Portman Ridge Finance Corporation

Q4 2022 Earnings Conference Call


spk_0: welcome to portray ridge finance corporations fourth quarter and four year twenty twenty two earnings conference call and earnings press release was distributed yesterday march ninth after market close a copy of the release along with an earnings presentation is available on the company's website at www dot portman ridge dotcom in the yeah investor relations section and should be reviewed in conjunction with the company's form ten k filed with the as easy as a reminder that conference call is being recorded for replay purposes please know that at a conference call may contain forward looking statements which are not guaranteed a future performance or results and involve and number of risks and uncertainties actual results may differ materially from both in the forward looking statements as a result of a number of factors including those described in the company's filings with the as easy portman ridge finance corporation assumed no obligation to update any such forward looking statements unless required by law speaking on today is called will be ted gold thorpe chief executive officer president and director of portman ridge finance corporation jason ruth chief financial officer and patrick shaper chief investment officer with that i would now like the time a call over to ted go to work chief executive officer of portman ridge
spk_1: good morning banks around for join our fourth quarter and full year two thousand and twenty two are in school i'm joined today by chief financial officer jason ruse and or chief investment officer partridge shiver i'll provide brief highlights on the company's performance and activities for full year two thousand and twenty two patrick were barred commentary on our investment portfolio and our markets and juice and we'll discuss are operating results and financial condition and greater detail oh yesterday for marriage announced it's fourth quarter and full year two thousand and twenty two results we are pleased with a solid earnings power of the company despite operating under difficult market conditions are challenging economic environment rise in interest rates and market volatility or poor investment income and two thousand and twenty two increase by eight hundred thousand dollars to sixty four point two million dollars in comparison to sixty three point four million dollars seen and twenty twenty one as a continue to see the impact that rising rates have and generating incremental revenue from are sourced investments additionally or amended an extended credit facility with jp morgan chase has reduced our cost of capital helping further reduce our expenses relative to harass abyss overall or performance both this quarter and earnings momentum from a time lag in a realization of rising benchmarks has allowed us to raise or dividend for the second straight quarter to sixty eight cents per share and we believe that we were situated to continuing delivering attractive returns to our shareholders and two thousand and twenty three regarding our primary market as a whole despite the continued volatility in the syndicated markets and uncertain macro drip mag backdrop remain bullish on new investment opportunities and the ability to rotate our portfolio at reduce risk and incremental returns for new opportunities spreads of lot and by approximately one hundred and fifty to two hundred basis points as compared to the beginning of the year and upfront fees are an incremental one hundred to two hundred basis points additionally we continue to see strong equity contributions with sponsors and reduced lovers levels to illustrate this the way it average total leverage of deals with completed in the fourth quarter was four point eight times as compared to five times and que three and five point five times for all of two thousand and twenty two during the focus back to the company we continue to believe in evaluation apartment ridge as we continued for repurchasing shares under a renewed stock repurchase program and two thousand and twenty two alone we we purchased a total of one hundred and sixty seven thousand and seventeen shares an approximate cost of approximately three point eight million more than double the amount of shares we were purchased and two thousand and twenty one at seventy five thousand three hundred and seventy seven shares we expect this trend of repurchasing portman shares to continue into two thousand and twenty three as real to do so on this call patrick will also walk through the potential upside cases for nasa value or portfolio is largely and first lane dead and is now valued at a significant discount depart experience normalize defaults or even elevated default rates vs history we believe there is embedded net asset value upside of the portfolio so this adds to our earnings momentum during by wider spread the new originations and rise in short term interest rates to drive both potential nav and earnings upside
spk_2: with that i will turn the call over to patch of shaver or chief investment officer for have you ever investment activity
spk_1: thanks ted
spk_3: trying to slide five of our presentation and sensitivity of our earnings to interest rates as a december thirty first two thousand twenty two a proxy ninety percent of our debts secure his portfolio were either floating rate with this with a spread to an interest index such as live work so for a prime with sixty seven percent
spk_1: of these still being linked to live or as you can see from the chart the underlying benchmark rate of our assets during the quarter lag the prevailing market rates and still remains definitely below the live or and silver rates as of february twenty eighth two thousand twenty three we respect to normalize overtime and the underlying one three and six month contract reset for lesser purposes if all our assets were to reset to either a three month live or are still for rate respectively we would expect to generate an incremental two million dollars of quarterly income while or liability cost will also rise relative to their cue for levels we still expect a net positive benefit of approximately ten so
spk_3: cents per share assuming all of our assets and liabilities or utilizing the same a three month benchmark rates for the in for an entire quarter skipping down to slide eleven both invest an activity and originations for the fourth quarter were lower than the prior quarter resulting in that deployment of approximately six point three million dollars excluding regularly scheduled quarterly amazon payments and fundings underplays the committee facilities including a great lakes joint venture that deployment consisted of new findings are practically twenty three point eight million
spk_1: dollars offset by approximately sixty point five million of repayments
spk_3: the new investments are expected to yield a spread to silver of seven hundred and four basis points on the power balance
spk_1: and he veterans were purchased at a cost of approximately ninety five point five percent of par with will generate incremental income in addition to the state bread as mentioned in a press release would you fourteen point three million dollars under our twenty eighteen dashed to secure notes at a rate of lab or plus one hundred and fifty eight basis points to funded asset yielding so for it plus seven hundred and four basis points resulting in a very attractive return on equity
spk_3: additionally during the quarter we funded thirteen point seven million dollars into our great lakes joint venture and of add additional funding so far this year the have an aggregate taken as close to being fully funded under that commitment
spk_1: so much more experience with new acid on the bounty a croissant essence and are great lakes to adventure of combat increasing spread and widening of id we should result in higher returns going forward
spk_4: our investment secure his poor fellow at the end of the fourth quarter remained high diversified with investment spread across thirty one different industries and hundred and ninety different entities all while maintaining an average power balance per and the of approximate three point three million dollars
spk_1: trying to slide twelve
spk_5: we had one incremental invest in a non accrual as compared to september thirtieth two thousand and twenty two which is a sworn a note and for holdings which is valued at zero in aggregate investors are not approved as remained relatively low at for investments in the fourth quarter of he doesn't want to do as compared to seven investments an article status as a december thirty first two thousand
spk_1: twenty one
spk_3: these for investments a non accrual at the end of two thousand twenty two represent zero point zero and zero point six percent of the companies investment portfolio at fair value and amortized cost respectively
spk_6: i fly thirteen as ted mentioned in his opening remarks if we focus on the top three rows of the table we have an aggregate that security fair value of four hundred and seventy five point three million dollars which represents a blender price of ninety one point six six percent a par value and eighty four percent comprised of firstly loans
spk_1: at par value assuming a pa recovery are december thirty first two thousand and twenty two for values reflect a potential of forty three point two million of incremental nab value or four dollars and fifty one cents per share for lesser purposes if you would assume a ten percent default rate and seventy percent recovery rate on the debt portfolio there would still be an incremental two dollars and eighty nine cents per share of now value over time at the portfolio matures and it's repaid this to fall rate is above eight in the market is expecting or has experience historically
spk_3: twenty bother to slide fourteen if you aggregate these three portfolios over the last three years we have purchased a combined four hundred and thirty four point eight million dollars of investments have realize over two thirds of the positions at combined realize and unrealized mark of one hundred and three percent a fair value at the time of closing the respective margins
spk_1: we're able to see those result despite the global pandemic in two thousand and twenty and most of two thousand twenty one and a week market for almost all asset classes and two thousand and twenty two
spk_3: similar vein of the previous slide as a december thirty first two thousand twenty two the remains an experimental thirteen points to a million dollars of value as compared to the power in these portfolios or nine point three million dollars when applying a similar ten percent default rate and seventy percent recovery rate analysis
spk_1: on ultra the call over to jason the pro discuss our financial results for the period
spk_7: thanks patrick as both that and patrick previously mentioned this by operating under a challenging economic environment or results for both the fourth quarter and for the full year two thousand and twenty reflects strong financial performance total investment income for the full year two thousand twenty two with sixty nine point six million of which city five point eight million was attributable to interesting come from the debt securities portfolio that compares to total investment income for the full year two thousand twenty one of eighty point one million of which sixty five million was attributable to interesting come from the dead secure his portfolio the decrease largely due to lower purchase price aggression reflected in two thousand twenty two as well as reduced repayments along with lower fee income excluding the impact of purchase price accounting our core investment income for the year was sixty four point two million an increase of a hundred thousand as compared to core investment income at sixty three point four million in two thousand twenty one are net investment income for the for your two and twenty one twenty eight point nine million or three dollars per cent per share which compares the forty two million or four dollars and ninety two cents per share for the full your two thousand and twenty one the year over year decrease was largely due to the affirmation impact of reduced purchase accretion lower repayment activity and reduced fee income as a december thirty first and twenty two and december thirty first the i'm twenty one the weighted average contractual interest rate on our interest earning that securities was approximately eleven point one percent and eight point one percent respectively we believe the portfolio remains well positioned and are rising rate environment to generate incremental revenue and peter quarters total expenses for the year ended december thirty first two thousand and twenty were forty point seven million compared to total expenses of thirty eight point one million seen in the for your two thousand and twenty one that was predominantly driven by rising costs associated with the interest expense on are dead when i am to note is that we continue to see reduce expenses related to administrative services and other general and administrative costs a trend were looking to maintain and two thousand twenty three arnett as a value for the fourth quarter two thousand and twenty two as two hundred thirty two point one million or twenty five four dollars and twenty three cents per share as compared to two hundred and fifty one point six million or twenty six dollars and eighteen cents per share in the third quarter of two thousand and twenty two the decline due to are dead and equity securities a driven primarily by mark to market movements within our portfolio and the liability side of the bounty as of december thirty first two thousand twenty two were total of three hundred and seventy eight point two million par value of borrowings outstanding comprise the ninety two million and borrowings and our revolving credit facility a hundred and eight million of four and seven eight percent know it's due to that and twenty six and a hundred seventy eight point two million unsecured secured notes the two thousand twenty nine that balance represents a quarter over quarter increase in nine point two million relating to a drawn are secured notes of fourteen point three million upset by a five point one million repayment on a revolving credit facility as of the in the quarter we had twenty eight point nine million of available borrowing capacity under the senior security evolving facility and know remaining barring capacity under the two thousand and eighteen that to revolving credit facility as the reinvestment period ended shortly after i draw on nov twentieth two thousand twenty two additionally and as point in our in our previous earnings cause we successfully refinance their senior security bobbing credit facility in april which change the benchmark interest rate the three months sober reduce the rate of interest margin to two point eight percent per annum from two point five percent per annum and extent in the majority the facility april twenty ninth two thousand twenty six as of december thirty first two thousand and trying to er det equity ratio as one point six times on a gross basis and one point five times on that basis from a regulatory perspective are as a coverage ratio at quarter and with the hundred and sixty percent that is that the a high end of our target range threatened by the drawing of the remaining credit capacity under the jazz and eighteen dusty revolver in advance of its expiration and the fourth quarter of two thousand twenty two lazily and as announced yesterday a quarterly distribution of fifty cents per share which represents an increase of one said from prior quarter levels and an increase of five cents from levels seen in the first quarter of two thousand twenty two was approved by the boy lord and declared pebble in march thirty first two thousand twenty three
spk_1: the stockholders a record at the close of business on march twentieth two thousand twenty three the latest increase as a good sense also represents two consecutive quarters a stockholder distribution increases and the fourth stockholder distribution increase over the last six quarters
spk_7: this increased quarterly distribution is supported by the fourth quarter strong financial performance and our expectations for similar financial performance to continue in future quarters
spk_1: the that out and the call back over to ted thank you ahead of questions i'd like to reemphasize that we believe we are well positioned to take advantage of the current market through our prudent yet selective investment strategy coupled with our an emphasis on cost management we anticipate that we will be able to generate strong returns for our shareholders and two thousand and twenty three
spk_0: thank you once again to our shareholders were ongoing support this concludes are prepared remarks and i'll now turn the call of the operator with any questions
spk_8: at the time it might ask a question simply press star one on your telephone keypad our first person well cap on the line of christopher nolan with land back down and go ahead
spk_1: the guys on the leverage ratio is high what since his patients gone full in terms of farm maintain that level of bring it down and was the current target like clever trench yeah i think our a a crisis that have shape our side i think our target lower drains kind of remains what we said before which is one two five to one point thought one point four so we're living above that at at one point five i think
spk_9: again as as mentioned we intensely drew up our volver with brought us all a bit above our leverage range given that it was turning out and it's a particular attractive financing at at the or plus one fifty eight but we would expect over the course of the here to have leverage decline ah back into kind of what what we think of our target range is kind of them below bump
spk_8: point four times net okay thanks patrick as a follow up question on silicon valley back as in the news today and i know too quickly evolving situation but you know and are you guys trying to figure out in terms of a you for for companies have or you their sponsors may have some exposure to sort of well in terms of significant costs there
spk_1: i know it's early days and that the fast moving situation but none came perspective phone would be welcomed yeah any tim time summit something like this happens you know always very focused on a knock on effects you know we we called and spoke to number of our portfolio companies have last night in this morning and i think it's a little too early to on to assess but obviously he other there will be some flow through of facts on on certain tech businesses given their big wondered there as well as a whole on a cash and then we'll look at other knock on effects to in terms of eat out there have been to sell securities and big discounts you know arrows at how does that rebel for the rest of the financial markets i would take a look at our portfolio we think again we all think this is going at as of right now we don't think this is going to have really any material impact on our portfolio
spk_10: i'm a lesser speedo other unforeseen thing said that happened because of it
spk_0: as the for me thanks guess
spk_11: again for any questions please press star one your next question of el capitan the line of ryan lunch with kbw please go ahead a good morning odd for says where the happened to and of what happened corner on a foreigner regarding interesting topic as well as or investment income as voltage six that's how i look at core investment income and only increase by one hundred thousand dollars from seventeen wednesday's nine seventy point seven million odd meanwhile at an authenticator slides far as like accelerated feed i know those are a little bit lower quarterback yeah couple hundred thousand dollars lower vs two three said i was only a few hundred thousand our head when ah the me while interest expands one not by over million dollars was just wondering events i understand that there's a lack of from the department of bike race by that same lag and path active third quarter numbers of so effectively where we are always a by quarter on quarter feels like we should be moving out with that you know the general is at the same allow so i was just curious on on on why the lack of movement investment income this quarter relative dog to where rates wang
spk_1: well rate from really moved in the third quarter which would then mostly and package your fourth quarter numbers yeah a run let let me to start queen is better let me start quickly on the timing so particular particular for portman our best see allow which is the bought not the ball but he is over fifty percent of our footing or liabilities resets in the middle of the quarter specifically reset at the end of november so we're on a bit of a different cadence where the but the majority of our liabilities and avoiding right reset during the quarter so depending on when the actual ah said rate hikes are over what about of a period of time we can get a bit of a mismatch there because of the timing of that reset so he again when you kind of wrote forward and we we discussed and we shall now representation car that the ten cents on a on a runway basis there's a significant amount of further increase in our liabilities because of where they were reset to during the fourth quarter so that's why we specifically highlighted some the timing differences but i'll turn it over to jason gonna go through some of the income numbers themselves but his wanted to throw it out there on on the timing we have a bit of a unique situation because of land a big chunk of our of our phone reliability reset yeah in there some netting netting impacts happening there so it if you look at quarter over quarter yeah you see purchase increasing kind of running off at a club of about five hundred grand for that the that the piece of income that has to be offset with the interest rates throughout the quarter of your luggage and pure interest were a blow over
spk_7: when young one point shooter plus million quarter over quarter on the interest alone that are settled there by that accretion i was mentioning these quarter of a quarter slightly down call two hundred that was it it to seventy thousand for the quarter see a low income as down
spk_11: and we can talk more about that but that's those are some of the drivers religious offsetting hard to get to a net
spk_7: increase quarter over quarter on that come the allied with below and down so much for or and is added that off or runway
spk_1: back or yeah yeah this yellows yeah how are on a the accounting model for that the beneficial interest method and as you read that your your bases and the assets and you calculate your ira are over the life for the future cashflows and as as cashflows move around your ira are will change which drives your yield and that's what drives your interest and come on those yellows as a result of the the embedded cashflows that future catch oh expected stream decreasing has given them market environment where and or that that yield this coming down which is what's driving driving reduction in that and i yield yesterday that shorthand there is is the actual price of the of these he allows that are marked that has an impact on what we recognize him a revenue prospective so the marks as the i'll be down court of quarter lead to less revenue be recognized as not necessarily a cash flow from the securities been down necessarily so in theory if you were to mark up the see allows next quarter you would see a increase in the end in of the revenue roughly speaking because of that but it's a little bit more revenue recognition as opposed to underline castles and ceilings
spk_11: yeah i think it's i think it's fair to say and in the same thing happened in two thousand twenty another appeared the time but i think the third party they were firms change their methodology around how they account for see allows in terms of you know how they view defaults and future future defaults and so that that they debuted they made a change in the fourth quarter which opposite had an impact done on income but also on directions data and the other question comes to and talked a little bit about your and much purchase that the net portfolio lawsuit that already in this corner and really the last couple of quarters you know driving and of a decline in math i know last quarter's time to buy it sounds like a lot of mark to market
spk_12: by a certainly that outsides relative to other btc mars now i know you can't comment on the other btc are march their portfolios and i also understand that i look at nonaccrual specifically they have an increased significantly said that added one indicated that credit
spk_1: you know this from a accrual the false name one has increased meaningfully but still a decline in your portfolio the markdown about while outside the normal range for what he sees how it it it feels like there's something more going on besides mark to market can you talk about that and and why of those markdown and so large and what do you expect the and i mean if it is just mark to market don't go go or that actually theoretically recover the and you know how your market this over time but it's just that the really outside relative that other btc yeah i mean it's obviously something that we ah yeah only it if you think about just take a huge step back right if you think about what happened with markets last year and were comparable indices were last year and were levered yeah we're not really a big outlier visa views the overall markets we are now wire visa be the btc sector and i can't speak to other people's policies but you know eighty four persons we are not in a market increase or decrease in quite a quality and our average joe's patrick mention his remarks and eighty four percent of our dead is for slang dead and our average debt markets at ninety one by one point six so you know we you know i hear what you're saying and by the way we obviously look in the mirror every single day and and by way we look at our peers earnings as well but again if you look at where our valuations are these of the market indices i would say there we feel that that like eat you can shock our portfolio and lots of different ways and you can add add of very elevated default rate to this and are still should be a pretty big upside to earn as and so get i i'm like a common on broad valuation policies but i would say our we believe our our nab declines are large lee temporary and to market nature i mean there is obviously it always credit specific stuff but yard or not across to the car at at fair value or zero so high i would serve our our i'm
spk_3: i i hear what you're saying actually and i are you at something that obviously we talk a lot about entirely here
spk_1: but obviously we always want to be conservative on valuations and adhere to our our buyers impulses and in in there i know the to other the to other minor small point i would add is perhaps unlike some of the btc we do have
spk_13: a little bit of a chunk of a of a liquid portfolio that has a lot more true kind of mark to market as opposed to like their party valuation type of marks so live see that the volatility in the syndicate markets and gonna wear that market is has had you know perhaps a slightly disproportionate impact on kind of our fair value relative to props and other btc that
spk_11: that that really doesn't have any level two assets and then at the the second thing i would say it again not did that to get into gentle people's investment as a valuation policies ah you know we do have a a decent reliance on the actual liquid benchmarks in the yields of those benchmarks so that that does ultimately again perhaps the dog lead to a little bit more more volatility are mark to market pass routed to others have director not using kind of cs lebron loan indices from up from me your perspective yeah i mean i guess i'm just looking at converse about the suisse i'm looking at you know lcd and
spk_1: the average cloning better that and ninety seven so you know how i certainly appreciate that and potential conservatism in your book did you guys have your firstly marked at ninety wine when i would also asked i guess why and marked down that road to that level of conservatism when i don't do that in broad liquid indices and leopards loan industry is an and i don't see other btc is are marking a doubted our what what drives that lovelock potential find out our time that just conservatism and and that overall mark than ninety seven number is a today figure and again deserve twelve thirty one marks so when you look at our liquidity benchmarks it again post as be be will see of this changes but did i say obviously we've had a pretty big rally and credit for the first three months of this year so if you look at the benchmarks be used to value our portfolio their tighter today million the spreads are tighter mean in prices are higher them they were at twelve thirty one so you've had a pretty big rally in i'm in credit and you've deftly had a big rally in floating rate dead because obviously the this higher for longer has been put abril floor under long durations and obviously you know the vast majority powerful as former eight months so
spk_11: the number you're using a like again like if we are going to value our book today and using it is today you know i visited the look different yen and renault the had their get happy the abbey fall offline and we used a a good part of what we used as a broad credits was levered loan index that i'm i'm but i pulled up and looking at right now and as if he ran the average price in that index was ninety one point nine not ninety seven so like i said i'd be happy to have to think about right it's have publicly available in if he that is that is part of what makes up our our valuation process but that the ninety seven i had a again i'm not sure that's more or of that apples to apples and unless i'd say i get up we don't to get all high and mighty about evaluation policies because you know every can speak for themselves but the other back to the we do for our board is we look at every single realization and where it was valued beforehand and where where was realized and i think across it's basically like a hundred percent had read the last couple borders on or realizations are
spk_1: they're higher and higher values than we were valued so i mean it just shows it's it's for us to to provide comfort the board that are valuations are generally speaking conservative yeah i if you know what would work i the with outsiders what he says figure out you know edit them a conservative than than that fine but i guess you know for an outsider looking in were trying to figure out eat outside moves in your portfolio now you know and and and the portfolio decline as well as the nap decline a bad credit or is that mark the market and is probably a combination of both of them are given what's going on in the market today which is broadly to cheer in credit quality hospice i think that that the biggest i think focus right now from bachelors particularly the sort of the outside move the was trying to navigate that's a great shape now i'd honestly i agree with of in your same damage you know last i do like i agree with all that and so as as it's frustrating because we feel like our business is doing really well and we feel like we're really not seeing male anatomy but look we will have credit issues as well everybody but we've incredibly diverse portfolio you know god likes of the not like one name that can really have a huge impact on our business in again not a curls or basically zero
spk_11: the and huge look at the broad loan indices last year and cbd sees reporting flat flat nav and i just to me i believe that been i have a common and others that just say i don't think our numbers are wildly off where you know benchmarks are so i can't you know that i bet with what you're saying is is the same
spk_0: question the a we ask ourselves as well i'm the exact because i would be a it it as a shareholder be awesome same question medicare at all that is you know obviously we're by back our stock we raised our dividends for the fourth time
spk_1: you know my guess is will have continuing diverted increases as as timing and lag issues normalize and so
spk_0: you know again we're pretty optimistic for earnings usher

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