Hercules Capital, Inc. (HTGC) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Hercules Capital Fourth Quarter and Full Year 2017 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference 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 fourth quarter and full year 2017. With us on the call today from Hercules are Manuel Henriquez, Founder, Chairman and CEO; and David Lund, Interim Chief Financial Officer and Gerald Waldt, our Corporate Controller and Interim Chief Accounting Officer. Hercules' fourth quarter and full year 2017 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 delayed between the date of this release and in the confirmation and final audit results. In addition, the statements contained in this release that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including, without limitation, the risks and uncertainties, including the uncertainties surrounding the current market turbulence, and other factors we identify from time-to-time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can be proved 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 for joining us today on our for the Hercules Capital fourth quarter and full year 2017 financial results. We have plenty of great news to share with you today, regarding a strong finish to Q4 2017 and the many great achievements realized during the year as well. However, I want to first start up by acknowledging our greatest assets our wonderful and tremendous team of outstanding employees who continuously step up and deliver exceptionally strong results. I'm enormously proud of our team and their continued execution and delivery of strong financial performance and results for our shareholders. They're what makes Hercules Capital successful. Now let me take a moment to share with you some of our achievements and financial results. I'm once again very pleased and delighted to announce yet another outstanding and very robust fourth quarter performance for Hercules Capital culminating and delivering another record performance on multiple fronts for the full year of 2017 for our shareholders. During the fourth quarter we continued to see material improvements across many of our key credit performance metrics, improved credit outlook as evidenced by our historical and exceptionally low levels of non-accrual loan rates of mere 90 basis points that 0.9 as well as continued overall waiting, improved credit rating and ranking in our - in own investment portfolio overall. In addition, we have successfully managed to maintain a steady core investment yield of 12.5%, while also maintaining a very robust effective yield of 14.2% during the quarter. While seeing a continued healthy transactional pipeline for new deal generation and for financially new funded transactions to complete in the coming quarters. Although competition remains persistent, it is nonetheless changing. As we're seeing a shift to a more aggressive push by commercial venture banks' lending and in some cases completely rational commercial venture bank underwriting which has led to very aggressive underwriting and an attempt to build loan portfolio assets at whatever cost. That said, we're seeing an improving competitive landscape as many of the existing BDCs as well as select new entrants continue to struggle and building deal flow and portfolio growth. Many of whom have highly concentrating non-diverse loan portfolios and rely in inferior underwriting practices to help build their investment portfolios. As a reminder, portfolio diversification is an important cornerstone to prudent portfolio management and mitigating concentration risk. Diversification is paramount to sound portfolio management and a core principle at Hercules Capital is continuously focusing on and maintaining. As evidenced by diversified loan investment portfolio and strong credit performance and outlook over the many years. Venture lending continuous to represent a highly attractive, high yield and desired asset class as evidenced by our above normal levels of early loan pay-offs which exceeded $500 million of loan in 2017. However the asset class is also proven to high variance entry and continues to prove a tough asset class to gain scale and build meaningful, large, diverse loan portfolios. Many of these challenges with our various competitors has caused them to not secure the market share they've attempted to do and also have struggle to build any meaningful position or scale in the business. In doing so, they've managed to build the subscale investor to loan portfolios that eventually will cause problems for them. In an environment where origination activities continues to be challenging for many of our BDC peers, coupled with tightening credit spreads, accelerating margin compression, continued industry-wide increased lows or early pay off activities, Hercules Capital direct venture lending platform continues to prove it's resiliency, strong brand recognition amongst their venture capital partners and innovative growth clients by allowing Hercules to realize excellent fourth quarter and strong finish to 2017. To put this in context and better perspective, let me share with some of hard earned facts of our achievements in 2017. Hercules Capital experienced materially elevated early loan repayments in 2017 of approximately $506 million. In addition, we realized scheduled normal loan principal amortization of approximately $120 million which when added together represents a total of $626 million of loan repayments or nearly 50% of our loan portfolio turned over during the year. And yet, Hercules Capital successfully absorb and grew its investment loan portfolio on a year-over-year basis. This speaks to the two resiliency of our platform and our scale within the market itself. For most companies experiencing a 50% loan portfolio turnover in one-year would have been overwhelming and potentially an insurmountable task to conquer. But Hercules Capital platform accomplished just that. Our team rose to this challenge and successfully originated funded $765 million in new transaction. Fully absorbing the impact of early loan repayments without compromising our credit score, our investment yield and overall credit quality ending the quarter with 12.5% overall core yield. Our focus and commitment to maintaining a solid credit underwriting discipline were also remaining one of the top performing BDCs by continue to execute for our shareholders remains one of our most critical focus, as an institution. As a reminder of our [indiscernible] principle, if we're unable to source high quality new funding opportunities we will prefer to wait out the cycle for an improved market then to chase deals down the balance sheet or the cap structure or materially shift our historical credit underwriting disciplines simply to make a quarterly earnings. History has shown as many BDC's have pursued similar strategies it ultimately has proven to be ineffective. During the fourth quarter, we completed our first strategic initiative by successfully securing and acquiring the high quality venture loan portfolio from Ares Capital for approximately $120 million and $5 million of equity and warranty securities for a total of $125 million. Given success of this acquisition, we expect to continue to evaluate and pursue additional strategic initiatives in 2018 and beyond. As we seek to augment our own origination activities and opportunistically to seek to grow our platform by identifying potential new accretive opportunities to further grow earnings and dividends for the benefit of our shareholders. In addition, during our call today I'll be discussing following select highlights and items. An overview of our strong financial performance and select key achievements during the fourth quarter and the full year 2017. A quick summary of the very impressive finish and activities completed by the venture capital community in 2017 and conclude with a brief outlook for Q1 in the first half of 2018. I will then turn the call over to Gerard, our Senior Controller along with David, our Interim CFO who will follow the more detailed overview of our financial results for the fourth quarter. And then we'll conclude with opening the call for Q&A. Now, let me take a few moments to highlight some of the achievements of fourth quarter as well as the full year. We delivered a record total investment income of $50.2 million for Q4 representing an increase of 6% year-over-year, which resulted in very strong adjusted net investment income of $0.32, when adjusting for the one-time events related to our early and partial loan, bond redemptions of $75 million which we retired in the fourth quarter. On a GAAP basis excluding the impact of this result would have been $0.29 on a GAAP basis, $0.32 in adjusted NII basis by adding back that one-time event. However, as [indiscernible] highlighted during the fourth quarter we completed this partial retirement of $75 million of bonds six and quarter [ph] notes. These does includes two events. It included non-recurring interest expense due to the required announcement of redemption to the bonds of 30 days and double interest cost during that period of time together with the acceleration of the unamortized offering cost representing an aggregate $2.4 million or $0.03 share as a one-time non-recurring expense. This outstanding achievement was made possible by the hard work of our team who delivered an impressive performance in Q4. For example, total new commitments of over $330 million. Gross fundings of over $271 million for net portfolio growth of approximately $116 million. This notwithstanding the fact that we had $124 million of early payoffs during the quarter. In addition to these outstanding achievements, we've also continued to generate solid financial performance for our shareholders. For example, we generated one-year, five-year and seven-year GSRs of 1.8%, 166% and 223% respectively for our shareholders. As a reminder, TSR stands for total shareholder return which includes stock appreciation and dividend distributions. These results especially our five and seven-year results far exceeded many of our BDC previews [ph] by a significant factor. In addition, we generated very strong healthy ROAA during the quarter. We had ROAA of 6.3% and also very impressive and strong ROAE of 12%. We consistently delivered strong results that exceed many of our BDC group peers which is a testimony to the venture lending focus that we operate under as well as testament of our teams ability to select the continuation of strong solid credits that we invest in. We've accomplished - also maintaining our historical credit discipline, maintaining a very strong balance sheet and a high liquid position with approximately $286 million of available liquidity to continue to work, to grow our investment portfolio which are put into work pursuing our slow and steady strategy in 2018. And lastly, regarding our year-over-year results we achieved also very strong records. For 2017, we recorded record total investment income of $191 million, an increase of 9% year-over-year. Also recorded a record NII income derived from $96 million of net investment income representing a 4% year-over-year and excluding one-time events in the prior year related to litigation settlements that we received proceeds from. Record total investment assets also were record at $1.4 billion, an increase of 8% year-over-year and record total debt investment portfolio of $1.42 billion or 4% and culminating in record total assets of $1.65 billion compared to $1.46 billion or 13% on a year-over-year basis. In addition to our record financial performance, we continue to strengthen our balance sheet and liquidity position, while also lowering our overall cash to financing and maintaining our growth target spread allowing our platform to remain highly competitive in this rapidly changing market. In 2017, we successfully raised $230 million at 4.375% in a convertible debt offering. We also raised $150 million in our first ever institutional grade bond offering at 4.625% of notes due on 2022. We also fully redeemed $110 million of our 7%, 2019 notes and partially redeemed the retired $75 million, 6.25% notes. Another quarter achievement was our earnings spillover. We also successfully generated our fourth consecutive year of projected earnings and dividends spillover of approximately $23 million representing $0.28 per share in undistributed taxable income based on the current share cut at year end. This accomplishment of having an earnings spillover affords us the flexibility and ability to consider multiple different options for the benefit of our shareholders as we focus on the continuation of growth of our platform and continue to pursue new opportunities that may make long-term sense at short-term cost without having to comprise a dividend cut. As BDC industry begins to share signs to consolidation scale is becoming paramount especially in direct private lending as it affords many advantages not afforded to smaller subscale platforms especially BDCs that are subscale. As we enter Q1, 2018 we continue to see a very healthy level of new loan demand and activities amongst our current and perspective portfolio companies as demonstrated our total new commitment of over $891 million and over $764 million of gross fundings during the year in 2017. As you can see from our press release as February 20, 2018 we've already secured $255 million of closed and pending financial commitments for the first quarter 2018 and this was the whole entire month still remaining in the quarter. We feel very confident and very assured on ability to continue to execute on behalf of growing our portfolio with the demand of deals that we're seeing in the marketplace and our scale in the market itself. Further evidenced is growing demand is our healthy pipeline of company seeking debt financing, heading into Q1, 2018 with over $1 billion of transactions currently in the pipeline that we're processing and analyzing for potential further investments to make. Now let me take the opportunity to discuss our views of the market and anticipated activities as we enter the first quarter 2018. As we enter the first quarter 2018, we're extremely well positioned having low net average and have a highly liquid balance sheet to originate new investment activities that need to select underwriting [indiscernible]. I expect that Hercules Capital to continue to effective and time proven slow steady strategy of growth which has served us well for over a decade and continue to pursue and evaluate the strategic opportunities to continue to grow portfolio through discipline to remain highly competitive platform for the benefit of our shareholders. Now let me take a moment to outline our expectations for early repayment in Q1 in the first half of 2018. As we saw with early payoffs in the fourth quarter of 2017, we were anticipating higher than normal elevated levels of continued early pay-offs opportunities through at least the first half of 2018 and we're anticipating elevated repayment levels of $125 million to potentially $150 million or higher for the next two quarters of the year. In addition, we're taking the approach as we've done many times in the past to proactively execute some portfolio rotation and pruning of select investments positions within our investment portfolio. These activities alone will further add to anticipated elevated levels of early pay off activities as we conclude of rebalancing our portfolio by mid Q2, 2018. These activities along with the anticipated elevated early levels of pay-offs could actually end up showing early repayment activities to exceed the $150 million or greater from what we're seeing today. However, given the persistent elevated levels of early pay-offs occurring across the industry is becoming impossible to predict any levels of early repayments beyond 30 days. As evidenced for $500 million of early pay off in 2017 and of course the 24% unexpected increase, in early pay off in Q4. In addition to that, we're seeing a shift and a change in the mix of our early pay off clients that they're paying off with older loans paying off rather than younger loans paying off, which means that the impact from income accelerations will be more muted than it would be earlier or younger companies paying off our loans. What that means is that, we do not expect to see a significant increase of velocity of fee income derived from some of these more mature early pay off activities that is not to say that we're not going to get some benefit from this activities, it just will not be on historical higher level because of the older duration of the older loans that we have in our books. As a reminder, predicting early repayments remains a very difficult task as we do not control or have insights as to which company or when a company may choose to pay off its loans. In fact, we typically have less than 30 days' notice or visibility so - significant variability in market conditions. Given the uncertainty surrounding early repayments and anticipated continue industry wide elevated repayment activities, we are now unable or uncomfortable to provide any reliable quarterly forecast has become impossible to predict these level. That said, we do anticipate elevated levels to continue for at least the first half of the year and we're anticipating activities to be at or above $150 million levels loan in Q1 and maybe higher when you include the portfolio rebalancing and rotation that we're effectively underway right now. As I wrap up my prepared remarks, let me share with you some quick updates on key developments from venture capital industry. Venture capital fund raising remained very strong. Venture capital fund raising the leading indicator future VC investments finished 2017 at $37 billion. This level of activity lays out a good foundation for continued investment activities by VCs for at least the first half of 2018 and beyond. Even more for us will be strong with VC investment activities. The venture capitals invested in the fourth quarter of the year and throughout 2017 over $65 billion of activities were invested to over 3,400 new transactions that were completed. This compares in contrast to the $50 billion that were invested in 2016 representing a very healthy increase of 30% year-over-year. But more impressive to that was the flow of capital that these investments went into. Later stage of investment allocations by VCs proceeds the lion share of the allocation representing nearly 60% of the capital investment by VCs went into later stage companies, which I like to remind everybody is in fact Hercules' sweet spot or focus on investment activities. We are very delighted to see those levels of capital investments by VCs into those companies. Liquidity, IPOs, 57 venture capital-backed companies successfully completed their IPO debut in Q4, 2017 exceeding the 2016 38 IPOs. Hercules had three companies complete IPOs in the fourth quarter. ForeScout, Aquantia and Quanterix made their fourth quarter debuts and represented 5% of the aggregate IPO activities in 2017 were Hercules portfolio companies. All three thus far have appreciated nicely from their IPO prices. M&A activities remained very robust. Having said that, in contrary to public perception venture capital is doing just fine. With a solid pace of realized exists from their investments through M&A activities. Since 2010, M&A represented 91% of the exits realized by the venture capital industry. M&A activities continue to be an important and critical part of raising capital and creating the cycle of investment activities for the venture capital community. With the steady and healthy pace transactions during the year amounted to approximately $76 billion of M&A activities for 2017. Hercules had 19% of those M&A companies where Hercules companies represent 3% of the overall M&A activities in the venture capital marketplace. As a recap, we had 5% of the IPO activities taking place for the market and 3% of the M&A activities taking place for the market, were Hercules portfolio companies. In closing, we complete another outstanding quarter with a solid finish to 2017. Despite higher than anticipated early repayment activities which along with scheduled amortization represented over 50% of our loan portfolio turning over yet our team of investment professionals once again successfully rose to the challenge, originated new investment activities to fully absorb and still manage to grow the investment loan portfolio, a testament to the achievement of this organization. We continued to be well positioned overall for growth with over $286 million of available liquidity we have plenty of capital to invest and seeking for the right opportunities to make those investments in. we continue to source and evaluate potential new investment opportunities and deploy capital in the first quarter. As I've indicated earlier, we already have $257 million of term sheets either in-house, close or about to be closed already exceeding our quarterly expectations for Q1. And I again, we still have one more month to go. We've also recently issued a press release earlier this week announcing the redemption of $100 million of our 6.25% 2024 bond expected to be redeemed early in Q2, 2018. As part of this redemption we anticipate to expense unamortized origination issuance cost of approximately $2.5 million or representing $0.03 per share. The partial redemption of $100 million in bonds will equate to approximately $6.6 million and interest expense in savings representing approximately $0.08 per share. With that, I'll turn the call over to Gerard and David to review the fourth quarter. Gentlemen?

Thank you, Manuel. And good afternoon and evenings, ladies and gentlemen. We're pleased to report our fourth quarter results. Today we'd like to focus on the following financial areas that impacted our fourth quarter earnings. Our origination platform the accretive benefit of the Ares venture debt portfolio acquisition. Our income statement performance in Q4, credit outlook and our liquidity. With that, let's turn our attention to the origination platform. Our originations platform continues to grow, we had total investment fundings of $277.4 million in the fourth quarter from a total of 27 portfolio companies offset by $150.7 million of payments from unscheduled early pay-offs and regularly scheduled amortization for net investment portfolio growth of $126.7 million. On a cost basis, our debt investment portfolio balance ended at $1.44 billion at the end of the fourth quarter were up approximately 4% from the beginning of 2017. This is a significant achievement given that we experienced approximately 44% increase in unscheduled early pay-offs and regularly scheduled amortization from 2016 to 2017. Our core yields were 12.5% slightly down from the 12.6% in the previous quarter. However still at the high end of our normalized levels of 11.5% to 12.5%. I now would like to discuss the benefits of the Ares venture debt portfolio we acquired in the quarter. At the beginning of November 2017, we completed the acquisition of the Ares venture debt portfolio which consists of 12 debt positions in 10 portfolio companies and two equity warrant and equity positions respectively for $125.8 million. The portfolio was immediately accretive to us in the fourth quarter. It had a weighted average yield of approximately 11.7%, we recognized total interest income of $2.2 million or $0.03 per share during Q4. As Manuel mentioned, we expect to see to a similar type of benefit in Q1, 2018. With that, I'd like to discuss our income statement performance for the fourth quarter. On a GAAP basis, our net investment income was $24.5 million in the fourth quarter or $0.29 per share which is a slight increase in net investment income of $24 million from the third quarter. On a pro forma adjusted basis, our net investment income close to $26.9 million in the fourth quarter or $0.32 per share. The adjustment is due to the $75 million partial redemption of 6.25% 2024 notes that occurred. Due to the redemption, we had a non-cash charge on the acceleration of $2 million and a 30-day expense overlap of $400,000 or $0.03 NII per share impact. Total investment income was $50.2 million in the fourth quarter, an increase of 9.4% from $45.9 million in the third quarter. The increase in total investment income is due to growth in the investment portfolio which includes the Ares acquisition where we saw an 8.7% increase in our weighted average principal outstanding from the third quarter as well as increase in the amount of fee income from one-time accelerations from early unscheduled pay-offs of $124.2 million during the quarter. NII margin was 48.8% in the fourth quarter which was a decrease from the third quarter of 52.3%. The decrease is due to the previously mentioned $75 million redemption that occurred during the quarter. Adjusted NII margin was 53.6%. Our interest and fee expenses was $13 million in the fourth quarter which was higher than the third quarter due to the non-cash charge and 30-day interest overlap of $2.4 million. Our SG&A increased to $12.6 million in the fourth quarter from $11.4 million driven by an increase in variable compensation due to the achievement of performance and funding objectives. Our net interest margin was $37.2 million in the fourth quarter up from $35.4 million in the third quarter, as a percentage our net interest margin remained flat at 10.4%. Lastly, we have a very well positioned portfolio with highly asset sensitive balance sheet in the event of movements. 96% of our loans are variable interest rate loans with floors [ph] and 100% of our debt outstanding was fixed interest rate debt. A 25 basis point or 50 basis point increase in benchmark interest rates would be accretive to interest income and net investment income by approximately $3.2 million and $6.4 million respectively on an annualized basis or $0.04 and $0.08 respectively of NII per share annually. Now I would like to turn it over to David Lund who will discuss our credit outlook and liquidity.

Thank you Gerald. Our credit and near term outlook remained solid. In the fourth quarter of 2017 our weighted average credit rating improved to 2.17 from 2.24 in the third quarter of 2017. While our non-accruals remained near historic closed and stayed flat at 0.9% as a percentage of the total investment portfolio on a cost basis and 0% on a value basis during the fourth quarter of 2017. Turning to our liquidity position, we finished the end of the fourth quarter with $286 million in available liquidity which was composed of $91 million in cash and $195 million in undrawn availability under our revolving credit facilities which are subject to borrowing base leverage and other restrictions. Our equity ATM program issued approximately 842,000 shares with net proceeds of approximately $10.8 million at an average price to book of 1.29. Also during the quarter, we closed our first investment grade bond offering of $150 million at an interest rate of 4 5/8. We used $75 million of the proceeds to partially redeem our 2024 notes as we've highlighted earlier. As a result of this transaction, our weighted average cost to capital during the quarter was 6.4% and while the future where the average cost of capital is expected to be approximately 5.4%. Our net regulatory leverage excluding SBA debentures as we have an exemptive relief from the SEC was 62% at the end of the fourth quarter versus 49.9% at the end of the third quarter. Our net GAAP leverage which is GAAP leverage less cash was 84.6% in the fourth quarter versus 72.2% at the end of the third quarter. In closing, we're well positioned at the end of the fourth quarter heading into 2018. Our liquidity position also allows us to grow our book strategically and cautiously. Our long-term focused approach and disciplined underwriting standards will enable us to deliver strong results for the foreseeable future. With that report, I know turn the call over to the operator to begin the 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. Sir your line is now open.

First question is little prior to just modeling characteristics for this year. Number one on that is, what should we think about just in terms of G&A trends over the year and second you did mention given uncertainty around prepayments and repayments about the fee income, what does at a decent level kind of base level of fee income that we should consider for the business?

It is so hard to answer the fee income question because it is heavily skewed by the age of the credit paying off. Historically we've seen more of the credits paying off that were more younger in nature thereby driving a 2% prepayment penalty or acceleration provision to call protection trigger. Lately we're seeing a bit more mature companies with call protections of under 1%. And so we don't have a good analog and how to mull it out because we don't know ourselves. So I don't know how to answer your question other than, we don't know.

I guess and framing it then, if you had a similar pace but mature companies would it be half as much fee income, is that one way to frame the other side of it?

Here's a way looking at it, a way to kind of model out prepayment activities is using a ratio of anywhere between 2% to 4% of the loans being repaid. Is probably the range of income acceleration you can expect to derive from those loans. So 2% to 4% of that range i.e. take the 3% if you will and it's probably good monitor or gage the use.

Okay that's helpful. What about G&A, how should we think about that?

As we said in our third quarter earnings call and as we look into 2018 and beyond. I think that SG&A is probably get modeled up by probably. We're expected into go up probably $1 million a quarter or so, but that's something it's somewhere in our control as when we dial it in, but I think that you can expect G&A to probably rise about $1 million a quarter or so. And I think that's where we kind of, we're focusing on right now.

Okay and then final question, I'll get back in the queue. Rates going up, you guys have quantified the benefit to NII as rates moved in 25 basis points. What happens to prepayment or repayment activity as rates go up and how does the rate environment effect your kind of I guess management of the capital structure as well?

Well a lot of questions in there. Yes we're highly asset rate sensitive, we're very happy about that. We have not seen and necessarily correlations with a rising rate environment in any ebbing of early pay off activities as evident with the momentum going into our Q1, right now that we're seeing. As it relates to the impact on the overall portfolio yes it's about $0.03 or $0.04 annually for every $0.25 increases. And I think the last part of your question was, legacy loans versus new refinancing, is that what the second part of your question was?

The last part of question was, how does the rise in your rate environment affect your management to capital structure. Do you migrate any rate exposure in the liability side of the capital structure? Or are you going to keep a consistent mix?

No, what I would tell you is that, I think in a rising rate environment you're going to be looking at your maturity walls and your staggering maturities that you want to make sure you have a well-disciplined cap structure and so as you've seen us do, we've now retired 7% bonds, we've now retired 6.25% bonds and we replaced those with low 4s and mid 4s bond offerings generating savings of 3 in some cases 400 basis points. So there's lot of activities there that we expect to do. So I think the answer to your question, when you take into account the most recent announcement of $100 million of bond redemptions we did, we have another $83 million of legacy bonds that we expect to retire later on in 2018. It could be maybe late Q2 or early Q3 but we're looking to potentially retire those bonds as well and replace them with additional lower cost to financing. So you can expect us to continue this pace of rotating out of more expensive longer term debt and replacing it with more attractive longer duration debt outstanding.

Perfect. Thanks very much guys.

And our next question comes from the line of Jonathan Bock from Wells Fargo. Sir your line is now open.

[Indiscernible] for Jonathan this afternoon. Thanks for taking our questions. Just to start out also with a quick modeling question, do you have an update on your target investment portfolio size?

Well we do, the hesitation in my response is that. I'm peddling a bike with a wind in my face right now with early pay off activities. So our target for yearend remains in the $1.6 billion to $1.7 billion however that is significantly impacted by what is the normalized level of early activities principal repayment that may occur in Q2, Q3, Q4. We just don't have that visibility yet, so we're simply modeling out and expecting that Q3 and Q4 may modulate back down to more normalized levels of $100 million a quarter, but we think Q2 an Q1 could experience early repayment activities above those levels. If we're wrong in that, which hopefully are, that means that the portfolio will have a greater tendency to migrate towards the $1.6 billion or better. But right now I think it's too early in 2018 to have any visibility as to what that portfolio may look like because of the inability to have an inaccurate forecast of portfolio of repayments.

Okay, very well that's helpful. And then sort of you know sort of related, I think you mentioned enacting [ph] sort of portfolio rebalancing by managing portfolio companies to pay off. Can you give more color on that agenda? Is it based on hold sizes or sectors, just any color there what we can expect from that front. And then for that matter, do you see any risk in perhaps alienating VC sponsors?

I don't think we have that problem, we generated $165 million of activities. I think we have the other problem. I think that we need to be more selective than what's going on. We're already are selective enough. I think the answer to your question is, on your first part of your question is, I'm not going to specifically tell you what sectors I'm cycling out of and what companies I'm doing because part of that is proprietary to what we're doing on portfolio management rotation and I don't really feel compelled to provide a roadmap to my competitors on how we do things or we're cycling out of certain industries. However, I think that you'll soon see when we do our Q1 filings that you will see very much what you just asked concentration issue, we're cycling out certain industry verticals, we're cycling out. And we're consciously rotating out of certain positions because we want to be in a slightly different position going into 2018 that we're coming out of it and we're taking the opportunity now to rebalance the portfolio and we've done this from time-to-time to position ourselves at even a stronger credit outlook, which I think will even lead to a better credit performance that we already have already today.

Okay, no that's also very fair and helpful and just one more, if we may. Are there any parameters for the ATM program you described it just in time, is it totally manual or is it, you run it at certain valuations or leverage ratios anything like that?

Sure, no I'm sure you want to me tell you that but I can't. How we manage the ATM is also very specific to Hercules cap structure. I will tell you that it's a factor of looking at where we're in a leverage spectrum, what are our anticipated capital needs, what is the impact on EPS on any equity issuance, as internally managed BDC. We care a lot about earnings and sustainability to dividends which is why we have $0.28 at earnings spillover. We're very, very aligned with our shareholders and we've really no interest in simply raising capital to raise capital that cannot be deployed and that make sense. So I think that, one of the greatest press release valves that you can use, is an equity ATM program to help a myriad rising leverage concerns and then right-size your liability structure by having that ability to raise just in time equity, if and when needed. And it's proven to be an extremely effective tool for us over the years and we're one of the few BDCs that trade above book, if you take advantage of the ATM program.

Very well, that's helpful as well and congratulations on the quarter and year and thank you.

Thank you.

And our next question comes from the line of Ryan Lynch from KBW. Your line is now open.

First question last quarter you spoke about after the Ares portfolio acquisition you talked about, you were evaluating maybe two other potential portfolio acquisitions. Are you guys still reviewing those or if those passed and are you guys currently in the market for taking on whole new portfolio going forward?

I think that we're reviewing multiple different opportunities not just two, right now. The biggest challenge for us in reviewing any portfolio is that, making to the Hercules credit screen is exceptionally difficult. And Ares, aside Ares is a great quality shop and they did a wonderful job with underwriting so we feel comfortable with that. However, as we evaluate many opportunities we're finding ourselves with significant differences in marks then what the seller is holding investments at and as such, I think it's more challenging environment to transact on an acquisition that is, we've been - accretive to ourselves and for our shareholders and what the seller redeemed [ph] so it's not untypical that you can end up chasing two or three different acquisition opportunities and not one of them come to ahead because valuation disparities and discrepancies that are quite vast. I can assure you, one thing I've learned in this process not everybody has a consistent ability to mark to books and sometimes those books are I don't know, how to mark these, they don't make a lot of sense to us.

Okay, well that's good to know I appreciate the conservatism not chasing deals just to grow the portfolio. So following up on John Hecht's question little bit on positioning your balance sheet you guys have done a great job positioning the balance sheet for rising rates, 100-basis point increase is roughly $0.15 per share. One question I did have because maybe I'm not as familiar with it, the VC bad debt versus standard middle market debt. In standard middle market debt as LIBOR rises portion of that, that impact will likely be offset by compressing credit spread so portion of the rising rates is going to be effectively in way by competition, how does that, how do you expect that to play out as in the VC debt world. Do you expect a significant portion or at least a portion of increases in the prime rates to effectively be in a way by lower credit spreads?

So that's a very astute question and I actually applaud you, it's an excellent question you're asking. And the answer is, that there is some impact related to the accretion or benefit of rising rate in our portfolio and so that $0.15 that you referred to, a portion of that will not be realized ultimately because that would assume the portfolio is static and to your question on the specificity related to the asset class of entry lending, unlike lower middle market. The asset class of venture lending is both short-term in nature and amortizing and so what happens is, as the portfolio is naturally amortizing down. The benefit of that accretion of the sustainability of that loan outstanding for longer period of time is somewhat evaporated because of the amortization of paying down the principal. Further augmenting that statement is the fact that, the average duration of venture loans are hovering now under 18-month period of time, so which means that we're not going to be able to derive the full impact and benefit of the rising rate because the expected loan portfolio, the venture loan portfolio will cycle out that evidenced as you saw in the 2017, we had $500 million of early pay off activities that obviously has a drag on the accretive benefit of a rising rate environment because those loans typically do not give the benefit from the rising rate environment, so that $0.15 is certainly the investment medical impact. However I think the practical impact is somewhere to be less than that, what is I don't know because once a portfolio stops any early pay off activities and stabilizes if you will and starts rising above the 22 to 24 months that we saw historically, you would see the benefit of that coming back in higher EPS. Sorry long way to answer but it's a complicated question.

Yes, no that makes sense. And yes, I understand that. Lot of moving pieces, hard to predict but that's helpful color. And then I just had one last question on solar spectrum or Sungevity with the US imposing 30% tariffs or border taxes on imported solar panels. Does that any impact on solar spectrum's business model?

It does and we've had multiple conversations about this. And as much I don't want to make a statement obviously our preference and I can't speak on the behalf company itself. But certainly it's a preference to buy American, installed by Americans, for Americans. So that is our preference. However with an imposed tax even still some of the four manufacture panels are either A; higher energy conversion and B; still slightly cheaper. But the good news is, that the grid is still expensive and people want to go to solar cells. So it does have an impact, it just simply switches vendors. Though different than you thought. I think you saw Whirlpool and Maytag and Samsung arguing about the washing machines. People are still going to be buying all those brands. The solar offers different solutions and different panel manufacturers. So I don't think it's going to curtail the business meaningfully and I don't think it will impact our margins very much. We'll pass on those costs which is ironic to the consumer itself anyways.

Okay, thanks for taking my questions. That's all from me.

And our next question comes from the line of Tim Hayes from B. Riley FBR. Sir your line is now open.

Relating to your commentary on early repayments. You mentioned the mix has shifted to older loans, how have the yields on those loans compared to the portfolio average?

Well as evidenced by you're seeing that the core yield didn't really osculate very much from quarter-to-quarter remained fairly static. So the good news is that, what I will tell you is that some of the more mature loans you've seen paid off it's in a larger loans being paid off in Q4 and certainly in Q1 so far tend to have actually lower yield than the prevailing yields that we're seeing in the market right now. So I don't think you'd see a material change in the overall core yields as you replace those legacy loans with new loans.

Okay, got it. And then can you just give us some color on how core yields were impacted by kind of different moving parts? One being the dilution from the Ares portfolio acquisition, two being kind of spread compression and three being, the impact from higher rates.

Well I mean, you can see for yourself as evidenced I think we're 12, 6 last quarter, we're 12,5 this quarter so it varies cause 10 basis point decrease I'll take it. The answer is that, clearly the Ares portfolio was probably conservatively 70 to 100 basis points lower than what we're seeing in our overall core yields. And I think we indicated when we did the transaction I think we're expecting to be low 11s and it turns out to be more probably more in the effective nature now that's fully digested by us, probably mid to high 11s. So that's kind of the benefit of that, but it's slightly again lower than what we're seeing some of our older transactions in the market. But we're still thinking of high 11s, our earning portfolio which is good and like I said. The evidence is in the numbers. Q3 to Q4 you saw 10 basis points delta and change in the core yield, so nothing materially occurred there. As to the rate impact, it's for us to really put a fine point on quantifying how much of that sustainability of core yields was directly correlated to 25 basis points increase in the index rate. I still have the answer to that, I mean I don't know if you could probably run it, you can try to figure it out, but I don't have the answer for you on this call.

Okay, yes. No worries that's helpful. Another one from one, just given the higher prepayments in the past quarter and your expectation for elevated prepayments this quarter and assuming that all the proceeds in the bonds issuance were issued either redeemed to 2024 notes or fund growth. Do you expect an earnings drag from undeployed capital this upcoming quarter and if so, can you help just kind of quantify that on a per share basis? Is that too tall of an order?

No, I mean it's always asking for guidance. The answer is, we've already gave you an indication. We eliminated or have neutralized a big significant part of exactly your question on earnings drag and by making an announcement of retiring $100 million of bond that has a material and chilling effect on cauterizing that earnings drag that you're referring to and in fact as we said, retiring $100 million bonds will relieve $6.6 million of interest expense from the balance sheet or representing $0.08 so it's highly accretive move to do. Let alone that's an expensive bond that can replace in the market today either probably 200 basis points or 180 basis points lower than that, if not more. So it's the right thing to do, it's right thing for our shareholders and I've no problems with that decision that we made, I think it's a right one and to exactly your point. It certainly alleviates and myriads a lot of that earnings drag that you're referring to.

Okay, thanks for taking my questions.

And our next question comes from Aaron Deer from Sandler O'Neill. Your line is now open.

I'll stick with that same kind of thought on the funding side, given this decision to let go some of your higher costs, but longer durations of funding. How are you thinking about that in terms of - because I know you've always been pretty thoughtful about funding with longer term but now you're shortening the duration on your liabilities in rising rate environment, when you think about if you had to replace those funds with something of similar duration, would you still be getting material cost save in terms of the rate paid?

Yes.

Okay, but with what the new stuff that you've been putting on over the past quarter was, has couple of years shorter duration, right?

We're not done, doing what we're doing. But the answer to your question is that, looking at I'm just trying to find the table we have in our charts. When you look at, how we look at the balance sheet management. Yes one of the critical things we look at, is duration. We have a significant part of our credits that had 2024 maturity and we can actually go out and do five, seven-year and even 10-year bonds right now. What we're looking at and our decisions in the capital raising is getting a better perspective of what are the competitor environments, looking like what are the yields. One of the things that people don't realize and you can easily run this analysis running a CapIQ or FactSet. Is that since inception of Hercules which is now almost 14 years, we maintained solid growth spreads of managing our liability management in our spreads of nearly 700 days, looks like 600 to 700 days [indiscernible] growth spreads between our cost of funds and our investment yields that we're getting in the marketplace. That is been incredibly consistent for nearly 14-year period of time. And so yes, we're looking at the balance sheet but I'm not particularly worried that because everything I'm talking about going onto the market and doing is pushing me for 2023 anyways as oppose to some of the stuff I'm retiring, clinging up is 2024. So the fact that I can go out and say, conservatively 150 and 250 basis points on growth spreads and simply give up six months to maybe a year at most in duration, I'll take all day long.

Okay and then I guess putting the yield side of the equation and you've said that you expect stable core yields going forward. Does that include the expectations few rate hikes this year? Or do you anticipate that's - you're not going to be able to charge past that onto customers, in other words to that the competitive environment has kind of eating up that benefit from higher fed fund rates?

Aaron, you're always so dark. No. our yield will only include, we never include any benefits of rising rates environment in our core yields and anticipated yields. So we don't do that because unless they happen we just don't know, so we don't do that. Secondly, I think as I said in the beginning of the call the competitor environment is changing quite dramatically. And we're beginning to see although in some segments of the market pretty ferociously competitive. In other areas we're realizing nice yields or sustained yields. So I think that right now having a core yield I think the way we generally tend to handicap it between 11.5 and 12.5 I think that our core yield probably will osculate between quarters of anywhere between 20 to 30 basis points in any direction, up or down. And I think that is a normal tolerance that we're fine with seeing it curve that way. And we can actually make that impact less or more by doing exactly what we're doing now, we're doing some portfolio rotations. Noticed somewhere we've done many times in the past, we think that right now is the right time to recycling out of certain credits in certain segments of the market. Where we think that the evaluations are probably too rich and we think the margins and the spreads are probably tight than they should be and others feel differently and we're happy to kind of let go some assets in that area.

Okay and then one last question, you mentioned your expectation or your hope anyway for $1.6 billion to $1.7 billion at the yearend. I missed what that was, what that in total investments for value or was that interest earning investments, what number was that?

Let me just - hold on a second. Give me one second, I'm just going to pull it up for you. So, Aaron we just looked it up it's about $1.65 billion to $1.75 billion in total investments. So you got about $50 million to $75 million in equity and warranty, derivatives in there. So you back that out, you're going be at $1.55 billion to $1.65 billion, I think is with the range on the debt portfolio.

Got it. Perfect. Thanks for taking my questions.

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

Manuel, $1 million per quarter and increased G&A is that basically just going forward retention compensation are you increasing the headcount or just paying people more?

I think it's all the above. I think that we're seeking higher, I think right now no less than 10 to 12 people we're trying to hire. We've in abundance of business, so - in this call we're hiring. So we're hiring because of that we're seeing the need to have retention programs in place. Talent is highly sought after in this marketplace right now. We want to make sure that our people are motivated, we want to make sure that our historical credit performance is sustained and so we care a lot about making sure that the interest of employees and our shareholders remains aligned. So yes part of that is retention driven, part of that is increased compensation and part of that is new hirers, I mean clearly all the above.

Great and then the 600-basis point investment spread that you mentioned earlier. Given everything that's happening, is it fair to assume that's probably going to drift up to the higher end of that level assuming the fed tightens and everything else and it could be exceed 700 basis points.

The answer to that is, I don't know but I suspect the answer is yes. When I ran the analysis, I kind of thought I knew what it was but when I actually ran it and you traditionally exercise the run on FactSet or CapIQ. The fact that is so consistent for the entire formation of Hercules was even surprising to me because I know focused on, but I didn't realize it was that tight. So yes, the 600 to 700-basis point goes spread. It is - I'll say a very, very strong performance and result. And we suspect that that's going to continue and possibly improve, so I don't disagree with your question on improving.

And then final point, is it fair to assume that the increased G&A would basically eat up a lot of this increased investment spread, if something had happened?

No, we don't think that's going to have a significant impact on the overall performance of the credit book.

I'm just saying in terms of EPS.

No, I don't think it will.

Okay.

I think that we have enough margin, enough. I think we have enough business that we feel pretty good about 2018 with what we know right now. Again it's only February, but we're pretty happy with what we're going, what we're seeing in the market. So we're quite encouraged about our b business right now.

Okay, thank you for taking my questions.

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

First just a point of clarification, when you discussed what you thought sort of the range and repayments would be $125 million to $150 million that was for both the first and then a similar amount for the second quarter? Is that correct?

Not quite. What I said was that, early repayment activities from what we know in Q1 are probably going to be in the elevated level of $125 million to $150 million. In addition to that and this was slightly to Q1 and Q2. As we conduct our portfolio rotation that we're speaking to about, it will clearly add to those numbers, but portfolio rotation is a delicate exercise and dance and some may will be realized in Q1 and some may still over to Q2, but notwithstanding that statement the $125 million to $150 million is what would have been the normalized early repayment activities, that we can't control that's being elevated upward. For Q2, our best indications right now was that any evidenced for any of our portfolio companies is that we're only expecting Q2 to be in a neighborhood of $125 million of elevated early pay off today and then taper back down in Q4 and Q3 of $100 million right now. So Q1 is higher spill off of Q4 of 2017 and the new expect is to start crusting back down in Q2 and then stabilize back at $100 million a quarter in Q3 and Q4 for what we know today.

Okay, great. Thank you. Now secondly, I noticed that your Grade 1 investments jumped $155 million quarter-to-quarter to $345 million. I'm assuming that is indicative of indications or what you have as a feeling for early prepayments that elevate something to Grade 1, but is that also in your background been indicative of potential equity gains in the future as well.

Well, Mr. Casey you're doing your homework, scary but the statement is correct. It is an early indicator or leaning indicator of anticipated early pay off activities. So yes, it does serve to that purpose of barometer if you will. As to second part of your question, a change through level one does not necessarily indicate an equity realization event because the loans will always preempt an equity realized gains by generally two to three years. So I wish it was that correlated but on the loan issues you're absolutely correct on your statement that a rising level one, is generally an indicator of expectedly pay off activities.

Okay and then lastly, when you do a transaction like the Ares transaction that's not like a newly originated portfolio that's a seasoned portfolio, so when you do that transaction doesn't that naturally accelerate our expectations of prepayments?

So without getting into how we do things, the answer to that statement is not necessarily correct because our capabilities of underwriting and our knowledge of these companies the saying in that you're missing is that, although practically speaking your comment is correct, that would presume that we didn't have the anticipation of extending more credit to those companies that we bought and increasing the exposure to some of these higher quality credits, higher good investments that exist there.

So what you're saying is that you picked items out of their portfolio that have the potential for add on investments.

Yes.

Okay, great. All right terrific. That's all I have, thank you very much.

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

Is it fair to say given the high level of repayments that you just talked about, the normal amortization and then the rebalancing. Is it fair to say that you'd expect the portfolio to shrink in Q1, maybe Q2 and then expand to get to your target in Q3 and Q4 is that kind of the shape of the year that's realistic right now.

So the answer to your question is, clearly on elevated prepayments activities going on Q1 and some of the rotations that we're doing. For those who know us, we're not going simply go underwrite silly deals to simply backstop that. These little ones making a conscious decision to rotate down the portfolio in certain positions and so yes, the portfolio may have a traction in Q1, but we chose to do that because we think we're going to be at better credit position by letting some of those credit cycle off, so yes I think that you'll see a dip in Q1 and then kind of return to the mean, probably by Q2 and then growth in Q3 and Q4, so that's you're not - directionally your right comment.

Well appreciated. Chasing few hundred basis points in yield in exchange for credit losses lousy trade in shareholders certainly don't want you to do that. So I think it's the right call. Secondarily on G&A, the $1 million quarter are we talking some kind of the Q4 level was obviously a bit elevated because you had bonus accruals from Goodyear etc., it's 12.6, it was 11.4 in Q3. You know which one of those am I supposed to aiming? Well at SG&A are we looking at 50, 54 for the year budget again right now things changed obviously but can you give us kind of a ball park number, is Q3 the right one to go from, is Q4?

I'm sorry, you lost in your question. Which thread [ph] you're asking?

Well for G&A combined, obviously Q4 was $12.6 million, Q3 was $11.4 million right and when you're saying it's going to grow $1 million a quarter what's my starting point? Because Q4 obviously was elevated because of bonus accruals but is that the right run rate to start from or is the lower number of Q3 the right number to start for?

I think if you look at it, it's probably going off of Q4 is beginning to show that, but you're absolutely right. Q4 has slightly elevated because of the origination activities during Q4. So that's probably little more in the inflated side. Honestly I would just take a blend and sharing so, if you look at it I think we ended up in 2017 around $47 million of G&A excluding interest expense with comp and G&A. and I think that, I mean the answer is, it's going to go up by $4 million.

All right, fair enough. Fair enough got it.

That's what we're showing it to go and it is going to be contingent upon obviously some of that, is upon pretty good origination activity, so there is variable comp associated with that. If for some reason something happens we decide to pull back then the comp G&A will probably pull back by $1.5 million, $2 million in Q3 and Q4 but right now, everything that we're doing is modeling out delta or variance of $4 million plus from 2017 to 2018.

Got it. Appreciate that. If I could just kind of following up on all these questions about - I mean, if we look at the fourth quarter last year and there's a lot of things that have changed between then and now, core yield is 12.9, now 12.5 obviously average kind of base rate is up 60 basis points over that period, right so. Seeing but we've seen 40 basis points of core yield compression, to your point and I think you address this on, the question of like, does it transfer in a competitive environment, do you see the benefits? You talked about that in the second quarter you've been ahead of the game and it really gets competed away, right so. The question mark here really is and obviously you're answering all the questions earlier, you don't factor that into your core yield or expectations of 11.5, 12.5, but does the - quite simply - how much does the rate curve actually made out versus the competitive environment?

Clearly the competitive environment is the more prevalent leading indicator of accretion to the portfolio or lack thereof, however to look at apples-to-apples Q4, 2016 to Q4, 2017 there is a material mission in the FactSet and that is that, we took out one of our major competitor which is Ares portfolio, so now have the Ares down in the marketplace among others out there, who have no access to capital these are trading below book, - leverage concentrated loan portfolio. They have been impacted by inability to exit the equity capital markets for growth, that is a more accretive position for us to be assuming and that's why I said, I think that the competitive landscape is improving when it comes to BDC and other market entrants aside from the non-bank players or the bank players have remained very aggressive, but the non-bank players are being capped out financially. And therefore we are able to take advantage of that improving spread market.

Okay, really appreciated. Thanks.

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

In terms of listening to all of this, nobody likes prepayments everybody would like to see growth etc., but when you're talking about core yields holding steady, some positive portfolio rotation building up the quality to business and then your ability to refinance high cost debt. It seems like we're in a pretty good - you'd like to grow, but you're in a pretty good position to earn and cover your dividend.

The earnings spillover $0.20 a share, you got it.

Right.

Which should be well positioned right now and abundance of liquidity.

Yes and so you'd like to grow, but you're not and it's okay. Really two questions. Are there chances for you actually to start thinking seriously about increasing the dividend again? Or you prefer to stay right where you are?

So my response to that question has always been historically, that decision is up to the Board of Directors to conclude, my recommendation as Chairman and the CEO and Founder of the Company is, I like raising dividends when I have even in larger earnings spillover because I'd like to be little conservative and have that extra horsepower into when I needed, when I want to make investments in the business that may actually bring my NII number below my dividend, I can make those investments from long-term capital building of the business and now worrying about the stress or the dividend not being covered. So the answer to that question is, that I think the dividend policy is certainly marriage being revisited probably at the end of Q1 and in earnest in probably end of Q2 at which point, that you could look at a supplement for other dividend increases you may want to look out like for example sprinkling maybe a penny of the special in each one of those or supplemental dividend at that point. But I think in fairness it's a dialog and conversations that the board will engage in probably at the end of the Q1, most likely be a little in Q2.

And the other side of what you're doing and some of the earlier speakers alluded to this, where in an environment where other parties are being more aggressive, valuations are inflating, etc., etc. what sort of impact is that having on the underlying fair value of the portfolio particularly in 2018?

So not to reveal my play book, but to exactly to your question. The fork environment that we're witnessing with every asset is good no matter what the price is, we're more than happy to cycle, rotate out credits that we may think it could be problems later on in the future and because we're in such an exuberant market, we're going to take advantage of that and improve the outlook of portfolio even further by recycling out those credits and replacing them with new credits that we feel even stronger about, so we're taking advantage of that. What's the second part of your question? I'm sorry I forgot.

No I'm just saying that we're in the kind of environment where valuations are increasing, willingness to lend is increasing and doesn't that increase the likelihood of M&A and other positive developments that could help clean up some of your more troubled up assets.

Well the problem, - had a lot of troubled assets I don't, I'm down to 90 basis points in non-accruals and my credit book is probably one of the strongest that's been in the long time, so I've earnings spillover, I have great credit outlook. I have abundance of liquidity. I have portfolio rotation in sustaining my core yield. I'm not sure what more I can do better than what we're doing right now in our organization. So we're actually very happy and delighted where we stand today and we're just taking advantage of just being hyperly [ph] selective on the deals that we're looking at to continue to grow and sustain a high quality portfolio. But as I said in our commentary, if we don't think that the yield spreads that we're seeking can be had, we'll then do what we did in this quarter. Announce that we're going to pay back some bonds and generate $6.6 million of savings which are earning accretive to $0.08 per year and continue to manage the balance sheet effectively. So we're always aligned with our shareholders eventually managed BDC and we don't care about AUM, we care more about sustainability of earnings and dividends and credit quality.

Right and what I'm trying to get at is, don't you think we'll be seeing more positive fair value markets either on the realized or the unrealized line in 2018. I know you don't want to comment that, but it seems like exactly the kind of environment that drives that process.

Yes I mean, if you believe the fed who's been reaffirming that, there's going to be three rate increases in fiscal 2018 because of strong and growing economy, GDP going at 3% and the PPI Index is just rising meaning inflation is coming. I mean everything is boding upward left chart, so yes everything is encouraging.

Great. Thank you.

And I'm seeing no further questions and I would like to turn the call back to management for any closing remarks.

Thank you operator. Thanks everyone for joining us today on the call. As a reminder we will be participating at the RBC Capital Markets Financial Institution Conference on March 7 in Manhattan, in New York City as well as the B. Riley FBR 19th Annual Institutional Conference on May 23 in Santa Monica, California as well as other upcoming events and non-deal roadshows that we'll be conducting in the first quarter. If anybody has an interest in scheduling meeting, please let us know and reach out to either RBC Capital. Michael Hara or B. Riley and FBR to schedule those meetings. I will tell you that we have a very busy schedule with non-deal roadshows coming up, but we'll try to accommodate the entire growing request that we have and we'll be happy to - if we have time to certainly meet with anybody, who'd like to meet with us. So thank you very much for your time and good afternoon, everybody.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. Everyone have a great day.