Sign in

You're signed outSign in or to get full access.

HT

Horizon Technology Finance Corp (HRZN)·Q1 2014 Earnings Summary

Executive Summary

  • Q1 2014 NII of $2.48M ($0.26/share) was below the $0.345/share dividend, reflecting elevated professional/legal costs and the drag from non‑accruals; NAV rose to $14.32 (+$0.18 QoQ) driven by reversals of prior unrealized depreciation and warrant gains .
  • Total investment income (revenue) declined sequentially to $7.53M from $8.80M in Q4 and $8.70M in Q3 as portfolio yield normalized to 13.6% (vs. 15.5% in Q4, 14.6% in Q3) .
  • Management maintained monthly dividends of $0.115 for Jul/Aug/Sep 2014 and guided to near‑term deleveraging (debt/equity ~0.76x by end Q2) and elevated professional fees in Q2 before normalizing in 2H14 .
  • Near‑term catalysts: resolution of remaining non‑accruals (two loans at $3.5M FV), anticipated Q2 loan prepayments (accelerated fees ~$290k and ~$500k), and potential warrant monetization amid active IPO/M&A markets .

What Went Well and What Went Wrong

What Went Well

  • NAV increased to $14.32 (+$0.18 QoQ), aided by net unrealized appreciation of $8.5M from reversals on resolved problem loans and warrant valuation gains .
  • Successful exits: Xtreme Power asset sale generated $9.9M cash and a 17.9% IRR; SolarBridge settlement produced $2.7M cash plus $2.3M preferred stock, reducing 1‑rated credits and improving portfolio quality .
  • Warrant/IPO upside: Everyday Health and Revance IPOs; 12 public warrant positions with $3.6M aggregate FV and intent to monetize opportunistically .

What Went Wrong

  • NII per share ($0.26) did not cover the $0.345 dividend for the quarter; total expenses rose to $5.01M on higher legal/professional fees tied to non‑accrual workouts .
  • Realized losses of $5.88M from settlements of two non‑accrual debt investments, despite offsetting unrealized reversals .
  • Portfolio yield moderated to 13.6% (from 15.5% in Q4), with sequential revenue down as average portfolio size and prepayment activity normalized .

Financial Results

MetricQ3 2013Q4 2013Q1 2014
Total Investment Income (Revenue, $USD Millions)$8.70 $8.80 $7.53
Total Expenses ($USD Millions)$5.10 $5.30 $5.01
Net Investment Income (NII, $USD Millions)$3.50 $3.40 $2.48
NII per Share ($USD)$0.36 $0.35 $0.26
Dividends Declared per Share ($USD)$0.345 (for Q1 2014) $0.345 (for Q2 2014) $0.345 (for Q1 2014)
Portfolio Yield (%)14.6% 15.5% 13.6%
NAV per Share ($USD)$14.95 $14.14 $14.32
Asset Coverage Ratio (%)208% 211% 215%

Segment/Portfolio Quality

Internal Credit RatingDec 31, 2013 Loans at FV ($USD M)Dec 31, 2013 (% of Loan Portfolio)Mar 31, 2014 Loans at FV ($USD M)Mar 31, 2014 (% of Loan Portfolio)
4$30.385 14.2% $32.858 15.1%
3$167.231 78.3% $163.153 74.8%
2$2.199 1.0% $18.429 8.5%
1$13.939 6.5% $3.484 1.6%
Total$213.754 100% $217.924 100%

Q1 2014 KPIs

KPIQ1 2014
Investment portfolio at FV ($USD M)$228.560
Warrants & equity FV ($USD M)$10.2
Public warrant positions (# / $USD M FV)12 / $3.6
New loan commitments closed ($USD M)$14.0
New venture loans funded ($USD M)$15.0
% of new debt priced floating93%
Liquidity ($USD M)$34.1
Borrowings outstanding ($USD M)$119.405
Borrowings fixed rate (% / at 3.0%)91.6% fixed; 64.0% at 3.0%
Non‑accrual loans (cost/FV, $USD M)$5.2 / $3.5

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Monthly DividendQ3 2014 (Jul/Aug/Sep)None prior for Q3$0.115/month declared; total $0.345 New/maintained run‑rate
Dividend PolicyOngoingCover by NII over time; spillover $0.66/share at 12/31/13 Maintain policy; spillover ~$0.58/share post Q1 Maintained
Professional FeesQ2 2014Elevated during workouts ~$800k in Q2; normalize to $300–$400k in 2H14 Clarified; near‑term elevated then lower
Leverage (Debt/Equity)End Q2 2014Target ~0.8x over time ~0.76x by end Q2 on expected prepayments Lower near‑term vs target
Net Portfolio ChangeQ2 2014—Down ~$10–$20M expected (subject to prepayments) New outlook
Accelerated Fee Income from XtremeQ2 2014—~$500k to be recognized in interest income New
Prepayment/Accelerated FeesQ2 2014—~$290k expected from a $7.5M prepayment New
Floating‑Rate Origination MixNear‑term39% of 2H13 fundings floating; 88% of backlog floating 100% of approved/committed backlog ($27.5M) floating; 93% of Q1 fundings floating Raised mix to predominantly floating

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2013, Q4 2013)Current Period (Q1 2014)Trend
Cleantech/non‑accrual resolutionExited solar exposure; multiple non‑accruals; working through Chapter processes SolarBridge settled; Xtreme exit at 17.9% IRR; 1‑rated credits reduced from 5 to 2 Improving credit quality
Floating‑rate shiftInitiated move to floating in 2H13; backlog 88% floating 93% of Q1 fundings floating; 100% of approvals/commitments floating Increasing floating exposure
Warrant monetization/IPO/M&A11 public warrants; favorable IPO/M&A outlook 12 public warrant positions ($3.6M FV); Everyday Health & Revance IPOs; plan opportunistic monetization Building optionality
Leverage/Asset coverageAsset coverage ~208–211%; target ~0.8x leverage Asset coverage 215%; guide to ~0.76x by Q2 end Deleveraging near‑term
Fee structure/alignmentExternal mgmt fees; questions on alignment Waived base fee on cash; board discussions to improve alignment Incremental progress
Professional feesElevated due to workouts ~$800k expected in Q2 then normalize Near‑term elevated, then lower
Dividend coverage/spilloverNII generally covered dividend; spillover $0.64–$0.66/share NII below dividend in Q1; spillover $0.58/share Temporary shortfall, cushion remains
Competition/pipelineEarly‑mid stage focus; market dislocation; robust pipeline >$140M pipeline; backlog $27.5M; strong tech/life science demand Healthy opportunity set

Management Commentary

  • “We made significant progress during the first quarter in resolving our troubled accounts…one of which had a positive impact on both net investment income and net asset value for the quarter.” — Robert D. Pomeroy Jr., CEO .
  • “Our goal remains to return to our target leverage of approximately 0.8 to 1.” — Robert D. Pomeroy Jr. .
  • “As a small first step, our advisor has agreed to waive the management fee on cash beginning in the first quarter of 2014.” — Robert D. Pomeroy Jr. .
  • “Onboarding yields…averaging 12.5%…our proved and committed backlog as of today totals $27.5 million of loans all priced with floating interest rates.” — Gerald A. Michaud, President .
  • “We realized warrant gains in the first quarter totaling $500,000…net unrealized appreciation on investments was $8.5 million.” — Christopher M. Mathieu, CFO .

Q&A Highlights

  • Xtreme deferred income timing: ~$520k benefited Q1 (interest and other income) and ~$500k will largely hit Q2 interest income via acceleration .
  • Non‑accrual balances: Two loans on non‑accrual at cost $5.2M and FV $3.5M; expectation to recover asset values through liquidation where applicable .
  • Floating rate strategy: New pipeline and backlog predominantly floating; transition does not require changing lien mix; continued blend of first/second lien .
  • Fortress facility: Considering prepayment in Q3 as economics improve after third anniversary; focus on cost of capital .
  • Professional/legal fees: Q2 expected around $800k, normalizing to $300–$400k in 2H .
  • Expected Q2 activity: Anticipated prepayments ($7–$15M principal) with accelerated fee/success fees; net portfolio down ~$10–$20M .

Estimates Context

  • Consensus EPS and revenue (total investment income) for Q1 2014 from S&P Global were not retrievable during this session; therefore, beats/misses vs Street cannot be determined. The company did not provide formal quantitative revenue/EPS guidance in the documents reviewed [GetEstimates error].
MetricQ1 2014 ActualQ1 2014 Consensus (S&P Global)
NII per Share ($USD)$0.26 Unavailable
Total Investment Income ($USD M)$7.53 Unavailable

Key Takeaways for Investors

  • Dividend coverage was weak in Q1 (NII $0.26 vs dividend $0.345), but spillover income ($0.58/share) provides near‑term cushion while management expects elevated fees to subside in 2H14; watch for normalization in legal/professional expense trajectory .
  • Credit quality improved meaningfully with resolution of two problem credits and reduction in 1‑rated loans; continued progress on remaining non‑accruals is a key driver of NII and NAV going forward .
  • Near‑term revenue catalysts include anticipated Q2 prepayments (accelerated fees $290k) and Xtreme fee acceleration ($500k); however, net portfolio may decline in Q2 by ~$10–$20M, tempering interest income unless redeployment accelerates .
  • Growing warrant portfolio (12 public positions; $3.6M FV) plus active IPO/M&A markets could drive additional gains; monitor monetization timing and realized outcomes .
  • Strategic shift to floating‑rate originations (93% of Q1 fundings; 100% of approvals/commitments floating) enhances rate defensiveness and pricing power; track execution quality and lien mix .
  • Balance sheet de‑risking continues (asset coverage 215%; fixed‑rate borrowings 92%; 64% at 3% coupon); leverage expected to decline to ~0.76x by Q2 end—constructive for risk, but monitor NII impact from lower assets .
  • Governance/alignment: Fee waiver on cash and active board discussions indicate willingness to improve shareholder alignment; watch for concrete changes (e.g., fee structure adjustments) in coming months .