Medley Management (NYSE:MDLY)
Q2 2016 Earnings Conference Call
August 11, 2016 10:00 AM ET
Sam Anderson - Head of Capital Markets & Risk Management
Brook Taube - Co-CEO
Seth Taube - Co-CEO
Rick Allorto - CFO
Ari Gosh - Credit Suisse
Mickey Schleien - Ladenburg
Ann Dai - KBW
Casey Alexander - Compass Point
Christopher Nolan - FBR & Company
Good day, ladies and gentlemen, and welcome and thank you for joining Medley Management Incorporation’s Second 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 Incorporation 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.
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.
Thank you, operator. Good morning, everyone, and thank you for joining us today for Medley Management's second quarter 2016 conference call. I'm joined today by Brook and Seth Taube, our Co-CEOs; and our Chief Financial Officer, Rick Allorto.
Before we begin, 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 reasons such as those disclosed in our most recent filings with the SEC. We do not undertake to update our forward-looking statements unless otherwise required by law.
During this conference call, we 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. 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 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 second quarter 2016 investor presentation, which is available on our Investor Relations section of the company's website at www.mdly.com.
I would now like to turn the call over to Brook.
Thanks, Sam, and welcome everybody to our second quarter conference call. This morning we announced our financial results for the quarter ended June 30. The company's core net income per share for the quarter was $0.14. On August 9, our Board of Directors approved a dividend of $0.20 per share that will be paid on September 6 to shareholders of record on August 24.
Our total AUM ended the quarter at $5 billion, which was up over $1 billion or 25% on a year-over-year basis. Our fee earning AUM at the quarter-end was $3.2 billion. We are pleased to report that we recently issued $25 million of senior unsecured notes with 10-year maturity. The net proceeds will be used to reduce the outstanding balance on our current term loan. This is our first issuance of public unsecured notes and we're pleased with the execution. We expect to access the public debt market in the future and believe this provides flexibility to Medley, as we continue to scale our platform.
Overall we remain focused on building our business around a combination of permanent capital, long-dated private funds and separately managed accounts. Combined, we expect these sources of capital will continue to drive revenue and earnings growth over time.
Seth will speak further about two new product launches, which combined with our existing dry powder, position the firm well for growth in both assets under management and fee earning assets under management in the back half of 2016 and as we look out into 2017.
But first, I'd like to turn the call over to Rick to give you a quick update on our financials.
Thank you, Brook. Our results from operations for the three months ended June 30, 2016 were as follows
Total revenues increased by 3.8%, or $0.8 million, to $21.3 million compared to $20.5 million for the same period in 2015. The increase was primarily due to an accrual of performance fees compared to a reversal of performance fees for the same period in 2015. Management fees decreased by 11%, or $2.2 million, to $18.7 million compared to the same period in 2015.
Total expenses increased by $7.5 million to $17.5 million compared to $10 million for the same period in 2015. The increase was due primarily to higher expenses under our expense support agreement with one of our funds. Pre-tax core net income decreased by $4.2 million to $7.4 million, and core net income per share was $0.14 compared to $0.22 in 2015.
Core EBITDA decreased by $4.1 million to $9.8 million, compared to $13.9 million for the same period in 2015.
That concludes my financial review. I'll now turn the call over to Seth.
Thanks Rick. During the second quarter of 2016, we continued to see consistent demand for our yield solutions from both institutional and the retail investors. Sierra Income Corporation continued to take it on a daily basis and remains a top performer among its peer group. Our institutional investors have contributed significant capital to our platform over the past 12 months and combined with our steady growth in retail, we are well positioned for continued growth.
As outlined on our previous calls, we continue to expand our product offerings for both retail and institutional investors. During the quarter, we received initial commitments from LPs for our CLO Equity Opportunity Fund. Subsequent to quarter-end, we held our first closing remit first investment from this fund.
Based upon the demand for capital in the CLO market and interest level that we are receiving from investors, we are optimistic of a potential for this new product on our platform.
On the retail side, we are making significant progress on Sierra Total Return Fund. We expect to be effective in the fourth quarter of 2016.
We value the growing opportunity within the Sierra channel and the brand recognition that we’ve built. We are currently developing our third product for the channel which we expect we’ll launch in the middle of 2017. With the broad-linked product platform and continued strong demand for yield from both our institutional and retail investors, we believe that we are well positioned to grow.
I'd like to now turn the call back over to Brook.
Thanks, Seth, and thank you all for joining us today. I'd just like to recap we grew our assets under management 25% year-over-year. Our retail and institutional product offerings continued to expand. We are investing in our people and infrastructure, while at the same time remaining focused on growing revenues and earnings in the quarters and years ahead.
We appreciate the continued support. Operator, we can now open the call for questions.
Okay. Thank you. [Operator Instructions]. And our first question comes from Craig Siegenthaler from Credit Suisse. Your line is now open.
Hey, good morning guys. This is Ari Gosh filling in for Craig.
Hey, how is it going? So just on the Sierra Total Return Fund, so you're planning to launch that by 4Q this year and it's going to be geared more towards the retail investors. Can you just provide some color on if the product is DOL-compliance, how you're thinking about that, and if you foresee needing to maybe use the best interest contract assumption? And then maybe just a quick update on how the discussions are going with the broker community on this?
Hi Ari, it’s Seth. Thanks for the question. We are designing all new products to as best we can comply with what we expect to be the DOL regulations that are proposed today and in the future. So the answer to the question is yes, I think to the DOL compliance. We have not yet been out to the retail channel of the broker dealers because we haven't been declared effective yet. So until we are effective, we’ll not be having conversations with them, specifically about signing selling agreements. However the general conversations are positive. Remember that the interval fund - sorry, Sierra Total Return Fund will be an interval fund. It will invest in loans as well as liquid securities and equity passive securities, so it's designed to be higher liquidity than the existing Sierra Income Corporation product. So both the higher - maybe more liquidity as well as the focused on compliance with the DOL regs we believe makes it attractive.
Got it. That’s helpful. And then just sticking with that, can you talk a little bit about the structure of the fund, maybe touch on the targeted returns, the coupon and maybe the targeted investor base also for the Total Return Fund?
Sure. It will be, what’s called, an interval fund. So it will offer periodic liquidity in the form of a company tender. We expect it will target a slightly lower yield to investors in Sierra Income Corporation as a result because of the higher liquidity.
Got it. Awesome. Thank you so much for taking our questions.
You got it.
Thank you. Our next question comes from Mickey Schleien with Ladenburg. Your line is now open.
Yes, good morning, everyone. My first question relates to demand by foreign investors for these products. My understanding is that there has been change some changes in the tax withholding rules for them and they are showing more interest. So I'm curious what your abilities are to distribute outside the U.S. and how much interest you’re seeing from abroad?
Thanks, Mickey, it’s Brook. We think the demand for yield is a global phenomenon. Today we do not have substantial capital in the institutional channel for the products. Interestingly we have begun to receive unsolicited inbound on the institutional side. I can't comment specifically on changes in these rules or tax matters. Those relate to the investors themselves. But the interest is, there we’re starting to see it and to the extent that we gain traction there, we'll keep you posted in the quarters ahead.
Thank you for that. My next question is related to the dividend, Brook. It's been - the payout ratio has been above 100% for about a year now and your cash balances have declined. And I'm curious what the Board’s rationale is for maintaining the dividend at this level as opposed to taking some of the pressure off and aligning it a little bit more with reasonable [ph] results?
Sure. Thanks for the question. Look, based upon our growth in AUM, the continued expansion that we referred to in our products, and then I would say the visibility on our growth in fee earning AUM, again that's capital we have, that's dry powder, our expectation - and we said this in the prior quarter, is that overtime we are going to be able to meet or exceed this dividend with core earnings. So at this point based upon reasonable visibility the decision was to keep the dividend where it is and that's our plan at this point.
All right, I understand. And a couple of modeling questions, then I’ll get back in the queue. The total compensation ratio as a percentage of revenues increased quarter-to-quarter but stock-based comp was flat. I’m curious what's driving that? And my last question is G&A was also up about 10% quarter-to-quarter. Was that driven by the relocation in New York City or something else, and is that probably a run rate?
Hi Mickey, this is Rick. On the compensation question, the increase is related to the discretionary bonuses. We had stronger performance in Q2 over Q1. And then on the G&A, the increase is related to the relocation.
And so, Rick, is the number that you just reported a decent run rate that we can assume for the balance of the year by quarter?
A - Rick Allorto
I would look at this six months year-to-date.
Okay. Appreciate it. Those are all my questions. Thank you for taking them.
Thank you. Our next question comes from Ann Dai with KBW. Your line is now open.
Hi, good morning. Thanks for taking my question. First question I had for you was around the third product that you guys just mentioned briefly, perhaps launching in mid-2017. Can you just give us some color on what strategy you're targeting for that product and is it retail or institutional?
Hi Ann, this is Brook. We are in process designing a product, the next one. At this point, we're not going to comment on the strategy specifically but it was for the Sierra channel. So we are focused on the interval fund which is Sierra Total Return Fund, and I’d expect sometime in the next quarter or two as we get that product more formalized, we'll be able to give you specifics on the opportunity.
Okay, great. And also you mentioned the closing of the CLO Opportunity Fund subsequent to quarter-end. I'm sorry if I missed it, but did you size that closing?
I'll give you some color. Medley Credit Opportunity Fund, this is a CLO Equity Opportunity Fund. The first close target was and remains $100 million, and we expect to close that on or before the end of the year. Given an attractive investment opportunity that we had in July and this was for MCOF, we decided - and it's also because of some appetite from some investors we had an early closing. So I'd say we had a partial closing to accommodate an early deal. We'll report more on how much we get deployed this quarter at our next call. But again the sort of cumulative first closing target remains $100 million, and again, we expect that on or before the end of the year, all in.
Okay. Perfect. Thanks Brook. Next question I had for you was around deployment. So it feels like this last quarter was a relatively sanguine environment for credit outside of continued distress in energy, but there was another quarter of slight deployment for you guys. So I'm just kind of curious what's been holding you back from putting more money to work, and do you see that changing in the next quarter or two based on what you're seeing out there?
That's a good question. Fourth quarter and first quarter, I think as we all knew, were challenging and volumes felled off. The up-trade from a risk perspective to the positive side began middle to end of Q1. So we began looking and seeing more opportunities during the quarter but given our approach which is around originating and closing specific generally bilateral loans, we just - it continued to be light. So for example first quarter volumes were low. That's what we would have expected to close in the second quarter.
Today we do see building demand. Our pipeline is filling, and we would expect to continue to deploy in Q3 and Q4. So this was a timing issue, not specifically a change in strategy or opportunity based upon what we are seeing today.
Terrific. And maybe moving onto the Opportunistic Fund. So what kind of returns would you need to see? We saw some were slightly positive performance fees in the quarter but what type of returns would we need to see in that fund for it to fully move back into position where it's earning performance fees and kind of through the catch-up?
Are you referring to Medley Opportunity Fund, Ann?
Sure. That fund is fully invested. So at this point it relates to the mark-to-market, specifically on the assets. To the extent that performance stays where it is or improves, we will begin to re-accrue performance fees. We are still in a catch-up phase here, so they to accrue dollar-for-dollar and it will be driven by performance not by new origination as we look forward in the next several quarters and years ahead.
Great. Thank you.
[Operator Instructions]. And our next question comes from Casey Alexander with Compass Point. Your line is now open.
Yes, thanks. My questions were asked and answered.
Thank you. Our next question comes from Christopher Nolan with FBR Company. Your line is now open.
Hi. Can you give us the management fees on AUM for the CLO Fund and also the Sierra Total Return Fund please?
At this point, Chris, we haven't disclosed the fee structure for the Sierra Total Return Fund. That is not officially in market yet, and we don't currently publish the fees on the Opportunity Fund.
Okay. Thank you.
I'm not showing any further questions at this time. Actually we do have another follow-up question from Ann Dai. Your line is now open.
Hi, thanks for fitting me in. I just have one quick question around the debt. As you're thinking about maybe issuing some more notes, and I don't know if those are the term loan over time or if there is other purposes you'd like to put that money towards. But when you're thinking about debt at the firm level, how do you think about the appropriate level of leverage and have you thought about what the threshold would be where - what you would feel comfortable levering up to?
Sure. Well, we went to market for this and the issuance. Our net debt was 0.6x debt to EBITDA. We do look generally at the sector, which on average has substantially higher net leverage. We are not publishing a target. This will be based upon our growth and EBITDA over time and then opportunities that we see to continue to grow the firm. So our estimation is that the debt is significantly below the industry average. I would expect it to remain there on a net basis. And as time goes on and opportunities present themselves, we'll revisit the level. But at any given time, we'll keep it at a conservative level and I'd like to point out that the nature of the new public debt gives us very long-term attractive term financing. Does that answer the question?
It does. Thanks.
At this time, I'm not showing any further questions. [Operator Instructions].
Great. Well, thank you all again for your time. Please feel free to reach out with any questions, and we look forward to speaking to you again on the next call. Have a good end of the summer. Thanks very much.
Ladies and gentlemen, thank you for joining today's call. This does conclude today's program. You may all disconnect and everyone have a great day.
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