Q4 2024 Rand Capital Corp Earnings Call
Speaker Change: Greetings and welcome to Rand Capital Corporation 4th quarter fiscal year 2024 financial results.
Speaker Change: At this time, all participants are in a listen-only mode. If anyone to require operator assistance, please press door zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded. It is now my pleasure to introduce Craig Moholic Invest Relations for Rand Capital. Thank you, you may begin.
Craig Mychajluk: Thank you, and good afternoon, everyone. We appreciate your interest in Rand Capital and for joining us today for our fourth quarter in full year 2024 financial results conference call. On the line with me, our 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 at the company or conversation is available at www.rancapital.com
Craig Mychajluk: If you're following along with the side deck, please turn to side 2, where I'd like to point out some important information.
Craig Mychajluk: As you are likely aware, we may make forward looking statements during this presentation. These statements apply to future events that are subject to recent uncertainties as well as other factors that could cause actual results to differ from where we are today.
Craig Mychajluk: You can find a summary of these written uncertainties and other factors in the earnings release and other documents filed by the company with the Securities and Exchange Commission.
Craig Mychajluk: These documents can be found on our website or at scc.gov.
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. You should not consider the presentation of this additional information and isolation, or is the substitute for results in accordance with generally accepted accounting
Craig Mychajluk: We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables at a company today's earnings release. With that, please turn to slide three, and I'll hand the discussion over to Dan. Ben? Thank you, Craig, and good afternoon, everyone.
Dan Penberthy: This past year was marked by a significant progress in our strategy. We delivered strong results, enhanced our portfolio composition, strengthened our balance and increased returns to shareholders.
Dan Penberthy: I believe that our Disciplined Execution and Strategic Capital Deployment have both positioned Rand for sustained long-term growth.
Dan Penberthy: I want to take a moment to recognize and thank our team for their hard work and dedication in executing our strategy and helping to deliver these strong results.
Dan Penberthy: In the fourth quarter, total investment income rose 11% to 2.1 million, bringing full-year investment income to 8.6 million, an increase of 17% from the prior year.
Dan Penberthy: This growth was driven by our focus on expanding our debt investment portfolio, which not only enhanced income, but also improved earning stability and predictability.
Dan Penberthy: Although we will always have some portfolio risk of churn or rather that is unexpected or early repayment.
Dan Penberthy: Our net asset value, per share, increased 7% year over year, reaching $25.31 at year end.
Dan Penberthy: These results reflect our commitment to our investment strategy and careful management of a $71 million portfolio.
Dan Penberthy: A key component of this strategy has been the ongoing shift over the past few years towards a more income-generating portfolio.
Dan Penberthy: Debt Investments now comprise 75% of our portfolio, up from 64% in 2023, contributing to improved yields and a more consistent earnings profile.
Dan Penberthy: We also strategically monetize, select equity investments, including the sale of SIAPS.
Dan Penberthy: We've exited our remaining publicly traded securities and received some loan repayments.
Dan Penberthy: A portion of these funds were redeployed into approximately 14 million of income generating assets.
Dan Penberthy: We also took deliberate steps to fortify our financial position by reducing outstanding bank debt by $15.7 million during the year.
Dan Penberthy: As of year end, we had over 24 million dollars in available credit facilities, providing us with flexibility for future investment and growth.
Dan Penberthy: In line with our commitment to shareholder value, we increase our regularly quarterly cash dividend by 16% in the second quarter of 2024.
Dan Penberthy: In total dividends declared for the year, reach $5.3 per share, driven largely by realized capital gains during the year.
Dan Penberthy: Looking ahead, I believe that Rand's financial strength will have us well positioned to capitalize on new opportunities.
Dan Penberthy: With strong liquidity and a proven capital deployment strategy, we are prepared to expand our investment income even further.
Dan Penberthy: Additionally, we are monitoring macroeconomic trends, including potential interest rate reductions, which, if they happen, could enhance portfolio performance with lower interest expenses in approved profitability.
Dan Penberthy: Our focus remains on creating long-term value for our shareholders by prudently allocating capital and managing our portfolio effectively.
Dan Penberthy: As highlighted on slide 4, our success in achieving these strategic objectives over the past few years has translated into meaningful benefits for our shareholders.
Dan Penberthy: Since 2021, we have steadily increased dividends with quarterly dividends that once started initially at 10 cents per quarter, and now are pacing at 29 cents per quarter.
Dan Penberthy: Our recent fourth quarter dividend was outsized and driven apart by the successful sale of SIAPS during 2024.
Dan Penberthy: In total, we declared $4.20 per share or approximately $10.8 million dividend in the fourth quarter. This included $0.84 per share in cash dividends and a $3.36 per share stock dividend.
Dan Penberthy: Following this distribution at the end of January 2025, Rand has nearly three million shares outstanding.
Dan Penberthy: We recently announced our Q1 2025 dividend, and Margaret will provide the details shortly.
Dan Penberthy: Our commitment to a robust balance sheet and optimized portfolio and a strategic capital deployment gives us confidence and our ability to continue delivering meaningful returns for our shareholders well into the future.
Dan Penberthy: Turning to Slide 5, please. You will see our portfolio's distribution between debt and equity, along with the recent changes.
Dan Penberthy: Our portfolio now stands at a fair value of 70.8 million across 22 businesses.
Dan Penberthy: This reflects an 8% decline from the year on 2023, primarily driven due to the successful exits from SIAPS which I'd mentioned, along with the stock sales and loan repayments from other portfolio companies.
Dan Penberthy: while we have seen an overall strengthening in many of our portfolio companies.
Dan Penberthy: We remain mindful of the challenging economic and political environment and consumer spending habits which has impacted certain business operations.
Dan Penberthy: in the bar chart on the bottom left, you can see that during the year our portfolio companies decreased from 30 to 22, which I previously mentioned and this was largely due to monetizing our publicly traded stock holdings.
Dan Penberthy: With the close of the CIEP's transaction, we have made substantial progress towards our goal of a more debt-focused portfolio. Currently, 75% of our investments are in debt, a
Dan Penberthy: The annualized weighted average yield of these debt investments, including PIK interest or payment in kind, was 13.8% as of December 31, 2024, an increase of 20 basis points
Dan Penberthy: The remaining 25% of our portfolio is comprised of equity investments, warrants, or direct equity purchase and private companies.
Many of these, by the way, are legacy investments.
Dan Penberthy: Moving forward, it will be rare for Rand to make a direct private equity investment without a related subordinated debt component that provides an interest yielding return.
Dan Penberthy: This is the key focus of the company at this time. Slide 6 highlights our investment activity during the fourth quarter, as well as notable transactions for the full year. During Q4, we made one new investment of $2.9 million into mobile IV nurses management LLC.
Dan Penberthy: This investment included a $2.5 million term loan at a 14% interest rate, plus 1% pick or payment in kind, alongside a $375,000 equity investment into the company.
Dan Penberthy: Mobile IV nurses is a growing provider of Mobile IV Hydration and Vitamin Therapy Services
Dan Penberthy: and we believe this investment aligns well with our focus on income-generating assets with a strong upside potential from the related equity investment.
Dan Penberthy: Additionally, during the period, we successfully exited our investment in nail-biter receiving full repayment of a $2.25 million debt instrument.
Dan Penberthy: Looking at the full year activity, our most notable transaction was the Successful Sale of Syaps, which generated 13.1 million in total proceeds and a realized gain of 7.7 million.
Dan Penberthy: Syeps was one of our longtime legacy portfolio holdings and early stage investment made over a decade ago, which ultimately contributed largely to the $4.20 per share dividend which we declared in Q4.
Dan Penberthy: and additionally, we continue to refine our portfolio throughout the year 24 by selling remaining shares of ACV auctions and liquidating our holdings and publicly traded BDCs. These generated total proceeds of $8.2 million.
Dan Penberthy: These capital recycling efforts allowed us to reinvest strategically, deploying 13.9 million across six trains actions, again with a strong emphasis on income generating debt investments.
Dan Penberthy: Our ability to execute on these transactions underscores our commitment to targeted capital
Dan Penberthy: Turning to slide seven, you can see the evolving diversity of our portfolio and the shift in industry allocation since the end of 2023.
Dan Penberthy: Notably our exposure to professional services increased from 42% to 48%, reflecting both new investments and the performance of our existing holdings.
Dan Penberthy: Additionally, consumer products grew as proportion of our portfolio, and now we have representation in the health wellness sector following our investment in mobile IV nurses.
Dan Penberthy: Meanwhile, manufacturing and software saw relative decline in portfolio mix due to the strategic portfolio adjustments and fair value updates.
Dan Penberthy: with the sale of our BDC stocks, they are no longer represented in the industry composition.
Dan Penberthy: We continue to prioritize a balanced sector diversified portfolio. This diversification is a key pillar of our investment strategy, helping to mitigate concentration risks while allowing us to capitalize on growth opportunities across many different sectors.
Dan Penberthy: By maintaining a broad risk across industries, we enhance portfolio resilience, we ensure that we can navigate economic fluctuations, and hopefully drive sustainable long-term returns.
Dan Penberthy: As of year end, slide 8 highlights are top 5 portfolio companies. These collectively represent 52% of our total portfolio.
Dan Penberthy: Notably, Tillson remains our largest fair value investment at 11.5 million. This accounts for 16% of our portfolio.
Dan Penberthy: This valuation does reflect a slight decline from the prior quarter, but underscores Tillerson's overall strength and strategic importance within our holdings.
We have been invested until since for a decade.
Dan Penberthy: The company's growth projectory has been impressive, both operationally in terms of our investment performance.
Dan Penberthy: with an initial investment or cost basis of approximately $3 million.
Our position now reflects 8.5 million in unrealized appreciation.
Re-enforcing the long-term valued creation of our investment strategy.
Dan Penberthy: This is one of our core holdings of our legacy investments.
Dan Penberthy: Alongside Tilson, Seabirds and Food Service Supply have been consistent names in our top five while Madison and High Tech move up and ranking this year.
Dan Penberthy: These companies again exemplify the diversification and strength of our portfolio, and we remain confident in their continued contributions to our long-term growth.
Dan Penberthy: With that, I'll turn it over to Margaret to review our financials and greater depth.
Margaret Brechtel: Thanks, Dan, and good afternoon, everyone. I will start on slides 10-11, which provide an overview of our financial summary and operational highlights for the 2024-4th quarter and full year period.
Margaret Brechtel: Total investment income for the quarter was 2.1 million up 11% over last year's fourth quarter, driven by an 18% increase in interest income.
Margaret Brechtel: For the full year, total investment income grew 17 percent or 8.6 million when compared to 2023, which reflects five new debt investments that we originated over the last year.
Margaret Brechtel: Additionally, we experience higher fee income, which is due in part to the collection of certain fees from our SIEP's exit.
Margaret Brechtel: Overall, the number of portfolio companies contributing to investment income was 25 during 2024, compared with 26 companies during 2023.
Margaret Brechtel: Total expenses were a credit of $376,000, compared with an expense of 1 million in last year's fourth quarter.
Margaret Brechtel: The change was primarily due to a decrease in capital gains in xenophie expense, as the recent period included a credit of 1.1 million in capital gains in xenophies.
Margaret Brechtel: compared with an expense of 64,000 for the fourth quarter of 2023.
Margaret Brechtel: Adjustive Expenses, which excludes capital gains and centipedes and is a non-GAAP financial measure, were 6,78,000 in the fourth quarter of 2024, compared with 950,000 in the fourth quarter of 2023.
Margaret Brechtel: The lower quarterly expense level reflected reduced interest expense of 276,000, given lower debt levels throughout 2024, compared with 2023.
Margaret Brechtel: Full-year total expenses were 4.8 million compared with 4.2 million in 2023. The change largely reflects an increase in incentive he expends.
Margaret Brechtel: and Santa Fe is comprised of two components, an income-based fee and a capital gains fee.
Both of which are contingent on meeting specified benchmarks.
Margaret Brechtel: The income base fee is calculated quarterly based on a pre-incent of fee net investment income with a hurdle rate of 1.75 percent per quarter or 7 percent annualized.
Margaret Brechtel: For 2024, this fee accrued at 178,000 with no similar expense incurred in the prior year.
Margaret Brechtel: The second component of our insanity is the capital gains fee. According to Gap, we are required to accrue capital gains in Sunafi based on all realized and unrealized gains
Margaret Brechtel: Given the recent performance of our portfolio and the realized gains, we recognize the higher accrual this past year.
Margaret Brechtel: Excluding the capital gains in Santa Fia Crue, adjusted expenses, which is a non-financial measure, increased $451,000 to $3.8 million in 2024.
Margaret Brechtel: 4th quarter net investment income increased to 2.2 million or 86 cents per share, compared with 960,000 or 37 cents per share in the 4th quarter of 2023.
Margaret Brechtel: On an adjusted basis, which is a non-GAAP financial measure, and excludes the capital gains in centafee, accrual expense, not investment income was 45 cents per share, up 13% from 40 cents per share in last year's period.
Margaret Brechtel: For the full year period, net investment income per share was $1.33, which is an increase to 15% over 2023.
Margaret Brechtel: Excluding the Capital Games in Sanofia, which is a non-GAAP financial measure, adjusted, not invested income per share, increased 18% to $1.72 in 2024.
Margaret Brechtel: On site 12, you will see a waterfall graph illustrating the change and net asset value for the year.
Margaret Brechtel: as of year-end 2024, net assets totaled 65.3 million, representing a 7% increase from the end of 2023. This change was primarily driven by higher net investment income, and a net realized gain of 11.1 million from sales and just dispositions of investments.
Margaret Brechtel: which was partially offset by a $5.7 million net decrease in unrealized depreciation on investments.
Margaret Brechtel: Rand declared 4.3 million in cash dividends to shareholders 2020-24, of which 2.1 million was paid in 2024 and 2.2 million was paid to shareholders in January of 2025.
to $25.31 from $23.56 last year.
Margaret Brechtel: As highlighted on slide 13, we continue to have a strong balance sheet and significant liquidity that positions us well for future investments.
Margaret Brechtel: Total assets decreased by 11% to 72.5 million, primarily due to the fail of SIEPS.
Margaret Brechtel: and included approximately 835,000 in cash at the end of 2024.
Margaret Brechtel: Actions taken over the past year enabled us to significantly reduce outstanding environments under our $25 million senior secured revolving credit facility.
Margaret Brechtel: As of year end, our remaining borrowing stood at just 600,000 with an interest rate of approximately 8%.
Margaret Brechtel: We believe our strategic shift towards income-producing investments will support sustained higher dividend levels over time. Reflecting this confidence, we raise the regular quarterly cash dividend by 16% to 29 cents per share in the second quarter of 2024.
Margaret Brechtel: on March 3, 2025, Rand declared its regular quarterly cash dividend of 29 cents per share, payable on or about March 28, 2025.
to shareholders of Rutgers as of March 14, 2025.
Margaret Brechtel: While the regular per-share dividend is unchanged, the total dollar amount of the distribution has increased due to a higher number of shares outstanding following the fourth quarter 2024 stock dividend, which was distributed in January of 2025.
Margaret Brechtel: and in fact we are delivering a 15% increase in total dividends distributed to shareholders, demonstrating both the resilience of our business and our commitment to shareholder value.
With that, I will turn the discussion back to Dan.
Thanks Margaret. Moving on to slide 14 please.
Margaret Brechtel: As we conclude today's discussion, I want to take a moment to reflect on what has been a year of significant achievement and strategic progress for Rand Capital.
Margaret Brechtel: Throughout 2024, we strengthened our financial foundation by monetizing select equity investments.
Reducing Outstanding Bank Depth In Improving Overall Equidity
Margaret Brechtel: These actions not only reinforce our ability to navigate evolving market conditions, but also position us to capitalize on new, high-quality investment opportunities that align with our long-term objectives.
Margaret Brechtel: The lower middle market continues to offer compelling opportunities, including family owned businesses undergoing generational transitions.
Margaret Brechtel: Many of these companies face succession challenges and our ability to provide flexible, customized financing solutions alongside with equity sponsors, positions us as a strong and reliable investment partner.
Margaret Brechtel: Rand's strategic investment, our sweet spot rather, typically is deploying $3.5 million to $4 million in transactions, which generally are on the $15 million to $20 million total transaction size. This does set us apart in this market.
Margaret Brechtel: We believe this focus on small leveraged buyouts and private debt investments gives us a competitive edge as traditional banks, rather, pull back from lending in the space.
Margaret Brechtel: Additionally, by leveraging syndication and co-investment strategies, we can mitigate risk while optimizing Rand's returns.
From a financial standpoint, our outlook remains positive and strong.
Margaret Brechtel: With our existing credit facility and a disciplined approach to capital allocation, we are well positioned to sustain our investment pace while maintaining flexibility to take advantage of new opportunities.
Margaret Brechtel: Recent reductions in interest rates have already lowered our borrowing costs which enhances profitability and further strengthens our ability to return to capital to shareholders.
Margaret Brechtel: A key advantage in executing our strategy is our partnership with our external manager, Rand Capital Management, or RCM.
Margaret Brechtel: The investment team as part of RCM continues to build a strong pipeline of potential investments.
Margaret Brechtel: Ensuring that we remain well positioned to deploy capital while maintaining a cost structure that efficiently scales with our portfolio.
through R.C.M. and its affiliation with Boston-Based Caledang Group.
We also gain access to deep investment expertise.
Margaret Brechtel: Broadening our reach in the lower-middle market and reinforcing our ability to identify and execute on a track of opportunities.
Margaret Brechtel: As we navigate 2025 and beyond, we are committed to expanding our income-generating investment portfolio to drive higher net interest income in future dividend growth.
Margaret Brechtel: At the same time, we will continue optimizing our portfolio holdings to achieve long-term value while actively managing risk in response to overall economic and political uncertainties.
Margaret Brechtel: Our strong governance and oversight to help our portfolio companies navigate these headlines, enabling them to adapt to changing marketing conditions and emerge even stronger.
Margaret Brechtel: We remain proactive in assessing potential macroeconomic shifts, credit risks, interest rate movements, and ensure that we are positioned to capitalize on the events and seize attractive investment opportunities when they are presented.
Margaret Brechtel: While challenges do persist, our investment approach and the overall diversified portfolio should help to provide resilience.
Margaret Brechtel: At the core of everything we do is our unwavering commitment to our shareholders.
Margaret Brechtel: and thank you for that. Our ability to generate sustainable long-term value remains our top priority and we are confident that our strategy positions does position as well for continued success.
Margaret Brechtel: Thank you for your time, your trust, and your continued support.
Margaret Brechtel: We look forward to updating you on our progress with our first quarter 2025 results in May and have a wonderful day.
Margaret Brechtel: Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
Margaret Brechtel: [inaudible] Bye-bye, bye-bye, bye-bye.
[inaudible]
[inaudible] Thank you for joining us today
Margaret Brechtel: [music].
Margaret Brechtel: Okay.
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Margaret Brechtel: Yeah.
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Margaret Brechtel: Yeah.