Stellus Capital Investment Corporation
Q4 2021 Earnings Call Transcript

Published: 2 Mar 2022

[Operator:]

Good morning, ladies and gentlemen and thank you for standing by. At this time I would like to welcome everyone to the Stellus Capital Investment Corporation Fourth Quarter 2021 Results Conference Call. At this time, all participants have been placed on a listen-only mode. The call will be open for a question-and-answer session following the speakers presentation. Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.

[Todd Huskinson:]

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.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, Robert Ladd.

[Robert Ladd:]

Thank you, Todd. We'll begin by discussing our operating results followed by a review of the portfolio which will include asset quality and outlook. And Todd will cover our operating results, first.

[Todd Huskinson:]

Thank you, Rob. We had solid results in the fourth quarter and for fiscal year 2021. First, I'll cover our annual results. For fiscal year 2021, we more than covered the dividend of $1.14 per share, with realized income of $2.08 per share which included $20.8 million of net realized gains after taxes or $1.06 per share. Core net investment income was $1.22 per share and GAAP net investment income was $1.01 per share. Core net investment income excludes $2.9 million of capital gains incentive fees accrued on realized and unrealized gains which are not included in net investment income and $1.1 million of estimated income taxes. Net asset value increased $11.8 million from $273.4 million to $285.1 million year-over-year due primarily to the realized gains. On a per share basis, net asset value increased from $14.03 to $14.61 per share year-over-year. Turning to the quarter. Our distributions of $0.28 per share which we declared in the third quarter were covered through core net investment income of $0.33 per share and realized core income per share of $1.10. On a GAAP basis, net investment income was $0.26 per share and realized income was $1.02 per share. During the quarter, we generated $14.8 million of realized gains after tax or $0.76 per share. In addition, our board declared an additional dividend of $0.06 per share in the aggregate to be paid in February, March and April of 2022. Net asset value per share increased $0.46 during the quarter from $14.15 to $14.61 due to the early declaration of the fourth quarter dividend and the realized gains from our equity portfolio. Finally, we increased our bank facility in December from $230 million to $250 million in order to enable us to participate in investment opportunities in anticipation of coming repayments while maintaining adequate liquidity to cover our unfunded commitments. And with that, I'll turn it back over to Rob.

[Robert Ladd:]

Okay. Thank you, Todd. I'd like to now cover the following areas

[Operator:]

Our first question will come from Christopher Nolan with Ladenburg Thalmann.

[Robert Ladd:]

Good morning, Chris.

[Christopher Nolan:]

Hey guys. Todd, in your comments, did I hear you correctly when you said core EPS was $0.26, please?

[Todd Huskinson:]

Yes. Core EPS was $0.33. So GAAP was $0.26.

[Christopher Nolan:]

Great. Okay. And I guess -- congratulations on the quarter, congratulations on the dividend supplements. As we look ahead and given the prospects of Fed hikes, what do you think that will do to the outlook for realized gains going forward?

[Robert Ladd:]

No. So overall, our view of interest rates would be -- they'll likely rise and -- but not materially. And so we would not expect that to have a material impact on both realization, new originations and repayments. So again, based on the forecast of increasing but not too high, we don't expect a material change. What really drives the equity gains, as you know, is our portfolio of companies being sold by their private equity owners. And we think that continued realization will occur. And also, as we know that the metal market private equity world has significant dry powder to invest which, in turn, ends up being, in some cases, the purchaser of these businesses that we finance and have an equity co-invest in.

[Christopher Nolan:]

Great, thank you. That's it for me.

[Robert Ladd:]

Okay. Thank you, Chris.

[Operator:]

And moving on, we'll go to Matt Tjaden with Raymond James.

[Robert Ladd:]

Good morning, Matt.

[Matt Tjaden:]

Hey, good morning, guys. Thanks for taking my question. Todd, maybe first one for you. In 2021, I know you guys -- you were taking dividends out of NAV based on the declaration date which is maybe a little bit different than some of your peers. Do you expect that to continue in 2022 or maybe take it out of NAV based on the ex-div date?

[Todd Huskinson:]

Yes, Matt, thank you. So at this point, we know that it's acceptable to do it both ways. And at this point, we don't have an intention to change it that we'll continue to take it out on the declaration date but we could change it. But my guess is, we'll keep it where it is and certainly would highlight it, if we decide to change that treatment.

[Matt Tjaden:]

Got it. As a follow-up, Rob, maybe for you. The $3.2 million realized gain that just occurred a couple of days ago, any chance you could give us a sense how that compares to kind of marks at 12/31 and if we should expect any impact to NAV.

[Robert Ladd:]

Sure. Good question, Matt. So it's roughly $700,000 higher than the market 12/31. So NAV would increase by that amount, whereas the overall gain would be the larger amount of $3.2 million. Total proceeds roughly -- total proceeds are just under $3.7 million.

[Matt Tjaden:]

Got it. That's helpful. Last one for me, Rob, maybe sticking with you. I'd be interested how hard it is right now to get equity positions in some of your portfolio companies relative to historic levels?

[Robert Ladd:]

Matt, we've -- as I've said earlier and you know it's a core part of our business and our strategy and although, we don't always receive them, we ask on all company's situations. And so I wouldn't see a meaningful change in that. We continue to receive them and -- so don't expect that to change.

[Matt Tjaden:]

Got it. That's it for me. I appreciate your time this morning, guys.

[Robert Ladd:]

Yes. Thank you, Matt.

[Operator:]

And moving on, we'll go to Ryan Lynch with KBW.

[Robert Ladd:]

Good morning, Ryan.

[Ryan Lynch:]

Hey, good morning. Thanks for taking my questions. First one, can you maybe clarify your comment on activity you guys expect in Q1 2022. It looks like you guys had like $41 million of investments kind of quarter-to-date. And then it looked like you just talked maybe about $20 million of additional fundings and then $20 million of repayments and then maybe flat. So can you just clarify exactly what were you thinking for Q1 of activity. Again, it's hardest today something to change.

[Robert Ladd:]

Yes. So best we can tell at this point, we would be, therefore, up about $40 million over Q4 and so the portfolio would be roughly 820 which is where we are today.

[Ryan Lynch:]

Okay. And then just from a kind of an environment portfolio activity outlook. And obviously, you've done pretty well in Q1, it looks like so far. But as valuations have come down, at least in the public market, I would think some of that would trickle over to some of the private market valuations coming lower. And then there's also the potential for interest rates to rise. Have you seen any slowdown in potential for deal activity kind of actually get out of Q1 and kind of looking forward have you seen sponsors, less billing to do deals or anything like that.

[Robert Ladd:]

Yes, Ryan. So I'd say overall, as you can tell from the pace in Q1, assuming we fund the remaining $20 million, that would be a pace of roughly $60 million annualized of $240 million and that would be lower than last year. So the first quarter is certainly slower than the third and fourth quarters of 2021. But we do have a lot of activity today. So we really haven't seen -- probably just a lull after the year-end but we haven't seen a slowdown in opportunities in front of us. I will say this though, that to kind of go back to some of the observations you've made that, as you know, we mark our equity portfolio off of the earnings of the companies but also we use public markets as proxies. And then in which the equity markets are off right now. And then relative to debt positions, we -- our models use credit spreads that are -- you can observe and they have widened since 12/31. So I think as a general matter, the industry could have a slightly lower valuation on a portfolio basis, just based on the public markets, although we don't expect it to be material for us. And then, we have -- and maybe going back to your original question, we haven't seen this phenomena impact the opportunity flow, though.

[Ryan Lynch:]

Okay. Yes, that's helpful color, both on the market activity as well as kind of internally how you guys marched off relative to market conditions that are in the environment today. So that's helpful. And I appreciate the time this morning.

[Robert Ladd:]

Okay. Thank you very much, Ryan.

[Operator:]

And that does conclude our question-and-answer session. I'd like to turn it back to Mr. Ladd for any additional or closing comments.

[Robert Ladd:]

Okay. Thank you, Paula. And first, thank everyone for joining the call and also for your support over the last year and for many of you since we started this company in November 2012. We look forward to speaking with everyone in early May as we report the first quarter. Thanks again.

[Operator:]

Thank you. And this does conclude today's call. We'd like to thank everyone for their participation. You may now disconnect.