Portman Ridge Finance Corporation (NASDAQ:PTMN) Q4 2022 Earnings Call Transcript

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

Operator: Welcome to Portman Ridge Finance Corporation’s Fourth Quarter and Full Year 2022 Earnings Conference Call. An earnings press release was distributed yesterday, March 9, after market close. A copy of the release along with an earnings presentation is available on the Company’s website at www.portmanridge.com in the Investor Relations 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 a 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.

Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. Speaking on today’s call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman 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 Portman Ridge.

Ted Goldthorpe: Good morning. Thanks everyone for joining our fourth quarter and full year 2022 earnings call. I’m joined today by our Chief Financial Officer, Jason Roos; and our Chief Investment Officer, Patrick Schafer. I’ll provide brief highlights on the company’s performance and activities for full year 2022. Patrick will provide commentary on our investment portfolio in our markets, and Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its fourth quarter and full year 2022 results and we are pleased with the solid earnings power of the company despite operating under difficult market conditions, a challenging economic environment, rising in interest rates and market volatility.

Our core investment income in 2022 increased by $800,000 to $64.2 million in comparison to $63.4 million seen in 2021. As we continue to see the impact that rising rates have in generating incremental revenue from our sourced investments. Additionally, our amended and extended credit facility with JP Morgan Chase has reduced our cost of capital, helping further reduce our expenses relative to our asset base. Overall, our performance both this quarter and earnings momentum from the timing lag and a realization of rising benchmarks has allowed us to raise our dividend for the second straight quarter to $0.68 per share, and we believe that we were situated to continuing delivering attractive returns to our shareholders in 2023. Regarding our primary market as a whole, despite the continued volatility in the syndicated markets and uncertain macro backdrop remained bullish on new investment opportunities and the ability to rotate our portfolio at reduced risk and incremental returns.

For new opportunities, Spreads have widened by approximately 150 to 200 basis points as compared to the beginning of the year, and upfront fees are an incremental 100 to 200 basis points. Additionally, we continue to see strong equity contributions from sponsors and reduced leverage levels. To illustrate this, the weighted average total leverage of deals we completed in the fourth quarter was 4.8x as compared to 5x in Q3 and 5.5x for all of 2022. Turning the focus back to the company, we continue to believe in the valuation of Portman Ridge as we continued repurchasing shares under our renewed stock repurchase program. In 2022 alone, we repurchase a total of 167,017 shares at an approximate cost of approximately 3.8 million more than double the amount of shares repurchased in 2021 at 75,377 shares.

We expect this trend of repurchasing Portman shares to continue into 2023, as we’re able to do so. On this call, Patrick will also walk through the potential upside cases for an asset value. Our portfolio is largely in first lane debt and is now valued at a significant discount to par. If the experience normalized defaults or even elevated default rates versus history. We believe there is embedded net value upside in the portfolio, so this adds to our earnings momentum driven by wider spreads on new originations and rising short-term interest rates to derive both potential NAV and earnings upside. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer for review of our investment activity.

Patrick Schafer: Thanks, Ted. Turning to slide five of our presentation and the sensitivity of our earnings to interest rates. As of December 31st, 2022, approximately 90% of our debt securities portfolio were either floating rate with a spread to an interest index such as LIBOR, SOFR or Prime, with 67% of these still being linked to LIBOR. As you can see from the chart, the underlying benchmark rate of our assets during the quarter lagged the prevailing market rates and still remains significantly below the LIBOR and SOFR rates as of February 28th, 2023. We would expect this to normalize over time as the underlying 1-, 3- and 8-month contracts reset. For lesser purposes, if all our assets were to reset to either a 3-month LIBOR or SOFR rate respectively, we would expect to generate an incremental $2 million of quarterly income.

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While our liability cost will also rise relative to their Q4 levels, we still expect a net positive benefit of approximately $0.10 per share, assuming all of our assets and liabilities are utilizing the same 3-month benchmark rates for an entire quarter. Skipping down to Slide 11. Both investment activity and originations for the fourth quarter were lower than the prior quarter, resulting in net deployment of approximately $6.3 million excluding regularly scheduled quarterly amortization payments and fundings under previously committed facilities, including our Great Lakes joint ventures. Net deployment consisted of new fundings of approximately $23.8 million offset by approximately $16.5 million of repayments. These new investments are expected to yield a spread to SOFR of 704 basis points on the par balance and the investments were purchased at a cost of approximately 95.5% of par, which will generate incremental income in addition to the stated spread.

As mentioned in our press release, we do $14.3 million under our 2018-2 secured notes at a rate of LIBOR plus 158 basis points to fund these assets yielding SOFR plus 704 basis points, resulting in a very attractive return on equity. Additionally, during the quarter, we funded $13.7 million into our Great Lakes joint venture and have had additional funding so far this year that have in aggregate taken us close to being fully funded under that commitment. Similar to our experience with new assets on the balance sheet, incremental investments in our Great Lakes joint venture have come at increasing spreads and widening OID, which should result in higher returns going forward. Our investment securities portfolio at the end of the fourth quarter remained highly diversified with investments spread across 31 different industries and 119 different entities, all while maintaining an average par balance per entity of approximately $3.3 million.

Turning to Slide 12. We had one incremental investment on non-accrual as compared to September 30, 2022, which is a subordinated note in prior holdings, which is valued at zero. In aggregate, investments on non-accrual status remained relatively low at four investments in the fourth quarter of 2022, as compared to seven investments on non-accrual status as of December 31, 2021. These four investments on non-accrual at the end of 2022 represent 0.0% and 0.6% of the company’s investment portfolio at fair value and amortized cost respectively. On Slide 13, as Ted mentioned in his opening remarks, if we focus on the top three rows of the table. We have an aggregate debt securities fair value of $475.3 million, which represents a blended price of 91.66% of par value you and is 84% comprised of first lien loans at par value.

Assuming a par recovery, our December 31, 2022, fair values reflect a potential of $43.2 million of incremental NAV value or $4.51 per share. For a lesser purposes, if you would assume a 10% default rate and a 70% recovery rate on this debt portfolio, there would still be an incremental $2.89 per share of NAV value overtime as the portfolio matures and is repaid. This default rate is above anything the market is expecting or has experienced historically. Turning finally to Slide 14. If you aggregate these 3 portfolios over the last three years, we have purchased a combined $434.8 million of investments. We have realized over two-thirds of these positions at a combined realized and unrealized mark of 103% of fair value at the time of closing their respective mergers.

We are able to achieve those results despite the global pandemic in 2020 and most of 2021 and a weak market for almost all asset classes in 2022. In a similar vein as a previous slide, as of December 31, 2022, there remains an incremental $13.7 million of value as compared to the par in these portfolios, or $9.3 million when applying a similar 10% default rate and 70% recovery rate analysis. I’m now turn the call over to Jason to further discuss our financial results for the period.

Jason Roos: Thanks, Patrick. As both Ted and Patrick previously mentioned, despite operating under a challenging economic environment, our results for both the fourth quarter and for the full year 2022 reflect strong financial performance. Total investment income for the full year 2022 was 69.6 million, of which 55.8 million was attributable to interest income from the debt securities portfolio. This compares to total investment income for the full year 2021 of 80.1 million of which 65 million was attributable to interest income from the debt securities portfolio. The decrease was largely due to lower purchase price aggression reflected in 2022, as well as reduced repayments along with lower fee income. Excluding the impact of purchase price accounting, our core investment income for the year was 64.2 million, an increase of 800,000 as compared to core investment income of 63.4 million in 2021.

Our net investment income for the full year 2022 was 28.9 million or $3 per share, which compares to 42 million or $4.92 per share for the full year 2021. The year over year decrease was largely due to the aforementioned impact of reduced purchase accretion, lower repayment activity, and reduced fee income. As of December 31, 2022 and December 31, 2021, the weighted average contractual interest rate on our interest earning debt securities was approximately 11.1% and 8.1% respectively. We believe the portfolio remains well positioned in a rising rate environment to generate incremental revenue in future quarters. Total expenses for the year ended December 31, 2022 we’re 40.7 million compared to total expenses of 38.1 million seen in the full year 2021.

This was predominantly driven by rising costs associated with the interest expense on our debt. One item to note is that we continue to see reduced expenses related to administrative services and other general and administrative costs. A trend we are looking to maintain in 2023. Our net asset value for the fourth quarter 2022 was 232.1 million or $24.23 per share as compared to 251.6 million were $26.18 per share in the third quarter of 2022. The decline due to our debt and equity securities was driven primarily by marked to market movements within our portfolio. On the liability side of the balance sheet, as of December 31, 2022, we had a total of 378.2 million par value of borrowings outstanding comprised of 92 million in borrowings under our revolving credit facility, 108 million of four and 78% notes due 2026 and 178.2 million in secured notes due 2029.

This balance represents a quarter over quarter increase of 9.2 million relating to a draw on our secured notes of 14.3 million offset by a 5.1 million repayment on our revolving credit facility. As of the end of the quarter, we had 28.9 million of available borrowing capacity under the senior secured revolving facility and no remaining borrowing capacity under the 2018 dash two revolving credit facility, as the reinvestment period ended shortly after our draw on November 20, 2022. Additionally, and as pointed out in our previous earnings calls, we successfully refinance our senior secured revolving credit facility in April, which changed the benchmark interest rate to three month, so far, reduced the rate of interest margin to 2.8% per annum from 2.85% per annum and extended the maturity of the facility to April 29, 2026.

As of December 31st, 2022, our debt-to-equity ratio was 1.6x on a gross basis and 1.5x on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 160%. This is at the high end of our target range, driven by the drawing of the remaining capacity under the 2018 dash two revolver in advance of its expiration in the fourth quarter of 2022. Lastly, and as announced yesterday, a quarterly distribution of $0.68 per share, which represents an increase of $0.01 from prior quarter levels, and an increase of $0.05 from levels seen in the first quarter of 2022 was approved by the board and declared payable on March 31st, 2023. The stockholders of record at the close of business on March 20th, 2023, the latest increase of $0.68 also represents two consecutive quarters of stockholder distribution increases, and the fourth stockholder distribution increased over the last six quarters.

This increased quarterly distribution is supported by the fourth quarter strong financial performance and our expectations for similar financial performance to continue in future quarters. With that, I will turn the call back over to Ted.

Ted Goldthorpe: Thank you. Ahead of questions. I’d like to reemphasize that we believe we are well positioned to take advantage of the current market. Through our prudent yet selective investment strategy, coupled with our emphasis on cost management, we anticipate that we will be able to generate strong returns for our shareholders in 2023. Thank you once again to all our shareholders for ongoing support. This concludes our prepared remarks, and I’ll now turn the call over the operator with any questions.

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Q&A Session

Operator: Our first question will come from the line of Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: The leverage ratio is high. What’s the anticipation going forward in terms of maintaining that level, we’re bringing it down, and what’s the current target leverage range?

Patrick Schafer: Yes. I think our — hey Chris, it’s Patrick Schafer. So I think, our target leverage ranges kind of remains what we stated before, which is 1.25 to 1.4. So we’re a little bit above that at 1.5. I think. Again, as mentioned, we intentionally drew up our revolver, which brought us a little bit above our leverage range, given that it was terming out and it’s a particularly attractive financing at LIBOR plus 1.58. But we would expect over the course of this year to have leverage decline back into kind of what we would think of our target range is kind of something below 1.4x net.

Christopher Nolan : Okay, thanks Patrick. And as a follow up question, Silicon Valley Bank is in the news today, and I know it’s a quickly evolving situation, but and are you guys trying to figure out in terms of any of your portfolio companies have, or their sponsors may have exposure to Silicon Valley in terms of significant deposits there? And I know it’s early days and it’s a fast-moving situation, but any perspective would be welcomed.

Patrick Schafer : Yes, anytime time some something like this happens, we’re always very focused on the knock on effects. We called and spoke to a number of our portfolio companies both last night and this morning, and I think it’s a little too early to assess, but obviously, there will be some flow through effects on certain tech businesses given they’re a big lender there as well as a whole lot of the cash. And then we’re looking at other knock-on effects too in terms of, if they’re having to sell securities at big discounts, how does that ripple through the rest of the financial markets? I would say if you look at our portfolio, we think, again, we don’t think this is going to — as of right now, we don’t think this is going to have really any material impact on our portfolio unless there’s other unforeseen things that happened because of it.

Operator: . Your next question will from the line of Ryan Lynch with KBW.

Ryan Lynch: Good morning. First, I just wanted to hop in to kind of what happened quarter-over-quarter regarding interest income as well as, or investment income as well as interest expense. So I look at core investment income, it only increased about $100,000 dollars from $17.6 million to $17.7 million. Meanwhile — and also look at your slide as far as like accelerated fees. I know those were a little bit lower in the quarter, but I think that was only maybe a couple of hundred thousand dollars lower versus Q3. So that was only a few hundred thousand dollars headwind. But meanwhile interest expense went up by over $1 million. So I was just wondering, I understand that there is a lag from the positive impact of rising rates, but that same lag impacted third quarter numbers.

And so effectively where we are, we will always want to lag. But quarter-over-quarter, it feels like we should be moving out generally the same amount. So I was just curious on why the lack of movement in investment income this quarter relative to where rates went. Where rates really moved in the third quarter, which would have then mostly impacted your fourth quarter numbers?