Q2 2023 Rand Capital Corporation Earnings Call
Greetings and welcome to Rand Capital Corporation second quarter 2023 financial results.
At this time, all participants are in listen only mode.
If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.
This conference is being recorded.
At this time I'll turn the conference over to Craig Mahalik, Craig you May now begin.
Thank you and good morning, everyone. We appreciate your interest in Rand capital and for joining US today for our second quarter 2023 financial results Conference call.
On the line with me are Dan Penberthy, our President and Chief Executive Officer, and market backed out our executive Vice President and Chief Financial Officer.
A copy of the release and slides that accompany our conversation is available at Rand capital Dotcom.
If youre following along in the slide deck, please turn to slide two where I'd like to point out some important information.
As you are likely aware, we may make some forward looking statements during this presentation.
These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from where we are today.
Finally, a summary of these risks and uncertainties and other factors in the earnings release and other documents filed by the company with the Securities and Exchange Commission.
These documents can be found on our website or worried at SEC Gov.
During today's call will also discuss non-GAAP financial measures. We believe these will be useful in evaluating our performance.
Should not consider the presentation of this additional information in isolation or as a substitute for results in accordance with generally accepted accounting principles.
We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's earnings release.
With that please turn to slide three and I'll hand, the discussion over to Dan Dan.
Yeah.
Thank you Craig and good morning, everyone.
Our second quarter results reflected the strength and execution of our strategy with continued earnings momentum driven by the addition of debt investments originated during the quarter and a recognized sizable gain from the exit of our debt and equity investment in D. S. T R dealer solutions and designs.
We delivered total investment growth of 34% for the quarter.
This reflects increased interest from portfolio companies and higher fee income.
For the quarter net investment income per share was <unk> 19 cents and on an adjusted basis are non-GAAP financial measure, which excludes the capital gains incentive fee accrual expense was 38 cents per share.
Margaret will review these changes in more detail later.
We paid a regular quarterly cash dividend up 25 cents per share during the second quarter.
And just over a week ago announced a regular quarterly cash dividend for the third quarter, which will also be 25 cents per share.
We believe that our deal flow and our unique position in the market.
Will help to continue to support future dividends.
Other notable highlights during the quarter included nearly $4 7 million in new and follow on investments, while receiving $8 8 million from portfolio investment sales and debt repayments.
If you turn to slide four you can see our portfolio mix between debt and equity and the changes during the past quarter.
At quarter end, our portfolio consisted of investments in 29 companies down one which reflects the sale of D. S. T and also summer set gas.
Offset by one new investment, which I'll talk to you on the next slide.
The portfolio comprises approximately 60% in fixed rate investments and this reflects an improvement over the past quarter and since the year ended 2022.
The remaining mix at the end of the quarter comprised 29% and equity investments in private companies and 11% in publicly traded equities consisting of other bdcs and R. E T D auctions holdings.
The fair value of our investments totaled $66 8 million. This.
This was down sequentially largely due to the partial sale of our ACD shares and the valuation adjustment on open exchange as well as the D. S T cell.
Helping to offset this with our new investments.
On a year to date basis, however, our portfolio value expanded 9% or 5.3 million from December 31st 2022.
We made an investment in one new portfolio company and one follow on investment that totaled $4 $7 million during the quarter.
Those transactions are highlighted on slide five.
The largest investment was $4 3 million to I N T E, which consisted of 3.3 million of subordinated debt at a 12% interest rate with an additional 2% payment in kind.
Alongside 1 million of preferred equity.
I N T E is the stocking distributor of controlled expanse expansion on alloys.
Electronic grade Nichols refractory grade metals, and alloys and also soft magnetic alloys.
We've also made a follow on that investment of $390000 in portfolio Company I T E.
This is to support the working capital needs and new manufacturing equipment for the company.
<unk> total debt and equity investment Nike a has a fair value of $4 8 million at quarter ends.
Yeah.
We had two exits during the quarter. The F. D was sold during June 'twenty, 'twenty, three which resulted in full repayments of our subordinated debt and the sale of our preferred equity investments.
In total Rand received $6 8 million in proceeds which included a net gain of $2 5 million.
The other exit was a small one as we sold ran for legacy legacy equity position rather than that wasn't Somerset gas.
Lastly, we have also added to our liquidity position by trimming some of our holdings in ACD auctions.
For which we sold 125000 shares during the quarter at an average price of $14.03.
Nevertheless, the realized gain of $1.7 million.
At quarter end, we still hold 194934 shares of AC ACD, which represented approximately 5% of the portfolio is fair value.
Recently, a C. D has been trading at the 16 to $18 share range and we have our shares valued at $17.32 a quarter ends.
As always we'll continue to evaluate our holdings in ACB as we consider our future liquidity needs.
The charts on slide six illustrates the diversity in our portfolio and the change in industry next during the second quarter.
Given the impact of the new investment in I N T E.
Sale of D. S D along with fair value changes, we saw notable changes in our industry mix.
Distribution, a rather new industry within our mix was due to the investment in I N T E, which now makes up 7% of our total.
Additionally, our automotive mix decreased seven percentage points due to the also due to the sale of D. S T.
There were also some smaller adjustments as manufacturing went up two percentage points.
Software went down two percentage points and overall, we continue to value the diversity of this portfolio.
Slide seven lists our top five portfolio companies at quarter end, representing almost half of our total portfolio.
There was one change in the rankings since the last quarter with I N E moving up to the top five ranking at the number five spot well D. S D drops out giving itself.
Hilton continues to remain the largest fair value investment at $10 6 million or 16% of our total portfolio.
With that I'll turn it over to Margaret to review our financials in greater depth.
Thank you Dan and good afternoon, everyone.
Start on slide nine which provides an overview of our financial summary, and operational highlights for the second quarter.
Total investment income was $1 8 million and this is up 34% over last year, driven by a 47% increase in interest income from portfolio companies and higher fee income.
The higher interest from portfolio companies reflect six new debt instruments that originated over the past year.
About 29 total portfolio company investments 22 contributed to our total investment income during the second quarter of 2023.
Charter investments by approximately 1.3 million during the second quarter compared with a credit of 96000 in the prior year second quarter.
Increase largely reflects reflects a change in accrued capital gains incentive fees to the company's external investment advisor ran capital management L. L C.
The current period includes 491000 up capital gains incentive fee expense compared with a credit of 663000 for the second quarter of 2022.
Our current total expenses, which reflects 259000 in interest expense.
Having used a virus senior revolving credit facility that we entered into last year.
There was no corresponding expense during the prior year second quarter.
As a reminder, we are required to accrue capital gain incentive fees on the basis of net realized capital gains and losses, and net unrealized capital gains and losses at the close of the period.
<unk> the capital gains incentive fee adjusted expenses, which is a non-GAAP financial measure.
We're 816000 compared with 567000 in the second quarter of 2022.
Second quarter net investment income was 493000 or 19 cents per share compared with $1 4 million or 55 cents per share in last year's period.
On an adjusted basis, which is a non-GAAP financial measure and excludes the capital gains incentive fee accrual expense net investment income was <unk> 38 cents per share up 31% from 29 cents per share in last year's period.
Slide 10 provides a waterfall graph of the change in net asset value for the corner.
Not as of June 32023 were $61 4 million up more than 3% from the end of the first quarter of 2023.
This reflects this increase reflects solid net investment income and net realized gains partially offset by a decrease in unrealized depreciation on investments and 645000.
And given and distributions to shareholders during the quarter.
As a result, the net asset value per share at June 32023 was $23 and 79%.
Compared with $23 at March 31st 2023.
As highlighted in slide 11, we have a strong balance sheet and significant liquidity and positions us well for future investments.
Cash at quarter end was approximately 8.4 million.
And we did not repurchase any shares during the quarter.
We have approximately $7 4 million in liquid BDC in ACD auction shares, which can provide near term funding capital for investments as we have demonstrated in past periods.
In addition, based on our borrowing based Formula Rand has $14 3 million of availability under our senior secured revolving credit facility at June 32023.
Our total outstanding borrowings of $10 7 million carried an interest rate of 8.59 at quarter end.
With our strong cash position after quarter end in July we paid down 3 million of our outstanding borrowings.
On July 25th 20, twenty-three Rand's board of directors declared a quarterly cash dividend of 25 cents per share cash dividend will be paid on or about September 14th 2023 to shareholders of record as of August 31st 2023.
With that I will turn the discussion back to Dan.
Thanks, Margaret the second quarter shows continued investment income growth as we scale the business by investing nearly $4 million in subordinated debt instruments, along with related equity investments in these privately held lower middle market companies.
We believe we can continue to execute our strategy as we look to the second half of the year and beyond.
With our strengthened balance sheet and liquidity position, we expect to leverage our cash on hand, and our credit facility to invest in new opportunities that will provide higher yields in order to drive our earnings potential and support a growing dividend well into the future.
Thank you for joining us today and for your ongoing and continued interest in Rand capital. We look forward to updating you on all of our third quarter 2023 results, which will be reported in November .
And we hope you have a great day.
This will conclude today's conference you may disconnect your lines at this time and thank you for your participation.