Logan Ridge Finance Corporation (NASDAQ:LRFC) Q3 2022 Results Conference Call November 9, 2022 10:00 AM ET
Company Participants
Ted Goldthorpe – President and Chief Executive Officer
Jason Roos – Chief Financial Officer
Patrick Schafer – Chief Investment Officer
Conference Call Participants
Christopher Nolan – Ladenburg Thalmann
Steven Martin – Slater
Operator
Good morning and welcome to Logan Ridge Finance Corporation’s Third Quarter Ended September 30, 2022 Earnings Conference Call.
An earnings press release was distributed yesterday after the close of market. A copy of the release, along with supplemental earnings presentation is available on the company’s website at www.loganridgefinance.com in the investors 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. Logan 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 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.
Ted Goldthorpe
Thank you. Good morning, and welcome to our third quarter 2022 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 would like to remind shareholders that, back in August when we reported our second quarter results, we told you that the second quarter of 2022 was transformative for the company and that the fruits of our labor will begin to be evident in the performance of the company during the second half of 2022. Fast forward to today, I’m pleased to say that, the company has reported its first quarter of positive NII under our stewardship, a significant milestone for the company.
While Patrick will provide additional details in the portfolio I would like to highlight that, we believe Logan Ridge’s portfolio is strong and substantially de-risked, having increased diversity from 32 portfolio companies when we took managing the portfolio on July 1, 2021 to 54 portfolio companies as of September 30, 2022.
Similarly, we have been averaging down our hold size from $7.2 million when we took over last July to $3.6 million as of September 30, 2022, effectively having our average credit exposure to our portfolio companies.
Further, with our new credit facility and our current credit leverage – in our current leverage capacity, we believe we are well-positioned to continue growing the portfolio and capitalize on opportunities arising from the current credit environment, which we believe will ultimately produce a very attractive vintage.
Accordingly, over the coming quarters, we will remain laser-focused on prudently growing the portfolio and increasing leverage, such that we achieve our target leverage ratio of 1.3 times to 1.4 times, which will further increase our earnings power and improve our overall financial performance. As always though, we are carefully monitoring the current economic environment, the impact of rising rates on our portfolio companies in the broader credit market.
To wrap up my prepared remarks, I would like to reiterate management’s belief that we have successfully righted the ship and our top priority moving forward is increasing the company’s profitability. With that in mind, we are cautiously optimistic that the company will be in a position to return to paying a quarterly dividend during the first quarter of 2023.
With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer.
Patrick Schafer
Thanks Ted. As of September 30, 2022, the fair value of our portfolio was approximately $193.1 million and consisted of 54 portfolio companies. First lien debt represented 61.2% and 61.9% of our total portfolio on a cost and fair value basis respectively. This compares 54.4% and 49.6% of the company’s total portfolio on a cost and fair value basis respectively as of December 31, 2021.
At quarter end, our debt investment portfolio represents 79.4% of the total portfolio at fair value and had a weighted average annualized yield of approximately 8.9% excluding income from non-accruals and collateralized loan obligations or 9.7% when excluding our debt securities and non-accrual from both the numerator and denominator.
This compares to a debt portfolio which represent 75% of our total portfolio at fair value with a weighted average annualized yield of approximately 8.7% excluding income from non-accruals and collateralized loan obligations or 9% when excluding our debt securities on non-accrual from both the numerator and denominator at the end of the second quarter.
Going forward, we expect the rising rate environment to continue to benefit Logan Ridge as 76% of our assets are floating rate compared to only 41% of our liabilities. During the quarter, the company continued to judiciously redeploy capital generated from exiting the legacy portfolio.
Specifically, the company made approximately $36.7 million of investments and approximately $17.1 million in repayments and sales, resulting in net repayments and sales of approximately $19.6 million for the quarter.
Thus, our investment portfolio as September 30, 2022 consisted of investments in 54 portfolio companies with a fair value of approximately 193.1 million or an average investment size of $3.6 million.
Our non-yielding equity portfolio as of December 30, 2022 decreased to 17.6% and 17.0% of the portfolio on a cost and fair value basis respectively. This compares to 21.7% and 21.4% of the portfolio on a cost and fair value basis as of the second quarter. And 27.1% and 32.6% of the portfolio on a cost and fair value basis as of December 31, 2021, which marks substantial improvement.
Additionally, subsequent to the quarter end, we exited Burke American Auto Parts Group LLC at the September 30th fair value, further reducing our non-yielding equity portfolio to 15.6% of the portfolio on a fair value basis. During the quarter, we had no new non-accruals.
Additionally, the company ended the quarter with 11.3 million in cash as well as $29.2 million of unused borrowing capacity available for deployment investments originated by the BC Partners Credit platform.
I will now turn the call over to Jason.
Jason Roos
Thanks, Patrick. Turning to our financial results for the quarter ended September 30, 2022. As Ted mentioned, we recorded net investment income of $200,000 for the quarter ended September 30, 2022. This was a substantial improvement compared to the prior quarter net investment loss of $900,000 which represents a 1.1 million increase in income this quarter.
This was largely driven by a $400,000 increase in total investment income, a $600,000 reduction in interest and financing costs driven by work we did refinancing the legacy capital structure and $100,000 reduction in general and administrative expenses.
During the quarter, we reported a 5.2 million realized loss on investments, partially offset by unrealized depreciation on the portfolio of two million. The realized loss was almost entirely due to Logan Ridge’s exit of our former portfolio company Vology Inc which had no NAV impact during the quarter as our fair value estimate in the prior quarter was consistent with where we were taken out.
As of September 30, 2022, our net asset value was 98.2 million or $36.21 per share as compared to 101.1 million or $37.31 per share at the end of the second quarter of 2022. Finally, as Patrick mentioned, cash and cash equivalents as of September 30, 2022 have decreased to 11.3 million compared to 29.5 million as of the prior quarter, largely attributable to the increased deployment throughout the quarter.
With that, I will turn the call back over to Ted.
Ted Goldthorpe
Thank you, Jason. We are proud of the significant milestones we have achieved to-date and are looking forward to further increasing the company’s profitability. Thank you for your support. This concludes our prepared remarks and I will now turn the call over to the operator for any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is open.
Christopher Nolan
Hey guys. Jason, were there any non-recurring items in the quarter?
Jason Roos
Thankfully I think this quarter you will see a lot of normalization in the numbers from previous quarters. So last quarter we had about 230,000 of excess expense related to some of the interest expense coming through on having multiple mature debt that we paid off last quarter. This quarter we don’t have that.
The general and administrative expenses have come down largely because we have normalized our legal costs. So, long winded way of saying no, I think this quarter is a pretty good run rate on the expense side and you are starting to see some of the benefit of the deployment that – and some of the rate rise that that impacted the portfolio during the quarter on the revenue side.
Christopher Nolan
Great. And also congratulations everyone for getting back to profitability. I mean, it is a long road and a lot of credit to all of you. On that note what is the thoughts about where leverage goes and given that, what do you think you are going to do with this 75 million credit facility cause it seems to be small.
Ted Goldthorpe
Yes, so, hey Chris, it is Patrick. So I think similar to our other public vehicle, I think we think the leverage range is kind of in the 1.3 times to 1.4 times. And if you kind of do that math, you get decently close to the top of that facility kind of as is. And so that kind of is sort of our expectation over some period of time and the speed with which we get there will depend a little bit on kind of some exits and things like that.
Additionally, we have, upwards of a hundred million dollar accordion on that facility that we theoretically could tap at some point. But for now at least kind of our kind of stated leverage range, we would get to pretty close to the top of that facility and that was kind of how we designed it originally.
Christopher Nolan
Great. And I guess strategically, now that you know, it seems that, you have the back, the wind at your back and the earnings, is it fair to assume that we are going to have profitability in future quarters?
Patrick Schafer
Yes, it is our expectation. I mean, it is a good question. I mean, with rising rates, increased deployment and obviously refinancing our debt structure and obviously our, you know, as Patrick mentioned in his prepared remarks, you know, we have more floating rate assets than we have floating rate debt. So all those factors absent, you know, a one off expense to your question, we expect to have tailwinds to our profitability.
Christopher Nolan
Because it seems to me that the $0.07 could be at least some sort benchmark run rate going forward or somewhere in that facility. I mean am I thinking completely off?
Patrick Schafer
I mean, as per other vehicles, there is a lag to when we get the benefit of LIBOR. So I think we would hope to achieve more. Let’s put it that way.
Ted Goldthorpe
Yes. I think the other thing going on particularly with Logan here is, starting kind of in and around May, when we refinanced out the credit facility and all the liabilities, we sort of continue to see an increasing assets and investments from that point on.
So theoretically kind of your ending quarterly balance is a higher terminal loss than sort of the average over the quarter. So we generally speaking should be benefiting all else be equal from both the rate environment as well as kind continuing to add – be a net adder of assets during the quarters.
Patrick Schafer
Yes. And I would just say, along all these lines, and I know this is not your question. But obviously we would expect to turn on the dividend relatively soon, if these earnings continue and a material dividend versus a token dividend.
And then number two is, as soon as practically possible, it probably makes sense for us to be buying back stock. And so to the extent we are able to, that is something that we are obviously thinking about as well.
Christopher Nolan
Alright good job guys thanks.
Ted Goldthorpe
Thanks.
Operator
Your next question comes from the line of Steven Martin from Slater. Your line is open.
Steven Martin
Hi, guys. You just made some comments about sort of terminal velocity versus the quarter and obviously having been on the Portman call. You gave some indication of what the pro forma would have looked like all else being equal, if rates had reset. Can you give us some sort of comparable color on what that number would have been?
Ted Goldthorpe
Yes. I mean, it is a little bit more complicated than Portman. But that said, I would say it is probably in kind of sort of 15-ish cent range. Obviously, depending on kind of when everything resets, but that would probably be again kind of roughly-speaking the potential increase.
Steven Martin
Okay. Can you talk about your mark-to-markets in terms of characterizing NIM, rate related, spread related, credit related?
Ted Goldthorpe
Yes, I think we probably had two mark-to-markets that roughly speaking offset each other that were kind of credit related, both the positive and negative. And then kind of the rest by and large was rate movement related, as opposed to credit related.
The first in terms of detractors was LGS Partners launch on Silvers companies entering in sale process and we are a minority holder there. But we think that is kind of roughly a good approximation of value for where the majority holders would be looking to exit the business.
And then on the positive side, Sequoia Loan not too much in detail, but we think we have some extra collateral there as part of some transactions. But ultimately should lead to a better recovery on a quicker timeline than perhaps we thought about last quarter.
Again those two like roughly even each other out. My guess is it is probably maybe $1 million negative when you net the two and then the rest of anything else is really all mark-to-market.
Steven Martin
Got you. The LJS you were talking about, I had actually had a question. You really, there was a big markdown from second quarter to third quarter. Was that based on company performance or just what you know about the sale process?
Ted Goldthorpe
What we know about the sale process, and I would say the incentives and mindset to the majority holders, which are kind of controlling the sale process.
Steven Martin
Got you. In terms of inherited portfolio, what do you see in terms of maturities and repayments through the end of the year?
Ted Goldthorpe
Yes, I again, it is a little bit tough with to have exact visibility, but I think based on kind of conversations we have been having so far with certain portfolio companies, I think you could expect to see, or we would expect to see a couple of the bigger positions, legacy positions actually pay off before year end.
Now that said, I that is a just kind of what we are hearing right now and obviously given where market conditions are, that that can move very, very quickly from week-to-week or month-to-month. But we are expecting at this point a couple of bigger chunkier legacy positions to actually get repaid by year end rather.
Patrick Schafer
Yes. I mean, we are working really hard to get out of the legacy positions. And the other thing, I mean, we put in the press release, but just to reiterate, you know, we have exited a equity position subsequent to quarter end, so you will see that and we will reinvest that money in income generating assets.
So you will, again, you will see absent markdowns, which we don’t foresee. You will see the debt portfolio grow as a percentage of the overall portfolio. And we continue to kind of chop down that equity exposure.
Steven Martin
In the Portman call, you discussed taking advantage of public liquid securities, or private liquid securities. Can you do the same thing or are you doing the same thing here at Logan Ridge?
Ted Goldthorpe
The short answer is yes, we can do the same thing. We have a little bit of a different kind of credit facility at Logan than we do at Portman that adds a kind of a wriggle to exactly how much of those things we can or cannot do based on the facility. But I would say generally speaking, yes, we kind of similarly at Logan Ridge can and would look to take advantage of those markets.
Steven Martin
Okay. And, I think as the earlier questioner great job turning this around. People forget how, how short a period of time you have actually controlled it.
Patrick Schafer
Yes. Well, I appreciate you saying that. Obviously we would like progress to happen as fast as possible, but we are, you know, we are obsessed with getting this to the right place.
Steven Martin
Good. Thanks a lot.
Ted Goldthorpe
Thanks.
Operator
[Operator Instructions] There are no further questions at this time, Mr. Ted Goldthorpe, I turn the call back over to you.
Ted Goldthorpe
Great. Well thank you everyone for joining us today. We look forward to speaking to you again on our next quarterly call, which will be our full-year results and we would like to wish everybody a very early but happy Thanksgiving.
Operator
This concludes today’s conference call. You may now disconnect.
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