Portman Ridge Finance Corporation (NASDAQ:PTMN) Q4 2023 Earnings Call Transcript

Portman Ridge Finance Corporation (NASDAQ:PTMN) Q4 2023 Earnings Call Transcript March 14, 2024

Portman Ridge Finance Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Portman Ridge Finance Corporation’s Fourth Quarter and Full Year 2023 Earnings Conference Call. An earnings press release was distributed yesterday, March 13th, 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 yesterday with the SEC. As a reminder, this conference call is being recorded by 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.

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; Patrick Schafer, Chief Investment Officer; and Brandon Satoren, Chief Accounting 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. And thanks everyone for joining our fourth quarter and full year 2023 earnings call. I’m joined today by our Chief Financial Officer, Jason Roos; our Chief Investment Officer, Patrick Schafer; and our Chief Accounting Officer, Brandon Satoren. I’ll provide brief highlights on the company’s performance and activities for the year. Patrick will provide commentary on our investment portfolio and 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 2023 results, and we are pleased with the solid earnings power of the portfolio, despite operating in somewhat challenging market conditions.

During the year, we saw a 10% increase in total investment income and a 16% increase in core investment income year-over-year. Additionally, our net asset value per share increased from $22.65 per share to $22.76 per share quarter-over-quarter. Credit quality also improved in the quarter, with a reduction in non-accruals on a cost, market value and company count basis. We continued our accretive repurchase program, purchasing 101,680 shares at an average cost of approximately $1.8 million during the fourth quarter. Due to the continued strong performance this past quarter, the Board of Directors was able to approve another strong dividend for the first quarter of 2024 amount of $0.69 per share, a level that represents a 12.1% annualized return on that asset value.

For the full year 2023, total dividends distributed to shareholders amounted to $2.75 per share, representing a 7.4% increase as compared to the dividend distributed in 2022. Turning to conditions in our primary market, new deal activity began picking up in late Q4 and while our primary market has been consistently active for most of 2024 so far, deal activity during 2023 as a whole was meaningfully down relative to 2022 and 2021. On the sponsor finance front, the fourth quarter deal activity began to tick up through a combination of valuation expectations being more reasonable and a belief by most industry participants that interest rates had either reached their peak or near enough that new buyers could reasonably estimate their cost of capital.

In both the sponsor and non-sponsor activity, we continue to find the investment opportunities to be very attractive, giving the combination of higher benchmark rates, lower leverage on new deals, higher equity contributions from sponsors and better documentation. As has been the case for the last couple quarters, we continue to be very selective on new investment opportunities and have overall found investments in existing portfolio companies more attractive to new borrowers. To that end, during the fourth quarter, 55% of our capital deployed was in existing portfolio companies, as compared to 45% being deployed in new — into new borrowers, three new borrowers to be specific. Our goal continues to be to maintain an exceptionally diversified portfolio and invest in companies that potential — have the potential to provide strong returns for our shareholders.

Refocusing on Portman Ridge, we continue to believe our buyback — stock remains undervalued throughout 2023 and consistently repurchased shares under a renewed stock purchase program. During the year, we repurchased an incremental 224,933 shares for an aggregate cost of approximately $4.4 million. This compares to an aggregate cost of $3.8 million for full year 2022. Consistent with prior years, the company’s Board of Directors renewed our $10 million stock buyback program for another year. And with that, I will turn the call over to Patrick Schafer, our Chief Investment Officer, for a view of our investment activity.

Patrick Schafer: Thanks, Ted. Turning now to slide five of our presentation and the sensitivity of our earnings to interest rates, as of December 31, 2023, approximately 90% of our debt portfolio were either floating rate — were floating rate to either a spread, wait a second, either floating rate with a spread to the interest rate index such as SOFR or Prime Rate, with substantially all of these being linked to SOFR. As you can see from the chart, the underlying benchmark rates of our assets during the quarter lag the prevailing market rates and still remain below the SOFR rates as of March 8, 2024. But between the market transition last year from LIBOR to SOFR and the recent pause from the Fed, the gap is the narrowest it has been since the onset of the Fed rate hike cycle.

For illustrative purposes, if all of our assets were to reset to a three-month SOFR rate, we would expect to generate an incremental $86,000 of quarterly income. Having said that, slide seven shows the aggregate impact to NII on a run rate basis of both our assets and liabilities as of December 31, 2023. Given the relatively shallow benchmark curve and limited financial impact of this analysis, we will likely be retiring this slide going forward from our earnings presentations, as we have been relatively in equilibrium for the past few quarters. Skipping down to slide 11, originations for the fourth quarter remain at a lower level than prior year fourth quarter, as well as below the repayment levels, resulting in net repayments and sales of approximately $30.1 million.

Our new investments made during the quarter are expected to yield a spread to SOFR of 780 — 798 basis points on par value and the investments were purchased at a cost of approximately 96.3% of par. Our investment securities portfolio at the end of the fourth quarter remained highly diversified. We ended the year with investments spread across 27 different industries and 100 different entities, all while maintaining an average par balance per entity of approximately $3.1 million. Turn to slide 12. In aggregate, securities on non-accrual status remain relatively low and decreased to seven investments at the end of the fourth quarter of 2023, as compared to eight investments on non-accrual status as of September 30, 2023, as one of our borrowers emerged from bankruptcy in Q4 and our restructured loan return to cash pay.

These seven investments on non-accrual status at the end of the fourth quarter of 2023 represent 1.3% and 3.2% of the company’s investment portfolio at fair value and amortized costs, respectively. On slide 13, excluding our non-accrual investments, we have an aggregate debt securities fair value of $373 million, which represents a blended price of 94.3% of par and is 88% comprised of first lien loans at par value. Assuming a par recovery, our December 31, 2023 fair values reflect a potential of $29.2 million of incremental net value, a 13.7% increase or $3.12 per share, excluding any recovery on non-accrual investments. If we were to overlay an illustrative 10% default rate and 70% recovery rate to the debt securities portfolio, again, excluding non-accrual investments, the incremental NAV value potential would be $1.83 per share or an 8% increase to NAV per share as of December 31, 2023.

Finally, turning to slide 14, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $434.8 million of investments and have realized over 82% of these investments at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. I’ll 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, our results for the fourth quarter and full year 2023 reflect strong financial performance. Our total investment income for the full year 2023 was $76.3 million, of which $63.5 million was attributable to interest income from the debt securities portfolio. This compares to total investment income for the full year 2022 of $69.6 million, of which $55.8 million was attributable to interest income from the debt securities portfolio. The increase was largely due to growth in the previously discussed interest income, PIK, dividend and fee income. Excluding the impact of purchase price accounting, our core investment income for the year was $74.5 million, an increase of $10.3 million as compared to core investment income of $64.2 million in 2022.

Our net investment income for the full year 2023 was $34.8 million or $3.66 per share. As of December 31, 2023 and December 31, 2022, the weighted average contractual interest rate on our interest-earning debt securities was approximately 12.5% and 11.1%, respectively. We continue to believe the portfolio remains well-positioned to generate incremental revenue in future quarters due to the current rate environment. Total expenses for the year ended December 31, 2023 were $46.8 million, compared to total expenses of $40.7 million for the full year 2022. This increase was largely due to an increase in interest and amortization of debt issuance costs, which was largely driven by the increase in interest rates on the company’s liabilities. Our net asset value for the fourth quarter of 2023 was $213.5 million or $22.76 per share, an increase of $0.11 per share, as compared to $214.8 million or $22.65 per share in the third quarter of 2023.

The quarter-over-quarter increase in NAV per share, despite total NAV decreasing slightly, was predominantly driven by the repurchase of 101,680 shares during the fourth quarter. Turning to the liability side of the balance sheet, as of December 31, 2023, we had a total of $325.7 million par value of borrowings outstanding at a current weighted average interest rate of 7%. This balance was comprised of $92 million in borrowings under our revolving credit facility, $108 million of 4.78% [ph] notes due 2026 and $125.7 million in secured notes due 2029. As of the end of the year, we had $23 million of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity under the 2018-2 notes as the reinvestment period ended shortly after our draw on November 20, 2022.

As of December 31, 2023, our leverage ratio was 1.5 times on a gross basis and 1.2 times on a net basis. From a regulatory perspective our asset coverage ratio at year-end was 165%. Finally, and as announced March 13, 2024, a quarterly distribution of $0.69 per share was approved by the Board and declared payable on April 2, 2024 to stockholders of record at the close of business on March 25, 2024. This is a $0.01 per share distribution increase as compared to the first quarter of 2023. Total stockholder distributions for 2023 amount to $2.75 per share. With that, I will turn the call back over to Ted.

Ted Goldthorpe: Thank you, Jason. Ahead of questions, I’d like to reemphasize that we believe we are well-positioned to take advantage of the current market environment as shown throughout 2023. Through our proven investment strategy, we believe we will be able to deliver strong returns to our shareholders in 2024. Thank you once again to all of our shareholders for ongoing support. This concludes our prepared remarks and I will turn over the call for any questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Christopher Nolan with Ladenburg. Your line is open.

Christopher Nolan: Hey, guys.

Ted Goldthorpe: Hi, Chris.

Christopher Nolan: Can I ask you one-time reimbursement expense related to, please?

Jason Roos: Yeah. Yeah. Hey, Chris. This is Jason. That’s a reimbursement to the fund related to and for administrative transition services paid to personnel of OHAI, Garrison, and HCAP following the acquisition of those BDCs.

Christopher Nolan: Okay. And then given the 2018-2 secured notes are no longer in their reinvestment period and given the slow cautious investment perspective you guys are taking on new investments, how should we look at the balance sheet growing or not growing in coming quarters?

Patrick Schafer: Yeah. Hey, Chris. It’s Patrick. So I’d say, I think the way I would frame it is, I think, relative to December 31st, I think, you could reasonably expect of — more of a reduction in terms of our liabilities as you saw at the end of the quarter. We had something like $70 million of cash on the balance sheet. I think it’s reasonable to assume a chunk of that is ultimately going to go towards debt repayment. But I would say kind of absent that, we would expect kind of generally speaking over the course of the year, I would imagine to be in a relatively stable place. I mean, if you assume, again, some chunk of that is repaid, you’d probably be down to something like somewhere between 1.3 times and 1.4 times gross leverage, and probably, on the lower end from a net leverage perspective, like the same net leverage that we have for the quarter and that kind of is right within our wheelhouse in terms of what we said our kind of target leverage range is on a long-term basis.

So I think from that point forward, you could reasonably expect relatively consistent portfolio size, again, obviously kind of timing around when things are repaid versus new investments. But I think generally speaking, we’re probably on the tail end of sort of our kind of decrease in our portfolio in favor of debt repayment.

Christopher Nolan: Gotcha. And then final question is on the driver, I noticed that ATP Oil is no longer non-accrual. Was the exit from that the driver for the realized losses?

Patrick Schafer: So, no, I don’t think, ATP was ever on non-accrual. So it’s an equity position. So it’s not, it doesn’t have like a sort of stated coupon or anything to otherwise have it accrue. So I don’t, that…

Jason Roos: Yeah. No. Let me, maybe.

Patrick Schafer: Yeah. Go ahead, Jason.

Jason Roos: The realized losses you’re seeing there, Chris, are related to primarily a couple of CLOs that were called this last quarter, and as a result, we flipped previously recognized unrealized losses into realized this quarter.

Christopher Nolan: Gotcha. And you guys are holding the equity strips on those CLOs, right?

Patrick Schafer: Correct. I mean, again, as Jason mentioned, I think, one or two of them…

Jason Roos: Not anymore.

Patrick Schafer: Yeah. Finally got called. So, no, but broadly speaking, when you look at our CLO bucket, that is the equity strips.

Christopher Nolan: Got it. I’ll get back in line. Thank you.

Operator: Our next question comes from the line of Paul Johnson with KBW. Your line is open.

Paul Johnson: Yeah. Good morning. Thanks for taking my question.

Ted Goldthorpe: Good morning.

Paul Johnson: I just sort of asked on the reimbursement, but I’m just curious, those expenses that the advisor essentially reimbursed for this quarter, are those expenses done and over with at this point or do you expect there will be more those next — this year or where do those stand?

Jason Roos: No. No. That was a one-time expense reimbursement, and I would say, for a good run rate on administrative expenses, you should look at the quarter amount for that being roughly the $400,000, $450,000. That’s the quarterly run rate going forward. So, you should see that.

Paul Johnson: Okay. Got it.

Jason Roos: Yeah.

Paul Johnson: Gotcha. Okay. And then, yeah, thanks for that. And then, as far as the realization, I mean, it sounds like most of that is driven by CLOs this quarter getting called away. I mean, were those — were most of those realized losses that you took from that, I mean, that’s obviously closing out those position, were those already marked or was there any sort of extra markdown in the quarter from those?

Jason Roos: Yeah. About — so, you’re seeing total, like, $15.6 million total realized loss. About $14.4 million of that was flipped from unrealized to realized and then the remainder was incremental this quarter related to a couple of other CLO positions that we still hold.

Paul Johnson: Gotcha. Okay. Appreciate that. That’s helpful. And then, in terms of just kind of leverage and the portfolio, obviously, you’ve got to — you’re sitting in a pretty good spot on the net leverage-based. I mean, is this kind of where you’d like to have the portfolio sort of running going forward around these levels or do you feel comfortable, just adding a little bit of leverage going into the year?

Patrick Schafer: Yeah. It’s a great question. I mean, we’ve provided guidance on where we want to be in terms of target leverage range, and obviously, on a net basis, we’re at the — we’re below the low end of that. The investment environment today is very attractive. Like, we’re seeing very wide spreads and, obviously, high SOFR. So, it is a decent deployment environment, but we’re continuing to be pretty prudent about investing money. So, I don’t think you’re going to see a big spike in leverage, but I think we are operating at the low end of our target range.

Paul Johnson: Okay. And then, last one for me, a simple one, but on the share purchases for the quarter, do you guys have any on hand an estimation of how — what sort of per share basis that was accretive to NAV this quarter?

Jason Roos: Yeah. We’ll have to get back to you on that one. I don’t have that on hand.