Earnings Call Transcript - RAND Q4 2023

Operator, Operator

Greetings. Welcome to Rand Capital Corporation's Fourth Quarter Fiscal Year 2023 Financial Results. At this time, all participants are in a listen-only mode. Please note this conference is being recorded. I will now turn the conference over to Craig Mychajluk, Investor Relations. Thank you, Craig. You may begin.

Craig Mychajluk, Investor Relations

And good afternoon, everyone. I appreciate your interest in Rand Capital and for joining us today for our fourth quarter and full-year 2023 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 2, 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. Statements apply to future events that are subject to risks and uncertainties with 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. 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 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 3, and I'll hand the discussion over to Dan.

Daniel Penberthy, President and CEO

Thank you, Craig, and good afternoon, everyone. We have achieved another impressive year of results as we continue to grow the business through the successful implementation of our investment strategy. We started 2023 with a robust and adaptable balance sheet supported by multiple capital sources. Throughout the year, we monetized several equity investments, exited some publicly traded securities, and collected around $10 million in loan repayments. Additionally, we utilized over $13 million from our credit facility. In total, we invested more than $20 million in available cash during 2023, mostly in income-generating investments. Our debt portfolio now accounts for 64% of the total, compared to 56% at the end of 2022. This has led to an improved portfolio yield and contributed to total investment income growth of 11% for the quarter and 27% for the full year. This strong performance allowed us to increase returns to shareholders. In 2023, we paid total dividends of $1.33 per share, including a special dividend of $0.38 per share in the fourth quarter. Our total dividends represent a 60% increase over 2022 and three times growth compared to 2021. In the second quarter of 2023, we raised our regular quarterly cash dividend by 20%, or $0.05 per share. We have announced that our first quarter 2024 dividend will remain at $0.25 per share. After putting our capital to work and distributing $3.4 million in cash dividends to shareholders, we still have over $19 million available, which includes cash on hand, our line of credit, and highly liquid publicly traded securities. These funds are available for future investment opportunities that will provide higher yields. Our portfolio at year-end consisted of investments valued at $77.1 million, distributed across 30 diverse portfolio companies, marking an increase of $15.6 million or 25% from December 31, 2022. This growth is a result of new investments, follow-on investments, valuation adjustments in various portfolio companies, and successful sales of some investments. The portfolio is approximately 64% in debt investments with an annualized weighted average yield of 13.6%, while 27% consists of equity investments in private companies and 9% in publicly traded equities. In the fourth quarter, we completed two follow-on investments, the largest being a $2.2 million investment in BMP Food Service Supply, which is based in Utah and specializes in commercial kitchen design, distribution, and installation. This follow-on debt investment was partially offset by a loan principal repayment of approximately $0.6 million later in the quarter. Our total investment in FSS had a fair value of $7.4 million at year-end. We also made a small equity investment of $73,000 in Caitec, a pet toy company. We invested a total of $20.3 million in nine transactions in 2023, primarily in interest-yielding assets. Our investment in DSD was sold in the second quarter of 2023, leading to the full repayment of Rand subordinated debt and a sale of our preferred equity investment, resulting in $6.7 million in proceeds and a net gain of $2.5 million. Additionally, we sold some of our ACV Auction securities for $1.7 million in gains this year. We still hold nearly 195,000 shares of ACV, representing about 4% of our portfolio's total fair value. We will keep evaluating these holdings concerning our future liquidity needs. Our portfolio's diversity and industry mix have changed throughout the year, with Professional Services becoming our largest industry concentration, increasing by 11 percentage points to 42% of the total. In contrast, Automotive and Consumer Products saw slight declines, although other smaller industries experienced minor adjustments. Overall, we maintain a focus on the diversity of our industry mix across the 30 portfolio companies. Our Top 5 portfolio companies at year-end include Tilson, the largest investment at $10.6 million or 14% of our total portfolio. FSS moved up to the second position following the fourth quarter investment. Together, these top companies represent 45% of our total portfolio. Now, I will hand it over to Margaret to delve deeper into our financials.

Margaret Brechtel, Executive Vice President and CFO

Thanks, Dan, and good afternoon, everyone. I will start on Slides 10 and 11, which provide an overview of our financial summary and operational highlights for the 2023 fourth quarter and full-year period. Total investment income for the quarter was $1.9 million, up 11% over last year, driven by a 47% increase in interest income. The full-year total investment income grew 27% to $7.3 million, which reflects the new debt instruments that we originated from six portfolio companies over the last year. Overall, the total number of portfolio companies contributing to investment income was 26 this year compared to 24 at the end of 2022. For both periods, we did experience lower dividend income, which will fluctuate based upon the profitability of certain portfolio companies and the timing of the distributions for the impact of new investments or divestitures. We did receive a large prior year dividend from a portfolio company, which didn’t occur in 2023, and the sale of the company's investment in DSD during the second quarter of 2023 also impacted this year's dividend level. Total expenses were approximately $1 million during the fourth quarter of 2023 compared with $371,000 in the prior year fourth quarter. Adjusted expenses, which include accrued capital gains incentive fees and is a non-GAAP financial measure, were $950,000 compared with $539,000 in the fourth quarter of 2022. This change reflects a $293,000 increase in interest expense on borrowings under the senior revolving credit facility entered into in June of 2022 to fund growth. Full-year total expenses were $4.2 million compared with $1.1 million in 2022. Again, when excluding the accrued capital gains incentive fees, total adjusted expenses were up for the year largely due to the usage of the credit facility. Fourth quarter net investment income was $962,000 or $0.37 per share compared with $1.2 million or $0.48 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 and investment income, it was $0.40 per share compared with $0.41 per share in last year's period. For the full-year period, net investment income per share was $1.15 compared with $1.72 per share in 2022. Excluding the capital gains incentive fee accrual, which is a non-GAAP financial measure, adjusted net investment income per share increased 11% to $1.46 per share. I'm going to move on to Slide 12, which provides a waterfall graph for the change in net asset value during the year. Net assets at December 31, 2023, were $60.8 million, up 5% from the end of 2022. This change reflects the net investment income along with realized gains and the net change in unrealized depreciation, which more than covered the $3.4 million in dividend distributions to shareholders during the year. As a result, the net asset value per share at December 31, 2023, increased to $23.56 per share compared with $22.36 at the year-end 2022. As highlighted on Slide 13, we continue to have a strong balance sheet and significant liquidity position that positions us well for future investments. Cash at year-end was approximately $3.3 million. We held approximately $7.4 million in liquid BDC and ACV auction shares, which can provide near-term funding capital for investments as we have demonstrated in past periods. In addition, based on our borrowing base formula, Rand has $8.8 million in availability under the senior secured revolving credit facility at December 31, 2023. In total, our liquidity resources total over $19 million. Our portfolio transformation to include more income-producing investments is expected to support an increased dividend level over time. In line with that expectation, we announced during the second quarter of 2023 that we raised the regular quarterly cash dividend by 25% to $0.25 per share and then on a full-year basis, increased the dividend to $1.33 per share. On February 26, 2024, Rand declared its regular quarterly cash dividend distribution of $0.25 per share for the first quarter of 2024. The dividend will be distributed on or above March 29, 2024, to shareholders of record as of March 13, 2024. With that, I will turn the discussion back to Dan.

Daniel Penberthy, President and CEO

Thanks, Margaret. Our strategy is to continue to grow and scale our business by focusing on debt and related equity investments in privately held lower middle market companies in which we can drive investment income growth and increase the dividend paid to shareholders. We do believe the combination of our current sources of capital with potential proceeds from future portfolio exits and continued investment income growth will provide us the liquidity that will enable us to add these new investments to our portfolio as well as reinvesting into existing portfolio companies that demonstrate continued growth potential. Equally important to our future growth have been the efforts of our external investment advisers and specifically our investment team who are part of the Rand Capital Management, or RCM team. We believe that the reputation and experience in the investment community do provide a competitive advantage in originating quality investments that meet our investment objective, which of course is to drive current income and, when possible, a capital appreciation. We will target opportunities with favorable risk-adjusted returns that are appropriate for Rand. They have been leveraging their vast network of referral relationships, and this has resulted in a solid pipeline of investment opportunities for Rand Capital. Going forward, our initial investment into any one portfolio company is expected to be in the range of $2 million to $4 million, of course, with a focus on current cash yields in order to achieve our income-producing goals. Ultimately, with the support of our liquidity position, we believe we can continue to replicate our past success and drive strong returns for our shareholders. Thank you for joining us today and for your ongoing interest in Rand Capital. We look forward to updating you on all of our first quarter 2024 results, which will be reported in early May. We hope you have a great day.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.