Sculptor Capital Management, Inc. (NYSE:SCU) Q3 2022 Earnings Call Transcript November 8, 2022
Sculptor Capital Management, Inc. misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.19.
Company Representatives: Jimmy Levin – Chief Investment Officer, Chief Executive Officer Wayne Cohen – President, Chief Operating Officer Dava Ritchea – Chief Financial Officer Ellen Conti – Head of Corporate Strategy
Operator: Good morning, everyone, and welcome to Sculpture Capital’s Third Quarter of 2022 Earnings Conference Call. At this time all participants in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. . As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ellen Conti, Head of Corporate Strategy at Sculptor Capital.
Ellen Conti: Thanks Doug. 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 Dava Ritchea, 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 Sculpture 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 financials 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. Today, we reported a GAAP net loss of $22.5 million for the third quarter of 2022 or $0.91 per basic and per diluted Class A share. Our distributable earnings were $618,000 for the third quarter or $0.01 per fully diluted share.
Additionally, we declared a cash dividend of $0.01 per Class A share. All earnings metrics discussed by both Jimmy and Dava will be on a non-GAAP economic income and distributable earnings metrics. I will now hand the call over to Jimmy.
Jimmy Levin : Thanks, Ellen. 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 that’s the first time this has happened in over 30 years. What that has done is it’s made year-to-date performance across all asset holders, generally one of the worst on record. If you 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 financial crisis style events such as the COVID crisis or the global financial crisis.
And so against that, we are starting to see or have begun to see dislocations, spread widening and investment opportunities almost 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-based financing markets, all types of different spread environments and spread markets, what used to offer mid-single digit yields, now generally across the board offer what look 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 best opportunity. Those are two things that have been part of our DNA forever and that we tend to be able to capitalize quite well on.
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, and these truly are some of the best investment opportunities that we really ever see apart from those moments of acute crisis, which 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 of exceptional relative outperformance here. Again, against pretty much everything within the credit and fixed income world, and from that position of strength now against a backdrop of very wide spreads, very high rates, very significant complexity premier are now in a position to deploy capital fairly 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 resorts, 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, etc. and so our existing 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 de 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 relative outperformance sets 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 that’s what allows us to demonstrate our skill set, largely protect capital and set up the opportunity sets of the future. In terms of the impact of all of this on the flow side or the business side, I’d 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 and this level of markdown in a 60-40 portfolio that generally slows almost all institutional activity. I’d 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 are 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. On our adjusted net assets, so moving to the balance sheet, largely unchanged quarter-over-quarter, modest DE offset by the continued buyback. Obviously 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 every day moves slowly.
Having that balance sheet that we have today, in times like this we’re remembering why we spent years and years building that balance sheet back up, because it is allowing us to again play defense to weather what are very tough market conditions, and still allow us to do opportunistic things like continue a buyback program at levels that we think are very attractive 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 Dava.
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Dava Ritchea : Thanks, Jimmy, and good morning everyone. Before we jump into our earnings in 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 $618,000 or $0.01 per fully diluted share. On the revenue side our management fees trended lower for the quarter as AUM declined. This was largely driven by fund performance in our multi-strategy funds that occurred during the first half of the year. On multi-strategy funds, we earned management fees on NAV, which includes the impact of performance. So when NAV declines, we see a decrease in our management fee without necessarily a change to our fixed expenses.
The reverse also happened in periods of strong performance, pushing up NAV and corresponding management fees. Importantly, the management fee decline was not from elevated outflows as redemptions remain normalized throughout the year. This quarter, we had modest incentive income driven by realizations in our real estate funds. Our largest quarter for incentive income tends to be in the fourth quarter when our annual funds crystalize. 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 bonus and GA&O remain relatively flat to the prior quarter. Given the incentive income from real estate for the quarter, we recognized 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 were $306 million for the quarter, which is equal to our cash plus investments in funds and CLOs 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 this. 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 936,000 shares at an average price of $9.34 for a total of $8.7 million.
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 $0.01 per Class A share for the third quarter. In the fourth quarter we expect to true-up our dividends 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 in 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 funds and our corporate balance sheet.
With that, I’ll hand the call over to the operator and open it up to any questions.
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