Sculptor Capital Management Inc (SCU) 2017 Q3 法說會逐字稿

Good morning, everyone, and welcome to OZ Management's Third 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.

Thanks, Leandra. Good morning, everyone, and welcome to our call. Joining me are Dan Och, our Chairman and Chief Executive Officer; and Alesia Hass, 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 businesses 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 third quarter 2017 GAAP net income of $6 million or $0.03 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 third quarter 2017 distributable earnings of $39.8 million or $0.07 per adjusted Class A share. We declared a $0.02 dividend for the third quarter. If you have any questions about the 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 Dan.

Thanks, Adam, and good morning, everyone. I apologize for a little bit of a sore throat. Our third quarter results demonstrate continued execution on our priorities. Our performance continues to be strong and broad-based across funds and strategies. We are encouraged by the number and nature of client and prospective client conversations and we continue to make progress on our financial plan. We were pleased with the breadth of our multistrategy fund gains as our 5 main strategies were positive for the quarter. The OZ Master Fund, our largest multistrategy fund, returned 2.1% net for the quarter and 9.7% net for the first 9 months of 2017. For the last 12 months through September 30, the Master Fund posted a 12.7% net return.

Global markets continue to rally with the S&P 500 rising each month in the third quarter. This grind higher has been notable for its consistency and lack of volatility. The largest pullback in the S&P 500 this year has been under 3% and the VIX completed the calmest quarter in its history. This market dynamic, combined with historically low rates, leaves us to look for alternative ways to generate [attractive] risk-adjusted returns. We are constantly casting a wide net in search of opportunities, seeking solutions that are complex, process driven, those with catalysts, or have an otherwise exploitable niche element to generate returns.

Opportunistic credit continues to post strong returns. OZ Co., our largest credit fund, was up 2.2% net in the third quarter, 8% net for the first 9 months of the year and 14.3% net over the last 12 months. Structured and corporate credit continued to demonstrate strong performance across all geographies this quarter, as we made favorable progress in a number of process-driven situations.

During the third quarter, we closed 2 new CLOs, 1 in the U.S. and 1 in Europe, adding just over $1 billion in assets. We have already priced a $611 million CLO in October that will close during the quarter, and we're optimistic that we may price 2 more CLOs before year-end. Total CLO issuance year-to-date including refinancings now totals $6.1 billion. In real estate, we continue to focus on deploying capital on our current funds and harvesting investments in our legacy funds. We have committed approximately 60% of our third opportunistic real estate fund and 18% in our recently closed real estate credit fund. During the quarter, our real estate funds realized 9 investments across funds with an average multiple of 2x.

We are extremely pleased with our performance across all our businesses during the first 9 months of the year, and have started the last quarter of the year off strong with the Master Fund posting a 1.75% net return for October, bringing the year-to-date net return to 11.7%. Our October 1 net outflows continued to trend down from those experienced July 1, and were primarily concentrated in a multistrategy funds. While our multistrategy flows in the near term will remain negative on a net basis until offset by corresponding inflows, we are focused on building a pipeline of client mandates across all of our businesses. We continue to believe that the strong performance we have exhibited is the right first step to attracting new capital and are encouraged to hear positive feedback on our recent performance. At some point, we believe, this will translate into inflows.

With that, let me now turn the call over to Alesia.

Thanks, Dan. I'll start with a report of our economic income results. Our third quarter revenues were $125 million, down 10% year-over-year. Management fees were $72 million, $47 million lower than a year ago, primarily due to the redemptions from our multistrategy funds and the management fee reduction that took effect in the fourth quarter of 2016. Our incentive income was $51 million for the quarter, an increase of $32 million year-over-year. As of September 30, 2017, our gross accrued but unrecognized incentives generated from extended fee paying assets, was $402 million, up $31 million quarter-over-quarter. Again, we would like to remind you that with the exception of the balance associated with our real estate and energy funds, a remainder of this balance has no associated compensation expense as this was paid in earlier periods.

Our third quarter expenses totaled $75 million, down 8% year-over-year. For the quarter, compensation and benefits were $44 million, up 21% 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, an 11% decrease from the third quarter of 2016, and essentially flat from the prior quarter. Our bonus expense was $19 million.

In the third quarter, noncompensation expenses were $32 million, down 30% year-over-year and down 3% sequentially. We continue to focus on opportunities to further reduce our operating expenses.

We expect full year 2017 salaries and benefits and noncompensation expenses to be near the low end of the range of our previously communicated guidance. As a reminder, our guidance was $100 million to $105 million for salaries and benefits and $140 million to $155 million for noncompensation expenses, including interest expense. Our tax receivable agreement and other payables was 20% of economic income for the quarter. Our guidance for the full year tax receivable agreement and other payables remains unchanged at 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. We anticipate providing 2018 guidance on our fourth quarter 2017 earnings call.

Now an update on the balance sheet. As we mentioned last quarter, we are investing in our own CLOs to satisfy risk retention requirements by funding vertical strips in respect of each CLO on our balance sheet and financing this investment with third-party financing. On account of our strong level of CLO issuance in the quarter, our investments increased by $133 million and our reported debt obligations increased by $111 million this quarter. We want to remind you that this debt only has recourse to our CLO manager entity, and is not a general obligation of the management company. This risk retention-related CLO activity has also driven an increase in other revenues and interest expense.

Lastly, as we look to the fourth quarter and consider our potential full year 2017 incentive income, we are optimistic that we may see a meaningful amount of annual incentive based on the strong year-to-date performance of our funds. This will likely translate to a healthy amount of distributable earnings. Our top priority is to use fourth quarter distributable earnings to continue to strengthen our balance sheet by retaining cash. After that, we will evaluate increased dividends and share repurchases based on what we believe is in the best long-term interests of shareholders.

With that, we will open the line up for questions.

(Operator Instructions) Your first question comes from the line of Robert Lee with KBW.

Dan, I got on the call a little bit late, so I apologize if you made these comments. But could you just update us on outside of the multistrat some of the fundraising priorities right now? I think you mentioned that one of the real estate strategies is about 60% invested. So I assume that next generation of that will be coming up soon. Maybe just update us on fundraising priorities.

Sure. Well look, I don't want to comment on any specific funds for obvious reasons, but you are correct, we made clear that our real estate group, both on the equity side as well as the real estate credit side, has generated very, very strong returns and our plans are to grow both of those businesses hopefully in a substantial way. So we did point out, I don't know if you missed it on the call, that Real Estate Fund III is 60% invested. Once again, no specific comment the plans, but you are absolutely correct. That fund is performing extremely well and we do plan to continue to grow the real estate platform going forward. On the credit side, CLO issuance is strong. You heard those numbers during the quarter. We are going to continue to execute. Performance there continues to be extremely good. On the credit side, we're focused in all of our different product areas. So performance everywhere is hitting on all cylinders. In this business historically, lows have followed performance. So at Och-Ziff, provide people and clients with everything they are looking for, in addition to performance, and historically flows have always followed performance. That is what we're focused on.

Then, maybe just a follow up for Alesia. If I have my numbers correct, I think last year, kind of total incentive comp for '16 was about 30% of total revenues roughly. So given that, Alesia, currently where we sit, you're going to have -- should have a pretty good incentive quarter in Q4, given the year-to-date performance. How should we be thinking about that -- revenue to -- comp to total revenue for the full year? And how much should we assume that we'll see some improvement last year? Kind of keep it steady. How should we think of that?

So first of all, I would share that you are correct that we also anticipate generating strong annual incentive in the fourth quarter, which will result in us paying higher additional discretionary bonuses beyond our minimum bonus accrual that we have set forth. However, we're not prepared to provide guidance around what this amount may be at this time.

Had to try, so.

No problem. I understand.

Your next question comes from the line of Gerald O'Hara with Jefferies.

Just actually, one staying with you, Alesia, on expenses. You sort of mentioned here noncomp expense was -- decreased quarter-over-quarter was just reductions across various other expenses. Could you perhaps elaborate as to -- if that is related to some initiatives that are going on? Or just any specificity you might be able to add with respect to the quarter-over-quarter change?

We are actively exploring cost-saving opportunities and taking a very disciplined approach to our expenses. So each of those opportunities are one-off, I wouldn't say there is a general trend, but as we look across our noncompensation expense category, we are actively trying to identify opportunities to lower each of those buckets and bring them down every quarter. So nothing specific, but it is a high priority of the firm.

Okay, fair enough. And then just a quick follow up on the comments just a moment ago on the Real Estate Fund being or the latest vintage being 60% investor committed. Is there typically a threshold there? Whether it be 70, 75, and it doesn't necessarily have to be for this, this fund in particular. But that you target before you start entering the conversation for a raising a follow-on fund or something to that effect.

Most funds have a either contractual threshold or an understanding with investors.

Your next question comes from the line of Mike Carrier with Bank of America.

This is Mike Needham in for Mike Carrier. Just first on, I guess, cash. Did I hear it right that you're planning to retain most of the fourth quarter distributable earnings? And then if you could provide the quarter-end cash balance and what you plan to do with the cash you're going to hold.

Sure. So we are filing our 10-Q this evening and we will have the full balance sheet in the Q that you can review tonight. Our cash, as we've been sharing over the past few quarters, we haven't set forth the exact amount that we plan to withhold and the amount we plan to distribute. We have said that we plan to strengthen our balance sheet and we use that balance sheet strengthening for purposes of debt repayment, [seeking] new business opportunities and considering increased dividends or share repurchases, in addition to providing additional optionality to the business.

Okay. And just on the language, is it right that you're going to -- you're planning to retain most of the fourth quarter [TE]?

I wasn't specific. We are focused on strengthening our balance sheet and we will evaluate what that means in the fourth quarter once we determine the full amount of our earnings for the year. As we don't know what our full year incentive will be until the fourth quarter, it's hard to be specific on an exact amount today.

Okay. And the other one on the credit business. I think assets are up somewhere around 20% from last year. What's the margin upside for that business as you build it out? And what are some of the things you're planning outside of the CLOs?

We haven't announced specific plans and we explore opportunities in a normal course. The margin opportunities, obviously the CLO business is a management fee business that we believe has very attractive margins to the company, both on the investment that we make with regards to risk retention as well as just the management fees contributed for each CLO that we raise. We do not disclose the specific margin of that business.

And maybe I'll comment on your question about future plans for growth in that area because we do have many, many plans in that area. Our focus historically, as you've seen, create the best investment platforms, be opportunistic as well as strategic. So developing a CLO business was more strategic. The opportunistic credit funds, obviously were more opportunistic. Something like real estate credit, I'd argue, falls somewhere in the middle with strategic in terms of developing the real estate business and the structured credit business and then opportunistic in terms of the opportunity. And so one of the structures of our firm is to have all these different business units working together to find solutions, think of solutions for clients, think of opportunities for clients. They look to us not only to invest capital for stable, consistent, strong risk-adjusted returns, but they look to us for unique investment opportunities as well as solutions.

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

This is Jack Keeler filling in for Bill. First one for Dan. There is a number of articles out in the hedge fund industry suggesting there is a shift toward a lower management fees and potentially higher performance fees. Have you put any thought into this for your products and -- are fees something that you would look at to potentially drive gross sales, given that your performance is good, but it seems like gross sales have kind of [sold] out here.

So Jack, I think that you know a year ago, we reduced management fees across a number of our multistrategy clients. And we believe this was a one-time event to rightsize our fees to the industry. At this time, we don't anticipate any additional broad fee cuts. But we certainly work with clients in exchange for size and duration. And with regards to the incentive fees, at this time, we don't anticipate any change to our 20% incentive fee.

Got it. And then, Alesia, follow up for you on expenses -- seems like you're tracking towards -- I think you got it to ending out the year at the low end of your previous guidance for 2017. Any early read into how we might think about expenses for 2018?

We will be providing that guidance on the fourth quarter 2017 earnings call.

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

This is Will Cuddy filling in for Ken. So we have MiFID II coming into effect in January. How are you thinking about the impacts of MiFID II for Och-Ziff?

We've been preparing for MiFID II over the course of 2017, and at this time, do not believe it to have a material impact to our business. But we will be in full compliance by beginning of 2018 and have been working towards updating all of our practices and policies and procedures associated with compliance.

Okay. So my second question is the longer-term AUM disclosure has multistrat long-term AUM declining to $630 million, down from about $1.2 billion last quarter and $2.3 billion in 1Q. Can you please talk about the drivers of that -- those decreases quarter-on-quarter and from the beginning of the year? I mean, should we expect this to continue to trend downward, particularly for multistrat?

So as we've shared with you on past calls, we did see elevated redemptions on our multistrat business coming out of the settlement in 2016. As we shared with you, I believe, on the second quarter earnings call, we do believe that the investigation-related redemptions are largely behind us and going forward, we believe that redemptions as well as inflows in multistrat business will be largely reflecting industry trends as well as our performance. And as Dan shared with you earlier, we believe that our performance is the best indicator of flows and we are very proud of our performance year-to-date and we hope that this will lead to inflows at some point.

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

This is Daniel Jacoby filling in for Alex. Just taking a step back and bigger picture. Just given the increasing number of alternative managers looking to expand into the credit space seemingly, how are you thinking about the competitive landscape there on the credit size? And the opportunities that it represents?

Well look, that landscape has been extremely competitive with a number of very good firms before we started our dedicated products. Every day since we have, quite frankly, we have that in every area of our business. So you are correct that there are a number of very good firms. Our growth and performance has occurred against the backdrop of those very good firms and going forward, we know that a lot of our competition is extremely good and we welcome that challenge.

Your next question comes from the line of Jonathan Casteleyn with Hedgeye.

I want us to talk about the accrued unrecognized incentive fee balance. Obviously pretty strong growth here plus $30 million quarter-to-quarter. The language around this capital, though, talks about these are funds that are still within their 3-year commitment period. I was curious, though, that doesn't mean that it's a 3-year starting point from the date of reporting, correct? I mean these funds could be...

That is correct.

Okay. So is there any way to describe the duration that is left on these funds? I understand that they were initially under 3-year commitments but, I mean, if you think about a weighted average distribution schedule for these funds, can you describe any sort of duration there?

Yes. So in past quarters, we've shared with you that there are components of the accrued but unrecognized incentives that are deep in the money and could be crystallized at any point that our investment professionals deem it in the best interest of clients to harvest these investments. Which is to say, that they are contractually able to be harvested at any time. And we estimate this balance to be roughly $70 million of accrued but unrecognized incentives that could be crystallized at any point going forward. In addition from a timing perspective in the fourth quarter, we estimate approximately $14 million will contractually crystallize. This excludes the impact of any fund performance in the fourth quarter either positive or negative. With regards to the remaining balance, in our earnings press release in the exhibit, we do estimate that the average -- weighted average life of the (inaudible) is between 4 to 5 years.

I see. Okay. And then the drop-down to dividend from this distributable cash flow. Is this still under review with the broader firm policy? Or is this at a different distribution rate than what you're articulating for the fourth Q and into '18?

Our practice has always been that we will evaluate our distributable earnings and evaluate the needs of the company including debt prepayment, funding of new businesses, other working capital needs of the company. So I don't believe this is a broader change. What I'm sharing with you in the fourth quarter, though, is we do intend to focus, as our top priority, on strengthening our balance sheet.

Understood. Okay, great. And then, Dan, you called out, I think it was industry issuance on the CLO side, $6 billion in aggregate. I was curious as to what you think structurally is happening in the industry and is this rate of change terms? Is this a growth business in '18? Is it flat business? Is it sort of peaking out now with everything else?

The $6.1 billion, that's the total amount that we have raised or refinanced during 2017. It has been a robust year in general for CLO issuance. We think we've done extremely well. We think it's a combination of the 2 reasons I just mentioned: a market that has been receptive, a market that's created investment opportunities, and Och-Ziff performance generating very strong demand for our CLOs. We're hopeful that continues in 2018 and beyond.

Okay. So anything structurally? I mean, I know the markets are wide open. Is there any sort of -- are banks restructuring credit? Or is there anything schematically you think makes sense? Or has there just been a -- an open capital market schedule and that's reflexive and environmental specific?

Well, in terms of the CLOs themselves, our focus is new CLO issuance. We've recently expanded into Europe, so we think that's a big opportunity and refinancings. To the extent there are other things to do in credit, we are focused on them and some of them could relate to CLOs, but more probably if other things occur, there will be new types of products.

Okay, makes sense. And then lastly, you talked about the fee cut in the fourth quarter of '16. I'm just curious when new money comes in the door, is that eligible for the prevailing rate in '16? Or was that just for existing clients and new money goes out more of a market rate?

It's highly dependent on the fund and the investor. So I can't answer that specifically.

Your next question comes from line of Robert Lee with KBW.

I just had one more fundraising-related question. So -- some of the other alternative managers have talked to raise some assets and kind of flexible separate account mandates. I believe several years back, you had something similar with the state of New Jersey. Can you maybe just update us on if those -- if you see much opportunity for Och-Ziff and pursuing more of those kind of opportunities? I know they are hard to come by. Or is it really kind of the core focus on just getting your -- the funds up and running, the CLOs. I was just trying to get a sense of your outlook for flexible separate account-type mandates.

We're focused on both. As a general matter, what the client is looking for is what the fund provides, then the fund is the better solution for the client. To the extent, I mentioned client solutions before. That's about dialogue -- that's generally about dialogue with clients about what they're looking to accomplish strategically. If clients of the right size and right capital duration commitment are interested in products such as that and they fit with our mandates and commitments and obligations to all of our other clients, it's something that we are very receptive to.

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

Thank you for joining our earnings call today. If you have any questions, please don't hesitate to give me a call. Thank you very much.

This concludes today's conference call. You may now disconnect.