Q3 2019 Earnings Call
Thank you for standing by welcome to the Carla group's third quarter 2019 earnings call. At this time, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press Star then zero.
I'd now like to hand, the conference over to your Speaker today, Daniel Harris head of Investor Relations. Thank you. Please go ahead.
Thank you Jamie good morning, and welcome to Carlyle's third quarter 2019 earnings call.
With me on the call today, our co Chief Executive Officer, Q sung Lee and Glenn Younkin, and our Chief Financial Officer Curb user. This call is being webcast and replay will be available on our website.
We will refer to certain non-GAAP financial measures during today's call. These measures should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. We have provided reconciliations of these measures to GAAP in our earnings release any forward looking statements made today do not guarantee future performance, an undue reliance should not be placed.
These statements are based on current management expectations and involve inherent risks and uncertainties, including those identified in the risk factor section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated Carlyle assumes no obligation to update any forward looking statements at anytime.
Earlier. This morning, we issued a press release in detailed earnings presentation with our third quarter results, which is also available on our Investor Relations website.
Third quarter, we generated 109 million in fee related earnings and 161 million and distributable earnings with de per common unit, a 41 cents our distribution will be 31 cents per common unit.
Our previously announced conversion to a full C Corporation will be effective on January Onest 2020, after that date quarterly distributions to shareholders will be in the form of dividends and as such the distribution for the third quarter of 2019 to be paid in November will be the last unit holder distribution upon conversion shareholders.
All received regular 10 99 tax forms with K, one reporting requirements only relating to unit holders through year end 2019.
Glenn in key where he is going to provide some brief comments Kurt will go through our metrics on financial results for the quarter.
To ensure participation by all those on the call. Please limit yourself to one question and then returned to the queue for any additional follow ups with that let me turn the call over toward Kurt Co Chief Executive Officer, Glenn younger.
Thank you Dan and good morning, everyone. Thanks for joining the call.
With Carlyle's global headquarters being in Washington, D.C. for nearly 33 years, let me start by saying what a spectacular games seven.
Go Nat.
Now turning to the quarter in the spirit of getting to the point.
I want to reiterate the consistent themes that you have heard from us all year.
We have solid momentum across the business.
And we're delivering on the priorities that we established at the beginning of the year.
Our corporate financial results, especially fr. He continued to improve.
We are on track to exceed our field earnings guidance for 2019 and are positioned well to grow at Fahri further in 2020 and in subsequent years.
We're on track to achieve our fundraising target for 2019.
Building on our success over the past few years, including the recent final closing of our fifth European private equity fund at 6.4 billion euros or just over $7 billion.
Our growth initiatives or more broadly at global credit, but also more specifically in insurance in aviation finance are performing in line with if not a little ahead of expectations.
And finally, while appreciation was relatively low for the quarter.
Aggregate fund performance continues to generally tracking in line with predecessor funds, giving us confidence that our substantial accrued performance fees, which totaled $1.8 billion will become realized performance revenues overtime.
This momentum underpins our expectations for continued earnings growth and margin expansion over the coming years, and we believe that are announced corporate conversion will help to further unlock shareholder value.
With that I'll turn the call over to Q.
Thanks Glenn.
Let me provide some more thoughts on our corporate conversion.
Since our announcement last quarter, we have spent significant time with existing and new potential shareholders.
Reception has been positive and I want to share a few observations.
First there is a much broader pool of investors that want to engage with us, including many that have not previously been able to invest in Carlyle due to our current partnership for.
Second.
The simplicity transparency and alignment of our structure one class a common shares.
One dollar fixed dividend per share for all shareholders and a one share one vote governance construct is viewed as distinctive my many investors.
Third investors appreciate the substantial recent progress we have made in improving and expanding our business.
And finally, even though we remain two months away from our conversion we've already seen a meaningful pickup in our trading liquidity and there is broad recognition that our structure maximizes the potential for index and benchmark inclusion.
We are encouraged by this early feedback clearly however, operating performance will drive our valuation over the long term.
We remain focused on improving our financial results and producing attractive investment performance, which is the second topic I'd like to touch on.
The focus on investment performance is Paramount given the complexities of the current environment.
Slowing global growth high valuations and the uncertainties from trade tensions and geopolitics makes investing more challenging now than ever before.
But this environment is also creating significant opportunities as corporation sell non core subsidiaries companies seek private capital solutions and entrepreneurs from around the world seek to partner with us to help them grow and build their businesses for the long term.
We believe our investment approach in global platform positions us well to drive value at our existing portfolio companies. While also finding interesting new opportunities across multiple asset classes in every major region of the world.
Our track record of success and ability to generate attractive performance is an important reason fire fund investors have been trusted carlyle with significant amounts of capital.
And we remain focused and disciplined as we drive our investing activity forward.
Let me now turn the call over to our Chief Financial Officer, Kurt few Sir.
Thank you.
This quarter, we generated $161 million and as Jim learnings of which two thirds came from fee related earnings.
Fee related earnings totaled a $109 million in the quarter, 22% higher than the year ago level.
Year to date, we have produced $345 million a fee related earnings and we expect to end 2019 with approximately $450 million enough Ari.
Seeding our prior guidance of at least $400 million.
We ended 2018 with a quarterly every run rate of below $100 million and are now routinely generating a run rate of Ferrari and the $105 million to $110 million range.
Which we expect to further grow in 2020.
We expect annual F. Ari will reach approximately $500 million over the next couple of years.
The fee related earnings margin was 27% in the third quarter and 28% year to date.
From 17% year to date in 2018.
We expect every margins to expand into the 30% plus range.
Over the next several years as we continue to focus on growing F., Ari and improving margins.
Sorry growth during 2019 has been supported by more than 16 billion in year to date fundraising activity driving an 8% year over year increase in fee, earning AUM to $159 billion.
Fund management fees were $385 million in the quarter, an increase of $30 million over the year ago quarter, and generally flat with the second quarter of this year after adjusting for catch up management fees.
Cash compensation expense was $194 million for the quarter.
An increase of 4% over the past year.
Third quarter equity based compensation expense of $39 million was down 25% from the year ago quarter, and we expect equity based compensation expenses due to continued decline in future periods.
DNA and other indirect expenses were generally in line with a year ago period, and depreciation and amortization expense increased $3 million over the third quarter of 2018, primarily due to the accelerated depreciation of certain leasehold improvements.
Realized proceeds from carry funds were $5.7 billion in the quarter higher than the trend in the first half of 2019, but we remain below the levels of recent years.
The increase in realized proceeds helped drive an uptick in net realized performance revenues compared to the first half of the year totaling $58 million in the third quarter.
Strong exits in our real estate business drove most of the realized performance revenue this quarter, while corporate private equity realizations continue at levels below a year ago.
Our carry fund portfolio was up 2% in the quarter, primarily reflecting the stronger appreciation in the solutions portfolio offset by headwinds in energy.
This compares to a 1% decline in the mesquite all country World Index over the same period.
Net accrued performance revenue of $1.8 billion was down slightly from 1.9 billion last quarter.
During the quarter, we optimized certain parts of our balance sheet.
Taking advantage of low interest rates in early September we issued $425 million in new tenure notes with a 3.5% coupon and the first week of October we completed the redemption of our five and seven AIDS preferred equity securities.
This refinancing is projected to improve after tax distributable earnings by more than $12 million annually.
In closing, let me reiterate that we will complete our corporate conversion on January one 2020.
Meanwhile, Investor interest in our sector and then Carlyle is rapidly building, we remain excited about our future and with that we're ready to take your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pound key we ask that you. Please keep to one question before rejoining the queue for any follow ups.
Please hold while we've compiled accumulate roster.
Our first question comes from Craig Siegenthaler with Credit Suisse. Your line is now open.
Thanks, Good morning, everyone.
Good morning.
With the credit business continued to expand here.
Can you talk about the fund raising outlook really outside of the CLL business, including direct lending aviation and some of your carry funds.
Okay.
Hey, Craig how are you the in general I, it's not a fair bit from you talk about funds that are in market. So let me just give you a little bit more color. We are very pleased with the progress that our global credit businesses, making.
Revenues are up a one is up and the moment momentum is quite strong as you correctly pointed out our CFO business is doing very well and continues to be a market leader in that business away from that let me just pick on some of the items you raised our aviation finance business as Glenn mentioned.
Is actually doing a little bit better than we expected.
We are accelerating our plans there to raise.
Funds and to put the platform is exceptionally well positioned in the current environment as a lot of tailwinds with respect to our distressed business. It's still in its investment phase, but we are trying to think through in light of the current market.
When we can actually brings the next generation of that fund to market.
You should know that we're already in our fourth fund in the distressed business. It's a top performing fund and we have every expectation that.
Our investors will greet that fund warmly when we do go to market with the fixed with the fifth version of that fun and then finally direct lending direct lending no doubt is among the most competitive sectors in the credit space.
We did have a very successful fundraise with a private BDC over the course of the past 18 months.
We are preparing to think about when we want to go back to market with respect to more fund raising it is a core an important element of our strategy and we feel pretty confident and our ability to continue to grow our direct lending business in the general credit space.
Thank you.
Thank you and our next question comes from my carrier with Bank of America Merrill Lynch airline is now open.
Good morning, guys. Thanks for taking the question.
Maybe just on the C Corp conversion and just given your guys nuance in terms of the share class in the voting changes.
And next potential.
Just more curious on conversations.
With the index providers, and how you're thinking about additions or potential additions, particularly with some of the bigger ones like the rest on the SMB.
Just wanted to get your thoughts on that on that front.
Mike. Thanks for the question. So look I think the Chris Myskina Dow Jones Russell indices are all expected to be added in the first half of 2020.
And we think that that will be a nice pickup for volume as that occurs.
We have reached out to the S&P I think we are I, that's a more difficult discussion I like the fact that we are appropriately structured and leave that we have positioned ourselves very well for consideration in those indexes, but as you know thats a more subjective test and so we'll see how that process.
As goes but we remain optimistic in terms everything we're seeing in terms of discussions with investors I mean, they have been really pleasing.
Just as we commented in her opening remarks that process is going very well and you can you really see the uptick in the the activity of the stock.
Operator.
Our next question comes from Patrick David with Autonomous Research. Your line is now open.
Hi, Good morning, guys. Thank you.
My questions on the credit Mark negative, 2%, which looks about the same is for Q1 8, when there was a much worse kind of credit spread environment could you maybe give a little bit more color on any idiosyncratic positions that might have driven that or groups or finds that drove that.
Patrick its current so just remember that this charge is shows carry funds and so it's not really reflective of the entire credit business and the entire structured credit businesses outside of this a lot of the direct lending businesses outside of this so it's only the carry funds.
And the big carry funds that impact here, we're energy mezzanine funds and you all know what's happened with energy prices and a lot of one of the comparable NRG indices are down like 18% et cetera in the quarter. So that had an impact here on us in the quarter, It's really energy everything else is actually tracking quite nicely.
Perfect. Thanks.
Thank you and our next question comes from Bill Katz with Citi. Your line is now open.
Okay. Thank you very much so I appreciate sort of the the a fresh look on that for re outlook. If you will fulfill fourth quarter as you look out over next couple of years.
As you continue to study your franchise, how do you think about benchmarking versus your peers were fob matsons, rather high I. Appreciate some of them ask me just some traffic drivers, but if you strip that out your margins are still running rather low to that so as you think longer term where are you thinking washington to get to maybe beyond sort of 30% plus range.
Bill and thanks for the question so.
Look we are fundamentally built differently, we have a very global platform many dedicated teams.
I think that Thats really proven true in our historical ability to generate a lot of great Carrie and fully expect that to be our future again.
With respect to margins, let's just think about where we've come from may have come from a low teens margin.
We gave you guidance entering this year, there, we're going to seek to kind of run at 25%.
Already year to date at 28%, 27% here in the quarter really trying to push this forward to get to 30% plus we think we can achieve that once we get to their look we're not going to stop we're going to continue to push on beyond that but we got to get to the 30% first once we do that then I'll reset your guidance.
Thank you.
Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is now open.
Thanks very much.
FCC talking about finding ways to make pride investments available to individuals on a broader basis.
Makes tons of sense, obviously can you talk about.
What you think the right vehicles are and what you're doing to make sure that you're there and scale for if and when it happens.
Thanks.
Yeah, Glenn high it's Glenn Youngkin.
I think that this topic is been.
Discussed for many years and it continues to be a tough one.
I think we have a very very robust demand equation out of the high net worth channels.
And we continue to see that demand in our own fund raising.
But broader access to particularly very illiquid private investments by the broad base mass retail I.
I think we'll continue to provide challenges on how to structure and how to provide the same kinds of.
Registered vehicles and liquidity offerings that exist in the comparable registered 40 Act funds and so I think this is this will continue to be an area that we all spend a lot of time thinking about.
But I don't expect this to be something that is crack in the near future.
How come not as simple as putting something inside the four on K platform, just with different liquidity constraints.
I guess easier said than Doug.
I think you answered your own question.
Easier said than Doug.
Okay.
Thank you. Our next question comes from Ken Worthington JP Morgan Your line is now open.
Hi, Good morning. This is John if any.
Income.
Quick question.
We'll go into next year. So we continue to see a somewhat weaker environment for you.
Realization.
Private equity.
Maybe review the lighter activity this year.
Private equity and update us.
More active realizations looking forward.
Jay as Curt Thanks for the question and you're right activity has been life, but here in the current quarter.
And I have billions are so a realized proceeds yeah, that's been tracking relatively well. Although you know granted this year is lighter than it has been.
As we look at how that translates to carry our model is helpful. Given the multitude of phones and platforms that we have this year, we've seen a lot out of our real estate business and it's done really well expect that to continue I do think that 2020 is going to be an uptick over 2019. So I expect the an increase next year.
Over these levels, but predicting carry in this market and the expected market with the macro risks very difficult very challenging and so I would be careful in terms of how much of a rebound to expect in 2020, I do think it'll be up but I'd be careful with that 2021, I think goes up even further.
Further and underpinning all of this is $1.8 billion of accrued carry which I feel strongly about until that just a question of timing and underpinning that is $83 billion remaining fair value in our carry funds. So really see a recovery in our in our realized carry over time.
Exact timing always hard to predict.
Thank you.
Thank you. Our next question comes from Michael Cypress with Morgan Stanley . Your line is now open.
Yes.
Hey, good morning, Thanks for taking the question just hoping you give a little bit of an update on some of the trends within your portfolio companies around revenue and EBITDA growth any additional color there you're able to provide around the pace of realizations. I know you mentioned in answer to the prior question being a little bit lighter year on year, but I guess why why is that the case and if this current market backdrop continues.
Can we still expect to pickup next year.
Hey, Michael its Q.
Actually the question first of all just generally speaking.
We're observing what all of you are seeing which is in general global growth is slowing down it's positive, but it's lower this year than it was last year. We all know the reasons why that's the case in particular I would just comment the industrial sector seems to be more week.
And then it was last year at this point in time, and obviously the consumer sector seems to still be.
Strong.
At this point in time than we saw last year, so with that with the general economic backdrop, our portfolio in general.
Shows much of the similar trends, having said that on a run rate basis right now the generally speaking on or private equity portfolio. Our companies are growing at about 8% in terms of EBITDA year over year on a run rate basis that's trend.
In terms of slowing down and growth is challenge in margins are challenged in general on a fundamental basis. We think we're in okay shape with respect to your realizations questions I mean.
You know the deal environment is tough there's a lot more uncertainty, it's harder getting things done accessing the markets.
Is harder than it was last year at this point in time.
And confidence is something beds and trust is something that's required to get deals consummated and I think it's fair to say everyone recognizes that this is an environment, where there's a little bit more uncertainty and having said that this is probably as Curt mentioned the low watermark in terms of realizations we fully.
Since the start picking up next year.
Great. Thank you.
You could just provide a little bit more colors to kind of what next few years.
You know Intel's and help us think about that timeframe. Thanks.
Sure so.
Got it okay. Thank you.
Thank you.
Thank you and as a reminder to ask a question. Please press star one on your telephone to withdraw your question press the pound key.
Our next question comes from Chris Kotowski with Oppenheimer. Your line is now open.
Yes, good morning.
I was looking at the carried interest receivable and there was.
Wondering if you can give some color on that as I understand that has trouble and energy, but it just seems like kind of a big drawdown for just given the overall market environment.
Sure Alex.
This is card so 1.8 billion this quarter 1.9 billion last quarter. If you were to just mark the differences between the components, you'll see it's primarily in our natural resources funds, where it's we now have net accrued performance revenues of one.
Hundred 34 million versus 212 million of net accrued carry last quarter, that's largely in as it related to upstream production.
As opposed to investments in portfolios that are currently producing.
And also we have your new.
Stakes that we're looking to do in renewables. So obviously, that's not really been affected there but.
Just the the them we have both as a good downward movement, 11% over the last 12 months in natural resources, but you all the comes back to kind of where various things are in their respective carry waterfalls and you can get kind of outsize returns, but thats, where the masses.
Thank you and I am assuming no further questions in the queue. At this time, so I'd like to turn the call back to Daniel Harris for any closing remarks.
Thank you for your time and attention. This morning, if you do have any follow up questions feel free to call Investor Relations. After the call. We look forward to talking to you next quarter.