Hercules Beats Ests, Hikes Dividend

Hercules Technology Growth Capital Inc.’s ( HTGC - Analyst Report ) first quarter 2012 distributable net operating income (DNOI) came in at 26 cents per share, outpacing the Zacks Consensus Estimate of 23 cents. This also compared favorably with the prior-year quarter’s DNOI of 23 cents.

Results in the quarter benefited from an impressive growth in total investment income and lower operating expenses, partly offset by substantially higher interest expense and loan fees. Overall, Hercules ended the quarter on a spirited note with a stronger credit quality and a high level of liquidity.

Quarter in Detail

Hercules’ total investment income for the reported quarter came in at $22.4 million, up 16.7% from $19.2 million in the prior-year quarter. The increase was a result of higher average balance of interest earning investments. Moreover, total investment income was marginally above the Zacks Consensus Estimate of $22.0 million.

Total operating expenses (excluding interest expense and loan fees) were $6.0 million in the first quarter, down 3.2% from $6.2 million in the year-ago quarter. The modest fall reflected lower auditing fees and workout related expenses.

On a year-over-year basis, interest expense and loan fees in the reported quarter jumped 56.3% to $5.0 million. The significant increase was mainly driven by interest and fee expense associated with senior unsecured convertible notes, which were issued in the second quarter of 2011.

As of March 31, 2012, the weighted average cost of debt, comprising interest and fees, was 6.80% compared with 7.7% as of March 31, 2011.

Net investment income (before investment gains and losses) for the quarter came in at $11.4 million or 24 cents per share compared with $9.8 million or 23 cents per share in the year-ago quarter. The increase was mainly attributable to a higher interest and fees earned from debt investments.

Business Highlights

The fair value of Hercules’ total investment portfolio was nearly $694.5 million as of March 31, 2012, up 6.4% from $652.9 million as of December 31, 2011. During the first quarter, the company provided approximately $101.3 million debt funding to new and existing portfolio companies.

As of March 31, 2012, Hercules’ net asset value was $9.76 per share compared with $9.20 as of March 31, 2011.

Dividend Update

Concurrent with the earning release, the board of directors of Hercules increased the quarterly cash dividend 4.0% to 24 cents. The dividend is to be paid on May 25, 2012 to shareholders of record, as of May 18, 2012.

Share Repurchase Update

During the first quarter, the company did not repurchase shares of its common stock. However, in February 2012, the board of directors approved the extension of the company’s share repurchase program through August 2012.

Our Viewpoint

Hercules is well poised to expand its portfolio, given its strong liquidity position. Additionally, we believe that the company will continue to gain from the increased market demand for venture capital investments. Further, the company’s strong capital position enables it to enhance shareholders’ value.

In spite of these positives, the ongoing capital market disruption and sluggish economic recovery makes us apprehensive. We also remain wary of Hercules’ investment and credit management strategies. Moreover, the sluggish economic recovery may increase the cost of funding.

Currently, Hercules retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. However, one of the peers of the company, Main Street Capital Corporation ( MAIN - Snapshot Report ) retains a Zacks #4 Rank (short term ‘Sell’ rating).