Logan Ridge Finance Corporation (NASDAQ:LRFC) Q1 2023 Earnings Call Transcript

Logan Ridge Finance Corporation (NASDAQ:LRFC) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Thank you. 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 the 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 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: Good morning, and welcome to our first quarter 2023 earnings call. As mentioned, 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. To open, I’d like to highlight that the first quarter of 2023 was very much a continuation of the earnings trajectory established during the second half of 2022. We are continuing to execute on our strategic priorities and are cautiously optimistic for 2023 despite the challenging market we are 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 $0.6 million or $0.23 per share to $1.1 million or $0.40 per share. Further, the first quarter of 2023 was our third consecutive quarter of positive NII. I believe our first quarter results demonstrate the enhanced earnings power of our portfolio, driven by the reworked capital structure and success we’ve had monetizing the non-yielding legacy portfolio and rotating into income-generating NIMs. Deployment for the quarter remained positive with $7.4 million in new investments and $6.7 million repayments and sales, leaving us with net deployment of $0.7 million. 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 million share repurchase program. As of March 31, 2023, we have repurchased 1,625 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 made in the turnaround story of Logan Ridge since Mount Logan management took over as the company’s investment adviser 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.

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We will continue to focus 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 Schafer, our Chief Investment Officer.

Patrick Schafer: Thanks, Ted. As of March 31, 2023, the fair value of our portfolio was approximately $203.3 million and consisted of 54 portfolio companies. This compares to 59 portfolio companies with a fair value of approximately $203.6 million in the prior quarter and 42 portfolio companies with a fair value of approximately $206.9 million as of March 31, 2022. As of March 31, 2023, 54% or more than half of the company’s investment portfolio at fair value was invested in assets originated by the BC Partners Credit platform. During the first quarter, we continue to judiciously deploy capital. Specifically, the company made approximately $7.4 million of investments and had approximately $6.7 million in repayments and sales, resulting in net deployment of approximately $0.7 million 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% of the total portfolio at fair value and had 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, first lien debt represented 65.4% and 67.7% of our total portfolio on a cost and fair value basis, respectively. This compares to first lien debt representing 64.9% and 67.3% of our total portfolio on a cost and fair value basis, respectively, as of the prior quarter ended December 31, 2022, and 53.7% and 48.7% of our total portfolio on a cost and fair value basis, respectively, as of March 31, 2022. Further, the non-yielding equity portfolio represented 16.4% and 14.6% of the portfolio on a cost and fair value basis, respectively, as of March 31, 2023. This compares to 16.3% and 14.2% of the portfolio on a cost and fair value basis as of December 31, 2022, and 21.9% and 28.3% 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 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 two debt investments on non-accrual with an aggregate amortized cost and fair value of $14.2 million and $10.0 million, respectively or 6.4% and 4.9% of the investment portfolio at cost and fair value, respectively. This compares to one portfolio company on non-accrual status as of the prior quarter with a cost and fair value of $11.9 million and $9.7 million, respectively, representing 5.4% and 4.9% of the investment portfolio’s cost and fair value, respectively.

Now I’ll turn the call over to Jason.

Jason Roos: Thanks, Patrick. Turning to our financial results for the quarter ended March 31, 2023. For the first quarter of 2023, total investment income increased by $700,000 or $5.3 million as compared to the prior quarter and increased by $2 million 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 first quarter of 2023 increased to $4.2 million as compared to $3.9 million in the fourth quarter of 2022, primarily due to higher interest and financing expenses as a result of increases in base rates.

Total operating expenses for the first quarter 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 $1.1 million or $0.40 per share, marking the third 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 first quarter of 2022, for which the company reported a net investment loss of $1.1 million.

Again, 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 $93.8 million or $34.63 per share as compared to $95 million or $35.04 per share at the end of the fourth quarter of 2022. The decrease was primarily due to realized and unrealized losses on the portfolio 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 $9.3 million in cash and cash equivalents as well as $16.6 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: Thank you, Jason. We are proud of the continued progress we have made during the first quarter of 2023, and we look forward to the rest of the year. Thank you for your continued support. This concludes our prepared remarks, and I will now turn over the call to the operator for any questions.

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Q&A Session

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

Christopher Nolan: Hey guys. Given the comments that first quarter results are a good run rate going forward, and given where the EPS the dividend, is it fair to say that we should expect to see further dividend increases in the coming quarters, assuming the earnings momentum remains at current level?

Ted Goldthorpe: 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 be relatively prudent with our dividend increases, but the risk of a dividend increase is substantially higher than 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 certainty around the forward trajectory of earnings.

Christopher Nolan: Great. And I guess a 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?

Patrick Schafer: Yes. 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 to try and kind of create our own catalyst in certain instances. But I would say it certainly kind of elongates that process in general.

Ted Goldthorpe: 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 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 now. So puts and takes across that portfolio, but there is some upside to it.

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

Patrick Schafer: So you broke up a little bit, Chris. I think you were asking is the plan to use our credit facility as opposed to a new issue of a baby bond or something in terms of if we were to increase leverage or if we were to be in net deploy our capital. I think if that is – in fact, your question then the answer would be yes, that was sort of our intent behind the facility. It’s a $75 million headline number. So we still have an incremental $20 million, $25 million 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.

Christopher Nolan: Okay. That’s it for me. Thank you.

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

Steven Martin: Hi, guys.

Ted Goldthorpe: Hi, Steve.

Steven Martin: 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?

Patrick Schafer: Yes. I would 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.