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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 third fiscal quarter ended September 30, 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, November 8th, 2023. 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.
spk03: Okay, thank you, Holly. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30th, 2023. 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 the telephone number and pen 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 any 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. This time, I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.
spk03: Okay, thank you, Todd. Todd will now cover our operating results, life-to-date review, and portfolio and asset quality.
spk02: Thank you, Rob. In the third quarter, we more than covered the dividend of $0.40 per share with gap net investment income of $0.47 per share. Core net investment income was 49 cents per share, which excludes estimated excise taxes and the impact of capital gains and Senate fees. Net asset value per share was lower as a result of some unrealized losses in our investment portfolio. These were company-specific, and we don't believe are indicative of overall asset quality. Net investment income exceeded the dividend by $1.5 million, but we also issued additional shares of $21.5 million on a net basis, all at or above net asset value. From a life-per-day perspective, since our IPO in November 2012, we've invested approximately $2.4 billion in over 191 companies and received approximately $1.5 billion of repayments while maintaining stable asset quality. We have paid over $233 million of dividends to our investors, which represents $14.55 per share to an investor in our IPO in November 2012. We ended the quarter with an investment portfolio at fair value of $886 million across 96 portfolio companies, up from $882 million across 93 companies at June 30, 2023. During the third quarter, we invested $44.1 million in six new and six existing portfolio companies, and along with additional fundings of $4.7 million, and received two full repayments totaling $21 million and $15 million of other repayments, resulting in net portfolio growth at cost of $4.7 million. At September 30th, 99% of our loans were secured and 97% 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. Overall, our asset quality is below a rating of two, therefore slightly better than planned. Twenty-five percent of our portfolio is rated a one or ahead of plan, and 14 percent of the portfolio is marked in an investment category of three or below. Currently, we have five loans on non-accrual, which comprise 1.6 percent of the fair value of our total loan portfolio. With that, I'll turn it back over to Rob to discuss dividends and the overall outlook.
spk05: Okay.
spk03: 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 in order to generate realized gains sufficient to offset losses over time. While we've had modest equity realizations so far this year, we expect this activity to pick up over the next six to 12 months. As of the end of the quarter, we have 57 million of equity investments at cost that were marked at 66 million. Our historical performance would indicate that the ultimate realization for this portfolio could 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. We are well positioned to benefit from the higher interest rates as our portfolio is over 97% floating rate and our liability structure is approximately 65% fixed rate. As a reminder, as we are now in the fourth quarter, the November dividend is paid on December 15th and the December dividend is paid on December 29. Looking forward to Q1 of 2024, 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 quarter. It's worth noting that based on the average price of our stock over the last 10 days ending yesterday, Our current dividend equates to an annual yield of 12.5%. Now turning to Outlook. Since quarter end, we have funded $3.2 million at par in five existing portfolio companies and have received one repayment of $400,000. This brings our total portfolio to approximately $888 million at fair value with 95 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 year will be offset by expected repayments of approximately the same amount. As a result, we estimate we'll end the year flat quarter over quarter. Now, with that, I'll open it up for questions. Thank you, and Holly, you 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 two 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 coming from Christopher Nolan at Ladenburg-Zellman. Hey, guys.
spk06: The increase in non-accrual assets, what is the thinking? Given the broader economy, is the inclination to work through these or to try to exit them?
spk03: Chris, good question. It has been our mode for now almost 20 years that we work through things versus sell them off. That would not change. Continue to work through problems and And ultimately, we found the realizations are better overall that way.
spk06: Okay. And then, Rob, what is the thoughts on leverage? You're already covering the dividend. Is the thought to keep the leverage low, take the excise tax hit, or just to increase leverage? How are you thinking about it?
spk03: Sure. So we have reached a point on leverage based on leverage equity issue under the ATM program and some repayments where we're less levered than normal, we target the regulatory leverage to be at one to one or so. We're now, I believe, about 0.8 or so to one. So we would expect the leverage to tick back up to one to one and have a more full portfolio, which we think is a good position to be in.
spk06: Final question. In your comments, you mentioned the first quarter 24 dividend of 13 cents per share per month. Did you mean fourth quarter 23 or?
spk03: Yeah, no. So what I was referring to is we're now we've declared the dividends for the fourth quarter of this year. So just to indicate that based on the performance of where we're headed, we would expect that dividend to continue on to into the first quarter of next year. Again, subject to board approval.
spk06: Great. Thank you for the clarification.
spk05: That's it for me. Yeah. Thank you. Thank you, Chris.
spk00: Your next question for today is coming from Robert Dodd with Raymond James.
spk05: Good morning, Robert.
spk07: Good morning. I just want to ask you about ArborWorks. Obviously, last quarter you told us you were going to put it on the quote, which you did. And it's a pretty large chunk of the unrealized appreciation this quarter, so I presume you're working for it. But you've also then in October made a small – couple hundred thousand dollar um follow-up can you give us any is that is that working capital is that part of the the work it through process or is that that the sponsors stepped up and put in equity and and you put in a little bit of debt as well can you give us any any any color on that since that was you know one of your biggest moves this quarter sure uh yes so this uh again as you know we
spk03: We really limit our discussion about private companies, you know, for competitive reasons. But I would say this is the normal working through a situation with the sponsor who's been supportive and where there's some modest additional funding on both sides.
spk07: Got it. Got it. Thank you. Owen, just looking to your point on the equity co-invest potential realizations over the next year, can you give us – So what kind of market environment needs to be going on for those realizations to occur, and what would that mean more broadly for the rest of the portfolio to that point, maybe getting the leverage back up to your target? Are those two things just intrinsically related, where you couldn't have the realizations without portfolio growth, or what are your thoughts there?
spk03: Yes, so maybe take them separately. In terms of portfolio growth, again, as I indicated in my remarks, that we have seen a slowdown, and I think others are experiencing this, but at the same time seeing very interesting opportunities that our pipeline is growing. Just a matter, we're very selective, as you know. So I would expect you'll see continued portfolio growth. We're targeting to take the, eight 88 or so up to at least nine 50, um, based on activity over the next six months or so. Um, and then in terms of equity realizations, you know, your point's a good one. So the, the equity overall public equity markets have been somewhat muted lately thing to be rallying the last few days. Uh, so this certainly drives, um, uh, exits, but it's, they're typically not to a public offering. but rather it just influences market multiples. So we found that the equity realizations are more company specific and tied to what the private equity firm is able to do with the platform and now has achieved the time where the significant EBITDA growth and they're exiting the position. So although it's become a little bit muted, we would expect it to pick up in part, Robert, just because of the vintage of some of our portfolio. that and one thing I didn't mention the remarks is we went back and studied the history of the equity co-invest portfolio and looks like on average they're they're they're realized in just over four years so we have some positions that are longer than that which are drive eventually from historical math that that we'll be having some coming up again in the next year or so so I say they're different they're different And of course, you know, the cash that would come from the realizations would be very helpful because it's not earning a coupon. So we would, of course, reinvest the cash that came in from realizations into principally the loan portfolio. And again, with about a 5% typically co-invest that's attached to each new loan.
spk07: Got it. Thank you for that, Colin. Appreciate it.
spk05: Yeah. Thank you, Robert.
spk00: Your next question is coming from Paul Johnson with KBW.
spk04: Good morning. Yeah, hey, guys. Hey, thanks for taking my questions. On your comments on your internal credit rating on the portfolio, I just want to make sure I'm clear. I think you said 14% was rated 3 or below, I think rated 3 or 4. Is that on cost basis or is that on fair value?
spk03: Yeah, Paul, all of those are based on fair value. Gotcha.
spk04: So I would assume, obviously, that includes non-accruals on that list. I mean, is it fair? I guess, are you able to offer any other color on any other portfolio that kind of falls into that bucket in terms of performance kind of outside of the non-accruals, I guess, that are included in that number?
spk03: You know, I would say that the percentage there is about normal over time. So not anything, as Todd said earlier, not that would indicate a broader concern about the portfolio. So we always have a number of, a handful of risk grade threes that we consider somewhat like on our watch list that we're working through. So not any material difference than in the past. Okay, got it.
spk04: And then I guess from your, you know, the, you know, performing part of your portfolio, you know, what have you guys seen so far in terms of, you know, amend and activity, you know, relief requests? Is there been any sort of instances of, you know, amendments just for credit relief and trends that you're seeing there that are notable?
spk03: Yes, so I'd say that, you know, very few requests in that way. Now, there's no question that as nominal interest rates have come up roughly, depending on the floors, but roughly 400 plus basis points. So all companies are bearing that difference in interest expense that they didn't have a couple of years ago. So I think it's reduced, but companies' cash flows, but not in a material way that's affected performance. So when we have something that's Again, a risk rate three or below. It's really company-related specific performance versus a macro. Gee, we just can't cover the interest expense. And just as a reminder, you know, we do have the flexibility, which is part of your question, I think, that if we got rates too high, we could certainly pick some part of the interest, knowing that we'd ultimately collect that upon a refinancing or a sale. So I'd say not... not a broad-based issue in the portfolio, and we're certainly trying to be flexible when there's a need, but we've had very few requests that have come just from interest rates increasing.
spk04: Got it. Thanks for the color.
spk05: It's all for me. Yeah, thank you, Paul.
spk00: Your next question is coming from Bryce Rowe with B Reilly.
spk01: Thanks. Good morning. Hi, Rob and Todd. Good morning, Bryce.
spk02: Good morning, Bryce.
spk01: Good morning. I wanted to just clarify, maybe with Chris's question about leverage and your prepared remarks, too. I mean, clearly you're comfortable operating at one-to-one from a regulatory perspective. You've been active with the ATM, and I think in the second quarter, not third, you subsidize some of the offering expense to achieve NAV. Just curious, you know, in this current backdrop, are you still interested in raising equity, you know, on the ATM over the short term despite that one-to-one, you know, regulatory leverage target that you kind of have had over time? Thanks.
spk03: Sure, sure. I'd say, you know, we're certainly – always interested in raising equity if it's positive for the company. But given our current leverage position, I think you'd find us more of investing the capital than issuing new shares. But again, we would be open-minded and would look at that each quarter as the opportunity presents itself.
spk05: Okay. That's good clarification. Thank you. Thank you.
spk00: We have reached the end of the question and answer session, and I will now turn the call over to Robert for closing remarks.
spk03: Okay, thank you, Holly, very much. So we thank everyone for your support, for participating this morning on the call, and we look forward to updating you in early March when we'll have the year-end figures.
spk00: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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