Earnings call: Logan Ridge Finance Corporation reports record year, plans to leverage

Logan Ridge Finance Corporation (LRFC), a business development company, has announced a record-setting year in its fourth quarter and full-year earnings call for 2023. The company reported its highest annual net investment income since it began managing the company in mid-2021. Notably, the Board of Directors has approved a 7% increase in the quarterly distribution for the first quarter of 2024.

This marks the fourth consecutive quarterly distribution increase. The company’s net investment income for the year stood at $3.8 million, a significant turnaround from the net investment loss of $1.2 million in the previous year. Logan Ridge also introduced a new share repurchase program and plans to increase its leverage throughout the year to capitalize on attractive investment opportunities.

Key Takeaways

Logan Ridge Finance Corporation records its highest annual net investment income since July 2021.The Board approves a 7% increase in quarterly distribution for Q1 2024, the fourth consecutive rise.Net investment income hits $3.8 million, compared to a net investment loss of $1.2 million the previous year.A new share repurchase program has been announced.The company’s portfolio fair value reached approximately $189.7 million, with investments in 60 companies.Net asset value (NAV) per share decreased by 4.1%, with the overall NAV down 4.3% for Q4 2023.

Company Outlook

Logan Ridge aims to increase leverage over the year to boost net investment income and distribution rates.The investment environment has improved, with tighter credit spreads and a reopened syndicated loan market.The company has a pipeline of new investments and expects valuations to benefit from the tighter spreads.

Bearish Highlights

The NAV of Logan Ridge decreased by 4.3% in Q4 2023, with a per-share decrease of 4.1%.The decrease in NAV was due primarily to net realized and unrealized losses on the portfolio.Year-over-year, the NAV fell by $5.8 million or 6.1%, with a per-share decrease of $1.70 or 4.9%.

Bullish Highlights

The company’s debt investment portfolio represented 82% of the total portfolio at fair value, yielding an average of approximately 11.1%.Logan Ridge generated $20.2 million of investment income for the year, a $5.3 million increase from the previous year.Despite a decrease in NAV, the company outearned its dividend and benefited from the share repurchase program.

Misses

Total operating expenses for 2023 increased to $16.3 million.The NAV’s decrease was partially due to net realized and unrealized losses.

Q&A Highlights

The company discussed the impact of tightening credit spreads on portfolio valuation.Repayment activity, which has been low, is expected to increase.Logan Ridge is focusing on exiting legacy positions and extending and amending older credits, which brings incremental spreads and fees.

In conclusion, Logan Ridge Finance Corporation has demonstrated a strong financial turnaround and is positioning itself for further growth through strategic leveraging and capitalizing on improved market conditions. The next earnings call is scheduled for May 2024, where the company will announce its first-quarter results for the year.

InvestingPro Insights

Logan Ridge Finance Corporation’s (LRFC) recent earnings announcement highlighted its record-setting year and strategic moves for future growth. To add further context to these developments, let’s look at some key metrics and insights from InvestingPro.

InvestingPro Data metrics reveal that LRFC has a market capitalization of $60.23 million. The company’s revenue for the last twelve months as of Q4 2023 stood at $20.18 million, showcasing a substantial year-over-year growth of 35.17%. Despite this impressive revenue growth, the company’s P/E ratio is currently negative at -24.42, reflecting its lack of profitability during this period.

An InvestingPro Tip notes that LRFC’s stock generally trades with low price volatility, which could be a sign of investor confidence in the company’s steady performance and management strategies. Another tip, however, points out that the valuation implies a poor free cash flow yield, which investors may want to consider when evaluating the company’s financial health.

For those seeking more in-depth analysis, InvestingPro offers additional tips on LRFC. By visiting https://www.investing.com/pro/LRFC, readers can access these insights. Moreover, users can take advantage of the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking a wealth of information to guide their investment decisions.

With the next earnings call scheduled for May 2024, stakeholders and potential investors will be keen to see how Logan Ridge’s strategic initiatives, such as increased leverage and the share repurchase program, will impact its financial trajectory.

Full transcript – Capitala Fi (LRFC) Q4 2023:

Operator: Good morning, and welcome to Logan Ridge Finance Corporation’s Fourth Quarter and Full Year ended December 31, 2023 Earnings Conference Call. An earnings press release was distributed yesterday after the close of the market. A copy of the release along with a supplemental earnings presentation is available on the company’s website at www.loganridgefinance.com in the Investor Resources section and should be reviewed in conjunction with the company’s Form 10-K filed 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 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. Speaking on today’s call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Logan Ridge Finance Corporation; Brandon Satoren, Chief Accounting Officer; and Patrick Schafer, Chief Investment Officer. With that, I would like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Ted Goldthorpe: Thank you, and good morning. Welcome to our fourth quarter and full year 2023 earnings call. As I mentioned, I’m joined today by Brandon Satoren and our Chief Investment Officer, Patrick Schafer. Following my opening remarks, Patrick will provide additional details on our investment activity to date and Brandon will walk through the financials. I’d like to start by highlighting that 2023 was a record year for Logan Ridge as we’re able to reintroduce the quarterly dividend as well as record the highest level of annual investment income — net investment income since we began managing the company in July of 2021. This success is largely a continuation of the performance trajectory Logan has been on since we reported our first quarter of positive net investment income for the quarter ended September 30, 2022. As the company’s exposure to the [indiscernible] equity portfolio has continued to decline and its exposure to credits originated by the BC Partners credit platform has increased, the benefit to shareholders has been clear and has been reflected through Logan’s strong financial results. With that in mind, I will keep our prepared comments brief today and limit it to a few key highlights with Patrick and Brandon providing more detail on shortly. First and foremost, as a result of the company’s financial performance, the company’s Board of Directors approved a 7% increase to the company’s quarterly distribution, which brings it to $0.32 per share for the first quarter of 2024. This is the fourth consecutive quarterly distribution increase and represents a 77.8% increase from the $0.18 per share distribution we declared when we turned the quarterly dividend just 1 year ago. Our net investment income for the year ended December 31, 2023, was $3.8 million or $1.43 per share, which represents an increase of $5 million compared to a net investment loss of $1.2 million or $0.43 a share for the year ended December 31, 2022. This result underscores the enhanced earnings power of our portfolio and the success we’ve had monetizing the non-yielding legacy portfolio and redeploying that capital into income-generating NIMs originated by the BC Partners credit platform. The company ended the year with undistributed spillover income of $2.6 million or $0.97 per share, which should fortify the company’s quarterly distribution. Finally, the company’s Board of Directors approved a new share repurchase program with similar terms at the current share repurchase program that was established in March of 2023. Since the inception of the program through year-end, the company has repurchased approximately 37,000 shares, which is accretive to NAV approximately $0.18 per share since the introduction of the program. After a strong 2023, we entered 2024 cautiously optimistic. Given the increase in M&A activity and more broadly, the increase in private credit deal activity as a whole, our pipeline remains robust and we continue to see attractive investment opportunities in the market. As throughout 2023, the BC Partners credit platform remains well equipped to take advantage of the current market conditions, and we continue to prudently deploy capital into new borrowers. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer.

Patrick Schafer: Thanks, Ted, and hello, everyone. As of December 31, 2023, the fair value of Logan’s portfolio was approximately $189.7 million with exposure to 60 portfolio of companies. This compares to 58 portfolio of companies with a fair value of approximately $187.1 million in the prior quarter and 59 portfolio of companies with a fair value of $203.6 million in the same period a year ago. During the quarter ended December 31, 2023, we continued to deploy capital despite the lower deal activity as a whole during the year. Specifically, the company made approximately $14.8 million in new investments and had approximately $9.2 million in repayments and sales, resulting in net deployment of approximately $5.6 million for the quarter. While we continue to be prudent and disciplined underwriters, we believe 2022 and 2023 will prove to be particularly attractive vintages. Now on to our portfolio composition. As Ted previously noted, the company’s investment portfolio at fair value was invested in assets originated by the BC Partners credit platform. As of December 31, 2023, our debt investment portfolio represented 82% of the total portfolio at fair value and a weighted average annualized yield approximately 11.1%, excluding income from nonaccruals and collateralized loan obligations. This compares to a debt investment portfolio, which represented 82.0% of our portfolio at fair value and a weighted average annualized yield of approximately 11.0%, excluding income from nonaccruals and collateralized loan obligations as of the prior quarter, and 83.2% with a weighted average annualized yield of approximately 10.4% as of the same period for the prior year. The weighted average annualized yield, excluding income from nonaccruals and collateralized loan obligations, increased by 10 basis points and 70 basis points compared to the prior quarter and prior year, respectively. As of December 31, 2023, 86.4% of our portfolio — of our debt investment portfolio at fair value was bearing interest at a floating rate compared to 82.3% as of September 30, 2023, and 82.8% as of December 31, 2022. As of December 31, 2023, first lien debt represented 65.4% of our total portfolio on both a cost and fair value basis. This compares to first lien debt representing 63.6% and 64.8% of our total portfolio on a cost and fair value basis, respectively, as of September 30, 2023, and 64.9% and 67.3% of our total portfolio on a cost and fair value basis, respectively, as of December 31, 2022. The nonyielding equity portfolio represented 15.5% and 17.0% of the portfolio on a cost and fair value basis, respectively, as of December 31, 2023. This compares to 17.6% and 16.6% of the portfolio on a cost and fair value basis as of September 30, 2023. Moving on to nonaccrual status. During the quarter, there is one new portfolio of company added to nonaccrual status. Accordingly, at December 31, 2023, the company had 3 portfolio of companies on nonaccrual status with an aggregate amortized cost and fair value of $17.2 million and $12.8 million, respectively, or 8.7% and 6.8% of the investment portfolio at cost and fair value, respectively. This compares to 2 portfolio of companies on nonaccrual status as of the prior quarter with a cost and fair value of $16.8 million and $10.6 million, respectively, or 8.3% and 5.7% of the investment portfolio’s cost and fair value, respectively. I’ll now turn the call over to Brandon.

Brandon Satoren: Thanks, Patrick. Turning now to our financial results for the quarter and year ended December 31, 2023. For the year ended December 31, 2023, Logan generated $20.2 million of investment income, which was an increase of $5.3 million as compared to $14.9 million for the prior year. The increase was primarily driven by redeploying proceeds received from exiting the nonyielding equity portfolio into interest-earning assets originated by the BC Partners credit platform as well as base rate increases. Total operating expenses for 2023 increased by approximately $200,000 to $16.3 million as compared to $16.1 million for the prior year, primarily driven by higher interest and financing expenses, partially offset by a decrease in base management fees as well as general and administrative expenses. Our net investment income for the year was $3.8 million or $1.43 per share, an increase of $5.0 million from the previous year’s net investment loss of $1.2 million or negative $0.43 per share. The company ended the year with undistributed spillover earnings of $2.6 million or $0.97 per share. This substantial year-over-year increase in net investment income highlights significant strides the company has made since Mount Logan management took over as the investment adviser. For the quarter, the company reported net investment income of $0.6 million or $0.22 per share, compared to $1.2 million or $0.43 per share for the prior quarter. The decrease was largely due to a reversal of $0.6 million or $0.22 per share of previously accrued interest income as a result of placing a portfolio of company on nonaccrual status in the fourth quarter. Our net asset value as of December 31, 2023, was $89.2 million, representing a $4 million decrease or 4.3% as compared to the prior quarter net asset value of $93.2 million. On a per share basis, net asset value was $33.34 per share as of December 31, 2023, representing a $1.44 per share decrease or 4.1% as compared to $34.78 per share at the third quarter of 2023. I’d like to highlight that the difference between the 4.3% decrease in net asset value as compared to the 4.1% decrease in net asset value per share is the accretive effect of our share buyback program. The decrease in net asset value quarter-over-quarter was driven by net realized and unrealized losses on the portfolio during the quarter. Compared to the company’s prior year net asset value of $95 million, net asset value decreased by $5.8 million or 6.1%. On a per share basis, net asset value decreased $1.70 per share or 4.9% from $35.04 as of December 31, 2022. Again, the difference between the 6.1% decrease and the 4.9% is the accretive effect Logan shareholders received from the buyback program. The decrease in net asset value relative to the prior year was again driven by net realized and unrealized losses on the portfolio, but partially offset by the company outearning its dividend and the accretive effect on a per share basis of our share repurchase program. Finally, as of quarter end, the company had $3.9 million in cash and cash equivalents as well as $39.5 million of unused borrowing capacity available for deployment in investments originated by the BC Partners Credit platform. With that, I will now turn the call back over to Ted.

Ted Goldthorpe: Thank you, Brandon. We are very proud of the progress that we’ve made in 2023 and look forward to continue to execute our strategy in 2024. To our shareholders, thank you for your continued support. This concludes our prepared remarks, and I’ll now turn over the call to the operator for any questions.

Operator: The floor is now open for your questions. [Operator Instructions] Your first question comes from the line of Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: Ted, on your comments on the new repurchases, 37,000 shares, is that first quarter to date?

Brandon Satoren: Chris, know that this is Brandon. That’s not, that’s through December 31, 2023. However, we’ve been active in the market and have continued repurchasing shares.

Christopher Nolan: And then I guess on the question of the dividend going forward. Should we look for the leverage ratio to be increased in coming quarters? Or with the priority increasing the dividend and increasing leverage or keeping leverage low and [indiscernible].

Patrick Schafer: Yes. Good question, Chris. I think we would ideally anticipate taking leverage up over the course of the year, as we’ve kind of mentioned historically, sort of the leverage level that we are comfortable operating in is a little bit driven by our equity portfolio and how we want to be somewhat conservatively levered. But I think our expectation would be that we’d be in a position to increase leverage over the course of this year, and that obviously would increase our net investment income and ideally, our distribution rates.

Christopher Nolan: And does that assume that the investment environment improves that you take up leverage because last couple of quarters, you guys have been pretty cautious?

Patrick Schafer: Yes. I mean I think that — yes, I think that’s an appropriate assumption, which is I don’t think we have an intention of just increasing leverage and adding assets for the sake of adding assets. Having said that, over the course of the year so far, it’s been a fairly active M&A market in general, private credit markets. So we’re seeing and have seen over the course of this year fairly attractive opportunities. So I think at least where it stands now, we feel like we’ll be able to source, originate and underwrite attractive opportunities to be able to deploy the capital sort of as I mentioned.

Ted Goldthorpe: Yes. So like deal activity from the second half of last year has definitely picked up. And again, I continue — we continue to think it’s gotten a little more competitive recently, but we’ve got actually a decent pipeline of new investments that we think are really interesting.

Operator: Our next question comes from the line of Steven Martin with Slater Capital.

Steven Martin: Given that you’re reporting so late and the first quarter ends, I guess, today, technically, would you care to comment a little more specifically about what you’ve seen in the first quarter numerically as opposed to conceptually?

Ted Goldthorpe: I don’t think we really want to provide guidance just because the quarter is still ending. But I would say, yes, I mean I’d just read it in our previous comments, which again, we’re continuing to deploy capital and we’re finding some interesting things to do.

Steven Martin: Can you comment on sort of the rates on new investments today or over the last couple of months versus, let’s say, the fourth quarter?

Ted Goldthorpe: Yes. I mean I think spreads generically have come in probably by about 50 basis points on new private credit. And the other theme you’ve seen is you’ve obviously had a real comeback. It doesn’t really affect Logan Ridge, but it has more market impact. Obviously, the syndicated loan markets have reopened for really the first time in 12 to 18 months. I mean issuance in loans is up 400% year-over-year this year. So the markets have definitely reopened, and that’s caused a little bit of pressure on spreads. But again, with SOFR at 5.3% and people feel a little bit better about higher for longer, the yields on first lien bank debt continue to be in the double digits, and leverage is coming down and covenants are still very robust. So it is still a good environment for us despite the fact that spreads have tightened a little bit.

Steven Martin: Okay. Along those lines, can you comment on what marks may look like? Would you expect the spreads tightening to have a benefit to portfolio marks?

Ted Goldthorpe: Yes. There’s a bit of — so when we overlay the benchmarks versus our portfolio, which is how the portfolio gets valued, obviously, we’ve seen a continuing tightening in credit and there’s a bit of a lag. So absent company-specific situations, by and large, spreads have tightened. So that should have a little bit of tailwinds for, broadly speaking, valuations.

Steven Martin: Okay. And there doesn’t — there hasn’t been much change, and I know business activity was slow. But there hasn’t been much change in the third and fourth — in the fourth quarter from the third quarter on sort of residual equity investments, a couple of markups and markdowns. What are the prospects right now that the market has opened up a little of converting some of those?

Ted Goldthorpe: Yes. I mean repayments basically over the last 12 to 18 months have been at all-time lows. So like we’ve never seen this level of low repayment activity since 2008. That being said, obviously, it’s picked up a lot this year. And so, yes, we’re working really, really hard on a number of smaller and larger positions to get out of some of this legacy stuff. And I feel like it’s going to pick up a little bit. This is a pretty low base in the third and fourth quarter.

Steven Martin: All right. One last one. On extends and amends, I noticed there were a couple that have matured. Are you still getting some fees or benefits from extending and amending some of the older credits?

Ted Goldthorpe: Yes. So amend and extend was a big thing last year because no one could refinance. And so even though we’re way, way, way covered, it just — so we get incrementals. Usually, when we do an amend and extend, we were getting incremental spread as well as some fees. I would say the only things where amend and extend are stuff we really, really want to stay on the credit because there is a refinancing option today and there wasn’t 3, 6, 9 months ago. So the stuff we’re extending today is stuff that we really want to stay in. And typically, when we’re extending, the spreads are wider than where you’d be able to do a new deal. So it’s like pretty compelling just because a lot of times, the company or the management team is comfortable with their lending group, and they just don’t want to go through the process of having people re-due diligence and everything else. So just getting stand with your existing lenders is oftentimes easier, and we get paid for that.

Patrick Schafer: Just to add on to what Ted said, though. As he mentioned, the spreads have come in a little bit. So there are often situations where just keeping the spread the same is effectively extra economics relative to what they could do a new deal in the market. So as you said, we’re typically getting extra pricing or fees or what have you, but sometimes that’s in the form of actually keeping our spread the same as opposed to being refinanced out with new capital at 25 or 50 basis points cheaper than where our facility is to date.

Operator: There are no further questions at this time. Mr. Ted Goldthorpe, I turn the call back over to you.

Ted Goldthorpe: Well, thank you very much, and thanks, everyone, for joining us today, and we look forward to speaking to you again in May, when we announce our first quarter 2024 results. Thank you, and have a good weekend.

Operator: This concludes today’s conference call. You may now disconnect.

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