Q4 2020 Horizon Technology Finance Corp Earnings Call
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Greetings and welcome to Horace Horizon technology at this time, all participants are in a listen only mode. A question and answer session will follow the presentation and finish and require operator assistance during the call. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host you may begin.
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Your lives you can start.
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Yes. This is Rob Pomeroy, we were please wait for the tone and a recording will begin.
Yeah.
Thank you and welcome to the Horizon Technology Finance fourth quarter, 2020 conference call, representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer, Jerry Michaud, President and Dan <unk> Chief Financial Officer.
I would like to point out that the Q4 earnings press release and form 10-K are available on the company's website at horizon and Tech Finance dotcom.
Before we begin our formal remarks I need to 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 intends or similar expressions are used to identify forward looking statements. These forward looking statements are subject to the inherent uncertainties and predicting future results and conditions.
Certain factors could cause actual results to differ on a material basis from those projected and these forward looking statements and some of these factors are detailed in the risk factor discussion and the company's filings with the Securities and Exchange Commission, including the company's form 10-K for the year ended December 31st 2020.
The company undertakes no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise at this time I would like to turn the call over to Rob Pomeroy.
Good morning, Thank you for joining us and for your continued interest and horizon.
Today, I will provide an overall perspective on horizon performance and its current operating environment.
Jerry will then discuss our business development efforts and our markets.
Dan will detail, our operating performance and financial condition, and then we will take some questions.
2020 was an incredibly challenging year, but with the progress of the vaccines. We are hopeful we will soon start to return to a more normal or normal health and economic environment and 2021.
Looking back at 2020, and we want to highlight our important accomplishments.
We grew our portfolio to $253 million, despite a record level of prepayments we.
We maintained our level of distributions through a challenging time and our total net investment income has exceeded our total distributions for the past three years.
After experiencing a low volume of originations and the third quarter due in large part to the impact of COVID-19, we experienced a high volume of originations and the fourth quarter and enter 2021 with a record committed backlog of $107 million.
We achieved and industry, leading portfolio yield on our debt investments of 14, 6%.
We added new key team members to horizon, and originations underwriting and portfolio management and accounting.
We improved our forward outlook and credit profile as we resolved several underperforming loans.
Ending the year with our lowest level of underperforming loans since 2017.
By resolving these non earning assets, we returned cash to the balance sheet to invest and new earning assets.
We generated net investment income of $1 18 per share, which allowed us to maintain a monthly distribution level of <unk> 10 per share throughout the pandemic and based on our outlook for 2021, we have declared these distributions through June marking 54 consecutive months at this level.
We are particularly proud of our ability to protect our distributions.
We raised approximately $45 million of equity from our at the market program all at a premium to NAV.
We enhanced our ability to leverage our equity through our $100 million amended credit facility with New York life and.
And ended the year with strong available liquidity and $175 million of capacity to support our portfolio of companies and make additional investments.
In addition, we believe over 98% of our portfolio companies have adequate cash or access to cash to execute their business plans and <unk>.
Over 70% has runway into late 2021 and beyond.
Further 22 of our portfolio companies raised a total of over $500 million and 2020.
And again, showing the continued support of the investors and the health of the venture capital equal ecosystem.
Looking forward into the balance of 2021, we believe we are well positioned to grow our portfolio and generate strong NII for the year.
Demand for venture debt within our targeted industries remains robust.
Day, we have expanded our record committed backlog to $137 million after already funding $25 million and the first quarter and there are a wealth of opportunities and our pipeline for investment and the first half of this year and beyond.
And we have ample capacity on our balance sheet to execute on our backlog pipeline and new opportunities we originate.
Overall 2020 was a true test of our ability to withstand and unprecedented crisis and our team and our portfolio remained resilient.
Sure.
Built together over the years held firm and as a result, we are strongly positioned to grow and succeed and into the future.
Moving forward, we will remain proactive and managing our portfolio and look to Opportunistically fund new investments to further expand and diversify our portfolio and ultimately generate additional long term value for our shareholders. We're very proud of and thankful for our entire team and with that I will now turn the call over to Jerry.
Hey.
Thanks, Rob Good morning, everyone. We continue I continue to hope all of you are healthy and safe.
As we evaluated the impact of COVID-19 on our core markets and the second and third quarter of 2020, we identified certain market segments that not only we're surviving the pandemic, but we're thriving.
As a result during the fourth quarter, we were able to focus on our market efforts on those sub sectors of the life Science technology and health care information and services market, we funded nine transactions totaling $76 6 million during the quarter, our onboarding yield of 12, 2% during the quarter reflected our continued disciplined focus.
Pricing transactions that enhance NII and are an important contribution to our overall predictive pricing strategy.
We experienced lower than expected prepayment activity and the quarter with only two loans prepay them and only two loan prepayments totaling $17 million the prepayment fees and accelerated income from the prepayments increased our debt portfolio yield for the quarter to 13%, which was once again among the top of the BDC industry.
During the quarter. We also received proceeds of $1 3 million from the exercise and sale of warrants as with noted structuring investments with warrants and equity Reits as a key aspect of our venture debt strategy and an additional value generator.
And 2020, we generated over $9 million and proceeds from warrants and equity and at year end, we held warrant and equity positions and 68 portfolio companies with a fair value of $17 million.
And the fourth quarter, we closed $118 million and new loan commitments and approvals and we ended the quarter with a committed and approved backlog of 107 million compared to $96 million at the end of the third quarter. We continued to see strong demand for venture debt and ended the quarter with a pipeline of new opportunities totaling 532 million.
Yes.
Turning to our portfolio management activities and we made significant progress during the quarter to resolve three of our most challenging investments and the quarter. We exited here, a one rated investment and and core dump dermatology and health product company, which had been significantly impacted by COVID-19. During 2020 received a total of.
$8 5 million from the sale of the company and a recovery of the cash from the company.
We also exited two other one rated credits lantos and tightened with recoveries equal to or greater than our Q3 fair values.
As a result, we ended the fourth quarter with only one rated one one rated credit nano steel while experiencing our second consecutive quarter with a record level of four rated credits are highest credit rating.
Subsequent to year, and we exited our debt investment and me and Osteo and a recovery was consistent with the investments fair value at December 31st simply.
Simply put we have proactively managed recoveries on and most of our challenged accounts and our venture debt portfolio is now and a much stronger position to grow and succeed in 2021.
Also subsequent to Q4, we are funding an additional four loans totaling $25 million and sold our remaining equity and on track, bringing our total proceeds from warrant and equity sold and on track from last year and this year $2 million our committed backlog at the end of February stood at a 137 million.
And our pipeline of new opportunities stood at $645 million again, demonstrating demand for our venture debt products and providing a solid base to continue growing our venture debt portfolio and 2021.
Turning now to the venture capital environment. According to pitch book, approximately 39 billion was invested and VC backed companies and the fourth quarter amazingly Despite COVID-19.
2020 was a record year of 156 billion and invested in VC backed companies in terms of VC fundraising 17 billion was raised and the fourth quarter, bringing the total raised in 2020 to 74 billion a record performance.
And that's what's the trend in 2020 larger funds have mostly driven and the increased fundraising.
Regarding VC backed exit activity the IPO window remains wide open and the fourth quarter with 35 venture backed ipos with a total value of 138 billion and a total exit value of 290 billion for the year setting another record.
Most notably we have seen a significant number of companies pursue this back route as means to go public and this and all in the past six to nine months in.
And 2020 alone the number of expect vehicles quintupled Quinn troubled to 250 by raising 75 billion and capital.
IPO and spec Windows remained open and providing multiple paths for investment firms and companies to generate additional liquidity.
Turning now to our core markets, we experienced a growing number of investment opportunities during the fourth quarter as our core markets adjusted to the impact of COVID-19. As a result, we made a total of $66 million and debt investments and seven new portfolio companies. These investments provide and solid diversification to our portfolio as we added.
Three new life Science investments, three new technology, and technology investments and one new healthcare information and services company. We also funded 11 million to two of our existing portfolio of companies.
Notably we are seeing a trend and our core markets towards companies developing products with sustainability as part of their core technology. Your focus we believe the companies that can provide innovative products and services that meet market demand and have the added benefit of helping achieve sustainability will continue to attract capital during 2021.
To see additional opportunities in 2021 to invest and search companies the competitive.
The market has shifted and the second half of 2020 from a cautionary story of COVID-19 risks and uncertainty to a more aggressive approach with both debt and equity available to companies, who served markets and have benefited from the new economic and social environment.
And 2020, we carefully navigated through one of the most challenging periods and our 18 year history. We entered 2021 and are positioned to take advantage of our liquidity and strong pipeline of new investment opportunities and using our predictive pricing strategy to profitably grow our portfolio and deliver additional long term shareholder value.
And 2021 with that I will now turn the call over to Dan.
Thanks, Gerry and good morning, everyone as Rob noted in his remarks, we navigated through a top 2020 and entered 'twenty 'twenty, one and a strong position to expand our portfolio and generate additional long term value for our shareholders.
During 2020, we grew the size of our portfolio to 353 million and enhance our balance sheet by adding another 100 million and debt capacity through our amended facility with New York life.
And through our ATM program, we successfully and Accretively sold three 7 million shares and raised nearly $45 million.
Which included receiving net proceeds of approximately $11 million from the program and the fourth quarter continue.
Continuing to show our ability to opportunistically access the equity markets.
We're proud of our entire team's efforts throughout 2020 and we are poised to take advantage of even greater opportunities and 2020 one.
As of December 31st Horizon had just under $73 million and available liquidity, consisting of 47 million and cash 26 million and funds available to be drawn under our existing credit facilities.
As of December 31st It was 28 million outstanding under our 125 million Keybank credit facility and 22 million outstanding on our $100 million, New York life credit facility, leaving us with ample capacity to grow the portfolio.
Our debt to equity ratio stood at 91 as of December 31st which is lower than our targeted leverage up 1.2 to one.
Based on our cash position and our borrowing capacity on our revolving credit facility.
Tangible new investment capacity at December 31 was $222 million.
And fourth quarter Horizon earned total investment income of $10 1 million compared to 13 million and a prior period the EBITDA.
And was mainly due to lower interest income on investments.
Which was primarily a result of lower average earning portfolio for the quarter.
And that's and portfolio on a net cost basis stood at $340 million as of December 31st.
$6 five per cent increase from September 30, and 21.
For the fourth quarter of 2020, we achieved onboarding yields of $12 two per cent compared to 11, 9% achieved and the third quarter.
Our loan portfolio yield was 13% for the fourth quarter versus $17 six per cent for last year's fourth quarter.
Turning to our expenses for the fourth quarter total net expenses were $5 9 million.
Five per cent reduction compared to $6 3 million and the fourth quarter and 19.
Our performance based incentive fees decreased to $1 million compared to $1 6 million based on lower NII generated and the fourth quarter of 2020.
Our interest expense increased to $2 3 million from $2 1 million and the prior fourth quarter due to an increase and avid borrowings partially offset by a reduction and our effective cost of debt.
Our base management fees increased to $1 6 million from $1 5 million and the prior fourth quarter, driven by an increase and the average size of our portfolio.
Net investment income for the fourth quarter was 21 cents per share compared to 34 cents per share and the third quarter of 2020, and 43 cents per share for the fourth quarter of 19.
Our fourth quarter NII was impacted by the timing of new originations and lighter prepayment activity and we expect a sizable increase and the portfolio by the end of 2020 to generate solid NII during the first quarter of 2021 and beyond.
For the full year, 2020, we generated NII of $1 18 per share.
The company's undistributed spillover income as of December 31st with 32 cents per share.
To summarize our portfolio activity for the fourth quarter, new originations totaled $77 million, which were partially offset by $4 million and scheduled principal payments.
17 million and principal prepayments and $14 million and cash received from saddled accounts.
We ended 2020 with a total investment portfolio of $353 million.
The portfolio consisted of debt investments and 34 companies with an aggregate fair value of $333 million and their portfolio of warrant and equity and other investments and 70 companies with an aggregate fair value of $19 million.
Based upon our outlook for NII for 'twenty, and 'twenty, one and our liquidity forecast and our spillover income levels. Our board declared monthly distributions of <unk> 10 cents per share for April may and June 2021.
And now declared monthly distributions of <unk> 10 cents per share for 54 consecutive months.
And we remain committed to providing our shareholders with distributions that are covered by our net investment income over time.
Our NAV as of December 31 was $11.02 per share compared to $11 and 17th and as at September 30, 2020 and $11.83 as of year end 2019.
The 15th that reduction and and Avionic quarterly basis was primarily due to our pay distributions in excess of our net investment income and resolving underperforming loans.
As we've consistently noted 100 per cent of the outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase as interest rates rise with interest rate floors.
At December 31st and 100% of our portfolio is out there specific floors.
This concludes our opening remarks, we'll be happy to take questions. You may have at this time.
Yeah.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and it may be necessary to pick up your handset before pressing the star.
And our keys one moment, please while we poll for questions.
Yeah.
Our first question comes from Sarkis <unk> with B Riley. Please proceed with your question.
Good morning, and thank you for taking my question here just wanted to touch on the your expectation for prepayment activity here as we're sitting in Q1 and heading into <unk> any thoughts on the level of prepayment activity and in light of that how aggressive would you get and deploying our capital to build the portfolio.
Earlier.
So we have a vision on prepayments that.
We've been told should happen and the first quarter or second quarter first half of the year and so we're able to.
Look forward and see that we also are very very strong pipeline and origination volume expectations for the first quarter. So.
We think that the level of prepayments should be higher and the first quarter than they were and the third and the fourth quarter.
Right and can you maybe give us some flavor too.
The level of origination that you would expect to deploy here and the first half of the year. So for example, if you look at.
Fourth quarter is pretty strong from an origination standpoint, and just wanted to see EBIT just kind of in line with your historical deployment or or do you think it'll be more aggressive.
Well I this is Jerry.
Yeah.
And the demand for venture debt and.
For equity.
Are both extremely strong.
Going in and coming out of the fourth quarter and going into the first quarter here.
And as Rob mentioned, I think our portfolio companies raised R 22 of our portfolio companies raised about $500 million and equity alone last.
Last year, we're starting and we're seeing the same type of financing activity here into the first quarter and of course, the new entre into this hole.
On liquidity side of the equation is specs and so we expect all of the equity and debt markets to be very active when we look at our own portfolio, it's significantly higher than historically it has been going into the beginning of the year, So where we're pretty confident about.
I'm trying to stay on kind of the growth trajectory that we kind of saw and that fourth quarter and obviously, it's also a competitive market. So we'll be paying attention to that but we think we're extremely well positioned.
Given our reputation and the marketplace and.
Our ability to fund new transactions, so looking for a pretty positive first half of the year.
Thank you I'll hop back into queue.
Yeah.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes from Ryan Lynch with K B W. Please proceed with your question.
Okay.
Hey, good morning, I wanted to talk about the competitive environment for a minute.
Obviously you guys are are venture lenders are what are the competitors <unk> and EBITDA.
And can actually be equity capital.
And you talked about a significant amount of venture equity capital has been raised at 2020.
Oxy and the huge growth it's back.
Out there. So could you just talk about what does the competitive environment look like today to deploy capital and as far as you know tariff structures pricey quality deals out there that are available for yourself and other venture lenders.
Yeah, that's a great observation honestly, because basically what we're seeing is and all of them all of the above strategy.
Just as a kind of topline example, I think of the seven new investments we added in the fourth quarter and five of those also included either new equity rounds that came with them or strategic.
Strategic financing and so companies are really and their investors are really looking for companies that are thriving and this new market.
To grow and grow quickly and so they're adding a lot of liquidity to the balance sheet and they're not relying on any specific one way of doing that but you are correct that that more so in the fourth quarter, we saw as part of our competition as being additional equity we had a couple.
And our four rated credits and our portfolio raise a substantial amount of equity when we were offering that term sheet.
And so that is now a part of our competitive landscape, which.
Historically hasnt been.
And as significant so, but what we're seeing basically and it isn't all of the above and so the.
And the transactions that we are looking at as I look at our pipeline when we're talking about new transactions most of them are coming with or with new equity involved or just recently raised equity and they're adding that as a cushion to that that equity to ensure that they can continue to.
Grow.
And what are pretty pretty interesting markets on.
On the technology and life Science side right now.
Okay.
And so that's helpful color on what you guys are kind of cute and then the bucket from a competitive standpoint.
And <unk>.
I believe you guys. Historically have has set a targeted leverage range of <unk>.
Two times, obviously that that's a pretty wide range Jacob probably.
It will fluctuate and where you guys tend to operate and there.
Have you got the quality of deal flow, you're seeing in the market and and and I would also take it could depend on kind of a broad.
And I'll back macro outlook, given that we're coming out of a pretty substantial downturn and I feel like the economy is hopefully going to be in a pretty good place going forward and it continues to.
So meaningful growth within that target leverage range.
And you think we could start to see you guys pushed that up higher to the upper and maybe above one to one and closer to the upper end of that range or where do you guys and tend to operate and now the medium term.
Yeah, Ryan that's a great question.
And our target has been between eight and one two to one and you know and we and when we start each quarter and we plan out the quarter based on the liquidity liquidity liquidity, we have the strength of the pipeline by volume.
And then determine how and where things fall out during that during that quarter.
And so our goal is to get up to that one two to one and you know we model it out throughout the year to get to that and it all depends on what happens in and out of the quarter with prepayments and funding activities and whatnot.
And we'd rather be and the one to one two range then eight.
8.9.
Okay great.
And it makes.
Okay. That's all from me I appreciate the time today.
Yeah.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Rob Pomeroy, Chairman and CEO for closing comments.
Thank you.
And thank you all for joining us. This morning, we appreciate your continued interest and support and Horizon. We hope you and your families continue to remain safe and healthy and we look forward to speaking with you again very soon thank you.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Okay.
Yeah.
Okay.