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Hercules Capital Inc
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Good day, ladies and gentlemen, and welcome to the Hercules Capital Q1 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time. [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 Gerald Waldt, our Corporate Controller and Interim Chief Accounting Officer.
Hercules' first quarter 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 on Hercules' 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, without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence, and other factors we identify from time-to-time that are on 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 be 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'll be discussing the following select achievements and highlight, 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 it currently are. I will then provide a brief statement regarding the recent passage of small business credit availability act, which has garnered a great deal of attention and chatters in this passage and our views and positions on the subject.
I will then turn the call over to our finance and accounting team led by Gerald 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 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 earned - 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 continue 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 spill over, representing $16 million of projected earnings spill over 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 commitment 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 earnings loans.
I would like to point out, we're only four months into 2018 and we have already secured $600 million of new commitments and we still have eight months to go for the year. We believe that we are in pace for a potential record year to exceed $1 billion in new commitments and even more if they pace of our new original business continues to way we are seeing the market currently.
We accomplished many of these results, while maintaining our historically strong credit discipline as evidenced by historically low sub-1% non-accrual loans on a costs basis, while also maintaining a very strong and highly 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 seven 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 consistent financial performance, we continue to strengthen our balance sheet, while also enhancing our liquidity position by proactively lowering our overall costs of financing, while maintaining our targeted growth spreads.
As we entered Q2, 2018, we have been active in the equity - debt capital markets by successfully completing a partial redeeming and retiring of $100 million of our 6.25% 2024 notes, which had an overall costs of capital of approximately 6.6% when accreting to original issuance costs associated with those bonds. As we have initially indicated in our Q4 earnings call, the retirement of these $100 million bonds will result in a non-cash charge of $2.4 million or $0.03 in Q2.
We also recently as I indicated earlier raise $75 million of a seven year note at a lower coupon rate of 5.25%, while also extending the maturity out to 2025 further enhancing our debt while 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 in transaction deal flow pipeline than we had initially anticipated for potential new and future investment opportunities, driven no smaller part by the very impressive performance and higher than anticipated venture capital investment activities during the first quarter of 2018 with the 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 one of the best quarters since 2000 according to Dow Jones venture source data.
Now turning my attention to liquidity. Liquidity activities or realized access by the venture capital 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 is in the second quarter or the beginning of second quarter we saw DocuSign one of Hercules Capital's equity holder completed very successful IPO, generating an unrealized appreciation of over $9 million or $0.11 in net asset value alone above costs basis in Q1, based on the first day closing price performance.
I can give assurances that the $9 million first day closing price actually closed even higher this morning or this afternoon. So, we're very encouraged by that activity and we're very encouraged by what we are 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 leading high-growth innovative venture capital backed companies. This positions us well to potentially reap some material benefits if and when many of these companies choose to pursue and complete their IPO debuts.
This new industry resources of optimism 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 complete their IPOs such as DocuSign and Dropbox among many others.
This invest enthusiasm coupled with industry's pent-up demand for high growth, venture backed companies 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 four 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 access in our portfolio.
As another sign of encouragement, we're also seeing early payoff activities beginning to finally curtail and show signs of abatement. After having three years of tremendously strong early payment activities taking place and to remind everybody nearly $500 million alone in fiscal 2017 we're 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 second rotation improving out of such industry sectors that we were invested in as is previously announced during our first - 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 two portfolio companies that we've 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 rotate out of certain industries that we were in.
Although this will 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 recent economic life that we think is important to move on. We will give up from time-to-time as a proactive measure to ensure a long credit history and performance I would stand 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 anticipated sector rotations that we completed in Q1 and excluding of course the Machine Zone early payoff activities, we're beginning to see early sign of tapering off activities early payoff. When you adjust for those early payoff activities that we encouraged, you will see the normalized level of payoff activities now hovering around $80 million. In how to resist [ph] knowledge in this inside, we now anticipate that early payoff activities for Q3 and Q4 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 force 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 throughout activities expected in Q2 alone.
Although much of this proactive portfolio rotation including a 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 low portfolio and we think that maintaining a highly concentrated low portfolio leads to elevated risks and unnecessary volatility in the portfolio.
As a reminder, predicting early repayment activities remains a very difficult task as we do not control or have inside as to which company or when a company may choose to pay off its loan balances early. In fact, we typically have less than 30 days' notice of visibility so 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 these numbers were to change materially, we will be more than happy to share that updated inside with you on early payoff activities.
Now, let me discuss some of the new commitment and fundings during the quarter, which were very, very strong. Notwithstanding the historical elevated levels of early payoff activities in the past few 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 is resilient as a platform and a strong brand recognition among the top leading venture capital firms in the country.
Those top venture capital firms and their innovative venture growth company clients having trusted Hercules with now nearly $600 million of new origination activities in the just four months of 2018. That is 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 commitment 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 no smaller 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 returned 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 in anywhere between $1.6 billion and now we are revising the number to potentially $1.7 billion in total loan portfolio outstanding by the end of the year.
There are very few BTCs 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 has 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 a $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 will 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 converts all of these commitments into new funded assets. We are quite optimistic about what we are seeing and we are very encouraged by what we are 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 platforms 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 asset based lending or ABL and factoring solution.
We're 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 in the Gibraltar team and their continued success in performance. At this point we're very, very happy on our acquisition, 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 success of our two most recent acquisitions, the Aris [ph] venture portfolio and a 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 involve any element of externalization. As I 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 continual propel the Hercules platform in helping to service the needs of our growing portfolio companies as it goes 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 lifecycle.
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 decisions on very few. We're 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 about what we were seeing as evidenced by a $330 million in growing sign term sheet just in the first few weeks of 2018 - excuse me, 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 buildings from both our current and perspective new portfolio 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 we'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 overall loan portfolio. We're very encouraged by all signs of the business today and have not been this up beat in quite a long time of what I am 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 of new commitments in a single year in 2018. I caution you that the number could rise meaningfully above that if their current pace continues, but at this level potentially achieving $1 billion the run rate that we're on should be accomplished assuming everything continues the way it is.
Given this increased loan demand we're extremely well positioned. We are actively looking at evaluating all elements of our capital structure. We are actively looking to lower our overall costs 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 invested portfolio and meet the needs of many of these high growth innovative backed by the top leading venture capital firms of the country.
We are seeing ordinary 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 these later stage, larger stage companies that we are looking at today.
As I mentioned in an effort to keep up with this unprecedented demand that we're seeing we are also looking to add headcount. We are actively looking to hire across all elements of the company and we are actively looking to hire anywhere between 10 to 15 additional new headcount in the business to help keep us up with this demand. I've to emphasize this strongly, we have never seen this level of demand in the marketplace for quite some time and we are very encouraged by that.
However, we want to make sure that we maintain the rigorous and discipline of our growth the last 14 years and with that we will be actively hiring as we continue to grow the loan portfolio and emphasize a strong credit discipline that we have exhibited in the past.
Notwithstanding all this optimism we are slowly moving away from a 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 rigorous, but we are continuing to now increase our pace of new investment activities and continuing to grab market share and opportunities from 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 in everyone's mind and anxious to learn more about and added to the passage of the conventional legislation on increasing BC leverage from 1 to 1 to 2 to 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 in 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 increased leverage. Albeit still materially lower than REITs, commercial financial companies and MLPs 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 are all very different and we all offer different value prepositions.
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 service the needs of their companies by offering lower costs 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 rate, but with leverage affordability to have an even stronger balance sheet and credit book by offering lower costs financing solutions to these new clients that are not able to be serviced today.
However, Hercules Capital has taken more a 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 had chosen to pursue a wait and see strategy and continuing to simultaneously reach out and engage with our stakeholders and 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 have 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 the rating agencies have been very encouraging and very promising. I will say that I have no complaints on the rating agencies on how they are evaluating the process and how they are taking a very slowly methodical way of doing it. I will encourage the rating agencies to retain an open mind. I will say to also distinguish the different between internally managed BDCs and externally managed BDCs. I am not saying one business model is better than the other, but there are differences that certainly playing into a access in leverage for the benefit of stakeholders and shareholders that should be evaluated.
After all, not all BDCs are created equal, or motivated equal, or perform equally, this appreciation should be considered by all parties forecasting 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 the decision on when is the appropriate time to seek leverage.
With that statement, I like to remind everybody that aside from gaining access to additional higher leverage Hercules today is one of the highest performing ROE BDCs in the marketplace. We already generated ROEs well above 12% at basically slightly half of slightly above half leverage already today.
An incremental increase in leverage does not mean higher risk in the Hercules portfolio. In fact, it means that we're expanding the universe associated needs of higher growth, more mature companies that should and gain access lower costs of capital. Any additional leverage we put on our balance sheet would drive the ROEs even higher today.
Now, moving along into my closing comments. We had a very solid start to Q - to 2018 and certainly Q2 of 2018. With an exceptionally strong first quarter of $0.31 NII and we're off to what appear to be in a tremendously equally strong Q2 2018 coming together nicely, as always 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 as early part of the year. As I have always said, a quarter does not make a trend, but certainly help to 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 2018 to be equally as promising as the first half of 2018. We see additional opportunity to doing even better than we're doing in the first half, however, I want to caution and wait to see that if this robust activities that we're see in the first half of 2018, we will give you the perspective on that at our Q2 earnings call and if this trajectory continues, we will then further enhance our upward trajectory on our forecast for 2018 at our Q2 earnings call.
Now to one and last and very important item, none of this would have been accomplished it's down for our greatest assets. Our wonderful and tremendous team of outstanding employees. What I call our human capital, who have continued to step-up and deliver strong results for our shareholders. I am seeing 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 continues hard work.
I am enormously proud of our ever going team of investment professionals and professionals across all elements of the business and the company, who continue to execute and deliver strong results for our shareholder. They are what makes Hercules Capital successful. And I could say to them thank you very much and thank you for job well done and continue what you are 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 of early payoffs of $243.5 million and regularly scheduled amortization of $29.8 million.
This repayment activity is the highest we've 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 six months of 2017, which was $286 million.
The ability to offset significant repayment activity is attributed 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 yield 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 assuming 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 would 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 non-cash reacceleration 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. A 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 loan to 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 the 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 points or 50 basis points 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 Gerald 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 two positions, which were written off and previously were valued at zero 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 depreciation 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 is 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 a 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 three credit rated one 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 break free as a company's approach to capital raise or critical milestones. Traditionally our portfolio companies will need to raise capital every 9 to 14 months, but it is our expectation that our portfolio companies will migrate to a three rating at some point in their normal lifecycle with Hercules and in the ordinary course of business.
Our credit rating four and five companies, which are our primary area of focus did slightly increase from 4.5% to 5.2% on a costs basis in the first quarter, primarily related to the addition of two 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 costs basis and 0% on a value basis in the first quarter of 2018. This is three consecutive quarters, where non-accruals as a percentage of total investments at costs 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 exempted release 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 2nd, will result in a one-time non-cash charge of approximately $2.4 million in Q2 2018. Subsequent to March 31st, 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 approach and disciplined underwriting standards as well as our access to diversify 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] And our first question comes from the line of John Hecht from Jefferies. Your line is now open.
Afternoon guys, thanks very much for taking my questions. Manuel you seem pretty optimistic at least definitely more optimistic and you are constructive on the business conditions as you have relative to recent quarters. I am wondering what do you think the driver to that is, is it related to tax reform or general macro-economic conditions is this something more specific technology overall?
I think we are seeing - we ourselves are trying to figure it out, I mean, clearly you are seeing a renewed optimism in venture capital dollars with $26 billion invested in Q1 alone, lease are pretty optimistic. Look our outlook and add to that the pretty successful IPOs that have occurred obviously some have a like snap has been a little bit underperforming, but the fact that we're seeing unicorns able to go out and see your share rallying and demand for growth stock in the marketplace serves as a way of encouraging more and more companies to pursue the IPO to round. 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 had some element of this, you are seeing a bit more people want to hire faster, which means they are showing growth, but for me to sit and correlate that the tax code has had a direct cause an effect add to this growth. I am not comfortable doing that or able to do that. But I don't think it's not helping any I think it had some factors in it, but I think venture capital optimism and dollars in IPO, access in M&A and IPOs is really what's driving.
Okay, that's helpful. Second, 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 am not interested in educating my competitors on what we do and why we rotate our certain sectors. I think it's safe to assume that obviously and I want to be clear the 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 make sense to having seek lower costs of financing and continue to pursue their business model. But that's the sector that we decided that I think is well priced and well valued. But I'm not going get into, which sectors we are cycling out of for the purpose of helping our competitors figure that out.
Okay, I can certainly understand that. I appreciate that. Last question is you mentioned specifically just for modeling purposes. I think you gave some outlook for the next two or three quarters of repayment activity or early within this. Can you say that again just to have our model accurate?
Yes, I think, that in Q2 we're probably looking at $100 million to $125 million of early payout activities. What we know that includes - well I won't tell you exact dollars. That a portion of that is embedded in portfolio rotations that's spilled over that we're completing in Q2 that sort of pretty comfortable having that number probably cap out at 125. I think thereafter, we're pretty comfortable saying that we're seeing a regression to the mean and seeing kind of $75 million to $100 million of early payout activities that take place in Q3 and Q4 giving us more optimistic outlook on portfolio growth when we start curtailing back the early payout activities to normalized levels.
Perfect. Appreciate that, thanks very much.
You're welcome.
Our next question comes from the line of Tim Hayes from B. Riley. Your line is now open.
Hey, everyone thanks for taking my questions today. Can you first start Manuel and just give us some inside into the process to attain the third SBIC license and how long that could take once the process commences?
Your guess is guess of mine. We're dealing with the government. So I think to be clear what I said is that we're retiring our first license here in July and will commence the process given our hopefully a relation with the SBA and the great partners that we have the SBA. I'm hopeful the process will take three to six months. I think it will probably end up being more in the six months in the tail.
So that's why I have indicated that I think we'll start seeing economic benefit of 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 three months and probably six months looking at historical levels.
Got it, thanks that's helpful. And then how much of your pipeline today do you think would be SBIC eligible?
Well, the lion 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 are still on research and development, which is one of the criterias.
So overwhelming our portfolio will qualify for SBIC financing. So we've done it before, we've done over $1 billion - I think it's $1.3 billion. And our first two licenses of investment activities with the SBA. And we anticipate similar levels to 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 of kind of left on the table this quarter as a result of the timing mismatch. Or maybe not in earnings peak, but just the kind of the impact that had on the core yields in the quarter?
Yes, the portfolio rotation that we embarked on that took place at the beginning of the quarter probably cause 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 was down around $71 million. You get impute what that income losses at the economics that we have at the 12 something yield and drive it on the NII margin. You can kind of drive what that number equates to.
But when you look at it's about $0.02 to $0.03 in earnings on our portfolio rotation that we did in Q1 that will have a little bit of ripple effect throughout fiscal 2018. 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.
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 the factor that related to the timing of the portfolio rotation and early payout 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 are on the money then 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 helped 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-one-time items?
Pretty strong, I mean, we have good portfolio momentum going on right now. We already 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 to G&A obviously when you do the math the shortfall in Q1 in terms of the funding level will have some little bit of repel in 2018.
But given if you heard what I said at the beginning of the call, the renewed confidence having our loan portfolio end the year about $1.6 billion, $1.7 billion I think that please do the math on a $1.7 billion portfolio for example at the higher end at Q4 you are going to be at a run rate well above our dividend rate.
Okay, thanks for all the - for taking all my questions.
You're welcome.
Our next question comes from the line of Aaron Deer from Sandler O'Neill.
Hey, good afternoon guys. Good afternoon, everyone.
Hey, Aaron, how are you?
I am doing well, how are you?
Fantastic.
Good. I just want to understand a little bit maybe another aspect of this portfolio rotation. Am I correct to understand that the part of this rotation maybe is less sector specific than it is maybe just downsizing some of the outsize positions, which 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 is three companies in total. They are embedded in the portfolio rotation in Q1 and probably two in Q2.
Okay. And then of the loan commitments that were made in the quarter, it looks like the average size of those was around $22 million. What was the largest of the commitments that were made here in the first quarter?
I don't have here in front of me, we are 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 that you can ensure on that and maybe likelihood of any recoveries that we might see later in the year?
I am sorry, can you - what was the part of that question recoveries what?
Any additional color that you can provide on the collateral impairments in the quarter?
It was pretty negligible, but we have collateral impairment in normal course of business that we do. We typically as you know for trucking as we typically will automatically mark down a credit, as or embark beyond a capital raise until such capital raise has been completed. But there wasn't that much of a material markdown in a portfolio related to credit, most of the markdown of the portfolio related to mark to market.
So I think that the markdowns you saw on there, I am already aware of one of those markdowns - actually two of those markdowns have paid off in Q2. And have been fully recovered with a gain.
That's great, okay very good, that's it for me. Thank you.
Thank you.
Our next question comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is now open.
Hey, guys. Can you just clarify something in the press release, there was no non-recurring 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 noticed that we have to get the bondholders it made no sense to have it occur in Q1 because would have happened almost the last day. So mathematically became logical just do it in April 2nd, is where we thought to be.
Got it.,
You see the charge come through on April 2nd in the second quarter.
Got it, okay. And then given the higher growth target to $1.6 billion to $1.7 billion. 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 was 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'm comfortable talking about is that there will be a capital debt raise in the foreseeable future. We did our first $175 million, we want to see how the markets work kind of test the market that was a very successful offering. Frankly pricing a seven year deal 5.25% was very attractive with a three non-call.
And we also access the investment grade market earlier in the year at 4.625% and 5.625% also 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 continuing to also widen our user products whether securitization whether it's going to be a convert or retail a part 25 offering or part 1000 offering. All of around the table and we're accessing most of the facets of liquidity from our well-structured balance sheet.
Final question. Understanding that you're not going to go above one-time to 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 raised equity when it's 0.75 or 0.8 or so. Or 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 the trajectory of our portfolio and the use of the ATM product, I think that that is exactly the right way to looking at it. I think you'll see Hercules normalize leverage probably in the 0.9 to 0.95 level in fiscal 2018. I think that's probably where the comfort zone you will see us operate the business, which we elevated from a historical levels of 0.75 to 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.
Okay, thanks Manuel. That's it from me.
You're welcome.
And our next question comes from the line of Ryan Lynch with KBW. Your line is now open.
Hey, good afternoon guys. First question on prepayment fees were actually pretty low this quarter they look like relative to the extremely high level of prepayment that you actually received. Was this due to kind of pruning your guidance 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 absolutely right, the prepayment activities this quarter were generally subdued by a combination of factors that include us obviously for encouraging pruning. We're not going to hold companies to 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 is a lot less income accreted on any early payout activities or penalties if we 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.
Okay, makes sense. And 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 to - or you guys should to recognize the $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 this investment. It's a pretty large investment now for equity investment. You guys have other ones in the past like Box to held on a for a little while. Do you guys planning on holding on to DocuSign this equity investments for a while and writing out or is this investment you guys are looking to exit over the next coming months or quarters?
So I hope you appreciate my response in this period that I want 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 non-disruptive selling program to liquidate the position.
In the case of DocuSign, we have a 108 day investment banker lockup anyways 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, 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 I think it has a lot more legs for growth associated with it. But we are also now the hedge funds. So we're not - we don't get paid by holding on to long positions as an internally managed BDC. So once we've the threshold, we will liquidate the position.
Okay, make sense. And then final question is on your acquisition of Gibraltar, I know you've talk about in the past the meaningful amount of prepayment income from existing portfolio companies that have had success and go out and refinance with another lender as a lower rate. With the Gibraltar acquisition, do you expect that acquisition to be have a slowdown potentially some of these prepayments because some of those loans or companies could then transaction 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 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 to saw owners of the company. But to answer the latter part of your question is that I can remind everybody, it's barely even 60 days, we just got the thing closed.
So, I think that the relationship is still evolving and developing and it is our intent overtime to introduce perspective candidate companies that are looking for and seeking ABL type lending to then be handed off to this Gibraltar credit team and 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 intent that acquiring the ABL lender, the ABL platform, it will serve as a historical - future mitigate on extending the economic life of our relationship with our companies by holding on to the credit or the company a lot further in its cycle than we other do today because we don't have an ABL product that's really costs effect now that we have Gibraltar we do.
As to Gibraltar itself we are very encourage by the growth in the I think it's 60 days and they are already with our capital behind and as a partner, we're always seen very strong encouraging signs of the Gibraltar platform doing quite well. It is small, but that small means that they will - they can be doubling in size at a much more rapid pace because of their size where they start off at.
We're very encouraged by what we're seeing we just had our first board meeting, we're very encouraged by what's going on in Gibraltar. The team and the platform continue to do very, very well. And I think that they'll probably nearly double from our acquisition point bottom 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 2019.
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.
Okay. Thank you, those are all my questions.
Thank you.
Our next question comes from the line of Casey Alexander from Compass Point. Your line is now open.
Hi, good afternoon. When you said that you would like to trail the leverage ratio up and settle it in at between 0.9 and 0.95, 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 now 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 - there are a lot of issues are not rated by the rating agency so they don't really care. We are rated by the rating agency so we do care. 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 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 are not going to do that for a minimum probably again 60 to 120 days, it could be longer than that until we complete the outreach program and a continued dialogue with the rating agencies that we have already started.
Okay, great. I mean, if the rating agencies draw a line in the sand and just say that's if you ask for additional leverage they are 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 response to hypothetical it's certainly a factor that has to get quantified and evaluated. And I just would I guess respect which I just want to reserve judgment to finish those constructed conversations and continue the outreach program. I don't want to say the line of sand, another line in the sand. I think that it's a continue fruitful outreach program to continue to educate all stakeholders.
Okay. 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.
Okay, alright. And also the previous question about DocuSign, I don't think was answered. Is there $7 million of - as of today of unrealized depreciation versus the first quarter mark or $9 million in the second quarter?
So let me reconcile for you. It's a total of $40 a share. It's approximately $9.1 million. Yes that in Q1 because the S1 was filed, we took a mark to market step up on the fair value and I believe it's $2 million of appreciation was - unrealized appreciation was recorded in Q1 leading out to the IPO. When the IPO begin effective in April, that's should give your delta of another $7.1 million or so.
Okay, got it, terrific. Thank you for taking my questions.
Thank you.
And our next question comes from the line of Henry Coffey from Wedbush. Your line is now open.
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 are seeing a very aggressive tone about what you think is going on in debenture debt market. Have the competitors drop that has there something turned on new that wasn't there six 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 will be a complete miss statement. Clearly the team has done an incredible job, but there are many factors as I weighed in earlier that are impacting that. We are seeing evidence of increased banking regulation taking place where we've seen banks in the first and the second quarter dramatically shift backwards for the competitive offering point of view.
We have seen players who taking capital losses, who didn't know what they were doing in venture lending, taken some hits, which has spook them. We've seen increase in venture capital equity investment activities that's propelling this enthusiasm further. We are seeing increased optimism on liquidity of 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 combination of all of those factors coming together and do I think that the tax reform has had some impact, probably had 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 there are 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 their balance sheet in preparation for guidance what to come.
So, in terms of the likely marks on debt. If there is a lot of positive activity going on in terms of capital raise and expansion that would normally given how you like to kind of play things on the conservative side, that would normally result of a lot of loans being moved down to level three. Are we still sort of - and given that rates are rising. We have those two 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 in 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 at later come back and rust [ph] see on you. So I think as a reminder your more selling question, is that Hercules has a policy unlike I think any other BDC operator that I'm aware of that we will automatically downgrade a loan to level three when it approaches a capital new round of financing.
The company still have plenty of enterprise value, but we've always adopted that approach since the inception of Hercules. 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 is probably more than a dozen companies in the portfolio as we speak of 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 itself with a positive development you will see a significant uptick in the ratings too and you will see a significant reversals of any interim impairment that we have associated with our commitment to the 40 act on fair value accounting and making a mark down.
And I think that I don't lose sleep that we overly conservative marked down the 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 PDUFA date or get a positive read out. I think that will lead to a markup in the portfolio that will occur in Q2 and certainly by early Q3.
Great, thank you very much.
Our next question comes from the line of Robert Dodd from Raymond James.
Hi, guys. So just on the G&A on the comp and benefit side. Obviously potentially considerable portfolio growth. You already mentioned that you're looking to hire 10 to 15 people I would expect that would continue if this kind of portfolio growth continues. So, I mean, what can you - can you give us an indication obviously Q4 was pretty high bonus accruals for the successful year last year obviously a drop this quarter in terms of a comp. What's the ballpark kind of growth we could expect through the course 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 2019 around $13 million to $13.5 million.
Okay.
I think we have run rate right now of about 12 to 12.1 at Q1. So you'll see us over the next three to four quarters migrate another $0.25 million [ph] a quarter gravitating to the $13 million to $13.5 million by Q1 2019. 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 a $800,000 to $900,000 accretive over the next three quarters or $300,000 a quarter, which we now in the year-end.
Got it. And on that kind of more the type of people you're looking for i.e., originators obviously like you are always looking for those these are hard find. Are you looking to have more portfolio manager so to speak stewards of assets they have on the books already, or is it everybody just trying to add more people can do it bringing more big deals to the table, good deals obviously?
Well, look we hire just like we invest. We're very slow, we study the equation, we want to make sure it's a right hire and then we also recognize and we've accepted this as part of the business model that a hire will take us six to nine months of costs 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.
Okay, I appreciate it. Thank you.
And I'm currently seeing 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 March 23rd in Santa Monica, and also participating at the JMP Securities Financial Services Conference in New York City on June 19th. As well as many additional upcoming non-deal road shows 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 to our many expected non-deal road shows 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.