Stellus Capital Investment Corp Q4 FY2024 earnings call

• Life-to-date since IPO in Nov 2012: invested ~$2.6B in over 200 companies, received $1.6B repayments, paid over $288M in dividends ($16.69 per share from IPO).
• Q4 operating results: GAAP net investment income $0.35 per share, core net investment income $0.37 per share. Net asset value per share decreased $0.09. ATM program issued shares above net asset value.
• Portfolio and asset quality: Investment portfolio at fair value increased, $76.5M invested in new/portfolio companies, $46.9M in repayments, $6.5M in equity realizations.
• First quarter 2025 outlook: Portfolio expected to reach $1B, expect $4-5M equity gains by June 30, dividend of $0.40 per share payable monthly continuing into second quarter, targeting one-to-one leverage.

In the fourth quarter, Stellus generated $0.35 per share of GAAP net investment income and $0.37 per share of core net investment income (excluding estimated excise taxes). Net asset value per share decreased $0.09 due to net unrealized depreciation and reduction of spillover income, offset by net realized gains. The ATM program issued 441,754 shares for $6.1 million at an average gross price of $13.86 per share. The investment portfolio at fair value was $953.5 million across 105 portfolio companies, up from $908.7 million across 99 companies as of September 30, 2024. $76.5 million was invested in nine new and portfolio companies, $33 million in other investment activity. Received $46.9 million in full repayments, $15.6 million in other repayments, and $6.5 million from equity realizations with $5.5 million realized gains. 98% of loans were secured, 95% at floating rates, average loan per company $9.5 million, largest $21.2 million. 24% of portfolio rated one or ahead, 21% category three or below, 5.4% of loan portfolio on nonaccrual.

• Portfolio expected to maintain at $1 billion level by quarter end.
• Anticipate $4 to $5 million in equity gains by June 30, 2025.
• Dividend of $0.40 per share payable monthly to continue into second quarter and likely throughout the year.
• Targeting a one-to-one regulatory leverage ratio, with plans to move towards this target over time.

• Potential tariff impacts on portfolio companies, estimated to potentially impact up to 10% of the portfolio.
• Uncertainty regarding government activity impacts on the business, especially for companies with cross-border or government-related activities.
• Concerns about credit quality and leverage magnification in a tightening spread environment.

Q: Thoughts on potential tariff impacts, credit quality, and leverage going into 2025 and 2026?

A: Operating at lower leverage than normal, targeting one-to-one leverage. Cautious about government uncertainty and tariff impacts but in a wait-and-see attitude.

Q: Will first quarter EPS cover the dividend?

A: Probably not fully covered, but close, with substantial past earnings not distributed and expected equity realizations to help.

Q: Driver for decrease in investment yields in first quarter?

A: Macro spread decrease, slight decline quarter over quarter, and some impact from non-accruals.

Q: Why not increase leverage?

A: Targeting one-to-one leverage, will move towards that over time with different ways to achieve it.

Q: Re-up for more SBA lending capacity?

A: Moving forward with a third license, prepayed $16M of SBA maturity in Feb 2025.

Q: Pipeline update, new vs add-on opportunities?

A: Busy fourth quarter and first two months of 2025, good pipeline, ~two-thirds new transactions, ~a third follow-ons or draws under DDTLs.

Q: Delayed draw term loans structure?

A: True commitments subject to compliance with covenants and incurrence tests, typically for acquisitions or expansion.

Q: Spillover dollar level?

A: $45 million of spillover at year end.

Q: Tariff risk impact on portfolio?

A: Estimated up to 10% impact, more than government exposure, but not material currently.

Q: Additional markup on realized gains from exited investments in fourth quarter?

A: A few million dollars, one equity position continued to grow with increased value from partial realization.