Mount Logan Capital Inc. (MLCI) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Stockholders of Mount Logan Capital Inc. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Ted Goldthorpe, Chairman. Sir, the floor is yours.

Thank you. Good morning, and welcome to the Annual Meeting of Shareholders of Mount Logan Capital Inc. My name is Ted Goldthorpe. I'm the Chief Executive Officer and Chairman of the Board of Directors of the company, and I will also act as chair of today's meetings. As noted in the materials sent to shareholders prior to the meeting, due to the current COVID-19 crisis and as part of the company's social responsibility and preparedness plans in response to COVID 19, this year's shareholder meeting has been conducted online-only in a virtual format. As this meeting is being held virtually via live webcast, I would like to first set out a few rules for the orderly conduct of this meeting. Questions can be submitted by anyone logged in today using the instant messaging service of the virtual interface. When asking a question, please indicate your name and which entity you represent, if any. Questions will be addressed during the question-and-answer period at the end of the meeting, provided that the questions regarding procedural matters or directly related to the motions before the meeting may be addressed during the meeting itself. Prior to the question-and-answer period, we will also have the management presentation on our business and the results of operations. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each item of business after the presentation of all business items. If you are logged in as a guest today, you will be able to observe the meeting and ask questions, but you will not be able to vote on any items. I will indicate when voting is opened. If you're eligible to vote, you'll receive a message on the virtual interface requesting you to register your votes, at which point you'll have a certain amount of time to complete your voting. I understand that the scrutineers have tabulated the votes received by proxy properly submitted prior to the meeting. If you have previously voted, you do not need to vote again when prompted. By voting again, you will revoke any previous vote. I will also note that prior to the start of the meeting, I received a report from the scrutineers in respect to each resolution. The scrutineers have indicated that based on proxies received prior to the start of the meeting, at least the majority of the shares voted were voted in favor of each resolution. Therefore, rather than waiting for a new interim voting report to be generated during the meeting, I will declare each motion carried following voting. The scrutineers' report showing the full voting results will be published on SEDAR and by press release following the meeting. For more information regarding the virtual meeting platform, please refer to management information circular sent to shareholders prior to this meeting. We will now proceed with the formal portion of today's meeting. To expedite the formal part of the meeting, I will move and second all motions. I now call to order at the annual meeting of shareholders of the company. I appoint Ted Gilpin, Chief Financial Officer and Corporate Secretary of the company, to act as secretary of the meeting. For purposes of this meeting, I appoint Computershare Investor Services Inc., through its representatives, as scrutineers to calculate and report on the votes in respect to the motions presented in this meeting. The purpose of today's meetings are set out in the management information circular of the company dated May 26, 2020. The notice calling this meeting, the management information circular and the form of proxy were mailed to shareholders who are entitled to receive the notice of the meeting on or about June 1, 2020. The audited consolidated financial statements of the company for the year ended December 31, 2019, and related management discussion and analysis, are available under the company's profile on the SEDAR website. Copies of all documents are also available on the company's website, which is linked at the bottom left-hand side of the viewer screens. Unless there's any objection, I will dispense with the reading of the notice of the meeting. Seeing no objection, we will dispense with the reading. With respect to the mailing of materials to shareholders, I have a statutory declaration attesting to the due service of the media materials, and I direct that the statutory declaration be annexed to the minutes of the meeting. The preliminary scrutineers' report shows that a quorum of shareholders is present at this meeting. As such, I declare that the meeting is properly constituted for the transaction of business. I direct that the scrutineers' report on attendance be annexed to the minutes of the meeting. As the first item of business on the agenda for today's meeting, I now present to the meeting the audited consolidated financial statements of the company for the year ended December 31, 2019, together with the auditor's report thereon. Copies of such documents are available to be viewed on SEDAR and at the link to the company's website shown at the bottom left-hand side of the viewer screens. Unless there are any objections, I will dispense with the reading of the financial statements and auditor's report thereon. Seeing no objection, I will dispense with the reading. The next item of business is the election of directors. The Board of Directors has fixed the number of directors to be elected at the meeting at 5. The 5 directors to be elected by the shareholders of the company shall hold office until the close of business of the next annual meeting of shareholders or until their successors are elected or appointed. The following persons have been nominated as directors: Edward Goldthorpe, Graeme Dell, Perry Dellelce, Sabrina Liak and Radford Small. Each of the persons nominated has confirmed that he or she is prepared to serve as a director. If there are no further nominations, I will declare the nominations closed. Since there are no other nominees, I move and second the motion to elect the directors. As mentioned at the beginning of the meeting, voting on all matters will take place at the same time, closer to the end of this meeting. I will now move on to the next item of business. The next item of business is to appoint the auditors of the company for the ensuing year and to authorize the directors of the company to fix the remuneration of the auditors. I move and second that KPMG LLP be reappointed as auditors of the company until the next annual meeting of shareholders, and that the Board of Directors be authorized to fix their remuneration. I will now move on to the voting on both items of business. As mentioned earlier, voting today will be conducted by electronic ballot. I will now take a moment to ask that the balloting be opened to registered holders and appointed proxy holders. The polls are now open. And at this point, all registered shareholders and proxy holders who have properly logged in with their control numbers or user name and wish to vote will be able to see on the screen all motions being brought forth at this meeting. As previously mentioned, if you already voted the proxy prior to the meeting, you do not need to vote again now. As such, any votes will override your previous votes. Guests are not permitted to vote. And as such, if you're logged in as a guest, your screen will not change. Please register your votes by accessing the voting page and selecting the for or withhold buttons next to the name of each proposed director and next to the resolution with respect to the appointment of auditors. Once the electronic balloting closes, the voting page will disappear and your votes will automatically be submitted. I will now pause during the voting period, and we'll announce once the polls will close. [Voting]

As the polls have now been opened for the allotted time, I direct that Computershare close the polls. As mentioned earlier, prior to the start of the meeting, I received a report from the scrutineers in respect to each resolution. The scrutineers have indicated that based on proxies received prior to the start of the meeting, at least a majority of the shares voted were in favor of each resolution. I therefore declare that each motion has been carried. Each of the 5 nominees have been elected as directors of the company to serve until the next annual meeting of shareholders or until their successors are elected or appointed. On behalf of the company, I would like to thank the directors for agreeing to stand for election and for the past efforts and contribution to Mount Logan. KPMG LLP has been reappointed as the auditors of the company, and the Board of Directors of the company has been authorized to fix their remuneration. I would ask that the scrutineers compile the report regarding full results of voting on all business matters, which results will be published on SEDAR and by press release following the meeting. I'll also direct that the report be annexed to the minutes of this meeting. The formal items of business as set forth in the notice of meeting have now been dealt with. Unless there is any further business, I will terminate the meeting. As there is no further business to come before the meeting, I declare the formal part of the meeting to be concluded. So with that, we thought we'd give an update and management presentation, as we normally do, including the recent transaction we announced. As the formal part of the meeting has now been concluded, we will now turn to a management presentation to review the transaction we recently announced. In light of the regulatory environment in which all Canadian public companies operate, I note that the information shared during our presentation today and later during the Q&A may include forward-looking statements based on our best estimates and judgment. These forward-looking statements are subject to important risks and uncertainties that could cause actual results to differ materially from the conclusions, forecasts and projections discussed at this meeting as certain material factors and assumptions were made in drawing such conclusions, forecasts and projections. We encourage shareholders to review our public record on SEDAR, which is comprised of our documents filed with the securities regulator that set out the nature of our business, along with the risks, uncertainties and other relevant factors that could cause results to differ materially from any forward-looking statements. Our remarks today are qualified by our public record and those filings. I will now proceed with a brief management presentation. I note that each person viewing the meeting will need to click through the slides on the right-hand side of their own screen as we aren't able to advance these slides for you. To start off, we are pleased with the performance of the last year and the continued momentum in our business as we built up a diversified portfolio, growing organically and initiated the dividend. As discussed with the release of our first quarter results last month, we remain vigilant in these times of economic turmoil, and we have conviction in the quality, security and diversity of our underlying portfolio and believe we are well positioned to take advantage of the current market environment. What we wanted to focus today on -- what we wanted to focus on for today's presentation was the future of Mount Logan and our ongoing expansion into the asset management activities. Please refer to Slide 3 of the management presentation. On June 22, we announced that we entered into a definitive agreement, alongside Sierra Crest Investment Management, to manage a $240 million semi-permanent capital vehicle. This is a transformational acquisition and monumental step from Mount Logan as it greatly accelerates our transition into a scaled asset management platform. Our business will now benefit from meaningful, low-volatility, recurring asset management fees that will be accretive to Mount Logan's earnings, while allowing us to add value at the fund level by our credit investment expertise and sourcing channels. The fund under consideration is the Resource Credit Income Fund, or CIF, as we'll refer to it throughout these comments. CIF is a closed-end interval fund that invests in credit assets that are highly complementary with Mount Logan's mandate, including direct lending, private credit and public credit. CIF was previously managed by Resource Advisers (sic) [ Resource Alternative Advisor ], a U.S. asset management company that specializes in real estate and credit investments. Structurally, for this transaction, Sierra Crest Investment Management and affiliate of BC Partners will serve as the formal investment adviser in the U.S., while Mount Logan will be funding the purchase of the management contract and receiving all of the economic benefits associated with the transaction. We anticipate the transaction to close in the fourth quarter of 2020, following a vote by the shareholders of CIF. Moving to Page 4. We believe this transaction is highly accretive to Mount Logan Capital for a number of reasons. First of all, this transaction will result in transitioning from a capital-intensive, interest income-driven model to a lower-volatility, asset-light, recurring management fee model. CIF's annual management fee of 1.85% of net asset value is underpinned by a highly sticky retail capital and a strong track record of retention. Additionally, CIF presents Mount Logan with a differentiated opportunity to access U.S. retail investor flows, a thriving fundraising channel with a strong secular tailwinds that not only offers us a long-term growth opportunity for CIF, but also creates the optionality for Mount Logan to leverage the acquired infrastructure in order to expand its offerings into complementary retail-focused products. This transaction opportunity arose due to the extensive relationships of the Mount Logan management team across the industry, and its renowned ability to swiftly execute deals in a time-sensitive process. The transaction was proprietary in nature with no intermediaries involved, meaning we were able to negotiate directly with the decision-makers to achieve attractive structure and price for our shareholders, offering certainty to close and speed of execution to the seller, Resource Advisers. This opportunity originated as the seller was evaluating strategic alternatives for its managed funds as they had recently divested their real estate-related funds to Goldman Sachs Asset Management, thus creating an opportunity for Mount Logan Capital to obtain the economics of the sole remaining externally managed fund. We have further detail on Page 7. But to briefly summarize, we believe the potential value of the management contract for CIF in the public markets is significantly higher than our proposed purchase price. We purchased a contract at an attractive mid-single-digit multiple of fee-related earnings, or FRE, versus the 18x average FRE multiple for North American publicly traded alternative asset managers. Outside of the attractive process dynamics and valuation, we have conviction in the long-term potential enterprise value creation driven by growing the fund's assets under management. We intend to leverage CIF's existing fundraising momentum, which peaked at $40 million in a single quarter, and infrastructure in order to achieve this. When assessing this transaction, we weighed the return potential of this management contract versus our traditional credit investing model, which we described in more detail on Page 8. The resilience of CIF as an investment stems from its consistent management fee generation on a sticky capital base, with limited redemptions by investors, averaging a mere 2.6% per quarter since 2017. Furthermore, under the interval structure, CIF has the ability to limit quarterly redemptions to 5%, thus, essentially making CIF a semi-permanent capital source of capital. This is a key feature as it enables the manager to proactively allocate capital between liquid and illiquid securities to generate incremental value for shareholders. For further information on the general structure of the interval fund products, it's available on Page 5. Lastly, as we are credit investors, we remain laser-focused on protecting our capital and are always careful to assess our downside protection even under declining scenarios. In this case, we have confidence on a full recovery of our proposed investment in the transaction, even under a scenario in which investor redemptions are maximized and no additional funds are raised. Moving to Page 6 to provide a brief overview of the fund itself. CIF is a $240 million continuously offered unlisted fund that was founded in 2015 under the leadership of Mike Terwilliger, an experienced credit portfolio manager that we expect to retain as part of this transaction. The fund itself is a diversified credit-skewed portfolio that is highly complementary with Mount Logan's existing investment mandate and management's expertise. Since inception, CIF has achieved a positive investment track record, which has excelled against its respective benchmarks, that send a strong foundation for further fundraising under Mount Logan. In order to fully leverage CIF's successful track record and maintain its fundraising momentum while ensuring a seamless transition, we intend to retain key management members and vendor contracts. Page 9 is a slide we used in our original presentation when we launched Mount Logan in 2018 as a way to illustrate our long-term goal for the evolution of Mount Logan's business model. The proposed transaction with CIF is a major step towards fulfilling our transition to a diversified credit manager. We view this transaction as a significant milestone towards the market, ascribing value to the asset management fee streams associated with our business and thus, transitioning to being a value -- valued similarly to our asset management peers as opposed to being valued on a price-to-book basis. Overall, we are very excited about this transaction with CIF as it embodies many of the characteristics we look for in a strategic acquisition, including a proprietary process, compelling valuation, operational synergies and established track record to leverage downside protection and significant upside potential. We will be in touch in subsequent announcements regarding the transaction status and plans regarding financing activities to support this transaction. That concludes our presentation on the proposed transaction, and I'd like to turn it over to questions, if anybody has any. So with that, if there's no questions, please follow up with us live, and the management team is available to answer any questions anybody has at any time. And thank you very much for all of your support of ourselves and of our Board of Directors. Thank you.

This concludes the meeting. You may now disconnect.