Hercules Technology Growth Capital Inc.’s (HTGC) third quarter 2010 distributable net operating income (DNOI) came in at 25 cents per share, up from the Zacks Consensus Estimate of 23 cents. However, this compares unfavorably with the DNOI of 31 cents in the prior-year quarter.
Results for the reported quarter were negatively impacted primarily by a year-over-year increase in operating expenses and higher net realized loss on investments. However, Hercules ended the quarter with a strong balance sheet and a high level of liquidity.
Quarter in Detail
Hercules’ total investment income for the quarter came in at $15.6 million, down 12% from $17.7 million in the prior-year quarter. However, total investment income topped the Zacks Consensus Estimate of $15.1 million. The year-over-year decrease was attributable to lower interest income and total fees.
Total operating expenses were $7.5 million, up 2% from $7.3 million in the year-ago quarter. This increase is primarily attributable to higher employee compensation, partially offset by lowergeneral and administrative expenses. On a year-over-year basis, interest expense increased 4% to $2.1 million and loan fees increased 8% to $0.3 million.
Net investment income (before investment gains and losses) for the quarter came in at $8.1 million or 23 cents per share, compared with $10.3 million or 30 cents per share in the year-ago quarter.
Net realized loss on investments was $18.9 million compared with $14.2 million in the year-ago quarter.
The fair value of Hercules’ total investment portfolio was approximately $407.5 million as of September 30, 2010 compared with $431.5 million as of June 30, 2010. The company funded approximately $41.0 million to the new and existing portfolio companies during the reported quarter.
Net Asset Value
As of September 30, 2010, Hercules’ net asset value was $9.36 per share, compared with $9.80 as of June 30, 2010. The decline in net asset value was attributable to fair value adjustments in the overall portfolio.
Dividend Update
Concurrent with the earning release, Hercules declared a quarterly dividend of 20 cents per share. The dividend will be paid on December 17, 2010 to shareholders of record as of November 10, 2010.
Despite the capital market disruption and the sluggish economic recovery, a steady pace of new investments by venture capitalists is being viewed. As a result of this, new investment opportunities are expected, though we remain cautious about investment and credit management strategies.
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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