Ares Management Corp (ARES) 2017 Q4 法說會逐字稿

Welcome to Ares Management, L.P.'s Fourth Quarter and Full Year 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded on Thursday, February 15, 2018.

I will now turn the call over to Carl Drake, Head of Public Investor Relations for Ares Management.

Good afternoon, and thank you for joining us today for our fourth quarter and full year 2017 conference call. I'm joined today by Michael Arougheti, our newly appointed Chief Executive Officer; and Mike McFerran, our newly appointed Chief Operating Officer, and he continues to serve as our Chief Financial Officer. In addition, Bennett Rosenthal, co-Head of our Private Equity Group, will also be available for questions.

Before we begin, I want to remind you that comments made during the course of this conference call and webcast contain forward-looking statements and are subject to risks and uncertainties. Our actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. We assume no obligation to update any such forward-looking statements. Please also note that past performance is not a guarantee of future results. Moreover, please note that performance of and investment in our funds is discrete from performance of and investment in Ares Management, L.P.

During this conference call, we will refer to certain non-GAAP financial measures such as economic net income, fee-related earnings, performance-related earnings and distributable earnings. We use these as measurements of operating performance, not as measures of liquidity. These measures should not be considered in isolation from or a substitute for measures prepared in accordance with generally accepted accounting principles. These measures may not be comparable to like-titled measures used by other companies. In addition, please note that our management fees include ARCC Part I fees. Please refer to our fourth quarter and full year 2017 earnings presentation that we filed this morning for definitions and reconciliations of the measures to the most directly comparable GAAP measures. This presentation is also available under the Investor Resources section of our website at www.aresmgmt.com, and can be used as a reference for today's call. Please note that we plan to file our Form 10-K later this month.

I would like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any securities of Ares or any other person, including any interest in any fund.

This morning, we also announced that we've submitted an election to the IRS to be treated as a corporation for state and federal income tax purposes effective March 1, 2018. Please see Ares' separate presentation on corporate status election, which is also available on our website and filed with our 8-K, along with our earnings presentations this morning. Michael Arougheti and Michael McFerran will also reference this presentation during our call today. We also declared a distribution of $0.40 per common unit that represented a portion of our earnings for the 5-month period beginning October 1, 2017, and ending February 28, 2018. Unitholders of record on February 26, 2018, will be paid this distribution on February 28, 2018.

Starting March 1, 2018, Ares shareholders will receive a Form 1099-DIV for any dividends received. In addition, for March 2018, the first month that Ares will be taxed as a corporation, Ares has declared a $0.0933 common dividend payable on April 30 to holders of record on April 16.

Now I'll turn the call over to Michael.

Great. Thanks, Carl. Thanks for joining us today, everybody. As Carl mentioned, we have some really exciting news to share regarding our change in our tax structure, as we've elected to change to corporate tax status. However, before we discuss the details behind the action, I thought it would be helpful to first discuss our recent fourth quarter and 2017 results. Mike McFerran will start off with our results, and then I'll follow up with a review of the growth dynamics of our business, which have contributed in part to our decision to make this election to corporate tax status. Mike McFerran and I will then walk you through the separate presentation that Carl mentioned on our election before we take your questions.

So with that, I'll hand the call over to Mike McFerran.

Thanks, Mike. The fourth quarter of 2017 concluded another strong year for Ares. We generated our highest quarterly levels of management fees and core fee-related earnings, with year-over-year growth of 17% and 22%, respectively. For the full year, our management fees and fee-related earnings increased 13% and 26%, respectively, reflecting double-digit growth in AUM and solid FRE margin improvement, largely as a result of the scale efficiencies in our business.

Our economic net income growth was also notable, reflecting not just FRE growth, but also strong fund investment performance across our primary strategies. Fourth quarter and 2017 after-tax ENI net of preferred increased 23% and 37%, respectively. Our strong performance is also evidenced in our net accrued performance fees, which increased 53% year-over-year.

Within credit, we generated solid performance on a wide range of strategies, including the full year gross returns of more than 15% in our European Direct Lending strategies, and 5% to 8% gross returns on our liquid strategies in syndicated loans and high-yield. In addition, our externally managed business development company, Ares Capital Corporation, generated a total net return of approximately 10.5% for the year.

2017 gross returns in our corporate private equity strategy were approximately 26%. And our 2 primary real estate private equity strategies had gross returns of approximately 19% in the U.S. and approximately 24% in Europe. As Mike will discuss later, we believe the strong and consistent fund performance and client satisfaction is setting us up for additional success in our fundraising, including a connection with new adjacent strategies. Overall, we finished 2017 with another good year of fundraising, with $16.7 billion in gross new commitments, driven largely by a wide range of new and existing illiquid and liquid credit strategies, and to a lesser extent, successor funds in our real estate private equity strategy.

In terms of the highlights for 2017, we raised our largest first-time fund in our history, Ares Private Credit Solutions, a $3.4 billion commingled fund focused on junior capital investments in upper middle-market companies. We added another $3.7 billion in U.S. and European Direct Lending private funds and priced or closed 5 new CLO funds, totaling $3.5 billion throughout the year. Collectively, this fundraising helped drive our AUM up 12% to $106.4 billion, and our Fee Paying AUM up 20% to $72.5 billion during 2017. The growth in our incentive-eligible AUM has been another noteworthy development, as we reached a record high in the fourth quarter with more than $62 billion, up 23% year-over-year. Of that amount, approximately $22 billion is uninvested and available for future deployment, which we believe represents the potential for significant future value creation over the long term.

Now let me walk through our detailed results. For the fourth quarter and full year, we reported economic net income of $132.4 million and $467.7 million, respectively, which translated into $0.54 and $1.93 on an after-tax per-unit basis after preferred distributions, compared to $0.44 and $1.42 for 2016. The fourth quarter also represented our strongest quarter of fee-related earnings to date, with nearly $59 million, up 22%, with our full year fee-related earnings of $217 million, 26% higher year-over-year. These numbers include the ARCC Part I fees waived in conjunction with the ACAS transaction. Our fourth quarter FRE margins reached 30% compared to 28% in the fourth quarter a year ago.

Available capital or dry powder at the end of the year stood at $25.1 billion, up 8% year-over-year. Our AUM not yet earning fees, or shadow AUM, declined to $14.5 billion compared to $17.8 billion in 2016, as $7.6 billion of ACOF V became fee-earning upon that fund's activation in March of 2017. Of this $14.5 billion, approximately $10.8 billion was available for future deployment, with corresponding management fees totaling over $118 million and a blended expected management fee rate of 1.1%, consistent with our current levels.

Our deployment also reflects the growth and breadth of our global platform, particularly within direct lending. Within our drawdown funds, we deployed $12.6 billion during 2017, primarily in U.S. and European Direct Lending strategies, followed by active deployment of flexible capital within our corporate private equity, structured credit and real estate private equity strategies. The investing environment remains challenging, but we continued to draw upon our extensive relationships and deep sourcing capabilities, along with our flexible capital strategies, to find attractive investments in a world full of elevated asset prices.

The strong fund performance I cited earlier led to significant improvements in our performance-related earnings for the fourth quarter with $73.5 million and set a new record for the full year with $250.7 million versus $65.4 million for the fourth quarter of 2016 and $184.6 million for the full year of 2016.

Our balance sheet investment portfolio has continued to perform well. At the end of the year, we had $823 million of diversified investments, primarily in our funds, and the portfolio generated strong investment income of $33.8 million for the fourth quarter and $86.7 million for all of 2017, representing an average annual net investment return of over 12%. Our investment portfolio consists of income from credit investments complemented by private equity and real estate fund investments.

Our fourth quarter distributable earnings net of taxes were $0.26 per common unit versus $0.31 per common unit a year ago. Our fourth quarter distributable earnings were moderately lower due to comparably less monetization activity. But keep in mind that the underlying core level of our distributable earnings continues to be driven by higher fee-related earnings growth. For the year, our after-tax distributable earnings per common unit was $1.18 versus $1 in 2016, both net of the preferred distributions.

Let me update you on the status of our remaining tax benefit related to the support payment we made in connection with Ares Capital's acquisition of American Capital or ACAS. During 2017, we used about $0.16 per unit against our fee-related earnings. We have about $0.30 per unit remaining to carry back or carry forward. Due to the reduction of corporate tax rates under tax reform, we've decided to carry back the net operating loss to 2015 and 2016 to maximize the cash benefit. We expect to receive our tax refund in early 2019.

Looking forward, we believe our business is well-positioned, with a high degree of management fees, which represented more than 80% of our total fees in 2017, and our fee-related earnings to continue to grow and account for the majority of our cash earnings, representing approximately 80% in 2017.

Our management fees are derived from long-dated capital, as more than 80% of our fourth quarter management fees were earned from funds that had a remaining life of more than 3 years, and 39% were from publicly-traded permanent capital vehicles.

Now I'll turn the call back to Mike for his thoughts on our historical and future growth.

Thanks, Mike. As you can see from the growth in all of our metrics, we've made a lot of progress in the development of our business since our IPO nearly 4 years ago. As we articulated, we decided to become a public company to improve our fundraising through greater brand awareness in the global markets, improve our access to the capital markets, enhance our already-strong culture of ownership across the firm and to have a currency for potential acquisitions, given the significant consolidation opportunities in our industry. We believe that we've achieved success in these areas but believe that meaningful opportunities still lie ahead of us.

Over the last 5 years, our AUM, management fees and fee-related earnings have all experienced compound annual growth rates of around 10%. In 2017, as Mike discussed, the growth rates in these metrics were even higher. FRE accelerated by 26%, and our economic net income increased by over 30%, both representing the strong momentum in our core management fee business and strong fund performance across our entire platform.

Our business has continued to benefit from several important industry trends, namely: the faster growth in demand for alternative investments, as investors seek higher returns with less volatility; the consolidation opportunity as limited partners shrink the number of their GP relationships and managers like Ares strive to achieve economies of scale; and lastly, the global trend away from traditional banking and the acceptance of private debt as an investable asset class.

To capitalize on these trends, we've continued to scale our business development team. Prior to our IPO, our global business development and investor relations team was composed of 44 people. Today, it's almost 70 people in 8 offices and 5 regions around the globe. These investments have been bearing fruit as we systematically raise larger successor funds, launch sizable first-time funds and penetrate new geographies and new distribution channels. As an example, and looking at our fundraising pipeline going into 2018, we've launched larger successor funds in our European Direct Lending strategy and our European real estate private equity strategy, and we've had a significant uptick in strategic managed account opportunities in illiquid credit across the spectrum of direct lending and structured credit.

Our investors have rewarded our performance with larger AUM and broader relationships across the platform. Our client growth has also benefited from our investors giving us a greater share of their wallet. At the time of our IPO, we had about 210 investors invested in more than one Ares fund. Today, that number is 305 investors, and our average client now has invested in 2 funds with us.

Additionally, we have continued to expand and develop new direct investor channels. As an example, we were barely active in the private banking or high-net-worth channels 5 years ago. And in 2017, those channels constituted over 11% of our direct institutional funds raised.

As another example, we continue to see a compelling opportunity in the insurance sector for customized solutions. This segment now accounts for over 10% of our total AUM versus 5% prior to our IPO. We've also seen an increasing amount of growth from new strategies. The emergence of ancillary or step-out strategies in areas like structured credit, European Direct Lending, our PCS strategy, commercial finance and so on, have all helped fuel the growth in our product offering. In addition, we've developed a significant private fund business where we market our U.S. direct lending products directly to institutional investors, a distribution channel that wasn't meaningful to us 5 years ago. If you look at that in the aggregate, since our IPO, fundraising from new strategies or new channels has accounted for approximately 20% of our annual fundraising compared to just 4% the year before our IPO.

The changing composition of our AUM has also made us a stronger company, as more of our new funds are in long-dated, closed-end or permanent capital funds in proprietary strategies like direct lending, structured credit and corporate real estate and infrastructure private equity, with a shrinking component in open-ended funds in traded liquid assets.

For example, in our credit strategy, our direct lending business, which includes long-dated funds and managed accounts with sticky assets, now comprises almost 60% of our total credit AUM versus 48% at the time of our IPO. We've also invested heavily in building out our distress team, and the returns on recent deployment are promising. We hope to raise additional funds in distressed special situations and opportunistic credit as the cycle evolves. We're also building out our real estate debt platform with new leadership and important new hires. And we expect to become a meaningfully larger player in that $4 trillion market segment in the coming years. We expect to build upon our success in the private asset-backed sector in the U.S. with a new team in Europe. And lastly, there's been a notable uptick in the number of large investors that are looking to develop significant strategic mandates across our platform. I think this speaks to both the increasing awareness of the performance and breadth of Ares' strategies as well as investors' desire to forge more meaningful partnerships with selected managers of scale. To support this growth, we recently made a very strategic hire to lead our efforts in new product development and cross-platform mandates and in expanding our consulting channel.

While the vast majority of our growth is organic, we do have a strong track record of acquisitions. Over the last 5 years, we've added to our real estate platform, primarily through the acquisition of AREA Property Partners, where we've grown our real estate PE AUM to $7.3 billion and total real estate AUM to over $10 billion.

As Mike stated earlier, our real estate PE fund performance has been very strong. We have 2 large successor funds in the market, and we have a platform that has considerable opportunity for further scaling.

In structured credit, we acquired a small platform, Indicus Advisors, in 2011 and have added to it organically with private ABS and CMBS capabilities. And in 2017 year-end, our structured credit strategy had grown to approximately $5 billion AUM, and continues to benefit from our leading franchise in illiquid credit. These acquisitions have provided complementary add-on strategies, and we believe that there are significant additional opportunities to acquire proven managers at attractive levels.

To that end, we now have a fully developed corporate strategy team dedicated to exploring and analyzing these opportunities. And to put that in perspective, over the last 2 years, we've reviewed over 150 potential acquisitions with over $2 trillion in assets under management.

So in summary, we believe that the drivers of our business are pointing upwards, and we have no shortage of ways to further expand our business. We have opportunities to grow organically by increasing our fund sizes or by expanding our products, geographic coverage, channels of distribution. In addition, we are seeing significant consolidation opportunities that we believe could be accretive and strategic for our unitholders. It's for these reasons that we're firmly committed to executing on the need for scale and profitable growth, which leads me then to the rationale for the change in our corporate tax status election.

So if folks could now maybe turn to the separate presentation on corporate status election, starting on Slides 4 and 5, I'd like to explain why we've elected to move forward and the benefits that we expect from this change. Bear in mind that this is something that we started to evaluate well before tax reform seemed imminent. And we believe that our decision to elect corporate tax status is in the best interest of unitholders. We believe that there is a willing but ineligible shareholder universe for publicly-traded asset managers that are taxed as partnerships. And while we've been public for less than 4 years, we've witnessed the evolution of this model for public shareholders since the first firms in our industry began going public over 10 years ago. And while the public partnership model seemed optimal from a tax perspective, the complexities of pass-through taxes and scheduled K-1 reporting for investors, we believe, has limited our potential investor base, both domestically and internationally.

Asset managers, including Ares, that are taxed as partnerships have historically traded at meaningful discounts to other traditional managers that are taxed as corporations. And this is the case despite the fact that alternative managers have attractive business models that are relatively insulated from mark-to-market volatility, fee pressure, the rise of passive investing and funds with daily liquidity and outflow risk. So we're making this change, first and foremost, to simplify our tax structure to expand our eligible investor universe. And we believe that the ability to attract a broader and more diverse investor base should benefit all equity-holders and enable us to be valued accordingly.

Secondly, with more liquid shares as currency, we believe that we can more efficiently pursue selective acquisitions and continue to broaden and deepen our platform. While we have a public currency, the liquidity and attractiveness of that currency is somewhat limited for M&A, as issuing units from a PTP creates tax challenges for sellers.

And third, in conjunction with this election, we've adopted a dividend policy that will allow investors to better appreciate the underlying stability and growth of our core management fee business. One of the challenges with alternative managers has been inconsistent distributions. And this has been driven by the core difference between cash distributions and dividends that Mike McFerran will explain in a minute. So therefore, we're electing to move to a steady quarterly dividend that will be based on our after-tax fee-related earnings, and this dividend will be reassessed each year based upon the level and growth of our after-tax FRE. We believe this has 2 obvious benefits: first, it will provide more predictability with respect to our dividends while reducing dividend volatility; and second, it allows us to retain our net performance-related earnings stream to fund future growth or for potential accretive share repurchases.

Lastly, the election also reduces the operational complexity of managing a publicly-traded partnership, including the requirement to send out Schedule K-1s. We expect that this alone will result in annual savings to our company and make owning our shares a little less burdensome.

And with that, I'll turn it over to Mike McFerran to walk through some of the math and financial metrics around the conversion. Mike?

Thanks, Mike. For reference, I'd ask you to turn to Slide 6, where I'll spend a few minutes on our current pass-through tax status and what changes with our corporate tax status election. As a quick reminder, the public units issued by Ares represent approximately 39% of the total ownership of our firm. Our revenue can be grouped into 2 categories: income that is considered good or qualifying for PTPs under the IRS rules; and non-qualifying or bad income. Translating this for Ares, our management fees and a small portion of our performance fees are considered bad income. Historically, management fees have represented over 80% of our total fee income.

Our qualifying income, or good income, consists mostly of our performance fees. Our bad income allocable to our public entity is taxed at corporate rates. As a result, after-tax fee-related earnings are not impacted whether we are taxed as a partnership or a corporation, as it is treated the same. The only difference is the treatment of our performance-related earnings, which is predominantly passed through to our investors and taxed at the individual level.

As the majority of our revenue comes from management fees, we have already had the majority of our revenue taxed as if we are a corporation. Our unitholders are public partners in Ares and are allocated their pro rata share of partnership income and losses annually through the issuance of K-1s to all unitholders. Investors then pay taxes based on the respective tax status and the character of income reported through the K-1s, which generally consist of a mix of ordinary income, qualifying dividend income and capital gains or losses.

Since our IPO, we have declared a paid quarterly cash distributions as a public partnership. I want to highlight that a common misconception about our industry is that our cash distributions are dividends. They are not. As unitholders receive their taxable income through allocations reported in their K-1s, the cash they receive is intended to provide unitholders with cash to pay their taxes, ideally providing unitholders with positive after-tax cash. The nature of K-1s also results in the possibility that certain unitholders may have to file state tax returns in multiple states and incur higher tax preparation costs due to the complicated nature of K-1s in comparison to simple Form 1099-DIV reporting.

Under our corporate tax status election, Ares will pay corporate taxes on all common shareholders' revenue. And common shareholders will not have tax obligations arising from their investment in Ares shares, other than on the receipt of qualifying dividends. Common shareholders will receive Form 1099-DIVs for the dividends they receive and they would no longer receive pass-through income or any Schedule K-1s with possible multi-state tax filing obligations from owning our shares.

Turning to Slide 9. Starting March 1, 2018, we will no longer declare cash distributions but rather declare actual after-tax qualifying dividends. We have adopted a dividend policy effective March 1 that we believe achieves the following. First, our intention is that after-tax fee-related earnings become the basis for our dividend, with the dividend being targeted at a level that we estimate reflects a full payout of our after-tax fee-related earnings. As fee-related earnings reflect the core earnings of our business and consist of management fees less compensation and general and administrative expenses, having our recurring dividend based on this amount removes volatility from our dividend and enables investors to receive what we believe is an attractive after-tax qualifying dividend yield. We intend to grow the dividend in line with the growth of our fee-related earnings. Our dividend policy reflects our intention to retain net performance fees. As we have historically paid out on average 90% to 100% of distributable earnings, we have not retained earnings for future growth in the past. We now intend to do so and we have the opportunity, through low corporate tax rates, to retain after-tax performance fees at a lower rate than investors would have and use the retained earnings for potential share repurchases and to fund future growth, with the objective of accelerating our fee-related earnings growth per share.

I do want to spend a moment reviewing the procedural steps and time line related to us making a corporate tax election. Our last day taxed as a partnership will be February 28 of 2018, and K-1s will be issued for the stub period of 2018, starting January 1, ending at the end of February. As Carl stated, there will be one final distribution while being taxed as a partnership of $0.40 per common unit, reflecting the 5-month period ending February 28, 2018, that will be paid on that date. Going forward, we expect to pay qualifying dividends under our adopted dividend policy. For March 2018, the 1-month stub period of the first quarter post the change, we are declaring a $0.0933 per common share dividend, reflecting 1/3 of a full quarter $0.28 per share dividend for holders of record on April 16, to be paid on April 30. Starting the second quarter of 2018, we intend to pay a $0.28 per common share dividend per quarter for the remainder of the year.

Page 11 presents an illustrative financial impact of this change. To keep this simple, we have assumed that reported fee-related earnings and realized performance-related earnings match taxable income. As I previously mentioned, fee-related earnings have been taxed as if we have been a corporation. The reduction in the corporate tax rate results in an increase to after-tax fee-related earnings of 23%. This reduction in taxes already being incurred on fee-related earnings, offsets the new taxes that will now be incurred at the entity level for realized performance-related earnings. To the extent of this -- the extent of this offset will be a function of the ratio of fee-related earnings to net realized performance-related earnings. We refer to the sum of FRE and realized PRE as realized income. The breakeven level of this offsetting tax is when realized PRE is approximately 35% or less of realized income. For 2017, a year that overall was strong for realizations, realized PRE represented approximately 33% of our realized income.

In summary, the top of Slide 11 shows you that with our large contribution of FRE as a percentage of total realized income, the reduction in corporate tax rates would more than offset the taxes on the incremental income being taxed. While we believe this analysis is useful, it's most important for our investors to understand the after-tax impact to them. Remember, when taxed as a partnership, we pay corporate taxes on fee-related earnings and investors are allocated pass-through income of performance-related earnings, which primarily consist of a mix of ordinary income and capital gains. When taxed as a corporation, we will pay taxes on PRE at the corporate level. To illustrate this point on a look-through basis, under this assumption, the table in the middle of Slide 11 shows you that an individual investor would receive higher after-tax income if we pay out 100% of our after-tax earnings. The point here is that individual common shareholders may benefit from an increased percentage of tax -- of income tax at a qualifying dividend income rates versus ordinary individual income rates.

On Slide 12, we also illustrate our dividend policy of paying out our after-tax FRE, which is a lower total payout ratio of realized income. Under this scenario, the total shareholder economics are higher when one includes the value to a shareholder of the retained earnings at Ares and the corresponding growth in our book value. As previously mentioned, we believe our ability to retain earnings for potential share repurchases and to invest in the growth of Ares, represents an opportunity for value creation for our shareholders.

On Slide 13, using our actual 2017 FRE, PRE and ENI, we present the illustrative impact on both current and deferred taxes. To assess the impact to common holders and appropriately and conservatively, we assume all private units are exchanged into common units, and thus, all of our earnings are subject to statutory tax rates. Under this scenario, the after-tax ENI per unit is approximately 8.9% lower, inclusive of the deferred tax on unrealized performance-related earnings. Excluding this deferred tax, you can see that the impact is negligible. We highlight the distinction between current and deferred taxes, since we find this to be important. The deferred tax amount is based on unrealized gains and does not translate into current tax obligations until realized. For example, unrealized performance fees driven by the appreciation of a portfolio company in a private fund we manage does not trigger tax until we realize that amount, which often may occur over several reporting periods or more. So while the 8.9% implies after-tax ENI dilution as a function of the nature of our industry where we are recording unrealized income and a provision against it, if that income were to be reversed, then a reversing deferred tax benefit would be recorded. Further, we looked at the impact on our 2017 actual reported ENI per total unit under our current ownership, which reflects a tax rate on the 38.75% of our common unit ownership of all units. The impact was approximately 3%.

In summary, we believe this change positions us to meet our objective of growing future shareholder value in several ways: first, the simplification of our tax reporting through the elimination of K-1s should enable us to appeal to a broader shareholder universe, and in turn, we believe enhance our liquidity and trading volume; next, we have adopted a dividend policy designed to support value creation for our shareholders through both growth and income by pegging our after-tax dividend to our stable growing level of core earnings driven by our management fees and to retaining earnings for potential share repurchases and further investments in growth; last, our shares after the change should provide us with a more liquid and attractive currency to use for strategic transactions to further the long-term growth and value creation.

With that, I'm going to turn the call back to Mike for closing remarks.

Thanks, Mike. I know that's a lot to digest, but we really are just so excited about what this all means for our opportunity to continue to drive value for our shareholders going forward. In the 4 years since our IPO, we've executed well, we believe, on our organic and nonorganic growth strategies, resulting in strong growth in both FRE and economic net income. Performance in our underlying funds continues to be solid, and our fund investors are rewarding us with AUM, which have grown 44% to $106.4 billion since our IPO. And importantly, as I discussed, the composition of our AUM continues to improve towards higher-fee and longer-dated structures. The management fee contribution to our total fee income continues to exceed 80%, contributing to the stability in our earnings. And we hope that this stability and growth will be better appreciated and rewarded as a corporation for tax purposes, paying a qualified dividend.

As I highlighted earlier, our significant growth has been against the backdrop of an increasing global appetite for alternative investments from both institutional and retail investors. And in addition, we've seen consolidation in our space in 2 notable ways: LPs are aggregating more capital with fewer GP relationships; and subscale, single-strategy managers are merging into larger platforms. And while these trends have supported our growth up to this point, I believe that these trends will only accelerate going forward, providing further momentum to our already-meaningful growth trajectory. And we also hope that our decision to be taxed as a corporation will help us capitalize on this opportunity with a simpler corporate structure, a more liquid and attractive stock and the ability to retain earnings to fund our growth.

We appreciate everybody's patience today. I'm sure folks have some questions. So with that, operator, let's open up the line.

(Operator Instructions) First question comes from Chris Harris with Wells Fargo.

Just a quick question on the new dividend policy, the $0.28 per share on a quarterly basis. Isn't that above your pro forma fee earnings on a per-share basis?

Yes, I mean, as we mentioned in the call, we're announcing the fact that we have forward-looking dividend during the course of 2018. So it implies our expectations for continued growth in the platform. And we want to highlight the comments we just made a moment ago. We're pegging this dividend level to FRE. And again, as it's forward-looking, it's not necessarily a backward-looking concept. This is really a key distinction on how to think about us as a corp versus the public partnership model we had before, where previously, because of the flow-through nature of the business, you look at distributable earnings and we're looking backwards to come up with a payout ratio on it to provide investors with cash to cover taxes and get income. Now we're operating as a corporation, where we will have a forward-looking dividend.

Right. No, I get that. I just wanted maybe a little bit more clarity as to how you plan to cover that dividend, if it's over your fee earnings. I guess, is it just going to be through investment sales? Is that how you plan on doing that?

No, no, no. I think if you look...

No, one thing to keep in mind, Chris, we have -- as we've talked about, we have a number of drivers that are growing the absolute level of FRE through the course of the year. We also have things like the turning on of the ARCC fee, post the ACAS waiver. We do have the lingering benefit of the ACAS tax benefit. So as we think of where we will end 2018 and the trajectory of our FRE through 2018, we feel that the dividend will be well-covered.

Got you, okay. And then a quick question on Slide 13, where we're showing the $1.66 relative to $1.51. I guess, though should we be really comparing things to what you guys actually just reported, so $1.93? So in other words, this change in status is really like 20% dilutive to the results you just reported. And that just seems like a high level of dilution, given how much your fee earnings are.

Keep in mind, what we're showing here on Slide 13, what we've presented is effectively using our reported numbers, not assuming any deductions. We wanted to give, effectively, our investors a very simplistic, back of the envelope way to understand this impact. So that 9% is an apples-to-apples comparison with the numbers on the slide. So we're -- the positive of this is, this gets you, effectively, just back of the envelope math, approximates our reported numbers, but there's other things going through our reported numbers that aren't necessarily captured through reported ENI and FRE.

One thing I'd highlight, guys, in terms of the simplification of the model, which is the challenge of the PTP, and I think Mike McFerran, in his prepared remarks, tried to articulate the very significant difference between a cash distribution reported on a Form K-1, the differential character of that income, what it means for an individual taxpayer's tax position and after-tax in their pocket income relative to this. I think one of the challenges that the industry has had is by using ENI as a framework for how to think about value, there's a lot of variability in what the actual shareholder experience is, and obviously, a lot of volatility in that ENI number, not just based on realized performance fees, but unrealized performance fees as well. What we've tried to do throughout the course of this presentation is boil it down to what the actual shareholder experience will be owning a common unit taxed as a C-Corp versus a publicly-traded partnership unit.

And one other point, real quick, we need to clarify is, in your question, you were comparing the amounts shown in this table to our reported ENI per unit. Keep in mind, in this table, we assume 100% conversion. So the comparison you should make is, if you look at number three, 2/3 down the slide of number 13, we show it being a 3% dilution. Again, when we report our numbers, you compare the after-tax per unit, you want to compare it to after-tax per unit here, which is 3% difference.

Next question is from Craig Siegenthaler with Crédit Suisse.

Michael, just starting with the last point you had there. I think many of us do appreciate ENI because it does attract the accrued carry build, which is really just future DE. But do you have any thoughts on switching your main EPS metric, and this is one the sell-side tracks, from ENI to distributable earnings, which will reduce downside volatility to sell-side assets?

It's a good question. We think the value of distributable earnings was when we were a partnership to frankly measure total distributable cash, because going back to the flow-through nature of the business. What I would think is going to be more appropriate going forward, Craig, is to look at 2 metrics: one, we're showing realized income in our presentation, which is our realized earnings of the business being fee-related earnings and realized performance-related fees; and ENI, which the difference between those 2 captures the unrealized. I think those 2 metrics should give you the 2 pieces of the business to understand it. But again, DE was, I think, more appropriate for a partnership, not a corporation.

Got it. And now that your shareholders will be filing a 1099, but your float is still under 20%, do you have any thoughts on which major passive indexes Ares could be added to post the conversion? And also, can you update us on any modifications we've seen here in corporate governance? I may have missed that point.

So there have been no changes to our legal structure or corporate governance. We can't speak for all indices, because each of the indices have their own rules and will make their own determination of what's included. But since we're not making a sort of legal structural change, we don't think, broadly, for the major indices like the S&P, at this point, this would make us index eligible.

But we do believe, Craig, and it's all subject to further analysis, that certain of the Russell indices, given the percentage of our freely traded shares, we would likely qualify, but there's still work to do there.

Our next question is from Michael Carrier with Bank of America Merrill Lynch.

This is Mike Needham for Mike Carrier. So just first one, another on C-Corp conversion. I guess, how close were you to making this decision now, was it a no-brainer or not? From the numbers, it looked like things are pretty breakeven financially. So maybe it was a no-brainer. And then if you could just touch on the potential for higher taxes at some point in the future. And I think if you were to switch back, like the tax consequences could be significant, so like how that scenario factored in? And then just a clarifying point, you guys just touched on some of it. But if -- like if you were to enter 2018 and your income makeup would've been the same, so you benefit from the lower FRE rate, is the ENI -- is that still a wash under either structure?

So great question. So let's take those in pieces. I apologize, your first part of that question, Michael, was what?

Was it a no-brainer or not?

Was it a no-brainer? Look, hindsight is 20/20. As Mike Arougheti mentioned on the call, we have thought about this in advance. Would we be making this announcement on the call today if tax reform had not passed? I don't know. It was appealing enough that there's a good chance we would. And part -- and the main reason for that, as we've highlighted and as I know you know, we have a management-fee-centric model. We've been paying taxes as if we were a corporation on the majority of our revenue since we went public. So while -- and FRE continues to grow as a percentage of the total. So while there's a part of our income that was previously flow-through, and clearly, the distinction now between individual and corporate tax rates have made this what you might call a no-brainer, this probably would've been pretty appealing to us regardless. And I think we have messaged that in the past, that it's always something that we've been thinking about. On the cost of...

With regard to converting back, this election is not irreversible, but to your point, it could be -- could come with some adverse tax consequences. It's interesting, now that we've elected to make the change, I have so much conviction that this is the right corporate structure for this company. And I actually think there's been so much operational, strategic and financial constraint within the alternative space because of the structure. And so I hope, through good execution, the market will come to appreciate that regardless of the underlying corporate tax rate, that this is value-enhancing and the right way to position this company for the long term. I'd re-ask you the question that with volatile tax rates, we don't see C-Corps going through an exercise of wondering if they should convert back to partnerships. And I think that where some, and maybe including ourselves, have been guilty, is we have used the desire to optimize tax and it's constrained our strategic opportunity. And so I think we are committed to being a C-Corp. I think our shareholders are better off net after-tax. And I think were it to reverse, I think we're going to demonstrate, because of this unique model, that we have a high dividend rate relative to what people are used to seeing, with a very high degree of our dividend being supported by long-dated permanent capital. And the opportunity now to build balance sheet to drive growth is just something that people haven't seen before, and we have a lot of conviction around it, whether corporate taxes are at 24% or 28%.

And then, Michael, the last part of your question, if you -- going back to Slide 11 in the presentation, we highlight here that -- and this is, frankly, just basic math, so it's not unique to Ares. I think it's a function of the decline in tax rates, that from the 2017 tax rate that we're already paying on fee-related earnings, dropping 40% for the federal rate, that offsets a good amount of income that we would now pay taxes on for performance earnings. And again, we highlight that breakeven as being -- if the composition of fee-related earnings and realized performance-related earnings was 35% the latter, then the decline in tax rates is offset it and your tax bill is the same. So effectively, it gives you cover there. It's a benefit of doing this post tax reform. And again, if you look at this past year, our realized performance earnings were just under that. So if the same ratio held true for 2018, then the decline in tax rates did offset the incremental tax.

Okay, okay, that makes sense. And then just one more quick one on buybacks that you guys mentioned as a possible use of extra retained cash. Would you do buybacks at the current float level? Or is this like a longer-term view?

We're going to have to institute, and we haven't technically converted yet, it's March 1. But one of the things we're going to have to put in place is a share repurchase program, so we'll think about the details of it. Clearly, it would be more appealing when it's accretive, but at the same time, managing to more of a constant outstanding count, when we think about restricted grants to employees, is advantageous to us.

Our next question is from Michael Cyprys with Morgan Stanley.

Just curious, as you convert to a C-Corp, what the implications are for the inside holders in the structure, any sort of the nuances and mechanics there? It seems like they're still, and correct me if I'm wrong, receiving their sort of allocable earnings through partnership, and so the earnings are not necessarily taxed at the entity level. They're still going to be paying taxes on an individual basis on the allocable earnings. If you can just help us kind of flesh out and understand the differences between the inside holders and the public?

Sure. So one thing to bear in mind is the inside holders do also own a decent amount of the public units. So they're -- inside holders have ownership both of Ares through a private partnership as well as a decent ratio of the public vehicle. As I've mentioned, there's no change in the legal structure, so the allocation of income between the 2, frankly, the public side and the private side, does not change. And it only changes with a conversion of units from the private to public, which would take that 39% ratio upward.

Michael, maybe just to put a finer point on that, too. Given the dynamic that we just discussed of receiving pass-through income at an individual tax rate, probably not lost on you, that in the absence of distributing realized performance-related earnings, the tax burden, if you will, in terms of cash received to the private holders is actually significantly lower. And the reason I highlight that is I think that's a good demonstration of the amount of conviction that my partners and I have around the value creation opportunity through the conversion, because some of the challenges that we talked about around net in the pocket distribution doesn't actually change for the inside holders. But other than that fact, nothing actually changes.

Okay, great. And just as a follow-up question, just on M&A, it seemed like you mentioned that a number of times in your prepared remarks. So just curious, 2 thoughts here. One, if you could expand on your point that you made earlier, that M&A seemed to have maybe limited opportunities in the past. What sort of structural issues were created for sellers of the PTP structures? And then related to that, second, how are you thinking about M&A at this stage? You mentioned that a number of times. It sounded like you looked at a few trillion dollars' worth of deals over the past couple of years. Just any color on what you're looking at in recent quarters, what criteria you have, what sort of products and distribution channels could make sense next?

Well, I'll take the first part of that, and Mike can talk about how he thinks about M&A strategically. As a public partnership, we had a public currency. But again, because of the nature of a flow-through public unit, if we were -- based on what we could potentially acquire, it would be taxable to the seller at acquisition. Whereas you traditionally expect, when you acquire another business with your publicly-traded equity, it would be a deferred transaction to the seller. So we felt that while this was a liquid currency, it was a less liquid currency that constrained our ability, one, for it to be attractive to certain sellers, especially by the tax nature of it. Now with us making this corporate tax election, our currency is, frankly, just a lot more liquid, because it's going to operate just like any other corporate stock would in an equity acquisition. And we believe that will make it more attractive to potential sellers of businesses we may want to buy. Mike?

I think we've talked on past calls just about what requirements we have when looking at acquisitions. And as I highlighted in our prepared remarks around Indicus and Area and other things that we've done, we have been quite active acquiring companies. For us, it has really -- there are 3 very obvious requirements, but it's hard to check the box on all of them. One, it has to make strategic sense for us, i.e., we have to have a view that we can add value to the business, in the way that we did in some of our prior acquisitions by enhancing their distribution and asset gathering, giving them research and information benefits to add value to their information, their investment process. And we frankly have to feel that they make us better, where they're bringing some kind of a capability or perspective to us that we don't have. Two, it has to make financial sense. It has to be accretive, and we have to feel that the transaction stands on its own, and again, that we can grow it, but the math has to make sense. And probably most importantly in our business, it has to be a great cultural fit, because the investment business is really rooted in great culture. And I think our culture is one of our greatest assets. And if we're going to make an acquisition, we have to have a lot of conviction that it's a good cultural fit. So those may seem like 3 very simple filters, but it's very hard to make all 3 of those work. In terms of what we're looking at, we're really looking at a full spectrum of opportunities across each of our businesses in private equity, credit and real estate. They range in size from small tuck-in acquisitions to some larger, more transformational types of opportunities. And I think we'll continue to do it. Some of the things that we've talked about before that are driving this are this move to scale that I highlighted in the prepared remarks is very real. The global demand for alternatives, while growing, is flowing disproportionately to the large platforms, as investors are seeing better performance, more diversity of strategies, the ability to drive efficiencies in their own business. So I think, even for very well-run, high-performing institutional quality managers, if they're not scaled, it's very hard for them to compete for capital and compete for investment opportunities over time. So this move to scale, I think, is driving some of this. The other, which we've talked about, is just the evolution of the private funds business. And if you think about the evolution of the private equity and leveraged finance markets that we largely participate in, most of the businesses that are of a certain size and quality today probably launched sometime in the late '80s or early '90s. And just the fact is, you have founding partners likely starting to think about generational transfer, what the future for their business holds. And so we're also just at a point in time in the evolution of the private funds business where a lot of these platforms, not only are having a difficult time scaling, but also, I think, contemplating the future in a way that they probably hadn't been 10 years ago.

(Operator Instructions) Our next question is from Ken Worthington with JPMorgan.

Really, just one for me. To the extent that your -- to what extent will your conversion to a C-Corp be accompanied by more conforming to the earnings reporting done by similar structures? So for example, you present the idea of the hypothetical conversion in Slide, I think it was 13. The other publicly up-C structures do all report on an if-converted basis. So is that something you're contemplating? And if not, maybe why? And then the other up-C structures also include things like stock-based comp, and where applicable, placement fees. Would you be thinking about conforming to those reporting standards as well?

Sure. Look, as we continue to evolve and make sure our reporting is as transparent as possible, we're going to do what we've done and keep challenging ourselves to make sure you and all of our investors see the business through the same lens we do. With respect to the Slide 13, on the 100% converted basis, we -- that information, that metric is presented because we report on a per common unit basis, so it's the same math. So I think we do provide that today. Here, we wanted to illustrate it with the detail, so it's...

[Audio Gap]

That's anything that we have not already reported. On the placement fees and equity comp, we'd make sure those numbers are properly disclosed, as they have been, so everyone has all the pieces of the picture.

The only other thing I'd add, and Mike brought it up earlier, I do think that we want to focus people on realized income, and we want to simplify the lens that people are thinking about our business and seeing it through. We do believe that some of the existing frameworks and conventions that are being used in both traditional C-Corp managers and alternatives are not the right way to think of it, so we do have growing conviction around focusing on realized income. But to Mike's point, I think we have a good track record of giving information to the market and entering into a dialogue with you, how you want to think about us. But as we're thinking about the transition, that's where we're anchoring.

And then just with a follow-up on the ACAS portfolio. Is the repositioning of that largely done? I think last quarter, you said you were about halfway there, I recall. And depending on where we are, how close is ARCC at being at a good run rate for the Part I fees outside of the normal variations in that fee stream?

Sure. So I'd encourage you to, if you have the time, just check in on the ARCC transcript from their earnings call earlier in the week, because there was a pretty significant amount of dialogue around ACAS. But to summarize it, the transition is largely done. The experience that we have had, I think, has been better than was underwritten, both in terms of the speed with which we were able to rotate the portfolio and improve yields as well as both the realized and unrealized gains that rolled through that portfolio in the first year. So while it's not completely finished, it's largely finished. As a result of the re-leveraging of the portfolio, the rotation out of some of the lower-yielding assets, the replenishment of the lost income from SSLP with new income from SDLP, there are a lot of drivers for continued earnings growth at ARCC, which will show up in incremental revenue to ARES without regard to the fee waiver. As we mentioned in the prepared remarks, we are currently within the fee waiver period. That rolls off in the third quarter of 2019, and so there will be a step function change in the income coming off of ARCC, all else being equal, beginning in the fourth quarter of 2019. But if you look at the Q4 -- Q1, 2, 3, 4 sequential growth, you'll see that the income coming off of ARCC has been sequentially growing.

Our next question is from Robert Lee with KBW.

Congratulations on pulling the trigger. I guess, in a way, this is maybe a little bit of a follow-up to one of Ken's questions. So you're pegging the future dividend to after-tax FRE. I mean, that's actually not a number, though, that you've historically disclosed. And understanding that the high-line tax rate historically in the 37.8%, but the best as I can tell, your effective tax rate through the corporate block has probably, I think, has been more in the 20s. So can you maybe help us, number one, think about what kind of the -- how we should think about your reporting going forward? Will we see an after-tax FRE? And will it be on a fully converted or just a common basis? And how should we think of your actual cash tax rate for forecasting purposes?

All good questions. I think the important thing to remember is, again, we're declaring a forward [dividend]. And Rob, I know you know this, but, while I think it's helpful for you to understand existing FRE performance, we're not declaring a dividend with a look-back view of a payout, for just -- there's a lot of background. We're declaring this on a forward-looking, and hence, I think trying to tie in the numbers out precisely is not the best exercise. As far as looking at the tax rates, I would think of it as, in simplicity, 38.75% of Ares today is public, [indiscernible] at a 24.4% tax rate, that gives you a 9.5% effective tax rate. However, that's without any deductions, so I would kind of view that as the effective tax rate absent us putting deductions behind it. So net of those, so I would expect us probably to be showing something around 20%. Going forward with this change, we are going to have very transparent current income tax provision disclosure in our financial statements, whereas previously, it just wasn't relevant as a partnership. So I think there'll be great transparency on current taxes versus what we'll call this provision approach.

Okay. I look forward to seeing that. And then, I guess, this is also maybe a follow-up to, maybe a little bit, Craig's question earlier, but I mean -- and also Ken's, I guess. I mean, just going back and in trying to kind of simplify and obviously, simplify the structure, and then there's also the complexity around all of these questions on reporting and stuff. So I don't know, why not even think about going to method 1, then you can still kind of disclose an accrued carry in those metrics and performance, but why not kind of even simplify that, and even as Craig said, kind of cut off the tails of volatility?

Well, we're doing that by introducing realized income. I mean, that's the reason why we've introduced that metric, and you'll see it throughout our reporting our earnings presentation. So the acronym RI is something new we're introducing this quarter, but that's method 1. And we felt, if we were able to accomplish that clarity in reporting without actually having to make the accounting convention change.

Our next question is from Kenneth Lee with RBC Capital Markets.

Just a follow-up on C-Corp conversion. Given that the company will be retaining some earnings versus paying most out as distributions, maybe could you expand upon some potential uses of that retained earnings for growth opportunities? Specifically, I'm just wondering whether there is anything outside of M&A. And relatedly, maybe help us think through the potential boost to your earnings growth through this reinvestment.

Sure. I think there are 3 primary uses of the capital: one, M&A, as we talked about; two, potential for share buybacks, which we've talked about; and three, which is largely how we've been using our balance sheet up until this point, is to invest in our own managed fund product. And so as we highlight in the prepared remarks, we currently have a balance sheet exposure to our own funds as the GP of about $820 million. And the good news is, that's been generating gross returns in about 15%, and net of investment interest expense were generated net returns of about 12% on that portfolio in 2017. So by investing in our balance sheet, we're obviously generating some pretty exciting, we think, investment income. But more importantly, we're largely making those investments in support of the raising of new funds. And so by making those investments in support of new funds, that obviously is catalyzing new FREs, new management fee streams are coming onboard. So fund investments, M&A, share repurchases.

Okay, great. And just one more, in terms of the -- I think you mentioned briefly in the prepared remarks about potential for annual savings post-conversion. I was wondering if there's any other or specific quantifiable changes to compensation or G&A expenses after C-Corp conversion.

I think the most noteworthy is being a public partnership and all these K-1s wasn't the most inexpensive exercise in the world. So there should be some modest savings of having to do all of this. So clearly, from an internal operations standpoint, not only is this easier for -- and more simplified for our investors, this is definitely a lot more simplified and easier for us.

And we have time for one more question today. Our last question will come from Doug Mewhirter with SunTrust.

Just one question. On your dividend policy, do you have any sort of contingency plan if there's maybe a prolonged downturn in the credit markets and/or revenue markets, where your net investment income or you get negative performance income that would be a substantial fraction of your fee-related income that may impair your ability to pay the dividend that's set on the basis of fee-related income? Is there a situation where you would have to maybe make an exception?

We don't anticipate one now and for a couple reasons: first -- let's kind of put this in 2 pieces. On the fee-related earnings, as you know, Doug, and as we highlight, our management fees are pretty insulated from market gyrations, based on the longevity of the capital, so most of what we manage is not subject to redemption; and based on how we charge management fees, whether it be off invested or committed. So markets could tumble tomorrow in asset prices, and again, our management fee streams are stable and insulated nicely against that. So that gives us, as we think about FRE as being the peg for the dividend, we thought a lot of that was based on the comfort levels, how and what drives FRE, and it's a very stable management fee stream.

You might want -- if I can interject 1 second, before you switch to the second part of the question, because I think it's important to reference your comments in the prepared remarks. When you think about not just the insulation, but the embedded growth, one of the things that has been happening in our business as we've been scaling our credit businesses, is the amount of management fee opportunity from deployment is quite significant. And so as Mike talked about earlier, about $10.8 billion of our AUM not yet earning fees is available for deployment. And with deployment, that represents $118 million of management fee revenue, i.e., revenue available to us on capital that we've already gathered. And so one of the things that I think is important that people appreciate is, as we're going into a new year, given the fundraising track record from the prior year, we have very good forward visibility, not just in terms of the baseline FRE, but a path to growth, just from regular way deployment. Sorry, Mike.

No, Mike, that's a great point. And then on -- look, and you mentioned volatility of realizing performance earnings. That's clearly the nature of the industry, to some extent. What I'd highlight, a portion of our performance earnings, albeit the minority, comes from recurring income off credit products, whether it be more income-oriented credit funds we manage or our holdings of some co-investment on the CLO notes. Second, the reason we thought to kind of peg the balance sheet retention to the performance earnings and the dividend being pegged to fee-related earnings is the latter is stable, recurring, and we believe, growing, whereas the performance earnings is more volatile. But at the same time, the uses of that capital or retained earnings would also be more volatile. So we think that matchup works nicely. So in short, there could be a lot of volatility in asset prices, credit markets, equity markets that we don't expect that would have an impact on our dividend intentions.

And we will take one final question from Kaimon Chung with Evercore ISI.

Apologies if you addressed this before. Maybe this is an obvious thing, but why not fully convert to C-Corp with the legal structure, too? And as a follow-up, given that your legal structure remains intact, do you have any thoughts on how much you expect your investor base to broaden, given this change?

So why don't we start with the legal structure? We're making the tax election today, because frankly, that's easy and immediate action. It was -- not to belittle the simplicity of it, but it literally required a signing a form yesterday, and that was it. The legal structure change, we are looking at and considering. So we have not made a decision to do it or not to do it. We're evaluating it. It's a more significant undertaking to change our legal structure, so more work is being done there, but it's clearly something that we're going to be thinking about in the coming months. On -- and I'm sorry, the second part of your question, Kaimon, was?

Second part was just any thoughts on how much you expect your investor base to broaden, given this change?

We don't know. I mean, obviously, we have conviction, taken at will, because we -- based on our interactions with existing and potential investors, and there's a lot of work we've heard as well from some of the research from the different banks. We believe that the investor base has had fairly significant limitations, whether it be the nature of the flow-through income we generate and how that's just not tolerable to certain investors. For example, ECI to international investors, the nature and the complexity of the K-1s, which, whether that's fairly a challenge for retail investors, because it's a lot more complicated to wait for a K-1 and hire your accountants to -- and these aren't easy K-1s, by the way -- but to have your accountants process all that for you and file extensions to do your personal tax returns. And frankly, a lot of institutions that -- fund managers who are equipped to handle it, which we don't blame them for, the complexity and the back office challenges, just historically, kind of steer people away. So I don't know what -- we don't have or can't give an estimate of what we think the eligible universe could expand to, but we are optimistic that it is a -- potentially, a meaningful change for us.

This concludes our question-and-answer session. I would just like to turn the call back to management for closing remarks.

No, it's interesting, that we had record earnings in 2017, and we didn't get any questions on our performance. So I guess that's a good thing. But we do appreciate everybody's time and patience and interest. As I said, it is a lot to digest, so we will be available to continue to help folks think through this. But we're very excited and appreciative of everybody's time. And I guess with that, we'll say have a good day and speak to you again next quarter. Thank you.

Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, an archived replay of this conference call will be available through March 15, 2018, by dialing (877) 344-7529, and to international callers, by dialing 1 (412) 317-0088. For all replays, please reference conference number 10116126. An archived replay will also be available on the webcast link located on the homepage of the Investor Resources section of our website. Thanks everyone for attending. You may now disconnect.