Medley Management Inc.
Q1 2016 Earnings Call Transcript

Published: 12 May 2016

[Operator:]

Welcome, and thank you for joining Medley Management Inc.'s first quarter 2016 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 pass code 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. And now, I'd 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.

[Samuel Anderson:]

Thank you, operator. Good morning, everyone, and thank you for joining us today for Medley Management's first quarter 2016 conference call. I'm joined today by Brook Taube and Seth Taube, our CEOs; as well as Rick Allorto, our Chief Financial Officer. Before we begin today, I want to call your attention to the customary Safe Harbor disclosure in our press release regarding 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 the 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 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 will refer to certain non-GAAP financial measures including fee earning asset under management, pre-tax core net income and core net income per share. We use 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 generally accepted accounting principles. In addition, these measures may not be comparable with similarly titled measures used by other companies. Please refer to our earnings press release and our Form 10-Q for definitions and reconciliations of these measures to the most directly comparable GAAP measures. We have posted our first quarter 2016 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 Brook.

[Brook Taube:]

Thank you, Sam, and welcome, everybody. This morning we announced our financial results for the March 31 quarter. Core net income per share was $0.13. On May 10, our Board of Directors approved a dividend $0.20 per share that will be paid on June 2 to shareholders of record on May 24. At Medley, we continue to focus on building the business around a combination of permanent capital, long-dated private funds and separately managed accounts. Total AUM ended this quarter at $5 billion, which was up $200 million or 5% during the quarter and that was up over $1 billion or 28% increase versus a year ago. Fee earning AUM during this quarter declined modestly from $3.3 billion to $3.2 billion, primarily due to lower than normal loan volume, which was really a result of the market volatility. However, given the meaningful dry powder that we do have across the platform, combined with our announced and intended product expansion, we are really well-positioned and we're looking to take advantage of attractive investment opportunities for the remainder of 2016 and beyond. Seth is going to review in more detailed, the AUM growth as well as the new product expansion. But first I'm going to ask Rick to give you a quick update on the financials for the quarter.

[Richard Allorto:]

Thank you, Brook. Our results from operations for the three months ended March 31 were as follows. Management fees decreased by 7% or $1.3 million to $16.3 million compared to the same period in 2015. Total revenues decreased by 31% or $7.9 million to $17.6 million compared to $25.5 million for the same period in 2015. The decrease was primarily due to a reversal in performance fee revenue of $0.6 million for the quarter ended March 31, 2016, as compared to an accrual of performance fee revenue of $6.3 million for the same period in 2015. Exclusive of the impact of performance fees, total revenues would have decreased by 5% or $1 million to $18.2 million compared to $19.2 million for the same period in 2015. Total expenses increased by $1.9 million to $13.8 million compared to $11.8 million for the same period in 2015. The increase was primarily due to an increase in general and administrative expenses and other expenses, as a result of higher expense support agreement expenses related to Sierra Income Corporation, one of our permanent capital vehicles. Pre-tax core net income decreased by $6.5 million to $6.8 million. Core net income per share was $0.13 compared to $0.25 in 2015. Exclusive of the impact of performance fees, core net income per share would have decreased by 13% to $0.14 per share as compared to $0.16 per share for the same period in 2015. Core EBITDA decreased by $6.4 million to $9.1 million compared to $15.5 million for the same period in 2015. That concludes my financial review. I'll now turn the call over to Seth.

[Seth Taube:]

Thank you, Rick. In the retail channel, we continue to increase our presence as a top-tier manager through our existing Sierra product, and we expect to broaden our reach through our planned new initiatives this year. Sierra continues to outperform the loan market, the high-yield market and its comparable peers, as it has for the last three years. As I mentioned in our last quarterly call, our distribution partner for Sierra Strategic Capital has reestablished itself as an independent investment distribution platform. I'm pleased to report that we're seeing increased traction with existing and new broker-dealer relationships. In the institutional channel, we're also gaining access from top-tier institutional investors. We're pleased with the support from our existing and new institutional investors who committed over $200 million in AUM to Medley already in 2016. In the past two quarters, we've raised over $1 billion in our institutional business. We remain well-positioned to capitalize on both the retail and institutional fund flows and expect continued growth in both going forward. Turning to our new product pipeline. We have plans in place to expand in both the retail and institutional channels. For the retail side, we filed with the SEC to establish Sierra Total Return Fund, which we expect to launch in the second half of 2016. Sierra Total Return Fund will be a registered investment company and our first interval fund. This offering will broaden our relationship with financial advisors, and importantly works well within the current regulatory environment. Preliminary discussions with our broker-dealer partners indicate strong interest in the product. At Medley, we believe that we are well-positioned to benefit from our broadening product offering across our platform and the current market dynamics as we look to 2016 and beyond. I'd now like to turn the call over to Brook.

[Brook Taube:]

Thanks, Seth, and thanks, Rick. Overall, we're pleased with the progress that we've made at MDLY over the past quarter. We continue to grow the retail platform and institutional businesses. The consistent growth in our core AUM combined with well-positioned and attractive products, that Seth mentioned, gives us confidence, as we look forward here in 2016. Again, we'd like to thank everybody for their support. And we can now open the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Mickey Schleien with Ladenburg.

[Mickey Schleien:]

Three questions. First of all, Seth, any insight or what can you tell us about reaction from the broker-dealer community in terms of demand for Sierra following the favorable DOL decision?

[Seth Taube:]

I think the short answer is that the DOL decision was favorable for BDCs in general. So we're positively predisposed. As you know, and I think we've communicated, there won't be -- we're looking at how to further modify some of these programs, including launching interval fund as well as looking at multiple share classes for our existing BDCs. So that all is the deal with the regulatory environment, but it is, I would say, favorable response from the BD Channel as it relates specifically to the positive DOL response.

[Mickey Schleien:]

My next question relates to the performance fee line. I'm trying to understand why there was a reversal? We saw in the leverage loan market a rebound, a rally towards the end of the quarter pretty significant, and there was some softness in second lien. So any insight you can give us on what caused the reversal?

[Brook Taube:]

I think as you're aware, we have limited exposure to broadly syndicated, so our performance fee reversal came in our private fund. The valuation adjustment was modest during the quarter, but it really does reflect underlying credit performance. Ours are largely Level 3 assets and we had continued softness in some of the credit. So you didn't see and we wouldn't expect valuations necessarily to track the liquid markets for that portfolio.

[Mickey Schleien:]

And my last question, which I always ask every quarter, maybe for Rick. Can you tell us what the cash EPS were?

[Richard Allorto:]

Sure. The cash core earnings per share was approximately $0.15 for the quarter.

[Operator:]

And our next question comes from the line of Ann Dai with KBW.

[Ann Dai:]

First question, you mentioned that capital deployment was a bit lower in the quarter just given the market volatility. Just wondering if you could give us an update on how the environment looks today?

[Brook Taube:]

We deployed about $100 million -- just over $100 million. We did have repayments some of which were scheduled and some were normal early repayments. So the net result was flat. We generally would expect higher volumes. If you looked at 2015 as a proxy, volumes were down 50%. That's spilled over into Q1 on the private side, and perhaps had even more volatility, both down and then backup as Mickey mentioned. We are beginning to see an increase in activity and our pipeline is full, so we expect to continue to deploy capital this quarter and would expect based upon what we're seeing in uptick versus Q1 as we look out into the back of '16.

[Ann Dai:]

Next question, just thinking about the amount of dry powder you have on hand, and kind of linked to the previous question, how do you think about the timeframe for deploying the various asset and the separate account mandates that you've won? Internally, do you think of that as kind of a one to one-and-a-half year kind of thing? Is that about right or is it shorter or longer?

[Brook Taube:]

I would say, put a pin in 18 to 24 months. And it really comes down, if you think about it, if you had a new portfolio of $100, and you wanted to have 2% or 3% position sizes that would be $35 million to $40 million investments. So it's really driven by the rate at which we put out the number of deals. So for any new portfolio, we would be looking at 18 to 24 months as an expected average deployment. It might be faster, it could be longer, but I would put a pin in 18 to 24 months as that range.

[Ann Dai:]

The next question I had with just around reimbursable expenses. They came out a little higher this quarter and I'm just wondering if there is anything driving that, whether it's maybe higher cash drag or some pressure to the income from non-performing loans due to some of the softness in the credit?

[Richard Allorto:]

Ann, are you referring to the reimbursement of administrative expenses from the funds?

[Ann Dai:]

Yes.

[Richard Allorto:]

The increase in the quarter was the result of some additional vehicles, which provide for reimbursement.

[Ann Dai:]

But the reimbursement was for Sierra, right?

[Richard Allorto:]

You're referring to the ESA?

[Ann Dai:]

Yes.

[Richard Allorto:]

Yes. The increase in ESA was primarily driven to the lower origination activity during the quarter that Brook mentioned.

[Ann Dai:]

And last question for me. If you think about the strategic goals you have for the company, building out the product set, growing the breadth of the platform, and just thinking about the amount of liquidity that you'd like on hand for that, if earnings were to stay around this level for the rest of the year, how do you think about the size of the dividend?

[Brook Taube:]

I'm sorry. The question is, just to clarify, about building the business, Ann?

[Ann Dai:]

Yes. It's about the size of your current dividend payout within that context?

[Brook Taube:]

I see. I'm sorry, now I understand. So look, as we've mentioned, a significant amount of dry powder, and we also have one and maybe two products that we're going to launch here. So I think as we look at this, with not perfect clarity, but some reasonable visibility and growth in our fee earning AUM, our intention remains to grow that and then over time grow earnings per share. So at this point, I think our intention is to grow. We would look at that, as we look to exit 2016. And our view remain that we're going to be able to earn a dividend that meets or exceeds that level. I mean we have income that meet or exceed a dividend of the current level over time.

[Operator:]

And I am showing no further questions at this time. I would now like to turn the call back over to Brook Taube with any closing remarks. End of Q&A

[Brook Taube:]

Thank you, operator. Thanks, everybody, again, for joining. We look forward to reporting on, as we said, continued growth in our fee earnings AUM, as well as our new product launches anticipated, as Seth mentioned, in the second half of 2016. So thanks again for participating. And we look forward to speaking to you next quarter.

[Operator:]

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