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 First Quarter 2019 Results. At this time, all participants have been placed on a listen-only mode. The call will be open for a question-and-answer session following the speakers’ remarks. This conference is being recorded today, Friday, March (sic) [May] 10, 2019. 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.

Okay. Thank you, Britney. Good morning, everyone, and thank you for joining the call. Welcome to our conference call covering the quarter ended March 31, 2019. 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. We'll begin by discussing our operating results followed by a review of the portfolio, including asset quality and then the outlook. Todd will cover first the operating results.

Thank you, Rob. We generated strong earnings during the quarter and completed a secondary offering of 2.9 million shares resulting in net proceeds of $41 million, including the over allotment, which was exercised in April. The offering was done at NAV with our manager paying approximately $700,000 of the sales load. The proceeds were used initially to repay our bank facility but will be used over time to fund new transactions in our pipeline. We covered our first quarter distributions through core net investment income of $0.34 per share. GAAP net investment income was $0.27 per share impacted by the accrual of $1.2 million of capital gains incentive fees related primarily to our realized gains. We also generated $10.2 million of long-term capital gains or $0.63 per share from the realization of two equity investments. Net asset value increased $0.23 per share during the quarter from $14.09 to $14.32, primarily due to the unrealized depreciation of our debt portfolio from spreads tightening during the quarter and the realized gains. With that, I'll turn it back over to Rob.

Okay. Thank you, Todd. So now I'll cover portfolio and asset quality and outlook. With respect to portfolio quality, we ended the quarter with an investment portfolio at fair value of $517.4 million across 55 portfolio companies, which is up from about $505 million across 57 companies at December 31. During the first quarter, we invested $29 million at par value in 1 new and 4 existing companies and received $21.8 million of repayments and realizations. Our portfolio continues to be weighted towards secured lending at floating rates. At March 31, 95% of our loans were secured and 91% were priced at floating rates, both unchanged from year-end. We continue to maintain good diversification with the largest industry sector at 16% of the total. The average investment per company is $9.4 million and the largest investment is $22.6 million both measured at fair value. 52 of the 55 companies are backed by a private equity firm. Overall, our asset quality is stable at 1.9 on our investment rating system or slightly better than planned. One loan came off nonaccrual during the quarter leaving 3 loans on nonaccrual, which comprised 1.7% at fair value of the total loan portfolio. Now turning to outlook. As we mentioned on our last call, part of our strategy has been to invest in the equity of our portfolio companies in a modest way in order to generate realized gains sufficient to offset losses over time. As our business has matured over the last 6 years, we began to see somewhat regular realized gains from our portfolio. During 2018, we had $5.3 million net realized gains, and we generated $10.2 million of realized gains in the first quarter, and we may have $2 million plus of additional gains in the second quarter. This quarter end, we…

[Operator Instructions] Our first question comes from Christopher Nolan with Ladenburg Thalmann.

Hey guys. Rob, is the target for the portfolio at year-end 2019 still $600 million?

It is.

Great. And do you anticipate -- I mean, right now the first lien is 60% or so of the portfolio. Do you anticipate that continuing to rise?

I wouldn't say that it's likely to rise, Chris from here, but certainly not to go down. At March 31, our second lien portfolio was about 28% of the total investment portfolio. So we think there's an interesting component of that, but I think that I would think of the first lien as being at least 60%.

Got you. And then in your prepared comments, you mentioned that one loan came off non-accrual. Am I still correct that there's still four borrowers of non-accrual: Refac, Grupo, Abrasive and Wise?

There should just be three. Abrasive is no longer non-accrual.

Okay, great. Okay. And then, oh yes, and what was the driver of the realized gains in the quarter, please?

Yes. So there were two transactions, again, both equity co-invest, the larger of which was the sale of a business that we've had for, I want to say, almost three years. So again, just from -- and the company-specific one was called Resolute and the other was called Millennium Trust.

Great. That’s it for me. Thank you very much.

Thank you, Chris.

Our next question comes from Robert Dodd with Raymond James.

Hi, guys. To your point about that you made equity co-invest in the past, where would say -- I just want to word this right way. Obviously you're harvesting gains right now. You did last year. You did this quarter. It looks like you've got another next quarter. Once those are complete, how would you characterize the rest of your equity book in terms of maturity position, because obviously you’re going to make a co-investment, it might be three-plus years before realization. I mean, that's the cycle. So where would you characterize the rest of the equity book in relative maturity age, if you will?

Yes. S,o Robert, the -- interestingly, we really didn't have -- I mean the company went public in November of 2012, and we really didn't have any, pardon me, material realized gains until 2017. So I think the good news is we're far off -- far along enough in the portfolio, and its life cycle that we would expect these gains would continue to occur. As an example, the current equity portfolio is marked at about $8 million higher than cost basis. So on average, we would expect you'll see another $8 million over time, and we'd be optimistic that you'd see more as some of the companies appreciate in value. So I think we view this as, again, part of our overall investing philosophy and approach, so you continue to see this. The only thing I would caution us by is that, again, our overall approach is -- we think these are used for also to cover credit losses. So, we don't have any on the horizon, but we're inevitably going to have some additional credit losses. So, we like to harvest when we can, and they are there if we have such potential losses in the future, so I think the good news is we think there are more to come.

Got it. Got it. Appreciate that. On the activity, I mean, you said obviously that the Q2 might be relatively flat because there's a lot of activity going on deployments and repayments. Given the BDC, can you recap for us? I mean, the BDC now has a bit more available capital and lev up. You raised equity. You just got some nice gains and cash in. Where do you stand on -- where does it stand on the BDC maybe getting big -- slightly bigger bite sizes? Obviously, because you have a private fund that you co-invest with which has enabled diversification, et cetera, et cetera. But does the BDC's extra available capital in the near-term shift how things are going to be allocated?

Well, it's a good question, Robert. We like the approach we're taking. So as we get larger. So, first with the additional equity that was raised in March and April, we do have more capacity. Our equity book is in the -- from the 220s to the 260s, but we like as when we can to have smaller rather than larger positions. So, I think you'll see our investing sizing will stay similar to the way it's been. Our upper limit we try to keep any one position not more than the low 20s. And ideally, we'd like to see every position in the low-double digits. So, I think maybe just -- I think what you'll see is that we'll continue to keep our sizing in that same range, but across a larger equity base. And then it's truly incumbent upon us as we're finding new opportunities to continue to increase the size of the portfolio, but we certainly intend to do it in a very diversified way.

Okay. I appreciate that and thank you for the color.

Thank you, Robert.

Our next question comes from Ryan Lynch with KBW.

Good morning, Ryan.

Good morning. I wanted to tag in on kind of the equity co-investment discussion and maybe talk a little bit about a philosophical question on your equity co-investments. Where we're at in the market cycle today, clearly it's competitive out there and multiples are -- they feel like they're elevated. They're certainly elevated from the last couple years. Do you guys ever make any sort of call where you guys just decide -- and you guys are having a great -- doing a great job of exiting some equity co-investment position. There's some nice gains. So, do you guys ever make a call in the cycle that, okay, given where multiples are at today, we're going to kind of pair back over equity co-investments and just focus on just the core debt investments? Do you guys ever make that call? Or are you guys more of the philosophy that we're just going to try to take small equity co-investments in companies along the way and just kind of have that diversification?

Ryan, we really do the latter as you suggest. So, as a reminder, we've been investing in this way for almost 15 years. And throughout that period of time, we've taken the same approach. So, you will have cycles up and down, but we still think that taking the modest equity positions in companies that we've underwritten, that are owned by investors or private equity firms we like and we think are good investors, that we think that over time a diversified portfolio like this is valuable. And I would add to that, that our experience with these high quality investors is that even though they might be purchasing a company for 10 to 12 times EBITDA, a lot of their strategy is to take this as a platform and make it a very new and larger enterprise. So, it comes both in terms of EBITDA growth as much as it is an multiple expansion. So having said that, in a time when you're paying more for companies, it's going to have to come in EBITDA growth. So we're still very positive about the businesses we're underwriting, both from a credit perspective as well as we think it's quite interesting to be alongside these very capable investors to be an equity co-investor.

Okay. That makes sense. And then just one final one. You mentioned -- you said that there could be potentially $2 million of realized equity gains in the second quarter. Just curious, if those come to fruition, are those already reflected via unrealized gains in those entities? Meaning if you guys would actually realize and there's actually going to be no delta in book value?

Interestingly, Ryan, in this case, that's not currently reflected in the marks because we didn't have sufficient information to support it. And so -- but I did thought -- I thought I should mention it today. But -- so but we think if it happens, it would happen now by the end of the quarter.

Okay. Thank you. Those were all my questions. I appreciate the time today.

Yes. Thank you, Ryan.

Thank you. We have one more question from Mr. Robert Dodd with Raymond James.

Just a nuance one, Rob. I mean you mentioned in your prepared remarks, you don't expect to cover the dividend from NII in the next couple quarters. Did you mean you don't expect to cover it from core NII because obviously, if there is another markup on that portfolio, your NII will take a dip because the capital gains, incentive fee? So were you talking about core there or just GAAP NII, so to speak?

Robert, both, both.

Okay. Got it.

So your point is good that yes, there will be some additional capital gains, incentive fee. But again, it's just you've seen the gestation of these type of equity offerings in the past. But again, the good news here is we -- our current track of the coverage, including the gains, is quite substantial.

Yes, yes, I mean no question. I mean, the realized earnings are covering. The last question, I guess, for me is what -- at the end of Q1 -- do you have an estimate at the end of Q1 of how much spillover income you have?

So at the end of Q1, we had, I think, about $4 million of spillover from last year. And so I mean really, it's hard to know because your taxable income isn't determined until the end of the year, right.

Yes.

You know, right. So this gain is -- so maybe by the end of the quarter, it's another $10 million. And again, we distributed all of our regular earnings, and the $10 million is an additional gain undistributed. So hard to know what it actually is going to be at the end of the year, Robert, but it's substantial at the end of the quarter.

Yes, Got it. Thank you.

Yes, thank you, Robert.

Thank you, everyone. This concludes today's question-and-answer session. I will now turn the conference back over to Mr. Robert Ladd.

Okay. Thank you, everyone, and we very much appreciate your support. And we'll be back in front of you all in August when we go over the second quarter. Thanks, again.

Thank you, everyone. This concludes today's teleconference. You may now disconnect.