Logan Ridge Finance Corp

NASDAQ:LRFC

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to the Logan Ridge Finance Corporation's First Quarter ended March 31, 2024 Earnings Conference Call. An earnings press release was distributed yesterday, May 8, after the close of the market.

A copy of the release along with a supplemental earnings presentation is available on the company's website at www.loganridgefinance.com in the Investor Resources section and should be reviewed in conjunction with the company's fourth 10-Q filed 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. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including described in the company's filings with the SEC.

Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Logan Ridge Finance Corporation; Brandon Satoren, Chief Financial Officer; and Patrick Schafer, Chief Investment Officer.

With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Go ahead, Ted.

[Edward Goldthorpe, executive]

Thank you. Good morning, and welcome to our first quarter 2024 earnings call. As mentioned, I'm joined today by my Chief Financial Officer, Brandon Satoren; and our Chief Investment Officer, Patrick Schafer. Following my opening remarks, Patrick will provide additional details on our investment activity to date and Brandon will walk through our financials.

While I will keep my prepared remarks brief today and limited to a few key highlights, which Patrick and Brandon provide more detail on shortly, I would like to emphasize that during the first quarter of 2024, we continue to build upon record financial results we've generated in 2023. The first quarter results are highlighted by the quarter-over-quarter increases in net investment income and net asset value of 63% and 1%, respectively. Following the strong earnings we saw in 2023, Logan Ridge is off to a solid start in 2024, ending the first quarter with net deployment of $8.9 million and a robust pipeline.

As the company's exposure to the legacy equity portfolio has continued to decline and its exposure to credits originated by the BC Partners credit platform have increased, the benefit to shareholders has been clear and is being reflected through Logan's strong financial results. Furthermore, as a result of the company's strong financial performance during the quarter, the company declared a second quarter distribution of $0.33 per share or a 3% increase to the company's quarterly distribution compared to the prior quarter. This is the company's fifth consecutive quarterly increase and represents an 83% increase from the $0.18 per share distribution we declared in the first quarter of 2023. Finally, during the quarter, the company repurchased 21,867 shares, which was accretive to NAV by approximately $0.08 per share.

Looking forward to the rest of 2024, our pipeline remains robust, and we continue to see attractive investment opportunities in the market. Over the course of 2023, private equity firms were sitting on record amounts of dry powder while at the same time, are being pushed by LPs to return capital. Although expectations for future rate hikes have diminished towards the end of the first quarter and the beginning of the second quarter, we believe the aforementioned fundamentals combined with positive economic outlook and sentiment should continue to fuel [ new deal ] activity in our private credit space over the course of 2024. We remain focused on increasing shareholder value by leveraging the company's stronger balance sheet, and we believe our platform remains well equipped to take advantage of current market conditions.

Specifically at Logan Ridge and more generally across the BC Partners credit platform, we continue to find attractive opportunities, both through our sponsor relationships and our focus on sponsor and nonsponsor backed companies and continue to win transactions based on our ability to custom tailor capital solution for the borrower and the borrower's belief that our platform can add value to their business above and beyond just being a capital provider.

With that being said, I will turn the call over to Patrick Schafer, our Chief Investment Officer.

[Patrick Schafer, executive]

Thanks, Ted, and hello, everyone. As of March 31, 2024, the fair value of Logan's portfolio was approximately $200.1 million with exposure to 62 portfolio companies. This compares to 60 portfolio companies with a fair value of approximately $189.7 million as of the prior quarter and 59 portfolio companies with a fair value of $203.3 million as of March 31, 2023.

During the quarter ended March 31, 2024, we continue to deploy capital in new and existing portfolio companies. Specifically, the company made approximately $9.8 million in new and existing investments and had approximately $0.9 million in repayments and sales, resulting in net deployment of approximately $8.9 million for the quarter. While we continue to be prudent and disciplined underwriters, we believe that the loans originated in the current environment will prove to be an attractive vintage.

On to portfolio composition, as of March 31, 2024, 60% of the company's investments at fair value were invested in assets originated by the BC Partners credit platform. As of March 31, 2024, our debt investment portfolio represented 80.8% of the total portfolio at fair value, with a weighted average annualized yield of approximately 11.4%, excluding income from nonaccruals and collateralized loan application. This compares to a debt portfolio, which represented 82.0% of our total portfolio at fair value with a weighted average annualized yield of approximately 11.1%, executing income from nonaccruals and collateralized loan obligations as of the prior quarter, and 83.1% with a weighted average annualized yield of approximately 10.7% as of March 31, 2023.

The weighted average annualized yield, excluding income from nonaccruals and collateralized loan obligations increased by 30 basis points and 70 basis points compared to prior year -- prior quarter and prior year, respectively. As of March 31, 2024, 88.5% of our debt investment portfolio at fair value was bearing interest at a floating rate compared to 86.4% as of December 31, 2023, and 83.4% as of March 31, 2023.

As of March 31, 2024, first lien debt represented 66.5% and 65.2% of our total portfolio on a cost and fair value basis, respectively. This compares to first lien debt representing 65.4% of our total portfolio on both a cost and fair value basis as of December 31, 2023, and 65.4% and 67.7% of our total portfolio on a cost and fair value basis, respectively, as of March 31, 2023.

The nonyielding equity portfolio represented 15.2% and 18.2% of our portfolio on a cost and fair value basis, respectively, as of March 31, 2024. This compares to 15.5% and 17.0% of the portfolio on a cost and fair value basis as of December 31, 2023.

Moving on to nonaccrual status. As of March 31, 2023, the company had 3 portfolio companies on nonaccrual status with an aggregate amortized cost and fair value of $17.2 million and $10.6 million, respectively, or 8.3% and 5.3% of the investment portfolio at cost and fair value, respectively. This compares to 3 portfolio companies on nonaccrual status as of the prior quarter with a cost and fair value of $17.2 million and $12.8 million, respectively, or 8.7% and 6.9% of the company's -- of the investment portfolio's cost and fair value, respectively.

I'll now turn the call over to Brandon.

[Brandon Satoren, executive]

Thanks, Patrick. Turning to our financial results for the quarter ended March 31, 2024. For the quarter ended March 31, 2024, Logan generated $5 million of investment income, an increase of $0.6 million as compared to $4.4 million in the prior quarter. The increase was largely a result of a onetime reversal of $0.6 million, a previously accrued income on a portfolio company that was placed on nonaccrual in Q4 of 2023.

Total operating expenses for the first quarter increased by approximately $0.2 million to $4.1 million as compared to $3.8 million for the prior quarter. The increase in operating expenses was primarily driven by higher financing costs as well as higher general and administrative expenses.

Our net investment income for the first quarter was $0.9 million or $0.35 per share, an increase of $0.3 million from $0.6 million or $0.22 per share in the fourth quarter of 2023. As I noted previously, the increase in net investment income was primarily due to reversing $0.6 million or $0.22 per share of previously accrued income on a portfolio company that was placed on nonaccrual status in the prior quarter.

Our net asset value as of March 31, 2024, was $90.2 million, representing a $1 million increase as compared to the prior core net asset value of $89.2 million. On a per share basis, net asset value was $33.71 per share as of March 31, 2024, representing a $0.37 increase as compared to $33.34 at the end of 2023. The increase in net asset value quarter-over-quarter was driven by net realized and change in unrealized gains on the portfolio as well as Logan Ridge outearning the quarterly dividend payment by $0.1 million.

Finally, as of quarter end, the company had $8.3 million in cash and cash equivalents as well as $23 million of unused borrowing capacity available for deployment and investments originated by the BC Partners credit platform.

With that, I will turn the call back over to Ted.

[Edward Goldthorpe, executive]

Thank you, Brandon. To our shareholders, thank you for your continued support. This concludes our prepared remarks, and I will now turn the call over to the operator for any questions.

[Operator]

[Operator Instructions] And your first question comes from the line of Christopher Nolan of Ladenburg Thalmann.

[Christopher Nolan, analyst]

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

[Brandon Satoren, executive]

No, Chris, that was last quarter. We had about $600,000 in receivables that we had to write off through Q4 NII, that's the reversal this quarter, you're seeing flow through earnings.

[Christopher Nolan, analyst]

So there was a reversal this quarter?

[Patrick Schafer, executive]

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

[Edward Goldthorpe, executive]

The flip.

[Christopher Nolan, analyst]

Got it. Okay. Nth Degree, you guys are getting a lot of love from Nth Degree Equity Holdings. And what you say about this? Because according to my calculations, the fair value on that increased 38% quarter-over-quarter, and that comes [indiscernible] total equity holdings?

[Patrick Schafer, executive]

Yes. Chris, I think what I'd say is the company continues to do very, very well. when we took over this portfolio in the first place, this was marked at probably close to 0. It was a -- it is a events business where they like put up and organize events for trade shows and things like that. I think they actually like run part of the -- I believe, they actually run part of the Apple like CES conference and such. So like a pretty good business that got massively impacted by COVID, they continue to grow really, really well. They made an acquisition. And I am saying this in public, they mean acquisition, it was announced last quarter -- sorry, not quarter -- the summer of last year. So they're just continuing to perform very well. There is at least one other BDC that's also in it with us, and you can see pretty consistent growth trajectory with kind of how that firm looks at this position as well as us.

[Christopher Nolan, analyst]

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

[Patrick Schafer, executive]

Yes. So what I'd say is, I think, similar to how we think about our other BDC, Portman Ridge, I think are like conceptual. We conceptually feel like BDC should probably be somewhere in the 1.25 to 1.4x net leverage depending on the environment, depending on portfolio composition, et cetera. I think right now, Logan is at 1.3x on a net basis -- or on a gross basis, sorry, and a little bit less than that on net, not significantly less. So we're kind of at the low end of our range. Obviously, you alluded to it, but we have 1 or 2 very large equity positions. So there is a little bit of -- a little bit more variability in our NAV than perhaps others. I would say to the extent that 1 or 2 of our large equity positions were to be realized in monetizing cash. We would probably feel a little bit more comfortable bringing leverage up from there. But kind of where, again, given sort of that portfolio composition, we would probably sort of look to be on the lower end of our sort of guidance until those kind of get realized?

[Operator]

Your next question comes from the line of Steven Martin of Slater.

[Steven Martin, analyst]

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

[Patrick Schafer, executive]

Yes. I think for Portman -- sorry, I think for Logan, there are 2 new borrowers. And there was -- again, this is a little bit more of the nuance, but there was one particular portfolio company or investment we made across the platform was a little bit lower on the yield spectrum. So we didn't think it quite made sense for Portman from a yield perspective or an ROE perspective. But for Logan, it fit very nicely within the leverage facility. So on an ROE basis, it was significantly more attractive for Logan than it would have been for Portman. So there's -- again, it's another position that's across our platform, but it made a little bit more sense for Logan than it did for Portman.

But other than that, again, I'd say the trends are generally fairly similar across the 2 on the margin where we were obviously more of a net deployer in Logan than in Portman just because it was -- on a little bit lower end of the leverage spectrum. But I would think kind of what we talked about, Steve, earlier, is the same, which is, I think, over the course of the year, we would expect Logan, again on the whole to be in that deployer of capital. Again, some of it depends on [ it ] we had some realizations hopefully, and particularly in our equity portfolio, again, kind of the timing of if we did happen to received $15 million or $14 change million from Nth Degree, which is kind of where it's marked, just as a simple example, it might take a little bit of time for us to rotate that cash into loans and if that happens over quarter end, et cetera, you might see some net repayment. But over -- again, where we sit at the end of the year, we would expect to probably be a net deployer of capital in Logan Ridge.

[Steven Martin, analyst]

And your prospects for the second quarter?

[Patrick Schafer, executive]

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

[Steven Martin, analyst]

Okay. And you made the comment, I think, that [ Riddle ] was -- came right at the end of the quarter?

[Patrick Schafer, executive]

Correct.

[Steven Martin, analyst]

So really see the impact of Riddle on the investment income?

[Patrick Schafer, executive]

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

[Edward Goldthorpe, executive]

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

[Patrick Schafer, executive]

It traded and closed on like Good Friday and settled on like Monday. So it kind of -- it went over quarter end.

[Steven Martin, analyst]

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

[Patrick Schafer, executive]

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

[Steven Martin, analyst]

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

[Patrick Schafer, executive]

I think the comment I would make is similar to the market as a whole M&A is starting to come back in the private credit space, but generally sort of the private equity space as well. It was a really tough -- it's been a really tough 12 or 18 months to try and sell a business. And so I think just from a macro perspective, we have a lot better chances of exiting an equity position or 2 this year relative to last year or probably even in sort of the back half of 2022, unless something had already been in a process. Nothing really got done in the back half of 2022, either. So I'd say we're hopeful and optimistic. But from a macro perspective, we certainly have tailwinds to be able to exit some of these as opposed to all of last year, there were certainly meaningful headwinds to exiting equity positions.

[Edward Goldthorpe, executive]

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

[Steven Martin, analyst]

Got you. And the nonaccruals? By the way, you made the comment in your prepared remarks about nonaccruals about there being 3 nonaccruals, the schedule says 4. Is the schedule wrong? Or did you just misspeak?

[Patrick Schafer, executive]

No, sorry, 3 borrowers on nonaccrual, one of them happens to have 2 securities. It's the same set quarter-over-quarter.

[Steven Martin, analyst]

Okay. Because on the schedule, it says nonaccrual investments, not borrowers.

[Patrick Schafer, executive]

Correct. Apologies for the confusion there.

[Steven Martin, analyst]

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

[Patrick Schafer, executive]

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

[Steven Martin, analyst]

Got you. Any prospect of cleaning some of those off? Are they in workout? Is there a shot that the borrower restructure it?

[Patrick Schafer, executive]

They're all in various -- obviously all in very [ similar ] stages since they're on nonaccrual in sort of restructuring. I would say for the only one that really moves the needle, we probably still have a lot of time to kind of working through that. So there's the 3 names, there's 2 that are on the smaller end, and 1 is fairly large, which is the historical [ Sequoia ] position. And I'd say that one still has a lot longer to work through. And again, the other ones we obviously continue to try to work out and work through. I wouldn't say we're necessarily any closer than we were last quarter and we're also now farther away. We're hopeful that -- we're hopeful on all of them to try and move them into accrual status eventually. But again, for the one that moves the needle, I would not say we're closer to.

[Operator]

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

[Edward Goldthorpe, executive]

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

[Operator]

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