SCU (2020 - Q4)

Good morning, everyone, and welcome to Sculptor Capital's Fourth Quarter and Full Year 2020 Earnings Call. . I will now read the following remarks on behalf of the company. Today's call contains forward-looking statements, many of which are inherently uncertain and outside of the company's control and actual results may differ, possibly materially from those indicated in these forward-looking statements. Please refer to the company's most recent SEC filings for a description of the risk factors that could affect its financial results, its businesses and other matters related to these statements. The company does not undertake any obligation to publicly update any forward-looking statements. Robert S

Thanks, Donna, and good morning, everyone. Joining me on the call today is Dava Ritchea, our new Chief Financial Officer. We're happy to welcome Dava to the Sculptor team during this exciting time of the firm. Early this morning, we reported fourth quarter 2020 GAAP net income of $216 million or $9.50 per basic and $5.05 per fully diluted Class A share. Distributable earnings were $342 million or $6.08 per fully diluted share and adjustable distributable earnings were $343 million or $6.10 per fully diluted share. We declared a dividend of $2.35 per Class A share. Dava will get into the details of our results a little later. Our fourth quarter results are a culmination of the hard work and dedication of the entire organization, setting against a challenging 2020 backdrop. This focus was reflected in our strong investment performance, growth in our client base and improvement in our corporate balance sheet. Let me first turn to performance. Despite weakness in October, market sentiment shifted rapidly in the aftermath of the election, helping global equity markets close at record levels with the MSCI World Index climbing 12.5% during the fourth quarter. The Biden victory, coupled with the lack of a clear democratic majority, followed shortly thereafter by a host of better-than-expected vaccine trial results, propelled risk assets to new highs heading into year-end. Sculptor Master Fund returned 6.3% net for the fourth quarter, bringing 2020 year-to-date net performance to 19.5%, our strongest net return for the fund in over a decade. This compares favorably with the MSCI World Index, which was up 14.1% over the same period. Fundamental equities was the largest positive contributor to performance during the quarter. Our expertise in fundamental investing, coupled with dynamic capital allocation was central to our ability to navigate the ever-changing market backdrop during 2020. Our credit strategies generated positive returns during the quarter as credit assets experienced one of the best backdrops for sustained gains in years.

Thanks, Rob, and good morning, everyone. As Rob mentioned at the start of the call, and as you can see on Page 9, we reported fourth quarter 2020 distributable earnings of $342 million and full year distributable earnings of $279 million. Adjusted distributable earnings were $343 million for the fourth quarter and $406 million for the full year 2020. Additionally, we declared a cash dividend of $2.35 per Class A share. Revenues were $600 million for the fourth quarter, up 124% from the fourth quarter of 2019. For the full year 2020, revenues were $876 million, up 52% from 2019. Management fees were $70 million in the fourth quarter, up 11% from the previous quarter and up 16% from the fourth quarter of 2019 due to increased AUM and recovery of deferred CLO fees. Management fees were $250 million in 2020, 5% higher than 2019. The year-over-year increase in management fees was driven primarily by Real Estate Fund IV, which held its final close in the second quarter of 2020 and higher average fee-paying assets in certain of our open-ended credit funds, partially offset by CLO fee deferrals. As Rob mentioned, we expect to see continued recovery in our CLOs in the first quarter. As of today, only one of our CLOs remains in full deferral, which is a significant recovery from the deferrals we were seeing early on in the pandemic. Incentive income was $528 million in the fourth quarter, up 160% compared to the fourth quarter of 2019. Incentive income was $617 million for the full year 2020, 92% higher than 2019. The higher incentive income was driven by our multi-strategy funds performance in 2020 as well as the crystallization of accrued unrecognized incentives in the customized credit platform.

Thanks, Dava. 2020 was a pivotal year for the firm. We achieved outstanding financial results and made significant progress on our strategic goals, putting the firm in a strong position going forward. We're incredibly proud of our performance in 2020, the strongest in over a decade in our flagship multi-strategy fund. We broadened our investor relationships, raising over $1 billion of new capital in our multi-strategy and opportunistic credit funds, launched our largest ever opportunistic real estate fund with almost $2.6 billion in commitments and settled the last of our legacy legal matters. With the refinancing and debt pay downs, we strengthened our balance sheet, leaving us in the most stable and flexible capital structure since 2007. We continue to focus on operational efficiencies and enhancing our scalable platform that will provide us with the operating leverage as we continue to grow our assets under management. With Jimmy Levin taking over as CEO in April, combined with the broader leadership team, most of whom have been working together for well over a decade, I am confident that the right people are in place to lead Sculptor towards a bright future. With that, let me turn the call back over to the operator to take some questions.

. Our first question is coming from Gerry O'Hara of Jefferies.

Perhaps we can start on fundraising. And if you could give maybe any sense of how conversations have been evolving with the kind of consultants, gatekeepers and the like as it relates to the forward outlook for 2021.

Sure, Gerry. It's Rob. I'll take this one. Look, I'd say in terms of the level of inquiring activity, it is definitely the best by a long shot, it's been since I've been at the firm. And I think there's several reasons for that. First and foremost has been our returns, which I think have been exceptional, and they've been consistent. So I think we can lead with that. And I think in addition to that, closing out all of our legacy issues, which, as we all know, is an impediment with many of the clients out there has also opened up a lot of new conversations with us. So whether you're looking at consultants who are upgrading us and those conversations are becoming more robust, whether it's private banking platforms that have opened to us and more conversations going on there about potentially more openings as well. And the institutional client base that we're seeing pretty much across the globe, gives me a lot of encouragement. Now with that said, and I've said this before, timing of these things is always tricky. And for some of these accounts, when they look at our firm, they're really re-underwriting our firm. And I would say not just for clients who've never done business with us, but clients that may have been business many, many years ago, still look at Sculptor Capital today, and rightly so, are looking at a very different firm. And that re-underwriting process takes some time. COVID, I would say, also has not helped there with some of the newer clients who, in some cases, like to have face-to-face meetings. So that's been a bit of a drag. So what I would say is there is always going to be the occasional idiosyncratic outflow here and there, given the nature of institutional clients. But when I look at the level of activity and I look at our returns, particularly in an environment that's not as target-rich as perhaps it once was. And I think about the fact that the legacy issues are behind us and that the firm is a much more stable place than it may have been a few years ago, that gives me a lot of confidence. So I guess my answer to you would be, I'm optimistic in the long term, very difficult to determine exactly when it's going to happen. I wouldn't expect to have some avalanche of money arrive at our door tomorrow morning. But I think it's really a question of when not if. So I am confident we'll be able to grow over the intermediate to long term.

Okay. That's helpful context. I guess, also, if we can maybe touch on Delaware Life, if there's any update you might be able to provide there with respect to potential future opportunities, whether it's strategic or otherwise to partner with them for product, that would also be helpful.

Sure, Gerry. Well, look, let's put context into the whole Delaware Life transaction. I mean what the Delaware Life transaction did for us is, number one, it allowed us to capture over $60 million of discounts on the outstanding liabilities at the time. In addition to that, it allowed us to push out our amortization schedule. We're giving our balance sheet much more flexibility and comfort going forward. And remember, this was at a time when you were sitting on -- COVID beginning to rise. We didn't have the vaccine news that we have today, and you had an upcoming election. So it derisked the firm, it gave us a much more flexible capital structure and it allowed us to capture discounts. So there's a lot of logic to going forward with the financing. I'd say in addition to that, the fact that Delaware Life has a board seat, and they are a warrant holder aligns them with us. So as we think about portfolio opportunities and/or financing opportunities, I'd say we have good dialogue with them, and we look forward to collaborating with them in the future.

Okay. Great. And one more, if I could squeeze this one in. The CLO sub-fees, you kind of mentioned that, that will remain a headwind in 1Q, perhaps a question for Dava here. But could you put maybe a finer point on what we might be able to expect for 1Q and perhaps into this year as the sub-fees?

Sure. I'm happy to take that one. So the CLO sub-fees have really started to normalize. And that is because, as of today, we only have 1 CLO that is currently still in full deferral, and we have 4 CLOs that are in partial deferrals. For the fourth quarter, we actually saw a net impact of the deferrals of a positive $2.3 million. So we had a small amount of additional deferrals in Q4, which was $1.8 million, and that was offset by $4 million that we recognized in Q4 related to prior periods. So we are seeing that balance go down in terms of what continues to be deferred. And we still have a balance of $5.6 million that we would expect to collect as all of those CLOs accrue.

Our next question is coming from Patrick Davitt of Autonomous Research.

So if we think about the time line for realizing the accrued carry balance, I know you had talked about the vast majority of it before being realized then we saw the event in the fourth quarter. So is the right way to think about it, kind of the $50 million of legacy balance kind of coming more immediately and then the $80 million of new accrual may be spread over a longer term? Or are you still kind of thinking about that coming out quite quickly?

Sure. I can take that. So of the $80 million of new accrual this quarter, $60 million of that was actually related to the customized credit platform, and that has fully crystallized this year. So a portion of what we earned this year actually did crystallize within the year. We have $128 million left outstanding. The vast majority of that is in our real estate business, which will accrue over time as those funds exit their investment periods and start to return capital.

Great. Helpful. And then another one on fundraising. Could you maybe update us on, away from the Master Fund, kind of potential chunky products in the market, either in real estate credit, real estate equity, credit -- the credit platform. Anything you kind of see in the pipeline that could add to the more closed-end side of the business?

Yes. I'll take that one, Dava. Look, we can't comment on any specific fundraising on a forward basis, so I can't be specific about that. I'd say if I were to sort of look across the platform, I think we've got opportunity to grow pretty much in all the verticals, starting with multi-strat. I mean as we've -- as I've said on many of these calls, I've just been a strong believer that the ability to approach markets and invest anywhere in the capital structure pretty much anywhere in the globe and having the flexibility to do that in a disciplined way, to me, was real competitive advantage if you have real capability there. And I think we do. And I think we've demonstrated that. And I think as markets continue to do what they do, and they become somewhat more volatile at times, we -- given that nimble approach that does protect capital, it's going to be a really good value proposition to our clients. So I believe that. I believe that for a long time, and I think that will ultimately bear fruit. I think in the credit space, again, we can't comment on specific funds or raises, but credit is a place that is always going to be target-rich in nature. And I think if you think about this COVID crisis, it's created tremendous dispersion amongst companies in terms of capital requirements and outcomes and so forth. So we will see our opportunities there. And I think if you saw what we did when the crisis hit, we obviously deployed a lot of capital. We caught a lot of that retracement of things in the spread product area. But we also have lots of more complex process-driven investments that are going to, from time to time, begin to bear fruit and we started to see that more in the fourth quarter, and we're seeing that in 2021. So I think it's more idiosyncratic in nature, but there will always be opportunities there. And in terms of real estate, obviously, we've ended the investment period on rec one. We've just closed the big private equity fund, but we have real momentum in our real estate vertical right now. And I think a broadening -- a very happy client franchise there. So I do believe over time that, that vertical will become bigger and more meaningful as part of the Sculptor platform.

Our next question is coming from Craig Siegenthaler of Crédit Suisse.

This is Sam on for Craig. Now that you've raised your fourth real estate fund, what opportunities are you seeing across segments and geographies?

Yes. Again, I'll answer. As I said, I can't comment on any specific areas in particular. But what I would say is, the first thing you have to think about when you think about our real estate business is the fact that it's a little bit less conventional than some of the other real estate businesses out there in the sense that we cast a very broad net and invest in many different asset classes, many nontraditional places like gaming and places like Marinas and so forth. So because of that wide net, we generally are going to see sort of a broader range of potential opportunities out there. I think that's worked out very well for us, not only through the crisis, but certainly, over the history of our real estate business. But I'd say, look, we're seeing opportunities pretty much across the board. We're seeing everything from public market opportunities to -- given the dislocations that we've seen to things in the private markets, whether it's being a liquidity provider or taking advantage of certain situations where assets have needed to be disposed of and so forth as well as some of the more traditional places where we do equity investing. So I think we're going to see things across the capital structure there, and we're going to see things across a very broad range of traditional and nontraditional asset classes where we've typically been very active.

And just as a quick follow-up. Can you talk about the realization trajectory for the third real estate opportunistic fund?

Sure. I can take that. We just exited the investment period. And so you can expect realizations to occur over the next several years as we are out of that investment period.

Our next question is coming from William Katz of Citi.

Rob, congratulations on turning the franchise around a good luck in your next endeavor. And Dava, welcome to the group. A question for you just on capital management policy from here. It looks like you paid down debt a bit fast, and we were certainly modeling, given the big performance during the quarter. How do you think about sort of capital return from here, dividend policy, buyback for the deleveraging reinvestment, maybe for the kickoff how you sort of think about that? And maybe put that in the context of where you are in the distribution holiday versus a normalized payout ratio?

Dava, why don't I start and you can chime in from here. Obviously, as you know, Bill, we've paid down a bunch of net debt right now, and we're sitting, from a balance sheet perspective, in the best position we've sat in, in years. Obviously, given our cash and our assets on balance sheet, vis-à-vis, what is only $145 million of liabilities left on the balance sheet. That being said, I think, first and foremost, our objective continues to be to strengthen that balance sheet. And the reasons for that are severalfold. First of all, the stability and strength of the franchise in order to not only weather different market environments and have the staying power to do so in a very comfortable way, which is sort of objective #1 and also be able to play offense where we see opportunities to potentially grow the business. So I think from a strategic standpoint, it was all about delevering before. We'll continue to look to do that and strengthen our balance sheet, as I said. I think beyond that, beyond strengthening and/or giving us the opportunity to play offense, I'd say, look, we will obviously be opportunistic in considering the -- our dividend policy, considering optimizing our balance sheet across debt and equity so that we are in what we consider to be the most optimal place. But first and foremost, it's about strength and stability. But Dava, I don't know if you want to jump in here and...

I don't mind taking the distribution holiday question. So we had a distribution holiday of where we had to earn $600 million of distribution holiday economic income. We have, to date, earned $378 million of that distribution holiday economic income. So we have $221 million left to go.

Okay. That's helpful. And just a follow-up question, maybe a little more conceptual. Just given everything that's going on in the retail engagement dynamic and some of the short positions getting hit pretty difficultly. How do you think about that as it relates to the multi-strat portfolio? Is there any risk or opportunity as a result of some of these outsized moves? Obviously, it's much more illiquid names, and I'm sure you're playing around in. But nonetheless, is there some kind of structural opportunity or impediment to the multi-strat looking ahead?

Yes. I mean, look, first and foremost, I'd say, obviously, we weathered that little mini storm quite well. You saw our returns for the month of January. And obviously, markets have recovered, and things are going fine for us. Typically, we are not a player in very illiquid-crowded shorts as kind of a general rule. So I wouldn't -- there's always specific situations, but I don't anticipate that being a major risk factor for us. And as you know, away from just the alpha generation potential on short positions, you have just our general risk management approach to the portfolio. And oftentimes, we are using indices and options and so forth to risk manage our exposures. So I think both in terms of the fact that we're oftentimes managing risk through broader indices and option markets and generally not very involved in very crowded illiquid shorts. I don't anticipate that being a major challenge for us going forward. And arguably, it could be an opportunity. We'll see. We'll see how it works out for some of the business models that are more challenged by that. I suspect they'll generally make the proper adjustments and be just fine. But I don't see that being a major impeditive for us.

At this time, I'd like to turn the floor back over to management for any additional or closing comments.

No. I guess, look, I'll just close. I mean, again, thanks, everyone, for participating. This will be my last call. And again, I'm very proud of what we've been able to do here. And as I said earlier, just in terms of not just the financial results, but really kind of achieving a lot of the strategic things that we've all set course to do. And that's been an effort by pretty much everybody at the firm in terms of whether it's closing out some legacy issues, getting back on the growth path, managing our expense base, strengthening our balance sheet and really rebuilding our brand right now. So I feel good about where the firm is, and I feel very good about where it's going, and I'm confident that Jimmy Levin will do a great job, along with the management team, as you all know, that has worked together for many, many years. I think they are all -- these people are all ready to drive the business at the next level. And I think they're going to do a great job. So with that, I'll -- I guess I'll close the call. Thanks, everyone.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log-off the webcast at this time, and have a wonderful day.