Hercules Capital Inc (HTGC) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome the Hercules Capital Q1 2018 Earnings Conference call. (Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to hand the call over to Mr. Michael Hara, Senior Director of Investor Relations. Sir, you may begin.

Thank you, Brian. Good afternoon, everyone, and welcome to Hercules' conference call for the first quarter 2018. With us on the call today from Hercules are Manuel Henriquez, Founder, Chairman and CEO; David Lund, our Interim Chief Financial Officer; and Gerard Waldt, our Corporate Controller and Interim Chief Accounting Officer.

Hercules' first quarter of 2018 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 Hercules' web page 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, without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence, and other factors we identify from time to time in our filings with the Securities and Exchange Commission.

Although we believe that the assumptions on which these forward-looking statements are based 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 sec.gov or our website, htgc.com.

With that, I will turn the call over to Manuel Henriquez, Hercules' Chairman and Chief Executive Officer.

Thank you, Michael, and good afternoon everyone, and thank you all for joining us today for the Hercules Capital First Quarter 2018 Financial Results Earnings Call. We have plenty of great news to share with you today regarding our strong start to 2018, and our renewed optimism and improved outlook for 2018.

We had an outstanding first quarter, with exceptionally robust performance across all of our business units, which is expected to continue unabated through at least the second quarter of 2018, if not for the remainder of 2018.

For today's call, I will be discussing the following select achievements and highlights - an overview of our outstanding financial performance and key achievements during the first quarter; our renewed optimism and upward revision to our 2018 outlook and forecast based on our outstanding performance in the first quarter; and our trajectory of extremely strong originations and funding activities taking place early in Q2 2018, which, when combined, led to our updated net loan portfolio growth once again reoccurring now earlier than anticipated and starting as early as Q3 2018.

Adding to this optimism is our materially improved competitive outlook. These upward revisions are based on assuming current market conditions remain favorable throughout 2018, as they currently are.

I will then provide a brief statement regarding the recent passage of the Small Business Credit Availability Act, which has garnered a great deal of attention and chatter since its passage, and our views and positions on the subjects.

I will then turn the call over to our finance and accounting team led by Gerard and David, to conclude with an overview of our financial results during the quarter, and then finally conclude with a Q&A session.

Now to highlight our key achievements in Q1. During the first quarter, we witnessed a material improvement across many of our business units, including a material improvement across the competitive environment, which led to the following results. We delivered another very strong quarter of net investment income of $26.1 million for Q1, representing a year-over-year increase of 15%, which resulted in $0.31 of NII EPS.

We also generated a very healthy distributed net operating income, or DNOI, of $0.34 a share for our shareholders. We also entered into new commitments of over $266 million, up 39% on a year-over-year basis. And we also had a very strong funding by closing and funding over $236 million of new investments, representing over a 54% growth year-over-year in new fundings, while generating a very healthy effective yield of over 14% at 14.3%.

We also continued to generate one of the industry's highest ROEs at 12.7% based on net investment income. And we finished the quarter with approximately $0.19 of earnings spillover, representing $16 million of projected earnings spillover at the start of 2018.

In addition to these achievements, you can see from our earnings press release that as of the end of April 30, 2018, we have already entered into new commitments on a year-to-date basis of nearly $600 million, of which $266 million was booked in Q1. We expect to convert and fund nearly 80% to 85% of those remaining commitments in Q2, to interest-earning loans.

I would like to point out, we are only 4 months into 2018, and we have already secured $600 million of new commitments, and we still have 8 months to go for the year. We believe that we are on pace for a potential record year to exceed $1 billion in new commitments and even more if the pace of our new original business continues the way we are seeing the market currently.

We accomplished many of these results while maintaining our historically strong credit discipline as evidenced by our historically low sub-1% nonaccrual loans on a cost basis while also maintaining a very strong and high liquid balance sheet with over $313 million of available liquidity, to which we expect to deploy in Q2 and early Q3 into interest-earning assets.

We also recently chose to bolster our liquidity position with a recent offering of $75 million of a new 7-year bond offering at 5.25%, to continue to drive further new investment growth and portfolio growth by enhancing our liquidity position.

In addition, to our strong and consistent financial performance, we continue to strengthen our balance sheet while also enhancing our liquidity position by proactively lowering our overall cost of financing, while maintaining our targeted gross spreads.

As we entered Q2 2018, we have been active in the debt capital markets by successfully completing a partial redeeming and retiring of $100 million of our 6.25% 2024 notes, which had an overall cost of capital of approximately 6.6% when accreting the original issuance cost associated with those bonds.

As we have initially indicated in our Q4 earnings call, the retirement of these higher million dollar bonds will result in a noncash charge of $2.4 million, or $0.03 in Q2.

We also recently, as I indicated earlier, raised $75 million of a 7-year note at a lower coupon rate of 5 1/4%, while also extending the maturity out to 2025, further enhancing our debt wall and extending out the maturities of our debt liabilities.

We're also anticipating that in early Q3 2018, to begin the end of life and retirement of our first SBIC license. This license is now approximately 12 years old, and we currently have $41 million outstanding under the SBA debenture program that we expect to retire in the first few weeks of July. And we will then commence the process of evaluating and pursuing our third SBA license that we expect to pursue later in 2018, but most likely effectively begin in 2019, for additional $150 million of new SBA availability under the SBA program under our third license.

New business activities. We are seeing a much stronger demand and transaction deal flow pipeline than we had initially anticipated for potential new and future investment opportunities, driven in no small part by the very impressive performance and higher-than-anticipated venture capital investment activities during the first quarter of 2018, with approximately $26 billion of new venture capital investment activities, inclusive of all venture investing, including corporate venture activities.

This is a record pace of new investment in Q1 2018 and making it one of the best quarters since 2000, according to Dow Jones Venture Source data.

Now turning my attention to liquidity. Liquidity activities or realized [excess] by the venture capitalists were also very encouraging. We are also becoming increasingly optimistic as the IPO markets are beginning to pick up as well. With 14 U.S. venture-backed IPOs being completed in Q1 and making their debut, we are very encouraged by the size that we're seeing.

We're also seeing very strong indications of a growing backlog of potential future promising venture capital-backed IPO companies queuing up to make their own IPO debuts later in 2018, as a further sign of encouragement and evidence of our own portfolio IPO activities taking place.

Evidence of this in the second quarter or the beginning of second quarter, we saw DocuSign, one of Hercules Capital's equity holdings, complete their very successful IPO, generating an unrealized appreciation of over $9 million, or $0.11 in net asset value alone above our cost basis in Q1, based on the first day closing price performance. I can give you assurances that the $9 million first day closing price actually closed even higher this afternoon.

So we're very encouraged by that activity and we're very encouraged about what we're seeing in the overall queuing up of IPO companies, including within our own venture portfolio.

As a reminder, Hercules Capital has approximately 134 unique warrant positions in various companies and over 53 unique equity positions in many of these top-leaning, high-growth innovative venture capital-backed companies. This positions us well to potentially reap some material benefit, if and when many of these companies choose to pursue and complete their IPO debuts. This new industry resurgence of optimism and enthusiasm, as many industry observers believe, is being driven by the recent strong IPO performance by some of these high-profile companies that have recently completed their IPOs such as DocuSign and Dropbox, among many others. This investor enthusiasm, coupled with investors pent-up demands for high growth, venture-backed company stock could potentially help propel a new wave of IPO offerings later in 2018. We are, nonetheless, very encouraged by these signs.

Hercules Capital at the end of the quarter had 4 companies in IPO registration, one of which just I mentioned earlier, DocuSign, completed its IPO debut in Q2.

We are very encouraged by these signs and remain very optimistic on continued further liquidity being realized from these IPO [assets] in our own portfolio.

As another sign of encouragement, we're also seeing early payoff activities beginning to finally curtail and show signs of abatement. After having 3 years of tremendously strong early payment activities taking place and to remind everybody nearly $500 million alone in fiscal 2017, were beginning to show signs of encouraging and in tapering off of that activity.

As previously anticipated and announced, Q1 witnessed an above normal level of early repayment activities or payoffs of $243 million. However, I want to caution everybody, as we indicated, over $150 million of that early payoff activities in Q1, of $243 million, was driven by our own desire to complete a sector rotation and pruning out of certain industry sectors that we were invested in as we previously announced during our Q4 earnings call.

As an example of this rotation, one of these companies alone, Machine Zone, represented over 50% or nearly 50% of that early payoff activities, at $105 million. Add to that, the other 2 portfolio companies that we decided to sector out of, and you have over 50% of the early payoff activities was driven by our own selection on looking to reduce concentration and sector rotated out of certain industries that we were in.

Although this may have a short-term impact on earnings, we still believe it's very prudent from a portfolio management point of view, to actually make the decision to actually cycle out positions that we feel either are highly concentrated or have reached an economic life that we think it's important to move on. We will do that from time to time as a proactive measure to ensure a long credit history and performance [are withstand] our 14-year history in managing our credit book.

Again, as an example of that concentration position, Machine Zone was our largest single concentration portfolio position at the end of Q4, representing over $105 million of long-term exposure.

After adjusting for our anticipated sector rotations that we completed in Q1 and excluding, of course, the Machine Zone early payoff activities, we are beginning to see early signs of tapering off activities in early payoff. When you adjust for those early payoff activities that we encourage, you'll see the normalized level of payoff activities now hovering around $80 million.

Empowered with this knowledge and this insight, we now anticipate that early payoff activities for Q3 and Q4 will represent around $75 million to $100 million.

I will also say that our Q2 expectation for early payoff activities will hover between $110 million and $125 million that will be slightly inflated by some remaining forced portfolio rotation that we're just completing at the beginning of Q2, giving us the insight into approximately $100 million to $125 million of early payoff activities expected in Q2 alone.

Although much of this proactive portfolio rotation and pruning of selected investment has occurred in Q1 and is primarily behind us, we continue to remain watchful for trends that may lead us to reopen these activities and these initiatives as we look to maintain a well-balanced and diversified portfolio.

We are not interested in having a highly concentrated loan portfolio and we think that maintaining a highly concentrated loan portfolio leads to elevated risk and unnecessary volatility in the portfolio.

As a reminder, predicting early repayment activities remains a very difficult task since we do not control or have insight as to which company or when a company many choose to pay off its loan balances early. In fact, we typically have less than 30-day notice of visibility. So it is subject to significant variability and market conditions in determining the early payoff activities.

We will strive to work diligently to give you the best heads-up ability that we have on each one of our quarterly earnings call. If we these numbers were to change materially, we will be more than happy to share that updated insight with you on early payoff activities.

Now let me discuss some of the new commitments and funding during the quarter which were very, very strong. Notwithstanding the historical elevated levels of early payoff activities, in the past 3 quarters representing nearly $800 million of repayment activities, the Hercules Capital direct lending platform once again continues to prove its leadership position with investor lending marketplace and its resilience as a platform and in strong brand recognition among the top leaning venture capital firms in the country.

Those top venture capital firms and their innovative venture growth company clients have entrusted Hercules with now nearly $600 million of new origination activities in the just 4 months of 2018. That, if anything, exemplifies our position in the marketplace and the strong brand awareness that we have established in the venture capital community as a financing partner of choice.

Hercules team delivered another strong quarter of over $260 million of new commitments, and gross fundings of over $235 million in Q1, which greatly positions Hercules Capital to successfully absorb mostly all of the early payoff activities that took place in Q1, including most, if not all, of our sector rotation that is occurring.

Notwithstanding that comment, we saw the portfolio slightly decline from Q4 to Q1, of $71 million, driven in no small part by our own selection of self-pruning and sector rotation. I am confident that we will fully see that $71 million of portfolio step-down that took place in Q1, fully absorbed and turned back to a net portfolio growth at the beginning of Q3 2018, and we expect to see the portfolio continue to grow for the remainder of the year.

I will reinforce the statement we made earlier in Q4, that we expect the portfolio to continue to grow and end the year anywhere between $1.6 billion, and now we're revising the number to potentially $1.7 billion in total loan portfolio outstanding by the end of the year.

There are very few BDCs that I am aware of capable of absorbing this high level of early repayment activities and still manage to grow the loan portfolio book. But Hercules capital has proven once again its ability to do just that.

Now as to our pipeline and what is going on. At the beginning of Q2, we already have over $1.3 billion of transactions in the pipeline. We have begun the quarter with over $320 million of signed term sheets already in the quarter, many of which are in the process of being converted to funded assets, culminating in $600 million of total commitment through April 30, 2018. That is a tremendous amount of transaction to speak of, and it shows again our leadership position in the market.

Assuming all of these signed term sheets, in fact, do convert into newly funded loans in the second quarter, we find ourselves in a very favorable position to once again start seeing portfolio growth and start seeing a significant accretion to earnings and potential dividend growth as we convert all of these commitments into new funded assets.

We are quite optimistic about what we're seeing, and we're very encouraged by what we're seeing in this process.

Now let me take a moment to discuss our recent acquisition and potential future acquisitions that we're evaluating. Further enhancing our platform's capabilities and future product offering was the successful completion during the first quarter of our second strategic acquisition of the Gibraltar Business Capital, a leading provider of working capital lines of businesses to small and medium businesses through Gibraltar's Assets-Based Lending, or ABL, and Factoring Solution.

We are very encouraged by the signs that we're seeing early on in the Gibraltar acquisition, who themselves are beginning to witness pretty significant portfolio growth. And we're very encouraged by the signs that we're seeing with the Gibraltar team and their continued success and performance.

At this point, we are very, very happy on our acquisition and we're very encouraged by the growth in earnings that we'll see from that acquisition and the continued portfolio growth from the Gibraltar team and their platform.

Given the success of our 2 most recent acquisitions, the Ares venture portfolio and the Gibraltar ABL acquisition, we are currently evaluating an additional new opportunity and expect to continue to evaluate other future opportunities that have come before us as we seek additional strategic initiatives in 2018.

I want to emphasize strongly to everybody, these initiatives do not include, nor are we evaluating absolutely any interest in externalization. So I want to allay all concerns, none of these acquisitions or strategic initiatives involved any element of externalization. As I've said in other calls, we are much beyond that and well behind us on that issue.

These new strategic acquisitions are expected to augment our origination activity and opportunistically help continue to propel the Hercules platform in helping to service the needs of our growing portfolio of companies as we go through the various development cycles from development stage to mature. We want to be able to have multiple product offerings and financial product solutions that meet the needs of our companies as it goes through their life cycle.

We believe that completing some of these future acquisitions will further enhance our earnings growth and further accelerate dividends for the benefit of our shareholders. However, I will caution like we do our investments. We will evaluate many, many acquisition opportunities and make the decision on very few. We are very selective and very methodical on how we evaluate investment opportunities and strategic opportunities in terms of acquisitions.

Now let me take a brief opportunity to discuss our views of the market and anticipated activities as we enter the second quarter and the second half of 2018.

We are extremely encouraged by what we are seeing, as evidenced by our $330 million and growing, signed term sheets just in the first few weeks of the second quarter of 2018. We are seeing unprecedented demand in a very healthy and above normal level of new loan demands and pipeline building from both our current and prospective new portfolio of companies. I have been doing this for 30 years, and I have not seen this level of robust activity and vibrant venture capital activities in the marketplace as you're seeing today. We're quite encouraged. We are extremely well positioned, and we have the liquidity and the scale to accommodate this growing demand of opportunities that we're seeing in the marketplace.

We are actively hiring additional people to help us deal with this growing pipeline and growing demand for capital, and we're having success and also adding to our team as we're adding to our overall loan portfolio. We're very encouraged by all signs of the business today and have not been this upbeat in quite a long time at what I'm seeing in the marketplace today.

As further evidence of this renewed confidence is the fact that we're on pace of potentially shattering our historical record and potentially finding ourselves closing over $1 billion in new commitments in a single year in 2018. I caution you that number could rise meaningfully above that if the current pace continues, but at this level potentially achieving $1 billion at the run rate that we're at, should be accomplished, assuming everything continues the way it is.

Given this increased loan demand, we are extremely well positioned. We are actively looking at and evaluating all elements of our capital structure. We are actively looking to lower our overall cost of capital and we're looking to extend the maturities of our debt stack and enhance liquidity of our balance sheet to continue to ensure that we have ample capital to fund the growth of our new investment portfolio and meet the needs of many of this high growth, innovative, backed by the top leaning venture capital firms in the country.

We are seeing an [inordinary] amount of highly promising and very interesting companies we have not seen in quite some time. We're also seeing a greater exposure to later stage companies which means that we'll see a rapid or more faster IPO liquidity event or a merger event for some of this later stage, larger stage companies that we're looking at today.

As I mentioned, in an effort to keep up with this unprecedented demand that we're seeing, we're also looking to add head count. We're actively looking to hire across all elements of the company and we're actively looking to hire anywhere between 10 to 15 additional new headcount in the business to help keep up with this demand.

I have to emphasize this strongly. We have never seen this level of demand in the marketplace for quite some time, and we're very encouraged by that. However, we want to make sure that we maintain the rigors and discipline of our growth the last 14 years, and, with that, we'll be actively hiring as we continue to grow the loan portfolio and emphasize a strong credit discipline that we exhibited in the past.

Notwithstanding all this optimism, we are slowly moving away from our slow and steady strategy, but we like to call it now a bit faster but steady growth strategy that we're implementing. We are not losing controls of our rigors, but we're continuing to now increase our pace of new investment activities and continue to grab market share and opportunities in the market, given our well-capitalized balance sheet and our scale and position within the venture lending marketplace today.

Now for some topic which apparently is on everyone's mind and anxious to learn more about, and that is the passage of the Congressional legislation on increasing BDC leverage from 1:1 to 2:1.

Let me first start off by saying that we have begun an outreach program to all of our stakeholders. It's very important to us to make sure that we hear and speak to all of our stakeholders, including that of the rating agencies in the marketplace. So let me take a moment to proactively address these concerns and also highlight some of the issues and how we are looking at the process.

We were strong advocates and remain strong advocates on increasing leverage and leveling the playing field for BDCs and gaining access to increase leverage. Albeit still materially lower than REITs, commercial finance companies, LLPs and banks, we think that the BDCs have received an unjust ruling by many in the industry today. We ask that everybody take a moment to please listen and evaluate each BDC independently. We're all very different and we all offer different value propositions.

It is imperative that BDCs gain access to greater leverage. Greater leverage offers a wide array of benefits for shareholders. It offers the BDC the opportunity to continue to service the needs of their companies by offering lower cost financing options for their companies and expanding the universe of opportunities for BDCs to invest in, in higher quality companies, that, albeit, have lower coupon rates, but with leverage affords the ability to have an even stronger balance sheet and credit book by offering lower cost financing solutions to these new clients that are not able to be serviced today.

However, Hercules Capital has taken a more pragmatic position or view towards increased leverage. We are not in any rush to increase leverage. Although we are well-positioned to do so, we have chosen to pursue a wait-and-see strategy and continue to simultaneously reach out and engage with our stakeholders in an outreach program over the next 60 to 120 days before making any decisions on leverage.

We think it's imperative that we engage and speak to our stakeholders. The outreach program has commenced, and I've already met with our rating agencies, partners, and I expect to do so again over the proceeding next 60 to 120 days. My meetings with my rating agents have been very encouraging and very promising. I will say that I have no complaints on the rating agencies and how they're evaluating the process and how they're taking a very slow and methodical way of doing it.

I will encourage the rating agencies to maintain an open mind. I will say to also distinguish the difference between internally managed BDCs and externally managed BDCs. I am not saying one business model's better than the other. But there are differences that certainly play into a access and leverage for the benefit of stakeholders and shareholders that should be evaluated. After all, not all BDCs are created equal, are motivated equally, or perform equally. This differentiation should be considered by all parties before passing judgment on leverage.

Again, we are very supportive of leverage and we think it's an important aspect of the business, but we will take our time before making a decision of when is an appropriate time to seek leverage. With that statement, I'd like to remind everybody that aside from ganging [access] to additional higher leverage, Hercules today is one of the highest performing ROE BDCs in the marketplace. We already generate ROEs well above 12% at basically slightly half or slightly above half leverage already today.

Any incremental increase in leverage does not mean higher risk in the Hercules Portfolio. In fact, it means that we're expanding the universe of services and needs of higher growth, more mature companies that should gain access to lower cost of capital. Any additional leverage you put on our balance sheet would drive ROEs even higher today.

Now moving along into my client comments. We had a very solid start to 2018 and certainly Q2 2018, with an exceptionally strong first quarter of $0.31 NII. And we're off to what appears to be a tremendously equally strong Q2 2018 coming together nicely as all these transactions currently in the pipeline begin to convert and close.

Our outlook for 2018 has materially improved to the upside, and we're feeling very good about how things are shaping and trending at early part of the year. As I have always said, a quarter does not make a trend, but certainly helps point into a favorable direction to develop a trend.

If things continue to trend in the upward direction as they are, we expect the second half of '18 to be equally as promising as the first half of 2018. We see additional opportunities to doing better than we're doing in the first half. However, I want to caution and wait to see that if this robust activity that we're seeing in the first half of 2018, we will give you some perspective on that at our Q2 earnings call. And if the trajectory continues, we will then further enhance our upward trajectory on our forecast for 2018 at our Q2 earnings calls.

Now for one last and very important time. None of this would have been accomplished if not for our greatest assets - our wonderful and tremendous team of outstanding employees, what I call our human capital who have continuously stepped up and delivered strong results for our shareholders. I have seen unprecedented commitment from every layer and every one of our employees across the entire company. I am deeply grateful and thankful for everything they have done and for their outstanding and continuous hard work. I am enormously proud of our ever-growing team of investment professional and professionals across all elements of the business and the company who continue to execute and deliver strong results for our shareholders. They are what makes Hercules Capital successful. And I'd like to say to them, thank you very much and thank you for a job well done and continue what you're doing.

Now I'll turn the call over to David.

Thank you, Manuel, and good afternoon, ladies and gentlemen. We are pleased to report our first quarter results. Today we would like to focus on the following financial areas that impacted our quarterly earnings; first, origination platform; second, our operating performance in Q1; third, NAV performance and realized and unrealized activity in the portfolio; fourth, credit outlook; and fifth, our liquidity.

With that, let's turn our attention to the origination platform. Our originations platform continues to demonstrate its market-leading performance. We had total investment fundings of $236.3 million in the first quarter, from a total of 18 portfolio companies. The fundings were offset by $273.3 million in payments from unscheduled early payoffs of $243.5 million and regularly scheduled amortization of $29.8 million.

This repayment activity is the highest we have ever experienced. And to put the activity into perspective, $273.3 million in repayments experienced in Q1 represents almost the same total repayment activity experienced for the last 6 months of 2017, which was $286 million.

The ability to offset significant repayment activity is a tribute to the hard work of our origination team in identifying new investment opportunities. As a result of this activity, on a cost basis, our debt investment portfolio ended at $1.369 billion at the end of the first quarter, or down slightly from 5% from December 31, 2017.

Our core yields were 11.9%, down from 12.5% in the previous quarter. The decline in core yields was partially due to the timing of early payoffs at the beginning of the quarter, while fundings occurred later in the quarter and lower interest income due to a lower day count in Q1 as compared to the prior quarter. We do expect our core yields to rebound in the second quarter.

With that, I'd like to discuss our income statement performance for the first quarter. On a GAAP basis, our net investment income was $26.1 million in the first quarter, or $0.31 per share, which is an increase in net investment income of 6.5% compared to $24.5 million from the fourth quarter.

The increase in NII was driven by a decrease in interest and loan fee expense from $13 million in Q4 2017 to $10.6 million in Q1 2018, or a decline of 18.5% due to the noncash fee acceleration and interest expense overlap related to the partial redemption of our 2024 notes in Q4 2017.

Total investment income was $48.7 million in the first quarter, a decrease of 3% from $50.2 million in the fourth quarter. The slight decrease in total investment income is due to the decline in investment portfolio, specifically the debt portfolio where we had a decrease in our weighted average loans outstanding of approximately $49 million to $1.364 billion from $1.413 billion in the fourth quarter.

NII margin was 53.5% in the first quarter, which was an increase from the fourth quarter of 48.8%. The increase is due to the previously mentioned lower interest and fee expense related to the $75 million redemption of the 2024 notes that occurred in the fourth quarter of 2017.

Our SG&A decreased to $12.1 million in the first quarter from $12.6 million, driven by a decrease in variable compensation based on performance and funding objectives relative to plan.

Our net interest margin was $38.1 million in the fourth quarter, up from $37.2 million in the fourth quarter. As a percentage, our net interest margin increased slightly to 10.5% from 10.4%.

Lastly, we have a very well-positioned portfolio with a highly asset-sensitive balance sheet in the event of interest rate movements. 97% of our loans are variable interest rate loans with floors, and 100% of our debt outstanding was fixed interest rate debt. A 25 basis point or 50 basis point increase in benchmark interest rates would be accretive to interest income and net investment income by approximately $3.1 million or $6.2 million, respectively, on an annualized basis, or $0.04 and $0.07, respectively, of NII per share annually.

Now I will turn the call over to Gerard Waldt, who will discuss our NAV performance, credit outlook, and liquidity.

Thank you, David. We saw our NAV decreases to $828.7 million in the first quarter from $841 million in the fourth quarter of 2017, or a decrease of 1.5% to $9.72 per share. This $12.3 million decrease was a result of net realized and unrealized investment activity during the period.

We had modest net realized activity in the first quarter, with net realized losses of $4.9 million, which was primarily the result of 2 positions which were written off and previously fair valued at 0 in Q4 2017. We had a net change in unrealized depreciation of approximately $15.2 million on our investment portfolio during the quarter.

We had net unrealized appreciation in our debt investment portfolio of approximately $8.3 million. The depreciation in our debt investment portfolio consisted of $9 million of current impairments and $4.5 million of market yield adjustments, offset by $5.2 million of reversals due to payoffs. The depreciation in our equity portfolio was made up of $2.6 million in our public portfolio and $1.5 million in our private portfolio. The depreciation in our warrant portfolio was made up of approximately $800,000 and $3.4 million in our public and private portfolios respectively, which was offset by $1.4 million in reversals due to sales and/or write-offs.

We saw our return on average equity increase to 12.7% in the first quarter, up from 12% in the fourth quarter. Our return on average assets also increased slightly to 6.5% from 6.3%.

I now would like to discuss our credit and near-term outlook for the quarter. In the first quarter of 2018, our weighted average credit rating was 2.43, up from 2.17 in the fourth quarter of 2017. The decline in credit rating was due to the payoff of 3 credit rated warrant positions as of December 31, 2017, which amounted to approximately $198 million. Furthermore, the additional movements within the portfolio are consistent with our longstanding policy of generally downgrading credits to a grade 3 as the companies approached capital raise or (inaudible).

Traditionally, our portfolio companies will need to raise capital every 9 to 14 months. It is our expectation that our portfolio companies will migrate to a 3 rating at some point in their normal lifecycle with Hercules and in the ordinary course of business.

Our credit rating 4 and 5 companies, which are a primarily area of focus, did slightly increase from 4.5% to 5.3% on a cost basis in the first quarter, primarily related to the additional of 2 portfolio companies. Our non-accruals remain near historical lows and moved slightly down to 0.8% as a percentage of our total investment portfolio on a cost basis, and 0% on a value basis in the first quarter of 2018. This is 3 consecutive quarters where nonaccruals as a percentage of total investments at cost is below 1%.

Finally, our liquidity position at quarter end. We finished the end of the first quarter with $313.2 million in available liquidity, which was composed of $118.2 million in cash and $195 million of undrawn availability under our revolving credit facilities, which are subject to borrowing base, leverage, and other restrictions. Our equity ATM program issued approximately 478,000 shares with net proceeds of approximately $6 million. Our net regulatory leverage, excluding SBA debentures, as we have an (inaudible) relief from the SEC, declined to 57.8% at the end of the first quarter or 62% at the end of the fourth quarter.

Our net GAAP leverage with SBA debentures also declined to 80.7% in the first quarter from 84.6% at the end of the fourth quarter. Also during the quarter, we announced our intention to partially redeem our 6.25 2024 notes for $100 million. The partial redemption which occurred on April 2 will result in a one-time non-cash charge of approximately $2.4 million in Q2 2018.

Subsequent to March 31, we also announced the closing of our bond offering of $75 million at 5.25 notes due in 2025.

Finally, in closing, we are well positioned at the end of the first quarter, heading into the remainder of 2018. Our long-term focused approached and disciplined underwriting standards, as well as our access to diversified funding sources, will enable us to deliver strong results for the foreseeable future.

With that report, I now turn the call over to the Operator to begin our Q&A part of our call. Operator, over to you, please.

(Operator Instructions) John Hecht, Jefferies.

Manuel Henriquez, you seem pretty optimistic, definitely more optimistic, and you're constructive on the business conditions as you have relative to recent quarters. I'm wondering what do you think the driver of that is. Is it related to tax reform or general macroeconomic conditions, or would it be something more specific to technology overall?

I think we're seeing--we ourselves are trying to figure it out. I mean, clearly, you're seeing a renewed optimism in venture capital dollars. With $26 billion invested in Q1 alone, leaves a fairly optimistic look--outlook. And add to that the pretty successful IPOs that have occurred. Obviously, some haven't, like SNAP has been a bit underperforming. But the fact that we're seeing unicorns able to go out and see their shares rally and demand for growth stock in the marketplace serves as a way of encouraging more and more companies to pursue the IPO to rally. And in doing so, they want to minimize any equity dilution and see a demand for debt.

I think that the tax code may have added some element of this. You're seeing a bit more people wanting higher and faster, which means they're accelerating growth. But for me to sit here and correlate that the tax code has had a direct cause and effect as to this growth, I'm not comfortable doing that or able to do that. But I don't think it's not helping, meaning I think it has some factor in it. But I think venture capital optimism and dollars and IPO assets and M&A and IPOs is really what's driving it.

That's helpful. Second is you talked about pruning certain sectors and then maybe increasing exposure to others. Can you give us a sense for which segments that might--or sectors that might be?

No. I'm not interested in educating my competitors on what we do and why we rotate out of certain sectors. I think it's safe to assume that obviously--and I want to be clear because Machine Zone is a great company. Machine Zone became a very classic example. I think the company became a very mature company and I think that it made sense to have them seek lower cost of financing and continue to pursue their business model. But that's a sector that we decided that--I think it was well priced and well valued. But I'm not going to get into what sectors we are cycling out of for the purpose of helping our competitors figure that out.

I can certainly understand that. I appreciate that. Last question is you mentioned specific -- this is for modeling purposes. You I think gave some outlook for the next 2 or 3 quarters of repayment activity or early repayments. Can you cite those again just so I have our model accurate?

Yes. I think that in Q2 we're probably looking at $100 million, $125 million of early payoff activities of what we know. That includes--well, I won't tell you exact dollars. That--a portion of that is embedded in portfolio rotation that spilled over that we're completing in Q3. That-- so we're pretty comfortable having that number probably cap out at $125 million. I think thereafter we're pretty comfortable saying that we're seeing a regression to the mean and seeing kind of $75 million to $00 million of early payout activities to take place in Q3 and Q4, giving us a more optimistic outlook on portfolio growth when we start curtailing back the early payoff activities to normalized levels.

Tim Hayes, B. Reilly.

Can you first start, Manuel Henriquez, and just give us some insight into the process to attain the third SBIC license and how long that could take once the process commences?

Your guess is as good as mine. We're dealing with the government. So I think that to be clear what I said is that we're retiring our second license--our first license here in July and we'll commence the process. Given our hopefully relation with the SBA and the great partners that we have at the SBA, I'm hopeful the products will take 3 to 6 months. I think it will probably end up being more in the sixth month in the tail, so that's why I indicated that I think we'll start seeing economic benefit if and when we apply the third license, probably being accretive to earnings commencing in probably 2019, and not much, if any, in 2018.

So I think it's probably going to be a healthy minimum of 3 months and probably a 6-month look at historical levels.

And then, how much of your pipeline today do you think would be SBIC eligible?

Well, the lion's share of what we do as a business are SBIC eligible. Because we invest in great American innovative companies that don't have a lot of retained earnings because they're still on research and development, which is one of the criterions. So overwhelmingly, our portfolio would qualify for SBIC financing. So we have done it before. We've done over a billion -- I think it's 1.3 billion. And our first 2 licenses of investment activities were with the SBA. And we anticipate similar levels to go forward in the future. But the vast majority of our transactions qualify into the SBA program.

Okay. Got it. And then, do you have an estimate of the magnitude of earnings kind of left on the table this quarter as a result of the timing mismatch or maybe not in earnings speak, but just kind of the impact that had on core yields in the quarter?

Yes. The portfolio rotation that we embarked on that took place at the beginning of the quarter probably caused anywhere on a conservative level $0.02 to $0.03 in earnings. When you actually look at the math and you see the portfolio mathematically it was down around $71 million. You can impute what that income loss is -- the economics that we have at the 12-something yield and derive it on the NII margin. You can kind of derive what that number equates to.

But when you look at it, it's about $0.02 to $0.03 in earnings in our portfolio rotation that we did in Q1 that will have a little bit of ripple effect throughout fiscal '18. But we expect to catch all that up by the end of Q2. Certainly, by the beginning of Q3, the portfolio will be back to that normal level and growing again.

As to the yield impact, I think the last time we looked at the calculations, probably anywhere between I think it was 30 or 40 basis points was a factor that related to the timing of the portfolio rotation and early payoff activities.

Okay. Got it. So all else equal, we should be looking at a core yield of closer to 12.3% -- 12.2%, 12.3% for next quarter?

Tim, you're on the money, man. Literally on that number. We expect Q2 to normalize back in the -- what we call the mid-range of our level. But yes, we think that Q2 will be between 12.2% and 12.3% as we speak right now.

Okay. Got it. And then, one more for me. Obviously, you had some prepayment income help out a little bit this quarter. But just given the earnings drag from the liquidity you had, and then reflecting your asset sensitivity and just kind of the expected expense savings from the bond pay down, how much confidence do you have in being able to cover the dividend from an NII basis going forward, ex-onetime items?

Pretty strong. I mean, we have good portfolio momentum going on right now. We are going to be adding to SG&A -- I indicated that in Q3 and Q4 -- because of the expected headcount and incentive comp with our team. So we expect to see earnings continue to grow. Obviously, when you do the math, the shortfall in Q1 in terms of the funding level will have some little bit of ripple in 2018. But given -- if you heard what I said at the beginning of the call, the renewed confidence happening in loan portfolio end the year about 1.6 billion, 1.7 billion, I think that if you do the math on a 1.7 billion portfolio, for example, at the higher end, at Q4, you're going to be at a run rate well above our dividend rate.

Aaron Deer, Sandler O'Neill.

I just want to understand a little bit -- there may be another aspect to this portfolio rotation. Is it -- am I correct to understand that part of this rotation maybe is less sector-specific than it is maybe just downsizing some of the outsized positions that you had?

No. It's a combination of mitigating concentration risk and also some sector rotations embedded in that number. We just highlighted one company, Machine Zone, but there are--I think there's 3 companies in total that are embedded in the portfolio rotation in Q1 and probably 2 in Q2.

And then, of the loans -- the loan commitments that were made in the quarter, it looks like the average size of those was running $22 million. What was the largest of the commitments that were made here in the first quarter?

That I don't have here in front of me. We're happy to give you that when we call you back if you like, but we don't have that in front of us right now.

Okay. And then, just on the collateral impairments in the quarter, any information you can assure on that, and maybe the likelihood of any recoveries that we might see later in the year?

I'm sorry, can you--what was the first part of that question? Recoveries what?

On the -- any additional color that you can provide on the collateral impairments in the quarter.

Well, they're pretty negligible. But we have collateral impairment in normal course of business that we do. We typically, as you know from tracking us, we typically will automatically mark down a credit as they're embarking on a capital raise until such capital raise has been completed. But there wasn't that much of a material markdown in the portfolio related to credit. Most of the markdown in the portfolio was related to mark-to-market. So I think that the markdowns you saw on there -- I'm only aware of one of those markdowns -- actually, 2 of those markdowns have paid off in Q2 and have been fully recovered with a gain.

Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann.

Can you just clarify something in the press release? There was no nonrecurring charge related to the debt retirement. That was something for second quarter, but nothing for this quarter.

That's correct. Q1 is clean. There is no debt retirement. By the time we took action and the notice that we have to give to bondholders, it made no sense to have it occur in Q1 because when it happen it was on the last day. So it mathematically became logical to just do it in -- well, April 2 is what it worked out to be.

So you'll see the charge come through on April 2 -- in second quarter.

Got it. And then, given the higher growth target, 1.6 to 1.7, and also given the retirement of the first SBA license in the third quarter, should we expect incremental debt issuances or possible equity raises here? What's the capital planning outlook for that?

Well, obviously, we don't talk about if and when we're doing equity raises for many reasons. We have an active ATM program in effect that's been a very useful tool for us to use. But yes, I think that what I am comfortable talking about is that there will be a capital debt raise in the foreseeable future. We did our first one at $75 million. We wanted to see how the markets were, and kind of test the market, and that was a very successful offering. Frankly, pricing a 7-year deal at 5.25 was very attractive with a 3-year non call. And we also accessed the investor grade market earlier in the year at 4.625, also a very attractive instrument.

So I think it's safe to assume that you will see us access the debt capital markets here in the foreseeable future and continue to also wind or use our products, whether it's securitization, whether it's going to be a convert, or a retail part 25 offering or a part 1000 offering. All of them are on the table and we're all accessing multiple facets of liquidity from our well-structured balance sheet.

Final question. Understanding that you're not going to go above 1x debt to equity, given the change in the law, are you more inclined at this point to increase your typical threshold debt to equity? Normally you raise equity when it's like 0.75 or 0.8 or so. Now would you be willing to take that higher to 1.0 before you start considering a large debt raise?

I think it's a safe assumption. Given our trajectory of our portfolio and the use of the ATM product, I think that is exactly the right way of looking at it. I think you'll see Hercules normalize leverage probably in the 0.9, 0.95 level in fiscal '18. I think that's probably where the comfort zone you'll see us operate the business, which we elevated from our historical levels of 0.75, 0.85. And so, I think you'll see a cadence of running it at 0.95 at the higher end and 0.9 on average if you will.

And our next question comes from the line of Ryan Lynch from KBW.

First question on -- prepayment fees were actually pretty low this quarter it looked like, relative to the extremely high level of prepayment that you actually received. Was this due to kind of pruning your guy's portfolio a little bit, or what was driving this? And do you expect prepayment fees to kind of return to a more normalized level in the second quarter?

Great observation, Ryan. And you're actually right. The prepayment activities this quarter were definitely subdued by a combination of factors that include us. Obviously, if we're encouraging pruning, we're not going to hold companies to a full prepayment and other issues. So we're not going to do that to the companies. Number two, a lot of the companies that did cycle out were beyond -- they're later stage companies, so there's a lot less income accreted on any early payoff activities or penalties, if you will, prepayment penalties. So a combination of the maturity of the companies and our portfolio rotation certainly helped dampen the early payoff activity income that was realized in the quarter.

Then I did have a question on DocuSign as well. It looks like in the first quarter you guys had about a $2 million unrealized gain. Given this current price you guys talked about a $9 million unrealized gain based on the closing price that we have. Does that mean we should expect--or you guys should expect to recognize a $7 million unrealized gain in the second quarter pending the price doesn't change? And then, also with that investment what's kind of the outlook for what you plan on doing with this investment? It's a pretty large investment now for an equity investment. You guys have other ones in the past like Box that you held on for a little while. Do you guys plan on holding onto DocuSign, this equity investment, for a while and ride it out, or is this an investment you guys are looking to exit over the next coming months or quarters?

So I hope you appreciate my response in the spirit that I'm going to give it. We're not going to indicate our selling price threshold. But every security that we invest in has a proposed exit price that we have modeled in and we track to. When the companies hit those exit prices, we immediately engage in a nondisruptive selling program to liquidate the position. In the case of DocuSign, we have a 180-day investment banker lockup anyway on the transaction, given our position. So we're not going to be exiting anytime soon. And we're also very active users of the product. We've been users of the product for many years. We're actually a big believer in DocuSign as a product, which led us to make the equity investment in the company.

But we're not looking to just kind of sell it right away. I think it's a great company and I think it has a lot more legs for growth associated with it. But we're also not a hedge fund. So we're not--we don't get paid by holding onto long positions as it (inaudible) BDC. So once we hit the threshold, we will liquidate the position.

And then, final question is on your acquisition of Gibraltar. I know you've talked in the past a meaningful amount of prepayments have come from existing portfolio companies that have had success and go out and refinance with another lender at a lower rate. With the Gibraltar acquisition, do you expect that acquisition to be able to slow down potentially some of these prepayments because some of those loans or companies could then transition to that platform? And can you also comment--it looks like it's a pretty small portfolio today. Can you just talk about what is the potential for that company to grow in the future?

So Gibraltar is held as a portfolio company. It's not consolidated. And they have an independent board and operate autonomously. We're obviously the sole owners of the company. But to answer the latter part of your question--the latter part of the question is that I'd like to remind everybody it's barely been 60 days. We just got the thing closed. So I think that the relationship is still evolving and developing. And it is our intent over time to introduce prospective candidate companies that are looking for and seeking ABL type lending to then be handed off to the Gibraltar credit team and the Gibraltar credit process and let them make their independent determination as to whether or not they want to provide capital to that company itself. But that is one of the intents that acquiring the ABL lender--or the ABL platform--it will serve as a historical or a future mitigant on extending the economic life of our relationship with our companies by holding onto the credit or the company a lot further in its cycle than we otherwise do today because we don't have an ABL product that's really cost effective. Now that we have Gibraltar, we do.

As to Gibraltar itself, we are very encouraged by their growth since the--60 days. And they're already--with our capital behind them as their partner we're already seeing very strong encouraging signs of the Gibraltar platform doing quite well. It is small but that small means that they'll--they can be doubling in size at a much more rapid pace because of the size that they started off at. We're very encouraged by what we're seeing. We just had our first board meeting and we're very encouraged about what's going on at Gibraltar. The team and the platform continue to do very well. And I think that they'll probably nearly double from our acquisition point when we bought them to year end.

I would not be surprised if they won't end up doubling by the end of the year or by the first quarter of '19. And our trajectory that we have for them and they have for themselves is probably doubling again in 2019. So we're going to see some pretty good growth out of that platform and that team, so we're very encouraged by that.

Casey Alexander, Compass Point.

When you said that you would like to trail the leverage ratio up and settle it in at between .9 and .95, that is exclusive of whether or not the board passes a resolution to access the additional leverage. Is that correct?

Our board and management has not made any determination, nor have we asked our board to vote on increased leverage until we complete the outreach program. I think that seeking that--well, there are a lot of VCs that are not rated by the rating agencies, so they don't really care. We are rated by the rating agencies, so we do care. And we do care about our bondholders and our equity holders. So we think it's prudent to embark on that outreach program and help folks quantify and see that the business judgment and business case why it makes a lot of sense in doing that.

So to the first part of your question, we will operate at the 90% to 95% leverage without seeking board approval to go beyond that. We're not going to do that for a minimum of probably, again, 60 to 120 days. It could be longer than that until we complete the outreach program and our continued dialogue with the rating agencies that we have already started.

I mean, if the rating agencies draw a line in the sand and just say, that's it, if you ask for additional leverage they're going to downgrade you below investment grade, would that be a non-starter?

Yes. I don't want to pass judgment whether or not or respond to a hypothetical. It's certainly a factor that has to get quantified and evaluated. And I just would--I'd just respectfully say I just want to reserve judgment to finish the constructive conversations and continue the outreach program. I don't want to say there's a line in the sand or not a line in the sand. I think that it's a continued fruitful outreach program to continue to educate all stakeholders.

A different question. You talked about $75 million to $100 million of expected prepayments in Q3 and Q4. Was that $75 million to $100 million in each quarter or cumulative?

Each quarter.

All right. And also, the previous question about DocuSign I don't think was answered. Is there $7 million of--as of today of unrealized appreciation versus the first quarter mark or $9 million in the second quarter?

So let me reconcile it for you. It's a total of--at $40 a share, it's approximately $9.1 million. Yes, in Q1 because the S-1 was filed, we took a mark-to-market step up on the fair value. And I believe it's $1.8--it's like $2 million of appreciation was--unrealized depreciation was recorded in Q1 leading up to the IPO. When the IPO became effective in April, that's when you get your delta of another $7.1 million or so.

Henry Coffey, Wedbush.

So what changed? I would say listening to the February call and talking to you all after, it was a fairly conservative view on life, based mainly on the fact that you were looking at a lot of potential early redemptions. That's still playing out as--sort of as expected. And now, we're seeing a very aggressive tone about what you think is going on in the venture debt market. Have competitors dropped out? Has something turned on new that wasn't there 6 months ago? What's changed? It's a real positive shift in tone.

Well, look, I would love to say selfishly and arrogantly it's all Hercules. But that would be a complete misstatement. Clearly, the team has done an incredible job, but there are many factors, as I weighed in earlier, that are impacting that. We're seeing evidence of increasing banking regulation taking place where we've seen banks in the first and the second quarter dramatically shift backwards from a competitive offering point of view. We've seen players who have taken capital losses, who didn't know what they were doing in venture lending, taking some hits, which has spooked them. We've seen an increase in venture capital equity investment activities that's propelling this enthusiasm further. We're seeing increased optimism on liquidity, M&A events, and IPO activities taking place, as witnessed in our own portfolio, and also evident in our own backlog of companies filing.

So I think it's a culmination of all of those factors coming together. And do I think that the tax reform has had some impact? It probably has--some of it. But I think there's just a lot of renewed optimism in this country and certainly, in Silicon Valley, that is driving more companies to accelerate their growth. And I will also add another element that I think a lot of companies want to fund themselves through the mid-term election and not risk a second half of the year liquidity issue. And I think that's also a driver that people want to kind of bolster up their balance sheets in preparation for God knows what to come.

So in terms of the likely marks on debt, if there's a lot of positive activity going on in terms of capital rates and expansion, that would normally -- given how you like to kind of play things on the conservative side, that would normally result in a lot of loans being moved down to level 3. Are we still sort of at--and given that rates are rising. We have those 2 factors at work. Are we still going to see a lot of--an increase in unrealized depreciation negative marks against your debt holdings over the next couple of quarters just to kind of reflect all this movement and change? Or do you think the increased enthusiasm will result in more acquisitions, more payoffs, more positive marks?

So my enthusiasm--our enthusiasm doesn't change our conservative credit marks. And yes, we've been blamed for many years of being overly conservative and very cautious. And I'm fine with that accusation because I prefer to be cautious than optimistically doing things that later come back and roost on you. So I think that the--as a reminder to your more salient question, is that Hercules has a policy of unlike I think any other BDC out there that I'm aware of, that we will automatically downgrade a loan to a level 3 when it approaches a capital--a new round of financing. The company still has plenty of enterprise value, but we've always adopted that approach since the inception of Hercules and I think it's still the right thing to do regardless of being prudent to mark it down.

I can tell you right now there's probably more than a dozen companies in the portfolio as we speak right now that are embarked on a capital raise as we speak or have a major clinical FDA event coming up right now that if they all manifest themselves with positive developments, you will see a significant uptick in the ratings, too. And you'll see significant reversals of any interim impairment that we have associated with our commitment to the 40 Act on fair value accounting and making a markdown. And I think that I don't lose sleep that we overly conservatively mark down a portfolio because I think it's the right thing to do. And I think that when these companies secure the next round of financing or achieve an efficacy on an FDA clinical trial and get the (inaudible) or get a positive readout, I think that will lead to a markup in the portfolio that will occur in Q2 and certainly by early Q3.

Robert Dodd, Raymond James.

So just on the G&A and the comp and benefits side, obviously, potentially considerable portfolio growth. You already mentioned that you're looking to hire 10, 15 people. I would expect that would continue if this kind of portfolio growth continues. So I mean, what can you--give us an indication. Obviously, Q4 was pretty high. Bonus, of course, for the successful year last year. Obviously, it dropped this quarter in terms of a comp. What's the ballpark kind of growth we could expect through the quarter of the year kind of by Q4 in terms of total comp and overhead costs for the growth you're looking at?

Sure. Excluding interest expense and fees, we think that SG&A will normalize at a run rate beginning probably Q4, early Q1 '19 around $13 million to $13.5 million. And I think we're at a run rate now of about $12.2 million, $12.1 million at Q1. So you'll see us over the next 3 to 4 quarters migrate another $250,000 a quarter gravitating to the $13 million to $13.5 million by Q1 '19. But I will caution that the $13.5 million is a full headcount hiring. So I think that it will probably modulate around $13 million or so by Q4 at the current pace that we expect to hire and bring in people onboard. So you're looking at an $800,000 to $900,000 accretion over the next 3 quarter, or 900--$300,000 a quarter between now and year-end.

And on that kind of more--the type of people you're looking for, originators, obviously. Like you're always looking for those and it's a hard find. Are you looking to hire more portfolio managers, so to speak, stewards of assets they have on the books already, or is it everybody--you're just trying to add more people who can bring more big deals to the table, good deals obviously?

Well, look, we hire just like we invest. We're very slow. We study the equations. We want to make sure it's the right hire and then we also recognize--and we've accepted this as part of the business model--that a hire will take a 6 to 9-months of cost before we see accretive contribution from a new hire on the business development side of the equation. And we're fine with that because we want people to be immersed in our credit discipline and our underwriting standards.

So we invest in our team and our employees to develop them and make sure they understand our credit culture and our disciplines.

And I currently see no further questions. I would now like to turn the call back to Manuel Henriquez, Chairman and CEO, for any closing remarks.

Thank you, Brian, and thank you all for joining us on our call today. We will be participating in the B. Riley FBR Investor Conference at the Annual Institutional Conference on May 23 in Santa Monica, and also participating at the JMP Securities Financial Services Conference in New York City on June 19, as well as many additional upcoming non-deal roadshows and investor outreach that I just discussed during this call. If anyone has an interest in meeting with us, please contact either B. Riley for their conference, JMP Securities for their conference, or certainly our own internal IR, Mike Hara, who will be happy to coordinate a potential meeting time during our many expected non-deal roadshows coming up.

With that, thank you, everybody, and have a great day.

Ladies and gentlemen, thank you for attending this conference call. You may now disconnect. Everyone have a great day.