Medley Management Inc.
Q2 2015 Earnings Call Transcript

Published: 13 Aug 2015

[Operator:]

Welcome and thank you for joining Medley Management Inc.’s Second Quarter 2015 Conference Call. I’d like to remind everybody 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, but will be prompted for question-and-answer session following the prepared remarks. I’d now like to hand the call over to Sam Anderson, Medley’s Head of Capital Markets and Strategy, 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 second quarter 2015 earnings conference call. I’m joined today by Brook Taube and Seth Taube, our Co-CEOs as well as Rick Allorto, our Chief Financial Officer. 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 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 fees, earnings assets under management, pre-tax, core net income and core net income per share. We use 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 with 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 recent directly comparable GAAP measures. We have posted our second quarter 2015 investor presentation, which is available on 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:]

Thanks, Sam and welcome everyone to our second quarter call. I’m pleased to be here and I’d like to thank you all for taking this time to join us. Last night, we announced our results for the quarter ended June 30. Core net income per share was $0.22 and fee earnings asset under management increased to 3.4 billion, which represents a 37% increase compared to the prior year. On August 10th, our Board approved a dividend of $0.20 per share, [indiscernible] quarter, this will be payable on September 4, the shareholders of record of August 26. As well the Board authorized a $5 million share repurchase program. A quick agenda for this morning’s call, we are going to give you an update on the business at Medley, summary of our fee earnings assets under management growth, the overview of investing environment, review of recent business developments. Rick’s going to give a quick second quarter financial review and then we’ll take the questions. We continue to build the business around our combinations of our permanent capital and long dated funds and separately managed accounts. As we’ve said before, these sources of capital will continue to provide steady cash return to shareholders of MDLY over time. In this second quarter, our fee earning assets under management continued to rise and with the end of the quarter permanent capital representing 67% of our total fee earning assets, with the remaining 33% in the institutional side which is the funds and managed accounts. As a firm, we are well positioned to capitalize on the continued opportunity that exists in direct lending in the middle market in the U.S. Our team has continued to grow, and we are excited about the opportunity that we are seeing in the market today and we are going to continue to seek ways and gain shareholder value at MDLY in the quarters in the years ahead. On a year-over-year basis, permanent capital, fee earning assets under management grew by 49%, while our institution capital fee earning assets increased by 17%. During the second quarter, permanent capital and institutional capital fee earning assets each grew sequentially 6% compared to the prior quarter. The quarter over quarter growth on the permanent capital fee earnings side was primarily driven by our ongoing capital raise for Sierra. We’re pleased to see continued growth for Sierra and look forward to further grow during the balance of this year, in this segment of our business. At Medley Capital Corporation, our publicly traded BDC, there were three important developments since our last earnings call. One, we’ve increased the capital at our SBIC, 150 million and we expect this will be fully deployed by the end of this current quarter. Two, at MCC, we amended and extended our ING credit facility, the maturity was extended. We amended the facility to buy more flexibility to the company and we lowered the pricing. And finally third on August 5th, we added $100 million credit facility with Credit Suisse, to support the activities of our senior loan joint venture at MCC. These three developments at MCC demonstrates the very strong support we have institutional lending partners. Turning now to share repurchase, as I mentioned in the initial remarks, we received approval from the Board to implement a $5 million share repurchase program, and this program is approved for a one year period. The purpose of the share repurchase program is twofold; first, to the extent that we grant RSUs, we’ll use the repurchase program to offset this issuance by purchasing an amount that will generally offset the number of RSUs we’ll grant. The magnitude of the RSU grant in the near future however, is not expected to be significant. And second, from time to time, based upon market price we may selectively acquire shares of MDLY in the open market. I’d like now to turn the call over to Seth.

[Seth Taube:]

Thanks, Brook. As you see Brook mentioned, we continue to see growth Sierra, the order that we continue to add. Selling agreements we now have 147 selling agreements, up 135, that’s an addition of 12 important new broker-dealer relationships during the quarter. Share now reaches over 27,500 independent financial representatives to those 147 selling agreements. The increasing secular demand for alternative field products we sell is significant remains significant. Certain estimates have reached that exposure to alternative rising to as much as $4 trillion, 2020, this will be an increase of as much as $2 trillion and we’ll continue to focus on broadening and deepening our broker dealer and advisor relationships in the quarters ahead to meet this increasing demand. Last quarter, Sierra and MCC each announced the formation of separate senior loan joint ventures with Great American Life Insurance. As we announced on August 5th, both Medley Capital Corporation and Sierra Income Corporation each completed raising $100 million credit facility to support these joint ventures. As investments are allocated for joint ventures, we expect these financial facilities will ramp in line with origination. We have a pipeline of high quality opportunities and we expect to begin originate assets into the joint venture to begin ramp the financing of these joint ventures in the second half of 2015. These joint ventures broaden up the product offerings and represented national extension of our lending franchise. During the quarter, our platform -- across the whole platform we deployed $300 million of total capital to 12 borrowers in seven industries. The average yield on these investments is 11.7%. This new origination was 80% floating rate and 95% first lean. We continue to remain selective and careful on our underwriting. We continue to see attractive opportunities available in the market with various -- vehicle. And now I’d like to turn the call over to Rick Allorto, our Chief Financial Officer to review the second quarter financial results. Rick.

[Rick Allorto:]

Thank you, Seth. Our standalone results from operations for the three months ended June 30, 2015 were as follows; management fees increased by 40% or $6 million to $20.9 million compared to the same period in 2014. This was primarily due to an increase in fee earning AUM. Performance fees for the quarter were negative 2.4 million, primarily due to valuation adjustment. As a result of valuation adjustments this period, total revenues decreased by 19% to 4.8 million to 20.5 million compared to 25.3 million for the same period in 2014. Total expenses decreased by 19%[ph] or $2.4 million, to $10 million compared to $12.3 million for the same period in 2014. The decrease was primarily the result of a reduction in our performance fee compensation payable. Total other expense increase by 0.9 million, to 1.9 million compared to 0.9 million for the same period in 2014. The increase was due primarily to a 1.4 million increase in interest expense, partially offset by a decrease in other expenses. Pre-tax core net income increased by 0.1 million to 11.6 million compared to the same period in 2014. Core net income per share was $0.22 per share for the three month ended June 30, as compared to $0.22 per share for the same period in 2014. Core EBITDA increased by 1.5 million to 13.9 million, as compared to 12.4 million for the same period in 2014. That concludes my financial review. I will now turn the call back over to Brook.

[Brook Taube:]

Thanks, Rick and thank you all again for joining us today. We had 6% sequential growth in fee earning assets under management this quarter and 37% growth on a year-over-year basis. We extended and amended our credit facilities at MCC, providing increased flexibility and strengthening MCC balance sheet. And in addition, at MCC and Sierra, we secured important lending capacity to grow those senior loan joint ventures. At Sierra, we continue to expand our relationship with broker-dealers and financial advisors, and at Medley we had several high quality professionals in the team in the past quarter, and we’ll continue to evaluate strategic opportunities to enhance shareholder value at MDLY. Appreciate your continued support, and operator, we can now open the call for questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Craig Siegenthaler with Credit Suisse. Please go ahead.

[Craig Siegenthaler:]

Thanks, guys. It’s Craig Siegenthaler with Credit Suisse here. If we take a step back and look at core earnings, they are below the levels of last year. So I’m wondering, I think we all see how AUM growth and lower yields have impacted the profit levels too. But, may be you can provide us a update on the level of kind of core EPS growth going forward here?

[Brook Taube:]

Craig, it’s Brook. If the question is about the targeted growth in the core number on the balance of the year?

[Craig Siegenthaler:]

It’s actually two parts, one is can you help us on your perspective in terms of your ability to grow earnings here at this point going forward? And then the second part of my question would be, may be you could remind us on the special dividend top up math, just giving the buyback here? So I’m just trying to forecast where the dividend could be heading.

[Brook Taube:]

Sure. Let’s start with the first one, if we take out the performance of – volatility that hit in each of the last quarter, it was down in Q4 up in Q1, down here, this represents a mark to market of something approximately like 1%, up and down on our private fund, due to the fact that our private fund are institutional business is passage rate and in it what we call it catch up phase, the percentage change in the asset value material or otherwise, is captured one for one in terms of our performance fees. We expect and hope that that volatility will not continue although it might. We normalize and hope that constant we would still expect to be able to grow core earnings over the balance of next year and into next year.

[Craig Siegenthaler:]

And then my second part there was, could you remind us of how the dividend top-off fourth quarter and last quarter, because I believe if you are able to grow earnings you’re – threshold it would be prospect for a top-up dividend? And may be this fourth quarter or fourth quarter ‘16 so does that amount work?

[Brook Taube:]

Sure, we have not stated that we will pay special dividend by any specified equation. I think we have – as you can see have the ability and continue to grow fee earnings assets under management, that will translate into earnings growth and our intention is to increase the dividend over time. At this point, we have not specified a specific top-up dividend to the extent that earnings rise which is our expectation, through time we will be looking to increase the dividend and effective pay off per share.

[Craig Siegenthaler:]

Okay. Thank you guys. Thanks, Brook.

[Brook Taube:]

Thanks, Craig.

[Operator:]

Thank you. Your next question comes from the line of Ann Dai, of KBW. Please go ahead.

[Ann Dai:]

Hi. Good morning. Thanks for taking my questions. On the roughly $100 million in commitment to the long dated funds and SMAs, does that reflect in additional closings for – or was that capital drawn down for the managed account?

[Rick Allorto:]

Hi, Ann. This is Rick. The majority of that additional capital deployed was in the managed account.

[Ann Dai:]

Okay, great. Thank you. And also just quickly on the repurchase program, you guys mentioned that you’ll be purchasing membership units on a one for one basis, alongside the Class A shares. I was just wondering what the reason for that was?

[Rick Allorto:]

Ann, that was set up initially pre-IPO within the organizational documents.

[Ann Dai:]

Great. And just given how the stock has traded over the past couple of months, you mentioned MOF II repurchase program to opportunistically buyback stock. So do you view the current stock prices attractive and a buying opportunity here?

[Brook Taube:]

We do think it’s attractive and as I mentioned in the call, we are going to do it selectively as we look into share price over the next year.

[Ann Dai:]

Okay, great. Thanks.

[Operator:]

Thank you. And your next question comes from the line of Alex – of Goldman Sachs. Please go ahead.

[Unidentified Analyst:]

Great. Hey, good morning everybody.

[Brook Taube:]

Hi, Alex.

[Unidentified Analyst:]

So just to follow up on the capital management discussion, I guess you were about $40 million of net debt from the balance sheet. You are paying out something like 90% of your earnings and dividend. Just help me bridge the map on – if the dividend stays at $0.20 and kind of how can you operate in this environment, -- the cash flow flexibility can be managed by that stock?

[Rick Allorto:]

Alex, we do have – and you’re referencing net debt number, we obviously do have in excess of 65 million cash on balance sheet, that is available to us as well as $15 million undrawn revolver. The liabilities are relatively long-dated from today’s date and it’s a bullet maturity. We’re amortized through 2017.

[Unidentified Analyst:]

Okay. And what is the kind of like the minimum amount of working capital or cash, do you guys feel like you need more cash on balance sheet, so $60 million cash number how low could it go?

[Brook Taube:]

Alex, this is Brook. We raised the capital, we have the intention to continue to evaluate new product expansion. I think the idea would be that the use of cash would be to drive EBITDA and additional earnings. We haven’t specified the minimum amount but I think you can put a pin in $20 million of cash on balance sheet as a minimum as we look out at this point. We don’t have a specific use for the 15 million today between here and there, but we are continuing to evaluate again both new product and other strategic alternatives, each of which we expect would drive revenue and EBITDA.

[Unidentified Analyst:]

Got it. That makes sense. Shifting gears a little bit, so I think you guys mentioned lower fees, at MCC just wanted to make sure I understand that correctly. How is that, if at all impacting, I guess the management company is lower kind of fee already in the run rate or should we expect to see any kind of fee rate compression on the publicly traded –

[Brook Taube:]

I’m not sure I exactly understand the question. You’re talking about the nominal revenues from MCC at the moment?

[Unidentified Analyst:]

No, just saying I think and if I misunderstood at the time, I think you mentioned in your prepared remarks, you lowered the fees in MCC?

[Brook Taube:]

That is not correct, sorry. I think I understand now. The fees are not lower at MCC, we have not made that comment.

[Unidentified Analyst:]

Okay. Couple of other ones, if we kind of take a step back, just hoping to better understand the impact of higher interest rates on the business as a whole, specifically under the scenario if were to go up 75 basis points to 100 basis points then it’s not fair. Just trying to understand how that dynamic would impact the management and I guess the overall profitability of business?

[Brook Taube:]

Sure, that’s a good question. Let me start at the high level, as Seth mentioned, 80% of our investment for floating rate this quarter, across the platform it’s not quite 80% but it’s in the mid 70s in terms of floating rate exposure. What that means for us at our vehicles are that the assets yield will generally rise with LIBOR. In the short term, there are some floors which are in place, so the specific per basis point rise in the rate may not have a immediate impact, but in a secular rising rate environment, assuming that it takes the curve back over time, you will see the nominal yields on our investments rise. Our view is that, that is likely to occur when GDP is positive and that is compatible with the growth in the economy. So to the extent that that’s happening in a positive GDP stable economic environment, we would have rising asset yields and we would not be looking at a terribly difficult credit environment. That will boil down to us from the margin is the higher revenues and better credit performance on the portfolio. We have termed out our liabilities and we continue to do so on our vehicles, the BDCs, so we should have a very positive impact over time to rising rate if it occurs in that positive GDP scenario.

[Unidentified Analyst:]

Okay. Gotcha. Thanks.

[Operator:]

Thank you. And your next question comes from the line of Mickey Schleien of Landenburg. Please go ahead.

[Mickey Schleien:]

Yes, good morning. I wanted to ask if you could give us some background on what caused the weak performance at MOF II? Spreads look like they were generally stable so, I would suppose it was probably company specific and I’m just curious, if it was co-investments and things like them, [indiscernible] or was it something else like oil and gas?

[Brook Taube:]

Good question, Mick. It was really related to one position, that you mentioned it MOF, I think you know that credit from the MCC portfolio, that is also in MOF II. On the balance of the portfolio there was no material changes on the institutional side.

[Mickey Schleien:]

Okay. And any background you can give us on how MOF II is doing this quarter? Trying to get an handle on the performance feed line which has been very volatile as you mentioned.

[Brook Taube:]

Sure. At this point, we have not we’re kind of half way through the quarter, it’s difficult to tell specifically, but our sense is that it would be relatively stable as we look today and that is to say we would have A - normal quarter leak run rate on the institutional side. But again, it’s mid quarter.

[Mickey Schleien:]

Yeah. Okay. Couple other question, Brook a question I’ve asked on Medley on capital call, capital debt equities, 0.9 but the regulatory level is only 0.7 and it’s actually down since you’ve drawn the -- of that. So I’m just curious in terms of how you’re weighing potentially increasing the bond balance sheet leverage or you’re more focused on funding the off balance sheet to your loan fund?

[Brook Taube:]

We will focus on funding the off balance sheet senior loan fund as we said Mickey, we keep repeating at this point, we do not intend to increase the on balance sheet leverage. The key criteria that we’re focused on that MCC as well as the platform and that’s evidenced by the origination Seth referred to, 95% is first lean secured with covenant. It’s not a call on the cycle but at this point, it makes sense to stay secured with covenant. So I would not expect any increase in leverage at MCC.

[Mickey Schleien:]

Okay, fair enough. And my last question, Brook, it relates to management, I saw the hiring of David Indelicato and I’m just curious whether his role will be the same – it was a GE or is he going to be shifting gears to help broaden the platform. Anything you can tell us about that would be helpful?

[Seth Taube:]

Hi, Mickey this is Seth here. We are really excited to have David join the team to bolster this already existing strong credit management, or the management system we have, he’s really seasoned investment professional, long track record across underwriting structure and restructuring. So we are pleased to have him join the team. I would say you can assume that he is deploying the skills that he’s developed, very successful in the past. He did a similar –

[Mickey Schleien:]

And is he focused on a particular industry or a new industry for Medley?

[Seth Taube:]

He joined the credit management so he is specific to his accountabilities range from the underwriting asset management and restructuring. So not origination but specifically investment cycle, really the credit management side which has those three specific accountabilities that are reported to him.

[Mickey Schleien:]

Okay. I understand. Thank you for taking my questions and for your time this morning.

[Seth Taube:]

Thanks, Mick.

[Operator:]

Thank you. And your next question comes from the line of Casey Alexander with Gilford Securities. Please proceed

[Casey Alexander:]

Yeah, hi. Good morning. Most of my questions have been answered but, I noticed that RCS Capital was in the process of selling their wholesale distribution system. Did that include SC distributors, your distribution arm? And does that free up any new or regenerate any old broker-dealer agreements for you?

[Seth Taube:]

Okay, Casey. This is Seth. They did announce this week that a follow out strategic – RCS and that does include our wholesaler strategic capital. Take a general view is that all those commitment in non-traded space is terrific development for that sector and we’re still optimistic on the broker dealers that hadn’t resigned Sierra or – maintain the suspension of Sierra I think Apollo false commitment very significant positive for accelerating resumption of that agreement.

[Casey Alexander:]

All right. Great. Thank you, that’s good to hear. Thanks for taking my questions.

[Operator:]

Thank you. And your next question comes from the line of Craig Siegenthaler from Credit Suisse. Please go ahead.

[Craig Siegenthaler:]

Thanks guys for the follow up here. So, while we’re on the subject of distribution for Sierra, how has Sierra’s commitments trended order to date in 3Q relative to the 130 million that was in 2Q?

[Seth Taube:]

Yeah we were – this is Seth. We did just under 80 million capital raising in the second quarter and that was consistent with Q1 so steady fund raising for Sierra. And I think you can assume that it’s little bit too early to tell what the full quarter will look like in the summer but we’ve seen steady consistent growth at Sierra.

[Craig Siegenthaler:]

Got it. And then I have a housekeeping question, may be for Sam, what was the permanent capital base rate – permanent capital level one and the long-dated private fund management in 2Q and I can say that again if you missed that Sam?

[Sam Anderson:]

Yeah I mean, Craig, I don’t believe we specifically disclose fund to level but I’m happy to give you generalization there. I mean generally, we’re making – disclose the four to the 0.5 assets over 15 or 20 depending on the funds which is consistent with what we have historically done.

[Craig Siegenthaler:]

Got it. Could you just disclose those three lines that you have pulled this quarter right?

[Sam Anderson:]

Correct.

[Craig Siegenthaler:]

Okay. We can talk offline.

[Brook Taube:]

Thanks, Craig.

[Operator:]

Thank you. And your next question comes from the line of Christopher Nolan from MLV & Company. Please go ahead.

[Christopher Nolan:]

Hi, thanks for taking my questions. Is the $100 million credit facility for the SLS for both Sierra and MCC based on your questions?

[Brook Taube:]

Yeah, they are separate. We have 100 million for MCC and separate commitment from the 100 million that is also committed to Sierra.

[Christopher Nolan:]

Okay. So they are two separate agreements both with their own –

[Brook Taube:]

Yes.

[Christopher Nolan:]

Seth, you mentioned what type of strategic opportunities are you currently evaluating, you mentioned in your comments you are looking at strategic opportunities?

[Brook Taube:]

At a high level, we continue to focus on expanding broadly our leverage finance capability, at one end of the spectrum that would be moving toward more broadly syndicated loans in the limit that’s the CLO business and a loan only business. The risk retention rules that are pending have created a very interesting dynamic there and I think our insurance partners as well as other players in the market are evaluating the appropriate way to do that. I think for the past 9 to 12 months we have indicated that that’s something we are looking at and we’ll continue to. We have nothing to report specifically there yet. Secondly, and I think it’s consistent with the comment Seth made about the secular demand in yield, both from institutional and also importantly from retail for evaluating yields, alternative yield products. Some of the volatility obviously in the BDC sector, and some of the growth but not at the – in the non-traded sector have caused us to evaluate both the product and the timing. But we are still actively looking at new products that we’d feed into this secular for –

[Christopher Nolan:]

Would this be like the BDC type of product or real-estate product or?

[Brook Taube:]

From an asset class perspective, I think we have said that the real-estate market opportunity is attractive to us. The BDC is in the echo, I would not rule out that BDC product in the non-traded share loan. We are still picketing and focused on Sierra but we intend to expand our product offerings and shelf space in that segment in the years ahead.

[Christopher Nolan:]

Great. Final question on the repurchases, what percentage do you think of that $5 million program do you think will be directed towards MDLY publicly traded shares?

[Brook Taube:]

Yeah, just to clarify Chris, that share repurchase program is $5 million, it’s authorized to MDLY to buy MDLY shares.

[Christopher Nolan:]

Okay. It wasn’t just to offset RCS or anything else?

[Brook Taube:]

Well, the two purpose of the share purchase program which will be only for MDLY shares, would be to buy as I said to buy an amount of MDLY that would offset the any grant of RSUs approximately that is in a sense to definitely keep the share constant. And secondly would be to opportunistically acquire shares of MDLY in the open market which would have the effect of reducing the total share count.

[Christopher Nolan:]

Okay. Thank you for taking my questions.

[Brook Taube:]

Thanks, Chris.

[Operator:]

Thank you. And your next question comes from the line of Alex – with Goldman Sachs. Please proceed.

[Unidentified Analyst:]

Thanks. Just a quick follow up for you guys, so there’s been a bunch of investigations I guess launched recently by few – understand that probably early stages but hoping you could help us understand what the risks are of these? And then from a P&L perspective, is there anything on a elevated – SG&A or anything like that, caused by that? Thanks.

[Brook Taube:]

Are you referring to the announcements of the – from the Class action firms?

[Unidentified Analyst:]

Correct.

[Brook Taube:]

Yeah, we are aware of the announcements, we don’t believe they have basis in any back, so there are no numbers at this point running through any of our G&A lines.

[Unidentified Analyst:]

So no like incremental legal expenses or anything else that you would think about things [indiscernible] quarter –

[Brook Taube:]

I mean at this point I would say nothing material.

[Unidentified Analyst:]

Okay. Thanks.

[Brook Taube:]

Thanks.

[Operator:]

Ladies and gentlemen, thank you for your questions. I would now like to turn the call over to management for closing remarks.

[Brook Taube:]

Thank you all again for joining us. We expect continued growth on the fee earning assets under management, our market growing and the opportunity and the products that strategic initiatives. Again, thanks for joining us and have a good rest of the summer. We look forward to speaking to you individually as well. Take care.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a very good day.