Logan Ridge Finance Corporation (NASDAQ:LRFC) Q4 2022 Earnings Call Transcript

Logan Ridge Finance Corporation (NASDAQ:LRFC) Q4 2022 Earnings Call Transcript March 10, 2023

Operator: Thank you. Good morning and welcome to Logan Ridge Finance Corporation’s Full Year and Fourth Quarter Ended December 31, 2022 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-K 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 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 full year and fourth quarter 2022 earnings call. As I mentioned, I am 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. The fourth quarter marks another significant milestone for Logan Ridge as the company is reinstating its quarterly dividend at $0.18 per share and marks the second consecutive quarter of positive NII since Mount Logan Management took over its investment adviser just 18 months ago. Furthermore, the company’s Board of Directors approved a $5 million share repurchase program, which will continue for one year.

We believe our equity trades below fair value and the stock buyback plan is accretive to both our net asset value and net investment income per share. Although, our window is short between our year end results and our first quarter earnings period, we would look to capture that discount for our shareholders. We are very proud of what we achieved during 2022, which was a transformative year for the company and the first full fiscal year under Mount Logan’s Management stewardship. To open, I’d like to start by reminding you that last August when we reported our second quarter results, we said that management had made significant progress on the execution of our strategic priorities for Logan Ridge and that is the progress that would be evident in the company’s financials during the second half of the year.

Notably, we had just announced a successful refinancing of the entire legacy debt capital structure we inherited from the former adviser and successfully refinanced and recapitalized the company’s legacy investment in Eastport Holdings where we generated substantial cash for deployment and exited the company’s non-yielding equity interest in the portfolio company. Fast forward to today, the company has reported its second consecutive quarter of positive NII for the fourth quarter NII more than triple the prior quarter, which in turn led to the reintroduction of the quarterly dividend. Further, during the year, we took steps to reposition the company’s investment portfolio making substantial progress on our goal to rotate out of the non-income-producing legacy equity exposure.

Specifically, the non-yielding equity portfolio represents just 16.3% and 14.2% of the company’s total investments at cost and fair value respectively as of December 31, 2022 compared to 27.2% and 32.6% as of the prior year. We’ve also reduced the number of non-accruals, significantly increased portfolio’s diversification, and growing the company’s exposure to credits originated by the BC Partners credit platform. Most importantly, we achieved these results against the backdrop of particularly challenging and uncertain market conditions. Looking to the future, Logan Ridge is now well-positioned to capitalize on opportunities arising from the current credit environment in 2023, which we believe will produce an attractive vintage of credit. Over the coming quarters, we will focus on maximizing the earnings power of the company’s balance sheet and more efficient capital structure to further increase shareholder total returns.

After a pivotal 2022, we enter 2023 optimistic and well-positioned to continue our work transforming the company into a more stable higher earnings and higher dividend paying BDC. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer.

Patrick Schafer: Thanks Ted and hello everyone. As of December 31st, 2022 the fair value of our portfolio was approximately $203.6 million and consisted of 59 portfolio companies. This compares to 54 portfolio companies with a fair value of approximately $193.1 million in the prior quarter in 40 portfolio companies with a fair value of approximately $198.2 million as of December 31st, 2021. In addition to substantially increasing our portfolio diversification, as of December 31st, 2022, 55% of the company’s investment portfolio at fair value was invested in assets originated by the BC Partners credit platform. As of December 31st, 2022, we have an aggregate debt securities fair value of $169.2 million, which represents a blended price of 93.8% of par value and 81% comprised of first lien loans at par value.

Assuming a par recovery, our December 31st, 2022 fair values reflect a potential of $11.1 million of incremental NAV value or $4.12 per share. For luster purposes, if you assume a 10% default rate and a 70% recovery rate on this debt portfolio, there would still be an incremental $2.13 per share of NAV over time as the portfolio matures and is repaid. During the fourth quarter, the company continued to judiciously redeploy capital generated from exiting the legacy portfolio. Specifically, the company made approximately $23.9 million of investments and had approximately $10.2 million in repayments and sales resulting in net deployment of approximately $13.7 million for the quarter. At quarter end and year-end, our debt investment portfolio represented 83% of the total portfolio at fair value, had a weighted average annualized yield of approximately 10.4% excluding income from non-accruals and collateralized loan obligations.

This compares to a debt investment portfolio, which represented 67% of the total portfolio at fair value with a weighted average yield of approximately 8.1% excluding income from nonaccruals and collateralized loan obligations as of the prior year. Further, as of year-end, first lien debt represented 64.9% and 67.3% of our total portfolio on a cost and fair value basis respectively. This compares to the to first lien debt representing 54.4% and 49.6% of our total portfolio on a cost and fair value basis respectively as of the prior year end December 31st, 2021. Our non-yielding equity portfolio as of December 31st, 2022 has decreased to 16.3% and 14.2% of the portfolio on a cost and fair value basis, respectively. This compares to 27.2% and 32.6% of the portfolio on a cost and fair value basis as of December 31 2021, which marks a substantial improvement, which is evident in our fourth quarter net investment income.

During the fourth quarter of 2022, we successfully exited our debt investment in BigMouth Inc. for a realized gain of approximately $100,000, which has been on nonaccrual since Mount Logan took over the company’s investment adviser. Accordingly, as of year-end, only one debt investment remains on nonaccrual, with an aggregate amortized cost and fair value of $11.9 million and $9.7 million, respectively or 5.4% and 4.8% of the investment portfolio at cost and fair value, respectively. I’ll now turn the call over to Jason.

Jason Roos: Thanks, Patrick. Turning to our financial results for the quarter ended December 31 2022. As Ted mentioned, during the fourth quarter of 2022, the company reported net investment income of $600,000 or $0.23 per share marking the second consecutive quarter of net investment income. Moreover, this is a substantial improvement compared to the prior quarter, for which the company reported net investment income of $200,000 or $0.07 per share and a complete turnaround when compared to the fourth quarter of 2021, for which the company reported a net investment loss of $1.4 million. For the year, we reported total investment income and total interest income of $14.9 million and $13.7 million respectively primarily, as a result of, net deployment and increases in base rates.

Total operating expenses for 2022 declined to $16.1 million as compared to $20.3 million in 2021, primarily due to lower interest and financing expenses, as a result of a smaller portfolio and a lower cost of capital. This results — this represents a decrease in operating expenses of 20.7% year-over-year, and we are looking to continue to reduce these further for the benefit of shareholders. Our net asset value as of December 31 2022 was $95 million or $35.04 per share as compared to $98.2 million or $36.21 per share at the end of the third quarter of 2022 and $107.1 million or $39.48 per share as of December 31 2021. This decrease was primarily due to the net investment losses reported during the first half of the year, and realized and unrealized losses on our portfolio.

Finally, as of year-end, the company had $6.8 million in cash and cash equivalents, as well as $19.1 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 significant milestones, we achieved during 2022 and are looking forward to 2023. Thank you all for your continued support. This concludes our prepared remarks, and we will now turn over the call to the operator for any questions.

Q&A Session

Operator: Thank you Our first question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead. Your line is open.

Christopher Nolan: Hi, guys. Were there any nonrecurring items in the quarter please?

Jason Roos: Yes. Yes, this is Jason. Hi, Chris, good morning. I would say, this quarter is a pretty good quarter for a run rate projection. Our expenses are relatively flat slightly up, on the administrative service fees as a result of some — just any incremental oversight of the portfolio, but all in all relatively flat quarter-over-quarter and should represent a pretty good run rate for you.

Christopher Nolan: Great. And then on the dividend, I mean, given — I mean, by the way very nice quarter. It looks like the cash dividend will start to be reinstated sooner rather than later. Are there any sort of tax related things, which could basically retard the dividend being a percentage of GAAP income or will basically 75% of GAAP income be a reasonable proxy work going forward?

Jason Roos : Yes. That’s a good question, Chris. I think, that’s something that we’ll need to pay attention to as we go throughout the year here. Relatively new challenge for Logan Ridge given that this is the first quarter that we’re paying a dividend. And we monitor this on all the portfolios that we manage in the BDCs that we have oversight of, but we think this is a stable dividend that we can continue to achieve even factoring in the tax implications.

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

Jason Roos : Thanks, Chris.

Operator: Our next question comes from Steven Martin from Slater Capital. Please go ahead. Your line is open.

Steven Martin : Hi, guys. How are you? And thank you for the dividend. Question about you gave some subsequent events information. Anything on portfolio — on the portfolio subsequent that you care to share?

Patrick Schafer: Hey, Steve, this is Patrick. No nothing that would rise to a level of the subsequent event item.

Steven Martin : Or any comment on deployments and repayments subsequent?

Patrick Schafer : I would say, generally, ordinary course, I think, probably in aggregate we are slightly, I would say, net deployment that’s just off the top of my head. In general, we kind of continue to utilize the new credit facility we put in place middle of last year to deploy capital. Our leverage levels are pretty reasonable and we see a decently attractive opportunity set. Again, I don’t think anything particularly out of the ordinary. But I’d say, in general, we are — we have been a net deployer of capital over the course of the quarter so far.

Steven Martin : Okay. On Portman, you gave that the slide where you say, what would the portfolio — what would be NII have been if everything had flowed through? Would you care to hazard a guess as to what that would be on the RFC portfolio versus the earnings?

Patrick Schafer : Yes. I’d be a little bit hesitant to hazard a guess exactly. I think it’s fair to say, it would be up quarter-over-quarter. Logan specifically has a little bit higher percentage of fixed rate and not relevant now, but their floor is tended to be a little bit higher than Portman. So there was a little bit less uplift earlier in the cycle. But I would say that, in general, it should have kind of a similar trajectory with the caveat that newer originated assets get on that higher end of the curve more quickly. So, theoretically, Logan should benefit in terms of being a net deployer, should benefit from being able to kind of move up that curve more quickly.

Steven Martin : Okay. Ted, would you care to comment on covenants, amendments a little more on the credit of maybe some of the older investments that you guys have inherited as opposed to the newer ones that you put on yourself?

Ted Goldthorpe : I mean, I’ll make a general comment which is some of our — some of the portfolios that we inherited were seeing outperformance by some of the weaker credits, because the things that were impacting them, happen to be things like supply chain, COVID lockdowns and some other factors that seem to be abating. And then obviously on the flip side of that, our strong growth companies, growth is slowing down and people are all seeing margin impacts or margin degradation. And obviously, the good companies in these portfolios obviously have higher leverage and therefore are more impacted by rises in rates. So it’s kind of like a backwards environment towards normal. I would say, amendment activity was — has increased the last couple of weeks.

And I can’t tell you, why that is. A lot of it’s like, very, very, very technical, like it’s not covenant waivers and things like that. So we are seeing a little bit of an increase generally speaking across the portfolio on what I would call technical amendments.

Patrick Schafer: Yes. Steve, just to put a little bit more meat on that. In Q4, Logan had I’d say three kind of amendments that would rise above sort of the ordinary course type stuff that Ted was alluding to. All of them were on legacy positions, two were maturity extensions on — related to Sequoia Health which is a name that’s kind of been in the portfolio for some time. And the third was a maturity extension with the company, with a view to kind of moving towards the sale of the business. I think, historically, the company had been looking to try and be an aggregator of other companies and the CEO kind of wanted to be the controlling entity of some kind of merger combination that made it a little bit challenging candidly.

But I think kind of we’ve sort of decided to move forward towards some kind of sale of that business, where it’s possible that, we end up being the acquired entity as opposed to majority entity. But again, I’d say those are kind of only three things to sort of again rise to more than the level that Ted was referencing with changing LIBOR or the documents to SOFR or technical extensions on an audit by a month et cetera, et cetera.

Steven Martin: On these extensions, we generally from a financial standpoint, are we coming out ahead behind or even?

Patrick Schafer: Yes, I’d say in general, ahead, obviously, all situations are dependent. One example, we move from like 8% fixed to floating plus 8%. So that’s pretty well ahead. But I would say in general, they come a little bit ahead and it wasn’t the case in this particular case — or sorry in the case with Logan, with Portman, we had a number of — we had a couple of kind of maturity amendments that are subsequently taken out of the portfolio. So it was again kind of a technical need another month or two to get taken out or kind of some kind of substantial paydown. But I would say in general, yes, you kind of are getting out ahead, if you will, but it is obviously very situation dependent.

Steven Martin: Okay. Thanks a lot guys. I’ll talk to you later.

Patrick Schafer: Thanks, Steve.

Operator: We have no further questions in queue. I would like to turn the call back over to Ted Goldthorpe for closing remarks.

Ted Goldthorpe: Great. Well, thank you, everyone for joining us today, and we look forward to speaking to you again in May, when we announce our first quarter of 2023 results. Thank you, so much.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.