Hercules Technology Growth Capital Inc.‘s (HTGC) fourth quarter 2011 distributable net operating income (DNOI) came in at 27 cents per share, surpassing the Zacks Consensus Estimate of 24 cents. This also compared favorably with the prior quarter’s DNOI of 22 cents and the prior-year quarter’s DNOI of 26 cents.
Results in the quarter benefited from a substantial increase in total investment income and net realized and unrealized gain, partly offset by higher operating expenses. Overall, Hercules ended the quarter with a stronger credit quality and a high level of liquidity.
For full-year 2011, DNOI increased to $1.00 per share, beating the Zacks Consensus Estimate of 90 cents. This also came above 2010 DNOI of 91 cents per share.
Quarter in Detail
Hercules’ total investment income for the reported quarter came in at $21.2 million, up 21.1% from $17.5 million in the prior-year quarter. The increase was attributable to higher average balance of interest earning investments. Moreover, total investment income was slightly above the Zacks Consensus Estimate of $21.0 million.
For 2011, total investment income grew 34.3% to $79.9 million from $59.5 million in 2010. However, total investment income marginally missed the Zacks Consensus Estimate of $80.0 million.
Total operating expenses (excluding interest expense and loan fees) were $5.8 million in the fourth quarter, up 7.0% from $5.4 million in the year-ago quarter. The modest rise reflected higher employee compensation expenses and other general and administrative expenses.
On a year-over-year basis, interest expense and loan fees in the reported quarter jumped 72.7% to $4.6 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 December 31, 2011, the weighted average cost of debt, comprising interest and fees, was 6.23% compared with 6.27% as of December 31, 2010.
Net investment income (before investment gains and losses) for the quarter came in at $10.8 million or 25 cents per share compared with $8.6 million or 20 cents per share in the prior quarter and $9.5 million or 24 cents in the year-ago quarter. The increase was mainly attributable to a higher average balance of interest earning investments outstanding during the quarter under review.
Net realized and unrealized gain was $6.7 million compared with $2.4 million in the year-ago quarter.
Business Highlights
The fair value of Hercules’ total investment portfolio was approximately $652.9 million as of December 31, 2011, up 38.3% from $472.1 million as of December 31, 2010. During the fourth quarter, the company provided approximately $165.3 million debt funding to new and existing portfolio companies, up 34.4% from the prior-year quarter.
As of December 31, 2011, Hercules’ net asset value was $9.83 per share compared with $9.61 as of September 30, 2011 and $9.50 as of December 31, 2010. The increase in net assets in excess of dividend paid, explains the rise in the quarter.
Dividend Update
Concurrent with the earning release, the board of directors of Hercules increased the quarterly cash dividend by 5.0% to 23 cents. The dividend is to be paid on March 15, 2012 to shareholders of record, as of March 12, 2012.
Share Repurchase Update
During the fourth quarter of 2011, the company did not repurchase shares of its common stock. However, in February 2012, the board of directors approved extending Hercules’ share repurchase program through August 2012.
Our Viewpoint
Hercules is well positioned to expand its portfolio, given its strong liquidity position. Additionally, we believe that the company will continue to gain from the increased market demands for venture capital investments.
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.
One of the peers of Hercules, Main Street Capital Corporation (MAIN) is scheduled to release its fourth quarter and full year 2011 results on March 8, 2012.
Currently, Hercules retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.
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