Welcome to Portman Ridge Finance Corporation's third quarter 2024 earnings conference call. An earnings press release was distributed Thursday, November 7th, 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 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 filing 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.
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. 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, using the upsized and lower-cost JPM credit facility, the company refinanced the remaining $85 million of the 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 or $0.03 a share. With that in mind, we continue to believe our stock remains undervalued and thus we continued repurchasing stock during the third quarter under our Rule 10b-5 stock repurchase program.
Specifically, during the quarter ended September 30th, 2024, the company repurchased 33,429 shares in the open market for an aggregate cost of approximately $600,000, which was accretive 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 fourth quarter 2024, which represents a 13.6% annualized return on net asset value, among the highest in the BDC space. Regarding the private credit markets, and specifically the core middle market, which we define as companies generating 10- 50 million in EBITDA, activity levels continue to be elevated relative to 2023, but the majority of activity has consistently been from refinancings, add-ons, or amend-and-extend transactions that most often result in lower cost of capital for borrowers and extended maturities.
While true 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, and 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.
Thanks, Ted. Turning to slide five of our presentation and the sensitivity of our earnings to interest rates. As of September 30th, 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 revolving draws in seven 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 close 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 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 30th, 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 30th, 2024, fair values reflect a potential of $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 relates. 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 the respective mergers. As of Q3 2024, we have 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.
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 expenses for the quarter ended September 30th, 2024, decreased by $0.5 million- $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%- 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 30th, 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 company's prior quarter net asset value of $196.4 million, or $21.21 per share. As of September 30th and June 30th, 2024, our gross leverage ratios were approximately 1.4x and 1.5 x, respectively. For the same periods, our leverage ratio net of cash was 1.3x . Specifically, as of September 30th, 2024, we had a total of $267.5 million in borrowings 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 a then-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 29th, 2024, to stockholders of record at the close of business on November 19th, 2024. With that, I will now turn the call back over to Ted.
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 through 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 tail end of 2024. Thanks again, once again, to all of our shareholders for ongoing support. This concludes our prepared remarks, and I'll turn the call over for any questions.
At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. And your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.
What's the driver of the realized losses, please?
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 NAV as a result of that realized loss that was previously captured.
I thought so. Okay. On the interest rate sensitivity, I'm looking at slide five, and it says, blah, blah, blah, reduction of quarterly income of $164K. 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 has eased by 75 basis points or so, should that information? I mean, there seems to be a lot; the impact of our 1% rate change seems to be a lot bigger in the Q than it is in the deck.
Yeah. Sorry. Just to make sure that in the deck, it's just the difference between the 475 and the 455. So it's not a full 1% reduction.
Okay. And then I guess spillover. How much is spillover?
So it's about $0.70 per share, Chris, from the prior year.
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?
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 Patrick talked a little bit about it in the scripts, but we can get you the numbers. So to the extent that we remain in a subdued credit environment, there just should be NAV upside just with our existing portfolio. And there are some positions that we have that as rates go down, if they go down, you get a NAV increase. So income comes down a little bit, but you get NAV increases in certain situations. So that's number one. And then in terms of investment strategy, again, we haven't been nearly as impacted as other BDCs by this reduction in spreads. It may be coming to our market.
It's 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 reduce spreads to where big-cap market guys are, we've generally taken the refi. So again, you can see on slide six of what we just closed, I mean, fee income for us continues to be anemic. We basically had our lowest fee income ever this quarter going back four years, four or five years. And that should revert back to normal at some point as this refi wave continues. So that obviously is a tailwind to earnings as well, although it's something we can't obviously forecast or predict.
Okay. Great. Thank you. Talk to you guys later. Is the call still going on?
[crosstalk] We're doing well.
Apologies. Your next question comes from the line of Steven Martin with Slater Capital. Your line is open.
Hi, guys. Two questions. You made some comments about some activity in the fourth quarter. Are we expecting net deployments in the fourth quarter?
I think the short answer is yes, Steve. The long answer is it always depends on we only have sort of one known repayment during the quarter for now. The answer is yes, all to be equal, we'd expect to be a net deployer over the next two months. Again, we might get unforeseen exits or things like that. I'd say our strategy is and will be to be a net deployer.
Okay. And your PIK income declined dramatically in the quarter, which was great. What was the reason for the decline?
Yeah. I mean, Brandon gave you the specifics, but we did have one company that had a period of time where there was a partial PIK, and that has converted back to cash. And there's a couple of other things that Brandon can enumerate, but.
Yeah. It's two portfolio companies in particular that were previously paying their interest with PIK that reverted to cash this quarter. It was about $500,000 worth.
Okay. That's the good way to reduce PIK. Can you talk about the activity in the non-accruals? What went in, what went out?
Yeah. As we mentioned last quarter, so QualTek security went out. And the loan, I should say, went out. And then we had one new loan in, which is Inviga on non-accrual. It goes by a number of different names colloquially. It's Inviga on non-accrual, and Colonnade is another name that goes by. But that one, we, the lenders have been working through at the company. I think we would expect that to be a somewhat temporary non-accrual. But for now, that's kind of where it is based on the facts and circumstances.
Okay. And what does it look like for restructurings of any of the other non-accruals?
I think as of right now, there is nothing substantial. I mean, again, there are a couple that candidly just are we have marked at zeros, and we would expect them to continue to be zeros, such as ProAir is a name that's on non-accrual that will continue to be 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.
Okay. Thanks a lot.
I'm looking at names now. There is one that 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 get cleaned up. And the new security we'd be taking on should be an accruing security, so that might be one other one. But that's a relatively small number. It's $200,000 in market value, so not particularly relevant. But that should get cleaned up shortly.
Okay. Thanks.
Your next question comes from the line of Paul Johnson with KBW. Your line is open.
Hey, guys. Thanks for taking my questions. 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 sorry, last week 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, I guess, how that would have affected results this quarter if it did at all?
Yeah. Yeah, Paul. I mean, the short answer is we were in the process of refinancing out the secured notes with an upsize to the JPMorgan facility, and to be prudent, we had been sitting on additional cash in our vehicle to ensure a smooth refinancing. And so, too, we were sitting on incremental capacity in the JPMorgan facility to make sure 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 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.
Got it. Appreciate that. That's helpful. That's all the questions for me. Thank you.
Again, if you would like to ask a question, press star one on your telephone keypad. I will now turn the call back over to Mr. Goldthorpe for closing remarks.
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 12th during our investor luncheon event and encourage you guys to come. Thank you very much.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.