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.
spk00: Good afternoon, 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 first fiscal quarter ended March 31st, 2024. This conference is being recorded today, May 10th of 2024. 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.
spk05: Thank you, Kelly, and good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31st, 2024. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements.
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 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. Now I'd like to turn the call back over to our Chief Executive Officer, Rob Lamb.
spk05: Thank you, Todd. We'll begin this morning by discussing our operating results, followed by a review of the portfolio, including asset quality. I'll then talk about dividends and outlook.
spk04: In the first quarter, we more than covered the dividend of 40 cents per share with gap net investment income of 42 cents per share. Core net investment income was 44 cents per share, which excludes estimated excise taxes. Net asset value per share increased 15 cents during the quarter as a result of net unrealized depreciation on our investment portfolio, as well as generating NII in excess of the dividend. Life-to-date review overall, since our IPO in November 2012, we've invested approximately $2.5 billion in over 190 companies and received approximately $1.6 billion of repayments while maintaining stable asset quality. We've paid over $252 million of dividends to our investors, which represents $15.35 per share to an investor in our IPO in November 2012. Turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $876 million across 94 portfolio companies, up from $874 million across 93 companies at December 31st, 2023. During the first quarter, we invested $23.8 million in three new portfolio companies, $5.8 million in other investment activity at par. We also received two full repayments totaling $26.2 million and $5 million of other repayments, both at par, resulting in net portfolio growth at value of $1.4 million, including the impact of net unrealized gains of $3.1 million. In March 31st, 99% of our loans were secured and 98% were priced at floating rates. The average loan per company is $9.9 million, and the largest overall investment is $19.5 million, both at fair value. Substantially, all of the portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. 25% of our portfolio is rated at one or ahead of plan, and 19% of the portfolio is marked in an investment strategy, investment act category of three or below, meaning not meeting plan or expectations. Currently, we have four loans on non-accrual, which comprise 2.1% of the fair value of the total loan portfolio. And with that, I'll turn it back over to Rob to discuss dividends and the overall outlook. Thank you, Todd.
spk05: 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. Although we did not have any realizations in the first quarter, so far in the second quarter, we have realized one equity position and expect to realize one more, which will mean combined proceeds of about 5.3 million and expected to generate 3.8 million of realized gains. and a slight uptick in NAB. It was noting the combined multiple of these two realizations is just over three times our original cost basis. At the end of the quarter, we have 60.6 million of equity investments at cost that were marked at 74.9 million. Our historical performance would indicate that the ultimate realization for this portfolio would be greater than two times our portfolio's cost basis. Of course, however, the ultimate Performance of our current equity positions will be depend on a variety of factors including among other things the economic environment and sponsors exit strategies Now not about dividends as you see we continue to cover our dividend 40 cents per share per quarter and to this end looking forward to q3 of 2024 we expect subject to our board of directors approval to continue our monthly dividend of approximately 13 cents per share of excuse me, resulting in aggregate dividends of 40 cents per share for the third quarter. And now to outlook. Since quarter end, we have funded 10.9 million in two new and two existing portfolio companies at par. Additionally, we did receive one repayment of 11.4 million at par and one equity realization previously noted. Proceeds for that were approximately 3 million, which resulted in a realized gain of two. You then combine this activity with our other net funding of about $2.8 million. This brings our total portfolio to approximately $875 million at fair value with 95 portfolio companies. Again, this is as of today. Now looking forward to the balance of the quarter. We are expecting a meaningful increase in fundings and no known loan repayments. As a result, we expect to end the quarter with a portfolio which will be in excess of $925 million. In other words, $50 million higher than where we are today. And with that, I'll open it up for questions. Kelly, if you'd begin the Q&A session, please.
spk00: Certainly. 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, please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold just a moment while we poll for questions. Your first question is coming from Christopher Nolan with Ladenburg Salmon. Please pose your question. Your line is live.
spk05: Good morning, Chris.
spk02: Hey, guys. How you doing? Were the realized losses from new MET machining? It wasn't clear to me.
spk05: They were. That was the position had been marked at zero for some time, and that was the final realization, but no impact on NAV.
spk06: Chris, are you still there?
spk00: It looks like Chris has left the queue.
spk05: Okay.
spk00: No worries.
spk05: Why don't we go to our next call or question, and then we can come back to Chris when he comes back on.
spk00: Okay. There are actually no further questions in queue at this time.
spk05: Okay. Okay, good. We'll wait just a second and see if Chris comes back.
spk00: Sure. We do have a question from Bryce Rowe with B. Riley. Please pose your question. Your line is live.
spk01: Thanks. Good morning. Rob, I wanted to just kind of ask about market conditions, if you wouldn't mind. You know, you just talked about some good activity here that is expected in the second quarter, especially from here to the end of the quarter. Can you talk about, you know, what pricing is looking like, any kind of dynamic from a competitive perspective that you're seeing with these transactions that, you know, would compare to, you know, others in the portfolio?
spk05: Yeah, sure, Bryce. So, and thank you for joining. So, as going back to our last earnings call, I'd indicated that we were slower in terms of activity, but that we thought the activity would pick up in the second half of the year. Well, it turned out it picked up in the second quarter. So, and more recently. So, and again, this is the M&A activity we were expecting that would start coming back, which it has. So, I'd say that in terms of the competitive dynamics and maybe overall market conditions, So all the transactions we're looking at are same type of not over levered. Leverage is typically four times or less. All have covenants. Most have equity co-invest. So the typical thing. The one thing that has changed in the market is a little bit less spread that think of it in, you know, three or four months ago, you know, in the sixes overall. And we've seen spreads come down 50 basis points or a little bit more over time. That's the only change we've noticed, but again, quite a bit of pickup and activity. And the other thing I wanted to note is I talked about the equity gains that are expected, one that's already occurred, another expected this quarter or could slip into the first month of the following quarter, but did learn about recently. We have a couple of more that we are hearing might come in the fourth quarter. So this would be an indication on both sides. On the new deal front, M&A activity picking up, and on the existing portfolio side, M&A activity picking up, resulting in more gains for us later in the year. Okay.
spk01: And, Rob, when you think about, you know, you just said that some of the activity got pulled forward from what you thought to be second half to second quarter. Is there still, you know, a pretty active pipeline beyond that? what you see here coming in the second half of the second quarter?
spk05: Yes. So wouldn't expect anything to change there for the balance of the year. It's picked up many. Okay.
spk01: And then when we think about funding the new activity, you know, how should we think about that? I mean, obviously you have some room on your credit facility, and I guess with the benefit of visibility here towards what can close in the back half of this quarter, how do you think about, you know, using equity versus debt to fund that?
spk05: Yes, so I'd say that relative to equity... know our stock prices come back some so as we were active last year with our ATM program we would certainly look at that in this year again really driven by the pipeline so so but I think it would be more likely in that form than and kind of any larger offering so think of the ATM being something we would use this year but then overall I think it'd be helpful that From a leverage perspective, as you pointed out, so we have quite a bit of capacity in our bank facility, and we have quite a bit of cash in our SBIC entities that is from repayments. So as an example, we have quite a bit of capacity to get beyond the 925 I indicated as a likely number, and certainly the 950 or more. So I think we're in good shape, but again, overall capital is good and we could see some activity in the ATM.
spk01: Okay. Last one for me, just in terms of kind of internal risk ratings, you know, there was some movement from the December quarter to the March quarter. Looks like, you know, Category 3 bumped up a bit. Can you talk a little bit about, you know, kind of what the dynamic driving that?
spk05: Yeah, just looking at the changes, you know, I'd say normal evolution in the portfolio over time. Nothing that we would characterize as overly concerning. You know, you'd have to get to a four where we would, that's where an investment, a loan investment would be considered non-accrual. So three would be operating below plan. And then I just would note that we had a, some upgrades, which again would be normal too. We had a couple of positions moved to a one, a three moved to a two. So, but overall I'd say not worrisome. And so we look at the entirety of the portfolio and our average weighted risk grade is, as Todd mentions, a little bit less than two, which means better than planned. Excellent.
spk01: Okay. Thanks for taking the time. Good to talk to you. Thank you, Bryce.
spk00: Your next question is coming from Eric Zwick with Hope Group. Please pose your question. Your line is live.
spk03: Thank you. Hello, everyone. I wanted to start a little bit on... Good morning. In terms of, you know, your comments about so far in the second quarter, you know, not seeing any repayments, you know, from a number of the other BDCs that have reported this quarter, repayment activity has been pretty high. And I know it's tough to have a, you know, a certain... high degree of certainty in your outlook over probably, you know, the next couple months or so. But do you think there's, you know, something inherent in your portfolio that's, you know, resulting in lower repayments today or is this just kind of maybe a temporary lull here that we're seeing this quarter?
spk05: Yeah, I think it's that, Eric. It certainly ebbs and flows. But as I mentioned, we recently learned about a couple of companies that are going to come to market in the third and fourth quarter and and they would result, in addition to an equity gain, would result in some good repayments. So I think we've just gotten to a little bit of a low point here.
spk03: Yes, that makes sense. And the only other question I had, I was just curious, given the fact that rates have, kind of base rates have remained high now for a while and they seem to kind of be staying here and probably not any near-term probability of them going Material lower as you're underwriting and potentially negotiating floors in there. Has there been any ability to increase those those floors at all? Are they still kind of sticking around to the levels that we've seen for the past number of years?
spk05: Yes. So we we've always been focused on floors and we generally they vary between one and two percent and think of us as being closer to two percent.
spk06: Thank you. That's all I had today. Appreciate it. Yeah, thank you.
spk00: Your next question is coming from Christopher Nolan with Ladenburg-Solomon. Please pose your question. Your line is live.
spk02: All right. I'm back. Okay, good. Yeah, now my phone works now. You have some maturities coming up on your SBA loans next year and then following after that. And I know the amount of maturing in 2025 is only around $12 million or so. but it starts to step up after that. And the cost of that debt seems to be really low at this point. What are your options? I mean, can you refinance it with the SBA and get similarly low-cost funding, or is it something that you've got to have the bank facility refinance?
spk05: Yes, so it's a good question. So we do have, as you know, two SBIC licenses, and the first – of those licenses, the debentures will start to come due in March of next year, and then they're spread out over a number of years. And so we are in the process of applying for a third license. So this would think of us as going forward, and this is a normal evolution in terms of the SBA process. And then a follow-up thought would be they are Many of those debentures were struck at a lower interest rate environment, as you're pointing out. And the debentures are priced off the 10-year treasury plus a market premium, which is typically less than 1%. So our cost of funding, if things don't change by next year, we will be borrowing at somewhat of a higher cost of the SBA. But I would think of it as the 10-year treasury, which is now under 4.5%, or at least it was yesterday. And so add a premium, so you're in the fives, but that would compare to a regular way bond offering of similar duration in the eights or higher. So still very favorable rates, but yes, higher than we currently have.
spk02: Thanks, Rob. And then I guess more of a strategy question, you get some other BDCs, which, well, I guess I noticed that you had a management fee waiver this quarter, but your leverage is so low. And you had a management fee waiver last quarter. And I'm just thinking, why don't you just lever up a little bit more if there's – I mean, I don't know why that's going on because your earnings seem to be pretty good.
spk05: Yes, so this – I think you're referring not to a management fee waiver, but an incentive fee waiver. And this is just a function of our 12-quarter test. Not all BDCs have this. but we have a 12-quarter test where you look back for historical performance. So we have had a little bit of a waiver in the first quarter, may have a little bit more this year, but that's just a function of that test.
spk02: Okay, great. Thank you very much.
spk05: Yeah, thank you, Chris.
spk00: There are no additional questions in queue at this time. I would now like to turn the floor back over to Mr. Robert Ladd for any closing remarks.
spk05: Okay, yeah, thank you, Kelly, and thanks again, everyone, for being on. Thank you for your support, and we look forward to reporting the second quarter in August. Take care. Enjoy the summer.
spk00: Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Disclaimer