Portman Ridge Finance Corporation Price & Performance (PTMN)

Welcome to Portman Ridge Finance Corporation's Fourth Quarter and Full Year Ended December thirty one, twenty twenty four Earnings Conference Call. An earnings press release was distributed yesterday, 03/13/2025, after the close of the market. A copy of the release along with an earnings presentation is available on the company's website at www.portmanrige.com in the Investor Relations section should be reviewed in the conjunction with the company's Form 10 ks filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward looking statements 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 and factors, including those described in [indiscernible] 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 Goltorb, Chief Executive Officer President and Director of Portland REACH Finance Corporation. [indiscernible] Financial Officer and Patrick Schafer, Chief Investment Chief Investment Officer. With that, would now like to turn the call over to Ted Goldturpe, Chief Executive Officer of Portman Ridge.

Good morning and welcome to our fourth quarter and full year 2024 earnings call.

I'm joined today by our Chief Financial Officer, Brandon Sitorin our Chief Investment Officer, Patrick Schafer. Following my opening remarks on the company's performance and activities during the fourth quarter, Patrick will provide commentary on our investment portfolio and our markets. And Brandon will discuss our operating results and financial condition in greater detail. While 2024 had several positive developments for Portman, including the potential for an accretive combination with Logan Ridge, announced just after year end. Company's financial results were impacted by certain idiosyncratic challenges within our investment portfolio. We will continue to focus on our underperforming credits Portman confident in our ability to drive the best outcome for shareholders and most importantly in the credit quality of the portfolio overall. As far as the combination with Logan Ridge is concerned, the next critical step towards completion is the special meeting of shareholders, investors will be asked to approve the transaction which will be scheduled once the N-fourteen is declared effective by the SEC. This transformative transaction marks a significant milestone in our long term growth strategy and underscores our commitment to finding creative ways continue to grow the company's balance sheet generate shareholder value. We believe the combination of these two BDCs create a stronger, more competitive combined company with increased scale, significant operational efficiencies enhanced trading liquidity.

InviteR shareholders devote for the merger when they receive the proxy card. Both Portman and Logan Board of Directors have unanimously recommended that shareholders vote for the merger. The proposed merger with Logan Ridge is a testament to the In support of this transaction, our external advisor, Sierra Crest, agreed to waive up to $1,500,000 of incentive fees over the next eight quarters following the merger's closing. Further aligning interests with our shareholders. During the year, we executed our disciplined capital management strategy through prudent capital and portfolio management initiatives. I'm very pleased with the work we did on the right side of the balance sheet and substantial improvements we made to the company's debt capital structure. This is highlighted by the refinancing of the twenty eighteen-two secured notes and the amendment and extension of our Portman Chase Bank credit facility which we upsized and termed out. Which resulted in net spread savings of that we truly benefited fully in fourth quarter of twenty twenty four. Complementary to these efforts, we continue to strengthen our portfolio by reducing non accrual investments from nine as of 09/30/2024 to six as of December 31, 2024, improving the overall asset quality. In light of both the benchmark rate environment as well as the general market spread compression, Board of Directors has approved the modification of Portman's dividend policy to introduce quarterly based distribution a quarterly supplemental distribution.

Which will approximate 50% of net investment income in excess of a quarterly base distribution. For the first quarter of twenty twenty five, the Board of Directors approved a base distribution of $0.47 per share and a supplemental cash distribution of $0.07 a share. Additionally, during the year, we continue to believe our stock remained undervalued and thus [indiscernible] the company repurchased 202,357 shares of its common stock in the open market under its renewed stock repurchase program for an aggregate cost of approximately $3,800,000 which was accretive to NAV by $0.07 per share reinforcing our commitment to increasing shareholder value. Looking ahead, we are excited about the opportunities the proposed merger will create. Entering 2025, we anticipate being active in the market net deployers of capital we anticipate will restore net investment income more normalized levels. The healthy pipeline four to five balance sheet, prudent investment strategy and experienced management team remain confident in our ability to generate strong risk adjusted returns and drive long term value for our shareholders. With that, I will turn the call over to Patrick Schafer, Chief Investment Officer for a review of our investment activity. Thanks, Ted. Turning now to Slide five of our presentation and the sensitivity of our earnings to interest rates.

As of 12/31/2024, approximately 90.1% of our debt securities portfolio was floating rate with a spread peg to an interest rate index such as SOFR or prime rate, with substantially all of these being linked to SOFR. As you can see from the chart, SOFR rates have declined in the past two quarters impacting the current quarter's net investment income. Skipping down to Slide 10, originations for the quarter were higher than last quarter or below the current quarter repayment and sales levels, resulting in net repayments and sale net repayments and sales of approximately $19,200,000 Of note, approximately $12,000,000 of this was due to the repayment of critical nurse on the last day of the year. So as we went to year end, we have successfully deployed critical nurse proceeds through add on to multiple existing portfolio companies and investment in a new borrower that is expected to close in the near term. Overall, yield on par value of new investment during the quarter was 11.4% slightly above the yield of the overall portfolio at 11.3% on par value. Our investment portfolio at year end remained highly diversified. We ended the fourth quarter with a debt investment portfolio excluding our investments in CLO funds equities and joint ventures spread across 26 different industries with an average par balance of $2,500,000 Turning to Slide 11, in aggregate, we had six investments on non accrual status at the end of the fourth quarter twenty twenty four.

Representing 1.73.4% of the company's investment portfolio. Portfolio at fair value and cost respectively. This compares to nine investments on non accrual status as of 09/30/2024, representing 1.64.5% of the company's investment portfolio at fair value and cost, respectively. [indiscernible] excluding our non accrual investments, we have an aggregate debt investment portfolio $320,700,000 at fair value, which represents a blended price of 90.7% of par value and is 90.2% comprised of first lien loans at par value. [indiscernible] our 12/31/2024 fair values brought a potential of $16,400,000 of incremental net value. A 16.4% increase to NAV. When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $2.2.0.36 dollars per share of NAV, which an 11.1% increase Finally, through to Slide 13, If you aggregate the three portfolios acquired over the last three years, we have purchased a combined $435,000,000 of investments and have realized approximately 85% of these investments a combined realized and unrealized mark of 101% of fair value at the time of closing of those respective mergers. As of Q4 twenty twenty four, have fully exited the acquired Oak Hill portfolio and are down to a combined $27,000,000 of the acquired HCAP and initial KCAP portfolios.

I'll now turn the call over to Brandon to further discuss our financial results for the period. Thanks, Patrick. Turning to our financial results for the quarter ended 12/31/2024. [indiscernible] For the quarter ended 12/31/2024, Portman generated $14,400,000 of investment income. A $800,000 decrease as compared to $15,200,000 reported for the quarter ended 09/30/2024. The quarter over quarter decrease in sales during the quarter of 19,200,000.0 as well as decreases in base rates. For the quarter ended 12/31/2024, total expenses were $8,900,000 a $500,000 decrease as compared to $9,400,000 reported for the quarter ended 09/30/2024. The quarter over quarter decrease was primarily due to lower average debt outstanding during the quarter as well as a full quarter's benefit of the 30 basis point reduction in spread on the Portman credit facility, which was effective 08/20/2024. Accordingly, our net investment income for the fourth quarter of twenty twenty four was $5,500,000 or $0.6 per a decrease of $300,000 or $0.03 per share from the prior quarter. Our net asset value as of 12/31/2024 was $178,500,000 representing a $9,500,000 decrease $188,000,000 dollars On a per share basis, net asset value was $19.19.0.41 dollars per share as compared as of 12/31/2024, representing a $0.95 decrease per share as compared to 02/1936 in the prior quarter.

The decline in NAV was driven by a combination of under earning the distribution in Q4, the wind down of two of our December and 09/30/2024, our gross leverage ratios were 1.5x and 1.3x respectively. For the same periods, our leverage ratio net of cash was 1.4x and 1.3x. Specifically, as of 12/31/2024, we had a total of $267,000,000 dollars $267,500,000 of borrowings outstanding with a current weighted average contractual interest rate of 6.2 This compares to the same borrowings outstanding as of the prior quarter the weighted average contractual interest rate of 6.7%. The company finished the quarter with $40,500,000 of available borrowing capacity under the senior secured revolving credit facility. With that, I will turn the call back over to Ted.

Thank you, Brandon.

I'd like to emphasize how excited we are about the opportunities the proposed merger will create. Additionally, with a robust pipeline prudent investment strategy and experience management team, we believe we are well positioned to take advantage of the current market environment and will be able to deliver strong returns to our shareholders throughout 2025. Thank you once again to all of our shareholders for your ongoing support. This concludes our prepared remarks and I'll turn the call over for any questions.

We will now begin the question and answer session.

And your first question comes from the line of Chris Nolan with Ladenburg. Chris, please go ahead. Hi, guys. Hi, guys.

What was the generator of the realized loss in the quarter please? [indiscernible] primarily our former non accrual investments in Robert Shaw and Pomeroy. As well as the CLOs. Those were the biggest drivers. A company called STG Logistics that was not on non accrual was also a contributor. However, most of that most of those realized losses were previously reflected in our NAV. About $10,000,000 of the $10,800,000 And how much do repurchases out to NAV in the quarter?

So it was accretive it was about 40 basis points in change in net per share quarter over quarter.

So I guess going forward, given the lower base rates in the the spread compression, where are you guys thinking in terms of controlling costs What sort of levers are you thinking about in terms of how to improve returns? And that's it for me.

Yes.

Good question. So obviously, big driver of Logan Portman merger is cost savings. So obviously, less board fees, less audit fees, less tax, all that kind of stuff. So actually a really low hanging fruit from us. And then number two is obviously as we grow, we're spreading our various back office and financial functions over a larger base. Which will lead to lower per share admin costs. So I think a couple of things we're hoping to do over the next six to nine months, you should see continued cost savings. And then the other thing I'd highlight is, obviously, as part of this Logan Portman merger, we're waiving some incentive fees So that should obviously help with run rate NII. Okay.

Thank you.

And your next question comes from the line of Eric Zwick with Lizard Capital Markets.

Eric, please go ahead.

Hi, guys. Good morning. Justin Mark on for Eric today. It sounds like the pipeline is healthy. Curious if you could give us any detail on the current mix, new versus add ons and if you are seeing any better risk adjusted return I'll go first, which is I'd say coming into the year, so post the election, there was a massive wave. Our pipeline increased dramatically. For obvious reasons. Business friendly, less concern about antitrust, more feeling that the economy would be on better footing. [indiscernible] six weeks, I would say a lot of our deal flow has been put on hold.

Unsurprisingly. It's very, very hard to buy companies in certain sectors. With some of the volatility around tariffs. The good news for us and I don't want to give you too long of an answer, but the good news for us is many of the sectors that we're focused on just are less directly impacted by this. So we really have very little in the way consumer exposure, very little in the retail exposure we actually feel like we're relatively insulated from some of these potential risks directly. Now there's obviously indirect impact. And I would say, our pipeline has actually picked up this last week and a half. And so we've gone from what I would call a mediocre pipeline to a less mediocre pipeline probably over the last ten days. Yes. And I just to add to that, I'd say as a blanket statement, we would much rather provide incremental opportunities to our existing portfolio companies because they're names that we've been in for a while. We understand management teams. We understand the financial reporting. There's less surprises. So in general, I think we would always try and skew towards an incremental that you tend to be able to get a little bit stickier pricing there just because there's an ease of use around a small incremental with your existing lenders, we're still out doing a whole new facility.

So again, 10 down the margin, get a little bit pricing and feel a lot better about about the diligence and sort of the core of the company you're underwriting. So again, as I alluded to in a little bit of my comments, at least so far through Q1, most of the investments we've had have been to existing portfolio companies as opposed to new borrowers. Again, just because it you tend to be able to feel a lot better about the diligence process and underwriting those names. Makes sense. And last one for me. Curious how the non accrual resolutions came to fruition and if you have any line of sight into additional resolution opportunities for the companies that remain on non accrual today? [indiscernible] take the last one first. Again, we're kind of like continuously going through working closely with those portfolio companies to try and come to resolutions. Oftentimes, they take sort of twists and turns and take a while. So just a simple example of that is in the Keytronics Pomeroide non accruals. There's ultimately there had been a transaction we're working on with the company for probably the better part of a year that finally came to fruition in Q4 where we actually acquired and merged in additional company to gain scale.

And at that time, it made sense to convert some amount of our debt into reinstated debt that is low levered and accruing. And then the residual of our exposure, we took in form of equity in the pro form a company So that ultimately just came to fruition in Q4, but that was a year of work behind the scenes to kind of try and have that come to fruition. So on Robert Shawn, STG, both simple examples, sorry, similar cases STG, there was a that wasn't a non accrual. The Robert Shaw was that one was in a bankruptcy and in merchant bankruptcy in Q4. So we got some amount of reinstated debt. There was no real NAV impact to that, but it finally kind of there was a final resolution of that name. Okay. Great. All from me today. Thank you.

And your next question comes from the line of Evan Slater with Slater Capital Management. Evan, please go ahead. Well, guys, they got the name wrong, but that's okay.

It's Steve.

I felt like it was pretty good that it was you, Steve.

How are you?

Hey Steve.

Couple of questions.

Can you be a little more elaborative about the dividend policy how you got there and how you went what drove the restructuring of the dividend policy?

Yes, I'd say, I mean listen, we've been pretty resistant to make a change in our dividend policy I would say well over half the BDCs have gone in this direction. And I think that there's four or five more that announced this quarter. And so it seems to be where the industry is going. And so, this base plus supplemental with all the volatility in short term rates and spreads means that all of us can pay out our base dividend and then whatever the overage is the overage.

So So historically, I mean, I've said it publicly, I've been I historically have not liked special dividends. I would say it's where the industry is going. So in consultation with our Board, we just look across the industry in the comp sheet, mean, this is kind of becoming norm across the industry. Yes.

And Steve, if I just add on to that, we did a pretty extensive sort of benchmarking analysis of where all the other BDCs who have this kind of policy, where they've set base for to the extent that they guide, how they guide on the supplementals, And so what we endeavored to do was strike a base rate that was on the high plus supplemental. And then generally speaking, not everyone guides to how they think about the supplemental, but those that do guide us somewhere between 5075% of the overage going towards the supplemental. So that would be the more elaborate answer of it was a full benchmarking of those that have done it how they've done it, where those metrics are, and try to ensure as we have been historically that we're on the higher end of sort of our peers in terms of distributions.

Well, how did you arrive at the $0.47 base?

Given that that's substantially lower than your quarterly NII for quite a while going far back?

Yes. I mean, if you look at all of BDCs that have a base plus supplemental you analyze their base, I'll get the numbers a little bit wrong as I'm going off the top of my head. But they're somewhere in like 8.5%, 9% at the low end to maybe like 10% on the high end. And with the average being a little bit below 9.5%, probably something like 9.3%, 9.4%, give or take. So the number that we arrived to is obviously a whole $0.01 per share, but it works out to about 9.7%. As a percentage of NAV. And again, that's on sort of the higher end of eighteen, nineteen or so BDCs that have this structure. And as I said, on the supplemental, again, what we were able to again, a lot of folks don't have to give any guidance whatsoever, but those that do specify or give somewhere around 50% to 75% of the overage terms of their supplemental.

Okay. So it was basically a return on NAV your base?

Correct.

Okay. Let's talk about deployments. The whole industry has had a hard time deploying You guys seem to you haven't had a positive deployment in probably almost 420% last year. Are you being too tight and or what do you think about net deployments this quarter recognizing how how many changes have occurred in the political landscape?

Yes. I mean, it's a fair question. I mean, what I would say is, obviously, we're focused on good deployment versus deployment. And obviously, spreads have tightened quite dramatically over the last twelve months. I mean, I think the way we think about it is very simple, which is private new capital activity is very muted.

If you actually look at where Portman is happening, a lot of it is in refinancings and repricings and not in new deals. And so as I mentioned earlier, Steve, we had a really big pipeline coming into this year. So we're kind of saving some dry powder for some of those deals. A number of those deals unsurprisingly to you, have either been put on hold or are moving a little bit slower. So we feel pretty good about our deployment prospects this year. But obviously, these last six weeks, it's not been great for our deal pipeline.

Yes. And again, I'd just add that small quirk like we are a little bit subject to timing on some of the stuff where Critical Nerds, which was like a $12,000,000 $13,000,000 position, we got repaid on the last day of the quarter. So it significantly skews our net deployments. We still would have been slightly under deployed for the quarter, because we have a deal that's been working through the pipeline that is still the process of closing. But we do occasionally get burned by that from a deploying [indiscernible] and candidly it takes a month, two months for us to be able to find attractive credit quality portfolio companies that also meet a rate of return necessary to pay out and above above an above market dividend rate, which we've historically been doing and and try to endeavor to do. So that's again, there are some lags around the timing, as I mentioned in my results. We've more than been deployed that million dollars where we sit today. And we look to kind of continue. We have a couple more things in the pipeline that hopefully will close in the next two weeks. So some of it is a little bit around timing, but as Ted said, I think we have always tried to a little bit more prudent on how we deploy capital.

And our strategy historically is to try and focus as much as we can on non sponsor or founder backed businesses those tend to have more twists and turns along the way. From term sheet to closing and a little bit more difficult to sort of time properly as opposed to if we want to just be in in the sponsor deal flow, you can look at a lot of our peers who are in that business and their returns on assets are probably 9.5% to 10% versus 11.5%. But they have a little bit easier time refilling the funnel because can just lean into the next L500 deal, which is a little bit more difficult for us to lean into. So again, long winded way of saying it's a very valid point, Steve, and we try and do everything we can to minimize that, but there do tend to be some timing impacts here or there.

So what do you view as [indiscernible] like looking at a snapshot at December 31, what would you have viewed your incremental capacity to be on a net basis? I'm not sure I'm asking the question in the right way. Yes, I know what you're asking. Is your question basically how much dry powder do we have? Given our leverage? [indiscernible] I'll say it in a couple of different I'll give a couple of different I don't have the exact number on top, but I have to can only give you sort of how we think about it. But I would say the obvious thing would be the net deployments of $19,000,000 is absolutely can be redeployed. The other thing I would say is again, like our our NAV and the things that that move our credit facility and the availability under the credit facility are two different things. As an example, our CILO equity has no impact on our ability draw under the Portman facility because it's all sitting outside of the JPMorgan facility. So mark to market movements or realized losses in the CLO equities have absolutely zero impact to our JPMorgan facility. There is a number of assets that we have that are just generally outside of them.

Those don't have any movement. Candidly, like the way that our assets in collateral values in Portman is not the same as how we reflected on our balance sheet. So there's oftentimes we have something marked at 99 and it might only have 97% credit in the JP facility because that's just how they do it. Or we have something marked at 92 and we have a 95% credit for it in Portman because that's just how they do it. So they're a little bit they're not entirely linked in terms of our actual NAV and our borrowing base availability under our facility.

And do I understand correctly that you unwound, closed out, did something to some of the JMP CLOs. [indiscernible] In I think it would have been late maybe late October or mid November we actually started the process to unwind those vehicles by issuing BWIX, it takes a long time to settle. So we still have the positions on our balance sheet at the end of the year from an SOI perspective, but we have closed out those trades. We have sold and priced the collateral. So those should be off our SOI in Q1 and I don't believe they should have any impact to NAV in Q1 in terms of how they get unwound. But yes, it tends to take a couple of months between when you actually go and sell the assets, then they all need to get assigned and cash come in the door and pay down the liabilities and then get the the residual. So, I'll and Brandon might be able to say whether they actually came to the door as of where we sit today, but it is a little bit of a process. [indiscernible] if those were outside the credit agreement, does cleaning those up therefore, create incremental capacity Correct.

Yes.

You could take those that let's pick a random number. You could take $5,000,000 and contribute into the facility and that would give you probably something in the area of like $8,000,000 or $9,000,000 of investing capacity. Again, so [indiscernible] some million dollars from our balance sheet into the JP facility get incremental capacity to invest. So yes, that would give us incremental investing capacity as we get back the cash.

Okay. Thanks a lot guys.

And your next question comes from the line Paul Johnson with KBW. Paul, please go ahead. Yes. Good morning. Thanks for taking my questions.

Maybe just in terms of the watch list, your internal watch list investments this quarter, Was there any pretty flat quarter over quarter, but is there any internally changes there? Any new investments added and the like?

Yes.

So I'll go first, which is we really haven't had a lot of negative credit surprises over the last twelve months. The number of the names that we've highlighted this quarter has been challenging. It's been challenging for a while and a lot of them are not inherited positions, but legacy positions that we bought in other vehicles. So I don't think we've seen a lot of negative credit migration again, with all this stuff going on now, we'll see because a lot of that's trailing. But generally speaking, our companies are 80% of our companies are growing. And we continue to be pretty healthy on a fixed charge coverage ratio.

Yes.

I'd say, again, I'd say there's probably always one or two things that we're watching that aren't underperforming. The way this is done is based on our rating systems. One through five. So names normally come on at a two which is like regular way. And if there's things that we're watching, that's a three and when we start to unperforming, they get moved to a four or a five, which is we expect a loss. So yes, we always have things fluctuate between two and three in terms of things that are under are a financial perspective underperforming, but that I wouldn't that's not like based on a rating system is, hey, they had a down quarter or two, there was some weather, we need to kind of stay a little more on top of something. So those names fluctuate a little bit from two to three in a given time period. As Ted said, over the course of 2024, say it was generally characterized by the stuff that had been struggling has kind of continued to muddle along. And so again, with the rise of some of this tariff policy, we've been active in doing a deep dive on our portfolio and how they might or might not be impacted.

I think in general, the sentiment is it's relatively muted. Having said that like the tariffs change week by week and sometimes they're inactive, sometimes they're not and sometimes it changes to goods and services and all that. So it's a it's like a really tough tough bull's eye to hit in terms of identifying that. So we're trying to stay on top of it. But again, I would say we have names that we've kind of continued to be watching and [indiscernible] wild surprises over the course of last year.

Thanks for that. And then could you just give us a sense of maybe how much of the pork Let us get back to you. I know as like a platform, we are probably like close to fifty-fifty in terms of sponsor, non sponsor. I would say our BDCs tend to be a little bit more weighted sponsor just because because I know I gave the previous comments to Steve, but the reality is, it's tough to run an entire permanent capital, always need to be invested vehicle based on non sponsor activity because it is so episodic. So I would say we probably have off the cuff is maybe more sixty-forty in terms of our public BDCs because you need to have a little bit more of that flow business to stay invested. But we can I can follow-up if you want a more specific number? Paul. But I'd say our platform as a whole is fifty-fifty with a little bit more weighting towards sponsor in the BDCs just because of let's call it working capital management.

Yes. It would help you and our shareholders to publish in every quarter. We can begin to do that. Yes, sure. Yes, thanks. It would be interesting. Kind of see and track that. I mean, when I look though when I look at your portfolio, kind of at the watch list investments, loans that are marked down.

There's a number of investments on there. I mean, how many of those investments then would you say that you're I guess, actively involved in the turnaround or the resolution process as a platform versus more of like a syndicated type of participation? [indiscernible] Sorry, I kind of want to pull something what we do. We really have seven or so names that are like syndicated where we have varying levels of potential influence. I'd say for the most part, we have to the extent that there is something in our portfolio, we very actively engaged in it. Again, like the list the list of stuff that we have that is truly like broadly syndicated is pretty small. I think probably the largest one that is below par would be Avanti.

When I asked that is one where we have a a decent holding across our platform. But that is a more broadly syndicated loan and we still have involvement there. But I'd say the vast majority of our portfolio as a whole is either we're one of two three lenders where the same lender or it is not large enough that you can kind of ignore any of the lenders. So that again, long wind way of saying generally speaking, we're pretty involved in all of our portfolio companies and that would then translate into the ones that say, would be on your watch list, Paul.

Thank you very much. I appreciate that.

That's all for me.

Thanks. Thank you.

Is no further question at this time. I would like to turn the conference back over to Ted Galtor for closing remarks.

Thank you all for attending our call.

As per always, reach out to us with any questions, which we're happy to discuss We look forward to speaking to you again in May when we announce our first quarter twenty twenty five results. Thank you very much and have a good weekend.

This concludes today's conference call. You may now disconnect. Please wait.

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