Medley Management Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Welcome, and thank you for joining Medley Management Inc's Third 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 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; 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 most directly comparable GAAP measures. The company has posted its third 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 third quarter 2018 conference call. I will provide an update on the announced merger later in the call, but first I'd like to briefly review our quarterly activity at Medley. The company's core net income per share for the quarter was $0.06. On November 7, our Board of Directors approved a dividend of $0.20 per share and that will be paid on December 12 to shareholders of record on November 28. Total AUM at Medley ended the quarter at $4.8 billion and our fee earning assets was $2.9 billion at quarter end. Given the current market environment we continue to seek investments that provide downside protection and generate durable income in this rising rate environment. For our core credit business we're primarily focused on larger sponsor back borrowers that are well capitalized, have sensible structures and attractive deal terms and we expect that this trend will continue into 2019 post-merger and then beyond as we positioned the combined balance sheet for growth. Looking now at a couple of our new business initiatives. I'm pleased to report that we do have a strong pipeline of demand from institutional and retail clients for managed accounts and private funds that is across our direct lending corporate credit, structure credit and tactical opportunity strategies. On an institutional side, we continue to expand our capabilities and the solutions that we provide for our large insurance clients. As a result subsequent to quarter end we received a commitment for a new $100 million account, this is from a new client, it's a high quality insurance company. We expect this will close and begin investing in the first quarter of 2019. As I mentioned last quarter, we were instrumental and at $1.4 billion tactical opportunities transaction that closed in July. We participated in and part with our institutional relationship to provide over $230 million of the capital to support this large transaction and with a significant achievement for our team represents the ninth investment in a tactical opportunities vertical and based upon the success that we continue to demonstrate here and over the last three years. We expect to develop the strategy further in the institutional channel and rate dedicated capital in 2019. Like the tactical opportunities vertical over the past few years we've built a great foundation in our structure credit discipline. I did mention last quarter that we're on file with the retail investment product for this vertical and we're actively engaged with the distribution partner and I look forward to providing further progress on this product in the coming quarters. With the announced merger, the combined scale and balance sheet of our pro forma company will further enhance the ability to expand the existing business lines and anchoring grow new initiatives in the years ahead. Before I comment on the merger I'd like to turn the call over to Rick to review the quarterly financials.

[Rick Allorto:]

Thank you Brook. Our results from operations for the three months ended September 30, 2018 were as follows. Total revenues were $14.4 million compared to $16.6 million for the same period in 2017. Revenues primarily consisted of $12.3 million of management fees and $2.8 million of other revenues and fees. Total expenses were $12.5 million compared to $9.9 million for the same period in 2017. The increase was due primarily to an increase in professional fees including $2.1 million of expenses related to the announced merger. Other income net was $1 million compared to other expense net of $1.5 million for the same period in 2017. The increase was due primarily to $2.7 million of unrealized gains related to our investment in MCC stock. The $2.7 million of unrealized gains were allocated to the non-controlling interest in consolidated subsidiaries it did not have an impact on the income attributed to Medley management. Pre-tax core net income was $2.7 million compared to $4.7 million for the same period in 2017. Core net income per share was $0.06 compared to $0.09 for the same period in 2017 and core EBITDA was $5.6 million compared to $7.6 million for the same period in 2017. That concludes my financial review. I'll now turn the call back over to Brook.

[Brook Taube:]

Thank you Rick. To update investors on the announcement of our proposed merger. Sierra Income Corporation filed a proxy statement with the SEC that was on November 6 that includes important information that was filed on behalf of MDLY in connection with the proposed transaction. As we've said we expect to close the transaction in the first quarter of 2019. The combined entity will be known as Sierra Income Corporation. Sierra will be the second largest internally managed and expected to be the seventh largest publicly traded BDC in the market after closing. And simultaneous with the close Sierra is expected to be listed on the New York Stock Exchange that would be under the ticker SRA. Importantly Sierra will continue to operate Medley's existing asset management business as a wholly owned subsidiary whose growth and continued growth is expected to add to NII and NAV of the combined entity overtime. Our expectation is that, the combination of scale portfolio diversification and continued growth in the asset management business will enable Sierra to trade in line with its internally managed BDC pier group overtime. For a more complete description of the proposed mergers I'd encourage you to review the proxy statement that was filed again that was on November 6 and it was filed by Sierra. Thanks everybody for the continued support and operator, we can now open the line for questions.

[Operator:]

[Operator Instructions] the first question will come from Craig Siegenthaler of Credit Suisse. Please go ahead.

[Craig Siegenthaler:]

So first question here, the pickup and professional fees little larger than we're thinking, pretty sizable. I'm just wondering if you can help us with guidance around these fees into the fourth quarter and first quarter and the merger was a driver, but any detail on sort of what factors drove that will be helpful too?

[Rick Allorto:]

Craig, this is Rick. The driver in professional fees was related to the merger and as we look at Q4 and into Q1, 2019 we would expect those fees to decline, a good effort went into preparing the proxy statement for filing. So we would expect those to decline as we look in Q4.

[Craig Siegenthaler:]

Thanks and just a follow-up here on credit quality and I know the MCC data is public and you have a separate call for that one. If we look across your entire business of private credit. Can you comment on what you're seeing in terms of early stage credit quality, delinquencies? Has there been a pick up any commentary on that front will be helpful too?

[Brook Taube:]

Thanks Craig. As we mentioned on the MCC call in particular. We continue to work through and we sort of messaged that we'd expect in 2018 to walk through a substantial final parts of the legacy asset issue that we did have and we define those largely as loans made to smaller, borrowers and pre-dating 2015. So I will continue to message that we expect that to be largely resolved in 2018 and then with the merger closing in 2019 and beyond, the combined entity should be looking much more stable and post 201 in aggregate. With respect to 2015 and beyond assets which would be the most relevant bucket that would exclude that legacy component. We've had pretty stable performance. I'd say inline or better as it relates to default rate and non-accruals. We have not seen a pickup that would relate to overall performance in the economy. I think we like most investors are looking very carefully. So no there is no early signs that we're seeing that would suggest that there is portfolio issues in that group. And were continuing with the migration at the platform stay for larger more senior floating rate, larger positions, large borrower size. All of these I think largely would be consider defensive measures as we enter the later part of this overall cycle. So that process continue, we haven't seen signs in that 2015 and beyond group and we look forward to 2019 and after the merger to continue with that trend.

[Craig Siegenthaler:]

Great, thanks Brook.

[Operator:]

[Operator Instructions] the next question will come from Casey Alexander of Compass Point. Please go ahead.

[Casey Alexander:]

Couple questions. The $230 million of the tactical opportunity that you guys provided. I don't get the sense that has exhibited itself in the reporting of fee earning assets under management. Is it being carried in a different way or because it has a different compensation structure that it doesn't naturally fit into fee earning assets under management or am I just misreading that?

[Rick Allorto:]

Casey, this is Rick. You're correct in your latter thinking, the amount in fee earning AUM is smaller than that $230 million, it's around $40 million, $45 million and the balance is going to come in the form of just other fees and revenue not base management fees.

[Casey Alexander:]

Okay so only $40 million to $45 million shows up as fee earning assets under management and the rest of it comes in differently. Where would we look for it in the income statement when it comes in? Will it still come in under management fees?

[Rick Allorto:]

It will come in under other revenues.

[Casey Alexander:]

It will come in under other revenues. Okay. So I guess to a certain extent without some sort of guidance it will be almost unforecastable [ph] for us to figure out what, is there a reasonable run rate that we should be operating with as we look to model into the future.

[Rick Allorto:]

Yes, $1 million a year.

[Casey Alexander:]

Okay. Secondly, I appreciate the commentary about focusing on larger sponsor backed transactions certainly at this point in time in the economic cycle. That is a space that does have pretty well healed competition as well from some large platforms. How do you compete against those platforms and do you have the whole sides [ph] offer entire solutions to those platforms or would you look to club together some of those deals with other competitors?

[Brook Taube:]

That's a good question, Casey. I would say that a priority for borrowers, sponsors as you get to the larger part of the middle market, is certainty of close and the relationship. So we've done this and this is been part of our business for many, many years probably going back over a decade. So I don't want to suggest that this is an anyway new. As we've been able to grow the platform our relevance to the larger borrower in the middle market has increased and our relationships have deepened and broadened with the sponsors that we've known for 10, 15, 20 years in some cases. So it is relationship business and we're getting our fair share. When the size gets larger than we can hold, we can easily and frequently be partnered up. So that is the solution, there are clearly large platforms that have formidable dry powder and high quality capabilities, so there is competition. There's no question. The way we're seeing it, however in our space is not through overly aggressive terms in the deal. We have covenants still in our deals which is unlike the large and broadly syndicated market today. Leverage has [indiscernible] up a bit and that's used five times or higher per [indiscernible] that we're seeing more leverage but we're still seeing sensitive structures, large equity contributions and high quality sponsorship. I think what we're also seeing is, which has stabilized in the last quarter or so are overall returns, that's partially driven by spreads that are not compressing. Whether that's a reflection of continued risk op or more volatility I think for all us to be determined. Clearly LIBOR rising has helped but the balance here is a stability although lower yields when you go to the larger sponsor [indiscernible] borrower. So competitions are higher, yields are lower, structures are still sensible, leverage a little bit higher but we're still finding interesting and desirable opportunities to invest in.

[Casey Alexander:]

Thank you. These comments are greatly appreciated. One other question. We also appreciate that, when the merger was announced it was stated that the dividend policy would remain in place through the close of the deal and we did see that, the third quarter dividend of $0.20 was announced and should go ex-dividend in a couple of months. If the closing of the merger extends into late Q1, would it be your anticipation that MDLY would likely take another dividend based upon fourth quarter.

[Brook Taube:]

That's a good question, Casey. I don't want to jump the gun on forward dividends. But I would reiterate and we've publicly said it in a press release and disclosing the proxy that the intention of, all of the parties was to keep their dividend policies in place between announcing and closing.

[Casey Alexander:]

Well I certainly appreciate you're taking my questions and thanks very much

[Operator:]

And this concludes our question-and-answer session. I'd now like to turn the conference back over to Brook Taube for any closing remarks.

[Brook Taube:]

Thank you everybody for joining today. We've been hard at work on new deal opportunities growing our existing verticals, looking at new initiatives and importantly focusing on filing the proxy and then completing the attractive, exciting merger opportunity ahead of us. We'll have more to report on the fourth quarter and look forward to telling you about that at that time. Thanks again and we'll talk to you soon.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may disconnect your lines. Have a great day.