Hercules Capital, Inc.

Good day, and thank you for standing by. Welcome to the Hercules Capital Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any assistance during the call, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Michael Hara. Mr. Hara, the floor is yours.

Thank you, Chris. Good afternoon, everyone, and welcome to Hercules' conference call for the first quarter of 2022. With us on the call today from Hercules are Scott Blustein, CEO and Chief Investment Officer, and Seth Meyer, CFO. Hercules' first quarter of 2022 financial results were released just after today's market close and can be accessed from Hercules' investor relations section at htgc.com. we have arranged for a replay of the call at Hercule's webpage or by using the telephone number and passcode provided in today's earnings release. During this call, we may make forward-looking statements based on current expectations. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and in the confirmation and final audit results. In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including, and without limitation, the risks and uncertainties, including the uncertainty surrounding the current market turbulence caused by the ongoing pandemic and geopolitical crisis, and other factors we identified from time to time in our findings with the SEC. Although we believe that the assumptions on which these forward-looking statements are reasonable, Any of those assumptions can prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit our website. And with that, I will turn the call over to Scott.

Thank you, Michael, and thank you all for joining us today. The momentum that we experienced in our business throughout 2021 continued in Q1, where we originated record Q1 gross new debt and equity commitments of over $615 million and gross fundings of over $351 million. More importantly, With early payoffs abating even more than expected, we achieved record net debt investment portfolio growth of over $190 million during the first quarter. The substantial investments that we have made in our team, infrastructure, and platform have positioned us well to be able to take advantage of what we continue to view as a favorable market environment for our business. Given our strong performance in Q1 and our activity quarter to date in Q2, We believe that the company is well positioned to be able to deliver strong net investment income growth over the remainder of the year. This will be further bolstered by our dramatically reduced cost of debt of 4% in Q1 2022 from 5.5% in Q1 2021. And the fact that Hercules debt portfolio is highly asset sensitive with 94.7% of our loans being variable rate with floors. Our liabilities are fixed with the exception of our credit facilities. As the FOMC raises interest rates, each 25 basis point increase generates an additional approximately four cents of earnings annually. Let me recap some of the key highlights of our performance for Q1. Our record Q1 originations activity was once again driven by both our technology and life sciences teams delivering strong performance during the quarter. Our commitments and funding activity demonstrated balance between our two core verticals, although our investments during the quarter were weighted towards technology. We funded capital to 26 different companies in Q1, of which 10 were new borrower relationships. In addition to strong funding activity for new portfolio companies, we were also able to once again expand our funding relationship with numerous portfolio companies that continued to show strength and achieve performance milestones during the quarter. Based on the record $2.64 billion of new debt and equity commitments that we delivered in 2021, we expect this trend of increased follow-on fundings and the unlocking of milestone-based committed tranches to existing portfolio companies to continue to accelerate in 2022 and drive strong gross funding levels for the remainder of the year. During Q1, our funding activity was back-end weighted towards the end of the quarter, with over 55% of the quarterly fundings occurring during the month of March. Since the close of Q1 and as of May 2, 2022, our deal team has already closed $335 million of new commitments, and we have pending commitments of an additional $622 million in signed non-binding term sheets. Combined, our year-to-date closed and pending new commitments currently exceeds 1.5 billion, which is the strongest start to any year that we have ever had through this period. Inclusive of our Q1 performance, we have now delivered over 600 million of new gross commitments and over 350 million of new gross fundings in three consecutive quarters. We expect this trend to continue in Q2. Our new deal pipeline remains very healthy and active and currently exceeds one billion of potential investments. As a result of the continued volatility across the equity markets, particularly for growth stage companies, we expect our pipeline to continue to strengthen near to medium term as companies continue to look for creative and non-dilutive structured capital solutions from debt providers that they trust. Our scale, permanent equity capital base, and 17 plus year track record are clear differentiators of our business, particularly in periods of equity market volatility. As we indicated on our last call in February, while the continued equity market volatility for certain growth stage companies may negatively impact net asset value short term, as it did in Q4 and in Q1, we expect it to be a long-term net benefit to our business in terms of increased investment opportunities and net debt portfolio growth. This is exactly what we have seen year to date. Consistent with our historical approach to underwriting credit, we will remain patient and disciplined on new originations, irrespective of the market conditions. Based on the current market volatility and increasingly challenging macro environment, we are being even more selective than normal in terms of underwriting new credits with an increasing emphasis on later stage and more established companies where we believe the risk-adjusted profile is better at this time. During Q1, portfolio company exits and liquidity events for the industry pulled back but remained healthy across our portfolio. Year-to-date, we've had three companies complete their IPOs, including one that closed this week. and five companies announce or complete M&A transactions, four in Q1 and one company in Q2. In addition, we have five companies that have registered for their IPOs or have entered into definitive agreements to go public via merger or SPAC transaction. Early loan repayments were approximately 85 million, well below our guidance of 150 million to 250 million. and a significant decrease from 426 million in Q4 2021. While the lower level of early loan prepayments reduced our Q1 NII per share, it resulted in record net debt portfolio growth in the quarter, which positions us well for strong earnings growth beginning in Q2. For Q2 2022, we expect prepayments to remain low and be between 100 million and 200 million, although this could change as we progress in the quarter. The lower levels of early payoffs that we experienced and are continuing to project will give us an opportunity to enhance the longer-term earnings power of the business, assuming that originations remain strong. Our private funds business has also continued to ramp up, which has contributed to the increased levels of origination activity that we have seen over the last several quarters. In Q1, we generated total investment income of $65.2 million and net investment income of $35.8 million, or $0.30 per share. As a result of the lower levels of prepayments, total fee income during the quarter was $2.9 million, down $4.6 million from $7.5 million in Q4 2021. Our portfolio generated a GAAP effective yield of 11.5% in Q1 and a core yield of 11.1%, which was consistent with our guidance for the quarter. With net regulatory leverage at a very conservative 83.2% and continued robust liquidity across our platform, our balance sheet remains well-positioned. Credit quality of the debt investment portfolio remains strong and consistent with what we reported in Q4. Our weighted average internal credit rating of 2.10 was the same as Q4. Our grade one and two credits remained the same at 73.2% versus Q4. Grade three credits were also relatively the same at 26.4% in Q1 versus 26.3% in Q4. Our rated four credits made up 0.4%, and our rated five credits declined to 0%. Capital raising across our portfolio remained strong in Q1, with our active portfolio companies raising over $1 billion of equity and strategic capital during the quarter. In Q1, the number of loans on non-accrual decreased to one debt investment, with an investment cost and fair value of approximately $13,097,000 respectively, or 0.5% and 0.0% as a percentage of the company's total investment portfolio at cost and value respectively. During Q1, excluding the impact of the non-recurring loss on debt distinguishment of $3.7 million, Hercules had net realized gains of $1.3 million. This was comprised of gross realized gains of $5 million, offset by $2.1 million due to the write-off of one debt investment and $1.6 million due to the write-off of legacy equity and warrant positions. We ended Q1 with strong liquidity of $430 million, which provides us with ample coverage of our available unfunded commitments of $371 million and the ability to continue to fund our ongoing anticipated business activities. The venture capital ecosystem continued its healthy pace with fundraising activity at $74 billion and investment activity at $71 billion, according to data gathered by PitchBook and the National Venture Capital Association. Fundraising activity is on record pace to exceed 2021's level of $132 billion, while investment activity moderated from Q4 2021. We exited Q1 with undistributed earnings spillover of over $171 million or $1.39 per share. The undistributed earnings spillover continues to provide us with the added flexibility with respect to our shareholder distributions going forward and the ability to continue to invest in our team and platform. For Q1, we declared a base distribution of $0.33 and a supplemental distribution of $0.15. we will continue to evaluate the quarterly variable-based distribution with a particular focus on the debt portfolio growth and NII growth that we are expecting to materialize. In closing, we are off to a terrific start to 2022, and we continue to be well-positioned to take advantage of market conditions and grow our core income-generating assets and, as a result, the earnings power of the business. We will remain steadfast with our core themes of maintaining a strong balance sheet and staying disciplined on new underwritings while continuing to invest in our teams and platform. We are thankful to the many companies, management teams, and investors that continue to make Hercules their partner of choice. I will now turn the call over to Seth.