B. Riley Financial, Inc.

The line is muted.

Today's call includes prepared remarks from the company, followed by a question and answer session. Joining us today from B. Riley are Bryant Riley, Chairman, Co-Founder, and Co-CEO, Tom Kelleher, Co-Founder, and Co-CEO, and Philip Ahn, CFO and COO. After management's remarks, we will open the line for questions. Please note that all participants will be on a listen-only mode until the Q&A portion of the call. As a reminder, this call is being recorded. An audio replay will be available on the company's investor relations website later today. And before we conclude today's call, I will provide the necessary cautions regarding forward-looking statements. Now, I will turn the call over to Mr. Bryant Riley. Mr. Riley, you may proceed.

Welcome, and thanks for joining our call this afternoon. Throughout 2022, we continued to execute our strategy amid a tough environment, with markets taking back the investment gains we saw in 2021, contributing to a net loss of $168 million for the year. Despite the marks in our investment portfolio, we delivered operating revenues of $1.3 billion in 2022, which is close to where we were at the end of 2021, during a record year that produced operating revenues of $1.4 billion. It is important to put this into perspective. The income and losses over the last two years were largely influenced by our investment portfolio. And over the course of 2021 and 2022, our investment book is effectively flat. During that period, we made approximately $10 per basic share and generated an operating EBITDA of over $780 million. Additionally, during that time, we continued to diversify our business and implement a strategy we began five years ago. which is to invest our excess episodic cash flows into recurring operating businesses that will generate strong cash flows even when our episodic businesses are slow. Our operating performance in 2022 highlights the benefits of this strategy. To highlight this bit further, consider that our investment banking and institutional brokerage business represented roughly 60% of our operating EBITDA in 2021 versus about 10% in 2022. During that same period, overall operating EBITDA declined by less than 20%. Since our inception as a sub-$50 million market cap publicly traded company in 2014, we have delivered in excess of $21 per share or over $570 million in common stock dividends to our shareholders. We have had meaningfully up and down years, and through all cycles, our diversified platform has demonstrated strength and resiliency to yield meaningful returns for our business and our shareholders, including in previous stock market cycles. We are and will continue to be opportunistic. As I mentioned, we made several strategic acquisitions this past year to bolster our platform with additional uncorrelated sources of steady revenue and to enhance capabilities where we see opportunities for longer-term growth. These additions include Targus, which has already contributed meaningful growth in our results, Bullseye Telecom and Lingo, which have enhanced the cash flows generated by our communications segment, and FocalPoint, which has expanded our M&A, debt, and restricting advisory capabilities as part of B-Riley Securities. In addition, we added to our receivables portfolio. This has been a great investment that continues to perform with double-digit rates of return. Since our unlevered purchase of the first portfolio for $400 million, and as of yesterday, we have recovered approximately $395 million of cash and have an incremental $154 million of current receivables. We typically recover 7% to 8% of our receivables per month. The second portfolio that we've purchased in partnership with Pathlight Capital is performing in line with our expectations, and we expect to have an IRR in excess of 40%. Speaking to our corporate loan portfolio, at year end, we had 12 loans with a total failed value of $384 million. This excludes our bad clock or unreceivable portfolio and a few loans under a million of fair value. Approximately 95% of our loan portfolio fair value was represented by secured loans. As a general view, we believe that our loan portfolio, which is almost entirely fair valued by an outside valuation firm, provides a very attractive risk-adjusted returns potential for us over the course of the year. We have received a number of calls on this portfolio, so I will outline a few highlights of our loan portfolio activity for 2022 and including activity thus far for 2023. We received a total paydown by Srento of their $41 million loan. We received a $15 million paydown of our Cadiz loan. We received an $11 million paydown of our Excel loan. The last loan I will update is our Core Scientific loan. We provided Core with a $42 million loan against Future Equity Sales, which now is an unsecured claim in the bankruptcy. We also provided a $70 million dip, of which $35 million has been funded, in order to have a greater speed at the table during the bankruptcy. At the time, our $42 million loan was marked to less than $8 million, which is reflected in our 2022 results. And since that time, Bitcoin has risen from $16.5 million to $24 million, and power costs consisting of mostly natural gas have declined meaningfully. We will continue to utilize our balance sheet to facilitate opportunities for our clients and provide strong returns for our constituents. In summary, we like where we sit heading into 2023 from an earnings power, liquidity, and opportunity perspective, and we will continue to keep our heads down to perform for our colleagues, our clients, our partners, and our shareholders. With that, I'll turn the call over to Phil Hahn, our CFO and COO, to discuss key financial metrics for the quarter. Then Tom Kelleher, our Co-CEO, will discuss results from our business segments before we open up for questions. Over to you, Phil.

Thanks, Brian. For the fourth quarter ending December 31st, 2022, B. Ryder reported total revenues of $327 million, down from $422 million in Q4 of 2021. Net loss available to common shareholders was $59 million, or $2.08 diluted loss per share, compared to net income of $62 million, or $2.08 diluted earnings per share, in the prior year period. This loss primarily reflects investment losses of $124 million, representing mark-to-market declines in our investment portfolio. Excluding the marks on our investments, operating revenues increased to $450 million for the quarter, up from $353 million in Q4 of 2021. Operating adjusted EBITDA of $102 million, compared to $106 million in the prior year period. For the full year in December 31, 2022, Total revenues were $915 million down from $1.7 billion from the prior year. Net loss available to common shareholders was $168 million or $5.95 diluted loss per share compared to net income of $438 million or $15.09 diluted earnings per share in 2021. Investment loss of $404 million for the year compared to investment gains of $387 million in 2021. Again, the loss was primarily due to the impact of the broad market declines throughout 2022 and its related impact on investments that we hold. Operating revenues for the year were $1.3 billion, which was relatively flat compared to 2021, despite softness in small cap markets and a decrease in investment banking and underwriting fees throughout 2022. Operating adjusted EBITDA was $366 million, down from $422 million for the prior year period. As a reminder, adjusted EBITDA and our metrics for operating investment results are non-GAAP financial measures. Please refer to our earnings release for a definition of these terms and for reconciliation to the nearest GAAP measures. Investors can also find additional details relating to these metrics and related reconciliations in the financial supplement on our investor relations website. Now turning to highlights from our balance sheet, as of December 31st, we had $269 million in unrestricted cash and cash equivalents, $1.1 billion in net securities and other investments owned, and $702 million in loans receivables. Of this total, Loans on non-accrual accounted for approximately $7 million of our total fair value. At year end, we had a total cash and investment balance of approximately $2.1 billion, which includes approximately $54 million of other investments reported in prepaid and other assets. Total debt as of December 31st was approximately $2.4 billion. This includes $1.7 billion of senior notes, approximately $700 million of senior loans, and $25 million in notes payable at year-end. We remain in compliance with all of our debt covenants, and specifically with regards to our Nomura debt facility covenants, the net asset value related to our primary guarantor was in excess of $2 billion at year-end. As a result of recent additions to our platform, we have realigned our segment reporting structure to reflect organizational changes at B. Reilly. The new consumer segment includes our previously reported brand segment, which historically represented licensing revenues from our six brands portfolio, and Targus, which we acquired in the fourth quarter of 2022. The consumer segment also includes revenues from our equity investments in Hurley and Justice brands, which were previously reported in the capital market segment. We have also realigned our previously reported principal investments, communications, and other segment into two separate segments, a communications segment and an all-other segment. The communications segment includes our legacy United Online and Magic Act businesses, in addition to Marconi Wireless, Lingo, and Bullseye Telecom. The all-other segment consists of opportunistic acquisitions in sectors unrelated to the above described segments. And finally, our regular quarterly dividend of $1 per share will be paid on or about March 23rd to common stockholders of record as of March 10th. That completes my financial summary, and now I'll turn the call over to our co-CEO, Tom Kelleher, to provide highlights from our business divisions. Tom?

Thanks, Phil. Over the past year, we helped clients navigate challenging markets to raise capital in a liquidity-restraining environment and execute on their strategic business initiatives. At the same time, we continue to grow our platform while making enhancements to strengthen our position long-term, both organically and through acquisitions. Excluding investments, our capital market segment generated operating revenues of $542 million, with segment operating income of $232 million for the year. reflecting lower levels of investment banking and underwriting activity. Our securities lending business continues to demonstrate resiliency amid a softer capital markets environment. After a challenging year, we realized a meaningful improvement in our capital markets business during the fourth quarter that has us optimistic for 2023. Underwriting, ATM, and banking advisory activities within BRI securities all increased sequentially compared to Q3 2020. With notable deals completed during the quarter, including a $75 million equity follow-on for AST Space Mobile, $125 million combined debt and equity raise for Harrow Health, $119 million follow-on offering for Lilium, along with several notable sell-side transactions, including the sale of Pericone juices, as well as the sale of a prominent brand to P&G. While many issuers have opted To wait for a more accommodating market environment, we are proud to have been nimble and aggressive in helping clients opportunistically seize windows to raise capital as evidenced by our role as sole book running manager in Bed Bath & Beyond's public equity raise earlier in the month. In our B. Reilly asset management business, 272 Capital has maintained its performance as a top equity long short fund worldwide, while adding assets and growing our institutional base. Assets under management for the business increased substantially year-over-year to $330 million as of December 31, 2022. Turning to wealth management, revenues for this segment totaled $234 million for the year, down from $382 million in 2021. The year-over-year decrease is primarily related to our strategic realignment of this division following our acquisition of National in the first quarter of 2021, as well as reduced client activity due to the market headwinds through 2022. As part of our realignment in this business, we exited a significant amount of producing registered representatives to give us the balance we sought for the business. And today, more than half of our wealth revenues are on a recurring basis. As fixed costs for this division continues to trend down, we expect to realize additional annual savings as vendor contracts roll off in the coming years. As we look ahead, we continue to invest in growing this business organically and recruiting quality advisors to our platform. Asset center management were more than $23 billion at December 31st. In our financial consulting segment, revenues totaled $99 million for the year, with segment income of $16 million for the year, related to B. Reilly Advisory Services and B. Reilly Real Estate. During 2022, we achieved record appraisal revenue levels, expanded our forensic and litigation service division, and realized year-over-year revenue growth of 44% in our real estate division, which we established in 2020. This segment continues to steadily perform as a source of stable revenues and profits to our platform, and we continue to explore opportunities to grow this division. To that end, earlier today we announced our acquisition of the corporate division of Farber Group, which is a Toronto-based restructuring and business advisory firm that our legacy Glass-Ratner team has collaborated with on cross-border engagements for over 15 years. This acquisition has 45 professionals and enhances our suite of advisory services. In addition to restructuring and turnaround management, Farber brings specialized expertise in human capital consulting, interim management, and executive search services. This added capability supports our role when we are appointed as interim CEO, CFO, or CRO for clients navigating or restructuring. and in sourcing executive talent for our clients, whether for growth or distress situations. This addition also extends our appraisal, valuation, litigation, and forensic services to Farber's clients and provides a foundation with which to expand our capabilities in Canada. We look forward to growing our collective foothold across the North American market together. In addition, we have established a new field examination practice to complement services we provide to vendors, private equity firms, and company borrowers. Our field exam practice strengthens our in-house capabilities and offers incremental value to our clients as a service that can be performed in conjunction with an appraisal for a more streamlined process in valuing collateral. This new practice is led by a veteran valuation expert who joined us at the end of last year. We were really excited about the opportunity to grow this vertical within our appraisal division. In our auction and liquidation segment, revenues increased to $74 million for the year, driven by an increase in retail liquidation assignments, with legacy and repeat clients in the U.S. during the quarter, and two large European projects, which added sizable profits in December. Rising interest rates, rising labor rates, and past supply chain disruptions are all adding to retail distress and disruptions. As financial pressure continues to mount for retailers, we are starting to see positive momentum for liquidations and are optimistic about the distressed retail market going into 2023. Turning to our communication segment, with recent enhancements, our communication segment revenues increased over 150% to $236 million for the year and generated segment income of $30 million in 2022. In 2021, this segment primarily consists of United Online and MagiJack, which we acquired in 2016 and 2018, respectively. Since then, we have added Marconi Wireless in the fourth quarter of 2021, completed the acquisition of Lingo in the second quarter of 2022, and acquired Bullseye Telecom in the third quarter of 2022. We acquired all these companies on a cost basis in line with our investment thesis and stated strategy to maximize cash flows to our platform. Importantly, each of these businesses continue to perform ahead of our investment ROI goals to generate cash flow for the firm. Finally, our consumer segment revenues increased to $171 million with segment income of $96 million for the year. The significant increase was primarily due to the acquisition of Targus in the fourth quarter of 2022. This segment also includes our investment in the Hurley and Justice brands and dividend income received from those investments, which totaled $28 million for the year, as well as revenues related to the licensing of trademarks for our six brands portfolio. We have a world-class team of colleagues across B. Riley who have the industry credentials and awards to rival the best in their fields. The dedication and support of teams continues to be paramount to both our and our clients' collective success. We appreciate integration is a big lift and requires flexibility from all our teams, both new and old, and our colleagues continue to bring complete focus and dedication. Our people are the most valuable asset we have, and we are humbled by the high caliber of professionals who represent B. Reilly Grand in the market every day. With that, we will now open the line for questions and then turn it back over to Brian for closing remarks.

Thanks.

Thank you. At this time, we will conduct the question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad to enter the queue. If you've joined via web, please press the raise hand icon on the right side of your DealRoadShow screen. Again, press star 1 on your telephone keypad to enter the queue. for the raise hand icon on the right side of your Deal Roadshow screen. We'll pause here briefly to allow questions to generate. Our first question comes from Sean at Charles Lane Capital. Your line is open. You may proceed.

Hey, guys. Congratulations on the quarter, and thanks for finding a better dialing this quarter. That wasn't a surprise. Quick question on Farber. It seems like you guys have been building out capabilities for the past couple years, but this one you're expanding geographically. Can you just kind of discuss your vision there and if that's something you're planning on pursuing going forward?

Sure. Hey, Sean. It's Brian. So, you know, there's two ways to kind of look through acquisitions. There's strategic and there's opportunistic. And so Farber was an opportunistic acquisition of a group of people that Ian Ratner, who runs that business, is known for a long time. He actually happens to be from Canada. But was very familiar with that group, and we found – an opportunity to acquire them and add on not only capabilities, but also geographical opportunities. And so, I don't know that we weren't looking to be in Canada, we weren't looking to go to a certain region. I think it was a great fit for them. They saw the benefits that Glass-Ratner got. I mean, when Glass-Ratner joined our firm, I think their ability to price went up meaningfully, the jobs that they did from referrals went up meaningfully, and that was part of the sales pitch to Farber. We're really excited. I think that's a group that they're as excited to be here as we're excited to have them. It wasn't an acquisition that we ran and chased and had a bake-off. It was just a really good fit. We'll take those opportunities as they come.

Great. Just on that note, does it come with any kind of expediting of entry into Canadian market for your other businesses? Or is this just kind of separate from all that?

I don't know, TK, do you have any thoughts on that? I would say that, you know, we have been mostly domestic and to the extent, you know, if we're able to utilize those relationships, whether it's capital markets or lending or whatever, but I will tell you, that's not why we did it. We did it because of the people that are coming. So I wouldn't I wouldn't suggest that we said, boy, if we could cross-sell our products in Canada, it would be a multiplier effect, although we absolutely will try. Tom, anything you would add?

Yeah, I would just add it's an opportunity. So the base business, the forensic accounting and shareholder litigation support restructuring, that's right up Ian's alley. But there's an executive search piece. There's some wealth management, some M&A expertise. So, again, not a reason why we acquired it, but, yeah, it gives us all the opportunity to scale from what they've already put together.

Got it. That makes sense. And then, you know, I know you've done this in the past, but could you just remind us the recurring for you to die and kind of where that settled for you? Sure.

Sure. So I'll be super specific on the overall numbers, then I can get into the weeds a bit. So for 2022, as we define recurring, it was about $325 million of operating EBITDA. And to put that in perspective, we need about $310 million to pay everything, including our dividend and overhead and everything. So to be able to pay for all of that with our recurring EBITDA and have you know, two other businesses that can generate outsized returns, I feel like that puts us in a really good place. When I look out to 2023, we had a big benefit from bad-cocked receivables in 2022 that we have to replace them. But we didn't get the benefit of a full year of Targus, and we didn't get the benefit of a full year of Lingo and Bullseye, which kind of makes up for that bad-cocked receivable side. So I would say – You know, when I look at my kind of run rate estimate of recurring and my upside estimate, my run rate is somewhere in the low 300s and my upsides in the high 300s. So, you know, I think we're really well – and all those businesses, none of those businesses require a lot of CapEx. They are cash flow generative. So I really like where we're sitting. And if capital markets comes back or if liquidations comes back, I mean, you've seen that. You've been a shareholder for a while. You can see how those – Those are both saying at the same time how powerful it can be.

Yeah, definitely. Okay, great. And that's all I got. But thanks for the additional transparency, Intracorder. That was very helpful. So keep it up. Thanks, guys.

All right. Thanks, Sean.

Thank you. Our next question comes from Paul at Punchin Associates. Paul, your line is open.

Hi, good afternoon. Hey, Paul.

Hey, a couple questions for you. First, on the loan book, you know, I appreciate you guys tackling things head on here and giving the attention that's attracted. Could you... spend a little more time just talking about the underwriting process with the loan portfolio specifically and how you think about rate as well as how the loan book can fit with the rest of the business strategically?

Sure. So, you know, in general, for us to provide a loan, we have to think of it as enhancing a relationship, whether it's a corporate relationship where we can, you know, create incremental opportunities to create fees or or, you know, we own part of the equity or whatever. And so that, those opportunities come at us pretty fast. We have five people, I think you may have met, maybe you haven't, but we have five people in our principal investment group that do a deeper underwriting. We have, we often will bring in people from Glass Rattner, for example, on the backpack receivables. of our business, that is run by a guy who has receivable expertise for years and years. On the restructuring side, we've got Perry Mandarino, who runs our restructuring business, will dive in and is diving into core. And we have a risk management team. And so there's an investment group that works through all of those opportunities and tries to figure out the right And typically when we're doing something, we are a bridge. So we're going to be, you know, we are going to be somebody that you're going to want to replace if you can. So, so for example, a great example, that would be Harrow where, you know, we helped that company make an acquisition, you know, That stock after that acquisition went from 11 to 16 because I think people saw the merit of it. When they needed $120 million to do that, we provided them a combination of equity, of debt that became baby bonds, and senior security. And so that package, which I think we're uniquely positioned to do, not only because of our wealth management group, but also because we're willing to take a merchant banking approach, created that opportunity for them, We, you know, we own a chunk of the equity, which we did really well on. We own right now 70 million of senior secured paper, which, you know, sits on top of a $600 million market cap that is at a high rate. And they, you know, I think they will probably replace that by the end of March. And we own $10 million of baby bonds. And so for all of that, the fee opportunity there was great. And the client was super happy. And if we can put all of those pieces together, I think that differentiates us in a meaningful way. So that's the general theme. You know, if we're going to have our troubles, I think it's going to be something that really catches us, you know, something super dramatic. And I would call core pretty dramatic. I mean, the commodity that core serves went from $45,000 to $16,000 pretty quickly. I mean, you know, we wouldn't put on a loan tied to a commodity and not hedge it a bit. So, you know, I think the face – number you're seeing on the loan was offset a little. But, yeah, that one, you know, we're going to get – I don't think you can do as – put as much money to work as we do and not, you know, not get caught once in a while. But I think we're going to work out of that situation a lot better than I thought before. But anything – how else can I address that, Paul?

No, that's perfect. I appreciate you – riffing on that a bit. And like I said, I appreciate you guys tackling it head on in the prepared remarks. That's good. On on wealth management, can you just spend a little more time talking about, you know, what I guess the amount of time you think it'll take to to get that business to the the level of profitability that you were thinking initially?

So I think if I were to grade myself over the last five years on being right around, you know, what businesses and where they were positioned, I'd give myself a pretty good grade. This one I have not done great. I think I've felt like, you know, we were going to get more profitable quicker. We made a decision in that business to shrink it, you know, really dedicate ourselves, our service, you know, our capital to what we thought were the highest and most productive businesses. wealth managers, and I think we're super close. I think I said this to you last year. Obviously, you know, they do rely on some syndicates. Syndicate was off. But I think if you look at this year, I think we'll be profitable. You know, when I look at my recurring piece of that business, and I've always bucketed them in recurring, I probably shouldn't. It's not big enough to think too much about, but I've got something that's all the way from negative 2 to positive 10. But I think we're there. I think we are at a spot where we are very close to profitable without any incremental syndicate business. And I think the quality and the partnership we have with the wealth management group that's with us is a lot better. Smaller, but a lot better. Tom, anything you want to add there?

No, I guess I would just say, look, it's been a tremendous amount of work. You've got two large groups of people that do things, you know, the same thing completely different. So just managing and working through all the operational headaches that come with combining companies is substantively behind it. You know, that was a big part of last year and the year before. So it's just it, it takes time. As I mentioned, you know, really excited where we sit, because that's basically behind us. And rather than looking in the rearview mirror, now we can look forward and really try to figure out how to grow and scale and, you know, build the business as opposed to merging them. Okay, perfect.

On Targus, could you just, you know, spend a little bit of time on how that's getting integrated and, you know, how they're managing through, I believe most of their companies or clients are corporate, so just kind of how they're managing through this choppy labor environment?

Yeah. The beauty of Targus, and just bear with me. I'll give you a little background because I think it's relevant. I had worked with Michael Williams, who was the CEO of DDI. I don't know if you remember that public company, Printed Circuit Board. Then I had actually become an activist. I became the chairman. And Michael was literally, I mean, I think he was just an amazing CEO. We ended up selling that business for a big number. I asked him to join the board because I thought he was incredibly smart and I thought he could be incredibly helpful. So he joined the board. And during the probably seven years he was on the board, he sold one public company. And then he was at Targus. And he turned Targus from what was an over-leveraged bankrupt company to a business that had recapped dividends out to the shareholders and had no debt and was generating, you know, 50, mid-50 millions in EBITDA. And so I had said to him as, you know, as when you want, you know, often your best investments are with people you've invested with before. I said, if you ever want to roll your equity in that business, like, I'd love, we'd love to hear about that because it kind of fits us. It's, you know, it's a low capex, high cash flow business and with a great operator. So that happened. You know, that business last year did mid-50s EBITDA but had freight costs that were punishable as much as like 15, 20 million. So I think when we underwrote that business, we assumed that the business would be off 20, 25%, but the freight savings would offset that. And so we underwrote it to in between 50 and 60 million. You know, if I were a betting man right now, I'd say it'd be closer to the 50 million and the 60 million. We definitely, there's, you know, the channels are full, but we're in it for not a month or two months. And we think we have a great operator. We're going to, you know, look at other opportunities to have add-on products. We think it's a great, you know, it's a great platform. And the integration is easy. I mean, we've got a guy that we, you know, we have a ton of respect for that's been running it himself, reporting himself. themselves as a company. So that part of the integration. That was an opportunistic purchase that we will only try and enhance in any way we can, but we'll rely on the current management team.

Okay, great. And just pulling on that thread a little bit, where are you looking to allocate capital either strategically? I guess it's harder to pick the opportunistic ones, but where do you want to put your incremental dollars in 2023? So, I mean, not to this

The risk of being controversial, we think that bridge loans to public companies where we can utilize, whether it's, you know, our relationships on the institutional side, our ability to provide different types of loans, whether it's an eight asset back or otherwise, you know, one of the smartest things we did is we sold a lot of baby bonds, it yields at 5.5% and 6%. And, you know, our job is obviously to pay those back, which we will. But in the meantime, we've got a four-year runway of a very low cost of capital. So if we can, you know, when I look at it right now, if we can utilize our balance sheet to make some, you know, really interesting investments, get, you know, mid-teens type of returns and also enhance that with, you know, maybe a a bigger mandate, whether it's a sell side or whatever, those opportunities are pretty prime. You know, it's tight out there if you're a public company looking for money quickly, and we think we can be helpful.

Okay. Great. That's it for me. Thanks for your time, and thanks for the work this quarter. Thank you. Thanks, Paul. Thank you.

Next question comes from Thompson at Malden Economics. Your line is open.

Hey, Brian. Thanks for the time. A lot of my questions have been answered. I saw the net debt for the quarter is, you know, net of cash investments went negative. Any target you guys are looking for there? What do you want to be for that?

Well, I mean, we want to have a ton of net cash, but what are we accepting of? Look, if I were to sit here and say we've paid out $580 million to our shareholders. We've also, I don't know what we bought back in stock. I think it was dividends. We also bought back another, I don't know the number, but a meaningful number. And we've had some pretty tough marks. I mean, this was a tough year for everybody in the small cap world. And we are less than one times levered. And that's a pretty good spot. Like, I feel really good about that. And so... I don't know. I mean, I think we could be two and a half, three times levered. I don't think we're going to get there because I think our business is going to earn itself out of that. And I think our portfolio is at a discount. But I think a business like ours has got a meaningful piece of recurring that doesn't CapEx and working capital needs associated with it could lever up some more, but we just have to be cognizant that, you know, we've got some volatile businesses. You know, if you look at the B. Reilly Securities business in the last three years, you had operating even at 138, 264, and 27. I mean, that is what it is. I'm really pleased we made money. A lot of people grew during 2021 and lifted their overhead, and we were pretty careful. But that's a tough thing to manage, and we always manage for the downside. And when I do those numbers and when I do that one-times leverage, that's managing for downside in the brokerage business, and that business can turn meaningfully. And if it does, I think we're really well positioned. I mean, the markets opened up in November, you know, sub-billion-dollar non-healthcare deals. I think – I don't know how many there were, but we had five, and the next person did two, and all of those are up, and I think they were opportunistic deals. So I like our balance sheet. I don't sweat our net debt. We could have more, but we're going to be really, you know, we're going to be cautious. And, again, Thompson, just realize that of our debt that comes due, over $1.2 billion doesn't come due to the end of 26 and going into 28. So we've got a long runway to make a lot of money on those spreads. So we feel like we're in a pretty good position.

Great. Yeah, super helpful. And then looking at the loans receivable for the end of the year, $700 million, can you just break down a little bit, you or Phil, break down a little bit kind of what's in there? We've got BADCOC and we've got BABCOC. Can you kind of get through those and then any other big ones?

So, Phil, I think you break it up between BADCOC and I think there's some notable ones that are out there. You know, some of our loans are related to, you know, we'll provide – margin services for customers with, you know, large share amounts. It's kind of all over the place, so I obviously wouldn't mention those people by name, but we have loans all over, and the average loan is $32 million. Is it $32 million? Is that what we said, Phil?

Yeah, excluding Baghdad, the average fair value per name is roughly $32 million.

across 13 names, and the duration unknown should be less than a year. They should be three to six months. Our goal is to provide a bridge loan and, you know, help a client out and let them get to a more – a lender that's going to be longer term, doesn't have the same kind of capital returns that we would require, but we're helping them get a deal done. Okay, great.

And then in that total cash investments, The private equity, you know, about 394 million, any color there, what's in there?

I don't know, Phil, you want to walk through that in a little bit? Sorry, let me just, let me pull through a couple of things here.

Okay, I'll give you a few examples. We have a VC portfolio that we brought on a VC team three years ago. We utilize that group to find proprietary investments for our wealth management group. Average investment in that is probably $7 million. The average banking fee associated with those has been probably 10% of the invested capital. And we utilize that to enhance our banking fees. We have opportunistically purchased a few energy assets that we saw and we were uniquely positioned for that have done okay, and so that's part of that. We have our brand. Is our brand in that private equity side, Phil? Okay.

Got it. Okay, yeah, that's helpful.

Yeah, I think that's it for me. So I appreciate the time and the questions.

All right. Thank you.

Thank you. Our next question comes from Keith at Cruiser Capital Advisors. Keith, your line is open.

Thank you.

Hey, Bryant. Hi. Could you elaborate a little bit on the operating earnings that you've guided to the non-episodic operating earnings? Does that I think you said $324 million. Does that include a full year of Targus, or is Targus additive to that?

Targus is additive. Targus contributed about, this is rough, $11 million for the year. We acquired that in mid-October, maybe $12 million.

So if we were to run rate that for next year, it would be?

Well, what I would say is I don't think we're going to find – so we've freed up a lot at $400 million over the course of, you know, 14 months on BACOC. And as I mentioned in the call, we still have $157 million receivables. We think that – it says double. We think that return will be – IRs will be 25% to 30%. that money is being put back to work in other opportunities. I don't think it's going to be put back to work at the kind of, you know, those kind of IRRs. So the contribution from BACOC, it comes in a bit to offset, you know, maybe some of that targets. But the lingo and the lingo and the bullseye kind of are the small telecom businesses that we have. They only contributed in 2022, you know, $9 million, $10 million, Lingo and Bullseye, which is an acquisition we made together, and I have them contributing closer to $25 million in 2023. So they didn't contribute for the whole year either. So there's definitely the run rates higher than the 2022 average. I would just say Babcock would be the most meaningful detractor.

Okay. And then on the Babcock and Wilcox receivables, This is Babcock Furniture. I understand, but I'm talking about the receivables to Babcock and Wilcox. Sorry, just clarifying. One of the elements of the short report was questioning the caliber or quality of those receivables for the loan. What has been the overall default rate You know, how would you categorize the quality of the loan?

So I think we're mixing two things. I think the criticism was on our backstopping of LCs for Batcock and Wilcox. We backstopped for a relatively low rate, about $100 million of LCs. That Batcock, you know, we're a big shareholder and we're a partner of theirs. We didn't put up any of the money. We just backstopped it. So there was a question of why we did that for a low rate. Babcock and Wilcox has not walked away from an LC in 20 plus years. The business took off as COVID started to clear up and they just needed help in financing LCs. I view that as non-controversial and zero risk. BACOC is the receivable package that we bought for 400, where the underwriting of that, so you understand, is that we bought 500. We bought those at 75 cents on the dollar. So we bought roughly 500, and I'm doing this off of memory, but somewhere around 530 million of receivables. Obviously, there's an interest rate associated with the receivables. There's an insurance associated with those receivables. And so charge-offs are a meaningful portion. It is a customer that, you know, is a lower FICO score customer, but that's how it's priced. And so the net of that, which I think is the most important part, because you can – the write-offs are somewhat irrelevant, is that we invested $400 million. We have gotten back $396 million. We have $156 million of receivables that are in good standing. and we've written off a rough 95 million of receivables, which we think will recover 5% to 10%. So if you mix all of that up, you get a total return of, you know, IRRs of 25% to 30%. Of that 156 million that we still have, we'll probably recover 65% to 70%, and we'll recover, you know, 5% to 10% a year of the charge-off. So it's been a great investment. I mean, we got our money back every month. Like our initial receivables, every month we get 8% to 9% back. So when we started with $520 million that first month, we got back $40 million. So it's been a great place during a very difficult market to have an unlevered portfolio that's generating a bunch of cash for us. And it's like, you know, it's almost like we put money in the piggy bank in 2021 at a decent time. We had sold some equities to do that, and it's coming back. That $400 million we put in the piggy bank is coming back close to, you know, $530. Got it. But that's the nature of the fee. That's the nature of the receivable. So I don't really, you know, that's Babcock's business.

Okay. Thanks, guys. I appreciate the clarification on the Babcocks. Sure. No problem. Operator, any other questions?

Our next question comes from Keith with Cruiser. Pardon me. Our next question comes from Steve with Schoenfeld Strategic Advisors. Steve, your line is open.

Hi, guys. Congrats on the adjusted operating input in a tough environment. Maybe just staying on the high level here. So in 20 and 21, well, I guess going back, you guys had never had over $100 million of net cash from operations. And with interest expense now over $175 million annual rate and negative tangible book value, when you think of the dividend, what do you think of the funding model for this dividend? What's going to be the source to fund this? Because obviously you have the cash available to pay it down, but I guess just the sustainable funding of the dividend.

Yeah, so I feel like you're, so as I mentioned, in 2022, our recurring EBITDA funded our dividend, funded our taxes, and funded our overhead. So that number, which is $310 million, was funded by $324 million. What we define as recurring EBITDA. So that's how we're funding the dividend. And then you have Two other businesses, yeah, we didn't do $100 million in cash flow. Well, you know, we've grown our business from a brokerage business that started with 10 people that did over $200 million in EBITDA. So that business is going to be up and down, but we haven't lost money in that business for more than a month, like in four years. So we'll make money in that business, and that will be incremental cash flow.

Got it. Okay, and thinking of that core capital market service and fee, so it's been the 65 to 70 million run rate on that line. The third quarter had 42 million of incentive fees. Just remind me if that was cash or non-cash, what drove those, and if that number is in that adjusted EBITDA, and if that didn't occur.

Are we talking about the PR issues there?

There was 42 million of incentive fees in the third quarter Q I saw, And that is what lifted that line from the $65 million, $70 million run rate up. And I just want to know, what was that incentive fee with the cash, non-cash, and what we can expect if that was in the $310 million dividend you called out?

Well, it wasn't in the $310 million dividend because we don't have any incentive fees in that. Phil, can you respond to that?

Yeah, I think we're going to – you know what? Why don't, Steve, why don't we follow up with you? I'm not sure exactly the incentive that you were referring to there.

Okay. All right. Yeah, it's just in the third quarter key, but it's better to go through that in more detail later. I'm happy to do that.

Great. Okay. Thanks, guys. Thank you.

Thank you. This concludes our question and answer session. I'd now like to turn the call back to Mr. Riley for his closing remarks.

Okay, well, thank you. Thank you, everyone. I saw 480 people on this call, which I think is a record. I think a lot of people work at the firm. They've entrusted their careers with us. We take that with a ton of responsibility. We know that there's been a lot of noise, a lot of inaccuracies floating out there. I hope fully we addressed it. We think we're incredibly well positioned as we move forward in 2023, as we've kind of laid out on a recurring and episodic side. And we think we have a great runway, and we're very appreciative to everybody that helps us get there. And to our shareholders, we know we're a somewhat difficult story, and we have some ups and downs. But overall, I think we've performed, and we're dedicated to continue to perform. So thank you for giving us that opportunity. Thank you, everyone.

Thank you. Before we conclude today's call, I will provide B. Riley Financial's safe harbor statement, which includes important cautions regarding forward-looking statements made during this call. Statements made during this call that are not descriptions of historical facts are forward-looking statements that are not on management's current expectations and assumptions and are subject to risks and uncertainties. If such risks or uncertainties materialize or such assumptions prove incorrect, our business, operating results, financial condition, and stock price could be materially, negatively affected. You should not place undue reliance on such forward-looking statements, which are based on the information currently available to us and speak only as of today's date. Such forward-looking statements include but are not limited to statements regarding our excitement and the expected growth of our business segments. Factors that could cause such actual results to differ materially from those contemplated or implied by such forward-looking statements include, without limitation, the risks described from time to time in B. Reilly Financial Incorporated's periodic filings with the SEC, including, without limitation, the risks described in B. Reilly Financial Incorporated's annual report on Form 10-K for the year ended December 31, 2021, and in our quarterly reports on Form 10-Q for the quarters ended March 31, June 30, September 30, 2022. Under the captions Risk Factors, and management's discussion and analytics of financial condition and result of operations as applicable. Additional information will be set forth in our annual report on Form 10-K for the year ended December 31st, 2022. These factors should be considered carefully and participants are cautioned not to place undue reliance on such forward-looking statements. All information is current as of today's call and B. Reilly Financial undertakes no duty to update this information. Thank you for joining us today for B Reilly Financial's fourth quarter and full year 2022 earnings conference call. You may now disconnect.