Ares Capital Corp (ARCC) 2018 Q4 法說會逐字稿

Good morning. Welcome to Ares Capital Corporation's Fourth Quarter and Year Ended December 31, 2018, Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded on Tuesday, February 12, 2019.

I will now turn the call over to Mr. John Stilmar of Investor Relations.

Thank you, Kate, and good morning, everyone. Let me start with some important reminders. Comments made during the course of this conference call and webcast as well as the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar such expressions.

The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results.

During this conference call, the company may discuss certain non-GAAP measures as defined by the SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding the financial performance because it's one method the company uses to measure its financial condition and results of operation.

A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity resulting from operations, the most directly comparable GAAP financial measure, can be found in the accompanying slide presentation for this call. In addition, reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K.

Certain information discussed in this presentation, including information relating to portfolio companies, was derived from third-party sources and has not been independently verified, and accordingly, the company makes no representation or warranty in respect to this information.

The company's fourth quarter and year-end December 31, 2018, earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the Q4 '18 earnings presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and 10-K are also available on the company's website.

I will now turn the call over to Kipp DeVeer, Ares Capital Corporation's Chief Executive Officer.

Thanks a lot, John. Good morning, and thanks to everyone for joining us. I'm here with certain members of the management team, including our Co-Presidents, Mitch Goldstein and Michael Smith; our Chief Financial Officer, Penni Roll; and other members of the Finance, Investment and Investor Relations teams. Penni and Mitch will walk through our fourth quarter and full year financial results, our investment activity and our portfolio statistics in detail later in the call. But I'd like to start by recapping our 2018 highlights and providing an update on the market. I'll also discuss our outlook for 2019 and the dividends we declared on the back of the strong performance for the year.

This morning, we reported fourth quarter core earnings of $0.45 per share, which includes a strong finish to a great year for Ares Capital, one in which we earned core earnings of $1.68 per share. This is an increase of 21% over the 2017 levels. Our core earnings benefited from our rotation of the noncore assets in the American Capital portfolio, rising LIBOR, higher utilization of our 30% basket, increased fee income and stable credit metrics. And note that we achieved these strong results despite operating at or below the low end of our leverage target range throughout the year.

We also generated strong GAAP earnings of $2.01 per share for the year, which is far in excess of our dividends and which drove yet another year of net asset value growth with NAV reaching $17.12 per share at year-end.

Finally, for 2018, we continued to generate industry-leading net realized gain performance. We had net realized gains of $419 million or $0.98 per share in 2018, making it the 9th year in a row and the 13th year in our 14-year operating history of generating net realized gains. On a cumulative basis, since our IPO, we've generated more than $1 billion of realized gains in excess of our realized losses.

Throughout the year, we used the strong demand for private assets to largely complete the rotation of the acquired American Capital portfolio, to monetize gains and to reinvest the proceeds into our core assets. Our rotation of the American Capital portfolio is now largely complete and what was a successful acquisition by any measure for our shareholders.

Since our purchase of the American Capital portfolio at the beginning of 2017, we've generated investment income as well as $426 million of net realized gains on exited investments, which results in a 37% realized IRR from the transaction.

Of the $2.5 billion portfolio acquired, only $683 million at fair value remains, most of which we consider to be core assets. At this point, we will likely provide less robust updates on American Capital as that story is largely complete.

Looking beyond our strong financial results, we believe the company is well positioned for continued success. For much of the year, the market was highly competitive, especially with new entrants competing on aggressive terms without differentiating between structure or price, regardless of the stability, size or nature of the business. We've successfully navigated similarly aggressive markets in the past by remaining highly disciplined in our credit selection and industry composition. We are not a benchmark investor. And as a matter of practice, we can largely avoid cyclical industries, such as retail, homebuilding, media, broadcasting and metals and mining. And in these types of competitive markets, we can also use strong market demand to optimize our portfolio and exit more difficult situations.

Now we find ourselves in a market of modest recovery from the tremendous volatility we witnessed during the credit market selloff in the fourth quarter of 2018. We saw that when sentiment shift and outflows occurs, as they did rapidly in late 2018, many funds, particularly retail and passive funds, are forced to sell to meet redemptions. Many retail funds and passive vehicles are structured to manage liquidity and not necessarily credit. But we believe that the big negative move that we saw in December was largely a technical event. As a result, during the fourth quarter, the broadly syndicated loan market experienced price weakness, but the buy-and-hold middle-market, where we are most active, demonstrated materially less price volatility. Since the start of this year, institutional money has returned and secondary prices in the broadly syndicated loan market have partially recovered. Our retail loan funds were continuing to see outflows, and we believe the supply of capital may be more balanced going forward, which could result in a more lender-friendly environment. We remain optimistic that these shifts in the supply of capital will result in improved lending terms in pricing, but it's probably too early to predict by how much and when.

As we look at the portfolio and evaluate the economy, we continue to approach the market with a belief that we are late in the credit cycle and that economic growth is slowing. As a lender, these are perfectly healthy conditions for underwriting and strong portfolio performance. However, we do believe that slowing economic growth can challenge weaker companies. And if this thesis proves itself out, it should benefit Ares Capital as more differentiation among credit managers is a good thing for established companies, like ours, which has resources and access to capital that surpasses our peers. A more fundamental credit downturn can be a significant market opportunity for us. We have been able to consolidate market share during times of distress and outperform other credit managers, and we're positioning ourselves to take advantage of this if an opportunity arises.

Before I turn the call over to Penni for a more detailed financial review, I want to provide an update on our increased dividend levels and the extension of our share buyback program. With higher LIBOR, higher aggregate portfolio yields attained with the substantial completion of the American Capital, portfolio rotation and limited credit issues, we believe the company has reached a higher level of sustainable recurring earnings. In addition, we believe our balance sheet is in a very strong position with solid and stable asset quality and a diversified, long-duration liability structure. Based on these factors and our strong market position, we feel confident the earnings profile of the company supports a higher regular quarterly dividend. Therefore, we've elected to increase the quarterly dividend, again, to $0.40 per share for the first quarter of 2019. This represents the second quarterly dividend increase in the past 3 quarters. Furthermore, based on the significant gains that we realized in 2018, particularly from the American Capital portfolio, we have declared additional dividends totaling $0.08 per share. We intend to pay this in 4 equal quarterly installments of $0.02 per share over the next year.

And lastly, as it relates to the stock repurchase plan, given the return of volatility in the equity markets, we've seen our stock trade in ways we feel are unrelated to the company's strong fundamentals. As a result, we believe there may be compelling opportunities to repurchase our stock below net asset value. Accordingly, we've extended our stock buyback authorization for another year and we've increased it from $300 million to $500 million in size.

Let me now turn the call over to Penni.

Thanks, Kipp, and good morning. Our core earnings per share were $0.45 for the fourth quarter of 2018, consistent with the third quarter and up compared to $0.38 for the fourth quarter of 2017. Our GAAP earnings per share for the fourth quarter of 2018 were $0.36, including a $0.12 per share reduction from net losses on the portfolio and other transactions. This compared to GAAP net income of $0.54 per share for the fourth quarter of 2017.

In total, we reported net realized and unrealized losses on investments and other transactions for the fourth quarter of 2018 of $50 million. The net losses were primarily a result of $81 million of net fair value declines, driven by $135 million of gross unrealized depreciation, offset by $54 million of gross unrealized appreciation. The net fair value declines were offset by net realized gains of $21 million.

As of December 31, our investment portfolio totaled $12.4 billion at fair value and we had total assets of $12.9 billion. The yields on our portfolio remain consistent with Q3 levels. And at the end of the fourth quarter, the weighted average yield on our debt and other income-producing securities at amortized cost was 10.2% and the weighted average yield on total investments at amortized cost was 9% as compared to 10.3% and 9%, respectively, at September 30, 2018.

Now looking at the full year. Core earnings were $1.68 per share for 2018 compared to $1.39 for 2017, and GAAP net income per share was $2.01 for 2018 compared to $1.57 for 2017. For the full year 2018, we had total net realized and unrealized gains of $164 million or $0.38 per share, including record net realized gains of $419 million or $0.98 per share.

Moving to the right-hand side of the balance sheet. Our stockholders equity at December 31 was $7.3 billion, resulting in a net asset per share of $17.12 versus $17.16 a quarter ago, but up 3% compared to $16.65 a year ago.

As of December 31, our debt-to-equity ratio was 0.73x and our debt-to-equity ratio, net of available cash of $247 million, was 0.69x compared to 0.63x and 0.54x, respectively, at September 30, 2018. Our leverage moved back into our current target leverage range during the fourth quarter, driven by increased investment activity and slower repayments.

During the fourth quarter, we exited or repaid on $1 billion of investment commitments, which is lower than our 2018 quarterly average of $1.6 billion. The lower repayments reflected slowing market activity as well as fewer exits from the acquired American Capital portfolio. We ended the year with total available liquidity of approximately $1.9 billion.

In terms of recent debt activity, during the fourth quarter, we repaid the $750 million of 4.875% unsecured notes that matured using existing available liquidity. This was our first investment-grade unsecured note issuance to reach maturity since our inaugural issuance in that market back in 2013. Also, in January of this year, we fully repaid the $300 million of 4.375% 2019 convertible notes that matured. Our next term debt maturity isn't now until January of 2020.

Typically, we would expect to return to the unsecured investment-grade debt markets to replace the debt that's matured. However, those markets have not been that favorable. The good news is the deep and diversified funding structure that we've built affords us the ability to be patient and flexible in accessing the market opportunistically and has allowed us to repay this debt without any new issuance.

In addition to repaying maturing unsecured term notes, we have been actively managing our existing secured credit facilities, including extending our SMBC funding facility at the end of Q3 2018 and extending and reducing pricing on our Wells funding -- Wells Fargo funding facility in Q4.

As Kipp mentioned, we announced this morning that we declared a regular first quarter dividend of $0.40 per share and an additional dividend of $0.02 per share payable for each of the next 4 quarters for a total of $0.08 per share of additional dividends to be paid in 2019.

The first quarter dividend as well as the first $0.02 per share additional dividend are both payable on March 29, 2019, to stockholders of record on March 15, 2019. We currently estimate that our spillover income from 2018 into 2019 remains strong at $323 million or $0.76 per share.

As a follow-up from our last earnings call, you may recall, we previously mentioned that while we were on track to have a record year of GAAP net realized gains in 2018, we were advantaged by having certain tax-only capital losses inherited from investments acquired in the Allied Capital acquisition that could allow us to offset a significant portion of the expected gains. Our year-end estimate of the spillover reflects the realization of these tax-only losses, which has positioned us to fully retain all of the capital gains realized in 2018. Also, as a reminder, the tax-only losses had no impact on our GAAP earnings or our net asset value.

Since the spillover income determination is not complete until we file our final tax return later this year, these amounts remain subject to change.

With that, I will now turn the call over to Mitch to walk through our investment activities for the quarter.

Thanks, Penni. I would like to spend a few minutes reviewing our fourth quarter and full year investment activity and portfolio performance. I will then provide a quick update on our post-quarter-end activity and our backlog and pipeline.

For 2018, we used the size and scale of the company and broad market coverage to selectively invest in our best borrowers and in other defensively positioned high-quality companies. During 2018, we closed on $8 billion of commitments with 113 of our 172 commitments about 65% made to incumbent borrowers. We believe our incumbent position not only enables us to grow with our best companies, but it also results in enhanced portfolio performance.

During the fourth quarter, we originated $2.7 billion of commitments across 51 transactions, of which 72% of these commitments were first lien and 94% were in senior secured positions. This quarter's activity reflects our efforts to be highly diversified and our conservative approach to investing off the balance sheet at this stage of the cycle.

We are also focusing on larger companies with more diversified business lines and stronger market positions. The weighted average EBITDA of transactions originated in Q4 was over $100 million. Let me highlight some recent transactions to give some context on how we use our incumbency and our extensive market coverage to drive advantages to ARCC.

In the fourth quarter, Ares provided a $792 million senior credit facility to support the refinancing of Pathway Vet Alliance, one of the largest operators of freestanding veterinary hospitals in the United States. The company is sponsored by Morgan Stanley Capital Partners. Ares first supported Pathway in 2017 providing capital for acquisitions and future growth. In the fourth quarter, the company sought to reduce the number of lenders we are refinancing. As a result of our incumbent position, strong relationship and ability to lend and commit to the entire facility, we were awarded the sole lead role in the new facility.

Additionally, during the quarter, we provided a $120 million senior secured financing to support Blackstone's acquisition of TaskUs. The company offers outsourced customer service solutions and back-office support to high-growth companies in the e-commerce, software and tech-enabled service industries and is one of the fastest-growing BPOs in the sector. Both of these transactions underscore our broad origination capabilities and ability to support the financing needs of attractive companies backed by high-quality sponsors.

At year-end, our portfolio was $12.4 billion, consisting of 344 different portfolio companies. The portfolio is highly diversified with an average hold position at fair value of only 0.3% of the portfolio.

Consistent with our increased focus on senior investments, our portfolio is now comprised of 76% in senior secured positions, with 47% in first lien, up from 74% in senior secured positions and 44% in first lien loans at the end of the third quarter. Our portfolio weighted average EBITDA increased to $99 million, reflecting our unique ability to finance larger companies. However, we have not lost our focus on our historical strength in the core middle market. The median EBITDA of our portfolio was $37 million at year-end.

Our portfolio leverage statistics remain stable and below-market average levels. Our weighted average total -- our weighted total leverage remain unchanged versus last year at 5.4x debt-to-EBITDA. Also despite recent market volatility impacting equity valuations, our portfolio had a weighted average equity cushion of 48% resulting in weighted average loan-to-value of 52%.

Performance continues to be strong in our underlying portfolio of companies. As of December 31, our portfolio of companies continue to generate solid growth with weighted average EBITDA over the past 12 months increasing by approximately 5% in the fourth quarter of 2018 compared to 6% a year ago.

Our nonaccruals remain relatively stable this quarter as well. Nonaccruals as a percent of total portfolio at cost decreased to 2.5% from 2.7% last quarter, as discussed by Mike Smith, and down from 3.1% at the end of 2017. Nonaccruals at fair market remain consistent with last quarter at 0.6%. The total number of non-accruing loans also declined modestly.

Before I turn the call back over to Kipp, let me provide a brief update on our post-quarter-end investment activity. From January 1 to February 7, 2019, we made new investment commitments totaling $623 million and exited or were repaid on $469 million of investment commitments, generating approximately $2 million of net realized gains. As of February 7, our backlog and pipeline stood at roughly $1.4 billion and $150 million, respectively.

As always, these potential investments are subject to approvals and documentation, and we may sell a portion of these investments post closing. Please note that there are no certainties that these transactions will close.

I will now turn the call back over to Kipp for closing remarks.

Thanks a lot, Mitch. In closing, I just wanted to thank the team for a year of hard work that's led to our successful results in 2018 and our strong positioning for 2019 and beyond. The market seems to be digesting what feel likely to be more volatile and uncertain times ahead. We're enthusiastic about the prospects for this in 2019 and beyond because Ares Capital is a highly diversified, stable company that continues to have distinct competitive advantages. We've shown a long history of both growing our dividends and increasing our NAV, which is the ultimate measure of our performance as a company. Our goal for 2019 is to continue the strong momentum and to deliver great results for the shareholders.

That concludes our prepared remarks. We'd be happy to open the line for questions.

(Operator Instructions) The first question is from Ryan Lynch of KBW.

First question. You kind of mentioned that the middle market was somewhat insulated from some of the market volatility this quarter, unlike the broadly syndicated loan market. So just wondering, given your guys' size and ability to really be a full solution provider to some of these larger companies, maybe in the BSL market, were you guys seeing and/or really participating in any of these opportunistic deals in the broadly syndicated loan market? And did that help drive any of the really strong fourth quarter portfolio growth?

We had a back-ended fourth quarter, which actually is one of the things we didn't talk about in the prepared remarks, so it gives us sort of a lot of confidence as to where we're headed for '19. But did we jump in and do anything material? 1 or 2 situations, I'd say, improved themselves in a way that gave us some more conviction at year-end. But December is a pretty funny month. I'd tell you, we were just as cautious as we were opportunistic because the market was changing week to week. So I think, as I mentioned, we're still in a little bit of a period of price discovery in January. So we balance that ability to step into deals, I think where we're already involved, extract better pricing, extract better documentation, perhaps commit to something larger than expected. But I'd say we're also balancing that with a little bit of cautiousness because the markets sold off pretty hard, Ryan, as everybody saw.

Okay, that makes sense. And then really given your very strong portfolio growth that you guys had this quarter, I really wanted to talk about your guys' leverage range as we kind of look into 2019. Your guys' new leverage range of 0.9 to 1.25 goes into effect later this year. That's a pretty wide range. So I just wanted to know what are the factors that you guys are considering that would have you to operate at the lower end of the range versus the upper end of the range. Are you guys concerned about the pulse of the economy, competition of private credit or quality or quantity of deals? And given the factors that you guys look to evaluate where you operate, given the current environment that we're in today, do you guys see yourself operating closer to the bottom end of that range or the top end of that range?

Sure. So just for folks who forgot, we have until June 21 of '19 to kind of stay at 1x or below based on our board approvals and all that. So we're kind of managing up, I think, is the tendency, Ryan, but as we've tried to communicate in the past, that range is something that we look at. And again, there's a presentation on our website that can take you through that's stated now. But it takes you through a 3-year plan that we tried to develop coming out of the SBCAA process with our board that gives folks a sense of where we're headed. So we've said most importantly, we'll expand the leverage ratio only if we find investments that we think are exciting for the company. We've been able to do that. That's why I think the general trend is, we'd like to take the leverage ratio up as we approach that June 21st period where we flip over. But look, we ended Q4, I think, at 0.7x net. We would have been happy if we were higher than that, frankly, but it's in the mid range of where we expect to be right now. And I think it's hard to tell. I mean, it really depends where the market goes from here. We had a pretty active Q4. Based on Mitch's comments around our backlog and pipeline, we remain pretty busy. That being said, it's again, in our minds, very much a period of price discovery. There's some large LBOs up above our market that are just getting syndicated today that have seen a lot of fluctuation in their syndication process from week to week. So I think to say that we know exactly where we're headed from here is probably expressing too much certainty. But look, our goal is over a 2- to 3-year period, generally, to be able to take our leverage ratio well up over 1. And we think that, that improves the ROE, just as a reminder, at our company, improves our ability to continue to pay the existing dividend, and we hope higher dividends without introducing material risk to the company that wasn't effective.

The next question is from Rick Shane of JP Morgan.

Kipp, you touched on a lot of it, but what did you just think about the approach as you move towards June 19th? What I'm really sort of wondering is, in second quarter, as you approach that -- presumably sort of approach the historic leverage limit, is there any fair value risk intra-quarter? Is the sort of tail scenario spread flowing out June 17th occurred? And is the expectation that you would presumably have a pretty significant pipeline that you'd try to close after the 21st?

Yes, thanks, Rick. Good morning. Appreciate the question. I think, look, I mean, that's where we're trying to strike that balance, right, obviously, and that we're trying to get towards the 1 without putting ourselves in a position where if something funny happened, and certainly the markets are more volatile, that we would the company in a bad position, right, relative to the 1 to 1 leverage that's -- and the June 21st date. So we're balancing both considerations. We're certainly not in a hurry. There's no reason to rush to increase the leverage ratio, obviously, and that we're pretty happy with the company's performance based on the quarter and what we see going forward. So trying to strike that balance.

Okay, great. Look, worth mentioning, fourth quarter, I believe, was the highest organic originations in the time we've covered the company. And the pipeline is up 85% year-over-year entering the first -- quarter-to-date in the first quarter. So it's definitely seems like you guys want to ramp into this.

Yes, I mean, I think, like I said, we have enough to do. I mean, the good news is here we have -- back to your point about the company's history, we have more people than we've ever had, we have more capital than we've ever had. I think the platform is as strong as it's ever been and we're really executing on it. We're able to close some pretty large deals these days, which moves the needle. Just remember, though, as we're closing things at year-end, there are deals that we're syndicating, right? So what we finished with at Q4 doesn't always mean that's necessarily what we're going to retain going into 2019. We do have the ability to syndicate and do other things. But I think you're right. I mean even in a tough market environment, I think this platform continues to differentiate itself in its ability to generate high-quality flow that we're excited about for the company.

Got it. And last question, given your size and scale and the sort of timing window, do you think you have the first-mover advantage in terms of moving towards that higher leverage?

I'm sorry, do we have an advantage moving towards the higher leverage?

Do you have a first-mover advantage over the next, call it, 3 to 6 months?

I guess. To be honest, I haven't really thought about it that way, and that I think it's much more of a long-term planning exercise for the company and that it is a focus on the next 2 quarters. I think it's just something that, again, because of the flexibility that affords it, i.e., it takes this risk away that, I think, has always been inherent in the BDC industry of companies. Having fair value adjustments or potentially tripping a 1 to 1 leverage test, which obviously, is pretty bad news. With 2 to 1, it gives us that flexibility, it kind of takes that worry away just long term and that it's pretty positive regulatory relief. And for us, it's a longer-term gain. I mean, look, we've been running the company now for almost 15 years. I don't think we have our sight solely on the next couple of quarters. We're just excited about what we think the relief does for us over the next 3 to 5 years.

The next question is from John Hecht of Jefferies.

I guess, a little bit of follow up from Rick's question. You had the highest organic originations in history, lower prepayments. Trying to balance that with, Kipp, some of your commentary about the -- there's still lot of liquidity, people are being very selective, late stage economy. I guess the question is, is the success you guys have had in deploying capital and the risk score, is that a function of big banks pulling back or the fact that you're really unique in the component that you can put larger sets of money to work it at anytime? Or is it more a function of other direct competitors having to pull back because of lack of access to capital?

I think it's not the -- thanks for the question, by the way, John. I think it's not the latter. I mean, the competition on the direct lending side definitely has capital. I do feel that, certainly, that we deliver relative to what the big banks provides these days is converting a lot of our private equity sponsored clients and larger ones. Just to say, I'd love to engage in buy-and-hold deals with couple of folks. We did one of those with a few of our competitors that was publicly announced until the $1 billion-plus-type transaction. That in the old days is a bank deal, right? In this world, because there was a take private, it was a 3-handed club between ourselves and 2 other substantial players in the market. So that should give you the thinking that just the model itself is very well positioned competitively. And when we look around vis-à-vis the competition, we think we're very well positioned in regards to the competition. But yes, we usually say that we don't really compete with banks. But I think more and more, the buy-and-hold option at the upper end of our market is exciting for our clients, and we probably do, to a certain degree, compete in some of these deals that could get syndicated or at least turn into lightly syndicated deals. The only other thing I'll just hit on because you mentioned the lower repayments number, which is what led to the net growth quarter, that's something that we expect. As the market gets more volatile, and certainly as we are virtually done with American Capital, we'd expect that the repayments that we see in the portfolio should slow down.

Okay, that's -- appreciate all that color. Follow-up question. Thinking about just kind of forward curves, where your pricing spreads now versus where maturing loans might be rolling off, is it fair to think that given all those things and what you plan on funding your growth with in 2019 that net interest margin should be relatively stable or is there other factors we should consider here?

I think so. I mean, I think the yields have been going up and we'll see what LIBOR does. It seems to have paused for now. I think pricing on the asset side has sort of settled in where it is for the time being, maybe it's 50 to 75 basis points wide of where it was 6 to 9 months ago. But until LIBOR rises, I don't think we see a big change there. The only other thing that impacts it is we'd see the potential for increasing defaults down the line to maybe widen spreads out. But again, economy seems good and it doesn't seem like defaults are set to pace up quickly. I think the longer-term focus for us is maintaining the cost of debt capital where it was. Penni made comments around the unsecured debt markets, which probably aren't as cheap for us as an issuers they were 12 months ago, and hopefully they'll peel up. But I think for now you're in kind of a period of NIM stability, John. Just as you guys think about forecasting, we feel maybe staying below is the best rather than thoughts about it going up versus going down.

Congratulations on another dividend hike.

The next question is from Casey Alexander of Compass Point.

Comprehensive presentation. You've answered most of my questions or they've been asked already. Just 2 real quick ones. You upsized the share repurchase program, but it doesn't appear as though you used any during the fourth quarter during a period of pretty significant volatility in BDC prices. Was it the environment that kept you or pricing discipline that kept you or were you close to using some of the repo program in the fourth quarter?

To be honest, it was bad luck. We actually were in a blackout period towards the end of December because we were doing valuation and we're trying to close the quarter out. So when things got really strange there the last couple of weeks of December, we're actually in a period where we were unable to buy stock under the current program. So one of the things that I think we're considering is obviously a program that allows us to buy stock back programmatically in any of these blackout windows. And I am not sure if the word is likely, but I think there is a high probability that's something that we put in place for '19 so that we can avoid situations where it's obvious we should be buying some stock back but we were unable to.

That's a very fair answer. Secondly, and I think we -- if I understood the comments correctly, the $300 million of converts that were paid off in January were paid off with the revolver?

Yes, and other available liquidity of cash and repayments, et cetera. So -- and those really came on par.

The next question is from Fin O'Shea of Wells Fargo Securities.

Just first question, looking back on the fourth quarter, I think we -- understanding from your comments and others that it was very technically driven. But to the extent that you saw perhaps a better risk-adjusted return, and I welcome your opinion on that, in the liquid markets, what are your views going forward on maybe a program that would allow you to lean in to liquid markets at a suitable fee structure to take advantage of that return?

It's not something we spend a lot of time on. It's a good question, Fin. I mean, look, if the secondary markets, where we can buy leverage loans at deep discounts, become so compelling, I think it's something we'd think about. Look, I mean, I think you know the credit platform here at Ares is pretty large. We obviously have a business focused on broadly syndicated loans, and that's sort of not what our BDC stands for. That being said, we do play at the upper end of the market in some of these likely syndicated names. And if there's secondary selling, I wouldn't be surprised if there were secondary selling, and some of the names that we're actually in the BDC, which are some of these sort of tweeners or slightly larger than middle-market names. So if we did it, I think we'd be focused on names in the existing portfolio and credit where we already felt comfortable with the existing metrics and that there was just technical pressure leading to selling in our existing groups. You look back to what we did in '06, '07 and '08, I think that was a lot of focus in the secondary market was on our existing names. It's one of the benefits of having 300-plus portfolio companies and more at Ivy Hill II that we can leverage.

Sure. Just a follow-up, sort of related, looking at the stability of the middle market, which I think you commented on alluding to a lot of the new managers taking perhaps indiscriminate deal flow. How do you feel today about the defensibility of the Ares brand with all of these new managers essentially, frankly, trying to be you, $10 billion plus, willing to take these deals if you choose to lean back? Where do you think you are in your ability to sort of maintain discipline, given the capital supply in today's market?

We feel confident. Look, I mean, there's no doubt the asset class has attracted a lot of capital. We've got competition that's growing rapidly. But I still think that there are 4 or 5 players, Ares included, that have really led and defined this market for a long time. And I am pretty confident in the team and the platform that we have here that we can continue to sustain that success.

Our next question is from Robert Dodd from Raymond James.

When I look, obviously, you have very good originations, strong growth in pipeline, but I'm -- and you've clearly got a good track record of directly originated credit over the years. Arguably, your track record on acquisitions is even better. Look at -- obviously, the gains last year on ACAS. So the question, I guess, is, Kipp, you made reference to gaining share in times of distress. How -- and, obviously, ACAS is now at the beginning, so talked about that, that's behind, that's the asset flush from that core asset, so it's kind of taken care of. So what's the appetite for acquisition of a portfolio versus direct originated lending? And do you think in times of volatility, there are likely to be, for the lack of a better term, motivated sellers, where you can pick up a portfolio rather than individually originated loans?

Yes. Thanks, Robert. We hope so. I mean, we've had some success doing that in the past. We've bought 2 companies. We've bought more than a couple of portfolios over the years. Look, we've built -- how do we compare to doing new deals? We built a pretty significant 100-plus person investment team here. They can originate assets below book, i.e., we charge fees on our new deals. We can bring on new investments at, call it, 96, 97. So we love the idea of doing acquisitions, but it's -- we've said in the past, we're value-oriented, right? So today, things, despite volatility, continue to trade reasonably well. There are definitely some exceptions. When we look at some of those exceptions that exist, it's difficult for us, at least, today, to find a catalyst there. Most of what we've done, as I've said in the past, have been driven by some sort of catalyst event, whether it was Allied being a lender-driven catalyst event or American Capital being a -- their existing shareholder base-driven catalyst event. There are things that put us in position to do something. So we hope so. I think a lot of people have our phone number and they have our track record of being able to, obviously, take on complicated deals and work through them and deliver good results for our shareholders. But not sure what else to add other than we'll see and we hope so.

And if I can, one follow-up sort of related because it's acquisition-related question, more for Penni. When I look at, obviously, spillover estimated, the end of this year, $323 million. The end of last year, it was $358 million. So obviously, it declined slightly despite the enormous gain. So this is a good thing for NAV and a good thing for shareholders. When I look at the tax loss carryforward, the end last year, it was $43 million, the end of this year it is $46 million. So can you give us some color on how that tax loss carryforward, which didn't change, protected $400 million in gains? So is it that the Allied tax law -- the tax-only loss is invisible in the 10-K, so to speak?

Well, there's a lot of disclosure in the footnotes. So I would refer you there if you want to look at it more and have further follow-up questions. But the short answer on the tax loss carryforward is, the carryforward is a combination of what was carried forward from prior years, additional tax losses realized in the current year and utilized, and that leaves tax loss for carryforwards for going into next year. So as we talked about, there were a number of tax-only losses that we were able to realize this year that came from the Allied portfolio that were tax-only losses, not GAAP impacted losses, and that's really what was available in there to have as effective tax deductions against the capital gains. So when you put all of that together, we effectively had no tax realized capital gains this year because of those losses that we took.

Okay. I appreciate it. What I'm really trying to get at is how much more in gains, which goes to NAV, which is a positive to shareholders. Could you take the -- I know this is an odd question, that would be protected in the similar manner. Obviously, $400 million in gains, all -- did you get to keep and a [tweak] to NAV is a positive thing -- it's permanent NAV, not spillover. How much more room do you have to do that if there were more gains going forward?

Yes. There are some additional Allied-related tax losses that are in the numbers that haven't been realized yet that could be available for the future. I just don't have that number off the top of my head, but it's not as large as what we took this year.

(Operator Instructions) The next question is from Christopher Testa of National Securities Corp.

I think you guys bumped up the dividend, again, and obviously, have the specials. Just curious how you're looking at the dividend going forward, especially after the fee waivers do run out, in the context of you recognizing the origination fees upfront? What I'm getting at is, is there was certain a cushion or like a fair amount of originations per quarter that you guys kind of assume when you declare the dividend levels?

Yes, Chris, thanks. Appreciate the question. So look, I mean, we've always said we want our core earnings to cover the dividend, right, and that's included fees. We're sort of at a level now where our core earnings, excluding our structuring fees, are covering the regular dividend. So especially as we look towards what I tried to mention to was a back-ended Q4, and we think about forecasting '19, we've got a lot of confidence in that $0.40. And we don't expect the fee waiver to be an issue as it -- in regards to that. We do kind of model forward about 6 quarters here that gives us a company operating model that allows us to think about dividends on a go-forward basis. But we do think we've got quite a fair amount of margin. It, of course, makes assumptions around having originations in Q2, 3 and 4 from a modeling perspective. But we don't, as you probably expect, put particularly aggressive modeling assumptions out there that we don't think are achievable. And the good news, too, is we typically, especially now don't really count on our structuring fees at this point to be an important component of the income to deliver the dividend. So that's our thought on the regular dividend. Historically, in terms of the fees, we've averaged around $0.07 a share just based on the natural activity of the portfolio. So we feel confident that there is a run rate, new investment, new fees piece of the model. And even in times, there have been a lot leaner or a lot stranger, which may impact '08, '09, our originations never go away, our repayments never compete go away. So we feel great about that $0.40 dividend today, or we wouldn't have increased it. We feel it's safe, sustainable, all of that. And when we increase dividends, we do it with a thought that they're not going back down. So it's certainly the philosophy. And the specials, frankly, is just driven by trying to strike the right balance between what was an unbelievable year of realized gains where we could pay specials out in cash, or simply to the last question, retain them all in a very accretive basis from a tax perspective and reinvest. And we've chosen to do both, but we thought some level of special was warranted just with the record to the tune of couple of hundred million dollars plus of realized gains. We haven't seen a year like that before, so we thought it made sense to pay out a special for the year.

Got it. Appreciate the detail there, Kipp. And you guys mentioned that now you're taking up the maturing notes with revolver as the unsecured note market is, obviously, unfavorable. Given that Ares, the platform already has a lot of CLOs that they serve as collateral managers, and you guys have the brand name, have you evaluated using securitization as a source of funding, especially with the increased flexibility that would allow you compared to a bank revolver?

Yes, we have. It doesn't give -- our expectation today is, it doesn't give us a huge cost advantage, but it allows us just to tap in a different source of capital, right? So if you think about, we have bank facilities, we have unsecured, we have converts. We did do a securitization, a balance sheet deal back in '06. We haven't done one since. But absolutely, it's part of the toolkit in terms of what we evaluate for the way we finance ourselves. Sometimes, just as a reminder, that's what Ivy Hill can do with and for us, and that we can syndicate some assets to Ivy Hill and end up having them do CLO issuances that bring back an equity investment for us and a fund that we consolidate under the Ivy Hill evaluation. So that takes up a portion of what you might have seen from us historically in terms of balance sheet securitizations. But absolutely we can. We're always thinking about it. We have those relationships certainly, and it's one of the tools in our toolkit.

This includes our question-and-answer session. I would like to turn the conference back over to Mr. Kipp DeVeer for closing remarks.

I really don't have anything, but I would just say thanks from everyone here for your continued interest in the company, and have a great day.

Ladies and gentlemen, this concludes our conference call today. If you missed any part of today's call, an archived replay of this conference call will be available approximately 1 hour after the end of the call through February 26, 2019, at 5:00 p.m. Eastern Time to domestic callers by dialing (877)344-7529 and to international callers by dialing +1 (412) 317-0088. For all replays, please reference conference number 10127020. An archived replay will also be available on our webcast link located on the homepage of the investor resources section of Ares Capital's website. You may now disconnect.