Q4 2023 Logan Ridge Finance Corp Earnings Call

Participants

Ted Goldthorpe; CEO, President & Director; Logan Ridge Finance Corporation

Patrick Schafer; Chief Investment Officer; Logan Ridge Finance Corporation

Jason Roos; CFO; Logan Ridge Finance Corporation

Christopher Nolan; Analyst; Ladenburg Thalmann & Co

Presentation

Operator

Thank you for standing by, and welcome to Logan Ridge Finance Corporation's third quarter ended September 30, 2023 earnings conference call. An earnings press release was distributed yesterday after the close of the market and 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 Form 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 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, Jason Roos, 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 Corp., please go ahead.

Ted Goldthorpe

Good morning, good afternoon. Welcome to our third quarter 2023 earnings call. As mentioned, I'm joined today by our Chief Financial Officer, Jason Roos, and our Chief Investment Officer, Patrick Shafer. Following my opening remarks, Patrick will provide additional detail on our investment activity to date and Jason will walk through the financials.
I'd like to start by highlighting that Logan Ridge, once again, reported another strong quarter, generating the highest net net investment income. Since we began managing the Company a little over two years ago. The success is largely a continuation of the performance trajectory Logan has been on since we reported our first quarter, a positive net income investment income just over one year ago.
For the quarter ending September 30, 2022. As the Company's exposure to the legacy equity portfolio has continued to decline and has exposure to credits originated by the BC credit BC Partners credit platform has increased. The benefit to shareholders has been clear and has been reflected through Logan Ridge's financial results. With that mine. I will keep my prepared remarks brief today and limited to a few key highlights, which Patrick and Jason can provide more detail on shortly.
First and foremost, as a result of the company's strong financial performance. The Board of Directors approved a 15% increase in the quarterly distribution, bringing it to $0.3 per share compared to $0.26 per share last quarter. Since we've turned the quarterly dividend back on and early to 2023, we've steadily increased it each quarter, including this distribution, total distributions declared in 2023 is $0.96 per share.
We reported our fifth consecutive quarter of positive net investment income, which which amounted to $1.2 million or $0.43 per share for this quarter compared to the prior quarter, our net investment income is up [$200,000] from $1 million or $0.38 per share compared to the same quarter in the prior year. Our net investment income is up $1 million from $200,000 or $0.07 per share in the third quarter of 2022.
This trend illustrates the enhanced earnings power of our portfolio, driven by the reworked capital structure we refinanced in 2022 and the success we've had in monetizing the non-yielding legacy portfolio and redeploying that capital into income-generating names originated by the BC Partners credit platform. I'm incredibly proud of this achievement.
Deployment for the quarter remained strong with the Company funding $6.1 million in new and follow-on investments. However, repayments and sales were elevated at $23.2 million, leaving us with net prepayment and sales of $17.1 million for the quarter. As of quarter end, the portfolio consisted of 58 companies consisted of investments in 58 companies.
Finally, during the quarter, we continued repurchasing shares until our share repurchase program that was established in late March. Since the inception of the program and through September 30, 2023, the company has repurchased over 31,000 shares for an aggregate cost of approximately $700,000, which is accretive to NAV by approximately $0.08 per share for the quarter and $0.16 per share since the introduction of the program as we enter the final quarter of the year, M&A activity is rebounding and our pipeline is strong. And thus we are expecting a solid fourth quarter for deployment. We continue to believe that 2023 will promote proved to be very attractive private credit vintage, and I am very optimistic on the company's future.
With that, I'll turn the call over to Patrick Shafer, our Chief Investment Officer, bank debt.

Patrick Schafer

As of September 30, 2023, the fair value of Logan's portfolio was approximately $187.1 million exposure to 58 portfolio companies. This compares to 62 portfolio companies with a fair value of approximately $206.6 million as of the prior quarter and 54 portfolio companies with fair value of $193.1 million as of the third quarter 2022.
During the third quarter, we continued to judiciously deploy capital. Specifically, the company made approximately $6.1 million in new and follow-on investments at approximately $23.2 million in repayments and sales, resulting in net repayments and sales of approximately $17.1 million for the quarter. Included in our repayments and sales for the quarter was the successful exit of the company's legacy portfolio company, Jurassic Quest, specifically, Logan Ridge received $8.2 million in proceeds to pay off its term loan and preferred equity interest in Jurassic Quest, which generated a realized gain of approximately $200,000.
Moreover, while we had some large repayments and sales during the second half of the quarter, as Ted mentioned, our pipeline is strong and we are optimistic that barring any unexpected large repayments, Logan Ridge will be able to redeploy this capital, such as the company is fully invested and back to its target leverage ratio by the end of the fourth quarter, which historically has been a strong quarter for deployment across our platform.
Now on to portfolio composition. As of September 30, 2023, 55% of the company's investment portfolio at fair value was invested in assets originated by the BC Partners platform. At quarter end, our debt investment portfolio represented 82% of the total portfolio at fair value with a weighted average annualized yield of approximately 11%, excluding income from non-accruals and collateralized loan obligations.
This compares to a debt investment portfolio, which represents 82.2% of our total portfolio at fair value, with a weighted average annualized yield of approximately 10.8%. Excluding income from non-accruals and collateralized loan obligations as of the prior quarter, first lien debt represented 63.6% and 64.8% of our total portfolio on a cost and fair value basis, respectively.
This compares to first-lien debt representing 66.1% and 66.8% of our total portfolio on a cost and fair value basis, respectively. As of June 30, 2023 and 61.2% and 61.9% of our total portfolio on a cost and fair value basis, respectively. At September 30th, 2022.
The non-yielding equity portfolio represented 17.6% and 16.6% of the portfolio on a cost and fair value basis, respectively. At December 30, 2023. This compares to 16.5% and 16.4% of the portfolio on a cost and fair value basis as of June 30, 2023, the increase in our equity portfolio relative to the prior quarter was largely driven by net repayments and sales in the debt portfolio. As of September 30, 2023, 82.3% of our debt portfolio at fair value was bearing interest at a floating rate compared to 83.2% as of June 30, 2023.
Moving on to nonaccrual status. Credit quality remained stable during the three months ended September 30th, 2023, as there were no new portfolio companies additive to nonaccrual status as of September 30, 2023, we had two portfolio companies on nonaccrual with an aggregate amortized cost in fair value of $16.8 million and $10.6 million respectively, or 8.3% and 5.7% of the investment portfolio at cost and fair value respectively.
This represents a slight decrease as compared to two portfolio companies on nonaccrual status as of the prior quarter with a cost and fair value of $17.1 million and $11.1 million respectively, representing 7.8% and 5.3% of the investment portfolio cost and fair value, respectively.
I'll now turn the call over to Jason as Patrick.

Jason Roos

Turning to our financial results for the quarter ended September 30, 2020, three. For the third quarter of 2023, Logan Ridge generated $5.2 million of investment income, which represents a decrease of [$100,000] compared to the prior quarter and an increase of $1.5 million compared to the third quarter in the prior year.
The slight decrease in investment income compared to the prior quarter was largely driven by the net repayments and sales PATRICK discussed earlier, as well as earning less non and nonrecurring other income during the quarter compared to the same period in 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 an increase in base rates.
Total operating expenses for the third quarter of 2023 decreased by approximately $297,000 to $4 million as compared to $4.3 million in the second quarter of 2023, primarily due to lower interest and financing expenses as a result of paying down the Company's credit facility with the proceeds received from net repayments and sales in the portfolio during the quarter compared to the third quarter of 2022.
Expenses were higher in the current quarter by approximately $442,000, largely driven by higher interest and financing expenses, partially offset by lower management fees and general and administrative expenses. In the current period, our net investment income for the quarter was $1.2 million or $0.43 per share, marking our fifth consecutive quarter of positive net investment income.
This compares to net investment income of $1 million or $0.38 per share in the prior quarter. And a particular note just [$182,000] or $0.07 per share for the period in the prior year. We believe the substantial year-over-year increase illustrates the significant progress the company has made under mount Logan's management.
Our net asset value as of September 30th, 2023 was $93.2 million, representing a $3 million decrease or 3.1% as compared to the prior quarter. Net asset value of $96.2 million on a per-share basis, net asset value was $34.78 per share as of September 30th, 2023, representing a $0.9 per share decrease or 2.5% as compared to $35.68 per share at the end of the second quarter of 2023.
I'd like to highlight that the difference between the 3.1% decrease in net asset value as compared to 2.5% 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, partially offset by the Company's net investment income exceeding the August 31st, 2023 dividend, as well as the accretive effect on a per share basis of our share repurchase program compared to the Company's prior year net asset value of $95 million, net asset value decreased by $1.8 million or 1.9% on a per share basis.
Net asset value per share decreased by $0.26 per share or 0.7% from $35 and $0.04 as of December 31st, 2022. Again, the difference between the 1.9% and 0.7% is the accretive effect Logan shareholders receive from the buyback program. The decrease in net asset value relative to the prior year was driven by net realized and unrealized losses on the portfolio during the year, partially offset by the Company our 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 $5.1 million in cash and cash equivalents as well as to $39.2 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.

Ted Goldthorpe

Thank you, Jason. We're proud of the continued progress we've made during the third quarter of 2023, and we look forward to updating you on Logan Ridge's continued progress in early 2020 24.
With that, I'll open up the call for questions.

Question and Answer Session

Operator

(Operator Instructions)
Christopher Nolan, Ladenburg Thalmann.

Christopher Nolan

Your line is open because I'm getting a lot of bang for the buck in terms of your share repurchases, effect on that, Vinicius increased share repurchases, so now it doesn't go down.

Patrick Schafer

Yes, I anchors It's Patrick. I think what I would say is there are certain limitations as management has management and company in terms of how much you can buy back and kind of all the rules and restrictions around there. So it's not necessarily just as simple as increasing the amount of shares that we're buying back in terms of what we can actually practically speaking, buy in the market.
So I mean, yes, we're pretty much in violent agreement with you just about where we operate within the constraints that we operate under.

Christopher Nolan

Understood. And then in terms of over earning the dividend, you guys foresee to be taking a incremental increase the dividend from is I mean, should we expect that for the coming quarters, assuming your this quarter is a decent run rate?
Yes.

Patrick Schafer

I mean, I think yes, maybe the short answer is, as you would expect, NII to increase, we would we expect to close that gap. Having said that, and we mentioned this on calls before the actual like absolute dollars are still sometimes can be small. And so we want to be very careful on our dividend policy to make sure that we don't have kind of one-time unexpected issue in either kind of expenses or fees or something like that impacting the actual dividend coverage. But generally speaking, yes, you would you could expect our rate to close the gap over time.

Christopher Nolan

Final question on any degree, given that you guys have such a large equity position in it, any update you can provide given the uncertainty of the economy?
Yes.

Patrick Schafer

A good question, Chris. I think and a lot of this is public through various different different places. But I think what I can say is, generally speaking, the Company continues to perform very well and they did an M&A transaction in the summer that we're hopeful will be very accretive to enterprise value in terms of the business that they're purchasing and the price at which they purchased it from. So I'd say, generally speaking, this particular company was hit very, very hard during COVID and has done an exceptional job rebounding.
And over the last, yes, I don't know I know what period of time, but a year, 18 months, whatever you want to call it has well exceeded pre-COVID levels of performance. So we're generally pretty pleased with with the performance so far and haven't seen anything that would suggest the current environment is impacting the business.

Christopher Nolan

And that's it for me. Thank you.

Operator

As a reminder, if you would like to join the queue and ask a question, please press star one on your telephone keypad. Now pause for just a moment for any final questions. There are no other questions at this time, I would like to pass the call back to Ted Goldthorpe for closing remarks.

Ted Goldthorpe

Great. Well, thank you, everyone, for joining us today. We wish everybody a very happy Thanksgiving and we look forward to speaking to you all again in early March of 2024 when we announce our fourth quarter and full year 2023 results. And as always, please feel free to reach out to any member of management with any questions or considerations. Thank you very much.

Operator

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.