Logan Ridge Finance - Q1 2024

Transcript

Operator (participant)

Morning and welcome to the Logan Ridge Finance Corporation's first quarter-ended March 31, 2024 earnings conference call. An earnings press release was distributed yesterday, May 8, after the close of the markets. 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 of 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 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, Brandon Satoren, Chief Financial Officer, and Patrick Schafer, 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.

Ted Goldthorpe (CEO, President and Director)

Thank you. Good morning and welcome to our first quarter 2024 earnings call. As mentioned, I am joined today by my Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schafer. Following my opening remarks, Patrick will provide additional details on our investment activity to date, and Brandon will walk through our financials. While I will keep my prepared remarks brief today and limited to a few key highlights which Patrick and Brandon provide more detail on shortly, I would like to emphasize that during the first quarter of 2024 we continue to build upon record financial results we generated in 2023. The first quarter results are highlighted by the quarter-over-quarter increases in net investment income and net asset value of 63% and 1%, respectively.

Following the strong earnings we saw in 2023, Logan Ridge is off to a solid start in 2024, ending the first quarter with net deployment of $8.9 million and a robust pipeline. As the company's exposure to the legacy equity portfolio has continued to decline and its exposure to credits originated by the BC Partners Credit Platform have increased, the benefit to shareholders has been clear and is being reflected through Logan's strong financial results. Furthermore, as a result of the company's strong financial performance during the quarter, the company declared a second quarter distribution of $0.33 per share or a 3% increase to the company's quarterly distribution compared to the prior quarter. This is the company's fifth consecutive quarterly increase and represents an 83% increase from the $0.18 per share distribution we declared in the first quarter of 2023.

Finally, during the quarter, the company repurchased 21,867 shares which was accretive to NAV by approximately $0.08 per share. Looking forward to the rest of 2024, our pipeline remains robust and we continue to see attractive investment opportunities in the market. Over the course of 2023, private equity firms were sitting on record amounts of dry powder while at the same time are being pushed by LPs to return capital. Although expectations for future rate hikes have diminished toward the end of the first quarter and the beginning of the second quarter, we believe the aforementioned fundamentals combined with positive economic outlook and sentiment should continue to fuel new deal activity in our private credit space over the course of 2024. We remain focused on increasing shareholder value by leveraging the company's stronger balance sheet, and we believe our platform remains well-equipped to take advantage of current market conditions.

Specifically at Logan Ridge and more generally across the BC Partners Credit Platform, we continue to find attractive opportunities both through our sponsor relationships and our focus on sponsor and non-sponsor-backed companies and continue to win transactions based on our ability to custom tailor a capital solution for the borrower and the borrower's belief that our platform can add value to their business above and beyond just being a capital provider. With that being said, I will turn the call over to Patrick Schafer, our Chief Investment Officer.

Patrick Schafer (Chief Investment Officer)

Thanks, Ted, and hello everyone. As of March 31, 2024, the fair value of Logan's portfolio was approximately $200.1 million with exposure to 62 portfolio companies. This compares to 60 portfolio companies with a fair value of approximately $189.7 million as of the prior quarter and 59 portfolio companies with a fair value of $203.3 million as of March 31, 2023. During the quarter ended March 31, 2024, we continued to deploy capital in new and existing portfolio companies. Specifically, the company made approximately $9.8 million in new and existing investments and had approximately $0.9 million in repayments and sales, resulting in net deployment of approximately $8.9 million for the quarter. While we continue to be prudent and disciplined underwriters, we believe that the loans originated in the current environment will prove to be an attractive vintage. Onto portfolio composition.

As of March 31, 2024, 60% of the company's investments at fair value were invested in assets originated by the BC Partners Credit Platform. As of March 31, 2024, our debt investment portfolio represented 80.8% of the total portfolio at fair value with a weighted average annualized yield of approximately 11.4% excluding income from non-accruals and collateralized loan obligations. This compares to a debt portfolio which represented 82.0% of our total portfolio at fair value with a weighted average annualized yield of approximately 11.1% excluding income from non-accruals and collateralized loan obligations as of the prior quarter and 83.1% with a weighted average annualized yield of approximately 10.7% as of March 31, 2023. The weighted average annualized yield excluding income from non-accruals and collateralized loan obligations increased by 30 basis points and 70 basis points compared to prior quarter and prior year, respectively.

As of March 31, 2024, 88.5% of our debt investment portfolio at fair value was bearing interest at a floating rate compared to 86.4% as of December 31, 2023 and 83.4% as of March 31, 2023. As of March 31, 2024, first-lien debt represented 66.5% and 65.2% of our total portfolio on a cost and fair value basis, respectively. This compares to first-lien debt representing 65.4% of our total portfolio on both a cost and fair value basis as of December 31, 2023 and 65.4% and 67.7% of our total portfolio on a cost and fair value basis, respectively, as of March 31, 2023. The non-yielding equity portfolio represented 15.2% and 18.2% of our portfolio on a cost and fair value basis, respectively, as of March 31, 2024. This compares to 15.5% and 17.0% of the portfolio on a cost and fair value basis as of December 31, 2023.

Moving on to non-accrual status. As of March 31, 2023, the company had three portfolio companies on non-accrual status with an aggregate amortized cost and fair value of $17.2 million and $10.6 million, respectively, or 8.3% and 5.3% of the investment portfolio at cost and fair value, respectively. This compares to three portfolio companies on non-accrual status as of the prior quarter with a cost and fair value of $17.2 million and $12.8 million, respectively, or 8.7% and 6.9% of the investment portfolio's cost and fair value, respectively. I'll now turn the call over to Brandon.

Brandon Satoren (CFO)

Thanks, Patrick. Turning to our financial results for the quarter ended March 31, 2024. For the quarter ended March 31, 2024, Logan generated $5 million of investment income, an increase of $0.6 million as compared to $4.4 million in the prior quarter. The increase was largely a result of a one-time reversal of $0.6 million of previously accrued income on a portfolio company that was placed on non-accrual in Q4 of 2023. Total operating expenses for the first quarter increased by approximately $0.2 million to $4.1 million as compared to $3.8 million for the prior quarter. The increase in operating expenses was primarily driven by higher financing costs as well as higher general and administrative expenses.

Our net investment income for the first quarter was $0.9 million or $0.35 per share, an increase of $0.3 million from $0.6 million or $0.22 per share in the fourth quarter of 2023. As I noted previously, the increase in net investment income was primarily due to reversing $0.6 million or $0.22 per share of previously accrued income on a portfolio company that was placed on non-accrual status in the prior quarter. Our net asset value as of March 31, 2024, was $90.2 million, representing a $1 million increase as compared to the prior quarter net asset value of $89.2 million. On a per-share basis, net asset value was $33.71 per share as of March 31, 2024, representing a $0.37 increase as compared to $33.34 at the end of 2023.

The increase in Net Asset Value quarter-over-quarter was driven by net realized and change in unrealized gains on the portfolio as well as Logan Ridge out-earning the quarterly dividend payment by $0.1 million. Finally, as of quarter end, the company had $8.3 million in cash and cash equivalents as well as $23 million of unused borrowing capacity available for deployment in investments originated by the BC Partners Credit Platform. With that, I will turn the call back over to Ted.

Ted Goldthorpe (CEO, President and Director)

Thank you, Brandon. To our shareholders, thank you for your continued support. This concludes our prepared remarks, and I will now turn the call over to the operator for any questions.

Operator (participant)

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. And if you are called upon to ask your question and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press star one to join the queue. And your first question comes from the line of Christopher Nolan of Ladenburg Thalmann. Please go ahead.

Christopher Nolan (Analyst)

Hey guys, I'm Brandon. Just to make sure that you mentioned the $0.22 recovery from the previous non-accrual, was that for this quarter?

Brandon Satoren (CFO)

Nope, Chris, that was last quarter. We had about $600,000 in receivables that we had to write off through Q4 NII.

Christopher Nolan (Analyst)

Okay. That's what I thought.

Brandon Satoren (CFO)

That's the reversal this quarter you're seeing flow through earnings.

Christopher Nolan (Analyst)

There was a reversal this quarter?

Brandon Satoren (CFO)

No, I mean, sorry, I think what he means is the fact that we did not have a reversal this quarter but did have a reversal last quarter. That's part of why you're seeing the meaningful increase. The flip.

Christopher Nolan (Analyst)

Got it.

Brandon Satoren (CFO)

That's right. That's right.

Christopher Nolan (Analyst)

Got it. Okay. Thank you. Nth Degree, you guys are getting a lot of love from Nth Degree Equity Holdings. What can you say about this? Because according to my calculations, the fair value net increased 38% quarter-over-quarter, and that counts as 20% of your total equity holdings.

Ted Goldthorpe (CEO, President and Director)

Yeah, Chris, I think what I would say is the company continues to do very, very well. When we took over this portfolio in the first place, this was marked at probably close to zero. It is an events business where they put up and organize events for trade shows and things like that. I think they actually run part of the—I believe they actually run part of the Apple CES conference and such. So a pretty good business that got massively impacted by COVID. They've continued to grow really, really well. They made an acquisition and I'm saying everything that's public. They made an acquisition. It was announced last quarter. Sorry, not quarter, last summer of last year. So they're just continuing to perform very well.

There is at least one other BDC that's also in it with us, and you can see pretty consistent growth trajectory with kind of how that firm looks at this position as well as us.

Christopher Nolan (Analyst)

Okay. And then I guess the final question is, where are we thinking about leverage going forward?

Ted Goldthorpe (CEO, President and Director)

Yeah. So what I'd say is I think similar to how we think about our other BDC, Portman Ridge, I think we conceptually feel like BDC should probably be somewhere in the 1.25-1.4x net leverage, depending on the environment, depending on portfolio composition, etc. I think right now, Logan is at 1.3 on a net basis or on a gross basis, sorry, and a little bit less than that on a net, not significantly less. So we're kind of at the low end of our range. Obviously, you alluded to it, but we have one or two very large equity positions. So there is a little bit more variability in our NAV than perhaps others.

I would say to the extent that one or two of our large equity positions were to be realized and monetized in cash, we would probably feel a little bit more comfortable bringing leverage up from there. But kind of where, again, given sort of that portfolio composition, we would probably sort of look to be on the lower end of our sort of guidance until those kind of get realized.

Christopher Nolan (Analyst)

Got it. Okay. Thank you.

Operator (participant)

Your next question comes from the line of Steven Martin of Slater. Please go ahead.

Steve Martin (Analyst)

Hello again, guys.

Ted Goldthorpe (CEO, President and Director)

Hi, Steve.

Steve Martin (Analyst)

Hey, how are you?

Ted Goldthorpe (CEO, President and Director)

Hey. Following Portman, can you talk a little bit more about the deployments in the first quarter? In Portman, it was only 1 new borrower. What does that look like in Logan Ridge? And obviously, can you talk a little bit more about the deployments you expect in the second quarter? Yeah. I think for Portman or sorry, I think for Logan, there were 2 new borrowers. And there was again, this is a little bit more of the nuance, but there was 1 particular portfolio company or investment we made across the platform was a little bit lower on the yield spectrum. So we didn't think it quite made sense for Portman from a yield perspective or an ROE perspective. But for Logan, it fit very nicely within the leverage facility.

So on an ROE basis, it was significantly more attractive for Logan than it would have been for Portman. So again, it's another position that's across our platform, but it made a little bit more sense for Logan than it did for Portman. But other than that, again, I'd say the trends are generally fairly similar across the two. On the margin, we were obviously more of a net deployer in Logan than in Portman just because it was on the little bit lower end of the leverage spectrum. But I would think kind of what we talked about, Steve, earlier is the same, which is I think over the course of the year, we would expect Logan, again, on the whole, to be a net deployer of capital. Again, some of it depends on if we have some realizations, hopefully, and particularly in our equity portfolio.

Again, kind of the timing of if we did happen to receive $15 million or $14-and-change million from Nth Degree, which is kind of where it's marked, just as a simple example, might take a little bit of time for us to rotate that cash into loans. And if that happens over quarter end, etc., you might see some net repayment. But over, again, where we sit at the end of the year, we would expect to probably be a net deployer of capital in Logan Ridge.

Steve Martin (Analyst)

Your prospects for the second quarter?

Ted Goldthorpe (CEO, President and Director)

In terms of deployment. Again, similar, which is, I think, we are in a pretty good spot, have a good pipeline, depending on timing of such. Again, I would think that Logan is on the whole probably a net deployer for the second quarter. But again, it would probably not be as large of a net deployer as it was in Q1 just because, again, we're at about a little under 1.3x gross leverage. So we're kind of in a decent spot from a leverage perspective.

Steve Martin (Analyst)

Okay. And you made the comment, I think, that Riddell came right at the end of the quarter?

Ted Goldthorpe (CEO, President and Director)

Correct.

Steve Martin (Analyst)

So we didn't really see the impact of Riddell on the investment income?

Ted Goldthorpe (CEO, President and Director)

Not at all. $0 of impact on net investment income for the quarter.

Brandon Satoren (CFO)

That's the open trade payable on the balance sheet, $4 million.

Ted Goldthorpe (CEO, President and Director)

It traded and closed on Good Friday and settled on Monday. So it kind of went over quarter end.

Steve Martin (Analyst)

Right. And the rest of the deployment, was that made sort of throughout the quarter, or did we not see when you get a full quarter of in Q2, when you get a full quarter of Q1's deployments, will it be a material increase?

Ted Goldthorpe (CEO, President and Director)

I think it will certainly be an increase. They were not done at the beginning of the quarter. They certainly weren't done as far towards the end as Riddell. So you would see a 100% pickup from Riddell. But there definitely, again, should be tailwinds from the net deployment in Q2 versus Q1. And again, off the top of my head, I think the other one that I was referencing closed sometime in March. But again, you will definitely see a pickup from our net deployments kind of heading into Q2.

Steve Martin (Analyst)

Okay. And would you care to further your comments on possible exits of the equity portfolio?

Ted Goldthorpe (CEO, President and Director)

I think the comments I would make is similar to the market as a whole. M&A is starting to come back in the private credit space, but generally speaking, in sort of the private equity space as well. It's been a really tough 12 or 18 months to try and sell a business. And so I think just from a macro perspective, we have a lot better chances of exiting an equity position or two this year relative to last year or probably even in sort of the back half of 2022 unless something had already been in a process. Nothing really got done in the back half of 2022 either. So I'd say we're hopeful and optimistic, but from a macro perspective, we certainly have tailwinds to be able to exit some of these as opposed to all of last year.

There were certainly meaningful headwinds to exiting equity positions. Yeah. We expect to make a lot of progress on that front over the course of the year.

Steve Martin (Analyst)

Gotcha. And the non-accruals? By the way, you made the comment in your prepared remarks about non-accruals, about there being 3 non-accruals. The schedule says 4. Is the schedule wrong, or did you just misspeak?

Ted Goldthorpe (CEO, President and Director)

No, sorry. 3 borrowers on non-accrual. 1 of them happens to have 2 securities.

Steve Martin (Analyst)

Gotcha. Gotcha.

Ted Goldthorpe (CEO, President and Director)

But it's the same set quarter-over-quarter.

Steve Martin (Analyst)

Okay. Because I'm moving.

Ted Goldthorpe (CEO, President and Director)

Oh, I see. Because on the schedule, it says non-accrual investments, not borrowers. Correct. Apologies for the confusion there.

Steve Martin (Analyst)

Nope. Not a problem. Not a problem. So it was a further markdown of an exit so at the end of Q3, it was $10.6 million at fair value. Then it jumped up to $12.8. Then it went down to $10.6. Is that just coincidence that it's the same number?

Ted Goldthorpe (CEO, President and Director)

Yes, it is. From Q3 to Q4, we added one, which was the reason for the increase there. And this quarter, one of them was marked down, and the numbers are pure coincidence.

Steve Martin (Analyst)

Gotcha. Any prospect of cleaning some of those off? Are they in workout? Is there a shot that the borrower will restructure it?

Ted Goldthorpe (CEO, President and Director)

They're all in various different stages, obviously, since they're on non-accrual in sort of restructuring. I would say for the only one that really moves the needle, we probably still have a lot of time to kind of working through that. So out of the three names, there's two that are on the smaller end, and one is fairly large, which is the historical Sequel position. And I'd say that one still has a lot longer to work through. And again, the other ones, we obviously continue to try to work out and work through. I wouldn't say we're necessarily any closer than we were last quarter, and we're also not farther away. We're hopeful on all of them to try and move them into accrual status eventually. But again, for the one that moves the needle, I would not say we're closer to.

Steve Martin (Analyst)

Gotcha. All right. Thanks a lot.

Brandon Satoren (CFO)

Thanks, Steve.

Ted Goldthorpe (CEO, President and Director)

Thank you.

Operator (participant)

There are no further questions at this time. I will now turn the conference back over to Ted Goldthorpe for closing remarks.

Ted Goldthorpe (CEO, President and Director)

Great. Well, thank you, everyone, for joining us today. We look forward to speaking to you again in August when we announce our second quarter results. Thank you very much.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.