Q4 2019 Earnings Call
Good morning, everyone and welcome to sculptor capital management fourth quarter 2019 earnings call.
This time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star and then fiero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference Elise King head of shareholder services at sculpture capital management.
Thanks, Randy and good morning, everyone and welcome to our call. Joining me are Robert Shaffer, Our Chief Executive Officer, and Thompson, Our Chief Financial Officer. Today's call contains forward looking statement, many of which are inherently uncertain and outside of our control.
Where we get started I need to remind you that gone through capital's actual results may differ possibly materially from knows indicated and these forward looking statements. Please refer to our most recent SEC filings for a description of the risk factors that could affect our financial results our business and other matters related to these statement.
The company does not undertake any obligation to publicly update any forward looking statements.
During today's call, we'll be referring to economic income Mr. Real earnings and other financial measures that are not prepared in accordance with U.S. GAAP.
Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release, which is posted on our website.
No statements made during this call she'd be construed as an offer to purchase shares of the company or an interest in any of our funds or any other entities.
Our earnings press release. This morning also included an earnings presentation, you'll be referring to this report during the call. If he would like to follow on you can find the presentation on the public investors page sculpture dotcom acid sports you press release link.
Earlier. This morning, we reported fourth quarter 2019, GAAP net income of $48 million or $2.29 per basic and 80 cents per diluted class a share.
The full year GAAP net income was $51 million or $2.48 per basic and $1.57 cents per diluted class a share as always you can find a overview of our GAAP results in our earnings release.
On an economic income basis reported fourth quarter 2019, distributable earnings of $58 million or dollar and five cents per fully diluted share for the full year 29 team distributable earnings were $171 million or $3, an 11 cents per fully diluted share.
Fourth quarter, adjusted distributable earnings were $66 million.
Full year adjusted distributable earnings were $161 million. If you have any questions about information provided in our press release or on our call. This morning.
No free to follow up with me with that let me turn the call over to Rob.
Thanks, Louise and good morning, everyone.
We were pleased with their investment performance in the fourth quarter, which benefited from Yoesting Cradic outperformance.
On a macro level. The period was marked by a reduction of recession fears robust third quarter earnings season, and encouraging developments in U.S., China trade negotiations.
Sculptor Master fund was up 5.8% index to the fourth quarter compared favorably with the 3.5% return of the HFR I've fund weighted composite index.
For the full year 2019, master from was up 14.8% debt compared to 10.4% CHF four.
In addition to the solid result relative to the index. It was the fund best annual performance in a decade.
Positive contributions across all strategies.
In addition, the Master fund was up 2.6 person that in January well, yes. It was down <unk> 0.0, poor <unk>, 4% for the month.
Fourth quarter performance in the Master from was led by fundamental equities.
<unk> performance drivers included the impact third quarter earnings.
Outperformance of our core China related positions and successful navigation of U.S. health care volatility.
Merger arbitrage was also positive contributor as we exited a number of positions and technology healthcare and specialty retail.
Convertible and derivative arbitrage made a solid contribution with profits for mandatory convertibles core arbitrage positions and robust capital markets activity.
Structured credit ended the year on a high note with the realization of a long held European position in which we have been actively involved multiple restructurings.
Coming on strong performance in 2018, our global opportunistic credit fund stopped or credit opportunities fund was a 0.3% net for the fourth quarter of 2019 and was up 1.4% net for the full year.
The fund has generated 10.5% annualized net returns life to date has outperformed the BAML global high yield index by 3.6%.
We are confident about the portfolio and the opportunity set heading into 2020.
Our real estate funds continue to deploy capital and generate strong returns they 20% annualized net return in our third opportunistic fund.
Turning to flows.
As you can see on page seven as of December 31st our assets under management were 34.5 billion with net inflows in the fourth quarter of 2.1 billion.
As of February 1st our assets under management remains 34.5 billion, which was driven by 330 billion close and real estate fund for and 217 million of performance related appreciation in January that was offset by approximately 480 million of net outflows in our multi.
Strategy, an opportunistic credit funds.
Turning to page eight our multi strategy product assets of 9.3 billion as of December 31st which includes 555 million of performance related depreciation partially offset by 306 million of net outflows.
From December 31st in February Onest Master Fund had net outflows of approximately 200 million.
Real estate had total assets under management of 3.4 billion as of December 31st.
The increase was driven by 1.6 billion of inflows into scope to real estate fund for and it related co investment vehicle.
And additional closed in January added over 330 million to the fund.
We were happy with the high demand for the fund and attribute the success to our strong performance and tenured team.
We anticipate a final closing the first half of this year.
In addition, we continue to see opportunities to expand real estates product offerings.
Opportunistic credit had 6 billion of assets as of December 31st which included $39 million of net outflows in the fourth quarter.
Since the ended the year opportunistic credit has had 283 million of net outflows.
Institutional credit strategies had total assets of 15.7 billion as of December 31st with net inflows of 790 million in the fourth quarter, primarily driven by closing our first collateralized font obligation and third GTS aircraft securitization vehicle.
With that let me turn the call over to Tom to go through the financials.
Thanks, Rob and good morning, everyone.
As a lease mentioned at the beginning in the call and as you can see on page nine.
We reported fourth quarter 2019, distributable earnings of 58 million.
And full year distributed earnings of 171 million.
Adjusted distributable earnings were 66 million for the fourth quarter and 161 million for the full year 2019.
Please see page 10 for full reconciliation from distributable earnings to adjusted distributable earnings.
Additionally, we declared a cash dividend of 53 cents per class a share.
Turning to page 10.
Revenues were 267 million for the fourth quarter up 61% from the fourth quarter 2018.
For the full year 2019 revenues were 575 million up 19% from 2018.
Management fees were 60 million in the fourth quarter.
Up 2% from the previous quarter, and 6% lower than the fourth quarter of 2018.
Management fees were 237 million in 2019, 10% lower than 2018.
The year over year decrease in management fees was driven primarily by lower multi strategy assets.
This was partially offset by increased assets in institutional credit strategies.
Incentive income was 203 million in the fourth quarter.
Up 105 million compared to the fourth quarter of 2018.
Incentive income was 322 million for the full year 2019, 59% higher in 2018.
The higher incentive income was due to higher performance in our multi strategy funds.
Please note that given multi strategy funds performance in 2018.
Our 2019 incentive income was reduced by a loss carry forward.
As seen on page 11.
As at the end of 2019.
Our accrued but unrecognized incentive was 254 million down 4 million or 2% from the prior quarter.
The decrease was primarily driven by recognized incentive income partially offset by positive performance.
We continue to expect a large portion of the opportunistic credit Barry.
To crystallize in the fourth quarter of 2020.
As a reminder, with the exception of the balances associated with our real estate funds.
Most of the remaining balance has no associated compensation expense as this was paid in earlier periods.
Turning back to page 10, other revenues were 4 million in the fourth quarter down 3% from the previous quarter down 17% from the fourth quarter 2018.
Other revenues were 16 million for the full year 2019 remaining relatively flat compared to 2018.
Now turning to our operating expenses.
For the fourth quarter 2019, total expenses were 204 million, bringing full year total expenses to 439 million.
Up 11% from 2018.
Excluding settlements provisions.
Related legal fees and recap related costs.
Total expenses were 395 million for the full year 2019.
Up 19% from 2018.
In the fourth quarter, 2019 compensation and benefits expense was 174 million, bringing our full year compensation and benefits expense to 304 million.
Up 39% from 2018.
Bonus expense was 154 million for the fourth quarter, bringing full year 2019 bonus expense to 224 million.
Up 73% from 2018.
The year over year increase was driven by higher compensation payments associated with higher performance in 2019.
As a reminder, we pay bonuses based on current year performance.
Which is not necessarily when we realized the related incentive income.
This causes our bonus as a percentage of incentive to vary year over year.
We expect full year annual bonuses for 2000 minimum annual bonus for 2020 to be between 80 and 90 million.
Salaries and benefits were $20 million for the fourth quarter flat from the previous quarter.
Salaries and benefits were $80 million for the full year 2019 down 11% from 2018.
The decrease year over year was due to lower head count in 2019.
We expect full year, 2020 salaries and benefits to be between 75 and 85 million.
In the fourth quarter.
General and administration expenses were 29 million, bringing full year g. the expenses to 125 million.
Excluding settlements provisions related legal fees and recap related cost.
Hey was $21 million for the quarter down 11% from the previous quarter, bringing full year 2019, DNA to 81 million down 9% from 2018.
The lower DNA in 2019 was due to disciplined expense management.
We expect DNA to be between 80 and 85 million in 2020.
This guidance excludes any legal fees reserves are settlements associated with outstanding legal matters.
Additionally, we are happy to report that in January the independent compliance monitor appointed in connection with the FCC and DLJ settlements concluded.
And certify that the company's corporate compliance program is functioning effectively.
Interest expense for the full year 2019 was 10 million down 57% from 2018.
The decrease driven by reducing the term loan balance from 250 million to 45 million.
Looking forward to 2020.
We want to remind you that the debt securities started to accrue interest on February Onest.
We expect full year 2020 interest expense to be between 15 and 20 million.
Please note that our preferred units started accruing dividends in February and will not impact economic income.
However, it will be treated as a reduction to distributable earnings.
Our guidance for the full year 2020 tax receivable agreement and other payables as a corporation is 12% to 16%.
As a reminder, these estimates are subject to many variables that won't be finalized into the fourth quarter the year and therefore could vary materially from the estimates provided.
Now an update on our balance sheet.
At year end total cash cash equivalents and long term treasuries were 388 million.
Subsequent to quarter end, we paid down the term loan by 27 million, resulting in outstanding balance of 18 million.
We continue we plan to continue to strengthen our balance sheet by using a majority of our earnings after public shareholder dividends to pay down our existing term loan followed by a preferred units and debt security instruments.
With that let me turn it back to Rob.
Thanks, Tom.
We are happy to wrap up 2019 have been accomplished many of our goals to highlight a few.
We're pleased with our investment performance as seen by the 14.8% net return the Master fund.
We have seen great traction in scope the real estate Fund Force fund raising.
We rebuilt our salesforce with a few strategic hires.
We are now operating under our new brands sculptor capital management.
We successfully transferred equity from retired executive managing directors to existing managing.
Directors.
We improved our balance sheet by reducing the term loan from 250 million to $18 million.
We successfully converted to a C Corporation, and we've made significant progress and optimizing our expense base across the business.
Looking forward to 2020, our strategic priorities expand upon our 2019 accomplishments and are as follows as always our main goal is to perform across products, while maintaining our disciplined investment process.
We continue to believe in the value proposition of our multi strategy funds and plan to leverage the great 2019 performance to grow assets.
We will focus on growing relationships with our existing clients and broadening our institutional investor footprint globally.
We see opportunity in our core product verticals for further extensions in areas, such as real estate credit and aviation.
We will continue to strengthen the balance sheet.
We are excited for what the new year, a decade will bring for Sculpsure and look forward to keeping you updated with that we will open the lineup for questions.
Thank you if you have a question at this time. Please press star followed by one on your Touchtone telephone. If your question has been answered or you would like to remove yourself from the Q. Please press the pound key.
Your first question comes from Bill Katz with Citi.
Okay. Thank you very much for taking my questions and ill prepared commentary, maybe just start with some of the year to date flow dynamics, if we could.
Could you maybe walk through a little bit what's going on in the hedge fund and maybe the opportunistic credit portfolio little surprise for the outflows on maybe the opportunistic credit side and then on the real estate side.
Any thoughts of where you think that the fund to ultimately can settlement and I guess, you're tracking with 2 billion I think program to date versus a billion five and in the first.
Real estate fund three thanks.
Sure Bill It's Rob Let me, let me take a stab at that I think when you starting I guess with.
The credit side I think despite what had been pretty significant headwinds for the hedge fund industry in general.
Our opportunistic credit funds were actually up in 2019 about $180 million net flows. So yet. This there is an outflow this quarter and it's really materially associated around 1.1 client making yet.
Portfolio change.
So that really speaks to credit and multi strategy. If you look at where we are right now on the outflows side, we're really kind of back to historical normal redemption levels quarterly redemption levels. In fact in some cases were actually starting to trend below line. There. So the real focus is going to be on on getting.
Flows and obviously, we're coming off the year, a very strong performance there, which we think we can leverage as I said on the call. We do very much still believe in the value proposition of products that can be less correlated and protect downside and give you upside capture which we feel like we can do and have done.
As you know we've also invested materially in senior hires on the IR side, and and continue to really get our story out there as we try to expand our footprint as well as working with existing clients. So obviously the focus will be on the on the inflow side, where the outflow sides really sort of normalized.
Our capital raise the owned real estate fund for is around 1.7 billion and all I can really say is that we anticipate a final close at some point in the first step this year.
Okay, and just as a follow up maybe for Tom. Thanks for the guidance I was just a couple things maybe on the.
The ratio between incentive income and the compensation I appreciate the variability of that but that that ratio has been rather wide over last couple of years and I get performance has been little variable as well.
But is there anyway to sort of quantify how much revenue didnt get recognized in the fourth quarter or how we might be thinking about that ratio.
As we look ahead into 2020 or beyond.
Yes, Hi, Bill the.
There is there's a natural mismatch between when we realize incentive and when we pay bonuses.
As an example, when you look at our current of Bari, which is a significant amounts going to crystallize. It at the end of this year, we pay compensation over the past three or four years associated with that you know remaining balance. So when you look at period to period. The ratio is going to be pretty variable, we do not provide a target rate.
Well as that you know not.
Natural mismatch.
Short term will create obviously variability the other factor when you look at 18 to 19, there was a loss carry forward.
And you have some clients that.
Crystallize in Q1 Q2 in Q3, so the performance that we delivered in 2019, where we paid and bonuses on that performance you won't see resulting incentives until subsequent quarters. So there is a natural mismatch and we don't provide guidance around specific ratio.
Externally.
Right, but there is is there anyway to quantify how much maybe asked a question I apologize for viewpoint on that how much incremental revenue might still flow through the pinedale from 28 2019 in the first half of this year.
No we don't we don't disclose that externally.
Okay, and then Rob I heard you say 1.6 billion so far in real estate, but does that include a year to date as well or is.
So much on the double counting.
Yes that includes year to date.
So thats, where we are as of now and obviously as I said, we expect our final close sometime in the first half of the year.
Okay and just some one last question. Thanks for taking all the questions no no mention of it and any update you can give us on the ethical lawsuit.
Yes, So our reserve is unchanged at the 19.1 million and beyond that we really don't comment on pending litigation.
Okay. Thank you.
Yes.
Your next question comes from the line of Patrick Davitt with Autonomous research.
Hi, good morning, guys.
So.
Early in the middle of last year, I guess you'd kind of been evolving.
The description of trying to sell the multi strat fun and kind of stop line stoplight way going from kind of Red yellow and then we had some more African noise introduced obviously had a really great.
Form it's year, so could you could try to like speaks through those lenses in terms of how does the light is looking now when you take the to offset some outperformance looked against the African noise coming back.
Yes, I honestly I can't really comment on the Africa thing in terms of how that would or would not affect our flow picture as I said earlier.
You got some.
Some head funds hedge fund headwinds as a general point, but but again I think our performance is very strong and.
For us, it's really been a function of moving past our legacy issues.
Restoring confidence in the from which I think we've done.
Getting through the rebrand and and delivering the performance to go along with our value proposition of this thing as I said.
It's certainly affecting our outflow situation, which is as I said earlier, not only kind of historical levels and starting to trend below historical levels. So the focus will be obviously on the inflow side.
So that's really where we're putting our efforts right now that's where we've invested.
In our Salesforce and again, we're off to a good start this year on the performance side. So.
Thats, great Thats really we're going to be focusing.
Okay.
Thanks, and then you mentioned kind of step out.
I want to get into too much detail because you can you help us frame maybe.
Yes, I did the number or sizing or how to think about where organic growth could come from away from the real estate fund.
And multi strat this year.
Well I mean, I think away from that you've got our core verticals right. Obviously, we've got a lot of momentum on the real estate side, focusing on the multi side as well as the opportunistic credit and continue.
To grow in are performing credit businesses, but as you know our strategy is really too focused on those core areas and look for logical adjacency to those areas rather than start things you know from scratch that are not really core to the strategy right now.
On the call I mentioned real estate credit, where we've had success in the past and it's certainly an area that we look to potentially.
You know focus on this year at aviation business, which we've had a lot of success NRG test partnership.
Someplace, where we again continue to grow those are examples so where we see logical adjacency to take advantage of where we think our core strengths are we're going to look to grow those would be the too that I would probably just mentioned so both about.
Thank you.
Mhm.
Your next question comes from the line of Gerry O'hara with Jefferies.
Great. Thanks for taking my questions. This morning, obviously very good traction on the real estate tied fund for but perhaps you could.
Speak a little bit too.
The Investor base, how many are kind of new too to sculptor versus perhaps.
Rehabs from from the predecessor fund.
Well I think what really what we've tried to do is I think there's a few layers to the strategy there our existing clients.
Which we've been focusing on and hope it a lot of that has manifested itself as I said, it's slowing down to lower than historic levels. The actually outflow side of the picture. So I think there is opportunities with existing clients over over the course of this year for potential top ups people that know us are comfortable with us.
I understand our strategies and are very deep in our performance I think that is certainly one.
One segment that we're going to be looking at on the short term basis. Another place, where we are looking to potentially grow this year will be on the private banking side as you know.
We got our rig the.
You know approval last year and it takes some time to start ramping up again with the private banking platforms, which we've been focusing on we made a senior hire their lead that effort last year and there's that we're optimistic about sort of having some success in that channel in 2019 I think.
Third one.
Which will probably take longer than 2019, but I think actually in the long run offers probably the biggest upside. It's just really broadening our footprint out globally with the senior hires that we've made a lot of clients that were touching now I've not heard from us in years.
And and they are getting reacquainted with the story, which I think is a good one.
And who we are today and I think you know as we continue to engage those clients overtime the sales cycle being what it is we're optimistic that we're going to turn some of those clients on I don't think for.
For those earlier stage conversations that's likely to be 2019, but I think longer term as we look at our numbers and the possibilities of success out there that's really where it gets somewhat exciting. So I think short term, it's going to be existing clients and or existing conversations that have been ongoing.
Well as opening up the private banking channel and longer term really broadening the footprint.
And getting back in front of clients, who either don't know us or haven't really been sort of engagements for years.
Okay. That's helpful and then I guess, perhaps a natural segue into sort of.
The the GSK and the expense discipline that Tom highlighted on the on the call.
Perhaps.
Any additional color on whether there are any initiatives there going forward versus perhaps balancing what sounds like potential future investment and.
Sales platform, another kind of global distribution, knowing that it's it's down the road, but any kind of color there would be helpful. Thank you.
Yes, hi, Jerry the ink, we've made pretty material improvements in our DNA based kind of our business as usual DNA based obviously.
Reducing costs related to legal matters. The recapitalization the monitor certifying was very helpful. The so.
Having those kind of onetime larger legal fees being reduced is very helpful. And then we've had a bunch of initiatives that we've executed over the past couple of years that have reduced the more business as usual DNA costs a lot of those there there are further opportunities, but weve implemented most of those.
And there will be some reinvestment come in because we see opportunities to grow the business long term and thats investing in infrastructure, it's investing in new products, you know there theres opportunities that we're starting to see across the business.
Okay. Thanks for taking my question this morning.
Sure.
I'm not showing any further questions I will now turn the call leveraging Ms. Kim.
Thanks, Randy thank everyone for joining us today and for your interest in their capital. If you have any question. Please don't hesitate to contact me at two one to 719738 line media inquiries should be directed John Gasthalter at Q1, Q2, five seven or line seven now.
Thank you.
[music].