Q1 2021 Horizon Technology Finance Corp Earnings Call
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Greetings and welcome to the Horizon Technology Finance Corp, first quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you would like to ask a question. During today's event. Please press star one on.
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As a reminder of this conference is being recorded it is now my pleasure to introduce your host Ms. Megan Bacon. Thank you. Please go ahead.
Thank you and welcome to the Horizon Technology Finance first quarter 2021 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 of the Q1 earnings press release and flow.
The 10-Q are available on the company's website at horizon type of finance dotcom.
Before we begin our formal remarks I need to remind everyone that during this conference call Ryzen technology finance will make certain forward looking statements, including statements with regards of 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 in predicting future results and conditions.
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 of discussion in the company's filings with the Securities and Exchange Commission, including the company's form 10-K for the year ended December 31 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 Robert Pomeroy.
Good morning.
Thank you for joining us and for your continued interest in horizon.
Today, I will provide an overall perspective on horizon its performance and its current operating environment.
Jerry will then discuss our business development efforts in our markets.
Dan will detail, our operating performance and financial condition, and then we will take some questions.
We had an excellent and very active start to 2021 in all facets of our operations.
We grew our portfolio to $380 million, an 8% increase from the end of 2020.
We generated net investment income of 31 cents per share.
First of our distributions.
Based on our outlook, we are maintaining our monthly distributions through September <unk>.
Marking 57 consecutive months of <unk> 10 per share.
We achieved an industry leading portfolio yield on our debt investments of 15, 2%.
We further improved our portfolio of credit profile and ended the quarter with no one rated loans or loans on non accrual.
When one considers where the venture industry and overall economy stood a year ago, we are particularly proud of our accomplish accomplishments and our team's ability to successfully navigate through the pandemic.
We ended the quarter with NAV of $11 seven per share of 5% increase from the end of 2020.
At the end of the quarter, we successfully lowered our cost of capital and further strengthened our balance sheet completing in the offering of four and seven eights notes due 2026 and use the proceeds the fully redeem our six in the quarter notes due 2022.
In addition to our strong results for the quarter I also want to highlight our advisors Horizon Technology Finance management.
Recent platform of expansion.
Which provides the capacity to originate and manage of $100 million venture debt portfolio for waterfall asset management.
Platform has the potential to expand to $300 million overtime.
With the addition of this new investment vehicle, which will invest side by side with horizon.
Horizon now has the ability to access larger and more investment opportunities while at the same time further improving its portfolio of diversity and reducing concentration risk the <unk>.
New vehicle has invested $21 million of venture debt today, and we would expect that it will be an important factor in horizon's future portfolio and net investment income growth.
Looking ahead, we believe we remain well positioned to continue growing our portfolio and generating strong NII due to the following day.
Demand for venture debt within our targeted industries continues to be high.
Our committed backlog and pipeline for investments are at record levels.
Our advisors, new investment vehicle will help us better compete for new loan opportunity and.
We maintain ample capacity on our balance sheet to execute on our backlog of commitments and pipeline of new opportunities as well as the new opportunities we originate.
Our strategic balance sheet management strong marketing disciplined underwriting and proactive management of our portfolio has enabled us to successfully navigate through the pandemic and placed us in a prime position to further expand and diversify our portfolio.
Ultimately generate net investment income and additional long term value for our shareholders.
I want to think of our entire team for all of their hard work and strong for another strong quarter and with that I will now turn the call over to Jerry.
Thanks, Rob and good morning to everyone the well.
Mentum, we generated towards the end of 2020 continue throughout the first quarter as we took advantage of strong market demand for venture debt originated eight transactions totaling $51 million during the quarter.
Our onboarding yield of 11, 7% during the quarter reflected our continued disciplined focus on pricing transactions that will provide strong NII. The can then be enhanced by our predictive pricing strategy.
We also experienced two loan prepayments during the quarter totaling $19 million and the prepayment fees and accelerated income from the prepayments increased our debt portfolio yield for the quarter to 15, 2%, which was once again among the top of the BDC industry.
During the quarter. We also received proceeds of $800000 from the exercise of sale of warrants as we have consistently noted structuring investments with warrants and equity Reits as a key aspect of our venture debt strategy and an additional value generate cash.
At March 31st the Hell of a warrant and equity positions in 67 portfolio companies with the fair value of $17 million.
In the first quarter, we closed $54 million in new loan commitments and approvals and we ended the quarter with the committed and approved backlog of 94 million compared to $107 million at the end of 2020 day.
The man for venture debt remains elevated and we ended the quarter, where the pipeline of new opportunities totaling $839 million.
Subsequent to quarter Q1, we funded an additional loan of two and a half million dollars and increased our committee of the approved backlog to a record $125 5 million or <unk>.
<unk> line of new opportunities now stands at almost 1 billion, including 105 million of recently awarded transactions, which provides us with a solid base to further grow our venture debt portfolio.
Also subsequent to Q1, we exited our investment in Kate farms, receiving 15 million in principal repayment along with the accrued interest of prepayment fee and accelerated final payment Brian Horizon continues to hold warrants okay farms.
Along with the growth of our portfolio, we are particularly pleased with the improvement in the credit quality of our portfolio as we ended the quarter, where the strong credit profile, including having over 98% of our day portfolios fair value consisting of three and four rated loans, having no loans on non accrual or.
The one rated.
In the quarter, we exited our debt investment of nano steel without recovery consistent with the investment fair value at December 31.
And we executed exited our investment in ignition one achieving strong recoveries from that process as a result of our venture debt portfolio of strong and well positioned to generate NII, while it continues to grow throughout 2021 and beyond.
Turning now to the venture capital environment sector continues to remain on a very strong footing. According to pitch book approximately 69 billion was invested in VC backed companies in the first quarter well above last year's first quarter.
In terms of VC fundraising 33 billion was raised in the first quarter, putting 2021 on a pace to shatter of 2000 Twenty's record performance of the $80 billion.
Larger funds continue to mostly drive the increased fundraising.
Regarding VC backed exit activity, the I P O and spec window remain wide open in the first quarter.
The venture backed ipos or spacs, helping to drive a total exit value of 118 billion.
Backs raised 83 billion of newly registered vehicles in the first quarter alone.
While there is growing regulatory and market uncertainty around the spec markets still remains multiple paths for venture backed companies to generate additional liquidity, including from venture capital Ipos venture debt and M&A activity.
Turning now to our core markets, we continue to see a multitude of investment opportunities as reflected by our committed backlog and robust pipeline during the quarter, we made $39 million in debt investments to six new portfolio companies, consisting of one new life science investment and five new technology investments, which provided for.
Of the diversification to our portfolio.
We also funded 12 million to two of our existing portfolio companies.
Overall, the remain substantial demand for venture debt investment instead of an equity remains widely available to companies in our target markets of life Science Technology Health care Tech and sustainability as Rob mentioned, we expect our advisors recent platform expansion provides us with the considerable advantage in this dynamic environment and access to low.
Roger potential investment opportunities as part of that expansion of our advisers that experienced venture debt marketing and portfolio management professionals in New England, California, and Austin, Texas.
We entered the second quarter and an excellent position to continue utilizing our liquidity, our robust pipeline and our predictive pricing strategy to further profitably expand our portfolio and deliver additional long term shareholder value.
That I will now turn the call over to Dan.
Thanks, Gerry and good morning, everyone as Rob noted in his remarks, we had a strong first quarter with respect to our portfolio and continuing to strengthen our overall balance sheet.
In terms of our balance sheet, we successfully reduced our cost of capital and extended our maturity through the issuance of $57 5 million of our four and seven day notes.
Which trade under the ticker H T F b.
Last week with the proceeds from the offering we redeemed all of our second quarter notes.
As a result, we will incur additional interest expense of $400000 in the second quarter of 2021 related to the acceleration of unamortized debt issuance costs.
Additionally, through our ATM, we successfully and Accretively sold 366000 shares opportunistically raising nearly $5 million.
As of March 31, Horizon had just under 100 of $49 million in available liquidity, consisting of $81 million of cash and $68 million of funds available to be drawn under our existing credit facilities.
As of March 31st there was no outstanding balance under 125 million Keybank credit facility and $51 million outstanding on our 100 million, New York life credit facility, leaving us with ample capacity to grow the portfolio.
Or that the equity ratio stood at 1.13 to one as of March 31, which is lower than our target leverage of one two to one.
Based on our cash position and our borrowing capacity on our revolving credit facility, our potential new investment capacity at March 31 was $255 million.
We know that with the redemption of our 22 notes last week, our debt to equity ratio has materially lowered to point 96, the one as we grow towards our target leverage of one two times you would expect that our NII will increase commensurately.
For the first quarter Horizon earned total investment income of $13 2 million of 31% increase compared to $10 1 million in the prior year period.
Growth was mainly due to increased interest income on investment, which is primarily a result of a higher average earning debt investment portfolio for the quarter.
Our debt investment portfolio on a net cost basis stood at $362 million as of March 31st.
Six 5% increase from December 31, 2020.
For the first quarter of 2020, one we achieved onboarding yields of 11, 7% compared to $12, 2% achieved in the fourth quarter of.
The loan portfolio yield was 15, 2% for the first quarter versus 13, 2% for last year's first quarter.
Turning to our expenses for the first quarter total expenses were $7 2 million compared to $5 8 million in the first quarter of 2020.
Our performance based incentive fee rose to $1 5 million compared to $1 1 million based on greater NII generated in the first quarter of 2020 one.
Our interest expense increased to $2 7 million from $2 2 million in the prior first quarter due to an increase in average borrowings.
Our base management fees was $1 8 million up from $1 6 million in the prior first quarter due to an increase in the average size of our portfolio.
Net investment income for the first quarter was 31 cents per share compared to 21 cents per share in the fourth quarter of 2020, and 26 cents per share for the first quarter of 2020.
As mentioned in the past changes period to period, two quarterly NII per share are primarily driven by the timing of new loan originations and the timing and extent of loan prepayments and the related fee income from those prepayments, including prepayment fees and acceleration of previously unamortized end of term payments.
Looking ahead we.
You would continue to expect to generate a solid base of NII driven by our larger debt investment portfolio with additional upside dependent on the timing of prepayment activity.
The company's undistributed spillover income as of March 31 was 33 cents per share.
Summarize our portfolio of activities for the first quarter, new originations totaled $51 million, which were partially offset by 5 million of scheduled principal payments of 19 million of principal prepayments.
We ended the quarter with a total of investment portfolio of $380 million.
The portfolio consisted of debt investments in 37 companies with an aggregate fair value of $362 million and a portfolio of warrant and equity and other investment in 69 companies with an aggregate of fair value of $18 million.
Based upon our outlook for NII for 2020, one our liquidity forecast and our spillover income levels. Our board declared monthly distributions of <unk> 10 per share of July August and September 2020 one.
We have now declared monthly distributions of <unk> 10 per share for 57 consecutive months.
We remain committed to providing our shareholders with distributions that are covered by our net investment income over time.
Our NAV as of March 31 was $11 seven per share compared to $11.02 as of year end 2020, and $11.48 as of March 31 2020.
The 5% increase in NAV on a quarterly basis was primarily due to our NII and accretion from our ATM program exceeding paid distributions.
As we've consistently noted 100% of the outstanding principal amount of our debt investment bear interest at floating rates with coupons that are structured to increase as interest rates rise with interest rate floors as of March 31st of 100% of our portfolio of us out there specific floors.
This concludes our opening remarks, we'll be happy to take questions. You may have at this time.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time all confirmation tone will indicate your line is in the question queue.
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Our first question is coming from Sarkis <unk> of B Riley FBR. Please go ahead.
Good morning, and thank you for taking my question here.
Good morning good.
Good morning, Hey, just want just wanted to get a sense if you can.
Can provide some insight on prepayment activity for the balance of fiscal 'twenty, one and maybe if you can compare that to the originations that you're expecting to to deploy given your balance sheet as we move through the year.
Yeah. So this is gerry so for for Q1, you know we have line of sight of about $20 million. If you look at.
Last year's prepayments I think of about $120 million for the year. Our portfolio. Obviously has has been growing so we could potentially expect it to be a little bit higher than that this year.
As you know in the cautionary note here prepayments are not as predictable as.
Other aspects of our business so.
On a quarter to quarter basis that can vary pretty significantly Q1, I think was $19 million and we expect it to be a little bit more elevated than that under normal circumstances. So.
That's kind of the prepayment activity.
We're expecting from the rest of the year.
Got it as far as the cadence for originations do you think you'll start to get a little bit more aggressive kind of given.
The level of leverage that you can achieve.
To get to your target or would you say the at a more moderate pace.
That's a really good question because you know today, we're looking at pipelines in the $800 million to $1 billion of transactions. We're looking at you don't have to go that far back with that pipeline might've looked at like more of like $200 million to $300 million. So the activity in the marketplaces is significantly elevated for a whole bunch of free.
And so a lot of equity going into the marketplace of lot of new technology development in certain areas.
So we really don't have to get more aggressive there is theres far more selection in the marketplace for us than there has been historically so we believe that we can grow the portfolio very nicely without having to lower interest rates or or move out on the credits credit spectrum at all so it's really a.
A pretty strong solid market for us to be operating in but we do believe we will grow the portfolio during the course of the year.
Great. Thanks for that one more from me and I'll hop back in the queue.
Finally, the announcement on the platform expansion fairly interesting can you maybe give some more detail on how you expect the.
The the horizon BDC to benefit from the platform expansion with waterfall asset management. Thank you.
Yes sure.
One of the the features of many bdcs.
And the market have are on multiple platforms and.
Having that is beneficial to the public Bdcs, where you as we mentioned in our prepared remarks or it gives you access to larger deals. But also provides further diversification at the public BDC and so the was a strategic initiative of ours to expand our platform.
And to allow us to look at larger deals and hold those deals ourselves and create the diversification at the horizon platform.
Thank you.
Once again, ladies and gentlemen that is star one to register a question at this time.
Our next question is coming from Brian Lynch of <unk>.
Please go ahead.
Hey, good morning, Congrats on the first of the.
Additional fund closed outside of the BDC of one question I did have on that.
That's obviously, a pretty sizable fund relative to the BDC, which I will definitely have a I think out of the impact on on your guys' investment strategy going forward. I was just wondering are there any other funds outside of of the BDC outside of the one you just closed or is that the all the a lot of that.
Is that there's this new fund the all the other capital here of managing outside the BDC.
Currently assets the that.
The only other fun outside of the BDC.
Okay got it and then you guys mentioned in your prepared remarks, you know the amount of capital being raised in the in the D C market today.
You know that in combination with just yet.
The kind of elevation of valuations in that space.
Does that create more competition and of that.
Does that result in ventured.
Venture debt potentially being a less compelling product.
The way entrepreneur or venture capital or looking to take on additional capital.
So the short answer to that would be yes, we definitely are seeing in this environment.
The competition from equity, whether it's whether it's public equity or of specs or.
Even private VC funds are it's hard to ignore the.
Correlation between very very large VC funds raising lots of money and then the size of the investments in particular sectors that we cover.
Moving up considerably so there they are of putting a lot more money to work.
That said the.
In terms of you know.
How we're competing in the marketplace, we are still seeing greater elevated opportunities as well.
For venture debt, there's still there's still the.
You know the value proposition the adventure that provides to the entrepreneurs and even to the existing.
Investors and fun.
<unk> companies, where venture that can provide incremental capital.
At a at a significantly reduced cost compared to what the equity would be.
So yes it is.
The competitive environment relative to that but there's also a lot more demand in the marketplace for both equity and debt and we're finding the market very strong for both.
Has that is that resulted in you guys having to change your terms or structures materially.
On the deals you're doing versus some of where you were.
In 2019, and where does the the landscape look like from a competitive standpoint.
Yeah from a not from a pricing standpoint, I think pricing has held up and you can see that in our force first quarter results of pricing has held up very strong as always just perception of risk relative to the markets that we serve.
So that's.
That's all of which used to kind of keep pricing relatively stable, there's always potential someone will come into the market on the debt side.
And do something that isn't consistent with market, but we haven't seen that as it relates to the debt markets.
Again, it is fairly competitive.
Think.
This day I still think that there are certain venture lenders who have been in this market for a very very long time that have really strong relationships and reputation.
And I think we all we always have that advantage in the marketplace.
It doesn't mean, the horizon is going to win every transaction, where even though we want to win every transaction, but it does give us a competitive advantage and we are seeing that we're seeing when we're competing head up against.
You know other lenders in the marketplace, we do quite well so yeah. It is going to continue to be a.
The competitive marketplace. So it does no no question about that there is there is.
A lot of headwinds excuse me a lot of tailwind behind the market right now, but we're maintaining you know kind of a balanced position relative to credit quality, our pricing things like that and with the with a significantly expanded.
Pipeline.
We're still holding our own in quite nicely and do expect to expand the portfolio over the course of the room.
Meaning of 2021.
Okay understood. That's all from me I appreciate the time today.
Thanks, I guess right.
Thank you there are no further questions I'd like to turn the call back over to Robert Pomeroy, Chairman and CEO for closing comments.
Thank you all for joining us. This morning, we appreciate your continued interest and support in Horizon. We hope you and your families continue to remain safe and healthy and we look forward to speaking with you again soon this will end our call.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your line or log off the webcast at this time and have a wonderful day.
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