Logan Ridge Finance Q2 2024 Earnings Call Transcript

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August 9, 2024

Key Takeaways

  • Strategic portfolio rotation: legacy equity exposure decreased to 15.2% of cost basis as BC Partners credit-originated assets rose to 59.4% of fair value, driving a $0.4M increase in investment income to $5.4M and no new non-accruals.
  • Declared a third-quarter dividend of $0.33 per share, nearly doubling the $0.18 per share paid in Q1 2023, underscoring the company’s stronger balance sheet and earnings outlook.
  • As of June 30, the portfolio encompassed 61 companies with a fair value of $195.6M, reflecting $1.5M of deployments, $5.6M of repayments and sales, and net repayments of $4.1M for the quarter.
  • Debt investments comprised 80% of the portfolio with an 11.4% weighted average annualized yield, 88% floating-rate exposure and 65.8% in first-lien positions.
  • Q2 operating results: operating expenses rose $0.6M to $4.6M (including $0.3M of non-recurring fees), net investment income was $0.8M ($0.28 per share), and NAV declined to $33.13 per share from $33.71.
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Earnings Conference Call
Logan Ridge Finance Q2 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Thank you. Good morning, and welcome to Logan Ridge Finance Corporation's 2nd Quarter Ended June 30, 2024 Earnings Conference Call. An earnings press release was distributed yesterday, August 8. 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.loganridgefinance.com in the Investor 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.

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 today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Logan Ridge Finance Corporation Brandon Satoran, Chief Financial Officer and Patrick Schaeffer, 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.

Speaker 1

Good morning. Welcome to our Q2 2024 earnings call. As mentioned, I am joined today by our Chief Financial Officer, Brandon Suttelin and our Chief Investment Officer, Patrick Schaeffer. Following my opening remarks, Patrick will provide additional details on our investment activity to date and Brandon will walk through our financials. Before Patrick and Brandon provide more details on our portfolio and financials, I would like to discuss a few key highlights from the quarter.

Speaker 1

During the Q2, we continue to make progress towards our strategy of reducing the company's exposure to the legacy equity portfolio and increase the exposure to credits originated by the BC Partners Credit platform. The benefits of such strategy resulted in a steady increase in our total investment income quarter over quarter. 2nd quarter total investment income increased by $400,000 to $5,400,000 $5,000,000 the previous quarter and by $100,000 as compared to the same quarter last year. Additionally, the underlying credit performance of our portfolio has remained strong with no new investments being placed on non accrual status during the quarter. Furthermore, the strength of the company's financial position and the outlook for the long term earnings power of the portfolio has allowed the company to declare a 3rd quarter distribution of $0.33 per share.

Speaker 1

The dividend has almost doubled compared to the $0.18 per share distribution we declared in the Q1 of 2023 when we reintroduced in our quarterly dividend, highlighting the company's successful turnaround and story since we took over management back in July of 2021. Looking forward to the second half of twenty twenty four, we continue to see attractive opportunities in our portfolio and our pipeline to deploy our available capital. New deal activity has picked up pace and the syndicated markets have continued to remain open. Our borrowers have continued to rely heavily on private capital providers for M and A activity given the certainty they provide, resulting in tailwinds for our industry. Having said that, combination of continued private credit capital raising and a more competitive syndicated market alternative has led to meaningful spread compression in certain parts of the private credit market.

Speaker 1

According to KBRE DLD private data, private credit spreads for borrowers with greater than $100,000,000 of EBITDA and those between $50,000,000 $100,000,000 of EBITDA have both declined by approximately 75 basis points since the beginning of the year. That is compared to spread compression of approximately 50 basis points for our borrowers between $20,000,000 $50,000,000 of EBITDA and just over 25 basis points for borrowers with less than $20,000,000 of EBITDA. We remain focused on increasing shareholder value through the diligent deployment of capital, continued rotation out of legacy investment portfolio and by leveraging and maximizing the earnings power of the company's balance sheet. With that, I will turn the call over to Patrick Schaeffer, our Chief Investment Officer.

Speaker 2

Thanks Ted and hello everyone. As of June 30, 2024, the fair value of Logan's portfolio was approximately $195,600,000 exposure to 61 portfolio companies. This compares to 62 portfolio companies with fair value of approximately $200,100,000 as of the prior quarter and 62 portfolio companies with a fair value of $206,600,000 as of June 30, 2023. During the quarter ended June 30, 2024, while our pipeline of new opportunities remain strong, we continue to be prudent and judicious on the deployment front, specifically coming off a strong quarter of net deployments during the Q1 of 2021. In the second quarter, we deployed approximately 1,500,000 in new and existing investments and had approximately $5,600,000 in repayments and sales, resulting in net repayments and sales of approximately $4,100,000 for the quarter.

Speaker 2

Regarding portfolio composition, as of June 30, 2024, 59.4 percent of the company's portfolio investment portfolio at fair value was invested in assets originated by the BC Partners Credit Platform. As of June 30, 2024, our debt investment portfolio represented 80% 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 investment portfolio, which represented 80.8% of our total portfolio at fair value with a weighted average annualized yield of approximately 11.4%, excluding income from non accruals and collateralized loan obligations as of the prior quarter and 82.2% with a weighted average annualized yield of approximately 10.8% as of June 30, 2020. Notably, while the weighted average annualized yield excluding income from non accruals and collateralized loan obligations remain unchanged from the prior quarter, and increased by 60 basis points as compared to the prior year. As of June 30, 2024, 88.1% of our debt investment portfolio at fair value was bearing interest at floating rate compared to 88.5% as of March 31, 2024 and 83.2% as of June 30, 2020.

Speaker 2

As of June 30, 2024, 1st lien debt represented 65.8 percent at 64% of our portfolio at cost and fair value perspective. This compares to 1st lien debt representing 66.5% 65.2% of our total portfolio on a cost and fair value basis as of March 31, 2024, 66.1% and 66.8% of our total portfolio at a cost and fair value basis, respectively, as of June 30, 2023. The equity portfolio represented 15.2% 19.0 percent of the portfolio on a cost and fair value basis respectively as of June 30, 2024. This compares to 15.2 percent 18.2 percent of the total portfolio on a cost and fair value basis as of March 31, 2020. Moving on to non accrual status.

Speaker 2

As of June 30, 2024, the company had 4 debt investments across 3 portfolio companies on non accrual status with an aggregate amortized cost and fair value of $17,200,000 and $10,100,000 respectively, or 8.5% and 5.2% of the investment portfolio at cost and fair value, respectively. This remained unchanged from the Q1, which had 4 debt investments across 3 portfolio companies with a cost and fair value of 17.2 percent and $17,200,000 $10,600,000 respectively or 8.3% and 5.3% of the investment portfolio's cost and fair value respectively. I'll now turn the call over to Brandon.

Speaker 3

Thanks, Patrick. Turning to our financial results for the quarter ended June 30, 2024. For the quarter ended June 30, 2024, Logan generated $5,400,000 of investment income, an increase of $400,000 as compared to $5,000,000 for the prior quarter. Total operating expenses for the Q2 increased by approximately $600,000 to $4,600,000 as compared to $4,000,000 for the prior quarter. This was largely due to $300,000 or $0.10 per share of certain non recurring incremental professional fees and other expenses incurred in the quarter, as well as higher financing costs, primarily as a result of higher average outstanding debt.

Speaker 3

Our net investment income for the 2nd quarter was $800,000 or $0.28 per share, a decrease of $100,000 from $900,000 or $0.35 per share in the Q1 of 2024. Again, the decrease from the prior quarter was largely due to non recurring incremental professional fees during the quarter. Our net asset value as of June 30, 2024 was $88,700,000 representing a $1,500,000 decrease as compared to the prior quarter net asset value of $90,200,000 On a per share basis, net asset value was $33.13 per share as of the second quarter, representing a $0.58 per share decrease as compared to $33.71 as of March 31, 2024. The decrease in net asset value quarter over quarter was driven by net realized and losses on the portfolio of $1,300,000 as compared to the company's as well as the company's quarterly dividend payment exceeding the company's net investment income by $100,000 Finally, as of quarter end, the company had $4,300,000 in cash and cash equivalents as well as $21,900,000 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.

Speaker 3

Thank you, Brandon.

Speaker 1

Before we go to Q and A, I just want to say to our shareholders a big 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. Our first question comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is open.

Speaker 4

Hey guys. Any share repurchases in the quarter?

Speaker 3

Chris, unfortunately not. We've been blacked out during the quarter, but we'll look to get that up and running as soon as we can, hopefully, within the next couple of weeks here.

Speaker 4

Sounds good. And then also, strategically, I mean, aren't the stars beginning to align for a merger between Logan Ridge and the other BDC you run, given it looks like with the things profitable, Logan Ridge is not profitable, no dividend paying, but the valuation on a price to book basis between the two entities is still quite significant.

Speaker 1

Yes. I think that's my question. I mean, it is something that we are obviously thinking about. And I'd also say naturally our portfolios are becoming more and more like between both Logan and Portman. So I think your comment is pretty spot on.

Speaker 4

Okay. Nice quarter. Thanks guys.

Operator

Thanks, Chris. Thank you. Our next question comes from the line of Stephen Martin of Slater Capital Management. Your line is open.

Speaker 5

Hi again guys.

Speaker 1

Hey Steve.

Speaker 5

Hi. Two questions. Back to the unrealized category, you had an unrealized loss this quarter. Was it something specific? Was it across the portfolio?

Speaker 5

Did something reverse?

Speaker 2

Yes. It's generally speaking, one name is the bulk of it American Clinical Solutions. The company has had like a bit of a challenging year as sort of they are a cannabis and hemp testing business based in Florida. And the year has been a little bit challenging as Florida is working towards recreational legalization this year during the election. So a lot of companies are sort of pulling back on spending in this area as they kind of wait to see where like everything shakes out with recreation.

Speaker 2

So I think we generally expect there to ultimately be a bounce back once the election kind of goes through. And from everything we've understood, we think recreation should pass, which is a huge benefit to the company. But even putting that aside, just kind of having a more settled environment will help them and their customers sort of more consistently set.

Speaker 3

So that's

Speaker 2

kind of like the biggest one. And then the second one is a company called Abonci. It's a broadly syndicated loan, and that loan moved down a handful of points, and that was a driver. Again, we think that's mark to market as opposed to anything that's credit driven.

Speaker 5

Got you. Major topic as always is the equity portfolio other than some slight changes in valuation and degree keeps improving. It doesn't look like there was any change in positions?

Speaker 2

No, that's generally right. So again, as we kind of mentioned a couple of different times, I do think the M and A market in general over the course of this year will ultimately be a benefit for us here within Logan as there are we know there are a number of portfolio companies that hopefully will be looking to exit themselves. So we're optimistic that sort of the market environment will be fairly conducive. We did have one small exit U. S.

Speaker 2

Bio, where again kind of similar to our playbook in a lot of other situations, we actually went directly to the owners and tried to get negotiated and exited. It was a relatively small number. I want to say it was about $500 or something and we had a market $350,000 $400 something like that. So that was relatively small. But again, kind of thematically, just given where the macro is right now, we're able to sort of engage in those types of transactions where the last probably 18 to 24 months, it's been difficult to engage with owners of the company for things like that.

Speaker 2

So we are optimistic that we're on the we're able to transact in a couple of different of our equity portfolio companies. And yes, hopefully, we can get those done by the end of the year.

Speaker 5

Yes. There are only a couple that really matter. There are a whole bunch of little ones. And most of the having done some research on the bigger positions, most of them are have been around for a while. I mean they're not young transactions.

Speaker 2

No, that's right. Again, just going down the list of our largest ones, Nth Degree, which obviously is the largest that was acquired in 2019. So again, just kind of think about private equity schedule that's you're coming up on sort of 5 years of a whole period. And it's as you can tell from our valuations, it's generally grown pretty nicely. So and the other largest one, which I think is Protaflex, Also again, it's been we've been in the name for quite some time, and it's been owned by the same sponsor for quite some time.

Speaker 2

So yes, you would likely think from a whole period perspective, those folks would kind of be at the point where they probably would be monetizing their portfolios.

Speaker 5

Yes. Just as a question, having looked at, I guess, it's Gladstone, who is the other nth degree holder, They have their equity mark substantially higher than yours. And it looks like it moved up again this quarter. Can you comment on I mean, when I say substantially, it's 20%, 25% higher than what you have the same shares mark?

Speaker 2

Yes. Steve, I think they actually marked theirs down this quarter, but it is still meaningfully higher than ours. Obviously, the number is a little bit wrong, but I think they're at like $2.99 a share and we're at $2.59 or something like that. But, yes, again, I think, hopefully, from our perspective, we are relatively small owner. Gladstone is a larger owner and perhaps they have, keep our equity valuations at a pretty conservative mark until we have something real to substantiate from a valuation perspective.

Speaker 5

All right. Thanks a lot. And as the previous caller, I would urge you to get back on the share buyback route.

Speaker 1

Of course.

Speaker 2

Thank you, Steve.

Speaker 4

Thank you.

Operator

Seeing as there are no more questions in the queue, that concludes our question and answer session. I will now turn the call back over to Todd Goldfarb for closing remarks.

Speaker 1

Thank you everyone for joining us today and we look forward to speaking to you again in November when we announce our Q3 2024 results. Hope everybody has a great end of the summer and please reach out

Operator

to us with any questions. Thanks. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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