Q2 2022 Horizon Technology Finance Corp Earnings Call
Greetings and welcome to the Horizon Technology Finance corporations second quarter 2022 earnings call.
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Brief question and answer session will follow the formal presentation.
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As a reminder, this conference being recorded it is now my pleasure to introduce your host.
Megan Bacon director of IR and marketing.
Please proceed.
[music].
Thank you and welcome to Horizon Technology Finance Corporation second quarter 2022 conference call, representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer, Jerry Michaud, President and Dan <unk>, Our Chief Financial Officer, I would like to point out that the Q2.
<unk> earnings press release and Form 10-Q are available on the company's website at Horizon Tech 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, including statements with regard to the future performance of the company.
Words, such as believe expect anticipate intend or similar expressions are used to identify forward looking statements.
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.
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.
Welcome everyone and thank you for your interest in horizon.
As we always do on our quarterly calls I will update you on our performance and our current overall operating environment.
Gary will then discuss our business development efforts our portfolio events in our markets and Dan will detail, our operating performance and financial condition. We will then take some questions.
Today, we are reporting the results of our strong performance in the second quarter, despite a challenging macroeconomic environment.
We hit on all cylinders in the second quarter validating the power of the lending platform of our adviser Horizon Technology Finance management.
Our earnings exceeded our distributions for the quarter and first half of 2022, while we significantly grew our portfolio maintained our credit quality and further strengthened our balance sheet in order to provide ample capacity to fund our growth we are keeping a watchful eye on the impacts of inflation.
Rising interest rates and volatile markets on our portfolio, but we are proud of our execution and results in these challenging times.
For the quarter, we generated net investment income of 35 per share above our distributions of <unk> 30 per share.
Based on our results and outlook, we declared monthly distributions of <unk> 10 per share through the end of the year.
Each will marks six straight years of monthly distributions at this level, we maintained undistributed spillover income of 53.
Sure as of June .
We grew the portfolio by $62 million. So another quarterly record for HRC, yet, which resulted in a portfolio of value at quarter end a $577 million.
The Horizon brand has gained significant traction in the venture debt community and our advisor continues to be successful in sourcing and winning high quality venture debt investments.
We finished the quarter with a record committed and approved backlog of $221 million and our pipeline of opportunities of over $1 billion. This momentum in the market provides us with the capability to be selective and disciplined as we look to further grow our portfolio.
We strengthened our balance sheet by issuing over $57 million of 2027 notes at 6.25%.
Further increasing our investment capacity and reflecting our ability to raise capital in a challenging environment.
In addition, during the quarter, we raised approximately $10 million of equity capital at a premium to NAV.
Through our at the market program.
As a result, we ended the quarter with over $120 million of liquidity.
We achieved a portfolio yield on our debt investments of 14, 2% for the quarter.
We ended the quarter with NAV of $11 69 per share up a penny from March 31, 2022, and up 49 cents from the end of Q2 2021.
And finally, we maintained a stable credit profile with 96% of our portfolio rated three or higher as of June 30th.
As always we are consistently and actively managing our portfolio of investments to maintain its credit quality.
Looking forward there continues to be very strong demand for venture debt within our targeted industries as evidenced by our committed backlog and pipeline.
We are keenly aware of the current environment and our prudent with respect to structuring and originating new high quality investments.
For the quarter the advisors platform funded a record $192 million in new venture debt investments spread throughout our targeted industries, including a record $137 million funded by the public company.
We believe our advisor continues to build us a portfolio with the opportunity for enhanced yields utilizing our advisors predictive pricing strategy. This strategy predicts our borrowers early exits from refinancings and liquidity events and the additional income and accelerated income that we receive from such events.
Yes.
We are proud of the team efforts of our adviser not just over the first half of the year, but for all it has accomplished over the past few years to successfully grow and manage its platform and our portfolio teams.
Team is stronger than ever prepared to address the changing macro environment, and we believe well positioned to navigate through this environment and continue generating sustainable growth and profitability 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. It was another historically strong quarter of growth for horizon, even in the face of increasingly challenging macro environment.
We grew our portfolio by $62 million in the quarter, our second consecutive quarterly record and finished the quarter with a portfolio of $577 million.
We funded 15 transactions totaling a record $137 million, including $63 million of debt investments to seven new portfolio companies consisting of four new life science investments to new technology investments in one new healthcare Tech investment, providing further diversification to our portfolio.
We also funded $74 million to eight of our existing portfolio of companies.
Our onboarding yield of 11, 6% during the quarter reflected the continued discipline in pricing transactions and we expect to produce strong net investment income.
We experienced three loan prepayments during the quarter totaling 57 million, which included a portfolio that we refinanced the prepayment fees and accelerated income from sex such prepayments contribute to our strong debt portfolio yield of 14, 2% once again among the top of the BDC industry.
Given the current macro environment, we anticipate prepayments for the remainder of the year, maybe lighter than we've typically seen in the second half of prior years as of June 30, we held warrant and equity positions in 90 portfolio companies with a fair value of $26 million as we've consistently.
Note it structuring investments with warrants and equity rights is a key aspect of our venture debt strategy and an additional value generator and.
In the second quarter, we closed $203 million in new loan commitments and approvals and ended the quarter with a record committed and approved backlog of $221 million compared to $151 million at the end of the first quarter. While there is no guarantee we will fund all these transactions and are committed or awarded backlogs we are clear.
<unk> well positioned to further grow our investment portfolio in the second half of the year.
Our portfolio's credit quality remained solid as the fair value of 96% of our debt portfolio consisted of three and four rated loans as of June 30, consistent with our prior quarter end during the quarter. One investment was downgraded to a two rating and one investment was downgraded to a one rating at the end of the.
Quarter, we had a total of five credits with a one or two rating with the remaining 50 portfolio credits rated three or better since the quarter end one of our one rated credits Matthew objects sold its assets and we received an initial cash payment and equity in the acquiring company as well as.
Potential potential future value from the collection of AAR and royalty payments on future sales.
Turning now to the venture capital environment as expected, we saw a reduction in VC investment activity compared to the record setting entire prior year. According to pitch Brook, approximately 62 billion was invested in VC backed companies in the second quarter of 2022.
Less than first quarter, but still a healthy fall.
VC fund raising momentum continued in the second quarter is 48 billion was raised lightly at last year's full year fundraising record will be surpassed in the third quarter larger VC funds continue to drive the bulk of the fundraising. Meanwhile, VC backed exit activity was markedly lower given the current environment.
<unk> and then Theyre shutting of the IPO window total exit value for the quarter was $13 billion the lowest.
Quarter total since 2016.
While the economic environment and Investor sentiment has clearly shifted in the first half of 2022, we again note. The VC firms continue to maintain record levels of dry powder that may provide liquidity for new investment opportunities and support for existing portfolio companies as is evidenced in our recent.
Thats the severe tightening of the IPO market and significant reduction in spec exits is in part driving increased demand for venture debt a key source of additional liquidity for growth stage companies, while we expect demand for venture debt remains strong in the second half of 2022, we also anticipate the V C.
Firms will participate alongside most new debt investments a follow on equity fundings in order to provide additional liquidity and runway to reach better equity and M&A markets.
VC community adventure that community, we will need to work collaboratively to provide the necessary and appropriate funding to their portfolio companies in order to successfully navigate through the current environment based on horizon's knowledge and experience and it's a long standing and favorable position in the venture capital ecosystem, we expect to work closely.
But the VC community to support our portfolio companies as well as fund new portfolio companies.
Our advice is strong and active lending platform.
The solid investment capacity of Horizon. We believe we are well situated to continue competing and winning in the current environment.
Subsequent to the end of the second quarter, we continued our growth momentum funding four transactions totaling $38 5 million in July our committed approved and awarded backlog as of today stands at $364 million, which includes new awards during July .
Our advisors pipeline of new opportunities today is still approximately $1 billion.
Among historically high levels of opportunities to further grow our venture door.
Portfolio over the coming quarters looking.
Looking ahead with an abundance of demand from attractive quality companies for venture debt solutions for which to grow our committed backlog and our advisors pipeline. We remain very mindful of the current environment and are pleased to be in a position, where we can afford to be selective in making new investments. We also continue to hold an active and <unk>.
Regular dialogue with each of our portfolio companies and their investors in order to manage our credit quality and identify changes in the VC ecosystem accordingly, because of such efforts. We believe we remain well positioned to continue to deliver additional long term shareholder value.
I will now turn the call over to Dan.
Thanks, Gerry and good morning, everyone.
During the second quarter, we built on our efforts from the beginning of the year and further enhanced our capital resources.
First we increased our lending capacity through the issuance of 57 $5 million of 2027 notes at six in a quarter.
Which includes $7 5 million issued in early July from the exercise of the over allotment.
Second through our ATM program, we successfully and Accretively sold 868000 shares of stock Opportunistically raising over $10 million. These actions provide us with further capacity to grow the portfolio.
Turning to our operating results as of June 30, we had $123 million in available liquidity, consisting of $76 million in cash and $47 million in funds available to be drawn under our existing credit facilities.
As of June 30, there was $75 million outstanding under our $125 million Keybank credit facility and $137 million outstanding on our 200 million, New York life credit facility, leaving us with ample capacity to grow the portfolio.
Debt to equity ratio stood at one <unk> to one as of June 30, which was slightly higher than our target leverage of one two to one.
But netting out our leverage with cash on the balance sheet, our net debt to equity ratio was one to one <unk>.
Based on our cash position and our borrowing capacity on our credit facilities are potential new investment capacity at June 30 was $190 million.
For the second quarter, we earned total investment income of $18 6 million, an increase of 38% compared to the prior year period.
Interest income on investments increased primarily as a result of a higher average, earning debt investment portfolio for the quarter.
Our debt investment portfolio on a net cost basis stood at $563 million as of June 30.
13% increase from March 31, 2022.
For the second quarter of 2022, we achieved onboarding yields of 11, 6% compared to 11, 4% achieved in the first quarter.
Our loan portfolio yield was 14, 2% for the second quarter compared to 14, 7% for last year's second quarter.
Total expenses for the quarter were $9 9 million compared to $7 3 million in the second quarter of 2021, our performance based incentive fee increased to $2 1 million from $1 5 million for last year's second quarter.
Our interest expense increased to $4 2 million from 3 million in last year's second quarter due to an increase in average borrowings.
Our base management fee was $2 5 million up from $1 8 million in last year's second quarter due to an increase in the average size of our portfolio.
Net investment income for the second quarter of 2022 was <unk> 35 per share compared to 26 per share in the first quarter of 2022 and 31 per share for the second quarter of 2021.
The company's undistributed spillover income as of June 30 was <unk> 53 per share.
We anticipate that our larger portfolio with our predictive pricing strategy will enable us over time to generate NII now covers distributions.
As we have said in the past, we will experience pre payments throughout the year, but the timing is difficult to predict.
To summarize our portfolio activities for the second quarter net new originations totaled $137 million, which were partially offset by $5 million in scheduled principal payments and $65 million in principal prepayments and principal pay downs.
We ended the quarter with a total investment portfolio of 577 million given.
Given the macro environment, we would expect portfolio growth to normalize from the first half of 2022 levels.
The portfolio consisted of debt investments in 55 companies with an agro fair value of $552 million and a portfolio of warrant and equity and other investments and 91 companies with an aggregate fair value of $26 million.
Based upon our outlook for 2022, our board declared monthly distributions of <unk> 10 per share for October November and December 2022.
We have now declared monthly distributions of <unk> 10 per share for six consecutive years.
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 69 per share compared to $11 68 as of March 31, 2022, and $11 20 as of June 32021.
The ones that increase in NAV on a quarterly basis was primarily due to our net investment income, partially offset by paid distributions and adjustments to fair value.
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 June 30 over 90% of our portfolio will benefit from additional increases in the prime rate.
This concludes our opening remarks, we'll be happy to take questions. You may have at this time.
Yes.
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One moment, while we poll for questions.
Our first question comes from Paul Johnson with <unk>. Please proceed.
Okay.
Yes, good morning, guys. Thanks.
Taking my questions.
Several for you this morning.
The first is just basically around.
Growth expectations kind of looking at.
Yes.
So I know you said first half.
Likely not to be as robust as the first half of this year.
I mean on a net basis are we talking about roughly flat.
No growth.
ADC.
Could expect what do you think there is a little bit.
The ability to continue to grow the portfolio through the end of the year.
Hi, Paul this is Jerry.
Yes.
I still think there is room for growth if you look at our.
Our numbers on our committed backlog.
What's been awarded just recently.
We certainly think that the demand is there to continue to grow the business, but of course, what we missed a little bit more difficult to predict as is.
Prepayments over the second half, we do think that they will.
We will slow I think we've been pretty much indicating that now for a couple of quarters.
Given the slowdown in the equity markets.
The choppiness.
The environment in general so.
I do think there could be room for growth, maybe not as robust as it was in the first half.
We do have.
Some potential prepayments here in the second half we have a couple of companies.
Well along in the spec process.
Which is those transactions happen, we'd probably get prepayments and then theres a couple of others.
We're also.
This seems to be some indication that we might be prepaid over the second half so.
There will be some prepayments.
I do think even with that though.
Given our strong backlog and the strong demand.
From what we're hearing in the marketplace.
We do think there will be some level some opportunity to continue to grow the portfolio, but probably not at the level. We did in the first half.
Got it thanks for that.
As far as like the activity that Youre seeing this demand curve for venture capital how much is it would you say here recently in the second quarter today in general quarter to date and is that driven by.
Companies, essentially looking to kind of bleed down rounds or.
Lower valuation equity raises that are good companies, just essentially kind of seeking a longer runway.
This is kind of high higher cash burn essentially earlier stage companies that are just.
Frank Please.
Capital.
Already financed those types of companies today.
Yes, yes.
The right question I think.
Most of what we're seeing today.
And I had mentioned this and I wanted to get some of this into.
Because I think it is really important based on some articles that I have just seen recently too.
Venture debt in this kind of environment doesn't replace equity that's not the idea now is to your point and it's a good one if it's a high quality company with really strong investors and have demonstrated continued support.
That's certainly something.
We're interested in looking at and funding.
A significant amount of what we're seeing today is we're providing that along with equity so.
Yes valuations are down Vcs don't want to have to put more money than they need to into.
Some of your portfolio companies to get to a better M&A market, but they are still very good companies and the vcs are going to continue to support them and in fact, they have the ability to do that because.
Of the fundraising that the VC community has experienced over the last couple of years actually so most of what we're seeing is really quality companies.
Coming to the market for both debt and equity.
And those are the kinds of transactions.
We are.
We obviously have a high level of interest in it and that is most of what we are seeing.
To your second part of that companies that need to raise capital.
There has been definitely.
Vcs are definitely put pressure on our portfolio companies to reduce costs.
Reduced burn.
And we are as we are seeing a lot of that for the most part.
Those are not transactions that we probably are prepared to step up.
<unk>.
Put that in and replace of what should be some additional equity.
We're not really seeing that many of media and fairness. So.
Most of it is a pretty strong market it's opportunistic.
But the demand is so high.
We had mentioned we actually can be fairly selective.
And still meet what we hope to be our growth numbers for the remainder of the year, but it is it is a choppy market and we are paying very close attention to what the VC community in general is doing we're paying very close attention to specifically what venture capital so doing relative.
Two our portfolio companies.
And that is guiding us relative to looking at new opportunities.
And the last thing I would just add is.
Another area, where probably staying away from we're not really interested in refinancing.
That did companies already have probably at the time they got the leverage it was probably okay.
But given valuations have come down.
We think some.
Some of those companies are probably over leveraged at this point.
Yes.
I appreciate all the color on that.
My next question is really for carrier.
Either way.
It has to do with just.
The marks on the book this quarter Im curious as to.
Good quarter, where we kind of expect space.
Headwinds mid single digit is probably on the higher end for Bdcs.
Equity exposure.
I understand your equity investments aren't quite as.
Largest summit.
Sure Bdcs out there, but could you just kind of.
Walk us through.
Kind of how you guys.
Look at the Mark for this quarter.
And I'm also interested in this as far as the equity investments go looks like newer marked higher this quarter.
Thanks.
Drove that.
Yes, Paul this is Dan.
We set every quarter is for venture debt portfolio, we look at the fair value of each investment every quarter. There really is no one specific index that would.
That would allow us to take a.
Yes.
Fair value adjustment.
Cross the board for our asset class I really wouldnt be fair value and so we go through each investment on a quarterly basis and based on the information we have at the time that we up until the day we file.
We adjust and make our fair value changes and that is reflected in the Q.
They're where our normal migration between two and one rated three and four rated credits.
So on the debt side that has been reflected in the fair value and then yes on the warranty piece.
Don't hold a significant portion of warrants in public equity.
But youre right the warrants.
A portion of our fair value did increase and that is specific to a handful of our our deals are portfolio companies were able to raise equity in this environment at a pretty significant up round and.
That drove the increase in the fair value that you are looking at.
Sure.
Got it I appreciate it.
Okay that answers my question.
I guess last question.
I apologize my question Okay.
This site.
Just around the unfunded commitments that you can touch on this area of the quarter. So how much visibility do you guys have around unfunded business.
Building over the last few quarters I imagine with all the new investment activity that <unk> had.
Yeah, just curious about how much visibility you have around any of that getting drawn down from quarter to quarter.
Yeah. So.
We actually have some visibility because a great portion of our committed backlog is based on company's meeting certain milestones and we know based on projections have given us when they expect to meet those milestones so.
We do have.
Good visibility in terms of.
And it would be an opportunity for the company to draw it down now whether they meet those milestones in this market of course is certainly something that.
It's not as <unk>.
Probably.
Clear or is it as it would be in a better environment. So that will really be the question is are companies able to.
Meet there Mike.
<unk> requirements in order to actually drive the capital now we had a pretty active second quarter in terms. If you look at the portfolio existing portfolio companies that we funded.
Some of those were a result of companies meeting milestones.
One company, we actually refinanced the debt package.
Is that a very significant equity round.
And we refinanced our debt package, which extended the runway for the company along with the significant equity. They raised and we were also able to get our final payment pull forward. So it's actually an income event from that transaction as well so.
It is it is a little bit more difficult to determine if milestones will be met but we certainly have.
Pretty good visibility.
And when and the expectation is that don't meet those milestones.
That's not necessarily a whole lot different than.
Even in a better market, but in a better market, we probably have a little bit more confidence.
The milestones would be met.
Got it.
Thank you for that and thanks for taking my questions.
Sure. Thank you. Thank you Paul.
Once again to ask a question. Please press star one on your telephone keypad at this time.
Thats Star one to ask a question at this time.
There are no further questions in queue at this time I would like to turn the floor back over to Mr. Rob Pomeroy 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 conclude our conference call. This morning.
Okay.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.