Q3 2019 Earnings Call

Greetings and welcome to.

Greetings and welcome to Hudson Technology Finance Corporation third quarter 2019 financial results Conference call.

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Thank you and welcome to the Horizon Technology Finance third quarter 2019 conference call, representing the company today, or Rob Pomeroy, Chairman and Chief Executive Officer, Gerry Michaud, President and Dantrolene <unk>, Chief Financial Officer, I would like to point out that the Q3 earnings press release and Form 10-Q .

Are available on the company's website at Horizon Tech Finance Dot com.

Before we begin our formal remarks, I remind everyone that during this conference call Horizon technology Finance will make certain forward looking statements, including statements with regard to the future performance of the company.

Words, such as believes expects anticipates intend or similar expressions are used to identify forward looking statements.

These forward looking statements are subject to the inherent uncertainty in predicting future results and condition.

Certain factors could cause actual results to differ on a material basis from those projected in these forward looking statements.

And some of these factors are detailed in the risk factor discussion in the company's filings with the with the Securities Exchange Commission, including the company's Form 10-K for the year ended December 31st 2018. The company undertakes no obligation to update or revise any forward looking statements whether as a result at new.

Information future events or otherwise at this time I would like to turn the call over to Rob Pomeroy.

Good morning, and thank you all for joining US we're proud of our third quarter results across every facet of our business as we continue to position ourselves for further growth and strong performance and 2020 and beyond.

The quarter, we recorded net investment income per share of 42 cents, notably our Eni through September Thirtyth.

Approximately 20% higher than the distributions we have paid for the same period.

All right and I included income from liquidity events as anticipated by our predictive pricing strategy. Just a reminder, that our predictive pricing strategy is based on our historical experience that are not make borrowers will experience an event, which results in the prepayment of our loans and additional in.

Tom to horizon.

Events may include a sale of the borrower refinancing of debt achieving development milestones or raising additional capital.

Our receipt of this event driven and Tom on a regular basis validates our loan structuring expertise and the overall, earning power of our portfolio as we've consistently noted liquidity events such as these and the structure of our venture loans or a feature an integral part of the design of our predictive pricing strategy.

[noise] importantly, even as we were experiencing liquidity events from our existing portfolio, we were still able to grow our portfolio for the six consecutive quarter to a total of 282 million as of September Thirtyth.

We experienced a record debt investment yield of 17.7% for the quarter, which takes into account regularly scheduled interest and fee income as well as income from liquidity events.

During the quarter, we updated the outlook on two of our non earning royalty agreements.

The fair value one royalty agreement was reduced to a small balance after we receive new information in the quarter, which no longer supported our previous fair value.

The other royalty agreement was purchased by one of our current borrowers with the proceeds from a new law and by arise.

The effect of this transaction was to convert a non earning asset into an earning asset collateralized by all of the assets of our borrower.

After giving effect to these changes and in conjunction with other adjustments in the fair value bar assets. We ended the quarter within any be of $11.67 up seven cents from the prior quarter end.

Looking at our credit profile, we believe we are maintaining stable asset quality as we continue to proactively manage our portfolio.

Accordingly, based upon our earnings and outlook our board declared monthly distributions of 10 cents per share through March of 2020.

From a capital markets perspective, it was a particularly busy quarter.

In August we successfully completed a 100 million dollar securitization.

This accretive financing allowed us to accomplish several objectives at once namely lowering our borrowing cost.

Increasing our capacity to originate loans fixing our interest rate in the new lower rate environment.

Freeing up our key bank revolving credit facility for further growth.

And adding more earnings power to our portfolio.

We also implemented a 50 million dollar aftermarket common stock offering during the quarter and we're active in issuing and selling stock at a premium to any be.

As of today, we have received $12 million of net proceeds from such issuance further improving our overall lending capacity.

Turning to our investment activity in the third quarter, we funded six new loans totaling $47 million and increased our debt investments on a net basis by $11 million from June Thirtyth.

We maintain a strong committed backlog and our overall pipeline continues to be robust.

Demand for venture debt remains strong and we look forward to growing the horizon portfolio in the quarters ahead.

Looking at the balance of 2019, we remain confident in our ability to continue to drive sustainable Eni above our distribution.

Demand for technology healthcare Tech and life science investments remain active in strong.

We continue to be disciplined and thoughtful with our approach to funding investments as reflected in our steady loan portfolio growth of 17% thus far in 2019.

And with our debt to equity ratio at 0.9 to one well below the high point of our targeted leverage at 1.2 to one we retain the ability to expand our leverage and have ample capacity to fund new investments and grow our portfolio.

To summarize we continue to successfully execute on all facets of our business as we once again generated eni above our distributions while growing the size of our portfolio and maintaining the stability of our credit profile.

We remain confident that we would continue to generate additional value for our shareholders.

I'll now turn the call over to Jerry who will update you on our business development efforts end market environment, and then to Dan I will detail, our operating performance and financial condition.

Thanks, Rob good morning, everyone.

Third quarter, a successful we built upon the momentum of the first half of the year as we continued to grow our portfolio in a disciplined quality and profitable manner.

We added six new floating rate transaction swap portfolio totaling $47 million and we achieved that onboarding yields in the third quarter of 11.9%, while maintaining our disciplined underwriting approach.

We experienced three loan portfolio exits during the quarter totaling 28.5 million, which again contributed to our near record at.

A 42 cents per share.

In addition, the prepayment and accelerated income from these events helped drive a record loan portfolio yield for the quarter a 17.7%.

We continue to add transactions to our joint venture during the quarter as we funded 4 million of one portfolio investment through the JV.

We continued to maintain a premium yielding debt portfolio reflected by our leading yield position in the BDC industry, which generates predictable income stream as we continue to grow our portfolio and add investments with new antibodies prepayment opportunities and Lawrence.

Closed 49 million and new loan commitments and approvals and ended the third quarter. When they committed backlog of 63 million an increased from 58 million at the end of the second quarter of 2019.

Our committed approved in awarded backlog as of September Thirtyth was 97.8 into 12 companies and our pipeline of new opportunities was 644 million as these numbers show, we are well positioned but our committed backlog and pipeline to continue growing up portfolio when income stream while it has.

Sensing and I with prepayment and accelerated income it is characteristic of our predictive pricing strategy.

As of September Thirtyth, we held more equity positions 75 portfolio companies with a fair value of 13.1 million.

In Q3, we also received proceeds in connection with the termination of our warrants.

You too.

In addition, subsequent to quarter end when received 1.6 million from the exercise and sale of our warrant and Varex equity solutions in pharma loan portfolio company at repayments horizon alone in 2012.

Turning now to the venture capital environment.

According to pitch book approximately 28 billion was invested in BC companies in the third quarter of 2019, another strong quarter overall for investment and leaving the industry on the doorstep to achieving a second consecutive year of over 100 billion VC investment with three months still to go.

In terms of VC fundraising 9 billion was raised in the third quarter of 2019, bringing the total race in 2019 as of September Thirtyth to nearly 30 billion and essentially and sharing fundraising activity for the full year 2019 will be near the five year average.

In terms of VC backed exit activity at week 20 venture backed ipos in the third quarter of 2019, which helped lead to exit value in the quarter of over 35 billion and bringing year to date total exit value to over 200 billion for the first time ever.

Dsos allow VCC opportunity to generate returns and to reinvest their capital, which potentially lead to higher VC fund raising and investing as we head into 2020 importantly, our there has been much discussion regarding high profile IPO, either underperforming or failing to price Hello.

Your life science sector Ipos continue to dominate the overall IP count and we believe this strength will be sustainable for the foreseeable future.

Turning now to our core markets in the third quarter demand for financing in the life science in healthcare technology markets remained strong during the quarter, we funded a $20 million venture loan to CV Rx a developer of an FDA approved implantable medical device that addresses advance card.

Oh vascular diseases, such as hypertension and heart failure also during the quarter, We fund at 11.6 million to Mackie logics, an existing portfolio life Science company and we funded a 5 million dollar bench, along the logic bio therapeutics, a publicly traded genome editing company focusing on.

Developing medicines to treat rare pediatric disease is.

Finally, we funded 4.8 million to our existing portfolio accompany a sparrow converting a royalty agreement into a bench alone and thereby turning a formally non earning asset into an earning asset.

The broader technology sector remains active during the quarter, we provided funding to two of our existing portfolio companies at $2.7 million belt venture loan to Intel up here, a leading provider of business communications and 2.5 million a funding to branch to solutions for rated or rice and portfolio company.

Demand for venture debt generally and our product specifically as remained consistently active and strong throughout 2019, particularly in life science as we continue to utilize our brand name and relationships to aggressively compete for deals that meet our underwriting standards.

We also continue to take a cautious in select the posture with respect to potential tech related investments, particularly given elevated valuations for internet related companies. Overall, we're very pleased with our third quarter performance in the quality of our portfolio. We will continue to source and identify attractive opportunities to add to our pipeline.

Now apply our knowledge based ability to win investments further our capital markets activity, including lowering our cost of capital. This year as placed us in a stronger competitive position to deliver additional long term well priced portfolio growth.

That I will now turn the call over to dance.

Thanks, Jerry and good morning, everyone, let's turn to our financial results for the third quarter 2019.

Hi that are in total investment income of 11.4 million for the third quarter, a 46% increase compared to 7.8 million and the prior year period.

This increase is primarily due to higher interest income on investments given a larger average size of our loan portfolio as well as the income generated from prepayment activity.

As of September Thirtyth, our debt investment portfolio had grown to 253 million, 19% year over year increase.

Third quarter of 19, we achieved onboarding yields of 11.9%.

Generally in line with a 12% achieved in the second quarter.

Our loan portfolio yield was a record 17.7% for the third quarter compared to 16.8% and the second quarter and 15% for last year's third quarter.

Turning to our expenses the third quarter total net expenses were 5.6 million compared to 4.4 million in the third quarter of 18.

Our interest expense was up 365000 compared to the prior year period, primarily due to the increase in average borrowings.

Our net incentive fee increased 592000, due primarily to higher pre incentive fee net investment income, while our base management fee rose $200000 Jairam by an increase in the average size of our portfolio.

As a reminder, under our new investment management agreement Ryzen pays in two tiered management fee, which includes the management fee of 1.6% and noncash asset the above 250 million.

But non Cas assets over 250 million.

Shareholders are now benefiting from the lower management fee rate and will increasingly benefit as we grow our assets.

Net investment income for the third quarter was 42 cents per share compared to 37 cents per share in the second quarter of 2019.

30 cents per share for the third quarter baking.

The company's undistributed spillover income as of September Thirtyth increased to 29 cents compared with 17 cents as of June Thirtyth.

Based upon our outlook for our NII, Our board declared monthly distributions of 10 cents per share for January February and March 2020.

We have now declared monthly distributions of 10 cents per share at 39 consecutive months.

We remain committed to providing our shareholders with distributions that are covered by our net investment income over time.

Our Navy as of September Thirtyth was $11, a 67 cents per share compared to $11.60 as of June thirtyth $11 in 66 cents at the Septemberthirty 2018.

Seven cents increase and then maybe on a quarterly basis was primarily due to the higher net investment income generated in the quarter, partially offset by net unrealized and realized loss on investments.

Summarize our portfolio activity for the third quarter, new originations totaled 47 million.

Were offset by 3 million in principle payments and 29 million in principal prepayments.

Ended the third quarter of 19 within investment portfolio up 282 million.

This thing up debt investments and 32 companies with an aggregate fair value up 253 million.

Hey portfolio of warrant and equity position and 75 companies with an aggregate fair value of 13 million.

Other investment position and two companies with a Nagar fair value of 1 million and.

In an equity interest in our JV with a fair value of 14 million.

As we've consistently nowadays nearly 100% of the outstanding principal amount of our debt investments bear interest at floating rates with the coupons that are structured to increase as interest rates rise.

Well, having a specific interest rate floor.

As of September Thirtyth, the average of about 30 day LIBOR reference rate floors are down investment equal to the current 30 day LIBOR rate and AEZS 100 basis points above the 30 day LIBOR reference floor for our Keybank facility.

On the balance sheet as of September Thirtyth Horizon had 51 million and available liquidity, consisting of 36.4 million in cash and 14.6 million of funds available to be drawn under our existing credit facility.

As of September Thirtyth, It was 15 million outstanding under our 125 million Keybanc credit facility.

Our debt to equity ratio stood at 8.9 to one as of September thirtyth lower than our targeted leverage of bump by two to one and based on our cash position in the capacity at our Keybank facility, our potential liquidity was 86 million at September Thirtyth.

As Rob mentioned, we're very active this quarter and the capital markets first in August we successfully issued 100 million of nodes created a plus by Morningstar and backed by a 160 million of secured loans originated by horizon.

The notes bear interest at a fixed rate of 4.2% per year, thereby further reducing our cost of capital by 100 basis points and increasing our overall capacity to originate new venture loans.

The proceeds were primarily used to pay down the outstanding debt of our Keybank facility.

Second during the quarter. We also entered into an asset market offering program to issue and sell up to 15 million in common stock from time to time.

We utilize this program in issued approximately 900000 shares of common stock in the quarter at a premium to any for total net proceeds the company of 10.2 million.

During October we sell than an additional 158000 shares netting an additional $1.8 million proceeds.

Lastly, with respect to our joint venture we funded it with an additional investment during the quarter and continue to have ample capacity of both the company and the JV to go out portfolio further this year and into 2020.

This concludes our opening remarks, we'll be happy to take questions. You may have at this time.

At this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

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My first question comes from Paul Johnson with KBW. Please proceed with your question.

Good morning, guys. Thanks for taking my question.

I was just hoping you could talk a little bit further on.

Any potential impact.

Impact that you've seen from your sponsors or on your portfolio companies from.

I guess any sort of hesitation at the IPO market just following the we work fallout since I think you also mentioned this is something a little more pertinent maybe to the tech sector of the PC market.

Maybe speak a little bit more to that how that's affected the tech sector as well as maybe your approach.

Two origination in that sector.

Sure Hi, Paul This is Jerry.

Yeah, we.

We have absolutely been paying pretty close attention.

Overall to kind of the funding ecosystem for.

You know the technology and life science sectors.

We actually think life science sector is still pretty strong even though there has been a lot of noise on the IPO side, it's been more about.

A lot of the.

Large technology.

Offerings.

Now for Unicorn type companies and some issues that quite frankly, we expected them to have when they when they finally decided to go public and we've seen that.

Oh here in the last few quarters.

We we are still seeing pretty strong demand in the IPO sector for.

Life Science.

Ipos.

We just mentioned relative to that point that more often than not the private investors in the life science companies are continuing to stay in these transactions when they go public and represent generally between 15 and 30% of the IPO offering proceeds they are continuing to invest so that's something we.

Like to see relative to certainly our portfolio companies and we're also still seeing plenty of private investment on the life Science site in both drug development and medical device.

We're also seeing plenty of.

Dry powder for investment in healthcare technology companies on the private side not so much on the public side.

As it really relates to tech sector.

Your your question is right on the Mark.

We are very cautious about looking at has been particularly internet related companies that have high valuations within anticipation of an IPO I.

I think that the market is.

Becoming somewhat conservative relative to looking at those companies and.

More interested in companies that are moving toward profitability than just growth.

And so that's something that as we underwrite our transactions.

We are watching quite carefully.

Great. That's a that's really good insight color. Thanks for that those all my questions.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad. One moment. Please why we poll for questions.

No questions at this time I'd like to turn the call back to Rob Pomeroy for closing comments.

Thank you all for joining us. This morning, we appreciate your continued interest and support and horizon and we look forward to speaking with you again soon.

This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.

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