Q2 2022 Sculptor Capital Management Inc Earnings Call
Good morning, everyone and welcome to sculptor Capital's second quarter 2022 earnings call. At this time all participants are in a 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 this year now on you touched.
On the telephone as a reminder, this conference is being recorded I would now like to introduce your host for todays conference Ellen head of corporate strategy at sculptor capital. Please proceed.
Thanks, Maria Good morning, everyone and welcome to our call. Joining me are Jimmy Levin are keeping up and officer and Chief Executive Officer, Wayne Cohen, Our President and Chief operating Officer, and Dave Ritchie, Our Chief Financial Officer.
Today's call contains forward looking statements many of which are inherently uncertain and outside of our control.
Before we get started I need to remind you that sculptor capital 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, we will 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 any other entity.
Today, we reported a GAAP net loss of $8 $1 million for the second quarter of 2022, or 32 cents per basic and <unk> <unk> per diluted class a share our distributable earnings were $32 million for the second quarter or <unk> 55 per fully diluted share. Additionally, we declared a cash dividend.
A 13 cents per class a share.
All earnings metrics discussed by both Jimmy and Dave I will be on a non-GAAP economic income and distributable earnings metrics I will now hand, the call over to Jimmy.
Good morning, everybody thanks for joining.
Let's start with the macro environment from a financial market perspective, the first half of the year has been one of the worst on record and well pretty much all major asset classes experienced dramatic declines I think it is most informative to think about the 60 40 portfolio because some version of that represents the vast majority.
Both institutional and retail capital allocations and the 60 40 portfolio had its worst performance in 90 years for the start of the year.
Of course that was driven by the laundry list of.
All of the issues, we all know no two well deteriorating global GDP growth outlook record inflation rising interest rates Central bank tightening supply chain disruptions, the rolling and disparate COVID-19 impacts being felt around the world.
And last but not least the war in Europe . All of this taking place against the backdrop of what's been pretty significant valued distortion in risk assets over the last two plus years.
Notably within that credit markets, which had been relatively well behaved for the initial part of the year.
That contagion hit towards the end of the second quarter and started to create meaningful dislocations across pretty much all types of credit assets, both public and private.
As it relates to sculptor this has created a robust and ever expanding universe of attractive investment opportunities for our funds.
Across our businesses.
We do a lot of different types of investing but I would say simply said the same type of investments that nine or 12 months ago offered mid single digit rates of prospective return.
Today offer mid double digit rates of prospective return.
From a top down standpoint, as it relates to how we deploy capital.
Understanding what I just said, we think we need to remain disciplined.
The economy is probably getting worse inflation is likely to be more stubborn than consumers companies or central bankers hope I'd say that hope is most definitely become.
More hopeful over the last month, and we're not sure that's quite warranted yet.
For this type of environment flexible capital is required to capitalize on the opportunity set.
And we think we're well positioned across all of our funds given our funds are generally opportunistic and generally unconstrained in their approach to investing.
Said simply dislocation can be good for our business in terms of increasing the number of attractive opportunities for our funds to invest in that help create future returns and in our ability to showcase outperformance against other risks.
Asset classes.
In the present moment.
In the second quarter, we delivered solid financial results for shareholders and relative outperformance for our fund clients notwithstanding the challenging market environment.
Opportunistic credit funds delivered what we think our exceptional returns relative during the quarter and continued to compound on year to date outperformance versus pretty much all relevant benchmarks, our real estate funds continue to achieve terrific realizations on existing investments and are now able to deploy capital into the type of.
<unk>.
Sets up for similarly successful future investments, our multi strategy funds have experienced a portion of the drawdown in risk assets year to date more than we targeted but fared better overall than the market and were broadly in line with expectations.
That being said incentive income is of course.
Based on absolute performance in our multi strategy funds are in a year to date loss position I will say this is not the first time, nor will it likely be the last time that such as temporarily the case.
We have seen periods of market dislocation Historically act as a catalyst for fundraising in certain areas, particularly credit and real estate related.
In a dampener fundraising more broadly and this is what we hear in the market we see in the market we hear it from our peers capital allocators of all shapes and sizes.
In the type of market environment that I described in the opening tend to pause and look inwards during period of time kind of take inventory and reset.
Especially when that stress is so broad based across the typical portfolio I think historically there has been periods of dislocation, where one asset class does worse, one asset class does better I think in this environment, where all of the major food groups of an institutional allocation have suffered so significantly that generally creates.
Slowdown in all activity.
<unk>.
Short term flows are always difficult for us to forecast in the current time of market stress I would say even more so the case.
Notwithstanding that I would say a highlight or an area too.
Focus on within all of that is the sculptor tactical credit fund, we call that stacks, where we held the second closing on July one with $250 million, bringing total committed capital to $370 million.
That is a private credit drawdown style fund building on the track record of six or seven similar funds over the last decade as well as our open ended opportunistic fund.
This is an asset class, where we have long had expertise. We believe we have a great reputation and we believe that.
In this environment, it is particularly relevant to clients.
And specifically in our private credit format, we plan to have additional closings in that fund and we plan to continue to grow that offering over time into.
One of our core areas. We also had as we discussed before our first close on our second real estate credit fund that was in the first quarter. We're continuing to look to hold subsequent closings as well as partner with our real estate clients across the board as we develop new areas to grow together and helped us.
<unk> capital into the space.
Our Ics business, we continue to raise additional CLO CLO market is obviously not insulated from everything else that's going on in that market is slower than it has been over the last several years.
The breadth and depth of our investment capabilities and outperformance for our clients and our long duration businesses has resulted in growth of our longer term AUM, both absolute and relative and it also helps to diversify the platform and I think we saw the benefits of that collectively in our second quarter financial numbers.
It adds stability and diversity to our earnings stream, which is particularly helpful in times of market stress.
And like we saw in the second quarter investments that we make across different vintages different funds different products.
That can create return streams.
In an idiosyncratic fashion that pay off when they pay off and that's what we experienced in the second quarter. This year.
Overall at the firm, we remain well positioned with a strong adjusted net asset position. This is something we've talked about for the last several years. It was an area that we felt was absolutely critical importance to buildup and improve on.
We said we needed to do that because we wanted to.
Have a stronger business in tough times for defense and we wanted to have the ability to play offense and I would say right. Now we are doing both we are getting the benefit of that balance sheet resilience.
A defensive standpoint, and we are doing we think is opportunistic offensive Lee with that balance sheet strength.
So with that we continue to repurchase shares during the quarter. We did so at levels that we think are very attractive.
We went through this math I think two quarters ago, but when we think about the combination of recurring earnings the value of our balance sheet or NAC.
And of course, the potential incentive income after variable bonuses that we can earn in any period of time across any number of funds.
With that the buybacks screens is frankly, a great use of capital and maybe the best use of capital.
So while markets will continue to be volatile or I should say may continue to be volatile near FERC near term. We think we're in a position of strength to capitalize that on many capitalize on that on many fronts. Both in our funds and at the level of our business and that's why we're making attractive investments for our clients.
By being stewards of our clients' capital and protecting it by showcasing the value of our investment capabilities.
And doing that with a strong and a strong balance sheet.
Reasonable earnings profile, excluding incentive income and earnings power with the benefit of incentive income and with all of that together. We think we can continue to generate long term earnings growth.
With that I will hand, it over to David to get into the financials. Thank you Jimmy and good morning, everyone I'll provide some highlights on our financials for the quarter and overall capital management strategy.
During the quarter, we generated distributable earnings of $32 million or <unk> 55 per fully diluted share. Despite the overall volatility in the market environment.
A portion of our distributable earnings this quarter were from earnings generated on our management fees showcasing the value of recurring earnings and the progress we've made in improving the contribution from management each of our business.
We also had incentive income realization of $44 6 million for the quarter largely from our longer dated fund. This highlights the testament of our long term performance and the value of diversification of our platform in terms of engage product.
As announced that we had compensation expense directly linked to this incentive income, which increased our compensation expense versus our normal minimum quietly ex bonus accrual.
As a reminder, we typically recognized compensation expense in the quarter in which we generate the income for our long dated funds as again this quarter.
At year end for our open at that time.
As seen this quarter, our longer dated and can generate significant incentive realization during otherwise challenging market condition and we perform for our clients.
Turning to the balance sheet, we remain well positioned with a strong adjusted net asset level and significant liquidity.
Adjusted net assets have increased from a deficit of $55 8 million in 2018 to $304 2 million as of June 30, which is up quarter over quarter.
This balance sheet position significantly increases the resilience of our platform and has allowed us to start playing offense that we believe will lead to future long term shareholder value, while returning capital to shareholders.
Our dividend and buybacks.
In the second quarter. We also continued to return capital to shareholders, we executed on our buyback and repurchased one 2 million shares at an average price of $11 34.
For a total of $13 2 million. This brings total life to date repurchases through June 30 to about one 6 million shares for a total of $19 nine at.
At recent stock prices. We believe this is one of them as attractive uses of our capital base.
We also announced a cash dividend of <unk> 13 per class a share for the second quarter, which represents 10% of distributable earnings in line with the guidance that we gave last quarter.
We expect to target a dividend of 10% of distributable earnings the class a shareholders for the third quarter and then in the fourth quarter, we expect to true it up to bring full year dividend to between 20% and 30% of the stable earnings as.
As we discussed last quarter. This case during the year and more sensible prudent approach to our dividend policy as it better aligns dividend payments with earnings given the timing of incentive income and bonus expenses.
Importantly, this is not a change to our annual dividend policy just to the timing of payments throughout the year.
As a reminder, during the distribution high we only pay dividends to class a shareholders.
Taking the dividends and share repurchases together for the second quarter. We are returning $16 4 million to shareholders 13 key via the share repurchase program and $3 two via our dividend, we will continue to be thoughtful and maintaining the ongoing balance of a strong core balance sheet deploying capital to areas of growth and returning capital to shareholders.
As Jamie discussed we are well positioned to endure the current market volatility given both our positioning in our funds and on our corporate balance sheet.
With that I'll hand, the call over to the operator and open for any questions.
Thank you if you have a question at this time. Please press star followed by one on your Touchtone telephone. Thank you for your question has been answered or you would like to remove yourself from the queue. Please press the pound key.
One moment, please while we poll for question.
Our first question comes from Jerry O'hara with Jefferies. Please proceed with your question.
Great. Thanks, Thanks, and good morning folks.
And around just the the incentive income and how we should think about sort of the pace of crystallization and generation of that incentive as you start to shift I think you mentioned in the prepared commentary and the earnings release that some of the products won't necessarily have the kind of year end anniversary that we're accustomed to.
So any sort of color or context, there would be helpful.
Sure.
We have not historically given forecasts on what that incentive income quite look like on a go forward basis for a long dated funds. This is based on realizations and harvest, which are as you know a little bit difficult to forecast and so that isn't something that we have given color on a long term basis.
For our annual fund.
Which is primarily our multi strategy fund and our credit opportunities fund.
We would expect annual crystallization at the end of the year.
Should there be any kind of income generated by <unk> performance.
Okay. That's helpful and maybe just to clarify are there additional products coming online or are there additional products in the mix that aren't necessarily tied to that annual.
Kind of year end or that we should at least sort of watch for as they grow.
The main portion of that is going to be from our real estate.
And we have a series of equity real estate funds at varying together and also from our newly launched stacks on which can be had mentioned earlier.
And lastly, there is a portion in our custom credit.
Our custom credit opportunity fund, which has a multi year crystallization period, which will not be crystallizing this year, but will in A&P carrier.
Okay. That's helpful. Thanks for the explanation there and then.
Just one more from me can you kind of remind us where we are.
In terms of the.
<unk> holiday, what sort of percentage of the way through that earn out.
You kind of through quarter end.
Yeah.
Thank you.
We will be putting this number into the 10-Q.
We have about $75 million remaining.
Of that 100 that we had to begin with.
Okay. Thanks for taking my questions. This morning I appreciate it.
Our next question comes from Patrick Davitt Ottoman This research. Please proceed with your question.
Good morning. Thanks.
Our first question is on kind of the broader fund raising pipeline you mentioned stacks the second real estate credit fund.
Stacks is this something that you are expecting kind of always be in the market or do you have a hard cap in mind.
And in that same vein any view on the potential size of the real estate credit fund.
So stacks as a closed end fund, which means it's not evergreen and the market. It has.
Fund raising window that.
Speak to that.
Yes, I think it was a year from the July one close so called that's open for a year.
In terms of sizing, we generally look to have funds that are bigger than their predecessor fund and I think our last closed end credit fund was around five or $600 million.
Several years ago.
The.
Real estate credit funds.
Credit fund two that is give generally the same thoughts we try to meet or exceed prior funds and fund one was around $700 million.
Okay.
Okay, Great that's helpful and as we get closer to <unk>.
It looks increasingly unlikely that the master fund.
We will have a performance fee.
In that vein if that performance fee of zero do you think like the minimum annual bonus you need to pay people would put the distributable earnings into the red for the quarter.
Sure.
Good.
David can run through that math and figure out if that math is within guidance, we would give but.
Big picture the minimum bonus accrual is meant to represent the bonuses that we think we would pay to the extent theres not annual incentive income being generated obviously, when we generate incentive income off of.
Either a brewery or funds that.
Have direct carry in them, you'll see that bonus roll through at the same time, which is what you saw in this quarter, but the minimum bonus accrual is meant to represent the scenario you described.
Obviously, it's a best efforts on our part to try to create that accrual, but that's that's what we have.
That's right.
When you look at effectively the earnings from our management fee stream is what you would be looking in that in that scenario I need to be thinking about what your run rate management fees are lastly, our fixed expenses linked to the salary and benefits salary and benefits your fixed bonus accrual and <unk> and.
And we've talked about that being a positive number for this quarter.
Okay.
Last one for me since your if youre willing to since Youre not giving the monthly performance anymore, given the market reversal in July would you be willing to give it for.
Over the last months.
So we are we are not going to do that I will acknowledge that risk assets generally had a nice move in we participated in some of that.
Got it.
Yes.
Im not showing any further questions I will now turn the call back over to this country.
Thank you Maria and thanks, everyone for joining us today and for your interest in sculptor capital. If you have any questions. Please don't hesitate to reach out.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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