of the capital structure and the owners below us have the other 50%. And 84% of the loan portfolio is first lane unit launch and all loans have covenants. Now, equity gains. Notwithstanding a slowdown in the economy, we expect the equity gains we've been receiving will continue as private equity firms find opportunities to achieve realizations. As noted earlier, we've had 6.3 million of equity gains so far this year. And then finally, up to turn to new investments and repayments. We funded 29 million since quarter end and have one repayment for 14 million since quarter end. we have the potential to increase the portfolio additionally by 20 to 30 million over the balance of the quarter. I would note that we are expecting repayments to be slower this year, at least based on the first four months of the year so far. And with that, I'll open it up for questions. Thank you. And Kyle, you may begin the Q&A session, please.
spk01: Thank you. Ladies and gentlemen, 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, press star one to ask a question. We take our first question from Paul Johnson with KBW.
spk05: Yeah, good morning, guys. Thanks for taking my questions today. Good morning. First question is, morning. My first question is, is just on the pace of deployment. It sounds like you have some net deployment here quarter to date, and I believe your regulatory leverage, you know, not including the SBA debt is a little around one times or 1.1 or so, but gross leverage is much higher. Just hoping to get, you know, maybe a little bit of color on how you guys consider that while you're, you know, making deployments into the quarter if that factors into potentially pulling back on new originations or any sort of insight you might even have into realizations within the portfolio, if that helps.
spk04: Sure, Paul, I'd be glad to. So you're right, the target leverage from a regulatory standpoint is one or a little bit over one to one. On a combined gap basis, it's roughly two, two to one. which includes the SBIC debentures. It's our plan to fully deploy the debentures this year, again, based on activity. And so you could see the portfolio in total approach 900 million from roughly 850 today. So it would be our expectation to fully deploy those debentures so the leverage would take up, but it would come from SBIC leverage, not... not bank leverage. But again, ultimately, that goal is to be low to time. And again, given the portfolio is also principally first-lane unit launch, we're quite comfortable with that. And as you know, the SBIC debentures are 10-year interest-only debentures. So as an example, those that we took out recently in April will not be due until April of 2032.
spk05: Yeah, I know those are very beneficial sources of funding, and that's very good color on that. I appreciate that. My last question is just on just the slight drop quarter over quarter in interest income. I'm just wondering if anything in particular drove that, with rates obviously being higher. I think non-accruals dropped a little bit. Is there anything higher yielding that paid off during the quarter? And those are all my questions. Thanks.
spk04: Yeah, sure, sure, Paul. I'd say the delta between the first quarter of this year versus the fourth quarter of last year was just driven by much fewer repayments. So at very little fee acceleration in the first quarter versus the fourth quarter of last year. And again, it's likely with slower repayments that that may continue at least for another quarter or so. So that's the explanation. And in terms of the yield, So we're still holding, as you see, we reported a debt yield of 8%. We have average LIBOR floors of 1.12%. And at March 31, when most of the loans repriced, LIBOR was just under 1%. Now it's about 1.4%. So through the floors, many of the floors. So that holds to say you should see an uptick at the repricing of June 30, but that won't flow through until the third quarter as the loans reprice on, say, June 30, and then get the impact in the third quarter of this year. Appreciate it. Thank you very much. Okay, thank you.
spk01: Thank you. We take our next question from Christopher Nolan with Ledenberg Thelman.
spk00: Hey, good morning, guys.
spk02: Hey, Rob. I know you mentioned you expect slowing prepayments in the quarter. What are your assumptions in terms of asset quality given the rise in interest rate and the incrementally higher interest burden on your portfolio companies?
spk04: So we don't expect the rising interest rate environment to have a material impact on asset quality. And so again, as I said earlier, if you take the forward curve and LIBOR goes from what had been 1% at March 31 to say 3% in January or March of the year from now, we don't think that's material. What would be material would be 500 basis point increase. So we don't expect that to impact asset quality. But again, there's no question, given the headwinds that we've all been talking about and I mentioned earlier, that this will have an impact on the economy and will impact on a number of companies. But as I said, I think we're well positioned to weather it. But I don't think the near-term interest rate forecast is sufficient to have a material impact.
spk02: Great. And then I guess as a follow-up, what are your private equity partners doing to position themselves for the changing interest rate environment?
spk04: I'm sorry, the changing interest rate environment?
spk02: Yeah, the slowing economy and the rising interest rates. Are the private equity partners actually doing anything that you might notice to position themselves for the changing environment? Sure, sure.
spk04: Well, so a few thoughts. One, you know, the good news is that, you know, almost all of our companies are owned by private equity firms. So, you know, very smart investment professionals in all cycles and certainly are preparing and thinking through, you know, the headwinds ahead. So I think that that would be normal and it's why we have this strategy overall. We've seen a little bit of a slowdown in activity recently. in the first quarter. But there's substantial dry powder in private equity firms. So we do expect they'll continue to be acquisitions occurring throughout the year. But you would think that, again, with these headwinds, that there'll be even more selectivity and perhaps you'll see lower multiples paid for companies. But we're still waiting to observe that. But again, I'd say the most important point about your question, Chris, is how it's very positive for our portfolio to have such smart, able investors backing the companies.
spk00: Right. Thank you. Thank you.
spk01: We take our next question from Robert Dodd with Raymond James. Your line is open.
spk03: Hi, guys. On the expectations for lower prepayments or repayments to persist, is that primarily a function of what you're hearing from the companies, or is it that in this kind of market environment, you don't necessarily see a lot of of repayments or a lot of M&A activity. So it kind of relates to if the market normalized in the second half, maybe, would you expect them to ramp up or is it just you expect it to be low all year just because of what you've heard from portfolio companies?
spk04: Yeah, Robert, so it's a really good question. So allow me to elaborate on what I've said earlier. So I'm basing it just at this point on what we're observing. But at the same time, history would tell us that we're running lower, much lower than normal on repayments. They were unusually higher in the third and fourth quarters of last year and are now unusually low in the first and second quarters of this year. So in a reversion to the mean, we should see some pickup in the third and fourth quarters, but there's only one that we're aware of currently. And so I just wanted to make sure everyone had a sense of that could very well pick up, but it's not as obvious at this point.
spk03: I appreciate that comment. Maybe related, right? I mean, you've had equity gains. I mean, already, you know, $6 million this year. Since a disproportionate number of repayments are usually driven by M&A, which may tie to an equity. If repayments are low... equity gains aren't, right? I mean, they're not zero. Should we spend? Is there a connection? What are your thoughts on that?
spk04: Yes. So then in contrast, so because we have a number of equity co-invest positions where the loan has previously been repaid, I'm really flagging more that those could start to come to fruition. So even though the repayments may slow or are slowing, we have a number of equity co-investments that do not have debt associated with this point and that they are reaching the point where those companies will be sold. So that would be the distinction.
spk03: I appreciate that, thank you. And one more, if I can. Obviously, on the rate sensitivity, what What is the feel so far that you have on pricing in your market? I mean, obviously, you're not at the end of the market you're in with a lot of SBA-eligible assets, et cetera. You're not bumping up against the BSL market that much. But, I mean, what are you seeing on pricing discussions? And do you think rates are going to have – the base rate is going to have an influence on that, or do you think that's not? going to be a huge factor in impacting the spread on your first link.
spk04: Sure. So the first point is you're right. We do not compete with or are tied at all to the BSL market. And so our pricing continues. It's competitive, but our pricing continues to hold where it is currently and have not seen any issues there. You can make an argument if LIBOR then becomes 3 and your spread is 6 and the rate is 9, could you see some impact on the spread? But so far we've not seen that. But LIBOR moving up has just started to happen above 1. Pretty much the market floor right now has been a LIBOR floor of 1. So now we're at 140 or so. But so far no impact on what we're able to to charge it's very competitive but but the pricing is held stable got it thank you yeah thank you robert and that concludes today's question and answer session and i'd like to turn it back to mr ladd for any additional closing remarks okay thank you everyone for of course your support and uh for being on the call today um We look forward to speaking again with you. We'll likely report in late July or early August for the second quarter. Thanks again.
spk01: Thank you. And that concludes today's call. Thank you for your participation. You may now disconnect.
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