Hercules Capital, Inc.

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 speaker's presentation there will be a question and answer session to ask the question during the session you will need to press star 1 1 on your telephone you will then hear an automated message advising your hand is raised to draw your question please press star 1 1 again please be advised that today's conference is being recorded I would now like to hand the conference over to your speaker today, Michael Hara, Director of Investor Relations. Please go ahead.

Thank you, Gerald. Good afternoon, everyone, and welcome to Hercules' conference call for the first quarter of 2024. With us on the call today from Hercules are Scott Bluestein, CEO and Chief Investment Officer, and Seth Meyer, 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. 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 guaranteed the 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-K, 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. And with that, I will turn the call over to Scott.

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 4.5 billion of assets. an increase of 14.7% from where we were a year ago. 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. 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 an historic record for any Q1 for both gross debt and equity commitments and gross fundings of $956 million and $605.2 million, respectively. The $605.2 million of gross fundings in Q1 is the strongest funding quarter that we have ever delivered. For Q1, we generated total investment income of $121.6 million, up nearly 16% year over year, and net investment income of $79.2 million, up nearly 21% year over year, or $0.50 per share, and providing 125% coverage of our base distribution of $0.40 per share. We were able to achieve 125% coverage of our base distribution, despite ending the quarter with very conservative gap leverage of 93.6%. This is our fourth consecutive quarter of over $100 million 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. 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% of our fundings were to life sciences companies, while approximately 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. We funded debt capital to 24 different companies in Q1, of which nine were new borrower relationships. Consistent with what we saw throughout 2023, we expanded our funding relationship with numerous portfolio companies that continued to show strength and achieve performance milestones during the first quarter. 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 483.4 million, which increased from 335 million in Q4. Since the close of Q1 and as of April 30th, 2024, our deal team has closed 117.3 million of new commitments. and funded $52.3 million. We have pending commitments of an additional $308.5 million 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. 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 first quarter. In Q1, we had four portfolio companies announce acquisitions, of which one was recently completed in March. We also have two portfolio companies that have filed registration statements for an IPO. As we anticipated, early loan repayments decreased in Q1 to approximately $161 million, which was in line with our guidance of $125 million to $225 million. For Q2 2024, we expect prepayments to accelerate from Q1 levels and be in the range of $200 million to $300 million, although this could change as we progress in the quarter. Credit quality of the debt investment portfolio improved quarter over quarter. 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 one and two credits improved to 68% compared to 62.6% in Q4. Grade three credits decreased 29.2% in Q1 versus 34% in Q4. Our rated four credits decreased moderately to 2.6% from 3.4% in Q4 and rated five credits were 0.2%. In Q1, the number of loans on non-accrual increased by one. We had two debt investments on non-accrual with an investment cost and fair value of approximately $42.2 million and $5.2 million 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&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. During Q1, capital raising across our portfolio was very strong, with 31 companies raising approximately $2.6 billion in new capital, which was again weighted towards our life sciences portfolio. During Q1 2024, Hercules had net realized gains of $8.2 million, comprised of net realized gains of $9.2 million, primarily due to the gain on warrant and equity investments offset by $1 million 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 $498.1 million. 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 9.3 billion and investment activity at approximately 36.6 billion. according to data gathered by PitchBook NVCA. 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 million, or $0.88 per ending share outstanding. For Q1, we are maintaining our base distribution of 40 cents and a supplemental distribution of 8 cents 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 billion milestone in cumulative debt commitments for our company. 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. I will now turn the call over to Seth.