Portman Ridge Finance Q1 2025 Earnings Call Transcript

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May 9, 2025

There are 8 speakers on the call.

Operator

Welcome to Apartment Ridge Finance Corporation's First Quarter Ended 03/31/2025 Earnings Conference Call. An earnings press release was distributed yesterday, 05/08/2025, after the close of the market. A copy of the release, along with an earnings presentation, is available on the company's website at www.courtmanridge.com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10 Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties.

Operator

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. Portman Ridge Finance Corporation assumes no obligation to update any such forward looking statements unless required by law. Speaking on today's call will be Ted Goulthorpe, Chief Executive Officer, President and Director of Portland Ridge Finance Corporation Brandon Sutoran, Chief Financial Officer and Patrick Schiffer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Port Bent Ridge.

Speaker 1

Good morning. Welcome to our first quarter twenty twenty five earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoran and our Chief Investment Officer, Patrick Schaefer. Following my opening remarks on the company's performance and activities during the first quarter, Patrick will provide commentary on our investment portfolio and our markets, and Brandon will discuss our operating results and financial condition in greater detail. During the first quarter, despite operating under unpredictable macroeconomic environment, we continue to execute our disciplined investment strategy, deploying approximately $17,500,000 into strong defensively position opportunities in our pipeline.

Speaker 1

We also had $15,700,000 of repayments in sales during the quarter, resulting in our return to net deployers of capital. Additionally, we are enthusiastic about the strategic benefits the combination with Logan Ridge provide. This merger represents a meaningful step forward for the company with the potential to provide increased scale, improved liquidity, and greater operational efficiency, all key drivers in enhancing long term shareholder value. We encourage all shareholders to attend the meeting and vote for the proposed merger, as recommended by the Board of Directors of both companies. We're excited about the road ahead and look forward to sharing more updates soon.

Speaker 1

For the first quarter, the Board of Directors approved a base distribution of $0.47 per share. Of note, earlier this year, we modified our dividend policy and introduced a stable base distribution of $0.47 per share, which is anticipated to be sustainable across market cycles. Looking ahead, the current macroeconomic backdrop shaped by shifting trade dynamics, inflation, and ever evolving monetary policy continues to drive uncertainty in the market. These dynamics highlight the importance of taking a long term approach grounded in disciplined credit selection and prudent risk management, and we view this period as an opportunity to further differentiate through thoughtful deployment and rigorous underwriting. I remain confident in our ability to drive the best outcome for shareholders, and most importantly, credit quality of the overall portfolio.

Speaker 1

Overall, we're excited about the opportunities ahead on the Portman side, in addition to the new opportunities that should arise following the proposed merger with Logan Bridge due to scale, expected synergies, and cost savings benefits. We anticipate being active in the market and with a healthy pipeline, fortified balance sheet, prudent investment strategy and experienced management team, we remain confident in our ability to generate strong returns risk adjusted returns and drive long term value for our shareholders. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer for a review of our investment activity.

Speaker 2

Thanks, Ted. Turning now to slide five of our presentation and sensitivity of our earnings to interest rates. As of 03/31/2025, approximately 88.5% of our debt securities portfolio was based on floating rate with a spread pegged to an interest rate index such as SOFR or prime rate with substantially all of these being linked to SOFR. As you can see from the chart, SOFR rates have slightly decreased over the last few quarters impacting the current quarter net investment income. Skipping

Speaker 1

down

Speaker 2

to slide 10, originations for the quarter were higher than last quarter and above the current quarter repayment and sales levels, resulting in net deployment of approximately $1,800,000 Overall yield on par value of new investors during the quarter was 10.6%, slightly below the yield of the overall portfolio at 11% on par value. Our investment portfolio at year end remained highly diversified. We ended the first quarter with a debt investment portfolio when excluding our investments in CLO funds, equities and joint ventures spread across 24 different industries with an average par balance of $2,600,000 Turning to slide 11, in aggregate we had six investments on non accrual status at the end of the first quarter of twenty twenty five, representing 2.64.7% of the company's investment portfolio at fair and cost value respectively. This compares to six investments on nonaccrual status as of 12/31/2024, representing 1.73.4% of the company's investment portfolio at fair value and cost respectively. On slide 12, excluding our non accrual investments, we have an aggregate debt investment portfolio of $314,100,000 at fair value, which represents a blended price of 90.5% on par value and is 91.1% comprised of first lien loans at par value.

Speaker 2

Soon of our recovery, our 03/31/2025 fair values like the potential of $32,800,000 of incremental net value or an 18.3% increase to NAV. When applying an illustrative 10% default rate and seven percent recovery rate, our debt portfolio would generate an incremental $2.43 per share of NAV or a 12.5% increase as it rotates. Finally, turning to Slide 13, if you aggregate the last three portfolios we have purchased a combined $435,000,000 of investments and realized approximately 86% of these investments at combined realized and unrealized marks of 101% fair value at the time of closing the respective mergers. As of Q1 twenty twenty five, we've fully exited the acquired Oak Hill portfolio down to a combined $22,000,000 of the acquired HCAP and initial KCAP portfolios. And I'll turn the call over to Brandon to further discuss our financial results for the period.

Speaker 3

Thanks, Patrick. For the quarter ended 03/31/2025, Portman Ridge generated $12,100,000 in investment income, a decrease of $2,300,000 or $0.25 per share compared to $14,400,000 reported for the quarter ended 12/31/2024. The decrease in investment income from the prior quarter was primarily driven by one, a decrease of $600,000 or $07 per share as a result of lower non recurring pay down and fee income. To a decrease of $600,000 or $07 per share as a result of placing the company's first lien term loan to Sundance on non accrual status, of which $05 is the nonrecurring onetime impact to earnings as a result of writing off the prior quarter's interest receivable balance through current period income. Three, a decrease of $400,000 or $04 per share as a result of lower base rates.

Speaker 3

Four, a decrease of $400,000 or $04 per share as a result of the majority of the current quarter's deployment occurring in the second half of the quarter relative to the timing of repayments and sales. And then five, lower income from CLOs of 100,000.0 or $01 per share. For the quarter ended 03/31/2025, total expenses were 7,800,000.0, a $1,100,000 decrease or $0.12 per share as compared to 8,900,000.0 reported for the prior quarter. The decrease in expenses relative to the prior quarter was primarily driven by lower interest expense of $300,000 or $03 per share, lower management and incentive fees of $3,000,000 or $04 per share, as well as lower general and administrative expenses of 400,000.0 or $04 per share. The decrease in the general and administrative expenses was primarily driven by a lower than anticipated tax liability for the prior year.

Speaker 3

Accordingly, our net investment income for the first quarter of twenty twenty five was $4,300,000 or $0.47 per share, constitutes a $1,200,000 or $0.13 per share decrease from $5,500,000 or $0.60 per share reported for the prior quarter. Our net asset value as of 03/31/2025 was $173,500,000 representing a $5,000,000 decrease as compared to the prior quarter net asset value of $178,500,000 as of 12/31/2024. On a per share basis, net asset value was $18.85 per share as of 03/31/2025, representing a $0.56 per share decrease as compared to $19.41 per share as of 12/31/2024. The decline in net asset value was driven by unrealized depreciation on the portfolio as well as the company's March dividend exceeding the company's first quarter net investment income. As of 03/31/2025, our gross and net leverage ratios were flat to the prior quarter at 1.5 times and 1.3 times respectively.

Speaker 3

Specifically, as of 03/31/2025, we had a total of $255,400,000 of borrowings outstanding with a weighted average contractual interest rate of 5.9%. This compares to $267,500,000 of borrowings outstanding as of the prior quarter with a weighted average contractual interest rate of 6.2%. The company finished the quarter with 52,600,000 of available borrowing capacity under the senior secured revolving credit facility. With that, I will turn the call back over to Ted.

Speaker 1

Thank you, Brandon. Ahead of questions, I'd like to reemphasize how excited we are about the opportunities the proposed merger will create. Additionally, with a robust pipeline, prudent investment strategy and an experienced management team, we believe we are well positioned to take advantage of the current market environment and will be able to deliver strong returns to our shareholders through 2025. Thank you once again to all of our shareholders for your ongoing support. This concludes our prepared remarks, and I will turn the call over for any questions.

Operator

Your first question comes from the line of Eric Zwick with Lucid Capital Markets. First,

Speaker 4

just maybe a follow-up to make sure I got it down right. Brandon, in your comments, I think you gave that the reversal of interest for Sundance was $05 per share. You have that on a I guess I could kind of back into that. Did you have it on a dollar basis?

Speaker 3

Yeah, so the out of period impact is about $450 give or take. I could give you the exact number separately.

Speaker 4

Okay. That's helpful. That's about what I was calculating as well. And I guess my follow-up to that is I was trying to look at the kind of what like a normalized level of investment income would have been for the period without the reversal. And guess kind of one of the factors I'm looking at here, pick income has continued to grow over the past quarter or two and it's about 24% or so of total income at this point.

Speaker 4

So just kind of curious what is this a trend that's developing here in some companies that you're working with and granting pick? And then what is the outlook for returning these companies back to cash pay?

Speaker 3

So, I think I'll let Patrick speak to the portfolio itself, but just as it relates to the percentages this quarter, I think you've got two things at play. One is a denominator effect, just inherently lower investment income with about a $600,000 increase quarter over quarter and pick. However, with that said, we do have the 5¢ reversal. The impact of the late deployment during the quarter, etc. That is artificially decreasing that total investment income number Further in the PIC line item, and we tried to highlight this in the financial statements, there's about there's an amendment fee that's about $200, and then there's about another 150 of nonrecurring items flowing through PIK this quarter that we would expect to normalize in the coming quarter.

Speaker 2

Yes, on the portfolio in general, as we kind of said before, we don't have all that many names that sort of have converted to full PIK through underperformance. A good chunk of it is sort of, I want say preplanned, but sort of embedded in sort of the investment thesis from the time of the investment. And having said that, we probably have three names I can think of that are picking that are that have been underperforming, that we are working with the company on either sort of getting them to a place to reverse the cash and or exiting the positions. I think we're hopeful that we'll have some realizations on that front this year for a couple of names. But there's certainly a handful of names that sort of had challenges over the last sort of two years that at least we feel like we're seeing the other side of.

Speaker 4

Got it. I appreciate the commentary there. And then Ted, in your prepared remarks, I think you used both the words healthy and robust to describe the pipeline today. So wondering if you could maybe just expand on that a little bit in terms of how it's composed in terms of new versus add on opportunities as well as any industries where you're seeing particularly attractive opportunities to invest today.

Speaker 1

Yeah, good question. I mean, I think mean, overall market activity is way down, particularly post Liberation Day. So I think activity, broadly speaking, is pretty anemic. We have actually a decent pipeline, but a lot of it's stuff that we sourced pre Liberation Day and are working their way through the system. So I'd say in terms of new deals coming in, I would say it's down probably a lot.

Speaker 1

But we do have a decent pipeline of things we've been working on for a while that are closing. And so I would say we're very, very, very cautious. We feel like the economy is not going get better, let's put it that way. And lots of things can happen in the next six months, but we feel a lot of demand has been pulled forward. So I think we're pretty cautious on the environment.

Speaker 1

So despite deal flow being down, I don't think we're that worried about it because we're not overly bullish right now anyways.

Speaker 4

Yeah, that's a good point. And I guess has the potential impacts the tariffs and maybe reductions in government agencies, has that changed at all how, I guess, you are underwriting or the type of companies you might look to add to the portfolio in the future?

Speaker 1

Yeah, good question. So again, we have very, very, very little in the way of direct consumer exposure. I mean, Brandon in his comments mentioned Sundance, is probably one of the very few companies that has direct exposure and that was an inherited position from an acquisition. You have one or two other companies that have direct tariff exposure, but quite frankly, they're very under levered and we're not that worried about it. Our big question for all of our companies is second and third order effects.

Speaker 1

Like if you go into a recession, there's other things that could impact your business indirectly because of tariffs. So I think our whole sector, not just Portman, but I think generally speaking, we're all pretty light on consumer. Some BDCs have more than others. We have very, very little. So in terms of direct impacts, I think we don't have a lot.

Speaker 1

So we're looking for businesses that have, obviously, ability to pass on price increases, those who have very, very, very high gross margins. So think software. But I think, as I said, I think we're very, very focused on we're kind of planning for the worst and maybe something better happens. But I think that's what we're modeling right now.

Speaker 2

Yeah, I think on the diligence and underwriting side, the reality is if you're a private equity firm or a family officer or whomever trying to buy a company, it's going be really tough to sort of meet in the middle on a buyer and seller with companies that have direct tariff exposure. So just from a pipeline perspective of things that we're working they tend to be a lot more weighted toward service related businesses, healthcare, software, things like that, that are pretty obviously don't have the first order effect. And then as Ted said, we're really focused on kind of second and third order and how they perform during recessionary environments.

Speaker 4

That's all very helpful. That's it for me. Thanks for taking my questions.

Operator

Your next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Speaker 5

Hey, guys. First on the dividend. Last quarter you guys are hinting that the $07 supplemental dividend would be quarterly. And I didn't say it this quarter. So am I correct that it's not in the first quarter earnings?

Speaker 3

Yes, Chris, I think what we laid out was a dividend policy where we would where we set the base at $0.47 and then we would pay 50 approximately 50% of the incremental NII above the base each quarter. So, this quarter with the Sundance out of period impact being about $05 as well as some of the other items we laid out in our investment income, didn't have incremental NII in excess of the base. So, that's why there was no supplemental. However, if you run rate our earnings, you'll see we are very much, you know, we should be paying supplementals going forward. And it would be consistent with that framework, 50% of the incremental above the base distribution of 47.

Speaker 5

Okay. Thanks, Brandon. And I guess, I mean, given that you guys are sensitive to the LVO market and private equity and so forth, what's the risk that your private equity sponsors will not step in with additional support for their companies in terms of more equity if this cycle prolongs itself?

Speaker 1

I think we always live with that risk. Again, our portfolio is predominantly first lien. What we've seen actually is in our market, which is more of the middle market, sponsors have been a little bit more supportive than the large cap market. And generally speaking, it's because middle market funds have less companies in their portfolio. And therefore, the risk of loss is much higher than at very, very these big, big, big funds that we don't back.

Speaker 1

So we've really, I don't know, sponsors have been very constructive actually. And have actually, the negotiations on situations for the money have actually been relatively non controversial, I would put it that way. Now again, that might change if this prolongs. Obviously, a lot harder for these guys to sell their companies. So we've been in a very long, probably the longest in my career, prolonged period of no repayments.

Speaker 1

Because A, there's just not a lot of velocity of capital. There's not a lot of businesses being sold. And number two, with higher rates, no one wants to refi. We'll get some natural refinancing to our portfolio in the next twelve, eighteen months. But it probably means we're not going to get a whole bunch of sales done.

Speaker 5

A final question, I missed it. Have you guys announced the vote the date of the shareholder vote for Logan?

Speaker 3

Yeah, so you're very timely. So that should go out later today. It'll be record date will be May 6. June '6 will be the initial date for the shareholder meeting.

Speaker 1

Sounds good. Thank you.

Operator

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

Speaker 6

Two questions, and they're sort of related. Can you talk about the composition of non accruals and what the prospect is of and you did deal with this a little, but what the prospect is of those, A, becoming current pay and what the upside might be? And second, Patrick, quarter you talk about the embedded unrealized losses that could be recovered. But when you look through, there are a couple of big ones that are basically marked to zero, which I don't think would fall into your calculation of what is recoverable. So, of the unrealized losses embedded in the portfolio, what is actually possible to recover?

Speaker 2

Yeah. So I'll take your first one first, Steve. So we really on the non accruals, I would say we have kind of two main positions within the non accruals that are kind of worth talking about, one being Naviga, one being Sundance. I would say Sundance just recently, obviously this past quarter, went on non accrual. And so I would say it's tough to estimate what the pathway is to turning back on.

Speaker 2

We do lay out, I guess, in theory, the upside would sort of have been laid out in Brandon's comments, which is about on an ongoing basis about $02 a share of sort of ongoing income from Sundance. So that theoretically is the upside there. But again, having said that, it just recently went on. So I think that is a little bit less clear. On Naveaga, we've been doing a number of things with the company.

Speaker 2

It's about similarly sized to Sundance. So I don't have the exact number, but I would think of it as a fairly similar potential impact, call it, I need to decide $02 a share. And for that one, the company is positive cash flow, generating cash flow. We taken a fairly conservative position as a lender group and working through that. I would say there is a fairly good prospect for turning back on cash interest.

Speaker 2

But having said that, there's a different analysis of whether that ultimately comes in as income versus NAV recovery or cost recovery, depending on what we think about on the prospects there. But I would say that there's definitely line of sight for cash interest being turned back on. But that doesn't necessarily mean it's going to have an impact through the income.

Speaker 1

Yeah. So when we look at NAV upside, Steve, we break out for the board and we break it out for ourselves. Kind of like stress names and names that are performing. And the performing names, there is a lot of embedded upside in just those names. So I think you're making the right point.

Speaker 1

The right point is you can't save a lot of embedded upside on certain market zero. That's fair. So what we do is we break out two things. We have a watch list, and then we have our performing credits. And we have a pretty long list of performing credits with an average price in low 90s or something that are covered.

Speaker 1

So I think we feel very good about that portion of the portfolio.

Speaker 2

Yes, to be clear, strip out and all those numbers that I gave strip out all of our non accruals, which again tend to be your lower price than some zeros like a ProAir or things like that in there. And then second thing is, as Tim mentioned, I'll give you just a simple example and it's relatively small. But probably about half ish of those numbers that I gave out, maybe a little bit less than half, are from liquid names and we feel good about them to varying degrees. There was one name on the list I can see off the top of my head, LifeScan. It had been trading at like $0.25 $0.30 for the better part of the last year and it's now back up to $0.62 $0.06 3 dollars where we sit today.

Speaker 2

So I think if you would have that conversation a couple of quarters ago, you would have been asking the same question and we do see the recovery there. So again, we do try and strip out the very obvious names, the very obvious names like our non accruals and don't factor that into our NAV upside. But again, even with some level of conservatism, if we're giving out a 12.5%, which is the number, obviously there's a lot of room there to be off on that number and still have some fairly meaningful NAV upside.

Speaker 6

Well, for instance, and I'm just looking at the schedule of investments, you have KCap Freedom marked from 25 to 11. I don't know what asset management company is, but it's marked from 18 to 18.

Speaker 2

Yeah, Steve, sorry, I don't know we and sorry, maybe it wasn't clear in the commentary. We're specifically only focusing on the debt securities of our portfolio. So not any of our joint ventures, not our equity positions, strictly the debt portfolio.

Speaker 6

Got it. Okay. I'll come back to you offline with some questions.

Speaker 2

Thank you.

Operator

And our last question comes from the line of Lee Crockett, Private Investor. Your line is open.

Speaker 7

Thank you. Good morning. I had a couple of questions on KCAP Freedom three. It looks like you haven't received a dividend for the past six quarters. One, is that correct?

Speaker 7

And then you could go into any detail as to why you haven't received that dividend? And then a couple of follow-up questions would be, do you anticipate any dividend from that joint venture this year? And does that joint venture have an end date?

Speaker 2

Yes. So Lee, I'll take a couple of them and Brandon can follow-up as necessary. But I think I'll cover it. The short answer is yes, we still receive dividends from it. But the little bit similar to the answer I gave Steve on Naviga, which is there's a different analysis when you receive the dividend from an accounting perspective, whether you recognize that as income through our P and L or a recovery of cost.

Speaker 2

And so for the last, I don't know how many quarters, but a decently long period of time, we have been collect as we receive distributions from that joint venture, we are recognizing it as a recovery of cost as opposed to income. So the short answer is yes, we still receive distributions on it. But from an accounting perspective, we recognize it as a return of capital as opposed to a return on capital. And then on the end date, there is a stated end date. It is very far in the future.

Speaker 2

The reality is because of the way that's structured at some point, the liability costs will start to outweigh the income from the assets, in which case we would likely look to monetize or exit that portfolio, to your point on dividends. But in the meantime, while we're still receiving dividends and repayments, in our opinion, it makes sense to kind of continue managing vehicle.

Speaker 3

I'll just add, we did receive a distribution in Q1, it was about $360. And then over the course of 2024, we got just shy of $2,000,000 in distributions. Again, though, given the unrealized loss position that you highlighted in your question, we've been reducing the cost basis to reduce the realized loss as opposed to recognizing that as an income distribution.

Speaker 7

Okay. You said you got $3.60 of distribution. I see that coming down in the cost basis from year end. But you took down the fair market value by $1,600,000 Is there something going on there that or is that just mark to market?

Speaker 2

Yes. This is mark to market. Joint venture is funded via a CLO structure. So it's like a senior loan fund that's funded with the CLO. And so this particular quarter, just given that it's continued to be a smaller sized deal from a valuation perspective, the third party valuation moved it from a, I'll call it, a traditional cash flow CLO valuation model to what would be more like a NAV liquidation analysis.

Speaker 2

So there's a little bit of that going on in the mark to market impact of the quarter.

Speaker 7

Okay. And just any commentary you might have on the switching to the Great Lakes joint venture that looks like it's performing historically better than the KCAP Freedom three. Is that a fair statement? Any commentary you might want to add there just?

Speaker 2

I would say that's a fair statement. I would also just say they're differently structured. They're differently structured from a liability perspective and therefore the valuations are run a little bit differently. Great Lakes is sort of a I'll call it has like a traditional evergreen credit facility as opposed to a CLO liability structure. So from a valuation perspective, it's literally a NAV buildup of we value every single one of the underlying assets at fair value and then of debt sorry, reduce the amount of debt and that spits out what our value is on our balance sheet.

Speaker 2

So it's a little bit more straightforward, to be honest. But that also is a continuous we generally have a continuous investment period on that. So it was that structure Great Lakes had an original three year investment period. Rolled it all into a new three year investment period. That investment period is initial investment period is coming up this summer.

Speaker 2

We anticipate and anticipate rolling into a new three year investment period this summer. So unlike Haycat Freedom III joint venture where it's effectively running down, The structure of Great Lakes is more of an evergreen fund structure that has a continuous investment period.

Speaker 3

And Lee, I would just highlight, I think one important point here is the Great Lakes joint venture is a BC proprietary platform trade, whereas the Kcap Freedom three was a legacy position we inherited when we took over a capital.

Speaker 1

Okay, thank you. Thank you.

Operator

And that concludes the question and answer session. I would like to turn the call back over to Mr. Goldthor for closing remarks.

Speaker 1

Thank you for attending our call. We will continue to provide our shareholders with updates about the proposed merger with Logan Ridge as those become available. As always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again in August when we announce our second quarter twenty twenty five results. Thank you very much.

Operator

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

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Key Takeaways

  • Executed a disciplined investment strategy in Q1 by deploying approximately $17.5 million into defensively positioned opportunities while receiving $15.7 million in repayments and sales, resulting in net deployment of capital.
  • Announced a proposed merger with Logan Ridge designed to increase scale, improve liquidity and operational efficiency, and enhance long-term shareholder value, with shareholders urged to vote in favor.
  • The Board approved a stable base distribution of $0.47 per share for Q1, reflecting the company’s updated dividend policy intended to be sustainable across market cycles, with supplemental payouts tied to incremental net investment income above the base.
  • As of 03/31/2025, 88.5% of the debt securities portfolio is floating-rate linked primarily to SOFR, and the portfolio remains highly diversified across 24 industries with new originations yielding 10.6% on par value.
  • Reported Q1 net investment income of $4.3 million ($0.47 per share), with net asset value per share declining to $18.85 (down $0.56) due to unrealized depreciation and dividends exceeding income, while maintaining gross and net leverage at 1.5× and 1.3× respectively.
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Earnings Conference Call
Portman Ridge Finance Q1 2025
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