Good morning, ladies and gentlemen, and thank you for standing by. At this time, I would like to welcome everyone to the Stellus Capital Investment Corporation Q3 2021 results conference call. At this time, all participants have been placed on a listen-only mode. The call will be open for question-and-answer session following the speaker's remarks. This conference is being recorded today, Friday, October 29, 2021. 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.
Yeah. Thank you, Katie, very much. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30th, 2021 . 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. I'm pleased to report another solid quarter in which we covered our dividend, increased net asset value, received realized gains of $7.9 million, and maintained stable asset quality. In addition, as a result of our continued dividend coverage, our board increased our regular dividend to an aggregate of $0.28 per share beginning in the Q4. We have continued to see many interesting opportunities and as a result, funded $60 million on a cost basis during the Q3. Since year-end, we have originated $245 million of new investments, and our portfolio has increased by $128 million net of payoffs, $787 million on a cost basis. We'll begin by discussing our operating results, followed by a review of the portfolio, including asset quality, and then our dividend strategy and outlook.
Todd will now cover our operating results.
Thank you, Rob. For the quarter ended September 30, 2021, we covered our dividend of $0.27 per share with core net investment income of $0.31 per share. GAAP net investment income was $0.21 per share, which includes capital gains incentive fees of $1.7 million related to our realized and unrealized gains during the quarter and income tax expense related to our spillover income. We generated realized gains of $7.9 million related to the realization of an equity investment and unrealized gains of $2.1 million related primarily to the appreciation of our equity co-investment portfolio. During the Q3, our board declared a regular dividend of an aggregate of $0.27 per share, an aggregate $0.03 per share of supplemental dividends, and the Q4 dividend of an aggregate of $0.28 per share.
The early declaration of the Q4 dividend was required in order to complete the distribution of spillover income from 2020 in a timely manner, consistent with maintaining our qualification for taxation as a regulated investment company and to eliminate our liability for corporate-level U.S. federal income tax. Despite this additional accrual in the Q3, net asset value increased during the quarter to $14.15 per share. I'd like to note that these distributions constitute all remaining distributions for the year, so our Q4 net asset value will not be further reduced by distributions paid in the Q4. We continue to recycle capital in our first SBIC license and deploy the low-cost debentures in our second license. Of the $100 million of debentures in our second license that have pooled so far, the all-in cost is approximately 2.5%.
To date, we've committed the full $87.5 million of equity to the SBIC II, our second license, and have funded $70 million of that commitment. We have drawn $100 million of the $175 million of debentures that will be available when equity is fully funded. With that, I'll turn it back over to Rob.
Okay. Thank you, Todd. I'd like to now cover the following areas: YTD review, portfolio and asset quality, dividend policy, and outlook. YTD review. I always like to remind us of this. Since our IPO in November 2012, just reaching our ninth anniversary, we've invested approximately $1.9 billion in over 143 companies and have received approximately $1.1 billion in repayments while maintaining stable asset quality. We've now paid over $180 million of dividends to our investors, which represents $11.99 per share to an investor in our IPO in November 2012. Now turning to portfolio and asset quality.
We ended the quarter with an investment portfolio at fair value of $786 million across 74 portfolio companies, up from $653.4 million across 66 companies at calendar year-end. During the Q3, we invested $60.5 million in four new and 10 existing portfolio companies and received $67.4 million of repayments. Overall, our asset quality is stable at a 1.9 on our rating system or on plan. 23% of our portfolio is rated a one or ahead of plan, and 13% of the portfolio is marked in an investment category of three or below plan. In total, we have four loans on non-accrual, which comprise 1.1% of fair value of the loan portfolio. Now I'd like to talk a little bit about dividends.
In addition to our regular dividend of $0.28 per share in the aggregate for the Q4, we are today declaring a dividend for the Q1 of 2022 of $0.06 per share in the aggregate or $0.02 paid per month. This additional dividend is based on the significant realized gains income we are generating from our equity portfolio. This is the realized gains both from Q3 and currently expected for Q4. Looking forward, we expect to continue this $0.06 dividend each quarter for the foreseeable future. When you combine the current dividend of $0.28 per share per quarter and the additional $0.06 per share per quarter, our shareholders will be receiving an aggregate of $0.34 per quarter of dividends. At this rate, we'll be back to the pre-COVID level of $1.36 per year.
Which, as a reminder, is a 9% return on our IPO price of $15. Now just turning to outlook. Beginning in the Q4 of last year, we began to see a significant increase in our actionable pipeline, which continues through this Q4. We do expect meaningful repayments over the balance of this quarter, but we expect those to be at least offset by new fundings. Then just to note that these potential repayments should generate additional fee acceleration income, as we saw in the Q3. We're now expecting realized equity gains of as much as $7.5 million in the Q4. With that, we've concluded our remarks, and we'll open up for questions.
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question will come from Ryan Lynch with KBW.
Good morning, Ryan.
Hey. Hey, good morning. Thanks for taking my questions. The first one I had, I mean, there was a pretty substantial increase in total revenues this quarter, $17 million versus the $15.1 million in the previous quarter. Portfolio, you know, actually had net repayment. What I wanted to get a sense of is what sort of level, and now I know you had very strong net originations in Q2, so maybe some of that's, you know, kind of flowing through, getting the full impact in the Q3.
what I'm trying to get a sense of is what was the level of accelerated or one-time fees or OID that you recognized in the Q3 and how does that compare, you know, based on what you guys are, kind of an average of what you guys have historically received?
Yes, good question, Ryan. In the Q3, the fee acceleration was approximately $700,000. In previous quarters, it would've been a fraction of that because there were, you know, relatively few repayments.
There was only around.
Let's just say the quarter was benefited from just what you said, a full quarter where we were operating at a higher portfolio level as compared to the first two quarters, and then, too, from early repayments, meaningful fee reclassification. Very little of it affected. I don't think there was any actual call premium, just given the duration of how long we've held the loans. It was just the early OID, if you will, was coming back upon the repayment.
$700,000 of kind of acceleration versus very little in the past. That kind of brings me to my next question. This quarter, you guys broke above the upper end of your incentive fee hurdle range, and actually broke out of that range. Would you anticipate that you guys would fall back within your incentive fee hurdle range going forward, and that would be kind of what you guys will operate within on a consistent basis besides sort of one-off quarters of popping out like we saw in the Q3?
Mm-hmm.
Do you guys expect to get above that hurdle range on a consistent basis going forward?
Yes, this came up last quarter. I'd say that we'll likely operate in the range and then quarters where we have, you know, these early repayments. You may remember that we had nominal repayments during COVID and then coming into this first part of the year. We did expect that in the H2 of the year, those repayments would pick up. As I said earlier, we're expecting a number in the Q4 that we're now in. It's possible we'll operate above the range in the Q4. But I think on a normalized basis, we'll probably be in the range on the catch-up.
Okay. Understood. Just one last one for me, then I'll hop back in the queue. You mentioned $7.5 million of potential realized gains, you know, could be recognized in the Q4. I'm just curious, is all of that already previously been recognized as an unrealized gain in your portfolio, or could there actually be further, you know, gains when you guys actually if you guys actually do recognize those?
Yes, Ryan. If they came in the delta between expected proceeds and now valuations, about $2.8 million.
Got it.
If they all came in, you'd see all things being equal, an increase in NAV by $2.8 million.
Okay. Perfect. That's all for me. I appreciate the time today and nice quarter.
Yeah. Thank you very much, Ryan.
Thank you. Our next question comes from Christopher Nolan with Ladenburg Thalmann.
Hey, guys.
Good morning, Chris.
Hey, Rob. Rob, the $0.06 supplemental dividend, if I understood correctly, starts in the Q1 of 2022 and should be a regular quarterly event going forward?
Yes, that's the plan.
The $0.2 million in excise taxes for this quarter. Why didn't you guys just do a distribution just to get into the RIC, you know, distribution so you can avoid that? I mean.
Yes. This is, you know, approximately our run rate, and that's based on the $20+ million of spillover that will continue to spill over for the time being. We'd have to pay all of it out to eliminate that.
Gotcha. Todd, do you have an exact number for the spillover income at September 30th?
I'd say, well, except you know, spillover from last year was about $21 million. That may move around just depending on you know, kind of how things are ultimately classified and so forth. I would you know, Chris, assume it's about $21 million.
All right.
Total spillover.
Great. Thanks, guys.
Okay. Thank you, Chris.
Thank you. Our next question comes from Robert Dodd with Raymond James.
Good morning, Robert.
Morning. Yeah, morning, Rob. Sorry. First, you gave some color, obviously expect repayments, and it's a really active market out there. But you expect to at least equal them in deployments. On the deployment side right now with that competitive market, are you seeing any shifts in dynamics? I mean, is it the SBIC sized type assets or, rather, are those you know. That's where you've got capital, but are those just more attractive as well? Or any dynamics about different parts of the market that you play in that you can give us color on?
Sure. We continue to see a number of interesting SBIC qualifying opportunities. Now we're seeing some that are larger companies that would not qualify. I think we're seeing good activity on both fronts. We just went through the pipeline with our teams this morning and you know, very robust activity. Some are closer to being finalized than others. I think you'll see a nice mix going forward of both. If it's helpful too, that although it is a competitive market as always, you know, we continue to see proper capital structures where the equity checks are 40%-50% of the capital. Leverage is typically, you know, for us from 4x-4.5x. It could be less depending on the company.
You know, appropriate pricing and structures and the continued ability to earn equity co-invest. The market is quite good. Competitive, but lots of opportunities for us both on the SBIC and non-SBIC side.
Thank you for that. Just one more sort of on spillover. I mean, if you generate the $7.5 million in realized gains in the Q4, you know, along with obviously almost $8 that you generated this quarter, I mean, is any of that shielded either in blockers against, you know, previous losses or anything like that? Because obviously if not, that accrues to quite a lot of spillover going into next year as, you know, above the-
Sure.
the 20.
Sure, Robert. Very good question. The bulk of the equity gains that we've seen in the third and likely in the fourth are actually in blockers, and so they would not increase the spillover income.
Okay. Got it. Thank you.
Yeah. Thank you.
Thank you. Our next question comes from Bryce Rowe with Hovde Group.
Yes. Good morning, Bryce.
Good morning. Thanks for taking the questions here. Wanted to, I guess, start maybe along the same lines of Robert's questioning there in terms of what you're seeing in the market. Could you guys kind of describe what you're seeing from a pricing perspective on newer deals relative to, you know, some of the activity that might be coming out of the portfolio right now?
Yes. I'd say as you can see from the scheduled investments, all-in yields that were on new investments are, you know, ranging at about 8% when you include the fee accretion, as well. You know, typically LIBOR plus six with a LIBOR floor of one, sometimes a little bit higher. Repayments and new loans are about the same yield. You know, you could see this, our 8.3% yield come down just a little bit, but we think we'll be able to maintain it at least the 8% level. That pricing has roughly been true now for over a year or so.
Okay. That's good news. You know, maybe you all could speak. We've certainly heard you all talk about kind of the leverage profile of Stellus's balance sheet, you know, in quarters past, but any thoughts on, you know, how you think about balance sheet leverage now? You've got access to some more SBA debentures through your second license. Just trying to gauge how quickly you might go through that, and then how you think about kind of your strategy to fund new investments, once you get beyond the available debenture capacity.
Sure. I think as a general matter on the leverage profile, we like to maintain our regulatory leverage at one-to-one. It could be a little bit higher, 1.1 or so, but around that level. Then including SBIC debentures, we'll certainly get to a two-to-one level, which we're very comfortable with given the long-dated nature of the SBIC debentures. What's happening now, Bryce, just because of the significant repayments we're receiving, both in our SBIC licenses as well as in our regular way capital at the BDC, a lot of opportunity to recycle capital. I think you'll see us continue to grow over the next year. We'll be funding many of the new opportunities with just repayments.
I'd say, so we do intend to fully tap the second license debentures. We currently have $100 million drawn against the potential of $175 million, so we intend to draw the balance of that likely in the coming year. Eventually, you know, we may have the opportunity to raise additional equity capital and, you know, to maintain our overall leverage profile, we would add leverage to that. There's plenty of capital currently without raising more equity to operate in.
Right. Okay. That's good. That's good commentary, Rob. Then maybe just some more questions around the realized gains or the companies that are being exited, the equity investments that are seeing some exits. Can you speak to kind of what's driving those decisions? Is it more tax, you know, tax planning, tax driven, or, you know, is there the potential for, you know, a lot of this activity that we've seen, especially in the back half of this year, to persist into next year?
I'd say that it's mostly what appear to be almost pent-up demand on the sell side that, you know, during COVID, you know, M&A activity slowed down materially and now it's picked back up. We would just see it as something that some companies might have sold a year ago, but for COVID, and now they're coming to market. Especially on the tax side, you know, our tax advisors have indicated that the new tax law relative to capital gains would be effective in September. Any sales now would be covered by the new tax regime. We'll see whether that's the case. We think this is less tax driven, given that the rates seem to be gonna be moved up retroactively. It's more just, we think, pent-up demand on the sell side.
I'd say, yeah, we would look out to the next year and expect that continue to see companies be sold, you know, assuming that the market and the individual company performance was good. It's also, Bryce, good to raise this too. This is part of, you know, our, as you know, from the very start of the company back in 2012, that we've always had this strategy, not everyone does, that in addition to the lending, we like to always buy a smaller piece of equity in the companies we lend money to. We've thought over time that this would be helpful to our shareholders. Of course, it has been. This, we're glad to see that these gains have continued.
This is, of course, why we feel comfortable now having additional dividends be paid into next year. We've of course declared the Q1 as these have been coming in.
Got it. Great. I appreciate all the questions or the answers. Thanks.
Yeah. Thank you, Bryce.
Thank you. Our next question comes from Christopher Nolan with Ladenburg Thalmann.
Rob, given all the moving pieces with the macroeconomic picture, what are you hearing from your portfolio companies? I mean, are they hunkering down to be more defensive or what? I mean, can you just give some sort of little color on that?
Sure. You know, I'd say as a general matter, you know, our company's portfolio companies, which are over 70 today, are performing well. I think there's a lot of optimism around those businesses and around the economy generally. I know we're all concerned about potential inflation, but all are operating well. We have some portfolio companies that have experienced labor shortages or wage increases that they're having to work with, and others are dealing with, as you know, the supply chain logistics issues. You know, these are well-managed businesses with very professional owners and private equity firms, and you know, managing through it. We'd be very positive about what our portfolio companies are seeing, and they continue to grow and effectively end up delevering as a result.
Positive, but you know, we're always cautious for what's next. You know, we continue to be you know, very selective in our investing, new investing, and you know, just because we can't predict the future. We're quite optimistic at this point.
Great. Thank you.
Thank you.
Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Ladd for closing remarks.
Okay. Thank you, Katie, and thank you everyone for your support over this last nine years. We look forward to speaking with you in the spring when we'll have the results from the Q4 and for our 10-K.
Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.