Q4 2023 Portman Ridge Finance Corp Earnings Call

Participants

Ted Goldthorpe; Chairman of the Board, President, Chief Executive Officer; Portman Ridge Finance Corp

Patrick Schafer; Chief Investment Officer; Portman Ridge Finance Corp

Jason Roos; Chief Financial Officer, Treasurer, Secretary; Portman Ridge Finance Corp

Presentation

Operator

Welcome to Portman Ridge Finance Corporation's fourth-quarter and full-year 2023 earnings conference call. An earnings press release was distributed yesterday, March 13, 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-K filed yesterday with the SEC. As a reminder, this conference call is being recorded by 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; Patrick Schafer, Chief Investment Officer; and Brandon Satoren, Chief Accounting Officer.
With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.

Ted Goldthorpe

Good morning, and thanks, everyone, for joining our fourth-quarter and full-year 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos; our Chief Investment Officer, Patrick Schafer, and our Chief Accounting Officer, Brandon Satoren.
I'll provide brief highlights on the company's performance and activities for the year. 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 fourth quarter and full year 2023 results. And we are pleased with the solid earnings power of the portfolio despite operating in a somewhat challenging market conditions during the year, we saw a 10% increase in total investment income and a 16% increase in core investment income year over year. Additionally, our net asset value per share increased from 2265 per share to 2276 per share quarter over quarter. Credit quality also improved in the quarter with a reduction in non-accruals on a cost market-value and company count basis, we continued our accretive repurchase program, purchasing 101,680 shares at an average cost of approximately $1.8 million during the fourth quarter due to the continued strong performance this past quarter, the Board of Directors was able to approve another strong dividend for the first quarter of 2020 for an amount of $0.69 per share, a level that represents a 12.1% annualized return on net asset value. For the full year 2023, total dividends distributed to shareholders amounted to $2.75 per share, representing a 7.4% increase as compared to the dividend distributed in 2022.
Turning to conditions in our primary market. New deal activity began picking up in late Q4. And while a primary market has been consistently active for most of 2024 so far, deal activity during 2023 as a whole was meaningfully down relative to 2022 and 2021.
On the sponsor finance front, the fourth quarter deal activity began to tick up through a combination of valuation expectations being more reasonable and a belief by most industry participants that interest rates have either reached their peak or near enough that new buyers could reasonably estimate their cost of capital in 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. As has been the case for the last couple of quarters, we continue to be very selective on new investment opportunities and have overall found investments in existing portfolio companies more attractive in new borrowers. To that end, during the fourth quarter, 55% of our capital deployed was in existing portfolio companies as compared to 45% being deployed in new into new borrowers, three new borrowers to be specific, our goal continues to be to maintain an exceptionally diverse diversified portfolio and invest in companies that potential have the potential to provide strong returns for our shareholders.
Refocusing on Portman Ridge, we continue to believe our buyback. Our stock remains undervalued throughout 2023 and consistently repurchased shares under a renewed stock purchase program during the quarter. During the year, we repurchased an incremental 224,933 shares for an aggregate cost of approximately 4.4 million. This compares to an aggregate aggregate cost of $3.8 million for full year 2022, consistent with prior years, the Company's Board of Directors renewed our $10 million stock buyback program for another year.
And with that, I will turn the call over to Patrick Shaver, our Chief Investment Officer for a review of our investment activity.

Patrick Schafer

Thanks, Ed. Turning now to Slide 5 of our presentation and the sensitivity of our earnings to interest rates. As of December 31st, 2023, approximately 90% of our debt portfolio are either floating rate. We're floating rate to either a spread way with a full rate with this prior to the interest rate index such as sulfur or primary, but substantially all of these being linked to silver.
As you can see from the chart, the underlying benchmark rates of our assets during the quarter lagged the prevailing market rates and still remain below the silver rate as of March eighth, 2024. But between the market transition last year from Libor to sulfur and the recent pause from the Fed, the gap is the narrowest. It has been since the onset of the Fed rate hikes, the Fed rate hike cycle for illustrative purposes if all of our assets were to reset to a three month. So for rate, we would expect to generate an incremental $86,000 of quarterly income. Having said that, slide 7 shows the aggregate impact to NI on a run rate basis of both our assets and liabilities as of December 31st, 2023, given the relatively shallow benchmark curve and limited financial impact of this analysis, we will likely be retiring this slide going forward from our earnings presentations as we have been relatively in equilibrium for the past few quarters.
Skipping down to slide 11. Originations for the fourth quarter remain at a lower level than prior year fourth quarter, as well as below the repayment levels resulting in net repayments in sales of approximately 30.1 million. Our new investments made during the quarter are expected to yield a spread to far of 787 hundred and 98 basis points on par value and the investments were purchased at a cost of approximately 96.3% of par. Our investment securities portfolio at the end of the fourth quarter remained highly diversified. We ended the year with investments spread across 27 different industries and 100 different entities, all while maintaining an average power balance per entity of approximately 3.1 million.
Turning to Slide 12. In aggregate, securities on nonaccrual status remain relatively low and decreased to seven investments at the end of the fourth quarter of 2023 as compared to investments on nonaccrual status as of September 30th, 2023, as one of our borrowers emerged from bankruptcy in Q4 and our restructured loan return to cash pay. These seven investments on nonaccrual status at the end of the fourth quarter of 2023 represent 1.3% and 3.2% 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 373 million, which represents a blended price of 94.3% of par and is 80% comprised of first-lien loans at par value, assuming RevPAR recovery. Our December 31st, 2023 at fair values reflect the potential of 29.2 million of incremental net value, a 13.7% increase or $3.12 per share, excluding any recovery on nonaccrual investments if we were to overlay an illustrious 10% default rate and 70% recovery rate to the entire debt securities portfolio, again, excluding nonaccrual investments, the incremental now value potential would be $1.83 per share or an 8% increase to now five per share as of December 31st, 2023.
Finally, turning to Slide 14. If you aggregate the three portfolios acquired over the last three years, we have purchased a combined 434.8 million of investments and have realized over 82% of these investments at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers 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, our results for the fourth quarter and full year 2023 reflect strong financial performance. Our total investment income for the full year 2023 was $76.3 million, of which 63.5 million was attributable to interest income from the debt securities portfolio. This compares to total investment income for the full year 2022 of $69.6 million, of which 55.8 million was attributable to interest income from the debt securities portfolio. The increase was largely due to growth in the previously discussed interest income pick dividend and fee income. Excluding the impact of purchase price accounting, our core investment income for the year was $74.5 million, an increase of 10.3 million as compared to core investment income of 64.2 million in 2022. Our net investment income for the full year 2023 was $34.8 million or $3.66 per share as of December 31st, 2023 and December 31st, 2022. The weighted average contractual interest rate on our interest earning debt securities was approximately 12.5% and 11.1% 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 for the year ended December 31st, 2023 were $46.8 million compared to total expenses of $40.7 million for the full year 2022. This increase was largely due to an increase in interest and amortization of debt issuance costs, which was largely driven by the increase in interest rates on the Company's liabilities.
Our net asset value for the fourth quarter of 2023 was $213.5 million or $22.76 per share, an increase of $0.11 per share as compared to $214.8 million or $22.65 per share in the third quarter of 2023. The over quarter increase in NAB per share, despite total now decreasing slightly, was predominantly driven by the repurchase of 101,680 shares during the fourth quarter.
Turning to the liability side of the balance sheet, as of December 31st, 2023, we had a total of 325.7 million, par value of borrowings outstanding at a current weighted average interest rate of 7%. This balance was comprised of $92 million in borrowings under our revolving credit facility, $108 million of 4.78% notes due 2026 and $125.7 million in secured notes due 2029. As of the end of the year, we had $23 million of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity under the 2018 debt to notes as the reinvestment period ended shortly after our draw on November 20th, 2022, as of December 31st, 2023, our leverage ratio was 1.5 times on a gross basis and 1.2 times on a net basis. From a regulatory perspective, our asset coverage ratio at year end was 165% Finally, and as announced March 13th, 2024, a quarterly distribution of $0.69 per share was approved by the Board and declared payable on April second, 2024 to stockholders of record at the close of business on March 25th, 2024. This is a $0.01 per share distribution increase as compared to the first quarter of 2023. Total stockholder distributions for 2023 amounts to $2.75 per share. With that I will turn the call back over to Ted.
Thank you, Jason ahead of questions. I'd like to reemphasize reemphasize that we believe we are well-positioned to take advantage of the current market environment. And throughout 2023, through our proven investment strategy, we believe we will be able to deliver strong returns to our shareholders in 2024.
Thank you.
Once again to all of our shareholders for your ongoing support.
This concludes our prepared remarks, and I will turn over the call for any questions if the floor is now open for your questions

Question and Answer Session

Operator

to ask a question this time, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christopher Nolan with Ladenburg. Your line is open.
I guess aggressively one one time reimbursement expense relate to, please.
Yes, Chris, this is Jason. That the reimbursement to the fund related to and for administrative transition, transition services paid to personnel level high Garrison and aged care following the acquisition of those BDCs.
Okay. And then given the the 2018 dash two secured notes are no longer in their reinvestment period. And given the slow cautious investment perspective, you guys are taking in new investments and how should we look at the balance sheet growing or not growing in coming quarters?
Yes.
Hey, Chris, it's Patrick. So I'd say I think the way I would frame it is, I think relative to December 31st. I think you could reasonably expect some, you know, a little more of a reduction in terms of our liabilities, as you saw at the end of the quarter, we had something like 70 million of cash on the balance sheet. I think it's reasonable to assume a chunk of that is ultimately going to go towards towards debt repayment. But I would say kind of absent that, we would expect kind of generally speaking over the course of the year, I would imagine to be in a relatively stable place I mean if you if you assume again, some chunk of that is repaid, you probably be down to something like somewhere between 1.3 and 1.4 times gross leverage and probably on the lower end from a net leverage perspective, I could say that leverage that we have for the quarter and that kind of is right within our wheelhouse in terms of what we set our kind of target leverage ranges on a long-term basis. So I think from that point forward, you know, you could reasonably expect relatively consistent portfolio size again, obviously kind of timing around me know when things are repaid versus versus new investments. But I think generally speaking, we're probably on the tail end of sort of our kind a decrease in our portfolio in favor of debt repayment culture.
And then final question is on the driver. I noticed that ATP. oil is no longer nonaccrual was the exit from that the driver for the realized loss?
So no, I don't think I don't think ATP. was ever on nonaccrual. It's an equity position. So it's not it doesn't have like a sort of stated coupon or anything to otherwise otherwise have and have had a crew so that, you know, when the media started the realized losses, you're seeing an increase related to primarily a couple of CLOs that were called this last quarter.
And as a result, we flipped on previously recognized unrealized losses into realized this quarter.
Got you and you guys are holding the equity strips on those CLOs?
Chris, I mean, again, it's As Jason mentioned, I think one or two of them putting them off.
Yes.
Finally, got something called. So no. But broadly speaking, when you look at our CLO bucket, that is the equity strips, I'll get back in line.
Thanks.
Our next question comes from the line of Paul Johnson with KBW. Your line is open.
Yes, good morning.
Thanks for taking my question.
When I sort of asked on the reimbursement, I'm just I mean, are those expenses at the advisor essentially reimburse for this quarter of those expenses done and over with at this point, or do you expect there'll be more those next this year where those stand?
No, no, that was that was a one-time expense reimbursement and I would say and for a good run rate on administrative expenses, you should look at the quarter quarter amount for that being roughly the 400,000, 400, $50,000, that's a quarterly run rate going forward. So you should see that there.
Yes.
Got you. Okay.
And then yes, thanks for that. And then from there, as far as the realization, I mean, it sounds like most of that is driven by CLOs this quarter getting called away from. I mean were those on most of those realized losses that I mean that obviously presents a position where it was already on March? Or was there any sort extra markdown this quarter yes about that.
So you're seeing total 15.6 total realized loss from 14.4 that was flipped from unrealized to realized and then the remainder was incremental this quarter related to a couple of other CLO positions that we still hold.
That's okay. I appreciate.
That's helpful.
And then in terms of just has leverage in the portfolio, obviously, you got it. You're seeing a good spot there, leverage based. I mean, that's kind of where it's like to have the portfolio sort of running going forward around levels. Are you feel comfortable actually adding a little bit leverage?
Yes, it's a great question. I mean, we provided guidance on where we want to be in terms of target leverage range. And obviously on a net basis, rather, we're below the low end of that. And the investment environment today is very attractive like we're seeing very wide spreads and obviously high sulfur. So it is a decent deployment environment, but we're continuing to be pretty prudent about investing money. So I don't think you're going to see a big spike in leverage, but I think we are operate at the low end of our target range.
I kind of annualize this last one for me on a simple one, but on the share repurchases for the quarter, do you guys have any on hand an estimation of how what sort of per share basis that was accretive to now this quarter?
Yes, we'll have to get back to you on that one I don't have that AuthenTec abrupt across our stage taking my questions.
Thanks.
Our next question comes from the line of Steven Martin with Slater. Your line is open.
Hi.
Most of my questions have been asked and answered. Can you can you talk about the trends in a pick for the quarter? And also, I know you've talked about the portfolio for the quarter, but you're close to the end of the quarter. Can you say anything about deployments and repayments on so far or where you expect?
Yes, I think I think starting with you're starting with your with your latter question, Tom, I think probably where we sit today, we might be a little bit down still for the quarter, but there's a couple of things that we're working on just from a from an investment perspective. So as I kind of mentioned to Chris were no unlike just kind of depending on whether that some of those things ultimately hit in March versus get kind of finalized in early April. Obviously affects a little bit of that. But I would say we're probably still sort of a slight net net, right payer.
Okay.
And on the picks?
Yes.
And the PIC, um, what I I wouldn't expect there to be sort of meaningful trends in any direction as we've kind of talked about before some, you know, there are a lot of instances where like ours, where as we're thinking about an investment in security, sort of we're taking the combination of cash and pick and thinking about it in as kind of an aggregate investment. So from our perspective, if you know, we think we can, you know, structure a higher overall returning piece of paper, but a little, you know, a small component of that is PIC. We think that's an attractive opportunity to do. So obviously, there are small audiences where we intentionally go into a transaction with with an all pick security. But I think generally speaking, if you look at our at our peak investment, our PIC income as a whole as a whole broadly, it's sort of in situations where there is a mix of cash and pick component to the securities.
Okay.
And can you talk about look the portfolio restructurings of leverage ratio within the portfolio, what you're what you're expecting?
Inventory?
I think we know a great question.
I think we would do does it somewhere on our slides. I think our leverage ratios are kind of roughly roughly flat from the portfolio quarter over quarter. And again, I think generally speaking, we've mentioned this trend, but new positions tend to be sort of I'll say lower levered than than perhaps legacy positions just because of the interest coverage and sort of and sort of how borrowers are thinking about that. But I would say again, on the whole, like if you look like at our market as well as kind of BDCs broadly like underlying performance of companies kind of continues to hold up, people are still seeing somewhat decent revenue and EBITDA trends. So I'd say on the margin, you know, we probably would expect kind of flat to decreasing leverage over the whole of our portfolio and amendment quality like you saw this last quarter, nonaccruals were down.
I think you're going to I think credit quality as we sit here today as well is stable across the portfolio.
And what about amendments and extensions?
I would say I there's probably still a little bit of an uptick in extension activity in general just because, again, as we've kind of mentioned some of these trends like the M&A market is coming back, I think generally speaking, sponsors obviously trying to get themselves as much flexibility as they can in terms of in terms of when they might want to add to the portfolio. So we're definitely seeing sort of still like kind of some reasonable amount of sort of amendment or extension activity just because look we like the credit company is performing fine. We're happy to give the borrower sort of the sponsor sort of tumor year, decide whether they want to want to exit the company but I wouldn't say there's kind of any uptick in sort of forced extensions and things like that. I think it's generally a relatively calm, you know, stable slash average type of environment for that sort of activity?
And in the past you've said you were getting paid for those are. Would you still make the same comment?
Yes, we still either get you know of a fee or or some type of pricing again in the market right now. And we are seeing where we sit today, like it broadly speaking, spreads coming in as a whole in terms of new deals. So sometimes keeping the spread the same is the same is a is an economic benefit to us as opposed to some type of repricing transaction. But yes, I'd say generally speaking that those activities are not are not for free, but again, in a situation where a company has meaningfully delevered and they want, you know, an incremental two or three years, keeping it at, let's say, at six 50 as opposed to getting price down to 600 is actually an economic benefit to us. So I would say you're still getting paid for it, but it sometimes depending on the characteristics, it's a little bit little bit less obvious how you're getting paid for it.
Thank you very much.
Next question comes from the line of David Miyazaki.
Sorry, Neil Zaki with Confluence Investment Management. Your line is open.
Thank you. Thank you for taking my questions. And could you just And remind us what your longer-term plan is for your CLO investments here and about, let's say, about $9 million now that you're holding, where do you plan to take this in the future?
Yes. I mean, I mean, the plan is to get to zero. I mean, we're trying to wind down the portfolio and get the CLOs. It's called. So the plan is to get to zero.
Okay.
That was my mind, but on that, and does that does that affect and kind of where your target leverage ratio is as that winds down that. Do you feel like you have more capacity to take the balance sheet leverage up higher, in my opinion?
Not not particularly again, it's kind of $8 million it doesn't it doesn't have kind of a meaningful impact on the asset side. We generally feel like we want to be in the 1.25 to 1.4 times net leverage. So I wouldn't say that that necessarily has a meaningful impact on how we think about leverage for the portfolio as a whole and how we think about either taking up or down that leverage were a little bit. We I'd say we probably would be more focused on sort of the macro in terms of where we think sort of the economy and broadly as well as how attractive we think the investing environment is that probably more so driving our leverage decisions as opposed to the CLO portfolio itself.
Okay, great. Thanks. And then if I just kind of step back and widen the lens a little bit. I mean, and Ted, you and the teams have had a lot of experience in the middle market. And one of the things that the managers in the industry tend to do is talk about the ideal and kind of borrower profile to go after. And it's almost always whatever they happen to be working on. And since you're working in the upper middle market and you've worked with some of these acquisitions that have been hit from the lower middle market at 100 million. It looks like in EBITDA, it's been kind of your year home kind of neighborhood as far as what your weighted average EBITDA is. Is that pretty close to what your say the median would be? And how do you feel about where you are? Do you like that neighborhood or do you think that you should be going up bigger is one of the trends I hear about or do you like sticking in the middle or lower side where you have more bargaining power?
Yes, I think I think the latter, I mean, our franchise is really what are called big enough. So we do want to lend to companies below 15 million of EBITDA. Our weighted average EBITDA of our portfolio, I think is a little misleading. It skews high versus where I think are real franchises. I mean the reality is some of our peers are competing head-to-head with the syndicated markets and the banks, which we are not. And just given our size as a platform, we just think like you can see our average spread to LIBOR is L. seven 50 versus a market at the large cap end of like oh five, 25 or so. Our credit quality is very stable on really low. So we think it's one of the companies big enough, we think we get paid extra returns and we don't see a discernible difference in credit quality. So I would say that weighted average EBITDA always looks high if you really think about our core franchise and it's driven by a couple of outliers.
Okay.
Yes, that oftentimes tend to be the one of the limitations of looking at weighted averages and you and also then we get to that point, like there's a lot of instances where if we get involved in a roll-up acquisition strategy, it at 40 of EBITDA that might be 180 of EBITDA now. But obviously, our original investment was 40, and that's kind of how we look at it. And so too, we tend to be a little bit more active in sort of, I would say, the clinical syndicated market, but more so like in periods of stress where we're looking at acquiring assets off of bank balance sheets and things like that. And those would tend to skew higher EBITDA, but that is more of an opportunistic purchasing as opposed to, as Ted said, kind of the core of our franchise.
Right.
Okay.
And less less the topic I like Slide 14, it's always I mean, it's just could you kind of see the history of how you've march through acquiring assets and the industry kind of has a a mixed bag of outcomes with regard to acquiring portfolios of loans from other managers. I mean, what can you kind of say about how your realizations or even what it used to kind of ongoing wind downs have been relative to your expectations. And when we look at the larger amounts that are still still held? Are you getting to a point where the proportion of difficult loans and conditions is higher now because the end of the portfolio is higher harder to wind down or do you think that the progress is going to be relatively linear?
I think the latter, it's a great question, actually. But the reality is if you looked at Slide 14. I mean, the Oak Hill portfolio, we're basically out of harvest for less than 10 million of exposure. And we don't it's not on here because that's like the original platform is K. cap and we're down to a very small number and kick up too. So really the legacy loans relate to Garrison a number of those loans. Some are more challenged than not, but most of them are lower-yielding. And so a Garrison had an on-balance sheet CLO structure. So those are the types of loans. Those lower spread loans tend to be the ones that get refinanced later. That being said, you'll be close to Garrison transaction your end of 2020. So we're 3.5 years into that portfolio. So a lot of those legacy loans are coming up on maturities and and other things. One suggestion that a very small shareholders said to us yesterday, as we may want to break out of that 69, how much we've extended because again, we tend to be in the Garrison portfolio specifically, we tend to be a small player. So we usually take the realization there has been some instances of us extending because we like the credit and we could get more spread. And so we should break that out for people around proactive extensions versus what else is in the portfolio and then we should also break out for you guys, what's like lower-yielding as a percentage of the remaining 69 million. But yes, to answer your last answer your very last question, we continue we think it's going to continue to be linear because a lot of these are coming up on, you know, two years or so 18 months from the maturity date.
Okay.
Yes, that's very helpful. I think that you probably have the one of the best, if not the best perspective on it. I'm taking over portfolios and working them out. And you've had I've had a lot of success in recycling this capital and and seemingly not not come across a big surprises to the downside in what you're doing. So it's helpful to have some granularity on how that's actually unfolded and what's left. So I appreciate that.
And yes, it's a good, it's good feedback, good feedback we got. We had similar feedback from somebody yesterday and I think it's good feedback.
Okay.
Thank you very much.
Thanks.
Next question comes from the line of so far from now. The repertoire Partners, your line is open.
Thank you, Ted. Patrick and team.
It area another solid.
And yes, it seems like more further progress on both the portfolio management side in terms of improvements in leverage and portfolio quality and that and also definitely on the capital allocation side, I know you've been buying back shares for a few years now, but and but kind of seems to be increasing in size of that as well, given the accretion that it's creating.
A few questions on each of those one on the on the buyback and capital allocation. I know that you've been pretty consistent repurchasing shares and you've talked about senior stock is undervalued, but you've also talked about the environment increasingly becoming a pretty attractive place to invest. How do you think about it's balancing those two alternatives and where to deploy our capital, especially because it looked like it may be in the previous year, you leaned into some of the weakness in the credit market and appropriately so had a lot more deployments than repayments on a net basis.
And then I think also similarly now as there was a little bit of an improvement you've seen now more repayments or paydowns. And then maybe one, if you could talk because I know it looks like some of the newer investments are yielding quite a high number upfront and other good terms. So that is kind of like the first question, just on the capital allocation side and then on the portfolio management side, it seems like we don't have the full details, obviously in terms of gross versus net by industry, but it seems like there was either an exit or reduction in some of the areas that it probably does that you viewed as less attractive on whether it's automotive, consumer energy. I know you already have pretty low exposures there, but can you maybe talk about if there's anything that we can see in that data and in terms of industry breakdowns? And then finally, it looked like there were some new investments just curious to learn more about them in particular, I think the newer ones were Moray CineMedia, media CineMedia holdings and tactical air systems. And then I think there were some follow-on investments metal works and be hopeful and would love to hear more about those.
Thank you.
Luca. Why don't I start and Patrick can chime in as well. I mean, the new investments that we're doing. We're like are incredibly attractive. You can see it. We've picked up on a like a portfolio basis, 75 basis points of incremental spreads over even just two quarters. And then obviously, silver is higher the post regional banking crisis, the on the there's just no one lending last year. And so we were able to do really low levered widespread in deals. So we're really excited about that vintage. I would tell you that it's got more competitive. So like, you know, spreads have definitely come down year to date, starting in about February, particularly on generic sponsor, finance, supply demand. There's just not that many good LBOs out there. Our new investments, we're very excited about.
On the exit side, you brought it up. I mean we had a stressed auto supplier that we picked up in one of our acquisitions that we were taken out of this quarter. And I would tell you we're very excited to be taken out in many different ways and so on. So that was good. And away from that, I think a lot of the exit activity was relatively normal course. But yes, that the auto supplier in particular was something we're very excited to not have in our portfolio anymore.
And then on capital allocation, I would say like this last year was the 1st year that I've run a BDC ever where it made after the first time ever. The math made more sense for us to deploy capital than to buy back stock. But I think our philosophy is we should always be buy back stock, particularly we're trading below that because we believe that NAB has depth and we think you heard Patrick's comments, we think there is, like, you know, 10 plus percent and have upside in just things maturing at par. So we just think it's good discipline to always be buy back stock regardless of what the math says. But the math for the first time and basically in a long, long time, it would support actually new deployment as well as buy back stock. So as you said, we've increased our buyback program, but we're also you don't find really good things to invest our money.
Yes.
And Deepak, taking some of your portfolio questions. So I'll hit a couple of them.
And apologies if I look at all of them since you used it, accomplishes can can can, as I remember them all, but starting at the end, I'll be holdco.
That was it's actually a restructuring of a position we had in Lucky box. The Company emerged from bankruptcy and we received and debt and equity as part of as part of a take-back. So that's just kind of a restructuring in the quarter.
Northeast metal works.
I think it dates back to Q2. It was a legacy from Harvest Capital Lease cap portfolio. And we actually did a refinancing with the company where we brought in another lender, reduced our exposure and sort of put in place a new facility. So that's really just kind of like a again, I call it a refinancing but shows up as different securities because we kind of kind of brought in another person to reduce exposure there come on to your three new borrowers against you kind of a bit of a flavor and tactical air.
It's a defense business.
They have two main sector segments. One is they actually work with the Air Force and the Navy to retro fit kind of older older airplanes with their like weapon systems and cockpit tech cockpit technology and things like that.
So that's one part of the business.
And they're kind of one of the only only folks that do that.
And then the other part of the business is actually, I forget the name of the technical name of the segment, but they do what's called like the Red Team. So they actually on their their team. They have pilots in and airplanes, and they actually kind of train and help to help with training exercises for the Navy and the Air Force. I'm essentially acting as sort of the clinical enemy combatants for for kind of what kind of training simulation. So pretty good defensive business secured by pretty stable contracts. We really like that business, Moray, and we did a first lien term loan there. Moray, a global corporation actually provides a tech-enabled business that provides like legal solutions and consulting services. So a lot of what they do is around software implementation and ongoing maintenance for Fortune 500 companies within their kind of compliance and legal departments to help manage various different work streams between general legal paperwork as well as litigation and lawsuits and discovery and a kind of a fairly large gamut of things that they support Fortune 500 companies with from that particular transaction, we actually see it was it was the Company was making an acquisition in a different jurisdiction, and we structured a first lien loan with with some warrants attached to it as well that we think is a pretty attractive overall investment and security and then sit immediately the last one that was a refinancing of an existing portfolio company of a large European private equity firm at the U.S. business. But it's a European private equity firm owns it. They do a couple of different things around sort of I'll call it like video services and technology. So part of what they do is they actually they have like is there like cards and software that go into set-top boxes for your kind of traditional broadcast technology. So you can think mostly in kind of Europe where you have sort of Sky TV, SIM cards and things like that, that's a piece of their business. They also do some work with content providers to help them deliver their video and streams sort of between oh, call it like a Netflix and sort of, you know, the Internet provider who's who's sort of putting into into your homes? And then lastly, they actually they also work with them with video streaming a different area, but they help with ad targeting content performance within applications and apps and sort of, you know, Broadband Management broadband device management and things like that. So it's a it's a fairly a fairly diverse set of revenue streams, again, were senior secured first lien loan, and I guess that's priced at seven 75 at 96.5. So again, that's just kind of a flavor of that. And if you could just kind of think about that, but at a high level. We've got a defense business and two business services that we're kind of adding, which we feel like are pretty attractive industries. And then Ted already alluded to it, but exited at a, you know, a automotive supplier, which we would have no intention of I'm getting back into into that industry.
That all sounds great.
Yes, I mean, I certainly recognize that you already have most of your investments in business services, high tech industries and healthcare and pharma, but seems like kind of a continued progression even more along that direction. Seems great. And then just a quick follow-up. I don't have the details on the Lucky box thing, but had read something about how the company was there suing or in litigation with the former promoter of that business for a pretty big number. Is that something that could be interesting upside? Or is it kind of immaterial given the size of your equity stake there.
I would not say it's immaterial. But what I would say in general is look, it's public. So if I can I can I can I can talk to some extent on it. But I would say that the facts look pretty persuasive, but you kind of never know when you get involved in litigation. So I would say it feels it feels pretty interesting to us, obviously, to be pursuing them. But I would again, I would say that that's not kind of a really baked into how we think about the equity position there. So we again, you can think that was worth. But a few if you kind of read through the lawsuit, I'd say the facts are candidly pretty bad, pretty overwhelming, but having said that, like, you know, legal, I wouldn't want to handicap the legal process.
So great. Keep up the great work.
Thank you.
Thanks.
There are no further questions at this time, Mr. Ted Goldthorpe, I turn the call back over to you.
Thank you very much. Thank you all for attending our call. And as always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking you again on our next call. And thank you so much.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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Yes. Welcome to Portman Ridge Finance Corporation's Fourth Quarter and Full Year 2023 earnings conference call and earnings press release was distributed yesterday, March 13th after market close. A copy of the release, along with an earnings presentation is available on the Company's website at triple w. dot partnerre.com in the Investor Relations section and should be reviewed in conjunction with the Company's Form 10 K filed yesterday with the SEC as a reminder, this conference call is being recorded by 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 partners. Each Finance Corporation assumes no obligation can be 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 Rees, Chief Financial Officer, Patrick Shafer, Chief Investment Officer, and Brendan Support and Chief Accounting Officer.
With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer pipeline.
Mitch?
Good morning, and thanks, everyone, for joining our fourth quarter and full year 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos, our Chief Investment Officer, Patrick Schafer, and our Chief Accounting Officer, Brandon Satori.
I'll provide brief highlights on the company's performance and activities for the year. 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 fourth quarter and full year 2023 results, and we are pleased with the solid earnings power of the portfolio.
Despite operating in a somewhat challenging market conditions during the year, we saw a 10% increase in total investment income and a 16% increase in core investment income year over year. Additionally, our net asset value per share increased from 2265 per share to 2276 per share quarter over quarter. Credit quality also improved in the quarter with a reduction in non-accruals on a cost market-value and company count basis, we continued our accretive repurchase program, purchasing 101,680 shares at an average cost of approximately $1.8 million during the fourth quarter due to the continued strong performance this past quarter, the Board of Directors was able to approve another strong dividend for the first quarter of 2020 for an amount of $0.69 per share, a level that represents a 12.1% annualized return on net asset value. For the full year 2023, total dividends distributed to shareholders amounted to $2.75 per share, representing a 7.4% increase as compared to the dividend distributed in 2022.
Turning to conditions in our primary market new deal activity began picking up in late Q4. And while a primary market has been consistently active for most of 2024 so far, deal activity during 2023 as a whole was meaningfully down relative to 2022 and 2021.
On the sponsor finance front, the fourth quarter deal activity began to tick up through a combination of valuation expectations being more reasonable and a belief by most industry participants that interest rates have either reached their peak or near enough that new buyers could reasonably estimate their cost of capital in 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. As has been the case for the last couple of quarters, we continue to be very selective on new investment opportunities and have overall found investments in existing portfolio companies more attractive in new borrowers. To that end, during the fourth quarter, 55% of our capital deployed was in existing portfolio companies as compared to 45% being deployed in new into new borrowers, three new borrowers to be specific. Our goal continues to be to maintain an exceptionally diverse diversified portfolio and invest in companies that potential have the potential to provide strong returns for our shareholders.
Refocusing on Portman Ridge, we continue to believe our buyback. Our stock remains undervalued throughout 2023 and consistently repurchased shares under a renewed stock purchase program during the quarter. During the year, we repurchased an incremental 224,933 shares for an aggregate cost of approximately 4.4 million. This compares to an aggregate aggregate cost of $3.8 million for full year 2022, consistent with prior years the Company's Board of Directors renewed our $10 million stock buyback program for another year.
And with that, I will turn the call over to Patrick Shaver, our Chief Investment Officer, for a review of our investment activity.
Thanks, Ed. Turning now to Slide 5 of our presentation and a sensitivity of our earnings to interest rates. As of December 31st, 2023, approximately 90% of our debt portfolio were either floating rate. We're floating rate to either a spread way re-default rate with this prior to the interest rate index such as sulfur or primary, but substantially all of these being linked to silver. As you can see from the chart, the underlying benchmark rates of our assets during the quarter lagged the prevailing market rates and still remain below the sulfur rate as of March eighth, 2024. But between the market transition last year from Libor to sulfur and the recent pause from the Fed. The gap is the narrowest. It has been since the onset of the Fed rate hikes, the Fed rate hike cycle for illustrative purposes, if all of our assets were to reset to a three-month silver rate, we would expect to generate an incremental $86,000 of quarterly income.
Having said that, slide 7 shows the aggregate impact to NI on a run-rate basis of both our assets and liabilities as of December 31st, 2023, given the relatively shallow benchmark curve and limited financial impact of this analysis, we will likely be retiring this slide going forward from our earnings presentations as we have been relatively in equilibrium for the past few quarters.
Skipping down to slide 11, originations for the fourth quarter remain at a lower level than prior year fourth quarter, as well as below the repayment levels resulting in net repayments and sales of approximately 30.1 million our new investments made during the quarter are expected to yield a spread to so for 787 hundred and 98 basis points on par value and the investments were purchased at a cost of approximately 96.3% of par. Our investment securities portfolio at the end of the fourth quarter remained highly diversified. We ended the year with investments spread across 27 different industries and 100 different entities, all while maintaining an average power balance per entity of approximately 3.1 million.
Turning to Slide 12. In aggregate, securities on nonaccrual status remain relatively low and decreased to seven investments at the end of the fourth quarter of 2023 as compared to investments on nonaccrual status as of September 30th, 2023, as one of our borrowers emerged from bankruptcy in Q4 and our restructured loan return to cash pay. These seven investments on nonaccrual status at the end of the fourth quarter of 2023 represent 1.3% and 3.2% 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 373 million, which represents a blended price of 94.3% of par and has 80% comprised of first lien loans at par value. Assuming RevPAR recovery. Our December 31st, 2023 fair values reflect a potential of $29.2 million of incremental net value, a 13.7% increase or $3.12 per share, excluding any recovery on nonaccrual investments. If we were to overlay an illustrious 10% default rate and 70% recovery rate to the entire debt securities portfolio. Again, excluding nonaccrual investments, the incremental now value potential would be $1.83 per share or an 8% increase to now per share as of December 31st, 2023.
Finally, turning to Slide 14. If you aggregate the three portfolios acquired over the last three years, we have purchased a combined 434.8 million of investments and have realized over 82% of these investments at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers.
I'll now turn the call over to Jason to further discuss our financial results for the period.
Thanks, Patrick. As both Ted and Patrick previously mentioned, our results for the fourth quarter and full year 2023 reflect strong financial performance. Our total investment income for the full year 2023 was $76.3 million, of which $63.5 million was attributable to interest income from the debt securities portfolio. This compares to total investment income for the full year 2022 of $69.6 million, of which 55.8 million was attributable to interest income from the debt securities portfolio. The increase was largely due to growth in previously discussed interest income pick dividend and fee income. Excluding the impact of purchase price accounting.
Our core investment income for the year was $74.5 million, an increase of 10.3 million as compared to core investment income at 64.2 million in 2022. Our net investment income for the full year 2023 was $34.8 million or $3.66 per share as of December 31st, 2023 and December 31st, 2022. The weighted average contractual interest rate on our interest earning debt securities was approximately 12.5% and 11.1% 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 for the year ended December 31st, 2023 were $46.8 million compared to total expenses of $40.7 million for the full year 2022. This increase was largely due to an increase in interest and amortization of debt issuance costs, which was largely driven by the increase in interest rates on the Company's liabilities. Our net asset value for the fourth quarter of 2023 was $213.5 million or $22.76 per share, an increase of $0.11 per share as compared to $214.8 million or $22.65 per share in the third quarter of 2023. The quarter-over-quarter increase in NAB per share, despite total NAP decreasing slightly, was predominantly driven by the repurchase of 101,680 shares during the fourth quarter.
Turning to the liability side of the balance sheet, as of December 31st, 2023, we had a total of 325.7 million par value of borrowings outstanding at a current weighted average interest rate of 7%. This balance was comprised of $92 million in borrowings under our revolving credit facility. $108 million of 4.78% notes due 2026 and $125.7 million in secured notes due 2029 as of the end of the year, we had $23 million of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity under the 2018 debt to notes as the reinvestment period ended shortly after our draw on November 20th, 2022. As of December 31st, 2023, our leverage ratio was 1.5 times on a gross basis and 1.2 times on a net basis. From a regulatory perspective, our asset coverage ratio at year end was 165%.
Finally. And as announced March 13th, 2024, a quarterly distribution of $0.69 per share was approved by the Board and declared payable on April second, 2024 to stockholders of record at the close of business on March 25th, 2024. This is a $0.01 per share distribution increase as compared to the first quarter of 2023. Total stockholder distributions for 2023 amount to $2.75 per share.
With that, I will turn the call back over to Ted Thank.
Thank you, Jason ahead of questions. I'd like to reemphasize reemphasize that we believe we are well-positioned to take advantage of the current market environment and throughout 2023 through our proven investment strategy, we believe we will be able to deliver strong returns to our shareholders in 2024.
Thank you once again to all of our shareholders for your ongoing support.
This concludes our prepared remarks, and I will turn over the call for any questions if the floor is now open for your questions.
To ask a question, this time please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christopher Nolan with Ladenburg.
Your line is open, I guess, aggressively one one time reimbursement expense relate to, please.
Yes, Chris, this is Jason. That the reimbursement to the fine related to and for administrative transition, transition services paid to personnel level high Garrison and care following the acquisition of those BDCs.
Okay. And then given the the 2018 dash two secured notes are no longer in their reinvestment period. And given the slow cautious investment perspective you guys are taking in new investments and how should we look at the balance sheet growing or not growing in coming quarters?
Yes.
Hey, Chris, it's Patrick. So I'd say I think the way I would frame it is, I think relative to December 31st, I think you could reasonably expect some, you know, a little more of a reduction in terms of our liabilities. As you saw at the end of the quarter, we had something like 70 million of cash on the balance sheet. I think it's reasonable to assume a chunk of that is ultimately going to go towards towards debt repayment. But I would say kind of absent that we would expect kind of generally speaking over the course of the year, I would imagine to be in a relatively stable place. I mean, if you if you assume again some chunk of that is repaid. You probably be down to something like somewhere between 1.3 and 1.4 times gross leverage and probably on the lower end from a net leverage perspective, I could say that leverage that we have for the quarter and that kind of is right within our wheelhouse in terms of what we set our kind of target leverage ranges on a long-term basis. So I think from that point forward, you know, you could reasonably expect relatively consistent portfolio size again, obviously kind of timing around, you know, when things are repaid versus versus new investments. But I think generally speaking, we're probably on the tail end of sort of our kind of a decrease in our portfolio in favor of debt repayment culture.
And then final question is on the driver. I noticed that ATPOL.s, no longer nonaccrual was the exit from that. The driver for the realized loss.
So no, I don't think I don't think ATP. was ever on nonaccrual at an equity position. So it's not it doesn't have like a sort of stated coupon or anything to otherwise otherwise have it have it accrue?
So I don't that I'm not let me just grab the realized losses. You're seeing an increase related to primarily a couple of CLOs that were called this last quarter. And as a result, we flipped from previously recognized unrealized losses into realized this quarter.
Got you.
And you guys are holding the equity strips on those CLOs?
Chris, I'm again, as Jason mentioned, I think one of them putting them off, yes, I got something called so no. But broadly speaking, when you look at our CLO bucket. That is the equity strips. I'll get back in line.
Thanks.
Our next question comes from the line of Paul Johnson with KBW. Your line is open.
Yes, good morning.
Thanks for taking my question.
When I sort of ask on the reimbursement, I'm just I mean, are those expenses on at the advisor essentially reimbursed for this quarter of those expenses done and over with at this point, or do you expect there will be more those next this year where the sand?
No, no, that no, as there was a one-time expense reimbursement and I would say and for a good run rate on the administrative expenses, you should look at the quarter quarter amount for that being roughly the 400,400, $50,000. That's a quarterly run rate going forward. So you should see that there.
Yes.
Got you. Okay.
And then yes, thanks for that. And then from there as far as the realization, I mean, it sounds like most of that was driven by CLOs this quarter getting called away from I mean, were those on most of those realized losses, and that means that obviously closing open positions, were those already on March? Or was there any sort of extra markdown this quarter?
Yes, about that.
So you're seeing total 15.6 total realized loss of 14.4 that was flipped from unrealized to realized. Then the remainder was incremental this quarter related to a couple of other CLO positions that we still hold.
That's okay. I appreciate that.
That's helpful.
And then in terms of just has leverage in the portfolio, obviously, you've got it. You're seeing a good spot now leverage based. I mean, that's kind of where you'd like to have the portfolio sort of running going forward around levels. Are you feel comfortable potentially adding a little bit leverage?
Yes.
It's a great question. I mean, we provided guidance on where we want to be in terms of target leverage range. And obviously on a net basis, rather we're below the low end of that. And the investment environment today is very attractive like we're seeing very wide spreads and obviously high sulfur. So it is a decent deployment environment, but we're continuing to be pretty prudent about investing money. So I don't think you're going to see a big spike in leverage, but I think we are operate at the low end of our target range.
Okay.
Anyone else this last one for me on a simple one, but on the share repurchases for the quarter, do you guys have any on hand an estimation of how what sort of per share basis that was accretive to now this quarter?
Yes, we'll have to get back to you on that one. I don't have it down.
Okay.
I've run across our estate stations, taking my questions.
Thanks.
Our next question comes from the line of Steven Martin with Slater. Your line is open.
Hi.
Most of my questions have been asked and answered. Can you can you talk about the trends in a pick for the quarter? And also, I know you've talked about that.