Stellus Capital Investment Corp Q3 FY2024 earnings call

• Life-to-date since IPO in 2012: Invested approximately $2.5 billion in over 195 companies, received ~$1.6 billion in repayments, paid over $273 million in dividends. - Third quarter operating results: GAAP net investment income $0.39 per share, core net investment income $0.40 per share; net asset value per share increased $0.19 due to net unrealized depreciation; ATM program issued $14.6 million in shares at an average gross price of $13.79 (all above net asset value). - Portfolio and asset quality: Ended quarter with $908.7 million portfolio, invested $9.4 million in new company, received repayments and equity realization; 98% loans secured, 95% floating rate; asset quality slightly better than planned. - Outlook for fourth quarter: Expect portfolio between $930 million and $950 million; ~$29 million in loan repayments; ~$5.3 million in equity realization proceeds ($4.3 million realized gain); increased bank facility to $315 million; ability to grow portfolio to $1 billion plus; dividend declared at $0.40 per quarter payable monthly.

In the third quarter, Stellus Capital generated $0.39 per share of GAAP net investment income, with core net investment income at $0.40 per share (excluding estimated excise taxes). Net asset value per share increased $0.19 during the quarter. The investment portfolio had a fair value of $908.7 million across 99 portfolio companies, up from $899.7 million across 100 companies as of June 30, 2024. During the quarter, $9.4 million was invested in a new portfolio company, $8.4 million in other investment activity at par, $8.4 million was received as a full repayment, $5.5 million in other repayments, and an equity realization generated $2.6 million in proceeds with a $2.2 million realized gain. 98% of loans were secured, 95% priced at floating rates. 26% of the portfolio was rated a 1 (ahead of plan), 18% was marked at an investment category of 3 or below, and 4.7% of the loan portfolio was on non-accrual. Revenue contribution details weren't explicitly broken down by product segment but focused on overall portfolio and investment activity.

• Expect to end the fourth quarter with a portfolio between $930 million and $950 million. - Anticipate approximately $29 million in loan repayments and $5.3 million in equity realization proceeds, resulting in $4.3 million in realized gains. - Increased bank facility to $315 million with meaningful capacity, allowing potential portfolio growth to over $1 billion. - Dividend declared at $0.40 per quarter, payable monthly with record dates for November and December forthcoming.

• Impact of declining SOFR curve on yields, as loans reprice and affect yield levels. - Uncertainty around market conditions potentially affecting asset quality and the success of equity realizations. - Timing and outcome of potential transactions tied to equity appreciation, which could impact portfolio valuations.

Q: With NII a little light of our expectations and slightly below the dividend this quarter, was there any kind of temporary drivers?

A: Nothing unusual, including a lower SOFR rate for the quarter, a little tick-up in non-accrual, and lighter investment activity than expected.

Q: Is the $0.39, low 40s a pretty good run rate going forward?

A: Depends on other income in the fourth quarter, with SOFR having dropped affecting loan repricing.

Q: What drove the write up in the portfolio this quarter?

A: One equity investment tied to a potential transaction.

Q: Impact of Fed action on lowering rates on EPS?

A: Should have a downward bias, with lower SOFR in the fourth quarter.

Q: Should we expect the fee waiver to be a recurring item?

A: No current expectation, maybe in the second quarter of 2025 if nothing changes.

Q: What's the spillover income?

A: Stands at $42 million right now.

Q: Is the appreciation tied to a potential transaction going to occur in Q4?

A: Yes, expected to occur in Q4.

Q: Does spillover income include prospective realized gains in Q4?

A: Regular way realized gains in Q4, with no tax impact.

Q: Impact of spread compression?

A: Spreads came down from 6s to 5s, stabilizing and rolling through, with new opportunities coming in the 5s.

Q: Confidence in $930 million to $950 million portfolio by year-end?

A: Confident with 10 to 15 active deals, could be higher.