Q2 2021 Horizon Technology Finance Corp Earnings Call
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Greetings and welcome to Horizon Technology Finance finance corporations second quarter 2021earnings conference call. At this time, all participants are on a listen only mode a question and.
And answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press Star 1 Star Zero excuse me that it starts zero on your telephone keypad.
As a reminder, this conference call is being recorded I would now like to turn the conference over to your host Megan Fox. Thank you you may begin.
Thank you and welcome to the Horizon Technology Finance second quarter 2021 conference call, representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer, Jerry Michaud, President and Dantrolene, and <unk> Chief Financial Officer.
I would like to point out that the Q2 earnings press release.
And form 10-Q are available on the company's website at horizon and Tech finance Dot com.
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 in predicting future results and conditions.
Certain factors could cause actual results to differ on a material basis.
And as 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 31, 2020, the company undertakes no obligation to update or revise any forward looking.
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 update you on horizon performance and its overall current operating.
And in an environment.
Jerry will then discuss our business development efforts and our markets day.
Dan will detail, our operating performance and financial condition, and then we will take some questions.
We had another strong performance and the second quarter of 2021 and made significant headway during the first half for the year.
And growing our portfolio.
During the quarter, we grew our portfolio over the $400 million Mark.
And a 6% increase from the end of the first quarter and up 15% from the end of 2020.
We finished the quarter with a record committed backlog of $144 million.
We generated net investment income of 31 per share and excess of our distribution level for the quarter.
Based on our outlook and our undistributed spillover income of 34 per share as of June 30, we declared monthly distributions through December which marks 60 consecutive.
Consecutive months at <unk> 10 per share.
We achieved another industry, leading portfolio yield on our debt investments of $14, 7%.
We kept our portfolio credit profile stable and ended the quarter once again with no 1 rated loans and.
And no loans on non.
Non accrual.
We are consistently and actively managing our portfolio of investments to maintain the credit quality of our portfolio.
We ended the quarter with NAV of $11.20 per share of <unk> 13 per share increase from March 31.
And we maintained a strong balance sheet.
And ample capacity to fund the ongoing growth of our portfolio.
Earlier in the year, our advisor Horizon Technology Finance management expanded its origination platform with a $100 million venture debt fund, which may co invest with horizon.
We are already.
<unk>, we're seeing the clear benefits of the new fund in terms of Horizons recent portfolio growth for.
For the quarter, the advisors platform funded a record $100 million and business.
Our platform expansion is enabling horizon to access and control additional opportunities and its core market.
Markets, while further reducing its concentration risk.
The new venture debt fund has the potential to expand to $300 million.
And to further broaden horizon's investment opportunities.
As part of our expansion, we continue to grow and develop our team with the recent appointment of Dan.
Already <unk> to Chief operating officer, and other promotions within our team we continued to strengthen our bench as we prepare for the future.
Entering the second half of the year, we believe we remain well positioned to continue growing our portfolio and generating strong NII due.
The following.
Demand for venture debt within our targeted industries continues to be at or near record levels.
Our committed backlog and pipeline for investments our historically strong.
Our advisors, new investment vehicle is enabling us to better compete for new loan opportunities.
And have continued to maintain ample capacity on our balance sheet to execute on our backlog of commitments and pipeline of new opportunities.
We generated another quarter of solid growth and are successfully competing for quality venture debt opportunities with our strong brand and the venture debt market robust balance.
Alex sheet disciplined underwriting and enhanced platform, we remain in a prime position to further expand and diversify our portfolio and generate net investment income.
I appreciate our entire team's continuing efforts, which have resulted in another strong quarter for horizon and our shareholders.
And with that I will now turn the call over to Jerry.
Thanks, Rob and good morning to everyone.
Continued to generate strong growth and the second quarter, resulting in our portfolio topping $400 million at the end of Q2.
With the robust demand for venture debt, we fund 9 transactions totaling.
$67 million during the quarter.
Meanwhile, our onboarding yield of 12, 2% during the quarter. Once again reflects our disciplined focus on pricing strands transactions that we believe will provide strong NII enhanced by our predictive pricing strategy.
We experienced for loan prepayments.
Total linked quarter totaling $38 million and the prepayment fees and accelerated income from the prepayments increased our debt portfolio yield for the quarter to 14, 2% and.
Again, among the top of the BDC industry.
In addition, we received proceeds of $2.8 million from the redemption of warrants.
During the sale of equity as of June 30, we held warrant and equity positions and 71 portfolio companies with a fair value of $17 million since the beginning of 2020 horizon has received over $12 million and warrant and equity proceeds from 9 companies and its portfolio.
And as we've consistently.
<unk> noted structuring investments with warrants and equity Reits as a key aspect of our venture debt strategy and an additional value generator.
And the second quarter, we closed $97 million and new loan commitments and approvals. We ended the quarter with a record committed and approved backlog of $144 million.
Compared to $94 million at the end of the first quarter demand for debt venture debt has remained at record levels throughout this year and we ended the quarter with a pipeline of new opportunities totaling $843 million.
Subsequent to Q, we funded $7.9 million and venture debt loans.
Steve the 10 million dollar loans repayment.
Our committed and approved backlog stood at $141 million and our pipeline of new opportunities is nearly 1 billion, providing us with a solid base of opportunities to further grow our venture debt portfolio.
Along with the growth of our portfolio we maintained.
<unk> strong credit quality and our portfolio with another quarter of no loans on non accrual or 1 rating and 95, 4% of our debt portfolio is fair value consisting of 3 and 4 rated credits.
During the quarter 2 of our portfolio investments made migrated.
And down too.
And the 2 rated bucket.
And as we always do we are aggressively managing them in order to provide stability and ultimately achieving a positive outcome.
Turning now to the venture capital environment. The sector continues to be dynamic. According to pitch book approximately 75 billion was.
It and VC backed companies and the second quarter tracking with last quarter and putting the industry well on pace to smash last year's record level of investment by the middle of the third quarter.
In terms of VC fundraising 41 billion was raised and the second quarter pretty much ensuring that 2021, we'll break last.
And best record and make it conceivable that VC fundraising will clear the 100 billion milestone before the end of the year larger funds continue to be mostly drive the increased fundraising.
Regarding VC backed exit activity, the IPO and spec window remains wide open and in the second quarter with venture.
<unk> backed ipos and specs, helping to drive a total exit value and the quarter of over 240 billion.
Overall, there are a multitude of options for venture backed companies to generate additional liquidity, including from venture capital Ipos venture debt and M&A activity suffice it to say.
All of these funding options available to development technology and life science companies have created both opportunity as well as competition for horizon based on our results for the first half of 2021, we believe we are well positioned to compete and win in this environment.
Turning now to our core markets, we continued to see our wealth.
Health or investment opportunities as reflected by our committed backlog and robust pipeline during the quarter, we made 52 million and debt investments to 6 new portfolio companies consisting of 2 new life science investments to sustainability investments and 2 net technology investments providing further debt.
Our diversification to our portfolio. We also funded and 15 million to 3 of our existing portfolio companies. Overall. The current environment has produced a record amount and venture debt investment opportunities demand for new products and services and industries, such as AG Tech Fintech space mobility med.
Med Tech healthcare Tech and drug development are being met with innovative technology and product companies that are fueled by capital from Vcs venture lenders specs and the public markets and so.
Horizon remains disciplined and adding quality investments towards portfolio. Its advisers recent platform expand and expand.
Expansion, including additional marketing and capital resources gives horizon, a considerable edge enables it to better access investment opportunities and to more rapidly grow its portfolio.
As we enter the second half of the year, we're in prime position with ample capacity a deep pipeline.
Our predictive pricing strategy to further profitably expand our portfolio and deliver additional long term shareholder value with that I will now turn the call over to Dan.
Thanks, Gerry and good morning, everyone as Robin Jerry mentioned in Q2 was another strong quarter for horizon as we continue to grow our portfolio.
And and maintain a strong overall balance sheet.
As a reminder, during the quarter, we successfully reduced our cost of capital through the redemption of our 6 and a quarter notes.
Additionally, through our ATM program, we successfully and Accretively sold 361000 shares opportunistically raising nearly $6 million.
As of June 30, horizon had $83 million and available liquidity, consisting of $40 million and cash and 43 million and funds available to be drawn under our existing credit facilities.
As of June 30, there was $15 million outstanding under our $125 million Keybank credit facility and $51 million outstanding on our 1.
<unk>, New York Life credit facility, leaving us with ample capacity to grow the portfolio.
On June 22nd we amended the credit facility with Keybank, which among other things extends the dry period to June 2024, and the maturity date to June 2026.
The amendment strengthens our ability to.
To capitalize on compelling opportunities that will allow us to maintain our high portfolio yield and to grow net investment income.
We appreciate our long standing relationship with key and our syndicate partners and look forward to continuing on this relationship.
Our debt to equity ratio stood at 1 to 1 as of June 30.
Which was lower than our target leverage of 1.2 to 1.
Based on our cash position and our borrowing capacity on our revolving credit facilities or potential new investment capacity at June 30 was $199 million.
As we grow towards our target leverage of 1.2 times, we would expect that our NII and we will also increase.
And our second quarter Horizon earned total investment income of $13.5 million comparable with the prior year period interest income on investments increased primarily as a result of higher average, earning debt investment portfolio for the quarter and fee income decreased as lower fees were earned on prepayments.
Our debt.
Investment portfolio on a net cost basis stood at 387 million as of June 37.
A 7% increase from March 31st 2021.
For the second quarter of 2021, we achieved onboarding yields of 12, 2% compared to 11, 7% achieved and the first quarter our law.
<unk> folio yield was 14, 7% for the second quarter versus 16, 9% for last year's second quarter.
Turning to our expenses for the second quarter total expenses were $7.3 million compared to $6.8 million and the second quarter of 2020.
Our performance based incentive fee was 1.
Loan book $5 million, a reduction from $1.7 million for last year's second quarter based on lighter NII generated and the second quarter of 2021.
Our interest expense increased to 3 million from $2.6 million and last year's second quarter due to an increase in average borrowings are based.
<unk> management fee was $1.8 million up from $1.7 million and last year's second quarter, 2.2 and increase and the average size of our portfolio.
Net investment income for the second quarter was 31 per share compared to 31 per share and the first quarter of 2021 and.
<unk> 40 per share for the second quarter.
520.
The company's undistributed spillover income as of June 30 was <unk> 34 per share.
Yeah.
Summarize our portfolio activities for the second quarter, new originations totaled $67 million, which were partially offset by $3 million and scheduled principal payments and $38 million and principal.
Principal prepayments.
We ended the quarter with a total investment portfolio of $404 million.
The portfolio consisted of debt investments and 39 companies with an aggregate fair value of $386 million and a portfolio of warrant and equity and other investments and 73 companies with an aggregate fair.
Value of $18 million.
Based upon our outlook for NII for 2021 on liquidity forecast and our spillover income levels. Our board declared monthly distributions of <unk> 10 per share for October November and December 2021.
We have now declared monthly distributions of <unk> 10 per share.
60 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 June 30 was $11.20 per share compared to $11.7 as of March 31, 2021 and $11.
For for 64 as of June 32020.
13th increase and NAV on a quarterly basis was primarily due to our net investment income exceeding paid distributions the appreciation of our portfolio and accretion from the sale of our shares through our ATM program.
As we've consistently.
Lee noted, 100% 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.
As of June 3100% of our portfolio is at their specific floors.
This concludes our opening remarks.
We'll be happy to take questions you may have at this time.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.
A confirmation tone will indicate your line is and the question queue. You May press star 2 if you'd like to remove your question from the queue for.
And that's using speaker equipment and may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.
Yeah.
Our first question comes from Sarkis share veteran with B Riley Securities. Please proceed.
With your question.
Hey, good morning, everyone and thank you for taking my question here.
Good morning, good morning.
I just wanted to kind of get a sense for.
The new capacity for investments and I think he mentioned was close to $200 million.
And with your debt to debt to equity at about 1.
Participants just wanted to understand kind of the cadence that you'd like to to grow into that new investment and capacity figure on any kind of help or color. You can give on on that thought process given the strong venture debt environment would be helpful. Thank you.
Yeah. Thanks for the question, Yeah, you're correct and capacity today is close to 200.
<unk> and being at 1 day, 1 we're focused on getting to the 1.2 to 1 and so when we analyze the.
Leverage and our portfolio at the beginning of the quarter determine how to fund that through the leverage or through equity and so as we continue to build.
The portfolio will determine how we get to the 1.2 between the leverage and drawing.
Strong equity on the ATM.
Got it and just to kind of come back on the prepayment cycle anything unusual about youre seeing currently have prepayment and started to kind of get.
On a normalized patterns, if you will or do you think that share in the near term.
The prepayment activity is still going to be kind of elevated just wanted to kind of get your sense real time, what's happening on that front.
Yeah. This is Jerry.
Very good question as I mentioned and.
The script, so pretty dynamic.
Dynamic market right now so.
We're seeing.
A number of our portfolio of companies that have signed spec agreements.
We've had last quarter, we had 2 companies that went public 1 of which paid us off key pad.
We have at least 1 company that has already filed confidentially.
So more to go public this quarter and we know we have a couple of companies that are in very late stage M&A.
Discussion so we expect for the second half of this year.
And for prepayments to be somewhat elevated.
From.
Certainly the previous to <unk>.
<unk>.
That said.
And given given if you look at.
Our historically high level of backlog committed backlog approved backlog.
And new opportunities, we still think there'll be plenty of room to grow the portfolio during the second half of the year.
Quarters got it so just to kind of recap that thought process right prepaying.
Prepayments still elevated do you think it's going to look more so for for your specific.
Outlook here and the second half, but you have more than enough room to net net grow the portfolio is that the right summary, I think thats correct.
Okay. Good and then just.
Kind of wanted to touch a little bit more on the underwritten yields it sounded like in your prepared remarks.
And they were up quarter on quarter is was that right and then.
What's kind of driving that what's the biggest driver of the onboarding yields going up yes.
Yes, so really.
No.
It.
On a quarter to quarter basis, it's not really.
Don't really look at.
Significant changes and onboarding yields because it could be 1 transaction debt debt kind of skews that number.
And what I can tell you is debt.
Even though there is a.
And amount of competition and the market.
Think from and the overall venture debt perspective yields have actually held up very very well and.
We're we're pretty pleased about that part of that is always because we're not just being compared to other debt deals were being compared to the cost of equity.
Significant for raising funds through.
Equity fundings from Vcs and alike and so.
And that's kind of part of the comparison the companies are doing when they're figuring out how to get additional liquidity and the company. So.
I think overall I think our response to that would be yields have held up pretty well.
For <unk>.
And we kind of expect to see that to continue again.
During the second half of the year.
Okay, great. So nothing like systemically changing here, it's more so maybe 1 or 2 transactions that skew it with them.
Generally you think that from a macro perspective.
Things are business as usual.
That's that's that's where we are today, that's exactly how it will look at it today, yes.
Okay Fantastic I'm going to hop on the queue. Thank you so much for answering the questions.
Thank you thanks Circus.
And as a reminder, if you'd like to ask a question. Please press star 1.
And your telephone keypad, 1 moment, please while we poll for questions.
Our next question comes from Ryan Lynch with K B W. Please proceed with your question.
Hey, good morning, guys.
First question I had was you mentioned in your prepared comments.
2 loans were downgraded.
And the quarter to the level 2 credit rating.
I would just love to get any.
And given more color on that I know sometimes.
And companies will be downgraded.
You know as they start to run closer to fundraise.
Fundraising cycle.
<unk> capital raise cycle, that's taking longer is that what's going on at these companies or is there something fundamentally.
Deteriorate and net those 2 to cause those downgrades.
Yes.
Brian This is Rob so.
Yes.
Former description is where these companies are they.
And fund raising or.
Trying to transact the company.
And that process is.
Becoming a bit protracted so we.
For a sense of caution have downgraded these into that bucket both of them are working with potential sources of new capital.
They are that we hope will come to fruition and the second half, but because of our experience. We felt it was appropriate to put them into 2 buckets.
Okay understood that's helpful.
Your platform has grown pretty meaningfully over the last year.
Year, or so with with both.
On balance sheet growth as well as the additional funds raised outside of D. C.
And now that you guys are deploying capital and match fund it.
Contributing to that that capital deployment, and and and investing alongside the BDC.
Have you guys shifted.
Hey, you guys are approaching or the kind of companies you guys are targeting or industries. You guys are going into with you on the additional dry powder kind of across the platform.
This is Jerry so about 2 years ago, we identified went out to the market data.
And the significant.
And due diligence from a research effort to identify the markets, where we believed that venture capital would be putting their money.
And the future and.
We came up with a kind of a subset sectors within our basic markets.
Did is that we decided to go way to follow very closely and we've been doing that.
And sticking to that strategy it has been.
Extremely successful for us.
Have developed.
New relationships within those sectors, including new investors that.
<unk>.
And large funds that are investing in those sectors and they are relying on horizon for providing debt to these companies. So it has been.
Very good.
And effort that we feel like really has worked out quite well for us. So that has allowed us to access more transactions.
<unk> I think we're a little bit ahead of where some of the other debt lenders, where and the market relative to some of the subsectors that were not as well known 2 years ago as they are today and so.
And that's where that growth and opportunity is combined with the fact that we have expanded our marketing team again and I had a little bit ahead of the curve started in 2019.
19 through 2020, we've added significant depth on the origination side. So that's where the growth is coming from so we think were and are pretty stable position now relative to our ability to grow relative to both obviously our capital as Dan has talked about position, but also in terms of.
Our bench strength.
Within the advisor so that's that's where that growth is coming from that's where it will continue to come from.
Okay makes sense and then.
And as far as <unk>.
Your guys specific market as well as the broader and PC market and even just the general U S.
US economy things seem to be going.
Well.
On the U S economy is recovering nicely.
D C market ecosystem.
As you know has been really resistant during COVID-19 and showing you know a lot of strength as you mentioned some of the fund raising.
Numbers today and.
He also talked about.
And the adventure.
The demand for for venture debt is really high today, so things seem to be going very well.
On your business and on more broadly so.
What are you guys worried about today, where are the risks that you guys are looking at today as you guys look to deploy capital and its market what kind of worries you in.
And it keeps you guys.
And looking around the corner for okay. So none of it keeps me up at night I want to be clear on that point, but there are 3 things that I think that we are.
And are quite focused on and continue to look at and follow on.
Obviously, the new Delta variant of.
And.
And is becoming a concern and.
Getting people vaccinated and the potential impact if that doesn't happen.
By the fall and winter, which is when you'd probably see could see potentially significant increases and COVID-19 again. So we're clearly we're clearly following that.
Inflation is something that.
Covid. We are also looking at we don't see it as being kind of something we have to be overly concerned with today, but I can tell you just and talking to companies that within our own market and talking to V C.
There are some supply problems, which is the number 3 thing that we're a little bit concerned with which is driving.
Other costs in terms of being able to get parts and chips and things like that so those are the issues that we that we are kind of tracking.
I don't think we see any more concern and that and the broader market does but we ain't anecdotally, obviously hear from our customers.
For us on these things and so we are as part of our due diligence.
On and where we're looking at new opportunities right. Now those are things that we are we are also taking into consideration.
Okay understood. Those are all my questions I appreciate the time this morning.
Thanks, Brian.
[noise].
There are no further questions I would now like to turn the call back to Rob Pomeroy, Chairman and CEO for closing comments.
Thank you for all for joining US. This morning, we appreciate your continued interest and support and Horizon. We hope you and your families continue to remain.
And healthy have a great summer and we look forward to speaking with you again soon.
Concludes the call.
Yeah.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Okay.