Horizon Technology Finance Corp (HRZN) 2019 Q1 法說會逐字稿

Ladies and gentlemen and welcome to the Horizon Technology Finance First Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Miss Megan Bacon. Ma'am, you may begin.

Thank you, and welcome to the Horizon Technology Finance First Quarter 2019 Conference Call. Representing the company today, are Rob Pomeroy, Chairman and Chief Executive Officer; Gerry Michaud, President; and Dan Trolio, Chief Financial Officer. I would like to point out that the Q1 earnings press release and Form 10-Q are available on the company's website at horizontechfinance.com. 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. 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, 2018. 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 and thank you all for joining us. Our first quarter saw us continue to build on our success from 2018, with an overall solid performance in all facets of our business. We grew our portfolio for the fourth consecutive quarter and ended the quarter with a total portfolio of $266 million, including $235 million in venture debt investments. We recorded net investment income per share in the first quarter of $0.28, $0.02 below our distribution rate. But we should note that we funded 2 separate $15 million venture loans, one on March 31 and the other on April 1, and thus generated no interest income from those loans during the first quarter. We will see the full benefit of those investments in our second quarter performance. We finished another quarter with improved overall asset quality and continue to maintain strong standards. We had a weighted average debt investment yield for the first quarter of 14.4%, which takes into account regularly scheduled interest and fee income as well as income from liquidity events. Our predictive pricing strategy continues to enable us to maintain a quality, premium-yield floating-rate portfolio. We successfully completed a common equity offering above NAV generating $23.3 million in net proceeds and further enhancing our liquidity profile. Our NAV as of March 31st was $11.55 impacted primarily by the new shares issued from the capital raise as well as a markdown of a license agreement, and partially offset by improved marks on warrants and realized gains on warrants and equity. And based upon our outlook and our performance, our board declared monthly distributions of $0.10 per share for July, August and September 2019. Overall, we remain pleased with our current portfolio and are well positioned to succeed for the remainder of 2019 and beyond.

Turning to our investment activity. In the first quarter, we funded 6 new loans totaling $40 million, and increased our portfolio by a net -- on a net basis by $17 million from the end of 2018. We also closed on $72 million in new approvals and commitments and maintained a backlog of $60 million at the end of the quarter, which was inclusive of the $15 million loan we provided on April 1 to Encore Dermatology.

Our pipeline remains robust, demand continues to be high and we are well positioned to grow both the size of the Horizon portfolio as well as our joint venture. With respect to our joint venture, there were 2 new investments made by the JV in Q1. These investments were funded by the JV -- at the JV by accessing the New York Life credit facility. We continue to believe that as we grow the JV, it will be an additional value generator for Horizon's shareholders over the long term.

Importantly, our portfolio's asset quality remains stable with no new nonaccruals for the seventh consecutive quarter, and we continue to have no 1-rated loans.

During the quarter, one of our 2-rated credits was upgraded to a 3 rating, leaving us with only four 2-rated credits, which comprise less than 5% of our debt portfolio. This is a testament to our proactive portfolio account management.

Looking ahead, we remain set to drive additional portfolio growth and a sustainable NII. Our pipeline and backlog rose from the end of 2018 and demand for tech and life science investment remains robust.

With the recent capital raise, our debt-to-equity ratio was reduced to 0.85:1 as of March 31. This places us near the low end of our targeted leverage range of 0.8:1 to 1.2:1 and provides us with ample capacity to grow and further diversify our portfolio. As a reminder, as our portfolio continues to grow, our base management fee reduces to 1.6% on gross assets less cash that exceed $250 million. This reduction in base management fee will enhance NII as our assets grow.

To conclude, we are pleased with how our portfolio continues to take shape, driven by our underwriting and predictive pricing strategy and remain confident that we will continue to generate additional value for our shareholders. I will now turn the call over to Gerry, who will update you on our business development efforts and market environment and then to Dan, who will detail our operating performance and financial condition.

Thanks, Rob. Good morning, everyone. Our first quarter saw us start of the year nicely from a funding standpoint, adding 6 new floating-rate transactions to our portfolio totaling $40 million. That momentum continued into the second quarter as we began the quarter funding of $15 million venture loan. Our onboarding yield in the first quarter was 11.9%, maintaining our strong onboarding levels, and importantly, we remained disciplined with our underwriting before entering into an investment. We experienced 2 loan portfolio exits during the quarter totaling $13.2 million. The prepayment and accelerated income from these events resulted in a loan portfolio yield for the quarter of 14.4%.

In addition, the joint venture funded portions of 2 portfolio investments totaling $4.2 million in Q1, which was fully funded by our New York Life debt facility.

We continue to maintain a premium yielding debt portfolio as reflected by our leading yield position in the BDC industry, which generates a predictable income stream while we continue to add new investments with higher ETPs, prepayment opportunities and new warrants. We closed $72 million in new loan commitments and approvals and ended the first quarter with a committed backlog of $60 million, compared to a backlog of $42 million at the end of the fourth quarter of 2018. Our committed, approved and awarded backlog as of March 31 was $64.5 million to 9 companies and a pipeline of new opportunities of over $450 million.

Our robust committed backlog and pipeline sets us up well to execute on growing our portfolio and income stream while enhancing NII with prepayment and accelerated income. As of March 31, we held warrant and equity positions in 76 portfolio companies with a fair value of $11.1 million. In Q1, our portfolio company Luxtera was acquired by Cisco and we received warrant proceeds of approximately $780,000 in connection with the termination of our warrants. Additionally, we exited our equity investment in Insmed and received proceeds of $985,000.

Subsequent to the end of Q1, April has proven to be a very active month as we funded 1 new investment totaling $15 million, exited 1 investment, receiving proceeds of just over $500,000, and transferred an additional $5 million to our joint venture, which was also fully funded by our New York Life debt facility. In addition, we have been awarded 5 new transactions totaling $60 million to date in Q2. At the end of April, our awarded, approved and committed backlog sits at $105 million, representing a historic high for Horizon and provides us with a significant amount of momentum to continue to grow our portfolio for the balance of 2019.

Turning now to the venture capital environment. According to PitchBook, just under $33 billion was invested in VC-backed companies in the first quarter of 2019, keeping funding levels right on pace with last year's very strong performance. In terms of VC fundraising, $9.6 billion was raised in the first quarter of 2019, a bit off the record pace set last year but still a very solid number, it bodes well for the remainder of 2019. VC-backed exit activity in the quarter was significantly buoyed by the Lyft IPO contributing to the quarter, being the largest for exit value since 2014.

As we've clearly seen over the past couple of months, the IPO window remains very much open, providing VCs with the opportunity to generate returns and reinvest their capital.

In the first quarter, we saw 12 venture-backed IPOs, 75% of which were in the health care life science sector, a sector Horizon believes will continue to show strength over the foreseeable future. We have 2 portfolio companies that are filed to go public under the JOBS Act.

Turning now to our core markets. In the first quarter, demand for financing in the life science, healthcare, technology markets remained robust. During the first quarter, we funded a $2.5 million venture loan to one of our existing portfolio companies in health care technology, Catasys, publicly traded, leading AI and tech-enabled healthcare company.

At the very end of the quarter, we funded a $15 million loan to a new portfolio company Mustang Bio, a publicly traded, clinical stage, biopharma company focused on translating medical breakthroughs and cell and gene therapies into potential cures for cancers, solid tumors and rare genetic disease. Recently, Mustang had entered into a licensing agreement with St. Jude's Children's Research Hospital to develop a gene therapy for the treatment of SCID, a potentially fatal infant-related disease also known as bubble boy disease. Subsequent to our funding of Mustang Bio in Q1, in April, the company announced the results of its Phase I-II clinical trial for SCID, which demonstrated that Mustang Bio's gene therapy treatment had cured all 8 infants in the trial with little or no side effects. While Horizons monitors all of our life science companies' important milestone events, we were extremely gratified by the results of the trial for SCID as it represents the first potential cure for the disease.

And subsequent to the quarter end, we funded a $15 million venture loan to Encore Dermatology, a specialty pharmaceutical company, focused on U.S. dermatology market. In addition, we received 3 new life science related awards in April totaling $30 million. The broader technology sector continues to be very active with funding new and growth-oriented companies and we've seen several major IPOs in the past few weeks. In April, we received 2 new awards for technology-related companies totaling $30 million. Demand for venture debt generally and our products specifically remain strong in the first quarter. However, we continue to be selective with respect to tech companies, given the requests we're seen for large debt transactions and we continue to seek, opportunities with the borrowers positioned to achieve significant technological advancements over the next 3 years. Overall, there remains ample investment and exit opportunities from which to generate value for our shareholders. With our robust pipeline, our ability to identify and win attractive investment opportunities and our adequate liquidity, we are well positioned to continue to use our predictive pricing strategy to deliver long term, well priced, portfolio growth for the remainder of 2019.

With that, I will now turn the call over to Dan.

Thanks, Gerry, and good morning, everyone. Let's turn to our financial results for the first quarter of 2019. Horizon earned total investment income of $8.3 million for the first quarter of '19, a 16% increase compared to $7.2 million in the prior year period, which was primarily due to higher interest income on investments, given the larger average size of our loan portfolio.

As of March 31, 2019, our debt investment portfolio had grown to $235 million, a 9% increase from December 31, 2018. For the first quarter of '19, we achieved onboarding yields of 11.9%, compared to 12.1% in the fourth quarter of '18.

Our loan portfolio yield was 14.4% for the first quarter of '19 compared to 16.7% in the fourth quarter of '18 and 14.4% for last year's first quarter.

Turning to our expenses, total net expenses for the first quarter were $5.1 million compared to $4 million in the first quarter of '18. Our interest expense was up $560,000 compared to the prior year period due to additional average borrowings and the increase in the 1-month LIBOR. Our net incentive fee increased $260,000 due to a higher pre-incentive fee, net investment income and a lower deferred incentive fee amount. While our base management fee rose $180,000, driven by an increase in the average size of our portfolio.

Net investment income for the first quarter was $0.28 per share, compared to $0.34 per share in the fourth quarter of '18 and $0.28 per share for the first quarter of '18. The company's undistributed spillover income as of March 31, 2019 was $0.10, compared with $0.11 at the end of '18.

Based upon our outlook for NII, our board declared monthly distributions of $0.10 per share for July, August and September 2019. We've now declared quarterly distributions of $0.30 per share for 11 consecutive quarters. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time and currently maintain an undistributed spillover of $0.10 per share in support of our future distributions.

Our NAV as of March 31, 2019 was $11.55 per share compared to $11.64 as of December 31 and $11.65 as of March 31, 2018. The $0.09 decline in NAV on a quarterly basis was primarily due to the capital raise we completed toward the end of the quarter as we calculated certain per share data based on the 13.5 million shares outstanding as of March 31 rather than the weighted average shares outstanding for the quarter.

To summarize our portfolio activities for the first quarter. New originations, including loans funded at our JV, totaled $40 million, which were offset by $6 million in principal payments and $13 million in principal prepayments. We ended the first quarter of '19 with an investment portfolio of $266 million, which consists of debt investments in 35 companies with an aggregate fair value of $235 million, a portfolio of warrant and equity positions in 76 companies with an aggregate fair value of $11 million, other investment positions in 4 companies with an aggregate fair value of $6 million and equity interest in our JV with an aggregate fair value of $13 million.

As we've highlighted in the past, nearly 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, while having a specific floor in place.

On the balance sheet, Horizon had $26.5 million in available liquidity as of March 31, consisting of $22.2 million in cash and $4.3 million in funds available to be drawn under our existing credit facility.

As of March 31, there was $95.5 million outstanding under our $125 million KeyBank credit facility. With our leverage ratio at 0.85:1 and based on our cash position and the capacity at our Key facility, our potential liquidity was $52 million at March 31, 2019. With respect to our joint venture, we funded it with 2 additional investments during the quarter by accessing our New York Life facility and continue to have ample capacity at both the company and the JV to grow our portfolio in 2019.

Lastly, on April 26, our board extended our previously authorized share repurchase program until the earlier of June 30, 2020 or the repurchase of $5 million of the company's common stock. Since the share repurchase plan was first approved in September 2015, we have repurchased over 167,000 shares of our common stock at a total cost of $1.9 million.

This concludes our opening remarks, we'll be happy to take questions you may have at this time.

(Operator Instructions) Just one moment while we wait for questions. I'm not showing any questions at this time. So I'll now like to turn the call back over to Robert Pomeroy, Chairman and CEO, for closing remarks.

Thank you, all for joining us this morning. We appreciate your continued interest and support in Horizon and we look forward to speaking with you again soon. This will conclude our call.

Ladies and gentlemen, this does conclude the program, you may now disconnect. Everyone, have a great day.