Stellus Capital (NYSE:SCM) Investment Corporation has released its financial results for the third fiscal quarter ending September 30, 2023, with a focus on portfolio growth. The company reported GAAP net investment income of $0.47 per share, covering its dividend of $0.40 per share. However, the net asset value per share decreased due to unrealized losses in the investment portfolio. The company also announced its intention to continue the monthly dividend of approximately $0.13 per share in Q1 2024, pending board approval.
Key highlights from the earnings call include:
- Stellus invested $44.1 million in twelve portfolio companies, six new and six existing, during the quarter.
- The company ended the quarter with an investment portfolio at fair value of $886 million across 96 portfolio companies.
- Asset quality remained stable, with 99% of loans secured and 97% priced at floating rates.
- Five loans were on nonaccrual, representing 1.6% of the fair value of the total loan portfolio.
- The company aims to increase the portfolio from $888 million to at least $950 million over the next six months.
- 14% of the portfolio is rated 3 or below, based on fair value, which is considered normal and does not indicate a broader concern about the portfolio.
- The company is open to raising equity if it's positive for the company, but given their current leverage position, they are more focused on investing capital rather than issuing new shares.
During the earnings call, CEO Robert Ladd addressed concerns about the portfolio, stating that the number of risk grade 3s was normal and there were no broader concerns. He also mentioned that there had been very few requests for credit relief due to increased interest rates, which have impacted cash flows but not performance. Ladd added that they have the flexibility to adjust interest rates if necessary.
In terms of leverage, the company is more focused on investing capital rather than issuing new shares. The next update for investors is expected in early March with the year-end figures announcement.
InvestingPro Insights
In line with the information from InvestingPro, Stellus Capital Investment Corporation (SCM) has shown an accelerating revenue growth which aligns with their focus on portfolio growth. However, InvestingPro Tips also highlight a declining trend in earnings per share and a potential threat to dividend payouts due to poor earnings and cash flow. Despite these challenges, SCM has managed to maintain dividend payments for 12 consecutive years and pays a significant dividend to shareholders, as evidenced by the $0.40 per share covered in the recent Q3 results.
InvestingPro data also reveals that SCM is currently trading near its 52-week low, indicating that the price has fallen significantly over the last three months. However, it's worth noting that the company has remained profitable over the last twelve months, which might be an encouraging sign for potential investors.
For more comprehensive insights and additional tips, consider exploring the InvestingPro platform, which provides a wealth of data and tips for numerous companies, including SCM.
Full transcript - SCM Q3 2023:
Operator: Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's Conference Call to Report Financial Results for its Third Fiscal Quarter Ended September 30, 2023. [Operator Instructions] This conference is being recorded today, November 8, 2023. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.
Robert Ladd: Okay. Thank you, Holly. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 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.
Todd Huskinson: 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 Stellus 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.stelluscapital.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.
Robert Ladd: Okay. Thank you, Todd. Todd will now cover our operating results, life-to-date review, and portfolio and asset quality.
Todd Huskinson: Thank you, Rob. In the third quarter, we more than covered the dividend of $0.40 per share with GAAP net investment income of $0.47 per share. Core net investment income was $0.49 per share, which excludes estimated excise taxes and the impact of capital gains incentive 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, and 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 30, 99% of our loans were secured and 97% were priced at floating rates. We are 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 the portfolio companies are backed by a private equity firm. Overall, our asset quality is below a rating of 2, therefore, slightly better than planned. 25% of our portfolio is rated a 1 or ahead of plan and 14% of the portfolio is marked at an investment category of 3 or below. Currently, we have five loans on nonaccrual, which comprised 1.6% 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.
Robert Ladd: Okay. 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 realization 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 costs that were marked at $66 million. Our historical performance would indicate that the ultimate realization of this portfolio could be greater than 2x 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 equity exit strategies, rather. Now turning to dividends. We continue to cover our dividend of $0.40 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 15 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 $0.13 per share, resulting in aggregate dividends of $0.40 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 and 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.
Operator: Certainly. [Operator Instructions] Your first question for today is coming from Christopher Nolan at Ladenburg Thalmann.
Christopher Nolan: Hi, guys. The increase in nonaccrual assets, what is the thinking? Is - given the broader economy, is the inclination to work through these or to try to exit them?
Robert Ladd: So Chris, good question. It has been our mode for now almost 20 years that we work through things and versus sell them off. And so that's our - that would not change. So continue to work through problems. And ultimately, we found the realizations are better overall that way.
Christopher Nolan: 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 and just - or just to increase leverage? And how are you thinking about.
Robert Ladd: Sure. So we have reached a point on leverage based on equity issue under the ATM program and some repayments where we're less levered than normal. We target the regulatory leverage to be at 1:1 or so. We're now, I believe, about 0.8 or so to 1. So we would expect the leverage to tick back up to 1:1 and have a more full portfolio, which we think is a good position to be in.
Christopher Nolan: Final question. In your comments, you mentioned the first quarter '24 dividend of $0.13 per share per month. Did you mean fourth quarter '23 or...
Robert Ladd: Yes. No. So what I was referring to is we're now - we 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.
Christopher Nolan: Great. Thank you for the clarification. That's it for me.
Robert Ladd: Yes. Thank you, Chris.
Operator: Your next question for today is coming from Robert Dodd with Raymond James.
Robert Dodd: Hi. Good morning. Just I want to ask you about Arbor Works. Obviously, last quarter, you told us you're going to put Arbor Works, which you did. And you - it's a pretty large chunk of the unrealized depreciation this quarter, so I presume working through. But you've also then in October made a small couple of hundred thousand dollar follow-up. Can you give us any - is that working capital? Is that part of the work it through process? Or is that the sponsor stepped up and put in equity and you put in a little bit of that as well. Can you give us any color on that since that was -- yes, what your biggest moves this quarter?
Robert Ladd: Sure. Yes. So this - again, as you know, we really limit our discussion about private companies 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 fundings on both sides.
Robert Dodd: Got it. Got it. Thank you. On - just looking to your point on the equity co-invest potential realizations over the next, call it, a 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? I think - are those two things just intrinsically related when you couldn't have the realizations without portfolio growth? Or what are your thoughts there?
Robert Ladd: 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 of we're very selective, as you know. So I would expect you'll see continued portfolio growth. We're targeting to take the $888 million or so up to at least $950 million based on activity over the next six months or so And then in terms of equity realizations, your point is a good one. So the equity - overall public equity markets have been somewhat muted lately, seemed to be rallying the last few days. So this certainly drives 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 in the remarks is we went back and studied the history of the equity co-invest portfolio. And it looks like on average, there - they're realized in just over four years. So we have some positions that are longer than that, which will drive eventually from historical math that we'll be having some coming up again in the next year or so. So I'd say they're different. And of course, 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.
Robert Dodd: Got it. Thank you for that color. Appreciate it.
Robert Ladd: Yes. Thank you, Robert.
Operator: Your next question is coming from Paul Johnson with KBW.
Paul Johnson: Good morning. Thanks for taking my questions. On your comments on your internal credit ratings 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?
Robert Ladd: Yes, Paul, that's based - all of those are based on fair value.
Paul Johnson: Got you. So I - obviously that includes non-accruals on that list. I mean, is it fair - I guess, are you able to offer any other color on those - any other portfolio that kind of falls into that bucket in terms of performance kind of outside of the nonaccruals, I guess, that are included in that number?
Robert Ladd: I would say that the percentage there is about normal over time so not anything is - I think Todd said earlier, not that would indicate a broader concern about the portfolio. So we always have a number of handful of risk grade 3s that we consider somewhere like on our watch list that we're working through. So not any material difference than in the past.
Paul Johnson: Okay. Got it. And then I guess from your - the performing part of your portfolio, what have you guys seen so far in terms of amend activity relief requests. Has there been any sort of instances of amendments just for credit relief and any trends that you're seeing there are notable?
Robert Ladd: Yes. So I'd say that very few requests in that way. Now there's no question that 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 - company's cash flows, but not in a material way that's affected performance. So when we have something that's, again, a risk rate 3 or below, it's really company-related specific performance versus the macro. Just can't cover the interest expense. And just as a reminder, 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 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.
Paul Johnson: Got it. Thank you for the color. That’s all for me.
Robert Ladd: Yes. Thank you, Paul.
Operator: Your next question is coming from Bryce Rowe with B. Riley.
Bryce Rowe: Thanks. Good morning. Hi Rob.
Robert Ladd: Good morning, Bryce.
Todd Huskinson: Good morning, Bryce.
Bryce Rowe: Good morning. I wanted to just clarify maybe with Chris' question about leverage in your prepared remarks, too. I mean clearly, you're comfortable operating at 1:1 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, in this current backdrop, are you still interested in raising equity on the ATM over the short term, despite that 1:1 regulatory leverage target that you kind of have had over time? Thanks.
Robert Ladd: Sure. I'd say we're certainly always interested in raising equity if it's positive for the company. We - 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.
Bryce Rowe: Okay. That’s good clarification. Thank you.
Robert Ladd: Thank you.
Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Robert for closing remarks.
Robert Ladd: 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.
Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.