Hercules Capital Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 10 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Hercules Capital First Quarter 2024 Earnings Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Michael Hara, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Gerald. Good afternoon, everyone, and welcome to Hercules' conference call for the Q1 2024. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer and Seth Meyers, CFO. Hercules financial results were released just after today's market close and can be accessed from Hercules' Investor Relations section at investor. Htgc.com.

Speaker 1

An archived webcast replay will be available on the Investor Relations webpage for at least 30 days following the conference call. During this call, we may make forward looking statements based on our own assumptions and current expectations. These forward looking statements are not guarantees of future performance and should not be relied upon in making any investment decision. Actual financial results may differ from the forward looking statements made during this call for a number of reasons, including but not limited to, the risks identified in our annual report on Form 10 ks and other filings that are publicly available on the SEC's website. Any forward looking statements made during this call are made only as of today's date and Hercules assumes no obligation to update any such statements in the future.

Speaker 1

And with that, I will turn the call over to Scott.

Speaker 2

Thank you, Michael, and thank you all for joining the Hercules Capital Q1 2024 earnings call. Following our record operating performance in 2023, Hercules Capital is off to a tremendous start to 2024. Our record origination and funding performance in Q1 continues to reflect the benefits of being able to operate an institutional venture and growth stage lending platform at scale. Our ability to consistently deliver strong results for our shareholders and provide custom tailored solutions for our growth stage borrowers in a variety of market environments speaks to the quality of our employees, the strength of the platform and team first culture that we have built and our 20 plus year history of operating with an emphasis on prudent underwriting, asset and liability diversification and an unwavering commitment to the venture and growth stage ecosystem that we serve. As of the end of Q1, Hercules Capital is managing more than $4,500,000,000 of assets, an increase of 14.7 percent from where we were a year ago.

Speaker 2

We continue to expect 2024 to be another year with higher than normal market and macro volatility and a higher for longer rate environment. But as we discussed on our last call, we expected the market environment for new originations to improve throughout 2024. We have already witnessed this in Q1 and we are now benefiting from the balance sheet decisions that we made throughout 2023, where we went long liquidity and low leverage. We continue to manage our business and balance sheet defensively, while maintaining maximum flexibility to shift to offense quickly and aggressively if deal quality warrants it as we did in Q1. This includes continuing to enhance our liquidity position, maintaining low leverage, tightening our credit screens for new underwritings and maintaining our higher than normal first lien exposure, which remained relatively flat at 88.4% in Q1.

Speaker 2

Let me now recap some of the key highlights of our performance for Q1. Many of the quality later stage companies that put off debt decisions in 2023 were back at the table and that drove our very strong start to the year on originations. In Q1, we originated a historic record for any Q1 for both gross debt and equity commitments and gross fundings of $956,000,000 $605,200,000 respectively. The $605,200,000 of gross fundings in Q1 is the strongest funding quarter that we have ever delivered. For Q1, we generated total investment income of 121,600,000 up nearly 16% year over year and net investment income of 79,200,000 dollars up nearly 21% year over year or $0.50 per share and providing 125% coverage of our base distribution of $0.40 per share.

Speaker 2

We were able to achieve 125% coverage of our base distribution despite ending the quarter with very conservative GAAP leverage of 93.6%. This is our 4th consecutive quarter of over $100,000,000 of quarterly core income, which excludes the benefit of prepayment fees or fee accelerations from early repayments. We also generated return on equity in Q1 of 18.8%. Our portfolio generated a GAAP effective yield of 14.9% in Q1 and a core yield of 14%. Our balance sheet remains very well positioned to support our continued growth objectives and serves as a key differentiator of our business.

Speaker 2

The focus of our origination efforts in Q1 was once again on quality and diversification. Our Q1 originations activity was driven by both our technology and life sciences teams delivering record funding performance during the quarter. Although new business activity was again intentionally weighted slightly more towards the life sciences side. In Q1 approximately 65 57% of our commitments during the quarter were to life sciences companies. Our new commitments in Q1 reflect our slightly more optimistic view on the technology sector as we start the year.

Speaker 2

We funded debt capital to 24 different companies in Q1, of which 9 were new borrower relationships. Consistent with what we saw throughout 2023, we expanded our funding relationship with numerous portfolio companies that continue to show strength and achieve performance milestones during the Q1. In addition, the record level of new commitment activity and continued strong performance of the current portfolio led to an increase of our available unfunded commitments to approximately 483,400,000 dollars which increased from $335,000,000 in Q4. Since the close of Q1 and as of April 30, 2024, our deal team has closed $117,300,000 of new commitments and funded 52,300,000 We have pending commitments of an additional $308,500,000 in signed non binding term sheets and we expect this number to continue to grow as we progress in Q2. Consistent with our historical approach to underwriting credit, we will remain disciplined on new originations and we will prioritize asset quality over chasing higher risk transactions with a yield premium.

Speaker 2

Given the market backdrop throughout 2023, which carried into 2024, we remain pleased with the exit activity that we saw in our portfolio during the Q1. In Q1, we had 4 portfolio companies announce acquisitions, of which one was recently completed in March. We also have 2 portfolio companies that have filed registration statements for an IPO. As we anticipated, early loan repayments decreased in Q1 to approximately 161,000,000 which was in line with our guidance of $125,000,000 to $225,000,000 For Q2 2024, we expect prepayments to accelerate from Q1 levels and be in the range of $200,000,000 to 300,000,000 dollars although this could change as we progress in the quarter. Credit quality of the debt investment portfolio improved quarter over quarter.

Speaker 2

Our weighted average internal credit rating of 2.16 improved from the 2.24 rating in Q4 and remains at the low end of our normal historical range. Our grade 1 and 2 credits improved to 68% compared to 62.6% in Q4. Grade 3 credits decreased 29.2% in Q1 versus 34% in Q4. Our rated 4 credits decreased moderately to 2.6% from 3.4% in Q4 and rated 5 credits were 0.2%. In Q1, the number of loans on non accrual increased by 1.

Speaker 2

We had 2 debt investments on non accrual with an investment cost and fair value of approximately $42,200,000 and $5,200,000 respectively or 1.2% and 0.1% as a percentage of the company's total investment portfolio at cost and value respectively. With respect to our broader credit book and outlook, we generally remain pleased by what we are seeing on a portfolio level and our monitoring remains enhanced given continued market volatility. Our focus on credit underwriting and a diversified asset base is continuing to serve us well. We are continuing to see general outperformance and positive momentum in terms of capital raising, M and A activity and milestone achievement throughout our life sciences book. While things continue to remain slightly more muted on the technology side with respect to the same.

Speaker 2

During Q1, capital raising across our portfolio was very strong with 31 companies raising approximately 2 point $6,000,000,000 in new capital, which was again weighted towards our life sciences portfolio. During Q1, twenty twenty four, Hercules had net realized gains of $8,200,000 comprised of net realized gains of $9,200,000 primarily due to the gain on warrant and equity investments offset by $1,000,000 due to the loss on warrant and equity investments. Our net asset value per share in Q1 was $11.63 an increase of 1.7% from Q4 2023. We ended Q1 with strong liquidity of 498,100,000 dollars Our balance sheet is both strong and stable and it puts us in a very strong position to be able to benefit from a new business environment that we believe is as strong as we have seen in several years now. Venture capital ecosystem fundraising and Investment Activity started 2024 with fundraising activity at approximately $9,300,000,000 and investment activity at approximately $36,600,000,000 according to data gathered by PitchBook NVCA.

Speaker 2

We expect investment activity to remain at these levels driven by more selectivity in terms of the profile of the companies that are receiving equity funding. Given our strong operating performance in Q1, we exited the quarter with undistributed earnings spillover increasing to approximately $143,000,000 or $0.88 per ending share outstanding. For Q1, we are maintaining our base distribution of $0.40 and a supplemental distribution of $0.08 per share. This represents our 15th consecutive quarter of being able to provide our shareholders with a supplemental distribution on top of our regular quarterly base distribution. In closing, subsequent to Q1, we marked our 20th year investing in the venture and growth stage asset class, reaching the $20,000,000,000 milestone in cumulative debt commitments for our company.

Speaker 2

By focusing on our team, culture and always trying to do things that are in the best interest of our shareholders and stakeholders, our platform has been able to reach incredible highs. Our scale, institutionalized lending platform and our ability to capitalize on a rapidly changing competitive and macro environment continues to drive our business forward and our operating performance to record levels. Our success since inception over 20 years ago is attributable to the tremendous dedication, efforts and capabilities of our employees and the trust that our venture capital and private equity partners place with us every day. Having a team and platform that is able to consistently deliver for our borrowers in a variety of markets is something that we are all incredibly proud of. We are thankful to the many companies, management teams and investors that continue to make Hercules their partner of choice.

Speaker 2

I will now turn the call over to Seth.

Speaker 3

Thank you, Scott, and good afternoon, ladies and gentlemen. Hercules' record first quarter originations performance was a testament to the amazing team and the relationships we have in the venture and sponsor back space in which we operate. The portfolio growth was supported by our low leverage and cost of debt as well as strong liquidity entering the quarter, a position we maintain strategically throughout 2023. To further support our current and anticipated growth, in the Q1, we took advantage of the ATM by raising $66,000,000 of very accretive capital, helping us to maintain a strong leverage position below 1 to 1 on both the GAAP and regulatory basis. We continue to maintain strong available liquidity of approximately $500,000,000 as of quarter end and more than $850,000,000 across the platform, including the advisor funds managed by our wholly owned subsidiary, Hercules Advisor LLC.

Speaker 3

Speaking of Hercules Advisor, the performance for the quarter enabled us to increase our 2nd quarterly dividend to $1,600,000 which when combined with the expense reimbursement of approximately $2,900,000 resulted in $4,500,000 of cash delivered to the BDC in Q1. With that in mind, let's review the areas of the income statement performance and highlights, NAV, unrealized and realized activity, leverage and liquidity and the financial output. Turning our attention to the income statement performance and highlights. Total investment income was on par with the record prior quarter at $121,600,000 driven by the prior year and year to date growth in the debt portfolio. Core investment income, a non GAAP measure, remained stable at 114,200,000 dollars Core investment income excludes the benefit of income recognized as a result of loan prepayments.

Speaker 3

Net investment income decreased to $79,200,000 or $0.50 per share in Q1, an 8% quarter over quarter decrease, driven by an increase in variable compensation due to the record funding volume and peaking of benefit expenses and payroll taxes in Q1. Our effective and core yields changed modestly in the Q1 to 14.9% 14%, respectively, compared to 15.3% 14.3% in the prior quarter. The decrease in the core yield was due to a lower yield on new originations and lower expired commitment revenue. 1st quarter gross operating expenses were $45,300,000 compared to $38,200,000 in the prior quarter. Net of costs recharged to the RIA, our net operating expenses were $42,400,000 Interest expense and fees remained stable at $20,000,000 SG and A increased to $25,200,000 at the low end of my guidance.

Speaker 3

Net of cost recharged to the RIA, the SG and A expenses were $22,400,000 Our weighted average cost of debt remained stable at 4.9%. Our ROAE or NII over average equity was 18.8 percent for the Q1 and our ROAA or NII over average total assets was 9.2%. Switching the focus to the NAV unrealized and realized activity. During the quarter, our NAV per share increased $0.20 to $11.63 per share. This represents an NAV per share increase of 1.7% quarter over quarter.

Speaker 3

The main drivers were the net investment income of $79,200,000 accretion due to the use of the ATM, net realized gains mainly on the realization events on equity and warrant positions of $8,200,000 and unrealized appreciation of $3,600,000 all of which exceeded the dividends paid in the quarter. Our $3,600,000 of unrealized depreciation was the result of $700,000 of net unrealized appreciation on the loan portfolio and $5,700,000 of appreciation on the public equity and warrant portfolio. $2,400,000 of unrealized depreciation was attributable to the valuation movements in the privately held equity warrant and investment funds and $200,000 of the net unrealized depreciation attributable to net foreign exchange movements in addition to $7,300,000 of net unrealized depreciation attributable to the escrow and other investment related receivables. These were partially offset by the reversal of prior unrealized depreciation of 7,500,000 dollars For leverage and liquidity, our GAAP and regulatory leverage increased to 93,600,000 dollars 84.4 percent, respectively, compared to the prior quarter due to the greater utilization of our leverage facilities on the higher volume of business. Netting out leverage with cash on the balance sheet, our net GAAP and regulatory leverage was 91% and 81.7%, respectively.

Speaker 3

We ended the quarter with nearly $500,000,000 of available liquidity. As a reminder, this excludes the capital raised by the funds managed by our wholly owned RIA subsidiary. Inclusive of these amounts, the Hercules platform had more than 850,000,000 dollars of available liquidity. The strong liquidity positions us very well to support our existing portfolio companies and source new opportunities. As a final point, we continued to opportunistically access the ATM market during the quarter and as I mentioned, raised approximately $66,000,000 resulting in a $0.13 per share accretion to NAV.

Speaker 3

Finally, on the outlook points. For the Q2, we are updating our core yield guidance range at 13.7% to 13.9%, excluding any future benchmark interest changes. As a reminder, more than 97% of our portfolio is floating with a floor, so fed decreases and interest rate may not have an equal reduction to our core yield. Although very difficult to predict, as communicated by Scott, we expect $200,000,000 to $300,000,000 in prepayment activity in the Q2. We expect our 2nd quarter interest expense to increase slightly on the growth in the balance sheet compared to the prior quarter.

Speaker 3

For the Q2, we expect SG and A expenses of $23,000,000 to 24,000,000 and an RAA expense allocation of approximately $2,500,000 As previously guided, the Advisor business began paying dividends in the Q4 to Hercules Capital. Going forward, we expect a quarterly dividend from the RIA of approximately $1,000,000 to $1,500,000 per quarter. In closing, the business is positioned well for 2024 after delivering record first quarter commitments and fundings. We're excited to see how the rest of 2024 develops. I will now turn the call over to the operator to begin the Q and A part of our call.

Speaker 3

Carol, over to you.

Operator

Thank you. At this time, we will conduct the question and answer portion of the call. Our first question comes from the line of Crispin Love with Piper Sandler. The floor is yours.

Speaker 4

Thanks. Good afternoon. First on Q1 fundings, very strong here with net Hercules fundings at nearly $500,000,000 And Scott, you mentioned the pent up demand of companies that put off debt decisions in 2023 coming back to the table early in the year. Do you view the Q1 here as somewhat of an anomaly or could this pent up demand just remain a tailwind through the next few quarters to continue to drive elevated fundings to elevated levels or even levels similar to the Q1?

Speaker 2

Thanks, Crispin. The funding activity in Q1 was exceptionally strong. As you pointed out, dollars 605,000,000 of gross fundings, nearly $500,000,000 net in the BDC that led to net debt investment portfolio growth of over $325,000,000 If you look at our pending and closed pipeline, you can see continued momentum. So I would say that we are very optimistic about a continuation of a strong funding environment over the next couple of quarters. Do we expect it to reach the level that we saw in Q1?

Speaker 2

Most likely not, but we certainly don't expect to see a reversion back to the levels that we saw a year or so ago.

Speaker 4

Great. Thanks, Scott. That all makes sense. And then, a little bit of a bigger picture question just on the competitive environment. Can you just talk a little bit about how the competitive environment has shifted just over the last year or year and a few months since the bank turmoil of March last year.

Speaker 4

Are you seeing any recent activity from banks coming back or increasing exposure? And then just separately, are you seeing more of a pickup from private lenders or others in the space or any retrenchment? Just curious on the competitive environment as a whole.

Speaker 2

Sure. Yes, I think for us it's still status quo on the competitive side. As I pointed out in the last few calls, there are still venture banks that are active in the market. We continue to see First Citizens, SVB from time to time on transactions. We've seen HSBC on a handful of transactions and we've seen a couple of other venture banks that have been in and out of the market.

Speaker 2

The reality is we are not primarily competing with venture banks on transactions. When you think about sort of the non bank side of the market, there are a handful of competitors that we compete with on a deal by deal basis, but there really is no consistent source of competition that we see on a deal by deal basis. The changes that we've made to our business in terms of being able to strengthen our balance sheet, do deals that on the low end are $10,000,000 on the high end are 300,000,000 dollars due deals that are both expansion and established stage, go after companies that are looking for that last round of financing have really put us in a unique position where we can play on both ends of the market and we can really dominate everywhere in between. And so not much has changed on the competitive side for us and we continue to focus on the things that we can control and obviously that's leading to tremendous results both on an operating on the operating side and on the funding side as well.

Speaker 4

Thanks, Scott. Very good. Appreciate you taking my questions.

Speaker 2

Sure. Thanks, Crispin.

Operator

Thank you for your question. One moment, please. Our next question comes from the line of Brian McKenna with Citizens. The floor is yours.

Speaker 4

Thanks. Good evening, guys. I appreciate all the commentary on new funding activity and the outlook there. But I guess what I'm trying to figure out is the trajectory of the portfolio from here just in terms of growth. So if you're 10% in the quarter sequentially, I appreciate it likely doesn't increase that much moving forward every quarter.

Speaker 4

But if there's a way, how should we think about the cadence of portfolio growth in the coming quarters? And then what might that mean for the trajectory of NII assuming kind of no material shift in the rate backdrop?

Speaker 2

Yes. Thanks, Brian. We don't on a quarterly basis provide funding guidance and we certainly don't provide our expectations in terms of net debt portfolio growth. We did provide as we always do updated prepayment guidance for Q2 and we expect prepayments to increase pretty substantially in the second quarter. The guidance that we gave was $200,000,000 to $300,000,000 Based on what we're seeing right now, I would expect it to be on the high end of that number.

Speaker 2

So that's almost double what we saw in Q1 where we had $160,000,000 of prepayments. So in Q2, we're certainly not expecting to deliver another $300 plus 1,000,000 of net debt portfolio growth. I think if you think about sort of the basic cadence of the business, we are generally going to do somewhere between $300,000,000 $400,000,000 $450,000,000 of gross fundings on a quarterly basis. You can obviously pull out the normal course amortization and then you can pull out the prepayment guidance that we give knowing that the prepayment guidance is just our best guess based on what we know as of the date of this call.

Speaker 4

All right, great. Helpful, Scott. And then just maybe a question on credit. So you added 1 company to non accrual status. Can you just talk about that one investment a little bit?

Speaker 4

And then just more broadly, non accruals are still low in the absolute, but are there any areas across the portfolio you're watching closely today or any situations you're maybe looking to get out in front of?

Speaker 2

Sure. So we're always watching the totality of the portfolio very closely and that's our DNA. That's what we do. We run this firm as if it's a credit shop, which is the way a venture lending firm really should be run. The overall credit book continues to perform very well.

Speaker 2

If you look at the numbers that we just reported, less than 3% of grade 4 and about $8,000,000 in grade 5. So it's very small on a relative basis. We did add one small loan to our non accrual list in Q1. That loan has about a $12,000,000 cost basis, has a fair value of approximately $5,000,000 And our expectation is that we'll have that situation resolved before our next earnings call.

Speaker 4

All right. I'll leave it there. Thank you.

Operator

Thank you for your question. Our next question comes from the line of Finian O'Shea from WFS. The line is yours.

Speaker 5

Hey, everyone. Good afternoon. Scott, going back to some of your introductory remarks on positioning the company with liquidity to take advantage of this market that looks like it worked out pretty well. Are you able to update us on what you're thinking today and how much growth at Hercules, the overall BDC, you sort of hope for or plan for this year, next year?

Speaker 2

Sure. Thanks, Fin. We're planning for a strong robust year in terms of originations and growth. We were pretty clear in terms of our positioning last year that we were preparing for an improved origination environment in 2024. That's what we saw in Q1 and that's what we expect to see over the next several quarters.

Speaker 2

Having said that, if there is a quarter where we don't see deal quality, we'll pull back just as we would do in the ordinary course. In terms of how we're positioning the business and how we're managing the business now, it's going to be very consistent with what we did last year, which is to generally be defensive in terms of how we manage the balance sheet. We don't want to be caught in a position where we end up low liquidity or over levered because we think that just takes away optionality and flexibility. So Seth and I and the team are going to continue to focus on making sure we have a strong balance sheet, a healthy liquidity position and that we're managing the business relatively conservatively with respect to leverage so that if we do have an opportunity like we saw in Q1, we're able to very quickly take advantage of it.

Speaker 5

Great. It's helpful. And a follow-up for Seth is, I think I caught the guidance for the advisor dividend to be at least at the midpoint a little bit below what it started out at? Does that imply, a cessation and growth there or less origination? Or how do we think about that?

Speaker 5

Thanks.

Speaker 3

Yes, sure, Fin. It really in the first instance, the first dividend that we paid in Q4 there's a little bit of pent up cash and a little excess earnings and profits that we could distribute and that kind of spilled over into the Q1 as well. So I would stick with the guidance of $1,000,000 to $1,500,000 but we certainly hope that that's going to continue to grow.

Speaker 5

Thank you.

Operator

Thank you for your question. One moment please as I prepare the queue. Our next question comes from the line of Casey Alexander with Compass Point Research and Trading. The floor is yours.

Speaker 6

Hi, good afternoon. First of all, congratulations on the 20th anniversary. It's quite an accomplishment in this business. My first question is, I totally understand the strategy of being long liquidity in 20 23, especially following the upheaval at the beginning of the year. But at what point in time do you start to take the leverage ratio up some in order to more optimize the earnings of the BDC while still being well within the leverage limits.

Speaker 6

I mean, you could certainly deliver a lot more NII to shareholders if you were running at 1.1x. And it seems to me that you're in a much more stable environment than you were 3, 4 quarters ago.

Speaker 2

Yes. Thanks Casey. And first, thanks for the congratulations. It is a tremendous accomplishment for the company and for the team, and the credit really does go to the team. So thanks for that acknowledgment.

Speaker 2

In terms of leverage and liquidity, I think if you look at what we just did in Q1, we did begin to take leverage up. We ended the year with GAAP leverage of about 87%. We ended Q1 with GAAP leverage of about 94%. So that's for us, that's a pretty meaningful quarterly increase given that we had over $300,000,000 of net debt portfolio growth. On the Q4 earnings call, Seth and I were clear that we do expect to take leverage up slowly throughout the course of 2024 and that continues to be our intent.

Speaker 2

Are we going to get to 1.1? Are we going to get to 1.15? It's really difficult to say because that will largely depend on what happens on the pre payment side of the business. But we do expect to continue to take leverage up slowly and cautiously throughout the next several quarters, which will help further drive the profitability of the business.

Speaker 6

Okay, great. Thank you. Secondly, Q1 is normally kind of a quieter quarter after usually following a year end rush. And you've had basically 2 years of very lackluster activity and pent up activity that looks like it's starting to come to the marketplace and your deal size is so much larger than it was a couple of years ago. So I'm curious why you wouldn't expect your deal activity to be similar to levels of Q1 as the year goes along when deal activity actually traditionally increases?

Speaker 2

Yes. It's a great question. And I would point out a couple of things. Despite the fact that we have the capability now to do significantly larger deals than we did 1, 2, 3, 4, 5 years ago, the average dollars funded for us actually has remained fairly constant. In Q1 of 2023, for example, which is the year ago period that you just referenced, our average dollars funded per portfolio company was about $21,000,000 If you look at that data today as of Q1, twenty twenty four, it's about $23,000,000 average dollars funded per POCO.

Speaker 2

So there really hasn't been that much of an increase in terms of the average dollars and a lot of that is sort of self imposed. We're very focused on diversification and granularity within the portfolio. I think a mistake that a lot of our competitors make is when they chase the big deals and forget about granularity within the portfolio. So we focus very intently on our top five, our top ten as a percentage of our total book and what that average dollars outstanding per POCO number is. We do see some opportunity to continue to move upstream and we expect to be able to continue to do that.

Speaker 2

There were a handful of deals that we booked in Q1 that were larger in nature. There's a handful of deals that are in our pipeline right now that are also larger in nature, but we're also still focusing the majority of our time on the bread and butter deals where we think we can continue to add significant value to the ecosystem.

Speaker 6

All right. Thank you for taking my questions.

Speaker 2

Thanks, Casey.

Operator

Thank you for your question. One moment, please. Our next question comes from the line of John Hecht of Jefferies. The floor is yours.

Speaker 7

Afternoon, guys. Thanks for taking my question.

Speaker 6

First one is, were the fundings,

Speaker 7

I guess the timing of the fundings, were they kind of skewed toward the back end of the quarter? And I don't think that's untypical. But just because you have such substantial growth, but your interest income was somewhat flat with last quarter?

Speaker 2

Yes. Pretty typical quarter for us where we have funding activity in each of the 3 months of the quarter, but the vast majority did come once again in the last month of the quarter.

Speaker 7

Okay. And then the core yield guidance, is that a function of bigger later stage companies? Or is it just market rates? Or how do we think about that?

Speaker 3

Yes. You're thinking about it the right way as far as larger later stage deals that we're concluding, John. And as I had mentioned in my commentary, the decrease in the core yield was largely related to those new originations. And that's what causes us to guide down a little bit looking forward.

Speaker 7

Okay. And then how do we like the fee kind of fees as a percentage of call it activity, which should be both originations and then prepayments.

Speaker 6

I guess it's more prepayment or repayment fees. What

Speaker 7

is there anything changing there? Anything we should be cognizant about in terms of what's going on in the new deal market?

Speaker 3

No. No, pretty consistent, John. So we're not seeing a change. Quarter to quarter, we do have a variety of outcomes based on the specific transactions that pay off prepay, on whether they do have back end fees, what the size of the back end fee is, how old the deal is. And so while we typically give the guidance of either 3% to 4% on the acceleration, It could be much less or it can actually be higher in some instances.

Speaker 3

So it really depends on the specific deals, what the arrangements were and the age of that deal, whether it's fully or nearly fully amortized. So that changes, but as far as the agreements that we're putting in place and the fees that we're arranging on new business, there's no trend difference there.

Speaker 8

Okay. That's helpful. Thanks.

Operator

Thank you for your question. Our next question comes from the line

Speaker 7

of Vyas

Operator

Abraham of UBS. The floor is yours.

Speaker 8

Hey, everybody. Thanks for the question. Just one for me. Given the strong origination outlook that you're discussing on the call, can you just talk a little bit about Hercules capacity right now, ability to support that just from a people and a technology perspective and any areas you might be thinking about doing further investment in? Thank you.

Speaker 2

Sure. Thanks, Fellas. If you look at what we did in 2021 and in 2022, we made significant investments in the business. Our full time employee account now is up over 110. Throughout the course of the last 24 months, we've added to all groups and at all levels of the company.

Speaker 2

We made some very strategic intentional additions to the investment team over the course of the last 12 months. We have boosted our back office and credit team. We have improved our operations team and our finance team. We've added to our legal team. So we feel very good about where we are right now from a headcount perspective and the fact that we have the ability to support some pretty extensive growth over the next year or so.

Speaker 2

In terms of the balance sheet, the balance sheet as we've mentioned several times is very well positioned. We have nearly $500,000,000 of liquidity in the BDC, nearly $850,000,000 of liquidity across the platform. We are under levered relative to our historical targets from a GAAP perspective and from a regulatory perspective. And so we think we're very well positioned to be able to take advantage of growth. I think the key caveat and comment that I'll make is we're going to take advantage of the growth if it's quality growth, right.

Speaker 2

We're not interested in growing the business just for the sake of putting assets on the books. Every deal that we do has to meet our credit screens and it has to be a deal that we think is in the long term best interest of our shareholders and stakeholders.

Speaker 8

Got it. Thank you.

Operator

Thank you for your question. Our next question comes from the line of Christopher Nolan. The floor is yours.

Speaker 9

Hey, guys. Congratulations on a really good quarter. Last week, Moody's gave a downgraded the outlook or gave caution to the outlook for direct lenders. While Hercules was not specifically listed among the ones that did. Have you guys had any direct conversations with Moody's related to this at all?

Speaker 3

We are in constant contact with all the rating agencies in which we work with. There's no indication that they have any concern about our business. In fact, their guidance they shared with us was just trying to be cautious about the sector, the outlook. The performance of our competitors as you know, Chris, has not been stellar. So I think that we stand out a little bit differently than them and that's basically the conversation that they have with us as well.

Speaker 9

Okay. And have they been expressing any concerns or outlook or anything related to the venture capital venture ecosystem, which, because you guys do send a little bit apart from the other guys?

Speaker 3

Not that they shared with us, but I would definitely discuss that with them and see what their view is on that.

Speaker 9

Finally, you have some debt maturing in 2024. Is the idea to just use the credit facility to refinance that?

Speaker 3

Presently that is the plan. We'll take a look at the market a little bit closer to that maturity. It's $105,000,000 well below the capacity that we have in the $800,000,000 of credit facilities in total. So, we'll make the assessment closer to the date.

Speaker 1

Great. Thank you, Seth. Thanks.

Operator

Thank you for your question. That concludes the question and answer session. I would now like to turn it back to Scott Bluestein, CEO and Chief Investment Officer for closing remarks.

Speaker 2

Thank you, operator, and thanks to everyone for joining our call today. As a final note, we will be participating in the Wells Fargo Financial Services Investor Conference on May 14 in Chicago. If you are interested in meeting with us at this event, please contact Wells Fargo directly or Michael Hara. We look forward to reporting our progress on our Q2 2024 earnings call. Thanks and have a great night.

Operator

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

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Key Takeaways

  • Hercules reported a record Q1 origination and funding with $956 million in commitments and $605.2 million in gross fundings, marking its strongest quarterly funding ever.
  • Total investment income rose 16% year-over-year to $121.6 million and net investment income increased 21% to $79.2 million (or $0.50 per share), providing 125% coverage of the $0.40 base dividend and delivering an 18.8% ROE.
  • The balance sheet remains defensively positioned with $4.5 billion in assets under management (+14.7% YoY), GAAP leverage of 93.6%, $498 million of available liquidity, and $483 million of unfunded commitments.
  • Credit quality improved as the weighted average internal rating moved to 2.16 (from 2.24), non-accruals remain minimal at 1.2% of cost, and Hercules expects Q2 prepayments of $200–300 million.
  • Hercules marked its 20th year in the venture lending market, surpassed $20 billion in cumulative debt commitments, and raised $66 million via an at-the-market equity offering to further bolster capital.
AI Generated. May Contain Errors.
Earnings Conference Call
Hercules Capital Q1 2024
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