JMP Group LLC
Q1 2013 Earnings Call Transcript

Published: 6 May 2013

[Andrew Palmer:]

[call starts in progress] …Q1 cash distribution. For US GAAP purposes we reported net income attributable to Apollo Global Management of $249 million for Q1 ended March 31, 2013, compared to $98 million for Q1 2012. Today’s conference call may include forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these statements and projections. We don’t undertake to update our forward-looking statements or projections unless required by law. We will also be discussing certain non-GAAP measures on this call such as economic net income and after tax economic net income per share which are reconciled to our GAAP net income or loss attributable to Class A shareholders and GAAP weighted average- [audio skips]

[Ray Jackson:]

…2012. I should note that in the past we also reported adjusted operating earnings which excluded profits recognized by JMP Credit on the sale or payoff of loans acquired in April, 2009. In the past, these profits were substantial though they are no longer material. For Q1, loan sale gains came to $0.2 million or less than $0.01 per share in earnings. However, those gains were offset by a loan loss provision of $0.9 million taken in connection with an impaired acquired loan, resulting in a net loss of $0.7 million or $0.01 of earnings. Because it is unlikely that there will be any gains on acquired loans in the future we are refocusing investors on operating earnings, and keeping with the metric used by equity analysts when publishing their estimates. Keep in mind, however, that we will experience ordinary loan sale gains and losses due to our ongoing portfolio management activities and those related profits or net losses are included in our operating net income. In Q1, JMP Securities contributed $0.05 to operating earnings, up from $0.04 from the prior quarter but down from $0.09 earned a year earlier when investment banking revenues were more than 25% higher. Harvest Capital Strategies earned $0.04, matching the number for Q1 2012 despite the lost revenues from New York Mortgage Trust and ex (inaudible) in 2013. JMP Credit produced $0.15, down from $0.21 from Q4 but a penny better than the result from Q1 2012. From an expense standpoint, pro forma compensation and benefits expense which excludes non-cash expense tied to stock-based awards but includes any deferred compensation as a percentage of adjusted net revenues was 52.4%. And the non-compensation expense ratio was 19.3% for the quarter. We expect our pro forma compensation ratio to be approximately 65% this year but it will vary on a quarterly basis depending on our revenue mix. With regards to our balance sheet on March 31, JMP’s recourse debt to total capital ratio increased to 44% due to our January notes offering; and our net cash and liquid securities per share was $2.11. Stockholders’ equity, all of which was tangible, was $125.3 million and tangible book value per share was $5.54. Adjusted tangible book value per share was $5.24, up from $5.15 at December 31. I’ll remind you that the accelerated amortization of the net liquidity discount on JMP Credit’s assets, which came to about $0.24 per share after tax for the quarter, will be completed this month after which the only remaining adjustment to book value will be the accelerated recognition of compensation expenses which must be deferred under GAAP. JMP paid a cash dividend of $0.035 in the quarter though repurchased only about 12,000 shares primarily due to an extended blackout period. We continue to make effective capital management a priority, balancing dividends and share buybacks with other principle investment activities. With that I’ll send things back over to Joe.

[Joe Jolson:]

Thanks, Ray. I want to outline our growth strategies in more detail, starting with JMP Securities and its Institutional Commissions business. Despite a long term sector downturn in institutional commissions that has been affecting our industry since 2001, JMP had been able to more than offset the decline through market share gains until about 2008 when our net brokerage revenues peaked at nearly $36 million. Since that time those revenues have fallen every year to less than $22 million for 2012, a market share of 36 basis points of the US institutional equities commission’s pie according to McLaughlin. Our five-year goal is to garner a 1% share which would represent a near tripling of our commissions business assuming a static operating environment. However, given that the commission’s pie will likely shrink in the future, a 1% share may be more realistic equating to a doubling of net revenues if we achieve our objective. To meet our goal we need to build our sales and trading presence in the greater New York marketplace and improve our corporate access product and its delivery while continuing at the same time to grow the number of companies under coverage by around 30% to 450 to 500 names. We must also continue our efforts to increase the institutional relevancy of the companies we cover from the standpoint of market cap as well as liquidity. In late February, Tom Wright joined us as Director of Equities to lead our Research Sales and Trading business from our New York office. Tom was previously Global Head of Trading at Sanford Bernstein, and of US Equity Trading and Sales Trading at Merrill Lynch; and started his career as a Sales Trader at Goldman Sachs. He’s already hired two very senior sales and trading professionals to lead our team in New York, and we’re excited about our renewed momentum in this business. With regard for our Equity Capital Markets activities, we continue to make progress at increasing our market share. Last year JMP Securities garnered 52 basis points of all US public equity underwriting fees according to Dealogic, up from 48 and 39 basis points in the previous two years respectively. We were ranked #7 by total transaction count in our four industry verticals compared to #8 in 2011 and #11 in 2010. While we expect to remain a top ten underwriter in our sectors [as well] as a significant increase in a number of financings, we will need to materially increase our average revenues per transaction in order to double our market share over the next five years. While this battle will be hard fought during that period, we’re optimistic that as our corporate relationships mature we will get the opportunity to lead manage a much larger number of transactions and to be a more senior co-manager of follow-on offerings. In Q2 thus far we have already book run two successful IPOs and are book runner of another IPO that launched this week. In addition to building our ECM business, we’re actively looking to grow and broaden our M&A business through the recruitment of additional Senior Bankers. In 2013 we’ve already added two such individuals and we would like to add three to four per year for the next few years assuming we can attract top producers who also fit well within our culture. If successful we believe we can grow our annual M&A revenues from the $10 million to $15 million range that it’s been over the last few years to $40 million to $50 million in the next five years. Harvest Capital Strategies manages alternative asset funds, making both our existing revenues and our growth outlook heavily dependent on performance. At March 31 we were managing roughly $620 million in five distinct US long-short equity strategies, including nearly $400 million by our Small Cap Team in two separate funds, the larger of which – the $300 million Small Cap Fund – has been closed to new capital for many years. Thus our AUM growth outlook will be primarily driven by our three Sector Funds, which totaled $220 million as of March 31, up 28% in the past year, as well as any new funds we may launch over the next five years. To help these funds access larger investors and earn an attractive return on investment, we have put in $78 million of our capital as of the end of the quarter, which provided a 3.3% gross return in Q1. The majority of our full fee-paying hedge fund assets were in Harvest Small Cap Partners, a fund that typically drives our carried interest fees but as much less of an impact on our investment income with only $1 million of JMP’s capital invested in it. In addition to planning the expansion of our hedge fund platform, HCS has been actively looking to launch additional private capital niche strategies. In 2009 we launched Harvest Growth Capital which is focused on buying secondary positions in successful venture-backed companies from early-stage investors and employees that are seeking liquidity. We have now raised two funds for this strategy which currently have approximately $100 million in total commitments. In 2011 we launched Harvest Capital Credit, a small business lender that had $42 million of AUM at March 31 and last week completed its initial public offering as a BDC. We are hopeful that this niche strategy which focuses on lower middle-market corporate lending can grow to $400 million to $500 million in assets over the next five years. In 2011 we also launched River Bank in partnership with New York Mortgage Trust. River Bank is an opportunity investor in commercial mortgages and mortgage-backed securities with a niche in the Freddie Mac K series for multi-family mortgages. At the end of the quarter River Bank had AUM of $115 million. Going forward we will continue to target the launch of one to two new funds per year for strategies which we believe have a sustainable edge and can manage upwards of $500 million in a three- to five-year period if successful. JMP Credit Advisors, which we acquired in April, 2009, along with $42 million of the subordinated notes at par value and $14 million of the mezzanine debt managed one CLO with just over $470 million in AUM at the end of the quarter. Substantially all of the windfall profits from this business have been generated from the financial returns on these securities although the platform itself has also been profitable and we believe is highly scalable. The excess profits from this investment will start to decline more rapidly in the second half of 2013 as we have now reached the end of the CLO’s reinvestment period. Our growth plan has long been to re-access the new CLO market as soon as it became possible for a smaller but successful issuer such as ourselves. We’re happy to report that JMP Credit Advisors closed on a $344 million CLO last week. The secured debt was priced with a weighted average coupon of three-month LIBOR plus 186. JMP retained $17.3 million or 73% of the sub notes in the deal. We hope to regularly access the CLO issuance market over the next five years with a goal of garnering more than $2 billion of AUM by December, 2017, and that compares to roughly $800 million today. Harvest Capital Credit, our CLOs and our Equity Capital Markets businesses, all provide financing to companies that are credit worthy in our opinion but frequently capital-starved as traditional lenders make it difficult for these businesses to access funds for growth. Thus our activities at JMP, while meant to create shareholder value, simultaneously contribute to the US economy and its continuing recovery. To help finance our growth plans we raised $46 million of 8% senior notes due in January, 2023. While the cost of the debt will be a drag on our earnings this year until the proceeds are fully deployed, we believe that lacking in a modest amount of long-term debt in the current low interest rate environment will prove to be of long-term benefit to our shareholders. In closing, I want to thank JMP’s 216 employees as well as our independent Board members for their continued dedication to our goal of making JMP the last great place to work on Wall Street. We look forward to reporting further progress in the execution of our growth strategies over the next three or four quarters. Operator, we’re now ready to open the line for questions.

[Operator:]

(Operator instructions.) Your first question comes from the line of Joel Jeffrey.

[Joel Jeffrey:]

Hi, good morning guys. Ray, we appreciate the comments you made about the comp ratio. I’m just wondering though, in terms of the hiring and whatnot, going forward how should we think about the absolute comp expenses? Are Q1’s numbers sort of indicative of how you’re thinking about it or should there be a sort of gradual build throughout the year?

[Joe Jolson:]

This is Joe. I think Ray said in his remarks that we’re currently estimating that the comp ratio will be 65% for the year. That would include the investment spending that we referred to in terms of hiring some of the people in Investment Banking, Sales and Trading and the like ahead of the revenue that they would generate. So a budget for that was included in Q1 but remember, it’s mix-driven so when you have a quarter where we have a high amount of investment income that is below its comp ratio of the various revenue sources – and in Q1 we actually had a decent amount of carried interest fees which have the highest ratio, so they almost balanced each other out. But I think for your modeling purposes it’s probably reasonable to just assume 65%.

[Joel Jeffrey:]

Okay, great. And then I know you’d made some comments before, and in the press release it talked about sort of negligible share repurchase in Q1. I mean was that more due to other things going on with the company? How should we think about the repurchase activity going forward?

[Joe Jolson:]

Every year in Q1 there’s not much of a window between when we report, we file our K and then we go into our blackout period in the middle of the last month of the quarter. So this year I think there was less than two weeks or something, so we have an order in a 10b5 plan, so it’s a passive order but it depends on the stock price. So once it’s entered it can’t be changed, so it has to be entered pretty much in the middle of December; in other words, since we didn’t buy a lot of stock in Q1 because of that, I think this quarter to date we’ve bought over 400,000 shares.

[Joel Jeffrey:]

Okay. Great, I appreciate the color there. And then just lastly, and I really appreciate the comments you made about how you’re thinking of growing the business. Just wondering though, I mean with a lot of other firms out there struggling can you just talk a little more about why you think recruiting and building organically presents a better opportunity than a potential acquisition?

[Joe Jolson:]

Yeah. We’ve looked at a lot of acquisitions since we’ve been public, and some from before we went public. While we’ll continue to evaluate and look, and while you never know what can happen, it just seems to be a bad fit for us in acquisitions given the expectations on the parts of the sellers and the willingness of other companies to pay a lot more money than we would pay for the same earnings or in some cases losses. So rather than continue to wait around for something to materialize we actually think that investing a much less amount of capital in our own businesses can get us to a higher earnings level over the next three years than we could through acquisitions. So we’re not talking about… Remember, we have a pretty good level of profitability and a lot of that’s coming from investment income. And so we’re talking about spending roughly $0.20 a share this year and maybe next year, so that’ll reduce what we otherwise would have earned but we’re not spending all of our earnings. We’ll still have close to a 15% operating margin – it might be 13%, 14%, 15%, still pretty healthy and would put us right at the top of the industry group and like I said, these are hiring people that we think will be highly accretive in year three, should be accretive in year two but highly accretive in year three. And a lot of M&A guys, it takes a year or sometimes 18 months to close the first deals that they generate on your platform so there’s a bit of a lag there that’s just the nature of the business. On the Sales and Trading side, there’s less of a lag but there’s still a little lag as they get acclimated to a new platform and get to understand the research product that we have and that kind of thing.

[Joel Jeffrey:]

Great, thanks for taking my questions.

[Operator:]

There are no further questions at this time.

[Joe Jolson:]

Okay, well we appreciate everyone’s interest again and we’ll look forward to updating you after next quarter. Thank you.

[Operator:]

This concludes today’s conference call.