Medley Management Inc.
Q4 2017 Earnings Call Transcript

Published: 29 Mar 2018

[Operator:]

Welcome and thank you for joining Medley Management Incorporated Fourth Quarter and Year-End 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 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. 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 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 fourth quarter 2017 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 fourth quarter and fiscal year-end 2017 call. This morning, we announced our financial results for the quarter ending December 31st. The Company’s core net income per share for the year was $0.33. Core net income per share for the quarter was $0.05. On February 7, 2018, the Board of Directors approved a dividend of $0.20 per share that was paid on March 7, to shareholders of record on February 22. Our total AUM ended the quarter at $5.2 billion, our fee earning AUM was $3.2 billion at quarter end. We continue at to remain focused on building the business around the combination of our permanent capital vehicles, long-dated private funds, and separately managed accounts across our five investing disciplines. We do continue to see demand for our yield solutions from both institutional and retail investors. Our Sierra brand remains well established in the retail channel. In an effort to expand our Sierra product offerings, we now have three funds at different stages of development. Our flagship Sierra-branded offering Sierra Income Corporation continues to raise capital and had $1.2 billion in fee earning AUM at year end. Sierra Total Return Fund, our corporate credit focused interval fund continues to make inroads into the broker dealer channel and we continue to receive favorable feedback on the interval funds structure generally. We do look forward to reporting on the growth in STRF in the quarters ahead. Sierra Opportunity Fund had been reviewed by the SEC and we’re currently evaluating distribution options for that product, and we expect it to launch in the latter half of 2018. During the fourth quarter, we filed our fourth Sierra-branded product, Sierra Real Estate Fund. We expect this vehicle to launch in 2019 and this vehicle will provide retail investors with diversified exposure to real estate asset through both public and private investments. On the institutional side, we have a pipeline of demand for managed accounts and we expect to launch our next private fund targeting Sierra loans later this year. We continue to expand our structured finance team and are in active discussions on further capital raise in both the institutional and retail channels for our structure finance strategy. This expansion of our investment capabilities and products are and continued to be important steps as we diversify and grow our alternative asset management platform. I’d like to turn the call over 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 December 31, 2017 were as follows. Total revenues were $18.5 million compared to $18.3 million for the same period in 2016. Revenues consisted of $16.2 million of management fees, $2.2 million of other revenue and fees and $0.1 million of performance fees. The increase in revenues was due primarily to a $0.9 million increase in management fees, partially offset by a $0.6 million decrease in performance fees. Total expenses were $13.6 million compared to $9.2 million for the fourth quarter of 2016. This increase was due primarily to a $3.1 million increase in compensation and benefits and a $1.3 million increase in general, administrative and other expenses. Other expense net was $1.8 million compared to other expense net of $1.6 million in the fourth quarter of 2016. The unfavorable variance was due primarily with the decrease in other income partially offset by an increase in dividend income. Pre-tax core net income was $2.5 million compared to $7.4 million for the same period in 2016. Core net income per share was $0.05 during the three months ended December 31, 2017 versus $0.14 for the three months ended December 31, 2016. Core EBITDA decreased by $4.4 million to $5.5 million compared to $9.8 million for the same period in 2016. Our results from operation for the full year ended December 31, 2017 were as follows. Total revenues declined, a decrease by $10.5 million to $65.6 million compared to $76 million in 2016. This decrease was due primarily to an $11.3 million -- 11.3% or $7.4 million decrease in management fees partially offset by a 13.4% or $1.1 million in other revenue and fees. Total expenses decreased by $16.4 million to $39.6 million for 2017. This decrease was due primarily to a decrease in the general, administrative and other expenses. Pre-tax core net income decreased by 11.3 million to $17.6 million compared to $29 million for 2016. Core net income per share was $0.33 for the year-ended 2017 versus $0.54 for the year-ended 2016. Core EBITDA decreased by $9.3 million to $29.2 million as compared to $38.5 million in 2016. That concludes my financial review and I'll now turn the call back over to Brook.

[Brook Taube:]

Thanks, Rick. We appreciate the continued support and operator we can now open the call for any questions.

[Operator:]

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

[Craig Siegenthaler:]

So, it looks the DOL rule is not going to be enforced now, and the fiduciary role in this year is now fully shifted to the SEC. I’m just wondering if you have any thoughts on how this could impact your business from a growth perspective?

[Brook Taube:]

Thanks, Craig. Look the Sierra brand is well positioned within retail channel. Sierra Income Corporation continues to take it. We do think Sierra Total Return Fund will begin ticketing in the coming quarter that also structured appropriately for the current regulatory landscape as or the other funds. I think in general we’re not seeing many of the broker dealer reset sort of back to what we call pre DOL standards. For the most part they’re maintaining, I think most of the fiduciary roles even though they’re not require to do so, but the fact that our products are complaint and they’re appears to be a less of the headwind. The combination of all that suggest we think that’ll be continued to pull through for the products.

[Craig Siegenthaler:]

And then just a follow-up on the investing front. Can you comment on how competition is attracting across your bigger businesses like the public BDC, the private BDC. I know Sierra Total Return's new, but there is seriously a lot of capital chasing deals today at this part of the cycle. And I just wanted to see if IRR is growing more or less attractive in any of the segment?

[Brook Taube:]

Yes, that’s a good question and we think about the world from an origination perspective here on the front end of the manufacturing process. There continues to be pressure I would evidence that by slightly lower spreads, partially offset obviously by rising LIBOR. We’ll be continuing to see permissiveness on structure that is with respect to covenant levels to the extent that they exist. Most of that occurs in the larger cap more liquid loan market, but if we look at our volume in 2017, it was more than double 2016. So, I think in the middle market direct deal we had significant increase year-over-year, quarter-over-quarter we also saw volume uptake. So, we’re seeing enough deal flow, I think in the larger end of the market larger deals they’re certainly as compression on spreads and structure. We’ll have to watch carefully, we’re still finding enough deals to put the capital to work that we have and reinvest on the margin capital is been rolling off.

[Operator:]

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

[Casey Alexander:]

There was a solid increase in management fees for the quarter, but also a little more than corresponding increase in expenses. When we look at these things on a quarter-over-quarter basis compared to the third quarter. Can you give us some sort of feel for what drove those increases both on the management fees side and on the operating expense side?

[Rick Allorto:]

Sure, Casey, this is Rick. On the management fee side, the increase was driven largely by incentive fees, part one incentive fees for Sierra Income Corporation. And then on the expense side, including in G&A in Q4 was approximately about $500,000 of onetime expenses and the balance of the increase was related to compensation expense. These expenses gave results in the decline in core net income for Q4, however if you’re looking at the business on a run-rate basis for the full year, core net income per share was $0.33 and we’d expect 2018 to be above the 2017 level.

[Casey Alexander:]

Okay. That’s very helpful. Is the -- on the compensation side, was that like year-end bonus accruals things like that what drove the increase?

[Rick Allorto:]

A good portion was clearly related to the increase in the part once incentive fees at Sierra. And then a balance was related to the year-end bonus accrual, correct.

[Casey Alexander:]

Secondly, I think, how would you expect the Medley platform to potentially adapt to the new BDC leverage law? And would you say, it’s different for MCC as to Sierra Income Fund?

[Brook Taube:]

Thanks, Casey. Obviously, this is new. We’re going to see how the market is going to respond. Our view is that the positive for the structure, we would expect to look at this carefully overtime. There is likely to be no difference between how it impacts MCC versus Sierra in our view. In both cases, as we’ve mentioned on prior calls over the past two years to three years we’ve shifted to larger borrowers, larger deals. As we work through the remaining legacy portfolio specifically at MCC, we’ll look at both of these portfolio is position against larger borrowers, higher EBITDA more diversification. At that time, I would expect to the extent that the leverage limits are applicable and we’ve look at that pathway we would benefit from to leverage expansion.

[Casey Alexander:]

So, you would expect at some point in time to try to take advantage of the expanded leverage capability for the offer budget new law there?

[Brook Taube:]

I believe that’s correct, thank you, yes.

[Operator:]

[Operator Instructions] And at this time, I’m showing no further questions.

[Brook Taube:]

Thank you everyone for participating. Feel free to reach here if you have follow-up questions. And we look forward to speaking with you on the next call. Thanks.

[Operator:]

Ladies and gentlemen, this does conclude today’s call. And you may all disconnect. Everyone have a great day.