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DATE
Tuesday, Nov. 10, 2026
CALL PARTICIPANTS
- Chief Executive Officer - Robert Ladd
- Chief Financial Officer - W. Todd Huskinson
TAKEAWAYS
- GAAP Net Investment Income -- $0.25 per share, which matches the quarterly dividend declared for the period.
- Core Net Investment Income -- $0.26 per share, excluding the impact of estimated excise taxes.
- Net Asset Value -- $12.93 per share, representing a 3% decrease from the previous quarter primarily due to portfolio write-downs.
- Total Investment Portfolio -- $966 million at fair value, consisting of investments across 119 portfolio companies.
- New Investment Activity -- $37.8 million total, including $29.7 million deployed into four new portfolio companies and $1.4 million in add-on investments.
- Portfolio Repayments -- $30.3 million total, driven by three full loan repayments and $11.5 million in other repayments at par.
- Nonaccrual Loans -- 5.4% of the portfolio at fair value, involving six portfolio companies as management focuses on restructuring underperforming assets.
- Portfolio Risk Ratings -- 22% of the portfolio fair value was rated in category 3 or below, indicating companies not meeting established performance plans.
- Weighted Average EBITDA -- $15.9 million for the loan portfolio, reflecting the company's focus on substantial mid-sized enterprises.
- Weighted Average Leverage -- 4.2x for performing loans, supported by an average enterprise value exceeding $100 million for portfolio companies.
- Share Repurchase Program -- $6.6 million utilized in 2026 to repurchase 767,880 shares, contributing $0.08 per share to net asset value.
- SBIC III Investment -- $23 million currently invested through the third license, with plans to fund an additional $25 million in three deals by year-end.
- SBA Debenture Capacity -- $475 million total limit for the family of funds, following a regulatory increase from $350 million.
- Equity Co-investments -- $98 million in realized gains life-to-date, which management stated has historically offset losses within the debt portfolio.
- Life-to-Date Return on Equity -- 9.2% return for investors since the 2012 initial public offering, including all realized and unrealized gains and losses.
- Floating Rate Exposure -- 93% of the loan portfolio, providing interest rate sensitivity as market rates fluctuate.
- Maximum Investment Concentration -- $24.3 million in the largest single portfolio holding, representing a diversified risk profile across 119 companies.
- Private Equity Backing -- Substantially all portfolio companies are supported by private equity sponsors, which typically provide at least 50% equity capital at the time loans are made.
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RISKS
- Huskinson stated, "the level of nonaccruals remains higher than historical averages," identifying the reduction of these exposures as a key management priority.
- Huskinson reported that "net realized and unrealized losses contributed $0.48 per share" to the quarterly decline in net asset value.
- Ladd noted a fourth-quarter loss on an investment that was sold at a discount after a marketing process failed to yield "attractive offers" from potential buyers.
SUMMARY
Stellus Capital Investment Corporation (NYSE:SCM) reported financial results for the third quarter, noting a decline in net asset value per share primarily attributed to realized and unrealized losses from company-specific write-downs. Management stated that the company continues to execute its share repurchase program, which has provided accretion to net asset value, while expanding its investment capacity through the third Small Business Investment Company license. The company maintained its quarterly dividend distribution, citing sufficient coverage from net investment income and an improved origination pipeline. Management reported that the portfolio remains fully secured with a high percentage of floating-rate loans, providing sensitivity to interest rate trends.
- CEO Ladd stated that the company acts as the lead lender in approximately 65% of its loan investments, all of which are governed by financial covenants.
- Management indicated that the current origination pipeline has shown improvement since the start of the fourth quarter, which is expected to support future funding levels.
- Ladd noted that the expansion of the Small Business Investment Company platform could eventually increase the total investment portfolio by $100 million.
- CFO Huskinson stated that the company expects its nonaccrual levels to return to historical averages over time as credit cycles normalize.
- Management indicated that equity co-investments have generated $98 million in realized gains since the company's initial public offering, helping to offset credit losses.
INDUSTRY GLOSSARY
- BDC: A type of closed-end investment company that helps small and medium-sized companies grow and develop.
- SBIC: A privately owned and managed investment fund that is licensed and regulated by the Small Business Administration.
- SOFR: A benchmark interest rate for dollar-denominated derivatives and loans that replaced the London Interbank Offered Rate.
- Nonaccrual: An accounting status for a loan where the borrower is significantly behind on payments and the lender no longer expects to collect full interest and principal.
- EBITDA: A measure of a company's overall financial performance, calculated as earnings before interest, taxes, depreciation, and amortization.
- SBA: A U.S. government agency that provides support to entrepreneurs and small businesses.
- NAV: Net Asset Value, representing the total value of an entity's assets minus its total liabilities.
Full Conference Call Transcript
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 third fiscal quarter ended September 30, 2026. [Operator Instructions] This conference is being recorded today, November 10, 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.
Robert Ladd: Okay. Thank you, Sylvie. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended September 30, 2026. We have 6 topics to cover this morning. First, our financial results for the third quarter; second, portfolio and asset quality; third, a history of our Stellus investing and life-to-date performance; fourth, an outlook for Q4 and beyond; fifth, our $20 million share buyback program; and sixth, our opportunities for growth. Joining me as usual this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements.
W. Huskinson: 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. I'll start by covering our operating results for the quarter. In the third quarter, we generated $0.25 per share of GAAP net investment income and core net investment income of $0.26 per share, which excludes estimated excise taxes.
Overall, for the quarter, net asset value decreased by $0.40 per share or 3%, driven by 2 primary factors. First, net realized and unrealized losses contributed $0.48 per share, primarily driven by write-downs related to company-specific performance. Second, our share repurchase program was accretive to NAV, adding approximately $0.08 per share. Turning to portfolio activity and composition. We ended the quarter with an investment portfolio at fair value of $966 million across 119 portfolio companies, a slight decrease from $968 million across 116 portfolio companies as of June 30, 2026. During the third quarter, we invested a total of $37.8 million, of which $29.7 million was in 4 new portfolio companies and $1.4 million was add-ons to existing portfolio companies.
We also received 3 full repayments totaling $18.8 million and received $11.5 million of other repayments at par. The average loan per company is $8.8 million and the largest overall investment is $24.3 million, both at fair value. The 99 companies that comprise our loan portfolio, the weighted average EBITDA level was $15.9 million at quarter end, and the weighted average normalized leverage was 4.2x for the performing loans in the portfolio. As a reminder, SCIC co-invests alongside the other Stellus investment vehicles, so SCIC's exposure is only a portion of the total exposure. While we invest in lower middle market companies, these are still substantial businesses with meaningful earnings and private equity capital on their balance sheets.
As an example, in general, our portfolio companies have an enterprise value in excess of $100 million with loan-to-value ratios of less than 50%. At September 30, 100% of our loans were secured, 93% were priced at floating rates, and substantially all of our portfolio companies are backed by a private equity firm. From an asset quality perspective, our weighted average risk grade is slightly below plan. At fair value, 78% of our portfolio is rated a 1 or 2 or on or ahead of plan, and 22% of the portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We added 1 loan to nonaccrual status during the quarter.
Currently, we have loans to 6 portfolio companies on nonaccrual, which comprised 9.6% of the total cost and 5.4% of the fair value of the total investment portfolio, respectively, which represents a slight increase from the prior quarter at cost and no change at fair value. To be clear, the level of nonaccruals remains higher than historical averages and reducing both the number of these investments and our exposure to them remains a key priority and one that we have a track record and expertise in solving through many credit cycles.
We continue to give great focus to these positions and are bringing to bear our years of investing and restructuring experience to obtain the best resolution possible for our investors. Our experience would tell us that over time, our nonaccruals will return to a more moderate level, in line with our historical experience. Now I'd like to turn the call back over to Rob to discuss our history and life-to-date performance, the outlook for Q4 and beyond, our share repurchase program and opportunities for growth.
Robert Ladd: Thank you, Todd. For the benefit of our new and prospective shareholders who are listening and as a reminder for our long-time shareholders, I thought I would share some background about our history and life-to-date results. First, we are one of the longest-tenured active private credit managers with a history of investing that is 22 years across 400 companies and $10 billion of deployment. The Stellus management team has an investing history that has been resilient across multiple macroeconomic cycles, including the global financial crisis of 2008, 2009; COVID-19, the global pandemic; and periods of other market volatility such as the international tariff disruption of 2025.
Second, we are the lead lender in approximately 65% of our loan investments and all of our loans have financial covenants. Effectively, all of our portfolio companies are backed by a private equity sponsor and have substantial equity below us at the time the loans are made, typically at least 50%. I'd also like to point out this is different than the broadly syndicated loan market in which many of the larger public and private BDCs invest, where there are light to no covenants, leverage levels are typically higher, and the lenders may be participating in a loan with no ability to control outcomes. And third, we have a long history of equity co-investments alongside our debt investments.
This is where we buy a small piece of equity in the companies we lend money to, usually 5% of the total portfolio at cost. The equity co-investments have resulted in substantial equity gains. For SCIC, this has generated $98 million of realized gains life-to-date, which has largely offset loan losses, thereby protecting the net asset value of our shareholders. Regarding SCIC, since our IPO in November of 2012, we have invested approximately $2.9 billion in more than 230 portfolio companies while navigating multiple market and credit cycles, as I mentioned before. Over this time, we have received approximately $1.9 billion of repayments while maintaining disciplined credit.
Over our 14-year track record, we have generated a life-to-date return on equity for our investors of 9.2%, which includes all realized and unrealized gains and losses across the portfolio. We've also paid $356 million of dividends to our investors since our IPO, representing $19.08 per share over this period. Now turning to outlook. As of today, our portfolio is approximately $951 million across 120 portfolio companies. For the balance of the quarter, we expect new fundings, which will likely be replace repayments, thus ending the quarter roughly where we are today. However, we have seen an improvement in the origination pipeline across the Stellus platform since the beginning of the quarter.
As mentioned on previous calls, we have reduced the amount of spillover income such that now our dividend is covered by net investment income. To that point, based on the current trajectory of net investment income as well as the recent increase in SOFR and our outlook for short-term rates and spreads in general, we expect to be well positioned to earn our $0.25 quarterly dividend moving forward. Now turning to the share repurchase program, which you've heard about before, where we approved in the spring a $20 million program for repurchasing. We think this is certainly an attractive use of capital today.
And so to date, in 2026, we have repurchased 767,880 shares for a total cost of $6.6 million. Going forward, we'll continue to analyze liquidity and leverage levels as we consider additional repurchases. And finally, opportunities for growth from here. As we mentioned last quarter, we've begun investing in our third SBIC license and have grown the portfolio to $23 million. Near term, we expect to fund 3 additional deals, which will increase the portfolio by approximately $25 million. This should come by year-end. This third license allows us to contribute up to $125 million of equity and access up to $250 million of long-term, low-cost SBIC -- 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 -- excuse me, up -- by $100 million over time or approximately 10% of the current portfolio today at fair value. And with that, Sylvie, let's open the -- for questions and answers.
Operator: [Operator Instructions] And your first question will be from Erik Zwick at Lucid Capital.
Erik Zwick: I wanted to start, I guess, just a bit of a follow-up on the commentary about share repurchases and also mentioned that the pipeline still looks attractive today. So just given the discount of where the stock is trading in the market today relative to NAV, it's pretty compelling from a math standpoint to repurchase shares. So how do you guys think about that, where to allocate those funds, between share repurchases and new potential loans or add-on opportunities?
Robert Ladd: Yes, Erik, very good question. So as I indicated earlier, we purchased about $6.6 million of shares so far against the $20 million authority from the Board. I think at this point, there's no question it's an attractive investment for the company to make, meaning repurchasing shares at such a discount. I think we just want to balance overall liquidity and leverage levels in doing so. So more to come on that, but that's the balancing that we're doing. I think you'll find us continue to invest in new opportunities on the balance sheet, but we'll be certainly looking to share repurchases as they make sense.
Erik Zwick: Great. I appreciate the color there. And then just looking at the fair value of the equity portfolio, I guess, up to just under maybe 10% of the fair value of the total portfolio today. You've historically had the opportunity to realize some gains. Is there any outlook -- near-term outlook? I know it's hard to have a view out past maybe 3 to 6 months, but any near-term opportunities where you expect you might realize some gains there from the equity portfolio?
Robert Ladd: Yes. One of the repayments that we may receive over the next 2 to 3 months would include a nice equity gain. Beyond that, no near-term visibility, but we're certainly optimistic in '27 that we'll see more. And that portfolio has a nice markup, but it's relatively modest based on our experience which has been about 3x our investment. But in any event, we -- nothing more than 1 in the sideline, but I would expect in '27, we will see more, which is a nice recycling of capital because -- excuse me, it's a nice recycling of capital on the equity gains and that there's currently no income coming from them, and there's no borrowing base associated with them.
So it's really free capital that we can turn around and lever again, as an example, in the SBIC vehicle, 2:1. So it will be a great recycling of capital when they occur.
Erik Zwick: And then last question for me. You -- I think in talking about the unrealized depreciation in the quarter, mentioned company-specific performance. And just curious if you could give us a little color there in terms of what you saw at that company or companies that drove that mark? And if it's multiple, is it -- any kind of common trends that you're noticing?
W. Huskinson: Yes, Erik, it's Todd. So I would say that there were several names. Most of them were on our nonaccrual list as we continue to work those positions and over time, just kind of dealing with the current facts and circumstances that are occurring there. So those were further write-downs on 4 of those names or 5 of those names. And then we also had another position that was a 3 that was realized after quarter end, but we wrote it down by $4.5 million. And you'll see that at the beginning of the quarter.
It's in the subsequent events where that company was -- we were paid off and recognized a loss in Q4, but it was an unrealized loss in Q3. So that's a position that won't be there next quarter.
Robert Ladd: I might just add on that last position. This was a company that was being marketed for sale by the sponsor and turned out there were not attractive offers that came in and ultimately sold to another party at a discount. And that, as Todd said, realized in October, but written down to that level at 9/30.
Operator: The next question comes from Christopher Nolan at Ladenburg Thalmann.
Christopher Nolan: Rob, on your comments, and I apologize for missing this, you said expand portfolio by $100 million over time. Am I correct that's mostly from SBA investing? Or did I miss something?
Robert Ladd: No, Chris, that's right. That's expressing the potential that is there right now in another way of recycling capital more to SBIC III because of the 2:1 leverage and lower cost of borrowing. But that's right. That would be the mechanism to get up as much as 10% of size from here.
Christopher Nolan: Got it. And then J.R. Watkins, as I recall, is mostly in the SBIC. Does that affect the recovery at all? I mean, is that government guaranteed or anything like that?
Robert Ladd: No. If something is in the SBIC, it would just be that it had certain financial attributes that qualified for it to be there, but otherwise doesn't affect the company, how it's managed or recovery.
Christopher Nolan: Understood. And then I guess, given where the stock price is right now and your current dividend is over 20%, which is unbelievably high. And your comments, if I understood them correctly, that you expect to be able to sustain the current dividend. I mean I would imagine being really aggressive on the share repurchases makes a lot of sense just from preserving capital down the road. I mean, is that how management is looking at it? Or -- because it sounds like you guys are being a little bit more cautious on that.
Robert Ladd: We definitely agree with you, Chris. It's an outstanding opportunity. I think we just want to balance maintaining our equity base and our leverage level. And so I think we're just going to be looking at it over time, but I would expect that it's very attractive, and we would continue to execute on that program.
Operator: Next question will be from Robert Dodd at Raymond James.
Robert Dodd: I just want to get a handle -- obviously, there are some underperforming assets, as you point out, Rob, you've got a good track record of turning those around. But that requires fundamentally that like the end markets still be good, and it's a stumble by the borrower. So how much of that depreciation that's currently in the portfolio do you think is actually ultimately recoverable? I mean, as you said, right, you just had an asset sale after the end of the quarter for a loss. So I mean they don't always come back, but sometimes they do. I'm just trying to get a handle on how much you think is recoverable?
How much of it is a work in progress because obviously, you mark it down during the process. But just trying to get a picture there on what you think the ultimate recoveries on some of these assets could actually be, particularly relative to where you've got them marked?
Robert Ladd: Yes, it's a really good question. I think that, of course, our best estimate is the current valuation. And so I think that's what we would expect. I think where we could see perhaps movement upward would be in the equity portfolio overall. That's one that I think will be more likely to see appreciation. But we feel like the debt portfolio and those are properly marked for the information we have today.
Robert Dodd: Got it. Got it. And then one on the NAV, I mean, it's been particularly relatively volatile over the last year. I mean, a year ago, roughly, it was $12.80, $12.50, $12.80, $12.40. It's just hopping around quite a lot. And I know you're making your best efforts on realizing or estimating the fair values. But at the same time, that tends to imply that there's quite a lot of volatility in the portfolio itself.
So could you give us any color on like when do you think you might see more stability in the broadly across the portfolio, which are obviously, if that happened, you might see more stability in NAV and investors would have a little bit more maybe relaxed approach to the NAV if it wasn't bouncing around quite as much quarter-to-quarter.
Robert Ladd: Yes. Yes, another good question. So in a relative sense, if it's helpful, it's a 3% movement. So it's -- I know it may seem large, but that's a small movement. I think it's -- we call and value things as we see the information each quarter. And as an example, in the second quarter, we had some movement up on positions. They came down. So I think we're just trying to be as precise as we can in the valuation process. But I couldn't predict the time when it would be not move at all. And then in the meantime, we're generating a 10% return on capital and would pay a dividend at 20%.
But again, I think remember, we're also generating income off that portfolio.
Operator: At this time, we have no other questions registered. I will turn the conference over to Mr. Ladd.
Robert Ladd: Okay. Yes. Thank you, everyone, for being on the call, for being supportive, and we sure look forward to speaking with you in the new year about the performance for the fourth quarter. Happy holidays to everyone.
Operator: Thank you, sir. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
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