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Logan Ridge Finance Corporation (LRFC) CEO Ted Goldthorpe on Q4 2021 Results – Earnings Call Transcript – Seeking Alpha

Logan Ridge Finance Corporation (NASDAQ:LRFC) Q4 2021 Earnings Conference Call March 16, 2022 9:00 AM ET

Company Participants

Serena Liegey – The Equity Group Inc

Ted Goldthorpe – CEO and President

Patrick Schafer – CIO

Jason Roos – CFO

Conference Call Participants

Christopher Nolan – Ladenburg Thalmann

Steven Martin – Slater Capital Management

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Logan Ridge Fourth Quarter 2021 Financial Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to your speaker for today, Serena Liegey. You may begin.

Serena Liegey

Thank you. Good morning, and welcome to Logan Ridge Finance Corporation’s fourth quarter and full year 2021 earnings conference call. An earnings press release was distributed on March 14th after market closed. A copy of the release along with an earnings presentation, is available on the Company’s website at www.loganridgefinance.com in the Investor Relations section and should be reviewed in conjunction with the Company’s Form 10-K filed on Monday 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. Logan Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Ted Goldthorpe

Good morning and welcome to our fourth quarter and full year 2021 earnings call. I am joined today by our Chief Financial Officer, Jason Roos and our Chief Investment Officer, Patrick Schafer. This marks our second completed quarter and the first fiscal year as the new adviser to Logan Ridge Finance, and today I will start off by summarizing the progress that we have made and what lies ahead. Following that, Patrick will provide additional detail on our investment activity to-date and Jason will walk you through the financials.

Our immediate objectives as the new adviser are to first to reposition the book by rotating out of non-income-producing equity exposure and redeploying those proceeds into higher quality, senior secured income-generating investments originated by BC Partners. And second, to delever and optimize the Company’s debt capitalization. During 2021, we made substantial progress repositioning the investment portfolio having successfully monetized approximately $100 million of the legacy portfolio we inherited. Since assuming the role as the company’s investment adviser on July 1st, 2021 we have successfully exited equity investments in six portfolio companies generating $13.4 million of proceeds through December 31, 2021 which can be redeployed into interest earning investments originated by Logan Management, part of the BC Partners credit platform.

During the fourth quarter we exited three equity investments generating $2 million of proceeds that can be redeployed into interest earning investments. Originations and repayments were very active during this period and we will continue to redeploy the company’s capital into new investment commitments originated by the BC Partners credit platform in 2022. During the quarter we made approximately $46.2 million of investments and had approximately $42.1 million in repayments in sales and investments resulting in net deployment of approximately $4.1 million for the fourth quarter of 2021.

Since assuming the role of the company’s investment adviser on July 1st, 2021 we’ve deployed 79.5 million in interest earning investments originated by Logan Management through December 31st, 2021 and had sales and repayments of 106 million during the same period. As you can see on Slide 4, first lien debt as a percentage of the portfolio at fair value was 49.6%, second lien debt was 15.2%, subordinated debt was 2.5%, and collateralized loan obligations were 3.9% and our equity portfolio decreased to 28.8%.

During the year we made significant progress in risk reduction. Following the full repayment of the $91 million in SBA debentures during the first and second quarter, we repaid the $25 million outstanding on the KeyBank Credit Facility and refinanced a portion of our long-term notes and during the fourth quarter using $50 million of 5.25% senior secured notes due 2026 which received an investment grade rating of BBB minus. Our total debt to equity ratio was 1.2 times as of the end of 2021 as compared to 2 times at the end of 2020. We will continue to work on optimizing the company’s capital structure in 2022 aiming to further lower our overall costs of debt. Our longer term goal is to leverage the BC Partners platform, an entire AUM base to drive operating efficiencies. So far we have reduced and stabilized operating expenses by approximately 23% to $20.3 million in 2021 as compared to $26.4 million in 2020. And we will expect to continue this trend of spreading a stable level of expenses across a larger asset base as we seek to grow the investment portfolio.

As related on Slide 8 of the earnings presentation, we believe there’s a near term pathway to positive earnings and longer term accretion from the rotation of non-income generating assets. In the near term we expect significant cost savings from both onetime items in the fourth quarter such as an extra 30 days of interest on the $50 million of notes that were refinanced and from lower liability costs upon the full refinancing of the legacy Logan Ridge liability structure in addition to incremental income through the investment of our cash on our balance sheet. In the longer term our expected rotation out of non-income generating assets is expected to significantly increase returns on equity for our shareholders, but our ability to predict the exact timing of that rotation is difficult. I would also like to note that we are not including any benefit from high grade in the existing income generating portfolio or any benefit from rising interest rates in this analysis. With that I’ll turn the call over to Patrick Schafer, our Chief Investment Officer.

Patrick Schafer

Thanks Ted. I’ll briefly summarize investment activities for the fourth quarter and provide some more details on activities subsequent to quarter-end. During the fourth quarter the company made 52.3 million of new investment commitments to 10 new portfolio companies of which approximately 46.2 million was funded as of quarter end. The company had approximately 42.1 million in repayments and sales resulting in net deployment of approximately 4.1% for the period. As of December 31, 2021 the company’s investment portfolio consisted of 40 portfolio companies with a fair value of approximately $198.2 million. The debt investment portfolio which represented 67.4% of the fair value of our total portfolio had a yield of approximately 9.3%.

As of year-end we had debt investments in two portfolio companies that remain on nonaccrual status with an aggregate amortized cost of $12.7 million and an aggregate fair value of $7.6 million which represented 6.7% and 3.8% of the investment portfolio respectively. This compares to September 30, 2021 debt investments in the three portfolio companies on non-accrual status with an aggregate amortized cost of 21.3 million and an aggregate fair value of 9.2 million which represented 11% and 4.7% of the company’s investment portfolio.

During the quarter ended December 31, 2021, the company recognized $8.3 million of net realized losses on its investment portfolio. During the quarter ended September 30, 2021, the company recognized net realized gains of $7.4 million. The increase in realized losses was primarily driven by the exit of a nonaccrual investment during the fourth quarter of 2021 that has been valid at zero since we became the company’s investment adviser. For the full year 2021, the company recognized $8 million of net realized loss on its investment portfolio. This compares to $24 million of net realized loss on our investment portfolio in 2020. The change in realized losses was primarily due to the changes in market conditions of our investments and the values at which they were realized caused by fluctuations in the market and in the economy.

As we have previously discussed at length, our immediate objective remains the successful rotation of our portfolio out of non-income-producing positions and redeployment of the proceeds into high-quality senior secured interest earning debt investments originated by BC Partners. We believe that we have made good progress on this initiative in 2021 and since the beginning of 2022. To date, we have exited all or a substantial portion of 12 borrowers that were in the portfolio as of June 30, 2021. In aggregate, we have generated proceeds of $106.2 million and were offset by $95.1 million of new investment commitments to date made across 16 new borrowers. I’ll now turn the call over to Jason.

Jason Roos

Thanks, Patrick. Turning to our financial results for the quarter. Total investment income was $3.4 million for the fourth quarter 2021, which represents an increase of less than $0.1 million or approximately 1.2% compared to total investment income for the prior quarter ended September 30, 2021 of $3.4 million. Total investment income for the year ended was $14.8 million for December 31, 2021, which represents a decrease of $9.7 million or 36.6% compared to the prior year, mainly due to a smaller portfolio as a result of deleveraging the company. Total operating expenses for the year ended December 31, 2021, decreased to $20.3 million compared to $26.4 million a year ago. Interest and financing expenses declined by $4.6 million to $10.6 million for the year ended December 31, 2021, primarily due to lower average debt outstanding. Base management fee declined 25% to $4.8 million for the year ended December 31, 2021, due to lower average assets under management.

Additionally, our total operating expenses of $20.3 million includes nonrecurring expenses of $370,000 during the third quarter of 2021 and $470,000 during the fourth quarter of 2021. Accordingly, net investment loss for the year was $3.6 million or $1.32 per share compared to income of $58,000 or $0.01 per share in 2020. During the fourth quarter, we recognized $8.3 million of net realized losses on our portfolio investments. This compares to net realized gains of $7.4 million for the quarter ended September 30, 2021. The increase in net realized losses was primarily driven by the exit of a nonaccrual investment during the fourth quarter of 2021 that was previously valued at zero as of September 30, 2021.

During the year ended December 31, 2021, we recognized $8 million in net realized losses on portfolio investments as compared to $24 million a year ago. The change in realized losses was primarily due to changes in the market conditions of our investments and the values at which they were realized caused by fluctuations in the market and in the overall economy. Net assets of — as of December 31, 2021 were $107 million or $39.48 per share compared to $110.3 million or $40.67 per share at September 30, 2021. The decrease in NAV per share was primarily due to unrealized losses on the portfolio as well as the net investment loss during the fourth quarter 2021. As of December 31, 2021, we had $39.1 million in cash and cash equivalents.

On the liability side of the balance sheet, we fully repaid the $25 million outstanding on the KeyBank Credit Facility during 2021. On October 29, 2021, we issued $50 million of 5.25% senior unsecured notes due 2026 in a private placement, which was rated investment grade. The proceeds from this offering, we used to redeem $50 million of the $72.8 million outstanding of the 6% notes due 2022, of which we have $22.8 million of the 6% notes due 2022 that will remain outstanding. Thus, at December 31, 2021, we had approximately $125 million of debt outstanding, comprised of $22.8 million of 6% notes due 2022, $50 million of 5.25% senior unsecured notes due 2026, and $52.1 million of 5.75% convertible notes due 2022. The company’s total debt-to-equity ratio was 1.2 times at year-end 2021 compared to two times at year-end 2020. With that, I will turn the call back over to Ted Goldthorpe.

Ted Goldthorpe

Thank you, Jason. In closing, we have made significant headway since assuming management of the company by improving capitalization, quickly deleveraging, and most recently refinancing a significant portion of our long-term debt capital with a lower cost. We look forward to providing more updates in coming quarters as we continue to make progress. Thank you for your support. This concludes our prepared remarks. I will now turn over the call to the operator for any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.

Christopher Nolan

Hey guys. In the 10-K, you have the JMP CLOs which have roughly a 17% yield. Is that the cash yield on that or what’s going on there?

Jason Roos

Yes, I guess that would be the calculated yield on — as you know, like CLO equity positions are subject to beneficial interest accounting methodology. And as a result of kind of like the future cash flows anticipated on the underlying equity investments, that yield that is essentially the IRR calculated for the period.

Christopher Nolan

Okay. And the maturity on that is like 2027 — 2027, 2029, should we expect those investments to stay on the books for that long?

Patrick Schafer

No. Hey Chris, it’s Patrick. No, I think the reality is, assuming we do absolutely nothing that it is probably more likely runs off over an 18 to 24 month period, something like that. I would not think of that stated maturity as kind of the expected life.

Christopher Nolan

Great. And then given the current market conditions, do you really think you can lower your debt costs, I know you’ve got two debt issuances maturing in May?

Patrick Schafer

Yes. I mean, yes, I think we do. I mean, importantly, if you just kind of think about the existing structure, it’s entirely unsecured. There’s obviously a small — very small KeyBank facility that’s undrawn that would be secured. So we think at a minimum, swapping unsecured for secured borrowing should reduce our cost of capital without doing too much effort. So yes, we absolutely do think we can reduce the cost of capital.

Christopher Nolan

So you’d probably be financing this with your revolver?

Patrick Schafer

I think we’ve mentioned before, we would look to put in place a longer-term larger, more substantial revolver than the existing KeyBank facility.

Ted Goldthorpe

Yes. So like we always try to balance — yes, like we are always trying to balance cost of capital with flexibility. So I think you’ll see the mix between secured and unsecured debt, as Patrick said, change and lowers the cost of financing, but obviously, you have to give them some security on your bank line.

Christopher Nolan

Okay, I will get back in the queue. Thank you.

Operator

Thank you. [Operator Instructions]. Our next question comes from the line of Steven Martin with Slater. Your line is open.

Steven Martin

Hi guys.

Ted Goldthorpe

Hey Steve, how are you?

Steven Martin

Good, good. A couple of questions. Can you talk about — I guess, simple question is if your cap structure were exactly what it is today and nothing changed, what would you expect interest expense to look like in Q1, it’s hard that there were a lot of moving pieces in Q4?

Ted Goldthorpe

Yes. So I would say, again, if we did absolutely nothing simplistically, I think Jason mentioned we had an extra 30 days of interest expense in Q4, that would go away, and I think it’s approximately 250,000.

Jason Roos

250,000, yes.

Ted Goldthorpe

And then we reduced our cost by probably something like at least 50 basis points on that extra 50 million — that 51 million that was refinanced. So if you kind of do the math there, but that’s, again, assuming absolutely no other changes.

Steven Martin

Got you. Can you talk about Q1 and what’s gone on so far in terms of repayments, reinvestments, you’ve talked about e-support before and what you see with the heritage Logan Ridge portfolio and potential pay downs?

Ted Goldthorpe

Yes. Look, I’d say consistent with our experience at Portman and consistent with the market, last year being 2021 was an extremely active period of time. And generally speaking, I’d say a lot of activity was either pulled back from 2020 or kind of pulled up through in the first quarter of 2022 here. So I’d say as a general comment, we’ve been a little bit lighter on the repayment and deployment activity in Q1 relative to the two quarters of 2021 where we had taken over management. But it’s still active, it’s just slightly at a — at a slightly lower rate.

Steven Martin

Well, you had $36 million of cash on the books, and I understand having been on the Portman call, you had some delayed fundings. Should we expect that Q1 you will net fund or net repay?

Patrick Schafer

I know this sounds a little bit given that we only have 15 more days in the quarter, but I think it’s a little bit too early to say that because we have a lot of — we also have a lot of commitments that we’ve made that generally speaking get drawn during a quarter. So it’s a little bit tough even sitting where we are today to say how we’re going to end up for the quarter.

Ted Goldthorpe

I’d also say that we do have some maturities coming up in a couple of months. And so the cash can be used to pay off debt as well as make new investments.

Steven Martin

Absolutely. Alright, thank you very much.

Ted Goldthorpe

Thanks.

Operator

Thank you. At this time, I would now like to turn the call back over to Ted for closing remarks.

Ted Goldthorpe

Great. Thank you all for all your support. Thank you all for dialing in today, and we look forward to speaking to you again at the end of our first quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.

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