Q3 2022 Sculptor Capital Management Inc Earnings Call
Good morning, everyone and welcome to Sculpsure Capital's third quarter 2022 earnings call.
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As a reminder, this conference call is being recorded I would now like to introduce your host for todays conference Ellen content head of corporate strategy at Sculpsure capital.
Thanks, Doug Good morning, everyone and welcome to our call joining me or give me one of them, our Chief investment Officer, and Chief Executive Officer, Wayne Cohen, Our President and Chief operating Officer, and Dave <unk>, 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's 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 $22 $5 million for the third quarter of 2022, or <unk> 91 per basic and diluted class a share.
Distributable earnings were $618000 for the third quarter or one cent per fully diluted share.
Additionally, we declared a cash dividend of one cents per class a share.
Thanks, Alan and good morning, everybody and thank you for joining.
We're going to start with some overall macro commentary about the backdrop in which we're operating right now.
Most of which has obviously been well covered throughout earnings season, but it's worth noting that the third quarter was the third consecutive quarter of decline in both global equities and bonds.
Together those asset classes represent the traditional 60 40 portfolio and tend to look like what most institutional and retail portfolios.
Out there and Thats. The first time. This has happened in over 30 years and what that has done is it's made year to date performance across all asset holders.
Generally one of the worst on record.
Zero in on that a bit the back half of the third quarter.
Also saw a tightening of financial conditions at a pace that we really only see during the financial crisis style events, such as the Covid crisis or the global financial crisis.
Sure.
And so against that.
We are starting to see or have begun to see dislocations spread widening and investment opportunities.
Most across the board that represent for our funds. What we think are some of the best investment opportunities we ever get to see.
And whether that applies to the credit markets the real estate markets the asset base financing markets all types of different.
Spread environments and spread market.
What used to offer mid single digit yields now generally across the board offer what looked to be double digit returns on a very similar risk profile in order to take advantage of that we need that broad based skill set and we need flexible capital to move our funds around to where we're seeing the <unk>.
Best opportunity.
These are two things that have been part of our DNA forever and that we tend to be able to capitalize.
Quite well so these types of dislocations they generally involve near term.
Negative mark to market.
They generally are against a backdrop, where raising new capital gets more difficult, but those types of environments are what set up the investment opportunities to create years and years of returns on the follow in these truly are some of the best investment environment, the best investment opportunities that we.
Ever see apart from those moments of acute crisis, which.
It happened once or twice in a generation.
In the third quarter, our funds generated significant outperformance versus basically all relevant market indices and benchmarks our opportunistic credit funds.
Continued on pace.
The exceptional relative out performance here.
Again against pretty much everything within the credit and fixed income world and from that position of strength now against the backdrop of very widespread very high rates very significant complexity premia are now in a position to deploy capital.
Early aggressively our real estate funds, obviously in the private markets things moved more slowly.
But the hallmark of our real estate business since its inception has been a differentiated approach and that the vast majority of the capital we deploy is into what we call niche asset classes.
Gaming ski resort cell towers.
Special types of housing assets. These tend to have less correlation against the broader macro economy and are less reliant on financing markets capital markets leverage et cetera.
And so our existing portfolio.
Portfolios are performing quite well and again the dislocation, we're seeing sets up well for future capital deployment.
On the multi strategy side.
Largely protected capital in the quarter so.
A minimis negative performance against what was a roughly 5% decline.
Across almost all asset classes and again about a 5% decline in the 60 40 portfolio.
So while realm.
Relative outperformance.
It's us up well for the future, obviously, we still generated negative P&L in the quarter, but.
This is what happens in markets like these and Thats, what allowed us to demonstrate our skill set largely protect capital and set up the opportunity set for the future.
In terms of the impact of all of this on the low side or the business side, let's say market conditions like this that we're seeing today historically are not a catalyst for new flows.
So when you've got this level of pain in this level of markdown and a 60 40 portfolio that generally slows almost all institutional activity.
I would say that further gets compounded throughout the course of the cycle as private asset marks which have been coming in lower for institutions.
We believe are likely to continue to come in lower and that will continue to have.
A chilling effect on new capital allocations as people point to what is called the denominator effect there.
We think we're not alone in this across both alternative asset management and traditional asset management markets. Like this generally are not a tailwind for new capital formation.
I'd say importantly, we're not seeing elevated outflows anywhere in our business.
But on the new capital formation side that definitely feels to be slowing.
<unk>.
And our adjusted net asset so moving to the balance sheet largely unchanged quarter over quarter modest day offset by the continued buyback.
Obviously in the pace of that buyback is largely set by volume in the stock which.
Is quite low, but as we chip away over time, we are starting to.
As we disclosed.
In the press release, the number is starting to matter, but everyday moves slowly.
Having that balance sheet that we have today.
In times like this where we're remembering why we spent years and years building that balance sheet back up because it is allowing us to.
Play defense to weather, what are very tough market conditions.
So allow us to do opportunistic things like continue our buyback program at levels that we think are very.
We're active.
Long term.
So our expectation is.
Market volatility will continue difficult market conditions will continue our job in our funds is to first protect capital secondarily create investment opportunities that will allow us to compound capital in the future and that is what we will continue to do so with that I will hand the.
Call over to Dave Thanks.
Thanks, Jamie and good morning, everyone before we jump into our earnings and a little bit more detail I first wanted to highlight that we've enhanced our earnings press release format. This quarter and we hope that you all find additional clarity in that disclosure.
Turning now to our financials during the quarter, we generated distributable earnings of 618000 or one per fully diluted share on the revenue side, our management fees trended lower for the quarter AUM declined. This was largely driven by fund performance in our multi strategy funds that occurred during the first half of the year.
Our multi strategy funds, we earn management fees on Nab, which includes the impact of performance.
<unk> declines, we see a decrease in our management fee without necessarily a change to our fixed expenses.
The reverse also happens in periods of strong performance pushing up mass and corresponding management team.
Importantly, the management fee decline was not from elevated outflows as redemptions remained normalized throughout the year.
This quarter, we had modest incentive income driven by realizations in our real estate funds.
<unk> quarter for incentive income tends to be in the fourth quarter when our annual plans crystallize.
Given the negative year to date fund performance across our multi strategy and credit funds, we would expect limited incentive income for the remainder of the year.
On the expense side, our fixed expenses, which include salaries and benefits minimum Donna and GNL remain relatively flat to the prior quarter.
Given the incentive income from real estate for the acquirer, we recognize some corresponding carried interest profit sharing bonuses.
Turning to our balance sheet, we remain well positioned with a strong adjusted net asset position. During this time of increased market volatility adjusted net assets for $306 million for the quarter, which is equal to our cash plus investments in funds and CLO less our debt.
This balance sheet position significantly increases the resilience of our platform and we are benefiting from the steps we made to grow our balance sheet for periods like that.
Our adjusted net asset position has allowed us to start playing some offense and take advantage of the market opportunities, while returning capital to shareholders.
During the third quarter, we continued to return capital to shareholders, we executed on our buyback and repurchased 936000 shares at an average price of $9 34.
For a total of $8 7 million <unk>.
This brings total life to date repurchases through September 30 to $2 6 million shares for $28 2 million.
At recent stock prices. We believe this is one of the most attractive uses of our capital base.
We also announced a cash dividend of one per class a share for the third quarter.
In the fourth quarter, we expect to true up our dividend to bring full year dividends to be between 20% to 30% of distributable earnings.
As a reminder, during the distribution holiday, we only pay dividends to class a shareholders.
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.
We are well positioned to endure the market volatility given our positioning in both our underlying time on our corporate balance sheet.
With that I'll hand, the call over to the operator and open it up to any questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Gerry O'hara with Jefferies. Please proceed with your question.
Great. Thanks, and good morning folks I appreciate the color around just a more challenging environment for capital formation trends, but perhaps you could give us just a little update on how conversations are trending with kind of the keepers and asset allocators.
Is it as it relates to <unk>.
Traction in those.
On those platforms.
Sure.
Generally conversations continue to be positive look at we've spent years getting back to.
Yes.
Where we are in those conversations and those conversations were.
Definitely beginning to get traction as you saw in our numbers.
Macro.
Not particularly helpful.
For the continuation of that and I would say general noise at the corporate level is not a particular tailwind for those conversations either.
Fair enough.
And then.
David perhaps one for you just see the fee holiday and the aforementioned fee holiday can you.
This might be a tough one to answer but can you give us maybe any sense of how youre thinking about runway for that fee holiday or.
Perhaps.
If there is any kind of target target date or time period.
Where you would hope all things being equal to be to get through it.
Sure well, we can give you what what's left outstanding on the fee holiday distribution, yes, sorry distribution holiday the distribution holiday ends on we've had $600 million of distribution holiday economic income were at $530 million today.
They'll go forward will largely depend on the overall performance of the business and so we're not going to provide guidance as to when that will necessarily end.
Great. Thanks, and then just maybe one last if I can sneak it in.
Can you just sort of remind us what sort of seasonal seasonal aspects, we should be looking out for I think you just kind of mentioned the major.
Alrighty.
Accruals kind of comes during the fourth quarter, but is there anything sort of on the expense side that we should also be looking for or kind of.
Focused on for for Q3, as we model that out.
Or on the expense side, we accrue our fixed expenses, which is largely our base salaries and benefits and <unk> minimum accrual.
Over the course of the year the same with <unk> over the course of the year, we wouldn't expect any material deviation from that.
In the fourth quarter, we do have the ability to pay additional discretionary bonuses and that is what you might see in the fourth quarter of this year.
Great. Thanks for taking my questions. This morning.
Our next question comes from the line of Bill Katz with Credit Suisse. Please proceed with your question.
Thanks, very much and appreciate the extra disclosure.
Helpful. This morning.
So a couple of questions for you Jimmy maybe starting with the.
The dynamics here that are affecting flows.
Alright.
I would say to continue to be rolled a peer of yours that has a pretty big liquid book of alternatives.
Speaking of the opportunity here of a pretty sizable migration from longer data mandates that corporate private equity back into liquid mandates.
But not quite hearing that from you guys is it a mix issue is a performance issue or as you alluded to in your comments some of the corporate governance topics that are going on that's affecting maybe a more robust opportunity.
To grow or is it just that you have good relative but weak absolute performance on the hedge fund side any all of that any unpacking that would be super helpful.
Sure so.
The longer term trend of.
Yes.
Institutional allocators.
Possibly over did it on the private asset side and thereby in the future the pendulum swing the other way.
Where yield oriented credit strategies are the beneficiary of that we certainly agree with you I think that moves in months or quarters, not even close.
Just the way that the institutional movement of capital works. It will take significant time for the world to Digest what has already occurred to eventually get marks to eventually <unk>.
Process.
The fact that capital returns will be slow capital calls will remain elevated denominator effect. I mean this is this is like the turning of a battleship and I don't think that happens.
In any way instantly.
Specifically as it relates to.
<unk>.
Those same credit strategies.
Our performance in both open and closed end funds there is excellent on a.
Relative basis on an absolute basis is close to flat just to use a round number right. It's down a couple a few percent amidst a down 20% bond aggregate index or something like that so.
Do not think that is a performance issue I think capital movement as is.
Has slowed and will be slowing materially as the world digests the change to its balance sheet.
And as I said before the.
Corporate activity here in all of its forms and all of the attention it attracts.
It is not a tailwind there that's not a helpful factor to the formation of capital.
Okay second question in terms of the commentary yourself with Dave.
In terms of your variable minimum expense of $17 million or so it sounds like thats going to persist into the fourth quarter, maybe some upside on the discretionary side. So as we think about 2023.
Are there any strategic flexibility here to flex that down or is there a conundrum here that you have good relative, but but we got absolute and the competitive environment is such that you have to forego some FRE margin here to sort of keep stays intact.
Yes.
Definitely not room to flex that down.
That minimum as a minimum.
<unk>.
Implying if anything we would see to make investments in our people above that level in the fourth quarter to some extent in order to.
Keep the great talent, we have and attract new talent that we will need over time. So you should think of the minimum as a floor not a ceiling for the fourth quarter.
Okay, just one more and this is a rather pointed question I apologize for it but theres been a fair amount of public discourse on this.
Where does the board stand in terms of third party specific third party interest to potential franchise.
Sure I'll take that one.
Yes.
<unk> made a public statement in response to Mr. <unk> 13D filing that we'll refer you to on that matter, but high level to paraphrase that the board is always open to exploring any avenue that has the potential to enhance shareholder value.
Okay Thats it from me thank you.
I'm showing no further questions in the queue at this time I'd like to hand, the call back to Mr. <unk> for closing remarks.
Thank you, Doug 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. Thank you.
This does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.