Hercules Capital, Inc. (HTGC) CEO Manuel Henriquez on Q4 2018 Results - Earnings Call Transcript

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About: Hercules Capital, Inc. (HTGC)
by: SA Transcripts
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Earning Call Audio

Hercules Capital, Inc. (NYSE:HTGC) Q4 2018 Earnings Conference Call February 21, 2019 5:00 PM ET

Company Participants

Michael Hara - Managing Director of Investor Relations and Corporate Communications

Manuel Henriquez - Founder, Chairman and Chief Executive Officer

David Lund - Interim Chief Financial Officer

Conference Call Participants

John Hecht - Jefferies LLC

Timothy Hayes - B. Riley FBR, Inc.

Aaron Dorr - Sandler O'Neill and Partners

Ryan Lynch - Keefe, Bruyette & Woods, Inc.

Casey Alexander - Compass Point Research & Trading, LLC

Christopher Nolan - Ladenburg Thalmann Financial Services Inc.

Henry Coffey - Wedbush Securities Inc.

Robert Dodd - Raymond James Financial

Finian O'Shea - Wells Fargo Securities, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Hercules Capital Q4 and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference will be recorded for replay purposes.

It is now my pleasure to turn the conference over to Michael Hara, Managing Director of Investor Relations. Please proceed, sir.

Michael Hara

Thank you, Hayley. Good afternoon, everyone, and welcome to Hercules conference call for the fourth quarter and full year 2018. With us on the call today from Hercules are Manuel Henriquez, Founder, Chairman and CEO; and David Lund, our Interim Chief Financial Officer. Hercules fourth quarter and full year 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 webpage or by using the telephone number and pass-code 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 then the confirmation of 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 uncertainty surrounding the current market turbulence and other factors we identified 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 upon 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 the 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 CEO.

Manuel Henriquez

Thank you, Michael, and good afternoon, everyone, and thank you for joining us today.

Before we begin today's call, I want to take a brief moment to personally say thank you to David Lund for his sustained dedication, professionalism and commitment to Hercules Capital during both of his tenures at Hercules, first as our CFO post IPO offer in 2005, and most recently, as our Interim CFO, where's he's done an amazing job.

In fact, during his most recent tenure at Hercules Capital, we successfully grew our debt investment portfolio by 33% to a new record high. We raised nearly $900 million of capital including two back-to-back securitization within 90 days of each other. He was instrumental in securing our investment grade rating from DBRS. He helped us to integrate the Ares Capital debt investment portfolio acquisition.

He was also instrumental integrating our first asset-based lending platform, acquisition of Gibraltar Capital, as a wholly-owned operating company of Hercules Capital. Has single handedly overseen the expansion and increase of our bank credit facilities such as the Union Bank, a new accordion that we announced yesterday for $200 million. And lastly, he was responsible for overseeing the accounting and finance team in completing five quarterly earnings calls and SEC filings during his tenure.

As you can see, it's been a very busy 16-month for David while at Hercules Capital. I can't thank him enough for his world-class professionalism, support and mentoring that he has done to our team, and through the growth periods that we've experienced here at Hercules. We will greatly miss David, and we wish him well in his second retirement and time with his wonderful grandchildren. Thank you, David, and thank you for everything you've done with us.

Now, for today's call. I will briefly discuss the following select achievements and highlights. I will provide an overview and highlights of our outstanding financial performance in numerous new records as well as key achievements for the fourth quarter and the full year 2018.

I will also offer some perspective and insight into the very robust venture capital marketplace, as it relates to Q4 2018, including fundraising, new investment activities, and of course, M&A and IPO exits realized by the venture capital community as a whole. I will then provide a brief commentary as to a revised and optimistic, if not, bullish outlook for the first half of 2019, especially as we are more than halfway through the first quarter 2019 with already nearly $350 million in closed or pending new commitments, which if all comes to fruition, puts us on pace to exceed our 2018 accomplishments of $1.2 billion of total commitment.

This of course assumes market conditions remain favorable throughout 2019.

With this renewed optimism leading into Q1 2019, we are now anticipating generating net investment income growth in 2019 that we expect to exceed our existing dividend distribution level of $0.31, which will further bolster our already strong earnings spillover of $0.32 per share, which I will explain later on in our presentation.

Because of this growing expectation of 2019, we now anticipate that this should eventually lead to an increase in our dividend distribution or even potentially additional supplemental dividend distribution in 2019 and beyond. As a reminder, our current dividend is $0.31 per share distribution. Of course, again, this assumes favorable market condition remain and no unexpected U.S. government uncertainties or shutdowns that may impact the outlook for 2019.

I will then turn the call over to David for a more detailed overview of the specific financial results for the quarter and key summary achievements of 2018 financial results, and finally, conclude the call with our Q&A session to address any of your questions.

With that said, let me begin. Once again, I'd like to say thank you for the wonderful and amazing support we continue to receive from the venture capital community and the amazing entrepreneurs who have selected Hercules Capital as one of their trusted strategic financial partner. This has culminated in an outstanding 2018 record of $1.2 billion of total new commitments in the single year.

Because of our increasing brand recognition within the venture capital community, our broad marketplace presence with 6 offices around the country and our platform that has now achieved a scale of optimal performance, the financial capabilities of our platform, I am extremely pleased to report another record-setting year for Hercules Capital on multiple fronts.

In 2018, we achieved the following new records. Total new debt and equity commitments of $1.2 billion representing a 37% increase over 2017; honestly, it's a pretty amazing achievement. We set a new record for total gross fundings of $961 million, representing an increase of 25% over the same period of 2017.

We also established a new record for total debt investment portfolio growth of $313 million during the year. And we also established a new record for total debt investment portfolio, now at $1.73 billion, representing a 22% increase over the same period last year.

Finally, on the balance sheet, we also saw a record for total assets, now standing at $1.94 billion, representing an increase of 17%. Not to be left behind, our income statement performance was equally as strong. We saw numerous achievements on the income statement, many of those outstanding achievements also produced record high new levels. For example, record investment income of $108 million representing a 12% increase over the same period last year.

Total investment income of $208 million representing a 9% year-over-year growth. And lastly, another record for undistributed earnings spillover of $30.7 million or representing approximately $0.32 per share, representing a full quarterly distribution of our current dividend, subject to the final tax true-up of our 2018 tax filings. This places us in great position to continue to grow and have distributions for our shareholders with this very strong earnings spillover.

We also anticipate adding further to our earnings spillover in 2019 as we look to eventually begin to harvest potential unrealized capital gains from our holdings in our portfolio companies. As an example of such harvesting of capital gains or realized gains in our portfolio is DocuSign. DocuSign alone, which has demonstrated tremendous recovery from the fourth quarter till the present period has now stands at about $12 million to $16 million in unrealized gains in the Hercules Capital Holdings or if were harvested today as an example would represent $0.13 to $0.17 in additional earnings spillover that will be in our undistributed earnings, allowing us to have now $0.45 to $0.49 in earnings spillover.

This is a tremendous achievement and allows us to eventually begin further distributions on behalf of our shareholders of this growing undistributed earnings. Clearly, this very strong position coupled with our expectations for 2019 earnings growth will only allow us to look at the dividend increase, which we expect to announce in our first quarter earnings in 2019.

As evidenced by our many 2018 accomplishments, Hercules Capital has not only achieved the necessary scale to succeed, but has clearly established itself as the BDC industry leader in venture lending, as we continue to build our investment portfolio, while many other small-scale BDCs in venture lending are still be unable to do so or have a dangerously high level of concentrated portfolio positions.

I'm happy to report our top-10 holdings represents a less than 27% of our holdings in our portfolio. We have employed our self in a widely distributed investment portfolio and we try to work very diligently to avoid any excessive concentration in our portfolio that we think are quite dangerous as you build out your platform.

As I indicated in my opening remarks, none of these achievements and accomplishments wouldn't have been possible if not for the strong market presence, trusted brand and brand awareness of Hercules Capital platform has established within the venture capital community, as the capital partner of choice of many of the top tier and select leading venture capital firms, and of course, the many innovative entrepreneurs who have made this possible.

Their trust and faith in Hercules Capital are measured not by hyperbole, but by strong performance and realizations in our financial results as you see in our filings.

Thank you for an amazing year and we look forward to repeating many of these achievements in 2019. As we are off to a very strong start of 2019 as evidenced already by our closed or pending signed term sheets pipeline as listed on our earnings release of representing nearly $350 million of flows or pending commitments to be closed already through mid-February. We are off to a tremendous start. And we are very confident and optimistic in the outlook for 2019.

As stated in my many times in the past and more than ever before, scale has become a critical BDC competitive differentiation and an competitive advantage. Hercules has successfully achieved such scale as nearly with nearly $2 billion of total assets and nearly $1 billion in total net assets. We anticipate adding further to our scale as we gradually begin to modestly increase the use of leverage in 2019 and beyond.

We expect to also begin to see rising in our ROAE or return on equity as we continue to modestly add leverage to our portfolio, and continue to prudently manage the growth of our investment portfolio overall. As a reminder, we intend to prudently exercise the use of leverage in 2019. In fact, we are maintaining our target of 1.25 leverage, and gradually thereafter in 2020, begin to increase that leverage, subject of course to market condition remain favorable in 2020 or beyond.

We firmly believe in disciplined growth and remain committed to our G&A of executing to the principle that have led us successfully for the past 15 years. As further evidence of this disciplined approach was another critical and significant milestone achieved in Q4 2018 for Hercules Capital.

As we have previously stated during our Q3 earnings call, we anticipate and now have achieved net investment income or NII of $0.32 per share in Q4 2018 driven no small part by a strong loan portfolio growth of 9% and sustained effective yield and core yield above 13% during the quarter and continues to stay in portfolio growth as you'll see in our press release again with the $350 million of already signed or closed term sheets or commitments, I should say, in the quarter so far for Q1 2019.

As we now enter 2019 with nearly a $1.7 billion debt investment portfolio and growing, we expect to continue to generate ample net investment income or NII to cover, if not, begin to exceed our current dividend declared levels of $0.31 per share. That should lead us to increase our dividend distributions in the first quarter of 2019 and beyond as we report our first quarter earnings call.

With the anticipation of NII beginning to exceed our current dividend distribution, as well as adding to already strong undistributed earnings spillover of $30 million a share pre any additional harvesting of gains, we find ourselves an incredible flexible operating position to make critical long term and short term strategic and tactical decisions to continue to invest in our platform to ensure our sustained growth over a long period of time without having to sacrifice any dividend distributions to our shareholders.

The flexibility afforded to us by having a strong dividend spillover allows us to have this maximum operating leverage to ensure that our shareholders benefit from a continued investment in the platform as we continue to build for the future. All of these outstanding achievements would not have been made possible if not for our most important asset, our human capital, our employees.

Our tremendous team of amazing dedicated employees, now numbering over 70 and growing, have once again proven the importance of teamwork and strong execution and strong work ethics. Thank you all very much for your continued dedication, loyalty and above all professionalism. You guys are amazing. And it would not have been made possible without all your hard work.

As a Founder of Hercules Capital and having the vision nearly 15 years ago to create what we accomplished today is simply amazing. I take immense pride to see the many achievements and new records that we have achieved. I truly cannot underscore the amazing depth and level of talent and discipline and diligence that our origination team, and for that matter, all of our employees have contributed to this great success of this platform for the benefit of our shareholders.

We are deeply grateful for you and we take enormous pride in our human capital and of advancing the shareholder value on your behalf, our shareholders. Thank you all. Now, let me take a few minutes to recap some additional operating accomplishments as well as high level achievements, which David can expand further during his presentation.

Our growth has been accomplished by refusing to yield to market competitive pressures, as we remain steadfast and unwilling to step away from any and all ill-structured or ill-priced transactions. We remain highly selective and judicious in evaluating new investment opportunities. And in fact we refuse and remain steadfast to our historical credit discipline and underwriting discipline that we've adhered to for the past 15 years.

An evidence of our historical and - as evidence of our commitment to this endeavor, it is evidenced in our historical and insignificant low non-accrual loan ratio of nearly 10 basis points, basically 0, which in addition to our massive accomplishment in our non-accruals we also have the proud achievement on a 15-year track record related to our credit underwriting and our credit performance.

Over the last 15 years, our cumulative net credit losses over the entire 15-year period of time represent a mere $40 million, which compared to our total commitments during the same 15-year period of $8.5 billion represents an insignificant amount of credit losses over a span of 15 years. Once again this would not have been achieved if not for the hard work of our team of dedicated and loyal employees. Thank you again for that commitment.

Now, let me say a few words regarding our liquidity as we continue to bolster our liquidity, as you've seen in our various press releases. We remain extremely active in the capital markets. And we remain extremely active and analyzing and evaluating multiple deal flows. We feel very confident of our outlook to 2019.

As we continue to grow our balance sheet, we also remain committed to broadening the multiple sources of available liquidity, while ensuring we maintain a broad source of access to liquidity, while maintaining a very strong balance sheet and highly liquid balance sheet. At the end the year, we finished with $156 million of total liquidity to continue to invest in new investment opportunities.

However, because of our continued growth in our pipeline and opportunities that we see, we actively reenter the market in Q1 with recently announcing the successful close of an additional securitization of $250 million completed in January 2019 at a price of 4.7%, which is also further bolstered by David's hard work recently of also closing an additional $100 million under our MUFG Union Bank credit facilities, which now tops $200 million for additional liquidity to continue to fund our portfolio growth.

Now let me take a few moments to share with you our views relating to our strong portfolio growth and that of the robust venture capital investment activities.

We continue to see and realize very strong loan demand and transactional deal flows, volumes driven in no small part by the impressive and robust performance by the venture capital investment community, which in the fourth quarter alone originated $43 billion in new investment activities, culminating in $130 billion of venture capital investments for the period of 2018. This amount in 2018 of $130 billion is a new record for the venture capital marketplace and the data is based on Dow Jones VentureSource data.

Showing an equally strong performance was the level of new venture capital marketplace fundraising activities, said differently, new funds formed by the venture industry. This is an important leading indicator, because as venture capitals are able to raise new forms of financing or capital, they're able to deploy that capital, eventually in new investment opportunities to which we will take ample advantage of as we're looking at new investment opportunities by the venture capital.

We are very encouraged to see the amount of the new venture capital dollars being raised by new venture investment funds another strongly encouraging sign of the vibrant in the venture capital community.

Realized exits. Venture capitals are quite actively in M&A and less active in the IPO market driven in no smart by the SEC shutdown that actually stymied many companies looking to go public in the fourth quarter and spilling over now to the first quarter.

With the extreme market volatility that we witnessed in Q4 and specifically in December of 2018, the government shutdown among the ongoing geopolitical tension occurring in the fourth quarter all served to have a bit of a stymie effect in the IPO market activities realized in the fourth quarter. However, much of that backlog has spilled over to the first quarter and certainly the second quarter of 2019, which I'll cover here briefly.

With that said, we saw 17 companies complete their successful IPO debuts in the fourth quarter, representing a total of 86 IPO companies in 2018. This still believe or not, represents a very strong showing as compared to the total activities of 60 companies completing their IPO exits in 2017.

However, as an encouraging and growing sign of optimism and improved outlook for 2019, we are certainly seeing a robust and growing pipeline of IPO registrations going on in the marketplace today. We are especially seeing very strong signs of Unicorns and Decacorns that are expected to complete their IPO offerings in 2019.

Adding further to my IPO optimism, our encouraging signs from the new SEC chairman Mr. Jay Clayton on the new changes of allowing private companies seeking IPO exit to begin to explore the potential IPO exit opportunities by holding plans and meeting with investors i.e. testing the waters privately with potential investors, both institutional and accredited before making any public announcements or filings.

As a potential catalyst to increasing the number of IPO offerings we are strongly supportive of this initiative, and we think this is a great change in how the Jobs Act will be put into effect to help encourage the earlier IPO process and accelerate IPO process by many companies.

I would like to caution however that the new proposal by the SEC, which we support strongly is subject to a 60-day public common period after which the SEC will decide whether to move forward or not. We hope that this initiative does move forward and we think we'll have tremendous positive impact in many of our IPO candidate companies today.

Now turning my attention to M&A activities. Unlike the IPO market, M&A market continue to deliver extremely strong and healthy levels of activities with 203 transactions completed in the fourth quarter, representing a total transaction volume of 784 companies in 2018.

Total M&A transaction values paid in 2018 represented nearly $150 billion of transaction, easily surpassing the $89 billion in 2017. With the equity markets now fully recovering and in some cases, surpassing or exceeding the December valuation pullback, we're certainly seeing encouraging signs of stabilizing and we're also seeing the potential IPO activity pipeline picking up. As an example of this growing optimism in the IPO pipeline, in this area alone there are 12 significant companies many of which are Unicorns or Decacorns that are queuing up for their much anticipated IPO offerings.

Ironically, many of those companies happened to be some portfolio companies. For example, existing portfolio companies in IPO - excuse me. Portfolio companies that are either have or expected to be filing for their IPOs soon include such things as Lyft, DoorDash, NextDoor, Palantir, Pinterest and Postmates. These are existing portfolio companies to which we have high expectations in the marketplace when and if they complete their IPO debuts.

Other potential well-known names not in the Hercules Capital portfolio, but certainly waiting to make their IPO debuts on their outright includes such great bellwether names as Uber, Airbnb or Peloton Interactive or Slack to name some of the higher profile names as well, who are expected to make their IPO debuts here shortly.

I'm proud to say that year-to-date Hercules loan portfolio companies have now completed two successful IPOs in the marketplace Stealth Bio Therapeutics and Avedro both just completed their IPO debuts, I believe it was just last week alone.

In addition, Hercules Capital has five existing companies in IPO registrations and expect to see potential liquidities from those registrations later on in 2019, of course, assuming market-ish remain favorable.

We are anticipating a very healthy IPO marketplace and activities in March, in the early part of Q2, 2019 and we expect to start seeing potential harvesting of the - over 131 positions and over 40 equity positions that we have in our portfolio, begin to monetize in 2019.

As always, I'd like to caution that IPO registrations did not necessarily mean they'll complete their IPO transactions. We hope that they do, but we have to leave that in the hands of the market and when the major IPO is debuted. But we are certainly encouraged by what we're seeing.

Now, let me take a brief opportunity to discuss our views of the marketplace and activities as we enter the first quarter 2019. We remain very optimistic about what we're seeing so far in Q1 of 2019. As we continue to be hyperly selective in evaluating and reviewing the potential pipeline that now stands at over $1.5 billion of new investment opportunities that we're evaluating. This is above and beyond the already $345 billion of close or pending to close commitments that we already have in-house today as outlined in our earnings release this afternoon.

Although some of you may be tired of hearing me speak of our long-standing strategy, we remain fully committed to our slow and steady growth strategy that has served us well for over a decade. As we see further signs of an improving competitive market environment, we continue to capitalize on that opportunity, and use our surface strength on our balance sheet and scale to take advantage of those opportunities to continue to grow our portfolio for the benefit of our shareholders.

We remain increasingly optimistic and anticipate continuing our disciplined growth approach in the first part of 2019. However, as we always do, we remain cautious until the second half of 2019 reassess the market as the second half of 2019 and determine of our growth strategies will continue and reassess our growth strategy at that point.

Now for a brief word on expectations related to early loan repayments and payoff activities in Q4 and 2019. We anticipate, early loan activities to remain at the levels currently evidenced in our fourth quarter and slightly begin to increase in the second half of 2019.

As a reminder, in evidence in Q4 2018 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 may choose the purpose loans or be acquired. In fact, we typically have less than 30 day notice of visibility, so certainly see tremendous, significant variability and market conditions. We do our best to try to predict it but it's extremely difficult to do so.

With that said, our outlook for the early loan repayments in 2019 represents an aggregate of $350 billion to $375 billion, which we anticipate both Q1 and Q2 each of 2019 to represent approximately $75 million in early payoffs or $150 million to which the balance of it will back-end weighted in the second half of 2019.

So again to reinforce the statement we expect $75 million of early payoff in Q1, $75 million in payoff in Q2, followed by the balance of $200 million to $225 million of early payoff in the preceding third and fourth quarter.

In closing, we had an outstanding 2018, setting multiple records across the business. In addition, our record debt investment portfolio growth coupled with a combined strong core and effective yield growth, we delivered on what we had indicated in Q3 on net investment income growth and solid reported net investment income of $0.32 a share, exceeding our dividend distribution.

Given our new optimistic outlook for 2019, we anticipate continuing to see NII growth in each of the quarters of 2019 assuming of course market niche remain favorable, along with sustained portfolio growth and yields.

Upon when realizing many of these expectations in 2019 I hope to eventually share with you potentially as early as Q1, the possibility of our future dividend increased distribution levels above $0.31.

I am highly encouraged of what we're now seeing with our portfolio growth. I'm encouraged to seeing by our earnings growth, which should lead to an eventuality of increase in our dividend and of course beginning to also consider supplemental dividends related to our impressively growing earnings spillover.

With that, thank you very much everyone. And David, over to you.

David Lund

Thank you, Manuel. And good afternoon, ladies and gentlemen. Before I address the financial results for the quarter, I would like to say that it has been a pleasure being back here at Hercules for these last 16 months.

We have certainly achieved great many milestones together in such a short period of time and I look forward to watching the continued success of Hercules in the coming years. The professional way the firm operates and conducts business and its outstanding performance is attributed to you, Manuel, and the rest of the management team.

I would especially like to thank the accounting team here at Hercules for the work they have done to support me and my role. This team is a very high-caliber group of people that made my job an easy assignment and I will truly miss working with them.

Now to address our financial results. We are pleased to report our fourth quarter and 2018 year-end results. This afternoon I will focus on the following financial areas: income statement performance, NAV and return performance, credit performance and liquidity.

With that, let's turn our attention to the income statement. On a GAAP basis, our net investment income for the quarter was $30.6 million or $0.32 per share, covering our dividend of $0.31 per share from operations. Total investment income was $56.9 million in the fourth quarter, an increase of 8.2% from $52.6 million in the third quarter. The increase in total investment income is due to the higher interest income of $52.7 million on the larger weighted loan portfolio and the increase in core yield.

Our weighted average principal outstanding increased by $130 million to $1.69 billion from $1.55 billion in the third quarter. Our fee income increased by 19.7% to $4.2 million during the fourth quarter, primarily due to one-time and facility expiration fees.

Our core yields increased 12.9% in the fourth quarter from 12.7% in the prior quarter and our effective yield remained constant at 13.5%. NII margin decreased to 53.8% in the fourth quarter to 55.7% in the third quarter. The decrease in margin is due to high interest rate and fee expense related to our $200 million securitization, borrowings under our credit facilities and higher compensation expense.

Our SG&A increased to $14.4 million in the fourth quarter from $12.3 million in the prior quarter, driven primarily by an increase in variable compensation due to our originators meeting our funding goals for 2018.

We anticipate our operating expenses to be between $14.5 million to $15 million in the first quarter of 2019. During the fourth quarter, primarily December, we all witness a significant volatility in the stock market, which in turn impacted the fair value of our investment portfolio. We had total unrealized losses of $47.1 million comprised of unrealized losses of $14.7 million of our loan portfolio, $30.1 million of our equity portfolio and $2.4 million in our warrant portfolio.

The unrealized losses in our loan portfolio were attributed to collateral-based impairments of $9.1 million primarily related to two loans and $6.6 million due to market yield adjustments.

Our equity and warrant portfolio had an unrealized depreciation of $33.5 million related to mark-to-market adjustments primarily driven by volatility in the market, offset by $1 million of appreciation due to the reversal of unrealized depreciation, primarily related to the liquidation of three equity positions.

Based on analysis we prepared as of the close of market on February, 11, we estimate that the warrant and equity portfolio would have recovered approximately 45% of these unrealized losses due to the general recovery in the market, representing approximately $0.15 per share. In contrast, the S&P technology and biotech indices dropped by approximately 18% and 23% in the fourth quarter and through February 20th have recovered approximately 12% and 18% respectively.

Now I would like to discuss our NAV performance and credit outlook. We saw our NAV decrease by approximately $48.7 million or $0.48 per share to $9.90 per share, principally related to the $47.1 million unrealized losses, I discussed previously.

I would like to emphasize to our investors that this decline is not related to the credit performance of our loan portfolio, which remains very strong, but from the impact of what appears to have been a short pullback in the market.

We saw our return on average equity increased to 13.6% in the fourth quarter, up from 12.7% in the prior quarter. The increase was due to the higher interest income on the higher weighted average portfolio in Q4.

Next I would like to discuss our credit performance for the quarter. As I noted earlier, the credit performance of our loan portfolio remained very strong in the fourth quarter, as demonstrated by the weighted average credit rating of 2.18 as compared to 2.23 in the third quarter.

Our nonaccruals remained at historic lows at just 0.1% as a percentage of our total investment portfolio on a cost basis and 0% on a value basis. This makes six consecutive quarters where nonaccruals as a percentage of total investments at cost were below 1%.

Lastly, I would like to discuss our liquidity. We finished the end of the fourth quarter with $156.2 million in available liquidity, which was comprised of $34.2 million in cash and $122 million of undrawn availability under our revolving credit facilities, which are subject to borrowing base leverage and other restrictions.

During the quarter, we closed our third securitization for $200 million at an interest rate of 4.605% and we use these proceeds to continue to make investments in our portfolio. As a result of this transaction, our weighted average cost of debt decreased to 5.3% at the end of December 2018.

Subsequent to year-end, we announced renewal of our $75 million credit facility with Wells Fargo, that can accordion to $125 million and as we announced yesterday, we entered into a new union credit facility, which includes a syndicate of four new lenders for $200 million that can accordion to $300 million. The new facility has a term of four years, reduced cost of borrowing at LIBOR plus 270 basis points and enhanced terms.

Additionally, in January, we closed our fourth securitization for $250 million at 4.703%, this was partially used to repay $83.5 million of our 2024 notes.

We expect to incur approximately $1.6 million or $0.02 per share of additional fee expense in Q1 2019 related to the early repayment of the 2024 notes. Based on our remarks today and our overall financial performance, we are very pleased with fourth quarter results.

That's in closing. We are well positioned as we head into 2019. Our long-term focused approach and disciplined underwriting standards and access to diversified funding sources will enable us to deliver strong results for the foreseeable future.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from John Hecht of Jefferies. Your line is now open.

John Hecht

Thanks very much, guys. I'm going to ask three questions. First one is just a clarification, David, what was that cost of repayment in the quarter for Q1 that we would just want to one-off it?

David Lund

$1.6 million or about $0.02, less than $0.02 a share.

John Hecht

Okay. The second question, your strong effective yield up 20 basis points quarter-to-quarter. I'm wondering you may - well, you got obviously your - it somewhat must be price maker in the market, it sounds like you've got a lot of looks at different transactions in this and that and the pricings going away. Maybe can you tell us what pricing is coming on in new deals versus some of the repayments that you're seeing and how that might affect yield going forward?

Manuel Henriquez

So, we're actually quite encouraged by what we're seeing in the marketplace. There's been somewhat of a, I'd use the California term, tectonic shift that has taken place in the marketplace through the competitive landscape. I think that's a combination of the prime rate increases that are now beginning to be digested in the market and being reflected in our new deal originations.

So to answer your question is the new deals that we are on-boarding are being onboard at slightly higher rates than the yields that are being paid back. So we're actually going in the right direction if you will.

However, our guidance for yields, we think that the range for the core yields is it going to be 12.5% to 13.5% is I think the new range of core yields that we anticipate in 2019. And I expect that to probably hover in 12.9% to 13.2%, core yields on a blended basis as we continue to digest all the new onboarding of loans that we're seeing in the portfolio and the core yields to gravitate at that level.

The effective yield is materially impacted by early payoff activities. As we saw in the fourth quarter with only $64 million early payoff activities, there have bit of a dampening effect. And if you look at our slide-deck on Page 28 on our website, you'll see that the effective yields have essentially remained flat for last three quarters at 13.5% for the last sequential two quarters in the rears, driven no small part by obviously Q3 and Q4 having sequentially the same early amount of early payoff activities of $64 million or so in that. So that's what we're seeing right now.

John Hecht

Okay. And my final question is you've had several quarters of strong demand, strong commitments. I'm wondering, can you tell us how maybe at the industry level maybe deploying capital is that changing where the industry is a focus and where might you see better opportunity - more opportunity in 2019?

Manuel Henriquez

Well, respectively - I'm not going to answer the second part of the question, because a lot of our competitors seem to be listening into our calls and try to gauge our perspective on what we're doing. So rather have a look at our way as opposed to where we're going.

With that said the California market remains very robust. The life-sciences biotechnology sector remains great. I think we have one of the best teams in the industry as reflected in our credit discipline and underwriting history there. And so, we think the portfolio is going to remain well and balanced at 50% tech, 50% life-sciences at a high level. Of course, below that there is a bunch of sub-sectors behind that, but I'm safe to say that we anticipate portfolio to remain in that cadence 50/50 between those two primary asset classes of life and tech.

John Hecht

Okay. Appreciate that. Congratulations, it's a good quarter and, David, congratulations on two successful tenures with the company.

David Lund

Hey, thank you very much. It really has been a pleasure.

Operator

Thank you. Our next question comes from Tim Hayes of B. Riley FBR. Your line is now open.

Timothy Hayes

Hey, good evening over here on the East Coast, everyone. And thanks for taking my questions. Just the first one, can you just touch on how you intend to approach the dividend over the coming year? Will you try to match it with NII as it grows over the course of the year or do you intend to leave a little bit of cushion to grow into?

Manuel Henriquez

Well, as a reminder, dividend policies are set by our Board of Directors. I have my strong views on what I think that should be. But as a difference to governance, the dividend policy is ultimately set by our Board of Directors. As to your salient point to your question, I always believe that you should leave a little bit of a buffer.

However, the issue with that is on the benefit for our shareholders, the fact that we have a very strong and robust undistributed earnings spillover coupled with the unrealized gains we expect to harvest, I think it will be a combination of both distributing some of our unrealized - again, let me back up. I think it will be a combination of organic NII growth, as well as some distribution from our earnings spillover that will set the new dividend policy going forward.

And because those two items are currently being shown to be very strong leading into 2019, it will be my recommendation to our Directors that we look at a dividends policy that will lead to potentially growth itself in 2019.

Timothy Hayes

Okay, I appreciate the comments there. And just a quick follow-up, the Grade 1 investment balance increased a lot this quarter. Can you just talk about the competition there? How many investments were upgraded and if the two companies that filed for IPOs are a part of that and if this maybe indicates even more exits in the near future?

Manuel Henriquez

Clearly, you hit the nail on the head. The level 1 is a leading indicator of exit activities that we expected on portfolio. I don't recall that we actually disclosed a number of candidates or constituents that are located in our bucket 1 category. So I don't think we were done that publicly. I don't think we disclosed that publicly as a company count.

I will say that the number if you look at an average of our holdings, you can extrapolate that number to be anywhere between 12 to 15 companies. I would tell you at a high level look at it that way. But I'm not aware that we disclosed the components of those buckets.

Timothy Hayes

Okay. Well, I appreciate the color. And thank you for taking my questions.

Manuel Henriquez

You're welcome.

Operator

Thank you. Our next question comes from Aaron Deer of Sandler O'Neill. Your line is now open.

Aaron Dorr

Good afternoon, everyone. I apologize if I missed it in your opening comments, but you've been providing some measure of guidance in terms of your expectation for net portfolio growth in recent quarters. Can you maybe give us a sense of what your expectations are for 2009 given the what sounds like a pretty strong pipeline and your expectation for early payoffs?

Manuel Henriquez

Well, Aaron, with all respect 2009 has already been accomplished. No, Aaron, I knew what you were saying. In 2019, I think that at this level, again it's only February. So I need to preface it with my optimism and it's only February. But with what we're seeing at this level is sustained, I think that a conservative level, you're looking at $300 million to $400 million net portfolio gain. That will be similar to what we achieved in 2018.

As obviously year goes - as the year progresses, we'll, obviously, tighten that number for you, but the fact that is it's still early February. The number that we use around here is about $300 million to $400 million of net growth.

Aaron Dorr

Okay, that's helpful. Thank you. And then, obviously, you guys have some pretty good asset sensitivity structured into the portfolio. I'm curious, is that rate sensitivity symmetrical on the downside as well if we were to start seeing the primary move lower at some point later in the year or next year?

And as you kind of look out prospectively where rates could go over the next year or two, are you making any specific changes to the loans that you're underwriting or how are you structuring the balance sheet that might mitigate any downside if rates do move lower at some point along the way?

Manuel Henriquez

So a very critical part of your question, and I don't have the percent, but I can assure you that it's a policy that we've adopted since 2008. I think most of our deals have LIBOR - sorry prime based floors. So we are protecting the downside of the prime. And the few deals that we do have LIBOR, I'm going to say that probably half of the ones that we have a LIBOR do not have a LIBOR floor on them.

However as a reminder, LIBOR will be going away. But that said, in the interim period before LIBOR does evaporate, I believe 50% of the LIBOR deals we have do not have LIBOR floors on them, but our prime-based deals, which are nearly 87% or 85% of loan book does have a prime-based floor.

Aaron Dorr

Okay. And how far are those floors typically below the all-in rate?

Manuel Henriquez

They are generally at the spot prime-rate.

Aaron Dorr

Okay. And then just one last question on the - just any color obviously credit metrics have been terrific. Just curious about the two loans that generated the $9 million of collateral based permit, if you give any color behind what caused that?

Manuel Henriquez

Sure. One of them was, it's an international company and with the government shutdown was going on there. There's a lot of activities going on in that sector. And because of that development they make - I got to be careful it's public. They basically make a circuit that lights up for use of mobile devices.

The company has demonstrated tremendous technology achievement. It's a very complicated physics issue to scale a circuitry say by 2/2 to 4/4, 8/8. And one of the issues that they are doing right now is actually scaling the circuitry and because of the shutdown that took place and the concerns that we had at the time of the marketplace, we took the prudent approach to do a markdown.

However, we believe, given as company's demonstrated technology advancements and its achievements that has done that the fourth quarter impairment that we took should be reversed or we expect it to be reversed in 2019 with what we are aware of with the company's ongoing dialog and discussions with additional capital and as progress in this technology offering.

But in abundance of prudence and caution, at the time we thought that that was the right thing to do from a fair value point of view and that's what we did. The second one was similar situation - it's in the solar industry. It's had a bit of a bumpy issue, you can imagine with our President and has Jaundice or negative views - excuse me - on the solar industry and versus his carbon fuel vision. We support more of a clean earth. And we think this company will start seeing some growth there.

And then the third one that we had a small impairment is an Asian based, China based exposure that with all the trade tensions going on, we felt that it was prudent to take a small impairment related to an Asian exposure. We only have I believe two companies left in our portfolio that have China exposure to it. As a reminder, we have actively managed down our China exposure.

Aaron Dorr

Okay, great, thank you for taking my questions.

Operator

Thank you. Our next question comes from Ryan Lynch of KBW. Your line is now open.

Ryan Lynch

Hey, good afternoon. First question, I wanted to talk about the slowing of prepayments that we've seen in the second half of 2018 and I know you said you expect them to be fairly light in the first half of 2019. Is there anything we can read into that slowing of prepayments. I would think from a competitive standpoint, if there was fierce competition out there. I think that would - seems logical that would actually increase prepayments.

And then also, I know in the past you've talked about pruning the portfolio, getting out of some weaker credits or some industries you don't want to be in have also driven some higher prepayment. So with the fact that prepayments have slowed in the second half of 2018, you expect them to be fairly slow and in early 2019, is there anything we can read from a competitive standpoint and/or how you guys view the overall quality of your portfolio?

Manuel Henriquez

Well, I can't win with you guys, if it's just slow, you guys give me grief, if it's too much you give me grief. So I'll take it because the dampening of early portfolio repayment really allows us to achieve that optimal performance level of NII growth that we're seeing by having the portfolio repayments tapered off. The first part of your question is a very critical and important one. We have seen a significant shift in the competitive landscape in the marketplace. Scale is a major factor in that issue, those with the balance sheets that we have and the capabilities to do transactions that we do our view to very little players on the marketplace.

The banking regulators who I sent chocolates to every night also have assisted in that level, with many banks being asked to pullback or hold onto higher capital ratios when it comes to cash flow negative term loans or they're having to participate those loans out as one of the larger players tends to do with their transaction.

So we're seeing a material shift in the competitive landscape and not to mention that the smaller players that exist do not have capabilities to underwrite life sciences since they have no expertise in that area or they have an insignificant balance sheet unable to compete in that level. So I'm happy to say that as you saw evidence in Q3 and Q4, the competitive landscape is really manifest itself in our balance sheet on the early repayment activities as you pointed out, so they're directly correlated to each other in that.

So unless there's been some or some unexpected changes in the competitive landscape, going into 2019, we're pretty confident the early repayment activities arguably driven probably most in part by M&A and IPO exits, those are the typical or historical levels of refinancing from a competitor right now. But again as I indicated in my opening remarks, early repayments visibility is only 30 day outlook for us. But with what we expect and what we see in our portfolio and given the landscape, we feel pretty confident that the $75 million for Q1 and Q2 of 2019 are the right levels to model into.

Ryan Lynch

Sure. Okay. And then my follow-up and then, well, I want to talk about the commentary you provided in the press release when you discuss hiring Seth Meyer as the new CFO. Several times in our press release you mentioned him being a key hire as you evaluate new potential strategic growth opportunities.

Can you shed some light on exactly what the strategic growth opportunities, what does that mean, does that mean portfolio acquisitions, does that mean new teams, I mean, new products like Gibraltar all the above, something else. Just any color you can provide on that would be helpful to consider, and you mentioned it several times in the press release.

Manuel Henriquez

Sure. Okay. Seth brings a lot of incredible experience and global talent that as you saw we announced, we had expanded our Board Directors. We now have three women in our Board of Directors absolutely embracing the diversity of Board of Directors, we think every public company should in fact have a nice diversified composition of the Boards.

We've expanded our liquidity in the marketplace. We have a broad distribution of that by signaling growth. We bought in a CFO that has a tremendous experience in capital markets and strategic initiatives, not that David not have any of that, but we're looking to expand on that platform and those capabilities. And Seth brings a very strong bench of experience in that area.

And we felt that again not taking anything away from David, I think David has done a phenomenal job that as you look to kind of wind our universe of opportunities are evaluating. The business model is shifting and the last part of your question is all the above.

We are evaluating actively right now as we speak of the strategic initiatives that you include teams and portfolios that can be acquired as well as bolting on of additional ABL providers and other, which I'm not going to say, other business initiative they'll will be extremely complementary through our underlying portfolio companies that continue to provide strategic capital for them to grow and allow us to continue to service the needs of our constituents portfolio companies and be the capital partner of choice that we are to them. And so I feel very strongly that strategically we should continue to look at new product offerings that complement our existing portfolio pool of companies and service their need.

Ryan Lynch

Okay, thanks. Manuel. I appreciate the time today.

Operator

Thank you. Our next question comes from Casey Alexander of Compass Point. Your line is now open.

Casey Alexander

Hi, good afternoon. I only have one question and that's at several points in the time - in the past, Manuel, Presidential elections, fear of tweets or tariffs, you've taken a more circumspect approach to originations and yet the fourth quarter of 2018 was a period of high volatility both in the credit markets, as well as government shutdown, trade tariffs, trade talks and yet your team seemed to kind of ball straightforward ahead. What allowed you to have a different level of confidence to attack the market despite these external factors that arguably might have caused you to be a little bit more circumspect in the past?

Manuel Henriquez

Well, God if I'm going to say, some of them are going to hate. Our President has been cased a bit, so I think that the threat of a government shutdown has I think hopefully behind us. So that should not occur. I think as returning our attention to an election year, I think that he's not going to do something that will be precipitously dangerous to the economy as he wants to ensure that he shows good performance. But I think at a more macro level, the pullback in competitive landscape and now as a reminder, we had to manage through the one to one or the 200% asset coverage ratio through December.

So we were not able to unlock the growth capabilities until we had that shareholder vote insured, which we did and I have in the operating flexibility of additional leverage, it allows us to take a much more pragmatic view on originations.

And I would also add that with the portfolio grooming and proving that we did in Q1 and Q2, we cycled out of sectors that we had some concerns about. And I think that right now we feel pretty comfortable with the credit book that we have and the underwriting discipline, which has not changed, that our confidence level in the companies that we're evaluating and underwriting today remains quite strong with a competitive environment that is arguably at being right now.

Casey Alexander

Okay, thank you for that color. And just to clarify, my understanding is that you believe that through February 11th I believe the date is you've gotten back about 45% of the market based impairments that you took in the fourth quarter based upon your estimate, is that correct?

Manuel Henriquez

Yes, I mean as an example, we kind of give you some more evidence of what that looks like, here is a tangible example. DocuSign alone was a fair value of $20 million in Q3, had a fair value of $15 million in Q4 and today has approximately $21 million fair value, representing a $5.5 billion recovery on that alone.

And if you go through the list of our public holdings, which you can do as well I can, you can quickly see all the recoveries in the fair value marks that occurred in Q4. So we feel pretty confident with the mark-to-market impairments that - mark-to-market depreciation that are credit-related have and will continue to recover as we progress later on in 2019. So the portfolio in NAV decline with the exception to $9 million was done credit related,

Casey Alexander

Right. Okay, great. Thank you for taking my questions.

Operator

Thank you. Our next question comes from Christopher Nolan of Ladenburg Thalmann. Your line is now open.

Christopher Nolan

Manuel, the 1.25 leverage, is that full regulatory leverage or overall leverage?

Manuel Henriquez

It is GAAP leverage.

Christopher Nolan

Okay. And so before you were saying 0.95 to 1.25, so we're now skewing toward the higher end of that range now?

Manuel Henriquez

Yes we are, because we actually see a very good robust marketplace. And we want to take advantage of that marketplace opportunities before you start seeing any effects that may start spilling into 2019 for the potential election in 2020. And so we rather make sure that we harvest the good investment opportunities that we're seeing today and bolster our earnings growth with the early part of the 2019 which building a portfolio up in the first half will give a much more sustaining earning power in the second half of 2019.

Christopher Nolan

Great. Thank you and congratulations, David. Wish you well going forward.

David Lund

Thank you. Appreciate that.

Operator

Thank you. Our next question comes from Henry Coffey of Wedbush. Your line is now open.

Henry Coffey

Yes, good afternoon everyone and thanks for taking my questions and David, it's been a great experience. I was just delighted when you came back. So when we look at leverage here, you're going to see a lot of growth in 2019, how willing are you going to be to fund all of that growth with just debt because you have the regulatory capacity to do so. And how willing would you be to basically stop any equity issuance and just build out the debt side of your balance sheet?

Manuel Henriquez

As you know we're not going to respond as to when our timely or equity offerings are or may not be. However, I will answer the question that with the added flexibility and the trust that our shareholders have afforded us with the asset coverage ratio down to 150%, we however have chosen to be more prudent and judicious in deploying of that leverage.

So I think that the first half of 2019 will be mostly driven by reliance on our bank lines, which is why David has done a phenomenal job of securing our partnership with Union Bank and the rest of the participating banks in our syndicate.

We expect to begin to draw down our bank partners' capital lines and use that initiative. Obviously, we have to be cognizant as leverage begins to increase that we will have the reliance, the use of the ATM, as a kind of regulator to allow us to ensure that we don't trip over the above and self-impose 1.25 leverage issue. And if and when needed, I think that will use the ATM regulator as a way of kind of ensuring that we stay within the tolerance levels. But from everything that we have, I guess models internally, we don't anticipate leverage levels to eclipse the one 1.25 for a period in 2019 and as such, we will manage to that level.

Henry Coffey

And then distributed net operating income isn't that closer to taxable income? With the…

Manuel Henriquez

Yes, DNOI, DNOI I'm old school. So I've been doing this since 2005, yes DNOI is a much more closer proxy to taxable income than of NII because people forget in the BDC world, distributions to the shareholders on a former dividend are not done in NII, they are legally, technically done on the RIC tax filing, which is emulates the DNOI number that you're - that you're saying. So yes DNOI is much more a closer proximity - a proximeter to that of the distributable taxable income.

Henry Coffey

Well, it doesn't that suggest that there is room for a much more aggressive dividend increase, say for example, maybe it doesn't come in the regular dividend, but it comes in the way of a twice yearly special then probably most of us are anticipating. I mean, I think most people would think you'd bump the dividend a penny or two, but when you look at it from the point of view of DNOI and you look at the likely realized gains, there is room for maybe doesn't have to be the regular dividend, but isn't there room for another $0.05 or $0.10 in specials?

Manuel Henriquez

Henry, you are spot on, there is no question that the undistributed earnings belongs to our shareholders. We use it from time to time to allow us of operating flexibility to invest in the platform and ensure that we don't cut the dividend as we make these strategic both short-term and long-term investments to ensure the platforms growth.

But you're absolutely right, with the anticipation of a lot of these IPO candidate companies that we have in our portfolio, coupled with the potential harvesting of the dock you sign, we will be sitting on literally $0.45 to $0.50 of undistributed earnings, coupled with the NII growth that were dissipating, I don't quiver what you just said.

I think that that is not an unrealistic expectations of seeing organic dividend growth related to NII earnings and DNOI, as well as doing some distribution related to the undistributed earnings as a special or supplemental dividend, I don't think you're incorrect in that statement.

Henry Coffey

Thank you.

Operator

Thank you. Our next question comes from Robert Dodd of Raymond James. Your line is now open.

Robert Dodd

Thank you. Almost going back a little bit to Ryan's question, I mean the press release announcing Seth's hiring talks about strategic acquisition opportunities. Obviously, the earnings release talks about expansion of product offerings and organic growth. So would it be reasonable to conclude that your expectation is maybe that you can add kind of the same way you did with the asset-backed lending that you can add more products through the acquisition channel rather than just organically on the product front?

Manuel Henriquez

That's correct. But our earnings outlook as of right now for 2019 are all embedded in organic. We did not include any of the strategic initiatives that we're evaluating right now. And you're absolutely correct. It's a fusion of both. It's both product and team or company acquisitions as we have done with the Gibraltar platform, which has done phenomenally well for us. So far as an ABL shop, the very strong management team there. So we're very happy with what they're doing and continue to do there.

But there is absolutely no question that we're evaluating actively other strategic opportunities. To speak right now that may or may not fall into place, but I want to give Seth time to also get us feel on the ground. But he will be a spearheading a lot of those efforts as well, has he evaluate the strategic opportunities that will be accretive to our earnings growth.

Robert Dodd

Got it. So just to - on that $300 million to $400 million in net portfolio growth you're talking about, that's all organic, right?

Manuel Henriquez

That is absolutely organic current core Hercules team.

Robert Dodd

Got it, got it. Now, just looking at it from a another close angle, I mean, obviously, in 2018 record new commitment to the $1.2 billion, you expect that to grow I think. The close rate from commitments to funding in 2018 was about 80%. If we go back to 2017, it was 87%. I mean, so obviously, that's just two data points.

Do you expect the close rate to continue to drop and if you do what's kind of the driver because fundings versus commitments I wouldn't expect any change in the ratio that would be competitively driven, it would be something else.

Manuel Henriquez

Well, it is something else and is purposely and consciously being done by us. It has to do with portfolio mix and portfolio diversification. A lot of the components on unfunded commitments tend to - the ratio tends to drop as the increase in life-sciences companies rises, and decreases meaning goes up - the increases going up to the 88.5% when the ratio of new company onboarding is technology driven. So it is absolutely a risk mitigation strategy that we embark on.

It also use competitive advantage in the marketplace, especially given our scale on a balance sheet that if we're comfortable we will do more structured milestone driven transactional business, if we think it's prudent to do that. But it is absolutely an industry mix to respond to your question.

And historically, the funding ratio was 75% to 80%. So we're within our wheelhouse of commitments to funding ratio today.

Robert Dodd

Got it. Thank you.

Operator

Thank you. Our next question comes from Finian O'Shea of Wells Fargo Securities. Your line is now open.

Finian O'Shea

Hi, guys. Thanks for my taking my question and congratulations, David, on your retirement. Just the first one, a bit of housekeeping on the spillover, can you give a breakdown, and forgive me if you already had, on your spillover income versus capital gains? And then if you want to expand, if that plays into your view of maintaining that versus a special or a raise?

Manuel Henriquez

Look, historically, you know that I run a pretty conservative balance sheet and income statement outlook. I like to have a high level of flexibility, modest levels of leverage. And I like to have the ability to have earnings spillover in order to address investments in the platform without sacrificing earnings. And you'll see that throughout our history, where NII may have been below our distributions of dividends, because we had a strong earnings spillover. We have the flexibility to make these short-term and long-term critical investments in the platform to ensure the continuation of growth that we're doing.

I don't think that the next major forklift investment will take place until we approach the $2.3 billion, $2.5 billion loan portfolio is when I expect to make the next major infrastructure investment in the platform. Anything in the interim may be driven by headcount additions, what I mean by that is as we had headcount and those headcounts become accretive, a new hire on the origination team or business development team will typically take anywhere between 9 months to a year-and-a-half before the productive if you will.

And therefore, we're making a G&A investment in those individuals that may pinch our NII earnings, but you will see that 15 months, 12 months later become very accretive on the NII side. And by having that earnings spillover, it affords us that flexibility without having to worry about the dividend rate.

So the next element of your question is that, because of our confidence and our sustained growth in NII, there's no question that an eventual dividend increase will happen. And I think that with growing, harvesting of the realized gains in our portfolio when they become realized, the confidence level of that undistributed earnings now eclipsing, say, $0.50 a share, that will give us a lot more confidence in looking at, bolstering a supplement to twice a year or even once a quarter, if and when that that threshold of undistributed earnings approaches a level that we think merits distribution to our shareholders. And I think we're getting to that level very quickly here.

Finian O'Shea

Makes sense. Thanks. And then just a portfolio strategy question, when you talk about your SaaS business, I think a lot of BDCs are increasing this exposure. What kind of revenue or revenue levels and multiples are you seeing in your segment of the market?

Manuel Henriquez

So the issue of multiple revenues is a bit of an anomaly or a misconception, because although it is a proxy, the better way of looking at SaaS models without getting into competitive issues too much is whether not it's an MRR or ARR. The acronym stands for Monthly Recurring Revenues versus Annual Recurring Revenues.

And not all revenues are the same. So you have to have a deep bench of understanding on SaaS business models, not all SaaS companies are the same. A lot of people are trying to call themselves as SaaS when they're not necessarily SaaS enabled or SaaS-light, if you will. We have a very rigid credit underwriting parameter when it comes to our SaaS businesses. There are plenty of SaaS companies out there and there are plenty of SaaS companies that we pass on.

We are pretty accurately selective in our SaaS models. I'm not going to tell you what our multiples are, because that's a competitive advantage on how we evaluate our LTVs, loan to value, and how we extrapolate the reoccurring revenue models, whether it's monthly or annual, because each one of those models has different multiples and every segment of the industry has different multiples.

So to simply apply a blanket lean statement on multiples, I think would be a horrific mistake to do that. My competitors are doing that. That I welcome them to continue to do that.

Finian O'Shea

Very well. Thank you for taking my question.

Operator

Thank you. Ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the call back over to Manuel for any closing comments.

Manuel Henriquez

Thank you, Hayley, and thanks everybody for joining us today on the call. I will be attending or we will attending, excuse me, the RBC Capital Markets Financial Institutions Conference. I guess, we'll be debuting Seth at that conference, as well as engaging in the various non-deal road-shows throughout month of March and April. We intend to engage in a very active shareholder outreach program throughout the first half of 2019.

And with that, thank you everybody for joining us today. And thank you Michael and everybody. And if you like to join us in an NDR Non-Deal Road-show, please reach out to Michael Hara, our Investor Relations department. With that said, thank you, everybody.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.