Stellus Capital Investment Corporation Price & Performance (SCM)

Yes. Thank you, Ali, and good morning, everyone. Thank you for joining the call. Welcome to our conference call covering the quarter and the year ended 12/31/2024, Joining me as usual this morning is Todd Huskinson, our Chief Financial Officer who will cover important information about forward looking statements and then start off our discussion.

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 pen provided in our press release announcing this call. 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 we ask that you refer to our most recent filing with the SEC 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.stelliscapital.com under the public investors link or call us at (713) 292-5400. Now I'll cover our operating results for the quarter. Would like to start off with our Life to Date activity. Since our IPO in November 2012, we've invested approximately $2,600,000,000 in over 200 companies and received approximately $1,600,000,000 of repayments, while maintaining stable asset quality.

We've paid over $288,000,000 of dividends to our investors, represents $16.69 per share to an investor in our IPO in November 20 which was offered at $15 per share. Turning to our current operating results, In the fourth quarter, we generated $0.35 per share of GAAP net investment income core net investment income of $0.37 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.09 during the quarter due to net unrealized depreciation on our investment portfolio and reduction of spillover income. Offset by net realized gains on our investment portfolio. Primarily related to one equity investment.

Our ATM program was active during the quarter We issued 441,754 shares for $6,100,000 and shares at an average gross price of $13.86 per share. All issuances were above net asset value. Regarding portfolio and asset quality, we ended [indiscernible] 105 portfolio companies, up from $908,700,000 across 99 companies as of 09/30/2024. During the fourth quarter, we invested $76,500,000 in nine new and portfolio companies and had $33,000,000 in other investment activity All at par. We also received three full repayments totaling $46,900,000 and received $15,600,000 of other repayments both at par. We also received one full equity realization and one material partial realization that generated proceeds of $6,500,000 and realized gains of $5,500,000 At December 31, 98% of our loans were secured and 95% were priced at floating rates. The average loan per company is $9,500,000 and the largest overall investment is 21,200,000.0 both at fair value All but one of our portfolio companies are backed by a private equity firm. Overall, our asset quality is on plan. At fair value, 24% of our portfolio is rated a one or ahead of plan and 21% of the portfolio is market investment category of three or below plan, meaning not meeting plan or expectations.

Currently, we have loans to seven portfolio companies on non accrual which comprise 5.4% of the fair value of the total loan portfolio. With that, I'll turn it back over to Rob to discuss the overall outlook. Okay, very good. Thank you, Todd.

So as we look ahead to the first quarter of twenty twenty five, I'll cover portfolio growth, equity realizations and dividends. The active fourth quarter has As of last Friday, we have funded an additional $47,000,000 bringing our portfolio to $1,000,000,000 for the first time in our firm's history. We expect that level to maintain and probably finish the quarter the $1,000,000,000 number. As Todd noted earlier, we had realized equity gains in the fourth quarter of $5,500,000 We expect we'll see more equity gains in 2025. With approximately $4,000,000 to 5,000,000 by June 30. And as a reminder, our equity co invest business, we have equity co investments across 92 companies with a cost basis of $59,000,000 We believe over time that we should see meaningful uplift from here Our historical results would indicate realizations in excess of two times our cost. And finally, regarding dividends, we declared the dividend for the fourth quarter sorry, for the first quarter of twenty twenty five at a rate of $0.4 per share again payable monthly. We do expect that level of dividends again $0.4 per share payable monthly to continue into the second quarter And based on spillover or previous year's earnings, that have not been distributed we would expect this level to continue throughout the year.

Of course, all of this subject to [indiscernible] And with that, we'll open up for questions. Ali, begin the Q and A session, please.

Thank you. At this time, we'll be conducting our question and Our first question is coming from Sean Paul Adams with Raymond James. Your line is live.

Hey, guys.

Good morning. Good morning.

Good morning. So when it comes to discussions about potential tariff impacts to companies within the portfolio. And also discussions about potential changes in credit quality What are your thoughts [indiscernible] leverage going into 2025 and 2026 and just potential concerns about the magnification of that potential credit risk?

Yes. Good morning. Good question. So as you know, we're operating at a lower leverage level than we've normally operated. Our target regulatory leverage is one to one And GAAP would be two to one but we're certainly at a lower level than that now.

So I'd say, I think we continue to shoot for that target leverage. Branch of the government But I think that at this point, so to speak, wait and see. The impact of what's happening. But we're certainly cautious about what that could mean. We certainly have Most substantially all of our businesses are based in The United States, but some would touch government activity, some would would have activities cross border. So we're certainly cognizant of that. But I think we're in a wait and see attitude and but cautious as you say.

Perfect answer.

Thank you.

Thank you.

Thank you. Our next question is coming from Christopher Nolan with Ladenburg Thalmann.

Your line is Rob, could you give us a little thoughts in terms of given all the outlook information you gave, which is always appreciated. Do you think the first quarter EPS will cover the dividend?

We don't have a quite a bit, but probably not. Fully covered We'll see what the balance of the quarter looks like, but probably not. Would be close. And again, I think part of this is we look at the dividend and we look at earnings One, we have substantial earnings from the past that have not been paid out. Effectively covering And then we look at it over time and I mentioned, likely to start seeing some equity realizations kick in will be helpful. But I think as a technical matter, Todd, if we probably won't quite cover in the first quarter. Yes, that's right, Chris.

We think we'll be off by a few cents and that That general trend will make kind of continue throughout the year just given the rate environment and the spread environment.

Got you. And then on the topic of spreads, what was the driver for the decrease in investment yields in the first quarter? So good so in terms of spreads, maybe as a macro thought, So as we started 2024, We were seeing spreads of sixes and as we end the year seeing spreads in five.

So you probably that's one factor. Two, silver did decline. Quarter over quarter. And then probably some impact again for some additional non accruals. But the good news is it's in excess of 10% growth.

And on the topic of leverage, your leverage is just so low. I mean, what's the thought here in terms of your leverage is artificial seems to be artificially low. The EPS outlook a little bit Yes. So that counterbalance to the first question. So So as I say, we're targeting a one to one. Being cautious about it. And so we you may see that come happen over time this year. And there's some different ways to achieve that leverage. But more to come.

Got you. Final question. I know you paid off part of an SBA maturity in the first quarter of twenty twenty five.

Are you guys going to re up for more SBA lending capacity?

Yes, we are. Moving forward with a third license And thanks for noting that, that After ten years, our first Stellus debentures are starting to come due and so we did prepay the first debenture payment in the mid February of of roughly $16,000,000 So but we were in the process of obtaining hopefully a third license and we'll continue that program along the way.

Great.

Thank you very much.

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

Yes, good morning. I wanted to start first on the pipeline, the obviously had some nice new origination activity in the fourth quarter.

Like you're off to a good start here in the first quarter as well. So maybe just quantitatively, can you be kind of update us on kind of where the pipeline stands today relative to ninety days ago? And additionally, what that mix looks like between new versus add on opportunities.

Yes. So I'd say that again very busy fourth quarter and really the last month or two of the fourth quarter and then really through the first two two months, we're this quarter, we're on a pace that's would be exceptional. I think we've seen a little bit of slowness, but continued activity. Our as you know, our platform is at $3,000,000,000 plus platform overall. And so our investment teams are seeing a number of deals every week. So I think good pipeline, good deal flow. Probably not expecting the same level every month that we had in the first two. But then I'd also say so following question about New investments versus follow on. So the follow ons are very helpful. They come in two ways. One would just literally be a new follow on to the same company. And then alternatively or in addition to that, we'll have delayed draw term loans where someone is tapping an existing commitment that's been made. And this is helpful in that It's already in place.

Everything's been negotiated. So it comes in both ways. I'd say the quantum of that is probably two thirds our new transactions and Roughly a third would be follow ons or draws under DDPLs.

Great. Thanks. Appreciate the color there. And just a reminder, in terms of most of the delayed draw term loans you have did the companies need to meet some sort of financial hurdles to be able to draw on that or are they at the discretion of Right. They're typically structured that they're a true commitment but they are subject to certain tests. So one, it would be in compliance with all the covenants And they typically would have in addition to that, what's known as an occurrence test, And so the leverage quotient at the time they draw would have to be similar to the time when the loan first closed. So keeping the leverage at where we started out. And then in addition to that, you could In addition to you could have what needs to be used for a certain purpose and typically it's for an acquisition or some expansion.

Yes, that makes sense. Okay. And then transitioning to the spillover, I think you mentioned it in the prepared remarks with regard to the dividend and having some ability to support the dividend in the near term. With that, can you remind us of where the dollar level of the spillover is? This quarter or at the end of the fourth quarter?

Yes, we had Eric, we had $45,000,000 of spillover at the end of the year. So that's kind of what we're working against during 2025.

Got you. Perfect. Thank you. That's all for me Appreciate it. Thank you, Eric. Thank you.

Our next question is coming from Paul Johnson with KBW.

Your line is live.

Good morning, Paul.

Good morning.

Just a little bit more on the just kind of tariff risk in general.

Higher level. But have you guys run any sort of analysis or assess the portfolio in any way in terms of just kind of how much of the portfolio might be at risk of any of the tariff issues ongoing as well as exposure to maybe kind of government services or any sort of anecdotal data points you'd be able to provide?

Sure, Paul. So we've certainly analyzed it or been looking at it.

It would appear that impact from tariffs would be more than the impact from the government kind of exposure. Probably like a two to one there.

Our rough estimate is that could be up to 10%. I mean, depends how you grade them and what actually happens. But at this point, would not appear to be material. In terms of the overall activity, but we're as I said at the outset, we're going to wait and see and what really comes through from what's said at the government level.

What actually ends up happening. Got it. Appreciate that. And then last one, On the realized gains this quarter, was there any additional markup at all from those investments that were exited In the fourth quarter? Yes. And but it was a few million dollars We have one equity position that is continuing to grow and and in addition to the partial realization its value was increased as well.

Got it. Great. Thank you very much. All for me. Okay. Thank you, Paul.

Thank you. As we have no further questions on the line, I will now hand the call back over to Mr. Ladd for any closing comments.

Okay, great. Thank you. And again, thank you everyone for your support of our company. We look forward to getting back with it you in early May as we discuss the first quarter.

Thank you, ladies and gentlemen. This concludes today's conference and you may disconnect your lines at this time. And we thank you for your participation. [indiscernible]