Onex Corporation (OTCPK:ONEXF) Q1 2016 Earnings Conference Call May 13, 2016 11:00 AM ET
Emilie Blouin - Director, Investor Relations
Gerry Schwartz - Chairman and Chief Executive Officer
Chris Govan - Chief Financial Officer
Robert Le Blanc - President
Tawfiq Popatia - Managing Director
Seth Mersky - Senior Managing Director
Josh Hausman - Managing Director
Paul Holden - CIBC
Scott Chan - Canaccord
Welcome to the Onex First Quarter 2016 Conference Call. My name is Kirsten and I will be your conference operator today. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference over to Ms. Emilie Blouin, Director, Investor Relations at Onex. Please go ahead.
Thanks, Kirsten. Good morning, everyone and thank you for joining us. We are broadcasting this call live on our website.
With me today are Gerry Schwartz, Chris Govan, and a number of our managing directors. The first quarter MD&A and consolidated financial statements are available on our website and have also been filed on SEDAR. Our Annual Report includes the How We Are Invested schedule. This is a good financial summary of our investments and includes Onex’s capital on a per share basis. Also on our website is the pro forma schedule of fees and expenses, which should give you greater visibility into the revenue and expenses in our asset management platform and the parent company.
Before we get started, just a reminder that all references to dollar amounts on this call are in U.S. unless otherwise stated. I must also remind everyone of the usual forward-looking statements disclaimer and need to point out that all information relating to the fair value of our private company with the view of Onex management.
In addition, later in this call, we will reference collateralized loan obligations, or CLO offerings. We are required to remind you that these offerings are made solely to qualified institutional investors and to certain non-U.S. investors in private transactions not requiring registration under U.S. securities laws. The securities are not and will not be registered under U.S. securities laws and cannot be offered or sold in the U.S. without registration or exemption. As a reminder, our Investor Day will take place in Toronto on June 14. Please contact me for details.
With that, I will now turn the call over to Gerry.
Thanks, Emilie. Good morning, everybody. I will talk today about our activity in the first quarter and some updates on things that have happened since then. First, let’s start with what we are seeing in the markets in order to give you some backdrop for what we will report later.
Coming into 2016, renewed concerns regarding global growth and poor energy and commodity prices created really poor equity and credit markets for the first part of this year. In March, a somewhat more optimistic sentiment began to take hold, equity markets and more recently credit markets have improved. Our biggest challenge throughout the quarter was finding new investments that we really liked. Globally, the number of leveraged buyouts completed in the first quarter was down about 35% from last year and private equity dry powder is at record levels amazingly over $1.3 trillion globally. The IPO markets in the U.S. and Europe remained quite quiet off about 50% year-to-date compared to last year.
As always, we are well positioned with plenty of available capital nearly $2 billion of cash and $3 billion of undrawn commitments and we have a great team of professionals to invest in the right opportunities. While the value of our existing private equity investments was essentially flat in the quarter, several of our businesses did announce important tuck-in acquisitions, which are not yet fully reflected in our valuations. Of particular note, in that regard, is Schumacher’s agreement to acquire ECI Healthcare Partners. ECI is a national provider of emergency room management services in the U.S. Pro forma for ECI and the acquisition of HPP, which we completed last year, our 2015 purchase multiple of Schumacher has been reduced by about two turns of EBITDA. Those are pretty quick good results. We are very happy with it.
At Onex Credit, we priced our 11th CLO shortly after quarter end. It’s still a difficult CLO market and we were very happy to be one of only a handful of issuers to successfully access that market. In Europe, gathering quality assets at acceptable pricing levels remains a challenge. We are making slow progress given the accumulating assets in our European warehouse, although we still believe we will complete the European CLO this year, our first. Upon the closing of CLO-11, our credit platform will manage about $7 billion.
Last month, we announced plans to launch a direct lending platform, which will provide non-investment grade credit to middle-market and larger borrowers. Direct lending platforms have stepped in to fill the void left by banks that have been forced to reduce their leverage lending activity and that’s driven by tightened regulations of capital requirements on those banks. This platform is a natural extension of our existing business. It leverages our infrastructure as well as the team’s transaction expertise and extensive industry knowledge. Effectively, we are looking for the same credit types of profiles and returns in the DLP program as we already have in our credit activities. So, it gives us an opportunity to leverage the management infrastructure.
We have hired Walt Jackson to help us build this platform. Walt has more than 30 years experience in the leveraged loan high-yield mezzanine markets. Direct lending platforms consist of committed capital, very much like our private equity platforms and provide both management fees and the opportunity to earn carried interest on investment performance. We will provide more details as we get closer to the actual launch. Our distinctive ownership culture requires Onex management at all levels to have a significant stake in Onex shares to make meaningful personal investments in everything we do. Today, our team has $1.7 billion invested in our shares, operating companies and credit platform. This financial alignment is critical to our culture and overall success. We all share in the risks and rewards of everything we own.
Now, let me hand it over to Chris to take you in more detail through some of the financial aspects.
Right. Thanks, Gerry and good morning everyone. My comments will focus on the two supplementary schedules that Emilie mentioned earlier, How We Are Invested schedule and the Pro Forma schedule of fees and expenses. So first looking at the How We Are Invested schedule, there really has been very little change since year end. The total value of our Onex Partners private company investments was largely unchanged at $2.6 billion, an increase of $46 million from year end. This increase was after net distributions of $11 million in the quarter, so the value of our portfolio actually increased by $57 million or 2% quarterly return. The value increased also impacted Onex’s unrealized carried interest, which at $183 million is up slightly from year end.
At ONCAP, the value of our investments was $401 million at March 31, up $20 million or 5% in the quarter. This was the result of a few markups and the foreign exchange gain on a handful of Canadian based investments in ONCAP. Turning to credit, there was a $15 million increase in our investments there, which was made up of three parts. First, a $40 million net increase in capital allocated to CLOs as Onex funded the warehouse facility for CLO-11, which is expected to close next week; second, $21 million of regular distribution from our CLO investment; and third, a $4 million mark to market loss in Q1. The mark to market loss was principally related to our CLO investment. While the leveraged loan market experienced a partial recovery during the quarter, investor appetite for CLO equity didn’t follow suit. Post quarter end, we have seen some strengthening in CLO equity prices, however. Having said that, we remain focused on the long-term outcomes for our CLOs, which depends on the underlying cash flows and default. Today, all of our CLOs are comfortably on-site their coverage debt. We remain confident that the mark to market losses we reported today will [revoke] [ph] first as the CLOs mature, such that no losses will ultimately be realized.
There are two additional items on the How We Are Invested schedule I want to point out this quarter. The first item is the $29 million increase in the value of our real estate investment. This increase is net of a $12 million distribution and as such, reflects the value increase of $41 million for Onex. The second phase of the Flushing Town Center condo project continues to progress well, both in terms of sales and construction. The second item is that other investments now includes the $33 million we funded into the Incline Aviation Fund, a new aircraft investment fund managed by BBAM, one of our OP III operating companies. Onex has committed up to $75 million to this fund. Looking at the schedule as a whole, our capital per share at quarter end was $55.46, up $1.07 or 2% since year end. As you heard me say each quarter, while the How We Are Invested schedule and the changes in Onex’s capital per share are good measures of Onex’s investing activities, they do not reflect the value of our asset management activities. Onex manages over $22 billion of capital, approximately $17 billion of which is committed by our fund investors.
The pro forma schedule fees and expenses is one measure of the contribution that these asset management activities make to Onex. This Pro Forma schedule reflects the full scope of our asset management platform and we think is useful in trying to assess the value of those assets. Overall, the pro forma contribution of our private equity platform was $49 million during the LTM period, March 31. As a reminder, we include carried interest in the schedule only on a realized basis, so the amounts reported to you will always be lumpy. For example, as a result of the KraussMaffei sale, we expect to see approximately $11 million of carried interest from third-party capital reported here in our Q2 results. Stepping back, you will see the total pro forma contribution from Onex and its asset management platforms in the LTM period is $34 million or about $0.29 per fully diluted share.
Our overarching objective is to have Onex’s share price reflect both the growth and the value of our investments and the growing contribution from managing other capital. This is supported by a long standing quarterly dividend and a soft buyback program. In the first four months of 2016, we remain active with buybacks, repurchasing approximately 2 million shares for CAD164 million or an average cost of CAD81.42 per share. I am also pleased to report that yesterday our Board of Directors approved an increase in our dividend, again this year, a 10% increase effective for the Q2 dividend, which moved the annual rate to $0.275 per share.
That completes my comments. We would now be happy to take questions.
[Operator Instructions] Our first question comes from Paul Holden with CIBC.
Thank you. Good morning. So you disclosed now that you are able to do fund raising for ONCAP-4, wondering if you are now in a position to discuss sort of target size or target closing dates?
Hi, Paul, it’s Emma. Unfortunately, we are not in a position to discuss the timing or the size of the fund raise. Once we get going, we are happy to do that, but not at this time.
Okay. And then maybe you can provide us with some more color on the direct lending platform, if possible I guess in terms of the potential mix between proprietary capital and third-party capital?
So I think you could probably anticipate that – I am sorry this is Seth speaking. You could probably anticipate that our commitment to the direct funding platform will be a reasonable resemblance to what we typically do in our private equity funds relative to the total amount of capital raised, maybe a little bit on the lower side, but very, very supportive of the platform we’ll be a significant investor in it.
Okay. So somewhere around 20%, 25% is a good estimate today?
That’s probably not a bad guess.
Okay. And then would you be able to give any indications of initial size for that platform like how much you are kind of ballpark thinking about?
Not at this point. We are kind of under the same restrictions we are generally with regard to fund raising.
Okay, fair enough. And then Gerry made a comment related to Schumacher and the bolt-on acquisitions that company has been able to achieve since the first purchase and that suggest that those bolt-ons have been done with internally generated free cash flow, is that correct?
Josh, go ahead.
Yes, it’s Josh. No, the first deal was done with a combination of incremental term loan and incremental equity from Onex Partners, the second – and then some rollover from the existing management team. The second transaction was done with an incremental term loan and rollover from the existing team, no new next equity from Onex.
Got it, okay. And then final question is just with respect to the investment in Incline Aviation Fund, wondering if you can give a little more detail behind that fund in terms of what exactly the assets are like are these actually aircraft – a portfolio of aircraft being held by the fund or something that give us a better flavor for the characteristics of what’s holding that fund?
Did you hear my last question?
Robert Le Blanc
Did we lose Toronto? Operator, I think we’ve lost...
Yes, sir. Ladies and gentlemen, this concludes today’s conference call.
Robert Le Blanc
No, no, wait a second, just to make sure just let them dial back in. Just give us a second. Okay, everybody just sit tight for a second. We are having technical problem. This is Bobby.
We do have a question from the line of Scott Chan with Canaccord.
Can you hear me?
Robert Le Blanc
Yes, Scott. Just one second, just to make sure we have Toronto back on the line.
And we do have them on.
Hello. Go ahead, Scott.
Okay. So, maybe put another way on your credit platform, are you comfortable with your initial AUM target of $10 billion by 2017, I think right now you are at about $7 billion right now?
Sorry, we got dropped from the call. Is your question about our total credit platform or is your question where we left off about Incline?
Actually, Paul was asking about the Incline Aviation Fund, so I was going to ask that as well, too. Maybe you can kind of comment on that new fund and just the characteristics of it and how we should think about it going forward.
Sure, sure. Tawfiq will comment on Incline and Seth will comment on the total credit platform and I will promise that we will pay our telephone bill.
Okay. Hi, it’s Tawfiq. I didn’t hear the nature of Paul’s original question on Incline, but I will just give you a bit of color on what it is. It’s a fund that invests in leased commercial jet aircraft. Many of you will know that our investment in BBAM was predicated on the emergent leased commercial jet aircraft as a bonafide asset class, not unlike infrastructure or real estate, albeit several decades behind. We have had now two years to watch the BBAM team work since they have been an investment in OP III since January 2013. And they have done a good job for us and for the other third-party capital pools, which they manage. And then you also recall we are a 50% owner of the BBAM platform alongside the management team and we have a joint control over that platform. And so our commitment, the $75 million of equity is part of a larger $750 million fund that they have launched called Incline Aviation investment in leased commercial jet aircraft.
As regards the original target they set for the aggregate assets under management at credit, I think we are going to stick by that target. It’s not a kickoff, but I think we have a very good shot at it.
Okay. And just lastly on JELD-WEN, in the opening remarks, obviously, the IPO markets are very slow right now in the U.S. markets right now. What’s the thinking on JELD-WEN over the near-term continue to grow the company? It seems that continues to deliver very good EBITDA growth.
Yes. We are on track to continue to do what we intended to at the outset, which is to invest in the company to see it grow, to upgrade the management team, to go after the cost structure, to rollout continued productivity improvements through the organization, and we are right on track. To your point, the profitability of the business has improved quite meaningfully since we bought the business. We think we are still in the relatively early innings of the recovery in the housing industry and we remain very confident about the prospects of the business.
Okay, great. Thanks.
[Operator Instructions] Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect your lines.
Thanks, everybody for participating in the call today. We appreciate your continued support and please feel free to contact Emilie if you have any questions. Thank you.
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