JMP Group LLC
Q4 2014 Earnings Call Transcript

Published: 13 Feb 2015

[Operator:]

Welcome to JMP Group’s Fourth Quarter 2014 Earnings Conference Call. Please note that today’s call is being recorded. [Operator Instructions] I’ll now turn the call over to Andrew Palmer, the Company’s Head of Investor Relations.

[Andrew Palmer:]

Good morning. Here with me today are Joe Jolson, JMP Group’s Chairman and Chief Executive Officer and Ray Jackson the Company’s Chief Financial Officer. We are joined by Carter Mack, President of JMP Group and Mark Lehmann President of JMP Securities. Before we get started, I will note that some of this 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 uncertainties that could affect JMP’s future performance please see the description of risk factors included in our most recent 10-K. That said I’ll turn things over to our Chairman and CEO, Joe Jolson.

[Joseph Jolson:]

Thanks Andrew. JMP Group produced another good year in 2014 net investment income and our corporate costs. Our three operating platforms under record $0.60 per share an increase of 25% from the $0.48 per share earned in 2013. The strong results drove an 8% increase in our tangible book value per share to $6.26 despite the repurchase a [million] common shares of our stock at an average price of $6.58 during the year. Most of those shares were repurchased post September. In January, we converted to a publicly traded partnership and declared three monthly cash distributions of [$0.03.5] per share for the first quarter of 2015 which represented a 50% increase over our most recent quarterly dividend which was paid last November. We anticipate that our payout ratio maybe between 50% and 70% of operating earnings this year compared to roughly 30% last year as it turned out. Ray Jackson will provide a few financial highlights and Carter Mack will discuss JMP Securities performance before I come back with some of my other comments. Ray.

[Raymond Jackson:]

Thanks Joe. Adjusted net revenues were $44 million for the quarter and a record $178.9 million for the year up 16%. Operating net income was $4.7 million or $0.21 per share for the quarter, for the year the total was $16.6 million or $0.73 per share, an increase of 23%. From an expense standpoint we focused on compensation and non-compensation ratios. Our adjusted compensation ratio excludes hiring cost related to strategic growth initiatives as well as hedge fund incentive fees. Since the majority of these fees is passed through to the investment teams when earned. For the quarter this ratio equaled 55.6% for the full year it was 62.4% versus 61.7% for 2013. On the same basis, a non-compensation ratio would have been 21.4% for the quarter and 18.6% for the year. Our adjusted operating margin pre-tax operating earnings over adjusted net revenues was 15% for 2014 compared to 14.2% for 2013. Given the adjusted compensation ratio of 62.4% just detailed, our adjusted operating margin would have been 17.7% for 2014; a number which we believe better reflects the core profitability of our company. From balance sheet perspective our recourse debt to total capital ratio was 42% at year end. Net cash and liquid securities equaled $1.43 per share and net invested capital, which includes less liquid investments was $5.07 per share. Stockholders equity all of which was tangible was approximately $133 million with book value per shares at $6.26 as Joe previously stated. With that I will turn things over to Carter.

[Carter Mack:]

Thanks Ray. JMP Securities had another record year in 2014 with the adjusted net revenues of $108.1 million up 9% from $99.1 million in 2013. Operating net income at JMP Securities in 2014 was $10.8 million or $0.48 per share up from $8.9 million or $0.39 per share in 2013. Driving this year-over-year increases was another record year for JMP Investment Banking business with $81.1 million of revenue up 9.3% from $74.1 million in 2013. JMP also experienced the second consecutive year of annual growth in its institutional brokerage business after management changes and strategic repositioning of that business starting in the middle of 2013. Brokerage revenues were $26.9 million for 2014 and 9.3% increase from $24.6 million for 2013. I am going to spend a minute talking about some of the highlights of JMP Securities in 2014, which included continuing market share gains in our equity capital market business, a meaningful increase in average revenues from transaction in our overall investment banking business and strong performances in initial public offerings in our M&A business. We believe that these areas should continue to be growth drivers in 2015. JMP Securities continue to benefit from more accepted U.S. equity capital market conditions in 2014. And once again, we were able to make significant market share gains in our ECM business. JMP Securities market share was 1.09% of all U.S. equity underwriting fees in the firms for targeted industries in 2014 compared to 90 basis points in 2013 and a significant increase from our 27 basis point market share during the height of the financial crisis in 2009. These market share gains were direct results of our continued strategic focus on increasing our economics and co-managed deals and winning a larger number of re-managed and book run transactions. Our Investment Banking Group completed 161 transactions in 2014 and while this was down from 171 transactions in 2013, our average revenue per transaction was 504,000 in 2014 versus 434,000 in 2013. This 16% growth in average revenue per transaction once again highlights our success in increasing our economics in ECM transactions as well as the growth of our higher margin M&A business, where we had average revenue per transaction of 1.1 million in 2014. Of our total transactions, 115 transactions were public common equity offerings versus 113 in 2013, with JMP acting as a lead manager on 33 transactions up from 30 the year before giving full credit to co-managers, JMP Securities ranked number eight overall and number two among the boutique banks as an underwriter of U.S. common equity offerings in its four targeted industry verticals last year. JMP was well positioned to benefit from the substantial growth of the U.S. IPO market over the past couple of years particularly with our strong last life sciences franchise where we have seen record IPO activity in the last two years. In 2014, JMP acted as manager on 39 IPOs with the U.S. market share of 13.3% by deal count, up from 33 IPOs and 14.4% market share in 2013. Both 2014 and 2013 represented substantial jumps in our IPO business over the 10 IPOs and 6.9% market share we had in 2012. Overall, IPO revenues in 2014 were $20.5 million versus $12.7 million in 2013. We continue to see healthy IPO market in 2015 and JMP’s pipeline and public and confidentially filed IPOs currently consisted ten deals. Assuming the IPO window remains open we expect another strong year for JMP in the IPO market. Our M&A business also experienced very strong revenue growth in 2014 with $18.7 million of revenues from 17 transactions up 67.3% from $11.1 million from 12 transactions in 2013. We are optimistic about growth in our M&A business in 2015, given the continuing maturation of deal pipelines for the M&A focused bankers we hired in 2013 and 2014 and a favorable overall environment for M&A. With the continued focus on the product by our bankers across all four of our industry verticals, our current M&A mandates and engagements are at very strong levels. Joe, back to you.

[Joseph Jolson:]

Thanks, Carter. Our asset management related fee revenues rose 19% year-over-year to $13.1 million for the quarter and jumped 58% to $45.7 million for the full year. Incentive fees came to $27.4 million for 2014 versus $15.6 million for 2013. The majority of our hedge fund incentive fee opportunity resides with Harvest Small Cap Partners which had an outstanding year producing a net return to investors of over 32%. Total client AUM including sponsored funds from which we earn fees equaled $2.5 billion at the end of the year up from $1.9 billion a year earlier. Hedge fund client AUM including sponsored funds increased by 22% during 2014 to $908 million, at year end 37% of our AUM was in hedge funds and 63% was in private capital strategies. We currently manage $1.1 billion in CLOs through JMP credit advisors, $116 million in small business credits through HCAP advisors, $127 million in late stage secondary venture capital through Harvest growth capital and a $198 million in multifamily debt and equity investments through River Bank. In our corporate credit segment, we continue to concentrate on growing our AUM, as we have since the market for CLO new issues re-emerged in 2012. At the end of the third quarter we closed our third CLO with $370 million in assets. At yearend total assets under management at JMP credit as I mentioned was $1.1 billion that compares to $782 million a year earlier. Assuming that market conditions remain or are favorable sometime as we go through this year, we anticipate we will issue CLO-4. For the fourth quarter, we earned a return of 1.2% on our capital in our hedge funds. For the year the return was 7.4% which was a little below our annual target of 10%, but obviously substantially better than what we could earn in the money market return and approximating the cost of our capital allocated from our long term debt. Including principal investments our total return on invested capital was 3.4% for the quarter and 13.3% for the year down from 17.5% in 2013. However, the decline has been expected and communicated and is primarily due to two factors. One is a decrease in contribution from CLO-1 as it has been in repayment for close to two years. And two, was our decision to de- risk our balance sheet somewhat from the potential of higher interest rates through the issuance of long term fixed rate debt at 8% versus our credit line which we can borrow at LIBOR plus 225. While we routinely assess opportunities to deploy our dry powder, we remain patient and highly selective in today's new zero short term interest rates environment. Even so, net investment income covered our corporate cost last year by $0.13 a share including the $0.10 per share cost from the issuance of the 48 million of new debt in January and $0.02 per share cost of converting to a publicly traded partnership. In August we announced that our board of directors had approved the potential transaction through which JMP Group would convert from a corporation into a limited liability company and be taxed as a partnership. In December, the stockholders of JMP Group Inc. voted to approve the transaction and as of January 1, we have been operating as a publicly traded partnership. Initially, we intend to distribute approximately 50% to 70% of our operating earnings through cash dividends while retaining remainder to invest in our growth and potentially to buy back stock. The range is wide and mixed driven to a large extent and we will look to distribute essentially all of the earnings at the PTP level from the investments we transferred in January, which were primarily CLO equity and hedge fund LP interest. In addition, we will likely dividend to the PTP a percentage of the fully taxed earnings generated each year at JMP Securities, JMP Credit and Harvest Capital strategies. In the process of converting to a PTP, we became aware that many of our longer term institutional shareholders held our stock in tax exempt funds and as such could not continue to own JMP post conversion. As a result our board decided to accelerate our 18 months stock repurchase plans which led us to repurchase nearly a million-and-a-half shares in the fourth quarter of this year at an aggregate cost of almost $10 million. In addition, members of our board and senior management stepped up to acquire more than 900,000 shares at cost of $6 million all of this was an open market transactions with an intent to help facilitate a smoother transition which has now been completed. While 2014 was a busy year of corporate action, we did not take our eye off the ball operationally as best illustrated by continued market share gains and by record platform earnings per share, which as I mentioned earlier rose 25% to $0.60 per share. Our five year plan continues to be to double our market share through year end 2017 and we are encouraged by our progress thus far. Organic growth through market share gains over multiple years is always challenging especially in a business such as ours, which has many established competitors, as in most things our tradeoffs that management must carefully consider. For us it is always balancing rapid growth with acceptable levels of profitability. We are very proud that we have successfully met this challenge for most of our 16-year history. 2014 was no exception with top line growth of 16% of already big up year in 2013 and an adjusted operating margin of 15%. Our $0.73 a share also exceeded the consensus analyst estimate of $0.66 for the year and we are pleased to say that we have been able to meet or exceed the quarterly EPS consensus estimate in 30 of the 31 quarters that we have been in public company. The only quarter that was not true was the September of 2008 quarter. In closing, I want to thank JMP’s employees and independent board members for their effort and dedication which produced excellent results in 2014 and positioned us for continued growth and even more success in the future. Operator we would be happy to open up the line for questions.

[Operator:]

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

[Joe Janssen:]

Good morning guys, this is actually Joe. First off, congratulations on a good year.

[Joseph Jolson:]

Thank you.

[Joe Janssen:]

On the brokerage business up 9% in 2014, which I think is very impressive given one of the changes you internally went through as well as, I think, the market still relatively challenged. Just some color on how that business has been trending, maybe kind of sea kick in the Q1 kind of year-to-date maybe versus last year and what the new team as they continue to ramp up assuming that still a challenging market, do you think 9% to 10%, I don’t want to put words in your mouth, but you think 9% to 10% growth in ’15 is achievable?

[Joseph Jolson:]

Mark Lehmann is here, who runs JMP Securities, so I’ll let him answer that.

[Mark Lehmann:]

First of all, thanks for the question. Yes, I thought the result in a ever evolving market for 2014 was one - we had somewhat higher expectations what we are proud of I think 2015 has started off a little tougher than I think, we had liked some of the issuance that we would have expected which also drives some of the conversations we have on our accounts, just feels little bit backend loaded for the first quarter. But it’s a business where we made a lot of investments as you know over the last 18 months, we would like our personnel, but it’s a very competitive business and some of the conversations I have had with Mark here and some of our competitors that continues to evolve as you know. But, we really like our team. I think our short term goal given our capital markets business will increase, but it is a grind every single day. I think it was somewhat, the first quarter was somewhat hurt by the number of days in the North East where basically Boston and New York was shut. Boston as you know even up till today is still a tough place to get to work every day at least for the people I talk to constantly and I think that you will hear some of that chatters to first quarter of us. But it has it’s - we expect an up year and we are working really hard towards that but there has been some challenges in the first six weeks and its quite early.

[Joseph Jolson:]

Hi Joe, I would add to that we would expect a similar kind of top line growth rate if not hopefully accelerating as you go through 2015.

[Mark Lehmann:]

I heard a great line from one of our issuers in an event we had in New York, where the team Boston was shut, it’s not for the first time ever, multiple days and he actually shut his business, the school was open but the business was closed. First time in the history of his working career, so you know how challenging the weather has been. So it’s been just kind of a core keys first six weeks, but thanks for the question.

[Joe Janssen:]

Sure. So, it sounds like Q1 probably year-over-year down, but then gradually you would expect that to increase as time goes down, is that fair?

[Joseph Jolson:]

You know it’s still, we only have one month of the three months Joe, so I wouldn’t want to give you any color but certainly the weather played a part early in the quarter. But, people might make up for that later in the quarter, so we will just have to see. But I think that if you look at the quarters last year, the first quarter was our best quarter last year which is just kind of unusual in that business so it might be more of a normal quarterly pattern where business kind of improves into the second quarter. The summer is little slower and then has a good fourth quarter that’s kind of the typical pattern, for some reason the last year's first quarter was unusually good as a percent of the total year.

[Joe Janssen:]

Okay. And then, just curious how many senior analysts you have now and kind of number of companies under coverage and how much more capacity do you have without having the senior analysts?

[Joseph Jolson:]

You know, we have roughly 22 senior publishing analysts with fully staffed associates and we cover about 450 companies. So, one of the things we’ve tried to do over the last few years in addition to increasing and maybe upgrading our distribution of the research particularly in New York was to increase the number of companies under coverage as well as the relevancy to institutional investors and relevancy means less micro cap and more kind of mid cap or the higher end of small cap stocks for us. So, I think we have done a good job of rolling out that product and now over the next couple of years we will try to continue to grow that but it's really just leveraging that product both in investment banking as well as in the commissions business.

[Joe Janssen:]

And then, one last question I will jump back in queue. Any advisory down in the quarter but obviously up almost 2x in 2014 versus 2013, it sounds like that business is going strong for you. Maybe just instead of saying hey what is 2015 shape up it’s a difficult question to ask, but maybe just talk about what you are seeing in the pipe maybe first half of 2015 obviously it sounds like the areas are strengthened in healthcare, tech and real estate and maybe just referencing how that compares up to where you were at last year this time?

[Joseph Jolson:]

I will have Carter answer that one, if you can.

[Carter Mack:]

Yes. We don’t really talk in detail about pipeline on the M&A side, but couple of comments on the M&A market. I think the M&A market is pretty good right now. It's improved steadily over the last couple of years and I think you have seen that obviously with a lot of the independent M&A boutiques that have reported. We have gone out and hired some bankers that specifically are focused on the product and I think that’s starting to pay off and I would say that the pipeline looks better at the beginning of this year than it did at the beginning in the last year and it's more diverse across different industry groups and there is a nice mix of business there. So, I am always hesitant to say too much because M&A deals are notoriously tricky to close, but we forget about the business and I think the result we have last year wasn’t a record year in M&A for us, so we know we can drive it to a bigger part of our revenue than we did in 2014 and it's spread across I think in technology where we’re starting to see really nice pipeline in healthcare and healthcare services, in real estate and they are hopefully picking up in big.

[Joe Janssen:]

Okay. Great. Thank you guys.

[Joseph Jolson:]

Okay.

[Operator:]

Your next question comes from Joel Jeffrey with KBW. Joel your line is open. Joel your line is open. Joel un-mute your line. There is no response from Joel's line. So there are no further questions.

[Joseph Jolson:]

Yes, thanks operator and we are around today for any follow-up questions. We appreciate the interest and we are pretty excited about the outlook not just for this year, but the prospects of going out and attracting a whole new institutional investor base as we go through this year that can own publicly traded partnership structure. So, we will look forward to updating everyone in late April on our first quarter. Thank you.

[Operator:]

Thank you ladies and gentlemen. This concludes today's call. You may now disconnect.