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B. Riley Financial Inc (RILY 36.97%)
Q3 2019 Earnings Call
Oct 30, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon and welcome to B. Riley Financial's Third Quarter 2019 Earnings Call. My name is Stacy and I will be your call operator. B. Riley issued a press release with its financial results shortly after today's market close. A copy can be found in the Investors section of the company's website at ir.brileyfin.com As a reminder this call is being recorded. A replay of today's call will also be made available on the company's website. Joining us today are Bryant Riley Chairman and CEO; Tom Kelleher CEO; and Philip Ahn CFO and COO. After management's remarks we will open the line for questions. And before we conclude today's call I will provide the necessary cautions regarding forward-looking statements.
I would now turn the call over to Mr. Bryant Riley.
Phillip J. Ahn -- Chief Operating Officer and chief Financial Officer
Thanks Bryant. Welcome everyone. As Bryant mentioned the third quarter of 2019 marked a new quarterly high for B. Riley Financial. Total revenues were $180.1 million in Q3 up from [Technical Issues]
Bryant Richard Riley -- Chairman and Co-Chief Executive Officer
Operator can you hear me? Okay. Sorry we have people in 2 different places. So Phil recorded his answer earlier today. So sorry for the error. So this is Bryant Riley and thank you operator. We're obviously excited about the outlet for all of our core businesses and to talk to you about them. We have seen tremendous synergies throughout our platform. And the ability for us to utilize all of our operating units to create strong results for shareholders has exceeded our expectations on participation in transactions which includes some combination of great American group class Ratner. The rally FDR and the Riley wealth management are becoming more commonplace. Be able to pull from all of these resources are also utilizing our balance sheet has created more opportunities and better returns than we could have expected While we are excited by these opportunities and are aggressively pursuing them none of this would be possible without the continued momentum leadership and buy-in from our various operating entities. Tom and Phil will walk through the numbers later and you will see that every business unit is experiencing growth and managing expenses.
The cash flow generated from these business units as well as our announcement today about our brand portfolio purchase are key to providing us with steady cash flows that enable us to be more aggressive with our balance sheet. This strategy also enables us to return cash to our shareholders. Year-to-date we will have returned approximately $40 million or $1.49 in the form of regular and special dividends upon payment of our latest quarterly dividend. We have raised our regular dividend almost 120% and we gave back roughly 1.3 million shares and over 600000 warrants. This demonstrates our balanced approach of reinvesting into our business while at the same time returning a portion of our profits to our shareholders and employees. As most of our shareholders know we look at our business in 2 components. Our steadier and more recurring cash flow streams include Appraisal GlassRatner wealth management asset management magicJack United Online and now our brand portfolio. We estimate that these businesses should generate approximately $110 million in EBITDA per year on a pro forma basis.
And these cash flows go a long way to paying for our corporate costs interests and dividend. The other side of our business is what we call our episodic business. This includes Great American retail liquidation B. Riley FBR and our balance sheet investments. These will be more volatile quarter-to-quarter. While they are more volatile by the very nature of the event-driven markets they serve we believe we have made significant progress acting as a catalyst to create these types of one-time events. Our goal is to make the one-time events as commonplace as possible while not forgetting what has created the strong returns to date aggressive use of our capital to enhance our returns for our shareholders and clients. Before moving on to our business units let me provide some detail on our brand investment portfolio purchase which includes our majority ownership of 6 brands and our investment in support of Bluestar Alliance's acquisition of Hurley from Nike. We have known the main principals of Bluestar Ralph Gindi and Joe Gabbay for many years. We first invested with Bluestar through our purchase of a 30% stake of bebe stores in 2017. At the time bebe had sold 50% of the bebe brand the Bluestar.
Over the course of the last two years we have not only been impressed with their team's ability to manage and grow bebe in addition to Brookstone which was the subsequently purchased entity but we also found common ground in how they ran their business. As we continue to work together we look for we look for other opportunities, which ultimately led to today's announcement. This relationship is about more than this purchase of the announcement press release. We have made a significant investment in yesterday's announced purchase internally, and we have options to continue to make investments hand in hand with restart. It is important to know that we have no intention management is banned. We cannot think any higher than we do have our partners will stand in their way as they continue to work to develop and grow that. Having said that we do have assets at our disposal that can be a benefit in acquisition of brands whether it's our asset disposition equity research or use of our balance sheet that we believe can enhance the business unit.
With that I'll turn it over to Phil Ahn who's clearly on a recording. And we'll start now and then we will answer your questions at the end of his comments. Operator?
Phillip J. Ahn -- Chief Operating Officer and chief Financial Officer
Thanks Bryant. Welcome everyone. As Bryant mentioned the third quarter of 2019 marked a new quarterly high for B. Riley Financial. Total revenues were $180.1 million in Q3 up from $99.7 million in revenues for the third quarter of 2018 and up from $164.7 million for the second quarter of 2019 which was our prior quarterly record. In terms of our business segment mix Capital Markets is our largest segment and includes results from our investment banking and wealth management businesses our funded management and direct lending businesses and our consulting business GlassRatner which we added in August of 2018. Capital Markets segment revenue increased to $134.1 million for the third quarter up from $76.3 million in the same year-ago period. Segment income increased to $52.4 million up from $11 million in the same period last year. Results in this segment were driven by the performance of the broker dealer B. Riley FBR which includes returns from proprietary investments that Bryant mentioned earlier. Next in our Auction and Liquidation segment revenues increased to $11.3 million for the third quarter of 2019 up from $2.5 billion in the same year-ago period. Segment income increased to $6 million up from $0.3 million in the same year-ago period.
Results in this segment were driven by our participation in several store closing projects during the quarter some of which were repeat client engagements in addition to other ongoing retail liquidation projects. As we've noted in previous calls our Auction Liquidation segment results will be variable in nature from quarter-to-quarter and year-to-year. Our Valuation and Appraisal segment experienced a modest quarterly increase in Q3 with segment revenue of $10.8 million up from $9.4 million in Q3 of last year and segment income of $3.5 million up from $2.9 million during the same year-ago period. Our Appraisal segment results tend to remain relatively steady quarter-to-quarter which is in contrast to our more episodic liquidation segment in Capital Markets segment. Our fourth and final segment is Principal Investments. In addition to United Online this segment now includes results from magicJack which we added in November of 2018. Segment revenue increased to $23.9 million up from $11.4 million in the same year-ago period. Segment income also increased to $8.7 million compared to $4.1 million in the same year-ago period.
Moving to our profitability metrics which are attributable to B. Riley Financial as a whole adjusted EBITDA increased to $70.3 million for the third quarter up from $21 million for the same year-ago period. Adjusted EBITDA totaled $157.6 million through the first nine months of 2019. Net income increased to $34.3 million or $1.21 per diluted common share up from $2.8 million or $0.10 per diluted common share for the same year-ago period. Net income totaled $64.5 million or $2.37 per diluted share for the nine months ended September 30 2019. Adjusted net income increased to $40 million or $1.42 per diluted share compared to $6.4 million or $0.24 per diluted share for Q3 of last year. Through the first 3 quarters of 2019 adjusted net income increased to $84.6 million or $3.11 per diluted share. For more information about adjusted EBITDA adjusted net income and a reconciliation to the nearest GAAP measures you can refer to the section in today's earnings release about the use of non-GAAP financial measures.
Now some highlights from our balance sheet. As of September 30 B. Riley Financial had $170.6 million in unrestricted cash and cash equivalents; $27.8 million due from clearing brokers; $267 million of loans receivable net of loan participations sold; $297.5 million in net securities and other investments owned; and $773.9 million of total debt. I would note that our investment balance includes approximately $81 million in various equity investments and deposits which are classified as prepaid expenses and other assets on our balance sheet. Net of our total debt we had net cash and investment balance of approximately $70.7 million at the end of the third quarter. B. Riley Financial's stockholders' equity increased to $298.9 million as of September 30 compared to $276.5 million at June 30 and we had approximately 26.9 million shares outstanding at the end of the third quarter. Lastly our Board of Directors has approved a special one-time cash dividend of $0.475 per common share in addition to our regular quarterly dividend of $0.175 per common share. The total cash dividend of $0.65 per common share will be paid on or about November 26 2019 to stockholders of record as of November 14 2019. Our Board of Directors has also approved to renew our share repurchase program of up to $50 million of our outstanding shares of common stock for the year ending October 31 2020. That completes our financial summary.
Now I'll turn the call over to Tom Kelleher our co-CEO to share a few specific highlights from our individual companies during the quarter. Tom?
Thomas John Kelleher -- Co-Chief Executive Officer and Director
Thanks Phil. During the quarter B. Riley FBR saw strong performance which was due in part to the proprietary investment gains Bryant discussed at the top of the call. Banking saw increased deal flow and participated in a couple of large deals during the quarter including the sale of PCM. The firm has become a known leader in advising special purpose acquisition companies or SPACs and our participation in the IPO during the quarter further demonstrates the strength of that franchise. In addition and while a small part of our revenue mix it is worth noting that both our stock loan and fixed income groups experienced material growth during the quarter. B. Riley Wealth Management saw a modest revenue increase in Q3 driven by deal syndicate participation and improved profitability. With about $10 billion in client assets this is one of our more steady businesses. We rebranded the group about a year ago and we believe our platform has resonated with financial advisors looking for alternatives to the traditional wirehouse or small independents.
We welcomed several new advisors during the quarter and have a robust pipeline of new recruits as we look ahead to 2020. During the quarter Chuck Hastings was appointed President. Both he and CEO Philip Zanone are making impactful moves to generate incremental growth as we continue to focus on recruiting and enhancing distribution. Our capital management business includes several funds and related products most notably our direct lending fund Great American Capital Partners. During the quarter GACP issued 3 new loans with a gross transaction size of over $150 million and completed 2 successful exits. We continue to be very pleased with GACP's performance and look forward to future growth in this part of our business. The last group within our Capital Markets segment is GlassRatner our consulting business. Ian Ratner and his leadership team have done a terrific job of tightly managing the business while growing the top line. The group has been a huge beneficiary of and contributor to the platform primarily in the area of solvency opinions and due diligence for lenders and investors. We have already seen many instances where banking and lending clients have mutually benefited from our enhanced suite of B. Riley GlassRatner services and we look forward to building on more of these natural synergies between our businesses in the future. Now moving on to our Auction and Liquidation segment.
Our strong results for the quarter were driven by Great American Group's participation in several ongoing store closing projects and repeat client engagement. We are currently working with several retailers both in and out of court as they navigate rising rent prices and real estate consolidation. We expect this to remain a high margin business for us as retailers continue to reassess store presence and focus on growing their e commerce channels. as Brian mentioned earlier, we are leveraging our unique visibility into the sector for other strategic opportunities within our broader business, including our new brand investment portfolio. Meanwhile, our great American evaluation appraisal business saw a modest increase in q3 revenue and income or appraisal business maintain steady performance quarter quarter and continues to focus on expanding revenue sources. We have expanded our regional coverage mandates and are continuing to grow our industry vertical focus, notably in Houston and energy and oilfield services where we have added a new lead. Our final segment is Principal Investments which is primarily magicJack and United Online. Both businesses continue to outperform our initial investment estimates and are generating strong cash flow for our platform. We are actively pursuing minority and majority investment opportunities or wholly owned businesses with which to grow this segment.
With that I'll turn the call back to Bryant for closing remarks.
Bryant Richard Riley -- Chairman and Co-Chief Executive Officer
Great. Thanks Tom. Operator let's open the line for questions please.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Wes Cummins with Nokomis Capital. Please go ahead.
Wes Cummins -- Nokomis Capital -- Analyst
Bryant first of all impressive results. I jumped on the call a little bit later. You were going through the end of the Bluestar discussion. Can you just help me out with the kind of financial impact how it flows through the P&L for you?
Bryant Richard Riley -- Chairman and Co-Chief Executive Officer
So Wes I would say that we're not going to get into the exact multiple for a variety of reasons that just -- I can't really talk about but I will say that it's highly accretive. We probably compromised a bit on valuation for the ability to partner with Bluestar. We think that there's a tremendous amount of opportunity to partnering with them. And you can -- as we mentioned I'm not sure if you saw we did make a meaningful investment in Hurley. They compromised I think a little bit on valuation because they saw the merits of partnership -- partnering with us and some of the things that we could bring to the table whether it's the balance sheet or also thinking differently to accumulate or acquire a brand. So highly accretive steady cash flows. I think what I can say is if I look out 12 to 18 months if you take all of those -- the brands that we have including our ownership in bebe and the ones that we've acquired we -- our EBITDA should be higher than $30 million from our brand group as we look out a little bit further.
Wes Cummins -- Nokomis Capital -- Analyst
Okay, great. That's helpful. That's the only question I had. Thanks.
Bryant Richard Riley -- Chairman and Co-Chief Executive Officer
Thanks.
Operator
[Operator Instructions] Our next question comes from Gary Jones with Reseco. Please go ahead.
Gary Jones -- Reseco -- Analyst
Bryant can you give any commentary on the National Holdings acquisition and how that's integrating or I guess not into the remainder of the Capital Markets segment you have?
Bryant Richard Riley -- Chairman and Co-Chief Executive Officer
So to -- for everybody's background we purchased a large portion of National Holdings about 1.5 years ago. As you may know we signed a standstill -- a three-year standstill when we made that purchase. So we are a Board observer. And we have worked together on a number of transactions but that is a separate business a separate public company that we are an investor in. So I would say you can see the financial results as you look through their public filings. We've been pleased with the back and forth between the 2 companies and being able to work with them but at this point we are really a passive holder.
Gary Jones -- Reseco -- Analyst
Got it. Okay. Thank you.
Bryant Richard Riley -- Chairman and Co-Chief Executive Officer
Thank you.
Operator
Thank you. Before we conclude today's call I will provide B. Riley Financial's safe harbor statement which includes important cautions regarding forward-looking statements made during this call. Statements made during this call about B. Riley Financial's future expectations plans and prospects and other statements regarding matters that are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission.
Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today. And except as required by law the company undertakes no obligation to publicly update or revise any forward-looking statements whether because of new information future events or otherwise. This conference call also included a discussion of non-GAAP financial measures. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release.
[Operator Closing Remarks]
Duration: 21 minutes
Call participants:
Phillip J. Ahn -- Chief Operating Officer and chief Financial Officer
Bryant Richard Riley -- Chairman and Co-Chief Executive Officer
Thomas John Kelleher -- Co-Chief Executive Officer and Director
Wes Cummins -- Nokomis Capital -- Analyst
Gary Jones -- Reseco -- Analyst
