Prepared remarks
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 second fiscal quarter ended June 30, 2026. This conference is being recorded today, August 11, 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.
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 6 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 adviser 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 I 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. And 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. Now 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 3 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. And finally, dividend payments exceeded earnings by $0.08 per share as we continue 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 3 new portfolio companies and $9.3 million for add-ons to existing portfolio companies. We also received 5 full repayments totaling $38.7 million, $500,000 from 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 4.2x 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 at 1 or 2 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 5 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 the 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. Now I'd like to turn the call back over to Rob to cover a number of additional topics.
Okay. Thank you, Todd. As we look ahead to the third quarter of 2026, I'll cover 4 topics: the outlook for the quarter and beyond, an update on our adviser joining Ridgepost Capital, our $20 million share buyback program and again, 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 22, our external adviser, 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 private equity lower middle market private equity-backed companies and we believe our business is set to benefit from this meaningfully over time. We've been collaborating with the RCP's 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.
And 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 3 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 the remaining future authorization, we continue to view buybacks as accretive and an efficient way to improve the return to our shareholders. And 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. 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 $100 million over time or 10% of the current portfolio at fair value today. And before opening the line for questions, I'd like to conclude with a few final remarks. First, we have aligned our $0.25 per share quarterly dividend with the current trajectory of NII.
Second, while we still have work to do with several underperforming investments, we're actively managing these positions and remain focused on continuing to improve overall portfolio quality. Third, the origination backdrop is improving, and we're seeing encouraging signs across our pipeline as sponsor activity begins to accelerate. Taken together, we believe these factors position Stellus to create meaningful long-term value for shareholders while continuing to generate attractive income through the cycles. And Jenny, with that, we'd now be happy to open up for questions.
Questions and answers
The operator provided instructions on how to ask a question. Our first question is coming from Erik Zwick of Lucid Capital Markets.
I wanted to start with a follow-up on your commentary regarding the pipeline and the outlook for the back half of the year improving. I'm curious what's driving that optimism? Is it the partnership with Ridgepost and broadening the funnel and potentially improved market activity, a combination of those or maybe some other factors? Wondering if you could comment there.
Yes, sure. Erik, one factor is seasonality: deal activity tends to be somewhat seasonal, and the second half of the year is typically busier than the first, with the fourth quarter typically the busiest of the four quarters. That is part of it. Activity was a little slower earlier in the year, and things have generally picked up for us. We are seeing pricing remain relatively stable. If we were less disciplined on pricing, we'd probably be closing more deals, but we've tried to be disciplined on pricing. Regarding RCP Advisors and Ridgepost, it's still early days, but we think the integration will take a few quarters. We're starting to see overlap where a sponsor evaluating a transaction turns out to be part of the RCP portfolio. That is starting to generate opportunities, but at this point most of the activity is coming from our existing origination capabilities.
I appreciate the color there. Just looking at the income statement, the other income line was a little bit lower this quarter or in the second quarter relative to the past three or four. Curious if there was anything noteworthy or specific in the most recent quarter and whether you would expect the second-quarter rate to be a good go-forward rate or to return to the more historical level there?
There's nothing particularly unusual. We carried less cash than we historically have, so our sweep income was lower. That's the primary difference for the quarter. That item moves up and down and is likely the main factor driving the variance.
Got it. And then last one for me. Just on the unrealized appreciation in the quarter. What drove the positive marks in the portfolio?
Two positions were the main drivers of the appreciation. One involved the sale of a unit or division, which improved the mark for that position. The other involved a restructuring where we and others took out another lender at a discounted price; that action increased enterprise value for both businesses and resulted in uplifts. That accounted for roughly half of the unrealized gain. The other half was largely a reversal of a realized loss we had previously recognized on another position, so the reversal shows up as an unrealized gain in the quarter.
And our next question is coming from Christopher Nolan of Ladenburg Thalmann.
The hookup with Ridgepost, do you anticipate you're just going to have a much larger pipeline of deals that you're going to be reviewing?
Chris, I think that's definitely right over time. It starts with sponsors we've called on before where Ridgepost or RCP is already an LP, which makes introductions warmer. Next are situations where RCP is an LP in a fund and we don't have an existing relationship; the warm introduction from RCP can open doors. This will take time to evolve, but we expect it to make a meaningful difference. We've already had good interaction with the RCP team, and their 20-plus year history of investing in the lower middle market gives us additional insight into the quality of those private equity firms.
And our next question is coming from Robert Dodd of Raymond James.
Just going back to RCP for a second, Rob. In the relationships and the preliminary discussions you've had with them and the private equity funds they have relationships with, are there any niches where those funds have particularly strong industry expertise where you haven't historically been a significant participant? In other words, can this expand your pipeline not only in volume but in industry and sector diversification as well?
That's a good point. In the lower middle market, many firms cover a variety of sectors; some are more specialized. For example, industrial services is a category, and others focus on technology or digital marketing. Our history of investing has covered most industries, with two notable exceptions where we haven't been active: real estate and pure oil and gas. Given RCP's 200-plus fund relationships, their portfolio covers a wide variety of sectors. So over time, the partnership could provide access to areas where we have less exposure or to new attractive sectors, meaning it could help both volume and industry diversification.
On the remaining nonaccruals, can you give us a sense of whether those nonaccruals can come back to performing? Are the primary issues operational that can be fixed over time, or will material restructurings be required that need sponsor approval? In other words, what needs to happen to deal with those remaining assets?
On the nonperforming situations, for most of them we and the other lenders now control the assets, so we're not relying on a private equity firm to take action. We've generally completed restructurings and are working directly with management teams and other lenders to improve operations. In some cases, we've provided incremental capital. From here, the focus is positioning the companies for exit. We're not trying to achieve outsized multiples from these positions but rather to get them to a point where they can be sold and convert fair value into cash that we can reinvest. In short, obstacles have been addressed, restructurings completed where needed, and now it's primarily operational improvement, limited targeted capital, and pursuing appropriate exits.
Well, we appear to have reached the end of our question-and-answer session. I will now hand back over to Mr. Ladd for any closing comments.
Okay. Thank you, Jenny, very much, and we thank everyone for joining the call and for the support from our shareholders. And we look forward to giving you a further update as we review the third quarter in early November. Thank you very much.
Thank you, everybody. This does conclude today's conference, and you may disconnect your phone lines at this time. We thank you for your participation.