Silvercrest Asset Management Group Inc.
Q4 2014 Earnings Call Transcript

Published: 13 Mar 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Silvercrest Asset Management Group Inc.’s Fourth Quarter and Year-End 2014 Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. Before we begin, let me remind you that during today’s call Silvercrest will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts, including statements regarding future events and developments, and Silvercrest’s future performance, as well as management’s current expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements. These forward-looking statements are only predictions based on current expectations and projections about future events. These forward-looking statements are subject to a number of risks and uncertainties, and there are important factors that could cause actual results, level of activity, performance or achievements to differ materially from the statements made. Among these factors are

[Richard Hough:]

Thank you very much. Silvercrest successfully obtained meaningful new assets contributing to firm’s organic growth for the fourth quarter ending December 31, 2014 along with increased revenue. Our fourth quarter represented the sixth straight quarter of positive organic growth generated by our new ultra-high net worth and institutional business. And it’s actually the 11th out of 12 quarters with positive organic flows to the firm. The firm’s relationships importantly increased to 538 as of December 31, 2014 up from 483 as of December 31, 2013. The firm’s total assets under management increased to $17.9 billion as of the year-end from $16.4 billion as of the third quarter of 2014, and up from $15.7 billion as of year-end 2013. Of that total, discretionary assets under management, which you may recall drive revenue grew to $11.6 billion as of December 31, 2014 from $10.1 billion as of December 31, 2013. We are quite pleased with the execution of our firm’s business strategy, including the pace of continued organic growth in our high net worth business, strong institutional asset management growth and the increased visibility of the firm’s prestigious brand. With that, I’ll turn the financials over to Scott, and then we’ll be taking questions.

[Scott Gerard:]

Thanks, Rick. As you may have read in our earnings release for the fourth quarter and year-end, discretionary AUM as of December 31, 2014, just to emphasize, was $11.6 billion and total AUM as of December 31, 2014 was $17.9 billion. Revenue for the quarter was $17.7 million and reported consolidated net income for the quarter was $2.7 million. Again, as a reminder, please keep in mind that the results of operations and cash flows for the year-ended December 31, 2013, include those results of operations and cash flows of our accounting predecessor, Silvercrest L.P. Commencing with the third quarter of 2013, we began reporting earnings attributable to Silvercrest Asset Management Group Inc., which represents our Class A shareholders. Also commencing with the third quarter of 2013, we began reflecting partner incentive payment accruals as compensation expense. Historically, these incentive payments were recorded as distributions when paid. Looking at the quarter, again, revenue for the quarter was $17.7 million, representing approximately a 3% increase over revenue of $17.2 million for the same period last year. This increase was driven primarily by growth in our management and advisory fees as a result of increased AUM. Expenses for the fourth quarter were $14.9 million, representing approximately a 3% decrease from expenses of $15.4 million for the same period last year. This decrease is primarily attributable to decreases in general and administrative expenses of $0.6 million. G&A decreased primarily because in the fourth quarter 2013 a charge was taken for payments to be made to a relative of our former CEO. Reported consolidated net income was $2.7 million for the quarter, as compared to $4 million in the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the fourth quarter of this year was $1.1 million or $0.15 per basic and diluted Class A share. Adjusted EBITDA, which we define as EBITDA without giving effect to equity based compensation expense and other non-recurring items, but inclusive of the effect of partner incentive payments was approximately $5.8 million or 32.5% of revenue for the fourth quarter, compared to $4.5 million or 26.3% of revenue for the same period last year, meaning 2013. Adjusted net income, which we define as net income without giving effect to non-recurring items, but inclusive of the effect of partner incentive payments and income tax expenses assuming a corporate tax rate of 40%, was $3.1 million for the quarter or $0.25 per adjusted basic and diluted share. Adjusted earnings per share is equal to adjusted net income divided by the actual Class A and Class B shares outstanding as of the end of the reporting period for basic adjusted EPS and to the extent dilutive we add unvested deferred equity units and performance units to the total shares outstanding to compute diluted adjusted EPS. Looking at the year, revenue for 2014 was $69.5 million representing approximately 16% increase over revenue of $60.1 million for the same period last year; again this increase was also driven primarily by growth in our management and advisory fees as a result of increased AUM. Expenses for the year-ended December 31, 2014 were $54.2 million, representing approximately a 24% increase over expenses of $43.5 million for the same period last year. This increase was primarily attributable to increases in comp and benefits expense of $10 million and increases in G&A expenses of $0.7 million. Again, the increase in comp and benefits expense for 2014 compared to 2013 is primarily as a result of the recognition of partner incentive payments as expense upon the commencement of our IPO. G&A expenses increased primarily as a result of increased occupancy expense due to a reduction in sub-tenant rental income and an increase to the provision for doubtful accounts because of higher revenue level we increased our reserve. Reported net income was $10.7 million for the year-ended December 31, 2014 as compared to $17.2 million in the same period last year. Reported net income attributable to Silvercrest or the Class A shareholders for the year-ended December 31, 2014 was $4.8 million or $0.63 per basic and diluted share. Adjusted EBITDA was $21.1 million or 30.4% of revenue for 2014 compared to $17.3 million or 28.8% of revenue for 2013. Adjusted net income was $10.7 million for the year-ended December 31, 2014 or $0.87 per basic adjusted EPS and $0.86 per adjusted diluted EPS. Looking at the balance sheet, total assets were $99.7 million as of December 31, 2014 compared to $100.7 million as of December 31, 2013. Cash and cash equivalents were $30.8 million at the end of 2014 compared to $27.1 million at the end of 2013. Notes payables $4.1 million at the end of 2014 and $8.3 million at the end of 2013; just to note as of December 31, 2014, we paid off our revolving credit balance of $3 million with Citi National Bank. As of the end of 2013, we had $3 million outstanding on this facility. Total stockholders’ equity was $42.5 million at end of 2014. That concludes my remarks, so I’ll turn it back over to Rick for Q&A.

[Richard Hough:]

Thanks, very much. We’ll be prepared to take questions at this time.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Michael Kim with Sandler O’Neill. Your line is open.

[Richard Hough:]

Good morning, Michael.

[Michael Kim:]

Hey, Rick. Good morning. Just first, I think, last quarter you’ve talked about the flows being a bit more skewed towards the high net worth business just given maybe some rebalancing that impacted the cash flows on the institutional side. So just curious, if you could talk a bit about the underlying mix this quarter and sort of any potential impact from lingering, rebalancing?

[Richard Hough:]

Yes, absolutely. And I did mention that we expected more rebalancing at that time and we expected more in the fourth quarter. It’s important to note, of course, rebalancing is due to very good performance, say, you don’t like to see it, but on the other hand you’d much rather have good investment performance and suffer that rebalancing. Actually the institutional assets did see more rebalancing. I think it was on the order of 20-some-odd-million. However, of course, we - one other mandates or additional funds, in fact, we saw new contributions into our mix on of about $10 million during the quarter. And I think the negative on the institutional side was only about $6 million, so very, very small rounding area error. During the quarter, we had performance, as you would expect that contributed. And overall institutional and sub-advisory assets actually increased to $115 million, as a result of that. So, really very little movement on the institutional side, but that is a result of some outflows.

[Michael Kim:]

Got it. And then maybe just to follow up on the institutional business, any comments or color in terms of what you are seeing on the RFP side or win rates or sort of allocation trends more broadly and…

[Richard Hough:]

Sure, sure.

[Michael Kim:]

…maybe the uptick for some of your strategies beyond this market product or you mentioned the sub-advisory side as well?

[Richard Hough:]

Absolutely, so and thank you for mentioning this sub-advisory side. I think, we mentioned certainly in the third quarter call, I may have mentioned it in the second quarter call that we were increasingly looking for sub-advisory relationships, because those are pools of assets that have the potential to continue growing at a meaningful pace, as opposed to place to mandates, which are more likely to be static and even potentially rebalance, as you have good performance, as we’ve experienced. The pipeline is growing for sub-advisory relationships and the pipeline is also going - growing for RFPs in terms of other mandates. In fact, it has grown since the fourth quarter. And I think the pipeline that we are in position to potentially win if you were to win at all, which is, of course, never going to happen. A several $100 million as of a few weeks ago and it’s well into over $1 billion closing in on $2 billion more recently. So that pipeline has really filled up. I haven’t given those numbers before, so it’s hard for you perhaps to compare it to our pipeline. Previously, I would say, it’s larger than our previous pipeline, which is very good. And given the continued performance of our capabilities and our relationship in the marketplace now that’s well established, I think we’ve doubled institutional assets over the past couple of years. We’re going to get a good share of that. So we’re excited about the possibilities in that business.

[Michael Kim:]

Okay. Just to clarify that the $2 billion number that you just mentioned that sort of….

[Richard Hough:]

I said between $1 billion and $2 billion shading towards to, that’s kind of an actionable potential pipeline, if you were to win at all.

[Michael Kim:]

Gotcha.

[Richard Hough:]

I would say which isn’t going to happen.

[Michael Kim:]

Yes, understood.

[Richard Hough:]

But it gives you some idea of the number of searches that we’re potentially in over time. And I’m not going to give that number regularly, I just happen to know it right now. What I will tell is, I have each quarter is, whether the pipeline looks robust and how it compares to the past and this is very robust.

[Michael Kim:]

Understood. And then maybe just frame the potential impact, any sense of historical win rats, as you think about in the context of that pipeline.

[Richard Hough:]

I’m not going to give a historical win rate for that pipeline. Our win rates are very good, but that would require granularity, I don’t have into the full pipeline.

[Michael Kim:]

Okay, fair enough. Then maybe just couple for Scott, it looks like the fee rate moved a bit lower this quarter, can you just maybe talk about some of the dynamics that drove that and sort of the outlook going forward?

[Scott Gerard:]

Well, I think, just to confirm with you that if you look at our through - discretionary AUM, there are fee rate, the needle really doesn’t move much from that perspective. If you’re looking at total AUM, which has a fair amount of nondiscretionary, which we don’t - doesn’t drive revenue because of the mostly flat fee nature and uncorrelated our revenue vis-à-vis AUM. So I’m not quite sure, which measure you are looking at there, but on the discretionary side, the needle really has not moved.

[Michael Kim:]

Okay. I was looking at the discretionary and maybe it’s more of a rounding error, but we can take that off-line. I guess, final question…

[Richard Hough:]

Michael, this is Rick, just sorry to interrupt. One item that you should probably keep in mind with regards to that number is, you may recall that we opened an office in Richmond, Virginia, which we’re ramping up. We’ve gotten good flows, as you would expect from that action. And they have slightly business - a different business model in some parts of their business, it’s a high net worth business for their institutional consulting relationships like 10-60 [ph]. And as they ramp up, there may be some movement in the fee basis that’s affecting things. But our perspective, we are not from a business, overall business perspective, we are not seeing free compression, we are still going into the market and being able to hold on to the fees we request from clients.

[Michael Kim:]

Understood. And then just lastly, any updates on plans to potentially grant equity awards and how that might impact some of the outlook for compensation expense and margins more broadly?

[Richard Hough:]

Yes, as far as the 2012 equity incentive plan, we’re in the midst of evaluating the most appropriate way to formally implement that plan. So at this point in time, I really can’t provide anymore color other than that. I will say, we do intend to make meaningful grants this year. My partners, including myself and Scott and others know that that plan is there to compensate us for the job well done. We feel like we have executed on our strategy in a number of areas and done so well with very smooth compared to our peers. And given that we have not made those awards and they’ve been out there for two years, and they are expected to last four, or five years when we are on the road, we would expect to make an allocation. We are going to do so in a way that looks after all shareholders, after all we are as well, in terms of their impact on earnings. But I would expect to see them come out and they are going to come out soon or rather than later, let me put that way.

[Michael Kim:]

Got it. Thanks for taking all my questions.

[Richard Hough:]

Sure, sure, no problem.

[Operator:]

Thank you. [Operator Instructions] We have a follow-up from Michael Kim with Sandler O’Neill. Your line is open.

[Richard Hough:]

Hi, Michael.

[Michael Kim:]

Thanks, guys.

[Richard Hough:]

Why don’t we have a nice conversation?

[Michael Kim:]

Okay, I’ll jump back in couple more. I guess, I think typically there is a bit of a seasonal step up in G&A expense in the fourth quarter. So just wondering if there was a sort of that same impact this time around and just maybe some color on the outlook going forward?

[Scott Gerard:]

The - our G&A was, I mean, certainly if you compare the quarter year-over-year, G&A went down. And so even if you carve out the charge we took a little bit north of 700,000 in the fourth quarter last year, our G&A remains fairly consistent. So and I think also our G&A now, because we’re quite at distance from the closing of the IPO is reflecting pretty much our steady state, not to say there wouldn’t be some lumpiness to the extent this initiative or investment that we make whether it’d be non-compensatory or compensatory but it’s pretty reflective. We didn’t have that many adjustments also in arriving at adjusted EBITDA as well, so…

[Michael Kim:]

Right, okay.

[Richard Hough:]

So Michael, this is Rick, of course. Conversation is always better than questions and I have a few things on my mind as a result of 2014 being put to bed. From our perspective we told the market a year-and-a-half ago, we came out in June of 2014 that we would execute a strategy based on four things

[Michael Kim:]

Got it. That’s helpful. Just one last question, any color or commentary on sort of the strategies that may have driven the performance fees in the fourth quarter and then just how you’re thinking about the potential going forward.

[Richard Hough:]

So we never count on performance fees, we never budget for them, because obviously they come and go with markets. The strategy responsible for most of those fees is a high-yield municipal strategy that currently has in the ballpark, maybe just north of 6% yield. And I think it’s about close to a 10-year duration, somewhere in that ballpark. It’s a very specialized strategy that is going into essential services in communities and it uses no leverage unlike many of its competitors. Given the low yield environment that’s been a very attractive strategy, and it one - it’s one that relies on superb bottom-up fundamental credit analysis, which our team has proven to be quite good at. They are buying bonds at a discount, they’re often not followed or covered. So that strategy is pretty unique to the firm. The - flows into that strategy from elsewhere in the firm have been meaningful, as a result of the yield that’s providing. And given the nice yield, there’s always a potential and discount to value. There’s always a potential for increase in the underlying bond value and that’s precisely what happened last year, I think it was up; that strategy was up depending on what vehicle you look at, but let’s just call 15% or thereabouts. So that’s where they came from. It’s been a consistent provider of performance fees, but like any strategy, you never quite know.

[Michael Kim:]

Got it. Thanks for taking all my other questions.

[Richard Hough:]

Sure, no problem.

[Operator:]

Thank you. [Operator Instructions]

[Richard Hough:]

Okay. Thank you very much. We appreciate you joining the call.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect.