U.S. Markets open in 18 mins

Edited Transcript of OZM earnings conference call or presentation 9-May-19 12:30pm GMT

Q1 2019 Och-Ziff Capital Management Group LLC Earnings Call

NEW YORK May 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Och-Ziff Capital Management Group Inc earnings conference call or presentation Thursday, May 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Adam Willkomm

Och-Ziff Capital Management Group Inc. - Head of Business Development and Shareholder Services & MD

* Robert Scott Shafir

Och-Ziff Capital Management Group Inc. - CEO, Executive MD & Director

* Thomas M. Sipp

Och-Ziff Capital Management Group Inc. - CFO & Executive MD

================================================================================

Conference Call Participants

================================================================================

* Gerald Edward O'Hara

Jefferies LLC, Research Division - Equity Analyst

* William R. Katz

Citigroup Inc, Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Oz Management First Quarter 2019 [Conference] Call. (Operator Instructions) As a reminder, this conference...

(technical difficulty)

I would now like to introduce your [host for today's] conference, Adam Willkomm, Head of Business Development and Shareholder Services at Oz Management.

--------------------------------------------------------------------------------

Adam Willkomm, Och-Ziff Capital Management Group Inc. - Head of Business Development and Shareholder Services & MD [2]

--------------------------------------------------------------------------------

Thank, Marcella. Good morning, everyone, and welcome to our call. Joining me today are Rob Shafir, our Chief Executive Officer; and Tom Sipp, our Chief Financial Officer.

Today's call may include forward-looking statements, many of which are inherently uncertain and outside of our control. Before we get started, I need to remind you that Oz Management'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 financial measures 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 entity. Earlier this morning, we reported first quarter 2019 GAAP net income of $37 million or $1.81 per basic and $1.73 per diluted Class A share. On an economic income basis, we reported first quarter 2019 distributable earnings of $30 million or $0.55 per adjusted Class A share.

We declared a $0.37 dividend for the first quarter. If you have any questions about the information provided in our press release and on our call this morning, please feel free to follow up with me.

With that, let me turn the call over to Rob.

--------------------------------------------------------------------------------

Robert Scott Shafir, Och-Ziff Capital Management Group Inc. - CEO, Executive MD & Director [3]

--------------------------------------------------------------------------------

Thanks, Adam. Good morning, everyone. We're off to a solid start in 2019. We achieved strong investment performance and made significant progress towards the strategic goals that we set forth for the year.

Let me first turn to investment performance. Oz Master Fund was up 7.9% net for the quarter and is up 11.4% net year-to-date through April 30. There were positive contributions from nearly all strategies in the fund, led by global equities. These returns were a product of both our alpha generating investment ideas and the tailwinds of rising markets. There were a number of positive macro developments during the quarter. The Federal Reserve decided not to -- to hold off further interest rate increases. The fear of a recession was reduced. Economic data was steady and there was a growing perception that trade discussions between the U.S. and China were headed in an encouraging direction. That all went a long way in helping markets recover from what had been a very negative end to 2018.

Looking back, we believe the performance of the Master Fund through this 2-quarter mini cycle of market drawdown and bounce-back illustrates how our approach helps to mitigate our downside in weak markets and capture the upside in rising markets.

While the first quarter was one of the Fund's best-performing calendar quarters since inception, we are seeking to maintain strict discipline in the portfolio by continuing to run a sizeable options hedge overlay and lower leverage relative to where we started the year.

Oz CO, our global opportunistic credit fund, was up 2.3% net for the first quarter 2019, with positive performance across corporate and structured credit investments. We took the opportunity to tactically reduce some of the positions that had rallied most, and we redeployed capital at new and existing positions where we see better value. This all follows Oz CO's strong positive performance of 6.5% net for 2018, a year where broad credit indices were down. Oz CO has 11.8% net annualized return since inception.

Our Real Estate Funds continue to deploy capital and generate strong returns, with a 21% annualized net return in our current opportunistic fund.

Let's turn to flows. As of May 1, our assets under management were $32.4 billion. In the first quarter, we had net outflows of $924 million primarily driven by redemptions in multi-strategy products. These outflows were also inclusive of $558 million of redemptions from former partners, which we previously announced. Together, multi-strat and opportunistic credit have $16 billion of assets as of March 31. From April 1 to May 1, there were approximately $850 million of net outflows primarily from multi-strategy products, including $335 million of outflows from former partners.

As we have mentioned, the sales cycle is long in these products, but we see opportunity for inflows later this year and into 2020. We are encouraged by conversation we're having with clients, including recent upgrades from consultants in private banking platforms. We think these positive moves stem from clients' warm receptions to our strategic actions and investment performance. We also continue to add resources to our Investor Relations functions as we grow our client coverage organization globally.

Institutional Credit Strategies have total assets of $13 billion as of March 31 and modest net inflows in the first quarter. Our CLO platform continues to perform as we closed a U.S. CLO last week, adding approximately $500 million in new assets under management and expect to price a new European CLO this week, which will add approximately $444 million in AUM. Additionally, we currently have 2 CLOs in our pipeline, which we expect to close later this year.

In April, we closed our second transaction through our strategic alliance with GE Capital Aviation Services, also known as GECAS. We will serve as the asset manager for this portfolio of $589 million in aircraft securitizations. We feel that combining GECAS' aviation expertise with our long history of holistic credit and equity investing in aviation, uniquely positions us to deliver and grow this platform. Additionally, we continue to expand our opportunities for aviation investments with other clients.

Real Estate has total assets under management of $3 billion as of March 31 and net inflows of $75 million in the first quarter. Our third opportunistic fund is roughly 71% deployed. We feel confident that we will continue to grow the business across new and existing product areas based on the strong team, demand for products and performance.

Now let me turn the call over to Tom to go through the financials.

--------------------------------------------------------------------------------

Thomas M. Sipp, Och-Ziff Capital Management Group Inc. - CFO & Executive MD [4]

--------------------------------------------------------------------------------

Thanks, Rob, and good morning, everyone. Before I move on to the numbers, I want to highlight that on April 1, we changed our tax classification to a corporation, and as of today, we completed our conversion from a limited liability company to a corporation.

Now moving into earnings. As Adam mentioned at the beginning of the call, we reported first quarter 2019 distributable earnings of $30 million. Revenues were $117 million for the first quarter, down 5% from first quarter of 2018. Management fees were $60 million for the -- in the first quarter, 11% lower than the first quarter of 2018. The year-over-year decrease in management fees was driven primarily by lower multi-strategy assets partially offset by increased assets in Institutional Credit Strategies. Incentive income was $53 million in the first quarter, 5% higher than the first quarter of 2018. Please note that given Master Fund's performance in 2018, we have a loss carryforward in 2019. Our performance thus far into 2019 has us in a gain position, but this remains dependent on full year performance.

As of the quarter end, our accrued but unrecognized incentive was $260 million, down 1% as compared to $263 million in the prior quarter. The decrease was driven by the recognition of $38 million of incentive in the first quarter, offset by $35 million of accrued positive performance. As a reminder, with the exception of the balance associated with our Real Estate Funds, most of the remaining balance has no associated compensation expense as this was paid in earlier periods. Other revenues were $4 million in the first quarter, down slightly versus the first quarter of 2018, due to a reduction in CLO risk retention investments.

Now turning to our operating expenses. For the first quarter 2019, total expenses were $79 million. Excluding $10 million in expenses related to the strategic actions, total expenses were $69 million, down slightly as compared to the first quarter 2018. In the first quarter, compensation and benefits were $44 million, up 32% from the first quarter of 2018. Bonus expense was the main driver of this variance, increasing from $9 million to $23 million year-over-year. This was primarily driven by a reversal in Q1 2018 of previously accrued expenses associated with deferred compensation forfeitures taken in the prior year.

Adjusting for the 2018 reversal, bonus expense is down 15%. We continue to expect full year minimum annual bonus for 2019 to be between $85 million and $90 million. Salary and benefits were $21 million for the first quarter, down 12% from the first quarter of 2018 due to lower headcount. We continue to expect full year 2019 salaries and benefits to be between $80 million and $85 million.

In the first quarter, general and administrative expenses were $32 million. Excluding the $10 million of expenses related to our strategic actions, first quarter G&A was $22 million, 28% lower than first quarter 2018. We expect these expenses to be between $85 million and $95 million in 2019. Please note that this guidance excludes additional strategic actions expenses, the majority of this of which we recognized in the first quarter.

Our interest expense was $4 million for the first quarter 2019, 41% lower than first quarter 2018 due to the reduction in our term loan balance. We continue to expect full year 2019 interest expense to be between $10 million and $15 million. Our guidance for the full year 2019 tax receivable agreement and other payables as a corporation is 18% to 22%. As a reminder, tax estimates are subject to many variables that won't be finalized until the fourth quarter of the year, and therefore, could vary materially from the estimates provided.

Now an update on the balance sheet. At quarter end, total cash, cash equivalents and long-term treasuries were $314 million. Subsequent to quarter end, we paid down the term loan by $25 million, resulting in an outstanding balance of $55 million. We will continue to strengthen our balance sheet by using a majority of our earnings, after public shareholder dividends, to pay down our existing term loan, followed by the new preferred and debt created as part of the strategic actions we mentioned on last quarter's call.

With that, let me turn it back over to Rob.

--------------------------------------------------------------------------------

Robert Scott Shafir, Och-Ziff Capital Management Group Inc. - CEO, Executive MD & Director [5]

--------------------------------------------------------------------------------

Thanks, Tom. 2019 is off to a strong start. We believe the firm is well positioned for success following the strategic actions completed in the first quarter. The key for us in 2019 will be to execute our plan and demonstrate our value proposition to our clients. To do this, we are focused on 3 key efforts: first, generating strong risk-adjusted investment performance; second, growing the client franchise by deepening existing client relationships and expanding our client footprint; and third, maintaining discipline around expenses.

There are a number of positive developments that suggest we are going in the right direction, such as our first quarter performance and the turnaround of the quality and tone of our conversations with clients, consultants and prospects. We look forward to keeping you updated on these objectives. With that, we will open the line up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Bill Katz from Citi.

--------------------------------------------------------------------------------

William R. Katz, Citigroup Inc, Research Division - MD [2]

--------------------------------------------------------------------------------

So maybe just coming back to sort of the balance sheet for a moment. You do seem to be running a little ahead, so we thought it might be the pay down on the debt. As you sort of look at the underlying fundamentals, is there any sort of update in your minds of sort of how you see the waterfall of cash flow and the time line to where you sort of get to reducing both the debt and the preferred?

--------------------------------------------------------------------------------

Thomas M. Sipp, Och-Ziff Capital Management Group Inc. - CFO & Executive MD [3]

--------------------------------------------------------------------------------

Bill, it's Tom. We are off to a good start this year. I think it's very helpful that we paid down $25 million in the first quarter. But it's still early in the year. I would still expect material pay-downs to come based on full year performance and thus, Q1 of next year. And then as we progress through 2020, we'd expected to then have the term loan paid off and then be able to pay the majority of the preferred equity, by the end of 2020. If you remember, we've got a pretty material accrued but unrecognized incentive that crystallizes at the end of 2020. So I think if anything, we're a little bit ahead of pace. We're off to a good start, but it's early in the year.

--------------------------------------------------------------------------------

William R. Katz, Citigroup Inc, Research Division - MD [4]

--------------------------------------------------------------------------------

Okay. And then maybe just coming back to the flow dynamic for a moment. So I heard you on the 2 CLOs, I don't know if you could sort of frame out the size you think that, that might be. And then sort of any update around maybe Fund IV on the Real Estate side, what maybe you're hearing from clients in terms of appetite? And then on the aircraft leasing, what else you might be able to do beyond what you just announced?

--------------------------------------------------------------------------------

Robert Scott Shafir, Och-Ziff Capital Management Group Inc. - CEO, Executive MD & Director [5]

--------------------------------------------------------------------------------

Look, I think if you look at sort of the -- Bill, it's Rob. When you look at the flow picture holistically, starting with the CLO business, as you know we closed one, we priced -- we're about the price the second. We've got a couple more in the pipeline. I'd say the CLO market is somewhat more challenging than last year, but we continue to see fairly strong demand for our products, given our performance.

GECAS is another additional line of business that we're encouraged by. We've had our second deal transaction that we just closed and there's -- we are optimistic there as well moving forward. I can't comment specifically on any future fund offerings regarding real estate. Yes, I'll just say that I think we're -- we have a great team, we have great performance and there's real demand for our products. So I'm optimistic about our prospects there.

And regarding the flow picture in the multi-strat, as I said in the call, look, I think a couple of things. First of all, our performance has really been terrific and it's not just looking at the first 4 months. If you really look back over the last 3 years, a very strong performance in a good market in '17, protected downside in '18 and are really kind of pretty much top of the class here in 2019. So the product is doing exactly what it's supposed to do, which is give you upside capture and protect in downside. And I think 2 things, number one, now that we've gotten our strategic actions behind us, I think that's answered a lot of questions and concerns investors had.

So I think the -- as I said, I think the quality of those conversations is at a completely different level, not just the quality, but the amount of activity we're seeing with clients. So I don't want to get ahead of myself, but I try to always be cautious on these calls of not overpromising then under-delivering because the sales cycle is a long one around these types of products. But you know, look, we have planned for and expect to see some progress in terms of inflows towards the second half of the year, probably the later part of the second half of 2019, building into what we hope will be a much stronger 2020. But I'm pretty encouraged by what I see so far and I think if volatility picks up in markets, I think these types of products, we'll see on an aggregate basis, more investor demand.

--------------------------------------------------------------------------------

William R. Katz, Citigroup Inc, Research Division - MD [6]

--------------------------------------------------------------------------------

Okay. If I can squeeze one more in, thank you for taking my questions this morning. I think you had mentioned in maybe the last call that there might be incremental opportunity around further efficiencies and I certainly appreciate your guidance as sort of unchanged. But as you sort of look out from here, where do you think you are in terms of sort of that incremental opportunity, maybe looking into 2020?

--------------------------------------------------------------------------------

Thomas M. Sipp, Och-Ziff Capital Management Group Inc. - CFO & Executive MD [7]

--------------------------------------------------------------------------------

Yes. Bill, it's Tom. I think we're making a lot of progress on our expense base. You can see it, it is coming down, once you adjust for one-time items or the strategic actions. So a lot of the efficiencies are recurring. So I think we're pretty confident in our full year guidance across the board. The -- and -- we are constantly looking for more ways to be efficient. But at the same time, we have -- we're starting to see some opportunities to invest in the business as well. So I don't see kind of a massive change when you look out to '20, but we will continue to optimize the platform and there will be some reinvestments as we start to grow.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Your next question comes from the line of [Patrick Davitt] from [Autonomous Research].

--------------------------------------------------------------------------------

Unidentified Analyst, [9]

--------------------------------------------------------------------------------

Just a quick follow-up on the Real Estate. Is it still fair to use the framework of the potential for launching a next-generation fund when that's 75% invested?

--------------------------------------------------------------------------------

Robert Scott Shafir, Och-Ziff Capital Management Group Inc. - CEO, Executive MD & Director [10]

--------------------------------------------------------------------------------

Yes. I think that's a fair assumption.

--------------------------------------------------------------------------------

Unidentified Analyst, [11]

--------------------------------------------------------------------------------

Okay. Great. And then on the CLO growth obviously, it's been a big driver of your AUM growth over the last couple of years. The press and regulators are clearly very focused on that world, leverage loans more broadly. Could you speak to maybe the ability to put all of that money to work, what you're seeing in that world, to what extent you are or are not concerned about the perceived frothiness there?

--------------------------------------------------------------------------------

Robert Scott Shafir, Och-Ziff Capital Management Group Inc. - CEO, Executive MD & Director [12]

--------------------------------------------------------------------------------

Look, I guess I'd say that there certainly is a cyclicality to these businesses, to that business. And we saw in the fourth quarter, some effects in that market. So I'd say that certainly, we continue to see strong demand for our products there. I think that speaks to the strong performance we've actually had in that business, and I think the brand we're building around our CLO franchise.

But like all other platforms, there will be an element of cyclicality in that business and it's conceivable that as you can see a slowdown there if there were a pullback. But I think certainly over the long term, the logic of that kind of a long platform does make a lot of sense. It is strategic and we're sort of confident in it across the cycle.

I also think that in a world where those markets were to have some kind of a pretty significant pullback and you'd have, let's just say for argument's sake, somewhat more of a distressed-like environment, the natural hedge to that for us is we have a very, very top-ranked opportunistic credit platform. And I would think in that environment, we would be pretty significant beneficiaries of that, if that were to come to pass.

So I feel like, look, these are long-term strategic assets of ours, there's always something -- some level of cyclicality, but I do think there's a natural hedge built in between our ability to capture a lot of opportunity if these markets were to fall off. And conversely, if they stay steady, we'll continue to get, I think, more than our fair share on the CLO side.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from the line of Gerry O'Hara from Jefferies.

--------------------------------------------------------------------------------

Gerald Edward O'Hara, Jefferies LLC, Research Division - Equity Analyst [14]

--------------------------------------------------------------------------------

Maybe one for Rob. If you could perhaps elaborate a little bit on the commentary with respect to the general engagement and kind of upgrades and progress within the consultant gatekeeper community that you mentioned earlier, especially as it relates to the multi-strategy funds.

--------------------------------------------------------------------------------

Robert Scott Shafir, Och-Ziff Capital Management Group Inc. - CEO, Executive MD & Director [15]

--------------------------------------------------------------------------------

Sure. Look, I think a lot of the impediments that we faced over the course of last year, were really addressed in the strategic actions we took around transfer of equity, locking in our management teams, addressing our balance sheet, addressing governance issues. A lot of the -- things that were sort of specific to our firm, I really do think are behind us and I think that the tenor of the conversations now are really not about that. They're much more, almost primarily about just purely our value propositions, our investment performance, how we see things and so forth.

And I'd say the level of activity that we're having is dramatically higher than it was, I would say, 6 months ago at this time. We have been upgraded by a few consultants and -- but as you know, that's sort of step 1, is getting the upgrade from the gatekeeper. Translating that into money is actually getting the end client to pull the trigger. And that is sort of step 2 and that's what we are engaged in now. And I think as I said, we don't want to get ahead of ourselves, but we are, our plan suggests that we will see some inflows on a gross basis in the second half of the year, probably back-end weighted and our objective is to build a material pipeline going into 2020.

I think the same thing in the private banking platforms. We've been green-lighted on a couple. There is another significant one that we are getting close to. But getting on the platform is one thing, then engagement of the respective teams in these platforms, re-familiarizing them with the story and getting them comfortable to where they actually start investing. Again, there's a lag time there, but I think we are in natural progression of getting on platforms, getting the green lights from the consultants and getting to the next level. And I think from there, as I said, I think that our performance, in my opinion, should speak for itself. We are doing what we said we could do and have done for, frankly, a long period of time and I'm very confident in our team.

--------------------------------------------------------------------------------

Gerald Edward O'Hara, Jefferies LLC, Research Division - Equity Analyst [16]

--------------------------------------------------------------------------------

That's helpful. And maybe just a clean-up, with respect to the partner redemptions, are we effectively through the bulk of those outflows? Or is there anything that we should still be sort of mindful on the horizon?

--------------------------------------------------------------------------------

Thomas M. Sipp, Och-Ziff Capital Management Group Inc. - CFO & Executive MD [17]

--------------------------------------------------------------------------------

Yes. Gerry, you're pretty much through it. There are some smaller amounts that will come later in the year, but they are relatively small. So that we're -- it's pretty much past, pretty much behind us.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

I'm not showing any further questions. I will now turn the call over to Mr. Willkomm.

--------------------------------------------------------------------------------

Adam Willkomm, Och-Ziff Capital Management Group Inc. - Head of Business Development and Shareholder Services & MD [19]

--------------------------------------------------------------------------------

Thanks, Marcella. Thank you everyone for joining us today. If you have any questions, please don't hesitate to contact us at (212) 719-7381. Media inquiries should be directed to Jonathan Gasthalter at (212) 257-4170. Thank you.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.