SLR Investment Corp. (SLRC) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Keisha and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2019 Solar Capital Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Mr. Michael Gross, Chairman and Chief Executive Officer. You may begin.

Thank you very much and good morning. Welcome to Solar Capital Limited's earnings call for the quarter ended March 31, 2019. I'm joined here today by Rich Peteka, our Chief Financial Officer, and Bruce Spohler, our Chief Operating Officer and Solar Capital Partners Co-Managing Partner. Rich, before you begin, would you please start by covering the webcast and forward-looking statements?

Of course. Thanks, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Limited and that any unauthorized broadcast, in any form, are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replays of this call will be made available later today as disclosed in our earnings press release. I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, financial condition or results and involve a number of risks and uncertainties. Additionally, cash performance is not indicative of future results. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. Solar Capital Limited undertakes no duty to update any forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at 212-993-1670. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. For the first quarter, Solar Capital delivered solid operating results, continuing our long-running history of strong credit quality, net asset value preservation and increased earnings power. At March 31, 2019, Solar Capital's portfolio was 100% performing and our net asset value of $21.93 per share increased by $0.18 per share from the prior quarter, substantially recovering the market sector selloff in the fourth quarter. During the quarter, Solar Capital generated $0.44 per share of net investment income and paid a distribution of $0.41 per share. Fundamental credit performance continues to be strong, supported by stable economic conditions and corporate earnings growth. However, middle market cash flow lending continues to be extremely competitive. We believe it is paramount to maintain our strict discipline in cash flow lending in the face of aggressive structures, tight pricing and elevated risk. Through the continued frothy market conditions in cash flow lending, our specialty finance businesses, Crystal Financial, Nations Equipment Finance and life science lending provided investments with collateral coverage and strong structural protections. These niche businesses have achieved double-digit internal rates of return and continue to originate investments that are highly attractive on an absolute and relative value basis. During the first quarter, on a comprehensive basis, we originated $194 million of new investments, predominantly in specialty finance. Our repayments of $122 million were distributed across our lending strategies, resulting in $72 million of portfolio growth. At March 31, approximately 75% of our comprehensive portfolio was in specialty finance investments, up from 57% at the end of 2017. Not only do our specialty finance loans carry credit protections and yields superior to those available in today's cash flow market, but the higher income we receive from our asset-based loans enables us to be more highly selective in underwriting middle market cash flow transactions. In the face of continued spread compression in cash flow lending, our barbell approach to portfolio construction has allowed Solar Capital to achieve a weighted average comprehensive portfolio yield at fair value of approximately 11% without having to take additional risk by investing in second lien cash flow loans or in more volatile sectors such as cyclicals or energy. On March 31, our net leverage was point 0.63x compared to 0.51x at December 31. We intend to move closer to our target leverage of 0.9 to 1.25x by growing our portfolio as the market opportunity presents itself. Consistent with our long-standing conservative investment approach, we will be prudent with the use of leverage. We view the increased leverage flexibility as simply another investment and risk management tool. Importantly, Solar Capital has sufficient debt capacity today to reach our target leverage without having to raise additional debt or equity. We are pleased with the results of our efforts to develop SLRC into a diversified, niche, specialty finance company and continue to invest in first lien senior secured loans with a current emphasis on specialty finance loans. Now for a quick update on our Investment Adviser. As a reminder, late last year, Solar Capital Partners announced the closing of private credit funds with total equity commitments of over $750 million. Including the new funds' expected leverage, SMAs and our 2 BDCs, the Solar Capital Partners' platform now has approximately $5.5 billion of investable capital. The increased scale across Solar's platform strategically positions SLRC to be a solutions provider with an ability to speak for as much as $200 million in a given transaction, while maintaining high diversified portfolios. This great investment capacity across the platform has already resulted in more investment opportunities for SLRC with enhanced ability to negotiate terms and meet our stringent underwriting criteria. At this time, I'll turn the call back over to Chief Financial Officer, Rich Peteka, to take you through the financial highlights.

Thank you, Michael. Solar Capital Limited's net asset value at March 31, 2019 was $926.7 million or $21.93 per share compared to $919.2 million or $21.75 per share at December 31. At March 31, 2019 Solar Capital's on balance sheet investment portfolio had a fair market value of $1.50 billion in 120 portfolio companies across 28 industries compared to a fair market value of $1.46 billion in 117 portfolio companies across 30 industries at December 31, 2018. At March 31, Solar Capital had $595.8 million of debt outstanding and leverage of 0.63x net debt to equity compared to $476.2 million or 0.51x net debt to equity at December 31, 2018. When considering available capacity from the company's credit facilities, combined with available capital from the non-recourse credit facilities at Crystal and NEF, Solar Capital had approximately $515 million to fund portfolio growth, subject to borrowing base limits. Turning to the P&L. For the 3 months ended March 31, 2019, gross investment income totaled $39.3 million versus $38.2 million for the 3 months ended December 31, 2018. Expenses totaled $20.8 million for the 3 months ended March 31 compared to $19.8 million for the 3 months ended December 31, 2018. Accordingly, the company's net investment income for the 3 months ended March 31, 2019 totaled $18.5 million or $0.44 per average share compared to $18.5 million or $0.44 per average share for the 3 months ended December 31, 2018. Below the line, the company had net realized and unrealized gain for the first quarter totaling $6.4 million versus net realized and unrealized losses of $9.5 million for the fourth quarter 2018. Ultimately, the company had a net increase in net assets resulting from operations of $24.8 million or $0.59 per average share for the 3 months ended March 31, 2019. This compares to an increase of $8.9 million or $0.21 per average share for the 3 months ended December 31, 2018. Finally, our Board of Directors declared a Q2 2019 distribution of $0.41 per share, payable on July 2, 2019, to shareholders of record on June 20, 2019. With that, I'll turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich. Let me turn to the portfolio. Overall, the financial health of our portfolio companies remain sound, reflecting our disciplined underwriting and focus on downside protection. At quarter-end, the weighted average investment risk rating of our portfolio was 1.9 measured at fair market value based on our risk rating scale of 1 to 4 with 1 representing the least amount of risk. As further indication of the strong underlying fundamentals across our portfolio, only 4% of the portfolio at fair value was on watch list and 100% of the portfolio was performing at quarter-end. Our $1.8 billion comprehensive portfolio is highly diversified, encompassing 226 issuers across 93 industries. The average investment per issuer was just under $8 million or 0.4% of the portfolio. Also at quarter-end, over 98% of the portfolio consisted of senior secured loans, comprised of approximately 87.5% first lien secured loans and just over 10% of second-lien in-secured loans. We continue to stay focused on reducing our exposure to second-lien cash flow investments, which carry higher yields, however, also higher risk than our first lien investments. At 3/31, our weighted average yield across the portfolio was just under 11%. Through our niche commercial finance verticals, we have been able to maintain a double-digit asset level yield in spite of the spread compression in the cash flow lending market. We've done this by replacing our second lien cash flow exposure with lower risk but higher return first lien specialty finance investments. Including the activity across our 4 business lines, originations totaled just under $200 million and repayments were $122 million for the quarter, resulting in net portfolio growth of approximately $72 million, all across our ABL strategies. Solar Capital Partners' increased scale provides us with a competitive advantage across all of our investment strategies. For example, our ability to speak for larger life science loans has enhanced our best-in-class life science lending team's sourcing capabilities. Now let me provide an update on each of our 4 investment verticals. First, our cash flow business. As you know, our cash flow business invests in senior secured bonds, which are predominantly first lien and stretch first lien investments to upper middle market sponsor-owned companies with an average EBITDA of approximately $60 million. During the first quarter, we originated senior secured cash flow investments of approximately $8 million in first-lien loans and had repayments of approximately $28 million. The reduction in our cash flow portfolio was the direct result of our decision to not participate in the refinancings of several of our investments due to either pricing or structure degradation which resulted in loan terms that did not meet our investment criteria. Given the continued heated cash flow market conditions, we intentionally allowed our cash flow segment to shrink at this time. At quarter end, our cash flow portfolio was approximately $425 million, representing 24% of our total portfolio. We expect to see continued reduction in our second lien cash flow investments throughout 2019. At quarter-end, the weighted average trailing 12-month revenue and EBITDA of our borrowers in our cash flow segment grew mid-single digits, reflecting continued positive fundamental trends. For the portfolio companies in our cash flow segment, leverage through our investment was just over 5x, and interest coverage stood at 2.25x. In addition, the weighted average yield of the cash flow portfolio was just under 10%, consistent with the prior quarter. Now let me turn to our asset-based lending strategy: Crystal Financial. In the first quarter, we funded just over $70 million of new asset based investments and had repayments of approximately $37 million, resulting in approximately $34 million of net growth. Since December of '17, we have grown this portfolio by 62%. At quarter-end, our asset-based portfolio was approximately $640 million, which represents 36% of our comprehensive portfolio at Solar. The weighted average yield of the asset based portfolio was 11.7%. Our ABL platform paid Solar first quarter dividend of $7.5 million equating to a 10.7% yield on cost, which is consistent with the prior quarter. Now let me turn to NEF, our equipment finance strategy. NEF had new investments of $39 million in the first quarter and had repayments and amortization totaling just over $21 million. At quarter-end, NEF's portfolio was just under $400 million and was comprised of 141 distinct borrowers with an average issuer size of approximately $2.8 million. As a reminder, loans in this - in our NEF business are equipment financings held both directly on Solar's balance sheet as well as in our wholly-owned subsidiary NEF Holdings. Since the end of 2017, NEF's portfolio has grown 26%. 100% of NEF's investments are first lien loans. This portfolio represents 22% of our overall comprehensive portfolio. The weighted average yield for our equipment finance portfolio was just over 10%. Now finally let me provide an update on our life science lending business. Here, our portfolio totaled $293 million at quarter-end, representing a 38% increase from December 2017. The life science portfolio consisted of 20 borrowers with an average investment of just under $15 million. Life science loans represented 16% of our overall comprehensive portfolio. During the quarter, the SCP platform committed $65 million to fund a first lien term loan for GenMark Diagnostics, with Solar, SLRC, committing to $46 million of the loan. Solar's role as the incumbent lender as well as our platform's increased scale enabled us to complete this refinancing as the sole lender. Including the final fee, Solar has earned a 19% gross realized IRR on its collective $35 million prior investment in GenMark. This new first-lien loan carries an all-in yield of just under 10.5% as well as an additional net final fee that will boost the yield further. During the first quarter, the life science team originated just over $75 million of new investments with repayments totaling just over $35 million, resulting in $40 million of portfolio growth. The weighted average yield of our life science portfolio was approximately 11.5%, which excludes additional yield from any success fees and warrants. In conclusion, SLRC's portfolio and activity during the first quarter represents a continuation of our investment themes that have been driving the portfolio over the last several years: a gradual increase in portfolio leverage, reduction of our second lien cash flow loan exposure and increase in our exposure to specialty finance assets where we are able to get both structure and more attractive risk-adjusted returns and, finally, generating net investment income that more than covers our dividends. We have clearly benefited from our diversified origination sources and we'll continue to be disciplined and prudent in deploying our substantial available capital. Longer-term, we believe that the record amount of private equity dry powder sitting on the sidelines, coupled with the retreat of banks from middle market cash flow lending, as well as the approaching refinancing wave of existing middle market companies creates a very attractive supply/demand dynamic for cash flow lending, which will augment our strength in specialty finance verticals. At this time, I'll turn the call back to Michael.

Thank you, Bruce. Our long-term strategy of migrating the portfolio to senior secured cash flow loans and developing diversified specialty finance verticals continue to drive superior results. SLRC is now firmly established as a diversified commercial finance company, providing solutions across the capital structure to middle market businesses. Importantly, our diversified origination and platform scale affords us greater flexibility to allocate capital to the best risk/return opportunities while sticking to our investment discipline across credit cycles. We have been prudent in the face of sustained frothy credit markets and remained disciplined in not compromising credit quality for yield. The result is a solid portfolio, which provides a strong foundation from which to grow. We've always maintained an investment philosophy of assuming that we are late in the credit cycle and believe that in the current environment, it pays to be cautious. It remains to be seen whether the recent volatility in the equity markets will lead to new attractive investment opportunities. But we believe our differentiated origination platform and diversified portfolio position us well to navigate in any environment. If the credit cycle does shift, we believe our history of conservatism will enable us to outperform our peer group. At 0.63x net debt to equity, we have leverage capacity and the accompanying substantial dry powder to deploy via our differentiated investment verticals. We believe Solar Capital has a clear path to a run rate quarterly net investment income per share at target leverage in the low 50s. As our earnings increase in a sustainable basis, our Board of Directors will evaluate further increasing our distribution to shareholders. At 11'o clock this morning, we'll be hosting an earnings call for the first quarter results of Solar Senior Capital. Our ability to provide traditional middle market senior secured financing through this vehicle continuous to enhance our origination team's ability to meet our clients' capital needs, and we continue to see the benefits of this value proposition in Solar Capital's deal flow. We thank you very much for your time this morning. Operator, could you please open the line for questions?

[Operator Instructions]. And our first question comes from Robert Dodd.

On the dividend income side, obviously, that ticked up from the fourth quarter and looks like there was $1.2 million, $1.3 million of that that didn't come from Crystal or NEF. Can you give any more color on - and I've looked at the footnote, so that's kind of hard to parse exactly. What's the source of that $1.2 million? And do you expect it to - what's the sustainability of that level?

Sure, great question. Yes, we have an aircraft portfolio that we've owned for a number of years and have been blessed with periodically getting extensions on those leases. And as that happens, we will dividend out some income, and that happened in Q4 and Q1. So I would say that there was more income to be dividended out of that portfolio, but unlike Crystal and NEF, it's not going to be on a steady consistent basis. It's going to be a little bit more episodic as we modify underlying leases on the aircraft.

Got it, got it. Thank you. And then the other one, kind of the big picture, on the mix of the portfolio - and if I look at the yield since - focus on credit quality first, but I don't particularly have any worries about that. And so, on the yield side, if we look at - on the Crystal and NEF portfolios, the weighted average yields look like they dropped 60 to 80 basis points from Q4 to Q1. I mean, can you give any more color? I mean, obviously, there's - you've got deployments. Is it market price competition for those kind of loans? Or is it a conscious decision on your part to maybe focus on a slightly different kind of borrower that's resulting in that compression? And where do you think you are in terms of the mix there?

Sure. As you know, from our comments over the last few quarters, we've really increased the scale of the platform and have substantial un-invested capital and find very attractive opportunities from a risk adjusted return basis, across our specialty finance verticals. So we have given the direction to our various teams to not necessarily abandon their search for optimum yields, but to expand their market set so that they are looking at some very attractive relative returns but taking a little bit less risk to expand their portfolios. And so we are seeing some spread compression, but it's really because the team is expanding the marketplace, be it in life sciences, be it in NEF, be it in Crystal as well as their core investments that offer a little bit higher yielding. So it's not a trend or driven by market dynamic. It's more driven by a broader opportunity set.

Got it, got it. And kind of the follow-on to that - obviously, on life sciences, where you expanded capacity with the 30% bucket moving as you grow assets, when - you mentioned GenMark Diagnostics, it has a 10.5% yield. Obviously, you can do more public companies now in non-qualified asset, where you've got more room. When I look at the weighted yields on the life sciences portfolio by now 11.5%, but GenMark at 10.5%, if we see you utilize more of the non-qualified to maybe do more public companies, would you expect - would it be fair to say that that yield should probably be coming down? But again, maybe - maybe an attractive risk return, but just the low yield itself...

Sure. I think the thing to note in life science, in particular, and this is also the case in both Crystal and NEF. These are all short duration asset class and I think we've refinanced GenMark 3 times already and the team has only been here 5 years. So if you look at the 10.5% stated yield, that excludes, as I mentioned, any success fees. And if I look at the expected IRR given the shorter duration, we love to seeing GenMark to maturity, but I'll be surprised if we own it more than 18 to 24 months. So I think the realized returns will be slightly less, but still will be elevated relative to that 10.5%. We would expect 12% to 13% typically as a underwriting case, and sometimes, as you know, we see 15% to 17%, depending on warrants and success fees. It'll be a little less return but not as dramatic as 100 basis points that you see on face of 10.5% versus the 11.5% portfolio.

[Operator Instructions]. And our next question comes from Mickey Schleien with Ladenburg.

Hey, good morning. I'd like to start by asking about how would you envision your net interest margin trends if the economy were to slow down when we think about the portfolio structure versus the potential for LIBOR to decline.

Well, if the economy slows down, we would generally expect spreads to widen really, and probably with the exception of life science, to that kind of margin to [indiscernible] but certainly in Crystal, in equipment leasing, in cash flow lending, we would actually expect spreads to widen in a slowing economy and therefore our interest margin to increase.

Okay, that's helpful. And apart from the cash flow business, how would you expect demand for capital in your other segments to develop in a slowdown? And how would you expect your credit metrics to develop?

So I think to your point, I think if we were in a slowing economy, generally speaking, you'd see new LBO formation dry up and slow down so you can see new platform builds change. But what won't change is the need to refinance. Bruce mentioned earlier in his comments that there is a huge refinancing where those loans are still up to get refinanced, and those with dry powder will get to take advantage of doing so in a better pricing environment. From Crystal's perspective, which are not just ABL, we would expect that in a slowing economy, there would be a much greater need for that capital as companies either run into roadblocks in terms of performance or run into refinancing issues at the wrong time. And so that portfolio, for us, has grown nicely in the face of a very benign credit environment. But we could easily see Crystal's business double in size in a more difficult economy.

Thank you for that.

And I think...

I'm sorry.

I think our equipment finance business would slow a little bit because they are funding a lot of capital expenditure projects by nature. But I think that it's an extremely diversified portfolio, with a $400 million portfolio of $2.8 million average loans. So it would take a lot for that - and a fair bit of time for that to shrink. And then I think life sciences, as Michael mentioned, beats to its own drum and is really funding companies that have been developing drugs and medical devices for 10 or 15 years, and that's not going to stop just because of what's going on in the economy. They're generally fully funded business plans.

That's helpful. Thank you, Bruce. If I could switch gears, you have HIS and PPT, which are both in the healthcare sector marked in somewhat distressed levels. Does that reflect some sort of trend developing in the sector? Or is that just due to something happening at those two companies themselves?

Sure. Definitely, they are company-specific. PPT is a physical therapy business. Phenomenal business, dominant market position in the New York metropolitan area, great market, having just had knee replacement surgery myself. But what we're finding is that sometimes in these healthcare roll-ups, be it anesthesia, physical therapy, et cetera, there's a lot of integration coming together, getting on the same systems, getting collections down, so operational issues rather than revenue issues. And so very company specific. There is no broad healthcare trend as we look across our healthcare portfolio and our life science portfolio.

Okay. And if I may, just a couple more questions on gauging risk. I think you provided the average EBITDA of the borrowers in your cash flow business. But can you give a sense of how big the borrowers are in the ABL and equipment financing segments, and perhaps since those are more-asset based, the LTV of those loans?

Yes. So our ABL business on Crystal side, as you know, are equally upper-end and mid-market companies. Many of them do have substantial EBITDA, but our underwriting thesis, as you know, is looking to assets as our primary source of payment rather than EBITDA. But they have substantial EBITDA. Average EBITDA there will be closer to $40 million, but asset basis, that will result in, as you think of a balance sheet, a company size of analogous to the $50 million, $60 million EBITDA in our cash flow segment. So Crystal is close to the same size from an enterprise value perspective through their assets. And as we mentioned, as we are continuing to scale up our capital base, our other verticals, particularly Crystal and our life science team, are going at much larger borrowers. So life sciences, we have a number of borrowers with $1 billion public market cap, which I would argue is larger than many of our cash flow enterprise values at $60 million average EBITDA. So the size is increasing across all verticals. I think the exception is clearly NEF, where we're really lending to small companies against their mission critical equipment.

And Bruce, in terms of life sciences, I think you mentioned in your prepared remarks that these are typically fully funded businesses. So how should we think about risk in that portfolio? If it's not cash burn, is it more regulatory risk or something else we should consider?

Sure. I think that, just to refresh for everybody's benefit on the call, Mickey, the team that you know, joined us in 2014, has been doing this for 18, 19 years going back to when they founded the business at GE Capital. Over that track record of 18, 19 years, they have invested over $3 billion and have never had a payment default, never mind a loss. So there is an incredibly longstanding track record across a highly diversified investment portfolio throughout the cycles. And I think the - you hit the nail on the head. The key here is that we're - we, unlike others who might invest earlier and take a little bit more equity risk when companies are going through clinical trials or Phase I, we are a late-stage lender. So there are companies, which is often unheard of in venture lending, often have revenues and many times even have gross profit. They don't have positive EBITDA because they are still investing in the business to get to that cash flow break-even at which time the companies will generally be sold by the VC community to either large strategics or into the public market. So the risk historically really has been making sure that you're late stage, which the team obviously is very focused on following these companies for 10, 12, 15 years before we'll make our loan, as well as making sure, to your point, that they do have access to capital to fund the burn until they get to cash flow break-even, making sure we have real teeth in the documents in the form of liquidity covenants, in the form of milestones, either revenues or regulatory approvals. So our risk is really not regulatory because we're lending against portfolios of devices or drugs. This is different from say a drug royalty business, where you hive off one specific drug and we'll lend against that expected, projected future revenue stream. We have a corporate loan against every asset, all of the IP, all of the cash, and we make sure that there is a portfolio of drugs and devices so that no one drug or device is going to make or break the company.

That's really helpful, Bruce. Those are all my questions, and I appreciate your time today.

[Operator Instructions]. And our next question comes from [indiscernible].

Hi, good morning, guys. Thanks for taking my questions. You guys have always been really conservative lenders, but some certain crack showing in credit, specifically in the broadly syndicated market in a lot of those trapped doors increasingly making their way more into the core middle market. Just wondering if you're shifting your underwriting, even more so, to be even more conservative in the current environment and where the credit cycle is than you have historically.

I think we clearly are cash flow lending, which is where we've seen structures being compromised to the point that there are many deals we just don't do because of the structures. And when we talk about funds to be active in the cash flow lending, but we're doing it by moving to less levered companies. Over at Solar Senior, our average leverage is about 4.5x, and we're doing that with covenants, so the conservative shows through really in the asset mix. As you know, we are - we're yet a net decliner in cash flow lending at Solar and that's primarily because we're walking away from situations both new and refinancings where we feel structures are not appropriate for the risk.

Got it. And sticking with that, Michael, would you say that - I know you guys mentioned in your prepared remarks that you didn't participate in certain refinancings. Are those refinancings predominantly being done by private debt funds or other BDCs?

Both. I mean, both. The answer is both. I think the - I think we're seeing a lot of it in the private debt funds, frankly. I think one of the issues we're all encountering and we're hopeful that it's for a period of time this has been [indiscernible] record amounts of capital raised in private credit funds, and the funds really all have one strategy, that's capital lending and unfortunately, the vast majority of them have very limited investment periods of typically 3 years. And so you're seeing of a lot of capital having to be deployed in a short period of time, and that frankly was putting the stress on the system in terms of compromising on structure and risk. But we're hopeful that at some point it'll go down.

But remember, this is against the backdrop of strong fundamentals. As we took you through, we have very good fundamentals across our cash flow portfolio at the operating level in terms of revenue growth, EBITDA growth. So as you know, covenants only matter when they matter. We assume that they're going to matter at some point in the next couple of years and so we've shied away from all of the covenant-light type transactions. But today, most people are facing very comfortable tailwinds and are benefiting from a fairly benign environment, and we're just not willing to bet on that long-term.

Got it. Appreciate the detail there. And with continued stress in retail, should we expect that potentially Crystal and ABL could be the biggest driver of portfolio growth through the remainder of the year for you?

Again, it's - Crystal has been just as incredibly hard to predict because it's so episodic. But I think you would continue to see growth in that portfolio with more retail names [indiscernible] challenge as it is.

Got it. And I know you guys had mentioned you have about 4% of the portfolio is watch listed. I'm just wondering if you could provide a breakout. Are these all cash flow loans? Or are there any of those in any of the other 3 specialty finance verticals?

Yeah, they're all cash flow loans.

Got it. And last one from me and I'll hop back in the queue. I know you guys mentioned that the Board is evaluating the dividend. Just to the extent that you could disclose, what exactly are they looking for potential increase? Is it sort of a mid-40s NII that's done consistently? Or does it have to be north of that? I'm just wondering what exactly they need to see.

The Board has not set firm parameters. I think they're really looking for guidance from us to - for us to [indiscernible] to a point where sustainability is something that we're willing to underwrite and therefore propose a dividend that we are comfortable continuing to cover as we have in the past.

[Operator Instructions]. And our next question comes from Owen Lau with Oppenheimer.

Good morning and thank you for taking my question. Many of my questions were being asked, but I do have a quick modeling question. Your portfolio grew by about $45 million each quarter over the past 2 quarters. And given where you are at your current leverage versus your target range, your pipeline, your capacity in the 30% bucket and your overall strategy, could you please give us an updated view on when you expect you can reach the target debt to equity leverage ratio? Thank you.

Yeah. Look, as you know, that's hard to predict. We're blessed, however, by not being a one trick pony, given we have 4 diverse strategies, that, as you've heard from the question and our comments, aren't completely correlated, and so that allows us to demonstrate some growth in varying economic environments, given the diversity of the strategy. So I think from a high level, we expect at some point next year to be approaching that target leverage of the 1 to 1.25. The one thing that could accelerate that is if we were to identify an attractive acquisition in specialty finance, either to continue to grow our existing platforms or add a new platform, that could move it along quicker.

[Operator Instructions]. And our next question comes from Paul Johnson with KBW.

Good Morning, guys. Thanks for taking my question. Just have one question today. I'm curious for the appreciation in your portfolio this quarter. Was that driven primarily just by the recoveries values from last quarter's mark-down of the 4Q18 volatility? Or was there any kind of one-time or I guess individual investments that drove that?

It was across the portfolio as well as our commercial finance businesses really reflecting the market rebound, broadly speaking. As we had talked about in Q4, we felt that the markdown was fairly technical in nature, not fundamental, not given the 100% performing portfolio and relatively low level of a watch list. So as you can tell, we've pretty much recaptured almost all of it from the Q4 markdown back up in Q1.

I now would like to turn the call back over to Mr. Michael Gross, Chairman and Chief Executive Officer, for any closing remarks.

No closing remarks. Just to thank you all for your questions. And we look forward to talking to you again soon.

And this does conclude today's conference call. Thanks for your participation. You may now disconnect.