B. Riley Financial Q4 2022 Earnings Call Transcript

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Provided by Quartr
February 22, 2023

Key Takeaways

  • B. Riley reported a net loss of $168 million for 2022, driven by $404 million of mark-to-market investment losses despite flat operating revenues of $1.3 billion and $366 million of adjusted EBITDA.
  • The receivables portfolio has recovered $395 million in cash with $154 million still outstanding and the newer portfolio, acquired with Pathlight Capital, is on track for an expected IRR of over 40%.
  • Management continued its diversification strategy with acquisitions—Targus, Lingo, Bullseye Telecom, Focal Point and Farber Group—to add uncorrelated, recurring revenue and enhance M&A, debt and restructuring advisory capabilities.
  • As of December 31, 2022, the balance sheet showed $269 million in cash, $1.1 billion in securities, $702 million in loans receivable versus $2.4 billion of debt, remaining in compliance with covenants and maintaining modest leverage.
  • The board declared a regular quarterly dividend of $1.00 per share payable March 23, 2023, underscoring confidence that recurring operating EBITDA (~$325 million) will sustain shareholder distributions.
AI Generated. May Contain Errors.
Earnings Conference Call
B. Riley Financial Q4 2022
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to B. Riley Financial's 4th Quarter and Full Year 2022 Earnings Call. My name is Britt, and I will be your call coordinator. B. Riley has issued a press release and financial supplement detailing its results for the Q4 of 2022, which can be found on its Investor Relations website at ir.brileyfin.com.

Operator

Today's call includes prepared remarks from the company followed by a question and answer session. Joining us today from B. Riley are Bryant Riley, Chairman, Co Founder and Co CEO Tom Kelleher, Co Founder and Co CEO and Philip Ahn, CFO and COO. After management's remarks, we will open the line for questions. Please note that all participants will be on a listen only mode until the Q and A portion of the call.

Operator

As a reminder, this call is being recorded. An audio replay will be available on the company's Investor Relations website later today. And before we conclude today's call, I will provide the necessary cautions regarding forward looking statements. Now, I will turn the call over to Mr. Bryant Riley.

Operator

Mr. Riley, you may proceed.

Speaker 1

Welcome, and thanks for joining our call this afternoon. Throughout 2022, we continued to execute our strategy amid a tough environment, with markets taking back the investment gains we saw in 2021, contributing to a net loss of $168,000,000 for the year. Despite the marks in our investment portfolio, we delivered operating revenues of $1,300,000,000 in 20 2, which is close to where we were at the end of 2021, during a record year that produced operating revenues of $1,400,000,000 It is important to put this into perspective. The income and losses over the last 2 years were largely influenced by our investment portfolio. And over the course of 2021 2022, our investment book is effectively flat.

Speaker 1

During that period, we made approximately $10 per Basic share and generated operating EBITDA of

Speaker 2

over $780,000,000

Speaker 1

Additionally, during that time, we continue to diversify our business and implement We began 5 years ago, which is to invest our excess episodic cash flows into recurring operating businesses that will generate Our operating performance in 2022 highlights the benefits of this strategy. To highlight this point further, consider that our Investment Banking and Institutional Brokerage business represented roughly 60% of our operating EBITDA in 2021 versus about 10% in 2022. During that same period, overall operating EBITDA declined by less than 20%. Since our inception as a sub $50,000,000 market cap publicly traded company in 2014, we have delivered in excess of $21 per share or over $570,000,000 in common stock dividends to our shareholders. We have had meaningfully up and down years and through All cycles, our diversified platform has demonstrated strength and resiliency to yield meaningful returns for our business and our shareholders, including in previous down market cycles.

Speaker 1

We are and will continue to be opportunistic. As I mentioned, we made several strategic acquisitions this past to bolster our platform with additional uncorrelated sources of steady revenue and to enhance capabilities where we see opportunities for longer term growth. These additions include Targus, which has already contributed meaningful growth in our results Bullseye Telecom and Lingo, which have enhanced the cash flows generated by our Communications segment and Focal Point, which has expanded our M and A, debt and restructuring advisory capabilities as part of B. Riley Securities. In addition, we added to our receivables portfolio.

Speaker 1

This has been a great investment that continues to perform with double digit rates of return. Since our unlevered purchase of the first portfolio for $400,000,000 and as of yesterday, we have recovered approximately $395,000,000 of cash and have an incremental $154,000,000 of current receivables. We typically recover 7% to 8% of our receivables per month. The second portfolio that we purchased in partnership with Pathlight Capital is performing in line with our expectations and we expect to have an IRR in excess of 40 Speaking to our corporate loan portfolio, at year end, we had 12 loans with a total failed value of 384,000,000 This excludes our Badcock loan receivable portfolio and a few loans under $1,000,000 of fair value. Approximately 95% of our loan As a general view, we believe that our loan portfolio, which is almost entirely fair valued by an outside valuation firm, provides a very attractive risk adjusted returns potential for us over the course of the year.

Speaker 1

We have received a number of calls in this portfolio, so I will outline a few highlights of our loan portfolio activity for 2022 and including activity thus far for 2023. We received a total pay down by Sorento of their $41,000,000 loan. We received a $15,000,000 pay down of our Cadiz loan. We received $11,000,000 pay down of our XL loan. The last loan I will update is our Core Scientific loan.

Speaker 1

We provided Core with a $42,000,000 loan against future equity sales, which now is an unsecured claim in the bankruptcy. We also provided a $70,000,000 dip, of which $35,000,000 has been funded in order to have a greater seat at the table during the bankruptcy. At the time, our $42,000,000 loan was marked to less than $8,000,000 which is reflected in our 2022 results. And since that time, Bitcoin has risen from $16,500,000 to $24,000 and power costs consisting of mostly natural gas has declined meaningfully. We will continue to utilize our balance sheet to facilitate opportunities for our clients and provide strong returns for our constituents.

Speaker 1

In summary, we like where we sit heading into 2023 from an earnings power, liquidity and opportunity perspective, and we will continue to keep our heads down to perform for our colleagues, our clients, our partners and our shareholders. With that, I'll turn the call over to Phil Ahn, our CFO and COO, to discuss key financial metrics for the quarter. Then Tom Kelleher, our Co CEO, will discuss results from our business segments before we open up for questions. Over to you, Phil.

Speaker 3

Thanks, Bryant. For the Q4 ending December 31, 2022, B. Riley reported total revenues of $327,000,000 down from $422,000,000 in Q4 of 2021. Net loss available to common shareholders was $59,000,000 or $2.08 diluted loss per share compared to net income of $62,000,000 or $2.08 diluted earnings per share in the prior year period. This loss primarily reflects investment losses of 124,000,000 representing mark to market declines in our investment portfolio.

Speaker 3

Excluding the marks on our investments, operating revenues increased to $450,000,000 for the quarter, up from $353,000,000 in Q4 of 2021. Operating adjusted EBITDA of $102,000,000 compared to $106,000,000 in the prior year period. For the full year end December 31, 2022, Total revenues were $915,000,000 down from $1,700,000,000 from the prior year. Net loss available to common shareholders of $168,000,000 or $5.95 diluted loss per share, compared to net income of $438,000,000 or $15.09 diluted earnings per share in 2021. Investment loss of $404,000,000 for the year compared to investment gains of $387,000,000 in 2021.

Speaker 3

Again, the loss was primarily due to the impact of broad market declines throughout 2022 and its related impact on investments that we hold. Operating revenues for the year were $1,300,000,000 which was relatively flat compared to 2021, despite softness in small cap markets and a decrease in investment banking and underwriting fees throughout 2022. Operating adjusted EBITDA was $366,000,000 down from $422,000,000 for the prior year period. As a reminder, adjusted EBITDA and our metrics for operating and investment results are non GAAP financial measures. Please refer to our earnings release for a definition of these terms and for a reconciliation to the nearest GAAP measures.

Speaker 3

Investors can also find additional details relating to these metrics and related reconciliations in the financial supplement on our Investor Relations website. Now turning to highlights from our balance sheet. As of December 31, we had $269,000,000 in unrestricted cash and cash equivalents, $1,100,000,000 in net securities and other investments owned and $702,000,000 in loans receivables. Of this total, loans on non accrual accounted for approximately $70,000,000 of our total fair value. At year end, we had a total cash and investment balance of approximately $2,100,000,000 which includes approximately $54,000,000 of other investments reported in prepaid and other assets.

Speaker 3

Total debt as of December 31 was approximately $2,400,000,000 This includes $1,700,000,000 of senior notes, approximately $700,000,000 of senior loans and 25 $1,000,000 in notes payable at year end. We remain in compliance with all of our debt covenants and specifically with regards to our Nomura debt The net asset value related to our primary guarantor was in excess of $2,000,000,000 at year end. As a result of recent additions to our platform, we have realigned our segment reporting structure to reflect organizational changes at B. Riley. The new Consumer segment includes our previously reported brand segment, which historically represented licensing revenues from our 6 Brands portfolio and Targus, which we acquired in the Q4 of 2022.

Speaker 3

The Consumer segment also includes revenues from our equity investments in Hurley and Justice Brands, which were previously reported in the Capital Markets segment. We have also realigned our previously reported Principal Investments, Communications and Other segment into 2 separate segments, a Communications segment and an All Other segment. The Communications segment includes our legacy United Online and Magicjack Businesses in addition to Marconi Wireless, Lingo and Bullseye Telecom. The All Other segment consists of opportunistic acquisitions in sectors unrelated to the above describe segments. And finally, our regular quarterly dividend of $1 per share will be paid on or about March 23rd to common stockholders of record as of March 10.

Speaker 3

That completes my financial summary. And now I'll turn the call over to our Co CEO, Tom Kelleher, to provide highlights from our business divisions.

Speaker 4

Tom? Thanks, Phil. Over the past year, we helped Clients navigate challenging markets to raise capital in a liquidity restraint environment and execute on their strategic business initiatives. At the same time, we continue to grow our platform while making enhancements to strengthen our position long term, both organically and through acquisitions. Excluding investments, our Capital Markets segment generated operating revenues of $542,000,000 with segment operating income of $32,000,000 for the year, reflecting lower levels of investment banking and underwriting activity.

Speaker 4

Our securities lending business continues Trade resiliency amid a softer capital markets environment. After a challenging year, we realized a meaningful improvement in our Capital Markets business during the Q4 that has us optimistic for 2023. Underwriting ATM and banking advisory activities within B. RISE Securities all increased sequentially compared to Q3, with notable deals completed during the quarter, including a $75,000,000 equity follow on for AST SpaceMobile, dollars 125,000,000 combined debt and equity raise for Harrow Health, A $119,000,000 follow on offering for Lilium, along with several notable sell side transactions, including the sale of Periconey Juices as well as the sale of a Prama brand to P&G. While many issuers have opted To wait for a more accommodating market environment, we are proud to have been nimble and aggressive in helping clients opportunistically seize windows to raise capital as evidenced by our role as sole book running manager in Bed Bath and Beyond's public equity raise earlier in the month.

Speaker 4

In our B. Riley Asset Management business, 272 Capital has maintained its performance as a top equity long short fund worldwide, while adding assets and growing our institutional base. Assets under management for the business increased substantially year over year to $330,000,000 as of December 31, 2022. Turning to Wealth Management. Revenues for this segment totaled $234,000,000 for the year, down from $382,000,000 in 2021.

Speaker 4

The year over year decrease is primarily related to our strategic realignment of this division following our acquisition of National in the Q1 of 2021 as well as reduced client activity due to the market headwinds through 2022. As part of our realignment in this business, we exited a significant amount of producing registered representatives to give us the balance we sought for the business. And today, more than half of our wealth revenues are on a reoccurring basis. As fixed costs for this division continues to trend down, we first. In our Financial Consulting segment, revenues totaled $99,000,000 for the year with segment income of $16,000,000 for the year related to B.

Speaker 4

Riley Advisory Services and B. Riley Real Estate. During 2022, we achieved record appraisal revenue levels, expanded our Forensic and Legation Services division and realized year over year revenue growth of 0.44p in our Real Estate division, which we established in 2020. This segment continues to steadily perform as a source of stable revenues and profits to our platform, and we continue to explore opportunities to grow this division. To that end, earlier today, we announced our acquisition of corporate of the corporate division of Farber Group, which is a Toronto based restructuring and business advisory firm that our legacy GlassRatner team has collaborated with on cross border engagements for over 15 years.

Speaker 4

This acquisition has 45 professionals and enhances our suite of advisory services. In addition to restructuring and turnaround management, Farber brings specialized expertise in human capital consulting, interim management and executive search services. This added capability supports our role when we are appointed as interim CEO, CFO or CRO for clients navigating a restructuring and in sourcing executive talent for our clients whether for growth or distress situations. This addition also extends our appraisal, valuation, litigation and forensic services to Farber's clients and provide the foundation with which to expand our capabilities in Canada. We look forward to growing our collective foothold across the North American market together.

Speaker 4

In addition, we have established a new Field examination practice to complement services we provide to lenders, private equity firms and company borrowers. Our field exam practice strengthens our in house capabilities and offers incremental value to our clients as a service that can be performed in conjunction with an appraisal for a more This new practice is led by a veteran valuation expert who joined us at the end of last year. We are really excited about the opportunity to grow this vertical within our appraisal division. In our Auction and Liquidation segment, revenues increased $74,000,000 for the year, driven by an increase in retail liquidation assignments with legacy and repeat clients in the U. S.

Speaker 4

During the quarter and 2 large European projects, which added sizable profits in December. Rising interest rates, rising labor rates and past supply chain disruptions are all adding to retail distress and disruptions. As financial pressure continues to mount for retailers, we are starting to see positive momentum for liquidations and are optimistic about the distressed retail market going into 2023. Turning to our Communications segment with recent enhancements, our Communications segment revenues increased over 150 percent to 236,000,000 for the year and generated segment income of $30,000,000 in 2022. In 2021, this segment primarily consists of United Online and Magicjack, which we acquired in 2016 2018, respectively.

Speaker 4

Since then, we have added Marconi Wireless in the Q4 of 2021, completed the acquisition of Lingo in the Q2 of 2022 and acquired Bullseye Telecom in the Q3 of 2022. We acquired all these companies on a cost basis in line with our investment thesis and stated strategy to maximize cash flows to our platform. Importantly, each of these businesses continue to perform ahead of our investment ROI goals to generate cash flow for the firm. Finally, our Consumer segment revenues increased to $171,000,000 with segment income of $96,000,000 for the year. The significant increase was primarily due to the acquisition of Targus in the Q4 of 2022.

Speaker 4

This segment also includes our investment in the Hurley and Justice brands dividend income received from those investments, which totaled $28,000,000 for the year as well as revenues related to the licensing of trademarks for our 6 brands portfolio. We have a world class team of colleagues across B. Riley who have the industry credentials and awards to rival the best in their fields. The dedication and support of teams continues to be paramount to both our and our clients' collective success. We appreciate Integration is a big lift and requires flexibility from all our teams, both new and old, and our colleagues continue to bring complete focus and dedication.

Speaker 4

Our people are the most valuable asset we have, and we are humbled by the high caliber of professionals who represent B. Riley brand in the market every day. With that, we will now open the line for questions and then turn it back over to Brian for closing remarks. Thanks.

Operator

Thank you. At this time, we will conduct a question and answer session. We'll pause here briefly to allow questions to generate. Our first question comes from Sean at Charles Lane Capital. Your line is open.

Operator

You may proceed.

Speaker 5

Hey, guys. Congratulations on the quarter and thanks for finding a better dialing This quarter, that was a pleasant surprise. Quick question on Farber. It seems like you guys have been building For the past couple of years, this one, you're expanding geographically. Can you just kind of discuss your vision there and if that's something you're Planning up pursuing going forward?

Speaker 2

Sure. Hey, Sean, it's Brian. So we're There's 2 ways to kind of look through acquisitions. There's strategic and there's opportunistic. And so, Farber was an opportunistic acquisition of a The people that Ian Ratner who runs that business has known for a long time, he actually happens to be from Canada, but was very familiar with that group and we found And opportunity to acquire them and add on not only capabilities, but also geographical opportunities.

Speaker 2

And so, I don't know that we weren't Looking to be in the Canada, we were looking to go to a certain region. I think it was a great fit for them. They saw the benefits That Glass Ratner got, I mean, when Glass Ratner joined our firm, I think their ability to price went up Meaningfully, the jobs that they did from referrals went up meaningfully and that was part of the sales pitch to Farber. So we're really excited. I think that's a great that it's They're as excited to be here as we're excited to have them.

Speaker 2

It wasn't an acquisition that we ran and chased and had a bake off. It was just a really good fit. We'll take those opportunities as they come.

Speaker 5

Great. Yes. I mean just on That, no, like does it come with any kind of like expediting of entry into Canadian market for your other businesses or is this just kind of separate from all that?

Speaker 2

I don't know. TK, do you have any thoughts on that? I would say that we have been mostly domestic and to the extent If we're able to utilize those relationships, whether it's capital markets or lending or whatever, but I will tell you That's not why we did it. We did it because of the people that are coming. So I wouldn't suggest that we said, boy, this if we cross sell our products in Canada, it would be A multiplier effect, although we absolutely will try.

Speaker 2

Tom, anything you would add?

Speaker 4

Yes. I would just add, it's an opportunity. So the base business, the forensic accounting and shareholder litigation support restructuring, that's right up Ian's alley. But there's a Executive search piece, there's some wealth management, some M and A expertise. So again, not a reason why we acquired it, but Yes.

Speaker 4

It gives us all the opportunity to scale from what they've already put together.

Speaker 5

Got it. That makes sense. And then I know you've done this in the past, but could you just remind us the recurring EBITDA and kind of where that settles for the year?

Speaker 2

Sure. So I'll be super specific on the overall numbers, then I'll get into Louise a bit. But so for 2022, as we define recurring, It was about $325,000,000 of operating EBITDA. And to put that in perspective, we need about $310,000,000 to pay everything, including our dividend And overhead and everything. So to be able to pay for all of our all of that with our recurring EBITDA and have Two other businesses that can generate outsized returns, I feel like that puts us in a really good place.

Speaker 2

When I look out to 2020 3, we had a big benefit from back half receivables in 2022 that we have to replace them. And But we didn't get the benefit of a full year of Targus and we didn't get the benefit of a full year of Lingo and Bullseye, which kind of makes up for those other for that The back half receivable side. So I would say, when I look at my kind of run rate estimate of recurring and my upside estimate, My run rate is somewhere in the low 300s and my upside is in the high 300s. So I think we're really well and all those businesses, none of those This require a lot of CapEx. They are cash flow generative.

Speaker 2

So I really like where we're sitting. And if capital markets comes back or if liquidation I mean, you've seen that you've been a shareholder for a while. You can see how if those those are both hitting at the same time, how powerful it can be.

Speaker 5

Yes, definitely. Okay, great. And that's all I got. But thanks for the additional transparency inter quarter. That was very helpful.

Operator

Thank you. Our next question comes from Paul at Punch and Associates. Paul, your line is open.

Speaker 6

Hi, good afternoon.

Speaker 3

Hey, Paul.

Speaker 6

Hey, a couple of questions for you. First, On the loan book, I appreciate you guys tackling things head on here and given the attention it's Attracted. Could you spend a little more time just talking about the underwriting process with the loan portfolio specifically And how you think about rate as well as how the loan book can fit with the rest of the business strategically?

Speaker 2

Sure. So in general, for us to provide a loan, we have to think of it as Enhancing a relationship, whether it's a corporate relationship where we can create incremental opportunities to create fees Or we own part of the equity or whatever. And so that those opportunities cut us pretty fast. We have 5 people. I think you may have not maybe you haven't, but we have 5 people in our principal investment group That do a deeper underwriting.

Speaker 2

We have we often will bring in people from GlassRatner for on the back half receivables Piece of our business, we get that is run by a guy who has receivable expertise for years years. On the restructuring side, we've got Perry Mandolino runs our restructuring business, will dive in and is diving into core. And we have a risk management team. And so there's an investment group that Works through all of those opportunities and tries to figure out the right rate and size. And typically, when we're doing something, we are a bridge.

Speaker 2

So we're going to be somebody that you're going to want to replace, if you can. So for example, a great example of that would We hope that company make an acquisition. That stock after that acquisition went from 11 to 16 because I think people saw the merit of it. When they needed $120,000,000 to do that, we provided them a combination of equity, of Debt that became baby bonds and senior secured. And so that package, which I think we're uniquely positioned to do, not only because Wealth Management Group, but also because we're willing to take a merchant banking approach, created that opportunity for them.

Speaker 2

We own a chunk of the equity, which we did really well on. We own right now $70,000,000 of senior secured Paper, which sits on top of a $600,000,000 market cap that is at a high rate and they I think they will probably replace that by the end of March. And we own $10,000,000 of baby bonds. And so for all of that, the fee opportunity there was great and the client was super happy. And if we can put all of those pieces together, That's I think that differentiates us in a meaningful way.

Speaker 2

So that's a general theme. If we're going to have Our troubles, I think it's going to be something that really catches us, something super dramatic, and I would call core pretty dramatic. I mean the commodity CoreServes went from $45,000 to $16,000 pretty quickly. I mean, we did we wouldn't put on a loan tied to the commodity and hedged it a bit. So I think The face number you're seeing on the loan was offset a little.

Speaker 2

But yes, that one, we're going to get I don't think you can do as Put as much money to work as we do and not get caught once in a while, but I think we're going to work out of that situation a lot better than I thought before. So anything how else can I address that, Paul?

Speaker 6

No, that's perfect. I appreciate you Riffing on that a bit and like I said, I hope you guys are tackling it head on in the prepared remarks. It's good. On Wealth Management, can you just spend a little more time talking about what I guess the amount of time you think it will take to get that business to the level of profitability that you were thinking initially?

Speaker 2

So I think if I were to grade myself over the last 5 years on being right around what businesses and where they were positioned, I I'd give myself a pretty good grade. This one, I have not done great. I think I've felt like we were going to get more profitable quicker. We made a decision And that business to shrink it, really dedicate ourselves, our service, our capital To what we thought were the highest and most productive wealth managers. And I think we're super close.

Speaker 2

I think I said that to you last year. Obviously, They do rely on some syndicates. Syndicate was off. But I think if you look at this year, I think we'll be profitable. When I look at my recurring piece of that business, because I've always bucketed them on recurring, I probably shouldn't, because it's not big enough To think too much about, but I've got something that's all the way from negative 2 to positive 10.

Speaker 2

But I think we're there. I think we are at a spot where We are very close to profitable without any incremental syndicate business. So and I think the quality and partnership we have with the Wealth Management Group that's with us is a lot better, smaller, but a lot better. TK, Tom, anything you want to add there?

Speaker 4

No, I guess I would just say, look, it's been a tremendous amount of work. You've got 2 large groups of people that do The same thing, completely different. So just managing and working through all the operational Headaches that come with combining companies is substantively behind us. That was a big part of last year and the year before. So It just it takes time.

Speaker 4

As Brian mentioned, really excited where we sit because that's basically behind us. And rather than looking in the rearview mirror, now we can look forward And really try to figure out how to grow and scale and build the business as opposed to merging them.

Speaker 3

Okay, perfect.

Speaker 6

On Targus, could you just spend a little bit time on how that's getting integrated and How they're managing through I believe most of their companies or clients are corporate, so just kind of how they're managing through this choppy labor environment?

Speaker 2

Yes. So the beauty of Targus and I just bear with me if I give you a little background because I think it's relevant. I had worked with Michael Williams who was the CEO of DDI. I don't know if you remember that public company, printed circuit board and I'd actually become As an activist, I became the Chairman. And Michael was literally, I mean, I think he was just an amazing CEO.

Speaker 2

We ended up selling that business for a big number. I asked him to join the Board because I thought he was incredibly smart. I thought he could be incredibly helpful. So he joined the Board and during the probably 7 years he was on the Board, he did he sold 1 public company And then he was at Targus and he turned Targus from what was a overleveraged bankrupt company to a business that had recapped dividends out to the shareholders And had no debt and was generating 50, mid-fifty 1,000,000 in EBITDA. And so I had said to him as When you want often your best investments are with people you've invested with before.

Speaker 2

I said, if you ever want to roll your equity in that business, like I'd love we'd love to hear about that because it's kind of fits It's a low CapEx, high cash flow business and with a great operator. So that happened. That business last year did mid-50s EBITDA, but had freight costs that were Punishable as much as like $15,000,000 $20,000,000 So I think when we underwrote that business, we assume that the business would be off 20%, 25%, but the freight savings would offset that. And so we underwrote it to in between $50,000,000 $60,000,000 If I were a betting man right now, I'd say it'd be closer to the $50,000,000 and the $60,000,000 We definitely there's the channels are full, but we're in it for not a month or 2 months and we think we have a great operator. We're going to Look at other opportunities to have add on products, we think it's a great platform.

Speaker 2

And the integration is easy. I mean, we've got a guy that we I have a ton of respect for that's been running it himself, reporting themselves as a company. So that part of the integration, we don't That was an opportunistic purchase that we will only try and enhance in any way we can, but we'll rely on the current management team.

Speaker 6

Okay, great. And just pulling on that thread a little bit. Where are you looking to allocate capital either strategically? I guess It's harder to predict the opportunistic ones, but where do you want to put your incremental dollars in 2023?

Speaker 2

So I mean not the The risk being controversial, we think that bridge loans to public companies where we can utilize whether it's Our relationships on the institutional side, our ability to provide different types of loans, whether it's asset backed or otherwise, Our one of the smartest things we did is we sold a lot of Baby bonds yields 5.5% 6% and our job is obviously to pay those back, which we will. But in the meantime, we've got a 4 year runway Of a very low cost of capital. So if we can when I look at it right now, if we can utilize our balance sheet to make some really Interesting investments get mid teens type of returns and also enhance that with maybe A bigger mandate, whether it's sell side or whatever, those opportunities are pretty prime to let it's tight out there if you're a public company Looking for money quickly and we think we can be helpful.

Speaker 3

Okay,

Speaker 6

great. That's it for me. Thanks for your time and thanks for the work this quarter.

Speaker 7

Thank you. Thanks, Paul.

Operator

Thank you. Our next question comes from Thompson at Malden Economics. Your line is open.

Speaker 8

Hey, Brian. Thanks for the time. A lot of my questions have been Answered. I saw the net debt for the quarter is net of cash investments went negative. Any target you guys are looking for there?

Speaker 8

Where do you want to be?

Speaker 2

Well, I mean, we want to add on the net cash, but what are we accepting of? Look, if I were to sit here and say We paid out $580,000,000 to our shareholders. We've also I don't know what we bought back in stock and it was dividends. We also bought back another And we've had some pretty tough marks. I mean, this was a tough year for everybody in the small cap world And we are less than 1x levered.

Speaker 2

That's a pretty good spot. Like I feel really good about that. And so I don't know. I mean, I don't I think we could be 2.5x, 3x levered. I don't think we're going to get there because I think our business is going to earn itself out of that and I think our portfolio is at a Kind of at a discount, but I think a business like ours, it's got a meaningful piece of recurring that doesn't have a lot of CapEx and working capital needs associated with it could lever up some more, but we just have to be cognizant that we've got some volatile businesses.

Speaker 2

If you look at the B. Riley Securities business in the last 3 years, you had operating EBITDA of 138,264 in 27. I mean that's a that is what it is. I'm really pleased we made money. A lot of people grew during 2021 and lifted their overhead and we were pretty careful.

Speaker 2

But that's a tough thing to manage and we always manage for the downside. And when I do those numbers and when I do that one times leverage, that's managing for the side in the brokerage business and that business can turn meaningfully. And if it does, I think we're really well positioned. I mean, the markets opened up in November, Sub $1,000,000,000 non healthcare deals. I think I don't know how many there were, but we did 5 and the next person did 2 and all of those are up and I think there were opportunistic deals.

Speaker 2

So I like our balance sheet. I like I don't sweat our net debt. We could have more, but we're going to be really we're going to be cautious. And again, Tom, so just realize that as our debt that comes to over $1,200,000,000 doesn't come due to the end of 'twenty six and going into 'twenty eight. So we've got a long runway to make a lot of money on those spreads.

Speaker 2

So we feel like we're in a pretty good position.

Speaker 8

Great. Yes, super helpful. And then looking at the loans receivable for the end of the year, dollars 700,000,000 can you just break down a little bit You or Phil breakdown a little bit kind of what's in there? We've got Babcock and we've got Babcock. Can you kind of get through those and then any other big ones?

Speaker 2

So Phil, I think you break it up between Badcock and I think there's some notable ones that are out there. Some of our loans are related to we will provide margin services for Customers with large share amounts, it's kind of all over the place. So and obviously, I wouldn't mention those types of those people by name, but We have loans all over and the average loan is $32,000,000 Is it $32,000,000 is that what we said so?

Speaker 3

Yes. Excluding Bag Talk, average fair value per name is roughly 32,000,000

Speaker 2

Across 13 names and the duration of those should be less than a year. They should be 3 to 6 months. Our goal is to provide a bridge loan And help a client out and let them get to a more a lender that's going to be longer term, Doesn't have the same kind of capital returns that we would require, but we're helping them get a deal done.

Speaker 8

Okay, great. And then in that total cash investments, the private equity, about $394,000,000 any color there? What's in there?

Speaker 2

I don't know, Phil, you want to walk through that a little bit?

Speaker 6

Sorry.

Speaker 3

Yes. Let me just let me pull through a couple of things here.

Speaker 2

Well, I'll give you a few examples. We have a VC portfolio that we brought on a VC team 3 years ago. We utilized that group To find proprietary investments for our Wealth Management Group, average investment of that is probably $7,000,000 The average banking fee associated with those has been Probably 10% of invested capital and we utilize that to enhance our banking fees. We have opportunistically purchased a few energy assets that we saw and we were uniquely positioned for that have done okay and so that's part of that. We have our is our brands in that private equity side, Phil?

Speaker 3

Not our 6 branches. Okay. Jeff Hurley and Jeff just as you know.

Speaker 8

Got it. Okay. Yes, that's helpful. And Yes. I think that's it for me.

Speaker 8

So I appreciate the time and the questions.

Speaker 2

All right. Thank you.

Operator

Thank you. Our next question comes from Keith at Cruiser Capital Advisors. Keith, your line is open.

Speaker 8

Thank you.

Speaker 6

Hey, Brian.

Speaker 8

Could you elaborate a little bit on the operating earnings that you've guided to the non episodic Operating earnings. Does that I think you said $324,000,000 Does that include a full year of Targus Was Targus additive to that?

Speaker 2

Targus is additive. Targus contributed about, this is rush $11,000,000 for the year. We acquired that in mid Over maybe 12. So if we were

Speaker 8

to run rate that for next year, it would be?

Speaker 2

What I would say is, I don't think we're going to find so We've freed up a lot at $400,000,000 over the course of 14 months on Babcock. And as I mentioned in the call, we still have 157 We think that return will be IRRs will be 25% to 30%. That money is being put back to work in other opportunities. I don't think it's going to be put back to work at the kind of those kind of IRRs. So the contribution from back comes in a bit to offset maybe some of that targets.

Speaker 2

But the Lingo and the Bullseye kind of a small telecom business that we have, they only contributed in 2022 $9,000,000 $10,000,000 Ingo and Bullseye, which is an acquisition we made together, and I have them contributing closer to $25,000,000 in In 'twenty three. So they didn't contribute for the whole year either. So there's definitely the run rate is higher than the 2022 average. I would just say Babcock would be the most meaningful detractor.

Speaker 8

Okay. So the okay. And then on the Babcock and Wilcox receivables themselves, one of the

Speaker 2

This is Babcock Furniture.

Speaker 8

I understand. But I'm talking about the receivables of Babcock and Wilcox, sorry. Just clarifying. One of the elements of the short report was questioning the caliber or quality of those receivables for the loan. And What has been the overall, I guess, default rate?

Speaker 8

How would you categorize quality of the month?

Speaker 2

So I think we're mixing 2 things. I think the criticism was on our backstopping of a of LCs for Babcock and Wilcox. So we backstopped for a relatively low rate, About $100,000,000 of LCs. Babcock, as we're a big shareholder and we're a partner of theirs. We didn't put up any of the money.

Speaker 2

We just backstopped it. So there was a question of why we did that for a low rate. Babcock and Wilcox has not walked away from an LC in 20 plus years. Their business was Took off as COVID started to clear up and they just needed help in financing LCs. I view that Non controversial and zero risk.

Speaker 2

Badcock is the receivable package that we bought for $400,000,000 where The underwriting of that, so you understand is that we bought 500 we bought those at 0.75 $1 on the dollar. So we bought roughly $500,000 and I'm doing this off memory, but somewhere around $530,000,000 of receivables. Obviously, there's an interest rate associated with the receivables, there's an insurance associated with the receivables. And so Charge offs are a meaningful portion. It is a customer that is a LIFICO score customer, but that's how it's priced.

Speaker 2

And so the net net of that, which I think is the most important part because you can the write offs are somewhat irrelevant is that We invested $400,000,000 We have gotten back $396,000,000 We have $156,000,000 of receivables That are in good standing and we've written off a rough $95,000,000 of receivables, which we think will recover 5% to 10%. So if you mix all of that up, You get a total return of IRRs of 25% to 30% of that $156,000,000 that we still have will probably recover 65 Percent and we'll recover 5% to 10% a year of the charge offs. So it's been a great investment. I mean, we got We get our money back every month. We get every our initial receivables, every month we get 8% to 9% back.

Speaker 2

So when we started with $520,000,000 that first month we got So it's been a great place during a very difficult market to have an unlevered portfolio that's generating a bunch of cash for us. And it's like it sounds like we put money in the piggy banks in 2021 at a decent time. We had sold some equities to do that And it's coming back that $400,000,000 we put in the piggy banks coming back close to $530,000,000

Speaker 3

Got it.

Speaker 2

That's the nature of the piece. That's the nature of the receivable. So I don't really that's that COGS business.

Speaker 8

Okay. Thanks guys. I appreciate the clarification on the Babcock.

Speaker 2

Sure. No problem. Operator, any other questions?

Operator

Our next question comes from Steve with Schoenfeld Strategic Advisors. Steve, your line is open.

Speaker 7

Hi, guys. Congrats on the adjusted operating EBITDA in a tough environment. Thanks, Dan. Maybe just staying on the high level here. So in 2020 2021, well, I guess going back, You guys had never had over $100,000,000 of net cash from operations.

Speaker 7

And with interest expense now over 175 $1,000,000 annual rate and negative tangible book value. When you think of the dividend, what do you think of the funding model for this dividend? What's going to be the source to fund this? Because Obviously, you have the cash available to pay it down, but I guess just the sustainable funding of the dividend.

Speaker 2

Yes. So I feel like you're so As I mentioned in 2022, our recurring EBITDA funded our dividend, funded our taxes and funded our So that number which is $310,000,000 was funded by $324,000,000 of what we define as recurring EBITDA. So that's how we're funding the dividend and then you have 2 other businesses. Yes, we didn't do $100,000,000 in cash flow. Well, We've grown our business from a brokerage business that started with 10 people that did over $200,000,000 in EBITDA.

Speaker 2

So That business is going to be up and down, but we haven't lost money in that business for more than a month like in 4 years. So we'll make money in that business and that will be incremental Cash flow.

Speaker 7

Got it. Okay. And thinking of that core capital market service and fee, so it's been the $65,000,000 to $70,000,000 run rate On that line, the Q3 had $42,000,000 of incentive fees. Can you just remind me if that was cash or non cash, what drove those? And if that number is in that adjusted EBITDA?

Speaker 7

And if that's in for like

Speaker 2

Are we talking about the PR issues there?

Speaker 7

There was $42,000,000 of incentive fees in the Q3 Q I saw and that is what listed that line from the $65,000,000 $70,000,000 run rate And I just want to know what was that incentive fee? Was it cash, non cash and what we can expect and if that was in the $310,000,000 EBITDA you called out?

Speaker 2

Well, it wasn't in the $310,000,000 EBITDA because we don't have any incentive fees in that. Phil, can you respond to that?

Speaker 3

Yes, I think we're going to you know what, Steve, why don't we follow-up with you? I'm not sure exactly the incentive fee you're referring to there.

Operator

Okay. All right.

Speaker 7

Great. Yes, it's just in the Q3 queue. But if it's better to go through that in more detail later, I'm

Speaker 3

happy to do that. Great. Okay. Thanks, guys. Thank you.

Operator

Thank you. This concludes the question and answer session. I'd now like to turn the call back to Mr. Reilly for his closing remarks.

Speaker 2

Okay. Well, thank you. Thank you, everyone. I saw 480 people on this call, which I think is a record. I think a lot of people work at the firm.

Speaker 2

They've entrusted their We take that with a ton of responsibility. We know that there's been a lot of noise, a lot of inaccuracies floating out there. I hope fully we addressed it. We think we're Incredibly well positioned as we move forward in 2023, as we've kind of laid out on a recurring and episodic side. And we think we have a great runway and we're very appreciative to everybody that helps us get there and to our shareholders.

Speaker 2

We know we're somewhat difficult story and we have some ups and downs, but overall I think we've performed and we're dedicated to continue to perform. Thank you for giving us that opportunity. Thank you, everyone.

Operator

Thank you. Before we conclude today's call, I will provide B. Riley Financial's Safe Harbor statement, which includes important cautions regarding forward looking statements made during this call. Statements made during this call that are not descriptions of historical facts are forward looking statements that are not on management's current expectations and assumptions and are subject to risks and uncertainties. If such risks or uncertainties materialize or such assumptions prove incorrect, our business, operating results, financial condition and stock price could be materially negatively affected.

Operator

You should not place undue reliance on such forward looking statements, which are based on the information currently available to us and speak only as of today's date. Such forward looking statements include, but are not limited to, statements regarding our excitement and the expected growth of our business segments. Factors that could cause such actual results to differ materially from those contemplated or implied by such forward looking statements include, without limiting, the risks described from time to time in B. Riley Financial Incorporated's periodic filings with the SEC, including without limitation, the risks described in B. Riley Financial Incorporated's annual report on Form 10 ks for the year ended December 31, 2021, and in our quarterly reports on Form 10 Q for the quarters ended March 31, June 30, September 30, 2022, under the captions Risk Factors and Management's Discussion and Analytics of Financial Condition and result of operations as applicable.

Operator

Additional information will be set forth in our annual report on Form 10 ks for the year ended December 31, 2022. These factors should be considered carefully and participants are cautioned not to place undue reliance on such forward looking statements. All information is current as of today's call and B. Riley Financial undertakes no duty to update this information. Thank you for joining us today for B.

Operator

Riley Financial's 4th quarter and full year 2022 earnings conference call. You may now disconnect.

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