Q1 2024 Rand Capital Corp Earnings Call
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Speaker Change: Greetings and welcome to Rand Capital Corporation's first quarter fiscal year 'twenty 'twenty four financial results conference call. At this time all participants are in a listen only mode. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this call.
Operator: Greetings and welcome to Rand Capital Corporation's first quarter fiscal year 2024 financial results conference call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: Is being recorded.
I would now like to turn the conference your over to your host Mr. Craig Mahalik. Thank you you may begin.
Craig Mychajluk: Thank you and good afternoon, everyone. We appreciate your interest in land capital and for joining US today for our first quarter 2024 financial results Conference call on the line with me are Dan Penberthy, Our President and Chief Executive Officer, and Margaret breakdown, our executive Vice President and Chief Financial Officer.
Craig Mychajluk: Thank you and good afternoon, everyone. We appreciate your interest in Rand Capital and for joining us today for our first quarter 2024 financial results conference call. On the line with me are Dan Penberthy, our President and Chief Executive Officer, and Margaret Brechtel, our Executive Vice President and Chief Financial Officer. A copy of the release and slides that accompany our conversation is available at RandCapital.com. If you're following along in the slide deck, please turn to slide two, where I'd like to point out some important information.
A copy of the release and slides that accompany our conversation is available Iran capital Dotcom.
Craig Mychajluk: Following along in the slide deck, please turn to slide two where I'd like to point out some important information.
Craig Mychajluk: 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. You can find 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 at sec.gov.
Craig Mychajluk: 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.
Craig Mychajluk: During today's call, we'll also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you 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-gap measures with comparable-gap 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?
Craig Mychajluk: You can find a summary of these risks 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 at SEC Gov. During today's call will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance you.
Craig Mychajluk: You 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.
Craig Mychajluk: Dan.
Daniel Patrick Penberthy: Thank you, Craig, and good afternoon, everyone. We kicked off the year with solid momentum, fueled by the strategic deployment of capital, particularly into new and follow-on debt investments. This approach has consistently delivered results over the past years and evidenced our strong performance in the first quarter of 2024. The initial three months were dynamic within our portfolio, characterized by these new and follow-on investments, certain equity sales, and portfolio repayment. This activity does underscore the strength and agility of our investment approach.
Daniel Patrick Penberthy: Thank you Craig and good afternoon, everyone. We kicked off the year with solid momentum fueled by the strategic deployment of capital, particularly into new and follow on debt investments.
Daniel Patrick Penberthy: Approach has consistently delivered the results over the past years and evidences our strong performance in the first quarter of 2024.
The initial three months for dynamic within our portfolio characterized by these new and follow on investments certain equity sales and portfolio repayments. This.
Daniel Patrick Penberthy: This activity does underscore the strength and agility of our investment approach.
Daniel Patrick Penberthy: Moreover, seizing upon favorable marketing conditions, rather than market conditions, we realized $3.5 million from the sale of our ACV auction stock. The strategic exit, in conjunction with the prudent utilization of our credit facility, has enabled us to deploy over $10 million during the quarter, fortifying the potential yield and the future of our portfolio and the strengthening dividend. Noteworthy is the evolution of our debt portfolio, which now represents 70% of our total mix, up from 64% at the close of 2023 and 56% at the end of 2022.
Daniel Patrick Penberthy: Moreover, seizing upon favorable marketing conditions, rather market conditions, we realized $3 $5 million from the sale of our HCV auction stock.
Daniel Patrick Penberthy: This strategic exit in conjunction with the prudent utilization of our credit facility.
It's enabled us to deploy over $10 million during the quarter.
Defining the potential yield and the future of our portfolio and the strengthening dividends.
Daniel Patrick Penberthy: Noteworthy is the evolution of our debt portfolio, which now represents 70% of our total mix up from 64% at the close of 2023 and 56% at the end of 2022.
Daniel Patrick Penberthy: This strategic shift has driven the 12% growth in total investment income for the quarter. The strong performance translated into tangible benefits for our shareholders, as evidenced on slide 4. Year-to-date, we have declared total dividends of $0.54 per share. This includes a cash dividend of $0.25 per share for the first quarter, and just last week on May 8th, we increased our regularly quarterly cash dividend for the second quarter by $0.04 per share, marking a 16% increase, and is now at $0.29 per share.
Daniel Patrick Penberthy: This strategic shift has driven the 12% growth in total investment income for the quarter.
Daniel Patrick Penberthy: This strong performance translated into tangible benefits for our shareholders as evidenced on slide four.
Daniel Patrick Penberthy: Year to date, we have declared total dividends of 54 cents per share.
Daniel Patrick Penberthy: This includes a cash dividend of 25 per share for the first quarter and just last week on May eight we increased our regularly quarterly cash dividend for the second quarter by four cents per share, marking a 16% increase and is now at 29 cents per share.
Daniel Patrick Penberthy: This dividend increase reflects not only the strength and stability of our business operations and its portfolio but our consistent and confident ability to execute in the future trajectory of the company. We firmly believe that our deal flow and unique marketing position will continue to support future dividends.
Daniel Patrick Penberthy: This dividend increase reflects not only the strength and stability of our business operations and its portfolio.
Daniel Patrick Penberthy: But our consistent and confidence our ability to execute in the future trajectory of the company.
Daniel Patrick Penberthy: We firmly believe that our deal flow and unique marketing position will continue to support future dividends.
Daniel Patrick Penberthy: At quarter end, having put our capital to work and distributed $645,000 in cash dividends to the shareholders, we still had approximately $11 million in total availability, including our cash-on-hand, line-of-credit availability, and our highly liquid publicly-traded security. If you turn to slide 5, you can see our portfolio mix between debt and equity and the changes during the recent quarter. Our portfolio consisted of investments with a fair value of $82.8 million across 30 portfolio businesses.
Daniel Patrick Penberthy: At quarter end, having put our capital to work and distributing $645000 in cash dividends to the shareholders. We still had approximately $11 million in total availability, including our cash on hand line of credit availability and our highly liquid publicly traded securities.
Daniel Patrick Penberthy: If you turn to slide five you can see our portfolio mix between debt and equity and the changes during the recent quarter.
Daniel Patrick Penberthy: Our portfolio consisted of investments with a fair value of $82 8 million across 30 portfolio of businesses.
Daniel Patrick Penberthy: This was up $5.6 million on a net basis, or 7% from the year-end 2023, and reflected these new and follow-on investments and valuation adjustments in multiple portfolio companies. These were partially offset by our sale of ACV auction stock and other portfolio company loan repayments.
Daniel Patrick Penberthy: It was up five point section at $5 $6 million, rather than net basis or 7% from the year end 2023, and reflected these new and follow on investments in valuation adjustments and multiple portfolio companies.
Daniel Patrick Penberthy: These were partially offset by our sale of HCV auction stock and other portfolio company loan repayments.
Daniel Patrick Penberthy: The portfolio comprised approximately 70% in debt investments as I privately noted previously noted rather which have an annualized weighted average yield of 13, 7%, which includes P. I K oar payment in kind interest.
Daniel Patrick Penberthy: The portfolio comprised approximately 70% in debt investments, as I previously noted, which have an annualized weighted average yield of 13.7%, which includes PIK, or payment in kind interest. The remaining mix was comprised 25% in equity investments in private companies, and 5% in publicly traded securities consisting of our other BDC investments. During the first quarter, we completed one follow-on and two new investments. These transactions are highlighted on slide 6. The larger investment was a debt investment totaling $5.5 million into Madison Avenue Holdings.
Daniel Patrick Penberthy: The remaining mix was comprised 25% and equity investments in private companies.
5% in publicly traded securities consisting of our other BDC investments.
Daniel Patrick Penberthy: During the first quarter, we completed one follow on and two new investments. These transactions are highlighted on slide six.
Daniel Patrick Penberthy: So a larger restaurant with a debt investment totaling $5 5 million in to Madison Avenue Holdings.
Daniel Patrick Penberthy: They have previously repaid their $1.9 million loan to Rand, also during the quarter. This debt instrument will carry a rate of 14%, including PIK interest. Madison Avenue is based in Texas and provides upscale salon spaces for lease.
Daniel Patrick Penberthy: They had previously repaid the $1 9 million dollar loan to Rand also during the quarter.
Daniel Patrick Penberthy: This debt instrument will carry a rate of 14%, including P. I K interest.
Daniel Patrick Penberthy: <unk> Avenue was based out of Texas and provides upscale salon space for lease.
Daniel Patrick Penberthy: The second was a new investment of $3 $2 million made with mountain regional equipment solutions or M. R. E S.
Daniel Patrick Penberthy: The second was a new investment of $3.2 million made with Mountain Regional Equipment Solutions, or MRES. That consisted of a $3 million term loan at 14% and a $205,000 equity investment. MRES is based in Utah and supplies automated lubrication systems, active and passive safety systems, and maintenance products designed for the mobile heavy equipment industry.
Daniel Patrick Penberthy: That consisted of a $3 million term loan at 14% and a 205000 other equity investment.
Daniel Patrick Penberthy: Marie asked is based out of Utah and supplies automated lubricate lubrication systems active and passive safety systems and maintenance products designed for the mobile heavy equipment industry.
Daniel Patrick Penberthy: The follow on investments during the quarter was $1 $8 million into cyber It's billiards Corporation, a billiard supply company based out of Michigan.
Daniel Patrick Penberthy: The follow-on investment during the quarter was $1.8 million into Cyberts Billiards Corporation, a billiard supply company based in Michigan. With this investment, our total debt and equity investment in Syberts increased to a fair value of $7.8 million at quarter end. The bottom half of the slide highlights the notable exits and repayments from the quarter, including the sale of the stock of ACV Auctions. We have determined an appropriate time to make an exit within our investment portfolio. And this is often just as critical as making the initial investment.
With this investment our total debt and equity investment in cyber it's increased to a fair value of $7 8 million at quarter end.
Daniel Patrick Penberthy: The bottom half of the slide highlights the notable exits and repayments from the quarter, including the sale of the stock of HCV auctions.
Daniel Patrick Penberthy: We have determined an appropriate time to make an exit within our investment portfolio and this is often just as critical as making the initial investment.
Daniel Patrick Penberthy: The shares of ACB were sold at an average price of $18.02 per share, and the sales of the 194,000 shares did result in a realized gain of $3.5 million. I should highlight that during the prior quarter, we had ACV stock valued, or that is rather an unrealized appreciation, for approximately $2.9 million. And with this sale, we have now monetized that prior appreciation. During the quarter, we also received $687,000 in principal loan repayment from PressurePro, which left our total fair value of debt and equity investment at $2.4 million in this portfolio company.
Daniel Patrick Penberthy: The shares of HCV were sold at an average price of $18 and <unk> <unk> per share.
Daniel Patrick Penberthy: And the sales of the 194000 shares did result in a realized gain of $3 $5 million.
Daniel Patrick Penberthy: I should highlight that during the prior quarter, we had HCV stack valued or that is rather unrealized appreciation.
For approximately $2 $9 million and with the sale, we have now monetized that prior appreciation.
Daniel Patrick Penberthy: During the quarter. We also received $687000 principal loan repayment from pressure Pearl, which left our total fair value of debt and equity investment at $2 $4 million into this portfolio company.
The charts presented on slide seven offer a visual depiction of the diversity within our portfolio and the evolving landscape of industry allocation over the past quarter.
Daniel Patrick Penberthy: The charts presented on slide 7 offer a visual depiction of the diversity within our portfolio and the evolving landscape of industry allocation over the past quarter. Against the backdrop of recent investments, as well as adjustments in fair value, our industry composition saw notable changes during the quarter, sectors such as professional services, consumer products, and distribution experienced growth. On the other hand, we observed declines in the representation of the manufacturing and software industries.
Against the backdrop of recent investments as well as adjustments in fair value our industry composition saw notable changes during the quarter.
Daniel Patrick Penberthy: Sectors, such as professional services consumer products and distribution witness growth.
Daniel Patrick Penberthy: On the other end, we observe declines in representation of the manufacturing and software industries.
Daniel Patrick Penberthy: Overall, we continue to value this diversity of our industry mix.
Daniel Patrick Penberthy: Overall, we continue to value this diversity of our industry mix. The diverse spectrum of sectors across our entire portfolio serves as a testament to our strategic approach, ensuring resilience and mitigating risk in our investment. Slide 8 lists our top 5 portfolio companies at the quarter; Tilson continues to remain the largest fair value investment at well over $10.6 million or 13% of our total portfolio. Cybert's moved up to number 2 following our recent investment, and Madison Avenue also moved to the 4th ranking following our investment. Overall, these top five represent 44% of our total portfolio at quarter end. With that, I'll turn it over to Margaret for a further review of our financials.
Daniel Patrick Penberthy: The diverse spectrum of sectors across our entire portfolio serves as a testament to our strategic approach.
Daniel Patrick Penberthy: <unk> resilience and mitigating risk in our investment efforts.
Daniel Patrick Penberthy: Slide eight lists our top five portfolio companies at quarter end.
Daniel Patrick Penberthy: Tilson continues to remain the largest fair value investment at well over $10.6 million or 13% of our total portfolio.
Daniel Patrick Penberthy: Cyber it's moved up to number two following their recent investment and Madison Avenue also moved to the fourth ranking following our investment.
Daniel Patrick Penberthy: Overall these top five represent 44% of our total portfolio at quarter end.
Daniel Patrick Penberthy: With that I'll turn it over to Margaret for further review of our financials.
Margaret Whalen Brechtel: Thank you, Dan, and good afternoon, everybody. I will start with slide 10, which provides an overview of our financial summary for the first quarter of 2024. Total investment income for the quarter was $2.1 million, up 12% over last year's first quarter, driven by a 40% increase in interest income. Overall, the number of portfolio companies contributing to investment income during the first quarter of 2024 was 24 companies compared to 23 in the first quarter of 2023. Total expenses were approximately $1.2 million during the first quarter, compared with $1 million in the prior year's first quarter.
Margaret Whalen Brechtel: Thank you Dan and good afternoon, everybody I will start on slide 10, which provides an overview of our financial summary for the first quarter of 2024.
Margaret Whalen Brechtel: Total investment income for the quarter was $2 1 million up 12% over last year's first quarter, driven by a 40% increase in interest income.
Margaret Whalen Brechtel: The change reflects a $232,000 increase in interest expense on borrowings under our senior revolving credit facility, partially offset by a decrease in capital gains and center fees to the company's external investment advisor. Adjusted expenses, which includes accrued capital gains center fees and is a non-gap financial measure, were 1.1 million compared with 757 in the first quarter of 2020. First quarter net investment income increased 17% to $840,000 or $0.33 per share compared with $715,000 or $0.28 per share in the prior year first quarter. On an adjusted basis, which is a non-GAAP financial measure and excludes the capital gains incentive fee, and accrual expense, net investment income was $0.37 per share, compared with $0.39 per share in the first quarter of 2023.
Margaret Whalen Brechtel: The number of portfolio companies contributing to investment income during the first quarter of 2024 was 24 companies compared to 23 in the first quarter of 2023.
Margaret Whalen Brechtel: Total expenses were approximately $1 2 million during the first quarter compared with $1 million in the prior year's first quarter.
Margaret Whalen Brechtel: The change reflects the $232000 increase in interest expense on borrowings under our senior revolving credit facility, partially offset by a decrease in capital gain incentive fees to the Companys external investment advisor.
Margaret Whalen Brechtel: Adjusted expenses, which includes accrued capital gains incentive fees and is a non-GAAP financial measure were $1 1 million compared with 757 in the first quarter of 2023.
Margaret Whalen Brechtel: First quarter net investment income increased 17% to 840000 or 33 cents per share compared with 715000 or 28 cents per share in the prior year first quarter.
Margaret Whalen Brechtel: 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> 37 per share compared with 39 per share in the first quarter of 2023.
Speaker Change: I'm going to move on to slide 11, which provides a waterfall graph for the change in net asset value for the quarter.
Margaret Whalen Brechtel: I'm going to move on to slide 11, which provides a waterfowl graph for the change in net asset value for the quarter. Net assets at March 31st, 2024 were $61.6 million, up 1% from the end of 2023. The change reflects our net investment income and realized gains from the ACD auction sale, coupled with a $2.9 million net change in unrealized depreciation and the $645,000 dividend distribution to shareholders during the quarter. As a result, the net asset value per share at March 31st 2024 increased to $23.85 compared with $23.56 per share at December 31st 2020. As highlighted on slide 12, we continue to have a strong and flexible balance sheet that positions us well for future investment.
Speaker Change: Net assets at March 31, 2024 were $61 6 million up 1% from the end of 2023.
Speaker Change: The change reflects our net investment income and realized gains from the ACD auction sale, coupled with a $2 $9 million net change in unrealized depreciation.
Speaker Change: And the $645000 dividend distribution to shareholders during the quarter.
Speaker Change: As a result, the net asset value per share at March 31, 2024 increased to $23 85, compared with $23.56 per share at December 31, 2023.
Speaker Change: As highlighted on slide 12, we continue to have a strong and flexible balance sheet that positions us well for future investments.
Margaret Whalen Brechtel: Total assets grew 4% to $84.4 million, which included cash at quarter end of approximately $759,000. We also held approximately $4.5 million in liquid BDC shares, which are available for future liquidity needs, as Dan will touch on in a moment. Based on our borrowing base formula, Rand has approximately $5.8 million of availability, and its existing $25 million senior secured revolving credit facility at March 31, 2024 will have total outstanding borrowings of $19.2 million, carrying an interest rate of approximately $8.8 a quarter.
Speaker Change: Total assets grew 4% to $84 4 million, which included cash at quarter end of approximately 759000.
Speaker Change: We also held approximately $4 5 million and liquid BDC shares which are available for future liquidity needs as Dan will touch on in a moment.
Speaker Change: Based on our borrowing base Formula Rand has.
Speaker Change: <unk> $5 8 million of availability in its existing $25 million senior secured revolving credit facility at March 31 2024.
Speaker Change: Our total outstanding borrowings of $19 2 million carrying an interest rate of approximately $8 eight at quarter end.
We did not repurchase any shares during the quarter. The board of directors did renew the share repurchase program authorizing the purchase of up to $1 $5 million and additional Rand capital stack. The new program expires on May 7th 2025.
Margaret Whalen Brechtel: We did not repurchase any shares during the quarter. However, the Board of Directors did renew the share repurchase program, authorizing the purchase of up to $1.5 million in additional Rand Capital shares. The new program expires on March 7th, 2025. Our portfolio transformation to include more income-producing investments is expected to support an increased dividend level over time. In line with that expectation, as previously mentioned, Rand recently declared its regularly quarterly cash dividend distribution of $0.29 per share, which increased 16% from the first quarter of 2024 dividend of $0.25 per share. The cash dividend will be distributed on or about June 14, 2024 to shareholders of record as of May 31, 2024. With that, I will turn the discussion back to Dan. Thanks, Margaret.
Speaker Change: Okay.
Speaker Change: Our portfolio transformation to include more income producing investments is expected to support an increased dividend level over time in line with that expectation as previously mentioned <unk> recently declared its regularly quarterly cash dividend distribution of 29 per share, which increased 16% from the first.
Speaker Change: A 2024 dividend up 25 per share.
Speaker Change: The cash dividend will be distributed on or about June 14th 2024 to shareholders of record as of May 31 2024.
Speaker Change: With that I will turn the discussion back to Dan Thanks Margaret.
Daniel Patrick Penberthy: We do remain focused on our commitment to maximizing shareholder value through the sustained rather than growth of dividends. We continue our strategic focus on bolstering our investment portfolio, particularly through prudent and strategic investments of income-generating debt instruments. By capitalizing on these targeted opportunities, our aim is to cultivate a consistent and robust stream of income, thus fortifying our ability to not only maintain but increase dividends over the long term. We are confident in our ability to execute this strategy, which is supported by a blend of existing capital resources and the potential influx of funds from the Portfolio Divestment Program, Future Investment Yields, as well as Future Portfolio Equity Churn.
Speaker Change: We do remain focused on our commitment to maximizing shareholder value through the sustained the sustained rather growth of dividends.
Daniel Patrick Penberthy: We continue our strategic focus on bolstering our investment portfolio, particularly through prudent and strategic investments of income generating debt instruments.
Daniel Patrick Penberthy: By capitalizing on these targeted opportunities our aim is to cultivate a consistent and robust stream of income.
Thus fortifying our ability to not only maintain.
But targeting an increase in dividends over the long term.
We are confident in our ability to execute this strategy, which is supported by a blend of existing capital resources and the potential influx of funds from the portfolio divestments and future investment yields as well as future portfolio equity churn.
Daniel Patrick Penberthy: Moreover, in alignment with our strategic vision, we recently opted to liquidate approximately $3 million worth of our BDC stock subsequent to the end of the quarter. This decision is driven by our commitment to safeguarding accrued gains and proactively managing our financial leverage. Looking forward, we are poised to replicate our historical achievements, and we're hopeful to deliver compelling returns for our shareholders. Thank you for joining us today and for your continued interest in Rand Capital. We look forward to updating all of you on our second quarter 2024 results, which will be reported in August. We hope you have a great day.
Daniel Patrick Penberthy: Moreover, in alignment with our strategic vision.
Recently opted to liquidate approximately $3 million worth of our BDC stocks.
Daniel Patrick Penberthy: Subsequent to the end of the quarter.
This decision is driven by our commitment to safeguarding our crude gains and proactively managing our financial leverage.
Daniel Patrick Penberthy: Looking forward, we are poised to replicate our historical achievements and.
Daniel Patrick Penberthy: And we're hopeful to deliver compelling returns for our shareholders.
Speaker Change: Thank you for joining us today and for your continued interest in Rand capital. We look forward to updating all of you on our second quarter 2024 results, which will be reported in August we hope you have a great day.
Speaker Change: This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.