Q4 2021 Portman Ridge Finance Corp Earnings Call
Good day, and thank you for standing by and welcome to the Portman Ridge fourth quarter 2021 financial results Conference call.
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Thank you good morning, and welcome to Portman Ridge Finance Corporation full year 2021 earnings conference call and earnings Press release was distributed yesterday March 10th after market closed a copy of the release along with an earnings presentation is available on the company's website at www adopt.
Portman Ridge Dot com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10-K 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 actual results may differ materially from those in the forward looking statements as a result of the number of <unk>.
Actors, 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.
With that I would like to now turn the call over to Ted Goldberg, Chief Executive Officer of Portman Ridge. Please go ahead Ted.
Thank you.
Good morning, and thanks, everyone for joining our full year 2021 earnings call I'm joined today by our Chief Financial Officer, Jason Rus, and our Chief Investment Officer, Patrick Schafer.
I'll provide brief highlights on the company's performance and activities for 2021, and Patrick will provide commentary on our investment portfolio and our markets. Jason will then discuss our operating results.
Financial condition in greater detail.
Yesterday afternoon, Portman Ridge announced its full year 2021 results were.
We were pleased to report a very strong year of earnings portfolio performance and investment activity.
For 2021, our net investment income increased to $42 million or $4 92 per share.
Our core net investment income increased to $25 4 million or 297 per share.
And now for the year increased to $281 million or 28.8 $8 per share.
All of these improved metrics reflect broad based improvements in our debt portfolio investments and joint ventures.
On the corporate front, we took steps to leverage fixed costs, lower our cost of capital and reduce expenses relative to our asset base.
We generated interest savings by driven.
Driven by a lower weighted average cost of debt.
Furthermore, we maintained other operating expenses at a relatively stable level and believe the impact of these savings will continue to materialize over time as we continue to grow and reposition our portfolio to higher quality and higher yielding assets.
Origination activity was robust during the year and we continue to realize the strength of the BC partners platform and generating attractive risk adjusted opportunities.
During the year, we continue participating in our stock repurchase program and during the year, we repurchased shares in the open market transactions at an aggregate cost of approximately $1 $8 million.
As a result, our board of directors declared a 63 cents per share quarterly distribution, which represents a one cent increase from prior quarter levels and another three <unk> increase from preceding quarters.
This marks the second quarter in a row of increased distributions.
This increased quarterly distribution reflects the consistently improved the performance of the company's operations and investment activities as well as the general economic outlook and related factors.
The refinancing of our long term fixed rate debt during 2021, especially now that the federal federal interest rates are rising should result in significant interest savings and higher net investment income for Portman Ridge during the first half of 2022, all else being equal.
We are well positioned and have the capacity to grow and increase the proportion of BC partners originate assets, while we will continue to be proactive and repositioning our portfolio and several targets already under consideration. We will also take an opportunistic approach.
With that I will turn the call over to Patrick Schafer, Our Chief investment Officer for a review of our investment activity.
Thanks Ted.
Turning first to the current market conditions as already noted by most of our peers. The fourth quarter of 2021 was our most active quarter from an origination perspective, and perhaps the second most active on exit and repayment front outside of Q4 2020, when we acquired garrison.
Although some of these trends abated in early Q1 due to the AMA crime variant Q4 activity was driven by ever increasing return to business as usual in the U S and a desire for sellers to crystallize gains prior to yearend.
As many of our sector have noted the market strength carried over from the first half of the year into the second half we had an active quarter in terms of originations and repayments with originations materially outpacing repayments.
Excluding revolving credit commitments, we invested a total of $108 million during the quarter and exited or repaid on investments with a carrying value of $78 $1 million.
With respect to debt originations made investments into 17 borrowers of which eight were just were existing borrowers in total all but three of these transactions were completed alongside other BC entities and the three transactions were all small investments in legacy Portman only borrowers.
Excluding short term investments that were sold prior to the end of the quarter, 93% of new investments were in first lien securities and 7% were in second lien securities.
The weighted average spread on new investments was 721 basis points. Additionally.
Additionally, our great Lakes joint venture returned a net $6 $2 million during the quarter and be opportunistic purchased $18 $1 million of assets from JMP group as reported on October 26, 2021 in a form 8-K.
On the repayments and disposition side, the fourth quarter was more active relative to last quarter due to the typical year end rush.
In total we exited or repaid on several positions the majority of which were repayments.
In aggregate. These exits represented a carrying value of approximately $78 1 million and resulted in an ink.
Incremental NAV of approximately <unk> $2 million.
Relative to September 30th 2021.
The fair value of course, if originated during the quarter, our debt and equity securities accounted for approximately $73 $7 million of net loss, while CLO equity positions accounted for $3 $1 million net loss and our two joint ventures accounted for a 0.1 million dollar net loss.
As it relates to the debt and equity Securities 3.6 of the $3 7 million is related to a select few investments one legacy equity position everywhere global and two legacy positions that have been on non accrual for some time group of Hema and pro Air.
As of year end, those legacy positions had an aggregate fair value of $2.8 million or 0.4% of total assets.
On an equivalent basis as of December 31, 2021.
Portman Ridge has $468 million of debt securities marked at 92, 8% of par and yielding a stated spread to LIBOR of 725 basis points on accruing debt securities disc.
This compares to $455 1 million of debt securities marked at 93, 8% of par and yielding a spread.
Stated spread to LIBOR of 748 basis points on accruing debt securities as of September 30th 2021.
Non accruals as of December 31, 2021 represented two 6% of cost and 0.5% of fair value on the investment portfolio as compared to 2.5% and 0.9% respectively as of September 30th 2021.
Seven investments were on nonaccrual status as of December 31, 2021, compared to six investments that were on nonaccrual status as of last quarter. However, we would like to note that the new non accrual is the result of converting a portion of our existing group behemoth term loan into a rolled up term loan so from a practical perspective, the non accruals are flat quarter over quarter.
Sure.
I'll now turn the call over to Jason to further discuss our financial results for the period.
Thanks, Patrick.
Given this is the time of year, we provide annual results I wanted to take this time to highlight some of the more notable achievements, we were able to accomplish in 2020 one.
I'll start with the sizable investment portfolio acquisition acquisitions done recently or which we were able to earn an entire year of interest income from the $353 million of assets acquired from garrison in Q4 2020.
This resulted in a significant increase in interest income during 2021 and adds to our core investment income.
We then added to this with the acquisition of H cap with assets of 89 million in late second quarter, 2021, which has had incremental contributions to core investment income with minimal purchase discount not.
Not only have we made progress on the asset side of the balance sheet, but we were able to reduce our cost of capital through the successful recent refinancing of $77.4 million of our six and one 8% baby bonds and even with the growth in the portfolio, we maintained our target leverage ratio.
In addition, we completed a 10 for one reverse stock split effective August 26, 2021, which benefits our shareholders through enhanced capability to more efficiently invest in Portman shares.
Accordingly, all common shares and per share metrics have been adjusted retroactively for this split.
As Ted previously mentioned during the year through these efforts, we improved our net asset value net investment income lowered net expenses as a percentage of total investment income and lowered our cost of capital.
Our net asset value for the full year 2021 increased to $280 1 million or $28 88 per share from $216 3 million or $28 77 per share year over year.
Reflecting broad based improvements in the debt portfolio investments and joint ventures.
Total investment income for the full year of 2021 was $80 1 million of which $63 8 million was attributable to interest income from our debt securities portfolio.
This represents an increase of 87% compared to total investment income for the full year 2020, and it was driven by higher interest income and higher capital structuring fees received during the year, reflecting a strong level of originations.
Net expenses for the full year 2021, although increased to $38 1 million decreased to 47, 6% as a percentage of total investment income as compared to 62% in 2020.
As we have discussed at length, we are very focused on maintaining a stable level of operating expenses against our asset base, which we believe will start to normalize given the significant asset growth and relative stability in the portfolio.
As a result of the $37 3 million increase in total investment income offset by a $12 3 million increase in net expenses net investment income for the full year 2021 increased to 42 million were $4 92 per share as compared to $17 million or $3 40 per share a year ago.
We have provided additional information this quarter within the earnings presentation on slide five to help show what we consider to be our core earnings absent the effects of amortization of purchase discounts.
We have shown the impact of purchase price accounting to both investment income and net investment income for the last three years. We believe this provides further transparency and the investment income one may expect absent the amortization of purchase discounts recorded.
As the purchase discounts or amortize and accreted into income the difference between GAAP earnings and core investment income is expected to reduce over time to eventually be consistent with what the core investment income represents.
Investment income for the full year 2021 was $63 4 million, an increase of $24 3 million as compared to core investment income of $39 1 million in 2020.
Our core net investment income for the full year 2021 increased to $25 4 million or $2 97 per share as compared to $13 3 million or $2 67 per share a year ago. It is our intent to continue providing similar disclosure on an ongoing basis.
Moving on to the liability side of the balance sheet as of December 31st 2021, We had a total of $352 4 million par value of borrowings outstanding comprised of $80 6 million in borrowings under our credit facility of $108 million of our four and seven eighths percent notes due 2026 and 106.
$3 7 million in secured notes due 2029.
During the year, we redeemed in full the aggregate amount outstanding of 28.75 million of the H cap, 6.25% notes due 2022, we also fully refinanced 77.4.
Million of our six and an 8% notes, replacing them, both with four and seven 8% notes in the amount of $108 million due 2026 and.
In addition, we repaid 88 million of lower tranche, CLO debt obligations, which reduced our cost of capital and allowed us to manage our leverage to a point, we believe optimal to generate yield but within a reasonable risk risk tolerance.
During the fourth quarter, we also purchased $18 1 million of portfolio assets in exchange for $1.4 million in cash and 556852 shares of common stock issued at NAV during fourth quarter 2021, resulting in approximately $16 million of new equity.
These aforementioned items have put us in a much stronger financial position and we are pleased with the current composition of our capital structure.
At December 31, 2021 par value of outstanding borrowings was $352.4 million with an asset coverage ratio of total assets to total borrowings of 178%. Our gross leverage was 1.3 times and 1.01 times on a net basis.
Our aggregate unfunded commitments stood at $47 9 million as of December 31, 2021, we had unrestricted cash of $28 9 million and restricted cash of $39 4 million, which along with other assets places us in a good position to meet commitment obligations as they may occur.
Finally during the year, we repurchased 75377 shares under our <unk>.
Stock repurchase program and open market transactions at an aggregate cost of approximately $1 8 million, which we plan to reestablish as soon as possible.
As mentioned in our earnings presentation, Our board has renewed our stock repurchase program for another year, and we plan to generate value to the shareholders by continuing to buy shares when and as we believe market pricing is advantageous to do so.
With that I will turn the call back over to Ted Goldberg.
Thank you Jason.
Before opening the Florida questions I would like to.
Address an important topic, which is the impact of rising rates.
As other bdcs.
Portman Ridge investment income is affected by fluctuations in various interest rates, including the LIBOR and prime rates as.
As of December 31, 2021, approximately 84% of our debt securities portfolio was either floating rate with a spread to an interest rate index, such as LIBOR or the prime rate.
75% of these floating rate loans contain LIBOR floors, ranging between 50 basis points and 200 basis points.
As of December 31, 2021, we had approximately $352 million of borrowings outstanding of which approximately 31% had a fixed rate and 69 had a floating rate component.
As we move forward with new investments in 2022, we expect these portfolio investments to predominantly be floating rate investments.
In periods of rising or lowering interest rates the cost of the portion of debt associated with fixed rates such as our four and seven eights notes due 2026 would remain the same while the costs associated with the borrowings under the revolving credit facility would fluctuate with changes in interest rates.
An increase in the base rate index for floating rate investment assets with increased gross investment income and a decrease in the base rate would decrease gross investment income.
In either case, such an increase or decrease may be limited by interest rate floors minimums for certain investment assets.
A 1% increase in interest rates would have a negative impact of approximately $1 million at $1.1 million toward net investment income, while at 2% and 3% increase in interest rates would have a positive impact of approximately $217000 and $1 7 million respectively.
I'll close by saying, we're very pleased with the progress we made during the year in terms of active repositioning deleveraging and refinancing our long term debt and we continue to generate solid earnings results on a consistent and steady basis.
We're also pleased to be a great financial position and for the second quarter in a row, increasing our distributions per share to our shareholders.
Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks and I'll now turn the call over to the operator for any questions.
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.
That is star then one if you'd like to ask a question at this time.
Our first question comes from Christopher Nolan with Ladenburg Thalmann.
Hey, guys.
The increase in Clo's was that related to the JMP acquisition.
Yes.
Okay, and then by my calculation. It looks like you guys did very little in the way of stock repurchases in the fourth quarter is that correct and if so.
Does that indicate a change in capital management strategy.
Yeah.
I'd characterize that as we had a lot of filings in the fourth quarter that were.
Pretty much throughout the fourth quarter and our <unk>.
Program had expired so the windows, where we're limited for us to reopen that we.
And then we've been closed down.
Really since then with open filings. So we're I would not take that as an indication of.
Our view on market pricing.
We plan to buy back stock as soon as practically possible.
Okay and is your leverage ratios show one five to $1 four O.
That's right, yes, thats our target window.
And final question.
The realized gain so what was the driver on that.
I missed it.
Jason's comments.
I would say I mean, we had 20 plus sales throughout the quarter I would say, there's not really one of any particular note more than another.
And I would say the majority of that is a flip.
Between realized and unrealized.
There was very little NAV impact to that.
Great.
I'll get back in the queue. Thanks.
As a reminder that is star then one to ask a question.
Our next question comes from Ryan Lynch with K B W.
Hey, good morning, Thanks for taking my question.
First one just a high.
Our level one.
Pete.
Look towards 2020 to you guys.
Several years ago.
Sure.
Right.
Capital structure right now.
What how should we measure.
Back in 2022.
Okay.
Good luck for fall.
Yes.
Yes, it's a great question, so, yes, I mean I think.
The level of transaction activity I think it's going obviously slow in that and we're really trying to point everybody towards our core earnings just because of some of the noise around the accretion.
At our Investor deck, and we tried to address it.
So I think this year you know listen I think we are pretty cautious.
Going into this year, just given everything going on and this is even this is pre the Russian conflict.
So even before that I think we're getting pretty cautious. So I think you know our goal is to kind of keep leverage within our range its extent good.
Acquisitions come along we'll obviously take a look at them, but really our goal is to continue to wring out costs out of our business and drive.
Stable earnings and stable credit quality.
Okay.
Okay.
And then one question I had you guys flagged it just shows the weighted average EBITDA for your portfolio.
$75 million in the fourth quarter I'm, just curious is that you buy.
Yes.
There is a few transactions that you guys have.
More like broadly syndicated loans that are really large skew that number or how should we think about that that feels pretty big relative to the side.
Yeah, I'll start and then I'll, let Patrick jump in Yeah, I mean, your debt you're dead right. So when we took over the garrison portfolio some of there.
Obviously, they had a on balance sheet CLO and some of the assets in their SKU. The SKU the number is high.
So you know our core franchise is really 10 to 50 of EBITDA. So that number is a little misleading because it's skewed by a couple of things that we inherited in the garrison transaction, Yes, I think the only thing the only thing I'd add is typically if we're going to be in a junior position and are in the cap structure, we like much larger.
Businesses are much larger more stable businesses. So some of that impact is it's tough to see exactly but you know as we are exiting out of perhaps.
Smaller company legacy second lien positions and investing in kind of I'll call. It a new second lien position than that second lien securities will be will be flat, but will actually be high grading into into larger more stable businesses. So that's kind of some of our game plan as well, but I wouldn't read too much into that 75, it is a little bit skewed away from what I.
Our kind of core franchises.
Okay.
Makes sense.
<unk>.
And then how are you guys thinking about.
And going forward.
You guys have obviously you've raised it twice.
I think.
<unk>.
And you guys flagged that that's helpful.
You know kind of the core.
Thank you guys 2021.
Which was 74 stack on a quarterly basis versus the Greek banks.
Just curious if.
That level of earnings.
It's relatively sustainable going forward, there is a pretty big gap between.
Yeah.
Somehow.
BDC.
Davidson.
Sure.
What are your thoughts regarding dividend.
Hey al.
Yeah.
What percentage is the right number but how do you guys think about.
Hello.
Yeah. So I'd say, it's great question. So you know this is a subject of a lot of discussion with our shareholders and our board.
I think listen we have a very very strong dividend coverage. We also have one of the highest dividend yields at NAV and at market in this space. So we're at the very high end of our fault.
Pretty high end of our payout already and it just goes to Arctic Roe's are obviously pretty strong.
No.
Listen I think there's a lot of uncertainty out there between everything going on and so we want to make sure whatever we raise our dividend too we feel really good about.
But to the extent that these earnings tailwind continue and to the extent that our credit quality is stable, which which so far it is.
You know I wouldnt be surprised for us to continue to increase the dividend I don't think youre going to see us.
New phenomenon out there across corporate America is a variable dividend and I don't think youre going to see us pursue that policy.
And then in terms of it the other thing that benefited us as when we did a lot of these merger transactions. There is a lot of tax benefits to doing that so we were very were in actually pretty good shape on our spillover income perspective, so unlike unlike a normal BDC who is static in nature.
We you know we have a lot more flexibility in our dividend policy just due to the so these tax benefits would be picked up in some of these deals.
Okay.
Gotcha.
Okay.
That's all for me this morning I appreciate your time today.
Thanks, Brian .
As a reminder, if you'd like to ask a question at this time that is star then one.
We have a question from the line of Steven Martin with Slater.
Hi, guys.
Okay.
Can you hear me.
Yeah, Yeah, yeah, okay.
A follow up to Ryan's question.
Given your level of core NII, given you know what I'm looking at slide five.
Forgetting spillover for a second you see.
Your.
Your spread of dividend to NII is actually sort of decreasing and so your spillover is therefore, increasing every quarter.
And if.
The 2021 sort of bottle is any example.
You know you're going to continue with that level.
Do you think inquiry and I know, it's a subject of a lot of discussion, but do you think increasing.
One quarter is going to narrow that gap at all.
Yeah, I mean, I think I think increasing it by one set of quarter clearly narrows the gap as I said earlier I mean, we disclose our spillover income you know we're in we're in decent shape, there, but that will begin to build obviously over the next four to eight quarters. So this is something that's going to be a subject of a disc.
A discussion every quarter and we just want to make sure that whatever we raised our dividend too.
We can stand up for a very long period of time through all cycles.
As he said, we do have a decent amount cushion now between core earnings and our.
And our dividend, but unlike most bdcs because we picked up a lot of tax but one thing one thing that I don't think it was apparent to a lot of people. We did these mergers as we did pick up a lot of tax benefits for our shareholders, which have real value.
And so again from a spillover perspective, you know that'll build bell definitely build over the next couple of quarters and so you know you can imagine that we're talking about this quite a lot about where to ultimately settle out our dividend policy vis vis your core earnings.
Okay.
Also say, it's the reason I'll give you a wishy washy answer because obviously over the last two years, we've had a lot of I would say nonrecurring expenses in terms of M&A fees lawyer's fees and then layer on top of that you know, where we're really trying to drive a lot of costs out through refinancing that you know we did switch certain professionals to.
Get costs down and we've done some stuff on the administration side to get it down. So I think I think we feel like our core earnings our core earnings and there are some tailwind to earnings.
Particularly if rates go up more than a couple a couple of fed rate hikes and LIBOR as of now is up 80 basis points was it 30 like you know couple.
A couple of weeks ago.
So.
You know all of that is good for us hopefully over the long period of time.
Alright, if I can refer to slide 10 for a second.
Equity Securities jumped in Q2, obviously merger related has seemed to be relatively flat.
The last couple of quarters.
They're all with all the refinancings M&A activity et cetera.
I would've expected unless youre investing in new equity securities I would've expected, maybe some of that to run off or get refinanced out.
Yeah, we're not.
As a general rule, we're not investing in new equity only securities. So there are some instances, where we're making an investment and we're getting penny warrants or something like that as kind of part of the transaction. So there are some kind of quote unquote, new equity securities, but obviously, it's a it's a corollary with that investment we're making.
We do have a couple of equity positions in the book that have appreciated in value over the last couple of quarters that that BCE is invested in so there's kind of some offset some of these legacy.
Equity positions kind of being re fans out or taken out and then an increasing in fair value of some of the positions that we put on over the last you know call. It.
Two and a half years.
But I guess do you is there sort of on the horizon should we expect that it's $22 million should we expect that maybe some of that gets refinanced and converted into interest bearing.
Securities or do we expect.
That could be railroad liberally static.
Yeah, I think as a general rule you it should be decreasing a little bit, but not significantly I mean, if you look at our soi, it's a lot of cats and dogs in terms of line items. So there's not any I think our largest equity position as maybe $5 million and that's actually a preferred equity position that is generating.
Our income for us that is a cash paying security.
I'd say as a general rule of thumb again, they're all it's just a lot of relatively small positions. So we would love to reduce that over time and move that into interest bearing securities, but the reality is there's there's not like a meaningful needle mover in that in that group.
Right.
You commented on your leverage ratio.
It's sort of slipped a wiggle. This core this quarter you didn't invest as much as you got repaid was that a conscious decision or was that just a function of what was what was available to you and what got repaid.
Honestly it was a bit of a function of your own activity. So kind of heading into December we had a number of planned investment activity drew a little bit on the revolver kind of where we are ready for a couple of deals we had two or three deals that got pushed and then at the end of the year, we had a bunch of repayment activity that obviously wasn't necessary.
We anticipated.
So between the combination of those things, we kind of drew on our on our facility expecting to need the capital and at the end of the day, we had kind of way more repayments towards the very end and so I would think of that as more of a minor blip.
From a timing perspective and anything that was.
Very intentional on our part to take up leverage.
Did I Miss was they were disclosure that I didn't see on whats on quarter to date activity.
Okay.
I think I had mentioned it in our in our in my script I think we had we had purchased $108 million of securities and I think we exited $78 million of securities give or take now those or does it kind of new deal. So if we if we.
If we funded an existing commitment that kind of doesn't get counted in there and if we and if just kind of regular course repayment activity doesn't necessarily get get counted in that.
But I'd say as a general rule of thumb, we were kind of we put out more money than we that we brought in.
And one last question and maybe again I got on a couple of minutes late did you comment anything on your in your portfolio companies exposure to Russia, Ukraine Belarus.
Yes, we did and I mean I was thinking the same thing so we have no direct exposure to.
Any of the recent volatility.
And we have very very limited indirect exposure. So we don't have any energy companies or anything else. You know the one thing we are watching is for like third derivative effects, so things like rising input costs.
And other factors, but as of now we've not seen any material impact on our portfolio.
Okay, and one last one on the share repurchase you said your plan has expired.
Is the intention to be opportunistic or is the intention to put a new plan in place.
Yeah, sorry, so couple of things to clarify there the board just reapproved, our extension or a new repurchase program that will extend through the year 2022 expiring March 2023, what I referred to.
Plant expiring always just a brokerage agreement with.
With a broker and we just need to reestablish that.
Our old <unk> five program expired and we would look to implement a new one at some point.
Yeah, Yeah exactly.
That's what I was referring to when that might you know, especially if you're not in a prospectus proxy situation, maybe youll be able to actually buy some shares.
Exactly and we are we are Oh boy we are.
And eager to exit this blackout window.
Good Thanks, a lot guys.
Thank you yes. Thank you.
That concludes today's question and answer session I'd like to turn the call back to Ted Goldcorp for closing remarks.
Great well, thank you very much for for.
Joining us today and thank you for all your support and we look forward to speaking to you guys in a couple of weeks when we report our first quarter earnings.
Thank you very much.
This concludes today's conference call.
Thank you for participating you may now disconnect.
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