STELLUS CAPITAL INVESTMENT CORPORATION 2026 Q2 Earnings Call

Okay. Thank you, Jenny, and good morning, everyone. Thank you for joining the call. Welcome to our conference call covering the quarter ended June 30, 2026. We have six topics to cover this morning. First, the financial results for the second quarter, portfolio and asset quality, the outlook for Q3 and beyond, an update on our advisor joining Ridgepost Capital, our $20 million share buyback program, and opportunities for growth. Joining me this morning is Todd Huskinson, our Chief Financial Officer, who will cover important information about forward-looking statements. Todd, I'll turn it over to you.

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. Now I'll cover our operating results for the quarter, but would like to start with our life-to-date activity. Since our IPO in November of 2012, we've invested approximately $2.9 billion in more than 225 portfolio companies while navigating multiple market and credit cycles. Over this time, we've received approximately $1.9 billion of repayments while maintaining disciplined credit performance. We believe our track record, our underwriting process, and deep sponsor relationships provide us with meaningful competitive advantages, reflecting more than 20 years of working together as an investment team and nearly 14 years of operating as a public BDC. Our focus remains on preserving capital while generating attractive risk-adjusted returns for our shareholders.

We think our long-term credit performance, as well as our 14-year track record of return on equity, demonstrates the effectiveness of our underwriting process and our portfolio management approach. To that point, we've generated a life to date return on equity of 9.5%, which includes all realized and unrealized gains and losses across the portfolio to date. We've also paid $349 million of dividends to our investors since our IPO, representing $18.83 per share over this period. Turning to operating results. In the second quarter, we generated $0.26 per share of GAAP net investment income and core net investment income, which excludes estimated excise taxes, was also $0.26 per share. Overall, for the quarter, net asset value increased by $0.26 per share or 2% sequentially, driven by three primary factors.

First, net realized and unrealized gains contributed $0.30 per share, primarily driven by write-ups related to company-specific performance. Second, our share repurchase program was accretive to NAV, adding approximately $0.05 per share. Finally, dividend payments exceeded earnings by $0.08 per share as we continued distributing the remaining spillover income from 2025. I'd like to note that these figures are in line with the preliminary results we previously reported. With respect to portfolio and asset quality, we ended the quarter with an investment portfolio at fair value of $968 million across 116 portfolio companies, a decrease from $990 million across 116 portfolio companies as of March 31, 2026. During the second quarter, we invested a total of $18 million, of which $8.7 million was in three new portfolio companies and $9.3 million were add-ons to existing portfolio companies.

We also received five full repayments totaling $38.7 million, $500,000 from one equity realization, which resulted in a realized loss of $200,000 and received $10 million of other repayments at par. At June 30, 100% of our loans were secured and 92% were priced at floating rates. The average loan per company is $8.9 million, and the largest overall investment is $26 million, both at fair value. For the 98 companies that comprise our loan portfolio, the weighted average EBITDA level was $15.6 million at quarter end, and the weighted average normalized leverage quotient was 4.2 times for the performing loans. Substantially all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly below plan.

At fair value, 74% of our portfolio is rated a one or two or on or ahead of plan, and 26% of the loan portfolio is marked at an investment category of 3 or below, meaning not meeting plan or expectations. We removed one loan from nonaccrual status during the quarter and did not add any new loans. Currently, we have loans to five portfolio companies on nonaccrual, which comprise 8.5% of the total cost and 5.4% of the fair value of the total investment portfolio, respectively, which represent a decrease from the prior quarter at cost and a slight increase at fair value. While the level of nonaccruals and risk grade 3 loans remains higher than we would like, reducing both that number of these investments and exposure to them remains a key priority.

We're actively working each position and continue to make progress, either exiting these investments or returning them to accrual status. I'd like to turn the call back over to Rob to cover a number of the additional topics.

Okay. Thank you, Todd. As we look ahead to the third quarter of 2026, I'll cover four topics: the outlook for the quarter and beyond, an update on our advisor joining Ridgepost Capital, our $20 million share buyback program, and opportunities for growth. In terms of outlook, as of today, our portfolio is approximately $960 million across 117 portfolio companies. For the balance of the quarter, we expect repayments to slightly outpace new fundings, thus ending the quarter slightly down from where we are today. However, we have seen a meaningful improvement in the origination pipeline across the Stellus platform since beginning the quarter.

While market conditions remain fluid and the timing around future deal closings is never certain, we're hopeful gross origination activity is set to increase toward the end of the year, which should have positive implications on net portfolio growth for the company over the next several quarters. As mentioned on previous calls, we have been reducing the amount of spillover income and have expected that over time our dividend would approximate our net investment income. We have now reached that point, and we have set our dividend to $0.25 per quarter per share for the third quarter. To that point, based on the current trajectory of NII, as well as our outlook for short-term rates and spreads, we expect to be well-positioned to earn our $0.25 quarterly dividend or more moving forward. Next, about Ridgepost. On June 22nd, our external advisor, Stellus Capital Management, officially joined the Ridgepost Capital platform.

As a reminder, Ridgepost Capital is a leading alternative investment manager in the middle and lower middle market, currently managing more than $50 billion of AUM across private equity, private credit, and venture. We're very pleased with how the transition is going and early integration is well underway. We're coordinating in many areas, including investment origination and management, investor relations, fundraising, and operations. Since joining Ridgepost Capital, one of the most promising opportunities has been the ability to leverage the firm's broader sponsor relationships, specifically Ridgepost Capital lower middle market private equity fund to funds business, which is RCP Advisors. RCP has been investing in the lower middle market GPs for 25 years, and the team has relationships with more than 200 lower middle market private equity firms.

This aligns well with our direct lending strategy, which is exclusively to lower middle market private equity-backed companies, and believe our business is set to benefit from this meaningfully over time. We've been collaborating with the RCP Advisors team to identify financing opportunities with these sponsor relationships. While still early, we believe the long-term opportunity could represent significant incremental originations annually across the Stellus platform. Importantly, this incremental deployment opportunity is additive to the strong origination pipeline we've been building over 20 years. Now to share repurchases. Regarding capital allocation, we continue to view share repurchases as an attractive use of capital today, specifically as our stock continues to trade at a significant discount to NAV. Repurchasing shares is immediately accretive to net asset value and earnings per share, creating value for our shareholders.

On March 3rd of this year, our board of directors approved a common stock repurchase program of up to $20 million. I'm pleased to share that since that date, we have repurchased 467,000 shares for approximately $4 million. Given our outlook for the business as well as our remaining future authorization, we continue to view buybacks as accretive and efficient way to improve the return to our shareholders. Now for opportunities for growth. We're pleased to announce that we received approval from the SBA for a third SBIC license. With this new license, we expect to meaningfully increase the size of our investment portfolio. The license will allow us to contribute up to $125 million of equity and access up to $250 million of long-term, low-cost SBA-guaranteed debentures.