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spk01: Welcome to Portman Ridge Finance Corporation's third quarter 2024 earnings conference call. An earnings press release was distributed Thursday, November 7th after market close. A copy of the release along with an earnings presentation is available on the company's website at www.portmanridge.com in the investor relations section. and should be reviewed in conjunction with a company's Form 10Q filed on November 7th 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 filing with the SEC. Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation, Brandon Satoran, Chief Financial Officer, and Patrick Schaffer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.
spk06: Good morning, and welcome to our third quarter 2024 earnings call.
spk07: I'm joined today by our Chief Financial Officer, Brandon Satoran, and our Chief Investment Officer, Patrick Schaefer. Following my opening remarks on the company's performance and activities during the second quarter, Patrick will provide commentary on our investment portfolio and markets, and Brandon will discuss our operating results and financial condition in greater detail. On November 7th, 2024, Portman Ridge announced its third quarter 2024 results And following the strong earnings we saw in the first half of 2024, the company's third quarter earnings were temporarily impacted by prudent cash and portfolio management initiatives prior to the successful refinancing of the 2018-2 secured notes. I'm very pleased with the work we did on the right side of the balance sheet and the substantial improvements we made to the company's debt capital structure. Specifically, the company extended the maturity of the JPM credit facility while also reducing the spread by a full 30 basis points. Further, using the upsized and lower cost JPM credit facility, the company refinanced the remaining $85 million of a 2018-2 secure notes at the end of August, which resulted in further net spread savings of approximately 28 basis points. On a run rate basis, the impact from reduced spreads should result in approximately $265,000 reduction of interest expense relative to Q3 results, or $0.03 a share. With that in mind, we continue to believe our stock remains undervalued, and thus we continued repurchasing stock during the third quarter under our Rule 10b-5 stock repurchase program. Specifically during the quarter ended September 30, 2024, the company repurchased 33,429 shares in the open market for an aggregate cost of approximately $600,000, which is accretive to NAV by one cent a share and reinforces our commitment to increasing shareholder value. Additionally, the Board of Directors approved a 69 cent per share distribution for the fourth quarter of 2024, which represents 13.6% annualized return on net asset value, amongst the highest in the BDC space. Regarding the private credit markets, and specifically the core middle market, which we define as companies generating 10 to 50 EBITDA, Activity levels continue to be elevated relative to 2023, but the majority of activity has consistently been from refinancings, add-ons, or amended extend transactions that most often result in lower cost of capital for our borrowers and extended maturities. While true new money buyout financings have remained at depressed levels throughout 2024, we continue to believe that a combination of dry powder, sponsors looking to return capital to LPs, the ongoing rate cuts by the Fed, are all tailwinds for our sector. Looking ahead to the final quarter of 2024 and the beginning of 2025, with the company's balance sheet fortified by the amended JP Morgan credit facility, we expect to be active in the market and net deployers of the company's capital, which we believe will restore net investment income back in line with more normalized levels. Above all, despite the current economic activity and a dynamic interest rate environment, we remain confident in our prudent investment strategy, strong pipeline, and experienced management team and believe the company remains well-positioned with our strong spillover income to continue to deliver positive returns to our shareholders. With that, I will turn the call over to Patrick Schaefer, our Chief Investment Officer, for a review of our investment activity.
spk03: Thanks, Ted. Turning to slide five of our presentation and the sensitivity of our earnings to interest rates, as of September 30, 2024, Approximately 88.5% of our debt securities portfolio was floating rate with a spread pegged to an interest rate index such as SOFR or Prime, with substantially all of these being linked to SOFR. As you can see from the chart, SOFR rates have been relatively consistent for the last several quarters with a decrease in rates impacting the current quarter. Skipping down to slide 10, originations for the third quarter were lower than last quarter and were also below the current quarter repayment and sales level. resulting in net repayments and sales of approximately $11.6 million. During the quarter, we funded small incremental DDTLs and revolver draws in seven existing portfolio companies and increased our investment in our Great Lakes Twin Venture, but did not add any new portfolio companies, as we had one transaction close in early October and several other transactions slated for Q4 closings. Our incremental fundings made during the quarter are expected to yield a spread to SOFR of 656 basis points on par value, and the investments were purchased at a cost of approximately 98.5 percent of par. Our investment portfolio at the end of the third quarter remains highly diversified. We ended the third quarter with debt investment portfolios spread across 28 different industries with 72 unique portfolio companies and an average split and an average par balance of $2.7 million. For Insight 11, in aggregate, investments on non-accrual status were nine investments at the end of the third quarter of 2024, representing 1.6 percent and 4.5 percent of the company's investment portfolio at fair value and cost, respectively. This compares to nine investments on non-accrual status as of June 30, 2024, representing 0.5 percent and 4.5 percent of the company's investment portfolio at fair value and cost, respectively. On slide 12, excluding our non-accrual investments, we have an aggregate debt investment portfolio of $341 million at fair value. This represents a blended price of 92.6 percent of par and is 92.9 percent comprised of first lien loans at par value. Assuming a par recovery, our September 30, 2024 fair values reflect a potential of $27.3 million of incremental NAV value, or a 13.9 percent increase to NAV. When applying an illustrative 10 percent default rate and 70 percent recovery rate, our debt portfolio would generate an incremental $1.76 per share of NAV, or an 8.3 percent increase as it rotates. Finally, turn to slide 13. If you aggregate the three portfolios acquired over the last three years, we have purchased a combined $435 million of investments, have realized approximately 85% of these positions at a combined realized and unrealized mark of 101% of fair value at the time of closing their respective mergers. As of Q3, 2024, we have fully exited the acquired Oak Hill portfolio and are down to a combined $27.9 million of the acquired HCaP and initial KCaP portfolios. I'll now send the call over to Brandon discuss our financial results for the period.
spk02: Thanks, Patrick. For the third quarter of 2024, Portman generated $15.2 million of investment income, of which $12.7 million was attributable to interest income, inclusive of PIC income from the debt investment portfolio. This compares to total investment income for the second quarter of 2024 of $16.3 million, of which $13.7 million was attributable to interest income inclusive of PIC income from the debt investment portfolio. The decrease was primarily driven by lower interest income due to net repayments and sales during the quarter, a loan being placed on non-accrual, as well as lower CLO and joint venture income. With that in mind, I'd like to highlight that recurring PIC income as a percentage of total investment income declined by over 200 basis points compared to the prior quarter. Excluding the impact of asset acquisition accounting, our core investment income was $15.2 million as compared to core investment income of $16.2 million in the prior quarter. Total expenses for the quarter ended September 30th, 2024 decreased by $0.5 million to $9.4 million as compared to $9.9 million in the prior quarter. This decrease was largely driven by lower interest expense during the quarter as a result of the successful refinancing of the 2018-2 secured notes in conjunction with the amendment to the existing senior secured revolving credit facility with J.P. Morgan that reduced the applicable margin from 2.8 percent to 2.5 percent, as well as lower management and incentive fees. Accordingly, our net investment income for the quarter decreased to $5.8 million or $0.63 per share. This compares to $6.5 million or $0.70 per share for the prior quarter. Further, for the quarter ended September 30th, net realized and change in unrealized losses on investments in debt was $7.3 million. This compares to net realized and change in unrealized losses on investments in debt of $12.8 million in the prior quarter. As of September 30th, 2024, the company's net asset value was $188 million, or $20.36 per share, a decrease of $8.4 million, or $0.85 per share, compared to the company's prior quarter net asset value of $196.4 million, or $21.21 per share. As of September 30th and June 30th, 2024, our gross leverage ratios were approximately 1.4 times and 1.5 times respectively. For the same periods, our leverage ratio net of cash was 1.3 times. Specifically, as of September 30th, 2024, we had a total of $267.5 million in borrowings outstanding with a current weighted average contractual interest rate of 6.7%. This compares to $285.1 million of borrowings outstanding as of the prior quarter, with a then-current weighted average contractual interest rate of 6.9%. The company finished the quarter with $40.5 million of available borrowing capacity under the senior secured revolving credit facility. Finally, the board approved a quarterly distribution of 69 cents per share payable on November 29th, 2024 to stockholders of record at the close of business on November 19th, 2024. With that, I will now turn the call back over to Ted.
spk07: Thank you, Brandon. Ahead of questions, I'd like to reemphasize that we believe we are well positioned to take advantage of the current market environment as shown for the first nine months of the year. Through our prudent investment strategy, we believe we'll be able to deliver strong returns to our shareholders in the tail end of 2024. Thanks again, once again, to all of our shareholders for ongoing support.
spk06: This concludes our prepared remarks, and I will turn the call over for any questions.
spk00: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. And your first question comes from the line of Christopher Nolan with Landenberg Falcon. Your line is open.
spk04: What's the driver of the realized losses, please?
spk06: Hey, Chris. This is Brandon.
spk05: The primary driver of the realized loss was Qualtech.
spk02: You may recall on our last earnings call, we had a disclosed that we had successfully exited Qualtech at the mark we had in the prior quarter. So there was no impact in that as a result of that realized loss that was previously captured.
spk04: I thought so. Okay. On the interest rate sensitivity, I'm looking at slide five and it says, you know, blah, blah, blah, reduction of quarterly income of 164K. And then if you look in the 10Q section, It says for a 1% decrease in interest rates, it's $1.7 million annually. And given that the Fed is eased by 75 bps or so, should that information, I mean, there seems to be a lot, the impact of a 1% rate change seems to be a lot bigger in the queue than is in the deck.
spk03: In the deck, it's just the difference between the $4.75 and the $4.55. So it's not a full 1% reduction.
spk04: Okay. And then I guess spillover. How much is spillover?
spk05: It's about $0.70 per share, Chris, from the prior year.
spk04: Finally, strategy. You guys are sort of cruising along at your... normal leverage ratio and the growth has been slow, what is the strategy, if anything, to grow earnings and growing NAV in general?
spk07: So I'll start, which is, number one is, I mean, there is a lot of embedded NAV. to the extent that our loans mature at par. Patrick talked a little bit about it in the script, but we can get you the numbers. So to the extent that we remain in a subdued credit environment, there just should be NAV upside just with our existing portfolio. And there is some positions that we have that as rates go down, if they go down, you get a NAV increase. So there's an income come down a little bit, but you get NAV increases in certain situations. So that's number one. And then in terms of investment strategy, you know, again, like we haven't been as nearly as impacted as other VDCs by this reduction in spreads. It may be coming to our market. It's beginning to come to our market, but that's really been a large cap and upper middle market phenomenon. So we've been able to retain spread. And in the situations where we've been asked to kind of like reduce spreads to, you know, where big cap market guys are, we've generally taken the refi. So again, You can see on slide six of what we disclosed, I mean, fee income for us continues to be anemic. Like we only had, you know, we basically had our lowest fee income ever this quarter going back, you know, four years, four or five years. And that should revert back to normal at some point as, you know, this refi wave continues. So there's like, that obviously is a tailwind to earnings as well, although it's something we can't obviously forecast or predict. Okay, great. Thank you. Talk to you guys later.
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