Medley Management Inc.
Q2 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

Welcome, and thank you for joining Medley Management Inc’s Second Quarter Conference Call. Today’s call is being recorded. Please note that this call is the property of Medley Management Inc. 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 numbers – 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 are Chief Executive Officers, Brook Taube and Seth Taube; Rick Allorto, CFO; and Sam Anderson, Head of Capital Markets. 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 the 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, pretax 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 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 Inc.’s earnings release and Form 10-K for definitions and reconciliations of these measures to those most directly comparable GAAP measures. The company has posted its second quarter 2018 investor presentation, which is available on 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 second quarter 2018 conference call. Last night, we had announced an important strategic transaction involving MDLY. I will talk specifically about that in the prepared remarks. But first, I’d like to review the quarterly financial results. The company’s core net income per share for the quarter was $0.05. On August 7, 2018, our Board of Directors approved a dividend of $0.20 per share that will be paid on September 6 to shareholders of record on August 23. Our total AUM ended the quarter at $5 billion, and our fee earning AUM was $3 billion at quarter end. Overall, we continue to focus on building the business around a combination of permanent capital, long-dated private funds and separately managed accounts. The expansion of our investment capabilities and products continue to be important as we diversify and grow our alternative asset management platform. I am pleased to report that we do have a strong pipeline of demand from institutional and retail clients for managed accounts and private funds across our direct lending, corporate credit, structured credit and tactical opportunity strategies. As I mentioned previously, we continue to make progress on our tactical opportunities vertical. Medley was instrumental this quarter at a $1.4 billion timber transaction that closed in July. We participated in and partnered with our institutional relationships to provide over $230 million of capital to support this opportunity. This was a significant achievement for our team and represents the ninth investment in our tactical opportunities vertical. As a result of this investment and others, we have seen increased demand from institutional partners that want access to these high-quality investment opportunities. In addition to tactical opportunities, we do continue to scale our structured credit strategy. We closed $40 million of new capital in the quarter, and we’re in active discussions with distribution partners to explore growth opportunities in this business line looking forward. We expect the contemplated strategic transaction will further enhance our ability to expand our existing business lines and anchor and grow our new initiatives in the years ahead. I will review more detail on the merger announcement, but I’d first like to ask Rick to review the financial results.

[Rick Allorto:]

Thank you, Brook. Our results from operations for the three months ended June 30, 2018, were as follows. Total revenues were $15.2 million compared to $16.1 million for the same period in 2017. Revenues primarily consisted of $12 million of management fees and $3 million of other revenues and fees. Total expenses were $11.6 million compared to $8.5 million for the second quarter of 2017. This increase was due primarily to an increase in compensation expense and professional fees. Other expense net was $5.8 million compared to other expense net of $2 million in the second quarter of 2017. This increase was due primarily to $4 million of unrealized losses related to one of our investments, partly offset by an increase of $1.2 million in dividend income. The $4 million of unrealized losses were allocated to noncontrolling interests in consolidated subsidiaries, which did not have an impact on our net income attributed to Medley Management Inc. Pretax core net income was $2.4 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 June 30th versus $0.10 for the three months ended June 30th 2017. Core EBITDA decreased by $2.9 million to $5.4 million compared to $8.2 million for the same period in 2017. That concludes my financial review. I’ll now turn the call over to Brook.

[Brook Taube:]

Thanks, Rick. And for those of you who joined our 9 a.m. merger overview call this morning, this information might be a little bit redundant. But I want to review it here. Last night, we announced that MDLY had entered into a definitive agreement to be acquired by Sierra Income Corporation as part of a combination that will also include Sierra’s merger with Medley Capital Corporation. The transaction is subject to approval by Sierra, MCC and MDLY shareholders, regulators, and other customary closing conditions do apply. That being said, we are focused on closing and expect that, that will occur at the end of 2018 or early in 2019. For MDLY shareholders, the Class A common stock, for each stock that you own, you’ll receive $3.44 of cash consideration and special dividends of $0.65 for total cash consideration of $4.09 at closing. In addition to the cash consideration, MDLY Class A shareholders will receive 0.3836 shares of Sierra Income Corporation common stock to combined entity will be known as Sierra Income Corporation. And we’re pleased to report that Sierra is projected to be the second- largest internally managed BDC and the seventh largest publicly traded BDC in the market. And simultaneous with the closing, Sierra will be listed on the New York Stock Exchange. The combined company will have over $5 billion of assets under management, including $2 billion of internally managed assets, based upon the publicly reported financial statements for Sierra, MCC and MDLY as of June 30th. So these numbers are as of June 30 pro forma for the combination. We’re excited about the combination of the three entities and the potential meaningful benefits that it provides for stakeholders. At a high level, there’s four key benefits. First, we believe it provides significant increased liquidity for shareholders of Sierra. Sierra goes from being a public but not listed or traded entity to being a listed traded entity on New York Stock Exchange. And MCC and MDLY, as a result, will benefit from the increased scale and liquidity. That’s our observation. Again, the combined entity will trade on the New York Stock Exchange. Second, we expect the combination will be accretive to the earnings of both Sierra and MCC. The company will benefit from certain operational efficiencies and reduction in duplicative costs that are currently associated with there being three public entities. Third, we expect the combination of the businesses will strengthen the balance sheet and result in improved portfolio diversification. A larger, more diversified balance sheet also may enable broader access to the capital markets, which may provide the potential for lower borrowing costs over time. In addition, Sierra will continue – will operate, excuse me, Medley’s existing asset management business as a wholly owned subsidiary. And we believe that, that growth in the asset management subsidiary will be in a position to drive or help drive the growth in NII and NAV of the combined entity over time. So looking at the combination of the scale, portfolio diversification and growth in the asset management business, we hope and expect that Sierra will trade in line with internally managed peers over time. This is exciting and transformational. We look forward to bringing these three complementary businesses together, which will be the second- largest internally managed BDC and seventh-largest BDC in the market. Thank you for your continued support. And we can now open the line for questions.

[Operator:]

[Operator Instructions] I’m not showing any questions, so I’ll now turn the call back over to Brook Taube for closing remarks.

[Brook Taube:]

Well, thank you all for joining today. Again, we’re extremely excited about this combination. We look forward to keeping you posted in the next quarterly conference call, and we appreciate the continued support. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.