Medley Management Inc.
Q1 2018 Earnings Call Transcript

Published: 16 May 2018

[Operator:]

Welcome and thank you for joining Medley Management Incorporated First Quarter Conference Call. Today’s call is being recorded. Please note that this call is the property of Medley Management Incorporated and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and PIN provided in the company’s earnings press release. At this time, all participants are in a listen-only mode, but will be prompted for a question-and-answer session following the prepared remarks. On the call today is Brook Taube, CEO and Rick Allorto, CFO. Before the call begins, the company would like to call to your attention the customary Safe Harbor disclosure in the company’s press release regarding forward-looking information as today’s conference call may include forward-looking statements and projections, which are subject to risks and uncertainties. Any statement other than a statement of historical fact may constitute a forward-looking statement. Please note that the company’s actual results could differ materially from those expressed by any forward-looking statements for any reason such as those disclosed in the company’s most recent filings with the SEC. The company does not undertake to update its forward-looking statements unless required by law. During this conference call, the company will refer to certain non-GAAP financial measures, including fee earning assets under management, pre-tax core net income and core net income per share. The company uses these as a measure of operating performance, not as a measure of liquidity. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with the Generally Accepted Accounting Principles. In addition, these measures may not be comparable to similarly titled measures used by other companies. Please refer to Medley Management Incorporated earnings release and Form 10-K for definitions and reconciliations of these measures to the most directly comparable GAAP measures. The company has posted its first quarter 2018 investor presentation, which is available in the Investor Relations section of the company’s website at www.mdly.com. I would now like to turn the call over to Mr. Taube.

[Brook Taube:]

Thank you, operator and welcome everyone to Medley’s first quarter 2018 conference call. This morning, we announced the results for the quarter ended March 31 and core net income per share for the quarter was $0.05. On May 10, our Board of Directors approved a dividend of $0.20 per share that will be paid on June 1 to the shareholders of record on May 24. On the AUM, our total AUM ended the quarter at $5.1 billion and fee earning AUM was $3 billion at quarter end. Adjusted for certain post quarter closings, that number is $3.3 billion and I will speak further about that in a moment. Overall, we remain focused on building the business around the combination of our permanent capital vehicles, long-dated private funds as well as the separately managed accounts across the various investment disciplines we now have on the platform. The expansion of the investment capabilities and the products continue to be important steps as we look to diversify and grow our alternative asset management platform. I am pleased to report that we continue to make progress with our most recent initiatives and capabilities. In particular, I’d like to highlight development in our structured finance vertical. We continue to see demand on both the institutional and retail side for the strategy and following quarter end, we added over $40 million of fee-earning assets from institutional investors and we look forward to continued growth in the quarters ahead. In addition, we continue to make strides and our pipeline is strong and our tactical opportunities initiative. As we announced earlier this week, Medley was instrumental in a $1.4 billion timber transaction. Specifically, this opportunity was developed by our tactical opportunities team and we participated in and partnered with our institutional relationships to provide over $230 million of the capital to support this opportunity. It is a continued sign of our – and the broader Medley platform’s ability to generate unique deal flow and strong partnerships with both institutional investors as well as high-quality operating partners. At Medley, we remain focused on expanding our direct lending and corporate credit strategies. We have experienced strong origination in growth year-over-year and the pipeline in this part of our business remains very active. We continue to see demand for the yield solutions on both the institutional and retail side of the business. We do have a strong pipeline of institutional demand for managed accounts and we remained focused on launching our next private fund which will target senior loans later this year or early in 2019. I would like now to turn the call over to Rick Allorto to give you an update on the financials for the quarter.

[Rick Allorto:]

Thank you, Brook. Our results from operations for the three months ended March 31, 2018 were as follows. Total revenues were $14.4 million compared to $14 million for the same period in 2017. Revenues consisted of $12.1 million of management fees and $2.3 million of other revenues and fees. Total expenses were $12.8 million compared to $7.6 million for the first quarter of 2017. This increase was due primarily to an increase in severance-related compensation, professional fees and expenses of our consolidated funds. Additionally, there was a $0.9 million reversal of performance fee compensation in the March 2017 quarter. Other expenses net, was $11 million compared to other expense net of $1.4 million in the first quarter of 2017. This increase was due primarily to unrealized losses from our investment in shares of MCC. Pre-tax core net income was $2.1 million compared to $5.2 million for the same period in 2017. Core net income per share was $0.05 during the three months ended March 31, 2018 versus $0.10 for the same period in 2017. Core EBITDA decreased by $2.9 million to $5 million compared to $7.9 million for the same period in 2017. That concludes my financial review. I will now turn the call back over to Brook.

[Brook Taube:]

Thanks, Rick and thank you all for joining us today. We would like to thank everyone for the continued support. Our team remains hard at work on our existing platform and recent initiatives and we do look forward to further progress in the quarters and years ahead. We can now open the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is now open.

[Steve Castano:]

Good morning. This is Steve Castano filling in for Craig. So, just first question on the interval fund, can you share some feedback from your early conversations and meetings with your key distributors?

[Brook Taube:]

Thanks, Steve. This is Brook. We are in the early stages of the interval fund as we mentioned and we continue to work with the channel. We are signing selling agreements and we expect that process will continue in the quarters – in the coming quarters and look forward to reporting on sales and progress in each of the next few quarters which will be important in terms of the inflection for STRF.

[Steve Castano:]

Thanks Brook. And just as my follow-up, are you seeing more advantages to the players with scale, especially when it comes to distribution?

[Brook Taube:]

Sure. I think it’s being seen on a number of fronts and we watch it both in the consolidation within our industry as well as the behavior of LPs on the institutional side, there is clearly at a growing appetite for platforms that have scale and diversification of product offering. Our dialogue with institutional investors is around what capabilities you can provide. So, we see it both on product side as well as overall firm scale. We have talked about this in the past and I would say to sort of process of thinking from the investor side as well as the allocation of capital is requiring greater and greater scale and we expect that’s going to continue.

[Steve Castano:]

Perfect. Thanks Brook. That’s all for me.

[Brook Taube:]

Thanks, Steve.

[Operator:]

And our next question comes from the line of Casey Alexander from Compass Point. Your line is now open.

[Casey Alexander:]

Yes, good morning. I appreciate that the unrealized loss on the MCC shares is one component of the other expenses, but there is still $7 million to $8 million that aren’t unaccounted. Can you kind of give us some color of what else is in there just because it characterizes other?

[Brook Taube:]

Casey that is the lion’s share of the detail, yes $9.7 million is related to MCC, Casey.

[Casey Alexander:]

Okay. Can you discuss a little bit more given the nature of the business the need for scale and strategic initiatives as the company might employ to take advantage of that?

[Brook Taube:]

Well, I will give you a high level comment in the Casey and I may have mentioned this in the past, there is two ways to get scale we have looked at, one is organic growth. We are pleased to see that, that’s developing in the structured credit business as well as the tactical opportunities business. The structured credit is gaining interest and we are looking at ways to expand that institutionally and then also in the retail channel. Again, like our interval fund, these are in the early stages we expect one or both will actually meet with growth, it just tends to be a slow ramp and then it inflects. Clearly, we are looking forward to that inflection on the positive side. The second is scale products. I think what we are saying about the institutional side of our business is increasingly LPs looking for larger allocations. So, where in the past you might collect smaller managed accounts or funds that grow in smaller increments. We think the institutional business will become a little bit more lumpy as we signed up new relationships. The more complicated and challenging is inorganic and that would come in two places, capital or distribution. As I have said in the past, we have looked at ways to do inorganic opportunities those would – those would be working with channels, working with folks who have capital to help us expand our product set and also looking at ways to expand the overall investment capabilities and asset classes at the firm. We have done that in the past. We expect to continue to look at those and my – high level comment is those can be challenging to break to execute. But as and when we find the right opportunity and the right fit with human capital, I think that’s something that you can reasonably expect from us. Does that answer the question? Maybe we lost Casey. Well, I hope that answered it, Casey.

[Operator:]

[Operator Instructions] And at this time, I am showing no further questions. I would like to turn the call back over to Brook Taube for any closing remarks.

[Brook Taube:]

Thank you all for joining today. We continue hard at work and look forward to reporting progress in the quarters ahead. And on behalf of the team, we wish everyone a good summer and look forward to speaking with you again in August.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.