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.
spk04: 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's conference call to report financial results for its third fiscal quarter ended September 30, 2022. At this time, all participants have been placed on a listen-only mode, and the floor will be open for a question and answer session following the speaker's remarks. This conference is being recorded today, November 4th, 2022. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stullis Capital Investment Corporation. Mr. Ladd, you may begin your conference.
spk01: Okay, thank you, Alan. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 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.
spk03: 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 Ladd.
spk01: Okay. Thank you, Todd. I'm pleased to report our results in the third quarter in which we grew our investment portfolio to $872 million, maintained asset quality, and notably generated 37 cents per share of GAAP NII. We continue to benefit from the rising interest rate environment as the yield on our loan portfolio has now risen approximately 140 basis points from the end of the second quarter. We continue to see many interesting opportunities, and as a result, have funded approximately $57 million on a cost basis during the third quarter. Todd will begin by discussing our operating results followed by a review of the portfolio, including asset quality, our dividend strategy, and then I'll cover the outlook.
spk03: Thank you, Rob. For the quarter ended September 30, 2022, we covered our total dividends, both regular and additional, of $0.34 per share, with net investment income of $0.37 per share. Core net investment income was $0.35 per share, which excludes income tax expense related to our spillover income and this quarter included a $600,000 reversal of the capital gains incentive fee accrual. Primarily as a result of widening credit spreads during the quarter and some write downs on specific positions, our portfolio valuation declined $4.8 million quarter over quarter. However, we had $1.5 million of net realized gains from realizations in our equity portfolio. I'd like to now cover the following areas, our life to date review, portfolio and asset quality, and dividends. Since our IPO in November 2012, we've invested approximately $2.2 billion in over 775 companies and received approximately $1.3 billion of repayments while maintaining stable asset quality. We've paid over $202 million of dividends to our investors, which represents $13.01 per share to an investor in our IPO in November 2012. We ended the quarter with an investment portfolio at fair value of $872 million across 89 portfolio companies, up from $852 million across 83 companies at June 30, 2022. During the third quarter, we invested $56.9 million in seven new and 19 existing portfolio companies, all of which were first-lane Unitranche, with a weighted average yield of over 10%. In addition, we received $34.2 million of repayments for net portfolio growth at cost of $25.5 million for the quarter. Overall, our asset quality is stable at a two on our investment rating system or on plan. 82% of our portfolio is rated a two or higher, meaning at or above plan. Thus, 18% of the portfolio is marked in an investment category of three or below. In total, we have four loans on non-accrual, which comprise 2.5% of fair value of the total loan portfolio. This is effectively unchanged from four loans on non-accrual at June 30th, which comprise 2.8% of fair value. With respect to dividends, in addition to our regular dividend of $0.28 per share in the aggregate for the fourth quarter, our board declared an additional dividend for the fourth quarter of 2022 of $0.06 per share in the aggregate, $0.02 paid per month. As we discussed last quarter, this additional dividend is based on the significant realized gains we are generating, $23.7 million in 2021, or $1.22 per share, $4.7 million year-to-date in 2022, and expected additional realized gains in the fourth quarter. This combined 34-cent dividend each quarter represents, based on yesterday's stock price, a close of $13.36 per share, an annualized yield of 10.2%. And with that, I'll turn it back over to Rob to cover the outlook.
spk01: Okay, thank you, Todd. Looking ahead, our outlook is very positive as we see an increasing net investment income and return on equity profile. It appears that higher interest rates are here for the foreseeable future. Our largely floating rate investment portfolio, coupled with our largely fixed rate liability structure, should mean an NII per share in excess of our regular dividend and the additional dividend program, which we have had in place for now a year. As a result, we expect that in January we will combine the regular and additional dividends into a regular dividend of 34 cents per share for the quarter, which is a 21% increase in the regular dividend. Further, assuming that our benchmark pricing rates, LIBOR and SOFR, stay at their current levels, if not rising, we would likely look at raising the new regular dividend in January to a level above the 34 cents per share, more to come in January on that. Relative to equity gains, notwithstanding a slowing economy, we continue to see the benefit of equity gain realizations. As noted earlier, we've had 4.7 million net realized gains this year through September 30th and expect more in the fourth quarter. With respect to new investments and repayments, we've had a very productive year for new investments with less than normal repayments, as you've heard on previous calls. However, repayments are now picking up. As a result, we would expect repayments for the balance of the quarter to approximate new fundings. And Ali, we will now open up for questions and answers.
spk04: Thank you. The floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Thank you. Our first question is coming from Paul Johnson with KBW. Sir, please ask your question.
spk00: Yeah, good morning. Thanks for taking my question. My first question is kind of wondering about your portfolio and kind of how you're thinking about, I guess, EBITDA performance year to date as well as Other fundamentals, just kind of like interest coverage, that sort of thing. As you're getting updates on your portfolio companies here more recently, how does that compare, I guess, to the prior year? Yeah, and just any commentary on your portfolio companies would be helpful.
spk01: Sure, Paul. Thank you for joining this morning. Relative to EBITDA performance across the portfolio, we actually have a slightly improving profile as we go through the year, so no concerns there. Certainly with higher interest rates, interest coverage will drop some, but we think that the amount of increase is not material relative to people's ability to pay. So, so far, we've seen, as Todd reported, a stable portfolio, stable performance, always company-specific issues. So, portfolio is in pretty good shape.
spk00: Got it. Thanks for that. And then I'd just ask you as far as maybe what you're seeing in the middle market in terms of just spreads and terms in the deals that you're seeing, if there's been any market improvement there that you expect to potentially take advantage of, given the level of repayments coming in over the next quarter or so.
spk01: Sure, sure. You know, we're very active. There's been a little bit of a slowdown, but we're finding private equity firms who have significant dry powder are continuing to be acquisitive. Pardon me. In terms of the terms of deals, they're pretty much the same as they've always been, typically seeing equity checks of approximately 50% of the capital structure, important covenants. I'd say that spreads and pricing have maintained fine. our normal fee structures. So I'd say not a material change and probably seeing a slight improvement. We've certainly noticed in the upper middle market higher pricing, and that's starting to translate into where we operate more in the lower middle market. But no big change. Same business we've been running and expect to be busy again in 2023.
spk00: Appreciate that. My last question, I think you've been pretty clear over the last few years as you've shifted the portfolio to more senior secured assets. Obviously, probably not a high demand for junior capital at the moment, but there may come a time, obviously, as we move through the cycle where that begins to potentially look attractive again. I'm just wondering if that's... potential opportunity that you're looking at of increasing exposure once again to junior capital type of loans in the future or if you're looking at more just kind of state of course with what you've been doing with mainly just senior secured portfolio?
spk01: Sure, Paul. So you're good to note that strategic shift. So that will continue. We're not interested in junior capital. Occasionally there might be something of interest for the sponsor. We know really well, but I'd say that think of us going forward, as was evidenced in this quarter, we're all in the first-lane unitronch mode.
spk00: I appreciate it. Thanks, Rob. That's all for me.
spk01: Yeah, thank you, Paul.
spk04: Thank you. Our next question is coming from Christopher Nolan with Ladenburg Thalmann. Please go ahead.
spk01: Good morning, Chris.
spk02: Rob, are there any industry sectors which you guys are sort of emphasizing more now, given the change in the interest rate environment and less than others?
spk01: You know, Chris, the approach we take to investing, which we've had really from inception, is really looking for significant free cash flow generating businesses that also have a growth profile. And as a result, which means low maintenance capital expenditures. And so that's what we'll continue to focus on. And yes, they do well in a rising interest rate environment in that they can manage or they can certainly handle an increase in the base interest rate. So I'd say no change from the past, a continued focus on significant free cash flow generating businesses.
spk02: Great. And then as a follow-on to your comments in terms of increasing the base dividend starting in January, were your comments about the NII covering the dividend, would that extend into 2023 given what you guys can currently see in terms of the outlook?
spk01: Yes. So I'd say a couple of things. One, as I indicated in the remarks, that It is clear now, given our asset liability mix, that we have the NII to more than cover the combined dividends. So we're going to go back to a regular dividend of our original $0.34 per share per quarter, $1.36 a year, and, of course, paid monthly. So this is kind of the starting point. And then given that rates have even increased since 930, and if that holds, it would indicate earnings potential greater than that, always subject to any additional non-accruals, but we don't expect those to be material. So if that holds out, we're going to have the capacity to essentially pay a higher regular dividend, but we'll start with a new regular dividend of 34 cents a share. in January, payable monthly, and this would, of course, subject to board approval.
spk02: Final question. Should we expect more volatility on NAV per share, given the higher discount rate use and free cash flow valuations and also the differences in how different companies handle the higher interest rate load?
spk01: Yeah, not expecting a material change there. Obviously, if you get a real widening in the spreads, that's the most impactful impact. You will have a higher discount rate in a higher interest rate environment. But remember, offsetting that is the higher forward coupons that are coming in as the cash flows. So I wouldn't expect the higher interest rate environment on a model to be impactful. It would be the spreads if they widen more. And it would be more company specific performance. Great. That's it for me. Thank you. Yeah. Thank you very much, Chris.
spk04: Thank you. Our next question is coming from Sean Paul Adams with Raymond James.
spk05: Please go ahead. It looks like a part of my question is already touched on, but, um, It looks like you guys have the highest net interest margin exposure to base rates from any BDC under coverage, especially among the peers. So I just wanted to get a little bit of your outlook on base rates for 2023.
spk01: Yes. And sorry, Sean, just to clarify, the base rate of our investment portfolio?
spk06: Yes.
spk01: Yes. So the LIBOR rate, so we still have a majority of the loans on LIBOR as a base rate. the, you know, some, some new loans are still under SOFR, but those rates are basically over 4% today. They were under 4% at 930. And so if you, if we just follow the forward curve, you're going to have a higher, um, rate than that in 2023, which is the market's best estimate. But what I'm describing is really just take the current rate, um, LIBORs in the mid fours, SOFRs in the low fours. And, um, That would be our assumption for 2023. Thank you. And one thing that you've noted, Sean, is that what we're also benefiting from, if you think of our liability structure, roughly $200 million of kind of average bank borrowings, which are floating, but the rest of the liability structure is roughly $300 million of SPIC debentures that have an all-in cost in the low 3s. And our notes, which were issued in March of last year, and they have a coupon of four and seven-eighths. So this is where we're really, you're going to see a meaningful increase in the margin as a result of this asset liability mix. And roughly 97% of our loan portfolio is floating.
spk05: Got it. Thank you, guys.
spk01: Yeah, thank you.
spk04: As there are no further questions in queue at this time, I would like to turn the call back over to Mr. Ladd for any closing comments.
spk01: Okay. No, thank you very much, everyone, for joining. Thank you for your continued support, and we look forward to speaking with you in the new year. Take care.
spk04: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. And we thank you for your participation.
Disclaimer