Portman Ridge Finance (NASDAQ:PTMN) Corporation (NASDAQ: PTMN) reported its third-quarter earnings on November 7, 2024, with CEO Ted Goldthorpe addressing several strategic initiatives and their impact on the company's financials. Despite a temporary impact on earnings due to cash and portfolio management activities, the company successfully refinanced $85 million of 2018-2 secured notes.
This move is expected to reduce interest expenses by $265,000. The company also repurchased shares and declared a quarterly distribution, signaling confidence in its financial strategy and shareholder value. However, investment income and net asset value saw a decline from the previous quarter.
Key Takeaways
- Portman Ridge Finance Corporation successfully refinanced $85 million of 2018-2 secured notes.
- The company repurchased 33,429 shares for approximately $600,000 during the third quarter.
- A quarterly distribution of $0.69 per share was declared, with a 13.6% annualized return on net asset value.
- The investment portfolio is diversified across 28 industries, with 72 unique companies.
- Non-accrual investments accounted for 1.6% of the portfolio at fair value as of September 30, 2024.
- Net investment income decreased to $5.8 million, and net asset value fell to $188 million.
- The company maintains a gross leverage ratio of approximately 1.4 times.
- The Board approved a quarterly distribution payable on November 29, 2024, to shareholders on record by November 19, 2024.
- A realized loss was primarily attributed to QualTek, and interest rate sensitivity could potentially impact annual earnings.
- The company plans to be a net deployer in the fourth quarter, with some restructuring expected in the near future.
Company Outlook
- Management expects to yield significant shareholder returns by the end of 2024.
- The next investor event is scheduled for December 12.
Bearish Highlights
- Investment income totaled $15.2 million, down from $16.3 million in Q2 due to lower interest income and net repayments.
- Net asset value decreased from the previous quarter.
- A decline in pick income was observed due to a transition from pick to cash interest payments by two portfolio companies.
Bullish Highlights
- The company's refinancing is projected to save approximately $265,000 in interest expenses.
- Strong market positioning and a prudent investment strategy are emphasized by management.
- The company has $40.5 million in available borrowing capacity under its senior secured revolving credit facility.
Misses
- The company reported a weighted average contractual interest rate of 6.9%.
- A realized loss was primarily due to the exit of QualTek.
Q&A Highlights
- Discussions on non-accrual assets included QualTek's expected temporary non-accrual and ProAir's ongoing legal issues.
- Robertshaw is in the process of restructuring and is expected to exit bankruptcy soon, potentially clearing it from non-accrual status.
In summary, Portman Ridge Finance Corporation is navigating a challenging market environment with strategic refinancing and portfolio management decisions. While there have been some declines in income and asset value, the company's diversified investment strategy and recent initiatives may position it for future growth and stability. Shareholders and investors may look forward to the next investor luncheon for further updates on the company's performance and strategic direction.
InvestingPro Insights
Portman Ridge Finance Corporation's (NASDAQ: PTMN) recent earnings report and strategic initiatives can be further contextualized with insights from InvestingPro. Despite the reported declines in investment income and net asset value, PTMN maintains a strong dividend profile, which aligns with the company's commitment to shareholder value.
According to InvestingPro data, PTMN boasts a remarkable dividend yield of 15.37% as of the latest available information. This high yield is supported by two key InvestingPro Tips: the company has raised its dividend for 4 consecutive years and has maintained dividend payments for 18 consecutive years. These facts underscore PTMN's dedication to returning value to shareholders, even in challenging market conditions.
The company's market capitalization stands at $166.02 million, reflecting its position in the financial sector. While the P/E ratio of 46.5 might seem high, it's important to consider this in the context of PTMN's business model as a business development company (BDC) and its high dividend yield.
InvestingPro Tips also reveal that PTMN's stock generally trades with low price volatility, which may be attractive to investors seeking stability in their portfolio. Additionally, the company's liquid assets exceed short-term obligations, indicating a solid financial position that supports its ongoing operations and dividend payments.
It's worth noting that 2 analysts have revised their earnings downwards for the upcoming period, which investors should consider alongside the company's recent financial performance and strategic moves.
For those interested in a deeper dive into PTMN's financials and prospects, InvestingPro offers 8 additional tips, providing a more comprehensive analysis of the company's strengths and potential challenges.
Full transcript - Portman Ridge Finance Corp (PTMN) Q3 2024:
Operator: Welcome to Portman Ridge Finance Corporation's Third Quarter 2024 Earnings Conference Call. An earnings press release was distributed Thursday, November 7th after market closed. A copy of the release, along with an earnings presentation is available on the company's website at www.portmanridge.com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10-Q filed on November 7th with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the company's filings with the SEC. Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation; Brandon Satoren, Chief Financial Officer; and Patrick Schafer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.
Ted Goldthorpe: Good morning and welcome to our third quarter 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren and our Chief Investment Officer, Patrick Schafer. Following my opening remarks on the company's performance and activities during the second quarter, Patrick will provide commentary on our investment portfolio and markets and Brandon will discuss our operating results and financial condition in greater detail. On November 7th, 2024, Portman Ridge announced its third quarter 2024 results and following the strong earnings we saw in the first half of 2024, the company's third quarter earnings were temporarily impacted by prudent cash and portfolio management initiatives prior to the successful refinancing of the 2018-2 secured notes. I'm very pleased with the work we did on the right side of the balance sheet and the substantial improvements we made to the company's debt capital structure. Specifically, the company extended the maturity of the JPM credit facility, while also reducing the spread by a full 30 basis points. Further, used the upsized and lower cost JPM credit facility, the company refinanced the remaining $85 million of a 2018-2 secured notes at the end of August, which resulted in further net spread savings of approximately 28 basis points. On a run rate basis, the impact from reduced spreads should result in approximately $265,000 reduction of interest expense relative to Q3 results of $0.03 a share. With that in mind, we continue to believe our stock remains undervalued and thus we continued repurchasing stock program. Specifically during the third quarter ended September 30th, 2024, the company repurchased 33,429 shares in the open market for an aggregate cost of approximately $600,000, which is a creative to NAV by $0.01 a share and reinforces our commitment to increasing shareholder value. Additionally, the Board of Directors approved a $0.69 per share distribution for the fourth quarter of 2024, which represents a 13.6% annualized return on net asset value amongst the highest in the BDC space. Regarding the private credit markets and specifically the core middle market, which we define as companies generating 10 to 50 EBITDA, activity levels continue to be elevated relative to 2023. The majority of activity has consistently been from refinancings, add-ons, or amended extend transactions that most often result in lower cost of capital for our borrowers and extended maturities. While through new money buyout financings have remained at depressed levels throughout 2024, we continue to believe that a combination of dry powder, sponsors looking to return capital to LPS, the ongoing rate cuts by the Fed are all tailwinds for our sector. Looking ahead to the final quarter of 2024 and the beginning of 2025, with the company's balance sheet fortified by the amended JPMorgan credit facility, we expect to be active in the market and net deployers of the company's capital, which we believe will restore net investment income back in line with more normalized levels. Above all, despite the current economic activity and a dynamic interest rate environment, we remain confident in our prudent investment strategy, strong pipeline and experienced management team and believe the company remains well positioned with our strong spillover income to continue to deliver positive returns to our shareholders. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.
Patrick Schafer: Thanks, Ted. Turning to Slide 5 of our presentation and the sensitivity of our earnings to interest rates. As of September 30, 2024, approximately 88.5% of our debt securities portfolio was floating rate with a spread pegged to an interest rate index such as SOFR or PRIME, with substantially all of these being linked to SOFR. As you can see from the chart, SOFR rates have been relatively consistent for the last several quarters with a decrease in rates impacting the current quarter. Skipping down to Slide 10. Originations for the third quarter were lower than last quarter and were also below the current quarter repayment and sales levels, resulting in net repayments and sales of approximately $11.6 million. During the quarter, we funded small incremental DDTLs and revolver draws in 7 existing portfolio companies and increased our investment in our Great Lakes joint venture, but did not add any new portfolio companies as we had one transaction closed in early October and several other transactions slated for Q4 closings. Our incremental fundings made during the quarter are expected to yield a spread to SOFR of 656 basis points on par value, and the investments were purchased at a cost of approximately 98.5% of par. Our investment portfolio at the end of the third quarter remains highly diversified. We ended the third quarter with debt investment portfolio spread across 28 different industries with 72 unique portfolio companies and an average split and an average par balance of $2.7 million. Turning to Slide 11. In aggregate, investments on non-accrual status were nine investments at the end of the third quarter of 2024, representing 1.6% and 4.5% of the company's investment portfolio at fair value and cost, respectively. This compares to nine investments on non-accrual status as of June 30, 2024, representing 0.5% and 4.5% of the company's investment portfolio at fair value and cost, respectively. On Slide 12, excluding our non-accrual investments, we have an aggregate debt investment portfolio of $341 million at fair value. This represents a blended price of 92.6% of par and is 92.9% comprised of first lien loans at par value. Assuming a par recovery, our September 30, 2024, fair values reflect a potential $27.3 million of incremental NAV value or a 13.9% increase to NAV. When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $1.76 per share of NAV or an 8.3% increase as it rotates. Finally, turning to Slide 13. If you aggregate the three portfolios acquired over the last three years, we have purchased a combined $435 million of investments, have realized approximately 85% of these positions at a combined realized and unrealized mark of 101% of fair value at the time of closing their respective mergers. As in Q3 2024, we fully exited the acquired Oak Hill portfolio and are down to a combined $27.9 million 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.
Brandon Satoren: Thanks, Patrick. For the third quarter of 2024, Portman generated $15.2 million of investment income, of which $12.7 million was attributable to interest income inclusive of PIK income from the debt investment portfolio. This compares to total investment income for the second quarter of 2024 of $16.3 million, of which $13.7 million was attributable to interest income, inclusive of PIK income from the debt investment portfolio. The decrease was primarily driven by lower interest income due to net repayments and sales during the quarter, a loan being placed on non-accrual as well as lower CLO and joint venture income. With that in mind, I'd like to highlight that recurring PIK income as a percentage of total investment income declined by over 200 basis points compared to the prior quarter. Excluding the impact of asset acquisition accounting, our core investment income was $15.2 million as compared to core investment income of $16.2 million in the prior quarter. Total (EPA:TTEF) expenses for the quarter ended September 30, 2024, decreased by $0.5 million to $9.4 million as compared to $9.9 million in the prior quarter. This decrease was largely driven by lower interest expense during the quarter, as a result of the successful refinancing of the 2018-2 secured notes in conjunction with the amendment to the existing senior secured revolving credit facility with JPMorgan that reduced the applicable margin from 2.8% to 2.5%, as well as lower management and incentive fees. Accordingly, our net investment income for the quarter decreased to $5.8 million, or $0.63 per share. This compares to $6.5 million or $0.70 per share for the prior quarter. Further for the quarter ended September 30, net realized and change in unrealized losses on investments in debt was $7.3 million. This compares to net realized and change in unrealized losses on investments in debt of $12.8 million in the prior quarter. As of September 30, 2024, the company's net asset value was $188 million or $20.36 per share. A decrease of $8.4 million or $0.85 per share compared to the prior -- to the company's prior quarter net asset value of $196.4 million or $21.21 per share. As of September 30 and June 30, 2024 our gross leverage ratios were approximately 1.4 times and 1.5 times respectively. For the same periods, our leverage ratio net of cash was 1.3 times, specifically as of September 30, 2024, we had a total of 267.5 million in outstanding with a current weighted average contractual interest rate of 6.7%. This compares to $285.1 million of borrowings outstanding as of the prior quarter with the current weighted average contractual interest rate of 6.9%. The company finished the quarter with $40.5 million of available borrowing capacity under the senior secured revolving credit facility. Finally, the Board approved a quarterly distribution of $0.69 per share payable on November 29, 2024, to stockholders of record at the close of business on November 19, 2024. The With that, I will now turn the call back over to Ted.
Ted Goldthorpe: Thank you, Brandon. Ahead of questions, I'd like to reemphasize that we believe we are well positioned to take advantage of the current market environment as shown for the first nine months of the year. Through our prudent investment strategy, we believe we'll be able to deliver strong returns to our shareholders at the end -- in the tail end of 2024. Thanks again, once again to all of our shareholders for ongoing support. This concludes our prepared remarks. I will turn the call over for any questions.
Operator: [Operator Instructions] And your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.
Christopher Nolan: What's the driver of the realized losses, please?
Brandon Satoren: Hey, Chris, this is Brandon. The primary driver of the realized loss was QualTek, you may recall on our last earnings call, we had disclosed that we had successfully exited QualTek at the mark we had in the prior quarter. So there was no impact in that as a result of that realized loss that was previously captured.
Christopher Nolan: That's -- I thought so. Okay. On the interest rate sensitivity, I'm looking at slide 5, and it says blah, blah, blah reduction of quarterly income of $164,000. And then if you look in the 10-Q, it says for a 1% decrease in interest rates, it's $1.7 million annually. And given that the Fed is eased by 75 bps or so, and should that information -- I mean, there seems to be a lot -- the impact of a 1% rate change seems to be a lot bigger in the Q than is in the deck.
Brandon Satoren: Yes. So I can just -- in the deck, it's just a difference between the $475 million and the $455 million, so it's not a full 1% reduction.
Christopher Nolan: Okay. And then I guess, spillover -- how much is spillover?
Brandon Satoren: So it's about $0.70 per share, Chris, from the prior year.
Christopher Nolan: Finally, strategy. You guys are sort of cruising along at your normal leverage ratio and the growth has been slow. What is the strategy, if anything, to grow earnings and growing the book -- excuse me, growing NAV in general?
Ted Goldthorpe: So I'll start which is number one is, I mean, there is a lot of embedded NAV to the extent that our loans mature at par. And we Patrick talked a little bit about it in the script, but we can we can get you the numbers. So to the extent that we remain in a you know subdued credit environment there just should be upside just with our existing portfolio and there is some positions that we have that as rates go down if they go down you get a NAV increase. So it there's a income comes down a little bit but you get NAV increases in certain situations. That's number one. And then in terms of investment strategy you know again like we haven't been as nearly as impacted as other BBCs by this production spreads. It may be coming to our markets beginning to come to our market but that's really been a large cap and upper middle market phenomenon. So we've been able to retain spread and in the situations where we've been asked to kind of like reduce spreads to you know where big cap mark guys are we've generally taken the refi. So again you can see on slide 6 of what we disclosed I mean fee income for us continues to be anemic like we only had you know we basically had our lowest fee income ever this quarter going back you know four years – four years, five years and that that should revert back to normal at some point as you know this refi wave continues. So there's like that obviously is a tailwind earnings as well. Although, it's something we can't obviously forecast or predict.
Christopher Nolan: Okay, great. Thank you. Talk to you guys later.
Operator: Your next question comes from the line of Steven Martin with Slater Capital. Your line is open.
Steven Martin: You guys. Two questions. You made some comments about some activity in the fourth quarter. Are we expecting net deployments in the fourth quarter?
Brandon Satoren: I think the short answer is, yes. Steve the long answer is it always depends on you know there we only have sort of one known repayment during the quarter for now. So the answer is, yes, all we'd expect to be a net deployer over the next call it two months. But you know again we might get unforeseen you know exits or things like that. But I'd say our strategy is and will be to be a net deployer.
Steven Martin: Okay. And your pick income declined dramatically in the quarter which was great. What was the reason for the decline.
Ted Goldthorpe: Yeah I mean Brandon gave you the specifics but we did have one company that you know had a period of time where there was a partial pick and that is converted back to cash and there's a couple of other things that that Brandon can enumerate.
Brandon Satoren: But, yeah. It's two portfolio companies in particular were previously paying their interest with pick that reverted to cash this quarter. It was about a half a million dollars worth.
Steven Martin: Okay. That's the good way to reduce pick. Can you talk about the activity in the non-accruals? What went in? What went out?
Brandon Satoren: Yeah, the as we mentioned last quarter so QualTek security went out and the borrower -- I should say went out and then we had one new borrower in which Vega on our SOI. So I it goes by a number of different names [indiscernible] on our on SOI. So I and QualTek [ph] is another name that it goes by. But that one we've been we the lenders have been working through with the company. I think we would expect that to be a somewhat temporary non-accrual. But for now that that's kind of where it is based on based on the facts and circumstances.
Steven Martin: Okay. And what does it look like for restructurings of any of the other non-accruals?
Brandon Satoren: I think as of right now there is nothing substantial. I mean again, it's – there are a couple that candidly just are – we have market zeros and we would expect them to continue to be zeros. Such as ProAir is a name that's on non-accrual until we can kind of legally clean it up. So I'd say, I don't think there's anything significant on the horizon in terms of other non-accruals.
Steven Martin: Okay. Thanks a lot.
Brandon Satoren: I'm looking at names now. There is one is in the process of restructuring Robertshaw, that should ultimately clear through our non-accruals sometime shortly. That was a bankruptcy process that I believe the company is exiting shortly. And so we should ultimately that going to get cleaned up and the new security we'd be taking on should be an accruing security. So that might be one other one. So that's a relatively small number, it's a couple of $100,000 of market value. So not particularly relevant, but that should get cleaned up shortly.
Steven Martin: Okay. Thanks.
Operator: Your next question comes from the line of Paul Johnson with KBW. Your line is open.
Paul Johnson: Hey, guys. Thanks for taking my question. I'm hopping on the call a little bit late, so I apologize if you mentioned this in your remarks or if there was already a question. But in the release last night -- or I’m sorry, last week on -- for earnings, you just mentioned some prudent cash and portfolio management initiatives prior to paying off some notes in the portfolio. Can you just tell us what exactly that was? And if how -- I guess, how that would have affected results this quarter if it did at all?
Brandon Satoren: Yes, Paul. I mean the short answer is we are in the process of refinancing out the secured notes with an upsize to the JPMorgan facility. And we -- to be prudent, and we had been sitting on additional cash in our vehicle to ensure a smooth refinancing. And so two, we were sitting on incremental capacity in the JPMorgan facility to make sure that there was – that the entire process went smoothly and we were able to successfully refinance and then able to kind of turn back to investing once we kind of had a collective facility with and better understood our kind of available capacity, but it was effectively holding back on investments and sitting on some cash to ensure a smooth refinancing process there.
Paul Johnson: Got it. Appreciate that. That's helpful. That's all the questions for me. Thank you.
Operator: [Operator Instructions] I will now turn the call back over to Mr. Goldthorpe for closing remarks.
Ted Goldthorpe: Thank you all for attending our call. As per always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again on December 12 during our investor luncheon event and encourage you guys to come. Thank you very much
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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