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Stellus Capital Investment Corporation (NYSE:SCM) 2023 Q4 Earnings Report Call Transcript March 5, 2024
Stellaus Capital Investment Corporation wasn’t among the 30 most popular stocks among hedge funds at the end of the third quarter (see the details).
operator: Good morning, ladies and gentlemen, thank you. I would like to welcome everyone to this conference call to report the fourth quarter and fiscal year ending December 31, 2023 of Stellas Capital Investment Corporation. All participants are currently in listen-only mode. A formal presentation will be followed by a question and answer session. [Operator Instructions] This conference was recorded today, March 5, 2024. He is pleased to transfer the call to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Rudd, may I begin?
Robert Rudd: Understood. Thank you, Holly. Hello everyone. Thank you for your participation. Welcome to our conference call covering the quarter and fiscal year ending December 31, 2023. Of course, we’re also joined this morning by our Chief Financial Officer, Todd Huskinson, who will provide important information regarding forward-looking statements and an overview of our company. Our Financial Information.
Todd Huskinson: Thank you, Rob. I would like to let everyone know that today’s call is being recorded. Please note that this call is the property of Stellus Capital Investment Corporation and unauthorized broadcasting of this call in any form is strictly prohibited. Audio playback of the call will be available using the phone number and PIN provided in the press release announcing the call. We would also like to draw your attention to the customary safe harbor disclosure regarding forward-looking information in our press releases. Today’s conference call may also include forward-looking statements and projections, and we will discuss important factors that could cause actual results to differ materially from those projected, including our latest filings with the SEC. Please refer to the documents.
We do not update forward-looking statements unless required by law. To obtain a copy of our most recent SEC filings, please visit the “Public Investors” link on our website (www.stelluscapital.com) or call us at 713-292-5400. At this time, I would like to turn the call back to our Chief Executive Officer, Rob Rudd.
Robert Rudd: Understood. Thank you, Todd. This afternoon, I’ll start by talking about our performance, followed by a review to date, a review of our portfolio, including asset quality, and our outlook for the future.
Todd Huskinson: Thank you, Rob. First, I will explain our business results. The company continues to benefit from a favorable asset-liability mix, with 98% of its financing variable and only 27% of its debt variable. As a result, we delivered a strong fourth quarter with core net investment income of $0.50 per share and GAAP net investment income of $0.49 per share, more than covering our $0.40 per share dividend. . Net asset value increased $0.07 per share to $13.26 per share. In the fourth quarter, we recorded a tax refund of $3 million. This was the result of recording a realized loss on a previously marked position. Since our IPO in November 2012, we have invested approximately $2.4 billion in over 195 companies and received approximately $1.5 billion in repayments, while maintaining stable asset quality.
We have paid out more than $246 million in dividends to our investors. This equated to his $15.08 per share for investors in his November 2012 IPO. Next, looking at portfolio and asset quality, we ended the quarter with an investment portfolio with a fair value of $874 million. Across the 93 portfolio companies, the total amount was $886 million, down slightly from $886 million across the 96 companies as of September 30, 2023. During the fourth quarter, the Company invested $40.3 million in three new portfolio companies and 11 existing portfolio companies, invested an additional $3.9 million in capital, and received full repayments in five companies. Four full realizations totaling $39.9 million and other repayments of $153 million reduced the net portfolio to $39.5 million in costs. As of December 31, 99% of our loans were secured and 98% had variable interest rates.
We always focus on diversification. The average loan amount per company was $9.9 million, and the maximum overall investment was $18.9 million, both at fair value. Virtually all of our portfolio companies are backed by private equity firms. The average leverage of his portfolio companies is approximately 4x and the average EBITDA is approximately $19 million per his company. Overall, the quality of our assets is slightly better than planned, with 24% of the portfolio receiving a rating of 1 or higher than planned and 14% of the portfolio marked in the investment category of 3 or lower. At year-end, we had four outstanding loans, representing 1.3% of the fair value of our total loan portfolio. So let’s turn it back to Rob to discuss the dividend and the overall outlook.
Robert Rudd: Understood. Thank you, Todd. As a reminder, part of our investment strategy has been to invest in stocks of portfolio companies in a conservative manner to generate enough realized gains to offset losses over time . While equity realizations have been modest recently, we expect this activity to further accelerate over the next 6-12 months. To this end, the Company recognizes that in the second quarter he may experience two stock realizations. Total revenue would be approximately $7 million, with a potential realized profit of $4 million. As of year-end, the Company has a $60 million stock investment at cost that was marked at $72 million. Our historical experience indicates that the ultimate realized value of this portfolio will be more than twice the cost basis of the portfolio.
However, of course, the ultimate performance of our current stock positions will depend on a variety of factors, including, among other things, the current economic environment and the stock of our sponsors. [ph] exit strategy. Turning now to dividends, we continue to maintain a quarterly dividend of $0.40 per share as a result of the increased earnings we are generating in this high interest rate environment. As Mr. Todd noted, our portfolio is over 98% floating and our debt mix is approximately 73% fixed rate, so we are well positioned to benefit from rising interest rates. For the second quarter of this year, the Company will continue to pay a monthly dividend of approximately $0.13 per share, subject to board approval, bringing the total dividend for the second quarter to $0.40 per share. It’s a schedule.
It is worth noting that the company’s current dividend represents an annual yield of approximately 12.4%, based on the average price of the company’s stock over the past 10 days ending yesterday. Moving on to the outlook, since the end of the year, we have raised $4.7 million in face value for seven of our existing portfolio companies, and one company has received a full repayment of his $16.2 million. This brings our total portfolio, including 92 portfolio companies, to a fair value of approximately $863 million. The company expects the remaining quarter’s funding to be offset by approximately the same amount of expected repayments, as the origination environment has slowed somewhat compared to past several quarters. Notably, we expect investment activity to pick up in the second half of this year for a variety of reasons.
We have ample headroom for new investments, which will naturally increase as repayments are expected. I’ll start asking questions now. And then, Holly, we’ll start the question and answer session.
operator: surely. At this time, we will have a question and answer session. [Operator Instructions] Our first question today comes from KBW’s Paul Johnson.
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To continue reading the Q&A session, click here.
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