Portman Ridge Finance Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to Portman Ridge Finance Corporation's First Quarter 2024 Earnings Conference Call. An earnings press release was distributed yesterday May 8 after market close. A copy of the release along with an earnings presentation is available on the Company's website at www.portmanridge.com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10 Q 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 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 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. Please go ahead.
Ted Goldthorpe: Good morning and thanks everyone for joining our first quarter 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren and our Chief Investment Officer, Patrick Schafer. I'll provide brief highlights on the company's performance and activities for the year. Patrick will provide commentary on our investment portfolio and our markets and Brendan will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its first quarter 2024 results and following the strong earnings trajectory we saw in 2023, we are pleased with the solid earnings power of the portfolio. Despite operating under challenging market conditions, we reported net investment income of $6.2 million or $0.67 per share and net asset value of $210 million -- $210.6 million or $22.57 per share.
We continue to target a well-diversified portfolio with investments spread across 29 industries and 103 entities, while maintaining an average par balance per entity of $3.1 million. This compares to 27 industries and 100 entities with an average par balance per entity of $3.1 million at the end of 2023. Credit quality remained stable with seven investments on nonaccrual representing 0.5% of the portfolio on a fair value basis. Additionally we continue to believe our stock remains undervalued. And during the quarter, we've continued to repurchase shares under our repurchase program purchasing 51,015 shares for an aggregate cost of $1 million. These repurchases had an accretive effect to Portland's net asset value of $0.02 per share, reinforcing our commitment to shareholder value.
Further, the Board of Directors approved dividend for the second quarter of 2024 in the amount of $0.69 per share, which represents a strong 12.2% annualized return on net asset value which is among the highest in the BDC space. Turning to conditions in our primary market, as we previewed on our first quarter earnings call, M&A activity has picked up during the quarter and capital markets as a whole were extremely active as compared to the fourth quarter. Net deal activity defined as new deals excluding corresponding repayments in the BSL loan market was $57.2 billion, up 64% from the fourth quarter and represented the highest new net volume since first quarter of 2022 and is representative of the fundamental tailwinds we believe exists in our primary markets.
For all of 2023, private equity firms have been sitting on record amounts of dry powder, while at the same time being pushed by LPs to return capital. Although, expectations for future rate hikes have diminished towards the end of the first quarter and the beginning of the second quarter, we believe the aforementioned fundamentals combined with positive economic outlook and sentiment should continue to fuel new deal activity in our private credit space over the course of 2024. Specifically at Portman Ridge and more generally across BC Partners credit platform, we continue to find attractive opportunities, both through our sponsor relationships and our focus on non-sponsor or nontraditional sponsor-backed companies and continue to win transaction based on our ability to custom tailor, a capital solution for the borrower and the borrowers' belief that our platform can add value to their businesses over and above just being a capital provider.
Our strategy has always been to be very selective on new investment opportunities, focusing on portfolio management and risk mitigation. To that point during the quarter, we made investments into only one new portfolio company. Our goal continues to be the further diversification of our portfolio by investing in companies that have a potential to provide high returns for our shareholders. As we proceed further into 2024, our pipeline remains strong and we believe we are well-positioned to take advantage of new investment opportunities while also remaining diligent in our investment and capital deployment process. With that, I'll turn the call over to Patrick Schafer, our Chief Investment Officer for a review of our investment activity.
Patrick Schafer: Thanks Ted. Turning now to slide 5 of our presentation and the sensitivity of our earnings to interest rates. As of March 31, 2024, approximately 91.1% of our debt securities portfolio were floating rate with the spread to an interest rate index such as SOFR or Prime with substantially all these being linked to SOFR. As you can see from the chart, the underlying benchmark rates of our assets during the quarter lagged the prevailing market rates and still remain below the SOFR rates as of April 29, 2024. But between the market transition last year from LIBOR to SOFR and the pause from the Fed earlier this year, the gap has narrowed to the tightest it has been since the onset of the Fed rate hike cycle. Skipping down to slide 10.
A close-up of a hand signing a loan agreement, symbolizing the trust between the company and its clients.
Originations for the first quarter were higher than prior year first quarter and were above repayment levels, resulting in net originations of approximately $1.7 million. Our new investments made during the quarter are expected to yield a spread to SOFR of 581 basis points on par value, and the investments were purchased at a cost of approximately 98.4% of par. Our investment portfolio at the end of the first quarter remained highly diversified. We ended the year with investment spread across 29 different industries and 34 different borrowers, all while maintaining an average par balance per entity of approximately $3.1 million. Turning to slide 11. In aggregate, investments on non-accrual status remain relatively low at seven investments at the end of the first quarter 2024, representing 0.5% and 3.2% of the company's investment portfolio at fair value and cost, respectively.
This compares to December 31, 2023 where there were also seven investments on non-accrual status, representing 1.3% and 3.2% 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 $384 million at fair value, which represents a blended price of 93.7% of par and is 90% comprised of first lien loans based on par value. Assuming a par recovery, our March 31, 2024 fair values reflect a potential of $25.8 million of incremental net value, a 12.1% increase or $2.72 per share, excluding any recovery from the non-accrual investments. If you were to further overlay an illustrative 10% default rate and 70% recovery to the entire debt securities portfolio, again excluding non-accrual investments, the incremental NAV value potential would be $1.41 per share or 6.2% increase to NAV per share as of March 31, 2024.
Finally, turning to slide 13, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $434.8 million of investments, have realized approximately 82% of these positions at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. As of Q1 2024, we had fully exited the acquired portfolio and are down to a combined $33.5 million of the acquired HCAP portfolio and the initial KCAP portfolio. I'll now turn the call over to Brandon to further discuss our financial results for the period.
Brandon Satoren: Thanks, Patrick. As Ted and Patrick previously mentioned, our results for the first quarter of 2024 continue to reflect the company's strong financial performance. Our total investment income for the quarter was $16.5 million, of which $14.2 million was attributable to interest income from the debt investment portfolio. This compares to total investment income for the fourth quarter of 2023 of $17.8 million of which $15.3 million was attributable to interest income from the debt investment portfolio. The decrease was primarily driven by the reversal of $0.4 million or $0.04 per share of previously accrued unpaid interest on two portfolio companies placed on non-accrual during the first quarter of 2024, as well as lower pay-down income of $0.4 million or $0.04 per share during the quarter.
Excluding the impact of purchase price accounting, our core investment income for the quarter was $16.5 million, a decrease of $1.2 million compared to core investment income of $17.7 million in the prior quarter. Our net investment income for the quarter was $6.2 million or $0.67 per share. This compares to $11.2 million or $1.18 per share for the prior quarter. The decrease in net investment income was the result of lower investment income and $0.1 million or $0.01 per share of incremental expenses in the first quarter as well as a onetime expense reimbursement from the company's investment adviser during the prior quarter. As of March 31, 2024 and December 31, 2023, the weighted average contractual interest rate on our interest-earning debt investment portfolio was approximately 12.1% and 12.5%, respectively.
We continue to believe the portfolio remains well positioned to generate incremental revenue in future quarters due to the current rate environment. Total expenses for the quarter ended March 31, 2024, were $10.3 million compared to total expenses of $11.9 million for the fourth quarter of 2023. The decrease was largely driven by lower incentive -- by a lower incentive fee as well as lower interest and financing costs as a result of lower average leverage during the quarter. Our net asset value as of March 31, 2024, was $210.6 million or $22.57 per share, a decrease of $0.19 per share as compared to the prior quarter net asset value of $213.5 million or $22.76 per share. The decrease was largely driven by our dividend exceeding net income for the quarter ended March 31, 2024.
Turning to the liability side of the balance sheet. As of March 31, 2024, the company had a total of $291.7 million of borrowings outstanding with a weighted average interest rate of 6.9%. This balance was comprised of $92 million in borrowings under our senior secured revolving credit facility, $108 million of 2026 notes and $91.7 million of 2018-2 secured notes due 2029. We finished the quarter with $23 million of available borrowing capacity under the senior secured revolving credit facility. Accordingly, as of March 31, 2024, our gross and net leverage ratios were 1.4 times and 1.2 times, respectively. Compared to the prior quarter, gross leverage is down 1 full turn from 1.5 times and net leverage is flat. The decrease in gross leverage is largely driven by the paydown on the 2018-2 notes during the quarter.
From a regulatory perspective, our asset coverage ratio as of quarter end was 171%. Finally, the Board approved a quarterly distribution of $0.69 per share payable on May 31, 2024, to stockholders of record at the close of business on May 21. With that, I will 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 in the first quarter. Through a prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders for the rest of 2024. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I'll turn the call over for any questions.
