Sculptor Capital Management Inc. Q1 2023 Earnings Call

Good morning, everyone and welcome to sculptor Capital's first quarter 2023 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 operator assistance during the conference. Please press star zero.

On your telephone keypad.

As a reminder, this conference call is being recorded I would now like to introduce your host for todays conference Ellen Coffey head of corporate strategy at sculptor capital.

Okay.

Thanks, operator, good morning, everyone and welcome to our call joining me are Jimmy Levin, our Chief investment Officer.

And Chief Executive Officer, Wayne Cohen, our President and Chief operating Officer, and Dave are risky, 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 states.

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 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 entities and they are not intended as such.

Today, we reported GAAP net income of $8 $5 million for the first quarter of 2023 or 34 cents per basic and <unk> <unk> per diluted class a share.

Our distributable earnings were $14 $2 million for the first quarter for 25 cents per fully diluted share. Additionally.

Additionally, we declared a cash dividend of six cents per class a share.

All earnings metrics discussed by both Jimmy and David <unk> will be on our non-GAAP economic income and distributable earnings metrics I will now hand, the call over to Stephanie.

Good morning, I appreciate everyone joining for the call today.

I'm going to cover investment in performance highlights for the first quarter, and then hand, it over to David to cover the business and financials in more detail.

Taking a step back on the overall macro environment during the first quarter. Despite a series of economic shocks deteriorating fundamentals and tightening credit conditions. Most major asset classes were up for the period.

The market was impacted by dislocation in the banking sector and interest rate volatility not winter not witnessed since the 1980.

Amidst this turbulent market environment, our funds were able to deliver solid absolute performance and relative out performance versus peer indices.

In opportunistic credit our credit opportunities Master fund generated a gross return of three 6% for the quarter with all underlying strategy is generating strong absolute returns.

The fund delivered strong performance, both on an absolute basis and relative to the HSR I fixed income credit index, which was up one 7% for the quarter.

We're seeing continued signs of stress across global markets as ray volatility poor liquidity in a general sense of for agility are prompting fast changing market conditions.

We believe these factors will provide favorable risk reward investment opportunities for investors that can provide capital nimbly.

Given our flexible and opportunistic investment mandate, we believe we should be able to continue to capitalize on this opportunity set.

In credit higher base rates wider excess spreads and greater investor protections have led to an attractive and building investment pipeline said simply it's a great time to be an opportunistic credit investor in our opinion.

On the real estate side, we continue to invest and harvest capital successfully our focus on non traditional niche asset classes within real estate has continued to produce returns that are less correlated to the broader market and to traditional real estate markets.

We think that such a risk return profiles, even more appreciated in times like this.

Sculptor real estate equity fund III has generated over a 30% gross IRR life to date and sculptor real estate credit fund one has generated over an 18% gross IRR life to date.

Both of these funds are now in harvest mode focused on returning capital to fund investors.

In multi strategy or Master fund generated a gross return of five 7% for the quarter.

This fund also delivered strong performance, both on an absolute and relative to the HSR Ifund weighted composite index, which was up one 3%.

We were pleased to see high returns generated on our historically low risk position for the portfolio due.

Due to our overall assessment of the economic environment. The fund has been running with historically low gross and net exposure and so while we have been enjoying strong returns we have done so with a trailing three month beta to global equities of about 2%, sorry, <unk> two on average and realised three month volatility of approximately 5% or.

About a third of the equity market volatility.

Overall, we were pleased with our ability to generate strong performance across the platform in the first quarter and believe the market environment. We will continue to provide favorable risk reward investment opportunities for our fund investors we.

We are well positioned due to our diverse set of investment capabilities across geographies and asset classes and the strong team we have in place.

While many things change over time, there is one which does not our number one focus is to deliver great investment results to our fund investors.

David.

Thank you Jamie and good morning, everyone I'll cover both business and financial highlights for the quarter, providing commentary on the drivers of our results for the first quarter, we generated $14 million of distributable earnings or <unk> 25 per fully diluted share.

Turning to our AUM for the quarter, we started the year with 36 billion in AUM and ended the quarter relatively flat at $36 1 billion.

Our positive fund performance in opportunistic credit and multi strategy was offset by net outflows across the platform.

As we discussed last quarter, we saw fundraising continue to be challenging during the first quarter consistent with the second half of 2022 impacted primarily by the uncertainty and perceived instability created by public actions taken by the founder and former CEO of boxes, along with other factors, including broader industry trends we.

Our overall flow picture can be challenged until there's a resolution of this externally driven legacy part by nine.

On our revenues, we had management fees of $60 million for the first quarter down from both the prior quarter and the first quarter of 2022, primarily from lower multi strategy AUM.

Incentive income was $40 million for the quarter, driven by crystallization and our real estate and opportunistic credit funds. This incentive income highlights the benefits of fund diversification of our platform, which is the result of building blocks you put in place over the last decade in credit and real estate.

As Jimmy mentioned, our performance for the quarter across the board was strong we have substantially recovered our losses in opportunistic credit and have made meaningful progress in multi strategy against the high water Mark year to date.

Our expenses for the quarter were driven by our fixed expenses, which consists of salaries and benefits minimum discretionary bonus and general general administrative and other expenses along with carried interest profit sharing on our real estate business.

There is no change to the fixed compensation guidance, we discussed last quarter and we would expect 2023 full year fixed compensation to be largely in line with prior years.

So and this was driven by our minimum discretionary bonus accrual of $18 million and carried interest profit sharing on real estate incentive income.

Our general administrative and other expenses were impacted by approximately $7 million of elevated professional services expenses largely related to legal spend for the activities of the special Committee of our board of directors, we would expect to see elevated levels continue into the second quarter.

Our normalized spend however remained relatively in line with the prior year.

Turning to our balance sheet.

Our adjusted net assets were $269 million for the quarter, which is equal to our cash plus investments in funds and CLO lesser debt.

Adjusted net assets were down from the prior quarter largely due to typical seasonality in our cash balance related to the timing of certain receivables and payables.

This typical seasonality primarily relates to the timing of payments for prior year bonuses disbursed in the first quarter of the current year.

We feel good about our overall adjusted net asset position in the longer term trend. If we look at the year over year change in adjusted net assets, we had 283 million as of Q1 2022.

269 million as of Q1 2023.

A large driver of this decrease was the $38 million of capital returned to shareholders through our share repurchase plan and dividends.

For the first quarter, we announced a cash dividend of <unk> <unk> per class a share which represents 10% of distributable earnings we will plan to target 10% of distributable earnings for the second and third quarters and true up our dividend in the fourth corner to be 20% to 30% of distributable earnings on a full year basis in line with our stated.

Policy and our practice in 2022.

As a reminder, we only pay dividends to class a shareholders. During the distribution holiday to date, we have earned $546 million of the $600 million distribution holiday economic income targets.

In addition to our adjusted net asset balance we have significantly we have significant expected value from our very balanced which is our accrued but unrecognized incentive income our brewery balance for the end of the first quarter was $163 million.

Lastly, regarding the formation of a special committee.

The Special Committee is comprised solely of independent directors to explore potential interest from third parties in a transaction with the company that maximizes value for shareholders.

We are not going to provide any more details about the process until it is appropriate to do so so there is no update for this call.

With that I'll now hand, the call back over to the operator to open it up for any questions.

Thank you if you have a question at this time, please press star one on your telephone keypad.

Thank you. Your question has been answered or you would like to remove yourself from the queue. Please press star two.

Thank you. Our first question is from Bill Katz with Credit Suisse. Please proceed with your question.

Hi, Good morning. This is Michael Kelly on for Bill Katz.

Thanks for taking the question.

I was wondering if we could just get an update on real estate credit fund raising I believe I saw that you guys had your second close of the credit funds I guess, if you guys could give us an idea of the timing for additional closes an ultimate target size and then an update on the committed deployment and the real estate fund four and a sight line to begin fund raising for fund buys.

One moment, please we have a slight technical difficulty.

Okay.

Okay.

Okay.

Okay.

Hello, Neil for you to answer.

Okay. This is Dave.

And Mike Thanks, so much for the question.

On the real estate credit fund, we would expect to have additional closures over the course of the year as we stated on the call earlier fund raising overall has been challenged given the legacy corporate noise.

Jimmy do you want to take the real estate for question in terms of deployment.

Sure.

I know if we disclosed at least close exactly where we are in the deployment of the existing policies.

So.

We are around 60% deployed there is different ways to calculate that number but thats a good rough number.

And generally speaking when you get to that point.

Is when you start looking towards the next month.

So I would assume.

So next year type of event.

Okay third question in there Mike.

No that was great. Thanks, and if I could just have one more follow up.

Sure.

What is the how do you guys stated target size for stacks.

Yes, the $4 75 in total commitments, thus far of the $100 million in <unk> do you guys.

Have a target for that and how do you how should we think about the framing for ultimate size there.

So what we've generally said on that is that we try to make each fund.

Larger than its predecessor fund.

I think the last opportunistic close end fund was around $500 million.

Steve any additional color.

I think again on this one it's something that we'll continue to raise or look to raise capital for over the course of the remainder of the year and again as stated earlier.

Trends on capital raising remain on hold challenging PRASM.

Okay, great. Thank you very much.

Thank you there are no further questions at this time I'd like to turn the call back over to Ms coffee.

Thank you operator, 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.

You may disconnect your lines at this time, thank you for your participation.