Earnings Call Transcript - HRZN Q4 2020

Operator, Operator

Greetings and welcome to Horizon Technology. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host. You may begin. Thank you.

Megan Bacon, Host

Thank you. And welcome to the Horizon Technology Finance Fourth Quarter 2020 Conference Call. Representing the Company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; and Dan Trolio, 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 horizontechfinance.com. Before we begin our formal remarks, I need to remind everyone that during this conference call Horizon Technology Finance will make certain forward-looking statements, including statements with regard to the future performance of the Company. Words such as believes, expects, anticipates, intends or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.

Rob Pomeroy, CEO

Good morning. Thank you for joining us and for your continued interest in Horizon. Today, I will provide an overall perspective on Horizon’s performance and its current operating environment. Jerry will then discuss our business development efforts and our markets. Dan will detail our operating performance and financial condition. And then, we will take some questions. 2020 was an incredibly challenging year, but with the progress of the vaccines, we are hopeful we will soon start to return to a more normal health and economic environment in 2021. Looking back at 2020, we want to highlight our important accomplishments. We grew our portfolio to $253 million, despite a record level of prepayments. We maintained our level of distributions through a challenging time, and our total net investment income has exceeded our total distributions for the past three years. After experiencing a low volume of originations in the third quarter due in large part to the impact of COVID-19, we experienced a high volume of originations in the fourth quarter and entered 2021 with a record committed backlog of $107 million. We achieved an industry-leading portfolio yield on our debt investments of 14.6%. We added new key team members to Horizon in originations, underwriting, portfolio management, and accounting. We improved our forward outlook and credit profile as we resolved several underperforming loans, ending the year with our lowest level of underperforming loans since 2017. By resolving these non-earning assets, we returned cash to the balance sheet to invest in new earning assets. We’ve generated net investment income of $1.18 per share, which allowed us to maintain our monthly distribution level of $0.10 per share throughout the pandemic. Based on our outlook for 2021, we have declared these distributions through June, marking 54 consecutive months at this level. We are particularly proud of our ability to protect our distributions. We raised approximately $45 million of equity from our at-the-market program, all at a premium to NAV. We enhanced our ability to leverage our equity through our $100 million amended credit facility with New York Life and ended the year with strong available liquidity and $175 million of capacity to support our portfolio companies and make additional investments.

Jerry Michaud, President

Thanks, Rob. Good morning, everyone. We continue to hope all of you are healthy and safe. As we evaluated the impact of COVID-19 on our core markets in the second and third quarters of 2020, we identified certain market segments that not only were surviving the pandemic but were thriving. As a result, during the fourth quarter, we were able to focus our marketing efforts on those subsectors of the life science, technology, healthcare, information, and services markets. We funded 9 transactions totaling $76.6 million during the quarter. Our onboarding yields of 12.2% during the quarter reflected our continued disciplined focus on pricing transactions that enhance net investment income and are an important contribution to our overall predictive pricing strategy. Although we experienced lower than expected prepayment activity in the quarter, with only two loan prepayments totaling $17 million, the prepayment fees and accelerated income from the prepayments increased our debt portfolio for the quarter to 13%, which was once again among the top of the BDC industry. During the quarter, we also received proceeds of $1.3 million from the exercise and sale of warrants. As we’ve noted, structuring investments with warrants and equity rights is a key aspect of our venture debt strategy and an additional value generator.

Dan Trolio, CFO

Thanks, Jerry. And good morning, everyone. As Rob noted in his remarks, we navigated through a tough 2020 and entered 2021 in a strong position to expand our portfolio and generate additional long-term value for our shareholders. During 2020, we grew the size of our portfolio to $353 million. We enhanced our balance sheet by adding another $100 million in debt capacity through our amended facility with New York Life. And through our ATM program, we successfully and accretively sold 3.7 million shares and raised nearly $45 million, which included receiving net proceeds of approximately $11 million from the program in the fourth quarter, continuing to show our ability to opportunistically access the equity markets.

Operator, Operator

At this time, we’ll be conducting a question-and-answer session. Our first question comes from Sarkis Sherbetchyan with B. Riley.

Sarkis Sherbetchyan, Analyst

I just wanted to touch on the expectation for prepayment activity here as we’re sitting in Q1 and heading into Q2. Any thoughts on the level of prepayment activity? And in light of that, how aggressive would you get in deploying capital to build the portfolio?

Rob Pomeroy, CEO

So, we have a vision on prepayments that we’ve been told should happen in the first quarter or the second quarter, first half of the year. And so, we’re able to look forward and see that. We also have very, very strong pipeline and origination volume expectations for the first quarter. So, we think that the level of prepayments should be higher in the first quarter than they were in the fourth quarter.

Sarkis Sherbetchyan, Analyst

Right. And can you maybe give us some flavor to the level of origination that you’d expect to deploy here in the first half of the year? So for example, if you look at fourth quarter, it’s pretty strong from an origination standpoint. I just wanted to see if it’s in line with your historical deployment or you think it will be more aggressive?

Jerry Michaud, President

Well, this is Jerry. Yes, the demand for venture debt and for equity are both extremely strong coming out of the fourth quarter and going into the first quarter here. As Rob mentioned, I think our portfolio companies raised approximately $500 million in equity alone last year. And we’re seeing the same type of financing activity here into the first quarter. Of course, the new enter into this whole liquidity side of the equation is SPACs. We expect all of the equity and debt markets to be very active. When we look at our own portfolio, it’s significantly higher than historically it has been going into the beginning of the year. So, we’re pretty confident about trying to stay on a growth trajectory that we kind of saw in the fourth quarter. Obviously, it’s also a competitive market. So, we’ll be paying attention to that. But we think we’re extremely well-positioned given our reputation in the marketplace and our ability to fund new transactions. We’re looking for a pretty positive first half of the year.

Operator, Operator

Our next question comes from Ryan Lynch with KBW.

Ryan Lynch, Analyst

I wanted to talk about the competitive environment for a minute. Obviously, you guys are venture lenders, but one of the competitors, two lenders in the VC space can actually be equity capital. You talked about a significant amount of venture equity capital has been raised in 2020, and there’s obviously been huge growth at SPACs out there. So, could you just talk about what the competitive environment looks like today to deploy capital as far as term structures, pricing, and quality of deals available for yourself and other venture lenders?

Jerry Michaud, President

Yes. That’s a great observation, honestly. Because basically, what we’re seeing is all of the above strategy. Just as a kind of top line example, I think of the seven new investments we added in the fourth quarter, five of those also include either new equity rounds that came with them or strategic financing. Companies and their investors are really looking for companies that are thriving in this new market to grow quickly. They’re adding a lot of liquidity to the balance sheet, and they’re not relying on any specific one way of doing that. But you are correct that more so in the fourth quarter, we saw additional equity as part of our competition. A couple of our four-rated credits in our portfolio raised a substantial amount of equity when we were offering debt term sheets. That is now a part of our competitive landscape, which historically hasn’t been as significant. So, we’re seeing basically all of the above, and most of the transactions we’re looking at involve new equity or recently raised equity, adding debt as a cushion to ensure they can continue to grow in pretty interesting markets on the technology and life science side right now.

Ryan Lynch, Analyst

Okay. That’s helpful color on what you guys are kind of seeing in the market from a competitive standpoint. I believe you guys historically have set a targeted leverage range of 0.8 to 1.2 times. Obviously, that’s a pretty wide range. It could probably fluctuate where you guys intend to operate in there, depending on the quality of deal flow you’re seeing in the market. And I would also think it could depend on the broad economic macro outlook. Given that we’re coming out of a pretty substantial downturn, it feels like the economy is hopefully going to be in a pretty good place going forward and continue some meaningful growth. Within that target leverage range, do you think we could start to see you guys push that up higher to the upper end, maybe above 1 to 1 and closer to the upper end of that range, or where do you intend to operate in the medium term?

Dan Trolio, CFO

Yes. Ryan, that’s a great question. Like you said, our target has been between 0.8 and 1.2 to 1. We start each quarter and plan based on the liquidity we have, the strength of the pipeline, and then determine where things fall out during that quarter. Our goal is to get up to that 1.2 to 1. We model it out throughout the year to get to that. It all depends on what happens in and out of the core quarter with prepayments and funding activities.

Rob Pomeroy, CEO

We’d much rather be in the 1 to 1.2 range than 0.8 to 0.9, Ryan.

Operator, Operator

We have reached the end of the question-and-answer session. At this time, I’d like to turn the call back over to Rob Pomeroy, Chairman and CEO, for closing comments.

Rob Pomeroy, CEO

Thank you, and 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. We look forward to speaking with you again very soon. Thank you.

Operator, Operator

This concludes today’s conference. You may disconnect your lines at this time. And we thank you for your participation.