Hercules Capital Inc

NYSE:HTGC

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the Hercules Capital Q4 and Full Year 2018 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference will be recorded for replay purposes. It is now my pleasure to turn the conference over to Michael Hara, Managing Director of Investor Relations. Please proceed, sir.

[Michael Hara, executive]

Thank you, Haley, good afternoon everyone and welcome to Hercules conference call for the fourth quarter and full year 2018. With us on the call today from Hercules are Manuel Henriquez, Founder, Chairman and CEO; and David Lund, our Interim Chief Financial Officer. Hercules fourth quarter and full year 2018 financial results were released just after today's market close and can be accessed from Hercules Investor Relations section at htgc.com. We have arranged for a replay of the call at Hercules web page or by using the telephone number and passcode provided in today's earnings release.

During this call, we may make forward-looking statements based on current expectations. Actual financial results filed with the Securities and Exchange Commission may differ from those contained herein due to timing delays between the date of this release and confirmation of the final audit results. In addition, the statements contained in this release that are not clearly historical are forward-looking statements. These forward-looking statements are not guarantees of future performance, and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements including, without limitation, the risks and uncertainties -- including the uncertainty surrounding the current market turbulence and other factors we 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, those assumptions can prove to be inaccurate, and as a result, forward-looking statements based on those assumptions also can be incorrect. You should not place undue reliance upon these forward-looking statements. The forward-looking statements contained in this release are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements or subsequent events. To obtain copies of related SEC filings, please visit SEC.gov or our website, htgc.com. With that, I will turn the call over to Manuel Henriquez, Hercules Chairman and CEO.

[Manuel A. Henriquez, executive]

Thank you, Michael. And good afternoon, everyone, and thank you for joining us today. Before I begin today's call, I want to take a brief moment to personally say thank you to David Lund for his outstanding dedication and professionalism and commitment to Hercules Capital during both of his tenures at Hercules. First, as our CFO post IPO offering 2005, and most recently, as our interim CFO, where he's done an amazing job. In fact, during his most recent tenure at Hercules Capital, we successfully grew our debt investment portfolio by 33%, to a new record high. We raised nearly $900 million of capital including 2 back-to-back securitizations within 90 days of each other. He was instrumental in securing our investment grade rating from DBRS. He helped us integrate the Ares Capital debt investment portfolio acquisition. He was also instrumental in integrating our first asset-based lending platform acquisition of Gibraltar Capital as a wholly owned operating company of Hercules Capital. Has single-handedly overseen the expansion and increase of our bank credit facility such as the Union Bank new accordion that we announced yesterday for $200 million. And lastly, he was responsible for overseeing the accounting and finance team in completing 5 quarterly earnings calls and SEC filings during his tenure.

As you can see, it's been a very busy 16 months for David while at Hercules Capital. I can't thank him enough for his world-class professionalism, support and mentoring that he has done to our team and through the growth period that we have experienced here at Hercules. We'll be great -- we will greatly miss David, and we wish him well in his second retirement and time with his wonderful grandchildren. Thank you, David, and thank you for everything you've done with us. Now for today's call. I will briefly discuss the following select achievements and highlights. I will provide an overview and highlights of our outstanding financial performance and numerous new records as well as key achievements for the fourth quarter and the full year 2018. I will also offer some perspective and insights into the very robust venture capital marketplace as it relates to Q4 2018, including fundraising, new investment activities, and of course, M&A and IPO exits realized by the venture capital community as a whole. I will then provide a brief commentary as to a revised and optimistic if not bullish outlook for the first half of 2019, especially as we are more than halfway through the first quarter 2019 with already nearly $350 million in closed or pending new commitments, which, if all comes to fruition, puts us on pace to exceed our 2018 accomplishments of $1.2 billion of total commitments. This, of course, assumes market conditions remain favorable throughout 2019.

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

Because of this growing expectation of 2019, we now anticipate that this should eventually lead to an increase in our dividend distribution or even potentially an additional supplemental dividend distribution in 2019 and beyond, as a reminder, our current dividend is $0.31 per share distribution.

Of course, again, this assumes favorable market conditions remain and no unexpected U.S. government uncertainties or shutdowns that may impact the outlook for 2019. I will then turn the call over to David for a more detailed overview of the specific financial results for the quarter and key summary achievements of 2018 financial results.

And finally, conclude the call with our Q&A session to address any of your questions.

With that said, let me begin. Once again, I'd like to say thank you for the wonderful and amazing support we continue to receive from the venture capital community and the amazing entrepreneurs who have selected Hercules Capital as one of their trusted strategic financial partner. This is culminated in an outstanding 2018 record of $1.2 billion total new commitments in a single year. Because of our increasing brand recognition within the venture capital community, our broad marketplace presence with 6 offices around the country, and our platform that has now achieved a scale of optimal performance, the financial capabilities of our platform I'm extremely pleased to report another record setting year for Hercules Capital on multiple fronts. In 2018, we achieved the following new records. Total new debt and equity commitments of $1.2 billion, representing a [ 37% ] increase over 2017. Honestly, it's a pretty amazing achievement. We set a new record for total gross fundings of $961 million, representing an increase of 25% over the same period of 2017. We also established a new record for total debt investment portfolio growth of $313 million during the year.

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

Finally, on the balance sheet. We also saw a record for total assets now standing at $1.94 billion, representing an increase of 17%.

Not to be left behind, our income statement performance was equally as strong. We saw numerous achievements on the income statement, many of those outstanding achievements also produced record high new levels. For example, record investment income of $108 million, representing a 20 -- 12% increase over the same period last year. Total investment income of $208 million, representing a 9% year-over-year growth. And lastly, another record for undistributed earnings or spillover of $30.7 million, or representing approximately $0.32 per share, representing a full quarterly distribution of our current dividend subject to final tax true-up of our 2018 tax filings. This places us in a great position to continue to grow and have distributions for our shareholders with this very strong earnings spillover. We also anticipate adding further to our earnings spillover in 2019, as we look to eventually begin to harvest potential unrealized capital gains from our holdings in our portfolio of companies. As an example of such harvesting of capital gains, or realized gains in our portfolio is DocuSign. DocuSign alone, which has demonstrated tremendous recovery from the fourth quarter till the present period has now stands at about $12 million to $16 million in unrealized gains in the Hercules Capital holdings or if were harvested today as an example, would represent $0.13 to $0.17 in additional earnings spillover that would be in our undistributed earnings, allowing us to have now $0.45 to $0.49 in earnings spillover. This is a tremendous achievement, and allows us to eventually begin further distributions on behalf of our shareholders of this growing, undistributed earnings. Clearly, this is very strong position coupled with our expectations for 2019 earnings growth will only allow us to look at a dividend increase, which we expect to announce in our first quarter earnings in 2019.

As evidenced by our many 2018 accomplishments, Hercules Capital has not only achieved the necessary scale to succeed but has clearly established itself as the BDC industry leader in venture lending as we continue to build our investment portfolio, while many other small-scale BDCs in venture lending are simply unable to do so or have a dangerously high level of concentrated portfolio positions. I'm happy to report our top 10 holdings represents less than 27% of our holdings in our portfolio. We have prided ourself in a widely distributed investment portfolio and we try to work very diligently to avoid any excessive concentration in our portfolio that we think are quite dangerous as you build out your platform.

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

Their trust and faith in Hercules Capital are measured not by hyperbole, but by strong performance and realizations in our financial results as you see in our filings. Thank you for an amazing year, and we look forward to repeating many of these achievements in 2019. As we're off to a very strong start of 2019, as evidenced already by our closed or pending signed term sheets pipeline as listed on our earnings release of representing nearly $350 million of closed or pending commitments to be closed already through mid-February. We are off to a tremendous start, and we are very confident and optimistic in the outlook for 2019. As stated in my many times in the past, and more than ever before, scale has become a critical BDC competitive differentiation and a competitive advantage. Hercules has successfully achieved such scale as nearly with 2 -- excuse me, with nearly $2 billion of total assets and nearly $1 billion in total net assets. We anticipate adding further to our scale as we gradually begin to modestly increase the use of leverage in 2019 and beyond. We expect to also begin to see rising in our ROA, or return on equity, as we continue to modestly add leverage to our portfolio and continue to prudently manage the growth of our investment portfolio overall. As a reminder, we intend to prudently exercise the use of leverage in 2019. In fact, we are maintaining our target of 1.25 leverage, and gradually thereafter in 2020, begin to increase that leverage subject of course to market conditions remaining favorable in 2020 or beyond. We firmly believe in disciplined growth and remain committed to our DNA of executing to the principle that has led us successfully in the past 15 years. As further evidence of the discipline and approach was another critical and significant milestone achieved in Q4 2018 for Hercules Capital. As we previously stated, during our Q3 earnings call, we anticipate and now have achieved net investment income, or NII, of $0.32 per share in Q4 2018, driven in no small part by our strong loan portfolio growth of 9%, a sustained effective yields and core yields above 13% during the quarter and continues sustained portfolio growth as you'll see in our press release, again, with $350 million of already signed or closed term sheets or commitment, I should say, in the quarter so far for Q1 2019. As we now enter 2019 with nearly a $1.7 billion debt investment portfolio and growing, we expect to continue to generate ample net investment income, or NII, to cover if not begin to exceed our current dividend declared level of $0.31 per share, that should lead us to increase our dividend distributions in the first quarter of 2019 and beyond as we report our first quarter earnings call. With the anticipation of NII beginning to exceed our current dividend distribution as well as adding to already strong undistributed earnings spillover of $30 million a share pre any additional harvesting of gains, we find ourselves in an incredible, flexible operating position to make critical long-term and short-term, strategic and tactical decisions to continue to invest in our platform to ensure our sustained growth over a long period of time without having to sacrifice any dividend distribution to our shareholders. The flexibility afforded to us by having a strong dividend spillover allows us to have this maximum operating leverage to ensure that our shareholder benefit from a continued investment in the platform as we continue to build for the future. All these outstanding achievements would not have been made possible if not for our most important asset, our human capital, our employees. Our tremendous team of amazing dedicated employees now numbering over 70 and growing have once again proven to the importance of teamwork and strong execution and strong work ethics. Thank you all very much for your continued dedication, loyalty, and above all, professionalism. You guys are amazing, and it would not have been made possible without all of your hard work.

As the founder of Hercules Capital and having the vision nearly 15 years ago to create what we accomplished today is simply amazing. I take immense pride to see the many achievements and new records that we have achieved. I truly cannot underscore the amazing depth and level of talent and discipline and diligence of our origination team and for that matter all of our employees have contributed to this great success of this platform for the benefit of our shareholders. We are deeply grateful for you, and we take enormous pride in our human capital and advancing this shareholder value on your behalf, our shareholders. Thank you, all. Now, let me take a few minutes to recap some additional operating accomplishments as well as high-level achievements, which David can expand further during his presentation. Our growth has been accomplished by refusing to yield to market competitive pressures, as we remain steadfast and unwilling to step away from any and all ill-structured or ill-priced transactions. We remain highly selective and judicious in evaluating new investment opportunities. And in fact, we refuse and remain steadfast to our historical credit discipline and underwriting discipline that we have adhered to for the past 15 years. As evidence of our historical -- as evidence of our commitment to this endeavor, it is evidenced in our historical and insignificant low nonaccrual loan ratio of merely 10 basis points, basically, 0, which in addition to our massive accomplishment in our nonaccruals, we also have the proud achievement of a 15-year track record related to our credit underwriting and our credit performance.

Over the last 15 years, our cumulative net credit losses over the entire 15-year period time represent a mere $40 million, which compared to our total commitment through the same 15-year period of $8.5 billion, represents an insignificant amount of credit losses over a span of 15 years. Once again, this would not have been achieved if not for the hard work of our team of dedicated and loyal employees. Thank you, again for that commitment. Now let me say a few words regarding on liquidity as we continue to bolster our liquidity, as you see in our various press releases. We remain extremely active in the capital markets, and we remain extremely active in analyzing and evaluating multiple deal flows. We feel very confident of our outlook in 2019. As we continue to grow our balance sheet, we also remain committed to broadening the multiple sources of available liquidity, while ensuring we maintain a broad source of access to liquidity, while maintaining a very strong balance sheet and highly liquid balance sheet. At the end of the year, we finished with $156 million of total liquidity to continue to invest in new investment opportunities. However, because of our continued growth in our pipeline and opportunities that we see, we actively reentered the market in Q1 with recently announcing the successful close of an additional securitization of $250 million completed in January, 2019, at a price of 4.7%, which is also further bolstered by David's hard work recently of also closing an additional $100 million under our MUFG Union Bank credit facility, which now tops $200 million for additional liquidity to continue to fund our portfolio growth.

Now let me take a few moments to share with you our views related to our strong portfolio growth and that of the robust venture capital investment activities. We continue to see and realize very strong loan demand and transactional deal flows volumes, driven in no small part by the impressive and robust performance by the venture capital investment community, which in the fourth quarter alone, originated $43 billion in new investment activities, culminating in $130 billion of venture capital investments for the period of 2018. This amount in 2018 of $130 billion is the new record for the venture capital marketplace and the data is based on Dow Jones VentureSource data. Showing an equally strong performance, was a level of new venture capital marketplace fundraising activities, said differently, new funds formed by the venture industry. This is an important leading indicator because as venture capitalists are able to raise new forms of financing or capital, they're able to deploy that capital eventually in new investment opportunities to which we will take ample advantage of as we're looking at new investment opportunities by the venture capital. We are very encouraged to see the amount of new venture capital dollars being raised by new venture investment funds. Another strongly encouraging sign of the vibrance in the venture capital community.

Realized exits. Venture capitalists are quite actively in M&A, and less active in the IPO market driven in no small part by the SEC shutdown that actually stymied many companies looking to go public in the fourth quarter and spilling over now to the first quarter. With the extreme market volatility that we witnessed in Q4, and specifically, in December of 2018, the government shutdown among the ongoing geopolitical tension occurring in the fourth quarter all served to have a bit of a stymie effect in IPO market activities realized in the fourth quarter. However, much of that backlog has spilled over to the first quarter and certainly second quarter of 2019, which I will cover here briefly. With that said, we saw 17 companies complete their successful IPO debuts in the fourth quarter, representing a total of 86 IPO companies in 2018. This still, believe or not, represents a very strong showing as compared to the total activities of 60 companies completing their IPO exits in 2017. However, as an encouraging and growing sign of optimism, and improved outlook for 2019, we are certainly seeing a robust and growing pipeline of IPO registrations going on in the marketplace today. We are especially seeing very strong signs of unicorns and decacorns that are expected to complete their IPO offerings in 2019. Adding further to my IPO optimism, are encouraging signs from the new SEC Chairman, Mr. Jay Clayton, on a new changes of allowing private companies seeking IPO exits to begin to explore the potential IPO exit opportunities by holding and -- plans and meeting with investors, i.e. testing the waters privately with potential investors both institutional and accredited before making any public announcement or filings. As a potential catalyst to increase the number of IPO offering, we are strongly supportive of this initiative, and we think this is a great change in how the jobs act will be put into effect to help encourage the earlier IPO process and accelerate IPO process by many companies. I would like to caution, however, that the new proposal by the SEC, which we support strongly, is subject to a 60-day public comment period after which the SEC will decide whether to move forward or not. We hope that this initiative does move forward, and we think it will have tremendous positive impact in many of our IPO candidate companies today. Now turning my attention to M&A activities. Unlike the IPO market, M&A market continue to deliver extremely strong and healthy levels of activities. With 203 transactions completed in the fourth quarter, representing a total transaction volume of 784 companies in 2018. Total M&A transaction values paid in 2018, represented nearly $150 billion of transaction easily surpassing the $89 billion in 2017. With the equity market now fully recovering, and in some cases, surpassing or exceeding the December valuation pullback, we're certainly seeing encouraging signs of stabilizing, and we are also seeing the potential IPO activity pipeline picking up. As an example of this growing optimism in the IPO pipeline, in the alone, there are 12 significant companies many of which are unicorns or decacorns that are queuing up for their much anticipated IPO offering. Ironically, many of those companies happen to be some of our portfolio companies. For example, existing portfolio companies in IPO -- excuse me, portfolio companies that are either have or expected to be filing for their IPOs soon include such names as Lyft, DoorDash, Nextdoor, Palantir, Pintrest, and Postmates, these are existing portfolio companies to which we have the high expectations in the marketplace when and if they complete their IPO debuts.

Other potential well-known names, not in the Hercules Capital portfolio, but certainly waiting to make their IPO debut on their outright include such great bellwether names as Bloomberg, Airbnb, or Peloton Interactive or Slack to name some of the higher-profile names as well who are expected to make their IPO debuts here shortly. I'm proud to say that year-to-date, Hercules own portfolio of companies have now completed 2 successful IPOs in the marketplace. Stealth Bio Therapeutics and Avedro both just completed their IPO debuts, I believe it was just last week alone. In addition, Hercules Capital has 5 existing companies in IPO registrations and expects to see potential liquidity from those registrations later on in 2019, of course, assuming market conditions remain favorable. We are anticipating a very healthy IPO marketplace and activities in March, and in the early part of Q2 2019, and we expect to start seeing potential harvesting of the over 130 warrant positions and over 40 equity positions that we have in our portfolio, begin to monetize in 2019. As always, I'd like to caution that IPO registrations do not necessarily mean they will complete their IPO transactions. We hope that they do, but we have to leave that in the hands of the market and when they make their IPO debut, but we're certainly encouraged by what we're seeing. Now let me take a brief opportunity to discuss our views of the marketplace and activities as we enter the first quarter 2019. We remain very optimistic, by what we're seeing so far in Q1 of 2019, as we continue to be hyperly selective in evaluating and reviewing the potential pipeline that now stands at over $1.5 billion of new investment opportunities that we're evaluating. This is above and beyond the already $345 million of closed or pending to close commitments that we already have in-house today as outlined in our earnings release this afternoon.

Although some of you may be tired of hearing me speak of our long-standing strategy, we remain fully committed to our slow and steady growth strategy that has served us well for over a decade. As we see further signs of an improving competitive market environment, we continue to capitalize on that opportunity, and use our source of strength in our balance sheet and scale to take advantage of those opportunities to continue to grow portfolio for the benefit of our shareholders. We remain increasingly optimistic and anticipate continuing our disciplined growth approach in the first part of 2019. However, as we always do, we remain cautious until the second half of '19, reassess the market at a second half of '19, and determine if our growth strategies will continue and reassess our growth strategy at that point. Now for a brief word on our expectations related to early loan repayments and the payoff activities in Q4 and 2019. We anticipate early loan activities to remain at the levels currently evidenced in our fourth quarter and slightly begin to increase in the second half of 2019. As a reminder, in evidence in Q4 2018, predicting early repayment activity remains a very difficult task since we do not control or have insight as to which company or when a company may choose to pay off its loans or be acquired. In fact, we typically have less than 30-day notice or visibility, so it's subject to tremendous significant variability and market conditions. We do our best to try to predict it, but it's extremely difficult to do so. With that said, our outlook for the early loan repayments in 2019 represent an aggregate of $350 million to $375 million, which we anticipate, both Q1 and Q2 each of 2019, to represent approximately $75 million in early payoffs or $150 million to which the balance of it will be back-end weighted in the second half of 2019. So again, to reinforce a statement, we expect $75 million of early payoff in Q1, $75 million in payoffs in Q2, followed by the balance of $200 million to $225 million of early payoff in the preceding third and fourth quarter. In closing, we had an outstanding 2018, setting multiple records across the business, in addition, our record debt investment portfolio growth coupled with our combined strong core and effective yield growth, we delivered on what we had indicated in Q3 on net investment income growth and solid reported net investment income of $0.32 a share, exceeding our dividend distribution. Given our new optimistic outlook for 2019, we anticipate continuing to see NII growth in each of the quarters of 2019 assuming of course market conditions remain favorable allowing us to sustain portfolio growth and yields.

[indiscernible] upon realizing many of these expectation in 2019, I hope to eventually share with you potentially as early as Q1 the possibility of a future dividend increase distribution level above $0.31, I'm highly encouraged about what I'm seeing with our portfolio growth, I am encouraged to see by our earnings growth, which should lead to an eventuality of increasing our dividend, and of course, beginning to also consider supplemental dividends related to our impressively growing earnings spillover. With that, thank you very much everyone. And David, over to you.

[David Lund, executive]

Thank you, Manuel, and good afternoon, ladies and gentlemen. Before I address the financial results for the quarter, I would like to say that it has been a pleasure being back here at Hercules for these last 16 months. We have certainly achieved great many milestones together in such a short period of time, and I look forward to watching the continued success of Hercules in the coming years. The professional way the firm operates and conducts business and its outstanding performance is a tribute to you, Manuel, and the rest of the management team. I would especially like to thank the accounting team here at Hercules for the work they have done to support me in my role. This team is a very high-caliber group of people that made my job an easy assignment, and I will truly miss working with them. Now to address our financial results. We are pleased to report our fourth quarter and 2018 end -- year-end result this afternoon. I will focus on the following financial areas. Income statement performance, NAV and return performance, credit performance and liquidity. With that, let's turn our attention to the income statement. On a GAAP basis, our net investment income for the quarter was $30.6 million or $0.32 per share, covering our dividend of $0.31 per share from operations. Total investment income was $56.9 million in the fourth quarter, an increase of 8.2% from $52.6 million in the third quarter. The increase in total investment income is due to the higher interest income of $52.7 million on the larger weighted loan portfolio and the increase in core yield. Our weighted average principal outstanding increased by $130 million to $1.69 billion from $1.55 billion in the third quarter. Our fee income increased by 19.7% to $4.2 million during the fourth quarter, primarily due to onetime and facility expiration fees. Our core yields increased 12.9% in the fourth quarter from 12.7% in the prior year quarter and our effective yields remain constant at 13.5%. NII margin decreased to 53.8% in the fourth quarter from 55.7% in the third quarter. The decrease in margin is due to high interest rate and fee expense related to our $200 million securitization, borrowings under our credit facilities and higher compensation expense. Our SG&A increased to $14.4 million in the fourth quarter from $12.3 million in the prior quarter, driven primarily by an increase in variable compensation due to our originators meeting our funding goals for 2018. We anticipate our operating expenses to be between $14.5 million to $15 million in the first quarter of 2019. During the fourth quarter, primarily December, we all witnessed a significant volatility in the stock market, which in turn impacted the fair value of our investment portfolio. We had total unrealized losses of $47.1 million comprised of unrealized losses of $14.7 million on our loan portfolio, $30.1 million of our equity portfolio and $2.4 million in our warrant portfolio. The unrealized losses in our loan portfolio were attributed to collateral-based impairments of $9.1 million, primarily related to 2 loans and $6.6 million due to market yield adjustments. Our equity and warrant portfolio had an unrealized depreciation of $33.5 million related to mark-to-market adjustments, primarily driven by volatility in the market, offset by $1 million of appreciation due to the reversal of unrealized depreciation, primarily related to the liquidation of 3 equity positions.

Based on analysis we prepared as of the close of market on February 11, we estimated the warrant and equity portfolio would have recovered approximately 45% of these unrealized losses due to the general recovery in the market, representing approximately $0.15 per share. In contrast, the S&P technology and Biotech indices dropped by approximately 18% and 23% in the fourth quarter and through February 20, have recovered approximately 12% and 18%, respectively. Now I would like to discuss our NAV performance and credit outlook. We saw our NAV decrease by approximately $48.7 million or $0.48 per share to $9.90 per share principally related to $47.1 million unrealized losses I discussed previously. I would like to emphasize to our investors that this decline is not related to credit performance of our loan portfolio, which remains very strong, but from the impact of what appears to have been a short pullback in the market. We saw our return on average equity increase to 13.6% in the fourth quarter up from 12.7% in the prior quarter. The increase was due to the higher interest income on a higher weighted average portfolio in Q4.

Next, I would like to discuss our credit performance for the quarter. As I noted earlier, the credit performance of our loan portfolio remains very strong in the fourth quarter, as demonstrated by the weighted average credit rating of 2.18 as compared to 2.23 in the third quarter. Our nonaccruals remained at historic lows at just 0.1% as a percentage of our total investment portfolio on a cost basis and 0% on a value basis. This makes 6 consecutive quarters where nonaccruals as a percentage of total investments at cost were below 1%. Lastly, I would like to discuss our liquidity. We finished the end of the fourth quarter with $156.2 million in available liquidity, which was comprised of $34.2 million in cash and $122 million of undrawn availability under our revolving credit facilities, which are subject to borrowing base leverage and other restrictions. During the quarter, we closed our third securitization for $200 million at an interest rate of 4.605%, and we used these proceeds to continue to make investments in our portfolio. As a result of this transaction, our weighted average cost of debt decreased to 5.3%, at the end of December 2018. Subsequent to year-end, we announced renewal of our $75 million credit facility with Wells Fargo, that can accordion to $125 million. And as we announced yesterday, we entered into a new union credit facility, which includes a syndicate of 4 new lenders for $200 million that can accordion to $300 million. The new facility has a term of 4 years, reduced cost of borrowing at LIBOR plus 270 basis points and enhanced terms. Additionally, in January, we closed our fourth securitization for $250 million at 4.703%, which was partially used to repay $83.5 million of our 2024 notes. We expect to incur approximately $1.6 million or $0.02 per share of additional fee expense in Q1 2019 related to the early repayment of the 2024 notes. Based on our remarks today, and our overall financial performance, we are very pleased with the fourth quarter results. Thus in closing, we are well-positioned as we head into 2019, our long-term focus approach and disciplined underwriting standards and access to diversified funding sources will enable us to deliver strong results for the foreseeable future. With that, I will now turn the call over to the operator to begin the Q&A part of our call. Operator, over to you, please.

[Operator]

[Operator Instructions] Our first question comes from John Hecht of Jefferies.

[John Hecht, analyst]

I'm going to ask 3 questions. First one is just a clarification, David, what was that cost of repayment in the quarter for Q1 that we would just want to one-off it?

[David Lund, executive]

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

[John Hecht, analyst]

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

[Manuel A. Henriquez, executive]

So we're actually quite encouraged by what we are seeing in the marketplace. There's been somewhat of a, to use a California term, tectonic shift that has taken place in the marketplace through the competitive landscape. I think that's a combination of the prime rate increases that are now beginning to be digested in the market and being reflected in our new deal originations. So to answer your question is, we've the new deals that we're onboarding are being onboarded at slightly higher rates than the yields that are being paid back. So we are actually going in the right direction, if you will. However, our guidance for yield, we think that the range for the core yields is going to be 12.5% to 13.5%, is I think the new range of core yields that we anticipate in 2019. And I expect that to probably hover in 12.9% to 13.2% on core yields on a blended basis as we continue to digest all the new onboarding of loans that we're seeing in the portfolio and the core yields should gravitate to the level. The effective yield is materially impacted by early payoff activities. As we saw in the fourth quarter with only $64 million of early payoff activities, it had a bit of a dampening effect, and if you look at our slide deck on Page 28 on our website, you'll see that the effective yields have ostensibly remained flat for the last 3 quarters at 13.5%, for the last sequential 2 quarters in arrears, driven in no small part by obviously Q3 and Q4 having sequentially the same early amount of early payoff activities of $64-million-or-so in that. So that's what we're seeing right now.

[John Hecht, analyst]

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

[Manuel A. Henriquez, executive]

Well, respectfully, I'm not going to answer the second part of the question, because a lot of our competitors seem to be listening into our calls and trying to gauge our perspective on what we're doing. So I'd rather have them look at our wake as opposed to where we're going. With that said, the California market remains very robust, the life sciences, biotechnology sector remains great. I think we have one of the best teams in the industry as reflected in our credit discipline and underwriting history there. And so we think the portfolio is going to remain well in balance at 50% tech and 50% life sciences at a high level, of course below that there's a bunch of subsectors behind that, but I am safe to say that we anticipate portfolio to remain in that cadence of 50-50 between those 2 primary asset classes of life and tech.

[Operator]

Our next question comes from Tim Hayes of B. Riley FBR.

[Timothy Hayes, analyst]

Just the first one. Can you just touch on how you intend to approach the dividend over the coming year. Will you try to match it with NII as it grows over the course of the year? Or do you intend to leave a little bit of cushion to grow into?

[Manuel A. Henriquez, executive]

Well, as a reminder, dividends as a policy are set by our Board of Directors, I have my strong views on what I think that should be. But as a deference to governance, the dividend policy is ultimately set by our Board of Directors. As to your salient points of your question, I always believe that you should leave a little bit of a buffer. However, the issue with that is on a benefit for our shareholders, the fact that we have a very strong and robust undistributed earnings spillover coupled with the unrealized gains, we expect to harvest, I think it will be a combination of both distributing some of our unrealized -- let me back up, I think it will be a combination of organic NII growth as well as some distribution from our earnings spillover that will set the new dividend policy going forward. And because of those 2 items are currently being shown to be very strong leading into 2019, it will be my recommendation to our directors that we look at a dividends policy that will lead to potentially growth itself in 2019.

[Timothy Hayes, analyst]

Okay. Appreciate the comments there. And just a quick follow-up. The Grade 1 investment balance increased a lot this quarter. Can you just talk about the competition there? How many investments were upgraded? And if the 2 companies that filed for IPOs are a part of that? And if this maybe indicates even more exits in the near future?

[Manuel A. Henriquez, executive]

Clearly, you hit the nail on the head. The level 1 is a leading indicator of the exit activities that we expect in our portfolio. I don't recall that we actually disclosed a number of candidates or constituents that are located in our bucket 1 category. So I don't think we ever done that publicly. I don't think we disclose that publicly as a company count. I will say that the number if you look at an average of our holdings, you can extrapolate that number to be anywhere between 12 to 15 companies, I would tell you at a high level look at it that way. But I am not aware that we disclosed the components of those buckets.

[Operator]

Our next question comes from Aaron Deer, of Sandler O'Neill.

[Aaron Deer, analyst]

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

[Manuel A. Henriquez, executive]

Well, Aaron, with all respect 2009 has already been accomplished. I knew what you were saying. In 2019, I think that, at this level, again it's only February, so I need to preface it with my optimism, and it's only February, but with what we're seeing if this level is sustained I think that conservatives level, we're looking at $300 million to $400 million net portfolio gain, that would be similar to what we achieved in 2018. As obviously the year goes -- as the year progresses, we'll obviously tighten that number for you but the fact that it's still early February the number that we use around here is about $300 million to $400 million of net growth.

[Aaron Deer, analyst]

Okay. That's helpful. And then obviously you guys have some pretty good assets sensitivity structured into the portfolio. I'm curious is that rate sensitivity, symmetrical on the downside as well if we were to start seeing the prime rate move lower at some point later in the year or next year? And as you kind of look out prospectively at where rates could go over the next year or 2, are you making any specific changes to the loans that you're underwriting or how you are structuring the balance sheet? That might mitigate any downside if rates do move lower at some point along the way.

[Manuel A. Henriquez, executive]

So a very critical part of your question, and I don't have the percent, but I can assure you it's a policy that we've adopted since 2008. I think most of our deals have LIBOR -- sorry, prime-based floors so we are protected on a down side of prime and the few deals that we do have LIBOR. I want to say that probably half of the ones that we have LIBOR do not have LIBOR floor on them. However, as a reminder, LIBOR will be going away, but that said, in the interim period before LIBOR does evaporate, I believe 50% of the LIBOR deals we have do not have LIBOR floors on them. But our prime-based deals, which are nearly 87% -- or 85% of loan book does have a prime based floor.

[Aaron Deer, analyst]

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

[Manuel A. Henriquez, executive]

They are generally at the spot prime rate.

[Aaron Deer, analyst]

Okay. And then just one last question on the -- just any color -- obviously credit metrics have been terrific, just curious about the 2 loans that generated the $9 million of collateral-based impairment, if we could get any color behind what caused that?

[Manuel A. Henriquez, executive]

Sure. One of them was -- it's an international company and with the government shutdown, and what is going on there. There's a lot of activities going on in that sector, and because of that development, they make -- I have got to be careful with what's public. They basically make a circuit that lights up for use on mobile devices. The company has demonstrated tremendous technology achievement. It's a very complicated physics issue to scale a circuitry, say, by 2 by 2 to 4 by 4 to 8 by 8. And one of the issues that they're doing right now is actually scaling the circuitry and because of the shutdown that took place and the concerns that we had at the time in the marketplace, we took the prudent approach to do a markdown. However, we believe given this company's demonstrated technology advancements and its achievements at the time that the fourth quarter impairment that we took should be reversed or we expect it to be reversed in 2019 with what we are aware of with the company's ongoing dialogue and discussions with additional capital and its progress in its technology offering. But an abundance of prudence, and caution, at the time, we thought that, that was the right thing to do from a fair value point of view and that's what we did. The second one was a similar situation. It's in the solar industry, it's had a bit of a bumpy issue you can imagine with our President and his jaundiced or negative view excuse me on the solar industry, and versus his carbon fuel vision. We support more of a clean earth, and we think this company will start seeing some growth there. And then the third one, that we had a small impairment, is an Asian-based, China-based exposure that with all the trade tensions going on, we felt that it was prudent to take a small impairment relating to an Asian exposure. We only have, I believe, 2 companies left in our portfolio that have a China exposure to it. As a reminder, we have actively managed down our China exposure.

[Operator]

Our next question comes from Ryan Lynch of KBW.

[Ryan Lynch, analyst]

First question. I wanted to talk about the slowing of prepayments that we've seen in the second half of 2018. And I know you said you expect them to be fairly light in the first half of 2019. Is there anything we can read into that slowing of prepayments? I would think from a competitive standpoint, if there was fierce competition out there, I think that would -- seems logical that, that would actually increase prepayments. And then also, I know in the past, you've talked about pruning the portfolio, getting out of some weaker credits or some industries you don't want to be in, have also driven some higher prepayments. So with the fact that prepayments have slowed in the second half of 2018, do you expect them to be fairly slow in early 2019? Is there anything we can read from a competitive standpoint? Or -- and/or how you guys view the overall quality of your portfolio?

[Manuel A. Henriquez, executive]

Well, I can't win with you guys. If it's too slow, you guys me grief, if it's too much, give me grief. I'll take it because the dampening of early portfolio repayment really allows us to achieve that optimal performance level of NII growth that we are seeing by having the portfolio repayments tapered off. The first part of your question is a very critical and important one. We have seen a significant shift in the competitive landscape in the marketplace, scale is a major factor in that issue. Those with the balance sheets that we have and the capabilities to do transactions that we do are few to very little players now in the marketplace. The banking regulators who I send chocolates to every night also have assisted in that level with many banks being asked to pull back or hold on to higher capital ratios when it comes to cash flow negative term loans or they are having to participate those loans out as one of the larger players tends to do with their transactions. So we are seeing a material shift in the competitive landscape, not to mention that the smaller players that exist do not have a capability to underwrite life-sciences, because they have no expertise in that area or they have an insignificant balance sheet, unable to compete in that level. So I'm happy to say that, as you saw evidenced in Q3 and Q4, the competitive landscape is really manifest itself in our balance sheet on the early repayment activities as you pointed out. So they are directly correlated to each other in that. So unless there has been some unexpected change in the competitive landscape, going into 2019, we're pretty confident that the early repayment activities are going to be driven probably mostly in part by M&A and IPO exits, as opposed to the typical or historical levels of refinancing from a competitor right now. But again, as I indicated in my opening remarks, early repayment visibility is only a 30-day outlook for us, but with what we expect and what we see in our portfolio, and the competitive landscape, we feel pretty confident that the $75 million for Q1 and Q2 of 2019 are the right levels to model into.

[Ryan Lynch, analyst]

Sure. Okay. And then my follow-up, Manuel, I wanted to talk about the commentary you provided in the press release when you discussed hiring Seth Meyer as the new CFO. Several times in that press release, you mentioned him being a key hire as you evaluate new potential strategic growth opportunities. Can you shed some light on exactly what these strategic growth opportunities, what does that mean? Does that mean portfolio acquisition? Does that mean new teams? Does that mean new products like Gibraltar, all the above something else, just any color you can provide on that would be helpful, considering that you mentioned it several times in the press release.

[Manuel A. Henriquez, executive]

Sure. Seth brings a lot of incredible experience and global talent that as you saw we announced that we expanded our Board of Directors. We now have 3 women in our Board of Directors, absolutely, embracing the diversity of board directors. We think every public company should in fact have a nice diversified composition of the board. We expanded our liquidity in the marketplace. We have a broad distribution of that signaling growth. We brought in a CFO that has a tremendous experience in capital markets and strategic initiatives, not that David doesn't have any of that, but we're looking to expand on that platform and those capabilities. And Seth brings a very strong bench experience in that area, and we felt that, again, not taking anything away from David. I think, David has done a phenomenal job that as we look to kind of wind our universe of opportunities that we are evaluating, the business model is shifting, and the last part of your question is, all of the above. We are evaluating actively right now, as we speak, other strategic initiatives that do include teams and portfolios that can be acquired as well as bolting on additional ABL providers and other, which I'm not going to say, other business initiatives that will be extremely complementary to our underlying portfolio of companies that continue to provide strategic capital for them to grow. And allow us to continue to service the needs of our constituent portfolio companies and be the capital partner of choice that we are to them. And so I felt very strongly that strategically we should continue to look at new product offerings that complement our existing portfolio pool of companies and service their needs.

[Operator]

Our next question comes from Casey Alexander of Compass Point.

[Casey Alexander, analyst]

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

[Manuel A. Henriquez, executive]

Well, God, I'm probably going to say something that I'm going to hate. Our president has been caged a bit. So I think that the threat of government shutdown is, I think, hopefully behind us, so that should not occur. I think as we're turning our attention to an election year, I think that he is not going to do something that will be precipitously dangerous to the economy as he wants to ensure that he shows good performance. But I think on a more macro level, the pullback in competitive landscape, and now as a reminder, we had to manage through the 1:1 or the 200% asset coverage ratio through December. So we were not able to unlock the growth capabilities until we had shareholder vote insured, which we did. Although I have in the operating flexibility of additional leverage, it allows us to take a much more pragmatic view on originations, and I would also add that with the portfolio grooming and pruning that we did in Q1 and Q2, we cycled out of sectors that we had some concerns about, and I think that right now, we feel pretty comfortable with the credit book that we have and the underwriting discipline, which has not changed that our confidence level in the companies that we are evaluating and underwriting today remains quite strong with a competitive environment that is arguably ebbing right now.

[Casey Alexander, analyst]

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

[Manuel A. Henriquez, executive]

Yes, I mean as an example to kind of give you some hard evidence of what that looks like. Here's a tangible example. DocuSign alone was a fair value of $20 million in Q3, had a fair value of $15 million in Q4, and today, has approximately $21 million fair value, representing a $5.5 million recovery on that alone. And if you go through the list of our public holdings, which you can do as well as I can, you can quickly see all the recoveries in the fair value marks that occurred in Q4. So we feel pretty confident with the mark-to-market impairments that -- excuse me, the mark-to-market depreciation, because they are not credit related. Have and will continue to recover as we progress later on in 2019. So the portfolio in NAV declined with the exception of $9 million was non-credit related.

[Operator]

Our next question comes from Christopher Nolan of Ladenburg Thalmann.

[Christopher Nolan, analyst]

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

[Manuel A. Henriquez, executive]

It is GAAP leverage.

[Christopher Nolan, analyst]

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

[Manuel A. Henriquez, executive]

Yes, we are. Because we actually see a very good robust marketplace and we want to take advantage of that marketplace opportunity before we start seeing any effects that may start spilling into 2019 for the potential election in 2020. And so we rather make sure that we harvest the good investment opportunities that we're seeing today and bolster our earnings growth with the early part of '19, which building the portfolio up in the first half will give a much more sustaining earning power in the second half of '19.

[Operator]

Our next question comes from Henry Coffey of Wedbush.

[Henry Coffey, analyst]

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

[Manuel A. Henriquez, executive]

As you know, we're not going to respond as to when our timing of our equity offerings are or may not be. However, I will answer the question that with the added flexibility and the trust that our shareholders have afforded us, with the asset coverage ratio down to 150%, we, however, have chosen to be more prudent and judicious in deploying that leverage. So I think that the first half of 2019 will be mostly driven by reliance on our bank lines, which is why David has done a phenomenal job of securing our partnership with Union Bank and the rest of the participating banks in our syndicates. We expect to begin to draw down our bank partners capital lines and use that initiative. Obviously, we have to be cognizant as leverage begins to increase that we will have the reliance, the use of the ATM, as that kind of regulator to allow us to ensure that we don't trip over the bump self-imposed 1 25 leverage issue. And if and when needed, I think that we use the ATM regulator as a way of kind of ensuring that we stay within the tolerance levels. But from everything that we have -- I guess modeled internally, we don't anticipate leverage levels to eclipse the 1 25 for a period in 2019. And as such, we will manage to that level.

[Henry Coffey, analyst]

Then distributed net operating income, isn't that closer to taxable income? Am I wrong in thinking that?

[Manuel A. Henriquez, executive]

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

[Henry Coffey, analyst]

Well, doesn't that suggest that there's room for a much more aggressive dividend increase, say, for example, maybe it doesn't come in the regular dividend but it comes in the way of a twice yearly special than probably most of us are anticipating. I think most people would think you would bump the dividend $0.01 or $0.02 but when you look at it from a point of view of DNOI, and you look at the likely realized gains, there is room for maybe doesn't have to be the regular dividend but isn't there room for another $0.05 or $0.10 in specials?

[Manuel A. Henriquez, executive]

Henry, you are spot on. There is no question that the undistributed earnings belongs to our shareholders. We use it from time to time to allow us to have operating flexibility to invest in a platform and ensure that we don't cut the dividend as we make the strategic both short-term and long-term investments to ensure the platform's growth. But you're absolutely right, with the anticipation of a lot of these IPO candidate companies that we have in our portfolio coupled with the potential harvesting of the DocuSign. We'll be sitting on literally $0.45 to $0.50 of undistributed earnings coupled with the NII growth that we're anticipating. I don't quibble with what you just said. I think, that is not an unrealistic expectations of seeing organic dividend growth related to NII earnings, and DNOI as well as doing some distribution related to the undistributed earnings as a special or supplemental dividend. I don't think you're incorrect in that statement.

[Operator]

Our next question comes from Robert Dodd of Raymond James.

[Robert Dodd, analyst]

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

[Manuel A. Henriquez, executive]

That's correct. But earnings outlook as of right now for 2019 are all embedded organic. They do not include any of the strategic initiatives that we're evaluating right now. And you're absolutely correct, it's a fusion of both. It's both product and team or company acquisitions as we have done with the Gibraltar platform, which has done phenomenally well for us, so far as the ABL shop. They have a very strong management team there. So we're very happy with what they're doing and continue to do there. But there's absolutely no question that we're evaluating actively other strategic opportunities, as we speak right now that may or may not fall into place. But I want to give Seth time to also get his feet on the ground, but he will be spearheading a lot of those efforts as well, as we evaluate the strategic opportunities that will be accretive to our earnings growth.

[Robert Dodd, analyst]

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

[Manuel A. Henriquez, executive]

That is absolutely organic, current core Hercules team.

[Robert Dodd, analyst]

Got it. Got it. Now just looking at it from another growth angle. Obviously, in '18 record new commitments of the $1.2 billion, you expect that to grow, I think. The close rate from commitments to funding in '18 was about 80%, if we go back to '17, it was 87%. I mean, so -- obviously that's just 2 data points. Do you expect the close rate to continue to drop? And if you do, what's kind of the driver, because fundings versus commitments, I wouldn't expect any change in the ratio there would be competitively driven, it would be something else.

[Manuel A. Henriquez, executive]

Well, it is something else, and it is purposely consciously being done by us. It has to do with portfolio mix and portfolio diversification. A lot of the components on unfunded commitments tend to -- the ratio tends to drop, as the increase in life sciences companies rises and decreases meaning it goes up -- excuse me, increases going up to the 80%, 85% when the ratio of new company onboarding is technology-driven. So it is absolutely a risk mitigation strategy that we embark on. It's also used as competitive advantage in the marketplace, especially given our scale on our balance sheet that if we're comfortable, we will do more structured milestone driven transactional business. If we think it's prudent to do that, but it is absolutely an industry mix to respond to your question, and historically, the funding ratio was 75% to 80%. So we're within our wheelhouse of commitments to funding ratio today.

[Operator]

Our next question comes from Finian O'Shea of Wells Fargo Securities.

[Finian O'Shea, analyst]

Congratulations, David, on your retirement. Just first one a bit of housekeeping on the spillover. Can you give a breakdown, and forgive me, if you already had on your spillover income versus capital gains? And then, if you want to expand -- if that plays into your view of maintaining that versus a special or a raise.

[Manuel A. Henriquez, executive]

Look, historically, you know that I run a pretty conservative balance sheet and an income statement outlook. I'd like to have a high level of flexibility, modest levels of leverage, and I like to have the ability to have a earnings spillover in order to address investments in the platform without sacrificing earnings, and you'll see that throughout our history where NII may have been below our distributions of dividends, but because we had a strong earnings spillover, we have the flexibility to make these short-term and long-term critical investments in the platform to ensure the continuation of growth that we're doing. I don't think that the next major forklift investments will take place until we approach the $2.3 billion, $2.5 billion loan portfolio is when I expect to make the next major infrastructure investment in the platform. Anything in the interim may be driven by headcount additions, what I mean by that is as we add headcounts and those headcounts become accretive, a new hire on the origination team or business development team will typically take anywhere between 9 months to 1.5 years before they are productive, if you will. And therefore, we're making a G&A investment in those individuals that may pinch our NII earnings, but you'll see that 15 months, 12 months later become very accretive on the NII side. And by having that earnings spillover, it affords us to have flexibility without having to worry about the dividend rate. So the next element of your question is that because of our confidence in our sustained growth in NII, there is no question that an eventual dividend increase will happen, and I think that with the growing harvesting of the realized gains in our portfolio when they become realized, the confidence level of that undistributed earnings now eclipsing say, $0.50 a share that will give us a lot more confidence in looking at bolstering a supplement to twice a year or even once a quarter. If and when that threshold of undistributed earnings approaches the level that we think merits distribution to our shareholders. And I think we're getting to that level very quickly here.

[Finian O'Shea, analyst]

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

[Manuel A. Henriquez, executive]

So the issue on multiples of revenues is a bit of an anomaly or a misconception, because although, it is a proxy, the better way of looking at SaaS models without getting into competitive issues too much, is whether or not it is an MRR or ARR, the acronyms stand for monthly reoccurring revenues versus annual reoccurring revenues, and not all revenues are the same. So you have to have a deep bench of understanding on SaaS business models. Not all SaaS companies are the same, a lot of people try to call themselves SaaS, when they are not necessarily SaaS enabled, they are SaaS light, if you will. We have a very rigid credit underwriting parameter when it comes to our SaaS businesses. There are plenty of SaaS companies out there, and there are plenty of SaaS companies that we pass on. We're pretty hyperly selective in our SaaS models. I am not going to tell you what our multiples are, because that's competitive advantage in how we evaluate our LTV, loan to value, and how we extrapolate the reoccurring revenue models whether it's monthly or annual, because each one of those models have different multiples and every segment of the industry has different multiples. So to simply apply a blanket lean statement on multiples, I think, would be a horrific mistake to do that. If my competitors are doing that, but I welcome them to continue to do that.

[Operator]

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

[Manuel A. Henriquez, executive]

Thank you, Haley, and thanks, everybody for joining us today on the call. We'll be attending or we will be attending -- excuse me, the RBC Capital Markets Financial Institutions Conference. I guess, we'll be debuting Seth at that conference as well as engaging in various nondeal roadshows throughout the month of March and April. We intend to engage in a very active shareholder outreach program throughout the first half of '19. And with that, thank you, everybody for joining us today. And thank you, Michael and everybody. And if you look -- if you like us to join us in an NDR, nondeal roadshow, please reach out to Michael Hara, our investor relations department. With that said, thank you everybody.

[Operator]

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