Q3 2020 Portman Ridge Finance Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Portman Rich Finance Corporation Conference call. An earnings press release was distributed Monday evening November night, if you did not receive a copy the releases are available on the company's website at www Dot work when rich dot com in the Investor Relations section.
As a reminder, this conference call is being recorded today Tuesday November 10 2020.
This call is also being hosted on a live webcast, which can be accessed at our company's website at www Dot Portman reach dot com in the Investor Relations section under events.
After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press Star then one on your telephone keypad.
Today's conference call includes forward looking statements and projections and we ask that you refer to Portman riches. Most recent filings with the FCC for important factors that could cause actual results to differ materially from these projections Portman Rich Finance Corporation does not undertake to update its forward looking statements unless required by law.
I would now like to introduce your host for today's conference Mr., Ted Gulfport, Chief Executive Officer for been Rich Finance Corporation Mr. Goldberg you may begin.
Thank you operator and welcome everyone. Thank you for joining us.
Yesterday afternoon, we reported our third quarter 2020 financial results.
I'm joined today by my CFO, Ted Gilpin, My Chief Investment Officer, Patrick Schaefer.
Hi, Ted Gilpin provides additional detail on our financial results and Patrick will do the same on the investment portfolio.
He did begin by discussing Porterages performance for the third quarter.
And speak more on the merger with garrison capital.
Which we closed on October 28.
Overall I'm pleased to report the apartment rich had a solid quarter marked by significant improvement and net realized and unrealized gains of $5.6 million across our entire portfolio.
Well, we're clearly not out of the woods with respect to kill that we experienced improved market sentiment during the quarter as portfolio companies began to gain a better sense of near term financial visibility on their prospects.
M&A in refinancing activity began to pick up after having been quiet in the <unk> in the prior quarter.
Net investment income per share was six cents consistent with the past four quarters and the distribution level, we've said for the past several quarters.
That's it for per share was $2.85 an increase of 5% from the net asset value per share of $2.71 as of June Thirtyth 2020.
Driving this increase in net asset value per share was a broad based strengthening of our portfolio due to market spreads tightening throughout the quarter.
M&A activity, which is a traditional source of middle market direct loans picked up substantially towards the end of the quarter.
Well, it's still at depressed levels as compared to last couple of years, we experienced buyers sellers lenders all returning to the market in an orderly fashion and activity levels continue to pick up.
He's through the end of the quarter up to present day.
Turning now to our merger with garrison capital, which we first announced on June 24th and subsequently closed on October 28.
We believe this merger is a truly transformational event for Portman rich as it represents the continued execution of our vision of the consolidation in the public BDC space.
It was a third strategic transaction successfully close by our team and less than two years. We're very excited about the benefits. This merger brings to the combined company.
First the merger results in significant added scale and size essentially doubling the size of the company.
Closing the combined company had held total assets of approximately $638 million compared apartment reject total assets of 300 million as of September thirtyth.
As a larger company, we expect to we expect immediate savings related to overhead and public company expenses on a per share basis and in the longer term increased trading liquidity of our common stock and the <unk> capability and flexibility to speak for larger deals.
Based on our previously discussed target leverage range of 1.25 to 1.4 times, where we sit today the pro forma Portman would need to generate at approximately 9.5% to 10% return on its investment portfolio to cover our historical six cents.
For quarter distribution.
Over the last five quarters Portman has averaged 10.
10.8% annual return on its investment portfolio. Despite the headwinds from LIBOR declining have reduced earnings from Mircea low equity portfolio.
Although although these estimates are subject to change the future.
Although these estimates are subject to change in the future.
Our historical ability to achieve returns our investment portfolio in excess of what is required to sustain our distribution level should provide shareholders insight into earnings prospects going forward.
Furthermore, we expect that leveraging the considerable resources, namely the access sourcing capabilities and industry expertise afforded by PC partners across the entire platform will be of significant benefits to all stakeholders of our combined company.
Integration of repossessed repositioning efforts are already underway as of this call. We've already sold approximately 87 million of assets originated by garrison at a slight premium to the fair value at the time of the merger pro.
Pro forma for the garrison merger and these asset sales Portland's leverage on a net cash basis <unk>. After the use of cash on hand to pay down debt. Once the debt becomes callable is approximately 1.4 times or regulatory asset coverage of approximately 169%.
We will continue to opportunistically sell assets as part of our repositioning strategy I believe that we have significantly reduced market risk to our portfolio in a very short period of time.
Overtime, our goal is to maintain a portfolio of directly originated senior secured debt investments with a focus on first lien investments and we look forward to updating you on our progress in future quarters.
With that I will turn the call over to Ted Gilpin, Our Chief Financial Officer for a brief overview of the financial results and then to Patrick Shaffer, Our Chief investment Officer for a review of our investment activity before concluding the call with some additional remarks Ted.
Thank you Ted good morning, everyone.
As of September Thirtyth, 2020, or any v. stood at 126 million or $2.85 per diluted share up 5% from last quarter of a 120.7 million or $2.71 per share.
The increase was mainly attributable to unrealized gains across our investment portfolio.
The 4.6 million on our debt securities portfolio.
1.9 million in our legacy CLL equity positions and 1.1 million owner investments in the KCAP freedom three.
Great Lakes joint ventures.
As Ted mentioned, we are beginning to observe improved market conditions, which resulted in the significant improvements in valuation.
Net investment income for third quarter, 2020 was 2.7 million or six cents per diluted per share as compared to 2.2 million.
Six cents per share in the third quarter of last year.
We've generated net investment income of six cents per share for the past five quarters right in line with our current quarterly distribution.
We announced a quarterly distribution of six cents per share on October 16th for shareholders of record on October 26 and to be paid on November 27th. Following this distribution, we will resume our normal declaration and payment schedule.
With respect to liquidity and unfunded commitments or aggregate unfunded commitments stood at 26.5 million at September Thirtyth 2020, However, only $2.4 million. This amount is subject to you lateral draw right by the borrower and the remaining commitments are subject to certain restrictions such as borrowing base.
Use of proceeds or leverage that must be satisfied before a borrower can draw down on the commitment.
On the liability side of the balance sheet. We believe that we are in a relatively strong position.
Have meaningful investment in liquidity flexibility.
Relatively limited funding commitments as of September Thirtyth 2020, we had 77 million in six <unk>.
On to 5% notes outstanding and 94 million and borrowings under our credit facility for a total of 171 million of debt.
As of September Thirtyth 2020, our debt to equity ratio was 1.36 times from a regulatory perspective, our asset coverage ratio as of September Thirtyth 2020 was 172%.
She is above the statutory requirement for bdcs of 150%.
Under the stock repurchase program announced in March of 2020, we continue repurchasing shares this quarter and repurchased 358959 shares of stock at an average price of $1.27 per share.
Expect to continue to evaluate opportunities to buy back shares to further facilitate these opportunities we entered into a tenbfive repurchase man on August 31st of this year.
As Ted Goldthorpe mentioned, we're very pleased to complete the merger with gears in capital this quarter.
At closing on October 28 years, and stockholders received it can be a combination of 19.1 million in cash from Portman Ridge and newly issued 400 shares valued at 100% of any v. scarcity.
Here's the stockholders also received an additional cash payment of 5 million from our investment advisor CR crust as a result, irrs and stockholders received for.
For share of garrison stock $1.50 in cash and 1.917 shows important rootstock for sure.
Following closing 400 shareholders owned approximately 59% of former and former gears and stockholders owned 41% of the combined company.
We were fully in process of integration and look forward to providing combined results next quarter.
With that I'd like to turn the call over to Patrick Shaffer, Our Chief investment Officer.
Thanks Ted.
Turning to page nine of the slide presentation. The third quarter was relatively quiet for us given where we plan to operate from a leverage perspective and preparing for the upcoming merger with garrison.
During the quarter, we made investment into two borrowers one of which was into the BCP great Lakes joint venture and the other which was a brand new bar, which was completed alongside other BC partners entities.
In aggregate these two investments totaled 4.7 million face value.
62% of which was a first lien security and the remaining 38% being net add ons to the great Lakes joint venture the.
The weighted average spread on the new investments excluding the great Lakes joint venture currently remain on our balance sheet was.
625 basis points.
Additionally, over the course of the quarter, we fully exited four positions one of which was the legacy non accrual or wage AI position.
In aggregate our fully exit positions represented a carrying value of $9.4 million and resulted in a gain of approximately $65000.
All positions, we're still either at or above their carrying value relative to June thirtyth or cost if it was acquired during the quarter.
After adjusting for movements between unrealized and realized we recognized approximately 5.6 million of unrealized gains on our portfolio.
Our debt and equity securities accounted for an approximate $2.5 million unrealized gain while seal equity positions accounted for $1.9 million unrealized gain and our two joint ventures accounted for the remaining 1.19 unrealized gain.
On an equivalent basis at the September Thirtyth permanent rich has 226.2 million of debt securities marked at 90.4% of par and yielding stages spread to LIBOR floor of 715 basis points on accruing debt securities.
This compares to 233.3 million of debt Securities March at 88.5% of par and he'll be stated spread to LIBOR work of 681 basis points on accruing debt securities as of June Thirtyth 2020.
And 165.7 million of debt securities portfolio marked at a blended price of 91.9% a bar and Steve is spread to LIBOR or 658 basis points when CR, Chris took over management for marriage on April Onest 2019.
Turning to slide 10, non accruals as of September Thirtyth, 2020 represented 3.2% of cost and 1.3% of fair value on the investment portfolio as compared to 5.9% and 3.7% respectively as of June Thirtyth.
With that I will turn the call back over to that goal part.
Thank you Patrick in closing we are pleased with our results in the third quarter, especially in these difficult Cove at times, the business environment, certainly seems to be improving compared to conditions in March and the second quarter. However, we will continue to remain vigilant as the possibility of a second wave of coated cases continues to limit for us.
We're very pleased to have successfully closed the merger with garrison and look forward to providing more updates on a combined company next quarter I'd.
I like to thank all of our shareholders for your ongoing support I will now turn over the call to operator for any questions.
Ladies and gentlemen, as a reminder, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone to withdraw your question press the pound key.
Our first question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Hey, guys, what does the ending falls under the care of some closing what do you estimate the ending share count to be please.
Sorry, I was on mute.
Oh, yes, I mean.
The ending share count to be just under 75 million.
I can give you.
The.
Gotcha Yeah.
I believe its 74 960 euros.
Great and I guess, a follow up on what's given where BDC led us in terms of valuations for hovering these days.
Where are your strategic thoughts in terms of once you digested garrison further acquisitions or.
How do you plan to go forward from there.
I would say well it's a couple of things one is we continue to into whole sectors cheap.
So we were going to were going to continue to continue to buy back our own stock and you'll see more of that I think this quarter.
I think number two is you know obviously, we're always on the the look out for additional things to add into our business, whether they are publicly traded bdcs or you know privately traded bdcs or other types of of mechanisms because again the benefits to our shareholders or just very compelling and we've shown a track record of being able to do.
These transactions I think it's we highlighted in the call, but you know when we close the garrison merger, we were two times gross leverage and we've got it down to 1.4 times net and I have two weeks and so it's a very similar playbook to what we've shown and so we've de risked the acquisition and and executed on a lot of.
The integration synergies you've talked about in a very short period time. So we're always on look out for it but I would say.
These things are always hard to predict and and.
So we don't have any we don't anything imminent to analysis, but that way.
Got it okay. Thanks.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
Our next question comes from Paul Johnson with KBW. Your line is now open.
Yeah, Hey, good morning, guys. Thanks for taking my question that you actually clarified one of the questions I wanted to ask to make sure I heard it right, but yeah 1.4 times pro forma.
Net leverage that's I'm, assuming after post closing.
Closing of all those asset sales 87 million or so that you mentioned.
Yeah, Yeah, that's right they do take a little bit to to actually settle but yes.
Sure, Yes, I got up to close to it and then and then they're out there are some seal the liabilities that we've inherited from the transaction, which become callable imminently.
So when those transactions.
Settle we'll be able to pay off debt. So that's oh, we quoted the reason the quarter's net is because we're waiting for these trials. These transactions are off our books from a risk perspective, but haven't settled and when they settle we'll be able to pay down our our some of our CLL liabilities.
Okay.
Okay, and then yeah post closing that merger, that's obviously very positive improvement very quick de leveraging and you guys.
Already completed their which is very positive, but going forward than the forward quarters.
Will the focus be to maybe first pay off some of those yellow troms debt were.
You turn your attention maybe just some of the unsecured debt perhaps the.
Baby bonds that are due in 2020, twos or any sort of priority there level for the debt capital.
I think I think one of the priorities is to remove the COO.
Liability debt first generally speaking.
Yes, where where where the baby bonds or are coming due.
Would you like to have a mix of secured and unsecured so there's.
There's a possibility that will go back into the unsecured market.
For that piece, but it then we'll probably have a blend between secured and unsecured and not be.
Reliant on the on balance sheet Siloed.
Got you.
And lastly, I just want to ask the the higher dividend income this quarter from the GE deal was that just more or less sort of a catch up from previous quarter or was there anything specifically that drove a higher distribution this quarter.
No you're you're pretty spot on you got held up in the prior quarters weren't able to distribute as much as we normally do we were able to do a catch up this quarter.
I think if you look across the last three quarters, that's pretty much this steady state.
Got you and one more if I may actually I'm, just kind of broadly speaking I'm from the beginning of the year, how would you characterize the depreciation I'm again, that's happened since the beginning of this year.
Remaining.
Depreciation about how much of that you think would be recoverable.
You know going into next year I'm looking I think approximately maybe 32 million in the first quarter of net depreciation I think this quarter. It was a pretty significant write up of 5.6 or so do you sort of look at that remaining depreciation as recoverable or how would you characterize that.
One night when I take the first crack at that.
I think if you look at our average where our average debt is marked we're still marked on a.
Decent discount to par so to the extent that we can continue to get non accruals down we don't have any surprises there is some embedded upside in our NAV.
Just between now and when we're going to realize that NAV is hard to predict and obviously you know I think our I think we're pretty cautious going into next year about just what's going to happen not not speaking about our own specific portfolio, but just in general.
So it's always hard to predict but you know again.
Where where our average debt pieces marked and where are seeing those are marked vis-a-vis. There you don't cost a we think we're conservatively marked and number. Two is is you know if things continue to recover as they are there should be some upside in or not.
Again, I I, we we really are hesitant to provide any kind of guidance or forward guidance. Just given you know the amount of uncertainty and change that's happening you know on a daily basis out there.
I think the good news from our perspective as you know.
You take a step back we've been able to increase debt spreads you know pretty dramatically actually over the last two quarters. So LIBOR has been kind of like interface. So that's been a negative.
But we have been able to get additional spreads and hopefully those spreads will stay on our books for some period of time and.
And then number two is you obviously saw the progress we've made on Nonaccruals this quarter.
And you know the credit quality of our portfolio has actually improved over the last six months and actually we've seen some improvement this quarter as well.
So again hard to hard to predict that trend continuing just given everything happening out there.
I'd say.
You know we continue to be encouraged from what we've seen on a trailing basis, let's put it that way.
Got you okay.
Thanks for that that's a good commentary and that's all from me. Thanks.
As a reminder, ladies and gentlemen that is star then one to ask a question.
Our next question comes from Steven Martin with Slater. Your line is now open.
Hi, guys.
I couple a quest.
My questions are can you talk in a little more detail about the.
The CLL portfolio, where it wherever it is what it went through and where was what it went through and where it is today.
And it Didnt look I thought you guys would be running more of it off and at cost it doesn't seem to be diminishing.
Hello.
Yeah, Ted or Patrick you want to address that I can give us that as well.
Sure Yeah.
Sorry, I Didnt do you want to know I mean, I mean talking about where it was where was to where it where it is now I think when when you look at our steel equity portfolio. Obviously, you know we're deemphasizing it.
And not continuing to invest but we have the.
The portfolio was split relatively evenly I'll say in terms of half of our positions are kind of out of their reinvestment period and half are still in their reinvestment period and so you.
When you think about where you know what happened during March and kind of where we are today about half the portfolio has been able to kind of take an active management rotate out of out of triple sees by asset the discounts and kind of generally.
You know refill their refill their their.
Collateral values and things like that and the other half of them are generally speaking in a bit about in a bit of a run off and so I think that the mix of those two things, it's kind of it's kind of leading us to be relatively flat on an amortized cost basis, but I'd defer a little bit to Ted Ted Gilpin on that specific accounting about.
Hi, Steve So I.
Obviously, you see a low because.
Through the effective interest method for accounting, which you know, which will determine which pieces that take down of the cost. If you will and which is recognized as income and as those cash flows change quarterly.
Get a different calculation as to what the I ours.
And when it gets booked and so on you know.
Typically since rather reinvestment you would you would start to see.
<unk> costs in the principal fees come down.
But at those cash flows change.
To give you need a quarter you may get a quarter were more of it is income and less bring down a principle, but generally speaking they should they should be continue to pay down overtime.
And so you will see them diminish so you're right, that's what you'd expect to see okay.
Okay, and the yellow income.
Was down.
This quarter, even though the COO Mark went up was there something in the accounting that accounted for that.
[laughter] [laughter].
Yes, generally speaking I'd, yeah, Oh God bless you.
If they're out of the reinvestment period, you have fewer less cash coming in overtime right you only have to write periods to bring forward. So so the calculation would come out that you know you would you would tend to see some of that income come down as well.
Yeah, there's also a little bit of a timing, there's also a little bit of timing lag between between the accounting and the marker of the seal equities.
So going forward should we see a low income.
The more like this quarter or more like the last couple of quarters or do we not know at any at any given point in time.
Well, it's it's it's sort of it's one of the frustrating parts as COO, Steve <unk>, you know that income is not necessarily predictable.
But I would I would say that it would tend to be you know relatively.
Relatively similar to where it is at the moment, although you know as they continue to pay down I would expect that that income to lessen.
Okay Yeah.
I think important I think importantly, obviously, the accounting will move things a little bit, but importantly, none of this year lows.
A couple of shut off during the March period, but but nothing there has been no further degradation on actual cash coming out of the the close so that's at least a decent indication that they should be relatively consistent.
Okay.
How about commenting on the Mark the portfolio marks.
Sort of subsequent to September Thirtyth I.E. October you had to Mark when the so you. After September 30, if you had a mark when the deal closed you had a mark at the end of October and obviously, you haven't marketed today, but sort of what where do you think that has evolved it gives.
In the market's tightening.
I would say I mean from my perspective, I would say so pro forma for the merger that was going to be some transaction costs that roll through that just legal fees and stuff to get it closed. So that's obviously a slight negative that we had as you've seen like you know there's been a continued.
Tailwind in the credit markets, so yeah hard to say, but when we set the you know you can back into our NAV as of the merger because you can look at how many shares were issued a you know at the time. So you can actually look at that and NAV is kind of like a little bit down like flattish, but that's just transaction costs.
So I guess, it's a long winded way of saying I don't think there's going to be a material impact on NAV as we sit here today, so little bit of Tailwinds.
Offset by some transaction costs.
Okay, and you started to talk about.
Or cost savings leverage in the acquisition, which obviously is one of the main goals of.
You know bigger bdcs buying smaller bdcs or combining them.
When you look at the cost structure.
You know.
What is the what is your cost structure look like going forward versus what they had and what you had.
Yeah, So I think.
Obviously, that's that is.
One of the big reasons to combine to get a little bit bigger and so if you look at our.
Income statement, if you look at the expense side professional fees admin services expenses.
Insurance.
And other Gionee, though you know one plus one doesn't equal to in this case so we.
We would expect you only have one on it not.
Two anymore right.
You are.
Expenses will increase a little bit as you have to have some more people working on some things, but I would I would expect that are.
Expenses become more in line with sort.
Sort of the rest of the industry on on a percentage of assets and so you know we've been a little bit high and and now you put the two companies in similar size together those expenses you know new margins go up so I think that's where you're going to start to pick up.
Yeah, I had heard that a lot of garrison people had left garrison you know before so.
<unk>.
Big Picture you know how many people did you bring over what did you did you have to bring over space. You know what are you going to have to do to your head count you know whether in your accounting area or otherwise.
Yes, well I mean, Fortunately space is not relevant for space relevant during cobot [laughter] well, that's not true the rent expenses portion of space, maybe relevant even if no one's using it.
Yeah right now it's very we yes.
Yeah. So I mean, that's a good question, Steve I don't you know we didn't we're not going to need to add more space I mean, I think that we did bring over.
One person from garrison.
As it relates to you know sort of the the financial and accounting side.
What we'll have to have a little bit more allocation to the to the fund, obviously bigger and more physicians and theirs and stuff to do but again, it's not a big lift I mean, we had lots of capacity.
Yeah, I mean, I mean, I'd answer it that versus what garrison was spending or we're going to spend a lot less.
Yes, that's very clear so that <unk> that all drops the bottom line within our own business. We've taken some cost actions over the last six months to take cost out of our own business across.
Across professional fees, you know some size a board or things like that and that all again just drops the bottom line.
So we're not only focused on cost take outside of the merger. We're also focused on our own business.
And anything like you know any cost like you know space all that stuff again like we you know we think the transaction on cost alone is about mid single digits accretive.
If we can take their liquid portfolio and monetize it and recycle it into the types of things that that we've been doing on origination franchise.
We think that's pretty accretive so we think the crushing and maybe even higher than that so.
So again, you've seen the spread pickup we picked up in the last nine months a lot some of that is spread widening in the markets, but a lot of that is monetizing you know somebody's acquisitions liquid assets and recycle them into more proprietary assets that have wider spreads. So between all those things you know it should be.
Mid to high single digits accretive.
Okay I have one last one last question and or comment [laughter], whichever, which I will repeat again and Ted you were probably expecting it have you given any further consideration.
Two a reverse merger now that your share count is bigger and you've done you're done with this deal.
[noise] that'd be even reverse split stocks I'm, sorry reverse split reverse split [laughter] yeah.
Yeah, I mean, it is said we.
Oh, sorry go ahead go ahead, but to do to do that we need a shareholder vote, and so I'm ready to vote [laughter], well, so ER and with mainly the Protmune. It's something that we're focused on and my guess is we'll do that in the next couple of quarters. I mean, it just makes sense for us to do it and so don't be surprised to see us do a reverse merger or a reverse stock split [laughter].
So over the last couple of months I mean, I think yourself and a lot of our big shareholders have suggested the same thing and I mean, we think it's a good idea.
So let's try to slip this in before you guys do your next acquisition [laughter] alright, Thanks, a lot.
Thanks.
We have a follow up question from the line of Christopher Nolan with Ladenburg Thalmann. Your line is now open.
And with that mid to single digit accretive to E. P. S I presume.
To Eni per share yep, okay.
Okay, Great and then.
What are your thoughts in terms of lowering your funding costs SP, a dead or anything else like that.
Well on the SP a debt I mean, I mean, we we are looking into it but I would say and and the terms for the SBH that are very attractive I'm not sure. We can get an S.B. I see approved.
And if we didnt get when approved I think would take us some period of time, so I wouldn't want to guide people to that.
You know I think our bigger focuses on we have I mean, the great thing with our business that we have a very diversified liability side between the seal oded, our bonds and our bank debt and during March when some of our peers had issues around their bank lines. Yeah. We're obviously very heavily skewed towards away from that now.
And so you know I think I think between you know Ted mentioned it earlier I think our focus is probably on tapping the unsecured markets at some point.
And at optimizing our our CLL.
Siloed that you know just given all this cash were taken.
So so yeah, we are very focused on reducing funding costs, but I don't think it's realistic for us to attack since the S.P.A. anytime soon.
Okay. Okay. That's it for me thank you.
That concludes today's question and answer session I'd like to turn the call back to management for closing remarks.
Thank you all for joining US today, we really appreciate every dialing in for all the questions and of course myself, Patrick Ted and the entire management team has always available to answer any questions or suggestions that you might have thank you very much for dialing in today. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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