Stellus Capital Investment Corporation (SCM) Earnings Call Transcript
August 11, 2026
Earnings Call Speaker Segments
Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to Stellus Capital Investment Corporation's conference call to report financial results for its second fiscal quarter ended June 30, 2026. This conference is being recorded today, August 11, 2026. It is now my pleasure to turn the call over to Mr. Robert Ladd, Chief Executive Officer of Stellus Capital Investment Corporation. Mr. Ladd, you may begin your conference.
Okay. Thank you, Jenny, and good morning, everyone. Thank you for joining the call. Welcome to our conference call covering the quarter ended June 30, 2026. We have 6 topics to cover this morning. First, the financial results for the second quarter portfolio and asset quality, the outlook for Q3 and beyond, an update on our adviser joining Rich Post Capital, our $20 million share buyback program and opportunities for growth. . Joining me this morning is Todd Huskinson Financial Officer, who will cover important information about forward-looking statements. Todd, I'll turn it over to you.
Thank you, Rob. 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 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 any 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. Now I'll cover our operating results for the quarter, I would like to start with our life-to-date activity. Since our IPO in November of 2012, we've invested approximately $2.9 billion in more than 225 portfolio companies while navigating multiple market and credit cycles. Over this time, we've received approximately $1.9 billion of repayments while maintaining disciplined credit performance. We believe our track record, our underwriting process and deep sponsor relationships provide us with meaningful competitive advantages, reflecting more than 20 years of working together as an investment team and nearly 14 years of operating as a public BDC. Our focus remains on preserving capital while generating attractive risk-adjusted returns for our shareholders. And we think our long-term credit performance as well as our 14-year track record of return on equity demonstrates the effectiveness of our underwriting process and our portfolio management approach. To that point, we've generated a life-to-date return on equity of 9.5%, which includes all realized and unrealized gains and losses across the portfolio to date. We've also paid $349 million of dividends to our investors since our IPO, representing $18.83 per share over this period. Now turning to operating results. In the second quarter, we generated $0.26 per share of GAAP net investment income and core net investment income, which excludes estimated excise taxes, was also $0.26 per share. Overall, for the quarter, net asset value increased by $0.26 per share or 2% sequentially driven by 3 primary factors: first, Net realized and unrealized gains contributed $0.30 per share, primarily driven by write-ups related to company-specific performance. Second, our share repurchase program was accretive to NAV adding approximately $0.05 per share. And finally, dividend payments exceeded earnings by $0.08 per share as we continue distributing the remaining spillover income from 2025. I'd like to note that these figures are in line with the preliminary results we previously reported. With respect to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $968 million across 116 portfolio companies, a decrease from $990 million across 116 portfolio companies as of March 31, 2026. During the second quarter, we invested a total of $18 million, of which $8.7 million was in 3 new portfolio companies and $9.3 million for add-ons to existing portfolio companies. We also received 5 full repayments totaling $38.7 million, $500,000 from one equity realization, which resulted in a realized loss of $200,000 and received $10 million of other repayments at par. At June 30, 100% of our loans were secured and 92% were priced at floating rates. The average loan per company is $8.9 million and the largest overall investment is $26 million, both at fair value. For the 98 companies that comprise our loan portfolio, the weighted average EBITDA level was $15.6 million at quarter end and the weighted average normalized leverage quotient was 4.2x for the performing loans. Substantially, all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly below billion, at fair value, 74% of our portfolio is rated a 1 or 2 or on or ahead of plan and 26% of the loan portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We removed one loan from nonaccrual status during the quarter and did not add any new loans. Currently, we have loans to 5 portfolio companies on nonaccrual which comprised 8.5% of the total cost and 5.4% of the fair value of the total investment portfolio, respectively, which represent a decrease from the prior quarter at cost and a slight increase at fair value. While the level of nonaccruals and risk rate 3 loans remains higher than we would like, reducing both that number of these investments and exposure to them remains a key priority. We're actively working each position and continue to make progress either exiting these investments or returning them to accrual status. Now I'd like to turn the call back over to Rob to cover a number of additional topics.
Okay. Thank you, Todd. As we look ahead to the third quarter of 2026, I'll cover 4 topics: the outlook for the quarter and beyond, an update on our adviser joining Repos Capital, our $20 million share buyback program and again, opportunities for growth. In terms of outlook, as of today, our portfolio is approximately $960 million across 117 portfolio companies. For the balance of the quarter, we expect repayments to slightly outpace again new fundings thus ending the quarter slightly down from where we are today; however, we have seen a meaningful improvement in the origination pipeline across the CELx platform since beginning the quarter, while market conditions remain fluid and the timing around future deal closings is never certain, we're hopeful gross origination activity is set to increase toward the end of the year, which have positive implications on net portfolio growth for the company over the next several quarters. . As mentioned on previous calls, we have been reducing the amount of spillover income and have expected that over time, our dividend would approximate our net investment income. We have now reached that point. and we have set our dividend to $0.25 per quarter per share for the third quarter. To that point, based on the current trajectory of NII as well as our outlook for short-term rates and spreads, we expect to be well positioned to earn our $0.25 quarterly dividend or more moving forward. Next about Rich Post. On June 22, our external adviser, sells Capital Management officially joined the Ridge Folks Capital platform. As a reminder, Rich Bose Capital is a leading alternative investment manager in the middle and lower middle market currently managing more than $50 billion of AUM across private equity, private credit and venture. We're very pleased with how the transition is going and early integration is well underway. We are coordinating many areas, including investment origination and management, investor relations, fundraising and operations. Since joining Rich Post Capital, one of the most promising opportunities has been the ability to leverage the firm's broader sponsor relationships, specifically RigePost capital, lower middle market private equity fund-to-funds business which is RCP Advisors. RCP has been investing in the lower middle market GPs for 25 years, and the team has relationships with more than 200 lower middle market private equity firms. This aligns well with our direct lending strategy, which is exclusively to private equity -- lower middle market private equity-backed companies and believe our business is set to benefit from this meaningfully over time. We've been collaborating with the RCPs team to identify financing opportunities with these sponsor relationships. While still early, we believe the long-term opportunity could represent significant incremental originations annually across the Stellus platform. And importantly, this incremental deployment opportunity is additive to the strong origination pipeline we've been building over 20 years. Now to share repurchases. Regarding capital allocation, we continue to do share repurchases as an attractive use of capital today, specifically as our stock continues to trade at a significant discount to NAV. Repurchasing shares immediately is immediately accretive to net asset value and earnings per share, creating value for our shareholders. On March 3 of this year, our Board of Directors approved a common stock repurchase program of up to $20 million. I'm pleased to share that since that date, we have repurchased 467,000 shares for approximately $4 million. Given our outlook for the business as well as the remaining future authorization, we continue to do buybacks as accretive and efficient way to improve the return to our shareholders and new opportunities for growth. We're pleased to announce that we received approval from the SBA for a third SBIC license. With this new license, we expect to meaningfully increase the size of our investment portfolio. The license will allow us to contribute up to $125 million of equity in excess of $250 million of long-term low-cost SBA guaranteed debentures. In addition, the SBA recently increased the maximum amount of debentures that a family of funds may have outstanding from $350 million to $475 million. providing us with additional long-term financing capacity as we continue to grow the platform. We believe these developments and changes will ultimately result in the ability to expand the investment portfolio by up to $100 million over time or 10% of the current portfolio at fair value today. And before opening the line for questions, I'd like to conclude with a few final remarks. First, we have aligned our $0.25 per share quarterly dividend with a current trajectory of NII Second, while we still have work to do with several underperforming investments. We're actively managing these positions and remain focused on continuing to improve overall portfolio quality. Third, the origination backdrop is improving, and we're seeing encouraging signs across our pipeline as sponsor activity begins to accelerate. Taken together, we believe these factors position Stealth to create meaningful long-term value for shareholders while continue to generate attractive income through the cycles. And Jenny, with that, we'd now be happy to open up for questions.
[Operator Instructions] Our first question is coming from Eric Zwick of Lucid Capital Markets.
Wanted to start with a follow-up on I wanted to start with a follow-up on your commentary regarding the pipeline and the outlook for the back half of the year improving. I'm curious what's driving that optimism? Is it the partnership with Ridge post and broadening the funnel and potentially improved market activity, a combination of those or maybe some other factors Wondering if you could comment there.
Yes, sure, Will. So I'd say 1 thing, it's generally true that the deal activity tends to be somewhat seasonable -- seasonal. And therefore, second half of the year is typically busier than the first. and the fourth quarter is typically the busiest of the 4 quarters. So I think that's part of it. I think a little bit slower activity earlier in the year. And I think things have just generally picked up for us. We are seeing pricing in that regard relatively stable. So as an example, if we were less disciplined on pricing, we'd probably be closing more deals, but we try to be disciplined on pricing, of course. And then in terms of the RCP advisers and Ridge Post combination, still early there, early days there, but we think this will take a few quarters or so, but we're starting to see some commonality of opportunities or sponsors really at a transaction and it turns out that the sponsor is part of the RCP portfolio, if you will. So that's starting. But this point is coming more from our existing origination capabilities.
I appreciate the color there. Just looking at the income statement, the other income line was a little bit lower this quarter or in the second quarter relative to the past 3 or 4. Curious if there was anything kind of noteworthy or specific in the most recent quarter and whether you would expect the 2Q rate to be a good go-forward rate or return to the more historical level there?
Todd, I'll turn that over to you.
Yes, I would say there's nothing particularly unusual. I mean 1 thing is that we didn't carry quite as much cash as we historically have, and so our sweep income. -- is not as high. So that's probably the primary difference. It kind of moves up and down. But I'd say that's probably the only thing that's unique for this quarter.
Got it. And then last 1 for me. Just on the unrealized appreciation in the quarter, what drove the positive marks in the portfolio?
Right. I mean related to 2 of the positions that were kind of working. So 1 of them was a sale of a unit division. And so that improved the mark there. And the other one was in restructuring and taking out another lender at a low -- at a low price, low value, the other lenders, increased enterprise value for both of those businesses. And resulted in kind of upper lifts on to those. So I'd say that was probably half of it. And the other half of it is simply a reversal for the realized loss that we had on 1 of our positions, which, as you know, Eric, kind of we have a realized loss that we've marked it, and we typically we marked it in roughly the same amount that the realized losses. And so it's a reversal that shows up as a realized gain.
Our next question is coming from Christopher Nolan of Layton Christopher.
The hook up with Ridge post, do you anticipate you just going to have a much larger pipeline of deals that you're going to be reviewing?
I think, Chris, I think that's definitely right over time. And I would say that it starts with where we've been calling on someone in for a while, maybe doing business with them and RidgePost is already an LP in their funds. So this is very helpful. The next would be in situations where RCP is an LP in a fund, and we don't have a previous relationship with them. and this will take time, but a nice warm introduction from RCP to that private equity firm. So that's how it will progress from here, but we definitely think this will make a real difference as time passes. And again, we've already had good interaction with the RCP team. And again, long time, 20-plus year history of investing in this market on the PE side. So though they also have great insight into the quality of these private equity firms having invested with them or observing them for over 2 decades.
Thank you, Rob. And also, See, the nonaccruals have been elevated for some time. If and when those come down, is the anticipation to keep the leverage ratios at the current levels or to if the nonaccruals come down and stay down to increase leverage going forward? What are the thoughts around that?
Yes. So I think that we're operating less than 1:1 leverage. Our target leverage is 1:1 on a regulatory basis and 2:1 or so on a GAAP basis. So I think you certainly could see our leverage increase as the third license SBIC license gets up and running, that will be helpful. Of course, that will be total GAAP leverage, which again, we view as safe, it's long dated. And so I think you will see leverage increase. And I think, too, it's -- your question is a good reminder that if you think about our portfolio today, we have roughly $50 million of nonaccruing assets at fair value. and roughly $90 million of equity co-invests at fair value, neither of which have a return to them. . Now the equity portfolio is appreciating, and we get a return from it over time. But imagine being able to recycle what is in total, $140 million into earning assets. Some will be equity new equity co-invest, but others will be performing loans. So this should help with earnings capacity. This will take time as they get recycled. And then back to your original question is that would expect leverage to get closer to 1:1 and 2:1 on a GAAP basis than it is today.
And our next question is coming from Robert Dodd of Raymond James.
On -- just going back to RCP for a second, if I can, not in the relationships and the preliminary discussions you've had with them and the PE funds kind of they have a list, are there any niches where they have the funds maybe have particularly strong industry expertise where you haven't historically been a significant participant. I mean is that 1 of the ways as well? Because obviously, you can expand the pipeline, but can it expand kind of like industry and sector diversification as well?
That's a really interesting point. So I would say in the lower middle market, what we found is that many of the firms cover a variety of areas, some are more specialized. As an example, industrial services would be a category. Some would be in technology. So our digital marketing. But I think our history of investing really kind of transcends all industries, except for the 2 that we've not been active in at all, which is real estate and the pure oil and gas industry. So I think what we found is, one, we have kind of touched probably most every industry sector. to, I would say, and haven't studied it carefully, but they would, therefore, and their portfolio of experiences 200-plus funds, would cover a variety. So I think together, will have touched everything. But it could certainly provide access to some areas where we don't have as much exposure to or that would be new and that we would find attractive. So I think it's a really good eliminating point that not only should it be in volume, but it could be interesting in terms of industry sector given the where they operate.
Yes, yes -- on the remaining noncore, I mean, can you give us any qualitative -- I mean, like how are -- do you -- do you think those nonaccruals can come back to performing? I mean, are the primary factors operational that can be fixed over time? Or are they the other issues where it may need a material restructuring and the sponsor may have to approve that? Or is this just operational improvements to get them back or something is needed order to deal with those remaining assets?
So on the nonperforming situations, the trying to think all but 1 of them I say this that most of them, we and the other lenders now control them. So we're no longer relying upon a private equity firm to do something. And so we're now working with the management -- the other lenders with the management teams to affect one, we've probably already done a restructuring and two, now how to improve the business operationally. In some cases, we provide hip to provide a little bit more capital. And so from here, it's a matter of getting the companies in a position for an exit. If it's helpful, we would be glad to convert that fair value today into cash and reinvest it. So we're not trying to achieve 2x our money from here, but rather position the companies where they can be sold for -- and so all do as well as possible, and they're working closely with the management teams. So I think it's that category. We're basically at that point where we don't have any obstacles. They've been restructured. We -- the lenders taken restructured the capital stack, providing capital if needed, and we try to be very limited in that way, but also try to be smart in that way, too. So that's the on...
Yes. I appreciate that color. .
Thank you very much. While we appear to have reached the end of our question-and-answer session. I will now hand back over to Mr. Lad for any closing comments.
Okay. Thank you, Jenny, very much, and we thank everyone for joining the call and for the support from our shareholders, and we look forward to giving you a further update as we review the third quarter in early November. Thank you very much. .
Thank you, everybody. This does conclude today's conference, and you may disconnect your phone lines at this time. We thank you for your participation.
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