Looking for high-yield tech and/or life science investments? While these two sectors aren’t recognized for enticing dividend yields, there are nonetheless methods you may earn high-yield earnings from them.

One method is to put money into sure enterprise improvement corporations to achieve high-yielding publicity to privately held tech and life science corporations. Horizon Technology Finance (NASDAQ:HRZN) is a BDC with a give attention to these two sectors.

Company Profile:

Horizon Technology Finance Corp. is managed by its advisor Horizon Technology Finance Management LLC. Horizon is a number one enterprise lending platform that gives structured debt merchandise to life science and know-how corporations. Since 2004, Horizon has instantly originated and invested greater than $3 billion in enterprise loans to greater than 315 rising corporations. It relies in Farmington, Connecticut. (HRZN web site)

Holdings:

HRZN’s greatest funding publicity, 63%, is with corporations within the enlargement stage, adopted by early-stage corporations, at 32%, and later-stage companies, at 5%. Its portfolio had warrant and fairness positions in 97 corporations as of June 30, 2023, with a price of ~$715M, as of 6/30/23.

Its two most important sectors are Life Sciences, at 43%, and Tech, at 40%. And 12% of its portfolio is invested in Sustainability corporations, with 5% invested in Healthcare Information Services.

Sub-sector exposures run from Biotech, at 26%, right down to Networking and Diagnostics, each at 1%:

Portfolio Company Ratings:

As with different BDCs, HRZN’s administration charges its debt portfolio corporations quarterly. Four is the best tier – one is the bottom. As of 6/30/23, its debt portfolio consisted of 54 secured loans with an combination truthful worth of $683.3M. Top tiers 1 and a pair of had 49 of the 54 corporations, for 89.5% of truthful worth of the portfolio, vs. 55 corporations on the finish of 2022, at ~95% of truthful worth.

As of June 30, 2023, there was one debt funding with an inside credit standing of 1, with an combination price of $17.4M and an combination truthful worth of $9.8M, vs. three debt investments with a price of $20.9M and a good worth of $8.3M, as of Dec. 31, 2022.

Earnings:

Like different BDCs, HRZN has been reaping the advantages of rising charges and the pullback of banks from business loans.

Q2 ’23: NII/share rose 54%, to $0.54, vs. $0.35/share in Q2 ’22. Total funding earnings for the quarter grew 51.3% to $28.1M, vs. $18.6M in Q2 ’22.

The annualized portfolio yield on debt investments was 16.3%, vs. 14.2% a yr in the past. HRZN funded 11 loans totaling $49.6M in Q2 ’23.

Sequentially, NAV declined from $11.34 as of three/31/23, to $11.07 at 6/30/23. Management wrote off three debt investments in addition to marked down the truthful worth of different debt investments contributing to the $0.27/share discount in NAV for the quarter.

Q1-2 ’23: Total Investment Income jumped 71% attributable to a bigger portfolio, and better curiosity earnings. NII rose 10%, whereas NII/Share rose 61%, attributable to the next share depend.

The share depend rose 25% – HRZN raised $38.9M of internet proceeds in a typical inventory providing, and ~$5.1M with its “at-the-market” (“ATM”) providing program in Q2.

Interest expense rose $6.7M, up 87%, however was outpaced by the $15M bounce in NII.

New Business:

HRZN funded 11 debt investments totaling $50M in Q2 ’23, together with a $10M debt funding to a brand new tech portfolio firm targeted on safety imaging, and a $10M debt funding to a brand new healthcare data portfolio firm, offering AI-enabled know-how for dementia care.

HRZN acquired two mortgage prepayments, one refinanced mortgage and one partial paydown in the course of the quarter totaling $30M. HRZN ended the quarter with a dedicated and accredited backlog of $159M, vs. $187M on the finish of the primary quarter.

Dividends:

At its 9/29/03 $11.88 closing value, HRZN yielded 11.11%. Management already declared dividends for October and November, sustaining the $.11/share payout that it has paid since December 2022. HRZN has had modest dividend progress of 0.99% during the last 5 years, sustaining its month-to-month payout at $.10 from 2017 to late 2022.

In Q2 ’23, HRZN’s dividend protection was even stronger than in latest quarters, rising from 1.39X to 1.64X, with a trailing common of 1.41X, one of many larger protection charges we have seen within the BDC business. It ended Q2 ’23 with $1.02/share in UNII, up from $.82 in Q1 ’23.

Profitability and Leverage:

The realized and unrealized losses in Q1-2 ’23 decreased ROA and ROE, that are beneath BDC business averages, whereas the EBIT Margin rose to ~76%, above common. Debt/NAV leverage decreased to 1.18X, extra conservative than the 1.33X business common.

HRZN’s Assets/Debt and EBIT/Interest protection ratios each improved in Q2 ’23:

Debt and Liquidity:

As of June 30, 2023, there was no excellent principal stability beneath its revolving credit score facility with KeyFinancial institution. On June 29, 2023, the Company amended the Key Facility, amongst different issues, to extend the dedication quantity to $150M, and to extend the quantity of the accordion characteristic, which now permits for the potential enhance within the complete dedication quantity to $300M.

On May 24, 2023, the corporate amended the NY Life facility, to extend the dedication by $50M.

As of June 30, 2023, the corporate had $273.5M in obtainable liquidity, consisting of $50.3 million in money and cash market funds, and $223.2M in funds obtainable beneath present credit score facility commitments.

Performance:

HRZN has outperformed the BDC business and the S&P 500 over the previous month, and quarter, and has outperformed its business to date in 2023 on a value foundation. It has outperformed the monetary sector over the entire intervals beneath whereas reaching the next complete return than the S&P over the previous yr.

HRZN has delivered a 96% return over the previous 5 years vs. 38% for its benchmark index.

Analysts’ Price Targets:

At $11.88, HRZN is 13% above analysts’ lowest value goal of $10.50, and 5.5% above the typical $12.57 value goal.

HRZN acquired a downgrade from Compass Point on 9/27/23, shifting to Sell from Neutral – they lowered their value goal from $11.00 to $10.50.

Valuations:

At its $11.88 9/29/23 closing value, HRZN was buying and selling at a 7.3% premium to NAV, vs. an total BDC business Price/NAV low cost of two%. However, HRZN’s earnings a number of, a Price/NII of 6.46X, is far decrease than the BDC common of 8.87X. Its P/Sales and EV/EBIT valuations are additionally decrease than common.

Parting Thoughts:

HRZN’s advisor was acquired by Monroe Capital, as of 6/30/23, which administration feels will probably be a boon to HRZN, enabling it to compete and win bigger funding alternatives and assist it create a extra numerous portfolio. And 100% of the excellent principal stability of its debt investments bear curiosity at floating charges, with charge flooring.

We charge HRZN a speculative Buy, primarily based on its floating charge publicity, its very well-covered yield, its low P/NII, and its long-dated debt maturities.

All tables are furnished by Hidden Dividend Stocks Plus, except in any other case famous.