Stellus Capital Investment Corp (SCM) 2018 Q4 法說會逐字稿

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 fourth fiscal quarter and year ended December 31, 2018. (Operator Instructions) This conference is being recorded today, Wednesday, March 6, 2019.

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, sir.

Okay. Thank you, Michael. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter and year ended December 31, 2018.

Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements as well as an overview of our financial information.

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 our 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.

At this time, I'd like to turn the call back over to our Chief Executive Officer, Rob Ladd.

Thank you, Todd. We will begin by discussing our operating results followed by a review of the portfolio, including asset quality and then the outlook.

Todd will cover our operating results first.

Thank you, Rob. We had solid results in the fourth quarter and for fiscal year 2018. First, I'll cover our quarterly results.

We covered our fourth quarter distributions of $0.34 per share through core net investment income of $0.42 per share. GAAP net investment income was $0.49 per share, impacted by the reversal of $1.1 million of previously recorded capital gains incentive fee accrual. The growth in net investment income in the fourth quarter was driven by higher interest income, including the realization of $1.1 million of previously reserved income.

Net asset value decreased $0.20 per share during the quarter from $14.29 to $14.09, due primarily to unrealized depreciation of our debt portfolio from spread widening at quarter-end, offset by unrealized appreciation in our equity portfolio.

Turning to fiscal 2018, our core and regular net investment income of $1.42 per share more than covered our distributions of $1.36 per share. In addition, core net investment income plus realized gains for the year totaled $1.75 per share.

As of December 31, 2018, we've generated undistributed taxable income of approximately $9.3 million or $0.58 per share that will be spilled over to 2019.

For the year 2018, net asset value increased $4.6 million or $0.28 per share from $13.81 to $14.09 due to: first, excess of dividend coverage from net investment income of approximately $900,000; realized gains net of tax provision [of] $5.3 million, which was offset partially by unrealized losses of $1.6 million.

Finally, of our $1.36 per share of dividend paid in 2018, approximately 27% were characterized as long-term capital gain and therefore taxable to our investors at the applicable long-term capital gains rate.

With that, I'll turn it back over to Rob.

Okay. Thank you, Todd. I'd like to cover the following areas: first, life-to-date review; second, portfolio and asset quality; and finally, outlook.

For the life-to-date review, since our IPO in November of 2012, we've invested approximately $1.2 billion in over 100 companies and received approximately $700 million of repayments, while maintaining good asset quality. To date, we have paid over $115 million of dividends to our investors, which represents $8.63 per share to an investor from our IPO in November of 2012.

Now turning to portfolio and asset quality. We ended the year with an investment portfolio at share value of approximately $505 million across 57 portfolio companies. This is up from approximately $372 million across 48 companies at the end of 2017. During 2018, we invested in total $278 million. This is in 17 new and 12 existing companies. And we did receive $147 million of repayments, which brought our net portfolio growth for the year of $131 million up in total.

Our portfolio continues to be weighted towards secured lending at floating rates. At December 31, 95% of our loans were secured and 91% were priced at floating rates. This move to more senior lending is resulting in lower coupons and larger hold sizes. However, we expect it will also result in stronger asset quality over time.

We continue to maintain good diversification with the largest industry sector at approximately 13% of the total. The average investment per company is $8.9 million and the largest investment is $22.3 million, both measured at fair value. Portfolio company leverage on average is in the mid-4s, and average EBITDA for the company is approximately $20 million. 54 of the 57 portfolio companies are backed by a private equity firm.

Overall, our asset quality is stable at 1.9 on our investment rating system or slightly better than planned. 18% of the portfolio is rated at a 1 or ahead of plan, and only 8% of the portfolio is marked at an investment category of 3 or below. In total, we have 4 loans in nonaccrual, which comprise 2.8% at fair value of the total loan portfolio.

Now turning to outlook. Since year-end, we have funded $28.5 million at par in 1 new and 2 existing portfolio companies. We received $3 million and full repayment of 1 investment. We've identified likely fundings of approximately $18 million over the next 30 days. And with respect to repayments, we are aware of up to $22 million of payoffs likely to occur in the second quarter. These repayments, should they occur, will contribute approximately $500,000 of additional income.

It's worth noting that 90-day LIBOR, which is the base rate for most of our floating loans, has declined about 20 basis points since 12/31. This, coupled with our closing more first lien and unitranche loans, we may see some decline in the debt portfolio this year.

Part of our strategy has been to invest in the equity of our portfolio of companies in a modest way in order to generate realized gain sufficient to offset losses over time. As our business has matured over the last 6 years, we have begun to see somewhat regular realized gains from the portfolio. During 2018, we had $5.3 million of realized gains, net of tax provision. And we would like to note that we have the potential for additional realized gains of approximately $10 million over the next 30 to 60 days.

We ended the year with leverage of approximately 0.7x. As a reminder, we have approval from our bank group to increase leverage to 1.33 to 1 and shareholder approval for 2 to 1 leverage. Our plan is to more fully utilize leverage and end the year with a portfolio close to $600 million.

And with that, I'll open it up for questions. Thank you. Michael, please begin the question-and-answer session.

(Operator Instructions) And I'm currently showing no questions in the queue.

Okay. Well, no worries. Thank you, everyone, for your support. And we look forward to updating you in early May with respect to the first quarter. Thanks again.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.