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Hercules Technology Growth Capital Inc.’s (HTGC - Analyst Report) first quarter 2011 distributable net operating income (DNOI) came in at 25 cents per share, 3 cents ahead of the Zacks Consensus Estimate. Also, this compares favorably with DNOI of 17 cents in the prior-year quarter.

Better-than-expected results in the quarter were attributable to a rise in total investment income and higher net realized gain on investments, partially offset by higher operating expenses. Additionally, Hercules ended the quarter with a strong balance sheet and a high level of liquidity.

Quarter in Detail

Hercules’ total investment income for the reported quarter came in at $19.2 million, up 53.0% from $12.5 million in the prior-year quarter. The increase was attributable to higher average balance of interest earning investments outstanding during the reported quarter and one-time fees related to early payoffs. Total investment income also topped the Zacks Consensus Estimate of $18.0 million.

Total operating expenses (excluding interest expense and loan fees)were $6.2 million, up 34.8% from $4.6 million in the year-ago quarter. Higher employee compensation and increased accounting and legal expenses were responsible for this increase.

On a year-over-year basis, interest expense and loan fees increased 39.1% to $3.2 million. At March 31, 2011, the weighted average cost of debt, comprising interest and fees, was 7.7% compared with 7.2% at March 31, 2010.

Net investment income (before investment gains and losses) for the quarter came in at $9.8 million or 23 cents per share compared with $5.6 million or 16 cents in the year-ago quarter. The increase was mainly attributable to higher interest earned from debt investments.

Net realized gain on investments was $4.4 million compared with $0.4 million in the year-ago quarter.

Business Highlights

The fair value of Hercules’ total investment portfolio was approximately $445.1 million as of March 31, 2011 compared with $472.0 million as of December 31, 2010. During the quarter, the company provided approximately $83.9 million debt funding to the new and existing portfolio companies.

As of March 31, 2011, Hercules’ net asset value was $9.20 per share, compared with $9.50 as of December 31, 2010. Net unrealized depreciation explains the decrease in the quarter.

Dividend Update

Concurrent with the earning release, Hercules declared a quarterly dividend of 22 cents per share. This represents the company’s twenty-third consecutive dividend since inception.The dividend will be paid on June 23 to shareholders of record as of May 13.

Our Viewpoint

Despite the capital market disruption and sluggish economic recovery, a steady pace of new investments by venture capitalists is expected. This could lead to new investment opportunities, even though we remain cautious about Hercules’ investment and credit management strategies.

One of the competitors of Hercules, Gladstone Investment Corporation (GAIN - Snapshot Report) is scheduled to announce its fiscal fourth quarter (ended March 31) results on May 23.

Hercules currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the fundamentals, we maintain our long-term Neutral recommendation on the stock.

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