Stellus Capital Investment Corporation

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 second fiscal quarter, ended June 30th, 2025. At this time, all participants are on a listen-only mode, and 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. As a reminder, this conference is being recorded today, August 7th, 2025. It is now my pleasure to turn the floor over to Mr. Robert Ladd, Chief Executive Officer of Stellis Capital Investment Corporation. Mr. Ladd, you may begin your conference.

Yeah, thank you, Ali. Good morning, everyone, and thank you for joining our call. Welcome to our conference call covering the quarter ended June 30, 2025. 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.

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 turn 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.selluscapital.com under the Public Investors link or call us at 713-292-5400. Now I'll cover operating results for the quarter, but I'd like to start with our life-to-date activity. Since our IPO in November 2012, we've invested approximately $2.7 billion in over 210 companies. and received approximately $1.7 billion of repayments, while maintaining stable asset quality. We've paid $306 million of dividends to our investors, which represents $17.35 per share, to an investor in our IPO in November 2012, which was offered at $15 per share. Turning now to the quarterly operating results, In the second quarter, we generated $0.34 per share of GAAP net investment income, and core net investment income was $0.35 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.04 during the quarter due to the reduction in spillover income. During the quarter, we issued approximately 300,000 shares for $3.9 million of proceeds under our ATM program. Year to date, we've issued approximately 900,000 shares $13.2 million, and all issuances were above net asset value. Turning to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $985.9 million across 112 portfolio companies, slightly down from $991 million across 110 companies as of March 31st, 2025. During the second quarter, we invested $15.4 million in three new portfolio companies and had $7.4 million in other investment activity at par. We also received two full repayments totaling $21.7 million, one equity realization totaling $500,000, which resulted in a realized gain of $200,000. And we received $10.4 million of other repayments all at par. On June 30th, 98% of our loans were secured and 91% were priced at floating rates. The average loan per company is $9.2 million, and the largest overall investment is $21.2 million, both at fair value. All but one of our portfolio companies are backed by a private equity fund. Overall, our asset quality is slightly better than planned. At fair value, 84% of our portfolio is rated a 1 or a 2 or on or ahead of plan, and 16% of the portfolio is marked in an investment category of 3 or below, meaning not meeting plan or expectations. We did not add any new loans to our non-accrual list during the quarter. Currently, we have loans to five portfolio companies on non-accrual, which comprise 6.8% of the total cost and 3.8% of the fair value of the total loan portfolio, respectively, which represents a decrease from the prior quarter. With respect to capital, as a reminder, we've received a green light letter from the Small Business Administration for sellers capital SBIC3, This is an important step in the process, and we therefore expect to receive a license, although it's not guaranteed. In general, as our existing debentures are repaid, we intend to draw new leverage under the SBIC3 license to continue funding qualifying portfolio company investments. And with that, I'll turn it back over to Rob to discuss the overall outlook.

Okay. Thank you, Todd. As we look ahead to the third quarter of 2025, I'll cover portfolio growth, equity realizations, and dividends. Investment activity has picked up meaningfully over the past 30 days or so. We expect the second half of the year to be busy, as evidenced by the $26 million of new funding since June 30. Our portfolio now stands at approximately $1 billion, with 113 companies now our largest number. And based on new fundings and repayments, we should end the quarter at about the same level. With M&A activity picking up, we expect to see more equity realizations over the next five months. Our best estimate today is 12 million of proceeds and approximately 10 million of gains. Finally, regarding dividends, we declared the dividend for the third quarter of 40 cents per share payable monthly. We expect the fourth quarter to also be payable at this 40 cents per share rate for the quarter. Again, payable monthly, of course, subject to board approval. And with that, we'll open it up for questions. And Ali, you may begin the question and answer session, please.

Thank you. Ladies and gentlemen, at this time, we will begin our 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. and 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. Thank you. Our first question is coming from Christopher Nolan with Ladenburg-Thalmann. Your line is live.

Hey, guys.

Good morning, Chris.

The EPS is not covering the dividend for the last few quarters. Two questions. How much spillover is there left over? And what's the strategy in terms of increasing your leverage to cover the dividend?

Yeah, Todd, why don't you cover the spillover, and then I'll cover the question about leverage.

Okay. Yeah, sounds good, Rob. So good morning, Chris. So with respect to spillover, so this year we have just under $45 million of spillover that we are working off through the dividend. And then going into next year, for next year's amount, we expect it to be about $38 million. And we'll continue to kind of reduce it from there. So that's what we're working on with respect to the dividends.

And then, Chris, relative to use of leverage, so we're currently running at about 0.9 on a regulatory test and total leverage for GAAP about 1.7 times. You know, our target leverage we've stated for a good while is about 1 to 1 on the regulatory test, so we don't intend to change that in the near term. So we have the capacity to move leverage up through the use of our bank facility. We expect that we have the capital base to really take the portfolio, what is currently about a billion, up 50 to 75 million higher over time. Is that helpful?

Yes, it is. And just as a quick follow-up, for the SBIC 3 lights, how much of your deal flow is eligible for the SBIC and how far? How quickly do you think you can fill that?

Interestingly, historically, roughly half of what we look at qualifies, so it's a meaningful part of our deal flow and an important aspect of the company.

So you can wrap that up in a pretty quick order, I'd imagine.

Yes, so this is helpful for us, and we anticipate we'll be able to get it approved, as Todd indicated.

Great. That's it for me. Thank you.

Many thanks, Chris.

Thank you. Our next question is coming from Eric Zwick with Lucid Capital Markets. Your line is live.

Good morning, Eric. Hey, good morning. This is Justin. I'm for Eric today. Rob, just going off your comments, obviously good momentum to start the quarter with some sizable new investments. Just curious how the pipeline is looking for the remainder of the year and where you're seeing opportunities, whether that's new or add-on investments.

Yes, so again, as I indicated, quite a pickup in M&A activity. It looked like it started to happen after July 4th. I guess the noise around the tariffs has quieted some, although there's more in the news the last couple of days. But I think that certainly private equity firms with whom we work exclusively are much more active in the marketplace looking at opportunities. So things have picked up meaningfully. So again, we would expect, and our pipeline runs typically, I'd say, 10 opportunities at a time that are very actionable, and we see five to seven new opportunities a week. So we're very busy, but also very selective. So I do think we've got the ability to continue to grow here, and as indicated, we have the capital to grow as well. As part of that, though, of course, we would expect repayments to speed up which have been slower this year but we think notwithstanding the repayments expected we'll be able to grow the portfolio between now and the end of the calendar year okay that's great um and then you know just a follow-up on credit quality i know you guys can't disclose much given the

you know, private aspect of all your portfolio companies. But any insight into any potential resolutions or progress that's being made with the current non-accrual list?

Yeah, and thanks for noting the privacy aspect. You know, continue to work through them. All have private equity firms associated with them, backing them. So we'll need more time. But fortunately, this quarter, Todd noted, we had no new non-accruals. So I think they'll all take more time. But I think generally in a good spot and where necessary, we'll get more involved in the situation to make sure the company continues. But our experience has been good private equity firms who we deal with. typically put money in, new money in, a couple of times to support their businesses. So these are ones working through that system, if you will. Okay. Great. That's all for me today. Thanks for taking my questions. Thank you, Justin.

Thank you. Our next question is coming from Robert Dodd with Raymond James. Your line is live.

Hi, guys. Good morning, Robert. Good morning. Good morning. How are you doing? On the potential equity realizations, um, that I think you mentioned, uh, maybe 12, 12 million proceeds, 10 million in gains in the second half of the year. What's the level of confidence on that? Because I mean, it does, you know, if the market activities picked up, but who knows? Um, like, I mean, how, how high is the confidence level on realizing them this year? I mean, you know, if they don't get realized this year, then it just happens later. But, um, You know, how's your feeling on the certainty of those things actually happening this year?

Sure. Sure, Robert. Yes, that's a great question. So when we indicate in forecast, again, things can change. Those are businesses that are in the market being marketed, some further along than others, but all are being actively marketed online. by a banker or by a company. And all are well-performing businesses. So we think the likelihood would be high. And sometimes things don't happen. And also there could be things that we're not aware of, especially if we're just in an equity-only position, don't have the debt instrument anymore. But we'd say fairly high, again, based on active marketing by the companies.

Got it. Got it. Thank you. And then if I can go to the, not so much the non-approval side, but the 15% of the portfolios rated three or lower, i.e. not meeting plan. I mean, if we exclude the non-approvals, because those have obviously already are having their issues currently, how much of the remainder of that are you seriously nervous about versus, yeah, it's not meeting plan, but we're not that worried kind of thing?

You know, given its category of being a three, by definition, it means that we expect to receive all of our principal and all of the associated income. To be a four, it would be we don't expect to receive the income. And five to be we don't expect the income or all the principal. So our current thinking is by definition we expect to receive all principal and income. That'd be the best way to characterize it, I think, Robert.

Okay, I appreciate that. And then if I can, one more, just on that, just kind of, you know, like you said, and you kind of partly addressed it, you know, activity picked up after July 4th. and meaningfully over the last 30 days. I mean, on the timeframe, because obviously some businesses take longer to do diligence than others, you said you expect to still grow the portfolio by year end, but how much uncertainty is in that given the pipeline and And kind of, you know, the timing of where we are with four months left in the year and these processes ramping up now. And I'm not talking about the equity. I'm just thinking kind of the pipeline.

Sure, sure. So the pipeline, as indicated earlier, is quite robust. So a number of opportunities that are what we would describe as a 75% or higher probability. So a lot in that bucket. And then a lot of things that we're looking at that, given that we're here in August, all of which have a good chance if they move forward and were selected to certainly close by the fourth quarter. So, again, it's hard to predict these things on both ends. We have found that repayments sometimes happen more quickly than new fundings, but we expect we'll have both and can grow the portfolio, the balance of the year. Thank you. Yeah, thank you, Robert.

Thank you. As we currently have no further questions on the lines at this time, I would like to hand the call back over to Mr. Ladd for any closing remarks.

Okay. Thank you very much. And thank everyone for being on the call today and your support of our company. And we look forward to providing the update on our third quarter results, which will be in early November. Take care.

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines at this time and have a wonderful day. And we thank you for your participation.