Q4 2021 Horizon Technology Finance Corp Earnings Call
If anyone should require operator assistance during the conference. 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 Ms. Megan Bacon Director Investor Relations and marketing for Horizon Technology Finance Corporation.
You may begin.
Thank you and welcome to Horizon Technology Finance Corporation fourth 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 that the Q4 earnings press release and form 10.
K are available on the company's website at Horizon had finance dot com.
Before we begin our formal remarks I need to be.
Remind everyone that during this conference call the company will make certain forward looking statements, including statements with regard 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.
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 2021 the.
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.
Jerry 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.
2021 was a fantastic year for HRC N and the lending platform of our adviser Horizon Technology Finance management.
We began the year.
Strong position after successfully navigating the most challenging aspects of the pandemic.
And ended the year, having significantly grown our portfolio and strengthened our brand and our balance sheet we.
We are proud of our advisors deepen professional team their dedication and their contributions to our excellent performance in 2021.
Our performance validated our predictive pricing strategy and disciplined investment approach.
Like you we are keeping a close eye on events around the world, including the turmoil unfolding in eastern Europe and on domestic issues, including inflation and what this may all mean for us and the broader economy in the months ahead.
Turning to our accomplishments in 2021.
Our portfolio at year end stood at $458 million, an increase of 30% from the end of 2020.
Consider that we achieved 30% growth despite a record year of nearly $175 million in prepayments.
Our growth was a testament to both our advisers ability to source and win larger high quality venture debt investments and the increasing power of the horizon brand in the venture debt community.
To that end our advisor expanded its platform during 2021 through an agreement with a private investment vehicle to originate and manage a venture debt portfolio to invest alongside horizon.
We are pleased that this relationship has had a positive impact on horizon's ability to access additional and larger investment opportunities.
We finished the year with a committed unapproved backlog of $127 million, our largest year end total which provides us with a significant base to further expand our portfolio in 2022.
We generated net investment income of $1 41 per share well in excess of our distribution level for the year. Thanks in part to the continued success of our predictive pricing strategy.
Based on our outlook and our undistributed spillover income of 51 cents per share as of year end, we declared monthly distributions of <unk> 10 per share through June of 2022, which will mark five and a half years of monthly distributions at this level.
We achieved a portfolio yield on our debt investments of 16, 2% for the second consecutive quarter and our full year portfolio yield of 15, 7% add.
At or near the top of the BDC industry.
We maintained a stable credit profile with nearly 98% of our portfolio rated three or higher at the end of the year, we are consistently and actively managing our portfolio.
Of investments to maintain its credit quality.
We ended the year with N V of $11 56 per share a slight reduction from the prior quarter, but up 5% from the end of 2020.
Finally, we strengthened our balance sheet in several respects.
Raised approximately $30 million of equity in 2021 from our at the market program all at a premium to NAV.
We reduced our cost of capital by refinancing our publicly traded six and a quarter notes with four and seven eights notes we.
We ended the year with available liquidity and capacity to fund additional growth in our portfolio as well as move closer to our target leverage of one two to one.
Just this week, we announced an increase in the size of our credit facility with New York life to $200 million further increasing our capacity and positioning us for growth.
We entered 2022 with excellent momentum across the board.
And believe we remain well positioned to continue growing our portfolio of investments and producing strong net investment income.
Our advisor continues to strengthen their horizon platform with new hires and by promoting members of our team and the key management positions. This will ensure horizon continues on its path to further growth and continued profitability.
Demand for venture debt.
Within our target industries, there's still a burgeoning and we are winning our share of transactions, including New awards, thus far in the first quarter.
Our committed backlog and pipeline of investments remains robust.
Our advisors expanded lending platform and the power of the Horizon brand continues to enable us to access a larger number of investment opportunities and we continue to maintain capacity to execute on our backlog of commitments as well as our advisors pipeline of new opportunities.
2021 was a banner year for horizon, and we believe the best is yet to come 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, everyone.
Blended a record number of 17 transactions totaling $80 million in the fourth quarter another quarter of substantial activity.
Our onboarding yield of 11, 3% during the quarter reflected the power of our advisors predictive pricing strategy and its continued discipline in pricing transactions.
Expects to produce strong NII.
We experienced five loan prepayments during the quarter totaling $66 million with the prepayment fees and accelerated income from such prepayments contributing to a debt portfolio yield of 16, 2% for the second consecutive quarter. Once again, among the top in the BDC industry.
In addition, we received proceeds of $400000 from the sale of warrants and equity are further testament to our message of structuring investments to generate additional yield from our growing warrant and equity portfolio.
As of December 31st.
Warrant and equity positions in 76 portfolio companies with a fair value of $21 million since the beginning of 2020, we have received approximately 14 million and proceeds from warrant and equity investments.
As we've consistently noted structuring investments with warrants and equity Reits as a key aspect of our venture debt strategy and an additional value generator.
In the fourth quarter, we closed $115 million in new loan commitments and approvals and ended the quarter with a committed unapproved backlog of $127 million compared to $101 million at the end of the third quarter.
There is no guarantee we will fund all of the transactions in our committed or awarded backlog. The total supports a positive funding outlook for 2022.
Subsequent to the end of the year, we funded $32 million and new venture debt loans and received 12 million in loan prepayments are committed and approve backlog as of today, that's grown to $179 million, which includes new awards in 2022.
In addition, our advisors pipeline of new opportunities today is approximately 876 million, providing us with a solid base of opportunities to further grow our venture debt portfolio over the coming quarters.
Portfolios credit quality remains robust as the fair value of nearly 98% of our debt portfolio consisted of three and four rated loans as of year end <unk>.
During the quarter, one investment was downgraded to a one rating and at the end of the quarter. We had a total of two credits with a one or two rating as always we are aggressively managing the one and two rated credits in order to achieve the best possible outcome in Q4, we exited N V. I a one rated credit.
Three and fully recovered our principle.
Turning now to the venture capital environment. It was a record shattering year in 2021. According to pitch book approximately 330 billion was invested in VC backed companies in 2021, essentially doubling 2000 twenty's prior record of 166 billion.
In terms of VC fundraising 32 billion was raised in the fourth quarter and for the year VC Fund raising eclipse. The 100 billion dollar Mark for the first time ever at 128 billion was raised larger VC funds continue to drive the bulk of them increased fundraising.
Regarding VC backed exit activity the I P. O inspect window remained open during the quarter, helping to drive a total exit value for the year of nearly 775 billion. However, we have seen recent underperformance by some spec transactions and a decline in the public biotech market in the second half of 2020.
One.
It will be challenging for vcs to match 2021 to record performance in the venture capital market, particularly with respect to exit value VC firms will start 2022 with record levels of dry powder that will provide liquidity for new investment opportunities.
And support for existing portfolio companies and numerous other options remain for venture backed companies to generate additional liquidity, including venture debt, which has become an important tool for growth stage companies to finance their development plans to that end, we expect 2022 to provide opportunity as well as.
Tissue for technology life Science sustainability in health care technology investments with our advisers strong and active lending platform. We believe we are well positioned to compete and win in the current environment.
Turning now to our lending markets. They continue to offer many quality investment opportunities to further fill and enhance our committed backlog and our advisors pipeline during the quarter. We made 46 million in debt investments to seven new portfolio companies consisting of two new life science investments in five new.
Technology investments, providing further diversification to our portfolio.
We also funded 34 million to 10 of our existing portfolio of companies.
We continue to keep a close eye on the macro environment and our underwriting new investments with those concerns in mind.
We also continue to have active and regular dialogue with all of our portfolio companies in order to maintain the credit quality of our portfolio.
As we progress in 2022 venture debt opportunities remain attractive in the technology and sustainability markets life Science public equity markets have significantly tightened, which is impacting valuations and access to capital for some biotechs. However, life science venture capital firms have plenty of dry powder and find lower.
<unk> to be an opportunity to selectively invest in both private and public biotech companies with strong clinical pipelines historically when the public markets for biotech companies tightened the market looks for alternative funding sources, such as big pharma collaborations and M&A as well as venture that we are seeing opportunity.
He's come to the venture debt market that fit that description.
Our advisor will remain disciplined in its marketing and underwriting and continue to seek quality investments that will rationally grow our portfolio.
We believe we remain well positioned to continue to deliver additional long term shareholder value in 2022 and beyond.
I will now turn the call over to Dan.
Thanks, Gerry and good morning, everyone as Robin Jerry mentioned, the fourth quarter capped off an excellent year for horizon as we significantly grew our portfolio and generate strong NII.
And then covered our distributions, while maintaining a strong overall balance sheet and stable credit quality.
We believe we entered 2022 position to expand our portfolio and generate additional long term value for our shareholders.
To recap 2020 , one we grew our portfolio by 30% to $458 million.
Our adviser expanded its platform to originating and managing a venture debt portfolio for a private investment vehicle, which expands our ability to win transactions and grow our portfolio in 2022.
We reduced our cost of capital during the year by redeeming, our six and a quarter notes, replacing them at four and seven eight notes.
Through our ATM program, we successfully Accretively sold one 9 million shares and raised $30 million in 2020 , one which included receiving net proceeds of approximately $13 million from the program in the fourth quarter.
Demonstrating our ability to opportunistically access the equity markets.
2021 with a landmark year for horizon, and we believe it puts us firmly on the path for additional growth and shareholder value creation in 2022.
As of December 31, we had $71 million and available liquidity.
<unk> up $46 million in cash and <unk>.
$5 million in funds available to be drawn under our existing credit facilities as of December 31. It was 54 million outstanding under our Keybank credit facility and $79 million outstanding on our New York Life credit facility.
But that's the equity ratio stood at one one to one as of December 31st which was lower than our target leverage of one two to one.
Based on our cash position and our borrowing capacity on our credit facilities are potential new investment capacity at December 31 was $139 million.
With our increased capacity in our New York life facility today, we have $239 million in new investment capacity.
As we grow towards our target leverage we would expect that our NII will also increase.
For the fourth quarter, the company or in total investment income of $16 9 million, an increase of 68% 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 higher fee income due to a larger amount of prepayments.
Our debt investment portfolio on a net cost basis stood at $442 million.
December 31st a 3% increase from September 32021.
For the fourth quarter of 2021, we achieved onboarding yields of 11, 3% compared to 11, 5% achieved in the third quarter.
Our loan portfolio yield was 16, 2% for the fourth quarter up 320 basis points from 13% for last year's fourth quarter.
Turning to our expenses for the fourth quarter total expenses were $8 7 million compared to $5 9 million in the fourth Florida 2020.
Our performance based incentive fee was $2 million, an increase of $1 million from last year's fourth quarter based on higher NII generated in the fourth quarter of 2021.
Our interest expense increased to $3 3 million from $2 3 million in last year's fourth quarter due to an increase in average borrowings.
Our base management fee was $2 million up from $1 6 million in last year's fourth quarter due to an increase in the average size of our portfolio.
Net investment income for the fourth quarter was 39 cents per share compared to 40 cents per share in the third quarter of 2021.
One cents per share for the fourth quarter of 2020.
For the full year 2021, we generated NII of $1 41 per share.
More than covering our total distributions during 2021 $1 25 per share.
The company's undistributed spillover income as of December 31 was 51 per share.
As a reminder, first quarter is typically the lightest in terms of prepayment activity.
And we expect the first quarter of 2022 to be in line with that historical norm.
However, our significantly larger portfolio, along with our predictive pricing strategy should enable us over time to generate solid NII that covers our distributions.
Summarize our portfolio activities for the fourth quarter, new originations totaled $80 million.
Which were partially offset by $2 million in scheduled principal payments and $66 million in principal prepayments.
We ended 2021 with a total investment portfolio of 458 million.
Portfolio consisted of debt investments in 45 companies with an aggregate value of $437 million.
And a portfolio of warrant equity and other investments in 78 companies with an aggregate value of $21 million.
Based upon our outlook for 2022, our board declared monthly distributions of <unk> 10 per share for April May and June 2022 .
We have now declared monthly distributions of <unk> 10 per share for five and a half years.
We remain committed to providing our shareholders with distributions that are covered by our net investment income overtime.
Our NAV as of December 31 was $11 56 per share compared to $11 63 as of September 32021, and $11.02 as of December 31, 2020.
The 7% reduction in NAV on a quarterly basis was primarily due to pay distributions, including the <unk> special distribution.
Unrealized and realized losses offsetting strong net investment income and accretion from the sale of our shares through our ATM program.
As we've consistently 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 December 31st 80% of our portfolio was at the prime rate floor that would benefit from an increase in the prime rate.
In fact, the prime rate would have to increase 75 basis points before our cost of debt begins to rise.
<unk>, providing us with a positive spread for at least a couple of quarters should the prime rate rise.
This concludes our opening remarks, we'll be happy to take questions. You may have at this time.
Yeah.
Thank you 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, a confirmation tone will indicate your line is in the question queue do.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Sarkis Sebastian with B Riley Securities. Please proceed with your question.
Hi, Good morning, and thank you for taking my question here you.
You guys talked about the environment here and also how some of the lower valuations are providing an opportunity to selectively invest in some of the stronger companies.
Are you seeing D C that you know becoming more.
More relevant in the conversations today as opposed to perhaps you know the equity stack and then you know in in light of that as well you talked about kind of the $239 million in new capacity, maybe if you can talk about how you anticipate on that.
Deploying that capital for growth.
Yeah, Hi, this is Terry.
So so yes it is.
Specifically talking about the life science market.
Not an unusual phenomenon when that market.
Titans, which can be uncorrelated.
And correlated to the global markets based on things that are happening in the biotech market.
Oftentimes when that does happen.
Biotech companies will try to extend their cash runway.
Using others other sources of capital are non dilutive capital like doing a deal with big pharma or.
Doing the venture debt transaction.
Just as an example, we recently.
I had a public biotech company come to us and ask us for some financing that would extend their runway about two quarters, but it's two quarters out in 2020 for the last quarter of 2024 in the first quarter 2025. So.
Theyre looking forward.
Public markets tightened this company had an ATM in place most biotech public biotechs do they didn't want to draw on that right now because the price was obviously being impacted by a tightening market. So we do expect to see opportunity in that marketplace relative to a tightening.
<unk> equity market.
Yeah.
This is Dan on your second part of the question related to the capacity and we will continue to look at deploying our debt to grow into our target leverage of one two times and I'll.
Do that and the combination of cash on our balance sheet.
Pasadena availability, we have on our facilities and you know continually opportunistically raising equity through the quarter.
Right that makes sense and and also a follow up if I may.
Looking at kind of the onboarding yields fairly consistent quarter on quarter, and then when we factor in.
Some of the incremental yield on the Prepays, where the fees are the accelerated income I think you guys are topping out at 16%.
Is that the correct level to expect.
Into fiscal 'twenty two.
<unk> kind of the interest rate backdrop and in talks of obviously rates increasing et cetera.
Well I think it's I think if you look historically at prepayments.
For horizon.
Generally speaking.
They've always been lower in the first quarter and then they grow over time.
And especially in the fourth quarter, and we had a lot of prepayments in the fourth quarter. This year too. So I really think you have to kind of a at least we do pay attention to.
You know that kind of activity as we've always said, it's a little bit more difficult to predict prepayments, but if you look historically at how that has worked for us.
The first quarter has generally been a relatively.
Comparatively lower.
Prepayment activity in the first quarter as you know companies are still figuring out your financing plans.
Still getting board approval on getting financings done or M&A transactions closed or ipos, whatever so I. It. It's generally speaking not not in even saying, but over the course of the year.
Yeah.
We'll expect our portfolio to yield between somewhere between 14 and 16%.
I think that's been a pretty again, if you go back and historically look at our portfolio.
Especially if you do it on a quarter to quarter basis. Instead of just an annual basis, you can see that we've been pretty consistent in that in that regard that has to do with how we price transactions not just on the onboarding yield, but our expectation of exits based on the specific footings of a company that.
That we're financing and we have a lot of data on that so that allows us to try to maximize the pricing when we can anticipate there'll be an exit for us.
From a transaction.
Yeah.
Thank you that's very helpful I'm going to hop back in the queue.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Ryan Lynch with <unk>. Please proceed with your question.
Hey, good morning, Thanks for taking my question.
I kind of worry about the follow up on the discussion regarding just the pullback in valuation.
The high grade areas of the market, which is where you got to participate there.
It sounds like given the pull back maybe there are some new opportunities that you guys are seen as.
Venture debt becomes you know, maybe a more attractive source or more available source of capital for some of these businesses.
Wondering on balance that sounds like that's maybe a positive aspect of it I was wondering if you know on balance. So you have the other side of data companies.
Needing to raise additional capital that you guys currently Africa portfolio.
Is it making it more difficult for them to go out and fundraise at appropriate valuations as well as Ah yeah.
I don't have our equity and warrant book pressure on valuations probably doesn't bode well.
For that so just love to hear kind of your.
On a full circle discussion on.
How you guys are really kind of a pullback in valuations.
Passing your business, both pro and Con side.
So Ryan this is Jerry so I think you've got you've got it right.
Your comment.
Comment on balance.
He is probably correct it definitely creates more opportunity as companies look for other ways to provide liquidity.
For their growth.
Outside of raising equity.
So that is something that is a very positive.
Aspects of our business. However, we can't ignore the fact that debt.
One of the reasons theyre coming to us as they don't want to or can't.
More importantly in some instances.
Raise equity and so you do have to balance.
You know how how youre looking how we are looking at the market going forward relative to equity and I think one of the positive things coming into 2022.
Valuations are down there's no question about it but VC funds are actually up.
Amount of liquidity that VC funds have.
To support their existing portfolio companies and invest in new new opportunities.
Higher than it has historically ever been so there is liquidity available to these companies.
They are going to have to be realistic about valuation.
It is going to create some opportunity for us.
We also what inevitably happens is there is some evaluations titan, especially when markets tightened a public markets tightened.
You know VC firms start looking at their portfolio companies and kind of start ranking them.
It's inevitable just to kind of a human thing that they do.
And so we want to make sure that all of the portfolio all of our portfolio companies that the investors are still strongly supportive of those companies and obviously every time, we're looking at a new transaction in this kind of market are we you know we do a pretty deep dive not that we don't otherwise but to a much deeper dive on.
Who the investors are how much capital they have.
And the and how much they have reserved for the transaction that we're looking at and so it's.
It's on balance a positive thing it will create certainly more opportunity for us, but you know our experience tells us that there has to be a level of caution and moving forward as well.
Okay.
That's helpful kind of.
Paulson discussion on that.
One quick question I had was you talked about Q1.
In a seasonally slow quarter for prepayments is that going to even be magnified.
Just given the cash that we just had with with some countries.
Uhm pulled back.
Lee looking towards a whole bogged down capital for longer.
Until you know hopefully valuations recover so this.
Even though theres seasonal slowness in Q1 prepayments do you expect to be back even more given the market dynamics.
Yeah.
Yeah, I know, it's always hard to project prepayments, but.
But what we do we feel currently today is that you know prepayments will probably come back to our historical norm.
<unk> 2020 , 'twenty, one where high level of prepayments in comparison to our to the balance sheet.
And as Jerry mentioned, you know the first quarter, we have 12 million today.
And if you go back and look at specifically 2020, and also 19 and 18, where we had very similar prepayments in the first quarter, what NII was produced during those.
Those periods, but overall throughout the year, we're very positive NII income.
Income producing years and so as we say venture debt portfolio prepayments always part of the picture. It's just the timing of it is hard to predict.
Brian This is Rob I'd I'd add to that.
As it relates to.
Magnifying the normal seasonality that Dan and Gerry just spoke to that when you have volatile markets like we have right now.
<unk> and other methods that produce the exits of prepays are temporary until the market stabilized so.
That's our outlook for Q1, and but we remain.
The.
Fundamental underlying our predictive pricing strategy should produce results over time, just not on a quarter by quarter basis.
Yeah.
Understood I appreciate the time today.
Thank you. Thank you thanks Ryan.
Thank you ladies and gentlemen, our next question is a follow up from the line of circa Sebastian with B Riley Securities. Please proceed with your question.
Hi, Thank you for taking the follow up here just just two more for me. If you can please provide us an update or or some sort of a refreshed outlook for credit quality and loan to value ratios here in fiscal 'twenty, two and I have one more as a follow up.
So the fundamental underwriting strategy continues asarco.
<unk> this is Rob.
We continue to underwrite to a low loan to values are going in and we try to make sure that we are managing our portfolio of companies to maintain that.
<unk>.
What was the second part of your question list.
So there's no fundamental difference in the way we look at these although as Gerry and Dan have noted we are being cautious about the macro environment the impact of inflation the impact of supply chain.
All of those things on.
The capacity of our company is to service the debt.
Yeah got you I guess, what I was trying to also tease out was if there were any things that horizon is especially mindful of and an underwriting.
Credit in today's environment, you know versus kind of your historical norm. That's what I was trying to tease out. Thank you.
Okay.
Yeah.
One of the things, we're looking at the impact on the supply chain inflation.
<unk> global we do not have.
Any direct exposure to.
Eastern Europe kind of investments or anything that would be directly impacting our portfolio.
Great. Thank you that's all for me.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Pomeroy for any final comments.
Well, we want to thank you all for joining US. This morning, we appreciate your continued interest and support in horizon.
Hope you and your families continue to remain safe and healthy and we look forward to speaking with you again soon.
This concludes our call.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.