Q1 2022 Portman Ridge Finance Corp Earnings Call
Yeah.
Good day, and thank you for standing by welcome to the Port minor Reed's first quarter two.
<unk> financial results conference call at this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer your staffing to ask a question. During the session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded and without further Ado I would now like behind the conference over to one of your speakers today Mr. <unk>.
Levi. Please go ahead.
Thank you good morning, and welcome to Portman Ridge Finance Corporation's first quarter 2022 earnings conference call and earnings Press release was distributed yesterday may 10th after market close a copy of the release along with our earnings presentation is available on the company's website at Www Dot Portman Ridge Dotcom Indian.
Buster relations section and should be reviewed in conjunction with the company's Form 10-Q 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 a number of factors.
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 got Dark Chief Executive Officer of Portman Ridge. Please go ahead Ted.
Good morning, and thanks, everyone for joining our first quarter 2022 earnings call.
I'm joined today by our Chief Financial Officer, Jason Roos, and our Chief Investment Officer, Patrick Schafer.
I'll provide brief highlights on the company's performance and activities for the quarter Pat.
Patrick will provide commentary on our investment portfolio and our markets and Jason will discuss our operating results and financial condition in greater detail.
Yesterday Portman Ridge announced its first quarter 2022 results and we were pleased to report another solid quarter of financial performance.
Our first quarter earnings were in line with the internal expectations, taking into consideration pervasive market volatilities volatility and other macro economic and political factors that ultimately led to a relatively quiet quarter on the new investment front.
We were happy to report that our NAV for the first quarter of 2022 remained relatively flat at $278 million or 28 76 per share as compared to 280 million or 28 88 per share in the fourth quarter of 2021.
Excluding a onetime tax impact NAV per share would have been 28 81.
Decline of less than 3% as compared to December 31, 2021.
For the first quarter of 2022.
Net investment income was $7 9 million or <unk> 82 per share and our core net investment income was $6 1 million or <unk> 63 per share.
Our board of directors declared a <unk> 63.
Per share quarterly distribution, which reflects the stable performance of the company's operations and investment activities as well as the general economic outlook and related factors.
Furthermore, during the quarter, we repurchased 22990 shares under our renewed stock repurchase program at an aggregate cost of approximately $545000 and we've continued to be active under this program in the second quarter.
Permit Portman Ridge is refinanced our revolving credit facility agreement with Jpmorgan Chase since the end of the first quarter a milestone achievement for the business.
This amended agreement shifts from LIBOR, two or three months, so for benchmark interest rate.
It uses the applicable margin to two two spot eight zero per cent per annum from 285, 2.85% per annum and extended the reinvestment period and scheduled termination date to April 29th 2025, and April 29th 2026, respectively.
This combination of a lower spread and the shift to sofa is expected to reduce borrowing costs going forward.
Additionally, we are very pleased to announce that we've added two new seasoned members to our board of directors, Jennifer Kwan Chow and Tricia Hazelwood.
Overall, we believe that we're well positioned to further improve our portfolio performance and investment income in 2022.
With that I will turn the call over to Patrick Schafer, Our Chief investment Officer for a review of our investment activity.
Thanks Ted.
The first quarter of 2022 was relatively low in terms of activity on the originations and investment side due to a great deal of activity at year end, which was then followed by a global geopolitical disruption market volatility inflation and rising rates have been ongoing market conditions, but the recent conflict in Ukraine.
Had a meaningful impact on deal volumes for a period of time.
Of the approximately $43 million of investments during the quarter. Excluding short term holds $21 5 million or 50% of these investments were made in the last two weeks of March and therefore had minimal impact on our income statement.
Excluding short term investments that were sold prior to the end of the quarter, 67% of the new investments were first lien securities and 26% were second lien or unsecured securities. The weighted average spread on new investments was 811 basis points. Additionally, our great Lakes joint venture funded in that zero point $9 million during the quarter.
Sure.
Our debt securities portfolio at the end of the first quarter remained highly diversified with investments spread across 30 different industries and 116 different entities, all while maintaining an average par balance per entity of approximately $3 $3 million.
In aggregate, our $483 million of debt Securities was marked at 94, 4% of par and yielding a stated spread to LIBOR of 727 basis points on accruing debt securities.
As of March 31, 2022, six of our debt investments were on nonaccrual status compared to seven at December 31 2021.
Investments on nonaccrual status at March 31, 2022 were 0.2% and one 9% of the company's investment portfolio.
At fair value and amortized cost respectively.
Compared to 0.5% and 2.8% as of December 31, 2021.
During the quarter Roscoe medical which was formerly on nonaccrual and was a large second lien position was repaid in its entirety and we also sold group of Hema and the beginning of the second quarter.
In total group of Hema represents 84% of our total non accrual portfolio as of March 31 on a cost basis perspective, so the sale will materially cleanup our nonaccrual portfolio.
Although investment activity and Rudy originations were lower in the first quarter of 2022 as compared to the second half of 2021, which was a sector wide trend. We have deployed approximately $35 million of our available cash and new investments subsequent to the first quarter and have a pipeline of an additional $20 million to $30 million we are.
Ready to deploy it before the end of the second quarter.
And now I'll turn the call over to Jason to further discuss our financial results for the period.
Thanks, Patrick as both Ted and Patrick previously mentioned similar to many other bdcs.
Our financial performance for the quarter was affected by market volatility and other macroeconomic job and geopolitical factors. Nonetheless, we were able to maintain a relatively unchanged net asset value per share for the first quarter of 2022 and $28 76 per share which includes a onetime tax provision of approximately five.
<unk> per share as compared to $28 88 per share at December 31, 2021.
Total investment income for the first quarter was $16 9 million of which 13 million was attributable to interest income from our debt securities portfolio.
Excluding the impact of purchase price accounting, our core investment income for the first quarter of 2022 was $15 1 million.
As has been the case in previous reporting periods. We continue to reduce expenses total expenses for the first quarter 2022 were 9 million compared to $10 1 million in the first quarter of last year. This was predominantly driven by reduced professional fees and other general and administrative expenses.
At quarter end, we had total investments of $568 million, which was up from the previous quarter by approximately $18 million as a result of purchases and originations outpacing paydowns and sales in the quarter.
As we continue to see interest rates move up we believe we are well positioned for increased investment income as those rates have already begun to extend beyond a certain rate floors embedded in our asset portfolio.
Our current portfolio is approximately 77% floating rate and we expect the majority of our future investments to predominantly be floating rate investments.
Our unrestricted cash at the end of the quarter was $20 5 million and restricted cash was $63 1 million, which along with other liquid assets places us in a good position to meet commitment obligations as they may occur and as market markets continue to fluctuate.
On the liability side of the balance sheet as of March 31st 2022, we had a total of $354 2 million par value of borrowings outstanding.
Price of $80 6 million in borrowings under our credit facility of $108 million of four and seven 8% notes due 2026 and $163.7 million in secured notes due 2029, this remains relatively unchanged quarter over quarter.
At the end of the quarter, we had $34 4 million of available borrowing capacity under the senior secured revolving credit facility and 25 million of borrowing capacity under the 2018 dash to revolving credit facility. Additionally, we have recently as we have recently announced that we were successful in refinancing our senior secured revolving credit facility.
After quarter end, which reduces the rate of interest and extends the maturity of the facility.
As of March 31st 2022, our debt to equity ratio was 1.27 times on a gross basis and <unk> 97 times on a net basis.
Given that our stated objective has been to target overall leverage to a range of 1.25 to 1.4 times.
We believe we remain solidly positioned to pursue growth opportunities.
Lastly, and as announced yesterday, our quarterly distribution of <unk> 63 per share. It was approved by the board and declared payable on June 7th 2022 to stockholders of record at the close of business on May 24th 2022.
With that I will turn the call back over to Ted Goldberg.
Thank you Jason.
Ahead of questions I'd like to again address the impact of rising rates in relation to Portman Ridge.
Norman Ridge investment income is affected by fluctuations in various interest rates, including LIBOR sofa and other benchmark rates.
As of March 31st 2022, approximately 87% of Portman Ridge debt Securities portfolio was either floating rate with a spread to interest rate index such as LIBOR.
76, 6% of these floating rate loans contain LIBOR floors, ranging from 50 basis points to 200 basis points.
In periods of rising or lowering interest rates the cost of the portion of debt associated with the four and seven eights notes due 2026 would remain the same given that this debt is at fixed rate while interest rate on borrowings on our revolver revolving credit facility would fluctuate with changes in interest rates.
As we mentioned the press release yesterday, assuming a 1% increase in interest rates. Our net investment income will increase by approximately $1.5 million on an annualized basis.
The increase in rates was more significant such as two or 3%. The net effect on net investment income would be an increase of approximately $3 2 million and $4 8 million respectively.
I'll close by saying that we're very pleased with the progress we've continued to make this quarter in terms of active repositioning.
We're also pleased to be in a stable financial position to continue to generate high distributions per share for our shareholders.
Thank you once again to all our shareholders for your ongoing support.
This concludes our prepared remarks, and I'll now turn over the call to the operator for any questions.
Thank you.
As a reminder to ask a question you will need to breath as tier one.
And keypad.
That would be our follow would be number one on your telephone keypad Las Vegas, a moment to compile the Q&A roster.
Your first question comes from the line of Christopher Hayden Olin School.
School thing.
Hey, guys.
Just a clarification your interest rate sensitivity seems true dramatically changed from year end.
You were effectively liability sensitive so now youre asset sensitive.
Fair characterization.
Yeah, that's a function of kind of where we are at quarter end versus where libraries has shifted on a quarter over quarter. So as of period in Q4, we were.
Probably looking at.
The trough of that analysis, meaning we were on our way down as the rates were starting to hit that.
And point given that are you know eight.
80% of our assets are variable rate, you know I'd say, 75% of it or so as you know subject to.
Floor predominantly around the 75 basis points 200 basis points and our debt is.
You know just Florida zero, So Q1 to Q2, we're kind of looking at that inflection point, which is what's driving that out yeah. The rate increases on a go forward basis. So as of Q4, when LIBOR was 30 basis points most of the 1% increase kind of hurt us in terms of having the LIBOR floors versus the liabilities, but where we sit today.
They were kind of through those floors are generally speaking for the most part rate increases are positive for us.
Great and then give.
Given that.
And also given the solid EPS in excess of the dividend.
Duration or workforce should we think the dividend.
Dividend policy is going to go and consideration of a dividend supplements and you can tell me what the spillover is that'd be great and I'll get back in the queue.
Yeah. Good question. So you know, we obviously have increased our dividend in the last two quarters I think given all the volatility and given where we are leverage wise, we want to be a little bit cautious today, but I think it's something we're always looking at you know, we're obviously over earning our dividend we feel very very good about core earnings and.
As Jason just outlined you know given where LIBOR is today and you know in and looking at and we're not macro forecasters, but looking where anybody would tell you its going we should have some pretty good earnings tailwind. So it's something we'll revisit every quarter I mean, we always know we also look at our dividend yield at NAV.
As well as at market, but at NAV, we still think we pay out a very competitive dividend vis vis the sector. So it's something we're always looking at them and evaluate every quarter. We would I think our general policy is we prefer to pay a higher state of dividends.
Rather than use special dividends over time, and because you know Chris because of our.
Previous mergers it actually really helped our spillover income meaning that mitigated it.
So so we haven't had we haven't been building material amounts of spillover income, where we need to do a special.
Great. Thanks, Tim.
Thank you.
Again, everyone to ask a question just press star one on your own.
Phone keypad jewelry.
Next question comes from the line of Ryan Lynch. Your line is open.
Hey, good morning, Thanks for taking my questions first.
First of all.
Housekeeping question.
Hey, you guys have a target leverage range.
Five four times is that a gross leverage range or is that in that range backing out cash.
Yeah, we think of that as it is a net range because we can always particularly since we have the J P. Morgan revolved, where we can always use cash in our balance sheet to pay down that facility to the extent, we want there's no prepayment penalties or anything like that so we would think of that as kind of a net range the 1.51 points.
Two five to 1.4.
Gotcha.
And then you talked about the environment.
<unk> been slow in Q1, and then kind of picking up.
Last few weeks and being more robust in the second quarter, which I think a.
A pretty common trend that we've heard in the BDC sector this quarter.
I'm just curious you know the environment is obviously changing pretty rapidly for us.
Okay.
Sure.
The biggest concern out there is inflation, whether that's you know labor inflation or.
Input cost inflation that that kind of thing.
The key risk out there. So hum how are you guys looking at underwriting companies today, given that the economic environment is changing.
So wrap of the and is so uncertain.
It's sort of you know that those changes are occurring.
It gets really occurred recently it feels like when you're underwriting the company, you're probably looking at their financials from from probably last year, maybe a couple of months. This year you don't really have updated thoughts on how they're really navigating and so has your investment.
That's a whole lot with the target strategy changed at all given this uncertain environment.
Yeah, I think it's a great question. So trailing earnings are very very strong and so you haven't seen it in earnings yet, but I think were pretty negative on on the future. So we don't see us go into recession anytime soon and again like we we get data from 600 of our portfolio companies.
And there are certain areas that are weak so like consumer discretionary is definitely slowing down like we're seeing that anything that the consumer has the choice to buy were actually seeing slowdowns in those areas, we tend to be more be focused versus b to C.
And then you are I mean, the biggest issue we're seeing is supply chain and so inflation to date people being able to pass it on although competent companies are now making commentary that it's becoming harder to do that particularly in consumer discretionary but.
But we don't have a lot of exposure there.
We are seeing weakness in industrial so you know just costing people more money to make stuff or they just can't make it fast enough and so we are seeing weakness generally speaking.
In certain discrete second sectors. So I think we're I think we're underwriting stuff, assuming we're going into recession again, we're not a macro economist, but again, we can only get paid back at par, we can't do better than that and so we're being pretty conservative. So you can see we're way below our target range for leverage.
And you know we've invested some of the cash but you know what.
I think I'd be surprised if we're we're at the high end of our leverage range anytime soon.
Okay.
That makes sense and then.
Tetra Pak from and ask you to get out your Crystal ball on this next one.
One of the things that we saw during though because you talked about rising interest rates one of the things we saw during the last rate hike cycle.
Was that there was a lot of spread compression.
They really offset a large portion of the benefit from rising rates.
Looks like this rate hike cycle is going to be much different one it's occurring way quicker.
And then two there theres much more of an uncertain economic environment I think it's tied to so are you seeing any spread can break.
As borrowers are looking at the forward LIBOR curve at the same things you are have you started to see any pressure on spreads yet on new deals.
<unk> heard about that from a market or are.
Do you think they're going to hold up fine.
Jim.
As rates continue to rise.
Yeah. It's a great question I mean, usually you have you know like anytime in my career, you've had rising rates in response to strong to strong economy. Now you have been raising rates due to inflation. So you're right like the rates are going up for different reasons than we've had in the past.
We have not seen spread compression at all in our general area.
And it feels like people are being more cautious but that being said you know there's less deals right. So I would say the competitive environment are we were hoping was going to the competitor and buyers actually like pretty robust right. Now like you know, we're losing a lot of deals.
And that's surprising given the volatility and quite frankly, the upon that we fishing tends to have people who've kind of just.
<unk> been successful on the fundraising front.
But deal flow has picked up quite dramatically. So I'm sure you've heard that from others. So are our deal flow was down our traditional like sponsored deal flow was down dramatically in the first quarter and it's picked up it's it's it's it's normalized pretty aggressively over the last couple of weeks. So.
So I'll give you I'm, giving you a long answer, but we don't see spread compression today, but you know if if sofa goes to three 5%, which some people are predicting.
You know, obviously spreads could come down.
Uh-huh.
Just just on that.
The deal pipeline have you seen any change in purchase price multiples in the private markets, yet obviously theres been a huge change in valuations in the public markets has that started to trickle down into the private markets I know that that takes a while but it's not going to react as quick.
<unk>.
Public markets, but have you seen purchase price multiples change at all or are they pretty similar topic.
Yeah.
2020, Yeah, I'd say I was so I'll give you two answers that one is going back to your question earlier, we've actually tried to push on wider spreads under people and it's generally been unsuccessful I'd say.
And then in terms of purchase prices you know generally what we've seen in the first quarter is if you have a great business people just aren't putting them up for sale because they just don't think they're going to get maximum price and so we.
We have not seen purchase prices come down, but the reason for that the reason for that is counterintuitive just because if you have a if you are a business that you want to sell today.
You want top dollar you're not going to put it up for sale given everything that's happening. So I think I wouldn't say purchase prices are coming down, but it's like a artificial just because people aren't necessarily like listing great companies.
So again the quality not only is our deal flow down the first quarter to the quality of the deals that we're seeing was down as well.
So we were pretty.
We would turn down a lot of stuff over the last three months.
But you're right I mean listen over time right over time. If this continues to happen like what's happened in markets inevitably spreads will go wider.
Documents will get better in purchase prices will come down, but it usually you know R&R market always lags the general liquid markets for whatever reason. So we're usually on like a three month lag. So it should be coming it should be coming into a market at some point.
That's a really interesting pointed out would it fall kind of the opposite of that.
I'm, a little bit more of an uncertain economic environment only.
The highest quality strong secular growth.
Come to market.
Interesting.
Yeah, not to not to belabor the point, but like you know again.
People are only coming to us for financing who need financing. So like the IP last year, we're doing a lot of quote opportunistic Refis you know you're not going to go out and refinance your debt down unless you need to or unless you theres a transaction or you're buying something that you're doing something so that that kind of regular way business is down a lot as well.
Got it.
And then just the last one that I had.
You know kind of ballpark numbers I'm, just trying to get a sense.
Corporate and bridge work.
The broader D C partners platform out of the new deal that you guys are originated in.
In the first quarter or you could even give me.
In the last.
Six or nine months.
Yes.
How many of those yields that wanted to Portman ridge or co.
Across the broader BDC partners flat form and so those deals that work co investments across the broader PC partners platform.
Like what percentage of the deal.
Portman Ridge, taking on.
The total deal size at that stage.
Just kind of.
I'm, just trying to get a sense here.
Yeah. Good question, Ryan just Patrick So I two.
Two different answers.
We're oriented to different parts of the question, which is.
Unless there is a.
Specific legacy asset that we took over in Portland through a different portfolio.
And therefore would not have the ability to co invest across our across our platform for a lot of esoteric 40 Act reasons every new deal that comes into Portman Ridge is being done as a co investment across our other vehicles now somebody's done under the co investment order and some was done under mass mutual but broadly speaking unless.
It is an add on or some type of transaction from a legacy name that we took over it's being done in connection with other VC funds.
I can give you the specific numbers there is theres, maybe a small handful of deals that if theres, an upsize to existing name or something like that it'll be done only in portman, but but at a macro.
95, plus percent of deals are being done across.
All are or a significant amount of funds your BC. So that's 0.1.
Two is what percentage is is Portland versus other funds you know we don't we don't necessarily look at it that way we look at it more in the sense of our individual funds have a certain.
Deal size that they try and target so for Portman, we try and have a run a very diversified fund. So they tend to be you know are sort of top position size in Portland is something like you know, 10% to $15 million in terms of in terms of a large position and that number might be different for other funds. So depending on how much we get allocate.
We kind of try and.
The way our allocation work as we put in what kind of are like I'll call. It Max position size by individual fund is and then they all just get allocated based on a percentage basis, what we ultimately receive so if there happens to be a deal where a larger fund has a larger ticket size pouring might get a smaller pro rata.
Percentage, but we always try and target portman to be kind of that 10 to 15 million dollar ticket and then it just gets allocated what it gets allocated once we once we get the amount.
So again that was a bit of a long winded answer but to say, yeah, we try and target $10 million to $15 million positions and if we you know aren't aren't getting enough. Every every fund could scale back into pro rata manner.
Gotcha.
Paul.
So.
Were you guys said Dan.
Hi, guys wondering about allocation as well as its also helpful to know that.
Basically every deal you guys are doing are going across the platform itself.
Yeah, that's right.
They're very round numbers. It is I don't know somewhere between like <expletive> might be somewhere between like 15% and 25% of a deal just depending on just depending on the specific deal. So.
The other answer is a significant amount is is is across the platform and not just portman.
Mhm.
Got you well I appreciate the time today. Thank you for taking my questions.
Thanks, Ron.
Again, everyone to ask a question just press star one again that telephone keypad. Your next question comes from the line of David Miyazaki. Your line is open.
Hi, good morning.
Hi, good morning, Dave.
I think you guys are sort of in an interesting position to comment.
Some middle market loans, because in a lot of ways, but what you're doing is cleaning up some of the underwriting.
The strength of her other.
Their tools, so one of the things that I.
Think about it or I worry about is rates going higher is that.
Got it.
For beating scenes that have floating rate asset portfolios.
Ted you said a tailwind in your earnings but you know.
It also would create.
Our higher interest burden for a lot of the borrowers. So when you look at the portfolio.
I'm sure you can consider this in your new originations, but how do you feel about the legacy exposure.
Higher rate.
And so we're moving above the floors.
Yeah, So there's an interesting.
I had the same views you, but I actually went through a whole portfolio.
So if you actually look at the high yield index, which is not a great proxy for middle market, but interest coverage today is at all time highs and leverage is actually most companies, including the middle market had been deleveraging and usually that doesn't happened.
So.
Despite the fact that rates are going up.
Even if you shock rates across our portfolio, we don't expect it to have a material impact on credit.
Today now again, if rates go like really really high and other things happen I think I think the thing we're more worried about is the other stuff. So.
So things like supply chain things like you know at what point well people push back against price increases.
I think we're worried about more like some of the other risks versus interest coverage and so we've done it for our portfolio and it doesn't have a it doesn't have a EV shock interest rates.
In a vacuum it doesn't it doesn't necessarily lead to a deterioration in credit quality are material.
Deterioration.
Okay, that's good to hear.
And regarding that that supply chain.
Comment it doesn't sound like it's starting to get better at all or or if it is it's only happening in a small amount or is it.
Still getting worse I suppose.
Well you know all of our companies are telling us like you know 234 quarters ago that they thought it was temporary and they thought it would all be cleaned up by now and they're not saying that today I.
I would say people are not people are not indicating is getting worse.
But I don't think we have a lot of our companies telling us it's getting better and again when I say this I mean in a very discrete.
Sectors like obviously, our media exposure in health care exposure in other areas software are not affected by this but for companies that do have supply chain issues.
It doesn't sound like it's getting better so that being said you know theres more shipping capacity Theres more factory capacity you know a lot of our companies just couldnt get slots to make stuff and now they can.
So I think some of this.
I think some of it just like the economy slowing down a little bit is helping with the supply chain in a in a kind of a perverse way.
Okay, and then obviously the other the other thing we're focused on is and put pricing.
So you know obviously oil retail gasoline today is at all time highs or are not all time highs, but near term highs.
So we've gone through a whole portfolio again, given where we focus.
We don't think that'll have a huge impact, but that's that's a that's the other big area we're focused on.
Okay great.
You'd mentioned.
Group of Hema now sort of in the past.
Recognizing that was something that you inherited but yeah.
That was a loan that's kind of all over the place and the beating Seaworld do you have any like.
Our thoughts are.
Going through that process and looking to see what happened what went wrong what does that mean.
Lessons learned from that for the industry.
Yeah I mean, this is patrick by the way.
How much time do you have.
[laughter] look I think that I think that coos.
Was and still is.
It's driven by massive macro factors, which is the population of Puerto Rico is declining at.
And particularly for a hospital chain like the very good doctors in Puerto Rico are also leaving Puerto Rico, and and and the combination of maybe this is group behemoth specific but they didn't really have like unlike the kind of U S system, where are sort of doctors own or have some percentage of the practice and in our earning some.
Variable rate, if you will they needed to pay doctors at fixed flat rate to keep them kind of in the hospitals and so you had just massive margin pressure over time as you had slight declines in volume and in operations and things like that so I'm not I'm not sure there's like.
Huge industry wide takeaway lessons other than you know be aware, a very very large macro trends that aren't working in your favor such as you know demographics in Puerto Rico.
But I'm not sure there are specific like takeaway lessons and in terms of how various bdcs or people in our space sort of I think played that one if you will.
I think the other lesson learned is you know in my 25 years of doing this when a hospital chain begins to struggle.
I'm not sure I've ever seen the ability for them to successfully turn it around like I like I just seen it many times, where if if if this specific industry begins to struggle.
It's very very it's very very hard to turn this around because you can't cut costs because it's labor.
And you know your revenues.
You know, it's hard to drive incremental revenue right. Because you can increase prices. So it's a it's kind of a tough business. Once it begins to struggle to kind of like you know pull the playing out of its a tailspin.
And then again like these guys Ryan these guys like we're on the verge of turning around many times and then Covid happened and then it was hard to get you know they make their money on optional surgeries and Theres a lot of intervening factors that were related to the pandemic.
Okay, great. Thank you that's very helpful and I'm, sorry to take up so much time, but I was curious you know when he talked about how the first quarter that.
Some of the geopolitical issues and the volatility of the market has really caused a slowdown in volume.
And then more recently, there's a pickup so through that that sort of short cycle. We've been through do you get the sense that the slowdown in the take up is being driven more from sponsor apprehension and then engagement again or is it more from the lending side.
Yeah, So I'd say I'll make a couple of comments ever everybody points to the Russian invasion, as as causing weakness, but if you actually look at the data and you actually like a SaaS theres a lot of weakness before that.
And so theres already you know are coming out of the balloon on some of the some of these valuations.
You know I think I think what's happening is generally speaking you know private equity is almost a victim of its own success private equity funds have raised bigger and bigger funds faster and faster and faster and performance has been very solid.
The flip side is you know people are now getting their first quarter numbers endowments foundations and others and you know treasuries was down investment grades down high yields down equities are down so generally speaking.
There was a big push by investors to private equity firms to get our money back so to get what's called DPI. So theres a lot of pressure on our clients to try and find some realizations or find ways to get cash back to L piece, because generally speaking and has a broad macro comment generally.
People are over allocated to private equity vis vis their top down asset allocation frameworks.
So I think in a perfect world I think some private equity firms would hold on to assets longer but there is there is there is pressure coming from the L. P community to return money.
Hmm, that's rather interesting and so some of the deal volume when he sees something getting shop visit they're just starting to realize and then.
Liquidity at the L P appetite convened.
It is fine.
Yeah, I mean, I mean, I think the L. P community, saying, if you guys want to raise a new fund you Gotta returned some money back on your old Fund first so you know people people think there's a general view that private equity firms can just raise whatever L. P capital they want and I'm not sure that is actually the case and just because they're there because there has been.
Because realizations of slow down I think I think it's going to impact fundraising or they have to get realizations.
So I think that's driving some of the pick up in activity.
Okay, great. Thank you very much that's a that's a great overview of a lot of different topics I appreciate your time.
Yes. Thank you.
Your next question comes from the line of Steven Wiping Your line is open.
Hi, guys can you hear me.
Yeah, Hey, Steve how are you good.
Good so a couple of questions on our net leverage Hugh Hugh Admittedly are at the low end of the net leverage ratio a ratio of slightly less than one and your target much higher and I know you said you were you were intending to run at the lower end, but.
Is one really where you're intending to run or is it somewhere between one and one in a quarter.
No I'd say, it's certainly more in though in the one and a quarter range.
Yes, it does.
Very short answer Steven and again like you know we made some commentary to this but you know we we came into this quarter expecting to do a bunch of deals and just given what's going on in the world. We we've we.
We kind of pull back a little bit so you know what.
If you look at our balance sheet, we have excess cash we have deployed some of that cash.
Subsequent to quarter end.
Okay. So given what you went on to tell me. If you did our leverage should that'd be higher okay, and that's why we've given what you know about the second quarter already where would you expect the leverage ratio to be at the end of the second quarter.
I think we mentioned we've deployed about 35 million subsequent to quarter end and probably have another 20 to 30 million. So like very round numbers I think you'd probably expect to see our cash balance.
Again, where we sit today with with our pipeline probably more in the $30 million range something like that so that would be kind of a.
A drop of 50 million ish of cash and obviously that can fluctuate, but like very round numbers that kind of what we're thinking right now.
Okay and in the in the past you've addressed some of the acquired portfolios.
And you have the slide in your presentation, and obviously, Ohio, and we sort of long.
Theres not much left.
Can you talk about the GARS and the H cap and some of the other stuff you've acquired in the interim.
Yeah, well, yeah, I mean, I mean, here's the quick answer is I think I think all the portfolios. We bought are outperforming our underwriting case.
And you know I was giving a speech yesterday you know when we when we underwrite. These portfolios. We only talk about we only valued them for things that could go bad.
And I think we never take into account as things actually go good somebody's portfolio companies. So I think generally speaking all the portfolios we bought are.
Our marks are valued higher than where we are paid for them at H cap is around flat H catch up a little bit but its around flat. So I think from where we acquired the portfolios to where they are today. We've I think we've proven that that you know we've been pretty pretty good about underwriting the portfolio valuations, yes, I wouldn't say there was any.
Things materially different about any of the quote unquote portfolios in terms of in terms of valuation I think generally speaking there was a bit of a of a headwind from from rate increases just in terms of valuations you know offset by company specific type items, you know to the good or bad, but I wouldn't say that there was like a broad brush.
Ex portfolio underperformed or a wide portfolio of massively outperformed.
But given where you are in the evolution of those portfolios are you Josh.
Sure.
Sanguine with them, where they are are you.
Oh, I'm, sorry, I didn't.
I'm, sorry, I didn't I didn't I didn't appreciate the question there.
Look I'd say certainly for the Ohio and garrison portfolios I think we're generally comfortable with where we are the garrison portfolio still has some liquid names in there that to the extent that we werent as Underinvested is as we are we would maybe look to monetize some of those in and rotate from our liquid and illiquid name, but obviously, we don't really need to do that now given.
Given where we are in cash where we're comfortable with the names.
But obviously, we kind of use that as a bit of a additional leverage mechanism to the extent that we need to for our kind of regular way origination and then on the harvest portfolio. It's just a little bit more difficult to monetize those things you know, we're looking at them and there's maybe one chunky position in that portfolio, but the rest of them are all right.
<unk> small dollar position. So it's just tough to make a dent in that even if we're even if we exit a position. It's still you know, maybe 2 million bucks or a million bucks of a position. So it doesn't really move the needle and aggregate them, but we're obviously you know look at those like we do everything in our portfolio.
And then the thematic Lee you know, we're very very focused on.
<unk> exposure to small EBITDA companies. So we do have a couple of companies in the portfolio that you know.
We wouldn't have done it if we underwrote them ourselves and so those are all the ones that were trying to beat were pretty aggressive about trying to get them to monetize.
Okay with respect to the share buyback you you adjusted the plan or initiated the plan at the end of the quarter and bought back a small amount of stock was the amount of stock you bought back a function of the time and as you given your lower leverage and the <unk>.
<unk> two N a V or what's your sort of thoughts on buyback and size.
Yeah sure so.
This is Jason Yeah, you're absolutely right. The the dollar amount of it in the share count that we purchased in Q1 was a function of basically.
Blackout windows that we were dealing with to issue the K and we had about what 10 days of activity in Q1, that's reflected in the quarterly results. We continue to do that at a clip at about the same pace. Every day is as we've carried into into Q2 here and can you.
Don't anticipate changing that anytime soon.
Okay. Thanks, a lot guys.
It's just from a cost of capital perspective, it just makes sense for us to buy back our stock.
Well you know I've been on that page for awhile and I'm glad you adjusted the plan. So it allows you to be a little more aggressive in quiet periods and blackout periods.
Right.
There are no further questions, let me turn the call over back to Mr. David Goldberg.
Great well, thank you everyone for joining us today and.
And we look forward to speaking to you in early August when we'll be announcing our 2022 second quarter results.
And I'd also like to just you know invite anybody to to call anyone of any member of management. If you have any further questions or or ideas.
You very much.
This concludes today's conference call you may now disconnect.
Okay.
Hum.
[music].
Okay.