Q3 2021 Horizon Technology Finance Corp Earnings Call
Greetings and welcome to Horizon Technology Finance Corporation third 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 anyone should require operator assistance during the conference. Please press star zero on your.
Telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Megan Bacon to begin thank you.
Thank you and welcome to the Horizon Technology Finance Corporation third quarter 2021, something separate.
I think the company today are Rob Pomeroy, Chairman and Chief Executive Officer, Jerry Michaud, President and Dan <unk>, Chief Financial Officer.
I'd like to point out that the Q3 earnings press release and Form 10-Q are available on the company's website at horizon check finance Dot com.
Before we begin our formal remarks I need to remind everyone that during this conference call. The company will make certain forward looking statements.
These statements with regards to the future performance of the company word 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 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 Rob Pomeroy.
Good morning, Thank you for joining us and for your continued interest in horizon.
Today, I will update you on our performance and our current overall operating environment.
Gary will then discuss our business development efforts our portfolio of events in our markets, Dan will detail, our operating performance and financial condition and then we will take some questions.
Our third quarter was a testament to the power of the Horizon brand and the lending platform of our adviser Horizon Technology Finance management.
As well as our continuing efforts to grow our portfolio.
We executed in all aspects of our operations and we are proud of the results.
During the quarter, our portfolio grew to more than $450 million, a 12% increase from the end of the second quarter and up 28% from the end of 2020.
These numbers are even more impressive when you consider that the portfolio experienced $50 million in prepayments during the third quarter.
We finished the third quarter with a.
Committed backlog of $101 million, providing us with momentum to continue our portfolio growth.
We generated net investment income of <unk> 40 per share well in excess of our distribution level for the quarter. Thanks to the continued success of our predictive pricing strategy.
Based on our outlook and our undistributed spillover income of 44 per share as of September 30.
We declared monthly distributions through March of 2022, which marks 63 consecutive months of 10 cents per share in.
In addition, we declared a special distribution of <unk> <unk> per share payable in December.
We achieved a portfolio yield on our debt investments of 16, 2% at or near the top of the BDC industry.
We maintained a stable portfolio credit profile with 97% of our portfolio rated three or higher.
We are consistently and actively managing our portfolio of investments to maintain its credit quality.
We ended the quarter with NAV of $11 63 per share a 43 <unk> per share increase from June 30.
Resulting from a combination of out earning our distributions.
Creatives share issuances and increases in fair value of some of our investments.
Finally, our balance sheet remains strong with ample capacity to fund more growth in our portfolio and move closer to our target leverage of one two to one.
We achieved these excellent results due to our advisors incredible team focused predictive pricing strategy discipline in selecting quality investments and expanded lending platform.
For the quarter the advisors platform funded a record $141 million in new business in what is typically a lighter quarter for originations.
Our adviser is competing for and winning larger high quality venture debt investments while at the same time, continuing to diversify our portfolio and further reducing concentration risk.
Given the momentum generated in the third quarter, we believe we remain well positioned to continue growing our portfolio of investments and to continue producing strong net investment income.
Our belief is supported by the following.
Our advisor continues to strengthen the horizon platform with new hires.
Demand for venture debt within our target industries remains robust.
Our committed backlog and pipeline of investments is still strong.
Our advisors expanded lending platform and the increasing recognition of the horizon brand is enabling us to access consider a considerably larger number of investment opportunities.
And we continue to maintain ample capacity to execute on our backlog of commitments as well as our advisors pipeline of new opportunities.
While we were excited and optimistic for horizon's future, we remain aware of possible headwinds from macroeconomic issues, including the supply chain global inflation labor issues in the pandemic.
Over the years, our advisors experienced team has successfully managed portfolios through various economic circle.
Cycles.
I am proud of our entire team's efforts, which resulted in this excellent quarter for us and our shareholders.
I will now turn the call over to Gerry and Dan to give you more details and color on our performance Jerry.
Thanks, Rob and good morning to everyone.
Third quarter is typically the lightest quarter for us in terms of originations, which makes our origination performance in the third quarter all the more impressive our portfolio topped $450 million for the first time ever at the end of Q3 with the robust demand for venture debt. We funded a record 15 transactions totaling 99 million.
During the quarter.
Our onboarding yield of 11, 5% during the quarter reflected our advisors predictive pricing strategy and continued discipline in pricing transactions that we believe will produce strong NII.
We experienced four loan prepayments during the quarter totaling $50 million and the prepayment fees and accelerated income from the prepayments contributed to our debt portfolio yield for the quarter of 16, 2% again, among the top in the BDC industry.
In addition.
We received proceeds of $1 5 million from the exercise or termination of warrants as well as proceeds of $1 1 million from success fees related to two debt investments are further testament to our method of structuring investments to generate additional yield.
As of September 30, we held warrant and equity positions in 74 portfolio companies with a fair value of $21 million.
Since the beginning of 2020 company has received approximately $13 million in proceeds from warrant and equity investments as.
As we've consistently noted structuring investments with warrants and equity rights is a key aspect of our venture debt strategy and an additional value generator in.
In the third quarter, we closed 91 million in new loan commitments and approvals and ended the quarter with a committed unapproved backlog of $101 million compared to $144 million at the end of the second quarter.
Our advisor also ended the quarter with an additional $48 million in newly awarded transactions why there was no guarantee we will fund all of the transactions and the committed or awarded backlogs. The total supports a positive funding outlook. In addition, our advisor ended the quarter with a pipeline of new opportunities.
Totaling $734 million.
Subsequent to the end of Q3, we funded a two and a half million dollar venture.
Venture debt loan and received $35 million in loan prepayments, including the prepayment in full of our debt investment in <unk>, which was to raise it at the end of Q2.
These early prepayments in the fourth quarter will obviously benefit NII in Q4, but will also provide a challenge to our efforts to grow our portfolio during the quarter.
As of today, our committed backlog has grown to $146 million and our advisors awarded backlog has increased to $50 million.
In addition, our advisors pipeline of new opportunities today is approximately $697 million, providing us with a solid base of opportunities to further grow our venture debt portfolio over the coming quarters.
Significant growth in our portfolio has been achieved while maintaining its robust credit quality as the fair value of 97% of the company's debt portfolio consisted of three and four rated loans as of September 30, an increase from the prior quarters and as further indication of the credit quality of our <unk>.
Portfolio, one of our portfolio companies see the Rx went public during the third quarter two of our portfolio companies Hardy diagnostics in outboard engines completed M&A transactions and three of our portfolio companies evidenced have entered to spec transactions.
During the quarter, one smaller investment migrated down to the one bucket while a larger two rated credit was upgraded to a three rating.
As always we and our adviser are aggressively managing the remaining one and two rated credits in order to achieve the best possible outcome.
It almost across the board hit new full record highs in only nine months. According to pitch book approximately 83 billion was invested in VC backed companies in the third quarter, an increase over last quarter's total from the beginning of the year through the third quarter approximately 239 billion.
Venture capital has been invested putting us on pace to double last year's record of 166 billion.
In terms of VC fund raising 22 billion was raised in the third quarter and 96 billion has been raised through September 30th already breaking last year's full year record in virtually assuring the VC fundraising will clear the $100 billion milestone before the end of the year.
Larger VC funds continue to drive the bulk of increased fundraising.
Regarding VC backed exit activity the IPO inspect window stayed open in the third quarter with venture backed Ipos and Spacs, helping to drive a total exit value in the quarter of over 187 billion.
For the year through September 30 exit value is shattered the 500 billion Mark although recent underperformance by some spec combinations is raising questions as to whether the spacs are a viable long term alternative to ipos.
Wealth of options for venture backed companies to generate additional liquidity, which provides us with both an opportunity and competition for technology and life science investments with our advisers strong and active lending platform. We believe we are well positioned to compete and win in this environment.
Turning now to our lending markets. They continue to offer many quality investment opportunities to restock, our committed backlog and our advisors pipeline during the quarter. We made 63 million in debt investments to eight new portfolio companies consisting of three new life science investments one new sustainability.
Investments in four new technology investments, providing further diversification to our portfolio. We also funded 36 million to seven of our existing portfolio of companies.
<unk> supply chain challenges Covid risks and in Flushing concerns all have the potential to disrupt our markets and impact our portfolio of companies. Accordingly, we are taking the potential impact of each of these issues into account as we underwrite new investments, including transparent discussions with our prospective.
Portfolio of companies and their investors.
That said demand for venture debt remains abundant in the life science technology and sustainability markets. Our advisor remains disciplined in its marketing and underwriting and we expect onboard new to onboard new quality investments overtime, which will continue to grow our portfolio.
With ample capacity, a deep pipeline and our predictive pricing strategy, we remain well positioned entering Q4 to deliver additional long term shareholder value.
I will now turn the call over to Dan.
Thanks, Gerry and good morning, everyone.
Robin Jerry mentioned, we had another excellent performance in Q3, as we significantly grew our portfolio and generated strong NII.
Maintaining a strong overall balance sheet.
As of September 30th.
Had 88 million in available liquidity, consisting of $43 million in cash and $45 million in funds available to be drawn under our existing credit facilities.
As of September 30th there was 838 million outstanding under our 125 million Keybank credit facility.
And $66 million outstanding on our 100 million, New York life credit facility, leaving us with ample capacity to grow the portfolio.
Additionally, through our ATM program, we successfully and Accretively sold 395000 shares opportunistically raising nearly $7 million.
Our debt to equity ratio stood at one one to one as of September 30th.
It is lower than our target leverage of one two to one.
Based on our cash position and our borrowing capacity on our revolving credit facilities.
A potential new investment capacity at September 30th was $165 million.
As you go as far as our target leverage we would expect that our NII will also increase.
For the third quarter. The company earned total investment income of $16 4 million, an increase of 33% compared to 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 also increased due to higher prepayment and success fees received from two of our debt investments.
Our debt investment portfolio on a net cost basis stood at $431 million as of September 30th.
11% increase from June 32021.
For the third quarter of 'twenty, one we achieved onboarding yields of 11, 5% compared to 12, 2% achieved in the second quarter.
Our loan portfolio yield was 16, 2% for the third quarter.
Up 110 basis points from 15, 1% for last year's third quarter.
Turning to our expenses for the third quarter total expenses were $8 3 million compared to $6 5 million in the third quarter of 2020.
Our performance based incentive fee with $2 million, an increase from $1 5 million for last year's third quarter based on higher NII generated in the third quarter of 'twenty one.
Our interest expense increased to $3 1 million from $2 6 million in last year's third quarter due to an increase in average borrowings.
Our base management fee was $2 million up from $1 6 million in last year's third quarter due to an increase in the average size of our portfolio.
Net investment income for the third quarter was 40 cents per share compared to 31 cents per share in the second quarter of 'twenty, one and 34 cents per share for the third quarter of 2020.
The company's undistributed spillover income as of September 30th that's 44 cents per share.
Summarize our portfolio activities for the third quarter, new originations totaled $99 million, which were partially offset by $3 million in scheduled principal payments and $50 million in principal prepayments.
We ended the quarter with a total investment portfolio 452 million.
The portfolio consisted of debt investments in 43 companies with an aggregate fair value of $430 million and a portfolio of warrant and equity and other investments in 76 companies with an aggregate fair value of $21 million.
Based on our outlook.
NII our board declared monthly distributions of <unk> 10 cents per share for January February and March 2022.
And based upon our liquidity forecast and our spillover income levels. Our board also declared a special distribution of five cents per share payable in December.
We have now declared monthly distributions of <unk> 10 per share for 63 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 September 30th was $11 63 per share compared to $11 20 as of June 32021, and.
And $11 17 as of September 32020.
The 43% increase in NAV on a quarterly basis was primarily due to certain portfolio companies closing investment round at higher valuations, which drove higher valuation and warrants our net investment income exceeding paid distributions and.
Accretion from the sale of our shares through our ATM program.
As we've consistently noted 99% of 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 September 30th 100% 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.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
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Our first question is from SEC is sure bet, John with B Riley. Please proceed.
Hi, Good morning, and thank you for taking my question here.
Just wanted to start off by by you know clearly highlighting the strong origination activity in the third quarter maybe.
Maybe any comments on ongoing into the fourth quarter. If you expect that level to continue just kind of given your committed backlog I know in the release and the recent developments. It seems like the prepayments are kind of outpacing them. You know maybe what was disclosed from an origination standpoint, but just wanted to get your thoughts around that.
Yeah very good question.
I think we are definitely experiencing a higher level of prepayment activity.
Port for our portfolio companies have.
Lots of options relative to how they finance their businesses going forward and we've talked about many of them, whether it's the ideal market being open or us back.
Obviously debt being part of that and as well as a private equity through significant venture capital.
Investments so.
The velocity at which companies are raising money.
Using their liquidity to develop there.
Their products and get those products to market and find exits is significantly higher than it has historically been and so that creates.
Both an opportunity for us because I think venture debt.
As a great place and that kind of menu.
To basically fill holes in financing strategies that are technology life science companies have nowadays so while we do expect higher prepayments and certainly experienced that so far this year and even going into the fourth quarter. We've already had a couple we also see a market that has grown substantially.
Relative to the sizing that the venture debt market, which today, we size it somewhere around $20 billion to $25 billion. So when we think about that that market size that there is plenty of opportunity in the market to replace those transactions that are paying off.
And.
With new deals and I think our portfolio.
Probably from a historical standpoint, probably has relative.
Relative to how much of the portfolio makes up new deals versus older portfolio. I think we are on the newer side, where we were able to complete two to regularly replace transactions. So we see that continuing we still see a lot of opportunity. We believe we believe that we can continue the growth portfolio.
With the with and expect to have a higher prepayments than we have historically have and so far that's.
Certainly that during the course of this year, we have I would just finally mentioned that we've expanded our advisor has expanded the platform considerably in terms of number of originators. We have in the field. They are experienced their knowledge of the market. We think we're right at the top of the pack relative to that and I think that also is reflected in our original.
<unk> capability.
Okay. Thanks for that and just kind of.
Thinking through some of the recent releases I think in September.
You had a release where are you in Trinity capital provided of 40 million virtual load to a certain company I believe that was for.
Our next seat if you if you kind of step back and think about potential partnership opportunities or underwriting transactions with potential partners is this part of the strategy kind of going forward would you dip into this more often just wanted to get your thoughts around that.
So historically that has been Oh, that's a good catch that transaction you got the name right.
And we have.
We have partnered with a number of.
Lenders that we.
We think our.
Represent good both competition and our partners in the marketplace historically.
I don't.
It's it's not so much having a specific strategy related to that but I think we are our knowledge of the overall market both types of companies we're going after.
And the competition and potential partners in the market. We look for what is the best transaction for the customer because at the end of the day, we believe that that's going to that's what's going to win the day.
So we will always talk to and look to participate certain kinds of transactions. It helps manage our concentration risks and our public company portfolio and so I don't think there's any shift there in strategy. We have historically done that if you look back at our history. So we.
We expect that to continue at some level.
Great. Thanks for that one final one for me I'll hop back into queue.
Youre looking at the pipeline of opportunities to underwrite that clearly you have a pretty good history with with some of the existing companies that you've underwritten, but as you look at the new companies.
Any concerns popping up in your mind regarding business models are kind of valuations or do you think that you know there's plenty of opportunities kind of given the flush liquidity environment.
Well certainly the flush liquidity environment.
Can I think SKU.
The enthusiasm you have for the market.
But I think we're you know, we're pretty well grounded in the kinds of transactions that we're looking at relative to loan to value.
Who the invest the basic tenants of underwriting a venture debt transaction.
We do that as well as anybody in the market and that's something that we will continue to do is I think Rob mentioned and I may have mentioned dwelling.
Our opening remarks, we are aware, obviously, if some of these macro issues relative to supply chain.
Our COVID-19 hiring.
<unk>.
All of those issues that are out there that we hear about every day in the market and we are regularly our portfolio managers are regularly in contact with our portfolio companies to see if these particular.
Types of issues are directly impacting those companies and so.
We're certainly trying to stay ahead of that and certainly when we're underwriting new deals. So all of those factors come into play as we underwrite the transaction.
Great. Thanks, that's all for me.
As a reminder, it is star one on your telephone keypad, if he would like to ask a question. Our next question is from Ryan Lynch with <unk>. Please proceed.
Good morning, Thanks for taking my questions.
First one I had was you mentioned kind of record levels.
Your capital being raised.
Which we've seen high levels for quite a bit of time today.
I'm just wondering how does the competitive landscape look from that standpoint, because one of the big competitors in your space can be.
Equity capital from can be see going that route versus the debt route.
And on top of that.
You know how has you know that those sort of those competitive landscape today.
How is that potentially impacted the.
The level of prepayments that you guys are experiencing which obviously are a good thing because you're getting money back and getting really nice returns on those phones, but honestly it can present a headwind for portfolio growth is certainly fair.
Fairly high in the third quarter and look like they're starting off in the fourth quarter fairly strong as well.
Yeah.
The question there.
So.
It's a double edge store, obviously is a substantial amount of venture capital that has gone into our marketplace.
Literally since we started.
Ryan has grown.
Tenfold.
And that has also led to a 10 fold growth in venture debt demand as well. So we kind of size of our market today around 20% to $25 billion relative to venture debt.
And so that's a much bigger market that we can we had historically have and so.
Yes, there are there is more competition in the marketplace.
Sure.
From venture debt.
Debt lenders in terms of new people coming into the marketplace, but it's a much it's a much bigger size market as well. So we're seeing plenty of demand as it relates to venture capital. What we're finding is and this has historically been true.
Companies today like to augment that that venture capital that's coming into the company.
With additional debt to basically obviously expand the runway, but but also lowers the overall cost of capital. This is really important especially to Dr.
The entrepreneurs, who maybe you can give up a little bit less equity in the company is doing that.
Venture capital for the most part I'm not saying it never happens most part when venture capital is put into a company. The venture capitalists really don't want that money going to repay debt most of the time, when we're getting repaid and if you look at.
The fourth quarter as an example.
Are those repayments came I think August repayments came from either M&A activity one of our companies went public so that was an IPO and we got.
We potentially could get paid upfront.
And then.
Spacs getting done and things like that that that could impact and then the last one would be being refinanced by cheaper cost of capital as our some of our four rated credits have.
Mature and become more bankable. So most of the repayment activity comes from those sources the venture capital is.
Going into these companies, where the velocity of which they're using their liquidity has also.
Grown quite a bit so they're using the money faster developing their products faster, they're getting them to market faster, which means they need more liquidity in order to do all of that and venture debt is a nice we believe today right now in the market as it sits today is a really nice space for venture debt and it's a pretty big space on it.
Comparative basis to our would've spent historically.
Gotcha that that's that's helpful backdrop on a commentary on that.
You know as we look at the fourth quarter, a 35 million of pre payments already received.
You know in your release, you talked about end of term payments and prepayment fees.
Could you quantify.
What those told we'll just we have a sense of what you guys have already received from what from an income standpoint that was accelerated in the fourth quarter.
Yeah. So you know every prepayment is in.
<unk>.
Similar for each quarter is very different but on average you can estimate you know as far as prepayment fees about 2% to 2.5% end of term payments and.
And other accelerated fees kind of in the four or five 5%.
And from there you can kind of back into the impact of the income for the quarter.
Okay.
That's helpful and then just a final one.
On your guys' realized and unrealized gains that you guys recognize this quarter can you just describe kind of what what was the main driver behind those was it one or two companies or was it.
You know a wide variety of companies being right now.
Yeah. It was it was bought for realized gains we had a two to three companies that had events, where we realized warrant gains and then on the unrealized side. There is a handful of companies that have raised substantial capital at higher valuations that drove.
Our fair value.
Mark for each one of the warrants that we hold.
Yes.
Okay.
Understood I appreciate the time today and really nice quarter guys.
Thanks Ryan.
There are no more questions at this time I would 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.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
Sure.
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<unk>.
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Okay.
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