JMP Group LLC
Q2 2019 Earnings Call Transcript

Published: 26 Jul 2019

[Operator:]

Welcome to JMP Group's Second Quarter 2019 Earnings Conference Call. Please note that today's call is being recorded. [Operator Instructions]. I will now turn the call over to Andrew Palmer, the company's Head of Investor Relations. You may begin.

[Andrew Palmer:]

Good morning. On the line with me today are Joe Jolson, JMP Group's Chairman and Chief Executive Officer, and Ray Jackson, the company's Chief Financial Officer. We're joined by Carter Mack, President of JMP Group; and Mark Lehmann, President of JMP Securities.Before we begin, please note that some of the morning's comments may contain forward-looking statements about future events that are out of JMP's control. Actual results may differ materially from those indicated or implied. For a discussion of the uncertainties that could affect the company's future performance, please review the risk factors detailed in our most recent 10-K.With that, I'll turn things over to JMP's Chairman and CEO, Joe Jolson.

[Joseph Jolson:]

Thanks, Andrew. We had a disappointing second quarter due to lower-than-expected investment banking revenues. However, the month of June was more in line with our expectations and given our current transaction pipeline, we're cautiously optimistic about our prospects for a strong second half of 2019. We continue to invest the material percentage of our earnings to grow our advisory business organically, hiring 3 M&A-focused managing directors so far this year.We've also made good progress in simplifying our balance sheet by reducing our investment portfolio and retiring long-term debt. In the second quarter, we saw our senior equity in our two loans recent collateralized loan obligations at relatively attractive prices, using the proceeds to help finance the self-tender offer for $1.8 million or about 9% of our shares in June, and the retirement of $11 million of our 8% Senior Notes in July. Even though we are halfway through the year, I want to provide an update on our 2019 plan. From a financial perspective, we've gotten off to a fairly slow start at JMP Securities with capital market revenues, which include our net brokerage revenues down 39% year-over-year to $28.3 million for the first half. Much of the drop-off can be attributed to especially weak first quarter, which was affected by the partial government shutdown and the closure of the SEC.In the second quarter, capital market revenues increased 50% sequentially and results for the month of June return to expected levels. The underlying strength in the U.S. equity market also bodes well for our backlog of potential IPOs in the technology and health care sectors. In the second quarter, we've participated in 6 IPOs versus just 2 in the second quarter. Our strategic advisory business should also play a bigger role in the strong second half potential performance.Our second quarter advisory revenues of $5.4 million outpaced those from the prior quarter and the year-ago quarter, but represented just three closed deals, while we have a record number of mandates in our pipeline. We continue to focus on increasing the revenue and earnings power of our M&A practice, hiring three more senior bankers since March all with long track records of success in the area.In April, we added a managing director to our Life Sciences Group, and in June and July, we added two managing directors with and the software experience. While we traditionally have been strong in both health care and technology M&A, we've made it a strategic imperative to deepen our capabilities and expand our market share in this highly competitive, but high-margin business. We know it's a zero-sum game for us, but we believe we can continue to gain market share by establishing JMP Securities as a more recognizable brand in the middle market and a more sought after strategic adviser to growing companies.We were also carefully monitoring the recent wave of industry consolidation and evaluating growth opportunities that can emerge from it, including the prospects of adding another industry vertical to our mix. The recent acquisitions of two of our full-service competitors, Leerink Partners late last year and Sandler O'Neill, more recently at attractive revenue and tangible book value multiples have not gone unnoticed by us, but the stock market has exhibited an apparent lack of interest.Given our strategic decision in March of this year to sell a controlling interest in our corporate credit platform in order to facilitate more rapid growth of that capital intensive business, we believe that we will need less than $100 million of capital longer term to execute on our growth plans of our other businesses. And some of that funding will likely take the form of debt as is now. Currently, we have $150 million of long-term debt and equity capital. Consequently, we will continue to evaluate the return of capital to our shareholders as well as the retirement of more long-term debt as we harvest our investment portfolio going forward.Turning to our asset management business, the first half of the year modestly exceeded our operating plan as we successfully executed on our strategic goal of materially simplifying the JMP story, spinning out both hedge fund partners and small-cap partners in our corporate credit business. Looking ahead, we are focused on growing our existing fund strategies with extra efforts focused on those that are synergistic with the intellectual capital across the broader JMP platform. Mainly, venture capital, real estate and private debt and equity capital. At the end of the second quarter, these strategies totaled of about $1.8 billion, which includes our 45% ownership still at the corporate credit business now called Medalist compared to $1.7 billion at the end of 2018.We are currently in the market of raising money for JMP Realty Partners and expect to officially launch Harvest Growth Capital III later this quarter. We are targeting total subscriptions of somewhere between 75 million to 100 million for each of these 2 funds in the next year. Our platform costs have been rationalized such that revenue growth should require a little in the way of additional resources resolving improving profitability if we meet our growth objectives.We are also evaluating partnership opportunities with a few venture capital firms, which could further enhance the development of the strategic area for JMP. In summary, we anticipate to return to more normal levels of profitability at JMP Securities in the second half of this year as well as continuing progress across our remaining fund strategies, which would support more consistent and growing contributions from asset management in the future.As mentioned earlier, we also made progress towards our longer-term capital goals by decreasing our investment in CLO securities and accelerating the repurchase of our shares in the second quarter. We also initiated the partial redemption of certain outstanding Senior Notes, which took place in July. In May, we sold our senior equity in 2 CLOs now managed by Medalist Partners, reducing our exposure in the asset class and using the proceeds to help finance the tender offer for our shares in the reduction of our long-term debt. Just a quick recap of some details on this. We've self-tendered for 3 million shares in May and ended up repurchasing 1.8 million of them at $3.95.When counting other routine buybacks during the period, we repurchased almost 2 million shares in the second quarter at a total cost of $7.8 million. The tender offer was immediately accretive adding $0.06 a share to adjusted book value though this effect was more than offset by the combination of the operating loss for the quarter and a negative fair value adjustment to the junior equity, we continued owning our 2 most recent CLOs, which cost us about $0.11 a share in the quarter. In June, we announced that on July 18, we would redeem $11 million of our 8% Senior Notes that come through in 2023. With the transaction now completed, we are left with $75 million face value of notes versus nearly $97 million at the time of issuance, $50 million of which are 7.25% coupon due in 2027 $25 million still at the 8% coupon due in 3.5 years. Our desire is to reduce our long-term debt to less than $50 million over the next two years if we are successful and opportunistically harvesting our existing investment portfolio currently at about $120 million, or 51% of our total assets. And these monies are invested for a return that shows up in our principal activities and is primarily in our fund strategies.As we have previously discussed at length, we elected to be taxed as a C-corp at the start of this year giving us the opportunity to retain earnings, while also using some of our capital to invest in growth and to repay long-term debt. We plan to use at least $5 million of cash earnings each year to redeem these outstanding Senior Notes. Nevertheless, we remain committed to providing shareholders with a regular quarterly dividend. Our first quarter payout of $0.04 a share was based on our best guess of about 50% of this year's normalized operating earnings.We'll announce our second quarter dividend in the next week. As always, I want to thank our employees and independent directors for their hard work and dedication to our company.I look forward to reporting on our progress in our next earnings call this fall. Operator, with that, I'd be happy to answer any questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Alex Paris from Barrington Research.

[Alexander Paris:]

I've got a couple of questions. First of all, you've done a lot over the last 6 to 9 months. To simplify the story, return capital to shareholders, repay your debt, yet the environment is really tough for both banking and brokerage. What gives you optimism regarding the second half? I think, you said that June investment banking was more in line with plan and your pipeline is attractive?

[Joseph Jolson:]

Well, I think that we have a number of IPOs -- we did 6 in the first -- or in the second quarter up from two and there are some -- at that level or higher expected in Q3 assuming market conditions stay like they are right now. So I think, we think we have a higher percentage of economics, I think, in those deals that we did in the second quarter. So I think that's one thing, that we're hopeful to happen. If they don't, happen in Q3, hopefully it will happen by year-end. We also, -- when I mentioned in the second quarter, even though we did over close to $5.5 million of revenues in the advisory business, it was only three deals, where M&A is difficult to gauge closings, there's lots of factors that can push these things out a month or two.And we have a reasonably good pipeline to close, we think, this quarter and in the year-end, I think you may remember, last year, our regard to M&A year was heavily late into the second half of the year too. The 4 M&A bankers that we hired last year, for instance, takes a while to -- we made an investment in hiring those people is roughly 20% of our pretax earnings last year as a firm. It takes a while, they walk away from an engaged pipeline, and it takes 6 to 12 months to rebuild a pipeline on our platform and then to start to close deals. So the one we hired the most recently has been here a little bit more than a year now. So looking at those 4 people as a vintage, they have a pipeline of engaged transactions as well roughly $10 million.And we were hoping that a chunk of some of that closes by the end of the year. Anyhow, those are the kind of things. Now we've hired 3 more bankers that probably we're hoping that contribute to this year's revenues, but we're not counting on it. But a year from now, maybe by the second quarter of next year, we'll have a similar type of pipeline that can be accretive in the second half of the year. So we have made those investments, and we're hopeful that things are looking like we made for the most part pretty good decisions on hires, and we're looking at building that business, Alex. So hopefully that gives you some sense of why we think it would be a stronger second half.

[Alexander Paris:]

Definitely appreciate that. So if I have the numbers straight here, so your advisory produced revenue of $10.5 million in the first half, and you said you have engaged transactions on the M&A side of another $10 million, that could potentially close in the second half?

[Joseph Jolson:]

No, no, that's just four people that we hired last year. I don't want to -- we normally don't get into the actual details of that, but our pipeline is quite a bit higher than that.

[Alexander Paris:]

Got you. You think you got a shot at last year's number? I think you did 22 deals producing revenue of $33.4 million strategic advisory based on your pipeline in the market?

[Joseph Jolson:]

Yes, last year was a record. Thanks. Last year was a record year. I think that our budget for this year was to be in line or maybe a little better. Obviously, the first half has had less closings than we expected, but we haven't lost any of that pipeline. So we'll see what happens, but I think that we haven't given up the goal of besting last year's number.

[Alexander Paris:]

Okay. Great. And then, I guess, just one other question. Brokerage revenue, down 14.5% in the quarter. That appears to be kind of the worst quarterly decline -- a year-over-year decline in some time. In fact, in the first quarter, it was down 2% rate or so, 2% or 3%. What are your thoughts regarding the second quarter institutional equities business and then your outlook for the rest of the year?

[Joseph Jolson:]

I think it was a tough comparison year-over-year. I think last year's second quarter, if you recall, had a pretty high VIX that occurred. There's a lot of market volatility in the first and second quarter, and I think that just general institutional trading -- active trading was higher. So I think it was a difficult year-over-year comparison just for the compare. And I think that the underlying trend based on kind of normal -- the typical secular decline that's been going on for a while in the industry and the more recent MiFID II impacts that are kind of lapping year 1 now. So we're continuing as an industry to see negative pressure from that into year 2. But if we would expect for the year, we did at the beginning of the year that brokerage revenues might decline in the high single digit to 10% range. So it's still a year-to-date in line with that and is now 9% year-to-date, but particularly the year-over-year compare was easier in Q1 and harder in Q2.I don't see any more questions. Is the operator on there?

[Operator:]

There are no further questions. You may proceed.

[Joseph Jolson:]

Yes, thank you, guys for your interest, and we look forward to giving you an update in three months.

[Operator:]

This concludes today's conference call. Thank you for your participation. You may now disconnect.