Logan Ridge Finance Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 12, 2024

There are 6 speakers on the call.

Operator

Thank you. Good morning and welcome to the Logan Ridge Finance Corporation's Third Quarter Ended September 30, 2024 Earnings Conference Call. An earnings press release was distributed Thursday, November 7, 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 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 such 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 Brendan Satteron, Chief Financial Officer and Patrick Schaeffer, Chief Investment Officer. With that, I would like to turn the call over to Ted Goldpour, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Speaker 1

Good morning. We will now begin the Q4 2024 earnings call. As mentioned, I am joined today by our Chief Financial Officer, Brandon Satoran 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 the financials. Before Brandon and Patrick provide more details on our portfolio and financials, I would like to discuss a few key highlights for the quarter.

Speaker 1

During the Q3, we successfully exited our largest investment, Nth Degree Investment Group for $17,500,000 in cash, which was $2,000,000 above its previously reported fair value as of June 30, 2024, in exchange for all of our equity interests. The sale of this equity investment is a transformative event for the company as it represented 7.9% of the company's investments at fair value prior to the sale. The proceeds of which can now be redeployed into interest earning assets originated by BC Partners credit platform, which will significantly improve the long term earnings power of our portfolio. The rotation out of legacy equity portfolio has been a key component of our turnaround strategy for Logan Ridge since Mount Logan Management took over as the company's investment advisor in July of 2021. We are proud to have taken a major step forward towards this goal.

Speaker 1

Additionally, the underlying credit performance of our portfolio has remained stable with no new investments being placed on non accrual status during the quarter. The strength of the company's financial position and the outlook for long term earnings power of the portfolio has allowed the company to declare a 4th quarter distribution of $0.36 per share. The dividend has doubled compared to the $0.18 per share distribution we declared in the Q1 of 2023 when we reintroduced our quarterly dividend, highlighting the company's successful turnaround story since we took over management back in July of 2021. Additionally, during the quarter, we amended and extended our revolving credit facility with KeyBanc. New attractive terms which reduced the applicable margins and extended the maturity date of both the reinvestment and amortization periods have reduced our overall cost of capital, bringing meaningful additional borrowing capacity and providing us with further financial flexibility.

Speaker 1

Regarding the private credit markets, specifically the core middle market, which we define as companies generating between $10,000,000 $50,000,000 of EBITDA, activity levels continue to be elevated relative to 2023. The majority of the activity has consistently been from refinancings, add ons or amended extend transactions that most often results in lower cost of capital for borrowers and extended maturities. While prudent buyout financings have remained at depressed levels through 2024, we continue to believe that a combination of dry powder, sponsors looking to return capital to LPs and the ongoing rate cuts by the Fed are all tailwinds to activity in our sector. Looking forward to the final quarter of 2024 and into 2025 as we navigate through economic uncertainty and a dynamic interest rate environment, we remain confident in our prudent investment strategy, strong pipeline and experienced management team. We continue to see attractive opportunities in our pipeline and believe we remain well positioned to continue to deliver positive returns to our shareholders through the diligent deployment of capital, continued rotation out of the legacy equity portfolio by leveraging the attractive terms of our amended credit facility.

Speaker 1

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 30, 2024, fair value of Logan's portfolio was approximately $176,500,000 with exposure to 59 portfolio companies. This compares to 61 portfolio companies with a fair value of approximately 195 $600,000 as of the prior quarter and 59 portfolio companies with a fair value of $187,100,000 as of September 30, 2023. During the quarter ended September 30, 2024, our pipeline of new opportunities remain strong, we continue our prudent and judicious approach on the deployment front. During the quarter, we deployed approximately $900,000 in new and existing investments and had approximately $19,000,000 in repayments and sales, resulting in net repayments and sales of approximately $18,100,000 for the quarter.

Speaker 2

The highest the high level of repayments and sales were due largely to the aforementioned sale of our largest equity position, nth Degree for $17,500,000 The company used a portion of the proceeds from the sale of nth degree paid on the key bank credit facility. Now onto our portfolio composition. As of September 30, 2024, 65.4 percent of the company's investment portfolio at fair value was invested in assets originated by the BC Partners Credit Platform, up from 59.4% in the last quarter and that percentage is artificially low as the proceeds from nth degree are not reflected in the amount of the investment portfolio originated by the BC Partners Credit Platform. As of September 30, 2024, our debt investment portfolio represented 86.8 percent of the total portfolio at fair value with a weighted average annualized yield of approximately 12.3% excluding non accruals and collateralized loan obligations or 11.1% excluding adjusted income from non accruals and collateralized loan obligations. This compares to debt investment portfolio, which represented 80.0% of our total portfolio at fair value with a weighted average annualized yield average annualized yield of approximately 12.7 percent excluding non accruals and collateralized loans or 11.4% excluding just the income from non accruals and collateralized loan obligations as of the prior quarter.

Speaker 2

As of September 30, 2024, 88.6 percent of our debt investment portfolio at fair value was bearing interest at a floating rate compared to 81.1% 88.1% as of June 30, 2024 and 82.3% as of September 30, 2023. As of September 30, 2024, 1st lien debt represented 67.6% and 69.3% of our total portfolio on a cost and fair value basis respectively. This compares to 1st lien debt representing 65.8% 64.0 percent of our total portfolio on a cost and fair value basis as of June 30, 2024 63.6% 64.8% of our total portfolio on a cost and fair value basis respectively as of September 30, 2023. The equity portfolio represented 12.7% and 12.1% of the portfolio on a cost and fair value basis respectively as of September 30, 2024. This compares to 15.2% 19.0 percent of the portfolio on a cost and fair value basis as of June 30, 2024.

Speaker 2

Moving on to non accruals. At September 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 $8,200,000 respectively or 8.8% and 4.6 percent of the investment portfolio at a cost and fair value respectively. This remains unchanged from the Q2, which had 4 debt investments across 3 portfolio companies, the cost and fair value of 17.2 percent and $10,100,000 $10,100,000 respectively or 8.5% and 5.2 percent of the investments portfolio portfolios cost and fair value respectively. I'll now turn the call over to Brandon.

Speaker 3

Thanks Patrick. For the quarter ended September 30, 2024, Logan generated $5,100,000 of investment income, a decrease of $300,000 as compared to $5,400,000 for the prior quarter. The decrease was primarily due to the receipt of a non recurring dividend of $200,000 during the Q2 of 2024. Total operating expenses for the Q3 decreased by approximately $400,000 to $4,200,000 as compared to $4,600,000 for the prior quarter. The decrease was largely due to non recurring professional fees incurred in the previous quarter.

Speaker 3

Accordingly, our net investment income for the Q3 was $1,000,000 or $0.37 per share, an increase of $200,000 from $800,000 or 0 point $2.8 per share last quarter. Our net asset value as of quarter end was $86,300,000 representing a $2,400,000 decrease as compared to the prior quarter net asset value of 88,700,000 dollars On a per share basis, net asset value was $32.31 per share as of September 30, 2024, representing an $0.82 per share decrease as compared

Speaker 2

to

Speaker 3

$33.13 per share as of June 30, 20 24. The decrease in net asset value quarter over quarter was primarily driven by net realized and unrealized losses on the portfolio. Additionally, I'd like to highlight that on August 21, we amended and extended our existing senior secured revolving credit facility with KeyBanc. Under the terms of the amendment, the applicable margin during the reinvestment period was reduced from 2.9% to 2.8%. The reinvestment period was also extended from May 2025 to August 2027 and the maturity date was extended from May 2027 to August 2029.

Speaker 3

Importantly, under the terms of the amendment, the advanced rates and concentration limits were revised, which created meaningful additional borrowing capacity for Logan Ridge. Finally, as of quarter end, the company had $5,000,000 in cash and cash equivalents as well as $35,900,000 of unused borrowing capacity available for deployment in new investments. With that, I will turn the call back over to Ted.

Speaker 1

Thank you, Brandon. To our shareholders, thank you so much for your continued support. This concludes our prepared remarks. And I'll now turn the call over to the operator with any questions.

Operator

Thank you. We will now begin our question and answer session. Our first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Speaker 4

Hey, guys. First off, I want to say congratulations on the nth degree. You guys should take a victory lap around the conference table and good job all around. I guess, in terms of two questions is, were there any non recurring items this quarter?

Speaker 3

There were not, Chris.

Speaker 4

Okay. And then I guess, what does this mean for in terms of integrating Logan Ridge with some of your other vehicles?

Speaker 1

Listen, I mean as we've said very publicly, there's a number of things we had to get done in order to move that ahead. And obviously this removes a very, very big barrier to do that. So I think we feel we've kind of outlined the 3 or 4 things that have to happen and those are all seem to be falling into place.

Speaker 4

Great. And then the final question on the revised facility. You guys indicated that you seem to have a higher advance rate. Are you reading any I mean, it sounds like the bank has become much more accommodating to you guys, which is interesting given the potential for commercial real estate wave hitting commercial banks. I mean, am I reading it correctly where the bank has actually been a bit more accommodating to you guys and revising the facility?

Speaker 4

That's it for me. Thank you.

Speaker 2

Yes. Look, Chris, I think what I'd say as a blanket statement there and we can get into to Logan, but I'd say like across our platform, we are definitely seeing our financing sources being a little bit more accommodating, a little bit more aggressive on terms on kind of availabilities and advance rates and concentration limits and things like that. So I think as a blanket statement, we are definitely seeing more competition from folks who want to do our financing facilities, this being kind of a representation of that. I think specifically for Logan Ridge, for our facility, it was in place initially when we first took over. And so there were just frankly just a number of different concentration limits and the way it's done, it's a very prescriptive depending on all the different metrics of the company, you get a certain advance rate.

Speaker 2

And so a lot of what we were doing was sort of just rightsizing the different concentration limits and tests and things like that, given that we now have a much larger portfolio that that facility is financing. So I would think of it I would think of specifically what we did here as a little bit more unique to Logan Ridge is because of when we put that facility on versus now. But your comment, I think as a broad brush is accurate, which is we are finding our financing sources in general to be a lot more accommodating and aggressive on advanced rates and cost of capital and things like that.

Speaker 4

Okay. That's it for me. And congratulations once again that was definitely a win. Thanks.

Speaker 1

Thank you, Chris.

Operator

Our next question comes from the line of Stephen L. Martin with Slater. Please go ahead.

Speaker 5

Hi, again, guys. Let me repeat some of the same questions. Can you comment on deployment in the Q4? I understand you guys are Logan and Portman are on the same platform. But with the pay down from nth degree, I guess Logan is a lot more a lot less leveraged and it would seem that you're going to have to do something a little different to get Logan more leveraged if Portman can't be?

Speaker 2

I don't know that I the short suggestion is that I know that I'd frame it as need to do something differently. But yes, I think that where Logan is right now with the nth degree and the pay down, I would say they certainly have it is certainly less of a one in one out or less of an optimizing the balance sheet necessarily. And there probably more value to Logan in terms of being a little bit more of a market buyer of credit as opposed to being a selective buyer. So I think Logan probably has a little bit more flexibility to participate in some of the lower yielding stuff that we still find very attractive from a credit perspective, but maybe is willing to do something at a marginally lower ROA because there is a significant benefit from an ROE perspective.

Speaker 5

Right. I would hope so. And does the well, I guess the deployment question is sort of moot. Non accruals, okay. You didn't the number didn't change.

Speaker 5

The investments at cost didn't change, but it seems like you picked up a little extra $2,000,000 extra on nth degree, but then your non accruals went from $10,000,000 of fair market value to $8,000,000 What was the change there?

Speaker 2

Yes. It was a further markdown of 1 of our non accruals Sequoia, which has been on non accrual since we sort of took over the vehicle. So it's really a mark to market on that name. And that it's gone through periods of time, but that has generally sort of tracked flat or slightly down relative to when we took over the portfolio.

Speaker 5

Okay. And one last one and it relates to the lower leverage in Logan. I guess I was a little disappointed that your share repurchase only resulted in, I don't know, 32,000 or 3,300 shares being repurchased. And given the lower leverage, it would seem that Logan has more capacity to buy and we've talked about it, to buy back stock at the current discounts?

Speaker 2

Yes. And the only comment I'd make there Steve is because we proactively put in place 10b5 programs to avoid or to allow those to work during blackout periods. We put in place a program without knowing what was happening with Nth Degree. So I think in hindsight, it's easy to say the program should have been larger given lower leverage. But we didn't have the level of visibility on that degree coming back when we originally put in place the 10b5 program for this quarter.

Speaker 2

So I agree with you. I think all else being equal, it would be reasonable

Speaker 4

to think that that could be

Speaker 2

a larger program. But at the time we had to put it in place and then we kind of couldn't really amend it until it came up again, sort of the facts on the ground were slightly different than they are with hindsight.

Speaker 5

Well, then the obvious question is, has it been amended?

Speaker 2

It had to run-in place for a certain period of time. And when we go and reset that, we will reset it with a new with all the facts and circumstances in place when we think about that. Yes. Steve, I'll just Yes. We normally do it like one quarter at a time and then we have the earnings that we put in place a new one for the next quarter.

Speaker 2

So it's a quarterly program that we put in place. So I didn't mean to be like evasive, Steve. The answer is yes. Now when we put in place a new program for this quarter, we'll factor in the fact our leverage is where it is and our liquidity is where it is, as opposed to when we put in place at the beginning of the last quarter.

Speaker 5

Okay. And you only really have 2 more equity positions of size. Any thoughts or any view as to the repayments on those? Is there anything on the horizon that you can't mention by name, but might be in the works?

Speaker 2

Look, I think I'll sort of repeat what I've done for the last couple of quarters, which is I think this is a decent market for companies to try and go out and execute an M and A strategy. I think for both of those large positions, I think our sense is that they've been held by the respective owners for a long enough period of time that we think it would make sense for them to go and execute on some sort of M and A transaction. But we obviously don't control either of those scenarios. But again, I would say that this feels like a fairly favorable market to be looking for exits for equity positions.

Speaker 5

Okay. Thanks a lot.

Operator

And that concludes the Q and A session. I would like to turn the call over back to Mr. Ted Goldcorp for any closing remarks.

Speaker 1

Right. Well, thank you very much for everyone joining us today and we look forward to seeing you again in a few weeks during our investor luncheon scheduled for December 12. Thank you so much and happy early Thanksgiving.

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Earnings Conference Call
Logan Ridge Finance Q3 2024
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