Medley Management Inc.
Q2 2017 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

Welcome and thank you for joining Medley Management Incorporated Second Quarter 2017 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; 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 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 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 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’s 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 second quarter 2017 investor presentation, which is available in the Investor Relations section of the Company’s at website at www.mdly.com. I would now like to turn the call over to Mr. Taube.

[Brook Taube:]

Thank you very much, and welcome everyone to Medley’s second quarter 2017 conference call. This morning, we announced our financial results for the quarter ended June 30th, and the Company’s core net income per share for the quarter was $0.10. On August 8th, our Board of Directors approved a dividend of $0.20 per share that will be paid on September 6th, to shareholders of record on August 23rd. Our total AUM ended the quarter at $5.4 billion, which was up over $400 million or 8% year-over-year. And our fee earning AUM increased to $3.3 billion at quarter-end. Overall, we remain focused on building the business around a combination of permanent capital, long-dated private funds and separately managed accounts, that’s now over our five investment disciplines. We do continue to see significant demand for our various yield solutions and that’s coming from both institutional and retail investors, globally. For a quick update on the institutional side of the business. Over the last 12 months, we have received nearly $500 million of commitments from institutional investors and expect to launch our next private fund in the second half of this year. On the retail side, Sierra brand remains a leader in the retail channel, and we continue to expand the Sierra product offerings. Sierra Income Corporation continues to raise capital daily and remains a top performer among its peer group. Turning to Sierra Total Return Fund, I’m pleased to report that we have signed selling agreements, and commenced investing. We expect to sign additional selling agreements in the months ahead. To remind folks, Sierra Total Return Fund is our first interval fund, providing access to private credit while offering liquidity on a quarterly basis. We continue to receive very favorable feedback on the interval fund structure and look forward to significant growth in Sierra Total Return Fund in the years ahead. And finally, I’ll say that we’re on file with our third Sierra-branded product, Sierra Opportunity Fund, which we expect to launch 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 that Chris Allen has recently joining the Medley team and will lead our Structured Credit business. He has deep experience in structured credit to our expanding investing capabilities. I’d like now to turn the call over to Rick to give you a brief update on the financials.

[Rick Allorto:]

Thank you, Brook. Our results from operations for the three months ended June 30th, were as follows. Total revenues were $16.4 million compared to $21.3 million for the same period in 2016. Revenues consisted of $13.3 million of management fees, $2.7 million of other revenues and fees and $0.6 million of performance fees; the decrease in revenue was due primarily to $6.2 million decrease of Part I incentive fees from our permanent capital vehicles. Total expenses were $8.5 million compared to $17.5 million for the second quarter of 2016. This decrease was due primarily to a $5.3 million decrease in ESA expenses. Other expenses net were $2 million compared to other expenses net of $2.7 million in the second quarter of 2016. The variance is due primarily to a decrease in expense associated with our revenue share payable, partly offset by increase in interest expense. Pre-tax core net income was $5.2 million compared to $7.4 million for the same period in 2016. Core net income per share was $0.10 during the three months ended June 30th versus $0.14 for the three months ended June 30, 2016. Core EBITDA decreased by $1.5 million to $8.2 million compared to $9.8 million for the same period in 2016. That concludes my financial review. I’ll now turn the call back over to Brook.

[Brook Taube:]

Thanks, Rick. And thank you all for joining us today. So, through the middle of 2017, we have continued to grow assets under management as well as the investing capabilities in Medley. We are continuing to high-quality investment professionals to the expanding platform, and Sierras footprint in retail is expanding, happy that Sierra Total Return Fund has commenced investing and look forward to more growth in the back half of this year and 2018. Thanks everybody for your continued support. Operator, we can now open the call for questions.

[Operator:]

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

[Jordan Friedlander:]

Good morning. This is Jordan Friedlander filling in for Craig Siegenthaler. Just given the news from one of your competitors joining forces with Oaktree, I was wondering if you have any thoughts in partnering with a larger financial services firm that could add distribution strength around your product.

[Brook Taube:]

Yes, thanks Jordan. Look, as you know, we’ve carefully built our business around people, products and then partnerships. These have been designed really to provide yield solutions to our investing partners. And I look back over the past five years or so, for example, we’ve done this organically and delivered industry-leading, annualized growth in AUM. In the last few years, we’ve added to our investment capabilities and launched new products. We believe that positions us well for continued growth in the years ahead. With respect to distribution partners or other inorganic growth options, I guess, I would say that we’ve looked at many options to expand our footprint in the past but today, we’ve focused really on organic growth. To the extent that an attractive opportunity became available, whether that’s related to I guess investment capability, a partner to grow retail or institutional distribution capability and that include an opportunity for us to expand into an adjacent asset class, we would obviously consider that very carefully. But today, we’re pleased with the continued growth of the platform and look forward to more of the same in the years ahead.

[Jordan Friedlander:]

Great, thanks. And then, just one quick follow-up, Brook. Can you give us an update on the Sierra BDC sales effort, just given the first implementation of the DOL rule in June? And I guess, also, given the latest news of the 12 months delay of full implementation, how are you thinking about this and does this change your strategy at all?

[Brook Taube:]

Good question. We have not changed our strategy, we continue to sell shares of Sierra on a daily basis. At a high level, we’re looking at ways to make sure that the sale of Sierra Income Corporation continue and even increase over time. And this approach is considered with respect to the DOL rules and the implementation timeline. With respect to Sierra Total Return Fund, we have signed selling agreements and commenced investing, as I mentioned in the prepared remarks. And I look at that as we’re at the -- we finished what has been a multiyear preparation and investment in developing this interval fund; that’s now complete. We do expect continued uptick in the retail channel in the next quarter or two and as measured by selling agreements and then access to financial advisor desktops. So, we do expect sales to pick up in the months and quarters ahead for STRF. And I would say that like all similar products, it’s going to take a little time for meaningful growth in AUM, as it relates to our total firm-wide assets. And STRF and the interval fund product appears to be outside of the DOL issue or implementation. So, we do have strategies in both cases, we are watching it carefully, and we will report more in the quarters ahead.

[Operator:]

Our next question comes from Casey Alexander from Compass Point Research. Your line is open.

[Casey Alexander:]

I appreciate your comments about the on ramp for STRF. But, looking at the last two quarters, in Q1, your fee earning assets under management increased $24 million and in this quarter, they increased by an additional $65 million, and that’s after a year of really sideways movement for fee earning assets under management. Are we starting to hit our stride in terms of getting some more money to work here?

[Brook Taube:]

Good question, Casey. Look, we have a plan in place to grow the fee earning assets, keeping in mind important investing disciplines which included measured deployment of capital in sensible deals. The headwind has really been two-fold. One is repayments; those are just real, it’s been significant and it’s been industry wide. We have witnessed many big platforms shrinking AUM actually. So that hasn’t happened; we are continuing to hold ground and grow in a measured way. The other is being disciplined and careful in an increasingly competitive environment. We are seeing deal flow; we are being careful and selective. I think time will tell whether either of those abate. But, we are positioned and we do have increasing products and increasing investing capabilities. So, we do have the intention to grow the fee earning AUM and I’ll expect to report constructive news in the quarters ahead.

[Casey Alexander:]

Secondly, we certainly appreciate the incentive fee waivers that you done to support the investors of some of the prominent capital vehicles, they seem to be acting a little bit better. Is there any visibility towards the resumption of some of the incentive fees?

[Rick Allorto:]

Casey, thanks. This is Rick. Without being too specific, the earnings growth we’ve driven by increasing fee earnings assets over time. We do have -- as Brook alluded, we do have meaningful dry powder and new product expansion in place. And then driving fee earning assets from the current levels, as Brook said, will depend on careful deployment of capital throughout this year and 2018.

[Casey Alexander:]

And again, Rick, while you are on the line, there seems to be significant quarter-to-quarter volatility in terms of reimbursement of fund offering expenses. I’m going to ask again, how do you suggest that we model that going forward? Is there any type of guidance that you can give us on that? Because, it seems to be a big variation sort of below the line but it definitely makes difference in terms of estimates.

[Rick Allorto:]

Sure, Casey. So, our expense support agreement with Sierra Income Corporation expired at the end of 2016. So, there will be no --- so we will no longer have ESA expenses related to Sierra Income Corp. We do have an expense support agreement currently in place for Sierra Total Return Funds. And our expectation is that the amount of ESA support that will be required will not be material. For the current quarter that amount was $283,000. And I would recommend that level from a forward projection perspective for Sierra Total Return Fund.

[Operator:]

Thank you. Our next question comes from Ann Dai from KBW. Your line is open.

[Ann Dai:]

Hi. Good morning. Thanks for taking my questions. First, I was just hoping, Brook, that you could give us somewhat of a postmortem on some of the credit issues that you’ve had within the portfolio, maybe what’s been learned by the investment teams? How much of that do you feel has been resolved to this point? And then, what you’ll need to still address going forward?

[Brook Taube:]

Yes. Ann, just to clarify, we’ve had a few credit issues at MCC, which is about 17% of the AUM now. That’s a legacy issue going back years. The team’s hard at work at those. We’ve talked about that specifically on the MCC call. We are through many of the restructurings and what we said publicly as if that’s going to resolve itself in 2017, we’re halfway through the year. But I’d just like to point out, that’s a very small part of our AUM and our overall business, the senior lending business has been performing quite nicely over years; that’s where we’re seeing growth as well. And the interval fund, structured credit and tactical opportunities businesses do not correspond to that. So, very much a legacy issue at MCC and we’re making our way through it.

[Ann Dai:]

Okay, I appreciate the color and how that relates to the other products. My other question is around fund raising. You talked about the launching the next private fund. Could you just remind us if that’s similar to the opportunity funds or if there is a different focus? And then, also, just give us an update on where things are with the CLO opportunity fund and the various JVs whether those are still actively fund raising?

[Brook Taube:]

Sure. Our new fund launched to the institutional market at the end of this year is going to be a senior loan fund strategy; that’s consistent with what we’ve done over the years in our senior lending business. Sierra Opportunity Fund which is in registration will come on line. We expect that to be our future distribution for the CLO business. Again, this is providing capital to the CLO market in the form of equity and mezzanine capital, as well as warehouse and then secondary activities, consistent with the Medley Credit Opportunity Fund strategy. We are in dialogue with many institutions for managed accounts that would range, primarily consist of senior lending but also in a lesser extent include both tactical opportunities or structured credit. Those dialogues are active and we would expect and are pushing forward on all of these fronts in the institutional channel. So, institutional pushes on all the products; retail will be Sierra Total Return Funds, coming on line and ramping; Sierra Income Corporation continuing to take a daily; and the third Sierra product coming on line in 2018 again focused on the structural credit. So, you can imagine our team is hard at work We have a lot of human beings focused on this. And we’re looking forward to pushing forward on each front in the back half of 2017 and 2018.

[Operator:]

[Operator Instructions] And our next question comes from Mickey Schleien from Ladenburg. The line is open.

[Mickey Schleien:]

I just wanted to ask a fairly high level question, given that Medley has a pretty wide net in private credit. Brook, I really appreciate hearing about your current view of the loan markets outlook. Given how tight the market is now, which investment strategies do you think offer the best risk adjusted returns?

[Brook Taube:]

Yes, I would agree with your comment, we are sensing that the market is tight. That’s characterized by two factors. One is competition which we think is driving down spreads. There is obviously a significant refinancing activity in the market that’s a reflection of investor appetite. The second is characterized by structure. We are continuing to see a trend toward more permissiveness. That’s more pronounced in the liquid markets, which we have a very significant view on, to a lesser extent but increasing in the middle market direct. At a high level, the way we are thinking about taking risk today is barbelled approach. On one hand providing capital in the firm of first lien, secured, LIBOR-based loans, and that does range in the middle market up through broadly syndicated. And then to the extent that investors have appetite for higher returns, our suggestion is use similar high-quality assets and then term financing, and that leads you to CLO equity or similar, and/or in special opportunities, tactical opportunities. And again, that’s a growing business for us. So we are barbelling the approach, anchor to first lien floating, seek out risk but use sensible financing, term financing or in specific situations, tactical opportunities to take advantage of that. Does that answer the question?

[Mickey Schleien:]

It sure does and that’s helpful. I just have one follow-up. Have you -- at some point, the tide will turn and lenders will say enough is enough. Have you seen any indication of that yet? Because anecdotally, we are hearing that that might be starting to happen but it’s not yet showing up in the numbers.

[Brook Taube:]

I think it will happen. It is happening here where we are actually turning down opportunities that just don’t meet the criteria. Again, either it’s yield, target or it’s structure. We are finding opportunities but it has been a headwind to growing fee earning AUM. We do have dry powder. So, we could put more of it work, but being careful is paramount. I would not be surprised that these trends continue if more people continue to step back.

[Operator:]

Thank you. And I’m showing no further questions from our phone lines. I would now like to turn the conference back over to Brook Taube for any closing remark.

[Brook Taube:]

Thank you very much. Thanks everybody for joining today. We wish you the best for end of your summer and look forward to speaking again in a few months.

[Operator:]

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