Q2 2020 Sculptor Capital Management Inc Earnings Call
Continue to stand by your conference will begin momentarily. We thank you for your patience and we ask that you remain on the line.
[music].
Good morning, everyone and welcome to sculptor Capital's second quarter 2020 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 zero on your Touchtone phone.
As a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference at least King head of shareholder services at sculptor capital.
Thanks can mika good morning, everyone and welcome to our call. Joining me are Robert Shaffer, Our Chief Executive Officer, and Tom that our Chief Financial Officer. Today's call contains forward looking statements, many which are inherently uncertain and outside of our control before we get started I need to remind you that sculptor capitals.
Actual results may differ possibly materially from those indicated in 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 statements.
The company does not undertake any obligation to publicly update any forward looking statements.
During today's call you'll be referring to economic income distributable 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 should be construed as an offer to purchase shares of the company or an interest in any of our funds or other entities.
Our earnings press release from this morning also included an earnings presentation, you'll be referring to this report during the call. If you have joined through the conference calls I'd like to follow along you can find the presentation on the Investor Relations page of sculptor Dotcom at the Twoq earnings release link if you joined through the webcast you can navigate through the presents.
Nation on the webcast screen.
Earlier. This morning, we reported a second quarter 2020, GAAP net loss of $25 million or dollar and 12 cents per basic and $1.77 cents per diluted class a share.
As always you can find a fuller view of our GAAP results in our earnings release.
On an economic income basis, we reported second quarter 2020, distributable earnings loss of $91.1 million or $1.62 cents per fully diluted share.
In the second quarter, we recorded a legal provision of $116.9 million. In addition to the previous $19.1 million provision taken in third quarter of 29 team, which we will get into the details of in a moment.
Second quarter, adjusted distributable earnings, which excludes the legal provision and related legal fees.
$27.3 million, if you have any questions about information provided in our press release or on our call. This morning. Please feel free to follow up with me with that let me turn the call over to Rob.
Thanks to lose and good morning, everyone.
Before we begin or you will come as I'd like to say scope MACI and hope you where your families are staying healthy during this time.
We've continued to operate at a high level and almost all of our employers are working from home.
Grateful to our employees were held in seamlessly adapting to this new environment beyond their job descriptions provide for watching shareholders.
I was like these remind us their employees truly our gross.
Additionally.
I'd like to address the 116.9 billion legal provision that was taken this quarter. In addition to the previous 19.1 billion provision taken in the third quarter of 2019.
As publicly announced we have conditionally agreed in principle with equipments in the upper go matter to 136 million restitution amount.
So there's more than we believe the law requires us to pay that we stand by our shareholder Quesnel says.
However, we are willing to pay the proposed them out as compromised and the matter in near term, allowing us to close out the West Africa related matters.
We caution that this proposed settlement is condition conditional on providing full closure and seasonality that must be approved by the judge.
The 136 billion, so but in principle be approved would be willing to pay out of cash cash equivalents and longer term U.S. government obligations. Tom will cover this in more detail later on.
Now moving on to performance.
Global mortgage staged and unprecedented recovery during the quarter on the heels of extraordinary government Central bank support coupled with encouraging economic indicators that said there continues to be wide branded outcomes for the way forward.
It did in the elevated levels of volatility and dispersion across them within asset classes.
We believe the environment creates an abundance of opportunity for fundamental investors such as sculptor who can nimbly allocate capital in the face of rapidly evolving markets.
One area, where this was relevant during the quarter wasn't expands the need for fresh capital.
Corporates rushed to raise capital as capital mortgage we open following the cobot Nike shutdown boosting issuance to record levels wrote global bond markets.
Still for Master fund benefiting from deploying significant capital near the mortgage troughs, helping drive a return of 13.4% net for the second quarter.
This is propelled the master funds, where year to date gain of 6% net which compares favorably to the M. A C. Our world index, which was down 5.1%.
Master Fund was up 1.3% net in July bringing year to date performance through July of 7.4% net.
The Master fund generated positive performance across all strategies in the second quarter lifted by broad rebounded risk assets, which helped to deliver strong performance in the majority of positions. We added at the depth of the coven 19 quests.
Our active repositioning of the portfolio, that's record volatility and emerging markets. We also meaningful and contributing to a second quarter return that drove the Master fund two year to date gains.
Following the message stimulus sort of mortgage credit led quarterly performance spreads compress rapidly and mortgage broadly deal.
For the first quarter, so from the first quarter so.
In corporate credit, we experienced a significant narrowing spreads for many of the investment grade at high yield new issue positions, which we had and at attractive levels as companies braced themselves to endure the crisis by issuing record amounts of debt.
The combination of uncharacteristically uncharacteristically wide spreads and new issue concessions for high quality companies made the deployment of capital from investors such as ourselves extremely compelling.
This was followed later in the quarter by rebounded several of our core process driven investments, which has led to an earlier stages in the market recovery.
Structured credit brokerage firm, mostly the result of significant retracing of non agency RMBS positions that we purchased aggressively extremely discounted prices in March and April when Levered investors reeling from margin calls were forced to sell high quality securities that fire sale prices.
Similar conditions and the convertible market improved steadily throughout the quarter as we saw frictions abate and volumes increase resulting in a tightening of convertible arbitrage spreads.
Record new issuance, specifically in the U.S., where year to date levels have now exceeded all annual volumes since 2007 provided a fruitful environment for our convertible and derivative arbitrage strategies.
Fundamental equities was also a significant positive contributor to performance during the quarter.
Gains were driven by a combination of our largest at highest conviction secular growth positions and more cyclical we expose companies directly impacted by the crisis that we added at depressed valuations during the quarter.
Our global up just a credit funds sculptor credit opportunities fund was up 10.8% net for the second quarter 2020, and was down 11.4% net year to date through June Thirtyth.
A similar amount it's been multi strategy funds the noteworthy healing of credit markets during the quarter propelled returns, particularly amongst the investments we made as a result.
Of extreme this pricings during the market downturn. This performance also represented strong returns seen in several of our largest process driven investments, which traded up late in the quarter, having lagged during the initial recovery and credit markets.
We believe the heightened dispersion seen across credit markets continues to generate opportunities for the funds to nimbly deploy capital.
As we conveyed after the first quarter, we still see embedded upside from majority of our assets that we had owned prior to the crisis as well as those that Weve added during the sell off.
Our real estate funds continue to deploy capital and generate strong returns with an 18.4% net annualized return in our third opportunistic fund.
Fund Foreclose last month and has already taken advantage of recent dislocations in public equities to step to stress public debt and forced sellers and private real estate.
Turning to flows.
As you can see on page seven as of June Thirtyth, our assets under management were 35.4 billion with net inflows in the second quarter of 1.2 billion and performance related depreciation of 1.5 billion.
As of August Onest, our assets under management were 35.5 billion, which was driven by an estimated $340 million performance related depreciation and $5 million net inflows, partially offset by $275 million distributions in July.
Turning to page eight multi strategy funds had assets of $9.4 billion as of June Thirtyth, which included a 108 million of net outflows and $1.1 billion of performance related depreciation in the second quarter.
From June Thirtyth to August Onest, multi strat had net outflows of approximately 61 million and appreciation of 147 million.
We continue to be encouraged as the net outflow numbers remain low.
We believe this is a testament to how sculpture protected clients capital during the market lows in March.
Given our performance and ability to protect capital in the midst of volatile markets, we've seen increased opportunity to raise capital once our firm's legal issues are fully behind us.
Real estate had total assets under management of 4.7 billion as of June Thirtyth.
The increase in the quarter was driven by 774 million of inflows, primarily due to the closings and real estate fund for.
The fund raised $2.59 billion total with an additional 400 million and co investment vehicles.
We feel the success of disciplined highlights the strength of our investment teams historical performance and as a vote of confidence from new and existing clients investing long term capital and sculptor.
We are fortunate to have a large amount of dry powder to take advantage of the current target rich real estate environment.
Opportunistic credit had 5.9 billion of assets as of June Thirtyth, which included 472 million of net inflows in the second quarter and 463 million to performance related appreciation.
In addition, we saw net inflows of 63 million and appreciation of 77 million in opportunistic credit from June Thirtyth to August Onest.
We are encouraged by the renewed interest in opportunistic credit specifically this the scope their credit opportunities Master fund and are continuing to a positive conversations with current and potential clients.
Institutional credit strategies.
Total assets of 15.4 billion as of June Thirtyth with distributions and other reductions of 619 million in the second quarter.
This was driven by a reduction in assets under management answer in certain aircraft Securitizations.
We expect a new issue aircraft ABS markets remain closed in the near.
Two medium term as the market looks for more clarity around direction of air travel and its associated impact on airline credit lease rates and residual values as the market reopens, we are confident our abilities to growth.
Yes.
Currently the CLL market is beginning to open, albeit under challenging conditions and terms.
New deals tend to have shorter reinvestment periods tighter fees and elevated return requirements on equity.
Based on our long term performance and market position, we are confident that when the CLL market recovers, we will be well positioned.
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 of the call and as you can see on page nine.
We reported a second quarter 2020 distributable earnings loss of 91.1 million.
In an adjustment adjusted distributable earnings gain of 27.3 million.
We did not declared dividend in this quarter.
Revenues were 97 million for the second quarter.
Remaining relatively flat from the second quarter 2019.
And up 35% from the previous quarter.
Management fees were 56 million in the second quarter.
Down 2% in the second quarter of 2019 and down 6% from the previous quarter.
We are no longer recognizing cash deferrals for siloed subordinated fees.
This has reduced our management fees in the second quarter by 6.2 million.
Which includes a 2.6 million reversal from the first quarter.
We have deferred fees on 12 close.
But estimate that some of our sales will recover to a point that will recognize a portion of year to date fees in the third quarter.
For comparison purposes only.
Total management fees adjusted for Siloed deferrals, or 63 million in the second quarter.
Up 5% from the first quarter of 2020.
This increase in management fees is attributable to growth in hedge fund and real estate assets.
Incentive income was 38 million in the second quarter up 3 million compared to the second quarter 2019.
And up 29 million from the previous quarter due to Master fund performance for annual clients that crystallized incentive.
As seen on page 10 as of June Thirtyth 2020.
Our crude but unrecognized incentive was 227 million.
Up 87 million from the prior quarter.
The increase was driven by 91 million and positive performance with the majority coming from the customized credit platform.
We continue to expect a large portion of the opportunistic credit a barry to crystallize in the fourth quarter of 2020.
Turning back to page nine.
Other revenues were 2 million in the second quarter down 52% versus the second quarter, 2019, and down 18% from the previous quarter due to lower rates impacting interest income.
For the second quarter 2020, total expenses were 181 million.
Total adjusted expenses were 63 million.
Up one for 1% from the second quarter 2019 in down 4% from the previous quarter.
In the second quarter 2020.
Compensation and benefits expense was 41 million.
Remaining relatively flat from the second quarter of 2019 and from the previous quarter.
Bonus expense was 21 million for the second quarter.
Up 3% from second quarter, 2019, and up 6% from the previous quarter.
We expect full year bonus accrual to be between 75 and 85 million.
For fixed bonuses.
Salaries and benefits were 20 million for the second quarter.
Relatively flat from the second quarter, 2019, and down 4% from the previous quarter.
The decrease quarter over quarter was due to lower headcount.
We expect full year salaries and benefits to be between 75 and 80 million.
In the second quarter General and administrative expenses were 137 million.
Adjusted General Administration expenses were 18 million.
Down 8% from the previous quarter, 2019, and down 15% from the previous quarter.
The lower adjusted DNA quarter over quarter was due to seasonality of accounting fees and lower costs due to employees working from home and travel restrictions.
Expense savings associated with work from home also impacted the year over year decrease.
We expect full year adjusted DNA to be between 75, an 80 million.
Interest expense for the second quarter 2020 was 4 million.
Up 61% from the second quarter 2019.
Driven by the first full quarter of interest accrual for our debt securities.
And relatively flat from the previous quarter.
We expect full year 2020 interest expense to be between 15 and 17 million.
Please note that our preferred units started accruing dividends in February and will not impact economic income.
However.
It will be treated as reduction to distributable earnings.
Our guidance for the full year 2020 tax receivable agreement in other payables as a corporation is 14% to 18%.
As a reminder, tax estimates are subject to many variables, including the timing of the potential Africa settlement and year end performance.
That won't be finalized until the fourth quarter of the year and their core therefore could vary materially from the estimates provided.
Now an update on the balance sheet.
As of June 32020, total cash cash equivalents and long term treasuries were 334 million.
The outstanding balances of our liabilities included 8.5 million of term loan.
204 million of preferred units and $200 million debt securities.
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 instrument.
As Rob mentioned earlier, a 136 million restitution amount has been conditionally agreed to in principle between odds Africa and Africa.
An additional 116.9 million legal provision was taken this quarter. In addition to the previous 19.1 million provision taken in the third quarter of 2019.
This will be funded from our cash cash equivalents in long term treasuries and we're comfortable with the resulting cash levels.
With that let me turn it back drop.
Thanks, Tom.
We're very pleased with where the firm's performed during the crisis and our nimble investment approach is proving advantageous in the current market environment.
We were excited by the growth and our client franchise as evidenced by the real estate fund close and inflows into opportunistic credit.
We have shown disciplined and maintaining our expense base and we remain committed to reducing our liabilities over time.
We have conditionally agreed to a restitution amount in principle, which we put the final Africa legacy issue behind us.
As part of this progress we are very excited to announce the Jimmy Levin, we'll be taking over for me as Chief Executive Officer in April of 2021.
Jimmy is built the firm for 14 years and is the right person to lead scope or capital based on his proven leadership and ability to manage capital through market cycles.
His appointment as a natural evolution of the company's senior management team.
Jimmy will be keeping the role of CIO, but we'll have to support will be tenured investment and operational team.
Looking forward to this next chapter in the leadership of sculptor.
With that let me turn the call back over to the operator.
Thank you.
If you have a question at this time. Please press one followed by four on your touched on telephone.
If your question asked and answered or you would like to removed himself from queue.
Please press to one followed by the three key.
Yes first question comes from the line.
Patrick Davitt Autonomous research. Please proceed with your question.
Good morning, guys. Thanks.
Could you, perhaps try to frame the extent towards the Africa situation has kept clients from allocating to the multi strat fund maybe broadly what percent of potential wins have been on hold because of this overhang or anything like that.
Yes, Thanks, it's Rob I'll take that I mean look it's very difficult to comment on on something where we have sort of existing.
Litigation outstanding and we're in the process of.
Going through that so.
So I can really just kind of turned back to what I said in the in the comments earlier we.
We have reached a compromise that obviously has to.
As a way to go up.
And our view is that.
The extent that we can finally puts us think fully behind us.
That would be good for the firm.
Putting all of the Africa legacy issues behind Us I think beyond that it's very difficult to comment specifically on what that needs for our pipeline.
Okay Fair enough. Thanks, and then a quick follow up are there.
Are there Crystal is are there a accounts that have crystallization as with the multi strat funded in Threeq you like we saw in to Q.
There are some yes.
Okay.
Thank you.
Thank you.
I'm not showing any further questions.
Ill now turn the color connection.
I do apologize.
It does appear to be.
A question.
Yes, I do apologize Weinstein. Please go ahead Mr. King.
Can you can you. Please me prompt for questions one more time.
Certainly thank you.
I'd like to address your question. Please press the one followed by four on your Touchtone telephone.
And we have a question from the line of Bill Katz with Citigroup.
Please proceed with your question.
And you for the extra prompt thousand leading star one so a couple of questions for me. This morning Ah. Thanks for your prepared commentary.
Just I think in the press release I read a you sort of called out a change in the base fee on the hedge fund sort of wondering if you could speak to that to start.
The really our fees are been pretty stable or you know there are additional break points at the higher end, but our overall average fees are very consistent and we really are not experiencing hedge fund fee compression there are large.
Clients that may achieve a or large investors that may achieve a lower average fee, but overall our fee levels are pretty stable and we think that will be consistent going for.
Okay. So there wasn't a pricing change here, it's just a as a on scouts, we'll make sure I understand that correctly.
Yeah, I think so I'll have to look at bill exactly what you're referring to.
We could take offline I'll say the exact quote that you're referencing.
Great. Okay. Thank you and then just on the Pinedale and I think I. Appreciate may have some timing from the ended the year in terms of how some of the realizations may have crystallized.
But if you look at your variable comp I had to variable incentive ratio.
That was about 55% or so and I certainly appreciate you reinstalling guidance is very helpful.
Actually thinking about that ratio as we look to the full year.
Well.
We talked about this a lot in the past the ratio does vary you recorded a quarter and year to year. Our compensation. It program is really paid annually based on TNL. That's delivered by the investment team, where crystallize can happen annually three years five years, so there's a natural Mitch.
Mismatch. So I think you got to be a little careful that that percentage will will wolfberry I think this year it will be lower.
As we have crystallization from the five year incentive from a long term client depending on how that plays out the rest of the year a lot of that compensation has been paid over the years, but again that ratio does does vary period to period and is somewhat misaligned.
On a short term basis, but obviously aligned on a long term basis.
Right, Okay, and then just I. It's one one clarification you'd mentioned that there could be some reversal of the siloed deferred.
Based fields for they see a day in third quarter day, there correct themselves alternate was very quickly if you wouldn't mind so.
The yeah. So in Q1, we recognize the revenue.
Even though we had 2.6 million of cash deferrals in.
In Q2, we change the accounting, where we're not recognizing the revenue. So we reversed the 2.6 million from Q1, and we didn't recognize 3.6 million of deferrals that occurred in Q2.
Looking forward.
Siloed picture is improving our the number of deals that we have that are in deferrals.
Due to the Collateralization tests are decreasing so we think we're going to collect additional fees in Q3 and actually start to recruit some fees that were deferred you know back in Q1. So the the accounting change happened in Q2, but the overall performance of the seal lows.
And you know is definitely improving the for the Siloed that I'm still not passing the test or getting a lot closer. So we are based on current marks in current.
Our current market environment, we think thats going to continue to improve.
Okay. Thank you think taking the questions.
Thank you.
As a reminder, please press star one followed by the four on your telephone she would like to ask a question.
I'm not showing any further questions I'll now turn the call back African is king.
Thank you for me Ken. Thank you everyone for joining us today for your encased in conflict capital did you have any questions. Please don't hesitate to contact me at Q1, Q 719738 line media increase should be corrected to Jonathan gas out there at Q on Q2 five seven.
For one sabby around.
That does conclude the conference call for today you. Thank you for your participation and we ask that you disconnect your lines.
Thank you and have a great okay.