Stellus Capital Investment Corporation Q2 FY2025 earnings call

• Life-to-date since IPO in November 2012: Invested approximately $2.7 billion in over 210 companies, received approximately $1.7 billion of repayments, and paid $306 million of dividends. - Quarterly operating results: GAAP net investment income $0.34 per share, core net $0.35 per share; net asset value per share decreased $0.04. Issued approximately 300,000 shares for $3.9 million under ATM program in the quarter, with YTD issuances of ~900,000 shares for $13.2 million. - Portfolio and asset quality: Fair value of portfolio at $985.9 million across 112 companies; invested $15.4 million in 3 new companies, received $21.7 million in repayments, $500,000 equity gain. 98% secured, 91% floating rate; asset quality slightly better than planned. - Capital: Received greenlight letter from SBA for Stellus Capital SBIC III, expect license, intend to draw new leverage as existing debentures are repaid.

In the second quarter, Stellus Capital generated $0.34 per share of GAAP net investment income and $0.35 per share of core net investment income. Net asset value per share decreased $0.04 during the quarter. The investment portfolio ended the quarter at fair value of $985.9 million across 112 portfolio companies, slightly down from $991 million as of March 31, 2025. During the quarter, $15.4 million was invested in 3 new portfolio companies, and $21.7 million in full repayments, $500,000 in equity realization with a $200,000 gain. 98% of loans were secured, 91% were priced at floating rates. 84% of the portfolio was rated 1 or 2, and 16% was rated 3 or below. Loans to 5 portfolio companies were on nonaccrual, which was a decrease from the prior quarter.

• Declared dividend for third quarter of $0.40 per share payable monthly; expect fourth quarter to also be $0.40 per share payable monthly. - Portfolio expected to be ~$1 billion with 113 companies by end of third quarter. Anticipate $12 million of proceeds and approximately $10 million of gains from equity realizations in the second half. - Investment activity picked up, with $26 million in new fundings since June 30, expect busy second half.

• Uncertainty in actual results differing from forward-looking statements as per SEC filings. - Potential uncertainty in equity realizations meeting projected amounts. - Uncertainty in leverage utilization and its impact on dividend coverage.

Q: EPS is not covering the dividend for the last few quarters. How much spillover is there left over? And what's the strategy in terms of increasing your leverage to cover the dividend?

A: Todd Huskinson said this year there's just under $45 million of spillover working off through the dividend, and next year expected to be about $38 million. Robert Thomsen Ladd said currently running at about 0.9x on regulatory test and 1.7x total leverage for GAAP, target is about 1:1 on regulatory test, with capacity to move leverage up through bank facility to grow portfolio.

Q: For the SBIC III license, how much of your deal flow is eligible for the SBIC? And how quickly do you think you can fill that?

A: Robert Thomsen Ladd said historically roughly half of deal flow qualifies, it's a meaningful part of deal flow and anticipate quick approval.

Q: Just curious how the pipeline is looking for the remainder of the year and where you're seeing opportunities, whether that's new or add-on investments.

A: Robert Thomsen Ladd said pipeline is quite robust with 10 actionable opportunities, 5 to 7 new opportunities a week, expect to continue to grow portfolio despite repayments.

Q: What's the level of confidence on the potential equity realizations that you mentioned, maybe $12 million in proceeds, $10 million in gains in the second half of the year?

A: Robert Thomsen Ladd said likelihood is high as businesses are actively marketed by bankers or companies and are well-performing.

Q: On the 15% of the portfolio is rated 3 or lower, i.e., not meeting plan. If we exclude the nonaccruals, how much of the remainder are you seriously nervous about?

A: Robert Thomsen Ladd said by definition, for category 3, expect to receive all principal and income, so not overly nervous.

Q: How much uncertainty is in the portfolio growth by year-end given the pipeline and timing with 4 months left in the year?

A: Robert Thomsen Ladd said pipeline has many opportunities with high probability, and a lot of things looking at have good chance to close by fourth quarter, expect to grow portfolio balance of year.