Horizon Technology Finance Corporation (HRZN) Q3 2026 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Horizon Technology Finance Third Quarter 2026 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Megan Bacon, Director, Investor Relations and Marketing. Please go ahead.

Thank you, and welcome to Horizon Technology Finance Corporation's Third Quarter 2026 Conference Call. Representing the company today are Mike Balkin, Chief Executive Officer; Paul Seitz, Chief Investment Officer; and Daniel Trolio, Chief Financial Officer. I would like to point out that the Q3 earnings press release and Form 10-Q 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, 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, 2025. 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 Horizon's CEO, Mike Balkin.

Welcome, everyone, and thank you for your interest in Horizon. Today, we will update you on our quarterly performance in the current operating environment. Paul Seitz, our Chief Investment Officer, will take us through recent business and portfolio developments as well as the current status of the venture lending market; and Dan Trolio, our Chief Financial Officer, will detail our operating performance and financial condition. We will then take questions. We made significant progress in the third quarter in terms of increasing our pipeline of opportunities with our backlog building to $351 million at quarter end. That is a testament to our scalable platform, the relentless work of our originations and credit teams as well as our ability to co-invest with Monroe Capital. We believe we are successfully laying the foundation for Horizon's long-term portfolio growth and increasing NII. At the same time, our NAV per share remains under stress due to credit pressures from certain investments. We believe we have made material headway in addressing these challenges, which should become more apparent as we move into 2027. Turning to our specific results for the quarter, we grew our debt investment portfolio for the fourth consecutive quarter, funding 9 investments totaling $98 million, while our total portfolio size ended at $650 million. We finished the quarter with a backlog of $351 million, up over $42 million from the prior quarter end and which positions us to materially grow our portfolio in the fourth quarter and beyond. We generated net investment income of $0.19 per share, which covered our regular distributions in the quarter, while our NAV per share ended the quarter at $5.56. Our NAV per share was down $0.67 for the quarter, primarily due to write-down of certain investments. Based on our outlook and our undistributed spillover income, our Board declared monthly distributions of $0.06 per share payable in January, February and March of 2027. As we continue to deploy the capital and move towards our target leverage, it remains our goal to deliver NII at or above our declared distributions over time. We achieved a portfolio yield on debt investments of just under 15% for the third quarter at or near the top of the BDC industry. We repurchased just over 2 million shares of our common stock in the quarter, reflecting the continued confidence we have in our near- and long-term outlook. And finally, we continue to win attractive venture debt and small-cap public company investments as we further build the top of our funnel and pipeline of loan opportunities. As we close out 2026, with our strong balance sheet and increasingly robust pipeline, we believe we are in an excellent position to further grow our portfolio and drive long-term value creation for shareholders. To support that effort, we are pleased to create the new role of Chief Growth and Strategy Officer at our adviser and to appoint Manuel Henriquez to this position. We have had the benefit of Manuel working with our adviser since June, and this new appointment will help accelerate his positive impact on Horizon. We look forward to his contributions as we build on our momentum. With the backing of Monroe Capital, one of the premier asset management firms in the country, we have the right team firmly in place, and we are executing on our strategic vision, which we believe will create a sustainable growth engine that will increase our NII and NAV over time. Despite our challenges, we remain excited about Horizon's future and the opportunity to take our platform to the next level. Again, we appreciate your continued interest and support in the Horizon Technology Finance platform. I will now turn the call over to our Chief Investment Officer, Paul Seitz, to give you the details of our third quarter results and progress. Paul?

Thanks, Mike, and good afternoon to everyone. As Mike noted, our team made excellent progress in expanding our committed and awarded backlog and pipeline in the quarter, which positions Horizon to deliver sustainable and profitable growth on a consistent basis. At the same time, we continue to work diligently through a number of stressed credits to optimize returns on those investments and ultimately increase our NAV over time. At the end of the quarter, our current portfolio stood at $650 million, our fourth consecutive quarter of debt investment portfolio growth. Our growth was offset by write-downs of certain investments. As always, we remain focused on recovering as much value as possible from these investments. In the third quarter, we funded 9 debt investments in our target sectors totaling $98 million. Additionally, we made significant progress in further building our pipeline, including larger-sized venture loan opportunities in our target sectors. In Q3, we increased our backlog by more than $42 million from the end of Q2. During the third quarter, we experienced 6 loan prepayments and partial paydowns totaling $81 million in principal. We are pleased with these prepayments as they generated accelerated income, validated our investment structure and provided us with additional capital to redeploy into new investments that can generate additional attractive risk-adjusted returns. Despite the uptick in prepayments in the third quarter, we anticipate a lower level of prepayment activity in the fourth quarter given the current macro environment. Our onboarding debt investment yield of 12.6% during the third quarter was ahead of our second quarter's level, thanks in part to the current rising rate environment. We expect to continue to generate strong onboarding yields with our current pipeline of opportunities, which we believe will generate strong net investment income over time. Meanwhile, our debt portfolio yield of 14.7% for the quarter was once again among the highest-yielding debt portfolios in the BDC industry. Our ability to generate industry-leading yields continues to be a testament to our venture lending strategy and our execution of such strategy across various market cycles and interest rate environments. As of September 30, we held warrants, equity and other investments in 95 portfolio companies as well as our RoHo joint venture with a fair value of $29 million. During the quarter, we realized proceeds valued at $2 million from the redemption of warrants in 2 investments and have now realized more than $4.3 million of proceeds from warrants and equity in just the last 6 months. Structuring investments with warrants and equity rights is a key component of our venture debt strategy and a potential generator of shareholder value. As Mike mentioned, we ended the quarter with a committed, approved and awarded backlog of $351 million compared to $309 million at the end of the second quarter. We continue to believe our pipeline of investment opportunities, combined with our expanding committed backlog with most of our funding commitments subject to companies achieving certain key milestones, provides a solid base to prudently grow our portfolio over time. As of quarter end, under our new 1 to 5 credit scale, which we realigned to as of June 30, 88% of the fair value of our debt portfolio consists of 1, 2 or 3 rated debt investments, while 12% of the fair value of our portfolio is rated 4 or 5. We recognize the credit pressures on certain investments in the portfolio, and we continue to closely monitor all of our investments. As always, we are collaborating with investors in all of our portfolio companies and utilizing a variety of strategies to optimize recoveries and preserve value. Turning to the venture capital environment. According to PitchBook, approximately $98 billion was invested in VC-backed companies in the third quarter. This results in year-to-date investments as of September 30, 44% higher than the prior record year 2021, notably with one more quarter still to go. The impressiveness of this increase is tempered by the fact that nearly all of the investment consists of large investments in AI. Accordingly, the market is significantly bifurcated with certain companies at the very top receiving the lion's share of capital. Meanwhile, exit market activity remained muted for non-AI companies due to the ongoing uncertainty in the macro and geopolitical environment. And Anthropic's anticipated IPO will almost certainly exit at a massive valuation later this quarter. But otherwise, we expect the IPO market will stay quiet for the remainder of 2026. Despite the top-heavy market, we continue to believe significant opportunities remain for venture loan originations in both life sciences and tech as evidenced by both our growing debt investment portfolio and the increase in our pipeline. We continue to believe venture debt remains a compelling option for high-quality companies to access additional capital. To sum up, we made significant progress in the third quarter in terms of expanding our pipeline, which positions us to sustainably grow our venture debt investment portfolio with high-quality investments. Combined with our strong balance sheet, we believe we are setting the stage to improve our financial performance over time and create more value for shareholders. With that, I will now turn the call over to our Chief Financial Officer, Dan Trolio.

Thanks, Paul, and good afternoon, everyone. We are continuing to make progress in growing our origination pipeline as evidenced by our stronger backlog while we closely manage our current investment portfolio. Along with a strong balance sheet, we continue to lay the groundwork to deliver sustainable long-term growth and create additional value for our shareholders moving forward. As of September 30, we had $211 million in available liquidity, consisting of $108 million in cash and $103 million in available borrowing base capacity under our existing credit facilities. As of September 30, we had no outstandings under our $150 million KeyBank credit facility, $181 million outstanding on our $250 million New York Life credit facility and $90 million outstanding on our $150 million Nuveen credit facility, leaving us with ample capacity to grow our portfolio of debt investments. Our debt-to-equity ratio stood at 1.12:1 as of September 30, and netting out cash on our balance sheet, our net leverage was 0.82:1, well below our target leverage. Based on our cash position and our borrowing capacity, our potential new investment capacity as of September 30 was $387 million. During the quarter, we repurchased just over 2 million shares of our common stock at an average price of $4.90 under our $20 million stock repurchase program. We expect to remain opportunistic with respect to our stock repurchase program given the dislocation between our current valuation and our confidence in the near- and long-term outlook of Horizon. Turning to our operating results. For the third quarter, we earned investment income of $24.1 million compared to $26.3 million in the prior year period, primarily due to lower interest income on our debt investment portfolio. Our debt investment portfolio on a net cost basis stood at $690 million as of September 30, up 1% compared to $682 million as of June 30, 2026. For the third quarter of '26, we achieved onboarding yields of 12.6%, ahead of what we achieved in the second quarter of '26. Our loan portfolio yield was 14.7% for the third quarter compared to 18.6% for last year's third quarter. Total expenses for the quarter were $12.5 million compared to $12 million in the third quarter of '25, with net expenses for the quarter totaling $11.5 million as the adviser waived $1 million of its base management fee. Our interest expense of $7.8 million was in line with last year's third quarter. As a reminder, in connection with our merger earlier this year, our adviser agreed to waive up to an aggregate of $4 million of fees or up to $1 million per quarter beginning with this third quarter. Net investment income for the third quarter of '26 was $0.19 per share compared to $0.11 per share in the second quarter of '26 and $0.32 per share for the third quarter of '25. The company's undistributed spillover income as of September 30 was $0.24 per share. Based upon our outlook and undistributed spillover income, our Board declared monthly distributions of $0.06 per share for January, February and March 2027. We anticipate that our expanded capital base and available leverage, our expectation for growth and our predictive pricing strategy will enable us to generate NII that covers our distribution over time. To summarize our portfolio activities for the third quarter, new originations totaled $98 million, which were offset by $3 million in scheduled principal payments and $81 million in principal prepayments and partial paydowns. We ended the quarter with a total investment portfolio of $650 million. At September 30, the portfolio consisted of debt investments in 42 companies with an aggregate fair value of $621 million and a portfolio of warrant, equity and other investments in 95 companies with an aggregate fair value of $29 million. Our NAV as of September 30 was $5.56 per share compared to $6.23 per share on June 30 and compared to $7.12 as of September 30, 2025. The NAV reduction on a quarterly basis was primarily due to the write-down on certain stressed investments. As we've consistently noted, nearly 100% of the outstanding principal amount of our debt investments bear interest at floating rates. As of September 30, 98% of our portfolio will benefit from additional increases in their applicable pricing index. This concludes our opening remarks. We'll be happy to take questions you may have at this time.

[Operator Instructions] And our first question today will come from Melissa Wedel with UBS.

You mentioned, obviously, NAV is under pressure on a couple of credits, but you also talked about some turnaround plans on a few of those. Could you help us dimensionalize, sort of, the time frame to the extent that you can provide detail around some of the efforts on stabilization and how investors should think about a time line on not just a turnaround there, but just even stabilizing that?

Yes. Melissa, this is Paul Seitz speaking. Thanks for the question. So we were running a few processes on certain names. You'll see the names in the schedule of investments. I won't go into too much detail regarding those processes given sensitivity and the fact that they're private right now. But we had run up against a few shortfalls in the terms of the outcomes we were expecting, definitely unfortunate, but we are working diligently and very hard to recover as much capital as possible. I think it's a little shocking and surprising that these all came about all at once, but there's been a lot of effort on our end to stabilize that. In terms of the outlook, I don't really want to provide any forward-looking statements, but suffice it to say that we are very all hands on deck in terms of making sure that the portfolio is stabilizing.

Okay. I appreciate it can be -- those things can be sensitive and uncertain on time line. Going back to a comment on the call about repayment activity being particularly elevated in 3Q and then expecting that to, sort of, normalize in the fourth quarter. Also looking to try to dimensionalize that in the context of some nice momentum on the origination side that you talked about headed into the fourth quarter. I mean, are we -- should we be thinking about that more in line with some of what we saw in 2Q or earlier this year?

Yes. As far as the fourth quarter, we got 1.5 months left. As we noted, we didn't have one prepayment to date on the smaller side, nothing in our future projections right now, but it's still at 1.5 months. When I -- if you're thinking about estimating it, I'd look back the last 3 quarters. You can see we've grown the portfolio average about $30 million. And I probably would be expecting a little bit higher than that this fourth quarter, but not significantly.

[Operator Instructions] And our next question will come from Paul Johnson with KBW.

So in terms of the processes you were running, I guess, your -- all these -- the loans that you -- or the companies that you've been managing out of the stress credits. I mean, are all of those found within the nonaccruals today? Or are there more of those investments, potentially some equity investments with just non-income-generating investments attached to them?

Yes. I'd say the majority of them, if not all, are in the nonaccrual bucket that will be labeled as such on the schedule of investments.

Got it. Okay. And then just one technical question, but you mentioned the $98 million originations this quarter on the call. I think it's also in the press release too as well. But just looking at the investment activity, it's $89 million. I'm just curious what the difference is there. Is it just commitment versus funded or I guess what's, like, the $10 million, sort of, difference between the $98 million?

Yes. I believe that's probably just location where that other $9 million, $10 million was funded in the joint venture. And so that is -- yes. So it's technically $98 million as far as earning assets put on the books, just different locations of where they're sitting.

Got it. Okay. And then the pipeline, it sounds like that's been building. We've been working to expand that as well. Just curious, so what's, kind of, like the expected time line, I guess, in terms of how long you think it would take to start seeing some of those investments come through and fund? And I guess how much of that activity went through this quarter as well?

Yes. So our pipeline is always fluid. And so deals can be delayed, they can accelerate. There's -- it's a bit nuanced and idiosyncratic at times. But we're confident that our pipeline is strong and that we're going to have some decent conversion on it. Right now, I think the pipeline typically is on a rolling 6-month basis as far as the deal activity. So any deals on the pipeline now, hopefully, is we have some sort of decision within 6 months from now.

Yes. And Paul, this is Mike. I would say that we're extremely encouraged by the backlog and the pipeline we have. It's the strongest we've had in quite a while. And so we're seeing lots of activity, and we're very pleased with how things are going right now.

Got it. Yes. That's great to hear. And last one for me, I guess, would just be with the recent appointment of Manuel Henriquez to Chief Strategy Officer. I'm just curious what you're hoping to, kind of, get from that, given there's obviously been a lot of changes and modifications to the investment strategy with the Monroe merger. But what -- just curious to get your thoughts there in terms of what you're hoping to benefit with the BDC.

Yes, sure. It's a good question. And actually, Manuel has been working with us for a little while here now, and we're very happy with having him on board. And he's -- obviously, he built a great business at Hercules. And so we're able to take a lot of the learnings and experience he had there and try to apply them to things we're doing here at Horizon. Obviously, Horizon has gone through a lot of changes over the last several years. And so a lot of the experience that he brings to the table is valuable. He's helping significantly in the origination side of the business, and we believe we'll continue to benefit from his contacts and relationships. So stay tuned, but it's incumbent upon us to put the numbers up on the board, and we're excited about what we see happening.

And this will conclude our question-and-answer session. I'd like to turn the call back over to Mike Balkin for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.