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HC

Hercules Capital, Inc. (HTGC)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 2025 was operationally strong but below Wall Street consensus: Total investment income was $119.5M versus $125.4M consensus*, and EPS was $0.45 versus $0.468 consensus*, driven by lower fee income from muted external prepayments and waivers on internal refinancings .
  • Originations and fundings were near record: $1.02B total gross commitments and $539.1M total gross fundings, yielding ~$269.8M net debt portfolio growth and positioning NII to rise in coming quarters as late-quarter fundings season .
  • Credit and liquidity remained solid: GAAP leverage 99.9%, net regulatory leverage 82.7%, liquidity $615.6M in the BDC and >$1.0B platform-wide; non-accruals increased to two loans (cost $72.2M; FV $19.6M), unchanged at 0.5% of portfolio at fair value .
  • Near-term catalysts: maintained total cash distribution of $0.47 per share (base $0.40 + supplemental $0.07) and guidance for Q2 prepayments of $200–$250M; recent rating upgrades and the $287.5M 4.75% 2028 convert support balance sheet scale .

What Went Well and What Went Wrong

What Went Well

  • Near-record origination and funding drove ~$270M net debt portfolio growth; management expects this late-quarter deployment to lift core income and NII in coming quarters .
  • Core yield within range (12.6% vs. 12.25–12.75 guided) and effective yield at 13.0%; ROAE 15.7%, ROAA 8.0% reflect continued strong core earnings power .
  • Management tone: “We drove a robust start to 2025” and expect to “benefit from the more favorable originations market” with over $1.0B platform liquidity and conservative leverage .

What Went Wrong

  • Revenue and EPS missed consensus*, primarily due to lower external early loan repayments and waived prepayment penalties on internal refinancings, compressing fee income and limiting NII benefit in Q1 .
  • Credit mix shifted modestly: Grade 1+2 decreased (65.9% in Q4 to 61.1% in Q1) and Grade 3 increased (29.0% to 33.9%), reflecting macro uncertainty and portfolio monitoring downgrades; non-accruals rose by one loan .
  • NAV per share decreased 0.9% QoQ to $11.55, driven by ($25.6M) net unrealized depreciation on debt and select private equity/warrants amid spread moves and biotech market volatility .

Financial Results

Core Financials vs Prior Periods and Estimates

MetricQ1 2024Q4 2024Q1 2025
Total Investment Income ($USD Millions)$121.6 $121.8 $119.5
Primary EPS (Basic, $)$0.50 $0.49 $0.45
Revenue Consensus Mean ($USD Millions)*$—$126.2*$125.4*
EPS Consensus Mean ($)*$—$0.503*$0.468*
GAAP Effective Yield (%)—13.7% 13.0%
Core Yield (%)—12.9% 12.6%
ROAE (%)——15.7%
ROAA (%)——8.0%
NAV per Share ($)—$11.66 $11.55
GAAP Leverage (%)—89.6% 99.9%
Regulatory Leverage (%)—75.6% 85.2%

Notes: Asterisks (*) indicate values retrieved from S&P Global.

Actual vs Consensus by Period

MetricQ3 2024Q4 2024Q1 2025
Revenue Actual ($USD Millions)$125.2 $121.8 $119.5
Revenue Consensus Mean ($USD Millions)*$128.1*$126.2*$125.4*
EPS Actual ($)$0.51 $0.49 $0.45
EPS Consensus Mean ($)*$0.511*$0.503*$0.468*

Notes: Asterisks (*) indicate values retrieved from S&P Global.

Segment / Portfolio Composition

Portfolio Composition (% of Debt Portfolio)Q1 2024Q2 2024Q3 2024Q4 2024Q1 2025
First Lien Senior Secured88.4% 90.1% 89.5% 91.0% 90.9%
Floating Rate w/ Floors97.3% 97.4% 97.3% 97.4% 98.0%

KPIs

KPIQ1 2024Q4 2024Q1 2025
Total Gross Debt & Equity Commitments ($USD Billions)—$0.620 $1.02
Total Gross Fundings ($USD Millions)—$468.5 $539.1
Net Debt Portfolio Increase (Cost, $USD Millions)——$269.8
Early Loan Repayments ($USD Millions)—$225.2 $131.8
Available Liquidity (BDC, $USD Millions)—$658.8 $615.6
Unfunded Commitments Available ($USD Millions)—$448.5 $455.7
Non-Accrual Loans (Cost / Fair Value, $USD Millions)—$61.3 / $18.2 $72.2 / $19.6
Undistributed Earnings Spillover ($USD Millions; per share)—$163.6; $0.96 $159.6; $0.92

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Prepayments ($USD Millions)Q2 2025—$200–$250 New
Core Yield (%)Q2 2025—12.0–12.5 New
Gross SG&A ($USD Millions)Q2 2025—$25–$26 New
RIA Dividend to BDC ($USD Millions)Q2 2025—$1.9–$2.1 New
Base + Supplemental Distribution ($/share)Q1 2025Announced $0.47 for 2025 (base $0.40 + $0.07 per quarter) Declared $0.47 (base $0.40 + $0.07) Maintained
Interest Expense DirectionQ2 2025—To rise with larger balance sheet New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3/Q4 2024)Current Period (Q1 2025)Trend
Macro volatility / policy uncertaintyAnticipated higher-than-normal volatility in 2025; cautious balance sheet stance Volatility increased; equity more expensive/dilutive; banks moving risk-off, boosting demand for Hercules capital Intensifying volatility; constructive for originations
Sector mix (Tech vs Life Sciences)Balanced; tech fundings 67% in Q4 Tech emphasis: ~53% commitments and 76% fundings; life sciences tempered by XBI volatility Slight tilt to tech
Tariffs / regulatory exposureMonitoring AFFE; policy expectations under new administration Limited direct tariff exposure; some API sourcing risk but immaterial to cost structures Watchful, not material
VC funding / valuation disciplineStrong VC investment; sensitivity to high-valuation legacy rounds 25 portfolio companies raised ~$2.5B in Q1; ongoing valuation selectivity Fundraising healthy; selectivity elevated
Leverage strategyGAAP 89.6%; planned gradual increase to offset yield compression GAAP ~100%; leverage at low end of target; remain conservative but opportunistic Rising toward low end of range
Yields / spreadsCore yield guidance 12.25–12.75% for Q1 Core yield 12.6%; slight spread compression; possible 25–50 bps increase on new deals Stable to modestly higher
Exit activityHealthy M&A in Q4; muted IPOs 3 M&A events; IPO activity muted/confidential filings continue Muted IPOs; ongoing M&A

Management Commentary

  • “We drove a robust start to 2025, achieving over $1.0 billion in gross debt and equity commitments... our net investment income of $0.45 per share provided 113% coverage of our base distribution.” — Scott Bluestein, CEO/CIO .
  • “Core yields declined slightly... largely coming from declining base rates and some spread compression on certain new originations.” — Management prepared remarks .
  • “We will generally waive prepayment penalties... when we upsized and expanded facilities for performing borrowers.” — Scott Bluestein (Q&A) .
  • “We ended Q1 with strong liquidity of $615.6 million in the BDC, and over $1 billion of liquidity across the platform.” — Management remarks .

Q&A Highlights

  • Demand drivers and competition shift: Volatility and bank risk-off posture increased demand for Hercules’ capital; equity becomes more expensive/dilutive in volatile markets .
  • Yields outlook: Core yield guided to 12.0–12.5% in Q2; onboarding yields broadly stable with potential 25–50 bps uptick not yet reflected .
  • Fee income dynamics: Internal refinancings typically waive prepayment penalties, contributing to lower fee income in Q1 versus prior guidance .
  • Credit stance: Portfolio quality largely stable; minor uptick in non-accruals; proactive monitoring of tariff/regulatory impacts with limited direct exposure .
  • Leverage and capital stack: Intent to keep leverage near low end while opportunistically increasing; unsecured debt remains predominant; recent $287.5M 4.75% 2028 convert priced attractively .

Estimates Context

  • Q1 2025 missed consensus*: Revenue $119.5M vs. $125.4M*, EPS $0.45 vs. $0.468*; drivers included lower external prepayments and waived prepayment fees on internal refinancings, with over 55% of fundings late in the quarter limiting immediate NII impact .
  • Prior quarters: Q4 2024 revenue $121.8M vs. $126.2M*, EPS $0.49 vs. $0.503*; Q3 2024 revenue $125.2M vs. $128.1M*, EPS $0.51 vs. $0.511* .
  • Forward: FY 2025 consensus revenue $536.4M*, EPS $1.93*, implying modest growth; management signals Q2 prepayments uptick and NII tailwinds from Q1 net portfolio growth .

Notes: Asterisks (*) indicate values retrieved from S&P Global.

Key Takeaways for Investors

  • Despite headline misses vs consensus*, underlying growth drivers strengthened: near-record commitments/fundings and ~$270M net portfolio growth set up NII/EPS tailwinds in Q2/Q3 as deployments season .
  • Fee income headwinds in Q1 were transitory and partly deliberate (waivers on performing borrower refinancings), supporting long-term borrower relationships and portfolio growth .
  • Credit remains disciplined with high first-lien exposure (~91%) and minimal non-accruals at fair value (0.5%); watch the rising Grade 3 mix and biotech volatility for spread/valuation impacts .
  • Balance sheet flexibility is intact: GAAP leverage ~100%, net regulatory leverage ~83%, liquidity $616M BDC / >$1B platform-wide; recent convert and rating upgrades broaden capital options .
  • Near-term trading lens: Misses on EPS/revenue* may weigh near term, but positive Q2 prepayment guide ($200–$250M) and strong pipeline (pending $682.5M) offer catalysts; dividend continuity ($0.47) provides carry .
  • Medium-term thesis: Scale, diversified platform (BDC + adviser funds), and asset-sensitive portfolio (98% floating with floors) support resilient core yields around 12% in a volatile macro, with leverage increment potential to offset yield compression .
  • Monitor: Core yield trajectory, external prepayment cadence, credit grading mix, life sciences market volatility, and any policy/tariff developments that shift borrower behavior .

Additional Notable Press Releases (Q1 2025)

  • Declared Q1 total cash distribution of $0.47 per share; QII designation 79.97% .
  • Fitch upgraded corporate rating to BBB (stable) .
  • Closed $287.5M 4.75% convertible notes due 2028 (initial conversion price ~$21.48) .