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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Horizon Technology Finance Corporation's Fourth Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Megan Bacon, Director of IR.
Thank you, and welcome to Horizon Technology Finance Corporation's Fourth Quarter 2023 Conference Call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; Dan Devorsetz, Chief Operating Officer and Chief Investment Officer; 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 to 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, 2023.
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. Today, I will update you on our performance and our current overall operating environment. Dan Devorsetz, our Chief Operating Officer and Chief Investment Officer, will then take us through recent business and portfolio developments. We welcome Dan to the call, and he will now be a regular participant on our future calls. Jerry will then discuss the overall venture lending market, and Dan Trolio will detail our operating performance and financial condition. We will then take some questions. 2023 was a challenging year for participants in the venture debt market, including Horizon. While we were able to finish the quarter and year with our net investment income, again, exceeding our quarterly and annual distributions as well as achieving record NII for the year, our net asset value declined due to the underperformance of certain stressed investments in our portfolio. The stress in the venture capital ecosystem, including the collapse of Silicon Valley Bank, the tightening of capital availability, the closed IPO markets and the decline in valuations contributed to the unfavorable performance by some of our portfolio companies, resulting in the reduction of the fair values of our investments in such portfolio companies.
You'll hear this theme throughout our call, but we continue to work diligently to maximize the value of all of our investments, including where necessary, from the sale of our portfolio of companies or our collateral. Recapping our full year 2023 results, we generated net investment income of $1.98 per share, well in excess of our declared distribution level for the year due largely to higher interest rates on our floating rate debt investment portfolio and lower incentive fees earned by our adviser.
Based on our strong NII performance and the confidence in our outlook, in 2023, we paid regular distributions of $1.32 per share and a $0.05 per share special distribution. Our December special distribution marked the fourth consecutive year we paid such a distribution. We achieved a portfolio yield of more than 16% on our debt investments for the full year, once again, at or near the top of the BDC industry. We finished the year with a committed and approved backlog of $218 million. We ended the year with a net asset value of $9.71 per share, primarily the result of fair value markdowns of our investments. We supported our balance sheet during the year, raising equity from an overnight equity offering in June and raising over $26 million of equity at a premium to NAV from our at-the-market program. We also expanded the capacity of our credit facilities with New York Life and KeyBank. And importantly, our adviser, Horizon Technology Finance Management completed its sale to Monroe Capital, now providing our adviser with access to Monroe's platform and resources, which we expect to benefit Horizon through increasing access and capability to originate quality venture debt investments. We were pleased to complete our first co-investment with Monroe in December with the origination of a loan to Vero-Biotech.
Finally, based on our outlook and our undistributed spillover income of $1.25 per share as of year-end, last week, our Board declared monthly distributions of $0.11 per share payable through June of 2024 together with a special distribution of $0.05 per share payable in April. Entering 2024, we continue to actively manage all of our investments while we support our borrowers and seek to maximize capital recovery in a difficult venture market. Looking ahead, we will remain prudent with respect to growing Horizon's portfolio of debt investments while we work to maximize our NAV. With that, I will now turn the call over to Dan Devorsetz to give you more details and color on our performance. Dan?
Thanks, Rob, and good morning to everyone. I'm happy to join today's call and look forward to speaking to you all in the quarters to come. Our portfolio size is slightly down in the fourth quarter from the prior quarter at $709 million, as new originations in the quarter were offset by prepayments and normal portfolio amortization as well as portfolio markdowns. In the fourth quarter, we funded 6 investments totaling $63 million including debt investments to 3 new portfolio companies and 3 existing portfolio companies. This combination is a reflection of our long-term portfolio strategy of blending high-quality venture loans to new borrowers with additional financing to existing borrowers that achieve important operational and financial milestones. While we maintain a healthy pipeline of new opportunities, we expect to remain selective in new originations for the near term and we expect the potential growth in the portfolio to occur towards the middle and back half of the year. During the quarter, we experienced 3 loan prepayments and 1 partial paydown totaling $48 million in prepaid principal. Similar to past years, we expect modest prepayments in the first quarter of 2024 with this normal seasonal trend compounded by the weak IPO and M&A markets at the end of 2023 continuing in the first month of 2024.
Our onboarding yield of 13.8% during the fourth quarter remained near our historic highs, reflecting the ability of our team to source and structure new quality venture loans even in this challenging environment. We expect our discipline in structuring and pricing transactions to continue to produce strong net investment income. Our debt portfolio yield of 16.8% for the quarter and 16.6% for the full year was again one of the highest yielding debt portfolios in the BDC industry. This further validates the profitability of our venture lending strategy and our execution of debt strategy in an elevated interest rate environment. As of December 31, we held warrant and equity positions in 99 portfolio companies with a fair value of $32 million. As a reminder, in addition to the high debt investment yield I just spoke about, structuring investments with warrants and equity rights is a key component of our venture debt strategy and a potential generator of shareholder value. In the fourth quarter, we closed $124 million in new loan commitments and approvals and ended the quarter with a committed and approved backlog of $218 million compared to $202 million at the end of the third quarter. We believe our committed backlog with most of our funding commitments subject to our portfolio companies, achieving certain key milestones provides a solid base as we look forward to prudently grow our portfolio during the course of the year.
As of year-end, 90% of the fair value of our debt portfolio consisted of 3 and 4 rated debt investments compared to 87% as of September 30 and 10% of the fair value of our portfolio was rated 2 or 1 compared to 13% as of September 30. For our stressed investments, we are continuing to diligently work for innovative solutions that can enable us to achieve additional recoveries. As Rob noted earlier, we continue to work closely and collaboratively with all of our current portfolio companies, their management teams, investors and stakeholders to navigate the continued uncertain venture macro environment.
While doing so, we remain just as focused on sourcing and originating new debt investments in order to take advantage of market opportunities to make venture loans, the companies whose investors have increased their support at attractive valuations while we also benefit from the current interest rate environment.
With that, I'll turn it over to Jerry for a look at that overall venture industry and current environment.
Thank you very much, Dan. Turning now to the venture capital environment. According to PitchBook, approximately $171 billion was invested in VC-backed companies in 2023, the lowest total in 4 years, reflecting the ongoing market issues related to valuations and investors being inwardly focused on managing their existing portfolio investments. VC investment activity levels remain depressed in Q4 as venture capital investments from 2021 and the first half of 2022, continued to face devaluation issues and stress liquidity levels during 2023. VC funds that did raise capital during that time have maintained significant dry powder commitments, and we expect there will be pressure and opportunities in 2024 for VC funds to invest their LPs committed capital. We have witnessed many private company valuations dropped steadily over the last 6 quarters, and there is some evidence that private company valuations are becoming more attractive again to both VC investors as well as strategic buyers. While we expect VC activity to gradually and steadily improve in 2024, certain market segments such as AI solutions-driven companies and life science companies should see significant investor interest in 2024. Of course, any improvement in the venture capital environment in 2024 will require the macroeconomic environment to continue to improve, including a reduction in overall inflation and interest rates during 2024. In terms of VC fundraising, only $67 billion was raised in 2023, the lowest in 6 years as the avenue to public exits remained largely closed in 2023. VC's committed capital from their LPs remained at record highs as a result of amounts raised during 2021 and 2022. VCs will remain reluctant to make new investments in the current market until exit markets improve and the significant correction in private company valuations subsides. We expect VC fundraising to lag VC investment in 2024 as the LP community remains largely on the sidelines until they begin to see attractive VC portfolio exits become more frequent. VCs will have high hurdles for raising new funds based on recent returns, quality of portfolios, organization size and investment strategy. Meanwhile, VC-backed exit activity at a decade low in 2023 as a modest market rally in the fourth quarter was not enough to fully open up the IPO market. The M&A market for venture-backed companies remained at historic lows as a combination of unrealistic valuations and higher interest rates, combined with regulatory scrutiny continue to keep acquirers on the sidelines.
We believe 2024 valuations will begin to become more attractive as 6 quarters -- because of 6 quarters of declining values. We believe industries such as energy, technology and healthcare are best positioned to resume M&A activity given their historically high earning results, public stock prices posting strong gains and the elevated level of cash and liquidity on the balance sheets of technology, big pharma and energy companies.
In terms of market conditions for new venture loan investments, we expect the challenging environment of 2023 to moderate in the first half of 2024. So we should see a gradual increase in demand for venture debt during 2024. And we hope to see, as Dan indicated, an increase in our originations as the year progresses. Accordingly, we will stay on current course of thoughtfully adding select top quality investment opportunities to our portfolio during this period while focusing on preserving and improving our current portfolio's value and credit quality.
As market conditions improve over time, we continue to believe Horizon's solid reputation and long-term market presence will allow it to prudently accelerate its portfolio growth. A key baseline for future prudent portfolio growth is our committed, approved and awarded backlog, which as of today, stands at $188 million, and our advisers pipeline of new opportunities, which as of today stands at $743 million. To sum it up, it was a challenging 2023 for venture lending and venture investing, and we look forward to improving conditions for both our industry and our portfolio as we move through 2024. We will remain laser focused on credit quality and providing all of our portfolio companies with support to ensure optimal outcomes. Where we find attractive companies seeking venture debt solutions, we will add to our pipeline and backlog as we look to begin to prudently accelerate portfolio growth during 2024. Based on our current portfolio size and attractive yield, we believe we remain well positioned to continue to generate solid NII for our shareholders and build additional long-term shareholder value. With that, I will now turn the call over to Dan Trolio.
Thanks, Jerry, and good morning, everyone. We had a strong year from an NII standpoint, once again, generating NII that more than covered our distribution while actively strengthening our balance sheet throughout the year. In addition, we continue to diligently work with all of our companies in order to optimize outcomes for our portfolio and further enhance our credit quality. To recap 2023, our portfolio stood at $709 million. In May, we expanded the capacity of our New York Life credit facility by $50 million to $250 million. In June, we successfully raised nearly $39 million in net proceeds from our common stock offering. We further strengthened our balance sheet in June by increasing the commitment amount on our KeyBank facility to $150 million and by expanding as according feature, the $300 million. So at the end of the year, we fully paid off our 2019 securitization. Finally, we successfully and accretively sold over 2.2 million shares to our ATM program during the year, raising over $26 million, further demonstrating our continued ability to opportunistically access the equity market.
As a result, we believe we remain well positioned to add quality investments to our portfolio and create additional value for shareholders in 2024. As of December 31, we had $104 million in available liquidity, consisting of $73 million in cash and $31 million in funds available to be drawn under our existing credit facility. We currently have $70 million outstanding under our $150 million KeyBank credit facility and $181 million outstanding on our $250 million New York Life credit facility, giving us with ample capacity to grow the portfolio. Our debt-to-equity ratio stood at 1.4:1 as of December 31 and netting out cash and our balance sheet, our leverage was 1.2:1 which was within our target leverage. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity at December 31 was $222 million. For the fourth quarter, we earned investment income of $28 million, an increase of 22% compared to the prior year period. Interest income on investments increased primarily as a result of the higher average size of our debt investment portfolio and increases in the variable interest rates on our debt investment. Our portfolio investment on a net cost basis to $721 million as of December 31, a 1% increase from September 30, 2023. For the fourth quarter of '23, we achieved onboarding yields of 13.8% compared to 13.9% achieved in the third quarter. Our loan portfolio yield was 16.8% for the fourth quarter compared to 14.5% for last year's fourth quarter. Total expenses for the quarter were $12.2 million compared to $12 million in the fourth quarter of '22. Our interest expense increased to $7.6 million from $6.2 million in last year's fourth quarter due to an increase in the average borrowings and higher interest rates on our borrowing.
Base management fee was $3.2 million, up from $3 million in last year's fourth quarter due to an increase in the average size of our portfolio. We had no performance-based incentive fee in the fourth quarter compared to an incentive fee of $1.4 million for last year's fourth quarter. This was due to the deferral of incentive fees otherwise earned by our adviser in the quarter under our incentive fee cap and deferral mechanism. The deferral was driven by unrealized and realized losses on the portfolio. As 2024 progresses, we would expect deferral to end and once again pay our adviser incentive fees. Net investment income for the fourth quarter of 2023 was $0.45 per share compared to $0.53 per share in the third quarter of 2023 and $0.40 per share for the fourth quarter of '22.
For the full year 2023, we generated NII of $1.98 per share, more than covering our total distributions during 2023 of $1.37 per share. Company's undistributed spillover income as of December 31 was $1.25 per share. We anticipate that the size of our portfolio, along with the portfolio's elevated interest rates and our predictive pricing strategy will enable us to continue generating NII that covers our distribution over time. As a reminder, the first quarter is typically the lightest in terms of prepayment activity, and we expect the first quarter of 2024 to be in line with the lower historic norm. To summarize our portfolio activities for the fourth quarter, the originations totaled $63 million, which were offset by $13 million in scheduled principal payments and $48 million in principal prepayments and partial paydown. We ended the year with a total investment portfolio of $709 million. Given the macro environment, we expect to remain selective in the near term with respect to originations. At December 31, the portfolio consisted of debt investments in 56 companies with an aggregate fair value of $670 million and a portfolio of warrant, equity and other investments in 102 companies with an aggregate fair value of $39 million. Based upon our outlook, our Board declared monthly distributions of $0.11 per share for April, May and June 2024 and given our amount of spillover income, our Board also declared a special distribution of $0.05 per share payable in April. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time. Our NAV as of December 31 was $9.71 per share compared to $10.41 as of September 30, 2023, and $11.47 as of December 31, 2022. The $0.70 reduction on NAV on a quarterly basis was primarily due to paid distributions, including the $0.05 per share special distribution, realized losses and adjustments to fair value partially offset by net investment income. As we've consistently noted, nearly 100% of our outstanding principal amount of our debt investments, their interest and floating rates with coupons are structured to increase if interest rates rise with interest rate flutters. This concludes our opening remarks. We'll be happy to take questions you may have at this time.
[Operator Instructions] And our first question comes from the line of Bryce Rowe with B. Riley Securities.
I wanted to maybe start with getting some updates on a couple of portfolio companies, I mean, those that you've kind of mentioned in recent releases here, the Nexii Building, what looks like the maturity on that one was shifted a little bit early -- or earlier to the end of March and -- and then also wanted to understand kind of the dynamics of the recent sale of HIMV and kind of what that means relative to where you have that marked on the schedule of investments right now?
Bryce, this is Dan Devorsetz, thanks. Good to talk to you. So yes, Nexii is -- during the quarter, it became inevitable that the company needed to find a new home. And so the best way to do that was to run it through a process. So it's been publicly announced, so this is not news that it's in the CCAA process, which is the equivalent of Chapter 11 here in the States. So we did adjust our maturity and some of the terms of our deal to align with what's going on in that process. The company continues to operate and deliver on its contracts. In fact, it's doing pretty well. It signed some new contracts and is doing well. So we expect it to find a home in the next couple of quarters, and we adjusted our terms, as you suggested, to accommodate that. In terms of IMV, also, this is public news. So not breaking anything. But BioVaxys, which is a small cap company and also in Canada, acquired the assets of IMV out of the HIMV entity that we created to acquire the IP. The plan is to develop those assets internally as well as find partners in the market to develop really a strong platform of biotech IP. And so we received cash and stock as part of that transaction as well as future payment schedules based upon performance and milestones that could potentially repay all of our initial investment in that -- in the original IMV asset. So our mark values that entire contract and the potential we see in the -- in the future payments as well as what we received upfront.
Okay, Okay. That's helpful, Dan. Good color. Let's say, just maybe a couple of questions from a, I guess, balance sheet perspective. Kind of surprised to see kind of lack of ATM use in the quarter just given the track record of tapping that ATM quite actively. Just kind of curious, maybe a question for Dan Trolio, what -- why the lack of ATM use in the quarter?
Yes. So every quarter, when we go into the quarter, we look at our capital needs and look at different levers to pull in each quarter and determine the best use to raise whatever equity or debt capital. In addition to that, we look at the portfolio and we look at the activity that's going into the quarter and the amount of information that we may know at the time, and so we felt it was prudent to be out of the market in the quarter.
Okay. That's helpful. And then in terms of cash on the balance sheet, balance sheet leverage, I mean, it sounds like the first half of the year will be slower than the back half? Are you thinking you'll continue to maybe be less active on the ATM and use cash and available -- availability within the credit facilities to fund? Or is it really just dependent on how the pipeline and the activity level starts to shape up as we get into the year.
Yes, it will definitely be dependent on how the activity shapes up for the year. We did in 2023 with a large cash balance, and that's because we received a very late prepayment. And you can see in the first quarter from our recent developments, there hasn't been a lot of activity in the quarter to date. But as we look forward, we'll do the same thing that I mentioned earlier and look at what we see coming down the pipeline, our capital needs. We will definitely look to consider any equity raise that may make sense or borrow like you said, on the facilities. So it will definitely be dependent on what we see.
Okay. All right. Last one for me, another one for you, Dan. Just thinking about the mechanics of the deferred income incentive fee, let's assume that kind of comes back into play. How does the deferred portion work? Does it run through the income statement in future quarters? Or would it just reduce the, I guess, the liability that is held on the balance sheet?
Yes. So you'll have to work through the calculation that looks back 3 years. And with the amount that's deferred right now, we do not have it on the balance sheet as a liability per se. If it is earned going forward, it would run through the income statement.
[Operator Instructions] And our next question comes from the line of Paul Johnson with KBW.
Part of this was answered, kind of, in your commentary on Nexii. But I'm just kind of wondering your thoughts in general for the stressed assets and really the VC market in general, what is kind of like the overlying stress that's been the issue for the last several quarters. I mean, has it just been simply that sponsors have held off for potentially too long, trying to avoid kind of the pain of obviously lower -- lower valuation rounds? Or are these more idiosyncratic issues that you're sort of -- you think that you're kind of seeing within portfolio, any comments there would be helpful.
Paul, this is Jerry. You kind of hit on both sides of that. I mean the fact of the matter is that through the whole 2023, even companies in our portfolio that have been performing well and have been able to raise capital, the amount of capital they have been able to raise and the valuations at which they've been able to raise, it has been really painful for the companies for the VCs based on their carrying value of those companies. And so that has led to, literally every time a portfolio company gets to a point where they're getting low on liquidity and they have to raise money, it's not just a matter of looking at the valuation and figuring out what's appropriate, whether you do a down round or bridge financing or whatever. It's -- venture capital firms are struggling with their own portfolio valuations. And it's difficult for a lot of VCs to put money into companies -- put new capital in the companies when the capital they already have in is way underwater and the LPs are basically saying, don't continue to throw good money after bad. And that's kind of a common theme we have seen throughout the year. And obviously, valuations have taken a huge hit over the last 6 quarters. I think Nexii was valued at $2 billion at one point in 2022, just to give you an idea. So that's been definitely a big part of the problem. I would like to say that's the only problem. The fact of the matter is that in some of these instances, there are some idiosyncratic issues relative to how these companies have been managed, who their investors are, the ability of those investors under any circumstances to put in more capital. And so we really have, really, for the whole year, had to roll up our sleeves and get really more heavily involved in kind of figuring out what the best strategy is to exit some of these transactions. And we've touched on some of them, Nexii is one, obviously, what we -- you saw what we did with IMV and so those are real issues that are more -- as much idiosyncratic, I would say, as they are just the overall markets. So it's been difficult. I would say, and I don't want to sound too confident here at all, but we are seeing some, what I call, green shoots relative to overall market conditions. For instance, there were 7 public life science IPOs in the first 2 months of this year, last year during the same period, there were only 2.
So we are starting to see -- and there's been some M&A activity in the marketplace as well. Again, I wouldn't say we're out of the woods by any stretch. I think this is going to be a really interesting year, especially the first half of it. But I do think that valuations have gotten to a point now where they are becoming a little bit more attractive to M&A buyers. And as I mentioned, even the IPO market seems to be showing some signs of life anyway. So that's where we are.
That's very helpful. A lot of color in there. I mean it sounds like there may be some testing of the waters again. But I mean, has the more recent kind of -- I mean, the prime rate is at 8.5% I believe. I mean, does the higher for longer commentary, I guess, that's out there. I mean does that push that out any further this year, do you think, more recently, just I guess, the recovery in that market? .
I wish -- I read probably the same things you read, and I wish I had -- so all -- all we can do really is at the ground level, at this point, just look at how all of this impacts our portfolio companies as well as the new transactions we're looking at. And it's definitely going to be an interesting -- like I said, the first half of 2024 is going to be very interesting. It could go either way because I mentioned higher interest rates and lowering inflation has been macroeconomic issues, but there's also 2 wars and an election coming up. So anyone who's trying to predict through all that relative to looking out to the future in 2024, it's really difficult. But -- so we've got our head down. We're looking at every one of our portfolio companies. We're staying extremely close to the management teams, to their investors, really all their stakeholders. And we're going to manage our way through this, that try to maximize the value of all of our assets, including those that are distressed right now.
Great. Appreciate it. And last one, I just ask, I mean, do you think that there's any kind of potential for just some incremental G&A cost savings from the acquisition of the Monroe platform.
I'll take that one, Paul. It's Rob. I think on the margin, absolutely, but the investment management agreement between HTFM and the public company established advent fees and costs that are important. But we have seen some as it relates to things cost borne by the public company D&O, insurance and other things that is helpful. So we have already seen a few of those -- not big numbers, but helpful.
Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann.
Apologies, I joined the conference late. Back to the ATM use question, what's the outlook for the leverage ratio going forward?
So as we mentioned, our target leverage is net of cash, 1.2x. And so with that at that level, again, it's a target, what we report is always a point in time. So we're a little above that, then we feel comfortable because there's a significant amount of cushion between the 1.2 and the 2x regulatory count. So I would say the outlook is to be within that range.
Got you. And on the dividend, I know that you guys announced a supplemental dividend for the first quarter. Given the rise in nonaccruals and -- but also given your high level spillover income, what's the thoughts on further dividend supplements through the year?
Yes. So each quarter, we have a distribution discussion with our Board and determining the level of not only the quarterly -- the monthly distributions each quarter but also the need for supplemental distribution. And based on exactly what you said, the elevated spillover that we have coming out of 2023, our outlook for 2024, we felt it was prudent along with the Board to provide a special distribution at this time, and then we will continue to do the same each quarter.
And I guess, final question and related to the spillover, do you guys compare what the excise tax would be not distributing in terms or I mean, how does the excise tax consideration fall into your spillover consideration? Your [indiscernible].
Yes, it's part of the consideration, but at 4%, it isn't a significant expense to the balance sheet. Some would say it's a lower cost way to keep capital on the balance sheet. And so with the spillover, we look at the level of where it is at the current point in time and being able to distribute the spillover in the required period to stay within the American BDC requirements.
Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Rob Pomeroy 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.
This concludes today's conference. You may now disconnect. Have a great day.