Stellus Capital (SCM) Q1 2026 Earnings Transcript

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DATE

Tuesday, May 12, 2026 at 11 a.m. ET

CALL PARTICIPANTS

• Chairman & Chief Executive Officer — Robert T. Ladd
• Chief Financial Officer — William Todd Huskinson

TAKEAWAYS

• GAAP Net Investment Income -- $0.26 per share, directly reported for the quarter.
• Core Net Investment Income -- $0.27 per share, which excludes estimated excise taxes.
• Total Realized Income -- $0.29 per share, incorporating $0.26 per share GAAP net investment income plus $750,000 in realized gains from one equity position.
• Net Asset Value Decrease -- Down $0.28 per share, driven by $0.08 per share in dividend payments above earnings and $0.20 per share in net realized and unrealized losses primarily from two debt investments.
• Portfolio Size -- $990 million across 116 portfolio companies at quarter-end, declining from $1.01 billion across 115 companies as of December 31, 2025.
• Non-accrual Loans -- Six loans to six companies are on non-accrual, representing 9.2% of portfolio cost and 5.2% of fair value, with both figures slightly increased from the previous quarter.
• Loan Security and Rate -- 99% of loans are senior secured, and 92% are floating rate, as of quarter-end.
• Portfolio Credit Quality -- 81% of the portfolio at fair value is rated 1 or 2 (on or ahead of plan); 19% is rated 3 or below (not meeting expectations).
• Average Loan Size -- Each portfolio company has an average loan value of $9 million at fair value, with the largest position at $18.5 million.
• Repayment and Investment Activity -- $18 million invested in three new companies, $9 million in other investments, $35 million in three full repayments, and $6.6 million in other repayments at par, not summing to the full change in portfolio size.
• Ridge Post Capital Integration -- The external adviser, Stellus Capital Management, is expected to join Ridge Post Capital's platform in summer 2026, providing access to RCP Advisors' relationships with over 200 private equity firms and expanding origination possibilities.
• Share Repurchase Program -- A $20 million common stock repurchase program was announced, citing the company’s shares trading at an approximate 25% discount to net asset value.
• Dividend Declaration -- A second quarter dividend of $0.34 per share, payable monthly, was declared in April.
• Portfolio Growth Capacity -- Management stated there is capacity to grow the portfolio by $75 million to $100 million, pending a potential third SBIC license and the recycling of equity gains and resolved non-accruals.
• Leverage Position -- Regulatory leverage is approximately 1x, and total leverage with SBA debentures is just under 2x, with balance sheet flexibility cited by management.
• SaaS Exposure -- Management stated, “Stellus does not have exposure to the large scale SaaS software sector,” while also clarifying that loans to software and IT companies are all rated 1 or 2.
• Spread Context -- Management reported, “our average deal we are looking at today is, you [see] approximately a 5.5% spread over SOFR,” and spreads were described as “stabilized…not meaningfully wider yet.”

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RISKS

• Non-accrual loans increased to 9.2% of portfolio cost and 5.2% of fair value, which management characterized as higher than we would like.
• Management stated, the dividend will be coming down. noting that net investment income plus realized gains are at a level that would support a lower dividend than currently declared.
• Net asset value decreased $0.28 per share in the quarter, primarily reflecting net realized and unrealized losses on two debt investments and dividend payments exceeding earnings.

SUMMARY

Management detailed the anticipated benefits of the Ridge Post Capital partnership, citing expanded origination opportunities through RCP Advisors’ network of over 200 private equity sponsors. They discussed share repurchase timing, explaining that no repurchases occurred due to a limited window after filing the annual report but expect increased activity this quarter. The company projects portfolio growth of $75 million to $100 million, contingent on receiving a third SBIC license and recycling proceeds from resolved assets. Regulatory leverage remains low, granting balance sheet flexibility for new investments. Software and IT portfolio positions are marked “close to par” and remain internally rated as performing, according to management.

• Repayment levels are expected to match new fundings in the near term, keeping the portfolio approximately stable.
• Annual equity realization estimates were disclosed at $9 million for 2026, of which $6 million is expected to be in realized gains.
• The company reiterated the absence of large-scale SaaS exposure, with credit quality in software positions characterized as solid by internal risk ratings.
• Spreads in the lower middle market are described as stable, with management indicating that stabilization is due to competition rather than lag effects from broader market developments.
• Non-accrual resolution is expected over a 12- to 24-month horizon, with progress targeted for late 2026 and early 2027.

INDUSTRY GLOSSARY

• SBIC license: License granted by the U.S. Small Business Administration allowing entities to borrow at favorable rates for private investment in small and mid-sized companies.
• SOFR: Secured Overnight Financing Rate, a benchmark interest rate for dollar-denominated loans and derivatives.
• Non-accrual loan: A loan for which the issuer has stopped accruing interest income due to concern about the borrower’s ability to pay.
• RCP Advisors: Lower middle market private equity fund-of-funds platform referenced as part of Ridge Post Capital’s network.

Full Conference Call Transcript

Robert T. Ladd: Okay. Thank you, Holly. Morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2026. We have 6 topics to cover this morning. First, the financial results for the quarter portfolio and asset quality, outlook update, opportunities with Ridge Post Capital, our share buyback program, and future growth in the portfolio. 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.

William Todd Huskinson: Thank you, Robert. I would like to remind everyone that today's call is being recorded. Please note that the 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 would 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 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) 292-5.4 thousand. Now I will cover our operating results for the quarter but would like to start with our life-to-date activity.

Since our IPO in November 2012, we have invested approximately $2.8 billion in over 250 companies and received approximately $1.8 billion of repayments while maintaining stable asset quality. We have paid $339 million of dividends to our shareholders, which represents $18.49 per share to an investor in our IPO, November 2012. In the first quarter, we generated $0.26 per share of GAAP net investment income, and core net investment income was $0.27 per share. Which excludes estimated excise taxes. During the quarter, we also realized gains of $750 thousand on 1 equity position, which resulted in total realized income for the quarter of $0.29 per share. Net asset value decreased $0.28 per share during the quarter from 2 components.

The first was $0.08 per share of dividend payments that exceeded earnings which was necessary to continue to pay out the spillover balance from 2025. The second was a net realized and unrealized loss of $0.20 per share related primarily to 2 debt investments. We ended the quarter with an investment portfolio at fair value of $990 million across 116 portfolio companies, a decrease from $1.01 billion across 115 portfolio companies as of 12/31/2025. During the first quarter, we invested $18 million in 3 new portfolio companies and had $9 million in other investment activity, at par.

We also received 3 full repayments totaling $35 million, 1 equity realization, which resulted in a realized gain of $750 thousand and received $6.6 million of other repayments. In March 31, 99% of our loans were senior secured, and 92% were priced at floating rates. The average loan per company is $9 million and the largest overall investment is $18.5 million both at fair value. Substantially, all of our portfolio companies are backed by a private equity firm. Overall, our asset quality is slightly better than planned. At fair value, 81% of our portfolio is rated a 1 or a 2 or on or ahead of plan.

And 19% of the portfolio is marked in an investment category of 3 or below, meaning not meeting plan or expectations. We added 1 new loan to our non accrual list during the quarter. Currently, we have 6 loans to 6 portfolio companies on non accrual which comprise 9.2% of the total cost and 5.2% of the fair value of the total investment portfolio respectively. Which represents a slight increase from the prior quarter. We recognize that the level of nonaccrual loans is higher than we would like. We are focused on reducing the number and dollar magnitude of these loans.

We are actively working each position and are making progress in exiting the positions or bringing them back onto an accrual status. there is been much speculation about the impact of artificial intelligence on large scale SaaS software industry. As we mentioned on our last call, Stellus does not have exposure to the large scale SaaS software sector. We do have portfolio companies in the software and information technology that they provide, and many cases deal with proprietary data. We believe AI will enable these in many of our portfolio companies across a variety of industry sectors to improve the speed of information.

Each of these companies is rated on our risk rating system as either a 1 or 2, meaning on plan or ahead of plan. And now I would like to turn the call back over to Robert to cover a number of other topics.

Robert T. Ladd: Thank you, Todd. As we look ahead to the 2026, I will cover 4 topics. The outlook for our adviser's plans to join the Ridge Post Capital's platform, Q2, our $20 million share buyback program, and opportunities for growth. First, with respect to outlook, As of today, our portfolio is approximately $970 million across 117 portfolio. The balance of the quarter, we would expect repayments to equal new fundings thus ending the quarter approximately where we are today. We expect equity realizations throughout the year At this point, we estimate $9 million for the balance of the year. With approximately $6 million of this in realized gain.

Regarding dividends, in April, we declared the dividend for the second quarter of this year of $0.34 per share in the aggregate. Payable monthly. Looking forward, we are making progress in reducing the amount of spillover income and we expect that over time, our dividend will approximate our net investment income plus realized gains. At this point, that would be at a lower level than the current dividend. Now turning to Ridge Post. We look forward to our external adviser, Stellus Capital Management, joining the RichPost Capital platform this summer.

We have been impressed with Ridge Post Capital's organization, They have excellent leadership, and we should benefit from meaningful new investment opportunities working with them particularly through their lower middle market private equity fund to fund strategy known as RCP Advisors. RCP has relationships with over 200 private equity firms and with their focus on the lower middle market, many of these sponsors are candidates for us to provide financing for their portfolio companies. We think this could bring could provide hundreds of millions of dollars of new lending possibilities across the entire Stellus platform each year. Now turning to the share repurchase program.

We recently announced a common stock repurchase program of up to $20 million This decision reflects the current trading level of our shares, which are approximately a 25% discount to net asset value. Historically, our stock has traded at or above NAV for many years. At the current price levels, we believe repurchasing shares represents a good opportunity to generate value for our shareholders. And now opportunities for growth. I would like to conclude our remarks by outlining the opportunity to grow our portfolio. We project that we have the capacity to increase our investment portfolio by $75 million to $100 million from here. This opportunity comes from 2 sources.

The first is from the third SBIC license which we are optimistic will be awarded this summer. And the second is from recycling equity gains and non accrual loans that have been resolved. As a reminder, a dollar of an equity position or a non accrual loan that turns to cash can be reinvested into a new loan close to $3 through our leverage facilities. In closing, let me thank everyone for your continued support and we will now turn to the Q and A session.

Operator: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 1 moment, while we poll for questions. Your first question for today is from Eric Zwick with Lucid Capital.

Robert T. Ladd: Good morning, Eric.

Analyst (Eric Zwick): Hey, good morning, Robert and Todd. Wanted to start just to make sure I understood some of the commentary there in the prepared remarks. With relation to the expectation for kind of dividends to be in line with NII plus realized gains Did I understand that you kind of mentioned that the way it was lined up currently, that our NII plus realized games would be of lower than the current dividend level. So just trying to figure out, are you expecting to be able to grow NII over time or potentially, think about resetting the dividend level as well? Just trying to kind of hone in on that a little bit.

Robert T. Ladd: Sure. Sure. Sure. So I would say that although we would like to grow the NII per share from here, we think we are probably at a level that we will be at for a while. So our expectation is that the dividend will be coming down. Associated with that.

Analyst (Eric Zwick): Got it. Okay. that is helpful. that is that is what I thought I heard. And then just with regard to, you know, share repurchases, I know you talked about it last quarter as well in terms of being attractive given where the stock is trading today. But correct me if I am wrong. I do not think you repurchased anything in 1Q, so it is anything that kept you out of the market, potentially the pending acquisition of the of the adviser by Ridge Post or anything else?

Robert T. Ladd: No, no. Good question. Good point. So we did not repurchase any shares after the previous quarter end. But a reminder, when issuing a K, we have a short period from the issuance of the k to the end of the quarter. So there is just limited periods we can be repurchasing. We will have a much longer window this quarter and it was strictly tied to the timing of that and nothing else.

Analyst (Eric Zwick): Gotcha. Okay. Understood. Thank you. And last 1 for me. Wondering if you can just talk about, the pipeline a little bit. I know you expect it to grow in the back half of the year. Post the Ridge Post tie-up. And curious from a spread perspective, if you can talk about where you are seeing spreads in the pipeline today relative to 90 days ago and also kind of compared to the current existing portfolio yield.

Robert T. Ladd: Yes. So relative to spreads, so as the private credit has been disrupted a little bit, we are seeing some I would say, steadiness in spreads. We have not seen the same widening that the upper market is seeing. But I think we have certainly seen stabilization. And so I would say our average deal we are looking at today is, you approximately a 5.5% spread over SOFR. It could be higher. But it is stabilized. But not meaningfully wider yet.

Analyst (Eric Zwick): Okay. Good to hear that it is at least stabilized and hopefully some widening going forward. So great. Well, that is all for me today. Thank you so much.

Robert T. Ladd: Okay. Many thanks, Eric.

Operator: Your next question is from Christopher Nolan with Ladenburg Thalmann.

Analyst (Christopher Nolan): Hey guys. I guess for Todd. Todd, does the I know your leverage your regulatory leverage ratios are low. But when including the SBA, you know, it is somewhat higher. Does the SBA in any way restrict what your regulatory leverage ratios could be?

William Todd Huskinson: No. No. it is it is the right the SBA leverage is excluded from regulatory leverage. So it is a it is a 2:1 regulatory leverage. Our rate our regulatory leverage you know, around 1x and then it is 2x with the SBA debentures. A little bit less than 2x now. You know, because we have paid off a number of debentures.

Analyst (Christopher Nolan): Okay. So your unsecured notes and so forth does not put any sort of restrictions on your total leverage. it is on your regulatory leverage. Correct?

William Todd Huskinson: Correct. Yep. that is right. Okay. Yeah. So just note, Priscilla and the credit facility are part of regulatory leverage, and then the debentures are in addition to that as total leverage.

Analyst (Christopher Nolan): Got it. And so we can see, you know, your regulatory leverage ratios are impressively low, so we can just see that you guys have a fair amount of balance sheet flexibility from that. Is that a fair interpretation?

William Todd Huskinson: that is correct. that is correct. Yeah. I think that is correct. it is, of course, limited by borrowing base, but that is right. We have a lot of and a lot of running room with respect to that.

Analyst (Christopher Nolan): Okay. And then I guess you mentioned in your comments that you did not have much software exposure. But in your industry list, is it buried into another industry like high-tech industries?

Robert T. Ladd: Yeah. it is in a couple-- it would be in several. Could be in high-tech. It could be in the industry it serves because as I mentioned, those software products are very industry specific, and could be like a service as well that might be industry specific, and those might be in different industry categories.

Analyst (Christopher Nolan): And we see with other BDCs where they have had take down unrealized depreciation on software positions, Have you guys experienced that as well?

Robert T. Ladd: We have not. Okay. Those positions are-- those positions are marked approximately where they were last quarter end, and are basically marked close to par. Yeah, they are both they are they are all good solid performing loans. I mentioned they are either a 1 or a 2 on our risk rating scale. So all doing fine. Okay. Thank you.

William Todd Huskinson: Yeah. Thank you, Christopher.

Operator: Your next question for today is from Robert Dodd with Raymond James. Good morning.

Analyst (Robert Dodd): Just sticking with that software well, not loading software. The marks. On the quality, so there is $0.22 in NAV attrition, primarily markdowns and debt investments Can you give us any idea how much of that was spread as you just mark to market versus actual company specific elements.

William Todd Huskinson: Yes. So I would say Robert, most of that is coming from kind of net company movements. We had-- and most of those markdowns were on 2 specific positions. So we did have certainly some spread markdowns in terms of just the models, but the majority of that was coming from 2 equity positions. And we also have-- we had a little bit of equity as well. I mean, 2 debt positions. I am sorry, that are wiped out on the equity as well.

Analyst (Robert Dodd): Got it. Got it. Thank you. On just going back to the Eric's question on spreads, and you said that you have seen some stability. there is sometimes, obviously, can be a lag between how the smaller end of the market, so to speak, responds to spread movements versus the upper end of the market, and to your point.

So do you think the spreads stability rather than expansion you are seeing right now is more a function of just things lagging what is going on in the upper market, or do you think that it is just that the competitive environment in your end of the market is just not moved, and you just do not expect those spreads to widen materially or at all.

Robert T. Ladd: Yeah, Robert. So I would say that it is driven by the latter that still a competitive space that we are in. And I think we are seeing things getting done in the high fours up to the mid to high fives. So I would say it is a competitive nature. it is a things are slower in terms of deal flow. I think as you see deal flow pick up, there is certainly opportunity to have the spreads also widen some. But so far, I think it is not a lag. I think it is just the competitive nature of where we are.

Analyst (Robert Dodd): Appreciate that. Thank you. And then just 1 more. On the non-accruals, and you addressed this that, like, they are a little elevated. You have got some, you know, you wanna work that down, rotate those into to you know, either back onto accrual or into income producing assets. I mean, any color you can give on I mean, I think you mentioned, you know, your making some progress. I mean, how it is a slow process. I wanna say fast. I do not mean fast, but what kind of timeline do you think that could go noticeably lower than where it is currently. In terms of the non accrual and non income producing debt capital assets?

Robert T. Ladd: Yes. So we had we discussed this on the last call, and I think I would say the same thing. I would I think we are you know, I think they are not gonna be immediate. I would be thinking toward the end of the year. This year, and then these are you know, generally in 12 to 24 month resolution, so to speak. But just we wanted to make sure that we have not we are very focused on it. But I think it is gonna take some more time. But we are seeing some progress in some.

And the other thing that you have noted and I have mentioned in my remarks is that as we get some of these equity realizations in, and we have some larger positions you know, this is a great opportunity to recycle but lever what are nonearning assets they could appreciate, but noncurrent earning assets to put leverage on them and grow the portfolio again. So we think we will start to see that come to fruition toward the end of this year So those 2 things combined think of it more toward the end of this year and the first of next year, but not immediately.

Analyst (Robert Dodd): Got it. Got it. Thank you. Yeah.

Robert T. Ladd: Thank you, Robert.

Operator: Your next question is from Paul Johnson with KBW.

Robert T. Ladd: Good morning, Paul.

Analyst (Paul Johnson): Yeah. Good afternoon, guys. Thanks for taking my questions. Just a little bit more on the on the non-accruals. As Robert said, those are elevated. I think they are probably as high as they have ever been for Stellus. I am just curious, what, I guess, has been kind of the weakness there? I mean, is it just been kind of a challenging vintage or has there been something maybe more specific in terms of kind of what is driven the more recent, I guess, increase in nonaccruals Yeah.

Robert T. Ladd: So good question, Paul. I would say they are all company specific. Not driven by any kind of a macro trend or an underwriting trend that we know. All of our businesses, when we underwrite them, there are few key characteristics 1, they have a substantial equity partner behind it, a private equity firm. 2, the equity component to the company is at least or typically at least 50% of the capital structure and each has serious covenants. Traditionally, a fixed charge coverage and a leverage test. So when we go into it, we are not expecting problems, but we certainly underwrite it We went through a recession. How would this company do?

But ended up having not a recession, but, again, company specific issues that have that have made some of them challenging. Also, it is worth noting that because there is a private equity sponsor beyond substantially all these, it is typical that a private equity firm will put in capital at least 2x to solve problems. So if that is helpful to say, that if we have something on nonaccrual, the sponsor owner has supported this over time, and just gotten to the point where they are not able to support it anymore. So, again, company specific, nothing we could tie down to anything that would be overall trend.

Part of it, too, is we have also had in the past, we have had things come off non accrual or be resolved, and we are having some slowness in that activity, and that is why I noted that we are working it and working it hard to get that to reduce over time. So I think it is that we have not been able to take as many off as we have added. But, anyway, thanks for the question, and that is where we are.

Analyst (Paul Johnson): Got it. Okay. Appreciate that. And then, I mean, it sounds-- if I am not mistaken, you are your 1- to 2-rated names roughly around 19% of the portfolio I believe, last quarter, I do not think there is too much change quarter over quarter. In terms of, like, the internal watch list with the new addition here, to nonaccrual, I believe that may have already been captured within, you know, your internal watch list.

Is that is that safe to say that any of the, you know, addition here to the non-accrual is not necessarily a surprise and is, you know, was more or less kind of within the bucket of underperforming rated names and that is relatively unchanged quarter over quarter.

William Todd Huskinson: that is right, Paul. And again, I think it so it is 19% that is risk grade 3 or below and you are right. That number did not change. My mistake. And no. No. No worries. And that the 1 that did move to nonaccrual was already a risk grade 3 before.

Analyst (Paul Johnson): Got it. Okay. that is all for me.

Robert T. Ladd: Thanks so much, Paul.

Operator: We have reached the end of the question and answer session, and I will now turn the call over to Robert T. Ladd, for closing remarks.

Robert T. Ladd: Okay. Thanks again, Holly. Thanks for your help, and thanks, everyone, for participating, your support over many years of our company. And we look forward to giving you an update again in early August. Relative to the second quarter. Thank you.

Operator: This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.

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