Logan Ridge Finance - Q2 2023

Transcript

Operator (participant)

Thank you. Good morning, and welcome to Logan Ridge Finance Corporation's Q2 ended June 30th, 2023 earnings conference call. An earnings press release was distributed yesterday after the close of the market. A copy of the release, along with the supplemental earnings presentation, is available on the company's website at 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 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 and President)

Good morning, welcome to our Q2 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos, and our Chief Investment Officer, Patrick Schafer. Following my opening remarks, Patrick will provide additional detail on our investment activity to date, and Jason will walk through the financials. I'd like to start by highlighting that the Q2 of 2023 was Logan Ridge's strongest quarter to date since we took over managing the company just two years ago, and largely a continuation of the performance trajectory Logan has been on since the middle of 2022. As the company's exposure to the legacy equity portfolio has continued to decline and its exposure to credits originated by BC Partners' credit platform has increased, the benefit to shareholders has been clear and is being reflected through Logan's financial results.

With that in mind, I will keep my prepared remarks brief today and limit it to a few key highlights, which Patrick and Jason will provide more detail on shortly. First and foremost, as a result of the company's strong financial performance, the board of directors approved an 18% increase in the quarterly distribution, bringing it to $0.26 per share, compared to $0.22 per share last quarter. Since we've turned the quarterly dividend back on in early 2023, we've increased it each quarter. Our net asset value was up 3% this quarter, or $1.05 per share, as compared to the prior quarter. We reported our 4th straight quarter of positive net investment income, which amounted to $1 million, or $0.38 per share, for this quarter.

This trend illustrates the enhanced earnings power of our portfolio, driven by the reworked capital structure we refinanced in 2022, and the success we've had monetizing the non-yielding legacy portfolio and redeploying that into income-generating names. Deployment for the quarter remained positive, with $4.8 million in new investments and $4.4 million in repayments and sales, leaving us with net deployment of approximately $0.4 million. As of quarter end, the portfolio consisted of investments in 62 different companies. Finally, during the quarter, we continued repurchasing shares under our share repurchase program that was established in late March. As of June 30th , we had repurchased approximately 14,000 shares for an aggregate cost of approximately $290,000, which was accretive to NAV by approximately $0.08 per share.

Looking ahead, we remain cautiously optimistic for the second half of 2023, and we continue to believe that 2023 will prove to be a very attractive private credit vintage. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer.

Patrick Schafer (Chief Investment Officer)

Thanks, Ted. As of June 30th 2023, the fair value of Logan's portfolio was approximately $206.6 million, with exposure to 62 portfolio companies. This compares to 59 portfolio companies with a fair value of approximately $203.3 million in the prior quarter. During the Q2, we continued to judiciously deploy capital. Specifically, the company made approximately $4.8 million of investments and had approximately $4.4 million in repayments and sales, resulting in net deployment of approximately $0.4 million for the quarter. Compared to a year ago, Logan's portfolio growth and increased diversification is even more impressive, as the company had just 44 portfolio companies with a fair value of $175.9 million.

As of June 30th, 2023, more than half of the company's investment portfolio at fair value was invested in assets originated by the BC Partners Credit Platform. As we have consistently demonstrated since we were appointed to serve as the company's investment advisor, we've been extremely thoughtful with your capital. Initially, laser-focused on de-risking the portfolio and now ensuring underwriting remains prudent and disciplined as we look to selectively take advantage of this lender-friendly market. Moving on to our portfolio composition. At quarter end, our debt investment portfolio represented 82.2% of the total portfolio at fair value, with a weighted average annualized yield of approximately 10.8%, 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 10.7%, excluding income from non-accruals and collateralized loan obligations as of the prior quarter. This decrease in our debt portfolio relative to the prior quarter, which is largely driven by the strong performance of our equity portfolio during the quarter. As of June 30th, 2023, 83.2% of our debt investment portfolio at fair value was bearing interest at a floating rate, compared to 83.4% as of March 31st, 2023. As of June 30th, 2023, first lien debt represented 66.1% and 66.8% of our portfolio on a cost and fair value basis, respectively.

This compares to first lien debt representing 65.4% and 67.7% of our total portfolio on a cost and fair value basis, respectively, as of March 31, 2023, and 55.7% and 55.4% of our total portfolio on a cost and fair value basis, respectively, as of June 30th, 2022. The non-yielding equity portfolio represented 16.5% and 16.4% of the portfolio on a cost and fair value basis, respectively, as of June 30th, 2023. This compares to 16.4% and 14.6% of the portfolio on a cost and fair value basis as of March 31, 2023.

The increase in our equity portfolio relative to the prior quarter, which is largely driven by the strong performance of our equity book during the quarter. Moving on to non-accrual status. During the three months ended June 30th, 2023, there were no new portfolio companies added to non-accrual status. We did add an additional security to non-accrual status, Logan's first lien term loan to Lucky Bucks, LLC. As of June 30th, 2023, we had two portfolio companies on non-accrual, with an aggregate amortized cost and fair value of $17.1 million and $11.1 million, respectively, or 7.8% and 5.3% of the investment portfolio at cost and fair value, respectively.

This compares to 2 portfolio companies on non-accrual status as of the prior quarter, with a cost and fair value of $14.2 million and $10.0 million, respectively, representing 6.4% and 4.9% of the investment portfolio's cost and fair value, respectively. Now I'll turn the call over to Jason.

Jason Roos (CFO)

Thanks, Patrick. Turning to our financial results for the quarter ended June 30th, 2023. For the Q2 of 2023, Logan generated $5.3 million of investment income, which was flat compared to the prior quarter and increased by $1.9 million compared to the same quarter in the prior year. The increase was primarily driven by redeploying proceeds received from exiting the non-yielding equity portfolio into interest-earning assets originated by the BC Partners Credit platform, as well as an increase in base rates.

Total operating expenses for the Q2 of 2023 slightly increased by approximately $122,000 to $4.3 million, as compared to $4.2 million in the Q1 of 2023, primarily due to higher interest in financing expenses as a result of higher average outstanding borrowings on our credit facility during the period. Compared to the Q2 of 2022, expenses were higher by approximately $73,000, again, driven by higher interest in financing expenses, but also administrative service fees, partially offset by lower management fees in general and administrative expenses in the current period.

Our net investment income for the quarter was $1 million, or $0.38 per share, marking the fourth consecutive quarter of positive net investment income and a complete turnaround compared to the Q2 of 2022, for which the company reported a net investment loss of $929,000. Our net asset value as of June 30th, 2023, was $96.2 million, representing a $2.4 million increase or 2.6% as compared to the prior quarter net asset value of $93.8 million.

On a per share basis, net asset value was $35.68 per share as of June 30th, 2023, representing a $1.05 per share increase or 3% as compared to $34.63 per share at the end of the Q1 of 2023. I'd like to highlight that the difference between the 2.6% increase in net asset value compared to the 3% increase in net asset value per share is the accretive effect of our share buyback program.

The increase in net asset value quarter-over-quarter was driven by the net investment income in excess of the May 31st, 2023, dividend payment, net realized and unrealized gains on the portfolio during the quarter, and the accretive effect on a per share basis of our share repurchase program. Compared to the company's prior year net asset value of $95 million, net asset value increased by $1.2 million, or 1.3%. On a per share basis, net asset value per share increased by $0.64 per share or 1.8% from $35.04 as of December 31st, 2022. Again, the difference between the 1.3% and the 1.8% is the accretive effect Logan's shareholders received from the buyback program.

The increase in net asset value relative to the prior year was driven by the company outearning its dividend, net realized and unrealized gains on the portfolio during the quarter, and the accretive effect on a per share basis of our share repurchase program. Finally, as of quarter end, the company had $6.3 million in cash and cash equivalents, as well as $18.6 million 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.

Ted Goldthorpe (CEO and President)

Thank you, Jason. Why don't we open up the call for Q&A? Before that, we're very proud of the continued progress we've made during the Q2 of 2023, and then look forward to increasing shareholder value through the back half of the year. Shareholders, thank you for your continued support, and I'll now turn the call over to the operator for any questions.

Operator (participant)

The floor is now open for your questions. Now, to ask a question, this time, please press star and then 1 on your telephone keypad. We will now pause for just a moment to compile the Q&A roster. Your first questions come from the line of Christopher Nolan with Ladenburg Thalmann. Your line is now open.

Christopher Nolan (Managing Director, Equity Research)

Hey, guys. What was the driver for the increase in diluted share count Q-over-Q?

Jason Roos (CFO)

The increase in diluted? Well, we had the share buyback program, so it should have had an anti-dilution effect for the quarter. Got it. If you're referring to the diluted EPS, is related to the debt that we issued last year that had a conversion feature to it.

Christopher Nolan (Managing Director, Equity Research)

Got you. What was the driver for the appreciation of equity fair values? Was there any particular driver?

Ted Goldthorpe (CEO and President)

Yes, the largest driver was one portfolio company called Nth Degree. Company continues to form very well, and they completed a relatively accretive acquisition during the quarter. It's mostly driven in one company, and it just continued very strong performance.

Christopher Nolan (Managing Director, Equity Research)

Great. Final question, pardon me if I missed this, was there a particular driver for the realized loss as well as the unrealized appreciation?

Jason Roos (CFO)

Yes. This portfolio had some CLO equity in it. As a result of markdowns on that portfolio this quarter, we took some impairment on those CLOs.

Christopher Nolan (Managing Director, Equity Research)

Got you.

Jason Roos (CFO)

That realized loss is predominantly CLO.

Ted Goldthorpe (CEO and President)

It flipped from unrealized to realized.

Jason Roos (CFO)

Only a portion of it was a flip. About $400,000 was a flip, but all of that realized was related to CLO impairment.

Christopher Nolan (Managing Director, Equity Research)

Yes, it looks like you guys are starting to hit your stride on this. Strategically, any ideas in terms of possibly taking on some SBA debt or anything like that?

Ted Goldthorpe (CEO and President)

Yes, it's a good question. We've explored it. I think it's really difficult for. Our understanding is it's really hard for BDCs to get new SBIC licenses, and obviously we don't have one. It is something we always think about, but I think it's unlikely that we'll be able to get one.

Christopher Nolan (Managing Director, Equity Research)

Got you. Okay, that's it for me. Thanks.

Ted Goldthorpe (CEO and President)

Thanks.

Operator (participant)

Our next question comes from the line of Steven Martin with Slater. Your line is now open.

Steven Martin (Analyst)

Hi again, guys.

Ted Goldthorpe (CEO and President)

Hi, Steve.

Steven Martin (Analyst)

Hey, this is the Q1. Well, the NAV increase was great, the buyback was great, but this is the Q1 where sequentially, as opposed to year-over-year, the NII didn't really go up. If you look at slide, what is it? Slide four.

Ted Goldthorpe (CEO and President)

Yes.

Steven Martin (Analyst)

Investment income was sort of flat, and expenses were up a little, and you've had a great progression of increasing investment income. I was wondering what the driver of that was and what we should expect?

Ted Goldthorpe (CEO and President)

Yes. It's a couple of things, Steve, which is particularly for the current quarter. Let's say two things, which is Q1 had some non-recurring fees in it. When you actually strip that out, and we specifically called it out last quarter as well, but I think there's something in the area of $200,000 of non-recurring fee income. When you strip out the fee income, there's a more material increase quarter-over-quarter in terms of the investment income. That obviously it's higher quality revenue stream. Then secondly, we also mentioned, we did put an incremental security on non-accrual.

Again, if you were to "normalize for that," organically, we are still growing our income base. Those would be the two biggest factors in what appears to be flat sequentially.

Steven Martin (Analyst)

The prospects for the Q3, if you had normalized Q1 and Q2, that ramp is occurring, and we should expect, absent something, that one of these unusual items you're talking about that should continue to grow?

Jason Roos (CFO)

Yes, that's right, Steve. The core earnings are solid. You'll see that growth projection or that growth trend over the last few quarters once you strip out these one-time items.

Steven Martin (Analyst)

Okay. Ted, or Patrick, the question I asked earlier, what does the Q3 look like for deployments, repayments? Any chance, any more of those equity securities got monetized and can be rolled into something producing?

Ted Goldthorpe (CEO and President)

Yes. Honestly, I forget exactly where we noted it. I think it might have been in our press or our earnings deck. We did monetize a relatively large position subsequent to quarter-end and Jurassic Quest. That was something in the area of $6.5 million-$7 million of debt, as well as an equity position there. I think we had it marked at quarter-end at about $650,000 or so. Not meaningful, but between that... I think that was a relatively under yielding investment as well, relative to what our new money is being put out at.

That's like, again, call it $7.5 million is between debt and equity that we would expect to sort of redeploy in the quarter. I'd say in general, we would expect to be a net deployer of capital as opposed to a net receiver, though obviously timing dependent on when we receive pay downs. Again, just as talked about in Portman as well, our pipeline, just private credit is a little bit longer gestation period for pipeline, so just depending on when that stuff would come back to us. We would think of this vehicle still as a net deployer of capital.

Steven Martin (Analyst)

Yes, sorry for missing that. It's been a little crazy this morning, and I got on your call a couple of minutes late.

Ted Goldthorpe (CEO and President)

No.

Steven Martin (Analyst)

All right. Can you talk about dividend policy on Logan Ridge as opposed to Portman? I'm sure it's slightly different.

Ted Goldthorpe (CEO and President)

Yes, Obviously, with every passing quarter, we're chopping more wood on the NII side and feeling more and more comfortable, around dividend coverage. Obviously, we increase the dividend in a pretty healthy way, but there's obviously room to continue to increase the dividend. Barring any negative surprises, we expect the dividend yield to continue to, to rise.

Steven Martin (Analyst)

All right. Thanks a lot.

Ted Goldthorpe (CEO and President)

Thank you.

Operator (participant)

Since there are no further questions at this time, Mr. Ted Goldthorpe, I turn the call back over to you.

Ted Goldthorpe (CEO and President)

Great. Thank you everyone, for joining us today. We look forward to speaking to you again in November, when we announce our Q3 results. I want to wish everybody a very happy end to summer. Thank you very much.