OHA Investment Corporation (NASDAQ:OHAI) Q1 2019 Earnings Conference Call May 15, 2019 10:00 AM ET
Steven Wayne - President & CEO
Cory Gilbert - CFO
Conference Call Participants
Steven Martin - Slater
Good day, ladies and gentlemen, and welcome to OHA Investment Corporation's First Quarter Report.
Before we begin, I would like to remind everyone that today's remarks may include comments which could be considered forward-looking statements and such statements are subject to many factors that can cause actual results to differ materially from our expectations as expressed in those forward-looking statements. Those factors are described in more detail in the Company's SEC filings and I refer you to the Company's website or through SEC's website to read those filings. The Company undertakes no obligation to publicly update or revise any forward-looking statements which speak only as of today's date. As a reminder, this conference call is being recorded.
I will now turn the call over to Steven Wayne, the Company's President and CEO.
Thank you, Sydney. Good morning. I'd like to welcome all of you to our company's first quarter 2019 earnings call. I'm joined on the call today by Cory Gilbert, our Chief Financial Officer. The presentation we're about to review has been posted to our website under the Events & Presentations heading on the Investor Relations tab. We also refer you to our Quarterly Report on Form 10-Q that was filed yesterday.
Before I begin today, I want to remind you that OHAI is in the midst of a strategic review process that our Board of Directors initiated to enhance shareholder value. These options could include among other things, raising additional capital, the sale of part or all of the Company, a merger or joint venture with another party, the acquisition of existing investment portfolios or other strategic transactions. We are actively working with our financial advisor, KBW, although there is no assurance that the Company will execute on any of these options.
As we've said previously, we do not expect to comment further or periodically provide updates to the market with additional information unless and until the Company's Board of Directors has approved a specific transaction or otherwise deemed disclosure appropriate or necessary, and I will not be commenting further or answering questions today regarding the strategic review process.
I'll now turn to Page 4 and provide a summary for developments for OHAI for the first quarter of 2019. OHAI’s NAV increased $0.06 per share or 3% to a $1.84 at March 31, 2019 from a $1.78 at December 31, 2018. This increase largely stands from $0.08 per share of net realized and unrealized gains on our investment portfolio. During the quarter, we wrote up our investment in the ATP royalty interests by $885,000 or $0.04 per share and we have $527,000 or $0.03 per share net mark-to-market gains on our OHAI portfolio.
We also recorded $220,000 or $0.01 per share of net realized gains. From a net investment income perspective, we incurred a $145,000 or $0.01 per share loss. During the quarter, we also declared $0.02 per share distribution which was paid to our shareholders on April 9, 2019. This quarter we invested a total of $2.3 million at an average price to par of 97.7%, and we had $6.3 million of net realizations.
Most significantly, we sold $5 million of our senior unsecured notes of Avantor at an average price of 104.5% of par, resulting in a realized capital gain of $223,000 or a $0.01 per share. This $5 million investment was initiated in September 2017 and generated a gross unlevered internal rate of return of 12.5%. Since quarter end, we’ve added or committed to over $2.7 million of new positions and exited our remaining $2.1 million investments in the TIBCO unsecured notes. I look forward to discussing this activity on next quarter’s call.
Now, a few comments on the general investing environment in the leverage credit markets. M&A activity which generally drives new money financing opportunities in the below investment grade credit markets slowed its pace in the first quarter of 2019 after an extremely active 2018. M&A activity in North America decreased year-over-year in the first quarter of 2019 on a deal count basis by 46%. However, bolstered by a few mega deals, M&A activity on a value basis only declined 6% year-over-year.
Despite the pervasive concerns over the capital markets at the end of 2018, markets rebounded quickly at the start of 2019. Although trade war fears have cut back into the market in recent weeks and we’ve seen some retracement of returns, most risk assets have posted a strong start to 2019. The leverage loan market returned 3.8% in the first quarter of 2019 and is up 5.3% through yesterday. The high yield market returned 7.4% in the first quarter of 2019 and is up 8.9% through yesterday. On the equity front, the S&P500 posted returns of 13.6% in the first quarter of 2019 and is gained 13.9% through yesterday.
In the leverage loan market following the volatile end to 2018, first quarter 2019 new issued volume was light. The typical strength experienced in leverage loan new issued volume in the first quarter of the year didn’t materialize with volume only growing 3% quarter-over-quarter and down 41% versus the first quarter of 2018. Syndicated transaction activity in the middle market posted an even weaker quarter.
Issuance by companies with EBITDA of $50 million or less was the lightest since the fourth quarter of 2015, decreasing from $1.7 billion in the fourth quarter of 2018 totaling $900 million in the first quarter of 2019. This was also a decrease from $2.4 billion in the first quarter of 2018. New issue middle markets spreads continued to move higher in the first quarter of 2019. New issue first lien yields for company of EBITDA of $50 million or less increased 48 basis points quarter-over-quarter to 8.5%, which is almost 200 basis points higher than the 6.6% in the first quarter of 2018.
I will now turn the call over to Corey to discuss the financial results for the first quarter.
Thank you, Steven, the financial headlines for the first quarter can be found on Page 5. Our investment income for the quarter totaled $1.5 million or $0.08 per share, a 9% decrease from the fourth quarter of last year. Base management fees were $316,000 and there were no incentive fees earned in the first quarter. We finished the quarter with net investment loss of $145,000, a $0.01 loss per share. We’re recorded net realized and unrealized gains totaling $1.7 million or $0.08 per share.
All together, we’ve reported a net increase in an asset from operations of $0.08 per share. After our $0.02 per share distribution declared in March and $0.08 in early April, our net asset value increased $0.06 per share to a $1.84, a 3% increase from the fourth quarter of last year. We continued our practice to seek positive assurance from the third party valuation firm on all level free assets with fair values in excess of $10 million on the quarterly basis. We will also seek positive assurance on other level free assets with any meaningful fair value on an annual basis. This quarter we sought and received third party positive assurance on 100% of our Level 3 assets with any fair value.
Page 6 shows the net investment income section of our income statement for the first quarter of 2019 compared to our results for the fourth quarter of 2018 and for the first quarter of the prior year. Investment income decreased by approximately $143,000 from the fourth quarter of 2018 primarily as a result of the $193,000 final Gramercy CLO remittance that was recognized as investment income in the fourth quarter of last year. Investment income decreased $754,000 or 33% from the same quarter last year predominantly due to placing our investment in OCI subordinating notes on non-accrual status in October of 2018.
In the first quarter of last year, our investment in LTI contributed $1.1 billion of investment income. Interest expense for the quarter was $629,000 or $0.03 per share compared to $593,000 or $0.03 per share in the fourth quarter of 2018 and $823,000 or $0.04 per share in the same quarter of the prior year. Quarter-over-quarter the increase in interest expense is due to higher average amount outstanding on our credit facility as a result of a $1 million net amount drawn during the first quarter of 2019. Compared to the same quarter prior year, interest expense was lower due to lower amounts outstanding on our credit facility as well as lower amortization of debt issuance costs. Management and incentive fees to our advisory were $44,000 lower in the first quarter of 2019 compared to the fourth quarter prior year. Compared to the same quarter prior year, base management and incentive fees were [indiscernible] lower.
Other G&A expenses for the quarter were $729,000 or $0.04 per share compared to $678,000 or $0.03 per share in the fourth quarter of 2018 and $1.1 million or $0.06 per share in the same quarter prior year. G&A expenses were $420,000 lower compared to the same quarter prior year primarily due to lower legal fee. As a result, we incurred a net investment loss for the first quarter of 2019 of a $145,000 or a loss of a $0.01 per share compare to net investment income of $49,000 less than a $0.01 per share in the fourth quarter of 2018. In comparison, we incurred net investment loss for the first quarter of 2018 totaling $95,000 or a loss of a $0.01 per share.
Turning to Page 7. You can see the summary of realized and unrealized gains and losses in the portfolio for the relevant quarters. As Steven mentioned earlier in the presentation, we sold $5 million of the senior unsecured notes of Avantor during the first quarter of 2019, resulting in a realized capital gain of $223,000 or $0.01 per share. Now let’s look at the net unrealized gains and losses on the lower portion of the page. For the first quarter of 2019, the total net unrealized gain was $1.5 million. The meaningful evaluation change in the quarter was related to an $885,000 unrealized gains in our ATP royalty interest. In addition of $527,000 of net unrealized gains were from the mark-to-market increases in the OHA investment portfolio.
On Page 8, you’ll find a graphical presentation of the components of the quarterly results and the respective impact on our net asset values per share. Net asset value per share at the beginning of the quarter was a $1.78 per share. NAV was reduced by the net investment loss of $0.01 per share in the first quarter distribution of $0.02 per share. These reductions to NAV were offset by the net positive adjustments in the values of investment portfolio totaling $0.08 per share. These all combined to increase our net asset value per share to a $1.84 for a quarter-over-quarter increase as $0.06 per share or 3%.
Now to discuss recent portfolio activity, let me hand the call back over to Steven.
Thanks Cory. Let’s go to Page 10. As shown here, OHA has been able to invest just over a $173,000 in 37 new portfolio companies since September 30, 2014, which we believe demonstrates OHA’s origination capability for outline.
Turning to Page 11. During that same period, we realized a $172.4 million of investments including a $120.3 million through the full or partial realization of OHA investments. A $104.8 million of this has come from the full realization of 11 investments. At the end of the first quarter of 2019, the fair value of our portfolio investments totaled $63.3 million excluding the $4.6 million of cash on our balance sheet. Our investment portfolio is split 83%, 17% between floating and fix rate investments. Also 78% of our portfolio investments based on fair value were classified as the Level 2.
Moving to Page 12. This page presents the realized and unrealized returns for the portfolio of company investments OHA has made through March 31, 2019, since becoming OHA's investment advisor. The 11 fully realized investments generated a $1 weighted average gross IRR of 13.4% on an unlevered basis. And when you include the $8 million of TIBCO that we sold in the third quarter of 2017, this increases to 13.8% as shown on the page. The remaining unrealized investments based on prices as presented in our March 31, 2019 financial statements have a dollar weighted average gross IRR of 10.9% on an unlevered basis.
Note that the unrealized returns shown here are considerably higher than a yearend due to the market rebound in the first quarter of 2019, reflecting generally asset prices. The returns shown in this presentation and discussed today are unaudited and provided for informational purposes, and these gross IRRs are presented before any fees or expenses. Please note, that the explanatory footnotes related to this chart are now found on the following.
Turning to Page 14. Despite investing $175.2 million over the past four plus years which includes $1.7 million of additional investments in legacy portfolio companies. The size of our portfolio by fair value has decreased 63% since September 2014, driven by $126.6 million in net negative valuation changes and $172.4 million of realizations.
Let’s now go to Page 15. This page better illustrates and explains the significant decline in NAV that OHAI has experienced since September 30, 2014 when OHA became the investment manager of OHAI. As shown here on that date, the portfolio consisted of $171 million of investment assets in only 10 portfolio companies, concentrated heavily in the energy industry. The price of West Texas Intermediate crude oil or WTI was over $90 a barrel, but almost immediately started drop, falling to around $50 a barrel by the end of 2014. In early 2016, WTI was under $30 a barrel and closed yesterday at around $61 after hitting a recent high of $76 in October 2018. This commodity price movement took its toll on these legacy energy assets.
Over the past four-plus years we’ve had a write-down or mark-down of approximately $111.6 million of the original $171 million of investment assets or approximately two-thirds of the fair value. Most of that $112.6 million of net write-downs and mark-downs, $97 million of it has come from seven legacy energy assets that totaled $127 million of the $171 million investment portfolio. As noted below, the amounts written-off and markdown shown here do not take into account any additional investment paid in kind of interest or dividends or discount accretion subsequent to September 30, 2014.
Let’s now go to Page 16. While the portfolio may be smaller, this chart does show a material difference in the composition and diversification of today’s portfolio. Although our energy exposure was down to 7% at March 31, 2019, as I just discussed, too much of this reduction in energy exposure has come unfortunately from the losses in the legacy energy investments. Away from the energy positions, we have substantially diversified our portfolio into a wide range of industries.
Let’s move on to page 17. During the quarter we increased the fair value of our ATP ORRI to $5.1 million. Since production recommenced in 2018, we received over $2 million in production payments including $611,000 received in the first quarter of 2019. Subsequent to quarter end, we received an additional $230,000 relating to March 2019 production. Our March 31st valuation of $5.1 million is based on the year end third-party reserve report updated for production during the quarter and March 31, 2019 commodity pricing strips, which were considerably higher than year end.
Consistent with the December 31, 2018 valuation, we arrived at our March 31, 2019 valuation by applying a 15% discount rate on only the proved producing reserve volume projections. Other than the previously noted mark-to-market improvements across the portfolio due to the market rebound in the first quarter, there were no other meaningful valuation changes during the quarter.
In February, we purchased $1.2 million of second lien term loan in Caliber, a leading provider of automobile collision repair. The Caliber second lien term loan was purchased at a 1.75% discount to par and earns interest payable in cash at a rate of LIBOR of plus 725. Also in February, we purchased $1.2 million of second lien term loan in PharMerica, a leading provider of health and pharmacy services to assisted living, skilled nursing and public health organizations. The PharMerica second lien term loan was purchased at a 2.5% discount to par and at interest payable in cash at a rate of LIBOR for 825 with a 1% LIBOR floor.
So, let’s move to another snapshot of our investment portfolio, the yields comparison on Page 18. This table focuses on the yields of our portfolio both as it relates to fair value and cost. Based on our current yielding investments, which include any PIK component for performing investments, our portfolio yields 10.5% and 10.6% based on weighted average fair value and cost respectively at March 31, 2019, this compares to 10.5% and 10.4% respectively at December 31, 2018.
As shown on Page 19, we have 27 active portfolio companies as of March 31, 2019 as compared to 10 at September 30, 2014. 25 of these are investments made by OHA and they now constitute 88% of the investment portfolio on a fair value basis. This ends our formal presentation for today.
I’ll now turn it over to the operator to coordinate the Q&A process.
Thank you. [Operator Instructions] Our first question comes from Steven Martin with Slater. Your line is now open.
Thanks a lot. Steven, with respect to ATP, on a quarterly basis, how are you booking the cash payments that you’re receiving?
As we’ve said before since we started receiving payments again year or so ago, we applying every payment we received to our basis. So, we’re not recording any income on the income statement, so everything goes in effect to the balance sheet and in effect to equity.
Okay. Now, correct me, if I’m wrong on my accounting rough cut. You’ve got $5.1 million left in ATP and a $1.340 million left in OCI totalling about $6.4 million and you have 20 million shares outstanding. If you wrote those off in their entirety and assume nothing that would be a $0.32 hit to book value?
I believe our value of OCI right now is $2.3 million, not $1.3. So that would be $7.4 million --there is $7.4 million of NAV left in our legacy assets and that’s about 12% of the portfolio. And yes on a -- it's about $0.035 or about -- sorry about $0.36 per share of NAV.
Well. Okay. Thank you very much.
Thank you. [Operator Instructions] And I’m showing no further questions at this, I would now like to turn the call back to Steven Wayne.
Thanks operator. And I want to thank everyone for their time today. I look forward to speaking with you next quarter.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.