Logan Ridge Finance - Q1 2023

Transcript

Speaker 0

Good morning, and welcome to Logan Ridge Finance Corporation's First Quarter Ended March 31, 2023 earnings conference call. An earnings press release was distributed earlier yesterday after the close of market. A copy of the release along with a supplemental earnings presentation is available on the company's website at www.loganridgefinance.com in the Investor Resources section and should be reviewed in conjunction with the company's Form 10 Q filed with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward looking statements as a result of a number of factors, including those described in the company's filings with the SEC. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Logan Ridge Finance Corporation Jason Roos, Chief Financial Officer and Patrick Schaeffer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Speaker 1

Good morning, and welcome to our Q1 2023 earnings call. As mentioned, I'm joined today by our Chief Officer, Jason Roos and our Chief Investment Officer, Patrick Schaeffer. Following my opening remarks, Patrick will provide additional detail on our investment and Jason will walk through the financials. To open, I'd like to highlight that the Q1 of 2023 was very much a continuation of the earnings trajectory established during the second half of twenty twenty two. We are continuing to execute on our strategic priorities and are cautiously optimistic for 2023 despite the challenging market we're currently navigating.

With that in mind, while Patrick and Jason provide more detail shortly, I would like to highlight a few key metrics from the quarter. Our net investment income was up 69% this quarter as compared to the previous one from $600,000 or $0.23 per share to $1,100,000 or $0.40 per share. Further, the Q1 of 2023 was our 3rd consecutive quarter driven by the reworked capital structure and success we've had monetizing the non yielding legacy portfolio and rotating into income generating names. Deployment for the quarter remained positive with $7,400,000 in new investments and $6,700,000 in repayments and sales, leaving us with net deployment of $700,000 As of quarter end, the portfolio consisted of investments in 59 companies. Our improved financial performance allowed the company's Board of Directors to approve an increase in the quarterly dividend from $0.18 per share in the previous quarter to $0.22 per share to be paid at the end of the month.

Finally, on March 23, 2023, we began repurchasing shares under the recently approved $5,000,000 share repurchase program. As of March 31, 2023, we have repurchased 1625 shares for an aggregate cost of approximately $34,000 which was accretive to NAV by $0.01 per share and demonstrates the potential benefit this program can have for Logan Ridge stockholders at the company's current trading levels. As a reminder, the program expires on March 31, 2024. We are proud of the significant progress we've made in the turnaround story of Mount Logan Ridge since Mount Logan Management took over as the company's investment advisor back in July of 2021. We look forward to updating you on our continued success in the coming quarters.

Looking forward to the rest of 2023, we continue to believe that Logan Ridge is well positioned to capitalize on opportunities arising from the current credit environment. We will continue to focused on maximizing the earnings power of the company's balance sheet and its more efficient capital structure to further increase total returns to shareholders. Current wider spreads and the large increase in short term interest rates make our asset class very compelling from a risk reward perspective. With that, I will turn over the call to Patrick Schaeffer, our Chief Investment Officer.

Speaker 2

Thanks Ted. As of March 31, 2023, the fair value of our portfolio was approximately $203,300,000 and consisted of 54 portfolio companies. This compares to 59 portfolio companies with a fair value of approximately 203,600,000 in the prior quarter in 42 portfolio companies with a fair value of approximately $206,900,000 as of March 31, 2022. As of March 31, 2023, 54% or more than half of the company's investment portfolio at fair value in assets originated by the BC Partners Credit Platform. During the Q1, we continued to judiciously deploy capital.

Specifically, the company made approximately $7,400,000 of investments and had approximately $6,700,000 in repayments and sales, resulting in net deployment of approximately $700,000 for the quarter. As we have consistently demonstrated since taking over management, we continue to be highly disciplined as we selectively take advantage of what is shaping up to be a very lender friendly deal environment in this volatile market. Moving on to our portfolio composition. At quarter end, our debt investment portfolio represented 83.1 percent of the total portfolio at fair value and had a weighted average annualized yield of approximately 10.7 excluding income from non accruals and collateralized loan obligations. This compares to a debt investment portfolio, which represented 83.2% of our total portfolio at fair value with a weighted average annualized yield of approximately 10.4% excluding income from non accruals and collateralized loan obligations as of the prior quarter.

Further, as of March 31, 2023, 1st lien debt represented 65.4% 60 7.7% of our total portfolio on a cost and fair value basis respectively. This compares to 1st lien debt representing 54.9% and 67.3 percent of our total portfolio on a cost and fair value basis respectively as of the prior quarter ended December 31, 2022 and 53.7 percent and 48.7 percent of our total portfolio on a cost and fair value basis respectively as of March 31, 2020 Further, the non yielding equity portfolio represented 16.4% and 14.6% of the portfolio on a cost and fair value basis as of March 31, 2023. This compares to 16.3% 14.2% of the portfolio on a cost and fair value basis as of December 31, 2022 21.9% 28.3 percent of the portfolio on a cost and fair value basis as of March 31, 2022. Moving on to non accrual status. During the quarter, we moved our investment in Lucky Bucks LLC's subordinated note to non accrual status.

We have been and continue to be actively engaged with all constituents to constructively work on a pathway forward. Accordingly, as of March 31, 2023, we had 2 debt investments on non accrual with an aggregate amortized cost and fair value of $14,200,000 $10,000,000 respectively or 6.4% and 4.9% of the investment portfolio at cost and fair value respectively. This compares to 1 portfolio company on non accrual status as of the prior quarter with a cost and fair value of $11,900,000 $9,700,000 respectively, representing 5.4% and 4.9% of the investment portfolio's cost and fair value, Now I'll turn the call over to Jason.

Speaker 3

Thanks, Patrick. Turning to our financial results for For the Q1 of 2023, total investment income increased by $700,000 or $5,300,000 as compared to the prior quarter and increased by $2,000,000 compared to the quarter ended March 31, 2022. The increase compared to the prior quarter was primarily a result of $200,000 of non recurring fee income as well as increases in base rates. The increase compared to the quarter ended March 31, 2022 was primarily driven by redeploying proceeds received from exiting the non yielding equity portfolio and interest earning assets originated by the BC Partners credit platform as well as an increase in base rates. Total operating expenses for the Q1 of 2023 increased to $4,200,000 as compared to $3,900,000 in the Q4 of 2022, primarily due to higher interest and financing expenses as a result of increases in base rates.

Total operating expenses for the Q1 of 2023 decreased by $200,000 compared to the quarter ended March 31, 2022, primarily as a result of lower management fees due to a smaller portfolio and lower interest and financing expense as a result of the company's lower cost of capital and lower general and administrative costs. Accordingly, our net investment income for the quarter was $1,100,000 or $0.40 per share, marking the 3rd consecutive quarter of positive net investment income. Moreover, this is a substantial improvement compared to the prior quarter for which the company reported net investment income of $600,000 or $0.23 per share and a complete turnaround compared to the Q1 of 2022 for which the company reported a net investment loss of 1,100,000 as we highlighted previously included in net investment income for the quarter ended March 31, 2023 was $200,000 or $0.06 per share of non recurring items. Our net asset value as of March 31, 2023 was $93,800,000 or $34.63 per share as compared to during the quarter, partially offset by net investment income in excess of the March 31, 2023 dividend payment and the accretive effect on a per share basis of our share repurchase program.

Finally, as of quarter end, the company had $9,300,000 in cash and cash equivalents as well as $16,600,000 of unused borrowing capacity available for deployment and investments originated by the BC Partners Credit Platform. With that, I will turn the call back over to Ted.

Speaker 1

Thank you, Jason. We are proud of the continued progress we have made during the Q1 of 2023 and we look forward to the rest of the year. Thank you for continued support. This concludes our prepared remarks and I will now turn over the call to the operator for any questions.

Speaker 0

Thank you. Your first question today comes from the line of Christopher Nolan from Landenberg Thalmann. Your line is open.

Speaker 2

Hey, guys.

Speaker 4

Given the comments that Q1 results are a good run rate going forward And given with EPS easily covered the dividend, is it fair to say that we should Expect to see further dividend increases in coming quarters assuming that earnings momentum remain at the current level.

Speaker 1

Yes. Hey, Chris, how are you? I would say yes. I mean the issue that we have with Logan Ridge is Small changes in certain line items can lead to very big swings in EPS or NII quarter to quarter. So we want to prudent with our dividend increases.

But the risk of a dividend increase is substantially higher than a revenue Then a dividend decrease. I mean, I think the intention is to increase the dividend over time as our earnings continue to grow and we have a lot of more Around the forward trajectory of earnings. Great.

Speaker 4

And I guess follow-up question would be, given This changing operating environment, what does that say in terms of your ability to exit some of these legacy equity investments?

Speaker 2

Yes. Hey, Chris, it's Patrick Schafer. So look, I think the environment remains continues to be slower. So I do think it elongated in some respect. That said, we continue to be active in a number of different names about rotating out.

In a lot of instances we are a relatively small minority equity holder. So there are kind of unique one off opportunities Try and kind of create our own catalyst in certain instances. But I would say it certainly kind of elongates that process in general.

Speaker 1

Great. The other thing I'd say is we've obviously been working super hard on this portfolio. And Not only I agree with everything Patrick said, but also there is some upside to some of these positions. They're not all But not all bad. So we're some of these positions are actually doing pretty well because they're impacted by things that are having less of an impact So there's puts and takes across that portfolio, but there is some upside to it.

Speaker 4

And a third question, if I may. Is the plan to use to credit facility rather than raising any

Speaker 2

So you broke up a little bit, Chris. I think you were asking is the plan to use our credit facility as opposed to new issue of a baby bond or something In terms of if we were to increase leverage or if we were to be a net deployer capital. I think if that is in fact your question then the answer would be That was sort of our intent behind the facility. It's a $75,000,000 headline number. So we still have an incremental $20,000,000 $25,000,000 of investing Capacity on there and we could potentially upsize that as well, not committed, but could potentially upsize that as well in the future.

Okay. That's it for me. Thank you.

Speaker 0

Your next question comes from the line of Steve Martin with Slater. Your line is

Speaker 5

open. Hi, guys. Hi, Steve. Can you comment on Activity quarter to date and any anticipation what you know may or may not happen before the end of the quarter?

Speaker 2

Yes, I would say, I'd say where we sit here today, There's kind of nothing material that's happened in our portfolio that I think would kind of be topical. As I mentioned to Chris just before, There's a number of different kind of things that we're working on specifically with portfolio companies to try and exit some legacy positions. I think we're hopeful some of those things will transpire in the relative near to medium term. But I think it's probably a little bit premature where we sit today to mention any of them.

Speaker 5

And you had some maturities at the end of 'twenty two that got pushed out and I know you have some maturities in 'twenty three. Is that what generally what you're talking about?

Speaker 2

Yes, that's correct.

Speaker 5

So if you have they're mature companies, if you had to And it wouldn't be the worst thing in the world and you get them marked back up to you get the terms closer to market?

Speaker 2

I mean, they're situation dependent, but generally speaking, yes, though they are some situational dependent on what is in the best Of the company in our position relative to market rates, but

Speaker 1

yes. Okay.

Speaker 5

Given that the portfolio is pretty static over the last 3 months, If all the rate increases that are pending that roll through, what would be the impact on investment income. Clearly, if your debt balances don't change, your interest expense doesn't change.

Speaker 2

That's right. I mean, I think we still have a little bit of continued momentum in kind of the rate movement. And again, I'd say This portfolio is probably on the relative low end in terms of fees and things like that just because a lot of our kind of new assets where we have kind of OIDs and call protection and things like that. There hasn't really been any churn in kind of the newer portfolio. So I think we're still kind of on the relatively low end from a general fee perspective.

But I think it's probably fair to say that, yes, without any material change in sort of the portfolio that obviously we're kind of in a relative run rate state from an income with again with a little bit of increasing from benchmarks and things like that. But there wouldn't be anything dramatic. Again outside of as you mentioned Steve, some positions exiting kind of high grading the portfolio from a taking out an L500 loan or replacing with an L700 loan. There's obviously that Stuff that goes on, but yes, in a static environment as you mentioned, then that's generally correct.

Speaker 5

Okay. You want to comment on and I know you commented on Portman, how you feel about The discount to cost and how much of that mark to market might be recoverable over time?

Speaker 2

Yes. So we didn't run I guess you're asking in we didn't run a specific math of X Percent of fall rates and wide percent recoveries, we can do that. I would say and can follow-up on that. I would say in general, we feel pretty good about where we have the portfolio marked from a fair value perspective. As Ted mentioned, I mean some of those portfolio companies based on the equity side continue to perform very well.

So we do think There is long term upside in some certain positions, but where we sit today, we feel pretty good about the marks. And again, like This portfolio is a little bit newer or at least half of it is relatively new. So it doesn't have quite the same mark to market impact to date that the other portfolio apartment range you referenced has. So they're a little bit different composition. So that's probably the best I could say right now and we can follow-up with the same analysis that we did on the other portfolio.

Speaker 5

Got you. Give me one second. Yes, because you have over the last couple of quarters marked the equity positions, the old equity positions down somewhat. And I assume that's environmental as much as anything else.

Speaker 1

Yes, I think it's what Patrick said. I think it's I don't think that I don't unfortunately, I don't think it's environmental. I don't think it's thematic. I think it's situation specific. Each company is going through different things, some good, some bad.

And I think it's just like that's just like where the math came out. I don't think there's a broad don't think we're seeing a broad slowdown across the portfolio. I think the puts and takes on the valuations I think are around very company specific outcomes. So again, like post COVID, some are doing much better and some others are facing some headwinds.

Speaker 5

Okay. The buyback, was there something that inhibited the buyback 1625 shares is it's great that we've commenced. It's not a particularly meaningful number.

Speaker 3

Yes. No, I think you'll be pleasantly surprised in Q2 because The timing basically it was like 7 days of possible buyback opportunity for us in the quarter because of when the blackout window opened up in March. So between like March 23, it was the first day we were actually buying back Shares in the Q1, but that program has been put in place now while we were outside of a blackout window and we'll continue to be buying back shares each day.

Speaker 1

Okay. I mean, obviously, we bought more of a stock in the second quarter than we bought in the Quarter and we're only one we're only we're only not done the quarter yet obviously. Got you. You're using the

Speaker 2

10b5, so it's sort of automatic somehow?

Speaker 5

Correct. Okay. Somehow?

Speaker 2

Correct.

Speaker 5

Okay. And how do you feel about leverage right now, the ratio Your leverage ratio gross net?

Speaker 2

We feel generally speaking pretty good. I'd say we're at the lower end of Sort of our general range of 1.25 to 1.4. That said, again, I think the portfolio composition of Logan is a little bit heavier equity, so we kind of want to be a little bit on the lighter side of that range kind of generally, but also again, As we see opportunities in the market, I think we would feel comfortable about increasing that leverage rate to expand Sorry, to make new investments.

Speaker 5

Got you. All right. Thanks a lot.

Speaker 3

Thank you.

Speaker 0

This concludes our Q and A for today. I turn the call back to Ted Goldthorpe for closing remarks.

Speaker 1

Great. Well, thank you very much for everyone attending today, and we look forward to speaking to you all again in August when we announce our Q2 2023 results. Thank you and have a good day.

Speaker 0

This concludes today's conference call. You may now disconnect.