Portman Ridge Finance Corporation (NASDAQ:PTMN) Q3 2023 Earnings Call Transcript
Portman Ridge Finance Corporation (NASDAQ:PTMN) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Welcome to Portman Ridge Finance Corporation's Third Quarter 2023 Earnings Conference Call. An earnings press release was distributed yesterday, November 8, 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 the company's Form 10-Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the company's filings with the SEC.
Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation, Jason Roos, Chief Financial Officer; and Patrick Schafer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.
Ted Goldthorpe: Good afternoon, and thanks, everyone, for joining our third quarter 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos; and our Chief Investment Officer, Patrick Schafer. I'll provide brief highlights on the company's performance and activities for the quarter. Patrick will provide commentary on our investment portfolio and our markets, and Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its third quarter 2023 results, and we are pleased with the solid earnings power of the portfolio despite operating in a somewhat challenging market conditions. Our core investment income was up year-over-year, increasing by $700,000 as we continue to see the impact that rising rates have on our debt portfolio.
Additionally, our net asset value per share increased from $22.54 per share to $22.65 per share. We continued our accretive repurchase program, purchasing over 60,000 shares at an average cost of approximately $1.2 million during the third quarter. Due to the continued strong performance this past quarter, the Board of Directors was able to approve a dividend of $0.69 per share, a level that represents a 12.2% annualized return on net asset value. On a year-to-date basis, total dividends to be distributed to shareholders amount to $2.75 per share, representing a 7.4% increase as compared to the dividend distributed in 2022. As we have discussed in previous quarters, M&A deal flow continues to be at depressed levels year-to-date, but we remain optimistic on the overall outlook.
On the sponsor finance front, we are starting to see the early innings of deal activity pick up through a combination of valuation expectations being more reasonable and acceptance that interest rates will remain elevated for an extended period of time significant dry powder on the sidelines and private equity LPs encouraging the return of capital from their fund managers. Sponsors are looking to put less total leverage on their companies, which lowers our detachment point. We'll remain cautious on the ultimate execution rate of these M&A processes, the recipe for increased activity levels appear to be in place. Both the sponsor and non-sponsor activity -- we continue to find the investment opportunities to be very attractive given the combination of higher benchmark rates, lower leverage on new deals, higher equity contributions from sponsors and better documentation.
Given the continued macro uncertainty around inflation, consumer sentiment and ongoing conflict in Ukraine and Israel, we continue to be very selective on new investment opportunities and have overall found investments in existing portfolio companies more attractive than those in new borrowers. Refocusing on Portman Ridge, we continue to believe our stock remains undervalued. Thus, as previously mentioned, we continued repurchasing shares under our renewed stock purchase program. In the third quarter, we repurchased an incremental 6,559 shares for an aggregate cost of approximately $1.2 million. This follows the trend set throughout 2022 and the first half of 2023 and expect this trend to continue through the final quarter of the year as we are able to do so.
Following my remarks, Patrick will also walk through the potential upside cases for net asset value. But in addition to the market trading discount of our stock price, we continue to believe that there is significant embedded value to NAV even when overlaying conservative default and recovery rates. With that, I will turn over the call to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.
Patrick Schafer: Thanks, Ted. Turning now to Slide 5 of our presentation and the sensitivity of our earnings to interest rates. As of December -- as of September 30, 2023, approximately 90.5% of our debt securities portfolio were either floating rate with a spread to an interest rate index such as LIBOR, SOFR or Prime Rate, with 98% of these being linked to SOFR. As you can see from the chart, the underlying benchmark rate of our assets during the quarter lagged prevailing market rates and still remain below the SOFR rates as of October 30, 2023, and but the gap is the narrowest it has been since the onset of the Fed rate hike cycle. For lesser purposes, if all our assets were to reset to either a 3-month LIBOR or SOFR rate, respectively, we would expect to generate an incremental $75,000 of quarterly income.
Having said that, Slide 7 shows a slight decline in NII per share on a run rate basis driven largely by a slightly lower asset balance as of September 30, 2023, and our simple methodology of not assuming any changes to the portfolio. Skipping down to Slide 11. Originations for the third quarter were slightly higher than the prior quarter but still remained below repayment levels, resulting in net repayments and sales of approximately $11.6 million. Some of this was driven by late repayments during the quarter and 2 transactions expected to close in Q3 that were pushed into early Q4. Our new investments made during the quarter are expected to yield a spread to SOFR of 917 basis points on par value, and the investments were purchased at a cost of approximately 99% of par.
Our investment securities portfolio at the end of the third quarter remained highly diversified with investment spread across 26 different industries and 101 different entities. All while maintaining an average par balance per entity of approximately $3.3 million. Turning to Slide 12. We had 1 new portfolio company go on nonaccrual as of -- as compared to June 30, 2023, and 1 come off nonaccrual due to the completion of a restructuring. In aggregate, securities on nonaccrual stats remain relatively low at 8 investments in the third quarter of 2023 as compared to 7 investments on nonaccrual status as of June 30, 2023. These 8 investments on nonaccrual status at the end of the third quarter of 2023 represent 1.6% and 3.6% of the company's investment portfolio at fair value and amortized cost, respectively.
On Slide 13, excluding our nonaccrual investments, we have an aggregate debt securities fair value of $427 million, which represents a blended price of 93.4% of par value and is 88% comprised of first lien loans at par value. Assuming a par recovery, our September 30, 2023 fair values reflect a potential of $28 million of incremental NAV value, a 13.1% increase or $2.94 per share, excluding any recovery on the nonaccrual investments. For illustrative purposes, if you would assume a 10% default rate and a 70% recovery rate on this debt portfolio, there would still be an incremental $1.60 per share of NAV value or a 7.1% increase over time as the portfolio matures and is repaid. Again, this is excluding any recovery on the nonaccrual investments.
This indicative default rate is above anything the market is expecting or has experienced historically. Finally, turning to Slide 14. If you aggregate the 3 portfolios acquired over the last 3 years, we have purchased a combined $435 million of investments, have realized over 78% of these positions at a combined realized and unrealized mark of 103% of fair value at the time of closing the respective mergers. This is an indication of our ability to effectively realize the value of legacy portfolios acquired, while rotating into BC Partners sourced assets. More importantly, we're able to achieve those results despite the global pandemic in 2020 and most 2021 and a weak market for almost all asset classes in 2022 and the first half of 2023. I'll now turn the call over to Jason to further discuss our financial results for the period.
Jason Roos: Thanks, Patrick. As both Ted and Patrick previously mentioned, despite operating under a challenging economic environment, our results for the third quarter of 2023 reflect strong financial performance. Our total investment income decreased slightly by $400,000 to $18.6 million in the third quarter of 2023 in comparison to $19 million in the third quarter of 2022. This reported total investment income represents a $1 million decrease from the $19.6 million of reported total investment income in the second quarter of 2023. The quarter-over-quarter decrease was largely due to reduced fee income and dividend income compared to the second quarter of 2023. Excluding the impact of purchase price accounting, our core investment income for the third quarter of 2023 was $18.3 million, an increase of $700,000 as compared to $17.6 million for the third quarter of 2022, a decrease of $900,000 as compared to $19.2 million for the second quarter of 2023.
Our net investment income for the third quarter of 2023 was $7.2 million or $0.75 per share, a decrease of $1.2 million as compared to $8.4 million or $0.87 per share for the third quarter of 2022 and a decrease of $700,000 as compared to $7.9 million or $0.83 per share for the second quarter of 2023. The quarter-over-quarter decrease was largely due to the aforementioned decreases unit fee and dividend income. As of September 30, 2023 and June 30, 2023, the weighted average contractual interest rate on our interest-earning debt securities was approximately 12.3% and 12.1%, respectively. We continue to believe the portfolio remains well positioned to generate incremental revenue in future quarters due to the current rate environment. Total expenses decreased quarter-over-quarter from $11.7 million for the second quarter of 2023 to $11.4 million in the third quarter of 2023.
This decrease was due to reduced expenses and predominantly all expense categories, a result of our efforts to reduce overall expenses. Our net asset value for the third quarter of 2023 was $214.8 million or $22.65 per share as compared to $215 million or $22.54 per share in the second quarter of 2023. Turning to the liability side of the balance sheet. As of September 30, 2023, we had a total of $321.5 million par value of borrowings outstanding at a current weighted average interest rate of 6.9%. This balance was comprised of $74 million in borrowings under our revolving credit facility, $108 million of 4 7/8% notes due 2026 and $139.5 million in secured notes due 2029. The quarter-over-quarter decrease of $12.2 million was primarily driven by an $8.2 million repayment on the secured notes due 2029 and a net $4 million repayment on the revolving credit facility.
As of the end of the quarter, we had $41 million of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity under the 2018-2 revolving credit facility as the reinvestment period ended shortly after our draw on November 20, 2022. As of September 30, 2023, our debt-to-equity ratio was 1.5x on a gross basis and 1.34x on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 166%. Finally, and as announced November 8, 2023, a quarterly distribution of $0.69 per share was approved by the Board and declared payable on November 30, 2023, to stockholders of record at the close of business on November 20, 2023. This is a $0.02 per share distribution increase as compared to the fourth quarter of 2022, including the distribution subsequent to the announcement of full year 2022 earnings results total stockholder distributions for 2023 amount to $2.75 per share.
With that, I will turn the call back over to Ted.
Ted Goldthorpe: Thank you, Jason. Ahead of questions, I'd like to reemphasize that we believe we are well positioned to take advantage of the current market environment as we have shown throughout the year so far. Through our prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders in the final quarter of the year and into 2024. Thank you once again to all of our shareholders for ongoing support. This concludes our prepared remarks, and I will turn the call over for any questions.
Operator: [Operator Instructions] Our first question will come from the line of Paul Johnson with KBW.
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