Sculptor Capital Management Inc (SCU) 2017 Q2 法說會逐字稿

Good morning, everyone, and welcome to OZ Management's Second Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Adam Willkomm, Head of Business Development and Shareholder Services at OZ Management. Please go ahead, sir.

Thanks, Krista. Good morning, everyone, and welcome to our call. Joining me are Dan Och, our Chairman and Chief Executive Officer; and Alesia Haas, our Chief Financial Officer. Today's call may include forward-looking statements, many of which are inherently uncertain and outside of our control. Before we get started, I need to remind you that OZ Management'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.

Earlier this morning, we reported second quarter 2017 GAAP net income of $13 million or $0.07 per basic and diluted Class A share. As always, you can find a full review of our GAAP results in our press release, which is available on our website. On an economic income basis, we reported second quarter 2017 distributable earnings of $53.3 million or $0.10 per adjusted Class A share. We declared a $0.02 dividend for the quarter. If you have any questions about the information provided in our press release on our call this morning, please feel free to follow up with me. With that, let me turn the call over to Dan.

Thanks, Adam, and good morning, everyone. Our second quarter results demonstrate successful execution on our priorities. As we stated on our last call, we are focused on providing our clients with strong investment returns in client service, growing our assets under management, prudently managing our total expenses and strengthening our balance sheet. Against these objectives, we posted the fifth consecutive quarter of positive performance across our funds and strategies, began to see a normalization of outflows, actively engaged in fundraising discussions with existing and potential clients across the globe, reached a new meaningfully lower level in our noncompensation expenses and strengthened our balance sheet.

Each of the 5-point investments strategies in our multi-strategy fund: long/short equity, merger arbitrage, corporate credit, structured credit, and convertible and derivative arbitrage generated positively returns this year, resulting in the OZ Master Fund, our largest multi-strategy fund, returning 3.2% net for the quarter and 7.5% net for the first half of 2017. For the last 12 months through June, the Master Fund posted a 14% net return. In the U.S. market, benchmarks generated positive returns in the quarter, however, the waters were not uniformly calm. Oil and gas prices, quant factor rotations, currency moves and European rates all presented challenges from market participants. We are pleased with the performance of our funds and strategies amidst this backdrop. Looking forward, we believe it appears increasingly likely that central banks are moving towards reducing monetary stimulus, creating the potential for increased volatility ahead. We believe we are well positioned in our multi-strategy funds to continue to perform in an environment in which our flexibility and an opportunistic approach to security selection and allocation are essential.

Opportunistic credit continues to post strong returns. OZ Co., our largest credit fund, was up 2.4% net in the second quarter, 5.7% net for the first half of the year and 19.5% net over the last 12 months. Performance was broad-based across corporate and structured credit. In the second quarter, we closed on the $410 million U.S. CLO and then in the third quarter, we expect to close 2 more transactions, which will add an additional $1 billion in AUM. Since the third quarter of 2016, we have priced 12 CLOs with a total par value of over $5.5 billion, and our CLO calendar for the back half of 2017 is strong. We attribute this strength to robust loan fundamentals and performance, coupled with a high appeal for floating rate CLO liabilities that have pushed funding cost lower, all of which have driven demand for CLOs. As to OZ specifically, the market has appreciated our best-in-class equity returns, combined with strong credit quality matrix -- metrics.

In real estate, we are pleased to announce that in June, we held a final close on our debut U.S. real estate credit fund totaling $736 million. This private equity-style closed-end fund will invest in a range of real estate credit assets in the U.S., leveraging the investment expertise of both our credit and real estate businesses. As of June 30, we have committed almost 20% from this fund. We are excited to complete this next step in building out our real estate investment activities as we think there is significant room to grow this business over time by expanding the platform and geographies. Real Estate Fund III has deployed approximately 12% year-to-date, taking us to over 50% committed in the fund. We also realized one investment this quarter at a 35% gross IRR and 2.1x our cost. We continue to harvest investments in Fund I and Fund II and in the quarter realized one investment in Fund I at 4.1x our cost and a gross IRR of 63%. We are extremely pleased with the performance across all of our businesses in the first half of this year and have started the second half strong with the Master Fund posting a 1.25% net return for July, bringing the year-to-date net return to 8.8%.

Now turning to flows. Our July 1 net outflows continue to trend down meaningfully from those experienced April 1, but we're still elevated as was our expectation when we spoke to you last quarter. Similar to April 1, net outflows were primarily concentrated in our multi-strategy funds. Going forward, we believe that flows will be driven by how we perform and how the industry does. We do believe the industry outflow trend remains elevated as compared with our past experience. While our multi-strategy flows in the near term will remain negative on a net basis until our step-by corresponding inflows, we are focused on building a pipeline of client mandates across all of our businesses and believe that the strong performance we have exhibited is the right first step to attracting new capital. With that, let me turn the call over to Alesia.

Thanks, Dan. I'll start with a report of our economic income results. For purposes of this discussion, comparisons to the second quarter of 2016 exclude the impact of the settlement expense in that period. Our second quarter revenues were $142 million, effectively flat year-over-year. Management fees were $75 million, $59 million lower than a year ago, primarily due to the redemption from our multi-strategy funds and the management fee reduction that took effect in the fourth quarter of 2016. Our incentive income was $66 million for the quarter, an increase of $58 million year-over-year. The majority of this incentive was earned from previously accrued but unrecognized amounts.

As of June 30, 2017, our growth accrued but unrecognized incentives generated from extended fee-paying assets was $371 million, up $21 million quarter-over-quarter. I want to remind you that with the exception of our real estate and energy funds, the remainder of this balance has no associated compensation expense as this was paid in earlier period. During the remainder of 2017, we now estimate approximately $20 million will contractually crystallize, excluding any impact of future fund performance, either positive or negative. In addition, approximately $70 million of accrued but unrecognized incentive in our opportunistic credit fund is deep in the money and will crystallize when we harvest the remaining investments in these funds.

Now turning to our operating expenses. Our second quarter expenses totaled $76 million, down 12% year-over-year. For the quarter, compensation and benefits were $43 million, up 20% year-over-year, driven by our decision to provide for a minimum annual discretionary cash bonus accrual over the year. Salaries and benefits were $24 million for the quarter, a 16% decrease from the second quarter of 2016. And our bonus expense was $19 million. In the second quarter, noncompensation expenses was $33 million, down 36% year-over-year and down 24% sequentially. Our expense saving initiatives in year -- have resulted in year-over-year declines in all of our noncompensation expense categories.

Now turning to our guidance expectations for the remainder of 2017. Our expense guidance remains unchanged. We estimate salaries and benefits expense will range between $100 million and $105 million for the full year 2017. Our estimated minimum discretionary cash flow in this accrual for the third quarter will be $18 million and $20 million. The total amount of our discretionary cash bonus for the full year, which is ultimately recognized in the fourth quarter is dependent on a variety of factors including fund performance for the year. We estimate that our noncompensation expense will range between $140 million and $155 million for full year 2017, including interest expense. Our tax receivable agreement and other payables were 19% of economic income for the quarter. We have lowered our expectation for the full year tax receivable agreement and other payables to between 16% to 22% of our economic income. As a reminder, these estimates are subject to many variables that won't be finalized until the fourth quarter of this year and therefore could vary materially. All guidance reflects our best estimates at this time. As consistent with our practice, we intend to update these amounts quarterly as we move forward.

Now an update on our balance sheet. In the fourth quarter of 2016, we began to invest in our own CLOs to satisfy risk retention requirements. While we evaluated many different structures to meet the requirements, we concluded that the most attractive economic option is to fund the CLO vertical strip on our balance sheet and finance this investment with third-party financing. It is worth noting that holding the finance vertical strip on the balance sheet generates positive economic returns in addition to supporting our business needs. On account of the strong level of CLO activity we anticipate going forward, we see these investments and the related financing growing steadily by the end of the year. While our reported debt obligations will be increasing, we want to remind you that this debt only has a recourse to our CLO manager entity and is not a general obligation of the management company.

To close, we are pleased we could be able to share our successes on multiple fronts with you this quarter. While we can't expect every quarter to see as many advances across our priorities, we remain focused on driving value in all aspects of our business, and we look forward to updating you as we move forward. With that, we will open the line up for questions.

(Operator Instructions) Your first question comes from the line of Bill Katz with Citigroup.

This is Jack Keeler filling in for Bill. First question on capital allocation here. Obviously, $0.10 cashable earnings with only a $0.02 distribution. How are you thinking about capital allocation from here as part of this to seed new products? And what are you thinking about the debt that is currently on your balance sheet?

Happy to answer the question. As noted, we are strengthening our balance sheet by building a healthy cash position, which is providing us optionality. We are evaluating using our cash to continue to fund our new business in opportunities as we are doing in our CLO business. We are seeing several other interesting new business opportunities, which may represent attractive ways to deploy capital. We also are considering additional dividend, share repurchases and debt repayments and will base these evaluations of actions on what we deem to be in the best interest of long-term shareholders. As the majority of our potential incentive is not known until the fourth quarter, we're making these evaluations in the fourth quarter, in light of our overall earnings.

Got it. And then, Dan, probably a question for you. Some of your peers have been talking about the retail opportunity, one of your peers mentioned potentially moving into the 401(k) space as part of an allocation within targeted funds, another subadvising mutual funds. Given your strong performance, any consideration in trying to reinvigorate gross sales in the retail channel?

Well, we have no specific plans in the channels that you mentioned right now, but we've always maintained, not just performance but we think that our brand and everything that we're about makes us one of the best candidates for those channels as they evolve. And so our plans to constantly grow our brand and capability and evaluate new channels as they develop, not just the ones you mentioned but others, are absolutely intact.

Your next question comes from the line of Alex Blostein with Goldman Sachs.

This is actually Ryan Bailey filling in for Alex. I was wondering if I could ask you a little bit about the outlook for additional fund raising from some of your closed-end fund strategies as we look throughout the rest of '17 and into '18? Is there anything we should be keeping in mind?

Well, it's -- we don't have anything specific that we're announcing now about closed-end funds. As we said, we did just close the real estate credit fund. We do have plans to do more things, and we will certainly update you and others at the appropriate time.

Got it. And then just maybe just one question. It looked like on the share creep was pretty meaningful in 2Q. I was just wondering what the outlook is for the rest of the year, excluding I guess your comments on potential buyback.

The share creep in Q2 was all attributed to the activities that took place in the first quarter, and so I think you're speaking about the weighted average share count versus the extensive period share count as all of the shares were issued in the first quarter of this year. As we talked about on our calls earlier in the year, those all pertain to year-end bonus activities as well the P Units and other retention awards that were granted at that time. Many of those were onetime options, and we don't see those to be going forward. However, we do anticipate resuming annual activities that you wouldn't see likely in the first quarter of 2018.

Your next question comes from the line of Ken Worthington with JP Morgan.

This is Will Cuddy filling in for Ken. So first, there was an article yesterday about Och-Ziff removing its application for a waiver from the Department of Labor. Could you please talk about the direct and indirect implications of: one, removing your application; and two, the potential ramifications if you don't receive a waiver at some point?

Sure. I'll just quickly comment. Please note that QPAM status does not materially impact our business. and our efforts to seek exemptive relief are active and ongoing at this time.

(Operator Instructions) Your next question comes from the line of Jonathan Casteleyn with Hedgeye.

I'm just wondering if you could remind us of the main factors that drive your monthly performance in mutistrat, just the main factors that drive performance there.

Well, are you asking for what was the attribution during the month or quarter as -- we have 5 core strategies.

I'm saying very broadly if you think about the main economic factors that drive performance in multi-strategy. Could you just remind us, describe them -- what the perfect environment is to generate performance in multi-strat. And I understand there's a lot of strategies in there, but if you just describing the sort of top 3 items or indicators?

Sure. Well, look, each strategy has its own set of perfect environment. It's a combination of opportunity created within that strategy as well as there are different macroeconomic factors for each strategy. There's not 1 set of 2, 3 or 4 of that drive the portfolio overall. That's the whole point to being multi-strategy and multigeography. So I understand -- and look as a general matter, of course, dislocation, creating opportunity does help us. Events help us. Some level of market volatility, uncertainty but that can be interest rate uncertainty, it could be political uncertainty, it could be financial uncertainty, does help create opportunity. So I hope that answers your question, but there are not 2, 3 or 4 specific macro environments that automatically create the opportunities.

Understood, yes, that's helpful. And then you called out volatility specifically in your remarks. Do you think higher vol, and obviously it depends on the level, is good for the complex or bad for the complex?

As a general matter, higher volatility and higher uncertainty creates more opportunity for us, as a general matter. But low volatility -- very often the higher volatility creates the opportunities and the lower volatility allows us to harvest the opportunities. That's -- I don't want to oversimplify it, but just -- I believe that is generally how it worked.

Yes, that makes sense. And then one for Alesia. I think you still have $16.4 billion in your "long-term 36-month commitments" but I believe that means that a shareholder could roll off next month or also roll off in 35 months. I'm just curious: one, is that right? And two, then how do you describe the potential access windows for these shareholders? Are there batches coming through or is it idiosyncratic? How can you describe the 36-month commitment windows?

Well, it is choppy, and there is no clean pattern when those investors will have their maturities and when we will see that accrued but unrecognized incentive manifest itself in earnings. We have provided our guidance for the remainder of 2017, and as we go forward, we hope to be able to continue to provide similar color. (inaudible)

Sorry, go ahead.

The $16.4 billion you're referring to, that's not all in 3-year lockups. Some of that is actually longer-term closedowns.

And they mature after...

Okay. And then lastly, you called out fundraising, generally. I'm just curious which strategies, which products are seeing potentially the most demand or interest.

Well, looking backwards, the first answer would be real estate credit, where we completed the close on our fund. On the multi-strategy side, our belief is that the industry trends, while they're not as negative as they were last year, we believe that at the margin industry trends remain negative, having said that, we believe from Och-Ziff perspective, if we continue to generate this performance, clients are noting 14% net over the last 12 months. They're noting 8.8% year-to-date. They're noticing that it's broad-based across all strategies and geographies. So we believe that our multi-strategy close will be driven by how we perform combined with industry trends. Industry trends, we believe, are still modestly negative, but we can't control that. We can control what we do.

Your next question comes from the line of Bill Katz with Citigroup.

Alesia, just one more question on expenses. You're showing strong expense fluctuated to date and appreciate it's kind of early to look into 2018, but is there any sense of where the run rate might shake up for 2018? And then given the strong performance that you've just mentioned, any sense on any appetite to spend a little bit to reinvigorate gross sales and take advantage of the strong performance and maybe some removal of the recent overhangs?

Sure. Let me answer on the expense guidance first. Our second quarter noncomp expense largely reflects the new run rate from our expense savings initiatives implemented over the past year. For the immediate future, we do expect some variability to this amount based on seasonality of certain expenses and also some benefits to do with some operational initiatives we have planned later for 2017. But I do believe this is the new run rate that we expect for the foreseeable future. And with regards to taking some of our savings and investing them into the business, as we said earlier, we are seeing some opportunity to make investments in our business and are seeing some new business opportunities that we are in the process of exploring, so we are open to all of those opportunities and are actively exploring various initiatives at this time.

I'm not showing any further questions. I will now turn the call over to Mr. Willkomm.

Thanks, Krista. Thank you, everyone, for joining us today and for your interest in OZ Management. If you have any questions, please don't hesitate to contact me at (212)-719-7381. Media enquiries should be directed to Joe Snodgrass at (212)-887-4821. Thanks again.

And this concludes today's conference call. You may now disconnect.