Yahoo Finance

David Spreng

Thank you, Quinlan, and thanks, everyone, for joining us this evening to discuss our second-quarter results. Today, I'll reflect on the first half of the year and second-quarter highlights, provide an overview of our financial results, and lastly, discuss our outlook for the remainder of 2024.
During the second quarter, we were pleased to execute on attractive opportunities. We've been encouraged by the volume of quality companies seeking non-dilutive growth capital and our position as a potential growth partner.
We completed two investments in new portfolio of companies at the end of the second quarter, representing $75.5 million in funded loans. These investments included the completion of a $58.4 million senior secured term loan to Airship Group and a $17.1 million senior secured term loan to Onward Medical.
Airship is an enterprise software platform focused on customer engagement for mobile apps, while Onward is a medical technology company creating innovative spinal cord stimulation therapies. We believe both companies are representative of our focus on high-quality, late-stage companies in the sectors we know best, technology, healthcare, and select consumer service and product industries.
Runway delivered total investment income of $34.2 million and net investment income of $14.6 million in the quarter. Our average portfolio risk rating increased to 2.47 in the second quarter compared to 2.44 in the first quarter of 2024. We continue to proactively monitor our portfolio for potential issues that may arise regardless of market conditions and uphold our commitment to supporting borrowers throughout the entire lifetime of a loan.
Further, we believe our focus on originating investments at the top of the capital stack and avoiding situations with significant downstream financing risk and junior capital at play reduces the risk of volatility often associated with investing in early-stage companies. We will thoughtfully accelerate origination growth moving forward.
Turning now to the market. As the Federal Reserve continues to focus on taming inflation, investors are cautious, and companies at various stages are contending with heightened probability of down rounds and liquidity constraints.
As we anticipated, companies that raised capital at record valuations during 2021 and 2022 continue to seek debt as a means for non-dilutive growth. However, in today's challenging capital markets, venture-backed companies are heavily scrutinized as investors prioritize the highest-quality companies with clear paths to profitability. In the current environment, we are seeing companies fundraising at quite conservative levels relative to their enterprise value, which translates to an increasing quantity of attractive opportunities for Runway.
Our investment thesis is always centered on supporting passionate entrepreneurs by providing access to minimally dilutive growth capital. The importance of capital preservation and providing a margin of safety cannot be overstated amid a challenging backdrop. Our critical eye on underwriting, emphasis on credit quality, and focus on cyclical sectors provides comfort in our potential credit performance moving forward.
We are going to remain disciplined and we'll be ready to execute on the rate deals in the coming quarters. That said, we believe that the operating environment for many borrowers has improved meaningfully in recent months. In these situations, we are going to be opportunistic as we seek to redeploy capital and diversify our portfolio with confidence in the underlying fundamentals of the borrowers' business amidst improving macro conditions in certain subsectors.
In our view, this will not necessarily result in linear portfolio expansion quarter to quarter, but will ensure we are positioning our portfolio and shareholders for long-term returns.
With that, I'll turn it over to Greg for an overview of the investment landscape.

Gregory Greifeld

Thanks, David. I'd like to take a moment to focus on the US venture equity deal activity in the second quarter, which increased sequentially to the highest deal values since Q2 2022, potentially marking an inflection point.
US late-stage venture equity represented 42% of total deal value and 29% of total deal count in the second quarter of 2024, marking strong quarterly figures. Companies at the later stages of venture have been the most apt to lengthen runway and the most cautious to stay out of the market to stem further dilution. We expect many late- and growth-stage companies to continue to struggle with fundraising and liquidity constraints for the remainder of 2024, a reflection of investor caution, given the higher for longer rate environment, geopolitical tensions, and uncertainty associated with the US election cycle.
As David mentioned, the companies seeking our financing solutions are coming to the table conservatively relative to their enterprise value, a trend we will continue to monitor over the coming quarters. Against a mixed backdrop of geopolitical uncertainty, we are pleased with the depth and quality of our pipeline. While financial conditions remain very accommodating, risks such as fiscal policy, given higher levels of debt and interest rates, are coming into focus. We remain confident in our ability to capitalize in the dynamic environment by deploying capital while delivering strong credit performance to maximize risk-adjusted returns for our shareholders.
We are witnessing our recent efforts, paired with deep sector relationships, translate to a broader funnel of high-quality opportunities for the Runway Growth platform. Under David's leadership, our targeted outreach and marketing efforts have yielded new investment opportunities in the second quarter, bringing a diversified mix of companies into our pipeline.
By continuing to strategically invest in our team-wide distribution networks and scale our strategy beyond late-stage companies in select industries, we look forward to pursuing diversified investment opportunities across the ecosystem. As larger deals refinance, we plan to replace them with smaller loans, thereby increasing the range of industries and verticals present in our portfolio. This is a trend we expect to continue.
As you look at the larger deals we've done, many have started out as smaller loans and our balance has grown with the companies. In fact, over a third of the portfolio of companies have upsized their financing throughout our partnership. And of the loans that upsized, commitments increased 55% on average from the original committed.
By completing smaller deals, we now have a pipeline for more fundings and expanded fundings down the road, thereby allowing us to deploy more capital to performing companies.
I want to reiterate David's sentiments. We plan to thoughtfully accelerate origination growth moving forward, and these initiatives do not mean that we expect to drive incremental portfolio expansion every sequential quarter. However, it does mean that we're confident in our position to deploy capital from our balance sheet and redeploy capital that may come from prepayment activity.
As we evaluate various investments in our pipeline, we see a path to executing select transactions at more opportunistic terms in situations where we're confident the borrower is positioned to outperform. We believe that some economic headwinds have subsided in the sectors and subsectors we like the most, and we want to take advantage of those improved operating environments for certain borrowers.
With that, I will now turn it over to Tom to dive deeper into our financials.

Thomas Raterman

Thank you, Greg, and good evening, everyone.
During the second quarter of 2024, we expanded deal flow completing two investments in new companies late in the quarter, representing $75.5 million in funded loans. Our weighted average portfolio risk rating increased to 2.47 in the second quarter compared to 2.44 in the first quarter of 2024.
Our rating system is based on a scale of 1 to 5, where 1 represents the most favorable credit rating. The change this quarter largely reflects the downgrade of our loan to Snagajob to Category 5.
As with previous quarters, we calculated the loan to value for loans that were in our portfolio at the end of the first quarter and at the end of the current quarter. In comparing this consistent grouping of loans on a like-to-like basis, we found that our dollar-weighted loan to value ratio increased from 25.8% to 27.3%, sequentially. The sequential increase is primarily the result of the increased loan to value ratio of Snagajob.
Our total investment portfolio had a fair value of approximately $1.06 billion, excluding treasury bills, an increase of 5% from $1.02 billion in the first quarter of 2024 and a decrease of 3% from $1.1 billion for the comparable prior-year period. Our loan portfolio continues to be comprised almost exclusively of first lien senior secured loans.
As of June 30, 2024, Runway had net assets of $506.4 million, decreasing from $529.5 million at the end of the first quarter of 2024. NAV per share was $13.14 at the end of the second quarter compared to $13.36 at the end of the first quarter of 2024.
Our loan portfolio is comprised of 100% floating rate assets. All loans are currently earning interest at or above agreed upon interest rate floors, which generally reflect the base rate plus the credit spread set at the time of closing or signing the term sheet.
In the second quarter, we received $25.3 million in principal repayments, a decrease from $34.5 million in the first quarter of 2024. These payments occurred early in the quarter, reducing our average earning assets for the quarter. As David mentioned, our largest positions in the portfolio are performing well, and we expect heightened prepayments in the near term. This is a testament to our credit-first philosophy focused on the highest-quality sponsored and non-sponsored companies, which are often ideal candidates for refinancing or acquisition.
Our current level of repayments is in line with our expectations for the year, and deployments are growing, which provides us with line of sight in our ability to cover our dividend distributions in the near term. Furthermore, the sizable amount of inflow generated by these exit fees and repayments will enable us to strategically redeploy capital in a diversified manner to attractive new opportunities that meet our investment criteria.
We generated total investment income of $34.2 million and net investment income of $14.6 million in the second quarter of 2024 compared to $40 million and $18.7 million in the first quarter of 2024. The decline is primarily a result of a decline in our average portfolio size and a prepayment at the start of the second quarter, which represented a reduction in interest income of approximately $0.05 per share.
The average outstanding debt portfolio declined by approximately 9.5% and 2.2% on a year-over-year and quarter-over-quarter basis, respectively, as we maintained very high credit standards for new transactions. PIK interest as a percent of total interest income declined to 6.8% during the quarter compared to 10.5% during the first quarter of 2024.
Our debt portfolio generated a dollar-weighted average annualized yield of 15.1% for the second quarter of 2024 as compared to 17.4% for the first quarter of 2024 and 16.7% for the comparable period last year.
Moving to our expenses. For the second quarter, total operating expenses were $19.6 million, down 8% from $21.3 million for the first quarter of 2024. Runway recorded a net unrealized loss on investments of $6.3 million in the second quarter compared to a net unrealized loss of $6.6 million in the first quarter of 2024. The unrealized loss was largely a result of an additional markdown of $5.9 million on our loan to Snagajob. We had no realized losses in the first or second quarters of 2024.
As of June 30, 2024, we had two loans on non-accrual status. Our loan to Mingle Healthcare has a cost basis of $5 million and a fair market value of $3.1 million, or 62% of costs. And our loans to Snagajob has a cost basis of $42.7 million and fair market value of $30 million, or 70% of cost. These loans represent 3.1% of the total investment portfolio at fair value.
In the second quarter of 2024, our leverage ratio and asset coverage were 1.1 and 1.91 times, respectively, compared to 0.91 and 2.09 times at the end of the first quarter of 2024.
At June 30, 2024, our total available liquidity was $249.8 million, including unrestricted cash and cash equivalents. We had borrowing capacity of $241 million, reflecting a decline from $319.9 million and $313 million, respectively, on March 31, 2024.
At quarter end, we had unfunded loan commitments to portfolio companies of $254.2 million, the majority of which were subject to specific performance milestones. $42 million of these commitments are currently eligible to be funded.
During the second quarter, we experienced one prepayment totaling $25.3 million and scheduled amortization of $1.3 million. The prepayment included full principal repayment of our senior secured term loan to Turning Tech Intermediate, Inc.
Subsequent to quarter end, on July 31, CloudPay, Inc., prepaid its outstanding principal balance of $75 million on our senior secured term loan. While the exact timing of prepayments is difficult to predict, we anticipate prepayment activity will continue throughout the balance of the year based on the performance and maturity of some of our largest portfolio positions.
These prepayments offer us additional capital to deploy across our pipeline to drive portfolio replenishment and expansion, as well as provide near-term stability around dividend coverage. While we are realistic about the impacts of these prepayments, we believe they demonstrate the health of our underlying borrowers who continue to perform well.
As mentioned on our previous earnings calls, in November 2023, our Board of Directors approved the stock repurchase program, giving us the ability to acquire up to $25 million of Runway's common stock. In the second quarter, we repurchased approximately 1,074,842 shares under the program, which brings the total shares purchased to date to 2,833,283 and effectively exhaust the November '23 program.
On July 30, 2024, our Board of Directors approved a new stock repurchase program of $15 million, which will expire on July 29, 2025 or earlier if we repurchased the total amount of stock authorized for repurchase under the program.
During the second quarter, Oaktree Capital Management and [affiliates] completed a secondary offering of 4,312,500 shares of our common stock. We were pleased to see this enhanced liquidity for our shareholders and broader ownership of our common stock as we execute against our long-term strategic initiatives.
Finally, on July 30, 2024, our Board of Directors declared a regular distribution for the second quarter of $0.4 per share as well as a supplemental dividend of $0.05 per share payable with the regular dividend.
With that, operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Doug Harter, UBS.

Doug Harter

Thanks, and good afternoon. Hoping you could give a little more detail behind the drop in yield on the portfolio this quarter.

Thomas Raterman

Thanks, Doug. Thanks for the question. The drop in yield really is a result primarily of a decrease in prepayment-related income. Spreads were reasonably steady. The portfolio yield remained -- the accounting yield was pretty steady. It's largely a result of the one-time income.

Doug Harter

And then just to help us think about it going forward, obviously, it's going to vary quarter by quarter, but how do we think about, over time, what a normalized level is 1Q or the 2Q or somewhere in between?

Thomas Raterman

In terms of prepayments or the portfolio yield?

Doug Harter

Both.

Thomas Raterman

Well, so let me take prepayments first. So for the second half of 2024, we expect probably $200 million to $300 million in prepayments. It's a big range, but we have a line of sight for a couple of handfuls of names. Now that represents probably close to, in total, $0.20 a share in income related to prepayment fees and acceleration of accretion.
There's also some offset in NII as a result of those coming out of the portfolio. And then we would expect that one, this is temporary; and two, that it will take a number of quarters, several quarters to build that back.
This isn't a contraction in the portfolio that's permanent by any stretch of the imagination. We'll have a tremendous amount of liquidity available. Our leverage will drop. And so we'll have plenty of dry powder to come back up to that 1.25 times. So we expect an elevated level of that prepayment-related income for the next couple of quarters.

Doug Harter

Thank you.

Operator

(Operator Instructions) Melissa Wedel, JPMorgan.

Melissa Wedel

Good afternoon. Appreciate you taking my question today. You've talked a lot about expecting higher repayment activity in the near term, and certainly appreciate the disclosure around CloudPay. It looks like that one might have come in just before a two-year mark since some origination. Should we think about that one as having prepayments income associated with it?

Thomas Raterman

There was some prepayment income associated with that. That's a loan and a borrower that we've had the pleasure of working with for a considerable period of time. So it really relates to prepayments. There wasn't a tremendous amount of acceleration in accretion on the end of term payment. And the range of $200 million to $300 million, that includes the $75 million CloudPay number.

Melissa Wedel

I'm sorry. I missed the first part of that.

Thomas Raterman

The range that I talked about, $200 million to $300 million in prepayments for the second half potentially of the year includes the $75 million that we received earlier in the quarter from CloudPay.

Melissa Wedel

Okay, okay. Appreciate the clarification. I'm just wondering, I mean, you were pretty specific around the repayment activity. Obviously, we know that the origination activity is tough to get your arms around, especially a couple quarters ahead of time. But is there anything that you can tell us about the origination environment so far in 3Q?

David Spreng

Yeah, sure, Melissa. I would say there's probably five really important points to make. Three on the demand side, and then two as relates to the environment.
And from a demand perspective, borrowers are more realistic about valuation structure and terms. They finally come to grips with the reality of the market. And they really delayed raising as long as they can. And now, especially in the face of potential economic downturn, they really do want to raise money, and equity remains scarce and expensive. So there's a lot of demand for the capital that we provide.
And from an environmental point of view, if you will, base rates are likely to decline and spreads hopefully will expand a bit. And as I said earlier, we're able to get more in terms of structure like covenants and a little bit better spread.
And the other point is that these companies are actually borrowing less so that they pay less. And they're looking for a lender that can grow with them. And we're almost always able to structure something that makes sense for both the borrower and Runway. Is that helpful?

Melissa Wedel

It is. I guess I'm also wondering if there's anything specifically you can size for us in terms of 3Q activity so far, unless I missed it already.

David Spreng

No. Well, I think Greg and I both said in our prepared remarks that the funnel looks very good. But we have -- it's like every quarterback, back-end weighted, and we remain really, really, really picky and really cautious about deals that we're going to do.
And the environmental wrapper, if you want to call it that, and not from like an ESG perspective, but just what the economy is like, there's even more volatility on that than there was over the previous year. So that kind of weighs heavily on our underwriting. And when things are on the fence or on the bubble, we tend to be conservative.
And so I wouldn't expect a massive Q3, but I think we're going to do some deals in Q3 and hopefully they won't both be on the last day of the quarter -- or not both, but they'll be more spread out throughout the quarter. That's our goal.

Melissa Wedel

Got it. Thank you.

David Spreng

Of course.

Operator

Bryce Rowe, B. Riley.

Bryce Rowe

Thanks. Good evening. One maybe follow-up on some of Melissa's questions or comments there. I think David, you and Greg both talked about broadening the funnel out, whether it was last quarter or over the last couple quarters.
Can you help us or can you talk a little bit about that process? I assume there's some -- no pun intended here, there's a bit of a runway in terms of that process. How has it or has it yielded a better pipeline? And not necessarily quantify that for us, but maybe give us multiples of what you expect from a pipeline once those efforts really start to take hold.

David Spreng

Yeah, so it's a great question. And we're referring to the fact that we are simultaneously trying to achieve our overall origination goals with a more conservative lens and more challenging backdrop. But we're also trying to add diversification to the portfolio. And our average commitment last quarter and I think really over the last couple quarters is right around $40 million.
And that's perfect to accomplish both of those goals, but it doesn't mean we need to do more deals. So we're busier. We're spending a lot more time filtering. And I think that's just the new reality that we have to get used to. But the one thing I can show you is we're not doing any less thorough of an analysis or being any less thoughtful about how we structure and price the deals that get into the portfolio.

Bryce Rowe

Okay, okay. And then nice to see the repurchase activity. It sounds like most of that program has been used up. There's some opportunity for another one at some point if the Board authorizes one. Can you talk about your appetite for that, especially considering what could be a -- either a much smaller credit facility outstanding or a big pile of cash with the repayment activity that's expected?

Gregory Greifeld

Yeah. I'll answer that, Bryce. The Board did approve last week a $15 million share repurchase program. So we have reloaded that bucket, if you will. And I think as we look at it, clearly depending on where the stock trades, we believe in investing in ourselves.
At the same time, I think we have a bias to really return capital to investors through dividends and through building a portfolio that demonstrates significant core earnings power over time. We have a lot of capacity to use that $15 million right now, whether it's leverage or not. So we'll just have to see what opportunities the market gives us on that, and we'll certainly be opportunistic in implementing that program.

Bryce Rowe

Okay. Last one for me. You just laid out the potential prepayment income and certainly outsized relative for the second half of the year. Can you kind of talk about that relative to the distribution of supplementals maybe on a going forward basis? Do you think you might keep that in your pocket as spillover to cover future regular way dividends in light of the portfolio that might get smaller?

Gregory Greifeld

Yeah. I think, yes, we'll have to look at all of that. Again, our preference is to maintain the base dividend and keep that intact, which is our intention. And we've got good amount of spillover today, and the prepayment income should generate more.
We'll have to see what the pace of originations is and we want to be thoughtful about it. We're going to be credit first about it. And at the same time, we want to build that portfolio back as quickly as possible.
So I kind of have to kick the can down the road on that. We want to keep we'd like to continue that supplemental as long as we can, but the pace of originations will really determine that. But we're in a good position right now with the supplemental and the anticipated prepayment income for a healthy dividend.

Bryce Rowe

Okay. All right. That's it for me. Thank you.

Operator

(Operator Instructions) I'm showing no further questions at this time. I would like to turn it back to David Spreng, Chairman, President, and CEO, for closing remarks.

David Spreng

Thank you, operator. As we enter the second half of 2024, we look forward to advancing Runway's portfolio through high-quality loans at favorable terms. As the number of venture-backed companies seeking capital in the current market environment continues to grow, it is critical that we maintain our dedication to selectivity and underwriting vigor while evaluating future opportunities.
We believe our credit-first approach to investing and monitoring continues to power our stable portfolio and will enable us to navigate changes in market condition or shifts in the operating environment. We're ready to take advantage of opportunities as the market becomes more lender friendly.
Thank you, all, for joining us today. And we look forward to updating you on our third quarter of 2024 financial results in November.

Operator

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.