Q1 2022 Horizon Technology Finance Corp Earnings Call
Greetings and welcome to Horizon Technology Finance Corporation first quarter 2022 earnings conference 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 todays conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn this conference over to your host Ms. Megan Bacon director of IR and marketing. Thank you Ma'am you may begin your presentation.
Thank you and welcome to the Horizon Technology Finance Corporation first quarter 2022 conference call representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer, Jerry Michaud, President and Dan <unk>, Chief Financial Officer I.
I would like to point out that the Q1 earnings press release and Form 10-Q are available on the company's website at Horizon Tech Finance dotcom.
Before we begin our formal remarks I need to 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 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 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 Theyre.
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.
Larry 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.
In the first quarter, we picked up right, where we left off in 2021 with substantial growth, which displays the power of the lending platform of our adviser Horizon Technology Finance management, our portfolio growth resulted in our surpassing the $500 million milestone during the quarter. We also maintain.
Our portfolio of strong credit quality, while we made notable strides in strengthening our balance sheet, ensuring we have ample capacity to further grow in the quarters ahead.
Our first quarter highlights include we grew the portfolio by $57 million, a quarterly record for HRC yen, which resulted in a portfolio value at quarter end of $515 million.
The growth is a testament to our advisers ability to source and win high quality venture debt investments and the increasing power of the horizon brand in the venture debt community.
We finished the quarter with a record committed and approved backlog of $151 million and a pipeline of opportunities of over $1 billion, providing an outstanding base to further expand our portfolio. We further strengthened our balance sheet in several respects.
We increased the size of our credit facility with New York life to $200 million further increasing our lending capacity and ability to grow during the quarter, we raised approximately $4 million of equity capital through our at the market program and in March we successfully completed a $34 million equity follow on offer.
During both at a premium to NAV.
These equity raising events provide us with significant new equity capital, which we can leverage towards our target leverage of one two to one.
We ended the quarter with any <unk> of $11 68 per share up 12 from year end 2021, and up 61 sets from the end of Q1 2021.
We generated net investment income of 26 cents per share below our distribution level 30 cents per share due to a lower amount of prepayments, which is historically typical for the first quarter based on our outlook. We declared monthly distributions of <unk> 10 per share through September of 2022, which will mark nearly <unk>.
Six years of monthly distributions at this level.
We have earned a total of $1 36 per share over the last four quarters, which exceeds our total distributions of $1 25 per share for such period.
Our undistributed spillover income was 47 per share as of the end of the quarter.
We achieved a solid portfolio yield on our debt investments of 12, 4% for the quarter.
And finally, we maintained a stable credit profile with nearly 96% of our portfolio rated three or higher as of March 31.
As always we are consistently and actively managing our portfolio of investors investments to maintain its credit quality.
The demand for venture debt within our target industries remains strong, but we are cautiously watching the equity markets and macro environment for the continued impact on the economy from inflation geopolitical events ongoing supply chain challenges and the effects of the pandemic, despite our necessary incur.
<unk> scrutiny, we continue to win our share of transactions, which we appropriately structure for the environment.
Our double digit portfolio growth is attributable to the standout work of our adviser and its entire team.
For the quarter the advisors platform funded $132 million in new high quality venture debt investments spread over all of our targeted industries. We believe our advisor continues to build US a portfolio based on its predictive pricing strategy with the opportunity for enhanced yields from our borrowers early debt investment.
Exits.
From a liquidity events.
In addition, our advisor continues to enhance the horizon platform with additional hires and promoting members of its team into key management positions, ensuring we remain on course to generate future growth and continued profitability.
The benefits of the Horizon platform include an expanded lending platform and the power of the horizon brand to access a larger number of investment opportunities our pipeline of investments that has never been larger enhanced capacity to execute on our backlog of commitments and new opportunities and an experienced team that is <unk>.
<unk> tested and fully prepared to manage through potential macro or economic headwinds.
I'm proud of our entire team's efforts, particularly in reaching the $500 million investment portfolio, a milestone with that 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.
Lending activity in the first quarter of 2022 resulted in two key milestones for Horizon first we grew our portfolio by a record $57 million in the quarter second our portfolio of top of the 500 million Mark for the first time in our history we.
We funded 16 transactions totaling $73 million in the first quarter, including 47 million in debt investments to seven new portfolio companies, consisting of three new technology investments two new sustainability investments.
New life Science investment and one new health care Tech investment, providing further diversification to our portfolio. We also funded $26 million from our committed backlog to nine of our existing portfolio companies, our onboarding yield of 11, 4% during the quarter reflected the continue.
Discipline in pricing transactions, and we expect to produce strong and I.
Experienced too long prepayments during the quarter totaling $12 million.
Payment fees and accelerated income from such prepayments contributing to a debt portfolio yield of 12, 4%.
Rob discussed Q1, historically experiences lower prepayment activity in the remainder of the year why would you not expect prepayment activity for the year to reach a historic level. We experienced in 2021, we do anticipate prepayments for the balance of the year in accordance with our historical averages.
As of March 31, we held more equity positions in 84 portfolio companies with a fair value of $23 million since the beginning of 2020, we have received approximately 14 million and proceeds from warrant and equity investments.
They noted structuring investments with warrants and equity rights is a key aspect of our venture debt strategy.
Additional value generator.
In the first quarter, we closed 100 million in new loan commitments and approvals and ended the quarter with a record committed unapproved backlog of 151 million compared to $127 million at the end of the fourth quarter. While there is no guarantee we will fund all of the transactions in our committed or awarded.
Backlog, we are well positioned to further grow our investment portfolio during the year.
Our portfolio's credit quality remains very solid as the fair value of nearly 96% our debt portfolio consisted of three and four rated loans as of March 31.
During the quarter, one investment was downgraded to a two rating and at the end of the quarter. We had a total of three credits with a one or two rating with the remaining 47 portfolio credits rated three or better.
As always we are aggressively managing the one and two rated credits in order to achieve the best possible outcome.
Turning now to the venture capital environment. It appears we are beginning to see a trend toward more normalized activity. According to pitch book approximately 71 billion was invested in D. C back companies in the first quarter of 2022.
Pretty healthy amount of investment, but often a torrid pace set in 2021.
In terms of VC fundraising momentum continued from 2021 74 billion was raised in the first quarter, putting 2022, well on pace to surpass last year's record larger VC funds continued to drive the bulk of the fundraising and it will be interesting to see market volatility.
Any impact on future fund raising or the number of active investors.
You see that backed exit activity on the other hand saw a considerable slowdown in the first quarter unsurprising.
Unsurprising, given the market volatility and underperformance inflation and geopolitical uncertainty total exit value for the quarter was 34 billion, which is closer to pre pandemic exit levels.
While we are watching the VC investment environment closely for signs of slowing fundraising investments annex activity.
C firms continue to maintain record levels of dry powder can provide liquidity for new investment opportunities and support for existing portfolio companies. As we noted on our last call a tightening of the IPO market and significant reduction in spec exits is in part driving increased demand for venture debt.
Key source of additional liquidity for growth stage companies.
But our advisers strong and active lending platform and the solid investment capacity at Horizon. We believe we are well situated to continue competing and winning in the current environment.
Subsequent to the end of the first quarter. We continued our strong growth momentum funding eight transactions totaling $60 million in April our committed approved and awarded backlog as of today, that's grown to $311 million, which includes several new awards during April .
Advisors pipeline of new opportunities today is approximately $1 2 billion again, an historic level of opportunities to further grow our venture debt portfolio over the coming quarters. We also experienced a prepayment in April of $25 million debt investment.
Now to our lending markets, there was a hell well.
Quality investment opportunities to further enhance our committed backlog and our advisors pipeline as noted earlier.
Not only quantitatively the size of our portfolio during the quarter. We also qualitatively improved our portfolio by adding new portfolio companies from all of our core markets of technology life Science healthcare technology and sustainability.
Regarding further diversification to our portfolio.
That said, we continue to keep close tabs on the macro environment and are mindful of ongoing concerns when underwriting new investments. We also continue to have an active and regular dialogue with each of our portfolio companies and their investors in order to maintain our credit quality as well as help us identify.
<unk> VC ecosystem.
Moving ahead venture debt as an asset class continues to grow, especially as equity markets tightened and as a result opportunities remain attractive in our core markets.
Continue to be disciplined C quality investments that'll allow us to intelligently grow our portfolio.
<unk> remains well positioned to continue to deliver additional long term shareholder value.
With that I will now turn the call over to Dan.
Thanks, Gerry and good morning, everyone I'll start with a review of our efforts to strengthen our balance sheet and capital structure in the quarter and then I'll provide a review of our first quarter results.
We took two significant steps to enhance our capital resources in the quarter first we increased our lending capacity by $100 million on our New York life facility.
Also extending its investment period.
In addition to match the new debt capacity, we completed a successful equity offering raising $34 million in the quarter.
We believe these actions will provide us with the capacity to continue to grow the portfolio.
Turning to our operating results as of March 31, we had $80 million in available liquidity.
Thing up $15 million in cash and $65 million of funds available to be drawn under our existing credit facilities at.
As of March 31st there was $44 million outstanding under our 125 million Keybank credit facility and $94 million outstanding on our $200 million in New York Life credit facility, leaving.
Leaving us with ample capacity to grow the portfolio.
Yeah.
Our debt to equity ratio stood at <unk> nine to one as of March 31, which is lower than our target leverage of one two times.
Based on our cash position and our borrowing capacity on our credit facility, our potential new investment capacity at March 31 was $202 million.
As we go towards our target leverage we would expect that our NII will also increase.
For the first quarter, we earned total investment income of $14 2 million, an increase of 7% 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.
Our debt investment portfolio on a net cost basis that at $500 million.
As of March 31st.
13% increase from December 31, 2021.
For the first quarter of 'twenty, two we achieved onboarding yields of 11, 4% compared to 11, 3% achieved in the fourth quarter.
Our loan portfolio yield was 12, 4% for the first quarter compared to 15, 2% for last year's first quarter.
Total expenses for the quarter were $8 4 million compared to $7 2 million in the first quarter of 2021.
Our performance based incentive fee was $1 4 million compared to $1 5 million for last year's first quarter.
Our interest expense increased to $3 4 million from $2 7 million in last year's fourth quarter due to an increase in average borrowings.
Our base management fee was $2 2 million up from $1 8 million in last year's first quarter due to an increase in the average size of our portfolio.
Net investment income for the first quarter of 'twenty, two with 26 cents per share compared to 39 cents per share in the fourth quarter of 'twenty, one and 31 cents per share for the first quarter of 'twenty one.
The company's undistributed spillover income as of March 31 was 47 cents per share.
We anticipate that the larger portfolio, along with our predictive pricing strategy should enable us over time to generate solid NII that covers our distributions.
As we have said in the past we will experience repayments throughout the year. However, it is difficult to predict in which quarter. They will occur with the first quarter typically being the lowest.
Summarize our portfolio activities for the first quarter, new originations totaled 73 million, which were partially offset by $2 million in scheduled principal payments and 12 million in principal prepayments.
We ended the quarter with a total investment portfolio of $515 million.
Our portfolio consisted of debt investments 50 companies with an aggregate fair value of $492 million and a portfolio of warrant equity and other investments in 86 companies with an aggregate value of $23 million.
Based upon our outlook for 2022, our board declared monthly distributions of <unk> 10 cents per share for July August and September 22.
We have now declared monthly distributions of <unk> 10 cents per share for nearly six years.
We remain committed to providing our shareholders with distributions that are covered by our net investment income over time.
As of March 31 was $11 68 per share compared to $11.56 as of December 31, 2021, and $11 seven as of March 31 2021.
Well San increase in NAV on a quarterly basis was primarily due to the accretion from our successful equity offering and net investment income, partially offset by paid distributions and unrealized losses.
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 March 31st over 80% of our portfolio will benefit from additional increases in the prime rate.
In addition, we have a 50 basis point spread in our cost of debt to the current prime rate, providing us with a positive spread when the prime rate rises.
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 would like to ask a question. Please press star one on your telephone keypad.
Formations home will indicate your line is in the question queue.
You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Question comes from the line of Paul Johnson with K B W. You May proceed with your question.
Yeah. Good morning, guys. Thanks for taking my questions.
I'm just curious how you know what your guys expectations are for your unfunded commitments just kind of under this environment.
With you know potentially maybe a slowdown in in VC equity investments in <unk> and.
Maybe a more of a preference for.
For our B C that and obviously tapping into any sort of unfunded commitments that's available.
Well I think that's a that's the question for our for our environment right now so it's a really good one as.
As you probably know most of our committed backlog is subject to companies meeting.
Milestones as they move forward that basically would provide.
Additional.
Higher valuations for the company and in today's environment of course meeting those.
Those key milestones are key to understanding kind of whether a company is able to stir.
Strategically.
Just both.
Its ability to raise capital to adjust.
Justice strategy based on their own economic.
Outlook for their own markets and so we pay very close attention to them and we pay very close attention to the milestones that need to be met.
In addition of course, many of our transactions have covenants as well so.
We're very focused on that.
Today.
And I think.
As are the venture capitalists, who are funding these companies.
I would say that probably a little bit of a difference in this volatility markets compared to others cycles. We've had is that the venture capitalist firms themselves have a lot of liquidity on their balance sheets and are able to alright, certainly through the first quarter had been able to raise additional.
<unk> capital. So there is a lot of dry powder powder, and we're seeing that in our discussions with the V C's they're still.
Strongly supportive of their portfolio companies, we are having more conversations more often right now with both our portfolio of companies and the investors and so that's kind of how.
How we are.
Kind of monitoring the market and we'll continue to do that at a heightened level through.
Certainly the rest of 2022.
Thanks, I appreciate that that's great color I guess when you are looking at your pipeline and you've obviously had a pretty good quarter in that growth.
This quarter.
Do you think for maybe looking at a scenario where Ah <unk>.
That growth is actually relatively high for the BDC, just kind of due to lower prepayments over the next few quarters.
Yeah. So you know we spent a fair amount of time looking at that actually and we are we certainly don't expect to see prepayment levels like we saw in 2021.
Our expectation is we will continue to have prepayments were well aware of some of.
The ongoing events within our portfolio companies.
Certainly in the near term of course prepayments are more difficult to predict obviously, but there are a couple of I think our indicators. We don't think that there will be as much refinance of a significant.
Existing debt it has been taken on in the last year or two during those periods.
You know that maybe.
Venture lenders are being a little bit more aggressive in terms of the amount of capital labor.
And venture banks by the way.
They were willing to provide companies I don't think youre going to see that kind of level of refinance activity I know for you know certainly for horizon, where.
We have a heightened awareness of companies that have taken on a lot of data are now looking to refinance that and that's that's.
That's not going to be a big part of our strategy during the course of 2022.
No reason to think that that wouldn't be true with other lenders as well so there'll be lesser activity, but there's still going to be some M&A activity for sure.
We're seeing that and as well as some opportunity and for public companies to raise capital in the public markets, albeit.
Not as it has been historically.
Thanks, again, I really appreciate that.
It's more great color.
Then just lastly.
Just one question on a specific credit I'm just curious you know the only non accrual I guess, Matt geologic so it looks like you made a small additional investment in the company. This quarter could you maybe just talk about what's going on there on their nose marked a little bit lower this quarter or is there you know.
Whole birds and idea for recovery within additional investment there you know what's the idea of a turnaround.
So it's not the case, thanks to pause if case.
A lot of these are.
Credits when we get to this level of putting it on non accrual. It is in the middle of a process.
We have expectations that it could resolve itself in the next quarter or two and were.
Providing small amounts of liquidity to make them happen.
Got it Okay I appreciate it that's my last question. Thanks for having me today.
Thank you.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, one moment, while we poll for questions.
Thank you there are no further questions at this time I would like to turn this call back over to Mr. 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 concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation or the rest of your day.
[music].
Yeah.
[music].
Yeah.
Okay.
[music].