Q1 2024 Logan Ridge Finance Corp Earnings Call

Participants

Ted Goldthorpe; Chairman of the Board, President, Chief Executive Officer; Logan Ridge Finance Corp

Patrick Schafer; Chief Investment Officer; Logan Ridge Finance Corp

Brandon Satoren; Chief Financial Officer, Chief Accounting Officer, Treasurer, Company Secretary; Logan Ridge Finance Corp

Christopher Nolan; Analyst; Ladenburg Thalmann & Co. Inc.

Steven Martin; Analyst; Slater Capital Management LLC

Presentation

Operator

Thank you. Good morning, and welcome to the Logan Ridge Finance Corporation's first quarter ended March 31, 2024 earnings conference call. An earnings press release was distributed yesterday, May 8 after the close of the market. A copy of the release, along with a supplemental earnings presentation is available on the company's web at www.LoganRidgeFinance.com in the Investor Resources section. And should be reviewed in conjunction with the company's Form 10-Q filed with 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 of 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 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; Brandon Satoren, 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

Thank you. Good morning, and welcome to our first quarter 2024 earnings call. As mentioned, I'm joined today by my Chief Financial Officer, Brandon Satoren; and our Chief Investment Officer, Patrick Schafer. Following my opening remarks, Patrick provide additional details on our investment activity to date, and Brandon will walk through our financials.
While keep my prepared remarks brief today and limited to a few key highlights, which Patrick and Brandon provide more detail on shortly, I would like to emphasize that during the first quarter of 2024, we continued to build upon record financial results we've generated in 2023. The first quarter results are highlighted by the quarter-over-quarter increases in net investment income and net asset value of 63% and 1%, respectively.
Following the strong earnings we saw in 2023, Logan Ridge is off to a solid start in 2024 and in the first quarter with net deployment of $8.9 million and a robust pipeline. As the Company's exposure to the legacy equity portfolio has continued to decline and its exposure to credits originated by the BC Partners credit platform have increased. The benefit to shareholders has been clear and is been reflected through Logan's strong financial results.
Furthermore, as a result of the Company's strong financial performance during the quarter, the Company declared a second quarter distribution of $0.33 per share, our 3% increase to the Company's quarterly distribution compared to the prior quarter. This is the company's fifth consecutive quarterly increase and represents an 83% increase from the $0.18 per share distribution we declared in the first quarter of 2023.
Finally, during the quarter, the Company repurchased 20,867 shares which was accretive to NAV by approximately $0.08 per share.
Looking forward to the rest of 2024, our pipeline remains robust, and we continue to see attractive investment opportunities in the market. Over the course of 2023, private equity firms were sitting on record amounts of dry powder, while at the same time are being pushed by LPs to return capital. Although expectations for future rate hikes have diminished toward the end of the first quarter and the beginning of the second quarter, we believe the aforementioned fundamentals combined with positive economic outlook and sentiment should continue to fuel new deal activity in our private credit space over the course of 2024.
We remain focused on increasing shareholder value by leveraging the Company's stronger balance sheet, and we believe our platform remains well equipped to take advantage of current market conditions. Specifically at Logan Ridge and more generally across the BC Partners credit platform, we continue to find attractive opportunities both through our sponsor relationships and our focus on sponsor and non-sponsor backed companies and continue to win transactions based on our ability to custom tailor capital solution for the borrower and the borrowers' belief that our platform can add value to their business above and beyond just being a capital provider.
With that being said, I will turn the call over to Patrick Schafer, our Chief Investment Officer.

Patrick Schafer

Thanks, Ted, and hello, everyone. As of March 31, 2024, the fair value of Logan's portfolio was approximately $200.1 million with exposure to 62 portfolio companies. This compares to 60 portfolio companies with fair value of approximately $189.7 million as of the prior quarter and 59 portfolio companies with a fair value of $203.3 million as of March 31, 2023.
During the quarter ended March 31, 2024, we continued to deploy capital in new and existing portfolio companies. Specifically, the company made approximately $9.8 million in new and existing investments and had approximately $0.9 million in repayments and sales, resulting in net deployment of approximately $8.9 million for the quarter. While we continue to be prudent and disciplined underwriters, we believe that the loans originated in the current environment will prove to be an attractive vintage.
Our portfolio composition as of March 31, 2024, 60% of the company's investments at fair value were invested in assets originated by BC Partners credit platform. As of March 31, 2024, our debt investment portfolio represented 80.8% of the total portfolio at fair value with a weighted average annualized yield of approximately 11.4% excluding income from non-accruals and collateralized loan obligations.
This compares to a debt portfolio which represented 82.0% of our total portfolio at fair value, with a weighted average annualized yield of approximately 11.1%, excluding income from non-accruals and collateralized loan obligations as of the prior quarter. And 83.1% with a weighted average annualized yield of approximately 10.7% as of March 31, 2023.
The weighted average annualized yield, excluding income from non-accruals and collateralized loan obligations, increased by 30 basis points and 70 basis points compared to prior quarter and prior year, respectively. As of March 31, 2024, 88.5% of our debt investment portfolio at fair value was bearing interest at a floating rate compared to 86.4% as of December 31, 2023, and 83.4% as of March 31, 2023.
As of March 31, 2024, first lien debt represented 66.5% and 65.2% of our total portfolio on a cost and fair value basis, respectively. This compares to first-lien debt representing 65.4% of our total portfolio on both the cost and fair value basis. As of December 31, 2023, 65.4% and 67.7% of our total portfolio on a cost and fair value basis, respectively as of March 31, 2023.
The non-yielding equity portfolio represented 15.2% and 18.2% of our portfolio on a cost and fair value basis, respectively as of March 31, 2024. This compares to 15.5% and 17.0% of the portfolio on a cost and fair value basis as of December 31, 2023.
Moving on to nonaccrual status. As of March 31, 2023, the company had three portfolio companies on nonaccrual status with an aggregate amortized cost and fair value of $17.2 million and $10.6 million respectively, or 8.3% and 5.3% of the investment portfolio at cost and fair value respectively. This compares to three portfolio companies on nonaccrual status as of prior quarter with a cost and fair value of $17.2 million and $12.8 million respectively, or 8.7% and 6.9% of the Company's investment portfolio's cost and fair value, respectively.
And I'll turn the call over to Brandon.

Brandon Satoren

Thanks, Patrick. Turning to our financial results for the quarter ended March 31, 2024. For the quarter ended March 31, 2024, Logan generated $5 million of investment in income, an increase of $0.6 million as compared to $4.4 million in the prior quarter. The increase was largely a result of a one-time reversal of $0.6 million of previously accrued income on a portfolio company that was placed on nonaccrual in Q4 of 2023.
Total operating expenses for the first quarter increased by approximately $0.2 million to $4.1 million as compared to $3.8 million for the prior quarter. The increase in operating expenses was primarily driven by higher financing costs as well as higher general and administrative expenses.
Our net investment income for the first quarter was $0.9 million or $0.35 per share, an increase of $0.3 million from $0.6 million or $0.22 per share in the fourth quarter of 2023. As I noted previously, the increase in net investment income was primarily due to reversing $0.6 million or $0.22 per share of previously accrued income on a portfolio company that was placed on nonaccrual status in the prior quarter.
Our net asset value as of March 31, 2024, was $90.2 million, representing a $1 million increase as compared to the prior quarter net asset value of $89.2 million. On a per share basis, net asset value was $33.71 per share as of March 31, 2024, representing a $0.37 increase as compared to $33.34 at the end of 2023. The increase in net asset value quarter over quarter was driven by net realized and change in unrealized gains on the portfolio as well as Logan Ridge out earning the quarterly dividend payment by $0.1 million.
Finally, as of quarter end, the Company had $8.3 million in cash and cash equivalents, as well as $23 million of unused borrowing capacity available for deployment in investments originated by the BC Partners credit platform.
With that, I will turn the call back over to Ted.

Ted Goldthorpe

Thank you, Brandon. To our shareholders, thank you for your continued 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)
Christopher Nolan, Ladenburg Thalmann.

Christopher Nolan

Hey, guys. Brandon, just to make sure that you mentioned the $0.22 recovery from the previous nonaccrual, was that for this quarter?

Brandon Satoren

No, Chris, that was last quarter. We had about that $600,000 in receivables that we had to write off through Q4 NII.

Christopher Nolan

Okay.

Brandon Satoren

So that's the reversal of this quarter you're seeing flow through earnings.

Christopher Nolan

So there was a reversal of this quarter?

Patrick Schafer

No, I think what he means is, the fact that we did not have a reversal of this quarter, but did have a reversal last quarter. That's part of why you're seeing the meaningful increase.

Christopher Nolan

Okay. Thank you, And, to agree, you guys are getting a lot of love from a degree equity holder and you know, what to say about this? Because, you know, according to my calculations, the fair value of [NAV] increased 38% quarter over quarter. That's how (multiple speakers) total equity holdings?

Patrick Schafer

Yeah, Chris, I think what I would say is the company continues to do very, very well, when we took over this portfolio in the first place, this was market probably close to zero. It is a events business where they like to put up and organize events for trade shows and things like that. I think they actually like run part of the -- I believe they actually run part of the Apple like CES conference and such.
So like a pretty good business that got massively impacted by COVID. They've continued to grow really, really well. They made an acquisition. And I'm sorry, I'm saying it in goes public, they made acquisition it was announced last quarter, sorry not quarter, summer of last year. So there is continuing to perform very well. There is at least one other BDC also ended with us and you can see pretty consistent growth trajectory, you know, with kind of how that firm looks at this position as well as us.

Christopher Nolan

Okay. And then I guess the final question is, where are we thinking about leverage going forward?

Patrick Schafer

So what I'd say is, I think similar to how we think about our other BDC Portman Ridge, I think are like conceptual. We conceptually feel like BDC, you should probably be somewhere in the 1.25 times to 1.4 times net leverage depending on the environment, depending on portfolio composition, et cetera. I think right now, Logan is at 1.3 times on a net basis -- on a gross basis, sorry, and a little bit less than that on that, not significantly less. So we're kind of at the low end of our range. Obviously, as you alluded to it, but we have one or two very large equity positions. So there is a little bit of some -- little bit more variability in our NAV and perhaps others. I would say to the extent that, you know, one or two of our large equity positions were to be realized and monetize it in cash, we would probably feel a little bit more comfortable bringing leverage up from there. But kind of where, again, given sort of that portfolio composition, we would probably sort of look to be on the lower end of our sort of guidance, you know, until those kind of get realized.

Christopher Nolan

Got it. Okay. Thank you.

Operator

Steven Martin, Slater.

Steven Martin

Hello again guys.

Patrick Schafer

Hi, Steve.

Steven Martin

Following, you know, Portman, could you talk a little bit more about the deployments in the first quarter, importantly, there was only one new borrower, where does that look like in Logan Ridge? And obviously, can you talk a little bit more about the deployments you expect in the second quarter?

Patrick Schafer

Yes, I think for Logan, there were two new borrowers and there was again, this is a little bit more of the nuanced, but there was one particular portfolio company investment we made across the platform was a little bit lower on the yield spectrum. So we didn't think it quite made sense for Portman from a yield perspective or an ROE perspective.
But for Logan, it fit very nicely within the leverage facility. So on an ROE basis, it was significantly more attractive for Logan than it would have been for Portman. So there's again, it's another position that's across our platform, but it made a little bit more sense for Logan than it did for Portman. But other than that, again, I think the trends are generally fairly similar across the two on the margin where we were obviously more of a net deployer in Logan than important than just because it was a little bit lower end of the leverage spectrum.
But I would think, you know, kind of what we talked about, Steve, earlier is the same, which is I think over the course of the year, we would expect Logan again on the whole to be a net deployer of capital. Again, some of that depends on it. We have some realizations hopefully, and particularly in our in our equity portfolio area and kind of the timing if we did happen to, you know, receive $15 million or $14 million change from degree, which is kind of worth mark, just as a simple example, might take a little time for us to rotate that cash into loans and if that happens over quarter end, et cetera, you might see some net repayment.
But overall, again, where we sit at the end of the year, we would expect to probably be a net deployer of capital in Logan Ridge.

Steven Martin

And your prospects for the second quarter?

Patrick Schafer

In terms of deployment, again, similar, which is I think we are in a pretty good spot, have a good pipeline depending on timing of such. Again, I would think that Logan is on the whole probably a net deployer for the second quarter, but again, I don't it would probably not be as large of a net deployer as it was in Q1 just because again, we're at about a little under 1.3 times gross leverage. So we're kind of in a decent spot from a leverage perspective.

Steven Martin

Okay. And you made the comment, I think that rental was came right at the end of the quarter?

Patrick Schafer

Correct.

Steven Martin

So we didn't really see the impact of varietal on the investment income?

Patrick Schafer

Not at all, $0 of impact on net investment income for the quarter.

Brandon Satoren

That's the open trade payable on the balance sheet, $4 million.

Patrick Schafer

Trading closed on Good Friday and settled on Monday. So it went over quarter end.

Steven Martin

And the rest of the deployment, was that made sort of throughout the quarter or did we not see -- when you get a full quarter of -- in Q2 when you get a full quarter of Q1's deployments, will it be a material increase?

Patrick Schafer

I think it will certainly be an increase. They were not done at the beginning of the quarter. They certainly weren't done as far towards the end as Riddell. So you would see like 100%, you know, pickup from Riddell. But there definitely, again, should be tailwind from the net deployments in Q2 versus Q1 and again, off the top of my head, I think that the other one that I was referencing close sometime in March but again, you will definitely see a pickup from our net deployments kind of heading into Q2.

Steven Martin

Okay. And would you care to further your comments on possible exits of equity of the equity portfolio.

Patrick Schafer

I think the comment I would make is similar to the market as a whole. M&A is starting to come back in th private credit space. But generally speaking, in sort of the private equity space as well, it was a really tough. It's been a really tough 12 or 18 months to trying to sell the business. And so I think just from a macro perspective, we have a lot better chances of, you know, exiting an equity position or two this year relative to last year or probably even in sort of the back half of 2022 unless something had already been in a process, nothing really got done in the back half of 2022 either.
So I'd say we're, you know, hopeful and optimistic. But from a macro perspective, we certainly have had tailwinds to be able to exit some of these as opposed to all of last year. There were certainly meaningful headwinds, stagnating equity positions.

Brandon Satoren

We expect to make a lot of progress on that front over the course of the year.

Steven Martin

Got it. And the non-accruals -- by the way you made the comment in your prepared remarks about non-accruals about there being three nonaccruals. The schedule says four, is the schedule wrong or did you just misspeak.

Brandon Satoren

No, sorry, three.

Patrick Schafer

Three borrowers on nonaccrual, one of them happened to have two securities.

Steven Martin

Got it.

Patrick Schafer

It's the same set quarter-over-quarter.

Steven Martin

Okay. Because in the schedule, which is nonaccrual investments, not borrowers.

Patrick Schafer

Correct.

Steven Martin

Gotcha.

Patrick Schafer

Apologies for the confusion there.

Steven Martin

No, not a problem, not a problem. So it was a further markdown of an exit. So at the end of Q3, it was $10.6 million at fair value, then it jumped up to $12.8 million then it went down to $10.6 million. Is that just coincidence that it's the same number?

Patrick Schafer

Yes, it is. From Q3 to Q4, we added one, which was there which was the reason for the increase there. And this quarter, one of them was marked down and it's a pure -- the numbers are pure coincidence.

Steven Martin

Got you. Any prospect of cleaning some of those off, are they in out on is there a shot that the borrower will restructure it?

Patrick Schafer

They're all in various stages since they're on nonaccrual in sort of restructuring, I would say for the only one that really moves the needle, we probably still have a lot of time to kind of working through that. So I will --there's of the three names, there's two that are on the smaller end and one is fairly large, which is the historical Sequoia position.
And I'd say that one's still, you know, has, as you know, a lot longer to work through. And again, the other ones we obviously continue to try to work out and work through. I wouldn't say we're necessarily any closer than we were last quarter, and we're also not farther away, we're hopeful that we will find all of them trying to move them into accrual status eventually. But again, for the one that moves the needle, I would not say we're closer to.

Steven Martin

Got you. All right. Thanks a lot.

Brandon Satoren

Thanks Steve.

Patrick Schafer

Thank you, Steve.

Operator

There are no further questions at this time. I will now turn the conference back over to Ted Goldthorpe for closing remarks.

Ted Goldthorpe

Right. Well, thank you, everyone, for joining us today and we look forward to speaking to you again in August when we announce our second quarter results. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.