Good day, and thank you for standing by. Welcome to the Portman Ridge third quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jeehae Linford, a representative of the company. Please go ahead.
Thank you. Good morning, and welcome to Portman Ridge Finance Corporation's third quarter 2021 earnings conference call. An earnings press release was distributed yesterday, November 4th, after market close. A copy of the press 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 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. With that, I'd now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Please go ahead, Ted.
Thank you. Good morning, and thanks, everyone, for joining our third quarter earnings call. I am joined today by our Chief Financial Officer, Jason Roos, and our Chief Investment Officer, Patrick Schafer. I'll provide brief highlights on the company's performance and activities this quarter. Patrick will provide commentary on our investment portfolio and our markets, and Jason will discuss our operating results and financial condition in greater detail. Yesterday afternoon, Portman Ridge announced its third quarter 2021 results. We reported overall a solid quarter in which we generated strong earnings, well covered our distribution, and increased our net asset value. Origination was robust this quarter, and we're beginning to see more evidence of the strength of the BC Partners platform in generating attractive risk-adjusted opportunities. Of note, we completed a one-for-ten reverse stock split effective August 26th, 2021, and so all metrics discussed will reflect that split.
For the third quarter of 2021, we generated NII of $1.50 per share. NAV per share as of quarter- end was $29.71, an increase of $0.43 or 1.5% compared to a NAV per share of $29.28 in the prior quarter, reflecting broad-based improvements in our debt portfolio and joint ventures. On the corporate front, we've previously spoken about our intent to leverage fixed costs of a growing asset base and generate cost efficiencies over time. Last quarter, we issued $108 million in 4 7/8 senior unsecured notes and used the proceeds to redeem the full $76.7 million of 6 1/8 notes in the third quarter. We also redeemed in full $28.75 million of the HCAP 6 1/8 notes that were assumed as part of the HCAP transaction. As a result, in the third quarter, we generated interest savings driven by a lower-weighted average cost of debt.
Furthermore, we maintained other operating expenses at a relatively stable level quarter- to- quarter and believe the impact of these savings will continue to materialize over time as we continue to grow and reposition our portfolio to higher quality and higher yielding BC Partners' originated assets. In additional corporate news, last quarter, we indicated that following a period of restrictions related to ongoing M&A activity, we were able to resume our share buyback program by the end of the second quarter. We've continued participating in our repurchase program, and as a result, during the third quarter, we repurchased a total of 1.4 million shares. Our expectation is to continue to conduct buybacks under the program throughout the remainder of the year based on market conditions and other factors. Finally, as announced yesterday, the board of directors declared a $0.62 per share quarterly distribution.
This represents a $0.02 increase from prior quarter levels and reflects the consistent performance of the company to date. The board will continue to assess the distribution level on a quarterly basis and will take into consideration both the company's ongoing performance as well as the general economic outlook and related factors. In summary, we are pleased to report on yet another quarter of solid earnings, portfolio performance, and investment activities. In terms of overall progress following M&A activity over the last year and a half, we feel very good about where we sit in terms of our overall leverage and portfolio composition. Over the past couple of quarters, we have refinanced our long-term debt, which will result in interest savings in the long run.
Furthermore, with the overall leverage at the lower end of our target range, we have the capacity to grow and increase the proportion of BC originated assets. We've accomplished much of this proactive portfolio repositioning that we targeted, but we'll continue to take an opportunistic approach in this regard. With all that being said, I will turn over the call to Patrick Schafer, our Chief Investment Officer, for review of our investment activity.
Thanks, Ted. Turning first quickly to the current market conditions. Third quarter of 2021 continued to experience elevated transaction volume and activity driving both origination and sales and repayments. Lower interest rates as well as above-average economic growth and continued post-pandemic activity are all contributing factors to these current market conditions. As many in our sector have noted, the market strength has carried over from the first half of the year and into the second half. We had an active quarter in terms of originations and repayments, with originations materially outpacing repayments. We invested a total of $62 million in debt securities during the quarter and exited or repaid on investments with a carrying value of $36.6 million. With respect to the debt originations, we had investments into 10 borrowers, of which only two were existing borrowers. In total, all these 10 transactions were completed alongside other BC Partners entities.
Excluding short-term investments that were sold prior to the end of the quarter, 97% of new investments were first-line securities and 3% were second-line securities. The weight of average spread on these new investments was 586 basis points. Additionally, we made net new investments of $4.7 million into our Great Lakes joint venture. On the repayments and disposition side, the quarter was less active relative to the first two quarters of 2021. In total, we exited or repaid on 18 positions, 14 of which were repayments. In aggregate, these exits represented a carrying value of approximately $36.6 million and resulted in a gain of approximately $500,000.
Relative to the June 30th, 2021, fair value or cost if originated during the quarter, our debt and equity securities accounted for an approximate $134,000 net loss, while CLO equity positions accounted for a $109,000 net gain, and our two joint ventures accounted for a $2.1 million net gain. On an equivalent basis, as of September 30th, 2021, Portman Ridge has $455.1 million of debt securities marked at 93.8% of par and yielding a stated spread to LIBOR of 725 basis points on accruing debt securities. This compares to $419.6 million of debt securities marked at 93.5% of par and yielding a stated spread to LIBOR of 744 basis points on accruing debt securities as of June 30th, 2021. Non-accruals as of September 30th, 2021, represented 2.5% of cost and 0.9% of fair value on the investment portfolio, as compared to 3.3% and 1.5%, respectively, as of June 30th, 2021.
Six investments were on non-accrual status as of September 30th, 2021, compared to eight investments that were on non-accrual status as of last quarter. I'll now turn the call over to Jason to further discuss our financial results for the quarter.
Thanks, Patrick. As Ted noted, during the third quarter, we completed a 10- for- 1 reverse stock split effective August 26th, 2021. As a result, all common shares and per share metrics have been adjusted retroactively to reflect the split. Turning to our results for the quarter, GAAP net investment income for Q3 was $13.7 million or $1.50 per share, which compares to net investment income of $11.7 million or $1.51 per share in the previous quarter. Total investment income was $22.9 million, an increase of $1.4 million or 6.3% from the prior quarter, driven by higher interest income and higher capital structuring fees received during the quarter, reflecting a strong level of originations. Total expenses for Q3 decreased to $9.2 million. This compares to $9.8 million of total expenses in the previous quarter, $10.2 million in Q1, and from $11 million in the fourth quarter of 2020.
As we have discussed at length, we are very focused on maintaining a stable level of operating expenses against our asset base, which has grown significantly in the past year. We expect further leveraging of our fixed costs driven by lower-weighted average interest rates across our borrowings and the spreading of operating expenses across a larger base of assets as we seek to continue to grow our portfolio. Turning to our portfolio, at quarter- end, we had total investments, excluding derivatives, of $562 million. Net assets were $271 million or $29.71 per share, an increase of $0.43 per share from $29.28 per share in the previous quarter. This marks the sixth straight quarter that we have increased NAV per share.
Turning to the liability side of the balance sheet, as of September 30th, 2021, we had a total of $340.9 million par value of borrowings outstanding, comprised of $69.1 million in borrowings under our credit facility, $108 million of 4 7/8% notes due 2026, and $163.9 million in secured notes due 2029. During the third quarter, we redeemed in full 28.75 million of HCAP 6 1/8% notes that we had assumed as part of the HCAP transaction. Having now refinanced approximately $106 million of legacy debt, we are pleased with the composition of our debt capital structure at this time. As of September 30th, 2021, our debt- to- equity ratio was 1.26x on a gross basis and 1.05x on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 178%.
Given that our stated objective has been to target overall leverage to a range of 1.25x- 1.4x , we believe we remain solidly positioned to pursue growth opportunities. As of quarter- end, we had unrestricted cash of $28.5 million, restricted cash of $21.1 million, and an additional $45.9 million of available borrowing capacity under the credit facility. Our aggregate unfunded commitments stood at $48.7 million as of September 30th, 2021. As announced yesterday, a quarterly distribution of $0.62 per share, which represents an increase of $0.02 per share compared to prior quarter levels, was approved by the board and declared payable on November 30th, 2021, to stockholders of record at the close of business on November 15th, 2021. With that, I will turn the call back over to Ted Goldthorpe.
Thank you, Jason. I'll close by saying that we're very pleased with the progress we've made in terms of active repositioning, deleveraging, and refinancing our long-term debt. Now that much of the heavy lifting is complete, we are focusing on continuing to generate solid earnings results on a consistent and steady basis. We are also very pleased to be increasing our distributions per share for our shareholders. Thank you once again to all of our shareholders for your ongoing support. This concludes our prepared remarks, and I'll now turn it over to the operator for any questions.
As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is now open.
Hey, guys. On non-accruals, is it correct that ATP Oil is now accruing?
No. ATP is technically in equity position, so there's no accrual status for it in either direction. It continues to receive cash, but it's not an accrual position either direction.
How about Emtek and Raven?
Emtek was refinanced out at par during the quarter, and Raven actually is essentially flipped to a liquidating trust. So there is a very, very small amount that's left over that is just a part of a liquidating trust that will be ongoing. It's technically in equity position now, so there's no accrual status for that either.
Great. The $3.9 million realized loss, what was the driver for that, please?
Yeah. I would say there's a handful of positions that were exited during the quarter at carrying value or slightly above, and this was unrealized flipping to realized.
Gotcha. And then I guess final question is higher capital structure fees and revenues. Any color you can provide on that?
Yeah. That's a function of, I would say, a positive trend in the growth of the BC Credit platform, enabling to take a larger role in, call it, arranging deals and taking more of the fees upfront. And we had a few of those this quarter.
Great. I'll get back in the queue. Thanks.
Thank you. As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Our next question comes from the line of Ryan Lynch from KBW. Your line is now open.
Hey, good afternoon, and thanks for taking my questions. Obviously, with the merger-related accretion from the merger-related accretion, accounting creates a lot of moving pieces and makes, I think, earnings really, really difficult to kind of understand what is the true earnings power. So could you help us out? And I don't know if you have this right now or if you can come back, but can you provide the dollar amount of the merger-related accretion that ran through the income statement in the third quarter so we can kind of tell what is kind of the true operating earnings level versus what was kind of skewed by that accretion?
Yeah. Yeah. Sure. Sure, Ryan. And thanks for the question. So we did try to break that out for investors in our tax footnote in the Q. So you'll see a line item there that's specific to year-to-date purchase accounting, like accretion. So that's the accretion number that'll run through the P&L. That's on a year-to-date basis, so you just have to back out what the year-to-date last quarter was to get the number. I don't remember offhand. I think it's right around $56 million.
Okay. That's helpful, and then post quarter- end, you guys purchased $18 million in two assets from a subsidiary of JMP. Can you just talk about what are those two assets, number one? And two, how did that transaction come about? What's the background on how those were sourced, how that deal came about?
Yeah. So why don't I start? I mean, we obviously have a very close relationship with that firm. It was announced that Citizens Bank is buying JMP, and there were some residual assets on their balance sheet that we knew really well that they wanted to clean up. So instead of a cash transaction, we did it at NAV in stock. And so the assets we purchased, we purchased at below what we think is true fair market value. So we think we got good value, and we were able to move very, very quickly. And JMP, given the transaction we'd done previously with Harvest, I think was pretty familiar with Portman Ridge and our stock. And they've obviously made a bunch of money in our stock given the timing of the Harvest transaction. So it kind of made it a very synergistic transaction.
So obviously, those assets should roll off relatively quickly. And then obviously, we can put on additional assets just given our leverage lines. So it's a very, very, very accretive transaction to earnings.
Okay. That's helpful background. The other question I had was looking at slide number four, where you kind of break down the three mergers and kind of how much has been monetized. Obviously, and you mentioned in the bullet there that you guys are still working through some of the Harvest assets to kind of monetize some of those. Obviously, with the OHAI and Garrison, there's going to be a level of assets that you guys view as kind of core long-term assets. Do you view that those two portfolios are kind of at the remaining positions that are still in your portfolio that came from those two other BDCs are kind of core long-term positions that will still remain there and kind of run off in normal course over time? Or are you still looking to kind of proactively monetize any investments in those OHAI and Garrison books?
Yeah. So OHAI and Garrison, I think we've kind of monetized the things we want to monetize. And Chris mentioned earlier things like ATP, which obviously are doing phenomenally well given what's happened with oil prices. So I think in both those portfolios, we feel pretty good about where they are. So you'll see these kind of naturally roll off. But I think the positions we really wanted to exit, we've largely done that. And HCAP, in a perfect world, there's probably some additional names here that we would love to get refinanced out of. So we are spending, as a percentage of the book, we're probably spending a disproportionate amount of time on the Harvest names just because we're trying to chop some of these names down. But again, we feel very, very good about where they're valued, and we feel good about the book.
And again, it's not a huge proportion of the overall Portman Ridge portfolio, but there are a couple of names in here that we're working to potentially monetize.
Yeah. And the only other thing I'd say, Ryan, was particularly for OHAI and Garrison, there were different reasons for both as to why we intentionally accelerated some of the refinancing, repayment exit strategies there. For OHAI, it was viewed to the outside world as a riskier second-line portfolio, which we didn't feel like it was. But that said, we wanted to kind of optically show that we're able to exit those positions at very good valuations. And so there was kind of, again, some heightened impetus for exits there. And in the Garrison portfolio, Portman as a whole was significantly over-levered immediately post-closing of Garrison. So there was, again, some kind of heightened rationale for a more expedited exit process over some of those assets.
Okay.
Yeah. I see. Yeah. I see.
One other thing I'd say, just, it's just an interesting theme. It's not really related to your question, but, in a typical environment, you get refinanced out of your higher-yielding assets in a spread-compressed environment. Right now, we're actually getting refinanced out of the stuff we're getting refinanced out of is actually around the same as where we're originating. And where we're originating really hasn't changed that much over the last, call it, two years. I mean, obviously, absent the COVID impacts last year. So the things that we're getting taken out of are actually not necessarily our highest-yielding positions, which I think is pretty healthy.
Gotcha. And then just one final one if I can. I'll hop back in the queue. You guys obviously had pretty strong growth this quarter. There's been a lot of things going on as far as mergers goes over the last several years.
The market is really active right now, but that's obviously which is both well for capital deployment, but it also can pressure repayments and prepayments. So what's your kind of outlook for fourth quarter and beyond as far as the ability to deploy capital and have net growth? At the same time, you're also looking just to monetize some assets, which could also put some pressure on that. What's your guys' confidence in you guys going to be able to grow the portfolio in the fourth quarter and early into 2022?
Yeah. Look, Ryan, I'd say the reality is we have a pretty strong pipeline here where we sit today, and generally, we've had a pretty strong pipeline all year. I think particularly for our business, some of that is a lot of it can be timing-related. There are points in time where we come to quarter- end and we're sitting out a bunch of cash because a particular transaction or two have gotten pushed out by a couple of weeks. So I'd say kind of absent general timing of when we're closing deals, I think we feel pretty good that we'll be able to continue to grow the portfolio from an origination perspective relative to repayments. I mean, you saw it in Q3, repayments were only about half of our originations, and it wasn't like we were intentionally trying to put the pedal down on originations or repayments.
The activity on repayments has slowed a little bit, and that will just allow us to naturally grow the portfolio on a net basis.
Okay. Understood. That's all for me. I appreciate the time.
Thank you. Our next question comes from the line of Steven Martin from Slater. Your line is now open.
Thanks a lot. Hi, guys. Question I ask sort of almost every quarter, can you comment on the CLOs and the timing of runoff? Because I do think that continues to grant that it's become a very small portion of the portfolio, but I think it's a big negative. And two, the equity securities have grown, and I was wondering what the nature is now of the equity securities and what's the likelihood of some of them getting flipped in this current active environment. And three, can you talk about the non-performings and what you're expecting in terms of workout elimination, sale, etc.?
Yeah. Oh, sorry. Go ahead.
No. So on CLO equity, I would say we've got it down to a very, very small percent of our books. So when you say it's a massive negative, I think this quarter is like 3%. And so we expect it to kind of not really be larger than 5% of our overall business. So we think it's at a pretty good spot. We actually are expecting some of the legacy positions to come out. But as part of this JMP transaction, we obviously picked up a little bit of structured products in that transaction. So I think, as I said, I don't think you're going to see us have massive increases in our CLO equity. And again, over time, that should migrate down. It's not a real core part of our business.
I think on the non-performing side, and Patrick can obviously add his color. I don't think we expect to see any real material change in those figures. I mean, obviously, you've seen our non-accruals were down by about a 1/3 this quarter. And I think credit quality of the overall portfolio is pretty stable, barring some surprise. So as of now, I don't really see us expecting a big increase in non-performers. And then do you want to talk about the equity? Because I think it depends on what, do you want to talk about the equity portion?
Yeah. And just quickly to add on to the non-accruals, I mean, the reality is one of our non-accruals was a piece of equity that got converted to a promissory note some time ago. So it never really should have been an accrual.
We essentially moved up in the capital structure and just changed something that was equity into a note, but we were never expecting any interest from it regardless. So kind of we get a negative tag, but the reality is it never had any impact. And then another one is Tank Partners, and we've just been waiting for a judge to approve the final liquidation payment on a wind-down that had happened over the course of 2019 and 2020. So it's just kind of sitting there in cash in a trust waiting to be sent out to us. So again, just naturally speaking, we should at some point lose a couple of non-accruals, generally speaking, over time. And sorry, what was your third question, Steven?
Equity.
Oh, equity. Yeah. Again, it depends a little bit on kind of what timeline you're looking at. We did take over some equity positions as part of the HCAP portfolio. We have not added any new equity positions kind of on the BC side that I can think of off the top of my head. There is one position that we had some warrants in the business that got marked up during the quarter. But generally speaking, we're not actively seeking out equity positions. So I think the increase that you'd be looking at is more so driven by the HCAP merger as opposed to a general operating model.
All right. Thank you very much.
Thank you. Our next question comes from the line of Angelo Guarino from a private investor. Your line is now open.
Hi. Thanks for taking my not really question. I really only have a question. I just wanted to say that I wanted to congratulate everybody on excellent performance. I mean, when you came into town and said what you're going to do with KCAP, you laid out a plan and said the proof will be in the pudding. Looking at us post-reverse split, post-refinancing of all that high debt, growing the asset base so that we have enough scale so that the fixed costs are manageable, I just want to make a note that you said you'd do. Congratulations.
Thank you very much, Angelo.
Yeah. We appreciate that. I mean, we really feel like we laid out a plan, and we feel like we've kind of achieved it, and so now I think you'll see the next couple of quarters. Really, the goal is to continue to hack away at costs where we can, maintain portfolio yields, and be disciplined underwriting, and we think we've got obviously great earnings momentum, but we also were able to raise the dividend this quarter, and on a go-forward basis, we would hope to have a pattern of maybe increasing dividends over time. So.
Yeah. I'd say some of the questions from someone who wasn't familiar with BC Partners before you showed up with KCAP was, "Okay. Well, we're talking about our deal flow. Our deals are the stuff we're going to bring to the table from BC Partners is going to be of better quality. BC Partners is going to give us better access to a low-cost capital." All those things have been proven. So just keep it up and keep pointing to the bleachers and keep hitting the ball.
Great. Well, thank you so much.
Thank you. Our next question comes from the line of Steve Martin from Slater. Your line is now open.
Hey, guys. I forgot one question. Can you comment on spillover? You probably have your 2020 done now, and what does that look like?
So from a just overall distributable taxable income for the quarter, it ticked up a little bit from where we were in year-to-date Q2. We're looking to, with the uptick in the dividend, kind of get to a fully distributable as possible. But I think it depends on where Q4 comes in. And obviously, that'll drive where we end up for the year. And that'll drive kind of where we land with any kind of a special or uptick in the dividend at that point. So I would say that we're not, the cake isn't baked on that yet, but we're looking at it fairly closely and managing that distributable income.
[crosstalk]
I'm sorry.
No, we benefited from two things on this, which is we got a bit of a tax advantage from some of these M&A deals we did. And the way CLO accounting works, you also get a bit of a tax advantage, which we're focused on. As Jason said, because the M&A is kind of done and the benefits of accretion are kind of rolling off, and because CLO equity is such a small part of our business now, you're going to see the spillover income begin to increase.
Can you give me an idea of where it stood by your estimate at the end of the quarter?
Yeah. So when I said that, say, end of Q2, we were right on. We were fully distributed right at that mark. Q3 ticked up a bit, and you'll kind of see where we landed in the tax footnote there provides where the distributable income is year-to-date versus, and you can just look at that versus the distributions to date. So as of Q3, we were under-distributed. But I don't remember. I don't recall the exact dollar figure.
All right. Thank you very much.
Thank you. At this time, I would like to turn the call back over to management for closing remarks.
Great. Thank you, everyone, for joining us today. A very happy Thanksgiving for everybody on the call. And we look forward to continued dialogue with all of our shareholders. And we look forward to speaking to you on the next call. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.