Medley Management Inc.
Q1 2017 Earnings Call Transcript

Published: 12 May 2017

[Operator:]

Welcome and thank you for joining Medley Management Inc.'s First Quarter 2017 Conference Call. I'd like to remind everyone that 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. You'll be prompted for a question-and-answer session following the prepared remarks [Operator Instructions]. And now, I would like to hand the call over to Sam Anderson, Medley's Head of Capital Markets and Risk Management who will host this morning's conference call. Mr. Anderson, you may begin.

[Sam Anderson:]

Thank you, Operator. Good morning, everyone and thank you, for joining us today for Medley Management's first quarter 2017 conference call. I'm joined today by Brook Taube, our CEO and Rick Allorto, our CFO. Before we begin, I want to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. And 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 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 our most recent filings with the SEC. We do not undertake to update our forward-looking statements unless required by law. During this conference call, we may refer to certain non-GAAP financial measures, including fee earning assets under management, pre-tax core net income and core net income per share. We use these as measures of operating performance, not as measures 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 our earnings release and our Form 10-K for definitions and reconciliations of these measures to the most directly comparable GAAP measures. We have posted our first quarter 2017 investor presentation, which is available in our investor relations section of the Company’s Web site at www.mdly.com. I would now like to turn the call over to Brook.

[Brook Taube:]

Thanks, Sam. And welcome everyone to Medley’s first quarter 2017 conference call. This morning, we announced our financial results for the quarter that ended on March 31st and the Company’s core net income per share was $0.10. On May 10th, our Board of Directors approved a dividend of $0.20 per share that will be paid on May 31st to the shareholders of record on May 22nd. Total AUM at Medley ended the quarter at $5.5 billion that was up over $400 million or 9% year-over-year. The fee earning AUM at quarter end was over $3.2 billion. During the quarter, we issued $69 million in seven-year unsecured notes, the net proceeds from this bond offering, combined with the previous issuance of bonds, which is in the latter part of 2016. These were used to fully repay the outstanding balance on our term loan and provide additional cash to support growth of the business. These public debt offerings allowed us to extend our maturities, term out and fix the rate on the debt, all with new unsecured borrowings. At this point, the balance sheet at Medley is in very strong position to support our growth in the years ahead. Overall, at the firm, we remain focused on building the business around the combination of permanent capital, long dated private funds and separately managed accounts, across all five of our investment disciplines. We continue to see significant demand for the various yield solutions coming from both institutional and retail. On the institutional side of the business, over the past 12 months, we received approximately $500 million of commitments from institutional investors. And on the retail side, Sierra remains a leader in the retail channel and we continue to expand the product offerings. Sierra Income Corporation continues to raise capital and remains top performer among its peer group. And I’m pleased to report that we have begun executing selling agreements with broker dealers, and we anticipate selling shares in Sierra Total Return Fund in the near future. And finally, we’re on file with our third branded -- Sierra-branded product, Sierra Opportunity Fund, and we expect to launch this fund in the latter half of this year or early 2018. These product expansions are important steps as we continue to diversify our alternative asset management platform. I am pleased to announce the addition of Chris Allen who came to the Medley platform recently. At Medley, he will be responsible for managing our structured credit strategy. Chris brings deep experience in structured credit and will add value to Medley’s investment capabilities as we continue to scale and strength the products at Medley for our investors. I’d like to turn the call over now for a moment to Rick to give you a quick update on the financials.

[Rick Allorto:]

Thank you, Brook. Our results from operations for the three months ended March 31st were as follows

[Brook Taube:]

Thanks Rick. As I said we continue to add high quality investment talent to the platform, adding assets under management, and our product expansion continues to diversify Medley's platform. All of this is going to continue to support our growth in the years ahead. Thank you for your continued support. We can now open up the call for questions.

[Operator:]

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

[Craig Siegenthaler:]

So first just on the investing environment, while you're not raising capital at the core BDC, you are in your other strategies; and refi activity is fairly high. So I just wanted to see if you could let us know how easier challenging it is say to put that capital to work in good risk adjusted credits?

[Brook Taube:]

Year-over-year volumes have been a little bit higher, but we're coming off of an early 2016 that was noticeably lower in volume, and that related to the challenged market in that part of '16. As we look in this year, activity is picking up but we're seeing spreads compressing both in the public and in the private markets. So there are some challenges. At the same time, we are seeing deal flow of our pipeline is strong and these are with sensible returns as well as sensible structure. So we're being careful but we are seeing volume. Does that answer the question?

[Craig Siegenthaler:]

And then just as a follow up on the lower Part 1 incentive fees. Do you guys have any visibility on those fees into the second quarter just because we're kind of already in the second quarter right now?

[Rick Allorto:]

Craig this is Rick. We’d expect to return to our historical Part 1 incentive and performance fees as we continue to grow the platform and add assets under management.

[Operator:]

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

[Casey Alexander:]

First of all, to follow-up on that last question when you say you expect to return get historical part one incentive fees. I guess question related to Q2 was that Q2 or at some point in time in the future?

[Rick Allorto:]

Casey, this is Rick. To clarify, it’s really more into the future, the latter part of ’17, early ’18.

[Casey Alexander:]

Secondly, can you -- now that you’ve finished the debt offerings. What on a quarterly basis do you expect the run rate of interest expenses to be?

[Rick Allorto:]

Casey on a run rate basis, interest expense is going to be approximately $2.5 million for the quarter.

[Casey Alexander:]

And lastly, just to follow-up on a question I asked last quarter. I asked about the lack of reimbursable offering expenses, and it was suggested that for forward modeling purposes, we should look back at the historical rates of offering expenses. And yet in this quarter, there was again no reimbursement for fund offering expenses. And as I said, this is -- at the time, this is something that is highly challenging for us to model. Is there any better clarity that you can give us on the reimbursable offering expenses going forward? Because it obviously has a tangible impact on adjusted EBITDA.

[Rick Allorto:]

And Casey, you’re specifically referring to Sierra Income Corporation?

[Casey Alexander:]

No. I’m referring to Medley Management.

[Rick Allorto:]

Unfortunately, I don’t have any additional guidance to give you at this point in time Casey.

[Casey Alexander:]

Okay. Thank you.

[Operator:]

And our next question comes from the line of Ann Dai with KBW. Your line is now open.

[Ann Dai:]

First question, I just wanted to touch on the lower comp. I’m just curious, if you think this is a descent run rate for the year and also wondering what areas of the firm the severance expense was driven by, whether it’s just one departure or if there were, if it's more than that?

[Brook Taube:]

Regarding the comp and the run rate, the current quarter is a good run rate. And then regarding the severance, that was due to a one-time -- departure of the single person.

[Ann Dai:]

And could you also give us some color on what specific products grow the growth in AUM this quarter, was it the CLO platform or something else?

[Brook Taube:]

The growth in AUM came from the expansion of the credit facilities in the joint ventures at the BDCs and then the growth in fee earning AUM came predominately from the deployment of capital within the managed accounts.

[Operator:]

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

[Brook Taube:]

Thank you. Can we just check, I think Ann had indicated she wanted to get back in the queue and maybe she was re-queuing.

[Operator:]

And we do have a follow from Ann Dai with KBW. Your line is now open.

[Ann Dai:]

I just have one more for you guys. I guess if I'm just thinking about the current earnings power and the pace of capital deployment, and the fact that they're still building out a bunch of new product offerings. Does it make sense at this point to maybe revisit the dividend and give yourselves a bit more breathing room to invest into the business or are you very committed to that dividend?

[Brook Taube:]

Looking at the business today, we obviously have plenty of the cash on the balance sheet to support growth. I'd say our current earnings level really includes limited Part 1 incentive and performance fees. So as Rick alluded to, our expectation is that we will earn these incentive and performance fees overtime on a run-rate basis at the back half of '17 and for sure in '18 if everything were stable. So if we look at that, as well as our dry powder that’s assets we have that will be deployed in the quarters and years also with new products that are in queue launched and pending launch. We remain optimistic about the earnings power both in the medium and long-term. So at this point, the Board approved the dividend. We'll obviously keep folks posted. But we’re optimistic about the medium and long-term growth of the platform for sure.

[Operator:]

I'm now showing no further questions, at this time. I would now like to turn the call back over to Mr. Brook Taube for closing remarks.

[Brook Taube:]

Thank you very much. Again, we're pleased probably the best time here as the addition and continued addition of high quality talents. The products are expanding selling agreements are being signed for Sierra Total Return Fund and other products are in queue. The team is doing a great job. We're looking forward to growing product and people, and look forward to speaking with you all again the quarters ahead. Thanks very much.

[Operator:]

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