Logan Ridge Finance Q4 2023 Earnings Call Transcript

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March 28, 2024

There are 6 speakers on the call.

Operator

Thank you. Good morning and welcome to Logan Ridge Finance Corporation's 4th Quarter and Full Year Ended December 31, 2023 Earnings Conference Call. An earnings press release was distributed yesterday after the close of the market. A copy of the release along with the supplemental earnings presentation is available on the company's website at www.lodenridgefinance.com in the Investor Relations session and should be reviewed in conjunction with the company's Form 10 and Q with the SEC. As a reminder, this conference call is being recorded for replay purposes.

Operator

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. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Logan Ridge Finance Corporation Braden Zothoren, Chief Accounting Officer and Patrick Schafer, Chief Investment Officer. With that, I would like to turn the call over to Ted Welfort, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Speaker 1

Thank you, and good morning. Welcome to the Q4 and full year 2023 earnings call. As I mentioned, I'm joined today by Brandon Satoran and our Chief Investment Officer, Patrick Schaeffer. Following my opening remarks, Patrick will provide additional details on our investment activity today and Brandon will walk through the financials. I'd like to start by highlighting that 20 23 was a record year for Logan Ridge as we're able to reintroduce the quarterly dividend as well as record the highest level of annual investment income, net investment income since we began managing the company in July of 2021.

Speaker 1

This test is largely a continuation of the performance trajectory Logan has been on since we reported our Q1 of positive net investment income for the quarter ended September 30, 2022. As the company's exposure to the legacy equity portfolio continued to decline and its exposure to credits originated by the BC Partners credit platform has increased, the benefit to shareholders has been clear and has been reflected through Logos' strong financial results. With that in mind, I'll provide our prepared comments brief today and limit it to a few key highlights with Patrick and Vinnenin providing more detail on that shortly. 1st and foremost, as a result of the company's financial performance, the company's Board of Directors approved a 7% increase to the company's quarterly distribution, which brings it to $0.32 per share for the Q1 of 2024. This is the 4th consecutive quarterly distribution increase and represents a 77.8% increase from the $0.18 per share distribution we declared when we turned the quarterly EBITDA on just 1 year ago.

Speaker 1

Our net investment income for the year ended December 31, 2023 was $3,800,000 or $1.43 per share, which represents an increase of $5,000,000 compared to net investment loss of $1,200,000 or $0.43 per share for the year ended December 31, 2022. This result underscored the enhanced earnings power of our portfolio and the success we've had monetizing the non yielding legacy portfolio and redeploying that capital into income generating names originated by the BC Partners Credit platform. The company ended the year with undistributed spillover income of $2,600,000 or $0.97 per share, which should fortify the company's quarterly distribution. Finally, the company's Board of Directors approved a new share repurchase program with similar terms as the current share repurchase program that was published in March of 2023. Since inception of the program through year end, the company has repurchased approximately 37,000 shares, which is accretive to NAV by approximately $0.18 per share since the introduction of the program.

Speaker 1

After a strong 2023, we entered 2024 cautiously optimistic. Given the increase in activity and more broadly the increase in private credit deal activity as a whole, our pipeline remains robust and we continue to see attractive investment opportunities in the market. As throughout 2023, the BC Partners credit platform remains well equipped to take advantage of the current market conditions and we continue to prudently deploy capital into new borrowers. With that, I will turn the call over to Patrick Schaeffer, our Chief Investment Officer.

Speaker 2

Thanks Ted and hello everyone. As of December 31, 2023, the fair value of Logan's portfolio was approximately 100 and $89,700,000 with exposure to 60 portfolio companies. This compares to 50 $187,100,000 in the prior quarter and 59 portfolio companies with a fair value of $203,600,000 in the same period a year ago. During the quarter ended December 31, 2023, we continued to deploy capital despite the lower deal activity as a holder during the quarter. Specifically, the company made approximately $16,800,000 in new investments and had approximately $9,200,000 in repayments and sales, resulting in net deployment of approximately $5,600,000 for the quarter.

Speaker 2

While we continue to be prudent and disciplined underwriters, we believe 20222023 will prove to be particularly attractive messages. Now on to our portfolio composition. As Ted previously noted, 58% of the company's investment portfolio at fair value was invested in assets originated by the BC Partners Credit Platform. As of September 31, 2023, our net investment portfolio represented 82% of the total portfolio at fair value and a weighted average annualized yield of approximately 11.1% excluding income from non accruals and collateralized loan obligations. This compares to a debt investment portfolio, which represented 82 0.0 percent of our portfolio at fair value and a weighted average annualized yield of approximately 11.0 percent excluding income from non accrual collateralized The weighted average annualized yield excluding income from non accruals and Calara's loan obligations increased by 10 basis points and 70 basis points compared to the prior quarter and prior year respectively.

Speaker 2

As of December 31, 2023, 86.4 percent of our portfolio of our debt investment portfolio at fair value was bearing interest at a floating rate compared to 82.3% as of September 30, 2023, and 82.8% as of December 31, 2022. As of December 31, 2023, 1st lien debt represented 65.4% of our total portfolio on both a cost and fair value basis. This compares to 1st lien debt representing 63.6% 64.8 percent of our total portfolio on a cost and fair value basis respectively as of September 30, 2023, 64.9% and 67.3 percent of our total portfolio on a cost and fair value basis respectively as of December 31, 2022. The non yielding equity portfolio represented 15.5% and 17.0 percent of the portfolio on a cost and fair value basis, respectively, on a cost and fair value basis respectively as of December 31, 2023. This compares to 17.6% 16.6% of the portfolio on a cost and fair value basis as of September 30, 2023.

Speaker 2

Moving on to non accrual status, during the quarter there was one new portfolio company added to non accrual status. Accordingly, as of December 31, 2023, the company has 3 portfolio companies on nonaccrual status with an aggregate amortized cost and fair value of $17,200,000 $12,800,000 respectively or 8.7% and 6.8 percent of the investment portfolio at cost and fair value respectively. This compares to 2 portfolio companies on non accrual status as of prior quarter with a cost and fair value of 16 point $8,000,000 $10,600,000 respectively or 8.3% and 5.7% of the investment portfolios, cost and fair value respectively. I'll now turn the call over to Brandon.

Speaker 1

Thanks, Patrick.

Speaker 3

Turning now to our financial results for the quarter year ended December 31, 2023. For the year ended December 31, 2023, Logan generated $20,200,000 of investment income, which was an increase of $5,300,000 as compared to 14,900,000 dollars for the prior year. The increase was primarily driven by redeploying proceeds received from exiting the non yielding equity portfolio into interest earning assets originated by the BC Partners Credit platform as well as base rate increases. Total operating expenses for 2023 increased by approximately $200,000 to $16,300,000 as compared to 16,100,000 dollars for the prior year, primarily driven by higher interest and financing expenses, partially offset by a decrease in base management fees as well as general and administrative expenses. Our net investment income for the year was $3,800,000 or 1 point $4.3 per share, an increase of $5,000,000 from the previous year's net investment loss of $1,200,000 or negative $0.43 per share.

Speaker 3

The company ended the year with undistributed spillover earnings of 2.6 $1,000,000 or $0.97 per share. This substantial year over year increase in net investment income highlights the significant strides the company has made since Mt. Logan Management took over as the investment advisor. For the quarter, the company reported net investment income of $600,000 or $0.22 per share compared to $1,200,000 or $0.43 per share for the prior quarter. The decrease was largely due to a reversal of $600,000 or $0.22 per share of previously accrued interest income as a result of placing a portfolio company on non accrual status in the 4th quarter.

Speaker 3

Our net asset value as December 31, 2023 was $89,200,000 representing a $4,000,000 decrease or 4.3% as compared to the prior quarter net asset value of $93,200,000 On a per share basis, net asset value was 33.34 dollars per share as of December 31, 2023, representing a $1.44 per share decrease or 4.1% as compared to $34.78 per share at the end of the Q3 of 2023. I'd like to highlight that the difference between 4.3% decrease in net asset value as compared to the 4.1% decrease in net asset value per share is the accretive effect of our share buyback program. The decrease in net asset value quarter over quarter was driven by net realized and unrealized losses on the portfolio during the quarter. Compared to company's prior year net asset value of $9,000,000 net asset value decreased by $5,800,000 or 6.1 percent. On a per share basis, net asset value decreased by $1.70 per share or 4.9 percent from $35.04 at December 31, 2022.

Speaker 3

Again, the difference between the 6 0.1% decrease and 4.9% is the accretive effect Logan shareholders received from the buyback program. The decrease in net asset value relative to the prior year was again driven by net realized and unrealized losses on the portfolio, but partially offset by the company out earning its dividend and the accretive effect on a per share basis of our share repurchase program. Finally, as of quarter end, the company had $3,900,000 in cash and cash equivalents as well as 39 point $5,000,000 of unused borrowing capacity available for deployment in investments originated by the BC Partners Credit platform. With that, I'll now turn the call back over to Ted.

Speaker 1

Thank you, Brandon. We are very proud of the progress that we made in 2023 and look forward to continue to execute our strategy in 2024. To our shareholders, thank you for your continued support. This concludes our prepared remarks And I'll now turn over the call to the operator for any questions.

Operator

Thank you. The floor is now open for your questions. Your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.

Speaker 4

Hey, guys. Hey, Ted, on your comments on the new repurchases, 37,000 shares, is that 1st quarter to date?

Speaker 3

Chris, no, this is Brandon. That's not that's through December 31, 2023. However, we've been active in the market and continued repurchasing shares.

Speaker 5

Okay.

Speaker 4

And then I guess on the question of the dividend going forward, is should we look for the leverage ratio to be increased in the coming quarters or what's the priority increasing the dividend and increasing leverage or keeping leverage low and putting the brakes? Yes.

Speaker 2

Good question, Chris. I think we would ideally anticipate taking leverage up over the course of the year As we've kind of mentioned historically, sort of the leverage level that we are comfortable operating in, it is a little bit driven by our equity portfolio and how we want to be somewhat conservatively levered. But I think our expectation would be that we'd be in a position to increase leverage over the course of this year, and that obviously would increase our net investment income and ideally our distribution rates.

Speaker 4

And does that assume that the investment environment improves, maybe you could take up leverage because last couple of quarters you guys would be cautious?

Speaker 2

Yes, I mean, I think that yes, I think that's appropriate assumption, which is I don't think we have an intention of just increasing leverage and adding assets for the sake of adding assets. Having said that, over the course of the year so far, it's been a fairly active M and A market and in general private credit market. So we're seeing and have seen over the course of this year fairly attractive opportunities. So I think at least where it stands now, we feel like we'll be able to source, originate and underwrite attractive opportunities to be able to deploy the capital sort of as I mentioned?

Speaker 1

Yes. So like deal activity from the second half of last year has definitely picked up. And again, we continue to think it's gotten a little more competitive recently, but we've got actually a decent pipeline of new investments that we think are really interesting.

Speaker 4

Okay. That's it. Thank you, guys.

Speaker 1

Thanks, Chris.

Operator

Our next question comes from the line of Stephen Martin, Slater Capital. Your line is open.

Speaker 4

Hi, guys.

Speaker 5

Given that you're reporting so late in the Q1 ends, I guess, today technically, would you care to comment a little more specifically about what you've seen in the Q1 numerically as opposed to conceptually?

Speaker 1

I don't think we really want to provide guidance just because the quarter is still ending. But I would say, yes, I mean, I would just reiterate our previous comments, which again, we are continuing to play capital and we are finding some interesting things to do.

Speaker 5

Can you comment on sort of the rates on new investments today or over the last couple of months versus, let's say, the Q4?

Speaker 1

Yes. I mean, I think spreads generically have come in probably by about 50 basis points on new private credit. And the other thing you've seen is, you've obviously had a real comeback. It doesn't really affect Logan Ridge, but it's more market impact. Obviously, the syndicate loan markets have reopened for really the first time in 12 to 18 months.

Speaker 1

I mean, issuance in loans is up 400% year over year this year. So, the markets have definitely reopened and that's caused a little bit of pressure on spreads. But again, so far, it's about 5.3% and people feel a little bit better about higher longer. The yields on the 1st lien bank that continue to be in the double digits and which is coming down and covenants are still very robust. So, it is a significant environment for us despite the fact that spreads to tighten a little bit.

Speaker 1

Okay.

Speaker 5

Along those lines, do you comment on what marks may look like? Would you expect the spreads tightening to have a benefit to portfolio marks?

Speaker 1

Yes, there's a bit of it. So when we overlay the benchmarks versus our portfolio, which is how portfolio gets valued, obviously, we've seen a continuing tightening in credit and there's a bit of a lag. So absent company specific situations, by and large spreads have tightened. So that should have a little bit of tailwinds for broadly speaking valuations.

Speaker 5

Okay. And there hasn't been much change and I know business activity was slow, but there hasn't been much change in the 3rd and 4th in Q4 from the Q3 on sort of residual equity investments, couple of markups and markdowns. What are the prospects right now that the market is opened up a little of converting some of those?

Speaker 1

Yes, I mean repayments basically over the last 12 to 18 months have been at all time lows. So, like we've ever seen this level of low repayment activity since 2,008. That being said, obviously, it's picked up a lot this year. And so, yes, we're working really hard on a number of smaller and larger positions to gather some of this legacy stuff and feel like it's going to pick up a little bit versus a pretty low base in the 3rd Q4.

Speaker 5

All right. One last one. On extends and amends, I noticed there were a couple that sort of have matured. Are you still getting some fees or benefits from extending and amending some of the older credits? Yes.

Speaker 1

So amending expense was a big thing last year, because no one can refinance. And so even though we're way, way, way covered, just so we've got an incremental we usually when we do an amend and extend, we're getting incremental spread as well as some fees. I would say the only things we're many in extent now are stuff we really, really want to stay in the credit because there is a refinancing option today and there wasn't 3, 6, 9 months ago. So, the stock up we're extending today is that we really want to stay in. And typically when we're extending, the spreads are wider than where you'd be able to do a new deal.

Speaker 1

So it's pretty compelling just because a lot of times the company or the management teams come through with their lending group and they just don't want to go through the process of having people redo diligence and everything else. So, just getting same with your existing lenders is oftentimes easier and we get paid for

Speaker 2

Just to add on to what Ted said though, as he mentioned, again, the spreads have come in a little bit. So there are often situations where just keeping the spread the same is effectively extra economics relative to what they could do in new deal in the market. So as you said, we're typically getting extra pricing or fees or what have you, but sometimes that's in the form of actually keeping our spread the same as opposed to being refinanced out for with new capital at 25 or 50 basis points cheaper than where our facility is to date.

Speaker 5

Got you. All right. Thank you very much.

Operator

There are no further questions at this time. Mr. Ted Galthorpe, I turn the call back over to you.

Speaker 1

Well, thank you very much, and thanks everyone for joining us today, and we look forward to speaking to you again in May when we announce our Q1 2024 results. Thank you and have a good weekend.

Operator

This concludes today's conference call. You may now disconnect.

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Key Takeaways

  • Record 2023 performance: Net investment income rose to $3.8 million ($1.43/share) from a $1.2 million loss in 2022, enabling the reintroduction and subsequent increases of dividends.
  • Dividend increased by 7% to $0.32 per share for Q1 2024, marking the fourth consecutive quarterly hike and a 77.8% jump vs. Q1 2023.
  • Portfolio now 58% invested in BC Partners-originated credits with an 11.1% weighted average yield and 86.4% floating-rate exposure, reflecting a shift away from non-yielding legacy equity.
  • New share repurchase program approved, with ~37,000 shares repurchased through year-end, adding $0.18 per share of NAV accretion.
  • NAV stood at $89.2 million ($33.34/share) as of December 31 2023, down 4.3% QoQ due to portfolio markdowns but cushioned by buybacks and $2.6 million in undistributed income.
A.I. generated. May contain errors.
Earnings Conference Call
Logan Ridge Finance Q4 2023
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