Earnings call transcript: Stellus Capital Q4 2024 misses forecast, stock falls

Stellus Capital Investment Corporation reported its Q4 2024 earnings, showing a slight miss in both earnings per share (EPS) and revenue compared to forecasts. The company’s EPS was $0.37, below the expected $0.3957, while revenue reached $25.61 million, falling short of the anticipated $26.54 million. Following the announcement, Stellus Capital’s stock price fell by 8.8%, closing at $13.78, reflecting investor disappointment and marking a significant drop from its 52-week high of $15.56. According to InvestingPro data, the company maintains strong fundamentals with a P/E ratio of 7.01 and revenue growth of 5.88% over the last twelve months.

Key Takeaways

• Stellus Capital’s Q4 2024 EPS and revenue both missed analyst expectations.
• The company’s stock dropped by 8.8% post-earnings announcement.
• Stellus achieved a $1 billion portfolio milestone for the first time.
• Dividends remain a focus, with a declared Q1 2025 dividend of $0.40 per share.
• Concerns over tariff impacts and market yield compression were highlighted.

Company Performance

Stellus Capital Investment Corporation has demonstrated growth by reaching a $1 billion investment portfolio, a significant milestone in its history. Despite this, the company faced challenges as spreads and investment yields were compressed throughout 2024. The company continues to focus on dividend payouts, having distributed over $288 million since its initial public offering. InvestingPro analysis reveals the company has maintained dividend payments for 14 consecutive years, currently offering an attractive 10.59% dividend yield. The company’s financial health remains robust with a current ratio of 3.17, indicating strong liquidity.

Financial Highlights

• Revenue: $25.61 million, below the forecast of $26.54 million.
• Earnings per share: $0.37, missing the forecast of $0.3957.
• Investment portfolio at fair value: $953.5 million across 105 companies.
• Declared Q1 2025 dividend: $0.40 per share, payable monthly.

Earnings vs. Forecast

Stellus Capital’s actual EPS of $0.37 represented a miss of approximately 6.5% against the forecasted $0.3957. The revenue shortfall was about $930,000 less than expected, highlighting the challenges the company faced in meeting market expectations.

Market Reaction

Following the earnings release, Stellus Capital’s stock fell by 8.8%, closing at $13.78. This decline indicates a negative investor sentiment, driven by the earnings miss and concerns over future profitability. The stock’s performance is notably below its 52-week high of $15.56, reflecting broader market pressures and company-specific challenges. For deeper insights into Stellus Capital’s valuation and growth potential, InvestingPro subscribers can access comprehensive analysis including 8 additional ProTips and detailed financial metrics in the Pro Research Report, which transforms complex Wall Street data into actionable intelligence.

Outlook & Guidance

Stellus Capital aims to maintain its $1 billion portfolio and is pursuing a third SBA lending license. The company expects to slightly fall short of full dividend coverage in Q1 2025 but plans to utilize $45 million in spillover earnings to support dividends.

Executive Commentary

CEO Robert Ladd noted, "Our platform is a $3 plus billion platform overall," emphasizing the company’s scale and potential. CFO Todd Huskinson stated, "We’ve invested approximately $2.6 billion in over 200 companies," highlighting Stellus’s extensive investment activities.

Risks and Challenges

• Tariff impacts could affect up to 10% of Stellus’s portfolio, presenting a significant risk.
• Spread compression and declining investment yields may challenge profitability.
• Economic uncertainties could impact the company’s strategic plans and market conditions.
• Seven portfolio companies are on non-accrual, representing 5.4% of the portfolio’s fair value.

Q&A

During the Q&A session, analysts focused on potential tariff risks and the company’s leverage strategy. Stellus’s management clarified the composition of its pipeline, with two-thirds of transactions being new and one-third as follow-ons, and explained the structure of delayed draw term loans.

Full transcript - Stellus Capital Investment (SCM) Q4 2024:

Ali, Conference Operator: 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 Ended 12/31/2024. At this time, all participants are on a listen only mode and a question and answer session will follow the formal presentation. This conference is being recorded today, 03/05/2025. 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.

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Yes. Thank you, Ali, and good morning, everyone. Thank you for joining the call. Welcome to our conference call covering the quarter and the year ended 12/31/2024. Joining me as usual this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward looking statements and then start off our discussion.

Todd Huskinson, Chief Financial Officer, Stellus Capital Investment Corporation: 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 pen 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.stelliscapital.com under the Public Investors link or call us at (713) 292-5400. Now I’ll cover our operating results for the quarter, but we’d like to start off with our life date activity. Since our IPO in November 2012, we’ve invested approximately $2,600,000,000 in over 200 companies and received approximately $1,600,000,000 of repayments, while maintaining stable asset quality.

We’ve paid over $288,000,000 of dividends to our investors, which represents 16.69 per share to an investor in our IPO in November 2012, which was offered at $15 per share. Turning to our current operating results. In the fourth quarter, we generated $0.35 per share of GAAP net investment income and core net investment income of $0.37 per share, which excludes estimated excise taxes. Net asset value per share decreased $0.09 during the quarter due to net unrealized depreciation on our investment portfolio and reduction of spillover income, offset by net realized gains on our investment portfolio, primarily related to one equity investment. Our ATM program was active during the quarter and we issued 441,754 shares for $6,100,000 in shares at an average gross price of $13.86 per share.

All issuances were above net asset value. Regarding portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $953,500,000 across 105 portfolio companies, up from 908,700,000 across 99 companies as of 09/30/2024. During the fourth quarter, we invested $76,500,000 in nine new portfolio companies and had $33,000,000 in other investment activity, all at par. We also received three full repayments totaling $46,900,000 and received $15,600,000 of other repayments, both at par. We also received one full equity realization and one material partial realization that generated proceeds of $6,500,000 and realized gains of $5,500,000 At December 31, ’90 ’8 percent of our loans were secured and 95% were priced at floating rates.

The average loan per company is $9,500,000 and the largest overall investment is $21,200,000 both at fair value. All but one of our portfolio companies are backed by a private equity firm. Overall, our asset quality is on plan. At fair value, 24% of our portfolio is rated a one or ahead of plan and 21% of the portfolio is marked at investment category of three or below plan, meaning not meeting plan or expectations. Currently, we have loans to seven portfolio companies on non accrual, which comprise 5.4% of the fair value of the total loan portfolio.

And with that, I’ll turn it back over to Rob to discuss the overall outlook.

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Okay, very good. Thank you, Todd. So as we look ahead to the first quarter of twenty twenty five, I’ll cover portfolio growth, equity realizations and dividends. The active fourth quarter has continued into the first quarter of twenty twenty five. As of last Friday, we have funded an additional $47,000,000 bringing our portfolio to $1,000,000,000 for the first time in our firm’s history.

We expect that level to maintain and probably finish the quarter at the $1,000,000,000 number. As Todd noted earlier, we had realized equity gains in the fourth quarter of ’5 point ’5 million dollars We expect we’ll see more equity gains in 2025 with approximately $4,000,000 to $5,000,000 by June 30. And as a reminder, our equity co invest business, we have equity co investments across 92 companies with a cost basis of $59,000,000 We believe over time that we should see meaningful uplift from here. Our historical results would indicate realizations in excess of two times our cost. And finally regarding dividends, we declared the dividend for the fourth quarter I’m sorry, for the first quarter of twenty twenty five at a rate of $0.4 per share, again payable monthly.

We do expect that level of dividend, again $0.4 per share payable monthly to continue into the second quarter and based on spillover or previous year’s earnings that have not been distributed, we would expect this level to continue throughout the year. Of course, all of this subject to Board approval. And with that, we’ll open up for questions. Ali, please begin the Q and A session, please.

Ali, Conference Operator: Thank Thank you. Our first question is coming from Sean Paul Adams with Raymond James. Your line is live.

Sean Paul Adams, Analyst, Raymond James: Hey guys. Good morning.

Paul Johnson, Analyst, KBW: Good morning.

Sean Paul Adams, Analyst, Raymond James: Good morning. So when it comes to discussions about potential tariff impacts to companies within the portfolio, and also discussions about potential changes in credit quality, What are your thoughts on leverage going into 2025 and 2026 and just the potential concerns about the magnification of that potential credit risk?

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Yes. Good morning. Good question. So as you know, we’re operating at a lower leverage level than we’ve normally operated. Our target regulatory leverage is one to one and GAAP would be two to one, but we’re certainly at a lower level than that now.

So I’d say, I think we continue to shoot for that target leverage. We’re certainly cautious about the uncertainty that’s being created by the executive branch of the government. But I think that at this point, we’d like to, so to speak, wait and see the impact of what’s happening. But we’re certainly cautious about what that could mean. We certainly have most substantially all of our businesses are based in The United States, but some would touch government activity, some would have activities cross border.

So we’re certainly cognizant of that. But I think we’re in a wait and see attitude and but cautious as you say.

Sean Paul Adams, Analyst, Raymond James: Perfect answer. Thank you.

Eric Zwick, Analyst, Lucid Capital Markets: Thank you.

Ali, Conference Operator: Thank you. Our next question is coming from Christopher Nolan with Ladenburg Thalmann. Your line is now open.

Christopher Nolan, Analyst, Ladenburg Thalmann: Hey guys.

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Good morning, Chris.

Christopher Nolan, Analyst, Ladenburg Thalmann: Rob, could you give us a little thoughts in terms of given all the outlook information you gave, which is always appreciated, do you think the first quarter EPS will cover the dividend?

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: We don’t have it quite, but probably not fully covered. We’ll see what the balance of the quarter looks like, but probably not, but be close. And again, I think part of this is we look at the dividend and we look at earnings. One, we have substantial earnings from the past that have not been paid out. So that’s helpful in effectively covering.

And then we look at it over time. And as I mentioned, we likely to start seeing some equity realizations kick in that will be helpful. But I think as a technical matter, Todd, we probably won’t quite cover in the first quarter.

Todd Huskinson, Chief Financial Officer, Stellus Capital Investment Corporation: Yes, that’s right, Chris. We think we’ll be off by a few cents and that general trend will may kind of continue throughout the year just given kind of the rate environment and the spread environment.

Christopher Nolan, Analyst, Ladenburg Thalmann: Got you. And then on the topic of spreads, what was the driver for the decrease in investment yields in the first quarter?

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: So in terms of spreads, so maybe as a macro thought, So as we started 2024, we were seeing spreads in sixes and as we end the year seeing spreads in fivees. So you probably that’s one factor. Two, silver did decline quarter over quarter and then probably some impact again for some additional non accruals, Chris. But the good news is it’s in excess of 10% currently.

Christopher Nolan, Analyst, Ladenburg Thalmann: And on the topic of leverage, your leverage is just so low. I mean, what’s the thought here in terms of your leverage is artificial seems to be artificially low. The EPS outlook doesn’t quite cover the dividend and you’re in a tightening spread environment. Why don’t you just increase leverage

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: a little bit? Yes. So that good counterbalance to the first question. So, yes, as I say, we’re targeting a one to one being cautious about it. And so we you may see that come happen over time this year and there’s some different ways to achieve that leverage, but more to come.

Christopher Nolan, Analyst, Ladenburg Thalmann: Got you. Final question. I know you paid off part of an SBA maturity in the first quarter of twenty twenty five. Are you guys going to re up for more SBA lending capacity?

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Yes, we are. We’re moving forward with the third license. And thanks for noting that, that after ten years, our first license debentures are starting to come due. And so we did prepay the first debenture payment in mid February of roughly $16,000,000 But we we’re in the process of obtaining hopefully a third license and we’ll continue that program along the way.

Christopher Nolan, Analyst, Ladenburg Thalmann: Great. Thank you very much.

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Yes. Thank you, Chris.

Ali, Conference Operator: Thank you. Our next question is coming from Eric Zwick with Lucid Capital Markets. Your line is live.

Eric Zwick, Analyst, Lucid Capital Markets: Good morning, Eric. Thank you. Good morning. Yes, good morning. I wanted to start first on the pipeline.

You obviously had some nice new origination activity in the fourth quarter and it seems like you’re off to a good start here in the first quarter as well. So maybe just quantitatively, can you maybe kind of update us on kind of where the pipeline stands today relative to ninety days ago? And additionally, kind of what that mix looks like between new versus add on opportunities?

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Yes. So I’d say that again, very busy fourth quarter and really the last month or two of the fourth quarter and then really through the first two months, this quarter we’re on a pace that would be exceptional. So I think we see a little bit of slowness, but continued activity, our platform is a $3 plus billion platform overall. And so our investment teams are seeing a number of deals every week. So I think good pipeline, good deal flow, probably not expecting the same level every month that we had in the first two.

But then I’d also say so following question about new investments versus follow on. So the follow ons are very helpful. They come in two ways. One would just literally be a new follow on to the same company. And then alternatively or in addition to that, we’ll have delayed draw term loans where someone is tapping an existing commitment that’s been made.

And this is helpful in that it’s already in place and everything’s been negotiated. So it comes in both ways. But I’d say the quantum of that is probably two thirds are new transactions and roughly a third would be follow ons or draws under DDTLs.

Eric Zwick, Analyst, Lucid Capital Markets: Great. Thanks. Appreciate the color there. And just a reminder, in terms of most of the delayed draw term loans you have, did the companies need to meet some sort of financial hurdles to be able to draw on that or are they at the discretion of the company? Just remind me how those are typically structured?

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Right. They’re typically structured that they’re a true commitment, but they are subject to certain tests. So one, it would be in compliance with all the covenants. And they typically would have an addition to that, what’s known as an incurrence test. And so the leverage quotient at the time they draw would have to be similar to the time when the loan first closed.

So keeping the leverage at where we started out. And then in addition to that, you could have what needs to be used for a certain purpose and typically it’s for an acquisition or some expansion.

Eric Zwick, Analyst, Lucid Capital Markets: Yes, that makes sense. Okay. And then transitioning to the spillover, I think you mentioned it in the prepared remarks with regard to the dividend and having some ability to support the dividend in the near term. With that, can you remind us of where the dollar level of the spillover is this quarter or at the end of the fourth quarter?

Todd Huskinson, Chief Financial Officer, Stellus Capital Investment Corporation: Yes. We had, Eric, we had $45,000,000 of spillover at the end of the year. So that’s kind of what we’re working against during 2025.

Eric Zwick, Analyst, Lucid Capital Markets: Got you. Perfect. Thank you. That’s all for me today. I appreciate it.

Todd Huskinson, Chief Financial Officer, Stellus Capital Investment Corporation: Thank you, Eric.

Ali, Conference Operator: Thank you. Our next question is coming from Paul Johnson with KBW. Your line is live.

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Good morning, Paul.

Paul Johnson, Analyst, KBW: Good morning. Thanks for taking my question. Just a little bit more on the just kind of tariff risk in general, higher level. But have you guys run any sort of analysis or assess the portfolio in any way in terms of just kind of how much of the portfolio might be at risk of any of the tariff issues ongoing as well as just exposure to maybe kind of government services or any sort of anecdotal data points you’d be able to provide?

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Sure, Paul. So we’ve certainly analyzed it or been looking at it. It would appear that the impact from tariffs would be more than the impact from the government kind of exposure, probably like a two to one there. Our rough estimate is that it’s probably could be up to 10%. I mean, it depends how you grade them and what actually happens.

But at this point, would not appear to be material in terms of the overall activity. But we’re as I said at the outset, we’re going to wait and see what really comes through from what’s said at the government level, what actually ends up happening.

Paul Johnson, Analyst, KBW: Got it. Appreciate that. And then last one, on the realized gains this quarter, was there any additional markup at all from those investments that were exited in the fourth quarter?

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Yes. And tell me the other one, but it was a few million dollars. We have one equity position that is continuing to grow and in addition to the partial realization, its value was increased as well.

Paul Johnson, Analyst, KBW: Got it. Great. Thank you very much. That’s all for me.

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Okay. Thank you, Paul.

Ali, Conference Operator: Thank you. As we have no further questions on the line, I will now hand the call back over to Mr. Ladd for any closing comments.

Robert Ladd, Chief Executive Officer, Stellus Capital Investment Corporation: Okay, great. Thank you. And again, thank you everyone for your support of our company. We look forward to getting back with you in early May as we discuss the first quarter.

Ali, Conference Operator: Thank you. Ladies and gentlemen, this concludes today’s conference and you may disconnect your lines at this time. And we thank you for your participation.

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